UNITED STATES – MEASURES AFFECTING TRADE IN LARGE CIVIL AIRCRAFT (SECOND COMPLAINT)
Document: Report of the Panel BCI DELETED, AS INDICATED [***]
Date: 31 March 2011
Document codes: WT/DS353/R
Complainant: EU
Respondent: U.S.
Third parties: Australia, Brazil, Canada, China, Japan, South Korea
Dispute stage: Implementation & Compliance
Agreements cited: Art. 3.1, 3.2, 5, 6.3, 1.1, 2  Subsidies and Countervailing Measures (SCM)Art. III:4  GATT 1994

UNITED STATES – MEASURES AFFECTING TRADE
IN LARGE CIVIL AIRCRAFT
(SECOND COMPLAINT)

Report of the Panel

BCI DELETED, AS INDICATED [***]

BCI deleted, as indicated [***]

I. INTRODUCTION
A. COMPLAINT OF THE EUROPEAN COMMUNITIES1
1.1 On 27 June 2005, the European Communities requ ested consultations with the United States
pursuant to Articles 4.1, 7.1 and 30 of the SC M Agreement, Article XXIII:1 of the GATT 1994 and
Article 4 of the DSU, with regard to meas ures affecting trade in large civil aircraft. 2 Consultations
were held on 3 August 2005, but the parties failed to resolve the dispute.
1.2 On 20 January 2006, the European Communiti es requested the establishment of a panel
pursuant to Article 6 of the DSU, Article XXIII:2 of the GATT 1994, and Articles 4, 7 and 30 of the
SCM Agreement (to the extent that Article 30 inco rporates by reference Article XXIII of the GATT
1994).3
B. ESTABLISHMENT AND COMPOSITION OF THE PANEL
1.3 At its meeting on 17 February 2006, the DSB established a Panel in accordance with Article 6
of the DSU to examine the matter referred to th e DSB by the European Communities in document

1.4 The terms of reference are the following:
"To examine, in the light of the relevant provisions of the covered agreements cited
by the European Communities in document , the matter referred to the
DSB by the European Communities 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".
1.5 On 22 November 2006, Deputy Director-General Alejandro Jara, acting in place of the
Director-General, composed the Panel as follows:

1 On 1 December 2009, the Treaty of Lisbon amending the Treaty on European Union and the Treaty
establishing the European Community (done at Lisbon, 13 December 2007) entered into force. On
29 November 2009, the WTO received a Verbal Note (WT /L/779) from the Council of the European Union and
the Commission of the European Communities stating that, by virtue of the Treaty of Lisbon, as of
1 December 2009, the European Union replaces and succeeds the European Community.
2 WT/DS353/1 (originally circulated as WT/DS317/1/Add.1 as corrected by WT/DS353/1), attached at
Annex A. The present proceeding ( United States – Measures Affecting Tr ade in Large Civil Aircraft (Second
Complaint) (DS353), which was initiated when the European Communities requested consultations in
June 2005, must be seen against th e background of an earlier proceeding, which was initiated in October 2004
when the European Communities requested consultations with the United States in respect of alleged prohibited
and actionable subsidies provided to U.S. producers of large civil aircraft. On 20 July 2005, the DSB
established a panel in that proceeding ( United States – Measures Affecting Trade in Large Civil Aircraft )
(DS317), which panel was composed on 17 October 2005. In September 2005, the DSB initiated an Annex V
procedure in the DS317 dispute and designated Mr. Mate o Diego-Fernández as the DS B representative for that
procedure; WT/DSB/M/197, paras. 6-10. In its 27 June 2005 request for consultations, the European
Communities referred to the United States' statement at the meeting of the DSB on 13 June 2005 asserting that
13 of the 28 subsidy programmes listed by the European Communities in its DS317 panel request were not
listed in the DS317 consultation request of 6 October 2004. The European Communities indicated that it was
unable to agree with the United States' contention but that it was prepared to pursue consultations on the issues
raised in these subsequent proceedings in order to clarify and, if possible, resolve them.
3 WT/DS353/2 (originally circulated as WT /DS317/5 as corrected by WT/DS353/2 and
WT/DS353/2/Corr.1), attached at Annex B ("European Communities' Panel Request").
4 WT/DSB/M/205, paras. 73-76.

BCI deleted, as indicated [***]

 Chairperson: Mr. Crawford Falconer

 Members: Mr. Francisco Orrego Vicuña
 Mr. Virachai Plasai
5

1.6 Australia, Brazil, Canada, China, Japan and Kor ea reserved their rights to participate in the
Panel proceedings as third parties.
1.7 In its request for establishment of a pane l in the DS353 proceedings, the European
Communities requested that the DSB, together with the establishment of the panel, initiate the
procedures for developing information concerni ng serious prejudice under Annex V of the SCM
Agreement (Annex V Procedures for Developing Info rmation Concerning Serious Prejudice) and that
Mr. Mateo Diego-Fernández be designated as DSB representative. 6 At the DSB meeting of
17 February 2006, the United States indicated that it was not in a position to agree to the European
Communities' request for the initiation of an Annex V procedure.
1.8 The European Communities subsequently raised the matter of the initiation of an Annex V
procedure and the designation of a DSB represen tative at DSB meetings held on 14 March 2006,
17 March 2006 and 21 April 2006. At each of those meetings, the United States indicated that it was
not in a position to consent to the initiation of the Annex V procedure in the DS353 proceedings. The
European Communities took the position that the Annex V procedure in the DS353 proceedings had
been initiated, and that Mr. Diego-Fernández had been designated as the DSB representative for that
Annex V procedure.7 At the DSB meeting held on 17 May 2006, the Chairman of the DSB proposed
that the DSB take note of the parties' statements and agree to suspend consideration of this agenda
item in order to allow consultations with a view to finding a way forward. The DSB took note of the
statements and agreed to the Chairman's proposal.8
1.9 On 25 May 2006, the European Communities submitted a list of fact-finding questions to
Mr. Diego-Fernández and asked him to put these questions to the United States in his capacity as DSB
representative. Mr. Diego-Fernández considered that the Annex V process had not been initiated, and
therefore returned the European Communities' request.9 Mr. Diego-Fernández noted that his doing so
was without prejudice to the right of the European Communities' to ask the Pa nel to seek information
pursuant to Article 13.1 of the DSU.
C. PANEL PROCEEDINGS
1.10 Following consultation with the parties, the Panel adopted Working Procedures on
19 January 2007.10
1.11 At the request of the parties, and followi ng consultations with them, the Panel adopted
additional procedures for the protection of busine ss confidential information ("BCI") and highly
sensitive business information ("HSBI") for the panel proceedings on 19 February 2007 ("the

5 WT/DS/353/3.
6 European Communities' Panel Request. The European Communities indicated that its request is
without prejudice to its position that all of the measures described in its request are properly before the panel
that was established on 20 July 2005 and therefore we re covered by the Annex V proceeding initiated by the
DSB on 23 September 2005.
7 See, e.g. WT/DSB/M/212, para. 67.
8 WT/DSB/M212, paras. 70-71.
9 Letter from Mr. Mateo Diego-Fernández to Mr. Raimund Raith, dated 6 June 2006, Exhibit EC-2 to
the European Communities' Preliminary Ruling Request.
10 These procedures were modified on various occas ions, and are attached, in their final form, at
Annex C.

BCI deleted, as indicated [***]

BCI/HSBI procedures").11 The Panel issued several rulings ov er the course of the proceedings with
respect to the interpretation and application of the BCI/HSBI procedures, including regarding the
designation of specific information as BCI or HSBI pursuant to those procedures in the parties'
submissions and exhibits.12
1.12 On 24 November 2006, the European Communities submitted a request for preliminary
rulings concerning the gathering of information in connection with its claims of serious prejudice. 13
The European Communities requested, inter alia, that the Panel rule that the Annex V procedure has
been initiated, that Mr. Diego-Fernández has been effectively designated as a facilitator in that
procedure, and that the United States is under an obligation to cooperate and answer the questions that
have been put to it in the European Commun ities' letter to the Facilitator dated 25 May 2006. 14 The
European Communities requested alternatively, that the Panel use the fact-seeking powers under
Article 13 of the DSU and request the United States to provide certain information. 15 O n
22 March 2007, the United States submitted its res ponse to the European Communities' Preliminary
Ruling Request.16 The Panel also received letters from Canada and Brazil, dated 1 December 2006
and 21 December 2006 respectively, commenting on the European Communities' request.
1.13 Having carefully considered the views of the pa rties and third parties, the Panel issued a
preliminary ruling concerning the request of the European Communities to the parties and third
parties on 30 July 2007. That ruling is set forth in the Panel's findings at section VII.C.2.
1.14 On 21 December 2006, Brazil submitted a request for enhanced third party rights in this panel
proceeding. A similar request was received from Canada on 22 December 2006. After careful
consideration of this issue in the light of the comments received from the parties, the Panel on
23 February 2007 informed the parties and third par ties of its decision declining to grant enhanced
third party rights to any third party. The Panel offered its reasons for declining this request on
30 July 2007. Those reasons are set out in the Panel's findings at section VII.C.1.
1.15 The Panel met with the parties on 26 and 27 Se ptember 2007 and on 16 and 17 January 2008.
At the request of the parties, and following cons ultations, the Panel adopted procedures for public
sessions of its meetings with the parties. Pursuant to those procedures, the Panel held a portion of its
meetings with the parties in public session, by mean s of a subsequent showing of video-recordings of
the public sessions. The parties were given an opport unity to review the recordings to ensure no BCI
or HSBI had been disclosed, and the recordings were shown in public on 28 September 2007 and
18 January 2008, respectively. The Panel met with the third parties on 15 January 2008.
1.16 The Panel posed its first set of questions to the parties and third parties on 7 November 2007,
and received the responses on 5 December 2007.
17 The Panel posed its second set of questions to the
parties and third parties on 3 March 2008, and received the responses on 14 April 2008. 18 The Panel

11 These procedures were modified on various occas ions, and are attached, in their final form, at
Annex D.
12 Selected rulings in this regard are attached at Annex E.
13 Request for Preliminary Rulings by the European Communities 24 November 2006 ("European
Communities' Preliminary Ruling Request").
14 European Communities' Preliminary Ruling Request, para. 58.
15 European Communities' Preliminary Ruling Request, para. 58.
16 Response of the United States to the Request for Preliminary Rulings Submitted by the European
Communities, 22 March 2007.
17 The parties submitted comments on each other's responses on 21 December 2007.
18 The parties submitted comments on each other's responses on 5 May 2008.

BCI deleted, as indicated [***]

posed its third set of questions to the par ties on 3 July 2009, and received the responses on
31 July 2009.19
1.17 The Panel submitted its interim report to th e parties on 15 September 2010. The Panel
submitted its final report to the parties on 31 January 2011.
II. FACTUAL ASPECTS
2.1 This dispute concerns various alleged prohibited and actionabl e subsidies provided to and
benefiting the United States' producers of large civil aircraft20 (the "U.S. LCA industry"), including, in
particular, The Boeing Company and McDonnell D ouglas Corporation prior to its merger with
Boeing:
(i) Subsidies provided by state and local authorities. T h e
European Communities alleges that U.S. states and localities, where research,
development, production and headquarters facilities of the U.S. LCA industry
are located, transfer in various ways economic resources to the U.S. LCA
industry. In this respect, the European Communities challenges measures in
the States of Washington, Kansas and Illinois, and their municipalities.
(ii) Subsidies provided by the federal government . The
European Communities alleges that the U.S. Federal Government transfers
economic resources to the U.S. LCA industry on terms more favourable than
available on the market or not at arm's length through certain measures
applied by NASA, DOD, DOC, DO L and through certain federal tax
incentives.
2.2 A detailed description of the measures at issu e is contained in the European Communities'
request for establishment, reproduced at Annex B of this report.
III. PARTIES' REQUESTS FOR FINDINGS AND RECOMMENDATIONS
A. E
UROPEAN COMMUNITIES
3.1 The European Communities requests that the Pa nel find that the United States has acted
inconsistently with its obligations under the SCM Agreement, because:
(a) the State of Washington's HB 2294 tax incentives and the FSC and ETI federal
taxation schemes constitute prohibited subsidi es, in violation of Articles 3.1(a) and
3.2 of the SCM Agreement21;
(b) through various measures provided by the U.S. Federal Government, the State of
Washington and municipalities therein, the State of Kansas and municipalities therein
and the State of Illinois and municipalities therein, the United States has provided

19 The parties submitted comments on each other's responses on 21 August 2009.
20 The European Communities' request for establishment of a panel contains the following footnote: "In
accordance with the 1992 Agreement between the European Communities and the Government of the
United States of America concerning the application of the GATT Agreement on Trade in Civil Aircraft on trade
in large civil aircraft, large civil aircraft ("LCA") included all ai rcraft as defined in Article 1 of the GATT
Agreement on Trade in Civil Aircraft, except engines as de fined in Article 1.1(b) thereof, that are designed for
passenger or cargo transportation and have 100 or more passenger seats or its equivalent in cargo configuration.
Boeing produces or markets the following families of LCA: 717, 737, 747, 757, 767, 777, and 787."
21 European Communities' first written submission, para. 24.

BCI deleted, as indicated [***]

actionable subsidies to Boeing's LCA division which cause serious prejudice to the
interests of the European Communities within the meaning of Articles 5(c) and 6.3 of
the SCM Agreement by means of :
(i) significant price suppression within the meaning of Article 6.3(c) of the SCM
Agreement with respect to orders of Airbus' A330, Original A350,
A350XWB-800, A320 and A340 families of LCA, or in the alternative, threat
of significant price suppression with respect to deliveries of Airbus' A330,
A350XWB-800, A320 and A340 families of LCA
22;
(ii) significant lost sales within the meaning of Article 6.3(c) of the SCM
Agreement with respect to orders of Airbus' A330, Original A350, A320 and
A340 families of LCA or, in the alternative, threat of significant lost sales
with respect to deliveries of Air bus' A330, A320 and A340 families of
LCA23;
(iii) displacement and impedance within the meaning of Article 6.3(a) of the SCM
Agreement with respect to orders of Airbus' A330 and Original A350 family
LCA, or in the alternative, threat of displacement and impedance with respect
to deliveries of Airbus' A330 and A350XWB-800 families of LCA24;
(iv) displacement and impedance within the meaning of Article 6.3(b) of the
SCM Agreement with respect to orders of Airbus' A330, Original A350,
A320 and A340 families of LCA, or in the alternative, threat of displacement
or impedance with respect to deliv eries of Airbus' A330, A350XWB-800,
A320 and A340 families of LCA
25;
(v) threat of significant price suppression with respect to future orders of Airbus'
A330, A350XWB-800, A320 and A3 50XWB-900/1000 families of LCA 26;
and
(c) the United States has violated agreed obligations concerning support to the LCA
sector that are set forth in the Agreement Concerning the Application of the GATT
Agreement on Trade in Large Civil Aircraft which constitutes serious prejudice to the
European Communities' interests within the meaning of Article 5(c) of the SCM
Agreement.
27
3.2 Consequently, the European Communities asks the Panel to recommend that the
United States:
(a) withdraw its prohibited subsidies without delay, as required by Article 4.7 of the
SCM Agreement; and
(b) take appropriate steps to remove the a dverse effects or withdraw the actionable
subsidies, as required by Article 7.8 of the SCM Agreement. 28

22 European Communities' first written submission, paras. 1654, 1387, 1455.
23 European Communities' first written submission, paras. 1654, 1446.
24 European Communities' first written submission, paras. 1654, 1455.
25 European Communities' first written submission, paras. 1654, 1455, 1640.
26 European Communities' first written submission, para. 1654.
27 European Communities' first written submission, para. 1055.
28 European Communities' first written submission, para. 1656.

BCI deleted, as indicated [***]

B. UNITED STATES
3.3 The United States requests the Panel to find that the United States has acted consistently with
its obligations under the SCM Agreement and to deny the relief requested by the European
Communities.29
IV. ARGUMENTS OF THE PARTIES
4.1 The arguments of the parties are set out in their written and oral submissions to the Panel, in
their answers to questions and in additional comme nts submitted pursuant to the Panel's request. The
parties' arguments, as summarized by them are presented in this section. 30 The full non-confidential
text of certain of the European Communitie s' submissions can be downloaded from the
European Communities' web site. 31 The full non-confidential text of certain of the United States'
submissions can be downloaded from the U.S. Government's web site.32
A. PRELIMINARY ISSUES
1. Arguments of the European Communities
4.2 In its panel request 33, the European Communities explained that it had initiated DS353
proceeding due, in part, to the U.S. non-coopera tion in the Annex V process that had been initiated
under DS317 proceeding, i.e. the European Co mmunities' initial challenge of prohibited and
actionable subsidies provided to U.S. producer s of large civil aircraft. Specifically, the
European Communities stated that it was regrettable that the United States decided to use unfounded
procedural objections to undermine the Annex V process initiated in DS317. The
European Communities asserted that the United St ates had decided not to provide answers on
measures that the United States unilaterally determined to be outside the scope of that dispute, and
had repeatedly blocked European Communities' end eavours to have the Panel rule authoritatively on
the scope of the dispute. The European Communities contended in its panel request that this resulted
in a deprivation of the European Communities' rights under the SCM Agreement to obtain the
necessary information with respect to approximately half of the measures involved, and seriously
undermined the European Communities' due process rights with respect to DS317 proceeding.
4.3 In its first written submission, the European Communities argues that if the United States had
not opposed the initiation of the Annex V procedure in this dispute and an early decision by the Panel
on the European Communities' Preliminary Ruling Request, the European Communities would be
able to present more detailed and precise information on the subsidy measures at issue. It explains
that as a result of this non-cooperation, the Euro pean Communities has had to base its first written
submission solely on the non-confidential informat ion that it has available from the United States.
34
Thus, the European Communities reserves the right to develop and add to its claims in the light of any
information eventually provided once the Panel ru les on the European Communities' Preliminary
Ruling Request. In the meantime, the Europ ean Communities asks that the Panel accept the

29 United States' first written submission, para. 1198.
30 Pursuant to paragraph 12 of the panel's working procedures, the parties and third parties submitted
non-confidential executive summaries of their written and oral submissions. The Panel issued its draft
descriptive part based on those executive summaries, which it provided to the parties for comment on
17 November 2009. The Panel received comments from the parties on 15 December 2009.
31 See http://trade.ec.europa.eu/wtodispute.
32 See http://www.ustr.gov/Trade _Agreements/Monitoring_Enforcement/Dispute_Settlement/WTO/
Section_Index.html.
33 WT/DS353/2 (originally circulated as WT/D S317/5 as corrected by WT/DS353/2 and
WT/DS353/2/Corr.1), attached at Annex B.
34 Executive Summary of the European Communities' first written submission, para. 33.

BCI deleted, as indicated [***]

information presented in its first written submis sion as the best information available and, as
appropriate, draw adverse inferences.35
4.4 In its second written submission, the European Communities emphasises that the
United States has continued its non-cooperation in providing critical information in this dispute. The
European Communities recalls that at the first m eeting of the Panel, the United States made it
perfectly clear that it had no intention to provide any more information. As the
European Communities asserts it has made its pr ima facie case, it argues that it is now the
United States' burden to provide additional inform ation (whether or not publicly available) to
substantiate the United States' challenges to the European Communities' arguments and evidence.
The European Communities expresses hope that the United States will disclose all relevant
information in its responses to the Panel's questions, so that the measures at issue can be more fully
analysed.
36
4.5 The European Communities further notes two points. First, the drawing of adverse inferences
from instances of non-cooperation is a general princi ple of the SCM Agreement that is applicable
regardless of initiation of Annex V, and may be part of the making of a prima facie case by a
complaining party. Second, to the extent the United States does not cite to specific portions of
exhibits it has submitted, they must be disr egarded by the Panel. In conclusion, the
European Communities submits that the U.S. assertion that hundreds of exhibits that are not cited to
anywhere in a submission could provide support for an y of the U.S. arguments is patently absurd and
inconsistent with the Appellate Body decision in Canada – Wheat Exports and Grain Imports.37
2. Arguments of the United States
4.6 With respect to the European Communities' Pr eliminary Ruling Request regarding Article 13
of the DSU, the United States contends that it sees no relevance to the European Communities'
assertion regarding the Annex V procedure in DS31 7. Additionally, the Eu ropean Communities has
provided no basis for the Panel to conclude that the information it seeks is necessary to understand or
evaluate the evidence or arguments presented by the parties. Finally, the United States emphasizes
that the very format of the questions posed by th e European Communities seems to miss the point of
Article 13. The European Communities is not seeking "information" directed to addressing an
argument made by the European Communiti es or the United States. Instead, the
European Communities lists generic categories of documents, without regard as to whether they
contain information of the type sought by the European Communities.
38
4.7 The United States notes that in the procedural section of its first written submission, and then
throughout the following arguments, the European Communities repeatedly asks the Panel to treat
information referenced by the European Communities as the "best information available" and to draw
adverse inferences with regard to certain facts. In contrast, the United States considers that the
European Communities selected information that was decidedly not the "best", as it routinely
disregarded readily available facts that contradicted its theories, even when those facts appeared in
documents cited by the European Communities. Moreover, according to the United States, the
European Communities' first written submission pr ovides neither a factual basis nor valid legal
justification for the Panel to take the radical step of drawing adverse inferences. Therefore, the
United States argues that the Panel should proceed as panels normally do, by requiring the

35 Executive Summary of the European Communities' first written submission, para. 34.
36 Executive Summary of the European Communities' second written submission, para. 3.
37 Executive Summary of the Europ ean Communities' non-confidential or al statement at the second
38 Executive Summary of the United States' non-confidential oral statement at the first meeting with the
Panel, para. 15.

BCI deleted, as indicated [***]

complaining party to meet its burden of proof and set out a prima facie case of inconsistency with the
covered agreements.39
4.8 Turning to the issue of adverse infere nces, the United States recalls that the
European Communities argues that adverse inferen ces are appropriate because, in the view of the
European Communities, the United St ates failed to cooperate with information gathering when it (1)
"opposed initiation of the Annex V procedure in this dispute" and (2) "opposed an early decision by
the Panel on the European Communities' Preliminary Ruling Request". 40 With regard to the
European Communities preliminary ruling request, th e United States notes that it was the Panel that
set the schedule. The United States simply expr essed its views as to when the Panel should address
the European Communities' Preliminary Ruling Requ est. It goes on to argue that the Panel was free
to reject those views, but did not. And, once the Panel set a deadline, the United States responded one
week in advance – hardly the action of a party that was inappropriately seeking to delay resolution of
the European Communities preliminary ruling request.41
4.9 As for opposing initiation of an Annex V pr ocedure, the key point, according to the
United States, – and one that the European Commun ities has itself repeatedly made – is that the
European Communities began DS353 to address pr oblems arising from its disagreement with the
United States about the validity of the panel request in DS317. 42 The United States submits that it
never opposed initiation of an Annex V procedure with regard to the European Communities' claims
of subsidization of large civil aircraft. In fact , it participated actively in the DS317 proceeding,
submitting more than 40,000 pages of documents. The only thing the United States opposed was an
unprecedented second Annex V procedure merely b ecause the European Communities unilaterally
decided, absent any guidance from the panel or th e facilitator, that the United States failed to
cooperate with the first. Thus, in the Un ited States' view, there is no support for the
European Communities' view that the United States failed to cooperate with information gathering
with regard to its claims.43
4.10 Noting the European Communities' request for the Panel to exercise its discretion under
Article 13 of the DSU, the United States called on th e Panel to find that the European Communities'
Preliminary Ruling Request is moot, as the f iling of the European Communities first written
submission has narrowed the scope of the European Communities' arguments. Furthermore, the
United States' first written submission contains a large volume of information rebutting the
European Communities' arguments, and the European Communities also apparently made use of some
of the Annex V materials from DS317 in its submissi on. Therefore, according to the United States,
the predicate of the European Communities' Preliminary Ruling Request – the supposed lack of
information on the programs challenged by the Eur opean Communities – no longer holds true (if it
ever did).44

39 Executive Summary of the United States' first written submission, para. 2.
40 Executive Summary of the United States' first written submission, footnote 5 referring to
European Communities' first written submission, para. 60.
41 Executive Summary of the United States' first written submission, para. 3.
42 Executive Summary of the United States' first written submission, footnote 6.
43 Executive Summary of the United States' first written submission, para. 4.
44 Executive Summary of the United States' first written submission, para. 5.

BCI deleted, as indicated [***]

B. SUBSIDY PROGRAMMES
1. Arguments of the European Communities
(a) General overview
4.11 The European Communities contends that from its early days, Boeing and the
U.S. Government have collaborated closely to adva nce the state of U.S. aeronautics technology, and
to improve the competitive position of Boeing vis- à-vis international competition. This close
relationship continues today, as valuable support pours into Boeing on an annual basis from multiple
agencies of the U.S. Government – none of which is ever repaid. The governments of states and
localities also aid this partnership in a very significan t way, adding to the wealth of grants, tax breaks,
and other support to which Boeing has become accust omed on the federal level. Furthermore, the
European Communities asserts that with Boeing su rpassing Airbus in LCA orders by a large margin
in 2006, and at the same time continuing to drive do wn prices, the direct results of this support have
never been clearer.45
4.12 The European Communities argues that it es tablishes its prima facie case that the
United States has granted $23.7 billion in specific subsidies to the division of the Boeing Company
("Boeing") that produces large civil aircraft ("LCA") – i.e. Boeing's LCA division. It also contends
that it shows that these subsidies are: (1) prohib ited subsidies contingent upon export performance;
and/or (2) actionable subsidies that cause serious prejudice, and therefore adverse effects, to the
interests of the European Communities and its LCA manufacturer – Airbus.
46
4.13 The European Communities asser ts that the $23.7 billion in subsidies before the Panel
comprise numerous measures implemented by various fe deral, state, and local governmental entities.
Beginning with state and local subsidies at issue, the States of Washington, Kansas, and Illinois, and
various localities therein, have provided over $800 million in benefits for Boeing, and have
committed to provide over $4 billion in additional benefits beginning in 2007. 47 The bulk of these
state and local incentives provided to Boeing are in the form of export contingent tax incentives
provided by Washington State tied to the production of Boeing LCA. These incentives, in the words
of Washington State Governor Gary Locke, are d esigned to help "Boeing to beat Airbus" and "give
Airbus executives many sleepless nights for years to come". 48 In addition to state and local subsidies,
Boeing has received almost $17 billion in funding and support from NASA, DOD, DOC, and DOL,
with the bulk of this funding provided by NASA and DOD, primarily through their aeronautics R&D
subsidies.
49 The U.S. Government has also provided almost $2.2 billion in export-contingent tax
relief to Boeing under the FSC/ETI tax exclusion regimes that impacts the sales of Boeing LCA.50
4.14 The European Communities presents the followi ng chart, which provides an overview of
subsidies discussed in great detail in the European Communities' first written submission:51

45 Executive Summary of the European Communities' first written submission, para. 2.
46 Executive Summary of the European Communities' first written submission, paras. 1 and 35.
47 Executive Summary of the European Communities' first written submission, para. 3.
48 Executive Summary of the European Communities' first written submission, para. 4.
49 Executive Summary of the European Communities' first written submission, para. 7.
50 Executive Summary of the European Communities' first written submission, para. 20.
51 Executive Summary of the European Communities' first written submission, para. 35.

BCI deleted, as indicated [***]

Figure 1: Overview of Subsidies to Boeing's LCA Division
(Millions of Dollars)

Entity Name of Subsidy Description of Subsidy Total Amount
HB 2294 Tax
Incentives
State of Washington provides LCA-related: (1)
business and occupation ("B&O") tax rate
reductions; (2) B&O tax credits; (3) sales/use tax
exemptions; (4) leasehold excise tax exemptions;
and (5) property tax exemptions.
$3,456.7
Everett B&O Tax Rate
Reductions
City of Everett reduces the B&O tax rate paid by
Boeing on LCA manufactured in Everett. $67.5 State of
Washington and
Municipalities
Therein
Project Olympus
Master Site Agreement
Subsidies
State of Washington and municipalities therein: (1)
provide coordinators to facilitate 787 production;
(2) provide job training incentives for 787
employees; (3) provide Boeing's 747 large cargo
freighter ("LCF") with the same incentives
accorded to the 787; (4) assume certain litigation
costs; and (5) provide infrastructure-related
subsidies to facilitate Boeing's LCA production in
Everett, Washington.
$395.8
Wichita IRB Tax
Breaks
City of Wichita provides property and sales tax
breaks to LCA component production facilities in
Wichita through the issuance of industrial revenue
bonds.
$783.7
State of Kansas
and
Municipalities
Therein KDFA Bonds
State of Kansas pays the interest on bonds that will
be used to facilitate production of a portion of the
787 fuselage.
$122.0
Boeing Relocation
Package
Pursuant to the relocatio n package for Boeing: (1)
State of Illinois reimburses costs related to the
relocation of Boeing's h eadquarters; (2) State of
Illinois provides Boeing's headquarters with income
tax credits; and (3) City of Chicago and Cook
County provide property tax abatements for
Boeing's headquarters.
$24.3
State of Illinois
and
Municipalities
Therein
Retirement of the
Former Lease
City of Chicago pays to retire the lease of the
former occupant of Boeing's headquarters in
Chicago.
$0.5
NASA
ACT Program
NASA funds R&D related to composites
technologies that will be utilized on the 787. $417.7
NASA
HSR Program
NASA funds R&D related to high speed civil
aircraft technology that also has applications for
subsonic LCA.
$1,314.4
NASA
AST Program
NASA funds R&D related to improving
environmental impact, safe ty, and efficiency of
LCA.
$692.5
NASA HPCC
Program
NASA funds R&D related to computing and
communications technology for the design and
development of LCA.
$352.8
NASA Aviation
Safety Program
NASA funds R&D related to improving the safety
of LCA. $804.1
NASA
QAT Program
NASA funds R&D related to noise reduction
technology for LCA. $103.7
U.S. Government
U.S. Aeronautics R&D
NASA Vehicle
Systems Program
NASA funds R&D related to improving
environmental impact and efficiency of LCA. $902.9

BCI deleted, as indicated [***]

Entity Name of Subsidy Description of Subsidy Total Amount
NASA
R&T Base
Program
NASA funds R&D related to basic and applied
advanced LCA technologies. $5,818.3
DOD RDT&E
Program
DOD funds R&D related to dual-use technologies –
i.e. technologies applicable to both military and
commercial aircraft.
$2,379.0

DOC Advanced
Technology
Program
DOC funds R&D related to high risk, high pay-off,
emerging and enabling technologies applicable to
LCA.
$4.6
NASA/DOD IP Right
Waivers/Transfers
NASA and DOD transfer to Boeing valuable patent
rights, rights to trade secrets, and exclusive rights to
certain data for LCA-related and other technologies.
$726.4
NASA/DOD
IR&D/B&P Program
NASA and DOD reimburse Boeing for its own
independent LCA R&D that is not related to any
specific contract, as well as for its bid and proposal
costs.
$3,108.3
NASA/DOD Facilities,
Equipment, and
Employees
NASA and DOD provide their facilities, equipment,
and employees for LCA-related R&D. N/A52
DOL 787 Worker
Training Grants DOL provides grants to help train 787 workers. $1.5

FSC/ETI
The U.S. Government lowers taxes paid by Boeing
on each LCA produced and sold for use outside the
United States.
$2,199.0
TOTAL $23,675.5

4.15 The European Communities asserts that it shows that each of the items listed in Figure 1
above is a subsidy under Article 1.1 of the SCM Agre ement – i.e. a financial contribution that confers
a benefit on its recipients. The European Communiti es contends that the scope of the transactions
covered by the term "financial contribution" in Ar ticle 1.1(a)(1) is broad. The types of financial
contributions at issue in this dispute include: direct and potential direct transfers of funds pursuant to
Article 1.1(a)(1)(i); government revenue otherwise due that is foregone or not collected pursuant to
Article 1.1(a)(1)(ii); and provision of goods or servi ces other than general infrastructure pursuant to
Article 1.1(a)(1)(iii). A financial contribution confer s a benefit when it "is provided on terms that are
more advantageous than those that would have been available to the recipient on the market".53
4.16 Furthermore, the European Communities asserts that it demonstrates that each subsidy is
specific under Article 2 of the SCM Agreement. The European Communities recalls that
demonstrating specificity requires a showing that the subsidy is specific within the meaning of
Article 2.1, unless the subsidy is prohibited under Ar ticle 3.1, in which case it is "deemed to be
specific" pursuant to Article 2.3. The use of the phrase "certain enterprises", as set out in the chapeau
to Article 2.1, according to the European Communiti es, reveals that the criterion is to be applied
broadly.
54
4.17 With respect to specificity, the European Communities obser ves that the United States
misunderstands several key aspects of the European Communities' specificity analysis. Noting that the
parties disagree on at least three cr itical aspects related to specificity , namely: (i) the role and proper

52 The benefits from these subsidies are included in the European Communities' estimates of the
benefits from NASA and DOD aeronautics R&D subsidies, and are therefore not listed separately. Amount of
Subsidies to Boeing's LCA Division, note 8, Exhibit EC-17.
53 Executive Summary of the European Communities' first written submission, para. 36.
54 Executive Summary of the European Communities' first written submission, para. 37.

BCI deleted, as indicated [***]

identification of "the granting authority"; (ii) the baseline with which disproportionality under
Article 2.1(c) is to be determined; and (iii) the scope of the phrase "group of enterprises or industries",
the European Communities makes the following observations.55
4.18 First, the European Communities contends that the question under Article 2.1 is whether a
subsidy is specific to certain enterprises "within the jurisdiction of the granting authority", and the
answer is based on evaluating the actions of the "g ranting authority". The European Communities
points out that it is not in dispute that the "grantin g authorities" at issue with respect to the IP right
provisions56 and IR&D/B&P reimbursements 57 are NASA and DOD, not the entirety of the
U.S. Government. The European Communities posits that if other granting authorities were relevant,
a defending party could open the specificity analysis to an unlimited inquiry comparing the practice of
every federal and local government entity with the pr actice of the granting authority at issue – thereby
avoiding a finding of specificity under Article 2.1(a) for virtually every measure.58
4.19 Second, with respect to the assessment of disproportionality under Article 2.1(c), the
European Communities argues that the relevant baseline is the recipient's economic position "within
the jurisdiction of the granting authority", where "jur isdiction" refers to geographic jurisdiction. The
U.S. approach of considering a ratio consisting of (a) "some information about Boeing" over (b)
"comparable information about the group of recipien ts of the alleged subsidy as a whole", would gut
the disproportionality factor in Article 2.1(c) of any meaning, since the granting authority would
control the outcome of such a test.59
4.20 Third, the European Communities posits that, based on the ordinary meaning of "group", a
"group of enterprises or industries" is a number of enterprises or industries that form a unity or whole
based on some mutual or common relation or purpo se, or some degree of similarity. Thus, the
European Communities argues that a subsidy that is available to a group consisting of a sufficiently
limited number of the corporations that operate w ithin the jurisdiction of the granting authority must
be specific, as in the case of ATP 60, which is limited to the group of U.S. companies that perform
research into "high risk, high pay-off, emerging and enabling technologies".61
4.21 Finally, the European Communities notes that, wherever possible, it endeavours to estimate
the value of the benefits to Boeing's LCA division fro m each of the subsidies at issue in this dispute
using an allocation methodology b ased on publicly available information. Listing these estimated
amounts in Figure 1 above, the European Communities requests the Panel to adopt these estimates as
the best information available and, as appropria te, draw adverse infere nces due to the U.S. non-
cooperation in the information-gathering process.62

55 Executive Summary of the Europ ean Communities' non-confidential or al statement at the second
56 See section IV.B.1(c)(ii) below
57 See section IV.B.1(c)(iii) below.
58 Executive Summary of the Europ ean Communities' non-confidential or al statement at the second
59 Executive Summary of the Europ ean Communities' non-confidential or al statement at the second
60 See paras. 4.96-4.97 below.
61 Executive Summary of the Europ ean Communities' non-confidential or al statement at the second
62 Executive Summary of the European Communities' first written submission, para. 38.

BCI deleted, as indicated [***]

(b) State support measures
(i) State of Washington and municipalities therein
4.22 In respect of the measures by the State of Washington and municipalities therein, the
European Communities challenges a $4 billion packag e of risk-free tax, infrastructure, and other
incentives, put into effect through a number of closely intertwined state and local measures and
guaranteed to Boeing under the terms of the Project Olympus Master Site Agreement.
4.23 The European Communities clarifies that the challenged Washington State subsidies comprise
a $3.92 billion package of tax breaks, infrastructur e improvements, training incentives, and a variety
of other measures designed, in their entirety, to allow Boeing to enjoy their benefits while being
insulated from risk. These include the following:
 - Tax subsidies: (i) HB 2294 B&O tax ra te reductions; (ii) HB 2294 B&O tax credits;
(iii) HB 2294 sales and use tax exemptions for computer hardware, peripherals, and
software; (iv) HB 2294 sales and use tax exem ptions for construction and equipment,
leasehold excise tax exemptions, and property tax exemptions; and (v) City of Everett
B&O tax rate reductions; and

 - Project Olympus Master Site Agreem ent subsidies: (i) provision of project
coordinators; (ii) job training incentives; (iii) 747 LCF incentives; (iv) support for
legal proceedings; and (v) infrastructure-related subsidies (road improvements for
Boeing Everett, 747 LCF landing fee waivers, Port of Everett Rail-Barge Transfer
and South Terminal facilities, and utility rate freezes for Boeing Everett).
63

4.24 The European Communities argues that all of these incentives were promised by Washington
State Governor Gary Locke in his "final offer" lette r to Boeing. They were put into effect through a
number of intertwined
64 measures, including: HB 2294; Everett Ordinance 2759-04; the
Memorandum of Agreement for Project Olympus between Washington State and Boeing; and the
Project Olympus Master Site Agreement, th rough which Washington State and its localities
committed to providing Boeing with these various incen tives. Indeed, the packaged nature of these
incentives is made explicitly clear in the MSA.65
4.25 In response to U.S. arguments regarding the specific subsidies provided by the State of
Washington and municipalities therein 66, the European Communities notes that nothing in the
arguments put forward and the facts pointed to by the United States affects the conclusion that the
myriad of commitments made by the State of Wash ington and its localities in this "Boeing Incentive
Package" are specific subsidies for the benefit of Boeing's LCA division. 67
State and local tax incentives
4.26 The European Communities argues that the St ate of Washington has committed to provide
almost $3.5 billion in tax breaks of benefit to Boeing over the next 20 years through HB 2294 68, and

63 Executive Summary of the European Communities' second written submission, para. 6.
64 For example, Section 1 of Everett Ordinance 2759-04 specifically references, and reiterates language
from, the Project Olympus Master Site Agreement. European Communities' first written submission, para. 147.
65 European Communities' second written submission, para. 30.
66 Executive Summary of the European Communities' second written submission, para. 6.
67 Executive Summary of the European Communities' second written submission, para. 7.
68 Executive Summary of the European Communities' first written submission, para. 4.

BCI deleted, as indicated [***]

the City of Everett has committed to provide an additional $67.5 million B&O tax rate reduction from
2006 through 2023.69
4.27 In particular, the European Communities, inter alia, asserts that the HB 2294 B&O tax rate
reductions are a textbook example of a specific subsidy, as prior to the passage of HB 2294,
commercial airplane and component manufacturer s had to pay the general B&O tax rate for
manufacturers of 0.484%, while after the passage of HB 2294, they pay a B&O tax rate that is 40%
lower.70 Therefore, the European Communities argu es that the HB 2294 B&O tax rate reductions
result in government revenue otherwise due that is foregone, and, therefore, a financial contribution,
with respect to the entire period from FY 2006 through FY 2024.71
4.28 The European Communities reca lls that HB 2294 established an exception for manufacturers
of commercial airplanes and commercial airplane components from the general rule of B&O taxation
for manufacturers in the State of Washington. In other words, but for HB 2294, commercial airplane
and commercial airplane component manufacturers would pay a higher B&O tax rate throughout the
period 1 October 2005 through 30 June 2024. The European Communities submits that this arbitrary,
targeted, and tailored tax reduction cannot be exem pted from the disciplines of the SCM Agreement,
as the United States attempts to do through its misleading and irrelevant arguments regarding
"pyramiding".72
4.29 The European Communities submits that the discu ssion by the United States of the impact of
"pyramiding" and Washington State's alleged policy of "equalizing effective tax rates" is wholly
irrelevant, as the measure challenged by the Eur opean Communities is HB 2294, and not the entire
Washington State B&O tax system. 73 The text of HB 2294, and the circumstances supporting its
passage, demonstrate that HB 2294 has absolutely nothing to do with "pyramiding", and everything to
do with providing financial support for Boeing and its 787 programme.
4.30 Furthermore, the European Communities em phasizes that HB 2294 does not mention
pyramiding, tax equalization, or anything alike. Rather, the law is about the "provision of tax
incentives" to the aerospace industry. The European Communities also points to the general rule of
taxation for manufacturers in Washington State, according to Washington State's own rules of
taxation set forth in the Revised Code of Washington, which requires manufacturers to pay a B&O tax
rate of 0.484%, and HB 2294, by its very terms, establishes an exception to this general rule for
commercial airplane and commercial airplane component manufacturers.74
4.31 The European Communities claims that the United States was unable to point to any law,
regulation, or policy in the State of Washington requiring the equalization of effective tax rates among
all Washington businesses. The European Communiti es draws attention to the fact that all the
United States repeatedly pointed to during the Panel's first meeting with the parties was a "study". In
response to the United States' obser vations that absent HB 2294, the tax rate would be "speculative",
the European Communities submits that "speculative" is not a benchmark.75

69 European Communities' first written submission, para. 156.
70 Executive Summary of the Europ ean Communities' non-confidential or al statement at the second
71 Executive Summary of the European Communities' second written submission, para. 8.
72 Executive Summary of the European Communities' second written submission, para. 8.
73 Executive Summary of the European Communities' non-confidential closing statement at the first
74 Executive Summary of the European Communities' non-confidential closing statement at the first
75 Executive Summary of the European Communities' non-confidential closing statement at the first

BCI deleted, as indicated [***]

4.32 The European Communities re jects the U.S. argument that the HB 2294 B&O tax rate
reductions do not constitute fo regoing of revenue otherwise due as baseless, because HB 2294
established special lower B&O tax rates for commer cial airplane and component manufacturers, as
compared to the general B&O tax rate fo r manufacturers in Washington State. The
European Communities explains that HB 2294 – the measure at issue – is moreover explicitly limited
to manufacturers, retailers, and wholesalers of commercial airplanes and components, and
consequently is specific.76
4.33 The European Communities also rejects the U.S. ar gument that the relevant amount of any
financial contribution resulting from the HB 2294 B&O tax rate reductions is only the revenue
actually foregone in FY 2006-FY 2007 as being without merit. In advancing this legal argument, the
United States makes a fundamental error by relying entirely on a provision of the SCM Agreement –
Article 1.1 – that simply does not address the issue of subsidy amount.77
4.34 Responding to the evidence regarding pass-th rough to Boeing of the benefits from the
Washington State B&O tax rate reductions to Bo eing suppliers, the European Communities claims
that the United States repeats its basic approach, i. e. stating that evidence exists contrary to the
European Communities' evidence and argument that a measure confers a benefit, but failing to
provide that other evidence.78 The European Communities maintains that the B&O tax rate reductions
to Boeing's LCA component producers pass through to Boeing's LCA division according to both
evidence from Washington State and expert analysis by Professors Paul Wachtel and John Asker of
New York University, and the United States has not refuted this evidence.
79 It notes that former
Governor Locke himself has made it clear that th e benefits of the HB 2294 B&O tax rate reductions
received by Boeing's Washington State suppliers pass through to Boeing's LCA division.80
4.35 Finally with regard to the HB 2294 B&O tax ra te reductions, recalling that the United States
made it patently clear during the Panel's second meeting with the parties that Washington State
applies a B&O tax rate of 0.484% to manufacturer s operating within the State, except for certain
specialized manufacturers – such as commercial ai rcraft manufacturers – for which the State has
granted special lower rates (i.e. "sector-specific adjustments"), the European Communities submits
that this confirms that the adjustment of B&O ta x rates in HB 2294 constitu tes revenue otherwise due
that is foregone.81
4.36 In addition to the HB 2294 B& O tax rate reductions, the European Communities also claims
that the State of Washington provided the fo llowing additional tax incentives to Boeing through
HB 2294: B&O tax credits for preproduction devel opment, computer software and hardware, and
property taxes;82 sales and use tax exemptions for computer hardware, peripherals, or software used in
the development of commercial airplanes or their components, and for construction and equipment
related to new buildings used in the manufacturing of superefficient airplanes;
83 leasehold excise tax
exemptions for manufacturers engaged in the manu facturing of superefficient airplanes that are

76 Executive Summary of the European Communities' non-confidential oral statement at the first
77 Executive Summary of the European Communities' second written submission, para. 9.
78 Executive Summary of the Europ ean Communities' non-confidential closing statement at the second
79 Executive Summary of the European Communities' second written submission, para. 10.
80 Executive Summary of the Europ ean Communities' non-confidential or al statement at the second
81 Executive Summary of the Europ ean Communities' non-confidential closing statement at the second
82 European Communities' first written submission, para. 109.
83 European Communities' first written submission, para. 117.

BCI deleted, as indicated [***]

leasing certain port district facilities; 84 and property tax exemptions for manufacturers engaged in the
manufacturing of superefficient airplanes that are lessees of a port district. 85 Further, the
European Communities claims that the City of Ev erett enacted a 75% reduction in its B&O tax rate
for manufacturing activities through Ordinance 2759-04 when the value of the products manufactured
exceeds $6 billion to $8 billion,86 and Boeing is the only company to manufacture products in Everett
worth more than $6-$8 billion per year. 87 The European Communities has demonstrated that the
various tax measures enacted through HB 2294 and Ev erett Ordinance 2759-04 are specific subsidies
to Boeing's LCA division.88
Project Olympus Master Site Agreement subsidies
4.37 The European Communities argues that the St ate of Washington and municipalities therein
have committed to provide almost $400 million in other incentives, including training facilities and
infrastructure improvements, in connection with production of the 787. 89 More specifically, the State
of Washington committed to the following series of incentives in the Project Olympus Master Site
Agreement designed to benefit Project Olympus – i.e. Boeing's 787 assembly facility:
– providing Boeing with coordinators to help start up Project Olympus;
– creating a workforce development programme and building an
Employment Resource Center to train Boeing's employees that will
work on assembling 787 LCA;
– helping Boeing develop and produce the 747 LCFs that Boeing will
use to transport 787 components to Everett by extending to 747 LCFs
the same tax and other incentives provided to the 787; and
– insuring Boeing against litigation risk related to the Project Olympus
Master Site Agreement.
90
In addition, the State of Washington, Snohomish County, the Port of Everett, and the City of Everett
committed in the Project Olympus Master Site Ag reement to the following series of incentives aimed
at improving or facilitating Boeing's use of infrastructure:

– specific road access improvements for the benefit of Boeing's LCA
production facilities in Everett, undertaken by the State of
Washington and City of Everett;
– the waiver of landing fees for Bo eing's 747 LCFs at Paine Field to
lower the costs of transporting 787 components to Everett,
undertaken by Snohomish County;
– improvements to rail-barge transfer capabilities and expansion of the
South Terminal facility to facilitate the transportation of 787
components to Everett, undertaken by the Port of Everett; and

84 European Communities' first written submission, para. 122.
85 European Communities' first written submission, para. 126.
86 European Communities' first written submission, para. 148.
87 European Communities' non-confidential oral statement at the first meeting with the Panel, para. 29.
88 European Communities' second written submission, para. 31.
89 Executive Summary of the European Communities' first written submission, para. 4.
90 European Communities' first written submission, para. 163.

BCI deleted, as indicated [***]

– the freezing of rates for water, sanitary sewer, solid waste, and
process wastewater services utili zed by Boeing's LCA production
facilities in Everett, undertaken by the City of Everett and Snohomish
County.91
The European Communities argues th at all of these incentives are subsidies that are part of an
agreement specifically between Boeing and the State of Washington – i.e. the Project Olympus
Master Site Agreement. They cost Boeing nothing and their economic value is in fact guaranteed to
Boeing under the terms of that Agreement.92

4.38 Furthermore, the European Communities argues th at the road and port improvements at issue
do not constitute general infrastructure, since th ey were, as a result of negotiations, tailored to
Boeing's requirements and guaranteed to Boeing.
93 More specifically, the European Communities
maintains that the 787 Road Improvement Package a nd Port of Everett rail-barge and South Terminal
improvements do not constitute general infrastructure. The European Communities argues that this is
confirmed by the facts adduced by it – e.g. legal rights to Boeing-specified improvements, preferential
access, etc.94 In sharp contrast to the statement by th e United States that "the European Communities
sets forth a couple of facts out of context fo r each challenged infrastructure measure", the
European Communities asserts that it pointed to a myriad of facts pertaining to each of these
measures, including the existence of numerous lega l rights retained by Boei ng with respect to each
measure. Importantly, the European Communities points out that the United States has at no point
disputed the existence of any of these facts.
95 Thus, the European Communities submits that it has
demonstrated that the road and port improvements are not general infrastructure, as Boeing has a legal
right to these improvements, which are tailored to Boeing's own requirements. In addition, the
European Communities emphasizes the fact that Boeing has preferential use of the port facilities.96
4.39 The European Communities also submits that, s hould the Panel consider the road and port
improvements themselves to be general infrastructure, in the alternative, the rights given to Boeing in
connection with the road and port improvements constitute the provision of goods and services other
than general infrastructure within the meaning of Ar ticle 1.1(a)(1)(iii) of the SCM Agreement. These
rights were provided only to Boeing, and they give Bo eing legal certainty with respect to elements of
the road and port improvements that are important to the operation of its production facility and that
could otherwise result in economic losses. Thus, they provide a benefit to Boeing that is not available
on the market.97
4.40 Turning to the "Make Whole" provision of the Project Olympus Master Site Agreement, the
European Communities submits that this provision plays a critical role in guaranteeing for Boeing
each of the subsidies in the $3.92 billion Boeing Incen tive Package. The U.S. contention that this is
"simply a 'best efforts' provision that encourages the Parties to comply with their commitments to the

91 European Communities' first written submission, para. 164.
92 European Communities' first written submission, para. 165.
93 Executive Summary of the European Communities' non-confidential oral statement at the first
94 Executive Summary of the Europ ean Communities' non-confidential or al statement at the second
95 Executive Summary of the Europ ean Communities' non-confidential closing statement at the second
96 Executive Summary of the European Communities' second written submission, para. 11.
97 European Communities' response to question 249, paras. 454, 459; European Communities' response
to question 364, para. 188.

BCI deleted, as indicated [***]

extent legally permissible" is absurd and contrary to the plain meaning of the text of the provision that
would be found under domestic law.98
(ii) State of Kansas and municipalities therein
4.41 In respect of the measures by the State of Kansas and its localities, the
European Communities argues that Boeing's LCA division has received $784 million in property and
sales tax benefits from City of Wichita industria l revenue bonds, and an additional $122 million
benefit from State of Kansas bonds.99
4.42 The European Communities argues that the United States has not satisfactorily contested the
European Communities' prima facie case that the City of Wichita, through property and sales tax
breaks associated with industrial revenue bonds, and the State of Kansas, through bonds issued by the
KDFA, provide subsidies benefiting Boeing's LCA di vision that are specific within the meaning of
Articles 1 and 2 of the SCM Agreement.100
Wichita IRB tax breaks
4.43 The European Communities contends that the City of Wichita, Kansas, has provided property
and sales tax abatements associated with almost $4 billion in industrial re venue bonds issued on
behalf of the Wichita facilities u sed to produce parts for Boeing LCA. 101 The European Communities
also alleges that through a complicated legal schem e, the sole intention and consequence of these
industrial revenue bonds has been to provide property and sales tax breaks benefiting Boeing.102
4.44 The European Communities rejects the U.S. argument that the industrial revenue bonds result
in no financial contributions as baseless, because th e general Kansas property tax exemption to which
the United States refers applies only to commercia l and industrial machinery and equipment acquired
after 30 June 2006. Further, the European Comm unities contends that it has established that the
expected value of future bond-related subsidies to Spirit (i.e. the new owner of Boeing's commercial
operations in Wichita and current co-producer of Boeing LCA) passed through to Boeing pursuant to
the terms and conditions of Spirit's purchase of Boei ng's Wichita facilities, based on expert analysis
by Professor Paul Wachtel of New York Universi ty. The European Comm unities notes that Boeing's
share of industrial revenue bonds is also dispropo rtionate to its economic position in the City of
Wichita.103
4.45 With respect to industrial revenue bonds, the European Communities contends that the U.S.
argument that the industrial revenue bonds result in no financial contributi ons fails principally
because the general Kansas property tax exemption to which the United States refers applies only to
commercial and industrial machinery and equipment ac quired after 30 June 2006. It maintains that
the industrial revenue bonds receive d by both Boeing and Spirit result in benefits for Boeing's LCA
division, as Spirit passes through its IRB benefits to Boeing's LCA division, which is demonstrated by
basic principles of asset pricing. These industr ial revenue bonds are specific because the share of

98 Executive Summary of the European Communities' second written submission, para. 12.
99 Executive Summary of the European Communities' non-confidential oral statement at the first
100 Executive Summary of the European Communities' second written submission, para. 13.
101 Executive Summary of the European Communities' first written submission, para. 5.
102 Executive Summary of the European Communities' first written submission, para. 5.
103 Executive Summary of the European Communities' non-confidential oral statement at the first

BCI deleted, as indicated [***]

industrial revenue bonds received by Boeing and Spir it is disproportionate to their share of the
Wichita economy.104
4.46 In relation to the issue of specificity, the European Communities contends that, contrary to the
U.S. assertions, it has taken into account the divers ification of economic activities in Wichita in its
specificity analysis. Indeed, it asserts that in an economy where manufacturers "produce everything
from motorcycles to computer storage devices" 105, the fact that Boeing has received as much as 69%
of the IRB-related property tax abatements provide d by Wichita, as compared to its (at most) 16%
share of the local economy, confirms that these subsidies are de facto specific. The
European Communities also objects to the United States' rhetoric, alleging that the United States has
never offered any measure of Boeing's share of the local economy based on a factor other than
employment.
106
KDFA bonds
4.47 The European Communities argu es that the State of Kansas, through the KDFA, has also
issued $80 million in bonds related to the produc tion of a portion of the 787 fuselage in Wichita. 107
The European Communities asserts that these bonds are a means to the end of providing twenty years
of semi-annual grants benefiting Boeing's 787 project. 108 In case there were any doubt for whom
these KDFA bonds and the implementing legislati on were intended, the European Communities
points to the fact that the State dubbed them "Boeing Bonds".109
4.48 With respect to KDFA, the European Co mmunities maintains that the KDFA bonds are
specific subsidies that benefit Boeing's LCA division. 110 The European Communities claims it has
demonstrated that Spirit passes the benefits of these bonds through to Boeing's LCA division, based
on expert analysis by Professor Paul Wachtel of New York University; and the bonds were specific
because they were made available to only Boeing, and its successor entity, Spirit.111
European Communities' arguments in relation to the Boeing-Spirit transaction
4.49 The European Communities considers that the United States' attempt to rebut the
European Communities' pass-through argument fails. 112 More specifically, it takes issue with the fact
that the United States simply asserts that Spir it does not pass through benefits it receives from
industrial revenue bonds and KDFA bonds to Boeing, but refuses to provide any information to
support this assertion.
4.50 The European Communities emphasizes that Spir it is actually a co-producer of Boeing LCA,
and as such, part of the U.S. LCA industry, whic h is the industry that is the subject of the

104 Executive Summary of the European Communities' second written submission, para. 14.
105 Executive Summary of the European Communities' non-confidential closing statement at the second
meeting with the Panel, footnote 2.
106 Executive Summary of the European Communities' non-confidential closing statement at the second
107 Executive Summary of the European Communities' first written submission, para. 5.
108 Executive Summary of the European Communities' first written submission, para. 5.
109 Executive Summary of the European Communities' first written submission, para. 5.
110 Executive Summary of the European Communities' second written submission, para. 15; Executive
Summary of the European Communities' non-confidential oral statement at the second meeting with the Panel,
para. 5.
111 Executive Summary of the European Communities' second written submission, para. 15.
112 Executive Summary of the European Communities' non-confidential closing statement at the first

BCI deleted, as indicated [***]

European Communities' claims in this dispute. 113 Importantly, Spirit is not an "independent entity,
unrelated to Boeing", as the United States asserts; ra ther, it is the successor en tity to Boeing's Wichita
operations with an ongoing special relationship with Boeing. Moreover, at the critical time for
assessing pass-through – i.e. at the time the Boei ng-Spirit transaction closed – Spirit had no
relationship with Airbus, while the City of Wichita had already expressed its intent to issue industrial
revenue bonds for Spirit and Spirit had already applied for its KDFA bonds.114
4.51 The European Communities further explains 115 that the terms of the Boeing-Spirit transaction
in February 2005, providing for p ass-through to Boeing of future subs idy benefits, were based on the
reasonable expectations that Boeing's successor in Wichita would receive industrial revenue bonds
and KDFA bonds. Although the United States notes that the European Communities has provided no
evidence that the terms of the Boeing-Spirit agreem ent were altered between February and June 2005
to take into account the benefits of future bonds , the European Communiti es argues that it is no
surprise that there is no such evid ence, since the events leading up to the closing of the transaction
in June 2005116 confirmed the parties' February 2005 e xpectations, meaning there was nothing to
amend.117 The European Communities maintains that, in responding to the evidence regarding pass-
through to Boeing of the benefits from the Kansas measures to Spirit, the United States follows the
approach of stating that evidence exists contra ry to the European Co mmunities' evidence and
argument that a measure confers a benefit, but failing to provide that other evidence.118
4.52 The European Communities maintains its argument that there were clear expectations that
Spirit would receive both industrial revenue bonds an d KDFA bonds prior to the closing of the arm's
length Boeing-Spirit transaction, and, as such, Spir it passed the future benefits of these subsidies
through to Boeing's LCA division as part of the overall transaction. The European Communities
maintains that these subsidies are specific, as th e amount of industrial revenue bonds received by
Boeing and Spirit is disproportionate to their share of the local economy, and as only Boeing's
successor (Spirit) has received the KDFA bonds.
119
(iii) State of Illinois and municipalities therein
4.53 The European Communities argues that the State of Illinois and its localities have provided an
incentive package for Boeing's corporate hea dquarters, consisting of relocation expense
reimbursements and tax breaks. The European Comm unities contends that the U.S. claim that these
measures are not specific lacks merit, as Boeing was the only intended beneficiary, and the only
actual beneficiary.
120

113 Executive Summary of the European Communities' non-confidential closing statement at the first
114 Executive Summary of the European Communities' non-confidential closing statement at the first
115 Executive Summary of the European Communities' non-confidential closing statement at the second
116 Executive Summary of the European Communities' non-confidential closing statement at the second
meeting with the Panel, footnote 1. Specifically, the 25 May 2005 Spirit IRB letter of intent, the 9 May 2005
Spirit application for KDFA bonds, and the 9 June 2005 KDFA resolution declaring its intent to issue the bonds.
117 Executive Summary of the European Communities' non-confidential closing statement at the second
118 Executive Summary of the European Communities' non-confidential closing statement at the second
119 Executive Summary of the Europ ean Communities' non-confidential or al statement at the second
120 Executive Summary of the European Communities' non-confidential oral statement at the first

BCI deleted, as indicated [***]

Boeing relocation package
4.54 The European Communities argues that the State of Illinois and municipalities therein provide
specific subsidies to Boeing through a package of measures enacted pursuant to the Relocation Act.
These measures include: relocation expense reimburse ments; 15-year EDGE tax credits; and local
property tax abatements in connection with relocated corporate headquarters.121
4.55 The European Communities further asserts th at this generous and long-term incentive
package was provided to Boeing in connection with its decision to relocate its corporate headquarters
to Chicago, Illinois, in 2001.122 The European Communities notes that legislators often referred to the
associated Relocation Act as the "Boeing package". 123 The European Communities adds that, as part
of the relocation incentives, the City of Chicago even wrote a check to the landlord of Boeing's
headquarters building, to help ensure that Boeing could have the building of its choice, at the time of
its choosing, without having to pay a premium.
124
4.56 Noting that the U.S. arguments related to these measures focus on limiting the amounts of the
financial contributions to the past, and argu ing that these measures are not specific, the
European Communities submits that all of th ese measures were properly referenced in the
consultation and panel requests, and were in existence well before this Panel was established. They
therefore result in financial contributions regardless of whether the transfer of funds or foregoing of
government revenue otherwise due takes pla ce in the past, present, or future. The
European Communities submits that these measur es are all specific because Boeing was the only
intended beneficiary, and the only actual beneficiary, of the Relocation Act, pursuant to which each of
these measures was enacted. The property tax cuts are also specific because the relevant ordinances
and agreements explicitly limit them to Boeing.125
4.57 Finally, the European Communities emphasizes the fact that the United States accepts that the
relocation expense reimbursements, EDGE tax cr edits and local property tax abatements are
subsidies, and that the United States has failed to rebut the European Communities' arguments as to
the amount and specificity of these subsidies.126
Retirement of former lease
4.58 The European Communities recalls the United States' admission that the lease retirement
payment by the City of Chicago constitutes a specific subsidy to Boeing's LCA division.127
(c) U.S. Federal Government measures
4.59 Generous as these state benefits are, the Eur opean Communities submits that the main source
of U.S. subsidies to Boeing has always been the federal government. Boeing has received almost
$17 billion in funding and support from NASA, DOD, DO C, and DOL. The bulk of this funding is
provided by NASA and DOD, primarily through th eir aeronautics R&D subsidies. NASA and DOD
also grant Boeing IP rights to valuable research results, including patents, trade secrets, and data

121 Executive Summary of the European Communities' second written submission, para. 16.
122 Executive Summary of the European Communities' first written submission, para. 6.
123 Executive Summary of the European Communities' first written submission, para. 6.
124 Executive Summary of the European Communities' first written submission, para. 6.
125 Executive Summary of the European Communities' second written submission, para. 17.
126 Executive Summary of the Europ ean Communities' non-confidential or al statement at the second
127 Executive Summary of the Euro pean Communities' second written submission, para. 18; Executive
Summary of the European Communities' non-confidential oral statement at the second meeting with the Panel,
para. 6.

BCI deleted, as indicated [***]

rights; they reimburse Boeing for certain R&D cost s incurred solely pursuant to Boeing's own will
(known as "independent" R&D) rather than pursuant to the terms of a contract; and they provide
facilities, equipment, and employees for LCA-related R&D. 128 The European Communities points to
the following features, which it considers are evident from an examination of the R&D subsidies:
(a) The U.S. Government and Boeing have had a very close and long-standing
relationship that has helped Boeing to succeed in the LCA markets.
(b) Both the U.S. Government and Boeing ofte n admit through public statements that the
LCA sector is unique in its ability to benefit from lavish government funding.
(c) Federal R&D funding and suppor t greatly reduce the need for Boeing to finance its
own R&D for developing new and improved LC A, and shift the risk of new product
development to the U.S. Government.
(d) Federal R&D funding and support lead to the development of valuable technologies
for Boeing's LCA division, and this technology remains with Boeing (rather than in
the public domain) through IP rights and other technology transfer restrictions.
129
In addition, the European Communities submits th at the U.S. Government has provided almost
$2.2 billion in export-contingent tax relief to Bo eing under the FSC/ETI tax exclusion regimes that
impacts the sales of Boeing LCA.130
(i) U.S. aeronautics R&D
4.60 The European Communities alleges that the Un ited States has provided $13 billion to help
Boeing research, develop, design, and produce its LCA families, most notably the 787, through the
NASA, DOD, and DOC aeronautics R&D programmes at issue. In particular, the
European Communities argues that the United States has done so through eight NASA R&D
programmes, 23 DOD RDT&E programme elements 131 and the DOC Advanced Technology
Program.132
4.61 The European Communities contends that th e U.S. Government-supported aeronautics R&D
has benefited all of Boeing's LCA models in th e past, and will continue to benefit Boeing's LCA
models in the future. Even in those instances where U.S. Government R&D support is purportedly for
military aircraft technology, such support often benefits LCA technology.133
4.62 The European Communities goes on to explain th at the U.S. LCA industry is unique among
U.S. manufacturing industries in having receive d extensive federal government support for R&D
since its inception. Robert Spitzer, the former Vice President for Engineering at Boeing's Commercial
Airplane Group, has acknowledged that NASA's unique collaboration with the U.S. LCA industry "is
evident in every U.S.-made aircraft". Indeed, J. F. Creedon, the former Director of NASA Langley,
has stated: "(t)he reason that there is a NASA Langley and the other aeronautics centers is to

128 Executive Summary of the European Communities' first written submission, para. 7.
129 Executive Summary of the European Communities' first written submission, para. 8.
130 Executive Summary of the European Communities' first written submission, para. 20.
131 The European Communities explained in its subsequent submissions that its challenge with respect
to DOD RDT&E is, and always has, related to the entire DOD RDT&E Program, and not just 23 specific
Program Elements. European Communities' response to question 359, para. 163; European Communities'
comments on United States' response to question 361, para. 151.
132 Executive Summary of the European Communities' non-confidential oral statement at the first
133 Executive Summary of the European Communities' first written submission, para. 9.

BCI deleted, as indicated [***]

contribute technology to assure the pre-eminence of U.S. aeronautics. When Boeing brings out a
flagship product like the 777, that uses as many pr oducts of NASA technology as are on this plane, it
reaffirms the reason that we exist and it is very gratifying to us".134
4.63 Thus, the European Communities submits that it has extensively analysed eight NASA
aeronautics R&D programmes, 23 DOD RDT&E PEs, and eight DOC ATP projects, and established a
prima facie case that this NASA, DOD, and DOC R&D support constitutes specific subsidies to
Boeing's LCA division that have helped Boeing r esearch, develop, design, and produce various
members of its LCA family, most notably the 787. It maintains that the United States has not rebutted
this prima facie case, as it has never addressed the European Communities evidence and argument on
a measure-by-measure basis.135
4.64 The European Communities rejects the U.S. arguments focusing on NASA's overall mission
and the military nature of DOD's RDT&E PEs as being a diversion. According to the European
Communities, the evidence demonstrates that th e NASA and DOD programmes actually at issue have
generated valuable knowle dge, experience, and confidence with respect to LCA technologies that
Boeing has put to use toward its LCA. This is th e case even with respect to early-stage research, as
well as research on aircraft that do not on their face resemble today's LCA. Contrary to U.S. claims,
key results and data from NASA/DOD-sponsored R&D are rarely published, and the little that is
published does not allow Airbus to adequate ly leverage the results. Further, the
European Communities notes that ITAR do es not prevent Boeing from using DOD-supported
technologies toward its LCA.136
4.65 With respect to the benefit from the NAS A and DOD R&D contracts, as well as from the
provision of IP rights, the European Communities has explained why the contracts with non-profit
universities provided by the United States fail to re fute the market benchmark established by the
European Communities. The Eur opean Communities' benchmark is based on a variety of different
sources, including a particularly relevant benchmar k detailed by Ms. Regina Dieu, legal counsel for
Airbus in industrial procurement, and articles aut hored by IP law experts on the general practice of
for-profit companies. 137
4.66 Finally, the European Communities observes that although the United States had several
opportunities to provide support for the incredibly low values that it alleges were provided to Boeing's
LCA division by NASA and DOD R&D support, it failed to provide any of that evidence. In
particular, the European Communities contends that it is left with lists of contract numbers and dollar
amounts, typed out on blank sheets of paper, without any way to precisely verify what was actually
included, and more importantly, what was excluded from those lists. The European Communities, by
contrast, has made a prima facie case of the subs idy values, with its meticulously supported top-down
analysis, and this remains the only real eviden ce now before the Panel on this issue. The
European Communities argues that to date, the U.S. submissions have not provided any comfort to the
European Communities that anyone at NASA or D OD has actually done a thorough review of the
contracts in their files.
138

134 Executive Summary of the European Communities' first written submission, para. 10.
135 Executive Summary of the Europ ean Communities' non-confidential or al statement at the second
136 Executive Summary of the European Communities' non-confidential oral statement at the first
137 Executive Summary of the European Communities' non-confidential closing statement at the second
138 Executive Summary of the European Communities' non-confidential closing statement at the first

BCI deleted, as indicated [***]

4.67 The European Communities unders tands the United States to argue that neither NASA nor
DOD can provide a full accounting of any of the progr ammes at issue in this dispute, because their
computers are unable to respond to the necessary qu eries. The European Communities submits that
the U.S. bottom-up approach cannot be relied upon, and the European Comm unities estimates of the
financial contributions to Boeing, whether through di rect transfers of funds or the provision of goods
or services, continue to be the best information available to the Panel.139
4.68 In view of the above and based on the best in formation available, the European Communities
maintains that the amount of the NASA, DOD, and DOC R&D subsidies to Boeing's LCA division is
$13 billion and that the ongoing U.S. criticism of th e top-down European Communities' approach is
unfounded.
140 In contrast, the European Communities s ubmits that the United States has provided no
confidence that its bottom-up estimates capture all of the NASA and DOD contract disbursements to
Boeing, as well as all of the valuable goods and services, in-house R&D support, and funding through
sub-contracts provided to Boeing for LCA-related R&D.141
R&D support does not constitute a purchase of service
4.69 The European Communities subm its that NASA and DOD R&D support constitutes a direct
transfer of funds and a provision of goods and services, not a purchase of services. 142 T h e
European Communities argues that the NASA support provides a benefit, given that no commercial
entity would ever pay another entity to conduct R&D primarily for the other entity's benefit, while
DOD's failure to recover a fair share of its inv estment in LCA-related technologies is inconsistent
with relevant market benchmarks.143
4.70 More specifically, the European Communities claims that NASA and DOD are paying for
R&D that is of exclusive benefit to the company performing the R&D, and DOD, in particular, fails to
"recoup" the portion of R&D costs it pays to Boeing that relates to Boeing LCA. The
European Communities argues that no company in the commercial marketplace would undertake
these practices. Noting that the United States pres ents four contracts between Boeing and unnamed
universities to illustrate that a party funding R&D do es not necessarily control the resulting IP rights,
the European Communities contends that presen ting these contracts as examples of commercial
practice is not credible, particularly in the light of Boeing's relationship with universities, which is
often that of a benefactor to charitable institutions.
144 Finally, the European Communities considers
that this support is specific because only entities capable of carrying out these aeronautics R&D
projects receive this support, and Boeing's share is disproportionate to its economic position in the
United States.
145

139 Executive Summary of the European Communities' non-confidential closing statement at the second
140 Executive Summary of the Europ ean Communities' non-confidential or al statement at the second
141 Executive Summary of the Europ ean Communities' non-confidential or al statement at the second
142 Executive Summary of the European Communities' non-confidential oral statement at the first
meeting with the Panel, para. 8; Executive Summary of the European Communities' second written submission,
para. 21; Executive Summary of the European Communities' non-confidential oral statement at the second
143 Executive Summary of the European Communities' non-confidential oral statement at the first
144 Executive Summary of the Europ ean Communities' non-confidential or al statement at the second
145 Executive Summary of the European Communities' non-confidential oral statement at the first

BCI deleted, as indicated [***]

4.71 The European Communities takes issue with th e statement by the United States that NASA
and DOD R&D contracts should be considered purch ases of services, and therefore fall outside the
scope of the SCM Agreement.146 This is a remarkable argument, and one which – if accepted – would
open up a hole in the SCM Agreement that woul d allow undisciplined subsidization without limit. 147
The European Communities elaborates that, rather th an simply writing a cheque to a given company,
a government could instead establish an agency with a mission to ensure the pre-eminence of the
industry in which that company operates, and then ha ve that agency enter into a "contract" with the
company to provide funds in exchange for reports or license rights that it does not intend to use. (The
European Communities notes that the U.S. explained during the first panel meeting that some of the
"contracts" entered into by NASA are in fact "cooperative agreements", "technology investments
agreements" or "other transactions". However, th e United States did not explain which are involved
in this case.) The European Communities submits that , regardless of the form of the transaction, the
company at issue receives government funds to co nduct research that the company wants to conduct
for its own benefit, while the government receives noth ing of any value to it. Failing to consider this
form of support as a financial contribution would, in the view of the European Communities, subvert
the object and purpose of the SCM Agreement, wh ich is to discipline subsidies that distort
international trade in goods.
148
4.72 The European Communities submits that a s ubstantive examination of the NASA and DOD
contracts at issue shows that they result in direct transfers of f unds and provisions of goods and
services, since they convey economic resources to Boeing. If a measure properly fits into any one of
the sub-paragraphs of Article 1.1(a)(1), there is a financial contribution, regardless of whether it might
also constitute a purchase of services. The United St ates focuses on what the government receives in
return for its transfers of funds and provisions of goods and services, but in doing so, deliberately
confuses the distinct concepts of financial contribut ion and benefit, contrary to clear Appellate Body
guidance in Brazil – Aircraft. In any event, the European Communities argues that NASA and DOD
R&D subsidies are not properly characterised as pu rchases of services because the transactions at
issue: (i) do not ultimately aim at the acquisition of a service for the direct benefit and own use of
NASA or DOD; (ii) do not contain the typical elements of a purchase; (iii) do not exclusively affect
trade in services, but rather are a crucial element of the production of goods – i.e. LCA and military
aircraft; and (iv) are not rendered by a genuine service provider.
149
NASA
4.73 The European Communities argues that NAS A research has contributed to numerous
advances applicable to LCA in areas such as aerodyna mics, flight dynamics, structures and materials,
flight systems, noise reduction, and operating problems, based in part on the expert analysis of Airbus
engineers Dominik Wacht and Tim Sommer. A ltogether, NASA has provided over $10.4 billion in
support to Boeing's LCA division through the following aeronautics R&D Programs: Advanced
Composites Technology ("ACT"), High Speed Resear ch ("HSR"), Advanced Subsonic Technology
("AST"), High Performance Computing and Commun ications ("HPCC"), Aviation Safety ("ASP"),
Quiet Aircraft Technology ("QAT"), Vehicle System s ("VSP"), and Research and Technology Base
("R&T Base"). As the U.S. Congressional Budget Office has found: "(t)he benefits from the R&D

146 Executive Summary of the European Communities' non-confidential closing statement at the first
147 See also, Executive Summary of the European Communities' non-confidential oral statement at the
first meeting with the Panel, para. 8. Accepting the United States' argument that LCA-related R&D support is a
purchase of services simply because it is funded th rough contracts would, in the view of the European
Communities, create an enormous loophole in the SCM Agreement.
148 Executive Summary of the European Communities' non-confidential closing statement at the first
149 Executive Summary of the Europ ean Communities' non-confidential or al statement at the second

BCI deleted, as indicated [***]

supported by the NASA programs in question fall almost exclusively to aircraft manufacturers, their
suppliers, and airlines".150
4.74 The European Communities submits that among the aeronautics R&D subsidies at issue are
NASA's AST Program and HSR Program, which provided over $2.3 billion for research that was
deemed by NASA itself as "vital to the future of the Nation's civil aircraft industry". The
European Communities asserts that much of this funding benefited Boeing's LCA division and that
benefits from this funding continue today. In addition, the European Communities emphasizes that
one of the policies of these programmes was to restrict the transfer of valuable information outside of
the United States because, in NASA's own words, "it is critical for the United States to maintain its
lead over foreign competition in aerospace technolog y". On this basis, the European Communities
argues that these R&D subsidies were not designed for the benefit of ordinary air travellers, but
instead for the benefit of the U.S. LCA industry.
151
4.75 The European Communities also argues that the legacy of these programmes has continued in
other multi-billion dollar NASA aeronautics programme s that have funded LCA-related research by
Boeing, such as the HPCC Program, ASP, QAT Program, VSP and R&T Base Program. 152
Furthermore, Boeing's ability to launch its 787 Dream liner using more than 50% composite materials
was made possible through decades of funding a nd support provided by NASA, including through its
Aircraft Energy Efficiency ("ACEE") Program a nd ACT Program. These pr ogrammes were focused
on increasing the use of composites in LCA.153
4.76 The European Communities alleges that NASA's aeronautics R&D contracts (including Space
Act Agreements) give rise to financial contributions because they result in both direct transfers of
funds and the provision of goods and services (nam ely the provision of facilities, equipment, and
employees).154 Second, it claims that NASA's R&D funding and support confer a benefit on Boeing's
LCA division worth $10.4 billion because NASA receives little to no value in return for the funds and
goods/services it provides, contrary to the U.S. as sertions. The European Communities argues that
NASA is not in the business of manufacturing LCA or its parts; NASA's interests, which the
United States relies on to demonstrate the value to NASA, are entirely identical to Boeing's interests
for the measures at issue; and the limited NASA R&D results that are eventually disseminated to the
public have little value to the companies th at did not participate in the research. 155 In this regard, the
European Communities makes reference to statemen ts by Airbus engineers and a UK Government
expert, Dr. Ray Kingcombe, on the difficulty of obtaining any meaningful data from published NASA
reports.156 Third, the European Communities emphasizes that the United States has not disputed the
conclusion that NASA's aeronautics R&D support for Boeing is specific.157
4.77 The European Communities specifically reject s the United States' argument that NASA R&D
support amounts to a purchase of services on the basis that, inter alia, its purpose is to advance the
interests of the U.S. LCA industry, not provide anything of value to NASA. For example, according
to NASA, "(t)he goal of the ACT program is to increase the competitiveness of the U.S. aeronautics
industry by putting the commercial transport manufact urers in a position to expand the application of
composites beyond the secondary structures in use today to wings and fuselages by the end of {the
1990s}". The European Communities posits that if the U.S. argument that these R&D contracts

150 Executive Summary of the European Communities' first written submission, para. 11;
European Communities' first written submission, para. 476.
151 Executive Summary of the European Communities' first written submission, para. 12.
152 Executive Summary of the European Communities' first written submission, para. 13.
153 Executive Summary of the European Communities' first written submission, para. 14.
154 Executive Summary of the European Communities' second written submission, para. 21.
155 Executive Summary of the European Communities' second written submission, para. 23.
156 European Communities' second written submission, para. 325.
157 Executive Summary of the European Communities' second written submission, para. 24.

BCI deleted, as indicated [***]

constitute purchases of services ex cluded from the scope of Article 1.1(a)(1) were accepted by the
Panel, it would create an enormous and unintended loophole in the SCM Agreement.158
4.78 The European Communities considers that the United States, throughout all of its NASA-
related arguments, largely ignores the mountain of evidence submitted by the European Communities
illustrating how NASA funding and support has benefited Boeing's LCA division. 159 M o r e
specifically, the European Communities claims that the United States continues to put emphasis on
NASA's overarching mission to expand "human knowl edge" or "the global foundations of aeronautics
science", instead of engaging the European Comm unities' arguments and evidence on a programme-
by-programme level.160
4.79 The European Communities asks the Panel to di sregard the United States' request that the
Panel ignore the statements from official NASA sources as to the very purpose of the programmes
challenged by the European Communities in fav our of vague statements about NASA's overall
mission. The European Communities contends that abstract generalizations about NASA's overall
purpose do nothing to diminish the lucid objectives of the programmes that are at issue in this
dispute.161 In this context, the European Communities maintains its argument that the United States
has never, on a programme-by-programme basis, defended these eight specific NASA R&D
programmes. Nor can it do so, in the view of th e European Communities, under the terms of the
SCM Agreement. Importantly, NASA's objectiv es for the eight programmes at issue are
indistinguishable from Boeing's objectives – i.e. "to assure the pre-eminence of U.S. aeronautics".162
4.80 The European Communities submits that the myriad of activities conducted by NASA is not
at issue in this dispute. What is at issue, however, are eight highly specialized aeronautics R&D
programmes operated by NASA that, based on clear evidence, help improve the competitiveness of
U.S. LCA manufacturers – i.e. Boeing. 163 To review some of this evidence, the
European Communities cites the following chart:164

158 Executive Summary of the European Communities' second written submission, para. 21.
159 Executive Summary of the European Communities' second written submission, para. 19.
160 Executive Summary of the European Communities' non-confidential closing statement at the second
161 Executive Summary of the European Communities' non-confidential closing statement at the second
162 Executive Summary of the European Communities' non-confidential closing statement at the first
163 Executive Summary of the European Communities' non-confidential closing statement at the second
164 European Communities' second written submission, para. 318.

BCI deleted, as indicated [***]

Figure 2 - NASA Aeronautics R&D Programmes Helped Boeing Build LCA

165 NASA ACT Budget Estimates, FY 1997, SAT 4-21, Exhibit EC-321, emphasis
European Communities.
166 L. Ilcewicz, et al., Advanced Technology Composite Fuselage , Sixth NASA/DOD ACT Conference ,
Exhibit EC-279, p. 22, emphasis European Communities.
167 NASA HSR Budget Estimates, FY 1999, SAT 4.1-29 to 4.1-30, Exhibit EC-343, emphasis
European Communities.
168 NASA High Speed Research Program Plan, April 1998, Exhibit EC-1208, p. 1, emphasis
European Communities.
169 Harris Statement, Exhibit EC-359, p. 5, emphasis European Communities.
170 Task Assignment No. 15, NASA Contract NAS1-20267, Integrated Wing Design, 26 July 1995 ,
Exhibit EC-362, emphasis added; Task Assignment No. 9, NASA Contract NAS1-20268, Integrated Wing
Design, 26 July 1995, Exhibit EC-363, emphasis European Communities.
171 HPCC Fact Sheet, Exhibit EC-372, emphasis European Communities.
172 NASA Aviation Safety Program Program Plan, 1 August 1999, Exhibit EC-1209, p. 35, emphasis
European Communities.
173 NASA Memorandum to Research and Focused Branch , Exhibit EC-365, p. 4, emphasis
European Communities.
174 NASA Vehicle Systems Budget Estimates, FY 2003, SAT 4- 23, Exhibit EC-396, emphasis
European Communities.
175 NASA R&T Base Budget Estimates, FY 1999, SAT 4.1-2, Exhibit EC-398, emphasis
European Communities.
NASA
Programme Statements by NASA and Boeing Illustrating Goal to Help Boeing LCA
ACT − "The goal of the Advanced Composites Technology (ACT) program is to increase the competitiveness of the
U.S. aeronautics industry by putting the commercial transport manufacturers in a position to expand the
application of composites beyond the secondary structures in use today to wings and fuselages by the end of {the
1990s}."165
− "U.S. government research funding, such as the NASA ACT program, is crucial to helping Boeing and other U.S.
aircraft manufacturers develop advanced technology and remain competitive in world markets."166
HSR − HSR aimed to "develop {} the technologies that industry needs … to establish the vi ability of an economical and
environmentally sound High Speed Civil Tran sport (HSCT), a vehicle that—if built by U.S. industry —could
provide U.S. leadership in the long-range commercial air travel markets of the next century …". 167
− "The projected High-Speed Civil Transport (HSCT) mark et is substantial, and successful development and
production of an HSCT by foreign comp etitors would significantly reduce the U.S. aerospace industry world
market share of civil transport aircraft. Technology deve lopment is essential. The NASA HSR program is being
conducted in two phases with the ultimate objective of helping to assure U.S. industry's continued preeminence in
aeronautics well into the next century by developing technology that will enab le an environmentally compatible
and economically viable HSCT aircraft."168
AST − "NASA's objective in the Advanced Subsonic Technology (AST) program is to provide U.S. industry with a
competitive edge to recapture market share , maintain a strongly positive balance of trade, and increase U.S.
jobs."169
− AST's Integrated Wing Design ("IWD") element aimed to " {c}onduct an assessment of the technology needs of
the U.S. commercial transport-aircraft industry that would allow that industry to design and manufacture their
products at significantly lower cost and less time than today".170
HPCC − "The goal of the CAS project is to accelerate the deve lopment, availability and use of high-performance
computing technology by the U.S. aerospace industry …." 171
Aviation Safety − "The Aviation Safety Program will emphasi ze rapid and effective dissemination of the {aviation safety }
technology to the U.S. industry .... AvSP resources fund R&D contracts a nd grants, which help ensure direct
transfer of technology to the U.S. industry and thus increase the likelihood of direct input into near-term
products."172
QAT − QAT, along with its predecessor Noise Reduction progra m under AST, focused on "d eveloping noise reduction
technology for the U.S. commercial aircraft industry to enhance its competitiveness to meet national and
international environmental requirements and to facilitate market growth."173
Vehicle
Systems
− Vehicle Systems, inter alia, "investigates and develops breakthrough technologies to maintain the superiority of
U.S. aircraft …". 174
R&T Base − "Through basic and applied research", R&T Base developed "critical hi gh-risk technologies and advanced
concepts for U.S. aircraft and engine industries".175

BCI deleted, as indicated [***]

4.81 The European Communities observ es that there is agreement be tween the United States and
the European Communities that the purpose and effect of the eight NASA programmes was to
improve the competitiveness of Boeing LCA. The European Communities recalls the U.S. telling
admission at the first Panel meeting that Airbus never received a penny of funding from the NASA
AST Program, adding that the same is true of all of the other R&D programmes that it is
challenging.176
4.82 In response to a number of general assertions made by the United States in relation to related
NASA R&D, the European Communities submits that:
 - the fact that NASA's overall mission goes beyond commercial aeronautics is
irrelevant to evaluating the measures at issue in this dispute;

 - NASA's aeronautics R&D programmes provide a variety of benefits to Boeing's LCA
development, and are not simply focused on basic research;

 - the critical question is how NASA-supported R&D benefits Boeing's current and
future LCA, not whether particular concept aircraft "resemble" current LCA; and

 - research results from NASA aeronautics R&D programmes are often kept hidden
from public view, particularly those that are especially valuable.
177

4.83 In addition, the European Communities tak es issue with a statement made by the
United States that limitations on access are necessary for NASA to obtain and release information that
"would otherwise remain in private hands". If the co ntracts carried out by Boeing were really for the
purpose of NASA's mission and not for the purpose of improving Boeing's competitiveness, why
would Boeing refuse release of the results, and why would NASA accept that they remain secret,
through the various restrictions on access summarise d in the technology overview table distributed
during the Panel's second meeting with the parti es? In this regard, the European Communities
maintains its claim that NASA utilises taxpayer dollars to suppor t Boeing's R&D efforts while
allowing Boeing to keep and utilise the information protected by these limitations for its own benefit
prior to disclosure.
178
4.84 Finally, the European Communities points out that the United States spent much of its time
defending NASA programmes that the European Communities simply is not challenging. 179
Defending measures that are not at issue, while ignoring those that are at issue, obviously does
nothing to rebut the European Communities' prima facie case. 180 In this context, the
European Communities clarifies that it is not cha llenging NASA R&D contracts related to "air traffic
management and air traffic safety" and "ways to modify airplane flight paths to decrease" fuel
consumption. Rather, it is challenging the eight NASA aeronautics R&D programmes that gave rise

176 Executive Summary of the European Communities' non-confidential closing statement at the first
177 Executive Summary of the European Communities' second written submission, para. 20.
178 Executive Summary of the European Communities' non-confidential closing statement at the second
179 Executive Summary of the European Communities' non-confidential closing statement at the first
180 Executive Summary of the European Communities' non-confidential closing statement at the first

BCI deleted, as indicated [***]

to LCA-related technologies for the benefit of the U.S. LCA industry. 181 In addition, the
European Communities maintains its estimate that NASA's R&D support to Boeing's LCA division is
worth $10.4 billion, given that the United States has provided no support for its lower figures. This
estimate captures all funding and support for LCA-related research provided by NASA to all divisions
within Boeing and McDonnell Douglas, including both direct funding and the provision of
goods/services.182
4.85 The European Communities asserts that th e United States seems to misunderstand the
European Communities' methodology in that the United States continues to believe that the European
Communities' methodology is aimed at determini ng the amount of dollars provided by NASA to
Boeing. This is incorrect, as th e European Communities' methodolog y is aimed at determining the
total amount of the subsidy – i.e. the total benefit – to Boeing's LCA division. 183 Even if the
United States were to demonstrate that (i) direct disbursements to Boeing for LCA-related R&D under
the programmes at issue totalled $775 million, and ( ii) provisions of goods and services to Boeing for
LCA-related R&D through Space Act Agreements under the programmes at issue totalled $75
million, such a showing still would not be sufficient to rebut the European Communities' prima facie
case that NASA subsidised Boeing in the amount of $10.4 billion, as it would not demonstrate that the
remaining funding under the programmes at issue did not benefit Boeing's LCA division.184
DOD
DOD RDT&E Program
4.86 The European Communities asserts that almost $2.4 billion in support through contracts under
the DOD RDT&E Program has also directly benefi ted Boeing LCA, without any requirement that
Boeing repay any portion of the commercial benefits to the U.S. Government. 185 Moreover, the
European Communities asserts that it, together with its aeronautics engineering experts at CRA
International and Airbus, has demonstrated th at Boeing utilizes technologies developed with DOD
support on its LCA, particularly the 787, and that Boeing's defence work contributes significantly to
the development of its LCA. Furthermore, th e European Communities submits that DOD not only
funds the development of technology for the U.S. LCA industry, but also pays Boeing and other
companies excessive and unwarranted award and incentive fees in conjunction with their DOD-
supported contracts.186
4.87 The European Communities claims that DOD contr acts give rise to financial contributions
because they result in both direct transfers of funds and the provision of goods and services (namely
the provision of facilities, equipment, and employ ees). They are not purchases of services, but rather
relate to the purchase of goods – i.e. the military aircraft and other defence systems that DOD
ultimately procures. The European Communities main tains that if the U.S. argument that these R&D
contracts constitute purchases of services excluded fro m the scope of Article 1.1(a)(1) were accepted
by the Panel, it would create an enormous and unintended loophole in the SCM Agreement.187
4.88 The European Communities asserts that DOD's RDT&E funding and support confer a benefit
on Boeing's LCA division because Boeing can utilize the R&D results and technology throughout its

181 Executive Summary of the European Communities' non-confidential closing statement at the first
182 Executive Summary of the European Communities' second written submission, para. 22.
183 European Communities' comments on United States' response to question 176, para. 168.
184 European Communities' comments on United States' response to question 341, para. 82;
European Communities' comments on United States' response to question 343, para. 109.
185 Executive Summary of the European Communities' first written submission, para. 16.
186 Executive Summary of the European Communities' first written submission, para. 16.
187 Executive Summary of the European Communities' second written submission, para. 27.

BCI deleted, as indicated [***]

military and civil divisions without paying DOD back for the value of R&D ultimately used toward
designing and building its LCA, as any commercial entity would do. The European Communities
estimates that DOD fails to recover $2.4 billion out of the total $4.3 billion in dual-use RDT&E
support provided to Boeing, resulting in a benefit to Boeing's LCA division worth $2.4 billion. 188
Indeed, because what is at issue in this dispute is R&D that has both military and civil applications
(i.e. dual-use research), the European Communitie s considers only a portion of the total dual-use
DOD RDT&E support to Boeing to be a financial contribution that confers a benefit on Boeing's LCA
division – namely, $2.4 billion out of a total $4.3 billion.189
4.89 In this context, the Europ ean Communities rejects the Unite d States' counter-argument in
which it compares Boeing's relationship with DOD to that of an attorney to a client. Using the U.S.
terminology, the European Communities posits that the United States here is comparing apples to
oranges. Boeing ultimately provides goods for DOD and its commercial customers, and develops
valuable IP rights. Nothing comparable is genera ted from an attorney-client relationship – if it were,
there is no doubt that market-based clients would demand something back.190
4.90 The European Communities recalls that until 1992, DOD attempted to recover a "fair share"
or "fair price" for its contribution to commercial technology through its "recoupment policy".
However, with the end of recoupment for commerc ial sales in June 1992, DOD no longer makes this
attempt, and the U.S. LCA industry benefits from DOD-funded research while paying nothing in
return. 191
4.91 Finally, the European Communities argues th at DOD's RDT&E Program is specific within
the meaning of Article 2.1(a) because DOD explicit ly limits access to RDT& E to only those entities
capable of carrying out the types of activities enum erated in DOD's regulations, and because each of
the PEs at issue was explicitly limited to a group of enterprises. Further, DOD's RDT&E Program is
also specific within the meaning of Article 2.1(c) because Boeing, as well as four other top U.S.
aerospace companies, have received a share of DOD RDT&E support that is not proportionate to their
share of the U.S. economy – i.e. the jurisdiction of the granting authority.192
4.92 The European Communities notes that the United States makes a number of general assertions
in its attempt to contest the European Commun ities' prima facie case that DOD provides specific
subsidies to Boeing's LCA division through its RDT&E Program. The European Communities
addresses those general assertions by explaining that:
 - DOD RDT&E PEs have given rise to LCA -related technologies, regardless of their
purported military purpose;

 - DOD's dual-use research does not levera ge only commercial technology for military
use;

 - differences between military and civil aircraft do not make it impossible for DOD-
supported technologies to be applied toward LCA; and

188 Executive Summary of the European Communities' second written submission, para. 29.
189 Executive Summary of the European Communities' second written submission, para. 25.
190 Executive Summary of the European Communities' non-confidential closing statement at the second
191 European Communities' first written submission, paras. 669, 671.
192 Executive Summary of the European Communities' second written submission, para. 30.

BCI deleted, as indicated [***]

 - ITAR controls do not prevent Boeing from using military technology toward its
LCA.193

4.93 Next, the European Communities addresses the United States' assertion that a number of the
DOD contracts at issue were awarded to Boeing after competitive bidding. According to the
United States, such bidding creates "competitive pr essure" on Boeing to offer the lowest possible
price, and this price would be lower when Boeing recognizes that benefits to its LCA division could
arise from performing the contract. The European Communities questions what "competitive
bidding" means where overall remuneration is based on costs (even when the contract goes over the
estimated budgets) rather than the value of the product. The European Communities again asserts that
the United States attempts to assume away the be nefit of R&D subsidies with unsupported assertions,
this time about the impact of competitive bidding . Moreover, the European Communities expresses
no surprise about the fact that other companies are interested in receiving DOD RDT&E funding
given the generous terms upon which they are granted, including the provision of IP to the recipient of
the funds, and the reimbursement of IR&D/B&P cost s. Although it is outside the scope of this
dispute, the European Communities posits that many of these contractors likely receive the same type
of subsidies that Boeing receives. For example, even if a recipient of DOD RDT&E funds does not
have significant sales in the commercial market, it could profit through charging license fees to other
companies that do need the DOD-funded patents provided to the contractor.
194
4.94 The European Communities submits that it has provided a wealth of evidence and expert
reports on how Boeing benefits from the DOD RDT&E subsidy programme. The United States, in
the European Communities' view, was unable to answ er any of the European Communities' questions
on this topic during the Panel meeting with the parti es, such as the question regarding Boeing's use of
C-17 technology on its LCA. What the United States did do, however, was to hide behind the military
purpose of the programmes. The Eu ropean Communities considers that this purpose is irrelevant to
the aspect of DOD RDT&E support at issue in this dis pute – namely the portion of this support that
benefits Boeing's commercial division. The Europ ean Communities considers that the United States
also hid behind the phrase "weapons systems" without revealing until direct questioning that an
aircraft can be called a "weapons system". Th e European Communities recognizes that all of these
are interesting tactics, but they fail to address the claims made by the European Communities in this
dispute.195
4.95 Finally, the European Communities maintain s its estimate that DOD's dual-use RDT&E
support to Boeing's LCA division is worth $2.4 bi llion, as the United States has provided no support
for its lower figures. This estimate captures the value of both direct funding and the provision of
goods/services.
196

193 Executive Summary of the European Communities' second written submission, para. 26.
194 Executive Summary of the European Communities' non-confidential closing statement at the second
195 Executive Summary of the European Communities' non-confidential closing statement at the first
196 Executive Summary of the European Communities' second written submission, para. 28.

BCI deleted, as indicated [***]

DOC
DOC Advanced Technology Program
4.96 The European Communities further argues that U.S. DOC has provided support to Boeing
that particularly benefits the development of the 787. 197 The DOC's ATP is designed to improve the
competitive position of U.S. industry by supporting industry-led R&D projects.198
4.97 The European Communities argues that the United States has not successfully contested the
European Communities' prima facie case that the eight ATP projects, through which the U.S. DOC
has provided funding (in the form of grants) and support to Boeing for LCA-related research,
constitute actionable subsidies.
199 The U.S. principal arguments relate to financial contribution and
specificity, but, according to the Eur opean Communities, these arguments fail. 200 In particular, the
U.S. assertion that the financial contributions from these projects are not as high as the
European Communities clai ms lacks support. Further, the Eu ropean Communities submits that the
U.S. argument that ATP is not specific fails becau se: (i) ATP is explicitly limited to groups of
industries or enterprises that engage in R&D re lated to "high risk, high pay-off, emerging and
enabling technologies"; (ii) the eight ATP projects at issue were explicitly limited to a select group of
enterprises that could perform the narrow scope of the research; and (iii) the predominant users of
ATP are enterprises engaged in researching "h igh risk, high pay-off, emerging and enabling
technologies".201
(ii) NASA/DOD intellectual property right waivers/transfers
4.98 In addition to the above, the European Communities also claims that NASA and DOD have
waived and/or transferred valuable patent and other IP rights to Boeing, without any demand for
payment or license fees. Boeing is free to use the pa tented technologies for itself, or to license them
to others for profit.202
4.99 Moreover, the transfer of valuable IP rights to Boeing is inconsistent with the stated objective
of creating technology and knowledge that can serv e the public good, but consistent with Boeing's
economic interests.203
4.100 The European Communities contends that NASA and DOD have waived and/or transferred,
at a minimum, hundreds of millions of dollars worth of valuable IP rights to Boeing, including
patents, rights to trade secrets, and data rights, with the valuation thereof based on the expert analysis
of CRA International. The patents at issue did not belong to Boeing "in the first place", and as such,
their waiver/transfer to Boeing constitutes a financ ial contribution that confers a benefit. The
European Communities submits th at the United States cannot avoid the disciplines of the
SCM Agreement by simply providing these subsidi es pursuant to so-called "contracts". It also
submits that these waivers/transfers are speci fic since only companies capable of conducting

197 Executive Summary of the European Communities' first written submission, para. 19.
198 Executive Summary of the European Communities' first written submission, para. 19.
199 Executive Summary of the Euro pean Communities' second written submission, para. 31; Executive
Summary of the European Communities' non-confidential oral statement at the second meeting with the Panel,
para. 11.
200 Executive Summary of the European Communities' second written submission, para. 31.
201 Executive Summary of the Euro pean Communities' second written submission, para. 32; Executive
Summary of the European Communities' non-confidential oral statement at the second meeting with the Panel,
para. 11.
202 Executive Summary of the European Communities' first written submission, para. 17.
203 Executive Summary of the European Communities' non-confidential closing statement at the first

BCI deleted, as indicated [***]

NASA/DOD R&D activities are eligible to receive th em, and since Boeing's share is disproportionate
in the light of its economic position in the United States.204
4.101 The European Communities argues that the United States fails to counter the
European Communities' arguments 205, and instead tries to defend the practice of NASA and DOD
through unsupported assertions, misleading statements about the relevant laws and regulations, and
references to aspects of NASA and DOD laws and regulations that the European Communities has not
even challenged. Moreover, in the European Co mmunities' view, the U.S. arguments, particularly
with respect to specificity, focus on issues and prac tices that are not relevant to the legal analysis
required by the SCM Agreement.206
4.102 The European Communities mainta ins that the United States fa ils to successfully contest the
European Communities' argument that NASA and DOD IP right waivers/provisions result in financial
contributions. Most important, in the European Comm unities' view, is the fact that the United States
focuses on a portion of the U.S. patent law that does not apply here. The European Communities
submits that the relevant U.S. laws make it clear that inventions made pur suant to a NASA contract
belong to the U.S. Government unless waived by NASA, and inventions made pursuant to a DOD
contract may be retained by the contractor unless DOD decides otherwise. As such, the
European Communities submits that by waiving/providing patent rights to Boeing, NASA and DOD
make financial contributions.
207
4.103 The European Communities further argues th at the U.S. argument that IP right
waivers/provisions confer no benefit also fails because it is based on the U.S. incredible assertion that
one cannot challenge as a subsidy any financial contribution that is included as part of something
deemed by the government as a "contract". The European Communities contends that this assertion is
unsustainable. The European Communities argues th at commercial practice illustrates that an entity
funding R&D typically retains the full IP rights that result. This confirms that providing Boeing with
IP rights, in addition to the funding and support necessar y to conduct the R&D, results in a benefit to
Boeing.
208
4.104 The European Communities reiterates its proposition that, in a market transaction, IP rights
would normally be under the control of the part y funding the R&D (in this case NASA and DOD),
and no company would provide IP to another compan y to "improve the position of the United States
in world trade", or to promote "new technology fo r commercial purposes" of the recipient of the R&D
funds. According to the European Communities, th e United States simply assumes away the value of
this benefit by arguing that NASA or DOD woul d never provide IP to Boeing through an R&D
contract without also requiring Boeing to pay for that IP pursuant to another aspect of that contract,
but it provides absolutely no evidence for this remarkable conclusion.209
4.105 Finally, the European Communities rejects the U.S. attempt to defend NASA and DOD IP
right waivers/provisions as not specific pursuant to Article 2.1(a) of the SCM Agreement as being

204 Executive Summary of the European Communities' non-confidential oral statement at the first
meeting with the Panel, para. 9; Executive Summary of the European Communities' second written submission,
para. 33; Executive Summary of the European Communities' non-confidential oral statement at the second
205 Executive Summary of the Euro pean Communities' second written submission, para. 33; Executive
Summary of the European Communities' non-confidential oral statement at the second meeting with the Panel,
para. 12.
206 Executive Summary of the European Communities' second written submission, para. 33.
207 Executive Summary of the European Communities' second written submission, para. 34.
208 Executive Summary of the European Communities' second written submission, para. 35.
209 Executive Summary of the Europ ean Communities' non-confidential or al statement at the second

BCI deleted, as indicated [***]

fundamentally flawed, as the United States ignores the fact that the relevant granting authorities are
NASA and DOD, not the United States as a whole. Moreover, these IP right waivers/provisions are
also specific pursuant to Article 2.1(c) becau se Boeing has received a share of NASA and DOD IP
right waivers/provisions that is disproportionate to its share of the U.S. economy – i.e. the jurisdiction
of the granting authorities at issue.
210
(iii) NASA/DOD IR&D/B&P Program
4.106 The European Communities submits that NAS A and DOD pay a select group of aerospace
and defence contractors, including Boeing, for th eir incurred independent research and development
("IR&D") expenditure and for their bid and proposal ("B&P") costs. 211 In particular, the
European Communities submits that over $3.1 b illion in IR&D and B&P funding provided by NASA
and DOD, a highly secretive programme of the U.S. Government, have further allowed Boeing to
develop its LCA at government expense. Noting that DOD has explained that primary control of
IR&D activities "rests with the contractors, who are free to determine both the amount and focus of
their IR&D activities", the European Communities points out that a study conducted for the DOD
found that companies can be reimbursed for IR&D expenses for "work on technologies that were
potentially of no interest to the Department of Defense".212
4.107 The European Communities emphasizes that th e financial contribution to Boeing's LCA
division from IR&D and B&P reimbursements is worth approximately $3.1 billion based on the
expert analysis of CRA International 213, and the United States has not contested this
European Communities' estimate. 214 It further observes that the United States offers no evidence
about what Boeing has done, and continues to do, with these reimbursements. The
European Communities submits that it is clear that a market entity would neit her provide nor seek to
provide reimbursement for these types of independently-incurred costs.215
4.108 The European Communities rejects the U.S. argument that IR&D/B&P reimbursements
confer no benefit because this argument is again based on the incredible assertion that one cannot
demonstrate benefit for any financial contribution that is included as part of something deemed by the
government as a "contract".216
4.109 Clarifying its claims that IR&D/B&P reimburseme nts involve a direct transfer of funds from
NASA and DOD to Boeing, and therefore result in fi nancial contributions within the meaning of
Article 1.1(a)(1)(i) of the SCM Agreement, the European Communities explains that, whether the
IR&D/B&P costs are reimbursed through a contract for goods or services is completely irrelevant. 217
With respect to benefit, the European Communitie s' position is that an entity operating pursuant to
market considerations would not agree, and woul d certainly not actively seek out, to reimburse
independently-incurred costs of companies (as does DOD) because those costs "(e)nhance the
industrial competitiveness of the United States" or "(s)trengthen ( ) the … technology base of the
United States". William Keevan, a well-known expe rt in IR&D accounting rules, explains that
Boeing is able to receive IR&D/B&P reimbur sements that fund R&D applicable to LCA

210 Executive Summary of the European Communities' second written submission, para. 36.
211 European Communities' first written submission, para. 857.
212 Executive Summary of the European Communities' first written submission, para. 18.
213 Executive Summary of the European Communities' non-confidential oral statement at the first
meeting with the Panel, para. 10; Executive Su mmary of the European Communities' second written
submission, para. 38.
214 Executive Summary of the European Communities' second written submission, para. 38.
215 Executive Summary of the European Communities' non-confidential oral statement at the first
216 Executive Summary of the European Communities' second written submission, para. 39.
217 Executive Summary of the European Communities' second written submission, para. 38.

BCI deleted, as indicated [***]

development, confirming that NASA and DOD IR&D/B&P reimbursements confer a benefit on
Boeing's LCA division.218
4.110 The European Communities next notes that the Un ited States' assertion that "IR&D costs will
be reimbursed only to the extent of the military benefit of the research" lacks support, and is
contradicted by Mr. Keevan. The logical implication from the total lack of evidence about Boeing's
use of IR&D/B&P funds is that there is no such evidence available to rebut the
European Communities' claims.219
4.111 Finally, the European Communities argues that th e United States fails to adequately address
the European Communities' evidence a nd argument that NASA and DOD IR&D/B&P
reimbursements are specific within the meaning of Articles 2.1(a) and 2.1(c) of the SCM Agreement.
The European Communities asserts that the United States again ignores the fact that the relevant
granting authorities are NASA and DOD, not the entirety of the U.S. Government. The
European Communities also points out that the Un ited States fails to recognize that Boeing has
received a share of NASA and DOD IR&D/B&P reimburse ments that is disproportionate to its share
of the U.S. economy – i.e. the jurisdiction of the granting authorities at issue.
220
4.112 More generally, the European Communities observe s that with respect to its argument that
IR&D/B&P reimbursements constitute a specific subsidy, the United States repeats its basic approach,
i.e. stating that evidence exists contrary to th e European Communities' evidence and argument, but
failing to provide that other evidence. For exam ple, in response to the European Communities'
evidence demonstrating benefit, the United States argues that IR&D/B&P reimbursements are part of
"an integrated term of a contractual bargain", a nd that the Panel should therefore assume that no
benefit could possibly result. But it provides absolu tely no evidence from contract negotiations with
Boeing to support this contention, evidence that is uniquely in the possession of the
U.S. Government.
221
4.113 In conclusion, the European Communities subm its that it has provided evidence and legal
arguments demonstrating that Boeing has received billions of dollars in subsidies through the
NASA/DOD IR&D and B&P reimbursements, whic h the United States has not successfully
contested. It also points to the fact that the Un ited States does not deny that Boeing receives billions
of dollars in IR&D/B&P reimbursements from NASA and DOD 222, but asserts that these
reimbursements "have none of the attributes of a s ubsidy". In contrast, the European Communities
considers that the U.S. response suffers from a co mplete lack of evidence about what Boeing has
done, and continues to do, with the billions of dollars in IR&D/B&P reimbursements received from
NASA and DOD for research that the United States admits neither NASA nor DOD requested Boeing
to do. Instead, the United States relies almost exclus ively on statements and interpretations about the
laws and regulations related to IR &D/B&P that are misleading and/or incorrect. In the few instances
where Boeing has apparently revealed something related to its IR&D/B&P practices for purposes of
this dispute, the European Communities contends that such revelations are generally left completely
unsupported.223

218 Executive Summary of the European Communities' second written submission, para. 39.
219 Executive Summary of the Europ ean Communities' non-confidential or al statement at the second
220 Executive Summary of the European Communities' second written submission, para. 40.
221 Executive Summary of the European Communities' non-confidential closing statement at the second
222 Executive Summary of the Euro pean Communities' second written submission, para. 37; Executive
Summary of the European Communities' non-confidential oral statement at the second meeting with the Panel,
para. 14.
223 Executive Summary of the European Communities' second written submission, para. 37.

BCI deleted, as indicated [***]

(iv) NASA/DOD facilities, equipment and employees
4.114 The European Communities clai ms that NASA provides goods and services, within the
meaning of Article 1.1(a)(1)(iii) of the SCM Agreem ent, to Boeing for LCA-related research and that
NASA receives less-than-adequate remuneration for the goods and services it provides, which results
in a benefit to Boeing's LCA division within the m eaning of Article 1.1(b) of the SCM Agreement.
NASA provides these goods and services in conjunction with the various contractual instruments (i.e.
Space Act Agreements and other contracts) it en ters into with Boeing under the eight NASA
aeronautics R&D programmes challenged in this di spute, and the terms of those contractual
instruments, as well as the objectives of NASA and th e particular programmes at issue, make clear
that NASA receives less-than-adequate remuneration in return.224
4.115 The European Communities uses the term "f acilities, equipment, and employees" as a
shorthand to describe the types of goods and services provided by NASA. 225 For example, the
European Communities argues that Boeing and NASA employees have worked closely together in
integrated teams to create technologies for Boeing's LCA, with the personnel costs for highly skilled
NASA and Boeing employees being paid by the U.S. Government.226
4.116 The European Communities also claims that in conjuncti on with various contractual
instruments entered into pursuant to the DOD RDT&E Program, DOD provides goods and services
(in the form of facilities, equipment, and employ ees) to Boeing for dual-use R&D, a portion of which
relates to LCA, resulting in financial contributions within the meaning of Article 1.1(a)(1)(iii) of the
SCM Agreement. With respect to these fina ncial contributions, the European Communities
establishes – on the basis of the factual aspects of the DOD RDT&E programme, including elements
of the contractual instruments and the lack of DOD "recoupment" – that when Boeing utilises
resulting technology and lessons to ward its development of LCA, DOD receives virtually no value,
meaning that the portion of the financial contribution allocable to LCA is a benefit to Boeing within
the meaning of Article 1.1(b).227
4.117 The European Communities further argues that the provision of facilities, equipment, and
employees by NASA and DOD is specific within the meaning of Article 2.1(a) of the
SCM Agreement, or alternatively within the meani ng of Article 2.1(c), for the same reasons that
NASA's and DOD's aeronautics R&D subsidies, thr ough which they provide this support, are
specific.
228
(v) DOL 787 worker training grants
4.118 The European Communities claims that U.S. DOL has provided support to Boeing that
particularly benefits the development of the 787. 229 The primary target of the DOL's training grant
was development of the workforce necessary for developing and building the 787.230
4.119 The European Communities further argues that th e United States has failed to show that the
grant awarded by DOL to Edmonds Community Colleg e is not a specific subsidy for Boeing's benefit
under the terms of the SCM Agreement. This gran t constitutes a financial contribution within the
meaning of Article 1.1(a)(1)(i). Further, the United States' assertion that Edmonds Community
College used this grant to develop curriculum that provides no benefit to Boeing is without support,

224 European Communities' response to question 148, para. 171.
225 European Communities' response to question 148, para. 172.
226 Executive Summary of the European Communities' first written submission, para. 15.
227 European Communities' response to question 156, para. 233.
228 European Communities' first written submission, para. 901.
229 Executive Summary of the European Communities' first written submission, para. 19.
230 Executive Summary of the European Communities' first written submission, para. 19.

BCI deleted, as indicated [***]

and contrary to the evidence that clearly indicates this grant was used to train Boeing's 787 workers,
thereby conferring a benefit on Boeing's LCA division . Finally, this grant was explicitly limited to
the aerospace industry (i.e. Boeing and Boeing's aerospace suppliers), and is therefore specific.231
(vi) FSC/ETI
4.120 The European Communities claims that th e U.S. Government has provided almost
$2.2 billion in export-contingent ta x relief to Boeing under the FSC and ETI regimes that impacts the
sales of Boeing LCA, based on the expert analysis of International Trade Resources LLC. These
infamous subsidies, which have repeatedly been fo und by panels and the Appellate Body to constitute
WTO-incompatible export subsidies, appear cert ain to continue to accrue to Boeing for the
foreseeable future despite their purported "repeal" by the U.S. Congress.232
4.121 Noting that the United States agrees that the FSC/ETI tax breaks are specific subsidies to
Boeing's LCA division worth over $2 billion 233, the European Communities argues that the
United States' claim that Boeing ceased to re ceive any benefit from these subsidies after
31 December 2006, has no merit, as it is based entirely on language in Boeing's 2006 Annual Report,
which, the European Communities contends, is not dispositive of Boeing's post-2006 FSC/ETI
intentions.234
4.122 The European Communities rejects the United States' claim that Boeing will not take
advantage of these subsidies after 2006 as being without support, as it is based entirely on a statement
in Boeing's 2006 annual report that is not dispos itive of whether Boeing may or may not claim
FSC/ETI tax breaks after 2006.235 According to the European Communities, this assertion by the U.S.
is not supported by any credible evidence, such as a sworn affidavit or a copy of Boeing's tax return
stating that Boeing has not claimed, and will not claim, available FSC/ETI tax benefits after 2006. 236
In fact, the European Communities regards as glar ingly absent from the U.S. submission, a certified
and enforceable statement from a Boeing official stati ng that regardless of the interpretation issued by
the IRS in its December 2006 Memorandum, Boeing will disclaim all FSC/ETI tax breaks after
2006.237
4.123 In response to the U.S. argument that the TIPRA is a "future measure", the
European Communities argues that its panel request expressly covers TIPRA for purposes of this
dispute. More fundamentally, the European Commu nities does not challenge TIPRA, but rather the
FSC/ETI measures to the extent that they provided, and continue to provide, subsidies to Boeing.238

231 Executive Summary of the European Communities' second written submission, para. 41.
232 Executive Summary of the European Communities' first written submission, para. 20.
233 The European Communities considers that the United States agrees that the FSC and extraterritorial
income tax breaks, as maintained th rough the FSC Repeal and Extraterrito rial Income Exclusion Act of 2000
("ETI Act"), American Jobs Creation Act of 2004 ("AJ CA"), and TIPRA, are specifi c subsidies to Boeing's
LCA division. Executive Summary of the European Communities' second written submission, para. 43.
234 Executive Summary of the European Communities' non-confidential oral statement at the first
235 Executive Summary of the European Communities' second written submission, para. 43.
236 Executive Summary of the Europ ean Communities' non-confidential or al statement at the second
237 Executive Summary of the European Communities' second written submission, para. 43.
238 Executive Summary of the Europ ean Communities' non-confidential or al statement at the second

BCI deleted, as indicated [***]

(d) United States' rebuttal
4.124 Overall, the European Communiti es argues that the U.S. arguments, as expressed in its first
written submission and oral statements before the Panel, contain serious deficiencies. In particular:
(a) The United States simply ignores many of the arguments and much of the detailed
evidence provided by the European Communities.
(b) When the United States does respond, it ofte n makes assertions or provides figures
without submitting any source information or supporting evidence.
(c) In many areas, the United States advances legal interpretations of the
SCM Agreement that, if accepted, would value form over substance, permit modes of
subsidization that would violate the object and purpose of the SCM Agreement, and
provide Members with a roadmap on how to subsidize their industries without
interference by WTO disciplines.
(d) In several cases, the United States adva nces erroneous and sometimes absurd
interpretations of the measures at issue, in cluding interpretations that would render a
number of the measures meaningless.
(e) The United States often tries to confuse the Panel by examining a measure or granting
authority different from the one actually at i ssue, or it tries to distract the Panel by
raising points that are completely immaterial.
(f) The United States argues without support that the $24 billion in subsidies to the U.S.
LCA industry had no impact on Boeing's commercial behaviour.
(g) The United States simply denies that NASA and DOD R&D subsidies provided
Boeing with knowledge, experience, and confidence in applying key innovative
technologies, including those required for building a composite wing and fuselage for
the 787; it makes these denials in spite of numerous admissions (outside the context
of this dispute) regarding Boeing's us e of NASA- and DOD-supported R&D results,
as well as the significant confirming evidence provided by the European
Communities.
(h) The United States ignores the fact that Boeing has received millions of dollars in U.S.
subsidies per aircraft, allowing Boeing to price down its products.
239
2. Arguments of the United States
(a) General overview of arguments relating to the existence of subsidies and burden of proof
4.125 The United States recalls that establishing the existence of a subsidy requires proof that there
is a financial contribution, that it confers a benefit, a nd that the benefit is specific. Article 1.1(a)(1) of
the SCM Agreement defines four categories of financial contribution. 240 A financial contribution
exists only if a government or public body performs one of the actions listed in Article 1.1(a).241

239 Executive Summary of the European Communities' second written submission, para. 2. See also,
Executive Summary of the European Communities' second written submission, para 4.
240 Executive Summary of the United States' first written submission, para. 6.
241 Executive Summary of the United States' second written submission, para. 5.

BCI deleted, as indicated [***]

4.126 The United States further asserts that Articles 1 and 2 of the SCM Agreement require an
individualized assessment of each alleged financial c ontribution because they set out a series of steps
for establishing the existence of a specific subsidy. The United States contends that these provisions
clearly require that this analysis occur separately with regard to each financial contribution, rather
than grouped together. The European Communiti es, however, attempts to dispense with this
individualized treatment by grouping together differe nt alleged financial contributions provided by
different government entities and treating them as if they were the same type of contribution. In so
doing, the United States argues, it fails to provide a pr ima facie case with regard to any of the alleged
subsidies.242
4.127 The United States adds that this combination of multiple different financial contributions and
disregard for the distinct standards for determining a benefit for each appears over and over again in
the European Communities' submission. It is also not the analysis required by the SCM Agreement.
The United States notes that Article 1 of the SCM Agreement is drafted in the singular. Article 1.1(a)
provides that "a subsidy shall be deemed to exist if: there is a financial contribution . . . ".
Article 1.1(b) then specifies that "a subsidy" exists with regard to "a financial contribution" if "a
benefit is thereby conferred". Article 1.2 then specifi es that "a subsidy" is subject to Part III only if
"such a subsidy is specific in accordance with the provisions of Article 2". This drafting clearly
envisages a separate analysis of e ach alleged financial contribution.
243 The United States therefore
submits that the European Communities' approach is completely at odds with the structure of
Article 1.1 and the guidance for determination of a benefit provided under Article 14, which
presupposes a precise identification of the type of financ ial contribution at issue. As a general matter,
a party fails to establish the existence of a subsidy if it does not establish the existence of a benefit and
specificity separately with regard to each type of alleged financial contribution.244
4.128 If a measure does not fall within those categories, it is not a subsidy for purposes of the
SCM Agreement. In this regard, the United States observes that it considers it is noteworthy that
Article 1.1(a)(1)(iii) of the SCM Agreement covers only situations in which "a government provides
goods or services other than general infrastructure, or purchases goods". The exclusion of purchases
of services from this definition is clear: (i) services are explicitly mentioned with respect to
government provisions but not purchases, and, (ii) the final version of the SCM Agreement eliminated
an explicit reference to purchase of services contained in earlier drafts. 245 This limitation on the
definition of "financial contribution" in the United States' view, must be given effect by excluding
government purchases of all services from treatment as a financial contribution. 246 Thus, based on the

242 Executive Summary of the United States' second written submission, para. 6.
243 Executive Summary of the United States' second written submission, para. 7.
244 Executive Summary of the United States' second written submission, para. 8.
245 Executive Summary of the United States' first written submission, footnote 7. Draft Text by the
Chairman, MTN/GNG/NG10/W/38/Rev.2 (27 November 1990) (Cartland III) ("For the purpose of this
Agreement, a subsidy shall be deemed to exist if … a government provides goods or services other than general
infrastructure, or purchases goods or services …"). The United States notes that, under Article 32 of the Vienna
Convention on the Law of Treaties, "recourse may be ha d to supplementary means of interpretation, including
the preparatory work of the treaty a nd the circumstances of its conclusion, in order to confirm the meaning
resulting from the application of article 31."
246 Executive Summary of the United States' first writte n submission, footnote 8. The drafters were, in
general, clear that they intended a limited universe of government measures to be considered financial
contributions. Panel Report, US – Export Restraints , para. 8.69 ("Obviously, Article 1 as ultimately adopted
incorporates the requirement of a financial contributi on by a government or other pu blic body as a necessary
element of a subsidy. The submissions by participants to the negotiations suggest that the proponents' purpose
behind including this element was to limit the kinds of government actions that could fall within the scope of the
subsidy and countervailing measure rules.").

BCI deleted, as indicated [***]

definition of "purchase", when the government c onfers something of value in exchange for the
recipient supplying a service, there is no financial contribution.247
4.129 According to the United States, the European Communities appears to take the position that
Article 1.1(a) of the SCM Agreement should be in terpreted expansively so as to cover all potential
government contributions and to eliminate "loopholes" . This view is at odds with the Appellate
Body's recognition, based on the negotiating history of the SCM Agreement, that "the requirement of
a financial contribution from the outset was intended by its proponents precisely to ensure that not all
government measures that conferred benefits could be deemed to be subsidies". The
European Communities' view is also at odds with the structure of Article 1.1, which states that a
subsidy exists if there is a financial contribution and which provides a list (preceded by "i.e." meaning
"id est " or "that is") of actions that are financial c ontributions. This structure, the omission of a
residual (or "all others") category, and the absen ce of any indication that the listed items are
"examples" rather than definitions, indicates that th e financial contributions defined in Article 1.1 are
a closed list. On this basis, the United States submits that to make a prima facie case of subsidization,
the complaining party must establish that the allege d subsidy falls into one of the four enumerated
categories of financial contribution.248
4.130 The United States further recalls that whethe r a financial contribution confers a benefit
depends on whether it provides treatment more favor able than is available on the market. The
treatment is evaluated from the perspective of the r ecipient, and not from the cost to the government
of providing the financial contribution. A fina ncial contribution given to one entity may not be
treated as a subsidy to another, unrelated entity unless the complaining party establishes that it
"passed through" to the other entity.249
4.131 In addition, the United States contends that under the SCM Agreement, to prevail on its
actionable subsidy claims, the European Communities mu st establish: (i) that a specific subsidy or
subsidies exist; (ii) that one of the conditions lis ted in Article 6.3 of the SCM Agreement – in this
case, displacement or impedance, significant price s uppression, or lost sales – has occurred; and (iii)
that the condition is the "effect of the subsidy". The Appellate Body has found that this last step
requires demonstration of a "causal link" between the alleged subsidy and the conditions referenced in
Article 6.3, which must ensure that the effects of f actors other than any subsidies are not attributed to
the subsidies. The United States submits that th e European Communities has not met any of these
requirements.250
4.132 According to the United States, the European Communities' response to the grave flaws with
its prima facie case is to ask the Panel to ignore the evidence. The European Communities' repeatedly
cites the same few statements by a few govern ment officials and Boeing personnel, or a few
documents, and asks the Panel to disregard the mass of evidence as to the substance of the measures
and what the relevant states and agencies actually do. The United States argues that it is not asking
the Panel to ignore the evidence cited by the Europe an Communities, or to give extra credence to its
evidence as "the best information available". Ra ther, the United States notes that the Panel will do
what Article 11 of the DSU requires, namely, make "an objective assessment of the facts of the case,
and the applicability of and conformity with the rele vant covered agreements". Such an assessment

247 Executive Summary of the United States' first written submission, para. 6.
248 Executive Summary of the United States' second written submission, para. 5.
249 Executive Summary of the United States' first written submission, para. 7.
250 Executive Summary of the United St ates' non-confidential oral stat ement at the first meeting with
the Panel, para. 1.

BCI deleted, as indicated [***]

will show that the evidence, when viewed in its full context, demonstrates that the
European Communities' claims are baseless.251
4.133 Turning to the issue of the burden of proof, th e United States notes that at several places the
European Communities either misstates or attempts to shift the burden of proof. For example, in its
first oral statement, the European Communiti es asks "{i}s it reasonable to assume, as the
United States would like you to do, that such subs idies could have no effect on Boeing's competitive
behavior? We think not". The United States ra ises this as an initial matter because it is well
established that in WTO dispute settlement "the bur den of proof rests on the party that asserts the
affirmative of a claim or defense" to put forw ard "adequate legal arguments and evidence" to
"establish{} a prima facie case". A prima facie case is, in turn, one "which, in the absence of
effective refutation by the defending party, requires a panel, as a matter of law, to rule in favour of the
complaining party". The Appellate Body recently observed that these principles "imply that a
responding party's measure will be treated as WTO-consistent unless proven otherwise".
252 Noting
that the European Communities rec ognizes in its first written submission that "the initial burden of
proving a violation is on the complaining party, which must establish a prima facie case", the
United States argues that much of the European Communities' subsequent argumentation, however, is
inconsistent with this principle.253 The United States contends that the burden of proof is that it is not
for a panel "to assume" anything at all about a Memb er's measures. To the contrary, the burden of
proof requires the complaining party to furnish proof of the assertions it makes in support of its claim.
To proceed otherwise improperly shifts the burden of proof to the responding party.
254
4.134 In its second written submission, the United St ates submits that it demonstrates that the
European Communities has yet to ma ke a prima facie case that the measures it challenges constitute
financial contributions, confer a benefit, or are specific as those terms are defined under the
SCM Agreement. Moreover, in the United St ates' view, the European Communities has not
demonstrated that any of the measures are c ontingent on export performance. Finally, the
European Communities has not demonstrated that Ai rbus is experiencing any "adverse effects" as a
result of any of the measures. In fact, Airbus is not experiencing any adverse effects as that term is
defined under the SCM Agreement. The United St ates alleges that the difficulties of which the
European Communities complain are the result of Airbus's own commercial choices.255
(b) State support measures
(i) State of Washington and municipalities therein
State and Local Tax Incentives
4.135 With respect to the Washington State measures, the United States first explains that the State
of Washington is a major center for aerospace de velopment and production. Noting that for many
years prior to 2007 aerospace manufacturing activities f aced one of the highest effective tax rates in
the State of Washington, the United States submits th at the State sought to alleviate the concerns of
aerospace manufacturers by enacting an aerospace tax package, the most significant component of
which was a reduction in the tax rate of Washi ngton's Business and Occupation ("B&O") tax for
aerospace manufacturing activities. The United States goes on to argue that the B&O tax rate
reduction served to bring the aerospace manufacturing effective tax rate closer to (but still higher

251 Executive Summary of the United States' non-confidential oral statement at the second meeting with
the Panel, para. 2.
252 Executive Summary of the United States' second written submission, para. 2.
253 Executive Summary of the United States' second written submission, para. 3.
254 Executive Summary of the United States' second written submission, para. 4.
255 Executive Summary of the United States' second written submission, para. 1.

BCI deleted, as indicated [***]

than) the average effective tax rate of other business activities in the State and that it does not provide
a subsidy at all, let alone to Boeing, as the European Communities claims.256
4.136 The United States argues that contrary to th e European Communities' claim, the B&O tax
reduction is not a financial contribution to Boei ng under Article 1.1(a)(1) of the SCM Agreement
because the State of Washington has not foregone any revenue that is "otherwise due" – a
determination that is made with reference to the State's own tax system. It explains that in
Washington's activities-based tax system, various busin ess activities have different tax rates within a
certain range. The tax rate reduction for aerospace manufacturing is part of Washington's regular
adjustment of its tax rates and falls within the range of tax rates for other activities. The United States
submits that as such, it is not revenue foregone that is otherwise due. An examination of the State of
Washington's effective tax rate confirms this conclu sion. Even with the B&O tax rate reduction, the
United States posits that the average effective tax rate for aerospace manufacturing remains higher
than the average effective tax rate for all businesses in the State, due to "pyramiding" of the B&O tax
– i.e. the taxation of goods at each stage in the production process.257
4.137 The United States further clarifies that the effect of the Washington State B&O tax
adjustment is to bring the tax rate for aerospace ma nufacturing into line with the average tax rate for
all business activities in the State of Washington. W ithout the adjustment, the effective tax rate on
aerospace manufacturing is significantly higher than other business activities in the state, because of
pyramiding. Since the B&O tax rate does not confer a preferential rate on Boeing, the state is not
foregoing revenue that would otherwise be due. Thus, there is no financial contribution. The
United States contends that the European Commun ities' claim fails on this basis alone. However,
even if the Panel were to find that there is a fi nancial contribution, the B&O tax adjustment is not
specific to an industry or enterprise because several industries in Washington state also receive a
B&O tax adjustment.
258
4.138 The United States notes that th e European Communities does not challenge only the tax
reduction to Boeing, rather, it contends that tax reduc tions to Boeing's unrelated suppliers are in fact a
benefit to Boeing. Based on this understa nding the United States posits that, assuming arguendo that
the B&O tax rate reduction for aerospace ma nufacturing is a financial contribution, the
European Communities has provided no basis to believ e that the tax rate reductions to other unrelated
and independent aerospace manufact urers pass through to Boeing. 259 Specifically, the United States
and its expert Dr. Dorman pointed out that the ec onomic theory on which the European Communities'
claim of pass-through rests does not reflect the fa ctual circumstances of the markets at issue or
competition from non-Washington State suppliers. A nd, the European Communities continues to fail
to point to any other basis for a pass-through finding.260
4.139 In its further written submissions the United St ates maintains that the European Communities
has failed to establish that the Washington State B&O ta x adjustment at issue in this dispute results in
revenue foregone to the State of Washington. The United States contends that, in asserting this
argument, the European Communities errs in classifying the B&O tax rate for aerospace
manufacturing as an exception to a general rule of ta xation in Washington State. The baseline for the
Panel's analysis of revenue foregone in this dis pute is the Washington State B&O tax regime, which
consists of a range of different individual rates to different business activities. In the light of the
multi-rate tax system established by the State, the ad justment of the B&O tax rate to a rate that is

256 Executive Summary of the United States' first written submission, para. 38.
257 Executive Summary of the United States' first written submission, para. 39.
258 Executive Summary of the United St ates' non-confidential oral stat ement at the first meeting with
the Panel, para. 8.
259 Executive Summary of the United States' first written submission, para. 40.
260 United States' response to question 234, para. 423.

BCI deleted, as indicated [***]

comfortably within the range of all B&O tax rates is consistent with the treatment of legitimately
comparable income in Washington. In addition, there is no rational basis for using the .484 per cent
B&O tax rate for manufacturers as the benchmark fo r analyzing revenue foregone rather than the
multi-rate system because the .484 per cent rate is just one rate in a multi-rate system. The
United States submits that in the context of the Washington State B&O tax system, applying an
individual tax rate for a particular business activity is comparable to treatment of other legitimately
comparable income. 261
4.140 As the United States detailed in its first writte n submission, the implications of the tax
adjustment on the effective rate for aerospace also demonstrate that the B&O tax rate for aerospace is
consistent with the tax treatment afforded to co mparable income by Washington State and therefore
does not result in revenue foregone. The adjustment of the nominal B&O tax rate served to bring the
effective tax rate for aerospace manufacturing within the range of effective tax rates for other business
activities in the State. This, in the view of the Un ited States, further supports the conclusion that the
adjusted rate does not constitute revenue foregone under Article 1.1(a)(1)(ii).262
4.141 Even aside from the fact that the B&O tax adju stment does not result in revenue foregone, the
United States argues that the B&O tax adjustment is not specific. The European Communities'
argument that the B&O tax adjustment is specific b ecause the measure that should be analyzed is HB
2294, rather than the overall B&O tax system, is fundamentally flawed. As noted above, the
adjustment of the aerospace B&O tax rates fits into the State's overall multi-rate tax regime in which
individual rates are moved independently of each ot her. The United States asserts that Washington
has provided such adjustments to several other bu siness activities in the State such as biofuels
manufacturing, timber products manufacturing, nucl ear fuel assembly manufacturing, wholesaling
and retailing, flour and oil manufacturing, dried pea and meat processors, and stevedoring.263
4.142 Noting that the European Communities also ra ises challenges to other Washington State tax
measures, the United States argues that in n one of these cases does th e European Communities
establish that subsidization exists. 264 In particular, in respect of the European Communities' claims
that certain other Washington State and local tax measures are subsidies that are inconsistent with the
SCM Agreement – B&O tax credits, certain sales and use tax exemptions, leasehold excise tax
exemptions, property tax exemptions, and a local B&O tax rate reduction – the United States argues
that most of these tax measures are not subsidies at all, and those that are subsidies are either not
actionable or are too small to cause adverse effects. In some cases, for instance, the tax measures are
not specific to Boeing. In other cases, Boeing has not and will not use the tax measures at issue
because they are tied to events, such as the building of a new Boeing manufacturing facility for the
787, that the United States asserts did not and will not occur.
265
Project Olympus Master Site Agreement subsidies
4.143 With respect to certain general infrastructur e projects and six other measures taken by the
State of Washington, the United States argues th at none of these measures constitute actionable
subsidies within the meaning of the SCM Agreemen t because they do not meet one or more of the

261 Executive Summary of the United States' second written submission, para. 47.
262 Executive Summary of the United States' second written submission, para. 48.
263 Executive Summary of the United States' second written submission, para. 49.
264 Executive Summary of the United St ates' non-confidential oral stat ement at the first meeting with
the Panel, para. 8.
265 Executive Summary of the United States' first written submission, para. 41.

BCI deleted, as indicated [***]

Agreement's requirements for a potentially actionable s ubsidy – (i) a financial contribution, (ii) that
confers a benefit, and (iii) is specific.266
4.144 In connection with the infrastru cture measures of the State of Washington, the United States
understands the European Communities to be contesting two road improvement projects contemplated
by the State on major public highways. The Unit ed States argues that these two projects are not
subsidies because the roads are quintessential general infrastructure; they are open to all and serve a
broad range of people, businesses, and communities. 267 The improvements to I-5 and SR-527
constitute general infrastructure because they ar e major roads serving countless businesses, tourists,
and commuters.268 These two public roads are part of a state-wide infrastructure improvement plan
and are projects that are quintessential general infr astructure, which is explicitly excluded from the
SCM Agreement's disciplines. 269 These improvements – which were identified by the State well
before the signing of the Project Olympus Master Site Agreement – were completed as part of a state-
wide package to improve infrastructure throughout the State.
 The United States maintains that these
projects in fact amount to general infrastructure, which is not a financial contribution – and thus, not a
subsidy – under the SCM Agreement. 270
4.145 The European Communities is also challenging im provements to the Port of Everett – a busy
port used by many industries, which the United States argues are not specific because they also serve
a broad range of people, businesses, and communities.
271 The United States further argues that the rail
barge transfer facility similarly constitutes gene ral infrastructure and thus is not a financial
contribution within the meaning of Article 1 of the SCM Agreement because the project was
undertaken to alleviate congestion on the BNSF freight railroad mainline and the facility is open to all
users. Thus, it constitutes general infrastructure.272
4.146 The United States next argues that the Eur opean Communities erroneously asserts that
Washington has provided a subsidy to Boeing by freezi ng the rates that it pays for certain utilities.
The United States asserts that, in fact, Boeing pays the same rates as other commercial, industrial, and
government customers, which means that it receives no financial contribution in the form of revenue
foregone that is otherwise due. Fourth, the Eu ropean Communities contests Boeing's payment of
certain landing fees at a municipal airport, which ar e also not subsidies to Boeing because, according
to the United States, these fees are covered by an agreement between the airport and Boeing, which
makes clear that there is no financial contributi on or benefit because Boeing effectively pays a higher
rate under the agreement than other airport users.273
4.147 Regarding the European Communities' claim th at the State of Washington is subsidizing
Boeing by providing State employees who offer re gulatory and other assistance to Boeing in the
normal course of their employment, the United States asserts that such assistance by State employees,
which is only a small portion of their total workload , provides no financial contribution or benefit to
Boeing. Even assuming a benefit, the project c oordinators are not specific to Boeing because
numerous other projects receive similar assistance from the State.
 274

266 Executive Summary of the United States' first written submission, para. 42.
267 Executive Summary of the United States' first written submission, para. 43. See also, Executive
Summary of the United States' non-confidential oral statement at the first meeting with the Panel, para. 9
268 Executive Summary of the United States' second written submission, para. 50.
269 Executive Summary of the United St ates' non-confidential oral stat ement at the first meeting with
the Panel, para. 9.
270 Executive Summary of the United States' second written submission, para. 50.
271 Executive Summary of the United States' first written submission, para. 43.
272 Executive Summary of the United States' second written submission, para. 50.
273 Executive Summary of the United States' first written submission, para. 43.
274 Executive Summary of the United States' first written submission, para. 44.

BCI deleted, as indicated [***]

4.148 Regarding certain litigation costs that may ari se out of an agreement between Boeing and the
State of Washington, the United States argues that these are also not a subsidy, as the
European Communities alleges. It explains that the State transfers no funds to Boeing for litigation
expenses that the company chooses to incur, so there is no financial contribution.275
4.149 In relation to the European Communities' asserti on that the State of Washington is providing
subsidies to Boeing in the form of tax and othe r incentives for Boeing's 747 Large Cargo Freighter,
the United States submits that Washington State is not providing any special tax incentives to this
airplane, and is therefore not foregoing any revenue otherwise due. It is also not providing other
goods or services for this aircraft.276
4.150 Additionally, the United States argues that the European Communities' claims regarding
certain job training measures and an employment cent er that will revert to public use, also lack
merit.277
Conclusion on the State of Washington measures
4.151 In short, the United States submits that:
(a) The European Communities has failed to est ablish that Washington State's B&O tax
adjustment results in revenue foregone to the State. The European Communities'
claim that the B&O tax adjustment results in revenue foregone is based on an analysis
of the B&O tax adjustment for aerospace in isolation and without a consideration of
the taxation regime in which the adjustment operates. This approach is inconsistent
with the Appellate Body's guidance for analyzing revenue foregone under the
SCM Agreement and thus fails. Because W ashington State has multiple rates for
taxing comparable income, it is the range of B&O tax rates applied to all business
activities in the State that serves as the appropriate normative benchmark.
Furthermore, as the adjustment moves th e B&O tax rate for aerospace within the
range of the B&O tax rates for all business ac tivities in the State, Washington State is
not foregoing revenue that is otherwise due . Accordingly, the B&O tax adjustment
does not result in a financial contribution or a subsidy under the SCM Agreement.
The European Communities has also faile d to demonstrate that the B&O tax
adjustments for Washington aerospace component manufacturers can be attributed to
Boeing.
278
(b) The European Communities has failed to satis fy its burden of establishing that any of
the infrastructure measures it challenges is "other than general" under the
SCM Agreement. Each of the infrastructure measures challenged by the
European Communities constitutes general in frastructure because they are available
to all users without limitation.279
(c) The European Communities' alternative argum ent that the infrastructure measures at
issue as well as other elements of the Mast er Site Agreement are subsidies because of

275 Executive Summary of the United States' first written submission, para. 44.
276 Executive Summary of the United States' first written submission, para. 44.
277 Executive Summary of the United States' first written submission, para. 44.
278 Executive Summary of the United States' non-confidential oral statement at the second meeting with
the Panel, para. 18.
279 Executive Summary of the United States' non-confidential oral statement at the second meeting with
the Panel, para. 19.

BCI deleted, as indicated [***]

Article 10.4.1 of the MSA is based on a mi sreading of that provision and its legal
effect.280
4.152 Lastly, the United States submits that in general, the standards advocated by the
European Communities would leave set in stone the rates of any Member that employed variable rate
taxes. Under its theory, any lowering of an excessi ve tax rate would be a subsidy, leaving Members
no flexibility but to increase taxes.281
(ii) State of Kansas and municipalities therein
4.153 The United States submits that the European Communities challenges two tax measures in the
State of Kansas, neither of which is a WTO-inconsistent subsidy.
Wichita IRB tax breaks
4.154 First, the United States notes that the Eur opean Communities contests industrial revenue
bonds issued by the City of Wichita as an ongoing acti onable subsidy to Boeing, despite the fact that
Boeing ceased its large civil aircraft operations in Kansas in 2005. The United States observes that
before that time, Boeing – like many companies in Kansas – used bond financing pursuant to a widely
available and long-standing economic incentive prog ram. The European Communities attempts to
minimize the significance of these facts by distor ting the nature of the bond program and asserting
that the post-2005 benefits have been "passed through" to Boeing based on an economist's opinion not
grounded in the facts of this case. But, for th e United States, the European Communities' subsidy
claims regarding the Wichita bonds lack merit. 282 More specifically, the United States asserts that the
industrial revenue bonds are not a fi nancial contribution because the City of Wichita is not foregoing
revenue on personal property. Kansas no longer assesses property or sales tax on commercial and
industrial machinery and equipment. Thus, even without the industrial revenue bonds, no tax revenue
would be due to Kansas or its subdivisions from any business on its machinery and equipment, which
represents most of the property financed with the industrial revenue bonds at issue.283
4.155 The United States further argues that even if th e industrial revenue bonds provide a financial
contribution, they are still not an actionable subsid y because they are not speci fic within the meaning
of Article 2 of the SCM Agreement. Industria l revenue bonds are a transparent and generally
available program, provided for in Kansas law, that the State of Kansas and its subdivisions have been
administering and applying to companies from a broad range of industries for more than 40 years.
Industrial revenue bonds are also not de facto specific because Boeing's percentage of industrial
revenue bonds is not disproportionate. Furthermore, although the industrial revenue bonds are not an
actionable subsidy, the United States also notes that any benefit of the industrial revenue bonds to an
independent and unrelated company (Spirit Aerosystems) did not pass through to Boeing.
284
4.156 Moreover, the United States argues that: (i) the European Communities' analysis of the
alleged "pass-through" of subsidies to Boeing does not actually provide analysis, just conclusions and
assumptions; (ii) a review of the facts and the actual circumstances of the sale of the Wichita facilities
to Onex shows that at the time of the sale and when the price was agreed, there was no certainty of
future issuance of IRBs – as assumed by th e European Communities' expert; (iii) the
European Communities' approach is fundamentally irrelevant because it incorrectly assumes that

280 Executive Summary of the United States' non-confidential oral statement at the second meeting with
the Panel, para. 20.
281 Executive Summary of the United States' non-confidential closing statement at the first meeting
with the Panel, para. 8.
282 Executive Summary of the United States' first written submission, para. 45.
283 Executive Summary of the United States' first written submission, para. 46.
284 Executive Summary of the United States' first written submission, para. 47.

BCI deleted, as indicated [***]

value equals price; and finally; (iv) Mr. Wachtel ignores actual evidence of elements that played a role
in Onex's valuation and the absence of any eviden ce that such elements included the value of any
possible future IRBs.285 The United States also states that there was every reason to believe the pass-
through alleged by the European Communities and its expert did not occur even under the
European Communities' own theoretical construct.
286
4.157 In conclusion, the United States recalls that the industrial revenue bonds issued by the State of
Kansas neither provide a financial contribution to Boeing nor are speci fic to Boeing. The
European Communities claims that Kansas' IRB program is merely a scheme to make Boeing eligible
for certain tax abatements. However, the United St ates asserts that the tax exemptions are no longer
relevant to Boeing because Kansas has stopped assessing property tax and sales tax on commercial
and industrial machinery and equipment, which comprises the vast majority of property that Boeing
has financed with industrial revenue bonds. Fu rthermore, the industrial revenue bonds are not de jure
specific because they are broadly av ailable to "any person, firm or corporation". Industrial revenue
bonds are also not de facto specific because in the light of the "extent of diversification of economic
activities" within Wichita, the amount of industrial revenue bonds issued to Boeing is not indicative of
predominant use.287
4.158 In its further written submissions, the United States maintains that the
European Communities' challenge to the industrial revenue bonds provided by the City of Wichita and
the State of Kansas as WTO-inconsistent subsidies is without merit. The United States contends, as it
asserts is shown in the United States' first written s ubmission, that much of the property at issue is no
longer subject to tax in Kansas, such that no reve nue is foregone with respect to such property as a
result of the IRB program. 288 More fundamentally, the United States argues that the
European Communities has failed to establish that th e industrial revenue bonds are specific. As the
United States stated in its first written submission, this is unsurprising in the light of the economy of
Wichita and is not a sign of specificity. Aircra ft production is the core industry of Wichita, and
Boeing's Wichita facility was not only the largest private sector employer in Wichita, but also the
largest private sector employer for the entire State of Kansas prior to its sale to Spirit. Accordingly,
the United States argues that the amount of industrial revenue bonds received by Boeing does not
support a finding of specificity. The European Co mmunities failed to respond to this in its oral
statement at the first panel meeting and merely st ated that "Boeing's receipt of industrial revenue
bonds is disproportionate to its economic position in the City of Wichita". On this basis the
United States submits that the European Communiti es falls far short of its burden in demonstrating
specificity.
289
KDFA bonds
4.159 The United States understands the European Co mmunities to be challenging KDFA bonds as
an actionable subsidy to Boeing, even though Bo eing never received or even applied for KDFA
bonds. The United States notes in this context th at the European Commun ities nonetheless attempts
to allocate KDFA tax benefits away from the actual recipient of the bond financing – Spirit, an
independent and unrelated company – to Boeing. As with its claims rega rding industrial revenue
bonds, the European Communities asserts that KDFA 's intent to issue bonds for Spirit was known

285 United States' response to question 255, para. 437.
286 United States' response to question 367, para. 213.
287 Executive Summary of the United St ates' non-confidential oral stat ement at the first meeting with
the Panel, para. 10.
288 Executive Summary of the United States' second written submission, footnote 2. The IRBs will also
be less attractive since an IRB is not required in order to be eligible for a tax exemption on personal property.
289 Executive Summary of the United States' second written submission, para. 51. See also, Executive
Summary of the United States' non-confidential oral statement at the second meeting with the Panel, para. 21.

BCI deleted, as indicated [***]

before Boeing's sale of Spirit closed, and, on that basis, concludes that the sales price must have
reflected expected future bond financing. 290 The United States submits in this respect that neither the
facts nor economic theory support a finding that the KDFA bonds were a subsidy to Boeing. First, it
argues that the subsidies are not a financial c ontribution to Boeing, which never received KDFA bond
financing. Second, the United States submits that the European Communities incorrectly assumes that
Spirit was assured of the future interest payment re bate at the time the transaction price was agreed –
and, moreover, that the amount of the future inter est payment rebate benefit was known at that time.
Third, the United States argues that the European Communities argument is based on a mistaken
theory that the value of a future expected tax benefit would necessarily be captured by the seller.
291
4.160 The United States reiterates its position that not a single bond under this program has even
been issued to Boeing. Instead, these bonds were issued to an independent entity, unrelated to
Boeing.292
(iii) State of Illinois and municipalities therein
4.161 With respect to the European Communities' chal lenges to measures by the State of Illinois,
the United States submits that th e European Communities fails to establish that these measures are
specific. The United States argues that the State of Illinois has established criteria to encourage
businesses to locate their corporate headquarters in th e State. These criteria are not specific to an
industry or enterprise. Thus, they do no t constitute an actiona ble subsidy under the
SCM Agreement.293
Boeing relocation package
4.162 More specifically, the United States submits th at, contrary to the European Communities'
claims, certain measures taken by the State of Illinois and its localities pursuant to the Corporate
Headquarters Relocation Act ("CHRA") and other state and local law do not constitute actionable
subsidies to Boeing. The CHRA provides that the State of Illinois will reimburse qualifying
relocation costs for corporate headquarters. More over, they were for amounts that were minimal in
comparison with the cost of developing and produci ng large civil aircraft. The United States argues
that the relocation expenses that Boeing received pur suant to that act are not a WTO-inconsistent
subsidy, as the European Communities alleges, b ecause the reimbursement of such expenses was not
specific to Boeing or similar enterprises.294
4.163 As to the state tax credits provided by Illinois pursuant to another state law – EDGE Tax
Credit Act – the United States argues that they also do not provide an actionable subsidy to Boeing,
despite the European Communities' claims to the contrary. Given that companies of all sizes in a
broad range of industries are eligible to appl y for and have received EDGE tax credits, the
United States submits that they are not specifi c within the meaning of Article 2.1 of the
SCM Agreement.295
4.164 Furthermore, the United States considers that the European Communities' claims regarding
property tax abatements provided for under Illinois law are without merit also. The United States
clarifies that the Illinois Property Tax Code allows any taxing district in the State to abate the property

290 Executive Summary of the United States' first written submission, para. 48.
291 Executive Summary of the United States' first written submission, para. 49.
292 Executive Summary of the United St ates' non-confidential oral stat ement at the first meeting with
the Panel, para. 11.
293 Executive Summary of the United St ates' non-confidential oral stat ement at the first meeting with
the Panel, para. 12.
294 Executive Summary of the United States' first written submission, para. 50.
295 Executive Summary of the United States' first written submission, para. 51.

BCI deleted, as indicated [***]

taxes of a wide variety of enterprises. The CHRA amended the relevant pr ovision of the code to
include relocated corporate headquarters among the t ypes of enterprises eligible to receive property
tax abatements. The property tax abatements provide d by two localities in the State of Illinois are not
WTO-inconsistent subsidies because they are not specific to Boeing.296
Retirement of the former lease
4.165 The United States notes that the European Communities challenges a very small lease
termination payment made by the City of Chica go on behalf of Boeing, which the United States does
not contest.297
(c) U.S. Federal Government measures
(i) U.S. aeronautics R&D
4.166 Before addressing specific R&D measures cha llenged by the European Communities, the
United States makes the following observation in relation to Article 2 of the SCM Agreement.
4.167 The United States contends that a generally app licable law does not confer a specific subsidy
simply because one of the government authorities enforcing the law has a limited scope. Specifically,
it contends that Article 2.1(a) and (b) frame the de jure specificity analysis in terms of whether the
granting authority or the legislation pursuant to wh ich that authority operat es explicitly limits access
to certain enterprises. The United States notes that the European Communities does not dispute that
the laws and regulations governi ng U.S. Government contracting, treatment of independent research
and development and bid and proposal expenses, and attribution of rights in patents, are applicable to
contracting in all sectors of the economy. Howe ver, the European Communities argues that when
applied by NASA or DOD, those measures are specific as to the "research-based defense and
aerospace industries" because only companies capabl e of meeting the procurement needs of those
agencies sell to those agencies. This argument disregards the text of the SCM Agreement and would
render the specificity requirement a nullity when a number of specialized agencies administer
generally available laws or programmes. In other words, the European Communities would pre-
ordain its desired conclusion by arbitrarily confining its specificity analysis to the group of enterprises
that forms the focus of its complaint.
298
4.168 In addition, the United States observes that Artic le 2.1(a) applies only when an authority or
legislation "explicitly limits access to a subsidy to certain enterprises". The ordinary meaning of
"limit" is "{c}onfine within limits, set bounds to; restrict". The ordinary meaning of "access" is
"{a}dmittance (to the presence or use of); {a} wa y or means of approach or entrance". Thus, an
authority or its legislation limits access to a subs idy within the meaning of Article 2.1(a) when it
restricts admittance to the subsidy to "certain en terprises". Performing this evaluation will involve
identifying which types of enterp rise have access to a subsidy, and evaluating whether that group is
sufficiently discrete to meet the definition of certa in enterprises, which the chapeau of Article 2.1
defines as "an enterprise or industry or group of ente rprises or industries". Where legislation provides
for multiple authorities to grant payments under a progr am, the fact that an enterprise or industry is
eligible for payments from one authority would indi cate that it has "access" to the alleged subsidy
within the meaning of Article 2.1. The fact that the same enterprise was inel igible to receive such
payments from a second granting authority would no t change the fact of its access through the first

296 Executive Summary of the United States' first written submission, para. 52.
297 Executive Summary of the United States' first written submission, para. 52.
298 Executive Summary of the United States' second written submission, para. 9.

BCI deleted, as indicated [***]

granting authority. Therefore, the United States submits that the second authority's rules should not,
absent other considerations, be considered to "limit access" to the alleged subsidy by the enterprise.299
4.169 The United States argues that the baseline for an evaluation of disproportionality is defined by
the alleged subsidy, and not by the jurisdiction of challenged authorities. In this context, the
United States notes that the European Communitie s and the United States apparently agree that
determining whether an apparently non-specific subs idy is, in fact, granted to certain enterprises "in
disproportionately large amounts" requires a comparis on of users of the alleged subsidy against some
baseline. However, the United States disagrees on wh at the baseline is. The text of Article 2.1(c)
calls for a comparison between use of a subsidy by en terprises as to which the subsidy is alleged to be
specific and the position of subsidy users within the baseline group of all enterprises that have
"access" to the alleged subsidy. The United States contends that if the actual usage by "certain
enterprises" is out of proportion to their size rela tive to the baseline group of all enterprises that
receive the alleged subsidy, that would be one "other factor" indicating specificity with respect to the
certain enterprises. 300 The United States claims that for the European Communities, however, the
proper comparison is between the "certain enterprises" and the overall U.S. economy. It notes that the
chapeau of Article 2.1 states that subparagraphs (a), (b), and (c) are principles for determining
whether a subsidy is specific to "certain enterp rises . . . within the jurisdiction of the granting
authority". The United States concludes that th e European Communities divines from this passage
that the de facto specificity analysis must take as its baseline the "jurisdiction" of the granting
authorities, and in the European Communities' vi ew, for DOD and NASA, this covers the entire
United States. 301
4.170 The United States argues that the text does not supp ort this interpretation. It posits that the
phrase "within the jurisdiction of th e granting authority" in the chapeau of Article 2.1 acts to delimit
the enterprises that are potentially subject to the specificity inquiry , making clear that enterprises
outside the jurisdiction are not relevant. Nothing in the phrase suggests, as the
European Communities seems to believe, an additi onal meaning that the specificity inquiry must
invariably be based on all enterprises within the ju risdiction. In fact, several of the factors for
consideration narrow the class of enterprises subject to consideration. To read "within the jurisdiction
of the granting authority" as expanding the inquiry to all enterprises in the jurisdiction would, in the
United States' view, deprive the subsequent factors of their ordinary meaning.302
4.171 The United States further contends that the interpretation advanced by the
European Communities would effectively nullify the de jure specificity factors under Article 2.1(a)
and (b). Both of these subparagraphs create sta ndards under which a subsidy would not be specific
even if some enterprises in the jurisdiction of the granting authority had no access. But if the
European Communities were correct, the amount of a lleged subsidies granted to classes of subsidy
recipients found nonspecific under Article 2.1( a) and (b) would always, according to the
United States, be found disproportionate, because the subsidy recipients would represent 100 per cent
of the amount of the subsidy granted, but less (a nd often far less) than 100 per cent of the overall
economy.303
R&D payments constitute a purchase of service for adequate remuneration
4.172 In response to the European Communities' argument that NASA research programmes
provided grants, and goods and services to Boeing for free, the United States argues that what the

299 Executive Summary of the United States' second written submission, para. 10.
300 Executive Summary of the United States' second written submission, para. 11.
301 Executive Summary of the United States' second written submission, para. 12.
302 Executive Summary of the United States' second written submission, para. 13.
303 Executive Summary of the United States' second written submission, para. 14.

BCI deleted, as indicated [***]

European Communities calls research "grants" we re actually NASA purchases of R&D services in
furtherance of NASA's own objectives. Therefore, as with DOD's research purchases, these are not
financial contributions within the meaning of the SCM Agreement. Similarly, the alleged provisions
of goods and services were in fact value-for-val ue exchanges pursuant to Space Act Agreements.
Boeing received nothing for free. In both purchases and under Space Act Agreements, NASA focuses
on basic, fundamental R&D covering a broad range of aeronautics topics. It does not fund the
development of particular products, or promote the interests of particular companies. Thus, it conveys
no commercial advantage and no financial contribution.304
4.173 The United States agrees with the European Communities' assertions that NASA does not
acquire or produce large civil aircraft. However, the United States submits that NASA does acquire,
produce, and disseminate knowledge. And, accordingly, the "true purpose" of the NASA programmes
is to develop and disseminate the greatest amount of information to the broadest group in the shortest
amount of time possible, and not to "convey resources to Boeing". The United States asserts that
NASA's contracts with Boeing and its actions provide evidence that this is the case, and that the
challenged measures are purchases of services – not just in name, but in substance. NASA formulates
its own goals, based on consultations with a wide variety of stakeholders. NASA seeks proposals
from contractors on how to meet those goals, and acc epts the bid that presents the best value. NASA
and its contractor negotiate over the terms of the contract. The contractor must then carry out all of
the terms of the contract in return for payment by NASA. This process, documented by the citations
to U.S. procurement regulations, the numerous ex amples of individual contracts and modifications,
and the huge volume of publicly disseminate d literature generated by these programmes,
demonstrates, in the United States' view, that NASA's contracts with Boeing are not, as the
European Communities would have the Panel believe, a "sham".
305
4.174 As for the "true purpose" of NASA's programs, th e United States claims that it is not – as the
European Communities intimates – an elaborately st aged effort "to convey resources to Boeing".
Rather, the United States has demonstrated that th e "true purpose" of NASA's programs is to use and
disseminate the results of research that will advance its broad, overarching goals, including a safer and
more efficient commercial aerospace system. That research is used both within government, by
U.S. government agencies, such as the FAA and DOD, and airport authorities, and outside of
government by industry and academia.
306
4.175 The United States also submits that there are commercial benchmarks for the NASA/DOD
purchases of research services challenged by the Eur opean Communities, and they demonstrate that
the terms on which NASA/DOD purchase R&D services are not more favorable than the terms on
which commercial entities in the U.S. mark et are willing to purc hase the same services. 307 These
benchmarks demonstrate several important points. First, there is no fixed rule in the marketplace as to
the division of intellectual property rights when one entity funds research performed by another entity,
as the European Communities would have the Panel be lieve. Second, sellers of R&D services in the
marketplace expect to receive more money if they convey greater intellectual property rights to the
purchaser.308

304 Executive Summary of the United St ates' non-confidential oral stat ement at the first meeting with
the Panel, para. 1.
305 Executive Summary of the United States' second written submission, para. 24.
306 Executive Summary of the United States' second written submission, para. 25.
307 United States' response to question 21, para. 66.
308 United States' response to question 21, para. 64.

BCI deleted, as indicated [***]

NASA
4.176 At the outset, the United States points out that NASA is most widely known as the agency
that put a man on the moon, and that today it cont inues to conduct a variety of exploratory activities
designed to expand human knowledge. The United States e xplains that this is, in fact, a vital part of
its stated mission, and has been since NASA was est ablished in the 1950s with the declaration that "it
is the policy of the United States that activities in space should be devoted to peaceful purposes for
the benefit of all mankind". Recognizing further that "the general welfare and security of the
United States require that adequate provision be made for aeronautical and space activities", the U.S.
Congress has also directed NASA to sponsor le ading-edge research in aeronautics and space
technology in the ultimate interests of the public.309
4.177 In contrast, the United States observes that while reading the European Communities'
submission, it might seem as if NASA was established and funded for the benefit of Boeing. In fact,
the United States notes that the European Communities treats virtually the entire operation and budget
of NASA's Aeronautics Research Mission Director ate as a subsidy to a few companies in the
aerospace sector, even though most of NASA's aer onautics research budget went to support research
at the NASA Centers (infrastructure and salaries to NASA employees), contracts with a far broader
group of companies, and independent resea rch facilities, and grants to universities.
310 T h e
United States immediately points to a flaw permeating the European Communities' claims, i.e. that the
European Communities' treatment of financial contributions to Boeing's suppliers as payments to
Boeing is based on the assertion, made without s upport of any credible evidence, that these
independent and unrelated companies somehow (and c ontrary to expectations for a profit-maximizing
actor) passed the alleged subsidies through to Boeing.311
4.178 Responding to the European Communities' argument that the purpose of NASA programmes
is "to assure the pre-eminence of U.S. aeronautics" , the United States asserts that that is only one
factor among many, which include the expansion of human knowledge of the Earth and of phenomena
in the atmosphere and space. 312 Equally important in the United States' view, is the fact that in most
cases, the research work perform ed under NASA aeronautics programme s is made publicly available
(consistent with national security and foreign policy), and may be drawn upon not only by Boeing, but
also by Airbus and the companies supplying Airbus.313
4.179 The United States considers that the European Communities belittled the importance of the
scientific reports that NASA releases to the world. The United States asserts that, in fact, a single
scientific report can change the world. In the United States, a scientific report on the effects of
cigarette smoking led to a dramatic decline in the nu mber of smokers. Closer to the issues in this
dispute, the United States observes that NAS A performed the initial research on the positive
aerodynamic effects of winglets, which are little upturns or downturns at the tips of wings and that
Boeing participated in this research. Yet it was Ai rbus, and not Boeing, that first put winglets on its
airplanes, many years ahead of Boeing.314
4.180 The United States points out that, instead of looki ng at the facts of the NASA contracts, many
of which the European Communities included with its first written submission, the

309 Executive Summary of the United States' first written submission, para. 16.
310 Executive Summary of the United States' first written submission, para. 17.
311 Executive Summary of the United St ates' non-confidential oral stat ement at the first meeting with
the Panel, para. 14.
312 Executive Summary of the United States' non-confidential closing statement at the first meeting
with the Panel, para. 2.
313 Executive Summary of the United States' first written submission, para. 17.
314 Executive Summary of the United States' non-confidential closing statement at the first meeting
with the Panel, para. 6.

BCI deleted, as indicated [***]

European Communities focuses on statements made about NASA's aeronautics research and its
usefulness to the aerospace community. NASA, Congress, industry, and academia have, at various
times, attempted to make a case for augmenting th e attention to, and budget for, the aeronautics
elements of NASA's mission, and the European Communities has selectively quoted all such
statements to that effect. In fact, the United States notes that NASA's aeronautics mission is put into
context by the organizational chart of the NAC, whic h shows that aeronautics is the focus of only one
of its six subcommittees (the others being audit and finance, exploration, human capital, science, and
space operations).
315 Responding to the European Communities' observations made in this context,
the United States clarifies that it has not requested th e Panel to ignore statements in contracts, or by
NASA or DOD officials in public. It argues that it h as asked the Panel to put them in the context of
everything each agency does – not evaluate them in isolation, as the European Communities asks the
Panel to do.316
4.181 The United States asserts that the European Communities also attempts to inflate Boeing's
role in setting NASA's priorities by noting that Boeing employees periodically served on the NAC.
However, the Council membership draws from a broa d variety of perspectives, including retired
astronauts, retired military officers, academics, business, and civil society.
317 The United States
argues that there are currently no Boeing employees on the NAC. Even in 2005, when Boeing Senior
Vice President Jim Jamieson was on the NAC, he was only one of more than 20 board members.318 In
any event, the Advisory Council is just that – a dvisory – and it is the NASA Administrator who sets
the agency's research agenda. 319
4.182 In addition, the United States considers it is important to note that the relatively limited
amount of aeronautics-focused work that NASA do es (in-house and subcontracted), does not confer
any competitive advantage. As the European Communities concedes, NASA's R&D activities are far
removed from the actual development and production of particular large civil aircraft models. 320
Instead, the United States asserts th at the research it does is focu sed on basic tools and technologies
that can improve the efficiency and safety of all aircraft – from single-seat general aviation aircraft to
very large aircraft configurations, including a revolutionary-configuration Blended Wing Body and
traditional-configuration A380. And many of the "aircraft" that NASA has studied under the
programs addressed by the European Communities do not even remotely resemble large civil aircraft,
including the designs for a hypersonic Highly Relia ble Reusable Launch System, a (hypersonic)
scramjet, a supersonic jet, a blended wing body, and rotorcraft. And finally, the United States points
out that the results of NASA research are dissemi nated publicly, except where prohibited by U.S.
export controls. The United States considers that these are scarcely the actio ns of an agency seeking
to confer a competitive advantage on domestic producers.
321 Moreover, the United States emphasizes
that the standard advocated by the European Communities would make it potentially inconsistent with

315 Executive Summary of the United States' first written submission, footnote 12 referring to NASA
Advisory Council Organizational Chart, Exhibit US-100 . Executive Summary of the United States' first written
submission, para. 19.
316 Executive Summary of the United States' non-confidential closing statement at the second meeting
with the Panel, para. 11.
317 Executive Summary of the United States' first written submission, footnote 13 referring to NASA
Advisory Council Members List, Exhibit US-101.
318 Executive Summary of the United States' first written submission, footnote 14 referring to Exhibit
EC-312.
319 Executive Summary of the United States' first written submission, para. 20.
320 Executive Summary of the United States' first written submission, footnote 15 referring to
European Communities' first written submission, para. 463.
321 Executive Summary of the United States' first written submission, para. 21.

BCI deleted, as indicated [***]

the SCM Agreement for any Member to conduct research on topics of public interest. Such research
would invariably be found to be a subsidy.322
4.183 The United States contends that any evaluation of the purpose of NASA aeronautics research
must look at all of the evidence, including the facts that:323
• NASA's governing statute instructs it to pursue "{t}he expansion of human
knowledge of the Earth and of phenomena in the atmosphere and space".

• Airbus' own engineers admit that NASA research has a "generic and academic value"
to Airbus.324

• NASA purchases research services from a wide variety of entities in a wide variety of
industries.325

• The NASA officials quoted by the European Communities have in fact testified to
their desire to disseminate NASA's knowledge not just to U.S. aircraft manufacturers,
but to users of aircraft throughout the world.326

• NASA maintains the largest open library of aeronautics research in the world,
available to scientists throughout the worl d, who may obtain documents at little or no
cost.327

• NASA insists that all of the research it funds be disseminated broadly. 328 As a result,
scientific reports funded by NASA programmes issue as soon as they meet
publication standards, throughout the life of a program and beyond.
329

• Scientists throughout the world access and cite NASA reports, including the
publications generated by Boeing under the programmes challenged by the European
Communities, showing that the knowledge generated by NASA provides a foundation
on which everyone – including Airbus – can build. 330 This information would not
exist in the public sphere if NASA did not fund the research and publish the results.

322 Executive Summary of the United States' non-confidential closing statement at the first meeting
with the Panel, para. 7.
323 United States' comments on European Communities' response to question 324, para. 51.
324 Statement by Patrick Gavin, Tim Sommer, Burkhard Domke, and Dominik Wacht, Exhibit EC-1175
para. 72.
325 United States' response to question 159, para. 148.
326 United States' non-confidential oral statement at the second meeting with the Panel, para. 41.
327 United States' first written submission, para. 209; United States' non-confidential oral statement at
the first meeting with the Panel, paras. 19, 56, and 63.
328 This is true even of the small volume of research protected by limited early release clauses, as the
United States discusses below in its comment on the European Communities' response to question 325.
329 The Integrated Wing Design (" IWD") Project, which the European Communities treats as a benefit
exclusive to Boeing, resulted in the publication of 67 papers, which were cited 369 times, including 40 citations
in Europe. This project was only one element of the larger Advanced Subsonic Technology ("AST") Program.
United States' second written submission, paras. 67; United States' response to question 23, para. 73;
United States' response to question 186, para. 208; List of publications based on work performed in the
Integrated Wing Design (IWD) Project, Exhibit US-1140 (revised).
330 List of publications based on work performed in the Integrated Wing Design (IWD) Project , Exhibit
US-1140(revised). NASA's contracts with Boeing alone under the eight challenged programs produced 291
published scientific reports that were cited 1 036 times, including 250 citations in Europe. Reports and articles
published by Boeing/McDonnell personnel pursuant to aeronautics research contracts, Exhibit US-1253.

BCI deleted, as indicated [***]

• An even wider group of industries participate in NASA conferences, provide advice
to NASA, and participate in its programmes.331

4.184 The United States observes that the Europ ean Communities attempts to minimize the
significance of the results of the research contract s, by stating: "it goes without saying that no
commercial entity would ever pay another entity to conduct R&D primarily for the other entity's
benefit, receiving only nominal research reports to disseminate to the public and license rights it never
plans to utilize in return". The United States ar gues that each element of this assertion is wrong. 332
First, the United States submits that research reports are not "nominal". NASA's server has thousands
of reports generated by NASA scientists and employees of Boeing and other enterprises working
pursuant to contracts with their employers. Th is represents a huge database of knowledge for the
world aeronautics research community. Second, the United States argues that the
European Communities provides no evidence that the U.S. Government "never plans to use" the
patent and license rights acquired under the research contracts. The rights in question are government
rights, so that Boeing would be barred from chargi ng any U.S. Government agency for use of any
patents or data rights generated under one of the r esearch contracts, including by the FAA, DOD, or
by NASA itself in subsequent research. Third, according to the United States, the
European Communities provides no evidence th at the R&D conducted at NASA's request is
"primarily for {Boeing's} benefit". In fact, th e research challenged by the European Communities is
for the broader public good, including public users of air transportation, airlines, and the academic
community, as well as the aeronautics industry, including the suppliers of aircraft components and
Airbus itself. And, finally, the United States su bmits that the European Communities provides no
support for the assertion that a commercial entity would not pay another entity to conduct services
that also provide benefit to that other entity. Commercial transactions routinely provide benefits to
both sides.
333
4.185 In the whole, the United States maintains that the European Communities has not established
the existence of a financial contribution. The Eu ropean Communities relies on rhetoric, rather than
evidence, to support its contention that NASA research contracts with Boeing were really grants and,
accordingly, has failed to carry its burden of proof. The United States submits that this is not because
the United States is hiding evidence, as the Europ ean Communities claims. The United States asserts
that it provided copies of all of the relevant contr acts as part of the Annex V procedure in DS317, and
NASA provided a number of contracts directly to the European Communities in response to requests
under the U.S. Freedom of Information Act. Rath er, as the United States has shown, the evidence
demonstrates that these payments were not grants , but instead were for purchases of services, a type
of transaction that is not a financial contribution wi thin the meaning of Article 1.1(a)(1). Thus, the
European Communities has not met its burden of pr oof, and the United States has fully rebutted the
unsupported arguments of the European Communities.334
4.186 The United States also argues that the Eur opean Communities' assertion as to the benefit
associated with the NASA-Boeing transactions was not supported. It notes that the
European Communities' assertions that NASA paym ents conferred a benefit on Boeing follow the
same theme as its arguments regarding the existenc e of a financial contribution – that NASA received
nothing in return for the money it paid. This, accordi ng to the United States, is manifestly incorrect.
In its first written submission and oral statemen t, the United States has demonstrated that the
U.S. Government receives a commensurate value in exchange for the money NASA pays Boeing.

331 United States' first written submission, para. 193; Membership of the NASA Advisory Council, 1997-
2007, Exhibit US-143; United States' second written submission, para. 64, note 102.
332 Executive Summary of the United States' second written submission, para. 27.
333 Executive Summary of the United States' second written submission, para. 28.
334 Executive Summary of the United States' second written submission, para. 23.

BCI deleted, as indicated [***]

The United States receives the labor of Boeing scien tists and engineers directed to the objectives of
the U.S. Government. The United States can and does disseminate the knowledge they generate for
the public benefit. By purchasing the research, the government receives IP rights with regard to
inventions and data that it would not otherwise hold.335
4.187 In short, the United States submits that NASA R&D contracts are not financial contributions.
NASA's contracts with Boeing create a large volume of aeronautics research for public use, including
improving air transport safety and expanding the capac ity of the air traffic control system. These
clearly advance NASA's objective of developing and disseminating aeronautics knowledge. Thus,
there is no basis for the European Communities' contention that these contracts are a "sham"
disguising a "grant" or "direct transfer" to Boeing. 336 The United States also submits that NASA
R&D contracts do not confer a benefit. NASA researches aeronautics topics and disseminates the
results of its efforts. The contracts with Boeing advance this objective, and the
European Communities has failed to show otherw ise. Therefore, its only argument regarding
benefit – that NASA receives nothing in return for the money it pays Boeing to conduct research – has
no support in the evidence.
337
4.188 Turning to the issue of magnitude of the NASA R&D support, the United States argues that,
in disregarding the broad scope of NASA's aeronautics research, the European Communities greatly
overstated – by nine or ten times – the amount of money NASA paid for aeronautics research
contracts with Boeing.
338 The European Communities asserts that NASA paid Boeing $10.4 billion in
"grants", but, according to the United States, the actual amount that NASA paid Boeing was less than
$750 million. Even more importantly, the Europ ean Communities ignored the fact that Boeing did
not receive those funds as a "grant". The United States argues that they were a purchase by NASA of
research services performed for a variety of public purposes. As the purchase of a service is not a
financial contribution, these NASA payments for research services are not a financial contribution
and, therefore, are not actionable subsidies.
339
4.189 The United States notes in this context that th e European Communities calculates the value of
payments to Boeing by equating the alleged provi sion of goods and services to Boeing with NASA's
operating budget. In other words, according to th e United States, the European Communities asserts
that the cost to NASA of paying employees and running NASA's operations was actually a service
provided to Boeing. The United States contests this proposition, arguing that the government
provides nothing to Boeing when NASA's scientists a nd engineers do what they do every day, such as
turn on the lights in their offices, travel to international confer ences, go to the doctor using their
federal health insurance and collect pensions when they retire, or any of the other activities they
perform in furtherance of NASA's objectives.
340
4.190 The United States also argues that the Europ ean Communities failed to support its calculation
of the amount of the financial contribution. More specifically, it argues that the European
Communities, in tandem with its subsidy analysis, a ttempts to estimate the value of NASA's research
payments to Boeing that it considers to be a financ ial contribution, which it considers to be identical
to the magnitude of the alleged benefit. In its first written submission, the United States demonstrated

335 Executive Summary of the United States' second written submission, para. 26.
336 Executive Summary of the United States' non-confidential oral statement at the second meeting with
the Panel, para. 7.
337 Executive Summary of the United States' non-confidential oral statement at the second meeting with
the Panel, para. 8.
338 Executive Summary of the United States' first written submission, para. 18. See also, Executive
Summary of the United States' non-confidential oral statem ent at the first meeting with the Panel, para. 3. In
addition, the European Communities greatly exaggerates the value of any NASA payments to Boeing.
339 Executive Summary of the United States' first written submission, para. 18.
340 Executive Summary of the United States' first written submission, para. 23.

BCI deleted, as indicated [***]

that this calculation was invalid because it was based on several erroneous assumptions, including that
the value of NASA's contracts with Boeing fo r aeronautics research was proportionate to the
company's share of U.S. civil aviation production, and that a share of NASA's spending on its own
salaries and other expenses was a grant to Boeing. The United States submits that there is no
evidence to support these assumptions, and the Eur opean Communities cited none in its written
submission. These errors led the European Commun ities to estimate NASA's payments to Boeing as
$7.3 billion, when the actual figure was less than $750 million.
341
4.191 The United States argues that the European Comm unities' oral statement simply repeated the
allegation that the European Communities' cons ultants had "meticulously examined the NASA
budgets to extrapolate funding provided to the U.S. civil aircraft industry for LCA-related R&D . . .
and apportioned this funding to Boeing's LCA divisi on based on its share of the U.S. civil aircraft
industry". According to the United States, this statement only serves to demonstrate one of the
fundamental errors of the European Commun ities estimates – the European Communities assumes
that NASA apportions funding to Boeing's large civil aircraft division based on its share of the U.S.
civil aircraft industry. There is no support for this assertion. Moreover, the United States submits that
the very data that the European Communities consultants "meticulous ly examined" further
demonstrates the error of their underlying assumption – NASA did not allot its funding according to
market share, and the amounts that they assert it spent on aeronautics research contracts with Boeing
are greater than the total amount NASA spent on aerona utics research – a mathematical impossibility.
Finally, the United States argues that it provided data from NASA's disbursement records indicating
that the agency's contracts with Boeing were worth far less than th e European Communities'
consultants alleged.
342
4.192 Addressing the value of NASA's research cont racts with Boeing and of any facilities,
equipment, and personnel provided to Boeing in its oral statement, the United States suggests that
since the issue concerns the world of science, it is useful to think in terms of hypotheses. A scientist
looking at a question takes known facts, frames a hypothesis as to how the world would act based on
those facts, and then tests the hypothesis. 343 The United States contends that the
European Communities has presented a hypothesis with regard to the amount of money NASA paid to
Boeing for research and development services, namely, that it can determine that amount reliably
based on a "top down" approach. The facts it proposes to use are NASA's known budgets for the
programmes in question and NASA's known budgets fo r personnel and facilities. Its hypothesis is
that it can derive the amount NASA spent on resear ch related to topics other than engines, and
assuming that, out of that budget, NASA paid Boeing an amount equal to Boeing's share of U.S.
production of civil aeronautics products. The United States submits that that results in assigning
Boeing approximately 80 per cent of NASA's non-engine budget.
344
4.193 To test this hypothesis, the United States propo ses looking at other evidence. For example,
NASA's data on total contracting demonstrates that the agency does not pay Boeing an amount equal
to its share of U.S. production. The same data show that NASA pays a significant portion of its
budget to universities and contractors other than Boei ng. In short, the United States argues that the
European Communities hypothesis fails. 345 That should be the end of the analysis. As the

341 Executive Summary of the United States' second written submission, para. 29.
342 Executive Summary of the United States' second written submission, para. 30.
343 Executive Summary of the United States' non-confidential closing statement at the second meeting
with the Panel, para. 3.
344 Executive Summary of the United States' non-confidential closing statement at the second meeting
with the Panel, para. 4.
345 Executive Summary of the United States' non-confidential closing statement at the second meeting
with the Panel, para. 5.

BCI deleted, as indicated [***]

European Communities is the complaining party, it has a burden of proof on this issue. By presenting
a demonstrably incorrect analysis, it has failed to meet that burden of proof.346
4.194 The United States contends that it has gone a step further, and that in order to provide the
Panel the most accurate information on funds paid to Boeing, it put together its own estimate. To this
end, the United States used NASA's internal system for recording payments to NASA's contractors,
including Boeing. NASA then identified the cont racts under which it made payments to Boeing for
research under these programmes, and reported th e amount that it paid to Boeing under those
contracts.347 The United States goes on to explain that NASA did this by consulting its records, and
asking individuals familiar with the nine programm es in question to identify contracts awarded to
Boeing under those programmes. It determined fr om its payment system how much was paid to
Boeing, and reported that amount to the Panel. The United States submits that the
European Communities has provided no basis to question that result. The only thing it has done is to
identify a small number of contracts, with a relativ ely small value, that it thinks NASA missed. The
United States is in the process of checking the European Communities' claims. Nevertheless, it
emphasizes that, even if the European Communities is correct, that would not result in a meaningful
change in the outcome – the margin of error would be a few percentage points. This small difference
only serves to confirm that NASA's process is substantially accurate. 348
4.195 The United States notes that the European Comm unities asserted that the difference between
the European Communities' large "top down" number and NASA's figure based on actual payments to
Boeing was a reason to question the accuracy of NAS A's process. The critical point here, according
to the United States, is that the European Co mmunities' huge number is based on a demonstrably
incorrect assumption about how NASA spends its money. That figure does not provide a valid
benchmark for evaluating NASA's methodology any more than it represents a valid estimate of
NASA's payments to Boeing. Nor does it provide any reason to believe that NASA staff, in their
efforts, failed to identify any meaningful paymen ts to Boeing under the nine programmes challenged
by the European Communities. The United States adds that the European Communities certainly
provides no reason to believe that it came up more than $10 billion short.
349
4.196 The United States submitted a verification exercise in response to Panel Question 188, which
asked to explain how the Panel could satisfy itself that the information submitted by the United States
with regard to "all relevant contracts and agre ements between NASA and Boeing MD" is "accurate
and complete". The exercise demonstrated that even if all disputed facts are resolved in favour of the
European Communities, including treatment of rotorcraft as related to large civil aircraft, the value of
NASA's contracts with Boeing funded under the challenged programmes was at most $775 million
from 1989 to 2006. Moreover, the Panel's record c ontains copies of most of the contracts that
generated these disbursements, which document the nature of the research conducted and the funding
obligated to accomplish that research.350
4.197 Even if the Panel decides to reject all of NASA's objectiv e and conservative judgments
regarding contracts awarded to Boeing by the aer onautics centers that fall outside the European
Communities' claims, the fact remains that all contracts with Boeing funded by the challenged
programmes were worth, at most, $1.05 billion. This figure represents the total value of all contracts

346 Executive Summary of the United States' non-confidential closing statement at the second meeting
with the Panel, para. 6.
347 Executive Summary of the United States' non-confidential closing statement at the second meeting
with the Panel, para. 7.
348 Executive Summary of the United States' non-confidential closing statement at the second meeting
with the Panel, para. 8.
349 Executive Summary of the United States' non-confidential closing statement at the second meeting
with the Panel, para. 9.
350 United States' response to question 341, para. 84.

BCI deleted, as indicated [***]

awarded to Boeing by the four centers during the re levant period, including those related to research
outside the European Communities' claim. This tota l value of all contracts with the four aeronautics
centers verifies the fundamental point that th e United States has made since its first written
submission remains – that NASA's funding of contracts directly with Boeing represents a very small
portion of the total amount that the European Communities attributes to Boeing as "funding" under
the challenged programmes. The European Communities has provided neither evidence nor argument
that would support treating the remainder of contr act funding under the challenged programmes – all
of which went to contractors unrelated to Boeing and NASA employees – as a subsidy to Boeing.
4.198 The United States also explains that to date , it focused on payments for research, because it
understood that as being the focus of the Europ ean Communities claim. The United States observes
that in recent submissions, the European Comm unities has begun putting more weight on provisions
of facilities, equipment, and employees under Space Ac t Agreements. In response, the United States
asserts that it provided the Panel with further info rmation on Space Act agreements and the value of
NASA's effort under those agreements. The United St ates submits that this evidence, based on actual
agency data and not supposition, shows that the provision of facilities, equipment, and employees is
not significant in comparison with the value of the contracts, and less than two per cent of the more
than $10 billion value the European Communities ascribes to the NASA programmes.
351
4.199 Despite the many objections to a methodology that treats NASA facilities, equipment, and
employees as working for private enterprises, the U. S. response to Question 175 sought to assist the
Panel in valuing the facilities, equipment, and employees related to contracts if it nonetheless found
that they were "provided" to contractors in the sense of Article 1.1(a)(1)(iii) of the SCM Agreement
and conferred a benefit. The United States suggest s that if the Panel considered a class of NASA
personnel or other expenditures to be in reality a good or service provided to contractors, it could
determine the share attributable to Boeing based on the company's 10.4 per cent share of the total
value of NASA aeronautics resear ch contracts in the 1989-2006 period. 352 Because this approach is
based on real data on NASA's expenditures, it would estimate Boeing's share of any NASA costs
more accurately than the European Communities' a pproach based on Boeing's share of sales of civil
aircraft and parts.353
4.200 Additionally, in response to the European Co mmunities' assertion that it is not challenging
"NASA R&D contracts related to 'air traffic management and air traffic safety' and 'ways to modify
airplane flight paths to decrease' fuel consumpti on", the United States notes that, in fact, these topics
were part of the research conducted under the progr ammes identified by the European Communities.
Therefore, the United States considers that the Eu ropean Communities is challenging this type of
research.
354
4.201 To sum up, the United States' arguments w ith respect to the magnitude of NASA R&D
programs, are as follows. The United States has provided extensive evidence that the value of
NASA's R&D contracts with Boeing are worth less than $750 million. In contrast, the
European Communities has provided only one basis for its huge estimated figure – its own
calculations. The United States points to three of the many flaws it alleges with these calculations.
First, all of the European Communities' estimat es rely on the proposition that NASA provides
research contracts and facilities, equipment, and em ployees to Boeing in proportion to Boeing's share
of U.S. civil aircraft production. However, all of the evidence before the Panel indicates otherwise.

351 Executive Summary of the United States' non-confidential closing statement at the second meeting
with the Panel, para. 10.
352 United States' response to question 352, para. 170.
353 United States' response to question 352, para. 172.
354 Executive Summary of the United States' non-confidential closing statement at the first meeting
with the Panel, para. 1.

BCI deleted, as indicated [***]

Second, the European Communities has done nothing to adjust its calculations in response to the
evidence presented by the United States on how much NASA actually spent, and on what the
contracts actually provided. Third, the European Communities estimates include the value of research
that even the European Communiti es concedes should be left out, such as air traffic management
topics. As for alleged provision of facilities, e quipment, and employees, NASA has reviewed its
electronic records, and determined estimated values for many of the NASA facilities, equipment, and
employees provided under the non-reimbursable or partially reimbursable SAAs for which such
information was unavailable in hard copy. These da ta indicate that the value of such SAAs was
approximately $83 million – not the large amount suggested by the European Communities.355
DOD
DOD RDT&E Program
4.202 The United States submits that U.S. DOD conduc ts research, development, testing, and
evaluation activities to develop weapons and other systems to advance its ability to protect U.S.
national security. DOD personnel conduct many of these activities themselves at the DOD's many
research facilities. The United States adds that DOD also contracts with private manufacturers,
private research laboratories, and universities to conduc t research into topics of interest to DOD. One
such contractor is Integrated Defense Systems (" IDS"), the Boeing division responsible for defense
contracting activities. BCA, the division that prod uces large civil aircraft, is not a party to these
RDT&E contracts. 356
4.203 According to the United States, the European Communities' argument that these contracts
with IDS for military research actually convey bene fits to BCA's production of large civil aircraft
rests on two unsupported (and incorrect) assertions : (i) that DOD "funding for LCA-related R&D
activities through what they call 'contracts' . . . are in reality grants to Boeing/MD for LCA-related
R&D expenses", 357 and (ii) that "Boeing is not required to pay anything in return for this RDT&E
funding".358 This framing of the claim creates a fict itious measure – DOD funding of "dual use"
research that provided "nothing in return" to the U.S. Government. 359 No such programme exists or
existed. The United States considers that the Eu ropean Communities uses this fiction to disregard
reality, which is fatal to its claims:
(a) DOD contracts with IDS to engage in explicitl y military research that is of interest to
DOD and advances the U.S. national defense objectives, generally to design more
advanced weapons or other defense systems or to reduce the cost of such systems.
(b) DOD tasks Boeing scientists to perform wo rk defined by DOD, receives voluminous
data and scientific reports on the outcome of that work, and receives the right to
convey the research results to any other company for use on any government project.
(c) DOD remuneration to Boeing for this contracted research is subject to an elaborate
legal regime and rigorous government auditi ng and enforcement to ensure that the
government is not overpaying for the services received.

355 Executive Summary of the United States' non-confidential oral statement at the second meeting with
the Panel, para. 11.
356 Executive Summary of the United States' first written submission, para. 8.
357 Executive Summary of the United States' firs t written submission, footnote 9 referring to
European Communities' first written submission, para. 457.
358 Executive Summary of the United States' first written submission, footnote 10 referring to
European Communities' first written submission, para. 765.
359 Executive Summary of the United States' first written submission, footnote 11 referring to
European Communities' first written submission, para. 766.

BCI deleted, as indicated [***]

In short, the United States submits that under th e DOD contracts at issu e, DOD purchases research
and development services, and does so for a ma rket-based price. Under the SCM Agreement,
government purchase of services is not a fi nancial contribution. Even, assuming arguendo that
purchase of services was a financial contribution, the European Communities can point to no evidence
that the U.S. Government paid more than adequa te remuneration for those services. Therefore, the
United States argues that there is no subsidy.360

4.204 The United States points out that the Eu ropean Communities seek s to bypass these
fundamental, and insurmountable, problems by calling the contractual payments at issue "grants".
However, in refusing to grapple with the rea lity of the government payments at issue, the
European Communities fails to make a prima facie case that the measures meet the three criteria for
an actionable subsidy: financial c ontribution, benefit, and specificity.
361 Therefore, the
European Communities' extended a llegations of so-called "dual use" technology or knowledge
transfer are besides the point, as they do not and cannot manufacture a subsidy from underlying
transactions that confer neither a financial contribution nor benefit to Boeing. In any event, according
to the United States, the European Communities' "dua l use" assertions fail even by their own terms –
they rest on a false premise that DOD's military r esearch is designed to assist the civilian sector, they
ignore the severe technological and legal limitations on the use of military technology for civil
aircraft, and they ascribe to Boeing a use of milit ary-origin "knowledge" that is inconsistent with
Boeing's own practice and U.S. law.362
4.205 First, the United States elaborates on what it considers to be the false premise of the
European Communities' argument: DOD has indeed in the past funded limited research on "dual use"
technologies. But the European Communities misrep resents the nature of the programmes. "Dual
use" from DOD's perspective involves leveraging commercial technology for military purposes. The
explicit design and objective is not to move resources to the civil sector, but rather to move resources
from the civil sector to the military sector. Th erefore, according to the United States, the
European Communities has the flow backwards.363
4.206 Second, the United States points to the technological realities behind the
European Communities' argument: the European Communities ignores fundamental technological
differences between military and civilian missions an d requirements, i.e. that DOD procures research
to fulfill military functions, which differ in important ways from the needs of commercial aircraft. It
points out that military aircraft carry only pilots or soldiers (but are increasingly unmanned), often fly
at supersonic speeds, must evade radar, survive bullet holes and land in rocky deserts or thick jungles,
and drop paratroopers and/or cargo. In contrast, ci vil aircraft carry commercial passengers (including
demanding, and high revenue-generating, first-cl ass passengers), fly only at subsonic speeds, are
required to be seen on radar, and land at busy hub airport runways. The technologies that allow
military aircraft to do their mission are expensiv e – and unnecessary – for a commercial aircraft.
Thus, even items that are "potentially" or "theoreti cally" useful to large civil aircraft are not what
aircraft designers or aircraft customers consider either commercially viable or feasible.364
4.207 Third, the United States emphasizes the legal limitations that undermine the
European Communities' argument: because of thei r military nature, technologies developed under a
DOD contract will generally be included in the U.S. Munitions List, which results in the imposition of
stringent controls under ITAR on the export and transfer of any resulting defense articles and
technical data related to those articles. The Unite d States asserts that these restrictions make it

360 Executive Summary of the United States' first written submission, para. 9.
361 Executive Summary of the United States' first written submission, para. 10.
362 Executive Summary of the United States' first written submission, para. 11.
363 Executive Summary of the United States' first written submission, para. 12.
364 Executive Summary of the United States' first written submission, para. 13.

BCI deleted, as indicated [***]

effectively impossible to use controlled technologies on large civil aircraft because, by their nature,
the aircraft can potentially fly anywhere, including to countries proscribed by U.S. law, regulation and
policy from receiving access to U.S. defense articles and technical data. As a result, Boeing has a
policy of excluding the use of ITAR-controlled articles and technical data on its large civil aircraft,
and has developed rigorous internal procedures to ensu re that this does not occur. The United States
submits that Boeing applied this policy to the 787, the aircraft the European Communities alleges was
aided most by DOD RDT&E activities, to ensure that the 787 incorporates only technologies with a
proven civil origin.
365
4.208 Additionally, the United States maintains th at even if the European Communities had
succeeded in demonstrating that there was a feas ible civil use for knowledge Boeing obtained during
performance of a DOD contract, such a use would not satisfy any of the criteria for finding a subsidy.
It is not a financial contribution. Nor is there a benefit. The United States considers that the existence
of knowledge synergies between different business un its of a company does not confer a benefit.
Such knowledge is, like any other experience that a commercial actor develops in the course of its
business, a normal part of commercial relationships.366
4.209 In response to the European Communities' statemen t that it is interested only in "the portion
of DOD RDT&E support that benefits Boeing's commercial division", the United States points to the
fact that the European Communiti es has conceded that all of DOD research projects, even the so-
called "dual use" projects, have a military purpose. As Adm. Ginman explained, DOD pays only for
that military purpose. The United States asserts that once that military purpose is taken into account,
there is no "portion" of the DOD RDT&E left that could go to civilian uses.
367
4.210 The United States asserts that, in paying Boeing to conduct research, DOD did not, as the
European Communities claims, get nothing in return for its money. In fact, it obtained valuable
technology and information for military purposes. The United States notes that at one point, the
European Communities concedes that this is the case, but claims, contrary to the evidence on the
record, that much of the research has "dual uses" that advance Boeing's production of large civil
aircraft. In this context the United States recalls that "dual use" means the adaptation of civil
technologies for military usage – not the other way around, as the European Communities asserts. It
further recalls that DOD research focuses on capabilities that are not relevant to civil aircraft. Finally,
even if some DOD-funded research had a theoretical applicability to large civil aircraft, U.S. export
control laws make use of any resulting technology on large civil aircraft a practical impossibility.
Thus, there is no basis to conclude that DOD rese arch was a financial c ontribution or provided a
benefit with regard to Boeing's large civil airc raft. The United States also notes that the
European Communities has greatly exaggerated the magnitude of the programmes it challenges.368
4.211 In its further written submissions the United States maintains its claim that the
European Communities failed to establish the existe nce of a financial contribution in respect of
DOD's RDT&E. The United States contends that in its first written submission it showed that all of
DOD contracts with Boeing had a military objectiv e, and that in exchange for payments, Boeing
employees performed research work to government sp ecifications and delivered the results to DOD.
The United States points out that the European Communities does not dispute that DOD received
"some value" under these contracts. In short, according to the United States, despite the
European Communities' rhetoric, it is forced to admit that the RDT&E contracts represented an

365 Executive Summary of the United States' first written submission, para. 14.
366 Executive Summary of the United States' first written submission, para. 15.
367 Executive Summary of the United States' non-confidential closing statement at the first meeting
with the Panel, para. 3.
368 Executive Summary of the United St ates' non-confidential oral stat ement at the first meeting with
the Panel, para. 2.

BCI deleted, as indicated [***]

exchange of value between DOD and Boeing, which would make them a purchase. The United States
argues that that should end the inquiry, as the c ontracts make clear that what DOD purchased was
Boeing's RDT&E services, a transaction that is not a financial contribution within the meaning of
Article 1.1 of the SCM Agreement.369
4.212 However, in the United States' view, the Eu ropean Communities attempts to avoid this
consequence by asserting that the military purpose is "irre levant" because the "issue in this dispute" is
"the portion of DOD RDT&E support that benefits Boeing's commercial division". The United States
contends that this assertion is wr ong on two levels. In the firs t place, the European Communities'
theory mixes two concepts that are separate unde r the SCM Agreement – financial contribution and
benefit. The identification of a financial contri bution under Article 1.1(a)(1) depends on the type of
the transaction that allegedly confers a subsidy. The question of whether there is a benefit comes only
after the establishment of a financial contributi on. Thus, the United States submits that the
European Communities' assertion that technologi es researched under some contracts have civil
application is irrelevant to a de termination of whether the contract s convey a financial contribution in
the first place.
370
4.213 Second, the United States recalls that the European Communities is challenging R&D
services that it believes result in "dual use" tec hnologies. It is not challenging two distinct
transactions. The United States considers that research performed (and, for that matter, any
technologies generated) cannot be artificially divided into a portio n done for military purposes and a
portion done for civil purposes. Accordi ngly, the United States argues that the
European Communities cannot challenge any allege d civil portion of the research contract as
something that DOD separately conveys to Boeing, discrete from the military portion of the research
contract, and that the Panel can analyze in isolation from its military applicability.371
4.214 Likewise, the United States argues that the European Communities failed to establish the
existence of benefit. It posits that even if the Panel were to find that the RDT&E contracts gave rise
to a financial contribution, the contracts conf er no benefit because Boeing performed valuable
research and delivered valuable results to DOD, and DOD paid only for the work directed to its own
objectives. Thus, any payment to Boeing was no mo re than adequate remuneration for what Boeing
did, which, under the analysis provided in Article 14(d), establishes that the payments do not confer a
benefit.372 The European Communities does not dispute that the agency received "some value" under
these contracts. However, it does not address whet her that "value" was worth less than what DOD
paid. According to the United States, that, by itself, represents a failure on the part of the
European Communities to meet its burden of proof, and requires rejection of its assertion that a
benefit exists.373
4.215 Taking issue with the European Communities' asse rtion that the larger part of the value of
each contract was a "benefit to Boeing's LCA divi sion" because "Boeing ultimately used a significant
portion of those funds for its own benefit", the United States points out that the
European Communities provided absolutely no evidence for this assertion in its first written
submission or in its first oral statement. Moreover, the United States provided evidence that the
opposite is true. Each contract specifically descr ibes DOD's goal, and lays out the work that the
contractor will perform to achieve that goal. Boeing has no latitude to change the work itself. Rather,
modifications must be agreed to by DOD, subject to negotiations and revisions in the amount of the
payment. Where the parties agr ee that the work carries some bene fit to Boeing, DOD uses a vehicle

369 Executive Summary of the United States' second written submission, para. 15.
370 Executive Summary of the United States' second written submission, para. 16.
371 Executive Summary of the United States' second written submission, para. 17.
372 Executive Summary of the United States' second written submission, footnote 1.
373 Executive Summary of the United States' second written submission, para. 18.

BCI deleted, as indicated [***]

(such as a cooperative agreement, other transaction, or technology invest ment agreement) that
requires Boeing to make its own monetary contribution to the project, and provides no allowance for a
profit. The United States contends that the government maintains detailed and voluminous
regulations designed to ensure that contractors charge only for expenses related to performance of
their contracts. Thus, the United States submits that the evidence shows that DOD defined the work
for Boeing to perform and paid only for what Boeing actually did.374
4.216 Turning to the European Communities' argument that the United States has made
"unsupported assertions" about "the impact of comp etitive bidding, the United States responds that it
did not think it would be necessary to explain that competition is likely to produce lower prices that
reflect the actual value of the transaction.375 In fact, DOD finds that competition yields many benefits
to the government, even where the competition results in cost-reimbursement-type contracts. Among
these benefits are:
(a) participation by all offerors able and interested in satisfying the government's needs;
(b) availability to DOD of various and inno vative approaches to satisfying the
government's needs; and
(c) uninflated estimates of cost due to the presence of competition.
The United States asserts that when cost-reimburs ement contracts are awarded, DOD's contract
management processes ensure it reimburses contractor s for costs incurred only if those costs meet
standards of allocability, allowability, and reasonableness. 376 In summary, the United States submits
that competition is important to the effectiveness of DOD's R&D efforts.377

4.217 The United States next argues that the Eu ropean Communities failed to establish the
specificity of the alleged subsidies. It posits that if the Panel finds that the RDT&E contracts are a
financial contribution, the United States has made a contingent argument that the subsidies alleged by
the European Communities are not specific. The European Communities argues, without any
supporting information, that "entities capable of car rying out the types of activities enumerated in
DOD's regulations" constitute a "group of entities or industries". However, the United States' first
written submission demonstrated that DOD contracts for RDT&E on a large variety of topics, with
thousands of enterprises, in a large number of industries. The United States submits that the
European Communities has provided no information or argument to support a conclusion that this
diversity of enterprises and industries is sufficiently discrete so as to be considered "specific".378
4.218 In addition, the United States argues that th e European Communities failed to support its
calculation of the amount of the alleged financial c ontribution. Also, the United States notes that the
European Communities attempts to estimate the am ount spent on research into so-called "dual-use
technologies" that it considers to be a financial c ontribution and treats this amount as equal to the
magnitude of the alleged benefit. As such, the United States submits that the European Communities'
calculations are superficial, self-contradictory, an d contrary to the evidence. More specifically,
according to the United States, the evidence of " dual use" was based on nothing more than mere
references to generic scientific terms that indicat ed nothing about whether the research in question

374 Executive Summary of the United States' second written submission, para. 19.
375 Executive Summary of the United States' non-confidential oral statement at the second meeting with
the Panel, para. 12.
376 Executive Summary of the United States' non-confidential oral statement at the second meeting with
the Panel, para. 13.
377 Executive Summary of the United States' non-confidential oral statement at the second meeting with
the Panel, para. 14.
378 Executive Summary of the United States' second written submission, para. 20.

BCI deleted, as indicated [***]

had a civil use, that the evidence was self-contra dictory in that the very evidence on which the
European Communities relied, proved that the estim ated value of the programs in question were
inflated by at least five to seven times, and proba bly by a greater amount, and that they were contrary
to the evidence in that DOD resear ch into "dual use technologies" aims to convert civil technologies
to military use, and not the other way around, as the European Communities claims.379
4.219 Finally, the United States submits that the allegations that Boeing "used" DOD-funded
technology in large civil aircraft are unproven and irrelevant to a finding as to whether there was a
financial contribution, a benefit, or specificity. The United States notes that the
European Communities has devoted much of its presentation on DOD RDT&E to assertions that
Boeing "used" technology funded under DOD contr acts on large civil aircraft, and that Boeing
developed "knowledge, experience, and confidence" working on DOD projects. As the United States
argues it had pointed out in its first written submission, these assertions are irrelevant to a
determination whether RDT&E contracts are a specifi c subsidy. The contention regarding "use" of
DOD technologies in large civil aircraft is not true, a point to which the United States will return later.
The United States claims that even if it were tr ue, the existence of synergies between different
divisions of an enterprise would be completely comme rcial in nature. Such synergies are one of the
primary reasons that enterprises combine with othe r enterprises. The United States further contends
that the development of "knowledge, experience, and confidence" by employees (and enterprises) is
also the result of any commercial transaction. Th erefore, the fact that Boeing employees added to
their professional skills while working under DOD contracts (or the European Communities
allegations that large civil aircraft used DOD -funded technologies) proves nothing about whether the
contracts themselves were more advantageous to Boeing than the market would provide. To the
contrary, the United States submits that these are completely normal commercial outcomes, and when
arising in connection with a payment that is not otherwise a subsidy, do not transform the payment
into a subsidy.
380
4.220 In short, the United States argues that:
(a) DOD contracts are not a financial contribution. DOD contracts are purchases of
services for purposes of Article 1.1(a)(1). Research and development are services, a
point that the European Communities has not disputed. DOD paid money for the
services, which had value to DOD, another proposition that the
European Communities does not contest. Ther efore, there is a purchase of services –
a type of transaction that is not a financial contribution for purposes of the
SCM Agreement.
381
(b) DOD contracts do not confer a benefit. Th e European Communiti es asserts that "a
commercial entity, particularly an entity with the market power of DOD, would never
pay for R&D costs that are known to also relate to a good other than the good being
purchased". This is demonstrably false. For example, clients routinely pay law firms
for the full cost of legal research, even though they know that the firm may
subsequently use the results of that resear ch in its representation of other clients on
unrelated matters. The European Commun ities also disregards the effect of
competition between Boeing and the many other companies that supply RDT&E
services to DOD. Where there is competiti on, the fact that Boeing won the contract
means that DOD has concluded that Boeing' s offer best meets the criteria that the
solicitation establishes as the basis for the awar d. In this situation, even if DOD

379 Executive Summary of the United States' second written submission, para. 21.
380 Executive Summary of the United States' second written submission, para. 22.
381 Executive Summary of the United States' non-confidential oral statement at the second meeting with
the Panel, para. 3.

BCI deleted, as indicated [***]

knows Boeing has a commercial use for a technology that may result from the
research, it would be completely contrary to commercial practice for DOD to choose
one of the less valuable bids.
382
(c) Magnitude. The evidence demonstrates that the European Communities' estimate of
the value of research into allegedly dua l use technologies vastly exaggerates any
actual value. In particular, for two of the areas analyzed by the European
Communities, the estimates were between tw ice and eight times the actual values.
The European Communities argu es that the Panel should disregard this pattern of
exaggeration because the 17 comparisons are a "small sample size". But if an
analysis shows that a methodology is consistently wrong for one group, expanding
the methodology to encompass a much larger group of contracts does not make it
right.
383
4.221 DOD facilities, equipment, and employees. When DOD allows use of its facilities, equipment,
or employees for the purpose of performing an RDT&E project, it is not "providing" them to a
contractor. It is providing them to itself, for use to advance its own objectives. Thus, there is no
financial contribution within the meaning of Article 1.1(a)(1). Perhaps more important, any benefit
associated with DOD facilities and equipment used under an RDT&E contract cannot be evaluated
independent of the contract because those assets form part of the basis of the exchange. A contractor
that has to supply facilities will charge more than a contractor that has access to DOD facilities. That
will influence the price that it is willing to accept for the work.
384
DOC
DOC Advanced Technology Program
4.222 The United States submits that the European Communities' challenge to the DOC programme
known as the ATP lacks merit because ATP is a br oad-based, non-specific programme. ATP assists a
broad range of companies in funding early-stage, high-risk research and turning it into innovative
technologies that could deliver broad-based economic rewards for the United States as a whole. ATP
does not fund the development of particular produc ts, but supports early-stage enabling technologies
that are essential to the development of new products, processes, and services across diverse
application areas.
385
4.223 The United States argues that ATP has funded 768 projects in a broad array of technology
areas that extend across the fields of advanced ma terials and chemicals, biotechnology, electronics,
computer hardware, communications, information technology, and manufacturing. ATP does not
target specific companies or institutions to receive funding or participate in projects; these entities
participate in ATP of their own initiative. The selection of ATP projects is done on a peer-reviewed,
competitive basis and is subject to established selection criteria.386
4.224 The United States asserts that Boeing participat ed in eight ATP projects as a member of a
consortium, rather than on its own, and received an amount of funding that is trivial in comparison
with the cost of developing and producing large ci vil aircraft. The ATP funding that Boeing received

382 Executive Summary of the United States' non-confidential oral statement at the second meeting with
the Panel, para. 4.
383 Executive Summary of the United States' non-confidential oral statement at the second meeting with
the Panel, para. 5.
384 Executive Summary of the United States' non-confidential oral statement at the second meeting with
the Panel, para. 6.
385 Executive Summary of the United States' first written submission, para. 32.
386 Executive Summary of the United States' first written submission, para. 33.

BCI deleted, as indicated [***]

is not an actionable subsidy because it was not sp ecific to Boeing. ATP is an extremely broad
programme that provides funding to a diverse array of industries and technology sectors. The
authorizing legislation does not limit eligibility to certain enterprises, which means that it is not de
jure specific pursuant to Article 2.1(a) of the SCM Agreement. Furthermore, the United States
considers that ATP is also not de facto specific under Article 2.1(c).
387
4.225 In its further submissions, the United States maintains that the European Communities has
failed to establish that any allege d subsidy is specific within th e meaning of Article 2 of the
SCM Agreement. The European Communities argu es that ATP is specific because ATP funding is
limited to those companies that perform research in to 'high-risk, high pay-o ff, emerging and enabling
technologies'. However, according to the United States, such a limitation does not amount to a
limitation to a group of enterprises or industries within the meaning of Article 2.1 of the
SCM Agreement. If "certain enterprises" in Artic le 2.1 captured as broad a range of companies as
those that could conduct "high-risk, high pay-off, emerging and enabling technologies", then it is
difficult to conceive of eligibility criteria for R&D funding that a Member could devise that would be
non-specific. In addition, the broad range of sect ors that have received ATP funding demonstrates
that ATP is not specific. Specifically, ATP has funded 768 projects that cover a range of sectors that
includes advanced materials and chemicals, biotechnology, electronics, computer hardware and
communications, information technology, and various types of manufacturing. The United States
submits that because ATP funding is not specific unde r the SCM Agreement, it is not an actionable
subsidy.
388
4.226 In sum, the United States maintains its argument that the DOC's ATP is not an actionable
subsidy because it is not specific. The European Communities claims that ATP is specific because
the programme funds "high risk, high pay-off em erging and enabling technologies". But, this
"group" that the European Communities attempts to fa bricate is artificial and has no basis in logic.
Moreover, ATP is broadly available throughout the U.S. economy, and in fact, an extremely wide
range of enterprises and industries has participated in ATP. 389 Thus, under the ATP, the DOC makes
grants to a wide swath of U.S. industries, and acco rdingly, this programme is not specific and not an
actionable subsidy.390
(ii) NASA/DOD intellectual property right waivers/transfers
4.227 Noting that the European Communities asserts that the U.S. Government "transfers" or
"waives" patent and data rights to its government contractors, and that this alleged transfer conveys a
benefit specific to Boeing, the United States subm its that the European Communities is wrong on all
counts. It explains that under U.S. law, an invent or is the initial holder of the rights to a patentable
invention. This rule holds true whether th e inventor conceives the patentable invention
independently, under contract to a private partner, or under contract with the government. Thus, the
question in a government contract, is not whether the government will "transfer" or "waive" patent
rights, but is instead what rights the government rece ives as part of the exchange of value under the
contract, and what rights the inventor retains. Since the contracts themselves are subject to
competitive bidding, or procurement rules designed to achieve a result equivalent to competitive
bidding, the resulting allocation of patent rights is c onsistent with market c onsiderations. Moreover,
the United States emphasizes that the ultimate assignment of patent rights that the
European Communities attacks is, in fact, the general rule under U. S. government contracting law

387 Executive Summary of the United States' first written submission, para. 34.
388 Executive Summary of the United States' second written submission, para. 46.
389 Executive Summary of the United States' non-confidential oral statement at the second meeting with
the Panel, para. 17.
390 Executive Summary of the United St ates' non-confidential oral stat ement at the first meeting with
the Panel, para. 7.

BCI deleted, as indicated [***]

and, therefore, is not specific. As for data rights, the United States asserts that concept of "waiver" is
not applicable. It goes on to argues that data rights may be licensed, but the European Communities
has not made any claims in this regard.391
4.228 The United States contends that the treatment that the European Communities challenges
arises only when a private party enters a contract w ith the U.S. Government, and thus is part of the
overall deal between an agency and its contractor . Under U.S. law, patent rights accrue to the
inventor. The IP clauses in a government contract confer certain rights on the government, not the
contractor, to use inventions or data conceived by the contractor during performance of the contract.
These rights are an important part of what the government obtains under its R&D contracts. The
rights retained by contractors are not given for free, but are part of an overall commercial
transaction.
392
4.229 The United States notes that the European Co mmunities devotes most of its analysis to
selective quotations regarding the policy underlying U. S. rules for the attribution of rights in patents
conceived by persons working under contracts with the government. It recognises that the
European Communities is correct that 30 years ago, the United States had a general policy of taking
all rights to patents conceived under government c ontracts, and then granting nonexclusive licenses to
any applicant that wished to use a patent. It fu rther recognises that the European Communities is also
right that 27 years ago, as a result of the Bayh-Dole Act, the United States changed its general policy
to allow contractors to retain their patent right s, while the government would acquire only those
patent rights it needed. The government rights take the form of a license to use the patent for any
"government use", which includes use of the pate nt by any government contractor engaged in
government business. The key point, in the United St ates' view, is that it was a general policy,
available to any contractor under any contract with any agency. It further argues that in the parlance
of the SCM Agreement, the patent rules are not specific.
393
4.230 The United States considers that the European Communities tries to create the appearance of
non-specificity by noting that NASA achieves this result by "waiving" patent rights that would
otherwise accrue to the agency by operation of law. (The United States observes that for historic
reasons, NASA's statute grants it full title to pate ntable inventions made by a contractor under a
contract with NASA.) However, the European Co mmunities disregards that the "waiver" process is
simply the way that NASA executes the government-w ide policy of allowing contractors to retain
rights to patentable inventions they make wh ile working under a government contract. The
substantive outcome is the same.394
4.231 In response to the European Communities' cl aim, the United States first argues that the
allocation of IP rights under U.S. government contracts cannot be analyzed independently of the
contracts that generate those rights. The United States notes that the European Communities attempts
to treat the disposition of IP rights under NASA a nd DOD contracts as autonomous acts – "waivers"
or "transfers" by those agencies – ignoring the fact that the treatment it challenges occurs only through
a contract, as part of an overall exchange of valu e between the government and private parties. The
United States argues that by taking one element – the retention of patent rights by the private party –
out of the context of the overall exchange, th e European Communities attempts to create the

391 Executive Summary of the United States' first written submission, para. 28.
392 Executive Summary of the United St ates' non-confidential oral stat ement at the first meeting with
the Panel, para. 5.
393 Executive Summary of the United States' first written submission, para. 29.
394 Executive Summary of the United States' first written submission, para. 30.

BCI deleted, as indicated [***]

impression that the government has bestowed something on the private party for free, when in fact the
government pays for rights that it obtains from its contractor.395
4.232 Next, the United States claims that the Europ ean Communities' assertion that the government
conveyed IP rights to Boeing reverses what actually occurred – that Boeing conveyed IP rights to the
government. More specifically, the United States cont ends that the allocation of patent rights under
U.S. government contracts is not a financial contribution at all, because there is nothing for the
government to contribute – under U.S. law, any rights in a patent belong in the first instance to the
inventor. Therefore, the only transfer of rights under a government contract is the license that the
contractor grants to the government. There simply is no transfer of patent rights from the government
to the contractor. The United States notes that in its oral statement, the European Communities did
not dispute that the general rule under U.S. law is that the inventor has the first right to any patents he
or she makes. Instead it simply ignored this rule, and focused on other laws and regulations that do
not tell the whole story.
396
4.233 Furthermore, with regard to DOD, the Unite d States notes that the European Communities
argues that 35 U.S.C. § 202(a) (part of the Bayh-Dole Act), as applied to medium and large businesses
pursuant to a 1983 Presidential Memorandum, "provi des that it is DOD that ultimately decides who
will own a patent". The United States submits that th is statement is wrong. Section 202(a) sets out a
general rule (which can be called the Bayh-Dole ru le) explicitly apportioning rights to patents for
inventions made under government c ontracts – the contractor may retain title to the patent, while the
government receives a "government use" license to use those inventions free of charge. This standard
applies to all contractors, without regard to size or status as a university or other nonprofit entity.
Thus, it is the acquisition rules and general patent law, rather than any agency, that "ultimately
decides" who owns a patent made under a government contract by a contractor employee. 397
4.234 With regard to NASA, the United States notes that the European Communities quotes
section 305(a) of the Space Act, which acts as an ex ception to the general rule under U.S. patent law
that an invention is owned by, and a patent issued to, the inventor or assignee of the inventor. As the
U.S. Court of Customs and Patent Appeals ruled, "Section 305 clearly treats an invention as property,
the right to which is in the inventor or his assi gnee unless the invention was made (conception or first
actual reduction to practice) in the performance of a work under a NASA contract". The Section 305
exception to the issuance of a patent to the invent or or his assignee is limited, in that the NASA
Administrator has discretion not to assert (or to "w aive") patent rights that might accrue to the
government. As noted in the United States' firs t written submission, in accordance with the 1983
Memorandum, NASA issued regulations that have resulted in the waiv er of its patent rights every
time a contractor has requested. Through this mechanism, NASA allocates patent rights between
agency and contractors in a manner substantively identical to what DOD and other agencies do.398
4.235 The United States considers that the European Communities has provided no support for its
assertion that the allocation of patent rights under U. S. government contracts is more advantageous
than is available in the market. The United St ates asserts that, in its first written submission, it
demonstrated that the standard government patent ri ghts clauses form part of a bargain struck at arm's
length between an agency and a contractor. The European Communities has provided no evidence to
suggest that the transaction was not at arm's length, or otherwise inconsistent with market practices.
The United States therefore submits that the Europ ean Communities has failed to make a prima facie
case of the existence of a benefit. 399 Noting nonetheless that in its oral statement, the

395 Executive Summary of the United States' second written submission, para. 37.
396 Executive Summary of the United States' second written submission, para. 38.
397 Executive Summary of the United States' second written submission, para. 39.
398 Executive Summary of the United States' second written submission, para. 40.
399 Executive Summary of the United States' second written submission, para. 41.

BCI deleted, as indicated [***]

European Communities contended that this treatment is "contrary to what market participants would
have negotiated at arms-length acco rding to relevant market benchmarks", the United States argues
that the European Communities has provided no support for this assertion.400
4.236 The United States also disagrees with the Eur opean Communities' observation that because
the generally applicable rules for allocating patent rights under government contracts were applied by
DOD and NASA, those rules are specific. The Unite d States contends that in its first written
submission, it demonstrated that the application of the Bayh-Dole rule to government contracts is de
jure non-specific because the government employs objectiv e criteria to determine eligibility: whether
a contract involves experimental, developmental, or research work, which any enterprise in any
industry may perform. Similarly, the rules are not specific under Article 2.1(a), because both the law
and the 1983 Presidential Memorandum make access to this treatment available to all government
R&D contractors, without limitation to a specific enterprise or industry or group of enterprises or
industries.401 The United States notes that the European Communities does not take issue with any of
these points. Instead, it simply asserts that, becau se the European Communities is challenging only
NASA and DOD contracts, the generally applicab le Bayh-Dole rules under 35 U.S.C. § 202(a) are
"irrelevant to the analysis required under Ar ticle 2.1". The overarching error with the
European Communities' theory is that it fo cuses on two granting authorities – DOD and NASA –
without regard to the activities of other agencies, thereby creating an appearance of limited access
where there is none. 402 The United States recalls that the Eu ropean Communities also alleges that
Boeing and the five top U.S. defense contractors receive "disproportionately large amounts" of IP
rights. The term "disproportionately" suggests a co mparison with some larger group, which both the
United States and the European Communities term the "baseline group". The United States rejects the
European Communities' assertion that the proper comp arison for disproportionality is the entire U.S.
economy. The United States maintains its view abov e that the European Co mmunities' interpretation
of disproportionality is incorrect as a legal matter.403
4.237 Thus, the United States maintains that the allocati on of patent rights and data rights is part of
the bargain that the government strikes with its contractors, usually through a competitive bidding
process. As the United States has shown above, the bargain resulted in the purchase of services for no
more than adequate remuneration. Assuming arguendo that such a purchase can be a financial
contribution, a position with which the United St ates disagrees, the adequacy of remuneration
establishes that there is no benefit.404
4.238 In short, the United States submits that:
(a) There is no financial contribution. Under U.S. law, patent rights to any invention
accrue in the first instance to the inventor. Thus, there is a chain of provision of those
rights from the inventor to the employer and, potentially, from the employer to other
parties. This is true also under government contracts, so there is no "provision" of
patent rights from the government to the contractor and, accordingly, no financial
contribution.
405
(b) There is no benefit. Any treatment of IP ri ghts is an integrated term of a contractual
bargain between the agency and Boeing that is negotiated at arm's length, typically

400 Executive Summary of the United States' second written submission, para. 42.
401 Executive Summary of the United States' second written submission, para. 43.
402 Executive Summary of the United States' second written submission, para. 44.
403 Executive Summary of the United States' second written submission, para. 45.
404 Executive Summary of the United States' first written submission, para. 31.
405 Executive Summary of the United States' non-confidential oral statement at the second meeting with
the Panel, para. 15.

BCI deleted, as indicated [***]

after competitive bidding. The European Co mmunities' view of the situation is also
incorrect. First, the U.S. Government does not allow the researcher to retain "full
rights" to the IP created – the contracts require the contractor to provide a free
"government use" license to the government . Second, the United States has provided
evidence that commercial companies do en ter into contracts under which they pay
other entities to perform research, and those entities retain rights to the IP created.
Thus, the European Communities has failed entirely to meet its burden of proof to
establish the existence of a benefit.
406
(iii) NASA/DOD IR&D/B&P Program
4.239 The United States asserts that the IR&D a nd B&P reimbursements are a mechanism that
U.S. government contracting law uses to ensure that government contractors get what suppliers in the
commercial marketplace get – a payment that covers th eir indirect costs of doing business. IR&D is
"independent" in the sense that the contractor undertakes the R&D for its own account, independent of
a request from the customer. It is the military analog to the R&D lines that both Airbus and Boeing
show on their financial statements for their civil ai rcraft operations. B&P consists of costs that the
contractor undertakes in preparing documents to seek government business. Its commercial sector
analog is in selling expenses that companies treat as a subtraction from revenue.407
4.240 The United States explains that where the U.S. Government buys a product at the price set by
the commercial market, IR&D and B&P are not "reimbursed". They are subsumed in the payment,
just as in any commercial transaction. However, for many goods or services the government buys,
there is no set commercial price. In these situations , the U.S. Government may determine what to pay
by calculating the cost to the supplier of supplying the good or service and adding a "fee" that allows
the supplier to register a profit. In these situati ons, the IR&D and B&P costs allocable to the good or
service are part of the cost calculation. When the go vernment pays for the good or service, part of its
payment "reimburses" those IR&D and B&P costs.
408
4.241 The United States takes issue with the European Communities' contention that Boeing
includes BCA expenses in its IR&D and B&P cost s and thereby charges the government for costs
associated with large civil aircraft. The United States argues that the European Communities provides
no support for this assertion. Moreover, if Boeing in curs IR&D or B&P costs that relate to civil
aircraft activities, government accounting rules would require allocation of a portion of those costs to
the civil aircraft division (namely, BCA). IR&D and B&P are only reimbursed by the
U.S. Government pursuant to cost-based contracts. The United States asserts that BCA has no such
contracts and, accordingly, receives no such reimbursements. 409 In any event, the United States
highlights that even assuming arguendo that the U.S. IR&D and B&P ru les conferred a benefit, they
are not specific, as they are available to all contractors with the U.S. Government in all sectors.410
4.242 The United States submits that the European Communities has failed to establish that DOD or
NASA IR&D or B&P reimbursements covered research for large civil aircraft. The
European Communities has provided no credible evidence that NASA or DOD actually included
research related to large civil aircraft research in IR&D and B&P reimbursements. The United States
argues that the European Communities' assertion that the agencies conveyed "financial contributions
worth $3.1 billion to Boeing's LCA division" rests in stead on another assertion, that there are "several

406 Executive Summary of the United States' non-confidential oral statement at the second meeting with
the Panel, para. 16.
407 Executive Summary of the United States' first written submission, para. 24.
408 Executive Summary of the United States' first written submission, para. 25.
409 Executive Summary of the United States' first written submission, para. 26.
410 Executive Summary of the United States' first written submission, para. 27.

BCI deleted, as indicated [***]

examples of such dual-use technologies developed by Boeing, for which Boeing likely received
reimbursement in whole or in part through the U.S. Government's IR&D/B&P Program". These
examples, in turn, rest on the conclusion by the Eu ropean Communities' consultants that the relevant
rules would allow IR&D/B&P reimbursements for large civil aircraft research, and that Boeing
engaged in projects that could have qualifie d if Boeing in fact sought reimbursement. 411 T h e
United States argues in response, that it showed in its first written submission that the rules and
regulations related to IR&D and B&P re imbursements and commercial competitiveness
considerations prevent Boeing from treating large ci vil aircraft research as IR&D or B&P expenses.
In fact, Boeing's own accounting rules require that research expenses be separated into separate
accounts for research on IDS products only, research on BCA products (that is, large civil aircraft)
only, and research applicable to the products of multiple units (known as the "common enterprise
overhead" account). The expenses of any true dual use IR&D projects would go into the common
enterprise account, which, according to Boeing, was worth only [[***]] in 2003. They are then
allocated to each segment (including BCA), with DOD reimbursing only the costs that are allocated to
IDS and subsequently to IDS's cost-based contracts with DOD. The European Communities concedes
that such treatment would ensure that DOD did not pay for dual-use IR&D related to large civil
aircraft.
412
4.243 According to the United States, the European Communities attempts to support its contention
that IR&D reimbursements cover large civil aircra ft research costs by noting that DOD changed its
IR&D eligibility standard in 1991, with the result th at, in the words of one report, "military relevance
is no longer demanded". However, the European Communities neglected to quote certain critical
findings in that report. One such finding goes to the motive for the changes:
"critics argued that there was no need to have government imposed IR&D ceilings.
In their view, IR&D spending would be self-limiting. If a firm put too much money
into IR&D . . . then the firm's overhead would rise and it would become non-
competitive."
Thus, the goal was to lessen DOD control over contractors' IR&D decisions, and use competition to
control IR&D spending, not to make IR&D reimbursements available for research into topics of civil
interest. The report, which was issued in 1997, al so made findings about how contractors reacted to
the IR&D reform. It demonstrates that what the European Communities characterizes as a
"relaxation" of controls on the type of research e ligible for IR&D projects had no such effect. To the
contrary, contractors focused on research of imme diate interest to DOD, and away from long-term
projects with broader potential benefits. Contractor s did not use the new standard to add non-defense
or dual-use technologies to their claims for IR&D or B&P reimbursement (as the
European Communities asserts) but "are generally work ing in the same technical areas as before the
changes". Thus, the United States submits that in fact, not only is IR&D focused more on military
projects, the total value of IR&D reimbursements decreased markedly after the 1992 introduction of
the new standard.
413

4.244 The United States also claims that IR&D and B&P reimbursements do not convey a benefit
because they reflect costs included in market prices paid by commercial customers. The United States
notes in this connection that in its oral statemen t, the European Communities did not dispute that
companies routinely factor R&D costs and selling expe nses into their prices. Nor did it dispute that
IR&D and B&P costs reflect such expenses. Instead, the European Communities asserted that

411 Executive Summary of the United States' second written submission, para. 31.
412 Executive Summary of the United States' second written submission, para. 32.
413 Executive Summary of the United States' second written submission, para. 33.

BCI deleted, as indicated [***]

"an entity operating pursuant to market c onsiderations would not agree, and would
certainly not actively seek, to reimburse i ndependently incurred costs of companies
because those costs "{e}nhance the industr ial competitiveness of the U.S. or
'{s}trengthen{} the . . . technology base of the United States."414
This statement, according to the United States, contains two fallacies. First, the
European Communities overstates the importance of the "enhance the industrial competitiveness" and
"strengthen the technology base" objectives. The IR&D report cited by the European Communities
indicates that more immediate and concrete object ives are the focus of IR &D projects. Second,
Boeing's large civil aircraft division routinely engages in research that enhances the industrial
competitiveness of the United States and strengthens the technology base of the United States. Its
commercial customers, both U.S. and foreign, know that this cost is built into the price they pay for
large civil aircraft, and that BCA could not conti nue to develop new products if it could not recover
these costs.415

4.245 Finally, the United States rejects the Eur opean Communities' proposition that because the
generally applicable IR&D and B&P rules we re applied by DOD and NASA, IR&D and B&P
reimbursements are specific. The United States c ontends that the European Communities simply
asserts, without explanation, that the United States "failed to rebut" its arguments because of an
"erroneous understanding of Article 2.1(a)" and "ignoring of the granting authorit{ies} issue". The
United States explains the overarching error with the European Communities' theory – that by
focusing on two granting authorities – DOD and NASA – without regard to the activities of other
agencies, the European Communities attempts to create an appearance of limited access where there is
none. In the United States' view, application of the relevant provisions of the SCM Agreement to
IR&D/B&P payments further demonstrates the error of the European Communities' arguments.
416
4.246 The United States contends that IR&D and B&P reimbursements by DOD and NASA are not
separate payments to contractors. They are indi rect costs or overheads, which are normal costs of
doing business incurred by a company, but not related to particular transactions. The United States
asserts that the government must cover these sorts of costs in the prices it pays, or commercial
suppliers will not do business with it. Thus, it submits that there is no benefit and no specificity.
417
4.247 In short, the United States submits that:
(a) Reimbursement of IR&D and B&P costs is not a separate financial contribution.
These expenses bear no relationship to particular contracts. Instead, they arise from
and relate generally to a company's abi lity to do business with government and non-
government customers. In short, they ar e not independent transactions between the
U.S. Government and its contractors. They are part of the price that an agency pays
for goods or services that it purchases from pr ivate enterprises. The United States
contends that it has shown that the inclusion of indirect costs in the price of a good or
service is standard, and the European Communities has provided no factual support
for its assertions to the contrary.
418

414 Executive Summary of the United States' second written submission, para. 34.
415 Executive Summary of the United States' second written submission, para. 35.
416 Executive Summary of the United States' second written submission, para. 36.
417 Executive Summary of the United St ates' non-confidential oral stat ement at the first meeting with
the Panel, para. 4.
418 Executive Summary of the United States' non-confidential oral statement at the second meeting with
the Panel, para. 12.

BCI deleted, as indicated [***]

(b) IR&D and B&P reimbursements do not confer a benefit. DOD regulations require
the outcome that the European Communiti es identifies as conferring no benefit to
large civil aircraft – proportionate shari ng of any "dual use" IR&D between the
company's civil and military operations.419
(c) Magnitude. The European Communities assumes that all of Boeing's IR&D expenses
related to dual-use technology and, therefor e, should be split proportionately between
civil and military transactions. In fact, ev en by the European Communities' inflated
estimates, dual-use technology accounted for less than ten per cent of DOD's total
RDT&E activity for the 1991 to 2006 peri od. The European Communities provides
no basis for the assertion that the dual-use share of IR&D expenses would be ten
times higher.
420
(iv) NASA/DOD facilities, equipment and employees
4.248 The United States argues that facilities, equipm ent, and employees under NASA contracts are
not a subsidy. The situation in this regard is the same as with DOD contracts – any facilities,
equipment, and employees are for the agency's objectiv es, not the contractor's own use. Thus, they
are not a financial contribution, and they cannot be severed from the overall transaction.421
4.249 With respect to the European Communities' assertion that NASA provided goods and services
to Boeing for less than adequate remuneration in the form of work performed by NASA employees or
use of NASA facilities, the United States makes an observation that under U.S. law, NASA provides
such services only pursuant to agreements under SAAs, which require the private participant to
provide a "fair and reasonable" contribution to NASA in return for any services supplied by the
agency. In fact, a review of NASA's SAAs w ith Boeing shows that the company provided the
government adequate remuneration for the services s upplied, which, according to the United States,
means that the arrangement did not confer a benefit within the meaning of the SCM Agreement.422
4.250 As such, the United States submits that fac ilities, equipment, and employees under SAAs are
not a subsidy. The European Communities has never provided any reason to conclude that the
amounts paid by Boeing under reimbursable SAAs represented less than adequate remuneration for
the facilities, equipment, or employees provided by NASA. As for "non-reimbursable" SAAs the
European Communities has nowhere effectively rebu tted the demonstration in the U.S. first written
submission that these instruments provide just what NASA's rules require – that "the respective
contributions of each Agreement Partner must be fair and reasonable compared to any NASA
resources to be committed, NASA program risks, and corresponding benefits to NASA". In short, the
European Communities has provided no support for its contention that the provision of facilities,
equipment, or employees under SAAs confers a benefit.
423
(v) DOL 787 worker training grants
4.251 According to the United States, and contrary to the European Communities' portrayal, a very
small U.S. Department of Labor grant awarded to Edmonds Community College pursuant to the High

419 Executive Summary of the United States' non-confidential oral statement at the second meeting with
the Panel, para. 13.
420 Executive Summary of the United States' non-confidential oral statement at the second meeting with
the Panel, para. 14.
421 Executive Summary of the United States' non-confidential oral statement at the second meeting with
the Panel, para. 9.
422 Executive Summary of the United States' first written submission, para. 22.
423 Executive Summary of the United States' non-confidential oral statement at the second meeting with
the Panel, para. 10.

BCI deleted, as indicated [***]

Growth Job Training Initiative, did not in fact provide a subsidy to Boeing. The United States
explains that the High Growth Job Training Initiative was created to help work ers take advantage of
job opportunities in high growth, high demand, and economically vital sectors of the U.S. economy.
The initiative applies to 14 broad industry sectors, such as biotechnology, energy, financial services,
health care, and information technology, that cover much of the U.S. economy. Pursuant to this
initiative, the DOL has awarded over 150 grants to a wide range of entities acr oss the United States
for a diverse array of topics.424
4.252 In this context, the United States confirms that the Edmonds Community College received
one such grant, in the amount of approximately $1 .5 million, for the development of an advanced
manufacturing curriculum with broad applicability to va rious industries. However, this grant did not
provide a subsidy to Boeing because Boeing did not benefit from it because it was not used to provide
training to Boeing employees, as the European Co mmunities alleges, nor was the grant specific under
Article 2.1. The United States argues that the DOL grant is not de jure specific to Boeing because
these grants are not explicitly limited to "certain enterprises", but are broadly available across 14
diverse industry sectors and may be used for a va riety of purposes across many sub-sectors. The
grants are also not de facto specific because they have been distributed across the 14 different industry
sectors, with aerospace receiving far fewer grants th an other industries. Furthermore, the curriculum
that Edmonds Community College developed relat es to skills that cut across a wide range of
manufacturing industries and is in no way limited to the aerospace sector.425
C. PROHIBITED SUBSIDIES
1. Arguments of the European Communities
4.253 The European Communities makes two clai ms in this respect. First, the
European Communities asserts that it demonstrates that the FSC/ETI and successor act subsidies are
contingent in law upon export performance, with in the meaning of Article 3.1(a) of the
SCM Agreement, and therefore inconsistent with U. S. obligations under Article 3.2. These measures
are contingent in law upon export performance because the measures themselves provide that their tax
exemptions and exclusions are available only with respect to "foreign trade income", which arises
from property sold for use outside the United States. Indeed, WTO panels and the Appellate Body
have repeatedly found these tax breaks to constitute WTO-incompatible export subsidies.426
4.254 Second, the European Communities argues th at the State of Washington's HB 2294 tax
incentives are contingent in fact upon export performance, within the meaning of Article 3.1(a) of the
SCM Agreement, and therefore inconsistent with U.S. obligations under Article 3.2. It further asserts
that HB 2294 itself was contingent on the siting of a "significant commercial airplane final assembly
facility in Washington state" that could produce "at least thirty-six superefficient airplanes {i.e. 787s}
a year". Expert analysis by Mr. Andrew Gordon, Airbus' Head of Market Analysis and Research,
demonstrates that "it is highly unlikely that Boei ng could sustain a production rate of 36 787 aircraft
per year for the U.S. market alone". The Eur opean Communities also observes that only companies
manufacturing commercial airplanes and components thereof, which are generally destined for export,
may benefit from the HB 2294 tax incentives. As such, the HB 2294 tax incentives are contingent in
fact upon export performance.427
4.255 In response to the United States' argument th at Washington State's HB 2294 subsidies are not
prohibited export subsidies, since HB 2294 does not require the production or export of any LCA and

424 Executive Summary of the United States' first written submission, para. 35.
425 Executive Summary of the United States' first written submission, para. 36.
426 Executive Summary of the European Communities' first written submission, para. 39.
427 Executive Summary of the European Communities' first written submission, para. 40.

BCI deleted, as indicated [***]

since Boeing's alleged need to export LCA is irre levant, the European Commu nities observes that it
generally agrees with this proposition, on condition that this analysis is consistently applied in WTO
case law. In the alternative, however, the European Communities emphasizes that one of the essential
preconditions for HB 2294 was clearly a precondition in respect of the actual or anticipated exports.
This leads the European Communiti es to the conclusion that HB 2294 is a prohibited export subsidy.
The European Communities further argu es that the United States has also failed to show that the U.S.
market could absorb 36 787s per year – i.e. the production capacity required to make HB 2294
effective.
428
4.256 Recalling the United States' position in term s of the export subsidy measures, the
European Communities expresses a view that during the first Panel meeting the United States
effectively admitted that the B&O tax rate reducti ons in HB 2294 result in a subsidy contingent on
export. Specifically, the European Communities argues that the United States confirmed that the
value of the HB 2294 subsidy increases when export sales of aerospace products increase. In short, it
confirmed that HB 2294 violates Article 3.1(a) of the SCM Agreement. The European Communities
also argues that the United States accepted that th e continuing FSC/ETI tax regime is a prohibited
export subsidy, to the extent received by Boeing.
429
4.257 The European Communities reiterates in its sec ond written submission that the United States
does not dispute the conclusion that the FSC/ETI and successor act subsidies are contingent in law
upon export performance and therefore inconsiste nt with Articles 3.1(a) and 3.2 of the
SCM Agreement.430
4.258 The European Communities further maintains th at the United States has failed to successfully
contest the European Communities' prima facie case that the subsidies provided by Washington State
through HB 2294 are prohibited subsidies inconsis tent with Articles 3.1(a) and 3.2 of the
SCM Agreement. The European Communities recalls that the United States effectively admitted at
the first meeting of the Panel that the HB 2294 B&O tax rate reductions are prohibited export
subsidies, and its defence with respect to HB 2294 as a whole rests on an inconsequential distinction
between production and production capacity.431
2. Arguments of the United States
4.259 With respect to FSC/ETI, the United States confirms that it does not dispute that FSC/ETI has
been found to be a financial contribution that confer s a benefit, and is specific, nor does it contest the
European Communities' estimate of FSC/ETI benefits related to large civil aircraft during the 1989 to
2006 period. But, relying on the certified statements by Boeing's officers, the United States argues
that Boeing ceased receiving FSC/ETI benefits as of December 31, 2006. Accordingly, the
United States considers that with regard to any clai ms of threat of serious prejudice, FSC/ETI benefits
should not enter into the analysis. As the European Communities' sole claim with regard to FSC/ETI
in this dispute is that it provided a subsidy to Boeing's production and development of large civil
aircraft, the United States argues that there is no need for the Panel to make any finding with regard to
application of FSC/ETI in any other sectors. Mo reover, the United States notes that in the adverse

428 Executive Summary of the European Communities' non-confidential oral statement at the first
429 Executive Summary of the European Communities' non-confidential closing statement at the first
430 Executive Summary of the Euro pean Communities' second written submission, para. 44; Executive
Summary of the European Communities' non-confidential oral statement at the second meeting with the Panel,
para. 21.
431 Executive Summary of the Euro pean Communities' second written submission, para. 45; Executive
Summary of the European Communities' non-confidential oral statement at the second meeting with the Panel,
para. 21.

BCI deleted, as indicated [***]

effects section of its submission, it further demons trates that FSC/ETI benefits did not cause adverse
effects to the interests of the European Communities.432
4.260 The United States argues that the European Communities' claim that FSC/ETI measures and
successor legislation is contingent in law on expo rt performance is superfluous and provides no basis
for the Panel to make a finding or render a recommendation. 433 The DSB has ruled that this is the
case, and has recommended that the United States br ing those measures into compliance with the
SCM Agreement. Another finding that they are e xport contingent or another recommendation that
they be brought into compliance with the SCM Agre ement will add nothing to the force or effect of
the earlier rulings or recommendations.434
4.261 The United States concedes that critical facts on this topic are not in dispute. It does not
contest that FSC/ETI was an export subsidy. The European Communities does not contest that
Boeing has stated that it will not u se that subsidy after the 2006 tax y ear. Instead, the United States
points out that the European Communities focuses on a memorandum issued by an Associate Chief
Counsel of the U.S. Internal Revenue Service with regard to the eligibility for FSC/ETI benefits in
some circumstances. As evidence, that genera l evaluation should not supersede the conclusion
reached by Boeing with regard to its specific tax situation that it will not use that subsidy in the future.
In addition, the European Communities has disregarded that the memorandum itself states that "{t}his
advice may not be used or cited as precedent".435
4.262 The United States notes that, in addition to cl aiming that the tax measures enacted by the
State of Washington pursuant to a piece of legislation known as HB 2294 are actionable subsidies, the
European Communities also asserts that these tax measures are prohibited subsidies under
Article 3.1(a) of the SCM Agreement. The Unite d States submits that the European Communities'
claim that these Washington State tax measures are contingent on export performance has no merit.
The plain language of HB 2294 makes clear that its tax incentives are in no way tied to actual or
anticipated export performance.
436 More specifically, the United States argues that the
European Communities erroneously claims HB 2294 did not become effective until the State of
Washington signed an agreement with a commercial airplane manufacturer to locate a manufacturing
facility in the State that will produce 36 supereffici ent airplanes, such as the Boeing 787, per year.
The United States points out that the European Communities then asserts that Boeing could not sell 36
such airplanes domestically and that, conseque ntly, the HB 2294 tax measures are de facto export-
contingent. In fact, to become effective, HB 229 4 only required that a manufacturing facility with the
capacity to produce 36 superefficient airplanes be locate d in the State. The United States asserts that
actual production quantities were irrelevant. As such, HB 2294 is in no way tied to actual or
anticipated exportation or export earnings – the standa rd under Article 3.1 for finding a prohibited de
facto export-contingent subsidy.437
4.263 As such, the United States requests the Panel to note that there is no evidence to support the
assertion that the Washington state tax measures under HB 2294 were export-con tingent subsidies.
The measure challenged by the European Communiti es was to become effective upon the state and "a
manufacturer of commercial airplanes" signing "a memorandum of agreement regarding an
affirmative final decision to site a significant commercial airplane final assembly facility in
Washington state". However, the United States as serts that the measure, HB 2294, does not require

432 Executive Summary of the United States' first written submission, para. 37.
433 United States' response to question 58, para. 163.
434 United States' response to question 58, para. 164.
435 Executive Summary of the United St ates' non-confidential oral stat ement at the first meeting with
the Panel, para. 6.
436 Executive Summary of the United States' first written submission, para. 53.
437 Executive Summary of the United States' first written submission, para. 54.

BCI deleted, as indicated [***]

that 36 airplanes per year actually be produced; it si mply requires that the assembly facility have the
capacity to do so.438
4.264 The United States goes on to argue that even if HB 2294 were a subsidy, it is not a prohibited
export subsidy under the SCM Agreem ent. It notes that the European Communities' claim of export
contingency is based primarily on the fact that HB 2294 requires the construction of an assembly
facility with the capacity to produce 36 superefficient airplanes annually. The European Communities
seems to assume that a tie to the establishment of production capacity is equivalent to a tie to actual or
anticipated exports. However, it provides no eviden ce to support this equation. The United States
contends that the European Communities merely incorrectly asserts that the U.S. market cannot
absorb 36 superefficient airplanes per year, stresses that Boeing is export oriented, and relies on what
it calls a "correlation" between exports and HB 2294. But these assertions fail to establish export
contingency.439
4.265 In sum, the United States argues that the Eu ropean Communities continues to advance the
remarkable claim that the tax treatment in HB 2294 is a subsidy and that provision of this alleged
subsidy is de facto contingent upon export performance under Article 3 of the SCM Agreement.
However, the European Communities has faile d to establish what is required under the
SCM Agreement i.e. that the State of Washington ti ed the granting of the tax treatment in HB 2294 to
actual or anticipated exportation or export earnings.440
D. ADVERSE EFFECTS
1. Arguments of the European Communities
(a) Overview of arguments
4.266 The European Communities argues that the U.S. fe deral, state, and local subsidies benefiting
Boeing's LCA division cause Airbus to lose billions of dollars in revenue, resulting in serious
prejudice, including a threat thereof, to the interests of the European Communities.
441 It argues that in
the 2004-2006 reference period alone, the U.S. subs idies total over $5 billion, and cause Airbus to
lose $27 billion in revenue. It further argues that the subsidies in question already cause adverse
effects to the European Communities because th ey violate the specific commitments of the
United States undertaken in a bilateral agreement concluded with the European Communities in 1992.
In addition, these subsidies cause significant price suppression and significant lost sales in the world
market, and displacement and impedance of Airbus ' sales in the U.S. and certain third country
markets, including a threat thereof, within the meaning of Articles 5(c), 6.3(a), 6.3(b), and 6.3(c) of
the SCM Agreement. Moreover, the European Communities argues that additional revenue losses
amounting to billions of U.S. dollars were caused prior to 2004, and w ill be caused in 2007 and
thereafter, as Airbus delivers LCA booked at s uppressed prices during the 2004-2006 period. These

438 Executive Summary of the United St ates' non-confidential oral stat ement at the first meeting with
the Panel, para. 13. See also, Executive Summary of the United States' second written submission, para. 52. The
United States argues that, as a threshold matter, the Eu ropean Communities has failed to establish that HB 2294
constitutes a subsidy within the meaning of Article 1 of the SCM Agreement. Therefore, it cannot be a subsidy
contingent on export performance.
439 Executive Summary of the United States' second written submission, para. 53.
440 Executive Summary of the United States' non-confidential oral statement at the second meeting with
the Panel, para. 22.
441 Executive Summary of the European Communities' first written submission, para. 41.

BCI deleted, as indicated [***]

revenue losses also mean that Airbus will have fe wer funds to finance its aeronautics R&D needs in
the future.442
4.267 The European Communities asserts that the U.S. subsidies have had two principal effects: (i)
they have provided Boeing sales negotiators with millions of dollars to price down each Boeing LCA
in sales campaigns against Airbus; 443 this cash flow was readily avai lable to Boeing when it decided,
in 2004, to price down its LCA to increase market share 444, forcing Airbus to lower its LCA prices
and lose LCA sales to Boeing; and (ii) they have financed Boeing's development of the latest
technology and production methods used on the 787 445, a technologically-advanced aircraft with first
deliveries five years ahead of the A350XWB 446, further forcing Airbus to lower its LCA prices and
cause it to lose LCA sales to Boeing in the 200-3 00 seat LCA market. While Airbus engineers have
the technical expertise to compete evenly with Bo eing, the European Communities asserts that Airbus
cannot compete with the U.S. federal, state, and local treasuries, which, inter alia, finance R&D for
Boeing LCA and offer Boeing significant tax breaks on the sale of its LCA.447
4.268 The European Communities contends that, reduced to its essence, this dispute is about Boeing
using its U.S. subsidy benefits to win sales and suppress Airbus' prices. Increasing market-share to
take advantage of cost reductions resulting fro m a steep learning curve and maintaining LCA
production levels are as central to Boeing, as they are to Airbus. Thus, given the price- and value-
sensitive nature of many sales campaigns between closely competing Airbus and Boeing products,
Boeing has clear incentives to use its U.S. subsidy be nefits at the expense of Airbus – Boeing's only
competitor in the LCA markets.448
4.269 The European Communities deve lops two separate and independent complaints in this
context, i.e. that the United States causes serious prejudice, and therefore adverse effects, to its
interests, within the meaning of Article 5(c) of the SCM Agreement. Specifically, the United States
causes serious prejudice to the interests of the European Communities because:
 - it violates its specifically agreed obligations concerning support to the LCA sector
pursuant to the 1992 Agreement; and

 - the effects of the U.S. subsidies r esult in "significant price suppression" and
"significant lost sales", and a threat thereof, in the world market, within the meaning
of Article 6.3(c) of the SCM Agreement, as well as displacement and impedance in
the U.S. and third country markets, and a threat thereof, within the meaning of
Articles 6.3(a) and 6.3(b) of that Agreement.

The European Communities asks the Panel to make findings with respect to each of these two
complaints in order to fully resolve the dispute between the parties.449

4.270 The European Communities, elaborating on the second complaint, explains that legalistic
labels can mask the real scope of the harm caused to Airbus and the European Communities. Lost

442 Executive Summary of the European Communities' non-confidential oral statement at the first
443 Executive Summary of the European Communities' first written submission, para. 41.
444 Executive Summary of the European Communities' non-confidential oral statement at the first
445 Executive Summary of the European Communities' first written submission, para. 41.
446 Executive Summary of the European Communities' non-confidential oral statement at the first
447 Executive Summary of the European Communities' first written submission, para. 41.
448 Executive Summary of the European Communities' first written submission, para. 42.
449 Executive Summary of the European Communities' first written submission, para. 43.

BCI deleted, as indicated [***]

Airbus sales today mean fewer jobs in the Europe an Communities in the fu ture. Lost sales and
suppressed Airbus prices today mean lower available revenue in the future to finance Airbus' R&D
and modernization of manufacturing equipment and techniques. The European Communities
estimates that the total revenue lost by Airbus because of the effects of the U.S. subsidies was
$27 billion during the 2004-2006 reference period.450
4.271 The evidence presented by the European Commun ities displays a consistent theme and goal –
it demonstrates that Airbus lost sales or suffers from suppressed prices because the U.S. subsidies
facilitated Boeing's offering of lower prices and its use of advanced technologies. But for the effects
of the U.S. subsidies, Airbus would have won cer tain additional sales and Airbus' average LCA prices
would be higher. These displaced, impeded, and lost sales, as well as suppressed prices, cause
Airbus billions of dollars in lost revenue.451
4.272 The European Communities' claim of serious prej udice pursuant to Articles 5(c) and 6.3 of
the SCM Agreement focuses on the effects of the U. S. subsidies in enhanc ing Boeing's ability to
lower prices for its 787, 737NG, and 777 family LC A, and its ability to use advanced technologies on
its 787 family LCA. The European Communities' clai ms are focused on the effects of U.S. subsidies
benefiting Boeing's products in the world market, U.S. market, and third country markets where
competition with Airbus takes place – i.e. in the markets for Boeing's subsidized (i) 787 family, (ii)
737NG family, and (iii) 777 family LCA that comp ete with Airbus' (i) A330 family/original A350
family/A350XWB-800, (ii) A320 family, and (iii) A340 family/A350XWB-900/-1000 LCA,
respectively. It is in competitive campaigns involving LCA from these three Boeing LCA families
that Boeing has the greatest incentiv e to use its U.S. subsidy benefits to lower its LCA prices.
Further, it is in a variety of campaigns involving the 787 where Boeing's subsidy-fuelled
technological advancements cause adverse effects.452
4.273 The European Communities contends in this connection that Boeing has, for decades,
received billions of dollars in benefits from several different federal, state, and local U.S. subsidy
programmes. The nature of these subsidies is to either reduce Boeing's marginal unit costs or increase
its non-operating cash flow. Specifically, Boeing receives B&O tax rate reductions, 747 LCF landing
fee waivers, and FSC/ETI subsidies that directly reduce its marginal unit costs related to the
production and sale of LCA. The other subsidies (e.g. tax breaks and other incentives provided by the
States of Washington, Kansas, and Illinois, and municipalities therein; R&D support provided by
NASA, DOD, and DOC; IP right waivers/transfers provided by NASA and DOD; and worker training
grants provided by DOL) reduce Boeing's costs, th ereby increasing its non-operating cash flow. The
European Communities argues that many of the U. S. aeronautics R&D programmes were specifically
designed with Boeing's R&D needs in mind. They relieved Boeing of having to expend considerable
resources of its own in researching and developing new LCA technologies. All of these subsidies
lowered Boeing's costs of researching, developing , producing, and selling its 787, 737NG, and 777
family LCA.453
4.274 The European Communities argues that it dem onstrates through its finance and accounting
experts that between 2004-2006, the magnitude of the subsidies enjoyed by Boeing's LCA division
was very large – i.e. on average, $1.7 billion per annum. This means that, on average between 2004-
2006, the Boeing sales team had $4.6 million per 787 LCA, $2.4 million per 737NG LCA, and
$5.5 million per 777 LCA to negotiate down prices.
454

450 Executive Summary of the European Communities' first written submission, para. 44.
451 Executive Summary of the European Communities' first written submission, para. 45.
452 Executive Summary of the European Communities' first written submission, para. 46.
453 Executive Summary of the European Communities' first written submission, para. 47.
454 Executive Summary of the European Communities' first written submission, para. 48.

BCI deleted, as indicated [***]

4.275 In addition, the European Communities relies on, inter alia, the work of an expert economist
to demonstrate that during the 2004-2006 referen ce period, the U.S. subsidies caused Boeing's 787,
737NG, and 777 prices to be significantly lower. Given the close competition between Airbus and
Boeing LCA, this, the European Communities subm its, means that Airbus' prices were similarly
forced lower due to these price effects of the U.S. subsidies.
455
4.276 The European Communities' LCA market expert s, Rod P. Muddle (former head of fleet
planning for British Airways) and Christian Scherer (Executive Vice President of Airbus for Future
Programmes and former deputy head of the commerc ial department for Airbus), testify as to the
conditions of competition in the LCA markets. Ac cording to the European Communities, its market
experts explain that the sales campaigns between competing Airbus and Boeing LCA are typically
won by the manufacturer offering the best value to th e customer, which is often driven by the lowest
"net price". Specifically, in their experience, final offers by Airbus and Boeing can be very close in
terms of their total value to the customer. This makes net price a critical factor in many sales
campaigns, and highlights the significance of the fina ncial benefits from the U.S. subsidies. The
European Communities maintains that this clo se and intense competition between the two LCA
manufacturers means that Boeing has an incentive to use its subsidies in competition with Airbus, and
that Airbus is the only other entity whose LCA prices , sales, or market-share is lowered by the effects
of the U.S. subsidies to Boeing.456
4.277 According to the European Communities, th e evidence from certain individual sales
campaigns involving Airbus and Boeing LCA demons trate that the U.S. subsidies to Boeing's LCA
division cause Airbus to lower its own LCA prices, and, in many cases, lose sales to Boeing. It argues
that in the cases of lost sales, Airbus' final offe r was often very close to the winning offer from
Boeing. It also notes that the difference between the two offers was far less than both the magnitude
of the U.S. subsidies available to Boeing and thei r price effects. The European Communities submits
that, in specific sales campaigns, but for the U.S. subs idies, Boeing would have been forced to charge
higher prices and, thus, would likely have lost those campaigns.457
4.278 With respect to the U.S. subsidies benefiting Boeing's 787 family LCA, the
European Communities argues that these subsidies not only allowed Boeing to offer its 787 LCA at
exceptionally low prices, but also played a key role in its early launch – in April 2004 – as a family of
LCA that heavily uses composite materials and ot her new technologies. It asserts that the U.S.
federal, state, and local subsidies allowed Boeing to price its 787 family LCA at the same price as, or
even cheaper than, Boeing's old 767 family LCA, despite the 787's advanced technologies. Boeing
developed these advanced technologies, in part, with the assistance of a number of NASA, DOD, and
DOC R&D programmes, which funded, inter alia, Boeing's R&D related to the use of composites for
large aeronautic structures. These U.S. aeronauti cs R&D subsidies allowed Boeing to accelerate the
launch of the technologically-advanced 787 by several years and to deliver the first 787 in 2008, five
years earlier than Airbus' competing A350XWB-800.
458
4.279 The European Communities charact erizes the effect on Airbus of the early launch of the
heavily subsidized 787, in April 2004, as immediate and severe. Airbus' A330-200, launched only
nine years earlier, was displaced, since the com posites and other advanced technologies of the 787,
which were developed with U.S. government assist ance, offered significant operating cost savings
over the older aluminium alloy technology found on A 330 family LCA. Airbus attempted to compete
in December 2004 with the expedited development of its original A350 family LCA, but without
access to the same R&D support as Boeing, Airbus' original A350 family was unable to match the

455 Executive Summary of the European Communities' first written submission, para. 49.
456 Executive Summary of the European Communities' first written submission, para. 50.
457 Executive Summary of the European Communities' first written submission, para. 51.
458 Executive Summary of the European Communities' first written submission, para. 52.

BCI deleted, as indicated [***]

technological advancements of th e 787 and was therefore ill-received in the market. Consequently,
Airbus' share of the world market for 200-300 seat LCA plunged from 85 per cent in 2003 to only
41 per cent by year-end 2006. When Airbus achie ved sales of its A330 family and original A350
family LCA, it did so only at severely suppressed prices.459
4.280 The European Communities notes that it was not until July 2006 that Airbus, using its own
resources, was able to offer the A350XWB-800 as a similar high-technology competitor to the 787.
However, by this time, due to the subsidy-enab led early launch of the 787, Boeing had established a
commanding market-share of orders in the 200-300 seat LCA market, locking in more than 360 orders
for its 787 family LCA between April 2004 and Ju ly 2006. Airbus was not in the position to
effectively compete for or secure those orders. Nor could Airbus promise customers that it could
deliver a technologically innovative LCA in 2008. The European Communities argues that, had
Boeing needed to develop the 787 using its ow n resources, the 787 would likely not have been
launched any earlier than mid-2006, by which time Ai rbus would have been ready to compete with
the A350XWB-800. Moreover, a non-subsidized 787, like the A350XWB-800, would have required
a longer period before it could be delivered. Instea d, Airbus was forced to play catch-up because of
the U.S. subsidies.460
4.281 With respect to the U.S. subsidies be nefiting Boeing's 737NG family LCA, the
European Communities contends that during the 2 004-2006 reference period, these subsidies allowed
Boeing to significantly lower its 737NG prices, forc ing Airbus to follow suit with prices for its own
A320 family LCA. During this period, at a time of record demand for 100-200 seat single-aisle LCA,
the U.S. subsidies allowed Boeing to change its pricing policy and drop the prices of its 737NG
family LCA to record lows. The European Communiti es explains that in order to compete effectively
and attempt to win orders for its A320 family LCA, Airbus was forced to similarly lower its prices, or
risk losing significant market-share. The impact of Boeing's subsidy-enhanc ed pricing pressure is
evident from developments in Airbus' A320 family pr icing, as well as Airbus ' lost sales and reduced
market-share in the 100-200 seat single-aisle LCA market.
461
4.282 With respect to the U.S. subsidies benefiting Boeing's 777 family LCA, the
European Communities submits that these subsidie s allowed Boeing to significantly lower its 777
prices, again forcing Airbus to follow suit with pr ices for its own A340 family LCA. At a time of
record demand for 300-400 seat wide-body LCA, the U.S. subsidies allowed Boeing to change its
pricing policy and drop the prices of its 777 family LCA to record lows. The European Communities
reiterates that in order to compet e effectively and attempt to win orders for its A340 family LCA,
Airbus was forced to similarly lower its prices, or risk losing significant market-share. Nevertheless,
Airbus' sales performance for its A340 vis-à-vis Boeing's 777 in 2004-2006 was very poor. Boeing's
subsidy-enhanced financial strength caused Airbus to lose a significant number of A340 sales, and
where Airbus was able to secure A340 orders, it could do so only at suppressed prices.
462
4.283 In sum, the European Communities submits that the U.S. subsidies allowed Boeing to lower
its prices for 787, 737NG, and 777 family LCA th at were ordered duri ng the 2004-2006 reference
period (and that have already been delivered or w ill be delivered in the future); and they allowed
Boeing to offer a technologically-advanced 787 with delivery slots as early as 2008 – five years ahead
of the A350XWB-800. This is confirmed by the na ture of the U.S. subsidies benefiting Boeing (i.e.

459 Executive Summary of the European Communities' first written submission, para. 53.
460 Executive Summary of the European Communities' first written submission, para. 54.
461 Executive Summary of the European Communities' first written submission, para. 55.
462 Executive Summary of the European Communities' first written submission, para. 56.

BCI deleted, as indicated [***]

their structure, design, and operation), their magnit ude, their estimated price effects, and the specific
conditions of competition in the LCA markets.463
4.284 Thus, according to the European Communities, th e U.S. subsidies negatively impact Airbus'
past, present, and future sales of A320, A330, A 340, original A350, and A350XWB family LCA.
Specifically, these subsidies cause serious prejudice, a nd therefore adverse effects, to the interests of
the European Communities in violation of Articles 5(c), 6.3(a), 6.3(b), and 6.3(c) of the
SCM Agreement by means of:
 - significant price suppression with respect to orders of Airbus' A330, original A350,
A320, and A340 family LCA, or, in the alternative, threat of significant price
suppression with respect to deliveries of those Airbus A330, A320, and A340 family
LCA;

 - significant lost sales with respect to orders of Airbus' A330, original A350, A320, and
A340 family LCA, or, in the alternative, thr eat of significant lost sales with respect to
deliveries of those Airbus A330, A320, and A340 family LCA;

 - displacement and impedance with respect to orders of Airbus' A330, original A350,
A320, and A340 family LCA, or, in the a lternative, threat of displacement and
impedance with respect to deliveries of those Airbus A330, A320, and A340 family
LCA; and

 - threat of significant price suppression with respect to orders of Airbus' A330,
A350XWB, and A320 family LCA.
464

4.285 In its second written submission, the European Communities reiterates that it has established
that the U.S. subsidies at issue benefit the U.S. LCA industry and cause present adverse effects to
European Communities' LCA-related interests, in violation of Articles 5 and 6.3 of the
SCM Agreement. It further maintains that none of the U.S. assertions in the United States' first
written submission or oral statements rebut the European Communities' prima facie showing of
adverse effects. Rather, compelling and credible evidence demonstrates that, but for the U.S.
subsidies, Boeing's commercial behaviour today, li ke in the past, would be very different. More
precisely, the European Communities submits that, ab sent the U.S. subsidies, Airbus would not suffer
significant price suppression, significant lost sales and impedance or displacement of its market share
in particular country markets. The European Communities contends that finding any one of these
situations to exist in any one of the three product ma rkets at issue, or in an y combination thereof, is
sufficient for the Panel to find adverse effects.
465
4.286 To sum up, the European Communities argues that, in its many submissions, exhibits and
expert statements, it has presented extensive evidence of price and technology effects that result in the
various forms of adverse effects. It submits that it has demonstrated in those submissions that billions
of dollars in U.S. subsidies allowed Boeing, as a duopoly LCA producer, to lower its LCA pricing to
win sales, increase its market share, and significantly suppress Airbus' pricing. 466 In addition, the
European Communities submits that it established that U.S. subsidies have enabled Boeing to launch
its products earlier and/or with more advanced t echnologies, causing competitive harm to Airbus.
Specifically, decades of NASA, DOD, and other U.S. subsidies have enabled Boeing to launch the

463 Executive Summary of the European Communities' first written submission, para. 57.
464 Executive Summary of the European Communities' first written submission, para. 58.
465 Executive Summary of the European Communities' second written submission, para. 46.
466 Executive Summary of the European Communities' non-confidential closing statement at the second

BCI deleted, as indicated [***]

technologically-advanced 787 in early 2004, and deliver it in 2008, causing significant price
suppression, lost sales and displacement or impedance. 467 The European Communities goes on to add
that during the Panel's meeting with the parties, it also showed that technologies funded by U.S.
subsidies were actually applied to the 787 – as th e United States and Boeing elsewhere concede – but
also demonstrated the essential value of knowledge gained by Boeing engineers through participation
in NASA and DOD R&D programmes – knowledge not availa ble, in any meaningful form, to Airbus.
Further, the European Communities argues that it refu ted the U.S. attempt to attribute adverse effects
to Airbus' decision to develop the A380 or to allege d Airbus resource constraints with respect to the
A350XWB.
468
4.287 In addition, the European Communities co mments on the U.S. assertions concerning the
alleged "four pillars" of the European Communitie s argument. The European Communities contends
that these pillars are purely a fiction created by th e United States, ignoring the scope and depth of the
argument and evidence underlying the prima faci e case of the Europ ean Communities, while
misstating its contentions. The European Commun ities expresses confidence that the Panel will
ignore these false characterizations as it continu es to review the many European Communities'
submissions. Thus, it encourages the Panel to review carefully the actual evidence – and reject the
U.S. repeated assertions about circumstances in those sales campaigns that did not occur.469
4.288 Finally, in response to the United States' asse rtion that "(t)he European Communities' does
not deny that Airbus undercut Boeing's pr ices in key 2002-2004 sales campaigns", the
European Communities points out that, indeed, the Un ited States spent nearly half of its confidential
statement on this point and that it simply repeats this statement, hoping it will become both true and
relevant. But, the European Communities submits that it is neither. In its statement and in its written
submissions and in responses to questions, the Eu ropean Communities asserts that it has repeatedly
contested and refuted this assertion. It submits that it has also demonstrated that such evidence
nevertheless would not negate the significant price effects emanating from the U.S. subsidies during
the reference period.
470
(b) Causation test under Articles 5 and 6.3
4.289 The European Communities notes its agreemen t with the United States regarding the
appropriateness of using a unitary "but for" causatio n approach and that the analysis of other, non-
subsidy factors involves the assessment of whether th ey attenuate or even eliminate the causal link
between subsidies and specific instances of serious prejudice.471 Such an approach is supported by the
panel and Appellate Body reports in US – Upland Cotton , where the Appellate Body criticized the
panel for having adopted a bifurcated, rather than a unitary, approach to assessing significant price
suppression.472 In applying the unitary "but for" analysis, the Eur opean Communities argues it has
taken into account current factual conditions and is olates the effect of the subsidies causing serious
prejudice under those current factual conditions.473

467 Executive Summary of the European Communities' non-confidential closing statement at the second
468 Executive Summary of the European Communities' non-confidential closing statement at the second
469 Executive Summary of the European Communities' non-confidential closing statement at the second
470 Executive Summary of the European Communities' non-confidential closing statement at the second
471 United States' response to question 295, para. 506; European Communities' comments on United
States' response to question 295, paras. 485-487.
472 European Communities' response to question 370, paras. 191-195, 207-211.
473 European Communities' response to question 287, paras. 583-603.

BCI deleted, as indicated [***]

4.290 However, according to the European Communiti es, despite this basic agreement on a unitary
"but for" approach to causation, the United States continues to misapply the counterfactual causation
test under Articles 5 and 6.3 of the SCM Agreemen t, essentially adopting a bifurcated approach: The
United States identifies certain actual harm with re spect to certain Airbus LCA, in particular the
A380, A340, and A350, and asserts that this harm w as not caused by the U.S. subsidies. Yet, the
harm identified by the United States is not the serious prejudice subject to the European Communities'
claims and as such irrelevant. 474 At the same time, the United States posits that, generally, Airbus is
not harmed. As the panel in US – Upland Cotton has already established, it is irrelevant to the
European Communities' serious prejudice claim whet her Airbus is suffering "material injury" in the
sense of Article 5(a) of the SCM Agreement. Rather, the question is whether, but for the U.S.
subsidies, Airbus' prices, sales, and market sh are would be higher. The evidence that the
European Communities provided, demonstrates that they would be higher. 475
4.291 As the European Communities has stated in its submissions, it considers that there might be a
number of factors that explain actual pricing le vels, sales volumes, and market shares in the LCA
markets. Yet, the European Communities posits that whatever factors might have determined their
actual level, a complaining Member needs to show on ly that prices, sales, and market share would be
higher, but for the subsidies. That is, it need not show that its industry is materially injured, just that it
would do better absent the challenged subsidies.476
4.292 While the European Communities agrees with the United States that a precise and definitive
quantification of the magnitude and price effect s is not necessary, the European Communities notes
that it has provided evidence establishing the orde r of magnitude of both the challenged measures and
their price effects. Accordingly, the European Communities considers that it has demonstrated a
causal link between subsidization and serious prejudice.477
4.293 The European Communities takes issue with th e U.S. response that Boeing's discounting is
"normal competitive behavior". If the United States is saying that Boeing would have charged the
same price even if it had not been subsidized, it is assuming the response to the very inquiry before
this Panel. The European Communities argues that the United States must demonstrate the accuracy
of that statement 478, noting that the U.S. attempt to do so consists of setting out its view of a
financially unconstrained Boeing operating in a styl ized perfect capital markets. According to the
United States, any subsidies that Boeing received woul d either reduce its debt or would be paid to the
company's shareholders. It follows that Boeing w ould make any investments it considers worthwhile,
obtain financing from the capital markets for these i nvestments, and then use any subsidy to repay
debt or distribute it as dividends to shareholders . However, the European Communities argues that
the U.S. arguments do not support its conclusion that these subsidies cause no effects. According to
the European Communities, U.S. subsidies do influence Boeing's commercia l behaviour in terms of
pricing and product development. The European Co mmunities posits that U.S. assertions that Boeing
is financially unconstrained and c ould have replaced the U.S. subsidies by significantly reducing its
compensation to shareholders and increasing its debt burden are entirely counter to economic logic.
Boeing's shareholders would have balked at seeing th eir returns dramatically reduced to prop up an
economically non-viable LCA business – thereby further limiting Boeing's ability to raise equity

474 Executive Summary of the European Communities' non-confidential closing statement at the first
475 Executive Summary of the European Communities' non-confidential closing statement at the first
476 Executive Summary of the European Communities' non-confidential closing statement at the first
477 Executive Summary of the European Communities' non-confidential closing statement at the first
478 Executive Summary of the European Communities' non-confidential closing statement at the first

BCI deleted, as indicated [***]

capital. Even, if Boeing had chosen this economi cally untenable course and significantly reduced its
compensation to shareholders by the amount of its $16 billion in share repurchases, the amount would
have been insufficient to replace the approximately $19 billion in U.S. subsidies over the 1989-2006
period. Nor would it be financially tenable for Bo eing to replace the U.S. subsidies with debt. The
level of debt required would have resulted in an unsustainable debt burden. Ultimately, this burden
would have threatened to render the company insolv ent. Thus, even if Boeing could presently be
characterized as financially unconstrained, this status is itself a consequence of the healthy returns the
company generates due to the U.S. subsidies. Absent U.S. subsidies and a change in Boeing's
behaviour, BCA would not be economically viable, ge nerating no or only very limited profits. Yet,
only economically viable companies can obtain fund s from the capital markets, whether as debt or
equity financing.479
4.294 With regard to the other causal factor s advanced by the United States, the
European Communities maintains that they do not undermine the European Communities' showing of
adverse effects. The European Communities has adopted a unitary approach to establishing causation,
following the same approach as the panel in US – Upland Cotton (Article 21.5 – Brazil) . The
European Communities contends that it has established that, although other factors might have
impacted the absolute level of prices and sales, Airbus prices would still have been significantly
higher, and Airbus would still have won significant a dditional sales and market share, but for the U.S.
subsidies.480
4.295 Making a final comment on "non-attribution", the European Communities observes, with
respect to its lost sales claims, that the European Communities does not ignore non-subsidy factors in
analysing those sales. Rather, it contends to demons trate that but for the magnitude of the subsidised
price effects, Airbus would have won the identif ied sales campaigns, where price (and not other non-
price and non-subsidy factors) was the key factor. The European Communities recalls that it presents
evidence from the sales campaigns showing that if Boeing's prices had been higher by the amount of
the price effects, Airbus' last offer would have been economically more advantageous to the customer.
The European Communities maintains that it also de monstrates lost sales by reason of the effects of
technology.481
4.296 In its price suppression claims, the European Communities submits that it demonstrates that
regardless of whether LCA prices rose or fell, th e magnitude of the price effects coupled with
Boeing's market power, opportunity, ability, and incen tive to use those price effects, were significant
enough to suppress Airbus' pricing. This is not assuming causation, but rather proving it. The various
non-attribution factors, which the United States claims have caused LCA prices to fall, do not
eliminate these significant suppressing effects on Airbus ' pricing from Boeing's use of the subsidies.
In the end, whether a "bifurcated" or "unitary" label is put on the causation analysis is not important.
The European Communities posits that, what is impor tant is whether the price effects caused by the
price and technology mechanisms in the context of duopoly competition are of a significant enough
magnitude to result in Airbus' pricing being lower than it otherwise should have been.482

479 European Communities' response to question 292 , paras. 693-696; Eur opean Communities' second
written submission, paras. 718-728.
480 Executive Summary of the Europ ean Communities' non-confidential or al statement at the second
481 Executive Summary of the European Communities' non-confidential closing statement at the second
482 Executive Summary of the European Communities' non-confidential closing statement at the second

BCI deleted, as indicated [***]

(c) Arguments relating to the reference period
4.297 The European Communities argues that 2004-2006 is a reasonable reference period reflecting
today's conditions of competition. It contends that Articles 5 and 6.3 of the SCM Agreement require
a demonstration of present adverse effects. The European Communities therefore focuses the
evidence supporting its serious prejudice claims largely on the recent 2004-2006 period. The 2004-
2006 reference period allows for an examination of the effects of the subsidies under conditions of
competition that are sufficiently similar to th e conditions of competition existing today. By
comparison, the European Communities observes th at the "historical" 2001-2003 period was so
dissimilar from today's conditions of competition that it should not form part of the reference period.
The European Communities contends that the dramatic effects of 9/11 transformed 2001-2003 into a
"buyer's market", characterized by extraordinarily low demand. This, according to European
Communities, is fundamentally different from toda y's "seller's market", where demand for LCA has
exploded to record highs, and where both Airbus' and Boeing's product offerings have significantly
changed.483
4.298 The European Communities emphasizes that th rough two causal mechanis ms – price effects
and technology (or product) effects – the European Communities has established its single claim that
the U.S. subsidies at i ssue cause adverse effects in the three LCA product markets at issue (200-300
seat, single-aisle, and 300-400 seat). The European Communities claim relates to – and the Panel
must assess – present adverse effects, and the legally and factually most relevant reference period is
the four-year period from 2004-2007. Even if the Panel were to select a longer reference period, the
evidence the European Communities ha s adduced demonstrates that the U.S. subsidies cause serious
prejudice through price and technology (or product) effects.
484
4.299 The European Communities further argues that the U.S. allegation that there is an absence of
temporal coincidence between subsidy magnitudes a nd serious prejudice factors is not supported by
the data.485
(d) Arguments relating to the effects of the U.S. subsidies
4.300 The European Communities submits that the United States' subsidies enable Boeing to charge
lower LCA prices and invest in additional aeronautics R&D for future LCA launches.
(i) Type of subsidies and determinants of effects of the U.S. subsidies
4.301 The European Communities analyses the effect s of subsidies on the market through product
development, output and pricing by assessing three dime nsions: (i) the nature of the subsidy (its
structure, design, operation); (ii) its magnitude; a nd (iii) the context, particularly the financial
condition of the recipient and the competitive cond ition in the market at issue. These three
dimensions, however, cannot be assessed in clin ical isolation; they are interdependent. 486 T h e
European Communities emphasises that the Unite d States abandoned its previous argument –
advanced in its First Written Submission – that an assessment of the effects of a subsidy must be

483 Executive Summary of the European Communities' non-confidential oral statement at the first
484 Executive Summary of the Europ ean Communities' non-confidential or al statement at the second
485 Executive Summary of the Europ ean Communities' non-confidential or al statement at the second
486 European Communities' comments on United States' response to question 391, para. 329;
European Communities' response to question 379, para. 425.

BCI deleted, as indicated [***]

based on the type of the financial contribution invol ved (e.g. grant, loan, tax reduction, etc.) and now
agrees with the European Communities' framework of analysing the effects of the U.S. subsidies.487
4.302 The European Communities also asserts that the two U.S. consultants, Greenwald and
Stiglitz, agree with its characteriza tion of determinants of effects. 488 In an attempt at categorising
different "types" of subsidies to assess their effect s, these consultants base their report on the same
three dimensions described in the previous paragraph. However, according to the
European Communities, their report lacks analytical rigour, depth and precision. Greenwald's and
Stiglitz's classification of subsidies is imprecise, tautological, overlapping in scope, and, therefore,
redundant, as well as on different levels of abstraction. 489 Importantly, their report lacks a discussion
of both the magnitude of the subsidy and other co nditions of competition in the LCA markets, and
ignores entirely the facts of this dispute. 490 By contrast, the analytical framework presented by the
European Communities consistently since its first written submission accurately links context, nature
and magnitude of the subsidies to their effects on product development, output and pricing in the
markets at issue. The European Communities stresses that it views its own approach to examining the
effects of the U.S. subsidies as appropriate, and considers that th e Panel should adopt it for its own
assessment. 491
(ii) Nature of the United States' subsidies
4.303 The European Communities argues that the U.S. R&D subsidies have assisted Boeing in
developing and bringing to market early certain inn ovative products, including the 787. In addition,
all U.S. subsidies benefiting Boeing impact its LCA prices by operating in one of at least two broad
ways. The European Communities submits that they either (i) provide additional non-operating cash
flow that Boeing can invest in lower prices as we ll as additional R&D so as to lower its costs of
research, development, production, and sale of 787, 737, and 777 family LCA; or (ii) directly reduce
Boeing's marginal unit costs related to the production and sale of 787, 737, and 777 family LCA. The
European Communities notes that during the 2004-2006 reference period, Boeing enjoyed $4.9 billion
in benefits from U.S. subsidies increasing Boeing's non-operating cash flow, and $259 million in
benefits from U.S. subsidies directly reducing Boeing's marginal unit costs.492
4.304 The European Communities further argues that the NASA and DOD R&D subsidies,
including through support by NASA and DOD empl oyees, provided Boeing with the knowledge,
experience, and confidence to launch the 787 in 2004. The early timing of this launch allowed Boeing
to seize market share and sales away from competing Airbus A330s, Original A350s, and the new
A350XWB. With respect to NASA R&D subsidies, Mr. Willshire, Deputy-Director of the
Aeronautics Research Directorate at NASA Lang ley Research Center, verified this when he
explained: "(i)f NASA did not fund the research being questioned, the research results and
breakthroughs would probably not be available t oday …". The European Communities observes that
it could not have said it better itself. No Boeing 787s in their current form would be rolling off the

487 European Communities' comments on United States' response to question 371, paras. 282-283.
488 European Communities' response to question 379, para. 421.
489 European Communities' comments on United States' response to question 391, para. 328;
European Communities' comments on United States' response to question 389, para. 387;
European Communities' response to question 379, paras. 423-426.
490 European Communities' comments on United States' response to question 370, para. 341;
European Communities' comments on United States' response to question 389, paras. 383-384;
European Communities' response to question 379, para. 426; European Communities' response to question 380,
para. 472.
491 European Communities' comments on United States' response to question 391, para. 328;
European Communities' response to question 380, para. 454.
492 Executive Summary of the European Communities' non-confidential oral statement at the first

BCI deleted, as indicated [***]

assembly line in Boeing's facility in 2008 but for the NASA subsidies supporting Boeing's research
into its critical technologies.493
4.305 The European Communities mainta ins that the structure, design, and operation of the U.S.
subsidies, i.e. their very nature, support the Eu ropean Communities' advers e effects claims. The
European Communities notes that it established that all of the U.S. subsidies benefiting Boeing cause
"price effects". That is, these subsidies cause Boei ng to charge lower prices than the company would
absent the subsidies. In additio n, the European Communities argu es that the U.S. R&D subsidies
cause "technology" and "product effects". That is, the U.S. R&D subsidies allowed Boeing to launch
technologically innovative products earlier, and sell them at a lower price than the company would
otherwise have been able to. The European Communities addresses several U.S. arguments with
respect to the nature of the subsidies at issue in its second written submission.494
4.306 At the outset the European Communities rebuts U. S. arguments regarding the aggregation of
subsidies. The United States suggests an assessment of the nature of the U.S. subsidies based on four
separate groups, classified according to the type of financial contribution involved. For the European
Communities, the U.S. categorization is disconnect ed from the requirement of the SCM Agreement,
directing the Panel to assess the U.S. subsidies in the light of their "nexus with … the particular
effects related variable" at issue, i.e. Boeing's pr ices or Boeing's product offerings. By contrast, the
European Communities submits that it has established that: (i) all of the U.S. subsidies at issue have
the effect of freeing up cash at Boeing for use to price down aircraft; and (ii) the U.S. R&D subsidies
have the independent and additional effect of accelerating Boeing's deve lopment of innovative
technology for application on its LCA.
495
4.307 The European Communities concludes that the evidence before the Panel demonstrates that
all of the U.S. subsidies have a sufficient ne xus with the price effects at issue. The
European Communities also concludes that all of the U.S. R&D subsidies have a sufficient nexus with
the technology and price effects at issue. It is, therefore, appropriate to aggregate all of those
subsidies for purposes of assessing their effects.
496
(iii) Magnitude of the U.S. subsidies
4.308 The European Communities stat es that between 2004-2006, Boeing's LCA division enjoyed,
on average, $1.7 billion per annum in benefits from U.S. subsidies. This translates into an average of
$4.6 million for each 787, $2.4 million for each 7 37, and $5.5 million for each 777 sold. The
European Communities submits that these amounts are significant, whether viewed from the
perspective of the total annual magnitude of th e subsidies to Boeing's LCA division, or as the
corresponding subsidization rates on a per-aircraft basis.497
4.309 The European Communities rejects the United Stat es' claim that the U.S. subsidies to Boeing
are very small and had no effect on the company's ability to gain a competitive advantage over its
only competitor – Airbus. The European Communiti es contends that the United States reaches this
conclusion by simply wishing away the overwhelm ing majority of U.S. subsidies, limiting its
magnitude calculation to the one subsidy progra mme that it recognizes to constitute a subsidy –
FSC/ETI. This, according to the European Communities, is simply implausible. The

493 Executive Summary of the European Communities' non-confidential closing statement at the first
494 Executive Summary of the European Communities' second written submission, para. 52.
495 Executive Summary of the European Communities' second written submission, para. 53.
496 Executive Summary of the European Communities' second written submission, para. 54.
497 Executive Summary of the European Communities' non-confidential oral statement at the first

BCI deleted, as indicated [***]

European Communities' calculations demonstrate that in the majority of years, U.S. subsidies
constituted well over 50 per cent of Boeing's net earnings, in many years even surpassing Boeing's net
earnings.498
4.310 The European Communities contends that its de monstration of adverse effects caused by the
U.S. subsidies benefiting Boeing flows from many factors. Yet, a simple assessment of the magnitude
of the U.S. subsidies is suffi cient to support such a claim. 499 The European Communities argues that
the allocation methodology offered by it reveals very large magnitudes and high ad valorem
subsidisation rates supporting the existence of adve rse effects. The Europ ean Communities notes, for
example, that in 2006 Boeing's LCA sold in compet itive sales campaigns against Airbus benefited
from an average $5.8 million for each 737, $ 13.6 million for each 777, and $11.1 million for
each 787. This represents ad valorem subsidisation rates ranging from 11.07 per cent to 15.99 per
cent. The European Communities submits that there is no rational basis to conclude that subsidies of
such magnitude to a duopoly competitor do not have a significant impact on Airbus' prices, sales and
market shares. Absent the U.S. subsidies and a change in its commercial behaviour, Boeing's LCA
segment would not have been an economically viable entity. The European Communities
demonstrates that from 1989 to 2006 the Boeing LC A segment would have generated an average
return on invested capital significan tly below its cost of capital. Such return would have been
insufficient to justify its continued investment in LCA. Professors Whitelaw and Zarowin of New
York University, by correcting the errors in the analyses proffered by 3 U.S. consultants – concerning
(i) their failure to adjust operating earnings and the weighted average cost of capital consistent with
their elimination of cash from invested capital; and (ii) the errors in their treatment of pension related
gains and losses, assets and liabilities – demonstrate that BCA would not remain economically viable
absent the U.S. subsidies and a change in its product deve lopment and pricing policies. 500 Thus, the
available evidence confirms that the U.S. subsidies changed BCA's commercial behaviour. 501 The
U.S. subsidies allowed BCA to offer its LCA at lower prices and to accelerate its product
developments beyond what would otherwise have been economically viable. Lower prices and
accelerated product development, in turn, cause sign ificant price suppression, significant lost sales,
and displacement and impedance of Airbus LCA.
4.311 The European Communities argues that had Bo eing borrowed the total amount of the 1989-
2006 U.S. subsidies from the capital markets to fi nance the same levels of investments, as the
United States suggests it would have done, the comp any would have collapsed under a spiralling debt
burden. In fact, ITR's calculations show that the financial markets would not have allowed Boeing to
assume this amount of additional debt, or at leas t at anything but prohibitively high costs. An
alternative, but equally economically untenable, course of action for Boeing would have been to
significantly reduce its compensation to shareholde rs, turning the company into the previously
discussed non-viable investment. However, even if Boeing had suspended dividends to shareholders
in the order of $16 billion in share repurchases, th e amount would have been insufficient to replace
the approximately $19 billion in U.S. subsidies over the 1989-2006 period.
502 T h e
European Communities considers that this evidence similarly demonstrates that, contrary to the U.S.
assertions, Boeing would have had to change its commercial behaviour – i.e. charge higher prices and

498 Executive Summary of the European Communities' non-confidential oral statement at the first
499 Executive Summary of the European Communities' second written submission, para. 47.
500 European Communities' comments on United States' response to question 370, para. 244.
501 European Communities' comments on United States ' response to question 370, paras. 226-231;
European Communities' response to question 378, paras. 350-353.
502 European Communities' response to question 292, para. 694.

BCI deleted, as indicated [***]

develop products later, or with less technological capabilities – had it not received the U.S.
subsidies.503
4.312 The European Communities rebuts the unfounded U.S. criticisms of the ITR methodology for
calculating the magnitude of the U.S. subsidies. This magnitude is based on U.S. countervailing
duties methodology, and does not suffer from any of the flaws alleged by the United States.504
4.313 In its rebuttal, the European Communities emphasi zes what it considers to be several of the
more egregious U.S. misrepresentations of the Eu ropean Communities' adverse effects argument and
evidence. For one, the European Communities takes issue with the Un ited States' assertion about the
European Communities' claim that "the magnitude of the alleged subsidies is, in and of itself
sufficient to prove the causal link between them and Bo eing's prices …". In fact, as noted in its oral
statement, and in its response to Question 84, th e European Communities submits that the magnitude
of the subsidy – in the light of Boeing's financia l situation and expectations regarding the behaviour
of a rational commercial entity – supports the infere nce that Boeing uses the subsidy to lower prices
and/or invest in product development, th ereby causing competitive harm to Airbus. 505 That said, the
European Communities explains that the magnitude of the subsidies is only one piece of its causation
evidence – working in combination with the Europ ean Communities' demonstration that the nature
and magnitude of the U.S. subsidies confer on Bo eing the ability to cause adverse effects; that
Boeing's duopoly position in highly price-sensitive LCA markets gave Boeing the strong incentive to
use the subsidies to price down its products; that competitive sales campaigns provide Boeing with the
opportunity to use the subsidies to cause adverse eff ects; and that evidence regarding Boeing's use of
other cost savings to lower price and gain market share, along with evidence of such behaviour by
Boeing in LCA markets, supports the strong inference that Boeing uses the U.S. subsidies to lower its
prices significantly. Thus, the U.S. attempt to misrepresent all of this evidence as merely a magnitude
figure fails.506
(iv) Price effects of the U.S. subsidies
4.314 The European Communities reiterates that through the mechanism of price effects, the U.S.
subsidies cause significant price suppression, significant lost sales, and displacement or impedance, or
threat thereof, in the three LCA product markets at is sue. First, the nature and magnitude of the U.S.
subsidies confer on Boeing the ability to cause advers e effects. Second, the conditions of competition
give Boeing the strong incentive to use the subsidi es to price down its products. Third, competitive
sales campaigns provide Boeing with the opportunity to use the subsidies to cause adverse effects.
And fourth, Boeing actually uses its subsidies to price down its LCA. 507 With respect to Boeing's
actual use of the subsidies, the Eu ropean Communities explains that, absent the U.S. subsidies and in
the light of its financial situation, no ra tional commercial actor, including Boeing Commercial
Airplanes, would make the same pricing and prod uct development decisions, even if it had the
necessary financial resources. Moreover, the Europ ean Communities argues that it shows that, in any
event, Boeing did not have the financial resources to make the same pricing and product development
decisions. Finally, the European Communities contends that it also shows that Boeing regularly uses
cost savings similar to those resulting from the U.S. subsidies to enable lower prices and to gain
market share. Collectively, th is evidence supports the strong infe rence that Boeing uses the U.S.

503 Executive Summary of the European Communities' second written submission, para. 50.
504 Executive Summary of the European Communities' second written submission, para. 51.
505 Executive Summary of the European Communities' non-confidential closing statement at the second
506 Executive Summary of the European Communities' non-confidential closing statement at the second
507 Executive Summary of the Europ ean Communities' non-confidential or al statement at the second

BCI deleted, as indicated [***]

subsidies to significantly lower its prices, thereby causing adverse effects to European Communities'
LCA-related interests.508
4.315 The European Communities considers that si nce the U.S. subsidies are of sufficient
magnitude to cause the claimed adverse effects, an inquiry into the pr ecise amount of the price effects
in this dispute is not required. Nonetheless, th e European Communities offers additional evidence of
price effects from the U.S. subsidies.509
4.316 With respect to the price effects of the U.S. subsidies, the European Communities explains
that it provided the Panel with two alternative options to assess these. First, the
European Communities has identified the per-aircraf t magnitude of the U.S. subsidies, using an
allocation methodology based on countervailing du ty concepts. These values represent the per-
aircraft subsidy magnitudes that provided Boeing with the ability to act on its incentives and
opportunities to lower its prices in competition with Airbus. Further evidence shows that Boeing
acted on that incentive. Second, the European Communities has provided evidence of a one-for-one
price effect of those subsidies that reduce Boeing' s marginal unit costs (or increase its marginal unit
revenue), and in addition has provided a quantification of the price effects from subsidies that increase
Boeing's non-operating cash flow based on an econo mic model developed by Luis Cabral, Professor
of Economics at New York University's Stern School of Business.
510 The European Communities
also argues that the U.S. subsidies enable Boeing to strategically set price and sales volumes in the
world markets according to its commercial needs. Further, the subsidies cause Boeing to lower its
prices by an amount that is roughly similar to th e amount of subsidies. The European Communities
contends that the U.S. arguments regarding Boei ng's unconstrained access to financing fail to rebut
these conclusions of Professor Cabral's model.511
4.317 In its second written submission, the European Co mmunities recalls that it has considered the
U.S. subsidies causing price effects in two sub-groups: (i) subsidies that reduce Boeing's marginal unit
costs and (ii) subsidies that increase Boeing' s non-operating cash flow by providing additional
resources. For all the subsidies, Boeing executiv es admit that Boeing passes on cost savings to its
customers.512
4.318 The European Communities mainta ins that the first group of subsidies lead Boeing to reduce
its prices by the full magnitude of the subsidy because of its precise knowledge of the amount of
subsidy available at the time of delivery of the aircraft, and the absence of any uncertainty with
respect to the continued existence of that subsidy. In other words, Boeing was able to decrease prices
by the full magnitude of the subsidies.513
4.319 The European Communities also contends that the United States incorrectly argues that the
withdrawal of the FSC/ETI tax is evidence of Boeing 's "uncertainty" regarding the availability of that
subsidy, which, therefore, could not be reflected in Boeing's prices. The evidence and U.S. arguments
in US – FSC (Article 21.5 – EC) demonstrate, however, that Boeing took FSC/ETI subsidies into
account when pricing its aircraft. When disconti nuing the FSC/ETI measures, the U.S. Congress felt
compelled to specifically grandfather existing sales contracts, and even options for additional LCA
orders that would be exercised under these existing c ontracts. As confirmed by the United States in

508 Executive Summary of the Europ ean Communities' non-confidential or al statement at the second
509 Executive Summary of the European Communities' non-confidential oral statement at the first
510 European Communities' response to question 378, para. 278.
511 Executive Summary of the European Communities' non-confidential oral statement at the first
512 Executive Summary of the European Communities' second written submission, para. 55.
513 Executive Summary of the European Communities' second written submission, para. 56.

BCI deleted, as indicated [***]

US – FSC (Article 21.5 – EC) , grandfathering provides foreign and domestic businesses with an
opportunity to adjust and protect entities that might have altered their conduct in reliance on the long-
standing tax treatment provided by the earlier la w. Thus, the United States acknowledges that
taxpayers came to rely on the FSC/ETI provisions in structuring their foreign transactions. Actions of
the U.S. Congress and the U.S. IRS to protect the legitimate expectations of companies like Boeing, in
the view of the European Communities, demonstrat e that Boeing suffered no uncertainty concerning
the availability of FSC/ETI subsidies for sales undert aken before the discontinuation of the measure.
Similarly, with respect to the State of Washington and City of Everett B&O tax rate reductions, there
is no uncertainty because the Project Olympus Mast er Site Agreement guarantees the economic value
of these subsidies.514
4.320 With respect to the second group of subsidies, the European Communities also maintains that
it demonstrates that such subsidies supplemen t Boeing's resources available for research,
development, production and sale of the entire line of LCA product, thereby allowing cost savings
which are passed through to customers in the fo rm of lower prices. More precisely, the
European Communities demonstrates that, contrary to the U.S. allegations, each of the U.S. subsidies
has the price and technology effects the European Communities asserts because the U.S. subsidies
either (i) reduce taxes, (ii) increase Boeing's technological capabilities and knowledge at no costs, (iii)
reduce costs and improve competitiveness vis-à-vis Airbus thanks to NASA and DOD provision of
R&D services, equipment, facilities and employees, (iv) decrease R&D expenses because of non
reimbursement of BCA R&D. In addition, KDFA bonds allowed Boeing to receive more
consideration from Spirit for its Wichita facility, wh ile the Department of Labor grant to Edmonds
Community College reduced training costs for Boeing's 787 workers.
 515
4.321 The European Communities next argues that it has demonstrated that Professor Cabral's
model supports the European Communities' adver se effects claims. In a dynamic model of
duopolistic competition, Professor Cabral quantifies th e price effects – but not the technology effects
– of those U.S. subsidies that provided Boeing w ith non-operating cash flow in the period between
1989 and 2006. Professor Cabral estimates that the total impact of each dollar of subsidy is 87.8 cents
in price discounts, of which 59.0 cents result from aggressive pricing to move down the learning
curve and to lock in potential repeat customers; and 28.8 cents from investments in R&D that result in
better aircraft and lower prices on a price-per-quality basis. Professor Cabral estimates price
reductions of $16.8 billion during the period of 19 89-2022 that result from the $16.9 billion in U.S.
subsidies during 1989-2006 – i.e. price effects of approximately the same magnitude as the amount of
the subsidies.
516
4.322 The European Communities explains that Pr ofessor Cabral's model adopts a standard
approach to modelling economic behaviour and refl ects the latest economic research. His approach
properly balances the model's need for simplicity with the need to include and account for all relevant
features that are crucial to the determination of ho w Boeing uses the U.S. subsidies. Importantly, the
model builds on the main factors that characteri se the LCA markets, including the price-sensitive
nature of sales campaigns; the steep learning curves applicable to the production of LCA, which
reward Boeing's higher levels of sales and market sh are with lowered production costs; the existence
of non-negligible switching costs, which provide Bo eing an incentive to price down aircraft today so
as to be able to charge relatively higher prices in the future; and, the ability of LCA purchasers to
quantify many of the qualitative differences between LCA features through the use of a net present
value analysis.
 In addition, input variables of Professor Cabral's model are based on available Boeing
data or reasonable estimates. An extensive sensitivity analysis, in which all parameters of the model

514 Executive Summary of the European Communities' second written submission, para. 57.
515 Executive Summary of the European Communities' second written submission, para. 58.
516 European Communities' response to question 379, footnote 561.

BCI deleted, as indicated [***]

are varied simultaneously, yields stable results, thus confirming the robustness of the Cabral Model
against variations of key parameters and reinforcing the European Communities' claims.517
4.323 The European Communities consider s that the U.S. criticism of that model rests largely on
misinterpretations and mischaracterisations of Pr ofessor Cabral's analysis. In particular, the
United States takes an overly simplistic view of the impact of imperfect capital markets, financial
constraints and subsidy cash flow on that investment behaviour. 518 The U.S. allegations further are
refuted by empirical evidence that provides strong support for Professor Cabral's model. In addition,
some of the U.S. criticisms are contradicted by th e United States' own consultants. According to the
European Communities, none of the U.S. arguments invalidates Professor Cabral's findings, or the
evidentiary value of those findings for establishi ng a causal link between the U.S. subsidies and
adverse effects.
 The price effects determined by Professor Cabral, therefore, stand and support the
European Communities' arguments and other eviden ce demonstrating the adve rse effects caused by
the U.S. subsidies.519
4.324 Further, the European Communities argues that in an examination of present adverse effects,
the distribution of a subsidy over time is an important factor to consider when evaluating the effects of
that subsidy. Specifically, the European Comm unities posits that a rational economic actor would
take into account, at the time of order, anyt hing that would impact the overall revenue and
profitability of that order upon delivery – even tho ugh the sales price, and for that matter any other
revenue such as subsidy revenue, is r eceived only several years later. For example, in the light of the
particular conditions of competition in the market for the product at issue, Boeing knows that a
portion of its tax liability in 2010 will be foregone on revenue recognized in 2010 and can take into
account that reduction when negotiating the sale of an aircraft. Hence, the European Communities
submits that the structure and timing of transactions in this particular market enable present adverse
effects from future committed subsidies, including those that derive from committed future tax
breaks.
520
4.325 With respect to the 787, the European Commun ities identifies some subsidies solely tied to
that aircraft. According to the European Comm unities, the evidence demonstrates that certain tax
exemptions provided by the State of Washington; most of the infrastructure, training, and other
subsidies provided by the State of Washington and municipalities therein; bonds issued by the Kansas
Development Finance Authority; R&D support provided by NASA through its ACT Program; and the
worker training grant provided by the U.S. Department of Labor are tied to the 787.
521
4.326 The European Communities submits that in many sales campaigns lost by Airbus the
difference between Airbus' and Boeing's offers was far less than either the magnitude or the price
effects of the U.S. subsidies. And, but for these billions in U.S. subsidies, Boeing would have been
forced to charge higher prices, and, as a result, Ai rbus would have won additional sales and its overall
LCA pricing for all orders that it booked during th e reference period would have been higher. The
European Communities concludes that given the pr ice- and value-sensitive nature of many sales
campaigns, and given the significant benefits of scale of LCA production, Boeing has strong
incentives to target its U.S. subsidy benefits in competitive sales campaigns at the expense of its only
competitor – Airbus.522

517 European Communities' response to question 376, para. 337; European Communities' response to
question 383, para. 542.
518 Executive Summary of the European Communities' second written submission, para. 59.
519 European Communities' second written submission, paras. 754-756, 785.
520 Executive Summary of the European Communities' second written submission, para. 60.
521 Executive Summary of the European Communities' second written submission, para. 61.
522 Executive Summary of the European Communities' non-confidential oral statement at the first

BCI deleted, as indicated [***]

4.327 The European Communities asks th e Panel to ignore U.S. arguments that non-subsidy factors
are responsible for certain Airbus harm identified by the United States as irrelevant. For the European
Communities, such negative financial factors would certainly be relevant for a panel to assess as non-
attribution factors were it reviewing a claim of material injury under Article 5(a) of the
SCM Agreement. But no such claim is before this Panel.523
4.328 The European Communities submits that it rebuts during the confidential session of the
second meeting with the Panel unfounded U.S. ar guments regarding the sales campaign specific
evidence, and shows how the U.S. subsidies cause adverse effects in particular sales campaigns by
suppressing prices, and by causing lost sales and displaced and impeded market shares.524
(v) Technology effects of the U.S. subsidies
4.329 The European Communities argues that the U.S. subsidies cause adverse effects not only
through price effects, but also through technology effects. That is, but for the U.S. R&D subsidies, it
would have taken Boeing far longer, at substantially more risk a nd cost, to launch and deliver the
technologically-innovative 787 LCA. The 787's s ubsidy-enabled characteristics – innovative
technologies, early availability, and low price – resu lt in suppressed prices for, lost sales of, and lost
market share for competing Airbus LCA, as well as a threat thereof.
 525
4.330 The European Communities asserts that the wea lth of evidence submitted by it demonstrates
that decades of U.S. R&D subsidies have allowed, and continue to allow, Boeing to research, design,
develop, produce, and sell a technologically innova tive 787 LCA, utilising, for example, fifty per cent
composite materials, years earlier than it could have on its own. Specifically, the knowledge,
experience, and confidence Boeing engineers gained through decades of participation in NASA and
DOD-supported R&D programmes have provided Bo eing the ability to identify the optimized
solution for the design of the 787, at the optimal time.526
4.331 The European Communities dismisses the U.S. ar gument equating the precise dollar value of
the U.S. R&D subsidies with the technological be nefits Boeing derived from its participation in
U.S. government-funded R&D programmes. The Eu ropean Communities demonstrates that the
knowledge, experience and confidence Boeing engineer s derived from their participation in those
programmes far exceeds the simple dollar value of those R&D contracts. 527 The
European Communities argues that in addition to certain R&D subsidies conferring a financial benefit
on Boeing, there is a related, and indeed additiona l, "multiplier" technological benefit, consisting of
LCA R&D-related knowledge, experience and confidence. This "multiplier" technological benefit
stems from the subsidy-enabled collaboration between Boeing and NASA/DOD engineers, which
provides benefits to Boeing because it enhances, through knowledge and te chnology transfer, the
quality of the research undertaken by Boeing un der U.S. government-supported R&D programmes.
Such collaborative research tends to generate better results at a faster pace. It is the accumulated
knowledge and hands-on experience Boeing engineers gained from engaging in collaborative R&D
with NASA/DOD engineers that are critical in devel oping LCA. It is also because Boeing engineers
enjoy access to NASA research and testing facilities, as well as reports and databases containing

523 Executive Summary of the European Communities' non-confidential oral statement at the first
524 Executive Summary of the Europ ean Communities' non-confidential or al statement at the second
525 Executive Summary of the Europ ean Communities' non-confidential or al statement at the second
526 Executive Summary of the Europ ean Communities' non-confidential or al statement at the second
527 European Communities' second written submission, paras. 838-839.

BCI deleted, as indicated [***]

research results on a variety of technological areas that are not commercially available. This access
further improves the quality of the research undertaken.528
4.332 The European Communities notes that, in contrast with Boeing, Airbus did not have access to
critical results of U.S. government-supported R&D, including knowledge, experience and confidence.
Although some NASA research results might be publicly available, they are frequently published late
(due to limited and exclusive access rights granted to Boeing), Boeing generally holds the patents to
any useful technology, and, in any event, NASA publications do not contain critical results that
Airbus engineers could use in their actual design of LCA. As a result, it will take Airbus three years
longer to develop and deliver the A350XWB than it takes Boeing to develop and deliver the 787.529
4.333 The European Communities notes that the Un ited States and Boeing admit that Boeing
applied U.S. government-supported technologies on the 787. These admissions include: (i) a Boeing
presentation acknowledging that Boeing applied, on the 787, technologies developed from NASA-
funded R&D; (ii) an admission by the United States that Boeing's 787 would not exist in its current
form absent NASA subsidies supporting Boeing's research into critical technologies;
 (iii) agreement
with the European Communities' assessment that the results of NASA's R&D subsidies have a
"multiplicative effect" ( see discussion supra); (iv) an admission that Boeing built upon the
knowledge, experience and confidence its engineers ga ined while participating in NASA's Advanced
Composite Technology Fuselage Program ("ATCAS"), to design and develop the 787 composite
fuselage; and (v) an admission that work Boei ng did under ATCAS provided the company with a
roadmap for further research.
530
4.334 Finally, the European Communities rejects the U.S. argument that Airbus' launch of the A380
in 2000, rather than the technology effects of the U. S. subsidies, is the cause of adverse effects, as
erroneous. The European Communities submits that Airbus' decision to focus on the A380 in 2000
made business sense, and it was not until 2004, when Boeing launched the 787 with NASA and DOD
support, that Airbus had to react in the 200-300 seat LCA market.531
(vi) Relationship between price and technology effects of the U.S. subsidies
4.335 The European Communities explains that each dollar's worth of U.S. R&D subsidy can confer
one of two sets of benefits on Boeing. 532 On the one hand, a given amount of R&D subsidy can
confer on Boeing a benefit that is di rectly financial in nature and wh ich consists of the market value
of the R&D undertaken (less any financial resource s Boeing contributed to the R&D). That is, it
consists of the value of the R&D, for which Boeing did not have to expend its own financial
resources. This same amount of R&D subsidy, in addition, confers a benefit that is technological in
nature, consisting of the additi onal knowledge, experience and confidence that Boeing engineers
gained by undertaking the R&D in cooperation with NASA and DOD engineers, rather than on their
own – i.e. the "multiplier" technological benefit. 533
4.336 On the other hand, a given amount of R&D subsidy can confer on Boeing solely
technological benefits from R&D that Boeing would not have undertaken itself. In that case, the

528 European Communities' response to question 373(b), paras. 286-287.
529 Executive Summary of the Europ ean Communities' non-confidential or al statement at the second
530 European Communities' comments on United States' response to question 371, paras. 288-290.
531 Executive Summary of the Europ ean Communities' non-confidential or al statement at the second
532 European Communities' response to question 373(b), para. 280.
533 European Communities' response to question 373(b), para. 281.

BCI deleted, as indicated [***]

entirety of the knowledge, experience and confiden ce gained by Boeing engineers would constitute
the technology benefit. 534
(e) Arguments relating to the three LCA markets
4.337 The European Communities recall that, accordi ng to the United States, three subsidized
Boeing LCA families compete directly with three co rresponding "like" Airbus LCA families. Thus,
the European Communities considers that for pur poses of evaluating the European Communities'
serious prejudice claims, the United States concurs that competition between Boeing and Airbus takes
place in three of the five LCA product markets: Boeing's 737NG family competes with Airbus' A320
family; Boeing's 787 family competes with Airbus' A330 family, Original A350 family, and
A350XWB-800; and Boeing's 777 family competes with Airbus' A340 family and A350XWB-900
and -1000. Airbus and Boeing do not offer competi ng products in either of the last two LCA product
markets: the Boeing 747 family covers the 400- 500 seat wide-body LCA market; and the Airbus
A380 covers the 500+ seat wide-body LCA market.
535 The European Communities confirms that it
does not challenge any present price effects from U.S. subsidies that historically benefited the 717,
757 and 767, because those LCA are either not produced or no longer actively marketed by Boeing.536
4.338 Turning to its arguments and evidence of a dverse effects in the three competitive LCA
markets, the European Communities alleges that th e U.S. subsidies for the 787 cause significant lost
sales and price suppression in the world market and di splacement and impedance in the U.S. and third
country markets. It alleges that the U.S. subs idies for the 737 also cause significant lost sales and
significant price suppression in the world market, a nd displacement and impedance in third country
markets. Further, the European Communities alle ges that the United States' subsidies for the 777
cause significant lost sales and price suppression in the world market, and displacement and
impedance in third country markets.
4.339 The European Communities next claims that it re buts the U.S. arguments regarding the 787.
The European Communities argues th at the evidence shows that Airbus suffered from the subsidy-
enabled launch by Boeing of technologically inn ovative products. Specifically, it submits that the
U.S. subsidies enabled Boeing to launch the 787 (i) at the time, (ii) with the technological capabilities,
and (iii) at the price that it did. Indeed, contrary to the U.S. assertions, Boeing's 787 Dreamliner is the
product of many years of Boeing's participation in U.S. government-supported R&D programmes that
provided Boeing engineers with the necessary knowle dge, experience and confidence in innovative
technologies to launch the 787 at the time it did and at an acceptable level of risk.537
4.340 The European Communities further submits that without access to results of the same NASA-
and DOD-supported research, Airbus' Original A350 could not match the subsidy-fuelled
technological advances found on the 787. Consequen tly, Airbus suffered lost sales from the early
launch of this aircraft, perceived by the market as "revolutionary". Without access to results similar to
NASA- and DOD-supported research, it will take Airbus five more years to bring to market a truly
competitive product, the A350XWB, and it will involve much higher cost. The
European Communities argues that the negative effects of the 787 launch on Airbus' market share and
pricing will reverberate well into the future.
538

534 European Communities' response to question 373(b), para. 282.
535 European Communities' first written submission, para. 1161.
536 Executive Summary of the European Communities' non-confidential oral statement at the first
537 Executive Summary of the Europ ean Communities' second written submission, para. 62, Executive
Summary of the European Communities' non-confidential or al statement at the first meeting with the Panel,
para. 24.
538 Executive Summary of the European Communities' second written submission, para. 63.

BCI deleted, as indicated [***]

4.341 Noting that the United States raises a nu mber of additional arguments, the
European Communities observes that it rebuts all of them. First, the European Communities explains
how the United States errs when stating that Boei ng's internal funds and access to capital markets was
more than sufficient to develop the innovative technologies for its 787. The U.S. argument fails to
account for the non-cash related benefits for Boeing that are derived from U.S. government-supported
R&D programmes, such as risk-free and cost-free funding, access to NASA engineers and facilities,
as well as achievement of a vast amount of knowle dge, experience and confidence in the application
of innovative technologies.
539
4.342 Moreover, the European Communities submits that the price effects of the U.S. subsidies
increase Boeing's ability to lower its prices for the 787, causing further competitive harm to Airbus.
Finally, the European Communities submits that while many of the non-attribution factors identified
by the United States are relevant as backgrou nd to understanding the general conditions of
competition prevailing in the LCA industry, they do not undermine the European Communities'
showing of a causal link between U.S. subsidies and ser ious prejudice. In particular, the United States
argues that Airbus was forced to launch a "paper ai rplane", the Original A350, to compete with the
787, because its resources were concentrated on th e A380. Contrary to the U.S. assertion, the
European Communities contends that the initial launch of the Original A350 – which could not
adequately compete with the subsidised 787 – and th e later launch (and much la ter entry into service)
of the A350XWB as a truly competitive aircraft were and are the result of Airbus' lack of access to
key technologies supported by the U.S. subsidies. They were not due to Airbus' focus on the
development and entry into service of the A380.
540
4.343 The European Communities submits that it al so rebuts the U.S. arguments that the
European Communities' sales campaign evidence does not support the European Communities'
adverse effects claim. The evidence provided by the European Communities regarding specific sales
campaigns shows how Boeing uses its subsidies to o ffer lower prices that result in Airbus either
losing significant sales, or having to accept significantly lower prices in instances where it wins a sale.
With respect to the 787-related sales campaigns, the European Communities submits that evidence
also shows how the subsidy-enabled technologies gave Boeing a competitive advantage in many sales
campaigns, similarly causing significant lost sales and significant price suppression.541
4.344 The European Communities explains that, in its submissions, the United States admits that the
787 technologies allowed Boeing to win sales campaigns. 542 The European Communities notes that
the United States even admits that, in at least half the challenged sales campaigns, the 787's subsidy-
enhanced characteristics – early availability a nd innovative technology – were decisive in the
customer's decision to purchase the 787 over the competing Airbus product. 543 As the
European Communities submits it has demonstrated , the 787's innovative technology was enabled by
the U.S. subsidies. Without this support, it w ill take Airbus five years longer – until 2013 – and
require substantially more resources, to bring to market a true competitor to the 787 – the A350XWB-
800. And without this support, Airbus lost not only market share because of competition against
Boeing's subsidy-fuelled 787, it also had to compet e against the low price expectations created by
Boeing in the market for 200-300 seat LCA.544

539 Executive Summary of the European Communities' second written submission, para. 64.
540 Executive Summary of the European Communities' second written submission, para. 65.
541 Executive Summary of the European Communities' second written submission, para. 66.
542 Executive Summary of the European Communities' second written submission, para. 67.
543 Executive Summary of the European Communities' non-confidential oral statement at the first
544 Executive Summary of the European Communities' second written submission, para. 67.

BCI deleted, as indicated [***]

4.345 Turning to the 100-200 seat single-aisle LCA market, the European Communities notes that
the United States is inconsistent in its argumentati on. While alleging that any and all price reduction
expectations and requests by LCA customers are due to Airbus' alleged systematic price undercutting
strategy, the United States asserts that none of Boeing's subsidy-fuelled 2004-2006 price concessions
for its 737NG had an impact on any of the A320 family sales campaigns at issue. Yet, at the same
time, the European Communities points out th at the United States acknowledges that Boeing
competed vigorously with its 737NG against Airbus' A320 in every one of the sales campaigns. 545 In
addition, the European Communities also observes that the United St ates takes an overly simplistic
and incorrect approach to the concept of "fleet co mmonality", asserting that any airline that has ever
ordered any Boeing aircraft can only be persuade d to switch to Airbus through Airbus price
undercutting. As the European Co mmunities submits it has explained, Airbus did not systematically
undercut Boeing's prices to obtain additional sales. Boeing lost market share due to a number of
reasons not attributable to an alleged Airbus price- undercutting strategy. To the contrary, it is Airbus
that suffered from Boeing's pricing pressure, which was particularly severe after 2004.
546 In sum, the
European Communities concludes that in the singl e-aisle LCA market, the provision of the U.S.
subsidies to Boeing causes adverse effects to Eur opean Communities' LCA-related interests in the
form of significant price suppression, significant lost sales, and impedance and displacement of
market share.
547
4.346 The European Communities submits that Boeing' s change in its pricing policy in 2004
resulted in much lower prices in th e market for single-aisle LCA. At a time of record demand for
single-aisle LCA in 2004-2006, the $2.6 billion in U.S. subsidies benefiting the 737 facilitated
Boeing's change in pricing policy that allowed it to seize significant sales from the Airbus A320
family. The European Communities therefore reasons that Boeing's only competitor, Airbus, had no
other alternative but to follow suit and lower its single-aisle pricing in response. Yet, the
European Communities observes that despite attempting to compete on price, Airbus still lost a
significant number of sales, and market share. Mo reover, even when Airbus secured sales, Boeing's
subsidized pricing significantly suppressed A320 LCA prices.548
4.347 Further, the European Communities claims that the United States' subsidies for the 777 cause
significant lost sales and price suppression in the world market, and displacement and impedance in
third country markets. It further argues that, as in the single-aisle LCA market, Boeing substantially
changed its pricing policy in 2004 with regards to its 777 family LCA. The result was dramatic.
Subsidized additional cash-flow of $1.2 billion for the 777 available to Boeing in the 2004-2006
period caused Airbus to lose a significant number of A340 sales. And where Airbus was able to
secure A340 orders, it could do so only at signifi cantly suppressed prices. Despite the alleged
inferiority of the A340 compared to the 777, th e European Communities has only challenged sales
campaigns where customers seriously considered the A340 and where the ultimate net price – and
Boeing's subsidized final price – made the difference in Airbus losing the sale.
549
4.348 With respect to the 300-400 seat LCA market, the European Communities states that in the
sales campaigns at issue, the airlines considered the 777 and th e A340 to be comparable. It argues
that in every one of the challenged lost sales, a final subsidy-enabled Boeing discount made the
difference between Airbus winning and losing the sal e. As BCA's then-president, Alan Mulally,
noted, reducing costs was "absolutely vital to our success in making our products more competitive

545 Executive Summary of the European Communities' second written submission, para. 68.
546 Executive Summary of the European Communities' second written submission, para. 69.
547 Executive Summary of the European Communities' second written submission, para. 70.
548 Executive Summary of the European Communities' non-confidential oral statement at the first
549 Executive Summary of the European Communities' non-confidential oral statement at the first

BCI deleted, as indicated [***]

and winning new orders". This statement, confirms that, contrary to the U.S. assertion that "it should
be clear that any {subsidy} would have no effect on prices for the 777", Boeing uses cost reductions,
whether from subsidies or other sources, to enable it to offer low prices and to win sales from Airbus.
The European Communities argues that even in the rare instances where Airbus did manage to secure
a small number of A340 sales, due to the effects of the U.S. subsidies, it did so only at significantly
suppressed prices.550 Finally, as in the single-aisle LCA market, the European Communities argues
that Boeing substantially changed its pricing policy in 2004 with regards to its 777 family LCA. The
result was dramatic. Subsidized additional cash-flow of $1.2 billion for the 777 available to Boeing in
the 2004-2006 period caused Airbus to lose a significant number of A340 sales. And where Airbus
was able to secure A340 orders, it could do so on ly at significantly suppressed prices. Despite the
alleged inferiority of the A340 compared to th e 777, the European Comm unities has only challenged
sales campaigns where customers seriously consider ed the A340 and where the ultimate net price –
and Boeing's subsidized final price – made the difference in Airbus losing the sale.
551
(f) Conclusion
4.349 In sum, the European Communities submits th at the amount and magnitude of the U.S.
subsidies alone demonstrates that these subsidies, provided over an almost 20-year period, cause
present adverse effects. But for the U.S. subsidi es, Boeing could not exist as a commercially viable
company charging the prices it does and developing the products it offers. This conclusion, according
to the European Communities, flows from: (i) an as sessment of the annual or per-aircraft magnitudes
of those subsidies; (ii) a comparison with BCA's ne t earnings with and without the subsidies; and (iii)
an assessment of the impact of those subsidies on Boeing's financial health. 552 Absent the U.S.
subsidies, Boeing's commercial pricing and investment behaviour would be very different today, and
would have been very different in the past. The European Communities states that this conclusion is
further supported by an examination of the nature of the subsidies at issue. Boeing's ability and
propensity to supply at a given price is heavily influe nced by the availability of U.S. subsidies, which
reduce its costs, or increase its revenue. As a duopol ist, Boeing has a significant impact on prices, as
the United States acknowledges with its repeated references to Boeing's change in its pricing policy in
2004. The European Communities concludes that an examination of specific aircraft markets and
sales campaign evidence reinforce the findings of si gnificant price suppression, significant lost sales
and impedance and displacement of market shar e in particular country markets from the U.S.
subsidies.553
2. Arguments of the United States
(a) Introduction
4.350 The United States contends that the arguments that alleged U.S. subsidies caused adverse
effects to European Communities' interests ignore a critical fact – that Airbus and its aircraft are doing
quite well. Airbus has gained 20 percentage points in market share since 2000. It tells the industry
that its performance in 2006 was the "best" and "hi ghest" in critical respects, and that 2007 is even
better. The United States agrees that Airbus has experienced some problems, among them difficulties
with its A380 and A350, but even Airbus admits that these have nothing to do with the alleged
subsidies. The United States contends that the situ ation continues to improve. The A380, the largest
civil aircraft ever, is scheduled to enter commercial service soon. In December 2006, Airbus unveiled
the final design of its A350, labelled the A350 XWB, with innovative technologies that it promises

550 Executive Summary of the European Communities' second written submission, para. 71.
551 Executive Summary of the European Communities' non-confidential oral statement at the first
552 Executive Summary of the European Communities' second written submission, para. 72.
553 Executive Summary of the European Communities' second written submission, para. 73.

BCI deleted, as indicated [***]

will give customers unprecedented cost savings. 554 The United States points out that, in spite of this
impressive performance by Airbus, the European Co mmunities alleges that s ubsidies caused serious
prejudice to Airbus in the form of price suppression, lost sales, and market
displacement/impedance.
555
(b) Arguments relating to the European Communities' serious prejudice claim
4.351 As a general matter, the United States first not es that the years 1995-2005 were a period of
steady triumph for Airbus. It became the largest pr oducer of civil aircraft in the world, increasing its
share of deliveries from 33 per cent to 57 per cent, and its share of orders from 16 per cent to 50 per
cent. It successfully converted from a consortium to an integrated company, with a profit margin of
more than ten per cent. And, it developed a revolu tionary new aircraft, the A380, designed to carry
more people farther than any civil aircraft before it. In May of 2006, Airbus's parent company,
EADS, reported at its general meeting that:
"Revenues increased by 10% to 22,179 million (FY 2004: _20,224 million). Airbus'
EBIT margin improved from 9.5% to 10.4%. With 1,111 gross orders in 2005, Airbus
achieved an all-time record order intake a nd as a result outsold its competitor for the
fifth year in a row. … At the end of 2005, the Airbus order book amounted to
202 billion based on list prices. This is an increase of 48% over year-end 2004. The
order book represents a total 2,177 commercial aircraft (2004: 1,500)."556
The Airbus management also reported that the compan y had almost finished testing of the A380, that
it expected to deliver the first A380 to Singapore Airlines "at the end of 2006", 557 and that another
new aircraft launched that year, the A350, had secured 172 orders by the end of 2005.558

4.352 The United States further asserts that only a month later, the situation took an unfavorable
turn. By then, production problems that would lead to a significant delay in the delivery of the first
A380 and cost Airbus billions of euros in penalty ch arges and added costs, had come to light. As a
result, the value of EADS shares dropped 25 per cent in one day. Airbus also had to face the
consequences of its decision to focus its engineer ing and other resources on the A380. That decision
meant that Airbus's effort to bring to market its A330 replacement and 787 competitor, the A350, fell
far short of customer expectations. The co-CEO of EADS resigned amidst suspicions of insider
trading, and two successive Airbus CEOs resigned before year end, largely as a result of the A380
delays and their effects.
559 The United States cites the EADS's report to shareholders in May 2007
recognized that 2006 had been "a disappointing year" for Airbus.560 It explained the difficulties as:
 (1) Problems with the A380. "{P}roduction difficulties encountered for the A380 led to
delays in its projected delivery schedule, with first A380 currently scheduled for

554 Executive Summary of the United St ates' non-confidential oral stat ement at the first meeting with
the Panel, para. 16.
555 Executive Summary of the United St ates' non-confidential oral stat ement at the first meeting with
the Panel, para. 17.
556 Executive Summary of the United States' first written submission, footnote 16. EADS,
Documentation for the Annual General Meeting ("EADS 2005 Documentation"), 4 May 2006, Exhibit US-266,
p. 6.
557 Executive Summary of the United States' first written submission, footnote 17. EADS 2005
Documentation, Exhibit US-266, p. 20.
558 Executive Summary of the United States' first written submission, para. 55.
559 Executive Summary of the United States' first written submission, para. 56.
560 Executive Summary of the United States' first written submission, footnote 18. EADS,
Documentation for the Annual General Meeting ("EADS 2006 Documentation"), 4 May 2007, Exhibit US-267,
p. 7.

BCI deleted, as indicated [***]

delivery in October 2007. The resulting co sts and charges associated with these
delays will impose a significant burden on EADS' future financial program".561

 (2) Problems with the A350. "A350 related charges, 0.5 billion in increased R&D . . . are
other important contributors to the loss".
562

 (3) Appreciation of the Euro against the Dollar. "{L}ess attractive dollar hedges are
other important contributors to the loss".563

Airbus predicted more losses in 2007, based largely on the same three factors: "further costs to
support the A380 program, potential A350XWB launch charges, higher R&D expenses, as well as the
impact of the worsening U.S. Dollar parity to the Euro".
564 Significantly, there was no mention of
competition from Boeing or the effects of subsidies to Boeing as a source of Airbus's problems.565

4.353 The United States alleges that these were not the only reasons that Airbus was having trouble.
Two other important factors played a role durin g this period, although EADS pays them little
attention:
 (4) Problems with the A340. When Airbus launched the A340 for long-haul service in
the late 1980s, it placed four engines on the aircraft, and has retained that
configuration in all subsequent models. As prices for aviation fuel increased in the
2000s, that made the A340 much less popular than the 777, which was more fuel
efficient because it carried only two engines.

 (5) Problems with pricing. In 2002, Airbus had launched a price wa r, dropping its prices
for A320s low enough that low-cost carriers would switch from the 737, which they
had previously favored. The effect was to lower prices for all single-aisle aircraft.
Boeing reluctantly lowered prices on the 737 only after belatedly realizing that
matching Airbus was necessary to prevent further market share losses.
566

4.354 According to the United States, even with these varied difficulties, EADS could still point to a
number of Airbus successes in 2006:
"The Airbus division delivered a record number of aircraft in 2006 (434 versus 378 in
2005). This led to revenues of 25,190 million representing a 14% increase compared
to the previous year (FY 2005: 22,179 m illion). ... With 824 gross orders (790 net
orders), Airbus achieved its second best y ear in terms of sales, including 673 Single
Aisles, 134 A330s, A340s and A350s as well as 17 A380s.
567

561 Executive Summary of the United States' first written submission, footnote 19. EADS 2006
Documentation, 4 May 2007, Exhibit US-267, p. 7.
562 Executive Summary of the United States' first written submission, footnote 20. EADS 2006
Documentation, 4 May 2007, Exhibit US-267, p. 7.
563 Executive Summary of the United States' first written submission, footnote 21. EADS 2006
Documentation, 4 May 2007, Exhibit US-267, p. 24.
564 Executive Summary of the United States' first written submission, footnote 22. EADS 2006
Documentation, 4 May 2007, Exhibit US-267, p. 29.
565 Executive Summary of the United States' first written submission, para. 57.
566 Executive Summary of the United States' first written submission, para. 58.
567 Executive Summary of the United States' first written submission, footnote 23. EADS 2006
Documentation, 4 May 2007, Exhibit US-267, p. 24.

BCI deleted, as indicated [***]

As a result of this strong sales performance, Airbus has increased its record backlog
by 17% to 2,533 aircraft at the end of 2006, giving Airbus 51% of all outstanding
orders.568
 And, at the Paris Air Show, Airbus CEO Louis Gallois announced that "{t}his air
show confirmed that Airbus is very much b ack in the market". The statistics confirm
his assessment:
 - "Airbus announced a record 425 aircraft orders worth $61.7 billion for the week,
triple the sales it announced during the 2006 trade event".

 - "Airbus's orders, combined with 303 commitments to purchase planes it announced
during the week, equaled the number of aircraft that typically roll off its assembly
lines during a two year stretch".

 - "Airbus appeared to shore up market c onfidence in its A350 WXB, the aircraft
designed, and redesigned, to counter Boeing's hot selling 787 Dreamliner. The 141
firm orders announced by the European pl ane marker during the trade event included
a $3.7 billion order from Singapore Airlines, one of the industry's blue chip players,
announced Friday"."
569

4.355 The United States thus asserts that Airbus's r ecord-setting performances in terms of its large
civil aircraft production, sales, revenues, market share gains and profits between 2000-2005, and its
evidently quick recovery from the A380 and A350 problems that made 2006 a "disappointing" year
indicate that any downturn was temporary. It does not constitute serious prejudice, and, therefore,
does not qualify for a remedy under Article 7.
570
4.356 The United States argues, however, that even if the Panel were to agree that Airbus's setbacks
with the A380, the A350, the A340, or any other of it s aircraft rose to the level of serious prejudice, a
subsidy is actionable under Article 6.3 only if that prej udicial condition is "the effect of the subsidy".
The United States submits that the European Communities has failed entirely to clear this hurdle. The
European Communities concedes that standard requir es a "but for" causation test. To succeed, the
complaining party must show that but for the s ubsidization, the serious prejudice would not have
occurred. The European Communities also recognizes that this test requires a counterfactual analysis
of how Airbus and Boeing would have performed in the absence of the alleged subsidization. 571 It
must, in other words, present evidence to show th at "but for" these alleged subsidies, Boeing's
development or pricing of large civil aircraft woul d have been materially different in a manner that
one of the serious prejudice factors resulted.572
4.357 In the view of the United States, the Europ ean Communities' chain of reasoning proceeds as
follows: (i) early stage research programmes, a nd military research and development programmes,
under which Boeing performs work for the U.S. Govern ment that is not linked to the development,
production and sale of any particular commercial airc raft, have subsidized BCA's operations; (ii) the

568 Executive Summary of the United States' first written submission, footnote 24. EADS 2006
Documentation, 4 May 2007, Exhibit US-267, p. 7. Executive Summary of the United States' first written
submission, para. 59.
569 Executive Summary of the United States' first written submission, footnote 25. Johnsson, Airbus
finds its lost love in Paris, Chicago Tribune , 23 June 2007, Exhibit US-268. Executive Summary of the
United States' first written submission, para. 60.
570 Executive Summary of the United States' first written submission, para. 61.
571 Executive Summary of the United States' first written submission, footnote 26.
European Communities' first written submission, para. 1062.
572 Executive Summary of the United States' first written submission, para. 62.

BCI deleted, as indicated [***]

alleged benefit of those programmes vastly exceed s the amount actually paid to Boeing under the
government's contracts with Boeing; (iii) Boeing would not have been ready to launch the 787 when it
did without the "knowledge, experience, and conf idence" Boeing gained while performing research
services under those contracts; 573 and (iv) an economic model created by Professor Luis Cabral
indicates that subsidies that increase "non-operating cash flow" lead to "price effects" in the form of
"aggressive pricing", especially on competitive sales of the A330, A350 Original, A320, and A340. 574
Thus, the United States submits that the European Communities' serious prejudice case against the
Boeing 737 and 777 is based entirely on the alleged pr ice effects of the alleged subsidies, and the
serious prejudice case against the 787 is based on a combination of the alleged price effects of the
alleged subsidies and the product development a dvantages the European Co mmunities claims that
Boeing gained from the alleged subsidies. Howeve r, it presents no credible evidence in support of
either theory.
575
4.358 The United States argues that at a fundamenta l level, the European Communities' serious
prejudice arguments fail to explain how Boeing could have lost 14 percentage points of market share
during the 2000-2006 period if the programmes ch allenged by the European Communities were
conferring the advantages that the European Communities claims they were. If the
European Communities is correct that Boeing's larg e civil aircraft operations have been "massively
subsidized" since 1989 to the detriment of Airbus , one would expect these allegations to be
corroborated by clear long-term market trends. 576 In fact, the long term trends contradict the
European Communities' allegations. The most stri king developments amo ng large civil aircraft
producers over the past 25 years have been the rise of Airbus from a peripheral player in the market to
its largest supplier (displacing Boeing) and the exit of two American producers from the market. 577
The United States notes that recently Airbus placed its "largest ever order in terms of value" – 70
A350XWBs and 11 A380s ordered by Emirates Airlines. Airbus projects that it will deliver more
aircraft than Boeing for the fifth straight year and break its 2005 record for aircraft orders.
578
Therefore, the United States submits that to the ex tent that the European Communities asserts that
Airbus' competitive performance could have been even better during the relevant period, the
United States has submitted evidence showing that the alleged subsidies are not the cause, in general,
or with regard to the particular aircraft orders that the European Communiti es alleges as evidence of
serious prejudice. The United States adds that th e European Communities has failed to respond to the
substance of this argument in any way.579
(i) Arguments relating to the European Communities' causation analysis under Article 6.3
4.359 The United States argues that the European Comm unities has failed to establish the existence
of any of the Article 6.3 conditions. With regard to displacement/impedance under Article 6.3(a) and
(b), the European Commun ities has framed its analysis in terms of orders, which do not indicate the
"imports" or "exports" covered by those Articles. Moreover, the countries the European Communities
identifies as "third country markets" had only small and sporadic deliveries, such that they do not
allow for any meaningful conclusions under Article 6.3(b). As for price suppression, the
United States contends that outside factors like Airbus' missteps in launching the A350, the
unattractiveness of the A340 in a high fuel cost environment, and Airbus undercutting of Boeing
prices in major A320 campaigns leave no reason to e xpect Airbus' prices to have increased more than

573 Executive Summary of the United States' first written submission, footnote 27.
European Communities' first written submission, para. 1334.
574 Executive Summary of the United States' first written submission, para. 63.
575 Executive Summary of the United States' first written submission, para. 64.
576 United States' comments on the European Communities' response to question 370, para. 203.
577 United States' comments on the European Communities' response to question 370, para. 204.
578 Executive Summary of the United States' second written submission, para. 54.
579 Executive Summary of the United States' second written submission, para. 55.

BCI deleted, as indicated [***]

they actually did. With regard to lost sales, th e evidence demonstrates that factors other than the
alleged subsidies explain Boeing's success in th e sales campaigns identified by the European
Communities.580
4.360 The United States submits that the European Communities misstates the proper standard for
causation, asserting that "the complaining Member n eeds to show only that prices, sales, and market
share would be higher, but for the subsidies". The United States argues that that is not the standard.
It asserts that, in fact, the causation inquiry is whet her "but for the subsidies", serious prejudice would
have occurred. That is not any change in prices, sales, or market share, but rather significant lost
sales, significant price suppression, and displacement/impedance that rises to the level of serious
prejudice.
581 On this basis, the United States argues that the European Communities also fails when it
comes to the requirement of establishing a causal link between the existence of the Article 6.3
conditions that it asserts and the alle ged subsidies. It makes three b asic arguments in this regard, but
all of them are invalid.582
4.361 First, the European Communities claims that the magnitude of the alleged subsidies is so great
that they must have caused serious prejudice. However, as the United States has discussed, the
European Communities' calculations grossly exa ggerate the value of the alleged financial
contributions and any benefit they could conceivably have conveyed to Boeing.583
4.362 Second, the European Communities claims that the nature of the alleged subsidies caused
Boeing to lower its large civil aircraft prices belo w what they otherwise would have been and gave
Boeing a technology advantage in developing the 787 th at it would not otherwise have had. It argues
that these effects in turn caused price suppression, lost sales, and displacement or impedance.
However, the European Communities has misunders tood the nature of the programmes it attacks –
they do not increase non-operating cash flow. This e rror by itself should end the analysis. But the
European Communities then makes another error – asserting that increases in non-operating cash flow
would lead a company like Boeing to change its pricing practices. It is the market, and not changes in
cash flow, that determines Boeing's prices.584
4.363 The only support the European Communities offers for concluding that cash flow affects
Boeing's prices is a series of propositions set out in the Cabral Report, but these are deeply and
fundamentally flawed.
585
 - The Cabral Report depends on the Eu ropean Communities' greatly exaggerated
calculation of the amount of the alleged subsidies.586

 - In explaining how alleged subs idy payments affect Boeing, the
European Communities assumes that Boeing spends any additional cash flow in only
two ways – making payments to shareholders and using the cash to reduce its prices.

580 Executive Summary of the United St ates' non-confidential oral stat ement at the first meeting with
the Panel, para. 18.
581 Executive Summary of the United States' non-confidential closing statement at the first meeting
with the Panel, para. 5.
582 Executive Summary of the United St ates' non-confidential oral stat ement at the first meeting with
the Panel, para. 19.
583 Executive Summary of the United St ates' non-confidential oral stat ement at the first meeting with
the Panel, para. 20.
584 Executive Summary of the United St ates' non-confidential oral stat ement at the first meeting with
the Panel, para. 21.
585 Executive Summary of the United St ates' non-confidential oral stat ement at the first meeting with
the Panel, para. 22.
586 United States' response to question 370, para. 249.

BCI deleted, as indicated [***]

The European Communities disregards read ily available public data showing the
variety of uses to which Boeing applies its free cash flow, and aggressive pricing is
not one of them. In fact, Boeing can and does spend its money in a number of ways
that have no effect on prices.

 - The Cabral model further assumes that Boeing allocates free cash among investment
options in fixed proportions, when the evid ence establishes that the attractiveness of
different investment options differs over time, and that Boeing changes investment
allocations accordingly.
587

 - The European Communities assumes contra ry to the evidence that a significant
portion of Boeing's 2000-2006 sales involved significant switching cost and learning
cost incentives to lower price.
588

 - The European Communities then assum es that Boeing has constrained access to
capital, when in fact it has available s ources of internal capital and faced no
significant capital constraints during the relevant period.

4.364 The European Communities then assumes that its theoretical model accurately depicts how
Boeing's pricing practices would be affected by add itional cash flow from the alleged subsidies, while
ignoring the actual evidence of Boeing's market behavior, which is the opposite of what the
theoretical model would predict.
589
4.365 The European Communities affirm that "the vast amount of the 'development' subsidies
Professor Cabral assesses are untied funds".590 This response is important to the Panel's assessment of
the European Communities' causation theories because, as Professors Stiglitz and Greenwald state, the
effects of subsidies on prices and competition are likel y to be greatest where the subsidies in question
either create supply or maintain supply that w ould not otherwise exist and/or reduce a producer's
marginal costs of producing a particular product. 591 In their Statement on the Question of the Impact
of Subsidies on Supply and Prices in the LCA Ma rket (the "Stiglitz/Greenwald Statement"),
Professors Joseph E. Stiglitz and Bruce C. Greenwald review "the different types of programs that
governments have used to support their aerospace industries" with specific reference to (i) new
product development or launch subs idies, (ii) general research and development subsidies not
specifically related to particular products, and (iii) unrestricted cash subsidies.592 They conclude that
"there is a critical difference in terms of their impact on competition and, therefore,
market pricing between, on the one hand, s ubsidies that create supply, maintain
uneconomic supply or are tied to the produc tion and sale of a particular aircraft
model, and, on the other, those that do not or are not."593
4.366 Subsidies that are tied to the development, production, or sale of a particular product are
likely to be supply-creating or supply-maintaining. 594 By contrast, subsidies that are not tied to the
development, production, or sale of a particular product are far less likely to be supply creating or

587 United States' response to question 370, para. 249.
588 United States' response to question 370, para. 249.
589 Executive Summary of the United St ates' non-confidential oral stat ement at the first meeting with
the Panel, para. 23.
590 United States' comments on the European Communities' response to question 374, para. 259.
591 United States' comments on the European Communities' response to question 374, para. 260.
592 United States' response to question 389, para. 282.
593 United States' response to question 389, para. 282.
594 United States' comments on the European Communities' response to question 374, para. 260.

BCI deleted, as indicated [***]

supply maintaining. 595 The Appellate Body's decision in US – Upland Cotton (Article 21.5 – Brazil) ,
which placed great weight on whether subsidies ar e, in their nature, supply-creating or supply-
maintaining, echoes the analysis of Professor Stiglitz and Greenwald. 596 Thus, an assessment of the
European Communities' claim of serious prejudice through the effects of the alleged NASA and DOD
subsidies would need to address the evidence that even if they were subsidies, they would have no
material impact on Boeing's product development or pr icing decisions both because they do not affect
Boeing's marginal large civil aircraft production costs and because they are not tied to any other
supply-creating or supply-maintaining activity.597
4.367 By its own admission, therefore, the bulk of the alleged subsidies about which the
European Communities complains are, under the "broad contours" of the Stiglitz/Greenwald
Statement endorsed by the European Communities, unlikely to affect competition or prices in the
large civil aircraft market. 598 The European Communities attempts to place them into the supply
creating/supply maintaining category by arguing that the amount and magnitudes of the alleged
subsidies are so large that, "but for" th em Boeing would not be a viable competitor. 599 After running
through a series of causation theories, the central European Communities argument now is that, but
for the alleged R&D subsidies, Boeing would not be a viable competitor in the large civil aircraft
market.600
4.368 Significantly, the European Communities does not argue that, but for the subsidies, Boeing's
large civil aircraft operations would ha ve lost money over the period 1989-2006. 601 Instead, it claims
that when the full amount of the alleged subsid ies is deducted from th e 1989-2006 profitability of
Boeing's large civil aircraft operations, the return s, though positive, fall below the cost of capital
invested in those operations.602 In fact, leading experts' independe nt analyses of BCA show that even
after deducting the full amount of the alleged subs idies from Boeing's revenues, the returns on its
large civil aircraft operations were well above the cost of capital inv ested in the business. 603 A s
Professor David Wessels of the University of Pennsylvania's Wharton School concludes, "BCA would
be economically viable (and even attractive) regardless of the provision of subsidies".604
4.369 However, the Panel should not even have to reach this question. 605 The pricing and product
development decisions that shaped Boeing's particip ation in the large civil aircraft market between
2004 and 2006 were profit-maximizing and led to a sharp "bottom line" improvement in Boeing's
business by 2006. 606 Therefore, the European Communities cannot (and does not) claim that those

595 United States' comments on the European Communities' response to question 374, para. 260.
596 United States' response to question 391, para. 308 (citing Appellate Body Report, US – Upland
Cotton (Article 21.5 – Brazil ), para. 392 ("Whether production of a particular product is higher than it would
have been in the absence of the subsidy is often a critical issue in establishing whethe r the effect of the subsidy
is significant price suppression. In our view, the effect of a subsidy on production can also be assessed on the
basis of a long-term perspective that focuses on how the subsidy affects decisions of producers to enter or exit a
given industry.")).
597 United States' response to question 391, para. 308.
598 United States' comments on the European Communities' response to question 374, para. 261.
599 United States' comments on the European Communities' response to question 374, para. 261.
600 United States' response to question 389, para. 290 (citing European Communities' response to
question 292, paras. 647-651).
601 United States' comments on the European Communities' response to question 370, para. 218.
602 United States' comments on the European Communities' response to question 370, para. 218.
603 United States' comments on the European Communities' response to question 370, para. 218.
604 United States' comments on the European Communities' response to question 379, para. 322.
605 United States' comments on the European Communities' response to question 370, para. 222.
606 United States' comments on the European Communities' response to question 370, para. 222.

BCI deleted, as indicated [***]

decisions did not make good economic sense. 607 Given the undisputed fact that Boeing's large civil
aircraft operations were profitable, both with and w ithout the alleged value of the subsidies, the only
real question is how the European Communities can contest Boeing's ability to make profit-
maximizing product development and pricing decisions between 2004 and 2006. 608
4.370 The European Communities also asserts that th e "nature" of the subsidies gives rise to
"technology effects" on the 787. The European Comm unities has provided no basis to conclude that
in the absence of the alleged subsidies, Boeing wo uld have developed the 787 later than it did or
differently than it did. In fact, the NASA resea rch at issue was widely available, the composites
technologies that Boeing built upon to develop the 78 7 were available in the commercial marketplace,
and Airbus was a leader in composites technology at the time it chose to pursue the A380.609
4.371 The European Communities cannot point to an y evidence that any of the R&D programmes
that it claims benefitted the 787 were 787-specific or contingent in any way on Boeing's decision to
bring the 787 to market. 610 Instead, the European Communities argues that general research on
technologies provided "learning" that Boeing drew upon in its own applied research for the 787.
Boeing has explained that it did no such thing. 611 More importantly, as a theoretical matter,
foundational research such as NASA conducts does not create particular technologies or products
because it is too far removed from the development stage. 612 Professors Stiglitz and Greenwald do
not consider these types of programmes to be "supply creating or maintaining" and, therefore, fall into
the category of programmes that are unlikely to affect competition in the large civil aircraft market.613
4.372 Third, the European Communities purports to ha ve calculated with precision how the alleged
subsidies collectively reduced the prices charged by Boeing on particular transactions. These
calculations are, however, the product of Professor Cabral's economic model, which accepts as given
the European Communities' exaggerated calculation of the magnitude of alleged subsidies and the
erroneous propositions noted above. Professor Cabral's reliance on invalid data and an invalid
methodology necessarily lead to invalid results.614
4.373 At the same time, the European Communities ignor es the "other factors" that are responsible
for the problems Airbus has encountered in the mark et in the past year or two. By devoting its
engineering and other resources to the A380, Airbus precluded itself from devoting those resources to
development of a smaller fuel-efficient competitor to Boeing's 787, which proved to be more popular
than Airbus ever imagined. And, its choice of a re latively fuel-inefficient design for the A340 created
the problems Airbus now faces in marketing that aircraft in today's high fuel price environment. And
finally, by systematically undercutting Boeing's pri ces, Airbus has set pricing expectations in the
marketplace at a level that is lower than would otherwise have been the case. These choices are the

607 United States' comments on the European Communities' response to question 370, para. 222 (noting
in a footnote that, to the contrary, the European Communities concedes the point, and citing
European Communities' response to question 378, paras. 411-413).
608 United States' comments on the European Communities' response to question 370, para. 222.
609 Executive Summary of the United St ates' non-confidential oral stat ement at the first meeting with
the Panel, para. 24.
610 United States' comments on the European Communities' response to question 380, para. 328.
611 United States' comments on the European Communities' response to question 380, para. 328 (citing
Bair Affidavit, paras. 38-42).
612 United States' comments on the European Communities' response to question 380, para. 328.
613 United States' comments on the European Communities' response to question 380, para. 328 (citing
Statement by Stiglitz and Greenwald, Exhibit US-1309, p. 3).
614 Executive Summary of the United St ates' non-confidential oral stat ement at the first meeting with
the Panel, para. 25.

BCI deleted, as indicated [***]

true source of any difficulties Airbus now faces, and they have nothing to do with the alleged
subsidies.615 The United States' submissions have discussed this issue at length. To summarize:
 - The alleged suppression of prices for the A330 and A350, the sales lost by these
aircraft to Boeing's 787, and any loss in market share (whether measured by
deliveries or orders), are the direct consequence of Airbus' decision to focus on the
A380 while Boeing chose to focus on devel oping a smaller aircraft. Because of its
product development choices, Airbus had no aircraft that could compete effectively
with the 787 and did not have the engineer ing and monetary resources to design one,
until it unveiled the A350 XWB. Nor can there be any realistic claim of price
suppression, because market prices for currently offered mid-sized aircraft were set
by reference to existing pricing on mid-sized aircraft.

 - Any suppression of prices for the A 320 about which the European Communities
complains is the result of, and is directly traceable to, a series of sales campaigns in
which Airbus deliberately undercut Boeing's prices in order to capture key Boeing
accounts.

 - Because of its four-engine design, the A340 is fuel inefficient, a significant
disadvantage in a time of very high fuel costs. Additional performance problems
associated with this particular aircraft ha ve added to the problem, forcing Airbus to
lower the A340 prices to compensate, [***]. Thus, any suppression of A340 prices,
lost sales, and any loss in market share (whe ther measured by deliveries or orders) is
the result of Airbus' design decisions, which have nothing to do with alleged
subsidies to Boeing.
616

4.374 The European Communities essentially ignores th e evidence of these non-attribution factors
and their role in determining sales and prices for Airbus aircraft, arguing that they are relevant only to
an analysis of the company's financial perform ance for purposes of assessing a claim of material
injury, a claim that the European Comm unities has not made. However, as the US – Upland Cotton
panel found:
"the condition of a causal link requires us to ensure that the significant price
suppression is "the effect of the subsidy" w ithin the meaning of Article 6.3(c). This
necessarily calls for an examination of United States subsidies, within the context of
other possible causal factors, to ensure an appropriate attribution of causality."
The United States argues that the European Communitie s' failure to address these other causes for the
alleged indicia of serious prejudice means that its causation argument fails, and along with it, the
serious prejudice claims that rest upon that argument.
617

4.375 In response to the European Communities' assertion that the Appellate Body in US – Upland
Cotton endorsed the so-called "unitary" approach fo r assessing causation, the United States contends
that the Appellate Body said only that the text of Article 6.3(c) does not "preclude" the approach taken
by the panel – certainly not an endorsement of any particular analysis. The United States also notes

615 Executive Summary of the United St ates' non-confidential oral stat ement at the first meeting with
the Panel, para. 26.
616 Executive Summary of the United States' second written submission, para. 56.
617 Executive Summary of the United States' second written submission, para. 57.

BCI deleted, as indicated [***]

that the Appellate Body went on to specify that in any event the panel should consider the same types
of factors that it has identified for this Panel.618
4.376 Noting that the European Communities dismiss es out of hand the possibility that anything
other than the alleged subsidies could have caused Ai rbus' aircraft sales and prices to be at the level
they were, while focusing instead on trying to build a case that the alleged subsidies are to blame, the
United States contends that the European Communities' case rests on four pillars:
 - First, that the U.S. Government has subsidized Boeing "to the tune of almost
$24 billion".

 - Second, that the magnitude of the alleged subsidies is, in and of itself, sufficient to
prove the causal link between them and Boeing's reference period pricing.

 - Third, that all these alleged subsidies, which include funds paid to enterprises other
than Boeing and a portion of NASA's and DOD's funding of government employee
salaries and administrative expenses, are the equivalent of "free cash" to Boeing, and
that BCA, Boeing's commercial aircraft divi sion, used this "free" cash to "price
down" its 737, 777 and 787 aircraft in a way that it otherwise could not have done.

 - Fourth, that the R&D work done for NASA and DOD gave Boeing the "knowledge,
experience, and confidence" necessary for it to bring the 787 to market when it did.

The United States argues that the European Commun ities, as the complaining party, bears the burden
of proof for each of these points. However, the United States points out that even on these topics, it is
silent on critical issues. Where it is not silent , it relies on assertions that either have no supporting
evidence or are contrary to the evidence before the Panel. Such assertions do not, in the United States'
view, establish that the alleged subsidies caused serious prejudice and, therefore, do not make a prima
facie case that the alleged subsidies caused serious prejudice.
619

4.377 The United States argues that the evidence shows that Boeing actually received a tiny fraction
of the $24 billion that the European Communities alle ges. Instead, almost all of this amount took the
form of (i) payments to enterprises other than Boeing that supplied research and development services
to the government; (ii) government administrative e xpenses or the salaries of government employees;
(iii) state tax reductions that Boeing will realize in relatively small amounts over the next 20 years; or
(iv) FSC/ETI tax benefits that the United States has discontinued. The European Communities never
provides a convincing reason as to why these paym ents would have any effect on Boeing's
commercial aircraft operations, much less its aircraft product development or pricing.
620
4.378 With regard to the payments that Boeing actua lly received, the United States argues that the
European Communities has greatly overstated th e amounts, relying on estimates provided by its
consultants that contradict the very documents they are supposed to have "meticulously examined".
The $24 billion figure also includes alleged subsidies that, under the European Communities' analysis,
are attributable to the Boeing aircraft that the European Communities views as not competing with the
A320, A330, A340, A350 Original, or A350XWB; na mely the Boeing 717, 757, 767, 747, MD-11,
MD-80, and MD-90. As the European Communities has conceded that such alleged subsidies have
"no such present {adverse} effects in the LC A markets", it is difficult to understand why the
European Communities persists in including them in its overall number. The European Communities

618 Executive Summary of the United States' non-confidential closing statement at the first meeting
with the Panel, para. 4.
619 Executive Summary of the United States' second written submission, para. 58.
620 Executive Summary of the United States' second written submission, para. 59.

BCI deleted, as indicated [***]

has also disregarded the great weight of evidence pr oving that none of the payments to Boeing – with
the exception of the relatively small amount of FSC benefits that the United States has already
discontinued – was either a subsidy or specific.
621
4.379 Thus, the United States contends that the Eur opean Communities' assertion that the alleged
$24 billion in subsidies is large enough in and of itsel f to have caused serious prejudice, rests entirely
on rhetoric. It argues that mere assertions are insu fficient to meet the burden of proof. Indeed, the
United States asserts that once account is taken of the $9.6 billion in NASA payments to Boeing
alleged by the European Communities that never o ccurred, the billions more in DOD payments that
had nothing to do with Boeing or its large civil airc raft, the $7.5 billion in alleged subsidies that the
European Communities concedes are not causing seri ous prejudice, and the FSC/ETI benefits that
have been discontinued, it becomes clear that any remaining payments, dispersed as they are over the
35-year period stretching from 1989 through 2024, are too small to be causing serious prejudice to the
European Communities.622
4.380 In response to the European Communities' assertion that the alleged subsidies are the
equivalent of "free" cash that allow Boeing to "price down" aircraft for competitive transactions, the
United States argues that the Eur opean Communities' efforts come no closer to meeting its burden of
proof because more than half of the alleged subsidi es, by value, consists of payments by NASA and
DOD for services provided to the U.S. Government on projects devised by the government to achieve
government objectives. The evidence shows that these payments to Boeing were reimbursements for
the cost of work performed for the U.S. Governme nt and, thus, were not in any sense "additional
nonoperating cash flow" to Boeing, much less "free" or "unencumbered" cash to Boeing's commercial
aircraft division, BCA. The United States posits that even if one were to assume, arguendo, that the
programmes challenged by the European Communities di d confer subsidies, and that they did provide
free nonoperating cash flow, the European Communities has provided no plausible reason to conclude
that but for the alleged subsidies, Boeing would have priced its large civil aircraft any differently.
The United States submits that throughout the releva nt period, BCA had ample cash flow to finance
its R&D, and Boeing had unconstrained access to cap ital markets. Therefore, according to the
United States, Boeing did not need the alleged subsidies to fund its commercial operations.
623
4.381 The final pillar, in the United States' view, of the European Communities' adverse effects case
is the claim that NASA and DOD programmes enab led Boeing to launch the 787 sooner and more
quickly than Airbus could launch its competing pr oduct, the A350XWB. However, the United States
argues that the evidence disproves th is theory. First, it submits that Boeing was able to bring the 787
to market sooner than Airbus was able to offe r a competitive version of the A350 because it started
earlier, based on its reading of customer demand. The alleged subsidies had nothing to do with its
decision to move forward with the 787 when it did or its ability to execute its plans. Airbus started
later because it thought the market demanded a much larger aircraft – the superjumbo A380 – and the
company was so focused on that aircraft (and co rrecting production errors discovered late in the
project) that it had insufficient resources to devote to another project. And as for how quickly Boeing
developed the 787, when the development periods fo r the 787 and A350XWB are laid side by side, it
is clear that the projected development time is almo st the same. Second, the United States argues that
the affidavit of Michael Bair, the general mana ger of Boeing's 787 programme, describes the many
reasons that DOD and NASA technology gave Boei ng no competitive advantage. In fact, the
United States submits that there is no meaningful technology gap. The United States points to the fact
that Airbus itself recently acknowledged what Airbus has been saying for the last decade: "{n}obody
has more experience working with composites than Ai rbus. We know this stuff well". To the extent
that Boeing may have moved ahead of Airbus in industrializing some technologies for the 787, the

621 Executive Summary of the United States' second written submission, para. 60.
622 Executive Summary of the United States' second written submission, para. 61.
623 Executive Summary of the United States' second written submission, para. 62.

BCI deleted, as indicated [***]

United States asserts that it is because of sel f-funded research. Airbus, on the other hand, has
concentrated on other areas, and moved ahead of Boeing in those.624
4.382 The United States points out that the European Communities itself contends that Airbus
engineers have found that NASA's published reports provide little in the way of information useful for
production of large civil aircraft. The European Communities assumes that this is because the reports
omit results or proprietary data funded by NASA. However, NASA does not fund the development of
proprietary information, and Boei ng is prohibited from treating NASA-funded results as proprietary.
As for the utility of the data for developing or producing aircraft, NASA funds primarily foundational
research, conducted in the laboratory, which has little applicability to the actual development or
production process. The United States adds that the Airbus engineers' purported inability to derive
production information from the NASA reports merely confirms the point the United States has been
making all along – that NASA work does not translate from the laboratory to the factory, as the Bair
affidavit documents.625
4.383 The United States asserts that these are the points that the United States and the
European Communities both view as the "core" of th e dispute. The United States finds it telling that
at this stage, the European Comm unities has yet to put forward credible arguments in support of any
one of these critical points, let alone all of them. In fact, as the United States has shown, the
European Communities has failed to meet its burden of proof to establish that the alleged subsidies
are "free cash" or grants to Boeing, that the amount of the alleged subsidies is $24 billion, or that but
for the alleged subsidies, Boeing's pricing would ha ve been different or its development of the 787
delayed to the point that serious prejudice did not oc cur. Therefore, the United States submits that the
European Communities has failed to establish that the alleged subsidies caused serious prejudice to
European Communities' interests.
626
(ii) Amount and magnitude of the alleged subsidies
4.384 The United States further argues th at the evidence shows that most of the $24 billion that the
European Communities alleges as subsidies to Boeing was either never paid to Boeing, or is funding
that the European Communities c oncedes is not causing serious prejudice. In particular, the
United States asserts that in its first written submission it demonstrated that the
European Communities greatly overestimated the amount paid under the programmes it challenges,
and that the very documents on which the European Communities' consultants relied confirm the error
of their estimates. Thus, the $24 billion figure that the Eur opean Communities references so
frequently as the amount of the alleged subsidies received by Boeing includes $9.6 billion that NASA
paid to enterprises and individuals with no relation to Boeing. The United States requests the Panel to
discount that figure accordingly. This is not the only amount improperly included in the $24 billion
figure. The European Communities in its oral st atement stated "{w}e do not challenge any present
adverse effects from U.S. subsidies that historica lly benefited the 717, 757, and 767 because there are
no such present effects in the LCA markets". This , according to the United States, is a significant
point. The European Communities, as part of its causation argument, attributes the alleged subsidies
to particular aircraft models. Under this me thodology, $7.5 billion of the subsidies that the
European Communities alleges during the 1989-2006 peri od is attributable to the 717, 747, 757, 767,
MD-11, MD-80, and MD-90 – all aircraft that th e European Communities said in its oral statement
were not causing adverse effects to European Co mmunities' interests. (In fact, by defining the
subsidized like products as being the 737, 777, and 78 7, the European Communities has failed even to
make a claim that any of the alleged subsidies rela ted to the other Boeing aircraft are causing serious
prejudice.) The United States argues that if those alleged subsidies do not cause serious prejudice,

624 Executive Summary of the United States' second written submission, para. 63.
625 Executive Summary of the United States' second written submission, para. 64.
626 Executive Summary of the United States' second written submission, para. 65.

BCI deleted, as indicated [***]

they should play no role in the Panel's analysis . The United States therefore requests the Panel to
discount the European Communities' analysis accordingly.627
4.385 The United States also notes the European Communities' argument that its inflated $24 billion
subsidy estimate is sufficient evidence by itself to establish that the challenged payments caused
serious prejudice. The United States submits that the European Communities' arguments are self-
contradictory and rely on assumptions contrary to other assumptions the European Communities asks
the Panel to make. Specifically, the arguments are contrary to the evidence in that the proper
comparisons indicate that the amounts in question did not have any meaningful effect.628
4.386 In addition, the United States contends that the European Communities' per-plane alleged
subsidy magnitude calculations:
 - allocated the alleged subsidies on the basi s of "imputed" or "derived" orders, which
are not actual orders but actual or estimated deliveries shifted backward in time by
three years, so as to artificially inflate the per-plane magnitudes in 2005 and 2006,
high order-volume years on which the Eur opean Communities' serious prejudice
arguments focus;
629

 - treated alleged recurring subsidies as having been received at the imputed/derived
time of order (i.e. three years prior to act ual or estimated delivery), even though
Boeing would not receive the alleged benefit until time of delivery; 630

 - improperly allocated alleged subsidies to Boeing aircraft on the basis of aircraft seats
associated with imputed/derived orders, rather than the associated aircraft value;
631

 - treated some alleged subsidies as linked only to the 787 when no such specific link
exists;
632 and

 - misstated the number of seats that the 787-3 actually has so as to allocate alleged
subsidies to the 787-8 and 787-9, which play a larger role in the
European Communities' arguments.
633

4.387 The United States submits that the most egregious of these flaws is the
European Communities' use of imputed/derived orde r data as the basis for its alleged per-plane
subsidy allocations.
634 The European Communities has used as its allocation basis actual deliveries
and, for much of the 2004-2006 period, estimated future deliveries. 635 The European Communities
has failed to provide a legitimate justification for this approach. 636 Despite insisting that the alleged
non-recurring subsidies cause "immediate and direct" pr ice effects on orders in the year the subsidies
were allegedly received 637, the European Communities' per-pla ne magnitude allocation methodology
matches alleged subsidy magnitude in each year agai nst "orders" that did not actually occur in that

627 Executive Summary of the United States' second written submission, para. 66.
628 Executive Summary of the United States' second written submission, para. 67.
629 United States' comments on the European Communities' response to question 372, para. 241.
630 United States' comments on the European Communities' response to question 372, para. 241.
631 United States' comments on the European Communities' response to question 372, para. 241.
632 United States' comments on the European Communities' response to question 372, para. 241.
633 United States' comments on the European Communities' response to question 372, para. 241.
634 United States' comments on the European Communities' response to question 372, para. 242.
635 United States' comments on the European Communities' response to question 372, para. 242.
636 United States' comments on the European Communities' response to question 372, para. 242.
637 United States' comments on the European Communities' response to question 372, para. 242.

BCI deleted, as indicated [***]

year.638 Thus, even if a per-plane allo cation of alleged subsidies were a ppropriate in this dispute, the
European Communities' allocati on method renders its per-plane ad valorem subsidy magnitudes
analytically useless. 639 As the United States has shown, usin g actual orders as the allocation basis
(and keeping all other aspects of ITR's met hodology constant) causes the alleged per-plane
magnitudes in 2005 and 2006 to fall by roughly 50 per cent.640
(iii) Arguments relating to the European Communities' price effects claim
4.388 The United States contends that, with regard to its arguments regarding price effects, the
European Communities performs a cursory "counterf actual analysis" in an attempt to meet the
SCM Agreement's causation standard. However, this analysis assumes, but does not prove, that in the
absence of the alleged subsidies, Boeing's prices would have increased by the amount of the alleged
subsidization rate 641 – a proposition that the European Communities concedes is untrue. 642 B y
contrast, the United States has provided evidence that Boeing always attempts to maximize its profits
over time and, therefore, prices its aircraft without regard to any alleged subsidies. 643 There is, then,
no basis on which the Panel can reaso nably conclude that each dollar of the alleged subsidies would
result in an equivalent decrease in Boeing's prices, or that changes in Boeing's prices translate into
dollar-for-dollar changes in Airbus prices. 644 The remainder of the European Communities' "price
effects" argument relies on (i) the assertion that 10 0 per cent of a set of a lleged tax benefits flow
through to the prices Boeing charges its customers, and (ii) an economic analysis (the "Cabral
Report"
645) that assumes the price effects of the other so-called "development subsidies" allegedly
given to Boeing. In fact, insofar as Boeing's prici ng is concerned, the United States submits that, the
evidence, as opposed to the Eur opean Communities' assertions and assumptions, is unequivocal on all
of the following points:
 - Boeing's pricing is market-driven. It seeks the highest prices for its aircraft that the
market will bear, without regard to the various payments that the
European Communities challenges as subsidies.646

 - Airbus has deliberately and systematica lly undercut Boeing's pricing for all three
types of large civil aircraft subject to the European Communities' complaint in order
to gain market share (the A320), to retain market share (A330), and to compensate for
customer dissatisfaction with its competing aircraft (A340 and A350 Original).

Boeing's resistance to the pricing pressure put on it by Airbus is evident in both the campaign-specific
evidence and, more generally, Boeing's large market share losses. In fact, the evidence shows that
Boeing's market share losses to Airbus were greatest in the period when the alleged price effects were
highest, thus disproving the European Communities' claim of a link between the alleged subsidies and

638 United States' comments on the European Communities' response to question 372, para. 242.
639 United States' comments on the European Communities' response to question 372, para. 242.
640 United States' comments on the European Communities' response to question 372, para. 243.
641 Executive Summary of the United States' first written submission, footnote 28.
European Communities' first written submission, 1396-1402, paras. 1502-1504, and 1597-1599.
642 Executive Summary of the United States' first written submission, footnote 29. The
European Communities' economic model – which assumes the price effects that it purports to derive – estimates
that 85 per cent of the value of any subsidy results in a price increase.
643 United States' response to question 370, para. 252.
644 United States' response to question 370, para. 252.
645 Executive Summary of the United States' first written submission, footnote 30. Luís M.B. Cabral,
Impact of Development Sub sidies Granted to Boeing , New York University and CEPR, March 2007, Exhibit
EC-4.
646 Executive Summary of the United States' first written submission, footnote 31. Statement of Clay
Richmond, Exhibit US-275.

BCI deleted, as indicated [***]

Boeing's pricing.647 According to the European Communities' calculations, the le vels of alleged non-
recurring subsidies over the 2004-2006 period were, on average, significantly lower than the levels
over the 2000-2003 period. 648 Yet, the 2004-2006 period does not feature a decrease in the types of
Boeing investments specified in the Cabral model. 649 In fact, and contrary to the predictions of the
Cabral model, Boeing's [***], and product R&D and shareholder payments increased significantly. 650
Thus, no temporal coincidence exists to support th e European Communities' pr ice effects theory and
the Cabral model on which it is based.651

4.389 By contrast, there is a strong temporal coinci dence between the alleged indicia of adverse
effects and non-subsidy factors:
 - Boeing's [***].
652

 - Prices for Airbus' fuel-inefficient A340 [***].
653

The decline in A380 development costs freed up resources in 2006, which coincided with Airbus
finally launching a primarily composite competitor for the 787, the A350 XWB.
654

4.390 In its further written submissions, the United States argues that the European Communities
has failed to rehabilitate its flawed econo mic analysis, which is the only basis the
European Communities put forward in support of its assertion that the alleged subsidies affected
Boeing's pricing. The United States recalls that the European Communities, in its first written
submission, based the contention that the alleged subsidies affected Boeing's prices on an economic
analysis grounded on a series of assertions about ho w subsidies would affect a company like Boeing
and a modeling exercise conducted by Professor Luis Ca bral. The United States asserts that its first
written submission demonstrated that those asser tions were wrong, and that the assumptions
underlying Prof. Cabral's model invalidated its results. In its oral statement, the
European Communities attempted to restore the credibilit y of its analysis, but it has not identified any
flaw in the U.S. criticisms of the European Co mmunities' reasoning or provided any evidence that
validates the many assumptions necessary to reach the conclusion it asks the Panel to reach.
655 In fact,
the United States argues that its first written submission and oral statement demonstrated that the
evidence before the Panel provides no support for an y of these assumptions and, in many instances,
disproves them. The European Co mmunities' oral statement did nothing more than present additional
assertions that were either without support or were directly contrary to the evidence.
656
4.391 The European Communities' ca mpaign-specific arguments linking the alleged subsidies to
lost sales and price suppression (e.g. that "Boeing' s ability to offer a final price concession made the
difference in winning or losing the sale") rely entirely on the per-plane magnitude calculations, the
per-plane price effects calculated by Professor Cabral, and, to some extent, the ITR economic viability
"analysis".
657 Because the works by ITR and Professor Cabral do not prove anything, the

647 Executive Summary of the United States' first written submission, para. 65.
648 United States' comments on the European Communities' response to question 370, para. 206.
649 United States' comments on the European Communities' response to question 370, para. 206.
650 United States' comments on the European Communities' response to question 370, para. 206.
651 United States' comments on the European Communities' response to question 370, para. 206.
652 United States' comments on the European Communities' response to question 370, para. 207.
653 United States' comments on the European Communities' response to question 370, para. 207.
654 United States' comments on the European Communities' response to question 370, para. 207.
655 Executive Summary of the United States' second written submission, para. 68.
656 Executive Summary of the United States' second written submission, para. 69.
657 United States' comments on the European Communities' response to question 381, para. 338.

BCI deleted, as indicated [***]

European Communities cannot show any connection between the outcome of specific campaigns and
the alleged subsidies, let alone the "genuine and substantial" link required by the SCM Agreement. 658
4.392 The United States notes that in response to its observation that Boeing prices its large civil
aircraft based on its read of the market, the European Communities argued that if "Boeing did not
have access to subsidies, it would not have been ab le to sacrifice current margins in order to increase
market share and extract more value from its custom ers in the future". The United States argues that
this is nothing more than an unsubstantiated c onclusion. The European Communities presents no
evidence suggesting that Boeing's prices would have been any different "but for" the alleged
subsidies. The European Communities also argues that "the U.S. assertions" regarding Boeing's use
of cash "conflict with the available data" because "t he data reveals that there is no statistically
significant correlation between subsidies and divide nds plus share repurchases" but does show "a
clear correlation between firm value and dividends plus share repurchases". However, the absence of
any correlation between the alleged subsidies and Bo eing's payments to shareholders is perfectly
consistent with the U.S. argument. The point th e United States is making is that the programmes at
issue are not subsidies and do not give Boeing "free cash flow". The United States would not expect
any correlation between subsidies that do not actually exist and Boeing's payments to shareholders
and, if it proves anything, the fact that there is none proves the U.S. point. And the fact that there is a
correlation "between firm value and dividends plus share repurchases" should surprise no one. A
firm's stock price and, therefore, its value tend to rise as a firm's returns to shareholders rise. The
United States submits that this phenomenon has nothing to do with the alleged subsidies.
659
(iv) Arguments relating to the European Communities' technology effects claim
4.393 The United States argues that, with respect to "technology effects", the
European Communities presents no convincing reason to believe that Boeing would have developed
the 787 later or more slowly in the absence of th e alleged subsidization. In fact, the evidence
demonstrates the opposite. When Boeing committed its resources to the 787 programme, Boeing and
Airbus had access to the same composite and othe r technology. Boeing launched the 787 well before
Airbus launched the A350 XWB – the first version of that aircraft to gain market acceptance –
because Airbus's resources were, at the time, commi tted to the A380. Airbus's position in the mid-
size aircraft segment was, in other words, a matter of choice – Airbus decided to focus on mastering
the technology of a "super-jumbo" aircraft that was designed to service hub-to-hub routes. In
contrast, Boeing decided to focus on a smaller, more fuel-efficient point-to-point aircraft that could
build on existing, generally available developmen ts in composite technology and reductions in
composite costs. Having decided to go in a diffe rent direction than Boeing, Airbus compounded its
own problem after Boeing's 787 launch by trying to rush the development of a competing "A350"
based on a quick reworking of its aging A330. The United States therefore submits that the alleged
subsidies to Boeing were never the issue.660
4.394 The United States argues that the European Communities also fails to address what EADS has
recognized – that the problems that Airbus has faced are problems of its own making, and unrelated to
the alleged subsidization. In fact, the United Stat es asserts that the problems Airbus created for itself
extend beyond the A380 and A350 issues discussed above . For example, Airbus decided to bring its
long-range A340 to market in the 1990s as a four-engine airplane. In an era of low-priced jet fuel, the
decision may have been sound. In today's environm ent of very high-priced jet fuel, however, that
decision has only caused problems. The A340 sells poorly because it performs poorly – it has been
consistently rated at the very bottom of the larg e civil aircraft on the market by operators and
investors. The United States submits that, for th e European Communities to claim, as it does, that

658 United States' comments on the European Communities' response to question 381, para. 338.
659 Executive Summary of the United States' second written submission, para. 70.
660 Executive Summary of the United States' first written submission, para. 66.

BCI deleted, as indicated [***]

subsidies, rather than the poor performance and operating economics of the A340, have caused the
A340 to lose sales to Boeing's more fuel-efficien t twin engine 777 ignores all evidence regarding
sales of these two aircraft.661
4.395 The United States alleges that, similarly, in 200 0 Airbus committed billions of dollars to its
A380 project. The A380, by far the largest commer cial airplane ever built, is designed to fly a
relatively small number of "hub-to-hub" routes. The United States further asserts that Boeing was
always more sceptical about the level of demand for so large an airplane, believing that the greatest
growth would be in direct "point -to-point" routes, which allow passe ngers to reach their destination
without changing planes at congested hubs like Frankfurt, London Heathr ow, or Tokyo Narita.
Therefore, while Airbus was developing the A3 80, Boeing committed its development resources to
the 787, a much smaller, much more fuel efficient aircraft based on composite technology, to fly those
point-to-point routes. Because engineering resource s are limited, Airbus's decision to focus on the
revolutionary A380 meant that it was impossible fo r it to create an equally revolutionary mid-size
aircraft at the same time. Instead, it tried to make do with a low-cost reworking of the A330, calling it
a new aircraft family (the "A350") and marketi ng it in competition with the 787. The successive
failures of this approach, as custom ers rejected ever more elaborate modifications to existing aircraft
components, finally led Airbus to launch a truly new aircraft, the A350 XWB, which will not be ready
for delivery until 2013, five years after the 787. On this basis the United States argues that the alleged
subsidization of Boeing could not have caused Airbus 's shortage of qualified engineers, or a series of
poor design decisions that customers rejected.662
4.396 The United States further asserts that the Eu ropean Communities does not, and cannot, claim
that Airbus' problems with production of the A380 are in any way related to anything done by Boeing.
According to the United States, there is no doubt th at the costly production delays – the A380 is two
years behind schedule and billions of euros over budget – explain most, if not all, of the loss Airbus
reported in 2006, and the difficulty Airbus had in finding resources to develop the A350. 663 Thus, the
United States submits that the available ev idence not only disproves the causation case the
European Communities seeks to make, but also pr oves that the serious prejudice about which the
European Communities complains is, in fact, a di rect result of product development and pricing
choices deliberately made by Airbus. Howe ver, the SCM Agreement does not permit the
European Communities to attribute to subsidies the effects of such other factors.664
4.397 In addition, the United States points to one other significant fact about Airbus's condition that
the European Communities neglects to mention in its submission. Although Airbus recently
experienced some adversity, the United States cont ends that its revenues and production are at near
record levels, and its commercial s ituation is improving. The A380 is nearly ready for delivery to
customers, and Airbus expects orders to pick up as the aircraft proves itself in revenue service.
Airbus decided to scrap the poorly designed Original A350, and start over with the A350 XWB. The
European Communities, Airbus, and most analysts pr edict that the new aircraft will gain more favor
with customers.
665 Indeed, Airbus has already received an impressive 232 orders and commitments
for the A350 XWB in the six months since programme launch. 666 Airbus has also drastically changed

661 Executive Summary of the United States' first written submission, para. 67.
662 Executive Summary of the United States' first written submission, para. 68.
663 Executive Summary of the United States' first written submission, para. 69.
664 Executive Summary of the United States' first written submission, para. 70.
665 Executive Summary of the United States' first written submission, footnote 32.
European Communities' first written submission, para. 1338 ("Airbus is now in a position to offer, with the
anticipation of being able to deliver in 2013, a new-ge neration LCA that exhibits comparable or even better
performance than Boeing's 787 family LCA").
666 Executive Summary of the United States' first written submission, footnote 33. Airbus Press
Release, "Renewed momentum for Airbus's leading products, and Paris Air Show with 425 firm orders",
22 June 2007, Exhibit US-377.

BCI deleted, as indicated [***]

its management team and undertaken a cost-cutting plan called "Power 8", which it believes will make
it more competitive in a weak dollar environment. While these developments may be consuming
revenue and cash flow from the company's financial statements today, they are investments that
promise swift future improvements, as is now evident from the A350 XWB order book.667
4.398 In its further written submissions, the United St ates argues that the alleged subsidies are not
responsible for Boeing's ability to bring the 787 into commercial service ahead of the
European Communities' competing aircraft. The United States notes that the European Communities'
arguments on "technology effects" ask the Panel to conclude that in the absence of the alleged
subsidies, Boeing would have had to take more time to offer a product superior to the A330, or would
have had to settle for offering an immediate comp etitor that was as good, but not better. In the
United States' view, that is the only conclusion possi ble from its argument that the alleged subsidies –
and not Boeing's own efforts – are responsible for the design and timing of the 787. But such a
conclusion is contrary to both the evidence and economic rationality.
668
4.399 In the period under consideration, Airbus engi neers were developing two new aircraft – the
A380 and the A400M. The European Communities ne ver claims, let alone proves, that Boeing's
engineers are less competent than Ai rbus' engineers. It also never claims, nor proves, that BCA had
insufficient funds to cover all of the R&D expenditur es that it needed to make. It provides no basis to
conclude that Boeing, w ith this capability and the financial resources to make full use of it, would do
nothing except cede market share while Airbus move d ahead with its projects. Rather, the economic
incentive, the financial resources, and the engineeri ng capability existed to produce a new aircraft. In
short, the United States submits that, whatever the fina ncial effect of the alleged subsidies, there is no
basis to conclude that they changed the technological outcome. 669 The United States adds that the
European Communities concedes as much. In its su mmary of the "nature" of the group of subsidies
that includes the DOD and NASA research th at allegedly had technology effects, the
European Communities states, "this second group of subsidies increases Boeing's non-operating cash
flow by paying for certain R&D activities that Boeing would otherwise have to finance itself". In
other words, according to the United States, the Eu ropean Communities' causation analysis rests on
the proposition that if the alleged subsidies funded r esearch relevant to large civil aircraft, in their
absence Boeing would have paid its own money to conduct the same research. Moreover, the
United States contends that becau se the European Communities treats each alleged subsidy as having
a cash effect in the year of receipt, it assumes that Boeing would have conducted that research at the
same time that it actually did. 670 On this basis, the United States ass erts that it demonstrated that the
European Communities' analysis of the economic eff ect of the alleged subsidies is wrong. However,
the United States adds that the European Communiti es is correct in recognizing that Boeing's large
civil aircraft technology development agenda would have proceeded without regard to the availability
of government funding.671
4.400 The United States finally submits that the European Communities' technology effects
arguments rest on the assumption that Boeing would not have performed all of the research relevant to
the 787 in the absence of the alleged subsidies – an assertion that even the European Communities
itself finds to be untrue. Therefore, in the Un ited States' view, the European Communities has failed
to make a prima facie case that the alleged subs idies affected Boeing's ability to bring the 787 to
commercial use in advance of a competitive product from Airbus.672

667 Executive Summary of the United States' first written submission, para. 71.
668 Executive Summary of the United States' second written submission, para. 71.
669 Executive Summary of the United States' second written submission, para. 71.
670 Executive Summary of the United States' second written submission, para. 72.
671 Executive Summary of the United States' second written submission, para. 73.
672 Executive Summary of the United States' second written submission, para. 74.

BCI deleted, as indicated [***]

4.401 In conclusion, the United States maintains that:
(a) Reference Period. The European Communities has tried a number of arguments to
exclude pre-2004 data from the Panel's review. The latest is the contention that the
Boeing and Airbus "product portfolios" saw a "dramatic" change in the 2004-2006
period. However, a consideration of all th e models available for sale in the periods
2001-2003 and 2004-2006 shows that product offerings overlapped extensively.673
(b) Aggregation. Where programmes "share a sufficient nexus" with the subsidized
product and a particular effects-related vari able, the effects of these programs may be
aggregated. There is no such nexus between the subsidies that the
European Communities alleges "lower the marginal unit costs" of specific Boeing
large civil aircraft and the R&D programme s that the European Communities alleges
to have subsidized Boeing's R&D.674
(c) Magnitude of the alleged subsidy. Th e $24 billion and $19 billion figures cited by
the European Communities are based in la rge part on analyses that are entirely
contradictory to the evidence. Even if every programme challenged by the
European Communities were a subsidy – an d the United States asserts that they are
not – the real value associated with the programmes is far lower than the
European Communities asserts, and far lower th an any level that can be conceived as
having an effect on Boeing's prices or technology.675
(d) The magnitude of the subsidies is not suffi cient by itself to establish a causal link.
Boeing's financial data disprove the Europ ean Communities' assertion that "but for"
this volume of alleged government f unding, Boeing's pricing and product
development strategies would have driven it into bankruptcy. During the 2004-2006
period on which the European Communities' adverse effects claim focuses, the funds
Boeing spent on stock repurchases were clos e to twice the amount of the alleged
subsidies. Boeing's resources were similarl y able to cover any cost funded by the
alleged subsidies over the longer 1989- 2006 period. These evaluations use the
exaggerated European Communities' figures. Obviously, the argument becomes more
and more implausible the smaller that number gets.
676
(e) The European Communities has failed to establish that Boeing's pricing strategy
would have changed in the absence of the alleged subsidies. The
European Communities alleges that four alleged subsidy programs reduce Boeing's
marginal unit costs of large civil aircraft production, and that the company passes that
advantage to customers on a "dollar-for-dollar" basis in the form of lower prices. The
evidence cited by the European Communities does not support this proposition. With
regard to the second group of subsidies, tho se allegedly provided in the form of R&D
programs, the European Communities asserts that a part of the budget of each
program is the functional equivalent of "free cash" that Boeing uses to "price
aggressively". The United States asserts that it has shown that Professor Cabral's
modeling exercise and accompanying report, which underpin the

673 Executive Summary of the United States' non-confidential oral statement at the second meeting with
the Panel, para. 23.
674 Executive Summary of the United States' non-confidential oral statement at the second meeting with
the Panel, para. 24.
675 Executive Summary of the United States' non-confidential oral statement at the second meeting with
the Panel, para. 25.
676 Executive Summary of the United States' non-confidential oral statement at the second meeting with
the Panel, para. 26.

BCI deleted, as indicated [***]

European Communities analysis, ar e fundamentally unsound. The
European Communities response to the U.S. cr iticisms fails to rehabilitate the Cabral
analysis.677
(f) The European Communities has not establishe d the existence of any of the types of
serious prejudice. The European Communities' core arguments go to the question of
how the alleged subsidies affect Boeing' s behavior and the marketplace. The
United States has shown that the European Communities has not made a prima facie
case that such effects occur. Even if it had, the SCM Agreement has a further
requirement – that the effects constitute one of the types of serious prejudice
enumerated in Article 6.3. However, the evidence does not demonstrate the
occurrence of the types of serious prejudi ce alleged by the European Communities –
significant price suppression, significant lost sales, or displacement or impedance.
678
V. ARGUMENTS OF THE THIRD PARTIES
A. AUSTRALIA
1. Introduction
5.1 Australia focuses on a select few topics which raise significant systemic issues as well as
important questions of legal interpretation.679
2. Financial contribution
(a) Relevance of the nature of government action
5.2 Australia considers that whether a government acti on can also be characterised as a particular
type of transaction (for example, the 'purchase of servi ces') is irrelevant to the question of whether it
constitutes a 'financial contribution' within the mean ing of Article 1.1(a)(1). Rather, the relevant
question is whether the government action can properly be described as falling within one of the
categories of financial contribution set out in Article 1.1(a)(1).
680
5.3 Australia recalls the statement of the Appellate Body in US – Softwood Lumber IV that '{a}n
evaluation of the existence of a financial contribut ion involves consideration of the nature of the
transaction through which something of econom ic value is transferred by a government'. 681
Therefore, Australia submits that it is important to accurately identify the nature of the government
action concerned in determining whether it falls within one of the categories of financial
contribution.682
5.4 In Australia's view, the facts and circumst ances surrounding the measure concerned should
determine the nature of the govern ment action and, consequently, wh ether it falls within one of the
categories of financial contribution in Article 1.1(a )(1). In other words, it is the nature of the

677 Executive Summary of the United States' non-confidential oral statement at the second meeting with
the Panel, para. 27.
678 Executive Summary of the United States' non-confidential oral statement at the second meeting with
the Panel, para. 28.
679 Executive Summary of Australia's written submission, para. 1.
680 Executive Summary of Australia's oral statement, para. 1.
681 Executive Summary of Australia's oral statement, footnote 1 referring to Appellate Body Report,
US – Softwood Lumber IV, para. 52. Executive Summary of Australia's written submission, para. 3.
682 Executive Summary of Australia's oral statement, para. 2.

BCI deleted, as indicated [***]

government action, and not its characterisation as a pa rticular type of transaction, that determines
whether it falls within Article 1.1(a)(1).683
(b) Relevance of consideration provided under contractual arrangements
5.5 Australia also considers that whether a recipi ent provides the government with consideration
(either in monetary form or in kind) under a contr actual arrangement is irrelevant to the question of
whether a particular government action is a financial contribution in terms of Article 1.1(a)(1)(iii) of
the SCM Agreement.684
5.6 Australia notes the Appellate Body's analysis concerning the definition of a subsidy under
Article 1.1 as having two discrete elements of (i) a financial contribution by a government and (ii) the
conferral of a benefit. 685 Australia considers it is important to analyse separately these two distinct
elements of the subsidy test under Article 1.1. Th at is, the nature of the government action concerned
should be examined separately from what was conferred on the recipient.686
5.7 Whether a particular government action is a fina ncial contribution is a separate element of the
subsidy test under Article 1.1, distinct from the question of benefit. 687 Article 14(d) of the
SCM Agreement provides that the provision of g oods or services by a government shall not be
considered as conferring a benefit unless the provisio n is made for less than adequate remuneration.
This indicates that a financial contribution may exist in cases where inadequate remuneration is
provided. Therefore, that a government receives remuneration for goods and services it provides is
not of itself sufficient to render the transaction outside the scope of a financial contribution within the
meaning of Article 1.1(a)(1) of the SCM Agreement.
688
5.8 As the European Communities noted in its or al statement, "it is normal practice among
governments all over the world to provide R&D support on the basis of contracts". 689 Australia
recalls, for example, that in US – Softwood Lumber III , the Panel considered the provision of
harvesting rights under stumpage contracts to be the provision of a good, notwithstanding that the
companies paid a price for these harvesting rights. 690 Similarly, cost-sharing arrangements between
private industry and government in conducting R&D, in Australia's view, do not preclude the
existence of a financial contribution.691
5.9 Therefore, Australia considers it is the nature of the government action, having regard to all
the facts and circumstances surrounding the provisio n of assistance, that should determine whether it
constitutes a financial contribution within the meaning of Article 1.1(a)(1) of the SCM Agreement.692

683 Executive Summary of Australia's oral statement, para. 3.
684 Executive Summary of Australia's oral statement, para. 4.
685 Executive Summary of Australia's oral statement, footnote 2 referring to Appellate Body Report,
Canada – Aircraft, para. 156.
686 Executive Summary of Australia's oral statement, para. 5.
687 Executive Summary of Australia's oral statement, footnote 3 referring to Appellate Body Report,
Canada – Aircraft, para. 156
688 Executive Summary of Australia's oral statement, para. 6.
689 Executive Summary of Australia's oral statement, footnote 4 referring to European Communities'
non-confidential oral statement at the first meeting with the Panel, para. 68.
690 Executive Summary of Australia's oral stat ement, footnote 5 referring to Panel Report, US –
Softwood Lumber III, para. 7.18.
691 Executive Summary of Australia's oral statement, para. 7.
692 Executive Summary of Australia's oral statement, para. 8.

BCI deleted, as indicated [***]

(c) Tax assistance
5.10 The Appellate Body in US – FSC and US – FSC (Article 21.5 – EC) provides guidance on
whether tax assistance to Boeing and other aer ospace manufacturers constitutes a financial
contribution within the meaning of Article 1.1(a)(1)( ii) of the SCM Agreement. In Australia's view,
the Panel needs to examine whether a tax rate reducti on for a particular sector constitutes revenue that
is otherwise due that is foregone or not collected , based on a comparison with "taxpayers in similar
situations" (i.e. other sectors engaged in business activities of a similar complexity/level of value-
add). Based on such a comparison, Australia subm its the key question is whether the tax measures
concerned "represent a departure" from tax rules that would otherwise apply to that sector. 693 A
relevant factor for the Panel to examine is the d esign of the measures or the "essential shape and the
rationale that is exhibited" for those measures in order to "assess the nature of the relationship of the
measure at issue with the overall tax regime". Th e Panel needs to examine the reduction in B&O tax
rates for aerospace manufacturing activities in the context of the overall scheme which provides tax
assistance to the aerospace manufacturing sector. 694
(d) R&D assistance
(i) Application of the legal standard to R&D assistance
5.11 Australia notes that there is a range of measur es in relation to R&D activities and the "fruit"
of those activities before the Panel in this dispute. Australia considers the Panel's consideration of
R&D activities and the "fruit" of those activities as financial contributions within the meaning of
Article 1.1(a)(1), should include: (i) whether R& D assistance involves the direct transfer of funds
(grants); (ii) whether the provision of government -owned property, institu tional support, scientists,
engineers and research facilities, for example, may also constitute the provision of goods and services;
(iii) whether the provision of IP rights may cons titute the provision of goods and services; (iv)
whether the provision of IP rights may also constitu te revenue foregone that is otherwise due where
the allocation of patent rights does not reflect mark et considerations; and (v) the extent to which dual-
use technology constitutes the provision of goods and services.695
(ii) Range of measures that fall within the meaning of 'financial contribution'
5.12 Australia considers the relevant test to determine whether a particular measure falls within the
meaning of financial contribution in Article 1. 1(a)(1) of the SCM Agreement is whether the
government has provided something of value to the recipient, including an in-kind transfer of
resources, that has the potential to artificially lower the costs of producing a pr oduct or to artificially
increase the revenues gained from selling the product.
696
5.13 That view is supported by earlier cases. For example, Australia recalls the Appellate Body's
statement in US – Softwood Lumber IV that '(a) wide range of transactions fall within the meaning of
"financial contribution" in Article 1.1(a)(1)'. 697 The Panel in US – Export Restraints provides
guidance in examining whether R&D activities conducted by government c onstitute a financial

694 Executive Summary of Australia's written submission, para. 2.
695 Executive Summary of Australia's oral statemen t, para. 9. Executive Summary of Australia's
written submission, para. 4.
696 Executive Summary of Australia's oral statement, para. 10.
697 Executive Summary of Australia's oral statement, footnote 6 referring to Appellate Body Report, US
– Softwood Lumber IV, para. 52.

BCI deleted, as indicated [***]

contribution: Article 1.1(a)(1)(i)-(iii) covers a br oad range of actions whereby a government is
"directly providing something of value – either money, goods, or services – to a private entity".698
5.14 In relation to the meaning of the term "goods" in Article 1.1(a)(1)(iii), Australia notes that the
Appellate Body in US – Softwood Lumber IV agreed with the Panel that the ordinary meaning of
"goods" includes "property or possessions" especial ly—but not exclusively—"moveable property". 699
Australia also recalls the statements of the Panel in US – Softwood Lumber III that "the sentence
'goods or services other than general infrastructure' refers to a very broad spectrum of things a
government may provide".700
5.15 Australia also considers it possible that a government assistance measure could comprise
more than one financial contribution. Therefore, it is important to examine each element of a measure
separately to determine whether it falls within one of the categories of financial contribution in
Article 1.1(a)(1).701
(iii) Treatment of government 'assistance for research activities' under the SCM Agreement
5.16 Australia considers that the lapsed Article 8 of the SCM Agreement (relating to non-
actionable subsidies) provides guidance in consid ering the treatment of government "assistance for
research activities" under the SCM Agreement. In Aust ralia's view, the inclusion of Article 8 clearly
indicates that the negotiators considered R&D subs idies to be subject to the SCM Agreement.
Article 8.2(a) confirms that assistance by govern ment to a wide range of costs related to R&D,
including services and knowledge, would be captured within the meaning of Article 1.1(a)(1)(iii).702
5.17 If a company retains the rights to IP that w ould normally reside with that company, the
retention of these IP rights, in Australia's vi ew, would not necessarily constitute an additional
financial contribution (over and a bove the government funding) in the form of the provision of goods
within the meaning of Article 1.1(a)(1)(iii), as there has been no transfer of such rights.703
5.18 However, Australia considers it is important to have regard to the facts and circumstances
surrounding the ownership of the IP rights. In par ticular, it is necessary to compare the treatment of
such rights under the specific contractual arrangeme nts concerned with comparable arrangements for
the treatment of IP rights under other U.S. government contracts. In these circumstances, it will be
important to have regard to the extent other government contractual arrangements are in fact
comparable and the degree to which they can provide a benchmark.704
5.19 It is also Australia's view that IP rights deve loped in the course of a government contract (that
is, activities for which the government has provided a financial contribution) would not necessarily
constitute an additional financial contribution in the form of foregoing of government revenue that is
otherwise due within the meaning of Article 1.1(a )(1)(ii). This would depend on an examination of
government contractual arrangements generally an d those specifically applying to the company. 705
The financial contribution would be limited to the assistance provided by way of government funding

698 Executive Summary of Australia's oral statement, footnote 7 referring to Panel Report, US – Export
699 Executive Summary of Australia's oral statement, footnote 8 referring to Appellate Body Report, US
– Softwood Lumber IV, para. 58.
700 Executive Summary of Australia's oral statement, footnote 9 referring to Panel Report, US –
Softwood Lumber III, para. 7.25. Executive Summary of Australia's oral statement, para. 12.
701 Executive Summary of Australia's oral statement, para. 13.
702 Executive Summary of Australia's oral statement, para. 14.
703 Executive Summary of Australia's oral statement, para. 15.
704 Executive Summary of Australia's oral statement, para. 16.
705 Executive Summary of Australia's oral statement, para. 17.

BCI deleted, as indicated [***]

of R&D activities, which would in Australia's view constitute a direct transfer of funds within the
meaning of Article 1.1(a)(1)(i). 706 It may be the case that the treatment of the IP rights under a
particular government contract could be considered an additional fina ncial contribution in the form of
the provision of goods within the meaning of Article 1.1(a)(1)(iii) or the foregoing of revenue within
the meaning of Article 1.1(a)(1)(ii). This would depend on all the facts of the particular case and
would, in Australia's view, have to involve a transfer of IP rights from the government to the
company.707
5.20 Australia agrees with Brazil that "if the Panel finds that NASA or the DOD provided goods or
services to Boeing, in the form of access to or use of government facilities, equipment, or employees,
the Panel should find that the provision of these goods or services constitute a financial contribution
under Article 1.1(a)(1)(iii)".708
5.21 Australia notes that cost-sharing arrangements between private industry and government in
conducting R&D, for example in relation to dual-use technologies, do not preclude the existence of a
financial contribution. That is, a financial c ontribution could still exist in the amount of funding
provided by government, regardless of the amount of funding contributed by industry.709
5.22 Australia considers the IR&D programme appear s to be a mechanism or guideline by which
the U.S. Government determines the level of assistan ce for certain costs related to IR&D activities. It
does not alter the consideration of whether R&D funding constitutes a financial contribution.710
(iv) R&D assistance under NASA and DOD programmes
5.23 The Appellate Body in US – Softwood Lumber IV and the Panel in US – Export Restraints
provide guidance on the types of transactions consid ered to be a financial contribution and on the
meaning of the term "goods" within the meaning of Ar ticle 1.1(a)(1)(iii). Australia considers that the
government provision of goods and services under Artic le 1.1(a)(1)(iii) has a broad meaning and
provides guidance on whether ownership of the fruit of the R&D provides a basis for asserting that the
funding provides something of value to Boeing.711
5.24 In considering whether the U.S. Governme nt's purchase of R&D services from Boeing
amounts to government procurement, Australia not es there is no legal basis in the SCM Agreement
for exemption from subsidy obligations for governme nt procurement. The characterisation of a
transaction as government procurement is irreleva nt to whether such a transaction constitutes a
financial contribution within the meaning of Article 1.1(a)(1)(iii).712
5.25 In the light of the above considerations, Australia submits clarification of the following would
be relevant to the Panel's examination of th e European Communities' characterisation of R&D
activities as financial contributions:713
(a) Is it appropriate to characterise the arrangements under which NASA contracts the
U.S. LCA industry to conduct R&D as the "purchase of services"? If so, are
purchases of services excluded from Article 1.1(a)(1)(iii)?

706 Executive Summary of Australia's oral statement, para. 18.
707 Executive Summary of Australia's oral statement, para. 19.
708 Executive Summary of Australia's oral statem ent, footnote 10 referring to Brazil's written
709 Executive Summary of Australia's oral statement, para. 21.
710 Executive Summary of Australia's oral statement, para. 22.
711 Executive Summary of Australia's written submission, para. 5.
712 Executive Summary of Australia's written submission, para. 6.

BCI deleted, as indicated [***]

(b) Where the United States claims that the contractual arrangements between NASA and
the U.S. LCA industry amount to government procurement, can the R&D activities
conducted for NASA be properly characterised as "products purchased for
governmental purposes and not with a view to commercial resale or with a view to
use in the production of goods for commercial sale"?
(c) Where the United States claims that the contractual arrangements between NASA and
the U.S. LCA industry are purchases of services or amount to government
procurement, does ownership of the fruit of the R&D under a contract provide a basis
for asserting that the R&D funding was such a 'purchase'?
(d) Where the European Communities claims that the transfer of knowledge to the U.S.
LCA industry arising from R&D activities conducted by NASA/DOD constitutes a
financial contribution, does such a transfer involve the provision of "something of
value" or of "goods that might be used by an enterprise to its benefit"?
(e) Can the purchase of services or government procurement simultaneously be a
financial contribution or the provision of a service to the U.S. LCA industry?
714
(v) Dual-use technology
5.26 Australia considers that cost-sharing arrangeme nts in which industry contributes 'matching
funding' towards the R&D activities do not preclude the existence of a financial contribution. In the
light of this, Australia submits that the Panel s hould clarify the following in examining whether DOD
RDT&E activity involving dual-use technology constitutes a financial contribution under
Article 1.1(a)(1):715
(a) Is DOD funding to Boeing's Integrated Defense Systems (IDS) division quarantined
in the manner described by the United Stat es, or does some funding flow through to
Boeing's commercial (BCA) division?
(b) Do any of DOD's R&D programmes (e.g. the Dual Use Science and Technology
(DU.S.&T) Program) relate to civil airc raft technology and/ or have non-military
application?
(c) Do the stringent controls under the U.S. In ternational Traffic in Arms Regulations
(ITAR) make it effectively impossible to use controlled technologies on LCA?
(d) Regardless of whether this is the case, is th ere any potential for cross-subsidisation of
R&D from Boeing's IDS division or Phantom Works division to Boeing's BCA
division (that is, does Boeing's commercial arm utilise the results of this R&D)?
 716
(vi) Treatment of the fruit of R&D activities
5.27 Australia considers the fruit of the R&D is separate to the issue of funding by the
U.S. Government to Boeing to conduct R&D. The Panel should clarify:
(a) What rights does the government receive as part of the exchange of value under
contracts with private industry and what rights does the inventor retain?

714 Executive Summary of Australia's written submission, para. 9.
716 Executive Summary of Australia's written submission, para. 10.

BCI deleted, as indicated [***]

(b) Is R&D funded through NASA/DOD program mes available either publicly or
commercially (either immediately or after a period of time)?
(c) Can IP rights be properly characterised as either the 'provision of a good' or 'revenue
foregone that is otherwise due'? 717
3. Benefit
(a) Legal standard for determining a benefit
5.28 Australia considers that analysis of whether the second limb of the definition of a subsidy has
been met, namely whether a benefit has been c onferred, requires a comparative assessment. Should
the Panel find the existence of a financial contribution, that financial contribution needs to be assessed
on whether it has been provided on more advantageo us terms than would have been available on the
market.718 Australia considers that where contractual arrangements to provide government assistance
to conduct R&D activities are found to constitut e financial contributions and where these
arrangements do not reflect prevailing market conditions, a benefit is thereby conferred.719
(b) Tax assistance
5.29 Australia submits that in determining whether a benefit has been conferred, the Panel should
examine whether the tax assistance to the aerosp ace manufacturing sector results in tax treatment
more advantageous than would ha ve been available to the U.S. LCA industry without such tax
assistance.720
(c) R&D assistance
5.30 Australia considers that Article 14(d) of the SCM Agreement provides guidance for
determining whether a benefit is conferred in the context of government transactions. 721 I n
considering whether a benefit is provided, the Panel should clarify the following:
(a) Where R&D conducted by NASA/DOD is used by the U.S. LCA industry, is the
"provision of goods and services" for adequate (or any) remuneration?
(b) Does NASA/DOD own the fruit of the R&D? If so, does ownership of the fruit of the
R&D provide a standard (or basis) for asserting that the funding was a purchase?
(c) Does the shifting of the risk involved in conducting R&D from private industry to
government constitute a benefit in itself?
(d) Where NASA/DOD contracts pr ivate industry to conduct R&D, does the payment to
industry represent adequate remuneration?
(e) Does private industry receive any rights to the fruit of the R&D it conducts under
contract? If so, can this be considered part of the remuneration for conducting the
R&D?

717 Executive Summary of Australia's written submission, para. 12.
718 Executive Summary of Australia's oral statement, footnote 11 referring to Panel Report, Canada –
Aircraft, para. 9.112.
719 Executive Summary of Australia's oral statement, para. 23.
720 Executive Summary of Australia's written submission, para. 13.

BCI deleted, as indicated [***]

(f) If the fruit of the R&D is provided to the U.S. LCA industry, is it for adequate
remuneration? If not, does this confer a be nefit additional to the payments (and any
benefits arising) under the R&D contracts?722
4. General infrastructure
5.31 Australia considers that general infrastructure in the context of Article 1.1(a)(1)(iii) means the
provision by government of goods and services that are generally available or multi-user and, as noted
by the Appellate Body, infrastructure of a general nature. In determining whether certain
infrastructure projects constitute infrastructure-related subsidies to Boeing, the Panel needs to analyse
the facts and circumstances including access to su ch infrastructure and any terms and conditions
relating to its use to determine whether it is for exclusive or limited use.723
5. Specificity
5.32 Australia considers that important factors to be considered in assessing the specificity under
Article 2.1(c) of government programmes such as the DOC Advanced Technology Program (ATP)
include the predominant use of th e subsidy programme by a limited num ber of certain enterprises, the
manner in which discretion has been exercised by the granting authority in the decision to grant a
subsidy, evidence that other applicants for the subsidy were overlooked and the "extent of
diversification of economic activities within the juri sdiction of the granting authority". The Panel in
Japan – DRAMs (e.g. para. 7.374) offers guidance on ho w these factors can be used to assess a
specific transaction in the context of a longstanding framework programme.724
6. In fact export contingency
5.33 Australia recalls that, in establishing in fact contingency under Article 3.1(a), three elements
must be established: (i) the granting of a subsidy; ( ii) that is "tied to"; (iii) actual or anticipated
exportation or export earnings. Australia recalls that the Appellate Body in Canada – Aircraft
emphasised that the second element is at "the very he art of the legal standard" and must be considered
independently from the third element and evidence of export orientation. 725 Australia considers that
evidence of the export nature of a product, and a requirement to establish a production capacity to
meet export demand, supports the establishment of a relationship of conditionality but is not
conclusive of this second element. A requirement to establish a specified production capacity, taken
together with an examination of the estimated demand for a product in the domestic and export
markets, is relevant in determining whether the gr anting of a subsidy is "tied to" export performance.
However, such an examination would need to ta ke into account that capacity to produce is one
relevant factor, distinct from actual production.726
5.34 Australia recalls that the Appellate Body in Canada – Aircraft also noted that to establish
export contingency, the requisite relationship of contingency "m ust be inferred from the total
configuration of the facts constituting and surrounding the granting of the subsidy, none of which on
its own is likely to be decisive in any given case". In Australia's view, such relevant facts could
include: an analysis of the nature of the product; the design and form of the subsidy; the export
propensity of the product; performance requirements or conditions attached to the granting of the
subsidy (including, for example, the requirement to establish a specified production capacity); any

722 Executive Summary of Australia's written submission, para. 14.
723 Executive Summary of Australia's written submission, para. 15.
724 Executive Summary of Australia's written submission, para. 16.
725 Australia's written submmission, para. 59, referring to Appellate Body Report, Canada – Aircraft ,
para. 171.
726 Executive Summary of Australia's written submission, para. 17.

BCI deleted, as indicated [***]

distinction made between domestic and export sales in relation to repayment requirements; the level
of sales requirements relative to domestic demand; and official statements by governments indicating
the intention behind the granting of the subsidies. The possibility that there may be some sales that do
not involve exportation does not necessarily sever the tie to anticipated exportation.727
7. Adverse effects
(a) Reference periods to assess serious prejudice
5.35 Australia points out that the Panel in US – Upland Cotton provides guidance on an
appropriate reference period for assessing adverse effects, namely, a historical recent period for which
essentially complete data exists. "Current" serious prejudice will be "establishe d to exist up to, and
including, a recent point in time". This is also cons istent with the references to consistent trends and
appropriately representative periods in Articles 6.3(d) and 6.4 of the SCM Agreement.728
(b) Cumulative effects
5.36 Australia also considers that it may be relevant to assess the effects of subsidies in terms of
the cumulative effects of certain subsidies. Subs idies should only be aggregated where appropriate
for an adverse effects claim and where an appropria te nexus exists between those subsidies, based on
the nature of the subsidies.729
(c) Threat of serious prejudice
5.37 Australia notes that the panel report in US – Upland Cotton suggests that the threat of serious
prejudice can be established by an examination of th e likely existence of serious prejudice at some
future point in time. Australia considers that curre nt effects of the subsidies are relevant because, in
the absence of a significant change in circumst ances, they will indicate the likelihood that the
subsidies would continue to cause serious prejudice in the future. Consequently, the same facts may
be relevant in establishing both present serious prejudice and threatened serious prejudice.730
B. BRAZIL
1. Introduction
5.38 From the outset Brazil notes that its participation in this dispute is based on its long-standing,
systemic interest in the interpretation of the SCM Agreement, particularly in relation to the civil
aircraft industry. Brazil's submissions focus on (i ) the Annex V procedure a nd burden of proof; (ii)
the potential that government contracts for research and development could be used to shield
Members from their obligations under the SCM Agreem ent; (iii) subsidies disguised as the "purchase
of services"; (iv) specificity; (v) financial contributio ns to third parties; (vi) the potential for access to
government personnel and facilities to qualify as financ ial contributions; (vii) adverse effects; (viii)
theories of causation; and (ix) the lack of relevance of the 1992 Agreement to this dispute.731

727 Australia's written submmission, paras. 62 and 63, referring to Appellate Body Report, Canada –
Aircraft, para. 167.
728 Executive Summary of Australia's written submission, para. 18.
729 Executive Summary of Australia's written submission, para. 19.
730 Executive Summary of Australia's written submission, para. 20.
731 Executive Summary of Brazil's oral statement, para. 1; Brazil's written submission.

BCI deleted, as indicated [***]

2. The failure of the United States to coopera te in the Annex V process threatens to
undermine the WTO dispute settlement process a nd should result in the use of adverse
inferences where appropriate
5.39 Brazil argues that the Annex V procedure is criti cal to the ability of Members to protect their
rights under the SCM Agreement. Based on the te xt of Annex V, the DSB should automatically
initiate the relevant procedures upon a request from a complainant, and WTO Members are obligated
to cooperate in the Annex V procedure. Accordingl y, in the interest of the timely and efficient
resolution of disputes, Members should not block the initiation of Annex V procedures at the DSB
and should fully cooperate by providing requested information.732
5.40 Brazil notes that the United States argues that it refused to participate in the Annex V
procedure in DS353 because the European Communities' Preliminary Ruling Request amounted to an
"unprecedented" second request covering the "same t opic" as the Annex V procedure in DS317. In
Brazil's view, there is no textual basis under the DS U to support the U.S. argument that a Member's
rights or obligations under the Annex V procedures ca n be limited by anything arising in a previous
dispute.733
5.41 Paragraph 7 of Annex V of the SCM Agreemen t states that a panel "should draw adverse
inferences from instances of non-cooperation by an y party involved in the information-gathering
process". By establishing a penalty for non-complian ce in the form of adverse inferences, Annex V
provides an incentive for Members to cooperate. To the extent that the Unite d States has refused to
provide information or otherwise failed to cooperate, Brazil encourag es the Panel to use its discretion
to draw adverse inferences, where appropriate, and thereby ensure that Annex V remains an effective
tool for the resolution of disputes under the SCM Agreement.734
5.42 In its oral statement Brazil notes that it h as continuing concerns regarding the Annex V
procedure, including the implications of the Annex V procedure on burden of proof. In Brazil's view,
the Annex V procedure is particularly critical in cases such as this one in which the relevant
information is almost exclusively contained in confidential documents held by the subsidizing
Member. The Panel should use its discretion to draw adverse inferences and to make other findings,
where appropriate, in order to ensure that Annex V remains an effective tool for the resolution of
disputes under the SCM Agreement.735
5.43 Brazil also notes that the Annex V procedure is important in the context of determining
whether the complaining Member has met its burden of proof to establish a prima facie case. In this
context, a panel should take into consideration wh ether evidence important to meeting the burden of
proof is primarily in the hands of the respondi ng Member and whether the responding Member
withheld evidence, in whole or in part, during the Annex V procedure. Thus, Brazil submits that, in
examining whether the European Communities has met its burden of proof by presenting sufficient
evidence to substantiate its claims, the Panel should take due account of any U. S. failure to cooperate
in the Annex V procedure and, accordingly, should draw adverse inferences where appropriate.
736

732 Executive Summary of Brazil's written submission, para. 1.
733 Executive Summary of Brazil's written submission, para. 2.
734 Executive Summary of Brazil's written submission, para. 3.
735 Executive Summary of Brazil's oral statement, para. 2.
736 Executive Summary of Brazil's oral statement, para. 3.

BCI deleted, as indicated [***]

3. Funding under a government contract for researc h and development should not be used
to shield a Member from its obligations under the SCM Agreement
5.44 Brazil notes that the United States argues that Article 1.1(a)(1)(iii) of the SCM Agreement
defines a financial contribution to include "pur chases of goods" but does not refer to "purchases of
services" and, thus, "when the government confers so mething of value in exchange for the recipient
supplying a service, there is no financial contribution".737
5.45 In Brazil's view, the U.S. attempt to exclude government research and development measures
from the scope of the SCM Agreement has the pot ential to undermine the effectiveness of the
SCM Agreement. If the U.S. position were to preva il, Members could provide billions of dollars in
payments directly to a manufacturer and shield th is funding from WTO scrutiny by simply entering
into a "contract" declaring that the funding is in return for a nominal amount of research and
development, consulting, or other services. Such an enormous loophole was not intended by the
drafters, and, accordingly, the Panel should reject the U.S. interpretation.738
5.46 In contrast to the absolute U.S. position, Brazil considers that the facts and surrounding
circumstances should dictate whether a particular payment of money or monetary contribution to a
recipient falls within the scope of Article 1.1(a )(1) of the SCM Agreement. The fact that the
government's transfer of money is nominally made within the framework of a services agreement or
other type of contract should not, without further examination, be sufficient to determine that the
transfer could not amount to a financial contribution within the meaning of the SCM Agreement.739
4. Subsidies disguised as purchases of services
5.47 As indicated above, Brazil opposes the attemp t by the United States to undermine the
effectiveness of the SCM Agreement by exclud ing from the scope of the SCM Agreement any
transaction allegedly involving the purchase of services. In Brazil's view, WTO Members should not
be able to circumvent the disciplines of the SCM Agreement by characterizing financial contributions
as the purchase of services. Brazil disagrees with the United States that government purchases of
services are excluded, ipso facto, from the scope of Article 1.1(a)(1). The text of Article 1.1(a)(1) of
the SCM Agreement does not contain any exclusion for "purchases or services". Brazil believes that
the reference at the end of Article 1.1(a)(1)(iii) to the purchase of goods but not to the purchase of
services may have been intended to maintain a separation between subs idization of goods and
subsidization of services. Brazil argues that the omission of the purchase of services from the list of
financial contributions in Article 1.1(a)(1) was not intended to create any carve-out from subsidy
disciplines.
5.48 Brazil posits that two hypothetical transactions could help to clarify the scope of the
SCM Agreement:
 - First, assume that a government enters a services contract with an LCA manufacturer
under which the government pays $10 billion in exchange for transport by the
manufacturer of a letter from Chicago to Washington, DC.

 - Second, assume that a government enters a services contract with a law firm for
$10 billion in exchange for a one-page legal opinion.

737 Executive Summary of Brazil's written submission, para. 4.
738 Executive Summary of Brazil's written submission, para. 5.
739 Executive Summary of Brazil's written submission, para. 6.

BCI deleted, as indicated [***]

These examples demonstrate what should and s hould not be within the purview of the
SCM Agreement. Because a law firm is normally e ngaged exclusively in the provision of services,
the government's procurement of services from such firm has no discernible linkage to the production
or trade of any goods. The $10 billion payment ma y be a subsidy to the law firm, but because it
relates solely to the supply of services, it is not c overed within the scope of the SCM Agreement. In
contrast, the LCA manufacturer's contract would clearl y involve a direct transfer of funds that would
likely affect the manufacturer's production or trade of goods. The fact that the transaction is disguised
as the purchase of courier, postal, or similar tran sportation services does not change the fundamental
characteristic of the transaction as a financial contri bution within the meaning of Article 1.1(a) of the
SCM Agreement.
740

5.49 In Brazil's view, transactions involving r esearch and development constitute financial
contributions under the SCM Agreement to the extent that they are linked to the production and trade
of goods. To automatically disregard payments on the basis that they were made pursuant to a
contract for the provision of a service to the govern ment, particularly in instances where the work
undertaken was in the clear interest of the contractor in the first place, would be contrary not only to
the purpose of the SCM Agreement but to common sense as well. In any event, Brazil considers that
the facts and surrounding circumstances should dictate whether a particular transaction involves the
provision of a financial contribution to a recipient within the meaning of Article 1.1(a)(1) of the
SCM Agreement.
741
5. The Panel should not interpret "group of enterprises or industries" under Article 2.1
too narrowly, particularly when analyzing subsidies in the aircraft sector
5.50 Brazil notes that the United States contends that "research-based defense and aerospace
industries" are not "an enterprise or industry or group of enterprises or industries" within the meaning
of Article 2.1 of the SCM Agreement, and t hus, subsidies limited to such entities are not de jure
specific. In Brazil's view, if the facts demonstrate that access to subsidies is expressly limited to a
certain group of entities or industries, even if the gr oup is large and diverse, the Panel should find that
it constitutes a "group of enterprises or industries" within the plain meaning of Article 2.1 of the
SCM Agreement.742 A finished aircraft, for example, results from the coming together of an
enormously complex and voluminous collection of intermediate products and technology associated
with diverse and often unrelated industries (e.g. composites and telecommunications).743
6. A financial contribution to an unrelated third party may confer a benefit on Boeing
5.51 Brazil notes that the United States argues that certain funding does not constitute a subsidy
because it was provided to unrelated third parties rath er than directly to Boeing. In Brazil's view,
Article 1.1 of the SCM Agreement does not limit the r ecipient of a benefit to the entity that received
the financial contribution from the government. In both Brazil – Aircraft and Canada – Aircraft,
panels and the Appellate Body found prohibited export subsidi es to the respective aircraft
manufacturers when financial contributions to thir d parties indirectly conferred a benefit on the
manufacturers. This same logic would apply here if the facts demonstrate that research and
development funding to an unrelated third party indirectly conferred a benefit on Boeing.744

740 Executive Summary of Brazil's oral statement, para. 5.
741 Executive Summary of Brazil's oral statement, para. 6.
742 Executive Summary of Brazil's written submission, para. 7.
744 Executive Summary of Brazil's written submission, para. 8. See also, Executive Summary of

BCI deleted, as indicated [***]

5.52 Brazil points out that the United States also argues that any subsidies to unrelated third parties
can only confer a benefit on Boeing if the Europe an Communities demonstrates that the benefit is
passed-through from the unrelated recipient of the fina ncial contribution to Boeing. In Brazil's view,
the Panel should take into account the facts and surrounding circumstances in the LCA sector and
should not impose any particular requirements for a strict input/final product pass-through analysis in
examining whether a financial contribution to a third party benefits Boeing.745
5.53 In Brazil's view, the traditional pass-through anal ysis contemplated by the United States may
not be appropriate in the context of research and de velopment funding or other types of subsidies for
the aircraft sector. The situation in this dispute may be more similar to Canada – Aircraft and
Brazil – Aircraft, where the nature of the alleged s ubsidies and the surrounding facts and
circumstances demonstrated that subsidies to an unrel ated third party indirectly conferred a benefit to
the manufacturer. Thus, in Brazil's view, the Panel should take into account the facts and surrounding
circumstances in the LCA sector and should not impose any requirement for a strict input/final
product pass-through analysis in examining whether a financial contribution to a third party benefits
Boeing.746
7. The U.S. Government's provision of faciliti es, equipment, and employees to Boeing may
constitute financial contributions conferring a benefit
5.54 Brazil notes that the European Communities claims that NASA and DOD have provided
Boeing with substantial research and development support through no-cost access to NASA and DOD
facilities, equipment, and employees. If the Pa nel finds that NASA or the DOD provided goods or
services to Boeing, in the form of access to or use of government facilities, equipment, or employees,
the Panel should find that the provision of these goods or services constitutes a financial contribution
under Article 1.1(a)(1)(iii) of the SCM Agreement. If such goods and services were provided on
terms and conditions that are below-market, i.e. not for adequate remuneration in comparison to an
appropriate commercial benchmark, the Panel should find that a benefit was conferred on Boeing
within the meaning of Article 1.1(b).747
5.55 In addition, the United States argues that NASA's provision of goods or services is exempt
from scrutiny under the SCM Agreement because su ch contributions are payments for services
purchased by Boeing. As discussed above, this argument exemplifies how a WTO Member may
attempt to circumvent the disciplines of the SCM Ag reement by characterizing financial contributions
as falling within the "purchases of services" loophole advocated by the United States.748
8. Adverse effects
5.56 In response to the parties' arguments regardi ng adverse effects, Brazil provides the following
comments:
(a) Conditions of Competition : In conducting its serious prejudice analysis, the Panel
should consider the conditions of compe tition in the LCA market. These conditions
are critical to ensuring that the rights a nd obligations of both the parties and third
parties under the SCM Agreement are fully protected in this dispute.
(b) "Subsidized Product" : The SCM Agreement does not define the "subsidized
product", and, thus, it provides no guidance as to whether the "subsidized product"

745 Executive Summary of Brazil's written submission, para. 9.
746 Executive Summary of Brazil's oral statement, para. 8.
747 Executive Summary of Brazil's written submission, para. 10.
748 Executive Summary of Brazil's written submission, para. 11.

BCI deleted, as indicated [***]

should be defined narrowly or broadly. In Brazil's view, the Panel should provide the
European Communities substantial discretion as the complaining party to define the
"subsidized product" to which its claims apply.
(c) "Like Product" : Footnote 46 of the SCM Agreement defines "like product" for
purposes of the SCM Agreement. Accordingly, Brazil is of the view that "like
products" corresponding to the "subsidized products" should be analyzed in
accordance with this definition. To th e extent that the European Communities'
identification of the "like product" is in accordance with this definition, the Panel
should not second-guess the complainant.
(d) Definition of the "Market" : In Brazil's view, the LCA market may be considered a
global market that in turn may encompass individual country markets and collections
of individual country markets. Brazil disagr ees with the U.S. interpretation that the
term "market" in Article 6.3 cannot be applied to individual countries unless the
number of potentially relevant transactions exceeds some numerical threshold.
(e) Cumulation: In Brazil's view, in making its findings under Article 6.3(c), the Panel
should cumulate the challenged subsidies on the basis of whether they would result in
prices lower than those that would have been charged otherwise (the particular
"effects-related variable" under c onsideration). Brazil is also of the view that, if the
Panel cumulates subsidies in making its fi ndings on price suppression, it should also,
to maintain consistency, cumulate subsidies in making its findings on
displacement/impedance and lost sales. Finally, Brazil disagrees with the U.S.
classification of the challenged subsidies in to four separate categories because the
United States has not explained how the s ubsidies in the different categories have
different effects based on the test set out in US – Upland Cotton.
(f) Quantification of the Subsidies
: Although general quantification of the magnitude of
subsidization may assist the Panel in assessi ng the effects of the subsidies, neither
Article 6.3(c) nor Part III of the SCM Agreement establishes a particular
methodology for calculating the magnitude of subsidization or a legal threshold
below which subsidies cannot cause serious prejudice. In the absence of such
guidance, the Panel should not require a pa rticular level of precision in assessing the
magnitude of the subsidies and should not adopt specific methodologies or minimum
thresholds in this dispute.
(g) Quantification of the Price Effects
: Brazil submits that precise quantification of the
price effects of subsidization has no textual support in the SCM Agreement and is not
necessary for making findings under Article 6.3(c), or Part III generally. Brazil
agrees that the Panel may consider the ma gnitude of the subsidy in determining
whether the alleged price effects are "significant", but this does not require a precise
quantification of either the alleged subsidies or the consequent price effects.
(h) Order Versus Delivery Data: Consistent with the Appellate Body's reasoning in US –
Upland Cotton , serious prejudice may be demonstrated in a variety of ways. In
Brazil's view, the Panel should not find that specific forms of serious prejudice or
threat of serious prejudice under Article 6.3 must be demonstrated using orders or
deliveries. A complainant could satisfy its burden to demonstrate serious prejudice
using either order or delivery data.
(i) "But For" Test for Causation
: Although both parties rely upon a "but for" test for
causation, there is no basis in the text of the SCM Agreement for the U.S. statement

BCI deleted, as indicated [***]

to the effect that the Agreement "requires" this kind of test, and the Panel should not
make any findings that would effectively preclude the use of other causation
methodologies in other cases, including those involving the aircraft sector.
(j) Lost Sales
: The United States argues that the par ties agree that a "but for" test is
appropriate for examining "lost sales", and, therefore, the Panel must evaluate what
price Boeing would have charged in the absence of subsidies and whether that price
would have been sufficiently higher for the customer to choose Airbus. Brazil
considers that the United States is proposing a test that is too rigid and that is not
justified by the text of the SCM Agreemen t. In Brazil's view, depending on the facts
and surrounding circumstances, the Panel may find that subsidies are causing lost
sales, and thus serious prejudice within the meaning of Article 6.3(c) of the
SCM Agreement, even where price is not the "decisive" or predominant factor
resulting in the lost sales.
(k) "Cash Flow Effects"
: In Brazil's view, the Panel's findings regarding the
European Communities' claims of adve rse price effects should not be made
contingent on whether the evidence of additio nal cash flow is found in the financial
data of the subsidized producer.
(l) Airbus' Financial Condition : Brazil disagrees with the U.S. arguments that Airbus'
financial and market position precludes the possibility that the
European Communities is suffering serious prejudice caused by subsidies. With
respect to impedance and displaceme nt, for example, Article 6 of the
SCM Agreement does not make any reference to the fi nancial condition of the
producer of the like product and does not i ndicate that the relative market shares at
any particular point in time are relevant. Rather, the issue is whether Airbus' market
share would be greater absent the subsidized Boeing product.
(m) No Additional Requirement to Demonstrate That The Effects Are "Serious"
: Both
parties contend that to demonstrate serious prejudice under Article 6.3, the
complainant must demonstrate that the effects rise to the level of "serious". This
interpretation has been expressly rejected in prior disputes, and the Panel should not
adopt such a requirement based on agreement of the parties.
(n) "Lag" Between Granting of Subsidies and Serious Prejudice
: Because of the
significant period between development, pro duction, and sale of aircraft, the effects
of subsidies granted early in the period ( e.g., for research and development) may not
manifest themselves until much later in time when actual sales of the aircraft take
place. Thus, a strict requirement to show "coincidence in time" between the alleged
subsidies and the alleged effects would make the showing of causation unreasonably
difficult in the aircraft sector. Accordingl y, in analyzing causation in this case, the
Panel should take into consideration the potential "lag" between the granting of the
alleged subsidies and their possible adverse effects.
749
9. Theories of causation
5.57 Generally, Brazil considers that the Panel should focus on making its findings on a more
straightforward causation analysis consistent with that adopted by the panels in US – Upland Cotton
and US – Upland Cotton (Article 21.5 – Brazil) . The European Communities has presented its case

749 Executive Summary of Brazil's written submissi on, para. 12. See also, Executive Summary of
Brazil's oral statement, para. 11, 12, 13,14, 15, 16 and 17.

BCI deleted, as indicated [***]

by using complex economic models and by traci ng the application of cash flows according to
Boeing's financial statements. Brazil cautions the Pa nel not to adopt findings that would effectively
require the use of such complex models and methodologies to demonstrate causation under the
SCM Agreement, as any such requirement would lack textual support in the SCM Agreement.750
5.58 Moreover, even if, as the European Commun ities argues, the subsidies involved were
provided in the form of cash grants that were simp ly redirected to shareholders as dividend payments,
these increased dividend payments would send a signa l to financial markets of improvement in the
company's financial situation and would lower its cost of capital. Similarly, if all subsidies were used
to reduce a company's debt, this would directly lo wer its financial costs and would also represent a
significant improvement in the company's financial situation at the government's expense. When
subsidies are used to improve a company's financial situation, they may enable such company to take
actions that have trade-distorting effects and that the market would otherwise not allow, such as, for
example, maintaining inefficient production capacity . In Brazil's view, the approach apparently
endorsed by the parties in this dispute, to the ex tent that it neglects this possibility, would open a
loophole in the SCM Agreement and does not reflect an appropriate causation analysis.751
10. The Panel should reject the European Communities' arguments in relation to the 1992
Agreement
5.59 The European Communities argues that the 1992 Agre ement is a relevant rule of international
law to be taken into account when interpreting the SCM Agreement in this dispute and that a U.S.
violation of the 1992 Agreement would constitute serious prejudice under Article 5(c) of the
SCM Agreement.752
5.60 In Brazil's view, the Panel should reject the European Communities' arguments for the
following reasons: (i) the SCM Agreement is the appr opriate instrument to address subsidies in the
civil aircraft industry in a WTO dispute settlement proceeding; (ii) the 1992 Agreement is not a WTO
covered agreement, and it is outside the Panel's terms of reference; (iii) an appropriate analysis should
lead the Panel to find that an alleged substan tive violation of the 1992 Agreement cannot constitute
"serious prejudice" with the meaning of Article 5(c) of the SCM Agreement; (iv) the 1992 Agreement
cannot be used to interpret provisions of the SC M Agreement because it does not assist the Panel in
determining the common intent of all WTO Members; and (v) in the alternative, any interpretation of
the SCM Agreement based on the 1992 Agreement can only apply to the bila teral relations between
the United States and the European Communities.
753
C. CANADA
1. Introduction
5.61 In its third party submission, Canada conte nds that this dispute will have important
consequences for the development and production of ci vil aircraft. Canada is participating because of
its role as one of the world's major aircraft produ cers and its interest in the interpretation of the
SCM Agreement.754
5.62 Taken together, Canada's oral statemen t and written submission addressed questions
regarding six issues: (i) purchase of services; ( ii) intellectual property rights; (iii) general

750 Executive Summary of Brazil's oral statement, para. 9.
751 Executive Summary of Brazil's oral statement, para. 10.
752 Executive Summary of Brazil's written submission, para. 13.
753 Executive Summary of Brazil's written submission, para. 14.
754 Executive Summary of Canada's written submission, para. 1.

BCI deleted, as indicated [***]

infrastructure; (iv) the U.S. Department of Commerce's Advanced Technology Program and
specificity; (v) de facto export contingency, and (vi) serious prejudice.
2. Purchase of services
5.63 Canada notes that this dispute is the first under the SCM Agreement to address the question of
whether a government's purchase of a service can be the subject of a claim under Parts II, III or V of
the SCM Agreement. In Canada's view, the answer is that it cannot be – provided, however, that the
transaction in question is a legitimate purchase of a se rvice and is not simply designed to camouflage
a financial contribution that would otherwise fall with in the list of financial contributions set out in
Article 1.1(a)(1) of the SCM Agreement.755
5.64 In responding to the Panel's questions, Canada agrees with the United States that the list of
financial contributions in Article 1.1(a)(1) is an e xhaustive list of the kinds of financial contributions
that can give rise to a subsidy. Canada also agr ees that the omission of any reference to the purchase
of services from this list must be given some meaning – particularly since the purchase of services
was included in the list in some of the negotiating texts before being dropped from the final text.
756
5.65 Furthermore, Canada notes that Article XV of the GATS indicates that the regulation of
subsidies in respect of services is a task for a futu re work programme of the Members. Even if the
Panel were to find some merit to the argument that this omission in the SCM Agreement was made in
deference to the GATS, the incomplete work pr ogramme of the Members in respect of service
subsidies provides a good reason for the Panel to exercise caution in this area.757
5.66 Australia and Brazil have both advanced the argument that Article 8.2(a), now lapsed, is proof
that no carve-out from subsidy disciplines was intende d for the purchase of services. Article 8.2(a),
when in force, provided that "assistance for re search activities conducted by firms or by higher
education or research establishments on a contract basis with firms" was non-actionable if certain
conditions were met. 758 In Canada's view, Article 8.2(a) does not establish that legitimate purchases
of services were intended to come within the scope of the SCM Agreement. Article 8.2(a) only
demonstrates that financial assistance for research activities provided on a contract basis was never
categorically excluded from the SCM Agreement. Ho wever, "assistance" is not synonymous with
"purchase", and it is the purchase of services that was omitted from Article 1.759
5.67 According to Canada, government assistance for a firm to conduct research, or for a firm to
contract for research with another institution does not entail the purchase or acquisition of a service by
the government. Rather, it is the firm that is c onducting or contracting for the research. Therefore,
the recognition in lapsed Article 8.2(a) that go vernment assistance for a firm's research activities
would be subject to the SCM Agreement, unless certai n conditions were met, in no way conflicts with
an exclusion in Article 1 for the purchase of services by a government.760
5.68 Canada does agree with Australia and Brazil that the omission from Article 1 of any reference
to the purchase of services should be interpreted narrowly to avoid circumvention of subsidy
disciplines. A Member's characterization of one of its own transactions as a purchase of a service

755 Executive Summary of Canada's oral statement, para. 2.
756 Executive Summary of Canada's oral statement, para. 3.
757 Executive Summary of Canada's oral statement, para. 5.
758 Executive Summary of Canada's oral statement, para. 6.
759 Executive Summary of Canada's oral statement, para. 7.
760 Executive Summary of Canada's oral statement, para. 8.

BCI deleted, as indicated [***]

should not preclude a panel from determining the true nature of the transaction at issue. This is a
question of fact to be weighed by a panel and must be done on a case by case basis.761
5.69 Notwithstanding the anti-circumvention concern, the silence in Article 1.1 respecting the
purchase of services should be understood to excl ude from the SCM Agreement those cases where a
government can prove that it has genuinely purchased services, and that it is not attempting to
disguise a direct transfer of funds or other form of financial contribution within the scope of
Article 1.1(a)(1) as the purchase of a service.762
3. Intellectual property rights
5.70 Canada notes that the European Communities claims that NASA and the U.S. DOD together
have waived/transferred an estimated 228 patents to Boeing and McDonnell Douglas. Further, the
European Communities alleges that Boeing has "recei ved" trade secrets from the U.S. Government as
well as having benefited from valuable technical data developed by Boeing through its government-
funded research. According to the European Commun ities, patents, trade secrets and technical data
are all "goods" provided by government within the meaning of Article 1.1(a)(1)(iii) of the
SCM Agreement.763
5.71 Canada argues that, regardless of whether or not these intangible rights are "goods", the
European Communities claims under Article 1.1(a)(1)(iii) fail because these IP rights are not provided
to Boeing by any government. They are simply retained by Boeing as the original owner or developer
of the patents, trade secrets and data at issue.764
5.72 Canada points out that the European Communities concedes that the patents at issue originate
with Boeing in stating that U.S. patent laws, regulations and policies benefit Boeing because they
"generally grant government contractors the option to retain title, with some li mitations, to inventions
that arise from a funding agreement with the Federal G overnment". An option to retain title is not a
transfer, provision or contribution. In respect of trade secrets, the European Communities appears to
be primarily concerned with Boeing trade secrets rath er than NASA trade secrets. Boeing's use of its
own trade secrets, however, cannot form the basis of a subsidy claim as there is clearly no transfer,
provision or contribution. The European Communities ' claim in respect of the "transfer of technical
data" references only "technical data developed by Boeing through government-funded research".
This claim does not encompass any provision to Boeing of technical data developed by a
governmental entity or agent.765
5.73 Thus, Canada considers that the European Communities claims fail at the most basic level. A
retention of a right to property by a contractor cannot constitute a contribution by government.766
5.74 Canada notes that the European Communities has raised an alternative claim that the retention
by Boeing of IP rights developed in the course of a government contract constitutes "the foregoing of
government revenue that is otherwise due" within the meaning of Article 1.1(a)(1)(ii). To support this
assertion, the European Communities notes that "entities making use of a government's IP rights
would ordinarily need to pay license fees for such use". However, this alternative claim again

761 Executive Summary of Canada's oral statement, para. 9.
762 Executive Summary of Canada's oral statement, para. 10.
763 Executive Summary of Canada's written submission, para. 2.
764 Executive Summary of Canada's written submission, para. 3.
765 Executive Summary of Canada's written submission, para. 4.
766 Executive Summary of Canada's written submission, para. 5.

BCI deleted, as indicated [***]

assumes that the IP rights at issue were, at some point, the property of the U.S. Government. They
never were. For this reason, the European Communities alternative claim also fails.767
4. General infrastructure
5.75 The European Communities alleges that road improvements near Boeing's Everett facility and
improvements to the Port of Everett are subsidies, de spite the fact that they are general infrastructure
excluded from the SCM Agreement by Article 1.1( a)(1)(iii). Canada takes this opportunity to
elaborate on the analysis required by the general infra structure exclusion in Article 1 and to apply that
analysis to the facts of this dispute.768
(a) The scope of the general infrastructure exclusion
5.76 The Appellate Body has ascribed an e xpansive meaning to the word "goods" in
Article 1.1(a)(1)(iii) of the SCM Agreement. Ho wever, the SCM Agreement and WTO jurisprudence
offer little guidance on the considerations relevant to the determination of whether government
provided infrastructure is of a "general" or non-ge neral nature. This Panel has an opportunity to
clarify the analysis required.769
5.77 Canada notes that according to the rules of inte rpretation set out in Article 31 of the Vienna
Convention, the meaning of a term is to be determin ed by reference to its ordinary meaning, read in
the light of its context, and the object and purpose of the treaty. The ordinary meaning of
"infrastructure" is "the installations and servi ces (power stations, sewers, roads, housing, etc.)
regarded as the economic foundation of a country". There is no disagreement that the public works at
issue qualify as infrastructure.
770
5.78 Canada considers that the disagreement is whet her the improvements to the road network and
port facilities are "general" or "other than general" . The word "general" has a number of ordinary
meanings, the most relevant of which is "not speci fically limited in application; relating to a whole
class of objects, cases, occasions, etc". The phrase "not specifically limited in application" as
distinguished from the broader phrase "not limited in application" helps convey the concept that, for
government-provided infrastructure to be transformed from "general" to non-general or restricted
application, the limitation must be clearly specified.
771
5.79 In Canada's view, whether infrastructure is genera l or other than general is closely tied to its
availability for use by the public. An understanding of general infrastructure that encompasses any
facility or service available to the public is confirme d by the negotiating history of the exclusion. In
particular, Canada notes the roots of the general infr astructure exclusion in proposals by the Canadian
Chief Negotiator in 1988 that basi c infrastructure available "for general public use" be excluded from
the SCM Agreement's disciplines.772
5.80 Canada notes that the panel in US – Export Restraints found, the Article 1 subsidy definition
"was drafted with the express purpose of ensuring th at not every government intervention in the
market would fall within the coverage of the Ag reement". Article 1.1(a)(1)(iii) should not be
interpreted too narrowly so as to undermine that purpose.773

767 Executive Summary of Canada's written submission, para. 6.
768 Executive Summary of Canada's written submission, para. 7.
769 Executive Summary of Canada's written submission, para. 8.
770 Executive Summary of Canada's written submission, para. 9.
771 Executive Summary of Canada's written submission, para. 10.
772 Executive Summary of Canada's written submission, para. 11.
773 Executive Summary of Canada's written submission, para. 12.

BCI deleted, as indicated [***]

5.81 Canada argues that the roads and ports in qu estion in this dispute are public. As such
improvements to these roads and the port facilities ar e improvements to general infrastructure. The
European Communities has identified no measure that restricts the ability of the general public to use
the improved road network or port facility at issue.774
(b) The appropriate treatment of improveme nts to general infrastructure under the
SCM Agreement when the improvements are of particular benefit to certain users
5.82 Canada argues that nothing in the SCM Agreement indicates that improvements to general
infrastructure that significantly benefit a limited nu mber of users should change the status of general
infrastructure when it remains av ailable to the public. The pub lic reasonably expects that a
government will maintain and improve general infrast ructure in the public in terest, for instance to
permit the supply of production and the distribution of goods to market. Moreover, to the extent
infrastructure is general, improvements to it that in itially benefit a single or limited number of users
frequently end up benefiting new economic actors and activities that may not have been foreseen
when the improvements were made.775
5.83 Canada maintains that, in this dispute, th e European Communities has identified no limitation
on the use of the roads or port facility at issue by the general public as a result of the Project Olympus
Master Site Agreement.776
5.84 Canada posits that improvements to privat e roads would appear to raise different
considerations. The European Communities has cl aimed that "…the Master Site Agreement even
includes the possibility of the government funding Boeing's 'private roads.'" However, the
European Communities does not appear to allege that any such improvements have been provided to
date. Moreover, the European Communities appear s to limit its challenge in respect of road
improvements to the appropriation of $262.3 million for "the I-5 expansion project" and $28.9 million
for the "SR-527 expansion project".777
(c) The distinction to be made between the concept of non-general as it pertains to infrastructure,
and the concept of specificity as it pertains to subsidies
5.85 Canada notes that to bolster its argument that the infrastructure at issue is other than general,
the European Communities claims that Boeing receives a dispr oportionate and predominant benefit
from them. However, the concepts of "disproporti onate" or "predominant" benefit or use appear
nowhere in Article 1. Rather, these are concep ts that are addressed in Article 2 of the
SCM Agreement.778
5.86 Canada posits that by virtue of Article 1.2 of the SCM Agreement, a subsidy is only subject to
the provisions of Part II, or Parts III or V, if the subsidy is specific in acco rdance with the provisions
of Article 2 of the Agreement. Because "subsidy" and "specificity" determinations constitute discrete
and sequential findings under the SCM Agre ement, it follows that a finding under
Article 1.1(a)(1)(iii) that government-provided infrast ructure is not general, cannot be equated with a
finding under Article 2.1 of the Agreement that a re sulting subsidy is specific, as this would introduce
an element of redundancy to the analysis.779

774 Executive Summary of Canada's written submission, para. 13.
775 Executive Summary of Canada's written submission, para. 14.
776 Executive Summary of Canada's written submission, para. 15.
777 Executive Summary of Canada's written submission, para. 16.
778 Executive Summary of Canada's written submission, para. 17.
779 Executive Summary of Canada's written submission, para. 18.

BCI deleted, as indicated [***]

5.87 Therefore, Canada considers that the test for de facto specificity in Article 2.1(c) of the
SCM Agreement is not the relevant te st in an analysis under Article 1.1(a)(1)(iii). It is also not the
appropriate test from a systemic perspective b ecause a determination that government-provided
infrastructure should be considered other than gene ral, on the basis of certain enterprises deriving a
predominant or disproportionate benefit from its usage, would disadvantage those Members whose
lack of national or regional economic diversifi cation results in predominant use of government-
provided infrastructure by certain enterprises.780
(d) Propositions relevant to the analysis of alleged infrastructure subsidies
5.88 Canada argues that, for the foregoing reasons, the Panel should adopt an approach to its
analysis of the European Communities' infrastructure claims consistent with, inter alia, the following
propositions: (i) the general infrastructure exclusion encompasses all government-provided
infrastructure that is available for use by the general public; (ii) improvements to general
infrastructure, which benefit specific users in a si gnificant or predominant way, do not alter the
character of that infrastructure for the purpose of Article 1.1(a)(1)(iii); (iii) the fact that certain
enterprises receive a significant or disproportionate benefit from government-provided infrastructure
does not establish that such infrastructure is not "g eneral" for the purposes of Article 1.1(a)(1)(iii) of
the SCM Agreement.
781
5.89 Finally, in its oral statement, Canada main tains that the infrastructure challenged by the
European Communities in this dispute that is ge nerally available for use by the public. This
infrastructure is not a financial contribution under Article 1 because availability for public use is a
hallmark of general infrastructure.782
5. The ATP Program and Article 2 specificity
5.90 Canada notes that the European Communitie s alleges that the Advanced Technologies
Program of the U.S. Department of Commerce (ATP) is specific within the meaning of Article 2.1(a)
of the SCM Agreement. The European Communiti es bases its claim on the assertion that "(a)ccess to
ATP funding is explicitly limited by regulation to only those companies that perform research into
"high risk, high pay-off, emerging and enabling technologies". The European Communities' approach
to the specificity test would effectively allow a complainant to establish specificity whenever a
subsidy programme places conditio ns on eligibility, no matter how generic those conditions.
According to the European Comm unities approach, specificity can be established even where the
eligibility conditions relate to generic skills applicable across mul tiple sectors of the economy such as
a capacity to do research and development.
783
5.91 Canada contends that there are three major flaws to the European Communities' claim that the
ATP Program is specific: First, the universe of companies and industries that potentially fall within
the limits identified by the European Communities is highly indeterminate and extraordinarily diverse
Second, the European Communities' analysis makes no effort to establish any commonality among the
industries or groups of industries that are eligible for ATP funding by reference to the products they
produce. Third, the European Communities attempts to establish the specificity of the ATP Program
as a whole by reference to an unrepresentative sample of eight particular ATP projects (out of 768
ATP projects created since the program's inception in 1988).
784

780 Executive Summary of Canada's written submission, para. 19.
781 Executive Summary of Canada's written submission, para. 20.
782 Executive Summary of Canada's oral statement, para. 31.
783 Executive Summary of Canada's written submission, para. 21.
784 Executive Summary of Canada's written submission, para. 22.

BCI deleted, as indicated [***]

5.92 Canada argues that asserting that a subsidy programme is specific when the potential universe
of users is both diverse and indeterminate is impossi ble to reconcile with the ordinary meaning of the
term "certain enterprises" as used in Article 2.1(a). The chapeau of Article 2.1 clarifies that the term
"certain enterprises" refers to "a n enterprise or industry or groups of enterprises or industries". The
ordinary meaning of the word "certain" is "(d)etermi ned, fixed, not variable, definite, precise, exact".
The European Communities has not attempted to dete rmine at all, much less with precision, how
many enterprises and/or industries might be capable of performing research into "high risk, high pay-
off, emerging and enabling technologies". Nor has the European Communities identified objective
criteria that could be used to establish whether an enterprise comes within this definition.
785
5.93 Canada considers that conspicuously lack ing from the European Communities claim of
specificity for ATP funding is any attempt to demo nstrate that the enterprises receiving such funding
produce similar products. In fact, as the United States notes, ATP projects have supported research in
fields as diverse as animal and plant biotec hnology, optics and photonics and semiconductors.
Divorcing the concept of "an industry" from the produc ts produced by that industry is contrary to
practice under the WTO agreements in general, a nd under the SCM Agreement in particular. For
example, in determining the scope of a counter vailing duty investigation or the basis for a
determination of injury, the nature of the output pr oducts is the link used to determine the relevant
group of enterprises or industries at issue.
786
5.94 Canada notes that prior panels have recognized that the concept of industry is tied to the types
of product produced. The European Communities interpretation of "industry" or "group of industries"
is not supported by the dictionary definition of eith er the word "industry" or "group". The ordinary
meaning of "industry" is "(a) particular form or br anch of productive labour; a trade, a manufacture".
The ordinary meaning of "group" is "(a) number of people or things regarded as forming a unity or
whole on the grounds of some mutual or common relation or purpose, or classed together because of a
degree of similarity". "High risk, high pay-off, emerging and enabling technologies" do not form a
discrete form or branch of manufacture, nor do they comprise a unity or whole. The industries
supported by the ATP Program are engaged in a multiplicity of forms of manufacture.
787
5.95 In Canada's view, a third flaw in the European Communities' specificity argument is that it
relies on supposed commonalities within and among the eight different ATP projects explicitly
identified by the European Commun ities in its first written submission. Putting aside the fact that
these eight projects involve very diverse collections of industries, there is no reason to assume that
any specificity of these particular projects is representative of the whole programme.
788
5.96 In its oral statement, Canada contends that the European Communities based its claim that the
U.S. Department of Commerce's Advanced Tech nology Program, or ATP was specific to certain
enterprises within the meaning of Article 2.1(a) of the SCM Agreement on the assertion that ATP was
explicitly limited by regulation to only those compani es that perform research into "high risk, high
pay-off emerging and enabling technologies". It also based its claim on the fact that eight particular
ATP projects are limited to funding companies involved in manufacturi ng composite and metal
structures, electrical components and improving logistics for manufacturing and supply chains.
789
5.97 Canada disputes these claims. Its concern w ith the European Communities' approach is
threefold: First, the universe of companies a nd industries involved in "emerging and enabling
technologies" is extraordinarily diverse. Sec ond, there is no commonality among the users of the

785 Executive Summary of Canada's written submission, para. 23.
786 Executive Summary of Canada's written submission, para. 24.
787 Executive Summary of Canada's written submission, para. 25.
788 Executive Summary of Canada's written submission, para. 26.
789 Executive Summary of Canada's oral statement, para. 11.

BCI deleted, as indicated [***]

ATP by reference to the products they produce. Thir d, it is inappropriate to assess the specificity of
the ATP as a whole by reference to an unrepresentative sample of eight projects.790
5.98 Canada notes that Australia has a somewhat different appreciation of the
European Communities' specificity claim in respec t of ATP. Australia's submission appears to
assume that the European Communities is challengi ng each of the eight ATP projects at issue as
specific under Article 2 regardless of whether the ove rall ATP is specific. Australia has suggested
that the Panel look to the panel report in Japan – DRAMs for guidance in assessing the specificity of
individual transactions under the ATP.791
5.99 Canada observes that Australia may well be correct that the Euro pean Communities would
like a specificity finding for each of the eight projects at issue regardless of whether ATP is specific.
However, Canada is not aware of such a request from the European Communities. If the
European Communities meant to make this requ est, Canada would have expected to see legal
arguments in the European Communities' first written submission as to why it was appropriate to do a
transaction-level specificity analysis in the case of these ATP projects. Canada would urge the Panel
to avoid even considering such an analysis given the absence of an explicit request.792
5.100 Canada argues that the specificity analysis is properly conducted at the programme level
when the subsidies at issue are provided under a ge nerally available support programme. If subsidies
are provided under such programmes in compliance w ith programme guidelines, they are not specific
within the meaning of Article 2.1. Canada notes that the European Communities does not appear to
have alleged that the eight ATP projects highlight ed in its submission deviated in any way from
standard ATP guidelines.793
5.101 Canada notes that the panel report in Japan – DRAMs was the first and only panel report to
have assessed subsidies provided pursuant to a gene ral framework programme at the transaction level
rather than at the programme level. In that case, the Japan – DRAMs panel acknowledged that, as a
general matter, individual transactions that flow from generally available support programmes would
not be specific within the meaning of Article 2. 1 if they do not deviate from standard programme
guidelines. Even if the European Communities had re quested a specificity analysis at the individual
ATP project level, Canada does not believe such an analysis would be appropriate given Canada's
view that specificity should be assessed on a program b asis. If, in any event, the Panel is considering
such an analysis, Canada does not share Australia's view that the Japan –DRAMs panel report
provides appropriate guidance.794
5.102 Canada further notes that the panel in Japan - DRAMs found that an individual transaction
would be specific, "if it resulted from a framewo rk programme whose normal operation (1) does not
generally result in financial contributions, and (2) does not predetermine the terms on which any
resultant financial contributions mi ght be provided, but rather requires (a) conscious decisions as to
whether or not to provide the financial contributi on (to one applicant or another), and (b) conscious
decisions as to how the terms of the financial c ontribution should be tailored to the needs of the
recipient company". In Canada's view, the Japan – DRAMs test does not provide appropriate
guidance in this dispute for two reasons.795

790 Executive Summary of Canada's oral statement, para. 12.
791 Executive Summary of Canada's oral statement, para. 13.
792 Executive Summary of Canada's oral statement, para. 14.
793 Executive Summary of Canada's oral statement, para. 15.
794 Executive Summary of Canada's oral statement, para. 16.
795 Executive Summary of Canada's oral statement, para. 17.

BCI deleted, as indicated [***]

5.103 First, according to Canada, criterion 1 simply does not apply. Canada notes that neither the
European Communities nor the United States has cl aimed that ATP "does not generally result in
financial contributions". Quite the contrary. Second, the Japan – DRAMs panel seems to have
assumed, in criterion two, that a generally ava ilable support programme can only be considered non-
specific if the support it provides is granted automati cally and without conscious decisions. This "no
conscious decision" approach sets the bar too high to serve as a model for this or any other panel.796
5.104 In Canada's view, Article 2 of the SCM Agreem ent is intended to provide Members with real
guidance as to what types of subsidy are or are not actionable under the SCM Agreement. It is rare
for a government to establish a general support pr ogramme that provides subsidies without any
conscious decisions at all. A careful reading of Article 2 does not support the Japan – DRAMs panel's
apparent view that the granting of a subsidy must be automatic, without conscious decisions, to
qualify as non-specific. Article 2.1(b) provides that specificity shall not exist for subsidies where
eligibility is automatic based on obj ective criteria. Critically, however, Article 2.1(b) refers only to
automatic eligibility. The actual granting of support need not be automatic and unconscious.797
5.105 Canada contends that to claim otherwise would be to ignore Article 2.1(c), which presupposes
some element of discretion in the granting of Arti cle 2.1(b) subsidies. Article 2.1(c) sets out the
de facto specificity test. It provides that programs that qualify as non-specific under Article 2.1(b)
may nonetheless be found de facto specific if discre tion has been exercised inappropriately by the
granting authority in the decision to grant a subs idy. Since the exercise of some discretion is
assumed, it follows that not every exercise of discretion is disqualifying.
798
5.106 According to Canada, it is not necessary to find th at the granting of a subsidy is automatic or
unconscious to qualify a programme as non-specific under Article 2. It is only necessary that the
exercise of discretion not undermine a programme's objective criteria governing eligibility for, and the
amount of, a subsidy. Because the Japan – DRAMs panel overstated the rele vant standard in its
proposed test, it does not provide helpful guidance in this dispute.799
5.107 As a final comment on ATP, Canada does not agree with Australia that the Panel should
assess ATP using the de facto specificity criteria in Article 2.1(c). The European Communities
framed their specificity claim in respect to ATP under Article 2.1(a) alone.800
6. De facto export contingency
5.108 Canada notes that the European Communities a lleges that certain tax incentives provided to
Boeing by Washington State are prohibited under Article 3 of the SCM Agreement because
Washington State, in fact, tied the tax incentives to actual or anticipated export performance within
the meaning of Article 3.1(a) of the SCM Agreement. However, the European Communities claims in
respect of these tax incentives fail to satisfy the test for de facto export contingency provided for in
the SCM Agreement.
801
5.109 Canada points out that the Appellate Body has f ound that this standard requires that "the facts
must 'demonstrate' that the granting of a subsidy is tied to or contingent upon actual or anticipated
exports. It does not suffice to demonstrate solely that a government granting a subsidy anticipated
that exports would result". The Appellate Body has also explained that export orientation may be

796 Executive Summary of Canada's oral statement, para. 18.
797 Executive Summary of Canada's oral statement, para. 19.
798 Executive Summary of Canada's oral statement, para. 20.
799 Executive Summary of Canada's oral statement, para. 21.
800 Executive Summary of Canada's oral statement, para. 22.
801 Executive Summary of Canada's written submission, para. 27.

BCI deleted, as indicated [***]

taken into account as a relevant fact, depending on the facts of a particular case, but export
orientation, on its own, cannot support the conclusion that a subsidy is export contingent.802
5.110 Canada considers that the European Commun ities' argument that HB 2294 tax incentives are
contingent on export performance is based on the fact that its entry into effect was contingent on an
agreement by Boeing to site a final assembly facility in Washington State. Such a facility is defined
in HB 2294 as "a location with the capacity to produ ce at least thirty-six super-efficient airplanes per
year". According to the European Communities, such a capacity, if fully utilized, would produce
more 787 airplanes than could be absorbed by the U.S. market in an average year.803
5.111 Canada argues that this claim, even accepted at face value, falls well short of establishing an
export contingency. Washington State's requirement was that Boeing site a facility in Washington
State with a minimum production capacity in order to receive the tax incentives. It did not require
Boeing to make a single export sale or sell more than it otherwise would have in export markets, nor
did it distort Boeing's market orientation in favour of exports. A more compelling explanation for the
contingency in HB 2294 is that Washington State wanted to retain aerospace manufacturing and was
not willing to accept a mere token facility in return for its tax incentives.804
7. Serious prejudice
5.112 Canada notes that, in their responses to the Pane l question on the issue of whether Article 6.3
of the SCM Agreement sets out an exhaustive list of the possible forms of serious prejudice that may
be challenged under Article 5(c), the third parties ta ke divergent positions. Australia and Korea take
the position that Article 6.3 is an exhaustive list. Japan takes the position that a successful serious
prejudice claim requires the demonstration of an effect under Article 6.3, but stops short of declaring
that Article 6.3 is exhaustive. Brazil and Chin a take no position on the issue. Canada takes the
position, consistent with the views expressed by the panel in Korea – Commercial Vessels , that
Article 6.3 does not set out an exhaustive list.805
5.113 According to Canada, this divergence of views is not surprising since the relevant provisions
appear to pull in different directions. Footnote 13 to Article 5(c) clarifies that the term "serious
prejudice" is used in the SCM Agreement in the same sense as it is used in Article XVI of GATT
1994 and includes threat of serious prejudice. Article 5(c) brings into the SCM Agreement a broad
understanding of serious prejudice forged over decades of GATT practice. Article 6.2, on the other
hand, establishes that serious prejudice cannot be established if none of the effects listed in Article 6.3
exist. This suggests that Article 6.3 is an exha ustive list of the forms of serious prejudice. The
language of Article 6.3 itself is open-ended, and refers the reader back to Article 5(c).
806
5.114 However, as discussed in Canada's written respon se to the Panel on this subject, there is a
way to interpret these provisions harmoniously. Ar ticle 5(c) imports into the SCM Agreement an
unbroken chain of meaning for the term "serious prejudice", encompassing the concepts set out in
Article 6.3, but also recognizing the possibility of additional forms of serious prejudice closely linked
to those core concepts. Article 6.2 serves to indicat e that Article 6.3 is a gatekeeper provision in that
serious prejudice cannot be established if none of the core concepts in Article 6.3 are present.
Article 6.3 itself is drafted broadly enough to permit the possibility of un-enumerated forms of serious
prejudice, while providing particular guidance on the co re concepts that must be established to found

802 Executive Summary of Canada's written submission, para. 28.
803 Executive Summary of Canada's written submission, para. 29.
804 Executive Summary of Canada's written submission, para. 30. See also, Executive Summary of
805 Executive Summary of Canada's oral statement, para. 23.
806 Executive Summary of Canada's oral statement, para. 24.

BCI deleted, as indicated [***]

a serious prejudice claim. Treating Article 6.3 as the gatekeeper provision provides a mechanism for
giving Article 6.3 its due weight without denying the legacy of 60 years of GATT/WTO practice that
has adopted a broad understanding of the serious prejudice concept.
807
5.115 Canada is sympathetic to the concern raised by Australia that the possibility of undefined
forms of serious prejudice could be seen as leavi ng a panel with no guidance for its examination of
such a complaint. However, in Canada's view, such guidance is available in the jurisprudence of the
GATT. This jurisprudence suggests that forms of serious prejudice that are not enumerated in
Article 6.3 must have a real and substantial link to the core concepts that are set out in Article 6.3.808
5.116 In Canada's view, there is a practical reason why Article 6.3 may have been structured as a
gatekeeper provision for the serious prejudice con cept, while permitting a panel to consider the
possibility of other forms of serious prejudice once one of the effects in Article 6.3 is established.
WTO dispute settlement is a limited resource. There is a logic to requiring a specific threshold before
a Member can access the dispute se ttlement system to make a claim of serious prejudice. However,
once a Member has reached that threshold, the bene fits of an effective resolution of the dispute
between the Parties may justify giving a panel so me latitude to acknowledge other forms of serious
prejudice that go beyond the confines of Article 6.3.809
5.117 Canada considers that this type of gatekeeper structure is not unique in the WTO Agreements.
An analogy can be made to Article 17.4 in the AD Agreement that requires a complainant to delay its
recourse to dispute settlement in respect to an anti-dumping investigation until an administering
authority has taken one of three types of measur es: a provisional measure of significant impact, a
final action to levy definitive anti-dumping duties or acceptance of price undertakings.810
5.118 Canada recalls that the Appellate Body in Guatemala – Cement I found that Article 17.4 of
the AD Agreement meant that a panel request in respect of an anti-dumping investigation must
specifically identify one of the required types of me asures in order to give a panel jurisdiction over a
dispute. However, as the Appellate Body clarified in US – 1916 Act , once a Member has identified
one of the three types of gatekeeper measures in its panel request, it may cha llenge the consistency of
any preceding action taken by an investigating authority in the course of an anti-dumping
investigation.811
5.119 Canada posits that a gatekeeper interpretati on of Article 6.3 in the SCM Agreement is
justifiable for the same reasons that the Appe llate Body gave for justifying the structure of
Article 17.4 of the SCM Agreement in US – 1916 Act . It avoids excessive use of dispute settlement,
while seeking to provide a full and effective resolution to those disputes that do require formal dispute
settlement.812
D. CHINA
1. Introduction
5.120 Recognizing at the outset that many of the issues ra ised in this dispute are solely or primarily
factual, China focuses on the discussion of the following three legal issues in its third-party
submission:

807 Executive Summary of Canada's oral statement, para. 25.
808 Executive Summary of Canada's oral statement, para. 26.
809 Executive Summary of Canada's oral statement, para. 27.
810 Executive Summary of Canada's oral statement, para. 28.
811 Executive Summary of Canada's oral statement, para. 29.
812 Executive Summary of Canada's oral statement, para. 30.

BCI deleted, as indicated [***]

(a) The use of best information available and the drawing of adverse inferences;
(b) The finding of de facto specificity; and
(c) The finding of threat of serious prejudice.813
2. Best information available and adverse inference
5.121 China notes that Annex V of the SCM Agreement provides for a set of special rules for the
development of information on serious prejudice. Such rules are only expressly applicable where an
Annex V procedure has been initiated. Based on th e language of Annex V, there appear to be two
landmarks that indicate the existence of an Anne x V procedure: whether the DSB has initiated an
Annex V procedure and whether a "representative" ("Annex V Facilitator") has been designated. 814
Having addressed the threshold issue of whether Annex V is applicable to this dispute, China wishes
to discuss two aspects of the Annex V rules that are c onceivably relevant to the parties' arguments in
this dispute.815
(a) Best information available
5.122 China points out that paragraph 6 of Annex V authorizes the complaining party to make its
case based on evidence available to it and the panel to rely on "best information otherwise available"
in certain cases. However, this provision does not deprive the defending party of the right to submit
other information, including rebuttal information, in the later part of the panel proceedings following
the Annex V procedure.816
5.123 First, China notes that the wording of paragraph 5 of Annex V does not prevent the
submission of information by either party after an Annex V procedure. For example, paragraph 5
provides that the information obtained during th e process "should" include rebuttal evidence. The
word "should" is often used to imply an exhortation or a preference. This seems to be true especially
taking into account that the word "shall" is used in other parts of paragraph 5. 817 According to China,
the last sentence of para. 5 further envisages the co llection of supplemental information by the panel
"in the course of reaching its conclusions". This as well indicates that the Annex V procedure is not
the end to the information-collecting process.818
5.124 Second, China notes that although the last sentence of paragraph 9 provides that "ordinarily
the panel should not request additional information to complete the record where the information
would support a particular party's position and the absen ce of that formation in the record is the result
of unreasonable non-cooperation by that party in the information-gathering process", it does not
prevent a party from submitting further factual info rmation during the panel process. Furthermore,
China argues that the words "ordinarily" and "should" imply that there is a possibility for a panel to
seek information even though the lack of such information is the result of the unreasonable non-
cooperation of a party.819
5.125 Third, China considers that it is important to note that during the Annex V procedure the
defending party is not in a good position to fully understand how a complaining party will structure its
claim and substantiate it with factual and legal ar guments. This situation greatly limits a defending

813 Executive Summary of China's written submission, para. 1.
814 Executive Summary of China's written submission, para. 2.
815 Executive Summary of China's written submission, para. 3.
816 Executive Summary of China's written submission, para. 4.
817 Executive Summary of China's written submission, para. 5.
818 Executive Summary of China's written submission, para. 6.
819 Executive Summary of China's written submission, para. 7.

BCI deleted, as indicated [***]

party's ability to submit pertinent rebuttal informatio n. Depriving a defending party of the rights to
submit rebuttal evidence during the substantive st ages of the panel proceedings would seriously
prejudice its rights to argue its case with factual s upport and would thus unfairly prejudice its right to
due process.820
5.126 In summary, China believes that the reference to "best information otherwise available" in
paragraph 6 of Annex V of th e SCM Agreement should not be interpreted to prevent a non-
cooperating party in the Annex V procedure from su bmitting further factual information at the later
stage of the panel proceedings.821
(b) Adverse inference
5.127 With respect to drawing adverse inferences, China submits that a panel is not required to draw
adverse inferences in any cases of non-cooperation. Rather, it should take into account the relevant
facts and policy considerations when making a decision to do so.822
5.128 First, China notes that paragraph 8 of Annex V pr ovides that a panel shall consider the advice
of the Annex V Facilitator on certain aspects. In Ch ina's view, this does not require a panel to make
its decision on the sole basis of the Annex V Fac ilitator's advice. Rather, Article 11 of the DSU
mandates a panel with the responsibilities to "make an objective assessment of the matter before it".
Therefore, a panel is obligated to make an objective assessment of the facts on its own in order to
decide whether to draw adverse inferences, and if so, what adverse inferences to be drawn.
823
5.129 Second, in China's view, when a panel is invoking its discretion under paragraph 7 of
Annex V, it is also bound by the principles set forth in Article 13 of the DSU and the WTO
jurisprudence with respect to adverse inferences.824
5.130 China recalls that in Canada – Aircraft , the Appellate Body opined that "authority (to draw
adverse inferences) seems to us an ordinary aspect of the task of all panels to determine the relevant
facts of any dispute involving any c overed agreement (emphasis added)". 825 Given this conclusion,
China believes that the guidance given by the A ppellate Body in respect of drawing adverse
inferences in cases other than t hose involving Annex V procedures should also be followed when a
panel is under the Annex V procedures to determine whether and what inferences should be drawn.826
5.131 China also points out that the Appellate Body in Canada – Aircraft, emphasized that a panel
"should examine very closely indeed whether the full ensemble of the facts on the record reasonably
permits the inference urged by one of the parties to be drawn".827 In a subsequent dispute, US - Wheat
Gluten, the Appellate Body re-confirmed its position th at adverse inferences must be drawn on the
basis of all of the facts of record relevant to th e particular determination to be made and it is not

820 Executive Summary of China's written submission, para. 8.
821 Executive Summary of China's written submission, para. 9.
822 Executive Summary of China's written submission, para. 10.
823 Executive Summary of China's written submission, para. 11.
824 Executive Summary of China's written submission, para. 12.
825 Executive Summary of China's written submission, footnote 1 referring to Appellate Body Report,
Canada – Aircraft, para. 202.
826 Executive Summary of China's written submission, para. 13.
827 Executive Summary of China's written submission, footnote 2 referring to Appellate Body Report,
Canada – Aircraft, para. 204.

BCI deleted, as indicated [***]

permissible for a panel to draw adverse inferences simply because a party refuses to provide certain
information requested from it by the panel.828
5.132 Third, China submits that the drawing of adverse inferences should not be used as a
punishment of a party's non-cooperation. In Canada – Aircraft , the Appellate Body noted that the
"'adverse inferences' that Brazil believes the Panel sh ould have drawn is not appropriately regarded as
a punitive inference in the sense of a 'punishment ' or 'penalty' for Canada's withholding of
information. It is merely an inference which in certain circumstances could be logically or reasonably
derived by a panel from the facts before it". 829 This shows the drawing of adverse inferences should
not be made as a "punishment" of a party's withholding of information.830
5.133 On the basis of the above, China submits that Annex V does not require or even authorize a
panel to draw adverse inferences in any case of non- cooperation by a party in the Annex V procedure.
Rather, the drawing of adverse inferences should be based on all the relevant facts of record and
should not be used as a punishment to the non-cooperating party.831
3. A three-prong analysis in the determination of de facto specificity
5.134 China believes that Article 2.1(c) of the SCM Agreement provides for a three-prong analysis
in the determination of de facto specificity.832
5.135 First, China considers that there should be fact s indicating the possible existence of de facto
specificity. In practice, only when de jure specificity cannot be established on sufficient evidential
grounds will one turn to analyze whether de facto specificity exists. Under such circumstances,
Article 2.1(c) requires "reasons to believe". Howeve r, such reasons need only be indicative of the
possibility of de facto specificity. The first "may" in the first sentence of Artic le 2.1(c) also indicates
that the standard for the reasons is not very high.833
5.136 Second, China argues that consideration may then be turned to any or all of the four factual
factors identified in the second sentence of Article 2.1(c). As the panel in US – Softwood Lumber IV
ruled, the second "may" in the paragraph indicates that an authority may want to look at any of the
four factors.
834 In the multilateral context, the burden is on the complaining member to substantiate
its claim of de facto specificity with positive evidence supporting the finding of any of these factual
factors.835
5.137 Third, China argues that the last sentence of Article 2.1 (c) requires that, when assessing any
or all of the four factual factors, one shall take in to account two circumstantial factors, i.e. the extent
of diversification of economic activities and the le ngth of time of the application of the subsidy
program. Thus, in the context of a multilatera l challenge against a WTO Member's subsidy
programme, a complaining Member should demonstrat e that based on the consideration of these two

828 Executive Summary of China's written submission, footnote 3 referring to Appellate Body Report,
US – Wheat Gluten Safeguard, para. 174. Executive Summary of China's written submission, para. 14.
829 Executive Summary of China's written submission, footnote 4 referring to Appellate Body Report,
Canada – Aircraft, para. 200.
830 Executive Summary of China's written submission, para. 15.
831 Executive Summary of China's written submission, para. 16.
832 Executive Summary of China's written submission, para. 17.
833 Executive Summary of China's written submission, para. 18.
834 Executive Summary of China's written submission, footnote 5 referring to Panel, US – Lumber CVD
Final, WT/DS257/R, para. 7.123.
835 Executive Summary of China's written submission, para. 19.

BCI deleted, as indicated [***]

circumstantial factors, any or all of the four f actual factors support a positive finding of de facto
specificity.836
5.138 In short, China submits that in assessing whether the facts surrounding a subsidy program
supports the finding of de facto specificity, the thr ee-prong analysis provided in Article 2.1(c) should
be followed.837
4. Threat of serious prejudice
5.139 In China's view, footnote 13 to Article 5 of th e SCM Agreement makes it clear that "serious
prejudice" includes "threat of serious prejudice". Thus, threat of serious prejudice may be an
independent condition that leads to the appl ication of remedies under Article 7 of the
SCM Agreement. It is therefore important to co nsider how threat of serious prejudice could be
established.
838
5.140 China notes that Article 6 of the SCM Ag reement only has detailed provisions on the
establishment of serious prejudice and gives no guidan ce on the finding of threat of serious prejudice.
However, in China's view, given the structure of Article 5 and the general framework of the
SCM Agreement, Articles 15.7 and 15.8 of the SC M Agreement on the determination of threat of
injury should provide important guidance of finding threat of serious prejudice in the multilateral
context.839
5.141 First, China observes that as the thrust of finding threat of serious prejudice, the threat must
be "clearly foreseen and imminent" as provided in pertinent part of Article 15.7. In Mexico – Corn
Syrup (Article 21.5 – US), when discussing the parallel provision of Article 3.7 of the AD Agreement,
the Appellate Body notes that "a 'proper establishment' of facts in a determination of threat of material
injury must be based on events that, although they have not yet occurred, must be 'clearly foreseen
and imminent', in accordance with Article 3.7 of the Anti-Dumping Agreement".840
5.142 Second, China is of the view that depending on the threat of specific types of serious
prejudices at issue, one needs to look at relevant factual factors to establish the existence of the
threat.841
5.143 China recognizes that the concepts of "material injury" and "serious prejudice" are distinct
from each other, and that the factors as enumerated in Article 15.7 may not be fully applicable to the
finding of threat of serious prejudice. However, in China's view, some of the factors listed in
Article 15.7 might be neutral, and thus common, in th e consideration of threat of injury and that of
serious prejudice. For example, "nature of the subs idy or subsidies in question and the trade effects
likely to arise therefrom" is one of such factors.
842
5.144 Third, China notes that Article 15.7 requires that "(a) determination of a threat of material
injury shall be based on facts and not merely on a llegation, conjecture or remote possibility". If a
complaining party chooses to pursue a threat of serious prejudice case, it must establish a prima facie

836 Executive Summary of China's written submission, para. 20.
837 Executive Summary of China's written submission, para. 21.
838 Executive Summary of China's written submission, para. 22.
839 Executive Summary of China's written submission, para. 23.
840 Executive Summary of China's written submission, footnote 6 referring to Appellate Body Report,
Mexico – Corn Syrup (Article 21.5 – US), para. 85. Executive Summary of China's written submission, para. 24.
841 Executive Summary of China's written submission, para. 25.
842 Executive Summary of China's written submission, para. 26.

BCI deleted, as indicated [***]

case of such threat on the basis of facts supported by evidence, rather than mere allegation, conjecture
or remote possibility.843
5.145 Fourth, as Article 15.8 provides that "special care" should be taken in the consideration of
threat of injury, China believes the same logic und erlying that provision remains valid in a dispute
under the multilateral framework. As noted above, a finding of threat of serious prejudice alone can
lead to application of remedies under Article 7. Th us, when the effects of the subsidy have not yet
materialized, a panel should be cautious in assessing whether such threat does exist and is clearly
foreseen and imminent.844
5.146 In summary, China submits that the threat of serious prejudice must be clearly foreseen and
imminent and the finding of such threat must be based on facts and made with special care.845
5. Conclusion
5.147 In conclusion, China is of the opinion that:
(a) the reference to "best information otherwise available" in Annex V of the
SCM Agreement should not be interpreted to prevent the non-cooperating party in the
Annex V procedure from submitting further fact ual information at the later stage of
the panel proceedings; China further submits that paragraph 7 of Annex V does not
require or even authorize a panel to dr aw adverse inferences in any case of non-
cooperation by a party in the Annex V proce dure; the drawing of adverse inferences
should be based on all the relevant facts of record and should not be used as a
punishment on the non-cooperating party.
(b) to determine the de facto specificity, a th ree-prong analysis shall apply: (i) there
should be facts indicating the possible existen ce of de facto specificity; (ii) any or all
of the four factors listed in Article 2.1(c) of the SCM Agreement shall be
demonstrated; and (iii) two circumstantial factors shall be considered.
(c) the threat of serious prejudice must be clearly foreseen and imminent and the finding
of such threat must be based on facts and made with special care.
846
E. JAPAN
1. An examination of specificity as a matter of law must be based on the entire legal
framework under which the alleged subsidy is conferred
5.148 Japan first argues that a cornerstone of the SCM Agreement, laid out in Article 1.2, is the
threshold that subsidies are subject to Part III only if they are specific. Article 2, in turn, provides
principles for determining whether a subsidy is "s pecific to an enterprise or industry or group of
enterprises or industries…" As a general matter, Ar ticle 2.1, in subparagraphs (a) and (b), provides
principles for determining where a subsidy is specific as a matter of law, or de jure specific.
Subparagraph (c) sets forth additional criteria for de termining the existence of specificity as a matter
of fact, or de facto specificity.847

843 Executive Summary of China's written submission, para. 27.
844 Executive Summary of China's written submission, para. 28.
845 Executive Summary of China's written submission, para. 29.
846 Executive Summary of China's written submission, para. 30.
847 Executive Summary of Japan's written submission, para. 1.

BCI deleted, as indicated [***]

5.149 Japan comments on the application to this dispute of the principles for determining de jure
specificity with respect to the Parties' arguments concerning the right of NASA contractors to retain
patent rights arising from their work as U.S. gove rnment contractors. Japan notes that the
European Communities claims that the legal regime providing for the retention of these patent rights
is de jure specific because it is established under the National Aeronautics and Space Act of 1958
("Space Act"), and so is expressly limited to the aeronautics and space-related industries. 848 T h e
United States responds that the regulations impl ementing the Space Act are tied to government-wide
policies as established in a Presiden tial Memorandum and an Executive Order. 849 Further, the
United States maintains that all contractors under U.S. government R&D contracts have the same
patent retention rights. 850 In essence, the United States maintains that the alleged subsidy is not de
jure specific when examined in the light of the overall legal framework governing contractor retention
of patent rights. 851 Japan agrees that the Panel's specificity analysis should be based on the overall
legal framework governing the alleged subsidy.852
5.150 Japan argues that in determining whether "t he legislation…explicitly limits access to a
subsidy to certain enterprises", or whether "the legislation…establishes objective criteria or conditions
governing the eligibility for, and the amount of, a subs idy", for the purpose of Articles 2.1(a) and (b)
of the SCM Agreement, a panel must first engage in a detailed examination of the domestic legislation
at issue. In doing so, Japan believes this Panel s hould examine the relevant legal regime as a whole,
and not merely a small or isolated portion of that re gime. In other words, if a proper examination of
the legal regime requires – under a Member's partic ular domestic legal framework – the consideration
of several legal instruments, a panel must take in to account all of these instruments, and not focus on
one in isolation of the others. Japan further notes that the Appellate Body has indicated that "it is
permissible, indeed essential, to conduct a detailed examination of {pertinent} legislation in assessing
its consistency with WTO law". 853 Japan submits that this approach applies equally where a panel is
assessing whether a subsidy measure is de jure specific for purposes of Articles 2.1(a) and (b).854
2. Comments on certain elements of the analys is the Panel should undertake in assessing
whether the alleged U.S. subsidies cause serious prejudice
(a) The Panel should ensure that the reference period is sufficient to permit the required objective
assessment of the matter before it
5.151 First, Japan makes a brief comment on the appr opriate period for an analysis of alleged
adverse effects through the types of serious prejudice described in Article 6.3 of the SCM Agreement.
Japan observes that the United States takes the positi on that "a panel considering claims of serious

848 European Communities' first written submission, , para. 852. Executive Summary of Japan's written
submission, footnote 1.
849 United States' first written submission, para . 335. Executive Summary of Japan's written
submission, footnote 2.
850 United States' first written submission, para . 335. Executive Summary of Japan's written
submission, footnote 3.
851 Japan notes that the United States made a similar argument in the United States –Offset Act (Byrd
Amendment), contending that the specificity analysis must be carried out for the challenged subsidy program "as
a whole." Panel Report, para. 7.112. The panel agreed that the CDSOA, rather than individual subsidy
payments under that legislation (as argued by Mexico ), should be examined in determining specificity.
Executive Summary of Japan's written submission, footnote 4.
852 Executive Summary of Japan's written submission, para. 2.
853 Appellate Body Report, US – Hot-Rolled Steel, para. 200. See also, Appellate Body Report, India –
Patent (US), paras. 65-68 (discussing the requirement to ex amine "relevant aspects" of a Member's domestics
laws in order to assess conformity thereof with that Member's WTO obligations). Executive Summary of
Japan's written submission, footnote 5.
854 Executive Summary of Japan's written submission, para. 3.

BCI deleted, as indicated [***]

prejudice under Article 6.3 must examine the markets re ferenced in that article over a period of time
sufficient to permit an objective asse ssment of the 'matter before it'". 855 Japan agrees with this
position.856 Japan notes that nothing in the SCM Agreement or the DSU establishes a fixed timeframe
for a panel's reference period in examining eviden ce of alleged adverse effects, provided that the
evidence relates to subsidy measures within the panel' s terms of reference. Further, Article 11 of the
DSU requires that a panel "make an objective assessment of the matter before it, including an
objective assessment of the facts of the case and the a pplicability of and conform ity with the relevant
covered agreements". Thus, dependi ng on the facts before it, a panel must determine the appropriate
reference period to examine, and it must choose a period that will allow it to render the required
"objective assessment", so as to accomplish the task imposed on a panel pursuant to DSU
Article 11.857
5.152 In addition, Japan notes that selection of the appropriate reference period may also, depending
on the facts of a particular case, be relevant to the required analysis of whether adverse effects
through serious prejudice are caused by the subsidies at issue. For example, the reference period
should be sufficient to ensure that a panel can exam ine whether "the effects of other factors…are not
improperly attributed to the challenged subsidies".
858 Japan addresses issues related to the required
causation test under Articles 5 and 6 below.859
5.153 On a separate but related issue, Japan believes th at the Panel should also be able to consider
evidence that pre-dates or post-dates its establishmen t, as well as evidence that falls outside of the
determined reference period. In EC – Selected Customs Matters , the Appellate Body clarified that,
while there are temporal limitations on the measures that a panel may consider, "such limitations do
not apply in the same way to evidence", and that "{a} panel is not precluded from assessing a piece of
evidence for the mere reason that it pre-dates or post-dates its establishment". 860 The same logic
should be applied by the Panel in this dispute to evaluate evidence concerning the alleged adverse
effects of the challenged subsidy measures. In particular, Japan believes that the Panel should
consider all relevant evidence provided, regardless whether that evidence pre-dates or post-dates the
Panel's establishment.861
(b) The Panel should evaluate whether the claimed serious prejudice results from the subsidies at
issue
5.154 Japan provides its views with respect to certain aspects of the causation analysis that the Panel
is called upon to perform in assessing claims of adverse effects through serious prejudice under
Article 6.3.862 First, Japan emphasizes that the requirement to determine whether the alleged adverse
effects result from the subsidies at issue is clear from the text of the SCM Agreement itself. It appears

855 United States' first written submission, para . 803. Executive Summary of Japan's written
submission, footnote 6.
856 Executive Summary of Japan's written submission, para. 4.
857 Executive Summary of Japan's written submission, para. 5.
858 Appellate Body Report, US – Upland Cotton , para. 437. Executive Summary of Japan's written
submission, footnote 7.
859 Executive Summary of Japan's written submission, para. 6.
860 Appellate Body Report, EC – Selected Customs Matters , para. 188. In US – Upland Cotton , the
United States agreed that the panel could look at post-establishment evidence. Panel Report, US – Upland
Cotton, para. 7.192 and n.254. See also, Panel report, EC – Trademarks and Geographical Indications (US) ,
para. 7.20. Executive Summary of Japan's written submission, footnote 8.
861 Executive Summary of Japan's written submission, para. 7. Japan notes that post-panel
establishment evidence relevant to the evaluation of claimed adverse effects may be particularly probative in
this case, given the rapidly evolving conditions of competition for the U.S. and EC LCA industries. Executive
Summary of Japan's written submission, footnote 9.
862 Executive Summary of Japan's written submission, para. 8.

BCI deleted, as indicated [***]

that both the European Communities and th e United States agree with this proposition. 863 To begin
with, Article 5 provides that "{n}o Member should cause, through the use of any subsidy referred to
in paragraphs 1 and 2 of Article 1, adverse effects to the interests of other Members". Serious
prejudice as defined by Article 6.3 is, of course, one of the types of adverse effects specified in
Article 5, which no Member should cause. Thus, under the plain language of the SCM Agreement,
serious prejudice caused by factors other than a subsidy is not actionable under Part III.
864
5.155 Further, Japan considers that the requirement for a causation test with respect to alleged
serious prejudice is embedded in the structure of Ar ticle 6.3. Article 6.3 describes four types of
serious prejudice. With respect to each, serious prejudice is characterized as "the effect of the
subsidy". In other words, Article 6.3 requires an analysis of whether the alleged serious prejudice is
the effect of (i.e. caused by) the subsidy or not.865
5.156 Japan notes that panels have described the required causation analysis as a counter-factual
"but for" test. 866 Further, in conducting such a "but for" analysis, panels have also stressed the
importance of proper attribution, i.e. "the need to take into account the effects of identified factors
other than the subsidies, to determine whether such factors would attenuate any affirmative causal link
that one may find, or render insignificant any price suppression or price depression effect of the
subsidy that one may find". 867 Japan submits that these standard s should apply equally in this case,
taking into account the obligation to properly attribut e effects to their respec tive causes as stated by
the panel.868
5.157 Concerning the role of the nature of the s ubsidy in the required causation analysis, Japan
wishes to comment on the European Communities' argument that the Washington State Business and
Occupation ("B&O") tax rate reduction, as applie d to the new Boeing 787 programme (along with
other alleged subsidies), operates to reduce margin al unit costs for the subsidized products, thus
enabling Boeing to lower its sales prices for those products by the amount of the subsidy. 869 Japan
refrains from commenting on the specific facts with respect to this issue. However, Japan particularly
notes that in a segmented causation analysis, which th e United States agrees to employ in this dispute,
the adverse effect on a "like product" which falls under the category of a certain product market

863 European Communities' first written submission, para. 1058; United States' first written submission,
para. 725. Executive Summary of Japan's written submission, footnote 10.
864 Executive Summary of Japan's written submission, para. 9.
865 Executive Summary of Japan's written submission, para.10. The Appellate Body in US – Upland
Cotton confirmed this point. Appellate Body Report, US – Upland Cotton , para. 437. In that case, while the
Appellate Body upheld the panel's causation analysis under Article 6, it also explained that the panel should
have done more to "demonstrate precisely how it evaluated the different factors bearing on the relationship
between the price-contingent subsidies and significant price suppression." Ibid., para. 458. The Appellate Body
further explained that, while the causa tion analysis required under Part V of the SCM Agreement should not be
"automatically transposed into Part III of the SCM Agreement", that type of analysis, along with the causation
tests set forth in the Agreement on Safeguards and th e AD Agreement – might "suggest ways of assessing
whether the effect of a subsidy is significant price suppre ssion rather than it being the effect of other factors."
Ibid,. para. 438. Executive Summary of Japan's written submission, footnote 11.
866 For example, in the words of the Korea – Commercial Vessels panel, addressing claims of price
suppression under Article 6.3(c), "the analysis that seems to be called for by the Agreement (by virtue of the
concepts of prices suppression and depression themselves ), concerns what the price movements for the relevant
{goods} would have been in the absence of (i.e., 'but for') the subsidies at issue." Panel Report, Korea –
Commercial Vessels, para. 7.537. Executive Summary of Japan's written submission, footnote 12.
867 Panel Report, Korea – Commercial Vessels , para. 7.618. See also, Panel Report, US – Upland
Cotton, para. 7.1344. Executive Summary of Japan's written submission, footnote 13.
868 Executive Summary of Japan's written submission, para. 11.
869 European Communities' first written submission, paras. 1233-34. Executive Summary of Japan's
written submission, footnote 14.

BCI deleted, as indicated [***]

should be attributed to the subsidy provided fo r a corresponding "subsidized product" and not to
another "subsidized product" which falls under a different category of product market.870
5.158 Japan also notes with interest the U.S. ar gument that the Washington State B&O tax rate
reduction, as applied to the new Boeing 787 programme , will not generate any fiscal effects until the
first aircraft is delivered in 2008. Japan supports the United States in that any finding of revenue
foregone (whether foregone in the past, present, or future) must be accompanied by an analysis of
adverse effects flowing from any such measure, to be conducted separately for a pertinent subsidy
measure under Articles 5 and 6 of the SCM Agreem ent. Such an analysis would have to be
performed based on the facts of each case, and pursuant to the causation tests referred to above.871
(c) The terms "imports" and "exports" for purposes of Article 6.3 require appropriate special
consideration in the light of the nature of the LCA industry
5.159 Japan also would like to comment on how the Panel should properly assess the
European Communities' claims of serious prejudice with regard to the meaning of the terms "imports"
and "exports" in Article 6.3. Article 6.3(a) provides that serious prejudice may arise where "the effect
of the subsidy is to displace or impede the imports of a like product of another Member into the
market of the subsidizing Member". Article 6.3( b) provides that serious prejudice may also arise
where "the effect of the subsidy is to displace or impede the exports of a like product of another
Member from a third country market". The terms "imports" and "exports" as used here are nowhere
defined in the SCM Agreement.872
5.160 Japan notes that in discussing the meaning of the terms "imports" and "exports", the
European Communities relies on dictionary definitions that reference the physical movement of goods
across borders. 873 The European Communities also conte nds, however, that in the context of
Article 6.3, these terms may be read as encompassing current orders that will result in future imports
or exports.874 The United States, by contrast, argues that the ordinary meaning of these terms does not
extend beyond the physical movement of goods acr oss borders, or in this context, actual LCA
deliveries.875 The United States further contends that the broader context of Article 6.3 – i.e.
Articles 6.3(c) and (d) – shows that the drafters of the SCM Agreement knew how to specify distinct
stages in a commercial transaction; thus, "imports" a nd "exports" as used in paragraphs (a) and (b) of
Article 6.3 should not be afforded the expans ive reading urged by the European Communities. 876 In
Japan's view, the correct interpretation lies in between the opposing views espoused by the Parties.877
5.161 Japan respectfully cautions against any wholesale conclusion that orders that may lead to
future deliveries are necessarily within the meaning of "imports" and "exports" for purposes of
Article 6.3. In Japan's view, it is important to take into account the nature of the industry at issue.
Where, as in this dispute, the industry involv es capital goods for which significant periods of time
typically elapse between the dates of order and delivery, it is not considered reasonable to interpret the

870 Executive Summary of Japan's written submission, para. 12.
871 Executive Summary of Japan's written submission, para. 13.
872 Executive Summary of Japan's written submission, para. 14.
873 European Communities' first written submission, paras. 1121-22 (citing definitions provided in The
New Shorter Oxford English Dictionary (4 th ed. 1993)). Executive Summary of Japan's written submission,
footnote 15.
874 European Communities' first written submission, para. 1123. Executive Summary of Japan's written
submission, footnote 16.
875 United States' first written submission, para . 903. Executive Summary of Japan's written
submission, footnote 17.
876 United States' first written submission, para . 904. Executive Summary of Japan's written
submission, footnote 18.
877 Executive Summary of Japan's written submission, para. 15.

BCI deleted, as indicated [***]

terms "imports" and "exports" as encompassing orders ; because orders are often cancelled, the terms
of orders are subject to change prior to deliv ery, delivery dates are often postponed for extended
periods, or other factors break the link between order and delivery. In this respect, Japan agrees with
the U.S. position that imports and exports refer to actual deliveries than orders for the purpose of
Articles 6.3 (a) and (b) at least in this dispute.878
F. KOREA
1. In order to make a prima facie case, a Member claiming existence of an actionable
subsidy must "demonstrate" that all the elements provided in the SCM Agreement exist
5.162 In Korea's view, satisfying prima facie standard is to present factual evidence and legal
arguments "sufficient to demonstrate" the incons istency of the challenged action with the defending
Member's obligation. By nature, the evidentiary requirement is highly case-specific. How much and
precisely what kind of evidence is required to establish a prima facie case varies from measure to
measure, from provision to provision, and from case to case.879
5.163 In this dispute, however, Korea is not su re whether the Europ ean Communities indeed
demonstrated all the factual evidence and legal ar guments to establish existence of an actionable
subsidy. According to Korea, the European Communities seems to have catalogued all kinds of
governmental programmes which are directly or indir ectly related to the U.S. LCA industry and then
believe that it has satisfied its prima facie obliga tion. The European Communities may hope that it
will be able to obtain further evidence in the course of the current proceedings or that the Panel may
somehow do the work for it, but Korea submits that the Panel should reject such an attempt if it
confirms that the European Communities fails to satisfy the prima facie standard.880
2. Finding of benefit must be based on the co mparison between the terms of the alleged
subsidy program and comparable terms available in the commercial market
5.164 Korea notes that another area of dispute here is whether there exists a benefit conferred by the
U.S. Government on Boeing through various gove rnmental programmes. Korea submits that a
decision of existence of benefit can only be made by identifying a comparable commercial market and
then comparing the terms of the alleged subsid y programme with the terms of the comparable
transactions in the commercial market. 881 Simply offering a conclusory statement that a Member has
a regulation in place to ensure non-preferential treatment does not rise to the comparison as mandated
by Articles 1.1(b) and 14 of the SCM Agreement,
882 and thus does not prove or disprove the
existence of a benefit.883
5.165 Korea points out that the Appellate Body's past decisions have confirmed that the
identification of a benefit under Articles 1.1(b) and 14 requires a comparison. 884 Thus Korea submits
that without such a comparative analysis, it is simply not possible to state whether a benefit exists. In

878 Executive Summary of Japan's written submission, para. 16.
879 Executive Summary of Korea's written submission, footnote 1 referring to Appellate Body Report,
US – Wool Shirts and Blouses, para. 14. Executive Summary of Korea's written submission, para. 3.
880 Executive Summary of Korea's written submission, para. 4.
881 Executive Summary of Korea's written submission, footnote 2. See Articles 1.1(b) and 14 of the
SCM Agreement.
882 Executive Summary of Korea's written submission, footnote 3. Although Article 14 of the
SCM Agreement addresses benefit calculation in a countervailing duty investigation, Korea believes that to the
extent a benefit finding is concerned, the same or similar rule also applies in the actionable subsidy context.
883 Executive Summary of Korea's written submission, para. 5.
884 Executive Summary of Korea's written submission, footnote 4 referring to Appellate Body Report,
Canada – Aircraft, para. 157.

BCI deleted, as indicated [***]

addressing the benefit issue in this dispute, therefor e, the Panel should ensure that such a comparison
is properly conducted.885
3. Providing general infrastructure should not co nstitute a financial contribution from the
government
5.166 Korea contends that the European Communiti es appears to challenge certain programs,
including Project Olympus Master Site Agreement, I-5 Expansion Project, and the SR 527 Expansion
Project, as subsidies even if the programs are apparently for the establishment of general
infrastructure. Apparently, they seem to be open to all and serve a broad range of people, businesses,
and communities. Korea believes that the European Communities' submission does not sufficiently
show that these facilities and programs serve a particular company or an industry.886
5.167 While Korea does not express an opinion on the specific facts of the U.S. Government's
programs at issue here, Korea notes that Article 1.1(a)(1)(iii) of the SCM Agreement should be
dispositive if the Panel indeed determines that th e public at large is served by these programs.
According to the Article, it is only the provisi on of goods and services "other than general
infrastructure" that can be considered to constitute financial contribution by the government. As such,
Korea believes that the European Communities, as the complainant in this dispute, must provide
prima facie evidence that the claimed subsidies are not "general infrastructure". Korea considers that
it is not clear whether the European Communities h as indeed satisfied this obligation in its first
written submission.887
4. An export subsidy can only be found when th e granting of a subsidy is "tied to" actual
or anticipated exportation or export earnings
5.168 Korea notes that the European Communities also argues that the tax measures found in HB
2294 are contingent on export performance and th us the program constitutes a prohibited subsidy
under Article 3.1(a) of the SCM Agreement. In th is respect, Korea notes th at a simple fact that
Boeing exports many of its airplanes should not be the legal standard for determining whether the
program is a prohibited export-con tingent subsidy. The relevant precedents of panels and the
Appellate Body mandate a specific inquiry in this regard.888
5.169 According to Korea, in the light of precedents it should therefore be demonstrated by relevant
facts that such a subsidy would not have been gran ted to the recipient but for anticipated exportation
or export earnings.889 As put forward by the panel in Canada – Aircraft in more concrete terms, "the
factual evidence adduced must demonstrate that ha d there been no expectation of export sales (i.e.
'exportation' or 'export earnings') 'ensuing' from the subsidy, the subsidy would not have been
granted".890
5.170 Based on the reading of previous panel and Appe llate Body reports, Korea is of the view that,
in order to establish that a certain U.S. pr ogram is "tied to" export performance, the

885 Executive Summary of Korea's written submission, para. 6.
886 Executive Summary of Korea's written submission, footnote 5. See, for instance,
European Communities' first written submission, pa ras. 89-93. Executive Summary of Korea's written
submission, para. 7.
887 Executive Summary of Korea's written submission, para. 8.
888 Executive Summary of Korea's written submission, para. 9.
889 Executive Summary of Korea's written submi ssion, footnote 6 referring to Panel Report, Canada –
 Aircraft, para. 9.332.
890 Executive Summary of Korea's written submi ssion, footnote 7 referring to Panel Report, Canada –

BCI deleted, as indicated [***]

European Communities has to prove that the benef it would not have been granted to Boeing if the
U.S. Government had known that no export sales would ensue from the program.891
VI. INTERIM REVIEW
A. INTRODUCTION
6.1 On 15 September 2010, the Panel submitted its Interim Report to the parties. On
27 October 2010, both parties submitted written request s for review of precise aspects of the Interim
Report. On 17 November 2010, the parties subm itted comments on each other's requests for review.
Neither party requested that the Panel hold an interim review meeting.
6.2 Pursuant to Article 15.3 of the DSU, the findi ngs of the final panel report must include a
discussion of the arguments made by the parties at the interim review stage. This section of the Panel
Report provides such a discussion. As Article 15.3 ma kes clear, this section fo rms part of the Panel's
findings.
6.3 The Panel explains below its response to issues of a substantive nature raised by the parties in
their comments on the Interim Report. The Panel h as also corrected a number of typographical and
other non-substantive errors throughout the Report 892, including those identified by the parties, which
are not referred to specifically below.
6.4 Due to changes as a result of our review, th e numbering of paragraphs and footnotes in the
Final Report has changed from the Interim Report. The text below refers to the paragraph and
footnote numbers in the Interim Report regarding which the parties requested review. Where we have
made changes, a reference to the corresponding para graph or footnote number in the Final Report is
included (in parentheses) for ease of reference.
6.5 In order to facilitate understanding of the in terim review comments and changes made, the
following section is structured to follow the organizati on of the Report itself, with the review requests
of the parties, and their comments, addressed sequentially.
B. PARTIES' REQUESTS FOR CHANGES TO THE INTERIM REPORT
1. Footnote 1096
6.6 The European Communities 893 submits that footnote 1096 of the Interim Report is incorrect
because it refers to the City of Wichita IRB Ordi nances, rather than to the Washington B&O tax
system. The European Communities requests that the footnote be changed to "Business and
Occupation Tax, RCW 82.04, Exhibit US-179 and United States' first written submission,
para. 430".894
6.7 The United States makes no comment on the European Communities' request.

891 Executive Summary of Korea's written submission, para. 11.
892 Thus, the Panel has corrected stylistic and gra mmatical errors and errors in references to
submissions and exhibits. The Panel has also corrected inconsistencies in terminology and has made changes to
improve the clarity and accuracy of the Report.
893 The Panel notes that elsewhere in this Report the complainant in this dispute is always referred to as
"European Communities". Therefore, while the entity that submitted the request for interim review was the
"European Union", the Panel continues to refer in this interim review section to "European Communities" rather
than to "European Union".
894 European Communities, Request for Interim Review, p. 3.

BCI deleted, as indicated [***]

6.8 The Panel agrees with the European Commun ities' comment and has amended footnote 1096
of the Interim Report (now footnote 1218) as suggested by the European Communities.
2. Paragraph 7.147
6.9 The European Communities requests that the Pa nel amend paragraph 7.147 of the Interim
Report in order to convey the European Comm unities' position that Boeing could in fact
simultaneously claim the Washington B&O tax credit for property taxes and the leasehold excise tax
exemption and the property tax exemption. In particular, the European Communities suggests that the
following be added to the end of footnote 1124: "The European Communities argued in later
submissions that Boeing may, in fact, claim all three subsidies simultaneously, under certain
circumstances. See European Communities' response to question 363, paras. 166-174".
895
6.10 The United States objects to the European Communities' request. According to the
United States, the Panel should not restate the European Communities' erroneous argument that
Boeing can simultaneously claim the Washington B&O tax credit for property taxes, the leasehold
excise tax exemption and the property tax exemption. This is because in paragraphs 7.139-7.159 of
the Interim Report, the Panel in fact addressed and rejected this proposition.
896
6.11 In the European Communities' response to ques tion 363, the European Communities explains
its view that there are two circumstances in wh ich Boeing could claim the Washington B&O tax
credit for property taxes and the leasehold excise tax exemption and the property tax exemption. In
particular, the European Communities first cont ends that Boeing could claim a different tax
exemption from year to year and, second, that Bo eing could claim all three tax exemptions in the
same year if it were to set up two different legal persons, one eligible for the B&O tax credit and the
other for the leasehold excise and property tax exem ptions. Therefore, the European Communities
presents only one scenario in which Boeing could clai m all three tax exemptions simultaneously (i.e.
in the same year). Consequently, the Panel has adde d text to the end of footnote 1124 of the Interim
Report (now footnote 1246) to discuss this scenario. The Panel has also added a new paragraph after
paragraph 7.80 of the Interim Repor t (now paragraph 7.80), to make the summary of the European
Communities' arguments more comprehensive.
3. Paragraphs 7.163-7.164
6.12 The European Communities argues that in para graphs 7.163-7.164 of the Interim Report the
Panel has attributed arguments to the European Communities regarding the meaning of "potential
direct transfer of funds" that are broader than those it actually presented. The European Communities
requests the Panel to modify its summary of the European Communities' arguments on potential direct
transfer of funds in paragraphs 7.163-7.164 of th e Interim Report. In particular, the European
Communities requests that the Panel eliminate sugge stions that the European Communities considers
the following situations as sufficient to demonstrate a potential direct transfer of funds: (i) "any time
there is a possibility that the government will transfer funds in the future"; (ii) "almost every direct
transfer of funds could also, at an earlier date, be characterized as a potential direct transfer of funds";
(iii) "a government alluding to the possibility of provi ding future funding to an industry"; and (iv)"the
mere possibility that a government may transfer funds". The European Communities recalls that in its
comments on the United States' response to question 1 24, it stated that there must be a "defined
triggering event" for a potential direct transfer of funds to exist.897

895 European Communities, Request for Interim Review, p. 3.
896 United States, Comments on the European Communities' Request for Interim Review, para. 4.
897 European Communities, Request for Interim Review, p. 4.

BCI deleted, as indicated [***]

6.13 The United States objects to the European Communities' request. According to the
United States, the Panel was not presenting a summary of the European Communities' arguments in
paragraphs 7.163-7.164. Rather, the Panel was setting out its analysis of the parties' arguments and,
in particular, the implications of the European Communities' arguments. For example,
paragraph 7.164 states: "If the Panel concludes that this is a potential direct transfer of funds , it may
be possible to find, for example, that any time a government makes a general promise to provide
assistance or support to an industry, a financial c ontribution under Article 1.1(a)(1)(i) exists, because
one possible means of providing assistance to an industry is through a direct transfer of funds".
According to the United States, the European Communities is essentially asking the Panel to revise its
analysis and conclusions, without providing a reason for why the Panel should do so.
898
6.14 The Panel has amended paragraph 7.163 of the Interim Report (now paragraph 7.164) to
provide a more accurate description of the Europ ean Communities' position that there must be a
"defined set of circumstances" that triggers the pos sible transfer of funds. For the same reason, the
Panel has also amended the third sentence of paragraph 7.164 of the Interim Report (now
paragraph 7.165). As explained at the end of paragraph 7.164, these changes do not alter the Panel's
view that the European Communities' interpretation of the notion of a "potential direct transfer of
funds" is problematic.
4. Paragraph 7.165
6.15 The European Communities requests that the Panel add the following phrase to the end of the
last sentence of paragraph 7.165 of the Interim Repor t: "with respect to the alleged potential direct
transfer of funds". The European Communities argu es that this addition will provide greater clarity
regarding the scope of the findings on benefit, which are found in the subsection following
paragraph 7.165.899
6.16 The United States objects to the European Communities' request. According to the
United States, the European Communities' proposed addition to the paragraph does not accurately
reflect the Panel's finding. This is because th e Panel did not make a finding regarding whether
Article 10.4.1 of the MSA confers a financial contribution under Article 1.1 of the SCM Agreement in
the form of a potential direct transfer of funds or in any other form. Rather, the Panel reasoned that
because the measure did not confer a benefit unde r Article 1.2, there was no need to determine
whether the measure conferred a financial contribu tion. Consequently, the European Communities'
requested modification to paragraph 7.165 woul d introduce an inaccuracy into the Panel's
statement.900
6.17 The requested modification appears to stem fro m a concern that the statement in the last
sentence of paragraph 7.165 of the Interim Report (now paragraph 7.166) "the European Communities
has not demonstrated that a benefit to Boeing exis ts under Article 1.1(b)" could also refer to the
benefit finding for those measures found to constitute a financial contribution under
Article 1.1(a)(1)(ii). Therefore, the Panel has amended the paragraph by adding "...with respect to the
alleged potential direct transfer of funds". In relation to the United States' concern about the
requested amendment, the use of the term "alleged" ensures that the modification remains consistent
with the Panel's position of not r eaching a conclusion on whether a potential direct transfer of funds
exists.

898 United States, Comments on the European Communities' Request for Interim Review, paras. 5-7.
899 European Communities, Request for Interim Review, p. 4.
900 United States, Comments on the European Communities' Request for Interim Review, para. 8.

BCI deleted, as indicated [***]

5. Paragraph 7.288
6.18 Both the European Communities and the United States request that the Panel delete the
reference to "Spirit" in the second sentence of para graph 7.288 of the Interi m Report and substitute it
with "Washington State component manufacturers". 901 Further, the European Communities suggests
that the figure at the end of the last sentence of the paragraph should be $6.8 million, rather than
$8.6 million.902 The United States makes no comment on this suggestion.
6.19 The Panel agrees with the parties and has change d the word "Spirit" in the second sentence of
paragraph 7.288 (now paragraph 7.289) to "Washi ngton State component manufacturers". The Panel
has also corrected the typograp hical error in the final sentence by changing the figure from
$8.6 million to $6.8 million.
6. Paragraph 7.291
6.20 The European Communities requests that the Pane l clarify that its discussion of benefit in
paragraph 7.291 of the Interim Re port is limited to the pass-through context and does not apply
generally to the evaluation of the amount of a benefit accorded by a financial contribution. In
particular, the European Communities requests that the fourth sentence be modified to read: "The
benefit of a subsidy, as that term is used in Ar ticle 1.1(b) of the SCM Agreement, cannot increase
beyond 100 per cent when it passes from the recipi ent of the financial contribution to another
entity".903
6.21 The European Communities also suggests amen dments to the fifth, sixth and seventh
sentences of the paragraph. According to the Eu ropean Communities, if the sentences were not
modified, they could be misinterpreted as addressing the calculation of the amount of the benefit to
the initial subsidy recipient, rather than the pass-through to another entity. The European
Communities requests that the sentences be modified to clarify that the finding relates to the need to
distinguish between the value of any follow-on trad e effects resulting from a s ubsidy and the value of
the benefit itself. In particular, the European Communities suggests the following changes:
In the context of the SCM Agreement, the benefit of a subsidy is the amount by
which established when the terms of the financial contribution are more favourable
than those available on the market. This is a one time calculat ion determination is
made in the first instance by reference to th e recipient of the financial contribution.
The benefit at the time the financial contribution is provided is not increased by any
follow-on trade effects that may result from the financial contribution, such as any
additional price changes that may result wh en a subsidized part is placed in the
stream of commerce.904
6.22 The United States has no comments regarding th e European Communities' proposed edit to
the fourth sentence of paragraph 7.291. However, the United States objects to the modification of the
fifth, sixth and seventh sentences. This is b ecause the European Communities' suggestion introduces
an entirely new concept of "follow- on trade effects". Further, the modification does not clarify the
Panel's statement, which is already entirely clear, namely that there can be no "additional" benefit

901 European Communities, Request for Interim Review, p. 4.; United States, Request for Interim
Review, para. 3.
902 European Communities, Request for Interim Review, p. 4.
903 European Communities, Request for Interim Review, p. 5.
904 European Communities, Request for Interim Review, p. 5.

BCI deleted, as indicated [***]

over and above the amount calculated, on the basis of a one-time calculation, at the time the financial
contribution is provided.905
6.23 Although the Panel is of the view that there are no circumstances in which the benefit of a
subsidy can increase beyond that which exists at th e time the financial contribution is provided, it has
modified the fourth sentence of paragraph 7.291 of the Interim Report (now paragraph 7.292) in order
to clarify the context of the discussion. The Pa nel has also clarified the second sentence of the
paragraph by adding "benefit of the " before the term "subsidy". In relation to the suggested
amendments to the fifth, sixth and seventh sentences , the Panel is of the view that the discussion of
the amount of the benefit is relevant to the pass-through analysis, because the amount of the benefit of
the subsidy is the upper bound for the amount of any p ass-through of the benefit that can occur. The
Panel has made changes to clarify its discuss ion in the fifth through seventh sentences of
paragraph 7.291 of the Interim Re port (now paragraph 7.292). For the purposes of clarification, the
Panel has also made amendments to the tenth sentence of the paragraph.
7. Paragraph 7.296
6.24 According to the European Communities, paragraph 7.296 of the Interim Report suggests that
the United States presented a specific example that Professor Asker could have reviewed and rebutted,
but did not. The European Communities requests a modification to the paragraph to clarify that
Professor Asker did not have an opportunity to respond to the United States' specific example. In
particular, the European Communities suggests that the tenth sentence of the paragraph be amended as
follows: "...he does
 did not address anticipate the scenario postulated by the United States in its final
set of comments...".906
6.25 The United States objects to the European Co mmunities' request. The United States argues
that there is no basis on which to conclude whethe r or not Professor Asker anticipated the scenario
presented by the United States. Further, the scenario referred to by the Panel in paragraph 7.296 was
presented by the United States to demonstrate a shor tcoming in Professor Asker's model. It is
precisely because his model fails to address or anticip ate the scenario that the United States considers
the model unreliable. This is true regardless of when the United States highlighted the flaw in the
model.907
6.26 The Panel has modified the text of the ninth sentence of paragraph 7.296 of the Interim
Report (now paragraph 7.297) to avoid the impression that the United States presented a specific
example and that Professor Asker reviewed and ignored it.
8. Paragraph 7.540
6.27 The European Communities requests the Panel to correct certain factual errors in
paragraph 7.540 of the Interim Report. First, the European Communities ar gues that in the fifth
sentence, only the rate paid by Boeing per 100 cubic feet ("ccf") of water consumed in 2006 can be
said to be "clearly higher" than the rate menti oned in the MSA. It therefore suggests that the
reference to "2004, 2005 and 2006 were" be changed to "2006 was" in this sentence. The European
Communities notes that the Panel references the rate of $0.65 per 1,000 gallons for water services in
Exhibit C-1 of the MSA, which the European Communities previously converted to $0.486 per ccf.
The European Communities recalls that the City of Everett has a tiered rate structure for water
consumption, whereby lower consumption levels recei ve higher marginal rates; and City of Everett
water rates also vary by usage (i.e. whether for comme rcial, industrial, irrigation, or fire protection).

905 United States, Comments on the European Communities' Request for Interim Review, para. 9.
906 European Communities, Request for Interim Review, p. 5.
907 United States, Comments on the European Communities' Request for Interim Review, para. 10.

BCI deleted, as indicated [***]

Thus, the European Communities submits that a comp arison of a rate for Boeing's water consumption
derived from the information presented in the "totals" rows in Exhibit EC-154 with the rate referenced
in Exhibit C-1 of the MSA (which is for Boeing's industrial water consumption) is inaccurate. Rather,
an accurate comparison should be based on a rate derived from the rows in Exhibit EC-154 for
Boeing's 10" industrial metered water line at W C asino Road, which represents the bulk of Boeing's
water consumption. Based on this row, Boeing consumed 187,498 ccf and paid $91,825.48 in 2004,
for an average rate of $0.490 per ccf; Boeing c onsumed 178,445 ccf and paid $87,437.15 in 2005, for
an average rate of $0.490 per ccf; and Boeing cons umed 55,685 ccf and paid $28,740.35 in 2006, for
an average rate of $0.516 per ccf. Thus, the European Communities submits that only Boeing's
average rate for industrial water consumption in 2006 (i.e. $0.516 per ccf) can be said to be "clearly
higher" than the rate derived from the MSA (i.e. $0.486 pe r ccf). This is also consistent with the final
page of Exhibit EC-154, where the City of Evere tt Utilities Finance Manager explains with respect to
water rates that "2006 is the first year of a three-year rate increase".908
6.28 Second, in the final sentence of paragraph 7.540, the European Communities suggests that the
reference to "water filtration and sewer services" be changed to just "sewer services", because the rate
for water filtration is not part of the $3.127 per ccf rate referenced from Exhibit C-2 of the MSA to
which the Panel is drawing a comparison. Rather , Exhibit C-2 references only the rate for sewer
services.909
6.29 The United States makes no comment on the European Communities' request.
6.30 The Panel accepts that the calculation of the ra te paid by Boeing for water service proposed
by the European Communities in its interim review comments is more accurate than the calculation
made by the Panel in paragraph 7.540 of the Inte rim Report (now paragraph 7.541) and that based on
this more accurate calculation it is only in 2006 that the rate paid by Boeing per 100 cubic feet of
water consumed was clearly higher than the rate re ferred to in the MSA. The Panel has therefore
corrected the fifth sentence of paragraph 7.540 of the Interim Report (now paragraph 7.541) by
deleting the reference to 2004 and 2 005. The Panel also agrees with the European Communities that
because exhibit C-2 to the MSA only refer to sewer services, the last sentence of paragraph 7.540 of
the Interim Report (now paragraph 7.541) should be modified by deleting the reference to water
filtration services. The Panel notes that these corr ections to paragraph 7.540 of the Interim Report
(now paragraph 7.541) do not affect the main point made in this paragraph that "the evidence before
{the Panel} reveals that the rates charged to Boeing by the City of Everett and Snohomish County for
the use of certain utility services have actually increased since 2003".
9. Paragraphs 7.751 and 7.778
6.31 With respect to paragraph 7.751 of the Interi m Report (now paragraph 7.752), the European
Communities argues that in its specificity analysis, the Panel does not complete its analysis regarding
"predominant use" of the subsidy programme by certa in enterprises, stating instead that "it is not
necessary for us to duplicate the comparison" that the Panel makes in the section on
"disproportionately large amount". The European Communities submits that at no stage does the
Panel take a view on "predominant use" as a factor supporting the finding of de facto specificity.
Rather, at paragraph 7.778 of the Interim Report ( now paragraph 7.779), the Panel appears to base its
conclusion exclusively on the "d isproportionately large amount" f actor. The European Communities
requests that the Panel make a finding on whether the Wichita IRBs are specific in view of
"predominant use" of the subsidy programme by certain enterprises.
910

908 European Communities, Request for Interim Review, p. 7.
909 European Communities, Request for Interim Review, p. 7.
910 European Communities, Request for Interim Review, p. 8.

BCI deleted, as indicated [***]

6.32 The United States objects to the European Co mmunities' request. The United States notes
that the Panel found that the measure at issue was de facto specific on the grounds that a
disproportionately large amount of IRBs were issued to Boeing. According to the United States, it is
within a Panel's discretion to exercise judicial economy on an issue, as long as all findings necessary
to resolve the dispute are made. Given that the Panel reached a conclusion regarding whether the
measure at issue was specific under Article 2.1 of the SCM Agreement, is was appropriate for the
Panel to decline to rule on whether the same measure was also de facto specific on an additional basis,
namely due to "predominant use" of the subsidy programme by certain enterprises.911
6.33 The Panel declines to modify its Interim Re port by reaching a conclusion on whether
"predominant use" of the subsidy programme by cer tain enterprises supports a finding of de facto
specificity. The Panel has concluded that the tax abatements granted under the Wichita IRB
programme are de facto specific on the grounds that they were granted in disproportionately large
amounts to Boeing and Spirit. This is sufficient to resolve the question of whether the tax abatements
are specific. Therefore, it is within the Panel's discretion to decline to reach a conclusion regarding
the "predominant use" factor. The European Communities has not advanced a convincing reason
regarding why it is necessary for the Panel to make the additional finding that it seeks.
10. Paragraph 7.768
6.34 The European Communities requests that the Panel add the phrase "(i.e. after it had acquired
Boeing's LCA operations in Wichita)" after the sec ond instance of the word "Spirit" in the first
sentence of the paragraph. According to the Eu ropean Communities, this will clarify why it is
appropriate to compare Spirit's 2006 share of empl oyment with Boeing's and Spirit's combined 1979-
2005 share of IRBs.912
6.35 The United States makes no comment on the European Communities' request.
6.36 The Panel has added the phrase "(i.e. after it had acquired Boeing's LCA operations in
Wichita)" after the second instance of the word "Spirit" in the first sentence of paragraph 7.768 of the
Interim Report (now paragraph 7.769).
11. Paragraph 7.841
6.37 With respect paragraph 7.841 of the Interim Report, the European Communities requests that
the Panel make a finding regarding whether the KDFA bonds are specific within the meaning of
Article 2.1 of the SCM Agreement.913
6.38 The United States objects to the European Communities' request. According to the
United States, the Panel acted within its discreti on in declining to make a finding on whether the
KDFA bonds were specific. Such a finding was not n ecessary to resolve the dispute. Further, the
European Communities has not provided any basis for its request.914
6.39 The Panel declines to modify its Interim Re port by making a finding regarding whether the
KDFA bonds are specific within the meaning of Articl e 2.1 of the SCM Agreement. As explained in
paragraph 7.841 of the Interim Report (now paragra ph 7.842), the Panel finds that there is no subsidy
to Boeing and therefore does not consider it necess ary to decide the question of specificity. The

911 United States, Comments on the European Communities' Request for Interim Review, paras. 11-12.
912 European Communities, Request for Interim Review, pp. 8-9.
913 European Communities, Request for Interim Review, p. 9.
914 United States, Comments on the European Communities' Request for Interim Review, para. 13.

BCI deleted, as indicated [***]

European Communities does not advance any reasoning to explain why the Panel should make a
finding on specificity in relation to the KDFA bonds.
12. Paragraph 7.848 and footnote 2145
6.40 The European Communities requests the Pa nel to replace the final sentence of
paragraph 7.848 of the Interim Report with: "In pa rticular, the European Communities observes that
the United States has not provided full copies of all of the documents constituting the full set of long-
term supply agreements. Absent full copies of all those documents, the European Communities
requests the Panel to draw the necessary inferences on this issue." As a reference to this expanded
description, the European Communities requests that the Panel add the following to footnote 2145:
"European Communities' comments on United Stat es' response to question 252, paras 364-365;
European Communities comments on United States' response to question 255".915
6.41 The United States does not object to the proposed modification to footnote 2145. However,
the United States objects to the European Commun ities' proposed amendment to paragraph 7.848
because it is unnecessary. Accordi ng to the United States, the paragraph already incorporates the
European Communities' arguments regarding the redacted supply contracts and explains the European
Communities' analysis of the publicly availa ble information underpinni ng its "pass-through"
arguments. Further, in paragr aph 7.882 (now paragraph 7.883), the Panel addresses and rejects the
European Communities' arguments regarding lack of access to un-redacted versions of supply
agreements.916
6.42 In paragraph 7.848 of the Interim Report (now paragraph 7.849) the Panel is summarizing the
European Communities' arguments. The additions to the paragraph that the European Communities
requests can be found in the European Commun ities' comments on the United States' response to
questions 252 and 255. Therefore, the Panel has modified the summary of arguments in the manner
suggested by the European Communities. The Pane l has also made the additions to footnote 2145
(now footnote 2268) suggested by the European Communities.
13. Paragraph 7.882
6.43 The European Communities requests that the Pane l add the following to the end of the first
sentence of paragraph 7.882 of the Interim Report: "..., but further recall that those documents were
provided with numerous redactions" (with a corresponding footnote stating: "See European
Communities' comments on United States' response to question 252, para. 364). Similarly, the
European Communities requests that the second senten ce of the paragraph be modified as follows:
"Our review of the un-redacted portions of these documents
...".917
6.44 The United States objects to the European Comm unities' request. The United States submits
that the modification proposed by the Eur opean Communities is unnecessary because the Panel
addressed and rejected the European Communities' argument regarding the un-redacted versions of
the supply agreements.918
6.45 The European Communities requ ests modification of paragra ph 7.882 of the Interim Report
(now paragraph 7.883) in order to highlight that the documents referred to in the paragraph were
redacted. To accommodate this request, the Panel ha s amended the first sentence of the paragraph as
follows: "…we recall our analysis of the documents on the record, created at or around the time of

915 European Communities, Request for Interim Review, p. 9.
916 United States, Comments on the European Communities' Request for Interim Review, para. 14.
917 European Communities, Request for Interim Review, p. 9.
918 United States, Comments on the European Communities' Request for Interim Review, para. 15.

BCI deleted, as indicated [***]

sale and provided by the United States in redacted form" . The Panel has added the corresponding
footnote requested by the European Communities.
14. Paragraph 7.944 and footnote 2286
6.46 The European Communities requests that the Panel amend the second sentence of
paragraph 7.944 of the Interim Report, to clarify the fact that the European Communities' arguments
related to NASA "enabling the US LCA industry to exploit the results thereof {of NASA R&D
programmes} by means including but not limited to the foregoing or waiving of valuable patent
rights, the granting of limited exclusive rights data ('LERD') or otherwise exclusive or early access to
data, trade secrets and other knowledge resulting fro m government funded research" were reflected in
both its challenge to the NASA R&D programmes (as the Panel acknowledges, for example, in
paragraph 7.1013), as well as the separate challenge to "NASA/DOD Intellectual Property Rights
Transfers/Waivers." The European Communities su ggests that this clarification can be achieved
through making the following changes to the sec ond sentence: "... the Eu ropean Communities
addresses these measures primarily in the sections of its submissions regarding 'NASA/DOD
Intellectual Property Rights Transfers/Waivers., but also throughout its discussion of the nature of the
NASA aeronautics R&D programmes."919
6.47 In addition, the European Communities submits that footnote 2286 should refer to the
European Communities' response to question 215(b) in which the European Communities addressed
this issue, rather than the response to question 215(a).920
6.48 The United States shares the Panel's understandi ng that the European Communities addressed
NASA's IP policies in the sections of its submi ssion related to NASA/DOD Intellectual Property
Rights Transfers/Waivers, and accordingly suggests th at the Panel not make the change suggested by
the European Communities. The Unite d States submits that if the Panel decides that a reference to
the European Communities' discussion of NASA IP policies in the context of its NASA R&D claim is
appropriate, it should reflect the nature of that discussion by replacing the European Communities'
suggested language with the following change: ". . . the European Comm unities addresses these
measures in the sections of its submissions regarding NASA/DOD Intellectual Property Rights
Transfers/Waivers, and also references them in its discussion of NASA Aeronautics R&D
programs."
921
6.49 The Panel has amended the text of the second sentence of paragraph 7.944 of the Interim
Report (now paragraph 7.946) by inserting the word "primarily" before "in the sections of its
submissions". Because the Panel considers that th is issue is addressed in both question 215(a) and
(b), the Panel has amended footnote 2286 (now footnote 2412) by substituting "215" for "215(a)".
15. Paragraph 7.982
6.50 The European Communities requests that th e Panel modify the third sentence of
paragraph 7.982 of the Interim Report as follo ws: "The contracts a nd agreements primarily fall into
two different categories: (i) 'procurement contract s', and (ii) Space Act Agreements". The European
Communities makes this request in the light of th e fact that a limited number of NASA instruments
other than "procurement contracts" and Space Act Ag reements are at issue in the present dispute, as
made clear by: Exhibit US-1245, which referen ces at least two cooperative agreements and two
purchase orders; and Interim Report, paragraph 4.73, which references the United States' explanation
at the first panel meeting that NASA enters in to cooperative agreements, technology investment

919 European Communities, Request for Interim Review, pp. 9-10.
920 European Communities, Request for Interim Review, p. 10.
921 United States, Comments on the European Communities' Request for Interim Review, para.16.

BCI deleted, as indicated [***]

agreements, and other transactions. The European Communities suggests that the Panel may add a
footnote at the end of the third sentence refe rencing Exhibit US-1245 and Interim Report,
paragraph 4.73, to make note that a limited num ber of other NASA instruments – such as cooperative
agreements, purchase orders, technology investment ag reements, and other transactions – are also at
issue in this dispute.922
6.51 The United States objects to the European Co mmunities' request. The United States argues
that to say that the contracts and agreements covered by the European Communities' challenge
"primarily" fall into the categories of procurement contracts and Space Act Agreements would
indicate an open list that could encompass instruments not at issue in this case. (As demonstrated in
Exhibit US-1245, there are no technology investment agreements or other agreements between NASA
and Boeing under the challenged programs.) If the Panel considers it appropriate to adjust the
language in this paragraph to reflect the two cooperative agreements under the challenged programs, it
should expand its list to indicate specifically th at category of agreement: "The contracts and
agreements fall into three different categories: (i ) 'procurement contracts', (ii) Space Act Agreements,
and (iii) cooperative agreements."
923
6.52 The Panel has amended paragra ph 7.982 of the Interim Report (now paragraph 7.945) and
added a footnote, in order to reflect that NASA ha d a limited number of cooperative agreements with
Boeing.
16. Paragraph 7.1038
6.53 Although the Panel considers that "it was not necessary for the Eur opean Communities to
present benchmark evidence" in order to establis h that a 'benefit' was conferred by the NASA
transactions, the European Communities requests that the Panel note that the European Communities
did, in fact, present such benchmark evidence. The European Communities suggests that the Panel
could make this point with the addition of a footnote attached to the end of the fifth sentence of the
paragraph, stating as follows: "Although it was not necessary for the European Communities to
present benchmark evidence, it did supply such eviden ce to the Panel (e.g. The Declaration of Regina
Dieu (Exhibit EC-1178)). See paragraph 7.1029 of this Report".924
6.54 The United States objects to the European Comm unities' request. The United States submits
that the Interim Report already reflects the full argument and evidence submitted by the European
Communities, including a reference to the Declaration of Regina Dieu, in para graph 7.1029. As this
evidence played no role in the Panel's findings, the United States does not consider that an additional
reference to Ms. Dieu, as requested by the European Communities, is either necessary or appropriate.
Moreover, the particular text proposed by the European Communities would suggest that the Panel
had found that the evidence submitted by the Europ ean Communities constituted a "benchmark". The
United States submits that the Panel made no such finding.925
6.55 The Panel considers that the change pr oposed by the European Communities to
paragraph 7.1038 of the Interim Report (now paragraph 7.1039) is unnecessary. The arguments of the
European Communities regarding the Declaration of Regina Dieu are already reflected in
paragraph 7.1029 of the Interim Report (now paragraph 7.1030).

922 European Communities, Request for Interim Review, p. 10.
923 United States, Comments on the European Communities' Request for Interim Review, para.17.
924 European Communities, Request for Interim Review, p. 11.
925 United States, Comments on the European Communities' Request for Interim Review, para. 18.

BCI deleted, as indicated [***]

17. Paragraph 7.1078
6.56 The European Communities submits that Exhibit EC-1440 does not support the conclusion in
the penultimate sentence of paragraph 7.1078 of th e Interim Report that "it appears that over the
period 1989-2006, these four centres accounted for more than 99 per cent of 'Aeronautical Research &
Technology Resources'". First, Exhibit EC-1440 relates to only the period 1989-2000; and second,
Exhibit EC-1440 shows that over the period 1989- 2000, these four centres (i.e. Langley, Glenn
(formerly Lewis), Ames, and Dryden) accounted fo r only 95.3% of aeronautical R&D resources.
Thus, the European Communities re quests that the Panel revise the penultimate sentence to conclude
that "it appears that over the period 1989-2000, th ese four centres accounted for 95.3 per cent of
'Aeronautical Research & Technology Resources'". The European Communities also requests that the
Panel delete the final sentence of this paragraph in view of this result.
926
6.57 The United States objects to the European Comm unities' request. The United States submits
that in paragraph 7.1078 of the Interim Report, as drafted, the Panel properly compares the amount of
funding for research at NASA aeronautics research centres (i.e. Langley, Glenn, Ames and Dryden)
with funding for research conducted at its other non-aeronautics research centres. The revised
calculation proposed by the European Communitie s treats research and technology resource budget
expenditures attributable to NASA headquarter s as pertaining to research conducted by the
non-aeronautics research centres. NASA headquarter s is not a research centre, and therefore the
United States considers that the Panel properly excluded this element of the NASA budget from its
calculation in this context. The United States observes, however, that 95.3 percent of NASA's
aeronautics budget still constitutes "substantially all" of its expenditures.927
6.58 The Panel declines the European Communities' requ est. First, while it is correct that Exhibit
EC-1440 only covers the period FY 1991-FY2000, th e nature of the information set out in EC-1440
supports a general conclusion about the share of aeron autical R&D that the four centres accounted for
over the period 1989-2006. Second, as the United States explains in its comments on this request, the
Panel compared the amount of funding for research at NASA aeronautics research centres with
funding for research conducted at its other non-aeronau tics research centres. The revised calculation
proposed by the European Communities treats res earch and technology res ource budget expenditures
attributable to NASA headquarters as pertaini ng to research conducted by the non-aeronautics
research centres. However, that approach a ppears to presuppose that NASA headquarters is a
research centre, which it is not. Accordingly, the Panel has left the final sentence of paragraph 7.1078
of the Interim Report (now paragraph 7.1079) unchanged.
18. Paragraphs 7.1079 and 7.1076
6.59 The European Communities requests that the Pa nel delete para graph 7.1079 of the Interim
Report in its entirety and modify the beginning of paragraph 7.1076 to read: "The European
Communities advances two arguments in response to ...". The European Communities makes this
request because the argument refe renced by the Panel in paragraph 7.1079 is not an argument in
response to the U.S. assertion that all contracts rela ted to the European Communities' challenge must
have been awarded by the four NASA centers in question; nor was the European Communities' point
in making this argument that "Boeing's aerona utics R&D contracts with NASA account for less
{than} 3.5 per cent of all of Boeing's contracts w ith NASA". Rather, the European Communities was
simply responding to a separate argument made by the United States at paragraph 218 of the
United States' response to Question 188, in which the United States suggested that the fact that
96.5 per cent of Boeing's contracts with NASA are related to non-aeronautics activities verifies that

926 European Communities, Request for Interim Review, pp. 11-12.
927 United States, Comments on the European Communities' Request for Interim Review, para. 19.

BCI deleted, as indicated [***]

Boeing's aeronautics contracts with NASA were worth US$1.05 billion. Like the Panel, the European
Communities did not view this U.S. argument as being on point.928
6.60 The United States makes no comment on the European Communities' request.
6.61 The Panel has modified paragraph 7.1076 of th e Interim Report (now paragraph 7.1077) as
requested by the European Communities and has dele ted paragraph 7.1079 of the Interim Report.
Although the European Communities advanced the ar gument in paragraph 7.1079 of the Interim
Report in a paragraph that formed part of its comments on the United States' response to question 339,
a footnote to that paragraph makes it clear that the point made in that particular paragraph actually
pertained to an argument made by the United Stat es in its response to question 188. The Panel
therefore agrees with the Europ ean Communities that the argument described in paragraph 7.1079
does not pertain to the arguments of the United States in its response to question 339.
19. Footnote 2500
6.62 The United States requests that the Panel modify footnote 2500 by adding the following
sentence: "The European Communities does not challenge the supply of goods and services under
Space Act Agreements to the extent that Boeing pays cash in exchange for those goods and
services."929
6.63 The European Communities makes no comment on the United States' request.
6.64 The Panel has modified footnote 2500 of the Interim Report (now footnote 2624) as requested
by the United States. The Panel notes that the Eur opean Communities has clarified, for example in its
response to question 158, paragraph 237, that "{ w}ith respect to LCA-related SAAs, the European
Communities challenges only instances where NASA provides goods and services pursuant to non-
reimbursable and partially-reimbursable SAAs, in exchange for alleged 'in kind' remuneration".
20. Paragraph 7.1099
6.65 The European Communities requests that the Pa nel change the figure of "14 per cent" to
"14.1 per cent" in the penultimate sentence of para graph 7.1099 of the Interim Report, and that it
change the figure of "$1.55 billion" to "$1.59 billion" in the final sentence. The European
Communities also requests that the Panel make the se modifications throughout its Report wherever
the figures of "14 per cent" and "$1.55 billion" may appear. The European Communities recalls that,
pursuant to the Panel's analysis in the preceding para graphs, the relevant pools of money that must be
allocated to Boeing are: (i) $7,446 million under th e programme budgets that relate to aeronautics
research contracts; (ii) $4,789 million under the prog ramme budgets that do not relate to payments to
contractors; and (iii) $6,469 million under the institu tional support budgets. With regard to item (i),
the United States suggested that $775 million be allocated to Boeing, which works out to 10.4 per cent
(i.e. 775 / 7,446 = 0.104). However, the Panel dete rmined that $1.05 billion should be allocated to
Boeing, which works out to 14.1 per cent (i.e . 1,050 / 7,446 = 0.141). Next, with regard to items (ii)
and (iii), the Panel decided to apply the same percentage as determined for item (i). This works out to
$1.59 billion (i.e. (4,789 + 6,469) x 0.141 = 1,587).930
6.66 The European Communities notes that even if the Panel decides not to change "14 per cent" to
"14.1 per cent" in the penultimate sentence, it should nonetheless change "$1.55 billion" to
"$1.58 billion" in the final sentence, because (4 ,789 + 6,469) x 0.140 = 1,576. If the Panel chooses

928 European Communities, Request for Interim Review, p. 12.
929 United States, Request for Interim Review, para. 5.
930 European Communities, Request for Interim Review, p. 13.

BCI deleted, as indicated [***]

this approach, the European Comm unities requests that the Panel make this modification throughout
its report wherever the figure of "$1.55 billion" may appear.931
6.67 The United States indicates that it has no comment on this request. However, the
United States "recalls that the Panel's calculation is an estimate, and therefore rounding errors and
small differences relative to the total sum are very relevant".932
6.68 The Panel declines the European Communities' requests regarding paragraph 7.1099 of the
Interim Report (now paragraph 7.1099). The calcula tions and figures in question reflect the Panel's
attempt to avoid false and artificial precision in its estimate of this particular subsidy. The "14 per
cent" figure reflects a rounding of 14.1% down to the nearest percentage point. The "$1.55 billion"
figure reflects the fact that the figures the Panel used to arrive at the estimate of this particular subsidy
were 14% of $4.7 billion + $6.4 billion, rather th an $4.789 billion + $6.469 billion. The resulting
figure (i.e. $1.554 billion) was then rounded down to "$1.55 billion". The Panel recalls the Appellate
Body's pronouncement in US – Upland Cotton (cited several times in this Report) that in a case
involving claims of serious prejudice, a "precise, definitive quantification is not required".
21. Paragraph 7.1100
6.69 The European Communities requests that the Pa nel amend paragraph 7. 1100 of the Interim
Report by adding a cross-reference to paragraph 7.1771, where the Panel discusses its understanding
of the significant limitations on public dissemination by NASA. Specifically, the European
Communities suggests the addition of the fo llowing sentence after the second sentence of
paragraph 7.1100: "That said, the Panel has also found that this public dissemination was subject to
significant limitations". This would be followe d by a footnote with a cross-reference to
paragraph 7.1771.
933
6.70 Moreover, the European Communities requests the Pa nel to recall that to the extent that the
publicly disseminated information benefits from pate nt protection, Boeing has the exclusive right
(subject to the Government's own limited rights) to use that patented technology for approximately
17-20 years. While competitors may have knowledge of the patented technology through the patent
disclosure and any associated reports, they are fo rbidden from using this technology pursuant to
domestic patent laws, and will be subject to damages and/or injunctions if they infringe the patent.
Thus, for patented technology, disclosure does not imply that Boeing has given up anything of value
in exchange for the funds and access to facilities, equipment, and employees. For this reason, the
European Communities requests that the Panel add the phrase "to the extent such public dissemination
does not involve technology that has been patent ed" in the second sentence of paragraph 7.1100
before the phrase "that this represents ..."; further, the word "that" should be deleted in the phrase
"that this represents ...".934
6.71 The United States objects to the European Comm unities' request. The United States submits
that the Panel's point in this pa ragraph appears to be that the technical reports on each R&D project
done by Boeing under the NASA programmes were pub licly disseminated, and that the Panel made
no factual findings that NASA's public dissemination of information was subject to "significant"
limitations. Any delays in dissemination of a sub set of reports that the European Communities seeks
to reference are not relevant in this context. The United States also notes that the Panel made no
findings with respect to a link between technologies discussed in particular reports and particular
patents, and in any event, a pate nt on any inventions that may be discussed in the circulated reports

931 European Communities, Request for Interim Review, p. 13.
932 United States, Comments on the European Communities' Request for Interim Review, para. 20.
933 European Communities, Request for Interim Review, p. 13.
934 European Communities, Request for Interim Review, p. 13.

BCI deleted, as indicated [***]

does not bear on the Panel's finding in this paragraph that the dissemination of the data and findings in
the reports represent something of value given up in exchange for what it receives.935
6.72 The Panel declines the European Communities' request to make changes to certain statements
in paragraph 7.1100 of the Interi m Report (now paragraph 7.1100). The Panel understands that in
proposing these changes the European Communities ta kes issue with the Panel's view expressed in
paragraph 7.1100 that the transactions at issue cannot be treated as grants on the grounds that Boeing
has given up something of value. The Panel notes th at paragraph 7.1100 is part of a section of the
Interim Report that deals with the determina tion of the amount of the subsidy, and that
notwithstanding its observation in pa ragraph 7.1100 that the transactions at issue are not grants, the
Panel explains in paragraph 71101 that it will trea t "the full amount of the financial contributions
provided to Boeing as a subsidy to Boeing's LCA division". The Panel therefore considers that when
the statements in paragraph 7.1100 of the Interi m Report which the European Communities seeks to
qualify are viewed in their proper context it is unclear what purpose the proposed changes would
serve.
22. Paragraph 7.1121 and footnote 2542
6.73 The European Communities requests that the Panel amend the second sentence of
paragraph 7.1121 of the Interim Report to clarify th e fact that the European Communities' arguments
related to DOD "enabling the US LCA industry to exploit the results of such {DOD RDT&E}
research, by means including but not limited to the foregoing or waiving of valuable patent rights, and
the granting of exclusive or early access to data, trade secrets and other knowledge resulting from
government funded research" were reflected in bot h its challenge to the DOD RDT&E programmes
(as the Panel acknowledges, for example, in par as. 7.1149-50), as well as the separate challenge to
"NASA/DOD Intellectual Property Rights Transfer s/Waivers". The European Communities suggests
that this clarification can be made through maki ng the following changes to the second sentence: "...
the European Communities a ddresses these measures primarily in the sections of its submissions
regarding NASA/DOD Intellectual Property Rights Transfers/Waivers. , but also throughout its
discussion of the nature of the DOD RDT&E programmes ." In addition, the European Communities
submits that footnote 2542 should refer to the Eu ropean Communities' response to question 215(b) in
which the European Communities addressed this issue, rather than the response to question 215(a).936
6.74 The United States shares the Panel's understandi ng that the European Communities addressed
DOD's IP policies in the sections of its submission related to NASA/DOD Intellectual Property Rights
Transfers/Waivers, and accordingly suggests that th e Panel not make the change suggested by the
European Communities. The United States submits that if the Panel decides that a reference to the
European Communities' discussion of DOD IP polici es in the context of its DOD RDT&E claim is
appropriate, it should reflect the nature of that discussion by replacing the European Communities'
suggested language with the following change: ". . . the European Comm unities addresses these
measures in the sections of its submissions regarding NASA/DOD Intellectual Property Rights
Transfers/Waivers, and also references them in its discussion of DOD RDT&E programs."937
6.75 The Panel has amended paragraph 7.1121 and footnote 2542 of the Interim Report (now
paragraph 7.1122 and footnote 2666) along the lin es of the European Communities' request by
inserting the word "primarily" befo re "in the sections of its submissions", and by substituting "215"
for "215(a)".

935 United States, Comments on the European Communities' Request for Interim Review, para. 21.
936 European Communities, Request for Interim Review, p. 14.
937 United States, Comments on the European Communities' Request for Interim Review, para. 22.

BCI deleted, as indicated [***]

23. Paragraph 7.1148
6.76 The European Communities requests that the Pane l add a footnote to the end of the first
sentence of paragraph 7.1148 of the Interim Report, which would help to clarify the focus of the
European Communities' arguments with respect to the dual use nature of the RDT&E programmes
summarised immediately above. The European Communities submits that as currently drafted, this
paragraph narrowly focuses on only two of the 23 progr ammes, and fails to provide any discussion of
the European Communities' position on the remaining programmes, other than the statement in the
first sentence about what the European Communitie s "does not dispute". The European Communities
suggests the following text for the proposed footnot e: "Rather than attempting to dispute the
proposition that the RDT&E programmes provided so me benefit and use to DOD, the European
Communities focused its attention (and that of its experts) on demonstrating that the R&D funded
through these programmes provided significant benefit and use to Boeing's LCA division. See
paras. 7.1602-1604 of this Report; a nd Annex VIII.F.1 of this Report, paras. 26-36, 43-45, 50-51, 57-
59, 74-75".
938
6.77 The United States objects to the European Comm unities' request. The United States submits
that the first sentence of paragraph 7.1148 of th e Interim Report accurately and fully reflects the
position taken, and arguments made, by the Eu ropean Communities in these proceedings. The
footnote purports to describe the mental process th at led the European Communities to take the
position that it took. That is not an appropriate insertion into the Panel's findings.939
6.78 The Panel declines the European Commun ities' request. The first sentence of
paragraph 7.1148 of the Interim Re port (now paragraph 7.1148) does not purport to describe or fully
reflect the European Communities' position and argumentation on this issue.
24. Paragraph 7.1176
6.79 The European Communities requests that th e Panel further summarise the European
Communities' argument regarding the appropriate benchmark for evaluating "benefit" from DOD
transactions. Because part of the European Comm unities' benchmark evidence for DOD is the same
as its benchmark evidence for NASA, the Europ ean Communities suggests that the Panel could
simply copy the fourth sentence of paragraph 7.1029 (including the footnotes), and paste it at the end
of this paragraph 7.1176.
940
6.80 The European Communities also requests th at the Panel recall that the European
Communities referenced DOD's pre-1992 recoupment po licy as evidence of a market benchmark. In
particular, the European Communities suggests that the Panel add the following sentence at the end of
this paragraph:
"The European Union also pointed to DOD's recoupment policy prior to June 1992,
as evidence of a benchmark pursuant to which, in the words of DOD's own
recoupment regulations, the Department of Defense intended 'to recover a fair share
of its investment in nonrecurring costs relate d to products, and/or a fair price for its
contribution to the development of relate d technology, when the products are sold,
and/or when technology is transferred.'"
6.81 This sentence would conclude with a footnot e, stating: "European Communities' second
written submission, para. 479." The European Comm unities suggests that providing this additional

938 European Communities, Request for Interim Review, pp. 14-15.
939 United States, Comments on the European Communities' Request for Interim Review, para. 23.
940 European Communities, Request for Interim Review, p. 15.

BCI deleted, as indicated [***]

detail in this paragraph would be consistent with the level of detail provided by the Panel in
paragraph 7.1029, when it summarised the European Communities' arguments with respect to the
benchmark issue in the context of discussing NASA tran sactions. It would also provide the context to
understand the United States' rebuttal to the European Communities' arguments on the DOD
recoupment policy, which is summarised at paragraph 7.1181 of the Interim Report.941
6.82 The United States makes no comment on the European Communities' request.
6.83 The Panel has made the changes to paragraph 7.1176 (now paragraph 7.1176) requested by
the European Communities.
25. Paragraph 7.1184
6.84 Although the Panel considers that "it was not necessary for the Eur opean Communities to
present benchmark evidence" in order to establis h that a "benefit" was conferred by the DOD
transactions, the European Communities suggests that the Panel note that the European Communities
did, in fact, present such benchmark evidence. The European Communities suggests that the Panel
could make this point with the addition of a footnote attached to the end of the fifth sentence of the
paragraph, stating as follows: "Although it was not necessary for the European Communities to
present benchmark evidence, it did supply such evid ence to the Panel. See para. 7.1176 of this
Report". The European Communities requests that th is comment be considered together with the
previous comment on paragraph 7.1176, in which it requests that the Panel summarize the benchmark
evidence.942
6.85 The United States objects to the European Communities' request. The United States considers
that the Panel has sufficiently su mmarized the European Communities' argument in the appropriate
context. Here, the European Communities seeks to have the Panel add a reference to certain
arguments and evidence with respect to which th e Panel made no findings, including no finding as to
whether the evidence in fact constituted "benchmark evidence".943
6.86 The Panel considers that the changes re quested by the European Communities to
paragraph 7.1184 of the Interim Report (now paragraph 7.1184) are unnecessary.
26. Paragraph 7.1196
6.87 The European Communities requests the Panel to clarify whether its finding of specificity in
paragraph 7.1196 of the Interim Report based on the individual PEs is a finding under Article 2.1(a),
Article 2.1(c), or both.944
6.88 The United States makes no comment on the European Communities' request.
6.89 The Panel has amended the text of the last sentence in paragraph 7.1196 (now
paragraph 7.1196) to make it clear that it has found the subsidies at issue to be specific within the
meaning of Article 2.1(a) of the SCM Agreement.

941 European Communities, Request for Interim Review, p. 13.
942 European Communities, Request for Interim Review, pp. 15-16.
943 United States, Comments on the European Communities' Request for Interim Review, para. 24.
944 European Communities, Request for Interim Review, p. 16.

BCI deleted, as indicated [***]

27. Footnote 2672
6.90 The European Communities requests that the Panel change the figure of $43 million to
$44 million in the penultimate sentence, because the assistance instruments listed on Exhibit US-41
(revised) (i.e. those listed as type CA, CA(T), or OTA) total $44,095,404.945
6.91 The United States makes no comment on the European Communities' request.
6.92 The Panel has reviewed the assistance instrument s identified in Exhibit US-41 and concluded
that the European Communities is correct that the total value of these instruments was $44,095,404.
The Panel has therefore amended the penultimate sent ence of the first paragraph of footnote 2672 of
the Interim Report (now footnote 2800) to substitute "$44 million" for "$43 million".
28. Paragraph 7.1276
6.93 The European Communities requests the Panel to make findings as to whether the allocation
of patent rights under NASA/DOD R&D contracts and agreements constitutes a financial contribution
that confers a benefit within the meaning of Ar ticle 1 of the SCM Agreement. The European
Communities understands that the Panel believes that such findings are unnecessary because the Panel
has found that "the allocation of intellectual pr operty rights under NASA and DOD contracts and
agreement{s} is not specific to a 'group of enterprises or industries' within the meaning of Article 2 of
the SCM Agreement". However, the European Communities believes that the completion of the
Panel's evaluation as to the existence of a specific subsidy will promote the goal of prompt settlement
of the dispute, in accordance with the objective articulated in Article 3.3 of the DSU.946
6.94 The United States objects to the European Comm unities' request. The United States observes
that the Panel appears to have exercised judicial economy with regard to the issue referenced by the
European Communities. The European Communities' interim review comment provides no reason to
question the Panel's decision in this regard.947
6.95 The Panel declines to modify its Interim Re port by making a finding that the allocation of
patent rights under NASA/DOD R&D contracts and ag reements constitutes a financial contribution
that confers a benefit within the meaning of Ar ticle 1 of the SCM Agreement. As stated in
paragraph 7.1294 of the Interim Report (now paragraph 7.1294), the Panel finds that assuming
arguendo that the allocation of patent rights under NASA/DOD R&D contracts and agreements with
Boeing involves a subsidy within the meaning of Article 1 of the SCM Agreement, the European
Communities has not demonstrated that any such subs idy is specific within the meaning of Article 2
of the SCM Agreement. The Panel explains in footnote 2805 of the Interim Report (now
footnote 2933) why it considers that it is appropriate to rely on this arguendo assumption. The
European Communities does not assert, let alone expl ain, that the Panel erred in relying on this
arguendo assumption nor does it advance any reasoning in support of its assertion that a finding that
the allocation of patent rights under NASA/DOD R&D contracts and agreements constitutes a
financial contribution that confers a benefit within the meaning of Article 1 of the SCM Agreement
would promote a prompt settlement of this dispute.
6.96 The European Communities also requests the Pane l to replace the term "intellectual property
rights" in the first sentence with the term "paten t rights". The European Communities believes that

945 European Communities, Request for Interim Review, p. 16.
946 European Communities, Request for Interim Review, p. 17.
947 United States, Comments on the European Communities' Request for Interim Review, para. 25.

BCI deleted, as indicated [***]

this substitution is necessary to align this sentenc e with the Panel's discussion of patent rights,
specifically, in the remainder of Section 8(e)(i).948
6.97 The United States makes no comment on the European Communities' request.
6.98 The Panel agrees with the European Communities th at in order to reflect correctly the subject
matter of this section of the Report, "patent right s" should be substituted fo r "intellectual property
rights" in the first sentence of paragraph 7.1276 of the Interim Report (now paragraph 7.1276).
29. Paragraphs 7.1309-7.1310
6.99 The European Communities requests that the Pa nel replace the words "intellectual property
rights" with "data rights" in the first, third, a nd fourth sentences of paragraph 7.1309 of the Interim
Report and in the sole sentence of paragraph 7.1310 of the Interim Repor t. In addition, the European
Communities requests the Panel to replace the clause "intellectual property at issue arises" with the
clause "data at issue arise" in the fourth sentenc e of paragraph 7.1309. The European Communities
explains that these modifications in phrasing bette r align with: (i) the subject matter addressed in
Section 8(e)(ii) – i.e. "Data rights and trade secrets" ; (ii) the Panel's conclu sion in paragraph 7.1311
regarding "the allocation of data rights under NAS A/DOD R&D contracts and agreements"; and (iii)
the Panel's intention, as stated in paragraph 7.1295, of addressing in these paragraphs "the question of
whether the LERD and 'limited' government data rights treatment accorded to Boeing under the
challenged programmes can be anal ysed and found to constitute a separate, additional 'financial
contribution' ...".949
6.100 The United States objects to the European Comm unities' request. The United States submits
that it does not appear that the Panel's findings in th ese paragraphs are intended to be limited solely to
intellectual property protections in the form of data rights.950
6.101 The Panel declines to make the changes request ed by the European Communities. Although
paragraphs 7.1309-7.1310 of the Inte rim Report (now paragraphs 7.1309-7.1310) are part of a section
of the Interim Report that specifically pertains to data rights, the reasoning in those paragraphs is
applicable to any kind of intellectual property.
30. Paragraph 7.1431(d) and NASA row in table at paragraph 7.1433
6.102 The European Communities recalls that the Panel's conclusi on at paragraph 7.1110 of the
Interim Report with regard to the NASA R&D measu res does not depend on the type of instrument at
issue (i.e. whether procurement contract or Space Act Agreement). The European Communities
submits that the Panel stated its conclusion at pa ragraph 7.1110 of the Interim Report as follows: "...
the Panel finds that the payments and access to facilities, equipment and employees that NASA
provided to Boeing through the eight aeronauti cs R&D programmes at issue constitute specific
subsidies within the meaning of Articles 1 and 2 ...". Moreover, at paragraph 7.983, the Panel
concluded: "In the case of NASA aeronautics R&D, we consider that the different types of
instruments used do not shed very much light on th e nature of the transactions". Accordingly, the
European Communities requests that the Panel summari se its conclusions with respect to the NASA
R&D measures at paragraph 7.1431(d) and in the NASA row of the table at paragraph 7.1433 without
reference to the type of instrument at issu e, consistent with the Panel's conclusion at
paragraph 7.1110. Thus, the European Communities suggests that the Panel modify its summaries at
paragraph 7.1431(d) and in the NASA row of the ta ble at paragraph 7.1433 as follows: "the payments

948 European Communities, Request for Interim Review, p. 17.
949 European Communities, Request for Interim Review, p. 18.
950 United States, Comments on the European Communities' Request for Interim Review, para. 26.

BCI deleted, as indicated [***]

made to Boeing under the eight aeronautics R& D programmes at issue"; and "the access to
government facilities, equipment and employees provided to Boeing under the eight aeronautics R&D
programmes at issue".951
6.103 The United States objects to the European Comm unities' request. The United States submits
that the evidence on the record and the Panel's fi ndings do not support the blanket summary statement
requested by the European Communities. The m odification proposed by the European Communities
would imply that the Panel's finding covers instrume nts not at issue in this case (and potentially new
legal instruments that might be developed in the fu ture) and with respect to which the Panel had not
made any factual findings. The United States also observes, in accordance with its own comments on
the Panel's Interim Report, that the Panel's findi ng with respect to Space Act Agreements actually
covers only non-reimbursable Space Act Agreements. Thus, to the extent that the European
Communities' revised text suggests that the Pane l found reimbursable Space Act Agreements to
confer a subsidy, that suggestion is inconsistent with the European Communities' own position.952
6.104 The Panel declines to make the changes request ed by the European Communities. As stated
in paragraph 7.943 of the Interi m Report (now paragraph 7.944), th e Panel's understanding is that the
measures challenged by the European Communities are the payments and the free access to NASA
facilities, equipment and employees that NASA provided to Boeing through R&D contracts and
agreements. Elsewhere in its Interim Report the Panel also characterizes the measures at issue as
payments made and access to facilities, equipmen t and employees provided under R&D contracts and
agreements. While it is true that in several instan ces the Panel has referred to payments and access to
facilities, equipment and employees provided throug h or under the R&D programmes at issue, the
Panel considers that adding a refe rence to R&D contracts and agreements allows for a more precise
definition of the measures at issue.
31. Paragraph 7.1433, State of Washington row in table
6.105 The European Communities request the Panel to co rrect a factual error, and change the total
amount of the subsidy from the State of Washingt on and Municipalities therein from $74.5 million to
$77.7 million. The European Communities notes that the Panel reached the following conclusions
earlier in the report with respect to the amounts of each of the Washington State subsidies, which add
up to $77.7 million:
• $13.8 million for the B&O tax reduction (see para. 7.301);
• $21.3 million for the B&O tax credit for preproduction development (see para. 7.301);
• $20.0 million for the B&O tax credit for computers (see para. 7.301);
• $1.1 million for the B&O tax credit for property taxes (see para. 7.301);
• $8.3 million for the sales and use tax exemptions for computers (see para. 7.301);
• $2.2 million for the City of Everett B&O tax reduction (see para. 7.353); and
• $11.0 million for the job training incentives (see para. 7.596).953
6.106 The United States makes no comment on the European Communities' request.

951 European Communities, Request for Interim Review, p. 19.
952 United States, Comments on the European Communities' Request for Interim Review, para. 27.
953 European Communities, Request for Interim Review, pp. 19-20.

BCI deleted, as indicated [***]

6.107 The Panel accepts that the figure of $74,5 million for the total amount of Washington State
subsidies in the table in paragraph 7.1433 of the Interim Report (now paragraph 7.1433) is incorrect
and that the correct figure is $77.7 million. The Panel has therefore modified this table accordingly.
32. Paragraph 7.1595, footnote 3217
6.108 The European Communities requests that the Panel correct a factual error in footnote 3217 by
changing the reference "until 2004" to "from 2004 until late 2006". According to the European
Communities, Airbus marketed the Original A350 during the period 2004 - 2006, not "until 2004".954
6.109 The United States similarly requests the Panel to make a change to footnote 3217 to indicate
that the Original A350 LCA family was marketed by Airbus in 2004 and 2005. 955 The European
Communities, in its comments on the United States' requ est, asserts that the Unit ed States' request is
factually incorrect. In this regard, the European Communities refers to ev idence that it considers
demonstrates that Airbus, in fact, marketed the Original A350 LCA family from 2004 to 2006.956 The
European Communities therefore suggests the followi ng revisions to the wording proposed by the
United States:
"The Original A350 LCA family was marketed by Airbus until from 2004 through
2006, but has since been was replaced by the A350XWB family in December 2006,
when the A350XWB family was officially launched."
6.110 The European Communities treats the "Original A350" as including the "initial concept of the
A350 family" that Airbus began marketing in December 2004. 957 This design originally retained the
A330 fuselage, while having new composite wings. However, by April 2005, the design had been
modified to include a composite aft fuselage section. 958 The United States refers to the successive
iterations of the A350 which were marketed prior to the redesign of the A350 in April 2005 as the
"A350 Initial" and appears to treat the European Communities' reference to the "Original A350" as the
version comprising a composite aft fuselage section that was redesigned in April 2005. 959 Despite the
differences in terminology used by the parties, it appears from the evidence that the earliest versions
of the A350 (whether known as the "Original A350" or "A350 Initial") were marketed from
December 2004. As for the time at which Airbus ceased marketing the Original A350 (i.e. the
versions of the A350 preceding the A350XWB), the European Communities states in its First Written
Submission that Airbus set aside marketing its Original A350 family in July 2006 and began
marketing the A350XWB.
960
6.111 The Panel considers that it is appropriate to revise footnote 3217 of the Interim Report (now
footnote 3345 of the Report) to indicate that the Or iginal A350 LCA family was marketed by Airbus
from December 2004 through 2006, bu t that it was subsequently replaced by the A350XWB family,
which Airbus began marketing in July 2006. The Pa nel has also revised the th ird to last sentence of
paragraph 7.1777 of the Interim Re port (now paragraph 7.1777 of the Report) to clarify that the
Original A350 programme was officially launche d in October 2005, notwithstanding that other
iterations of the A350 had been marketed as early as December 2004.

954 European Communities, Request for Interim Review, p. 21.
955 United States, Request for Interim Review, para. 6.
956 European Communities, Comments on United States' Request for Interim Review, p. 2.
957 See European Communities' first written submission, para. 1174.
958 See e.g. Christian Scherer, Commercial Aspects of the Aircraft Business from the Perspective of a
Manufacturer, March 2007, Exhibit EC-11 (BCI), para. 102.
959 See e.g. United States' first written submission, para. 927.
960 European Communities' first written submission, para. 1174. This is borne out by other evidence;
see e.g. a July 2006 press release announcing that Singapore Airlines had signed a letter of intent to purchase 20
A350XWB-900s, as well as 20 options, Exhibit EC-1157, p. 219.

BCI deleted, as indicated [***]

33. Paragraph 7.1606
6.112 The European Communities requests that the Panel add a parenthetical clarification at the end
of the last sentence of paragraph 7.1606 so that the paragraph would read as follows:
"The European Communities estimates that the total amount of these subsidies that
benefited Boeing's LCA division between 1989 and 2006 was $19.1 billion. The
European Communities also estimates that the total amount of these subsidies will
continue to be very large. To that e nd, the European Communities estimates that
Boeing will receive approximately $4.6 billion in subsidies between 2007 and 2024
(excluding FSC/ETI federal tax exempti ons/exclusions and aeronautics R&D support
provided by NASA, DOD and DOC).3243"
6.113 The European Communities' explanation for the suggested addition is as follows. The
preceding paragraph of the Interim Report (paragraph 7.1605) lists the 11 categories of subsidies that
the European Communities argues have affected Boeing's pricing behaviour. The European
Communities argues that, in this context, as present ly drafted, paragraph 7.1606 could be read to
suggest that the $4.6 billion estimate for 2007 – 202 4 includes amounts representing the future value
of FSC/ETI federal tax exemptions/exclusions and aeronautics R&D subsidies provided by NASA,
DOD and DOC, when it does not in fact do so.961
6.114 The United States objects to the European Communities' comment and submits that the
Interim Report accurately reflects the argumen t and evidence submitted by the European
Communities.962
6.115 The Panel considers that, in order to addr ess the European Communities' comments, it is
appropriate to amend the second sentence of pa ragraph 7.1606 of the Interim Report (now
paragraph 7.1606) to clarify the categories of subsid ies that comprise the $4.6 billion in subsidies that
the European Communities estimates that Boeing will receive between 2007 and 2024.
34. Paragraph 7.1701
6.116 The European Communities requests that the Panel expand its serious prejudice evaluation to
include DOD assistance instruments funded throug h any of the challenged RDT&E project elements,
not just those funded through the ManTech and DUS&T project elements. 963 The European
Communities considers that there is evidence on the record to enable the Panel to determine which
transactions between DOD and Boeing under th e RDT&E programmes (other than ManTech and
DUS&T) funded assistance instruments with Boeing . The European Communities provides a tabular
summary of information said to be based on Exhibits US-41 (revised), US-1267 and the United States'
response to Question 213 which, according to the European Communities, makes it clear that several
DOD RDT&E project elements, other than the Ma nTech and DUS&T programmes, funded assistance
instruments with Boeing.964
6.117 On the basis of the foregoing, the European Communities requests that the Panel state that it
includes in its serious prejudice evaluation " any of the challenged RDT&E PEs to the extent that the
PE has funded assistance instruments with Boeing." 965 The European Communities further requests
that the Panel summarize its subsidy findings in pa ragraph 7.1701 by making the following addition

961 European Communities, Request for Interim Review, p. 21.
962 United States, Comments on the European Communities' Request for Interim Review, para. 28.
963 European Communities, Request for Interim Review, p. 22.
964 European Communities, Request for Interim Review, pp. 22-24 and Annex A thereto.
965 European Communities, Request for Interim Review, p. 24.

BCI deleted, as indicated [***]

after the third sentence in that paragraph: "The Panel has also recognized the link between "assistance
instruments" and "dual use" technologies with bene fit or potential benefit to contractors' commercial
operations" (to be followed by a footnote cross-refere nce to paragraph 7.1159 of the Interim Report).
The European Communities has also compiled evidence of what it considers to be the "dual-use
nature of the R&D at issue" under each assistance in strument in Annex A to its Request for Interim
Review, "{s}hould the Panel require additional assura nce that assistance instruments under PEs other
than the ManTech and DUS&T programmes related to dual-use R&D."966
6.118 Finally, the European Communities requests th e Panel to take this comment into account
throughout its serious prejudice analysis. The Euro pean Communities suggests, for example, that the
Panel maintain its description of the structure and design of the ManTech and DUS&T programmes in
the serious prejudice section of the Interim Report, but that it clarify that these two DOD programmes
are examples of RDT&E programmes that have funded assistance instruments with Boeing.967
6.119 The United States objects to the European Comm unities' comments and considers that the
Interim Report accurately and fully reflects the exte nt of the Panel's findings and the scope of the
European Communities' challenge. 968 The United States argues that the European Communities has
provided no basis for the Panel to consider that any of the instruments that it references in its
comment on paragraph 7.1701, except to the exte nt funded through ManTech and DUS&T, should be
included in the Panel's serious prejudice anal ysis or its findings as to adverse effects. 969 T h e
United States further identifies what it consider s to be the following flaws with the European
Communities' proposal.
6.120 First, the United States asserts that the Eur opean Communities attempts to establish for the
first time in its comments on Interim Review that certain assistance agreements funded "dual use"
research. According to the Unite d States, the evidence on which th e European Communities relies to
make this argument has been on the record for years and it is not appropriate for the European
Communities to seek to have the Panel make additional findings based on argumentation that the
European Communities had an opportunity to present, but did not present, during the panel
proceedings.
970 Indeed, the United States considers that the European Communities' request that the
Panel consider new arguments on these factual issues goes beyond the scope of interim review
contemplated by Article 15.2, which is limited to review of "precise aspects" of the interim report.971
6.121 Second, the United States says that it has never indicated that the subject matter of the R&D
(in this case, dual use) determines whether DOD enters into assistance instruments with Boeing or any
other entity; rather, it is the nature of the government 's interest in or need for the research that
determines the form of instrument. 972 In other words, according to the United States, the mere fact
that research is funded through an assistance in strument does not support an inference that the
research has civil applications. The United States refers to Annex A to the European Communities'
Request for Interim Review, which purports to co mpile evidence of the "dual-use" R&D conducted
under the various assistance instruments. According to the United States, where for several of the
assistance instruments the European Communities indicates only "N/A", it effectively concedes that
all research funded by assistance instrument s under the 23 challenged RTD&E programmes was not
necessarily dual-use.

966 European Communities, Request for Interim Review, p. 24.
967 European Communities, Request for Interim Review, p. 25.
968 United States, Comments on European Communities' Request for Interim Review, para. 29.
969 United States, Comments on European Communities' Request for Interim Review, para. 35.
970 United States, Comments on European Communities' Request for Interim Review, para. 30.
971 United States, Comments on European Communities' Request for Interim Review, para. 30.
972 United States, Comments on European Communities' Request for Interim Review, para. 31,
referring to United States' response to question 192, para. 235.

BCI deleted, as indicated [***]

6.122 Third, the United States argues th at the European Communities' listing of PE numbers that it
considers to have funded dual-use research is based on the fact that those programme elements funded
assistance instruments. According to the United St ates, this conclusion woul d be valid only if all
assistance instruments funded dual use aeronau tics RDT&E activities, which they do not. 973
Moreover the United States objects to the European Communities' inclusion in its table of project
elements that funded assistance instruments on the reco rd project elements that are not covered by the
terms of reference of the Panel. According to the United States, the Eur opean Communities has in
any case failed to provide any basis for the Panel to consider that these project elements funded dual-
use technology.974
6.123 Finally, the United States argues that repetition in this section of the Interim Report of the
statement regarding the link between assistance in struments and dual-use technologies, which was
made in the context of the subsidy evaluation, would create the misimpression that the Panel's
findings apply to all assistance instruments without regard to the subject matter of the research. The
United States does not understand this to be the extent of the Panels' finding.
975
6.124 The European Communities' comment appears to rest on one or both of the following
premises; namely (i) that the Panel erroneous ly concluded that only the ManTech and DUS&T
programmes under the RDT&E Program funded assistance instruments with Boeing; and (ii) that
there is insufficient evidence on th e record to enable the Panel to determine which transactions
between DOD and Boeing under the RDT&E programm es are procurement contracts and which are
assistance instruments. However, the Panel is awar e that assistance instruments were funded through
RDT&E programmes other than ManTech and DUS&T, and of the evidence on record linking the
assistance instruments on record to the RDT&E programmes that funded them. The Panel has revised
paragraph 7.1701 of the Interim Re port (now paragraph 7.1701) to further clarify that its serious
prejudice evaluation includes assistance instruments funded under the ManTech and DUS&T
programmes as well as under the 21 other progra mmes under the RDT&E Program. The revisions
also further clarify that, as part of our evalua tion, the European Communities has not advanced
sufficient argument and evidence that would enable the Panel to assess the effects of assistance
instruments funded by programmes other than th e ManTech and DUS&T programmes, as distinct
from the effects of those RDT&E programmes as a whole (which involve funding in the form of both
procurement contracts and assistance instruments) . The Panel declines the European Communities'
request to "summarize its subsidy findings" in pa ragraph 7.1701 by making the requested addition
after the third sentence in that paragraph becau se the European Communities has failed to advance
any explanation as to why it seeks this addition and the Panel does not consider that the requested
addition is necessary.
35. Paragraph 7.1701, footnote 3458
6.125 Related to the above issue, the European Communities requests that the Panel delete
footnote 3458.
976 According to the European Communiti es, the question whether a given RDT&E
programme funds exclusively assistance agreements or exclusively procurement contracts is not
instrumental to the Panel's analysis. The Europ ean Communities recalls that in paragraph 7.1210 of
the Interim Report, the Panel finds that assistan ce instruments under any of the challenged RDT&E
programmes are specific subsidies to Boeing, re gardless of whether the programmes also funded
procurement contracts.

973 United States Comments on European Communities' Request for Interim Review, para. 32.
974 United States Comment on European Communities' Request for Interim Review, para. 34.
975 United States Comments on European Communities' Request for Interim Review, para. 36.
976 European Communities, Request for Interim Review, p. 25.

BCI deleted, as indicated [***]

6.126 The United States objects to the European Co mmunities' request. The United States notes
that the European Communities does not suggest that the footnote is inaccurate, and also that, while
the Panel's inability to conclude that particul ar RDT&E programmes funded entirely procurement
contracts or entirely assistance instruments is not instrumental to its analysis, it was nevertheless an
important element in its conclusion that it could not put a value on the funding challenged by the
European communities.
977
6.127 The revisions that the Panel has made to paragraph 7.1701 of the Interim Report (now
paragraph 7.1701) have resulted in a deletion of what was previously footnote 3458.
36. Paragraphs 7.1786-7.1787, footnote 3596 a nd paragraphs 7.1790-7.1794, 7.1854(a) and
8.3(a)(i)
6.128 The European Communities requests the Panel to modify its finding regarding the sales
campaigns that Airbus lost during 2004 – 2006 due to the effects of the R&D subsidies, and to modify
its consequential findings regarding threat of displacement or impedance.978
6.129 More specifically, the European Communities requests the Panel to add Boeing's 787 sale to
Japan Airlines as a significant lost sale, which it ar gues turned at least in part on the technological
features and early availability of the 787. 979 The European Communities notes that, while the Panel
identified the Japan Airlines sales campaign as one of the campaigns covered by the European
Communities' claim, it did not include this campaign in either its list of sales campaigns where "the
performance characteristics of the 787 and/or its sche duled entry into service in 2008 appear to have
been the decisive factors in the outcome" or in its list of sales campaigns in which other factors
"played a significant part in the Boeing sale."
980 The European Communities recalls its arguments
that, in addition to price concerns, the Japan Ai rlines campaign also turned on the technological
capabilities and earlier availability of the 787. 981 Should the Panel agree to this modification, the
European Communities further requests that the Panel modify its threat of displacement findings in
paragraphs 7.1790-7.1794 to include the third country market of Japan.982
6.130 The United States objects to the European Comm unities' request. The United States submits
that the Panel's lost sales finding in the main body of the Interim Report is limited to the Qantas,
Ethiopian and Icelandair campaigns in 2005 and the Kenya Airways campaign in 2006. 983 T h e
United States notes that the threat of displacement findings do not cover Japan, which suggests that
the Panel did not intend to find that the 2004 Japan Airlines campaign represents a lost sale that is the
effect of the aeronautics R&D subsidies.984
6.131 The Panel has revised footnote 3596 of the Inte rim Report (now footnote 3725 of the Report)
to include a specific reference to the Japan Airlin es sales campaign. The Panel has considered the
evidence to which the European Co mmunities refers in support of its argument that, in addition to
price concerns, the Japan Airlin es campaign also turned on the technological capabilities and earlier
availability of the 787. The Panel is not persuaded by this evidence in the lig ht of the evidence that

977 United States, Comments on European Communities' Request for Interim Review, para. 37.
978 European Communities, Request for Interim Review, p. 26.
979 European Communities, Request for Interim Review, p. 26.
980 European Communities, Request for Interim Review, p. 26.
981 Referring to European Communities' second writte n submission, HSBI Appendix, paras. 28-33 and
the evidence cited therein.
982 European Communities, Request for Interim Review, p. 26.
983 United States, Comments on the European Communities' Request for Interim Review, para. 38.
984 United States, Comments on the European Communities' Request for Interim Review, para. 38.

BCI deleted, as indicated [***]

points to other factors having played a significant part in the Boeing sale. These other factors include
Boeing's relationship with Japan Airlines985, and the routes to be serviced and range of the aircraft.986
37. Paragraph 7.1788
6.132 The European Communities requests that the Pane l clarify its finding related to the Qantas
campaign (pertaining to lost sales of Airbus Orig inal A350s) to include a finding of lost sales of
Airbus A330s.987 The European Communities submits that the evidence demonstrates that Airbus was
offering Qantas both Original A350s and A330s in that campaign.988
6.133 The United States makes no comment on the European Communities' request.
6.134 In the Panel's view, the evidence demonstrates that the Qantas sales campaign was, in the
final analysis, a choice between the 787 and the Original A350. 989 The Panel therefore declines the
European Communities' request to include a finding of lost sales of Airbus A330s.
38. Paragraph 7.1810
6.135 The European Communities requests a modification of the statement in paragraph 7.1810 of
the Interim Report:
"In our view, precisely because the FSC/ETI subsidies are contingent on Boeing
making export sales, we are entitled to de termine, absent reliable evidence to the
contrary, that by their very nature, they will have trade distortive effects."
6.136 The European Communities requests the Panel to cl arify that this inference is not the only
evidentiary basis for its finding that FSC/ ETI and B&O subsidies caused adverse effects. 990 T h e
European Communities refers to paragraphs 7.1806- 7.1807, 7.1811 and 7.1817-7.1823 as evidentiary
bases which appear to fully support the Panel's findings of adverse effects, even in the absence of any
inference to be drawn from the fact that the FSC/ETI subsidies are prohibited subsidies.991
6.137 The United States objects to the European Communities' request. According to the
United States, the rationale behind the European Communities' request (namely, that the export
contingency inherent in the FSC/ETI subsidies is not the only evidentiary basis for the Panel's finding
that FSC/ETI and B&O subsidies caused adverse effects) is wrong.992

985 "Year End Dividends; Continental and JAL orders bring establishment blessings to the 7E7,"
Aviation Week and Space Technology, 3 January 2005, Exhi bit EC-1275 (noting that Ja pan Airlines is not an
Airbus customer and that Japanese industry was supplying the composite wing and much of the composite
fuselage structure for the 7E7); "Sizing Twin Aisl es," Aviation Week and Sp ace Technology, 17 May 2004,
Exhibit EC-1276 (suggesting that following its acquisition of Japan Air Systems, Japan Airlines had decided to
streamline its fleet by flying a largely Boeing fleet powered by Pratt and GE engines).
986 "Year End Dividends; Continental and JAL orders bring establishment blessings to the 7E7,"
Aviation Week and Space Technology, 3 January 2005, Exhibit EC-1275 (noting that Boeing had adjusted the
performance characteristics of the 7E7 by creating the 7E7-3 to meet the particular demands of the Japanese
market).
987 European Communities, Request for Interim Review, p. 26.
988 European Communities, Request for Interim Review, pp. 26-27.
989 Notwithstanding that Airbus may have initially proposed including some A330s in its offer. See,
e.g. Dream Deal for Boeing, Boeing/Airbus Press Reports, Exhibit EC-1157, pp. 467-469, Airbus Document, 24
January 2006, Exhibit EC-900 HSBI, Airbus Document, undated, Exhibit EC-903 HSBI.
990 European Communities, Request for Interim Review, p. 27.
991 European Communities, Request for Interim Review, p. 27.
992 United States' Comments on European Communities' Request for Interim Review, para. 39.

BCI deleted, as indicated [***]

6.138 The Panel has amended paragraph 7.1810 of th e Interim Report (now paragraph 7.1810 of the
Report) in response to the European Communities' request.
39. Paragraph 7.1814, footnote 3637
6.139 The United States requests that the Panel add additional references to the United States'
submissions in order to fully reflect the relevant U.S. arguments concerning the size and relevance of
foreign sales corporate/extraterritorial income tax treatment.993
6.140 The European Communities does not object to th e requested U.S. additions, but only on the
condition that the Panel likewise add a number of references to the relevant arguments of the
European Communities on the same topic. In par ticular, the European Communities requests that the
Panel add the following at the end of footnote 3637, immediately after the additional U.S. references:
"The European Communities disagrees w ith the US position on the lack of
significance of a subsidy of a relatively low magnitude in the LCA market. European
Communities' response to question 94, pa ras. 496-513; European Communities'
comments on United States' response to questions 94 and 99, paras. 332-336, 375-
379; and European Communities' comments on United States' response to question
389, para. 403."
6.141 The Panel has amended the text of footnote 3637 of the Interim Report (now footnote 3767 of
the Report) to include references to arguments made by both the United States and European
Communities on the issue of whether the amounts or magnitudes of the FSC/ETI and B&O tax
subsidies are so small that they are unlikely to ha ve affected Boeing's LCA prices or the outcome of
LCA sales campaigns and thus are unlikely to have caused Airbus to lose sales or to win sales at
suppressed prices. The Panel observes that these argu ments should be distinguished from the parties'
arguments on a related but separate issue; namely, the degree of price suppression or lost sales that
would constitute "significant" price suppression or "significant" lost sales for the purposes of
Article 6.3(c). The Panel has amended footnote 3637 to reflect only the arguments pertaining to the
former issue as that is the issue that is the focus of the Panel's discussion in paragraph 7.1814.
40. Paragraph 7.1818, footnote 3646
6.142 The European Communities requests the Panel to make additional evidentiary references to
further support its finding regarding the relevance of switching costs.
994
6.143 The United States makes no comment on the European Communities' request.

993 United States, Request for Interim Review, para. 7. In particular, the United States requests that the
following references to the United States' argument s be added: United States ' second written submission,
para. 175 and footnote 272; United States comment on European Communities' response to question 229,
para. 420; United States' comment on European Communities' response to question 269, para. 469;
United States' comment on European Communities' response to question 94, paras. 348-352; United States'
response to question 94, para. 241.
994 European Communities, Request for Interim Review, p. 27. The European Communities suggests
the particular references from exhibits filed by the European Communities (Exhibit EC-10, para. 97, Exhibit
EC-11, (BCI), para. 53, Exhibit EC-4, paras. 6, 28, 35, 63-68, Appendix B.4), as well as from its submissions
(European Communities' first written submission, pa ra. 1212, European Communities' second written
submission, paras. 776-777, European Communities' response to question 95, paras. 514-518, European
Communities' response to question 307, paras. 787-792). It also argues that the United States does not dispute
the relevance of switching costs, referring in this regard to various parts of the United States' submissions
(United States' second written submission, HSBI Appendix, paras. 36-37, United States' response to question 95,
para. 243, United States' comment on European Communities' response to question 95, para. 355).

BCI deleted, as indicated [***]

6.144 Although the European Communities has not e xplained why it requests the Panel to make
additional evidentiary references to support the Panel' s statement regarding the relevance of switching
costs, the Panel has revised footnote 3646 of the Interim Report (now footnote 3776 of the Report) to
make such additional evidentiary references as it cons iders appropriate in the context of its statement
in paragraph 7.1818 of the Interim Report (now pa ragraph 7.1818 of the Report) regarding switching
costs.
41. Paragraph 7.1822
6.145 The European Communities requests the Panel to add to its explanation in paragraph 7.1822
(now paragraph 7.1822 of the Report) as to why it is reasonable to infer that the effects of the
subsidies on Airbus' prices and sales could be "significant" in the sense used in Article 6.3 of the SCM
Agreement, that this conclusion is unaffected by the various non-attribution factors that the
United States alleged affected the outcomes of the various LCA sales campaigns.
995 The European
Communities submits that, applying the same logic that was applied by the Panel in paragraph 7.1694
(where it recognizes that price and non-price fact ors can be offset by price concessions) and
paragraph 7.1792 (now para graphs 7.1694 and 7.1792 of the Report, respectively), the Panel could
usefully add a finding that any possible impact of the factors that the United States mentioned on the
prices of Airbus LCA does not diminish the effects of the FSC/ETI and B&O subsidies that the Panel
found to exist.996
6.146 The United States objects to the European Commun ities' request on the basis that the Panel
addressed non-attribution factors in paragraph 7.1819 of the Interim Report and that it understands the
finding in paragraph 7.1822 to be one with respect to the "significance" of the effects.997
6.147 The Panel declines to make the additions re quested by the Europ ean Communities. The
European Communities has not explained why the requested additions are necessary or useful.
42. Appendix VII.F.1, paragraphs 3-10
6.148 The European Communities notes that the Pane l's discussion of composites technologies in
parasgraphs 3-10 of Appendix VII.F.1 does not include any discussion of the application of
composites technologies on the 787, while the discussion of each of the other technology areas at
issue in paragraphs 11-18 of Appendix VII.F.1 does include a discussion of the application of that
technology on the 787.998 The European Communities suggests, for the sake of completeness, that the
Panel insert a new paragraph after paragraph 10 th at states: "A discussion of the application of
composites technology on the 787 is included as part of the discussion in Section C of this
Appendix."
999
6.149 The United States makes no comment on the European Communities' request.
6.150 For the sake of completeness, the Panel has inserted a new paragraph after paragraph 10 that
states: "A discussion of the application of compos ites technology on the 787 is included as part of the
discussion in Section C of this Appendix."

995 European Communities, Request for Interim Review, p. 28.
996 European Communities, Request for Interim Review, p. 28.
997 United States, Comments on European Communities' Request for Interim Review, para. 39.
998 European Communities, Request for Interim Review, p. 28.
999 European Communities, Request for Interim Review, p. 28.

BCI deleted, as indicated [***]

43. Appendix VII.F.2, paragraph 74
6.151 The European Communities requests the Panel to expand its explanation in the last sentence
of paragraph 74 which explains that "the evid ence suggests that the relationship between lower
development costs and LCA prices is less direct than is suggested by Professor Cabral." 1000 T h e
European Communities believes that the Panel meant to refer to "costs" more generally, rather than
"development costs" specifically ("development cost s" usually being used to define the specific
development costs for an aircraft programme, rather than general R&D costs). More importantly, the
European Communities requests that, to improve the clarity of the Report, the Panel identify more
precisely how it considers the relationship to be "less direct".1001
6.152 The United States objects to the European Comm unities' request. The United States indicates
that it understands that the Panel meant to distinguish between "costs" more generally and the R&D or
development costs at issue in paragraph 74.1002
6.153 The Panel has revised paragraph 74 to clarify that in the last sentence it meant to refer to costs
in a general sense as distinguished from the deve lopment costs of a specifi c LCA programme and to
clarify more precisely why it considers that the relationship between costs and LCA prices is less
direct than is suggested by Professor Cabral.
VII. FINDINGS
A. INTRODUCTION
7.1 In this dispute, the European Communities 1003 claims that the United States has acted, and
continues to act, inconsistently with the SCM Agreement by providing prohibited or actionable
subsidies to The Boeing Company and the McDonnell Douglas Corporation prior to its merger with
Boeing (which the European Communities terms the "US LCA industry"). 1004 The European
Communities argues that these subsidies have been pr ovided or are being provided by the States of
Washington, Kansas and Illinois and municipalities in those States and by the U.S. Government.
7.2 Regarding the State of Washington and muni cipalities therein, the European Communities
challenges: (i) various tax rate reductions, tax credits and tax exemptions provided for in a law
adopted by the State of Washington in June 2003 to retain and attract the aerospace industry to
Washington State; (ii) tax rate reductions adopted by the City of Everett; and (iii) a series of tax- and
non-tax incentives provided for in the Project Olym pus Master Site Agreement, an agreement
concluded between Boeing and the State of Washington and municipalities in December 2003.
7.3 Regarding the State of Kansas and munici palities therein, the European Communities
challenges: (i) property and sales tax breaks provided by the City of Wichita to large civil aircraft
component production facilities through the issuance of industrial revenue bonds ; and (ii) interest
payments by the State of Kansas on Kansas State Development Bonds, which the

1000 European Communities, Request for Interim Review, p. 30.
1001 European Communities, Request for Interim Review, p. 30.
1002 United States, Comments on European Communities' Request for Review, para. 41.
1003 On 1 December 2009, the Treaty of Lisbon amending the Treaty on European Union and the Treaty
establishing the European Community (done at Lisbon, 13 December 2007) entered into force. On
29 November 2009, the WTO received a Verbal Note (WT/L/779) from the Council of the European Union and
the Commission of the European Communities stating that, by virtue of the Treaty of Lisbon, as of
1 December 2009, the European Union replaces and succeeds the European Community.
1004 The European Communities generally uses the term "Boeing" to include McDonnell Douglas
unless otherwise stated, and we will follow the same approach in this Report.

BCI deleted, as indicated [***]

European Communities alleges will be used to facilita te production of a portion of the fuselage of the
Boeing 787.
7.4 Regarding the State of Illinois and munici palities therein, the European Communities
challenges certain measures whereby the State of Illinois, the City of Chicago and Cook County have
reimbursed or paid certain costs related to the re location of Boeing's headquarters or have provided
certain tax credits or tax abatements in connection with that relocation.
7.5 Regarding the U.S. Government, the European Communities challenges: (i) payments and
access to government facilities, equipment and employees provided to Boeing pursuant to R&D
contracts and agreements entered into under ei ght National Aeronautics and Space Administration
(NASA) aeronautics R&D programmes; (ii) paymen ts and access to government facilities, equipment
and employees provided to Boeing pursuant to R&D contracts and agreements entered into under 23
Department of Defense (DOD) RDT&E programm es; (iii) payments and access to government
facilities, equipment and employees provided to joint ventures / consortia in which Boeing
participated under the Department of Commerce's A dvanced Technology Program; (iv) the allocation
of intellectual property rights under NASA and D OD R&D contracts and agreements entered into
with Boeing; (v) the reimbursement of Boeing' s independent R&D and bid and proposal expenses
under NASA and DOD R&D contracts with Boeing; (vi) the provision by the Department of Labor of
grants to help train workers for the Boeing 787; and (vii) tax advantages unde r legislation relating to
foreign sales corporations and the exclusion of extraterritorial income.
7.6 The claims of the European Communities with respect to the above-mentioned measures fall
into two categories. First, the European Commun ities claims that two of the alleged subsidies,
namely the tax incentives provided by the State of Washington under the legislation adopted in 2003
and the tax breaks provided by the U.S. Federal Government pursuant to legislation concerning
foreign sales corporations and exclusion of extraterritorial income, are prohibited under
Articles 3.1(a) and 3.2 of the SCM Agreement. S econd, the European Communities claims that all of
the subsidies are actionable under the SCM Ag reement and that by using these subsidies
the United States has caused and continues to cause adverse effects to the interests of
the European Communities within the meaning of Article 5(c) of the SCM Agreement.
7.7 The European Communities requests that th e Panel recommend that the United States
withdraw the prohibited subsidies without delay, as required by Article 4.7 of the SCM Agreement,
and take appropriate steps to rem ove the adverse effects or withdraw the actionable subsidies, as
required by Article 7.8 of the SCM Agreement.
7.8 The United States requests the Panel to find that the United States has acted consistently with
its obligations under the SCM Agreement a nd to deny the relief requested by the
European Communities.
7.9 This Report is organized as follows. Section V II. B sets out the relevant principles regarding
the Panel's function, treaty interpretation, and the burde n of proof. Section VII. C contains the text of
decisions rendered by the Panel in July 2007 on certa in preliminary matters. In section VII. D, the
Panel examines whether the measures challenged by the European Communities constitute specific
subsidies within the meaning of Articles 1 and 2 of the SCM Agreement.
1005 The Panel then turns to

1005 Section VII. D of this Report generally addresses the measures in the same order in which they are
addressed in the European Communities' first and seco nd written submissions. In addition, the Panel has
generally addressed these measures under the same sub- headings used by the European Communities in its
submissions. Our adoption of the terminology used by the European Communities' in its sub-headings is for
convenience only, does not necessarily reflect any view on the part of the Panel, and does not prejudge any
disputed factual or legal issues.

BCI deleted, as indicated [***]

an examination of whether two of the challenged measures are prohibited under Article 3 of the SCM
Agreement, in section VII: E. With respect to tho se measures the Panel finds to be specific subsidies,
the Panel addresses in section VII. F the European Communities' claims that the United States,
through the use of those subsidies, causes advers e effects to the European Communities' interests
within the meaning of Article 5(c) of the SCM Agreement. We set forth our conclusions and
recommendation in section VIII.
B. FUNCTION OF THE PANEL, TREATY INTERPRETATION AND BURDEN OF PROOF
1. Function of the Panel
7.10 Article 11 of the DSU provides that the functi on of WTO panels is to make an "objective
assessment" of the matter, including an objective assess ment of the facts, and the applicability of and
conformity with the relevant cove red agreements, and to "make such other findings as will assist the
DSB in making the recommendations or in giving the ruling provided for in the covered agreements".
2. Treaty interpretation
7.11 Article 3.2 of the DSU provides that Members recognise that the dispute settlement system
serves to clarify the provisions of the covered ag reements "in accordance with customary rules of
interpretation of public international law". It is well established that the principles codified in
Articles 31 and 32 of the Vienna Convention on the Law of Treaties (the "Vienna Convention")1006 are
such customary rules of interpretation of public international law. They provide as follows:
"ARTICLE 31
General rule of interpretation
1. A treaty shall be interpreted in goo d faith in accordance with the ordinary
meaning to be given to the terms of the trea ty in their context and in the light of its
object and purpose.
2. The context for the purpose of the inte rpretation of a treaty shall comprise, in
addition to the text, including its preamble and annexes:
 (a) any agreement relating to the tr eaty which was made between all the
parties in connexion with the conclusion of the treaty;
 (b) any instrument which was made by one or more parties in connexion
with the conclusion of the treaty and accepted by the other parties as an
instrument related to the treaty.
3. There shall be taken into account together with the context:
 (a) any subsequent agreement between the parties regarding the
interpretation of the treaty or the application of its provisions;
 (b) any subsequent practice in the application of the treaty which
establishes the agreement of the parties regarding its interpretation;

1006 Done at Vienna, 23 May 1969, 1155 United Nations Treaty Series 331 (1980); 8 International
Legal Materials 679 (1969).

BCI deleted, as indicated [***]

 (c) any relevant rules of internati onal law applicable in the relations
between the parties.
4. A special meaning shall be given to a te rm if it is established that the parties
so intended.
ARTICLE 32
Supplementary means of interpretation
Recourse may be had to supplementary me ans 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."
3. Burden of proof
7.12 We have kept in mind the general principles a pplicable to burden of proof in WTO dispute
settlement, which require that a party claiming a violation of a provision of a WTO Agreement by
another Member must assert and prove its claim.
1007 In this dispute, the European Communities thus
bears the burden of demonstrating that the disputed measures are specific subsidies, and in some cases
export subsidies, and that through the use of tho se subsidies, the United States causes adverse effects
to the European Communities' interests. It is ge nerally for each party asserting a fact to provide proof
thereof.1008 Therefore, it is also for the United States to provide evidence for the facts which it asserts.
7.13 We have also kept in mind that a prima facie case is one which, in the absence of effective
refutation by the other party, requires a panel, as a matter of law, to rule in favour of the party
presenting the prima facie case.1009 Finally, we recall that the Appellate Body has also stated that "{a}
complaining party may not simply submit evidence a nd expect the panel to divine from it a claim of
WTO-inconsistency. Nor may a complaining party si mply allege facts without relating them to its
legal arguments".1010 The normal international legal standards governing the discharge of the burden
of proof unquestionably apply to the WTO dispute settlement procedures as an important element of
its functions concerning dispute resolution under the rule of law and due process.
C. PRELIMINARY MATTERS
1. Decision of the Panel on requests for enhanced third party rights1011
7.14 On 21 December 2006, Brazil requested the Pane l to grant it certain "enhanced" third party
rights in this proceeding, including the right: (1) "t o attend the entirety of all substantive meetings of
the Panel with the parties"; (2) "to present oral statements and oral observations at the substantive
meetings of the Panel with the parties"; (3) "t o receive copies of all submissions to the Panel,
including answers to the questions posed by the Panel or the parties"; and (4) "to review and
comment on the interim Panel Report, in particular the summary of Brazil's arguments in the draft

1007 Appellate Body Report, US – Wool Shirts and Blouses, p. 14.
1008 Appellate Body Report, US – Wool Shirts and Blouses, p. 14.
1009 Appellate Body Report, EC – Hormones, para. 104.
1010 Appellate Body Report, US – Gambling, para. 140.
1011 The decision reproduced in paras. 7.14-7.18 was originally transmitted to the parties and third
parties on 30 July 2007.

BCI deleted, as indicated [***]

descriptive part of the Panel report". Brazil submit s that it has a significant economic interest in the
aircraft sector, and that any findings concerning the relevant provisions of the SCM Agreement in
relation to the aircraft sector are necessarily of di rect and substantial economic interest to Brazil.
According to Brazil, granting its request would not le ad to any blurring of the distinction between the
rights of parties and those of third parties. On 22 December 2006, Canada requested the Panel to
grant it any enhanced third party rights granted to Brazil. On 9 February 2007, the Panel received
comments from both parties, opposing the requests for enhanced third party rights.
7.15 On 23 February 2007, the Panel informed the pa rties and third parties that it had decided not
to grant enhanced third party rights to any third pa rty in this proceeding. The Panel indicated that it
would issue its reasons in due course. The Pane l's reasons for declining Brazil's request, and the
conditional request of Canada, are as follows.
7.16 The DSU establishes the rights of third parties in panel proceedings in paragraphs 2 and 3 of
Article 10 of the DSU and paragraph 6 of Appe ndix 3 to the DSU. Under these provisions,
third parties have the right to receive the submissions made by the parties up to the first meeting of the
panel, to make submissions to the panel, to present their views during a session of the first substantive
meeting of the panel set aside for that purpose, and to be present during the entirety of such a
session.1012 It is well-established that panels have th e discretion to grant additional rights to third
parties, subject to the requirements of due process and the need to guard against an inappropriate
blurring of the distinction drawn in the DSU between the rights of parties and those of third
parties.
1013 However, all third parties in a panel proceeding may be pr esumed to have a "substantial
interest" in the matter before the panel1014, and additional third party rights have so far been granted in
panel proceedings for specific reasons only. 1015 Previous panels have gr anted enhanced third party
rights on the basis of, inter alia, the significant economic effect of the measures at issue on certain
third parties 1016, the importance of trade in the product at issue to certain third parties 1017, the
significant trade policy impact that the outcome of the case could have on third parties maintaining
measures similar to the measures at issue 1018, at least one of the parties agreeing that enhanced third
party rights should be granted 1019, claims that the measures at i ssue derived from an international
treaty to which certain third parties were parties 1020, third parties having previously been granted
enhanced rights in related panel proceedings 1021, and certain practical considerations arising from a
third party's involvement as a party in a parallel panel proceeding.1022

1012 We also note that, in accordance with Article 10.4 of the DSU, noth ing precludes a Member
participating as a third party in a panel proceeding from requesting the establishment of another panel to
examine the measures at issue.
1013 Panel Reports, EC – Export Subsidies on Sugar , para. 2.7; Panel Report, US – Upland Cotton ,
Annex L-1.7, para. 9; Panel Report, EC – Tariff Preferences, Annex A, para. 7; Appellate Body Report, US –
1916 Act, para. 150; Panel Reports, US – 1916 Act , para. 6.32; Appellate Body Report, EC – Hormones ,
1014 Article 10.2 of the DSU indicates that the term "thi rd party" is used throughout the DSU to refer to
a Member that has "a substantial interest" in a matter before a panel, and which has notified its interest to
the DSB.
1016 Panel Reports, EC – Bananas III , para. 7.8; Panel Report, EC – Tariff Preferences , Annex A,
para. 7. See also, Panel Reports, EC – Export Subsidies on Sugar, para. 2.5.
1017 Panel Reports, EC – Export Subsidies on Sugar, para. 2.5.
1018 Panel Report, EC – Tariff Preferences, Annex A, para. 7.
1019 Panel Reports, EC – Bananas III, para. 7.8.
1020 Panel Reports, EC – Bananas III, para. 7.8.
1021 Panel Reports, EC – Bananas III, para. 7.8.
1022 Panel Report, EC – Hormones (Canada), para. 8.17.

BCI deleted, as indicated [***]

7.17 In this case, Brazil has not presented the Panel with any similar reasons in support of its
request for enhanced third party rights. While the Panel accepts that Brazil ha s a substantial interest
in the aircraft sector, the Panel considers that Brazil's interest in "the aircraft sector" as a whole
constitutes an insufficient basis for gran ting Brazil enhanced third party rights.
1023 Brazil has not
claimed that it produces large civil aircraft, or that it has any trade interests in large civil aircraft, for
instance as a supplier to producers of large civil aircra ft. Brazil has not claimed that regional aircraft
produced in Brazil compete with large civil aircra ft. Brazil has not claimed that it maintains any
measures similar to those at issue in this dispute; to the contrary, Brazil claims that it does not confer
subsidies for the development and production of new aircraft products. 1024 While Brazil has been
involved as a party in a number of WTO disputes involving the aircraft sector, these disputes involved
products (i.e. regional aircraft) and measures (e.g. ex port credits on the sale of such aircraft) that are
not at issue in this dispute. Brazil has not explained how, in the light of the foregoing, the measures at
issue have a significant economic or trade policy eff ect on Brazil. While we accept that Brazil has a
general systemic interest in the interpretation of the SCM Agreement, this does not differentiate Brazil
from any other WTO Member. Finally, both parti es agree that enhanced third party rights are not
warranted in this case.
7.18 We therefore decline Brazil's request fo r "enhanced" third party rights in these
proceedings.1025

1023 Brazil submits that it has a significant economic inte rest in "the aircraft s ector" (Letter from Brazil
to the Panel, dated 21 December 2006, para. 6), that any findings concerning the relevant provisions of the
SCM Agreement "in relation to the aircra ft sector" are necessarily of direct and substantial economic interest to
Brazil (Ibid., para. 6), that trade-distorting subsidies in "the aircraft sector" are considerably greater than the
impact of similar policies on other industries (Ibid., para. 7), and that the interpretation of the SCM Agreement
"as applied to the aircraft sector" may affect the way Br azil and other Members apply the relevant disciplines of
the SCM Agreement to the "civil aircraft sector" (Ibid., para. 8).
1024 Ibid., para. 7.
1025 Brazil has requested the Panel to grant it the "enh anced" third party right "to review and comment
on the interim Panel Report, in particular the summary of Brazil's arguments in the draft descriptive part of the
Panel report". In EC – Bananas III , the panel referred to the "normal practice" of permitting third parties to
review the draft of the summary of their arguments in the descriptive pa rt of the report (Panel Reports, EC –
Bananas III, para. 7.9). Insofar as Brazil is merely requesting the Panel to permit Brazil to review and comment
on the summary of its arguments contained in any descriptive sections of the Panel's draft report, the Panel sees
no reason to depart from the normal practice in WTO panel proceedings. We note that, while both the
United States and the Europ ean Communities oppose Brazil's request for "enhanced" third party rights, the
United States considers that "the ability to comment on the description of its arguments in the draft descriptive
part of the report" is "a right routinely provided to third parties, not an "enhanced" right". Letter from the
United States to the Panel, dated 9 February 2007, footnote 13.

BCI deleted, as indicated [***]

2. Decision of the Panel on the request of the European Communities for a preliminary
ruling on Annex V of the SCM Agreement1026
7.19 On 24 November 2006, the European Communitie s filed a request for preliminary rulings
relating to the information-gathering procedure e nvisaged in Annex V of the SCM Agreement. The
European Communities' request arises from the part ies' inability to reach agreement on the initiation
of an Annex V procedure in the above-captioned di spute, and from the parties' inability to reach
agreement on a means for transferring the informa tion obtained during the Annex V process that was
initiated and completed in United States — Measures Affecting Trade in Large Civil Aircraft (DS317)
to the present Panel. The European Communities made two alternative requests. 1027 F i r s t , t h e
European Communities requested the Panel to rule that the Annex V procedure has been initiated in
this dispute, and that the United States is therefor e under an obligation to respond to certain questions
put to the United States by the European Communities in a letter dated 25 May 2006. Second, in the
event that the Panel is unable to rule that the Annex V procedure has been initiated, the
European Communities requested that the Panel exercise its discretion under Article 13 of the DSU to
put some or all of these questions to the United States. In its response filed on 22 March 2007, the
United States requested the Panel to reject both of the European Communities' requests. The Panel
also received letters from Canada and Braz il, dated 1 December 2006 and 21 December 2006
respectively, commenting on the European Communities' requests.
7.20 The Panel is unable to rule that an Annex V procedure was initiated in this dispute.
Paragraph 2 of Annex V of the SCM Agreement provides that, in cases where matters are referred to
the DSB under Article 7.4 of the SCM Agreement, a nd serious prejudice has to be demonstrated, "the
DSB shall, upon request, initiate the procedure" envisaged in Annex V. In this case, the
European Communities requested that an Annex V information-gathering process be initiated.
1028
However, the United States refused, for various re asons, to consent to the initiation of an Annex V
procedure in this dispute. It is clear from the minutes of the DSB meetings where this matter was
discussed that the DSB never took any action to initiat e an Annex V procedure, or to designate a DSB

1026 The decision reproduced in paras. 7.19-7.24 was originally transmitted to the parties on
30 July 2007. In support of its Preliminary Ruli ng Request, the European Communities submits that the
initiation of an Annex V procedure is a DSB "action" that is not subject to consensus, and that "is automatically
taken" upon request, unless there is negative consensu s not to take the action. The European Communities
further argues that certain provisions of Annex V are capable of operating independently of whether or not a
facilitator has been designated, or is functional. With respect to its alternative request under Article 13 of the
DSU, the European Communities submits that there is no limitation as to what kind of information the Panel
may require, or when it may require it, under Article 13. The European Communities also contends that the
Panel, in determining whether to exercise its discre tion under Article 13, should take due account of the
specifics of a serious prejudice case, and the requireme nts of due process. The European Communities argues
that it is not requesting the Panel to alleviate the European Communities' burden of proof, or make a prima facie
case for it. The United States argues that nothing in the DSU or elsewhere in the covered agreements gives
panels the authority to "rule" on the conduct of the DSB, and that no provision of the covered agreements allows
panels to describe the duties the DSB must perform, define the procedures it must follow in performing those
duties, or evaluate whether it has done so properly. The covered agreements provide no support for the
European Communities' contention that initiation of an Annex V process is "automatic" upon the request of the
complaining party, subject only to negative consensus. Finally, the European Communities and the
United States have already undertaken an exhaustive Annex V process in relation to the European Communities'
claims. The United States also argues that it would be in appropriate, at this juncture, for the Panel to grant the
European Communities' Article 13 request. The United States further argues that Article 13 of the DSU does
not authorize a panel to collect for a complaining party information that the complaining party - as opposed to
the panel - deems to be "necessary and appropriate."
1027 In its 24 November 2006 request, the European Communities also requested the Panel to adopt
procedures for the protection of business confidential information and highly sensitive business information.
1028 WT/DS353/2 (also circulated as WT/DS317/5), p. 14.

BCI deleted, as indicated [***]

representative pursuant to paragraph 4 of Annex V. Rather, the DSB merely "took note" of the
statements made by Members at those meetings.1029
7.21 The European Communities argues that the initiation of an Annex V procedure is not a DSB
"decision" which must be taken by consensus, but is rather a DSB "action" that is not subject to
consensus, and which "occurs automatically" 1030 upon request unless there is negative consensus not
to take the action. The Panel is not convinced by the European Communities' argument. It may well
be that the initiation of an Annex V procedure is not a "decision" that is subject to consensus within
the meaning of Article 2.4 of the DSU. However, it does not follow that the initiation of an Annex V
procedure "occurs automatically" in the absence of any action by the DSB to initiate the procedure.
We see no basis for such an interpretation in the te xt of paragraph 2 of Annex V, which states that
"the DSB shall, upon request, initiate the procedure" envisaged in Annex V. The term "initiate"
means "{b}egin, introduce, set going, originate".
1031 The ordinary meaning of the term "initiate", used
in the immediate context of a positive duty formulated in the active voice ("the DSB shall ... initiate"),
implies that some form of action is required on the part of the DSB. Furthermore, the
European Communities' interpretation of paragraph 2 of Annex V w ould effectively remove the DSB
from having any role in the initiation of an Annex V procedure, which seems inconsistent with the
ordinary meaning of the terms of that provision . Finally, accepting the European Communities'
argument that there are certain so-called DSB "acti ons" that may be deemed to "occur automatically"
in the absence of any indication of agreement or actual action by the DSB could have far-reaching and
potentially surprising systemic consequences that w ould be inconsistent with the object and purpose
of providing "security and predictabilit y" to the multilateral trading system. 1032 For these reasons, we
conclude that, even though it may well be that the in itiation of an Annex V procedure is not subject to
consensus, the initiation of an Annex V procedure does not "occur automatically" upon request, in the
absence of any action by the DSB to initiate the procedure.
7.22 We therefore deny the European Communities' re quest that the Panel "rule that the Annex V
procedure requested by the European Commun ities at the DSB meeting of 21 April 2006 and
confirmed at the DSB meeting of 17 May 2006 has been initiated". 1033 The European Communities
further requested that the Panel: (i) "rule that th e United States is under an obligation to cooperate
and answer the questions that have been put to it in the European Communities' letter to the Facilitator
dated 23 May 2006"; (ii) "rule that Mr. Mateo Diego-Fernández was effectively designated as a
facilitator in that procedure, and in the event that the Panel does not make this ruling, nevertheless to
provide the relief set forth in the preceding and following points"; and (iii) "adopt such working
procedures that would allow the completion of the Annex V procedure in due time before the deadline
for the filing of the European Communities' first written submission".
1034 These additional requests
are necessarily dependant upon the Panel ruling th at the Annex V procedure was initiated. We
therefore deny these requests as well.
7.23 The Panel has decided that it will not exercise its discretion under Article 13 of the DSU to
seek information from the United States prior to havi ng carefully reviewed the parties' first written
submissions. We recall that Article 13.1 of the DSU grants a panel the right to seek such information
"as the panel considers necessary and appropriate". By virtue of Article 13 of the DSU, a panel "is

1029 WT/DSB/M/205, paras. 75-76; WT/DSB/M/ 206, para. 26; WT/DSB/M/207, para. 101;
WT/DSB/M/210, para. 104; WT/DSB/M/212, paras. 70-71.
1030 Request for Preliminary Rulings by the Eu ropean Communities, dated 24 November 2006
("European Communities' Preliminary Ruling Request"), para. 14.
1031 Shorter Oxford English Dictionary , 5th ed., W.R. Trumble, A. Stevenson (eds.), (Oxford
University Press, 2002), Vol. 1, p. 1377.
1032 See Article 3.2 of the DSU.
1033 European Communities' Preliminary Ruling Request, para. 58.
1034 Ibid.

BCI deleted, as indicated [***]

vested with ample and extensive di scretionary authority to determine when it needs information to
resolve a dispute and what information it needs". 1035 However, a panel will usually not be in the
position to determine what information is "necessary and appropriate", and w ill therefore usually not
be in a position to exercise its authority under Article 13 of the DSU to request information "the panel
considers necessary and appropriate", prior to havi ng carefully reviewed the parties' first written
submissions. This is especially true where, as in the present case, one party requests a panel to
transmit hundreds of questions to another part y relating to a range of measures. The
European Communities contends that the Panel shoul d make use of its discretion under Article 13 of
the DSU, taking into account the "specifics of a serious prejudice case", and taking into account the
"requirements of due process" to ensure that "all procedural rights conferred on the
European Communities and recognized in A nnex V SCM Agreement are fully respected".
1036 T h e
Panel notes that the first sentence of paragraph 9 of Annex V of the SCM Agreement provides that
nothing in the information-gathering procedure envi saged in Annex V limits the ability of a panel to
seek such additional information "as it deems essential to a proper resolution of the dispute"
(emphasis added). Thus, even in a serious prej udice case, a panel should still seek information only
where the Panel is able to satisfy itself that such information is necessary (or "essential"). Moreover,
having taken into account the particular circumstan ces and procedural history of this dispute, the
Panel does not consider it necessary or appropriate to use its discretion under Article 13 of the DSU to
remedy the parties' inability to reach agreement on the initiation of an Annex V procedure, or to
remedy the parties' inability to reach agreement on a means for transferring the information obtained
during the DS317 Annex V procedure to the present Panel.
7.24 The Panel encourages the parties to continue th eir efforts to reach agreement on the question
of the information to be used in this dispute.
D. WHETHER THE MEASURES AT ISSUE CONSTITUTE SPECIFIC SUBSIDIES WITHIN THE MEANING OF
ARTICLES 1 AND 2 OF THE SCM AGREEMENT
1. Introduction
7.25 In this section of the Report, the Panel exam ines whether the measures challenged by the
European Communities constitute specific subsidies within the meaning of Articles 1 and 2 of the
SCM Agreement. We begin by setting out the text of these provisions. We then set out our general
approach to estimating the amounts of any subsidies found to exist.
7.26 Article 1 of the SCM Agreement is entitled "D efinition of a Subsidy". Paragraph 1 of
Article 1 provides that:
"1.1 For the purpose of this Agreement, a subsidy shall be deemed to exist if:
(a)(1) there is a financial contribution by a government or any public body within
the territory of a Member (referred to in this Agreement as "government"), i.e. where:
 (i) a government practice involves a direct transfer of funds (e.g. grants,
loans, and equity infusion), potential direct transfers of funds or liabilities
(e.g. loan guarantees);
 (ii) government revenue th at is otherwise due is foregone or not collected
(e.g. fiscal incentives such as tax credits);

1035 Appellate Body Report, Canada – Aircraft, para. 192.
1036 European Communities' Preliminary Ruling Request, paras. 48-49.

BCI deleted, as indicated [***]

 (iii) a government provides goods or services other than general
infrastructure, or purchases goods;
 (iv) a government makes payments to a funding mechanism, or entrusts
or directs a private body to carry out one or more of the type of functions
illustrated in (i) to (iii) above whic h would normally be vested in the
government and the practice, in no real sense, differs from practices normally
followed by governments;
 or
(a)(2) there is any form of income or pr ice support in the sense of Article XVI of
GATT 1994;
and
(b) a benefit is thereby conferred.
Article XVI) and the provisions of Annexes I through III of this Agreement, the exemption of
an exported product from duties or taxes borne by the like product when destined for domestic
consumption, or the remission of such duties or taxes in amounts not in excess of those which
have accrued, shall not be deemed to be a subsidy."
7.27 Article 2 of the SCM Agreement is entitled "Speci ficity". Paragraph 1 of Article 2 provides
that:
"2.1 In order to determine whether a subsidy, as defined in paragraph 1 of
Article 1, is specific to an enterprise or industry or group of enterprises or industries
(referred to in this Agreement as 'certain en terprises') within the jurisdiction of the
granting authority, the following principles shall apply:
(a) Where the granting authority, or the legislation pursuant to which the
granting authority operates, explicitly limits access to a subsidy to
certain enterprises, such subsidy shall be specific.
(b) Where the granting authority, or the legislation pursuant to which the
granting authority operates, est ablishes objective criteria or
conditions2 governing the eligibility for, and the amount of, a
subsidy, specificity shall not exist, provided that the eligibility is
automatic and that such criteria and conditions are strictly adhered to.
The criteria or conditions must be clearly spelled out in law,
regulation, or other official document, so as to be capable of
verification.
(c) If, notwithstanding any appearance of non-specificity resulting from
the application of the principles la id down in subparagraphs (a) and
(b), there are reasons to believe that the subsidy may in fact be
specific, other factors may be consider ed. Such factors are: use of a
subsidy programme by a limited number of certain enterprises,
predominant use by certain enterprises, the granting of
disproportionately large amounts of subsidy to certain enterprises,

BCI deleted, as indicated [***]

and the manner in which discretion has been exercised by the
granting authority in the decision to grant a subsidy. 3 In applying
this subparagraph, account shall be taken of the extent of
diversification of economic activiti es within the jurisdiction of the
granting authority, as well as of the length of time during which the
subsidy programme has been in operation.
Body reports into account where relevant to a legal issue before the Panel.
7.29 With respect to the existence of a fina ncial contribution within the meaning of
Article 1.1(a)(1) of the SCM Agreement, the Appellate Body has explained that:
"An evaluation of the existence of a financ ial contribution involves consideration of
the nature of the transaction through which something of economic value is
transferred by a government. A wide range of transactions falls within the meaning
of 'financial contribution' in Article 1.1(a)(1)."1038
7.30 With respect to the existence of a benefit w ithin the meaning of Article 1.1(b) of the
SCM Agreement, the Appellate Body has explained that:
"the word 'benefit', as used in Article 1.1(b), implies some kind of comparison. This
must be so, for there can be no 'benefit' to the recipient unless the 'financial
contribution' makes the recipient 'better off' than it would otherwise have been, absent
that contribution. In our view, the ma rketplace provides an appropriate basis for

1037 Panel Report, Indonesia – Autos ; Panel Report, Canada – Aircraft ; Appellate Body Report,
Canada – Aircraft ; Panel Report Brazil – Aircraft ; Appellate Body Report, Brazil – Aircraft ; Panel Report,
Australia – Automotive Leather II; Panel Report, US – FSC; Appellate Body Report, US – FSC; Panel Report,
US – Lead and Bismuth II; Appellate Body Report, US – Lead and Bismuth II; Panel Report, Canada – Autos;
Appellate Body Report, Canada – Autos; Panel Report, US – Export Restraints; Panel Report, Brazil – Aircraft
(Article 21.5 – Canada II) ; Panel Report, US – FSC (Article 21.5 – EC) ; Appellate Body Report, US – FSC
(Article 21.5 – EC) ; Panel Report, Canada – Aircraft Credits and Guarantees ; Decision by the Arbitrator,
Canada – Aircraft Credits and Guarantees (Article 22.6 – Canada) ; Panel Report, US – Countervailing
Measures on Certain EC Products ; Appellate Body Report, US – Countervailing Measures on Certain EC
Products; Panel Report, US – Offset Act (Byrd Amendment) ; Panel Report, US – Softwood Lumber III ; Panel
Report, US – Softwood Lumber IV ; Appellate Body Report, US – Softwood Lumber IV ; Panel Report, US –
Upland Cotton; Panel Report, US – Countervailing Duty Investigation on DRAMS; Appellate Body Report, US
– Countervailing Duty Investigation on DRAMS; Panel Report, Korea – Commercial Vessels; Panel Report, EC
– Countervailing Measures on DRAM Chips; Panel Report, Japan – DRAMs (Korea); Appellate Body Report,
Japan – DRAMs (Korea); Panel Report, US – Upland Cotton (Article 21.5 – Brazil); and Panel Report, Mexico
– Olive Oil.
The Panel Report in EC and certain member States – Large Civil Aircraft was circulated on
30 June 2010, and is currently under appeal.
1038 Appellate Body Report, US – Softwood Lumber IV, para. 52 (emphasis added).

BCI deleted, as indicated [***]

comparison in determining whether a 'benefit' has been 'conferred', because the trade-
distorting potential of a 'financial contri bution' can be identified by determining
whether the recipient has received a 'financial contribution' on terms more favourable
than those available to the recipient in the market."1039
7.31 With respect to the concept of "specificity" in Article 2 of the SCM Agreement, the panel in
US – Upland Cotton explained that:
"At some point that is not made precise in the text of the agreement, and which may
modulate according to the particular circumstances of a given case, a subsidy would
cease to be specific because it is sufficiently broadly available throughout an
economy as not to benefit a particular limited group of producers of certain products.
The plain words of Article 2.1 indicate that specificity is a general concept, and the
breadth or narrowness of specificity is not susceptible to rigid quantitative definition.
Whether a subsidy is specific can only be assessed on a case-by-case basis."
 1040
7.32 As the complaining party, the European Communities carries the burden of demonstrating, for
each of the challenged measures, that: (i) the me asure it is challenging actually exists; (ii) the
measure involves a financial contribution by a public body within the meaning of Article 1.1(a)(1) of
the SCM Agreement; (iii) the financial contribu tion confers a benefit within the meaning of
Article 1.1(b) of the SCM Agreement; and (iv) the s ubsidy is specific within the meaning of Article 2
of the SCM Agreement. These are cumulative requi rements. Thus, if the Panel finds that the
European Communities has failed to demonstrate any one of these elements, then the Panel must find
that the European Communities has failed to demonstrate the existence of a specific subsidy.
7.33 For most of the measures at issue, the Eu ropean Communities: (i ) presents evidence and
argument relating not only to the existence of a specific subsidy under Articles 1 and 2 of the
SCM Agreement, but also the amount of each alleged subsidy 1041; (ii) allocates a portion (in many
instances, the entirety) of the total amount of each subsidy to what it terms "Boeing's LCA
division"1042; and (iii) asks the Panel to adopt its estimat e of the amount of the subsidy to Boeing's
LCA division as the "best information available" and to "draw adverse inferences" due to the
United States' alleged "non-cooperation" in the in formation-gathering process under Annex V of the

1039 Appellate Body Report, Canada – Aircraft, para. 157 (emphasis added).
1040 Panel Report, US – Upland Cotton, para. 7.1142 (emphasis added).
1041 European Communities' first written submission, Section VI; European Communities' second
written submission, Section III.
1042 Prior to 1997, The Boeing Company ("Boeing") was one of two firms in the United States that
produced large civil aircraft, with the other being the McDonnell Douglas Corporation ("McDonnell Douglas").
Prior to 1997, these two firms comprised the "U.S. LCA industry". McDonnell Douglas merged with The
Boeing Company in 1997. Following the merger , Boeing became the sole U.S. pro ducer of large civil aircraft.
Boeing is divided into several different business segments and units. "Boeing Commercial Airplanes" ("BCA")
is the segment of Boeing that produ ces large civil aircraft and parts. Bo eing's "Integrated Defense Systems"
(IDS) segment focuses on defence, intelligence, communi cations, and space. Boeing's "Phantom Works" unit
conducts R&D for both segments of the company. Boeing Capital Corporation provides asset-backed lending
and leasing to support other Boeing business units by arranging, structuring, and providing financing to assist in
the sale and delivery of Boeing products. The European Communities defines "Boeing's LCA division" as "the
segment of Boeing that produces LCA and its parts". European Communities' first written submission, para. 77.
The European Communities explains that it uses "Boeing's LCA division" to mean the pre-merger "LCA
divisions" of both Boeing and McDonnell Douglas, as well as the post-merger "LCA division" of Boeing, i.e.
Boeing Commercial Airplanes. European Communities' response to question 294, para. 710. Thus, we
understand the European Communities to use "Boeing's LCA division" interchangeably with "Boeing
Commercial Airplanes (BCA) division", and with "US LCA industry".

BCI deleted, as indicated [***]

SCM Agreement. 1043 The Panel will briefly set out its a pproach to these three elements of the
European Communities' argumentation.
7.34 First, in this section of the Report the Pane l will determine not only whether each of the
measures at issue is a specific subsidy within the meaning of Articles 1 and 2 of the SCM Agreement,
but also the amount of any subsidy found to exist on a measure-by-measure basis.1044
7.35 Second, where we determine that a measure cons titutes a specific subsidy within the meaning
of Articles 1 and 2 of the SCM Agreement, we will then, and only then, determine the amount of the
subsidy that is properly allocated to "Boeing's LCA division". In our view, the question of whether a
challenged measure constitutes a subsidy within the m eaning of Article 1 is distinct from the question
of what amount of the subsidy is properly allocated to Boeing's LCA division. This approach is
consistent with prior panel reports. In US – Upland Cotton , the panel considered that "the argument
... relating to the 'amount' or 'portion' of the subsidy ... is not germane to the inquiry that is to be
conducted under Article 1 of the SCM Agreement . Here, we are asking whether a 'financial
contribution' exists, and whether a 'benefit' is thereby conferred".
1045 The panel in EC –
Countervailing Measures on DRAM Chips explained that:
"there are two distinct questions to be addressed. The first relates to the existence of a
benefit, the second deals with the calculation of the amount of the benefit. In other
words, a finding that the financial contribution was provided on terms more
favourable than what the market place provide d for is, in our view, sufficient to find
that a benefit existed. Our view is based on our interpretation of the term benefit as it
appears in Article 1.1 of the SCM Agreement which determines when a subsidy is
deemed to exist, read in the context of the SCM Agreement and Article 14 thereof, in
particular."
 1046
The panel further noted:

"that it would not be nec essary nor appropriate for us to address these questions
concerning the calculation of the amount of benefit, if we were to conclude that the
investigating authority failed to properly establish the existence of a benefit in the
first place."1047
7.36 Although the European Communities has formulat ed some of its arguments relating to the
existence of benefit within the meaning of Article 1.1(b) of the SCM Agreement in terms of how the
subsidies "relate to the production" of Boeing LC A, it has acknowledged in response to a question
from the Panel that:
"In general terms, and in accordance with Appellate Body findings, the
European Communities considers that a 'benefit' is conferred when 'the recipient has
received a financial contribution' on terms more favourable than those available to the
recipient in the market.' The fact that the subsidies 'relate to the production' of one or
more models of Boeing LCA is not strictly relevant to the ultimate question of

1043 European Communities' first written submission, Section IV, and paras. 132, 154, 168, 182, 194,
203, 230, 245, 261, 277, 325, 336, 361, 385, 406, 431, 450, 525, 549, 573, 589, 604, 619, 632, 651, 763, 799,
848, 876, 912 and 958.
1044 Appellate Body Report, Canada – Wheat Exports and Grain Imports , para. 126 (" {a}s a general
principle, panels are free to structure the order of their anal ysis as they see fit. In so doing, panels may find it
useful to take account of the manner in which a claim is presented to them by a complaining Member").
1045 Panel Report, US – Upland Cotton, para. 7.1119. See also, parties' responses to question 1.
1046 Panel Report, EC – Countervailing Measures on DRAM Chips, para. 7.178 (emphasis original).
1047 Panel Report, EC – Countervailing Measures on DRAM Chips, footnote 169 (emphasis original).

BCI deleted, as indicated [***]

whether or not a 'benefit' is conferred within the meaning of Article 1.1(b) of the SCM
Agreement. It is, however, relevant to the question of how to allocate the benefit to
individual Boeing LCA, for purposes of evaluating the resulting adverse effects."1048
7.37 Third, the question of whether the United States did or did not "fail to cooperate in the
information-gathering process" within the me aning of paragraph 6 of Annex V of the
SCM Agreement has been the subject of extensive argumentation in this dispute. 1049 However, the
Panel does not see any practical need to make a ruling on this issue. The Panel recalls that it is not
required to "quantify precisely the amount of the subsidy" 1050 and notes that both parties agree that, in
the absence of actual data regarding the amount of an alleged subsidy, a panel may base its findings
on an estimate of the amount of the subsidy. Mo re specifically, in response to a question from the
Panel, both parties agree that the use of estimates is consistent with a panel's requirement to make an
"objective assessment of the facts of the case" within the meaning of Article 11 of the DSU, and that a
panel need not find "non-cooperation" within th e meaning of paragraph 6 of Annex V of the
SCM Agreement in order to rely on an estimate of the amount of a subsidy for the purpose of the
serious prejudice analysis.
1051
7.38 For each of the challenged measures, the European Communities has presented the Panel with
evidence and arguments in support of its estimate of the amount of the subsidy allegedly provided to
Boeing. Where the United States disputes the Europ ean Communities' estimate of the amount of an
alleged subsidy, it has provided the Panel with its own evidence and/or arguments to support its own,
generally lower, estimate. If the Panel were to c onsider the evidence and/or arguments advanced by
the United States to be insufficient to rebut the evidence and arguments presented by the
European Communities, then the Panel would accept th e European Communities' estimate. In such a
situation, the Panel would accept the European Comm unities' estimate not by virtue of United States
"non-cooperation", and not as a matter of drawing "adverse inferences", but simply by virtue of the
operation of the normal principles regarding th e burden of proof in WTO dispute settlement
proceedings. Likewise, if the Panel were to consid er the evidence and/or arguments advanced by the
United States to be sufficient to rebut the evidence and arguments presented by the
European Communities, then the Panel would accept the United States' estimate not by virtue of
United States "cooperation", but simply by virtue of the operation of the normal principles regarding
the burden of proof in WTO dispute settlement proceedings.

1048 European Communities' response to question 134(a), para. 123 (emphasis original) (footnote
omitted). The European Communities adds that "{w}ith particular respect to the benefit from the DOD RDT&E
Program, the reference to the fact that it relates to 't he production of all Boeing LCA' (European Communities'
first written submission, para. 764) serves to further clarify the limitations in the scope of the
European Communities' claim". European Communities' response to question 134(a), para. 124 (emphasis
added).
1049 European Communities' first written submission, paras. 51-68; United States' first written
submission, paras. 24 -37; European Communities' second written s ubmission, paras. 19-23; United States'
second written submission, para. 4; Parties responses (a nd related comments) to questions 2, 106, 107, 108,
316, and 317; Brazil's written submission, paras. 3-8; Br azil's response to question 4; Brazil's oral statement,
paras. 3-6; China's written submission, paras. 3-26 ; China's response to question 4; Korea's written
submission, paras. 9-15; Korea's response to question 4.
1050 Appellate Body Report, US – Upland Cotton , para. 467 ("In sum, reading Article 6.3(c) in the
context of Article 6.8 and Annex V suggests that a panel should have regard to the magnitude of the challenged
subsidy and its relationship to prices of the product in th e relevant market when analyzing whether the effect of
a subsidy is significant price suppression. In many cases, it may be difficult to decide this question in the
absence of such an assessment. Nevertheless, this does not mean that Article 6.3(c) imposes an obligation on
panels to quantify precisely the amount of a subsidy benefiting the product at issue in every case. A precise,
definitive quantification of the subsidy is not required.")
1051 Parties' responses to question 109.

BCI deleted, as indicated [***]

2. State of Washington and municipalities therein
(a) HB 2294 tax incentives
(i) Introduction
7.39 The European Communities argues that each of the tax measures adopted under a Washington
State Legislature House Bill constitutes a financial contribution under Article 1.1(a)(1)(ii) of the SCM
Agreement, confers a benefit to Boeing and is sp ecific under Article 2. The European Communities
estimates that the amount of the subsidy to Boeing' s LCA division as a result of these tax measures is
approximately $3.56 billion over the period 2004-2024.1052
7.40 The United States contests that certain of the tax measures constitute a financial contribution
and that certain are specific within the meaning of Articles 1 and 2 of the SCM Agreement. Further,
according to the United States, the European Co mmunities has over-estimated the amount of any
benefit to Boeing.
(ii) The measures at issue
7.41 In 2003, the Washington State Legislature passed House Bill 2294 ("HB 2294"), entitled "An
Act Related to Retaining and Attracting the Aerospace Industry to Washington State". 1053 T h e
legislation relates to "retaining and attracting the aerospace industry to Washington State" and
includes "comprehensive tax incentives" directed at achieving this aim.1054
7.42 HB 2294 includes five tax measures which the European Communities challenges as
subsidies to Boeing's LCA division that cause adve rse effects and are also prohibited under the SCM
Agreement.1055 The five measures are:
(a) A Business and Occupation ("B&O") tax reduction;
(b) B&O tax credits for preproduction developm ent, computer software and hardware
and property taxes;
(c) Sales and use tax exemptions for computers, construction and equipment;
(d) Leasehold excise tax exemptions; and
(e) Property tax exemptions.

1052 The European Communities presents this estimate in fiscal year terms, i.e. $3.56 billion from
"FY 2004 through FY 2024". The European Communities also presents its estimates of the amounts of a
number of other alleged subsidies in fiscal year terms. When discussing the amount of the alleged subsidies in
this Report, we simply refer to the years, without specification as to whether it is the calendar year or a fiscal
year. We do so for the sake of simplicity, and because the differences appear to be de minimis, and are certainly
inconsequential to our findings. As the European Commun ities itself explains at footnote 78 of its first written
submission:

"The figures in this chart {Exhibit EC-17, Amount of Subsidies to Boeing’s LCA Division }
come from a variety of sources. Some of these sources provide figures in fiscal year terms,
while others provide figures in calendar year te rms. Further, fiscal years vary from one
granting entity to another. For sake of simplicity, and because the difference is de minimis,
the European Communities has not attempted to reconcile these discrepancies."
1053 HB 2294, 58th Leg., 2d Spec. Sess. (Wash. 2003), Exhibit EC-54, HB 2294, preamble.
1054 HB 2294, 58th Leg., 2d Spec. Sess. (Wash. 2003), Exhibit EC-54, Preamble and section 1.
1055 European Communities' first written submission, para. 69.

BCI deleted, as indicated [***]

7.43 HB 2294 took effect in December 2003 when Boeing entered the "Memorandum of
Agreement for Project Olympus" ("the Memorandum of Agreement") with the State of
Washington.
1056 It entered into effect on this day because HB 2294 (section 17) provides that it:
"{T}akes effect on the first day of the month in which the governor and a
manufacturer of commercial airplanes sign a memorandum of agreement regarding an
affirmative final decision to site a significant commercial airplane final assembly
facility in Washington state." 1057
7.44 A "significant commercial airplane final assemb ly facility" is defined in HB 2294 as "a
location with the capacity to produce at least thirty -six super-efficient airplanes a year". Further, a
"superefficient airplane" is define d at section 17 of HB 2294 as a "twin aisle airplane that carries
between two hundred and three hundred fifty passengers , with a range of more than seven thousand
two hundred nautical miles, a cruising speed of approximately mach .85, and that uses fifteen to
twenty percent less fuel than other similar airplanes on the market".
7.45 The Memorandum of Agreement confirms that the Project Olympus Master Site Agreement
("the MSA")
1058 between Boeing and the State of Washington constitutes an agreement to site a
significant commercial airplane final assembly facilit y in Washington, specifically in the City of
Everett. According to the European Communiti es, HB 2294, the MSA and an Ordinance enacted
within the City of Everett constitute a "Boeing Incentive Package", designed to lure Boeing to
establish its new production facilities for the 787 in the State of Washington.1059
7.46 Although HB 2294 is the relevant legislation under which the tax measures are adopted, the
MSA confirms or reiterates that the State of Washington will extend each of the tax measures under
HB 2294 to Boeing. For example, in relation to the Washington B&O tax reduction, the MSA
provides:
"4.1 The State represents and warrants to Boeing that HB 2294 was enacted in
accordance with all laws, HB 2294 is and remains in full force and effect subject only
to the…contingency contained in HB 2294…
4.1.1 The State…agrees that Boeing shall be entitled to a reduction in the rate of
…the B&O tax pursuant to HB 2294…The St ate shall not suspend, revoke, require
repayment of the rate reduction as authorized by HB 2294."
 1060

1056 Memorandum of Agreement for Project Olympus, 19 December 2003, Exhibit EC-57.
1057 HB 2294, 58th Leg., 2d Spec. Sess. (Wash. 2003), Exhibit EC-54, section 17. We note that the tax
measures under HB 2294 do not depend upon delivery of the Boeing 787, which as of September 2010 has not
yet occurred, before they can be claimed. Even though the Washington B&O tax reduction is an ad valorem tax
reduction which the European Communities states "is generally not realized until the year the aircraft is
delivered" (International Trade Resources LLC, Calculating on a Per-Aircraft Basis the Magnitude of the
Subsidies Provided to US Large Civil Aircraft, 20 February 2007, Exhibit EC-13, p. 2), it applies to all Boeing
aircraft manufactured in Washington and not just the 787.
1058 Project Olympus Master Site Development and Location Agreement Between the Boeing Company
and the State of Washington, County of Snohomish, City of Everett and Certain Other Governmental Units and
Authorities of or in the State of Washington, 19 December 2003 ("MSA"), Exhibit EC-58.
1059 European Communities' first written submission, para. 81.
1060 For the equivalent provisions of the MSA in relation to the other HB 2294 tax incentives, see
European Communities' first written submission, paras. 111, 113, 115, 119, 121, 12 4 and 128. See also, MSA,
Exhibit EC-58.

BCI deleted, as indicated [***]

Washington B&O tax reduction
7.47 The B&O tax is Washington's major business tax. 1061 It is a tax on the "gross receipts of all
businesses operating in Washington, as a measure of the privilege of engaging in business". 1062
"Gross receipts" refers to the gross proceeds of sales, the gross income of a business, or the value of
products, depending upon which is applicable. 1063 Taxpayers are taxed based on the activities in
which they engage in the State of Washington, su ch as manufacturing, wholesaling, retailing or the
provision of services.1064
7.48 HB 2294 lowers the B&O tax rate for manufactur ers of commercial airplanes or components
for such planes. In particular, the tax on the va lue of the manufactured commercial aircraft and the
tax on the sales of such aircraft, where the seller is also the manufacturer, is reduced in two stages.
HB 2294 provides for a reduction of the tax rate fro m 0.484 per cent (or 0.471 per cent in the case of
retail sales) to 0.4235 per cent on 1 October 2005. It provides for a further reduction to 0.2904 per
cent on the later of 1 July 2007 or the commencement of final assembly of a "super-efficient"
airplane.
1065 "Final assembly" is defined to mean th e activity of assembling an airplane from
component parts necessary for its mechanical operation such that the finished commercial airplane is
ready to deliver to the ultimate consumer. 1066 The taxation reductions apply until 2024 unless final
assembly of a super-efficient aircraft has not commenced by 31 December 2007, in which case the tax
rate reverts to 0.484 per cent for manufacturi ng and wholesaling activities and 0.471 per cent for
retailing activities.1067 Given that final assembly of the 787, which the European Communities and
the United States agree meets the definition of a "sup erefficient airplane", commenced in Washington
in the first half of 2007, the reduced taxation rates continue until 2024.
7.49 The relevant provisions of HB 2294 state (see sections 3(13) and 4(13)):
"13 (a) Beginning October 1, 2005, upo n every person engaging within this
state in the business of manufacturing commercial airplanes, or components of such
airplanes, as to such persons the amount of tax with respect to such business shall, in
the case of manufacturers, be equal to the value of the product manufactured, or in the
case of processors for hire, be equal to the gross income of the business, multiplied by
the rate of:
(i) 0.4235 percent from October 1, 2005, through the later of
June 30, 2007, or the day preceding the date final assembly of a
superefficient airplane begins in W ashington state, as determined under
section 17 of this act; and
(ii) 0.2904 percent beginning on the later of July 1, 2007, or the date
final assembly of a superefficient airplane begins in Washington state, as
determined under section 17 of this act.

1061 Final Bill Report, HB 2294, undated, Exhibit EC-90.
1062 Business and Occupation Tax, RCW 82.04, Exhibit US-179.
1063 Business and Occupation Tax, RCW 82.04, Exhibit US-179.
1064 United States' first written submission, para. 429.
1065 See HB 2294, 58th Leg., 2d Spec. Sess. (Wash. 2003), Exhibit EC-54. See sections 3(13) and
4(13); European Communities' first written submission, para. 105 and United States' first written submission,
para. 438.
1066 HB 2294, 58th Leg., 2d Spec. Sess. (Wash. 2003), section 17.
1067 See HB 2294, 58th Leg., 2d Spec. Sess. (Wash. 2003), HB 2294. See sections 3(13) and 4(13);
European Communities' first written submission, para . 105 and United States' first written submission,
para. 438.

BCI deleted, as indicated [***]

(b) Beginning October 1, 2005, upon every person engaging within this state in
the business of making sales, at retail or wholesale, of commercial airplanes, or
components of such airplanes, manufactured by that person, as to such persons the
amount of tax with respect to such business shall be equal to the gross proceeds of
sales of the airplanes or components multiplied by the rate of:
(i) 0.4235 percent from October 1, 2005, through the later of
June 30, 2007, or the day preceding the date final assembly of a
superefficient airplane begins in W ashington state, as determined under
section 17 of this act; and
(ii) 0.2904 percent beginning on the later of July 1, 2007, or the date
final assembly of a superefficient airplane begins in Washington state, as
determined under section 17 of this act.

(e) This subsection (13) does not apply after the earlier of: July 1, 2024; or
December 31, 2007, if assembly of a superefficient airplane does not begin by
December 31, 2007, as determined under section 17 of this act."
 1068
Washington B&O tax credits for preproduction development, for computer software and
hardware and for property taxes
7.50 HB 2294 includes three B&O tax credits rela ting to certain preproduction development
expenditures, computer software and hardware a nd property taxes. The European Communities cites
Black's Law Dictionary in explaining that a tax credit is an amount subtracted directly from a
taxpayer's total B&O tax liability.1069
7.51 Section 7 of HB 2294 provides for a B&O tax credit for p reproduction development to any
"manufacturer or processor for hire of commercial airp lanes, or components of such airplanes" for its
expenditure on certain aeronautics-related research, design and engineering activities performed in the
development of a product. The credit is equa l to 1.5 per cent of qualifying preproduction
development expenditure. It can be claimed after 1 July 2005, although credits earned prior to this
date can be accrued and carried forward. The credit expires on 1 July 2024.
7.52 Section 7 of HB 2294 provides:
"(1)(a) In computing the tax imposed under th is chapter, a credit is allowed for each
person for preproduction development spendi ng occurring after the effective date of
this act.
…
(2) The credit is equal to the amount of qualified preproduction development
expenditures of a person, multiplied by a rate of 1.5 percent.
(3) Except as provided in subsection (1)(b) of this section the credit shall be
taken against taxes due for the same ca lendar year in which the qualified
preproduction development expenditures ar e incurred…The credit for each calendar

1068 See HB 2294, 58th Leg., 2d Spec. Sess. (Wash. 2003), Exhibit EC-54.
1069 European Communities' first written submission, para. 109.

BCI deleted, as indicated [***]

year shall not exceed the amount of tax otherwise due under this chapter for the
calendar year. Refunds may not be granted in the place of a credit.
…
(5)...
(b) "Person" means…a manufacturer or processor for hire of commercial
airplanes, or components for such airplanes…
(c) "Preproduction development" means research, design, and engineering
activities performed in relation to the development of a product…

(e) "Qualified preproduction developmen t" means preproduction development
performed within this state in the field of aeronautics.
(f) "Qualified preproduction developm ent expenditures" means operating
expenses, including wages…benefits, suppli es, and computer expenses, directly
incurred in a qualified preproduction development."
 1070
7.53 Section 8 of HB 2294 grants a B&O tax credit for computer software and hardware to any
"manufacturer of commercial airplanes" for its expenditures, between 1 July 1995 and 1 July 2003, on
design and preproduction development computer softwa re and hardware used primarily for the digital
design and development of commercial airplanes. Th e credit is equal to 8.44 per cent of the purchase
price of the property.
7.54 In particular, section 8 of HB 2294 provides:
"(1) In computing the tax imposed under th is chapter, a credit is allowed for the
investment related to design and preproduc tion development computer software and
hardware acquired between July 1, 1995, and the effective date of this act, and used
by an eligible person primarily for the di gital design and development of commercial
airplanes. The credit shall be equal to the purchase price of such property, multiplied
by 8.44 percent. Credit taken in any one calendar year may not exceed ten million
dollars, and total lifetime credit taken under this section by any one person may not
exceed twenty million dollars. Credit may be carried over until used.
…
(2)(c) "Eligible person" means…a manufacturer of commercial airplanes."
 1071
7.55 Section 15 of HB 2294 grants a B&O tax credit for property taxes. It is equal to the state and
local property taxes paid on certain property used in the manufacture of commercial airplanes or
components for such airplanes. The three types of qualifying property taxes are:
(a) taxes on new buildings, and the land upon which the buildings are located, used in
manufacturing airplanes and components;

1070 HB 2294, 58th Leg., 2d Spec. Sess. (Wash. 2003), Exhibit EC-54.
1071 HB 2294, 58th Leg., 2d Spec. Sess. (Wash. 2003), Exhibit EC-54.

BCI deleted, as indicated [***]

(b) taxes on increases in the assessed value of a building, used in manufacturing aircraft
or components, due to renovation or expansion of the building; and
(c) taxes on certain machinery and equi pment used in manufacturing commercial
airplanes or their components.
7.56 In particular, section 15 of HB 2294 provides:
"(1) In computing the tax imposed under this chapter, a credit is allowed for
property taxes paid during the calendar year.
(2) The credit is equal to:
(a)(i) Property taxes paid on new buildings , and land upon which this property is
located, built after the effective date of this act, and used in manufacturing
commercial airplanes or components of such airplanes; or
(ii) Property taxes attributable to an increase in assessed value due to the
renovation or expansion, after the effective date of this act, of a building used in
manufacturing commercial airplanes or components of such airplanes; and
(b) Property taxes paid on machinery and equipment…used in manufacturing
commercial airplanes or components of such airplanes and acquired after the effective
date of this act."
 1072
Washington sales and use tax exemption for computer software, hardware and peripherals and
for construction services and equipment
7.57 In addition to the B&O tax, the State of Washington has a retail sales and a use tax. The retail
sales tax is a tax on the sale of tangible personal prop erty and certain services. The use tax is due on
the value of tangible personal pr operty and certain services on which the Washington retail sales tax
has not been paid.
7.58 HB 2294 provides for two exemptions to the sales and use taxes, namely, an exemption
relating to computer hardware, software and peripherals and an exemption relating to certain
construction services and equipment.1073
7.59 Sections 9 and 10 of HB 2294 provide for a sales or use tax exemption for computer
hardware, software and peripherals, where the computer equipment is purchased for or used in the
development of commercial airplanes or their com ponents by manufacturers or processors for hire of
such airplanes or components. Further, the la bour and services used in installing the computer
equipment are exempt from sales and use taxes.
7.60 More particularly, HB 2294 provides:
"9(1) The {sales tax} shall not apply to sales of computer hardware, computer
peripherals, or software, not otherwise elig ible for exemption…, to a manufacturer or

1072 HB 2294, 58th Leg., 2d Spec. Sess. (Wash. 2003), Exhibit EC-54.
1073 Something is tax-exempt when there is a "freedom from a liability to be taxed" or when it is "freed
or released from an obligation or requirement" to be taxed, or when it is "not legally subject to taxation"
(Shorter Oxford English Dictionary, L. Brown (ed.) (Clarendon Press, 1993), Vol. II, p. 3192; Webster's New
Encyclopedic Dictionary, (Könemann, 1993), p. 350 and Black's Law Dictionary, 7th ed., B.A. Garner (ed.)
(West Group, 1999), respectively).

BCI deleted, as indicated [***]

processor for hire of commercial airplanes or components of such airplanes, used
primarily in the development, design, and e ngineering of such products, or to sales of
or charges made for labor and services rendere d in respect to installing the computer
hardware, computer peripherals, or software…
…
10(1) The provisions of this chapter sha ll not apply in respect to the use of
computer hardware, computer peripherals, or software, not otherwise eligible for
exemption…, by a manufacturer or processor for hire of commercial airplanes or
components of such airplanes, used primarily in the development, design and
engineering of such products, or to the use of labor and services rendered in respect to
installing the computer hardware, computer peripherals, or software."
 1074
7.61 Sections 11 and 12 of HB 2294 provide for a sales tax exemption for construction services
and equipment. The exemption applies in relation to la bour and services rendered in the construction
of new buildings by a manufacturer of superefficient airplanes or by a port district intending to lease
to such a manufacturer and in relation to tangible personal property incorporated as a component of
such buildings. The buildings must be used ex clusively in the manufacturing of superefficient
airplanes.
7.62 More particularly, HB 2294 provides:
"11(1) {The sales tax} shall not apply to charges made for labor and services
rendered in respect to the constructing of new building by a manufacturer engaged in
the manufacturing of superefficient airplanes or by a port district, to be leased to a
manufacturer engaged in the manufacturing of superefficient airplanes, to sales of
tangible personal property that will be incor porated as an ingredient or component of
such buildings during the course of the constructing, or to labor and services rendered
in respect to installing, during the course of constructing, building fixtures not
otherwise eligible for exemption…
…
(3) The exemption in this section applies to buildings, or parts of buildings, that
are used exclusively in the manufacturing of superefficient airplanes, including
building used for the storage of raw materials and finished product."
 1075
Washington leasehold excise tax exemption and property tax exemption
7.63 The State of Washington imposes a leasehold excise tax on the use and possession of publicly
owned real or personal property by private individua ls or businesses. It can be imposed by the State
of Washington or by cities and counties. Any local leasehold excise taxes are credited against the
state leasehold excise tax.
7.64 Section 13 of HB 2294 provides for a leasehold excise tax exemption for manufacturers of
superefficient airplanes that lease newly built po rt district facilities for exclusive use in the
manufacturing of superefficient airplanes. However, if the lessee claims the B&O tax credit for
property taxes, it may not also claim the leasehold excise tax exemption.

1074 HB 2294, 58th Leg., 2d Spec. Sess. (Wash. 2003), Exhibit EC-54.
1075 HB 2294, 58th Leg., 2d Spec. Sess. (Wash. 2003), Exhibit EC-54.

BCI deleted, as indicated [***]

7.65 More particularly, section 13 of HB 2294 provides:
"(1) All leasehold interests in port district facilities exempt from tax under
section 11 or 12 of this act {the sales and use tax exemptions for construction services
and equipment} and used by a manufact urer engaged in the manufacturing of
superefficient airplanes…are exempt from ta x under this chapter. A person taking the
credit under section 15 of this act {the B&O tax credit for property taxes} is not
eligible for the exemption under this section." 1076
7.66 The State of Washington imposes a property tax on all real and personal property, based upon
its market value, unless the property is specifically exempted by law.1077
7.67 Section 14 of HB 2294 provides for a property tax exemption for lessees of port district
facilities (where the facilities are newly built by the port district to be leased to a superefficient
airplane manufacturer). The exemption does not apply to persons claiming the B&O tax credit for
property taxes paid.
7.68 More particularly, section 14 of HB 2294 provides:
"(1) Effective January 1, 2005, all buildings, machinery, equipment, and other
personal property of a lessee of a port district eligible under sections 11 and 12 of this
act {the sections relating to the sales and use tax exemption for construction services
and equipment}, used exclusively in ma nufacturing superefficient airplanes, are
exempt from property taxation. A person taking the credit under section 15 of this act
{the B&O tax credit for property taxes} is not eligible for the exemption under this
section."
 1078
(iii) Whether a subsidy exists within the meaning of Article 1 of the SCM Agreement
Arguments of the European Communities
Whether a financial contribution exists in relation to each of the measures
7.69 The European Communities argues that each of the taxation measures under HB 2294
constitutes a financial contribution to Boeing because each involves the foregoing of government
revenue otherwise due, within the meaning of Article 1.1(a)(1)(ii) of the SCM Agreement.1079
7.70 According to the European Commun ities, the Appellate Body found in US - FSC that the
analysis under Article 1.1(a)(1)(ii) requires a co mparison between the tax rate in question and a
"defined normative benchmark", where the benchmark is "the rules of taxation that each Member, by
its own choice, establishes for itself". 1080 Further, where it is possible to identify the measure at issue
as an "exception" to a "general" rule of taxation, it is appropriate to apply a "but for" test to assess
whether revenue is foregone that would otherwise be due. If it is not possible to identify a general

1076 HB 2294, 58th Leg., 2d Spec. Sess. (Wash. 2003), Exhibit EC-54.
1077 United States' first written submission, para. 126 and United States' first written submission,
para. 509.
1078 HB 2294, 58th Leg., 2d Spec. Sess. (Wash. 2003), Exhibit EC-54.
1079 European Communities' first written submission, para. 130. See also, European Communities'
response to question 229, para. 429, where the European Communities asserts that the financial contribution is
received by Boeing and by suppliers of LCA components, the latter of which passes-through to Boeing.
1080 European Communities' second written submission, para. 35, quoting from Appellate Body Report,
US – FSC, para. 90.

BCI deleted, as indicated [***]

rule and an exception to it, additional analysis, comparing the fiscal treatment of "legitimately
comparable income", may be required.1081
 Whether a financial contribution exists fo r those tax measures which the parties agree
have been used by Boeing
7.71 There is no dispute between the parties that the B&O tax reduction, the B&O tax credits and
the sales and use tax exemption for computer softwa re, hardware and periphera ls have been claimed
by Boeing.
7.72 In relation to the Washington B&O tax reducti on, the European Communities argues that a
"but for" analysis is the appropriate t est to apply to the B&O tax rate reduction. 1082 The European
Communities submits that prior to the enactment of HB 2294, there was a general manufacturing
B&O tax rate of 0.484 per cent. The effect of HB 2294 is to exempt manufacturers of commercial
airplanes and commercial airplane components from this general rate. Were it not for HB 2294, such
aircraft and component manufacturers would pay a higher tax rate, namely 0.484 per cent.1083
7.73 The European Communities submits that if the Panel considers the "but for" test inappropriate
and finds it necessary to compare the tax treatment of gross receipts from aerospace manufacturing to
"legitimately comparable income" or a "defined, normative benchmark", the general manufacturing
rate of 0.484 per cent, established by section 82.04.240 of the Revised Code of Washington, is the
relevant normative benchmark. It allows for th e comparison of the tax treatment of "legitimately
comparable income", namely income derived fro m general manufacturing operations and income
from aircraft manufacturing operations.1084
7.74 The European Communities contends that the United States is in error in attributing
importance to the fact that other specific manufact uring activities, apart from aircraft manufacturing,
have had their B&O tax rate adjusted. 1085 The European Communities argues that these adjustments
may also be subsidies, but are not at issue in this dispute. 1086 According to the European
Communities, there is no general rule or norm that governs these adjustments, for example a general
rule to achieve equity between effective rat es of taxation, as argued by the United States. 1087
Therefore, contrary to the arguments of the Unite d States, the European Co mmunities asserts that the
range of manufacturing taxation rates, whether nomin al or effective, cannot serve as the normative
benchmark against which to compare the B&O tax reduction to aircraft manufacturers.1088
7.75 The European Communities asserts that the B&O tax credits and the sales and use tax
exemption for computer software, hardware and peripherals constitute th e foregoing of revenue
otherwise due. 1089 Given that this is uncontested by the United States, the European Communities
does not elaborate on this submission.

1081 European Communities' second written submission, para. 36.
1082 European Communities' second written submission, para. 37.
1083 European Communities' second written submission, paras. 37-38.
1084 European Communities' second written submission, paras. 39-41.
1085 European Communities' comments on United States' response to question 32.
1086 European Communities' comments on United States' response to question 32, para. 126.
1087 European Communities' comments on United States' response to question 32, para. 118.
1088 European Communities' comments on United States' response to question 32, para. 124.
1089 European Communities' first written submission, para. 130.

BCI deleted, as indicated [***]

 Whether a financial contribution exists fo r those tax measures in relation to which
there is disagreement about whether the subsidies have been used by Boeing
7.76 The European Communities rejects the United St ates' argument that the sales and use tax
exemption for construction services and equipment, the leasehold excise tax exemption and the
property tax exemption have never been used by Boei ng. Even if the subsidies have never been used,
the European Communities argues that the tax measures are mandatory and that there is a current right
or entitlement to them for manufacturers of supereff icient airplanes. Ther efore, they constitute a
financial contribution under Article 1.1(a)(1)(ii) of the SCM Agreement .
1090 The European
Communities notes that, contrary to the submission of the United States, Boeing "qualifies" for the tax
measures in issue, regardless of whether or not it has made use of them.
1091
7.77 More particularly, the European Communities rejects the United States' argument that the
sales and use tax exemption for construction services and equipment does not constitute a financial
contribution because Boeing has not taken advantag e of the tax exemption, and will never do so,
given that it has not built or leased any new buildings or facilities in connection with its
"superefficient" airplane, the 787. 1092 The European Communities ar gues that the United States has
provided no evidence to support its contention that Boeing has not and will not use the sales and use
tax exemption for construction services and equipmen t. The attachments to the MSA cited by the
United States do not demonstrate that Boeing is using only existing facilities for manufacturing the
787. In fact, the European Communities notes th at the MSA indicates that the site where the
manufacturing is occurring consists of "parcels of land", which may be used to construct new
buildings. Further, Boeing may choose to tear down its existing buildings to construct new ones.1093
7.78 The European Communities also refutes the United States' argument that Boeing does not
"qualify" for the sales and use tax exemption. Even if Boeing does not and will not make use of the
exemptions, it still "qualifies" for them. Indeed, th e MSA provides that the State "shall" extend them
to Boeing. The tax exemptions are mandatory and available to manufacturers of "superefficient
airplanes" until 2024. Boeing would immediat ely be granted the incentives upon deciding to
construct new buildings. Therefore, the exemptions are financial contributions within the meaning of
Article 1.1(a)(1) of the SCM Agreement because revenue to be foregone in the future constitutes a
financial contribution as long as there is an existing right or entitlement to the tax break.
1094
7.79 Finally, the European Communities notes that the spreadsheet prepared by the Washington
State Department of Revenue, and on which the Unite d States relies in quantifying the amounts of the
subsidies, indicates that Boeing is receiving a B& O tax credit for property taxes paid "on new
construction related to the 7E7 plane" in Everett. According to the European Communities, this
construction also qualifies for the sales and use tax exemption.1095
7.80 In relation to the leasehold excise tax exemption and the property tax exemption, the European
Communities argues that Boeing may be engagi ng in sale-leaseback transactions with a port
district.1096 Boeing could tear down its existing facilities to construct new buildings, and engage in

1090 European Communities' second written submission, para. 82 and European Communities'
comments on United States' response to question 239, para. 339.
1091 European Communities' comments on United States' response to question 239, paras. 335-336.
1092 United States' first written submission, para. 503.
1093 European Communities' comments on United States' response to question 239.
1094 European Communities' comments on United States' response to question 239 and
European Communities' second written submission, para. 82 and footnote 127.
1095 European Communities' comments on United States' response to question 239, para. 337.
Washington State Department of Revenue Final HB 2294 Fiscal Note - 20-Year Spreadsheet, Exhibit US-184.
1096 European Communities' comments on United States' response to question 239, para. 333.

BCI deleted, as indicated [***]

sale-leaseback transactions with respect to those new buildings. 1097 In fact, the MSA specifically
contemplates sale-leaseback transactions between Boeing and a port district and the Project Olympus
Restatement of Commitments provides that "{t}he Port of Everett will purchase approximately nine
acres of Boeing land and leaseback to Boeing for 20 years".
1098 Therefore, according to the European
Communities, these documents cannot serve as the b asis for concluding that Boeing is not leasing
facilities from a port district.1099
7.81 Finally, the European Communities argues that it is possible for Boeing to claim the
Washington B&O tax credit for property taxes and the leasehold excise tax exemption and the
property tax exemption.1100 According to the European Comm unities, Boeing has a choice from year
to year about whether to claim the B&O tax credit for property taxes or both the leasehold excise and
the property tax exemptions.1101 Further, Boeing could set up two di fferent legal persons, one eligible
for the B&O tax credit and the other for the leasehold excise and property tax exemptions, resulting in
Boeing claiming all three tax measures in the same year.1102
Revenue to be foregone in the future
7.82 In its calculation of the subsidy amounts, the European Communities includes revenue to be
foregone in the future. The European Communitie s rejects the argument of the United States that
Article 1.1(a)(1)(ii) requires that the amount of a fi nancial contribution be limited to revenue that has
actually been foregone in the past. According to the European Communities, this argument is based
on a fundamental error. Article 1.1 does not address the issue of subsidy amount. 1103 The only matter
Article 1.1(a)(1) deals with is the existence of a financial contribution, rather than its amount. The
issue of the amount of a subsidy arises only in the context of the adverse effects inquiry. 1104 T h e
European Communities argues that the United States is in error in asserting that Article 1.1(a)(1)(ii) is
written in the past tense. Article 1.1(a)(1)(ii) provides that a financial contribution exists when
"government revenue that is otherwise due is foregone or not collected". 1105 If the provision were in
the past tense it would refer to "government revenue that was otherwise due was foregone or not
collected". This interpretation is confirmed by the Spanish and the French versions of the SCM
Agreement.1106
7.83 According to the European Communities, the im portant factor under Article 1.1(a)(1)(ii) is
whether a right to the financial contribution exists , rather than the time at which the foregoing of
revenue actually occurs. 1107 If this were not the case, Memb ers could never challenge subsidy
programmes, but only individual applications of them.1108 The European Communities argues that the
distinction made by the United States between the legal entitlement to a financial contribution, and the
actual moment in time at which the transfer o ccurs, is artificial and not found within the SCM
Agreement.1109 The European Communities contends that the comparison the United States makes
between Article 1.1(a)(1)(ii) and Artic le 1.1(a)(1)(i), which refers to " potential direct transfers of

1097 European Communities' comments on United States' response to question 239, para. 333.
1098 European Communities' second written submission, para 125 and European Communities'
comments on United States' response to question 239, para. 338.
1099 European Communities' comments on United States' response to question 239, para. 338.
1100 European Communities' response to question 363, paras. 166-174.
1101 European Communities' response to question 363, paras. 169-172.
1102 European Communities' response to question 363, para. 173.
1103 European Communities' second written submission, para. 45.
1104 European Communities' second written submission, para. 48.
1105 European Communities' second written submission, para. 50.
1106 European Communities' second written submission, para. 50.
1107 European Communities' second written submission, para. 51.
1108 European Communities' second written submission, para. 51.
1109 European Communities' second written submission, para. 53.

BCI deleted, as indicated [***]

funds", does not advance the United States' argument . In making this argument, the United States
attempts to equate the term "potential" with "future", when in fact it is equivalent to "possible".1110
Argument in the alternative
7.84 The European Communities argues that if the Panel were to conclude that the taxation
measures under HB 2294 do not involve the foregoing of revenue otherwise due, the measures,
together with the MSA, amount to a potential direct transfer of funds under Article 1.1(a)(1)(i) of the
SCM Agreement.1111 The European Communities expressly stat es that the Panel need not consider
this issue if the Panel agrees with the European Communities' principal argument that there is a
financial contribution in relation to each tax measure under Article 1.1(a)(1)(ii) of the SCM
Agreement.1112
7.85 The European Communities submits that the MS A guarantees all of the commitments in the
Boeing Incentive Package, including the taxation measures under HB 2294. The
European Communities' argument that there is a financial contribution under Article 1.1(a)(1)(i)
centres around Article 10.4 of the MSA, which provides, relevantly:
1113
"10.4 Make Whole Actions The Public Parties and Boeing each assert that it enters
into this Agreement based upon certain objectives and expectations, more specifically
described below in this Section 10.4 . The Public Parties and Boeing each further
acknowledge and agree that it is not possible to predict, consider and provide for all
future changes, circumstances or conti ngencies affecting the performance or
implementation of this Agreement. Therefore, in order to preserve the basis upon
which the Agreement is entered into by th e Public Parties and Boeing, the Public
Parties and Boeing each agree to the terms and conditions set forth in this
Section 10.4

 10.4.1 The Public Parties each ack nowledge and agree that Boeing has
entered into this Agreement in material reliance on each and all of the obligations and
Commitments of the Public Parties under th is Agreement, as a package and without
exception, with the reasonable expectation that Boeing will receive all of the benefits
of such obligations and Commitments. Therefore, each Public Party represents,
warrants and covenants to Boeing that in the event of a change in law, or any other
act, event or circumstance, the result of which would be to materially diminish,
impede, impair or prevent in connec tion with the Project Olympus the full
performance after the Effective Date of any or all of the obligations and
Commitments made by the applicable Public Parties, all applicable Public Parties
shall exercise their best efforts to, and to the extent permitted by law shall, provide
Boeing either with an exemption from the law as so changed or otherwise with
another obligation or Commitment acceptable to Boeing and having economic effect
equivalent to the Commitment so lessened or removed. If the applicable Public
Parties fail to provide such exemption or other Commitment, such failure shall be a
substantial impairment of this Agreement…
…

1110 European Communities' second written submission, para. 52.
1111 European Communities' first written submission, paras. 130 and 151; European Communities'
second written submission, paras. 55, 67, footnote 100. See also, European Communities' second written
submission, para. 75, footnote 118 and paras. 83, 91 and 117.
1112 European Communities' response to question 124, para. 84.
1113 MSA, Exhibit EC-58.

BCI deleted, as indicated [***]

 10.4.3 The Public Parties and Bo eing each acknowledge and agree …(iii)
that the terms and conditions set forth in this Section 10.4 are material to this
Agreement and intended to be enforced to the maximum extent possible."
7.86 The European Communities argues th at as a result of this provision of the MSA, each of the
alleged subsidies "as promised to Boeing through the Project Olympus MSA, results in a financial
contribution in the sense of a poten tial direct transfer of funds". 1114 Therefore, we interpret the
European Communities' argument to be that the relevant measures which constitute a "potential direct
transfer of funds" are HB 2294 together with the MSA.1115
7.87 The European Communities submits that Artic le 10.4.1 of the MSA amounts to a potential
direct transfer of funds under Article 1.1(a)(1)(i) of the SCM Agreement because it guarantees to
Boeing the performance of all of the commitments in the "Boeing Incentive Package", or provision of
a remedy "having economic effect equivalent" to those incentives. 1116 Therefore, according to the
European Communities, there is a potential direct tr ansfer of funds in connection with each of the
obligations and commitments made through the MSA, which includes the taxation measures under
HB 2294. In fact, the MSA guarantees that Boeing w ill receive a $4 billion subsidy, regardless of its
form.1117
7.88 The European Communities rejects the United Stat es' argument that Article 10.4.1 is simply a
"best efforts" provision that encourages the parties to comply with their commitments to the extent
legally permissible. According to the European Communities, this interpretation is "absurd and
contrary to the plain meaning of the text of the provision…{and} would render {the} provision
completely meaningless". 1118 The European Communities argues that Article 10.4.1 is a guarantee
that should something happen to lessen one of the Public Parties' obligations under the MSA, the
Public Parties must provide Boeing with an exemption from the change in law, or if that is not
possible, the full economic value of the lost oblig ation or commitment. The European Communities
notes that simply exercising "best efforts" would not release the Public Parties from their commitment
to provide Boeing with another obligation or co mmitment of equivalent economic effect under
Article 10.4.1.
1119 If an event were to trigger the guarantee under Article 10.4.1, the Public Parties to
the contract could not fulfil their obligation under Article 10.4.1 merely by claiming that they had
made their "best efforts" to provide something of equivalent economic effect, but were unable to do
so.1120 If that were to happen, Boeing would have a viable cause for breach of contract because
Article 10.4.1 provides that if the guarantee is not honoured, "such failure shall be a substantial
impairment of this Agreement". Article 11.2.1 of the MSA provides th at in the event of a breach of
the agreement, Boeing may seek "specific perfo rmance of any of the…commitments…or may be
awarded damages".1121 Therefore, if the Public Parties are not able to fulfil one of the commitments
guaranteed by the MSA, such as providing the Washington tax incentives, Boeing must be provided
with a commitment of equivalent economic effect, or may receive damages for breach of contract.
Therefore, the tax abatements, as promised to Boeing through the MSA, "result in a financial
contribution in the sense of a potential direct transfer of funds".
1122 Further, the

1114 European Communities' second written submission, para. 55.
1115 See European Communities' response to question 124 where the European Communities describes
its alternative claim as: "Article 10.4.1 of the MSA gives rise to a potential direct transfer of funds in connection
with each of the MSA obligations and commitments at issue in this dispute".
1116 European Communities' second written submission, para. 205.
1117 European Communities' non-confidential oral statement at the first meeting with the Panel,
para. 32.
1118 European Communities' second written submission, para. 203.
1119 European Communities' comments on United States' response to question 43, para. 145.
1120 European Communities' comments on United States' response to question 43, para. 145.
1121 European Communities' comments on United States' response to question 43, para. 145.
1122 European Communities' second written submission, para. 55.

BCI deleted, as indicated [***]

European Communities notes that Article 10.6.6 of the MSA, and not Article 10.4.1, is the MSA's
"best efforts" provision because it provides:
"10.6.6 The parties hereby agree to use b est efforts to perform all commitments to
the maximum extent authorized by curre nt laws and in full compliance with
applicable laws and constitutional provisions." 1123
Therefore, if Article 10.4.1 were simply a "b est efforts" provision, it would be completely
meaningless in the light of Article 10.6.6. 1124 Finally, it is clear from the rest of the text of
Article 10.4 that Article 10.4.1 is a guarantee rather than a "best efforts" provision. Article 10.4 states
that its purpose is to "preserve the basis upon which the {MSA} is entered into", namely to preserve
the expectations of the parties, including the "reas onable expectation that Boeing will receive all of
the benefits" of the commitments undertaken by the Public Parties. Further, Article 10.4.3 provides
that Article 10.4 is "material to the Agreement a nd intended to be enforced to the maximum extent
possible".1125

7.89 The European Communities acknowledges that Ar ticle 10.4.1 guarantees the obligations in
the MSA, or provides for a commitment of equivale nt economic effect, "to the extent permitted by
law".
1126 However, according to the Eu ropean Communities, this simply requires that in fulfilling the
guarantee, the Public Parties may not do somethi ng that is contrary to law. The European
Communities notes that commitments made by public authorities in contracts with private companies
will be limited by constitutions and applicable laws in most, if not in all, WTO Member jurisdictions.
Contrary to the United States' argument, reflecting this fact within the contract does not make a
commitment, such as the one in Arti cle 10.4.1, "entirely speculative". 1127 Further, the European
Communities argues that "given that the Public Part ies have the power to make or change the state
and local laws, the 'to the extent permitted by la w provision' would appear to have little practical
impact".1128 In addition, the other obligation or commitment of equivalent economic effect need not
be something that requires the legislature to enact it.1129
7.90 In relation to the correct interpretation of "potential direct transfer of funds" under
Article 1.1(a)(1)(i) of the SCM Agreement , the European Communities an d the United States agree
that there must be some "currently defined and committed circumstances – i.e. a defined triggering
event" that gives rise to th e direct transfer of funds. 1130 However, while the United States argues that
the consequence of the triggering event must be a direct transfer of f unds, the European Communities
contends that where the triggering event requires the transfer of either money or something apart from
money, at the option of the public authorities, this cannot fall outside the scope of "potential direct
transfer of funds". 1131 The European Communities notes that one of the remedies that Boeing could
receive in the event of a breach of the guarantee under the MSA is a direct transfer of funds equal to
the value of the obligation or commitment lessened or removed.
1132 Therefore, Article 10.4.1 results
in a potential direct transfer of funds. Accordi ng to the European Communities, the United States'
submission that a "potential direct transfer of funds" exists only where it is certain that the recipient of
the alleged financial contribution will receive a dire ct transfer of funds should the triggering event

1123 MSA, Exhibit EC-58 and European Communities' second written submission, para. 208.
1124 European Communities' second written submission, para. 208.
1125 European Communities' second written submission, para. 207.
1126 European Communities' second written submission, para. 206.
1127 European Communities' comments on United States' response to question 124, para. 49.
1128 European Communities' second written submission, para. 206.
1129 European Communities' comments on United States' response to question 43, para. 146.
1130 See European Communities' comments on United States' response to question 124, para. 52.
1131 European Communities' comments on United States' response to question 124, paras. 52-53.
1132 European Communities' comments on United States' response to question 43, para. 147.

BCI deleted, as indicated [***]

occur "leads to an absurd result". 1133 The United States' interpretation makes it very easy for
Members to circumvent the disciplines of the SCM Agreement because Members could simply attach
a possible course of action, not involving the transfer of funds, to a measure that would otherwise be a
potential direct transfer of funds. 1134 For example, a government could guarantee a loan by
committing either to transfer funds to the creditor, or to transfer something else of value, such as a
piece of land, should the borrower default. The European Communities reje cts the United States'
submission that adding the option of transferring land upon default takes the guarantee outside the
scope of Article 1.1(a)(1)(i) of the SCM Agreement.1135
7.91 In response to the United States' argument that it is "entirely speculative" what if anything a
Public Party would provide under the Article 10.4. 1 guarantee and what if any remedy a court may
impose, the European Communities contends that it is precisely the uncertainty regarding whether a
direct transfer of funds will occur that makes the guarantee a potential direct transfer of funds.1136 The
European Communities submits that where it is certain that a transfer of funds will take place, this is
characterized as a direct transfer of funds under Artic le 1.1(a)(1)(i), rather than as a potential direct
transfer of funds. 1137 To support this interpretation, th e European Communities notes that the
dictionary definition of "potential" is " possible as opposed to actual", which captures a wide range of
uncertainty regarding whether a transfer of funds will take place. Further, the European Communities
quotes the panel in Brazil – Aircraft, which held that "if the determination of whether a measure was a
'potential direct transfer of funds' depended on the degree of likelihood or probability that a payment
would subsequently occur, then the drafters surely would have chosen an adjective more suggestive of
high probability than 'potential'".1138
7.92 Finally, the European Communities submits that the object and purpose of the SCM
Agreement is to "impose multilateral disciplines on subsid ies which distort international trade" and
one type of distortion is the transfer of risk from a private party to the government via a potential
direct transfer of funds. This is evident from th e example provided in Article 1.1(a)(1)(i), namely a
loan guarantee.
1139 The European Communities argues that Artic le 10.4.1 transfers the risk of default
on the Public Parties' commitments under the MSA from Boeing to the government and as a result
there is no reason to treat it any differently to a loan guarantee.1140
Whether a benefit to Boeing exists in relation to each of the measures
7.93 The European Communities argues that each of the tax measures under HB 2294 confers a
benefit to Boeing's LCA division within the meaning of Article 1.1(b) of the SCM Agreement because
Boeing is not required to pay anything in return for them. The tax measures result in Boeing
receiving advantages on non-market terms. 1141 In its arguments regarding the existence of a benefit,
the European Communities relies upon US – FSC, in which the panel held that the foregoing of
certain taxes that would otherwise be due "clearly confers a benefit".1142

1133 European Communities' comments on United States' response to question 124, para. 56.
1134 European Communities' comments on United States' response to question 124, para. 56.
1135 European Communities' comments on United States' response to question 124, para. 56.
1136 European Communities' comments on United States' response to question 43, para. 147.
1137 European Communities' comments on United States' response to question 43, para. 147.
1138 European Communities' comments on United States' response to question 124, para. 87.
1139 European Communities' comments on United States' response to question 124, para. 89.
1140 In fact, the European Communities notes that Artic le 10.4.1 transfers the risk directly from the
subsidy recipient to the government, whereas a loan guarantee transfers the risk in a less than direct manner
from a third party to the government.
1141 European Communities' first written submission, paras. 133, 138.
1142 European Communities' first written submission, para. 137.

BCI deleted, as indicated [***]

7.94 The European Communities also submits that the Washington B&O tax reduction to
manufacturers of components for commercial airpla nes confers a benefit on Boeing's LCA division
within the meaning of Article 1.1(b) of the SCM Agreement. 1143 In this regard, the European
Communities relies on a pass-through analysis. Th e European Communities' pass-through arguments
are outlined commencing at paragraph 7.221 of this Report, in the section regarding the amount of the
subsidy, for the reasons expressed at paragraph 7. 214 of this Report. The European Communities
does not argue pass-through in relation to any of the other taxation measures under HB 2294.1144
Arguments of the United States
Whether a financial contribution exists in relation to each of the measures
7.95 The United States contests that the B&O tax reduction to Boeing, the sales and use tax
exemption for construction services and equipment, the leasehold excise tax exemption and the
property tax exemption constitute financial contri butions under Article 1.1(a)(1)(ii) of the SCM
Agreement.
7.96 According to the United States, the Appellate Body has held that in analyzing whether
revenue otherwise due has been foregone under Artic le 1.1(a)(1)(ii), it is necessary that there be a
"defined normative benchmark against which a comparison can be made". 1145 Further, the normative
benchmark is the "Member's own tax rules". Theref ore, what is otherwise due depends "on the rules
of taxation that each Member, by its own choice, establishes for itself". 1146 The Appellate Body has
commented that it may be difficult to identify the relevant benchmark where a Member's tax system is
"varied and complex". In any analysis, "there must be a rational basis for comparing the fiscal
treatment of the income subject to the contested measure and the fiscal treatment of certain other
income".1147 Where it is not possible to characterize a tax measure as an exception to a general rule, it
is necessary to compare the fiscal treatment of "legitimately comparable income".1148
Whether a financial contribution exists for those tax measures which the parties agree
have been used by Boeing
7.97 Applying the guidance from the Appellate Body to the Washington B&O tax reduction, the
United States argues that the appropriate benchmark is the "range of nominal B&O tax rates that the
State applies to all categories of business activities subject to the B&O tax". 1149 The United States
submits that the B&O tax system imposes taxes on categories of activities. There are four major
activity classifications and tax rates (including manu facturing, taxed at 0.484 per cent). However,
these four categories are further subdivided into 36 other categories, each with its own tax rate,
ranging from 3.3 per cent to 0.138 per cent. 1150 The United States argues that, in the light of the
varying rates for different business activities, there is no general tax rate under the B&O tax system.
The 0.484 per cent rate for manufacturing is just one rate within a multi-rate system and there is no
rational basis to use it as the comparator. In fact, 60 per cent of total taxable manufacturing income in
the State receives an adjusted rate of taxation.
1151 Therefore, the normative benchmark is the range of

1143 European Communities' first written submission, paras. 133, 135.
1144 European Communities' second written submission, para. 69
1145 United States' first written submission, para. 443.
1146 United States' first written submission, para. 444.
1147 United States' first written submission, para. 445.
1148 United States' response to question 32, para. 81.
1149 United States' first written submission, paras. 450-451.
1150 United States' first written submission, para. 451.
1151 United States' second written submission, para. 136.

BCI deleted, as indicated [***]

B&O tax rates that exist for different business activities.1152 Given that the reduced tax rate applicable
to aerospace manufacturers falls within the range of all B&O tax rates (several business activities are
taxed at a lower rate of 0.138 pe r cent), no revenue that is "otherwise due" has been foregone. The
adjustment to the rate applicable to manufacturers of aircraft is consistent with the treatment of
legitimately comparable income.1153
7.98 The United States also appears to suggest in its first written submission that the "average
effective tax rate" for all businesses in the Stat e of Washington is an appropriate normative
benchmark.1154 However, in its answers to a Panel question, the United States clarifies that it does not
argue that the average effective tax rate is an appropriate benchmark. Rather, the United States
provides information on the impact of the B&O ta x reduction on the effective tax rate paid by
aerospace manufacturers in order further to confir m the conclusion that the B&O tax reduction does
not result in foregoing of revenue that is otherwise due. 1155 In particular, the United States provides
extensive information regarding th e "pyramiding" of the B&O tax. 1156 Essentially, the concept of
"pyramiding" refers to the situation where goods and services that are inputs into higher stages of
production are taxed multiple times as they move through the production chain. It results in a
successively greater effective tax rate for each bus iness in the chain, because the gross value of the
product at each stage includes taxes paid on intermediate products. Therefore, the tax accumulates, or
"pyramids", as it moves through the production chain.
1157 According to the United States, aerospace
manufacturing often involves multiple steps. Theref ore, the "effective" tax rate (which accounts for
pyramiding) paid by the aerospace manufacturing sect or is much higher than in other sectors. The
United States contends that the purpose of the tax reduction in HB 2294 was to reduce this inequality.
Following the tax reduction, the effective rate pa id by aerospace manufacturers remains slightly
higher than the average effective B&O tax rate. 1158 Therefore, this further confirms that the B&O tax
rate for aerospace manufacturing is consistent with tax treatment afforded to comparable income in
Washington and does not result in revenue foregone.1159
7.99 The United States does not contest that a financial contri bution exists under
Article 1.1(a)(1)(ii) in relation to the B&O tax credits and in relation to the sales and use tax
exemption for computer software, hardware and peripherals.1160
Whether a financial contribution exists fo r those tax measures in relation to which
there is disagreement about whether the subsidies have been used by Boeing
7.100 In relation to the sales and use tax exemption for construction services and equipment, the
United States argues that this is not a financial contribution because Boeing "has not used and will not
use this tax exemption". 1161 The exemption applies in the ev ent a manufacturer of superefficient
airplanes constructs new buildings, or leases such buildings, to carry out its manufacturing. Boeing
has done neither. Rather, Boeing decided to use its existing facilities in Everett to perform its 787
assembly work. The United States argues that Bo eing has no plans to construct or lease any such
buildings in the future. Therefore, Boeing is not eligible or does not qualify to take these tax

1152 United States' first written submission, para. 452, United States' second written submission,
para. 135.
1153 United States' second written submission, para. 135.
1154 United States' first written submission, paras. 460-461.
1155 United States' response to question 32, para. 81.
1156 United States' first written submission, paras. 455-461.
1157 United States' first written submission, para. 456.
1158 United States' first written submission, paras. 459-461 and United States' second written
submission, para. 137.
1159 United States' second written submission, para. 137.
1160 United States' first written submission, paras. 492 and 499.
1161 United States' first written submission, para. 503.

BCI deleted, as indicated [***]

exemptions and the State of Washington has not fo regone any revenue with respect to them. As a
result, there is no financial contribution within the meaning of Article 1 of the SCM Agreement.1162
7.101 To support its argument that Boeing has not and will not take advantage of the sales and use
tax exemption for construction services and equipment, the United States cites the MSA, including the
exhibits to the MSA, and the Memorandum of Ag reement, which "memorialize Boeing's decision to
site its 787 operations in existi ng Boeing facilities in Everett". 1163 Further, the United States refers to
the Washington Department of Revenue spreadsheet th at estimates the cost to government of the HB
2294 tax measures. The Department estimates that the cost will be zero in relation to the tax
exemption for construction services and equipment.1164
7.102 The United States argues that there is no financial contribution to Boeing as a result of the
leasehold excise tax exemption or the property tax exemption and therefore no WTO-inconsistent
subsidy.1165 According to the United States, this is b ecause Boeing has not and will not use either of
the exemptions. The exemptions apply only to l easehold interests in, and property of lessees of, port
district facilities used by manufacturers of supereffi cient airplanes. Boeing decided to use its existing
facilities for the manufacture of the 787, rather than to lease public property. 1166 Evidence for this is
found in the MSA and the Memorandum of Agreemen t. Therefore, Boeing does not qualify for the
tax breaks.1167
7.103 The United States submits that "although the Mast er Site Agreement states that the Port of
Everett will purchase nine acres of land and lease th is land back to Boeing, that, in fact, has not
occurred. Boeing has not entered and informs us that it does not intend to enter, a sale-leaseback
arrangement for its 787 assembly facilities".1168 Therefore, the State of Washington has not foregone
any revenue as a result of the leasehold or property tax exemption provisions in HB 2294 and there is
no financial contribution.1169 Further evidence of this can be found in the Washington Department of
Revenue spreadsheet estimating the cost to gove rnment of the HB 2294 tax measures over twenty
years. The Department estimates that the cost of the leasehold and property tax exemptions will be
nil.1170
7.104 Finally, the United States notes that it is not possible for Boeing to claim the B&O tax credit
for property taxes and the leasehold excise tax exemption and the property tax exemption. 1171 This is
because sections 13 and 14 of HB 2294, which are the provisions for the leasehold excise tax
exemption and the property tax exemption, both provide that "{a} person taking the credit under
section 15 of this act {B&O property tax credit} is not eligible for the exemption under this section".
As a result of this provision, Boeing cannot be nefit from all three measures in any one year.
Therefore, according to the United States, the Eu ropean Communities' quantification of the amounts
of the subsidies is erroneous because it attribut es a non-zero value to each of the three measures in
every year through until 2024. The United States c oncludes that "the EC's quantification of the
alleged subsidies assumes that Boeing will take a nd has taken the B&O tax credit for property taxes,

1162 United States' first written submission, paras. 50 3-505 and United States' response to question 239,
paras. 398 and 400.
1163 United States' response to question 239, para. 396.
1164 United States' response to question 239, para. 399.
1165 United States' first written submission, para. 508.
1166 United States' first written submission, para. 507.
1167 United States' response to question 239, paras. 396-398.
1168 United States' first written submission, para. 508.
1169 United States' first written submission, para. 508.
1170 United States' response to question 239, para. 399.
1171 United States' comments on European Communities' response to question 363.

BCI deleted, as indicated [***]

the leasehold excise tax exemption and the property tax exemption in each year…this would be illegal
and is factually incorrect".1172
Revenue to be foregone in the future
7.105 In addition to its argument that the State of Washington has not foregone revenue otherwise
due, the United States argues that, in any event, when the financia l contribution associated with an
alleged subsidy is the foregoing of government re venue under Article 1.1(a)(1)(ii), the amount of the
financial contribution must be limited to revenue that has actually been foregone.1173 Revenue that a
government may potentially forego in the future do es not constitute a financial contribution under
Article 1.1(a)(1)(ii).1174 In response to a Panel question, the United States clarifies that, in its view,
Article 1.1(a)(1)(ii) addresses the existence rather than the amount of a subsidy. 1175 The United States
argues that where the financial contribution of an alleged subsidy consists of government revenue to
be foregone in the future, this does not meet the Ar ticle 1 definition of a subsidy. The United States
continues, in response to the same question, th at "{w}hether a measure results in a financial
contribution is one of the elements in the analysis of whether there is a subsidy and the amount of the
subsidy. Because possible future revenue foregone cannot be considered a financial contribution, it
cannot be considered a subsidy or be included in the subsidy amount".1176
7.106 The United States argues that revenue to be foregone in the future cannot constitute a
financial contribution because Article 1.1(a)(1)(ii) states that a financial contribution exists when
"government revenue that is otherwise due is foregone or not collected". This is in the past tense and
refers only to revenue that has already been foregone or not collected. 1177 Article 1.1(a)(1)(ii) makes
no reference to revenue that a government may choo se to forego or not collect in the future. The
United States contrasts this with the language of Article 1.1(a)(1)(i), which allows for "potential direct
transfers of funds or liabilities". The United States argues that this clearly contemplates a financial
contribution occurring in the future, as opposed to th e language of Article 1.1(a)(1)(ii), which is not
forward-looking.1178
7.107 In response to a Panel question, the United States acknowledges that measures mandating the
foregoing of revenue otherwise due can be challenged "as such" in WTO dispute settlement, as
occurred in US – FSC.1179 However, in the same response, the United States insists that "no financial
contribution exists under Article 1.1(a)(1)(ii) unless the government has foregone revenue".1180
Argument in the alternative
7.108 The United States rejects the European Communities' argument in the alternative that a
potential direct transfer of funds exists under Article 1.1(a)(1)(i) of the SCM Agreement.
Article 10.4.1 of the MSA does not provide Boeing w ith a "guarantee" that it will get an exemption
from any change in law or a remedy of "equivalent economic effect". Rather, Article 10.4.1 is merely
a "best efforts" provision that encourages the pa rties to the agreement to comply with their
commitments to the extent legally permissible. 1181 This is because the commitment by the Public

1172 United States' comments on European Communities' response to question 363, para. 182.
1173 United States' first written submission, para. 462.
1174 United States' first written submission, para. 462.
1175 United States' response to question 125, para. 47. In addition, and more generally, see the parties'
responses to question 1.
1176 United States' response to question 125, para. 47.
1177 United States' first written submission, para. 463.
1178 United States' first written submission, para. 464.
1179 United States' response to question 31, para. 80.
1180 United States' response to question 31, para. 80.
1181 United States' second written submission, paras. 587-588.

BCI deleted, as indicated [***]

Parties in Article 10.4.1 is subject to the "best efforts" and "to the extent permitted by law" conditions.
Therefore, Article 10.4.1 "has no independent economic value".1182
7.109 In relation to the "extent permitted by law condition", the United States argues that the Public
Parties to the MSA do not have the power unilaterall y to enact changes to Washington State laws, or
to guarantee a potential direct transfer of funds. At most, the Public Parties can promise to use their
best efforts to bring about changes in laws through the processes that produce such laws. They cannot
and would not promise to do more.1183
7.110 According to the United States, the dictionary definition of "potential" is "possible as opposed
to actual; capable of coming into being or action; latent". 1184 This suggests a future possibility based
on some current capacity or state, not a "lack of cer tainty" or an entirely speculative outcome. This is
even clearer through the inclusion of the synonym "latent" in the dictionary definition. 1185 Therefore,
to establish that a measure constitutes a potential direct transfer of funds under Article 1.1(a)(1)(i) of
the SCM Agreement, it is necessary to demonstrat e that there are certain currently defined and
committed circumstances under which the recipient of the alleged financial contribution is assured a
direct transfer of funds by the granting authority.1186 This is not the case with the MSA, which simply
provides for a speculative, possible future financia l contribution. Article 10.4.1 does not provide
Boeing with a guarantee of any kind of payment or tr ansfer of funds. This is because Article 10.4.1 is
subject to the "best efforts" and the "to the extent permitted by law" conditions. Further, a direct
transfer of funds is only one of the possible ways in which the Public Parties can meet the obligation
under Article 10.4.1.1187 In addition, if the Public Parties fail to honour one of the commitments under
the MSA or to provide an alternative, Boeing c ould bring a civil cause of action in court. The
United States argues that the result of such an actio n is "wholly indeterminate" and even the European
Communities admits that "one of the remedies Boeing may receive in an action under Article 10.4.1 is
a direct transfer of funds". 1188 Therefore, according to the United States, "there are no defined
circumstances under which Boeing is assured anything, let alone a direct transfer of funds, nor is there
any kind of other guarantee that it will receive such funds".1189 The United States compares this to the
example of a potential direct transfer of funds provided in Article 1.1(a)(1)(i), namely a loan
guarantee. A loan guarantee is a current financial in strument that sets forth defined contingencies and
provides that in the event that one of the contingencies arises, the guarantor is required to transfer
funds to the recipient of the loan guarantee. In ot her words, there is a pre sent commitment to transfer
funds in certain defined circumstances. 1190 In contrast, Article 10.4.1 contains no such commitment.
The United States clarifies that it does not consider the degree of probability of a future transfer
relevant. Rather, what is relevant is whether there are defined circumstances in which a direct transfer
of funds is required.1191
7.111 Finally, the United States submits that Article 10.4.1 of the MSA provides for best efforts to
replace an impaired obligation or commitment with another "obligation" or "commitment", without
specifying what the obligation or commitment must be. Therefore, it is impossible to evaluate ex ante
whether any possible future "obligation" or "comm itment" would be a potential direct transfer of

1182 United States' second written submission, para. 588.
1183 United States' response to question 43, para. 118.
1184 United States' response to question 124, para. 36 and United States' comments on
European Communities' response to question 124, para. 64.
1185 United States' comments on European Communities' response to question 124, para. 64.
1186 United States' comments on European Communities' response to question 124, para. 64.
1187 United States' response to question 124, para. 40.
1188 United States' response to question 124, para. 41.
1189 United States' response to question 124, para. 44.
1190 United States' response to question 124, para. 42; United States' comments on
European Communities' response to question 124, para. 65.
1191 United States' comments on European Communities' response to question 124, para. 67.

BCI deleted, as indicated [***]

funds that confers a benefit. 1192 The United States argues that the European Communities is asking
the Panel to assume not only that a future transfer of some sort will occur, but also that the alternative
measure will take the form of an actionable subsid y, or at least a financial contribution covered by
Article 1.1(a)(1) of the SCM Agreement. The European Communities has not demonstrated that there
is a basis for such an assumption.1193
Whether a benefit to Boeing exists in relation to each of the measures
7.112 The United States does not contest that if the tax measures are each a financial contribution
under Article 1.1(a)(1)(ii) of the SCM Agreem ent, then each confers a benefit to Boeing. 1194 The
United States does not accept that the benefit of the B&O tax reduction to component manufacturers
passes-through to Boeing. The United States' argume nts in this regard are summarized commencing
at paragraph 7.238 of this Report, in the section re garding the amount of the subsidy, for the reasons
expressed at paragraph 7.214 of this Report.
Arguments of third parties
Australia
7.113 Australia notes that Washington B&O tax syst em consists of sector-specific tax rates. 1195
Relying upon the guidance provided by the Appellate Body in US – FSC and US – FSC (Article 21.5
– EC), Australia submits that when assessing whethe r the B&O tax reduction constitutes a financial
contribution under Article 1.1(a)(1)(ii) of the SCM Agreement, the Panel needs to compare "taxpayers
in similar situations (i.e. other sectors engaged in business activities of a similar complexity/level of
value-add)".1196 The key question is whether the tax measu res "represent a departure" from tax rules
that would "otherwise" apply to that sector. A rele vant factor for the Panel to consider in conducting
the comparison under Article 1.1(a)(1)(ii) is the design of the measure under consideration or the
"essential shape and the rationale that is exhibited for those measures in order to assess the nature of
the relationship of the measure at issue with the overall tax regime". 1197 In the context of this case,
Australia argues that the Panel needs to examine the reduction in the Washington B&O tax rates in the
context of the Boeing Incentive Package.1198
7.114 In relation to the benefit analysis for the ta xation subsidies, Australia asserts that the
European Communities has neglected to conduct a co mparison to determine whether the terms of the
financial contribution are more advantageous than those available on the market. 1199 The
European Communities merely asserts that tax assistance is, by definition, not available on the market
and consequently concludes that the tax assist ance constitutes an advantage on non-market terms. 1200

1192 United States' comments on European Communities' response to question 124, para. 72.
1193 United States' comments on European Communities' response to question 124, para. 72.
1194 See United States' response to question 13, para. 26, where the United States accepts that the B&O
tax credit for computer software and hardware is a specific subsidy; United States' response to question 14,
paras. 31-32, where the United States accepts that th e B&O tax credits for prepro duction development and for
property taxes are subsidies under Article 1 of the SCM Agreement; United States' response to question 13,
para. 27, where the United States accepts that the sale s and use tax exemption for computer equipment is a
subsidy. In relation to the tax exemption for construction services and equipment, the leasehold excise tax
exemption and the property tax exemption, the United States argues that no financial contribution exists and
does not address the issue of benefit.
1197 Australia's written submission, paras. 8 and 9.

BCI deleted, as indicated [***]

Australia argues that the assessment of whethe r a tax incentive confers a benefit requires a
comparison with market benchmarks, namely the taxes that would otherwise be due.1201
Evaluation by the Panel
Whether a financial contribution exists in relation to each of the measures
7.115 The issue before us is whether the tax meas ures enacted under HB 2294 constitute a financial
contribution under Article 1.1(a)(1)(ii) of the SCM Agreement, which provides:
"1.1 For the purpose of this Agreement, a subsidy shall be deemed to exist if:
(a)(1) there is a financial contribution by a government of any public body
within the territory of a Member (referred to in this Agreement as
"government"), i.e. where:
 …
 (ii) government revenue that is otherwise due is foregone or not
collected (e.g. fiscal incentives such as tax credits)"
7.116 In US – FSC, the Appellate Body held that in dete rmining if revenue "otherwise due" has
been foregone, a comparison must be made between the revenue actually raised and the revenue that
would have been raised "otherwise". The panel an d the Appellate Body agreed that the basis of
comparison in determining what would otherwise have been due "must be the tax rules applied by the
Member in question".1202
7.117 The panel applied a "but for" test in determin ing whether revenue had been foregone that was
"otherwise due". This involved examining the situa tion that would have existed but for the measure
in question and determining whether there would have been a higher tax liability in the absence of the
measure.1203 The Appellate Body expressed some reservati ons about whether the "but for" test is an
appropriate general test that should apply in all situations.1204
7.118 The Appellate Body reasoned:
"{T}he word 'foregone' suggests that the government has given up an entitlement to
raise revenue that it could otherwise have raised. This cannot, however, be an
entitlement in the abstract, because governments, in theory, could tax all revenues.
There must, therefore, be some define d normative benchmark against which a
comparison can be made between the revenue actually raised and the revenue that
would have been raised 'otherwise'…
The Panel found that the term 'otherwise due' establishes a 'but for' test in terms of
which the appropriate basis of comparis on for determining whether revenues are
'otherwise due' is 'the situation that would prevail but for the measures in question'.
In the present case, this legal standard pr ovides a sound basis for comparison because
it is not difficult to establish in what wa y the…income…would be taxed 'but for' the
contested measure. However, we have cer tain abiding reservations about applying
any legal standard, such as this 'but fo r' test, in the place of the actual treaty

1201 Australia's response to question 10.
1202 Appellate Body Report, US – FSC, para. 90.
1204 Appellate Body Report, US – FSC, para. 91.

BCI deleted, as indicated [***]

language…It would, we belie ve, not be difficult to circumvent such a test…We
observe, therefore, that, although the Panel's 'but for' test works in this case, it may
not work in other cases." 1205
7.119 In the corresponding compliance proceedings, the Appellate Body clarified that there may be
situations where it is possible to apply a "but for" test, namely where the measure at issue is an
"exception" to a "general" rule of taxation.1206 However, a panel is not always required to identify the
"general" rule of taxation. In many situations, it may be difficult to do so.1207 In such circumstances:
"Panels should seek to compare the fiscal treatment of legitimately comparable
income to determine whether the contested measure involves the foregoing of
revenue which is "otherwise due", in relation to the income in question…
{T}he normative benchmark for determining whether revenue foregone is otherwise
due must allow a comparison of the fiscal treatment of comparable income, in the
hands of taxpayers in similar situations."
 1208
7.120 Therefore, the Appellate Body's analysis sugg ests that where it is possible to identify a
general rule of taxation applied by the Member in ques tion, a "but for" test can be applied. In other
situations, the challenged taxati on measure should be compared to the treatment applied to
comparable income, for taxpayers in comparable circumstances in the jurisdiction in issue.
Whether a financial contribution exists for those tax measures which the parties agree
have been used by Boeing
7.121 Applying the guidance from the Appellate Body to the Washington B&O tax reduction, a
review of the evidence before the Panel reveals th at there is indeed a general rate of taxation
applicable to manufacturing activities in the State of Washington and that the tax reduction provided
to aircraft manufacturing activities constitutes an exception to this rule.
7.122 The Revised Code of Washington , Section 82.04.240, is entitled "Tax on manufacturers" and
provides:
"Upon every person engaging within this state in business as a manufacturer, except
as persons taxable as manufacturers under other provisions of this chapter, as to such
persons the amount of the tax with respect to such business shall be equal to the value
of the products, including byproducts, manuf actured, multiplied by the rate of 0.484
percent." 1209
7.123 Therefore, on its face, the Washington tax code establishes a general rule that applies to
"every person engaging…in business as a manufacturer". It also allows for certain exceptions to this
rule, which are set out in other provisions of the same chapter. The exceptions include lower taxation
rates for manufacturers of semiconductor materi als, manufacturers of wheat into flour and
manufacturers of bio-diesel and alcohol fuel, for example.
7.124 Similar provisions apply in relation to tax es on wholesaling and retailing activities. The
Revised Code of Washington 82.04.270 provides:

1205 Appellate Body Report, US – FSC, paras. 90-91.
1206 Appellate Body Report, US – FSC (Article 21.5 – EC), para. 91.
1207 Appellate Body Report, US – FSC (Article 21.5 – EC), para. 91.
1208 Appellate Body Report, US – FSC (Article 21.5 – EC), paras. 91 and 98.
1209 Wash. Rev. Code § 82.04.240 (2004), Exhibit EC-83 (emphasis added).

BCI deleted, as indicated [***]

"Upon every person engaging within this state in the business of making sales at
wholesale, except persons taxable as wholesalers under other provisions of this
chapter; as to such persons the amount of tax with respect to such business shall be
equal to the gross proceeds of sales of su ch business multiplied by the rate of 0.484
percent." 1210
Similarly, the Revised Code of Washington 82.04.250 provides:

"(1) Upon every person except persons taxable under {HB 2294}, 82.04.272, or
subsection (2) of this section engaging within this state in the business of making
sales at retail, as to such persons, the amount of tax with respect to such business
shall be equal to the gross proceeds of sales of the business, multiplied by the rate of
0.471 percent." 1211
7.125 The effect of HB 2294 is to include co mmercial aircraft manufacturing, and the
manufacturing of components for such aircraft, wi thin the list of activities that are subject to a
taxation rate that differs from the rate of 0.484 pe r cent. It also includes wholesale and retail sales by
such manufacturers within the exceptions to the rates of 0.484 per cent and 0.471 per cent
respectively.
7.126 The terminology employed in HB 2294 provides support for the notion that there is a general
taxation rate applicable to manufacturing activities and that deviations from this are an exception. For
example, in section 16(2)(a) and (b) of HB 2294, the tax rate applicable to manufacturers of
commercial aircraft and components for such aircra ft is referred to as a "preferential tax rate". 1212
This provides further confirmation that there is a standard rate from which the aircraft manufacturing
rate deviates in order to give preference to such manufacturers.
7.127 Further, section 16 of HB 2294 establishes that aerospace manufacturers that make use of the
"preferential tax rate" must submit an annual re port in order to provide the legislature with
"information on how the tax incentive is used". Sec tion 16(b) provides that if a manufacturer fails to
submit an annual report:
"{T}he department shall declare the amount of taxes … reduced in the case of the
preferential business and occupation tax rate, fo r that year to be immediately due and
payable." 1213
This provides further support for the conclusion that the reduced rate is an exceptional rate, and if
certain requirements are not met, the amount by whic h the taxes were reduced must be repaid. The
Final Bill Report on HB 2294 reiterates the repa yment requirement but includes a more explicit
statement that the reduced rate is a deviation from the generally applicable rate. In particular, it
provides that if the reporting requirements are not met "full taxes" will be immediately due and
payable.1214 The MSA also employs the terminology "full taxes". 1215 Given the structure of the
Washington tax code, we interpret the reference to "fu ll taxes" to be a reference to the rate generally
applicable to manufacturers, set out in Revised Code of Washington , Section 82.04.240, which was

1210 Wash. Rev. Code § 82.04.270 (2004), Exhibit EC-88 (emphasis added).
1211 Wash. Rev. Code § 82.04.250 (2003), Exhibit EC-87 (emphasis added).
1212 HB 2294, 58th Leg., 2d Spec. Sess. (Wash. 2003), Exhibit EC-54.
1213 HB 2294, 58th Leg., 2d Spec. Sess. (Wash. 2003), Exhibit EC-54.
1214 Final Bill Report, HB 2294, undated, Exhibit EC-90, p. 3.
1215 Exhibit B-1 to MSA. Exhibits to the Project Olympus Master Site Development and Location
Agreement Between the Boeing Company and the State of Washington, County of Snohomish, City of Everett
and Certain Other Government al Units and Authorities of or in the State of Washington, 19 December 2003
("Exhibits to MSA"), Exhibit EC-59.

BCI deleted, as indicated [***]

also applicable to aircraft manufacturers prior to the enactment of HB 2294, namely 0.484 per cent
(and 0.471 per cent in relation to retail activities).

7.128 In addition to the terminology used in HB 2294, there are various other documents produced
by the State of Washington that u se similar language. For example, the Washington Administrative
Code 458-20-136, which "explains the application of the business and occupation (B&O) … taxes to
manufacturers", refers to B&O tax rates that differ from the rate of 0.484 per cent as "special B&O tax
rates/classifications for manufacturers engagi ng in certain manufacturing activities".
1216 Further, the
"Project Olympus Legal Questionnaire, Washington State Response" refers to the reduced taxation
rate for manufacturers of commercial airplanes and components as a "preferential B&O tax rate".1217
7.129 The United States' written submissions and a numb er of documents produced by the State of
Washington refer to "four major activity classifica tions and tax rates" or "four principal tax
classifications", namely manufacturing, wholesaling, retailing and services. 1218 These four rates
"account for 90 percent of total B&O tax liability". 1219 This confirms that the B&O manufacturing
rate is a standard rate and using it as a benchmark in the Article 1.1(a)(1)(ii) analysis is not equivalent
to randomly picking one of the 36 possible activity classifications, as suggested by the United States.
7.130 In an attempt to rebut a European Communities' argument regarding specificity, the
United States submitted an extract from a study prepared by the Washington State Department of
Revenue, entitled "A Study of Tax Exemptions, Excl usions, Deductions, Deferrals, Differential Rates
and Credits for Major Washington State and Local Taxes".
1220 The study describes each of the
"differential tax rates" under the B&O tax system. In relation to the tax rate for manufacturers of
commercial aircraft, the document provides (emphasis added):
"A preferential tax rate is provided for manufacturers of commercial airplanes or
components of commercial airpla nes. Compared with the general tax rate for
manufacturing of 0.484 percent , this statute allows a two-step reduction in the tax
rate." 1221
The study also appears to answer the "but for" t est discussed in the panel and Appellate Body reports
in US – FSC:

"If the exemption were repealed, would th e taxpayer savings be realized as increased
revenues?
Yes; if the industry remains in this state and final assembly of the super-efficient
airplane occurs here." 1222
In other words, but for the exemption for aircra ft manufacturers, increased taxation revenue would
otherwise be due to the State.

1216 Wash. Admin. Code § 458-20-136 (2000), Exhibit EC-80, s5.
1217 Schedule 2 to Project Olympus Master Site Agreement, Project Olympus Legal Questionnaire
Washington State Response, 3 October 2003, Exhibit EC-91, p. 3.
1218 See for example, Business and Occupation Tax, RCW 82.04, Exhibit US-179 and United States'
first written submission, para. 430.
1219 Business and Occupation Tax, RCW 82.04, Exhibit US-179.
1220 Business and Occupation Tax - Differential Tax Rates, Exhibit US-191. See also, United States'
response to question 365.
1221 Business and Occupation Tax - Differential Tax Rates, Exhibit US-191 at description of
82.04.260(13).
1222 Business and Occupation Tax - Differential Tax Rates, Exhibit US-191 at description of
82.04.260(13).

BCI deleted, as indicated [***]

7.131 In describing other differential B&O tax rates, the same Department of Revenue document
continues to refer to the "normal" or the "general" manufacturing tax rate of 0.484 per cent.1223
7.132 Therefore, the State of Washington legislation and documents produced by State departments
confirm the European Communities' argument that th ere is a general or "normal" B&O tax rate of
0.484 per cent for manufacturing and wholesaling activiti es and that deviations from this rate are an
exception or a "preferential" rate. Similarly, the text of the Revised Code of Washington and some of
the other evidence surveyed in th e foregoing analysis, including section 16 of HB 2294, indicate that
the rate reduction from 0.471 per cent in relation to retail sales is also a "preferential rate".
7.133 In these circumstances, where it is not difficu lt to identify a general rule of taxation and
exceptions to it, the guidance provided by the Appella te Body suggests that a "but for" test can be
applied. The relevant question is whether, "but for" the challenged tax reduction, a higher B&O tax
rate would otherwise apply to manufacturers of commercial aircraft and their components. The
answer to this question is in the affirmative. The standard rate for manufacturing and wholesaling
activities is 0.484 per cent and for retailing activ ities is 0.471 per cent. Were it not for the
"preferential rate" introduced by HB 2294, aircraft manufacturers would be subject to the rates of
0.484 per cent for manufacturing and wholesaling a nd 0.471 per cent for retail sales. For these
reasons, the Panel finds that the reductions in th e B&O tax rates constitute the foregoing of revenue
otherwise due and, as a result, are a financial c ontribution under Article 1.1(a)(1)(ii) of the SCM
Agreement.
7.134 The Panel is not convinced by the United States' argument that there is no rational basis to use
the rate of 0.484 per cent as the normative benchmar k in relation to the tax rate on manufacturing
activities. Rather than being just one rate within a range of rates, as argued by the United States, the
evidence reveals that it is the standard manufacturi ng rate that applies unless there is an exception to
it.
7.135 The United States advocates use of the analysis suggested by the Appellate Body when there
is no general rule of taxation, namely compari ng the fiscal treatment of legitimately comparable
income. For this purpose, the United States advocates the use of the range of nominal B&O tax rates
as the "defined normative benchmark". A problem w ith using such a "defined normative benchmark"
is that, by definition, every rate in any multi-rate ta x system falls within the range of rates in that tax
system. The United States' approach suggests that if there is a change to a taxation rate, as long as the
new rate is the same as or higher than the low est rate in the Washington B&O tax system, it falls
within the "range" of tax rates. As a result, the a pproach advocated by the United States results in the
lowest B&O tax rate at any give n point in time becoming the "general rule" for the purposes of an
Article 1.1(a)(1)(ii) analysis. Therefore, in advocating that the range of nominal B&O tax rates be the
defined normative benchmark, the United States is ef fectively arguing that the rate of 0.138 per cent,
the lowest existing B&O tax rate on manufacturing activities at the time of making its submissions, be
the benchmark. The United States does not explain w hy the rate of 0.138 per cent is "normative" or
where it is "defined".1224

1223 Business and Occupation Tax - Differential Tax Rates, Exhibit US-191.
1224 We note that at the time the United States made its written submissions, the lowest nominal B&O
tax rate was 0.138 per cent. However, the United States indicates in its first written submission, para. 431, that
as of 1 July 2006, manufacturing fresh fruit and vegetables and manufacturing dairy products were to be tax
exempt. This further illustrates the problematic nature of the United States' argument. The result of the
amendment is that the lower bound of the range of nomin al B&O tax rates is 0 per cent. Therefore, every tax
rate falls within the range and it is never possible for a tax reduction to constitute a financial contribution.

BCI deleted, as indicated [***]

7.136 Further, it is difficult to conclude that the ra nge of B&O tax rates is a "defined normative"
benchmark. It is not a "defin ed" benchmark because, as new rates are established, the benchmark
shifts. Further, it is not "normative" because there is nothing prescriptive about it. In no sections of
the Washington tax code or in the documents prod uced by Washington State and submitted by the
parties as exhibits, is there evidence to suggest th at the B&O tax rates must always fall between 0.138
per cent and 3.3 per cent (the actual range of tax rates on manufacturing activities in existence at the
time the parties made their submissions).
7.137 The United States advances its arguments regarding the average effective B&O tax rate
merely as support for its conclusion that revenue otherwise due has not been foregone. We have
concluded to the contrary and any consideration of the average effective B&O tax rate does not alter
our decision. The United States itself concedes th at the average effective B&O tax rate is not a
normative benchmark by which to contrast the fiscal treatment afforded to legitimately comparable
income. Therefore, whether or not the B&O ta x reduction for aircraft manufacturing draws the
effective tax rate paid by such manufacturers closer to the average effective tax rate is not relevant to
the analysis required by the Appellate Body report in US – FSC.
7.138 We note the United States' argument that 60 per cent of total taxable income in Washington
State receives an adjusted rate of taxation. However, as the European Communities points out, this
calculation includes the aerospace industry, the larg est manufacturing industry in Washington State,
which is subject to an adjusted rate of taxation.
1225 In contrast, the European Communities'
calculations exclude the $36 billion aerospace sector 1226 and find that, excluding the aerospace
industry, 20 per cent of manufacturing income is subject to an adjusted B&O tax rate. 1227 In other
words, if HB 2294 had not adjusted the rate fo r aerospace manufacturing, approximately 80 per cent
of manufacturing activities in Washington State woul d be subject to the 0.484 per cent tax rate.
Therefore, the United States' submissions do not alte r our finding that the reductions in the B&O tax
rates constitute the foregoing of revenue othe rwise due under Article 1.1(a)(1)(ii) of the
SCM Agreement.
7.139 The United States does not contest that the B&O tax credits and the sales and use tax
exemption for computer softwa re, hardware and peripherals have been claimed by Boeing and that
each constitutes a financial contribution under Article 1.1(a)(1)(ii) of the SCM Agreement. We note
that the B&O tax credit system operates by subtr acting an amount directly from the taxpayer's total
B&O tax liability. Further, under the Washington tax system, absent the exemption, sales or use taxes
would ordinarily be paid on computer equipment used by an airplane manufacturer. For these
reasons, we find that each measure, namely the B&O tax credits and the sales and use tax exemption
for computer software, hardware and peripherals, is a financial contribution under Article 1.1(a)1(ii)
of the SCM Agreement.
Whether a financial contribution exists fo r those tax measures in relation to which
there is disagreement about whether the subsidies have been used by Boeing
7.140 In relation to the sales and use tax exemption for construction services and equipment, the
United States argues that it is not a financial c ontribution because Boeing has not and will not use the
exemption, a fact which the European Communities contests.
7.141 In assessing whether Boeing has indeed made use of the exemption, the principal issue of
contention between the parties is whether Boeing ha s constructed any new buildings for use in the

1225 European Communities' comments on United States' response to question 32, para. 125.
1226 This figure finds support in Washington Stat e Aerospace Industry Over view, Washington State
Website, Exhibit EC-1322.
1227 European Communities' comments on United States' response to question 32, para. 125.

BCI deleted, as indicated [***]

manufacture of the 787 that would render it eligible for the sales and use tax exemption for
construction services and equipment. We agree with the European Communities' argument that
Boeing's choice to use its existing Everett site fo r the purposes of 787 assembly is not conclusive of
the issue. This is because, as the European Communities notes, Boeing could construct new buildings
on the "parcels of land" that are included as a part the site chosen by Boeing for the manufacture of
the 787.1228
7.142 The European Communities' estimate that the bene fit to Boeing over the period 2004-2005 of
the sales and use tax exemption for construction services and equipment was $9.6 million is drawn
from the Washington State September 2003 presentation.
1229 This presentation, prepared before
Boeing decided to locate in Washington State, outlines the advantages to Boeing of locating in Everett
or in Moses Lake.1230 In the context of considering the advantages associated with the Everett site, the
State estimates that Boeing will claim a sales and use tax exemption worth $9.6 million, on the
assumption that Boeing will invest in a new paint hangar.
1231 Although this is merely an assumption
about the future construction decisions of Boei ng, the beginning of the presentation includes a
statement that "we have been working with Boei ng over the past two months to provide detailed
information on Moses Lake and Everett, gain furthe r insight on the 7E7 programme and site needs,
and develop a collaborative, effective program to make the 7E7 a success." 1232 This reveals that the
State's estimate is based upon an indication from Boeing of site needs for a 787 assembly facility.
7.143 However, the United States submits a spreadsheet prepared by the Washington Department of
Revenue (Exhibit US-184), entitled "HB 2294 Fiscal Note – 20 Year Spreadsheet", which was
updated on 1 November 2005, and which therefore pr ovides more recent estimates of the amount of
the tax incentives claimed by Boeing compar ed with the September 2003 presentation. 1233 Further,
unlike the 2003 presentation, the Department of Re venue spreadsheet post-dates the signing of the
MSA and was updated post-2004, which is one of the years the European Communities alleges the tax
exemption conferred a benefit on Boeing. The sp readsheet, which appears to be an attempt to
estimate the total fiscal impact of HB 2294, do es not include any amounts for a sales and use tax

1228 European Communities' comments on United States' response to question 239.
1229 For $9.6 million estimate, see State and Local S ubsidies to Boeing LCA Division, Exhibit EC-27.
The source of this estimate is Washington State and th e Boeing Company: Working Together for the Boeing
7E7 Dreamliner, Continuing Support and Collaborative Actions, September Presen tation, Greenville, SC,
Exhibit EC-65. Exhibit EC-65 p. 54, sets out the assumptions upon which the estimate for the claim of the sales
and use tax exemption in Everett is based and the Appendix (pages unnumbered) includes a table (heading at the
top of the page is "Everett Incentives Values 9/16/200 3") which estimates the "Retail Sales Tax (RST) and Use
Exemption: Construction of new buildings for manufacture of Comm Air", based upon the assumption of a new
paint hangar. The table estimates that the tax exemption will provide a benefit to Boeing of $3.7 million in 2004
and $5.8 million in 2005.
1230 Washington State and the Boeing Company: Wo rking Together for the Boeing 7E7 Dreamliner,
Continuing Support and Collaborative Actions, Septembe r Presentation, Greenville, SC, Exhibit EC-65. See
e.g. index at p. 2, which indicates that the presentation details the "advantages and actions" relating both to
Everett and Moses Lake.
1231 Washington State and the Boeing Company: Wo rking Together for the Boeing 7E7 Dreamliner,
Continuing Support and Collaborative Actions, Septem ber Presentation, Greenville , SC, Exhibit EC-65.
Exhibit EC-65 p. 54, sets out the assumptions upon which the estimate for the claim of the sales and use tax
exemption in Everett is based and the Appendix (pages un numbered) includes a table (heading at the top of the
page is "Everett Incentives Values 9/16/2003") wh ich estimates the "Retail Sales Tax (RST) and Use
Exemption: Construction of new buildings for manufacture of Comm Air", based upon the assumption of a new
paint hangar.
1232 Washington State and the Boeing Company: Working Together for the Boeing 7E7 Dreamliner,
Continuing Support and Collaborative Actions, September Presentation, Greenville, SC, Exhibit EC-65, p. 3.
1233 The bottom left of the second page of Washington State Department of Revenue Final HB 2294
Fiscal Note - 20-Year Spreadsheet, Exhibit US-184, includes the date of update (namely, 11.1.05, which we
assume is written in the month/day/year format, as is customary in the United States).

BCI deleted, as indicated [***]

exemption in Everett. It gives an amount of $0 to the "sales tax exemption for construction of new
buildings (Moses Lake)". If Boeing did indeed claim the sales and use tax exemption for construction
services, it would be reasonable to expect this to be reflected in the Department of Revenue
spreadsheet. In addition to this ev idence, we also rely on the declaration of the United States in its
first written submission that "Boeing has not used … this tax exemption … {and}Boeing informs us
that it has no plans to construct any such buildings {i.e. buildings to which the tax exemption applies}
in the future".1234
7.144 Therefore, after reviewing all of the evid ence, we accept the United States' position that
Boeing has not claimed the sales and use tax exemp tion for construction services and equipment. We
recognize that the Department of Revenue spread sheet indicates that the B&O tax credit has been
claimed by Boeing for taxes paid on "new constr uction related to the 7E7 plane" and that the
European Communities argues that such "new cons truction" would render Boeing eligible for the
sales and use tax exemption for construction services and equipment. 1235 H o w e v e r , t h e " n e w
construction" may refer to "renova tion" or "expansion" of existing buildings, to which the B&O tax
credit applies, but the sales and use tax exempti on for construction services and equipment does not.
On balance, given that the other tax incentives under HB 2294 which have be nefited Boeing are all
reflected in the Department of Revenue spreadsheet, we conclude that the absence of an estimate for
the sales and use tax exemption for construction servi ces in Everett confirms that it was not claimed
by Boeing.
7.145 In relation to the leasehold excise tax exemption and the property tax exemption, the European
Communities' position is that a sale-leaseback arrange ment exists or will exist between Boeing and a
port district, thereby entitling Boeing to claim the le asehold excise tax exemption and the property tax
exemption. In this regard, the European Comm unities relies upon the MSA, which provides that, if
requested by Boeing, the Port of Everett, to the exte nt it has financial capacity , shall engage in a sale-
leaseback arrangement with Boeing. 1236 In addition, the European Communities refers to the
"Restatement of Commitments", attached as a Schedule to the MSA, which provides that "the Port of
Everett will purchase approximately nine acres of Boeing land and leaseback to Boeing for
20 years".1237
7.146 We are not convinced that the sections fro m the MSA and its Schedule upon which the
European Communities relies establish that Boeing and a port district have engaged in a sale-
leaseback arrangement. Article 5.2.2 of the MSA contemplates the possibility of a sale-leaseback
transaction occurring, but it does not require such an arrangement or establish that one is in place.
The "Restatement of Commitments", which is a ttached as Schedule 3 to the MSA, is more
prescriptive in its language, stating that the Port of Everett will buy Boeing's land and lease it back to
Boeing.
1238 However, the "Restatement of Commitments" is in fact the submission by the Governor
of Washington outlining the State's offer to site the Boeing 787 manufacturing facility in
Washington.
1239 The submission lists the benefits to Boeing of choosing to site the 787 assembly
facility in Everett and one of the listed "actions {o f the State} to support the 7E7 Dreamliner" is that

1234 United States' first written submission, para. 504.
1235 European Communities' comments on United States' response to question 239, para. 239.
1236 European Communities' comments on United States' response to question 239, para. 338 and MSA,
Article 5.2.2, Exhibit EC-58.
1237 European Communities' first written submission, para. 125 and Project Olympus Master Site
Agreement, Restatement of Commitments, 10 November 2003, Exhibit EC-71, p. 6.
1238 Schedule 3 to Project Olympus Master S ite Agreement, Restatement of Commitments,
10 November 2003, Exhibit EC-71, p. 6.
1239 Schedule 3 to Project Olympus Master S ite Agreement, Restatement of Commitments,
10 November 2003, Exhibit EC-71, see p. 1.

BCI deleted, as indicated [***]

Port of Everett will engage in a sal e-leaseback arrangement with Boeing. 1240 At a time when Boeing
had not yet decided to locate in Washington State, and where the relevant section of the submission
reads like an offer or a list of possibilities, the Restatement of Commitments does not amount to an
agreement between Boeing and the Port of Everett to engage in a sale leaseback transaction.1241
7.147 In our view, we do not have sufficient eviden ce before us to conclude that Boeing has
engaged in a leasing arrangement with a port authorit y and that it is consequently receiving either the
leasehold excise tax exemption or the property tax exemption. The Washington State Department of
Revenue spreadsheet, which the European Comm unities relies upon as the most current source of
information in quantifying the amount of other taxation measures, such as the B&O tax credits,
attributes an amount of zero to both tax exemptions.
1242 Further, the United States makes a
declaration in its written submissions that "Boeing has not entered and informs us it does not intend to
enter, a sale-leaseback arrangement for its 787 assembly facilities".1243
7.148 Although we accept the European Communities' view that Boeing could potentially engage in
a sale-leaseback transaction under the terms of the MS A, in the light of the Department of Revenue
spreadsheet and the declaration from the United States regarding Boeing's actions, we are not
convinced that Boeing is in fact involved in such a leasing arrangement. Further, we have accepted
the arguments and evidence relied upon by the Eu ropean Communities demonstrating that Boeing
received the B&O property tax credit from the time the tax credits and tax exemptions became
available in 2005 through 2006. Given that secti ons 13 and 14 of HB 2294, which provide for the
leasehold excise and the property tax exemptions, bot h state that "a person taking the {property tax
credit} is not eligible for the exemption under this section", the position advocated by the European
Communities is in fact not legally possible. If, as the European Comm unities has demonstrated,
Boeing received the B&O tax credit for property taxes from the time the tax incentives became
available until the final year of relevance to our serious prejudice analysis (2006)
1244, it is not possible
under the terms of HB 2294 that Boeing also bene fited from the leasehold excise and the property tax
exemptions in the same years. The European Co mmunities appears to recognize this in Exhibit EC-
27, where it argues that Boeing is receiving the leasehold excise and the property tax exemptions and
that Boeing does not receive the B&O property tax credit because "sections 13 and 14 of HB 2294
provide that an entity taking the B&O tax credit fo r property taxes cannot claim the leasehold excise
tax exemption or the property tax abatement".
1245 However, when the European Communities updates
its quantification of the subsidies in its second wr itten submission to reflect its revised position that
Boeing does in fact benefit from the B&O credit fo r property taxes, the European Communities does

1240 Schedule 3 to Project Olympus Master S ite Agreement, Restatement of Commitments,
10 November 2003, Exhibit EC-71, pp. 5 and 6.
1241 Similarly, we note that the Washington State and the Boeing Company: Wo rking Together for the
Boeing 7E7 Dreamliner, Continuing Support and Colla borative Actions, September Presentation, Greenville,
SC, Exhibit EC-65, contemplates the possibility of a sale-leaseback arrangement between Boeing and a port
authority. However, the presentation was prepared at a time when Boeing had not yet decided to locate in
Everett and it sets out a number of scenarios to quantify th e advantages to Boeing of locating in Everett or in
Moses Lake, including the scenario wh ere Boeing participates in a sale-l easeback arrangement. Therefore, the
presentation does not demonstrate that Boeing actually chose to engage in such a leasing transaction.
1242 Washington State Department of Revenue Final HB 2294 Fiscal Note - 20-Year Spreadsheet,
Exhibit US-184. See European Communities' second wr itten submission, para. 68 for an example of the
European Communities relying on Exhibit US-184 as the most current source of information for the purposes of
quantifying the amount of the subsidies to Boeing.
1243 United States' first written submission, para. 504.
1244 See analysis at paras. 7.1676-7.1679 of this Report.
1245 State and Local Subsidies to Boeing LCA Division, Exhibit EC-27, footnote 4.

BCI deleted, as indicated [***]

not adjust the quantification of the tax exempti ons to reflect the impossibility of simultaneously
receiving all three subsidies.1246
7.149 Therefore, the situation before us is that while HB 2294 provides for a sales and use tax
exemption for construction services and equipment, a leasehold excise tax exemption and a property
tax exemption, these exemptions have not been used by Boeing (or indeed by any other entity, ruling
out the possibility of an argument that the bene fit arising from the financial contribution passes-
through to Boeing).
7.150 The European Communities attempts to dem onstrate that each of the measures under HB
2294 satisfies the Article 1 definition of a subsid y for the purposes of its serious prejudice and
prohibited subsidy claims. In the Panel's view, th e European Communities' serious prejudice claim is
based upon use of the subsidies in issue by a particul ar entity, namely Boeing. In relation to the three
taxation measures that have never been used, th e European Communities does not argue that they
constitute financial contributions in the abstract. Rather, the European Communities' position is that
each measure is a financial contribution to Boeing . The European Communities' evidence and
arguments are directed at demonstrating that Boeing has engaged in particular property-related
activities, such as constructing new buildings and entering a sale leaseback agreement with a port
authority. Similarly, the European Communities' case under Article 3 of the SCM Agreement is that
there is an export contingent subsidy to Boeing. It presents evidence and arguments in an attempt to
demonstrate that the grant of HB 2294 was continge nt upon Boeing's exports, rather than exports in
general. Therefore, in the context of the Article 3 analysis, the European Communities relies upon the
same arguments to demonstrate the existence of a subsidy as it does for its serious prejudice case,
namely that Boeing constructed new buildings for use in the manufacture of the 787 and entered a
sale-leaseback agreement, rendering Boeing eligible for the tax exemptions.
7.151 Therefore, in the Panel's view, the European Communities' argument is not that a financial
contribution exists in the abstract, by virtue of the existence of legislation providing for a tax
abatement that has in fact never been used. Rath er, the European Communities' case is that there is a
financial contribution to a specific entity, namely to Boeing . For these reasons, in circumstances
where the sales and use tax exemption for constructi on services and equipment, the leasehold excise
tax exemption and the property tax exemption have never been claimed by Boeing, and in fact Boeing
has taken steps that suggest that it will not clai m the exemptions, the Panel finds that there is no
financial contribution to Boeing in relation to these three measures.
Revenue to be foregone in the future
7.152 We recall the United States' argument that when the financial contribution associated with an
alleged subsidy is the foregoing of government re venue under Article 1.1(a)(1)(ii), the amount of the
financial contribution must be limited to revenue that has actually been foregone.1247 According to
the United States, revenue that a government may potentially forego in the future does not constitute a
financial contribution under Article 1.1(a)(1)(ii). 1248 The United States is not entirely clear about
whether its argument on this point relates to the existence or the amount of the alleged subsidy. In

1246 The European Communities updates its quantificati on of the B&O tax credits in its second written
submission, para. 68. It does not provide a similar update in relation to the leasehold excise tax exemption or
the property tax exemption. We note that in the Euro pean Communities' response to question 363, paras. 166-
174, the European Communities argues that Boeing could simultaneously take advantage of all three tax
measures if Boeing were to set up two different legal pe rsons, one eligible for the B&O tax credit and the other
for the leasehold excise and property tax exemptions. Even if this is the correct in terpretation of HB 2294, the
European Communities has not attempted to demonstrate that Boeing has indeed set up different legal persons
in this manner.
1247 United States' first written submission, para. 462.
1248 United States' first written submission, para. 462.

BCI deleted, as indicated [***]

response to Panel questioning, the United States s ubmits that Article 1.1(a)(1)(ii) addresses the
existence rather than the amount of a subsidy. 1249 In the same response, the United States argues that
where the financial contribution of an alleged subs idy consists of government revenue to be foregone
in the future, this does not meet the Article 1 defin ition of a subsidy. The United States continues that
"{w}hether a measure results in a financial contribu tion is one of the elements in the analysis of
whether there is a subsidy and the amount of the s ubsidy. Because possible future revenue foregone
cannot be considered a financial contribution, it canno t be considered a subsidy or be included in the
subsidy amount". 1250 Although the continued reference to s ubsidy amount creates some confusion,
the United States' argument rests purely on Article 1.1(a)(1)(ii), which the United States concedes
addresses the existence rather than the quantificati on of a subsidy. Therefore, the United States'
argument is that where revenue is to be foregone in the future, this is not a financial contribution
under Article 1.1(a)(1)(ii) of the SCM Agreement and therefore cannot constitute a subsidy.
7.153 At the outset, we note that in referring to revenue to be foregone in the "future", the parties
are referring to revenue to be foregone in the pe riod post-2006. The European Communities filed its
first written submission in March 2007. In calculating the amounts of the alleged subsidies in its first
written submission, the European Communities treat s 2006 as the cut-off point for the "past" and the
"future".1251 Therefore, the European Communities' calculations for the period post-2006 are
estimates of financial contributions expected to be received in the "future" and in relation to which
there is no evidence on the record to indicate that the subsidies have actually been received.
Therefore, for the purposes of this dispute, the period post-2006 is treated as the "future".
7.154 We do not find it necessary to resolve the issue of whether revenue to be foregone in the
period post-2006 constitutes a financ ial contribution. The Panel needs to address the question of
whether the measures under HB 2294 are subsidi es for the purposes of assessing the European
Communities' serious prejudice and Article 3 claims. As explained in the following paragraphs, in the
circumstances of this case, the Panel does not re ly upon tax abatements to be received post-2006 in
assessing the European Communities' present serious prejudice case. Further, given the Panel's
decision to exercise judicial economy in relation to that aspect of the European Communities' serious
prejudice case based on threat, it is not necessary for th e Panel to resolve the issue of whether revenue
to be foregone in the future constitutes a financial contribution for the purposes of the threat of serious
prejudice analysis. Finally, given the Panel's finding that the European Communities has not
established its Article 3 claim in relation to HB 2294
1252, there is no need for the Panel to resolve
whether the post-2006 tax reductions are subsidies for the purposes of this claim. In conclusion, it is
not necessary for the Panel to rule upon whether re venue to be foregone in the period post-2006
constitutes a financial contribution.
7.155 The Panel notes that in its "present" serious prejudice analysis the European Communities
relies upon post-2006 amounts in only one manner. In particular, as part of ITR's allocation of
subsidy amounts over time to arrive at estimates of per-LCA subsidy "magnitudes", the European
Communities allocates the value of recurring subsid ies that reduce Boeing's marginal unit costs,
namely the Washington and City of Everett B&O tax reductions, the waiver of the 747 Large Cargo

1249 United States' response to question 125, para. 47. In addition, and more generally, see the parties'
responses to question 1.
1250 United States' response to question 125, para. 47.
1251 See e.g. Amount of Subsidies to Boeing's LCA Division, Exhibit EC-17, in which the
European Communities splits its calculations of the subsidy values in to a "past amounts" column (1989-2006)
and a "future amounts" column (2007-2024). We note that in responding to question 311, the
European Communities states that because 2007 is no longer a year in the future, the Panel could consider
including the subsidies received in 2007 in the present serious prejudice an alysis. However, in assessing the
present serious prejudice case, the Panel assesses the effects of the subsidies through 2006, rather than extending
the analysis to 2007.

BCI deleted, as indicated [***]

Freighter ("the 747 LCF") landing fees in Washington and the FSC/ETI measures, to the year that an
LCA is ordered, even though Boeing receives th e subsidies only at the time of delivery. 1253 In
allocating the recurring subsidies that reduce ma rginal costs in this manner, the European
Communities deems the year of order to be three years prior to the year of delivery.1254 Therefore, the
European Communities allocates the recurring subsidi es that reduce marginal unit cost to the year
three years prior to their receipt. 1255 As indicated at paragraphs 7.1676-7.1679 of this Report, the
Panel considers it appropriate to assess the European Communities' present serious prejudice claim by
examining the effects of the subsidies over th e period 2004-2006. The European Communities'
method for allocating the subsidies over time is such that the only post-2006 amounts it would
allocate to the 2004-2006 period are the amounts of the recurring subsidies that reduce marginal unit
cost expected to be received in the years 2007, 2008 and 2009 (i.e. up to th ree years beyond 2006).
For other subsidies apart from the recurring subsid ies that reduce marginal unit cost, the annual
subsidy "magnitude" is either the "subsidy amount in {the} same year" (for recurring subsidies that
increase Boeing's non-operating cash flow) or the amount resulting from the allocation of non-
recurring subsidies over a period of years commencing from the year of receipt of the subsidy.
1256
7.156 The upshot is that if the European Communities' method of allocating the subsidies over time
were accepted, the reliance upon post-2006 amounts in the present serious prejudice analysis would
be limited to certain "subsidies" (the Washington B&O tax reduction, the City of Everett B&O tax
reduction, the waiver of 747 LCF landing fees in Wa shington and the FSC/ETI measures) expected to
be received in 2007, 2008 and 2009. The European Communities does not rely upon the post-2006
amounts that it has calculated for other subsidies a nd for other years (i.e. the amounts calculated for
2010-2024) in its present serious prejudice claim. 1257 Given our finding that the European
Communities has not demonstrated that the waiv er of the 747 LCF landing fees is a subsidy 1258 and
that the European Communities treat s the expected amount of the FSC/ETI subsidies post-2006 to be

1253 Amount of Subsidies to Boeing's LCA Division, Exhibit EC-17, Table 4,, "Subsidy Magnitude by
Subsidy Program", p. 1.
1254 International Trade Resources LLC, Calculating on a Per-Aircraft Basis the Magnitude of the
Subsidies Provided to US Large Civil Aircraft, 20 February 2007, Exhibit EC-13, paras. 4-7 and 35.
1255 This is confirmed by Table 4 in International Trade Resources LLC, Calculating on a Per-Aircraft
Basis the Magnitude of the Subsidies Provided to US Large Civil Aircraft, 20 February 2007, Exhibit EC-13.
Table 4 indicates that the European Communities' use of subsidies received post-2006 in its present serious
prejudice analysis is restricted to recurring subsidies that reduce Boeing's marginal unit cost, namely, the
Washington B&O tax reduction, the City of Everett B&O tax reduction, the waiver of 747 LCF landing fees in
Washington and the FSC/ETI measures. The column in Table 4 entitled "derivation of subsidy magnitude"
indicates that for recurring subsidies that reduce Boeing's marginal unit cost, the "subsidy amount 3 years
hence" provides the subsidy magnitude for each year.
1256 International Trade Resources LLC, Calculating on a Per-Aircraft Basis the Magnitude of the
Subsidies Provided to US Large Civil Aircraft, 20 February 2007, Exhibit EC-13, Table 4. The reference to
Table 6 in the "derivation of subsidy magnitude" column in Table 4 is a reference to the tables allocating non-
recurring subsidies over a period of years.
1257 The European Communities confirms that this is the case in its response to question 372, para. 262.
See also, European Communities' response to question 76, para. 291, where the European Communities states:
"…This 'Future Amount' column is provided for summary purposes. The European Communities does
not rely on all of the annual future amounts as evidence for establishing its claim of present serious prejudice,
and threat thereof… ."
Further, in European Communities' response to question 310, the European Communities states that
"the 2011 to 2024 data is not directly relevant to the European Communities' claim of present serious prejudice
and threat of serious prejudice" (the European Communities relies upon a "reference period" of 2007-2010 for
its threat of serious prejudice case, explaining why it vi ews the subsidy values up until 2010 as relevant to its
serious prejudice arguments).

BCI deleted, as indicated [***]

$01259, if the Panel were to apply the European Communities' methodology for the present serious
prejudice analysis, the only post-2006 subsidy amounts that would be incorporated into the analysis
would be the B&O tax reductions expected to be received in 2007-2009.
7.157 However, the Panel does not consider it necessa ry to arrive at a per-aircraft subsidy
"magnitude" in its serious prejudice analysis. It is for the purpose of calculating such "magnitudes"
that the European Communities allocates the recurring subsidies that reduce marginal unit cost in the
manner that it does.
1260 The Panel's present serious prejudice analysis considers the effects of the
B&O and the FSC/ETI tax reductions by consider ing the taxation savings that Boeing actually
realized in 2004-2006 arising from aircraft deliveries during that period. 1261 I n c o n t r a s t t o t h e
European Communities' serious prejudice analysis, ta xation savings to be realized in the period post-
2006 do not play a part in the Panel's analysis. Th erefore, in considering the European Communities'
present serious prejudice claim, there is no need to resolve the question of whether revenue to be
foregone in the "future" constitutes a financial cont ribution because taxation savings to be realized in
the post-2006 period play no part in the Panel's analysis.
7.158 In conclusion, revenue to be foregone post-2006 does not play a role in the Panel's analysis of
the parties' arguments regarding present serious pr ejudice and the Panel exercises judicial economy in
relation to threat of serious prejudice. 1262 Further, the Panel does not accept the European
Communities' Article 3 claim in relation to the HB 2294 measures. 1263 For these reasons, the Panel
does not find it necessary to resolve the question of whether revenue to be foregone in the "future" can
constitute a financial contribution.
Argument in the alternative
7.159 The European Communities makes what it labels an "argument in the alternative", which it
directs the Panel to consider only in the event that the Panel concludes that a financial contribution
under Article 1.1(a)(1)(ii) does not exist in relation to any of the measures under HB 2294. 1264 Given
our conclusion that the sales and use tax exempt ion for construction services and equipment, the
leasehold excise tax exemption and the propert y tax exemption do not constitute financial
contributions under Article 1.1(a)(1)(ii), it is necessary for the Panel to evaluate the
European Communities' "argument in the alternative".
7.160 In relation to the "argument in the alternative" , the principal point of contention between the
parties is whether a "potential direct transfer of funds" can only exist when a direct transfer of funds is
required upon the occurrence of a "triggering event" or condition, or whether it can be found to exist
where a potential direct transfer of funds is one of a number of possible consequences following the
fulfilment of a pre-defined condition. Previous panel and Appellate Body reports regarding the
meaning of potential direct transfer of funds do not provide any guidance on this point. In fact, the
focus of previous reports is on the meaning of the benefit arising from a potential direct transfer of
funds.
1265

1259 International Trade Resources LLC, Calculating on a Per-Aircraft Basis the Magnitude of the
Subsidies Provided to US Large Civil Aircraft, 20 February 2007, Exhibit EC-13, indicates that the expected
amount of the FSC/ETI measure post-2006 is $0.
1260 Amount of Subsidies to Boeing's LCA Division, Exhibit EC-17, Table 4, "Subsidy Magnitude by
Subsidy Program".
1261 See paras. 7.1812-7.1813 of this Report.
1262 See para. 7.1851of this Report.
1264 European Communities' response to question 124, para. 84.
1265 Panel Report, Brazil – Aircraft, paras. 7.68-7.69; Appellate Body Report, Brazil – Aircraft,
para. 157 and Panel Report, Canada – Aircraft Credits and Guarantees, paras. 7.344-7.345.

BCI deleted, as indicated [***]

7.161 The parties appear to agree that if the Public Parties to the MSA do not honour the
commitments "guaranteed" under the MSA, a direct transfer of funds is just one of the potential
outcomes. In fact, the terms of Article 10.4.1 pr ovide that if a commitment is not honoured, the
Public Parties will provide something with "econo mic effect equivalent" to the commitment which
was reneged upon. Therefore, the MSA does not even explicitly state that a transfer of funds to
Boeing is one of the possible consequences if the gove rnment is unable to fulfil one of its original
commitments. However, given the focus on the "e conomic effect" of the remedy, it is conceivable
that one of the ways the Public Parties could sa tisfy Article 10.4.1 of the MSA is by directly
transferring funds to Boeing.
7.162 With respect to the United States' argument that Article 10.4.1 imposes no obligation upon the
Public Parties because it is subject to the "best efforts" and "to the extent permitted by law"
conditions, we note that failure by the Public Pa rties to provide a commitment or obligation of
equivalent economic effect is considered to be a breach of the MSA, regardless of whether best efforts
were used and regardless of whether the governme nt was constrained by law in the alternative
commitments it could provide. This is because Ar ticle 10.4.1 of the MSA provides that the Public
Parties shall provide Boeing with "an exemption from the law as so changed or otherwise with
another obligation or commitment acceptable to Boei ng and having economic eff ect equivalent to the
commitment so lessened or removed". Failure to pr ovide such an exemption or commitment "shall be
a substantial impairment" of the MSA. Therefore, th e "best efforts" or the "extent permitted by law"
conditions are not a means by which the government is released from its obligation to provide a
commitment of equivalent economic effect under Article 10.4.1. For these reasons, we are not
convinced by the United States' submission that under Article 10.4.1 of the MSA the Public Parties
are under no obligation to provide a direct transfer of funds or some other commitment of economic
effect equivalent to the obligation lessened or removed.
7.163 Therefore, in our view, Article 10.4.1 of the MSA represents a promise by the Public Parties
to provide Boeing with a direct transfer of funds or any number of other possible remedies of a certain
economic value should it not be possible for the Public Parties to fulfil a commitment under the MSA.
The European Communities suggests that because Article 11.2.1 of th e MSA explicitly provides that
Boeing may sue for damages if there is a breach of the MSA, including of the commitment under
Article 10.4.1, this supports the notion that there is a potential direct transfer of funds. However, even
if Article 11.2.1 were considered together with Article 10.4.1 as the provisions that create a potential
direct transfer of funds, this would not change th e principal question that arises in relation to the
parties' submissions, namely whether a direct transfer of funds, as one of the possible consequences of
satisfaction of a predefined condition, is sufficient to meet the definition of a financial contribution in
Article 1.1(a)(1)(i) of the SCM Agreement. Whethe r Article 10.4.1 of the MSA is considered alone
or together with Article 11.2.1, we note that a fa ilure to provide the tax incentives identified in the
MSA may result in a direct transfer of funds (i.e. as the commitment of equivalent economic effect
provided by the Public Parties, or if Boeing su es the Public Parties and is awarded damages).
However, in no circumstances is Boeing assured of a di rect transfer of funds when the contingency in
Article 10.4.1 of the MSA is met.
7.164 In this regard, we note that the definition of "potential" is " possible as opposed to actual,
capable of coming into being or action; latent". 1266 On its face, this definition does not appear to
exclude from the reach of Article 1.1(a)(1)(i) of the SCM Agreement the possible transfer of funds
identified by the European Communities. Ho wever, accepting the European Communities'
submissions on this issue would require a broad inte rpretation of potential direct transfer of funds.
The European Communities' position is essentially that any time th ere is a possibility that the

1266 Shorter Oxford English Dictionary, L. Brown (ed.) (Clarendon Press, 1993), Vol. II, p. 2302. This
is confirmed by Webster's New Encyclopedic Dictionary, (Könemann, 1993), p. 788, which gives the definition
of "potential" as "capable of becoming real ... something that can develop or become actual".

BCI deleted, as indicated [***]

government will transfer funds in th e future, upon the occurrence of a de fined triggering event, this is
a financial contribution. The contextual guidan ce provided by the example of a "potential direct
transfer" in Article 1.1(a)(1)(i), namely a loan guara ntee, suggests that this was not intended to be the
case. A loan guarantee is a commitment by the government to assume responsibility for a loan when a
defined set of circumstances arise. Therefore, the example chosen in Article 1.1(a)(1)(i) suggests that
the mere possibility that a government may transfer funds upon the fulfilment of a pre-defined
condition will not be enough to satisfy the definiti on of a financial contribution. In our view, a
potential direct transfer of funds is a "possibility" due to uncertainty about whether the triggering
event will occur, rather than uncertainty about wh ether the transfer of funds will follow once the pre-
defined event has transpired.
7.165 The broad nature of the finding that the Eu ropean Communities seeks is highlighted by the
fact that the provision under the MSA that allege dly promises a possible transfer of funds does not
even explicitly mention this possibility. Rather, it provides that an "obligation or Commitment" of a
certain economic value will be provi ded to Boeing. If the Panel concludes that this is a potential
direct transfer of funds, it may be possible to fi nd, for example, that any time a government makes a
general promise to provide assistance or suppor t to an industry upon the occurrence of a defined
triggering event, a financial contribution under Ar ticle 1.1(a)(1)(i) exists. This is because one
possible means of providing assistance to an industry is through a direct transfer of funds. Further, if
the Panel were to accept the European Communities' argument that the prov ision in the MSA which
states that Boeing may sue the government for damag es for breach of contract also supports a finding
of a potential direct transfer of funds, this sugg ests that any time a government enters a contract a
potential direct transfer of funds exists because, whether explicitly provided for or not, claiming
damages for breach of contract is almost always a possibility.
7.166 Therefore, the Panel has considerable doubts abou t whether the term "potential direct transfer
of funds" under Article 1.1(a)(1)(i) of the SCM Agreement is as broad as suggested by the
European Communities. In any event, we do not consider it necessary to establish the outer limits of
the meaning of the term because, as discussed in the following subsection of the Report, the
European Communities has not demonstrated that a be nefit to Boeing exists under Article 1.1(b) with
respect to the alleged potential direct transfer of funds.
7.167 For these reasons, the Panel does not find it necessary to resolve whether a financial
contribution exists under Article 1.1(a)(1)(i) of th e SCM Agreement in relation to those measures not
found to constitute a financial contribution in the fo rm of Article 1.1(a)(1)(ii). Even if a potential
direct transfer of funds exists, the European Communities has not demonstrated that it confers a
benefit.
Whether a benefit exists in relation to each of the measures found to give rise to a
financial contribution
7.168 The benefit analysis under Article 1 of the SCM Agreement requires a comparison with the
marketplace; the recipient must re ceive a "financial contribution on terms more favourable than those
available to the recipient in the market".
1267
7.169 In those cases where a financial contribution has been found to exist in the form of the
foregoing of revenue otherw ise due, the conclusion that a benefi t exists has been made with little
difficulty. For example, in US – FSC, the panel noted that the United States did not contest the issue
of benefit. The panel stated:

1267 Appellate Body Report, Canada – Aircraft, para. 158.

BCI deleted, as indicated [***]

"In our view, the financial contribution clear ly confers a benefit, in as much as both
FSCs and their parents need not pay certain taxes that would otherwise be due." 1268
7.170 In the compliance proceedings in the same case, the panel used similar reasoning, finding that
the recipient was "better off than it would have been absent the contribution, that is, if …it was
therefore subject to otherwise applicable US taxation rules". 1269 The panel in Canada – Autos also
found that the existence of a benefit readily follows once a determination has been made that revenue
otherwise due has been foregone. 1270 In our view, the relevant tax break is essentially a gift from the
government, or a waiver of obligations due, and it is clear that the market does not give such gifts.
7.171 For these reasons, the Panel finds that for those tax measures that it has found to constitute a
financial contribution, a benefit is conferred.
7.172 The alleged pass-through of the benefit of the B&O tax reduction from LCA component
manufacturers to Boeing is analysed in the section regarding the amount of the B&O taxation subsidy
received by Boeing, commencing at paragraph 7.260 of this Report, for the reasons expressed at
paragraph 7.214.
7.173 In relation to the European Communities' argume nt in the alternative, namely that the tax
measures and the MSA give rise to a potential di rect transfer of funds, the Panel notes that under
Article 1.1(a)(1)(i), a "potential direct transfer of fu nds" is distinct from a "direct transfer of funds".
Therefore, a potential direct transfer of funds must give rise to a benefit that is different from the
benefit that arises as a result of a direct transfer of funds. In other words, the benefit must arise as a
result of the potential direct transfer of funds per se, rather than due to any direct transfer of funds that
may eventually occur.
7.174 This approach is in accordance with that taken by previous panels to have considered the
issue, for example, the panels in Brazil – Aircraft and in Canada – Aircraft Credits and
Guarantees.1271 The panels drew support from the text of Article 14 of the SCM Agreement , which
provides guidelines for the calculation of the benefit in the countervailing duty context. In particular,
the panels noted that Article 14(c) provides:
"A loan guarantee by a government shall not be considered as conferring a benefit,
unless there is a difference between the amount that the firm receiving the guarantee
pays on a loan guaranteed by the government and the amount that the firm would pay
on a comparable commercial loan absent the government guarantee. In this case the
benefit shall be the difference between these two amounts adjusted for any
differences in fees."
7.175 The submissions of the parties in this dispute concerning Article 10.4.1 of the MSA focus
almost exclusively on the meaning of "potential dir ect transfer of funds" under Article 1.1(a)(1)(i).
The European Communities' only reference to bene fit is in the context of arguing that the
Article 10.4.1 "guarantee" should be considered a pote ntial direct transfer of funds given that a loan
guarantee is considered to be one. The European Communities argues:
"{T}he object and purpose of the SCM Agreement is to impose multilateral
disciplines on subsidies which distort intern ational trade in goods, and one type of

1269 Panel Report, US – FSC (Article 21.5 – EC), para. 8.46.
1271 Panel Report, Brazil – Aircraft, paras. 7.68-7.69; Appellate Body Report, Brazil – Aircraft,
para. 157 and Panel Report, Canada – Aircraft Credits and Guarantees, paras. 7.344-7.345.

BCI deleted, as indicated [***]

trade distortionary impact of 'potential direct transfers of funds' is the transferal of
risk to the government. This is evident, again, from the example of loan guarantees,
where the risk of default on a loan is transf erred from the creditor (i.e. third party) to
the government, indirectly providing a benefit to the borrower (i.e. the subsidy
recipient). In the present dispute, Ar ticle 10.4.1 of the Project Olympus MSA
transfers the risk of default on the Public Parties' commitments from Boeing (i.e. the
subsidy recipient) to the government, directly providing a benefit to Boeing."
 1272
7.176 The European Communities does not refer to bene fit in the context of demonstrating that a
benefit in the sense of Article 1.1(b) exists. Howeve r, as this is the only reference to benefit that the
European Communities makes, we act on the assump tion that this is its submission relating to
Article 1.1(b).
7.177 In Canada – Aircraft the Appellate Body found that an analysis of benefit under
Article 1.1(b) of the SCM Agreement requires consideration of whethe r the financial contribution in
issue, by virtue of its terms, accords better treatment to the recipient than the treatment available in the
market. According to the Europ ean Communities, the relevant benefit to Boeing arising from the
potential direct transfer of funds is the transfer of the risk of default under the MSA from Boeing to
the government. In a similar manner, the Eur opean Communities suggests that in the case of a loan
guarantee the relevant benefit is the transfer of th e risk of default from the creditor to the
government.1273 However, as indicated in Article 14(c) of the SCM Agreement , whether or not a
government loan guarantee confers a benefit is determ ined by comparing the terms of the government
guaranteed loan with a comparable commercial loan absent the government guarantee. Therefore, the
European Communities' understanding of the bene fit arising from a loan guarantee does not accord
with the way in which the term benefit is used in th e SCM Agreement. Similarly, in our view, even if
the commitment under Article 10.4.1 of the MSA tr ansfers the risk of default under the MSA from
Boeing to the government, this does not convince us that a benefit under Article 1.1(b) exists in
relation to the potential direct transfer of f unds. The European Communities does not offer any
submissions or evidence regarding the existence or the nature of an appropriate market benchmark
against which to assess the terms of the financial cont ribution in issue. Merely demonstrating that the
government has promised to provide either a direct transfer of funds or some other remedy should it
default on its MSA commitments is not sufficient to prove that the promise per se, rather than the
remedy that may eventually be provided, confers a benefit to Boeing. In these circumstances, we
cannot conclude that a benefit has been conferred under Article 1.1(b) of the SCM Agreement.
7.178 For these reasons, the Panel finds that, even if the tax measures considered together with the
MSA could be found to constitute a potential direct transfer of funds, the European Communities has
not demonstrated that a benefit exists.
7.179 The Panel finds that the Washington B& O tax reduction, the B&O tax credits for
preproduction development, for computer software and hardware and for property taxes and the sales
and use tax exemptions for computer software, ha rdware and peripherals are subsidies to Boeing
within the meaning of Article 1 of the SCM Agreement.
7.180 The Panel finds that the sales and use tax exem ption for construction services and equipment,
the leasehold excise tax exemption and the property tax exemption are not subsidies to Boeing.

1272 European Communities' response to question 124, para. 89 (emphasis added).
1273 European Communities' response to question 124, para. 89.

BCI deleted, as indicated [***]

(iv) Whether the subsidy is specific within the meaning of Article 2 of the SCM Agreement
Arguments of the European Communities
7.181 The European Communities argues that each of the tax measures under HB 2294 is de jure
specific under Article 2.1(a) of the SCM Agreement or , in the alternative, is de facto specific under
Article 2.1(c). Further, given its claim that th e HB 2294 tax incentives are not only subsidies that
cause adverse effects, but are also prohibited subs idies under Article 3 of the SCM Agreement, the
European Communities contends that the subsidi es are deemed specific under Article 2.3 of the
SCM Agreement.1274
7.182 According to the European Communities, HB 2294 is the relevant legislation to consider
under Article 2.1(a) of the SCM Agreement. HB 2294 explicitly limits the tax measures to an
industry (the aerospace industry) or to a group of enterprises (enterprises engaged in producing and
selling commercial aircraft or components for such aircraft). 1275 In relation to the leasehold excise tax
exemption and the property tax exemption, the Eu ropean Communities argues that exemptions are
available only to manufacturers of "superefficien t airplanes" and Boeing is the only such
manufacturer within Washington State. 1276 To support its argument that HB 2294 is specific, the
European Communities notes that the preamble to HB 2294 states that the act relates "to retaining and
attracting the aerospace industry to Washington state". 1277 In addition, by entering the MSA with
Boeing, the State of Washington has explicitly limited access to the tax breaks to Boeing.1278
7.183 The European Communities rejects the United Stat es' argument suggesting that the fact that
other manufacturing activities benefit from adjusted B&O tax rates or that other sectors receive B&O
tax credits means that the tax reductions and cred its to the aerospace industry cannot be specific.
According to the European Communities, a prope r analysis of whether the HB 2294 tax rate
reductions and tax credits are specific excludes cons ideration of B&O tax rate reductions and credits
to other sectors. 1279 This is because Article 2.1 of the SCM Agreement defines specificity by
reference to "a subsidy". Therefore, the specificity analysis is exclusive to the subsidy in issue,
namely HB 2294, and does not contemplate reference to other legislation or acts of the granting
authority.1280 The European Communities argues that the other tax rate reductions or credits may
themselves constitute specific subsidies, but are not at issue in this dispute.1281
7.184 If the Panel considers that the tax measures under HB2294 are not de jure specific within the
meaning of Article 2.1(a), the European Communities ar gues, in the alternative, that they are de facto
specific to either an enterprise (Boeing), an industry (the aerospace industry) or a group of enterprises
(enterprises engaged in producing and selling commercial airplanes or components), under
Article 2.1(c) of the SCM Agreement . 1282 This is because "the fact of the matter" is that only
manufacturers, retailers and wholesalers of commercia l aircraft and commercial aircraft components,
or in the case of the leasehold excise and prop erty tax exemptions, only manufacturers of
"superefficient airplanes", may take advantag e of the tax incentives offered in HB 2294. 1283 Further,

1274 European Communities' first written submission, para. 144.
1275 European Communities' first written submission, para. 139; European Communities, Exhibit EC-
1286.
1276 European Communities' second written submission, para. 85.
1277 European Communities' first written submission, para. 139.
1278 European Communities' first written submission, para. 142.
1279 European Communities' response to question 34, para. 104.
1280 European Communities' response to question 34, para. 104.
1281 European Communities' second written submission, para. 73 and European Communities'
comments on United States' response to question 233, para. 320.
1282 Summary of the European Communities' Specificity Arguments, Exhibit EC-1286.
1283 European Communities' second written submission, paras. 65, 74 and 85.

BCI deleted, as indicated [***]

according to the European Communities, Boeing a nd component manufacturers in Washington will
receive all of the B&O tax reductions and tax credits.1284
7.185 The European Communities also argues that th e subsidies are de facto specific because
HB 2294 was passed with Boeing in mind.1285 The tax incentives were contingent upon establishing a
commercial airplane final assembly facility, with th e capacity to produce 36 "superefficient" airplanes
per year, in Washington. The European Communiti es argues that the definition of a "superefficient
airplane" in HB 2294 matches the specifications of the 787.1286
7.186 The European Communities submits that the f act that the State has guaranteed the tax
measures specifically to Boeing through the MSA i ndicates that the reductions are de facto specific
within the meaning of Article 2.1(c) of the SCM Agreement.1287
Arguments of the United States
7.187 The United States accepts that the tax credit for computer software and hardware is specific
"in that it applies only to manufacturers of commercial airplanes". 1288 Further, although its first
written submission is not clear on this point 1289, in response to a Panel question the United States
confirms that the sales and use tax exemption for computer equipment is a specific subsidy. 1290 In
relation to the sales and use tax exemption for c onstruction services and equipm ent, the leasehold tax
exemption and the property tax exemption, the Unit ed States argues only that they are not financial
contributions. It does not address the issue of specificity.
7.188 However, the United States argues that th e Washington B&O tax reduction and the
Washington B&O tax credits for preproduction development and for property taxes are neither de jure
nor de facto specific. 1291 The United States rejects the Eur opean Communities' argument that the
specificity analysis is limited to a considerati on of the subsidy in issue. According to the
United States, although the measure in issue is HB 2294, there is no basis in logic, in the text of the
SCM Agreement or in past panel or Appellate Body reports to limit the evidence regarding specificity
to the measure in issue.1292
7.189 The United States' position is that the specificity analysis should occur within the context of
Washington's overall tax structure and in the light of its treatment of all categories of business
activities.1293 According to the United States, the B&O tax regime is a multi-rate system and the State
has provided B&O tax reductions to a variety of business activities.1294 Therefore, the reduction in the
B&O rate for aerospace manufacturing is not speci fic within the meaning of the SCM Agreement .1295
Further, in relation to the B&O tax credits, similar credits are provided to a variety of other business
activities in the State. For example, B&O tax credits are provided to:

1284 European Communities' second written submission, paras. 65 and 74.
1285 European Communities' second written submission, para. 66.
1286 European Communities' second written submission, para. 66.
1287 European Communities' second written submission, para. 66.
1288 United States' first written submission, para. 484, footnote 660; United States' response to
question 13, para. 26.
1289 See United States' first written submission, para. 500.
1290 United States' response to question 13, para. 27.
1291 United States' response to question 233, paras. 385 and 386.
1292 United States' comments on European Communities' response to question 34, para. 116.
1293 United States' first written submission, para. 482.
1294 United States' first written submission, paras. 482-483; United States' second written submission,
para. 140.
1295 United States' first written submission, para. 483; United States' response to question 233,
para. 385.

BCI deleted, as indicated [***]

(a) qualifying businesses in rural areas that create new employment positions;
(b) aluminium smelters, which are eligible for B&O credits for property taxes;
(c) small businesses;
(d) businesses engaged in certain international service activities;
(e) high technology businesses engaged in research and development activities; and
(f) businesses that provide certain job training programmes.1296
Evaluation by the Panel
7.190 The primary argument of the European Communities regarding each of the tax measures
under HB 2294 is that they are specific under Article 2.1(a) of the SCM Agreement. Article 2.1(a)
focuses on whether the granting authority, or the legi slation pursuant to which the granting authority
operates, explicitly limits access to a subsidy to "c ertain enterprises", as defi ned in the chapeau to
Article 2. According to the ordinary meaning of the term "explicit", not just any limit on access to a
subsidy will render it specific within the meaning of Article 2.1(a). Rather, the limitation must
"distinctly express all that is meant; leaving nothing merely implied or suggested". The limitation
must be "unambiguous" and "clear".
1297 In other sections of the SCM Agreement, such as Article 3,
which refers to "in law or in fact" export cont ingency, panels and th e Appellate Body have
distinguished between de jure and de facto analyses by stating that a de jure analysis should be
confined to the text of the relevant legislation or instrument in issue. 1298 Although Article 2.1(a) of
the SCM Agreement does not specifically refer to "in law" or " de jure " specificity, we note that
Article 2.1(c) refers to "in fact" specificity, perhap s as a means of distinguishing the analysis required
under Article 2.1(c) from that required under Article 2.1(a). However, given that Article 2.1(a)
provides that "where the granting authority, or the legislation pursuant to which the granting authority
operates, explicitly limits access to a subsidy", it is clear that the express limitation can be found
either in the legislation by which the granting authority operates, or in other statements or means by
which the granting authority expresses its will.
7.191 In considering the meaning of specificity, we recall that in US – Upland Cotton the panel
stated that beyond setting out the rather general requirement that the granting authority or its
legislation explicitly limit access to the subsidy to certain enterprises, "Article 2 of the
SCM Agreement does not speak with precision about when 'specificity' may be found".
1299 The panel
decision in US – Upland Cotton provides that the specificity analysis turns on the extent to which a
subsidy is "sufficiently broadly available" throug hout an economy. It suggests that there is some
tipping point, which varies on a case-by-case basis, at which access to the subsidy in issue is no
longer considered to be limited to "certain enterprises" but rather is "sufficiently broadly available"
throughout an economy as to be non-specific.
7.192 Following the guidance from US – Upland Cotton, and in the light of the ordinary meaning of
the term "explicit", a finding of specificity under Article 2.1(a) requires establishment of the existence

1296 United States' first written submission, para. 495.
1297 Shorter Oxford English Dictionary, L. Brown (ed.) (Clarendon Press, 1993), Vol. I, p. 888. This is
confirmed by Webster's New Encyclopedic Dictionary, (Könemann, 1993), p. 353, which provides that
"explicit" means "so clear in statement that there is no doubt about the meaning ... such verbal plainness and
distinctness that there is no room for doubt or difficulty in understanding".
1298 See e.g. Panel Report, Canada – Autos, para. 10.179 and Appellate Body Report, Canada – Autos,
para. 167.
1299 Panel Report, US – Upland Cotton, para. 7.1139.

BCI deleted, as indicated [***]

of a limitation, on the face of the legislation or in other statements or means by which the granting
authority expresses its will, that expressly and unambi guously restricts the availability of a subsidy to
"certain enterprises" and as a result does not make the subsidy "sufficien tly broadly available
throughout an economy".
7.193 In considering the facts of this case, at the outset it is important to note that we are confronted
with a situation where the parties to the dispute each have a different conceptual approach to the issue
of specificity. In particular, the European Co mmunities definitively asserts, in answer to a Panel
question, that the specificity analys is must be restricted to consideration of HB 2294, the amending
legislation through which the tax incentives to the aerospace se ctor were enacted. 1300 It rejects the
United States' argument that B&O tax reductions and B&O tax credits in other sectors should be
considered and that the specificity analysis sh ould occur in the contex t of the entire B&O tax
regime.1301 In other words, the breadth of the spec ificity analysis, on the European Communities'
case, is defined by the complaining party's defin ition of the measure through which a subsidy is
enacted. In contrast, the United States argues that there is no basis in the SCM Agreement , or in past
dispute settlement reports, to limit the evidence regarding specificity to the measure itself.1302
7.194 As a starting point for the analysis of de jure specificity, we consider it necessary to examine
the terms of HB 2294. An inspection of HB 2294 le nds credence to the European Communities' view
that those tax measures under HB 2294 that we have found to be subsidies are specific. HB 2294 is
entitled "Aerospace Industry – Tax Incentives", sugges ting that any tax abatements provided through
the legislation are limited to the aerospace industry. 1303 Further, section 1 of HB 2294, a general
clause setting out the purpose of the legislation, provides that "… the people of the state have
benefited from the presence of the aerospace industry in Washington state … it is in the public interest
to encourage the continued presence of this i ndustry through the provision of tax incentives". 1304 This
provides further support for the notion that the ta x measures were intended to be limited to the
aerospace industry.
7.195 HB 2294 also explicitly limits each tax measure that we have found to be a subsidy to the
aerospace industry or to certain enterprises within the aerospace industry. For example, sections 3
and 4 of HB 2294 are the relevant provisions that amend the Revised Code of Washington by
introducing the B&O tax rate reduction at issue in these proceedings. Both sections set out the
relevant provisions from the Revised Code of Washington in full and insert the amendments in
underline, at sections 3(13) and 4(13). Sections 3(13) and 4(13) both commence:
"Beginning October 1, 2005, upon every pers on engaging within this state in the
business of manufacturing commercial airplanes, or components of such airplanes, as
to such person the amount of tax with respect to such business shall…" 1305
This is followed by the relevant B&O tax rate reductions. Further, the tax credit for computer
software and hardware is enacted under section 8 of HB 2294. Section 8 explicitly provides that the
tax credit it introduces is available only for co mputer programmes used for the "design and
development of commercial airplanes" by a "manufacturer of commercial airplanes". 1306 Sections 7
and 15 expressly limit the preproduction developmen t tax credit and the property tax credit to
manufacturers of commercial airplanes or components for such airplanes. Finally, the terms of HB

1300 European Communities' response to question 34, para. 104.
1301 European Communities' response to question 34, para. 105.
1302 United States' comments on European Communities' response to question 34, para. 116.
1303 HB 2294, 58th Leg., 2d Spec. Sess. (Wash. 2003), Exhibit EC-54.
1304 HB 2294, 58th Leg., 2d Spec. Sess. (Wash. 2003), Exhibit EC-54.
1305 HB 2294, 58th Leg., 2d Spec. Sess. (Wash. 2003), Exhibit EC-54.
1306 HB 2294, 58th Leg., 2d Spec. Sess. (Wash. 2003), Exhibit EC-54.

BCI deleted, as indicated [***]

2294 indicate that the sales and use tax exempt ion for computer hardware and software and
peripherals applies to manufacturers or processors fo r hire of commercial airplanes or components for
such airplanes.

7.196 Therefore, on the face of HB 2294, the taxa tion subsidies are expressly and unambiguously
limited to enterprises manufacturing commercial airplanes or components for such airplanes. This is a
limit to "certain enterprises" within the meaning of Article 2 of the SCM Agreement. Prior panels
that have considered the meaning of "certain enterp rises" in the chapeau to Article 2 have agreed that
an "industry" may generally be referred to by th e type of products it produces, which may include a
broad range of end-products, rather than a specific type of product.
1307 For example, it may be
possible to refer to a "steel industry", "textile industry" or a "telecommunications industry". 1308
Therefore, it is consistent with this line of reas oning to find that, on the face of HB 2294, the tax
measures are limited to an "industry" within the mean ing of Article 2, namely the aerospace industry.
Similarly, it can be considered limited to a "g roup of enterprises", namely those enterprises that
manufacture commercial airplanes or their components.
7.197 Therefore, a consideration of the amending legislation to the Revised Code of Washington,
namely HB 2294, in isolation from the rest of the Washington tax system supports a finding that the
taxation subsidies are de jure specific under Article 2.1(a) of th e SCM Agreement. Access to the
subsidies is expressly and unambiguously limited to an industry or to a group of enterprises. However,
we do not think it is appropriate to stop the analys is at this point. There are a number of problems
with the European Communities' approach of rest ricting the specificity analysis to the measure
through which the subsidy is enacted, namely the am ending legislation, rather than considering the
taxation legislation as a whole pursuant to which the granting authority operates. In particular, the
approach advocated by the European Communities may lead to anomalous results. For instance, if a
granting authority were to introduce a broadly availa ble subsidy through a single piece of legislation,
on the European Communities' approach this subsid y would not be specific within the meaning of
Article 2. However, if the granting authority were to introduce exactly the same broadly available
subsidy, but were to extend it to each industry by passing separate pieces of legislation, this could
result in a finding of specificity if the complainant defined the measure under challenge as only one of
the pieces of legislation.
7.198 Therefore, we cannot accept the European Co mmunities' submission that the specificity
analysis must be limited to amending legislati on through which the subsidy is enacted. As the
United States points out in its submissions, the European Communities is perhaps conflating the
"issue of an element of a claim (whether a measure is a subsidy) and the evidence (what needs to be
shown to establish the claim)".
1309 By limiting the specificity analysis to the amending legislation,
rather than considering the Washington taxation le gislation as a whole, valuable information which
may shed light on whether or not a subsidy is pr operly characterized as specific may be ignored.
Further, the approach advocated by the European Communities means that the specificity analysis is
dependent upon how the complaining party chooses to define the measure it is challenging.
7.199 In relation to the B&O tax reduction for aircraft manufacturing, although we have found it
constitutes a subsidy, it is possible that it is one pa rt of a wider subsidy exte nded to other industries
through separate amendments to the Washington tax code. In our view, it is necessary to examine the
B&O taxation system as a whole, in particular the legislation and documents produced by the granting
authority, in order to determine whether the subsidy in issue is explicitly limited to certain enterprises
or is broadly available. Therefore, we judge it appropriate to consider the Revised Code of
Washington as a whole, rather than merely the amendi ng legislation, HB 2294, in analyzing whether

1307 Panel Report, US – Softwood Lumber IV, paras. 7.120 – 7.121.
1308 Panel Report, US – Softwood Lumber IV, paras. 7.120 – 7.121.
1309 United States' comments on European Communities' response to question 34, para. 116.

BCI deleted, as indicated [***]

the B&O tax rate reduction is specific within the meani ng of Article 2.1(a). In doing so, we note that
although the European Communities categorically st ates in response to question 34 that only the
HB 2294 B&O tax reduction should be considered in the specificity analysis, the European
Communities moderates this argument to some extent by making submissions regarding other
differential tax rates, namely by suggesting that pe rhaps the differential tax rates that apply to other
sectors are also individually specific subsidies.
7.200 The essence of the United States' argument regarding de jure specificity is that, when
considered in the broader context of the Washingt on B&O taxation regime, it is evident that the tax
reduction implemented through HB 2294 is not a specif ic subsidy. This is because the B&O taxation
regime taxes different business activities at different rates and aerospace manufacturing is merely one
among numerous business activities that h as an individual rate of taxation. 1310 These rates may be
periodically adjusted and there is no generally applicable taxation rate.1311 Although not made explicit
in relation to its de jure specificity submissions, the United States' argument seems to be the same as
that in relation to its de facto specificity arguments, namely that the State of Washington has provided
similar reductions to a variety of other business activities and therefore, if the reduction to the
aerospace industry is a subsidy, it is not specific.
7.201 It is possible that the B&O tax reduction to the aerospace industry is one part of a wider
subsidy to a variety of industries, such that the s ubsidy is "sufficiently broadly available" throughout
the Washington economy as to render it non-specific. However, beyond a one paragraph submission
regarding de jure specificity, the United States has provided little information on which the Panel
would be able to draw the conclusion the United States seeks.1312
7.202 It is evident from the text of the Revised Code of Washington that there is some variation in
the B&O taxation rates that apply in the ma nufacturing, retailing and wholesaling sectors in
Washington. We recall our previous conclusion that there is a general B&O tax rate for
manufacturing activities. However, there are certain ex ceptions to this rate. In particular, aside from
aircraft manufacturers, the following manufacturing activities are subject to a differential rate of
taxation:1313
(a) Manufacturing wheat into flour, barley into pearl barley, soybeans into soybean oil,
canola into canola oil or sunflower se eds into sunflower oil, raw seafood,
biodiesel/alcohol fuel, processing or splitting dried peas and processing perishable
meat products (0.138 per cent);
(b) Manufacturing semi-conductor materials a nd nuclear fuel assemblies (0.275 per
cent);
(c) Manufacturing aluminium and solar energy systems (0.2904 per cent);
(d) Manufacturing associated with fresh fruit, vegetables and dairy products (exempt);
1314
(e) Manufacturing of timber and timber products (0.4235 per cent until 30 June 2007 and
0.2904 per cent until 30 June 2024).

1310 United States' first written submission, paras. 482-483.
1311 United States' comments on European Communities' response to question 34, para. 117.
1312 See United States' response to question 233, para. 385.
1313 See RCW 82.04.260, Exhibit US-181, HB 2294, 58th Leg., 2d Spec. Sess. (Wash. 2003), Exhibit
US-54 s3; Business and Occupation Tax, RCW 82.04, Exhibit US-179, RCW 82.04.294, Exhibit US-188,
RCW 82.04.2909, Exhibit US-189.
1314 See United States' first written submission, para. 431, footnote 588.

BCI deleted, as indicated [***]

7.203 Similarly, we recall our conclusion that there is a general tax rate of 0.484 per cent for
wholesaling activities and 0.471 per cent for retailing. These general rates are also subject to certain
exceptions. Aside from wholesaling and retailing of commercial aircraft, a differential taxation rate
applies to: 1315
(a) Wholesaling and reselling pr escription drugs, wholesaling of perishable meat
products (0.138 per cent);
(b) Wholesaling of solar energy systems and of aluminium, where manufactured by the
seller (0.2904 per cent);
(c) Wholesaling or retailing of nuclear fuel assemblies, where manufactured by the seller
(0.275 per cent);
(d) Retailing of interstate transport equipment (0.484 per cent);
(e) Wholesaling of dairy products, fresh fruit a nd vegetables, where manufactured by the
seller and where the purchaser transports the goods out of the state (exempt). 1316
7.204 This information gives credence to the United St ates' argument that the aerospace industry is
not alone in receiving an exception to the general rates of taxation for manufacturing, retailing and
wholesaling activities. However, the United States' submissions regarding why this should lead to a
finding of non-specificity under Article 2.1(a) are rather vague. In particular, as pointed out by the
European Communities, it is not clear why any pr eferential B&O taxation rates afforded to other
industries should not be considered separate specific subsidies to the industries concerned. We have
found that through the introduction of HB 2294 the State of Washington granted a subsidy and that on
the face of HB 2294 the subsidy is limited to the aerospace industry. Viewing the Revised Code of
Washington as a whole, it is clear that at various times, differential rates, also explicitly limited to
certain enterprises, have been introduced. The Unite d States' submissions seem to suggest that the
reduced rate of taxation that applies to airplane manuf acturers is in fact part of a wider subsidy, that
has been granted to a range of other industries, that is "sufficiently broadly available" throughout the
Washington economy as to be non-specific.
7.205 If the differential B&O tax rates were truly implemented as part of a common subsidy
programme, it would be reasonable to expect some links between the individual tax reductions, for
example, in the timing of their introduction, in their purpose or in their levels.
1317 However, beyond
an assertion that the tax reductions were implemented to combat the inequities that arise due to
"pyramiding", the United States has not provided th e Panel with any evidence to suggest that the
reductions to separate industries are part of a wider, generally available and explicit programme of tax
reductions. In fact, some of the evidence submit ted by the United States runs counter to this
argument. For example, Exhibit US-191 reveals that the differential tax rates were introduced at a
range of different times and for a variety of different purposes. Further, although a number of exhibits
submitted by the United States include statements that "pyramiding" is a problem associated with the
B&O tax 1318, the exhibits do not indicate that any tax re ductions have been introduced in order to

1315 See RCW 82.04.260, Exhibit US-181, HB 2294, 58th Leg., 2d Spec. Sess. (Wash. 2003), Exhibit-
US-54, s3; Business and Occupation Tax, RCW 82.04, Exhibit US-179, RCW 82.04.294, Exhibit US-188,
RCW 82.04.2909, Exhibit US-189.
1316 See United States' first written submission, para. 431, footnote 588.
1317 In fact, USDOC considers similar factors in determining if two or more separate subsidy
programmes are "integrally linked" and can therefor e be treated as one for specificity purposes (see
G/SCM/N/1/USA/1/Suppl.4, 29 March 1999, §351.502 (c)).
1318 See e.g. Business and Occupation Tax, RCW 82.04, Exhibit US-179 and Washington State Tax
Structure Study 2002, Volume 1, Exhibit US-180.

BCI deleted, as indicated [***]

combat this problem, as asserted by the United States. For these reasons, the Panel finds that the
B&O tax reduction granted to the aerospace indus try under HB 2294 is a subsidy that is specific
within the meaning of Article 2.1(a) of the SCM Agreement.
7.206 In relation to the B&O tax credits for preproduction development and for property taxes, in
taking a broader view of the Washington B&O taxa tion system, we note that the United States argues
that the subsidies are not specific because "the State of Washington has provided similar credits to a
variety of other business activities within the State".1319 The United States provides a brief list of such
tax credits. Its description of these credits is minimal, although some are supported by exhibits.1320
7.207 The submissions of the United States regarding why the grant of B&O tax credits to other
industries supports a conclusion that the two aerospace credits in question are non-specific are quite
vague. In particular, it is not clear why the United States concedes that the tax credit for computer
software and hardware is specific and does not make the same concession in relation to the tax credits
for preproduction development and fo r property taxes. Presumably, it is because the tax credit for
computer software and hardware was not considered "similar" enough to the credits provided to other
sectors. Yet, the similarities between the remaini ng two tax credits under HB 2294 and the credits to
other sectors of the economy are not highlighted by the United States and are not clear from the
information provided in relation to them.
7.208 None of the tax credits provided to other sectors are directly related to preproduction
development. For example, the B&O tax cred it for businesses in rural areas that create new
employment positions does not require that the em ployment positions be created in the area of
preproduction development. 1321 There is one tax credit cited by the United States, provided to
aluminium smelters, that credits property taxes paid. 1322 However, no detailed information is
provided regarding the degree of similarity between the terms of this prop erty tax credit and the
property tax credit granted to the aerospace industry.
7.209 In any event, the United States does not clearly articulate why any similarity between the tax
credits provided to other sectors and those provided u nder sections 7 and 15 of HB 2294 is central to
the specificity analysis. The argument seems to be along the same lines as its submissions on the
B&O tax rate reduction, namely that the preproducti on and property tax credits are part of a wider,
broadly available subsidy. The United States does not explain why the various tax credits, including
the two to the aerospace industry, are part of the same subsidy programme, rather than each tax credit
being a separate, specific subsidy.
7.210 In principle, it is possible that while HB 2294 is explicitly limited to the aerospace sector, this
is merely one measure through which a more generall y available subsidy is implemented. However,
the United States' submissions and evidence are not su fficient for us to reach such a conclusion. For
these reasons, the Panel finds that the B&O tax credit for preproduction development and the B&O
tax credit for property taxes are specific subsidies within the meaning of Article 2.1(a) of the SCM
Agreement.
7.211 In relation to those taxation subsidies for whic h the United States does not contest specificity,
namely the tax credit for computer software and hardware, and the sales and use tax exemption for
computer hardware, software and peripherals, we recall that a consideration of HB 2294 in isolation

1319 United States' first written submission, para. 495 (emphasis added).
1320 See United States' first written submission, para. 495; United States' response to question 233,
para. 386 and Rural Area Business and Occupation Tax Credit for New Employees, Exhibit US-196 and B&O
Tax Credits Website, Exhibit US-197.
1321 See Rural Area Business and Occupation Tax Credit for New Employees, Exhibit US-196.
1322 United States' first written submission, para. 495 and Exhibit US-197, p. 2.

BCI deleted, as indicated [***]

from the rest of the Washington tax system supports a finding that the taxation subsidies are de jure
specific under Article 2.1(a) of the SCM Agreement. Taking a broader view of the taxation system as
a whole, rather than restricting the specificity anal ysis to the terms of HB 2294, does not indicate that
the subsidies are non-specific. Neither party makes any submissions or directs the Panel to any
evidence to support a deviation by the Panel from the conclusion that the subsidies are de jure
specific. For these reasons, the Panel finds that the B&O tax credit for computer software and
hardware and the sales and use tax exemption for co mputer hardware, software and peripherals are
specific subsidies within the meaning of Article 2.1(a) of the SCM Agreement.
7.212 In conclusion, the Panel finds that the B&O ta x reduction, the three B&O tax credits and the
sales and use tax exemption for computer software , hardware and periphera ls are specific under
Article 2.1(a) of the SCM Agreement. In the light of this conclusion, it is not necessary for the Panel
to address the European Communities' argument in the alternative, namely that each of the tax
measures is specific under Article 2.1(c) of the SC M Agreement. Further, given that we have
concluded that there is no financial contributi on to Boeing in relation to the sales and use tax
exemption for construction services and equipment, the leasehold excise tax exemption and the
property tax exemption, there is no need for the Panel to address the European Communities'
arguments on specificity in relation to these measures.
(v) The amount of the subsidy to Boeing's LCA division
7.213 The European Communities includes its arguments regarding the amount of the subsidies
within its submissions regarding the existence of the s ubsidies, in particular as a part of its financial
contribution submissions. In the view of the Pane l it is not necessary to calculate the amount of a
subsidy under Article 1 of the SCM Agreement. However, for ease of reference we include our
reasoning and conclusions on the amounts of the su bsidies following the Article 1 analysis for each
subsidy. This maintains the structure of arguments chosen by the parties. However, in our view, the
findings on amount are properly characterized as one part of the serious prejudice analysis.
7.214 In relation to three of the subsidies in issu e, namely the Washington B&O tax reduction and
the two measures challenged in the State of Ka nsas, the European Communities makes claims of
"pass-through". In the Panel's view, as explained at paragraphs 7.281-7.288 of this Report, any need
to demonstrate "pass-through" arises under Articles 5 a nd 6 of the SCM Agreement. In particular, a
pass-through analysis is conducted in order to iden tify the subsidized product in issue under Article 6
of the SCM Agreement. The pass-through analysis h as close links to the calculation of the amount of
each subsidy, the purpose of which is to demons trate the extent to which the subsidized product
benefits from the subsidy. Consequently, we in clude our findings on pass-through in the sections of
the Report quantifying the amounts of the subsidies, although we view both pass-through and amount
to be issues of relevance to the serious prejudice analysis.
Arguments of the European Communities

Amounts received directly by Boeing's LCA division
7.215 In estimating the amounts of the tax measures under HB 2294, the European Communities
calculates amounts in the period 2006-2024. In doing so, the European Communities relies
upon estimates derived from a Washingt on State September 2003 presentation. 1323 T h e
European Communities' estimates in th is regard are set out in Exhibit EC-27. In relation to some of
the subsidies, the European Communities accepts that a spreadsheet prepared by the Washington
Department of Revenue (entitled "Final HB 2294 Fi scal Note – 20 Year Spreadsheet") and submitted

1323 Washington State and the Boeing Company: Wo rking Together for the Boeing 7E7 Dreamliner,
Continuing Support and Collaborative Actions, September Presentation, Greenville, SC, Exhibit EC-65.

BCI deleted, as indicated [***]

by the United States as Exhibit US-184, is a more up-to -date source of information. In relying on the
estimates in the Washington Department of Reve nue spreadsheet, the European Communities notes
that the spreadsheet does not distinguish between the amount of each subsidy to Boeing and the
amount to other enterprises within the aircraft i ndustry. Therefore, the European Communities uses
the estimates of the proportion of the benefit that accrues to Boeing in relation to each tax measure,
which are found in the Washington State September 2003 presentation.
7.216 In relation to the Washington State B&O tax reduction, the European Co mmunities concedes
that, rather than attributing a dollar value to the B&O tax reduction, the Panel could assess it on an ad
valorem basis, reflecting the statutory reduction in the applicable tax rates. 1324 However, in making
this concession, the European Communities notes that certain complications arise in expressing the
Washington B&O tax reduction in this way. 1325 This is because of the European Communities'
allegation that the B&O tax reduc tion to component manufacturers passes-through to Boeing. The
European Communities notes that the precise value of the components used in each aircraft is not
known and therefore it is difficult to convert the benefit of the B&O tax reduction that passes-through
to Boeing into an ad valorem rate.1326 The European Communities submits that whether the B&O tax
subsidies are assessed on the basis of annual projected amounts provided by the granting authorities or
an ad valorem basis, the resulting per-aircraft subsidization figures remain the same. 1327 T h e
European Communities quantifies the dollar valu e of the benefit to Boeing arising from the
Washington B&O tax reduction as $2. 12 billion over the period 2006-2024. 1328 This estimate is
derived from the Washington September 2003 presentation.
7.217 The European Communities originally derived its estimates for the three B&O tax credits
from the Washington State September 2003 presentation and set out those estimates in Exhibit EC-27.
However, after submission by the United States of the spreadsheet prepared by the Washington State
Department of Revenue, the European Communities' revised its estimates. 1329 It relied upon the
Department of Revenue spreadsheet and the estim ates in the Washington State September 2003
presentation that Boeing receives 65 per cent of th e B&O tax credit for preproduction development
and 100 per cent of the tax credit for computer software and hardware. In relation to the tax credit for
property taxes, the European Communities attributed the full value of the estimate in the Department
of Revenue Spreadsheet to Boeing because the spread sheet indicates that the amount relates to "new
construction related to the 7E7 plane" at Boeing's Everett facility. 1330 Using this methodology, the
European Communities' position is that, over the period 2004-2023, Boeing received $101.3 million
in B&O tax credits for preproduction development, $20.4 million in B&O tax credits for computer
software and hardware and $15.1 million in B&O tax credits for property taxes.1331
7.218 The European Communities submits that the benefit to Boeing's LCA division of the sales
and use tax exemption for computer hardware, peripherals and software over the period 2004-2024 is
$120.3 million. 1332 The European Communities bases this estimate on the Washington State
September 2003 presentation, which estimates the amount of the tax exemption to Boeing by
assuming that Boeing will receive 80 per cent of the am ount of the tax exemption that is provided to

1324 European Communities' response to question 229, para. 427.
1325 European Communities' response to question 229, para. 430.
1326 European Communities' response to question 229, para. 430.
1327 European Communities' response to question 229, para. 434. In response to this question, the
European Communities recalcula tes the per-aircraft subsidization rates based upon ad valorem subsidization
rates that it attributes to the Washington B&O tax reduction and to the City of Everett B&O tax reduction.
1328 European Communities' first written submission, para. 131.
1329 European Communities' second written submission, para. 68 and footnotes 102 and 103.
1330 European Communities' second written submission, para. 68 and footnotes 102 and 103.
1331 European Communities' second written submission, para. 68 and footnotes 102 and 103.
1332 European Communities' second written submission, para. 76.

BCI deleted, as indicated [***]

the industry as a whole. 1333 The European Communities argues that this estimate is consistent with
that in the spreadsheet prepared by the Washington State Department of Revenue. 1334 T h e
European Communities argues that insofar as the United States suggests that it is over-counting the
benefit of the tax exemptions to Boeing's LCA di vision, it has already re duced the estimates in the
Washington State September 2003 presentation to ta ke into account tax exemptions going to
suppliers.1335 The United States' argument that the figures should be further reduced because of use of
the tax exemptions by other companies is "entirely unsupported".1336
7.219 In relation to the sales and use tax exemption for construction and equipment, the European
Communities estimates that the benefit to Bo eing's LCA division over the period 2004-2005 is
$9.6 million and that beyond this period the amount received by Boeing is zero. The European
Communities draws these figures from the Washington State September 2003 presentation. The
European Communities' response to the argument of the United States that Boeing has not and will
not use this subsidy are outlined in the section on existence of a financial contribution commencing at
paragraph 7.76 of this Report.
7.220 The European Communities' quantification of the Washington leasehold excise tax exemption
and the property tax exemption can be found in Exhibit EC-27 an d is based on the Washington State
September 2003 presentation. 1337 In this exhibit, the European Communities submits that the benefit
to Boeing of the leasehold excise tax exemption is $0.6 million from 2004-2024, while the benefit to
Boeing of the property tax exemption over the same period is $45.5 million. In response to the
United States' argument that Boeing has not and will not use these tax exemptions, the European
Communities relies upon the same submissions as outlined in the section on the existence of a
financial contribution, commencing at paragraph 7.76 of this Report.
Amount of the benefit claimed to "pass-through" to Boeing
7.221 In addition to arguing that Boeing directly recei ves the benefit of the Washington State B&O
tax reduction, the European Communities also conte nds that the benefit of the Washington B&O tax
reductions to manufacturers of components for co mmercial airplanes "passes-through" to Boeing.
1338
In particular, the European Communities contends th at of the $1.15 billion in B&O tax reductions to
component manufacturers, $1.05 billion passes-thr ough to Boeing. The European Communities does
not argue that the full amount of the tax reduction to Boeing's suppliers passes-through to Boeing
because it attempts to exclude benefits to manufacturers that supply both Boeing and Airbus.
1339
7.222 The European Communities states that in or der for it to make a successful claim under
Articles 5 and 6 of the SCM Agreement, it must dem onstrate that the benefit associated with the tax
reduction provided to component manuf acturers "passes-through" to Boeing. 1340 T h e
European Communities reasons that a claim under Ar ticles 5 or 6 of the SCM Agreement requires a
causation analysis, namely a demonstration that th e subsidy is responsible for the adverse effects
claimed. To perform this analysis, a prerequisite is that the alleged subsidy does in fact benefit the
product that the complaining Member identifies as subsidized. 1341 Therefore, it is necessary for the

1333 European Communities' second written submission, para. 76, footnote 119.
1334 European Communities' second written submission, para. 76, footnote 119.
1335 European Communities' second written submission, para. 78.
1336 European Communities' second written submission, para. 78.
1337 See footnote to the spreadsheet at State and Local Subsidies to Boeing LCA Division, Exhibit EC-
27.
1338 European Communities' first written submission, paras. 133 and 135.
1339 European Communities' response to question 234, para. 437.
1340 European Communities' response to question 137, paras. 147 and 152.
1341 European Communities' response to question 137, para. 148.

BCI deleted, as indicated [***]

European Communities to prove that the tax re duction to component manufacturers benefits the
downstream product, Boeing LCA.1342
7.223 In support of this position, the European Commun ities refers to the Appellate Body's decision
in US – Upland Cotton, which it interprets as holding that a lthough a pass-through analysis is not
critical for the purposes of quantifying a subsidy un der Article 6, it is always necessary to conduct a
pass-through analysis under Articles 5 and 6 to demons trate that the measures in question do in fact
subsidize the product in issue and not some other product. 1343 The European Communities also cites
the Appellate Body's decision in US – Softwood Lumber IV as authority for the notion that in order to
satisfy the definition of a subsidy under Article 1 of the SCM Agreement, it must be established that
benefits to an upstream producer pass-through to the downstream product alleged to be subsidized.1344
Although not entirely clear, it does not seem that the latter argument based on US – Softwood
Lumber IV constitutes a distinct basis for the requirem ent to establish pass-through. Rather, the
European Communities appears to argue that as part of the causation analysis it is necessary to
demonstrate that the product allegedly causing the adverse effects is in fact subsidized. To do this, the
essential elements of the subsidy definition in Arti cle 1 must be present in respect of the products
claimed to be causing the serious prejudice.1345
7.224 The European Communities submits that it has proven that component manufacturers pass-
through to Boeing the benefit of the B&O tax reduction in the form of lower input prices. Its case is
based on the best information available, in view of the refusal by the United States to provide the
supply contracts between Boeing an d its Washington-based suppliers. 1346 To demonstrate pass-
through, the European Communities submits an economic model prepared by Assistant Professor
John Asker and supplemented by a report by Professor Wachtel. 1347 In response to the reports of the
United States' economists and to the questions of th e Panel, Professor Asker submits three additional
papers.1348
7.225 Based on his model, Professor Asker reaches the conclusion that an ad valorem subsidy paid
to an input supplier passes-through to the downstream pr oducer at the rate of at least 100 per cent. In
creating the model, Professor Asker makes a number of assumptions, including that the downstream
firm is a monopsonist, although the model also accommodates an oligopolistic structure. The
suppliers to the downstream firm also have some limited market power arising from an information
asymmetry about their fixed costs of production ("an in formation rent"). The suppliers have the same
marginal cost and each receive the same ad valorem subsidy. The downstream purchaser of inputs
invites suppliers to compete for supply contract s in a competitive tendering process and chooses the

1342 European Communities' response to question 137.
1343 European Communities' response to question 137, para. 149. Appellate Body Report, US – Upland
Cotton, para. 472.
1344 European Communities' response to questi on 137, para. 151. Appellate Body Report, US –
Softwood Lumber IV, para. 143.
1345 European Communities' response to question 137, para. 151.
1346 European Communities' second written submission, para. 58 and European Communities'
comments on United States' response to question 231, para. 305.
1347 Dr. Paul Wachtel, Economic Analysis: Subsidy Pa ss-Through and Asset Pricing Issues Relevant to
Subsidies to U.S. LCA Industry, December 2006, including Dr. John Asker, On the Pass-Through of
Ad Valorem Subsidies Received by Input Suppliers, 1 No vember 2006, Exhibit EC-16. The exhibit indicates
that Wachtel is a Professor of Economics at New York University, Leonard N. Stern School of Business and
that Asker is Assistant Professor of Economics at New York University, Leonard N. Stern School of Business.
1348 Dr. John Asker, Reply to Report of Dr. Gary Dorman and to Related Aspects of Report of
Drs. Stephen D. Smith & Lorrie Brown, October 2007 , Exhibit EC-1174, Dr. John Asker, Responses to
Questions 384, 385, 393 and 394 from the DS353 Panel, 28 July 2009, Exhibit EC-1437 and Dr. John Asker,
Comments on US Response to Panel Question 393(a), and on Related Aspects of Exhibit US-1363,
14 August 2009, Exhibit EC-1447.

BCI deleted, as indicated [***]

supplier that quotes the lowest price. The leve l of pass-through decreases as the number of input
suppliers increase. However, the model always pr edicts that the minimum level of pass-through
is 100 per cent.1349
7.226 Professor Wachtel's report provides some eviden ce that the market for the supply of LCA
components fits the assumptions of the model. For instance, Professor Wachtel provides a quote from
Thomas Friedman indicating that Boeing purchases "off-the-shelf commodity parts" by a process of
competitive tender.1350
7.227 In response to the criticism of the United States' economists that the assumptions underlying
the economic model do not reflect the reality of the market for LCA components, Professor Asker
responds that some of the points raised by the Un ited States' economists are not well-founded and that
his framework can easily accommodate their other points.
1351 Professor Asker concludes that "none
of the critiques…are problematic, for either the fr amework itself, or for its application to the
commercial airplane business".1352 However, in his response, Professor Asker acknowledges that in at
least one circumstance, namely when only a subset of suppliers is eligible fo r the subsidy, he cannot
rule out less than 100 per cent pass-through.1353
7.228 In response to a Panel question, Professor Aske r indicates that, in the absence of empirical
data, it is not possible to narrow down the range of pass-through to anything other than "somewhat
greater than 100%". He notes that in empirical studies of other industries, "pass-through of greater
than 100% is common".
1354
7.229 The European Communities contends that the United States' criticism of its pass-though
model hinges on the point that Boeing is not the sole buyer of outputs produced by its suppliers. 1355
The European Communities' economist concludes that this makes a difference to his economic model
only under very limited circumstances and the United States has failed to demonstrate that these
circumstances exist.
1356
7.230 In response to a Panel question regarding a ma rket structure in which each supplier acts as a
monopolist, the European Communities rejects any suggestion that this market structure is appropriate
in the context of the LCA supplier market. 1357 The European Communities submits a statement from

1349 See Dr. Paul Wachtel, Economic Analysis: Subsidy Pass-Through and Asset Pricing Issues
Relevant to Subsidies to U.S. LCA Industry, December 2006, including Dr. John Asker, On the Pass-Through of
Ad Valorem Subsidies Received by Input Suppliers, 1 No vember 2006, Exhibit EC-16 for a description of the
assumptions on which the model is based.
1350 Dr. Paul Wachtel, Economic Analysis: Subsidy Pa ss-Through and Asset Pricing Issues Relevant to
Subsidies to U.S. LCA Industry, December 2006, including Dr. John Asker, On the Pass-Through of
Ad Valorem Subsidies Received by Input Suppliers, 1 Novemb er 2006, Exhibit EC -16, p. 3. In relation to this
point, the European Communities also refers to a statement from the Boeing website that "our company
emphasizes the importance of competitive bidding as a good business practice" (Dr. John Asker, Responses to
Questions 384, 385, 393 and 394 from the DS353 Panel, 28 July 2009, Exhibit EC-1437).
1351 Dr. John Asker, Reply to Report of Dr. Gary Dorman and to Related Aspects of Report of
Drs. Stephen D. Smith & Lorrie Brown, October 2007, Exhibit EC-1174, p. 2.
1352 European Communities' second written submission, para. 59.
1353 See also, Dr. John Asker, Responses to Questions 384, 385, 393 and 394 from the DS353 Panel,
28 July 2009, Exhibit EC-1437, p. 16.
1354 Dr. John Asker, Reply to Report of Dr. Gary Dorman and to Related Aspects of Report of
Drs. Stephen D. Smith & Lorrie Brown, October 2007, Exhibit EC-1174, pp. 20-21.
1355 European Communities' second written submission, para. 60.
1356 European Communities' second written submission, para. 60.
1357 European Communities' response to question 393, para. 547.

BCI deleted, as indicated [***]

an Airbus procurement specialist which indicates th at the existence of only one supplier willing and
able to supply a given component in the LCA market is "extremely unusual".1358
7.231 In addition to the economic model, the Europ ean Communities also refers to a number of
statements made by Governor Locke of Wash ington, which it argues acknowledge pass-through of
B&O tax rate reductions from component producers to Boeing. 1359 For instance, Governor Locke
stated "if we can reduce the tax burden on the suppliers, those benefits will be passed on to
Boeing".1360
7.232 Throughout its submissions, the European Communiti es repeatedly refers to the failure by the
United States to provide it with the contracts be tween Boeing and its suppliers. Further, it is
hypocritical for the United States to argue that it is impossible accurately to assess pass-through
without empirical data, when such data is solely in the possession of the United States. 1361 T h e
United States could have provided this informa tion to the European Communities or to its own
experts to allow such an empirical analysis to be conducted.1362
Arguments of the United States
Amounts received directly by Boeing's LCA division
7.233 In relation to each of the taxation measure s in issue under HB 2294, the United States'
position is that only revenue that has actually been foregone in the past may be included in the
quantification.1363
7.234 With respect to the Washington B&O tax reduction, the United States argues that it is not in
fact necessary to attribute a dollar value to th e amount of the tax reduction to Boeing. The tax
reduction is calculated on an ad valorem basis and therefore, any subsid ization rate remains constant
regardless of the absolute levels of Boeing's sales volume and prices. 1364 In response to the European
Communities' calculation of a dollar value for the su bsidy, the United States originally relies upon the
spreadsheet prepared by the Washington Stat e Department of Revenue to argue that the total revenue
foregone due to the B&O tax reduction was $54.4 million between 1 October 2005 and the end of
the 2007 financial year.1365 In response to a Panel question, given that the spreadsheet prepared by the
State Department of Revenue does not isolate th e amount of the tax reduction to be received by
Boeing, but rather provides a figure that estimates the benefit to the industry as a whole, the United
States submits that the Panel should rely upon the Washington State September 2003 presentation.1366
7.235 The United States' argues that the European Communities overstates the amount of the
financial contribution to Boeing arising from the Washington B&O tax credits. This is because the
European Communities' estimates include tax credits provided to other entities.1367 Despite taking this
position, the United States indicates that it "accepts th e EC's use of Washington State's estimate that

1358 European Communities' response to question 39 3, para. 547 and Declar ation of Philippe Alary-
Tossaint regarding competition among Airbus suppliers, 22 July 2009, Exhibit EC-1438.
1359 See e.g. European Communities' first written submission paras. 96, 135 and
European Communities' second written submission, para. 57.
1360 European Communities' non-confidential oral stat ement at the second meeting with the Panel,
1361 European Communities' comments on United States' response to question 393, para. 455.
1362 European Communities' comments on United States' response to question 393, para. 455.
1363 See e.g. United States' first written submission, para. 466.
1364 United States' response to question 229, para. 374.
1365 United States' first written submission, para. 466.
1366 United States' response to question 228, para. 371.
1367 United States' response to question 235, para. 392.

BCI deleted, as indicated [***]

65 per cent of the value of the B&O tax credit for preproduction development is provided to
Boeing…Similarly, the United States accepts the estim ate from Washington State that 100 per cent of
the value of the B&O tax credit for computer software and hardware is provided to Boeing. Finally,
the United States accepts the EC's estimate that 100 pe r cent of the B&O tax credits for property taxes
is provided to Boeing". 1368 Similarly, in response to a Panel question, the United States categorically
affirms that it "accepts the EC's estimate of the amount of B&O tax credits for preproduction
development, property taxes, and computer software and hardware that were taken by Boeing".1369
7.236 The United States relies on the estimates found in the Washington State Department of
Revenue spreadsheet in quantifying the amount of the sales and use tax exemption for computer
hardware, peripherals and software. 1370 This leads to an estimate of $11.5 million for the total
amount of revenue foregone in relation to this tax exemption. 1371 However, only a portion of this
represents the benefit received by Boeing because other manufacturers of airplanes and airplane
components have also received the tax exemption.
1372 The United States is prepared to accept the
European Communities' estimate that 80 per cent of th e total amount of the exemption is received by
Boeing.1373
7.237 The United States' position is that the sales and use tax exemption for construction and
equipment, the leasehold excise tax exemption and the property tax exemption have not and will not
be used by Boeing. Therefore, any quantifica tion of the amount of these tax incentives to Boeing
should be zero. 1374 The evidence and arguments that the United States relies upon in support of its
position that the subsidies have not and will not be used by Boeing are outlined in the section on the
existence of a financial contribution, commencing at paragraph 7.100 of this Report.
Amount of the benefit claimed to "pass-through" to Boeing
7.238 In relation to the European Communities' pass-through case, the United States' position on the
relevance of a pass-through analysis in the contex t of a claim under Articles 5 and 6 is in general
agreement with that of the European Communities.1375 However, at various stages of its submissions,
the United States seems to assert differing bases in th e SCM Agreement for a requirement to conduct
a pass-through analysis in the context of a serious prejudice case.
7.239 In its first written submission, the United States argues that pass-through must be
demonstrated in this case in order to prove the existence of the subsidy:
"{I}f the recipient of a subsidy is different from and unrelated to the producer of the
allegedly subsidized product, a subsidy exists only if the benefit is passed through to
the producer." 1376
7.240 The United States relies on US – Softwood Lumber IV as support for this proposition. It
acknowledges that although the case was a decision regarding Part V of the SCM Agreement, the
decision applies equally to a claim under Part III because the Appellate Body "grounded its
conclusion exclusively in Article 1, which is equa lly applicable to an actionable subsidy claim". 1377

1368 United States' response to question 235, para. 392.
1369 United States' response to question 236, para. 393.
1370 United States' first written submission, para. 499.
1371 United States' first written submission, para. 499.
1372 United States' first written submission, para. 499.
1373 United States' response to questions 237 and 238, paras. 394 and 395.
1374 United States' responses to question 239.
1375 United States' comments on European Communities' response to question 137, para. 127.
1376 United States' first written submission, para. 54.
1377 United States' first written submission, para. 55.

BCI deleted, as indicated [***]

Therefore, in its first written submission, the United States appears to suggest that the requirement to
demonstrate pass-through in a serious prejudice claim is found exclusively in Article 1 of the
SCM Agreement.
 1378
7.241 In its response to question 137, the United St ates argues that pass-through is required on a
different basis to that asserted in its first written su bmission. It argues that when the recipient of a
subsidy is a third party unrelated to the producer of the allegedly subsidized product, it is necessary to
demonstrate pass-through in order to show that the subsidy confers a benefit on the allegedly
subsidized product and leads to the adverse effects claimed.1379 In this regard, the United States refers
to the use of the terms "like product" and "subsidi zed product" in Article 6.3 of the SCM Agreement
as supporting the requirement for a pass-through analysis.1380
7.242 The United States contends that the European Communities has not proven pass-through of
the benefit of the subsidies. According to the United States, the reports prepared by Professors
Wachtel and Asker and relied upon by the Europ ean Communities are entirely theoretical and are
based upon assumptions that do not reflect the re alities of the aerospace manufacturing market.
Further, the models are not supported by empirical testing. 1381 The United States argues that if the
conclusion of the European Communities' reports were accurate, namely that ad valorem subsidies to
upstream suppliers pass-through to downstream producer s at the rate of at least 100 per cent, there
would never be any need to prove pass-through of a subsidy between suppliers and manufacturers, at
least for ad valorem subsidies.1382
7.243 The United States relies on reports by its own e xperts, Drs Dorman, Terris, Smith and Brown,
to discredit the reports by Professors Wachtel and Asker. 1383 Dr Dorman criticizes the European
Communities' model as "entirely theoretical" and c ontaining no reference to Boeing, the large
commercial airplane business, the aerospace indus try generally or any real-world supplier
relationships.1384 According to Dr Dorman, the assumptions underlying the model "differ
dramatically from the reality of aerospace procurement". 1385 For example, Dr. Dorman criticizes the
assumptions that Boeing is a monopsonist with respec t to every input it purchases, that price is the
sole consideration in Boeing's choice of supplier, that input suppliers have an equal and constant
marginal cost of production, that the only source of market power for suppliers is asymmetric
information and that all bidders receive the same subsidy. 1386 According to Dr. Dorman, these
assumptions do not reflect the realities of the market for the supply of LCA components. As a result

1378 United States' first written submission, para. 55.
1379 United States' response to question 137, para. 105 and United States' comments on
European Communities' response to question 137, para. 127.
1380 United States' response to question 137, footnote 111.
1381 United States' first written submission, paras. 469-481.
1382 United States' comments on European Communities' response to question 234, para. 422.
1383 See Economic Analysis of the European Communities' Assertion Regarding Pass-Through Taxes in
the Washington State Aerospace Market, by Drs. Stephen D. Smith, PhD., and Louie Brown, Exhibit US-185;
Reply to the Reports of Professors Wachtel and Asker, by Gary J. Dorman Exhibit US-186 and Gary J. Dorman
and Kristin L. Terris, Economic M odels and Subsidy Pass-Through, July 30, 2009, Exhibit US-1363. The
exhibits reveal that Drs. Smith an d Brown are economists employed full- time by the State of Washington
Department of Revenue to provide "objective, scholarly analysis of the economic effects of proposed and
enacted tax legislation". They received no additional compensation for their report. Dr. Dorman is Senior Vice
President and Chair of NERA's (National Economic Re search Associates Inc., Ec onomic Consulting) Global
Antitrust Practice.
1384 Dorman, Exhibit US-186, p. 1.
1385 Dorman, Exhibit US-186, p. 1.
1386 Dorman, Exhibit US-186, pp. 2-5.

BCI deleted, as indicated [***]

of this, Dr. Dorman concludes that Professor Aske r's model does not establis h that any Washington
State tax savings are passed-through to Boeing from its suppliers.1387
7.244 Drs. Smith and Brown also submit a report in response to Professor Asker's model. They
criticize the lack of empirical evidence and argue that the model bears little resemblance to the
realities of the aerospace sector. 1388 Drs Smith and Brown argue that the evidence relied upon by the
European Communities regarding the structure of th e LCA component market is inaccurate due to the
use of selective quotes. 1389 According to Drs Smith and Brown, the market would have been better
modeled as a bilateral monopoly, where the outcome regarding pass-through is "indeterminate with a
vengeance".1390
7.245 In response to a Panel question, Drs Dorman and Terris insist that the level of pass-through of
a subsidy is "highly sensitive to the choice of a pass-through model" and th e model itself is sensitive
to the assumptions underlying it. 1391 They suggest that establishing the degree of pass-through is a
fact-specific enquiry that cannot be resolved by th eoretical modeling. According to Drs Dorman and
Terris, on the basis of existing economic knowledge and evidence, choosing any range narrower than
zero to 100 per cent would be arbitrary.1392
7.246 The United States notes that the European Communities' expert, Professor Asker, has
conceded that he cannot rule out the possibility that pass-through may be less than 100 per cent in
certain circumstances. 1393 Given that the European Communities is attempting to prove that pass-
through is at least 100 per cent, the admission by Pr ofessor Asker that this may not be so means that
the European Communities has not met its burden of proof. In accepting that pass-through may be
less than 100 per cent, the European Communities is acknowledging that it may be anywhere between
zero and 100 per cent and therefore it has failed to prove that pass-through is greater than zero. 1394
Further, the United States contends that there is no basis on which the Panel can estimate the range of
pass-through as anything more narrow than zero to 100 per cent.1395
7.247 The United States' position is that determining the rate of pass-through between a supplier and
its downstream customer in any specific case "requires a complex analysis", taking into account a
range of factors including competitive structur e, demand and supply characteristics and cost
structure.1396 According to the United States, "it is not enough to apply economic models based on
hypothetical assumptions about the market that are not supported by the facts".1397 Rather, a "rigorous
analysis of the facts and an explanation as to how they translate into the parameters of an economic

1387 Dorman, Exhibit US-186, p. 7.
1388 Economic Analysis of the European Communities' Assertion Regarding Pass-Through Taxes in the
Washington State Aerospace Market, Exhibit US-185, p. 1.
1389 Economic Analysis of the European Communities' Assertion Regarding Pass-Through Taxes in the
Washington State Aerospace Market, Exhibit US-185, pp. 4-5 .
1390 Economic Analysis of the European Communities' Assertion Regarding Pass-Through Taxes in the
Washington State Aerospace Market, Exhibit US-185, p. 8.
1391 Gary J. Dorman and Kristin L. Terris, Economic Models and Subsidy Pass-Through, 30 July 2009,
Exhibit US-1363, p. 3.
1392 Gary J. Dorman and Kristin L. Terris, Economic Models and Subsidy Pass-Through, 30 July 2009,
Exhibit US-1363, p. 8.
1393 United States' comments on European Communities' response to questions 384 and 385, paras. 363
and 365.
1394 United States' comments on European Communities' response to questions 384 and 393, paras. 364
and 372.
1395 United States' response to question 394, para. 327.
1396 United States' comments on European Communities' response to question 384, para. 356.
1397 United States' comments on European Communities' response to question 384, para. 356.

BCI deleted, as indicated [***]

analysis" is required. 1398 Further, "actual empirical work is needed to determine how the aerospace
supplier markets fit into any of the theoretical models". 1399 The United States argues that it is not
appropriate to draw conclusions in relation to th e facts of this case from empirical studies that have
been conducted in relation to other industries unrelated to the aerospace supplier market.1400
7.248 Although one of the expert reports adduced by the United States suggests that a "bilateral
monopoly" may be an appropriate model in the aer ospace supplier market, in response to a Panel
question the United States rejects any suggestion that a "monopoly supplier" model may be
appropriate.
1401 Rather, large civil aircraft markets are more likely to be characterized by
differentiated oligopolies. The economic literature shows that pass-through in differential oligopoly
markets is variable and a detailed empirical review is required to analyze the question.1402
7.249 The United States also discredits any re liance by the European Communities on the
statements made by Governor Locke. The Unite d States contends that in the quoted statements,
Governor Locke was not addressing the pass-through question. Even if he was doing so, he was in no
position to make such an evaluation because it is a complex economic and factual question.1403
7.250 The United States notes that the European Communities does not contend that the full amount
of the tax reduction to Boeing's suppliers passes- through to Boeing because it attempts to exclude
benefits to manufacturers that supply both Boeing and Airbus. The United States argues that the
European Communities should also exclude benefits to component manufacturers that supply Boeing
and other companies apart from Airbus. 1404 Further, the European Communities does not exclude
from its calculation companies that are component manufacturers in the aerospace industry in
Washington but that do not supply Boeing or Airbus at all.
1405
7.251 Finally, in response to the European Communitie s' argument that the United States failed to
provide it with the relevant data for the purposes of an empirical analysis of pass-through, the United
States responds that the data would have been as ea sily available to the Eu ropean Communities as to
the United States, either through Airbus or through its own independent market research. The United
States argues that Airbus operates in the same supplier markets as Boeing, including in the
Washington State market.1406
Evaluation by the Panel
Amounts received directly by Boeing's LCA division
7.252 In quantifying the amount of the subsidies in i ssue in this dispute, the European Communities
calculates the amounts for many of the taxation measures up until 2024. Our purpose in reaching a
conclusion regarding the amounts of the subsidies is to assess the European Communities' serious
prejudice case. As indicated at paragraphs 7.1676-7.1679 of this Report, we analyze the European
Communities serious prejudice claim over the period 2004-2006. Further, we assess the effects of the
subsidies in the year they are received. In particul ar, we do not evaluate the effects of subsidies prior
to their receipt, as the European Communities woul d have the Panel do in relation to the recurring

1398 United States' comments on European Communities' response to question 384, para. 356.
1399 United States' comments on European Communities' response to question 384, para. 358.
1400 United States' comments on European Communities' response to question 384, para, 361.
1401 United States' response to question 393, para. 322.
1402 United States' response to question 393, para. 322.
1403 United States' response to question 231, paras. 380, 381.
1404 United States' comments on European Communities' response to question 234, para. 427.
1405 United States' first written submission, para. 467.
1406 United States' comments on European Communities' response to question 393, para. 380.

BCI deleted, as indicated [***]

subsidies that reduce marginal unit cost. 1407 Therefore, only the amounts of the taxation subsidies
received up until 2006 play a part in our analysis of the European Communities' present serious
prejudice case. Consequently, for the purposes of ou r present serious prejudice analysis, there is no
need for us to quantify the amounts of subsidies ex pected to be received post-2006. Further, as
explained at paragraphs 7.1851-7.1853 of this Report, the Panel exercises judicial economy in relation
to that aspect of the European Communities' serious prejudice case based on threat. Therefore, there
is no need for us to quantify post-2006 amounts fo r the purposes of a threat of serious prejudice
analysis.
7.253 In relation to the Washington B&O tax reduction, given that it is calculated on an ad valorem
basis, the subsidization rate on a per-aircraft b asis remains constant irrespective of the sales and
deliveries that take place in the relevant period. From 1 October 2005 until 30 June 2007, the B&O
tax reduction in relation to manufact uring is equal to 0.06 per cent of gross proceeds of sale and from
30 June 2007 onwards is equal to 0. 19 per cent of gross proceeds of sale. 1408 Therefore, the
subsidization rate up until 2006 is 0.06 per cent of the gross proceeds of sale of each aircraft.1409
7.254 With respect to the dollar value of the benefit of the Washington B&O tax reduction to
Boeing's LCA division, the parties agree that it is appropriate to base this estimate on the Washington
State September 2003 presentation (reflected in the Eu ropean Communities' calculations in Exhibit
EC-21).1410 The other possible source of information before the Panel for quantifying the amount of
the tax reduction is the spreadsheet prepared by the Washington Department of Revenue. 1411 T h e
spreadsheet estimates the benefit of the tax reduction to the entire industry, rather than only to Boeing.
However, applying the estimate of the proportion of the benefit that will accrue to Boeing's LCA
division that is found in the Washington Stat e September 2003 presentation, namely 65 per cent,
yields the identical amounts across the two exhibits . For these reasons, the Panel estimates that the
amount of the B&O tax reduction received direct ly by Boeing's LCA division through 2006 is
$13.8 million.
7.255 In relation to the Washington B&O tax credits, in our view, the European Communities'
estimates are based on the best information availabl e. The spreadsheet prepared by the Washington
State Department of Revenue is the most recent es timate before the Panel of the amount of the tax

1407 See paras. 7.155-7.157 and 7.1812-7.1813 of this Report.
1408 Although the B&O tax rate is reduced in relation to wholesale and retail sales as well as
manufacturing activities, the European Communities ack nowledges that if a business engages in both
manufacturing and sales activities in the State of Washington, the business owes separate B&O taxes with
respect to each activity but that a credit is allowed for multiple activities to prevent double taxation. The
Washington Administrative Code provides that for products that are both manufactured and sold in Washington,
"the payment of the manufacturing tax reported may be credited against the selling tax (i.e. the wholesaling
and/or retailing B&O tax) reported". European Communities' first written submission, para. 104 and
footnote 148. Therefore, if Boeing sells its aircraft in the State of Washington, the B&O taxes paid on its
manufacturing activities will be credited against the B&O taxes paid on its sales. Therefore, in practice Boeing
is required only to pay the B&O tax on its manufactur ing activities and the tax reduction in relation to sales
activities does not need to be quantified when assessing the value of the Washington B&O tax reduction to
Boeing. This is consistent with the way in which th e European Communities calculates the subsidization rate
for the Washington B&O tax reduction. See Washington State and City of Everett B&O Tax Rate Reduction
Subsidy Magnitudes Recalculated Based on Ad Valorem Rate Reductions, ITR, 26 March 2008, Exhibit EC-
1385.
1409 As indicated at para. 7.300, we conclude that the European Communities has not made out its
"pass-through" case. Therefore, "pass-through" of the benefit of the tax reduction from component suppliers to
Boeing does not alter the ad valorem subsidization rate.
1410 Washington State and the Boeing Company: Working Together for the Boeing 7E7 Dreamliner,
Continuing Support and Collaborative Actions, September Presentation, Greenville, SC, Exhibit EC-65.
1411 Washington State Department of Revenue Final HB 2294 Fiscal Note - 20-Year Spreadsheet,
Exhibit US-184.

BCI deleted, as indicated [***]

incentives under HB 2294. 1412 Given that the parties agree, and th at it is the best information before
us, we also consider it appropriate to rely upon the estimates in the Washington State September 2003
presentation for the percentage of each tax credit that is received by Boeing's LCA division relative to
the aerospace industry as a whole. 1413 Although the United States argues that the quantification
method used by the European Communities includes B&O tax credits to entities other than Boeing,
this in fact is not the case. In calculating the amounts of the B&O tax credits to Boeing's LCA
division, the European Communities attributes only the proportion of the tax credit that the
Washington State September 2003 presentation es timates is received by Boeing's LCA division.
1414
The United States accepts that use of these proportions is appropriate.1415
7.256 In relation to the B&O tax credit for computer software and hardware, although the parties
agree that Boeing received 100 per cent of the tax credit as estimated in the Department of Revenue
spreadsheet, this results in an estimate that Boeing's LCA division received $20.4 million as a result
of this credit. However, section 8 of HB 2294, un der which the tax credit for computer software and
hardware is authorized, provides that "total life time credit taken under this section by any one person
may not exceed twenty million dollars". Therefore, on the basis of this, we conclude that $20 million
is the maximum amount of B&O tax credit for comp uter software and hardware that Boeing's LCA
division could have received. This subsidy was received by Boeing's LCA division during 2004-
2005.
7.257 For these reasons, the Panel estimates that the amount of the B&O tax credit for
preproduction development received by Boeing's LCA division through 2006, is $21.3 million 1416, the
amount of the B&O tax credit for computer softwa re and hardware is $20 million and the amount of
the B&O tax credit for property taxes received by Boeing's LCA division through 2006 is
$1.1 million.1417
7.258 In relation to the sales and use tax exemption for computer hardware, peripherals and
software, the European Communities relies on estimates derived from the Washington State
September 2003 presentation and set out in Exhibit EC-27. 1418 The estimates of the subsidy to
Boeing's LCA division were calculated as 80 per cent of the amount of the subsidy provided to all
entities. These amounts are close to id entical to the estimates in the Washington State Department of
Revenue spreadsheet. The amounts through 2006 c onsistently differ between the spreadsheets by
$0.1 million each year. 1419 The fact that the estimates are al most identical suggests that the amounts
in the Washington State Department of Revenue have already been adjusted to exclude entities other
than Boeing. However, this is not clear from the Department of Revenue's spreadsheet. Further, in its

1412 Washington State Department of Revenue Final HB 2294 Fiscal Note - 20-Year Spreadsheet,
Exhibit US-184.
1413 Washington State and the Boeing Company: Wo rking Together for the Boeing 7E7 Dreamliner,
Continuing Support and Collaborative Actions, September Presentation, Greenville, SC, Exhibit EC-65.
1414 See European Communities' second written submission, footnote 103.
1415 United States' response to question 235, para. 392.
1416 This is calculated by multiplying the value of the "R&D credit for aerospace design" received up to
and including 2006, as estimated in Washington State Department of Revenue Final HB 2294 Fiscal Note - 20-
Year Spreadsheet, Exhibit US-184 (i.e. $32.7 million), by 65 per cent.
1417 This is calculated by adding the estimates reported in Washington State Department of Revenue
Final HB 2294 Fiscal Note - 20-Year Spreadsheet, Exhibit US-184 for FY 2005 and FY 2006 for the "B&O
credit for state and local property taxes paid on new construction related to the 7E7 plane".
1418 See Washington State and the Boeing Compan y: Working Together for the Boeing 7E7
Dreamliner, Continuing Support and Collaborative Actions , September Presentation, Greenville, SC, Exhibit
EC-65 and State and Local Subsidies to Boeing LCA Division, Exhibit EC-27.
1419 Compare State and Local Subsidies to Boeing LCA Division, Exhibit EC-27 and Washington State
Department of Revenue Final HB 2294 Fiscal Note - 20-Year Spreadsheet, Exhibit US-184.

BCI deleted, as indicated [***]

submissions, the United States seems to contest that this is the case. 1420 Given that there is some
uncertainty regarding whether the estimates of the sales and use tax exemption for computer
hardware, peripherals and software in the Depart ment of Revenue spreadsheet include or exclude
entities other than Boeing, it is most appropriate to rely on the estimates in the Washington State
September 2003 presentation. Using this source, the Panel estimates that the amount of the sales and
use tax exemption for computer hardware, software and peripherals to Boeing's LCA division through
2006 is $8.3 million.
1421
7.259 With respect to the sales and use tax exemption for c onstruction services and equipment, the
leasehold excise tax exemption and the property tax exemption we have concluded at paragraph 7.151
that Boeing has never claimed these tax exemptions. Therefore, there is no subsidy to Boeing to be
quantified.
Amount of the benefit "passed-through" to Boeing
The basis for a "pass-through" analysis under the SCM Agreement
7.260 In determining whether it is necessary to perfo rm a pass-through analysis and, if so, under
which provisions of the SCM Agreement this arises, it is useful to consider adopted panel and
Appellate Body reports in which pass-through has been considered. Our review indicates that the
issue has arisen in the context of countervailing duty, serious prejudice and prohibited subsidy cases.
Countervailing duty cases
7.261 Although the dispute between the European Communities and the United States does not arise
under Part V of the SCM Agreement, it is useful to provide an overview of the cases involving an
analysis of pass-through in the countervailing duty context. This is because some of the cases address
the relevance of Article 1 of the SCM Agreement in the context of pass-through, which is an issue
raised by the parties to this dispute. Further, th e reasoning used by the Appellate Body and panels in
finding a requirement to demonstrate pass-through under Part V of the SCM Agreement, may shed
some light on whether there is also such a requirement under Parts II and III.
7.262 An analysis of the requirement to demons trate pass-through in countervailing duty cases was
conducted in US – Canadian Pork, a case arising under GATT 1947.
1422 The United States imposed
countervailing duties upon pork from Canada, designed to offset subsidies provided by the Canadian
Government to producers of live swine. The Unite d States deemed that 100 per cent of the subsidies
to swine producers had passed-through to pork produ cers, in circumstances where swine and pork
production were separate industries composed of unrelated firms.1423
7.263 The panel found that a countervailing duty may be imposed on a product only if a subsidy has
been bestowed upon that particular product. This conclusion was based on Article VI:3 GATT, which
provides:
"No countervailing duty shall be levied on any product … in excess of an amount
equal to the estimated…subsidy determined to have been granted, directly or
indirectly, on the…production…of such product."

1420 United States' first written submission, para. 499 and United States' response to question 237,
para. 394.
1421 This is calculated by adding the estimates for FY 2004, FY 2005 and FY 2006.
1422 US – Countervailing Duties on Pork, DS7/R, BISD 38S/30.
1423 US – Countervailing Duties on Pork, DS7/R, BISD 38S/30, para. 2.8. See also, analysis of the case
in Panel Report, Mexico – Olive Oil, para. 7.131.

BCI deleted, as indicated [***]

7.264 The panel noted that the countervailing duty must be limited to the subsidy granted on the
production of "such product". Therefore, the United States could impose a countervailing duty on
pork only to the extent the subsidy had been dete rmined to have been bestowed on its production,
namely, only to the extent the subsidy to swine producers had passed-through to pork producers.1424
7.265 The issue of pass-through under the SCM Agreement, in a countervailing duty context, arose
in US – Softwood Lumber IV. 1425 The Appellate Body upheld the panel's conclusion that a pass-
through analysis was required in circumstances where the United States imposed countervailing duties
on imports of softwood lumber, in response to subs idies provided by the Canadian Government to
producers of inputs used in the production of such lumber. However, the Appellate Body found that
no pass-through analysis was required where the producer of the inputs was related to the producer of
the imported product subject to the countervailing duty.1426
7.266 The Appellate Body held that the requirem ent to conduct a pass-through analysis when a
subsidy is provided to an input producer, but a countervailing duty is imposed on a downstream
product, in circumstances where the producer of the input and the producer of the final product are
unrelated, arises under Article VI:3 of GATT 1994 and consequently under Articles 10 and 32.1 of
the SCM Agreement.
1427 The requirement arises under Articles 10 and 32.1 of the SCM Agreement
because they provide, respectively, that Members mu st "take all necessary step s to ensure that the
imposition of a countervailing duty … is in accordance with the provisions of Article VI of GATT
1994" and that "no specific action against a subs idy … be taken except in accordance with the
provisions of GATT 1994". The Appellate Bo dy reasoned that the phrase "subsid{ies}
bestowed… indirectly", used in Article VI:3, indicates that financial contributions to inputs used in the
production of a countervailed product are not exclude d from the amount of subsidies that may be
offset in the imposition of a countervailing duty.
1428 However, Article VI:3 requires that the
countervailing duty not exceed the total amount of the subsidy granted on the "manufacture {or}
production … of such product".1429 Therefore, the duties imposed can only offset an input subsidy to
the extent that the benefit of the subsidy p asses-through to the processed product. In such
circumstances, the Appellate Body held that pass-th rough cannot be presumed, but that an analysis of
the extent of pass-through to the countervailed product is required.1430
7.267 The Appellate Body found that its conclusion on the necessity to demonstrate pass-through
was supported by the definition of "countervailing dut y" under footnote 36 of Article 10 of the
SCM Agreement, which mirrors the definition used in Article VI:3 of GATT 1994. The Appellate
Body also noted that the conditions in Article 1. 1 must be established with respect to the product
subject to the countervailing duty.1431 This is necessary because of the requirement under Article VI:3
to calculate the extent to which a countervailed produc t is subsidized, rather than being a requirement
arising independently under Article 1.1 of the SC M Agreement. Therefore, where a subsidy is
provided to an input used in the production of th e countervailed product, it must be established that
the benefit arising from the financial contribut ion has passed-through via the input, to benefit
indirectly the downstream countervailed product.1432
7.268 The Appellate Body concluded that "in the absen ce of such analysis, it cannot be shown that
the essential elements of the subsidy definition in Article 1.1 are present in respect of the

1424 US – Countervailing Duties on Pork, DS7/R, BISD 38S/30, para. 4.5.
1425 Appellate Body Report, US – Softwood Lumber IV.
1426 Appellate Body Report, US – Softwood Lumber IV, para. 147.
1427 Appellate Body Report, US – Softwood Lumber IV, para. 143.
1428 Appellate Body Report, US – Softwood Lumber IV, para. 140.
1429 Appellate Body Report, US – Softwood Lumber IV, para. 141.
1430 Appellate Body Report, US – Softwood Lumber IV, paras. 140 and 143.
1431 Appellate Body Report, US – Softwood Lumber IV, para. 142.
1432 Appellate Body Report, US – Softwood Lumber IV, para. 142.

BCI deleted, as indicated [***]

{countervailed} product". 1433 In turn, the right to countervail an input subsidy to the extent of any
pass-through of the benefit to the processed product would not have been established under
Article VI:3 GATT 1994.1434
7.269 The issue of pass-through in the countervailing duty context arose again in Mexico – Olive
Oil.1435 The European Communities contested the imposition by Mexico of countervailing duties on
imports of olive oil on the basis that a pass -through analysis had not been conducted. The
European Communities argued that the Mexican inv estigating authority shoul d have determined the
extent to which any subsidies received by olive growers for the production of olive oil were passed
through to the unrelated exporters of olive oil. 1436 In dismissing the claims of the European
Communities, the panel noted that neither US – Canadian Pork nor US – Softwood Lumber IV
established a requirement that a pass-through analysis be conducted whenever there is any transaction
between unrelated companies in the chain of produc tion of a product subject to a countervailing duty.
For example, where a producer of the countervailed product receives a subsidy, there is no
requirement that a pass-through analysis be conducted if the product is sold to a distributor prior to
export.
1437
7.270 In relation to the European Communities' specific claims in Mexico – Olive Oil , although
US – Softwood Lumber IV established that the requirement to demonstrate pass-through arises under
Article VI:3 of the GATT 1994, and consequently under Articles 10 and 32.1 of the SCM Agreement,
in Mexico – Olive Oil the European Communities based its clai m exclusively in Articles 1 and 14 of
the SCM Agreement.
7.271 The European Communities' argument under Ar ticle 1 of the SCM Agreement essentially
amounted to an allegation that Mexico did not pr operly calculate the amount of the benefit from the
subsidy that was received by the exporters of the olive oil. 1438 The panel noted that although the non-
existence of a benefit leads to the conclusion under Article 1.1 of the SCM Agreement that a subsidy
does not exist, and therefore that a countervailing duty cannot be imposed, Article 1.1 does not
include a requirement that the amount of benefit accruing to a direct or indirect recipient in a
countervailing duty investigation be calculated.
1439 The panel concluded that "it is not necessary to
identify the particular recipient…of the benefit and the particular manner in which a subsidy is
bestowed in order to determine that a benefit has be en conferred, and therefore that a subsidy exists,
within the meaning of Article 1.1(b)".1440
7.272 The panel also dismissed the European Communities' claim under Article 14 of the
SCM Agreement. The European Communities allege d that the Mexican investigating authority had
failed to conduct a pass-through analysis where one w as required and therefore that its explanation of
how it calculated the amount of subsidization was not reasoned and adequate as required under
Article 14, which provides:
"For the purpose of Part V, any method u sed by the investigating authority to
calculate the benefit to the recipient conferred pursuant to paragraph 1 of
Article 1…shall be transparen t and adequately explained."

1433 Appellate Body Report, US – Softwood Lumber IV, para. 143.
1434 Appellate Body Report, US – Softwood Lumber IV, para. 143.
1435 Panel Report, Mexico – Olive Oil.
1436 Panel Report, Mexico – Olive Oil, para. 7.125.
1437 Panel Report, Mexico – Olive Oil, para. 7.144.
1438 Panel Report, Mexico – Olive Oil, para. 7.150.
1439 Panel Report, Mexico – Olive Oil, paras. 7.149 and 7.152.
1440 Panel Report, Mexico – Olive Oil, para. 7.152.

BCI deleted, as indicated [***]

7.273 The panel concluded that there was nothing in Article 14 requiring a Member to conduct a
pass-through analysis.1441 The panel also noted that even if Article 14 did contain such a requirement,
it would find no basis upon which to conclude that the Mexican investigating authority had acted
inconsistently with it. The authority gave reasons for its conclusion that no pass-through
demonstration was required, namely because the subsidy was to the producers of olive oil, the product
the subject of the countervailing duty investigation, and was bestowed on its production, rather than
being a subsidy bestowed on the production of olives, an input into the production of olive oil.
Applying the relevant standard of review, the panel held that this conclusion was reasonably
supported by the evidence.
1442
7.274 Therefore, following Mexico – Olive Oil, in which the panel clarified that Articles 1 and 14
SCM Agreement do not include an obligation for an investigating authority to demonstrate pass-
through, US – Softwood Lumber IV remains the report that sets out the provisions under which such
an analysis is required in the context of a countervailing duty case.
Serious prejudice case
7.275 In US – Upland Cotton, the adopted panel and Appe llate Body reports address pass-through
in the context of Part III of the SCM Agreement. 1443 The United States argued before the panel that it
was necessary for Brazil to "establish the precise ex tent to which United States subsidies provided in
respect of 'upland cotton' production were actually 'passed through' to the exporter, after having been
processed and sold, before being traded". 1444 The panel held that, due to textual differences between
Parts III and V of the SCM Agreement, the A ppellate Body jurisprudence on pass-through in US –
Softwood Lumber IV, conducted under Part V of the SCM Agreem ent, was not directly applicable to
an examination of serious prejudice under Articles 5(c) and 6.3(c) of Part III.1445
7.276 The Appellate Body held that the panel did not err in its assessment of the amount of the
subsides for the purpose of its analysis under Article 6. 3(c) of the SCM Agreement. In coming to this
conclusion, the Appellate Body noted:
"{T}he requirement in Article VI:3 of the GATT 1994 and Article 19.4 of the SCM
Agreement that countervailing duties on a pr oduct be limited to the amount of the
subsidy accruing to that product finds no parallel in the provisions on actionable
subsidies and pertinent remedies under Part III of the SCM Agreement. Therefore,
the need for a 'pass-through' analysis under Part V of the SCM Agreement is not
critical for an assessment of significant price suppression under Article 6.3(c) in
Part III of the SCM Agreement. Nevertheless, we acknowledge that the 'subsidized
product' must be properly identified for purposes of significant price suppression
under Article 6.3(c) of the SCM Agreement. And if the challenged payments do not,
in fact, subsidize that product, this may undermine the conclusion that the effect of
the subsidy is significant suppression of prices of that product in the relevant
market."
1446
7.277 In summary, the Appellate Body reasoned that because there is no need precisely to quantify
the amount of subsidization in a serious prejudice claim, as opposed to the situation in a
countervailing duty case, the need for a pass-through analysis in making an assessment of significant

1441 Panel Report, Mexico – Olive Oil, para. 7.159.
1442 Panel Report, Mexico – Olive Oil, para. 7.168.
1443 Appellate Body Report, US – Upland Cotton.
1444 Panel Report, US – Upland Cotton, para. 7.1180.
1445 Panel Report, US – Upland Cotton, para. 7.1181.
1446 Appellate Body Report, US – Upland Cotton, para. 472.

BCI deleted, as indicated [***]

price suppression under Article 6.3(c) is not essentia l. Nevertheless, the Appellate Body concluded
that proving serious prejudice may be difficult without a demonstration that the subsidy in fact
subsidized the producer of the product in issue.
Prohibited subsidy case
7.278 Pass-through in the context of Part II of the SCM Agreement was addressed in Brazil –
Aircraft (Article 21.5 – Canada II).
1447 The facts of the case were that, after an aircraft was exported
and paid for by a purchaser, the Brazilian Govern ment provided non-refundab le payments to the
financial institution that loaned money to the pur chaser for the purpose of buying the aircraft. The
panel concluded that the purpose of the government intervention in the transaction was to allow the
lender to offer better terms for the loan, to be used to purchase a Brazilian aircraft, than would
otherwise have been possible.1448
7.279 The panel noted that, while there was no doubt that the payments conferred a benefit, the
question remained whether they conferred a benefit to the producers of the aircraft. 1449 The panel
held:
"As the SCM Agreement is an Annex 1A agreement on trade in goods, and as this
case relates to alleged export subsidies in respect of a particular good – Brazilian
regional aircraft – it is incumbent upon Cana da to establish that the benefit derived
from {the} payments is not retained excl usively by the lender but rather is passed
through in some way to producers of regional aircraft." 1450
7.280 This passage suggests that the requirement to demonstrate pass-through arose because the
export subsidy claim was made in relation to a spec ific product, namely Brazi lian regional aircraft.
Therefore, it was necessary for the claimant to est ablish that the producer of that product received a
benefit from the government's financial contribution. 1451 Establishing a benefit to an unrelated
financial institution was not sufficient. Furthe r, because the SCM Agreem ent regulates trade in
goods, it was necessary to demonstrate that a good, rather than merely a financial service, was
subsidized.
 "Pass-through" in the context of this dispute
7.281 The parties to the dispute agree that there is a requirement to demonstrate that the benefit of
the B&O tax reduction to the component manufactur ers passes-through to the Boeing LCA division
and that this requirement arises under Articles 5 a nd 6 of the SCM Agreement. It appears that the
United States also makes a separate submission which asserts that a requirement to demonstrate pass-
through in a serious prejudice claim can be found in Article 1 of the SCM Agreement.
7.282 In US – Upland Cotton the Appellate Body indicated that pass-through is not critical for a
price suppression causation analysis but that it is n ecessary to identify the "subsidized product" in a
price suppression claim and if the financial contribut ion does not "subsidize" the product, this may
undermine the proof of causation.

1447 Panel Report, Brazil – Aircraft (Article 21.5 – Canada II).
1448 Panel Report, Brazil – Aircraft (Article 21.5 – Canada II), para. 5.31.
1449 Panel Report, Brazil – Aircraft (Article 21.5 – Canada II), para. 5.27.
1450 Panel Report, Brazil – Aircraft (Article 21.5 – Canada II), para. 5.27, footnote 41.
1451 The Panel also stated (in para. 5.28, footnote 42) that if Canada could establish that the payments to
lenders passed-through to the purchasers in the form of improved terms of credit, this would constitute a prima
facie case that the payments benefited the producers of the aircraft. This is because the effect of the payments
would be to lower the cost of purchasing Brazilian aircraft, increasing the competitiveness of the producers.

BCI deleted, as indicated [***]

7.283 Articles 5 and 6 of the SCM Agreement do not include provisions equivalent to those under
Part V, which, as established in US – Softwood Lumber IV , require a specific quantification of the
alleged subsidy, and an allocation of it to a speci fic product, to ensure that the countervailing duty
imposed does not exceed the amount by which the pr oduction of the product is subsidized. This
difference between Parts III and V was confirme d by both the panel and the Appellate Body in US –
Upland Cotton .1452 It is these provisions under Part V that have been found to give rise to the
requirement to demonstrate pass-t hrough in a countervailing duty contex t. As the provisions have no
analogue under Part III, the basis for any requir ement to demonstrate pass-through is necessarily
different.
7.284 We note that Articles 5 and 6.3(c) of the SC M Agreement require the establishment of a
"causal link between the subsidy and the significant price suppression".1453 In our view, in those cases
in which an upstream supplier receives a subsidy, but the argument is that this subsidy causes price or
sales effects through the products of a downstream producer, it will be very difficult, to say the least,
to demonstrate that this is indeed the effect w ithout demonstrating, as one part of the causation
analysis under Articles 5 and 6, that there is a link between the subsidy provided to the upstream
producer and the downstream "subsidized product".
1454
7.285 As a matter of logic, on the European Commun ities' own case regarding causation of serious
prejudice, it seems clear that it will have to demons trate a link between the subsidy to the component
manufacturers and Boeing LCA in order to succeed in its serious prejudice argument in relation to the
tax reductions to LCA component manufacturers. The European Communities argues that the effect
of the subsidy is price suppression, lost sales and di splacement of exports and that this is occurring
through a particular product, namely Boeing LCA. To demonstrate this, the European Communities
needs to demonstrate a link between the subsi dy to the upstream supplier and the allegedly
"subsidized product", namely Boeing LCA. In orde r to do so, the European Communities sets out to
demonstrate that the tax reductions received by Boei ng's upstream suppliers lead to reduced prices for
the inputs it uses in its LCA. After establishing this link, the final step in the European Communities'
causation analysis is to prove that the Bo eing LCA cause price suppression, lost sales and
displacement of exports for Airbus because, in re sponse to receiving the benefit of the subsidy,
Boeing reduces the prices charged for its subsidized LCA.
7.286 Our conclusion that any need to demonstrate "p ass-through" in a serious prejudice case arises
under Articles 5 and 6 of the SCM Agreement accords with US – Upland Cotton, in which the
Appellate Body held that a pass-through analysis under Part III is "not critical", but in certain cases if
the product in issue is not in fact "subsidized", this will undermine the conclusion that the subsidy
causes serious prejudice.
7.287 However, we query whether there is a need to categorize the demonstration of link between a
subsidy provided to an upstream producer and th e downstream product, in order to establish that

1452 See e.g. the panel's conclusion at para. 7.1177: "we decline to transpose directly the quantitative
focus and more detailed methodological obligations of Part V, into the provisions of Part III of the
SCM Agreement." See also, the Appellate Body at para. 472: "{T}he requirement in Article 6.3 of the
GATT 1994 … finds no parallel … under Part III of the SCM Agreement."
1453 Panel Report, US – Upland Cotton , para. 7.1341. Article 5 of the SCM Agreement provides that
"no Member should cause, through the use of any subsidy … adverse effects", while Article 6.3(c) stipulates
that serious prejudice arises when "the effect of the subsidy is…significant price suppression" (emphasis added).
1454 The effects that are identified in Article 6.3 as constituting serious prejudice in the sense of
Article 5(c) all relate to effects of a subsidy through specific products. For example, in Article 6.3(a) and (b),
serious prejudice requires th at the effect of the subsidy is to disp lace imports or exports of "like products",
where Article 6.4 clarifies that it is by reference to the "subsidized product" that like products are to be
identified. Similarly, in Article 6.3(c), serious prejudice arises where a "subsidized product" undercuts the price
of like products.

BCI deleted, as indicated [***]

product is in fact subsidized, as "pass-through". To date, panel and Appellate Body reports on pass-
through have largely been confined to countervailin g duty cases in which there is a need precisely to
quantify the amount of a subsidy bestowed on the pr oduction of the countervailed product. However,
under Part III of the SCM Agreement there is no need for such a calculation. Nevertheless, when a
subsidy is provided to an upstream supplier and serious prejudice is alleged to occur through the
product of a downstream producer, a link between the s ubsidy and the product will usually need to be
demonstrated to prove that the subsidy is the cause of the serious prejudice. However, we consider
this merely to be one element of the proof of cau sation, rather than being a separate "pass-through"
requirement under Articles 5 and 6. In our view , neither element of the European Communities'
serious prejudice case, in which it first attempts to prove that the component suppliers lower the price
of their inputs and secondly attempts to demonstrat e that Boeing ultimately lowers the price of its
aircraft when sold to end-users, should be charac terized as "pass-through". Rather, both are merely
steps in proving that the tax reductions to component manufacturers cause serious prejudice.1455
7.288 It appears to us that the United States makes tw o separate arguments regarding the legal basis
for any requirement to demonstrate pass-through in a serious prejudice case. The first, in its written
submissions, is based exclusively in Article 1 of the SCM Agreement. It relies on US – Softwood
Lumber IV to support the proposition that where the recipien t of a subsidy is unrelated to the producer
of the allegedly subsidized product, the subsidy will exist only if the benefit is passed-through to the
producer of the downstream product. For the foregoing reasons, to the extent the United States argues
that Article 1 of the SCM Agreement includes any obligation to conduct a pass-through analysis, we
disagree and find that the "pass-through" analysis is conducted under Articles 5 and 6.
Has the European Communities demonstrated "pass-through"?
7.289 Before commencing the analysis of the European Communities' "pass-through" case, we put it
in context by considering the amount of pass-th rough in issue. While the European Communities
argues that $1.05 billion in B&O tax reductions is passed-through to Boeing's LCA division from
Washington State component manufacturers, this is the amount expected to be passed-through over
the period 2006-2024. 1456 As indicated at paragraphs 7.1676-7.16 79 of this Report, in the context of
the serious prejudice analysis, the Panel assesses the effects of the subsidies up until 2006. During
this period, the amount of the B&O tax reductio n that the European Communities estimates is
received by component suppliers is $6.8 million.1457 We note, as described at paragraphs 7.155-7.156
of this Report, that for the purposes of arriving at estimates of per-LCA subsidy "magnitudes", the
European Communities allocates recurring subsidies that reduce marginal unit cost to the year three
years prior to their actual receipt. The Europ ean Communities uses this allocation method for the
entire amount of the Washington B&O tax reducti on, including the amount it estimates will be
passed-through to Boeing from its suppliers.
1458 However, the Panel does not consider it necessary to

1455 Proof that the manufacturer of the "subsidized product" reduces the prices charged for the product
to end users arises in all cases in which price-related se rious prejudice is claimed, wh ether or not the subsidy is
provided directly to the manufacturer of the product or indirectly via an upstream supplier. Although whether
the producer ultimately reduces its prices to end users may depend on the same sort of factors as whether the
upstream supplier reduces it prices to the downstream producer, the former has never, in previous panel or
Appellate Body rulings, been found to require a pass-through analysis. Rather, it is considered merely to be one
step in the causation demonstration. This supports our c onclusion that it is appropriate to treat the reduction of
prices between upstream and downstream entities in the same manner, namely as a part of the causation
demonstration, rather than as part of a separate "pass-through" analysis.
1456 Amount of Subsidies to Boeing's LCA Division, Exhibit EC-17.
1457 Estimates of Benefits from Washington State B&O Tax Rate, Exhibit EC-21.
1458 International Trade Resources LLC, Calculating on a Per-Aircraft Basis the Magnitude of the
Subsidies Provided to US Large Civil Aircraft, 20 February 2007, Exhibit EC-13, Table 4. The amount of the
B&O tax reduction that is being allocated to the year thre e years prior to receipt is the amount received directly

BCI deleted, as indicated [***]

arrive at per-LCA subsidy "magnitudes", and assesses the effects of each subsidy in the year of its
receipt.1459 Therefore, the amount of the tax reduction received by component suppliers that is alleged
to pass-through during the time period of relevance to our serious prejudice analysis is $6.8 million.
7.290 To prove pass-through of the B&O tax reduction to Boeing's LCA division from its suppliers,
the European Communities relies upon statements made by Governor Gary Locke as well as a number
of reports prepared by its economists. We note that at least one of Governor Locke's statements is an
explicit assertion that pass-through will occur: "i f we can reduce the tax burden on the suppliers,
those benefits will be passed on to Boeing". 1460 In determining whether or not Boeing's suppliers
passed-through the benefit of the B&O tax reduction, we accord some weight to Governor Locke's
statements. They indicate that the intent in providing tax reductions to LCA component
manufacturers was to reduce Boeing's costs. Howeve r, in order to find in favour of the European
Communities with respect to its pass-through submissions, we require something more than a political
statement revealing the government's intent in passing th e legislation. The statements need to be read
in the light of the context in which they were de livered, namely the Governor attempting to promote
the advantages of a costly package of incentives provide d by the State to private entities. Further, the
question of the extent to which a subsidy to an upstream supplier passes-through to a downstream
producer is essentially an economic one. Therefore, although we weigh Governor Locke's statements
in the assessment of the European Communities' evidence, we place most reliance upon the reports of
the economists.
7.291 At various stages in its reports and submissions, the United States appears to suggest that the
only way to prove pass-through is via an empirical analysis. 1461 In reaching our conclusion on the
facts of this case, we do not endorse the United States ' position in this regard. In particular, we do not
intend to limit the potential methods that may be used successfully to prove pass-through, which in
appropriate circumstances could include the use of a commercial benchmark price or a theoretical
model that accurately reflects the conditions in the market in question.
7.292 The Panel recalls that Professor Asker's econo mic model aims to demonstrate that an ad
valorem subsidy paid to an input supplier passes-through to the downstream producer at the rate of at
least 100 per cent. Although the European Communities claims that the lower bound of
Professor Asker's estimate passed-through to Boei ng, namely 100 per cent of the benefit of the
subsidy, in his analysis Professor Asker contemplates the possibility of greater than 100 per cent pass-
through. It is our understanding that when the European Communities refers to pass-through
exceeding 100 per cent, it is referring not only to pass-through of the benefit of the subsidy, but is also
referring to an additional effect on the price of the inputs arising as pass-through of the benefit occurs.
The benefit of a subsidy, as that term is used in Article 1.1(b) of the SCM Agreement, cannot increase
when it passes from the recipient of the financial cont ribution to another entity. In other words, the
maximum amount of any pass-through that can occur is the amount of the benefit of the subsidy,

by Boeing plus the amount "passed-through" to Boeing. See Estimates of Benefits from Washington State B&O
Tax Rate, Exhibit EC-21.
1459 We note that the European Communities does not provide an explanation regarding why this is an
appropriate method to allocate the benefit that is "passed-through" from component manufacturers. In
particular, the European Communities does not explain why the tax reductions to component manufacturers will
have an effect on Boeing's behaviour three years pr ior to the component manuf acturer receiving the tax
reduction.
1460 European Communities' non-confidential oral stat ement at the second meeting with the Panel,
1461 See e.g. Economic Analysis of the European Communities' Assertion Regarding Pass-Through
Taxes in the Washington State Aerospace Market, Exhibit US-185, where Smith and Brown criticize the
European Communities' case on the basis that it makes "no attempt to present empirical evidence". In its
Comments on the European Communities' response to question 394, the United States argues at para. 381 that "a
purely theoretical answer to the pass-through question – as the EC appears to advocate – is simply not possible".

BCI deleted, as indicated [***]

which in the context of the SCM Agreement, is the amount by which the terms of the financial
contribution are more favourable than those available on the market. 1462 The calculation of the
amount of the benefit is a one-time calculation made at the time the financial contribution is provided.
As noted in US – Upland Cotton (Article 22.6 – US I), there is no "additional" benefit, beyond that
identified under Article 1.1(b). 1463 Therefore, any decrease in the pr ice of the inputs that exceeds the
benefit of the subsidy cannot be considered pass -through of the benefit. Rather, we understand the
European Communities to be referring to an additional reduction in price, which is a flow-on effect of
passing-through the benefit. Professor Asker explains that when the price of the inputs is lowered in
order to pass-through the benefit of the subsidy, this has a negative effect on revenue but a positive
effect on demand. Due to certain assumptions inco rporated within his model, the increase in demand
outweighs the decrease in revenue such that price can be further decreased without affecting suppliers'
initial profit margins, and more strongly so at low levels of competition between suppliers. 1464 It is
this reduction in price beyond the value of the benefi t which Professor Asker refe rs to in stating that
pass-through can exceed 100 per cent.
7.293 In considering the European Communities' ec onomic model, we note that the principal
concern of the United States is that the model does not reflect the realities of the market for the supply
of LCA components. In particular, the United States criticizes the assumptions that Boeing is a
monopsonist with respect to every input it purchases, th at price is the sole consideration in Boeing's
choice of supplier, that input suppliers have an e qual and constant marginal cost of production, that
the only source of market power for suppliers is asymmetric information and that all bidders may
receive the same subsidy.1465 In essence, the United States argues that these conditions do not exist in
the market for the supply of LCA components.
7.294 Professor Asker responds to each of these concerns by arguing either that it is not relevant or
that the model can accommodate the changes in the assumptions suggested by the United States,
without the conclusion of the model changing. 1466 For example, in relation to the assumption that
Boeing chooses the supplier that quotes the lowest pr ice, the United States argues that price is only
one of many considerations in Boeing's sourcing d ecisions, given that it operates in an industry where
small deviations from quality standards can have severe financial and professional consequences. The
United States concludes that if contracts are aw arded on the basis of non-price considerations, the
conclusions of Professor Aske r's model no longer apply. 1467 However, Professor Asker rebuts this
argument by explaining that making price the determinative feature of the contract award process is a
convenient simplifying assumption that is not essential for model results. He points to the
procurement literature, which shows that the sta ndard results in competitive tendering frameworks
apply to more general and complex procuremen t settings where price and other product/supplier
features are important in determining the final award. The reason for this is that a combination of

1462 Appellate Body Report, Canada – Aircraft, para. 157.
1463 Arbitrator's Report, US – Upland Cotton (Article 22.6 – US I), para. 4.148.
1464 Dr. Paul Wachtel, Economic Analysis: Subsidy Pa ss-Through and Asset Pricing Issues Relevant to
Subsidies to U.S. LCA Industry, December 2006, including Dr. John Asker, On the Pass-Through of
Ad Valorem Subsidies Received by I nput Suppliers, 1 November 2006, Exhi bit EC-16, page 11 of Annex A.
Professor Asker states that "{T}he reduction in revenue from lowering an initially high price per unit is offset to
a large extent by the increase in the amount of the input required by the monopsonist, allowing the price to be
reduced further".
1465 Dorman, Exhibit US-186, pp. 2-5 .
1466 See Dr. John Asker, Reply to Report of Dr. Gary Dorman and to Related Aspects of Report of
Drs. Stephen D. Smith & Lorrie Brown, October 2007, Exhibit EC-1174.
1467 Dorman, Exhibit US-186, p. 3; Economic Analysis of the European Community's Assertion
Regarding Pass-Through Taxes in the Washington State Aerospace Market, Exhibit US-185, p. 11 and
Gary J. Dorman and Kristin L. Terris, Economic Models and Subsidy Pass-Through (July 30, 2009),
Exhibit US-1363, p.5.

BCI deleted, as indicated [***]

price and quality (however defined) generates so me level of utility for the purchaser that can be
mapped to a "score" or "price equivalent".1468
7.295 Although Professor Asker provides a range of arguments showing that his model can
accommodate most of the changes in the assump tions suggested by the United States without
changing the conclusion that pass-through is always at least 100 per cent1469, the assumption that all of
Boeing's suppliers are eligible to receive the W ashington B&O tax reduction is problematic for the
European Communities' case. According to the evidence on th e record, Boeing sources its LCA
components from a global supplier market. 1470 Therefore, the assumption in Professor Asker's model
that all suppliers may receive the subsidy is clearly not an accurate one. Only those suppliers with a
taxable presence in Washington State are eligible for the tax reduction. Further, Professor Asker
acknowledges that if this assumption does not hold, the conclusion of the model, that pass-though of
an ad valorem subsidy is always at least 100 per cent, is no longer accurate. 1471 In particular,
Professor Asker states that if only a subset of supplie rs is eligible for the subsidy, this changes the
relative competitiveness of the suppliers. Profess or Asker states that modeling such a market
structure "requires the use of tools from asymmetric first price auctions for which no closed form
results exist".1472 Therefore, Professor Asker concludes that he is "unable to rule out the possibility
that there is less than 100% pass-through". 1473 Professor Asker moderates this conclusion by stating
that the extent of pass-through is affected only if there is a "material" change in competitiveness,
which is most likely in input markets with relatively few suppliers. 1474 However, in markets where
there are relatively few suppliers, Professor Asker's model predicts that the rate of pass-through is
higher than in markets with a greater number of suppliers. Therefore, Professor Asker concludes that
even though the extent of pass-through may be reduced when only a subset of suppliers receive the
subsidy, "it would require a very fi ne balancing of economic factors for the net effect to be that pass-
through is reduced below 100%".1475
7.296 A further problem with Professor Asker's mode l, which is implied in the United States'
submissions, is that Professor Asker does not sufficiently justify why his analysis commences with the
benchmark of perfect competition. Professor As ker's model demonstrates that, from a given
benchmark, pass-through increases as the number of suppliers decrease. He then chooses the
benchmark of perfect competition, under which pass- through is 100 per cent, and concludes that as
the number of suppliers decreases, pass-through increases to above 100 per cent. However, the choice
of perfect competition and consequently 100 pe r cent pass-through as the starting point for the

1468 Dr. John Asker, Reply to Report of Dr. Gary Dorman and to Related Aspects of Report of
Drs. Stephen D. Smith & Lorrie Brown, October 2007, Exhibit EC-1174, p. 5.
1469 See Dr. John Asker, Reply to Report of Dr. Gary Dorman and to Related Aspects of Report of
Drs. Stephen D. Smith & Lorrie Brown, October 2007, Exhibit EC-1174, for all of Asker's responses to the
United States' criticisms about the assumptions underlying the model.
1470 See e.g. Rod P. Muddle, The Dynamics of the Large Civil Aircraft Industry, 2 March 2007, Exhibit
EC-10, para. 53(iii); Economic Analysis of the Eur opean Community's Assertion Regarding Pass-Through
Taxes in the Washington State Aerospace Market, Exhibit US-185, p. 10, where the Un ited States claims that
only a small proportion of Boeing's suppliers are located in Washington State; and Bair Affidavit, Exhibit US-7,
which discusses Boeing's global supplier network.
1471 Dr. John Asker, Responses to Questions 384, 385, 393 and 394 from the DS353 Panel,
28 July 2009, Exhibit EC-1437, p. 16 and Dr. John Asker, Reply to Report of Dr. Gary Dorman and to Related
Aspects of Report of Drs. Stephen D. Smith & Lorrie Brown, October 2007, Exhibit EC-1174, p. 10.
1472 Dr. John Asker, Responses to Questions 384, 385, 393 and 394 from the DS353 Panel,
28 July 2009, Exhibit EC-1437, p. 16.
1473 Dr. John Asker, Responses to Questions 384, 385, 393 and 394 from the DS353 Panel,
28 July 2009, Exhibit EC-1437, p. 16.
1474 Asker explains that in markets where there are many suppliers, competitive pressures are likely to
be maintained, even when a subset of the suppliers receive a sizeable subsidy.
1475 Dr. John Asker, Reply to Report of Dr. Gary Dorman and to Related Aspects of Report of
Drs. Stephen D. Smith & Lorrie Brown, October 2007, Exhibit EC-1174, p. 10.

BCI deleted, as indicated [***]

analysis may not be as obvious as implied by Professor Asker. The United States' criticism of this
aspect of the model is evident, fo r instance, in its observation that Boeing's suppliers are in fact
diverse and highly specialized. 1476 This problem with the model provides further support for the
conclusion in the preceding paragraph that Professo r Asker's model does not necessarily lead to the
conclusion that pass-through is always greater than 100 per cent.
7.297 The reports submitted by the European Commun ities and prepared by its economists attempt
to establish pass-through by proving that pass-through is always at least 100 per cent for ad valorem
subsidies. For the reasons expressed in the precedi ng two paragraphs, we conclude that the economic
model prepared by Professor Asker does not in fact demonstrate that pass-through is always at least
100 per cent. Therefore, we are in the situati on where the European Comm unities has not made its
case in proving that pass-through is always 100 pe r cent or higher and where it has not attempted to
make a case regarding any other level or range of pass-through. Therefore, given that we do not
accept the conclusion arising from Professor Asker's model, we have nothing on which to base any
determination regarding pass-through. The level of pass-through could be 90 per cent, 50 per cent or
zero, but we are left with no way in which to asses s this. In fact, the possibility of zero pass-through
is not entirely theoretical. The United States provid es an example, related to the fact that not all
suppliers are eligible for the subsidy, in whic h it contends that pass-through may be zero. In
particular, the United States refers to a scenario in which two suppliers, A and B, are competing in a
tender and absent the subsidy A is the low-cost supplie r and bids the lowest input price. If A receives
the subsidy but B does not, there is no reason for A, as the low-cost supplier, to pass-through any of
the subsidy because it can already underbid B and win the tender.
1477 Although in response to
question 385 Professor Asker discusses the scenario in which B receives the subsidy, he does not
discuss the scenario which is later postulated by th e United States in its final set of comments, in
which A receives the subsidy. 1478 Therefore, we are in the position where pass-through may range
from zero to 100 per cent and the European Communities has not provided a basis upon which we can
narrow this down. In response to a Panel questi on, Professor Asker explicitly states that beyond the
estimate he has provided, namely at least 100 per cent pass-through, which we do not accept as
always holding true, he is not able to provide an alternative estimate. For the foregoing reasons, in the
Panel's view the European Communities has not est ablished its pass-through case. Although in the
light of Governor Locke's statement the Panel recognizes that it may seem somewhat counterintuitive
to conclude that there was no pass-through, the Eu ropean Communities has argued an all or nothing
case. While it is conceivable that some degree of pass-through occurred, there is nothing on the
record to allow the Panel to make a defensible estim ate of this. Therefore, the Panel concludes that
the European Communities has not made out its pass-through argument.
7.298 In the light of the problems we have identified with the European Communities' model, which
in our view are fatal to the European Communitie s' arguments on pass-through, it is not necessary for
us to resolve certain factual questions in issue betw een the parties, including whether, as suggested by
the United States, the market for LCA components w ould have been more accurately represented as a
bilateral monopoly or a differentiated oligopoly. In addition, it is not necessary for us to resolve the
factual question of whether the competitive tendering process is an accurate reflection of the way in
which Boeing chooses its suppliers. We note that the evidence presented by the
European Communities indicates that at least so me Boeing LCA components are indeed purchased
through a competitive tendering process, as reflected in Professor Asker's model.
1479 However, even

1476 Economic Analysis of the European Communities' Assertion Regarding Pass-Through Taxes in the
Washington State Aerospace Market, Exhibit US-185, p. 8 and Dorman, Exhibit US-186, p. 6.
1477 United States' comments on European Communities' response to question 385, paras. 367-368.
1478 Dr. John Asker, Responses to Questions 384, 385, 393 and 394 from the DS353 Panel,
28 July 2009, Exhibit EC-1437, p. 16.
1479 For example, the European Communities quotes a statement from the Boeing website, namely that
"our company emphasizes the importance of competitive bidding as a good business practice". Dr. John Asker,

BCI deleted, as indicated [***]

finding in the European Communities favour on this point would not cure the problems we have
identified with the model and would not alter our conclusion.
7.299 With respect to the European Communities' argu ment that the United States refused to supply
it with the data required to conduct an empirical analysis, we recall that the European Communities
has acknowledged that Airbus also purchases supplies in the Washington State market. As a result, in
our view, the European Communities would also ha ve had access to information about the market.
Therefore, we decline to draw any adverse infere nces against the United States in relation to this
issue.
7.300 For these reasons, the Panel finds that the Eur opean Communities has not demonstrated that
the benefit of the B&O tax reduction received by Boeing's suppliers with a taxable presence in
Washington passed through to Boeing. Consequently, the Panel finds that the benefit passed-through
to Boeing from its component suppliers is $0. Theref ore, the Panel finds that the total amount of the
B&O tax reduction to Boeing's LCA division is limit ed to the amount received directly by Boeing's
LCA division, namely $13.8 million.
(vi) Summary of conclusions regarding the Washington taxation measures under HB 2294
7.301 The foregoing analysis and conclusions a ddressed the question of whether the following
measures constitute specific subsidies to Boeing within the terms of the SCM Agreement:
(a) the Washington B&O tax reduction;
(b) the B&O tax credits for preproduction development, computer software and hardware
and property taxes;
(c) the sales and use tax exemptions for computers, construction and equipment;
(d) the leasehold excise tax exemptions; and
(e) the property tax exemptions.
7.302 For the foregoing reasons, the Panel finds th at the Washington B&O tax reduction; the
B&O tax credits for preproduction developmen t, for computer software and hardware and for
property taxes; and the sales and use tax ex emption for computer hardware, peripherals and
software are specific subsidies to Boeing within the meaning of Articles 1 and 2 of the SCM
Agreement. The Panel estimates that the amounts of the subsidies to Boeing's LCA division are
$13.8 million; $21.3 million; $20 million; $1.1 million; and $8.3 million respectively.
7.303 Finally, the Panel finds that the European Communities has not demonstrated that the
sales and use tax exemption for construction services and equipment, the leasehold tax
exemption and the property tax exemption are subsidies to Boeing.

Responses to Questions 384, 385, 393 and 394 from the DS353 Panel, 28 July 2009, Exhibit EC-1437, p. 12.
Exhibit EC-1437 also refers to evidence from procurement surveys showing the use of competitive bidding
among suppliers in the aerospace indus try. Evidence submitted by the European Communities in another
context demonstrates that for inputs such as engi nes, LCA manufacturers orga nize a competition between
suppliers at the development stage in order to put long-term pricing and performance pressure on suppliers.
Rod P. Muddle, The Dynamics of the Large Civil Aircra ft Industry, 2 March 2007, Exhibit EC-10, para. 91.
This indicates that a competitive tendering process may be used for more components than merely "off-the-shelf
commodity parts" as suggested by the United States. Dorman, Exhibit US-186, pp. 6-7.

BCI deleted, as indicated [***]

(b) City of Everett local B&O tax reduction
(i) Introduction
7.304 The European Communities argues that a tax re duction introduced in the City of Everett
constitutes a financial contribution and confers a benefit under Article 1 of the SCM Agreement.
Further, the subsidy is specific within the m eaning of Article 2. The European Communities
estimates that the amount of the subsidy to Boeing's LCA division is $67.5 million over the
period 2006-2023.
7.305 The United States argues that the tax reduction is not a subsidy because the City of Everett is
not foregoing any revenue otherwise due, as required under Article 1.1(a)(1)(ii) of the
SCM Agreement.
(ii) The measure at issue
7.306 The City of Everett imposes a B&O tax, which is similar to that imposed by Washington
State. It is a tax upon gross revenues, which in the case of manufacturing is generally treated as the
value of products manufactured, and in the case of retailing or wholesaling, as the gross proceeds of
sale. It applies to all business activities occurring within the limits of the city of Everett.1480
7.307 Prior to the passing of Ordinance 2759-04 in 2004, the City of Everett B&O tax was imposed
at a rate of 0.1 per cent. Under the MSA, the City of Everett made the following commitment:
"The City recognizes that a more simplifie d, predictable and long-term reduction of
the City B&O Tax is an important consideration as Boeing contemplates the siting of
Project Olympus. Accordingly, the City shall negotiate in good faith and use all
diligent efforts to reach agreement with Boeing on a permanent City B&O Tax rate
reduction. The City hereby commits that any such reduction shall provide a benefit to
Boeing in accordance with the terms and conditions set forth in Exhibit B-8."
 1481
7.308 In 2004, the City of Everett passed Ordinan ce 2759-04, which reflects the negotiations and
commitment referred to in the MSA.1482 Section 1 of the Ordinance provides:
"As a result of diligent good faith negotiations the City of Everett and The Boeing
Company have agreed on a Business and O ccupation tax reduction to be permanent
for the calendar years 2006 through 2023. During such period the City of Everett
agrees not to suspend, revoke or require repayment of such reduction as authorized by
its Business and Occupation ta x reduction, provided that final assembly of the 7E7
Aircraft begins by December 31, 2007."
 1483
7.309 The Ordinance amends Chapter 3.24 of the Ev erett Municipal Code. The upshot of the
amendment is that the B&O tax rate "upon every person engaging within the city in business as a
manufacturer" is:

1480 European Communities' first written submission, para. 145; United States' first written submission,
para. 512; and Everett Mun. Code ch. 3.24 (2004), Exhibit EC-104.
1481 European Communities' first written submission, paras. 146-148; United States' first written
submission, para. 512; and MSA, Article 4.3, Exhibit EC-58.
1482 European Communities' first written submission, para. 147.
1483 Everett Ordinance 2759-04 (2004), Exhibit EC-61.

BCI deleted, as indicated [***]

Time period Tax rate
1 January 2006 – 31 December 2009 0.1% for the first $6 billion in value of products
manufactured and 0.025% thereafter.
1 January 2010 – 31 December 2015 0.1% for the first $7 billion in value of products
manufactured and 0.025% thereafter.
1 January 2016 – 31 December 2023 0.1% for the first $8 billion in value of products
manufactured and 0.025% thereafter.
1 January 2024 0.1%

(iii) Whether a subsidy exists within the meaning of Article 1 of the SCM Agreement
Arguments of the European Communities
7.310 The European Communities argues that the City of Everett's B&O tax reduction results in a
financial contribution within the meaning of Article 1.1(a)(1)(ii) of the SCM Agreement because the
City is required to forego tax revenue that it would otherwise have collected.1484
7.311 The European Communities recalls that an anal ysis of whether revenue otherwise due is
foregone within the meaning of Article 1.1(a)(1)( ii) requires a comparison of the contested measure
with a normative benchmark. A "but for" test can be used for the purposes of this comparison if it is
possible to classify the measure in issue as an "exception" to a "general" rule of taxation.
1485
7.312 According to the European Communities, Or dinance 2759-04 sets up an exception to a
general rule. The general rule or "normative be nchmark" is Section 3.24.050(B) of the Everett
Municipal Code, as it existed prior to the enactment of Ordinance 2759-04, when it provided:
"Upon every person engaging within the city in business as a manufacturer; as to such
persons the amount of the tax with respect to such business shall be equal to the value
of the products, including byproducts, ma nufactured, multiplied by the rate of one
tenth of one percent (.001)." 1486
7.313 The amendment enacted through Ordinance 2759-04 keeps this language intact but at the end
adds the phrase "except as provided as follows" and then lists the rate reductions.1487
7.314 Therefore, the European Communities submits that but for Ordinance 2759-04, the City of
Everett would collect additional B&O tax revenue from manufacturers that make products worth more
than $6 billion, $7 billion or $8 billion, depending on the time period in issue. 1488 The European
Communities argues that the City of Everett "gave up a real entitlement to charge all manufacturers,
regardless of the value of the products they manufact ure in Everett, a B&O tax rate of 0.1%" and as a
result, there is a financial contribution within the meaning of Article 1.1(a)(1)(ii) of the SCM
Agreement.1489
7.315 In response to the United States' argument that the City of Everett does not forego revenue
that would otherwise be due because the B&O tax reduction applies to all entities engaged in

1484 European Communities' first written submission, para. 151.
1485 European Communities' second written submission, para. 88.
1486 European Communities' second written submission, para. 89 (emphasis added).
1487 European Communities' second written submission, para. 89. See also, Everett Ordinance 2759-04
(2004), Exhibit EC-61.
1488 European Communities' second written submission, para. 89.
1489 European Communities' second written submission, para. 90.

BCI deleted, as indicated [***]

manufacturing in Everett, the European Communities ar gues that this is not only inaccurate but also
irrelevant because it conflates the specificity analysis with the financial contribution analysis.1490
7.316 The United States again submits that only revenue actually foregone, rather than revenue to
be foregone in the future, can constitute a fina ncial contribution. The European Communities'
response to this is the same as that outlined in relation to the tax measures under HB 2294.
7.317 The European Communities' argument in the alte rnative is that there is a potential direct
transfer of funds under Article 1.1(a)(1)(i) of the SCM Agreement because the MSA requires the City
of Everett to provide Boeing with a remedy of eq uivalent economic effect if it cannot provide the
B&O tax rate reduction.1491
7.318 Finally, the European Commun ities argues that the City of Everett B&O tax rate reduction
confers a benefit within the meaning of Article 1. 1(b) of the SCM Agreement. This is because it
provides Boeing with advantages on non-market term s. The European Communities notes that in
US – FSC, the panel held that the foregoing of taxes th at would otherwise be due "clearly confers a
benefit".1492
Arguments of the United States
7.319 The United States argues that the City of Evere tt B&O tax rate reduction does not constitute a
financial contribution because the City is not foregoing any revenue otherwise due within the meaning
of Article 1.1(a)(1)(ii) of the SCM Agreement. The United States reasons that "since this tax rate
reduction applies to all entities engaged in manufact uring in the City, it is not the case that any
revenue foregone would have been otherwise due".1493
7.320 In the event the Panel disagrees with its position and finds that there is a financial
contribution, the United States submits that the financial contribution includes only revenue that has
actually been foregone and does not include revenue to be foregone in the future, for the same reasons
as outlined in relation to the Washington B&O tax rate reduction.1494
7.321 The United States does not make any submissions in relation to benefit.
Evaluation by the Panel
7.322 As indicated in the analysis of the Washington State taxation measures, the Appellate Body
established in the compliance proceedings in US – FSC that if a general rate of taxation and exception
to it can be identified, a "but for" test may be a pplied in determining if a financial contribution has
been made under Article 1.1(a)(1)(ii) of the SCM Ag reement. In other circumstances, the challenged
taxation measure should be compared to the treatment applied to comparable income for taxpayers in
comparable circumstances in the economy of the Member in question.1495
7.323 In our view, in the case of the City of Ever ett B&O tax, following the amendment to the
Everett Municipal Code by Ordinance 2759-04, there is a standard B&O tax rate and a preferential
rate introduced by the amendment that results in the foregoing of revenue otherwise due under
Article 1.1(a)(1)(ii) of the SCM Agreement. Or dinance 2759-04 amends Chap ter 3.24 of the Everett

1490 European Communities' second written submission, para. 87.
1491 European Communities' first written submission, para. 151.
1492 See European Communities' first written submission, paras. 155-157.
1493 United States' first written submission, para. 514.
1494 United States' first written submission, para. 514, footnote 680.
1495 See paras. 7.115-7.120.

BCI deleted, as indicated [***]

Municipal Code, the Chapter that imposes the Ever ett B&O tax reduction, so that Chapter 3.24.050
provides:
"B. Upon every person engaging within the city in business as a manufacturer; as
to such persons the amount of the tax with respect to such business shall be equal to
the value of the products, including byproduc ts, manufactured, multiplied by the rate
of one tenth of one percent (.001) except as provided as follows:
1. For the years beginning January 1, 2006, and ending December 31, 2009,
upon every person engaging within the city in business as a manufacturer; as
to such persons the amount of the tax with respect to such business shall be
equal to the value of the products, including byproducts, manufactured,
multiplied by the rate of one tenth of one percent (.001) where such value is
up to and including $6,000,000,0 00 and where such value exceeds
$6,000,000,000 the value of such products so exceeding the $6,000,000,000
shall be multiplied by the rate of twenty-five hundredths of one percent
(.00025).
2. For the years beginning January 1, 2010, and ending
December 31, 2015…"
1496
7.324 Therefore, on its own terms, the Everett M unicipal Code expresses the tax on manufacturers
as a general rate, applicable to all manufacturers, subject to an exception.
7.325 Further, the preamble to Ordinance 2759-04 provides:
"Whereas, the City of Everett agreed the standard rate of B&O tax of .001 shall
apply to manufacturing receipts up to including $6 billion of receipts …" 1497
7.326 The MSA, which was agreed between Boeing and the "State of Washington, County of
Snohomish, City of Everett and certain other govern mental units" also refers to the 0.001 rate of
taxation on manufacturers as the "standard rate":
"Exhibit B-8: City of Everett B&O Tax Rate Reduction
1. Rate Reduction – Standard rate of one-tenth of one percent (.001) on
manufacturing gross receipts up to $6 billion, after which the rate will reduce by 75%
to .00025
…
Representatives from Boeing and the City of Everett are currently discussing a
proposal to reduce City of Everett Business and Occupation taxes assessed on
Boeing's aerospace manufacturing activities at its Everett facility. The proposal sets
forth an addendum to the City of Everett Municipal Code Chapter 3.24…calling for a
rate reduction from the standard rate of .001 to .00025 for manufacturing gross
receipts greater than $6 billion."
 1498

1496 See Everett Ordinance 2759-04 (2004), Exhibit EC-61 and Everett Mun. Code ch. 3.24 (2004),
Exhibit EC-104 (emphasis added).
1497 Everett Ordinance 2759-04 (2004), Exhibit EC-61 (emphasis added).
1498 MSA Exhibit B-8, Exhibits to the MSA, Exhibit EC-59 (emphasis added).

BCI deleted, as indicated [***]

7.327 Therefore, the terminology employed by the City of Everett (and the State of Washington in
the MSA) reveals that the rate of 0.001 is the ge neral rate and that the deviations from this are
exceptional.
7.328 The fact that there is a time limit associated with the tax reduction also provides support for
the notion that the reduction is exceptional rather than establishing a new, permanent standard rate.1499
Further, unlike the Washington B&O tax regime, whic h includes up to 40 different rates of taxation,
in the City of Everett, apart from the rate a pplied to manufacturing revenue exceeding $6 billion
($7 billion or $8 billion), a single, uniform rate of 0.001 applies throughout the economy. The Everett
Municipal Code includes separate subsections ex tending the B&O tax to separate business activities,
for example, to manufacturing, extracting, wholesali ng, printing and publishing. However, the rate
applied to each sector is uniform at 0.001, apart from the change introduced by Ordinance 2759-04 for
manufacturing income above the relevant threshold. 1500 As a result, an examination of Chapter 3.24
of the Everett Municipal Code reveals that the deviation from 0.001 is indeed exceptional.
7.329 Therefore, we conclude that in the City of Everett there is a "defined normative benchmark"
against which to compare the revenue actually raised against the revenue that would be have been
raised "otherwise". Given our finding that there is a general rate of B&O taxation on manufacturing
income in Everett and that Ordinance 2759-04 introdu ces an exception to this, a "but for" test can be
employed. Application of the test leads to the c onclusion that, "but for" the exception introduced by
Ordinance 2759-04, the standard rate of 0. 001 would apply to all manufacturing revenue. 1501 F o r
these reasons, the Panel finds that there is a financial contribution within the meaning of
Article 1.1(a)(1)(ii) of the SCM Agreement.
7.330 The United States' rebuttal of the argument th at the City of Everett is forgoing revenue
otherwise due through the B&O tax rate reduction is limited to a single sentence:
"Since this tax rate reduction applies to all entities engaged in manufacturing in the
City, it is not the case that any revenue foregone would have been 'otherwise due'."1502
7.331 The United States does not explain on what basis th is is conclusive of the issue. Given our
finding that there is a general rule of taxation in the C ity of Everett, the "but for" test is dispositive of
the issue. The fact that an exceptional rate of ta xation may be widely or even universally available
goes to the question of specificity, rather than to the existence of a financial contribution. 1503
Therefore, we dismiss the argument of the United St ates and find that the City of Everett B&O tax

1499 Everett Ordinance 2759-04 (2004), Exhibit EC-61, section 3B.4.
1500 See Everett Mun. Code ch. 3.24 (2004), Exhibit EC-104.
1501 The European Communities argues that the law prior to the amendment is the benchmark for the
Article 1.1(a)(1)(ii) analysis. In our view, the benchmark is the standard rate as it exists after the amendment to
the law is made (i.e. the standard rate in the new, amended ordinance). In this case, it makes no difference to the
analysis, because the "standard rate" (0 .001) does not change as a result of the amendment. However, in some
cases the purpose of an amendment may be to create a new standard rate. If the comparison were with the pre-
amended law, this would mean that the but for test would always be satisfied.
1502 United States' first written submission, para. 514.
1503 Although not made explicit, it is possible that the United States' argument arises out of the
Appellate Body's statement in US – FSC that, where it is difficult to identify a general rule of taxation in the
Member State in question, a comparison of the fiscal treatment of legitimately comparable income should be
made to determine whether revenue "otherwise due" ha s been forgone. The United States may be suggesting
that, since the tax reduction is theoretically availabl e to all manufacturing entities, legitimately comparable
income, namely manufacturing revenue, is receiving the same fiscal treatment. However, in this case, given the
existence of a "defined norm ative benchmark" in the City of Everett B&O tax system, it is appropriate to apply
the "but for" test rather than the "legitimately comparable income" test. In fact, to apply the "legitimately
comparable income" test in these circumstances would result in conflating the financial contribution and the
specificity analysis.

BCI deleted, as indicated [***]

reduction constitutes the foregoing of revenue otherw ise due under Article 1.1(a)(1)(ii) of the SCM
Agreement.
7.332 Given our finding that the City of Evere tt B&O tax reduction constitutes a financial
contribution in the form of the foregoing of revenue otherwise due, the Panel finds that a benefit is
thereby conferred. The tax reduction is essentiall y a gift from the government, or a waiver of
obligations due, and it is clear that the market doe s not give such gifts. The tax reduction provides
advantages on non-market terms and therefore confers a benefit within the meaning of Article 1.1(b)
of the SCM Agreement.1504
7.333 For these reasons, the Panel finds that the City of Everett B&O tax reduction is a subsidy
within the meaning of Article 1 of the SCM Agreement.
(iv) Whether the subsidy is specific within the meaning of Article 2 of the SCM Agreement
Arguments of the European Communities
7.334 The European Communities submits that the City of Everett B&O tax reduction is de jure
specific within the meaning of Article 2.1(a) of the SCM Agreement .1505 Ordinance 2759-04 states
that its purpose is to benefit Boeing. 1506 Further, the tax reduction is limited to manufacturers with
output worth at least $6 billion per year. Apart from Boeing, no other manufacturer in Everett comes
close to manufacturing products with such a value. 1507 As a result, the European Communities
concludes that the tax rate reduction is limited e xplicitly to "an enterprise", namely Boeing. The
European Communities also argues that the reduction is limited to a "group of enterprises", namely
those enterprises manufacturing products in Everett worth over $6 billion annually.1508
7.335 In the alternative, the European Communities contends that the tax rate reduction is de facto
specific under Article 2.1(c) of the SCM Agreement. This is because Boeing is the only company that
qualifies for it, as no other manufacturer pr oduces goods with the required annual value. 1509 A f t e r
Boeing, the next largest manufacturer produces goods to the value of just over $1 billion per year. 1510
Further, the MSA and Ordinance 2759-04 state that the tax reduction is intended to benefit production
of the 787. In addition, Chapter 3.24.055 of the Everett Municipal Code incorporates section 1 of the
Ordinance with the heading "Findings and purpose – Boeing business and occupation tax
reduction".1511 As a result, the European Communities ar gues that the tax reduction is limited to "an
enterprise" (Boeing) or to a group of enterprises (those that make products in Everett worth over
$6 billion annually – which is only Boeing). 1512 Further, the European Communities submits that the
United States does not address its argument that the subsidy is de facto specific and therefore the
United States implicitly concedes this.
1513
7.336 The European Communities rej ects the United States' argument that Ordinance 2759-04
contains objective criteria that render it non-specific under Article 2.1(b). The "objective criteria or
conditions" referred to in Article 2. 1(b) must be "neutral" and must "not favour certain enterprises

1504 See also paras. 7.168-7.171 of this Report.
1505 European Communities' first written submission, para. 159.
1506 European Communities' first written submission, para. 159.
1507 European Communities' first written submission, para. 159.
1508 Summary of the European Communities' Specificity Arguments, Exhibit EC-1286.
1509 European Communities' first written submission, para. 161.
1510 European Communities' first written submission, para. 159.
1511 European Communities' first written submission, para. 161.
1512 Summary of the European Communities' Specificity Arguments, Exhibit EC-1286.
1513 European Communities' second written submission, para. 94 and European Communities'
comments on United States' response to question 233, para. 321.

BCI deleted, as indicated [***]

over others". This is not the case for the City of Everett tax rate reduction, because the condition to
access the subsidy is such that only one corporation can satisfy it. 1514 The European Communities
also disagrees with the suggestion from the United Stat es that an analysis under Article 2.1(c) is not
necessary if a measure falls within Article 2.1(b) of the SCM Agreement. The text of Article 2.1(c)
provides that a panel may make a finding of specificity, "notwithstanding any appearance of non-
specificity resulting from the application of the principles laid down in subparagraphs (a) and (b)".1515
Arguments of the United States
7.337 The United States argues that although Ordinance 2759-04 mentions Boeing as a beneficiary
of the tax reduction, the Ordinance is not specific under Article 2.1(a) of the SCM Agreement because
it is in no way limited to Boeing. Rather, the Ordina nce applies to "every person engaging within the
city in business as a manufacturer". It is a neutra lly worded tax measure with broad applicability to
other large businesses.1516
7.338 The United States also submits that Ordinance 2759-04 contains objective criteria that render
it non-specific under Article 2.1(b) of the SCM Agreement .1517 According to the United States,
"objective" conditions are those that are observa ble and capable of being evaluated and applied
without subjective judgment. 1518 The conditions associated with the City of Everett tax reductions
meet this definition because the tax reductions appl y to "every person engaging within the city in
business as a manufacturer" when certain monetary values for the manufactured products are met. 1519
At one point, the United States seems to suggest that once a subsidy is found to fall within
Article 2.1(b), it is non-actionable:
"Pursuant to Article 2.1(b), a subsidy may be found to be de jure non-specific and
therefore not an actionable subsidy under the SCM Agreement".1520
7.339 However, in answer to Panel questioning, the United States acknowledges that a subsidy
found de jure non-specific under Article 2.1(b) may be found to be de facto specific under
Article 2.1(c) of the SCM Agreement.1521
7.340 In response to a Panel question regarding whethe r the United States concedes that the City of
Everett B&O tax reductions are de facto specific, the United States responds: "the primary argument
of the United States with respect to the City of Everett B&O tax reduction is that it does not confer a
subsidy".1522
Evaluation by the Panel
7.341 In our view, the City of Everett B&O tax reduction is a clear case of a de facto specific
subsidy. Article 2.1(c) of the SCM Agreement provides:
"If, notwithstanding any appearance of non-specificity resulting from the application
of the principles laid down in subparagraphs (a) and (b), there are reasons to believe
that the subsidy may in fact be specific, other factors may be considered. Such

1514 European Communities' second written submission, para. 96.
1515 European Communities' comments on United States' response to question 49, para. 179.
1516 United States' first written submission, para. 515.
1517 United States' first written submission, para. 516.
1518 United States' response to question 49, para. 139.
1519 United States' first written submission, para. 516.
1520 United States' response to question 49, para. 137.
1521 United States' response to question 145, para. 128.
1522 United States' response to question 233, para. 387.

BCI deleted, as indicated [***]

factors are: use of a subsidy programme by a limited number of certain enterprises,
predominant use by certain enterprises, the granting of disproportionately large
amounts of subsidy to certain enterprises, and the manner in which discretion has
been exercised by the granting authority in the decision to grant a subsidy."
7.342 The "value of the products manufactured", whic h provides the threshold for the tax reduction,
is determined by the gross proceeds of sale derived from the manufactured products.
1523 T h e
European Communities submits an exhibit that lists "Top Everett Manufacturers" by sales revenue.1524
After Boeing, the company with the next largest sales revenue is UNOVA, which in 2005 generated
$1.12 billion in revenue. All of the other manufacturers in Everett generated less than
one billion dollars.1525 Further, the United States does not contest the European Communities'
assertion that only Boeing meets the threshold required to benefit from the tax reduction. On the basis
of this evidence, we conclude that only Boeing uses the subsidy programme.
7.343 This is perhaps not a coincidence given that th e language in the preamble to Ordinance 2759-
04 and in Section 3.24.055 of the City of Evere tt Municipal Code indicates that the reduction was
enacted with Boeing in mind. Section 3.24.055 essentially repeats the preamble and provides:
"3.24.055 Findings and purpose – Boeing business and occupation tax reduction
The City of Everett, the State of Washi ngton, the Port of Everett and the Boeing
Company on December 19, 2003, entered into 'Project Olympus Master Site
Development and Location Agreement' concer ning the location in the City of Everett
the facility for the manufacturing of the airc raft commonly referred to as the 7E7.
The purpose of said agreement was to assi st the Boeing Company in obtaining a
suitable site including buildings, related facilities, infrastructure and other
improvement for the location of the final assembly of the 7E7 aircraft and other
operations related thereto. As a result of diligent good faith negotiations the City of
Everett and the Boeing Company have agreed on a business and occupation tax
reduction to be permanent for the calendar years 2006 through 2023. During such
period the City of Everett agrees not to susp end, revoke or require repayment of such
reduction as authorized by its business and occupation tax reduction; provided the
final assembly of the 7E7 aircraft begins by December 31, 2007. The rate reduction
by the City of Everett is intended by th e parties to create an estimated net present
value reduction of approximately thirty -five million dollars, which amount is
calculated using a six percent discount rate over a twenty-year period beginning in
2004 and based on current estimated aircraft production and sales."
 1526

1523 European Communities' first written submission, para. 145, footnote 228.
1524 E-mail from Charli McGourty, Administrative As sistant, City of Everett Mayor's Office,
5 May 2005, and attached spreadsheets of top Everett manufacturers as compiled by the City of Everett Mayor's
Office, Exhibit EC-106.
1525 One of the lists in E-mail from Charli McGourty, Administrative Assistant, City of Everett Mayor's
Office, 5 May 2005, and attached spreadsheets of top Ev erett manufacturers as compiled by the City of Everett
Mayor's Office, Exhibit EC-106, states that Fluke Corp has sales revenue of $100-500 million, while the next
list states that it has corporation-wide revenue of $4.57 billion. We assume that the discrepancy arises because
the corporation-wide revenue is not all taxable in the City of Everett and that the figure to rely on for the
purposes of eligibility for the tax reduction is $100-$500 million. In any event, even if Fluke Corp. does
generate sales revenue of $4.57 billion taxable within the City of Everett, this does not affect our analysis,
because the fact remains that only Boeing meets the threshold to be eligible for the tax reduction.
1526 See Everett Mun. Code ch. 3.24 (2004), Exhibit EC-104.

BCI deleted, as indicated [***]

7.344 Therefore, we find that the City of Evere tt B&O tax reduction is de facto specific under
Article 2.1(c) of the SCM Agreement on the basis th at the subsidy programme is "used by a limited
number of certain enterprises", namely Boeing.
7.345 The submissions of the parties regarding whet her the City of Everett B&O tax reduction is de
jure specific under Article 2.1(a) of the SCM Agreement, on the basis that it is limited to a group of
enterprises, namely those enterprises making products in Everett worth over $6 billion per year, raise
several questions regarding the relationship between Articles 2.1(a) and 2.1(b) of the SCM Agreement
and the interpretation of "objective criteria or conditions" under Article 2.1(b). However, in our view,
for the reasons outlined in the preceding paragraphs, the City of Everett B&O tax reduction is clearly
de facto specific and therefore we find it unnecessary to resolve the question of whether it is also de
jure specific.
7.346 For these reasons, the Panel finds that the City of Everett B&O tax reduction is a specific
subsidy within the meaning of Articles 1 and 2 of the SCM Agreement.
(v) The amount of the subsidy to Boeing's LCA division
Arguments of the European Communities
7.347 The European Communities submits that the amount of the tax reduction to
Boeing's LCA division is $67.5 million over the period 2006-2023. 1527 The European
Communities derives this figure from Ordinance 2759-04, which states that the net present value of
the reduction is approximately $35 million over the life of the measure. Specifically, the Ordinance
provides:
"The rate reduction by the City of Everett is intended by the parties to create an
estimated net present value reduction of a pproximately thirty-five million dollars
($35,000,000.00), which amount is calculated using a six percent (6%) discount rate
over a twenty (20) year period beginning 2004 and based on current estimated aircraft
production and sales."
 1528
7.348 To arrive at the figure of $67.5 million, the European Communities assumes that the value of
the tax reduction in real terms should be allocated evenly over the period 2006-2023. The European
Communities then calculates the nominal value of th e tax reduction using the 6 per cent discount rate
cited in Ordinance 2759-04. This results in a total amount for the subsidy of $67.5 million. 1529
Although the European Communities argues that this is likely to be an underestimate of the value of
the subsidy, given that Boeing's forecast for LCA deliveries has increased substantially since 2004, it
accepts $67.5 million as the appropriate amount to attribute to the tax reduction to Boeing's LCA
division.1530
7.349 In response to a Panel question, the Europ ean Communities agrees that it may not be
necessary for the Panel to arrive at a total dollar valu e for the subsidy, given that the tax reduction is
calculated on an ad valorem basis.1531 However, the European Commun ities argues that this leads to
"certain complications" in the case of the City of Everett B&O tax reduction because the reduction
applies only once the value of goods sold has exceeded certain thresholds. 1532 In any event, the

1527 European Communities' first written submission, para. 152.
1528 European Communities' first written submission, para. 152 and Everett Ordinance 2759-04 (2004),
Exhibit EC-61.
1529 European Communities' first written submission, para. 153.
1530 European Communities' first written submission, para. 152.
1531 European Communities' response to question 229, para. 427.
1532 European Communities' response to question 229, para. 430.

BCI deleted, as indicated [***]

European Communities notes that whether the Panel assesses the subsidies using a total dollar amount
or on an ad valorem basis, the resulting per-aircraft subsidization figures remain substantially the
same.1533
Arguments of the United States
7.350 The United States' position is that only revenue th at has actually been fo regone in the past
should be included in calculating the amount of the tax reduction. 1534 Therefore, only the benefit to
Boeing in 2006 and 2007 should be quantified, resu lting in an amount for the tax reduction of $5.5
million.1535 Further, the United States agrees that it is not necessary for the Panel to arrive at a precise
dollar value for the tax reduction. This is because the reduction is calculated on an ad valorem basis
and as a result any subsidization rate remains constant regardless of the absolute levels of Boeing's
sales volumes and prices.1536
Evaluation by the Panel
7.351 For the same reasons as expressed in relati on to the Washington HB 2294 taxation measures,
we quantify the amount of the City of Everett B&O tax reduction up until 2006.1537
7.352 Given that the City of Everett B&O tax reduction is calculated on an ad valorem basis, once
the threshold for receipt of the tax reduction has been reached, the subsidization rate on a per-aircraft
basis remains constant irrespective of the sales and de liveries that take place in the relevant period.
The subsidization rate until the end of 2006 is 0.075 pe r cent of gross proceeds of sale for sales above
$6 billion.
7.353 In relation to the dollar value of the benefit of the City of Everett B&O tax reduction to
Boeing's LCA division, the European Communities' calculation of a nominal annual value for the tax
reduction is based on the best information availabl e, namely the figure and the discount rate in
Ordinance 2759-04. We note that the United Stat es does not object to the use of these figures and
does not object to the method employed by the European Communities to convert the lump sum
figure, which is expressed in real terms, into annual nominal amounts. Relying on these figures, the
Panel finds that the amount of the City of Ev erett B&O tax reduction received by Boeing's LCA
division through 2006 is $2.2 million.
(vi) Conclusion
7.354 For these reasons, the Panel finds that the loca l tax reduction introduced by the City of
Everett is a specific subsidy within the meaning of Articles 1 and 2 of the SCM Agreement. The
Panel estimates that the amount of the subsid y to Boeing's LCA division through 2006 is
$2.2 million.

1533 European Communities' response to question 229, para. 428.
1534 United States' first written submission, footnote 690.
1535 United States' first written submission, footnote 690. The United States indicates that in calculating
the value of the tax reduction for 2006-2007 it relies on State and Local Subsidies to Boeing LCA Division,
Exhibit EC-27. This reveals that the United States implicitly accepts the method the European Communities has
used in allocating the $35 million figure over time and in converting it into nominal terms. We note that there
appears to be a clerical error in the United States' submis sions. The United States reports that the value of the
tax reduction for 2006 and 2007, as reported in State and Local Subsidies to Boeing LCA Division, Exhibit EC-
27, is $5.5 million. However, an examination of Exhibit EC-27 indicates that the amount in these two years is
in fact $4.5 million ($2.2 million in 2006 and $2.3 million in 2007).
1536 United States' response to question 229, para. 374.
1537 See para. 7.252.

BCI deleted, as indicated [***]

(c) Project Olympus Master Site Agreement s ubsidies pursuant to "The Boeing Incentive
Package"
(i) Introduction
7.355 The MSA was concluded on 19 December 2003. Article 1.2 of the MSA provides:
"This Agreement is intended to legally bind th e parties, subject only to the granting,
adoption or enactment of the respectiv e resolutions, ordinances, legislative
amendments and similar authorizations that may be required to provide any
Commitments. This Agre ement sets forth the terms and conditions under which
Boeing intends to locate the Facilities and operations related to Project Olympus in
the State and the covenants, represen tations and warranties in connection
therewith."
1538
7.356 "Project Olympus" means "a fully operational state-of-the art facility for, initially, the
assembly of the 7E7 Aircraft, together with all related utilities and transportation improvements and
facilities necessary and appurtenant thereto to be located on or connected to the Facilities Site,
including any off-site improvements and facilities". 1539 Article 1.3 of the MSA provides that "{i}n
consideration of Boeing locating the Facilities and operations related to Project Olympus at the
Facilities Site, the Public parties shall fully perfo rm at all times their individual Commitments set
forth in this Agreement".1540 The MSA contains specific provisions with respect to: the facilitation of
Project Olympus1541; bonds, grants, credits, abatements , exemptions and related matters 1542; facilities
site1543; site suitability and development 1544; job training and other employment matters 1545; 747-400
large cargo freighter programme 1546; Boeing suppliers 1547; representations, warranties, covenants and
acknowledgements1548; and indemnification and remedies.1549
7.357 The European Communities argues that eight measures referred to in the MSA constitute
specific subsidies within the meaning of Articles 1 and 2 of the SCM Agreement. These measures
are: (i) specific road improveme nts for the benefit of Boeing's LCA production facilities in Everett;
(ii) the waiver of landing fees for Boeing's 747 Larg e Cargo Freighters ("the 747 LCF") at Paine Field
to lower the costs of transporting 787 components to Everett; (iii) improvements to rail-barge transfer
capabilities and expansion of the South Terminal f acility to facilitate the transportation of 787
components to Everett; (iv) the freezing of rates fo r water, sanitary sewer, solid waste, and process
wastewater services utilized by Boeing's LCA production facilities in Everett; (v) the provision of
coordinators to Boeing to help start up Project Olympus; (vi) the creation of a workforce development
programme and the provision of an Employment Resource Center to train Boeing's employees who
will work on the assembly of the 787; (vii) the ex tension to 747 LCFs of tax and other incentives
provided to the 787; and (viii) the assumption of litigation costs that Boeing may incur in relation to

1538 MSA, Art. 1.2, Exhibit EC-58.
1539 MSA, Art.2.1, Exhibit EC-58.
1540 MSA, Art. 1.3.1, Exhibit EC-58.
1541 MSA, Art. III, Exhibit EC-58.
1542 MSA, Art. IV, Exhibit EC-58.
1543 MSA, Art. V, Exhibit EC-58.
1544 MSA, Art. VI, Exhibit EC-58.
1545 MSA, Art. VII, Exhibit EC-58.
1546 MSA, Art. VIII, Exhibit EC-58.
1547 MSA, Art. IX, Exhibit EC-58.
1548 MSA, Art. X, Exhibit EC-58.
1549 MSA, Art. XI, Exhibit EC-58.

BCI deleted, as indicated [***]

the MSA.1550 The European Communities contends that th e total amount of the subsidies to Boeing's
LCA division resulting from these eight measures over the period 2004-2024 is $463.3 million.1551
7.358 The United States argues that none of the eight measures challenged by the European
Communities are actionable subsidies under the SCM Agreement and that each claim of the European
Communities fails under one or more of the requi rements of the SCM Agreement for a potentially
actionable subsidy – (i) a financial contribution, (ii) that confers a benefit, and (iii) is specific.
7.359 The Panel first examines the infrastructure-re lated measures challenged by the European
Communities, which account for some eighty per cent of the total amount of the subsidies allegedly
provided pursuant to the MSA.1552
(ii) Road improvements around Boeing's Everett fac ility, construction of a rail barge transfer
facility and expansion of South Terminal by the Port of Everett
Introduction
7.360 The European Communities argues that: (i) road improvement projects around Boeing's
Everett facility and (ii) the construction of a rail-ba rge transfer facility and the expansion of the South
Terminal facility by the Port of Everett, constitute specific subsidies within the meaning of Articles 1
and 2 of the SCM Agreement. The European Comm unities estimates that the amount of the subsidy
to Boeing's LCA division from the road improvement projects is $291.2 million over the period 2004-
2024, that the amount of the subsidy to Boeing's LCA division resulting from the construction of the
rail-barge transfer facility is $16.0 million over the period 2004-2024, and that the amount of the
subsidy to Boeing's LCA division resulting from th e expansion of the South Terminal is $34 million
over the period 2004-2024.1553
7.361 The United States argues that the measures chal lenged by the European Communities are not
subsidies within the meaning of Article 1 of the SCM Agreement because they constitute general
infrastructure.
The measures at issue
Road Improvements for Boeing's Everett Facility – I-5 and SR 527 Expansion
Projects
7.362 The European Communities challenges what it re fers to as "road improvements for Boeing's
Everett facility" 1554, which it alleges were specifically designe d to "(1) alleviate traffic congestion
around Boeing's Everett plant; (2) allow Boeing to accommodate additional h eavy-duty truck traffic;
and (3) provide sufficient road capacity to handle a substantial increase in employment at the Boeing
facility".1555 The measures at issue are two road improve ment projects undertaken by the State of
Washington and the City of Everett in the vicinity of Boeing's facilities in Everett. The first project
("I-5 expansion project") involved the widening of freeway lanes and extending High Occupancy

1550 European Communities' first written submission, paras. 91-92 and 163-164.
1551 State and Local Subsidies to Boeing LCA Division, Exhibit EC-27, p. 2.
1552 The amount of the alleged infrastructure-related subsidies (i.e. the road and port improvements, 747
LCF landing fee waivers, and utility rate freezes) over the period 2004-2024 is $370.80 million. State and Local
Subsidies to Boeing LCA Division, Exhibit EC-27, p. 2.
1553 State and Local Subsidies to Boeing LCA Division, Exhibit EC-27, p. 2.
1554 European Communities' first written submission, p. 88. The European Communities also refers to
these measures as the "787 Road Improvement Package". European Communities' first written submission,
para. 210.
1555 European Communities' first written submission, para. 213.

BCI deleted, as indicated [***]

Vehicle ("HOV") lanes on Interstate 5 ("I-5") between State Route ("SR") 526 1556 and U.S.
Highway 2.1557 The second project ("SR 527 expansion pr oject") involved the addition of another
lane in each direction on SR 527 in the stretch of highway from 112 th Street NE in the north to 132 nd
Street NE in the South.1558
7.363 Article 6.11.1 of the MSA provides:1559
 "6.11 Road Access
6.11.1 DOT and the City each acknowledge th at they have been provided with
detailed information regarding Boeing's roadway access requirements as set forth on
Exhibit C-9 . DOT and the City each represent and warrant that they own and
maintain certain public roadways which pr ovide access to or are in proximity to the
Facilities Site and which are described w ith more particularity in Exhibit C-9 . DOT
and the City each shall undertake and complete all design and construction of all road
and road and traffic control-related improvements set forth in Exhibit C-9 pursuant to
the terms, conditions and schedule set fort h therein. Such improvements shall be
designed and constructed in accordance w ith drawings and specifications in
consultation with Boeing prior to DOT and the City each seeking of bids or
proposals, or letting of contracts, for the construction thereof. All road access
improvements shall be designed and constr ucted in accordance with the American
Association of State Highway Transportati on Officials and State standards for heavy-
duty truck traffic meeting the requirements that Boeing has provided to DOT and the
City. After the completion of construction of the road access improvements, such
improvements shall be owned by, maintained, repaired and replaced, as necessary by
DOT and the City. All design and constructi on work to be performed by or on behalf
of DOT and the City shall be accorded the highest priority. DOT and the City shall,
upon making a determination that such action is in the public interest, promptly after
the Effective Date, acquire all such easements and property interests as may be
necessary to provide for the road access improvements for the Facilities Site as set
forth herein and in Exhibit C-9
. The sources of funding for such road access
improvements are set forth in Exhibit C-9 . Each of DOT and the City shall pay all
costs, fees and expenses in connection with or arising out of all obligations and
Commitments set forth in this Section 6.11 . DOT and the City each represent and
warrant that the road access that currently serves, or will serve upon substantial
completion of the road access improvements required under this Section 6.11 . The
Facilities Site shall be sufficient to meet road access requirement s for the needs of

1556 The European Communities notes that SR 526 "is commonly known as the Boeing Freeway".
European Communities' first written submission, para. 214, footnote 317. The United States contends that
"{t}his name is correct, but it merely refers to the Boeing plant's status as an easily identifiable landmark on SR
526. SR 526 is, in fact, a public road that is used by thousands of local residents, business, and tourists".
United States' first written submission, para. 522, footnote 696.
1557 United States' first written submission, para. 522; European Communities' first written submission,
para. 215; WSDOT Projects: I-5 – Everett, SR 526 to US 2 HOV Lanes, Exhibit EC-118; Washington State
Department of Transportation, "Nickel Funding Package" Enacted for Transportation by the 2003 State
Legislature, p. 15, Exhibit EC-123.
1558 United States' first written submission, para. 523; European Communities' first written submission,
para. 215; Washington State Department of Transportation, "Nickel Funding Package" Enacted for
Transportation by the 2003 State Legislature, p. 17, Exhibit EC-123. WSDOT Projects: MAP SR 527 Widening
132 St. SE to 112 St. SE, Exhibit US- 206; SR 527 -132 St. SE to 112 St. SE, Exhibit US-207; SR 527 Route
Development Plan, Exhibit US-208.
1559 "DOT" means the Washington State Department of Transportation. "City" means City of Everett,
Washington. MSA, Art. 2.1, Exhibit EC-58.

BCI deleted, as indicated [***]

Boeing and its Suppliers to provide sufficie nt capacity for employment levels up to
83,000 through 2030.
6.11.2 The City and DOT shall do all thi ngs and take all actions necessary to obtain
funding for and construction of any new arterial roadways, including any utilities
necessary to facilitate future development, as set forth in Exhibit C-9."
7.364 Most of the funding for the I-5 and SR 527 expansion projects was provided by an
appropriations bill passed by the Washington Stat e legislature in 2003. This bill established a
$3.9 billion "Nickel Funding Package" to finance 158 infrastructure projects. 1560 The European
Communities emphasizes that it "is challengi ng only the $291.2 million allocated for the
infrastructure improvements that are part of the M aster Site Agreement obligations undertaken by the
State and the City, and not the entire $3.9 billion transportation improvement package".1561
7.365 The I-5 expansion project was expected to be completed by June 2008. The SR 527
expansion project was completed in May 2006.1562
Port of Everett – Improvement of Rail-Ba rge Transfer Capabilities and Expansion of
South Terminal Facility
7.366 The European Communities challenges the constr uction of a new rail-barge transfer facility
and the expansion of the South Terminal facility by the Port of Everett. Regarding the rail-barge
transfer facility, the European Communities alleges that this "new facility will make it easier for
Boeing to accept delivery of oversized containers ho lding 787 parts, and transport them to its 787
assembly facility". 1563 Regarding the expansion of the South Terminal, the European Communities
contends that "{t}his expansion will allow the South Terminal to directly accept ships carrying
oversized containers of 787 parts from Japan".1564
7.367 Article 6.12 of the MSA provides:1565
 "6.12 Rail
6.12.1 The Port of Everett acknowledges that it has been provided with detailed
information regarding Boeing's rail and rail access requirements as set forth in
Exhibit C-10. The Port of Everett represents and warrants that BNSF owns, operates
and maintains certain railroad rights of way and track which are in proximity to the
Facilities Site and which are described w ith more particularity in Exhibit C-10
. The
Port of Everett shall undertake the design a nd construction of all rail and rail-related
improvements as described on Exhibit C-10 pursuant to the terms, conditions and
schedule set forth therein. Such improvements shall be designed and constructed in
accordance with drawings and specifications in consultation with Boeing prior to the
earlier of the Port of Everett seeking of bids or proposals, or the letting of contracts,
for the construction thereof. All rail impr ovements shall be designed and constructed
in accordance with the Standards of the American Railway Engineering Association.
After the completion of construction of the rail improvements, such improvements

1560 ESHB 1163, 58th Leg., 2003 Reg. Sess. (Wash. 2003), Exhibit EC-121.
1561 European Communities' first written submission, para. 211.
1562 European Communities' first written submission, paras. 223-224.
1563 European Communities' first written submission, para. 253.
1564 European Communities' first written submission, para. 255.
1565 "Port of Everett" means the Port of Everett, a municipal corpora tion of the State of Washington.
"BNSF" means Burlington Northern Santa Fe Corporation, a Delaware corporation. MSA, Art. 2.1, Exhibit EC-
58.

BCI deleted, as indicated [***]

shall be owned and operated by BNSF and maintained, repaired and replaced, as
necessary by BNSF. The Port of Everett shall, upon making a determination that
such action is in the public interest, prom ptly after the Effective Date, acquire, or
facilitate discussions for the acquisition by BNSF of all such easements and property
interests as may be necessary to provide for the rail service to the Facilities Site set
forth herein and in Exhibit C-10
. All design and construction work to be performed
by or on behalf of the Port of Everett sh all be accorded the highest priority. The
sources of funding for such rail improvements are set forth in Exhibit C-10 . The Port
of Everett shall pay all costs, fees and e xpenses in connection with or arising out of
all obligations and Commitments set forth in this Section 6.12 . The Port of Everett
represents and warrants that the rail system that currently serves the Facilities Site is
sufficient to meet all of Boeing's rail sy stem requirements for Project Olympus upon
substantial completion of the rail system improvements required under this
Section 6.12.
6.12.2 The Port of Everett shall cons ult regularly with Boeing on the design,
development and construction of the rail to dock facility as set forth in Exhibit C-10."
7.368 Article 6.13 of the MSA provides:
 "6.13 Dock and Port
6.13.1 The Port of Everett acknowledges that it has been provided with detailed
information regarding Boeing's dock and port requirements as set forth in Exhibit C-
11. The Port of Everett represents and warrants that its {sic} owns, operates and
maintains those dock and port facilities which are in proximity to the Facilities Site
and which are described with more particularity in Exhibit C-11 . The Port of Everett
shall undertake and complete the design and construction of all dock and port and all
dock and port-related improvements as described on Exhibit C-11 pursuant to the
terms, conditions and schedule set forth therein. Such improvements shall be
designed and constructed in accordance w ith drawings and specifications in
consultation with Boeing prior to the earlier of the Port of Everett's seeking of bids or
proposals, or letting of contracts, for th e construction thereof. All dock and port
improvements shall be designed and construc ted in accordance with all applicable
standards. After the completion of cons truction of the dock and port improvements,
the dock, port and such improvements shall be owned, operated, maintained, repaired
and replaced, as necessary, by the Port of Ev erett. All design and construction work
to be performed by or on behalf of the Po rt of Everett shall be accorded the highest
priority. The Port of Everett shall, upon making a determination that such action is in
the public interest, promptly after the Eff ective Date, acquire all such easements and
property interests as may be necessary to provide for the dock and port improvements
as set forth herein and in Exhibit C-11. The sources of funding for such dock and port
improvements are set forth in Exhibit C-11 . The Port of Everett shall pay all costs,
fees and expenses in connection with or arising out of all obligations and
Commitments set forth in this Section 6.13 . The Port of Everett represents and
warrants that the port and dock system th at currently serves, or will serve, the
Facilities Site shall be sufficient to meet all of Boeing's port and dock system
requirements for project Olympus upon subs tantial completion of the port and dock
system improvements required under this Section 6.13.
6.13.2 The Port of Everett shall enter into an agreement with Boeing pursuant to
which: (a) port access will be available on a guaranteed and first priority basis to
Boeing pursuant to an agreement to be ente red into between the Port of Everett and

BCI deleted, as indicated [***]

the carrier nominated by Boeing; and (b) in the event that space is unavailable at any
time for Boeing at berth having direct rail access, the Port of Everett shall make
access to a berth available to Boeing at the Port of Everett having truck access or
efficient truck-to-rail access.
6.13.3 The Port of Everett shall cons ult regularly with Boeing on the design,
development and construction of the S outh Terminal facility as set forth in
Exhibit C 11
."
7.369 The Port of Everett broke ground on the ra il-barge transfer facility in August 2005 1566 and as
of mid-2006 it was nearing completion. 1567 The European Communities contends that construction of
the expanded South Terminal facility was expected to begin in mid-2007, with completion between
2009-2011.1568 The United States contends that the expansion of the South Terminal facility has not
occurred.1569
Arguments of the European Communities
7.370 The primary argument advanced by the European Communities as to why the I-5 and SR 527
expansion projects, the construction of the rail-barge transfer facility and the expansion of the South
Terminal facility constitute financ ial contributions in the sense of Article 1.1(a)(1) of the SCM
Agreement is that they involve a provision of go ods or services other than general infrastructure
within the meaning of Article 1.1(a)(1)(iii).1570 Alternatively, the European Communities submits that
each of these measures involves a potential direct transfer of funds within the meaning of
Article 1.1(a)(1)(i).1571
7.371 The European Communities argues that the ro ad improvement measures, referred to in
Article 6.11 and Exhibit C-9 of the MSA, and the Po rt of Everett improvement measures, referred to
in Articles 6.12-6.13 and Exhibits C-10 and C-11 of the MSA, constitute financial contributions
within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement in the form of provisions of
infrastructure that is not general. 1572 The European Communities challenges the infrastructure
improvement projects rather than the provision of the underlying infrastructure itself.1573
7.372 The European Communities submits that infrastru cture cannot be general within the meaning
of Article 1.1(a)(1)(iii) if pertinent facts, or the "totality of facts and circumstances" suggest that the
infrastructure is "partial" or "particular" in some way.1574 Use or access by the public at large does not
suffice to conclude that infrastructure is general. Rather, the totality of facts and circumstances
surrounding the provision of infrastructure by a government must be examined to determine whether
that infrastructure is general or non-general.
1575 The European Communities submits that an
interpretation of "general infrastru cture" based on the ordinary meaning of the terms, the object and
purpose of the SCM Agreement, and the negotiating history of the SCM Agreement supports its view
that whether infrastructure is available for use by the general public is not decisive.

1566 European Communities' first written submission, para. 254.
1567 European Communities' first written submission, para. 254.
1568 European Communities' first written submission, para. 257.
1569 United States' first written submission, para. 549.
1570 European Communities' first written submission, paras. 225-227 and 258.
1571 European Communities' first written submission, paras. 228 and 258.
1572 European Communities' first written submission, paras. 225-227 and 258.
1573 European Communities' response to question 36, paras. 117-121.
1574 European Communities' second written submission, para. 131.
1575 European Communities' second written submission, paras. 132-133.

BCI deleted, as indicated [***]

7.373 The European Communities argues that the fact that the SCM Agreement does not provide
any textual clarification, specification, or explanation of the phrase "general infrastructure"
demonstrates that Members did not intend to make a particular factual circumstance, or a particular
set of circumstances, determinative and that it was the intention of Members that "general
infrastructure" be interpreted in such a manner as to take account of diverse factual circumstances.
1576
Thus, the interpretation of the meaning of "general infrastructure" in Article 1.1(a)(1)(iii) must be
based on the rules of treaty interpretation laid down in the Vienna Convention. The ordinary meaning
of the word "general" is "{i}ncluding, involving, or affecting all or nearly all the parts of a specified
or implied whole...; completely or nearly univer sal; not partial, particular, local, or sectional".
1577 In
the light of this ordinary meaning of "general", the European Communities asserts that while use or
access by all or nearly all of the public should certa inly be a relevant consideration, "infrastructure
that is somehow partial or particular by means of other facts and circumstances would necessarily be
non-general".
1578 Infrastructure that is intended to alter the competitive position of firms is not
general within the ordinary meaning of the term "general" because it enhances the competitive
position of one firm vis-à-vis other firms and is ther eby "partial" to that firm in that it favours that
firm over others.1579
7.374 The European Communities submits that a cons ideration of the object and purpose of the
SCM Agreement sheds further light on the meaning of the phrase "general infrastructure". The reason
for the exclusion of general infrastructure from the WTO disciplines is that while the SCM Agreement
provides disciplines regarding the grant of subs idies to specific economic operators, it does not
interfere with the legitimate government choices to pursue public policies for the benefit of the
population as a whole. 1580 Interpreted in the light of object and purpose of the SCM Agreement, the
phrase "general infrastructure" covers infrastructure measures for the public interest i.e. infrastructure
measures designed to benefit the public as a whole rather than a particular company or group of
companies.1581
7.375 The European Communities argues that the dr afting history of the SCM Agreement lends
further support to the view that use or access by th e public at large is not a determining factor in
considering whether infrastructure is general. In th is regard, it refers to a paper which it submitted to
the Uruguay Round Negotiating Group on Su bsidies and Countervailing Measures 1582 as support for
the proposition that the exclusion of general infrastructure from the scope of Article 1.1(a)(1)(iii) does
not apply to improvements to infrastructure that have the potential to alter the competitive positions of
firms, even if that infrastructure may be useable or accessible to the public.1583
7.376 The European Communities considers that whet her infrastructure is general for the purposes
of Article 1.1(a)(1)(iii) of the SCM Agreement is a question distinct from whether a subsidy is
specific for the purposes of Article 2. In order to be excluded from the scope of application of the

1576 European Communities' second written submission, paras. 134-135.
1577 European Communities' first written su bmission, para. 226, referring to the New Shorter Oxford
English Dictionary 1073 (4th ed. 1993); European Communities' second written submission, para. 136.
1578 European Communities' second written submission, para. 136.
1579 European Communities' response to question 129, para. 92.
1580 European Communities' second written submission, para. 137. The European Communities asserts
that this is also reflected in th e preamble to the WTO Agreement, accord ing to which Members recognize that
"their relations in the field of trade and economic endeavour should be conducted with a view to raising
standards of living".
1581 European Communities' response to question 129, paras. 93, 97; European Communities' comments
on United States' response to question 128, para. 173 ("The critical inquiry in considering whether infrastructure
is 'general' is whether th e infrastructure serves the public interest or the interest of a particular company or
group of companies." (italics original).)
1582 Submission by the European Community, 27 November 1989, MTN.GNG/NG10/W/31, p. 6.
1583 European Communities' second written submission, para. 138.

BCI deleted, as indicated [***]

SCM Agreement, it should be clear and unambi guous that the measure at issue relates to
infrastructure that is not "partial" or "particular" in some way. Such a determination should be a
straightforward factual exercise. If, on the other hand, there are facts suggesting that the
infrastructure might be particular in some way, th e measure should not be excluded from the scope of
application of the SCM Agreement in the initial financial contribution analysis.
1584
7.377 The European Communities argues that the dicti onary definitions cited by the United States
do not support the conclusion drawn by the United States that "infrastructure is general if the
infrastructure is universally available to all or nearly all inhabitants or users of the relevant area". The
United States' single-pronged approach not only is without any foundation in the SCM Agreement but
also would allow Members to subvert the object and purpose of the SCM Agreement.
Article 1.1(a)(1)(iii) of the SCM Agreement uses th e word "general", and not the words "accessible"
or "available". Because the word "general" relates to more than just accessib ility or availability, the
determination of whether infrastructure is general should be based on an examination of the totality of
the facts and circumstances pertinent to the infrastructure (or infrastructure improvement) at issue.1585
7.378 As to why the I-5 and SR 527 expansion proj ects do not constitute a provision of general
infrastructure, the European Communities contends that the measures were "part of a tailor-made
package for Boeing to improve transportation infrastru cture only in the vicinity of the Boeing facility
at Everett".1586 The measures were designed to alleviate traffic congestion around the Boeing Everett
plant, to accommodate additional heavy-duty truck traffic into and round the Boeing Everett plant,
and to increase employment capacity at the Boeing Ev erett plant. The work on the projects at issue
coincided with the start-up of the 787 programme, a nd the Washington State Legislature had rejected
previous efforts to improve the same roads. Th e European Communities also asserts that the road
improvement projects were the result of negotiatio ns between Boeing and the State of Washington
before Boeing agreed to site its 787 facility in Everett and were thus a pre-condition for Boeing's
agreement to site its facility in Everett.1587
7.379 The European Communities rejects the argumen t of the United States that the road
improvement projects at issue were necessary because of problems of traffic congestion on I-5 and SR
527. The points made by the United States regardi ng pre-existing traffic and congestion levels on I-5
and SR 527 are immaterial as Boeing obtained the road improvements in anticipation of future
increases in Boeing's employment level. 1588 Regarding the I-5 expansion project, the European
Communities argues that the reliability of the data on traffic volumes presented by the United States is
questionable and that because Boeing's Everett facilit y operates seven days a week, the congestion on
I-5 is a result of Boeing's operations. 1589 With regard to SR 527, the European Communities argues
that the anticipated increase in traffic volume is at tributable to Boeing's operations at Everett. The
European Communities notes, in this regard, that the MSA guaranteed the SR 527 project to ensure
that the roads around SR 526 1590 could accommodate significant 787-related employment level
increases.1591
7.380 In summarizing its position on why the I-5 and SR 527 expansion projects cannot be
considered to be a provision of general infrast ructure, the European Communities argues that: (i)
Boeing has a legal right to define the specificati ons of the publicly-financed road improvements,

1584 European Communities' response to question 35, para 114.
1585 European Communities' comments on United States' response to question 38, para. 137.
1586 European Communities' first written submission, para. 227.
1587 European Communities' first written submission, paras. 212-217 and 227; European Communities'
second written submission, para. 140.
1588 European Communities' second written submission, para. 144.
1589 European Communities' second written submission, para. 145.
1590 See above, footnote 1556.
1591 European Communities, second written submission, para. 146.

BCI deleted, as indicated [***]

including those related to the re-routing of the private roads; (ii) Boeing was provided with a
performance guarantee that the publicly-financed ro ad improvements would at all times satisfy its
current and future needs; (iii) the road improveme nts specified by Boeing we re accorded the highest
priority and were to be conducted within a speci fied time-frame counting from the moment when
Boeing authorized the project; and (iv) each of these commitments was guaranteed to Boeing and
reinforced by the MSA's "Make Whole" provision. 1592 Against this background, the European
Communities asserts that the rationale behind the road improvement measures is to diffuse other users
of the underlying roads over the improved roads in such a way that Boeing's performance
requirements are at all times satisfied. While the roads may be open to other users, the combined
effect of the legal right to define specifications a nd of the performance guarantee results in a situation
where Boeing will never have to put up with more other users on the improved roads at issue than it is
willing to tolerate.
1593 The European Communities argues th at the MSA confers very significant
rights on Boeing that go far beyond a simple right to be consulted and which create particular
advantages for Boeing that are not available to other u sers of the roads. The transfer of legal rights to
Boeing shows that the road improvements serve d Boeing's interest, as opposed to the public
interest.
1594
7.381 In support of its view that the construction of the rail-barge transfer facility by the Port of
Everett is not a provision of general infrastructure th at falls outside the scope of Article 1.1(a)(1)(iii),
the European Communities argues that the totality of facts and circumstances demonstrates that the
rail-barge transfer facility is partial or particular to Boeing. 1595 The MSA and the Amended and
Restated Facilities and Services Agreement between the Port of Everett and Boeing 1596 provide for
preferential use of the facility by Boeing.1597 Because Boeing enjoys access on "a guaranteed and first
priority basis", other users are inevitably limited in their access, and can in fact be deprived of their
access.1598 Moreover, by virtue of the MSA, Boeing has a legal right to a publicly-funded rail-barge
transfer facility designed and built fully to Boeing's specifications. The Port of Everett made a legally
binding commitment under the MSA to construct the rail-barge transfer fac ility, which commitment
was one of the preconditions for Boeing's decision to locate its 787 assembly facility in Everett, and
granted Boeing the right to define the specifications of the rail-barge transfer facility. The European
Communities also asserts that the facility was designed in particular to facilitate transport of oversized
components to the Boeing manufacturing and assembly facilities located at the Paine Field industrial
area and that Boeing itself paid $14-$16 million necessary to complete the project.
1599
7.382 In a summary of its position on why the rail- barge transfer facility cannot constitute a
provision of general infrastructure, the European Communities submits that: (i) Boeing has a legal
right to define the specifications of the publicly -financed improvements to the rail-barge transfer

1592 European Communities' comments on United States' response to question 38, para. 139;
European Communities response to question 248, paras. 446-448; European Communities' response to
question 364, para. 179.
1593 European Communities' response to question 248, paras. 445 and 447.
1594 European Communities' comments on United States' response to question 128, paras. 79-84.
1595 European Communities' second written submission, para. 173.
1596 Port of Everett – Boeing Amended and Restated Facilities and Services Agreement, Exhibit US-
224.
1597 European Communities' second written submission, para. 174.
1598 European Communities' second written submission, para. 174; European Communities' comments
on United States' response to question 128, para. 85. The European Communities refers to Article 3.2 of the
Amended and Restated Facilities and Services Agreemen t between Boeing and the Port of Everett, which
provides that "… cargos delivered to the Port and destin ed for delivery to Boeing designated facilities (whether
or not owned by Boeing) shall be entitled to Preferential Use of the [***] Facility. The Port has the right to use
the new Facility for all other purposes as long as it does not interfere with Boeing's Preferential Use". Port of
Everett – Boeing Amended and Restated Facilities and Services Agreement, Exhibit US-224.
1599 European Communities' second written submission, paras. 176-177.

BCI deleted, as indicated [***]

facility; (ii) Boeing also has highly preferential ac cess to the facility; (iii) the works were to be
completed within a specified time-frame counted from the moment when Boeing "authoriz{es}" the
project;1600 (iv) each of these promises was guaranteed to Boeing and reinforced by the MSA's "Make
Whole" provision; and (v) Boeing itself pays part of the costs of the project. 1601
7.383 Similarly, the European Communities asserts that the expansion of the South Terminal facility
by the Port of Everett is not general infrastructure within the meaning of Article 1.1(a)(1)(iii) because
the totality of the facts and circumstances demonstrat es that the South Terminal facility is partial or
particular to Boeing. 1602 This project cannot qualify as general infrastructure even under the
United States' own theory because, as with the rail barge facility, Bo eing enjoys "guaranteed and first
priority" access under the MSA and the Amended a nd Restated Services and Facilities Agreement
between the Port of Everett and Boeing. This inev itably means that other users are limited in their
access and can in fact be deprived of their access. 1603 Moreover, by virtue of the MSA, Boeing enjoys
a legal right to a publicly-funded South Terminal facility designed and built fully to Boeing's
specifications. The Port of Everett made a lega lly binding commitment under the MSA to expand the
South Terminal facility, which commitment was one of the preconditions for Boeing's decision to
locate its 787 assembly facility in Everett, and grante d Boeing the right to define the specifications of
the expansion of the South Terminal. Because the Port of Everett made a commitment under the
MSA to expand the South Terminal facility, the fact that this expansion has not yet occurred is
immaterial.
1604
7.384 With respect to the argument of the United States that through its larger capacity the
expanded South Terminal facility would be availabl e to even more users than it currently is, the
European Communities submits that given Boeing 's preferential and guaranteed access, a larger
capacity of the South Terminal simply means that Boeing can physically use more capacity. Larger
capacity under the conditions of preferential ac cess does not establish, in any way, that the
infrastructure at issue could be considered general. 1605 The European Co mmunities contests the
United States' assertions that Boeing would not have had to undertake the port infrastructure
improvements itself. The provisions of the MSA confirm that the infrastructure-related commitments
contained therein, including with respect to the ex pansion of the South Terminal facility, were among
the preconditions for Boeing's investment in Washington State.1606
7.385 In summarizing its position on why the expansion of the South Terminal facility cannot be
considered to be a provision of general infrastru cture, the European Communities argues that: (i)
Boeing has a legal right to define the specificati ons of the publicly-financed improvements to the
South Terminal facility; (ii) Boeing also has highly preferential access to the facility; (iii) Boeing has
the right to rapid completion of the project; and (iv) each of these promises was guaranteed to Boeing
and reinforced by the MSA's "Make Whole" provision.
 1607
7.386 In response to a panel question, the European Co mmunities submits that to the extent that the
Panel finds that the road improvement projects a nd the Port of Everett improvement projects are
provisions of general infrastructure, certain rights as provided to Boeing in conjunction with these
projects could independently constitute a provisi on of goods or services other than general

1600 Exhibits to MSA, Exhibit C-10, Point 4, Exhibit EC-59.
1601 European Communities' comments on United States' response to question 38, para. 139.
1602 European Communities' second written submission, para. 185.
1603 European Communities' second written submission, para. 186; European Communities' comments
on United States' response to question 128, para. 86.
1604 European Communities' second written submission, paras. 187-189.
1605 European Communities' comments on United States' response to question 128, para. 87.
1606 European Communities' comments on United States' response to question 128, paras. 88-95.
1607 European Communities' comments on United States' response to question 38, para. 139.

BCI deleted, as indicated [***]

infrastructure within the meaning of Artic le 1.1(a)(1)(iii) of the SCM Agreement. 1608 The European
Communities asserts, in this respect, that the totalit y of these rights gives Boeing what it terms "legal
certainty" with respect to elements of the infrastructure improvements that are important to the
operation of its 787 production facility and that could otherwise result in economic losses.
1609
7.387 In support of its view that these legal rights constitute a provision of goods and services other
than general infrastructure within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement, the
European Communities argues th at the Appellate Body in US – Softwood Lumber IV found that by
granting a right to harvest standing timber, Canadi an provincial governments provided goods within
the meaning of Article 1.1(a)(1)(iii). The European Communities asserts that it follows from this that
in this case, by granting certain rights to Boeing in the MSA, the Washington State authorities provide
goods and services to Boeing within the meaning of Article 1.1(a)(1)(iii).1610
7.388 The European Communities asserts that it has dem onstrated that the MSA, by virtue of the
specific rights conferred on Boeing, provides legal certainty to Boeing that goes beyond the Nickel
Funding Package and the general road improvement policy of Washington State. None of the rights at
issue are generally available, let alone granted or conferred upon any company through the Nickel
Funding Package. It is this legal certainty enjoyed by Boeing which distinguishes the road
improvement measures provided for in the MSA from the Nickel Funding Package or from any other
similar general legislation or government initiative.
1611 Because Boeing enjoys a permanent guarantee
that the road improvements at issue will meet certain performance requirements, the Washington State
authorities must provide certain services to Boei ng, such as planning, maintenance, scheduling,
construction. Thus, under the MSA the State of Washington has provided and will provide Boeing
rights to past, current and future services in the same manner that in US – Softwood Lumber IV
Canadian authorities provided harvesters rights to goods.1612
7.389 The European Communities argues, in the alte rnative, that the I-5 and SR 527 expansion
projects, the construction of the rail-barge transfer facility and the expansion of the South Terminal
are financial contributions in the form of potential direct transfers of funds within the meaning of
Article 1.1(a)(1)(i) of the SCM Agreement on the gr ounds that, by virtue of Article 10.4.1 of the
MSA, "the State and City must provide Boeing with a remedy of equivalent effect if they fail to make
the promised road improvements" and "the Port mu st provide Boeing with a remedy of equivalent
economic effect if it cannot fulfil its promised rail-barge and South Terminal improvements".1613
7.390 Regarding the existence of a benefit within the meaning of Article 1.1(b) of the SCM
Agreement, the European Communities argues that the road improvement measures confer "benefits"
upon Boeing's LCA division because "these improvements relate explicitly to the production of
commercial aircraft and are provided to Boeing's LCA division on non-market terms". 1614
Specifically, the European Communitie s argues that: (i) "Boeing is not required to pay anything in
return for these road improvements, which Boeing w ill use to facilitate production of its LCA;" (ii)

1608 European Communities' response to question 249, paras. 454, 459. The European Communities
refers here to rights enjoyed by Boeing under the MSA as described above, paras. 7.380, 7.382 and 7.385 of this
Report.
1609 European Communities' response to question 249, para. 454.
1610 European Communities' response to question 249, para. 454.
1611 European Communities' response to question 364, paras. 178-183.
1612 European Communities' response to question 364, paras. 184-186.
1613 European Communities' first written submission, pa ras. 228 and 258. This is a generic argument
made by the European Communities with respect to all measures contained in "The Boeing Incentive Package".
The European Communities has clarified that it is only n ecessary for the Panel to consider this alternative
argument if the Panel does not agree with its principal argument as to why the measures at issue are financial
contributions. European Communities' response to question 124, para. 84.
1614 European Communities' first written submission, para. 234.

BCI deleted, as indicated [***]

"the advantages conferred on Boeing's LCA divisi on by the 787 Road Improvement Package are
provided on non-market terms;" and (iii) "Boeing is paying nothing in return for the associated
commitments in the Master Site Agreement, while a market participant would no doubt need to
provide consideration for such contractual commitments".1615
7.391 Similarly, the European Communities argues that the construction of the rail-barge transfer
facility and the expansion of the South Terminal by the Port of Everett confer "benefits" upon
Boeing's LCA division because "these improvements relate explicitly to the production of the 787 and
are provided to Boeing's LCA division on non-market terms". 1616 Specifically, the European
Communities argues that: (i) "{a}lthough Boeing genera lly pays fees for use of the Port facilities, the
fees do not cover these Port of Everett improvement s that facilitate Boeing's 787 production;" and (ii)
the "advantages conferred on Boeing's LCA division by these Port of Everett improvements are
provided on non-market terms", and "Boeing is pa ying nothing in return for these improvements,
while a market participant would no doubt need to provide consideration for such tailored
improvements to rail and terminal facilities".1617
7.392 In response to the argument of the United Stat es that Boeing receives no benefit from the rail-
barge transfer facility, the European Communities argues that the Port of Everett itself has stated that
"{t}he facility will be used to support the 747, 767 and 777 Airplane programs, and be used as a
backup facility to the 787 Dreamliner". The time and effort saved by transporting parts from the Port
to Paine Field as a result of this ra il-barge transfer facility will be an immense benefit to Boeing. The
European Communities also submits that the fact that Boeing is paying for the cost overrun to
construct the rail-barge transfer facility is irrelevant. The critical point is that Boeing does not need to
repay the $15.5 million committed by the State of Washington.1618
7.393 The European Communities submits that, while the United States argues that Boeing does not
receive a benefit because the Port of Everett char ges usage fees that cover its capital and operating
costs for all capital improvements to the South Te rminal, the United States has provided no evidence
to support this assertion, such as the rates charged to Boeing (or the rates that will be charged to
Boeing) in comparison with commercial rates. The f act that the Port of Everett operates at a profit
does not demonstrate that the fees charged by th e Port cover the costs of expanding the South
Terminal.1619
Arguments of the United States
7.394 The United States argues that the road improve ment projects challenged by the European
Communities are general infrastructure within the meaning of Article 1.1(a)(1)(iii) of the SCM
Agreement and are therefore not financial contribu tions. With regard to the Port of Everett
improvement measures, the United States submits that the rail-barge transfer facility is general
infrastructure, that the South Terminal expansion has not occurred, and if it does occur, will be
general infrastructure, the expenses of which are fully funded through user fees.1620

1615 European Communities' first written submission, paras. 232-233.
1616 European Communities' first written submission, para. 265.
1617 European Communities' first written submission, paras. 263-264.
1618 European Communities' second written submission, paras. 180-181.
1619 European Communities' second written submission, para. 190.
1620 United States' first written submission, paras. 536 and 543. The United States characterizes the
measures at issue as "quintessential ge neral infrastructure". By this it me ans "that the measures are the purest,
or most typical type of general infrastructure measur es. In particular, the United States considers these
measures at issue to be 'quintessential general' infrastructure because there are no limitations on the availability
of the infrastructure at issue". United States' response to question 38, para. 112.

BCI deleted, as indicated [***]

7.395 The United States asserts that, in the light of th e ordinary meaning of the terms "general" and
"infrastructure", general infrastructure within the meaning of Article 1(a)(1)(iii) means installations
and services that are available to all or nearly all in habitants of the relevant area. Thus, infrastructure
is general if the infrastructure is universally availabl e to all or nearly all inhabitants or users of the
relevant area. 1621 The United States emphasizes that Article 1.1(a)(1)(iii) asks whether the
infrastructure is other than general, not whether the infrastructure was motivated by a particular
goal.1622 The United States contends that there is no support in the text of the SCM Agreement, its
negotiating history and its object and purpose for th e argument of the European Communities that
even where infrastructure is usable or accessible to the public at large it may not be general.1623
7.396 The United States considers that the object of the inquiry under Article 1.1(a)(1)(iii) as to
whether infrastructure is general is different from the inquiry under Article 2 as to whether a subsidy
is specific. While some of the factors relevant to determining whether infrastructure is general may
also be relevant to determining whether a subsidy is specific, it would not be appropriate to merely
apply the same criteria to both inquiries.1624
7.397 The United States asserts that infrastructure does not lose its general availability simply
because the government promised a particular constituen t or constituents that it would undertake the
project. In basing its challenge to the infrastru cture-related measures on the MSA, the European
Communities ignores the fact that companies will freque ntly decide that it is only feasible to locate
their operations in a certain place if the necessary in frastructure exists. The fact that a particular
company has a strong interest in ensuring the ava ilability of infrastructure necessary to conduct its
operations does not make the infrastructure improve ment project non-general if the infrastructure
improvement is available to all users.1625
7.398 The United States contends that the European Communities sets forth an incorrect legal
standard for the purposes of Article 1.1.(a)(1)(iii) which, if accepted, would lower the complaining
party's burden with respect to establishing that infrast ructure is other than general, while raising the
evidentiary standard that a responding party must meet to rebut a prima facie c ase. The United States
identifies two specific problems with the European Communities' proposed st andard: first, that
merely the existence of facts that suggest – but not necessarily establish – that "the infrastructure
might be particular in some way" would be suffi cient to establish non-generality, and, second, that a
party seeking to establish that a transaction provides "g eneral infrastructure" would not need to have
"clear and unambiguous" proof, but only evidence sufficient to raise a presumption that the
transaction provides general infrastructure. Unde r this approach, rather than establishing that
government-provided goods or services are other than general infrastructure, a complaining party
merely would have to provide "facts suggesting that the infrastructure might be particular in some
way". As such, this approach is contrary to th e principles governing the allocation of burden of proof
in WTO dispute settlement. The United States argues that, while an analysis of whether infrastructure
is general should be based on an examination of th e totality of the facts, there is no basis for the

1621 United States' first written submission, para. 46; United States' response to question 35, paras. 91,
93; United States' response to question 36, para. 99; United States' response to question 37, para. 105;
United States' response to question 38, para. 112. The Un ited States argues that the legal test for determining
whether particular infrastructure is general infrastructure is the same as the legal test for determining whether an
improvement to that infrastructure is general infrastructure. United States' response to question 36, para. 99.
1622 United States' response to question 37, paras. 105, 108. The United States argues that while
"{b}ackground and beneficiaries of infrastructure improve ments are not in themselves determinative of the
question of whether infrastructure is general...{e}lements of historical and other background can be among the
factual circumstances relevant to a demonstration that the infrastructure at issue is or is not 'general' in the sense
of availability to all users or inhabitants". United States' response to question 245, para. 407.
1623 United States' response to question 35, paras. 92-96.
1624 United States' response to question 35, paras. 97-98.
1625 United States' response to question 37, paras. 106-107.

BCI deleted, as indicated [***]

suggestion that as long as the infrastructure at issue is "particular in some way, such infrastructure
cannot be regarded as general", as the Europ ean Communities argues. Because the European
Communities fails to explain the meaning of "particul ar in some way", it is impossible to tell why a
finding that infrastructure is "particular in some wa y" should lead to a finding that infrastructure is
other than general. Thus, it is insufficient for the European Communities to assert that there are "facts
suggesting that the infrastructure might be par ticular in some way". Instead, the European
Communities' burden is to establish, based on the tota lity of the facts, that the infrastructure measures
it challenges are not universally available.1626
7.399 The United States argues that while the fact that infrastructure or an infrastructure
improvement was made according to the specifications of one particular company may be relevant to
the Panel's general infrastructure analysis, two types of situations need to be distinguished. The first
type of situation arises where a government, in de veloping, designing, and constructing infrastructure
takes into account through consultation or other fo rms of information gathering, the interests and
needs of those companies or individuals who use or ar e expected to use the infrastructure. This type
of "taking into account", according to the United States, is a normal planning function and would not
normally, in itself, result in de jure or de facto limitations on availability of the infrastructure. The
second type of situation arises where the infrast ructure is truly tailor-made to the needs and
specifications of a particular company or sector in a way that effectively excludes others from using
the infrastructure. In such a situation, the in frastructure would be non-general because the "tailor-
making" has resulted in de jure or de facto limitations on the availability of the infrastructure. 1627
7.400 The United States argues that the European Communities' proposition that general
infrastructure is infrastructure that does not "alter the competitive position" of firms is unsupported by
the text of the SCM Agreement as interpreted in acco rdance with customary rules of interpretation of
public international law.1628 In this connection, the United States contends that this proposition has no
basis in the ordinary meaning of the terms "gener al infrastructure" and is nonsensical because all
infrastructure would be non-general under the Euro pean Communities' interpretation given that most
infrastructure will alter the competitive position of fi rms located in the area wh ere that infrastructure
is available. This does not make such infrastructure non-general in any way.1629
7.401 The United States argues that all of the in frastructure improvements challenged by the
European Communities constitute general infrastructur e because they are universally available to all
users or inhabitants of the relevant area. 1630 In support of its view that the I-5 and SR 527 expansion
projects are general infrastructure, the United St ates argues that the road s in question (and their
improvements) are open to all and serve a broad range of people, businesses, and communities.1631 I-5
and SR-527 are public roads with no limitations on availability. There were no limitations on the
availability of these roads to the public before the improvements, and there were no such limitations
after the improvements. Accordingly, the improvements to these roads constitute general
infrastructure.1632
7.402 The United States rejects the European Commun ities' assertion that the State of Washington
created the two road improvement projects in questi on specifically for Boeing's benefit as part of the
MSA. The I-5 and SR 527 expansion projects had been identified as priorities in the final report

1626 United States' comments on European Communities' response to question 35, paras. 118-124.
1627 United States' response to question 128, paras. 64-65.
1628 United States' comments on European Communities' response to question 129, paras. 74-87.
1629 United States' comments on European Communities' response to question 129, paras. 86-87.
1630 See e.g. United States' response to question 36, para. 99; United States' response to question 246,
para. 411.
1631 United States' first written submission, para 521 and 536.
1632 United States' response to question 36, para. 100.

BCI deleted, as indicated [***]

issued in November 2000 of the Blue Ribbon Commission, which had been established in 1998 to
conduct a comprehensive analysis of the State's tran sportation system. The two projects were part of
the Nickel Package, a transportati on initiative that was approved by the Washington State legislature
in 2003 and that devoted $3.9 billion to construct 158 transportation improvement projects around the
State of Washington from 2003 to 2013, incl uding highway improvement , highway preservation,
ferries, local roads, railways, and public transportation. 1633 Closely related to this, the United States
argues that Washington State did not undertake the I-5 and SR-527 improvements as part of an
agreement with Boeing.
1634
7.403 The United States explains that I-5 is part of the U.S. Interstate Highw ay System and is the
major north-south highway on the West coast of th e United States, running from Canada to Mexico
and used by countless businesses, tourists and citizens, all of which are affected by traffic delays and
safety concerns. Traffic congestion on I-5 in Ever ett had been recognized as one of the worst "choke
points" in the State.1635 The United States points out that SR-527 is a major thoroughfare between the
I-5 and Interstate 405 freeways and argues that th e need for improvements to the SR 527 between
112th Street and 132 nd Street had been recognized well before any Boeing expansion project and had
been planned by WSDOT for years. The accident and fatality rates along SR 527 were higher than
the State average. Based on the WSDOT's standards for a single-lane highway, traffic on SR 527 was
too heavy and a multi-lane highway was needed already before the 2003 Nickel Package.1636
7.404 The United States also contests the European Co mmunities' assertion that work on the I-5 and
SR 527 expansion projects coincided with the begi nning of the 787 programme and that the State
legislature had rejected previous efforts to impr ove these same roads. Th e failure to fund these
projects was part of a pervasive state-wide probl em in funding transportation infrastructure, and
ultimate funding of the projects was part of a broad infrastructure solution for the State. 1637
Washington State's inability to obtain funding for the I-5 and SR-527 improvements fails to establish
that they are other than general infrastructure.1638
7.405 With regard to the European Communities' ar gument that projected traffic increases along I-5
and SR-527 reflect anticipated increases in Boeing' s employment level, the United States argues that
the European Communities disregards the fact th at Boeing is but one of innumerable businesses and
residences accessible from I-5 and SR-527 in a dy namic and growing area of the United States. 1639
The United States rejects the characterization of the road improvement measures as "a specific
improvement to a particular part of that highway done in the vicinity of, according to the
specifications of, and to the satisfaction of one particular company, which enjoys an ongoing
contractual performance guarantee with respect to the highway improvement". First, under the logic
of this argument, any improvement to a public road would be non-general infrastructure merely
because it is near a particular company. Second, there is no basis in the text of the MSA for the
assertion that the road improvements were undertaken "according to the specifications of, and to the
satisfaction of one particular company". The MSA provides only for consultation with Boeing.
Given that Washington State consults with a wide range of citizens, businesses and other users in

1633 United States' first written submission, para. 528.
1634 United States' response to question 36, para. 106.
1635 United States' first written submission, para. 531. The United States contends that the fact that
traffic congestion problems are not limited to weekdays, when the Boeing plant is fully operational, shows that
this is not just a Boeing problem.
1636 United States' first written submission, para. 533. The United States quotes a WSDOT study which
notes that "{t}here has been a large increase in traffic volumes [***] and future growth is forecast to increase at
3.5% annual rate". United States' first written submissi on, para. 533, referring to SR 527 Route Development
Plan, Exhibit US-208, p.3.
1637 United States' first written submission, para. 535.
1638 United States' response to question 36, para. 109.
1639 United States' response to question 36, para. 101.

BCI deleted, as indicated [***]

designing road improvements 1640, such consultation alone does not make the infrastructure non-
general. Third, the United States denies that under the MSA Boeing "enjoys an ongoing contractual
performance guarantee with respect to the highway improvement". The MSA in fact contemplates the
possibility of a change in circumstances in the "Make Whole" provision.
1641 The United States also
submits that the provisions of the MSA cited by the European Communities as support for its
argument that "Boeing-specified road improvements we re accorded the 'highest priority' and were to
be conducted within a specified time-frame count ed from the moment when Boeing 'authorizes the
project' " were designed to affirm the State's inte ntion to make the improvements that were already
included in the Nickel Funding Package and to highlight the steps it had already undertaken in this
regard.
1642
7.406 The United States argues that the $15.5 million in funding provided by the State of
Washington to the Port of Everett for constr uction costs for the rail-barge transfer facility 1643 is not a
financial contribution under the SCM Agreemen t because this facility constitutes general
infrastructure. Alleviating traffic congestion is the type of quintessential general infrastructure project
in which governments engage. Facilitating the abilit y to transport large containerized cargo between
barges and industries will help support current and fu ture industrial operations of many companies,
including Boeing.1644 Because the rail-barge transfer facility was designed to ease traffic congestion
and is available to any business, the improvement of the Port of Everett with a rail-barge transfer
facility is general infrastructure. 1645 Both the consideration of the expansion of the South Terminal
facility and the creation of the rail-barge transfer facility were a response to general congestion
problems and were not merely "tailor-made" fo r Boeing, as argued by the European Communities. 1646
The United States argues that the MSA does not provid e a legal right to Boeing that the infrastructure
measures at issue will be made according to Boeing' s specifications but only provides that the public
authorities will consult with Boeing in preparing drawings and specifications. 1647 The United States
argues that Boeing would not have had to undertak e the infrastructure improvements at issue itself
because the reason for the Port of Everett to constr uct the rail-barge transfer facility was to avoid
having to shut down the main rail line for between one and two hours every time it needed to transfer
cargo from large rail barges. This improvement was, however, in no way necessary for Boeing
because Boeing could transfer oversized containers ont o rail barges at the Port's Marine terminal and

1640 In response to question 128, the United States submits a document, Exhibit US-1296, which it
asserts, shows that "the public authorities took into account the needs of Boeing and many other users of the
infrastructure".
1641 United States' comments on European Communities' response to question 35, paras. 125-128.
1642 United States' response to question 246, para. 415.
1643 The United States observes that this funding was insufficient to complete the necessary changes to
the facility to make it operational and that pursuant to the Amended and Restated facilities and Services
Agreement signed in the fall of 2006, Boeing agreed to cover the costs n ecessary to complete the project.
United States' first written submission, paras. 546-547.
1644 United States' first written submission, para. 546. By way of background, the United States
observes that the rail-barge transfer facility is located in southwest Everett near the Everett/Mukilteo boundary
and is directly adjacent to the BNSF freight railroa d mainline, which provides service between Seattle and
Chicago. According to the project's October 2004 Envi ronmental Impact Statement, an average of 44 trains a
day, both commuter and freight trains, will use this corridor. By 2010, 64 trains per day are projected to use this
corridor. In the past, when oversized containers delivered to the Port of Everett were transferred to railcars, the
authorities had to shut down the mainline between the Port of Everett's Marine Terminal and the Japanese Gulch
spur for between one and two hours, which affected all rail traffic on the corridor. The requirement that trains
carrying oversized cargo travel during the daylight hours further compou nded the problem because this is when
the rail corridor is most heavily used. The United States asserts that the new rail-barge transfer facility will
reduce the time that the mainline is shut down to only 15 minutes. United States' first written submission,
paras. 544-545.
1645 United States' response to question 36, para. 102.
1646 United States' response to question 128, para. 73.
1647 United States' response to question 128, para. 74.

BCI deleted, as indicated [***]

transport them from there to its facility. It was th e other users who experienced most of the hindrance
and for whom a solution needed to be found. Mo reover, even though the rail-barge transfer facility
now exists, Boeing is not actually using it because Boeing has shifted to air shipments of parts.1648
7.407 In response to the assertion of the European Communities that Boeing enjoys preferential
access to the rail-barge transfer facility and that Boei ng itself pays part of the cost of the project, the
United States argues that the Port of Everett - Bo eing Amended and Restated Facilities and Services
Agreement specifically foresees use by third parties. The government's ability to obtain contributions
from private parties for the construction of certain infrastructure is not in itself relevant to the
consideration of whether such infrastructure is gene ral in the absence of other factors that limit access
to such infrastructure to certain users.1649
7.408 In respect of the expansion of the South Termin al by the Port of Everett, the United States
argues that although the MSA states that the Port will expand the S outh Terminal to support direct
ships from Japan, the Port has not implemented th is provision. The MSA was drafted to capture
numerous options, and the parties to the MSA understood that not all provisions would be
implemented. No work has been done to expand th e South terminal and there has been no subsidy to
Boeing.1650 The United States further argues that this type of project is the type of general
infrastructure project that government entities ofte n undertake to improve conditions for all users,
given that a tenfold increase in traffic volume has taken place over the last couple of years. This
increase in traffic is unrelated to Boeing because Boeing has shifted to air shipments for components
for the 787. Therefore, if the project were impl emented, there would be no financial contribution
because the expansion would be general infrastru cture under Article 1.1(a)(1)(iii) of the SCM
Agreement, given its broad use and openness to all users.1651
7.409 In addition, the United States argues that Boeing would not have had to undertake the
infrastructure improvements at issue itself. Boeing has shifted to air shipments and therefore would
not need to undertake expansion of the South Terminal if the Port does not. 1652 Finally, with regard to
the provision of preferential access to the South Te rminal facility, the United States argues that the
preferential access negotiated by a particular user does not necessarily limit the universal availability
of the infrastructure. Boeing's agreement with th e Port of Everett sets forth a number of rights and
obligations for both Boeing and the Port, including an obligation for Boeing to pay certain agreed fees
for use of the facilities. There is nothing in this agreement that prevents other users or potential users
from negotiating similar access to the facilities.1653
7.410 The United States rejects the European Commun ities' argument that certain rights as provided
to Boeing in conjunction with the road and por t improvements under the MSA could independently
constitute a provision of goods or services other than general infrastructure within the meaning of
Article 1.1(a)(1)(iii) of the SCM Agreement. Ap art from the fact that this is an entirely new
argument, presented by the European Communities at a late stage of this proceeding in a most
summary fashion, this argument is without mer it. The European Communities does not explain how
the provision of certain rights regarding the ro ad improvements would be either a "good" or a
"service". The Appellate Body's finding in US – Softwood Lumber IV does not support the European
Communities' argument. The Appellate Body found that the granting of a right to harvest standing
timber constitutes a provision of goods. However, the pr ovision of "legal certainty" is not relevant to
the question of whether road improvement s constitute general infrastructure, and US – Softwood

1648 United States' response to question 128, para. 77.
1649 United States' response to question 246, para. 418.
1650 United States' first written submission, para. 549.
1651 United States' first written submission, para. 550.
1652 United States' response to question 128, para. 77.
1653 United States' response to question 246, para. 419.

BCI deleted, as indicated [***]

Lumber IV does not address the meaning of general infrast ructure. The United States argues that the
mere fact that a government promises to build certain infrastructure does not make such infrastructure
non-general as long as it is not indicative of or does not result in any limitations on the availability of
such infrastructure. Furthermore, the United States considers that the European Communities
provides no support for its assertion that certain rights "were provided only to Boeing, and they give
Boeing legal certainty". The European Communi ties does not explain how "legal certainty" is
relevant for the general infrastructure analysis. Finally, the European Communities has not shown
that any "legal certainty" was provided to Boei ng that was not available under the general road
improvement policy of the State of Washington with regard to all road improvements that were part of
the Nickel Package, which was in process well before the State and Boeing entered into the MSA.1654
7.411 The United States also asserts that none of the elements relied upon by the European
Communities with regard to this legal certainty or legal right changes the general availability of the
road improvements at issue. 1655 As to the European Communities' argument that the legal certainty
constitutes a financial contribution because it requir es the State of Washington to provide certain
services to Boeing, the United States argues that the European Communities has not actually
established the existence of any sort of guarantee or legal certainty but that even if improvement
measures or services related to such improvement measures were guaranteed to Boeing, this would
not have resulted in any kind of limitation on the availability of the infrastructure.
1656 Finally, the
United States rejects the argument of the European Communities that the Appellate Body report in US
– Softwood Lumber IV constitutes support for its view that a ri ght to certain services can be treated as
a provision of such services for purposes of Article 1.1(a)(1)(iii) of the SCM Agreement. The
services provided in connection with the road improvements at issue are the same services that benefit
all users of the roads. Because the services do not place any limitations on the general availability of
the roads, they do not transform the road im provements into anything other than general
infrastructure.1657
7.412 With respect to the alternative argument of the European Communities that the measures at
issue give rise to potential direct transfers of f unds in the sense of Article 1.1(a)(1)(i) of the SCM
Agreement, the United States submits that, contrary to the argument of the European Communities,
Article 10.4.1 of the MSA does not provide Boeing with a guarantee to any kind of payment or
transfer of funds and, as such, cannot give rise to a potential direct transfer of funds within the
meaning of Article 1.1(a)(1)(iii) of the SCM Agreement.
1658
7.413 As to whether the measures at issue confer a be nefit within the meaning of Article 1.1(b) of
the SCM Agreement, the United States argues that there is no financial contribution from the I-5 and
SR 527 expansion projects because the two projects are general infrastructure and that, therefore,
there is no benefit to Boeing.1659
7.414 Regarding the rail-barge transfer facility, th e United States argues that, aside from the fact
that there is no financial contribution because the facility is general infrastructure, Boeing also
receives no benefit from this facility because it is not obtaining goods and services at less than market
value. The funding provided by the State of Washington was insufficient to complete the project.
Boeing has agreed in the Amended and Restated Fa cilities and Services Agreement signed in the fall
of 2006 by Boeing and the Port of Everett to cover the additional $14-$16 million necessary to make
the facility operational. Given that Boeing is paying the balance of the costs required to complete the

1654 United States' comments on European Communities' response to question 249, paras. 442-444.
1655 United States' comments on European Communities' response to question 364, paras. 184-187.
1656 United States' comments on European Communities' response to question 364, paras. 188-191.
1657 United States' comments on European Communities' response to question 364, paras. 192-194.
1658 United States' response to question 124.
1659 United States' first written submission, para. 537.

BCI deleted, as indicated [***]

rail-barge transfer facility, it is certainly not recei ving access to or use of this facility at less than
market value.1660
7.415 The United States also submits that Boeing's agre ement with the Port of Everett clearly set
forth a number of rights and obligations of Boeing and the Port of Everett, including an obligation for
Boeing to pay certain agreed fees for the use of th e Port's facilities. The failure of the European
Communities to make a prima facie case that such fees are insufficient as compared to the price a
commercial investor would have demanded means that it has failed to make a prima facie case of the
existence of a benefit. Moreover, the United Stat es argues with respect to both the South Terminal
and the rail-barge transfer facility that Boeing does not in fact use these facilities and therefore cannot
benefit from them.
1661
7.416 Regarding the expansion of the South Terminal , the United States argues that there is no
benefit to Boeing because Boeing and others pay usage fees and the Port of Everett does not subsidize
its customers by charging rates that do not lead to a profit. Furthermore, the Port is not providing
Boeing an advantage on non-market terms because it seeks recovery of its capital and operating costs
for all capital improvements to the South Terminal.
1662
Arguments of Third Parties
Australia
7.417 Australia observes that a "use" or "access" test should be utilized to assess whether
infrastructure is general or non-general within th e meaning of Article 1.1(a)(1)(iii) of the SCM
Agreement.1663 In particular, Australia considers that the presence of restrictions on access and use of
certain infrastructure may be a relevant considerati on, but not a decisive one, with respect to whether
that infrastructure is general infrastructure. 1664 Australia argues that the facts and circumstances
surrounding the provision of "general infrastructure" need to be examined to determine whether the
provision of infrastructure confers a benefit to an en terprise. In addressing this issue, the Panel needs
to analyse whether the infrastructure is for exclus ive or limited use by enterprises. It should also
analyse separately any terms and conditions relating to the use of infrastructure to determine whether
such infrastructure is for exclusive or limited use by enterprises.1665
7.418 Australia considers that while the general infr astructure exclusion under Article 1 of the SCM
Agreement should be distinguished from the specific ity analysis required under Article 2, the concept
of specificity more broadly, and the factors that may be considered in determining specificity, may
provide guidance in determining whether the provision of infrastructure by government under
Article 1.1(a)(1)(iii) is of a general nature.1666
7.419 With regard to improvements to infrastructure, Australia takes the view that the Panel would
need to examine the circumstan ces and the details surrounding the provision by the government of
any improvements to general infrastructure. If th e Panel concludes that particular infrastructure
constitutes "general infrastructure", any fact s and circumstances surrounding any subsequent
improvement to that general infrastructure would ne ed to be examined. Such consideration would
need to include whether the infrastructure contin ues to be generally available or multi-user; and

1660 United States' first written submission, para. 547.
1661 United States' comments on European Communities' response to question 249, paras. 441 and 444.
1662 United States' first written submission, para. 552.

BCI deleted, as indicated [***]

whether the improvements have been tailored or limited to certain users or enterprises. 1667 The terms
and conditions surrounding the improvements to the ge neral infrastructure would also need to be
assessed.1668
Canada
7.420 Canada argues that the term "general" (interpret ed as "not specifically limited in application"
and as distinguished from the broader phrase "not li mited in application") helps convey the concept
that, for government-provided infrastructure to be transformed from "general" to non-general or
restricted application, the limitation must be cl early specified. Canada takes the position that the
absence of any restrictions/limitations on the use of certain infrastructure by the public is decisive of
whether the infrastructure is general infrastructure.1669 Accordingly, a "use" or "access" test should be
utilized to assess whether infrastructure is ge neral or non-general within the meaning of
Article 1.1(a)(1)(iii) of the SCM Agreement. Such a "use" or "access" test should be sufficient – i.e.
if the infrastructure at issue is useable by or accessible to the public, then it should be considered
general without any further considerations.1670
7.421 Canada argues that because subsidy and specifi city determinations constitute discrete and
sequential findings under the SCM Agreement, it foll ows that a finding under Article 1.1(a)(1)(iii)
that government-provided infrastructure is not general cannot be equate d with a finding under
Article 2.1 of the Agreement that a resulting subsid y is specific, as this would introduce an element of
redundancy to the analysis. Therefore, the test for de facto specificity in Article 2.1(c) of the SCM
Agreement is not the relevant test in an analysis under Article 1.1(a)(1)(iii), as the application of the
de facto specificity test to government-provided infr astructure available to the public would give rise
to systemic inequities, disadvantaging Member s whose lack of national or regional economic
diversification results in predominant use of government-provided infrastructure by certain
enterprises.1671
7.422 As to improvements to general infrastructure, Canada observes that nothing in the SCM
Agreement indicates that improvements to genera l infrastructure change the status of that
infrastructure so long as it remains generally available to the public. 1672 Because the roads and ports
in question in this dispute are public, improve ments to these roads and the port facilities are
improvements to general infrastructure, and the European Communities has identified no government
measure that specifically restricts the ability of the general public to use the improved road network or
port facility at issue.
1673 Canada argues that while improvements to private roads would appear to
raise different considerations, the European Comm unities does not appear to allege that any such
improvements have been provided to date. The Eur opean Communities' challenge in respect of road
improvements to the appropriation of $262.3 million for the I-5 expansion project and $28.9 million
for the SR-527 expansion project does not support the European Communities' claim because both,
the I-5 and SR-527, are major public highways.
7.423 In Canada's view, to the extent infrastructure is general, improvements to such infrastructure
that may appear to benefit a single or limited nu mber of users frequently benefit new economic actors

1667 Australia's response to question 9 (b).
1669 Canada's written submission, paras. 20, 22, and 27 . See also, Canada's response to question 9(a),
para. 8.
1671 Canada's written submission, paras. 25-26.
1672 Canada's response to question 9(b), para. 9. Canada considers that the public reasonably expects
that a government will maintain general infrastructure in th e public interest, for instance to permit the supply of
inputs to production and the distribution of goods to market.

BCI deleted, as indicated [***]

and activities that may not have been foreseen when the improvements were made. However, specific
restrictions on the use of a distinguishable element of infrastructure to certain enterprises may, in
appropriate circumstances, justify separate considerati on of that element, whether or not it is attached
or otherwise connected to general infrastructure. Temporary restrictions/limitations on the use of
infrastructure to certain users do not necessarily depr ive that infrastructure of its general nature if
there is a reasonable expectation that general use will resume in the fores eeable future (e.g. an
exclusive use agreement for a period before public use is practicable or covering a particular season
when public use is not practicable). A temporar y right of exclusive use may, however, require
independent consideration to dete rmine if that conferral of an exclusive right itself constitutes a
provision of a good (or service).1674
Korea
7.424 Korea argues that the absence of any restrictions/limitations on the use of certain
infrastructure (or evidence that infrastructure provides a benefit to the general public or common
goods to the public) would be decisive with respect to whether or not that infrastructure is general
infrastructure within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement. 1675 Such a "use" or
"access" test should be sufficient – i.e. if the in frastructure at issue is useable by or accessible to the
public, then it should be considered general without any further considerations.1676
Evaluation by the Panel
7.425 Article 1.1 of the SCM Agreement reads in relevant part:
"1.1 For the purpose of this Agreement, a subsidy shall be deemed to exist if:
(a)(1) there is a financial contribution by a government or any public body within
the territory of a Member (referred to in this Agreement as "government"), i.e. where:

(iii) a government provides goods or services other than general
infrastructure, or purchases goods"
7.426 The issue before us is whether, as argued by the European Communities, certain infrastructure
improvement measures referred to in the MSA are financial contributions within the meaning of
Article 1.1(a)(1)(iii) of the SCM Agreement. If we re ject this argument, we will have to consider the
alternative argument made by the European Communities that these measures involve potential direct
transfers within the meaning of Article 1.1(a)(1)(i) of the SCM Agreement.
7.427 In US – Softwood Lumber IV , the Appellate Body confirmed that: "{I}n the context of
Article 1.1(a)(1)(iii), all goods that might be used by an enterprise to its benefit—including even
goods that might be considered infrastructure—are to be considered 'goods ' within the meaning of the
provision, unless they are infrastructure of a general nature".
1677 Accordingly, where a government

1674 Canada's response to question 9(c), para. 10. Canada emphasizes that the focus of the inquiry in
Article 1.1(a)(1)(iii) is on what a government actually "pro vides" to a recipient or recipients. In cases where a
government has provided something less than complete and exclusive rights to a given item of infrastructure, the
focus of the inquiry into whether the government has provided a financial contribution should not be on the
totality of the infrastructure, but on the part of it that is actually being provided by the government exclusively
to the recipient(s).
1675 Korea's written submission, paras. 30 and 32.
1677 Appellate Body Report, US – Softwood Lumber IV, para. 60 (emphasis original).

BCI deleted, as indicated [***]

provides infrastructure goods and services, a subsid y is deemed not to exist where such goods or
services are "general infrastructure".
7.428 The question before the Panel is whether the road improvement projects and the Port of
Everett improvement measures referred to in the MSA constitute the provision of infrastructure that is
not general, as argued by the European Communiti es, and whether these measures are, therefore,
financial contributions within the meaning of Article 1.1(a)(1)(iii).1678 The disagreement between the
parties on this question reflects differences of view regarding (i) the correct legal interpretation of the
concept of "general infrastructure"; (ii) the analysis of certain factual aspects of the measures at issue;
and (iii) the interpretation of the relevant provisions of the MSA.
7.429 The key question of interpretation arising out of the arguments advanced by the parties in
regard to the road improvement measures at issue is whether the existence of limitations on use or
access by the public at large should be considered to be determinative of whether or not an
infrastructure improvement measure1679 is general.
7.430 The European Communities does not contest that the improvements resulting from the I-5 and
SR 527 expansion projects are available without lim itation to all users. However, the European
Communities argues that this factor is relevant but not determinative. The European Communities
argues that infrastructure cannot be general if the to tality of facts and circum stances suggests that the
infrastructure is "partial or particular in some way" and that infrastructure can be partial or particular
because of facts and circumstance s other than limitations on the use or access by the public. By
contrast, the United States considers that infrastructure is general if it is universally available to all or
nearly all inhabitants or users of the relevant area.1680
7.431 The Panel considers that, in the light of the sp ecific facts of this case, it is not necessary to
address the question of whether the existence of limi tations on the use of infrastructure by the public
should be treated as the determining factor in analyz ing whether a measure is general infrastructure.
This is because, even assuming that the European Communities is correct in its legal interpretation of
the concept of "general infrastructure" and that, therefore, the fact that the improvements resulting
from the I-5 and SR 527 expansion projects are availa ble to the public is not sufficient to conclude
that they are general infrastructure 1681, the Panel finds that there is insufficient factual support for the
contention of the European Communities that the I-5 and SR 527 expansion projects were specifically
designed to benefit Boeing and therefore cannot be treated as general infrastructure. The Panel recalls
that the European Communities asser ts that the I-5 and SR 527 e xpansion projects are "part of a
tailor-made package for Boeing to improve transpor tation infrastructure only in the vicinity of the

1678 The United States does not dispute that the alleged financial contributions were provided by a
"government", nor does it dispute that the measures in question constitute the "provision" of "goods and
services" that are "infrastructure".
1679 The issue in dispute between the parties is whether certain improvements to I-5 and SR 527, rather
than I-5 and SR-527 themselves, are "oth er than general infrastructure". The parties agree that the fact that
infrastructure is general does not necessarily mean that improvements to that infrastructure are also general.
1680 Several third parties agree with the view that the decisive consideration in determining whether
infrastructure is general is whether there are any limitations on the use of the infrastructure by the public.
1681 The Panel has some doubts about the argument of the European Communities that an interpretation
of Article 1.1(a)(1)(iii) of the SCM Agreement in accordance with Articles 31 and 32 of the Vienna Convention
supports the proposition that where, as in the present dispute, there are no limitations on the use of or access to
an infrastructure improvement measure by the public, such a measure should nevertheless be considered to be
non-general if it can be concluded, based on an analysis of other factors, that the measure is "partial or particular
in some way". The Panel finds that a strong argument can be made that the absence of any limitations on the
public use of or access to the road improvements resulting from the I-5 and SR 527 expansion projects is
sufficient to conclude that these road improvement s are general infrastructure within the meaning of
Article 1.1(a)(1)(iii) of the SCM Agreement.

BCI deleted, as indicated [***]

Boeing facility at Everett" 1682 and that the projects serve "Boeing's interest, as opposed to the public
interest".1683 As explained below, the evidence before the Panel does not support these assertions.
7.432 There is ample evidence before the Panel demonstrating that: (i) the need to undertake the I-5
and SR 527 expansi on projects had been identified well before Boeing decided to site its assembly
facility in Everett; (ii) the projects were conceived as part of a general policy of the authorities in the
State of Washington to improve the State's transportation infrastructure; (iii) the projects were
undertaken to address a range of economic, safety a nd environmental concerns; (iv) funding for the
projects was appropriated in May 2003, before the MSA was concluded, as part of the Nickel Funding
Package, which provided funding for 158 infrastructur e-related projects; and (v) preparations for the
work on the projects had started prior to the MSA.
7.433 As illustrated by several studies submitted by the United States, Washington State authorities
had since the 1990s attempted to address "problem s of increasing congestion, decreasing safety, and
environmental degradation in the State and local transportation system". 1684 In 1998, the Washington
State Governor and Legislature established th e Blue Ribbon Commission on Transportation "to:
assess the local, regional and state transportation syst em; ensure that current and future money is
spent wisely; make the system more accountable and predictable; and prepare a 20-year plan for
funding and investing in the transportation system." 1685 The final report of the Blue Ribbon
Commission was published in December 2000. In the introduction to this final report, the
Commission observed:
"Looking ahead twenty years, if nothing changes, the Puget Sound region will
experience severe traffic on every major roadway during most of the day. Congestion
will also spread and worsen north and south along the entire length of I-5 , east on I-
90 from Seattle to the I-82 junction and on to Yakima. Traffic and delay will also
expand along I-90 and U.S. 2 through Spoka ne, on U.S. 395 to Colville, on U.S. 195
to Pullman and on U.S. 12 between Walla Wa lla to the Tri-Cities. Critical rail and
freight corridors throughout Washington will also be increasingly bogged down,
delaying farm products and other goods from reaching our ports.
Perhaps the most sobering realization is that our state has no transportation plan in
place today that, if implemented, would come anywhere close to meeting the
challenges of the future. While Washingt on has an extensive and interconnected
transportation network, we are not prepared for current and future growth, and our
investment as well as the state's economic well being are threatened."
1686
7.434 The report contained a recommendation to begin with fixing the worst congestion
chokepoints in the State, in which context it speci fically included as priorities improvements to I-5

1682 European Communities' first written submission, para. 227.
1683 European Communities' comments on United States' response to question 128, para. 78.
1684 United States' first written submission, para. 524.
1685 The Commission consisted of 46 members representing business, labour, agriculture, tribes,
government, ports, shipping, trucking, transit, rail, environmental interests and the general public.
1686 Transportation Action: Final Recommendation to the Governor and Legislature (December 2000),
Exhibit US-215 (emphasis added).

BCI deleted, as indicated [***]

and SR 527.1687 The Panel has before it other documents th at demonstrate that the need to undertake
improvements to I-5 and SR 527 had been acknowledged years before the conclusion of the MSA.1688
7.435 As evidenced by the Blue Ribbon Commission's final report and by the fact that the I-5 and
SR 527 projects were mainly financed from the Nickel Funding Package enacted in May 2003 by the
Washington State Legislature, the two projects were conceived as part of a comprehensive, state-wide
set of measures that were seen as being necessary to address a general problem of the degradation of
Washington's transportation infrastructure. It is also noteworthy in this respect that "{i}mproving
transportation was the No.1 recommendation of the Washington Competitiveness Council, which the
governor convened in 2001 to further improve the state's business climate".
1689
7.436 The I-5 and SR-527 expansion projects, like other projects undertaken pursuant to the
recommendations of the Blue Ribbon Commission, were designed to address a variety of concerns.
The list of Nickel Funding Package projects describes the I-5 expansion project as follows:
"This section of I-5 experiences congestion and mobility problems due to high traffic
volumes and is part of the Puget Sound Core HOVE program. To relieve congestion,
increase capacity and mobility, and provide a travel time advantage to transit and
HOV traffic, this project will design an d construct northbound and southbound HOV
lanes on I-5 between SR 526 and US 2 in the city of Everett. Existing I-5 will be
widened asymmetrically with both median and outside widening. The Broadway
Interchange off-ramp will be moved to th e right side to increase safety and reduce
congestion. Up to 20 bridges will be wi dened. Design and construction of several
noise walls and retaining walls and a full storm water system retrofit is anticipated.
Intelligent Transportation System (ITS) monitoring equipment will be installed.
Investigation of the Lowell Road slide area is included."1690
7.437 A Washington State Department of Transport website document states:
"Why is WSDOT widening and improving I-5 between Highway 526 and US 2 in
Everett? Thousands of vehicles merging on and off I-5 at Broadway, 41 st Street,
Pacific Avenue, and Highway 2 and those just passing through create heavy traffic
congestion on I-5 through the city of Everett. Backups can be severe and increase the
chance of accidents.
This project is a step in the right direction to help fix one of our state's most notorious
bottlenecks. When we complete construction, additional lanes will make more room
for more cars on this busy stretch of I-5. Modifying the I-5/41 st Street Interchange
will help make transitions from the freeway to city streets safer and will get drivers
where they want to go quicker and with less frustration. These and other
improvements included in this project will enhance safety, reduce merging, and move
traffic more smoothly."
1691

1687 Transportation Action: Final Recommendation to the Governor and legislature (December 2000),
Exhibit US-215. The United States also cites other stat ements by authorities of Washington State regarding the
seriousness of traffic congestion problems on the I-5 and /or SR 527. Exhibits US-213, US-216 and US-217.
1688 See e.g. SR 527 Route Development Plan, Exhi bit US-208; State Highway System Plan: 1999-
2018, January 1998, Exhibit US-213.
1689 Gov. Locke Highlights State's Plan to Keep and Grow Boeing jobs; Calls for Swift Action on
Transportation-Improvement Package, Exhibit EC-119.
1690 "Nickel Funding Package" Enacted for Transportation by the 2003 Washington State Legislature,
Exhibit EC-123, p.15.
1691 WSDOT Projects, OI-5 – Everett, SR 526 to US 2 HOV Lanes, Exhibit EC-118 (emphasis added).

BCI deleted, as indicated [***]

7.438 Regarding the SR 527, the Nickel Funding Package projects list states:
"This project will construct one new lane in each direction with a two-way left-turn
lane from 132nd SE to 112th SE to increase safety and reduce congestion."1692
7.439 In this regard, the Panel notes that while the European Communities cites certain statements
as support for its view that the measures were design ed to serve Boeing's inte rests, these statements
typically refer to a broader range of interests than just Boeing's interests. For example, the European
Communities states that "{i}n urging passage of the 2003 legislative transportation bill, Washington
Governor Gary Locke recognized that '{t}he Bo eing {787} final assembly operation depends on the
smooth movement of parts and sub-assemblies from suppliers to the factory' ". 1693 The document at
issue states that:
"We must clear up traffic congestion and improve freight mobility ," Locke said. "The
Boeing final assembly operation depends on the smooth movement of parts and sub-
assemblies from suppliers to the factory. Our entire state needs these improvements .
I remain confident we can reach a compromise on transportation before the end of
this session."
1694
7.440 The European Communities also asserts that in explaining the decision to accelerate
implementation of the I-5 project, Washington State Secretary of Transportation Doug MacDonald
stated that the acceler ated schedule 'will benefit the Bo eing 7E7 Dreamliner Program...' "
1695 In fact,
the full statement cited to by the Eu ropean Communities is: "This project helps boost Washington's
economy and will benefit the Boeing 7E7 Dreamliner Program and 2010 Vancouver Olympics
tourism".1696
7.441 Finally, the Panel notes that preparations for the work on the I-5 and SR-527 had already
started prior to the conclusion of the MSA.1697
7.442 In the Panel's view, the fact that the need to undertake the I-5 and SR 527 projects had been
acknowledged well before the MSA and that they were undertaken as part of a comprehensive effort
of the State of Washington to improve its transpor tation infrastructure and pursued a variety of safety,
environmental and economic objectives means that the European Communities mischaracterizes these
projects when it asserts that the projects were designe d specifically to benefit Boeing. According to
the European Communities, the road improvement measures were "designed to achieve the following:
(1) alleviate traffic congestion around Boeing's Everett plant; (2) allow Boeing to accommodate
additional heavy-duty truck traffic; and (3) provide sufficient road capacity to handle a substantial
increase in employment at the Boeing facility". 1698 This statement may perhaps be pertinent as an
explanation of why Boeing was particularly inter ested in the prompt implementation of the road
improvement measures but it is not a factually accurate reflection of the various objectives pursued by
these measures. As discussed above, the objectives pursued were considerably broader in nature.

1692 "Nickel Funding Package" Enacted for Transportation by the 2003 Washington State Legislature,
Exhibit EC-123, p.17 (emphasis added).
1693 European Communities' first written submission, para. 216.
1694 Gov. Locke Highlights State's Plan to Keep and Grow Boeing jobs; Calls for Swift Action on
Transportation-Improvement Package, Exhibit EC-119 (emphasis added).
1695 European Communities' first written submission, para. 223.
1696 WSDOT News, WSDOT Fast tracks Everett I-5 Carpool Lane Expansion, Exhibit EC-126
(emphasis added). Similarly, WSDOT stated that "{ t}he accelerated schedule will benefit the Boeing 7E7
Dreamliner program, 2010 Vancouver Olympics tourism and all drivers who use I-5 through Everett." WSDOT
projects, I-5 – Everett, SR 526 to US 2 HOV lane, Exhibit EC-118 (emphasis added).
1697 See e.g. WSDOT Projects: MAP SR 527 Widening 132 St. SE to 112 St,. SE, Exhibit US-206.
1698 European Communities' first written submission, para. 213.

BCI deleted, as indicated [***]

7.443 The Panel emphasizes that it is well aware that Washington State authorities regarded the
infrastructure improvement measures provided for in the Nickel Funding Package, including the I-5
and SR 527 projects, as a key element in their stra tegy to persuade Boeing to establish a 7E7 final
assembly facility in Washington State. 1699 Washington State authorities were aware of Boeing's
specific infrastructure needs in relation to th e 7E7 assembly facility and knew that Boeing had
concerns regarding the quality of Washingt on State's transportation infrastructure. 1700 The proposal
made to Boeing by Washington State authorities in June 2003 included "{a} transportation-
improvement package that includes a 5-cent-a-ga llon gas tax hike to help ease congestion and
improve traffic safety across the state".
1701 Washington State authorities made a commitment in the
MSA "to undertake and complete a ll design and construction of all ro ad and road and traffic control-
related improvements set forth in Exhibit C-9 pursuan t to the terms, conditions and schedule set forth
therein".1702
7.444 Thus, the Panel does not contest the fact that the road improvements at issue, and more
generally the infrastructure improvement projects pr ovided for in the Nickel Funding Package, were
an important factor in Boeing's decision to locat e what was then referred to as the 7E7 assembly
facility in the State of Washington. It is possible that Boeing would have decided to locate its 7E7
assembly facility elsewhere if Washington State had not undertaken these projects. 1703 However, the
Panel has also found that the projects were origin ally designed years before the MSA as part of a
comprehensive effort to address a general problem of degradation of Washington State's
transportation infrastructure and that they pursued a range of safety, environmental and economic
objectives. That Boeing had a special interest in ensuring that these projects would be implemented
and that the Washington State authorities provided assurances to Boeing in this regard in the MSA
does not alter the fact that these projects were designe d to pursue a broad range of interests that went
beyond Boeing's particular interest. In this rega rd, the Panel sees merit in the arguments of the
United States that "companies will frequently seek to ensure that certain in frastructure necessary for
their operations is in place before undertaking a signi ficant investment" and that "{t}he mere fact that
a government promises to build certain infrastru cture does not make such infrastructure 'non-
general'".
1704 Given that the road improvements were a ccessible to the general public, were designed
to achieve a broad range of safety, environmen tal and economic objectives and had been conceived
years before the conclusion of the MSA, the Pane l finds that the existence of a promise to Boeing
made by the Washington State authorities in the MSA does not warrant the conclusion that, as argued
by the European Communities, the road improveme nt projects "served Boeing's interest, as opposed
to the public interest". In the Panel's vi ew, the European Communities' assertion that "{t}he

1699 Gov. Locke Highlights State's Pl an to Keep and Grow Boeing Jobs; Calls for Swift Action on
Transportation-Improvement Package, Exhibit EC-119 ("Gov. Gary Locke today highlighted the state's strategy
to keep and grow Boeing jobs in Washington by winning the final assembly of Boeing's next jet, the 7E7. A
cornerstone of the governor's strategy is to get a transportation-improvement package passed this legislative
session.")
1700 Gov. Locke Highlights State's Pl an to Keep and Grow Boeing Jobs; Calls for Swift Action on
Transportation-Improvement Package, Exhibit EC-119 ("Bo eing has indicated it will provide a list of issues it
would like the state to address to be competitive for winn ing the 7E7 assembly ... Transportation is also one of
Boeing's top concerns.")
1701 Gov. Locke, Business, Labor and Government L eaders Celebrate Delivery of State's 7E7 Proposal
at 'Action Washington' Rally, Exhibit EC-62.
1702 MSA Art. 6.11.1, Exhibit EC-58.
1703 In Article 10.6.2 of the MSA, the Public Parties agreed and acknowledged that "Boeing would not
have considered locating the Facilities in the State and investing substantial capital and other resources without
the Commitments provided by each of them for the entire period for which such Commitments are available."
1704 United States' response to question 246, para. 414.

BCI deleted, as indicated [***]

Washington State Department of Transportation and the City of Everett undertook these projects as
part of an agreement specifically with Boeing, and only Boeing"1705 is factually incorrect.
7.445 The Panel now proceeds to consider the European Communities' argument that the I-5 and SR
527 expansion projects should be cons idered to constitute provisions of infrastructure that is not
general because of certain specific legal rights conferred on Boeing under the MSA.
7.446 The European Communities asserts, inter alia , that under the MSA Boeing enjoys a legal
right to define the specifications of the road impr ovements. The European Communities refers to this
right as "a legal right to define the specificati ons of the publicly-financed road improvements,
including those related to the re-routing of privat e roads", "the sole legal right to define the
specifications of the planned infrastructure", and "a right to define the specifications of the publicly-
financed road improvements granted solely to Boeing among all other users, including those related to
the re-routing of private roads".1706 The European Communities alleges that "Boeing decides what the
DOT will do, and the DOT must comply with Boeing's demands". 1707 It also states that "Boeing and
only Boeing (not even the government of the State of Washington), has a legal right to affect the
specifications of the two projects at issue in accord ance with its current and future needs related to
project Olympus."
1708 According to the European Commun ities, the MSA effectively transfers
various legal rights to Boeing, including the right to "dictate" specifications of the road
improvements, with the result that "Boeing has replaced the Washington State department of
Transport ('DOT') for the particular projects at i ssue....The role of the DOT has effectively been
reduced to that of an entity that simply construc ts, finances, services, and maintains the improvements
at issue to meet Boeing's requirements".
1709
7.447 The United States argues that the MSA does not create a legal right that the road
improvements will be made according to specificati ons defined by Boeing and that the European
Communities' arguments in this regard rest on an incorrect interpretation of the provisions of the
MSA.1710
7.448 Article 6.11.1 of the MSA states, in relevant part
"DOT and the City each shall undertake and complete all design and construction of
all road and road and traffic control-rela ted improvements set forth in Exhibit C-9
pursuant to the terms, conditions and schedule set forth therein. Such improvements
shall be designed and constructed in accord ance with drawings and specifications in
consultation with Boeing prior to DOT and the City each seeking of bids or
proposals, or letting of contracts, for the construction thereof. All road access
improvements shall be designed and constr ucted in accordance with the American
Association of State Highway Transportati on Officials and State standards for heavy-
duty truck traffic meeting the requirements that Boeing has provided to DOT and the
City."

1705 European Communities' first written submission, para. 235.
1706 European Communities' comments on United States' response to question 38, para. 139;
European Communities' response to question 248, para. 446; European Communities' response to question 364,
para. 179.
1707 European Communities' second written submission, para. 141.
1708 European Communities' second written submission, para. 152.
1709 European Communities' comments on United States' response to question 128, para. 79 and
footnote 103.
1710 United States' response to panel question 128, paras. 74-75; United States' response to
question 246, para. 412; United States' comments on European Communities' response to question 364,
para. 185.

BCI deleted, as indicated [***]

7.449 The European Communities argues that the sen tence "All road access improvements shall be
designed and constructed in accordance with the American Association of State Highway
Transportation Officials and State standards for heavy-duty truck traffic meeting the requirements that
Boeing has provided to DOT and the City" mean s that "the roads at issue must satisfy both WTDOT
highways standards and Boeing's requirements. In other words, Boeing may not impose requirements
that conflict with WSDOT standards, but it may d esign the roads to satisfy its needs within the
parameters set by those standards. As such, it is clear that the State is making special
accommodations for Boeing."
1711 The European Communities argues that Boeing has the sole legal
right to define the specifications of the planned infrastructure because the MSA provides that:
"improvements shall be designed and cons tructed in accordance with drawings and
specifications in consultation with Boeing prior to DOT and the City each seeking
bids or proposals …. All road access improve ments shall be designed and constructed
… meeting the requirements that Boeing has provided to DOT and the City." This
includes, inter alia , '{a}ll improvements necessary to serve a building or other
improvements with public streets or roads and removal of or rerouting any existing
private roads presently serving such building or other improvement{s}."
1712
7.450 The European Communities contends that the United States distorts the meaning of the
relevant MSA provisions by asserting that the MS A only requires consultation with Boeing. The
European Communities reads the relevant provision as follows:
"DOT and the City each shall undertake and complete all design and construction of
all road and road and {sic} traffic contro l-related improvements set forth in Exhibit
C-9 pursuant to the terms, conditions and schedule set forth therein . Such
improvements shall be designed and constructed in accordance with drawings and
specifications in consultation with Boeing prior to DOT and the City each seeking of
bids or proposals, or letting of contracts, for the construction thereof. All road access
improvements shall be designed and constructed in accordance with the American
Association of State Highway Transportati on Officials and State standards for heavy-
duty truck traffic meeting the requirements that Boeing has provided to DOT and the
City."
1713
7.451 The United States argues that the sentence "A ll road access improvements shall be designed
and constructed in accordance with the American Association of State Highway Transportation
Officials and State standards for heavy-duty truck traffic meeting the requirements that Boeing has
provided to DOT and the City" means that "the ro ad improvements in question were designed and
built to pre-existing WSDOT highway standards. The State made no special accommodations for
Boeing's truck traffic".
1714 The United States asserts that Arts 6.11.1, 6.12.1 and 6.13.1 of the MSA
only "set out a commitment that the public authorities implementing the infrastructure improvements
will consult with Boeing in prepar ing drawings and specifications".
1715 According to the
United States, the European Communities "mischar acterizes this commitment to consult as an
exclusive legal right for Boeing to have the infrastructure made to its specifications".1716

1711 European Communities' second written submission, para. 141, footnote 220 (emphasis European
Communities).
1712 European Communities' response to question 248, para. 446.
1713 European Communities' comments on United States' response to question 246, para. 349 (emphasis
European Communities).
1714 United States' first written submission, para. 533, footnote 733.
1715 United States' response to question 128, para. 74.
1716 United States' response to question 128, para. 75.

BCI deleted, as indicated [***]

7.452 The Panel is not convinced that the European Communities has demonstrated that the text of
Article 6.11.1 of the MSA supports its contention that Boeing "was singled out and given the sole
right to define the specifications with which the public authorities must comply" 1717. First, while the
European Communities points out that Article 6.11.1 provides inter alia that DOT and the City shall
undertake and complete all design and construction of all road and road and traffic control-related
improvements set forth in Exhibit C-9 "pursuant to the terms, conditions and schedule set forth in
Exhibit C-9", it has not explained how this in and of itself establishes that Boeing will have the right
to define specifications according to which the road improvements will be made. The Panel sees
nothing in "the terms, conditions and schedule set forth in Exhibit C-9" that confers on Boeing a right
to define the specifications of the road improve ment projects at issue. Second, the phrase "Such
improvements shall be designed and constructed in accordance with drawings and specifications in
consultation with Boeing" makes it clear that Boeing has a right to be consulted in respect of those
drawings and specifications but cannot reasonably be interpreted to provide a right to Boeing to
"define" or "dictate" the specifications. Third, re garding the reference to "requirements that Boeing
has provided to DOT and the City", the Panel notes that the European Comm unities interprets this
phrase to mean that "the roads around the Boeing Freeway will 'meet{} the requirements that Boeing
has provided to DOT and the City".
1718 The Panel does not believe that this construction is
necessarily correct. In the Panel's view, it is perhaps more correct to read this phrase to mean that (i)
the road access improvements are to be designed in accordance with the American Association of
State Highway Transportation Officials and State sta ndards for heavy-duty truck traffic, and (ii) these
standards meet "the requirements that Boeing has pr ovided to DOT and the City." In sum, the Panel
considers that the text of Article 6.11.1 of the MSA does not warrant the conclusion that in designing
and constructing the road improvements WSDOT a nd the City of Everett must comply with
specifications and standards defined by Boeing. Ra ther, this text lends more support to the argument
of the United States that Boeing's right under Article 6.11.1 is a right to be consulted.
7.453 The Panel also notes that the United States h as provided evidence that the I-5 and SR 527
expansion projects corresponded to a variety of consid erations and that in the design of these projects
a variety of interested parties had been consulted.1719
7.454 The Panel now turns to the argument of th e European Communities that the MSA provides
Boeing with a "performance guarantee" that the public ly financed road improvements will at all times
satisfy its current and future needs. The Europ ean Communities relies on Exhibit C-9, point 2 of the
MSA and Articles 6.11.1 and 6.11.2 as support for this assertion regarding the existence of a
performance guarantee. Specifically, the European Communities argues that:

1717 European Communities' comments on United States' response to question 38, para. 139,
footnote 188.
1718 European Communities' second written submission, para. 141.
1719 United States' response to question 128, paras. 71-73; I-5 Everett HOV Freeway Expansion Project,
Public Outreach Summary, US-Exhibit 1296. The Europ ean Communities contends that this list simply shows
that the authorities explained one of the projects at various public forums, but does not demonstrate that they
actually took into account the interests of entities other than Boeing. While the Panel sees some merit in this
argument, the Panel notes that the United States has cite d to other documents that in the view of the Panel
demonstrate that interests of entities other than Boeing we re taken into account in the development of plans for
the I-5 and SR 527 projects. The European Communities has declined to address those documents in any detail
on the grounds that "{n}one of the other documents referenced by the United States in its response to
Question 128 alters the conclusion that the project Olympus MSA gives Boeing significant legal rights
unavailable to other users. The European Communities therefore does not comment in detail on any of those
documents". European Communities' comments on United States' response to question 128, para. 81. As
discussed above, the Panel has found that the MSA does not support the contention of the
European Communities that the MSA grants Boeing a legal right not available to other users to define the
specifications of the road improvements at issue.

BCI deleted, as indicated [***]

"Boeing has a performance guarantee that the road improvements will at all times
satisfy its current and future needs: the ro ad improvements 'shall be sufficient to meet
road access requirements for the needs of Boeing and its Supp liers to provide
sufficient capacity for employment levels up to 83,000 through 2030'; '{t}he City and
DOT shall do all things and take all ac tions necessary to obtain funding for and
construction of any new arterial roadways, including any utilities necessary to
facilitate future development'; and the '{ r}equired {i}mprovements' listed on Exhibit
C-9 to the MSA must 'meet … the minimum performance criteria' set forth
therein."
1720
7.455 The Panel considers that there is nothing in the provisions cited by the European
Communities to alter the fact that, as discussed above , the road improvement projects at issue were
undertaken as part of the Nickel Funding Package, which provided for the funding of a package of
158 infrastructure-related measures as part of a state-wide comprehensive effort to resolve
Washington State's infrastructure problems.
7.456 In sum, assuming arguendo that the absence of limitations on the availability of the road
improvements to the general public is not determ inative, and that, as ar gued by the European
Communities, it is necessary to examine other fact ors in order to determine whether the road
improvement projects served a public interest, the Pa nel finds that the European Communities has not
demonstrated that the I-5 and SR 527 expansion pr ojects are not general in frastructure within the
meaning of Article 1.1(a)(1)(iii) of the SCM Agreement.
7.457 Apart from the argument that the infrastructure -related measures in the MSA constitute the
provision of goods or services other than general in frastructure, the European Communities makes an
alternative argument, according to which "{t}he rights under Article 6.11 and Exhibit C-9 of the
Project Olympus MSA are a good or service other than general infrastructure, irrespective of whether
the Panel considers the underlying road impro vements to be general infrastructure ".
1721 T h e
European Communities advances this argument for th e first time in its response to the second set of
questions from the Panel.1722
7.458 The Panel is not convinced by this argument. First, and as discussed above, the Panel does
not agree with the European Communities' characteri zation of the nature of the rights conferred on
Boeing under the MSA. Thus, the text of the MSA do es not support the assertions that Boeing enjoys

1720 European Communities' response to question 248, para. 446.
1721 European Communities' response to question 364, para. 184 (emphasis added). See also,
European Communities' response to question 364, para. 188 ("In conclu sion the 787 Road Improvement
Package is a financial contribution pursuant to Article 1.1(a)(1) of the SCM Agreement even if the Panel
considers the road improvemen ts to be general infrastruc ture. This is because the rights to those road
improvements constitute a provision of goods and serv ices other than general infrastructure pursuant to
Article 1.1(a)(1)(iii)." (emphasis original)).
1722 In explaining its methodology for quantifying the amount of the benefit allegedly conferred by the
road improvement projects, the European Communities observes that:

 "(t)he benefit to Boeing from the 787 Road Improvement Package could also be quantified by
evaluating the value of the legal right to define specifications according to its sole needs and
the performance guarantee prov ided to Boeing as part of the Package…In fact, the
European Communities submits that, should the Panel consider the road improvements
themselves constitute general infrastructure, in the alternative, the rights given to Boeing as
part of the Package constitute the provision of goods and services other than general
infrastructure within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement".

European Communities' response to question 249, para. 454.

BCI deleted, as indicated [***]

"the legal right to define specifications according to its sole needs" and that "the rights guarantee to
Boeing the enjoyment of the infrastructure improve ments as if there were no other users of the
roads".1723
7.459 Second, the European Communities' legal argument as to how the rights of the kind allegedly
granted under the MSA involve a provision of goods or services in the sense of Article 1.1(a)(1)(iii)
of the SCM Agreement is not very convincing. In a footnote to its response to question 249, the
European Communities asserts that b ecause the Appellate Body held in US – Softwood Lumber IV
that by granting the right to harvest timber, Ca nadian provincial governments were providing goods,
"{i}t follows that, by granting the rights at issue in this case, the public authorities provide goods and
services to Boeing within the meaning of Ar ticle 1.1(a)(1)(iii) of the SCM Agreement". 1724 We
believe that the Appellate Body's finding in US – Softwood Lumber IV , on which the European
Communities relies, does not support the European Communities' argument. At issue in US –
Softwood Lumber IV were stumpage arrangements provide d by Canada's provincial stumpage
programs, which gave tenure holders a right to en ter onto government lands, cut standing timber, and
enjoy exclusive rights over the timber that is ha rvested. Canada argued that the granting of an
intangible right to harvest standing timber cannot be equated with the act of providing that standing
timber. The Appellate Body disagreed. It found th at stumpage arrangements represent a situation in
which provincial governments provide standing timber:
"By granting a right to harvest, the provincial governments put particular stands of
timber at the disposal of timber harvesters a nd allow those enterprises, exclusively, to
make use of those resources ... Moreover, what matters, for purposes of determining
whether a government 'provides goods' in th e sense of Article 1.1(a)(1)(iii), is the
consequence of the transaction. Rights over felled trees or logs crystallize as a
natural and inevitable consequence of the harvesters' exercise of their harvesting
rights. Indeed, as the Panel indicated, th e evidence suggests that making available
timber is the raison d'être of the stumpage arrangements."
1725
7.460 It was the object of the right that explained wh y the panel and Appellate Body concluded that
the conferral of the right effectively meant the prov ision of a good. As such, the panel and Appellate
Body reports in US – Softwood Lumber IV cannot be invoked as support for a more general
proposition that by granting any kind of rights to a firm, a government is providing goods and services
in the sense of Article 1.1(a)(1)(iii) of the SC M Agreement. In the present case, the European
Communities has not demonstrated that the object of the rights allegedly conferred on Boeing, such as
the right to be consulted with respect to the speci fications of the road im provement projects and the
alleged performance guarantee enjoyed by Boeing, is su ch that by conferring these rights, the relevant
authorities effectively provided goods and services in th e sense of Article 1.1(a)(1)(iii). It is not clear
what "good" or "service" is provided to Boeing as a result of the rights challenged by the European
Communities. Notably, it is unclear whether th e argument by the European Communities concerns
provision of "legal certainty", as the United Stat es understands the European Communities to argue,
or provision of some other good, such as provision of infrastructure. If the argument of the European
Communities concerns the provision of "legal certainty", the European Communities has not
explained how "legal certainty" in and of itself is covered by Article 1.1(a)(1)(iii) of the SCM
Agreement.
7.461 In response to the critique of the United States, the European Communities asserts that what it
considers to be the performance guarantee enjoye d by Boeing under the MSA means that the
authorities of Washington State are required to provi de certain services such as planning, scheduling,

1723 European Communities' response to question 249, para. 453.
1724 European Communities' response to question 249, para. 454, footnote 517.
1725 Appellate Body Report, US - Softwood Lumber IV, para. 75 (footnote omitted).

BCI deleted, as indicated [***]

maintenance and construction. However, the Eu ropean Communities does not demonstrate how these
services allegedly provided to Boeing are any di fferent from the work that the Washington State
authorities need to undertake to operate the roads as general infrastructure.1726, 1727
7.462 For these reasons, the Panel finds that the Eur opean Communities has not demonstrated that
the I-5 and SR 527 expansion projects or the rights allegedly conferred to Boeing in connection with
those projects are financial contributions in the fo rm of provisions of goods or services other than
general infrastructure within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement.
7.463 With respect to whether the Port of Everett im provement measures i.e. the construction of the
rail-barge transfer facility and the expansion of th e South Terminal are general infrastructure, the
Panel notes, first, that the United States has repeat edly asserted in this proceeding that the Port of
Everett has not begun work on the expansion of the South Terminal and has no plans to do so. While
the European Communities has argued that this is i rrelevant, it has not disputed the fact that this
expansion of the South Terminal has not (yet) occurre d. The Panel fails to see the need to determine
whether the expansion of the South Terminal is a measure covered by Article 1.1(a)(1)(iii) of the
SCM Agreement when this expansion has not occurred and when there is no certainty that it will
occur in future. The expansion of the South Te rminal essentially is a measure that does not (yet)
exist.1728
7.464 Regarding the rail-barge transfer facility, the Panel notes that this project has been undertaken
and has been completed. The Panel considers that the evidence before it in support of the assertion by

1726 The European Communities provides the following example in order to illustrate the importance of
the provision of legal certainty:

"Suppose that one company receives a binding legal commitment from the authorities of the
city in which it is located that provides the company's employees with three rights: (1) the
right to ride on a local bus for free; (2) the right to demand that the buses run punctually,
regardless of cost; and (3) the right that the bus routes will be selected according to the
company's specifications."

 European Communities' response to question 364, para. 183. The European Communities also
provides an example in support of its argument that under the MSA Washington State "has provided
and will provide Boeing rights to past, current and future services":

"Consider that the State undertakes to ensure an uninterrupted supply of electricity to Boeing's
plant. Specifically, the State undertakes to pr ovide electricity from an alternative source of
supply based on diesel generators within 10 minutes of the moment the public electricity
supply ceases to function (for whatever reason). This contr act thus covers the costs of daily
maintenance and checking of the diesel generato rs, as well as the costs of diesel fuel and
operation of the engines in case of failure of the public network (all regardless of the cost).
Boeing's right to receive these services confers upon it a financial contribution."

European Communities' response to question 364, para. 185. The Panel considers that these examples
describe situations that are very different from the road improvement projects at issue in this dispute.
1727 The Panel notes that the European Communities has not advanced any arguments as to why and
how the rights under the MSA, as distinguished from the road improvements themselves, confer a benefit in the
sense of Article 1.1(b) of the SCM Agreement and wh y and how these rights are specific in the sense of
Article 2 of the SCM Agreement.
1728 The Panel notes the argument of the European Communities that the commitment to expand the
South Terminal constitutes a financial contribution in the form of a potential direct transfer of funds within the
meaning of Article 1.1(a)(1)(i) of th e SCM Agreement. Apart from the f act that the European Communities
makes this argument in a very summary fashion and pr ovides little reasoning as to why this commitment is a
potential direct transfer of funds, the European Communities has failed to show how such a commitment, in and
of itself, gives rise to a benefit within the meaning of Article 1.1(b).

BCI deleted, as indicated [***]

the European Communities that this facility is not general infrastructure for purposes of
Article 1.1(a)(1)(iii) of the SCM Agreement is c onsiderably stronger than in the case of the road
improvement projects.
7.465 First, in the case of the I-5 and SR 527 road improvements it is clear that the improvements
are open to the general public and there is nothing that provides Boeing with any special rights that
affects the ability of the general public to use the road improvements. In the case of the rail-barge
transfer facility, however, Boeing enjoys a right of "Preferential Use". The Amended and Restated
Facilities and Services Agreement provides in this respect that:
"As set forth in Section 4 below, cargos delivered to the Port and destined for
delivery to Boeing designated facilities (whe ther or not owned by Boeing) shall be
entitled to Preferential Use of the Facility. The Port has the right to use the new
Facility for all other purposes as long as it does not interfere with Boeing's
Preferential Use."
1729
7.466 Article 4.1 of the Amended and Restated Facilities and Services Agreement defines
"Preferential Use" as follows:
"For the purposes of this Agreement, 'Preferential Use' shall mean berthing rights on
arrival for vessels and barges and priority space allocated for all cargoes covered by
this Agreement in the Port's designated terminal and use of Port's own or its
contracted labor and equipment to load or unload Boeing cargo. In exchange, Boeing
agrees that it will cause shipments of parts or subassemblies for aircraft bound for
Boeing's Everett facilities and that are carried by water in either standard or oversized
containers or noncontainerized cargos to be directed through the Port of Everett when
Boeing determines, in good faith and in its so le discretion, that such routing is the
most cost-effective alternative. The Port agrees that it will grant preferential use at
present and future facilities at the Port of Everett to any shipments of parts or
subassemblies for any Boeing aircraft (incl uding future models) and that are carried
by water in either standard or oversized containers that are bound for a Boeing
facility or any Boeing supplier facility designated by Boeing."
7.467 The Panel acknowledges that, as argued by the United States, Boeing's Preferential Use does
not preclude the possibility of third parties using the rail-barge transfer facility. At the same time, the
Panel notes that the right of other third parties to use the facility is subject to the provision that it may
not interfere with Boeing's Preferential Use. This w ould appear to imply that third parties' access to
the rail-barge transfer facility can be restricted. Therefore, a strong argument can be made that if the
concept of "general infrastructure" is defined as in frastructure that is available for use by the public
without limitations, the "Preferential Use" clause precludes the facility from being considered as
general infrastructure.
7.468 Second, the Amended and Restated Facilities and Services Agreement explicitly states that
"{t}he Facility is designed to facilitate transport of large components to the Paine Field industrial
area, and, particularly, oversized components to the Boeing manufacturing and assembly facilities
located there".
1730 Thus, while the road improvement projects served a broad range of objectives, the
purpose of the construction of the rail-barge transf er facility is defined much more narrowly as the
facilitation of the transport of certain components to Boeing's manufacturing and assembly facilities.

1729 Port of Everett – Boeing Amended and Restated Facilities and Services Agreement, Art. 3.2,
Exhibit US-224.
1730 Port of Everett – Boeing Amended and Restated Facilities and Services Agreement, Art. 3.1,
Exhibit US-224.

BCI deleted, as indicated [***]

The Panel finds it significant, in this regard, that a review of the Amended and Restated Facilities and
Services Agreement signed by Boeing and the Port of Everett in the fall of 2006, confirms that Boeing
agreed to reimburse the Port of Everett for the entire additional costs necessary to complete the rail
barge transfer facility at 6 per cent interest over a 20-year amortization schedule. 1731 It is unlikely that
the Port of Everett would have succeeded in funding the completion of the project and the
construction of the rail-barge transfer facility but for the fact that Boeing agreed to reimburse the
entire additional costs necessary to complete the facility.
7.469 The Panel considers that certain arguments of the European Communities are less persuasive.
As in the case of the road improvement projects, the Panel is not convinced by the arguments
advanced by the European Commun ities that certain provisions in the MSA, such as those relating to
Boeing's right to be consulted, support its view th at the rail-barge transfer facility is not general
infrastructure. Furthermore, the European Communities has not adequately addressed certain
pertinent arguments of the United States, notably th e argument that the construction of the rail-barge
facility must be seen as part of the railroad netw ork and that the reason for the Port of Everett to
undertake the construction of the facility was to a void having to shut down the main rail line for
between one and two hours while large cargo was transferred onto rail barges.
7.470 Nevertheless, while not comple tely convinced by all arguments made by the European
Communities, the Panel considers that, especially in the light of the provisions regarding Boeing's
"Preferential Use", that a strong case can be made th at the rail-barge transfer facility is not general
infrastructure for purposes of Article 1.1(a)(1)(iii) of the SCM Agreement. In the light of its finding
below with respect to the existence of a benefit, the Panel does not find it necessary to decide this
issue definitively.
7.471 As an alternative argument in support of its contention that the infrastructure-related measures
referred to in the MSA are financial contributi ons, the European Commun ities submits that these
measures involve potential direct transfers of funds within the meaning of Article 1.1(a)(1)(i) of the
SCM Agreement. The European Co mmunities claims to find support for the characterization of the
measures as potential direct transfers of funds in the "Make Whole" provision in 10. 4.1 of the MSA
which require that Boeing be provided with "a remedy of equivalent economic effect".
7.472 The Panel does not consider it necessary to examine this alternative argument of the European
Communities. This is because, as explained below 1732, assuming that the measures can be considered
to be potential direct transfers of funds, the European Communities has not explained how these
measures confer a benefit within the meaning of Article 1.1(b) of the SCM Agreement.
7.473 For these reasons, the Panel finds that: (i) th e European Communities has not demonstrated
that the I-5 and SR 527 expansion projects and th e expansion of the South Terminal are financial
contributions within the meaning of Article 1.1( a)(1)(iii) of the SCM Agreement; (ii) while the
European Communities has a stronger case with respect to the construction of a rail-barge transfer
facility by the Port of Everett, it is not necess ary to decide definitively whether this measure
constitutes a provision of goods or services other than general infrastructure within the meaning of
Article 1.1(a)(1)(iii); and (iii) it is not necessary to examine the argument submitted by the European
Communities in the alternative that the measures at issue constitute potential direct transfers of funds
within the meaning of Article 1.1(a)(1)(i).
7.474 The Panel now proceeds to consider whether, assuming that the construction of the rail-barge
transfer facility by the Port of Everett is a financial contribution within the meaning of

1731 Port of Everett-Boeing Amended and Restated Facilities and Services Agreement, Exhibit C,
Exhibit US-224.
1732 See below, para. 7.480.

BCI deleted, as indicated [***]

Article 1.1(a)(1)(iii)1733, this financial contribution confers a benefit within the meaning of
Article 1.1(b).1734
7.475 It is well established that a financial contribut ion confers a benefit within the meaning of
Article 1.1(b) of the SCM Agreement if the terms of the financial contribution are more favourable
than the terms available to the recipient in the market. 1735 Thus, an analysis of the existence and
nature of a benefit must focus on the terms of a tr ansaction. In the case of a financial contribution of
the type identified in Article 1.1(a)(1)(iii) i.e. a provision of goods or services other than general
infrastructure, Article 14(d) of the SCM Agreement, which is relevant context for the interpretation of
the term "benefit" in Article 1.1(b) 1736, provides more specific guidance as to how the terms of a
transaction must be analyzed for purposes of Article 1.1(b). A determination of the existence of a
benefit in accordance with Article 14(d) with respect to a provision of goods or services other than
general infrastructure requires an analysis of th e adequacy of the remuneration received by the
government for the good or service at issue in relati on to prevailing market conditions for the good or
service in question in the country of provision.1737
7.476 The construction and use of the rail-barge transf er facility was the subject of an agreement
concluded between the Port of Everett and Boeing in the fall of 2006.1738 The European Communities
does not demonstrate, based on a de tailed analysis of the specific pr ovisions of this Agreement, that
the Port of Everett did not receive adequate rem uneration in connection with the rail-barge transfer
facility. The European Communities asserts that the key fact in relation to the existence of a benefit is
that "{a}bsent the State funding, Boeing would ha ve been required to pay the entire $30 million cost
for this type of specific infrastructure, not just the $14-$16 million cost overrun. It is this $15 million
funded by the State that is a benefit to Boeing's LC A division within the meaning of Article 1.1(b) of
the SCM Agreement". 1739 Therefore, the European Commun ities essentially argues that a benefit
exists because the State of Washington provid es Boeing with a good and requires Boeing to cover
only a part of the costs incurred by the State in constructing that facility. The European Communities
considers in this respect that the construction of the rail-barge transfer facility "can be viewed as
undertaken by Boeing with the Port contributing $16 million in funds". 1740 Under this approach, the
benefit is the investment that public authorities make in the construction of infrastructure that Boeing
would otherwise have had to finance itself. Th e European Communities argues more generally in

1733 See above, para. 7.470.
1734 The question of whether the I-5 and SR 527 expansion projects and the expansion of the South
Terminal confer a benefit within the meaning of Article 1.1(b) does not arise because, as explained above, (i)
the I-5 and SR 527 expansion projects are not financial contributions because they constitute the provision of
general infrastructure within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement; and (ii) the expansion
of the South Terminal has not occurred, which means that the measure alleged to constitute a financial
contribution does not exist.
1735 See above, para. 7.30.
1736 Appellate Body Report, Canada – Aircraft , paras. 155 and 158; Panel Report, US – Softwood
Lumber III, para. 7.5.
1737 According to Article 14(d):

"the provision of goods or services or purchase of goods by a government shall not be
considered as conferring a benefit unless th e provision is made for less than adequate
remuneration, or the purchase is made for more than adequate remuneration. The adequacy of
remuneration shall be determined in relation to prevailing market conditions for the good or
service in question in the country of provis ion or purchase (including price, quality,
availability, marketability, transportation and other conditions of purchase or sale)."

1738 Port of Everett – Boeing Amended and Restated Facilities and Services Agreement, Exhibit US-
224.
1739 European Communities' second written submission, para. 181.
1740 European Communities' response to question 249, para. 456.

BCI deleted, as indicated [***]

relation to infrastructure that the investments ma de by the Washington State authorities serve as a
proxy for the market value of the infrastructure at issue.1741
7.477 The Panel considers that this approach to determ ining the existence of a benefit by attributing
the totality of the costs of the construction of the rail-barge transfer facility as a benefit to Boeing is
problematic. The methodology used by the European Communities might be reasonable where the
provision of the infrastructure involves a transfer of t itle to ownership or the conferral of an exclusive
right to use the infrastructure to a particular firm. However, the evidence before the Panel shows that
the rail-barge transfer facility is owned by the Port of Everett and that, while Boeing enjoys a right of
Preferential Use, it has no right of exclusive use of the facility. The Panel sees no logical basis for the
view that the amount of the benefit to Boeing conf erred by the provision of the rail-barge transfer
facility is the amount of the investment made by the Port of Everett when Boeing does not own the
facility and when there are other users of the facility. 1742 In the Panel's view, the European
Communities is incorrect when it asserts that the cons truction of the rail-barge facility "can be viewed
as undertaken by Boeing with the Port contributing $16 million in funds". 1743 Rather the construction
was undertaken by the Port of Everett with Boei ng contributing $15.5 million. Contrary to the
argument of the European Communities, the Panel c onsiders that this payment is an element of
remuneration paid by Boeing and that the European Communities has not provided sufficient factual
and legal reasoning for the Panel to be able to conclude that, in the light of this payment and other
terms of the transaction at issue1744, the Port of Everett has not received adequate remuneration for the
goods or services allegedly provided to Boeing.
7.478 The Panel also notes that the United States asser ts that Boeing does not actually use the rail-
barge transfer facility as it has shifted to air ship ments of parts for the 787 and that the European
Communities has not disputed this assertion. The European Communities has not explained how the
financial contribution provided by the Port of Ever ett in relation to the rail-barge transfer facility
confers a benefit within the meaning of Article 1. 1(b) to Boeing when Boeing does not actually use
this facility. Thus, it is unclear on what basis it is possible for the European Communities to argue
that a benefit within the meaning of Article 1.1(b) exists on the grounds that the Port of Everett
improvements "relate explicitly to the production of the 787" when Boeing does not use the rail-barge
transfer facility for shipments of 787 parts.
7.479 For these reasons, the Panel considers that with regard to the rail-barge transfer facility the
European Communities has not provided sufficient factual and legal reasoning on the existence of a
benefit, as that term is used in Article 1.1(b) of the SCM Agreement, interpreted in the light of
Article 14(d). In particular, the European Commun ities has not explained why the Port of Everett has

1741 European Communities' response to question 249, para. 450.
1742 The Panel notes that the European Communities applies the same approach to the determination of
the existence of benefit in the case of the Washington State road improvement measures and the expansion of
the South terminal. Thus, with respect to the road improvement measures, it treats the amount of $291.2 million
invested by the State of Washington in the road improvement projects in the period FY2004-FY2008 as a
benefit to Boeing on the grounds that "{i}t is reasonable to conclude that Boeing would have had to pay these
same amounts if it were to finance these road improvements, which are beneficial for the operation of Boeing's
facilities, itself. Since the State is paying for these road improvements, and Boeing is paying nothing in return,
the entire $291.2 million is a bene fit conferred upon Boeing". Euro pean Communities' response to
question 249, para. 452. The Panel sees no rational basis for allocating to Boeing the entirety of the costs
incurred by Washington State for the road improvement projects when use of the road improvements is in no
way limited to Boeing.
1743 European Communities' response to question 249, para. 456.
1744 As set forth in particular in the Port of Ev erett – Boeing Amended and Restated Facilities and
Services Agreement. Exhibit US-224.

BCI deleted, as indicated [***]

received less than adequate remuneration fo r the goods or services provided to Boeing. 1745 The Panel
therefore finds that, assuming that the construction of the rail-barge transfer facility by the Port of
Everett is a financial contribution in the form of a provision of goods or services other than general
infrastructure, the European Communities has not dem onstrated that the construction of the rail-barge
transfer facility by the Port of Everett confers a benefit within the meaning of Article 1.1(b) of the
SCM Agreement.
7.480 The Panel also finds that the European Commun ities has not demonstrated the existence of a
benefit in respect of its alternative argument that the infrastructure-related measures referred to in the
MSA constitute financial contributions in the form of potential direct transfers of funds. As discussed
elsewhere in this Report, in relation to the argum ents of the European Communities regarding certain
tax measures contained in HB 2294 1746, the Panel considers that, assuming that the provisions of the
MSA relied upon by the European Communities could be interpreted to give rise to financial
contributions in the form of potential direct tran sfers of funds, the European Communities has not
provided any reasoning to explain why such potential di rect transfers of funds confer a benefit within
the meaning of Article 1.1(b) of the SCM Agreemen t. Merely demonstrating that the government has
promised to provide either a direct transfer of funds or some other remedy should it default on its
MSA commitments is not sufficient to prove that the promise per se, rather than the remedy that may
eventually be provided, confers a benefit to Boeing. The same reasoning applies to the argument of
the European Communities that the Panel should find that the infrastructure-related measures in the
MSA constitute potential direct transfers funds as a result of the operation of the "Make Whole"
provision in Article 10.4.1 of the MSA. Assuming arguendo that the effect of the "Make Whole"
provision gives rise to a potential direct transfer of funds in relation to the infrastructure-related
commitments in the MSA, the European Commun ities has not shown that these potential direct
transfers of funds provide a benefit in the sense of Article 1.1(b) of the SCM Agreement.
Conclusion

7.481 For these reasons, the Panel finds that the European Communities has not demonstrated
that the I-5 and SR 527 expansion projects, the co nstruction of a rail-barge transfer facility and
the expansion of the South Terminal by the Port of Everett are subsidies within the meaning of
Article 1 of the SCM Agreement.
(iii) Waiver of landing fees for Boeing's 747 Large Cargo Freighters at Paine Field
Introduction
7.482 The European Communities argues that the MSA requires Snohomish County to waive
landing fees at Paine Field for the 747 LCF and that this constitutes a specific subsidy. The European
Communities estimates that the amount of the subs idy to Boeing's LCA division is $13.1 million over
the period 2007-2024.
7.483 The United States argues that there is no subsidy because the alleged waiver of landing fees is
not a financial contribution and does not confer a benefit.

1745 The Panel also notes that the European Communities advances arguments that are not germane to
the issue of benefit. Whether or not "{t}he time and effort saved by transporting parts from the Port to Paine
Field as a result of this rail-barge tr ansfer facility will be an immense bene fit to Boeing" is not relevant to the
analysis of the existence of a benefit in the sense of Article 1.1(b) of the SCM Agreement.
1746 See above, paras. 7.173-7.177.

BCI deleted, as indicated [***]

The measure at issue
7.484 The Boeing 747 Large Cargo Freighter ("the 747 LCF") is constructed by Boeing by
modifying old 747-400s so that they include an aft fuselage that opens up to allow loading and
unloading of the 787's large composite structures. The 747 LCF also includes a hinged tail section
that opens to allow loading of parts and a redesigned cargo deck.
1747 Boeing uses the 747 LCF to fly
several 787 parts to Everett from supplie rs within its global supplier network. 1748 In particular, the
747 LCF is used to transport, among other components, the 787 fuselage sections, wing boxes and
horizontal stabilizers from Japan, Europe and South Carolina.
1749 The modifications to construct the
747 LCF occur in Chinese Taipei. 1750 According to the European Co mmunities, to date, transport of
787 components is the only projected use for the 747 LCF. In fact, Boeing has named the 747 LCF
the "Dreamlifter".1751 The European Communities asserts that Boeing will exclusively use 747 LCFs
to transport large completed sections of the 787 to Ev erett for final assembly and that Boeing plans to
utilize three 747 LCFs for the production of the 7 87, with the first 747 LCF having entered into
service in 2007.1752
7.485 Paine Field is the Snohomish County Airport in th e City of Everett, where Boeing decided to
locate its 787 assembly facility. 1753 Paine Field has a "standard la nding fee" based on landed weight
and number of landings. Paine Field's standard la nding fee for aircraft weighing over 30,000 lbs is
$1.00 per 1,000 pounds maximum gross landing weight. 1754 In the mid-1990s, Snohomish County
and Boeing agreed that Boeing would pay a "capped annual fee", which escalates by a set amount
each year to account for inflation, for Boeing's use of Paine Field runway and airfield facilities.
1755
The parties have referred to this agreement as the "1996 Joint Use Agreement". Thus, Boeing pays
Snohomish County an annual "flat fee", as opposed to the standard landing fee on "per-plane" i.e.
landing-by-landing basis. In this sense, "per-plane" landing fees are "waived". 1756 The agreement
between Boeing and the County has a sunset cl ause, so the parties periodically negotiate
extensions.1757
7.486 Exhibit E to the MSA states that "Snohomish County agrees to modify the existing Boeing
agreement to include waiving of all landing fees for 747-400 LCF aircraft". 1758 Thus, pursuant to the
MSA, any per-plane landing fees that would otherwise be paid in resp ect of 747-400 LCF aircraft are
"waived", and are instead included in and covered by the "flat fee" agreement between Boeing and
Snohomish County. It is this measure that the European Communities terms the "waiver of landing

1747 Boeing 787: Build globally, assemble locally, The Seattle Times, 11 September 2005, Exhibit EC-
115, p. 4.
1748 European Communities' first written submission, para. 189 and Dominic Gates, Boeing 787: Parts
from around world will be swiftly integrated, The Seattle Times, 11 September 2005, Exhibit EC-114.
1749 Boeing 787: Build globally, assemble locally, The Seattle Times, 11 September 2005, Exhibit EC-
115, p. 4.
1750 Boeing 787: Build globally, assemble locally, The Seattle Times, 11 September 2005, Exhibit EC-
115, p. 4.
1751 European Communities' first written submission, para. 189.
1752 European Communities' first written submission, para. 240.
1753 European Communities' first written submission, para. 239.
1754 European Communities' first written submission, para. 244; United States' first written submission,
para. 565.
1755 United States' first written submission, para. 560; 1996 Boeing-Paine Field Joint Use Agreement,
10 April 1996, Exhibit EC-1189.
1756 United States' first written submission, para. 561.
1757 United States' first written submission, para. 562.
1758 First Amendment to Project Olympus Master Site Agreement, Exhibit E, Exhibit EC-60 (emphasis
added).

BCI deleted, as indicated [***]

fees for Boeing's 747 large cargo freighters at Pain e Field", and which the European Communities
challenges as a specific subsidy within the meaning of Articles 1 and 2 of the SCM Agreement.
Arguments of the European Communities
7.487 The primary argument of the European Commun ities regarding the existence of a financial
contribution is that Snohomish County's agreem ent to waive landing fees for the 747 LCFs amounts
to: (i) a financial contribution within the meani ng of Article 1.1(a)(1)(ii) of the SCM Agreement
because the County foregoes revenue that it would othe rwise receive; and (ii) a financial contribution
within the meaning of Article 1.1(a)(1)(iii) becau se by allowing the 747 LCFs to land at Paine Field
and use its facilities the County provides services for free. 1759 In the alternative, the European
Communities submits that the measure gives rise to a potential direct transfer of funds within the
meaning of Article 1.1(a)(1)(i) because under Ar ticle 10.4.1 of the MSA Snohomish County must
provide Boeing with a remedy of equivalent e ffect if it cannot provide the 747 LCF landing fee
waiver.1760
7.488 The European Communities argues that Snoh omish County's commitment to waive landing
fees for the 747 LCFs contained in the MSA involve s the foregoing of revenue that would otherwise
be due and is therefore a financial contribution with in the meaning of Article 1.1(a)(1)(ii) of the SCM
Agreement. In this regard, the European Commun ities rejects the argument of the United States that
the County is not foregoing any re venue otherwise due because, based on its Joint Use Agreement for
Paine Field, Boeing pays a capped annual fee for landing of all Boeing aircraft. The European
Communities accepts that at th e time Snohomish County and Boeing signed the MSA they had a
capped annual fee agreement with respect to land ings at Paine Field. However, the European
Communities argues that that agreement did not, an d could not, have related to the 747 LCF because
the 1996 Joint Use Agreement, which established th e capped fee, was not a comprehensive agreement
encompassing landings by all Boeing civil aircraft and because neither the Joint Use Agreement, nor
any other agreement that pre-dated the MSA included the 747 LCF.
1761
7.489 The European Communities argues that the Joint Use Agreement 1762 was an interim
agreement reached by the parties to resolve a di spute over fees pursuant to an earlier agreement.
Specifically, the Agreement addressed the fees owed by Boeing to Paine Field from 1994 through
1998, and committed the parties to attempt negotiation of a more comprehensive agreement by the
end of 1998. Nowhere in the Agreement does it say that it relates to the landing of all Boeing civil
aircraft at Paine Field. 1763 Because Boeing and Snohomish County did not reach a comprehensive
agreement regarding Boeing's use of Paine Field by the end of 1998, they instead signed extension
letters dated 25 August 1999 1764, 7 December 2000 1765, 17 December 2002 1766, and 7 March 2007 1767
to periodically extend the temporary capped a nnual fee arrangement set up by the 1996 Joint Use
Agreement. These subsequent extension agreem ents support the view that the 1996 Joint Use
Agreement did not relate to landings by all Boeing ci vil aircraft at Paine Field, as it was not until the
17 December 2002 extension letter that the parties d ecided to add a clause stating: "this agreement

1759 European Communities' first written submission, para. 242.
1760 European Communities' first written submission, para. 243.
1761 European Communities' second written submission, paras. 161-164.
1762 1996 Boeing-Paine Field Joint Use Agreement, Exhibit EC-1189.
1763 European Communities' second written submission, para. 161.
1764 Boeing-Paine Field Joint Use Agreement Extension, 25 August 1999, Exhibit EC-1190.
1765 Boeing-Paine Field Joint Use Agreement Extension, 7 December 2000, Exhibit EC-1191.
1766 Boeing-Paine Field Joint Use Agreement Extension, 17 December 2002, Exhibit US-234 (BCI).
1767 Boeing-Paine Field Joint Use Agreement Extension, 7 March 2007, Exhibit US-235 (BCI).

BCI deleted, as indicated [***]

includes the introduction, testing and production of a dditional aircraft models with no additional cost
to Boeing". 1768
7.490 The European Communities argues that had th e 1996 Joint Use Agreement already covered
fees with respect to all Boeing civil aircraft, there would have been no need to add this clause in the
17 December 2002 extension letter. 1769 The European Communities also submits that in view of the
fact that Snohomish County "agree{d} to modify the existing Boeing agreement to include waiving of
all landing fees for 747-400 LCF aircraft" in the MSA 1770 and that Snohomish County actually
implemented this commitment in its 7 March 2007 extension letter with a clause separate from the
one added on 17 December 2002, it is evident th at the clause added in the 17 December 2002
extension letter did not encompass the 747 LCF. Th e clause in question in the extension letter of
7 March 2007 reads:
"Under this extension of the Joint Use Ag reement, Boeing is authorized to produce
current and additional aircraft models and derivatives with no additional charges for
use of the airfield for takeoff and landing for test, evaluation and delivery flights.
Additionally, pursuant to the Project Olympus Agreement there will be no additional
fees or low fuel flowage charges for 747 Large Cargo Freighter (LCF) operations
during flight test or cargo operations."1771
7.491 The European Communities asserts that 747 LC F would not be considered an "additional
aircraft model" that fits within the scope of th e clause added in the 17 December 2002 extension letter
because the 747 LCF is not like Boeing's other LC A models, which are sold in the commercial
marketplace. Rather, it is a cargo aircraft desi gned to assist Boeing in the production of the 787.
Thus, the European Communities rej ects the United States' interpretati on that the 'waiver' referenced
in the MSA merely reflects existing practice, under whic h in exchange for a flat fee, all per-plane fees
are waived. To accept this reading would render both the 747 LCF waiver clause in the MSA and the
clause implementing the waiver in the 7 March 2007 extension letter meaningless. 1772 It would also
make the commitment by Snohomish County in the MS A to provide a landing fee waiver for the 747
LCF unnecessary.1773
7.492 In its comments on the United States' response to a Panel question, the European
Communities reiterates 1774 its position that neither the 1996 Joint Use Agreement nor the
17 December 2002 extension letter re lated to landings by all Boeing civil aircraft at Paine Field. 1775
The European Communities further submits that th e failure by the United States to explain the
contradictions discussed by the European Communiti es confirms the view that the 747 LCF was not
within the scope of the December 2002 extension of the 1996 Joint Use Agreement. Therefore, the
waiver of 747 LCF landing fees, as required by the MSA and implemented by the March 2007
extension of the Joint Use Agreement, results in the foregoing of revenue ot herwise due within the
meaning of Article 1.1(a)(1)(ii) of the SCM Agreement.
1776
7.493 To demonstrate that Snohomish County has give n up a real entitlement to collect additional
revenue, the European Communities compares the c ontested measure with a normative benchmark.

1768 European Communities second written submission, para. 162.
1769 European Communities second written submission, para. 163.
1770 First Amendment to Project Olympus Master Site Agreement, Exhibit E, Exhibit EC-60.
1771 Boeing-Paine Field Joint Use Agreement Extension, 7 March 2007, Exhibit US-235 (BCI)
(emphasis European Communities).
1772 European Communities second written submission, para. 163.
1773 European Communities second written submission, para. 164.
1774 European Communities' Comments on United States' response to question 366 (b), paras. 181-183.
1775 European Communities' second written submission, paras. 160-169.
1776 European Communities' Comments on United States' reponse to question 366 (b).

BCI deleted, as indicated [***]

Since the capped annual fee arrangement did not encompass the 747 LCF, 747 LCF landings at Paine
Field would have been subject to Paine Field's st andard landing fee schedule, which is $1.00 per
1,000 pounds maximum gross landing weight. The Eu ropean Communities estimates in view of this
standard schedule, that absent the waiver agreed to in the MSA and implemented in the 7 March 2007
extension letter, Paine Field would be entitled to collect $1.00 per 1,000 pounds maximum gross
landing weight with respect to each 747 LCF landing at Paine Field, in addition to the capped annual
fee that relates to landings by other Boeing aircra ft. As such, it follows that Snohomish County is
foregoing revenue otherwise due within the m eaning of Article 1.1(a)(1)(ii) of the SCM
Agreement.1777
7.494 The European Communities submits that the waiver of landing fees for the 747 LCF also
gives rise to a financial contribution within the meaning of Article 1.1(a)(1)(iii) of the SCM
Agreement.1778 Specifically, Snohomish County is providing services to Boeing by allowing the 747
LCF to land at Paine Field at no cost, resulting in a financial contribution within the meaning of
Article 1.1(a)(1)(iii). The United States' assertion that there is no provision of free services to Boeing
because the waiver in the MSA is part of the fee paid by Boeing is factually incorrect.1779
7.495 The European Communities argues, in the a lternative, that because Snohomish County
committed to providing Boeing with a landing f ee waiver for the 747 LCF through the MSA, the
commitment is guaranteed to Boeing through the "M ake Whole" provision of the MSA, resulting in a
potential direct transfer of funds within the meaning of Article 1.1(a)(1)(i) of the SCM Agreement.1780
7.496 The European Communities argues that the 747 LC F landing fee waiver confers "benefits" on
Boeing's LCA division within the meaning of Article 1.1(b) of the SCM Agreement because the
waiver relates explicitly to the production of the 787 and is provided to Boeing's LCA division on
non-market terms. Because Boeing is not required to pay an ything in return for the waiver and the
747 LCFs will all be used to transport 787 parts to Everett for final assembly, the entirety of the
financial contributions can be considered to confer benefits on Boeing's LCA division. The advantage
conferred on Boeing's LCA division by this 747 LC F landing fee waiver is provided on non-market
terms. The landing fee waiver for 747 LCF results in Boeing paying less in transportation costs for
the parts needed to put together each 787. By de finition, the landing fee waiver is not available to
Boeing on the market and can be provided to Boeing only by Snohomish County, which allows the
747 LCFs to use the services of Paine Field at no cost – i.e. less than market value.
1781

1777 European Communities' second written submission, paras 165-166. In its first written submission,
the European Communities explains as follows how it has derived the amount of the subsidy resulting from the
waiver of landing fees:

"The European Communities estimates this financial contribution to be worth at least
$13.1 million from FY 2007 to FY 2024. According to Paine Field, their standard landing fee
for aircraft weighing over 30,000 lbs is $1.00 per 1,000 lbs maximum gross landed weight
(MGLW). Although the technical specifications for the 747 LCF are not yet available, using
the MGLW of 666,000 lbs for the 747-400F as a proxy, the fee waiver works out to $666 per
landing. If each of the three 747 LCFs lands at Paine Field once every day (i.e. 365 times per
year), the Project Olympus Master Site Agreement will require Paine Field to forego $729,270
in revenue from landing fees each year beginning in FY 2007, or $13.1 million from
FY 2007 to FY 2024."

European Communities' first written submission, para. 244.
1778 European Communities first written submission, paras. 242-243.
1779 European Communities' second written submission, para. 169.
1780 European Communities' second written submission, para. 169.
1781 European Communities' first written submission, para. 248.

BCI deleted, as indicated [***]

7.497 The European Communities reject s the United States' argument that under the fixed annual
fee arrangement, Boeing effectively pays a higher rate than the airport's standard fee for LCA based
on landed weight and number of landings. The fixed annual fee arrangement is irrelevant to the 747
LCF. The European Communities maintains that Boeing's fixed annual fee arrangement for the use of
Paine Field did not, and could not, have covere d the 747 LCF before the waiver agreed to by
Snohomish County in the MSA and implemented in the 7 March 2007 extension letter. Therefore,
Boeing would have owed Paine Field's standard rate of $1.00 per 1,000 pounds maximum gross
landing weight with respect to landings of the 747 LCF. The waiver, however, provides that the 747
LCF will not be subject to any separate fees, and as such deviates from what a market participant
would be required to pay for such landings at Paine Field. This results in a benefit within the meaning
of Article 1.1(b) of the SCM Agreement, the value of which is at least $13.1 million from 2007
through 2024.
1782
Arguments of the United States
7.498 The United States observes that in the mid-1990s Snohomish County and Boeing agreed that
Boeing would pay a capped annual fee, which escalat es $60,000 per year to account for inflation and
covers Boeing's use of Paine Field runway and airfield facilities. This agreement encompassed
landings by all Boeing civil aircraft, including th e 747 LCF. While Snohomish County agreed in the
MSA to modify the existing Boeing agreement to include waiving of all landing fees for 747-400 LCF
aircraft, this "waiver" merely reflects existing practic e, under which in exchange for a flat fee, all per-
plane fees are waived.1783
7.499 The United States explains that because the Joint Use Agreement contains a sunset clause, the
parties periodically negotiate extensions. In De cember 2002, Boeing and Paine Field extended their
Joint Use Agreement from 2003 to 2005. The Decem ber 2002 extension, which predated the MSA,
specifically stated that the Agreement "include{d } the introduction, testing, and production of
additional aircraft models with no additional cost to Boeing". 1784 The United States observes that
another extension of the Joint Use Agreement occurred on March 7, 2007, which provides that Boeing
is authorized to produce current and additional ai rcraft models and derivatives with no additional
charges for use of the airfield for takeoff and landing for test, evaluation and delivery flights and that,
pursuant to the MSA, there will be no additiona l fees or low fuel flowage charges for 747 LCF
operations during flight test or cargo operations. 1785 The United States argues that the 747 LCF is a
Boeing aircraft, and as such, was covered by the original agreement. The December 2002 extension
of the Boeing and Paine Field Joint Use Agreement pr ovided further clarification that the waiver of
landing fees included additional aircra ft models with no additional cost to Boeing. Consistent with
the original agreement and the December 2002 exte nsion, the March 2007 extension of the Joint Use
Agreement, repeats the pre-existing agreement that the 747 LCF would not be subject to additional

1782 European Communities' second written submission, paras. 170-171. The European Communities
also argues that "it also makes no sense that Boeing would agree to pay a hi gher rate than Paine Field's standard
landing fees". The European Communities questions E xhibit US-237, Boeing Landing Summary and Costs at
Paine Field, (BCI), on which the United States relies for its assertion that Boeing is paying more than Paine
Field's standard rates, as lacking underlying source information. European Communities' second written
submission, para. 170, footnote 297.
1783 United States' first written submission, paras. 560-561.
1784 United States' first written submission, para. 562. The United States argues that, contrary to the
argument of the European Communities, this extension did not "modify" the Joint Use Agreement to include
operations with respect to additional aircraft models. United States' response to question 366(b), para. 208,
footnote 251.
1785 United States' first written submission, para. 563. This March 2007 extension also provides that for
the years 2007, 2008, 2009, 2010, and 2011, Boeing's total billing will be the lesser of the amount due under the
1995 Formula (Addendum A) or the "Capped Amount." The "Capped Amount" is [***] for year 2007, [***]
for 2008, [***] for 2009, [***] for 2010, and [***] for 2011. United States' first written submission, para. 563.

BCI deleted, as indicated [***]

landing fees. Accordingly, the original agreem ent between Boeing and the County established that
the 747 LCF would not be subject to per-plane la nding fees. The December 2002 and March 2007
extensions and the relevant MSA provision merely reflect existing practice as established in the
original agreement.1786
7.500 The United States argues that based on the capped annual fee for landing of all Boeing
aircraft agreed to by Boeing and Snohomish County and Paine Field, as well as the March 2007
amendment to the Joint Use Agreement, it is clear that the County is not forgoing any revenue that it
would otherwise collect for landing of the 747 LCF. 1787 The United States also argues that there is no
provision of free services to Boeing because the "wai ver" in the MSA is part of the fee paid by
Boeing. As such, there is no financial contribution. 1788 The United States argues that there is no
benefit to Boeing because under the fixed annual fe e arrangement, Boeing effectively pays a higher
rate than the airport's standard fee for LCA based on landed weight and number of landings.1789
Evaluation by the Panel
7.501 The issue before the Panel is whether what the European Communities characterizes as a
commitment made by Snohomish County in the MSA to waive landing fees for the 747 LCF is a
subsidy within the meaning of Article 1 of the SCM Agreement. The European Communities argues
that Snohomish County's commitment in the MSA to waive landing fees for the 747 LCF constitutes
the foregoing of government revenue otherwise due within the meaning of Article 1.1(a)(1)(ii) of the
SCM Agreement and a provision of goods or services within the meaning of Article 1.1(a)(1)(iii).
The European Communities argues that these financ ial contributions confer a benefit upon Boeing
within the meaning of Article 1.1(b) of the SCM Agreement. The United States contends that the
County is not foregoing any reve nue that would otherwise be due for 747 LCF landings because
Boeing pays the "capped annual fee for landing of all Boeing aircraft" based on its Joint Use
Agreement for Paine Field, which pre-dates the MSA. The United States also argues that there is no
provision of services to Boeing at no cost. The United States further argues that if there is a financial
contribution within the meaning of Article 1.1(a)(1) of the SCM Agreement, there is no benefit within
the meaning of Article 1.1(b).
7.502 The Panel explains below why it consider s that the European Communities has not
demonstrated that the commitment made by Snohomish County in the MSA to waive landing fees for
the 747 LCF constitutes a subsidy within the meani ng of Article 1 of the SCM Agreement. It is
important to note at the outset that even if the Pa nel had found this measure to be a subsidy, the Panel
would have found that this measure is not relevant to its analysis of the European Communities' claim

1786 United States' response to question 366(b), paras. 208-209. More generally, the United States
explains that the MSA reflects an e ffort by Washington State and Boeing to address, in a comprehensive
manner, a range of factors relevant to Boeing's operations in Washington State. For some of those factors, such
as the 747 LCF landing fees, Boeing and the State had already established a practi ce that was satisfactory to
both parties and that did not require changes. Because Boeing had been conducting operations in Washington
State for many years prior to the MS A, Washington State and Boeing merely sought to memorialize existing
practice in the MSA. That is what happened with regard to the 747 LCF landing fees. Therefore, the
United States submits that the European Communities con tinues to read obligations and benefits into the MSA
that just are not there. United States' response to question 366, para. 200.
1787 United States' first written submission, para. 564.
1788 United States' first written submission, para. 564.
1789 United States' first written submission, para. 565. The United States submits that in 2006, Boeing
paid $[***] million under its contract for landing fees, which is equivalent to $ [***] per 1,000 lbs maximum
gross landing weight landed during that year. This is higher than what Boeing would have been charged had it
paid the airport's standard landing fee. Based on Boeing's 2006 maximum gross landing weight of 201,156,892,
it would have paid a total of $201,157 in landing fees under standard rates, compared to its $ [***] million
pursuant to the contract. United States' first written submission, para. 565.

BCI deleted, as indicated [***]

of serious prejudice. The Panel needs to address the question of whether this measure is a subsidy for
the purposes of assessing the European Communities' claim of serious prejudice. The total amount of
subsidization which the European Communities alleges to exist in this dispute includes both "past
amounts" and "future amounts", where "past" and "future" refer to, respectively, 1989-2006 and 2007-
2024.
1790 As indicated in the serious prejudice sect ion of this Report, the Panel considers it
appropriate to assess the European Communities' present serious prejudice claim by examining the
effects of the subsidies over the period 2004-2006.1791 In the case of the waiver of the landing fees for
the 747 LCFs, the amount of the alleged subsidy pert ains entirely to the post-2006 period. According
to the European Communities, the amount of this subsidy is $0 in the period 1989-2006 and
$13.1 million in the period 2007-2024.
1792 As discussed elsewhere in this Report 1793, the European
Communities has explained that the only post-2006 amount s of subsidies that are relevant to its claim
of present serious prejudice are the amounts of ce rtain recurring subsidies that reduce Boeing's
marginal unit costs, including the waiver of the 747 LCF landing fees, expected to be received in the
years 2007, 2008 and 2009. 1794 However, these subsidy amounts expect ed to be received in the post-
2006 period play no part in the Panel's analys is of the European Communities' present serious
prejudice claim.1795 Moreover, the Panel exercises judicial economy with regard to threat of serious
prejudice.1796 Therefore, even if the Panel found that the alleged waiver of landing fees in respect of
the 747 LCF constitutes a specific subsidy, the Panel would not take the amount of this subsidy into
account in its analysis of the European Communities' claim of serious prejudice.
7.503 The Panel now proceeds to set forth the r easons for its finding that the European
Communities has not demonstrated that the measure at issue constitutes a subsidy within the meaning
of Article 1 of the SCM Agreement.
7.504 The Panel notes, in this regard, that the par ties have advanced extensive arguments on the
factual question of whether, prior to conclusion of the MSA, the capped annual landing fee agreed
upon between Boeing and the Snohomish County app lied to the 747 LCF. In this regard, the
European Communities asserts that the capped a nnual fee provided for in the pre-MSA flat fee
agreement did not apply to the 747 LCF. The United States asserts that the waiver of landing fees
provided for in the pre-MSA flat fee agreement
1797 already applied to 747 LCF, and that the MSA
simply memorialises this existing practice.
7.505 We consider that the evidence submitted by the European Communities supports its
contention concerning the scope of the pre-MSA flat fee agreement. Among other things, it is not
clear to us why the MSA would single out and make specific reference to 747 LCF if the pre-MSA
flat fee agreement already covered all Boeing aircraft , including the 747 LCF. In addition, we recall
that the MSA required Snohomish County "to modify the existing Boeing agreement to include

1790 See e.g. Amount of Subsidies to Boeing's LCA Division, Exhibit EC-17.
1791See below, paras. 7.1676-7.1679.
1792 Amount of Subsidies to Boeing's LCA Division, Exhibit EC-17.
1793 See above, para. 7.155.
1794 European Communities' response to question 372. The European Communities treats the alleged
waiver of the landing fees for the 747 LCF as a subsid y that reduces Boeing's marginal costs of production of
the 787. European Communities' first written submission, para.1230, Figure 15.
1795 See below, para. 7.1813.
1796 See below, paras. 7.1851-7.1853.
1797 As explained above, this agreement, which the pa rties refer to as the "1996 Joint Use Agreement",
has been the subject of a number of extensions. For the sake of simplicity and ease of understanding, we refer to
the pre-MSA agreement and extensions as the "p re-MSA flat fee agreem ent", and the post-MSA
agreement/extension as the "post-MSA flat fee agreement".

BCI deleted, as indicated [***]

waiving of all landing fees for 747-400 LCF aircraft" in the MSA. 1798 We also note that a
7 March 2007 extension letter provides:
"Under this extension of the Joint Use Ag reement, Boeing is authorized to produce
current and additional aircraft models and derivatives with no additional charges for
use of the airfield for takeoff and landing for test, evaluation and delivery flights.
Additionally, pursuant to the Project Olympus Agreement there will be no additional
fees or low fuel flowage charges for 747 Large Cargo Freighter (LCF) operations
during flight test or cargo operations."
1799
7.506 Thus, we believe that the European Communities has demonstrated that the effect of the MSA
was to modify and extend the scope of the pr e-MSA flat-fee agreement to "include" 747 LCF
landings.
7.507 However, we do not agree with the European Co mmunities that it follows from this that there
is a subsidy within the meaning of Article 1 of th e SCM Agreement. In our view, the only conclusion
that follows from this is that Boeing was able to renegotiate its flat fee arrangement with Snohomish
County as part of the MSA, just as Boeing and Snohomish County had on previous occasions
renegotiated the terms of that flat fee arrangement. 1800 In other words, the only conclusion we draw
from this is that the pre-MSA flat fee agreement did not cover or "include" landing fees for 747 LCF,
and that the post-MSA flat fee agreement now covers and includes 747 LCF landing fees.
7.508 To establish that this modification of the pre- MSA agreement gives rise to a subsidy within
the meaning of Article 1 of the SCM Agreement, we believe that the European Communities must at
minimum provide some kind of comparison between the terms of the post-MSA agreement with the
'standard landing fee' collected from other users of Paine Field. The European Communities has not
done so. Rather, it appears to us that what the Eu ropean Communities has effectively done is to use
the pre-MSA flat fee agreement between Boeing and Snohomish County as the benchmark, both for
the purpose of attempting to demonstrate that the post-MSA flat fee agreement involves a foregoing
of government revenue otherwise due within the m eaning of Article 1.1(a)(1)(ii), and for the purpose
of attempting to establish the existence of a benefit within the meaning of Article 1.1(b). However,
we have difficulty with such an analysis.
7.509 With respect to the foregoing of government revenue otherwise due, we recall the Appellate
Body's clarification that:
"{T}he word 'foregone' suggests that the government has given up an entitlement to
raise revenue that it could otherwise have raised. This cannot, however, be an
entitlement in the abstract, because governments, in theory, could tax all revenues.
There must, therefore, be some define d normative benchmark against which a

1798 First Amendment to Project Olympus Master Site Agreement, Exhibit E, Exhibit EC-60 (emphasis
added).
1799 Boeing-Paine Field Joint Use Agreement Extension, 7 March 2007, Exhibit US-235 (BCI),
Paragraph 2 (emphasis added).
1800 For example, it appears that in a 2002 extension letter, parties decided to add a clause stating: "this
agreement includes the introduction, testing and production of additional aircraft models with no additional cost
to Boeing." See European Communities' comments on United States' response to question 366(b), para. 181,
comparing Boeing-Paine Field Joint Use Agreement Ex tension, 17 December 2002, Exhibit US-234 (BCI) with
Boeing-Paine Field Joint Use Agreement Extension, 25 August 1999, Exhibit EC-1190 and Boeing-Paine Field
Joint Use Agreement Extension, 7 December 2000, Exhibit EC-1191.

BCI deleted, as indicated [***]

comparison can be made between the revenue actually raised and the revenue that
would have been raised 'otherwise'…" 1801
7.510 We do not see how Boeing's pre-MSA flat fee agreement with Snohomish County can be
treated as a "defined, normative benchmark" fo r the purpose of determining whether Snohomish
County is foregoing revenue otherwise due under the post-MSA flat fee agreement.
7.511 Assuming arguendo that Paine Field provides goods or services to Boeing within the meaning
of Article 1.1(a)(1)(iii) of the SCM Agreement under this arrangement 1802, we encounter the same
basic difficulty in ascertaining whether the post-MSA flat fee agreement confers a benefit within the
meaning of Article 1.1(b). More specifically, assu ming that the agreements involve a provision of
goods or services within the meaning of Article 1. 1(a)(1)(iii), then Article 14(d) provides for a
comparison with "prevailing market conditions":
"the provision of goods or services or purchase of goods by a government shall not be
considered as conferring a benefit unless the pr ovision is made for less than adequate
remuneration, or the purchase is made for more than adequate remuneration. The
adequacy of remuneration shall be determ ined in relation to prevailing market
conditions for the good or service in question in the country of provision or purchase
(including price, quality, availability, marketability, transportation and other
conditions of purchase or sale)."
7.512 Again, we do not believe that the pre-MSA fl at fee agreement can be used as the benchmark
in this regard. Rather, we consider that the st andard landing fee collected from other users of Paine
Field must serve as the benchmark, both for the purpo se of Articles 1.1(a)(1)(ii), 1.1(b) and 14(d) of
the SCM Agreement. We consider that the Europ ean Communities must demonstrate, by reference to
that benchmark, that the terms of the post-MSA flat fee agreement between Boeing and Snohomish
County provide a subsidy within the meaning of Article 1.
7.513 To be clear, we do not accept at face value the United States' assertion that "under the fixed
annual fee arrangement, Boeing effectively pays a higher rate than the airport's standard fee for LCA
based on landed weight and number of landings."
1803 In this regard, we take note of the European
Communities' observation that Exhibit US-2371804, on which the United States relies for that assertion,
lacks any underlying source information. 1805 Rather, the difficulty is that there is no information
before the Panel that would enable us to engage in a comparison of the terms of the post-MSA flat fee
agreement with Paine Field's standard landing fee. Rather, the information before us essentially
comes down the following:
(a) Paine Field has a standard landing f ee based on landed weight and number of
landings. Paine Field's standard landing fee for aircraft weighing over 30,000 lbs is
$1.00 per 1,000 pounds maximum gross landing weight.
1806
(b) Under its post-MSA flat fee agreement with Snohomish County, the annual fee that
Boeing pays is [***] for year 2007, [***] for 2008, [***] for 2009, and [***] for

1801 Appellate Body Report, US - FSC, paras. 90-91 (emphasis original).
1802 We note that the United States does not argue that the "goods or services" provided to Boeing by
Paine Field are general infrastructure within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement.
1803 United States first written submission, para. 565 (emphasis added).
1804 Boeing Landing Summary and Costs at Paine Field, Exhibit US-237 (BCI).
1805 European Communities second written submission, para. 170.
1806 European Communities' first written submission, para. 244; United States' first written submission,
para. 565.

BCI deleted, as indicated [***]

2010, and [***] for 2011. 1807 This flat fee agreement now includes and covers the
costs of LCF landings, whereas previously it did not.
7.514 This information suggests to us that the pos t-MSA flat fee agreement between Boeing and
Snohomish County is more favourable to Boeing than the pre-MSA flat fee agreement between these
parties. However, this information does not suffi ce to establish the existence of a subsidy. The
European Communities, as the complaining party, carries the burden of demonstrating that the
measures it challenges constitute subs idies within the meaning of Article 1 of the SCM Agreement.
In order to demonstrate that the post-MSA flat fee arrangement with Boeing constitutes a subsidy, it is
not sufficient for the European Communities to dem onstrate (as we believe it has) that the post-MSA
flat fee agreement modified the pre-MSA flat fee ag reement to include LCF landings within its scope.
The reason is that the pre-MSA flat fee agre ement between Boeing and Snohomish County cannot
serve as a benchmark for the Article 1 analysis. Ra ther, the appropriate benchmark is the standard
landing fee charged by Paine Field to other users. The European Communities must provide some
kind of comparison between (a) and (b) above, i.e. some kind of a comparison of Boeing's post-MSA
flat fee agreement with the 'standard landing fee' charged by Paine Field to other users. The European
Communities has not done so.1808 Accordingly, we do not believe that the European Communities has
carried its burden of demonstrating the existence of a subsidy.
7.515 For the same reasons as expressed in relation to the Washington HB 2294 taxation measures
and the MSA infrastructure-related measures, the Pa nel considers that the European Communities has
not made out its argument in the alternative, namely that the waiver of landing fees, as a result of the
operation of the Make Whole Provision in Article 10.4.1 of the MSA, constitutes a subsidy in the
form of a potential direct transfer of funds that confers a benefit.
1809
Conclusion
7.516 For these reasons, the Panel finds that the European Communities has not demonstrated
that Snohomish County's "waiver of 747 LCF landing fees at Paine Field" is a subsidy within
the meaning of Article 1 of the SCM Agreement.
(iv) City of Everett and Snohomish County: rat es for water, sanitary sew er, solid waste, and
process wastewater services
Introduction

7.517 The European Communities alleges that the City of Everett and Snohomish County have
made commitments in the MSA to "indefinitely fr eeze" the rates charged to Boeing for certain utility
services at the levels applicable at the time of the conclusion of the MSA in 2003. The European
Communities contends that the City of Everett made such commitments with regard to water service,
sanitary sewer service and process wastewater treatment facilities and that Snohomish County made
such a commitment with regard to solid waste disposal services.
1810 The European Communities
argues that this freezing of the rates of these utility services charged to Boeing gives rise to specific
subsidies within the meaning of Articles 1 and 2 of the SCM Agreement and that the amount of these
subsidies to Boeing's LCA division is at least $16.5 million over the period 2004-2024.

1807 United States' first written submission, para. 563; B o e i n g - P a i n e F i e l d J o i n t U s e A g r e e m e n t
(7 March 2007), Exhibit US-235 (BCI).
1808 We note that this is an altogether different kind of analysis from that which the
European Communities provides at paragraph 244 of its fi rst written submission, and at paragraphs 165-167 of
its second written submission. See above, footnote 1777.
1809 See above, paras. 7.159-7.167 and paras. 7.173-7.178.
1810 European Communities' first written submission, para. 271.

BCI deleted, as indicated [***]

7.518 The United States argues that the European Communities misunderstands the relevant
provisions of the MSA and that no specific subsidy exists because Boeing pays the same rates for
utility services as other commercial, industrial and government customers.
The measures at issue
7.519 With respect to water service, the MSA provides in relevant part:
"6.3.1 {…} The City shall negotiate a wa ter contract with Boeing that would fix
water rates at their present levels for an agreed period of time".1811 …
"6.3.2 The City covenants, represents and warrants to Boeing that: {...} (d) the
aggregate rates and fees charged for water service to the Facilities Site shall not
exceed the amounts set forth in Exhibit C-1".1812
Exhibit C-1 provides that "{m}unicipal Water is provide d to the site for an average rate of $0.65 per
1,000 gallons" 1813 and that the "{m}aximum Aggregate Rat es and Fees" are set at the "Applicable
regulated tariff rate".1814
7.520 With regard to sanitary sewer service and pr ocess wastewater service, the MSA provides in
relevant part:
"6.4.2 The City further represents, covenant s and warrants to Boeing that: {...} "the
aggregate rates and fees charged for sanitary sewer and/or POTW service to the
Facilities Site shall not exceed the amounts set forth in Exhibit C-2
".1815
"6.6.2 The City covenants, represents and warrants to Boeing that: {...} the
aggregate rates and fees charged for waste water treatment in connection with Project
Olympus shall not exceed the amounts set forth in Exhibit C-4
".1816
Exhibit C-2 provides that "{t}he project will be served by municipal sewer line at the average rate of
$4.18 per 1,000 gallons per day" 1817 and that the "{m}aximum Aggregate Rates and Fees" are set at
the "Applicable regulated tariff rate".1818
7.521 With regard to solid waste disposal services, the MSA provides in relevant part:

1811 MSA, Art. 6.3.1, Exhibit EC-58.
1812 MSA, Art. 6.3.2, Exhibit EC-58.
1813 MSA, Exhibit C-1, para. 1 and Exhibit EC-59. The European Communities notes that this converts
to $0.486 per 100 cubic feet. The European Communities asserts that the rate applicable to Boeing is essentially
equal to the City of Everett's 2003 rate of $0.485 per 100 cubic feet for water consumed in excess of 15,000
cubic feet – i.e. Boeing's marginal rate of water given th e large volumes of water that Boeing consumes. In this
context, the European Communities explains that because the City has a tiered rate structure for the first 15,000
cubic feet of water consumed, "it makes sense that Boeing's average rate would be slightly higher than its
marginal rate". European Communities' first written submission, para. 272, footnote 423.
1814 MSA Exhibit C-1, para. 6, Exhibits to the MSA, Exhibit EC-59.
1815 MSA, Art. 6.4.2, Exhibit EC-58.
1816 MSA, Art. 6.6.2, Exhibit EC-58.
1817 MSA Exhibit C-2, para. 1 and Exhibit C-4, para. 1, Exhibits to the MSA, Exhibit EC-59. The
European Communities notes that this converts to $3.127 per 100 cubic feet and that this rate is essentially equal
to the City of Everett's 2003 rate of $3.128 per 100 c ubic feet for sewer services. European Communities' first
written submission, para. 272, footnote 424.
1818 Exhibit C-2, para. 6 and Exhibit C-4, para. 6, Exhibits to the MSA, Exhibit EC-59.

BCI deleted, as indicated [***]

"The aggregate rates and fees charged for solid waste disposal in connection with
Project Olympus shall not exceed the amounts set forth in Exhibit C-3".1819
Exhibit C-3 provides that "{t}he County provides solid waste disposal services utilizing the solid
waste transfer facility located at Paine Field Air port and Roosevelt landfill in Klickitat County. The
Current tipping fee is $89 per ton and the tran sportation charge is $85 per 10-ton container". 1820 It
also states that the "{m}aximum Aggregate Rates a nd Fees" are set at the "Applicable regulated tariff
rate".1821
Arguments of the European Communities
7.522 The primary argument of the European Commun ities regarding the existence of a financial
contribution is that by freezing the rates charged to Boeing for certain utility services the City of
Everett and Snohomish County are foregoing revenue th at is otherwise due within the meaning of
Article 1.1(a)(1)(ii) of the SCM Agreement. 1822 In the alternative, the European Communities argues
that the measures at issue can be considered to constitute a guarantee against future utility rate
increases for which Boeing does not have to pay any premium, thus amounting to a potential direct
transfer of funds pursuant to Article 1.1(a)(1)(i). The European Communities also asserts that the fact
that Washington State must provide Boeing with a re medy of equivalent econom ic effect if it cannot
provide the utility rate freezes themselves, further demonstrates that a potential direct transfer of funds
exists within the meaning of Article 1.1(a)(1)(i).
 1823
7.523 The European Communities submits that th e MSA commits the City of Everett and
Snohomish County to freeze rates for utility services at their 2003 levels because the expression
"{a}pplicable regulated tariff rate" in the relevant Exhi bits to the MSA refers to the rate applicable as
of 19 December 2003, i.e. the date of the MSA.
1824 The European Communities argues that this
commitment constitutes revenue foregone that w ould otherwise be due within the meaning of
Article 1.1(a)(1)(ii) of the SCM Agreement because the City of Everett and Snohomish County forego
revenue that they would otherwise collect from Boei ng when they raise rates for these services in the
future for entities other than Boeing, as they must to keep pace with inflation, rising costs, etc. The
European Communities notes that the relevant norma tive benchmarks for the Article 1.1(a)(1)(ii)
analysis are the prevailing utility rates set by local ordinance. 1825 A comparison of the rates frozen at
their 2003 levels with these normative benchmarks 1826 illustrates that revenue is foregone that would
otherwise be due.1827
7.524 The European Communities conte nds that the amount of the financial contribution provided
by the measures at issue can be estimated to be $16.5 million from 2004 through 2024.1828

1819 Art. 6.5.2, MSA, Exhibit EC-58.
1820 MSA Exhibit C-3, para. 1, Exhibits to the MSA, Exhibit EC-59.
1821 MSA Exhibit C-3, para. 6, Exhibits to the MSA, Exhibit EC-59.
1822 European Communities' first written submission, para. 274.
1823 European Communities' first written submission, para. 275.
1824 European Communities' first written submission, para. 272.
1825 European Communities' second written submission, para. 199, footnote 354. Specifically, for water
rates, Everett Ordinance 2805-04, Exhibit EC-150; and for sewer rates, Everett Ordinance 2804-04, Exhibit EC-
153.
1826 Estimates of City of Everett Water/Sewer Subsidies to Boeing, Exhibit EC-22.
1827 European Communities' second written submission, para. 199, footnote 354.
1828 Amount of Subsidies to Boeing's LCA Division, Exhibit EC-17; Estimates of City of Everett
Water/Sewer Subsidies to Boeing, Exhibit EC-22; State and Local Subsidies to Boeing LCA Division, Exhibit
EC-27. The European Communities explains that it bases this estimate on public records received from the City
of Everett regarding its water and sewer rates and Boeing's historical consumption of these services. City of

BCI deleted, as indicated [***]

7.525 The European Communities rejects the argument of the United States that the MSA simply
requires Boeing to pay the utility rates set by ordinance. The MSA provides that "the aggregate rates
and fees charged" to Boeing with respect to water, sewer, solid waste, and wastewater services shall
not exceed the "{a}pplicable regulated tariff rate {s}", which must mean the rates in place as of
19 December 2003 – the date of the MSA. In ad dition, the European Communities emphasizes the
fact that with respect to water rates, the MSA spec ifically provides that the City of Everett "shall
negotiate a water contract with Boeing that would fi x water rates at their present level for an agreed
period of time". To read the MSA provisions in question as requiring Boeing to simply pay the utility
rates set by ordinance would read them out of existence because absent some other arrangement,
Boeing would be required to pay the utility rates set by ordinance.
1829
7.526 The European Communities submits that the Un ited States' argument that Washington State
prohibits the City of Everett and Snohomish C ounty from charging Boeing preferential rates is both
incorrect and impertinent. While the United Stat es relies on a provision of the Revised Code of
Washington that rates for water, sewer, and solid waste services "must be uniform for the same class
of customers or service", the same sections of th e Revised Code of Washington, allow localities "in
{their} discretion" to consider several factor s when establishing rates for different classes of
customers, including the quantity of the service requi red and, importantly, "any other matters which
present a reasonable difference as a ground for distinction". 1830 In the light of the sheer size of its
operation, Boeing is by far the largest consumer of utility services in the City of Everett and
Snohomish County. Thus, Washington State law a llows the City and County to factor Boeing's
importance into account when setting its utility rates.1831
7.527 The European Communities submits that even assuming that Washington State law somehow
prevents the City and County from charging Boeing preferential rates, this does not change the fact
that the commitment to freeze Boeing's utility rates in the MSA results in a financial contribution.
Since the City of Everett and Snohomish County ma de this commitment in the MSA, it is guaranteed
to Boeing through the "Make Whole" provision of that Agreement. 1832 The European Communities
also argues that the United States fails to provide any evidence in support of its argument that Boeing
actually pays the same utility rates as other industria l customers. Moreover, even if Boeing has paid
the same utility rates as other industrial customers so far, it has an enforceable right under the MSA to
seek refunds for any amounts it has paid in excess of what it would owe at 2003 rates. 1833 T h e
European Communities submits that its understandi ng of the existence of a utility rate freeze for
Boeing is confirmed by a press release from a public policy research organization in Washington
State.1834
7.528 In its comments on a response of the United States to a Panel question, the European
Communities asserts that the United States continues to read the relevant provisions of the MSA out

Everett Utility Rate FOIA Response, Exhibit EC-154. Th e European Communities also notes that this estimate
does not take into account the impact of the solid waste rate freeze, because Snohomish County failed to provide
any information regarding Boeing's consumption of solid waste services that could serve as the basis for an
estimate. Snohomish County Solid Waste FOIA Respon se, Exhibit EC-155; Summary of Denials to Requests
for Government Information, Exhibit EC-28, p.6.
1829 European Communities' second written submission, paras. 193-194.
1830 Wash. Rev. Code § 35.92.010, Exhibit US-231; Wash. Rev. Code § 35.92.020(2), Exhibit US-232;
Wash. Rev. Code § 35.67.020(2), Exhibit US-233.
1831 European Communities' second written submission, para. 195.
1832 European Communities' second written submission, para. 196.
1833 European Communities' second written submission, para. 198; European Communities' comments
on United States' response to question 366, para. 177.
1834 European Communities' comments on United States' re sponse to question 145, para. 140, referring
to Details of Boeing Agreement Re vealed, Evergreen Freedom Foundation Press Release, 21 January 2004,
Exhibit EC-56.

BCI deleted, as indicated [***]

of existence, in contravention of Washington State's contract law. The MSA states that "the aggregate
rates and fees" charged for a particular type of service "shall not exceed the amounts set forth" in
certain Exhibits and these Exhibits explicitly set forth specific amounts of the rates charged for the
services at issue. Moreover, the Exhibits provide that the maximum aggregate rates and fees are the
applicable regulated tariff rate. That the phrase "applicable regulated tariff rate" has no specific
temporal connotation, as argued by the United States, is irrelevant because the temporal connotation
arises out of the statement that Boeing's rat es "shall not exceed" certain specified amounts. 1835 To
read the provisions of the MSA to simply mean that the "legal regime that pre-dated the
MSA...continues to apply"1836 and that "{t}he MSA merely confirms that utility rates, as set regularly
by local regulations, apply to Boeing's operations"1837 is to read them out of existence.1838
7.529 The European Communities argues that the utilit y rate freezes by the City of Everett and
Snohomish County confer "benefits" on Boeing's LCA division within the meaning of Article 1.1(b)
of the SCM Agreement because they relate explicitl y to the production of commercial aircraft and are
provided to Boeing's LCA division on non-market terms.
1839 The benefit from these utility rate
freezes is the difference between the frozen rates for Boeing and any increased rates the City charges
other Everett entities in the future.1840
7.530 The European Communities argues that the utility rate freezes are specific within the meaning
of Article 2.1(a) of the SCM Agreement because the rate freezes are part of an agreement specifically
between Boeing and the City of Everett and S nohomish County and because the MSA provides that
the City and County will freeze the rat es for these utility services only for Boeing. 1841 I n t h e
alternative, the European Co mmunities argues that the utility rate freezes are specific under
Article 2.1(c) of the SCM Agreement because the MSA makes it clear that they will extend only to
Boeing and the history of "The Boeing Incentive Package" demons trates that the rate freezes are
intended to directly benefit Boeing's LCA production.1842
Arguments of the United States
7.531 The United States argues that the European Comm unities erroneously asserts that the State of
Washington has provided a WTO-inconsistent subsidy to Boeing by freezing the rates that it must pay
for certain utilities. The United States submits that the European Communities fundamentally
misunderstands the provisions of the MSA and that Boeing pays the same ra tes as other commercial,
industrial, and government customers. 1843 The MSA states that the "Maximum Aggregate Rates and
Fees" for the utilities at issue will be the "applicable regulated tariff rate." 1844 However, the
"applicable regulated tariff rate" is set by ordinance. Water rates are currently set by Ordinance 2805-
04, sewer rates are set by Ordinance 2804-04, and solid waste rates are set by Ordinance 2753-04. 1845

1835 European Communities' comments on United States' response to question 366, paras. 172-173.
With regard to water services, the European Communities argues that the temporal connotation also follows
from the provision in the MSA that requires the City of Everett to "negotiate a water contract with Boeing that
would fix water rates at their present level for an agreed period of time". European Communities' comments on
United States' response to question 266, para. 173, footnote 321.
1836 United States' response to question 366, para. 200.
1837 United States' response to question 366, para. 201.
1838 European Communities' comments on United States' response to question 366, para. 175.
1839 European Communities' first written submission, para. 281.
1840 European Communities' first written submission, para. 279.
1841 European Communities' first written submission, para. 282.
1842 European Communities' first written submission, para. 283.
1843 United States' first written submission, para. 554.
1844 MSA Exhibits C-1, C-2, C-3, and C-4, Exhibits to the MSA, Exhibit EC-59.
1845 City of Everett Water Ordinance 2805-04, Exhibit US-227; City of Everett Sewer Ordinance 2804-
04 Exhibit US-228; and City of Everett Solid Waste Ordinance 2753-04, Exhibit US-229.

BCI deleted, as indicated [***]

As such, the law requires Boeing to pay the same rates for the utilities at issue as all customers
defined as "Commercial/Industrial/Governmental" by city ordinance, which includes all City of
Everett retail customers other than residential cu stomers. Moreover, these rates have increased for
water, sewer, wastewater, and solid waste di sposal since the signing of the MSA in 2003 1846 and
Boeing is subject to those higher rates. Thus, the European Communities has no basis for alleging
that the City of Everett and Snohomish County's utility rates confer a subsidy on Boeing. 1847 The
United States also points out that charging Boeing a preferential rate would be a violation of
Washington State law, which requires that no utility rate be charged "that is less than the cost of the
water and service to the class of customers served".
 1848
7.532 The United States argues that while the MSA does not provide a definition of "applicable
regulated tariff rate" as it relates to utilities, if interp reted in the light of the ordinary meaning of the
terms in that phrase, it is clear that this phrase reflects a dynamic concept and in no way precludes
changes to the utility rate over time. The MSA merely confirms that utility rates, as set regularly by
local regulations, apply to Boeing's operations.
1849 In addition, the United States posits that under
Washington State law, since the MSA does not cont ain a definition of "applicable regulated tariff
rate," an interpretation of this phrase would be governed by the plai n meaning of the words contained
in the phrase. The plain meaning of "applicable" is "able to be applied ( to a purpose etc.); having
reference, relevant".1850 The term does not have specific temporal connotation, and, by its ordinary
meaning, in no way precludes the possibility of period ic adjustments to the rate that is applicable. 1851
Consistent with this plain meaning, Washington St ate understood the "applicable" rate in this context
to be a dynamic concept in the sense that the app licable rate may be periodically adjusted. The
United States rejects the European Communities' conten tion that "applicable" rate must be the rate in
effect at the time of the MSA without the possi bility of adjustments because this reading is
inconsistent with Washington State's understanding of this provision and finds no support in the text
of the MSA.1852
7.533 The United States submits that further review of the terms "regulated", "tariff", and "rate" also
confirms this. The plain meaning of "regulate" is to "control, govern, or direct by rule or regulations;
subject to guidance or restriction; adapt to circumstances or surroundings". 1853 Thus, something that
is regulated is subject to control, governance or di rection by rule or regulations, and is subject to
guidance or restriction.1854 Additionally, "tariff" is defined as "a table or scale of fixed charges made
by a private or public business, as a list of prices for a hotel, a schedule of rates payable for a public
utility, etc."
1855 and "rate" is defined as "the price paid or charged for a thing or class of things; esp. an
amount paid or charged for a certain quantity of a commodity, work, etc.; a fixed or assigned price,
charge, or value."1856 The United States argues that none of these terms has the temporal connotation
that the European Communities suggests.1857
7.534 Finally, the United States asserts that it has adduced considerable evidence demonstrating that
the European Communities' contention that Wash ington State committed in the MSA to freeze
Boeing's utility rates at the rates that were in effect at the time of the MSA is inaccurate and finds no

1846 Everett Utilities Rate Tables for 2004, 2006, and 2007, Exhibit US-230.
1847 United States' first written submission, para. 555.
1848 United States' first written submission, para. 556.
1849 United States' response to question 366(a), para. 201.
1850 New Shorter Oxford English Dictionary, p. 99.
1851 United States' response to question 366(a), para. 202.
1852 United States' response to question 366(a), para. 203.
1853 New Shorter Oxford English Dictionary, p. 2530.
1854 United States' response to question 366(a), para. 204.
1855 New Shorter Oxford English Dictionary, p. 3222.
1856 New Shorter Oxford English Dictionary, p. 2481.
1857 United States' response to question 366(a), para. 205.

BCI deleted, as indicated [***]

support in the text of the MSA. 1858 The fact that the rates paid by Boeing for water, filtration, and
sewer, in fact, increased from 2004 to 2007 demonstrates that Washington State made no such
commitment to freeze Boeing's rates
 .1859
7.535 The United States asserts that the measures at issue confer no benefit on Boeing as Boeing is
not receiving utilities at less than market rates paid by all users. The United States also argues that the
utility rates that Boeing pays are not specific within the meaning of Article 2.1(a) of the SCM
Agreement because the "applicable regulated tariff rate" is the same rate charged to other commercial,
industrial and government customers. Moreover, Washington State law requires that utility rates be
non-discriminatory between customers and classes of customers that are similarly situated. The
United States also considers that the utility rates are not specific by operation of Article 2.1(b)
because the rates are established by ordinance, for which objective criteria exist.
1860
Evaluation by the Panel
7.536 The European Communities argues that the City of Everett and Snohomish County made a
commitment in the MSA to freeze the rates charged to Boeing for certain utility services at the levels
applicable at the time of the conclusion of the MS A. The question before the Panel is whether this
alleged measure constitutes a specific subsidy with in the meaning of Articles 1 and 2 of the SCM
Agreement.
7.537 Before proceeding to examine whether the Eu ropean Communities has demonstrated that a
specific subsidy exists within the meaning of Artic les 1 and 2 of the SCM Agreement, the Panel notes
that the significance of this alleged subsidy within the overall context of the European Communities'
claim of serious prejudice is very limited. The Pa nel needs to address the question of whether this
measure is a subsidy for the purposes of assessing the European Communities' claim of serious
prejudice. The total amount of subsidization which the European Communities alleges to exist in this
dispute includes both "past amounts" and "future amounts", where "past" and "future" refer to,
respectively, 1989-2006 and 2007-2024.
1861 As indicated in the serious prejudice section of this
Report, the Panel considers it appropriate to assess the European Communities' present serious
prejudice claim by examining the effects of the subsidies over the period 2004-2006. 1862 While the
European Communities estimates that the amount of the subsidy to Boeing's LCA division resulting
from the alleged freeze of utility rates is $16.5 million over the period 2004-2024, most of this amount
pertains to the post-2006 period. According to the European Communities, the amount of this subsidy
in 2004-2006 is $0.4 million whereas the amount of this subsidy in the period 2007-2024 is
$16.1 million.1863 Thus, the figure of $16.5 million consists almost entirely of amounts of subsidy in
the period post-2006. As discussed elsewhere in this Report 1864, the European Communities has
explained that the only post-2006 amounts of subsidies that are relevant to its claim of present serious
prejudice are the amounts of certain recurring subs idies that reduce Boeing's marginal unit costs.
1865
The European Communities treats the freezing of the utility rates as a subsidy that increases Boeing's
non-operating cash flow, rather than as a subsid y that reduces Boeing's marginal unit costs. 1866
Therefore, it would appear that the post-2006 amount s of subsidy from the freezing of utility rates
simply do not play any role in the European Comm unities' claim of present serious prejudice. In its

1858 United States' response to question 366(a), para. 206.
1859 United States' response to question 366(a), para. 207.
1860 United States' first written submission, paras. 557-558.
1861 See e.g. Amount of Subsidies to Boeing's LCA Division, Exhibit EC-17.
1862 See below, paras. 7.1676-7.1679.
1863 Amount of Subsidies to Boeing's LCA Division, Exhibit EC-17; Estimates of City of Everett
Water/Sewer Subsidies to Boeing, Exhibit EC-22.
1864 See above, para. 7.155.
1865 European Communities' response to question 372.
1866 European Communities' first written submission, para. 1230, Figure 15.

BCI deleted, as indicated [***]

own analysis of present serious prejudice, the Panel also does not rely on any subsidy amounts
relating to the post-2006 period. Moreover, the Panel exercises judicial economy in relation to threat
of serious prejudice. 1867 The Panel therefore considers that it is necessary to make a finding with
regard to whether the freezing of the utility rates c onstitutes a specific subsidy within the meaning of
Articles 1 and 2 of the SCM Agreement only in respect of the period 2004-2006. The European
Communities estimates that the amount of the alleged subsidy in this period is $0.4 million.
7.538 With regard to whether the alleged freezing of the utility rates has given rise to a specific
subsidy in the period 2004- 2006, the Panel finds, based on the evid ence before it, that the European
Communities has not demonstrated that the C ity of Everett and Snohomish County made a
commitment in the MSA to freeze the rates charged to Boeing for the use of certain utility services at
the levels applicable at the time of the conclusion of the MSA.
7.539 First, the MSA does not say that the City of Everett and Snohomish County made a
commitment not to increase rates of utility services consumed by Boeing beyond the level applicable
at the time of the conclusion of the MSA. Rath er, the MSA obliges Boeing to pay "the applicable
regulated tariff rate". The Panel considers that th e phrase "applicable regulated tariff rate" in Exhibits
C-1, C-2 and C-4 of the MSA should be given its ordina ry meaning, i.e. the rate that may be adjusted
from time to time rather than a rate that is fixed at a certain level.
7.540 Second, the context of these terms does not su pport the European Communities' reading of
the MSA. While the European Communities relies inter alia on a statement in Article 6.3.1 of the
MSA that "{t}he City shall negotiate a water contract with Boeing that would fix water rates at their
present level for an agreed period of time", this statement actually contradicts the argument of the
European Communities that the City of Everett ma de a commitment in the MSA not to increase the
rates of certain utility services above the level app licable in 2003. If, as argued by the European
Communities, certain statements in the MSA
1868 create an obligation upon the City to "freeze
indefinitely" the rates at the levels applicable at th e time of the conclusion of the MSA, it is hard to
understand why the MSA provides for the negotiation of a water contract "that would fix water rates
at their present level for an agreed period of time". This sentence shows that the parties intended that
the issue of the fixing of water rates at their presen t level for an agreed period of time would be the
subject of a contract to be negotiated by the City of Everett and Boeing.1869 Moreover, this sentence is
preceded by a sentence stating that "{t}he City expect s rate stability for the foreseeable future". If the
City had actually made a legal commitment to freeze the rates of utility services at the level applicable
in 2003, the statement that it "expects rate stability in the foreseeable future" would be irrelevant.
7.541 Third, the Panel considers that the evidence before it reveals that the rates charged to Boeing
by the City of Everett and Snohomish County for the use of certain utility services have actually
increased since 2003. With regard to water se rvice, Exhibit C-1 to the MSA provides that
"{m}unicipal Water is provided to the site for an average rate of $0.65 per 1,000 gallons", which
according to the European Communities converts to $0 .486 per 100 cubic feet. The Panel has before
it evidence regarding Boeing's water consumption a nd payments made by Boeing for water service in
the period 2000-2006.
1870 Based on this evidence, it is possible to calculate a per unit rate paid by
Boeing for water services by dividing the total amount of payments made by Boeing by the amount of

1867 See below, paras. 7.1851-7.1853.
1868 The relevant statements are that "the aggregate rates and fees charged" for certain utility services
"shall not exceed the amounts set forth in" the Exhibits to the MSA and that the "maximum aggregate rates and
fees" shall be the "applicable regulated tariff rate".
1869 The European Communities has not shown that such a contract has actually been concluded.
1870 This evidence consists of data provided by the City of Everett to the European Communities
pursuant to a Freedom of Information Act Request. C ity of Everett Utility Rate FOIA Response, Exhibit EC-
154.

BCI deleted, as indicated [***]

Boeing's water consumption. This calculation shows that the rate paid by Boeing per 100 cubic feet
of water consumed in 2006 was clearly higher than th e rate mentioned in the MSA. With regard to
sanitary sewer service and process wastewater servic e, Exhibit C-2 to the MSA provides that "{t}he
project will be served by municipal sewer line at the average rate of $4.18 per 1,000 gallons per day",
which according to the European Communities convert s to $3.127 per 100 cubic feet. The Panel has
before it evidence regarding Boeing's consumption and payments made for sanitary sewer and process
wastewater services in the period 2000-2006. 1871 Based on this evidence, it is possible to calculate a
per unit rate paid by Boeing for the services by dividing the total amount of payments made by the
amount of Boeing's consumption. This calculation shows that the rates paid by Boeing per 100 cubic
feet for sewer services in the post-2003 period were clearly higher than the rate mentioned in the
MSA.
7.542 The European Communities acknowledges that "{a} ccording to the City of Everett, Boeing
made payments for sewer services in 2004 and 2 005 at the higher 2004 and 2005 rates". However,
"since the project Olympus Master Site Agreemen t imposes a legal obligation on the City to fix
Boeing's sewer rates at the 2003 level, the Eur opean Communities assumes that Boeing will (or
already may have) received refunds for 2004 and 20 05 equal to the difference between what it paid
and what it would have paid at 2003 rates."
1872 The Panel considers that a more logical interpretation
of the fact that Boeing actually paid amounts for sewer services at rat es that were higher than the rate
in force in 2003 is that the MSA simply did not obligat e the City of Everett to freeze that rate at its
2003 level. The Panel notes, in this respect, that there is no evidence before the Panel to support the
assertion that Boeing received refunds of amounts paid in 2004-2005 in excess of the rate in force in
2003.
7.543 Fourth, the Panel considers that other eviden ce before it regarding the various incentives
provided by the State of Washington to Boeing lends further support to the view that the MSA did not
obligate the City of Everett and Snohomish County to freeze indefinitely the rates of certain utility
services used by Boeing. For example, a documen t submitted by the European Communities, which
contains answers of the Governor of Washington State to commonly asked questions regarding the
contents of the MSA, states that the City of Everett and Snohomish County made commitments
regarding "{i}nfrastructure improvements and service such as water, sewer or solid waste treatment as
deemed necessary by Boeing (Exhibits C of the Ag reement). Costs will be recovered through rate
revenues or relevant tariffs".
1873 Nothing in this document indicates that the City of Everett and
Snohomish County had agreed to fix certain rates at the levels applicable at the time of the conclusion
of the MSA.
7.544 The Panel notes that the European Communities also alleges that Snohomish County has
made a commitment in the MSA to freeze indefinite ly the rate charged to Boeing for solid waste
disposal services. However, since Snohomish Count y was unable to provide data on Boeing's annual
consumption of solid waste disposal services and on the amounts of the annual payments made by
Boeing for such services 1874, the European Communities does not in clude this alleged freeze of the
rate charged for waste disposal services in its estimate of the amount of the subsidy.1875 As in the case
of the alleged freeze of utility rates charged by the C ity of Everett, the Panel is not convinced that
there is sufficient support in the text of the MS A for the European Communities' contention that

1871 See above, footnote 1870.
1872 Estimates of City of Everett Water/Sewer Subsidies to Boeing, p.4, footnote 4, Exhibit EC-22. See
also, City of Everett Utility Rate FO IA Response, Exhibit EC-154; Everett Utilities Rate Tables for 2004, 2006
and 2007, Exhibit US-230.
1873 Action Washington, The Master Site Agreement, Commonly Asked Questions, Exhibit EC-63, p.5.
1874 Snohomish County Solid Waste FIOIA Response, Exhibit EC-155.
1875 European Communities' first written submission, para. 276.

BCI deleted, as indicated [***]

Snohomish has made a commitment not to raise the rate charged to Boeing for waste disposal services
above the level applicable at the time of the conclusion of the MSA.
7.545 In sum, the Panel finds that the European Communities has not demonstrated that the MSA
obligates the City of Everett and Snohomish Count y not to increase the rates charged to Boeing for
the use of certain utility services above the levels appli cable at the time of the conclusion of the MSA.
Thus, the European Communities has not demonstr ated that the measure which the European
Communities alleges to constitute a financial contribution actually exists.
Conclusion
7.546 For these reasons, the Panel finds that the European Communities has not demonstrated
that a subsidy exists within the meaning of Article 1 of the SCM Agreement by virtue of a
commitment undertaken by the City of Everet t and Snohomish County in the MSA not to
increase the rates charged to Boeing for the use of certain utility services above the levels
applicable at the time of the conclusion of the MSA.
(v) Provision of coordinators
Introduction
7.547 The European Communities argues that the MSA requires the State of Washington to provide
Boeing with a number of dedicated coordinators to facilitate Project Olympus and that this provision
of coordinators is a specific subsidy within the m eaning of Articles 1 and 2 of the SCM Agreement.
The European Communities estimates that the amount of the subsidy to Boeing's LCA division is at
least $0.9 million over the period 2004-2006.
7.548 The United States argues that the amount of the financial contribution resulting from the
provision of these coordinators is de minimis, that the provision of these coordinators does not confer
a benefit within the meaning of Article 1.1(b) and that any benefit is not specific within the meaning
of Article 2 of the SCM Agreement.
The measure at issue
7.549 Article III of the MSA ("Facilitation of Project Olympus") states "that it is in the parties' best
interests for the design, development, construction, equipping and operational start up of the Facilities
to proceed on an expedited timetable" and pr ovides for the designation of seven coordinators 1876, each
of whom is required to "devote such time as may be required to carry out his or her duties prior to and
during Facilities Construction and thereafter as needed by Boeing".
1877
Arguments of the European Communities
7.550 The primary argument of the European Commun ities regarding the existence of a financial
contribution is that by providing Boeing with the services of its employees to help facilitate Boeing's
production of the 787 the State of Washington provides goods or services other than general
infrastructure within the meaning of Artic le 1.1(a)(1)(iii) of the SCM Agreement.
1878 Alternatively,
the European Communities submits that given that th e State of Washington must provide Boeing with

1876 Article 3.1.1 of the MSA, as amended, provides for a Project Coordinator, an Environmental Permit
Coordinator, a Permit Coordinator, a Tax, Commitment and Incentive Coordinator, a Workforce Development
Coordinator, a Transportation Infrastructure Coordinator and an Everett Coordinator.
1877 MSA, Art. 3.1.1 The State of Washington established the 787 Project Coordination Office and
appointed the coordinators in Spring 2004.
1878 European Communities' first written submission, para. 167.

BCI deleted, as indicated [***]

a remedy of equivalent economic effect if it cannot provide the coordinators themselves, a potential
direct transfer of funds exists within the meaning of Article 1.1(a)(1)(i).1879
7.551 The European Communities argues that the pr ovision of coordinators by the State of
Washington confers "benefits" on Boeing's LCA division within the meaning of Article 1.1(b) of the
SCM Agreement because the coordinators "relate explicitly to the production of the 787 and are
provided to Boeing's LCA division on non-market te rms". Specifically, the European Communities
argues that: (i) "Boeing is not required to pay anything in return for these Project Olympus
coordinators, who all help fac ilitate Boeing's 787 programme" and ( ii) the "advantages conferred on
Boeing's LCA division are provided on non-market terms" in that the State of Washington is paying
the salaries of the coordinators which Boeing would have to pay if it were to seek these coordination
services on the market.
1880
7.552 The European Communities alleges that the provision of special coordination services to
Boeing by the State of Washington is specific w ithin the meaning of Article 2.1(a) of the SCM
Agreement because the provision of these coordinators is part of an agreement specifically between
Boeing and the State of Washington and the MSA e xplicitly states that the State shall designate the
coordinators for Boeing and make their services av ailable "as needed by Boeing". Thus, under the
terms of the MSA the State has explicitly limited access to the coordinators to Boeing.1881
7.553 In the alternative, the Europ ean Communities argues that the provision of coordinators under
the MSA is specific within the meaning of Article 2.1(c) of the SCM Agreement because the MSA
makes it clear that the coordinators will be at the disposal of Boeing to use "as needed" and the history
of "The Boeing Incentive Package" shows that the coordinators were intende d to directly benefit
Boeing's production.1882 The European Communities contends that by stating that the State provides
coordination services to many other businesses in Wash ington State, the United States fails to rebut
the European Communities' prima facie case under Article 2.1(c). The fact that Washington State
may also provide coordination services for other pr ojects based on what appear to be arbitrary and
discretionary criteria does not demonstrate that th e provision of coordinators under the MSA is not
specific. Rather, it means that the provision of coordinators for other projects may also be specific.1883
7.554 The European Communities argues that, should the Panel consider that the Washington State
law on "Projects of State-wide Significance" is relevant to the specificity analysis, quod non , the
Panel need not review that law, or its criteri a for determination of "Projects of State-wide
Significance," in detail. This is because Article 3.1 of the MSA provides clear evidence that Boeing's
Project Olympus would be designated as a "Project of State-wide Significance" without any
consideration of the broader Washington State la w. Thus, Article 3.1 demonstrates that the

1879 European Communities' first written submission, para. 167.
1880 European Communities' first written submission, paras. 169-172; European Communities' second
written submission, paras. 101-103. The European Co mmunities posits that, for purposes of determining
whether a benefit exists, the critical question is whether Boeing receives something that is not available on the
market. The fact that, as argued by the United St ates, the State of Washington has in place a broader
programme of providing coordination services is not relevant in this regard. European Communities' response
to question 242.
1881 European Communities' first written submission, para. 173. The European Communities argues
that at issue in this case is the provision of coordinato rs to Boeing pursuant to the MSA, not the provision of
coordinators with respect to other pr ojects in the State of Washington. Th ese coordinators are guaranteed to
Boeing by the terms of Article 3.1 of the MSA, especi ally when read in conjunc tion with the "Make Whole"
provision of Article 10.4.1. Furthermore, the MSA is an agreement that the State entered into with Boeing, and
only Boeing. European Communities' second written submission, para. 105.
1882 European Communities' first written submission, para. 174.
1883 European Communities' second written submission, para. 106.

BCI deleted, as indicated [***]

designation of a project as a "Project of State-wide Significance" is indeed arbitrary and discretionary,
or at least has been so in the present case.1884
Arguments of the United States
7.555 The United States argues that other than two project coordinators, Washington did not hire
new coordinators specifically to serve Boeing a nd that the coordinators were existing State
employees. The financial contribution of the project coordinators for Boeing is de minimis at most as
the payment of total salaries expended for the Pr oject Coordinator's office during 2004-2005 was only
$213,600. Moreover, the project coordinator functio n was terminated on 30 June 2005 and there are
no plans to provide any further funding for it. 1885 The United States argues that Boeing receives no
benefit under the SCM Agreement from the project coordinators because the State employees who
serve as project coordinators are simply doing their jobs. Even absent the existence of Article 3.1 of
the MSA, State employees would still have been available to assist Boeing in meeting regulatory and
other requirements. Boeing is also not receiving a benefit from the project coordinators because this
office has been closed since June 2005.
7.556 The United States argues that the provision of the project coordinators is not specific within
the meaning of Article 2 of the SCM Agreement. By law, all projects of state-wide significance are
eligible to receive similar coordination assistance fro m the State. In order to qualify as a project of
state-wide significance, a project must have hi gh capital investment, full-time employment of over
100 people after completion of the project, and significant regional impact. To qualify, a project must
also be located in a county that meets the rural threshold or otherwise requires economic assistance, or
have a large regional impact. In addition, Wash ington's Office of Regulatory Assistance frequently
provides assistance to businesses of all sizes regarding the State's complex permitting process.
1886 The
United States argues that the provision of project coordinators is not de jure specific under
Article 2.1(a). The provision of project coordinators is contingent on the designation of a project as a
"Project of State-wide Significance" and it is Wash ington State law, not the MSA, that sets forth the
criteria for designation as a Project of State-wide Si gnificance. Thus, the MSA, on its own, does not
provide for project coordinators. Rather, the coor dinators are provided pursuant to the provision of
Washington State law for projects of state-wide significance. The criteria taken into account to
determine whether a project is of state-wide significance apply regardless of the enterprises or
industries involved in the project.
1887
7.557 The United States notes the statement of the European Communities that its de jure
specificity argument with respect to the provision of project coordinators is that "the granting
authority explicitly limits access" to the alleged subsidies, not that "t he legislation pursuant to which
the granting authority operates explicitly limits acces s" to the alleged subsidies. However, in
providing the project coordinators Washington State was acting pursuant to legislation, which is also
reflected in Article 3.1 of the MSA, according to which the provision of project coordinators is
contingent on the designation of a project as a "Project of State-wide Significance".
1888
7.558 The United States rejects the assertion of the European Communities that the fact that the
State may also provide coordination services for other projects selected according to what appear to
be arbitrary and discretionary criteria does not demons trate that the provision of coordinators is not

1884 European Communities' comments on United States' response to question 233, para. 323.
1885 United States' first written submission, para. 570; United States' response to question 240, para. 401
("...the provision of the two dedicated project coordinators to facilitate the establishment of Boeing's 787 facility
does constitute a financial contribution").
1886 United States' first written submission, para. 571.
1887 United States' response to question 233, paras. 388-389.
1888 United States' comments on European Communities' response to question 144, paras. 136-137.

BCI deleted, as indicated [***]

specific. The United States submits that what th e European Communities describes as "arbitrary and
discretionary" criteria, are in fact non-specific criteria under which a broad range of industries and
enterprises have been provided project coordinators by the State. This is both directly relevant to the
de facto specificity inquiry and also demonstrates that the provision of project coordinators by the
State of Washington is not specific to the aerospace industry or to Boeing. In the light of this, the
project coordinators are also not de facto specific under Article 2.1(c) of the SCM Agreement.
1889
Evaluation by the Panel
7.559 Assuming arguendo that the provision of coordinators by the State of Washington is a
subsidy in that it constitutes a fina ncial contribution within the meaning of Article 1.1(a)(1) of the
SCM Agreement, which confers a benefit within th e meaning of Article 1.1(b), the Panel considers
that the European Communities has not demonstrated that this subsidy is specific within the meaning
of Article 2 of the SCM Agreement.
7.560 Under Article 2.1(a) of the SCM Agreement, a s ubsidy is specific if the granting authority, or
the legislation pursuant to which the granting auth ority operates, explicitly limits access to a subsidy
to certain enterprises. As noted above, in support of its argument that the provision of coordinators is
specific within the meaning of Article 2.1(a) the European Communities argues that the provision of
these coordinators is part of an agreement speci fically between Boeing and the State of Washington
and that the MSA explicitly states that the State sh all designate the coordinators for Boeing and make
their services available "as need ed by Boeing". The European Communities considers that it is
irrelevant that Washington State may also provide coordinators for other projects. It emphasizes that
its argument under Article 2.1(a) is that the granting au thority, rather than "the legislation pursuant to
which the granting authority operates", explicitly limits access to the subsidy to certain enterprises.
7.561 It is clear from the text of the MSA that the provision of coordinators to Boeing took place
within the framework of existing legal provisions of the Washington Code relating to the provision of
coordination services in respect of projects of state-wide significance.
7.562 Article 3.1 of the MSA states:
"...in order for the development of Project Olympus to commence as soon as possible,
to proceed in an efficient manner and to be completed on schedule, the State, through
the applicable SLG, shall do all things a nd take all actions, in cooperation with
Boeing, including, without limitation, th e designation by CTED of Project Olympus
as a project of state-wide significance upon application by Boeing pursuant to Section
43.157.005 of the Code, commencing upon the Effective Date, to cause the following
to occur: 3.1.1 ...".
7.563 Section 43.157.005 of the Washington Code in the version in force at the time of the
conclusion of the MSA, states:
"The legislature declares that certain industrial investments merit special designation
and treatment by governmental bodies when they are proposed. Such investments
bolster the economies of their locale and impact the economy of the state as a whole.
It is the intention of the legislature to recognize industrial pr ojects of state-wide
significance and to encourage local government s and state agencies to expedite their
completion."

1889 United States' response to question 233, para. 390.

BCI deleted, as indicated [***]

7.564 Section 43.157.030 of the Washington Code in the version in force at the time of the
conclusion of the MSA, specifically provides for th e provision of coordinators to projects of state-
wide significance.
7.565 It is thus clear that Washington State ha d in place a programme for the provision of
coordination services in respect of projects of state-wide significance and that the provision of
coordinators under the MSA was a specific instance of application of this programme rather than an
isolated, ad hoc action.1890 Consistent with the approach adopted elsewhere in this Report, the Panel
considers that where a subsidy forms part of a broader programme, the question of whether the
subsidy is specific must in principle be answered at the level of the broader programme. Thus, in this
case, to answer the question of whether the provision of coordinators to Boeing is specific it is
necessary to conduct an analysis of whether the legislation pursuant to which Washington State
provides these coordination services to projects of state-wide significance explicitly limits access to
these services to certain enterprises. The European Communities has not advanced any arguments to
demonstrate that access to the broader programme pursuant to which Washington State offers
coordination services with respect to projects of st ate-wide significance is subject to an explicit
limitation to certain enterprises. Therefore, assuming that the measure is a subsidy, there is no basis
for the Panel to find that the Eu ropean Communities has demonstrated that this subsidy is specific
within the meaning of Article 2.1(a) of the SCM Agreement.
7.566 Similarly, the Panel considers that the Eu ropean Communities has failed to advance
convincing arguments to support a finding that the pr ovision of coordinators under the Washington
State measure relating to projects of state-wide significance is specific within the meaning of
Article 2.1(c) of the SCM Agreement. While it has asserted that the criteria for designating projects
as being of state-wide significance are arbitrary, it has provided very little support for this assertion.
The European Communities has also not provided an analysis of how the factors enumerated in the
second sentence of Article 2.1(c) support a finding of de facto specificity.
Conclusion
7.567 For these reasons, the Panel finds, assuming arguendo that the provision of coordinators
by the State of Washington in connection with Project Olympus is a subsidy within the meaning
of Article 1 of the SCM Agreement, that the Eu ropean Communities has not demonstrated that
this subsidy is specific within the meaning of Article 2 of the SCM Agreement.
(vi) Job training incentives
Introduction

7.568 The European Communities argues that a wo rkforce development programme and an
Employment Resource Center provided for in the MSA constitute specific subsidies within the
meaning of Articles 1 and 2 of the SCM Agreement. The European Communities estimates that the
amount of the subsidies to Boeing's LCA division resulting from these "job training incentives" is $14
million over the period 2004-2007 in the case of th e workforce development programme and $4.78
million over the period 2007-2011 in the case of the ERC.
7.569 The United States argues that: (i) the amount of the subsidy from these measures is much
smaller than alleged by the European Communities; (ii) the workforce development programme is not
specific; and (iii) the ERC is specific only in the first five years of its existence.

1890 The Panel considers that the European Communities fails to substantiate its assertion that Project
Olympus was designated as a project of state-wide significance without any consideration of the criteria
identified in the Washington State Code.

BCI deleted, as indicated [***]

The measures at issue
7.570 First, the State of Washington agreed in the MSA to establish a workforce development
programme. The MSA provides in this regard:
"Consistent with the funding Commitment s and program description set forth in
Exhibits D-1, D-2 and D-3 , the State agrees to fund an end-to-end recruitment,
screening, assessment and training program to meet the initial staffing and workforce
development needs of Boeing and its S uppliers and other parties designated by
Boeing for Project Olympus."1891
To this end, the State entered into a contract with Accenture, LLP, in May 2005 and provided it with a
budget of $4.4 million to develop the workforce deve lopment programme that would operate out of
the Employment Resource Center by 30 June 2006.
7.571 Second, the State of Washington agreed to build an Employment Resource Center ("ERC").
The MSA provides in this regard:
"In order to provide a facility for the necessary workforce development activities
dedicated to the 7E7 Aircraft producti on and assembly, including recruitment,
screening, assessment, pre-employment training and employment life cycle services,
the State hereby agrees to either acquire an existing facility or construct a new
facility, and in either case, design engineer, modify and equip such facility to serve as
the ERC.

The Parties agree that the State, through the AFB, shall pay all costs, fees and
expenses in connection with or arising out of all obligations and Commitments set
forth in this Section 7.5.1
".1892
The State paid $950,000 per year to lease the ERC from Sierra Construction, the company which built
it.1893 The ERC became operational on 1 August 2006. Boeing has exclusive use of the ERC for a
period of five years.1894
7.572 These job training incentives are overseen by the Workforce Development Coordinator,
provided for in Article 7.3 of the MSA, and by an Aerospace Futures Board ("AFB"), which was
established pursuant to Article 7.4 of the MSA.1895
Arguments of the European Communities
7.573 The primary argument of the European Commun ities with respect to why the job training
incentives are financial contributions within the m eaning of Article 1.1(a)(1) of the SCM Agreement
is that they constitute provisions of goods or ser vices other than general infrastructure within the
meaning of Article 1.1(a)(1)(iii). First, the State of Washington provides services to Boeing by
helping Boeing recruit and train the workers who will manufacture the 787. Second, the State

1891 MSA, Art. 7.2.1, Exhibit EC-58.
1892 MSA, Art. 7.5.1, Exhibit EC-58.
1893 Bryan Corliss, Builders break ground on 787 training center, Exhibit EC-111.
1894 MSA, Art. 7.5.2, Exhibit EC- 58.
1895 As explained in Article 7.4 of the MSA, the AFB is "a private not-for-profit panel or other mutually
agreeable structure of aeros pace industry employers (including Boei ng and any Suppliers or other entities
designated by Boeing) along with such of the Public Parties as may be designated by Boeing".

BCI deleted, as indicated [***]

provides goods and services to Boei ng by building the ERC to Boeing's specification and then giving
Boeing the exclusive use of the ERC. 1896 Alternatively, the European Communities submits that the
job training incentives constitute potential direct transfers of funds within the meaning of
Article 1.1(a)(1)(i) of the SCM Agreement becau se under Article 10.4.1 of the MSA the State of
Washington must provide Boeing with a remedy of equivalent economic effect if it cannot provide the
job training incentives.
7.574 The European Communities argues that the job training incentives confer "benefits" on
Boeing's LCA division within the meaning of Artic le 1.1(b) of the SCM Agreement because they
relate explicitly to the production of the 787 and are provided to Boeing's LCA division on non-
market terms. Boeing is not required to pay re nt, user fees, or any other consideration for
construction or use of the ERC, while on the mark et it would be required to pay something for these
goods and services. In particular, on the market Boeing would be responsible for paying the full
salaries of the persons involved in the aforementi oned activities, as well as costs for construction and
use of the ERC.1897
7.575 The European Communities argues that Washington State's provision of these job training
incentives to Boeing is specific within the meaning of Article 2.1(a) of the SCM Agreement. First,
the provision of these incentives is part of an agr eement specifically between Boeing and the State of
Washington. Second, the MSA explicitly states that the workforce development programme is
designed to "meet the initial staffing and workfo rce development needs of Boeing" and parties
designated by Boeing. Further, Boeing has five-year exclusive use of the ERC, which is a stand-alone
facility built to Boeing's specifications in close proximity to the 787 manufacturing site. Thus, the
provision of these incentives is specific because the State of Washington has tailored these incentives
for Boeing's benefit under the terms of the MSA. 1898 The European Communities argues in the
alternative that, should the Panel consider th e job training incentives not to be specific under
Article 2.1(a) of the SCM Agreement, they are speci fic within the meaning of Article 2.1(c) of the
SCM Agreement because Boeing will be the predominant beneficiary thereof.1899
7.576 The European Communities notes that the United States has acknowledged in its first written
submission that the ERC is specific during the fi ve years that Boeing has exclusive use of the
facility.1900 The European Communities rejects the ar gument of the United States that the workforce
development programme is not specific. While it may be true that the workforce development
programme is also open to Boeing suppliers, th is does not demonstrate that the workforce
development programme is not specific. An exp licit limitation contained in the MSA to Boeing and
its suppliers is still an explicit limit ation to "certain enterprises" within the meaning of Article 2.1(a)
of the SCM Agreement because a subsidy is specific pursuant to Article 2.1(a) or 2.1(c) if it is limited
to "certain enterprises," which means "an enterp rise or industry or group of enterprises or
industries."
1901 With respect to the United States' ar gument that the skills emphasized in the
programme are transferable to other industries, the European Communities observes that this
argument is unsubstantiated and irre levant to the specificity analysis in the circumstances of the
present case.1902
7.577 In its first written submission, the European Communities asserts that the amount of the
financial contribution to Boeing from job training incentives is at least $24 million from 2004 through

1896 European Communities' first written submission, para. 180.
1897 European Communities' first written submission, paras. 183-186.
1898 European Communities' first written submission, para. 187.
1899 European Communities' first written submission, para. 188.
1900 European Communities' second written submission, para. 112.
1901 European Communities' second written submission, para. 113.
1902 European Communities' second written submission, paras. 112-113.

BCI deleted, as indicated [***]

2007.1903 In support of this assertion, the European Communities relies on the text of the MSA,
according to which the State allocated approxima tely $14 million for the workforce development
programme from 1 July 2003 through 30 June 2007 1904 and a minimum of $10 million for the ERC,
which opened on 1 August 2006 – i.e. one month in to FY 2007. Thus, these job training incentives
cost the State at least $24 million, which the Euro pean Communities assumes is spread evenly from
FY 2004 through FY 2007.1905
7.578 In its second written submission, the European Communities submits a revised estimate of the
amount of the financial contribution in relation to the ERC. This revised estimate takes into account
the fact that, as argued by the United States in its first written submission, the State of Washington has
not actually built an employment resource centre but has leased a facility. The European
Communities asserts that the financial contribution arising from the lease of the ERC is $4.78 million
over the five years from FY 2007 through FY 2011, not just $478,200 for the first half of FY 2007, as
argued by the United States. The European Comm unities accepts that the State of Washington is
leasing a facility for use as the ERC at an annual cost of $956,400 for the first five years, based on the
lease actually provided by the United States. 1906 However, the European Communities argues that the
State made a commitment to provide Boeing with ex clusive use of the ERC for the first five years
through the MSA and that this commitment is further guaranteed to Boeing through the "Make
Whole" provision of the MSA. As such, the financial contribution to Boeing is the cost to the State of
leasing the ERC for Boeing's use over that time period – i.e. $4.78 million.
1907
7.579 The European Communities reject s the argument of the United States that since funding for
the workforce development programme is a comb ination of State and federal funds, only the
$1 million provided by the State shoul d count as a financial contribution. 1908 The critical point is that
in the MSA, it was the State of Washington that committed to providing $14 million for the workforce
development programme. The origin of the funding sources, whether State or federal, is irrelevant.
Arguments of the United States
7.580 The United States does not contest the existenc e of a financial contribution within the
meaning of Article 1.1(a)(1) of the SCM Agreem ent in relation to the ERC but it disputes the
assertion of the European Communities that the amount of this financial contribution is $10 million
during 2004-2007. The United States argues, in this regard, that the State of Washington agreed in
the MSA to pay a minimum of $10 million for the creation and establishment of an employment
resource centre, but that, rather than building a new employment resource centre, the State actually
chose to lease a facility. This lease will cost $956,400 per year or $4.78 million over 5 years during
which Boeing has exclusive use of the ERC. Since the ERC was not in force prior to August 2006,
the amount of the financial contribution through December 2006 in relation to the ERC has been only
$478,200 rather than the $10 million that the European Communities claims.
1909
7.581 The United States argues that the benefit to Boeing of the ERC is only $478,200 through
December 2006. Moreover, because Boeing is only entitled to exclusive use of the facility for the
first five years, the entire amount of the facility ca nnot be attributed to Boeing. After 2011, the ERC
will revert to general public use, and even if Bo eing chooses to lease the facility from Washington, it
must be open to the aerospace industry generally, in cluding suppliers of Airbus. The United States

1903 State and Local Subsidies to Boeing LCA Division, 1-2, Exhibit EC-27.
1904 MSA Exhibit D-2, Exhibits to the MSA, Exhibit EC-59.
1905 European Communities' first written submission, paras. 181-182.
1906 Employment Resource Center Lease, August 2005, p. 3, Exhibit US-239.
1907 European Communities' second written submission, para. 108.
1908 European Communities' second written submission, para. 109.
1909 United States' first written submission, para. 583.

BCI deleted, as indicated [***]

submits that this fact further reduces the benefit to Boeing. 1910 Finally, the United States argues that
the ERC is specific to Boeing only for its first five years of operating and that if it continues, it will be
available to the general public.
1911
7.582 Regarding the workforce development programme, the United States argues that funding for
this programme is a combination of State and federal funds. The State of Washington provided
$1 million pursuant to a job skill programme. 1912 The United States argues that the workforce
development programme is not limited to Boeing because Article 7.2.1 of the MSA states that the
workforce development programme is also open to Boeing suppliers. Beca use the skills that are
emphasized in the programme are transferable to other industries, the programme is not specific.
1913
Evaluation by the Panel
7.583 The Panel considers that both the ERC and the workforce development programme are
financial contributions within the meaning of Artic le 1.1(a)(1) of the SCM Agreement and that each
of these financial contributions confers a benefit w ithin the meaning of Article 1.1(b) of the SCM
Agreement.
7.584 First, regarding the workforce development programme, the Panel notes that the State of
Washington made a commitment in the MSA "to fund an end-to-end recruitment, screening,
assessment and training program to meet the initia l staffing and workforce development needs of
Boeing and its Suppliers and other parties designated by Boeing for Project Olympus". 1914 The State
appropriated approximately $14 m illion for this workforce development programme in the period
1 July 2003-30 June 2007.1915
7.585 The European Communities argues that the work force development programme is a financial
contribution within the meaning of Article 1.1(a )(1)(iii) in the form of a provision of services to
Boeing other than general infrastructure. 1916 The Panel finds that the above-mentioned facts support
this argument. The Panel notes, in this regard, th at the United States does not contest the existence of
a financial contribution within the meaning of Article 1.1(a)(1)(iii).
7.586 The Panel notes that the United States argues in its first written submission, in relation to the
workforce development programme, that "the funding for this program is a combination of State and
federal funds. The State of Washington provi ded $1 million pursuant to a job skills program". 1917
The United States has not elaborated on this argume nt in the course of this proceeding. If this
statement is to be interpreted as an argument that only the $1 million provided by the State of
Washington should be treated as relevant for purpo ses of determining the existence and amount of the
financial contribution, the Panel finds such an ar gument unconvincing. Apart from the fact that the
United States has not explained what the factual b asis is for the assertion that "the funding for this
program is a combination of State and federal funds" 1918, the United States has not articulated a legal
rationale for limiting the financial contribution at i ssue to the portion of the funding provided by the
State of Washington. The Panel sees nothing in Article 1 of the SCM Agreement to suggest that

1910 United States' first written submission, para. 583.
1911 United States' first written submission, para. 585; United States' response to question 13, para. 28.
1912 United States' first written submission.
1913 United States' first written submission, para. 585.
1914 MSA, Art. 7.2.1, Exhibit EC-58.
1915 MSA Exhibit D-2, Exhibits to the MSA, Exhibit EC-59.
1916 European Communities' first written submission, para. 180.
1917 United States' first written submission, para. 583.
1918 The Panel can see no reference in Article 7.2 of the MSA or in Exhibit D-2 to the MSA to the use
of federal funds. By contrast, with regard to the ERC, Exhibit D-3 to the MSA states that "the ERC will be
constructed and equipped through a combination of State and federal funds".

BCI deleted, as indicated [***]

where a public authority at a given level of gove rnment makes a financia l contribution which is
funded in part by authorities at another level of government, the funding provided by the authorities at
that other level of government should not be ta ken into account in determining the existence and
amount of a financial contribution.
7.587 Second, regarding the ERC, the Panel notes that the State of Washington made a commitment
in the MSA to take certain steps "to provide a facility for the necessary workforce development
activities dedicated to the 7E7 Aircraft production and assembly". 1919 The MSA also provides that
"Boeing shall have the exclusive use of the ERC for a minimum of five years for the benefit of
Boeing and its Suppliers". 1920 The State of Washington agreed that it would appropriate, at a
minimum, $10,000,000 for the design and construction of the ERC. 1921 However, instead of
constructing a new facility, the State decided to le ase an existing facility, at a cost of $956,400 per
year.1922 In the light of these facts, the Panel finds that by providing the ERC to Boeing for its
exclusive use during a period of five years the State of Washington provides a financial contribution
within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement.
1923 The Panel notes that the
United States contests neither the existence of the fi nancial contribution nor the fact that the financial
contribution is covered by Article 1.1(a)(1)(iii).
7.588 With regard to whether each of the financial contributions at issue confers a benefit within the
meaning of Article 1.1(b), the Panel considers that the financial contributions made by the State of
Washington through the workforce development pr ogramme and the ERC are provided on terms that
are more favourable than the terms available to the recipient in the market. There is nothing in the
evidence before the Panel to sugg est that Boeing has provided any form of remuneration, let alone
adequate remuneration in the sense of Article 14( d) of the SCM Agreement, for the goods and
services provided by the State of Washington in th e form of the workforce development programme
and the ERC. The Panel also notes, in this rega rd, that the United States does not dispute that the
financial contributions related to the ERC and wo rkforce development programme confer benefits
within the meaning of Article 1.1(b) of the SCM Agreement.
7.589 For these reasons, the Panel finds that the wo rkforce development programme and the ERC
are subsidies within the meaning of Article 1 of the SCM Agreement.
7.590 The Panel considers that the subsidies provided by the State of Washington through the
workforce development programme and the ERC are sp ecific within the meaning of Article 2.1(a) of
the SCM Agreement.
7.591 First, the workforce development programme concerns "the initial staffing and workforce
development needs of Boeing and its Suppliers and other parties designated by Boeing for project
Olympus".1924 A finding of specificity under Article 2.1(a) requires a limitation that expressly and
unambiguously restricts the availability of a subsidy to "certain enterprises", such that the subsidy is
not "sufficiently broadly available throughout an eco nomy". A subsidy that specifically addresses the
needs of "Boeing and its Suppliers and other parties designated by Boeing" clearly is not "sufficiently
broadly available throughout an economy". In this regard, the Panel finds unconvincing the argument
of the United States that the workforce developmen t programme is also open to Boeing suppliers.
The question under Article 2.1(a) is not whether the subsidy is "limited to Boeing" but whether it is
specific to "certain enterprises" as that concept is used in the chap eau of Article 2.1. While the

1919 MSA, Art.7.5.1, Exhibit EC-58.
1920 MSA, Art.7.5.2, Exhibit EC-58.
1921 MSA Exhibit D-3, Exhbits to the MSA, Exhibit EC-59.
1922 Employment Resource Center Lease, Exhibit US-239, p.3.
1923 In the Panel's view, the measure involves a provision of both goods and services.
1924 MSA, Art. 7.2.1, Exhibit EC-58.

BCI deleted, as indicated [***]

workforce development programme may be open to Bo eing suppliers, that does not alter the fact that
the programme is limited to "an enterprise or industry or group of enterprises or industries". 1925 The
Panel is also not convinced by the argument made by the United States that the skills that are
emphasized in the workforce development programme may be transferable to other industries. The
United States has not explained, and the Panel fails to see, how this has any bearing on the specificity
analysis. The subsidy that is specific consists of the financial contribution through the funding of the
workforce development programme by Washington State for the needs of Boeing and its suppliers .
The fact that the Boeing staff (or its suppliers' staff) who benefited from the programme can later
use or transfer knowledge to other industries, is not relevant in this respect.
7.592 Second, regarding the ERC, the Panel recalls that the MSA provides that Boeing will enjoy
exclusive use of the facility for a period of five years. The Panel considers that such exclusive use is a
clear instance of an "express limitation" of access to a subsidy within the meaning of Article 2.1(a) of
the SCM Agreement. The United States has not contested that this subsidy is specific by virtue of this
right of exclusive use granted to Boeing.
7.593 Having found that the subsidies provided through the workforce development programme and
the ERC are specific within the meaning of Article 2.1(a) of the SCM Agreement, it is not necessary
for the Panel to analyze the argument made by the European Communities in the alternative that these
subsidies are specific within the meaning of Article 2.1(c) of the SCM Agreement.
7.594 For these reasons, the Panel finds that the wo rkforce development programme and the ERC
are specific subsidies to Boeing within the meaning of Articles 1 and 2 of the SCM Agreement.
7.595 The Panel notes that the estimates provided by the European Communities of the amounts of
the subsidies resulting from the workforce development programme and the ERC pertain in part to the
post-2006 period. With regard to the workforce development programme, the European Communities
estimates that the amount of the subsidy is $10.5 million over the period 1989-2006 and $3.5 million
over the period 2007-2024. With regard to the E RC, the European Communities estimates that the
amount of the subsidy is $4.78 million over th e period FY2007-2011. Of this amount $478,200
reflects the amount of the subsidy in the second half of calendar year 2006 (the first half of FY 2007).
The rest of this amount relates to the period post-2006.
7.596 The Panel considers, based on the evidence be fore it, that $10.5 million is a reasonable
estimate of the amount of the subsidy resulting fro m the workforce development programme in the
period 1989-2006. The Panel recalls, in this rega rd, that it has rejected the argument of the
United States that the amount of the financial cont ribution and benefit from this measure is limited to
the $1 million contributed by the State of Washi ngton. The Panel also considers, based on the
evidence before it, that $478,200 is a reasonable estimate of the amount of the subsidy resulting from
the ERC in 2006. The Panel considers that it is not necessary to estimate the amounts of the subsidies
resulting from the workforce development programme and the ERC at issue in the post-2006 period.
As indicated in the serious prejudice section of this Report, the Panel considers it appropriate to assess
the European Communities' present serious prejudice cl aim by examining the effects of the subsidies
over the period 2004-2006. 1926 As discussed elsewhere in this Report 1927, the European Communities
has confirmed that it relies upon post-2006 subsidy amounts only for th ose subsidies that it classifies
as recurring subsidies that reduce Boeing's margin al unit costs. Given that the European

1925 Panels that have considered the meaning of "certa in enterprises" in the ch apeau to Article 2 have
agreed that an "industry" may generally be referred to by the type of products it produces, which may include a
broad range of end-products, rather than a specific type of product. Panel Report, US –Softwood Lumber IV ,
paras. 7.120 – 7.121, Panel Report, US – Upland Cotton, para. 7.1142.
1926 See below, paras. 7.1676-7.1679.
1927 See above, para. 7.155.

BCI deleted, as indicated [***]

Communities does not classify the workforce development programme or the ERC in this manner, but
rather considers these measures to be subsidies that increase Boeing's non-operating cash flow1928, it is
clear that the post-2006 amounts for these subsidies play no part in the European Communities'
present serious prejudice analysis. In its own analysis of present serious prejudice, the Panel also
does not rely on any subsidy amounts relating to th e post-2006 period. Moreover, the Panel exercises
judicial economy in relation to threat of serious prejudice.
1929
Conclusion
7.597 For these reasons, the Panel finds that th e workforce development programme and the
ERC are specific subsidies within the meaning of Articles 1 and 2 of the SCM Agreement. The
Panel estimates that the amount of these subsidies to Boeing's LCA division in the period 1989-
2006 is $11 million.
(vii) Tax and other incentives related to the 747 LCF
Introduction

7.598 The European Communities argues that the MSA requires the State of Washington to provide
Boeing with tax and other incentives related to the 747 LCF that are the same as those accorded in
respect of the 787 and that this constitutes a specific subsidy wihtin the meaning of Articles 1 and 2 of
the SCM Agreement.
7.599 The United States argues that no specific subsidy exists because the State of Washington is
not providing any special tax incentives to the 747 LCF and there is nothing in the MSA stating that
the State will provide the same goods and services w ith regard to the 747 as it provides in relation to
the 787.
The measure at issue

7.600 The MSA provides:1930
"The State and CTED {Department of Community, Trade and Economic
Development} shall ensure 747-400 Large Car go Freighter is eligible for all benefits
afforded the 7E7 Program and shall facilita te a low cost operating environment for
the aircraft through tax abatements a nd other avenues available through the
appropriate state and local governments."
Arguments of the European Communities
7.601 The European Communities submits that the MSA requires the State of Washington to extend
to the Boeing LCF programme "the same state and local tax breaks, and the same goods and services
it provides to the 787".1931
7.602 In relation to the tax incentives associated with the 747 LCF, the European Communities
argues that they constitute specific subsidies to Bo eing within the meaning of the SCM Agreement.
The tax benefits constitute a financial contributi on under Article 1.1(a)(1)(ii) because the State of

1928 European Communities' first written submission, para. 1230, figure 15.
1929 See below, paras. 7.1851-7.1853.
1930 First Amendment to Project Olympus Master Site Development and Location Agreement,
2 February 2004, Exhibit EC-60 (the amended Exhibit E to the MSA. See Article II(2.4) of Exhibit EC-60
explaining the insertion of an amended Exhibit E into the MSA.)
1931 European Communities' first written submission, para. 190.

BCI deleted, as indicated [***]

Washington is required to forego tax revenue that it would otherwise have collected. 1932 I n t h e
alternative, given that under the MSA the State of Washington must provide Boeing with a remedy of
equivalent effect if it cannot provide the incentives, the tax benefits also cons titute a potential direct
transfer of funds under Article 1.1(a)(1)(ii) of the SCM Agreement.
1933
7.603 In response to the United States' argument that the State of Washington is "not providing any
special tax incentives to the 747 LCF", the European Communities argues that this is beside the
point.1934 The State's obligation is not to provide speci al tax incentives to the 747 LCF, but to ensure
that it receives the same tax incentives as the 787, namely the HB 2294 tax breaks, which the
United States concedes are extended in relation to the 747 LCF.1935 The European Communities notes
that it has already demonstrated that these are specific subsidies that benefit Boeing.1936
7.604 The European Communities argues that the requirement upon the State in the MSA to ensure
that the 747 LCF receive all benefits afforded to the 787 means that the State must provide the
747 LCF programme with the same goods and servi ces it provides to Boeing's 787 programme. This
constitutes a provision of goods and services a nd therefore a financia l contribution under
Article 1.1(a)(1)(iii) of the SCM Agreement. Altern atively, there is a potential direct transfer of
funds, for the same reason given in relation to the tax incentives.1937
7.605 The European Communities submits that the tax breaks and other incentives confer a benefit
on Boeing's LCA division within the meaning of Article 1.1(b) of the SCM Agreement . Boeing is not
required to pay anything in return for the tax breaks and other incentives and therefore Boeing
receives advantages on non-market terms.
1938
7.606 In addition, the European Communities submits that the tax breaks and other incentives are de
jure specific under Article 2.1(a) of the SCM Agreemen t. This is because they are part of an
agreement specifically between Boeing and the Stat e of Washington. Further, the MSA explicitly
limits the extension of the tax breaks and incentiv es to the 747 LCF, an airplane that will be
manufactured and used by Boeing for production of its 787 aircraft. Therefore, "the provision of
these incentives is specific because the State of W ashington has explicitly limited access to these
incentives to Boeing under the terms of the {MSA}". 1939 In the alternative, the tax breaks and
incentives are de facto specific under Article 2.1(c). This is because the MSA makes it clear that they
will extend only to Boeing's 747 LCF, so Boeing will be the predominant beneficiary.1940
7.607 The European Communities argues that it is unab le to estimate the value of the financial
contributions resulting from the incentives, as the United States has not cooperated in providing the
relevant information. The European Communities maintains that the value of the subsidies is
"large".
1941 However, in response to Panel questioning , the European Commun ities concedes that the
values it has calculated for the HB 2294 tax incentiv es include the tax incentives provided in relation

1932 European Communities' first written submission, para. 191.
1933 European Communities' first written submission, para. 193.
1934 European Communities' second written submission, para. 115.
1935 European Communities' second written submission, para. 115.
1936 European Communities' second written submission, para. 115.
1937 European Communities' first written submission, paras. 192-193.
1938 European Communities' first written submission, paras. 195-197.
1939 European Communities' first written submission, para. 199.
1940 European Communities' first written submission, para. 200.
1941 European Communities' first written submission, para. 194. See also, European Communities'
response to question 41.

BCI deleted, as indicated [***]

to the 747 LCF. 1942 Therefore, it is the other incentives to 747 LCF, apart from tax abatements (i.e.
the provision of goods and services), which the European Communities is unable to calculate.
Arguments of the United States
7.608 In its first written submission, the United States argues that the "State of Washington is not
providing any special tax incentives to the 747 LCF, and is therefore not foregoing any revenue
otherwise due".1943
7.609 However, in its first written submission, the United States concedes that the 747 LCF is
eligible for the tax measures that apply to Washi ngton's aerospace sector more broadly, namely the
measures enacted pursuant to HB 2294. However, according to the United States, these measures are
not WTO-inconsistent subsidies to Boeing.1944
7.610 In response to Panel questioning, the United States confirms that its argument that there are
no "special tax incentives" provided to the 747 LCF rests on the premise that the tax measures under
HB 2294 are not subsidies.1945
7.611 The United States argues that the European Communities' contentio n that a financial
contribution exists because Washington must provi de the 747 LCF with the "same goods and services
it provides to the 787", is baseless. There is nothi ng in the MSA stating that Washington will provide
such goods and services to the 747 LCF.1946
7.612 In its first written submission, the United Stat es argues that given the absence of any special
tax incentives for the 747 LCF, "there is neither be nefit nor specificity". However, in response to
Panel questioning, the United States confirms that its argument rests upon the premise that the tax
measures under HB 2294 are not subsidies.1947
7.613 The United States argues that the application of the tax treatment in HB 2294 to the 747 LCF
is already included in the European Communities' ca lculation of the value of all the tax measures in
HB 2294.1948 The United States also submits that the ar gument that it has failed to cooperate in the
information gathering process, in order to allow ca lculation of the value of the subsidies to the
747 LCF, lacks merit.1949
Evaluation by the Panel
7.614 The first issue before the Panel is whether E xhibit E of the MSA creates any new state or
local taxation subsidies in Washington, or extends the reach of existing ones.
7.615 The taxation measures enacted under HB 2294 wh ich we have found to constitute specific
subsidies do not refer explicitly to the 787 or to "superefficient" airplanes. Therefore, these incentives
apply to the 747 LCF irrespective of the clause in Exhibit E of the MSA challenged by the European
Communities. For example, to the extent that the 747 LCF is manufactured in the State of
Washington, which the evidence in fact indicates is not the case, the Washington B&O tax reduction

1942 European Communities' response to question 250.
1943 United States' first written submission, para. 578.
1944 United States' first written submission, para. 578, footnote 766.
1945 United States' response to question 42, para. 113.
1946 United States' first written submission, para. 579.
1947 United States' response to question 42, para. 113.
1948 United States' response to question 250, para. 424.
1949 United States' response to question 251, para. 447.

BCI deleted, as indicated [***]

on manufacturing activities applies to it under the terms of HB 2294, regardless of Exhibit E of the
MSA.1950 Therefore, Exhibit E of the MSA does not create any new subsidies or extend existing ones.
7.616 The European Communities' submission that th e MSA requires the State of Washington to
extend to Boeing "the same state and local tax breaks … it provides to the 787" 1951 suggests that the
European Communities is arguing that the MSA requires the City of Everett B&O tax reduction to be
extended to the 747 LCF. However, to the extent th at the 747 LCF is manufactured within the City of
Everett, the tax reduction already applies to the 747 LCF, regardless of the MSA.
7.617 Therefore, the Panel finds that Exhibit E of the MSA does not create any additional taxation
subsidies to Boeing. 1952 This conclusion is confirmed by the European Communities' concession that
the values it has calculated for the HB 2294 tax incentives include the tax incentives provided in
relation to the 747 LCF.1953
7.618 The second issue before the Panel is whethe r, as the European Communities asserts, the
requirement in the MSA for the State to ensure that the 747 LCF "is eligible for all benefits afforded
the 7E7 Program" constitutes a subsidy to Boeing in the form of the provision of goods and services
to the 747 LCF programme.1954
7.619 The Panel has found that the only goods and ser vices provided under the MSA that constitute
specific subsidies to the Boeing 787 programme are the ERC and the services provided under the
workforce development programme. Therefore, the qu estion before the Panel is whether Exhibit E to
the MSA, providing that the 747 LCF is "eligible for all benefits afforded to the 7E7 programme", has
the effect that there is a further subsidy to Boeing in the form of an ERC and a workforce
development programme in favour of the 747 LCF. Th e Panel does not need to decide whether this is
the correct interpretation of Exhibit E. Even if it were, there is no evidence before the Panel to
demonstrate that any workforce development activ ities relating to the 747 LCF have been conducted
within the State of Washington. In fact, the evidence before the Panel reveals that the design work for
the 747 LCF occurred in Moscow and the modifica tions to the 747-400s, to create the 747 LCFs,
occurred in Chinese Taipei. 1955 Therefore, there is no evidence be fore the Panel to demonstrate that
any workforce development activities of the type d escribed in Exhibit D to the MSA occurred in the
State of Washington in relation to the 747 LCF. Consequently, even if the correct interpretation of
Exhibit E is that it provides for the possibility of workforce development support associated with the
747 LCF, there is no evidence that Boeing has ever taken advantage of this clause in Exhibit E.
7.620 As indicated at paras. 7.150-7.151 of this Report, in the Panel's view, the European
Communities' serious prejudice claim is based upon use of the subsidies in issue by a particular entity,

1950 Boeing 787: Build globally, assemble locally, The Seattle Times, 11 September 2005, Exhibit EC-
115, p. 4 indicates that the 747 LCF will be constructed from existing 747-400s in Chinese Taipei.
1951 European Communities' first written submission, para. 190.
1952 Although eligibility for three of the taxation meas ures under HB 2294 (i.e. the sales and use tax
exemption on construction services and equipment, the leasehold excise tax exemption and the property tax
exemption) is related to production of "superefficient planes", the definition of which is met by the 787, we have
found that these three measures do not constitute subsidies to Boeing. The European Communities' case is that
the MSA extends to the 747 LCF programme the taxation subsidies provided to the 787 programme. As these
measures are not subsidies to the Boeing 787 programme, they do not fall within the European Communities'
argument.
1953 European Communities' response to question 250.
1954 First Amendment to Project Olympus Master Site Development and Location Agreement,
2 February 2004, Exhibit EC-60 (the amended Exhibit E to the MSA. See Article II(2.4) of Exhibit EC-60
explaining the insertion of an amended Exhibit E into the MSA.)
1955 Boeing 787: Build globally, assemble locally, The Seattle Times, 11 September 2005, Exhibit EC-
115, p. 4.

BCI deleted, as indicated [***]

namely Boeing. The European Communities does not argue that the provision of goods and services
under Exhibit E is a financial contribution in th e abstract. Rather, the European Communities'
position is that the measure is a financial contribution to Boeing. Assuming that the effect of Exhibit
E is to provide for the possibility of the provisi on of goods and services in relation to the 747 LCF
programme, in circumstances where there is no evid ence before the Panel that Boeing has ever
claimed such goods and services, the Panel finds that there is no financial contribution to Boeing.
7.621 For the same reasons as expressed in relation to the Washington HB 2294 taxation measures
and the MSA infrastructure-related measures, the Pa nel considers that the European Communities has
not made out its argument in the alternative under Article 1.1(a)(1)(i) of the SCM Agreement.1956
Conclusion
7.622 For these reasons, the Panel finds that the European Communities has not demonstrated
that Exhibit E in the MSA gives rise to any additional subsidies to Boeing.
(viii) Costs of legal proceedings
Introduction
7.623 The European Communities argues that the MSA requires the State of Washington to assume
certain litigation costs incurred by Boeing and that this gives rise to a specific subsidy within the
meaning of Articles 1 and 2 of the SCM Agreement.
7.624 The United States argues that the MSA provisi on at issue does not constitute a subsidy
because it does not entail a financial contribution.
The measure at issue
7.625 Article 11.3 of the MSA provides:
"In the event that any third party or parti es institute any legal proceedings against any
of the Public Parties and/or Boeing relating in any manner to this Agreement, or any
agreement, document or Permit, executed, issued or implemented pursuant to this
Agreement, then the State (or such othe r SLG as the State may designate) shall
assume the entire defense of such proceedings , including all fees, costs and expenses
whatsoever relating thereto. The State's (or such other SLG) obligations pursuant to
this Section 11.3 shall be subject to the terms and conditions set forth in
Section 11.3.1 to Section 11.3.4."1957
Arguments of the European Communities
7.626 The European Communities submits that Article 11.3 of the MSA requires the State of
Washington to pay all costs incurred by Boeing for an y legal proceedings that may arise relating to
the MSA and that Washington State's agreement to insure the costs of Boeing's legal proceedings
related to the MSA constitutes a potential direct transfer of funds within the meaning of
Article 1.1(a)(1)(i) of the SCM Agreement. Shoul d Boeing be involved in any litigation relating to
the MSA, the State of Washington is required to tr ansfer funds covering the fees, costs and expenses
of such litigation to Boeing. The European Communiti es also argues that the f act that the State must
provide Boeing with a remedy of equivalent ec onomic effect if it cannot cover Boeing's litigation

1956 See paras. 7.159-7.167 and paras. 7.173-7.178 of this Report.
1957 MSA, Art. 11.3, Exhibit EC-58.

BCI deleted, as indicated [***]

costs further demonstrates that a potential direct tr ansfer of funds exists in connection with this
"litigation risk insurance policy".1958
7.627 The European Communities submits that the argum ents advanced by the United States in its
first written submission reflect a fundamental mi sunderstanding of the European Communities'
argument with regard to the State of Washingt on's commitment to pay Boeing's costs of legal
proceedings. The European Communities submits, in this regard, that it has never made any
arguments regarding litigation costs that Boeing may choose to independently incur or regarding the
payment of potential damages or liability to Boeing. Rather, its argument is that should a third party
or parties bring legal proceedings against Boeing, alone or together with the Public Parties,
Washington State is required to pay all fees, costs and expenses relating to de fending that litigation.
The fact that the State of Washington has not yet engaged in any litigation relating to the MSA is
entirely irrelevant. Moreover, the statement that th e "State also does not expect such proceedings in
the future" is inconsistent with the very existence of the provision at issue – a provision that the State
and Boeing agreed was necessary because of the real possibility of such proceedings.1959
7.628 The European Communities argues that it is cl ear from the wording of Article 11.3 of the
MSA that it mandates a potential direct transfer of funds to Boeing because the State or other SLG are
required to pay for the fees, costs and expen ses incurred by Boeing in defending against legal
proceedings instituted by a third party. That this transfer is contingent on some other event taking
place is what makes this provision a potential direct transfer of funds, as opposed to a direct transfer
of funds. In this respect, Article 11.3 of the MSA is comparable to a loan guarantee.1960
7.629 The European Communities argues that Washington State's assumption of litigation costs
confers "benefits" on Boeing's LCA division within the meaning of Article 1.1(b) of the SCM
Agreement because this litigation ri sk insurance policy relates explicitly to the production of the 787
and is provided to Boeing's LCA division on non-market terms. Boeing receives a guarantee from the
State that it will assume Boeing's litigation risk related to the MSA that facilitates Boeing's
development and production of the 787 in Washington St ate. This type of guarantee is an insurance
policy for which Boeing pays nothing in return. On the market, Boeing would need to pay a premium
for such an insurance policy. The benefits to Bo eing from this assumption of litigation costs are the
amounts of premium Boeing would be required to pay each year to insure against such litigation risk
in the market. The European Co mmunities submits that, as a result of lack of cooperation by the
United States, it is unable to provide an estimate of the value of the these benefits. 1961 The European
Communities argues that it is clear that absent Artic le 11.3 of the MSA, if a third party or parties
instituted legal proceedings against Boeing relati ng to the MSA, Boeing would be required to pay
market-based fees, costs, and expe nses in defending that litigation. Article 11.3 provides that in this
situation, the State, not Boeing, will pay those f ees, costs, and expenses. Thus, Boeing has obtained
an insurance-like commitment from the State for nothing in return. As such, it has received a benefit
within the meaning of Article 1.1(b) of the SCM Agreement. The fact that "Washington has not
agreed to pay any damages or other potential liab ility to Boeing under the {Master Site} Agreement"
does not change the fact that the commitment the State has made in Article 11.3 confers a benefit on
Boeing. Moreover, that Article 11.3 was, in the United States' view, motivated by the State's self
interest also does not change the fact that by the terms of Article 11.3, Boeing is receiving something
for free that it could not get on the market without paying adequate consideration.1962

1958 European Communities' first written submission, para. 203.
1959 European Communities' second written submission, para. 123.
1960 European Communities' response to question 244, paras. 443-444.
1961 European Communities' first written submission, paras. 204-207.
1962 European Communities' second written submission, paras. 124-125.

BCI deleted, as indicated [***]

7.630 The European Communities argues that Washington State's agreement to assume Boeing's
litigation costs related to the MSA is specific within the meaning of Article 2.1(a) of the SCM
Agreement because it is part of an agreement specifically between Boeing and the State of
Washington. The MSA explicitly states that the St ate will cover the litigation costs related to the
Agreement only for the Project Olympus SLGs or Bo eing. Thus, the provision of these incentives is
specific because the State of Washington has exp licitly limited access to these incentives to Boeing
under the terms of the MSA. Should the Panel c onsider Washington State's agreement to assume
litigation costs not to be specific under Article 2.1(a) of the SCM Agreement, it is nonetheless de
facto specific under Article 2.1(c). The MSA makes it clear that Boeing is the only party other than
the Project Olympus SLGs that will benefit from the State's guarantee against litigation costs.
Further, the history of "The Boeing Incentive Packag e" illustrates that this litigation risk insurance
policy was intended to directly benefit Boeing's LCA production. Indeed, Boeing will be the
predominant beneficiary thereof.
1963
Arguments of the United States
7.631 The United States argues that Article 11.3 of the MSA is not a subsidy. Boeing receives no
financial contribution under Article 11.3 of the MSA, which calls for the State or local government to
"assume the entire defense of such proceedings, in cluding all fees, costs and expenses whatsoever
relating thereto". Contrary to the argument of the European Communities, Article 11.3 does not
require Washington State to "transfer funds coveri ng the fees, costs, and expenses of the litigation to
Boeing" for costs that Boeing may choose to independently incur. The MSA gives Boeing the right to
retain its own counsel and intervene on its own behalf in any litigation. Article 11.3 is also not a
"litigation risk insurance policy" as it pertains exclus ively to the State's defense of a legal proceeding
and not to the cost of any potential damages or lia bility that may result. The United States observes
that Washington has not engaged in any legal pr oceedings under the MSA on behalf of Boeing or
itself, and that the State also does not expect such proceedings in the future.
1964
7.632 The United States argues that Article 11.3 of the MSA is not a potential direct transfer of
funds under Article 1.1(a)(1)(i) of the SCM Agreemen t. Article 11.3 provides that in the event of
litigation challenging provisions of the MSA, the State of Washington will control the defense of such
litigation. To the extent that Boeing seeks to interv ene in such litigation, it may exercise its right to
do so, but Article 11.3 does not require the State to fund Boeing's litigation costs nor does the State
intend to do so. In fact, the intent of Article 11.3 was to protect the State's self-interest in controlling
the defense in any litigation challenging the MSA. A potential direct transfer of funds exists under
Article 1.1(a)(1)(i) if a direct transfer of funds is assured in the event of certain defined circumstances.
Since Article 11.3 does not assure Boeing a direct tr ansfer of funds under any circumstances, there is
no potential direct transfer of funds within the meaning of the SCM Agreement.
1965
7.633 The United States rejects the European Communitie s' argument that the benefit to Boeing
under Article 11.3 of the MSA is the amount "of pr emium Boeing would be required to pay each year
to ensure against such litigation risk in the market".

The United States maintains that Article 11.3 is
not a litigation risk insurance policy because Washi ngton has not agreed to pay any damages or other
potential liability to Boei ng under the MSA. Furthermore, the United States asserts that the
provisions in Article 11.3 are motivated by the State's self-interest, rather than a benefit to Boeing. In

1963 European Communities' first written submission, paras. 208-209, European Communities' second
written submission, para. 126.
1964 United States' first written submission, para. 573.
1965 United States' response to question 244, paras. 405-406.

BCI deleted, as indicated [***]

the event of litigation challenging the MSA and rela ted legislation or agreements, independent of
Article 11.3, the State would defend the MSA and related legislation.1966
7.634 The United States argues that because there is no subsidy to Boeing, specificity is not at
issue.1967
Evaluation by the Panel
7.635 The parties disagree as to whether Article 11.3 of the MSA gives rise to a financial
contribution in the form of a potential direct transfer of funds within the meaning of
Article 1.1(a)(1)(i) of the SCM Agreement, wh ich confers a benefit within the meaning of
Article 1.1(b) of the SCM Agreement. With respect to whether Article 11.3 of the MSA gives rise to
a potential direct transfer of funds within the meanin g of Article 1.1(a)(1)(i), the key issue in dispute
is whether Article 11.3 reflects a commitment by th e State of Washington or its designee that if a
particular event occurs, it will make a direct transfer of funds to Boeing.
7.636 The Panel notes in this regard that the Eur opean Communities has argued that Article 11.3 of
the MSA requires the State of Washington "to pay all costs incurred by Boeing for any legal
proceedings that may arise relating to the Agreem ent", that "{s}hould Boeing be involved in any
litigation relating to the Project Olympus Master Site Agreement, the State of Washington is required
to transfer funds covering the fees, cost s, and expenses of the litigation to Boeing ", and that "the fact
that the State must provide Boeing with a remedy of equivalent economic effect if it cannot cover
Boeing's litigation costs further demonstrates that there is a potential direct transfer of funds in
connection with this litigation risk insurance policy..."
1968 This argument suggests that the direct
transfer of funds which according to the Europ ean Communities' interpretation of Article 11.3 will
occur if any third party or parties institute MSA-re lated legal proceedings against Boeing, is a direct
transfer of funds to Boeing to cover costs incurred by Boeing.
7.637 The Panel considers that the European Communities has not demonstrated that Article 11.3 of
the MSA provides for this type of direct transfer of funds to Boeing. Article 11.3 of the MSA
provides that if any third party or parties institute any legal proceedings relating to the MSA against
any of the Public Parties and/or Boeing, Washington State 1969 "shall assume the entire defense of such
proceedings, including all fees costs and expenses wh atsoever relating thereto". The "fees, costs and
expenses whatsoever relating thereto" would appear to be the fees, costs and expenses incurred by
Washington State in respect of Washington State's assumption of "the entire defense of such
proceedings". The Panel sees nothing in this provisi on requiring Washington State to pay fees, costs
and expenses incurred by Boeing in respect of such a proceeding. Therefore, the Panel considers that
there is no basis for the view that Article 11.3 provi des that if a certain event occurs Washington State
will make a direct of transfer of funds to Boeing to cover costs incurred by Boeing in connection with
certain MSA-related legal proceedings.
7.638 In addition to the terms of Article 11.3 of th e MSA, the immediate context of that provision
also suggests to us that the "fees, costs and expen ses whatsoever relating thereto" would appear to be
the fees, costs and expenses incurred by Washington State in respect of Washington State's
assumption of "the entire defense of such proceedings ". In this regard, we recall that the final
sentence of Article 11.3 provides that the State' s (or such other SLG) obligations pursuant to
Section 11.3 "shall be subject to the terms an d conditions set forth in Section 11.3.1 to
Section 11.3.4." The focus of the terms and conditions set forth in Section 11.3.1 through

1966 United States' first written submission, para. 575.
1967 United States' first written submission, para. 576.
1968 European Communities' first written submission, paras. 201-202 (emphasis added).
1969 Or such other SLG as Washington State may designate.

BCI deleted, as indicated [***]

Section 11.3.4 is on the manner in which Washington State (or such other SLG) would conduct such a
defense. For example, Article 11.3.1 requires Washington State (or such other SLG) to notify Boeing
in writing of any such legal proceedings, to vigorou sly undertake the defense in such proceedings, to
consult with Boeing on various issues, and to no t object to "intervention" by Boeing in "such
proceedings". Article 11.3.2 prov ides, among other things, that the State (or such applicable SLG)
may not make any settlement or abandon any litigation without prior consultation with Boeing.
7.639 For these reasons, the Panel finds that the Eu ropean Communities has not demonstrated the
existence of a financial contribution in the form of a potential direct transfer funds to Boeing to cover
costs incurred by Boeing.
7.640 The Panel notes that in its second written subm ission the European Communities argues that
if a third party or parties bring legal proceedings against Boeing relating to the MSA, Washington
State is required to pay all fees, cost and expenses "relating to defending that litigation".
1970 It is
possible that the statement of the European Comm unities that the fees, costs and expenses to be
assumed by Washington State are fees, costs and expenses "relating to defending that litigation" refers
to fees, costs and expenses incurred by Washington State rather than by Boeing. 1971 I f s o , t h i s
argument would seem to be somewhat different from the argument advanced in the European
Communities' first written submission that Article 11.3 of the MSA contemplates that Washington
State will transfer funds to Boeing corresponding to costs incurred by Boei ng. If the European
Communities' interpretation of Article 11.3 of the MSA is that it provides that if a defined event
occurs Washington State is obligated to pay fees, costs and expenses that it incurs when it assumes the
defense of MSA-related legal proceedings agains t Boeing, the Panel considers that, as explained
above, the text of Article 11.3 of the MSA supports th at interpretation. However, the Panel considers
that the European Communities has not provided suffi cient reasoning to demonstrate that in the event
that Washington State covers the costs it incurs in connection with its defense of MSA-related legal
proceedings against Boeing, this would amount to a direct transfer of funds to Boeing. Thus, the
Panel considers that the European Communities has not demonstrated that Article 11.3 of the MSA
gives rise to a potential direct transfer of funds.
7.641 In sum, the Panel finds that, on the one hand, if the argument of the European Communities is
that Article 11.3 of the MSA means that if a defi ned event occurs Washington State will be required
to make a direct transfer of funds to Boeing to cover costs incurred by Boeing in connection with
MSA-related legal proceedings, the European Comm unities has not substantiated that assertion. On
the other hand, if the argument of the European Communities is that Article 11.3 requires Washington
State to assume costs, fees and expenses that Wash ington State incurs when assuming the defense of
MSA-related legal proceedings against Boeing, the European Communities has not demonstrated that
this gives rise to a potential transfer of funds to Boeing. The Panel notes that the European
Communities does not advance arguments as to how Article 11.3 could be found to constitute a
financial contribution within the meaning of Article 1.1(a)(1) of the SCM Agreement other than in the
form of a potential direct transfer of funds.

1970 The European Communities also observes, in this regard, that its "claim is not about paying for any
litigation costs independently incurred by Boeing or about paying any potential damages or liability to Boeing,
but rather about paying to defend Boeing in potential litigation brought by third parties relating to the Project
Olympus MSA". European Communities' second written submission, paras. 122- 123 (emphasis added).
Similarly, in its response to a question from the Panel, the European Communities argues that Article 11.3 of the
MSA "mandates the State or its designee to pay for the fees, costs, and expenses incurred in defending against
legal proceedings brought by a third party, should such proceedings arise." (emphasis added).
1971 See also, European Communities' comments on United States' response to question 244, para. 345.

BCI deleted, as indicated [***]

Conclusion
7.642 For these reasons, the Panel finds that the European Communities has not demonstrated
that Article 11.3 of the MSA constitutes a financial contribution in the form of a potential direct
transfer of funds within the meaning of Article 1.1(a)(1)(i) of the SCM Agreement. Therefore,
the Panel also finds that the European Communi ties has not demonstrated that Article 11.3 of
the MSA constitutes a subsidy within the meaning of Article 1 of the SCM Agreement.
(ix) Summary of conclusions regarding the alleged Project Olympus Master Site Agreement
subsidies pursuant to "The Boeing Incentive Package"
7.643 The foregoing analysis and conclusions a ddressed the question of whether the following
measures provided for in the MSA in connection with Project Olympus constitute specific subsidies
within the meaning of Articles 1 and 2 of the SCM Agreement:
(a) the I-5 and SR 527 expansion projects, the construction of a rail-barge transfer
facility and the expansion of the South Terminal by the Port of Everett;
(b) the waiver of 747 LCF landing fees at Paine Field;
(c) the freezing of rates charged to Boeing for certain utility services;
(d) the provision of coordinators in connection with Project Olympus;
(e) job training incentives in the form of a workforce development programme and the
provision of an Employment Resource Center;
(f) tax and other incentives related to the 747 LCF;
(g) the assumption by Washington State of costs of MSA-related legal proceedings.
7.644 For the foregoing reasons, the Panel finds that the workforce development programme and the
Employment Resource Center provided for in the MSA constitute specific subsidies within the
meaning of Articles 1 and 2 of the SCM Agreement. The Panel estimates that the amount of these
subsidies to Boeing's LCA division over the period 1989-2006 is $11 million.
7.645 For the foregoing reasons, the Panel finds that the European Communities has not
demonstrated that the following measures constitu te specific subsidies within the meaning of
Articles 1 and 2 of the SCM Agreement: (i) the I-5 and SR 527 expansion projects, the construction
of a rail-barge transfer facility and the expansion of the South Terminal by the Port of Everett; (ii) the
waiver of 747 LCF landing fees at Paine Field; ( iii) the alleged commitment made by the City of
Everett and Snohomish County to freeze utility rate s charged to Boeing; (iv) the provision of
coordinators pursuant to the MSA; (v) tax and ot her incentives related to the 747 LCF; and (vi) the
assumption by Washington State of costs of MSA-related legal proceedings.
3. State of Kansas and municipalities therein
(a) Tax breaks arising from the issuance of Industrial Revenue Bonds
(i) Introduction
7.646 The European Communities contends that certain tax exemptions arising from the issuance of
"Industrial Revenue Bonds" ("IRBs") in the State of Kansas and municipalities therein constitute the

BCI deleted, as indicated [***]

foregoing of revenue otherwise due under Article 1. 1(a)(1)(ii) of the SCM Agreement, that they
confer a benefit and that they are de facto specifi c to certain enterprises. Where the tax exemptions
are not directly received by Boeing, the Eur opean Communities argues that the benefit "passes-
through" to Boeing. The European Communities esti mates that the amount of the benefit to Boeing's
LCA division arising from the IRBs is at least $784 million from 1989 to 2019.
7.647 The United States' principal argument against the European Communities' case in relation to
the tax exemptions is that they are not specifi c within the meaning of Article 2 of the SCM
Agreement. Further, the United States argues that any benefit to companies other than Boeing did not
pass-through to Boeing.
(ii) The measure at issue
7.648 The European Communities argues th at the State of Kansas has granted subsidies to Boeing's
LCA division, in the form of tax abatements, through an IRB programme.
7.649 Relevant background to the European Commun ities' submissions is that Boeing Commercial
Airplanes, Wichita Division ("Boeing Wichita") produced commercial airplanes and their components
in Wichita, Kansas, for over 70 years. On 16 June 2005, Boeing sold its Boeing Wichita facilities to
another company, which is now known as Spirit Aerosystems ("Spirit").1972
7.650 The European Communities submits that the am ount of tax abatements to Boeing under the
IRB scheme is at least $784 million in the period 198 9-2019. This figure includes $643 million in tax
abatements granted directly to Boeing and $141 million in tax abatements to Spirit, which the
European Communities argues have "passed-through" to Boeing.
7.651 IRBs are issued by cities and counties in Kansas, on behalf of private entities, in order to
assist in raising revenue to fund the purchase, c onstruction or improvement of various types of
industrial and commercial property ("the Project Property").1973
7.652 The relevant state law which grants cities in Ka nsas the authority to issue IRBs is Kansas
Statutes Annotated ("KSA") section 12-1740 et seq. KSA section 12-1741 provides:
"{A}ny city shall have the power to issue bonds, the proceeds of which shall be used
for the purpose of paying all or part of the cost of purchasing, acquiring, constructing,
reconstructing, improving, equipping, furnis hing, repairing, enlarging or remodeling
facilities for agricultural, commercial, hos pital, industrial, natural resources,
recreational development and manufacturing pur poses. Any city shall also have the
power to enter into leases or lease pur chase agreements by ordinance with any
person, firm or corporation for the facilities." 1974
7.653 In general, the relevant city, which in the case of Boeing and Spirit is the City of Wichita, acts
as the "issuer" of the IRBs. The IRBs are sold to the general public for proceeds that the private
entity, on whose behalf the IRBs are issued, uses to acquire or enhance Project Property. During the
term of the IRB, legal title to the Project Property re mains with the issuer (i.e. the City). The private
entity leases the property, making rent payments to th e holders of the IRBs that are sufficient to pay

1972 European Communities' first written submission, para. 286.
1973 European Communities' first written submission, para. 286.
1974 Kan. Stat. Ann. § 12-1740 et seq. (2001), Exhibit EC-167.

BCI deleted, as indicated [***]

the principal and interest on the IRBs. At the end of the term of the IRB, title to the Project Property
transfers to the private entity involved.1975
7.654 The IRB issuance process involves a number of steps, including the issuer's city council
approving a letter of intent ("LOI"), expressing the issuer's will to issue the IRBs on behalf of the
private entity involved, subject to negotiated conditions. 1976 The authority for the actual issuance
comes from a Bond Ordinance, which is adopted by the issuer's city council.1977
7.655 The European Communities subm its the following diagram to assist in understanding the
operation of the "IRB scheme":

7.656 For a private entity, the advantages of having IRBs issued on its behalf include:
(a) The ability to borrow funds at lower than market interest rates, due to tax-exempt
interest;
(b) Property tax abatements for up to 10 years on Project Property; and
(c) Sales tax exemptions on Project Propert y and services acquired with the proceeds of
IRBs.
1978

1975 See European Communities' first written submission, Annex A, paras. 4-8.
1976 European Communities' first written submission, Annex A, paras. 14-15.
1977 European Communities' first written submission, Annex A, paras. 14-15.
1978 European Communities' first written submission, para. 298.

BCI deleted, as indicated [***]

7.657 The authority for the latter two benefits arises from KSA section 79-201a, which provides that
all IRB-financed real property shall be exempt from state and local property taxes for a period of up to
10 years, and from KSA section 79-3640, which provi des that tangible personal property and services
acquired with IRB proceeds shall be exempt from all sales taxes.1979
7.658 The operation of the IRBs that have been issued to Boeing and Spirit by the City of Wichita is
slightly different to the general scheme outlined in the preceding paragraphs. In particular, rather than
being purchased by the public, the IRBs issued on behalf of Boeing or Spirit are purchased by these
companies themselves. 1980 This results in a circular flow of money, from Boeing (or Spirit) to the
City, in the purchase of the IRBs, and from the City back to Boeing (or Spirit) to fund purchase of
Project Property. 1981 As Boeing or Spirit own the IRBs, any principal or interest payments are
payments the companies make to themselves. Ther efore, Boeing and Spirit do not use the IRBs in
order to receive an injection of funds to finance th e acquisition of property. Rather, the advantages of
the IRB issuances to Boeing and Spirit are limited to the property tax and the sales tax exemptions. 1982
It is the tax breaks to Boeing, including those th at "pass-through" from Spirit to Boeing, which arise
from the IRBs issued by the City of Wichita, th at the European Communities challenges. The
European Communities does not challenge any other aspects of the IRB transactions.1983
7.659 In its first written submission, the Europ ean Communities provides detailed information
regarding the timing and the manner in which IRBs have been issued to Boeing and Spirit.1984
7.660 According to the European Communities, the City of Wichita has issued Boeing Wichita with
IRBs every year since 1979. The European Communities provides a table of the IRB issuances which
it claims result in the subsidies to Boeing in the form of tax abatements that are under challenge in this
dispute. The table identifies IRBs issued directly to Boeing, over three different time periods, and
IRBs issued to Spirit.

1979 European Communities' first written submission, Annex A, para. 9.
1980 European Communities' first written submission, Annex A, para. 19.
1981 European Communities' first written submission, Annex A, para. 22.
1982 European Communities' first written submission, para. 312.
1983 European Communities' first written submission, para. 318.
1984 See European Communities' first written submission, paras. 293-317.

BCI deleted, as indicated [***]

IRB
Recipient
IRBs Issued Tax Benefit
Period
Financial
Contribution
Benefit
Boeing Pre-1995
(prior to sale of
Boeing
Wichita)
Pre-2005
(prior to sale
of Boeing
Wichita)
Boeing
(Boeing leases the
property and owns the
bonds; no other entity
is involved)
Boeing LCA
(based on LOI, Bond
Ordinance,
and Project Property)
1996-2004
(prior to sale
of Boeing
Wichita)
Boeing
(Boeing leases the
property and owns the
bonds; no other entity
is involved)
Boeing LCA
(based on LOI, Bond
Ordinance,
and Project Property)
Boeing 1995-2004
(prior to sale of
Boeing
Wichita)
2005-2014
(after sale
of Boeing
Wichita)
Boeing
(Boeing subleases
property to Spirit,
while maintaining
leasehold interest;
Boeing owns the
bonds)
Boeing LCA
(based on LOI, Bond
Ordinance,
and Project Property)
Boeing 2005-
(after sale
of Boeing
Wichita)
2006-
(after sale
of Boeing
Wichita)
Boeing
(Boeing leases the
property and owns the
bonds; no other entity
is involved)
Boeing LCA
(based on LOI and Project
Property)
Spirit 2005-
(after sale
of Boeing
Wichita)
2006-
(after sale
of Boeing
Wichita)
Spirit
(Spirit leases the
property and owns the
bonds)
Boeing LCA
(based on Project Property and
transaction consideration,
particularly fixed-price long-
term supply agreements with
Boeing Commercial
Airplanes)

7.661 The first row of the above table identifies IRBs issued to Boeing, where the term of the IRBs,
and therefore the tax exemptions, expired prior to the sale of Boeing Wichita to Spirit in 2005.1985
7.662 The second row identifies IRBs issued to Boeing prior to the sale to Spirit, but where the term
of the IRBs, and the tax exemption period, contin ue post-2005. In relation to these IRBs, Boeing
continues directly to receive the tax benefits de riving from the IRBs because Boeing maintained its
leasehold interest in the Project Property, rather than selling it to Spirit. It subleases the Project
Property to Spirit.1986
7.663 The third row identifies IRBs is sued to Boeing following the sale to Spirit in 2005. Despite
the sale, the City of Wichita has continued to issue IRBs to Boeing. According to the
European Communities, the Project Property associated with these issuances is used by Boeing to
continue building LCA parts on its old Boeing Wichita facilities. 1987 Therefore, the tax abatements

1985 See European Communities' first written submission, para. 299, Figure 3.
1986 European Communities' first written submission, para. 311.
1987 European Communities' first written submission, paras. 308-310. The European Communities cites
an exhibit listing the Project Property for a 2005 IRB issuance to Boeing. The list is preceded by a statement
that Boeing may locate and use the Project Property "on real property either owned by The Boeing Company or
owned by Spirit Aerosystems Inc" (Exhibit A to the Boeing IRB Lease Agreements from 1994-2005, Exhibit
EC-187). According to the European Communities, this suggests that Boeing uses the Project Property to
continue building LCA parts on its old Boeing Wichita facilities. The European Communities states that this is
confirmed by the fact that Boeing continues to own and fu rnish tooling at Spirit's facilities in Wichita to help
Spirit manufacture parts for Boeing LCA.

BCI deleted, as indicated [***]

arising from the IRB issuances to Boeing, after the sale to Spirit, continue to benefit Boeing's LCA
division.1988
7.664 The final row of the table identifies IRBs issu ed to Spirit after the sale of Boeing Wichita.
The European Communities argues that the benefit of the tax abatements arising from the IRBs issued
to Spirit has "passed-through" to Boeing.1989
(iii) Terms of reference: future measures
Arguments of the United States
7.665 The United States argues that a "future measure" is a measure "not in existence at the time of
Panel establishment" and that all such measures are outside a panel's terms of reference.1990
7.666 To provide context to the United States' al legation that the European Communities is
attempting to include "future measures" within its claim, we note that the following sequence of
events occurred in the period 2005-2006:
(a) 17 May 2005: the City of Wichita issued a letter of intent ("the 2005 LOI")
indicating its intention to issue Spirit $1 billion in IRBs over a period of five years;
(b) 16 June 2005: Boeing sold its Boeing Wichita facility to the company now known as
Spirit;
(c) December 2005: Pursuant to the 2005 LOI, th e City of Wichita issued IRBs to Spirit
to the value of $80 million;
(d) January 2006: the European Communities re quested establishment of a Panel in this
dispute; and
(e) November 2006: Pursuant to the 2005 LOI, th e City of Wichita issued IRBs to Spirit
to the value of $252 million.
7.667 The United States contends that the second set of IR Bs issued by the City of Wichita to Spirit
in November 2006 are "future measures". The Unite d States asserts that the European Communities
is not challenging the State of Kansas' IRB statute. Rather it is challenging a series of actions taken
by the Wichita City Council pursuant to the IRB statute. 1991 The second set of IRBs was issued to
Spirit when the Wichita City Council passed a city ordinance in November 2006, after the request for
the establishment of the Panel.1992
7.668 In addition to arguing that the IRBs issued to Spirit under the November 2006 ordinance are
outside the Panel's terms of reference, the United States also submits that "any other IRBs that the
Wichita City Council may choose to issue to Spirit in the future pursuant to new city ordinances that it
may pass are also future measures that ar e outside the Panel's terms of reference". 1993 In calculating
the amount of the tax abatements arising from th e IRBs, the European Co mmunities operates on the
assumption that the 2005 LOI to Spirit will be fully utilized. Therefore, in its quantification, the
European Communities also includes tax abatements arising from IRBs it assumes will be issued to

1988 European Communities' first written submission, paras. 308-310.
1989 European Communities' first written submission, para. 316.
1990 United States' response to question 12, para. 23.
1991 United States' response to question 12, para. 24.
1992 United States' response to question 12, para. 24.
1993 United States' response to question 12, para. 24.

BCI deleted, as indicated [***]

Spirit between 2006-2009 (i.e. within the term of the LOI, but after the request for establishment of
the Panel). There is also a 1999 LOI expressing an in tent to issue IRBs to Boeing over a period of ten
years. The European Communities assumes that the value of this LOI will also be fully utilized
because in the past Boeing has always taken full advantage of its LOIs. 1994 Therefore, the
European Communities includes in its quantification tax abatements arising from IRB issuances that it
assumes will occur between 2006-2009 pursuant to the 1999 LOI. Given that the United States
challenges as future measures "any other IRBs that the Wichita City Council may choose to issue to
Spirit in the future pursuant to new city ordinan ces", the United States contests the inclusion within
the Panel's terms of reference of the future IRB issuances under the 2005 and 1999 LOIs, which are
predicted by the European Communities.
Arguments of the European Communities
7.669 The European Communities "genera lly agrees" with the United St ates' definition of a future
measure.1995 The European Communities defines it as a "mea sure that was not in existence and/or not
committed to at the time the Panel was established". 1996 However, the European Communities argues
that none of the measures in issue in this dispute ar e future measures. In any event, future measures
are not necessarily excluded from a panel's terms of reference.1997
7.670 According to the European Comm unities, the United States is inco rrect in asserting that IRBs
issued to Spirit from November 2006 onwards are future measures. The European Communities
asserts that "individual IRB ordinances enacted by the Wichita City Council are not the only measures
at issue in this dispute when it comes to the Eur opean Communities' challenge to the City of Wichita
IRBs".1998 With respect to the IRBs issued to Sp irit, the European Communities challenges all
property and sales tax abatements provided to Spirit pursuant to KSA section 79-201a, KSA section
79-3606 and KSA section 79-3640 (t he sections of the Kansas legislation providing for tax
abatements for Project Property), as a result of I RBs issued to Spirit pursuant to KSA sections 12-
1740 et seq, under the authority of the 2005 LOI issued by the Wichita City Council .1999 The 2005
LOI and each of the cited KSA provisions were prope rly referenced in the panel request and were
measures in existence prior to the request for establis hment of a Panel. Therefore, according to the
European Communities, all the property and sales tax abatements provided to Spirit as a result of
IRBs issued under the authority of the 2005 LOI are properly within the Panel's terms of reference,
whether or not the actual IRB issuance took place before or after the Panel was established.2000
7.671 Even if the second set of IRBs issued to Spirit were "future measures", the European
Communities asserts that they are not outside the Panel's terms of reference. The European
Communities relies on the Appellate Body's statement in EC – Chicken Cuts in this regard:
"The term 'specific measures at issue' in Article 6.2 suggests that, as a general rule,
the measures included in a Panel's terms of reference must be measures that are in
existence at the time of the establishment of the Panel. However, measures enacted

1994 Under the LOIs, the City of Wichita expresses an intent to issue IRBs to the company in question
up to a certain value. The IRBs are then granted in a series of separate issuances, up until the value of IRBs
cited in the LOI is reached.
1995 European Communities' comments on United States' response to question 12, para. 29.
1997 European Communities' response question 12, para. 38 and European Communities' comments on
United States' response to question 12, para. 29.
1998 European Communities' comments on United States' response to question 12, para. 32.
1999 European Communities' comments on United States' response to question 12, para. 32.
2000 European Communities' comments on United States' response to question 12, para. 32.

BCI deleted, as indicated [***]

subsequent to the establishment of the P anel may, in certain limited circumstances,
fall within a Panel's terms of reference." 2001
7.672 The European Communities also relies on a line of authority relating to the inclusion of
measures within a panel's terms of reference wher e the measures are not explicitly mentioned in the
panel request, but are closely related to measures th at are so mentioned and the respondent party has
adequate notice of the scope of the claims against it. 2002 The European Communities argues that the
United States was on notice that the challenge in this dispute encompassed each IRB issuance made to
Spirit pursuant to the 2005 LOI. The LOI itself in dicated that the Wichita City Council intended to
issue IRBs to Spirit in "an amount not to exceed $1,000,000,000…for a period of five years, ending
May 17 2010". 2003 Further, each IRB issuance to Spirit is identical in structure and effect to the
annual IRB issuance made to Boeing every year si nce 1979. Therefore, the European Communities
argues that the Spirit IRB ordinances enacted under the 2005 LOI are "so closely related" to the IRB
ordinances enacted prior to the estab lishment of the Panel, that they must be within the Panel's terms
of reference.2004
Evaluation by the Panel
7.673 The issue between the parties is whether the set of IRBs issued by the City of Wichita to
Spirit in November 2006 is within the terms of refe rence of the Panel. The United States contends
that the IRBs are "future measures" and theref ore cannot be considered by the Panel. The
United States also argues that the IRB issuances that the European Comm unities expects to occur
under future ordinances, between 2007-2009 under th e existing 1999 and 2005 LOIs, are outside the
Panel's mandate.
7.674 Therefore, the issue before us is whethe r ordinances that post-date the request for
establishment of the Panel are "future measures" and therefore outside its terms of reference. This is a
separate issue to whether or not all measures were specifically identified in the panel request in
accordance with Article 6.2 of the DSU, which is not challenged by the United States.
7.675 There is disagreement between the parties rega rding the measure that is under challenge in
relation to the IRBs issued to Spirit in November 2006. The United States submits that "the EC is not
challenging the State of Kansas' IRB statute. Rather it is challenging a series of actions taken by the
Wichita City Council pursuant to the IRB statute". 2005 In contrast, the European Communities argues
that:
"With regard to Spirit IRBs, what the European Communities challenges in this
dispute are all property and sales tax abatements provided to Spirit pursuant to KSA
§79-201a, KSA §79-3606, and KSA §79-3640, as a result of IRBs issued to Spirit
pursuant to KSA §§12-1740 et seq, under the authority of the 17 May 2005 letter of
intent issued by Wichita City Council." 2006
7.676 Therefore, the European Communities argues that the measures it is challenging in relation to
the IRBs issued to Spirit in November 2006 (and beyond) are the relevant Kansas statutory
provisions, the 2005 LOI and the tax abatements provided pursuant to these measures.

2001 European Communities' comments on United States' response to question 12, para. 33 (emphasis
added).
2002 European Communities' comments on United States' response to question 12, paras. 33 and 34.
2003 European Communities' comments on United States' response to question 12, para. 34.
2004 European Communities' comments on United States' response to question 12, para. 34.
2005 United States' response to question 12, para. 24.
2006 European Communities' comments on United States' response to question 12, para. 32.

BCI deleted, as indicated [***]

7.677 The panel request submitted by the European Communities provides, relevantly:
"This dispute concerns prohibited and acti onable subsidies provided to and benefiting
the US producers of large civil aircraft (the US LCA industry)…The measures are
currently reflected in and derive from the following:
1. State and Local Subsidies
US States and local authorities…transfer in various ways economic resources to the
US LCA industry.
These economic resources include numerous financial incentives and other
advantages effectuated, for example, through tax breaks, bond financing…
…
b) State of Kansas
Governmental authorities in the State of Kansas,…provide incen tives, including bond
financing, tax benefits and other a dvantages, to the US LCA industry, inter alia ,
through the following:
…
-- Property and sales tax abatements pursu ant to KSA §79-201a, as amended, KSA
§79-3606, as amended, and KSA §79-3640, as amended, associated with Industrial
Revenue Bonds…issued for the financing of US LCA industry projects by the City of
Wichita pursuant to KSA §§12-1740 et seq, including, but not limited to, those
authorized by the following Ordinances of the Wichita City Council:
• Wichita City Council Ordinance No. 46-818 authorizing $80 million in
IRBs for Spirit Aerosystems, Inc., dated 15 November 2005;
• {Followed by a list of another 15 such Ordinances}
…
Letters of intent for IRBs for the US LCA industry, including, but not limited to,
those issued pursuant to actions of th e Wichita City Council taken on 17 May 2005,
13 July 2004, 9 November 1999."
 2007
7.678 The provisions of the KSA referred to in the European Communities' panel request, and
which it relies upon as the measures under challenge, are the provisions which authorize cities to issue
IRBs and which provide for property and sales ta x exemptions on property financed with IRB
proceeds. The 2005 LOI expresses the intent of the City of Wichita to issue up to $1 billion in IRBs,
subject to the final approval of the terms of th e ordinance and other related documents. The issue
before us is whether challenging these measures has the result that the set of IRBs issued in
November 2006, and the IRBs the European Co mmunities assumes will be issued up until 2009
(under the 1999 and 2005 LOIs), fall within the terms of reference of the Panel.

2007 Request for Establishment of a Panel by the European Communities, WT/DS353/2.

BCI deleted, as indicated [***]

Prior cases to have considered this issue
7.679 In order to resolve the issue raised by the par ties, the Panel needs to identify the "measure at
issue" in relation to the November 2006 IRB issuance (and the other predicted IRB issuances) and to
decide whether it is within the Panel's terms of referen ce. In this regard, it is useful to review the way
in which previous panel and Appella te Body reports have dealt with similar issues relating to "future
measures".
7.680 The Appellate Body has held that, as a general rule , to be within a panel's terms of reference,
a measure must be in existence at the time of establishment of the panel. 2008 This general rule has
been applied in a number of cases, including by the panel in US – Upland Cotton . In that case, the
panel held that the Agricultural Assistance Act of 2003, which was not enacted until after the request
for establishment of a panel, was not within its terms of reference. 2009 The panel reasoned that at the
time of the panel request, the Agricultural Assistance Act "did not exist, had never existed and might
not subsequently have ever come into existence". 2010 Brazil's claim in relation to the legislation was
"entirely speculative". 2011 The panel noted that the legislati on could not be considered to be an
amendment to, or a measure implementing, any of the measures within the panel's terms of
reference.2012 The Appellate Body recently noted that this finding was never appealed.2013
7.681 The Appellate Body has recognized that there are exceptions to the general rule that a
measure must be in existence at the ti me of establishment of the panel. In EC – Chicken Cuts, the
Appellate Body noted:
"The term 'specific measures at issue' in Article 6.2 suggests that, as a general rule,
the measures included in a Panel's terms of reference must be measures that are in
existence at the time of the establishment of a Panel. However, measures enacted
subsequent to the establishment of the Panel may, in certain limited circumstances,
fall within a Panel's terms of reference."
 2014
7.682 The most frequently applied exception is that relating to amendments to measures in existence
at the time of a panel request. In Chile – Price Band System , the Appellate Body held that an
amendment made to a measure after the request for establishment of the panel was within the panel's
terms of reference. This was because the pane l request was broad enough to cover the measure as
amended, because the amendment did not change the essence of the measure as it existed at the time
of the panel request and because it was necessary to consider the measure as amended in order to
secure a positive solution to the disput e. Further, the panel noted th at neither party objected to the
inclusion within the panel's terms of reference of the measure as amended.
2015 This reasoning has
been applied in a number of other disputes.2016

2008 Appellate Body Report, EC – Chicken Cuts, para. 156.
2009 Panel Report, US – Upland Cotton, paras. 7.157-1.171. For another example of a Panel ruling
"future measures" outside its terms of reference, see Panel Report, EC – Commercial Vessels , where the Panel
noted at para. 7.30 that even at the time of writing the report, the measures in question remained "hypothetical
future measures".
2010 Panel Report, US – Upland Cotton, para. 7.158.
2011 Panel Report, US – Upland Cotton, para. 7.158.
2012 Panel Report, US – Upland Cotton, para. 7.170.
2013 Appellate Body Report, US – Zeroing (Japan) (Article 21.5 - Japan), para. 127.
2014 Appellate Body Report, EC – Chicken Cuts, para. 156.
2015 Appellate Body Report, Chile – Price Band System, paras. 135-144.
2016 See e.g. Panel Report, Colombia – Ports of Entry , para. 7.52; Panel Report, India – Additional
Import Duties , paras. 7.56-7.72; Appellate Body Report, Brazil –Aircraft , para. 132 and Panel Report,
Argentina – Footwear, paras. 8.40-8.46.

BCI deleted, as indicated [***]

7.683 In addition to the cases regarding amendments to measures within a panel's terms of
reference, a limited number of panels have used other reasons to justify inclusion of a "future
measure" within their terms of reference. In US – Zeroing (Japan) (Article 21.5 - Japan), the panel
held that an administrative review under the United States' anti-dumping system, that did not exist at
the time of the panel request but that had been initiate d, was within its terms of reference. The panel
reasoned that, although the parties treated the administrative reviews as individual measures, they
were part of a chain of measures or a conti nuum, the purpose of which was the ongoing assessment of
anti-dumping duties under the same anti-dumping order. Each new administrative review superseded
the previous one and the review in issue, although not itself in existence at the time of the panel
request, formed a part of this existing chain. Given the existence of this "chain" and the fact that the
review in issue had been initiated (although not comp leted) at the time of the panel request, the claim
in relation to it was "entirely predictabl e", rather than "entirely speculative". 2017 The Appellate Body
agreed that the measure was prope rly within the panel's terms of reference but tied its conclusion
closely to the fact that the proceedings were compliance proceedings under Article 21.5.2018
7.684 In a similar manner, the panel in Australia – Salmon (Article 21.5 - Canada) included within
its terms of reference a ban on the importation of salmon that was introduced by Australia after the
panel's establishment. The panel held that, in the context of an Article 21.5 compliance panel,
measures taken subsequently to the establishment of a panel should not per force be excluded from a
panel's mandate. 2019 The panel's reasoning in this regard was closely linked to the nature of
compliance proceedings. In particular, the panel st ated that implementation is often an ongoing or
continuous process and for this r eason "there may be different and, arguably, even more compelling
reasons to examine measures introduced during the proceedings". 2020 Therefore, the reasoning in this
case appears largely to be confined to compliance panels established under Article 21.5 of the DSU.
7.685 In EC – Selected Customs Matters, the parties raised an issu e regarding the "temporal
limitations of the Panel's terms of reference". 2021 In this case, the Appellate Body held that the
measures in issue were certain legal instruments iden tified in the panel request, and that the claim in
relation to them was that they were not administered in a manner consistent with Article X:3(a) of the
GATT 1994. In relation to acts of administra tion pre-dating and post-dating the request for
establishment of the panel, the Appellate Body noted that such acts of administration were evidence,
rather than the relevant measures in issue and therefore, there was no temporal limitation associated
with the administrative acts that the panel could consider:
"{I}t is important to distinguish between, on the one hand, the measures at issue and,
on the other hand, acts of administration that have been presented as evidence to
substantiate the claim that the measures at issue are administered in a manner
inconsistent with Article X:3(a) of th e GATT 1994. The Panel failed to make the
distinction between measures and pieces of evidence. While there are temporal
limitations on the measures that may be with in a Panel's terms of reference, such
limitations do not apply in the same way to evidence. Evidence in support of a claim
challenging measures that are within a Panel's terms of reference may pre-date or
post-date the establishment of the Panel."
 2022

2017 Panel Report, US – Zeroing (Japan) (Article 21.5 - Japan), para. 7.116.
2018 Appellate Body Report, US – Zeroing (Japan) (Article 21.5 - Japan), paras. 120-130.
2019 Panel Report, Australia – Salmon (Article 21.5 – Canada), para. 7.10, sub-paras. 27-28.
2020 Panel Report, Australia – Salmon (Article 21.5 – Canada), para. 7.10, sub-paras. 27-28.
2021 Appellate Body Report, EC – Selected Customs Matters, paras. 177-189.
2022 Appellate Body Report, EC – Selected Customs Matters, para. 188 (emphasis in original).

BCI deleted, as indicated [***]

7.686 One of the preliminary rulings the panel was required to make in US – Upland Cotton is also
relevant to the issues raised by the parties in the present dispute. 2023 In US – Upland Cotton , the
United States argued that to the extent Brazil ch allenged cottonseed payments, as opposed to legal
instruments "as such", payments made after the da te of establishment of the panel were outside the
panel's terms of reference. In that case, Brazil' s panel request identified the legislation and the
programmes under which the cottonseed payments we re authorized. The panel noted that the
legislative and regulatory provisions under which the pa yments were made entered into effect prior to
the consultations and remained in place throughout the panel proceeding. Given that the relevant
programmes and legislation were within the panel' s terms of reference, the panel ruled that the
payments made under those programmes and legislati on, even if made after the date on which the
panel was established, were w ithin its terms of reference. 2024 The panel noted that "other
considerations" also supported its conclusion. One such consideration was that Brazil's panel request
specifically indicated that some of the payments at issue were provided in the past, some were
currently being provided and others would be provided in the future. The panel noted that this put the
respondent on notice that subsequent payments were in issue. 2025 The panel also held that the
"evidence before a Panel is a separate issue from th e measures within its terms of reference" and that
it is not disputed that a panel may look at eviden ce that comes into existence after the date of the
request for establishment of a panel.2026
Conclusion on the facts of this case
7.687 The European Communities argues that the measures under challe nge are the tax abatements
provided under the relevant Kansas legislation and th e 2005 LOI. As a starting point for the analysis
of whether the tax abatements arising due to th e 2006 IRB issuance are within the Panel's terms of
reference, we note that neither party contests that the relevant Kansas legislation cited in the panel
request and the 2005 LOI are measures within the Pa nel's mandate. The case law reviewed above
provides some guidance regarding whether the 2006 I RBs issued pursuant to these measures, and the
IRBs the European Communities predicts will be issued between 2007-2009, are also within the
Panel's terms of reference.
7.688 At first glance, it seems that the issuance of the 2006 IRBs (and the predicted issuance of
IRBs in 2007-2009) are measures that come into existence after the panel request and therefore,
according to the general rule in EC – Chicken Cuts, are outside the Panel's terms of reference. The
series of cases in which "future measures", in the form of amendments to measures within a Panel's
terms of reference, are treated as an exception to the general rule in EC – Chicken Cuts, does not seem
applicable in the present case. Th e IRBs issued after the panel request, and the consequent tax
abatements, are not readily characterized as modi fications to existing measures and neither party
attempts to argue that this is the case. Therefore, the reasoning in Chile – Price Band System does not
advance our analysis. Further, given that th e present case is not a compliance proceeding under
Article 21.5, the reasoning used in Australia – Salmon (Article 21.5 - Canada) and US – Zeroing
(Japan) (Article 21.5 - Japan), to incorporate a measure implemented after the establishment of the
Panel, is not applicable.
7.689 In the present dispute, the legislation and the LOI under which the November 2006 IRBs were
issued were in effect prior to the request for establishment of the Panel and were identified in the
panel request. Therefore, the legislation and the LOI are within the Panel's terms of reference.
KSA section 12-1740a, which is one of the provisions of the Kansas legislation referenced in the
panel request, provides that a city council must issue an approved LOI before any IRBs may be

2023 Panel Report, US – Upland Cotton.
2024 Panel Report, US – Upland Cotton, para. 7.187.
2025 Panel Report, US – Upland Cotton, paras. 7.188-7.189.
2026 Panel Report, US – Upland Cotton, paras. 7.192-7.193.

BCI deleted, as indicated [***]

issued. Further, the 2005 LOI issued by the City of Wichita expresses the intent of the City to issue
IRBs (up to the value of $1 billion). Although the LOI is subject to various conditions and is not a
firm commitment that the bonds will be issued, th e LOI provides the conditional authority for the
issuance of IRBs over a certain period of time (five years in the case of the 2005 LOI). Therefore,
this is a case where there is particular legislation in operation in the State of Kansas, providing for the
issuance of IRBs which give rise to tax advantages. The legislation is implemented via LOIs and both
the legislation and the 2005 LOI were in existence at the time of the panel request and are undeniably
within the Panel's terms of reference. In these ci rcumstances, we find that the IRBs issued under the
authority of these measures, even if after the time of the panel request, are within the Panel's terms of
reference. Our conclusion finds support in one of the panel's preliminary rulings in US – Upland
Cotton. In that case, payments made after the panel re quest, but authorized under legislation within
the panel's terms of reference, were found to be w ithin the panel's terms of reference. We also note
that the LOIs referenced in the panel request conveye d the City' s intention to issue IRBs for a certain
period of time into the future (e.g. for five years in the case of the 2005 LOI). This put the
United States on notice that subsequent IRBs were in issue.
7.690 The effect of this reasoning is to include with in the Panel's mandate IRBs that the European
Communities predicted would continue to be issued to Boeing and to Spirit under existing LOIs, in
years post-dating its written submissi ons. However, we do not consider this to be analogous to the
"entirely speculative" claim referred to in one of the preliminary rulings in US – Upland Cotton . In
US – Upland Cotton, there was no legislation or any other instru ment in existence at the time of the
panel request. Brazil was speculating about the future existence and content of such legislation. In
the present dispute, at the time of the panel request there was legislation in existence, including
measures implementing the legislation (LOIs). The 2005 LOI provided a clear indication of what
further implementing action would occur in the future, namely the issuance of IRBs under ordinances.
Although the LOI set a cap on the value of IRBs authorized under it, it was not possible to know in
advance the value of IRBs to be issued under each futu re ordinance. However, we consider this to be
relevant to the merits and the quantification of the European Communities' claim, rather than
precluding us from considering the substance of the claim arising in relation to these IRBs.
7.691 For these reasons, the Panel finds that IRBs issued in November 2006 under the 2005 LOI,
and subsequent IRB issuances under the 2005 LOI, are within the Panel's terms of reference. The
Panel also finds that IRBs issued under the 1999 LOI are within the Panel's terms of reference.
(iv) Whether a subsidy exists within the meaning of Article 1 of the SCM Agreement
Arguments of the European Communities

7.692 The European Communities argu es that the state and local property and sales tax breaks
granted to Boeing and Spirit through the issuance of IRBs are financial contributions under the SCM
Agreement. In particular, the European Co mmunities contends under the "IRB programme", the
State, Sedgwick County, the City of Wichita and local school districts are required to forego tax
revenue that they would otherwise have collected from Boeing and Spirit. This constitutes a financial
contribution under Article 1.1(a)(1)(ii) of the SCM Agreement.2027
7.693 The United States argues that there is no fina ncial contribution associated with the IRBs
because, as of July 2006, the State of Kansas no longer assesses property tax on commercial and
industrial machinery and equipment, and as of Ju ly 2000 does not assess sales tax on such machinery
and equipment. The European Communities rejects th is argument. It notes that the property tax
abatements on commercial and industrial machinery and equipment granted prior to July 2006 and the
sales tax abatements on such machinery and equipmen t granted prior to July 2000 constitute financial

2027 European Communities' first written submission, para. 319.

BCI deleted, as indicated [***]

contributions under Article 1.1(a)(1)(ii) of the SCM Agreement . According to the
European Communities, the United States does not dispute this.2028
7.694 Further, the change to the Kansas taxation le gislation regarding property tax on commercial
and industrial machinery and equipment states th at only "commercial and industrial machinery and
equipment acquired … after June 30, 2006 " is exempt from property taxation.2029 All such machinery
and equipment acquired prior to this date is still taxed. Therefore, all commercial and industrial
machinery and equipment acquired prior to June 2006 will continue to be exempt from property taxes
for the term of the IRBs, namely for a period of 10 years. For example, property acquired in
January 2006 is subject to property tax, but is exempt from it under the IRB scheme until
January 2016.2030
7.695 The European Communities also refutes the United States' submission by noting that Boeing
and Spirit have received, and will continue to r eceive, otherwise unavailable property tax breaks with
respect to property that is not considered to be commercial or industrial machinery or equipment and
which, but for the IRBs, is still subject to property taxes in Kansas. 2031 The same argument applies in
relation to the improvement, repair and remode ling of commercial and industrial machinery and
equipment because the change to Kansas law re peals property taxes only in relation to the acquisition
of "commercial and industrial machinery and equipm ent". In contrast, IRBs provide property tax
exemptions with respect to "any property constructed or purchased" with IRB proceeds".2032
7.696 The European Communities submits that the IRBs in issue have resulted in, and continue to
result in, the foregoing of revenue otherwise due with respect to property taxes on all real
property.2033 Although the United States ar gues that the majority of property acquired by Boeing and
Spirit with IRB funds was personal property, not real property, the European Communities argues that
while this may be true, both companies nonetheless u sed a significant amount of the IRB proceeds to
purchase real property. Further, given the change in the Kansas taxation law regarding commercial
and industrial machinery and equipment, in the futu re it is likely that Boeing and Spirit will use an
increased proportion of their IRB proceeds to purchase real property.2034
7.697 The European Communities argues that, despite the change in law regarding sales tax
exemptions, effective in 2000, the State of Kansas and its subdivisions continue to forego sales tax
revenue that would otherwise be due. Although the Kansas taxation legislation was amended so that
sales tax is no longer assessed on commercial and i ndustrial machinery and e quipment, several types
of machinery and equipment are excluded from this general sales tax exemption. This includes
machinery and equipment used for non-production purposes, maintenance and repair equipment,
certain office machines and equipment and certain building fixtures. According to the European
Communities, these are all types of property that Boeing and Spirit purchase with their IRB
proceeds.2035 Indeed, in the May 2005 LOI for the issuan ce of IRBs to Spirit, the City of Wichita
stated that the issuance would r esult in an estimated $2 million in sales tax exemptions for Spirit. 2036
Therefore, through the issuance of IRBs, the Stat e of Kansas and its subdivisions forego sales tax
revenue that would otherwise be due.

2028 European Communities' second written submission, para. 214.
2029 European Communities' second written submission, para. 218.
2030 European Communities' second written submission, paras 217-218.
2031 European Communities' second written submission, para. 219.
2032 European Communities' second written submission, para. 219.
2033 European Communities' second written submission, para. 221.
2034 European Communities' second written submission, para. 222.
2035 European Communities' second written submission, para. 223.
2036 European Communities' second written submission, para. 223.

BCI deleted, as indicated [***]

7.698 Finally, the European Communities concludes th at Boeing and Spirit have every incentive to
use their IRB proceeds toward the purchase of property other than commercial and industrial
machinery and equipment. If it were not possible for Boeing and Spirit to receive tax abatements
through the IRBs, they would not have bothered a pplying for IRB issuances in November 2006 to the
value of $272 million.2037 The United States acknowledges that the sole purpose of the IRB issuances
to Boeing and Spirit is to provide the companies with property and sales tax breaks and that "there are
transaction costs associated with a bond issuance".2038 Therefore, the European Communities submits
that this demonstrates that Boeing and Spirit continue to receive tax exemptions as a result of the IRB
issuances, otherwise these companies would have no incentive to continue to apply for IRBs.2039
7.699 In relation to the existence of a benefit unde r Article 1.1(b) of the SCM Agreement, the
European Communities argues that Boeing directly be nefits from the tax breaks associated with all
the IRBs issued by the City of Wichita on Boei ng's behalf. Further, the European Communities
submits that Boeing is the ultimate beneficiary of the tax breaks associated with the IRBs issued on
Spirit's behalf, as the benefit passes-through from Spirit to Boeing. 2040 The European Communities'
pass-through arguments are outlined in the section quantifying the amount of the Kansas measures,
for the reasons expressed at paragraph 7.214 of this Report.
7.700 In relation to the tax breaks that are granted to Boeing and to Spirit, the
European Communities notes that they lower the tax burden on property acquired and used by Boeing
and Spirit in developing and producing parts for Boeing LCA. Further, the European Communities
submits that the panel in US – FSC concluded that the foregoing of government revenue that would
otherwise be due "clearly confers a benefit".
2041 The European Communities concludes:
"In sum, these IRB-related tax breaks conf er benefits on Boeing's LCA division
within the meaning of Article 1.1(b) of the SCM Agreement. That is, these tax
breaks relate explicitly to the production of commercial aircraft and are ultimately
provided to Boeing's LCA division on non-market terms." 2042
Arguments of the United States
7.701 In its first written submission, the United States argues that, as of 1 July 2006, Kansas no
longer assesses property tax on commercial and industrial machinery and equipment. Further, in 2000
Kansas stopped assessing sales tax on such machinery an d equipment. Therefore, even without the
IRBs, there would be no taxation revenue due to Kansas or its s ubdivisions on any commercial or
industrial machinery or equipment, which represents most of the property that Boeing and Spirit have
financed with IRBs. 2043 Most of Boeing's IRB proceeds have been used to finance personal rather
than real property. The United States concludes:
"{T}he vast majority of property acquired {with IRB proceeds} would be tax exempt
in any event; no government revenue on this property is being foregone as a result of
the IRBs. There is accordingly no financ ial contribution under Article 1.1(a)(1)(ii)
with respect to the vast majority of property identified by the EC." 2044

2037 European Communities' second written submission, para. 214.
2038 European Communities' second written submission, para. 214.
2039 European Communities' second written submission, para. 214.
2040 European Communities' first written submission, paras. 327-328.
2041 European Communities' first written submission, para. 332.
2042 European Communities' first written submission, para. 333.
2043 United States' first written submission, para. 594.
2044 United States' first written submission, para. 594.

BCI deleted, as indicated [***]

7.702 In its response to a Panel question, the United St ates concedes that it does not contest that the
general property tax exemption on machinery a nd equipment applies only to commercial and
industrial machinery and equipm ent acquired after 30 June 2006. 2045 However, the United States
submits that while the change in Kansas taxation law did not eliminate the incentive to apply for
IRBs, it reduced it because most of the property acquired by Boeing with IRB proceeds has been
property that is now tax exempt.2046
7.703 The United States does not seem to contest that there is a financial contribution under
Article 1.1(a)(1)(ii) of the SCM Agreement in relation to property acquired with IRB proceeds that,
but for the IRBs, remains subject to property and to sales tax.
7.704 Finally, the United States repeats its argument that revenue to be foregone in the future "does
not meet the definition of a financial contributi on within the meaning of Article 1.1(a)(1)(ii)". 2047
Although the United States bases its argument in Article 1, dealing with the existence of a financial
contribution, it includes the argument within the "amount" section of its submissions.
7.705 The United States concedes that the tax breaks a ssociated with the IRBs provide a benefit
within the meaning of the Article 1.1(b) of the SCM Agreement. However, the United States does not
agree that the benefits of the tax breaks received by Spirit pass-through to Boeing.2048
Evaluation by the Panel
7.706 As indicated in our analysis of the Wash ington taxation measures, the Appellate Body
established in US – FSC that where a general rule of taxation can be identified, it is possible to apply a
"but for" test in determining whether reve nue that is otherwis e due is foregone under
Article 1.1(a)(1)(ii) of the SCM Agreement.2049 Where it is not possible to identify a general rule, the
challenged taxation measure should be compared to the fiscal treatment of legitimately comparable
income.2050
7.707 Although the United States highlights that an am endment to the Kansas taxation legislation
renders some property tax-free regard less of the tax abatements arising through the issuance of IRBs,
the parties agree that it is only the purchase of commercial and industrial machinery and equipment
after 30 June 2006 that is no longer subject to propert y tax in any event, and since July 2000 has not
been subject to sales tax. In its first written su bmission, the United States seems to have taken a
broader view of the 2006 amendment to the Kansas taxation legislation than it later concedes to be the
case. In its first written submission, the United States appears to be of the view that from 1 July 2006
no commercial and industrial machinery and equipment will be subject to property tax. Therefore, the
United States suggests that the IRBs that have been issued in the past and ha ve been used to purchase
such property will no longer give rise to tax abatem ents and a financial contribution. However, in
response to Panel questioning, the United States recognizes that the amendment to the taxation

2045 United States' response to question 46, para. 122.
2046 United States' response to question 46, para. 122.
2047 United States' response to question 253, para . 432 and United States' first written submission,
para. 639.
2048 The summary of the parties' arguments regarding "pass-through", and our analysis of them, is
included in the section of this Report quantifying the amount of the Kansas measures for the reasons expressed
2049 Appellate Body Report, US – FSC, para. 90.
2050 Appellate Body Report, US – FSC, para. 91.

BCI deleted, as indicated [***]

legislation only creates a tax exemption for property purchased after 30 June 2006 and that property
purchased previously will continue to be subject to taxation, but for the IRBs.2051
7.708 As the European Communities notes, and as the Un ited States appears to concede, there is a
range of property that remains subject to property or to sales tax in the State of Kansas. This includes:
(a) Commercial and industrial machinery and equipment acquired before 2006 (whether
or not the 10 year abatement period under the IRB scheme had expired by 2006);2052
(b) Property that is not commercial or industrial machinery or equipment;
(c) The improvement, repair or remodeling of commercial and industrial machinery and
equipment (because the property tax exem ption for commercial or industrial
machinery and equipment applies only to the acquisition of such property);
(d) Real property (since 'commercial and industr ial machinery and equipment' is defined
as 'tangible personal property'); and
(e) Machinery and equipment excluded from the sales tax exemption.2053
7.709 Therefore, the "general rule" of taxation in Ka nsas is that the property listed in the preceding
paragraph is subject to property or to sales tax. Gi ven that it is possible to identify a general rule for
taxation, then according to th e Appellate Body report in US – FSC, it is appropriate to apply a "but
for" test in determining if the government is foregoing revenue that is "otherwise due" under
Article 1.1(a)(1)(ii) of the SCM Agreement. In a pplying this test, we find that the IRB legislation
creates exceptions to the general rule, by granting ta x abatements in relation to the property listed in

2051 The United States recognizes this in its respon se to question 46, where its submissions regarding
the change in Kansas taxation law go to the incentive that Boeing and Spirit will have to continue to seek IRBs
after June 2006.
2052 Kan. Stat. Ann. 79-223, Exhibit US-244. The amendment to the Kansas taxation law to which the
United States refers in its submissions is found in KSA section 79-223. It provides:

79-223 (b) The following described property, to the extent specified in this section, shall be
and is hereby exempt from all property or ad valorem taxes levied under the laws of the state
of Kansas:

First. Commercial and industrial machinery and equipment acquired by qualified purchase or
lease made or entered into after June 30, 2006 , as the result of a bona fide transaction not
consummated for the purpose of avoiding taxation.

2053 Kan. Stat. Ann. 79-3606(k)(1), Exhibit US-246. See sub-section (5) of KSA 79-3606(kk), which
lists property that remains subject to sales tax, following the amendment to the Kansas sales tax legislation
in 2000:

(a) Machinery and equipment used for non-production purposes;
(b) Machinery, equipment and tools used primarily in maintaining and repairing any type
of machinery and equipment or the building and plant;
(c) Transportation, transmission and distribution equipment not primarily used in
production , warehousing or material handling operation at the plant or facility;
(d) Office machines and equipment;
(e) Furniture and other furnishings;
(f) Buildings and any other part of real estate that is not otherwise exempt;
(g) Building fixtures that are not integral to the manufacturing operation; and
(h) Machinery and equipment used for general plant heating, cooling and lighting.

BCI deleted, as indicated [***]

the preceding paragraph when IRB funds are used to purchase such property. Therefore, "but for" the
relevant Kansas statutory provisions providing for tax breaks through the issuance of IRBs, taxes
would otherwise be due on the purchase of such property.
7.710 As indicated at paragraphs 7.155-7.158 of th is Report relating to the Washington HB 2294
taxation measures, due to the nature of our serious pr ejudice analysis, there is no need for the Panel to
make a finding regarding whether revenue to be foregone in the period post-2006 constitutes a
subsidy.
2054
7.711 For these reasons, the Panel finds that the IRB scheme results in the foregoing of revenue
otherwise due under Article 1.1(a)(1)(ii) of the SCM Agreement.
7.712 Given this conclusion , for the reasons expressed in relation to the Washington HB 2294
taxation measures the Panel finds that a benefit exists in relation to the foregoing of revenue otherwise
due.2055 We analyze the parties' arguments regardi ng "pass-through" in the amount section of this
Report, for the reasons expressed at paragraph 7.214.
(v) Whether the subsidy is specific within the meaning of Article 2 of the SCM Agreement
Arguments of the European Communities
7.713 The European Communities argues that the tax bene fits associated with the IRBs issued to
Boeing and Spirit are de facto specific within the meaning of Article 2.1(c) of the SCM Agreement .
This is because of the "predominant use" by Boeing and Spirit of the IRBs, "the granting of
disproportionately large amounts of subsidy" to Boeing and Spirit and the discretion exercised in
granting the IRBs and associated tax breaks.
2056
7.714 In relation to its submission that Boeing and Spirit receive a disproportionately large amount
of the subsidy, the European Communities submits that Boeing and Spirit have received 61 per cent of
all IRBs issued by Wichita through 2005. In add ition, Boeing and Spirit ha ve received 69 per cent of
IRBs that included property tax abatements. 2057 The European Communiti es also contends that,
assuming much of the Project Property is tangible personal property, Boeing and Spirit have received
a disproportionate amount of IRB-related sales tax exemptions granted by the City of Wichita.
Finally, in relation to the IRBs issued to companies purely for the purpose of tax breaks, rather than as
financing vehicles, the European Communities argues that it is likely that only Boeing and Spirit
received such IRBs. In any event, the European Communities requests that the Panel draw an adverse
inference that only Boeing and Spirit receive IRBs structured in this manner, due to the United States'
non-cooperation in the information-gathering process.2058
7.715 In its second written submission, the European Communities compares the statistics quoted in
the preceding paragraph with the size of Boeing and Spirit relative to the size of the Wichita
economy.2059 The European Communities assesses this by considering Boeing and Spirit's
employment as a percentage of local employment. The European Communities submits that in 2006,
Spirit accounted for 3.5 per cent of total employment in the Wichita metropolitan area or 16 per cent
of manufacturing employment in the same area. In response to the United States' submission that

2054 The Panel notes that as there is no Article 3 clai m with respect to the tax reductions arising out of
the IRBs, the Panel only need quantify the value of the subsidy for the purposes of the serious prejudice
analysis.
2055 See paras. 7.168-7.171 of this Report.
2056 European Communities' first written submission, para. 334.
2057 European Communities' first written submission, paras. 336-337.
2058 European Communities' first written submission, paras. 337, 339.
2059 European Communities' second written submission, paras. 248-249.

BCI deleted, as indicated [***]

citing Spirit employment levels is misleading b ecause Boeing's employment figures were nearly
double those of Spirit during the period in which the IRBs were issued, the European Communities
notes that it is prepared to accept this and the r esulting figures of 7 per cent and 32 per cent. The
European Communities concludes that comparing these figures with the 61 per cent of IRBs that
Boeing and Spirit received, "it is clear that Boeing and Spirit have received a disproportionate share
of IRB benefits".2060
7.716 In making this comparison, it is relevant to note that a Panel question regarding specificity
revealed that the parties have different views a bout the relevant baseline for determining whether
"disproportionately large" amounts of subsidy have been granted to certain enterprises.2061 The parties
seem to agree that the disproportionality analysis requires a comparison between two ratios and that
the first ratio is the ratio of the total amount of the alleged subsidy granted to Boeing relative to the
total amount of the alleged subsidy granted to all participants (i.e. in this case, the ratio indicating that
Boeing received 61 per cent of all IRBs issued or 69 per cent of all IRBs issued with tax
abatements).
2062 The parties disagree about the second ra tio. The European Communities contends
that the second ratio should be a ratio of some information about Boeing and Spirit, such as
employment levels, relative to comp arable information relating to the entire economy in the
jurisdiction of the granting authority (i.e. in this case the ratio i ndicating that Boeing made up 7 per
cent of employment in all of Wichita). For th e United States, the second ratio should compare the
information about Boeing and Spirit, such as empl oyment levels, with compar able information about
the group of recipients of the alleged subsidy (i.e. in this case, the percentage of employment Boeing
and Spirit account for out of the enterprises that have received IRBs).2063
7.717 The European Communities justifies its choice of baseline by referring to the chapeau to
Article 2.1, which provides that the question of wh ether a subsidy is specific must be considered
based on the situation "within the jurisdiction of the granting authority". Therefore, the
disproportionality analysis must consider the positi on of the recipients of the subsidy "within the
jurisdiction of the granting authority". 2064 Further, Article 2.1(c) provides that in considering the
various factors listed in the sub-paragraph, it is n ecessary to consider the "diversification of economic
activities within the jurisdiction of the granting authority ". The European Communities interprets
"jurisdiction" to mean the geographic territory over which the granting authority can extend or
exercise its powers. According to the European Communities, the United States' proposed baseline
fails to account for the "extent of diversification of economic activities within the jurisdiction of the
granting authority". This is because the United Stat es' proposed baseline is self-contained within the
realm of the particular subsidy programme in issue.
2065 The European Communities also notes that
the result of applying the United States' baseline in circumstances where only one company receives a
particular subsidy would be a finding that the co mpany does not receive a disproportionately large
share of the subsidy because it receives 100 per cent of the subsidy and accoun ts for 100 per cent of
employment in the group receiving the subsidy (i.e. it is the only member of the group). This would
circumvent the very purpose of Article 2.1(c).2066
7.718 In relation to its submission under Article 2.1(c) that the City of Wichita has exercised its
discretion in favour of Boeing and Spirit in gran ting the IRBs and subsequent tax breaks, the
European Communities argues that Boeing and Spir it have received specially tailored IRBs. For
example, the IRBs issued to Boeing and Spirit have not been used as financing vehicles. Further,

2060 European Communities' second written submission, para. 250.
2061 See European Communities and United States' responses to, and comments on, question 51.
2062 See United States' comments on European Communities' response to question 51, para. 161.
2063 United States' comments on European Communities' response to question 51, paras. 161-162.
2064 European Communities' response to question 51, para. 155.
2065 European Communities' response to question 51, paras. 156-157 and 161.
2066 European Communities' response to question 51, paras. 165-169.

BCI deleted, as indicated [***]

Boeing and Spirit have, since 1999, received the full 10 year property tax abatement without the five
year review and re-authorization which other companies require. 2067 Finally, there is a certain amount
of discretion in issuing the IRBs in the first place. For instance, in 1999 a health club was denied its
application.2068
7.719 In its first written submission, the European Communities states that no other companies,
apart from Boeing and Spirit, have received letters of intent for IRBs for values anywhere near $1
billion or $2 billion.2069 The European Communities does not make it clear whether this is relevant to
its argument about "predominant use" or disp roportionality. However, in its second written
submission, the European Communities clarifies this . It responds to the United States' submission
that another company, Cessna, has received IRBs totalling approximately $1 billion since 1991. The
European Communities argues this supports a findi ng of specificity because Boeing, Spirit and
Cessna have received approximately 78 per cent of IRBs issued through 2005. This constitutes use by
a limited number of certain enterprises, predominant use by certain enterprises and a disproportionate
grant of subsidies to certain enterprises.2070
Arguments of the United States
7.720 The United States' primary argument in relation to the tax breaks provided following the
issuances of IRBs is that the alleged subsidy is not specific. This is clear from the United States'
response to a Panel question in relation to the financial contribution analysis. 2071 The United States
briefly addresses the financial contribution question in a single paragraph before stating:
"More fundamentally, as the United States expl ained in previous submissions, the EC
has failed to establish that the IRB benefits are specific." 2072
The United States then uses the rest of its response to the question to discuss specificity.

7.721 The United States notes that the alleged subsidies arising as a result of the IRBs are not de
jure specific and notes that the European Communities concedes this by not arguing de jure
specificity under Article 2.1(a).
2073 The United States argues that th e Kansas law authorizing cities to
issue IRBs does not restrict the identity of bondholders. Rather, the relevant statute provides that "any
person, firm or corporation" across a broad range of sectors may have IRBs issued on their behalf.
This is consistent with the law's purpose, which is to promote the welfare of Kansas citizens by
attracting business activities to the State.2074
7.722 The United States also argues that the alleged subsidies are not de facto specific under
Article 2.1(c) of the SCM Agreement. The United States notes that the City of Wichita has issued
hundreds of IRBs and that the relevant IRB legislati on is not designed or applied specifically to assist
Boeing.2075

2067 European Communities' first written submission, para. 339 and European Communities' second
written submission, para. 252.
2068 European Communities' second written submissi on, para. 250 and European Communities' first
written submission, para. 339, footnote 542.
2069 European Communities' first written submission, para. 338.
2070 European Communities' second written submission, para. 251.
2071 United States' response to question 46.
2072 United States' response to question 46, para. 123.
2073 United States' first written submission, para. 602.
2074 United States' first written submission, paras. 599-602.
2075 United States' first written submission, paras. 603 and 611.

BCI deleted, as indicated [***]

7.723 In relation to the European Communities' conten tion that the subsidy was predominantly used
by Boeing and Spirit, the United States notes that in considering this factor, "account shall be taken of
the extent of economic diversification in the jurisd iction of the granting authority". According to the
United States, the European Communities has ignored this requirement.2076
7.724 The United States rejects the proposition that Boeing and Spirit receive a disproportionate
percentage of IRBs issued by the City of Wichita. Comparing the proportion of the economy
employed by Spirit with the proportion of IRBs received by Spirit and Boeing is not "the fact-
intensive inquiry required to determine whether the factors listed in Article 2.1(c) support a finding of
specificity".2077 Examining one metric in isolation "do es not establish that there was a granting of
disproportionately large amounts of subsidy to certain enterprises within the meaning of
Article 2.1(c)".2078 In addition, the single metric that the European Communities relies upon is
misleading because the European Communities cites Spir it's, rather than Boeing's, employment level.
Boeing's employment level was more than double that of Spirit during the period of time during
which many of the IRBs were issued.
2079
7.725 The United States argues that, of the group of companies eligible for IRB issuances in the
City of Wichita, the share of IRBs Boeing received is not disproportionate. The fact that Boeing
received a large share of the IRBs is unremarkable because the Boeing Wichita facility was the largest
private sector employer for the entire State of Kansas prior to its sale to Spirit. 2080 Although the
United States does not provide a statistic for th e proportionality analysis when conducted using the
baseline it considers appropriate, namely the group of companies that received Wichita IRBs, this
may be explained by the United States' argument elsewhere that "it is not the burden of the
United States to demonstrate that IRBs are de facto non-specific".2081 A further point that the United
States makes in relation to the proportionality analysis is that many companies, apart from Boeing and
Spirit, have received IRBs with large face values. For example, Cessna Aircraft Company has
received $1 billion in IRB issuances.
2082
7.726 In defending its choice of baseline for the pr oportionality analysis, the United States argues
that its approach leads to an "apples-to-apples" comparison, whereas th e European Communities'
approach leads to an "apples-to -oranges" comparison. This is because, in the two ratios to be
compared, under the United States' approach, the same group serves as the denominator in both ratios
(i.e. the group comprised of all recipients of th e alleged subsidy). However, under the European
Communities' approach, two different groups serve as the denominators (one consists of all recipients
of the subsidy and the other consists of the entire population of the relevant geographic jurisdiction of
the granting authority).2083
7.727 The United States also contests the European Co mmunities' argument that use of a baseline
consisting of the geographical jurisdiction of the granting authority is grounded in the text of
Article 2.1. The chapeau of Article 2.1 refers to specificity "within the jurisdiction of the granting
authority", but this serves to delimit the enterpri ses that are potentially subject to the specificity
inquiry but does not suggest that the specifi city enquiry must necessarily be based on all enterprises
within the jurisdiction. 2084 Further, in providing that account shall be taken of the "extent of

2076 United States' first written submission, paras. 606-607.
2077 United States' response to question 46, para. 124.
2078 United States' response to question 46, para. 124.
2079 United States' response to question 46, para. 125.
2080 United States' first written submission, para. 613.
2081 See United States' comments on European Communities' response to question 51, para. 161 and
United States' second written submission, para. 146.
2082 United States' first written submission, para. 612.
2083 United States' comments on European Communities' response to question 51, paras. 161-162.
2084 United States' comments on European Communities' response to question 51, para.163.

BCI deleted, as indicated [***]

diversification of economic activities within the juri sdiction of the granting authority", Article 2.1(c)
establishes an additional consideration, rather than conditioning the proportionality analysis. 2085 I n
response to the European Communities' argument th at the United States' approach fails when a
subsidy is granted only to one company, the United States ar gues that in such a case, the
"predominant use" enquiry is the relevant factor to consider, rather than a disproportionality
analysis.2086
7.728 The United States rejects the European Communitie s' argument that the City of Wichita has
improperly exercised its discretion in favour of Bo eing and Spirit. The United States asserts that
ownership of the IRBs by the entity on whose behalf they were issued is not unusual, as many other
companies have had IRBs structured in this manner. 2087 Further, the structure is the decision of the
entity and not the government, which only approves the bond issuance. Therefore, the structure
Boeing and Spirit choose to use is irrelevant because the SCM Agreement only disciplines
government action. Finally, the fact that Boeing u ses the IRBs to gain only the benefit of the tax
abatements and not as a financing vehicle as well "hardly shows that the subsidy was specific to
Boeing".2088
7.729 With respect to the European Communities' argu ment that discretion has been exercised in
favour of Boeing and Spirit because Boeing has received ten year tax abatements without a review at
the five year mark, the United States notes that it is not aware of any case in which an extension has
been refused for entities that have faced a five year review. 2089 In addition, although there is now a
policy providing for five year tax abatement periods relating to personal (as opposed to real) property,
Boeing's IRBs were issued prior to implementati on of this policy and "a ten year abatement on
personal property tax was far from unique". 2090 Finally, the fact that the Wichita City Council
disapproved an application to issue IRBs on behalf of a health club does not indicate that there was an
improper exercise of discretion that demonstrates specificity. In considering the exercise of discretion
under Article 2.1(c), footnote 3 provides that the fre quency with which such applications are refused
or approved and the reasons for such decisions shall be considered. The United States notes that the
purpose of issuing IRBs is to attract new investme nt to the area to increase employment. The City
does not use the IRBs to attract businesses that must be located within the area in any event, in order
to take advantage of the local consumer market. It was on this basis that the health club application
was rejected. This was consistent with the City 's IRB policy and it does not demonstrate that the
IRBs are specific.
2091
7.730 According to the United States, the Europ ean Communities ignores the requirement in
Article 2.1(c) that account "shall be taken of the extent of diversification of economic activities within
the jurisdiction of a granting authority". 2092 The SCM Agreement recognizes that a subsidy may be
widely distributed and yet appear specific, due to limited diversification in the relevant economy. The
United States argues that this is the case with the IRBs distributed in Wichita because the core
industry in Wichita is aircraft production.2093

2085 United States' comments on European Communities' response to question 51, para. 165.
2086 United States' comments on European Communities' response to question 51, para. 167.
2087 United States' first written submission, para. 616.
2088 United States' first written submission, para. 617.
2089 United States' first written submission, para. 621.
2090 United States' first written submission, para. 622.
2091 United States' first written submission, para. 624.
2092 United States' first written submission, para. 607.
2093 United States' first written submission, para. 607.

BCI deleted, as indicated [***]

Arguments of third parties
Australia
7.731 In determining whether a subsidy has been granted in disproportionately large amounts in the
context of the de facto specificity analysis, Aust ralia contends that the appropriate baseline group
against which to compare the proportion of the subs idy granted to certain enterprises is "the wider
group of entities in the territorial jurisdiction whic h potentially are able to use or have access to the
subsidy programme". 2094 Australia notes that this may be a wider group than that which actually
received the subsidy.2095 According to Australia, to use the gr oup of entities that actually received the
alleged subsidy as the baseline group, as advocated by the United States, would create a meaningless
point of comparison. 2096 Australia explains that under the United States' test, "the subsidy recipients
would always represent the total potential subsidy recipients".2097
Brazil
7.732 Brazil submits that the appropriate baseline against which to compare the proportion of
subsidy received by certain enterprises in the context of determining if the subsidy has been granted in
disproportionately large amounts is the wider group of entities in the territorial jurisdiction of the
granting authority.2098 Brazil argues that the text of Article 2.1(c) of the SCM Agreement provides
support for the use of this baseline because it provide s that "{i}n applying this subparagraph, account
shall be taken of the extent of diversification of economic activities within the jurisdiction of the
granting authority".2099 Brazil also notes that although Article 2.1(c) does not define the expression
"disproportionately large amounts", its understanding is that to the extent the share of a subsidy
granted to a company corresponds to such compan y's share of total manufacturing production, the
company does not receive the subsidy in "disproportionately large amounts".2100
7.733 Brazil contends that the approach advocated by the United States, namely using the group of
entities that received the subsidy as the baseline group for the purposes of the disproportionality
analysis, "is contrary to the concept of specificity itself". 2101 In Brazil's view, specificity exists where
a subsidy is targeted at a particular group of user s. Under the United States' approach, if a certain
industry were granted 100 per cent of the subsidy, the industry woul d be found to have received the
subsidy in a proportion commensurate with its share in manufacturing production because the industry
would represent 100 per cent of baseline production.2102
Canada
7.734 Canada notes that the SCM Agreement does not provide any express guidance regarding the
appropriate benchmark to use in determining wh ether certain enterprises have been granted a
disproportionate amount of subsidy. According to Canada, no single benchmark is appropriate for
every fact pattern that may arise. Further, any be nchmark that is chosen must allow for a thorough
and objective consideration of the specific facts of the dispute.2103

2094 Australia's response to question 11.
2095 Australia's response to question 11.
2096 Australia's response to question 11.
2097 Australia's response to question 11.
2098 Brazil's response to question 11, para. 13.
2099 Brazil's response to question 11, para. 14.
2100 Brazil's response to question 11, para. 12.
2101 Brazil's response to question 11, para. 11.
2102 Brazil's response to question 11, para. 13.
2103 Canada's response to question 11, para. 12.

BCI deleted, as indicated [***]

7.735 In Canada's view, any disproportionality analys is must be based on relevant and objective
benchmarks, such as sales, capital invested or shar e of GNP. The appropriate benchmark to employ
requires an assessment of the totality of the facts in a given case and depends upon the nature of the
subsidy. For instance, if the subsidy in issue assi sts in the area of employment training, the relevant
benchmark may be the number of employees found in each industrial sector.2104
7.736 Canada also contends that some discretion must be exercised in determining whether a
disproportionately large amount of subsidy has been granted to certain enterprises. According to
Canada, disproportionality requires "a significant deviation from the results expected as a result of the
comparison to an objective benchmark".
2105 Further, the deviation should be assessed in the light of
any explanation for it offered by the Member in question.2106
7.737 Canada argues that the European Communities' choice of baseline for the purposes of the
disproportionality analysis is problematic. This is because if, for example, a subsidy were available to
the manufacturing and the services sectors, which w ould be a widely available programme, a finding
of disproportionality would be inevitable if the f unding proportions were assessed against the wider
group of enterprises in the territorial jurisdiction of the granting authority. This would be the case
even if each enterprise received th e subsidy in proportion to its weight within the manufacturing and
services sectors. Canada submits that this woul d not advance the objectives of Article 2 of the
SCM Agreement.2107
7.738 Canada also contends that the United States' choice of baseline for the purposes of the
disproportionality analysis is overly formalistic. According to Canada, the United States' position is
that the disproportionality analysis requires an exam ination of the proportion of subsidy received by
each enterprise "in order to ascertain whether each enterprise received approximately the same
share".2108
China
7.739 China submits that the de facto specificity analysis under Article 2.1(c) of the
SCM Agreement requires a three-prong analysis. 2109 First, there should be "reasons to believe" that
the subsidy in issue may in fact be specific. This requires the Panel to ascertain whether the
complaining party has presented plausible reasons to challenge the subsidy programme as de facto
specific.2110 China submits that the standard to satisfy this first prong is not particularly high.2111
7.740 The second step of the analysis requires a cons ideration of any or all of the four factors
identified in the second sentence of Article 2.1(c). This is at the "centre of testing whether the subsidy
is specific in fact". 2112 China submits that any of the four factors may point to a finding of de facto
specificity and that it is not necessary that all four factors be present simultaneously.2113
7.741 Finally, China argues that account shall be taken of the two "circumstantial factors" listed in
the final sentence of Article 2.1(c), namely the exte nt of diversification of economic activities within
the jurisdiction of the granting authority and the length of time during which the subsidy programme

2104 Canada's response to question 11, para. 18.
2105 Canada's response to question 11, para. 19.
2106 Canada's response to question 11, para. 19.
2107 Canada's response to question 11, para. 14.
2108 Canada's response to question 11, para. 15.
2109 China's written submission, paras. 27-33 and China's response to question 12.
2110 China's response to question 12, para. 7.
2112 China's response to question 12, para. 8.
2113 China's response to question 12, para. 8.

BCI deleted, as indicated [***]

has been in operation. 2114 The purpose of the final step is to verify that a subsidy is indeed de facto
specific in circumstances where this appears to be the case following the second prong of the
analysis.2115
Japan
7.742 Japan submits that the baselin e against which to compare the proportion of the subsidy
received by certain enterprises in the disproportionate ly analysis should include "all of the enterprises
that received the similar subsid ies from the granting authority". 2116 Japan argues that the use of all
entities within the territorial jurisdiction of the granting authority is not an appropriate baseline.2117
Evaluation by the Panel
7.743 The European Communities does not attempt to argue that the tax abatements provided
through the issuance of IRBs are de jure specific under Article 2.1(a) and it is clear that this is not the
case. The relevant Kansas statutory provisions do not expressly limit the av ailability of the subsidy
such that it is not broadly available throughout the economy. This is in accordance with the
legislation's broad purpose, which does not include any suggestion of an intent to limit the issuance of
IRBs to "certain enterprises" within the meaning of Article 2.1(a):2118
"It is the purpose of this act to promote, stimulate and develop the general welfare
and economic prosperity of the state of Kansas through the promotion and
advancement of physical and mental health , industrial, commercial and agricultural,
natural resources and of recreational development in the state; to encourage and assist
in the location of new business and industry in this state and the expansion, relocation
or retention of existing business, industry and health development; and to promote the
economic stability of the state by providing greater employment opportunities,
diversification of industry a nd improved physical and ment al health, thus promoting
the general welfare of the citizens of this state by authorizing all cities and counties of
the state to issue revenue bonds."
7.744 The European Communities restricts its specificity submissions to Article 2.1(c) of the SCM
Agreement. Under Article 2.1(c), a subsidy that appear s non-specific under Article 2.1(a) and (b),
may nevertheless be found to be in fact specific due to the way the subsidy programme actually
operates. Article 2.1(c) provides:
"If, notwithstanding any appearance of non-specificity resulting from the application
of the principles laid down in subparagraphs (a) and (b), there are reasons to believe
that the subsidy may in fact be specific, other factors may be considered. Such
factors are: use of a subsidy programme by a limited number of certain enterprises,
predominant use by certain enterprises, the granting of disproportionately large
amounts of subsidy to certain enterprises, and the manner in which discretion has
been exercised by the granting authority in the decision to grant a subsidy. In
applying this subparagraph, acc ount shall be taken of the ex tent of diversification of
economic activities within the jurisdiction of the granting authority, as well as of the
length of time during which the subsidy programme has been in operation."

2115 China's response to question 12, para. 9.
2116 Japan's response to question 11.
2117 Japan's response to question 11.
2118 Kan. Stat. Ann. § 12-1740 et seq. (2001), Exhibit EC-167.

BCI deleted, as indicated [***]

7.745 The European Communities' main contention is th at the City of Wichita IRBs are granted in
disproportionately large amounts to Boeing and Spirit, are predominantly used by Boeing and Spirit
and that the granting authority exercised its discreti on in favour of Boeing and Spirit. At one point in
its submissions, the European Communities also argues that the subsidy programme is used by a
limited number of certain enterprises.
Predominant Use
7.746 The first two specificity factors found in the text of Article 2.1(c) are "use of a subsidy
programme by a limited number of certain enterprise s" and "predominant use by certain enterprises".
The ordinary meaning of the term "predominant" includes "constituting the main or strongest element;
prevailing" and "most frequent or common".
2119 Further, reading the second factor in the context of
the first indicates that "predominant use" refers to predominant use of a subsidy programme.
Therefore, the second factor listed in Article 2.1( c) requires consideration of whether the subsidy
programme in issue is mainly or most frequently used by "certain enterprises".
7.747 The final sentence of the text of Article 2.1(c) requires that "in applying this subparagraph,
account shall be taken of the extent of diversifica tion of economic activities within the jurisdiction of
the granting authority, as well as of the length of time during which the subsidy programme has been
in operation". Therefore, the assessment of whether "certain enterprises" are the predominant users of
the subsidy programme is informed by these two cons iderations. For example, if certain enterprises
have been the main or most frequent recipients of a subsidy, whether th is constitutes "predominant
use" of the programme will be affected by whet her or not the economy in the jurisdiction of the
granting authority is highly diversified or whether it is made up of only a small number of industries,
with the "certain enterprises" in question playing a significant role. Further, the length of time in
which a subsidy programme has been in operation co lours the analysis because if, for example, the
subsidy programme is relati vely new, the fact that "certain ente rprises" have been the main or most
frequent beneficiaries under the programme may be a reflection of the fact that the programme has not
been in operation long enough to have a wide range of users, rather than an indication that the
programme is de facto specific.
7.748 In contending that the subsidy has been pr edominantly used by cer tain enterprises, the
European Communities relies on the fact that Boei ng, Spirit and Cessna Aircraft Company are the
only enterprises to receive LOIs for IRBs in am ounts as high as $1-$2 billion. According to the
European Communities, the three companies received 78 per cent of the IRBs issued in the City of
Wichita over the period 1979-2005. Further, th e European Communities submits that Boeing and
Spirit received 61 per cent of all IRBs issued by the City of Wichita, 69 per cent of all IRBs that
included property tax abatements 2120 and close to 100 per cent of bonds that provided only for
property tax abatements and were not used as fina ncing mechanisms (because the bonds were bought
by Boeing and Spirit themselves).
7.749 In its description of the IRB scheme, the Eu ropean Communities identifies three "economic
incentives" that can arise under it, namely, the ability to borrow funds at lower than market interest
rates, property tax abatements and sales tax exemptions. 2121 In its submissions regarding
"predominant use", the European Co mmunities presents statistics relating to three different scenarios.
First, the percentage of IRBs received by Boeing and Spirit in the group of companies that receive any
type of IRB, whether only giving rise to tax abat ements, only to borrowed funds or to both (61 per

2119 Shorter Oxford English Dictionary, L. Brown (ed.) (Clarendon Press, 1993), Vol. II, p. 2321 and
Webster's Online Dictionary, respectively.
2120 Some of the IRBs issued by the City of Wichita were financing vehicles only and did not provide
for property tax abatements on property purchased with IRB funds.
2121 European Communities' first written submission, para. 298.

BCI deleted, as indicated [***]

cent); secondly, the percentage of IRBs received by Boeing and Spirit in the group of companies that
receive IRBs that include property tax abatements ( 69 per cent); and finally, the percentage of IRBs
received by Boeing and Spirit in the group of compani es that receive IRBs that include only property
tax abatements (approximately 100 per cent, although this figure is refuted by the United States).
7.750 In analyzing the "predominant use" factor unde r Article 2.1(c) of the SCM Agreement, and
determining which of the statistics presented by th e European Communities is the appropriate one to
consider, we recall that "predominant use" refers to predominant use of a subsidy programme .
Therefore, the relevant statistic is the relative u se by Boeing and Spirit of the subsidy programme in
issue. The European Communities does not make any submissions to suggest that the City of Wichita
operates separate IRB programmes depending upon whethe r or not tax abatements, or financing, or
both, are provided under the IRBs. The State of Kansas legislation and the City of Wichita Economic
Development Incentive Policy, under which the IRBs are issued, set out single policy objectives and
procedures for the issuance of IRBs, regardless of the terms under which the IRBs are issued. 2122 The
City of Wichita Economic Development Incentive Po licy also establishes the conditions under which
an IRB issuance will include tax abatements. 2123 Further, as the United States highlights, the decision
regarding whether a company will purchase its own bonds and therefore not borrow funds as a part of
its IRB programme is made by the company itself, rather than the City of Wichita. These factors
indicate that there is a single IRB programme. In our view, there is not a separate programme relating
to IRBs that provide only tax abatements, as this is a consequence of the decision of a private
company to purchase its own bonds, rather than the actions of a government body implementing a
different IRB programme. Further, the issuance of IRBs with and without tax abatements occurs
under the same City of Wichita policy and is depe ndent upon whether or not certain conditions are
met, as set out in the single policy. This is al so indicative of a single IRB programme, albeit with
different consequences depending upon what conditions the applicant meets.
7.751 Having reached the conclusion that there is a single IRB programme, in our view it would not
be appropriate to include IRBs that give ri se only to the borrowing of funds, and not to tax
abatements, within the analysis and calcu lations regarding predominant use of a subsidy programme.
Whether or not the lending of funds by the City of Wichita under IRBs is a subsidy is not in issue in
this dispute. Therefore, to find that a company is using a subsidy programme when it receives IRBs
that only provide for the borrowing of funds, when it is not clear that such IRBs in fact confer a
subsidy, would be problematic. Therefore, we find that although there is a single IRB programme, for
the purposes of this dispute, the relevant users of the subsidy programme are those companies that
receive IRBs that include tax abatements and may or may not include the bor rowing of funds. Under
this approach, the relevant statistic is that Boei ng and Spirit receive 69 per cent of the relevant IRBs
(and Boeing, Spirit and Cessna together receive more than 78 per cent of the relevant IRBs).
2124
7.752 In determining whether there has been "pre dominant use" of the subsidy programme by
certain enterprises, we are required to consider th e extent of diversification of economic activities
within the jurisdiction of the granting authority, as well as the length of time during which the subsidy
programme has been in operation. While the statistics provided by the European Communities
suggest that Boeing, Spirit and Cessna are indeed significant users of the tax breaks, any form of

2122 City of Wichita/Sedgwick County Economic Development Incentives Policy, Exhibit EC-190.
2123 City of Wichita/Sedgwick County Economic Development Incentives Policy, Exhibit EC-190,
pp. 3-4.
2124 "More than" 78 per cent because the statistic repr esents the proportion of IRBs received by the
Boeing, Spirit and Cessna, relative to the total value of all IRBs issued, i.e. those IRBs that provide only for the
borrowing of funds are not excluded. If such IRBs we re excluded from the calcula tion, the statistic would
increase because the numerator would stay the same (the value of IRBs issued to Boeing, Spirit and Cessna) but
the denominator would decrease (the total value of all I RBs issued but excluding those that provide only for the
borrowing of funds).

BCI deleted, as indicated [***]

judgment regarding whether they are the "main" or "most frequent" users must be conditioned by
consideration of the extent of diversification in the economy of the granting authority, namely the
Wichita economy. 2125 The only information provided by the European Communities regarding the
diversification of the Wichita ec onomy is submitted in s upport of its analysis regarding whether
Boeing and Spirit have been "granted disproportiona tely large amounts of the subsidy". In this
regard, the European Communiti es argues that Boeing and Spirit account for 14 per cent of total
employment in Wichita or 32 per cent of employme nt in the manufacturing sector. In contrast, the
United States submits that the "core industry of Wichita has focused on aircraft production" 2126 and
that Wichita is sometimes known as the "Air Capital of the World", indicating that it does not have a
diversified economy.2127 This comparison, between the proportion of subsidy received by Boeing and
Spirit and the proportion of the economy employed by Boeing and Spirit, is analyzed in the subsection
following, which assesses whether Boeing and Spirit have been granted a "disproportionately large"
amount of subsidy. Given our conclusion in the following subsection, that this comparison supports a
finding of de facto specificity, it is not necessary for us to duplicate the comparison in the context of
the "predominant use" analysis.
Disproportionately large amount
7.753 In considering the arguments of the parties rega rding whether the City of Wichita granted the
tax abatements to "certain enterprises" in dispropor tionately large amounts, two issues arise. The first
is the correct interpretation of "disproportionality", including what ratios need to be compared in this
analysis. Once we have interpreted the term, we must determine whether the European Communities
has adequately substantiated its argument that th e City of Wichita granted Boeing and Spirit IRB tax
abatements in a disproportionate amount.
7.754 The ordinary meaning of "disproportionate" is "lacking proportion", where "proportion"
means "a portion, a part, a share, esp. in relati on to a whole", " a relative amount or number", "a
comparative relation or ratio between things in size, quantity, number etc."2128 Therefore, in assessing
whether a subsidy to certain enterprises is "dispr oportionately large", it will be necessary to convert
the amount of the subsidy into a ratio by comparing it to something else that is "whole". This ratio
then needs to be assessed to determine whether it is lacking proportion.
The proportion of the subsidy received by Boeing and Spirit
7.755 The parties agree on the way in which the ratio or the proportion of subsidy granted to Boeing
and Spirit should be calculated. Both parties submit that the relevant ratio is the total amount of the
alleged subsidy granted to Boeing and Spirit, relative to the tota l amount of the alleged subsidy
granted to all participants in the City of Wichita IRB programme. We agree with the submissions of
the parties that when a subsidy has been grante d under a subsidy programme, that programme should
ordinarily serve as the "whole" against which the subs idies to "certain enterp rises" can be compared.
This approach finds support in the text of the fi nal sentence of Article 2.1(c), which provides that
when applying the subparagraph, it is necessary to take into account the length of time during which
the subsidy programme has been in operation. If this needs to be considered when performing the

2125 In the case of the IRBs provided to Boeing and Spirit, although the State of Kansas implemented
the legislation authorizing the issuance of IRBs, individual cities and counties are responsible for actually
granting the IRBs. Therefore, the City of Wichita is the relevant granting authority and the diversification of the
Wichita economy must be considered.
2126 United States' first written submission, para. 607.
2127 Greater Wichita Convention & Visitors Bureau, Aviation and Wichita, Exhibit US-250.
2128 Shorter Oxford English Dictionary, L. Brown (ed.) (Clarendon Press, 1993), Vols. I and II, pp. 708
and 2370. This is confirmed by Webster's New Encyclopedic Dictionary, (Könemann, 1993), pp. 291 and 811,
which gives the definition of "disproportion" as "lack of proportion", where "proportion" means "the relation of
one part to another or to the whole".

BCI deleted, as indicated [***]

disproportionality analysis, this implies that the re levant baseline for the ratio is the amount granted
under that subsidy programme.
7.756 The European Communities submits that Boeing and Spirit received 69 per cent of all IRBs
granted by the City of Wichita. 2129 The United States does not object to this ratio. However, we note
that the European Commun ities has calculated this ratio using th e values of the IRBs issued, rather
than the value of the tax abatements granted, which is the relevant subsidy. To the extent that other
IRB recipients received tax abatements of the sam e percentage value under the terms of their IRB
issuances as Boeing and Spirit, namely 100 per cent ta x abatements, the value of the IRBs issued is a
good proxy for the amount of the subsidy. This is b ecause the value of the I RBs represents the value
of the property that may be purchased and consequent ly subject to the tax abatement. To the extent
that all tax abatements under the IRBs are of the same percentage value, the value of the property
purchased will be in proportion to the value of the tax abatement. However, we note that under the
terms of the City of Wichita Economic Developmen t Incentive Policy, the City of Wichita has the
option of granting less than 100 per cent tax abatements under the IRBs. 2130 Further, the list of IRBs
issued by the City of Wichita, provided by the Eu ropean Communities in an exhibit, indicates that
while the majority of IRBs issued with tax abat ements included 100 per cent tax abatements, a small
percentage were granted less than 100 per cent tax abatements.2131 This indicates that the value of the
IRBs is not a perfect proxy for the amount of the subsidy granted. Howeve r, taking account of the
fact that not all companies received 100 per cent tax abatements, the effect would be to increase the
value of the statistic above 69 per cent. 2132 Therefore, in our view it is reasonable to rely on the ratio
calculated by the European Communities in the disproportionality analysis.
7.757 In calculating the proportion of the subsidy received by Boeing and Spirit, the European
Communities bases its calculation on the IRBs issued between 1979, when the City of Wichita began
keeping records of the issuances, and 2005. The Un ited States does not raise any objections to this.
We recall that the final sentence of Article 2.1(c) requires that account be taken of the length of time
during which the subsidy programme has been in operation and we consider that the
disproportionality analysis is one stage at whic h the length of the subsidy programme should be
considered. It is not the case that the IRB progra mme has been in operation for only a short period of
time and therefore that it is too early to draw c onclusions regarding specificity. However, it is
arguable that when a subsidy programme has been in operation for a long period of time, such as the
IRB programme, aggregating the data over the en tire life of the subsidy may not always be
appropriate. This may be the case where there has been a significant change in the structure of the
economy and the importance of the subsidized activiti es in the economy over the life of the subsidy.
However, there is no evidence before the Panel to suggest that this has b een the case in Wichita.
Therefore, in the absence of su ch evidence, we rely on the method used by the European
Communities to calculate the proportion of the s ubsidy received by Boeing under the IRB subsidy
programme.
7.758 Finally, in calculating the proportion of the subsidy received by Boeing and Spirit, the
European Communities uses the value of IRBs issu ed to all enterprises as the denominator. An
examination of the list of enterprises that have been issued IRBs reveals that some of them were

2129 Where we rely on the reasoning in the "predominant use" section of this Report regarding the
relevant "subsidy" programme.
2130 City of Wichita/Sedgwick County Economic Development Incentives Policy, Exhibit EC-190,
pp. 3-4.
2131 List of IRBs Maintained by the City of Wichita, 1979-2005, obtained via Kansas Open Records Act
request to the City of Wichita, Exhibit EC-170.
2132 If the lower level of tax abatements to some companies were accounted for in the statistic, the
numerator of the equation (the subsidy to Boeing) would not change, but the denominator (the total amount of
subsidies granted) would become smaller, creating a larger ratio.

BCI deleted, as indicated [***]

issued to entities within the services sector. 2133 Given that the SCM Agreement disciplines only the
goods sector, the de facto specificity analysis is concerned with determini ng whether a subsidy is
specific within this sector. However, if the Eu ropean Communities had excl uded the IRBs issued to
entities within the services sector, the proportion of the subsidy issued to Boeing and Spirit would in
fact have been higher than 69 per cent. 2134 Therefore, in our view it is still legitimate to rely on a
value of at least 69 per cent as the proportion of the subsidy issued to the goods sector received by
Boeing and Spirit.
Is the proportion of the subsidy received by Boeing and Spirit
disproportionately large?
7.759 We accept that Boeing and Spirit received approx imately 69 per cent of the subsidy granted
by the City of Wichita to the goods sector. In dete rmining whether this is a "disproportionately large"
amount, we note that there is no explicit guidance in the text of Article 2.1(c) regarding what the
relative amount of subsidy received by Boeing and Spirit should be compared against. This is where
the disagreement between the parties arises. Th e European Communities contends that the second
ratio should be a ratio of some information about Boeing, such as employment levels, relative to
comparable information relating to the entire economy in the jurisdiction of the granting authority. In
comparison, the United States argues that the second ratio should compare the information about
Boeing, such as employment levels, with comparable information about the group of recipients of the
alleged subsidy.
7.760 In our view, the ratios advocated by the parti es are both problematic. While there is some
textual support for the European Communities' appro ach, it has implications that are not consistent
with the way in which Article 2 has been interpre ted in previous panel reports. The textual support
for the European Communities' a pproach arises from the final sentence of Article 2.1(c), which
requires that "the extent of diversification of economic activities within the jurisdiction of the granting
authority" be taken into account in applying the s ubparagraph. In determining whether the amount of
subsidies granted to "certain enterprises" is lack ing proportion, comparing the percentage of the
subsidy received by the "certain enterprises" with their position within the entire economy, is one way
in which the diversification of the economy in the jurisdiction of the granting authority can be taken
into account. Although not addressed by the European Communities in its submissions, in the context
of the SCM Agreement we consider the reference to entire or overall economy to be a reference to
that part of the economy represented by the goods sector, given that the SCM Agreement disciplines
only subsidies provided within this sector. The European Communities' reliance upon Boeing's
employment levels within the manufacturing sector indicates that the European Communities
implicitly accepts this.
7.761 However, while there is some textual support for the European Communities' approach, there
are a number of problems with it. The first arises when reading Article 2.1(c) in the context of
Article 2.1(b). The European Communities' approach always allows a finding of disproportionality to
be made in circumstances where eligibility for a subsidy is restricted according to objective criteria or
conditions under Article 2.1(b) (w here we interpret disproportion ality as any discrepancy, however
small, between the two ratios). However, Article 2.1(b) provides that a subsidy shall not be found to

2133 List of IRBs Maintained by the City of Wichita, 1979-2005, obtained via Kansas Open Records Act
request to the City of Wichita, Exhibit EC-170, which indi cates that IRBs have been issued to entities such as
"Riverside Hospital", "St Francis Medical Center" and "Historic Hotel Partners ", which appear to be within the
services sector.
2134 This is because exclusion of the subsidies to th e services sector would have left the numerator
unchanged (the value of the subsidy to Boeing and Spirit) and would have decreased the denominator (because
it would become the amount of the IRBs issued only to the goods sector, rather than the goods and services
sectors combined). This would have the effect of increasing the ratio.

BCI deleted, as indicated [***]

be specific by reason of such objective criteria or co nditions. To illustrate why Article 2.1(b) would
be deprived of all meaning under the European Communities' interpretation, we consider a
hypothetical situation where all enterprises with mo re than 1000 employees are eligible for a subsidy
and this criteria falls within Article 2.1(b). In th is circumstance, the recipients of the subsidy will
represent 100 per cent of the amount of the subsidy granted, but less than 100 per cent of the overall
economy. Taking a very simple example for illustra tive purposes, consider there are three companies
with over 1000 employees and they receive 50 per cent, 40 per cent and 10 per cent of the amount of
the subsidy granted. Using the European Communi ties' approach, these ratios are compared with the
position of the companies in the overall economy, for example by comparing them to the percentage
of employment they each contribute to the total ec onomy. Unless the other companies in the wider
economy that did not receive the subsidy account for 0 per cent of employment, the contribution to
employment of the three companies in question cannot be 50 per cent, 40 per cent and 10 per cent.
Rather, at least one of the percentages must be smaller, making it possible to find that at least one of
the enterprises has been granted a subsidy that lacks proportion to its position within the economy.
7.762 In fact, the same issue arises in relation to any limit on the availability of a subsidy. In
circumstances where a subs idy may be broadly available throughout an economy, with 90 per cent of
enterprises receiving it, a comparison of the ratio of the amount of subsidy received by each
enterprise, or set of "certain enterprises", with th eir contribution to the wider economy (including the
10 per cent of enterprises that did not receive th e subsidy) will necessarily result in at least one
enterprise or set of "certain enterprises" receivi ng an amount of subsidy in disproportion to its
contribution to the economy. This contradicts the approach that has been taken to the purpose of a
specificity analysis by prior panels, such as the panel in US – Upland Cotton, which held that there is
a tipping point, which is not subject to rigid qua ntitative definition, at which a subsidy becomes
"sufficiently broadly available" throughout an economy as to become non-specific. The panel
indicated that something less than universal availability can lead to a finding of non-specificity.
7.763 On the face of Article 2 of the SCM Agreemen t, which does not expressly suggest that there
must be some level of strictness associated with th e limit on access to the subsidy for it to be specific,
it may have been possible to interpret a subsidy as specific whenever there were any limit on its
availability. Indeed, if the purpose of Article 2 is as the panel suggested in US – Softwood Lumber IV,
namely to prevent trade distortion, it would seem that any express or de facto limit on the availability
of a subsidy, such that it is not universally available, would create a distortion. This is because
resources would be diverted from those enterprises not benefiting from the subsidy to those that are so
benefiting. If such an approach had been taken to Article 2, the European Communities' approach to
the disproportionality analysis would have been appr opriate (apart from in relation to Article 2.1(b))
because it leads to a finding of disproportionality, and therefore a potential finding of de facto
specificity, in response to any limit on the availability of a subsidy such that 100 per cent of
enterprises do not benefit from it. However, this is not the way in which Article 2 has been
interpreted in prior disputes. The upshot is that the European Communities' approach leads to a
finding that a subsidy has been granted in dispropor tionately large amounts by reason of the existence
of a restriction on its availability but where otherwis e the subsidy would be c onsidered to be broadly
available throughout the economy and therefore non-specific.
7.764 The United States' approach to the disproportiona lity analysis is also problematic. According
to the United States, the second ratio in the disp roportionality analysis should compare information
about Boeing and Spirit, such as employment levels or output, with comparable information about the
group of recipients of the alleged subsidy. While it is di fficult to find support for the United States'
view from the text or context of Article 2 of the SCM Agreement, from a mathematical point of view,
the United States' approach is more logical than that of the European Communities. As the
United States highlights, in comparing the ratio of the amount of subsidy that Boeing and Spirit
receive in relation to the entire group of recipients of the subsidy with the ratio of Boeing and Spirit's
employment levels in relation to the aggregated em ployments levels of the group of recipients of the

BCI deleted, as indicated [***]

subsidy, like is compared with like, as both ratios have the same denominator. The effect is that,
unlike under the European Communities' approach, it is always at least possible to find that a subsidy
has not been granted to "certain enterprises" in a disproportionate amount in circumstances where
there is some limit on the subsidy's availability.
7.765 However, it is difficult to reconcile the United States' approach with the purpose of Article 2
of the SCM Agreement , as interpreted by panels in prior disputes, which is to determine whether a
subsidy is sufficiently broadly available throug hout an economy so as not to benefit "certain
enterprises". It is difficult to rationalize how the division of a subsidy among what could be a very
limited group, goes to the question of whether the subsidy is broadly available throughout an
economy. Under the United States' approach, a subsidy may be granted to only two or three
enterprises and as long as these two or three enterp rises receive the subsidy in proportion to their
relative economic contributions as compared to each other, the disproportionality analysis does not
point to any problem of specificity. Taking the most extreme example, where one enterprise receives
100 per cent of the subsidy, this will never le ad to a finding that the enterprise receives a
disproportionately large amount of the subsidy, b ecause the enterprise also makes up 100 per cent of
the economic activity of the subsidy recipients.
7.766 The United States addresses this problem by c ontending that in circumstances where a single
enterprise receives a subsidy, the relevant factor to consider under Article 2.1(c) is the "use of subsidy
programme by a limited number of certain enterpri ses". Although there may be something to this
argument, the problem remains that the United Stat es' approach to disproportionality is limited to a
group of selected recipients of a subsidy, divorced from their position in the wider economy. This is
problematic given that the purpose of the specifi city analysis, at least as interpreted in US – Upland
Cotton, is to determine whether or not a s ubsidy is sufficiently broadly available throughout an
economy and given that the final sentence of Article 2. 1(c) requires the diversification of economic
activities within the jurisdiction of the granting authority to be taken into account.
7.767 In our view, neither of the approaches suggested by the parties is completely satisfactory. It
may be, given the approach that has been adopted with respect to specificity in prior panel, that there
is no flawless way to conduct the disproportionately analysis. We note that a third possible option is
advocated in this dispute by Australia.
2135 Under this approach, for the second ratio in the
disproportionately analysis, the baseline group against which the economic position of the "certain
enterprises" is compared is the group of entities that are potentially able to make use of the
subsidy.
2136 This approach has the advantage that it see ms to take into account the approach to the
purpose of the specificity analysis that has been adopted in previous WTO case law. It is clear from
previous panel reports that eligibility for a subsidy may be quite restricted and yet the subsidy not be
specific under Article 2.1(a) or (b). The Austra lian approach recognizes this by excluding from the
consideration in the de facto specificity context th ose enterprises that Article 2.1(a) and (b) deems
possible to exclude from eligibility for the subsid y without creating a specific subsidy programme.
However, the approach does not overcome the probl em that whenever the denominators of the two
ratios are not the same, namely when the actual reci pients of the subsidy are less than the potential
recipients, it will always be possible to find at least one set of "certain enterprises" that has been
granted a disproportionate amount of subsidy. However, the problem should be less severe than under
the European Communities' appro ach because the difference between the denominators of the two
ratios will be smaller.2137

2135 Australia's response to question 11.
2136 Therefore, in cases where the subsidy has no explicit limits on eligibility, the denominator of the
second ratio will be the entire economy.
2137 Due to the exclusion from the denominator of th e second ratio of those enterprises that are not
eligible for the subsidy.

BCI deleted, as indicated [***]

7.768 While we recognize the significant problems with the European Communities' approach to the
disproportionality analysis, we acknowledge that it has at least some support in the text of
Article 2.1(c) of the SCM Agreement. Further, the problem that any limit on the availability of the
subsidy leads to a finding of disproportionality may be overcome somewhat if disproportion is
interpreted to mean a significant disparity between the two relevant ratios, rather than any
discrepancy, however small. This does not seem an unreasonable way to read Article 2.1(c) because,
in any event, it would seem unduly strict to requi re exact correspondence between the proportion of
subsidy granted to certain enterprises with the en terprises' relative economic importance, as judged by
an unspecified economic indicator. In the circumstan ces of this case, given that the pool of eligibility
for the IRBs is very wide, employing the Australia n approach is unlikely significantly to alter the
second statistic regarding the position of Boeing and Spirit in the overall economy.2138
7.769 In considering the specific facts of this c ase, the European Communities' position is that
Boeing and Spirit received 69 per cent of the IRBs that included tax abatements in the period 1979-
2005, but that in 2006 Spirit i.e. after it had acqui red Boeing's LCA operations in Wichita accounted
for 3.5 per cent of total employment or 16 per cent of manufacturing employment in Wichita. For the
reasons expressed at paragraph 7.758 of this Report, namely that the SCM Agreement disciplines only
the goods sector, we consider Boeing's proportion of employment within the manufacturing sector as
the relevant statistic to consider. The United St ates argues that the statistics regarding employment
levels are misleading because they reflect only Spir it's employment levels; during most of the period
over which IRBs were issued, Boeing's employment le vels were more than double those of Spirit in
2006. In response, the European Communities is pr epared to accept this, but notes that the resulting
figure, namely 32 per cent, is still disproportionate to the 69 per cent of IRBs that Boeing and Spirit
were issued. We agree with the European Communities that there is a significant disparity between
the proportion of IRBs received by Boeing and Sp irit and their place within the goods sector of the
economy, as indicated by the proportion of the sector they employ. While the United States argues
that comparing the proportion of the subsidy receive d by Boeing and Spirit with the proportion of the
economy they employ is not the fact-specific enquiry required for a specificity analysis, in our view,
given the significance of the disparity between th e figures, it constitutes a prima facie case of
disproportionality. The United States has not provided a convincing rebuttal of this prima facie case.
The United States argues, at a relatively high level of generality, that the degree of diversification in
the Wichita economy is low. However, the Unite d States does not present any statistics to indicate
that Boeing and Spirit do indeed account for appr oximately 69 per cent of the economic activity in
Wichita and that an examination of the employment levels of Boeing and Spirit is misleading in this
regard. Therefore, we accept the European Co mmunities' argument that Boeing and Spirit were
granted disproportionately large amounts of the tax abatements available through the IRB bonds.
7.770 For these reasons, the Panel finds that Boeing and Spirit were granted a disproportionately
large amount of the subsidy, indicating that the ta x abatements are de facto specific to "certain
enterprises".
Discretion
7.771 Article 2.1(c) provides that the Panel may cons ider the "manner in which discretion has been
exercised by the granting authority in the decision to grant a subsidy" in determining whether a
subsidy is de facto specific. The footnote to Article 2.1(c) states that in considering the way in which
discretion has been exercised, "information on the frequency with which applications for a subsidy are
refused or approved and the reasons for such decisions shall be considered".

2138 City of Wichita/Sedgwick County Economic Development Incentives Policy, Exhibit EC-190,
outlining the eligibility for IRBs.

BCI deleted, as indicated [***]

7.772 The European Communities argues that the City of Wichita has exercised its discretion in
favour of Boeing and Spirit in making its decisions to grant IRBs. In particular, the European
Communities submits that Boeing and Spirit have receive d "special" IRBs in that they have not been
true financing mechanisms, but merely a means to obtain tax abatements. Further, only Boeing and
Spirit have received full ten-year property tax abatements, with no need for review and re-
authorization at the five-year mark. Finally, the European Communities notes that the City of Wichita
"exercises a certain amount of discr etion in granting IRBs to begin with, as not all applications for
IRBs are approved by the City Council" and notes as an example the denial of an application by
Fitness 2000 24hr Health Club.2139
7.773 The submissions of the European Communiti es alleging that the subsidy is de facto specific
because of the way in which the City of Wichita has exercised its discretion are not convincing.
Article 2.1(c) refers to the way in which discretion has been exercised in the decision to grant a
subsidy. Further, the footnote to Article 2.1(c) provi des that, in this regard, the frequency with which
applications are refused or approved and the reasons for such decisions must be considered. This
indicates that the relevant discretion to which Article 2.1(c) refers is the decision about whether or not
to approve or reject an application for a subsidy. Therefore, the European Communities' submissions
regarding the terms on which IRBs issued to Boeing and Spirit were approved are not strictly relevant
to this. In relation to the European Communities' submission that the City of Wichita once rejected an
application from Fitness 2000 24hr Health Club, an analysis of the reason for this decision reveals that
it was based upon the policy for granting economic in centives expressed in the City of Wichita
Economic Development Incentive Policy. 2140 In particular, the application was rejected because
Fitness 2000 did not directly generate new wealth in Wi chita. IRBs are used by the City in order to
encourage businesses that could locate elsewhere, to locate in Wichita. However, regardless of
whether or not it was granted IRBs, Fitness 2000 was compelled to locate in Wichita in order to take
advantage of the local consumer market. This r eason does not demonstrate that the City used its
discretion in a manner that renders the subsidy in fact specific to Boeing and Spirit. One example of a
rejection of an application does not go far in proving de facto specificity.
7.774 Even if the "decision to grant a subsidy" is open to a wider interpretation than merely a
decision to accept or reject a subsidy application, and also includes decisions regarding the terms on
which a subsidy is granted, the two other allegations made by th e European Communities regarding
the way in which the City of Wichita has exercised its discretion are not convincing in support of a de
facto specificity case. The European Communities argues that Boeing and Spirit are granted "special"
IRBs because its IRBs are purely for the purpose of receiving tax abatements, rather than also being
used as financing mechanisms. However, as the United States highlights, the decision that a company
will purchase its own IRBs is a decision that the co mpany itself makes, rather than being a matter in
the discretion of a government body. Even it were a decision of the government, the United States
submits evidence to indicate that a number of other companies hold their own IRBs.
2141
7.775 The final submission of the European Communities regarding the manner in which the City of
Wichita exercises its discretion is that the City of Wichita grants tax abatements to Boeing for ten year
terms, without the requirement for review and re -authorization after five years, to which other
companies are subjected. It is not entirely clear how this demonstrates de facto specificity. Perhaps
the European Communities is suggesting that Boeing is granted a subsidy that is different to that
granted to other companies and in this way, because Boeing is the only recipient of such a subsidy, it
is specific. However, the European Communiti es does not make any submissions to support this
notion. The fact that the terms on which a subsid y is granted may vary between recipients does not
convert an otherwise broadly available subsidy into a specific subsidy. In any event, the United States

2139 European Communities' first written submission, para. 339, footnote 542.
2140 See Minutes of the Wichita City Council, 9 November 2004, Exhibit EC-191.
2141 Minutes of Meeting of the City Council, Dec. 14, 2004, Exhibit US-247.

BCI deleted, as indicated [***]

makes a convincing submission that, even though some other companies may be required to submit to
a review after five years to assess whether the tax abatements should be re-authorized, in fact no
company has ever been refused re-authorization. Therefore, although there is a difference in the terms
of some IRBs, there is no practical effect arising out of this difference. The European Communities
does not explain why imposing different terms on the gr ant of subsidies, where the practical effect of
the terms is the same, should compel a finding of de facto specificity.
7.776 Therefore, consideration of the manner in which discretion has been exercised by the granting
authority does not support a finding of de facto specificity.
Limited number of certain enterprises
7.777 In its response to the United States' submissi on that another company in Wichita apart from
Boeing, namely Cessna Aircraft Company, receive d IRB issuances of approximately $1 billion, the
European Communities introduces th e argument that the subsidy was used by a limited number of
certain enterprises. The Europ ean Communities submits that Boeing, Spirit and Cessna together
received 78 per cent of the IRBs issued by th e City of Wichita through 2005 and that this
demonstrates limited use by certain companies. Although this statistic is relevant to the analysis
regarding whether the subsidy was predominantly u sed by certain enterprises or was granted in
disproportionate amounts to certain enterprises, it is not relevant to the assessment of whether the
subsidy was used by a limited number of enterprises. In considering whether a subsidy programme is
used by a limited number of certain enterprises, the focus is on the number of enterprises that use the
programme, rather than the proportion of the subsidy granted to such enterprises.
7.778 In fact, an examination of Exhibit EC-26 indicates that at least 50 companies in Wichita
received IRBs granting property tax abatements between 1979-2005. 2142 The European Communities
does not make any submissions regarding why, in the light of the diversification of the Wichita
economy and the length of time the IRB programme has been in operation, this constitutes use of the
subsidy by a "limited number of certain enterprises". Therefore, consideration of whether the subsidy
has been used by a limited number of certain enterprises does not support a finding of de facto
specificity.
7.779 For these reasons, the Panel finds that the tax abatements have been granted in
disproportionately large amounts to Boeing and Spirit. Therefore, the subsidies are de facto specific
within the meaning of Article 2.1(c) of the SCM Agreement.
(vi) The amount of the subsidy to Boeing's LCA division
Arguments of the European Communities

7.780 In its first written submission, the European Communities estimates that the amount of the
benefit arising from the IRBs is at least $784 million from 1989 to 2019. 2143 Of this amount, the
European Communities argues that $643 million was r eceived directly by Boeing's LCA division and
$141 million was passed-through from Spirit to Boeing's LCA division. 2144 T h e
European Communities provides detailed submissions regarding how it calculated this estimate
through the use of cost-benefit analyses performed by the City of Wichita. 2145 T h e

2142 Sorted List of Wichita IRBs, 1979-2005, Exhib it EC-26. Many more companies have received
IRBs that are used purely for financing purposes and do not include tax abatements.
2143 European Communities' first written submission, para. 320.
2144 European Communities' first written submission, paras. 321 and 323.
2145 For example, the City of Wichita commissioned a cost-benefit analysis prior to issuing the 1999
LOI. The cost-benefit analysis found that the $1 b illion in IRB issuances contemplated under the 1999 LOI
would result in total property tax abatements of $165 million over 10 years. Relying on this analysis, the

BCI deleted, as indicated [***]

European Communities asks the Panel to accept its estimate as the best information available and,
where appropriate, to draw adverse inferences due to the United States' non-cooperation in the
information-gathering process.2146
7.781 In relation to the IRB issuances to Boeing, th e European Communities contends that Boeing
received "substantial" sales tax exemptions on tangible personal property and services that it
purchased with IRB proceeds. Ho wever, the European Communitie s is unable to calculate the
amount of the benefit arising from the sales ta x exemptions because, according to the Kansas
Department of Revenue, Boeing's sales ta x exemption certificates are confidential. 2147 The
European Communities argues that the value of the sales tax exemp tions is "likely substantial"
because the bulk of the property acquired by Bo eing with the IRB proceeds was personal property. 2148
For example, of the $96 million in IRBs issued on behalf of Boeing in December 2002, Boeing spent
$92.6 million on personal property and consequently received $5.8 milli on in tax exemptions on this
property alone.2149
7.782 The United States argues that the European Communities has overestimated the amount of the
LCA-related tax abatements that arise following the i ssuance of IRBs. In particular, the United States
contends that Boeing used some of its IRB proceed s to purchase property that does not relate to LCA,
but rather relates to military operations. The Eu ropean Communities rejects this argument and notes
that the bond ordinances enacted in relation to th e Boeing IRB issuances prior to 2005 were explicitly
"for the purpose of providing funds for the acquisiti on, construction, reconstruction and improvement
of certain industrial and manufacturing facilities of Boeing Commercial Airplanes, Wichita
Division".2150 Therefore, using the IRBs to acquire property unrelated to Boeing LCA operations
would have been contrary to the authorization pr ovided by the Wichita City Council. According to
the European Communities, Boeing's list of IRB Project Property confirms that the property acquired
related to Boeing's LCA operations. No item of property listed stands out as unrelated to LCA and
the United States does not point to any specific item to support its argument.
2151 Further, the
European Communities rejects the United States' proposition that the references in the 2004 IRB lease
agreement to the "security requirements of the United States" indicate that military rather than civil
property was being acquired. Using the IRB procee ds for such a purpose would have violated the
authorization granted by the City of Wichita.2152
7.783 Although the bond ordinances for IRBs issued post-2005 do not include the same
authorization clause regarding the purpose for the use of the funds, the European Communities argues
that there is no obvious difference between the typ es of property purchased pre and post-2005 and no
evidence that after 2005 Boeing stopped using its I RB proceeds for the purchase of property used in
manufacturing LCA. 2153 Since its sale of Boeing Wichita to Spirit, Boeing continues to own and
furnish tooling at Spirit's facilities to help Spirit manufacture parts for Boeing LCA. Therefore, the

European Communities calculates that the amount of property taxes fore gone pursuant to an IRB issuance to
Boeing is 16.5 per cent of the face value of the IRBs. The European Communities app lies this estimate to the
IRBs issued to Boeing to arrive at its estimate of $643 million in tax abatements received directly by Boeing.
2146 European Communities' first written submission, paras. 321-325. See also, European
Communities, Exhibit EC-23.
2147 European Communities' first written submission, para. 322.
2148 European Communities' first written submission, para. 322.
2149 European Communities' first written submission, para. 322.
2150 European Communities' second written submission, para. 225 and European Communities'
comments on United States' response to question 253, para. 370.
2151 European Communities' comments on United States' response to question 253, para. 370.
2152 European Communities' comments on United States' response to question 253, para. 371.
2153 European Communities' comments on United States' response to question 253, para. 372 and
European Communities' second written submission, para. 226.

BCI deleted, as indicated [***]

European Communities concludes that there is no re ason to believe that any of the property acquired
by Boeing, either before or after 2005, relates to non-LCA operations.2154
7.784 The United States also submits that future ta x savings are speculative and lower than the
European Communities' estimates because of the decr eased appeal of the IR Bs as a result of the
changes in the Kansas taxation legislation, ex empting newly acquired co mmercial and industrial
machinery and equipment from property tax. The European Communities argu es that the future tax
savings are not speculative because the IRBs is sued between 1997-2006 provide guaranteed tax
abatements from 2007 until 2016 with respect to al ready purchased property (and therefore property
not affected by the change to Kansas taxation law). Therefore, these tax savings are not
speculative.
2155 Further, in relation to future IRB is suances, the European Communities argues that
there is no reason to believe that these will have less appeal as a result of the amendment to the
Kansas property tax law. In response to the Unite d States' point that the European Communities'
estimate of the amount of IRBs issued in 2007 w as inaccurate, the European Communities argues that
there are many possible reasons to explain this, including Boeing's difficulties with its 787
production.
2156 The European Communities continues that "once 787 production ramps up, it is likely
that Boeing and Spirit will need to utilize the full authorized amounts of IRBs". 2157 The European
Communities concludes that the United States has not rebutted its prima facie case regarding the
estimate of the future amount of IRB issuances.2158
7.785 The European Communities also refutes the Un ited States' submission that tax savings from
future Boeing IRBs are overstated because Boei ng no longer has LCA operations in Kansas. The
European Communities argues that there is "every reason to believe that Boeing will take full
advantage of the amount of IRBs to which it is en titled pursuant to its 1999 LOI despite the sale of its
LCA facilities in Wichita to Spirit". 2159 According to the European Communities, since the sale of
Boeing Wichita, Boeing has indeed continued to use IRBs to purchase equipment related to LCA
manufacturing. 2160
7.786 With respect to its pass-through case, the Eu ropean Communities relies on the same legal
analysis as it used in relation to the Washingt on B&O tax reduction. In particular, relying on US –
Upland Cotton, the European Communities argues that it needs to demonstrate that the benefits of the
tax abatements received by Spirit passed-through to the Boeing LCA division in order to demonstrate
that the subsidy benefits the product alleged to be causing serious prejudice under Articles 5 and 6 of
the SCM Agreement.2161
7.787 The European Communities' case is that at the time of the sale of Boeing Wichita to Spirit,
both parties to the transaction had a reasonable expect ation that there would be future IRB issuances
to the entity to be sold, and consequent tax abatements to Spirit. This future expected benefit stream
would have been factored into the valuation of Boeing Wichita. 2162 The European Communities
argues that Boeing captured the full value of the fu ture subsidies to Spirit through negotiating, as a
term of the sale, long-term supply contracts with Spirit at discounted prices of supply. 2163 Although it
is not entirely clear from the European Communities' submissions whether it argues that pass-through

2154 European Communities' second written submission, para. 226.
2155 European Communities' second written submission, para. 228.
2156 European Communities' second written submission, para. 229 and European Communities'
comments on United States' response to question 253, para. 374.
2157 European Communities' comments on United States' response to question 253, para. 374.
2158 European Communities' comments on United States' response to question 253, para. 374.
2159 European Communities' second written submission, para. 230.
2160 European Communities' second written submission, para. 230.
2161 European Communities' response to question 137.
2162 European Communities' second written submission, para. 236.
2163 European Communities' first written submission, para. 296.

BCI deleted, as indicated [***]

also occurred through the price paid by Spir it for Boeing Wichita, the European Communities'
response to question 44 clarifies that only pass-through via the long-term supply contracts is in issue.
Although in response to this question the Europ ean Communities contends that it is possible pass-
through occurred through a lump-sum payment at th e time of sale, in the absence of documents to
establish this, the European Comm unities asks the Panel to assume that the pass-through occurred via
the long-term supply contracts.2164
7.788 The European Communities refers to a "close" and "special" relationship between Boeing and
Spirit.2165 In response to Panel questioning in rela tion to this, the European Communities responds
that the sale of Boeing Wichita was an arm's le ngth fair market value transaction between two
independent companies. However, the resulting lo ng-term supply agreements do not operate at arm's
length; the prices charged under the contracts are lower than would otherwise be the case.2166
7.789 To support its pass-through argument, the Eu ropean Communities relies on a report prepared
by Professor Wachtel, which concludes that "the economics literature on asset pricing leaves no doubt
that the terms and conditions of the sale of a r eal capital asset, such as Boeing's commercial airplane
facilities in Wichita, would reflect the benefit stream expected to accrue to the new owner from future
expected subsidies" and that "there is every r eason to believe that Boeing realized the discounted
value of the expected subsidies pursuant to the terms and conditions of its sales contract with
Spirit".2167
7.790 In contrast to the United States' submission, the European Communities contends that the
terms of the sale contract were finalized after the State of Kansas released the letter of intent to issue
IRBs to Spirit.2168 The European Communities acknowledges that the Asset Purchase Agreement for
the sale of Boeing Wichita was signed on 22 February 2005 and that the letter of intent for the
issuance of IRBs to Spirit was released on 25 May 2005. However, according to the
European Communities, the terms of the deal were not final until the transaction closed on
16 June 2005. The European Communities argues that, in any event, the precise timeline of events is
not as important as the expectations of the parties at the time they negotiated and finalized the deal.
The European Communities concludes that Boeing and Spirit would have expected IRBs to be issued
to Spirit following the sale. 2169 The European Communities notes that Boeing's IRB applications had
been approved every year without fail since 1979. As Boeing's successor, Spirit had every reason to
expect that its application for IRBs would also be a pproved. Further, at the time of sale, the parties
had "solid expectations" about Spirit's future prope rty needs and consequently about Spirit's future
IRB needs.2170 The terms of conditions of the sale would have reflected these expectations.
7.791 In response to the United States' submission that a number of years after the sale, the Boeing
Wichita facility was valued at a higher figure th an the price paid by Spirit in the sale, the
European Communities argues that th ere is no evidence that this difference had anything to do with
the expected subsidies. Given that the expected subsidies were public knowledge at the time of the
sale, they could not be the source of the information asymmetry.2171

2164 European Communities' response to question 44, para. 136.
2165 European Communities' first written submission, paras. 290-292.
2166 European Communities' response to question 45, para. 137.
2167 Dr. Paul Wachtel, Economic Analysis: Subsidy Pa ss-Through and Asset Pricing Issues Relevant to
Subsidies to U.S. LCA Industry, December 2006, Exhibit EC-16, pp. 4 and 5.
2168 European Communities' second written submission, para. 237.
2169 European Communities' second written submission, para. 238.
2170 European Communities' second written submission, paras. 239-240.
2171 European Communities' comments on United States' response to question 367, para. 189.

BCI deleted, as indicated [***]

7.792 In response to the United States' point that Spirit also currently supplies Airbus, the
European Communities contends that this is irrelevant. 2172 If anything, the fact that at the time of the
sale Spirit had indicated that it would also supply Ai rbus meant that both parties to the transaction
expected Spirit to receive further IRB benefits in re lation to the additional property required by Spirit
to fulfil Airbus' orders. These expected additiona l IRB-related tax abatements would have been
passed through to Boeing in the terms and conditions of sale.2173
7.793 In its first written submission the European Co mmunities relies on an economic theory very
similar to the reasoning underlying one of the "privatization cases", namely US – Countervailing
Measures on Certain EC Products , to argue that the benefits asso ciated with the Kansas subsidies
accrue to Boeing.2174 In response to Panel questioning, the Eu ropean Communities confirms that the
reasoning in US - Countervailing Measures on Certain EC Products is applicable to the question of
pass-through of the Kansas subsidies.2175 The rationale behind the decisions in the privatization cases
seems to be that if an entity that has benefited from a subsidy is bought at arm's length and for fair
market value, the benefit associated with the financial contribution will be reflected in the terms of the
sale, for example, through a higher sale price. In other words, by paying fair market price for the
subsidized entity, the purchaser cannot be considered better off than in the absence of the financial
contribution, or at least it cannot be presumed that the subsidy passes-through to the purchaser. The
seller of the entity receives the benefit associated wi th the subsidy through the terms of sale. The
European Communities argues that the reasoning is applicable to the sale of Boeing Wichita .
2176
Contrary to the United States' submission, the Euro pean Communities contends that it is even more
certain in a transaction between two private parties, as opposed to the sale of a government asset, that
the benefit of the subsidy will remain with the seller. 2177 To support this argument, the European
Communities notes the Appellate Body's statement in US – Countervailing Measures on Certain EC
Products that:
"The Panel's absolute rule of 'no benefit' may be defensible in the context
of transactions between two private parties taking place in reasonably competitive
markets; however, it overlooks the ability of governments to obtain certain
results from markets by shaping the circum stances and conditions in which markets
operate." 2178
7.794 According to the European Communities, this indicates that although it may not be
appropriate to make an automatic finding that a subs idy is extinguished in the case of a privatization
transaction where the market is distorted by governme nt intervention, this is not the case where the
transaction is between two private entities. 2179 Further, the European Communities notes that in
administering its own domestic countervailing duty re gime, the United States allows a party, in both
private sales and in government privatizations, to de monstrate that subsidies to a company are
extinguished upon sale of the company in an "arm's length transaction for fair market value". A
United States' document describing the methodology it uses in this regard provides that in determining
whether a transaction was for fair market value USDOC will normally examine whether the seller
acted in a manner consistent with the normal sa les practices of private commercial sellers. The
document states that "where an arm's length sale occurs between purely private parties, we would

2172 European Communities' second written submission, para. 245.
2173 European Communities' second written submission, para. 245.
2174 Panel Report, US – Countervailing Measures on Certain EC Products.
2175 European Communities' comments on United States' response to question 367.
2176 European Communities' comments on United States' response to question 367.
2177 European Communities' comments on United States' response to question 367, paras. 184-186.
2178 European Communities' comments on United States' response to question 367, para. 186 (emphasis
added by the European Communities).
2179 European Communities' comments on United States' response to question 367, para. 186.

BCI deleted, as indicated [***]

normally expect the private seller to act in a manne r consistent with the normal sales practices of
private, commercial sellers in that country. W ith regard to a government-to-private transaction,
however … we cannot make that same assumption". 2180
7.795 Although the reasoning in US – Countervailing Measures on Certain EC Products relates to
subsidies granted in the past rather than the expected value of subsidies to be granted in the future, the
European Communities argues that this is not rele vant because both types of subsidies have a present
value at the time of sale of the asset in question.2181
7.796 According to the European Communities, it has established a prim a facie case that the benefit
of future IRB issuances to Spirit passed-through to Boeing's LCA division. 2182 The European
Communities notes that the United States has refused to supply it with unredacted copies of all of the
relevant long-term supply agreem ents to support its pass-through analysis and has not provided any
information regarding how the pricing for suppl ies in the long-term supply agreements was
derived.2183 However, the European Communities argues that this information is not strictly necessary
to demonstrate pass-through and that it has made a prima facie case in any event, which the
United States has failed to rebut. 2184 In its view, the best informa tion publicly available regarding the
supply contracts indicates that pass-through occurred via the terms of the agreements.2185
Arguments of the United States
7.797 The United States' primary argument is that the tax breaks that arise following the issuance of
IRBs are not actionable subsidies. If the Panel were to find otherwise, the United States' position is
that the European Communities' estimate of th e tax abatements to Boeing's LCA division is
significantly inflated.2186
7.798 The United States argues that some of the IRBs ha ve been issued with respect to property that
does not relate to large commercial aircraft. Boeing has substantial facilities in Wichita that relate to
its military business. The United States argues that the lease agreements between Boeing and Wichita
demonstrate that some IRB proceeds were used for property connected with military aircraft
operations. For example, the 2004 lease agreemen t provides that the issu er may inspect the IRB
property, books and records of the lessee, "subject to the security requirements of the United States
Government" and that "no person shall…reveal…any national security, trade secret, confidential or
other information…which, if disclosed, might put th e lessee in violation of law". The United States
submits that this indicates that military property an d data are in issue because Boeing could not be in
"violation of law" for disclosing its own technical data.2187
7.799 The United States submits that the European Co mmunities' estimates of future benefits are
"speculative". In relation to most of the Spirit IRBs and some of the Boeing IRBs, the
European Communities' estimates are based on IRBs that have not yet been issued. Whether Spirit
will actually seek IRB issuances based on the LOI will depend on its rate of expansion and need for
new property. 2188 Further, the appeal of the IRBs is re duced in the light of the amendment to the

2180 European Communities' comments on United States' response to question 367, para. 187.
2181 European Communities' comments on United States' response to question 367, para. 188.
2182 European Communities' second written submission, para. 246.
2183 European Communities' comments on United States' response to question 47, paras. 157, 158.
2184 European Communities' comments on United States' response to question 252, para. 365.
2185 European Communities' second written submission, para. 242; European Communities' comments
on United States' response to question 47, paras. 160-163.
2186 United States' first written submission, para. 637.
2187 United States' first written submission, para. 638 and United States' response to question 253,
para. 430 and footnote 562.
2188 United States' first written submission, para. 640.

BCI deleted, as indicated [***]

Kansas taxation law that exempts certai n property from taxation in any event. 2189 In relation to this
amendment, the estimate of the benefits flowing from future IRBs needs to be adjusted to account for
the fact that there is no longer a tax advantage asso ciated with commercial and industrial machinery
and equipment.2190
7.800 The European Communities' estimate also assumes that in 2007 and 2008 Boeing fully
utilizes its LOI and finances more than $600 m illion worth of property in Kansas under new IRB
issuances. According to the United States, this lacks credibility because Boeing no longer has LCA
operations in Kansas. 2191 Further, the reality is that, alt hough the European Communities estimated
that Boeing would apply for and receive $301.5 milli on in IRBs in 2007, it actually applied for and
received only $12 million in IRBs in 2007 and that was in connection with its military aircraft facility.
The European Communities estimated that Spirit w ould apply for and receive $222.7 million in IRBs
in 2007, but in fact Spirit did not apply for or receive any IRBs. 2192 According to the United States,
the enormous discrepancies between the Europe an Communities' estimates and what actually
occurred in 2007 demonstrate that the rest of its estimates are "completely unreliable".2193
7.801 The United States also argues that the Europ ean Communities has not proven pass-through to
Boeing's LCA division of the benefits of the tax breaks received by Spirit and therefore the estimate
of the benefit accruing to Boeing's LCA division as a result of the tax abatements should be adjusted
to reflect this. 2194
7.802 The United States repeats its argument that reve nue to be foregone in the future "does not
meet the definition of a financial contribution w ithin the meaning of Article 1.1(a)(1)(ii)" and
therefore should not be included in any quantification of the amount of the alleged subsidy.2195
7.803 In relation to the European Communities' p ass-through case, the United States relies on the
same legal basis for a requirement to demonstrate pass-through as it did in relation to the Washington
B&O tax rate reductions. In particular, the United States cites US – Softwood Lumber IV as authority
for the point that when an upstream supplier of an input receives a subsidy and sells the input in an
arms-length transaction to an unrelated entity that produces the allegedly subsidized product, pass-
through cannot be assumed but must be proven. This is necessary in order to demonstrate that the
elements of the subsidy definition are present in relation to the processed product.2196
7.804 The United States argues that the European Co mmunities has not demonstrated that the long-
term supply contracts were anything apart from arm' s length. Therefore, the European Communities
is required to establish pass-through and it has failed to do so.2197
7.805 The United States contends that relying on a theoretical economic analysis that merely
assumes pass-through is not sufficient to prove pass- through of the benefit of the alleged subsidy. 2198
According to the United States, the European Co mmunities' pass-through case rests solely on the
expert report prepared by Professor Wachtel, whic h is based upon a specific set of economic and
market assumptions that do not relate to the facts of this case.

2189 United States' first written submission, para. 641.
2190 United States' first written submission, para. 642.
2191 United States' first written submission, para. 643.
2192 United States' response to question 253, para. 431.
2193 United States' response to question 253, para. 431.
2194 United States' response to question 253, para. 433.
2195 United States' response to question 253, para . 432 and United States' first written submission,
para. 639.
2196 United States' first written submission, para. 625.
2197 United States' comments on European Communities' response to question 45, para. 152.
2198 United States' comments on European Communities' response to question 44, para. 144.

BCI deleted, as indicated [***]

7.806 Further, the economic reasoning relied upon by the European Communities is flawed and
Professor Wachtel comes only to a tentative conc lusion that pass-through would actually have
occurred.2199 According to Professor Wachtel, the parties, in their calculation of Boeing Wichita's net
present value, would have included the future tax abatements from the IRBs. The United States
contends that, even if this were the case, there is a difference between the valuation of an asset and the
price paid. If the price fully reflected the value of an asset, there would be no incentive to invest in it.
There needs to be a difference between percei ved value and price for investment to occur. 2200 The
United States also argues that even if valuation were relevant to the issue of pass-through, the
European Communities' approach to valuation is too simplistic. The United States' contends that
valuation depends on the information available to those performing the valuation and that market
actors make individual choices regarding how to valu e certain information and what risk factors to
consider in discounting future values to the present. A valuation is coloured by assumptions about the
future of the economy and the company. Theref ore, the European Communities cannot know how
Spirit and Boeing would each have valued the Wichita facility and whether they would have taken the
IRBs into account in making the valuation. 2201 The United States refers to Boeing's 2005 financial
report, which indicates that Boeing recorded a net loss on the sale of the Boeing Wichita facility. 2202
It argues that this confirms that Spirit purchased the asset for less than the value that could have been
attributed to it. Further, the sale price for the facility in June 2005 was $1.1 billion, while its valuation
at 31 December 2007 was $3.3 billion. The United Stat es contends that this indicates that not all
future value was included in the price Spirit paid for the Boeing Wichita facility.2203
7.807 According to the United States, the European Communities' economic analysis is based on a
"mistaken factual assumption". 2204 At the time the price of sale wa s agreed, namely when the Asset
Purchase Agreement was signed in February 2005, Spirit had not even applied for IRBs, much less
received authorization or approval for their issuance. The City of Wichita issued the letter of intent in
May 2005, after the price for the asset was agreed upon. In addition, the letter of intent was not a
commitment to issue the bonds and therefore, at the time of sale, there was no certainty that the IRBs
would be issued to Spirit. Therefore, there is no b asis to conclude that any future IRB benefits would
have been factored into the sale price.2205
7.808 The United States argues that the European Co mmunities' theory of pass-through is also
flawed because at the time of sale of Boeing Wich ita to Spirit, the amount of any benefit to Spirit
from future IRB issuances was uncertain. IRBs ar e issued only up to the value of the relevant
property being purchased and it could not have been known in advance what Sprit's future property
needs were. Therefore, even if at the time the tr ansaction was negotiated there was some expectation
that Spirit would receive future IRBs, there is no basis to determine how this might have been
reflected in the sale price. 2206 Further, Professor Wachtel ignor es evidence of the elements that did
play a role in the valuation of the Boeing Wich ita facility. The United States argues that publicly
available information indicates that possibilities of renegotiation of union contracts and the growth
that Spirit believed could be achieved through cust omer diversification and increased outsourcing
were key value drivers for the transaction. There is "clear evidence" that such factors were considered

2199 United States' first written submission, paras. 589 and 635.
2200 United States' first written submission, para. 636 and United States' response to question 255,
para. 441.
2201 United States' response to question 255, footnote 576.
2202 United States' response to question 367, para. 214.
2203 United States' response to question 367, para. 214, footnote 262.
2204 United States' first written submission, para. 629.
2205 United States' first written submission, paras. 628-631.
2206 United States' first written submission, paras. 630-631.

BCI deleted, as indicated [***]

during the valuation process, but no such evidence to suggest the same was true in relation to alleged
future IRB values.2207
7.809 The United States notes that at the time of the transaction, Spirit indicated its intention to
supply Airbus in the future and now does so. 2208 In fact, Spirit now supplies more to Airbus than to
Boeing and there is a "very close relationship" between the two companies. 2209 T h e
European Communities does not highlight anything in the long-term supply contracts to suggest all
IRB related tax abatements are passed through to Boeing rather than to another customer.2210
7.810 In response to a Panel question, the United St ates argues that the economic reasoning used by
the panel in US – Countervailing Measures on Certain EC Products does not apply to the transaction
between Boeing and Spirit because the facts of US – Countervailing Measures on Certain EC
Products are distinguishable. The panel and the Appellate Body in that case stated that the decision
was confined to its very precise set of facts, which was a "privatization … where the government
transferred all or substantially all the property and retained no controlling interest in the firm" and a
"benefit originating from a non-recurring financial c ontribution bestowed on a state-owned enterprise
before privatization".2211 The United States argues that there is no basis to apply the reasoning that
was used for this specific set of facts to the sale of Boeing Wichita.2212
7.811 The United States contends that even if th e Panel were to consider the reasoning in US –
Countervailing Measures on Certain EC Products, this would still lead to the conclusion that there
was no pass-through of the future subsidies. This is because the panel's reasoning in US –
Countervailing Measures on Certain EC Products was premised on the assumption that the alleged
benefit, arising from a past subsidy, was fully reflected in th e balance sheet of the privatized
company.2213 The United States argues that it is not at a ll clear that this was the case for the alleged
future benefits arising out of the I RBs. It is not certain that potential future benefits are reflected in
the balance sheet of an asset. 2214 The United States notes that even if the future benefits were
reflected in the balance sheet of Boeing Wichita, the price paid for an asset does not necessarily
equate to value. Finally, even if the Panel were to extend the presumption used in the privatization
cases to the facts of this case, the United States notes that the presumption used by the Appellate Body
in US – Countervailing Measures on Certain EC Products was a rebuttable one and that the
United States has rebutted the European Communities allegations of pass-through.2215
7.812 In response to the European Communities' cont ention that the United States has withheld the
long-term supply contracts, the United States notes that it has provided the documents, redacted to
protect very sensitive commercial information, and th at the contracts are also readily available on the
website of the US Securities and Exchange Commission. The continued request by the
European Communities for unredacted versions of the documents and for information about
negotiations is merely a fishing expedition.2216

2207 United States' response to question 367, para. 216.
2208 United States' first written submission, para. 632.
2209 United States' first written submission, para. 593.
2210 United States' first written submission, para. 632.
2211 United States' response to question 367, paras. 218-219.
2212 United States' response to question 367, para. 219.
2213 United States' response to question 367, para. 220.
2214 United States' response to question 367, para. 221.
2215 United States' response to question 367, para. 223.
2216 United States' response to question 252, paras. 425-427.

BCI deleted, as indicated [***]

Evaluation by the Panel
7.813 In relation to whether the European Commun ities' estimates of "f uture" benefits are
"speculative" and unreliable, we refer to our anal ysis of the Washington HB 2294 taxation measures
at paragraphs 7.155-7.158 of this Report. As there indicated , for the purposes of its present serious
prejudice analysis, the European Communities make s no use of post-2006 amounts, except for those
subsidies that reduce Boeing's ma rginal unit costs, which does not include the tax abatements
associated with the IRBs. Further, the Panel's own analysis of the present serious prejudice claim
places no reliance upon post-2006 subsidy amounts. 2217 Finally, as indicated at paragraphs 7.1851-
7.1853 of this Report, the Panel exercises judicial economy in relation to the threat section of the
European Communities' serious prejudice case. Fo r these reasons, it is necessary for the Panel to
quantify the amount of the subsidies only through until the end of 2006. Consequently, we do not
need to rule upon the reliability of the European Communities' post-2006 estimates.
7.814 With respect to the amount of the subsidy received directly by Boeing's LCA division, in the
view of the Panel, the European Communities' use of the City of Wichita's cost-benefit analyses in
order to estimate the amount of the subsidy is based upon the best information available. Further, we
note that the United States does not object to the u se made by the European Communities of the cost-
benefit analyses in deriving its estimates.
7.815 However, the United States contends that the estimates include subsidies not only to the
Boeing LCA division, but also to Boeing's military division. To rebut this argument, the
European Communities refers to the Ordinances under which the IRB issuances were made. All the
Ordinances enacted pre-2005 include an explicit statem ent that the IRBs were issued "for the purpose
of providing funds for the acquisition, construc tion, reconstruction and improvement of certain
industrial and manufacturing facilities of Boeing Commercial Airplanes, Wichita Division".
2218 In our
view, this is strong evidence to indicate that the tax breaks arising out of IRBs issued pre-2005 were
for the benefit of the Boeing LCA division and coul d not have been used to purchase property for
military purposes. The evidence that the United St ates relies upon in asserting the contrary is not
convincing. The United States refers to lists of Project Property bought with IRB proceeds and asserts
that because the lists indicate that the Proj ect Property was purchased "for the manufacture,
modification, maintenance, and storage of aircraft and components", this could include both civil and
military operations.2219 However, the United States does not identify any property within the lists that
is necessarily related to Boeing's military operations. The United States also contends that the lease
agreements between Boeing and the City of Wichita indicate that some Project Property was used in
Boeing's military operations. In this regard, the United States cites the provisions in the lease
agreements authorizing the Issuer of the IRBs to inspect IRB property, as well as to examine the
books and records of the Lessee "subject to security requirements of the United States Government"
and providing that "no person sha ll be entitled to … reveal to any person any national security, trade
secret, confidential or other information which has not otherwise been made public and which, if
disclosed, might put Lessee in violation of law or at a competitive disadvantage".2220 According to the
United States, these provisions "clearly refer" to the United States' ITAR requirements, which are
applicable to defence articles.
2221 However, in the light of the restrictive authorization in the IRB

2217 See paras. 7.1812-7.1813 of this Report.
2218 Wichita City Council Ordinance Nos. 47-280 (2006), 46-817 (2005), 46-401 (2004), 45-914
(2003), 45-495 (2002), 45-133 (2001), 44-811 (2000), 44-428 (1999), 44-102 (1998), 43-642 (1997), 43-325
(1996), 42-949 (1995), 42-553 (1994), 42-228 (1993), 41-916 (1992), and 41-592 (1991), Exhibit EC-179.
2219 United States' response to question 253, para. 430, citing Exhibit A to the Boeing IRB Lease
Agreements from 1994-2005, Exhibit EC-187.
2220 United States' response to question 253, para. 430 footnote 562, citing Lease Agreement between
the City of Wichita, Kansas, and the Boeing Comp any, dated as of 1 December 2004, Exhibit EC-180
Section 7.02.
2221 United States' response to question 253, para. 430 footnote 562.

BCI deleted, as indicated [***]

Ordinances enacted pre-2005, requiring IRB funds to be used for the purpose of Boeing's LCA
operations, and given that the provisions cited by the United States do not explicitly mention ITAR or
military operations, we are not convinced that th e tax breaks arising from IRBs issued pre-2005
benefited Boeing's military division rather than its LCA division.
7.816 We note that the Ordinances relating to IRBs issued from 2005 and beyond do not explicitly
limit the use of the IRB funds to Boeing's commercial operations. 2222 The Panel recalls that it is
necessary to quantify the tax breaks received by Boeing's LCA division only through until the end of
2006. The only IRBs issued from 2005 and beyond that give rise to tax breaks before the end of 2006
are those issued in 2005. The amount of these tax breaks is $0.5 million.
2223 The only additional
evidence relied upon by the United States relating to the period post-2004 is a reference to a webpage
which includes the Minutes of Wichita City Council proceedings in November 2007 (not provided as
an exhibit by the United States), including minutes of a public hearing regarding the 2007 IRB
issuance to Boeing.
2224 Although the minutes include a statem ent that Boeing needs to acquire
advanced technologies in order to compete for milita ry engineering work, as the minutes relate to an
IRB issuance in 2007 we do not find them probative of the use to which the funds from the 2005 IRB
issuance were put. In these circumstances, after revi ewing all of the evidence, we are inclined to
accept the European Communities' submission that post-2005, Boeing continued to purchase the same
type of property and continued to locate such property at the Wichita LCA facility. 2225 The Panel
notes that there is no evidence to suggest a change in the use to which IRB funds were put in 2005
compared with pre-2005. As a result, we are prepar ed to include in the estimate of the amount of the
subsidy the $0.5 million in issue.
7.817 Finally, we recall the European Communities' ar gument that, in addition to the property tax
breaks, Boeing's LCA division received "substantia l sales tax exemptions" arising out of the IRB
scheme. However, the European Communities argu es it is unable to estimate the value of these
exemptions because, according to the Kansas Department of Revenue, Boeing's sales tax exemption
certificates are confidential. 2226 Although the European Communitie s requests that the Panel draw
adverse inferences due to the United States' non-c ooperation in the information gathering process 2227,
we do not consider it necessary to attribute a precise value to the sales tax exemptions received by
Boeing. The Panel has no information before it to make an accurate estimate and, in any event,
arriving at an estimate would not effect our conc lusions in relation to the European Communities'
serious prejudice claim.
7.818 We recall that for the reasons expressed at paragraph 7.214, we address the issue of "pass-
through" in the sections quantifying the amounts of the relevant subsidies. In relation to the European
Communities' pass-through case for the tax breaks arising from the IRB bonds, given that the
European Communities relies upon the same economic an alysis to prove pass-through of the benefit
arising from the KDFA bonds, we include our findings on this issue in the section quantifying the
amount of the KDFA bonds.
2228 In that section we do not accept the European Communities' pass-
through arguments and therefore the benefit to Boeing's LCA division from the tax breaks which arise

2222 Wichita City Council Ordinance Nos. 47-280 (2006), 46-817 (2005), 46-401 (2004), 45-914
(2003), 45-495 (2002), 45-133 (2001), 44-811 (2000), 44-428 (1999), 44-102 (1998), 43-642 (1997), 43-325
(1996), 42-949 (1995), 42-553 (1994), 42-228 (1993), 41-916 (1992), and 41-592 (1991), Exhibit EC-179.
2223 Estimates of Tax Benefits from Wichita IRBs, Exhibit EC-23, breaks down the tax benefits arising,
each year, from IRBs issued in each year from 1979-2019.
2224 United States' response to question 253, para. 431 footnote 564.
2225 European Communities' comments on United States' response to question 253, para. 372.
2226 European Communities' first written submission, para. 322.
2227 European Communities' first written submission, para. 325.

BCI deleted, as indicated [***]

from the IRBs is the amount directly received by Boeing's LCA division over the period 1989-2006,
namely $475.8 million.2229
(vii) Conclusion
7.819 For these reasons, the Panel finds that the tax breaks arising from the issuance of IRBs,
introduced by the State of Kansas and municipalities therein, are a specific subsidy within the
meaning of Articles 1 and 2 of the SCM Agreement. The Panel estimates that the amount of the
subsidy to Boeing's LCA division is $475.8 million.
(b) Direct transfer of funds arising from the Kansas Development Finance Authority bonds
(i) Introduction
7.820 The European Communities argues that certain payments made by the State of Kansas
following the issuance of Kansas Development Fi nance Authority Bonds ("KDFA bonds") constitute
either a direct transfer of funds under Article 1. 1(a)(1)(i) or the foregoing of revenue otherwise due
under Article 1.1(a)(1)(ii) of the SCM Agreement. Although the financial contribution is received by
Spirit, the European Communities argues that th e benefit has passed-through to Boeing. The
European Communities estimates the benefit to Boeing to be $122 million over the period 2005-2024.
7.821 Although the United States accepts that a financ ial contribution exists in relation to the
payments, the United States argues that the payments are made to Spirit and that the benefit does not
pass-through to Boeing.
(ii) The measure at issue
7.822 In 2003 the Kansas State legislature adopted the Economic Revitalization and Reinvestment
Act ("ERRA"), codified as KSA §74-50,136. It authorizes the Kansas Development Finance
Authority ("the Authority") to issue up to $500 million in bonds ("KDFA bonds") on behalf of an
"eligible business" for an "eligible project".
7.823 Under the ERRA, an "eligible business" is:2230
"A person, corporation, partnership or ot her entity doing business in Kansas that
satisfies conditions imposed by the secretary, which may include, among other
conditions, that the corporation, partnership or other entity:
(A) Paid at least $600,000,000 in average annual gross Kansas
compensation…during the base eligibility period {i.e. during the three taxable years
immediately preceding the date of application for benefits under the ERRA}; and
(B) paid at least $50,000 of average annual gross compensation per Kansas
employee during the base eligibility period; and

2229 Amount of Subsidies to Boeing's LCA Division, Exhibit EC-17 provides the estimate of the value
of the IRB tax breaks to Boeing over the period 1989-2006 ("Past Amount" column, p. 3). From this amount
($476.9 million) we subtract the amount estimated to be received by Spirit during this period, due to our
conclusion that the benefit to Spir it does not "pass-through" to Boeing. The amount received by Spirit over the
period 1989-2006 can be found in Estimates of Tax Benefits from Wichita IRBs, Exhibit EC-23, in the row
entitled "Tax Benefit from Spirit IRBs" ($1.1 million).
2230 Kan. Stat. Ann. § 74-50,136 (2004), Exhibit EC-207.

BCI deleted, as indicated [***]

(C) has invested at least $1,000,000,0 00 in real and tangible personal property
located within and currently used in the operation of a business in Kansas; and
(D) is described by north American industrial classification system as being in the
manufacturing sector." 2231
An "eligible project" is defined as:

"A research, development, engineering or manufacturing project:
(A) undertaken by an eligible business relating to the development of a new or
improved business component or product…
(B) for which the eligible business proposes to invest not less than $500,000,000
in Kansas in direct connection with the eligible project …; and
(C) for which the eligible business proposes to employ up to 4,000 full-time
employees in Kansas." 2232
The ERRA provides that no new "eligible project" shall be approved for financing after 1 July 2005.

7.824 Under the terms of the ERRA, an eligible busin ess that enters an agreement to receive the
proceeds of KDFA bonds to fund an "eligible project" commits to repay the principal and the interest
on such funds. However, the State of Kansas cred its a "special economic revitalization fund", created
in the custody of the state treasurer, with the in come taxes withheld from employees of an eligible
business. The withheld income taxes in this fund are used to pay the interest due on the bonds. The
"eligible business" is obligated to pa y only that interest, if any, th at exceeds the revenue collected as
withheld income taxes from the "eligible business".
7.825 Spirit filed an application for KDFA bond fi nancing in May 2005. In response, on
9 June 2005, seven days prior to Boeing's sale of Boeing Wichita to Spirit, the Authority signed a
"Resolution of Intent" to issue KDFA bonds on be half of Spirit, in an amount not exceeding
$500 million.
2233 On 30 June 2005, the Kansas Department of Commerce and Spirit reached an
agreement regarding the terms of the bond issuance. As a result, on 5 December 2005, the first
tranche of bonds to fund Spirit's "eligible project", namely the development of parts for the 787, was
issued in the amount of $80 million, at an interest rate of 8.5 per cent per annum.2234
7.826 Spirit's application for financing reveals that, in a similar manner to the IRBs, it does not use
the KDFA bonds as a true financing mechanism. Ra ther than a third party buying the bonds and
Spirit receiving the proceeds of sale to finance th e eligible project, Spirit purchases its own bonds. 2235
The funds used by Spirit to purchase the bonds are then loaned back to Spirit. The interest and the
repayment of the principal are owed to the owner of the bonds, namely Spirit. However, Spirit is able
to file a "set-off acknowledgment" so that it is not re quired to make the loan payments to itself and so
that the only flow of funds is the transfer to Sp irit of the tax withheld from Spirit's employees as the
interest payments on the bonds.2236

2231 European Communities' first written submission, para. 343 and Kan. Stat. Ann. § 74-50,136 (2004),
Exhibit EC-207.
2232 Kan. Stat. Ann. § 74-50,136 (2004), Exhibit EC-207.
2233 European Communities' first written submission, para. 348.
2234 European Communities' first written submission, para. 348.
2235 European Communities' first written submission, paras. 350-352.
2236 European Communities' first written submission, paras. 350-352.

BCI deleted, as indicated [***]

(iii) Whether a subsidy exists within the meaning of Article 1 of the SCM Agreement
Arguments of the European Communities
7.827 According to the European Communities, the ne t effect of the KDFA bond issuances is that
"the State of Kansas provides grants to Spirit out of the tax withholdings from Spirit's employees for
the benefit of the 787 parts that Spirit will manufacture for Boeing".
2237 The European Communities
argues that the commitment by the State of Kansas to pay interest due on the bonds issued on behalf
of Spirit constitutes a financial contribution un der Article 1.1(a)(1) of the SCM Agreement. The
financial contribution can be characterized as a di rect or potential direct transfer of funds under
Article 1.1(a)(1)(i) or as the foregoing of re venue otherwise due under Article 1.1(a)(1)(ii). 2238 A s
Spirit holds its own bonds, Spirit receives a direct gr ant from the State in the amount of the interest
due on the bonds, which is a direct transfer of funds under Article 1.1(a)(1)(i). Further, because the
State of Kansas uses income tax withholdings to pa y the interest on the bonds, it forgoes tax revenue
that it would otherwise collect, which constitutes a fi nancial contribution under Article 1.1(a)(1)(ii) of
the SCM Agreement.2239
7.828 The European Communities argues that Spirit is not required to pay anything in return for the
interest payments it receives pursuant to the KDFA bonds and that the "substantial advantages
conferred … by these KDFA bonds that relate to the production of 787 LCA are provided on non-
market terms. Indeed, this type of financing scheme, where the State uses tax withholdings to pay a
portion of the interest on the bonds, can be granted only by a government".
2240
7.829 Although Spirit is the direct recipient of the financial contribution arising from the issuance of
KDFA bonds, the European Communities argues that the KDFA bonds confer a benefit on Boeing's
LCA division within the meaning of Article 1.1(b) of the SCM Agreement. The
European Communities contends that the benef it conferred by the KDFA bonds passes-through to the
Boeing LCA division. The European Communities' arguments on this point are summarized at
paragraphs 7.846-7.849 of this Report.
Arguments of the United States
7.830 In its response to a Panel question, the Unite d States confirms that it "accepts that the
measures at issue related to the…KDFA bonds involve a financial contribution under the
SCM Agreement".2241 The United States does not clarify whether, in its view, the financial
contribution arises under Article 1.1(a)(1)(i) or (ii) or both.2242
7.831 The United States accepts that the KDFA bonds provide a benefit within the meaning of
Article 1.1(b) of the SCM Agreement. 2243 However, the United States argues that the benefit is
provided to Spirit, not Boeing. According to the United States, the European Communities has failed
to establish that the benefit arising out of the KDF A bonds issued to Spirit passes-through to Boeing.
The United States' arguments on this point are summarized at paras. 7.852-7.856 of this Report.

2237 European Communities' first written submission, para. 350.
2238 European Communities' first written submission, para. 356.
2239 European Communities' first written submission, para. 356.
2240 European Communities' first written submission, para. 365.
2241 United States' response to question 257, para. 445.
2242 We note that the fact that the United States does not repeat its argument that a financial
contribution under Article 1.1(a)(1)(ii) is limited to revenue foregone in the past, indicates that the United States
at least accepts that there is a financial contributi on under Article 1.1(a)(1)(i) , which according to the
United States, contemplates a financial contribution occurring in the future.
2243 United States' response to question 258, para. 449.

BCI deleted, as indicated [***]

Evaluation by the Panel
7.832 We agree with the parties that the KDFA bonds involve a direct transfer of funds under
Article 1.1(a)(1)(i) of the SCM Agreement.
7.833 Although the flow of funds under the KDFA bond scheme is quite convoluted, the "eligible
business" remits the taxes it has withheld from its employees working on the "eligible project" to the
State of Kansas. The State of Kansas then transfer s the withheld taxes to pay the interest due on the
KDFA bonds. In the context of this case, Spirit re mits the taxes it has withheld from its employees
working on the eligible project and then the Kansas state treasurer pays the funds back to Spirit, rather
than the State merely waiving the requirement that Spirit pay it the withholding taxes it owes. 2244 In
these circumstances, the Panel finds that there is a financial contribution to Spirit in the form of a
direct transfer of funds under Article 1.1(a)(1)(i) of the SCM Agreement. 2245 Therefore, it is not
necessary for us to decide whether the KDFA bond sch eme can also be characterized as involving the
foregoing of revenue otherwise due under Article 1.1(a)(1)(ii).
7.834 In analyzing whether Spirit received a benefit as a result of the direct transfer of funds, it is
necessary to assess whether it received a financial cont ribution more favourable than that available on
the market.2246 The payments from the State of Kansas to Spirit, to pay for the interest due on the
KDFA bonds, are equivalent to a grant, rather than to a loan for example, because Spirit is not
required to repay the money or provide anything in return. In these circumstances, the conclusion that
Spirit receives a benefit within the meaning of Article 1.1(b) follows readily. On the marketplace, any
such transfer of funds would be accompanied by a re quirement that the sum be repaid with interest.
This conclusion is in accordance w ith that reached by the panel in US – Upland Cotton, where it was
held that financial contributions in the form of gran ts confer a benefit "as they place the recipient in a
better position than the recipient would otherwise have been on the marketplace".
2247

2244 Kan. Stat. Ann. § 74-50,136 (2004), Exhibit EC-207, section (h) provides that "the state treasurer
shall credit all revenue collected or received from withholding upon Kansas wages paid by a taxpayer which is
an eligible business with respect to an eligible project…to the special economic revitalization fund, which fund
is hereby created in the custody of the state treasurer but shall not be a part of the state general fund" (emphasis
added). The use of the phrase "collected or received" indicates that there is a flow of funds from the taxpayer, in
this case Spirit, to the State. Section (e) of KSA §74-50,136 provides that "… revenue realized from
withholding upon Kansas wages paid by the eligible bu siness … with respect to the eligible project which is
necessary to pay the interest on such obligations shall be credited to the special ec onomic revitalization fund …
and shall be transferred by the state treasurer to pay interest on such obligations". This indicates that there is a
flow of funds back from the state to the "eligible business", namely Spirit. Footnote 568 of the
European Communities' first written submission explains in further detail the flow of funds from the special
economic revitalization fund to other accounts in the custody of the state, until the interest payment is eventually
made to Spirit.
2245 Even if the withheld taxes did not actually change hands, but rather the State of Kansas waived the
requirement that Spirit remit withheld taxes to it, allo wing Spirit to keep the taxes collected as the interest
payment, this would not necessarily prevent a finding of a direct transfer of funds under Article 1.1(a)(1)(i). In
Japan – DRAMs (Korea), the Panel held that the form of a tran saction, including whether money actually
changes hands, is less important than its consequences in determining whether or not a transaction constitutes a
"direct transfer of fund s" (para. 7.444). In Japan – DRAMs (Korea) , the Panel noted that debt forgiveness,
where the government liberates a debtor from the obligati on to repay the debt, could constitute a direct transfer
of funds (para. 7.442). In a similar manner, being liber ated from the need to remit withheld taxes may be a
direct transfer of funds. However, in any event, the terms of the KDFA bond scheme provide for the actual flow
of funds from Spirit to the State and back again.
2246 Appellate Body Report, Canada – Aircraft.
2247 Panel Report, US – Upland Cotton, paras. 7.1115-7.1116.

BCI deleted, as indicated [***]

7.835 For these reasons, the Panel finds that the KDFA bonds confer a benefit and we analyze
whether this benefit passes-through to Boeing in th e section commencing at paragraph 7.857 of this
Report.
(iv) Whether the subsidy is specific within the meaning of Article 2 of the SCM Agreement
Arguments of the European Communities
7.836 The European Communities' primary argument is that the KDFA bonds are de facto specific
under Article 2.1(c) of the SCM Agreement . According to the European Communities, the criteria to
be met to qualify as an "eligible business" with an "eligible project" are such that only Boeing Wichita
(or its successor) could qualify for the bonds. This conc lusion is reinforced by the fact that Spirit was
the only company ever to receive the bonds.2248
7.837 The European Communities notes that because Spirit received 100 per cent of the bonds, it is
clear that only a limited number of "certain enterpri ses" (i.e. one) used the bonds. Further, Spirit
received a disproportionate share of the bonds within the meaning of Article 2.1(c) because Spirit
does not represent 100 per cent of the economy of the State of Kansas.2249
7.838 In response to the United States' argument that the KDFA bonds were available to "any
person doing business in Kansas" that met th e eligibility criteria in the ERRA, the
European Communities argues that the criteria were such that only Boeing (or its successor) could
qualify for the bonds. Therefore, the conditions were not "objective criteria or conditions" within the
meaning of Article 2.1(b) of the SCM Agreement. 2250 The fact that the Kansas Department of
Commerce refers to the bonds as the "Boeing bonds" reinforces the conclusion that the KDFA scheme
was designed with Boeing in mind and that the eligibility criteria favour certain enterprises over
others.2251
7.839 Although the United States argues that the KDFA bonds are not specific to Boeing because
the bonds were issued to Spirit, the European Commun ities contends that this is beside the point. A
subsidy need not be specific to one pa rticular enterprise to be de facto specific within the meaning of
Article 2.1(c). Rather, a subsidy is de facto speci fic if it is used by a limited number of "certain
enterprises", predominantly used by "certain enterp rises" or disproportionately granted to "certain
enterprises", where "certain enterpri ses" refers to "an enterprise or industry or group of enterprises or
industries".2252
7.840 At the end of its second written submission rega rding the specificity of the KDFA bonds, the
European Communities also asser ts that the KDFA bonds are de jure specific under Article 2.1(a) of
the SCM Agreement. The European Communities argu es that "given that the criteria established by
the ERRA made it impossible for any entity other than Boeing (or its successor) to qualify … the
legislation explicitly limited access to the KDFA bonds to certain enterprises".2253

2248 European Communities' first written submission, paras. 367 and 369.
2249 European Communities' second written submission, para. 266.
2250 European Communities' second written submission, para. 267.
2251 European Communities' second written submission, para. 267 and Kansas Department of
Commerce, Legislative Update, Legislative Session Track for S.B. 281, Economic Revitalization and
Reinvestment Act (Boeing Bonds), 10 November 2004, Exhibit EC-212.
2252 European Communities' second written submission, paras. 264–265.
2253 European Communities' second written submission, para. 269.

BCI deleted, as indicated [***]

Arguments of the United States
7.841 The United States argues that the KDFA bonds do not give rise to a specific subsidy to
Boeing because the bonds were not issu ed to Boeing; rather, they were issued to Spirit. Further,
under the ERRA, the KDFA bonds were "available to any person doing business in Kansas that met
the statute's criteria".2254
Evaluation by the Panel
7.842 In the light of our conclusion at paragraphs 7.8 89-7.890 of this Report, that the benefit of the
financial contribution did not "pass-through" from Spir it to Boeing, and therefore that there is no
benefit to Boeing arising from the direct transfer s of funds under the KDFA scheme, there is no need
for the Panel to address whether the subsidy is specific.
(v) The amount of the subsidy to Boeing's LCA division
Arguments of the European Communities
7.843 The European Communities argues that the benefit arising from the KDFA bonds is
approximately $6.1 million per year from 2005 until 2024, which amounts to $122 million.2255
7.844 The European Communities calculates this fi gure by noting that Spirit purchased $80 million
in KDFA bonds in 2005 at an interest rate of 8.5 per cent per annum over 20 years. At this rate, the
interest due on the bonds is approximately $6.8 million per year. 2256 Under the ERRA, the State of
Kansas pays Spirit the interest on these bonds up to the amount of income tax withheld from Spirit's
employees working on the "eligible project". Th e European Communities notes that in its KDFA
financing application, Spirit indicated that appr oximately 1,500 of its employees would work on the
"eligible project".2257 Further, Spirit indicated in the same application process that the average annual
gross compensation earned by employees of the fo rmer Boeing Wichita commercial airplane business
was $69,979 between 2002 and 2004. 2258 In its calculations, the Eu ropean Communities assumes that
Spirit's employees working on the "eligible project" will have the same average wage and therefore
will collectively pay approximately $6.1 million in income tax per year.2259
7.845 According to the European Communities' ca lculations, the interest due on the bonds
($6.8 million per year) exceeds the income tax w ithheld each year from employees working on the
"eligible project" ($6.1 million per year). Therefore, under the ERRA, the State of Kansas is required
to pay $6.1 million in interest each year to Spirit over a period of 20 years. This amounts to a
financial contribution of $122 million between 2005 and 2024, of which $12.2 million is received in
the period 2005-2006 and $109.8 million is received in the period 2007-2024.
2260
7.846 In arguing that this amount passed-throug h from Spirit to Boeing's LCA division, the
European Communities relies on the same Appellate Bo dy reports in relation to pass-through as it did

2254 United States' first written submission, para. 655.
2255 European Communities' first written submission, para. 357.
2256 European Communities' first written submission, para. 358.
2257 European Communities' first written submission, para. 359 and Kansas Development Finance
Authority, Financing Application, filed by Mid-Western Aircraft Finance, Inc., dated 26 May 2005, Exhibit EC-
209, p. 3.
2258 European Communities' first written submission, para. 359 and Kansas Department of Commerce,
Application for Benefits as Authorized by the Economic Revitalization and Reinvestment Act, filed by Mid-
Western Aircraft Systems. Inc., dated 9 May 2005, Exhibit EC-208, p. 2.
2259 European Communities' first written submission, para. 359.
2260 European Communities' first written submission, para. 364.

BCI deleted, as indicated [***]

with respect to the B&O tax rate reductions and the IRBs. 2261 It also argues that pass-through
occurred via the same mechanis m as the IRB benefits, namely through the long-term supply
agreements concluded as a term of the sale of Boeing Wichita to Spirit. The European Communities
cites Professor Wachtel's analysis, that the future expected benefit of an asset is factored into its
valuation upon sale, to support its case.2262
7.847 In response to the argument of the United States th at, at the time of sale, neither the issuance
of KDFA bonds nor their value was certain, the Eur opean Communities contends that the terms of the
sale were finalized after Spirit applied for the bonds (i.e. at th e time of the transaction closing rather
than at the time of the signing of the Asset Purchase Agreement). 2263 In any event, at the time of
signing the Asset Purchase Agreement, both parties to the transaction had a reasonable expectation
that the KDFA bonds would be issued to Spirit and therefore would have factored this in to the
valuation of the asset. 2264 In fact, the European Communiti es argues that at the time the Asset
Purchase Agreement was signed, there was "little doubt " that Spirit would receive and take advantage
of the bonds. The ERRA had been passed and its terms indicated that it was intended to advantage
Spirit, and only Spirit. According to the European Communities, it would have been a poor business
decision for Spirit not to seek the benefit of the bonds.2265
7.848 In relation to the amount of the future benef its, the long-term supply agreements and Spirit's
business plan included enough detail for an accurate estimate of employees' future salaries and
therefore, their tax obligations, which the State of Kansas uses to provide the financial contributions,
to be estimated.2266
7.849 The European Communities contends that it has pr oven, based on the best publicly available
information, that the benefits associated w ith the KDFA bonds have passed-through to Boeing's LCA
division and that the United States has not rebutted this. 2267 In particular, the European Communities
observes that the United States has not provided full copies of all of the documents constituting the
full set of long-term supply agreements. Absent full copies of all those documents, the European
Communities requests the Panel to draw the necessary inferences on this issue.2268
Arguments of the United States
7.850 The United States argues that at the time the pr ice for the asset was negotiated, and even at
the time the transaction closed, the amount of any possible future benefit to Spirit from KDFA bond
issuances was unknown. Although the Authority had indicated its intent to issue up to $500 million in
KDFA bonds to Spirit before the deal closed, the fi rst tranche of bonds, in the amount of $80 million,
was not issued until after the transaction closed.2269
7.851 Further, the United States contends that the amount of the benefit to accrue to Spirit as a
result of the issuance of KDFA bonds could not be known with certainty in advance because the

2261 European Communities' response to question 137.
2262 European Communities' response to question 256, para. 456 and European Communities' first
written submission, para. 363.
2263 European Communities' second written submission, para. 258.
2264 European Communities' second written submission, para. 257.
2265 European Communities' second written submission, para. 259.
2266 European Communities' second written submission, para. 260.
2267 European Communities' second written submission, para. 262.
2268 European Communities' comments on United States' response to question 47. European
Communities' comments on United States' response to question 252, paras. 364-365; European Communities
comments on United States' response to question 255.
2269 United States' first written submission, para. 651.

BCI deleted, as indicated [***]

interest payments to Spirit are funded by the income tax withheld from its employees. 2270 T h e
United States argues that the level of employment over the period of the bonds cannot be predicted
with any certainty.
2271 In addition, employees generally ha ve some leeway regarding how much
income tax is withheld from them. 2272 Finally, an employee's withholding tax is based on the
employee's expected tax liability, which depends not only on salary, but also on number of
dependents, home ownership and u se of personal tax exemptions. 2273 Therefore, the amount of
withheld income tax from Spirit's employees could not be known in advance.
7.852 The United States relies upon the same legal analys is regarding the need to demonstrate pass-
through as it did in relation to the B&O tax rate reductions and the IRBs.2274
7.853 Although the United States accepts that the KDFA bonds confer a benefit, it argues that the
European Communities has not demonstrated that the benefit to Spirit passed-through to Boeing's
LCA division.2275
7.854 The United States argues that at the time a price was set for the sale, namely at the time the
Asset Purchase Agreement was signed in February 2005, Spirit had not even applied for the KDFA
bonds, much less received approval for them. 2276 In addition, although be fore the transaction closed
the Authority had issued a resolution of intent to issue KDFA bonds to Spirit, this commitment was
contingent upon a number of conditi ons being fulfilled. The Authority was not committed to issuing
the bonds until after the transaction was finalized. 2277 Therefore, the future benefits from the KDFA
bonds would not have been reflected in the sale price.
7.855 Further, the amount of any future benefit was uncertain because the number of future
employees was unknown and employees also have some leeway regarding how much of their salary is
withheld as tax. 2278 Therefore, even if there were some e xpectation at the time the transaction was
negotiated that Spirit would receive KDFA bonds, there is no basis to determine how this may have
been reflected in the sale price.
7.856 The United States relies upon the same argument s regarding the flaws in the economic
analysis of pass-through presented by the European Co mmunities as it did in relation to the IRBs. In
particular, the United States notes that the price of an asset is unlikely to correspond to its expected
value.2279
Evaluation by the Panel
7.857 As relevant background to the pass-through issu es that the European Communities raises in
relation to the Kansas measures, we note that prior to the sale to Spirit, Boeing Commercial Airplanes,
Wichita Division ("Boeing Wichita") was a manufacturing facility owned by Boeing and located in

2270 United States' first written submission, para . 652; United States' response to question 257,
para. 447.
2271 United States' first written submission, para. 652; United States' response to question 257,
para. 447.
2272 United States' first written submission, para. 652; United States' response to question 257,
para. 448.
2273 United States' first written submission, para. 652; United States' response to question 257,
para. 448.
2274 United States' response to question 137.
2275 United States' response to question 258, para. 449.
2276 United States' first written submission, para. 648.
2277 United States' first written submission, para. 649.
2278 United States' first written submission, para. 652.
2279 United States' first written submission, para. 654.

BCI deleted, as indicated [***]

Wichita, Kansas. Boeing produced parts at the faci lity, over a period of 70 years, for every Boeing
LCA except the 717. 2280 It functioned as an internal supplie r of parts and assemblies for Boeing's
airplane programmes and had very few sales to third parties. 2281 On 16 June 2005, Boeing sold the
facility to Spirit, at which time Spirit agreed to be Boeing's exclusive supplier for substantially all of
the products and services provided by Boeing Wichita to Boeing prior to the sale. Spirit has since
entered long-term supply agreements with Airbus.2282
7.858 In order to establish that any tax abatements or direct transfers of funds to Spirit under the
IRB and KDFA bond schemes caused serious prejudice in the LCA market, the
European Communities needs to demonstrate that Boeing LCA is in fact a product subsidized by these
payments and tax incentives. While the European Communities refers to this as a "pass-through"
analysis, we prefer to consider it as one of the step s in the causation analysis under Articles 5 and 6 of
the SCM Agreement.
2283
7.859 In essence, the European Communities' argument re garding pass-through is that at the time of
sale of Boeing Wichita to Spirit, both parties to th e transaction anticipated that in the future Spirit
would be granted tax abatements and transfers of funds under the bond schemes. As a result, the
parties factored these future benefits into the terms of the transaction, such that the beneficiary of the
subsidies was Boeing, rather than Spirit. The Eu ropean Communities argues that the future benefits
associated with the bond issuances to Spirit may have been factored into the sale transaction through a
lump-sum payment or through the terms of the supply agreements negotiated at the time of sale. In
the absence of evidence to support one theory ove r the other, the European Communities asks the
Panel to assume that the pass-through occurred via th e long-term supply contracts agreed at the time
of the sale. Therefore, the European Communitie s' pass-through claim differs from those cases in
which an upstream supplier is alleged to pass-th rough the benefits of a subsidy to a downstream
producer through adjusting the prices of the inputs as they are sold. Rather, the
European Communities' case is that the pass-through occurred at the time of sale of Boeing Wichita.
The European Communities does not argue that Spirit adjusts the prices for the components it sells to
Boeing as it receives the subsidies in issue. Indeed, this scenario is not possible given that the prices
for components sold to Boeing have been fixed in long-term supply agreements negotiated at the time
of the sale of Boeing Wichita, with price adjustments possible in only a few very limited
circumstances.
7.860 Before evaluating the merits of the European Communities' case, it is necessary to consider
the standard of proof for pass-through that has been applied in previous cases. In US – Softwood
Lumber IV, the Appellate Body held, albeit in the context of a countervailing duty case, that pass-
through between upstream and downstream entities cannot be presumed but must be proven:
"Where the input producers and producers of the processed products operate at arm's
length, the pass-through of input subsidy bene fits from the direct recipients to the
indirect recipients downstream cannot simply be presumed; it must be established by
the investigating authority."
7.861 However, we note that the "privatization cases" discussed by the parties in their submissions,
namely US – Countervailing Measures on Certain EC Products and US – Lead and Bismuth II ,
indicate that in certain circumstances a rebuttabl e presumption regarding pass-through arises. In
particular, in US – Countervailing Measures on Certain EC Products , the Appellate Body held that
following a privatization at arm's length and for fair market value, there is a rebuttable presumption

2280 European Communities' first written submission, para. 286.
2281 Prospectus, Spirit AeroSystems Holdings, Inc., 20 November 2006, Exhibit EC-165, p. 5.
2282 Prospectus, Spirit AeroSystems Holdings, Inc., 20 November 2006, Exhibit EC-165, pp. 2 and 5.
2283 See analysis at paras. 7.281-7.288 of this Report.

BCI deleted, as indicated [***]

that the privatized producer paid for the benefit of prior financial contributions bestowed upon the
state-owned producer and therefore that the benefit is "extinguished" upon sale. In other words, in the
circumstances described in US – Countervailing Measures on Certain EC Products , there is a
rebuttable presumption that the benefit of the subsidy does not pass-through to the purchaser of the
state-owned entity.
7.862 In our view, unless the principle espoused in US – Countervailing Measures on Certain EC
Products applies to the facts of the case, there is no presumption for or against pass-through. Rather,
US – Softwood Lumber IV establishes that pass-through must be established, rather than presumed.2284
7.863 In considering the merits of the European Comm unities' case, the first step is to consider
whether the theory espoused in the privatization cases applies to the facts of this case and therefore
gives rise to a presumption relating to pass-through. If the theory does not apply and consequently it
is necessary in accordance with US – Softwood Lumber IV for the European Communities to establish
pass-through on the evidence , we consider whether the European Communities has successfully done
so. We also consider the implications of the fact that the European Communities' case relates to pass-
through that is alleged to occur prior to the receipt of any of the subsidies.
The privatization cases
7.864 To support its pass-through case in re lation to the Kansas measures, the
European Communities relies upon an economic analys is prepared by Professor Wachtel, which
begins:
"The economics literature on asset pric ing leaves no doubt that the terms and
conditions of the sale of a real capital asset, such as Boeing's commercial airplane
facilities in Wichita, would reflect the benefit stream expected to accrue to the new
owner from future expected subsidies. Su ch terms and conditions could include, for
example, present and future lump-sum pa yments, commitments to long-term supply
agreements etc." 2285
7.865 According to the European Communities, Prof essor Wachtel's reasoning is similar to that
which underlies the privatization cases, in particular US – Countervailing Measures on Certain EC
Products, in that it relies on the notion that on the sale of an asset at arm's length and for fair market
value the purchaser is presumed to pay for the value of the subsidy. Therefore, in considering the
merits of the European Communities' case, it is n ecessary for us to decide whether the reasoning in
the privatization cases is indeed applicable to th e facts of the case before us, giving rise to a
presumption relating to pass-through. In particular, it is necessary for us to consider whether the sale
of Boeing Wichita at arm's length and for fair mark et value leads to a presumption regarding the pass-
through of the benefit of the subsidies expected to be received by Spirit post-sale.

2284 We note that the European Communities argues that the long-term supply contracts between
Boeing and Spirit are not at arm's length because the prices under the contracts are lower than would ordinarily
be the case. The European Communities does not seem to claim that this exempts it from any need to
demonstrate pass-through. If the Euro pean Communities intends to imply th is, we do not accept such a claim.
The panel report in US – Softwood Lumber IV (Article 21.5 – Canada) (paras. 4.68-4.73) clarifies that pass-
through may not need to be demonstrated where the relevant transaction occurs between related entities.
However, the requirement to demonstrate pass-through does not depend in and of itself on whether the
transaction in question is at arm's length.
2285 Dr. Paul Wachtel, Economic Analysis: Subsidy Pa ss-Through and Asset Pricing Issues Relevant to
Subsidies to U.S. LCA Industry, December 2006, including Dr. John Asker, On the Pass-Through of
Ad Valorem Subsidies Received by Input Suppliers, 1 November 2006, attached as Annex A to Wachtel
Economic Analysis, Exhibit EC-16, p. 4.

BCI deleted, as indicated [***]

7.866 The privatization cases involved an assessment of the WTO-consistency of countervailing
duties imposed or maintained by the United Stat es on products imported from formerly state-owned
producers to offset subsidies received by the pr oducers prior to their privatization. In US – Lead and
Bismuth II, the panel found that due to the change in ownership of the subsidized state-owned
producer, leading to the creation of the privatized producers, the United States investigating authority
should have examined whether the production of th e privatized producers, and not the state-owned
producer, was subsidized. 2286 The Appellate Body found no error in the panel's conclusion, in the
specific circumstances of the case. 2287 In US – Countervailing Measures on Certain EC Products,
where the legitimacy of a number of countervaili ng duties imposed by the United States against
imports from the European Communities was in issue, the panel held that privatization at arm's length
and for fair market value rebuts any presumption th at the benefit from prior financial contributions
continues to accrue to the privatized producer. In reviewing the panel's findings, in areas of the panel
report in which the panel made broad statements or findings, the Appellate Body found that the panel
went "too far" and that the panel "should have confined its finding to {the} specific circumstances" of
the case before it. 2288 In particular, the Appellate Body em phasized that the findings of the panel
applied only to the specific facts of the case, wh ich consisted of a "benefit resulting from a prior non-
recurring financial contribution bestowed on a state-owned enterprise where, following a privatization
at arm's length and for fair market value, the govern ment transfers all or substantially all the property
and retained 'no controlling interest in the privatized producer'".2289
7.867 Therefore, if in this dispute we were to fo llow the theory underlying the privatization cases,
namely that in the sale of an asset at arm's length and for fair market value the purchaser is presumed
to pay for the value of the subsidy, this woul d necessarily require extending the reasoning to a
completely different set of facts, in circumstan ces where the Appellate Body indicated that the
reasoning should be used restrictively. In particul ar, the Panel would need to hold that the same
reasoning as used in the privatization cases applies to future financial contributions bestowed on
private enterprises and to the sale of enterprises in private-to-private transactions.
7.868 We consider that the privatization cases are di stinguishable from the facts before us and we
do not consider it appropriate to extend the theory underlying the privatization cases to the facts of
this case. Whereas the upshot of the privatization cases was that the benefit of the subsidies received
prior to sale were presumed not to pass-through to the privatized entity, the result of extending the
theory underlying the privatization cases to the facts of this dispute would be a presumption in favour
of pass-through to the seller of the benefit of subsid ies to be received in the future. In creating a
presumption against pass-through, the privatizati on cases placed the burden on the complaining party
to establish pass-through. If we were to create a presumption in favour of pass-through of future
subsidies, this would effectively shift the burden of proof by placing a burden on the respondent to
rebut or to disprove the presumed pass-through. In our view, this was not an intended consequence of
the privatization cases.
7.869 We also consider the privatization cases to be distinguishable from the facts before us because
the nature of a privatization is very different from a private-to-private sale. As the panel noted in
US – Countervailing Measures on Certain EC Products, "privatization is a very particular and
complex change in ownership. It involves a funda mental transformation of a government-owned and
controlled entity into a privately-owned, market-oriented company".
2290 Whereas a privatization
results in a "fundamental transforma tion" of the entity in issue, in an ordinary private-to-private

2286 Panel Report, US – Lead and Bismuth II.
2287 Appellate Body Report, US – Lead and Bismuth II.
2288 Appellate Body Report, US – Countervailing Measures on Certain EC Products, paras. 116-118.
2289 Appellate Body Report, US – Countervailing Measures on Certain EC Products, para. 117; Panel
Report, US – Countervailing Measures on Certain EC Products, para. 7.62.
2290 Panel Report, US – Countervailing Measures on Certain EC Products, para. 7.60.

BCI deleted, as indicated [***]

transaction the nature of the legal entity does not necessarily change in the course of the sale.
Consequently, while the change in the nature of the entity that was privatized may provide some
grounds for finding that the entity's production is no longer subsidized post-sale, the same reasoning is
not applicable to private-to-private sales.
7.870 Further, in the Panel's view a major loophole in the SCM Agreement would result if the
reasoning underlying the privatization cases were extended to private-to-private sales. The
European Communities' case is that the sale of Boei ng Wichita caused the benefit of the subsidies to
pass-through to the Boeing LCA division. However, in the privatization cases (in which the seller no
longer acted as a producer in the market), the conclu sion that the purchaser paid for the value of the
subsidy was found to "extinguish" the subsidy. If the Panel in this dispute were to extend the
principle in the privatization cases to private-to-priva te sales, daily trading in the shares of publicly
traded corporations could not logically be excl uded from the changes of ownership to which the
"extinction" principles would apply. Therefore, a subsidized public trading corporation would be
placed outside the disciplines of the SCM Agreement , because any sale of a share in the company on
arm's length terms and for fair market value would "extinguish" the subsidies . As trading in shares
occurs on a daily basis in relation to many publicly traded corporations, a subsidy provided to such a
company would be "extinguished" soon after its pr ovision. Therefore, a government could provide
such companies with subsidies, confident in the knowledge that they would quickly be "extinguished"
and therefore would be immune fro m challenge under the SCM Agreement. Therefore, in our view,
applying the principle underlying the privatizati on cases to a wider context than the specific one
endorsed by the Appellate Body could significantly undermine the disciplines of the SCM Agreement.
7.871 Therefore, we distinguish the facts that arose in the two privatization cases from the facts
before us and we do not consider it appropriate to extend the reasoning underlying those cases to the
facts of this case. As a result, we conclude that there is no presumption relating to pass-through.
Rather, as indicated in US – Softwood Lumber IV , pass-through cannot be presumed but must be
established on the evidence.
Evidence to support the European Communities' case
7.872 Apart from the economic theory espoused by Professor Wachtel and the theory underlying the
privatization cases, the latter of which we have conc luded is not applicable to the facts before us, the
European Communities does not submit any evidence to support its contention that the expected
subsidies were factored into the negotia tion of the sale of Boeing Wichita. The
European Communities explains that it lacks any other evidence, aside from Professor Wachtel's
statement, because the United States has refused to supply it with un-redacted copies of the long-term
supply agreements. However, according to the Eu ropean Communities, even in the absence of any
such evidence, it has made a prima facie case.
7.873 Although the European Communities does not c ite any evidence to demonstrate that the
economic theory upon which it relies applied as pr edicted in the context of the sale of Boeing
Wichita, there are a number of documents on the reco rd which were created at or around the time of
the sale. These documents include the Asset Purchase Agreement between Boeing and Spirit 2291, the
Spirit Prospectus2292, a Form 8-K lodged by Boeing with th e United States Securities and Exchange
Commission2293 and the supply agreements entitled "the Special Business Provisions Agreement" and

2291 Asset Purchase Agreement Betw een The Boeing Company and Mi d-Western Aircraft Systems,
Inc., 22 February 2005, Exhibit EC-166.
2292 Prospectus, Spirit AeroSystems Holdings, Inc., 20 November 2006, Exhibit EC-165.
2293 Boeing 8-K, 16 June 2005, Exhibit EC-158.

BCI deleted, as indicated [***]

"the General Terms Agreement".2294 A review of the documents indicates that they do not contain any
evidence in support of the European Communities' case, despite being created at or around the time of
the sale of Boeing Wichita.
7.874 In particular, we note that the form (Form 8- K) lodged with the United States Securities and
Exchange Commission by the Boeing Company provides:
"On June 16, 2005, The Boeing Company (" the Company") completed the sale of its
Commercial Airplanes operations in Kans as…Transaction consideration to the
Company includes approximately $900 million cash, transfer of certain liabilities, and
long-term supply agreements that provide the Company with ongoing cost
savings."
2295
7.875 Therefore, this exhibit confirms the Europ ean Communities' submission that the long-term
supply agreements, through which Boeing obtains cost s savings, were a part of the consideration for
the sale of Boeing Wichita. However, this does no t prove that the cost savings arising under the
supply agreements were due to Spirit passing-th rough the benefit of the expected subsidies to
Boeing's LCA division. In the Spirit Prospectus re peated reference is made to the "comprehensive
cost reductions" Spirit achieved through the Boeing acquisition, for example through reducing the
workforce by 15 per cent and through entering into new labour contracts. 2296 Therefore, the cost
savings Boeing realizes through contracting w ith Spirit, rather than manufacturing its own
components, as it did prior to the sale, may be a reflection of the efficiency improvements made by
Spirit, rather than an indication that the value of expected subsidies was passed-through to Boeing's
LCA division.
2297 Further, given that the long-term supply agreements were a part of the
consideration for the transaction any preferential pricing may simply have been negotiated in
exchange for a decreased amount of cash to be paid for the Boeing Wichita facility. Therefore,
although the form lodged with the Securities and Exchange Commission confirms the European
Communities' case that long-term supply agreements we re a part of the consideration for the sale of
Boeing Wichita, this is not evidence that the expected subsidies were passed-through to Boeing's LCA
division at the time of sale.
7.876 The Panel notes that a provision in the Genera l Terms Agreement suggests that the prices
charged under the supply agreements are not disco unted, as asserted by the European Communities,
but that the components are sold at their market value:
"Boeing and {Spirit} agree that the prices have been negotiated on an arms-length
basis and represent the fair market value of the Products as of the date hereof."
 2298

2294 The long-term supply agreements negotiated as cons ideration for the sale are defined in the Asset
Purchase Agreement (Asset Purchase Agreement Betw een The Boeing Company a nd Mid-Western Aircraft
Systems, Inc., 22 February 2005, Exhibit EC-166) as th e "BCA Supply Agreement", which includes the Special
Business Provisions (Sustaining), the General Terms Ag reement (Sustaining), the Special Business Provisions
(787), the General Terms Agreement (787), the Special Business Provisions (Spares), the Special Business
Provisions (Tech Support) and the Special Business Provisions (Repair Support). The United States supplies
the Special Business Provisions Betwee n The Boeing Company and Spirit Ae rosystems, Incorporated; General
Terms Agreement Between The Boeing Company and Spirit Aerosystems, Incorporated Q 47, Exhibit US-1213.
2295 Boeing 8-K, 16 June 2005, Exhibit EC-158.
2296 Prospectus, Spirit AeroSystems Holdings, Inc., 20 November 2006, see e.g. Exhibit EC-165, p. 3.
2297 Further, post-sale the Wichita facility began supplying Airbus as well as Boeing. Through
increasing its customer base, economies of scale and therefore cost reductions may have been realized.
2298 Special Business Provisions Betw een The Boeing Company and Spir it Aerosystems, Incorporated;
General Terms Agreement Between The Boeing Company and Spirit Aerosystems, Incorporated Q 47,
Exhibit US-1213, s31, p. 39.

BCI deleted, as indicated [***]

However, this provision does not necessarily disp rove the European Communities' argument, as it
may have been inserted into the agreements for taxation purposes.

7.877 The Spirit Prospectus and the Speci al Business Provisions Agreement
2299 provide some
insight into the pricing arrangements in the long- term supply agreements. The supply arrangements
consist of requirements contracts, under which Boei ng is obligated to purchase all of its requirements
for specified components from Spirit. In relation to components for the 737, 747, 767 and 777, the
Special Business Provisions Agreement provides for a quantity-based price adjustment formula, such
that average per unit prices are higher at low volumes and lower at high volumes. In relation to the
supply of components for the 787, prices decrease as cumulative volume levels are met over the life
of the programme.
7.878 It is not possible to draw a conclusion regard ing pass-through from this pricing structure.
However, the Panel notes that the expected subsidies to Spirit are not ad valorem subsidies, but rather
are fixed sums expected to be nefit Spirit each year. For an ad valorem subsidy, 100 per cent pass-
through can be achieved if the price per unit is discounted to reflect the benefit of the subsidy received
per unit. In the case of a fixed sum to be passed-t hrough via the sale of components, as the volume of
components ordered decreases, the amount of the fixed sum to be passed-through per component
increases. The European Comm unities' case seems to be that even if Boeing's component
requirements are very low, 100 per cent of the expe cted benefit from the subsidies will pass-through
to Boeing's LCA division. Although unlikely, if Bo eing ordered only one component in a particular
year, the European Communities' c ase is that the preferential price on that component has been fixed
such that full pass-through will o ccur, where each year the European Communities calculates that the
benefit from the subsidies significantly exceeds $6 million.
2300 The latter proposition seems difficult
to accept, although we acknowledge that even if in a particular year full pass-through of the benefit
received in that year does not occur, it may eventu ally do so in the long-run over the term of the
supply agreement. Having made these observations, we acknowledge that we are not able to draw a
conclusion regarding pass-through from the pricing structure in the agreements.
7.879 We note that under the supply agreements, Boeing must purchase all of its requirements for
specified components from Spirit but there is no minimum order amount. 2301 Therefore, under the
agreements, it is possible that Boeing may place no orders at all. In the light of this, it is not clear that
we can confidently conclude that pass-through will be greater than zero.
7.880 The Panel also observes that the Special Busi ness Provisions Agreement specifically provides
for the pass-through of a certain percentage of the cost savings realized by Spirit through purchasing
directly from a Boeing subcontractor:
"Seller {i.e. Spirit} to notify Boeing of any cost reductions resulting from use of
Third Party Price Contracts. Seller shall apply [***] of the savings achieved through

2299 Special Business Provisions Betw een The Boeing Company and Spir it Aerosystems, Incorporated;
General Terms Agreement Between The Boeing Company and Spirit Aerosystems, Incorporated Q 47,
Exhibit US-1213.
2300 The European Communities calculates that the expect ed direct transfer of funds to Spirit to arise
under the KDFA bond programme is $6.1 million per year, while the tax abatements expected to accrue to Spirit
under the IRB programme through 2006 is $1.1 million per year (see Estimates of Tax Benefits from Wichita
IRBs, Exhibit EC-23).
2301 Special Business Provisions Betw een The Boeing Company and Spir it Aerosystems, Incorporated;
General Terms Agreement Between The Boeing Company and Spir it Aerosystems, Incorporated Q 47, Exhibit
US-1213, p. 85.

BCI deleted, as indicated [***]

the use of these Boeing Third Party Price C ontracts towards price reductions on the
applicable Boeing Products." 2302
Of course, the lack of reference to pass-th rough of the subsidies does not disprove the
European Communities' theory, but we note the European Communities does not explain why pass-
through of such cost savings was explicitly ment ioned in the agreement but pass-through of the
benefits of the expected subsidies was not.

7.881 In conclusion, an analysis of the agreements on the record creat ed at the time of sale does not
reveal evidence in support of the European Communities' pass-through submissions. The
implications of accepting the European Communiti es' pass-through case would be that every time a
company is sold for fair market value in circ umstances where the parties to the sale expected a
subsidy to be received in the future, the conditi ons for a finding of pass-through of the expected
subsidy will have been met. This would be th e case even in the absence of any evidence that the
parties factored the expected subsidy into the cons ideration for the transaction. All that a disputing
party before a WTO panel would be required to do to prove pass-through would be to cite the
economic theory advocated by Professor Wachtel. We cannot accept that this should be the case.
7.882 While it is possible that the European Comm unities' position is correct, the Panel has no
evidence before it to convince it of this. The Eu ropean Communities was una ble to adduce evidence
even to narrow its position regarding whethe r pass-through occurred via the long-term supply
agreements negotiated at the time of sale or via the cash payment made at the time of sale. Given that
we have found that there is no presumption in favour of pass-through in the circumstances of this
case, and therefore that at least some evidence is required to demonstrate that pass-through has
occurred, we cannot accept the European Communities' claim.
7.883 With respect to the European Communities' argu ment that the United States has not provided
it with the relevant information and documents re quired to demonstrate pass-through, we recall our
analysis of the documents on the record created at or around the time of the sale and provided by the
United States in redacted form.
2303 Our review of these documents indicates that they contain no
evidence that pass-through occurre d in the manner advanced by the European Communities. Given
the nature of the documents and the time at which th ey were created, in our view we can accord some
significance to this. Consequently, and also in the light of the concerns expressed in the following
subsection regarding the fact that pass-through is alle ged to occur prior to the receipt of the subsidies
in issue, we decline to draw the inference requested by the European Communities.
The relevance of the fact that "pass-through" is alleged to occur prior to the receipt of
any of the subsidies
7.884 The European Communities' pass-through case is different to prior cases in which pass-
through has been proven, or in which the benefit of a subsidy has been "extinguished" upon the sale of
a legal entity, because the European Communities' case relates to pass-through of subsidies that, at the
time of sale, were all expected to be received in the future.
7.885 An obvious difficulty with accepting the European Communities' case is that at the time of the
sale, which is the time at which the pass-through is alleged to have occurred, there was no guarantee
that Spirit would actually apply for and receive all the subsidies that are the subject of the

2302 See Special Business Provisions Between The Boeing Company and Spirit Aerosystems,
Incorporated; General Terms Agreement Between The Boeing Company and Spirit Aerosystems, Incorporated
Q 47, Exhibit US- 1213, p. 45 and Prospectus, Spirit AeroSystems Holdings, Inc., 20 November 2006,
Exhibit EC-165, p. 86.
2303 See European Communities' comments on United States' response to question 252, para. 364.

BCI deleted, as indicated [***]

European Communities' predictions.2304 If the Panel were to accept the European Communities' case,
it would be concluding that pass-through of certain "subsidies" occurred at a time when the subsidies
had not been and may not ever have been granted. Although it is possible that the parties to the sale
adjusted the terms and conditions of the sale of Bo eing Wichita in the anticipation of Spirit receiving
certain subsidies in the future, in the Panel's view it is incorrect to classify this as "pass-through" of a
subsidy in circumstances where the anticipated tax ab atements or direct transfers of funds may never
actually be received by Spirit.
7.886 If we were to accept that subsidies to be recei ved in the future may "pass-through" at the time
of sale of a legal entity, this line of reasoning may be extended to the facts of privatization cases, such
that subsidies could be "extinguished" upon the sale of the legal entity, either prior to or after the
receipt of the subsidies in issue. In our view, to conclude that a subsidy that may never actually be
received is "extinguished" is problematic. Even if the financial contribution is eventually granted, it
will not be possible to find that it gives rise to a subsidy because the benefit will have already been
"extinguished", prior to the financial contribution ever having been received. This gives rise to
certain logical problems, including the fact that a panel would be making findings regarding the
extinguishment of a "subsidy", even though the "subsidy" never actually exists.
7.887 The United States highlights that while the Eu ropean Communities estim ated that Spirit
would apply for and receive IRBs to the value of $222 million in 2007, in fact Spirit did not apply for
any IRBs in that year. 2305 Although the European Communities argues that Spirit will make up for
this by applying for more IRBs in later years as the production of the Boeing 787 "ramps up", there is
no guarantee this will occur. This highlights the speculative nature of the finding that the
European Communities is requesting the Panel to make.
7.888 The consequence of accepting the European Commun ities' case is that in the future, if Spirit
actually receives the financial contributions associ ated with the IRB and the KDFA bonds, Spirit will
not be able to have a countervailing duty imposed against it, because we will have concluded that
Spirit is not in fact the recipient of the benefit of the subsidy. Therefore, accepting the European
Communities' case may establish a new defence in countervailing duty cases. In particular, any entity
that is subject to an ownership change prior to r eceiving a particular subsidy may argue that it should
be immune from any countervailing duties because the benefit of the subsidy "passed-through" to the
seller at the time of the sale. In the absence of evidence that pass-through of this nature actually
occurred, we are not convinced that parties should be entitled to avail themselves of such a defence.
Therefore we are not prepared to lay the foundations for this line of argument by finding in favour of
the European Communities in this case.
7.889 For these reasons, the Panel finds that the Eu ropean Communities has failed to demonstrate
that the benefit of subsidies to be received by Spirit passed-through to Boeing at the time of sale of
Boeing Wichita. Therefore, the Panel finds that the amount of the subsidy to Boeing's LCA Division
arising from the issuance of the KDFA bonds is $0.
(vi) Conclusion
7.890 For these reasons, the Panel finds that the direct transfer of funds arising following the
issuance of KDFA bonds is a financial contribution within the meaning of Article 1 of the SCM
Agreement, but that the European Communities ha s not demonstrated that the benefit of the
financial contribution passed-through to Boeing. Therefore, the Panel finds that the European
Communities has not demonstrated that the measure gives rise to a subsidy to Boeing.

2304 At the time of the sale, Spirit had not received any of the subsidies in issue. At the time of the
written submissions, Spirit had received some of the subsidies that were anticipated at the time of sale.
2305 United States' response to question 253, para. 431.

BCI deleted, as indicated [***]

4. State of Illinois and municipalities therein
(a) Introduction
7.891 The European Communities argues th at each of the four measures at issue is a subsidy within
the meaning of Article 1 of the SCM Agreement, and is specific within the meaning of Article 2 of the
SCM Agreement. The European Co mmunities estimates that the total amount of the four subsidies to
Boeing's LCA division is approximately $25 million over the period 2002-2021.
7.892 The United States accepts that these measures are subsidies within the meaning of Article 1 of
the SCM Agreement, but argues that three of the four subsidies are not specific within the meaning of
Article 2 of the SCM Agreement. In addition, th e United States asserts that any amounts that Boeing
receives after 2006 are "speculative" and fall outside of the Panel's terms of reference, and asserts that
the total value of the four subsidies to Boeing's LCA division is [***] million over the period 2002-
2006.
(b) The measures at issue
7.893 The European Communities' claim concerns four separate incentives that the State of Illinois
and municipalities therein (i.e. Cook County and the City of Chicago 2306) provided to Boeing in
consideration for Boeing's decision to relocate its corporate headquarters from Seattle to Chicago
in 2001. The first three incentives are derived from the Corporate Headquarters Relocation Act 2307
("CHRA"). The CHRA was signed into law on 1 August 2001, approximately one month before
Boeing relocated its headquarters to Chicago. The CHRA authorized the granting of certain
incentives to an "eligible business" undertaking a "qualifying project". The CHRA incentives
included the following:
(a) the reimbursement of up to 50 per cent of the relocation expenses incurred by
an "eligible business"2308;
(b) the granting of 15-year Economic Development for a Growing Economy
("EDGE") tax credits to an "eligible bu siness", instead of the normal 10-year
tax credit available under the EDGE Tax Credit Act2309; and
(c) the abatement or refund of a portion of property taxes of an "eligible
business" for up to 20 years.2310
7.894 Under the CHRA, an "eligible business" is defined as a business that:
(a) is engaged in interstate or intrastate commerce;
(b) maintains its corporate headquarter s in a state other than Illinois as of
1 August 2001;
(c) had annual worldwide revenues of at least $25 billion for the year
immediately preceding its application for the benefits authorized by the
CHRA; and

2306 The City of Chicago is located within Cook County.
2307 Corporate Headquarters Relocation Act, 2001 Ill. Pub. Act 92-0207, Exhibit EC-216.
2308 20 ILCS § 611/20, Exhibit EC-223.
2309 35 ILCS § 10/5-45(b), Exhibit EC-224.
2310 35 ILCS § 200/18-165(a)(8), Exhibit EC-225.

BCI deleted, as indicated [***]

(d) is prepared to commit contractually to relocating its corporate headquarters to
the State of Illinois in consideration of the benefits authorized by this Act.2311
7.895 The CHRA defines a "qualifying project" to mean:
"... the relocation of the corporate headquarters of an eligible business from a location
outside of Illinois to a location within Illinois, whether to an existing structure or
otherwise. When the relocation involves an initial interim facility within Illinois and
a subsequent further relocation within 5 years after the effective date of this Act to a
permanent facility also within Illinois, all those activities collectively constitute a
'qualifying project' under this Act."2312
7.896 To qualify as an "eligible business" with a "qua lifying project", a company must meet all of
these requirements. In addition, the CHRA provid es that in order to obtain the reimbursement for
relocation costs, an "eligible business" had to propose a "qualifying project" by 1 July 2004. 2313 The
CHRA likewise provides that, to receive a 15-year EDGE tax credit, an "eligible business" had to
propose a "qualifying project" no later than 1 July 2004. 2314 The CHRA granted both the City of
Chicago and Cook County, as taxing districts, the aut hority to abate or refund certain property taxes,
so long as such property tax abatements/refunds were approved by 1 August 2006.2315
7.897 The CHRA indicates that its purpose is to en courage the relocation of the international
headquarters of large, multinational corporations to a location within Illinois "through the use of
incentives ... that would otherwise not be available through existing incentives programs".2316
7.898 Boeing has made use of all of these incentives provided under the CHRA.
7.899 First, Boeing and the State of Illinois entere d into a "Corporate Headquarters Relocation Act
Master Agreement" in March 2002, under which the State of Illinois agreed to reimburse Boeing for a
portion of its relocation expenses. 2317 The reimbursement for corporate relocation costs is provided
through one or more grants issued annually for (i) a period of up to 10 years or (ii) until 50 per cent of
the expenses of an "eligible business" have been reimbursed, whichever comes first.
2318 The amount
of the annual grant, however, cannot exceed 50 per cent of the total amount of income taxes withheld
by an "eligible business" during the preceding calendar year from its employees at the
headquarters.2319 These reimbursements are issued from the Corporate Headquarters Relocation
Assistance Fund. This Fund is generated from the pe rsonal income taxes paid by the employees of an
"eligible business". In particular, 50 per cent of th e aggregate amount of income taxes withheld from
the employees of an "eligible business" at the corporate headquarters during the preceding calendar
year is transferred to the Fund.
2320

2311 20 ILL. COMP. STAT. § 611/10, Exhibit EC-226.
2312 20 ILL. COMP. STAT. § 611/10, Exhibit EC-226.
2313 20 ILCS § 611/20(a), Exhibit EC-223.
2314 35 ILCS § 10/5-45(b), Exhibit EC-224; 20 ILCS § 611/20(a), Exhibit EC-223.
2315 See 35 ILCS § 200/18-165(a)(8), Exhibit EC-225.
2316 Corporate Headquarters Relocation Act, 2001 Ill. Pub. Act 92-0207, Exhibit EC-216.
2317 See Corporate Headquarters Relocation Act Master Agreement between The Illinois Department of
Commerce and Community Affairs and The Boeing Company, 27 March 2002, Exhibit EC-228.
2318 20 ILCS § 611/20(b)(6), Exhibit EC-223.
2319 20 ILCS § 611/20(b)(7), Exhibit EC-223.
2320 20 ILCS § 611/30, Exhibit EC-232.

BCI deleted, as indicated [***]

7.900 Second, Boeing and the State of Illinois entered into an EDGE tax agreement on
27 March 2002.2321 The tax credit that Boeing received lo wered the company's state income tax
liability by the amount of the credit. Pursuant to the EDGE Agreement, the EDGE credit is equal to
60 per cent of the state payroll taxes of Boeing's employees.2322
7.901 Third, Boeing applied for and received the property tax abatements provided for in
the CHRA. These tax abatements entered into force upon the City and County passing two separate
ordinances2323, and completing two associated agreements with Boeing. 2324 Pursuant to the tax
reimbursement agreement between the City of Ch icago and Boeing, and the accompanying approval
ordinance passed by the City Council, the City of Chicago has been providing Boeing with the
abatement of property taxes since 2002. 2325 In particular, the City of Chicago committed to provide
Boeing, on an annual basis from 2002 through 2021 (or until the Boeing lease expires, whichever
comes first)2326, reimbursements for the applicable shares of the Boeing General Real Estate Taxes 2327
paid to the City of Chicago, the School Finance Authority, the Board of Education, and the City's
Library Fund.
2328 Pursuant to the tax reimbursement agreement between Cook County and Boeing,
and the accompanying approval ordinance passed by Cook County's Board of Commissioners, Cook
County has also provided Boeing with property tax refunds since 2002. 2329 In particular, Cook
County committed to reimburse Boeing for the Boeing General Real Estate Ta xes paid to the County
and the Forest Preserve District on its corporate headquarters building for 20 years – that is, from
2002 until 2021, or until the last year of the Boeing lease, whichever comes first.2330
7.902 In addition to the three incentives provided under the CHRA, the City of Chicago also agreed
to pay $1 million to retire the lease of the previous tenant of Boeing's new headquarters building.
Chicago made the payment in order to enab le Boeing to move into its office space by
September 2001. Immediately after the City agreed to the $1 million payment, on 10 May 2001, the
Landlord and Boeing executed a 15-year lease agreement (the "Boeing Lease"). 2331 The City made
the actual payment on 15 January 2003 pursuant to the Lease Termination Compensation Agreement
between 100 North Riverside, LLC, and the City of Chicago. This Agreement notes that the City

2321 EDGE Tax Credit Agreement between the St ate of Illinois and The Boeing Company,
27 March 2002, Exhibit EC-237.
2322 EDGE Tax Credit Agreement between the St ate of Illinois and The Boeing Company,
27 March 2002, Exhibit EC-237, p. 5, § 2.B.
2323 An Ordinance of the City of Chicago, Illinois Approving Execution of a Tax Reimbursement
Payment Agreement with the Boeing Company, Exhibit EC-244; An Ordinance of the County of Cook, Illinois
Approving Execution of a Tax Reimbursement Payment Agreement with the Boeing Company, Exhibit EC-245.
2324 Tax Reimbursement Payment Agreement between the County of Cook and The Boeing Company,
1 November 2001, Exhibit EC-246; Tax Reimbursement Payment Agreement by and between the City of
Chicago and The Boeing Company, 1 November 2001, Exhibit EC-247.
2325 Tax Reimbursement Payment Agreement by and between the City of Chicago and The Boeing
Company, 1 November 2001, Exhibit EC-247, pp. 2-3.
2326 Tax Reimbursement Payment Agreement by and between the City of Chicago and The Boeing
Company, 1 November 2001, Exhibit EC-247, pp. 5-6.
2327 Boeing General Real Estate Taxes are defined as the general ad valorem real estate taxes Boeing is
obligated to pay with respect to the two private tax pa rcels applicable to Boeing's Property and Building in
Chicago. Tax Reimbursement Payment Agreement by and between the City of Chicago and The Boeing
Company, 1 November 2001, Exhibit EC-247, p. 4.
2328 Tax Reimbursement Payment Agreement by and between the City of Chicago and The Boeing
Company, 1 November 2001, Exhibit EC-247, p. 2-3.
2329 See Tax Reimbursement Payment Agreement be tween the County of Cook and The Boeing
Company, 1 November 2001, Exhibit EC-246.
2330 Tax Reimbursement Payment Agreement between the County of Cook and The Boeing Company,
1 November 2001, Exhibit EC-246, pp. 8-9, § 4.2.
2331 Lease Termination Compensation Agreement between 100 North Riverside, LLC and the City of
Chicago, 15 January 2003, Exhibit EC-217, p. 2.

BCI deleted, as indicated [***]

made the payment in order to "induce the Landlor d to consent to the termination of Morton's {the
previous tenant's} long-term, above market lease". 2332 This served to "make floors 25-28 available to
Boeing and finalize the Boeing relocation".2333
(c) Whether a subsidy exists within the meaning of Article 1 of the SCM Agreement
(i) Arguments of the European Communities
7.903 The European Communities provides a separate fi nancial contribution analysis for each of
these four measures. First, the European Commun ities argues that the reimbursements to Boeing for
its relocation expenses constitute a direct transfers of funds within the meaning of Article 1.1(a)(1)(i)
of the SCM Agreement. 2334 Alternatively, the European Comm unities argues that "by using income
tax withholdings to finance the grant, the State of Illinois is also foregoing tax revenue that would
otherwise be available to it within the meaning of Article 1.1(a)(1)(ii)". 2335 Second, the European
Communities argues that through the 15-year EDGE tax credits, the State of Illinois is required to
forego tax revenue that it otherw ise would have collected from Boeing, as Boeing's tax liability is
reduced by the amount of the credit. According to the European Communi ties, such government
revenue foregone or not collected constitutes a financial contribution within the meaning of
Article 1.1(a)(1)(ii).
2336 Third, the European Communities argue s that the combined contributions of
the City of Chicago and Cook County pursuant to the tax reimbursement agre ements and ordinances
can be considered either as a direct transfer of f unds within the meaning of Article 1.1(a)(1)(i), or as
the foregoing of government revenue that is ot herwise due pursuant to Article 1.1(a)(1)(ii). 2337
Fourth, the European Communities argues that the lease retirement payment from the City of Chicago
to Boeing's landlord constitutes a direct transfer of funds within the meaning of Article 1.1(a)(1)(i).2338
7.904 The European Communities also provides a sep arate benefit analysis for each of these
four measures. However, the arguments that it advances for each of the four measures are very
similar. With respect to the existence of a bene fit within the meaning of Article 1.1(b) of the
SCM Agreement, the European Communities argues in respect of each of the four measures that:
(i) the financial contributions provide Boei ng's LCA division with "advantages on non-market
terms"2339; (ii) Boeing "is not required to pay anythi ng in return" for these financial contributions 2340;
(iii) advantages conferred on Boeing's LCA divisi on by these financial contributions "result in a
reduction in Boeing's overhead costs" 2341; (iv) these types of financial contributions are not available
on the market because by definition they can be granted "only by a government" 2342; and (v) a portion
of these reimbursements "relate to Boeing's production of commercial aircraft".2343
7.905 In its second written submission, the European Communities notes that the United States does
not dispute that each of the four measures constitut es a financial contribution within the meaning of

2332 Lease Termination Compensation Agreement between 100 North Riverside, LLC and the City of
Chicago, 15 January 2003, Exhibit EC-217, p. 2.
2333 Lease Termination Compensation Agreement between 100 North Riverside, LLC and the City of
Chicago, 15 January 2003, Exhibit EC-217, p. 2.
2334 European Communities' first written submission, para. 381.
2335 European Communities' first written submission, para. 382.
2336 European Communities' first written submission, para. 402.
2337 European Communities' first written submission, para. 427.
2338 European Communities' first written submission, para. 448.
2339 European Communities' first written submission, paras. 386, 407, 432 and 451.
2340 European Communities' first written submission, paras. 387, 408, 433 and 452.
2341 European Communities' first written submission, paras. 388, 409, 434 and 453.
2342 European Communities' first written submission, paras. 388, 409, 434 and 453.
2343 European Communities' first written submission, paras. 389, 410, 435 and 454.

BCI deleted, as indicated [***]

Article 1.1(a)(1)(i) or (ii) of the SCM Agreement 2344, and that the United States does not dispute that
each of the financial contributions confers a benefit within the meaning of Article 1.1(b) of the SCM
Agreement.2345
(ii) Arguments of the United States
7.906 In its first written submission, the United States argues, under the sub-heading "Financial
Contribution/Benefit", that the European Communiti es has overestimated the value of the subsidies
provided to Boeing. 2346 However, the United States does not dispute that each of the four measures
provides a financial contribution within the meaning of Article 1.1(a)(1) of the SCM Agreement, and
the United States does not dispute that each of these four financial contributions confers a benefit
within the meaning of Article 1.1(b) of the SC M Agreement. Furthermore, in its responses to
questions 13 2347, 14 2348, and 368 2349 from the Panel, the United States agrees that each of the four
measures challenged by the European Communities is a subsidy within the meaning of Article 1 of
the SCM Agreement.
(iii) Evaluation by the Panel
7.907 In this case, the European Communities provides evidence and legal argument as to why each
of the four challenged measures constitutes a fi nancial contribution within the meaning of
Article 1.1(a)(1) of the SCM Agreement, and why each financial contribution confers a benefit within
the meaning of Article 1.1(b) of the SCM Agreement. The United States does not contest that each of
the four challenged measures constitutes a subsidy within the meaning of Article 1. Having reviewed
the evidence presented by the European Communitie s, the Panel sees nothing that would support a
different conclusion.
7.908 Accordingly, the Panel finds that each of th e four challenged measures constitutes a subsidy
within the meaning of Article 1 of the SCM Agreement.
(d) Whether the subsidy is specific within the meaning of Article 2 of the SCM Agreement
(i) Arguments of the European Communities
7.909 The European Communities argues that each of the four subsidies is specific within the
meaning of Article 2 of the SCM Agreement.

2344 European Communities' second written submission, paras. 272, 286, 297, and 308.
2345 European Communities' second written submission, paras. 277, 290, 302, and 309.
2346 United States' first written submission, paras. 662-663 (concerning the amount of the relocation
expenses reimbursed to Boeing), 669 (concerning the amount of the EDGE tax credit claimed by Boeing), and
679 (concerning the amount of the property tax abatements claimed by Boeing). The United States does not
dispute the European Communities' estimate of the amount of the subsidy to Boeing's LCA Division arising
from the lease termination payment. United States' first written submission, para. 682.
2347 United States' response to question 13, para. 29 ("The retirement of the lease by the City of
Chicago is a subsidy that is specific within the meaning of Articles 1 and 2 of the SCM Agreement.")
2348 United States' response to question 14, paras. 34-35 ("The reimbursement of certain relocation
expenses by the State of Illinois pursuant to the Corp orate Headquarters Relocation Act ("CHRA") constitutes a
subsidy under Article 1 of the SCM Agreement. ... The property tax abatement provided by the City of Chicago
to Boeing can be considered a subsidy within the meaning of Article 1 of the SCM Agreement ...").
2349 In its response to question 368, the United States confirmed that with respect to the reimbursement
of corporate relocation expenses, the EDGE tax credit, and the property tax abatements, the arguments in the
United States' first written submission regarding the "spe culative nature" of these tax credits, abatements, and
reimbursements are aimed at challenging the European Communities' "quantification" of the alleged subsidies,
rather than the "existence of the alleged subsidies under Article 1.1".

BCI deleted, as indicated [***]

7.910 With respect to the three subsidies provided to Boeing under the CHRA, the
European Communities asserts that: (i) Boeing is th e only company that has met the definition of an
"eligible business" under the CHRA, and therefore Boei ng is the only company that has ever received
these subsidies 2350; (ii) as a result of the expiry of the statutory time limits for applying for these
subsidies, no company other than Boei ng will ever receive these subsidies 2351; and (iii) numerous
government publications, statements by members of the Illinois General Assembly, press reports, and
other sources demonstrate that the CHRA was tailored specifically for Boeing. 2352 T h e
European Communities therefore argues that the CH RA subsidies, i.e. (i) the reimbursement of
relocation expenses (ii) the 15-year EDGE tax cred its and (iii) the abatement or refund of property
taxes, are all de facto specific within the m eaning of Article 2.1(c) of the SCM Agreement. 2353 I n
addition, the European Communities argues that the property tax abat ements are specific within the
meaning of Article 2.1(a) of the SCM Agreement because "the two ordinances at issue here are
specific only to Boeing, as are the tax agreements that Boeing entered into with the City and
County".
2354
7.911 The European Communities argues th at the lease retirement grant is de jure specific within
the meaning of Article 2.1(a) of the SCM Agreem ent, because the Lease Term ination Agreement, by
its terms, applies only to Boeing. The European Communities notes that this payment was purely a
one-time grant from the City of Chicago.2355 In the alternative, the European Communities argues that
the subsidy is nonetheless de facto specific under Article 2.1(c) of the SCM Agreement, because it
benefits only one company, i.e. Boeing.2356
(ii) Arguments of the United States
7.912 The United States argues that the three subsidi es provided to Boeing under the CHRA are not
specific within the meaning of Article 2 of the SCM Agreement.
7.913 First, the United States argues that the reloca tion expense reimbursements are not specific
because: (i) the CHRA is not de jure specific under Article 2.1(a) of the SCM Agreement because "it
is not explicitly limited to Boeing or similar enterprises"; (ii) the CHRA is non-specific under
Article 2.1(b) of the SCM Agreement because it "c ontains objective criteria governing the eligibility
for and the amount of costs that may be reimbursed"; and (iii) although Boeing was the only
company that ever received relocation expense reim bursements pursuant to the CHRA, this does not
indicate de facto specificity under Article 2.1(c) of the SCM Agreement because of "the size of the
neutrally defined benefit group and the short length of time for this program".
2357
7.914 Second, the United States argues that the 15-year EDGE tax credits provided to Boeing
pursuant to CHRA are not specific because: (i) the EDGE Tax Credit Act "is not explicitly limited to
certain enterprises under Article 2.1(a)"; (ii) th e EDGE Tax Credit Act "contains objective criteria
that govern the eligibility for, and the amounts of, the tax credits" under Article 2.1(b); (iii) EDGE
tax credits are "broadly available to a vari ety of companies in Illinois that meet the {EDGE Tax
Credit} Act's requirements" and therefore are not de f acto specific under Article 2.1(c); and (iv) only

2350 European Communities' first written submission, paras. 390-391, 411, 415 and 441.
2351 European Communities' first written submission, paras. 391, 412 and 443.
2352 European Communities' first written submission, paras. 392-395, 412-414 and 442-443.
2353 European Communities' first written submission, paras. 390, 411 and 442.
2354 European Communities' first written submission, para. 436.
2355 European Communities' first written submission, para. 455.
2356 European Communities' first written submission, para. 456.
2357 United States' first written submission, para. 664.

BCI deleted, as indicated [***]

during the five-year extension provided by the Relo cation Act is there an EDGE tax credit that is
unavailable to non-CHRA companies, but since this is in the future, it is irrelevant to this dispute.2358
7.915 Third, the United States argues that the prope rty tax abatements are not specific "because
Illinois law permits any taxing district in the Stat e to abate the property taxes of numerous types of
enterprises".2359
7.916 The United States does not dispute that the leas e retirement payment is specific within the
meaning of Article 2.2360
(iii) Evaluation by the Panel
7.917 The parties agree that one of the four subsidies, i.e. the lease retirement payment, is specific
within the meaning of Article 2. 2361 The main point of disagreement is whether the three subsidies
provided to Boeing pursuant to the CHRA are de facto specific within the meaning of Article 2.1(c) of
the SCM Agreement. In the Panel's view, the three subsidies provided to Boeing under the CHRA are
clearly de facto specific within the meaning of Article 2.1(c) of the SCM Agreement.
7.918 First, Boeing is the only company that has met the statutory definition of an "eligible
business" with a "qualifying project", and it is not in dispute that Bo eing is the only company that has
ever received these subsidies.2362 The fact that Boeing was the onl y company that ever received these
subsidies is perhaps not surprising, given the European Communities' unrebutted assertions that only a
limited group of U.S. companies (less than 75) located outside of Illinois had revenues of over
$25 billion in 2002, and that none of those had announced plans to move to Illinois in the pertinent
timeframe.
2363
7.919 Second, as a result of the expiry of the statutory time limits for applying for these subsidies,
no company other than Boeing will ever receive these subsidies. 2364 As we have explained above, the
CHRA provides that in order to obtain the reimburse ment for relocation costs, an "eligible business"
had to propose a "qualifying project" by 1 July 2004. The CHRA likewise provides that, to receive a
15-year EDGE tax credit, an "eligible business" ha d to propose a "qualifying project" no later than
1 July 2004. The CHRA granted both the City of Chicago and the County of Cook, as taxing districts,
the authority to abate or refund certain pr operty taxes, so long as such property tax
abatements/refunds were approved by 1 August 2006.
7.920 Third, the fact that Boeing is the only compan y that has ever received and the only company
that will ever receive these subs idies is no coincidence, given th e numerous government publications,
statements by members of the Illinois General Assembly, press reports, and other sources that
demonstrate that the CHRA was tailored specifically for Boeing.
2365 Among other things, an Illinois
Department of Commerce and Community Affairs publication explains that the CHRA "was endorsed

2358 United States' first written submission, paras. 670-672.
2359 United States' first written submission, para. 680.
2360 United States' first written submission, para. 683; United States' response to question 13, para. 29
("The retirement of the lease by the City of Chicago is a subsidy that is specific within the meaning of Articles 1
and 2 of the SCM Agreement.")
2361 United States' first written submission, para. 683; United States' response to question 13, para. 29
("The retirement of the lease by the City of Chicago is a subsidy that is specific within the meaning of Articles 1
and 2 of the SCM Agreement.")
2362 European Communities' first written submission, paras. 390-391, 411, 415, 441.
2363 European Communities' first written submission, footnote 607 (citing The 500 Largest U.S.
Corporations, Fortune, 15 April 2002, Exhibit EC-230, F-1).
2364 European Communities' first written submission, paras. 391, 412, 443.
2365 European Communities' first written submission, paras. 392-395, 412-414, 442-443.

BCI deleted, as indicated [***]

in concept by the four legislative leaders during negotiations with the Boeing Company in April
{2001}".2366 An Illinois Economic and Fiscal Co mmission publication explains that " {i}n addition to
financial and tax incentives, some states have used customized, company-specific incentives to
engage in bidding wars which other states, such as Illinois did in obtaining Boeing's headquarters".2367
Legislators referred to the CHRA as the "Boeing package" 2368, or otherwise made clear that they
understood that the law was being created specifically for Boeing. 2369 A press report issued by the
Illinois Government upon Boeing's announcement that it would move its headquarters to Chicago
indicates that "the Governor said the General Assemb ly would be asked to make minor modifications
to existing incentive programs to meet Boeing's specific needs. Legislation would be introduced this
session".
2370
7.921 The United States does not dispute any of those facts. Rather, it argues that notwithstanding
these facts, the European Communities has failed to demonstrate th at the subsidies are specific. The
Panel considers the United States' arguments to be unpersuasive.
7.922 The United States argues that the definition of "eligible business" and "qualifying project" is
not de jure specific under Article 2.1(a) of the SCM Agre ement because "it is not explicitly limited to
Boeing or similar enterprises", and is non-specifi c under Article 2.1(b) of the SCM Agreement
because it "contains objective criteria governing the eligibility for and the amount of costs that may be
reimbursed". In the Panel's view, even if these arguments were correct, they are not relevant given the
fact that the European Communities argues that the subsidies are de facto specific under Article 2.1(c)
of the SCM Agreement. Article 2.1(c) provi des that a subsidy may be de facto specific
"notwithstanding" any "appearance" of non-specificity under sub-paragraphs (a) and (b). The use of
the term "notwithstanding" indicates that if such an analysis leads to a finding of de facto specificity,
any appearance of non-specificity unde r sub-paragraphs (a) and (b) can be disregarded. Therefore, if
a subsidy is de facto specific under Article 2.1(c), this is dispositive of the matter.
7.923 The United States argues that although Boeing was the only company that ever received the
CHRA subsidies, this does not indicate de f acto specificity under Article 2.1(c) of the
SCM Agreement because of "the shor t length of time for this program".
2371 The Panel agrees that
Article 2.1(c) mandates that in considering de facto specificity, a Panel must take into account "the
length of time during which the subsidy programme has been in operation". We have taken this
consideration into account. However, rather th an calling into question the conclusion that the
subsidies are de facto specific to Boeing, the 2001-2006 statutory "window" for applying for CHRA
subsidies simply reinforces that the CHRA subsidies were designed specifically for Boeing.

2366 Memo to Honorable Members of the General Assembly from Pam McDonough, Director,
Department of Commerce and Community Affairs, regarding the Corporate Headquarters Relocation Act,
23 May 2001.
2367 Illinois Economic and Fiscal Commission, Cor porate Incentives in th e State of Illinois,
August 2001, Exhibit EC-221, p. 20.
2368 See e.g. State of Illinois, 92 nd General Assembly, House of Representatives, Transcription Debate,
69th Legislative Day, 31 May 2001, Exhibit EC-234, p. 105.
2369 See e.g. State of Illinois, 92 nd General Assembly, House of Representatives, Transcription Debate,
69th Legislative Day, 31 May 2001, Exhibit EC-234, p. 103 (Floor Statement of Representative Franks) ("I think
it's important that the state does pr ovide incentives for Boeing."), p. 98 (Floor Statement of Representative
Wojcik) ("I compliment the Governor and I compliment D CCA for their fine efforts in recruiting Boeing to
Illinois."), p. 97 (Floor Statement of Representative Mulliga n) ("What we need to do is to continue to work to
have companies like Boeing move here."), p. 95 (Floor Statement of Representative Fritchey) ("I have a lot of
respect for the people involved in the negotiation of the Boeing package, people from the city, people from the
state, people from DCCA, the Legislators involved.").
2370 Press Release from the Office of Illinois Gove rnor George Ryan, "Governor Ryan, Mayor Daley
Welcome Boeing's Global Headquarters to Chicago", 10 May 2001, Exhibit EC-215.
2371 United States' first written submission, para. 664.

BCI deleted, as indicated [***]

7.924 The United States argues that only during the five-year extension provided by the CHRA is
there an EDGE tax credit that is unavailable to non- CHRA companies, i.e. to companies other than an
"eligible business" under the CHRA. 2372 In other words, the Panel understands the United States to
argue that for the first 10 years of the EDGE tax credit, the subsidy is not specific, and that it is only
for the last five years of the 15-year EDGE tax cred it that there would be a specific subsidy. Leaving
aside the question of whether the 15-year EDGE tax credits granted to Boeing under the CHRA can
be split into a 10-year subsidy and five-year subsidy for the purposes of Article 2 of the
SCM Agreement, the United States' argument rests on a false premise, namely, that "for the first ten
years, benefits to Boeing are the same as to any other recipient of the EDGE tax credits".
2373 First, the
CHRA provides that when an "eligible business" makes use of the 15-year EDGE tax credit, it
"applies against its State income tax liability, during the entire 15-year period, no more than 60% of
the maximum credit per year that would otherwise be available under this Act". 2374 Thus, the amount
of the EDGE tax credit that an "eligible business" re ceives is also different. Second, while the EDGE
Tax Credit Act provides that the credit may generally not be claimed "with respect to any jobs that the
taxpayer relocates from one site in Illinois to anothe r site in Illinois", the CHRA provides that "any-
full time employee of an eligible business relocated to Illinois in connection with that of a qualifying
project is deemed to be a new employee for purposes of this Act". 2375 Thus, the kinds of tax credits
that an "eligible business" may claim under the EDGE ta x credit are different. In sum, it is clear that
for "the first ten years", benefits to Boeing are not the same as to any other recipient of the EDGE tax
credits. The Panel recalls that the CHRA indicates that its purpose is to encourage the relocation of
the international headquarters of large, multina tional corporations to a location within Illinois
"through the use of incentives ... that would otherw ise not be available through existing incentives
programs".2376
7.925 Finally, the United States argues that the prope rty tax abatements are not specific "because
Illinois law permits any taxing district in the Stat e to abate the property taxes of numerous types of
enterprises".2377 In support of this argument, the United States refers the Panel to the provision of the
Illinois tax code that authorizes taxing districts to abate the property taxes of "commercial and
industrial firms", "academic or research institut es", "historical societies", "recreational facilities",
"housing for older persons", "property used for horse or auto racing", and "relocated corporate
headquarters".
2378 The Panel accepts that Illinois law permits any taxing district in the State to abate
the property taxes of numerous types of industries. However, the Panel fails to see the relevance of
that fact because the Panel observes that the provi sion of the Illinois tax code that contains this
authorization makes clear that each one of the listed enterprises and industries is subject to a different
set of terms, conditions and limitations.
7.926 For instance, the duration of these property tax abatements differ from one another: not more
than 10 years in the case of most "commercial and i ndustrial firms" (except a development of at least
500 acres, in which case it is not more than 20 years), "horse and auto racing", and "recreational
firms"; not more than 15 years in the case of "housing for older persons"; at least 15 years in the case
of "academic or research institutes"; and not more than 20 years in the case of "relocated corporate
headquarters". To take another example, the maximum dollar amount that may be claimed differs:

2372 United States' first written submission, paras. 670-672.
2373 United States' response to question 261, para. 454.
2374 35 ILCS § 10/5-45(b), Exhibit EC-224 (emphasis added). See also, Illinois Economic and Fiscal
Commission, Corporate Incentives in the State of Illinois, August 2001, Exhibit EC-221, p. 19 (explaining that
"{u}nder the original deal with Boeing, the 60% provision was not included, but legislators wanted this
provision included in the bill, which Boeing later accepted").
2375 Corporate Headquarters Relocation Act, 2001 Ill. Pub. Act 92-0207, Exhibit EC-216.
2376 Corporate Headquarters Relocation Act, 2001 Ill. Pub. Act 92-0207, Exhibit EC-216.
2377 United States' first written submission, para. 680.
2378 35 ILL. COMP. STAT. § 200/18-165, Exhibit EC-225.

BCI deleted, as indicated [***]

not more than $3 million for "housing for older pers ons"; generally not more than $4 million in the
case of "commercial and industrial firms" (except a development of at least 500 acres, in which case
not more than $12 million); not more than $5 millio n in the case of "horse r acing" and "academic or
research institutes"; no stated maximum dollar limit in the case of "auto racing" or "historical
society" or "recreational facilities". Furthermore, this provision sets forth different methods for
calculating the applicable property tax abatements for the different enterprises and industries that are
listed. In some cases (e.g. "co mmercial and industrial"), there is a very detailed methodology. In
others, no calculation methodology is set forth. As the United States itself notes, the methods for
calculating the applicable property tax abatements for Boeing are memorialized in the two separate
agreements that it entered into with Chicago and Cook County.
2379 In addition, the provision sets
forth different rules regarding what types of property may be subject to the property tax abatement
granted to the particular type of enterprise or industry.
7.927 In our view, the fact that Illinois law permits taxing authorities to grant different property tax
abatements to different enterprises and industries s ubject to different sets of terms, conditions and
limitations does not call into question that the property tax abatements granted to "eligible businesses"
(i.e. Boeing) under the CHRA are de facto specific under Article 2.1(c) of the SCM Agreement. The
Panel again recalls that the CHRA indicates that its purpose is to encourage the relocation of the

2379 United States' first written submission, para. 674. The United States elaborates upon the formula at
paragraphs 675-677 of its first written submission:

"The two agreements – which by their terms are substantially identical – set out a formula for
determining the value of the property tax abatem ents Boeing may receive as a result of its
occupancy of its corporate headquarters at 100 North Riverside Plaza in Chicago.
Specifically, the value of the property tax abatements is the product of: (a) the portion of the
property's total property tax bill that Boeing has paid in a given year; and (b) the "allocable
share" of the property's total property tax bill th at is attributable to City of Chicago or Cook
County taxes, as the case may be. Thus, for exam ple, if Boeing's share of the property's total
tax bill in a given year were $50 out of $150 and the "allocable share" of the property's total
tax bill attributable to the City of Chicago (as opposed to other jurisdictions) was 80 per cent,
Boeing would be entitled to a property tax abatement of $40 from the City of Chicago.
The two agreements, however, provide certain limitations on Boeing's entitlement to property
tax abatements. First, the value of Boeing's tax abatement may not exceed – as a percentage
of the property's total property tax bill – the ratio of rentable square feet leased to and
occupied by Boeing and the total number of rent able square feet in the property. Under the
agreements, this ratio is 0.3573. In other words, notwithstanding the formula discussed in the
paragraph above, Boeing's total property tax abatement may not exceed 35.73 per cent of the
property's total property tax bill. Thus, if Boei ng occupied half of the property, such that it
paid $50 of the property's total tax bill of $100 (and still assuming that the "allocable share" of
the property's total tax bill attributable to the City of Chicago were 80 per cent), Boeing would
be entitled to a property tax abatement of only $35.73 from the City of Chicago, rather than a
$40 property tax abatement.
Second, Boeing's entitlement to abatement of its property taxes further depends on the number
of employees it maintains at its corporate headquarters in the 100 North Riverside building. If
Boeing maintains 500 or more employees at that location, it may receive 100 per cent of the
figure calculated according to the formula in th e above paragraphs. If, however, it employs
fewer than 500 people, its property tax abatement is reduced as follows {...} Thus, to take
again the example cited above, if Boeing employed only 450 people in its corporate
headquarters in a given year (and still assuming that the "allocable share" of the property's
total tax bill attributable to the City of Chicago were 80 per cent), Boeing would be entitled to
a property tax abatement of only $36 from the City of Chicago, or 90 per cent of the $40 tax
abatement it would otherwise receive if it had met the 500-employee threshold."

BCI deleted, as indicated [***]

international headquarters of large, multinational corporations to a location within Illinois "through
the use of incentives ... that would otherwise not be available through existing incentives
programs".2380
7.928 For these reasons, the Panel finds that the CHRA subsidies to Boeing are de facto specific
under Article 2.1(c) of the SCM Agreement, and that it is therefore not necessary to make a finding on
whether the property tax abatements and refunds are also de jure specific under Article 2.1(a) of the
SCM Agreement. The Panel recalls that the parti es agree that the lease retirement payment is specific
within the meaning of Article 2.2381
(e) The amount of the subsidy to Boeing's LCA division
(i) Arguments of the European Communities
7.929 The European Communities estimate s that the total amount of the four subsidies to Boeing's
LCA division is approximately $25 million over the period 2002-2021. More specifically, the
European Communities estimates that: (i) the amount of the subsidy to Boeing's LCA division from
the relocation reimbursements from 2002 through 2011 (or until the relocation costs are paid in full) is
$4.3 million; (ii) the amount of the subsidy to Boeing's LCA division from the EDGE tax credits is
$8.5 million from 2003 through 2017; (iii) the amount of the subsidy to Boeing's LCA division from
the local property tax abatements provided by the City of Chicago and Cook County is $11.5 million
from 2002 through 2021; and (iv) the amount of the subsidy to Boeing's LCA division from the lease
retirement payment is $0.5 million in 2003.
2382
(ii) Arguments of the United States
7.930 The United States argues that any amounts that Boeing receives after 2006 are "speculative"
and fall outside of the Panel's terms of reference. The United States asserts that the total value of the
four subsidies to Boeing's LCA division is [***] million over the period 2002-2006.
(iii) Evaluation by the Panel
7.931 Before addressing the relatively narrow point of disagreement between the parties, the Panel
will first set forth the points in respect of which the parties appear to be in agreement.
7.932 First, there is no disagreement on the question of whether and if so how much of the subsidies
provided to The Boeing Company by the State of Illinois and municipalities therein should be
allocated to Boeing's LCA division. The European Communities argues that 50 per cent of the total
amount of the subsidies provided to The Boeing Co mpany by the State of Illinois and municipalities
therein should be allocated to Boeing's LCA division because, over time, approximately 50 per cent of
Boeing's total sales have related to LCA.
2383 The United States agrees that 50 per cent of the value of
these four subsidies should be allocated to Boeing's LCA division. 2384 The Panel sees no reason to

2380 Corporate Headquarters Relocation Act, 2001 Ill. Pub. Act 92-0207, Exhibit EC-216.
2381 United States' first written submission, para. 683; United States' response to question 13, para. 29
("The retirement of the lease by the City of Chicago is a subsidy that is specific within the meaning of Articles 1
and 2 of the SCM Agreement.")
2382 European Communities' first written submission, paras. 384 and 387, 405 and 408, 430 and 433;
449 and 452; State and Local Subsidies to Boeing LCA Division, Exhibit EC-27, pp. 1-2.
footnote 643, para. 430 and footnote 676, and para. 449 and footnote 697 (citing Boeing/MD LCA Allocation
Charts, Exhibit EC-18.)
2384 United States' first written submission, paras. 663, 679, and 682.

BCI deleted, as indicated [***]

disagree with the European Commun ities' allocation methodology, and will therefore allocate 50 per
cent of any subsidies provided to The Boeing Company to Boeing's LCA division.
7.933 Second, there is no disagreement regarding the amount of the subsidy provided to The Boeing
Company (and hence the total amount of the subsidy allocable to Boeing's LCA division) for three of
the four measures over the period 2002-2006. The parties agree that the amount of the subsidy to
Boeing's LCA division arising from the reimbursement of relocation expenses is [***] over the
period 2002-2006, that the amount of the subsidy to Boeing's LCA division arising from the property
tax abatements is [***] million over the period 2002- 2006, and that the amount of the subsidy to
Boeing's LCA division arising from the lease pa yment is $0.5 million over the period 2002-2006. 2385
The Panel sees no reason to disagree, given that each of these figures is sufficiently substantiated by
evidence submitted by the United States and/or the European Communities.2386
7.934 Third, neither party argues that it is necessary fo r the Panel to arrive at an estimate of the
post-2006 amounts of the subsidies provided to Boeing by the three CHRA measures. The
European Communities explains that "the estimates of future {i.e. post-2006} payments from all three
subsidies referenced in the Panel's question have no impact on the European Communities' analysis of
present adverse effects. These particular subsidy am ounts are applied to the year that the subsidy was
received".2387 The European Communities estimates that the total amount of the subsidy to Boeing's
LCA division from the reimbursement of relo cation expenses would be $4.3 million over the
period 2002-2011, that the total amount of the subs idy to Boeing's LCA division from the EDGE tax
credits would be approximately $17 million over the period 2003-2017, and that the total amount of
the subsidy to Boeing's LCA division from the lo cal property tax abatements would be $11.5 million
over the period 2002-2021. 2388 According to the United States, the post-2006 amounts are

2385 United States' first written submission, paras. 661-663, 678-679, 682; European Communities'
second written submission, paras. 276, 301 and 308.
2386 Regarding the amount of the subsidy arising from the reimbursement for relocation expenses, the
information is found in Illinois Corporate Headquarters Relocation Act Relocation Grant Expenses, 2002-2006,
Exhibit US-255 (BCI). For each y ear, the amounts claimed by Boeing are indicated on the first page of
"Exhibit B", within Exhibit US-255. The pages that include the amounts of reimbursement claimed by Boeing
each year are signed by an Executive Offi cer of the Boeing Company who states that "under penalty of perjury,
I certify that the above information is true and correct". Regarding the amount of the property tax abatements,
see City of Chicago Property Tax Abatements 2002-2006, Exhibit US-262 and Cook County Property Tax
Abatements 2002-2006, Exhibit US-263 (BCI), which contain the "Annual Reimbursement Forms" submitted
by Boeing to the City of Chicago and the County of Cook, pursuant to the "Tax Reimbursement Payment
Agreement". Regarding the amount of the lease payment, see Lease Termination Compensation Agreement
between 100 North Riverside, LLC and the City of Chicago, 15 January 2003, Exhibit EC-217, p. 2, which
indicates the amount paid by the City to the landlord.
2387 European Communities' comments on United States' response to question 368, para. 201 (emphasis
original).
2388 European Communities' first written submission, paras. 384, 405 and 430. The
European Communities' estimates of the amounts of these subsidies on a yearly basis is set forth in International
Trade Resources LLC, Calculating on a Per-Aircraft Basis the Magnitude of the Subsidies Provided to US Large
Civil Aircraft, 20 February 2007, Exhibit EC-13, Appendix A, and also in State and Local Subsidies to Boeing
LCA Division, Exhibit EC-27. After the United States provided information indicating that the actual amount
of the relocation expenses reimbursed to Boeing during the period 2002-2006 was higher than the
European Communities estimate of the amount that Boeing received over th e period 2002-2006, the
European Communities submitted that the amount of the subsidy to Boeing's LCA Division from the
reimbursement of relocation expenses over the period 2007-2011 "may be as high as [***]". The
European Communities calculates this by noting that the figures provided by the United States indicate that total
reimbursement to Boeing [***] by approximately [***] between 2004 and 2005 and by approximately [***]
between 2005 and 2006. According to the European Communities, if Boeing's annual reimbursement continues
to [***] at this pace, Boeing may receive the maximum possible reimbursement for its relocation costs by 2011,
namely 50 per cent of its relocation expenses. Therefore, the European Communities concludes that the total

BCI deleted, as indicated [***]

"speculative", and are "not within the Panel's terms of reference" because they were not "a measure in
existence at the time this Panel was established". 2389 Because it appears to be unnecessary for the
Panel to arrive at an estimate of the post-2006 amounts of the subsidies provided to Boeing by the
three CHRA measures, the Panel considers it unnecessary to resolve these other issues.
7.935 The point of disagreement concerns the amount of the EDGE tax credit subsidy to Boeing
over the period 2002-2006. The European Communities estimates that the total amount of the subsidy
to Boeing's LCA division from the EDGE tax cred its would be approximately $17 million over the
period 2003-2017, including $2.4 million over the period 2003-2006.
2390 The European Communities
bases its estimate on the figures contained in two publicly available documents, both prepared and
dated 2001, setting forth the State of Illinois' own estimate of the amount of the EDGE tax credit
subsidy to Boeing. 2391 The European Communities indicates th at it attempted to obtain more precise
figures through the Freedom of Information Act, but that the State of Illinois refused to provide it with
such information. 2392 The United States asserts that the State of Illinois made [***] financial
contribution to Boeing in relation to th e EDGE tax credits between 2003-2006 because [***].2393
However, the United States notes that in 2002 [***].2394 At paragraph 289 of its second written
submission, the European Communities responds that:
"Finally, as to the amount of financial contribution to Boeing's LCA division from
these EDGE tax credits, the United States has offered no support for its assertion that
the amount is less than the $17 million from 2003 through 2017 claimed by the
European Communities. The United States simply asserts that [***] without
providing Boeing's Illinois corporate income ta x returns for those years. Absent such
concrete evidence, there is no basis to accept the United States' assertion. ..."
7.936 The Panel asked the United States to respond to the European Communities' arguments at
paragraph 289 of its second writte n submission, but the United States only indicated that " {a}s ...
stated previously, Boeing has [***]".
2395
7.937 The Panel considers that the European Commun ities' estimate is supported by evidence, and
that the United States assertions are not supported by any evidence. We recall that the
European Communities relies on the State's 2001 estim ates of the amount of revenue it will forego

financial contribution to Boeing is [***] from 2002 through 2011. European Communities' second written
submission, para. 276.
2389 United States' first written submission, para. 663; United States' first written submission, para. 669;
United States' first written submission, para. 679. In its response to question 368, the United States confirms the
Panel's understanding that the United States' arguments relating to post-2006 measures concern the amount of
the subsidies, rather than the existence of the subsidies.
2390 The European Communities' estimates of the amount s of these subsidies on a yearly basis is set
forth in International Trade Resources LLC, Calculating on a Per-Aircraft Basis the Magnitude of the Subsidies
Provided to US Large Civil Aircraft, 20 February 2007, Exhibit EC-13, Appendix A, and also in State and Local
Subsidies to Boeing LCA Division, Exhibit EC-27.
2391 Illinois Economic and Fiscal Commission, Cor porate Incentives in th e State of Illinois,
August 2001, Exhibit EC-221, p. 19; Testimony of Pam McDonough to the Illinois House Revenue Committee,
23 May 2001, Exhibit EC-233, p. 3.
2392 European Communities' first written submission, para. 403.
2393 United States' first written submission, para. 669.
2394 United States' first written submission, para. 669, footnote 863. We note that the United States
provides Boeing's Corporate Income Tax Return in the State of Illinois for 2002, and this tax return indicates
that in 2002 Boeing claimed an EDGE tax credit to the value of [***]. See Boeing 2002 Illinois Corporate
Income Tax Return, Exhibit US-259 (BCI), p.2.
2395 United States' response to question 260, para. 453.

BCI deleted, as indicated [***]

under the EDGE tax credit scheme.2396 In contrast, the United States does not provide any evidence to
support its assertion that [***]. The Panel provided the United States with an opportunity to respond
to the European Communities' argument on this very point, and it did not do so. We consider the
European Communities' estimate to be based on the best publicly available information and we accept
it. Consequently, we quantify the value of the ta x credits received by Boeing in the period 2003-2006
as $2.4 million. 2397 Adding to this 50 per cent of the va lue of the EDGE tax credit that Boeing
received in 2002 2398, we estimate that the amount of the subsidy to Boeing's LCA division arising
from the EDGE tax credit over the period 2002-2006 is [***], i.e. $2.4 million + [***].
7.938 In sum, the Panel estimates that the amount of the subsidy to Boeing's LCA division arising
from the four measures at issue is [***].
(f) Conclusion
7.939 For these reasons, the Panel finds that the fo ur incentives that the State of Illinois and
municipalities therein provided to Boeing in consid eration for Boeing's decision to relocate its
corporate headquarters to Chicago constitute specific subsidies within the meaning of Articles 1
and 2 of the SCM Agreement, and estimates that the amount of the subsidy provided to Boeing's
LCA division is approximately $11 million over the period 2002-2006.
5. National Aeronautics and Space Administration (NASA) aeronautics R&D2399
(a) Introduction
7.940 The European Communities asserts that NASA pr ovides Boeing with funding and support for
aeronautics R&D pursuant to a number of R&D programmes. The European Communities argues
that this funding and support c onstitutes a subsidy within the meaning of Article 1 of the
SCM Agreement, and is specific within the mean ing of Article 2 of the SCM Agreement. The
European Communities estimates that NASA provide d $10.4 billion in subsidies to Boeing over the
period 1989-2006.2400
7.941 The United States does not dispute that, under the eight NASA aeronautics R&D programmes
at issue in this dispute, NASA made payments to Boeing, and that NASA provided Boeing with
access to government facilities, equipment and em ployees for the purpose of performing aeronautics-
related research. However, the United States argues that the payments and access to facilities,

2396 Illinois Economic and Fiscal Commission, Cor porate Incentives in th e State of Illinois,
August 2001, Exhibit EC-221, p. 19; Testimony of Pam McDonough to the Illinois House Revenue Committee,
23 May 2001, Exhibit EC-233, p. 3.
2397 European Communities' first written submission, para. 404. The European Communities estimates
that Boeing will receive $1.13 million pe r year in EDGE tax credits, and submits that 50 per cent of this should
be allocated to the Boeing LCA Division.
2398 As noted above, in 2002 Boeing claimed an EDGE tax credit of [***]. The parties agree that only
50 per cent of the value of these should be allocated to Boeing's LCA Division. 50 per cent of [***] is [***].
2399 The European Communities discusses the paym ents and access to "facilities, equipment and
employees" that NASA allegedly granted to Boeing in tw o different parts of its first written submission. In
Section VI:E.2, the European Communities discusses them both under the heading "NASA Aeronautics
Research and Development". In Section VI:H of its first written submission, the European Communities
elaborates on the latter under the heading "NASA/DOD Facilities, Equipment and Employees". In its first
written submission, the United States addresses both in one section, entitled "NASA R&D". Likewise, in its
second written submission the European Communities ad dresses both in only one section, entitled "NASA
Aeronautics Research and Development". The Panel a ddresses the European Communities' arguments relating
to payments and "facilities, equipment and employees" togeth er in this section of its Report. The Panel will
follow this same approach in respect of "Department of Defense (DOD) Aeronautics R&D".
2400 NASA/DOD/DOC Aeronautics R&D Subsidies to Boeing LCA Division, Exhibit EC-25, p. 20.

BCI deleted, as indicated [***]

equipment and employees that NASA provided to Boeing are not subsidies within the meaning of
Article 1 of the SCM Agreement. The United St ates further argues that NASA's granting Boeing
access to wind tunnels is not specific within the m eaning of Article 2 of the SCM Agreement. In
addition, the United States argues that the Eur opean Communities has overestimated the amount of
any subsidy provided to Boeing by NASA. Accord ing to the United States, the total amount of
payments made to Boeing under NASA R&D contract s and agreements entered into under the eight
aeronautics R&D programmes at issue was $1.05 b illion, out of which less than $775 million was
LCA-related. According to the United States, th e total value of the NASA facilities, equipment and
employees provided to Boeing under these R&D contracts and agreements was less than $80 million.
(b) The measures at issue
7.942 From 1969 to 2002, aeronautics research each y ear accounted for between two and seven
percent of NASA's total budget. 2401 It is common ground between the parties that most of NASA's
budget is related to space activities, and it is also common ground between the parties that most of
NASA's contracts with Boeing are unrelated to aeronautics. 2402 The scope of the
European Communities claim is limited to aeronautics-related R&D.
7.943 The pertinent items of the European Communities' panel request2403 read as follows:
"a. allowing the US LCA industry to participate in research programmes, making
payments to the US LCA industry under those programmes, or enabling the US LCA
industry to exploit the results thereof by means including but not limited to the
foregoing or waiving of valuable patent rights, the granting of limited exclusive rights
data ("LERD") or otherwise exclusive or early access to data, trade secrets and other
knowledge resulting from government funded research. The following are examples
of such NASA programmes:
(i) High Speed Research Program

(ii) Advanced Subsonic Technology Program

(iii) Aviation Safety Program/Aviation Safety & Security Program/Aviation
Security & Safety Program

2401 United States' first written submission, footnote 266.
2402 The European Communities estimates that the value of payments and goods and services provided
to Boeing for aeronautics R&D over the period 1989-20 06 was $10.4 billion. In Boeing's Share of NASA
Contracts, FY 1991-FY 2004, Exhibit EC-19, the Europ ean Communities indicates that the value of "Total
NASA Contract Awards to Boeing/MD" over the period FY1991-FY2004 was approximately $32.064 billion.
Note 1 to Exhibit EC-19 indicates that the information is drawn from NASA Annual Procurement Report,
FY 1991-FY 2004, "One Hundred Principal Contractors", Exhibit EC-341. Thus, it appears that by the
European Communities' estimate, the value of the paym ents and goods and services that NASA provided to
Boeing for aeronautics-related R&D is roughly equal to one third of the total amount of payments that NASA
made to Boeing over the period 1991-2004.
2403 WT/DS353/2, items 2(a) and 2(b), pp. 6-8.

BCI deleted, as indicated [***]

(iv) Quiet Aircraft Technology Program

(v) High Performance Computing and Communications Program

(vi) Research & Technology Base Program

(vii) Advanced Composites Technology Program

(viii) Vehicle Systems Program

(ix) Materials and Structures Systems Technology Program, including advanced
composites materials and structures research

(x) Aircraft Energy Efficiency Program, including Composite Primary Aircraft
Structures, Transport Aircraft Systems Technology, and Advanced
Composite Structures Technology Programs

b. providing the services of NASA employees, facilities, and equipment to
support the R&D programmes listed above and paying salaries, personnel costs, and
other institutional support, thereby providi ng valuable services to the US LCA
industry on terms more favourable than available on the market or not at arm's
length"
7.944 On the basis of the European Communities' panel request, wr itten submissions and responses
to questions, the Panel understands that the measures challenged by the European Communities in this
dispute are the "payments"
2404 and "free access to NASA facilities, equipment and employees" 2405 that

2404 In its Panel Request, the European Communities refers to NASA "making payments" to Boeing. In
its first written submission, the European Communities refe rs to the "direct R&D funding" provided to Boeing
in the form of "grants". European Communities' first wr itten submission, paras. 524, 548, 572, 588, 603, 618,
631, and 650.
2405 See e.g. European Communities' first written submission, paras. 890-891 ("In addition to funding
the R&D efforts of the US LCA industry over the years, NASA and DOD have provided Boeing and
McDonnell Douglas with substantia l R&D support through free access to NASA/DOD facilities, equipment,
and employees ... NASA, in particular, has provided Bo eing with substantial benefit by giving Boeing free
access to its facilities, equipment, and employees."); European Communities' response to question 148,
para. 172 ("The European Communities uses the term "fac ilities, equipment, and employees" as a shorthand to
describe the types of "goods and services" provided by NASA. For purposes of the European Communities'
claim, the terms "facilities, equipment, and employees" and "goods and services" ar e interchangeable. The
European Communities has described the "facilities, equipment, and employees" provided by NASA in detail in
its prior submissions by citing to specific NASA Space Act Agreemen ts and other contracts.") and

BCI deleted, as indicated [***]

NASA provided to Boeing through R&D contract s and agreements entered into with Boeing 2406
under the following aeronautics R&D programmes: Advanced Composites Technology ("ACT"),
High Speed Research ("HSR"), Advanced Subs onic Technology ("AST"), High Performance
Computing and Communications ("HPCC"), Aviati on Safety, Quiet Aircraft Technology ("QAT"),
Vehicle Systems ("VSP"), and Research and Technology Base ("R&T Base").
2407
7.945 NASA and Boeing entered into a number of R&D contracts and agreements with Boeing
under the eight aeronautics R&D programmes at issue. The contracts and agreements essentially fall
into two different categories: (i) "procurement contracts", (as distinguished from "assistance"
instruments2408) and (ii) Space Act Agreements. U.S. laws and regulations establish legal conditions
for using "procurement contracts". Specifically, this type of instrument may be used only where the
"principal purpose" of the activity is the "acquisitio n of goods or services" for the "direct benefit or
use" of the U.S. Government. 2409 In addition, NASA regulations pr ovide that the types of Space Act
Agreements challenged by the European Communiti es in this case, i.e. "non-reimbursable" or
"partially reimbursable" Space Act Agreements, ma y only be entered into when the R&D conducted
pursuant to the agreement will "further the Agency's missions". 2410 I n t h i s R e p o r t , w e u s e t h e

European Communities' response to question 148, paras. 180-182 ("the European Co mmunities' claim is that
NASA provides "facilities, equipment, and employees" to Boeing for LCA-related R&D. This claim is captured
by the first element of item 2(b) of the European Communities' Panel Request. The second element of item 2(b)
... is intended to po int out that "institutional support" reflects part of the value of the "facilities, equipment, and
employees" provided by NASA. ... Item 2(d) serves as a more specific example of the types of facilities
provided by NASA.").
2406 See e.g. European Communities' first written s ubmission, para. 457 ("NASA and DOD generally
provide funding for LCA-related R&D through what they call "contracts," but what are in reality grants to
Boeing/MD for LCA-related R&D expenses.") and European Communities' response to question 148, para. 171
("NASA provides these "goods and services" in conjunction with the various contractual instruments (i.e. Space
Act Agreements and other contracts) it enters in to with Boeing under the eight NASA aeronautics R&D
programs challenged in this dispute").
2407 European Communities' first written submission, para. 476.
2408 The Panel notes that the vast majority of the transactions between NASA and Boeing under the
eight aeronautics R&D programmes at issue are "procure ment contracts". However, in a few cases, the
transactions between NASA and Boeing (or entities purchased by Boeing) under these programmes have been in
the form of what are termed "assistance" instrument s under U.S. law, and more specifically "cooperative
agreements". According to the United States, there were only three cooperative agreements between Boeing
and NASA, and a total of less than $5 million was allotted to these agreements. According to the United States,
there were no other types of "assistance" instruments between NASA and Boeing. See Exhibit US-1245;
footnote 464; United States' response to question 328, paragraph 38 and footnote 55.
2409 See, e.g. United States' first written submission, footnote 100 (citing 32 C.F.R. § 22.205(a) (Exhibit
US-22) and 48 C.F.R. § 35.003) (Exhibit US-23)); NASA Grants and Cooperative Agreement Handbook, §
1260.12(b)(1) (Exhibit US-94); parties' responses and related comments to questions 20, 151, 154 and 191.
2410 NASA policy regarding Space Act Agreements is set out in NASA Polic y Directive 1050.1H,
Exhibit US-108. The Space Act authorizes NASA "to enter into and perform such contracts, leases, cooperative
agreements, or other transactions as may be necessary in the conduct of its work and on such terms as it may
deem appropriate, with any agency or instrumentality of the United States, or with any State, territory, or
possession, or with any political subdivision thereof, or with any person, firm, association, corporation, or
educational institution". The term "Space Act Agreemen ts" refers to agreements that NASA enters into
pursuant to the "other transactions " authority provided by the Space Ac t. NASA's policy directive governing
Space Act Agreements explains:

Under its Space Act authority, NASA has entere d into a great number of agreements with
diverse groups of people and organizations, both in the private and public sector, in order to
meet wide-ranging NASA mission and program requirements and objectives . It is NASA's
policy to utilize the broad authority granted to the Agency in the Space Act to further the
Agency's missions.

BCI deleted, as indicated [***]

expression "NASA R&D contracts" to mean NASA' s procurement contracts with Boeing under the
eight aeronautics R&D programmes at issue, "agreements" to mean NASA's non-reimbursable and
partially reimbursable Space Act Agreements with Boeing under the eight aeronautics R&D
programmes at issue, and "NASA R&D contracts and agreements" to cover both.
7.946 In response to a question from the Panel, the European Communities clarifies that it does not
challenge NASA allowing Boeing to "participate" in research programmes as a distinct measure.
2411
With respect to NASA "enabling the US LCA indus try to exploit the results thereof by means
including but not limited to the foregoing or waiving of valuable patent rights, the granting of limited
exclusive rights data ('LERD') or otherwise excl usive or early access to data, trade secrets and other
knowledge resulting from government funded research ", the European Comm unities addresses these
measures primarily in the sections of its subm issions regarding "NASA/ DOD Intellectual Property
Rights Transfers/Waivers".2412
7.947 We discuss the challenged measures in greater detail in the context of our evaluation of
whether these measures constitute sp ecific subsidies within the meaning of Articles 1 and 2 of the
SCM Agreement, and in the context of estimatin g the amount of any subsidy to Boeing's LCA
division.
(c) Whether a subsidy exists within the meaning of Article 1 of the SCM Agreement
7.948 In this section, we address whether the pa yments and access to facilities, equipment and
employees that NASA provided to Boeing under the eight aeronautics R&D programmes at issue
constitute a subsidy within the meaning of Article 1 of the SCM Agreement. We begin by addressing
the question of whether the transactions involve a financial contribution cove red by Article 1.1(a)(1)
of the SCM Agreement. The two main issues raised by the arguments of the parties are: (i) whether
transactions properly characterized as "purch ases of services" are excluded from the scope of
Article 1.1(a)(1); and (ii) whether NASA's R&D contracts with Boeing are properly characterized as
"purchases of services". We will address these two issu es in turn. If we find that the challenged
measures provide financial contributions to Boei ng, we will then address the question of whether
those financial contributions are provided on terms that confer a benefit within the meaning of
Article 1.1(b) of the SCM Agreement.

NASA uses three different types of Space Act Agreement – reimbursabl e, partially reimbursable, and
non-reimbursable. NASA provides goods and services under reimbursable Space Act Agreements when it "has
unique goods, services, and facilities, not being fully utilized to accomplis h mission needs, which it can make
available to others on a non-interference basis, consiste nt with the Agency's missions " . N A S A r e q u i r e s f u l l
reimbursement, defined as "full cost recovery" for the goods services or facilities provided, where it does not
receive any "benefit" from the use of its facilities. NASA also has the authority to accept partial reimbursement
where a proposed contribution of the Agreement Partner is fair and reasonable compared to the NASA resources
to be committed, NASA programme ri sks, and corresponding "benefits to NASA". Where NASA is "obtaining
rights to intellectual property or data or some other benefit", there is a presumptive NASA interest that may
justify partial reimbursement. In partial reimbursement situations, NASA policy is that "{a} determination to
charge less than full cost should: (1) be accomplished consistent with NASA's written regulations and policies,
(2) articulate the market pricing analys is, benefit to NASA, or other legal authority that supports less than full
cost recovery, and (3) account for recovered and unrecovered costs in accordance with NASA financial
management policy". NASA uses non-reimbursable
 Space Act Agreements where it works with "one or more
Agreement Partners in a mutually beneficial activity that furthers the Agency's missions". In these situations,
"each party bears the cost of its participation and ther e is no exchange of funds between the parties". NASA
requires, under all non-reimbursable Space Act Agreements, that "the respective contributions of each
Agreement Partner must be fair and reasonable compar ed to the NASA resources to be committed, NASA
programme risks, and corresponding benefits to NASA."
2411 European Communities' response to question 149.
2412 European Communities' response to question 215.

BCI deleted, as indicated [***]

(i) Whether there is a financial contribution with in the meaning of Article 1.1(a)(1) of the
SCM Agreement
Whether transactions properly characterized as "purchases of services" are excluded from the
scope of Article 1.1(a)(1) of the SCM Agreement
Arguments of the European Communities
7.949 The European Communities argues that transacti ons involving purchases of services are not
excluded from the scope of Article 1.1(a)(1). Rather, the European Co mmunities considers that
Article 1.1(a)(1)(i) can be interpreted so as to c over any transaction involving a monetary payment to
a recipient, regardless of whether or not the tr ansaction involves a "purchase of services". Regarding
the interpretation of Article 1.1(a)(1), the princi pal arguments of the European Communities are as
follows: (i) the plain meaning of the terms of Article 1.1(a)(1)(i) ("a government practice involves a
direct transfer of funds...") is broad enough to encompass a direct transfer of funds made pursuant to
contracts for services; (ii) one can only specula te on why the drafters omitted the reference to
purchases of services in the final draft of the SCM Agreement, as there is more than one possible
explanation; (iii) Article 8.2(a) of the SCM Ag reement confirms that purchases of services, at least
with respect to contractual R&D support, are covered by Article 1.1(a)(1); (iv) excluding purchases of
services from the scope of Article 1.1(a)(1) would create an enormous loophole in the coverage of and
run counter to the overall object and purpose of the SCM Agreement; (v) the potential for partial
overlap between the second part of Article 1.1( a)(1)(iii) ("or purchases goods") and different sub-
paragraphs of Article 1.1(a)(1) does not, contrary to the United States argument, render the reference
to purchases of goods in Article 1.1(a)(1)(iii) redunda nt or inutile; (vi) the reference to "equity
infusion" (i.e. a purchase of shares) as an example of a "direct transfer of funds" in Article 1.1(a)(1)(i)
confirms that purchases may be covered by Article 1.1(a)(1)(i); and (vii) what a government receives
in exchange for its funding and support is an issue properly addressed under the "benefit" inquiry.2413
Arguments of the United States
7.950 The United States argues that governmental purchases of services are excluded from the
scope of Article 1.1(a)(1). The principal argum ents of the United States are as follows: (i) the
ordinary meaning of the terms of Article 1.1(a)(1)(i ) must be interpreted "in their context" and may
not be interpreted so as to render ot her provisions of Article 1 meaningless; (ii) Article 8.2(a) of the
SCM Agreement, which concerns "assistance" for research activities, does not support the view that
"purchases" of services are covered by Article 1.1(a)(1); (iii) the European Communities misconstrues
the object and purpose of the SCM Agreement, and i gnores the fact that the definition of "financial
contribution" was meant to exclude some measures from the disciplines of the SCM Agreement; (iv)
the only defensible conclusion that flows from a review of the drafting history of Article 1.1(a)(1)(iii)
is that the negotiators deleted the explicit reference to purchases of services because they intended that
those types of transactions not be treated as a fina ncial contribution; (v) the European Communities'
interpretation of subparagraphs (i) and (iii) would render the reference to purchases of goods in
Article 1.1(a)(1)(iii) redundant or inutile, and the examples to the contrary provided by the European
Communities do not demonstrate otherwise; (vi) the fact that "equity infusion" is included as an
example of a "direct transfer of funds" does not imply that purchase of goods or services are covered

2413 European Communities' second written submissi on, paras. 349-364; European Communities'
responses (and/or comments on United States responses) to questions 15, 17, 113, 114, 115, 116, 117, 118, 119,
and 120.

BCI deleted, as indicated [***]

by subparagraph (i); and (vii) giving effect to the omission of purchases of services from
Article 1.1(a)(1) does not collapse the distinction between financial contribution and benefit.2414
Arguments of Third Parties
7.951 Australia and Brazil submit that "purchases of services" are not excluded from the scope of
Article 1.1(a)(1) of the SCM Agreement. 2415 These third parties advance arguments that are
essentially the same as those advan ced by the European Communities. Among other things, both of
these parties argue that excluding purchases of ser vices from the scope of Article 1.1(a)(1) could
create an "enormous loophole" in the coverage of a nd run counter to the overall object and purpose of
the SCM Agreement.2416
7.952 Canada, Japan, and Korea take the position that purchases of services are excluded from the
scope of Article 1.1(a)(1) of the SCM Agreement. 2417 These third parties advance arguments that are
essentially the same as those advanced by the United States. Among other things, these third parties
argue that the omission of any reference to the pur chase of services in Article 1.1(a)(1)(iii) of the
SCM Agreement reflected a deliberate choice by the drafters and must be given meaning.2418
Evaluation by the Panel
7.953 As the Panel sees it, the issue before it is wh ether transactions properly characterized as
purchases of services are excluded from the scope of Article 1.1(a)(1)(i) of the SCM Agreement. This
issue has not been addressed in any prior WTO panel or Appellate Body Report.
2419 There is no
"subsequent agreement" regarding this issue between WTO Members within the meaning of
Article 31(3)(a) of the Vienna C onvention, and there is no "subse quent practice" establishing the
agreement of WTO Members regarding this issue within the meaning of Article 31(3)(b) of the

2414 United States' first written submission, paras. 48 and 218; United States' responses (and/or
comments on European Communities responses) to questions 15, 17, 113, 114, 115, 116, 117, 118, 119, and
120.
2415 Australia's written submission, paras. 19-26; Australia's response to questions 1, 5, and 6;
Australia's oral statement, paras. 5-27; Brazil's wr itten submission, paras. 9-15; Brazil's response to
questions 1, 5, and 6; Brazil's oral statement, paras. 7-12.
2416 See e.g. Brazil's written submission, para. 10 ("Obviously, such an enormous loophole was not
intended by the drafters, and, accordingly, the Panel should reject the U. S. interpretation"); Australia's oral
statement, para. 6 ("Australia finds force in the European Communities' argum ent that 'accepting the US
argument that LCA-related R&D is a purchase of servi ces simply because it is fund ed through contracts would
create an enormous loophole in the SCM Agreement'").
2417 Canada's response to questions 1 and 5; Canada's oral statement, paras. 3-11; Japan's response to
question 1; Japan's oral statement, paras. 2-4; Korea's response to question 1.
2418 See e.g. Canada's response to question 1, para. 3 ("the omission of any reference to the purchase of
services in Article 1.1(a) (1) (iii) re flected a deliberate choice by the drafters"); Japan's oral statement, para. 2
("Through this obvious omission, the SCM Agreement plainly exempts the government purchase of services
from the definition of financial contribution"); Korea's response to question 1, para. 1 ("the SCM Agreement
should be interpreted and applied as it was agreed upon at the Uruguay Round negotiations").
2419 The issue before the Panel is not whether ther e are certain transactions that can be covered
simultaneously by different sub-paragraphs of Article 1.1(a)(1), or covered simultaneously by both the
SCM Agreement and the GATS. We do not exclude the possi bility that certain transactions "might be covered
simultaneously by different sub-paragraphs of Article 1.1(a)(1)" (Panel Report, Japan – DRAMs (Korea) ,
para. 7.439). Likewise, we understand that "measures that involve a service relating to a particular good or a
service supplied in conjunction with a particular good" constitute a "category of measures that could be found to
fall within the scope of both the GATT 1994 and the GATS" (Appellate Body Report, EC – Bananas III ,
para. 221), and see little difficulty w ith the proposition that measures that involve a service relating to a
particular good or a service supplied in conjunction with a particular good constitute a category of measures that
could be found to fall within the scope of both the SCM Agreement and the GATS.

BCI deleted, as indicated [***]

Vienna Convention.2420 Thus, to answer this question, the Panel must examine the ordinary meaning
of the terms of Article 1.1(a)(1)(i), their contex t, and the object and purpose of the SCM Agreement,
as required by Article 31(1) of the Vienna Conve ntion. The Panel will also have recourse to
supplementary means of interpretation under Article 32 of the Vienna Convention to confirm the
meaning that arises from the application of Article 31 of the Vienna Convention.
7.954 Article 1.1(a)(1)(i) provides in relevant part that a financial contribution exists where "a
government practice involves a direct transfer of funds (e.g. grants, loans, and equity infusion)". We
accept that if the terms of Article 1.1(a)(1)(i) of the SCM Agreement are read in isolation, the
ordinary meaning of the words "a government practic e involves a direct transfer of funds" might be
broad enough to cover purchases of services. First, there is nothing in the dictionary definitions of
these terms to suggest that transactions properly characterized as purchases of services fall outside of
their scope: the definition of "transfer" is "a conveyance from one person to another" 2421, and the
definition of "funds" is "a stock or sum of money, esp. one set apart for a particular purpose" or
"financial resources". 2422 Second, there is no qualifying or lim iting language in the text of this

2420 In question 118, the Panel asked the United States and the European Communities whether there
was an any subsequent practice, within the meaning of Article 31(3)(b) of the Vienna Convention, which
establishes the agreement of Members on whether transacti ons involving the "purchase of a service" fall within
the scope of Article 1.1(a)(1). In its response to ques tion 118, the United States refers the Panel to the U.S.
Court of Appeals for the Federal Circuit's ruling that th e plain meaning of the text of the U.S. countervailing
duty law implementing Article 1 of the SCM Agreement was "unambiguous" because:

"Section 1677(5) is clear as to what constitutes a subsidy--and the purcha se of a service by a
foreign public entity, however related to the manufacture of a good, is not contemplated in the
statute as being a subsidy. While the provision of services by a government entity to another
entity for less than adequate compensation may be considered a subsidy, the plain language of
§ 1677(5) does not allow for the purchase
 of services by a government entity from another
entity to be considered a subsidy. Furthermore, § 1677(5)(D)(iii) clearly shows that Congress
was aware of the distinction between contracts for services and contracts for goods. Aware of
the distinction, Congress could have easily included the purchase of services by public entities
in the statutory definition of a subsidy. Because it did not, we must assume that the omission
was intentional. See Clay v. United States , 537 U.S. 522, 528, 155 L. Ed. 2d 88, 123 S. Ct.
1072 (2003) ("When Congress includes particular language in one section of a statute but
omits it in another section of the same Act, we have recognized, it is generally presumed that
Congress acts intentionally and purposely in the disparate inclusion or exclusion". Eurodif,
S.A. v. United States , pp. 17-18 (Court of Appeals for the Federal Circuit, 3 Mar. 2005)
(emphasis original) (footnotes omitted), Exhibit US-1264.

However, the United States indicates that it is "unaware of any other examples of subsequent practice
that would establish an agreement of the Members as to whether transactions involving the purchase of a service
fall within the scope of Article 1.1(a)(1)". United States' response to question 118, para. 26.
The European Communities comments that "The fact that the United States refers to the practice of
only one WTO Member – itself – can be taken as an implicit acknowledgment that there is no "subsequent
practice in the application of the treaty which establishes the agreement of the parties regarding its
interpretation" pursuant to Article 31(3)(b) of the Vienna Convention. The unilateral actions/decisions of one
party clearly do not reflect the "agreement of the parties". Therefore, the wording of the US countervailing duty
law, and its interpretation by the US Court of Appeals for the Federal Circuit ("Federal Circuit"), are simply
irrelevant for purposes of Article 31(3)(b) of the Vienna Convention". European Communities' comments on
United States' response to question 18, para. 32 (emphasis original).
2421 Shorter Oxford English Dictionary , L. Brown (ed.) (Clarendon Press, 2002), Vol. II, p. 3367. See
also, Webster's Online Dictionary , defining "transfer" to mean, among other things, the "conveyance of right,
title, or property, either real or personal, from one person to another, whether by sale, by gift, or otherwise".
2422 Shorter Oxford English Dictionary , L. Brown (ed.) (Clarendon Press, 2002), Vol. I, p. 1042. See
also, Webster's Online Dictionary, defining "funds" to mean, among other things, "Assets in the form of money"
and "A reserve of money set aside for some purpose".

BCI deleted, as indicated [***]

provision. Third, one of the examples of a "direct transfer of funds" given in Article 1.1(a)(1)(i) is
that of "equity infusion", which refers to a s ituation in which a government "purchases" something
(i.e. shares in a company). 2423 Fourth, previous panels and th e Appellate Body have not given a
restrictive interpretation to these terms. 2424 However, the terms of Article 1.1(a)(1)(i) must be read in
their context.
7.955 The immediate context of Article 1.1(a)(1)(i) in cludes Article 1.1(a)(1)(iii) and Article 14(d)
of the SCM Agreement. Article 1.1(a)(1)( iii) reads in its entirety, "a government provides goods or
services other than general infrastructure, or purchases goods ". Likewise, Article 14(d) of the
SCM Agreement, which forms part of the c ontext of Article 1 of the SCM Agreement 2425, mirrors the
wording of Article 1.1(a)(1)(iii) in providing that "the provision of goods or services or purchase of
goods by a government shall not be considered as conferring a benefit unless the provision is made for
less than adequate remuneration, or the purchase is made for more than adequate remuneration". The
omission must have some meaning. 2426 In other words, a textual analysis in accordance with the
Vienna Convention requires an interpreter to consider both what is in the text, and at the same time
what is not in the text. The glaring difference between the first and second parts of sub-paragraph (iii)
necessarily implies that the par ties intended to exclude purchases of services from the definition of
Article 1.1(a)(1) of the SCM Agreement. Moreover, we recall that "omissions in different contexts"
may carry different meanings. 2427 Article 1.1(a)(1) is a definitional provision that sets forth an
exhaustive, closed list ("... i.e. where ...") of th e types of transactions that constitute financial
contributions under the SCM Agreement. The omission of the words "or services" in the context of a
provision that sets forth an exhaustive, closed list of the kinds of transactions covered by the
SCM Agreement only reinforces the implication that the parties intended to exclude purchases of
services from the definition of "financial contribution" in Article 1.1(a)(1) of the SCM Agreement.
2428
7.956 It must be emphasized that if the Panel were to invent a line of reasoning to support the view
that transactions involving purchases of services are c overed by other sub-paragraphs and elements of
Article 1.1(a)(1) of the SCM Agreement, wh ether as a "direct transfer of funds" under
Article 1.1(a)(1)(i) or otherwise, this would necessarily mean that transactions involving purchases of
goods must also be covered by those same other sub- paragraphs and elements. That would mean that
the term "purchases goods" in Article 1.1(a)(1)(iii) is redundant and inutile, because the scope and
coverage of Article 1.1(a)(1) of the SCM Agreemen t would be precisely the same if those words had
not been added to Article 1.1(a)(1)(iii). The Panel is not free to adopt a reading of Article 1 that
would result in reducing key terms of that provision to "redundancy or inutility".2429 Accordingly, the

2423 Panel Report, EC – Countervailing Measures on DRAM Chips , para. 7.92 ("Article 1.1(a)(1)(i) of
the SCM Agreement provides that there is a financial contribution where a government practice involves a direct
transfer of funds, such as in the case of a grant, loan and equity infusion for example. The purchase of
corporate bonds is such a direct transfer of funds, and therefore constitutes a financial contribution.") (emphasis
added)
2424 Appellate Body Report, Japan – DRAMs (Korea) , para. 250 ("In our view, the term "funds"
encompasses not only "money" but also financial resour ces and other financial claims more generally. The
concept of "transfer of funds" adopted by Korea is too literal and mechanistic because it fails to encapsulate how
financial transactions give rise to an alteration of obligations from which an accrual of financial resources
results.")
2425 Appellate Body Report, Canada – Aircraft, paras. 155 and 158.
2426 See e.g. Appellate Body Report, Canada – Autos, para. 138, citing Appellate Body Report, Japan –
Alcoholic Beverages II, p. 18.
2427 Appellate Body Report, Canada – Autos, para. 138.
2428 We note that the omission of purchases of "ser vices" from Article 14(d) not only implies that the
parties intended to excluded purchases of services from the scope of the SCM Agreement, but means also that
there is no standard for determining whether purchases of "services" provide a "benefit" under Article 1.1(b).
2429 See e.g. Appellate Body Report, US – Gasoline, p. 23; Appellate Body Report, Japan – Alcoholic
Beverages II, p. 12; Appellate Body Report, US – Underwear, p. 16.

BCI deleted, as indicated [***]

Panel is not free to accept the argument that tran sactions involving purchases of services (along with
transactions involving purchases of goods) are covere d by other sub-paragraphs and elements of
Article 1.1(a)(1).
7.957 The context of Article 1.1(a)(1)(i) also includes (now lapsed) Article 8.2(a) of the
SCM Agreement.2430 The European Communities reasons that:
"Article 8.2(a) states 'the following subsidies shall be non-actionable'2431, and the first
item on the list is 'assistance for research activities conducted by firms or by higher
education for research on a contract basis with firms if {certain conditions are met }.'
As correctly noted by Australia in its third party submission 2432, although this
provision is no longer in force, and indeed never applied to civil aircraft pursuant to
footnote 24, it expressly provides that government support of R&D on a contract
basis is a 'subsidy,' and therefore by definition qualifies as a financial
contribution."
2433
7.958 We do not find this reasoning persuasive, a nd believe that the European Communities'
argument is to some extent based on a misreading of the text of Article 8.2(a), which concerns
"assistance" for research activities conducted by firm s, including "assistance" for higher education or
research establishments that conduct research for firms on a contract basis. In addition, Article 8.2(a)
does not state that "government support of R&D on a contract basis" is a subsidy. Rather,
Article 8.2(a) refers to government assistance for research activities conducted by firms "or by higher
education or research establishments on a contract basis with firms". If the terms of Article 8.2(a)
gave rise to the necessary implication that certain types of transactions necessarily constitute subsidies
within the meaning of the SCM Agreement, we woul d of course agree that those types of transactions
must logically involve a financial contribution within the meaning of Article 1.1(a)(1). The problem
with the European Communities' argument is th at there does not appear to be anything in
Article 8.2(a) to suggest that governmental pur chases of R&D services from firms fall within the
scope of the SCM Agreement. By its own terms, Article 8.2(a) concerns "assistance" for research
conducted by firms. If the only manner in which a government could provide "assistance" for
research conducted by firms was by purchasing R&D services from firms, then the European
Communities argument would rest on solid ground. However, this strikes us as a false premise.
7.959 Turning to "object and purpose", we recall that the Appellate Body has clarified that "the
object and purpose of the SCM Agreement ... reflects a delicate balance between the Members that
sought to impose more disciplines on the use of su bsidies and those that sought to impose more
disciplines on the application of countervailing measures".
2434 In addition, we find useful guidance in
the reasoning of the panel in US – Export Restraints. In that case, the panel concluded that the type of
measure at issue did not involve a financial contribution within the meaning of Article 1 of the
SCM Agreement. In the course of interpreting Article 1, the Panel explained that:

2430 Panel Report, US – Upland Cotton, footnotes 1086 ("We realize that this provision has now lapsed,
by virtue of the operation of Article 31 of the SCM Agreement. ... However, these provisions can nevertheless
be instructive in understanding the overall architecture of the Agreement with respect to the different types of
subsidies it sought and seeks to address. We recall that the Decision by the Arbitrator in US – FSC (Article 22.6
– US), footnote 66, expressed a similar view.")
2431 Emphasis added.
2432 Australia's written submission, paras. 20-21.
2433 European Communities' response to question 15(a); European Communities' second written
submission, para. 355.
2434 Appellate Body Report, US – Countervailing Duty Investigation on DRAMS , para. 115 (emphasis
added).

BCI deleted, as indicated [***]

"we do not see any contradiction between the said object and purpose of the
SCM Agreement and the fact that certain measures that might be commonly
understood to be subsidies that distort trade might in fact be excluded from the scope
of the Agreement. Indeed, while the object and purpose of the Agreement clearly is to
discipline subsidies that distort trade, this object and purpose can only be in respect of
'subsidies' as defined in the Agreement. This defi nition, which incorporates the
notions of 'financial contribution', 'benefit' , and 'specificity', was drafted with the
express purpose of ensuring that not every government intervention in the market
would fall within the coverage of the Agreement."
2435
7.960 The Panel has given very careful consideration to the argument advanced by the European
Communities, Brazil and Australia that excludi ng purchases of services from the scope of
Article 1.1(a)(1) "would run counter to the overall object and purpose of the SCM Agreement " by
creating "an enormous loophole in the coverage of the SCM Agreement and provide WTO Members
with a roadmap for distorting trade in goods through "service contracts" with their goods
producers".
2436 If a finding that purchases of services are excluded from the scope of the
SCM Agreement necessarily led to the manifestly absu rd result that a Member could turn a grant into
an excluded "purchase of services" simply by that Member "labelling" 2437 the transaction a "contract"
or "purchase of services", then such an interpre tation would indeed run counter to the object and
purpose of the SCM Agreement. However, a finding that transactions properly characterized as
purchases of services are excluded from the scope of Artic le 1.1(a)(1) would not lead to such a result.
There is every reason to believe that WTO panels an d national investigating authorities will be able to
detect transactions that are not properly characterized as purchases of services.
7.961 To confirm the meaning that arises from th e application of Article 31 of the Vienna
Convention, we now turn to "supplementary means" of interpretation under Article 32 of the Vienna
Convention.
7.962 First, an examination of the preparatory work of Article 1.1(a)(1)(iii) and Article 14(d) of the
SCM Agreement reveals that a reference to governme ntal "purchases of services" originally appeared
in and was subsequently removed from the text of bo th of these provisions in the final draft. More
specifically, the first and second drafts of Article 1.1(a)(1)(iii) referred to the provision of "goods or
services", but not to purchases of either goods or services. 2438 In the third draft, an additional
reference to purchases of "goods or services" was added to Ar ticle 1.1(a)(1)(iii), which was mirrored
in the draft of Article 14(d).2439 In this regard, Articles 1.1(a)(1)(iii) and 14(d) remained unchanged in
the fourth draft, and in the first draft of the Final Act of the Uruguay Round. 2440 However, in the
second draft of the Final Act, the reference to purchases of "services" was removed from both
Article 1.1(a)(1)(iii) and Article 14(d), but the reference to purchases of "goods" was retained. 2441 In
our view, the preparatory work confirms that the parties intended to exclude purchases of services
from the scope of Article 1.1(a)(1).

2435 Panel Report, US – Export Restraints, para. 8.63 (emphasis original). See also, Panel Report, US -
Softwood Lumber IV , para. 7.29 (citing Panel Report, US – Export Restraints , para. 8.63, and reiterating that
"the definition of a subsidy in Article 1 SCM Agreement reflects the Members' agreement that only certain types
of government action are subject to the SCM Agreement, and also that not all government actions that may
affect the market come within the ambit of the SCM Agreement.")
2436 European Communities' response to question 15(a), para. 51; Brazil's written submission, para. 10;
2437 European Communities' second written submission, paras. 356-361.
2438 MTN/GNG/NG10/W/38 (dated 18 July 1990); MTN/GNG/NG10/W/38/Rev.1 (4 September 1990).
2439 MTN/GNG/NG10/W/38/Rev.2 (2 November 1990).
2440 MTN/GNG/NG10/W/38/Rev.3 (6 November 1990); MTN.TNC/W/35/Rev.1 (3 December 1990).
2441 MTN/TNC/W/FA (20 December 1991).

BCI deleted, as indicated [***]

7.963 According to the European Communities, "one can only speculate on why the drafters omitted
the reference to purchases of services in the final draft of the SCM Agreement, as there is more than
one possible explanation". 2442 The Panel considers that the Eu ropean Communities has failed to
provide the Panel with any plausible explanation of why the drafters deleted the reference to
purchases of services from Article 1.1(a)(1)(iii) and Artic le 14(d) of the SCM Agreement. First, with
respect to the hypothesis that the nego tiators wished "to clarify that the SCM Agreement does not
discipline subsidies that exclusively distort trade in services", excluding purchases of services does
not convey this meaning, as the negotiators retain ed other types of financial contributions, which
could just as easily exclusively distort trade in servic es. In addition, we agree with the United States
that "one would think that if the negotiators sought to 'clarify' the complete exclusion of subsidies to
'services', they would pick a less oblique textual device". 2443 Second, with respect to the hypothesis
that "the negotiators sought to be clear that th e SCM Agreement applies only to those purchases of
services that fall within other clauses of Artic le 1.1(a)(1)", the European Communities does not
explain why the negotiators would seek such a result for purchases of services, but not purchases of
goods. It is not plausible that purchases of services were omitted from Article 1.1(a)(1)(iii) in order to
clarify that the SCM Agreement applies only to th ose purchases of "services" that fall within other
clauses of Article 1.1(a)(1) (e.g. a purchase of services effected through a monetary payment), but that
purchases of goods are covered by Article 1.1(a)(1) even in the absence of the payment of any
consideration of the type that would otherwise fall within the scope of one of the other sub-paragraphs
of Article 1.1(a)(1). Rather, as we have concl uded above, the necessary implication of a finding that
purchases of services are covered by other sub-paragraphs and elements of Article 1.1(a)(1) is that the
words "or purchases goods" in Article 1.1(a)(1)(iii) are redundant and inutile.
7.964 Second, the "circumstances of {the} conclusion" of the SCM Agreement
2444, which include
both pre-existing GATT disciplines regarding governme nt procurement, relevant dispute settlement
proceedings that took place under those disciplines, and also the negotiations that were underway to
establish new disciplines regarding government pr ocurement, including government procurement in
respect of services, suggest to us that the drafte rs of Article 1 of the SCM Agreement would have
understood the consequences of removing the reference to purchases of "services" in Article 1.
7.965 The scope of the 1979 Procurement Code was li mited to the "procurement of products", and
did not extend to "services contracts per se".2445 In Article IX:6(b), the parties to the Procurement
Code committed themselves to explore the possibili ties of expanding the coverage of the Code to
cover purchases of services. 2446 Article V:15(e) of the Procurement Code specifically addressed
"contract{s} for research, experiment, study or original development".
7.966 At the time that the SCM Agreement was be ing negotiated, there were two GATT panel
proceedings underway examining the meaning of these provisions. In US - Sonar Mapping 2447, the

2442 European Communities' response to question 15(a), paras. 52-53.
2443 United States' comments on European Communities' response to question 15(a), para. 55.
2444 With regard to "the circumstances of {the} conclusion" of a treaty, the Appellate Body has
explained that "this permits, in appropriate cases, the examination of the historical background against which the
treaty was negotiated." Appellate Body Report, EC – Computer Equipment, para. 86.
2445 Paragraph 1(a) of Article I (Scope and Coverage) stated that "any law, regulation, procedure and
practice regarding the procurement of products by the entities subject to this Agreement. This includes services
incidental to the supply of products if the value of these incidental services does not exceed that of the products
themselves, but not service contracts per se".
2446 Article IX:6(b) stated that "Not later than the end of the third year from the entry into force of this
Agreement and periodically thereafter, the Parties thereto shall undertake further negotiations, with a view to
broadening and improving this Agreement on the basis of mutual reciprocity, having regard to the provisions of
Article III relating to developing countries. In this c onnection, the Committee shall, at an early stage, explore
the possibilities of expanding the coverage of this Agreement to include service contracts".
2447 GATT Panel Report, US – Sonar Mapping, circulated 23 Apr 1992 (not adopted).

BCI deleted, as indicated [***]

United States argued that the procurement at i ssue involved the procurement of a product under a
"service contract", and was therefore excluded from the scope of the Procurement Code. The
European Communities disagreed. The panel proceeded to analyse the meaning of the phrase "service
contracts per se" in Article I:1(a). The panel ultimately re jected the United States' position, and found
that the procurement at issue fell within the scope of the Code, based on its interpretation of the scope of
Article I:1(a). In Norway – Trondheim Toll Ring
2448, the question before the panel was whether, under
the contract in question, the Norwegian entity had procured prototypes which had been developed at
its request in the course of, and for, a particular "c ontract for research or original development". The
panel examined the different interpretations of Norway and the United States of the phrase "contract
for research ... or original development" in Article V:15(e). The panel ultimately concluded that the
procurement fell within the scope of the Procurement Code.
7.967 While these panel proceedings were underway , and while the SCM Agreement was being
negotiated, the parties to the plurilateral Tokyo Round Procurement Code were in the process of
extending the scope and coverage of that agreement to cover purchases of services. The renegotiation
of the Code led to the WTO Agr eement on Government Procurement. 2449 The WTO Agreement on
Government Procurement "expand{s} the coverage of the Agreement to include service contracts".2450
7.968 While the SCM Agreement was being negotiated, parallel negotiations on trade in services
were also taking place. Article XIII:2 and XV of the GATS reflect the fact that the negotiators of the
GATS were unable to reach agreement on disciplin es regarding governmental purchases of services,
or on disciplines governing the provision of subsidies to service suppliers.
7.969 When the omission of "purchases" of "services" is read against this historical background, it
becomes clear that the drafters could not have removed the express reference to "purchases" of
"services" in Article 1.1(a)(1)(iii) on the understandi ng that the reference was superfluous, and that it
would be understood and intended that such transactions were implicitly covered by
Article 1.1(a)(1)(i). Rather, the exclusion of "purchases" of "services" from Article 1 can only be
seen as a deliberate choice.
7.970 The Panel is not entitled to assume that the disa ppearance of certain terms from the text of
Article 1 of the SCM Agreement "was merely accide ntal or an inadvertent oversight on the part of
either harassed negotiators or inattentive draftsmen".2451 The Panel must "read and interpret the words
actually used" in Article 1, not the words that the Panel "may feel should have been used".2452 It is not
open to the Panel to impute into Artic le 1 "words that are not there". 2453 Having considered the
ordinary meaning of the terms of Article 1.1(a)(1 )(i), their context, the object and purpose of the
SCM Agreement, and the preparatory work and circumstances of the conclusion of the
SCM Agreement, the Panel finds that transactions properly characterized as purchases of services are
excluded from the scope of Article 1.1(a)(1)(i) of the SCM Agreement.

2448 GATT Panel Report, Norway – Trondheim Toll Ring, adopted 13 May 1992.
2449 The Agreement on Government Procurement, a plurilateral agreement, is included in Annex 4 to
the WTO Agreement.
2450 Agreement on Government Procurement, preamble. See also, Article I (Scope and Coverage).
2451 Appellate Body Report, US – Underwear, p. 17.
2452 Appellate Body Report, EC – Hormones, para. 181.
2453 Appellate Body Report, India – Patents (US), para. 45.

BCI deleted, as indicated [***]

Whether NASA R&D contracts with Boeing ar e properly characterized as "purchases of
services"
Arguments of the European Communities
7.971 In the introduction to the section of its first written submission addressing NASA, DOD and
DOC aeronautics R&D, the European Communities ass erts that "NASA and DOD generally provide
funding for LCA-related R&D through what they call "contracts", but what are in reality grants to
Boeing/MD for LCA-related R&D expenses". 2454 In the sections of its first written submission
addressing NASA aeronautics R&D in particular, th e European Communities argues in respect of
each of the eight programmes that "NASA directly tran sferred funds in the form of grants to Boeing's
LCA division".2455 The European Communities argues that this "direct R&D funding" 2456 constitutes
a direct transfer of funds within the meaning of Article 1.1(a)(1)(i) of the SCM Agreement.
7.972 The European Communities further argues, in r espect of each of the eight programmes, that
NASA provided Boeing with access to government "facilities, equipment and employees", which
constitutes a provision of goods or services within the meaning of Article 1.1(a)(1)(iii) of the
SCM Agreement.2457 According to the European Comm unities, the value of these "facilities,
equipment and employees" is partly captured in NASA's "institutional support" budgets, and the
European Communities occasionally refers to the provision of access to facilities, equipment and
employees as "institutional support".2458
7.973 In its second written submission, the European Communities responds to the United States'
argument that NASA's R&D contracts with Boeing are " purchases of services" that fall outside of the
scope of Article 1.1(a)(1) of the SCM Agreemen t. The European Communities argues that NASA's
R&D contracts with Boeing cannot be characterized as "purchases of services", and that "purchases of
services" are in any event not excluded from the scope of Article 1.1(a)(1).2459
7.974 In its response to question 15 from the Panel, the European Communities argues that NASA
R&D contracts with Boeing are not properly characterized as "purchases of services" for four reasons.
First, because "NASA R&D contracts do not ultimately aim at the acquisition of a service for the
direct benefit and own use of the government". Rather, with regard to the NASA R&D contracts, the
R&D that Boeing performs under the aspects of th e eight aeronautics R&D programmes in question
"ultimately benefits Boeing, and is not a service fo r the direct benefit and use of NASA". NASA is
undisputedly "not in the business of manufacturing LCA or its parts, and therefore has no
demonstrable need for the LCA-related R& D that Boeing performs under the programs in
question".
2460 Second, because "NASA R&D contracts do not contain the typical elements of a
purchase". In this regard, the European Communiti es reiterates that because NASA's contracts with
Boeing "are intended to primarily and ultimately benefit Boeing's LCA manufacture", they deviate
from a typical purchase where one would expect the pur chased service to be of primary interest for
the purchaser. The European Communities reiter ates that "NASA, however, receives virtually

2454 European Communities' first written submission, para. 457.
2455 European Communities' first written submission, paras 524, 548, 572, 588, 603, 618, 631, and 650.
2456 Ibid.
2457 European Communities' first written submission, paras 524, 548, 572, 588, 603, 618, 631, 650,
and 890-901.
2458 See e.g. European Communities' response to question 148, para. 181 ("the European Communities'
claim is that NASA provides "facilities, equipment, a nd employees" to Boeing for LCA-related R&D. This
claim is captured by the first element of item 2(b) of the European Communities' Panel Request. The second
element of item 2(b) ... is intended to point out that "institutional support" reflects part of the value of the
"facilities, equipment, and employees" provided by NASA.")
2459 European Communities' second written submission, paras. 329-365.
2460 European Communities' response to question 15(c), para. 61.

BCI deleted, as indicated [***]

nothing of value from these contracts, since it is not in the business of acquiring or manufacturing
LCA or its parts". 2461 Third, because "NASA R&D contracts do not exclusively affect trade in
services". The European Communities argues that the "R&D services" that Boeing performed under
the aspects of the NASA R&D programs in question "relate directly to the production of LCA – i.e.
goods".
2462 Fourth, because "Boeing is not a genuine provider of LCA-related R&D services". In this
regard, the European Communities argues that "Boe ing does not offer such R&D services to anybody
else but NASA and DOD" and that "Boeing has not advertised itself as a service provider for LCA-
related R&D in the market".2463
Arguments of the United States
7.975 With respect to the existence of a financia l contribution, the United States submits that
NASA's R&D contracts with Boeing are not "grants" , as the European Communities asserts, but are
rather "purchases of services". The United States argues that "purchases of services" are not covered
by Article 1.1(a)(1) of the SCM Agreement. Acco rdingly, any payments and/or access to facilities,
equipment and employees provided to Boeing under NASA R&D contracts are not financial
contributions within the meaning of Article 1.1(a) (1). With regard to the European Communities'
assertions, it is true that NASA does not acquire or produce large civil aircraft. However, NASA does
acquire, produce, and disseminate knowledge. And, accordingly, the "true purpose" of the NASA
programmes is to develop and disseminate the greatest amount of information to the broadest group in
the shortest amount of time possible, and not to "c onvey resources to Boeing". That information is
used both within government, by U.S. governme nt agencies, such as the Federal Aviation
Administration ("FAA") and DOD, and airport authorities, and outside of government by industry and
academia. NASA's contracts with Boeing and its acti ons provide evidence that this is the case, and
that the challenged measures are purchases of services – not just in name, but in substance. NASA
formulates its own goals, based on consultations with a wide variety of stakeholders. NASA seeks
proposals from contractors on how to meet those goal s, and accepts the bid that presents the best
value. NASA and its contractors negotiate over the terms of the contract. The contractor must then
carry out all of the terms of the contract in retu rn for payment by NASA. This process, documented
by the citations to U.S. procurement regulations , the numerous examples of individual contracts and
modifications, and the huge vol ume of publicly disseminated literature generated by these
programmes, demonstrates that NASA's contracts wi th Boeing are not, as the European Communities
would have the Panel believe, a "sham".2464
7.976 While the United States argues in its first written submission that Space Act Agreements
should be analyzed as "purchases of services", it has subsequently adopted the view that both
reimbursable and non-reimbursable Space Agreements involve a provision of goods and services by
NASA.2465 The United States accepts that the provi sion of (access to) facilities, equipment and
employees provided to Boeing through the Space Act Ag reements at issue constitutes a provision of
goods or services within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement.
Evaluation by the Panel
7.977 Having concluded that purchases of services are ex cluded from the scope of Article 1.1(a)(1),
the next question before the Panel is whether NA SA R&D contracts are properly characterized as

2461 European Communities' response to question 15(c), para. 63.
2462 European Communities' response to question 15(c), para. 65.
2463 European Communities' response to question 15(c), para. 67.
2464 United States' first written submission, paras. 213-225; United States' second written submission,
paras. 60-64; United States' responses (and/or comments on European Communities' responses) to
questions 15(c), 16, 19, 20, 151, 154, 155, and 327.
2465 United States' response to question 18, para. 39. See also, United States' response to question 161.

BCI deleted, as indicated [***]

"purchases of services". The parties agree that NAS A provides goods and services to Boeing, within
the meaning of Article 1.1(a)(1)(iii) of th e SCM Agreement, under Space Act Agreements. 2466
However, the parties disagree on the question of whether the payments and access to facilities,
equipment and employees provided to Boeing throu gh its R&D contracts with NASA are covered by
the definition of "financial contribution" in Article 1.1(a)(1) of the SCM Agreement. In this regard,
the United States argues that NASA's R&D contracts with Boeing are "purchases of services" that fall
outside of the scope of Article 1.1(a)(1). As the Appellate Body has recognized, " {a}n evaluation of
the existence of a financial contri bution involves consideration of the nature of the transaction
through which something of economic va lue is transferred by a government". 2467 In this case, the
Panel's task is to reach a conclusion regarding the nature of NASA's aeronautics R&D contracts with
Boeing.
7.978 In the Panel's view, whether or not NASA's R&D contracts with Boeing are properly
characterized as a "purchase of services" depends on the nature of the work that Boeing was required
to perform under the contracts, and more specifically, whether the R&D that Boeing was required to
conduct was principally for its own benefit and use, or whether it was principally for the benefit and
use of the U.S. Government (or unrelated third parties ). This for several reasons. First, the Panel
considers that NASA's R&D contracts with Bo eing should be characterized based on their terms, and
the core term 2468 of these contracts is the wo rk that Boeing was required to perform. Second, it is
inherent in the ordinary meaning of the concept of a "service" that the work performed be for the
benefit and use of the entity funding the R&D (or unrelated third parties). 2469 Third, characterizing
the transactions on the basis of whether the R&D th at Boeing was required to conduct was principally
for its own benefit and use, or whether it was pr incipally for the benefit and use of the U.S.
Government (or unrelated third parties), is broadly consistent with the arguments of the parties and
third parties in this case. 2470 Fourth, focusing on whether the work performed was principally for the
benefit and use of the government (or unrelated thir d parties) is consistent with prior GATT panel

2466 The European Communities has provided specific examples in its submissions of the "facilities,
equipment and employees" provided to Boeing under NASA Space Act Agreements. European Communities'
para. 645; and para. 892; European Communities' second written submission, paras. 389, 390. In its response to
question 148, the European Communities states that it "has described the 'facilities, equipment and employees'
provided by NASA in detail in its prior submissions by citing to specific NASA Space Act Agreements and
other contracts". European Communities' response to question 148, para. 172, footnote 161. See also,
European Communities' response to question 148, para. 188, footnote 172.
2467 Appellate Body Report, US – Softwood Lumber IV , para. 52 (emphasis added). The "nature" of
something is generally defined as the basic or inhe rent features, character or quality of something; Oxford
Dictionary of English, 2ed (rev), 2005, p. 1172.
2468 The Panel uses the word "term" in its ordinary sense, i.e. "Conditions under which some action may
be undertaken ... stipulated requirememts or limitations", and specifically, "Conditions with regard to payment
for goods or services", and "A condition, a prerequisite of something." Shorter Oxford English Dictionary ,
p. 3215 (5th ed. 2002).
2469 The Shorter Oxford English Dictionary defines "service" to mean, "An act of helping or benefiting
another ... The action of serving, helping, or benefiting another; behaviour conducive to the welfare or
advantage of another". Shorter Oxford English Dictionary, p. 2768 (5th ed. 2002) (emphasis added).
2470 According to the European Communities, whether or not a transaction is pr operly characterized as
a purchase of services depends, inter alia, on whether "the ultimate purpose of the transaction would need to be
the acquisition of a service for the direct benefit and own use of the government". European Communities'
response to question 15(b), para. 55. Canada notes that in general terms, "a service is the performance of duties
or work for someone else", such that the relevant question is whether the government has "procured the
performance of duties or work for itself or anyone else (o ther than the service seller)". Canada's response to
question 5(c), paras. 4-7.

BCI deleted, as indicated [***]

reports examining the question of whether a transa ction was properly characterized as a government
procurement.2471
7.979 Having formulated the question that needs to be asked and answered, the Panel now turns to
the question of what kinds of evidence it will consider for the purpose of answering that question. In
general, the Panel has eschewed any notion of focu sing on one single fact for the purpose of reaching
a conclusion on that question. Rather, the Panel believes that it should review all of the evidence
regarding the terms and surrounding context of NASA's aeronautics R&D contracts with Boeing, with
a view to reaching a conclusion on whether NASA's aeronautics R&D contracts with Boeing are, in
essence, purchases of services. In the Panel's view, there is no reason why, for example, the type of
instrument and so-called "formal" features of the transaction would be disregarded if they shed light
on the question of the nature of the R&D activities required of Boeing under the contracts; there is
likewise no reason why, for example, evidence of the purpose and motives of the programmes under
which they were entered into would be disregarded if they shed light on the question of the nature of
the R&D activities required of Boeing under the cont racts. In both cases, they are not extraneous
features divorced from the "terms" of the transactions; rather, they could be central to understanding
the core term of the transaction. That is, this is evid ence that could be very helpful in understanding
whether the nature of the work performed under Bo eing's R&D contracts with NASA (the core terms
of the transactions) was principally for the U.S. Gove rnment's benefit or use (and/or for the benefit or
use of unrelated third parties), or rather for Boeing' s own benefit or use. That is the question that
needs to be answered for the purpose of de termining whether the transactions are properly
characterized as purchases of services.
7.980 More specifically, the Panel will consider, inter alia , the legislation authorizing the
programmes at issue, the types of instruments entered into between NASA and Boeing, whether
NASA has any demonstrable use for the R&D perfo rmed under these programmes, the allocation of
intellectual property rights under these transactions, and whether the transactions at issue had the
typical elements of a "purchase of services".
2472
7.981 When considered in its totality 2473, the evidence relating to NAS A aeronautics R&D, some of
which is individually discussed below, leads to th e conclusion that the work that Boeing performed
under its aeronautics R&D contracts with NASA was principally for its own benefit or use, rather than
for the benefit or use of the U.S. Government (or unrelated third parties). Accordingly, the Panel

2471 In US – Sonar Mapping , the panel stated that " {w}hile not intending to offer a definition of
government procurement within the meaning of Article I:1(a) {of the Tokyo Round Agreement on Government
Procurement}, the Panel felt that in considering the facts of any particular case the following characteristics,
none of which alone could be decisive, provide guidance as to whether a transaction should be regarded as
government procurement within the meaning of Article I:1(a): payment by government, governmental use of or
benefit from the product , government possession and government control over the obtaining of the product".
The panel concluded that in that cas e, the government agency would " enjoy the benefits of the system's
purchase - Antarctic research and the preparation of seabed maps – which were clearly for government
purposes, and the Government can thus be regarded as the ultimate beneficiary of the system". (GATT Panel
Report, US – Sonar Mapping , paras. 4.7 and 4.10 (emphasis added). See also, GATT Panel Report, Norway –
Trondheim, paras. 4.8-4.13.)
2472 As will become clear in our review of some of the evidence before the Panel, these different
considerations overlap to a certain extent.
2473 The Appellate Body has on a number of occasions stressed that a panel must consider the evidence
before it "in its totality". See e.g. Appellate Body Report, US – Continued Zeroing , para. 331 ("Article 11
requires a panel to consider evidence before it in its totality, which includes consideration of submitted evidence
in relation to other evidence. A particular piece of evid ence, even if not sufficient by itself to establish an
asserted fact or claim, may contribute to establishing that fact or claim when considered in conjunction with
other pieces of evidence".)

BCI deleted, as indicated [***]

concludes that NASA's R&D contracts with Boeing are not properly characterized as "purchases of
services".
7.982 We begin with NASA's statutory basis for perfo rming aeronautical research, which is found
in the National Aeronautics and Space Act of 1958.2474 The Space Act provides that:
"(d) The aeronautical and space activitie s of the United States shall be conducted
so as to contribute materially to one or more of the following objectives:
(1) The expansion of human knowledge of the Earth and of phenomena
in the atmosphere and space;
(2) The improvement of the usefulness, performance, speed, safety, and
efficiency of aeronautical and space vehicles;
(3) The development and operation of vehicles capable of carrying
instruments, equipment, supplies, and living organisms through space;
(4) The establishment of long-range studies of the potential benefits to
be gained from, the opportunities for, and the problems involved in the
utilization of aeronautical and space activities for peaceful and scientific
purposes;
(5) The preservation of the role of the United States as a leader in
aeronautical and space science and technology and in the application thereof
to the conduct of peaceful activities within and outside the atmosphere;
(6) The making available to agencies directly concerned with national
defense of discoveries that have mili tary value or significance, and the
furnishing by such agencies, to the civi lian agency established to direct and
control nonmilitary aeronautical and space activities, of information as to
discoveries which have value or significance to that agency;
(7) Cooperation by the United States with other nations and groups of
nations in work done pursuant to this Act and in the peaceful application of
the results thereof;
(8) The most effective utilization of the scientific and engineering
resources of the United States, with close cooperation among all interested
agencies of the United States in order to avoid unnecessary duplication of
effort, facilities, and equipment;
(9) The preservation of the Unite d States preeminent position in
aeronautics and space through research and technology development related
to associated manufacturing processes."
 2475
7.983 We note that Sec. 203(a) of the Space Act provides that NASA must, in order to carry out the
objectives of the Space Act , "provide for the widest practicable and appropriate dissemination of
information concerning its activities and the results thereof".

2474 National Aeronautics and Space Act of 1958, Pub. L. No. 85-568, as amended, Exhibit EC-286
(emphasis added).
2475 National Aeronautics and Space Act of 1958, Pub. L. No. 85-568, as amended, Exhibit EC-286
(emphasis added).

BCI deleted, as indicated [***]

7.984 We now turn to an examination of the types of instruments entered into between NASA and
Boeing. In the case of NASA aeronautics R&D, we consider that NASA's decision to provide
payments and access to facilities to Boeing through "p rocurement contracts" rather than "assistance
instruments" does not shed very much light on the nature of the transactions. Our reasoning on this
issue is as follows. NASA considers that a "direct benefit or use" to NASA exists when it initially
drafts a scope of the work to advance research under one of its programmes and defines the delivery
of the end products. In the case of the procurement contracts awarded to Boeing at issue in this
dispute, the research under the contract advanced one of NASA's research programmes and NASA
determined particular work that it needed, so it solicited proposals under a request for proposals, and
awarded contracts.
2476 Thus, the United States explains that NASA considers R&D to have "direct
benefit or use" for NASA where that R&D "adva nces research under one of its programmes".
Likewise, NASA considers R&D conducted pursuant to a Space Act Agreement to be of "benefit" to
NASA where that R&D advances its "program requirements and objectives".
7.985 We turn now to the question of whether NASA has any demonstrable use for the R&D
performed under the eight aeronautics programmes at issu e. Based on the Panel's review of all of the
evidence before it, it appears that a principal purpos e of NASA's aeronautics R&D in general, and of
the eight aeronautics programmes at issue, is to tran sfer technology to U.S. industry with a view to
improving U.S. competitiveness vis-à-vis foreign competitors.
7.986 In a 1992 congressional meeting on Federal Suppor t for U.S. Aeronautics Industry, NASA's
Richard Petersen, Associate Administrator of Office of Aeronautics, Exploration and Technology,
stated that:
"The current U.S. leadership in aeronautics has not happened by accident. It is the
result of a successful industry and government partnership that has evolved since the
founding of the NACA, over 77 years ago. In this partnership, there is a shared
responsibility between NASA, Industry, DOD and FAA for tec hnology development
and in securing U.S. leadership . NASA plays a central role in developing and
transferring technology, a responsibility we take very seriously."
2477
7.987 In a statement to a Senate subcommittee in 2001, Daniel Goldin, former Administrator of
NASA, explained that past NASA research is al ready incorporated into Boeing planes and that
NASA's partnership with Boeing will continue well into the future:
"{I}f the Europeans are going to make small, marginal improvements with what we're
saying here, we'll whip them. Money is not the magic ingredient. The partnership is.
It is absolutely clear. We have been talking to Boeing and working with Boeing and I
think it's important you talk to the Boei ng representative David Swain here today.
We've been talking to Pratt & Whitney and GE, who are the backbone of our
commercial aviation. They don't want us to do the near-term things that will impact
the next five years. The die is cast for the next five years. The things we have
already done are into their products and we're now looking, what can we do now for a
decade from now. ... {I}n talking to Pratt & Whitney, GE and Boeing, looking at a
futuristic program like that {i.e. the HSR Program } where the government does the
high-risk, high-payoff research and then transitions it to industry, they say that they're
interested. ... With Boeing, we need to look at new ways of building wings, new

2476 United States' response to question 151(a), para. 137.
2477 Federal Support for U.S. Aeronautics Industry: Hearing before the House Subcomm. on
Government Activities and Transportation of the Comm . on Government Operations, 102nd Cong. (1992)
(statement of Richard Petersen, Associate Administrator, Office of Aeronautics, Exploration and Technology,
NASA), Exhibit EC-326, p. 182 (emphasis added).

BCI deleted, as indicated [***]

tools so they can get the cycle time by a factor of two, down by a factor of two. The
cycle time is too long for building planes."2478
7.988 In a 1993 Senate hearing, Mr. Goldin stated that:
"As global competition increases, we will have to improve our ability to assist
industry to commercialize technology. We are all painfully aware that Airbus beat us
to the punch in commercializing, among other advanced technologies, fly-by-wire
controls, a technology invented in the United States by NASA and DOD. To prevent
this kind of occurrence in the future , we are now working harder at developing and
validating new technologies for industry to commercialize, and we intend to do it
faster, better, and cheaper than our competitors . NASA's Aeronautics Program can
contribute by ensuring that commercialization by industry is an integral part of
program planning from the very beginni ng, accomplished in cooperation with our
partners. This is a change from the wa y we have done business in recent years – a
much needed change – and exactly the tack we are taking."2479
In response to written questions, Administrator Goldin stated:

Question 1. Do you believe that American manufacturers are behind Airbus in terms
of technology?
Answer. ... The principal shortfall in U.S. technology development has been
insufficient validation and risk reduction to allow U.S. manufacturers to take full and
early advantage of technology availability. The proposed NASA aeronautics
enhancements for FY 1994 focus on c ooperation with industry through the
technology validation phase.

Question 3 . You have discussed the importance of NASA's aeronautics research
programs to the aircraft manufacturing in dustry. What steps has NASA taken to
ensure that technology development under these programs is effectively transferred to
industry? How does NASA ensure that American manufacturers have access to these
technologies before foreign companies?
 Answer. NASA generally performs its research in cooperation with the aeronautics
industry, thereby providing some direct mechanisms for technology transfer.
However, we are stepping up our effort s to increase and improve industry
involvement both in planning and implementing our programs. Additionally, much
of the Aeronautics investment, beginni ng in FY 1994, is aimed at developing
technologies to a more advanced stage, re ducing the risks sufficiently for industry
commercialization. Industry's partne rship in the NASA program should allow
manufacturers to easily continue the technology development through
commercialization, as desired. Fu rthermore, the natural advantage U.S. industry is
afforded through direct partnership in the NASA technology development program
will be supported by NASA contr acts and cooperative agreements which include

2478 NASA's Aeronautics Program: Hearing before the Senate Subcomm. on Science, Technology and
Space of the Comm. on Comme rce, Science and Transportation, 107th Cong. (2001), FDCH Political
Transcripts, 24 April 2001, Exhibit EC-292, pp. 13-18.
2479 Competitiveness of the Aerosp ace Industry: Hearing on S. 4 19 Before the Senate Comm. on
Commerce, Science, and Transportation, 103rd Cong. 81 (1993), Exhibit EC-1365, p. 34 (emphasis added).

BCI deleted, as indicated [***]

provisions to protect commercially va luable and/or sensitive technology from
premature foreign dissemination."2480
7.989 In a 1994 hearing, Wesley L. Harris, NASA Asso ciate Administrator for Aeronautics, stated
that:
"NASA's objective in the Advanced Subsonic Technology (AST) program is to
provide U.S. industry with a compe titive edge to recapture market share , maintain a
strongly positive balance of trade , and increase U.S. jobs . The program has been
planned and is being implemente d in close coordination with U.S. industry and the
Federal Aviation Administration (FAA) to address critical technology needs for a
new generation of superior U.S. subsonic aircraft and engines, an efficient global air
transportation system, and an expanded role for advanced short-haul aircraft in the
civil transportation system."2481
Mr. Harris went on to state that:

"Also funded from our R&T base is the research we conduct with high performance
aircraft, which supports both military and civil applications. In FY 1993, we
demonstrated the use of throttles only for flight control by landing our F- 1 5 aircraft
with a specially designed propulsion cont rol system. The NASA research team was
honored for this Propulsion Controlled Airc raft (PCA) project by Popular Science
magazine with a "Best of What's New' Award. The technology is now being
extended to civil transport aircraft. This is an example of how we have worked with
our DoD partners to transfer technologies developed from our integrated flight and
propulsion controls research to our commercial customers , which improves safety
and makes them more competitive . ... the R&T Base supports our unique national
aeronautics research facilities which include wind tunnels, simulators, computational
capability and research aircraft. These provide strong tools for aeronautics research
and help increase the U.S. aerospace industry's competitiveness."
2482
7.990 1n 1996, NASA Langley Center Director Paul Holloway stated that " {i}t is really important
to us at Langley when a customer like the Boeing Company uses and appreciates our technology .
This is the reason for our existence ".2483 Along the same lines, in 1998, Langley Director Dr. J.F.
Creedon stated that:
"The reason that there is a NASA Langley and the other aeronautics centers is to
contribute technology to assure the pre-eminence of US aeronautics . When Boeing
brings out a flagship product like the 777, that uses as many products of NASA
technology as are on this plane, it reaffirms the reason that we exist and it is very
gratifying to us."
2484

2480 Competitiveness of the Aerosp ace Industry: Hearing on S. 4 19 Before the Senate Comm. on
Commerce, Science, and Transportation, 103rd Cong. 81 (1993), Exhibit EC-273, pp. 80-81 (emphasis added).
2481 Statement of Wesley L. Harris, NASA Associate Administrator for Aeronautics, before the House
Subcommittee on Technology, Environment, and Aviation, 10 February 1994, Exhibit EC-359, p. 4 (emphasis
added).
2482 Ibid., pp. 8-9 (emphasis added).
2483 NASA News Release No. 96-33, "Boeing says 'thanks' with visit of innovative 777 airliner to
NASA Langley," 8 May 1996, Exhibit EC-1362 (emphasis added).
2484 Video clip of Langley Director Dr. J.F. Creedon on visit of Boeing 777, Langley Research Center,
LV-1998-00023, Exhibit EC-287 (emphasis added).

BCI deleted, as indicated [***]

7.991 At a 2005 hearing, Dr. J. Victor Lebacqz, NASA Associate Administrator for Aeronautics
Research, stated that:
"{t}he revolutionary technologies developed by NASA within the next decade will
form the basis for a new generation of e nvironmentally friendly aircraft and will
enhance U.S. competitiveness 20 years from now."2485
7.992 The evidence contains similar statements from senior Boeing officials. For example, in
a 1994 hearing, Robert Spitzer, Vice President of Technology with BCA, explained that:
"The NASA aeronautics role is different from the space role within NASA where
they are the customer and industry is the supplier. In the commercial aeronautics the
manufacturer of airplanes is the customer and NASA is the supplier."2486
7.993 A 1994 NASA document entitled Achieving Aeronautics Leadership, NASA Aeronautics
Strategic Enterprise Plan , 1995-20002487 states that the "Aeronautics Industry" is one of its main
"customers" (along with DOD, FAA, the academic community, and non-aerospace industries). The
document defines "customers" as "entities that require NASA-developed technologies, facilities,
and/or technical expertise to enhance the ec onomic competitiveness, military security, and air
transportation infrastructure of the United States". 2488 It goes on to state that while each of NASA's
"customer segments" is facing its own challenges, there are several factors which have severely
affected the "industry" (i.e. the "industry" that is NASA's "customer") as a whole, including the
following:
"Foreign Competition . During the same period in which domestic producers have
been facing this "profit squeeze" betwee n cost-conscious customers and escalating
production costs, foreign competition, ofte n subsidized by their host governments,
has captured a large share of previously U.S. dominated markets . For example, U.S.
manufacturers held 80 percent of the large commercial transport market in 1974, but
only 68 percent in 1993. And in 1994, for the first time ever, Europe's Airbus
Industrie consortium posted mo re new orders than did Boeing. Similar losses are
working their way through the lower-tier supplier industries. Although subsequent
trade negotiations have been addressing this situation, concerns still remain about
future foreign support in aircraft development and production."
2489
The document goes on to state that NASA will:

"Emphasize Technology Transfer. The Ae ronautic Enterprise has long recognized
the importance of ensuring that our custom ers actually use the products that we
develop. The Enterprise will continue to emphasize technology transfer to the
aerospace community through join t program planning and execution , and to all U.S.
industry through proactive commercial tec hnology utilization outreach efforts. The

2485 Statement of Dr. J. Victor Lebacqz, NASA As sociate Administrator for Aeronautics Research,
before the House Subcommittee on Space and Aeronautics, 16 March 2 005, Exhibit EC-289, pp. 2-3 (emphasis
added).
2486 Hearing Before the Subcommittee on Technology, Environment and Aviation of the Committee on
Science, Space, and Technology, US House of Representatives, 10 February 1994, Exhibit EC-1363, p. 128
(emphasis added).
2487 NASA, Achieving Aeronautics Leadership, NASA Aeronautics Strategic Enterprise Plan, 1995-
2000, Exhibit EC-302 (emphasis added).
2488 Ibid., p. 11.
2489 Ibid., p. 12 (emphasis added).

BCI deleted, as indicated [***]

Enterprise will also continue to protect sensitive research and technology as
appropriate."
7.994 A 1991 study prepared by the Office of Tec hnology Assessment, a research entity of the
US Congress, states that:
"NASA's aeronautics R&D program also benefits U.S. aircraft producers , though it
does not always bestow a competitive advantage. The program helps U.S. aircraft
manufacturers develop and adopt new technologies by conducting research inhouse
and then transferring the results to compan ies and by contracting with companies to
perform specific research tasks, usually in cooperatio n with inhouse NASA research.
Further, NASA researchers act as a free consulting service for industry engineers
having technical problems. The availability of technologies developed and tested at
NASA's expense and risk helps aircraft manufacturers incorporate new capabilities
into their products at diminished cost or risk, just as military developments do."
2490
7.995 A 1997 report by the Congressional Budget Office states that:
"The National Aeronautics and Space Administration (NASA) funds the development
of technology and systems intended for u se in commercial airliners—both subsonic
and supersonic--with the explicit objective of preser ving the U.S. share of the current
and future world airliner market . ... NASA justifies the supersonic part of its
aeronautical research and technology program the same way it justifies the program's
subsonic component: the agency needs to support U.S. businesses that produce large
commercial aircraft for the world market. ... Although a case can be made for federal
support of R&D that ultimately benefits pr ivate businesses and is consistent with an
economically efficient allocation of resources, it applies only weakly, or not at all, to
the production of large aircraft. The benefits from the R&D supported by the NASA
programs in question {the AST and HSR programs} fall almost exclusively to aircraft
manufacturers, their suppliers, and airlines." 2491
7.996 In 2003, Langley catalogued some of the contributions it had made to US large civil aircraft
in a publication entitled Concept to Reality: Contributions of the NASA Langley Research Center to
the US Civil Aircraft of the 1990's. This publication states that:
"A high priority is placed by NASA on the rapid, timely dissemination of information
to appropriate U.S. organizations , while being extremely sensitive to proprietary
interests and the protection of technology and critical intellectual property. …
Numerous NASA focused programs for civ il aircraft have emerged and delivered
unprecedented opportunities for the maturation of key technologies to the U.S.
airframe, propulsion, and avioni cs and flight controls industries for the design of
advanced aircraft."2492
This same publication states that Boeing "flew the first 777 to Langley for a 'thank you' visit" as "a
gesture of thanks for NASA's technology contributions to its creation". 2493 According to this

2490 Office of Technology Assessment of the Congress of the United States, Competing Economies:
America, Europe, and the Pacific Rim, Chapter 8 (selec tions): Government Support of the Large Commercial
Aircraft Industries of Japan, Europe, and the United States, 1991, Exhibit EC-306, p. 347 (emphasis added).
2491 Congressional Budget Office, Reducing the Defi cit: Spending and Revenue Options, March 1997,
Exhibit EC-307, pp. 152-153 (emphasis added).
2492 Joseph R. Chambers, Concept to Reality: Contributions of the NASA Langley Research Center to
U.S. Civil Aircraft of the 1990s (2003), Exhibit EC-293, p. 1 (emphasis added).
2493 Ibid., pp. 166-167.

BCI deleted, as indicated [***]

publication, Langley research contributed to sever al advances in aerodynamics, flight dynamics,
structures and materials, flight systems, noise reduction, and operating problems.2494

7.997 A 2003 Langley Economic Impact Report highlights numerous contributions made by
Langley to aircraft design.
2495 This report states, in a section entitled "Direct Impact of NASA
Langley on Government and U.S. Industry", that:
"Within the manufacturing sector, aerospace is the only industry with a positive
contribution to the U.S. balance of trade . It provides a net annual contribution of
more than $21 billion. However, the U.S. faces strong competition . Prior to 1974,
the U.S. had more than 90 percent of the commercial transport market share. Today,
the U.S. share is around 60 percent. To preserve our nation's economic health and the
welfare of the traveling public, NASA has set bold research objectives and goals to
sustain U.S. leadership in aeronautics and space. NASA Langley's leadership and
technology advancements in aviation safety, advanced subsonic technology, airframe
systems and high-speed research play a pivotal role in accomplishing these goals."2496
7.998 A 1994 NASA "Facts Online" publication entitled "NASA's B-737 Flying Laboratory"
catalogues a number of "Advanced Technologies Tranferred To U.S. Industry ".2497 It proceeds to
discuss "Technology Transfer Lessons":
"Gone are the days when successful technology transfer is as simple as writing a
report on research results after the work is completed. There is a growing consensus
... that technology transfer efforts stand a much better chance of success if they occur
as a part of the technology development process, through personal contact between
NASA and industry engineers. By involving industry earlier in the process, NASA
Langley B-737 program managers have helped insure that their efforts are relevant to
industry's needs. Also, flight testing new concepts on the airplane has provided
unassailable proof that the technology will work."
2498
7.999 The ACT Program Budget states that:
"The goal of the Advanced Composites Technology (ACT) program is to increase the
competitiveness of the U.S. aeronautics i ndustry by putting the commercial transport
manufacturers in a position to expand the application of composites beyond the
secondary structures in use today to wings a nd fuselages by the end of this decade.
Industry's resistance to using composites is one of economics. While the current
demonstrated level of composites tec hnology can promise improved aircraft
performance and lower operating costs through reduced structural weight, it does so
with increased manufacturing costs, currently twice the cost of aluminum. The goal
of this program is to verify composite structure designs that will have acquisition
costs 20-25% less and weigh 30-50% less than an aluminum aircraft sized for the
same payload and mission."
2499

2494 Ibid., pp. 249-258.
2495 NASA Langley Research Center, Economic Impact, Fiscal Year 1998, Exhibit EC-303, p. 17.
2496 Ibid., p. 16 (emphasis added).
2497 NASA Facts Online, "NASA's B-737 Flying Labo ratory," May 1994, Exhibit EC-1389, pp. 1-3
(emphasis added).
2498 Ibid., pp. 4-5.
2499 NASA ACT Budget Estimates, FY 1989-FY 1997, Exhibit EC-321, FY 1997, SAT 4-21 (emphasis
added).

BCI deleted, as indicated [***]

7.1000 NASA Contract NAS1-20546, funded under NASA's ACT Program, states that:
"The objectives of this contract are to perform design, analysis, fabrication and
testing verification of a full-scale composite wing structure for commercial transport
aircraft. The contract results are expected to pr ovide the technical data required for
the application of composite wing structures in new 21 st Century commercial
transport aircraft."2500
This contract goes on to require that the Contr actor, in that case MD, directly transfer the new
manufacturing technology "to other U.S. aircraft builders".2501

7.1001 Certain contracts between NASA and Boeing unde r the ACT Program contained a "For Early
Domestic Dissemination" (FEDD) clause, stating that:
"It has been determined that performan ce under this contract may result in the
generation of data having significant commercial potential . In recognition of this
agency's policy of enhancing the opportuniti es for U.S. economic benefits by
providing for early dissemination of such data in the US Government and U.S.
domestic industry prior to general publication … It is agreed that the Contractor will
not grant permission to publish this data or release said data to foreign parties, or
transfer this information to foreign parti es, or associates in any form without prior
concurrence of the Contracting Officer …. Information for general release will be
two (2) years from publication date indicated on the document."
2502
7.1002 Space Act Agreements entered into between NASA and Boeing under the ACT Program state
that:
"The NASA Program has been structured around definitions of success for the
commercial industry .... {M}any of the deliverables from the NASA program will
directly benefit Boeing."2503
"The principal technical objectives of the program {include}: … {t}ransfer the
technology to U.S. industry through technology transfer workshops...."2504
"NASA has a goal under its Advanced Co mposites Technology (ACT) program to
help establish United States leadership in this field . Toward this goal, MDC and
NASA LaRC agree to coordinate {their} two programs to deve lop and demonstrate
engineering and manufacturing readiness for composite wing structure on new
commercial transports."
2505
7.1003 A NASA technical report prepared under the ACT Program states:

2500 NASA Contract NAS1-20546 with McDonnell Douglas regarding Technology Verification of
Composite Primary Wing Structures for Commercial Transport Aircraft, 18 September 1995, Exhibit EC-324,
p. 3 (emphasis added).
2501 Ibid. (emphasis added).
2502 See e.g. NASA Contract NAS1-18862 with McDonnell Douglas Corporation regarding Innovative
Composite Aircraft Primary Structures (ICAPS), 31 March 1989, Exhibit EC-331, Article H-6 (emphasis
added).
2503 SAA 214: Aging Aircraft Research and Technology Development, Exhibit US-500, Article 4.0
(emphasis added)
2504 SAA 288: Aging Aircraft Research and Technology Development, Exhibit US-501, Article 3.0
(emphasis added)
2505 SAA 331: Composite Wing Structure Research, Exhibit US-503, Article 1.0 (emphasis added).

BCI deleted, as indicated [***]

"The timely development of advanced composite technologies for wing and fuselage
structures will ensure that U.S. manufacturers maintain a ma jority share of the world
market for transport aircraft . The US government currently finances such
developments under the NASA funded A dvanced Composite Technology (ACT)
program. Developmental funding such as ACT is crucial to the future of the U.S.
aircraft industry and, since a large number of commercial aircraft manufactured in
the U.S. are sold abroad, provides long term national benefits. …
World dominance in transport aircraft sales by US industry is threatened by foreign
competitors {… }
Boeing has remained the only US aircraft manufacturer to meet the Airbus challenge
without loss of market share. US government research funding, such as the NASA
ACT program, helps Boeing and other US aircraft manufacturers develop advanced
technology and remain competitive in world markets."
2506
7.1004 NASA also explained that " {t}he program will help accomplish one of NASA's new
technology goals for aeronautics – to reduce the costs of air travel by 25 percent within 10 years, and
by 50 percent within 20 years".2507
7.1005 The HSR Program Budget states that:
"The HSR program continues to develop technologies to establish the viability of an
economical and environmentally sound High Speed Civil Transport (HSCT), a
vehicle that - if built by U. S. industry - could provide U. S. leadership in the long-
range commercial air travel markets of the next century , offering returns of billions
of dollars in sales and numerous high-quality jobs for the U.S. workers. In FY 1999,
NASA has proposed an extension to th e program, HSR Phase IIA, which will
mitigate risk in two critical areas-propulsion and airframe materials and structures.
HSR Phase IIA will enable American taxpayers to continue to receive a return on
their investment in high-speed re search and will be essential to enabling U. S.
industry to make its decisions on whether the 21st Century commercial aircraft
market will call for an HSCT."2508
7.1006 NASA's HSR Program was a focused technology development programme intended to enable
development of a high-speed (i.e. supersonic) civil transport ("HSCT"). 2509 The programme
proceeded in two phases, with Phase I commenc ing in 1990 and Phase II commencing in 1994. 2510
Phase II of the programme was directed at "addressing essential technologies needed by the U.S.
aeronautics industry in order to make informed decisions regarding future HSCT development and
production".2511

2506 L. Ilcewicz, et al., Advanced Technology Composite Fuselage, printed in Sixth NASA/DOD ACT
Conference, Exhibit EC-279, pp. 21, 22, 76, and 98 (emphasis added).
2507 NASA Facts Online, "The Advanced Stitching Machine: Making Composite Wing Structures of
the Future", Exhibit EC-336, p. 2.
2508 NASA HSR Budget Estimates, FY 1991-FY 2001, Exhibit EC-343, FY 1999, SAT 4.1-30
(emphasis added).
2509 National Research Council, Committee on High Speed Research, U.S. Supersonic Commercial
Aircraft: Assessing NASA's High Speed Research Program, 1997, Exhibit EC-319, p. 1.
2510 NASA HSR Budget Estimates, FY 1991-FY 2001, Exhibit EC-343, FY 1994, RD 9-31 and RD 9-
33.
2511 NASA HSR Budget Estimates, FY 1991-FY 2001, Exhibit EC-343,FY 1994, RD 9-33.

BCI deleted, as indicated [***]

7.1007 The "Technology Transfer" Handbook for the HSR Program states the reason behind the
"Limited Exclusive Rights Data" (LERD) clauses used in certain contracts: " {b}ecause it is critical
for the U.S. to maintain its lead over foreign competition in aerospace technology, access to sensitive
information … generated in this program will be restricted to the extent permitted by applicable
Federal law".2512 NASA further stated that " {o}pen dissemination of criti cal technology developed
under this Program could severely impact the competitiveness of the U.S. aeronautics industry ".2513
The HSR Handbook states that:
"The intent in the application of the contro ls to be described in this section is to
control the transfer of sensitive information to foreign competitors."2514
7.1008 The HSR "Program Plan" states that:
"The projected High-Speed Civil Transpor t (HSCT) market is substantial, and
successful development and production of an HSCT by foreign competitors would
significantly reduce the U.S. aerospace industry world market share of civil transport
aircraft. Technology development is es sential. The NASA HSR program is being
conducted in two phases with the ultim ate objective of helping to assure U.S.
industry's continued preeminence in aeronauti cs well into the next century by
developing technology that will enable an environmentally compatible and
economically viable HSCT aircraft."2515
7.1009 A Space Act Agreement entered into between NASA and Boeing states:
"Through this commitment each Party agrees to focus HSR and HSCT funding on the
high-priority technologies required to de velop a commercially viable supersonic
transport."2516
7.1010 Other programme objectives included addressing "environmental issues and developing the
basis for evaluating technology advances th at can provide the necessary environmental
compatibility"2517, providing "as strong a technical basis as possible for establishing suitable
{environmental} standards" for high speed flight 2518, to "understand better the potential environment
effects" of high speed flight and carry out studies to "lead to environmental certification requirements
for future high speed transports" and "working on ways to soften the sonic boom to ensure minimal or
no harmful effects on human and animal life from its operation".2519
7.1011 The AST Program Budget states that:
"The goal of NASA's Advanced Subsonic T echnology (AST) Program is to develop,
in cooperation with the Federal Aviation Administration (FAA) and the United States

2512 NASA Langley Research Center, High-Speed Re search Program: Technology Transfer Control
Handbook, April 1998, Exhibit EC-344, p. 1 (emphasis added).
2513 NASA Langley Research Center, High-Speed Re search Program: Technology Transfer Control
Handbook, April 1998, Exhibit EC-344, p. 17 (emphasis added).
2514 Ibid. (emphasis added).
2515 NASA High Speed Research Program Plan, April 1998, Exhibit EC-1208, p. 1 (emphasis added).
2516 SAA 249: High Speed Technology Research, Exhibit US-502, Article 1.0; SAA 404: High Speed
Technology Research, Exhibit US-506, Article 1.0.
2517 NASA HSR Budget Estimates, FY 1991-FY 2001, Exhibit EC-343, FY 1991, RD 12-35; FY 1992,
RD 12-22, FY 1993, RD 12-23.
2518 NASA High Speed Research Program Plan, April 1998, Exhibit EC-1208, p. 4.
2519 Statement of Daniel S. Goldin, Administrator, National Aeronautics and Space Administration, US
Senate Committee on Commerce, Science, and Transportation, 19 May 1993, Exhibit EC-1365.

BCI deleted, as indicated [***]

aeronautics industry , high payoff technologies to enable a safe, highly productive
global air transportation system that incl udes a new generation of environmentally
compatible, economical U.S. subsonic aircraft that are superior to foreign products .
To improve the technological competitiveness of the U.S., the objective of the AST
program is to accelerate subsonic technology development in several key areas in
which the focus is on the economic value of the technologies to the airframe and
engine manufacturers, airlines and FAA.
With competition from foreign competitors greatly increasing, technology is critically
needed to help preserve the U.S. aeronautics industry market share, jobs, and balance
of trade. Exports in large commercial transports make a significant contribution to the
U.S. balance of trade. However, according to industry estimates, the U.S. world-wide
market share has slipped from a high of 91% during the 1960's to about 67%
today."2520
7.1012 The objectives for the composites element of the AST Program were described as follows:
"The aircraft industry's resistance to using composites is one of economics. While the
current demonstrated level of composites technology can promise improved aircraft
performance and lower operating costs through reduced structural weight, it does so
with increased manufacturing costs, currently twice the cost of aluminum. The goals
of the composites element are to reduce the weight of civil transports by 30-50% and
their cost by 20-25% compared to today's me tallic transports. This translates into a
potential 16% direct operating cost-savings to the airlines and increases the
competitiveness of the U.S. built transports . In cooperation with industry and the
FAA, research is performed to validate th e technology for the application of new
composites manufacturing techniques, such as through-the-thickness stitching and
resin transfer moulding, textile preforms and advanced fiber placement, on transport
wings."
2521
7.1013 The HPCC Program consisted of four components, one of which was the computational
aerosciences project ("CAS"), the component most relevant to the aeronautics industry. 2522 The aim
of the CAS project has been described variously as "to significantly shorten the design cycle time for
advanced aerospace products such as future high-speed civil transports" 2523 and to "accelerate the
development, availability and use of high-performance computing technology by the U.S. aerospace
industry, and to hasten the emergence of a viable commercial market for hardware and software
vendors to exploit this lead".2524 In other words:

2520 NASA AST Budget Estimates, FY 1992-FY 2001, Exhibit EC-357, FY 1996 (emphasis added).
2521 NASA AST Budget Estimates, FY 1992-FY 2001, Exhibit EC-357, FY 1996, SAT4-38. In
FY 1997, this objective was modified to recognize indu stry's concern not just with the comparative costs of
composites, but also the robustness and reparability of co mposites. In addition, the weight and cost reduction
targets were modified as follows: reduce the weight of civil transports by 10-30 per cent and their cost by 10-20
per cent, translating into a potential 5 per cent direct operating cost-savings to the airlines; NASA AST Budget
Estimates, FY 1997, SAT4-37, Exhibit EC-357.
2522 Dominik Wacht, An Analysis of Selected NASA Research Programs and Their Impact on Boeing's
Civil Aircraft Programs, November 2006, Exhibit EC-15 (BCI), p. 122. The other components of HPCC were
the Earth and Space Sciences project, the Informatio n Infrastructure and Technology and Applications
component, and the Remote Exploration and Experimentation project, Exhibit EC-372.
2523 NASA HPCC Budget Estimates, FY 1992-FY 2003, Exhibit EC-373, FY 1996, SAT 4-18.
2524 The National Aeronautics and Space Administrati on's (NASA) High Perf ormance Computing and
Communications (HPCC) Program, Exhibit EC-372, p. 3 (emphasis added).

BCI deleted, as indicated [***]

"The CAS objectives are: to accelerat e development and availability of high-
performance computing technology of use to the U.S. aerospace community ; to
facilitate adoption and use of this technology by the U.S. aerospace industry; and to
hasten emergence of a viable commercial market for hardware and software vendors
to exploit this lead. CAS targets advances in aeroscience algorithms and applications,
system software, and computing machinery that will enable more than 1000-fold
increases in system performance early in the Twenty-first Century. These
computational capabilities will be sufficiently characterized such that they can be
rapidly integrated into economical d esign and development processes for use by U.S.
industry. Although CAS does not develop production computing systems, CAS
technology and the characterization of existi ng hardware and software will enable the
development of full-scale systems by industry and will make commercial ventures
into this area more attractive."
2525
7.1014 Further, according to the HPCC Budget estimates:2526
"CAS targets advances in aeroscience algor ithms and applications, system software
and machinery that will enable more than 1000-fold increases in system performance
early in the twenty-first century. These computational capabilities will be sufficiently
characterized such that they can be rapi dly integrated into economical design and
development processes for use by the U.S. industry . Although CAS does not develop
production computing systems, CAS technolog y and the characterization of existing
hardware and software will enable the de velopment of full-scale systems by industry
and will make commercial ventures into this area more attractive."
7.1015 The HPCC fact sheet provides:2527
"The U.S. aerospace industry can effec tively respond to increased international
competition only by producing across-the-board better quality products at affordable
prices. High performance computing cap ability is a key to the creation of a
competitive advantage, by reducing produc t cost and design cycle times; its
introduction into the design process is, howev er, a risk to a commercial company that
NASA can help mitigate by performing th is research. The CAS project catalyzes
these developments in aerospace computing, while at the same time pointing out the
future way to aerospace markets for domestic computer manufacturers."
7.1016 A Space Act Agreement between NASA and Boeing states that:
"This effort will provide an excellent opportunity to transfer NASA HPCC
technology to the U.S. aerospace industry."2528
7.1017 NASA's HPCC Program Plan states that the "principal industry customers" of the CAS
project are "aerospace vehicle and engine manufacturers". 2529 It goes on to state that "NASA center
management, working with industry and NASA HPCC researchers, are responsible for identifying

2525 NASA HPCC Budget Estimates, FY 1992-FY 2003, Exhibit EC-373, FY 2000, SAT 4.1-24
(emphasis added).
2526 Ibid.
2527 The National Aeronautics and Space Administrati on's (NASA) High Perf ormance Computing and
Communications (HPCC) Program, Exhibit EC-372, p. 3 (emphasis added).
2528 NASA SAA2-B0001.3, Exhibit US-512, Article 1.2 (emphasis added).
2529 NASA High Performance Computing and Communications Program Plan, 25 April 2000,
Exhibit EC-1211, p. 14 (emphasis added).

BCI deleted, as indicated [***]

sensitive technologies. These technologies are handled in such a way that their dissemination to
foreign persons, companies, laboratories, and universities is restricted".2530
7.1018 The Aviation Safety Program, which commen ced in FY 2000, funds the development of
technologies that are intended to reduce aviation accide nt and fatality rates. The programme grew out
of aviation safety research conducted under the R&T Base Program prior to FY 2000. 2531 T h e
Program Plan for the Aviation Safety Program states that:
"The NASA Office of Aero-Space Technology (OAT) Enterprise is focused on long-
term, high-risk, high-payoff research and technology. The Enterprise seeks to
promote economic growth and security and to enhance U.S. economic
competitiveness through leadership in the global aircraft market by revolutionizing air
travel and the way in which aircraft are designed, built, and operated and by
providing low-cost space transportation technologies. ...
NASA may use formal agreements to establish partnerships with the U.S aviation
industry, FAA, DoD and other NASA Programs, such as the six R&T Base Programs
and the Aviation System Capacity Programs . These agreements leverage existing
programs within these organizations, as well as identify the means through which the
technology can be realized in U.S. industry production. ...
The Aviation Safety program will emphasize r apid and effective dissemination of the
technology to the U.S. industry . Technology transfer mechanisms depend on the
maturity of the technology. A variety of technology transfer mechanisms will be
employed. The most important is direct i nvolvement of the Users in the formulation
of the program described in this plan and direct contract of R&D. AvSP resources
fund R&D contracts and grants, which help ensure direct transfer of technology to the
U.S. industry and thus increase the likelihood of direct input into near-term products.
Technology exchange will also occur among the participants through special
technical working group meetings. Presenta tions at technical conferences sponsored
by the American Institute of Aeronauti cs and Astronautics, American Society of
Mechanical Engineers, and other similar professional societies will be limited to
discussion of non-competitively sensitive information . Other methods of technology
transfer include technical reports, coop erative programs, a nd personnel exchanges
between NASA, industry and other gove rnment agencies through memoranda of
agreement (MOA's), and technical demonstrations at NASA and user facilities."
2532
7.1019 The QAT Program built upon the Noise Reduction portion of the AST Program, which
according to NASA was "a focused technology prog ram for developing noise reduction technology
for the US commercial aircraft industry to enhance its competitiveness to meet national and
international environmental requirement s and to facilitate market growth". 2533 The QAT Program
funded the development of technologies to reduce airc raft noise levels by a factor of two within
10 years, by a factor of four within 25 years, and to create a transportation system "with no need for

2530 NASA High Performance Computing and Communications Program Plan, 25 April 2000,
Exhibit EC-1211, p. 48 (emphasis added).
2531 NASA Aviation Safety Budget Estimates, FY 2000-FY 2007, Exhibit EC-382, FY 2000, SAT 4.1-
49.
2532 NASA Aviation Safety Program Plan, 1 August 1999, Exhibit EC-1209, pp. 2, 4 and 35 (emphasis
added).
2533 NASA Memorandum to Research and Focused Programs Contracts Branch, 23 May 1996,
Exhibit EC-365, p. 4 (emphases added).

BCI deleted, as indicated [***]

curfews, noise budgets, or noise abatement procedures." 2534 NASA described the goal of the
QAT Program as follows:
"The goal of the Quiet Aircraft Technology program is to contribute to the 10-year
noise objective of the Global Civil Aviation enabling technology goals, as stated in
the Office of Aero-Space Technology Enterprise Strategic Plan, 'Reduce the
perceived noise levels of future aircraft by a factor of two from today's subsonic
aircraft within ten years, and by a factor of four within 25 years.' The Quiet Aircraft
Technology program is the next step in achieving the very ambitious and desirable
25-year goal for the public good. Achievement of the 25-year goal will fulfill
NASA's vision of a noise constraint-free air transportation system with the
objectionable aircraft noise contained within the airport boundaries. Part of this
vision is a transportation system with no need for curfews, noise budgets, or noise
abatement procedures. Benefits to the public of achieving these goals include
increased quality of life, readily available and affordable air travel, and continued
U.S. global leadership."
2535
7.1020 NASA also formulated the objectives of the QAT Program in terms of "fulfull {ing} NASA's
vision of a noise constraint-free air transport system with objectionable noise contained within airport
boundaries" and leading "the technology developm ent necessary to meet national community noise
impact reduction requirements"
2536, and developing "technology that, when implemented, reduce the
impact of aircraft noise to benefit airport neighbors, the aviation industry, and travellers".2537
7.1021 The VSP, which began as a separate programme in FY 2003 based on components from the
QAT and R&T Base Programs, focuses on "the deve lopment of key enabling technologies to enable
capabilities for future air vehicles".2538 In particular, it is "developing enabling technologies to expand
the availability of air travel that will satisfy th e public's demand for increased air travel without
affecting safety or degrading the environment". 2539 NASA has described the goal of this programme
as follows:
"U.S. competitors are targeting aviation leadership as a stated strategic goal. Without
careful planning and investment in new technologies, near- term gridlock, constrained
mobility, unrealized economic growth, and th e continued erosion of U.S. aviation
leadership could result. ... Breakthrough Vehicle Technologies investigates and
develops breakthrough technologies to maintain the superiority of U.S. aircraft , to
ensure the long-term environmental compatib ility of aircraft systems, and to improve
their safety and efficiency." 2540

2534 NASA QAT Budget Estimates, FY 2001-FY 2007, Exhibit EC-384, FY 2002, SAT 4.1-74.
2535 NASA QAT Budget Estimates, FY 2001-FY 2007, Exhibit EC-384, FY 2001, p. 4/55 (emphasis
added).
2536 NASA QAT Budget Estimates, FY 2001-FY 2007, Exhibit EC-384, FY 2001 and FY 2002, SAT
4.1-74.
2537 NASA Vehicle Systems Budget Estimates, FY 2003-FY 2007, Exhibit EC-396, FY 2003, SAT
4-24.
2538 NASA Vehicle Systems Budget Estimates, FY 2003-FY 2007, Exhibit EC-396, FY 2005, ESA
16-16.
2539 NASA Vehicle Systems Budget Estimates, FY 2003-FY 2007, Exhibit EC-396, FY 2005, ESA
16-16.
2540 NASA Vehicle Systems Budget Estimates, FY 2003-FY 2007, Exhibit EC-396, FY 2003, SAT
4-23 (emphasis added).

BCI deleted, as indicated [***]

7.1022 NASA also formulated the obj ectives of the VSP in terms of ensuring the "long-term
environmental compatibility of aircraft systems, and to improve their safety and efficiency", 2541 as
research that would "focus on embryonic technologies to further increase the quality of life for our
citizens"
2542, and demonstrations of "breakthrough of aeronautics technologies for protecting the
Earth's environment and enabling science missions".2543
7.1023 The R&T Base Program Budget states that:
"The aerodynamics research and technol ogy program: ... Is advancing the
understanding of fundamental fluid mech anics and aero acoustics phenomena and
providing new, validated aerodynamics technolog y applicable to future U.S. military
and civil aircraft from subsonic to hypersonic speeds. ...
Through basic and applied research in partne rship with industry, academia, and other
government agencies, NASA develops critical high-risk technologies and advanced
concepts for U.S. aircraft and engine industries. ...
These efforts provide the enabling technology that ultimately leads to future focused
technology programs and advanced systems development by U.S. industry . The
majority of the research is captured in the principal aeronautics disciplines of
aerodynamics, propulsion, materials, structures, controls and guidance, human
factors, and flight systems. A significant portion of the base program is performed in
cooperative agreements with the aerospace industry and other Government agencies
to facilitate rapid technology transfer. ...
The program seeks to provide the technology which, when applied by the U.S.
aerospace industry , will enable the development of economical, safe quiet globally
competitive aircraft for all speed ranges. Further, the program includes the
development of multidisciplinary methodologies to enable the U. S. industry to
reduce design cycle time and cost in the development of future aircraft. The primary
objective of the program is to provide the fundamental viscous aerodynamic expertise
and facilities to meet the ongoing and future design requirements of the U.S. industry,
the NASA, the DoD, the FAA, and other Government agencies. ...
In FY 1994, a computer code for designing and analyzing thermal ice protection
systems will be made available to U.S. industry, a joint NASA / FAA / Industry
Program to address the problem of ice-induced tail plane stalls will be initiated, and a
joint NASA/Industry Program to develop requirements for ice protection for Hybrid
Laminar Flow Control (HLFC) systems will be initiated. ...
The associated design databases, and design methods are effectively transferred to
industry and DoD for the development of safe and superior U.S. civil and military
aircraft. ...

2541 NASA Vehicle Systems Budget Estimates, FY 2003-FY 2007, Exhibit EC-396, FY 2003, SAT
4-23.
2542 NASA Vehicle Systems Budget Estimates, FY 2003-FY 2007, Exhibit EC-396, FY 2004, SAE
15-19 and FY 2005, ESA 16-16.
2543 NASA Vehicle Systems Budget Estimates, FY 2003-FY 2007, Exhibit EC-396, FY 2006, SAE
11-14.

BCI deleted, as indicated [***]

Each element of the R&T Base Program h as an objective to develop methods that
will contribute to the U.S. aerospace industry goal of reducing design cycle time by
at least 50%."2544
7.1024 The Panel has also examined the allocation of intellectual property rights under the R&D
contracts between NASA and Boeing. The allocati on of intellectual property rights under a number
of NASA's R&D contracts with Boeing, in particular with respect to data rights (as opposed to patent
rights) differed from the standard data rights clauses in U.S. government R&D procurement contracts.
Boeing, as the contractor, retained rights to any inventions (i.e. patent rights) that it conceived of in
the course of performing research funded by NA SA; however the U.S. Government receives a
royalty-free, "government use/purpose" license to use the subject invention. Boeing as the contractor
also retained rights to use any data (i.e. data rights) that it produced in the course of performing
research funded by NASA; however, the U.S. Govern ment receives a royalty-free, "unlimited rights"
license to use any data produced by the contract or in the course of performing research funded by
NASA. Boeing was not required to pay any royalties to NASA for any resulting commercial rewards.
Under some of the R&D programmes at issue, however, NASA included "Limited Exclusive Data
Rights" (LERD) clauses in its R&D contracts w ith Boeing. The clauses limited the otherwise
"unlimited rights" that the U.S. Government would no rmally have in the data developed in the course
of the contracted research. Th e LERD clauses granted Boeing excl usive rights to exploit critical
technologies developed under certain NASA contracts for at least five years from the date the data
was reported. Technologies were categorized as "s ensitive" and protected through LERD restrictions
if they were considered to affect the competitive position of US industry.
2545 The NASA R&D
contracts that contained LERD clause s involved "joint funding situation {s}", i.e. contractors were
"contributing a significant amount of their own resources to contract research efforts". In a statement
to a Senate subcommittee in 2001, Daniel Goldin , former Administrator of NASA, explained a link
between the allocation of intellectual property rights and objectives NASA was pursuing under the
programmes at issue:
Question 1. Do you believe that American manufacturers are behind Airbus in terms
of technology?
Answer. ... The principal shortfall in U.S. technology development has been
insufficient validation and risk reduction to allow U.S. manufacturers to take full and
early advantage of technology availability. The proposed NASA aeronautics
enhancements for FY 1994 focus on c ooperation with industry through the
technology validation phase.

2544 NASA R&T Base Budget Estimates, FY 1991-FY 2004, Exhibit EC-398, FY 1992, 1995, 1999
(emphasis added).
2545 European Communities' first written submissi on, para. 838 (citing NASA Langley Research
Center, High-Speed Research Program: Technology Transfer Control Handbook, April 1998, Exhibit EC-344,
p. 17; Advanced Subsonic Technology Program, Technology Transfer Control Handbook, August 1998,
Exhibit EC-370, p. 18). These LERD and other data rights provisions have appeared in several NASA contracts
with Boeing. See, e.g. NASA Contract NAS1-20267 with Boeing Commercial Airplane Group regarding
Integrated Wing Design, 12 September 1994, Exhibit EC-360, pp. 11-19; NASA Contract NAS1-20268 with
McDonnell Douglas regarding Integrated Wing Design, 12 September 1994, Exhibit EC-361, pp. 11-17.
NASA's R&D solicitations have also advertised to potential contractors that data produced under the project
would be protected by LERD and other data rights provisions. See e.g. NASA Final Solicitation 1-063-
DIG.1299, Flight Critical Systems Research, 27 August 1999, Exhibit EC-588, at I-7 to I-10; NASA
Solicitation 1-49-3400.0408, High Speed Research Program Systems Studies, 11 June 1990, Exhibit EC-589,
pp. 8-10 and 26-36; NASA Solicitation 1-50-0140.0001, High-Speed Research Airframe Technology,
11 August 1993, Exhibit EC-570, pp. 34-41.

BCI deleted, as indicated [***]

Question 3 . You have discussed the importance of NASA's aeronautics research
programs to the aircraft manufacturing in dustry. What steps has NASA taken to
ensure that technology development under these programs is effectively transferred to
industry? How does NASA ensure that American manufacturers have access to these
technologies before foreign companies?
 Answer. NASA generally performs its research in cooperation with the aeronautics
industry, thereby providing some direct mechanisms for technology transfer.
However, we are stepping up our effort s to increase and improve industry
involvement both in planning and implementing our programs. Additionally, much
of the Aeronautics investment, beginni ng in FY 1994, is aimed at developing
technologies to a more advanced stage, re ducing the risks sufficiently for industry
commercialization. Industry's partne rship in the NASA program should allow
manufacturers to easily continue the technology development through
commercialization, as desired. Fu rthermore, the natural advantage U.S. industry is
afforded through direct partnership in the NASA technology development program
will be supported by NASA contr acts and cooperative agreements which include
provisions to protect commercially va luable and/or sensitive technology from
premature foreign dissemination."
2546
7.1025 Although the United States does not assert that NASA's Space Act Agreem ents with Boeing
constitute "purchases of services", we note that a number of these agreements contained provisions "to
maintain any data that was generated in confidence for at least 2 to 5 years".2547
7.1026 Another relevant consideration is whether th e transactions at issue involve the typical
elements of a purchase of services. In this regard , we observe that a number of the R&D procurement
contracts between NASA and Boeing provide that Boeing would receive no fee or profit. 2548 Under
the "no fee" contracts, Boeing received no fee/profit for the R&D that it performed, because of
NASA's determination that Boeing stood to bene fit commercially from the R&D that it performed
under the contract. For example, the selection statement for one of the R&D contracts at issue
indicates that the fee provisions were delete d from the proposed procurement "based on a
determination by the NASA Administrator that the benefits {are} to be derived by the U.S. aerospace
industry".
2549 Documents related to another R&D contract between NASA and Boeing indicate that
there would be no fee because "Boeing stands to benefit commercially from efforts conducted as a
result of the proposed contract".2550

2546 Competitiveness of the Aerosp ace Industry: Hearing on S. 4 19 Before the Senate Comm. on
Commerce, Science, and Transportation, 103rd Cong. 81 (1993), Exhibit EC-273, pp. 80-81 (emphasis added).
2547 European Communities' second written submission, para. 396, citing SAA 331: Composite Wing
Structure Research, Exhibit US-503, Article 5.3; SAA 401: CADDRAD II Developments, Exhibit US-505,
Article 5.3; SAA 404: High Speed Technology Research, Exhibit US-506, Article 5.3; SAA 1-506: Advanced
Methodologies for Aerospace Analysis and Optimizatio n, Exhibit US-508, Article 5.4; SAA 2-B0001.3:
Advanced Aeroelastic Design Procedures, Exhibit US-512, Article 7.7; SAA 469: Study of High Reynolds
Number Aerodynamics and Ground-to-Flight Scaling for Aerospace Vehicles, Exhibit US-521 (BCI),
Article 5.3.
2548 Based on our own review of 16 R&D contracts between NASA and Boeing that the
European Communities submitted in its first written submission, it appears that nine of the R&D contracts
involved a payment of a fee, and that seven of the contracts were "no fee" procurement contracts.
2549 Selection Statement, Phase II High-Speed Research Airframe Technology, 9 September 1994,
Exhibit EC-356, p. 1.
2550 Prenegotiation Position – Proposed Contract to Boeing Commercial Airplane Group for AST Noise
Reduction Research, 13 December 1996, Exhibit EC-371 , pp. 1-2 ("Prior to solicitation issuance, several
discussions between procurement, technical and {Boeing Commercial Aircraft Group } were conducted to
determine and agree that a no-fee procurement was appropriate. It was discussed that {sic} NASA technical

BCI deleted, as indicated [***]

7.1027 For the reasons given above, the Panel consid ers that the question of whether or not a
transaction is properly characterized as a "purchase of services" depends on whether or not the work
performed was principally for the benefit or use of the government (or unrelated third parties), or
rather principally for the benefit or use of the "ser vice" "seller" itself. The evidence relating to NASA
aeronautics R&D, reviewed above, leads to the conc lusion that the work that Boeing performed under
its aeronautics R&D contracts with NASA was principa lly for its own benefit or use, rather than for
the benefit or use of the U.S. Government (or unrelated third parties).
2551 While NASA's aeronautics
R&D contracts take the form of a governmental pr ocurement of services, the totality of the evidence
before the Panel leads to the conclusion that th e substance of these transactions cannot properly be
characterized as a "purchase of services" for the pur pose of Article 1.1(a)(1) of the SCM Agreement.
Therefore, the Panel finds that the payments made to Boeing under these contracts are covered by
Article 1.1(a)(1)(i) of the SCM Agreem ent as a direct transfer of funds. 2552 The Panel further finds
that the access to NASA facilities, equipment and employees provided to Boeing through the R&D
contracts and agreements at issue constitutes a pr ovision of goods or services within the meaning of
Article 1.1(a)(1)(iii) of the SCM Agreement.
(ii) Whether there is a benefit within the meaning of Article 1.1(b) of the SCM Agreement
Arguments of the European Communities
7.1028 Regarding the existence of a benefit within the meaning of Article 1.1(b) of the
SCM Agreement, the European Communities argues that the NASA "subsidies" confer "benefits"
upon Boeing's LCA division. More specifically, the European Communities argues that: (i) the
financial contributions "relate to the production of Boeing LCA"; (ii) the financial contributions
"provide Boeing's LCA division with advantages on non- market terms"; (iii) "Boeing is not required

personal have identified that {sic} Boeing stands to benefit commercially from efforts conducted as a result of
the proposed contract. Further, NASA technical personnel cited their understanding of Dan Goldin's (NASA
Administrator's) edict that "focused programmes" shall not be fee-bearing. BCAG orally informed the Contract
Specialist that they would accept a no-fee contract for this programme, notwithstanding historical precedence of
earning fee {sic} for this type of effort.")
2551 In conducting this analysis, the Panel has found guidance in the Appellate Body report in China –
Auto Parts:

"We consider that a panel's determination of whether a specific charge falls under
Article II:1(b) or Article III :2 of the GATT 1994 must be made in the light of the
characteristics of the measure and the circumstances of the case. In many cases this will be a
straightforward exercise. In ot hers, the picture will be more mixed, and the challenge faced
by a panel more complex. A panel must thoroughly scrutinize the measure before it, both in
its design and in its operation, and identify its principal characteristics. Having done so, the
panel must then seek to identify the leading or core features of the measure at issue, those that
define its " centre of gravity " for purposes of characterizing th e charge that it imposes as an
ordinary customs duty or an internal charge. It is not surprising, and indeed to be expected,
that the same measure may exhibit some characteristics that suggest it is a measure falling
within the scope of Article II:1(b), and others suggesting it is a measure falling within the
scope of Article III:2. In making its objective assessment of the applicability of specific
provisions of the covered agreements to a measure properly before it, a panel must identify all
relevant characteristics of the measure , and recognize which features are the most central to
that measure itself, and which are to be accorded the most significance for purposes of
characterizing the relevant charge and, thereb y, properly determining the discipline(s) to
which it is subject under the covered agreements."

Appellate Body Report, China – Auto Parts, para. 171 (emphasis added, footnote omitted).
2552 We do not accept that the payments to Boeing are outright "grant s". We address this issue in the
context of estimating the amount of the subsidy to Boeing's LCA division. See below, para. 7.1100.

BCI deleted, as indicated [***]

to pay anything in return" for the funding and sup port, and "has not been required to repay the
US Government for any resulting commercial re wards"; (iv) Boeing has received valuable
"knowledge and experience" from the aeronautics R& D, and (v) it is "axiomatic that such R&D
funding and support are not available on the market."2553
7.1029 In its second written submission, the European Communities responds to the United States'
argument that NASA R&D contracts constitute "value -for-value" exchanges. First, NASA, which "is
not in the business of manufacturing LCA or its parts", receives nothing in real value from the
contracts and agreements with Boeing. Wherea s Boeing receives research experience and valuable
technology, NASA receives "summary research reports and license rights that are of no apparent use
to it".2554
7.1030 Second, in a commercial transaction, one entity will pay another entity to conduct research
and development only if it intends to actually utilize th e research to some end, i.e. if it can obtain the
full rights to the resulting technology and will not pay another entity to conduct research and
development "in exchange for nominal research reports to disseminate to the public and license rights
to hold onto ad infinitum ". By contrast, under the NASA R&D contracts, "Boeing can utilize the
results of the R&D and keep the technology for it self in exchange for only nominal remuneration".2555
The European Communities argues th at in a market transaction one entity will pay another entity to
conduct research and development only if that enti ty acquires full ownership of any intellectual
property rights to the technologies that resu lt from the research and development. The
European Communities refers2556 to an article on intellectual property rights and stem cell research 2557
and a Declaration of Regina Dieu, Legal Counsel in the Airbus SAS Indus trial Procurement Legal
Department, which states that when Airbus funds an R&D project it exclusively and solely owns any
and all Intellectual Property genera ted or acquired in connection with and during the performance of
the R&D project. 2558 In addition, in support of the same ar gument made in the context of its claim
regarding the NASA/DOD waiver/provision of intellectual property rights, the European
Communities refers
2559 to an article on collaborative research 2560, a WIPO Training Course 2561 and a
contract concluded by Boeing with the National Institute for Aviation Research at Wichita State
University.2562
7.1031 Third, a commercial entity will not pay another entity to conduct research and development
for the public policy objectives pursued by NASA, i.e. preserving the prominent position and
increasing the competitiveness of the U.S. aeronautics industry. The argument of the United States
that "NASA receives adequate remuneration from Bo eing in furtherance of government objectives" is

2553 European Communities' first written submission, paras. 526-528, 550-552, 574-576, 590-592, 605-
607, 620-622, 633-635 and 652-654.
2554 European Communities' second written submission, paras. 375 and 377.
2555 European Communities' second written submission, paras. 376 and 379.
2556 European Communities' second written submission para. 376.
2557 Sean M. O'Connor, "Intellectual Property Rights and Stem Cell Research: Who Owns the Medical
Breakthroughs?" 39 New Eng. L. Rev. 665 (2005), Exhibit EC-1212, p. 669.
2558 Declaration of Regina Dieu, 8 November 2007, Exhibit EC-1178.
2559 European Communities' second written submission, paras. 553-556.
2560 Rochelle Cooper Dreyfuss, "Collaborative Res earch: Conflicts on Authorship, Ownership and
Accountability", 53 Vand. L. Rev. 1161 (2000), Exhibit EC-1228, p. 1212.
2561 WIPO-MOST, "Intermediate Training Course on Practical Intellectual Property Issues in
Business", 13 November 2003, Exhibit-EC 1229, pp. 42-43.
2562 Contract Between Boeing Commercial Airplane Group Wichita Division and Wichita State
University, Contract No. 000051728, 4 November 2002, Exhibit EC-1231.

BCI deleted, as indicated [***]

circular in that the objective pursued by NASA is to enhance the competitiveness of the US LCA
industry.2563
7.1032 Finally, not all the results of the NASA R&D pr ogrammes are published, and the results that
are made available to the public are of little valu e to companies that did not participate in the
research.2564
Arguments of the United States
7.1033 In its first written submission, the United St ates does not explicitly address the issue of
whether the payments made to Boeing under R&D cont racts confer a benefit within the meaning of
Article 1.1(b) of the SCM Agreement. Howeve r, in addressing the argument of the European
Communities that NASA contracts are grants, the Un ited States rejects the assertion that because the
U.S. Government is not in the business of manufact uring LCA or its parts, it cannot possibly receive
anything of value in return for the R&D payments made to Boeing. 2565 In its first written submission,
the United States argues that NASA's provision of goods and services to Boeing is "always adequately
remunerated". The United States recalls that NASA provides goods and services to Boeing pursuant
to Space Act Agreements. More specifically, the Un ited States explains that NASA provides Boeing
with wind tunnel services, as well as "non-wind tunnel" goods and services. The United States argues
that NASA' provision of goods and services to Boeing pursuant to Space Act Agreements is always in
exchange for adequate remuneration.
2566
7.1034 In its second written submission, the United States argues that the European Communities has
failed to support its assertions as to the benefit associated with the NASA-Boeing transactions. The
argument that NASA received "nothi ng in return" for the payments made to Boeing pursuant to the
R&D contracts is incorrect because in exchange for the money that NASA pays Boeing, the U.S.
Government receives a commensurate value. The U. S. Government receives the labour of Boeing
scientists and engineers directed to the objectives of the U.S. Government, can disseminate the
knowledge they generate for the public benefit and receives intellectual property rights with regard to
inventions and data that it would not otherwise hold.
2567
7.1035 The United States also submits that the Eur opean Communities erroneously asserts "that no
commercial entity would ever pay another entity to conduct R&D primarily for the other entity's
benefit, receiving only nominal research reports to disseminate to the public and license rights it never
plans to utilize in return". First, the research reports generated in these transactions are not "nominal",
as evidenced by the amount of public information generated by NASA aeronautics research and the
wide dissemination of that information. 2568 Second, the European Communities provides no evidence
that the U.S. Government never plans to use the patents and licenses acquired under the research
contracts. These rights are government rights that can be utilized by any U.S. government agency,
including the FAA, DOD or NASA itself in furt her research conducted by NASA employees. The
fact that NASA is not in the business of acquiring or manufacturing LCA "is as irrelevant as it is
correct" in this regard.
2569 Third, the R&D conducted at NASA's request is not primarily for Boeing's
benefit, as alleged by the European Communities, but for the broader public good. 2570 Fourth, the

2563 European Communities' second written submission, paras. 378 and 380.
2564 European Communities' second written submission, para. 381.
2565 United States' first written submission, paras. 219-225.
2566 United States' first written submission, paras. 230-267.
2567 United States' second written submission, para. 65.
2568 United States' second written submission, para. 67.
2569 United States' second written submission, para. 68.
2570 United States' second written submission, para. 69. The United States emphasizes that while
NASA does not acquire or produce large civil aircraft, it acquires, produces and disseminates knowledge and
that the purpose of the NASA R&D programs is "to develop and disseminate the greatest amount of information

BCI deleted, as indicated [***]

European Communities provides no support for its assertion that a commercial entity will not pay
another entity to conduct services that also provide bene fit to that other entity. Such a benefit is a
normal occurrence in commercial transactions.2571
7.1036 In its response to questions 21 and 22 from th e Panel, the United States argues that the
European Communities has failed to demonstrate th at the treatment of intellectual property rights
under NASA/DOD R&D contracts constitutes a deviation from normal commercial practice that
confers a benefit within the meaning of Article 1.1( b) of the SCM Agreement. In this regard, the
United States argues that commercial practice diffe rs from case to case. Commercial entities seek to
buy the intellectual property rights they need, and do not operate from a single paradigm, as the
European Communities suggests. While certain commercial transactions may assign the buyer
ownership of intellectual property generated in the performance of a contract, there are commercial
entities that purchase R&D services in exchange for a limited license to use the resulting intellectual
property. By way of example, the United States provides four contracts in which Boeing pays for
major research universities to conduct R&D on its be half, and receives in exchange a license – not
ownership – of the intellectual property developed under the contract.
Evaluation by the Panel
7.1037 A financial contribution confers a benefit with in the meaning of Article 1.1(b) of the
SCM Agreement if the terms of the financial c ontribution are more favourable than the terms
available to the recipient in the market. 2572 Thus, in order to determine whether NASA's financial
contributions to Boeing confer a benefit upon Boeing within the meaning of Article 1.1(b), the Panel
must begin by recalling what the terms of those financial contributions are. Only then can the Panel
proceed to compare those terms with the terms of a market transaction.
7.1038 As the Panel has already concluded above in its analysis of the existence of a financial
contribution, NASA has made payments to Bo eing and granted Boeing access to NASA facilities,
equipment and employees on the condition that Boeing perform aeronautics R&D work that is
principally for Boeing's own benefit and use , rather than principally for the benefit or use of the U.S.
Government (or unrelated third parties). While th e R&D contracts and agreements of course contain
numerous other terms (for example, the contracts and agreements contain or incorporate by reference
numerous standardized clauses governing miscellaneous ma tters), this is, in the Panel's view, the core
"term" upon which the financial contributions are pr ovided, i.e. that Boeing use the payments and
access to facilities, equipment and employees that it receives from NASA for the purpose of
conducting aeronautics R&D work that is principally for Boeing's own benefit and use. The Panel has
concluded above that a transaction in which the work performed is principally for the benefit and use
of the "seller" cannot properly be characterized as a "purchase of services".
7.1039 In this case, both parties agree that, with regard to the financial contributions that Boeing
receives under the NASA R&D programmes, "the relevant market benchmark would be the terms of a
commercial transaction in which one entit y pays another entity to conduct R&D". 2573 The question,
then, is whether, in a commercial transaction, one entity would pay another entity to conduct R&D on
these same terms, i.e. on the term that the entity receiving the financial contributions conducts R&D
that is principally for the benefit and use of the entity receiving the payment. The Panel believes that
no commercial entity, i.e. no private entity acting pursuant to commercial considerations, would

to the broadest group in the shortest amount of time possible, and not to 'convey resources to Boeing'".
United States' second written submission, paras. 62-64.
2571 United States' second written submission, para. 70.
2572 See paras. 7.30-7.31 of this Report.
2573 European Communities' response to question 21, para. 76; United States' response to question 136,
para. 85.

BCI deleted, as indicated [***]

provide payments (and access to its facilities and personnel) to another commercial entity on the
condition that the other entity perform R&D activities pr incipally for the benefit and use of that other
entity. At a minimum, it would be expected that some form of royalties or repayment would be
required in the event that financial contributions were provided on such terms. Thus, with respect to
the financial contributions provided by NASA to Boeing, which were provided on these terms, we
consider that it was not necessary for the Europ ean Communities to present benchmark evidence of
the terms and conditions of specific market-based R& D financing in order to establish, at least on a
prima facie basis, that these NASA transactions conf erred a benefit upon Boei ng. Rather, it would
fall upon the United States, if it wished to rebut this prima facie case, to identify examples of
transactions in which commercial entities have pa id other commercial entities to perform R&D on
these terms, i.e. to perform R&D that is principally for the benefit or use of the entity receiving the
funding. The United States has not provided any ev idence or examples of commercial transactions in
which one entity pays another entity to conduct R&D th at is principally for the benefit and use of the
entity receiving the funding.
7.1040 Accordingly, the Panel concludes that the financial contributions provided to Boeing under its
aeronautics R&D contracts and agreements with NASA confer a benefit within the meaning of
Article 1.1(b) of the SCM Agreement.
7.1041 For these reasons, we find that the paymen ts and access to facilities, equipment and
employees that NASA provided to Boeing through the eight aeronautics R&D programmes at issue
constitute subsidies within the meaning of Article 1 of the SCM Agreement.
(d) Whether the subsidy is specific within the meaning of Article 2 of the SCM Agreement
(i) Arguments of the European Communities
7.1042 In its first written submission, the European Communities argues that each of the NASA
aeronautics R&D programmes at issue is de jure specific within the meaning of Article 2.1(a) of the
SCM Agreement, or, in the alternative, de facto spec ific within the meaning of Article 2.1(c) of the
SCM Agreement.
2574 The European Communities ar gues that the programmes are de jure specific by
virtue of the subject matter of the research. More specifically, the European Communities argues that
the eight NASA aeronautics R&D programmes at issue are specific within the meaning of
Article 2.1(a) because they are explicitly limited to certain enterprises that participate in aeronautics-
related R&D. The European Communities argues that because the legislative authority for each of the
eight programmes at issue derives from the Space Act, the programmes are also limited "to those
industries that can satisfy the objectives of that Ac t". The European Communities also argues that the
programmes are de facto specific because Boeing has received a disproportionate amount of the
funding provided under NASA R&D programmes. The European Communities argues that, in
addition to receiving a disproportionate amount of the funding awarded by NASA under each of the
programmes, Boeing has also received a dispropo rtionate amount of all contracts awarded by
NASA.
2575 Finally, the European Communities asserts that "Boeing's active participation at the
highest levels of the NASA Advisory Council an d its subcommittees reveals that NASA exercises
discretion in granting subsidies in a manner that takes full account of Boeing's views and needs".

2574 European Communities' first written submission, paras. 529-530; 553-554; 577-578; 593-594;
608-609; 623-624; 636-637 and 655-656.
2575 The European Communities cites to Boeing's Share of NASA Contracts, FY 1991-FY 2004,
Exhibit EC-19, which indicates that Boeing received, on average, 23.4 per cent of all NASA contracts over the
period 1991-2004. Note 1 to Exhibit EC-19 indicates that the information is drawn from NASA Annual
Procurement Report, FY 1991-FY 2004, "One Hundred Principal Contractors", Exhibit EC-341.

BCI deleted, as indicated [***]

7.1043 In its second written submission, the European Communities observes that the United States
"does not dispute the conclusion that NASA's aerona utics R&D support for Boeing is specific within
the meaning of Article 2.1 of the SCM Agreement".2576
(ii) Arguments of the United States
7.1044 The United States does not respond to the Eur opean Communities' arguments on specificity,
except in the context of the wind tunnel access th at Boeing received pursuant to a number of Space
Act Agreements. In this regard, the United Stat es asserts that NASA's wind tunnel services are "used
by a wide range of industries across the U.S. economic spectrum".2577
(iii) Evaluation by the Panel
7.1045 In this case, the United States does not di spute that each of the eight aeronautics
R&D programmes at issue would, if found to provide subsidies within the meaning of Article 1, be
specific under Article 2.1(a) of the SCM Agreement. It is not in dispute that the Space Act explicitly
limits the scope of NASA's R&D activities (i.e. to aeronautics and space). It is also not in dispute that
each of the eight programmes at issue involves R&D aimed at the "improvement of the usefulness,
performance, speed, safety, and efficiency of aeronautical and space vehicles".
2578
7.1046 The United States' only argument with respect to specificity is that NASA's wind tunnel
services are "used by a wide range of i ndustries across the U.S. economic spectrum". 2579 In its
response to question 162 2580 from the Panel, the United States indicates that it has provided the
following evidence to support this assertion:
"(1) RAND National Defense Resear ch Institute, Wind Tunnel and Propulsion
Test Facilities (Exhibit US-116): found that primary users of NASA wind tunnels are
aerospace related, but cover a wide range of applications, including spacecraft, launch
vehicles, missiles, fixed-wing and rotorcraft (both military and commercial
applications, including fighters, transports , business jets, and operating at all speeds,
including hypersonic, supersonic and subsonic speeds), as well as engines.
(2) NASA Langley Research Center, Wind Tunnel Enterprise, The Enterprise
(Exhibit US-93): wind tunnels are used by "traditional commercial and DoD ground
testing community" and being positioned to attract "non-traditional customers e.g.
automotive, submersible, recreational, etc."
By way of example, NASA reviewed its usage records for two wind tunnels, the 11-
foot Transonic Wind Tunnel and the Transonic Dynamics Tunnel, which show usage
by the following entities: Bell Helicopters, General Dynamics, Georgia Institute of
Technology, Jet Propulsion Laboratories, Lockheed Martin, the U.S. Navy, NextGen
Aeronautics, Northrop Grumman, Orbital Sciences, Sandia, and Sikorsky."
2581

2576 European Communities' second written submission, para. 383.
2577 United States' first written submission, para. 251.
2578 National Aeronautics and Space Act of 1958, Pub. L. No. 85-568, as am ended, Exhibit EC-286,
s. 102(d)(2).
2579 United States' first written submission, para. 251
2580 Question 162 reads, "In its FWS, the United States submits that NASA's provision of wind tunnel
services is not specific under Article 2. (United States' first written submission, para. 251) In this regard, the
United States asserts that NASA's wind tunnel services are "used by a wide range of industries across the U.S.
economic spectrum". Has the United States provided any evidence to support that assertion?"
2581 United States' response to question 162, paras. 155-156.

BCI deleted, as indicated [***]

7.1047 The Panel considers that the evidence provided by the United States does not support its
assertion that NASA's wind tunnel services are "used by a wide range of industries across the U.S.
economic spectrum". In fact, the evidence submitte d by the United States, and its own summary of
that evidence in response to questi on 162, seems to the Panel to actually contradict that assertion: it
confirms that the "primary users of NASA wi nd tunnels are aerospace related". What the
United States evidence seems to demons trate is that enterprises other than Boeing use NASA wind
tunnels. However, that does not call into question the fact that NASA's provision of wind tunnel
services is specific to "an enterprise or industry or group of enterprises or industries".
2582
7.1048 Apart from the United States' argument relating to wind tunnel services, which the Panel has
rejected, the European Communities is correct in observing that the "United States offers no response
to the European Communities' prima facie case that the eight NASA aeronautics R&D programmes at
issue are specific within the meaning of Article 2.1(a) of the SCM Agreement because they are
explicitly limited to certain enterprises that participate in aeronautics-related R&D".2583
7.1049 For these reasons, the Panel finds that the NASA aeronautics R&D subsidies at issue are
specific subsidies within the meaning of Article 2.1(a) of the SCM Agreement. Having concluded
that the subsidies are specific within the meaning of Article 2.1(a), it is not necessary for the Panel to
address the European Communities' alternative argum ent that the NASA R&D subsidies at issue are
de facto specific within the meaning of Article 2.1(c) of the SCM Agreement "because Boeing
receives a share of funding pursuant to these programme s that is disproportionate to its 0.5% share of
the US economy" and/or "because NASA exercises discretion in granting these subsidies to
Boeing".2584
(e) The amount of the subsidy to Boeing's LCA division
(i) Arguments of the European Communities
7.1050 The European Communities estimates that NAS A provided $10.4 billio n in subsidies to
Boeing over the period 1989-2006. 2585 The European Communiti es allocates approximately
$3 billion2586 of that total to the 2004-2006 period, which is the "reference period" suggested by the
European Communities for the purpose of determining whether NASA and other challenged subsidies
caused serious prejudice within the meaning of Articles 5 and 6 of the SCM Agreement.
7.1051 The European Communities asserts that the United States has failed to fully disclose
information regarding all of the NASA R&D c ontracts pursuant to which Boeing received LCA-
related R&D funding, and that as a result, the Eu ropean Communities is unable to undertake a

2582 If there were any evidence to support the assertion that NASA wind tunnel services are provided to
a "wide range of industries across the U.S. economic spectrum" that is so di verse that it cannot be considered a
"group of enterprises or industries" for the purpose of Article 2.1 of the SCM Agreement, it would then be
necessary to proceed to examine the point in dispute between the parties, which is whether the Panel should
confine its analysis and focus only on those entities that received access to NASA wind tunnel services under
the eight programmes at issue (as the European Communities argues), or whether it should take a wider analysis
of the terms upon which NASA provides wind tunnel servi ces outside of the context of the eight programmes at
issue (as the United States argues). However, because the Panel believes that the user of NASA wind tunnel
services would either way constitute a "group of enterprises or industries" for the purpose of Article 2.1, we
think that it is unnecessary for the Panel to resolve that point.
2583 European Communities' second written submission, para. 383.
2584 Ibid.
2585 NASA/DOD/DOC Aeronautics R&D Subsidies to Boeing LCA Division, Exhibit EC-25, p. 20.
2586 International Trade Resources LLC, Calculating on a Per-Aircraft Basis the Magnitude of the
Subsidies Provided to US Large Civil Aircraft, 20 February 2007, Exhibit EC-13, p. 22. The
European Communities allocates $993 million to 2004, $992 million to 2005, and $983 million to 2006.

BCI deleted, as indicated [***]

comprehensive "bottom-up" analysis of the U. S. Government's R&D support for Boeing. The
European Communities explains that, because it do es not have information regarding the amount of
the "direct R&D funding" and "goods and services" provi ded to Boeing, it must rather rely on a "top-
down", industry-level allocation methodology for the purpose of estimating the amount of the
subsidies provided to Boeing through each programme. The European Communities asks the Panel to
accept this methodology, and the resulting estimate, as the "best information available"
2587.
7.1052 The European Communities uses a "top down" approach, based on aggregated data in
NASA's programme budgets and figures regarding the "U .S. civil aircraft industry", to estimate the
amount of the subsidy to Boeing. The European Co mmunities begins by estimating the total cost of
the eight aeronautics R&D programmes at issue, based on NASA programme budgets. The
European Communities then subtracts, from that total, certain estimated amounts for non-LCA related
research conducted under the programmes. Specifica lly, the European Communities seeks to identify
and then deduct estimated amounts for (i) engine-specifi c research; (ii) research related to air traffic;
and (iii) research related to other miscellane ous non-LCA related projects (e.g. space-related
research2588). The European Communities then allocates the remainder exclusively to the "U.S. civil
aircraft industry", which includes producers of large civil aircraft (i.e. Boeing), small civil aircraft,
helicopters, and their suppliers. The European Co mmunities then allocates a share of that total to
Boeing, based on Boeing's share of the "U.S. civil aircraft industry". Using this methodology, the
European Communities estimates that $10.4 billion, out of the $18.7 billion in total programme costs,
should be allocated to Boeing. The European Communities explains its methodology as follows:
"For NASA, the EC analysis started with budget data that reflected total annual
spending on a programme-by-programme basis, with no indication of how much
NASA spent to support any particular comp any. Based on the budgets themselves
and other available facts regarding the eight NASA programmes at issue, it was clear
that the budgets reflected R&D spending relate d to: (1) civil aircraft airframes and
components (for all eight programmes at issue) ; (2) aircraft engines (for some of the
eight programmes at issue); and (3) othe r technologies unrelated to airframes, such
as air traffic control or space launch technolog y (for some of the eight programmes at
issue). To arrive at its estimate of the subsidy to Boeing's LCA division from each
NASA programme, the European Communities started by isolating the portion of
each budget related to item (1) by subtracti ng items (2) and (3) from the total budget
figures where applicable. This resulted in budget figures for each programme that
reflected the total amount spent by NASA on R&D related to exclusively civil aircraft
airframes and components. Then, recognisi ng that some of this R&D spending likely
supported entities in the US civil aircraft industry other than Boeing's LCA division,
the European Communities allocated only a portion of the resulting figures to
Boeing's LCA division. In performing th is allocation, the European Communities
considered it reasonable to use a ratio derived by dividing (i) the sum of all Boeing
and McDonnell Douglas LCA and parts sales fo r each year by (ii) the amount of all
US civil aircraft and parts sales for that year. The rationale for doing so was that
Boeing's LCA division (including McDonnell D ouglas' LCA division) is a subset of
the larger US civil aircraft and parts i ndustry, in support of which NASA spent the
budgeted amounts being allocated."
2589

2587 European Communities' first written submission, para s. 63-68 and paras. 525, 549, 573, 589, 604,
619, 632 and 651.
2588 More specifically, the European Communities deducts estimated amounts for costs relating to the
following elements of the R&T Base Program: "Space Transfer and Launch Technology", "Minority University
Research and Education Program", "Construction of Facilities", and "Future Space Launch Studies".
2589 European Communities response to question 163, para. 243.

BCI deleted, as indicated [***]

7.1053 In its second written submission, the European Communities argues that the United States has
failed to demonstrate that the funding to Bo eing under these programmes was worth less than
$750 million, and that $6.48 billion actually we nt to entities unrelated to Boeing. The
European Communities submits that, unless and until the United States discloses all of the contracts
(and Space Act Agreements) and sub-contracts pursuant to which Boeing and McDonnell Douglas
received "funding and support" under the eight progra mmes at issue, "including all relevant dollar
figures, statements of work, indications and values of goods and services provided by NASA under
the contracts, etc.", there is no way to conduct an adequate "bottom-up" analysis of the financial
contribution to Boeing from these NASA aeronautics R&D programmes.
2590
(ii) Arguments of the United States
7.1054 The United States asserts that the European Communities has overestimated the amount of
any subsidy provided to Boeing by NASA. Accord ing to the United States, the total amount of
payments made to Boeing under NASA R&D contract s and agreements entered into under the eight
aeronautics programmes at issue was $1.05 billion, out of which less than $775 million was LCA-
related. The United States estimates that the to tal value of the NASA facilities, equipment and
employees provided to Boeing under these R&D contr acts and agreements was less than $80 million.
According to the United States, the remainder of the funding was provided to other NASA
contractors, grantees and partners to conduct research under the programmes, as well as the direct
costs of NASA's in-house R&D, and "program support" costs that NASA incurs under each
programme.
2591
(iii) Evaluation by the Panel
Introduction
7.1055 The European Communities has demonstrated th at the payments and access to facilities,
equipment and employees provided to Boeing throug h aeronautics R&D contracts and agreements are
subsidies within the meaning of Article 1 of th e SCM Agreement. The Panel will now address the
amount of the subsidy to Boeing's LCA division.
7.1056 The European Communities presents the Panel with an estimate of the amount of the subsidy
provided to Boeing's LCA division. The European Communities' estimate is based on the publicly
available information regarding th e total budgeted costs of the eight R&D programmes at issue, and
Boeing's share of the U.S. civil aircraft industry. The European Communities argues that the Panel
should adopt this "top down" estimate, unless th e United States discloses evidence indicating the
actual value of the payments and access to faciliti es, equipment and employees provided to Boeing.
The United States submits that it has done exactly that. In the Panel's view, if the United States were
able to provide the Panel with the actual info rmation and figures regarding the amount of those
subsidies, or information from which the maximum amount of those subsidies could be derived, then
such information would necessarily prevail over th e European Communities' "top down" estimate.
Therefore, the Panel will begin by reviewing the evidence provided by the United States.

2590 European Communities' second written submission, paras. 365-373.
2591 United States' first written submission, para. 198.

BCI deleted, as indicated [***]

The United States' evidence regarding the maxi mum amount of the payments made to Boeing
for aeronautics R&D over the period 1989-2006
7.1057 The United States initially asserted that NASA records indicate that NASA "disbursements"
to Boeing under the challenged programm es amounted to less than $750 million." 2592 T h e
United States set forth, in paragraph 212 of its first written submission, a list of the eight R&D
programmes, and the corresponding total disburse ments to Boeing under those programmes, which
added together, came to $715 million, or "less than $750 million". 2593 The United States adds that
much of the "less than $750 million" that was dire ctly provided to Boeing was actually passed along
to other companies who performed work as sub-contractors.2594
7.1058 In its first set of questions to the parties, th e Panel asked the United States to explain how it
arrived at the figure of "less than $750 million". The United States responded that NASA reached this
estimate by:
(a) Identifying the relevant contracts with Boeing that were awarded under the eight
R&D programmes at issue between 1989 and 2006 through a search of the Federal
Procurement Data Base (FPDS) of all awards (whether contracts, cooperative
agreements, or grants) made to Boeing for the years 1989-2006.
2595 For the years
2004-2006, the relevant database was the Federal Procurement Data Base – Next
Generation (FPDS-NG) which had superseded the FPDS.
(b) Eliminating awards that "clearly did not pertain to any NASA Aeronautics programs,
such as those related to manned space flight, the International Space Station or space
science".2596
(c) Calculating the amounts disbursed to Boeing for each such contract from
disbursement information obtained from NASA 's internal financial databases which,
prior to 2004, accumulated data, performed checks and then fed the information into

2592 United States' first written submission, para. 212. The United Status explains that "disbursements"
are the cumulative amounts actually paid to Boeing and MDD under research contracts. There are several
points to note about the disbursement information: First, according to th e United States, "disbursements" offer
very close approximations of the true amount of payments, although they may not be exact due to changes in
record keeping over the period 1989-2006; second, disbur sements for a particular co ntract are allocated to a
single program, even if multiple programs use the same contract; and third, actual disbursements to Boeing may
differ from the amounts planned to be paid at the beginning of each period and appearing in the contract
documents; e.g. amounts actually paid under time and materials contracts may vary from anticipated amounts if
contracted tasks take more or less time than anticipated and amounts may differ where budget pools are
exhausted or contracted work is cancelled; United States' first written submission, para. 212, footnote 303.
2593 The figure of $715 million includes an estimate of disbursements of $66 million to Boeing pursuant
to the ACEE program which predate 1989, and for whic h company-specific records were not available due to
the age of the program.
2594 United States' first written submission, para. 226, footnote 328. In this regard, the United States
provides the example of the HSR program, which had 40 major subcontracts. According to the United States,
the structure of the program was such that Boeing effectively served as consortium leader, disbursing funding to
the other entities.
2595 The United States explains that the FPDS is th e database of record for procurements for the
United States Government and is the only reliable and comprehensive source for data on NASA procurements.
The United States explains that, whenever a federal ag ency awards a procurement action with an obligation
greater than $3,000, it must be reported to the Office of Management and Budget in the Executive Office of the
President via the FPDS. Following the award, the FPDS is updated over its life with additional obligations as
they occur. United States' response to question 7, para. 12.
2596 United States' response to question 7, para. 14.

BCI deleted, as indicated [***]

FPDS. NASA's system was known as th e NASA Procurement Management System
(NPMS).2597
7.1059 The United States also submitted Exhibit US-1202 as part of its response to the Panel's
question. Exhibit US-1202 sets forth the amounts disbursed under each contract, grouped by R&D
programme, as determined based on the above methodology.2598
7.1060 The Panel sought to confirm the above un derstanding of the methodology that the
United States used to calculate the amount of pa yments made to Boeing pursuant to contracts under
the eight R&D programmes in its second set of ques tions to the parties. The Panel also sought
additional details from the United States on: (i) th e list of relevant contracts obtained from the FPDS
database searches of awards to Boeing between 1989 a nd 2006; (ii) the awards that were determined
not to pertain to any NASA aeronautics programmes; and (iii) identification of amounts disbursed
under each relevant contract award on the basis of information contained in the NPMS and NASA's
internal financial records.
7.1061 The United States responded as follows. First, it confirmed the Panel's basic understanding as
outlined above. Second, it indicated that NASA did not print out the FPDS list of all awards to
Boeing between 1989 and 2006 because the FPDS a nd FPDS-NG contain entries for individual
purchase orders and task orders issued under each cont ract, and therefore contain thousands of entries
for such awards. According to the United States, NA SA used the list as the basis for additional steps
to weed out instruments not related to the European Communities' claims. 2599 Third, it explained in
greater detail than previously had been provided to the Panel the process by which NASA
"eliminated" awards that it ascertained did not pertain to the eight R&D programmes.
7.1062 The first, and most important, step in the elimination process was to identify awards issued by
NASA research centers that perform aeronautics rese arch. In this regard, the United States explained
that NASA conducts all of its research activities at nine research centers. Four of those centers;
namely, Langley Research Center, Glenn Research Center, Ames Research Center and Dryden
Research Center, are responsible for all aer onautics research conducted by NASA. These
four research centers administer the eight R&D programmes and perform all aeronautics research
required in support of NASA's other programmes. According to the United States, each research
center awards its own contracts for work performed in support of its projects.
2600 Because the FPDS
record for each award contains a code that in dicates the center that awarded the instrument in
question, NASA was able to filter the FPDS list of Boeing contracts to remove all contracts awarded
by the five NASA research centers that do not perform aeronautics research.
7.1063 The second part of the elimination process invol ved elimination of contracts that, although
awarded by one of the four NASA research centers that perform aeronautics research, nevertheless
pertained to non-aeronautics research (e.g. contr acts whose subject matter pertained to space,
atmospheric science, airspace hypersonics, vertical take-off and landing and short takeoff and landing,

2597 United States' response to question 7, para. 15. According to the United States, the FPDS did not
record disbursement data. However, prior to 2005, NASA rou tinely accumulated disbursement data in its
NPMS. The United States submits that for each action identified for Boeing, NASA could accurately identify
amounts obligated and disbursed for each contract, by year. The FPDS-NG also did not record disbursement
data for the years 2005 and 2006, however, the United States indicates that NASA obtained disbursement data
for these years from NASA's internal financial records.
2598 The United States notes that the ACEE Program is so old that no disbursement data were available
on either FPDS or NPMS. NASA therefore derived an estimate for disbursements to Boeing through contracts
under the ACEE Program based on Boeing's share of the NASA program budget for the next oldest program,
ACT. United States' response to question 7, para. 15.
2599 United States' response to question 179, para. 179.
2600 United States' response to question 179, para. 180.

BCI deleted, as indicated [***]

and aircraft support related to the main tenance and upkeep of NASA's aircraft). 2601 Identification of
the subject matter of the contracts was based on the FPDS and FPDS-NG fields that describe the
subject matter of each contract.
7.1064 In response to the Panel's request for additional detail as to its identification of amounts
disbursed under each relevant award on the basis of data in the NPMS and NASA's internal financial
records, the United States further explained that the FPDS databases contain only data on the amounts
"obligated" for funding a particular contract (i.e. budgeted funds provided to a prime contract for costs
to be expended in the performance of that contract). 2602 Funds "obligated" are not "disbursed" to the
contractor until the contractor has de monstrated an entitlement to payment. 2603 The NPMS database,
in addition to containing information on funds obligated, also recorded the amounts actually disbursed
for all disbursements prior to 2005. For the disbursement figures for 2005 and 2006, NASA used data
from NASA's SAP/BW system.2604
7.1065 The Panel also asked the United States to expl ain how the Panel could satisfy itself that the
information submitted by the United States as to the universe of R&D contracts and agreements
between NASA and Boeing is accurate and complete. The United States responded by explaining that
NASA had conducted the following verification exercise:
(a) NASA conducted a FPDS/FPDS-NG database s earch of all contracts with Boeing and
Boeing subsidiaries (i.e. not limited to aerona utics-related contracts, or contracts
pursuant to the challenged R&D programs) as identified in the list of 100 Principal
Contractors published in NASA's Annual Procurement Reports for the 1989-2006
period.
(b) NASA compared the values of awards identified from that search (a total of
$30.4 billion for 1989-2006) with the total value of awards to Boeing published in the
NASA Annual Procurement Reports. Accordi ng to the United States, in no case was
the variation in values of awards to Boei ng in the Top 100 contractors list as reported
by FPDS and FPDS-NG to the value reporte d in the Annual Procurement Reports
more than 2.1 per cent.
2605
7.1066 The United States contends that this part of th e check verifies that the NASA's contract data
set, based on its search of its FPDS/FPDS-NG databa ses, closely matches the published data from the
Annual Procurement Reports which are accepted by the United States and the European Communities
as a valid and complete representation of all NASA contracts with Boeing.2606

2601 United States' response to question 179, para. 181. The United States explains that the four
aeronautics research centers also conduct some non-aeronautics research.
2602 United States' response to question 179, para. 184.
2603 United States' response to question 179, para. 184, footnote 196.
2604 United States' response to question 179, para. 184.
2605 The results of the comparison ar e at Exhibit US-1301. The United States appears to have based its
valuations on the amounts obligated under the awards as reported in the FPDS/FPDS-NG, rather than the actual
disbursements made under the contracts, unlike its original estimate, which relied on the actual disbursements as
indicated from the NPMS and SAP/BW internal databases. The United States explai ns that the actual funds
disbursed under a contract may be (i) less than the fund s allotted (e.g. where the cont ractor finishes the work
before the funds run out); or (ii) more than the amount shown in the final contract modification (e.g. if
adjustments are necessary when the cont ract is closed out). According to the United States, the funds allotted
under the contract modifications allow an estimate of the maximum that NASA was authorized to spend under
the contract. United States' response to question 6, para. 3, footnote 7.
2606 United States' response to question 188, para. 217. We note, however, that the United States
indicates that the FPDS/FPDS-NG databases were the s ource for the Annual Procurement Report data, so this

BCI deleted, as indicated [***]

7.1067 The United States continued this "verification" ex ercise to arrive at what it contends is the
"maximum value" of contracts with Boeing under the eight R&D programmes:
(c) From the FPDS/FPDS-NG database search of all contracts with Boeing and its
subsidiaries (including any that were not in the 100 Principal Contractor's List),
NASA then filtered out contracts awarded by NASA centers that perform no
aeronautics research. The value of the elim inated contracts (i.e. contracts with non-
aeronautics NASA centers) for 1989-2006 was $29 billion for 1989-2006. According
to the United States, this amount represents 96.5 per cent of the value of all of
Boeing's contracts with NASA. In other words, the "vast majority" of Boeing's
contracts with NASA are related to non-aeronautics activities
 (i.e. NASA facilities,
NASA research activities and NASA programs supporting NASA's space and
exploration objectives), none of which have been challenged in this dispute.
7.1068 The United States contends that, once contr acts issued by NASA facilities that conduct
no aeronautics research are factored out, there are only $1.05 billion in contracts remaining for the
1989-2006 period that are even potentially related to the European Communities' claims regarding
aeronautics research.2607
(d) Finally, NASA personnel manually revi ewed the descriptions of the research
conducted under each Boeing contract awar ded by the four centers that conduct
aeronautics research . The result identified every Boeing contract with the four
aeronautics centers, not simply those re lated to aeronautics R&D. Then NASA
personnel assigned contracts to 13 various s ubject categories and excluded only those
contracts within nine of the clearly non-LCA-related categories. 2608 The remaining
group of contracts had a value of $775 million, which according to the United States,
represents the "maximum value" of Bo eing contracts related to EC-challenged
R&D.2609
7.1069 The United States argues that, while the value of the contracts identified in this verification
exercise is approximately $116 million higher than the value of contracts reported by the
United States at paragraph 212 of its first written submission, the difference is not significant.2610
7.1070 Certain of the European Communities' criticisms of the United States' "payments" estimate of
$750 million relate to the scope of transactions included in the estimate; i.e. that (i) the estimate

verification step does not address the European Communities' criticisms of the reliability of the FPDs/FPDS-NG
databases as the starting point for the identification of relevant contracts. The European Communities makes
this point also. European Communities' comments on United States' response to question 188, para. 207.
2607 United States' response to question 188, para. 219. The United States further notes that the contract
set at this stage still includes contracts relating to engi ne research, research into hypersonics and air traffic
control, which the European Communities has stated are not related to its claims, as well as research funded by
programs other than the eight aeronautics R&D programs.
2608 See United States' response to question 188, paras. 218 and 220.
2609 The United States contends that this list of remain ing contracts is over-inclusive (and therefore the
value of such contracts is certainly larger than the actual value of NASA research contracts related to the
European Communities' challenge) because, for purposes of this verification exercise, where the description of
research under a contract involved both aeronautics and non-aeronautics related R&D, NASA treated the whole
contract as related to the dispute. United States' response to question 188, para. 222.
2610 The United States explains that in order to compare the estimate at paragraph 212 of its first written
submission, with the estimate arrived at through the verification exercise in response to Panel question 188, it is
appropriate to subtract from the $715 million initial estimate the estimated $66 million in respect of the ACEE
program. United States' response to question 188, para. 222, footnote 239. If we do this, we find that the
difference between the two estimates is $126 million, not $116 million as indicated by the United States.

BCI deleted, as indicated [***]

excludes payments made to Boeing as a sub-contract or, and (ii) does not include the value of goods
and services provided to Boeing through Space Act Agre ements. Both of these criticisms are without
foundation. Leaving aside the strongly disputed issue of whether any payments that Boeing received
as a sub-contractor pursuant to contracts between NA SA and third parties are financial contributions
covered by Article 1.1(a)(1) of the SCM Agreement
2611, including such payments within the scope of
the transactions in the "payments" estimate would not increase the total amount. It would actually
reduce the total amount. If a proper estimate of the to tal amount of the payments received by Boeing
should include/add payments that Boeing received as a sub-contractor, then that estimate must
logically exclude/subtract payments that Boeing made to its sub-contractors when it was Boeing that
was the prime contractor. The parties appear to agree that the total amount of the payments that
Boeing received as a sub-contractor is likely far less than the total amount of the payments that
Boeing paid out to its own sub-contractors. Theref ore, adding the value of the payments that Boeing
received as a sub-contractor would actually lead to a reduction – likely a significant reduction – in the
total amount of the payments that should be included in the estimate of the amount of the subsidy to
Boeing. As for the exclusion of the value of "goods and services" from the United States'
$750 million estimate, the United States acknowledges that its payments estimate relates only to
payments to Boeing under NASA R&D contracts and agre ements, and does not include the value of
any goods and services provided to Boeing through R&D contracts or agreements. It provides a
separate valuation of the goods and services provided by NASA pursuant to Space Act Agreements
with Boeing, which the Panel addresses below. Therefore, this criticism is also without foundation.
7.1071 The European Communities argues that the United States has offered no means of verifying
that NASA has properly identified and counted all of the LCA-related contracts with Boeing (i.e. the
completeness of the contract data set)
2612; and has provided no basis for concluding that its
"disbursements" estimate captures all of the funds actually disbursed to Boeing under the R&D
programmes at issue.
7.1072 As to the criticisms directed to wards the completeness of the relevant contract data set, the
European Communities alleges that the FPDS/FPDS-NG database is a flawed and unreliable source
for identifying the contracts between NASA and Boeing. 2613 In this regard, the European
Communities refers to a Congressional Research Se rvice Report and a General Accounting Office
(GAO) report critical of the FPDS database. 2614 The European Communiti es also alleges that the
United States failed to include four contracts with Boeing in its contract data set in Exhibit US-1202
(worth $41 million) and that this omission of rele vant contracts from the contract data set on which
the disbursement estimate is based also calls into question whether the estimate includes all of the
relevant contracts between NASA and Boeing.2615
7.1073 The Panel has reviewed the exhibits submitte d by the European Communities to support its
contention that the FPDS/FPDS-NG databases cannot be relied upon to produce a complete set of
relevant contracts. The Panel is not persuaded that the evidence supports the European Communities'

2611 The arguments of the parties on this issue are found in their responses, and corresponding
comments, to questions 3(b), 130, 131 and 132.
2612 European Communities' comments on United States' response to question 7, para. 6.
2613 European Communities' response to question 173(b), para 301.
2614 CRS Report for Congress, The Federal Fu nding Accountability and Transparency Act:
Background, Overview, and Implementation Issues, 6 October 2006, Exhibit EC-1375; GAO, Improvements
Needed to the Federal Procurement Database System-Next Generation, GAO 05-960R, 27 September 2005,
Exhibit EC-1376. See also, GAO, Reliability of Federal Procurement Data, GAO-04-295R, 30 December 2003,
Exhibit EC-1377.
2615 European Communities' comments on United States' response to question 6, para. 8.

BCI deleted, as indicated [***]

contentions in this regard. 2616 Moreover, the Panel notes that ther e do not appear to be any practical
alternatives for the Panel, or for NASA, to re liance on the FPDS/FPDS-NG database to generate an
initial list of contracts between NASA and Boeing. We are inclined to agree with the United States
that a list of contracts generated by FPDS/FPD S-NG inquiries would be the starting point for
compiling any list of contracts between NASA and Boeing. Although not perfect, it is not only the
best source, but the only practical source of info rmation on the universe of contracts between NASA
and Boeing.
7.1074 In relation to the European Communities' allegation that the United States had failed to
include four relevant contracts between NASA and Bo eing in the list of contracts in Exhibit US-1202
that formed the basis for the Unite d States' disbursement estimate, th e United States explains that one
of the contracts in question was included in the list in Exhibit US-1202 but was mislabelled as a
different contract2617 and that the other three contracts were "a pparently missed in the initial analysis",
although they were captured in the calculation of the "maximum value" of Boeing contracts in the
United States' verification exercise performed in response to Panel question 188 and set forth in
Exhibit US-1305.2618 The United States does not elaborate on exactly how the three contracts were
apparently missed in the initial analysis, alt hough it is reasonable to assume that they were
erroneously omitted by NASA personnel as part of the elimination of contracts whose subject matter
indicated that they pertained to non-aeronautics research.
7.1075 If the United States' verification exercise correc tly portrays the relative value of contracts
awarded to Boeing by the four NASA research centers that perform aeronautics research
($1.05 billion) compared to all contracts awarded to Boeing by the NASA research centers that do not
perform aeronautics research ($29 billion), then it a ppears that the most significant element of the
United States' methodology for identifying the releva nt contracts is its filtering of the FPDS/FPDS-
NG databases to eliminate the latter category of contracts.
7.1076 It was in response to questions 179 and 188 from the Panel that the United States explained
that, once contracts issued by NAS A facilities that conduct no aeronauti cs research were filtered out
of the "all Boeing contracts" set, there are only $1.05 billion in contracts remaining for the 1989-2006
period that are even potentially related to the Eu ropean Communities' claims regarding aeronautics
research.
2619 In its comments on the United States' response to questions 179 and 188, the
European Communities did not criticise this aspect of the United States' methodology for identifying
the relevant contracts. Given that this seems to be the most significant element of the United States
methodology for identifying the maximum value of c ontractual payments made to Boeing, the Panel
subsequently sought further subm issions from the parties. In its response to question 339, the
United States confirmed, among other things, that the Panel was correct in understanding that, as a
factual matter, all contracts that are related to the European Communities' challenges to non-engine
aeronautics research must have been awarded by the four NASA centers (Langley, Glenn (formerly
Lewis), Ames, and Dryden) that are responsible for all aeronautics research conducted by NASA and
cannot have been awarded by any other NASA center or unit:

2616 More specifically, we consider that the European Communities has taken the comments made in
the reports out of context, and that the criticisms of th e FPDS system do not pertain to whether or not the FPDS
would be a reliable source of NASA-specific contract information.
2617 United States' response to question 184, para. 191. Contract NAS1-20553 was mislabelled as
NAS1-20550. The United States also indicates that, although the amount awarded under this contract was
originally $22 million (as alleged by the European Communities), the amount actually disbursed was
$1.8 million.
2618 United States' response to question 184, para. 191. According to the United States, the combined
value of disbursements under these three contracts was $15.2 million.
2619 United States' response to question 179, para. 180; United States' response to question 188,
para. 219.

BCI deleted, as indicated [***]

"... The EC challenge relates to a group of named research programs, all of them
involving aeronautics research. All of NASA's expenditures, including procurements,
cooperative agreements, and grants, are administered through one of the various
centers. Only four of the centers – Langley Research Center, Glenn Research Center
(formerly known as Lewis), Ames Research Center, and Dryden Flight Research
Center – perform aeronautics research. These centers administered all of the
aeronautics research under the programs ch allenged by the EC. The remaining
centers were not responsible for administering any of the programs challenged by
the EC. It is NASA policy that the center implementing a research program is
responsible for awarding any contracts, coope rative agreements, or grants to perform
research under that program. Therefore, all contracts (and cooperative agreements)
that are related to the EC challenges to non-engine aeronautics research must have
been awarded by those four NASA centers, and cannot have been awarded by any
other NASA center or unit."
2620
7.1077 In its comments on the United States' respon se to question 339, the European Communities
advances two arguments in response to the United States ' assertion that all contracts that are related to
the European Communities' challenges must have been awarded by those four NASA centers, and
cannot have been awarded by any other NASA center or unit.
7.1078 First, that " {t}he European Communities challenges non-engine aeronautics-related R&D
conducted by NASA at any of its facilities. Th e specific facility that conducts such R&D is
immaterial to the EC claims and arguments". 2621 The Panel understands that the
European Communities has challenged payments an d access to facilities, equipment and employees
provided to Boeing under the eight R&D programmes at issue, regardless of the specific NASA center
involved. However, in the Panel's view, this s till does not respond to the United States' contention
that, as a factual matter, all contracts that are re lated to the European Communities' challenge to
aeronautics research must have been awarded by Langley, Glenn (formerly Lewis), Ames, or Dryden.
7.1079 Second, the European Co mmunities argues that " {w}hile the bulk of NASA's expenditures
related to aeronautics may have been undertaken by Langley, Glenn (formerly Lewis), Ames, and
Dryden, the United States is incorrect that all NASA aeronautics expenditures were undertaken by
these four centers". The Eur opean Communities notes that " {e}ven a cursory review of NASA's
"aeronautical research and technology" budget summa ries reveals that some of NASA's aeronautics
funding was in fact spent by NAS A centers other than these four". 2622 In this connection, the
European Communities refers the Panel to "NASA Aeronautical Research and Technology, Budget
Summaries, FY 1991-FY 2000" (Exhibit EC-1440). The "NASA Aeronautical Research and
Technology, Budget Summaries, FY 1991-FY 2 000" submitted by the European Communities
identifies aggregate, yearly figures on the "resour ce requirements" for the R&T Base Program and
other "Aeronautical focused programs", followed by a breakdown of the "Distribution of Program
Amount by Installation". What this document s hows is that while "some of NASA's aeronautics
funding was in fact spent by NASA centers other than these four", i.e. other than Langley, Glenn
(formerly Lewis), Ames, and Dryden, as asserted by the European Communities, it appears that over
the period 1989-2006, these four centres accounted for more than 99 per cent of "Aeronautical
Research & Technology Resources". Thus, rather than calling into question the United States'
assertion, this information appears to offer confirmation that substantially all NASA aeronautics
expenditures were undertaken by these four centers.

2620 United States' response to question 339, para. 82 (footnote omitted).
2621 European Communities' comments on United States' response to question 339, para. 78.
2622 European Communities' comments on United States' response to question 339, para. 79.

BCI deleted, as indicated [***]

7.1080 As for the accuracy of the disbursement information related to each of the identified contracts,
the Panel notes, first, that the European Commun ities does not challenge the use of "disbursements"
data as a close approximation of the amount of "payments" made to Boeing under the research
contracts. The European Communities does challenge the reliability of NASA's "financial databases",
which presumably include the NPMS and SAP/BW systems that were the source of the disbursements
data. In this regard, the European Communities cites from a report of the GAO that indicates that
NASA had been on GAO's "high-risk" list since 1990 becau se of its failure to effectively oversee its
contracts, due in part to NASA's lack of accura te and reliable information on contract spending.
2623
The Panel has reviewed this GAO Report and notes that it does not refer to the NPMS or SAP/BW
systems specifically, nor does it suggest that those systems would be unreliable sources of information
as to actual disbursements made by NASA. We are therefore not persuaded that the
European Communities has adequately supported its allegations that NASA's financial databases are
unreliable for purposes of estimating the value of NASA's R&D subsidies to Boeing.
7.1081 It is clear to the Panel that NASA has made mistakes in compiling the relevant information,
and that NASA's records are not perfect (and as we discuss below, in relation to Space Act
Agreements, far from perfect). However, the Euro pean Communities has not demonstrated that the
United States' estimate involved any "methodological" errors. The Panel therefore estimates that the
total amount of payments to Boeing through R& D contracts under the eight R&D programmes over
the period 1989-2006 was $1.05 billion.
The United States' evidence regarding the ma ximum value of the NASA facilities, equipment
and employees provided to Boeing for aeronautics R&D over the period 1989-2006
7.1082 The United States estimates that the value of goods and services supplied to Boeing under
non-reimbursable and partially reimbursable SAAs was $79.7 million. 2624 The United States' estimate
reflects the value of facilities, equipment and em ployees captured in "Estimated Price Reports"
prepared by NASA in connection with the Space Act Agreements that it entered into with Boeing.
7.1083 The United States provided an original list of relevant Space Act Agreements as Exhibit US-
74.2625 In the second set of questions, the Panel asked the United States to explain the methodology
that it used to develop the list of Space Act Ag reements in Exhibit US-74. The United States
responded that the list of relevant Space Act Agreem ents set forth in Exhibit US-74 was obtained by

2623 European Communities' response to question 173(b), paras. 300-302; Statement of
Gregory D. Kutz, NASA Long-standing Financial Management Challenges Threaten the Agency's Ability to
Manage its Programs, 27 October 2005, Exhibit EC-1313. The European Communities also quotes from a 2006
Congressional Research Service Report which noted that the GAO had noted that FPDS users lacked confidence
in the data provided because there wa s no rigorous system in place to ensure the accuracy and completeness of
the data; Exhibit EC-1375.
2624 United States' response to question 175, para. 160. The Panel recalls that NASA provides goods
and services under reimbursable Space Act Agreements when it has uni que goods, services and facilities that
are not being fully utilized to accomplish mission needs, which it can make available to others on a non-
interference basis. United States' first written submi ssion, para. 233, footnote 336. NASA requires full
reimbursement, defined as "full cost recovery" for the goods, services or facilities provided. NASA also has the
authority to accept partial reimbursement where a proposed contribution of the SAA partner is fair and
reasonable compared to the NASA resources to be co mmitted, NASA program risks and corresponding benefits
to NASA. The European Communities does not challeng e the supply of goods and services under Space Act
Agreements to the extent that Boeing pays cash in exchange for those goods and services.
2625 The United States first referred to this list of Sp ace Act Agreements at para. 201 of its first written
submission (footnote 283), in the context of its critic ism of the inclusion of $3.3 billion from NASA's
"institutional support" budgets in the European Communities' $10.4 billion estimate. According to the
United States, from the $3.3 billion in "institutional support" challenged by the European Communities, NASA
has only provided limited goods and services to Boeing pursuant to 35 Space Act Agreements that cover
discrete uses by Boeing of NASA wind tunnels and work on other jointly undertaken R&D projects.

BCI deleted, as indicated [***]

searching NASA's "physical and electronic records" to identify Boeing Sp ace Act Agreements, and
then taking the relevant information from the hard copy documents. At that time, NASA had not
sought to determine which programme funded the par ticular Space Act Agreements in Exhibit US-74,
and the United States subsequently explained during the second meeting with the Panel, that
Exhibit US-74 included some Space Act Agreements th at on closer inspection, had not in fact been
funded under the challenged R&D programmes.2626
7.1084 At the second meeting with the Panel, the United States submitted Exhibit US-1256, "The
Value of NASA Facilities, Equipment, and Em ployees under Selected Space Act Agreements".
Exhibit US-1256 lists the relevant Space Act Agr eements for which the United States was able to
obtain valuation information.2627 The total non-reimbursable value of the instruments listed there was
estimated to be $82.9 million. However, the Unite d States also explained during the Second Meeting
that Exhibit US-1256 was not yet "final" (and also th at some of the Space Act Agreements that had
been listed in Exhibit US-74 were not, on clo ser examination, related to the challenged R&D
programmes).
7.1085 The United States subsequently revised Exhibit US-1256 in response to the Panel's
Question 185 to add two SAAs and remove two c ooperative agreements that were inadvertently
included on the original list of SAAs in Exhibit US -1256. The United States indicated in response to
Panel question 185 that revised Exhibit US-1256 contains all of the SAAs "for which the
United States has value information". 2628 The total of "NASA Planned Contributions" under the
21 Space Act Agreements listed in the revised Exhibit US-1256 was $79.9 million.
7.1086 In response to a question from the Panel as to how the value of NASA facilities, equipment
and employees provided through Space Act Agreements set forth in Exhibit US-1256 was calculated,
the United States indicated that these figures are b ased on "Estimated Price Reports" contained in
either the physical files related to an SAA, or in NASA's TechTrackS System, which includes data on
the Estimated Price Reports for SAAs.
7.1087 The TechTrackS System is an electronic da tabase that also contains data on the
R&D programme that is the source of funding for pa rticular SAAs. The United States advises that, in
compiling Exhibit US-1256, NASA removed SAAs th at were funded by programmes other than the
eight R&D programmes at issue in this dispute. Th e United States indicated that the list of Space Act
Agreements in revised Exhibit US-1256 contains all of the Space Act Agreements "for which the
United States has value information". 2629 In other words, Exhibit US-1256 does not purport to be a
comprehensive valuation of all relevant Space Act Ag reements. Rather, in the light of the difficulties
accessing value information for Space Act Agreements that are not recorded in the TechTrackS
system (i.e. Space Act Agreements entered into prior to 1993 by all research centers except the
Langley Research Center, which apparently entered onto the electronic database information for its

2626 United States' response to question 183, para. 190; United States' non-confidential oral statement at
the second meeting with the Panel, para. 63.
2627 United States' non-confidential oral statement at the second meeting with the Panel, para. 63. See
also, United States' comments on European Communities' response to question 172, para. 299, where the
United States explains that the value information in Exhibit US-1256 that was based on corresponding value
information reported in Exhibit US-74 was based on do cuments submitted to the Panel (these are listed in
footnote 489), while the remaining value information was based on information in the TechTrackS database.
2628 United States' response to question 185, para. 193.
2629 United States' response to question 185, para. 193; United States' comments on
European Communities' response to question 172, para. 300.

BCI deleted, as indicated [***]

pre-1993 contracts), revised Exhibit US-1256 is a lis ting of the relevant Space Act Agreements for
which Estimated Price Reports were available, or for which other value information was available.2630
7.1088 The European Communities advances a number of arguments concerning the United States'
valuation of goods and services provided pursuant to Space Act Agreements, including the following:
• First, it alleges that the United States has not submitted copies of all relevant Space Act
Agreements between NASA and Boeing. 2631 In support of this contention, the
European Communities alleges that NASA fa iled to submit into evidence copies of
two relevant Space Act Agreements that the European Communities was able to identify
through FOIA requests.2632

• Second, the European Communities has complained that in estimating the values of Space Act
Agreements in revised Exhibit US-1256, the United States has failed to tabulate values for all
of the Space Act Agreements that have been identified as relevant Space Act Agreements by
either the European Communities or the United St ates (these are set forth in Exhibit EC-1374,
which lists 21 such Space Act Agreements).2633

• Moreover, the European Communities argues that the United States' valuation of the facilities,
equipment and employees provided to Boeing through Space Act Agreements is unsupported
as the United States has failed to submit the Esti mated Price Reports and the results of its
inquiries of the TechTrackS system that form the basis for the estimate.2634

7.1089 The United States explains that six of the 21 SAAs for which it had not tabulated a value were
signed prior to 1993 and were not included on the TechTrackS System.
2635 However, the
United States notes that Langley Research Center entered historical (i.e. pre-1993) SAA data on the
TechTrackS System, and asserts that the Langley Center originated the greatest number of agreements
related to the European Communities' allegations, with greater value than those originated by other
centers, so the data in revised Exhibit US-1256 can be considered to be "substantially complete".2636
7.1090 According to the United States, nine of the remaining 17 SAAs 2637 that the
European Communities had identified were valued at a total of $8.1 million and were sponsored by a

2630 As indicated previously, in United States' comments on European Communities' response to
question 172, para. 299 (footnote 489), the United States lists the Exhibits (all of which are BCI) from which
the other value information was drawn, namely, Exhibits US-70 (BCI), US-109 (BCI), US-113 (BCI), US-120
(BCI), US-122 (BCI).
2631 Exhibit US-1245 was provided by the United States in response to a question from the Panel
(issued on 17 December 2007) requesting the United Stat es to submit a list of NASA contracts for which
Exhibits have been submitted by the United States, along with other information related to the contract and the
relationship of the contract to the U.S. submissions.
2632 The European Communities identifies Exhibits EC-1314 and EC-1315 as "examples" of such Space
Act Agreements; see European Communities' comments on United States' response to question 6, para. 14.
2633 European Communities' response to question 172, para. 297. The European Communities argues
that the unavailability of data on estimated price reports through th e TechTrackS system for Space Act
Agreements signed before 1993 does not excuse the United States from submitting information about the value
of goods and services provided through the relevant Space Act Agreements. European Communities' comments
on United States' response to question 184, para. 187.
2634 European Communities' comments on United States' response to question 183, para. 185.
2635 The TechTrackS system was not operational pr ior to 1993, so data pertaining to Space Act
Agreements entered into prior to 1993 are not necessarily retrievable using TechTrackS.
2636 United States' comments on European Communities' response to question 172, para. 300.
2637 By the Panel's calculation, there are 15 (not 17) remaining SAAs from the original 21 if we subtract
from 21 the six that were signed prior to 1993.

BCI deleted, as indicated [***]

NASA office that provided general support for putti ng such agreements into effect, and were possibly
related to one of the eight R&D programmes. 2638 The United States makes no mention of the possible
value of the other eight (or six) SAAs on which there is no value information.
7.1091 The United States considers that the Panel can have a high degree of confidence that the
United States has identified "all of the available Bo eing Space Act Agreements that are related to the
eight challenged programs". 2639 The United States suggests that, should the Panel consider that any
Space Act Agreement was improperly excluded, it assign a value to it equal to the average value of
SAAs listed in the revised Exhibit US-1256 (i.e. $4.7 million).
7.1092 The Panel notes that, although the United States was subsequently able to advise that the
value of nine SAAs for which value information was not tabulated in revised Exhibit US-1256, was
approximately $8.1 million in total, it did not revise the total value of SAAs set forth in its revised
version to Exhibit US-1256 to reflect the values of those SAAs. Leaving that point to one side, the
position appears to be:
• the United States has identified 38 relevant Space Act Agreements, copies of which it has
submitted to the Panel. The list of these Space Act Agreements is at Exhibit US-1245.

• the United States has tabulated value informati on for 21 of the 38 Space Act Agreements, this
valuation appearing in revised Exhibit US-1256 and amounting to $79.9 million.

• the United States has estimated in addition that nine Space Act Agreements whose values were
not part of the $79.9 million estimate, are worth approximately $8.1 million.

7.1093 As indicated above, the United States has only been able to tabulate value information for 21
of the 38 known Space Act Agreements between NAS A and Boeing. Second, the United States'
valuation of goods and services provided to Boeing does not capture the value of NASA facilities,
equipment and employees provided to Boeing in co njunction with R&D contracts (as distinguished
from Space Act Agreements).
7.1094 As a result of these limitations in the inform ation available concerning the value of NASA
facilities, equipment and employees provided to Boeing, the United States has advanced an alternative
methodology for estimating the maximum value of the free access to facilities, equipment and
employees provided to Boeing. Specifically, in its responses to question 175, the United States argues
that the Panel could, for the purpose of estimating the maximum value of this financial contribution,
use Boeing's share of total payments made to a ll of NASA's aeronautics R&D contractors, partners,
and grantees. In other words, an estimate of the maximum value of the use of NASA facilities,
equipment and employees to Boeing would be derived from the value of NASA's payments to Boeing.
The United States explained in its response to question 175
2640 that:
"The United States estimates that the value of goods and services supplied to Boeing
under non-reimbursable Space Act Agreem ents was $57.7 million and the value
under nonreimbursable Space Act Agreements was $21.9 million.
NASA's databases and internal information did not allow a valuation of goods and
services provided to all other contractors. With regard to Space Act Agreements that
might have been used to provide goods a nd services, the only way to determine with

2638 United States' comments on European Communities' response to question 172, para. 300.
2639 United States' comments on European Communities' response to question 172, para. 301. This
statement is qualified in a way that suggests that there may be other SAAs that are no longer available.
2640 United States' response to question 175, paras. 160-162.

BCI deleted, as indicated [***]

certainty whether an agreement relates to larg e civil aircraft more generally or to the
eight challenged programs in particular is to review the physical copy of the contract.
That is simply not possible in light of the hundreds of Space Act Agreements signed
with companies other than Boeing. With regard to the EC allegations that NASA
facilities and personnel referenced in procur ement contracts were separate provisions
of personnel and facilities to Boeing, NASA's records do not allow the linking of
personnel to contracts in a way that would allow quantification and valuation.
Should the Panel feel constrained to perfo rm an estimate, it could use the Boeing
share of payments made under contract s, cooperative agreements, grants, and
government agreements to estimate the Bo eing share of any overall provisions of
goods or services that it finds to exist."
7.1095 The Panel requested clarification from the Unite d States, and in response to question 352, the
United States explained that:
"Despite the many objections to a methodology that treats NASA facilities,
equipment, and employees as working for pr ivate enterprises, the U.S. response to
Question 175 sought to assist the Panel in valuing the facilities, equipment, and
employees related to contracts if it noneth eless found that they were 'provided' to
contractors in the sense of Article 1.1(a) (1)(iii) of the SCM Agreement and conferred
a benefit. The suggestion was that if the Panel considered a class of NASA personnel
or other expenditures to be in reality a good or service provided to contractors, it
could determine the share attributable to Boeing based on the company's 10.4
percent,
2641 share of the total value of NASA aeronautics research contracts in the
1989-2006 period.
To take an example, for most of the period, NASA divided its budget between
program budgets (covering expenditures unde r contracts, cooperative agreements,
and grants with outside suppliers) and 'Institutional Expenses' (which covered
primarily personnel costs).2642 If the Panel were to conclude that some portion of one
of these budgets represented facilities, equipment, or employees provided to
contractors, it could allocate part of th at value to Boeing based on the company's
share of contracting.
To give a numerical example, the EC asser ts that the sum of program budgets under
the challenged programs from 1989 to 2006 was $12,235 million. 2643 NASA's data
show that the agency paid contractor s (including Boeing) $7,446 million to conduct
aeronautics research during that period,2644 indicating that payments under other types
of contracts were $4,789 million. If the Pa nel decided that some portion of these
expenses were a financial contribution to contractors within the meaning of

2641 (footnote original) United States' response to question 175, para. 155.
2642 ( footnote original ) "Institutional expenses", comprised civil servant salaries, benefits, costs of
administrative buildings, travel, mainte nance, office equipment, electricity , library services, and vehicles.
Payments to non-NASA entities under contracts, cooperative agreements, government agreements, and grants
represented a large portion of program budgets. The HSR program budget had $1.00 in contracts and grants
spending for every 52 cents of non-contract costs, meaning that approximately 2/3 of all spending was for
payments under contracts or grants. US Comment on European Communities' response to question 148,
paras. 164 & 171; US Comment on European Comm unities' response to question 158(h), para. 253;
US Comment on European Communities' response to question 166, paras. 263 and 265.
2643 (footnote original) See U.S. response to Question 334 ($12 ,365 million total, minus $130 million
on the ACEE program, all of which predated 1989.
2644 (footnote original) United States' response to question 175, para. 155.

BCI deleted, as indicated [***]

Article 1.1(a)(1) of the SCM Agreement,2645 it could multiply the value of that portion
by Boeing's 10.4 percent share of the total va lue of aeronautics research contracts, to
estimate a value to Boeing. Because this approach is based on real data on NASA's
expenditures, it would estimate Boeing's sh are of any NASA costs more accurately
than the EC's approach based on Boeing's share of sales of civil aircraft and parts.
The Panel could take a similar approach if it decided that some portion of the
Institutional Expenses budget, which the EC alleges was $6,469 million in the 1989-
2006 period, also constituted a financia l contribution within its terms of
reference.
2646" 2647
7.1096 The Panel accepts the U.S. argument that if Boeing received only 10.4 per cent of payments
made to all programme participants, there is no b asis for allocating to Boeing more than 10.4 per cent
of the total costs incurred by NASA in maintaining and providing facilities, equipment and employees
for aeronautics R&D. In fact, the European Communities itself sought to estimate the value of NASA
"facilities, equipment and employees" to Boeing base d on Boeing's share of NASA funding. As the
European Communities explained in its comments on the United States response to question 175:
"... the US suggestion that the Panel use 'the Boeing share of payments made under
contracts, cooperative agreements, grants, and government agreements to estimate the
Boeing share of any overall provisions of goods and services' is analogous to the
approach used by the Eur opean Communities in deriving its own estimates of the
NASA R&D subsidies."
7.1097 More specifically, the European Communities h as explained that it "allocates total aerospace
institutional support" to Boeing "by using the percent of overall NASA aerospace/aeronautics
funding" going to Boeing.
2648
7.1098 In its comments on the United States' respon se to question 352, the European Communities
argues that the Panel should not follow the United St ates' suggestion for estimating the value of the
access to facilities, equipment and employees provi ded to Boeing under the NASA programmes at
issue. The European Communities argues that
"the US calculations that (i) Boeing's share of aeronautics research contracts under
the programmes at issue is 10.4 per cent, (ii) the amount of the programme budgets
that relate to aeronautics research contracts with Boeing is $775 million, (iii) the
amount of the programme budgets that relate to total aeronautics research contracts is
$7,446 million, and (iv) the amount of the programme budgets that do not relate to
payments to contractors is $4,789 m illion, are not supported by any actual
evidence".
2649

2645 (footnote original) The United States notes that any such valuation would have to take account of
the fact that the large (but unsegregable) majority of NASA budgets not devoted to funding of contracts is used
to fund NASA's own in-house research independent of contractors, with results disseminated to the broader
public.
2646 ( footnote original ) Any calculation attempting to relate NASA's non-contract costs to Boeing
would have to avoid double counting the Space Act Agreements reported in Exhibit US-1256( revised). Any
NASA contribution of employee time under those agreements is paid thro ugh the Institutional Support budget,
while facilities or equipment would be paid through the relevant program budget.
2647 United States' response to question 352, paras. 172-174.
2648 "NASA/DOD/DOC Aeronautics R&D Subsidies to Boeing LCA Division", Exhibit EC-25, Note 2,
p. 6.
2649 European Communities' comments on United States' response to question 352, para. 142.

BCI deleted, as indicated [***]

The Panel has already concluded, for the reasons gi ven above, that the United States' calculations are
supported by sufficient evidence.
7.1099 For the reasons given above, the Panel has estim ated that the total amount of payments to
Boeing through R&D contracts entered into unde r the eight R&D programmes over the period 1989-
2006 is $1.05 billion. If the Panel were to use the $775 million figure advanced by the United States,
this would mean that Boeing received 10.4 per cen t of payments made under the programmes. Using
the programme budget figures set out in the United Stat es' response to question 352 (which are in turn
derived from the figures submitted by the European Communities in Exhibit EC-25), this would yield
an estimate of approximately $1.17 billion for "f acilities, equipment and employees". However, the
Panel has estimated that the value of the payments made to Boeing is $1.05 billion. When this figure
is used, it leads to the conclusion that Boeing recei ved 14 per cent, not 10.4 per cent, of payments
made to programme participants. Using this figure, the Panel es timates that the value of the free
access to facilities, equipment and employees under the eight R&D programmes at issue was
$1.55 billion.
7.1100 As indicated above
2650, the Panel does not agree with th e European Communities that the
transactions are properly characterized as outright "grants". Among other things, the Panel accepts
that NASA publicly disseminated the reports that summarized the results of the research conducted
under the eight programmes at issue, and that this represents a situation in which Boeing has given up
something of value in exchange for the funds an d access to facilities, equipment and employees that it
receives. The Panel agrees with the reasoning by the panel in EC – DRAMs:
"In our view, there is a basic problem with the EC's grant methodology, and that is,
simply put that a loan, a loan guarantee, a debt-to-equity swap that requires the
recipient to repay the money or to surrender an ownership share in the company is not
the same as a grant and can not reasonably be considered to have conferred the same
benefit as the provision of funds without any such obligation. For the recipient, a
loan clearly has a different value than a gr ant as it involves a debt that is owed to
someone and will appear as such in a company's balance sheet. It is thus obviously
less beneficial for a company to be given a loan than it is to be given a grant.
Similarly, the issuance of new equity, directly or through a debt-to-equity swap
dilutes the ownership claims of existing shareholders. We note that, in a benefit
analysis, it is the perspective of the recipient that is important, not that of the provider
of the financial contribution. In that sense, we find erroneous the starting point of the
EC's calculation of the amount of benefit, which focuses on the expectation of the
provider of the funds to see his money back. The question of benefit is not about the
cost to the provider of the financial cont ribution, it is about the benefit to the
recipient."
2651
7.1101 Having said this, there are two reasons why we shall treat the full amount of the financial
contributions provided to Boeing as a subsidy to Boeing's LCA division. First, this is a case involving
claims of serious prejudice under Part III of the SCM Agreement, not a countervailing duty
investigation. It is well estab lished that in a case brought under Part III of the SCM Agreement, a
panel is under no obligation to "quantify precisely the amount of the subsidy". 2652 Second, in

2650 See above, footnote 2552.
2651 Panel Report, EC – Countervailing Measures on DRAM Chips, para. 7.212.
2652 Appellate Body Report, US – Upland Cotton , para. 467 ("In sum, reading Article 6.3(c) in the
context of Article 6.8 and Annex V suggests that a panel should have regard to the magnitude of the challenged
subsidy and its relationship to prices of the product in th e relevant market when analyzing whether the effect of
a subsidy is significant price suppression. In many cases, it may be difficult to decide this question in the
absence of such an assessment. Nevertheless, this does not mean that Article 6.3(c) imposes an obligation on

BCI deleted, as indicated [***]

addition to this legal consideration, the United States has advanced no argument or evidence to
support any alternative approach to calculating th e amount of the subsidy to Boeing. In such
circumstances, it is not for the Panel to invent its own calculation methodology.
7.1102 We turn now to an argument advanced by the European Communities that would, if accepted,
render all of the foregoing irrelevant. Following its first and second written submissions, and in
response to the United States' information and evidence regarding the maximum value of the
payments and access to facilities, equipment and employees challenged, the European Communities
advanced the argument that the amount of the paym ents and the value of fr ee access to facilities,
equipment and employees provided to Boeing was act ually irrelevant. The European Communities
argued, for the first time in response to a question from the Panel in the second set of questions, that
this was because NASA shared the results of th e R&D performed by other contractors and by NASA
in-house with Boeing. Thus, the European Commun ities argued that the Panel should reject the U.S.
information on the amount of the subsidies and a ccept the European Communities top down estimate,
because the U.S. estimate did not account for the fact that NASA allegedly provided Boeing with
access to the results of the R&D performed by th ese other contractors, and by NASA in-house.
According to the European Communities:
".... NASA spent some of this funding on in-house LCA-related R&D activities, and
shared the results (e.g. technologies and data) with Boeing, thereby providing goods
and services to Boeing. Further, to the extent NASA spent some of this funding on
R&D by entities such as military aircraft manufacturers or universities, it did so to
bring about technologies for use on civil aircraft, and it made the results of that R&D
available to Boeing, thereby also prov iding goods and services to Boeing. The
bottom line is that regardless of the precise recipient of the funding under these
programs, the non-engine civil aircraft components of this funding provided support
to the US civil aircraft industry. ... {T}he purpose of the non-engine civil aircraft
components of the other NASA programmes at issue was to develop technologies
specifically for use by Boeing and other entities in the US civil aircraft industry,
regardless of the precise recipient of NASA's funding"
2653
7.1103 By way of background, we recall that in its first and second written submissions, the
European Communities focused exclusively on the payments and the free access to facilities,
equipment and employees that NASA provided to Bo eing through R&D contracts and agreements for
the purpose of enabling Boeing to conduct R&D. The European Communities argued that these were
the two financial contributions provided to Boeing. It was in respect of th ese two alleged financial
contributions, and only in respect of these two financial contributions, that the European Communities
provided any analysis of the existence of a subs idy under Article 1 of the SCM Agreement. The
European Communities sought to estimate the value of these two financial contributions. It argued
that unless the United States provided complete in formation on the value of these two challenged
financial contributions to Boei ng, the Panel should adopt the Eu ropean Communities' top down
estimate of $10.4 billion.

panels to quantify precisely the amount of a subsidy benefiting the product at issue in every case. A precise,
definitive quantification of the subsidy is not required") . We note that Article VI:3 of the GATT 1994 and
footnote 36 to Article 10 of the SCM Agreement provide that the term "countervailing duty" shall be understood
to mean "a special duty levied for the purpose of offsetting any bounty or subsidy bestowed, directly, or
indirectly, upon the manufacture, production or export of any merchandise". Article 19.4 of the
SCM Agreement provides that no countervailing duty shall be levied on any imported product in excess of the
amount of the subsidy found to exist "calculated in terms of subsidization per unit of the subsidized and
exported product". These provisions do not apply in cases brought under Part III of the SCM Agreement. The
reason is that cases brought under Part III of th e SCM Agreement do not result in the imposition of
countervailing duties.
2653 European Communities' response to question 163, paras. 252-253 (emphasis added).

BCI deleted, as indicated [***]

7.1104 The United States subsequently provided th e Panel with information, taken from
contemporaneous NASA records and databases, re garding the maximum amount of the payments
made to Boeing under the eight aeronautics R&D programmes at issue. The United States also
provided the Panel with an estimate of the value of facilities, equipment and employees provided to
Boeing, and submitted that the Panel could derive its own estimate based on Boeing's share of total
payments.
2654 The United States explained that the remainder of the funding that the
European Communities had included in its estimate of the subsidy to Boeing captured payments made
to other programme participants, the cost of NAS A's in-house research, and the cost of providing
access to facilities, equipment and employees to third parties. The Panel put a large number of very
detailed questions to the United States on how it arrived at these figures.2655
7.1105 Against this background, the Panel is not pers uaded by the European Communities' argument
that programme funding provided to other contract ors (and funding used by NASA itself for in-house
R&D) and programme funding used to cover th e cost of providing facilities, equipment and
employees to other contractors (and used by NASA itself for in-house R&D) should be included in
the estimate of the amount of the subsidies provided to Boeing.
7.1106 First, the factual and legal arguments set out in the first and second written submissions of the
European Communities to identif y the particular measures which the European Communities
considers to be subsidies within the meaning of Article 1 of the SCM Agreement do not include an
allegation that NASA provides a financial contribution to Boeing in the form of early or
exclusive access to the results of R&D performed by other programme participants. The "financial
contributions" identified in the "legal considerations" section are clearly limited to "grants to Boeing's
LCA division" and NASA's provision of "free access to facilities, equipment and employees" to
Boeing.
7.1107 Second, the European Communities does not identif y the particular transactions or types of
transactions through which NASA provides to the U.S. civil aircraft industry access to the results of
research performed by entities outside that industry. In this regard, the Panel notes that the one
technology transfer mechanism on which the Euro pean Communities has actually provided detailed
information in this case – the allocation of in tellectual property rights under NASA R&D contracts
and agreements – concerns the transf er of technology from the government to the entity that
performed the research . To take the case of patent rights, it is the entity that performs the research
(whether it is Boeing, a third party, etc.) that ta kes title to patents (with a limited government-purpose
license granted to the U.S. Government). As th e European Communities correctly notes, a patent
right accords the rights to " exclude others from making, using, offering for sale, or selling" the
invention for a minimum of 20 years from date of application.
2656 Likewise, the
European Communities' arguments relating to Lim ited Exclusive Data Right s (LERD) clauses focus

2654 The United States acknowledged that its $80 million estimate only covered the amount of access to
facilities, equipment and employees provided to Boeing under Space Act Agreements, and did not include the
value of any such goods and services provided to Boeing through R&D contracts. The United States argued that
its $80 million estimate was substantially accurate t hough, because as the Eur opean Communities itself
recognized, the "bulk" (European Co mmunities' second written submission, para. 389) of the free access to
facilities, equipment and employees was provided to Boeing through Space Act Agreements. The United States
submitted, however, that because the va lue of the facilities, equipment and employees could not be determined
with the same degree of precision and certainty as the value of the payments made to Boeing, an alternative way
of estimating the cost of the access to facilities, equipmen t and employees granted to Bo eing would be to arrive
at an estimate based on Boeing's share of total payments made. See e.g. United States' response to questions 175
and 352).
2655 The questions to the United States on this issue include Questions 6, 7, 175, 176, 177, 178, 179,
180, 181, 182, 183, 184, 185, 186, 187, 188, 336, 337, 338, 339, 340, 341, 342, 343, 344, 345, 351, 352, and
353.
2656 European Communities' first written submission, para. 812 (emphasis added).

BCI deleted, as indicated [***]

on the "critical commercial data developed by Boeing through NASA-funded research were protected
pursuant to the LERD restrictions".2657
7.1108 Third, the logic of an argument that NASA's R&D funding to other entities is a subsidy to
Boeing is fundamentally incompatible with th e logic of the principal argument of the
European Communities in its first and second wr itten submissions, namely that through R&D
contracts NASA pays Boeing to conduct R&D that is principally for its own benefit and use. The
allocation of the entire amount of the R&D funding as a subsidy to entities other than the entity that
performs the research necessarily implies that the R& D funding is not principally for the benefit and
use of the entity that performs the R&D, i.e. is not a subsidy to the entity that performs the research.
7.1109 For these reasons, the Panel estimates that the amount of the subsidy provided to
Boeing's LCA division in the form of payments under R&D contracts is $1.05 billion over the period
1989-2006, and that the amount of the subsidy prov ided to Boeing's LCA division in the form of
access to NASA facilities, equipment and empl oyees under R&D contracts and agreements is
$1.55 billion over this same period. Thus, the Panel est imates that the total amount of the subsidy
provided to Boeing's LCA division through the eight R&D programmes at issue is $2.6 billion.
(f) Conclusion
7.1110 For these reasons, the Panel finds that the p ayments and access to facilities, equipment
and employees that NASA provided to Boeing through the eight aeronautics R&D programmes
at issue constitute specific subsidies within the meaning of Articles 1 and 2, and estimates that
the amount of the subsidy to Boeing's LCA division is $2.6 billion over the period 1989-2006.
6. Department of Defense (DOD) aeronautics R&D
(a) Introduction
7.1111 The European Communities argues that DOD make s payments to Boeing (and grants Boeing
access to facilities, equipment and employees) to pe rform R&D related to "dual-use" technologies –
i.e. technologies applicable to both military a nd commercial aircraft. The European Communities
argues that these payments (and access to facilities, equipment and employees) are subsidies within
the meaning of Article 1 of the SCM Agreement, a nd are specific within the meaning of Article 2 of
the SCM Agreement. The European Communities estimates that DOD provided $4.3 billion in "dual
use" funding to Boeing over the period 1991-2006, and argues that $2.4 billion of that total should be
treated as a subsidy to Boeing's LCA division.
2658
7.1112 The United States argues that DOD R&D contracts and agreements with Boeing are not
subsidies within the meaning of Article 1 of th e SCM Agreement, and are not specific within the
meaning of Article 2 of the SCM Agreement. In addition, the United States argues that the
European Communities has overestimated the amount of "dual use" research conducted under the
programmes at issue. According to the United Stat es, the total amount of payments made to Boeing
under DOD R&D contracts and agreements to perform R&D with even theoretical "dual uses" was
only $308 million.

2657 European Communities' first written submission, para. 838 (emphasis added).
2658 NASA/DOD/DOC Aeronautics R&D Subsidies to Boeing LCA Division, Exhibit EC-25, p. 20.

BCI deleted, as indicated [***]

(b) The measures at issue
7.1113 The pertinent items of the European Communities' panel request2659 read as follows:
"a. allowing the US LCA industry to participate in DOD-funded research,
making payments to the US LCA industry for such research, or enabling the US LCA
industry to exploit the results of such res earch, by means including but not limited to
the foregoing or waiving of valuable patent rights, and the granting of exclusive or
early access to data, trade secrets and other knowledge resulting from government
funded research, through, for example:
(i) A number of Research, Development, Test, and Evaluation ("RDT&E")
Programs of the US Air Force, Navy, Army, and the Defense Advanced Research
Projects Agency ("DARPA") including, but not limited to:
• Defense Research Sciences (PE# 0601102F)
• Materials (PE# 0602102F)
• Aerospace Flight Dynamics and Aerospace Vehicle Technologies (PE#
0602201F)
• Aerospace Propulsion (PE# 0602203F)
• Aerospace Sensors (PE# 0602204F)
• Dual Use Applications and Dual Use Science & Technology (PE# 0602805F)
• Advanced Materials for Weapon Systems (PE# 0603112F)
• Flight Vehicle Technology (PE# 0603205F)
• Aerospace Structures and Aerospace Technology Dev/Demo (PE# 0603211F)
• Aerospace Propulsion & Power Technology (PE# 0603216F)
• Flight Vehicle Technology Integration (PE# 0603245F)
• RDT&E For Aging Aircraft (PE# 0605011F)
• Manufacturing Technology/Industrial Preparedness (PE#
0603771F/0708011F/0708011N)
• C-17 (PE# 0401130F/0604231F)
• CV-22 (PE# 0401318F)
• Joint Strike Fighter (PE#0603800F/0603800N/0603800E/0604800F/0604800N)
• AV-8B Aircraft (PE# 0604214N)
• Comanche (PE# 0604223A)
• F-22 (PE# 0604239F)
• B-2 Advanced Technology Bomber (PE# 0604240F)
• V-22 (PE# 0604262N)
• A-6 Squadrons (PE# 0204134N)
• F/A-18 Squadrons (PE# 0204136N)
• Dual Use Applications Program (including its predecessor, the Technology
Reinvestment Project).

b. allowing the US LCA industry to use research, test and evaluation facilities
owned by the US Government, including the Major Range Test Facility Bases."

2659 WT/DS353/2, item 3(a) and 3(b), pp. 9-10.

BCI deleted, as indicated [***]

7.1114 The European Communities distinguishes "general aircraft" RDT&E programmes from
"military aircraft" RDT&E programmes:
• "general aircraft " RDT&E programmes: Defense Research Sc iences (PE# 0601102F),
Materials (PE# 0602102F), Aerospace Flight Dynamics and Aerospace Vehicle Technologies
(PE# 0602201F), Aerospace Propulsion (PE# 0602203F), Aerospace Sensors (PE# 0602204F),
Dual Use Applications and Dual Use Scie nce & Technology (PE# 0602805F), Advanced
Materials for Weapon Systems (PE# 0603112F), Flight Vehicle Technology (PE# 0603205F),
Aerospace Structures and Aerospace Technol ogy Dev/Demo (PE# 0603211F), Aerospace
Propulsion & Power Technology (PE# 0603216F), Flight Vehicle Technology Integration
(PE# 0603245F), RDT&E For Aging Aircraft (PE# 0605011F), and Manufacturing
Technology/Industrial Preparedness (PE# 0603771F/0708011F/0708011N); and

• "military aircraft" RDT&E programmes
2660: CV-22 (PE# 0401318F), V-22 (PE#
0604262N), and F/A-18 Squadrons (PE# 0204136N) , Joint Strike Fighter (PE#0603800F /
0603800N / 0603800E / 0604800F / 0604800N), C-17 (PE# 0401130F/0604231F).

7.1115 It is not in dispute that DOD made payments to Boeing (and granted Boeing access to
government facilities) to perform R&D pursuant to two different categories of R&D arrangements.
First, DOD entered into "procurement contracts" with Boeing, the stated purpose of which was to
acquire goods or services for the " direct benefit or use of the United States Government". Second,
DOD entered into different types of "assistance instruments" (including cooperative agreements,
technology investment agreements, and certain othe r transactions) with Boeing, the stated purpose of
which was "to transfer a thing of value to the recipient ... instead of acquiring property or services for
the direct benefit or use of the United States Government". In this Report, we use the expression
"DOD R&D contracts" to mean DOD's procurement contracts with Boeing under the 23 aeronautics
R&D programmes at issue, "agreements" to mean DOD assistance instruments with Boeing under the
23 aeronautics R&D programmes at issue, and "DOD R&D contracts and agreements" to cover both.
7.1116 The scope of the European Communities' clai m relating to DOD R&D measures is clear: it
challenges the payments (and access to facilities) provided to Boeing through R&D contracts and
agreements entered into under the 23 programmes identified in the European Communities' panel
request. The scope of the European Communities claim is relatively narrow in several respects.

2660 The European Communities challenges funding provided to Boeing under 13 "general aircraft"
programmes, and under 10 "military aircraft" programmes . However, of the 10 military aircraft programmes
identified in the European Communities' Panel Request (WT/DS353/2), and para. 677 of its first written
submission, only five are discussed in CRA International, U.S. Department of Defense (DoD) Research,
Development, Test and Evaluation (RDT&E) Funding Support to The Boeing Company for Dual-Use Aircraft
R&D, November 2006, Exhibit EC-7. CRA's estimate of the funding provided to Boeing under the DOD
military aircraft programmes, adopted by the European Communities in its submissions, is limited to these five
military aircraft programmes. At footnote 16 of its report, CRA indicates that:

"Other RDT&E PEs related to military aircraft, such as the F-22, B-2, Comanche, A-6, and
AV-8B, likely also contributed dual-use LCA technologies to Boeing, but CRA was unable to
find adequate publicly available information to allow it to provide a high-fidelity estimate of
the amount of dual-use aircraft-related RDT&E funding to Boeing from these PEs. Thus, it
chose to focus its analysis on the V-22 / CV-22, F/A-18, JSF and C-17."

The European Communities has also "focused" its analysis on these five military aircraft programmes:
following a separate discussion of each of the five milita ry aircraft programmes analysed in the CRA report, the
European Communities briefly discusses "other military aircraft" programmes at paras. 721-723 of its first
written submission.

BCI deleted, as indicated [***]

7.1117 First, the European Communities does not challenge the RDT&E Program as a whole.
Rather, it challenges only certain funding provided to Boeing under the 23 RDT&E programmes at
issue. In addition, the European Communities do es not challenge all of the funding that Boeing
received under these 23 programmes. Rather, it challe nges only the subset of funding that is, in the
European Communities' view, related to "dual use" technologies.
7.1118 Second, the European Communities' challenge is limited to the "payments" (and, as discussed
further below, access to government "facilities") th at DOD provided to Boeing for the purpose of
performing R&D – it does not challenge DOD's purchase of military aircraft from Boeing. In its
panel request, the European Communities does refer to DOD "entering into procurement contracts,
including those for the purchase of goods, from th e US LCA industry for more than adequate
remuneration ...".2661 However, the European Communities did not subsequently advance arguments
or evidence on DOD's purchases of aircraft or other goods. 2662 For example, the European
Communities has not provided the Panel with any information regarding the price that DOD paid
Boeing for the articles specified in this item of its panel request.
7.1119 Third, the scope of the European Communiti es claim is clearly limited to payments (and
access to facilities) provided to Boeing – as distinguished from a broader challenge to the DOD R&D
programmes per se , and as distinguished from a challenge to a subsidy provided to a broader
industry, e.g. the U.S. military aircraft industry. This is made clear by many aspects of the
European Communities' argumentation, including but not limited to the methodology followed by
CRA in its 96-page report that seeks to estimate "the amount of Research, Development, Test and
Evaluation ("RDT&E") funding received by The Boeing Company ("Boeing") from the United States
Department of Defense ("DOD") that can be cons idered relevant to both military and commercial
aircraft (i.e. "dual-use" RDT&E)".
2663

2661 WT/DS353/2, p. 11 ("entering into procurement contracts, including those for the purchase of
goods, from the US LCA industry for more than adequate remuneration, including in particular but not limited
to the US Air Force contract with Bo eing for the purchase of certain spar e parts for its Airborne Warning and
Control System (AWACS) aircraft, the National Polar- orbiting Operational Environmental Satellite System-
Conical Microwave Imager Sensor , the C-22 Replacement Program (C-40), the KC-135 Programmed
Depot Maintenance, the C-40 Lease and Purchase Program, the C-130 avionics modernisation upgrade program,
the C-17 H22 contract (Boeing BC-17X), the US Navy contract with Boeing for the production and maintenance
of 108 civil B-737 and their conversion into long-r ange submarine hunter Multi-Mission Aircraft, the Missile
Defense Agency's Airborne Laser (ABL) Program, and the Army's Comanche Program").
2662 In its submissions, the European Communities makes certain observations and assertions related to
DOD's purchases of aircraft from Boeing. However, the European Communities does not advance any claim in
this regard. See e.g. European Communities' first writte n submission, paras. 658-662, discussing the "close and
cosy relationship between the DOD and Boeing".
2663 CRA International, U.S. Department of Defense (DoD) Research, Development, Test and
Evaluation (RDT&E) Funding Support to The Boeing Company for Dual-Use Aircraft R&D, November 2006,
Exhibit EC-7, p. 1.

BCI deleted, as indicated [***]

7.1120 Finally, whereas the scope of the European Communities' claim relating to NASA R&D
covers NASA "facilities, equipment and employees", the scope of the European Communities' claim
relating to DOD only covers DOD "facilities". As with NASA aeronautics R&D, the
European Communities has advanced arguments regarding DOD "facilities, equipment and
employees".
2664 Unlike NASA R&D, however, the Eur opean Communities' panel request only
identifies DOD "facilities", and not DOD "equipment" and/or "employees". To illustrate the
differences, we provide a side-by-side co mparison of the pertinent items of the
European Communities' panel request regarding NASA and DOD R&D:
"2. NASA Subsidies

b. providing the services of NASA
employees, facilities, and equipment to
support the R&D programmes listed above and
paying salaries, personnel costs, and other
institutional support, thereby providing
valuable services to the US LCA industry on
terms more favourable than available on the
market or not at arm's length

d. allowing the US LCA industry to use
the research, test and evaluation facilities
owned by the US Government, including
NASA wind tunnels, in particular the Langley
Research Center."

"3. Department of Defense Subsidies

b. allowing the US LCA industry to use
research, test and evaluation facilities owned
by the US Government, including the Major
Range Test Facility Bases"

7.1121 Article 6.2 of the DSU provides that a panel request must " identify the specific measures at
issue and provide a brief summary of the legal basis of the complaint sufficient to present the problem
clearly". To the extent that a measure is not iden tified in the complaining party's panel request, that
measure falls outside of the scope of the panel's terms of reference.
7.1122 In response to a question from the Panel, the European Communities has clarified that it does
not challenge DOD allowing Boeing to "participate" in research programmes as a distinct measure.
2665
With respect to DOD "enabling the US LCA industry to exploit the results of such research, by means
including but not limited to the foregoing or waiving of valuable patent rights, and the granting of
exclusive or early access to data, trade secrets and other knowledge resulting from government funded
research", the European Communities addresses these measures primarily in the sections of its
submissions regarding "NASA/DOD Intellectual Property Rights Transfers/Waivers".2666
7.1123 We discuss the challenged measures in greater detail in the context of our evaluation of
whether these measures constitute sp ecific subsidies within the meaning of Articles 1 and 2 of the
SCM Agreement, and in the context of estimatin g the amount of any subsidy to Boeing's LCA
division.

2664 European Communities' first written submission, paras. 762, 895 and 896-901;
European Communities' second written submission, paras. 496-510.
2665 European Communities' response to question 149.
2666 European Communities' response to question 215.

BCI deleted, as indicated [***]

(c) Whether a subsidy exists within the meaning of Article 1 of the SCM Agreement
7.1124 In this section, we address whether the paym ents and access to facilities that DOD provided
to Boeing under the 23 RDT&E programmes at issu e constitute a subsidy within the meaning of
Article 1 of the SCM Agreement. We begin by addressing the question of whether the transactions
involve a financial contribution c overed by Article 1.1(a)(1) of the SCM Agreement. We have
already concluded that transactions properly charact erized as "purchases of services" are excluded
from the scope of Article 1.1(a)(1).
2667 Thus, the main issue addressed here is whether DOD's R&D
contracts and agreements with Boeing are in fact properly characterized as "purchases of services". If
we find that the challenge measures are not prope rly characterized as "purchases of services" and
therefore provide financial contributions to Boei ng, we will then address the question of whether
those financial contributions are provided on terms that confer a benefit within the meaning of
Article 1.1(b) of the SCM Agreement.
(i) Whether there is a financial contribution with in the meaning of Article 1.1(a)(1) of the
SCM Agreement
Arguments of the European Communities
7.1125 In the introduction to the section of its first written submission addressing NASA, DOD and
DOC aeronautics R&D, the European Communities asserts in general terms that "NASA and DOD
generally provide funding for LCA-related R&D through what they call 'contracts', but what are in
reality grants to Boeing/MD for LCA-related R&D expenses".
2668 In the section of its first written
submission addressing DOD R&D in particular, the European Communities argues that DOD, directly
transfers funds in the form of "grants" to Boei ng to support dual-use aeronautics research, and that
this "direct R&D funding" constitutes a financial contribution within the meaning of
Article 1.1(a)(1)(i) of the SCM Agreement.2669
7.1126 The European Communities argues that DOD al so dedicates federal personnel and research
facilities to support the RDT&E programmes, and th at the Government's provision of these goods and
services constitutes a financial contribution within the meaning of Article 1.1(a)(1)(iii) of the
SCM Agreement.2670
7.1127 In its second written submission, the European Communities responds to the United States'
argument that DOD's RDT&E contracts with Boeing constitute "purchases of services" and therefore
are not financial contributions within the meaning of Article 1.1(a)(1) of the SCM Agreement. The
European Communities argues that it would circumvent the object and purpose of the
SCM Agreement if DOD RDT&E contracts were considered to be entirely excluded from the
definition of financial contribution in Article 1.1(a)(1) of the SCM Agreement based on the
United States labelling them as "purchases of ser vices". The European Communities argues that
DOD RDT&E contracts have helped Boeing develop t echnology that it utilizes toward its LCA. The
European Communities argues that DOD RDT&E cont racts are not properly characterised as
"purchases of services" for the reasons set out in its responses to questions 15, 16, 19 and 20.
2671 The
European Communities also argues that DOD's transfers of funds to Boeing for RDT&E "in fact
relate to DOD's purchase of goods" – i.e. the military aircraft and other defence systems that DOD
ultimately procures".2672 The European Communities explains th at while a commercial customer of a

2667 See above, para. 7.970 of this Report.
2668 European Communities' first written submission, para. 457.
2669 European Communities' first written submission, para. 762.
2670 European Communities' first written submission, para. 762.
2671 European Communities' second written submission, para. 457.
2672 European Communities' second written submission, para. 454 (emphasis added).

BCI deleted, as indicated [***]

good would pay for R&D costs and acquisition cost s through one purchase price, DOD pays these
costs separately by first transferring funds for R&D through its RDT&E budgets, and then procuring a
related aircraft or defence system through its procurement budgets.2673
7.1128 In its response to Panel question 15, the European Communities argues that DOD RDT&E
contracts are not properly characterized as "purchases of services" for four reasons. First, because
"DOD RDT&E contracts do not ultimately aim at the acquisition of a service for the direct benefit and
own use of the government". Rather, the European Communities argues, "the ultimate purpose of
DOD RDT&E is not the purchase of services, but rath er the purchase of goods – i.e. military aircraft
and other defence systems". 2674 Second, because "DOD RDT&E contracts do not contain the typical
elements of a purchase". In this regard, the Eu ropean Communities argues among other things that
under the cooperative agreements entered into be tween Boeing, "DOD does not receive the entire
fruits of the labour generated with DOD's resources pursuant to these agreements. ... Boeing does not
make a profit pursuant to these agreements, while the seller in a typical 'purchase' transaction would
undoubtedly expect to make a profit." 2675 Third, because "DOD RDT&E contracts do not exclusively
affect trade in services". In this regard, th e European Communities again argues that the DOD
RDT&E contracts "ultimately aim at the purchase of military aircraft and other defence systems,
necessarily implying the production of goods" and that "the transactions are directly related to the
manufacture of goods, affect trade in goods, and therefore cannot properly be characterised as
'purchases of services'".2676 Finally, because "Boeing is not a genuine provider of LCA-related R&D
services". In this regard, the European Commun ities argues that "Boeing does not offer such R&D
services to anybody else but NASA and DOD" and that "Boeing has not advertised itself as a service
provider for LCA-related R&D in the market".2677
7.1129 With respect to the alleged provision of go ods and services, the European Communities
responds to the United States' argument that the European Communities has failed to provide any
specific evidence that DOD grants Boeing access to DOD facilities, equipment and employees. In its
second written submission, the European Communities points to several contracts and agreements
through which Boeing received the "rent-free use of facilities".2678
Arguments of the United States
7.1130 In its first written submission, the United St ates argues that the contracts submitted by the
European Communities "show conclusively that under these instruments, DoD purchased research
services from Boeing". The United States argues that the further contracts and agreements included
among the U.S. exhibits support the same conclusion. According to the United States, research is a
service, which accordingly makes these contracts purch ases of services. Purchases of services are not
financial contributions for purposes of Article 1.1( a)(1). Therefore, the only evidence on the Panel
record regarding the nature of these transactions estab lishes that they are not a financial contribution,
and that no subsidy exists. The United States subm its that the Panel's review of the entire issue
should end there.2679
7.1131 The United States observes that " {u}nder U.S. government contracting law, some of these
instruments are formally termed 'contracts,' and othe rs 'other transactions', 'cooperative agreements',

2673 European Communities' second written submission, para. 455.
2674 European Communities' response to question 15(c), para. 62.
2675 European Communities' response to question 15(c), and European Communities' comments on
United States' response to question 20(a), para. 75.
2676 European Communities' response to question 15(c), para. 66.
2677 European Communities' response to question 15(c), para. 67.
2678 European Communities' second written submission, para. 500.
2679 United States' first written submission, para. 90.

BCI deleted, as indicated [***]

or 'technology investment agreements'". 2680 The United States notes that some of the "contracts"
submitted by the European Communities are "procure ment contracts", and some are "cooperative
agreements, technology investment agreements, or other transactions". 2681 The United States
acknowledges that contracts are used only when the "p rincipal purpose" is the acquisition of supplies
or services for the "direct benefit or use" of the federal government, and that an "agreement" will
"often have a clause specifying that its principal purpose is not the acquisition of goods or services for
direct use by the U.S. government". However, the United States asserts that such a clause only
"reflects that the contract does not have as its immediate goal the development of a particular
technology for a particular weapon system" and "is not meant to reflect on the nature of the effort by
the private party". The United States argues that "in any event, the Appellate Body has found that
"municipal law classifications are not determinative" as to whether a measure is a financial
contribution.
2682
7.1132 The United States then sets out some of th e similarities and differences between these
two different types of transactions. 2683 The United States concludes that in respect of all of the
contracts and agreements, "it is clear that the government is not providing a grant to the contractor and
is, instead, engaging the contractor to perform resear ch of interest to the government for government
purposes".2684 The United States argues that "Research a nd Development" is widely recognized as a
"service".2685
7.1133 In its second written submission, the United States reiterates that "the contracts make clear
that what DOD purchased was Boeing's RDT&E services, a transaction that is not a financial
contribution within the meaning of Article 1.1 of the SCM Agreement".
2686 It then responds to several
arguments advanced by the European Communities in its oral statement at the first meeting with the
Panel. First, the United States responds to the European Communities' argument that the contracts are
not properly characterized as purchases of services because DOD R&D "benefits Boeing's
commercial division".2687 The United States responds that the European Communities' theory mixes
two concepts that are separate under the SCM Agreem ent – financial contribution and benefit. The
identification of a financial contribution under Article 1.1(a)(1) depends on the type of the transaction
that allegedly confers a subsidy. The ques tion of whether there is a benefit comes only after the
establishment of a financial contribution. Thus, th e EC's assertion that technologies researched under
some contracts have civil application is irrelevant to a determination of whether the contracts convey
a financial contribution in the first place.2688
7.1134 Second, the United States responds to the Europ ean Communities' referenc e to the fact that
some of the contracts and agreements contain statem ents to the effect that "the principal purpose of
this agreement is for the government to support and stimulate the recipient to provide reasonable
efforts in advanced research and technology development and not for the acquisition of property or
services for the direct benefit or use of the government ".2689 The United States responds by noting,

2680 United States' first written submission, footnote 75.
2681 United States' first written submission, para. 91.
2682 United States' first written submission, footnote 100 (citing Appellate Body Report, US – Softwood
Lumber IV, para. 56.)
2683 United States' first written submission, paras. 91-92 and 96-97.
2684 United States' first written submission, para. 92.
2685 United States' first written submission, para. 95.
2686 United States' second written submission, para. 31.
2687 European Communities' oral statement at the first meeting with the Panel, para. 12.
2688 United States' second written submission, para. 32.
2689 European Communities' non-confidential oral statement at the first meeting with the Panel, para. 70
(emphasis original), citing F33615-95-2-5019 with McDonnell Douglas regarding Affordable Tooling for Rapid
Prototyping and Limited Production of Composite Structures, 1 February 1995, Exhibit EC-512, Article 2.C.

BCI deleted, as indicated [***]

among other things, that " {t}he document cited by the EC (and ot hers containing similar statements)
are cooperative agreements, technology investment agreements, or 'other transactions,'...".2690
7.1135 Finally, the United States responds to the European Communities' argument that "DoD's
ultimate aim is to purchase goods – i.e. the military aircraft and other defense systems eventually
purchased by DoD". 2691 The United States argues that the ultimate aim of a purchase "does not
change the nature of the item purchased", and provides the examples of a manufacturer hiring an
advertising agency to create a marketing campaign to sell a new good (which does not make the
advertising service into a good), and the example of a company buying picks and shovels for a
contractor to use in landscaping (which does not ma ke the picks and shovels into a service). The
United States concludes that the "R&D services cont racts are discrete transactions that cannot be
equated with any goods that may result".
2692
Evaluation by the Panel
7.1136 It is not in dispute that DOD made paymen ts to Boeing and granted Boeing access to DOD
facilities pursuant to aeronautics R&D contracts and agreements.2693 Having concluded that purchases
of services are excluded from the scope of Article 1.1(a)(1) 2694, the question before the Panel is
whether DOD R&D contracts and agreements are properly characterized as "purchases of services".
As the Appellate Body has recognized, " {a}n evaluation of the existence of a financial contribution
involves consideration of the nature of the transaction through which something of economic value is
transferred by a government". 2695 In this case, the Panel's task is to reach a conclusion regarding the
nature of DOD's aeronautics R&D contracts and agreements with Boeing.
7.1137 For the reasons already given above 2696, the Panel considers that whether or not DOD's R&D
contracts and agreements with Boeing are properly characterized as a "purchase of services" depends
on the nature of the work that Boeing was required to perfo rm under the contracts, and more
specifically, whether the R&D that Boeing was required to conduct was principally for its own benefit
and use, or whether it was principally for the be nefit and use of the U.S. Government (or unrelated
third parties ). As with its analysis of NASA aeronau tics R&D, the Panel considers that it should
review all of the evidence that sheds light on th is issue. Again, the Panel sees no reason why, for
example, the type of instrument and so-calle d "formal" features of the transaction would be
disregarded if they shed light on the nature of the R&D activities required of Boeing under the

2690 United States' second written submission, para. 34.
2691 European Communities' non-confidential oral statement at the first meeting with the Panel, para. 70
(emphasis added).
2692 United States' second written submission, para. 35.
2693 In its first written submission, the United States argues that the European Communities failed to
provide any specific evidence that DOD grants Boeing access to DOD facilities. (United States' first written
submission, para. 177.) However, the United States does not actually deny that DOD does so, and even refers
the Panel to several such instances under Agreements F33615-97-2-3400 and F33615-98-3-5104. (United States'
first written submission, para. 179.) In its second written submission, the European Communities points to
several contracts and agreements through which Bo eing received the "rent-free use of facilities".
(European Communities' second written submission, para. 500, citing: F33615-94-C-3400: Extended Life Tire
(EXLITE) Batch Queue Capability and Grid Generation Enhancements for 3-Dimensional Design Optimization,
Exhibit US-622 (HSBI), clause 15; F33615-98-2-5113: Structural Repair of Aging Aircraft (1 of 2),
Exhibit US-636 (HSBI), Article 32; F33615-96-C-1958 : Low Cost Insertion of Commercial Technology into
Legacy Aircraft, Exhibit US-618 (HSBI), clause 16.)
2694 See above, paras. 7.953-7.970
2695 Appellate Body Report, US – Softwood Lumber IV , para. 52 (emphasis added). The "nature" of
something is generally defined as the basic or inhe rent features, character or quality of something; Oxford
Dictionary of English, 2ed (rev), 2005, p. 1172.
2696 See above, para. 7.978.

BCI deleted, as indicated [***]

contracts and agreements; there is likewise no reaso n why, for example, evid ence of the purpose and
motives of the programmes under which they were entered into would be disregarded if they shed
light on the question on the nature of the R&D ac tivities required of Boeing under the contracts and
agreements. In both cases, they are not extran eous features divorced from the "terms" of the
transactions; rather, they could be central to understanding the core term of the transaction. That is,
this is evidence that could be very helpful in unde rstanding whether the nature of the work performed
under Boeing's R&D contracts and agreements with DOD (the core terms of the transactions) was
principally for the U.S. Government's benefit or us e (and/or for the benefit or use of unrelated third
parties), or rather for Boeing's own benefit or use. That is the question that needs to be answered for
the purpose of determining whether the transac tions are properly characterized as purchases of
services.
7.1138 More specifically, the Panel will consider, inter alia , the legislation authorizing the
programmes at issue, the types of instruments entered into between DOD and Boeing, whether DOD
has any demonstrable use for the R&D perform ed under these programmes, the allocation of
intellectual property rights under these transactions, and whether the transactions at issue had the
typical elements of a "purchase of services".
7.1139 When considered in its totality, the eviden ce relating to DOD aeronautics R&D, some of
which is individually discussed belo w, leads to the conclusion that some of the work that Boeing
performed under its aeronautics R&D contracts and agreements with DOD was principally for its own
benefit or use, rather than for the benefit or use of the U.S. Government (or unrelated third parties),
and that some of the work that Boeing performed under its aeronautics R&D contracts and agreements
with DOD was principally for the be nefit or use of the U.S. Governme nt (or unrelated third parties).
A transaction in which the work performed is principa lly for the benefit and use of the "seller" cannot
properly be characterized as a "purchase of services". Accordingly, the Panel concludes that some of
DOD's R&D contracts and agreements with Boeing are not properly characterized as "purchases of
services", whereas others are. Thus, the Panel re jects the European Communities' position that none
of the DOD R&D contracts and agreements at i ssue are properly characterized as "purchases of
services", and we reject the United States' position that all of the DOD R&D contracts and agreements
at issue are properly characterized as purchases of services.
7.1140 We begin with the legislation authorizing the programmes and transactions at issue.
10 U.S.C. § 2358
2697 is the general statutory authority for all research and development (R&D) in
which DOD engages by "contract", "grant", or "cooperative agreement".2698 Section 2358 states:
"§ 2358. Research and development projects
(a) Authority.— The Secretary of Defense or the Secretary of a military
department may engage in basic research, applied research, advanced research, and
development projects that—
(1) are necessary to the responsibilities of such Secretary's department in
the field of research and development; and
 (2) either —

2697 10 U.S.C. (Armed Forces), Sub-Part A (Gener al Military Law), Part IV (Service, Supply and
Procurement), Chapter 139 (Research and Development), § 2358, Exhibit US-1205.
2698 See United States' response to question 20(a). The United States explains that 10 U.S.C. § 2371 is
the authority for R&D projects using "other transactions", that is, transactions other than contracts, cooperative
agreements, and grants.

BCI deleted, as indicated [***]

 (A) relate to weapon systems and other military needs; or
 (B) are of potential interest to the Department of Defense.
(b) Authorized Means.--The Secretary of Defense or the Secretary of a military
department may perform research and development projects—
(1) by contract, cooperative agreem ent, or grant, in accordance with
chapter 63 of title 31;
(2) through one or more military departments;
(3) by using employees and consultants of the Department of Defense; or
(4) by mutual agreement with the head of any other department or
agency of the Federal Government.
(c) Requirement of Potential Depa rtment of Defense Interest.--Funds
appropriated to the Department of Defense or to a military department may not be
used to finance any research project or st udy unless the project or study is, in the
opinion of the Secretary of Defense or the Secretary of that military department,
respectively, of potential interest to the De partment of Defense or to such military
department, respectively.
(d) Additional Provisions Applicable to Cooperative Agreements.-- Additional
authorities, conditions, and requirements re lating to certain cooperative agreements
authorized by this section are provided in sections 2371 and 2371a of this title."
7.1141 Thus, section 2358 gives DOD authority to fund cer tain kinds of R&D (§ 2358(a)), identifies
"contracts", "cooperative agreements", and "grant s" as the different means through which DOD can
generally provide funding to perform R&D (§ 2358(b)), requires that any R&D funded be of
"potential interest" to DOD (§ 2358(c)), and identifi es the special and additional rules that apply to
R&D funded through the means of "cooperative ag reements" (§ 2358(d)) as distinguished from
"contracts". Sections 2371 and 2371a, referenced a bove in § 2358(d), authorized the use of certain
"other transactions".
7.1142 We turn now to the different types of instru ments entered into between DOD and Boeing.
The DOD Grant and Agreement Regulations are set fo rth in Sub-Chapter C (Parts 21 to 37) of 32
C.F.R. Part 21 of the DOD Grant and Agreemen t Regulations sets forth general policies and
procedures related to "assistance and certain other nonprocurement instruments" that are subject to the
Grant and Agreement Regulations (§ 21.100(b)). These "assistance" and "other nonprocurement
instruments" are defined to include "grants, c ooperative agreements, and technology investment
agreements", as well as certain other "nonprocuremen t instruments" (§ 21.205(a) and (b)). Subpart F
of Chapter 21 defines certain terms:
"§ 21.605 Acquisition
The acquiring (by purchase, lease, or barter) of property or services for the direct
benefit or use of the United States Government (see more detailed definition at 48
CFR 2.101). In accordance with 31 U.S.C. 6303, procurement contracts are the
appropriate legal instruments for acquiring such property or services.

BCI deleted, as indicated [***]

§ 21.615 Assistance.
The transfer of a thing of value to a recipient to carry out a public purpose of support
or stimulation authorized by a law of the United States ( see 31 U.S.C. 6101(3)).
Grants, cooperative agreements, and technology investment agreements are examples
of legal instruments used to provide assistance.

§ 21.640 Cooperative agreement.
A legal instrument which, consistent with 31 U.S.C. 6305, is used to enter into the
same kind of relationship as a grant (see definition "grant"), except that substantial
involvement is expected between the Depart ment of Defense and the recipient when
carrying out the activity contemplated by the cooperative agreement. The term does
not include "cooperative research and deve lopment agreements" as defined in 15
U.S.C. 3710a.
§ 21.670 Procurement contract.
A legal instrument which, consistent with 31 U.S.C. 6303, reflects a relationship
between the Federal Government and a Stat e, a local government, or other recipient
when the principal purpose of the instrument is to acquire property or services for the
direct benefit or use of the Federal Government. See the more detailed definition for
contract at 48 CFR 2.101."
2699
(emphasis added)
7.1143 32 CFR part 37 (i.e. a part of the DOD Grant and Agreement Regulations ) is entitled
"Technology investment agreements". § 37.205 prov ides that a TIA may be used where the "grants
officer" concludes:
"... that the principal purpose of the project is stimulation or support of research ( i.e.,
assistance), rather than acquiring goods or services for the benefit of the
Government ( i.e., acquisition)". (emphasis added)
7.1144 §22.2052700 of the DOD Grant and Agreement Regulations ("Distinguishing assistance from
procurement") provides, in accordance with 31 U.S. C. chapter 63, that before using a "grant or
cooperative agreement", the "grants officer" must make a positive judgment that an "assistance
instrument", rather than a procurement contract, is the appropriate instrument. More specifically:
"the grants officer must judge that the principal purpose of the activity to be carried
out under the instrument is to stimulate or support a public purpose (i.e., to provide
assistance), rather than acquisition (i.e., to acquire goods and services for the direct
benefit of the United States Government). If the principal purpose is acquisition, then
the grants officer shall judge that a procurement contract is the appropriate
instrument" (§22.205(a)(1)). (emphasis added)
7.1145 All of the instruments submitted to the Panel cl early indicate, on the title page, whether they
are a "Contract", a "Cooperative Agreement", a "Tec hnology Investment Agreement", or an "Other

2699 The text of 48 CFR 2.101 has already been reproduced above.
2700 32 CFR § 22.205, Exhibit US-22.

BCI deleted, as indicated [***]

Transaction". Some of the DOD cooperative agreements with Boeing submitted by the
European Communities contain a clause within the agreement itself that explicitly states:
"This agreement is a 'Cooperative Agreement' under 10 USC 2358 (Pursuant to
10 USC2371). The parties agree that the principal purpose of this agreement is for the
government to support and stimulate the recipient to provide reasonable efforts in
advanced research and technology deve lopment and not for the acquisition of
property or services for the direct benefit or use of the government. The Federal
Acquisition Regulation (FAR) and Depa rtment of Defense FAR Supplement
(DFARS) apply only as specifically referen ced herein. This is not a procurement
contract."
 (see F33615-95-2-5019 (EC-512) and F33615-96-2-5051 (EC-513))
7.1146 All of the cooperative agreements, TIAs, a nd "other transactions" submitted by the
European Communities repeatedly and consistently use the terminology of "Grants Officer" and
"Grants Administration Office". All of these instruments (like the corresponding regulations above)
refer to the other party as the "recipient", and not a "contractor".
7.1147 We turn now to an examination of whethe r DOD has any demonstrable use for the R&D
performed under the 23 programmes at issue. Unlike NASA aeronautics R&D programmes, the
declared purposes of the DOD programmes at issue do not generally demonstrate that DOD aimed to
transfer technology to Boeing and the wider U.S. ai rcraft industry. Generally, the purpose of these
programmes was to conduct R&D aimed at designi ng more advanced weapons or other defense
systems or to reduce the cost of such systems.
2701 The more specific purpose of each of these
programmes is set out below, drawn from the "Mi ssion Description" statement contained in the
programme budgets:

2701 United States' first written submission, para. 72. Both of these aims – technological improvement,
and cost reduction – are readily apparent and feature prominently in DOD's annual budgets, reviewed below,
describing the nature of the research conducted under the RDT&E Program Elements at issue. Regarding the
cost reduction aim, see e.g. Defense Research Sciences: "... leading to cost-effective development and safe and
reliable operation of superior weapons and defensive systems"; Materials: "... advanced materials and
processes to reduce life cycle costs and improve performance, affordability, supportability, reliability, and
survivability of current and future ... . Develops materials technologies for aircraft, spacecraft, and missiles with
improved affordability, maintainability, and enhanced performance of current and future Air Force systems.
Advanced thermal protection and carbon-carbon (C-C) composites materials are developed that are
affordable ..."; Aerospace Flight Dynamics/A erospace Vehicle Technologies : "... to reduce life cycle costs
and improve the performance of exis ting and future manned and unma nned aerospace vehicles, and the
maintenance and survivability of air bases. The payoff s from these technology programs include: decreased
vulnerability, and increased affordability ..."; Aerospace Propulsion : "... Power conditioning, thermal
management, and power source improvements will significantly enhance reliability, reduce weight, and lower
life cycle costs "; Aerospace Avionics/Aerospace Sensors: "... will also reduce life cycle costs , facilitate
affordable modernization of aging and future aerospace platforms ..."; Dual Use Science & Technology :
"... stimulate the development of dual-use technol ogies that will provide greater access to commercial
technologies, and will result in affordable defense systems…"; Advanced Materials for Weapons Systems :
"Reducing risk in materials technology improves the affordability, supportability, reliability, survivability, and
operational performance of current and future warfighting systems"; Flight Vehicle Technology :
"... technologies for improved performance, reliability , maintainability, and suppor tability while increasing
affordability …"; Aerospace Structures/Aerosp ace Technology Dev/Demo : "... demonstrates affordable
aerospace vehicle structures by utilizing innovative metallic and composite structures technologies to reduce the
cost of airframe ownership …"; Aerospace Propulsion and Power Technology : "… develops and
demonstrates affordable turbine engine high pressure core components …"; Flight Vehicle Technology
Integration: "... provides proven aerospace vehicle technol ogies for allweather, day or night operations, and
technologies for improved affordability"; Industrial Preparedness/Manufacturing Technology :
"... ManTech provides cost reduction processes and practices and new manufacturing capabilities applicable to
existing as well as new weapon systems under development" (emphasis added).

BCI deleted, as indicated [***]

• Defense Research Sciences: "This Basic Research program, managed by the Air Force
Office of Scientific Research (AFOSR), suppor ts Air Force research efforts comprised of in-
house investigations in Air Force laboratori es and extramural activities in academia and
industry. The program element funds broad-based scientific and engineering basic research in
technologies critical to the Air Force mission. These technologies include aerospace
structures, aerodynamics, materials, propulsion, power, electronics, computer science, directed
energy, conventional weapons, life sciences, and atmospheric and space sciences".2702

• Materials: "This Applied Research program is the primary source of advanced materials and
processes to reduce life cycle costs and improve performance, affordability, supportability,
reliability, and survivability of current and future Air Force systems. Structural, propulsion,
and sub-systems materials and processes are de veloped for aircraft, missile, space, satellite,
and launch systems applications. Electronic a nd optical, advanced electromagnetic, and laser
protection materials and processes are developed for application in Air Force aircraft, missile,
space, and personnel protection systems. A dvanced nondestructive materials evaluation
methods, materials design data, pollution preventi on materials, materials failure analysis, and
materials repair methods are developed to improve the sustainment of Air Force systems for
the current and future warfighters".
2703

• Aerospace Flight Dynamics/Ae rospace Vehicle Technologies : "This Applied Research
program determines the technical feasibility of aerospace vehicle technologies in
aeromechanics, structures, flight control, air vehicle-pilot interface, vehicle subsystems, and
air base technologies to reduce life cycle cost s and improve the performance of existing and
future manned and unmanned aeros pace vehicles, and the maintenance and survivability of air
bases. The payoffs from these technology progr ams include: decreased vulnerability, and
increased affordability, reliability, maintainabilit y, and supportability for aerospace vehicles
and subsystems; improved air base operations ; and safe aerospace vehicle allweather
operations".
2704

• Aerospace Propulsion : "This Applied Research program develops airbreathing propulsion
and aerospace power technologies. The prime ar eas of focus are turbine engines, dual-mode
ramjets, combined cycle engines, fuels, l ubricants, and aerospace power technologies. …
Power system technologies are focused to eliminate troublesome, centralized hydraulic
systems by replacement with highly reliable el ectric systems. Power conditioning, thermal
management, and power source improvements will significantly enhance reliability, reduce
weight, and lower life cycle costs".2705

• Aerospace Avionics/Aerospace Sensors : "This Applied Research program develops the
technology base for Air Force aerospace sensors . Advances in aerospace sensors are required
to increase combat effectiveness by prov iding "anytime, anywhere" surveillance,
reconnaissance, precision targeting, and electr onic warfare capabilities for ground, air, and
space platforms. Advances in aerospace sensor technology will also reduce life cycle costs,
facilitate affordable modernization of aging and future aerospace platforms, and provide
protection against emerging hostile threat systems. Meeting these needs necessitates
simultaneous advances in multiple, interrelated disciplines including: airborne and spaceborne
sensors (e.g. infrared, radar, etc.); multi -function high-power electronic devices; target

2702 Defense Research Sciences Budgets for FY 1993-FY 2007 (PE# 0601102F), Exhibit EC-419.
2703 Materials Budgets for FY 1993-FY 2007 (PE #0602102F), Exhibit EC-420.
2704 Aerospace Flight Dynamics/Aerospace Vehicl e Technologies Budgets for FY 1993-FY 2007
(PE# 0602201F), Exhibit EC-421.
2705 Aerospace Propulsion Budgets for FY 1993-FY 2007 (PE# 0602203F), Exhibit EC-422.

BCI deleted, as indicated [***]

detection, classification, and recognition techniqu es; fire control; sensor fusion methods;
communication and navigation subsystems; and electronic warfare technologies".2706

• Dual Use Science & Technology : "This program allows the Air Force to leverage industry
investments in advanced technologies that are mutually advantageous to both the Air Force
and industry. One of the program's objectives is to establish a tool for the Air Force to
stimulate the development of dual-use technol ogies that will provide greater access to
commercial technologies, and will result in a ffordable defense systems that maintain
battlefield superiority. A key component of th e program is the costsharing requirement from
both industry and the Air Force, which affirm s commitment to the development effort.
Specific projects are determined through annual competitive solicitation(s). A second
objective is to use FY 1997 Defense Author ization Act Section 804, Other Transactions
Authority, as part of the Dual Use S&T program to educate the Air Force S&T workforce in
non-traditional or commercial contracting pr actices. Technology development areas
considered include advanced materials and ma nufacturing, affordable sensors, advanced
propulsion, power and fuel efficiency, information and communications systems, and weapons
systems sustainment".2707

• Advanced Materials for Weapons Systems : "This Advanced Technology Development
program demonstrates materials technology opti ons for application into Air Force weapon
systems. Developing materials technologies for the broadband laser protection of aircrews and
sensors from a variety of threats is a high prio rity of the Air Force. The Non-Destructive
Inspection/Evaluation (NDI/E) techniques for fighter, bomber, and transport aircraft are
critical to the logistics centers as well as th e operational fleet as the service lives of these
systems increase. This program provides criti cal data for prospective users to make
engineering decisions on both structural and non-structural materials for air and space.
Reducing risk in materials technology improv es the affordability, supportability, reliability,
survivability, and operational performance of current and future warfighting systems".
2708

• Flight Vehicle Technology : "This Advanced Technology Development program develops
and demonstrates advanced aerospace vehicle s ubsystems, aerodynamic/flight controls, and
vehicle-pilot interface technologies for impr oved aerospace vehicle performance, decreased
vulnerability, and reduced logistics support. This program also demonstrates technologies for
fixed and bare base assets, including airfield pavements, energy systems, air base survivability,
air base recovery, protective systems, fire protection, and crash rescue".2709

• Aerospace Structures/Aer ospace Technology Dev/Demo : "This Advanced Technology
Development program develops and demonstrates affordable aerospace vehicle structures by
utilizing innovative metallic and composite st ructures technologies to reduce the cost of
airframe ownership. Innovative structural concepts integrate these two types of materials with
design and monitoring techniques to develop and demonstrate solutions and repairs for
corrosion fatigue, multi-site damage fatigue, and other damage to which aging aircraft are
susceptible. The goal of this program is to develop technologies to restore structural integrity,
extend life, and improve survivability of the cu rrent fleet, and future fleet of manned and
unmanned aerospace vehicles. The results are less maintenance intensive, more durable, and
more dependable structures for current and future aerospace systems. This yields lower cost of

2706 Aerospace Avionics/Aerospace Sensors Budgets for FY 1993-FY 2007 (P E# 0602204F), Exhibit
EC-423.
2707 Dual Use Science & Technology Budgets for FY 2000-FY 2007 (PE# 0602805F), Exhibit EC-424.
2708 Advanced Materials for Weapons Systems Budgets for FY 1993-FY 2007 (PE# 0603112F),
Exhibit EC-425.
2709 Flight Vehicle Technology Budgets for FY 1993-FY 2006 (PE# 0603205F), Exhibit EC-426.

BCI deleted, as indicated [***]

ownership (by delaying acquisition and by reduc ing support and maintenance costs), restored
and improved sortie rates (due to durability, damage or threat tolerance, and design for
supportability), and reduced observability (both radar cross section and infrared)".2710

• Aerospace Propulsion and Power Technology : "This Advanced Technology Development
program develops and demonstrates affordable tu rbine engine high pressure core components,
advanced airbreathing engine concepts, high h eat sink and thermally stable fuels, and power
technology for aerospace vehicles".2711

• Flight Vehicle Technology Integration: "This Advanced Technology Development program
integrates and demonstrates advanced flight vehicle technologies that will improve the
performance and supportability of existing and future manned and unmanned aerospace
vehicles. System level integration brings together the aerospace vehicle technologies along
with avionics, propulsion, and weapon systems to flight demonstrate them in a near-realistic
operational environment. Integra tion and flight test demonstrations reduce the risk and time
required to transition technologies into operati onal aircraft. This program provides proven
aerospace vehicle technologies for allweather, day or night operations, and technologies for
improved affordability".2712

• RDT&E for Aging Aircraft : "This program is comprised of multiple efforts which will
transition needed technologies from laborat ory research and commercial technology
development into fieldable tools or capabilities. Projects will target critical needs of the aging
fleet such as corrosion, structural integrit y, and improved nondestructive inspection (NDI)
methods".2713

• Industrial Preparedness/Manufacturing Technology : "The Manufacturing Technology
(ManTech) program is a corporate Air Force program that establishes and demonstrates
advancements in manufacturing process technologies, manufacturing engineering systems, and
industrial practices, and transitions these advancements into weapon systems design,
development, acquisition, and/or sustainment. ManTech provides cost reduction processes and
practices and new manufacturing capabilities applic able to existing as well as new weapon
systems under development. ManTech strives to make superior mission enabling technologies
an affordable life cycle reality by expanding access to a capable, responsible, multi-use
industrial base with efficiencies comparable to world class enterprises".
2714

• V-22/CV-22: "This program element funds the developm ent of a replacement aircraft to meet
the medium lift needs of the United States Marine Corps (USMC) and the special operations
needs of the United States Special Operations Command (USSOCOM). … The CV-22 is a
Special Operations Forces (SOF) variant of th e V-22 vertical lift, multi-mission aircraft. The
CV-22 will provide critical capability to insert, extract, and resupply special operation forces
into denied or sensitive territory, not currently pr ovided by existing aircraft. This aircraft will
be baselined upon the V-22 aircraft (MV-22 conf iguration) with added terrain following radar,
fuel tanks, radios and flare/chaff dispensers, radar warning receiver and jammer, and infrared

2710 Aerospace Structures/Aerospace Technology Dev/ Demo Budgets for FY 1993-FY 2007 (PE#
0603211F), Exhibit EC-427.
2711 Aerospace Propulsion and Powe r Technology Budgets for FY 199 3-FY 2007 (PE# 0603216F),
Exhibit EC-428.
2712 Flight Vehicle Technology Integration Budgets for FY 1993-FY 2003 (PE# 0603245F), Exhibit
EC-429.
2713 RDT&E for Aging Aircraft Budgets for FY 2000-FY 2007 (PE# 0605011F), Exhibit EC-430.
2714 Air Force Industrial Preparedness/Manufacturing Technology Budgets for FY 1993, FY 1996-
FY 2007 (PE# 0708011F for FY 1993, FY 1997-FY 2007; PE# 0603771F for FY 1996), Exhibit EC-431.

BCI deleted, as indicated [***]

countermeasures (CV-22 Block 0 configuration). CV-22 production buys will begin in FY04.
This RDT&E funding is required to continue the design, integration, testing and certification
of CV-22-required GANS/GATM component s for compliance with the GANS/GATM
Capstone Requirements Document (CRD)".2715

• F/A-18 Squadrons : "… The capabilities of the F/A-18 weapon system can be upgraded to
accommodate and incorporate new or enhanced weapons as well as advances in technology to
respond effectively to emerging future threats. Continued development capability is required
to successfully optimize new F/A-18 weapon sy stem capabilities in the Fleet. Additionally,
continued improvements in reliability and main tainability are necessary to ensure maximum
benefit is achieved through reduced cost of ownership and to provide enhanced
availability".2716

• Joint Strike Fighter : "The Joint Strike Fighter (JSF) programme will develop and field an
affordable, highly common family of next gene ration strike fighter aircraft for the USN,
USMC, USAF and allies. Current program emphasi s is on facilitating the evolution of fully
validated and affordable join t operational requirements, and demonstrating cost leveraging
technologies and concepts to lower risk prio r to entering Engineering and Manufacturing
Demonstration (E&MD) in FY 2001. This is a joint program with no executive service. Navy
and Air Force each provide approximately equa l shares of annual funding for the program.
The United Kingdom (UK) is a collaborative partne r in this phase of the program and several
other countries also participate".2717

• C-17: "Airlift provides essential flexibility when responding to contingencies on short notice
anywhere in the world. It is a major elem ent of America's national security strategy and
constitutes the most responsive means of mee ting U.S. mobility requirements. Additional
airlift capability is needed for rapid deployme nt of combat forces in support of national
objectives. Specific tasks associat ed with the airlift mission include deployment, employment
(airland and airdrop), sustaining support, retrogr ade, and combat redeployment. The C-17 can
perform the entire spectrum of airlift missions and is specifically designed to operate
effectively and efficiently in both strategic and theatre environments. The C-17 provides a
vast increase in overall airlift capability necess ary to replace and exceed the capabilities lost
from retiring the aging C-141 fleet from the Air Force inventory. … RDT&E efforts support
producibility enhancements and product improvements".
2718

7.1148 The European Communities does not dispute that, in the case of DOD, the R&D performed is
of some benefit and use to DOD. The foregoing conf irms this. However, of the 13 different "general
aircraft" programmes at issue, it would appear that at least two had the explicit objective of
developing "dual use" R&D. These are: (i) th e Dual Use Applications and Dual Use Science &
Technology Program (PE# 0602805F); and ( ii) the Manufacturing Technology/Industrial
Preparedness Program (PE# 0603771F / 0708011F / 0708011N). In its first written submission, the
European Communities provides a brief overview of all of the programmes at issue, and then
discusses these two particular programmes – "DUS &T" and "ManTech" – in considerable detail.2719

2715 V-22 Budgets for FY 1994-FY 2007 (PE# 0604262N), Exhibit EC-433; CV-22 Budgets for
FY 2002-FY 2007 (PE# 0401318F), Exhibit EC-435.
2716 F/A-18 Squadrons Budgets for FY 1993-FY 2007 (PE# 0204136N), Exhibit EC-436.
2717 Joint Strike Fighter Budgets for FY 1995-FY 2003 (PE# 0603800F), Exhibit EC-437.
2718 C-17 Budgets for FY 1993-FY 2007 (PE# 0604231F for FY 1993-FY 1997; PE# 0401130F for
FY 1997-FY 2007), Exhibit EC-438.
2719 European Communities' first written submission, paras. 724-749 ("Additional Details Related to
Selected RDT&E PEs").

BCI deleted, as indicated [***]

These two programmes were funde d through cooperative agreemen ts or other cost-shared
arrangements.2720
7.1149 We turn now to the allocation of intellectual property rights under DOD R&D contracts and
agreements with Boeing. The R&D procuremen t contracts between DOD and Boeing differ from the
R&D assistance instruments with Boeing with regard to the allocation of intellectual property rights.
This appears to derive from the fact that under assi stance instruments, the "recipient" is required to
contribute its own funds to the R&D on a cost-shared basis. While the allocation of patents is uniform
across all U.S. government R&D contracts and agre ements, the allocation of "data rights" differs
(depending on the extent to which there is co st-sharing.) Any data delivered under an R&D
procurement contract funded solely by the government is " unlimited rights data". This means that the
license acquired by the U.S. Government gives it "u nlimited rights" to use the technical data "as it
sees fit, both inside and outside of the government", i.e. to "use, disclose, reproduce, prepare
derivative works, distribute copies to the public, and perform publicly and di splay publicly, in any
manner and for any purpose, and to have or permit others to do so".
2721 A typical "Unlimited Rights"
Data Clause reads:
"With the exception of the technical data or computer software set out below, all
technical data and computer software to be delivered under this contract shall be
furnished with unlimited rights as define d in Section I clause of DFARS 252.227-
7013.
{list of selected technical data items developed at private expense follows below}"2722
7.1150 However, in the case of assistance instruments, the government acquires only "limited rights"
data. In such transactions, the government genera lly "may release or disclose the data outside the
government only for government purposes (government purpose rights)". 2723 The term for these
"government purpose rights" is negotiable, with five years being the baseline, subject to negotiation
between the parties. 2724 DOD regulations state that " {l}onger periods should be negotiated when a
five-year period does not provide sufficient time to apply the data for commercial purposes ...". 2725

2720 See e.g. Department of Defense, Guidelines for Dual Use Science and Technology Program, Fiscal
Year 2002, Exhibit EC-484, December 2000, p. 6 ("Projects must be aw arded using Technol ogy Investment
Agreements or "Other Transactions" for prototypes. Intellectual property rights are often a stumbling block that
prevent commercial firms from participating in defense programs. The BAA must clearly state that Agreements
Officers have maximum flexibility to negotiate intellectual property rights that are appropriate for the program.
Agencies are encouraged to negotiate for the minimum in tellectual property rights for the Government that are
necessary for program execution, which could result in the award of an Other Transaction agreement". See also,
European Communities' first written submission, paras. 725 and 733 ("TRP awarded funds, on a cost-shared
basis, to industry-led projects working to create new dual-use techno logies", and "As with TRP, DOD
established DUS&T for the purposes of jointly fund ing, with industry, the development of dual-use
technologies ...").
See e.g. Manufacturing Technology Program, 10 U.S.C. § 2521 (2003), Exhibit EC-445, p. 6 ("For any
grant awarded or contract, cooperative agreement, or other transaction entered into on a basis other than a cost-
sharing basis because of a determination made under su bparagraph (A), the transac tion file for the project
concerned must document the rationale for the determination.")
2721 United States' first written submission, para. 3 50; United States' second written submission,
para. 64 and accompanying footnote.
2722 Air Force Contract F33615-91-C-5716 with Boeing regarding Design and Manufacturing of Low
Cost Composite Fuselage, 24 July 1991, Exhibit EC-507, p. 24.
2723 48 C.F.R. §§ 227.7100 - 227.7103-17, § 227.7103-4(a)(1), Exhibit EC-590 (emphasis added). The
Government may, however, "use, modify, release, reproduce, perform, display or disclose" such jointly-funded
data "within the government without restriction". Ibid. at § 227.7103-4(a)(1).
2724 48 C.F.R. § 227.7103-5(b)(2), Exhibit EC-590.
2725 48 C.F.R. § 227.7103-5(b)(2), Exhibit EC-590.

BCI deleted, as indicated [***]

During the term of the "government purpose rights", the government "may not use, or authorize other
persons to use, technical data marked with government purpose rights legends for commercial
purposes".2726
7.1151 Another relevant consideration is whether th e transactions at issue involve the typical
elements of a purchase of services. In this regard , we observe that the R&D procurement contracts
between DOD and Boeing differ from the R&D assistan ce instruments with Boeing with regard to the
payment of a fee or profit. The DOD R&D assistance instruments with Boeing do not provide for any
fee or profit. All of the procurement contracts submitted to the Panel appear to provide for the
payment of a fee. §22.205 of the DOD Grant and Agreement Regulations
2727 ("Distinguishing
assistance from procurement") explains that the payment of a "fee or profit":
"is consistent with an activity whose prin cipal purpose is the acquisition of goods and
services for the direct benefit or use of the United States Government , rather than an
activity whose principal purpose is assistance." (§ 22.205(b))
7.1152 §22.205 of the DOD Grant and Agreement Regulations therefore mandates that a
procurement contract, rather than an assistance inst rument, be used in all cases where: (i) a fee or
profit is to be paid to the recipient of the instrument; or (ii) the instrument is to be used to carry out a
programme where a fee or profit is necessary to achieving programme objectives (§22.205(b)). Along
the same lines, Part 34 ("Administrative Requireme nts for Grants and Agreements with For-Profit
Organizations") states in § 34.18: "In accord ance with 32 CFR 22.205(b), grants and cooperative
agreements shall not: (a) Provide for the payment of fee or profit to the recipient. (b) Be used to
carry out programs where fee or profit is necessary to achieving program objectives". The payment of
a fee or profit is also prohibited under technology investment agreements.
2728
7.1153 Based on the foregoing, it appears to the Pa nel that DOD "assistance instruments" are not
properly characterized as "purchases of services", but that there does not appear to be any reason for
treating DOD "procurement contracts" as something other than a "purchase of services". The Panel
would further note that the distinction between DOD "procurement contracts" and DOD "assistance
instruments" is not one of the Panel's own making. In its first written submission, the United States
draws the Panel's attention to the fact that there are two different categories of transactions between
DOD and Boeing. Specifically, the United States dr aws the Panel's attention to the fact that " {u}nder
U.S. government contracting law, some of these instruments are formally termed 'contracts', and
others 'other transactions', 'cooperative agreemen ts', or 'technology investment agreements'".
2729 The
United States notes that some of the "contracts" submitted by the European Communities are
"procurement contracts", and some are "cooperativ e agreements, technology investment agreements,
or other transactions".
2730 The United States acknowledges that R&D contracts are used only when
the "principal purpose" is the acquisition of supplies or services for the "direct benefit or use" of the
federal government, and that an "agreement" will "o ften have a clause specifying that its principal
purpose is not the acquisition of goods or servi ces for direct use by the U.S. government". 2731 The
Panel has put a number of questions to the parties on this distinction, and asked the parties to explain

2726 48 C.F.R. § 227.7103-5(b)(4), Exhibit EC-590.
2727 32 CFR § 22.205, Exhibit US-22.
2728 § 37.230 provides that, in accordance with 32 CFR 22.205(b), a TIA may not be used if any
participant is to receive fee or profit. As noted be low, 32 CFR 22.205 (b) provides that the payment of a
fee/profit "is consistent with an activity whose principal purpose is the acquisition of goods and services for the
direct benefit or use of the United States Government, rather than an activity whose principal purpose is
assistance". (§ 22.205(b))
2729 United States' first written submission, footnote 75.
2730 United States' first written submission, para. 91.
2731 United States' first written submission, footnote 70.

BCI deleted, as indicated [***]

the differences between the two categories of transactions. 2732 In response to these questions, the
European Communities generally argues that what matte rs "is the substance of the transaction, not its
form"2733, and that the Panel should not be guided by the "label" of the transactions. 2734 The United
States counters that "the EC fails to recognize that the type of vehicle (that is, cooperative agreement,
procurement contract, or Other Transaction) used will determine some of the substantive features of
the contract". 2735 Along the same lines, in response to th e European Communities' argument that
consideration of the types of instrument is "too fo rmalistic" to guide the analysis, the United States
indicates that it is "difficult to square this position w ith the EC view that the terms of the contracts are
relevant, since under the U.S. system, the type of instrument will determine which contract clauses are
available".
2736
7.1154 Notwithstanding the foregoing, the United States argues that all of the DOD R&D contracts
and agreements at issue are properly char acterized as "purchases of services", and the
European Communities argues that none of the D OD R&D contracts and agreements at issue are
properly characterized as "purchases of services". We will consider some of the arguments advanced
by the parties, in support of their respective positions, below.
7.1155 The United States argues that the DOD assist ance instruments at issue are properly
characterized as genuine "purchases of services" because:
"these instruments typically committed Boeing to a coordinated research and
development program in accordance with a detailed statement of work. These
agreements set a schedule for performance of research, and tied payments to
completion of the requisite tasks. The agreements specified that costs would be
governed by the same rules applicable to c ontracts, and that Boeing would provide a
final report, as well as quarterly reports a nd reports upon the achievement of certain
milestones."
2737
7.1156 In the Panel's view, it is reasonable to assume that similar or identical legal terms and
characteristics are found in most if not all instruments through which governments around the world
provide R&D grants. For example, it seems unlikel y that a government would provide an R&D grant
to a firm in the absence of an agreed statement of work / R&D. 2738 The fact that the "terms and
conditions of a cooperative agreement are enforceable , including by actions in U.S. courts, in the
same way as contracts" 2739 is also hardly surprising. In this regard, we note that Department of

2732 See questions 19, 20, 151, 152, 154, 191, 192, 195, 197, and 321.
2733 See e.g. European Communities' response to question 20(b).
2734 European Communities' response to question 154, para. 217.
2735 United States' comments on European Communities' response to question 20, para. 76.
2736 United States' comments on European Communities' response to question 19, para. 75.
2737 United States' first written submission, para. 92.
2738 For example, we note that both parties agree th at the "Department of La bour 787 Worker Training
Grants", which we will examine further below in this Report, constitute "grants" within the meaning of
Article 1.1(a)(1)(i) of the SCM Agr eement. These "grants" contained a "Statement of Work". See e.g.
Edmonds Community College Grant Notification, Exhibit EC-622, p. 1 ("The Grantee is approved for this
project up to $1,475,045 as specifi ed in the attached Statement of Work with an additional increment
of $725,045"). See also, European Communities' second written submission, para. 348 ("It is normal practice
among governments all over the world to provide R&D support on the basis of contracts – this does not make
such contracts conventional transac tions whereby R&D services are purc hased by NASA. For instance, the
European Commission provides funds to consortia of EC companies under its R&D Framework Programme to
cover a portion of costs (and only a portion) incurred in projects selected through calls for tender. This support
is regulated by a contract under which both parties have obligations – the companies to carry out the work, and
the European Commission to provide the funds.")
2739 United States' response to question 20, para. 51.

BCI deleted, as indicated [***]

Commerce (DOC) cooperative agreements – which the United States acknowledges are "grants" –
have similar if not identical features. Among other things:
• As with DOD cooperative agreements, under DOC cooperative agreements (as with all U.S.
government R&D contracts, agreements, and gran ts) the U.S. Government acquires a royalty-
free license to use any patents developed as a result of the R&D;2740

• As with DOD cooperative agreements, DOC cooperative agreements are legally binding
instruments;

• As with DOD cooperative agreements, DOC require s that recipients conduct the work set out
in an agreed upon work statement and does not allow the recipient to unilaterally modify the
scope of work;2741

• As with DOD cooperative agreements, DOC "c losely monitors the ongoing progress of the
project and ensures that it maintains appropria te technical and financial oversight of the
project"2742; and

• As with DOD cooperative agreements, DOC cooperative agreements require that the recipients
provide technical and other reports.2743

7.1157 None of these features make DOC cooperative ag reements "purchases of services". If that is
so, then it necessarily follows that these same features do not make DOD R&D cooperative
agreements and other assistance instruments with Boeing "purchases of services".
7.1158 The Panel is not persuaded by the United St ates' general arguments that technologies
developed under the DOD R&D programmes are neit her "technologically applicable" to commercial
aircraft (because of the different missions and cost -sensitivities of military and commercial aircraft),
nor "legally applicable" to commercial aircraft (bec ause of Boeing's decision to ensure that the 787 is
"ITAR free").
7.1159 With respect to the first of these arguments, we believe that the United States has failed to
substantiate its assertion that only a miniscule amount of the R&D conducted by Boeing under the
DOD R&D programmes at issue was "technologically applicable" to commercial aircraft. Among
other things, the United States' argument that DOD- funded research on military aircraft is designed to
fulfil military functions, and does not translate we ll to the different commercial imperatives of

2740 European Communities' first written submission, para. 784 ("The US Government itself retains
some rights with respect to the intellectual property developed with ATP funding. As with NASA and DOD
patent waivers/transfers, the US Government reserves a nonexclusive, nontransferable license to use the
invention on its own behalf. It also retains march-in rights").
2741 United States' first written submission, para. 377 ("The PMT, which includes both a technical
expert and a business expert, is responsible for monitoring the progress of the project and ensuring its
consistency with the project proposal ") (emphasis added). See also, United States' first written submission,
para. 378 ("In certain circumstances it may become necessa ry to modify a project's t echnical plan in light of
such developments. In such cases, the PMT ensures that modified plans remain consistent with the approved
goals and objectives of the project proposal and equivalent to the original merit of the project with respect to the
ATP selection criteria").
2742 United States' first written submission, para. 376. See also, United States' first written submission,
para. 378 ("PMT continuously reevaluates the progress of a project to determine how technological or industrial
developments affect the project and to ensure that the project remains on course for a successful conclusion").
2743 United States' first written submission, para. 378 ("In addition, the ATP General Terms and
Conditions require all award recipients to submit quarterly technical and business performance reports. The
PMT reviews all such reports and tracks project developments on an ongoing basis").

BCI deleted, as indicated [***]

commercial aircraft production (in terms of FA A certification/maintenance requirements and
efficiency of production) overlooks the fact that at least some of the DOD programmes, for example,
the ManTech Composites Affordability Initiative re lated to Advanced Fibre Placement, had the
explicit objective of funding R&D to be applied towards both military and civil aircraft and
emphasized the development of lower cost technol ogies. In this regard, we also recall the
United States' explanation that there exists a link between "assistance instruments" and "dual use"
technologies: according to the United States, the reason that Boeing and other firms agree to enter into
cost-sharing cooperative agreements with DOD is becau se of the benefit (or potential benefit) of the
R&D for their commercial operations . For example, the United States explains that, " {t}here are
some small areas of overlap, which produce "dua l-use" technologies, but in these areas, DOD
generally tries to use the potential civil application to motivate commercial companies to contribute
their resources to lessen DOD's cost of reaching its military objective".2744 The United States explains
elsewhere that "where a DoD contracting agency sees additional direct applications for purchased
technology, it seeks to obtain private sector cont ribution for the development of the technology". 2745
The United States further explains that, "the incentiv e for private participation is the opportunity to
share the cost of developing some technology of mutual interest to both the contractor and the
government".2746
7.1160 With respect to the second of these arguments, we consider that the United States has failed to
substantiate its assertion that the International Traffic in Arms Regulations ("ITAR") make it
effectively impossible for Boeing to utilize an y of the R&D performed under DOD R&D contracts
and agreements towards LCA. Among other things, wh ile we accept the United States' assertions that
the ITAR restrict Boeing's ability to use certain R&D performed for DOD towards its civil aircraft,
and while we accept that Boeing complies with ITAR in general and took steps to ensure that the 787
will be "ITAR free", and while we further accept th at the situation with respect to the scope and
coverage of the ITAR is not entirely clear, the United States has failed to explain how its assertions
regarding the ITAR can be reconciled with the fact that some of the R&D funded by DOD – including
R&D performed by Boeing under assistance instru ments entered into under the ManTech and
DUS&T Programs, which were subject to the ITAR - had the explicit objective of being applied
towards civil aircraft.
7.1161 The European Communities has advanced a number of arguments as to why, in its view, the
DOD R&D contracts at issue cannot be characterized as genuine "purchases of services".
7.1162 The European Communities argu es that the DOD R&D contracts at issue are not properly
characterized as "purchases of services" because the DOD R&D contracts in fact "relate to DOD's
purchase of goods" – i.e. the military aircraft a nd other defence systems that DOD ultimately
procures.2747 The Panel is not persuaded by this argument. While we accept that the military aircraft
that Boeing produces for DOD are goods within the meaning of Article 1.1(a)(1)(iii) of the
SCM Agreement, and while the R&D contracts clea rly "relate" to these goods, we do not see how it
follows that these contracts are themselves properl y characterized as "purchases of goods". Most
R&D is either directly or indirectly related in some way to the development of new products.
However, "Research and Development Services", including R&D services on natural sciences, are
also one of the sectors with regard to which WTO Members may undertake commitments under the
General Agreement on Trade in Services, indicating that they are "services" for purposes of the
GATS. "Research and development" is similarl y categorized in the United Nations Provisional
Central Product Classification. R&D is also widely classified as a "service" under national
procurement regimes. For example, the U.S. gove rnment procurement regime classifies "Research

2744 United States response to question 208, para. 266 (emphasis added).
2745 United States' first written submission, para. 132 (emphasis added).
2746 United States' first written submission, footnote 119 and para. 112.
2747 European Communities' second written submission, para. 454.

BCI deleted, as indicated [***]

and development" as a service under Federal Service Classification Code A, which is then further
divided into subcodes based on the area of research. The European Communities similarly treats
R&D as a "service" under Division 73 of its "Common Procurement Vocabulary".
2748
7.1163 The European Communities argues that there is a degree of artificiality in how DOD
finances R&D:
"DOD does not simply pay one purchase price for its goods; rather DOD first pays
for R&D through its RDT&E budgets, and then pays for acquisition costs through its
procurement budgets. In theory, one could construct a total purchase price for the
goods that DOD acquires by summing up the amounts DOD pays through its RDT&E
and procurement budgets."
2749
7.1164 We consider that the European Communities could have framed its case in terms of the "total
purchase price" paid to Boeing for the airc raft it acquired, and it was open to the
European Communities to provide evidence that this "total purchase price" was higher than the "total
purchase price" that a commercial purchaser (e.g. airlines) would pay for a similar product
(e.g. LCA). In this way, the European Communiti es could have focused on the "broader" transaction,
rather than focusing narrowly on DOD's R& D contracts with Boeing. And had the
European Communities advanced that kind of analys is, then the Panel might have found the existence
of a financial contribution in the form of a "purchase of goods" within the meaning of
Article 1.1(a)(1)(iii). However, the European Communities did not advance this analysis. Among
other things, there is no evidence before the Pane l on the "total purchase price" that DOD pays
Boeing. Instead, the European Communities has fo cused more narrowly on the payments and access
to facilities that DOD provided to Boeing under R&D contracts and agreements.
7.1165 The European Communities also argues that the DOD R&D contracts at issue are not
properly characterized as "purchases of service s" because DOD conveys monetary resources to
Boeing "for the purpose of conducting dual-use R&D".
2750 In our view, if it were the case that DOD
R&D contracts between DOD and Boeing had as thei r purpose conducting "dual use" R&D, then this
might well serve as a basis for finding that those procurement contracts are not properly characterized
as "purchases of services". However, as noted above, it appears that only two of the 23 R&D
programmes at issue in this dispute – the DUS&T and ManTech Programs – had a declared purpose
of funding "dual use" R&D (and, as was also indicated above, it appears that both of these
programmes were, as consequen ce, funded primarily if not exclusively through cooperative
agreements or other cost-shared "assistance instruments").
7.1166 The European Communities furt her argues that the DOD R&D contracts at issue are not
properly characterized as "purchases of services" because "DOD RDT&E contracts do not contain the
typical elements of a purchase". In this regard, the European Communities argues among other things
that under the cooperative agreements entered into between Boeing, "Boeing does not make a profit
pursuant to these agreements, while the seller in a typical "purchase" transaction would undoubtedly
expect to make a profit".
2751 As discussed above, the "atypical" elements that the
European Communities emphasizes are not found in procurement contracts. Rather, they are elements
found in cooperative agreements and other assistance instruments. Thus, this argument does nothing
to undermine, and would seem to reinforce, the conclusion that the DOD procurement contracts at

2748 See United States' first written submission, para. 95; European Communities' response to
question 116, para. 51.
2749 European Communities' second written submission, paras. 475-476.
2750 European Communities' second written submission, para. 453.
2751 European Communities' response to question 15(c), and European Communities' comments on
United States' response to question 20(a), para. 75.

BCI deleted, as indicated [***]

issue are "purchases of services" and that the DOD assistance instruments are not purchases of
services.
7.1167 The European Communities argu es that the DOD R&D contracts at issue are not properly
characterized as "purchases of services" because "Boeing does not offer such R&D services to
anybody else but NASA and DOD". We accept the Eu ropean Communities' factual assertion that
Boeing does not provide similar R&D services to commercial entities on the market, and we do not
believe that the United States has adequately rebutted this factual assertion. 2752 However, we do not
see how this is relevant to whether the DOD R&D contracts with Boeing are properly characterized as
"purchases of services". It seems clear that there are certain "services" that governments "purchase",
and that no entities other than governments purchase. This does not call into question that these are
"purchases of services".
7.1168 The European Communities argu es that the DOD R&D contracts at issue are not properly
characterized as "purchases of services" because the "DOD RDT&E contracts do not exclusively
affect trade in services", but rather "affect trade in goods". 2753 In our view, the problem with this
argument is that it imports into the Article 1.1(a)(1) analysis considerations that are germane to a later
step in the analysis, in this inst ance, the analysis of the "effects" of the subsidy under Articles 5 and 6
of the SCM Agreement. The extent to which the m easures challenged in this dispute affect trade in
goods – i.e. "the effect of the subsidy" – is the qu estion that arises in the context of the analysis of
serious prejudice under Articles 5 and 6. To find that DOD R&D procurement contracts with Boeing
provide a "financial contribution" by reference to their effect on trade in goods, the Panel would
essentially have to make a finding on the "effect of the subsidy" (i.e. the extent to which DOD and
other federal measures affect trade in goods is the issue in dispute under Articles 5 and 6) and then, on
the basis of that finding, reason that there is a financial contribution.
7.1169 The European Communities argues th at what matters "is the substance of the transaction, not
its form"
2754, and that "the manner in which the municipal law of a WTO Member classifies a
transaction cannot, in itself, be determinative for the purpose of applying any provision of the WTO
covered agreements".2755 It is difficult to disagree with either proposition. And it is because we agree
with both propositions that we ha ve gone beyond the simple "labels" of the transactions, and
examined, in detail, the different substantive featur es of these contracts and agreements, as reflected,
inter alia , in U.S. laws and regulations and in the contracts and agreements themselves. The
conclusion reached is that there are significan t, substantive differences between DOD's R&D
procurement contracts and DOD's R&D assistance instru ments with Boeing. This is not an analysis
that rests on the label "contract". There is more to our analysis than the label or form of the
transactions.

2752 The United States asserts that Boeing does offer certain "services " to customers other than the
government, "including financing services and lifecycle solution and support services". In support of that
assertion, the United States cites a Boeing Company annual report and a section of the Boeing website that
describes certain "lifecycle solutions and support" services that Boeing offers to its "aviation and transport
industry customers". United States' comments on European Communities' response to question 15, paras. 63
and 65. The United States does not, however, contest the European Communities' assertions that Boeing does
not offer "LCA-related R&D services" to anybody else but NASA and DOD, and/or that Boeing has not
advertised itself as a service provider for "LCA-related R&D" in the market.
2753 European Communities' response to question 15(c), para. 66.
2754 See e.g. European Communities' response to question 20(b).
2755 Appellate Body Report, US – Softwood Lumber IV, paras. 56 and 65; Appellate Body Report, US –
Corrosion-Resistant Steel Sunset Review , footnote 87 to para. 87. See also, Panel Report, India – Additional
import Duties , footnote 320 ("we would agree that the purpose stated in a Member's legislation is not
determinative, by itself, for WTO purposes. Nevertheless, it is a relevant factual element which we may
consider together with others in coming to an overall conclusion ...") and para. 7.32.

BCI deleted, as indicated [***]

7.1170 Finally, the European Communities argues th at the DOD R&D contracts at issue are not
properly characterized as "purchases of services" because "DOD RDT&E contracts have helped
Boeing develop technology that it utilizes toward its LCA". 2756 As an initial matter, we believe that
this argument is inextricably linked to, and is in fact about, the allocation of intellectual property
rights under the R&D contracts and agreements at issu e. That is, the reason that Boeing may be able
to utilize the technology developed under DOD R&D contracts towards its LCA is that under these
R&D contracts and agreements, Boeing retains certa in intellectual property rights. If DOD acquired
complete intellectual property rights over the results of the R&D, then Boeing would not be able to
utilize the results for any purpose. Thus, this ar gument is equivalent to arguing that the DOD R&D
contracts at issue cannot be characterized as purchases of services by virtue of the allocation of
intellectual property rights under the contracts.
7.1171 For the reasons given above, the Panel consid ers that the question of whether or not a
transaction is properly characterized as a "purchase of services" depends on whether or not the work
performed was principally for the benefit or use of the government (or unrelated third parties), or
rather principally for the benefit or use of the "ser vice" "seller" itself. The evidence relating to DOD
aeronautics R&D, reviewed above, leads to the conc lusion that the work that Boeing performed under
its aeronautics R&D contracts with DOD was princi pally for the benefit and use of DOD, and is
therefore properly characterized as a "purchase of services". Therefore, the Panel finds that the
payments and access to facilities provided to Boeing under DOD contracts are not financial
contributions within the meaning of Article 1.1(a )(1). However, the evidence demonstrates that the
work Boeing performed under its aeronautics R&D "assistance instruments" with DOD was
principally for the benefit and use of Boeing itself. Accordingly, the Panel concludes that DOD's
R&D agreements (i.e. "assistance instruments") w ith Boeing are not properly characterized as
"purchases of services". Therefore, the Panel finds that the payments made to Boeing under these
agreements are covered by Article 1.1(a)(1)(i) of th e SCM Agreement as a direct transfer of funds.
2757
The Panel further finds that the access to DOD f acilities provided to Boeing under these agreements
constitutes a provision of goods or services within th e meaning of Article 1.1(a)(1)(iii) of the SCM
Agreement.
(ii) Whether there is a benefit within the meaning of Article 1.1(b) of the SCM Agreement
Arguments of the European Communities
7.1172 Regarding the existence of a benefit within the meaning of Article 1.1(b) of the
SCM Agreement, the European Communities argues th at the DOD "subsidies" confer "benefits" upon
Boeing's LCA division. More specifically, the Eur opean Communities argues that: (i) the financial
contributions "relate to the production of all Boeing LCA"; (ii) the financial contributions "provide
Boeing's LCA division with advantages on non-market terms"; (iii) "Boeing is not required to pay
anything in return" for the funding and support, and "has not been required to repay the
US Government for any resulting commercial re wards"; (iv) Boeing has received valuable
"knowledge and experience" from the aeronautics R& D, and (v) it is "axiomatic that such R&D
funding and support, which provide commercial rewards for nothing in return, are not available on the
market".2758
7.1173 In its second written submission, the European Communities responds to the United States'
argument that DOD's RDT&E contracts with Boeing do not confer a benefit within the meaning of
Article 1.1(b). The European Communities argues, am ong other things, that "the critical point is that

2756 European Communities' second written submission, para. 457.
2757 As with NASA, we do not accept that these DOD payments to Boeing constitute outright "grants".
2758 European Communities' first written submission, paras. 764-766.

BCI deleted, as indicated [***]

Boeing maintains the results of and technology from the R&D for use throughout its military and civil
divisions, without adequately paying DOD back for their commercial value".2759
7.1174 The European Communities then contrasts th e manner in which DOD directly finances R&D
from the manner in which commercial buyers of civil ai rcraft (e.g. airlines) indirectly finance R&D.
The European Communities argues that in the commerc ial market, the cost of R&D that is directly
applied toward developing or building a particular product is generally linked to the cost of that
product. In other words, R&D directly used toward the development of a military aircraft would be
recovered through the price of the military aircraft, and R&D directly used toward the development of
a commercial aircraft would be recovered through the price of the commercial aircraft. The
European Communities argues that DOD practice, however, departs from this commercial
benchmark: DOD does not simply pay one purchase price for its goods; rather DOD first pays for
R&D through its RDT&E budgets, and then pays for acquisition costs through its procurement
budgets. In theory, one could construct a total purchase price for the goods that DOD acquires by
summing up the amounts DOD pays through its RDT&E and procurement budgets.2760
7.1175 The European Communities then argues that "{t}he overwhelming evidence already reviewed
above and discussed in the EC First Written Submission shows that Boeing does in fact use R&D
results funded through DOD's RDT&E programme towa rd the development of its LCA. However,
DOD fails to recoup the RDT&E funding and support that relates to Boeing LCA, and therefore
confers a benefit on Boeing's LCA division".2761
7.1176 In addition, the European Communities argues th at "a commercial entity that pays for R&D
retains the full rights to the technologies that result", and that if "the entity performing the R&D
wishes to utilize the R&D in this fashion, it is required to negotiate some form of license rights from
the entity paying for the R&D, thereby ensuring that the paying entity recoups the value of the R&D
being used by the performing entity for some other purpose". 2762 The European Communities
refers2763 to an article on intellectual property rights and stem cell research 2764 and a Declaration of
Regina Dieu, Legal Counsel in the Airbus SAS Industrial procurement Le gal Department, which
states that when Airbus funds an R&D project it ex clusively and solely owns any and all Intellectual
Property generated or acquired in connection with and during the performance of the R&D project.2765
The European Communities also poi nts to DOD's recoupment policy pr ior to June 1992, as evidence
of a benchmark pursuant to which, in the wo rds of DOD's own recoupment regulations, the
Department of Defense intended 'to recover a fair share of its investment in nonrecurring costs related
to products, and/or a fair price for its contribution to the development of related technology, when the
products are sold, and/or when technology is transferred.'2766
Arguments of the United States
7.1177 In its first written submission, the United States ar gues that even if the Panel were to find that
the payments made to Boeing under the R&D contra cts constitute a financial contribution covered by

2759 European Communities' second written submission, para. 474.
2760 European Communities' second written submission, paras. 475-476.
2761 European Communities' second written submission, para. 477.
2762 European Communities' second written submission, para. 483.
2763 European Communities' second written submission, para. 376.
2764 Sean M. O'Connor, "Intellectual Property Rights and Stem Cell Research: Who Owns the Medical
Breakthroughs?" 39 New Eng. L. Rev. 665 (2005), Exhibit EC-1212, p. 669.
2765 Declaration of Regina Dieu, 8 November 2007, Exhibit EC-1178.
2766 European Communities' second written submission, para. 479.

BCI deleted, as indicated [***]

Article 1.1(a)(1), the European Communities has not met its burden of proof with regard to the
existence of a benefit within the meaning of Article 1.1(b).2767
7.1178 First, the United States responds to the Eur opean Communities' argument that Boeing "pays"
nothing to DOD in return for RDT&E funding. 2768 The United States argues that whether under a
R&D contract or agreement, when Boeing conducts research for the government, it "pays" DOD value
commensurate with the funds expended. It puts Boeing's scientists at DOD's disposal, to conduct
research designed by DOD. It reports periodica lly on results and makes presentations, educating
DOD personnel on the outcome of the work. DOD's pa tent and data rights mean that if another
contractor on a subsequent government project (w hether with DOD or any other government agency)
needs to make use of the technology or data, it may do so without making any payment or receiving
any permission from Boeing. Accordingly, it is pl ainly untrue to assert that Boeing pays nothing in
return for government funding.2769
7.1179 The United States proceeds to argue that DOD ensures that it pays no more than "adequate
remuneration" for its purchases in the RDT&E contract s at issue in this dispute by reimbursing the
contractor – Boeing – only enough to cover the cost s that Boeing actually incurred in conducting the
research activities subject to the contract, along with a reasonable profit margin. 2770 In the context of
its discussion of the amount of the profit paid under DOD contracts, the United States notes that
"agreements do not allow for payment of a fee" , and that under cooperative agreements, other
transactions, and technology investment agreements, "the incentive for private participation is the
opportunity to share the cost of developing some tec hnology of mutual interest to both the contractor
and the government".2771
7.1180 The United States concludes by addressing the re levance of the possible "spillover" effects
from DOD R&D to Boeing's LCA division. The United States recalls that the European Communities
ends its argument on benefit with an "axiom", namely, that DOD's purchases of R&D, "which provide
commercial rewards for nothing in return, are not av ailable on the market". This "axiom", too, is
untrue. In its civil aviation division, Boeing also conducts research aimed at developing new
products. It recovers the cost of that research through revenue gained from selling aircraft to
customers, who are in every real sense funding the research. Technology developed in this effort does
sometimes have military application. However, th ese customers do not insist that Boeing reimburse
them when it uses civil technology on military product s. Rather, they recognize that this sort of
"spillover" of knowledge is a natural outcome of a commercial business relationship. Thus, even if a
DOD RDT&E contract resulted in a true dual-use technology, and that technology was not barred
from use on large civil aircraft by U.S. export laws, that rare example of such military-to-civil synergy
would be completely commercial in nature.
7.1181 In its second written submission, the United States reiterates that even if the Panel were to
find that the payments made to Boeing under the R&D contracts constitute a financial contribution
covered by Article 1.1(a)(1), they did not conf er a benefit because "any payment to Boeing was no
more than adequate remuneration for what Boei ng did, which, under the analysis provided in
Article 14(d), establishes that the payments do not confer a benefit". 2772 It then responds to several

2767 United States' first written submission, para. 100.
2768 United States' first written submission, paras. 101-103.
2769 United States' first written submission, para. 103.
2770 United States' first written submission, paras. 104-105, and 108-115.
2771 United States' first written submission, footnote 119 and para. 112.
2772 United States' second written submission, para. 37. At paragraph 107 of its first written
submission, the United States observes with respect to Article 14(d) that "this standard for measuring a benefit
covers only the government purchase of a good, or provision of a good or service, thereby emphasizing that
purchase of a service, such as R&D, is not a financ ial contribution for which determination of a benefit is
necessary. However, if DoD's RDT&E contracts were assumed arguendo to constitute financial contributions,

BCI deleted, as indicated [***]

arguments advanced by the European Communities in its Oral Statement at the first meeting with the
Panel. With respect to the DOD's former "recoupment" policy, the United States repeats its earlier
argument that the European Comm unities misunderstands what was c overed by this policy and that
"the old policy did not have the effect that the EC asserts". The United States then adds that the more
important point is that during the period covere d by the European Communites' allegations, DOD
used cost-contribution agreements (cooperative ag reements, technology investment agreements, and
other transactions) to require contractors to make an up-front contributio n to any research with
applicability beyond DOD's direct requirements. Therefore, there was no need to try to "recoup"
money from subsequent commercial transactions. Rather, " {w}hen DoD perceives a project as
having usefulness to both DoD and Boeing, it requ ires the company to share the costs of that
project".
2773
Evaluation by the Panel
Payments and access to facilities provided to Boeing through DOD assistance
instruments
7.1182 It is well established that a financial contribut ion confers a benefit within the meaning of
Article 1.1(b) of the SCM Agreement if the terms of the financial contribution are more favourable
than the terms available to the recipient in the market. 2774 Thus, in order to determine whether the
financial contributions to Boei ng provided under DOD assistance instruments confer a benefit upon
Boeing within the meaning of Article 1.1(b), the Panel must begin by recalling what the terms of
those financial contributions are. Only then can the Panel proceed to compare those terms with the
terms of a market transaction.
7.1183 As the Panel has already concluded above in its analysis of the existence of a financial
contribution, DOD has made payments to Bo eing and granted Boeing access to DOD facilities on the
condition that Boeing perform aeronautics R&D work that is principally for Boeing's own benefit and
use, rather than principally for the benefit or use of the U.S. Government (or unrelated third parties).
While the R&D agreements of course contain numer ous other terms (for example, the contracts and
agreements contain or incorporate by refe rence numerous standardized clauses governing
miscellaneous matters), this is , in the Panel's view, the core "term" upon which the financial
contributions are provided – i.e. that Boeing use the payments and access to facilities it receives from
DOD for the purpose of conducting aeronautics R&D wo rk that is principally for Boeing's own
benefit and use. The Panel has concluded above th at a transaction in which the work performed is
principally for the benefit and use of the "seller" cannot properly be characterized as a "purchase of
services".
7.1184 In this case, both parties agree that, with regard to the financial contributions that Boeing
receives under the DOD R&D programmes, "the releva nt market benchmark would be the terms of a
commercial transaction in which one entit y pays another entity to conduct R&D". 2775 The question,
then, is whether, in a "commercial transaction", one entity would pay anothe r entity to conduct R&D
on these same terms, i.e. on the term that the entity receiving the financial contributions conduct R&D
that is principally for the benefit and use of the entity receiving the payment. The Panel believes that
no commercial entity, i.e. no private entity acting pursuant to commercial considerations, would
provide payments (and access to its facilities and personnel) to another commercial entity on the

the standard set out in Article 14(d) would provide useful context for confirming there was no benefit in light of
the fact that Boeing received no more than adequate remuneration for its work".
2773 United States' second written submission, paras. 42-43.
2774 See paras. 7.30-7.31 of this Report.
2775 European Communities' response to question 21, para. 76; United States' response to question 136,
para. 85.

BCI deleted, as indicated [***]

condition that the other entity perform R&D activities pr incipally for the benefit and use of that other
entity. At a minimum, it is to be expected that some form of royalties or repayment would be required
in the event that financial contributions were pr ovided on such terms. Thus, with respect to the
financial contributions provided by DOD to Boeing, which were provided on these terms, we consider
that it was not necessary for the European Communi ties to present benchmark evidence of the terms
and conditions of specific market-based R&D financi ng in order to establish, at least on a prima facie
basis, that these DOD transactions conferred a bene fit upon Boeing. Rather, it would fall upon the
United States, if it wished to rebut this prima faci e case, to identify examples of transactions in which
commercial entities have paid other commercial entiti es to perform R&D on these same terms, i.e. to
perform R&D that is principally for the benefit or use of the entity receiving the funding. The
United States has not provided any evidence or examples of commercial transactions in which one
entity pays another entity to conduct R&D that is principally for the benefit and use of the entity
receiving the funding.
7.1185 Accordingly, the Panel finds that the financ ial contributions provided to Boeing under its
aeronautics R&D assistance instruments with D OD confer a benefit within the meaning of
Article 1.1(b) of the SCM Agreement.
Payments and access to facilities provide d to Boeing through R&D procurement
contracts
7.1186 Having found that these transactions do not provide a financial contribution to Boeing that is
covered by Article 1.1(a)(1) of the SCM Agreemen t, it is not necessary for the Panel to address the
issue of whether or not these alleged financial cont ributions confer a benefit within the meaning of
Article 1.1(b) of the SCM Agreement.
7.1187 For these reasons, the Panel concludes that the payments and access to facilities granted to
Boeing under assistance instruments are provided on terms that confer a benefit within the meaning of
Article 1.1(b) of the SCM Agreement. In the light of its conclusion that the payments and access to
facilities granted to Boeing under R&D procuremen t contracts are properly characterized as
"purchases of services" that fall outside of the scope of Article 1.1(a)(1) of the SCM Agreement, the
Panel makes no finding on whether the different set of terms upon which t hose alleged financial
contributions are provided confer a benefit.
7.1188 For these reasons, we find that some of the payments and access to facilities that DOD
provided to Boeing through the 23 aeronautics R&D pr ogrammes at issue constitute subsidies within
the meaning of Article 1 of the SCM Agreement.
(d) Whether the subsidy is specific within the meaning of Article 2 of the SCM Agreement
(i) Arguments of the European Communities
7.1189 In its first written submission, the Europ ean Communities argues that the "DOD RDT&E
Program" is de jure specific within the meaning of Article 2.1(a) of the SCM Agreement, or, in the
alternative, de facto specific within the mean ing of Article 2.1(c) of the SCM Agreement.
2776 The
European Communities argues that the programmes are de jure specific by virtue of the subject matter
of the research. More specifi cally, the European Communities argues that the "RDT&E Program
funds only those enterprises in the research-based defence and aerospace industries that are capable of
conducting specified activities: (1) basic research; (2) applied research; (3) advanced technology
development; (4) advanced com ponent development and prototypes; (5) system development and

2776 European Communities' first written submission, paras. 767-770.

BCI deleted, as indicated [***]

demonstration; (6) RDT&E management support; and (7) operational system development". 2777
According to the European Communities, these "activities ma y be performed only by a
limited number of enterprises", and the "DOD RDT&E Program" is "explicitly limited to the
companies in the US defence industry capab le of conducting these specialized activities".
2778 T h e
European Communities argues that the programmes are de facto specific because Boeing has received
a "disproportionate" amount of the funding pr ovided under DOD RDT&E programmes. In this
regard, the European Communities asserts th at from 1991 through 2005, Boeing has received on
average 12.6 per cent of all DOD RDT&E awards, and as much as 17.7 per cent of all such funding in
2001. In fact, only four other companies – Loc kheed Martin, Northrop Grumman, Raytheon, and
United Technologies – received more than $1.0 billion in RDT&E funding in FY 2005. On average,
Boeing and these four other companies have toge ther received 45.2 per cent of all DOD RDT&E
awards from 1991 through 2005. The European Communities notes that all RDT&E funding went to
"research-based defence and aerospace companies".
2779
7.1190 In its second written submission, the European Communities responds to the United States'
argument that the "DOD RDT&E Program" is not sp ecific within the meaning of Article 2 of the
SCM Agreement. The European Communities clarifi es that "what is at issue in this dispute are the
13 general aircraft RDT&E PEs and 10 military aircraft RDT&E PEs that gave rise to dual-use
technologies, and an examination at the PE level confirms that each PE was explicitly limited to a
group of enterprises, and therefore each PE is de jure specific within the meaning of Article 2.1(a)".
In this regard, the European Communities e xplains that "only enterprises capable of
conducting RDT&E in narrow areas such as defe nse research sciences, materials, aerospace
flight dynamics, etc., and only enterprises capable of supporting or building military aircraft such as
the V-22/CV-22, F/A-18, JSF, C-17, etc., c ould receive RDT&E funding and support from DOD
under the PEs at issue. As such, each PE is de jure specific pursuant to Article 2.1(a) of the
SCM Agreement".2780
(ii) Arguments of the United States
7.1191 In its first written submission, the United States argues that the "DOD RDT&E program"
covers "a huge number of areas, and involves a huge number of companies, universities, and other
research entities"2781, and that the DOD "RDT&E program" is therefore neither de jure specific within
the meaning of Article 2.1(a) of the SCM Agreem ent nor de facto specific within the meaning of
Article 2.1(c) of the SCM Agreement.2782
7.1192 In its second written submission, the United States reiterates that the DOD RDT&E
programme is not specific because "DoD contracts for RDT&E on a large variety of topics, with
thousands of enterprises, in a large number of industries".2783
(iii) Evaluation by the Panel
7.1193 The European Communities advances three diffe rent lines of argument in support of its
contention that the subsidies provided to Boeing ar e specific. First, the European Communities
argues that the entire DOD "RDT&E Program" is de jure specific within the meaning of Article 2.1(a)
of the SCM Agreement by virtue of the fact that DOD provides RDT&E funding only to those entities

2777 European Communities' second written submission, para. 767.
2778 European Communities' first written submission, paras. 768-769.
2779 European Communities' first written submission, para. 770.
2780 European Communities' second written submission, para. 490 (emphasis added).
2781 United States' first written submission, para. 118.
2782 United States' first written submission, paras. 118-123.
2783 United States' second written submission, para. 44.

BCI deleted, as indicated [***]

capable of carrying out the types of activities enumerated in DOD's regulations. Second, the
European Communities argues that the entire DOD "RDT&E Program" is de facto specific within the
meaning of Article 2.1(c) of the SCM Agreemen t because the top five U. S. aerospace companies –
Boeing, Lockheed Martin, Northrop Grumman, Rayt heon, and United Technologies – have received,
on average, 45.2 per cent of total DOD RDT&E f unding over the period 1991 through 2005. Third,
the European Communities argues th at each of the individual RDT&E programmes at issue in this
dispute is de jure specific within the meaning of Article 2.1(a).
7.1194 We recall, at the outset, that we have not found that all of the funding provided to Boeing
under the so-called DOD "RDT&E Program" is a subs idy within the meaning of Article 1 of the
SCM Agreement, or even that all of the funding provided to Boeing under the 23 RDT&E
programmes at issue is a subsidy. Rather, the Pane l has concluded, on the basis of the evidence and
arguments before it, that some of the funding (and access to government facilities) provided to Boeing
under the programmes at issue is a subsidy, wh ereas other funding (and access to government
facilities) provided to Boeing under these programmes is not a subsidy. Accordingly, while we will
conduct our analysis of specificity under Article 2 of the SCM Agreement as the parties have, i.e. by
examining whether R&D funding provided to entities under the aforementioned programmes is
limited to "certain enterprises" within the meani ng of Article 2 of the SCM Agreement, in following
this line of analysis we do not mean to suggest th at either the "RDT&E Program" as a whole, or the
individual RDT&E programmes at issue as a whole, is a subsidy within the meaning of Article 1.
7.1195 The first issue that arises from the arguments of the parties is whether, for the purposes of
analysing DOD R&D subsidies to Boeing under Article 2 of the SCM Agreement, the focus should be
on the "RDT&E Program" as a whole, or rather on the 23 individual RDT&E programmes at issue
(which may be termed "programme elements", "proj ect elements", or "PEs") into which the broader
"RDT&E Program" is subdivided. The Panel consider s that it is appropriate to analyse specificity at
the level of the individual programmes, rather than at the level of the entire "RDT&E Program".
First, the descriptions of the "PEs" themselves refer to the R&D activities covered by each PE as an
individual "program", and these programmes each have a defined purpose. 2784 Second, the European
Communities has pointed to an official DOD document which explains that "the program element …
is the major aggregation, at which RDT&E efforts are organized, budgeted and reviewed".
2785 Third,
what the parties refer to as the "RDT&E Program" appears to be the aggregate of all R&D activities in
all areas, by all of the individual branches of the U.S. armed forces (Army, Navy, and Air Force) and
the Department of Defense.
2786 It is not clear that this aggregation constitutes a "programme" for the

2784 See above, para. 7.1147 of this Report.
2785 DoD Financial Management Regulation, Volume 2B, Chapter 5, June 2006, Exhibit EC-1324, p. 5-
3. The United States responds that this statement "comes from a two-page segment of the DoD Financial
Management Regulations, which address the policy, regulations, and procedures that are the responsibility of the
Comptroller of DoD. This document deal s with the organization and review of the DoD budget , not of the
research efforts themselves". United States' re sponse to question 140, para. 117. Like the
European Communities, the Panel "fails to see how this explanation does anything to refute the understanding
that DOD organises its own R&D efforts based on PEs". European Communities' comments on United States'
response to question 140, para. 125.
2786 The Department of Defense's (D OD) budget is divided into five broad budget categories: Military
Personnel; Operations & Maintenance; "Procureme nt"; "Research, Development, Test, & Evaluation
(RDT&E)"; and Military Construction. The "RDT&E" bu dget category funds research, development, test and
evaluation spending by DOD toward designing and developing military systems or technology, while the
"Procurement" budgets fund the actual acquisition costs of parts and labour of military systems that are in
production. RDT&E funding focused on a particular m ilitary aircraft may continue even after procurement
spending commences on the same military aircraft. This funds the further design or development of advanced
technologies that can later be incorporated into a military system that is already in production. The DOD
RDT&E programme is executed by the individual branches of the U.S. armed forces (Army, Navy and Air
Force), as well as by DOD generally. The broader RDT&E programme is subdivided into numerous "program

BCI deleted, as indicated [***]

purposes of Article 2 of the SCM Agreement. In th is regard, we disagree with the United States that
"a determination as to the specificity of DoD RD T&E cannot be made at the PE level, as the EC
contends, because the PEs challenged by the Eur opean Communities are, for the most part, not
themselves programs, or even groupings below the program level, and do not create a frame of
reference".
2787 In our view, it is the so-called "RDT&E Program" that creates no "frame of reference"
for the specificity analysis under Article 2 of the SCM Agreement.
7.1196 Given that we consider that the individual pr ogrammes appear to be the relevant frame of
reference for the purpose of Article 2 of the SCM Ag reement, the question that we ask is not whether
the "RDT&E Program" as a whole is specific under Article 2 of the SCM Agreement; rather, the
relevant question is whether the individual progra mmes at issue are specific under Article 2. Given
the fairly narrow focus of R&D performed under th e 23 individual programmes (i.e. PEs) challenged
by the European Communities, we conclude that the subsidies provided to Boeing through DOD R&D
assistance instruments entered into under the 23 programmes at issue are specific within the meaning
of Article 2.1(a) of the SCM Agreement.
7.1197 In any event, even if it were necessary to ex amine specificity at the level of the "RDT&E
Program" as a whole, we believe that the European Communities has demonstrated de facto
specificity under Article 2.1(c) of the SCM Agreement. The European Communities has substantiated
its assertion that Boeing, Lockheed Martin, Nort hrop Grumman, Raytheon, and United Technologies
have received on average 45.2 per cent of tota l DOD RDT&E funding over the period 1991 through
2005.2788 The United States' has responded that this does not establish the existence of
"disproportionately" large amounts being granted to "certain enterprises or industries". In our view, it
is not necessary for us to resolve the issue of whether this demonstrates "disproportionately" large
amounts for the purpose of Article 2.1(c), or what the proper "baseline" is for determining whether
these five contractors have received "disproportio nately" large amounts of R&D funding. The reason
is that, leaving aside this particular factor in Article 2.1(c), this evidence demonstrates that almost half
of all RDT&E funding went to five enterprises, all of which form part of the same industry. In our
view, this is more than enough to confirm that RDT&E funding goes "predominantly" to firms in the
defense industry, and this is enough to establish de facto specificity under Article 2.1(c).
7.1198 We conclude that the payments and access to facilities provided to Boeing through the 23
programmes at issue are subsidies that are sufficientl y limited to "a group of enterprises or industries"
within the meaning of Article 2.
(e) The amount of the subsidy to Boeing's LCA division
(i) Arguments of the European Communities
7.1199 The European Communities estimates that DOD provided Boeing with $4.3 billion in funding
and support for "dual use" R&D over the period 1991 -2006. The European Communities argues that
$2.4 billion of that total should be treated as a subsidy to Boeing's LCA division.2789

elements" or "PEs". We will simply refer to these as "programmes" here. The programmes into which the
broader RDT&E programme is subdivided include what the European Communities terms "general aircraft"
R&D programmes (which are not specific to a particular military aircraft, such as the "Defense Research
Sciences" programme), as well as "military aircraft" progra mmes (specific to a particular military aircraft, e.g.
the "C-17" programme). Each of th ese programmes has its own "PE#"; for example, the "Defense Research
Sciences" programme is identified as "PE# 0601102F".
2787 United States' response to question 50, para. 146.
2788 See European Communities' first written submi ssion, para. 770; European Communities' second
written submission, para. 491. Top Contractors' Share of DOD RDT&E, FY 1991-FY 2005, Exhibit EC-29.
2789 NASA/DOD/DOC Aeronautics R&D Subsidies to Boeing LCA Division, Exhibit EC-25, p. 20.

BCI deleted, as indicated [***]

(ii) Arguments of the United States
7.1200 The United States argues that the European Communities has overestimated the amount of
"dual use" research conducted under the programmes at issue. According to the United States, the
total amount of any subsidy to Boeing's LCA di vision under DOD R&D contracts and agreements is
significantly less than $308 million over the period 1991-2006.
(iii) Evaluation by the Panel
7.1201 The European Communities has demonstrated th at some of the DOD payments and access to
facilities, equipment and employees provided to Boeing through aeronautics R&D contracts and
agreements are subsidies within the meaning of Article 1 of the SCM Agreement. The Panel will now
consider the amount of the subsidy to Boeing's LCA division.
7.1202 It is not in dispute that DOD provided Bo eing with $45 billion in RDT&E funding over the
period 1991-2005.
2790 The European Communities does not asser t that the entirety of this funding
constitutes a subsidy to Boeing. Rather, the Eu ropean Communities' claim relates to DOD R&D
funding and support to Boeing for "dual use" R&D.
7.1203 At the outset, we note that there is no publicly available information setting forth the amount
of DOD "dual use" R&D funding to Boeing. Th us, the European Communities has presented the
Panel with an estimate of the amount of the DOD subsidy provided to Boeing's LCA division. The
European Communities estimates that out of the $ 45 billion in RDT&E funding that Boeing received
from DOD over the period 1991-2005, approximately $4.3 billion related to "dual use" R&D. The
European Communities' estimate is based on a detailed expert report prepared by CRA
International.2791 The European Communities argues that $2. 4 billion of this "dual use" R&D funding
and support should be treated as a subsidy to Boei ng's LCA division. The European Communities
argues that the Panel should ad opt its estimate of the amount of DOD R&D subsidies to Boeing 's
LCA division, unless the United States discloses eviden ce indicating the actual value of the payments
and access to facilities, equipment and employees that DOD provided to Boeing for the purpose of
conducting "dual use" R&D. The United States submits that it has done so. In the Panel's view, if the
United States were able to provide the Panel w ith the actual information and figures regarding the
amount of DOD R&D subsidies to Boeing, or info rmation from which the maximum amount of those
subsidies could be derived, then such inform ation would necessarily prevail over the European
Communities' estimate. Therefore, the Panel will begin by reviewing the evidence provided by the
United States.
7.1204 The United States initially indicated that th e total funding provided to Boeing under the
23 programmes at issue that met the European Communities' criteria of "dual use" R&D was not more
than $529 million.
2792 The United States provided the Panel with a list of 43 R&D contracts and
agreements in the form of Exhibit US-41. Howe ver, the United States subsequently indicated that
Exhibit US-41 contained several mistakes, and that the actual maximum amount is only
$308 million.
2793 Furthermore, the United States has argued that this represents the maximum
possible amount of DOD subsidies to Boeing, and that many of the R&D contracts and agreements

2790 See European Communities' second written submission, para. 471; Top Contractors' Share of DOD
RDT&E, FY 1991-FY 2005, Exhibit EC-29, p. 1.
2791 CRA International, U.S. Department of Defense (DoD) Research, Development, Test and
Evaluation (RDT&E) Funding Support to The Boeing Company for Dual-Use Aircraft R&D, November 2006,
Exhibit EC-7.
2792 United States' first written submission, paras 160-161.
2793 See United States' response to question regarding U.S. Exhibits (10 January 2008), p. 2.

BCI deleted, as indicated [***]

that comprise this $308 million estimate do not, in fact, involve any "dual use" R&D. 2794 In addition,
in respect of a number of the few remaining contracts and agreements on its list, the United States
argues that some had "elements" with "no civil applicability".
2795 Finally, the United States' estimate
of the amount of any DOD subsidy (i.e. significantly less than $308 million) concerns the total
amount of the subsidy to Boeing as a whole: if we were to apply the European Communities'
methodology for allocating DOD subsidies to Boeing's "LCA division", then whatever remained of
the United States' estimate following all of these reductions would then need to be further split in half.
Thus, while the United States has never provided an exact figure regarding the actual amount of any
DOD subsidy to Boeing's LCA division, it is clear th at any such estimate would be significantly less
than $308 million, and, it seems, significantly less than $100 million over the period 1991-2006.
7.1205 The Panel cannot accept the United States' estimate that the total amount of any DOD subsidy
to Boeing for "dual use" R&D is significantly less than $308 million over the period 1991-2006.
First, we note that the United St ates' estimate completely excludes all funding provided to Boeing
under the "military aircraft" RDT&E programmes at issue, which accounts for $3.1 billion out of the
European Communities' $4.3 billion estimate. Sec ond, the United States' assertions regarding the
maximum value of DOD R&D contracts and agreements with Boeing related to "dual use" R&D is
not supported by the same kind of evidence as the United States' estimate of the amount of NASA
payments to Boeing: among other things, while the United States has provided the Panel with
evidence demonstrating that the maximum amount of the NASA payments to Boeing for aeronautics
R&D cannot be more than $1.05 billion, the United States has advanced no similar argument or
evidence in respect of the maximum amount of DOD R&D. In addition, the United States' estimate of
the amount of DOD R&D subsidies to Boeing does not account for the value of any access to DOD
facilities granted to Boeing. In addition, the Panel does not consider it credible that less than 1 per
cent of the $45 billion in aeronautics R&D funding that DOD provided to Boeing over the period
1991-2005 had any potential relevance to LCA.
2796
7.1206 However, while the Panel cannot accept the Un ited States' estimate of the total amount of
DOD R&D subsidies to Boeing, we are also unable to accept the European Communities' estimate of
the amount of the subsidy to Boeing's LCA division. The reason is that the European Communities'
estimate is based on a methodology and analysis th at do not distinguish payments and access to
facilities provided to Boeing unde r procurement contracts from payments and access to facilities
provided to Boeing through assistance instruments.
7.1207 The parties have informed the Panel that it is not possible to perform such an analysis on the
basis of the information before us. 2797 Based on the Panel's careful review of the parties' responses to

2794 See United States' first written submission, paras. 161-162; United States' response to question 208,
para. 290; United States' comments on European Communities' response to question 190(b), para. 326.
2795 United States' response to question 208(b), para. 290 and footnote 376.
2796 We recognize that the concept of "dual use" R&D can be interpreted relatively broadly or narrowly.
For example, under a relatively broad understanding, research with "theoretical" or "potential" civil applications
might be considered "dual use". Under a narrower conception of what constitutes "dual use", it might be
considered that only R&D giving rise to tangible technologies actually applied on civil aircraft should be
considered "dual use". We are not taking a position on this definitional issue here. We understand the
United States' estimate of the amount of DOD R&D that is "dual use" to reflect the broadest understanding of
"dual use" R&D; applying a narrower definition of what constitutes "dual use", the United States' estimate
would be even less.
2797 See e.g. parties' responses to question 321 (the United States explains why "it is not possible to
conclude that a given program element funds exclusiv ely assistance agreements or exclusively procurement
contracts" (para. 23); the European Communities likewise indicates that "PEs cannot necessarily be divided into
a group of PEs funded through cooperative agreements or other "assistance" instruments, and a group of PEs
funded through procurement contracts; rather, any of these instruments may be utilised under any RDT&E PE"
(para. 29)).

BCI deleted, as indicated [***]

question 321, and of the evidence submitted by the pa rties relating to the measures at issue, we agree
with the parties that it is not possible to perform such an analysis on the basis of the information
before us.
7.1208 In US – Upland Cotton , the Appellate Body clarified that while a panel should endeavour to
arrive at an estimate of the order of the "ma gnitude" of the subsid(ies) alleged to cause price
suppression within the meaning of Article 6.3(c) of the SCM Agreement, a "precise, definitive
quantification is not required". 2798 Although the Appellate Body was focusing in that case on
Article 6.3(c), we believe that the same conclusion mu st also hold true with respect to the other forms
of serious prejudice set forth in Article 6.3.2799
7.1209 In this case, where we have determined that a measure constitutes a specific subsidy within
the meaning of Articles 1 and 2 of the SCM Agreem ent, we have attempted to determine the amount
of the subsidy that is properly allocated to Boei ng's "LCA division". However, in the case of DOD
R&D subsidies to Boeing, while we do not accept the United States' estimate that the total amount of
any DOD subsidy to Boeing for "dual use" R&D is significantly less than $308 million over the
period 1991-2006, we also cannot accept the European Communities' estimate, and any attempt by the
Panel to go further and arrive at our own estimate of the amount of the subsidy to Boeing's LCA
division would be speculative.2800

2798 Appellate Body Report, US – Upland Cotton , para. 467 ("In sum, reading Article 6.3(c) in the
context of Article 6.8 and Annex V suggests that a panel should have regard to the magnitude of the challenged
subsidy and its relationship to prices of the product in th e relevant market when analyzing whether the effect of
a subsidy is significant price suppression. In many cases, it may be difficult to decide this question in the
absence of such an assessment. Nevertheless, this does not mean that Article 6.3(c) imposes an obligation on
panels to quantify precisely the amount of a subsidy benefiting the product at issue in every case. A precise,
definitive quantification of the subsidy is not required").
2799 We see nothing in the Appellate Body's analysis to suggest that a different conclusion would apply
to any other forms of serious prejudice set out in Article 6.3 of the SCM Agreement. Among other things, the
Appellate Body referred generally to the differences between Parts III and V of the SCM Agreement in reaching
this conclusion. See e.g. Appellate Body Report, US – Upland Cotton, para. 464.
2800 However, we see no evidence to suggest that th e value of the payments and access to government
facilities that DOD provided to Boeing through assistance instruments would have been greater than the value of
the payments and access to government facilities that DOD provided to Boeing through pr ocurement contracts.
In this regard, we observe that the European Comm unities submitted a number of DOD R&D contracts and
agreements with Boeing along with its first written submission. Of these, nine were procurement contracts. See
Exhibit EC-507, Exhibit EC-508, Exhibit EC-509, Exhibit EC-510, Exhibit EC-511, Exhibit EC-514, Exhibit
EC-827, Exhibit EC-838 and Exhibit EC-1143. The remaining seven were cooperative agreements, technology
investment agreements or other assistance instruments. See Exhibit EC-406, Exhibit EC-512, Exhibit EC-513,
Exhibit EC-515, Exhibit EC-517, Exhibit EC-518 and Exhibit EC-830. We have reviewed all of these R&D
contracts and agreements to ascertain the face value indicating t h e t o t a l a m o u n t o f g o v e r n m e n t f u n d s
"committed" or "obligated" under each. It appears that $72 mil lion was committed under these nine
procurement contracts , and that $48 million was committed unde r these seven assistance instruments.
Thus, funding committed under assistance instruments ($48 million) accounts for 40 per cent of the total amount
of funding committed under the contracts and agreements submitted by the European Communities. Exhibit
US-41 (revised) lists 42 different DOD assistance instru ments and procurement contracts with Boeing, totalling
$308 million. This list includes 14 assistance instruments, and 28 procurement contracts. The list indicates that
the "amount" provided through assistance instruments is approximately $44 million. Thus, funding provided
through assistance instruments accounts for 14 per cent of the total amount indicated in Exhibit US-41(revised).
Therefore, if the Panel were to accept the various steps in the Europe an Communities' analysis leading
to its estimate that DOD provided a $2.4 billion subsidy to Boeing's LCA division, and if the Panel were to
consider that there is no evidence to support the conclusion that the value of the payments and access to
government facilities that DOD provided to Boeing through "assistance inst ruments" would have been greater
than the value of the payments and access to gove rnment facilities that DOD pr ovided to Boeing through

BCI deleted, as indicated [***]

(f) Conclusion
7.1210 For these reasons, the Panel finds that some of the payments and access to facilities that
DOD provided to Boeing through the 23 aerona utics R&D programmes at issue constitute
specific subsidies within the meaning of Articles 1 and 2. While the Panel does not accept the
United States' estimate that the total amount of any DOD subsidy to Boeing for "dual use"
R&D is significantly less than $308 million over the period 1991-2006, the amount of the subsidy
to Boeing's LCA division is unclear.
7. Department of Commerce (DOC) aeronautics R&D
(a) Introduction
7.1211 The European Communities argues that DOC ma kes payments to Boeing (and grants Boeing
access to facilities, equipment and employees) to perform R&D under the Advanced Technology
Program (ATP). The European Communities argues that these payments (a nd access to facilities,
equipment and employees) are subsidies within the meaning of Article 1 of the SCM Agreement, and
are specific within the meaning of Article 2 of the SCM Agreement. The European Communities
estimates that DOC provided $7.5 million in R&D funding to Boeing over the period 1991-2004, and
submits that $4.6 million of that total should be treated as a subsidy to Boeing's LCA division.2801
7.1212 The United States accepts that DOC R&D funding to Boeing is a subsidy within the meaning
of Article 1 of the SCM Agreement. However, the United States argues that the subsidy is not
specific within the meaning of Article 2 of the SCM Agreement. In addition, the United States asserts
that Boeing only received [***] million under the eight projects at issue.2802
(b) The measures at issue
7.1213 The pertinent item of the European Communities' panel request2803 reads:
"The US Department of Commerce ("DOC") transfers economic resources to the US
LCA industry on terms more favourable than available on the market or not at arm's
length, through the Advanced Technology Program operated pursuant to the Omnibus
Trade and Competitiveness Act of 1988, Pub. L. No. 100-418, as amended, and the
American Technology Preeminence Act of 1991, Pub. L. No. 102-245 and 15 CFR
§§ 295.1 et seq., by allowing the US LCA industry to participate in this programme,
making payments to the US LCA industry under this programme, or allowing the US
LCA industry to exploit the results of this programme, including but not limited to the
foregoing or waiving of valuable patent rights, and the granting of exclusive or early
access to data, trade secrets and other know ledge resulting from government funded
research. In particular, economic resources are transferred to the US LCA industry
through a number of projects, including, but not limited to, the following:
• Project 93-01-0089 (CVD Diamond-Coated Rotating Tools for Machining
Advanced Composite Materials);
• Project 95-12-0024 (An Agent-Based Fr amework for Integrated Intelligent
Planning – Execution);

procurement contracts, then the Panel might estimate that the amount of the subsidy to Boeing's LCA division
would not be more than half of what the European Communities estimates, i.e. not more than $1.2 billion.
2801 NASA/DOD/DOC Aeronautics R&D Subsidies to Boeing LCA Division, Exhibit EC-25, p. 21.
2802 United States' first written submission, para. 395.
2803 WT/DS353/2, item 4, pp. 11-12.

BCI deleted, as indicated [***]

• Project 95-01-0108 (Precision Optoelectronics Assembly);
• Project 91-01-0267 (Pre-competitive Advanced Manufacturing of Electrical
Products);
• Project 97-05-0020 (Extended Enterprise Coalition for Integrated Collaborative
Manufacturing Systems);
• Project 98-01-0168 (Hot Metal Gas Forming);
• Project 90-01-0126 (Solid-State Laser Technology for Point Source X-Ray
Lithography);
• Project 95-02-0036 (Plasma-Based Processing of Lightweight Materials for
Motor-Vehicle Components and Manufacturing Applications)."

7.1214 Thus, the European Communities has not cha llenged the ATP as a whole. Rather, it has
challenged only the eight ATP "projects" throug h which DOC has provided funding to Boeing/MD
for LCA-related research.2804 This is clear, and is not in dispute.
7.1215 What also seems clear is that the European Communities' argument that DOC provides goods
and services to Boeing in the form of government "facilities, equipment and employees" relates to an
alleged measure that is not identified in the Eur opean Communities' panel request, and therefore falls
outside of the scope of the European Communities' cl aim. In contrast to the items of the European
Communities' panel request relating to NASA subs idies (which cover "facilities", "equipment" and
"employees") and DOD subsidies (which covers onl y "facilities"), the European Communities' panel
request makes no reference to DOC providing access to facilities, equipment or employees.2805
7.1216 The United States does not dispute that Boeing received funding and/or participated in the
consortia of companies that received funding, under each of the eight projects at issue. It is also not in
dispute that different segments of Boeing / MD par ticipated in and received funding related to these
projects, including Boeing's LCA division, Boeing's IDS segment, and McDonnell Douglas's
"electronic systems" division.2806
7.1217 The ATP is administered by the National Ins titute of Standards & Technology, which is a
division of the DOC.
7.1218 The legislation pursuant to which the ATP operat es appears to be comprised of three different
legal instruments. These are: (i) the so-called "ATP statute" 2807; (ii) the American Technology
Preeminence Act of 1991 2808 ("ATPA") which amended the ATP statute; and (iii) the "ATP

2804 European Communities' second written submission, para. 512.
2805 For a side-by-side comparison of these items of the European Communities' Panel Request, see
above, para. 7.1120.
2806 ATP Project Briefs, Projects 90-01-0126 (Solid-State Laser Technology for Point-Source X-Ray
Lithography), 91-01-0267 (PREAMP – Pre-competitive Adva nced Manufacturing of Electrical Products), 93-
01-0089 (CVD Diamond-Coated Rotating Tools for Machining Advanced Composite Materials), 95-01-0108
(Precision Optoelectronics Assembly), 95-02-0036 (Plasma-Based Processing of Lightweight Materials for
Motor-Vehicle Components and Manufacturing Applications), 95-12-0024 (An Agent-Based Framework for
Integrated Intelligent Planning – Execution), 97-05- 0020 (EECOMS: Extended Enterprise Coalition for
Integrated Collaborative Manufacturing Systems), and 98-01-0168 (Hot Metal Gas Forming), Exhibit EC-553.
2807 Omnibus Trade and Competitiveness Act of 1988, Pub. L. No. 100-418, § 5131, Exhibit EC-531
("OTCA"); OTCA § 5131 is codified at 15 U.S.C. § 278n, as amended, Exhibit EC-532 ("ATP Statute").
2808 American Technology Preeminence Act of 1991, Pub. L. No. 102-245("ATPA"), Exhibit EC-533.

BCI deleted, as indicated [***]

Rules".2809 In addition to the legislation, certain documents set forth certain guidelines and eligibility
criteria for participation in the ATP.2810
7.1219 The ATP statute indicates that the Advanced Technology Program has the purpose:
"… of assisting United States businesses in creating and applying the generic
technology and research results necessary to--
(1) commercialize significant new scientific discoveries and technologies
rapidly; and
(2) refine manufacturing technologies.
The Secretary, acting through the Director, shall assure that the Program focuses on
improving the competitive position of th e United States and its businesses, gives
preference to discoveries and to technologies that have great economic potential, and
avoids providing undue advantage to specific companies. …" 2811
7.1220 According to the ATPA, this assistance is designed
"to improve the competitive position of United States industry by supporting
industry-led research and development pr ojects in areas of emerging technology
which have substantial pote ntial to advance the economic well-being and national
security of the United States."2812
7.1221 The ATP Rules provide that:
"The purpose of the Advanced Technology Program (ATP) is to assist United States
businesses to carry out research and development on high risk, high pay-off,
emerging and enabling technologies."
2813
7.1222 Boeing participated in the eight ATP-funded proj ects identified in the panel request, and each
of these projects is briefly described in a doc ument prepared by the DOC entitled "ATP Project
Briefs".2814 According to the European Communities, these ATP projects fall into three general

2809 National Institute of Standards & Technology A dvanced Technology Program Rules, 15 C.F.R.
§§ 295.1 et seq. ("ATP Rules"), Exhibit EC-534.
2810 ATP Eligibility Criteria for U.S. Subsidiaries of Foreign-Owned Companies: Legislation,
Implementation and Results, NISTIR-6099A, March 2004 ("2004 ATP Eligibility Crit eria"), Exhibit EC-535;
Guidelines For Proposing Economic Evaluation Studies to The Advanced Technology Program (ATP), NISTIR-
5896, November 1996 ("Guidelines for ATP Economic Evaluation Studies"), Exhibit EC-536; Advanced
Technology Program: Proposal Preparation Kit, February 2004 ("2004 ATP Proposal Preparation Kit"), Exhibit
EC-539; Advanced Technology Program: Proposal Preparation Kit, November 1998, Exhibit EC-540 ("1998
ATP Proposal Preparation Kit"); Advanced Technology Program: Proposal Prep aration Kit, December 1997
("1997 ATP Proposal Preparation Kit"), Exhibit EC-543.
2811 ATP Statute, Exhibit EC-532, § 278n(a).
2812 ATPA, Exhibit EC-533, § 201(b)(2)(C) (concerning Congress's findings and purposes).
2813 ATP Rules, Exhibit EC-534, § 295.1(a).
2814 ATP Project Briefs, Projects 90-01-0126 (Solid-State Laser Technology for Point-Source X-Ray
Lithography), 91-01-0267 (PREAMP – Pre-competitive Adva nced Manufacturing of Electrical Products), 93-
01-0089 (CVD Diamond-Coated Rotating Tools for Machining Advanced Composite Materials), 95-01-0108
(Precision Optoelectronics Assembly), 95-02-0036 (Plasma-Based Processing of Lightweight Materials for
Motor-Vehicle Components and Manufacturing Applications), 95-12-0024 (An Agent-Based Framework for
Integrated Intelligent Planning – Execution), 97-05- 0020 (EECOMS: Extended Enterprise Coalition for
Integrated Collaborative Manufacturing Systems), and 98-01-0168 (Hot Metal Gas Forming), Exhibit EC-553.

BCI deleted, as indicated [***]

categories, all of which are applicable to LCA: (i) improving the manufacturing of lightweight
composite and metal structures and materials, (i i) improving electronics components, and (iii)
improving manufacturing efficiency and supply chain l ogistics. Various segments of Boeing and MD
have participated in and received funding relate d to these projects, including Boeing's commercial
aircraft division, Boeing's space and defence divi sion, and McDonnell Douglas's electronic systems
division.2815
7.1223 In each of these projects, Boeing participated as a member of a consortium. 2816 It appears that
DOC provided all of the funding under the ATP, in cluding all of the funding at issue, through
cooperative agreements.2817
(c) Whether a subsidy exists within the meaning of Article 1 of the SCM Agreement
(i) Arguments of the European Communities
7.1224 In its first written submission, the European Communities argues that DOC directly transfers
funds in the form of "grants" to Boeing's LCA divi sion to support research and development, and that
this "direct R&D funding" constitutes a financial contribution within the meaning of
Article 1.1(a)(1)(i) of the SCM Agreement. Th e European Communities asserts that DOC also
provides ATP recipients "with organizational and technical advice, and makes available federal
equipment, facilities, and personnel", and that the pr ovision of these "goods and services" by the U.S.
Government constitutes an additional financ ial contribution within the meaning of
Article 1.1(a)(1)(iii) of the SCM Agreement.
2818
7.1225 Regarding the existence of a benefit within the meaning of Article 1.1(b) of the
SCM Agreement, the European Communities argues that the DOC "subs idies" confer "benefits" upon
Boeing's LCA division. The European Co mmunities argues that: (i) the financial
contributions "relate to the production of all Boeing LCA"; (ii) the financial contributions "provide
Boeing's LCA division with advantages on non-market terms"; (iii) "Boeing is not required to pay
anything in return" for the funding and support, and "has not been required to repay the US
Government for any resulting commercial rewa rds"; (iv) Boeing has received valuable
"knowledge and experience" from the aeronautics R& D, and (v) it is "axiomatic that such R&D
funding and support, which provide commercial rewards for nothing in return, are not available on the
market".2819
(ii) Arguments of the United States
7.1226 In its first written submission, the United States does not dispute that the payments made to
Boeing under the eight projects at issue constitute a financial contribution in the form of a direct
transfer of funds. 2820 In response to a question from the Panel, the United States accepts the

2815 European Communities' first written submission, para. 792, citing ATP Project Briefs, Exhibit EC-
553.
2816 United States' first written submission, para . 379; European Communities' second written
submission, para. 516.
2817 European Communities' first written submission, para. 798: United States' first written submission,
para. 360 ("ATP is a cost-sharing program. It uses cooperative agreements as funding instruments to assist in
financing projects in which private companies, univers ities, government laboratories, independent research
institutions, and/or non-profit organizations participate.")
2818 European Communities' first written submission, para. 798.
2819 European Communities' first written submission, paras. 800-802.
2820 United States' first written submission, para. 395 ("ATP provides a financial contribution to
program participants by directly transferring funds.")

BCI deleted, as indicated [***]

European Communities' characteriza tion of these measures as "grants". 2821 The United States does
not respond to the European Communities' argu ment regarding DOC "facilities, equipment and
employees" in either its first or second written submissions.
7.1227 In its first written submission, the United States does not respond to the
European Communities' arguments relating to the ex istence of a benefit to Boeing's LCA division.
However, in a response to a question from the Panel, the United States confirms that DOC
R&D funding "can be considered a subsidy within the meaning of Article 1 of the
SCM Agreement".2822
(iii) Evaluation by the Panel
7.1228 The ATP payments at issue were made to "joi nt ventures" or "consortia" in which Boeing
participated.2823 It is clear from the evidence before th e Panel that the ATP funding at issue was
provided for R&D that was principally for the joint venture / consortia's own benefit or use. This
evidence includes, among other things, the fact that the payments were made pursuant to "assistance
instruments" (cooperative agreements), the fact that the declared objective of the ATP is "to improve
the competitive position of United States industry" 2824 and "to assist United States businesses"2825, and
the fact that DOC has no independent use for the R&D that was performed. 2826 The United States
does not dispute that the payments made to Boeing under the eight "projects" at issue constitute a
financial contribution in the form of a direct transfer of funds. 2827 More specifically, the United States
accepts the European Communities' character ization of these measures as "grants". 2828 Accordingly,
the Panel finds that the payments involve a direct transfer of funds within the meaning of
Article 1.1(a)(1)(i).
7.1229 With respect to the existence of a benefit w ithin the meaning of Article 1.1(b) of the
SCM Agreement, we recall the reasoning that le d us to find that NASA's R&D contracts and
agreements, and certain DOD R&D agreements, confer a benefit within the meaning of Article 1.1(b).
In short, the Panel believes that no commercial en tity, i.e. no private entity acting pursuant to
commercial considerations, would provide paymen ts (and access to its facilities and personnel) to
another commercial entity on the condition that th e other entity perform R&D activities principally
for the benefit and use of that other entity. At a minimum, it is to be expected that some form of
royalties or repayment would be required in the ev ent that financial contri butions were provided on

2821 United States' response to question 194, para. 240 ("the United States explicitly recognizes that
under some circumstances – represented in this dis pute by ATP cooperative agreements – cost sharing
arrangements can and do confer a benefit to the private party recipient when the government's "share" represents
a "grant" for purposes of Article 1.1(a)(1)(i).")
2822 United States' response to question 14, para. 30.
2823 European Communities' second written submission, para. 516.
2824 ATPA, Exhibit EC-533, § 201(b)(2)(C) (concerning Congress's findings and purposes).
2825 ATP Rules, Exhibit EC-534, § 295.1(a).
2826 United States' response to question 214, paras. 342-344 ("ATP uses cooper ative agreements not to
purchase any goods or services, but to fund ATP projects without any expectation that the research will improve
the operations of ATP, the National Institute of Standa rds and Technology ("NIST"), or the U.S. Department of
Commerce ... Although the program monitors ATP projects , neither the administeri ng agency, NIST, nor the
U.S. Government receive any operational improvements, good s, or services in return for the funding that is
provided").
2827 United States' first written submission, para. 395 ("ATP provides a financial contribution to
program participants by directly transferring funds").
2828 United States' response to question 194, para. 240 ("the United States explicitly recognizes that
under some circumstances – represented in this dis pute by ATP cooperative agreements – cost sharing
arrangements can and do confer a benefit to the private pa rty recipient when the government's 'share' represents
a 'grant' for purposes of Article 1.1(a)(1)(i)"). See also, United States' response to question 14, para. 30.

BCI deleted, as indicated [***]

such terms.2829 The United States does not dispute that the "grants" provided to the "joint ventures" or
"consortia" in which Boeing participated confer a be nefit within the meaning of Article 1.1(b) of the
SCM Agreement. 2830 Accordingly, the Panel finds that the payments are provided on terms that
confer a benefit within the meaning of Article 1.1(b).
7.1230 For these reasons, the Panel finds that the ATP payments at issue are subsidies within the
meaning of Article 1 of the SCM Agreement.
(d) Whether the subsidy is specific within the meaning of Article 2 of the SCM Agreement
(i) Arguments of the European Communities
7.1231 In its first written submission, the European Communities argues that ATP subsidies are
specific within the meaning of Article 2.1(a) of the SCM Agreement. The European Communities
argues that "Access to ATP funding is explicitly li mited by regulation to only those US companies
that perform research into 'high risk, high pay-off, emerging and enabling technologies'". The ATP is
therefore specific "to those US enterprises, industries, or group of industries that perform this type of
research, including the US LCA industry". The European Communities also argues that the ATP
statute specifies that the Program's emphasis is " on solving generic problems of specific industries,
and on making those industries more competitive in world markets", and that these "specific
industries" include the fields of "high-resolution information systems, advanced manufacturing, and
advanced materials". Finally, the European Co mmunities argues that the eight particular ATP
projects at issue are limited to funding companies involved in: (i) manufacturing composite and metal
structures and materials; (ii) designing, developing, and manufacturing electronics components; and
(iii) improving logistics for manufacturing and supply chains. Thus, these ATP subsidies are specific
because DOC explicitly limits access to this funding to certain enterprises.
2831
7.1232 In its second written submission, the European Communities responds to the United States'
argument that the ATP is not specific within the meaning of Article 2 of the SCM Agreement by
reiterating two of the arguments se t forth above: (i) that the ATP as a whole is specific within the
meaning of Article 2.1(a) because of the fact that ATP funding is explicitly limited by regulation to
"the group of US enterprises or industries that perform research into 'high risk, high pay-off, emerging

2829 Recipients of ATP funding are not required to pay royalties. At paragraphs 786-787 of its first
written submission, the European Communities explains that:

"the US Government at one time required ATP participants to give the government a share of
the royalties and licensing fees they recei ved on ATP-funded technology, implicitly
recognizing that ATP participants were receivi ng a commercial benefit at public expense.
More specifically, the OTCA an d initial ATP regulations required ATP participants to share
royalties and licensing fees resulting from intellectual property derived from ATP funding
with the US Government, "in an amount proportional to the Federal share of the costs incurred
by the business or joint venture." This requirement was repealed as of 1992 by the ATPA.

In 2002, DOC proposed various reforms to ATP, one of which was to reinstate a royalty
sharing requirement. In particular, DOC suggest ed that ATP award recipi ents "pay an annual
royalty to the Federal government of 5 percent of any gross revenues derived from a product
or invention supported by or created as a result of ATP funding." In making this proposal,
DOC noted that "… it is fair and reasonable to require direct repayment based on the initial
Federal share if the company is profitable an d nets considerable gains from technology
developed under ATP." This proposal has not been adopted." (footnotes omitted)

2830 United States' response to question 14, para. 30.
2831 European Communities' first written submission, para. 803.

BCI deleted, as indicated [***]

and enabling technologies'" 2832; and that (ii) "what is at issue in this dispute are the eight ATP
projects in which Boeing participated, and an examination at the project level confirms that each of
these projects was explicitly limited to a group of enterprises, and therefore each of these projects is
de jure specific within the meaning of Article 2.1(a)".
2833 In its second written submission, the
European Communities explains that it advan ces these two arguments as arguments in the
alternative.2834
(ii) Arguments of the United States
7.1233 In its first written submission, the United States argues that the ATP is not specific within the
meaning of Article 2 of the SCM Agreement b ecause it provides funding for innovative, high risk
technologies "across a wide range of industries and technology sectors" 2835, as reflected in the
distribution of projects and funding across a range of sectors, the technologies funded, and the broad
eligibility criteria.2836
7.1234 In its second written submission, the United States reiterates that the ATP's focus on research
into "high risk, high pay-off, emerging and enabli ng technologies" does not amount to a limitation to
a "group of enterprises or industries" within the meaning of the SCM Agreement, because if it did, the
SCM Agreement's specificity requirement would be meaningless.2837
(iii) Evaluation by the Panel
7.1235 To be specific, a subsidy must be provided to a sufficiently limited "group" of enterprises or
industries within the meaning of Article 2 of the SCM Agreement. Article 2 requires more than a
simple demonstration that less than all of the enterprises or industries within the territory of a Member
were eligible to receive the subsidy. In other wo rds, it is not the case that any limitation whatsoever
on access to a subsidy establishes specificity. Rather, it must be demonstrated that the subsidy is
provided only to a sufficiently limited "group of enterprises or industries" in order to be specific
within the meaning of Article 2. This interpretati on is consistent with past WTO case law, and is also
consistent with the understanding of both parties to this dispute.
7.1236 In US – Upland Cotton, the panel noted that beyond setting out the rather general requirement
that the granting authority or its legislation explic itly limit access to the subsidy to certain enterprises,
"Article 2 of the SCM Agreement does not speak with precision about when 'specificity' may be
found".2838 The panel in that case continued:
"At some point that is not made precise in the text of the agreement, and which may
modulate according to the particular circumstances of a given case, a subsidy would
cease to be specific because it is sufficiently broadly available throughout an economy
as not to benefit a particular limited group of producers of certain products. The
plain words of Article 2.1 indicate that specificity is a general concept, and the
breadth or narrowness of specificity is not susceptible to rigid quantitative definition.
Whether a subsidy is specific can only be assessed on a case-by-case basis."
2839

2832 European Communities' second written submission, paras. 520-527.
2833 European Communities' second written submission, paras. 528-529.
2834 European Communities' second written submission, para. 530.
2835 United States' first written submission, para. 396.
2836 United States' first written submission, paras. 397-405.
2837 United States' second written submission, paras. 119, 122.
2838 Panel Report, US – Upland Cotton, para. 7.1139.
2839 Panel Report, US – Upland Cotton, para. 7.1142 (emphasis added).

BCI deleted, as indicated [***]

7.1237 The panel decision in US – Upland Cotton indicates that the specific ity analysis turns on a
qualitative assessment of the extent to which a subsidy is " sufficiently broadly available" throughout
an economy, i.e. whether it benefits a " particular" limited group of enterprises or industries. The
analysis suggests that there is some tipping point, which varies on a case-by-case basis, at which
access to the subsidy in issue is no longer considered to be limited to "certain enterprises" but rather is
"sufficiently broadly available" throughout an economy as to be non-specific. In other words, the
relevant question is not whether access to the subsidy is limited in any way at all, but rather where it is
sufficiently limited for the purpose of Article 2 of the SCM Agreement.
7.1238 We further note that neither of the parties in this case, nor any third party in this case, has
questioned this interpretation of Article 2 of the SCM Agreement. The European Communities
argues that:
"The critical question in the present case, however, is whether ATP funding is
specific to a group of industries or to a group of enterprises. The European
Communities has demonstrated that ATP funding is limited to the group of industries
or group of enterprises engaged in R&D relate d to 'high risk, high pay-off, emerging
and enabling technologies.' That is, the common relation or purpose, or similarity,
amongst this group of industries or group of enterprises is that they engage in a
specific type of R&D. It is clear that ATP funding is ... available only for the sub-set
of US-produced goods that can be consider ed 'high risk, high pay-off, emerging and
enabling technologies.' This sub-set represents a sufficiently limited portion of the US
economy.
Thus, ATP is not a subsidy that is ' sufficiently broadly available throughout {the US}
economy {so} as not to benefit a particular limited group of producers of certain
products,' and consequently, A TP is specific within the meaning of Article 2.1 of the
SCM Agreement."
2840
7.1239 Along the same lines, the United States refers to a "limitation on the group that is restrictive
enough to make it 'specific'".2841
7.1240 In the light of the foregoing, we consider that the term "group" in Article 2 of the
SCM Agreement means a sufficiently limited group . This is how we use the term "group" in our
evaluation of the European Communities' ar guments. As the complaining party, the
European Communities bears the burden of demonstrating that the subsidies provided to Boeing under
the ATP are specific within the meaning of Ar ticle 2. The European Communities advances
three arguments. We address these in turn.
The ATP Rules refer to U.S. companies that perform research and development on "high risk,
high pay-off, emerging and enabling technologies"

7.1241 The European Communities emphasizes that acco rding to the ATP Rules, the purpose of the
Program is "to assist United States businesses to carry out research and development on high risk,
high pay-off, emerging and enabling technologies ".2842 For the following reasons, we do not believe
that U.S. enterprises or industries that perform re search and development on "high risk, high pay-off,
emerging and enabling technologies" constitute a sufficiently limited group of enterprises or
industries within the meaning of Article 2 of the SCM Agreement.

2840 European Communities' comments on United States' response to question 48, paras. 177-178.
2841 United States' response to question 142, para. 123.
2842 ATP Rules, Exhibit EC-534, §§ 295.1(a), 295.6.

BCI deleted, as indicated [***]

7.1242 First, limiting funding to R&D into "high risk, high pay-off, emerging and enabling
technologies" does not on its face appear to be a si gnificant limitation to any group of enterprises or
industries in the United States. Second, there is nothing in the relevant provision of the ATP Rules to
suggest that this language operates as a significant limitation:
"§ 295.1 Purpose.
(a) The purpose of the Advanced Technol ogy Program (ATP) is to assist United
States businesses to carry out research and development on high risk, high pay-off,
emerging and enabling technologies. These technologies are:
(1) High risk, because the technical challenges make success uncertain;
(2) High pay-off, because when applied they offer significant benefits to the U.S.
economy; and
(3) Emerging and enabling, because they offer wide breadth of potential
application and form an important technical basis for future commercial
applications."
 2843
7.1243 Along the same lines, other provisions of the ATP Rules suggest that this condition does not
operate to limit R&D funding to a limited group of enterprises or industries. For example,
section 295.6, which sets forth certain "eligibility criteria", provides that:
"… The proposed technology must be highly innovative . The research must be
challenging, with high technical risk. It must be aimed at overcoming an important
problem(s) or exploiting a promising opportunity . The technical leverage of the
technology must be adequately explained. The research must have a strong potential
for advancing the state of the art and contributing significantly to the U.S. scientific
and technical knowledge base. …" 2844
7.1244 Third, the evidence before the Panel regardi ng the manner in which ATP funding has actually
been expended further confirms that U.S. companies that perform research into "high risk, high pay-
off, emerging and enabling technologies" are not a limited group of enterprises or industries:
• Since the programme began making project awards in 1990, it has made 768 project awards
that extend across the fields of advanced mate rials and chemicals, biotechnology, electronics,
computer hardware, and communications, information technology, and manufacturing.2845

• The 768 ATP projects include 168 in the field of advanced materials and chemicals, 190 in
biotechnology, 167 pertaining to electronics, co mputer hardware, and communications, 156 in
the information technology sector, and 87 pertaining to manufacturing of various types. 2846
Each of these sectors potentially comprises multiple industries and enterprises. For example,
the manufacturing sector covers health care manuf acturing such as digital radiology, photonics
manufacturing, automobile manufacturing, a nd environmental technology manufacturing,
among a host of other industries.

2843 Ibid (emphasis added).
2844 Ibid (emphasis added).
2845 ATP Awards Summary Data - Awards 475 (T echnology Area by Year ), Factsheet 3.B1,
Sept. 2004, Exhibit US-151.
2846 ATP Awards Summary Data - Awards 475 (T echnology Area by Year ), Factsheet 3.B1,
Sept. 2004, Exhibit US-151.

BCI deleted, as indicated [***]

• The specific technologies that have resulted from ATP projects include, among others, animal
and plant biotechnology, automobile manufacturi ng, bimolecular and bi omimetic materials,
computer hardware, diagnostic and therapeutic biotechnology, environmental technologies,
imaging and image processing, intelligent contro l, marine biology, materials handling,
nanotechnology, optics and photonics, and semiconductors.2847

• The ATP has disbursed more than $2.3 billion in funding since 1990. 2848 The total $2.3 billion
of ATP funding from 1990 to 2004 has been si milarly broadly distributed: $488 million has
gone to projects in advanced materials a nd chemicals; $449 million to biotechnology;
$576 million to electronics, computer hard ware, and communications; $504 million to
information technology; and $252 million to manufacturing.2849

7.1245 Fourth, we note that this language is found only in the ATP Rules. As noted above, the ATP
statute states in more general terms that the ATP has the purpose:
"… of assisting United States businesses in creating and applying the generic
technology and research results necessary to--
(1) commercialize significant new scientific discoveries and technologies
rapidly; and
(2) refine manufacturing technologies.
The Secretary, acting through the Director, shall assure that the Program focuses on
improving the competitive position of th e United States and its businesses, gives
preference to discoveries and to technologies that have great economic potential, and
avoids providing undue advantage to specific companies. …" 2850
7.1246 In sum, the evidence before us leads us to conc lude that the reference to "high risk, high pay-
off, emerging and enabling technologies" in the ATP Rules does not operate to limit subsidies granted
under the ATP to a "group of enterprises or industries" within the meaning of Article 2 of the
SCM Agreement.
 The ATP statute refers to "solving generic problems of specific industries"

7.1247 The European Communities asserts that the ATP statute says that the Program's emphasis is
"on solving generic problems of specific industries, and on making those industries more competitive
in world markets".
2851 The European Communities also asserts , along the same lines, that the ATPA
indicates that "these specific industries" include the fields of "high-resolution information systems,
advanced manufacturing, and advanced materials".2852
7.1248 We believe that these statements are taken out of context. First, regarding the reference to
"solving generic problems of specific industries", the provision of the ATP statute that
European Communities relies on reads in relevant part:

2847 ATP Funded Technologies, Exhibit US-152.
2848 Historical Statistics on Applications and Awards, Factsheet 3.A1 (Sept. 2004), Exhibit US-153.
2849 ATP Awards Summary Data - Funding (Technolog y Area by Year), Factsh eet 3.B2 (Sept. 2004) ,
Exhibit US-168.
2850 ATP Statute, Exhibit EC-532, § 278n(a) (emphasis added).
2851 ATP Statute, Exhibit EC-532, § 278n(b)(1)(B).
2852 ATPA, Exhibit EC-533, § 201(b)(1)(F).

BCI deleted, as indicated [***]

"Under the Program established in subsection (a) of this section, and consistent with
the mission and policies of the Institute, the Secretary, acting through the Director,
and subject to subsections (c) and (d) of this section, may—
(1) aid industry-led United States joint research and development ventures
(hereafter in this section referred to as 'j oint ventures') (which may also include
universities and independent research organizations), including those involving
collaborative technology demonstration proj ects which develop and test prototype
equipment and processes, through—
(A) provision of organizational and technical advice; and
(B) participation in such joint ventures by means of grants, cooperative
agreements, or contracts, if the Secretary, acting through the Director, determines
participation to be appropriate, which ma y include (i) partial start-up funding, (ii)
provision of a minority share of the cost of such joint ventures for up to 5 years, and
(iii) making available equipment, facilities, and personnel,
provided that emphasis is placed on areas where the Ins titute has scientific or
technological expertise, on solving generic problems of specific industries, and on
making those industries more competitive in world markets …" (emphasis added)
7.1249 Reading this provision in full, it is clear th at it does not limit ATP funding to "specific
industries", within the meaning of Article 2 of the SCM Agreement or otherwise.
7.1250 Second, the ATPA does not list "high-resolution information systems, advanced
manufacturing, and advanced materials" as the "speci fic industries" that are eligible to receive ATP
funding. The provision that the European Communiti es cites makes clear that these are illustrative of
the fields of research that ATP funds. Section 201(b)(1)(F) states:
"(F) it is vital that industry within the United States attain a leadership role and
capability in development, design, and manufacturing in fields such as high-resolution
information systems, advanced manufacturing, and advanced materials".2853
 The eight projects at issue are each limite d to a group of enterprises or industries

7.1251 Finally, the European Communities argues, in the alternative, that each of the eight projects at
issue was limited to a "group of enterprises or industries".
7.1252 In the Panel's view, specificity must generally be analysed at the level of the subsidy
programme pursuant to which individual payments are provided (where the subsidy take the form of a
payment, and where it is provided pursuant to a wider programme), and not at the level of each
individual payment taken in isolation, absent one or mo re reasons as to why an analysis at the level of
the entire programme is not appropriate. To take a simple example, assume that a government
provides a $100 grant to every enterprise in every industry in its territory, including company A. This
would appear to be a textbook example of a subs idy that is not specific under Article 2 of the
SCM Agreement. It would seem absurd to reas on that the subsidy provide to company A is
nonetheless specific under Article 2 because access to that subsidy, i.e. the payment to A taken in
isolation, was limited to one company – i.e. to company A.

2853 ATPA, Exhibit EC-533, § 201(b)(1)(F).

BCI deleted, as indicated [***]

7.1253 The panel in Japan – DRAMs sought to avoid interpreting Article 2 of the SCM Agreement in
such a way as to lead to this result:
"... if an investigating authority were to focus on an individual transaction, and that
transaction flowed from a generally available support programme whose normal
operation would generally result in financia l contributions on pre-determined terms
(that are therefore not tailored to the r ecipient company), that individual transaction
would not, in our view, become 'specific' in the meaning of Article 2.1 simply
because it was provided to a specific company."2854
7.1254 Of course, the foregoing only applies where an individual payment is made pursuant to and
flows from a broader, identifiable subsidy programme. To the extent that a financial contribution is
not provided as part of any broader, identifiable subsidy programme, then specificity must necessarily
be analysed at the level of the individual payments . In addition, as noted above, there may be one or
more reasons as to why an analysis at the level of an entire programme is not appropriate. In this
regard, the United States agrees that "it is not the case that specificity must always be examined at the
highest level of aggregation of the activities of the granting authority" and that "it may be appropriate
to analyze specificity at a lower level". 2855 The United States argues th at this is a "fact-specific
inquiry", and that "the complaining party must provi de a reasoned basis for performing the analysis at
that level".2856 The European Communities seems to agree with these propositions.2857
7.1255 We have concluded above that the European Communities has failed to demonstrate that the
ATP as a whole is specific under Article 2 of the SCM Agreement. Therefore, we consider the
relevant question to be whether the European Communities has provided one or more reasons for
examining specificity at the level of the individual pr ojects at issue, rather than at the level of the
entire ATP. Having carefully considered th e evidence before us, we conclude that the
European Communities has failed to identify any ba sis for doing so in the case of the ATP. We
therefore conclude that, in the absence of any reas oned basis for conducting the specificity analysis at
the level of the individual projects, the specificity an alysis must be conducted at the level of the entire
ATP. We recall that we have already rejected the European Communities' argument that the ATP as a
whole is specific.
7.1256 In sum, we find that the Eur opean Communities has failed to de monstrate that the subsidies
provided to Boeing under the ATP are specific w ithin the meaning of Article 2 of the SCM
Agreement.
(e) Conclusion
7.1257 For these reasons, the Panel finds that the p ayments that DOC made to joint ventures /
consortia in which Boeing participated throug h the Advanced Technology Program constitute
subsidies within the meaning of Article 1 of the SCM Agreement. However, the Panel finds that

2854 Panel Report, Japan – DRAMs (Korea) , para. 7.374 (emphasis added). In Japan – DRAMs
(Korea), the main issue with respect to Article 2 was wh ether it was appropriate to analyse certain debt
restructuring transactions with Hynix at the level of those individual restructurings (in which case it was
axiomatic that the subsidies were specific to Hynix), or ra ther at the level of the broader framework legislation.
Korea argued that the broader framework legislation (the "CRPA") was the "relevant program" for the purposes
of the Article 2 analysis (which, if correct, would have likely led to a finding that the subsidy provided to Hynix
was not specific.) The same issue, involving the same transactions, was addressed by the panel in EC –
Countervailing Measures on DRAM Chips.
2855 United States' response to question 50, para. 143.
2856 United States' response to question 50, para. 143.
2857 European Communities' comments on United States' response to question 50, para. 185.

BCI deleted, as indicated [***]

the European Communities has not demonstrated th at these subsidies are specific within the
meaning of Article 2 of the SCM Agreement.
8. NASA/DOD intellectual property right waivers/transfers
(a) Introduction
7.1258 The European Communities argues that NASA and DOD "transfer" to Boeing certain patent
rights and data rights. The scope of the European Communities' claim is limited to these intellectual
property rights over research performed by Boeing under its R&D contracts and agreements with
NASA and DOD. The European Communities argues th at this "transfer" of intellectual property
rights is a subsidy within the meaning of Article 1 of the SCM Agreement, and is specific within the
meaning of Article 2 of the SCM Agreement. Th e European Communities is unable to estimate the
value of this alleged subsidy, but estimates that the value of 5 of the patents "transferred" to Boeing is
$726 million over the period 1997-2022 (i.e. the last year when any of the five valued patents are in
force).2858
7.1259 The United States argues that Boeing's retention of certain intellectual property rights under
NASA and DOD R&D contracts and agreements is not a subsidy within the meaning of Article 1 of
the SCM Agreement, and is not specific within the meaning of Article 2 of the SCM Agreement.
(b) The measures at issue
7.1260 The European Communities' panel request 2859 states that NASA provides a subsidy to Boeing
by enabling Boeing "to exploit the results" of research programmes "by means including but not
limited to the foregoing or waiving of valuable pa tent rights, the granting of limited exclusive rights
data ("LERD") or otherwise exclusive or early access to data, trade secrets and other knowledge
resulting from government funded research", by "granting the US LCA industry exclusive or early
access to data, trade secrets, and other knowledge resulting from government funded research", and
by "allowing the US LCA industry to exploit the results of government funded research, including,
but not limited to, the foregoing or waiving of valuable patent rights or rights in data as such".
7.1261 With respect to DOD, the European Communities' panel request
2860 states in similar terms that
DOD provides a subsidy to Boeing by enabling Boeing "to exploit the results" of DOD-funded
research, "by means including but not limited to th e foregoing or waiving of valuable patent rights,
and the granting of exclusive or early access to data , trade secrets and other knowledge resulting from
government funded research", and "by allowing the US LCA industry to exploit the results of
government funded research, including, but not limited to, the foregoing or waiving of valuable patent
rights or rights in data as such".
7.1262 The European Communities' panel request indicates that NASA and DOD accord this
treatment to Boeing pursuant to the following laws , regulations, and other measures (some of which
are specific to NASA, some of which are specific to DOD, some of which concern patents, and some
of which concern data rights):

2858 Amount of Subsidies to Boeing's LCA Division , Exhibit EC-17; Estimates of Benefits from Patent
Waivers/Transfers to Boeing/MD, Exhibit EC-20.
2859 WT/DS353/2, items 2(a), 2(f), 2(g), pp. 6, 8, and 9.
2860 WT/DS353/2, items 3(a), 3(d), pp. 9 and 11.

BCI deleted, as indicated [***]

• 35 U.S.C. §§ 200 et seq.;
• Memorandum to the Heads of Ex ecutive Departments and Agencies: Government Patent
Policy, Pub. Papers 248 (18 February 1983);
• Executive Order 12591 (10 April 1987);
• 14 CFR §§ 1245.100 et seq.;
• 14 CFR §§ 1274.911 - 1274.914;
• 48 CFR §§ 27.300 et seq.;
• 48 CFR §§ 27.400 et seq.;
• 48 CFR §§ 227.7100 et seq.
• 48 CFR §§ 227.303 et seq.;
• Requirements for Documentation, Approval, and Dissemination of NASA Scientific and
Technical Information, section 4.5.7.1 (NPG 2200.2A)

7.1263 In response to a Panel question, the European Communities clarifies that it is challenging all
patents transferred / waived to Boeing under any an d all R&D contracts and agreements that Boeing
entered into with NASA and DOD, including but not limited to those entered into under the specific
NASA and DOD R&D programmes listed in the Europ ean Communities' panel request. According to
the European Communities:
"... from the outset of this dispute, the European Communities has been challenging
as a specific subsidy the provision of all patents to Boeing by NASA and DOD
pursuant to all NASA and DOD contracts, even if they derive from programmes that
are not being specifically challenged."
2861
7.1264 With respect to the allocation of "data rights ", the scope of the Eur opean Communities' claim
is limited to the treatment accorded under NAS A R&D contracts and agreements with Boeing
containing "Limited Exclusive Rights Data" (LERD) clauses, and to DOD R&D contracts and
agreements with Boeing under which DOD acquired onl y "limited", "government-purpose" rights in
the data (as opposed to "unlimited rights data"). The European Communities has explained that it is
not otherwise challenging the allocation of data rights under NASA or DOD R&D contracts and
agreements with Boeing:
"To be clear, with respect to NASA, the European Communities is challenging as a
subsidy the protection of government-funde d data rights on behalf of Boeing only
pursuant to the Limited Exclusive Rights Da ta ('LERD') clauses of the ACT, HSR,
AST, and R&T Base programs. 2862 The United States acknowledges that, with
respect to LERD, 'Boeing and other contractors negotiated to limit the otherwise
unlimited rights that the U.S. government would normally have in specifically
identified data developed in the c ourse of the contracted research.' 2863 Consequently,
NASA provides 'goods other than general in frastructure' within the meaning of
Article 1.1(a)(1)(iii), as data rights are a type of intellectual property right that NASA
would ordinarily own, but which NASA has provided to Boeing through LERD
provisions.
With respect to provision of data right s by DOD, the European Communities is
challenging the practice of providing data rights to Boeing in instances where the
Government has funded, at least in part, the R&D resulting in those rights.
2864 During

2861 European Communities' response to question 216, para. 386 (emphasis added).
2862 (footnote original) First Written Submission by the European Communities, para. 838.
2863 (footnote original) First Written Submission by the European Communities, para. 352 (emphasis
added).
2864 (footnote original) First Written Submission by the European Communities, para. 839.

BCI deleted, as indicated [***]

the term of the data rights, the Government 'may not use, or authorize other persons to
use, technical data … for commercial purpo ses,' while the rights of Boeing to this
data is unlimited.2865" 2866
7.1265 With respect to "trade secrets", which appears to be a subset of data rights, the scope of the
European Communities' claim is limited to NASA.2867
(c) Arguments of the European Communities
7.1266 In its first written submission, the European Communities argues that the transfers of valuable
intellectual property rights to Boeing, including patents, rights to trade secrets, and rights to data, by
NASA and DOD, constitute financial contributions w ithin the meaning of Article 1.1(a)(1) of the
SCM Agreement. According to the European Comm unities, such transfers constitute a provision of
goods within the meaning of Article 1.1(a)(1)(iii). In this regard, the European Communities explains
that the term "good" is defined as " {p}roperty or possessions", that patents and the other rights at
issue are generally considered intellectual property and are covered as such by the TRIPS Agreement,
and that United States law explicitly states that "patents shall have the attributes of personal
property". 2868 The European Communities argues, in the alternative, that these intellectual property
right transfers constitute the "foregoing of govern ment revenue" that is "otherwise due" within the
meaning of Article 1.1(a)(1)(ii), as entities making use of a government's intellectual property rights
"would ordinarily need to pay license fees for such use". For example, when an entity seeks to use
technology patented by NASA or DOD, it must ordinarily negotiate a license requiring, inter alia ,
payment of royalties.2869
7.1267 In its second written submission, the European Communities responds to the United States'
argument that NASA and DOD patent and data rights transfers/waivers do not constitute a financial
contribution because under U.S. patent and copyright la w, the rights retained by the contractor and its
employees "belong to them in the first place". 2870 With respect to patent rights, the
European Communities argues that, under the appli cable law and regulations, the patent rights are
neither "guaranteed to the contractor and its employees," nor did they ever "belong {} to them in the
first place". The European Communities reviews the policies and practice of both NASA and DOD in
order to demonstrate that, absent a waiver, the patent owner is the U.S. Government, not the
contractor.2871 The European Communities argues that the same is true of the data rights it challenges.
In this regard, the European Communities clarif ies that it is only challenging as a subsidy the
protection of government-funded data rights on behalf of Boeing pursuant to the Limited Exclusive
Rights Data ("LERD") clauses in the case of NASA, and DOD's practice of providing data rights to
Boeing in instances where the govern ment has funded, at least in part, the R&D resulting in those
rights.
2872
7.1268 Regarding the existence of a benefit within the meaning of Article 1.1(b) of the
SCM Agreement, the European Communities argues that NASA/DOD "intellectual property right
waivers/transfers" confer "benefits" on Boeing' s LCA division. The European Communities argues
that: (i) the financial contributions "relate, at l east in part, to the production of all Boeing LCA";

2865 ( footnote original ) First Written Submission by the European Communities, para. 839, citing
48 C.F.R. § 227.7103-5(b)(4), Exhibit EC-590; First Written Submission of the United States, para. 353.
2866 European Communities' second written submission, paras. 546-547.
2867 European Communities' first written submission, para. 833.
2868 European Communities' first written submission, para. 841.
2869 European Communities' first written submission, para. 842.
2870 United States' first written submission, paras. 324, 355-356.
2871 European Communities' second written submission, paras. 538-541.
2872 European Communities' second written submission, paras. 546-547.

BCI deleted, as indicated [***]

(ii) the financial contributions "provide Bo eing's LCA division with advantages on non-market
terms"; (iii) "Boeing is not required to pay anyt hing in return" for these intellectual property right
waivers/transfers; (iv) Boeing has received valuable "knowledge and experience" from the
aeronautics R&D, and (v) these are rights that Bo eing "would not be able to obtain on the market
without purchasing or licensing them for fair market value, and therefore represent "free" property
rights for Boeing".2873
7.1269 In its second written submission, the European Communities responds to the United States'
arguments regarding benefit. First, the Eur opean Communities argues that a WTO Member cannot
avoid all disciplines of the SCM Agreement by simply asserting without any support that every aspect
of that contract was market-based and negotiated at arms-length.
2874 Second, the intellectual property
provision/waiver policies, as adapted for large bus inesses like Boeing, were implemented in order to
"improve the productivity of the U.S. economy, creat e new jobs, and improve the position of the U.S.
in world trade", at least according to the President of the United States; they were not implemented
because the government "was having a hard time fi nding contractors to take the Government's
money".2875 Third, the European Communities argues th at the allocation of intellectual property
rights under NASA/DOD R&D contracts and agreem ents deviates from normal commercial practice
because " {g}enerally, when private corporations fund other entities to carry out research on their
behalf, they retain full rights to any intellectual property created". 2876 In support of that assertion, the
European Communities refers to an article on intellectual property rights and stem cell research 2877
and a Declaration of Regina Dieu, Legal Counsel in the Airbus SAS Indus trial procurement Legal
Department, which states that when Airbus funds and R&D project it exclusively and solely owns any
and all Intellectual Property genera ted or acquired in connection with and during the performance of
the R&D project. 2878 In addition, the Eu ropean Communities refers 2879 to an article on collaborative
research2880, a WIPO Training Course 2881 and a contract concluded by Boeing with the National
Institute for Aviation Research at Wichita State University.2882
7.1270 Regarding specificity, the European Comm unities argues that NASA and DOD intellectual
property right waivers/transfers are specific w ithin the meaning of Article 2.1(a) of the
SCM Agreement. The European Communities argues that the legislative authority for NASA's R&D
programmes (pursuant to which the intellectual property is created) derives from the Space Act, which
limits those programmes to those indu stries that can satisfy the objectiv es of that Act. Accordingly,
NASA's intellectual property right transfers, whic h all derive from NASA-f unded R&D, are specific
to the enterprises that participate in aeronautics and space-related R&D. Likewise, DOD's intellectual
property right transfers all derive from DOD-funded R& D, which is specific to the group of defense-
related industries capable of c onducting these specialized activities. 2883 The European Communities

2873 European Communities' first written submission, paras. 849-851.
2874 European Communities' second written submission, paras. 549-550, 552.
2875 European Communities' second written submission, paras. 551, 559.
2876 European Communities' second written submission, para. 553.
2877 Sean M. O'Connor, "Intellectual Property Rights and Stem Cell Research: Who Owns the Medical
Breakthroughs?" 39 New Eng. L. Rev. 665 (2005), Exhibit EC-1212, p. 669.
2878 Declaration of Regina Dieu, 8 November 2007, Exhibit EC-1178.
2879 European Communities' second written submission, paras. 553-556.
2880 Rochelle Cooper Dreyfuss, "Collaborative Res earch: Conflicts on Authorship, Ownership and
Accountability", 53 Vand. L. Rev. 1161 (2000), Exhibit EC-1228, p. 1212.
2881 WIPO-MOST, "Intermediate Training Course on Practical Intellectual Property Issues in
Business", 13 November 2003, Exhibit-EC 1229, pp. 42-43.
2882 Contract Between Boeing Commercial Airplane Group Wichita Division and Wichita State
University, Contract No. 000051728, 4 November 2002, Exhibit EC-1231.
2883 European Communities' first written submission, paras. 852-853.

BCI deleted, as indicated [***]

also argues that the intellectual property rights tran sfers are de facto specifi c under Article 2.1(c) of
the SCM Agreement, on the basis of Boeing's share of NASA and DOD R&D contracts.2884
7.1271 In its second written submission, the European Communities responds to the United States'
rebuttal arguments on specificity by reasoning that it is not relevant if other U.S. government agencies
follow the same practices as NASA and DOD with rega rd to the allocation of intellectual property
rights. The European Communities argues that " {i}t is important to recall that Article 2.1(a) provides
two options (as reflected by use of the word "or") by which the complainant may demonstrate de jure
specificity – i.e. the complainant can show either that "the granting authority … explicitly limits
access to a subsidy to certain enterprises" or that "the legislation pursuant to which the granting
authority operates, explicitly limits access to a subsidy to certain enterprises". The
European Communities explains that the "second op tion does not, however, refer to the "legislation
pursuant to which the subsidy programme operates," but it refers instead to the "legislation pursuant
to which the granting authority operates". The European Communities reiterates that "the granting
authorities at issue here are NASA and DOD, and they operate pursuant to their own sets of laws and
regulations, such as the NASA Space Act".2885
(d) Arguments of the United States
7.1272 The United States argues that NASA and DOD patent and data rights transfers/waivers do not
constitute a financial contribution because under U.S. pa tent and copyright law, the rights retained by
the contractor and its employees "belong to them in the first place". 2886 Thus, NASA and DOD do not
provide any "contribution" to Boeing, financial or otherwise. Rather, it is Boeing that transfers
certain intellectual property rights to NASA and DOD under the R&D contracts and agreements at
issue when it grants the government a royalty-fr ee license to use any inventions and data produced
under the contract or agreement. Regarding patent rights, the United States argues that the
European Communities' allegation that DOD and NASA made a financial contribution by
"transferring" or "waiving" of patent rights fails on several counts. At the most basic, "it is the
inventor that holds the patent right in the first place", and the only possible "transfer of rights" as a
result of the contract begins with the inve ntor and proceeds to the government, and not vice versa. In
addition, the European Communiti es is mistaken in asserting that the assignment of patent rights
under a government contract is the provision of a good under Article 1.1(a)(1)(iii) of the
SCM Agreement or the foregoing of government reve nue otherwise due under Article 1.1(a)(1)(ii) of
the SCM Agreement.
2887 Regarding data rights, the United States argues along the same lines that
there cannot be a "provision" for purposes of Article 1.1(a)(1)(iii) when the government confirms the
data generator's rights and provides nothing additional, and as DOD and NASA merely allowed
Boeing to retain the intellectual property rights to which it was entitled under general copyright law,
the agencies did not "forego any revenue" within the meaning of Article 1.1(a)(1)(ii).2888
7.1273 The United States reiterates this argument in its second written submission, arguing that "the
EC assertion that the Government conveyed intell ectual property rights to Boeing reverses what
actually occurred – that Boeing conveyed intell ectual property rights to the Government". 2889 T h e
United States reiterates that intellectual propert y rights are not goods within the meaning of
Article 1.1(a)(1)(iii) of the SCM Agreement, such that even if there were a "transfer" of intellectual

2884 European Communities' first written submission, paras. 854-855.
2885 European Communities' second written submission, para. 577.
2886 United States' first written submission, paras. 324, 355-356.
2887 United States' first written submission, para. 317.
2888 United States' first written submission, para. 356.
2889 United States' second written submission, paras. 100-105.

BCI deleted, as indicated [***]

property rights from NASA/DOD to Boeing, such a "transfer" would not constitute a provision of
"goods" within the meaning of that provision.2890
7.1274 Regarding the existence of a benefit, the Unite d States argues in its first written submission
that even if the Panel were to conclude that there is a financial contribution, "the treatment identified
by the EC does not confer a benefit". The United St ates argues that the value of the patent rights is
incorporated in the exchange of value that th e government and contractor agree upon in negotiating
the initial contract. 2891 The United States further argues that "even if considered in isolation, the
patent clauses in U.S. government contracts indicate a rough balance between the parties". 2892 The
United States also takes issue with the Europ ean Communities' attempt to derive benefit under
Article 1.1(b) of the SCM Agreement based on an ex post facto consideration of the value of the
intellectual property rights under cer tain contracts and agreements. 2893 In its second written
submission, the United States argues that the Eur opean Communities has provided no support for its
assertion that the allocation of intellectual prope rty rights under NASA and DOD R&D contracts and
agreements is contrary to what market participants would have negotiated at arms-length according to
relevant market benchmarks.2894
7.1275 Regarding specificity, the United States argu es that NASA/DOD intellectual property rights
"transfers" are not specific within the meaning of Ar ticle 2 of the SCM Agreement. According to the
United States, the treatment of which the European Communities complains – i.e. the retention by
NASA contractors of their patent rights – ari ses under the NASA procurement regulations and the
patent waiver regulations, which in turn l ook to the policy established in the Presidential
Memorandum of 18 February 1983 and Executive Order 12591. The United States explains that those
authorities "apply generally to all federal departme nts and agencies", and "the substantive treatment"
in question is not specific to aeronautics and space R&D but rather is "the same as the treatment of all
contractors under U.S. government R&D contract s". In the United States' view, nothing in
Article 2.1(a) or (b) suggests that "the use of agency-specific procedures detracts from the general
availability of the substantive treatment it affords" . The United States argues that this point applies
with even greater force to DOD.
2895 The United States also responds to the European Communities'
arguments regarding de facto specificity, argui ng that the European Communities has failed to
demonstrate that Boeing obtained a disproportionate share of R&D funding from NASA and DOD.2896
In its second written submission, the United States reiterates that "the law and the 1983 Presidential
Memorandum make access to th is treatment available to all government R&D contractors, without
limitation to a specific enterprise or industry or group of enterprises or industries".2897
(e) Evaluation by the Panel
(i) Patent rights
7.1276 The Panel does not consider it necessary to reso lve the issue of whether the allocation of
patent rights under NASA/DOD R&D contracts and ag reements constitutes a financial contribution
that confers a benefit within the meaning of Article 1 of the SCM Agreement, because in the Panel's
view it is clear that the allocation of patent ri ghts under NASA and DOD contracts and agreements is
not specific to a "group of enterprises or industri es" within the meaning of Article 2 of the SCM
Agreement. The reason is that the allocation of patent rights is uniform under all U.S. government

2890 United States' first written submission, para. 331; United States' response to question 127.
2891 United States' first written submission, paras. 326-328.
2892 United States' first written submission, paras. 326-329.
2893 United States' first written submission, paras. 330-331.
2894 United States' second written submission, paras. 106-107.
2895 United States' first written submission, paras. 335-336.
2896 United States' first written submission, paras. 338-339.
2897 United States' second written submission, para. 108.

BCI deleted, as indicated [***]

R&D contracts, agreements, and grants, in respect of all U.S. government departments and agencies,
for all enterprises in all sectors. In all cases, the contractor / partne r / recipient owns any inventions
(i.e. patent rights) that it conceives in the course of performing research funded by the U.S.
Government; however the U.S. Government re ceives a royalty-free, "government use/purpose"
license to use the subject invention.
7.1277 Prior to 1980, the United States had a general policy of taking all rights to patents over
inventions produced by contractors under fede rally-funded R&D contracts (and then granting
nonexclusive licenses to any applicant, including th e contractor, that wished to use the subject
invention).
2898 In 1980, the U.S. Government changed its policy governing the allocation of patent
rights under federally-funded R&D contracts, and st arted granting government contractors ownership
of patents over any invention that they produced w ith federal funding under R&D contracts (with the
government receiving a limited "government use" licen se to use the subject invention without having
to pay the Contractor any royalties.) Originally, the new policy applied only to non-profit
organizations and small business firms. The policy was subsequently extended so as to accord the
same treatment to encompass all government contr actors, regardless of size and profit/non-profit
status.
7.1278 The policy was implemented through a number of different legal instruments. For present
purposes, five different legal instruments are relevant:
(a) the so-called Bayh-Dole Act , which implemented the policy in 1980, and which is
codified in 35 U.S.C. §§ 200-212 (entitled "Patent Rights in Inventions Made with
Federal Assistance")
2899;
(b) a 1983 Presidential Memorandum to the heads of executive departments and
agencies (entitled "Government Patent Polic y") that extended the scope of the policy
to encompass all government contractors, regardless of size and profit/non-profit
status
2900;
(c) a 1987 Executive Order (entitled "Facilitating access to science and technology")
into which the terms of the 1983 Presi dential Memorandum were eventually
incorporated2901;
(d) the corresponding general federal regulations implementing the Bayh-Dole Act, the
1983 Presidential Memorandum, and the 1987 Executive Order, which are found at
48 C.F.R. §§ 27.300-27. 306 (entitled "Patent Rights Under Government
Contracts")
2902;
(e) the NASA-specific regulations (entitled "Patents and Other Intellectual Property
Rights", with Subpart 1 entitled "Patent Waiver Regulations") embodied in 14 C.F.R.
§§ 1245 implementing this policy2903.
7.1279 The rationale behind the rules governing the a llocation of patent rights in U.S. government-
funded R&D contracts and agreements is set out in the Bayh-Dole Act (which applies only to non-
profit organizations and small business firms) under the heading "Policy and Objective" (§ 200):

2898 European Communities' first written submission, para. 806; United States' first written submission,
para. 314.
2899 Exhibit EC-558.
2900 Exhibit EC-560.
2901 Exhibit EC-561.
2902 Exhibit EC-559.
2903 Exhibit EC-572.

BCI deleted, as indicated [***]

"It is the policy and objective of the Congress to use the patent system to promote the
utilization of inventions arising from federally supported research or development; to
encourage maximum participation of smal l business firms in federally supported
research and development efforts; to promote collaboration between commercial
concerns and nonprofit organizations, in cluding universities; to ensure that
inventions made by nonprof it organizations and small business firms are used in a
manner to promote free competition and enterprise without unduly encumbering
future research and discovery; to pr omote the commercialization and public
availability of inventions made in the United States by United States industry and
labor; to ensure that the Government obtains sufficient rights in federally supported
inventions to meet the needs of the Government and protect the public against nonuse
or unreasonable use of inventions; and to minimize the costs of administering
policies in this area."
7.1280 The 1983 Presidential Memorandum that extended Bayh-Dole treatment to all contractors
regardless of size and profit/non-profit status was accompanied by a "fact sheet" which explained that:
"Inventions develope d under Government support c onstitute a valuable national
resource. With appropriate incentives, ma ny of these inventions will be further
developed commercially by the private sect or. The new products and processes that
result will improve the productivity of the U.S. economy, create new jobs, and
improve the position of the U.S. in world trade. The policy established by the
Memorandum is designed to provide such incentives."
7.1281 The 1987 Executive Order entitled "Facilitating access to science and technology" reads in
relevant part:
"Section 1. Transfer of Federally Funded Technology.
(a) The head of each Executive departme nt and agency, to the extent permitted
by law, shall encourage and facilitate co llaboration among Federal laboratories, State
and local governments, universities, and the private sector, particularly small
business, in order to assist in the transfer of technology to the marketplace.
(b) The head of each Executive depart ment and agency shall, within overall
funding allocations and to the extent permitted by law:

(4) promote the commercialization, in accord with my Memorandum to the
Heads of Executive Departments and Ag encies of February 18, 1983, of
patentable results of federally funded research by granting to all contractors,
regardless of size, the title to patents ma de in whole or in part with Federal
funds, in exchange for royalty-free use by or on behalf of the government."
7.1282 The general and NASA-specific implementing regu lations (i.e. (d) and (e) above) articulate
the rationale behind the allocation of patent rights in similar terms.

BCI deleted, as indicated [***]

7.1283 The rules governing the allocation of pate nt rights under U.S. government-funded R&D
contracts and agreements have remained essentially unchanged since the passage of the Bayh-Dole
Act.2904
7.1284 The U.S. laws and regulations referred to a bove grant government contractors the option to
retain title, with some limitations, to inventions that arise from a funding agreement with the U.S.
Government.2905 Contractors receive patent rights covering technologies "conceived or first actually
reduced to practice in the performance of work" und er "any contract, grant, or cooperative agreement
entered into between any Federal agency … and an y contractor for the performance of experimental,
developmental, or research work funded in whole or in part by the Federal Government".2906
7.1285 These patent rights authorize the contractor to prevent all other entities from exploiting the
technologies claimed by the patent, and allow the company to license the technology to others in
exchange for compensation. Specifically, a U.S. patent accords the rights to "exclude others from
making, using, offering for sale, or selling" the invention in the United States or "importing" the
invention into the United States, for a limited peri od of time (i.e. currently a minimum of 20 years
from date of application). 2907 In addition, as the owner of the pate nt, the contractor also has the right
to assign, or transfer by succession, the patent and to conclude licensing contracts with third parties.
However, there is a limitation on the contractor provi ding an exclusive license to third parties: "any
products embodying the subject invention or produ ced through the use of the subject invention
{must} be manufactured substantially in the United States".2908
7.1286 The U.S. Government receives "a nonexclusive, nontransferable, irrevocable paid-up license
to practice or have practiced for or on behalf of the United States any subject invention throughout the
world".2909 The U.S. Government patent rights take the form of a license to use the invention for any
"government use," which includes use of the pate nt by any government contractor engaged in
"government business". This license does not extend to any right to develop patented technology for
commercial sale. 2910 The U.S. Government also obtains certa in "march-in" rights, a provision that
empowers the Federal agency to compel the contract or, in certain limited circumstances, to grant a
license to applicants on terms that are reasonable under the circumstances, or to grant the license
itself. No U.S. government department or agen cy has ever exercised these march-in rights for any
patent under any contract.2911
7.1287 The Space Act provides that any invention made pursuant to a contract with NASA "shall be
the exclusive property of the United States, and if such invention is patentable a patent therefore shall
be issued to the United States" unless waived by NASA.2912 To comply with President Reagan's 1983
Executive Memorandum referred to above, NASA formulated re gulations under which it generally
waives its patent rights to large companies, such as Boeing, for inventions developed pursuant to

2904 United States' first written submission, para. 319.
2905 European Communities' first written submission, para. 810 (citing 35 U.S.C. § 202(a), Exhibit EC-
558, and 48 C.F.R. § 27.302, Exhibit EC-559).
2906 European Communities' first written submission, para. 811 (citing 35 U.S.C. § 201(e) and (b),
Exhibit EC-558).
2907 European Communities' first written submission, para. 812 (citing 35 U.S.C. § 154(a)(2),
Exhibit EC-562, and 35 U.S.C. § 271(a), Exhibit EC-563).
2908 European Communities' first written submission, para. 815 (citing 35 U.S.C. § 204, Exhibit EC-
558).
2909 European Communities' first written submission, para. 813 (citing 35 U.S.C. § 202(c)(4),
Exhibit EC-558, and 48 C.F.R. § 27.302(c), Exhibit EC-559).
2910 European Communities' first written submission, para. 813.
2911 European Communities' first written submission, para. 814.
2912 42 U.S.C. § 2457(a), Exhibit EC-571.

BCI deleted, as indicated [***]

NASA-funded research.2913 Pursuant to these NASA-specific regulations, NASA waives such rights
in order to, in part, "promote early utilization, e xpeditious development and continued availability of
{the} new technology for commercial purposes ...". 2914 The NASA patent waiver regulations permit
requests for waivers at two points in time: (i) in advance of the invention, as to any and all of the
inventions that may be made under a contract; and ( ii) after the reporting of an invention, subsequent
to the invention being made.2915
7.1288 When NASA waives patent rights, it formally ex ecutes this waiver through an "instrument of
waiver", which states, for example, as follows:
"{t}he Administrator waives the property righ ts of the United States Government in
the United States of America and in the following countries: …, and hereby conveys
to the waiver recipient the entire right, title , and interest in and to each invention
which may be conceived or first actually reduced to practice in the performance of
work under the above-identified contract …." 2916
7.1289 The regulations provide a general presumption that a timely waiver request will be granted to
U.S. companies "unless the {NASA Inventions and Contributions } Board finds that the interests of
the United States will be better served by restricting or eliminating all or part of the rights of the
contractor" in certain enumerated situations. 2917 The regulations address the situations in which
patents might not be waived, including instances when "the contractor is not located in the United
States or does not have a place of business in the United States". 2918 According to a study by the
National Bureau of Economic Research, by the early 1980s patent "waivers were essentially
automatically granted" by NASA.2919
7.1290 According to the United States, the patent ri ghts clauses that NASA and DOD use in their
R&D contracts and agreements are "standardized for both agencies". 2920 NASA maintains different
clauses for large and medium contractors, as oppo sed to small businesses, universities, and other
research institutions, but the clau ses are standard as to each group. 2921 The NASA procurement
regulations require the insertion of one of two di fferent clauses, 1852.227-70 (New technology) and
1852.227-71 (Requests for waiver of rights to inve ntions), into NASA contracts with medium and
large contractors.2922 These are among the numerous standardized clauses incorporated by reference
in NASA R&D contracts and agreements.2923

2913 14 C.F.R. §§ 1245.100 et. seq., § 1245.103, Exhibit EC-572. The regulations do not apply to small
business firms or non-profit organizations, which are governed by the U.S. patent law provisions on government
transfer of patents (35 U.S.C. §§ 200-212, Exhibit EC-558). See also, 14 C.F.R. § 1245.101, Exhibit EC-572.
2914 14 C.F.R. § 1245.103(a), Exhibit EC-572. As with patents transferred pursuant to the U.S. patent
laws, the patent rights waived by NASA pursuant to th eir regulations are not unlimited, as NASA retains the
right to use the patented technology for itself, or to issue compulsory licenses through "march-in" rights.
2915 14 C.F.R. §§ 1245.104, 1245.105, Exhibit EC-572.
2916 NASA, Instrument of Waiver (Domestic and Foreign Rights), Structures and Materials Technology
for Aerospace Vehicles, Exhibit EC-1227.
2917 14 C.F.R. § 1245.104(b), Exhibit EC-572. See also, § 1245.105(b)(1), Exhibit EC-572.
2918 14 C.F.R. § 1245.104(b)(1), Exhibit EC-572.
2919 National Bureau of Economic Research, Evidence from Patents and Patent Citations on the Impact
of NASA and other Federal Labs on Commercial Innovation, May 1997, Exhibit EC-574, p. 8.
2920 United States' first written submission, para. 328.
2921 United States' first written submission, para. 328, footnote 436.
2922 United States' first written submission, para. 322.
2923 See e.g. NASA Contract NAS1 -18889 with Boeing Commercial Airplanes for Research and
Development in Advance Technology Composite Aircraft Structures, 12 May 1989, Exhibit EC-329, p. 10,
incorporating NASA/FAR Supplement clause number 18-52.227-70 entitled "New Technology (APR 1988)".

BCI deleted, as indicated [***]

7.1291 Unlike NASA, DOD does not have its own detailed regulations regarding patent transfers to
large companies. Instead, DOD generally relies on the relevant portion of the Bayh-Dole Act and
the 1983 Executive Memorandum expanding the policy to large business firms
2924, as well as the
corresponding general regulations implementing these instruments. 2925 The relevant provision of the
Bayh-Dole Act is 35 U.S.C. § 202(a), as e xpanded to large businesses by the 1983 Executive
Memorandum, which provides that a contractor "may … elect to retain title to any {government-
funded} invention", unless DOD decides to remove th is possibility under certain circumstances. 2926
The DOD could opt to remove the choice of "elec tion", for example, "in exceptional circumstances
when it is determined by the agency that restricti on or elimination of the right to retain title to any
subject invention will better promote the policy and objectives of this chapter".2927
7.1292 As noted above, according to the United States, the patent rights clauses that NASA and DOD
use in their R&D contracts and agreemen ts are "standardized for both agencies". 2928 According to the
United States, DOD uses standardized clauses in all of the contracts it signs, and "equivalent clauses"
in agreements.2929 This aspect of U.S. law, along with the terms of the 1983 Executive Memorandum,
is generally implemented by DOD through incorporating certain contract clauses into R&D contracts.
In the case of R&D contracts with medium or la rge business, DOD uses standard clause 52.227-12
(Patent Rights – Retention by the Contractor (Long Form). 2930 As with the patent provisions of
NASA contracts, these are among the numerous standa rdized clauses incorporated by reference into
the contracts.2931
7.1293 In the Panel's view, NASA's agency-specifi c regulations for implementing this U.S.
Government-wide policy cannot, for the purposes of Artic le 2 of the SCM Agreement, be analysed in
isolation from the broader policy and legal framework that they implement. There are a number of
problems with the European Communities' approach of restricting the specificity analysis to the
measure through which NASA implements this U.S. G overnment-wide policy. First, the approach to
specificity advocated by the European Communities would lead to anomalous results. For instance, if
a granting authority were to introduce a broadl y available subsidy through a single piece of
legislation, on the European Communities' approach this subsidy would not be specific within the
meaning of Article 2. However, if the granting au thority were to introduce exactly the same broadly
available subsidy, but were to extend it to each indus try by passing separate pie ces of legislation, this
would result in a finding of specificity if the complainant defined the measure under challenge as only
one of the pieces of legislation. As the Un ited States points out in its submissions, the
European Communities is perhaps conflating the "issue of an element of a claim (whether a measure

2924 The U.S. patent law provisions regarding "patent rights in inventions made with federal assistance",
codified at 35 U.S.C. §§ 200-212, apply to any "Federal agency". 35 U.S.C. § 201(a), Exhibit EC-558.
"Federal agency" is defined as "any executive agency as defined in section 105 of title 5, and the military
departments as defined by section 102 of title 5". Id. In turn, Section 102 of title 5 provides that the military
departments consist of the Army, Navy, and Air Force. 5 U.S.C. § 102, Exhibit EC-581.
2925 48 C.F.R. §§ 27.300-27.306, Exhibit EC-559. These provisions, which are part of the Federal
Acquisition Regulation ("FAR") System, apply to "all execu tive agencies," which is defined to include DOD.
48 C.F.R. § 1.101 (purpose of FAR), Exhibit EC-582; 48 C.F.R. § 2.101 (defining "executive agency"),
Exhibit EC-583.
2926 35 U.S.C. §§ 200-212, "Patent Rights in Inventions Made with Federal Assistance", § 202(a),
Exhibit EC-558.
2927 35 U.S.C. § 202(a), Exhibit EC-558.
2928 United States' first written submission, para. 328.
2929 United States' first written submission, para. 338.
2930 United States' first written submission, para. 321.
2931 See e.g. Air Force Contract F33615-91-C-5716 with Boeing regarding Design and Manufacturing
of Low Cost Composite Fuselage, 24 July 1991, Exhibit EC-507, p. 27 (incorporating by reference FAR
contract clause 18-52.227-12 entitled "Patent Rights – Retention by the Contractor (Long Form) (JUN 1989)".)

BCI deleted, as indicated [***]

is a subsidy) and the evidence (what need s to be shown to establish the claim)". 2932 The approach
advocated by the European Commun ities means that the specificity analysis is dependent upon how
the complaining party chooses to define the measure it is challenging.
7.1294 For these reasons, the Panel finds that, assuming arguendo2933 that the allocation of patent
rights under NASA/DOD R&D contracts and agreements with Boeing involves a subsidy within the
meaning of Article 1 of the SCM Agreement, th e European Communities ha s failed to demonstrate
that any such subsidy is specific within the meaning of Article 2 of the SCM Agreement.
(ii) Data rights and trade secrets
7.1295 The Panel will now address the European Commun ities' argument that the allocation of data
rights (including trade secrets) constitutes a specific subsidy. We will begin with an explanation of
the types of "data rights" challenged by the Europ ean Communities in this dispute, namely, "Limited
Exclusive Rights Data" and "limited" government rights data treatment. We then address the question
of whether the European Communities has provided any evidence of such treatment outside of the
context of the eight NASA R&D programmes and 23 DOD RDT&E programmes that it has
challenged. We then address the question of whet her the LERD and "limited" government data rights
treatment accorded to Boeing under the challenged programmes ca n be analysed and found to
constitute a separate, additional financial contribution in the light of our already having found that the
payments and access to facilities provided to Boeing under the same set of contracts and agreements

2932 United States' comments on European Communities' response to question 34, para. 116.
2933 In China – Publications and Audiovisual Products , the Appellate Body offered the following
guidance on the use of arguendo assumptions by panels:

"We observe that reliance upon an assumption arguendo is a legal technique that an
adjudicator may use in order to enhance simp licity and efficiency in decision-making.
Although panels and the Appellate Body may choose to employ this technique in particular
circumstances, it may not always provide a solid foundation upon which to rest legal
conclusions. Use of the technique may detract from a clear enunciation of the relevant WTO
law and create difficulties for implementation. Recourse to this technique may also be
problematic for certain types of legal issues, for example, issues that go to the jurisdiction of a
panel or preliminary questions on which the substance of a subsequent analysis depends."

Appellate Body Report, China – Publications and Audiovisual Products, para. 213.

We have relied upon the arguendo assumption that the allocation of patent rights is a subsidy within
the meaning of Article 1 of the SCM Agreement and pr oceeded directly to the issue of specificity under
Article 2 of the SCM Agreement for the following reasons. First, the question of whether the allocation of
patent rights under NASA/DOD R&D contracts and agreements with Boeing constitutes a financial
contribution, whether in the form of a provision of goo ds within the meaning of Ar ticle 1.1(a)(1)(iii) of the
SCM Agreement or otherwise, is a potentially difficult one; in contrast, the question of whether the alleged
subsidy is specific is more straightforward. (On the question of whether the allocation of patent rights under
NASA/DOD R&D contracts and agreements with Boeing involves a financial contribution in the form of a
"provision" of "goods" or otherwise, see European Communities' first written submission, paras. 841-842;
United States' first written submission, paras. 317-3 25 and 331; European Communities' second written
submission, paras. 536-548; United States' response to question 127, and the European Communities' related
comments; Australia's oral statement, paras. 28-34; Ca nada's written submission, paras. 3-9.) In other words,
we have relied upon this arguendo assumption to "enhance simplicity and efficiency" in our decision-making.
Second, having found that the alleged subsidy is not specific under Article 2, our reliance upon this arguendo
assumption creates no issues or difficulties from th e point of view of the "implementation" of DSB
recommendations and rulings. Third, the question of whet her or not the allocation of patent rights constitutes a
subsidy does not "go to the jurisdiction" of the Panel. Finally, the substance of our analysis under Article 2 does
not depend on whether the measures at issue are properly characterized as subsidie s within the meaning of
Article 1.

BCI deleted, as indicated [***]

constitute subsidies on the basis of, inter alia , the LERD and "limited" government rights data
treatment being challenged.
7.1296 As a general rule, contractors own all techni cal data (i.e. data rights) produced with
U.S. government funding, and may use these for their own commercial purposes. As with patents, the
U.S. Government receives a royalty-free "license" 2934 to use the technical and scientific data produced
with government funding in the performance of the research. A DOD publication cited by both
parties in this case explains:
"'IP deliverables' refers to the contractual obligation to deliver IP that has a
predetermined content and format. The G overnment may own the delivered physical
medium on which the IP resides, but generally it will not own the IP rights. 'License
rights' refers to the Government's ability to use, reproduce, modify, and release the
delivered IP. ... As a general rule under Govern ment contracts, the contractor-
developer is allowed to retain ownership of the technical data and computer software
it developed; and the Government receives only a license to use that technical data
and computer software. DOD does not 'own' the technical data and computer software
included in deliverables, even if the Department paid for 100 percent of the
development costs. The scope of the licen se depends on the nature of the technical
data and computer software, the relative source of funding for development, and the
negotiations between the parties. "2935
7.1297 The 1987 Executive Order, referred to above, appears to ar ticulate the rationale behind the
rules governing the allocation of data rights under U.S. government contracts and agreements. As
noted above in the context of the discussion of pate nt rights, the 1983 Presidential Memorandum that
extended the scope of the Bayh-Dole Act policy to encompass all U.S. government contractors,
regardless of size and profit/non-profit status, was eventually incorporated into law through a 1987
Executive Order entitled "Facilitating access to science and tec hnology". The scope of this Executive
Order was not limited to patent rights. It also establis hed a similar policy in respect of data rights. It
reads in relevant part:
"Section 1. Transfer of Federally Funded Technology.
(a) The head of each Executive departme nt and agency, to the extent permitted
by law, shall encourage and facilitate co llaboration among Federal laboratories, State
and local governments, universities, and the private sector, particularly small
business, in order to assist in the transfer of technology to the marketplace.
(b) The head of each Executive depart ment and agency shall, within overall
funding allocations and to the extent permitted by law:

2934 See e.g. United States' first written submission, para. 216, explaining that under its R&D contracts,
NASA receives "an irrevocable paid-up license to us e the data and any inven tions developed under the
contract"; United States' first written submission, Section VI.C, entitled "The Allocation of License Rights to
Data Under NASA and DoD Contracts is Not a Financial Contribution, Does Not Convey a Benefit, and is Not
Specific".
2935 Office of the Under Secretary of Defense for Ac quisition, Technology and Logistics, Intellectual
Property: Navigating Through Commercial Waters, Issues and Solutions When Negotiating Intellectual
Property With Commercial Companies, 15 October 2001 ("DOD Intellectual Property Guide"), Exhibit EC-557,
pp. 1-3 and 1-4.

BCI deleted, as indicated [***]

(6) cooperate, under policy guidance pr ovided by the Office of Federal
Procurement Policy, with the heads of other affected departments and
agencies in the development of a uniform policy permitting Federal
contractors to retain rights to soft ware, engineering dr awings, and other
technical data generated by Federal gr ants and contracts, in exchange for
royalty-free use by or on behalf of the government."
7.1298 "Data rights" apply to so-called "technical data". "Technical data" means "recorded
information (regardless of the form or method of the recording) of a scientific or technical nature
(including computer databases and computer software documentation)".
2936
7.1299 The provisions governing data rights are set out across different provisions of the Federal
Acquisition Regulation and other U.S. laws, regulations, and policies. 2937 Section 52.227-
14(b) ("Rights in Data—General – Allocation of Rights") of the Federal Acquisition Regulation states
that "the Government shall have unlimited rights in— Data first produced in the performance of this
contract ...", and that " {t}he Contractor shall have the right to ... Use, release to others, reproduce,
distribute, or publish any data first produced or speci fically used by the Contractor in the performance
of this contract ...".
7.1300 Generally, any data delivered under an R&D cont ract funded solely by the government is
"unlimited rights data". This means that the li cense acquired by the U.S. Government gives it
"unlimited rights" to use the technical data "as it se es fit, both inside and outside of the government",
i.e. to "use, disclose, reproduce, prepare derivative works, distribute copies to the public, and perform
publicly and display publicly, in any manner and for any purpose, and to have or permit others to do
so".2938
7.1301 Where the contractor "contributes resources" 2939 toward a project, the U.S. Government may
agree to forego or curtail some of the rights that it would otherwise enjoy under its "unlimited rights"
license. In this sense, under the general acquisiti on regulations "the source of funds" used to produce
the data dictates, in the first instance, the scope of the license that the U.S. Government receives with
respect to data rights. The U.S. Government may acquire "limited rights" in data that embody trade
secrets or are commercial or financial and confidential or privileged, "to the extent that such data
pertain to items, components or processes developed at private expense". Thus, "limited rights" data
refers to data developed at "pri vate expense", i.e. not with government funding under a contract. The
government may explicitly contract for the deliver y of such proprietary data, although it would
acquire only "limited rights" in such data. Wh ere the government acquires "limited rights" data, it
may use the data for its own internal purposes, it may not disseminate the data outside the government
without the express consent of the contractors.
7.1302 In certain NASA contracts (apparently under the ACT, HSR, AST, and R&T Base Programs),
NASA used a special "limited exclusive rights da ta" ("LERD") clause. The clauses limited the
otherwise "unlimited rights" in data that the U. S. Government would normally have in the data
developed in the course of the contracted research.
2940 The LERD clauses granted U.S. companies
exclusive rights to exploit critical technologies de veloped under certain NASA contracts for at least

2936 See e.g. 48 C.F.R. § 52.227-14(a) ("Rights in Data—General"), Exhibit US-103.
2937 In its Panel Request (WT/DS353/2), the European Communities refers to "48 CFR §§ 27.400 et
seq". In their submissions, the parties have referred to numerous other provisions of United States laws,
regulations and policies concerning data rights.
2938 United States' first written submission, para. 350.
2939 United States' first written submission, para. 351.
2940 European Communities' second written submission, para. 546 (agreeing with the explanation found
at United States' first written submission, para. 352.)

BCI deleted, as indicated [***]

five years from the date the data was reported. Technologies were categor ized as "sensitive" and
protected through LERD restrictions if they were c onsidered to affect the competitive position of U.S.
industry.2941 The NASA contracts that contained LERD clauses involved "joint funding situation {s}",
i.e. contractors were "contributing a significant amount of their own resources to contract research
efforts".
7.1303 With respect to so-called "trade secret" protection, where contractors produce technical data
in the performance of a contract with NASA whic h qualifies as trade secret information, it may be
entitled to "trade secret" protection if it is the product of "cost-sharing". 2942 NASA's regulations
provide that "{i}n the performance of a contract, grant, or cooperative arrangement, usually which is
cost-shared2943, the "contractor, grantee, or partner may produce technical data which qualifies as
trade secret information". If such data is properly marked by its originator, NASA agrees to protect it
from disclosure as long as the data remains trade secret information. In addition, the Space Act
provides that if NASA employees develop information that constitutes a trade secret through joint
research with a contractor, such research may be protected for a period of up to five years. 2944 A
number of NASA's Space Act Agreements with Boeing (in which Boeing contributed some of its own
resources to the projects) contained provisions "to ma intain any data that was generated in confidence
for at least 2 to 5 years".2945
7.1304 With respect to DOD, when valuable technical data is developed through research that is
"jointly-funded" by DOD and the contractor, the U.S. Government generally "may release or disclose"
the data outside the Government only for "government purposes", i.e. "government purpose rights".
The U.S. Government may, however, "use, modify, re lease, reproduce, perform, display or disclose"
such jointly-funded data "within the government without restriction". The term for these "government
purpose rights" is negotiable, with five years bei ng the baseline, subject to negotiation between the
parties. DOD regulations state that " {l}onger periods should be negotiate d when a five-year period
does not provide sufficient time to apply the data for commercial purposes". During the term of the
"government purpose rights", the U.S. Government "may not use, or authorize other persons to use,
technical data marked with government purpose rights legends for commercial purposes". The
contractor, however, can use this data for its own purposes during this time, or license it to others.2946
7.1305 In this case, the European Communities has not provided any evidence of such treatment
outside of the context of the eight NASA R&D programmes and 23 DOD R&D project elements that
it has challenged. This raises the question of wh ether the LERD and "limited" government data rights
treatment accorded to Boeing under the challenged programmes ca n be analysed and found to
constitute a separate, additional fi nancial contribution, given the Pa nel's findings that the payments
and access to facilities provided to Boeing under the sa me set of contracts and agreements constitute
subsidies by virtue of, inter alia , the LERD and "limited" government rights data treatment being
challenged.

2941 See above, footnote 2545.
2942 United States' first written submission, para. 343.
2943 The European Communities reads this language as providing for trade secret protection even where
there is no cost sharing; according to the European Communities, the words "usually which is cost shared"
applies only to the third item listed, i.e. "cooperative ag reements", and not to the first two items, i.e. "contract,
grant". See European Communities' second written submission, para. 543.
2944 European Communities' first written submission, paras. 835-836 (quoting Requirements for
Documentation, Approval, and Dissemination of NASA Scientific and Technical Information (STI),
NPR 2200.2A, 12 August 2004, Exhibit EC-587, section 4.5.7.1.2.)
2945 See above, footnote 2545.
2946 European Communities' first written submission, para. 819 (citing 48 C.F.R. §§ 227.7100 -
227.7103-17, Exhibit EC-590, § 227.7103-4(a)(1)). See also, United States' first written submission, para. 353.

BCI deleted, as indicated [***]

7.1306 The Panel has put several questions to the Eur opean Communities on this issue, in an attempt
to understand how it could be that the allocati on of intellectual property rights under NASA/DOD
R&D contracts could constitute a separate, additiona l financial contribution given the fact that the
European Communities has already challenged the payments made to Boeing under those same
contracts and agreements. Question 28 to the European Communities reads:
"The European Communities argues that th e 'direct R&D funding' and support that
Boeing allegedly received under the NASA and DOD R&D programmes at issue
constitute subsidies, on the basis that Boeing 'is not required to pay anything in return'
for those financial contributions. Accord ing to the European Communities, because
Boeing is 'not required to pay anything in return' for this funding and support, the
entirety of those financial contributions to Boeing's LCA division can be considered
to confer benefits. The European Communities also claims that Boeing's
acquisition/retention of rights over the in tellectual property that it develops under
these NASA/DOD R&D programs constitutes an additional subsidy. Does this not
amount to double-counting the subsidies provided to Boeing under the NASA/DOD
R&D programmes at issue?"
7.1307 The Panel sought further explanation from th e European Communities. Questions 218
and 219 to the European Communities read:
"218. At para. 103 of its Comments on EC RPQ1, the United States argues that
'{f}or patents issued as a result of work done under contracts related to the eight
NASA programs and 23 DOD RDT&E PEs listed in its first written submission, the
EC's treatment of patent rights leads to double counting because it treats the value of
the research work and the value of any pate nt rights that result as separate from one
another when, in fact, they arise from the same transaction.' How does the European
Communities respond?
219. Assume that a government and a firm enter into a contract, pursuant to which
the government agrees to pay the contractor $100 to carry out certain R&D, and
pursuant to which the government further agrees to waive any resulting intellectual
property rights in favour of the contractor. Assume that the value of the resulting
intellectual property rights is estimated to be $50. Under what circumstances could a
panel conclude that there were two financ ial contributions, and that the total amount
of the subsidy was $150?"
7.1308 The Panel also posed a question to Australia w ith a view to clarifying its position on this
issue. Question 13 to Australia reads:
"At para. 24 of its Oral Statement, Austra lia states that it agrees with the European
Communities that the treatment of the fruit of the R&D under the SCM Agreement
'may be separate to the issue of funding' by the United States government to Boeing
to conduct R&D. At para. 29 of its Oral St atement, Australia states that the treatment
of intellectual property rights under a government contract 'would not necessarily
constitute an additional financial cont ribution (over and above the government
funding)'. At para. 32 of its Oral Statem ent, Australia argues that '{t}he financial
contribution would be limited to the assi stance provided by way of government
funding' of R&D activities. At para. 33 of its Oral Statement, Australia states that
'{i}t may be the case that the treatment of the intellectual property rights under a
particular government contract could be considered an additional financial
contribution'.

BCI deleted, as indicated [***]

(a) Is it Australia's position that the treatment of intellectual property rights under
a government R&D contract could constitute an 'additional' financial contribution
'over and above' the government funding provided to the contractor pursuant to the
contract, or is it Australia's position that the financial contribution 'would be limited
to the assistance provided by way of government funding'?
(b) If Australia's position is that the treatment of intellectual property rights
under a government R&D contract could in certain circumstances constitute an
'additional' financial contribution 'over and above' the government funding provided
to the contractor, please explain what tho se circumstances are. For example, assume
that a government and a firm enter into a c ontract, pursuant to which the government
agrees to pay the contractor $100 to carry out certain R&D, and further agrees to
waive any resulting intellectual property rights in favour of the contractor. Assume
that the value of the resulting intellectual property rights is estimated to be $50.
Under what circumstances could a panel c onclude that there were two financial
contributions, and that the total amount of the subsidy was $150?"
7.1309 As is clear from the general thrust of our questions to the European Communities and
Australia, we have considerable difficulty accepti ng the premise that the NASA/DOD payments and
access to facilities, equipment and employees provided to Boeing under R&D contracts and
agreements can be treated as one financial contri bution, and that Boeing's retention of certain
intellectual property rights over the results of th e research that it performs pursuant to those same
contracts could be treated as a separate, additional fi nancial contribution. It seems to us to be self-
evident that this kind of analysis involves double-c ounting. Put somewhat differently, this kind of
analysis involves an attempt to treat the allocation of intellectual property rights under NASA/DOD
R&D contracts and agreements both as a term upon which other financial contributions (i.e. the
payments and access to facilities, equipment and em ployees) are provided for the purpose of showing
that those other financial contributions confer a be nefit, and then as a separate, additional financial
contribution. In order to avoid any misunderstanding, we emphasize that we are not confronted with a
situation in which a government makes payments to an enterprise to perform R&D and, in addition,
transfers intellectual property rights to that enterprise that have arisen out research that was performed
with different funding; rather, we are dealing here with a situation in which the intellectual property
at issue arises from the R&D that the enterprise receiving the funding used the government funding to
perform.
7.1310 Having carefully reviewed the European Co mmunities' and Australia's responses to our
questions, we find no clear explanation of how the payments and access to facilities, equipment and
employees provided to Boeing under R&D contracts and agreements could be treated as one financial
contribution, and how Boeing's retention of certain intellectual property rights over the results of the
research that it performs pursuant to those same c ontracts could be treated as a separate, additional
financial contribution.
7.1311 Accordingly, we find that the European Comm unities has failed to demonstrate that the
allocation of data rights under NASA/DOD R&D cont racts and agreements constitutes a separate,
additional financial contribution under Article 1.1(a)(1) of the SCM Agreement.
(f) Conclusion
7.1312 For these reasons, the Panel finds that the European Communities has not demonstrated
that the allocation of intellectual property rights under NASA/DOD R&D contracts and
agreements with Boeing constitutes a specific subsidy within the meaning of Articles 1 and 2 of
the SCM Agreement.

BCI deleted, as indicated [***]

9. NASA/DOD Independent Research & Development (IR&D) and Bid & Proposal (B&P)
reimbursements
(a) Introduction
7.1313 The European Communities argues that both NASA and DOD reimburse Boeing for its own
independent LCA-related R&D ("IR&D ") that is not related to any specific contract, as well as for
R&D undertaken by Boeing in connection with bidding on NASA/DOD R&D contracts (bid and
proposal costs, or "B&P"). The European Communities argues that NASA/DOD IR&D/B&P
reimbursements are subsidies within the meaning of Article 1 of the SCM Agreement, and are specific
within the meaning of Article 2 of the SCM Ag reement. The European Communities estimates
that NASA/DOD provided $5.9 billion in IR&D /B&P reimbursements to Boeing over the
period 1991-2006, and argues that $3.1 billion of that total should be treated as a subsidy to Boeing's
LCA division.
2947
7.1314 The United States argues that NASA/DOD IR&D/B&P reimbursements to Boeing are not a
subsidy within the meaning of Article 1 of the SCM Agreement, and are not specific within the
meaning of Article 2 of the SCM Agreement. In addition, the United States argues that the
European Communities has overestimated the amount of any subsidy. In this regard, the United
States points out that the European Communities' es timate of the amount of the subsidy assumes that
100 per cent of the IR&D performed by Boeing and reimbursed by NASA and DOD through cost-
shared R&D contracts with IDS was LCA-related.
(b) The measures at issue
7.1315 The European Communities' panel request 2948 states that NASA and DOD subsidize Boeing
by "providing NASA Independent Research & Deve lopment, and Bid & Proposal Reimbursements".
The European Communities' panel request indicates that NASA and DOD accord this treatment to
Boeing pursuant to the following laws, regulations, and other measures (some of which are specific to
NASA, some of which are specific to DOD):
• 14 CFR § 1274.204(g);
• 10 U.S.C. § 2372;
• 48 CFR § 31.205-18;
• 48 CFR § 231.205-18;
• 48 CFR §§ 9904.420 et seq.;
• Department of Defense Directive Regarding IR&D, Number 3204.1 (10 May 1999);
• DOD Appropriations Acts

7.1316 Through the IR&D/B&P programme, as elaborated through federal statutes and
regulations
2949, NASA and DOD pay aerospace and defense c ontractors, including Boeing, for their

2947 NASA/DOD IR&D/B&P Subsidies to Boeing LCA Division, Exhibit EC-24, p. 1.
2948 WT/DS353/2, items 2(c) and 3(a)(ii), pp. 8 and 10.
2949 Independent Research and Development and Bid and Proposal Costs: Payments to Contractors,
10 U.S.C. § 2372, Exhibit EC-594; Independent Research and Development and Bid and Proposal Costs:
Payments to Contractors, 10 U.S.C. § 2372 (version in effect from FY 1993-FY 1994), Exhibit EC-595;
Independent Research and Development, 10 U.S.C. § 2372 (version in effect FY 1991-FY 1992), Exhibit EC-
596; Independent Research and Development and Bid and Proposal Cost Federal Acquisition Rule, 48 C.F.R.
§ 31.205-18, Exhibit EC-597; Independent Research and Development and Bid and Proposal Cost Defense
Acquisition Rule, 48 C.F.R. § 231.205-18, Exhibit EC-598.

BCI deleted, as indicated [***]

incurred independent research and developmen t expenditures and bid and proposal costs. 2950 IR&D
expenditures consist of money spent on: (i) basic research, (ii) applied research, (iii) development,
and (iv) systems and other concept formulation studies.2951 B&P costs are defined as costs incurred in
preparing, submitting, and supporting bids and pro posals (whether or not solicited) on potential
government or non-government contracts. 2952 These payments are made under certain government
R&D contracts ("cost-based" procurement contract s), although the IR&D and B&P payments are not
related to the underlying contract. 2953 Rather, these expenses are treated as reimbursements of
ordinary indirect "costs" (e.g. overhead expenses). Primary control of IR&D activities rests with the
contractors, who are free to determine both the amount and focus of their IR&D activities.2954 Federal
law requires that IR&D regulations "may not include provisions that would infringe on the
independence of a contractor to choose which tec hnologies to pursue in its independent research and
development program". 2955 Contractors maintain rights to the intellectual property developed as a
result of their independent research and developmen t, and such rights do not include any government
interest.2956
7.1317 The Defense Federal Acquisition Regulation imposes various limitations with respect to the
allowability of DOD IR&D/B&P costs for major contractors like Boeing. 2957 Among other things,
IR&D/B&P costs for major contractors are limited to those for projects that are of "potential interest"
to DOD. 2958 By law, DOD considers that activities intended to " {s}trengthen{} the … technology
base of the United States" and " {e}nhance the industrial competitiveness of the United States" to be
R&D activities that are of "potential interest".2959

2950 The statutory authority for this funding derive s from the NASA Appropriations Acts, Exhibit EC-
285, and the DOD Appropriations Acts, Exhibit EC-403.
2951 48 C.F.R. § 31.205-18, Exhibit EC-597, § 31.205-18(a) (defining "independent research and
development (IR&D)"); Defense Contract Audit Agency Contract Audit Manual, DCAAM 7640.1, Chapter 7,
23 February 2006, Exhibit EC-599, para. 7-1501.
2952 48 C.F.R. § 31.205-18, Exhibit EC-597, § 31.205-18(a) (defining "bid and proposal (B&P) costs);
Defense Contract Audit Agency Contract Audit Manual, DCAAM 7640.1, Chapter 7, 23 February 2006,
Exhibit EC-599, para. 7-1501.
2953 See CRA International, The United States Independent Research & Development (IR&D) and Bid
& Proposal (B&P) Reimbursement Program and Its Be nefits to The Boeing Company, December 2006,
Exhibit EC-5, pp. 3-4, 11-13.
2954 DOD Independent Research & Development, Program Report, May 2002, Exhibit EC-602, p. 1.
2955 Independent Research and Development and Bid and Proposal Costs: Payments to Contractors,
10 U.S.C. § 2372, Exhibit EC-594, para. (f).
2956 Michael E. Davey and Dahlia Stein, Congression al Research Service Report for Congress, DOD's
Independent Research and Development Program: Ch anges and Issues, 17 December 1993, Exhibit EC-604,
p. 20.
2957 "Major contractor" means "any contractor whose covered segments allocated a total of more than
$11,000,000 in IR&D/B&P costs to covered contracts during the preceding fiscal year". Independent
Research and Development and Bid and Proposal Cost Defense Acquisition Rule, 48 C.F.R. § 231.205-18
(a)(iii), Exhibit EC-598. "Covered contract" in that provision means "a DOD prime contract {or subcontract}
for an amount exceeding the simplified acquisition thres hold, except for a fixed-price contract without cost
incentives". Ibid., at (a)(i). "Covered segment" means "a product division of the contractor that allocated more
than $1,100,000 in independent research and development and bid and proposal (IR&D/B&P) costs to covered
contracts during the preceding fiscal year". Ibid., para. (a)(ii).
2958 Independent Research and Development and Bid and Proposal Cost Defense Acquisition Rule,
48 C.F.R. § 231.205-18, Exhibit EC-598, para. (c)(iii).
2959 Independent Research and Development and Bid and Proposal Costs: Payments to Contractors,
10 U.S.C. § 2372, Exhibit EC-594, at (g); Independent Research and Development and Bid and Proposal Cost
Defense Acquisition Rule, 48 C.F.R. § 231.205-18, Exhibit EC-598, at (c)(iii)(B); Department of Defense
Directive Regarding IR&D, Number 3204.1, 10 May 1999, Exhibit EC-600, at para. 4.1; Defense Contract

BCI deleted, as indicated [***]

7.1318 Under the Cost Accounting Standards that gove rn the reimbursement of IR&D/B&P costs,
which are elaborated further below, IR&D/B&P expenses must be allocated among business segments
based on the beneficial or causal relationship between the IR&D cost and those segments. If a cost
has a beneficial relationship to multiple business segme nts, it will be allocated proportionately to all.
In such case, the U.S. Government only reimburses the portion of the total costs.2960
(c) Arguments of the European Communities
7.1319 Regarding the existence of a financial contribution, the European Communities argues in its
first written submission that "IR&D and B&P reimbursements directly transfer funds from NASA and
DOD to Boeing. These transfers constitute fina ncial contributions within the meaning of
Article 1.1(a)(1)(i) of the SCM Agreement ".2961 According to the European Communities, these
reimbursements are "outright grants". 2962 In its second written submission, the European
Communities attempts to rebut the United St ates' argument that NASA/DOD IR&D/B&P
reimbursements fall outside of the scope of Article 1.1(a)(1) because they are elements of the price
paid to Boeing pursuant to R&D contracts th at are "purchases of services". The European
Communities argues, among other things, that "'ju st because government contractors may account for
IR&D reimbursement as "part of the purchase price of a good or service," and the US Government
approves of this practice, does not mean that they ar e, in fact, part of the purchase price of a good or
service". In the European Communities' view, IR&D /B&P reimbursements are paying Boeing for the
same type of activity, regardless of whether they ar e "tacked onto" a contract that is purchasing goods
or services.
2963
7.1320 Regarding the existence of a benefit within the meaning of Article 1.1(b) of the
SCM Agreement, the European Communities ar gues that "NASA and DOD IR&D/B&P Program
subsidies" confer "benefits" on Boeing's LCA divi sion. The European Co mmunities argues that: (i)
the financial contributions "relate, at least in pa rt, to the production of all Boeing LCA"; (ii) the
financial contributions "provide Boeing's LCA divi sion with advantages on non-market terms"; (iii)
"Boeing is not required to pay anything in retu rn" for this IR&D/B&P Program funding; (iv)
IR&D/B&P reimbursements are "outright grants that reimburse Boeing for IR&D and B&P expenses
it has already incurred related to improving, de veloping, and producing its entire line of LCA
products", and thus essentially represent "free" money fo r Boeing"; and (v) it is "axiomatic that such
reimbursements are not available on the market".2964
7.1321 In its second written submission, the European Communities responds to the United States'
arguments regarding the existence of a benefit. 2965 The European Communities emphasizes that the
kinds of R&D costs that may be reimbursed th rough IR&D/B&P include costs related to R&D
projects that "enhance the industrial competitiveness of the United States" or "strengthen the
technology base of the United States". According to the European Communities, it "is clear that an
entity operating pursuant to market considerations would not agree, and would certainly not actively
seek out, to reimburse independently-incurred costs of companies because those costs ' {e}nhance the
industrial competitiveness of the United States' or ' {s}trengthen{} the … technology base of the
United States'". The European Communities argues th at this "is particularly true given the global
nature of markets for technology, where the positi on of the United States relative to other countries

Audit Agency Contract Audit Manual, DCAAM 7640.1, Chapter 7, 23 February 2006, Exhibit EC-599,
section 7-1503.
2960 Cost Accounting Standard 420, 48 C.F.R. § 9904.420, Exhibit US-1287, subparagraph (e).
2961 European Communities' first written submission, para. 875.
2962 European Communities' first written submission, para. 880.
2963 European Communities' second written submission, paras. 589-592.
2964 European Communities' first written submission, paras. 878-880.
2965 European Communities' second written submission, paras. 594-614.

BCI deleted, as indicated [***]

makes no difference to a company that can seek out technology anywhere in the world". The
European Communities explains that when Boeing identifies its own suppliers, it selects them based
on the technology, capabilities, and price that they offer, not because they are located inside or outside
the United States, and not because purchasing goods or services from those suppliers could make
them more competitive relative to other suppl iers. In the European Communities' view,
reimbursements of a company's internal costs on the bases that those costs " {e}nhance the industrial
competitiveness of the United States" or "{s}trengthen{} the … technology base of the United States"
are completely foreign to market transactions in which adequate remuneration has been negotiated.
7.1322 The European Communities also responds to th e United States' argument that the applicable
IR&D/B&P cost accounting requirements require Boeing and other government contractors with
multiple business segments to allocate the costs of IR &D/B&P projects that are beneficial to multiple
segments on a pro rata basis across those segments, such that the government does not reimburse the
contactor for the portion allocated to its commerc ial segments. The European Communities argues
that: (i) this does not necessarily exclude the possibility that IR&D/B&P expenses that Boeing
initially considered to only have military relevance (and therefore allocated entirely to IDS contracts
with DOD and NASA) could turn out to have unexpect ed benefits, in later years, for Boeing's LCA
division; and (ii) the Panel cannot be sure that Boeing actually allocates its IR&D/B&P costs in this
manner.2966
7.1323 The European Communities submits that NASA/DOD IR&D/B&P reimbursements are
specific within the meaning of Article 2 of the SCM Agreement. The European Communities argues
that IR&D/B&P reimbursements are allowed only fo r those enterprises in the research-based "defense
and aerospace industries" that enter into c ontracts with NASA and DOD, and are capable of
conducting specified activities: (i) basic research, (ii) applied research, (iii) development, and
(iv) systems and other concept formulation studies. 2967 In addition, with respect to DOD, "major
contractors" are explicitly limited to receiving IR&D/B&P reimbursements on certain projects,
namely those that are "of potential interest to DOD". 2968 With respect to NASA, only entities that
support NASA's mission may enter into contracts w ith NASA, and, consequently, be reimbursed for
IR&D/B&P expenses. 2969 The European Communities argues that NASA/DOD IR&D/B&P
reimbursements are also de facto specific, because in practice a wide range of government contractors
are not eligible to receive NASA or DOD IR&D /B&P reimbursements. In this regard, the
European Communities asserts that Boeing and a fe w other aerospace and defense contractors have
received a predominant and disproportionate share of IR&D/B&P reimbursements. 2970 I n i t s
second written submission, the European Co mmunities responds to the United States'
rebuttal arguments on specificity by reasoning that it is not relevant if other U.S. government agencies
follow the same practices regarding IR&D/B&P re imbursements. The European Communities argues
that it "is simply not in dispute that the "granting au thorities" at issue, with respect to the challenge of
IR&D/B&P reimbursements, are NASA and DOD", and that the United States does not dispute that if
a contractor does not receive contracts from NAS A or from DOD, they will not receive IR&D/B&P
reimbursements from NASA or DOD. The European Communities states that the
"granting authority" is "not the entirety of the United States Government", thus, the extent to
which other "granting authorities" within the United States follow similar, or different, practices, is
irrelevant to an analysis of specificity for the subsidies provided by the granting authorities of NASA
and DOD.
2971

2966 European Communities' second written submission, paras. 608-609.
2967 European Communities' first written submission, para. 881.
2968 European Communities' first written submission, para. 883.
2969 European Communities' first written submission, para. 884.
2970 European Communities' first written submission, paras. 886-889.
2971 European Communities' second written submission, para. 617. See also, paras. 618-619.

BCI deleted, as indicated [***]

(d) Arguments of the United States
7.1324 In its first written submission, the Unite d States argues that NASA/DOD IR&D/B&P
reimbursements are not "grants". Rather, they ar e part of the price paid for purchases of goods or
services pursuant to government contracts. To the extent that they are reimbursed through a
government contract for services, such reimbursements fall outside of the scope of Article 1.1(a)(1) of
the SCM Agreement because they are simply part of the price paid to Boeing pursuant to R&D
procurement contracts that are "purchases of services".2972
7.1325 The United States argues that the European Communities has failed to demonstrate that
IR&D/B&P reimbursements provide a benefit to Boei ng's LCA division. The United States' principal
argument, as developed in its sec ond written submission, oral statements, and responses to questions,
is that the applicable IR&D/B&P cost accounting requirements require Boeing and other government
contractors with multiple business segments to al locate the costs of IR&D/B&P projects that are
beneficial to multiple segments on a pro rata basis across the segments, such that the government does
not reimburse the contactor for the portion allocated to its commercial segments.
7.1326 Regarding specificity, the United States argues that the IR&D and B&P regulations place no
limitation on the industries or enterprises that may claim IR&D or B&P as an overhead cost allocable
to cost-based contracts. The only requirements for specific reimbursement are that the company have
a cost-based contract with a U.S. government agency, and that the company has in fact
incurred expenses for research and de velopment or bid and proposal ac tivities that are not required in
the performance of any other contract and th at they are allocable, reasonable, and not
otherwise unallowable.2973 The United States further argues that even if IR&D and B&P
reimbursements were restricted to "defense and aerospace industries", this is too broad a category of
industries to be characterized as a "group of en terprises or industries" within the meaning of
Article 22974, and that Boeing has not received a disproportionate share of IR&D/B&P
reimbursements.2975
7.1327 In its second written submission, the United States reiterates that "the treatment of IR&D
costs is not limited to particular industries, becau se 48 C.F.R. § 31.205-18 (which the EC recognizes
as 'IR&D/B&P Federal Acquisition Rule') requires all government agencies to include IR&D/B&P
costs in the acquisition price on cost-based contracts with all contractors". 2976 The United States
argues that Article 2.1(a) defines an alleged subs idy as specific only if the granting authority or the
legislation under which it operates "limits access to a subsidy to certain enterprises". With regard to
IR&D and B&P, the "legislation pursuant to whic h the granting authority operates" for purposes of
Article 2.1(a) is, as the European Communities acknowledges, 48 C.F.R. § 31.205-18. This provision
is part of Chapter 1 of Title 48 of the Code of Federal Regulations, wh ich sets out the Federal
Acquisition Regulations ("FAR") applicable to all U.S. agencies. Thus, it applies "to all acquisitions,
by all agencies, with all contractors", and does not limit access to a specific enterprise or industry or
group of enterprises or industries. The United States indicates that these provisions "are the sole
authority for NASA's reimbursement of IR&D and B&P costs".2977

2972 United States' first written submission, para. 284.
2973 United States' first written submission, para. 304.
2974 United States' first written submission, paras. 306-307.
2975 United States' first written submission, paras. 308-309.
2976 United States' second written submission, para. 89.
2977 United States' second written submission, para. 91.

BCI deleted, as indicated [***]

(e) Evaluation by the Panel
(i) The Panel's understanding of the nature of th e claim of the European Communities and the
scope of the measures at issue
7.1328 While the European Communities frames this claim in terms of "NASA/DOD" IR&D and
B&P reimbursements, by the Eu ropean Communities' estimate 2978, DOD accounts for 95 per cent of
the payments to Boeing, and NASA only accounts for 5 per cent of the payments made to Boeing.
Thus, the European Communities' claim appear s to be predominantly about DOD IR&D/B&P
reimbursements.
7.1329 The European Communities' claim appears to relate to NASA and DOD IR&D/B&P
reimbursements to Boeing's military segment , i.e. IDS, through cost-based procurement contracts
with IDS. Together with its first written subm ission, the European Communities submitted a detailed
report prepared by CRA International entitle d "The United States Independent Research &
Development (IR&D) and Bid & Proposal (B&P) Reim bursement Program and Its Benefits to The
Boeing Company". 2979 This 86-page report provides a detailed overview of the IR&D/B&P
programme (including its history, governing struct ure, and rules and regulations), its impacts on
industry, and its impact on Boeing in particular. Because there is no publicly available information on
the amount of IR&D/B&P reimbursements made to i ndividual military contractors, this report also
develops and applies a methodology for estimating the value of IR&D reimbursements made to the
Boeing company. Importantly, the CRA estimate, upon which the European Communities relies, is
based on the assumption that
"the entirety of Boeing's IR&D reimbursements are derived from contracts performed
by Boeing's defense and space business unit, now called Integrated Defense Systems
(IDS)."2980
7.1330 Finally, the scope of the European Comm unities' claim is limited to "IR&D/B&P
reimbursements with respect to dual-use technologies applicable to Boeing's commercial aircraft".2981
More specifically, the European Communities asser ts that IR&D/B&P reimbursements "relate, at
least in part , to the production of all Boeing LCA , and they provide Boeing's LCA division with
advantages on non-market terms". 2982 The European Communities asserts that IR&D/B&P
reimbursements " reimburse Boeing for IR&D and B&P expenses it has already incurred related to
improving, developing, and produci ng its entire line of LCA products ".2983 In its second written
submission, the European Communities makes clear that:
"... the IR&D and B&P reimbursements at issue in this dispute are limited to those
that benefit the commercial aircraft division of Boeing . The European Communities
is not challenging as a subsidy the entire IR&D/B&P reimbursement system of
NASA and DOD, or any IR&D and B&P reim bursements that legitimately lead to

2978 European Communities response to question 29, para. 98.
 2979 CRA International, The United States Independent Research & Development (IR&D) and Bid &
Proposal (B&P) Reimbursement Program and Its Benef its to The Boeing Company, December 2006, Exhibit
EC-5.
2980 Ibid., p. 31.
2981 European Communities' first written submission, pa ra. 871 (emphasis added); CRA International,
The United States Independent Research & Development (IR&D) and Bid & Proposal (B&P) Reimbursement
Program and Its Benefits to The Boeing Company, December 2006, Exhibit EC-5, p. 26.
2982 European Communities' first written submission, para. 878 (emphasis added).
2983 European Communities' first written submission, para. 880 (emphasis added).

BCI deleted, as indicated [***]

developments exclusive to the military and space technology and products purchased
by NASA and DOD."2984
7.1331 Thus, it is the Panel's understanding that the measures that the European Communities is
challenging are NASA and DOD reimbursements, thr ough cost-shared procurement contracts with
IDS, of IR&D/B&P expenses that "relate to the production of ... Boeing LCA", i.e. that "reimburse
Boeing for IR&D and B&P expenses ... related to im proving, developing, and producing its ... line of
LCA products".
(ii) Whether the European Communities has establis hed the existence of the measures it is
challenging
7.1332 U.S. law requires Boeing to allocate a share of the costs of any IR&D/B&P projects
benefiting both its military segment (IDS) and its commercial segment (Boeing's LCA division) to
each of those segments on a " pro rata" basis. In the Panel's view, this fact means that the
European Communities has failed to establish the exis tence of the measure it is challenging, namely,
NASA and DOD reimbursement, through cost-shared procurement contracts with IDS, of IR&D/B&P
expenses that "relate to the production of ... Boeing LCA", i.e. that "reimburse Boeing for IR&D and
B&P expenses ... related to improving, developing, and producing its ... line of LCA products".
7.1333 In its 86-page report, CRA International does not say very much about the IR&D/B&P cost
accounting requirements that apply to military contractors, like Boeing, that have both a military and a
commercial business segment. In the context of it s discussion of the rules and regulations of the
IR&D/B&P programme, CRA International merely notes:
"3.4.4. Cost Accounting Standards (CAS)
CAS 420 provides detailed criteria and instru ctions for the allocation of IR&D/B&P
costs to a given company's contracts. The obj ective of the regulation is to ensure that
all allocations of IR&D/B&P costs to government contracts are conducted using a
consistent and equitable method that accura tely reflects the fraction of such costs
borne by each business unit, and in turn, by each covered contract."2985
7.1334 In its first written submission, the United States explains how the IR&D/B&P cost accounting
requirements operate:
"The EC also fails to realize that even if research is properly characterized as IR&D,
it will not be eligible for U.S. government reimbursement unless it is passed along to
the government as part of a cost-based contract. Under the Cost Accounting
Standards, IR&D expenses are allocated among business segments based on the
beneficial or causal relationship between the IR&D cost and those segments. If a cost
has a beneficial relationship to multiple business segments, it will be allocated
proportionately to all.
This principle has several implications. If IDS conducted research applicable only to
civil aircraft, Boeing would not be allowed to allocate the cost to IDS's government
contracts, as IDS only performs military and space business for the government.
Boeing would instead be required to allo cate the entire cost of the R&D to BCA.

2984 European Communities' second written submission, para. 602 (emphasis added).
2985 CRA International, The United States Independent Research & Development (IR&D) and Bid &
Proposal (B&P) Reimbursement Program and Its Bene fits to The Boeing Co mpany, December 2006,
Exhibit EC-5, p. 23.

BCI deleted, as indicated [***]

Because BCA has no cost-based contracts with the government, these costs would be
passed along to BCA's commercial customers, and not be subject to reimbursement
by the government.
Second, if a military IR&D project was 'directly beneficial to Boeing's LCA
operations,' as the EC mistakenly contends, Boeing would be required to allocate that
cost to IDS and BCA 'on the basis of the be neficial or causal relationship between the
IR&D and B&P costs and the final cost obj ectives.' Thus, the portion of that IR&D
project related to BCA would not be allocat ed to IDS, and would not be subject to
reimbursement in an IDS cost-based contract. The portion allocated to BCA could not
be included in a cost-based contract because BCA has no such contracts. Instead, that
portion of the cost would be passed al ong to commercial customers through BCA's
overhead. Thus, 'dual-use research' include d in IR&D costs will be reimbursed only
to the extent of the military benefit of the research."
2986
7.1335 In its second written submission, the United Stat es advances this argument not in connection
with the existence of a benefit to Boeing's LCA di vision, but rather as a threshold issue regarding the
existence of the measure being challenged . Under the heading "The EC Has Failed to Establish That
DoD or NASA IR&D or B&P Reimbursements C overed Research for Large Civil Aircraft" 2987, the
United States argues that the European Commun ities "has provided no credible evidence that NASA
or DoD actually included research related to large civil aircraft research in IR&D and B&P
reimbursements".
2988 The United States again summarizes the applicable U.S. government accounting
rules that govern the allocation of IR&D/B&P co sts to different "segments" of government
contractors (such as Boeing's LCA division and IDS within Boeing) 2989, and Boeing's own accounting
rules.2990 In responding to the European Co mmunities' argument that R&D to " {s}trengthen the
technology base of the United States" and " {e}nhance the industrial competitiveness of the
United States" may be treated as an IR&D expense, the United States emphasizes that there are other
types of R&D that may be reimbursed, but that:
"... the critical point is that to the extent such research benefitted Boeing 's large civil
aircraft operations, it would have to be allocated to those operations, and would not
be eligible for DoD reimbursement of IR&D or B&P . Therefore, there is no support
for the EC allegation that IR&D reimburs ements for projects under the "strengthen
the technology base" or "industrial competitiveness" rubrics would reduce the costs of
the large civil aircraft division."
2991
7.1336 The United States concludes that:
"... the evidence shows that U.S. law do es not allow Boeing to use IR&D or B&P
reimbursements to fund large civil aircraft research or to fund the share of common
research that is attributable to large civil aircraft."2992
7.1337 In its second oral statement, the United States addresses this question in connection with the
existence of a benefit, but its argument seems to again concern the very existence of the measure
being challenged:

2986 United States' first written submission, paras. 294-296.
2987 United States' second written submission, Section V.A.
2988 United States' second written submission, para. 78.
2989 United States' second written submission, para. 80.
2990 United States' second written submission, para. 81.
2991 United States' second written submission, para. 82 (emphasis original).
2992 United States' second written submission, para. 84.

BCI deleted, as indicated [***]

"We have shown that DoD regulations actually prohibit the conduct that the EC
alleges to be a subsidy. Namely, where IR&D or B&P expenses relate to both
military and civil transactions, DoD will re imburse only a share of those expenses
proportionate to the military transactions.
The EC's IR&D expert, Mr. Keevan, agrees with this assessment. In particular, he
agrees that if a known civil application ex ists at the time an IR&D expense for
military technology is incurred, DoD regulati ons require allocation of a proportionate
share of that expense to Boeing's civil transactions.

... it is clear that DoD regulations require the outcome that the EC identifies as
conferring no benefit to large civil aircraft – proportionate sharing of any "dual use"
IR&D between the company's civil and military operations."
2993
7.1338 The United States has provided the Panel with the full text of the relevant cost accounting
standards.2994 The provision is included as part of the Federal Acquisition Regulation (FAR).
Section 9904.420 ("Cost Accounting Standard 420") is entitled "Accounting for independent research
and development costs and bid and proposal costs" . It contains subsections on its "purpose",
"definitions", "fundamental requirements", "techniques of application", and "illustrations".
7.1339 With respect to "purpose", subsection 9904.420-20 states:
"The purpose of this Cost Accounting Standard is to provide criteria for the
accumulation of independent research and development costs and bid and proposal
costs and for the allocation of such costs to cost objectives based on the beneficial or
causal relationship between such costs and co st objectives. Consistent application of
these criteria will improve cost allocation."
7.1340 Subsection 9904.420-30 defines a number of ke y concepts, including "Allocate", "Bid and
Proposal Cost", Business unit", "Independent Research and Development", and "Segment".
7.1341 Subsection 9904.420-40 sets forth certain "fundamental requirements", including the
following:
"(d) The IR&D and B&P cost pools of a home office shall be allocated to
segments on the basis of the beneficial or causal relationship between the IR&D and
B&P costs and the segments reporting to that home office.
(e) The IR&D and B&P cost pools of a business unit shall be allocated to the
final cost objectives of that business unit on the basis of the beneficial or causal
relationship between the IR&D and B&P costs and the final cost objectives."
7.1342 Subsection 9904.420-50 explains some of the "techniques of application":
"(e) The costs of IR&D and B&P projects accumulated at a home office shall be
allocated to its segments as follows:

2993 United States' non-confidential or al statement at the second meeti ng with the Panel, paras. 72-73
and 77.
2994 48 C.F.R. § 9904.420-40(e), Exhibit US-131 ; Cost Accounting Standard 420, 48 C.F.R.
§ 9904.420, Exhibit US-1287.

BCI deleted, as indicated [***]

(1) Projects which can be identified with a specific segment(s) shall have
their costs allocated to such segment(s).
(2) The costs of all other IR&D and B&P projects shall be allocated
among all segments by means of the same base used by the company to
allocate its residual expenses in ac cordance with 9904.403; provided,
however, where a particular segment receives significantly more or less
benefit from the IR&D or B&P costs than would be reflected by the
allocation of such costs to the segment by the base, the Government and the
contractor may agree to a special allocation of the IR&D or B&P costs to
such segment commensurate with the benefits received. The amount of a
special allocation to any segment made pursuant to such an agreement shall
be excluded from the IR&D and B&P cost pools to be allocated to other
segments and the base data of any such segment shall be excluded from the
base used to allocate these pools.
(f) The costs of IR&D and B&P projects accumulated at a business unit shall be
allocated to cost objectives as follows:
(1) Where costs of any IR&D or B&P project benefit more than one
segment of the organization, the amounts to be allocated to each segment
shall be determined in accordance with paragraph (e) of this subsection."
7.1343 In addition to providing the Panel with the applicable IR&D/B&P regulations, the
United States has also submitted two statements by Boeing officials on the same point.
7.1344 First, the United States has submitted an "affidav it" of David Ramey, Corporate Director of
Business Operations for The Boeing Company.
2995 With regard to the IR&D/B&P accounting
regulations that govern the allocation of costs in firms with multiple business segments, Mr. Ramey
states:
"1. ... I have personal knowledge of the way in which the company accounts for
the activities and costs charged to the U. S. Government under its NASA and DOD
contracts.
2. While both the BCA segment and the IDS segment must account for their
various costs – including Independent Rese arch and Development costs – according
to general accounting standards (subject to audit by various tax and securities
authorities), Boeing's IDS business segment must also comply with the U.S.
Government's Cost Accounting Standards (C AS). These rules are set forth in the
Federal Acquisition Regulations, which are c odified in Volume 48 of the U.S. Code
of Federal Regulations and further amplifie d in the Defense Contract Audit Agency
(DCAA) Contract Audit Manual.
3. The CAS regulations require, amo ng many other things, that IR&D
expenditures be allocated to various segme nts (i.e. IDS and BCA) on the basis of the
'beneficial or causal relationship' to the bus iness of the segment. In practice, Boeing
operationalizes this accounting rule as follows : (1) the costs of an IR&D project
identified, planned and executed by a si ngle segment for the benefit of its own
business are born fully by that segment; and (2) the costs of an IR&D project
identified and planned by each segment for the benefit of both of their respective

2995 Affidavit of David Ramey, Exhibit US-1340.

BCI deleted, as indicated [***]

business, and executed by {Phantom Works} on behalf of both, are accumulated in
the 'enterprise-wide common pool' and allocated between the two segments according
to the relative value-added base of each segment. These designations are reviewed
annually, and if an IDS IR&D project is identified as having prospective value for
BCA {i.e. Boeing's LCA Division }, it will be reassigned to the enterprise-wide
common pool.
4. This methodology is specifically envisioned in 48 CFR § 9904.420-50 and it
has been approved by DOD. Our compliance with this methodology is audited on an
ongoing basis by contracting officers, contract administration officials and DCAA,
and is ultimately subject to scrutiny by the DOD Inspector General. Non-compliance
can result in severe penalties, including non- payment, recoupment by the government
of unallowable costs, suit under the False Claims Act, and debarment from future
government contracting."
7.1345 Second, the United States has submitted anot her "affidavit" from David C. Bullock, Vice
President and CFO for Engineering, Operations and Technology at The Boeing Company.
2996 In his
affidavit, Mr. Bullock states, with regard to Boeing's Phantom Works unit, that:
"{W}here Phantom Works does Independent Research and Development (IR&D) that
has applicability to multiple business operati ons, the costs of this R&D are allocated
per U.S. government regulations among the benefiting business operations; any
portion allocated to Boeing's civil aircra ft operations is covered fully by the
company's commercial revenues (and not re imbursed as overhead on the company's
U.S. government cost-based contracts)."
7.1346 Given the apparent significance of these cost accounting requirements, the third set of
questions put the following detailed question to the United States:
"362. It is the Panel's understanding that , under U.S. government accounting rules,
IR&D and B&P costs may be allocated to a ' segment' of a contractor only if the costs
bear a 'beneficial and causal relationship' to that segment (US Second Written
Submission, para. 80, citing 48 C.F.R. §9904-420-40 (Exhibit US-131); 48 C.F.R. §
9904.418-40(c) (Exhibit US-1141)).
(a) What does 'beneficial and causal rela tionship' mean in this context?
(b) How does Boeing determine whether IR&D and B&P costs incurred by IDS
bear a 'beneficial and causal relationship' to Boeing's LCA segment?
(c) The United States indicates that IR&D and B&P 'may' be allocated to
Boeing's LCA segment 'only if' the co sts bear a beneficial and causal
relationship to that segment. Does this mean that Boeing is not required to
allocate IR&D / B&P costs to its LCA segment even where there exists a
'beneficial and causal relationship'?
(d) Does Boeing have a financial incentive to allocate only a small share of its
IR&D / B&P costs to its LCA operations?"
7.1347 In its response to this question, the United Stat es confirmed, among other things that "costs
typically have a beneficial relationship to a segme nt if they advance one of the activities of that

2996 Affidavit of David C. Bullock, Exhibit US-1284.

BCI deleted, as indicated [***]

segment".2997 The United States confirmed that " {d}etermining whether IR&D and B&P costs
incurred by IDS bear a 'beneficial or causal relations hip' to Boeing's large civil aircraft is part of
Boeing's requirement to maintain an accounting syst em and related internal controls to ensure
compliance with the Cost Accounting Standard 420".2998 The United States further explained that:
"Boeing's IR&D review process does not re troactively reallocate IR&D costs when
one segment decides that it is interested in an IR&D project conducted by another.
Sometimes this practice will allow IDS to u se the results of an IR&D project funded
in whole or in part by BCA, and sometimes BCA will get the advantage of an IR&D
project funded in whole or in part by IDS. Given that civil technology is generally
ahead of military technology in areas wher e there is overlap, the net flow from BCA
to IDS is likely to be larger in volume than the flow from IDS to BCA."
2999
The United States reiterated that:

"the federal acquisition regul ations permit the allocation of IR&D and B&P to a
single segment, i.e., IDS or BCA, if and only if the costs bear a beneficial or causal
relationship only to that segment. Conversely, if IR&D and B&P costs do not bear a
beneficial or causal relationship to a par ticular segment, the regulations prohibit
allocation of any of the costs to that segmen t. If an IR&D project is identified with
more than one specific segment of Boeing (for example, with BCA and another
segment), the cost of the project must, in accordance with CAS 420-50(e)(2), be
'allocated among all segments by means of the same base used by the company to
allocate its residual expenses in accordance with 9904.403...'
3000 .... once a beneficial
or causal relationship exists, allocation is mandatory."3001
7.1348 The European Communities does not dispute that the applicable regulations require Boeing to
allocate IR&D/B&P benefiting both of its segment s across its military and commercial segments on a
pro rata basis. Rather, it advances the following two arguments.
7.1349 First, the European Communities argues that th is does not necessarily exclude the possibility
that IR&D/B&P expenses that Boeing initially cons idered to only have military relevance (and
therefore allocated entirely to IDS contracts with DOD and NASA) could turn out to have unexpected
benefits, in later years, for Boeing's LCA divisi on. The European Communities submits an expert
statement by William T. Keevan, an expert in IR&D /B&P accounting, in support of that position. 3002
In his expert statement, Mr. Keevan, agrees with the United States that if an expected civil application
exists at the time an IR&D expense for military technology is incurred, DOD regulations require
allocation of a proportionate share of that expe nse to Boeing's civil transactions. However,
Mr. Keevan explains that such allocation would not occur if civil uses are "unknown" or "unexpected"
at the time the research is conducted, but "are determined in a later year to have produced information
or results useful to its commercial aircraft business". 3003 However, it is only in such an "unexpected
use" situation that IDS would be reimbursed by for the full cost of R&D benefiting both IDS and

2997 United States' response to question 362, para. 191.
2998 United States' response to question 362, para. 192.
2999 United States' response to question 362, para. 194.
3000 (footnote original) 48 C.F.R. § 9904.420-50(e)(2), Exhibit US-131.
3001 United States' response to question 362, para. 195.
3002 William T. Keevan, "Independent Research & Development Reimbursements: Commentary
on Selected Issues Raised by the United States' First Written Submission in DS353," November 2007,
Exhibit EC-1179.
3003 Ibid., p. 5.

BCI deleted, as indicated [***]

Boeing's commercial segment. In our view, this " unexpected use" argument is not sufficient to
establish the existence of the measure.
7.1350 Second, the European Communiti es argues that the Panel cannot be sure that Boeing actually
allocates its IR&D/B&P costs in this manner. Specifically, the European Communities argues that:
"... to the extent that Boeing takes a pos ition in its own accounting procedures that is
consistent with the arguments advanced in this dispute, then not only will it not be
allocating potentially dual-use technology funded by Boeing IDS to the final cost
objectives of Boeing Commercial, but it will be allocating potentially dual-use
technology funded by Boeing Commercial to the final cost objectives of Boeing
IDS."
3004
7.1351 The "arguments advanced in this dispute" by the United States are that very little DOD R&D
has actual or potential "dual use" applications, i. e. the United States argues that very little DOD R&D
is LCA-related. In our view, this second argum ent by the European Communities does not suffice to
establish the existence of the measure. It cannot be presumed that Boeing does not comply with the
applicable cost accounting requirements. Moreover, even if the Panel were to assume that Boeing
does not comply with the applicable cost accounting requirements, this does not change the fact that
the U.S. Government has these legal requirements in place. As the panel in US – Export Restraints
observed:
"... the existence of a financial contribution by a government must be proven by
reference to the action of the government. To determine whether a financial
contribution exists under subparagraph (iv) solely by reference to the reaction of
affected entities would mean in practice that a di fferent standard would apply under
that provision as compared to the sta ndard under subparagraphs (i)-(iii), which
involves consideration of the action of the government first. Similarly, we do not see
how the reaction of private entities to a given governmental measure can be the basis
on which the Member 's compliance with its treaty obligations under the WTO is
established."3005
7.1352 The cost accounting requirements reviewed above are the same for both IR&D costs and B&P
costs.3006 In the light of the evidence before the Panel regarding the IR&D/B&P cost accounting
regulations, we conclude that the European Commun ities has failed to establish the existence of the
measure it is challenging. More specifically, we conclude that the European Communities has failed
to establish that NASA and DOD reimburse, through co st-shared procurement contracts with IDS,
IR&D/B&P expenses that: "relate to the production of ... Boeing LCA", i.e. that "reimburse Boeing
for IR&D and B&P expenses ... related to improving, developing, and producing its ... line of LCA
products".3007
7.1353 For these reasons, the Panel concludes that th e European Communities has not demonstrated
the existence of the measure challenged.3008

3004 European Communities' second written submission, para. 609.
3005 Panel Report, US – Export Restraints, para. 8.34.
3006 See e.g. European Communities' second written submission, para. 611 ("... the Cost Accounting
Standards at issue here are those for "{a}ccounting for independent research and development costs and bid and
proposal costs", and there is generally no distinction between cost accounting standards for IR&D and B&P").
3007 European Communities' first written submission, paras. 871, 878, 880; European Communities'
second written submission, para. 602.
3008 In the Panel's view, the European Communities' failure to establish that NASA/DOD reimburse
Boeing for IR&D/B&P expenses that "relate to the production of ... Bo eing LCA" could alternatively be

BCI deleted, as indicated [***]

(f) Conclusion
7.1354 For these reasons, the Panel finds that the European Communities has not demonstrated
that NASA/DOD reimburse Boeing for IR&D/B&P expenses that relate to the production of
Boeing LCA, and has therefore failed to establish the existence of the measures that allegedly
constitute a specific subsidy under Articles 1 and 2 of the SCM Agreement.
10. Department of Labor (DOL) 787 worker training grants
(a) Introduction
7.1355 In 2004, the Department of Labor ("DOL") awarded a $1.5 million grant to a group of entities
known as the "Triad Partnership". The European Communities alleges that the purpose of the DOL
grant was to cover the costs of training current a nd future workers for development and production of
the 787, and labels it the "787 Worker Training Gr ant". The European Comm unities argues that this
grant is a specific subsidy under Articles 1 and 2 of the SCM Agreement, and allocates the full
amount of the grant (i.e. $1.5 million) to Boeing's LCA division.
7.1356 The United States does not deny that the DOL made the grant, or that it is a subsidy under
Article 1 of the SCM Agreement. However, the Unite d States argues that the grant is a subsidy to the
Edmonds Community College, and not a subsidy to Boei ng. In this regard, the United States disputes
that the purpose of the grant was to train worker s for the 787, and refers to it as the "Edmonds
Community College Grant". In addition, the Unite d States disputes that the subsidy is specific under
Article 2 of the SCM Agreement.
(b) The measures at issue
7.1357 In 2004, the DOL awarded a $1.5 million grant to a group of entities known as the "Triad
Partnership". These entities include, among others, Edmonds Community College, Everett
Community College, the Snohomish Workforce De velopment Council, the Snohomish Economic
Development Council, Boeing, and other Snoh omish County aerospace manufacturing supplier
industries.3009 The money was received by, and used by, Edmonds Community College. The
European Communities' panel request3010 states that:
"The US Department of Labor transfers economic resources to the US LCA industry
on terms more favourable than available on the market or not at arm's length, through
the Aerospace Industry Initiative, an element of the President's High Growth Training
Initiative, under the authority of the Workfo rce Investment Act, Pub. L. No. 105-220
(1998), by granting to Edmonds Community College in the Stat e of Washington
funds for the training of aerospace industry workers associated with the Boeing 787."

analysed in terms of the European Communities' failure to demonstrate that any of the alleged subsidy should be
allocated to Boeing's LCA division.
3009 United States' first written submission, para. 410.
3010 WT/DS353/2, item 5, p. 12.

BCI deleted, as indicated [***]

(c) Whether a subsidy exists within the meaning of Article 1 of the SCM Agreement
(i) Arguments of the European Communities
7.1358 The European Communities argues that "DOL funding to Triad and Boeing" for training
787 workers provides a direct transfer of funds a nd, specifically, a grant, within the meaning of
Article 1.1(a)(1)(i) of the SCM Agreement.3011
7.1359 Regarding the existence of a benefit within the meaning of Article 1.1(b) of the
SCM Agreement, the European Communities argu es that the "DOL 787 worker training grants"
confer "benefits" on Boeing's LCA division. Th e European Communities argues that: (i) the
financial contributions "relate to the production of th e 787"; (ii) the financial contributions "provide
Boeing's LCA division with advantages on non-market terms"; (iii) "Boeing is not required to pay
anything in return for these DOL worker training gr ants"; and (iv) "Boeing would no doubt incur the
full cost of training its 787 workers on the market".3012
(ii) Arguments of the United States
7.1360 The United States argues that the grant constitutes a financial contribution, but not to Boeing's
787 programme, as the European Communities c ontends, because it was awarded to Edmonds
Community College and not to Boeing.3013
7.1361 The United States also argues that Boeing received no benefit from the Department of Labor
grant because not only was the grant given to Edm onds Community College, rather than to Boeing,
but it was not actually used to provide training to Boeing employees. In this regard, the European
Communities' portrayal of the grant to Edmonds Co mmunity College as "worker training grants" that
"relate explicitly to training 787 workers" is inaccurate.3014
(iii) Evaluation by the Panel
7.1362 Both parties agree that the challenged measur e provides a subsidy within the meaning of
Article 1 of the SCM Agreement. More specifica lly, both parties agree that the challenged measure
involves a financial contribution in the form of a gr ant within the meaning of Article 1.1(a)(1)(i) of
the SCM Agreement, and both parties agree that this financial contribution confers a benefit within
the meaning of Article 1.1(b) of the SCM Agreement. The Panel sees no reason to disagree, and notes
that the funding was identified as a "grant" by the Department of Labor itself.3015
7.1363 In the Panel's view, the question of whether some or all of the subsidy should be allocated to
Boeing's LCA division is an issue that relates to th e amount of the subsidy, rather than the existence
of a financial contribution or benefit within the meaning of Article 1 of the SCM Agreement. 3016 If
the Panel finds that the subsidy is specific within the meaning of Article 2 of the SCM Agreement, it
will address the parties' arguments and evidence on this question. However, if the Panel finds that the
subsidy is not specific within the meaning of Artic le 2, then it need not address the question of how
much of the (non-specific) subsidy should be allocated to Boeing's LCA division.

3011 European Communities' first written submission, para. 910.
3012 European Communities' first written submission, paras. 913-915.
3013 United States' first written submission, para. 413.
3014 United States' first written submission, paras. 414-416.
3015 See e.g. Edmonds Community College Grant Notifi cation, Exhibit EC-622, p. 1 ("The Grantee is
approved for this project up to $1,475,045 as specified in the attached Statement of Work with an additional
increment of $725,045").
3016 See above, paras. 7.35-7.36 of this Report.

BCI deleted, as indicated [***]

(d) Whether the subsidy is specific within the meaning of Article 2 of the SCM Agreement
(i) Arguments of the European Communities
7.1364 In its first written submission, the European Communities advances two arguments in support
of its position that the subsidy is specific within the meaning of Article 2 of the SCM Agreement.
First, the European Communities argues that the Tr iad Grant (which it refers to in the plural as
"grants", notwithstanding that there appears to have been only one grant) is specific by virtue of the
limited group of entities, including Boeing, that are part of the Triad Partnership. The
European Communities explains that numerous govern ment publications and the Notification of the
Grant Award make clear that the grant to the Tria d Partnership is used to train workers associated
with the Boeing 787 supply chain, and the key part ner in the project is the Boeing Company. For
example, the Triad Partnership grant proposal states that the "primary target for this training effort is
development of the workforce necessary for aer ospace manufacturers in building the Boeing 7E7"
including "Boeing and Boeing aerospace suppliers". In this regard, the grants are targeted at the
aerospace industry, and particularly benefit Boeing, and the Statement of Work, for example, explains
that the grants will be used to meet Boeing's particular needs".
3017 Second, the European
Communities asserts that the "grant is also specific unde r Article 2.1(a) because it is a part of a larger
government programme that targets only certain industries, including the aerospace industry".3018
7.1365 In its second written submission, the European Communities responds to the United States'
arguments that the broader government programme th at the Triad Grant is part of – i.e. the High
Growth Job Training Initiative – is not specifi c. The European Communities argues that the
United States misses the point th at the measure at issue is the DOL's $1.5 million grant to Edmonds
Community College, not the entire High Growth Job Training Initiative. According to the
European Communities, the fact remains that "t he grant at issue was explicitly limited to the
aerospace industry (i.e. Boeing and Boeing's aerospace suppliers), and it is therefore de jure specific
pursuant to Article 2.1(a) of the SCM Agreement".3019
(ii) Arguments of the United States
7.1366 In its first written submission, the United States advances two arguments relating to
specificity. First, the United States argues that the even if the Triad Grant is analysed in isolation
from the broader programme that it is part of, it "is not specific to the aerospace industry or Boeing".
Rather, the beneficiaries of this grant alone could extend well beyond the aerospace industry and
Boeing.
3020 Second, the United States argues that the Department of Labor grants awarded pursuant to
the High Growth Job Training Initiative are not specif ic under Article 2.1. To begin, they are not
specific within the meaning of Article 2.1(a) be cause they are not explicitly limited to "certain
enterprises". Rather, these grants are "broadly available" across 14 diverse industry sectors that cover
a significant portion of the U.S. economy, such as health care, financial services, information
technology, energy, manufacturing, retail, and transp ortation. Within these sectors, the grants may be
used for a variety of purposes across many sub-sectors. The grants are in no way de jure specific to
either Boeing or the aerospace industry.3021

3017 European Communities' first written submission, paras. 916 and 919.
3018 European Communities' first written submission, para. 917.
3019 European Communities' second written submission, paras. 628-629.
3020 United States' first written submission, paras. 419-421.
3021 United States' first written submission, para. 417.

BCI deleted, as indicated [***]

(iii) Evaluation by the Panel
7.1367 The European Communities argues that the Triad Grant is specific by virtue of the limited
group of entities, including Boeing, that are part of the Triad Partnership. If the relevant question for
the purposes of Article 2 was whether the Triad Grant would be specific if examined in isolation from
the broader High Growth Job Training Initiative pr ogramme pursuant to which it was provided, the
answer would surely be yes. Among other things , the "High Growth Job Training Initiative Grantee
List" says that the "Target Industry" for the Triad Grant is "Aerospace".
3022 However, the grant at
issue was provided pursuant to a wider programme. In this regard, we note that the
European Communities panel request indicates that the grant to Edmonds Community College was
made through the Aerospace Industry Initiative, "an element of the President's High Growth Training
Initiative".
3023 Thus, to establish specificity, we consider that the European Communities must either
advance a reasoned explanation as to why it is not appr opriate to analyse specificity at the level of the
broader programme, or demonstrate that the broade r programme (i.e. the "High Growth Job Training
Initiative") is specific. The European Communities' st atement that "the measure at issue is the DOL's
$1.5 million grant to Edmonds Community College, not the entire High Growth Job Training
Initiative" does not suffice as a reasoned explanation for examining the Triad Grant in isolation.
Thus, we turn to the question of whether the High Growth Job Training Initiative Program is specific.
7.1368 In the Panel's view, the European Communities h as failed to make a prima facie case that the
"High Growth Job Training Initiative" is specific unde r Article 2 of the SCM Agreement. While it is
true that the Program "targets only certain industries, including the aerospace industry" 3024, the
industries "targeted" are too broad (e.g. "advanced manufacturing" as 1 of 14 "industries") to support
a finding of specificity.
7.1369 The legislative basis for the High Growth Job Training Initiative is 29 U.S.C. § 2916a. The
legislation provides in relevant part:
"(1) In general
The Secretary of Labor shall use funds ava ilable under section 1356(s)(2) of title 8 to
award grants to eligible entities to provi de job training and related activities for
workers to assist them in obtaining or upgrading employment in industries and
economic sectors identified pursuant to paragraph (4) that are projected to
experience significant growth and ensure that job training and related activities
funded by such grants are coordinated with the public workforce investment system.
(2) Use of funds
(A) Training provided
Funds under this section may be used to provide job training services and related
activities that are designed to assist workers (including unemployed and employed
workers) in gaining the skills and compet encies needed to obtain or upgrade career
ladder employment positions in the industries and economic sectors identified
pursuant to paragraph (4).

(B) Enhanced training programs and in formation In order to facilitate the
provision of job training services described in subparagraph (A), funds under this
section may be used to assist in the development and impl ementation of model
activities such as developing appropriate curricula to build core competencies and

3022 High Growth Job Training Initiative Grantee List, Exhibit US-171, p. 6.
3023 WT/DS353/2, item 5, p. 12.
3024 European Communities' first written submission, para. 917.

BCI deleted, as indicated [***]

train workers, identifying and dissemi nating career and skill information, and
increasing the integration of community and technical college activities with
activities of businesses and the public workfo rce investment system to meet the
training needs for the industries and economic sectors identified pursuant to
paragraph (4).

(3) Eligible entities
Grants under this section may be awarded to partnerships of private and public sector
entities, which may include—
(A) businesses or business-related nonprofit organizations, such as trade
associations;
(B) education and training providers, including community colleges and other
community-based organizations; and
(C) entities involved in administeri ng the workforce investment system
established under title I of the Workforce Investment Act of 1998 {29 U.S.C. 2801 et
seq. }, and economic development agencies.

(4) High growth industries and economic sectors
For purposes of this section, the Secretary of Labor, in consultation with State
workforce investment boards, shall identify industries and economic sectors that are
projected to experience significant growth, taking into account appropriate factors,
such as the industries and sectors that--
(A) are projected to add substantial numbers of new jobs to the economy;
(B) are being transformed by technol ogy and innovation requiring new skill sets
for workers;
(C) are new and emerging businesses that are projected to grow;
or
(D) have a significant impact on the econo my overall or on the growth of other
industries and economic sectors.

(5) Equitable distribution
In awarding grants under this section, the Secretary of Labor shall ensure an equitable
distribution of such grants across geographically diverse areas. ..."
3025

7.1370 The Program is administered by the Depart ment of Labor's Employment and Training
Administration (ETA). In accordance with the le gislation reproduced above, the ETA identified
14 different "high growth industries and ec onomic sectors". These include: Advanced
Manufacturing, Aerospace, Automotive, Biotechnolog y, Construction, Energy, Financial Services,
Geospatial Technology, Health Care, Homeland Security, Hospita lity, Information Technology,
Retail, and Transportation.
3026
7.1371 Pursuant to the High Growth Job Training Initia tive, the Department of Labor has awarded
156 grants totalling over $288 million to entities in the 14 industry sectors covered by the
initiative.3027 The recipients of these grants include stat e and local workforce investment systems;
community colleges; health care associations and organizations; trade groups in industries such as
geospatial information and t echnology, nanotechnology, manufacturing, automotives, and

3025 29 U.S.C. § 2916a, Exhibit US-1294 (emphasis added).
3026 The President's High Growth Job Training Initiative Fact Sheet, Exhibit US-170.
3027 High Growth Job Training Initiative Grantee List, Exhibit US-171.

BCI deleted, as indicated [***]

construction; and state and local labour, empl oyment, and community development agencies, among
others.3028
7.1372 The projects funded by the grants cover various topics such as literacy, building arts, long-
term care workforce challenges, hospice care, mine training, supply chain logistics, training
individuals with disabilities for employment in the financial services sector, biotechnology workforce
development, machine shop skills training, food and beverage manufacturing, and integrated systems
technology.
3029
7.1373 Exhibit US-171 provides the following data rega rding the breakdown of grants funded under
the High Growth Job Training Initiative programme:
"Target Industry" Number of Grants
Advanced Manufacturing 31
Aerospace 7
Automotive 12
Biotechnology 17
Construction/Skilled Trades 9
Energy 11
Financial Services 5
Geospatial 6
Health Care 29
Hospitality 4
Information Technology 3
Retail 3
Transportation 4

7.1374 For these reasons, the Panel finds that the Eu ropean Communities has failed to demonstrate
that the subsidy is specific within the meaning of Article 2 of the SCM Agreement.
(e) Conclusion
7.1375 For these reasons, the Panel finds that the p ayment that the Department of Labor made
to Edmonds Community College under the High Growth Job Training Initiative is a subsidy.
However, the Panel finds that the European Communities has not demonstrated that the
subsidy is specific within the meaning of Article 2 of the SCM Agreement.
11. FSC/ETI and successor act subsidies
(a) Introduction
7.1376 The European Communities argues that the " FSC/ETI and successor act Subsidies" are
subsidies within the meaning of Article 1 of the SCM Agreement, and are specific within the meaning
of Article 2 of the SCM Agreement. The Europ ean Communities estimates that the amount of the
subsidy to Boeing's LCA division through 2006 in the form of FSC/ETI tax breaks is $2.199 billion.
7.1377 The United States accepts that the measures at issue are subsidies within the meaning of
Article 1, and are specific within the meaning of Article 2. The United States also accepts the
European Communities' estimate that the amount of the subsidy to Boeing's LCA division through

3028 High Growth Job Training Initiative Grantee List, Exhibit US-171.
3029 High Growth Job Training Initiative Grantee List, Exhibit US-171.

BCI deleted, as indicated [***]

2006 in the form of FSC/ETI tax breaks is $2.199 b illion. However, the United States disputes the
European Communities' assertion that Boeing will continue to receive FSC/ETI benefits after 2006.
(b) The measures at issue
7.1378 The European Communities char acterizes the measures at issue as "FSC/ETI and successor
act subsidies". In its description of these measur es, the European Communities discusses the original
provisions of the U.S. Internal Revenue Code relating to foreign sales corporations, the FSC Repeal
and Extraterritorial Income Exclusion Act of 2000 , the American Jobs Creation Act of 2004 and the
Tax Increase Prevention and Reconciliation Act of 2005.3030, 3031
(i) Provisions of the U.S. Internal Revenue Code relating to foreign sales corporations3032
7.1379 A Foreign Sales Corporation ("FSC") was a corporation created, organised, and maintained in
a qualified foreign country or U.S. possession outside the customs territory of the United States under
the specific requirements of Sections 921-927 of the U.S. Internal Revenue Code. 3033 A FSC obtained
a U.S. tax exemption on a portion of its "foreign trade income", which meant the gross income of a
FSC attributable to "foreign trading gross receipt s". Foreign trading gross receipts meant the gross
receipts of any FSC that were generated by qualif ying transactions, which generally involved the sale
or lease of "export property".
3034 A portion of the "foreign trade income" was deemed to be "foreign
source income not effectively connected with a trade or business in the United States" and was
therefore not taxed in the United States. This untax ed portion was referred to as the "exempt foreign

3030 European Communities’ first written submission, paras. 923-945.
3031 In its request for establishment of a panel in this dispute, the European Communities submits that:

"The US Government transfers economic resources to the US LCA industry through the federal tax
system, and in particular through the following tax measures:

a. Sections 921-927 of the Internal Revenue Code (prior to repeal) and related measures
establishing special tax treatment for "Foreign Sales Corporations" ("FSCs");

b. FSC Repeal and Extraterritorial Income Exclusion Act of 2000, Pub. L. No. 106-519; and

c. American Jobs Creation Act of 2004, Pub. L. No. 108-357."

Request for the Establishment of a Panel by the European Communities, WT/DS353/2, p. 12
(23 January 2006).
3032 The European Communities submits that "the primary legal provisions constituting the FSC
measure are sections 245(c), 921 through 927, and 951 (e) of the United States Internal Revenue Code".
European Communities' first written submission, para. 923, footnote 1615. A detailed description of the FSC
provisions is contained in Panel Report, US – FSC, paras. 2.1-2.8, 7.95-7.97 and Appellate Body Report, US –
FSC, paras. 11-18.
3033 Exhibit EC-623. A FSC had to meet certain requirements of foreign presence. For example, a FSC
had to maintain an office outside the customs territory of the United States, which office had to be equipped to
transact the FSC's business. Also, in order for a FSC, other than a small FSC, to be treated as having foreign
trading gross receipts for the taxable year, the management of the corporation during the taxable year had to take
place outside the United States, and the corporation co uld have foreign trading gross receipts from any
transaction only if economic processes with respect to the transaction took place outside the United States.
3034 With certain exceptions, export property was:
• 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 use, consumption, or disposition outside the United States; and
• with no more than 50 per cent of its fair market value attributable to imports.

BCI deleted, as indicated [***]

trade income". 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. In addition to the exemption from income taxation
of a portion of the FSCs foreign trade income, the FS C measure also allowed U.S. parents of FSCs to
defer paying taxes on certain "foreign trade income " that would normally be subject to immediate
taxation and to avoid paying tax es on dividends received from their FSCs related to "foreign trade
income".
(ii) FSC Repeal and Extraterritorial Income Exclusion Act of 20003035
7.1380 On 15 November 2000, the United States enacted the FSC Repeal and Extraterritorial
Exclusion Act of 2000 ("ETI Act") in response to the findings made with respect to the FSC
provisions by the panel and the Appellate Body in US – FSC .3036 The ETI Act (i) repealed the
provisions in the U.S. Internal Revenue Code relati ng to taxation of FSCs, subject to certain transition
and grandfather provisions and (ii) introduced an ex clusion from income taxation of "extraterritorial
income".
7.1381 First, the ETI Act specified that, in general, the amendments made by the Act "shall apply to
transactions after September 30, 2000". In addition, no new FSCs could be created after that date.
However, in the case of a FSC in existence on 30 September 2000, Section 5(c) (1) of the ETI Act
provided that the amendments made by the Act did not apply to any transaction in the ordinary course
of trade or business involving a FSC which occurred: (i) before 1 January 2002; or (ii) after
31 December 2001, pursuant to a binding contract between the FSC (or any related person) and any
unrelated person that was in effect on 30 September 2000.
7.1382 Second, the ETI Act allowed for the exclusion from taxation of certain income of a U.S.
"taxpayer". Such income -- "extraterritorial in come" that was "qualifying foreign trade income" –
could be earned with respect to goods only in transactions involving qualifying foreign trade property.
The ETI Act defined "extraterritorial income" as th e gross income of a taxpayer attributable to
"foreign trading gross receipts", i.e. gross rece ipts generated by certain qualifying transactions
involving the sale or lease of "qualifying foreign trade property" not for use in the United States.
"Qualifying foreign trade income" under the ETI Ac t meant, with respect to any transaction, the
amount of gross income which, if excluded, would result in a reduction of the taxable income of the
taxpayer from such transaction equal to the greatest of: (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 taxpayer from the transaction, or (iii) 15 per cent of the foreign trade income
derived by the taxpayer from the transaction. "Q ualifying foreign trade property" meant property:
"(A) manufactured, produced, grown or extracted w ithin or outside the United States ; (B) held
primarily for sale, lease or rental, in the ordina ry course of trade or 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 was attributable to: (i) ar ticles manufactured, produced, grown, or extracted
outside the United States; and (ii) direct costs for labour (determined under the principles of
Section 263A) performed outside the United States".
7.1383 The ETI Act's definitions of qualifying fore ign trade property and foreign trading gross
receipts -- which determined income that qualified as extraterritorial income , foreign trade income
and qualifying foreign trade income -- thus contained at least two requirements that had to be satisfied

3035 FSC Repeal and Extraterritorial Income Exclusion Act of 2000, United States Public Law 106-519,
114 Stat. 2423 (2000). Exhibit EC-625. A detailed description of the provisions of this Act is contained in
Panel Report, US – FSC (Article 21.5 – EC) , paras. 2.1-2.8 and Appellate Body Report, US – FSC (Article 21.5
– EC), paras. 12-14.
3036 Panel Report, US – FSC, para. 8.1(a); Appellate Body Report, US – FSC, paras. 177(a) and 178.

BCI deleted, as indicated [***]

in order for a taxpayer to qualify for the exclusion from taxation: (i) a requirement that a good
produced within or outside the United States be held pr imarily for sale, lease or rental, in the ordinary
course of trade or business for direct use, consumpt ion, or disposition outside the United States; and
(ii) a requirement that no more than 50 per cent of the fair market value of such property be
attributable to articles manufactured, produced, grow n, or extracted outside the United States, and
direct costs for labour performed outside the United States.
(iii) American Jobs Creation Act of 20043037
7.1384 On 22 October 2004, the United States enacted the American Jobs Creation Act of 2004
("AJCA") in response to the findings made by the Panel and the Appellate Body in US – FSC
(Article 21.5 – EC) .3038 Section 101 of the AJCA ("Repeal of exclusion for extraterritorial income")
repealed the provisions in Section 114 of the Inte rnal Revenue Code relating to the exclusion from
income taxation of extraterritorial income. The eff ective date of this repeal was 31 December 2004.
However, a "transitional rule for 2005 and 2006" in Section 101(d) of the AJCA allowed U.S.
taxpayers to claim 80 per cent of ETI tax benefits w ith respect to certain transactions in 2005 and to
claim 60 per cent of ETI tax benefits with respect to certain transactions in 2006. In addition to this
time-limited transitional rule, the AJCA indefinite ly grandfathered the ETI scheme in respect of
certain transactions. Specifically, Section 101(f) ("Binding Contracts") of the AJCA provided that
Section 101 of the AJCA did not apply to any transaction in the ordinary course of a trade or business
which occurred pursuant to a binding contract (i) which was between the taxpayer and an unrelated
person and (ii) which was in effect on September 17, 2003, and at all times thereafter. Moreover,
Section 101 of the AJCA did not repeal Secti on 5(c)(1) of the ETI Act, which indefinitely
grandfathered FSC subsidies in respect of certa in transactions entered into pursuant to binding
contracts in effect on 30 September 2000.
3039
(iv) Tax Increase Prevention and Reconciliation Act of 20053040
7.1385 On 17 May 2006, the United States enacted the Tax Increase Prevention and Reconciliation
Act of 2005 ("TIPRA") in response to the findings of the Panel and the Appellate Body in US – FSC
(Article 21.5 – EC II).3041 Section 513 of the TIPRA is entitled "Repeal of FSC/ETI Binding Contract
Relief". Section 513(a) of the TIPRA ("FSC Provisi ons") repeals the provision in Section 5(c)(1)(B)
of the ETI Act that allowed for the continuation of FSC benefits in respect of transactions occurring
pursuant to a binding contract in effect on 30 September 2000. Section 513(b) of the TIPRA ("ETI
Provisions") repeals the provisions in Section 101(f) of the AJCA that allowed for the continuation of
ETI tax benefits in respect of transactions occu rring pursuant to a binding contract in effect on
17 September 2003. Section 513(c) of the TIPRA provides that "{t}he amendments made by this
section shall apply to taxable years beginning after the date of the enactment of this Act".

3037 American Jobs Creation Act of 2004, Pub. L. No. 108-357, §101. Exhibit EC-626. The provisions
of the AJCA are described in greater detail in Panel Report, US – FSC (Article 21.5 – EC II), paras. 2.13-2.17.
3038 Panel Report, US – FSC (Article 21.5 – EC), paras. 9.1(a), 9.1(b), 9.1(e); Appellate Body Report,
US – FSC (Article 21.5 – EC),paras. 256(b), 256 (f), 257.
3039 Above, para. 7.1381.
3040 Tax Increase Prevention and Reconciliation Act of 2005, Pub. L. No. 109-222, § 513, Exhibit
EC 627.
3041 Panel Report, US – FSC (Article 21.5 – EC II) , para. 8.1; Appellate Body Report, US – FSC

BCI deleted, as indicated [***]

(c) Whether a specific subsidy exists within th e meaning of Articles 1 and 2 of the SCM
Agreement
(i) Arguments of the European Communities
7.1386 The European Communities argues that " {t}he US Government provides financial
contributions to those companies eligible for the FSC/ETI tax regime, including through the
associated transitional and grandfather provisions in successor legislation" and that these financial
contributions are covered by Article 1.1(a)(1)(ii) ("government revenue that is otherwise due is
foregone or not collected") of the SCM Agreement.3042
7.1387 The European Communities submits, in this resp ect, that the FSC measure provides for three
tax exemptions that operate together to shield in come from taxation that woul d otherwise be taxed in
the absence of the FSC measure. First, it exempts FSCs from paying taxes on a portion of their
foreign trade income. Second, the FSC measure allows U.S. parents of FSCs to defer paying taxes on
certain foreign trade income. Third, the FSC meas ure allows U.S. parents of FSCs to avoid paying
taxes on dividends received from their FSCs related to "foreign trade income". Thus, these three
exemptions, taken together, involve the foregoing of revenue that is otherwise due because absent the
FSC measure, the tax liability of FSCs and their U.S. parents would be higher.3043
7.1388 The European Communities submits that the ex clusion of "qualifying foreign trade income"
from taxation under the ETI measure similarly shields certain income of U.S. taxpayers from taxation.
Under the ETI measure only "qualifying foreign trad e income" of a U.S. taxpayer is non-taxable.
Such "qualifying foreign trade income" is determin ed on the basis of highly selective qualitative and
quantitative requirements such as the "use outside th e United States" requirements and the "foreign
articles/labour limitation". In the absence of the ETI measure, U.S. taxpayers would be required to
include in their income, and hence pay taxes on, su ch "qualifying foreign tr ade income". The ETI
measure therefore results in the foregoing of reve nue that is otherwise due because absent the ETI
measure the tax liability of US corporations would be higher.3044
7.1389 The European Communities argues that the ETI Act and the AJCA maintain the FSC and ETI
subsidies with respect to transactions based on cer tain pre-existing binding contracts and that the
TIPRA did not completely terminate this flow of subsidies. Thus, the tr ansitional and grandfather
provisions of the ETI Act and the AJCA continue to provide financial contributions within the
meaning of Article 1.1(a)(1)(ii) of the SCM Agreement based on the original FSC and ETI
measures.3045
7.1390 The European Communities argues that the FSC/ ETI tax breaks, including their continuation
through transitional and grandfather provisions, conf er benefits on Boeing's LCA division within the
meaning of Article 1.1(b) of the SCM Agreement. The tax breaks relate to the production of Boeing
LCA and provide Boeing's LCA division with advant ages on non-market terms. Since Boeing is not
required to pay anything in return for these FS C/ETI tax breaks, the entirety of the financial
contributions to Boeing's LCA division can be considered to confer benefits.3046
7.1391 The European Communities argues that the FSC and ETI measures, including their
continuation through successor legislation, are de emed to be specific within the meaning of

3042 European Communities' first written submission, para. 952.
3043 European Communities' first written submission, para. 953.
3044 European Communities' first written submission, para. 954.
3045 European Communities' first written submission, para. 956.
3046 European Communities' first written submission, para. 959.

BCI deleted, as indicated [***]

Article 2.3 of the SCM Agreement because these measu res are prohibited subsidies contingent in law
upon export performance within the meaning of Article 3.1(a) of the SCM Agreement.3047
(ii) Arguments of the United States
7.1392 The United States "does not dispute that FSC/ETI benefits are a financial contribution that
confers a benefit and is specific".3048
(iii) Evaluation by the Panel
7.1393 Before proceeding to an evaluation of whether the measures at issue are specific subsidies, the
Panel finds it useful to set out its understanding of the nature of the claims made by the European
Communities3049 and of the scope of the measures challenged by the European Communities.
7.1394 First, as to the nature of the claims advanced by the European Communities, the Panel notes
that these claims concern the FSC/ETI subsidie s as used by a particular entity, Boeing. The
European Communities asserts that "{t}hrough the US federal government's foreign sales
corporations ('FSC') and extraterritorial in come ('ETI') tax exemptions and exclusions, Boeing has
received over $2 billion in specific subsidies ".3050 The European Communiti es also alleges that the
FSC and ETI tax breaks confer benefits within the meaning of Article 1.1(b) of the SCM Agreement
on Boeing's LCA division . In response to a panel question, th e European Communities explains that
"its challenge to the continuing FSC/ETI schem e does not aim at requiring the United States to
withdraw all continuing effects of the scheme generally, but only the benefit accruing to
Boeing/McDonnell Douglas and the adverse effects caused thereby ".3051 Thus, the claims of the
European Communities pertain to FSC and ETI tax ex emptions and exclusions specifically in relation
to Boeing.3052
7.1395 Second, as to the scope of the challe nged measures, the Panel notes that the
European Communities, in its legal analysis of wh y these measures constitute subsidies, refers to the
measures as "the FSC/ETI tax regime, includi ng ... the associated trans itional and grandfather
provisions in successor legislation" 3053, "FSC/ETI tax breaks, including their continuation through
transitional and grandfather provisions" 3054 and "FSC and ETI measures, including their continuation
through successor legislation".3055 As noted above, in describing the factual background to its claims,
the European Communities summarizes the provisions of the U.S. Internal Revenue Code relating to
foreign sales corporations, the ETI Act, the AJCA and the TIPRA. We find the following statements
of the European Communities particularly instruc tive to understand how the European Communities'
legal claim relates to each of these different measures.
7.1396 In its first written submission, the European Communities states that:
"the ETI Act and the AJCA maintain these FSC and ETI subsidies with respect to
transactions based on certain pre-existing long term binding contracts, and the flow of
these subsidies was not completely terminated pursuant to the TIPRA. In so doing,

3047 European Communities' first written submission, para. 962.
3048 United States' first written submission, para. 422.
3049 The European Communities makes claims with respect to the FSC/ETI and succesor act subsidies
under Article 3 of the SCM Agreement, on the one hand, and Articles 5 and 6, on the other.
3050 European Communities' first written submission, para. 921 (emphasis added).
3051 European Communities' response to question 59, para. 207 (emphasis added).
3052 See also above, para. 7.150.
3053 European Communities' first written submission, para. 952.
3054 European Communities' first written submission, para. 959.
3055 European Communities' first written submission, para. 962.

BCI deleted, as indicated [***]

the transitional and grandfather provi sions of the ETI Act and the AJCA continue to
provide financial contributions based on the original FSC and ETI measures within
the meaning of Article 1.1(a)(1)(ii) of the SCM Agreement".
3056
7.1397 In its second written submission, the European Communities refers to "the Foreign Sales
Corporation ('FSC') and extraterritorial income ('ETI') tax breaks, as maintained through the FSC
Repeal and Extraterritorial Income Exclusion Act of 2000 ('ETI Act'), American Jobs Creation Act of
2004 ('AJCA'), and Tax Increase Prevention and Reconciliation Act of 2005 ('TIPRA')".3057
7.1398 In its statement at the second meeting of the Panel, the European Communities explains that it
"is not challenging 'TIPRA' as a separate measure, a nd it has no interest in doing so given that TIPRA
actually repeals certain aspects of FSC/ETI. Rather, it is challenging the FSC/ETI measures listed in
the Panel Request, to the extent that they provided and, despite TIPR A, continue to provide subsidies
to Boeing."3058
7.1399 In sum, it is our understanding that: (i) the claims of the European Communities pertain to,
on the one hand, the tax advantages allegedly enjoyed by Boeing under the original legislation
relating to the treatment of foreign sales corpor ations and the ETI Act and, on the other, the
continuation of those tax advantages under the tran sition and grandfather provi sions contained in the
ETI Act and the AJCA; and (ii) the European Co mmunities relies on the TIPR A as evidence that the
subsidies provided under the "binding contracts" gr andfather provisions of the ETI Act and the AJCA
have not been completely repealed.
7.1400 It is not in dispute that during the period 1989-2006 Boeing received tax exemptions and
exclusions under the FSC and ETI legislation, in cluding under transition and grandfather provisions
of successor legislation. The Panel notes that the parties agree that these tax exemptions and tax
exclusions provided to Boeing are financial contribu tions within the meaning of Article 1.1(a)(1)(ii)
of the SCM Agreement that confer a benefit within the meaning of Article 1.1(b) and are specific
within the meaning of Article 2 of the SCM Agreement.
7.1401 With respect to the existence of a subsidy un der Article 1, the Panel also notes the findings
made in this regard by the pa nels and the Appellate Body in US – FSC, US – FSC (Article 21.5 – EC)
and US – FSC (Article 21.5 – EC – II).
7.1402 First, the panel in US – FSC made findings regarding Sections 921-927 of the Internal
Revenue Code and related measures establishing special tax treatment for FSCs.
3059 The panel found
that certain "exemptions identified by the Eu ropean Communities under the FSC scheme" were
financial contributions under Artic le 1.1(a)(1)(ii) of the SCM Agreement because they involved the
foregoing of revenue which was otherwise due 3060 and conferred a benefit within the meaning of
Article 1.1(b) of the SCM Agreement. 3061 The Appellate Body upheld the panel 's findings that the
FSC exemptions were financial contributions within the meaning of Article 1.1(a)(1)(ii).
7.1403 Second, the panel in US – FSC (Article 21.5 – EC) made findings with respect to the ETI Act.
The panel found that the ETI Act's exclusion from gross income of certain "extraterritorial income"

3056 European Communities' first written submission, para. 955 (emphasis original).
3057 European Communities, second written submission, para. 631.
3058 European Communities, non-confidential statement at second meeting of the Panel with the parties,
para. 78. Thus, rather than making a claim in respect of the TIPRA, it appears that the European Communities
discusses this measure only for the purpose of pre-empti ng an argument that the measures at issue have been
repealed.

BCI deleted, as indicated [***]

gave rise to a financial contribution in the form of a foregoing of government revenue that was
otherwise due within the meaning of Article 1.1(a)(1)(ii) 3062 and that this financial contribution
conferred a benefit, such that a subsidy within the meaning of Article 1.1 existed. 3063 The Appellate
Body upheld the panel's findings that the ETI me asure involved a financial contribution through the
foregoing of government revenue otherwise due3064
7.1404 Third, in US – FSC (Article 21.5 – EC – II), the panel found that the United States, by
enacting Section 101 of the AJCA, maintained the prohibited FSC and ETI subsidies through
transition and grandfather clauses in section 101 of the AJCA. 3065 The Appellate Body upheld this
finding.3066
7.1405 Regarding specificity, we further note that, in a ddition to the agreement of the parties on this
issue, Article 2.3 of the SCM Agreement provides that subsidies that are contingent upon export
performance within the meaning of Article 3 of the SCM Agreement shall be deemed to be specific.
In US – FSC, US – FSC (Article 21.5 – EC) and US – FSC (Article 21.5 – EC II), the FSC/ETI
subsidies at issue were found to be export continge nt. In addition, this Panel finds further below 3067
that the measures at issue are export contingent. Acco rdingly, we conclude here that they are specific
within the meaning of Article 2 of the SCM Agreement.
7.1406 For these reasons, the Panel finds that tax exemp tions and tax exclusions provided to Boeing
under the FSC and ETI legislation, including the tran sition and grandfather provisions of the ETI Act
and the AJCA, constitute specific subsidies with in the meaning of Articles 1 and 2 of the
SCM Agreement.
(d) Amount of the subsidy to Boeing's LCA division
(i) Arguments of the European Communities
7.1407 The European Communities estimates that th e amount of the subsidy to Boeing's LCA
division through 2006 in the form of FSC/ETI tax breaks is $2.199 billion.3068
7.1408 The European Communities argues that the TIPRA 3069 repeals certain aspects of the
grandfathering of FSC and ETI tax breaks for ta x years beginning after 2006 but does not end the
flow of all FSC/ETI benefits after 2006. The Eu ropean Communities asserts, in the light of a
memorandum from the Internal Revenue Service's Office of Chief Counsel 3070, that Boeing will
continue to benefit from the FSC/ETI benefits. Sp ecifically, Boeing will continue to receive certain
FSC/ETI benefits to the extent that Boeing recogni zes revenue after 2006 that (i) is derived from a
firm order or option exercised prior to the end of 2006, where (ii) such order or exercised option was
made pursuant to a binding contract that qualifies unde r either the "FSC binding contract rule" of the

3062 Panel Report, US – FSC (Article 21.5 – EC), para. 8.43.
3063 Panel Report, US – FSC (Article 21.5 – EC), para. 8.48.
3064 Appellate Body Report, US – FSC (Article 21.5 – EC), para. 106.
3065 Panel Report, US – FSC (Article 21.5 – EC II), para. 7.65.
3066 Appellate Body Report, US – FSC (Article 21.5 – EC II), para. 96.
3067 See below, paras. 7.1450-7.1464.
3068 European Communities' first written submission, para. 957; International Trade Resources LLC,
FSC/ETI Tax Benefits Provided to U.S. Large Civil Aircraft Producers, Exhibit EC-12. The European
Communities asks the Panel to adopts this estimate as th e best information available and, as appropriate, draw
adverse inferences due to the United States' non-cooperation in the information gathering process.
European Communities' first written submission, para. 958.
3069 See above, para. 7.1385.
3070 Office of Chief Counsel, Qualification for FSC Benefits and ETI Exclusions, Internal Revenue
Service Memorandum Number AM 2007.001, 22 December 2006, Exhibit EC-628, p.6.

BCI deleted, as indicated [***]

ETI Act or the "ETI binding contract rule" of the AJCA. 3071 While the financial contributions from
the FSC/ETI measures continue to apply after 2006, the European Communities has been unable to
provide an estimate of the future value of those subsidies to Boeing's LCA division.3072
7.1409 The European Communities submits that there is no support for the argument of the
United States that Boeing will not take advantage of the FSC/ETI subsidies after 2006. The statement
in Boeing's 2006 annual report relied upon by the United States 3073, is not dispositive of what Boeing
may or may not do as of 1 January 2007 with regard to the FSC/ETI breaks. First, the statement that
"2006 will be the final year for recognizing any expor t tax benefits" is based on the text of the TIPRA
and does not take into account the implications of the December 2006 Internal Revenue Service
memorandum which interpreted the TIPRA as repealing the FSC/ETI binding contract rules only
prospectively. Second, the auditors report and the CEO/CFO certifications ar e limited to "material"
facts or to "the circumstances under which such statements were made". In other words, the
statements made in the annual report do not necessar ily reflect the full implications of the December
2006 Internal Revenue Service memorandum, as tho se implications may not have been entirely
known or understood at the time Boeing issued its annual report. The European Communities notes
that the United States has not submitted a certified and enforceable statement from a Boeing official
stating that regardless of the interpretation is sued by the Internal Revenue Service in its
December 2006 memorandum, Boeing will disclaim all FSC/ETI tax breaks after 2006. 3074 T h e
European Communities argues that given how easy it would be for someone at Boeing to author a one
or two paragraph affidavit to defe nd the United States' position on po st-2006 FSC/ETI tax benefits to
Boeing – something that Boeing has done to defend other claims on a number of other occasions – the
fact that Boeing and the United States have not submitted such an affidavit must be taken into account
by the Panel when evaluating the European Communities' claims.3075
7.1410 In response to a Panel question, the European Communities stresses that it includes within the
scope of this dispute the financial contributions a nd benefits that Boeing continues to receive after
2006. The statement in paragraph 957 of its first wr itten submission that "the financial contributions
from FSC/ETI continue to apply after 2006, alth ough the European Communities has been unable to
provide an estimate of the future value of those subsidies to Boeing's LCA Division" indicates simply
that the European Communities does not have sufficient informati on to value the FSC/ETI benefits to
Boeing after 2006. Thus, it is indeed necessary for the Panel to reach a conclusion on whether Boeing
will continue to receive financial contributions and benefits under the FSC/ETI-related measures after
2006.3076
7.1411 Regarding the statement by Boeing, submitted by the United States in its response to a panel
question, that Boeing "did not receive any benefits from FSC or successor legislation after
31 December 2006", the European Communities asserts that this statement does not indicate that
Boeing does not plan to recognise benefits from FSC or successor legislation in its tax filings after
20 July 2009, the date of the signed statement. Th e European Communities recalls in this regard that
it is clear from the Internal Revenue Service memorandum of 22 December 2006 that Boeing may
continue to receive certain FSC/ETI benefits after 2006. Because the type of revenue in respect of
which Boeing can continue to receive the FSC/ETI benefits can be recognised after 20 July 2009, the
benefits from FSC and successor measures can likewise be realised after that date. The United States
and Boeing have not presented any evidence to rebut this understanding. The European Communities
also points out that the United States' response to this question has no impact on the amount of the

3071 European Communities' first written submission, para. 945.
3072 European Communities' first written submission, para. 957.
3073 See below, para. 7.1423.
3074 European Communities' second written submission, paras. 635-637.
3075 European Communities' comments on United States' response to question 226, paras. 282-284.
3076 European Communities' response to panel question no. 30, paras. 99-100.

BCI deleted, as indicated [***]

FSC/ETI subsidies at issue, as the European Comm unities has never attempted to provide an estimate
of the future value of those subsidies to Boeing's LCA division.3077
(ii) Arguments of the United States
7.1412 The United States does not dispute the European Communities' estimate of FSC/ETI benefits
related to large civil aircraft during the period 1989-2006.3078
7.1413 The United States rejects the contention of the European Communities that Boeing will
continue to receive certain FSC/ETI benefits after 2006. In this connection, the United States refers to
a statement in Boeing's 2006 annual report. 3079 Since the European Co mmunities has presented no
reason to disbelieve this certified statement by Boeing's officers the Panel should conclude that
Boeing ceased receiving FSC/ETI benefits as of 31 December 2006. Accordingly, with regard to any
claims of threat of serious prejudice, FSC/ETI benefits should not enter into the analysis.3080
7.1414 The United States argues that the European Communities does not contest that Boeing has
stated that it will not use the FSC/ETI subsidy after the 2006 tax year. Instead, the European
Communities focuses on a memorandum issued by an Associate Chief Counsel of the Internal
Revenue Service with regard to the eligibility for FSC/ETI benefits in some circumstances. As
evidence, that general evaluation should not supersed e the conclusion reached by Boeing with regard
to its specific tax situation that it will not use that subsidy in the future. In addition, the
European Communities has ignored a statement at the beginning of the memorandum, saying "This
advice may not be used or cited as precedent".
3081
7.1415 The United States considers that, in the light of the fact that the European Communities
excludes any FSC/ETI benefits that Boeing will recei ve after 2006 from its calculations and in the
light of Boeing's statement that it will not receive such benefits after 2006, there is no need for the
Panel to make a finding as to whether Boeing will continue to receive such benefits after 2006. 3082 In
response to the argument of the European Communiti es that the Panel should apply adverse inference
to estimate the value of FSC/ETI benefits after 2006 in the light of "the US non-cooperation with
Annex V and otherwise", the United States asserts th at it has submitted all of the information on this
topic available to it namely the statement in Boeing's 2006 annual report that it will not receive
FSC/ETI benefits after the 2006 tax year. No pa rty can submit unavailable evidence and the absence
of that evidence supports only the conclusion that the party has cooperated to the best of its ability.3083
7.1416 The United States submits that there are many fo rms of evidence in addition to affidavits.
The United States in this instance has chosen to rely on a statement in Boeing's financial report stating
that it will not take advantage of FSC/ETI bene fits after 2006. The European Communities has
provided no evidence to the contrary. Its only rebutta l is to assert that Boeing would be eligible for
that subsidy. However, eligib ility and actual use are two very di fferent concepts. Even if the
European Communities had proven that Boeing woul d qualify for FSC/ETI benefits on the basis of

3077 European Communities' comments on United States' response panel question 369, paras. 202-206.
3078 United States' first written submission, para. 422. The United States observes that it does "not
agree with all aspects of the EC calculation, but the EC's estimate is sufficient for purposes of Article 6, given
that the general magnitude of a subsidy, and not its precise percentage incidence, is the focus of the analysis
under that article". United States' first written submission, para, 422, footnote 576.
3079 United States' first written submission, para. 423; Boeing Annual Report (2006), Exhibit US-126,
p. 55.
3080 United States' first written submission, para. 425.
3081 United States' non-confidential statement at first meeting of the Panel with the parties, para. 25.
3082 United States' response to question 30, para. 79.
3083 United States' comments on European Communities' response to question 30, para. 112.

BCI deleted, as indicated [***]

the Internal Revenue Service memorandum, that would not constitute evidence that the company
actually will use those benefits.
7.1417 In response to a Panel question whether Boeing received any FSC benefits after
31 December 2006, the United States indicates: "No, Boeing did not receive any FSC benefits after
December 31, 2006"
3084 In support of this answer, the United States submits a statement by Boeing's
Vice-Director for Tax.3085
(iii) Evaluation by the Panel
7.1418 The European Communities estimates that the amount of the FSC/ETI subsidies to Boeing's
LCA division during the period 1989-2006 is $2.199 billion. The European Communities has
provided a detailed explanation of the methodology used in deriving this figure.
3086 The United States
has indicated that it does not dispute the estimate by the European Communities of FSC/ETI benefits
related to large civil aircraft during the period 1989-2006.
7.1419 In the light of the explanation provided by the European Communities of the methodology
used for deriving its estimate of the amount of FSC /ETI subsidies to Boeing during the period 1989-
2006 and the statement of the United States that it does not dispute the European Communities'
estimate, the Panel estimates that the amount of FSC/ETI subsidies to Boeing's LCA division in the
period 1989-2006 is $2.199 billion.
7.1420 While there is no disagreement between the parties on the characterization of the FSC/ETI tax
advantages provided to Boeing through 2006 as specific subsidies and on the amount of these
subsidies, they disagree on the question of whether Boeing will continue to receive FSC/ETI benefits
in the post-2006 period.
7.1421 The Panel notes that the factual evidence pr ovided by the European Communities in support
of its assertion that Boeing will continue to receive FSC/ETI benefits after 2006 consists of an
Internal Revenue Service memorandum that sets fo rth a prospective interpretation of the TIPRA
repeal date. Specifically, th e European Communities relies on the following passage from this
memorandum:
"The TIPRA repeal date repeals the {FSC and ETI} binding contract rules for taxable
years that begin after May 17, 2006. Becau se the binding contract rules apply on a
transaction-by-transaction basis, we interpret the TIPRA repeal date as repealing the
binding contract rules prospectively, on a transaction-by-transaction basis, for
transactions entered into during a taxable y ear that begins after May 17, 2006. In
other words, the binding contract rules {continue to} apply to certain transactions, but
only if such transactions are not
 entered into in a taxable year that begins after
May 17, 2006."3087

3084 United States' response to question 369, para. 225.
3085 Statement of James H. Zrust, Exhibit US-1341.
3086 International Trade Resources LLC, FSC/ETI Tax Be nefits Provided to U.S. Large Civil Aircraft
Producers, Exhibit EC-12. At paragraph 3, ITR explains that "...Boei ng and MD received a total of
$2,284 million in FSC/ETI benefits during the period from 1989 thr ough 2005. Of this amount, approximately
$2,059 million was related to sales of LCA. In addition, ITR estimate s that Boeing will receive a further
$140 million in LCA-related FSC/ETI benefits in 2006. Thus, Boeing’s total LCA-related FSC/ETI benefits
from 1989 through 2006 is estimated to be $2,199 million."
3087 Qualification for FSC benefits and ETI Exclusions, Office of Chief Counsel, Internal Revenue
Service Memorandum Number AM 2007-001, 22 December 2006, Exhibit EC-628, p. 6.

BCI deleted, as indicated [***]

7.1422 The analysis in this memorandum is of a gene ral nature and does not specifically relate to
Boeing.
7.1423 The Panel notes that with its first written submission the United States provided a statement
from Boeing's 2006 annual report:
"On May 17, 2006, the Tax Increase Preven tion and Reconciliation Act of 2005 was
enacted, which repealed the FSC/ETI ex clusion tax benefit binding contract
provisions of the American Jobs Creation Act of 2004. Therefore, 2006 will be the
final year for recognizing any export tax be nefits. The 2006 effective tax rate was
reduced by 5.8% due to export tax benefits."3088
7.1424 At a later stage of this proceeding, the United States also submitted a statement of Mr. James
H. Zrust, the Vice President of Tax of The Bo eing Company, dated 20 July 2009, who "confirm(s)
that Boeing did not receive any FSC benefits after 31 December 2006".3089
7.1425 Therefore, while it may be true, as argued by the European Communiti es on the basis of the
December 2006 memorandum of the Internal Reve nue Service, that it is possible in certain
circumstances for a company to continue to benefit from the FSC/ETI measure through the
prospective interpretation of the TIPRA repeal provi sion, this must be weighed against other evidence
before the Panel that suggests that Boeing has not actually used this possibility.3090
7.1426 Moreover, the assertion of the European Comm unities that Boeing will continue to benefit
from FSC/ETI tax exemptions and tax exclusions in the post-2006 period is inconsistent with the fact
that a document submitted by the European Comm unities on the amounts of subsidies in the period
1989-2006 and 2007-2024 indicates that the amount of FSC/ETI subsidies in the period 2007-2024 is
$0.3091 3092 This document explicitly states that "{t}he benefits from FSC/ETI after 2006 are zero due
to the repeal of the grandfather provisions relating to FSC/ETI."3093
7.1427 In any event, the Panel is not convinced that it is necessary to make a finding as to whether
Boeing will continue to receive FSC/ETI benefits. In our view, the European Communities has not
adequately explained how such a finding is releva nt to the Panel's evaluation of the European
Communities' claims of present serious prejudice and threat of serious prejudice or to its claim of the
existence of prohibited subsidies. In this rega rd, the Panel finds the response of the European
Communities to question 30 unpersuasive. In this qu estion, the Panel sought a clarification from the

3088 Boeing Annual Report (2006), Exhibit US-126, p. 55.
3089 Statement of James H. Zrust, Exhibit US-1341. The statement indicates that Mr Zrust has
"personal knowledge of The Bo eing Company's... and Boeing Commercial Airplanes' ... tax issues, including
issues with respect to the Foreign Sales Corporation. .. Extraterritorial Income Exclusion Act ...and successor
legislation."
3090 We consider that the mere fact that, as argued by the European Communities, Boeing has not
explicitly stated that it does not plan to recognise bene fits from FSC or successor legi slation in its tax filings
after 20 July 2009 is not sufficient to conclude that Boeing will actually use FSC/ETI benefits after July 2009.
3091 Amount of Subsidies to Boeing's LCA Division, Exhibit EC-17, pp. 1,5.
3092 We also note that data provided by the European Communities indicates that the "magnitude" of
the FSC/ETI subsidies during the reference period (2004-2006) is $0. International Trade Resources LLC,
Calculating On A Per-Aircraft Basis the Magnitude Of The Subsidies Provided to US Large Civil Aircraft,
Table 4: Subsidy Magnitude by Subsidy Program, Exhibit EC-13.
3093 Amount of Subsidies to Boeing's LCA Division , Exhibit EC-17, p.7. While the
European Communities argues that the non-inclusion of future amounts of FSC/ETI subsidies is due to a lack of
information resulting from an absence of cooperation by the United States, we see nothing in this document that
suggests that future amounts of FSC/ETI subsidies could not be calculated because of a lack of cooperation by
the United States.

BCI deleted, as indicated [***]

European Communities as to why it was necessary fo r the Panel to reach a conclusion on whether
Boeing will receive FSC/ETI benefits after 2006, given that the European Communities had not
included any future amounts of FSC/ETI benefits in the estimate of the overall amount of FSC/ETI
subsidies at issue in this dispute. In its respon se to this question, the Eu ropean Communities states
that it "includes within the scope of this disput e" the FSC/ETI benefits that Boeing continues to
receive after 2006. The Panel considers that the statement that the European Communities "includes
within the scope of this dispute" FSC/ETI benefits that Boeing will receive post-2006 is too vague and
abstract to clarify how those benefits are relevant to the claims of the European Communities. We
note, in this regard, that the European Co mmunities acknowledges that whether or not Boeing
continues to receive FSC/ETI post-2006 does not affe ct its estimate of the overall amount of FSC/ETI
subsidies to Boeing.
7.1428 Therefore, the Panel does not consider it n ecessary to reach a conclusion as to whether there
is sufficient evidence before it to support the European Communities' contention that Boeing will
continue to receive FSC/ETI benefits in the post-2006 period.
(e) Conclusion
7.1429 For these reasons, the Panel finds that: (i ) tax exemptions and tax exclusions provided
to Boeing under the FSC and ETI legislation, including the transition and grandfather
provisions of the ETI Act and the AJCA, constitute specific subsidies within the meaning of
Articles 1 and 2 of the SCM Agreement; and (ii) the amount of FSC/ETI subsidies to Boeing's
LCA division in the period 1989-2006 can be estimated to be $2.199 billion.
12. Summary of conclusions on whether the measures at issue constitute specific subsidies
within the meaning of Articles 1 and 2 of the SCM Agreement
7.1430 In this section of our Report, we have examined whether the measures challenged by the
European Communities constitute specific subsidies within the meaning of Articles 1 and 2 of the
SCM Agreement, as well as the amount of any su ch subsidies that is allocable to Boeing's LCA
division.
7.1431 We have found that a number of the measur es challenged by the European Communities do
constitute specific subsidies:
(a) State of Washington and municipalities therein
(i) the Business and Occupation ("B&O") tax reduction provided for in
Washington House Bill 2294 ("HB 2294");
(ii) the B&O tax credits for preproductio n development, computer software and
hardware and property taxes provided for in HB 2294;
(iii) the sales and use tax exemptions fo r computer hardware, peripherals and
software provided for in HB 2294;
(iv) the City of Everett B&O tax reduction;
(v) workforce development programme and employment resource center;

BCI deleted, as indicated [***]

(b) State of Kansas and municipalities therein
(i) the property and sales tax abatemen ts provided to Boeing pursuant to
Industrial Revenue Bonds ("IRBs") issued by the State of Kansas and
municipalities therein;
(c) State of Illinois and municipalities therein
(i) the reimbursement of a portion of Bo eing's relocation expenses provided for
in the Corporate Headquarters Relocation Act ("CHRA");
(ii) the 15-year Economic Development for a Growing Economy ("EDGE") tax
credits provided for in the CHRA;
(iii) the abatement or refund of a portion of Boeing's property taxes provided for
in the CHRA;
(iv) the payment to retire the lease of the previous tenant of Boeing's new
headquarters building;
(d) National Aeronautics and Space Administration (NASA)
(i) the payments made to Boeing pursuant to procurement contracts entered into
under the eight aeronautics R&D programmes at issue;
(ii) the access to government facilities, equipment and employees provided to
Boeing pursuant to procurement contracts and Space Act Agreements entered
into under the eight aeronautics R&D programmes at issue;
(e) Department of Defense (DOD)
(i) the payments made to Boeing pursuant to assistance instruments entered into
under the 23 RDT&E programmes at issue;
(ii) the access to government facilities pr ovided to Boeing pursuant to assistance
instruments entered into under the 23 RDT&E programmes at issue;
(f) FSC/ETI
(i) the tax exemptions and tax exclus ions provided to Boeing under FSC/ETI
legislation, including the transition and grandfather provisions of the ETI Act
and the AJCA.
7.1432 However, we have concluded th at the European Communities has not demonstrated that the
following measures constitute specific subsidies within the meaning of Articles 1 and 2 of the SCM
Agreement, and/or that any amount of the allege d specific subsidy should be allocated to Boeing's
LCA division:
(a) State of Washington and municipalities therein
(i) the sales and use tax exemptions for construction services and equipment
provided for in HB 2294;

BCI deleted, as indicated [***]

(ii) the leasehold tax exemptions provided for in HB 2294;
(iii) the property tax exemptions provided for in HB 2294;
(iv) the I-5 and SR 527 expansion proj ects, the construction of a rail-barge
transfer facility and the expansion of the South Terminal by the Port of
Everett;
(v) the waiver of 747 LCF landing fees at Paine Field;
(vi) the freezing of rates charged to Boeing of certain utility services;
(vii) the provision of coordinators in connection with Project Olympus;
(viii) tax and other incentives related to the 747 LCF;
(ix) the assumption by Washington State of costs of MSA-related legal
proceedings;
(b) State of Kansas and municipalities therein
(i) the payments made to Spirit Aerosyte ms arising from the issuance of Kansas
Development Finance Authority Bonds ("KDFA") bonds;
(c) DOD
(i) the payments made to Boeing pursuant to procurement contracts entered into
under the 23 RDT&E programmes at issue;
(ii) the access to government facilities provided to Boeing pursuant to
procurement contracts entered into under the 23 RDT&E programmes at
issue;
(d) NASA/DOD
(i) the allocation of intellectual property rights under NASA and DOD R&D
contracts and agreements entered into with Boeing;
(ii) the reimbursement of indepe ndent R&D and bid and proposal
("IR&D/B&P") expenses under NA SA and DOD R&D contracts and
agreements with Boeing;
(e) Department of Commerce
(i) the payments made to joint ventures / consortia in which Boeing participated
through the Advanced Technology Program;
(f) Department of Labor
(i) the payment made to Edmonds Community College under the High Growth
Job Training Initiative.

BCI deleted, as indicated [***]

7.1433 With respect to the amount of the specific subsidies found to exist, we have estimated that the
amount of these subsidies to Boeing's LCA division was at least $5.3 billion over the period 1989-
2006:
Amount of subsidies to Boeing's LCA division over the period 1989-20063094

Government(s) or
Government Agency
Measures found to constitute specific subsidies within
the meaning of Articles 1 and 2
Amount of the subsidy
to Boeing's LCA
division over the
period 1989-2006
State of Washington
and Municipalities
therein
- Business and Occupation ("B&O") tax reduction
provided for in Washington House Bill 2294 ("HB 2294")
- B&O tax credits for preproduction development,
computer software and hardware and property taxes
provided for in HB 2294
- sales and use tax exemptions for computer hardware,
peripherals and software provided for in HB 2294
- City of Everett B&O tax reduction
- workforce development programme and employment
resource center
$77.7 million
State of Kansas and
Municipalities therein
- property and sales tax abatements provided to Boeing
pursuant to Industrial Revenue Bonds ("IRBs") issued by
the State of Kansas and municipalities therein
$476 million
State of Illinois and
Municipalities therein
- reimbursement of a portion of Boeing's relocation
expenses provided for in the Corporate Headquarters
Relocation Act ("CHRA")
- 15-year Economic Development for a Growing
Economy ("EDGE") tax credits provided for in the CHRA
- abatement or refund of a portion of Boeing's property
taxes provided for in the CHRA
- payment to retire the lease of the previous tenant of
Boeing's new headquarters building
$11 million
NASA
- the payments made to Boeing pursuant to procurement
contracts entered into under the eight aeronautics R&D
programmes at issue
- the access to government facilities, equipment and
employees provided to Boeing pursuant to procurement
contracts and Space Act Agreements entered into under the
eight aeronautics R&D programmes at issue
$2.6 billion
DOD
- the payments made to Boeing pursuant to assistance
instruments entered into under the RDT&E Program
Elements at issue
- the access to government facilities provided to Boeing
pursuant to assistance instruments entered into under the
RDT&E Program Elements at issue
the amount of the
subsidy to Boeing's
LCA division is unclear
FSC/ETI
- the tax exemptions and tax exclusions provided to
Boeing under FSC/ETI legislation, including the transition
and grandfather provisions of the ETI Act and the AJCA
$2.2 billion
Total at least $5.3 billion

3094 For the reasons set out at paragr aphs 7.153-7.158 above, the Panel does not take into account any
post-2006 subsidy amounts.

BCI deleted, as indicated [***]

E. WHETHER THE FSC /ETI MEASURES AND THE WASHINGTON HB 2294 TAX MEASURES ARE
PROHIBITED SUBSIDIES WITHIN THE MEANING OF ARTICLE 3 OF THE SCM AGREEMENT
7.1434 In this section of our Report we examine wh ether the FSC/ETI measures challenged by the
European Communities and the taxa tion measures enacted through HB 2294 are prohibited subsidies
within the meaning of Article 3.1(a) of the SCM Agreement.
1. FSC/ETI and successor act subsidies
(a) Introduction
7.1435 The European Communities claims that " FSC/ETI and successor act subsidies" are
inconsistent with Articles 3.1(a) and 3.2 of the SCM Agreement.
7.1436 The United States argues that this claim of the European Communities is superfluous and
provides no basis for the Panel to make a finding or render a recommendation.
(b) The measures at issue
7.1437 A description of the measures referred to by the European Communities as "FSC/ETI and
successor act subsidies" is provided at paragraphs 7.1378-7.1385 of this Report.
(c) Arguments of the European Communities
7.1438 The European Communities submits that the subsidies provided by the FSC/ETI measures
and successor legislation are contingent in la w upon export performance within the meaning of
Article 3.1(a) of the SCM Agreement, and therefor e inconsistent with the obligations of the United
States under Article 3.2. The European Communiti es recalls that WTO panels and the Appellate
Body have repeatedly found these tax breaks to constitute WTO-incompatible export subsidies.
7.1439 The European Communities argues that the FSC measure is contingent in law upon export
performance within the meaning of Article 3.1(a) because the measure itsel f provides that the FSC
exemptions are available only with respect to "f oreign trade income", which arises from the sale or
lease of "export property" or the provision of relate d services. Such "export property" is explicitly
limited to goods manufactured, produced, grown or ex tracted in the United States that are held for
direct use, consumption or disposition outside th e United States i.e. exports. The existence and
amount of the FSC subsidy therefore depends upon the existence of income arising from the
exportation of U.S. goods or the provision of rela ted services, based on the text of the FSC measure
itself. Consequently, these subsidies are con tingent in law upon export performance within the
meaning of Article 3.1(a).3095 This is confirmed by item (e) of the Illustrative List of Export Subsidies
in Annex I to the SCM Agreement, which lists the following as an illustrative export subsidy: "The
full or partial exemption remission, or deferral specifi cally related to exports, of direct taxes or social
welfare charges paid or payable by industrial or commercial enterprises."3096
7.1440 The European Communities argues that the ETI scheme is contingent in law upon export
performance within the meaning of Article 3.1(a) be cause the words of the ETI Act make it clear that,
at least in certain defined situations, the ETI subsidy is conditioned upon exportation. The ETI
measure allows U.S. taxpayers to exclude only th eir "extraterritorial income" that is "qualifying

3095 The European Communities cites the Panel Report, US – FSC , paras. 7.106-7.108 and the
Appellate Body Report, US – FSC, para. 121.
3096 European Communities' first written submission, paras. 966-967.

BCI deleted, as indicated [***]

foreign trade income" from taxation. 3097 Such income is derived from the sale of "qualifying foreign
trade property", which is generally property produced within or outside the United States that is sold
for use outside the United States i.e. exports, in th ose instances when the property is produced within
the United States. Thus, with respect to goods produced within the United States, the ETI tax
exclusion is available only in the instances when such goods are exported outside the United States.
As the ETI Act itself makes exporting a precondition to qualify for the subsidy with respect to goods
produced in the United States, the ETI subsidies are contingent in law upon export performance
within the meaning of Article 3.1(a).3098,3099
7.1441 The European Communities submits that by ma intaining the FSC and ETI subsidies through
the grandfather provisions of the ETI Act and the AJCA, the United States continues to grant
subsidies based on the original FSC and ETI m easures that are contingent in law upon export
performance within the meaning of Article 3.1( a). The inconsistency of these measures with
Article 3.1(a) was confirmed by the panel and Appellate Body reports in US – FSC (Article 21.5 –
EC II). The European Communities contends that th e export contingent subsidy continues to be
available, especially to companies such as Boeing, because of the ma nner in which the U.S. Internal
Revenue Service has interpreted the TIPRA repeal date.3100
7.1442 In its response to a panel question as to whet her the European Communities' claim that the
FSC/ETI measures are contingent upon export performance within the meaning of Article 3.1(a) is
properly before this Panel
3101, the European Communities argues that its claim in this dispute is
different from any claim that has previously been litigated before a WTO panel or the Appellate
Body. Although the Appellate Body has stated in Canada – Aircraft that "adverse effects are
presumed" for "cases that involve prohibited export subsidies", prior disputes involving the FSC/ETI
scheme did not involve claims or findings of advers e effects within the meaning of Article 5 of the
SCM Agreement. Because the European Communities bases the "specificity" aspect of its actionable
subsidy claim with respect to FSC/ETI on Article 2.3 of the SCM Agreement , which requires a
finding that the subsidy is a prohibited subsidy, the European Communities establishes that the
FSC/ETI scheme is a prohibited subsidy. The Euro pean Communities recalls in this connection that
the Panel in US – Upland Cotton found that Brazil had failed to m eet its burden of presenting a prima
facie case that the FSC/ETI regime was an export subsidy, despite prior Pa nel and Appellate Body
rulings to that effect.3102

3097 ETI Act, § 3(a), IRC §§ 114(a)-(b), Exhibit EC-625.
3098 The European Communities cites the Panel Report, US – FSC (Article 21.5 – EC), paras. 8.60-8.75
and the Appellate Body Report, US –FSC (Article 21.5 – EC), paras. 113-120.
3099 European Communities' first written submission, para. 968.
3100 European Communities' first written submission, paras. 969-970 and 944-945.
3101 Panel Question 58:

"In its first written submission, the European Communities recalls that "WTO panels and the
Appellate Body have repeatedly found these tax breaks to constitute WTO-incompatible
export subsidies" (e.g. para. 964 and footnote 1684). In US – Shrimp (Article 21.5 –
Malaysia), the Appellate Body clarified that Appellate Body Reports that are adopted by the
DSB must be treated by the parties to a par ticular dispute "as a final resolution to that
dispute". In EC – Bed Linen (Article 21.5 – India) , the Appellate Body clarified that an
unappealed finding included in a panel report that is adopted by the DSB must likewise be
treated "as a final resolution to a dispute between the parties in respect of the particular claim
and the specific component of a measure that is the subject of that claim". On that basis, the
Appellate Body concluded that a particular claim "was not properly before the Panel". Is the
European Communities' claim, i.e. that "subsidies provided by the FSC/ETI measures and
successor legislation are contingent in law upon export performance" ... properly before this
Panel?"
3102 European Communities' response to question 58, paras. 201-202.

BCI deleted, as indicated [***]

7.1443 The European Communities also submits that with respect to the export subsidy claim, as
such, there has never been a final resolution of at l east one aspect of the particular claim at issue in
this dispute – namely, whether the FSC/ETI scheme (a nd its violation of Article 3.1) continues today
in the light of (i) TIPRA, which repealed certain aspects of the grandfathering of FSC and ETI tax
breaks for tax years beginning after 2006 (which, in Bo eing's case, is the 2007 calendar year); and (ii)
the 22 December 2006 memorandum from the Internal Revenue Service Office of Chief Counsel
indicating that FSC/ETI benefits continue beyond 2006 .
3103 Finally, the European Communities
argues that it is clear that a Member may choose to challenge a subsidy as being both a prohibited
subsidy under Part II of the SCM Agreement and an actionable subsidy under Part III of the SCM
Agreement.
3104
7.1444 In response to the argument of the United Stat es that the TIPRA is a future measure outside
the terms of reference of the Panel, the Europ ean Communities points out that its panel request
expressly includes "any relevant subsequent ame ndments thereof or successor acts", a formulation
that surely covers TIPRA to the extent that it is re levant to this proceeding. More fundamentally, the
European Communities is not challenging TIPRA as a separate measure, and it has no interest in
doing so given that TIPRA actually repeals certain aspects of FSC/ETI. Rather, the European
Communities is challenging the FSC/ETI measures listed in the panel request, to the extent that they
provided and, despite TIPRA, continue to provide subsidies to Boeing.3105
7.1445 The European Communities considers that the United States' acknowledgement that
FSC/ETI-related benefits to Boeing are specific does not obviate the need for the Panel to address the
European Communities' claim that the FSC/ETI-rela ted benefits to Boeing are inconsistent with
Article 3.1(a).3106
7.1446 In response to a panel question, the European Communities states that it does not believe that
it is effectively asking the Panel to adjudicate whethe r the United States has failed to comply with the
recommendations and rulings of the DSB in US - FSC. However, this issue is immaterial because, in
any event, there is no legal bar in the DSU to a complaining Member preferring the route of fresh
panel proceedings, as opposed to proceedings under Article 21.5 of the DSU.3107
(d) Arguments of the United States
7.1447 The United States does not contest that the FSC/ETI measures, including as applied to
Boeing, constituted export subsidies that were prohibited under Article 3 of the SCM Agreement.3108
7.1448 In response to a panel question 3109, the United States argues that the European Communities'
claim that FSC/ETI measures and successor legislation are contingent in law on export performance is
superfluous and provides no basis for the Panel to make a finding or render a recommendation. There
is no dispute between the United States and the European Communities as to whether FSC or ETI
benefits are subsidies prohibited by the SCM Agreem ent. They are export-contingent subsidies and,
therefore, prohibited subsidies inconsistent with th e SCM Agreement. The DSB has ruled that this is

3103 European Communities' response to question 58, para. 203.
3104 European Communities' response to question 58, paras. 204-206.
3105 European Communities' non-confidential statement at second meeting of the Panel with the parties,
paras. 77-78.
3106 European Communities' response to question 264, para. 466.
3107 European Communities' response to question 265, para. 467.
3108 United States' non-confidential st atement at first meeting of the Panel with the parties, para. 25
("The United States does not contest that FSC/ETI was an export subsidy"); United States' response to
question 58, para. 163; United States' response to question 60, para. 167; United States' response to
question 266, para. 457.
3109 See above, footnote 3101.

BCI deleted, as indicated [***]

the case, and has recommended that the United States bring those measures into compliance with the
SCM Agreement. Another finding that they are export contingent or another recommendation that
they be brought into compliance with the SCM Agre ement will add nothing to the force or effect of
the earlier rulings or recommendations. Therefore, making such a finding or recommendation would
be superfluous. The United States notes, in this regard, that Article 3.7 of the DSU provides that the
"aim of the dispute settlement mechanism is to se cure a positive solution to a dispute". Given the
existing rulings and recommendations, whic h constitute a final resolution to the FSC/ETI dispute
between the European Communities and the United States, additional rulings and recommendations
would not provide any additional assistance to "sec ure{ing} a positive solution". For these reasons,
the Panel should decline to a ddress the question whether FSC or ETI is a prohibited subsidy.
3110 In
response to a panel question, the United States argu es that a panel can decide not to address a claim
where it will not further the resolution of the dispute. The United States also submits that, in its first
written submission, the European Communities asks the Panel to recommend that the United States
"withdraw its prohibited subsidies without delay" , which would mean that the United States would
have an additional period of time in which to wi thdraw FSC/ETI subsidies to Boeing. As the
United States has explained, Boeing has already affirmed that it will not be receiving FSC/ETI
subsidies after 2006.3111
7.1449 The United States contends that, in its response to question 58, the European Communities for
the first time states that it seeks a "final resolu tion" of the question "whether the FSC/ETI (and its
violation of Article 3.1 of the SCM Agreement) continues today in the light of (i) the Tax Increase
Prevention and Reconciliation Act of 2005 ('TIPRA')." This claim is not within the Panel's terms of
reference and, as a consequence, the DSU does not permit the European Communities to bring these
claims before the Panel. The European Commun ities' request for establishment of a panel does not
reference TIPRA. Therefore, although the Europ ean Communities might "seek" a "final resolution"
of whether TIPRA allows a measure to continue , it did not include TIPRA within the terms of
reference of this Panel. Thus, the question of whether TIPRA is inconsistent with the SCM
Agreement is not properly before the Panel.
3112
(e) Evaluation by the Panel3113
7.1450 The European Communities requests the Panel to make a finding that "FSC/ETI and
successor act subsidies" are contingent upon export pe rformance within the meaning of Article 3.1(a)
of the SCM Agreement and that, as a consequence, "through the ... federal FSC/ETI tax breaks, the
United States provides prohibited subsidies, in violation of Articles 3.1(a) and 3.2 of the SCM
Agreement".3114 In this regard, the European Communities also requests the Panel "to recommend that
the United States withdraw its prohibited subsidies without delay, as required by Article 4.7 of the
SCM Agreement".3115
7.1451 There is no substantive disagreement between the parties to this dispute that FSC and ETI tax
benefits have been provided to Boeing under provisi ons of U.S. tax law that were inconsistent with
Articles 3.1(a) and 3.2 of the SCM Agreement.
7.1452 The Panel notes the findings made in this regard by the panels and the Appellate Body in US
– FSC, US – FSC (Article 21.5 – EC) and US – FSC (Article 21.5 – EC II).

3110 United States' response to question 58, paras. 163-166.
3111 United States' response to question 266, paras. 457-458.
3112 United States' Comments on European Communities' response to question. 58, paras. 199-201.
3113 It is well established that it is possible for a m easure to be inconsistent with both Article 3 and
Article 5 of the SCM Agreement. Panel Report , US – Upland Cotton , para. 7.1193; Panel Report, Korea –
Commercial Vessels, para. 7.334. The United States does not argue otherwise in this case.
3114 European Communities' first written submission, para. 1655.
3115 European Communities' first written submission, para. 1656.

BCI deleted, as indicated [***]

7.1453 First, the panel in US – FSC made findings regarding Sections 921-927 of the Internal
Revenue Code and related measures establishing special tax treatment for FSCs. 3116 The panel found
that certain "exemptions identified by the Eu ropean Communities under the FSC scheme" were
financial contributions under Artic le 1.1(a)(1)(ii) of the SCM Agreement because they involved the
foregoing of revenue which was otherwise due 3117 and that these exemptions conferred a benefit
within the meaning of Article 1.1(b) of the SCM Agreement. 3118 Having found that the tax
exemptions were subsidies, the panel also fou nd that they were contingent in law upon export
performance within the meaning of Article 3.1(a) of the SCM Agreement. 3119 The Appellate Body
upheld the panel 's findings that the FSC exemptions were financial contributions within the meaning
of Article 1.1(a)(1)(ii) of the SCM Agreement and that these exemptions were subsidies contingent
upon export performance that were prohibited under Article 3.1(a) of the SCM Agreement.3120
7.1454 Second, the panel in US – FSC (Article 21.5 – EC) made findings with respect to the ETI Act.
The panel found that the ETI Act's exclusion from gross income of certain "extraterritorial income"
gave rise to a financial contribution in the form of a foregoing of government revenue that was
otherwise due within the meaning of Article 1.1(a)(1)(ii) of the SCM Agreement
3121 and that this
financial contribution conferred a benefit, such th at a subsidy within the meaning of Article 1.1
existed.3122 The panel also found that this subsidy was contingent in law upon export performance
and was thereby inconsistent with Ar ticle 3.1(a) of the SCM Agreement. 3123 Moreover, the panel
found that for FSCs in existence as of 30 Septembe r 2000, the FSC subsidies continued in operation
for one year and that, with respect to FSCs that had entered into long-term binding contracts with
unrelated parties before 30 September 2000, the Act di d not alter the tax treatment of those contracts
for an indefinite period of time. The panel therefore found that the United States had not fully
withdrawn the FSC subsidies found to be prohibited e xport subsidies inconsistent with Article 3.1(a)
and had thereby failed to implement the recomme ndations and rulings of the DSB pursuant to
Article 4.7 of the SCM Agreement. 3124 The Appellate Body upheld the panel's findings that the ETI
measure involved financial contri butions through the foregoing of government revenue otherwise
due3125 and that the ETI measure granted subsidies c ontingent in law upon export performance within
the meaning of Article 3.1(a).3126 It also upheld the panel's finding that the United States had not fully
withdrawn the FSC subsidies found to be prohibite d export subsidies under Article 3.1(a) and had
thereby failed to implement the recommendations and rulings of the DSB made pursuant to
Article 4.7 of the SCM Agreement.3127
7.1455 Third, in US – FSC (Article 21.5 – EC II), the panel found that the United States, by enacting
Section 101 of the AJCA, maintained prohibited FSC and ETI subsidies through transition and
grandfather clauses in section 101 of the AJCA and thereby continued to fail to implement fully the
operative DSB recommendations and rulings to withdraw the prohibited subsidies. 3128 The Appellate
Body upheld this finding.3129

3119 Panel Report, US – FSC, paras. 7.108, 7.130.
3120 Appellate Body Report, US – FSC, paras. 95, 121.
3121 Panel Report, US – FSC (Article 21.5 – EC), para. 8.43.
3122 Panel Report, US – FSC (Article 21.5 – EC), para. 8.48.
3123 Panel Report, US – FSC (Article 21.5 – EC), para. 8.75, 8.110.
3124 Panel Report, US – FSC (Article 21.5 – EC), paras. 8.168-8.170.
3125 Appellate Body Report, US – FSC (Article 21.5 – EC), para. 106.
3126 Appellate Body Report, US – FSC (Article 21.5 – EC), para. 120.
3127 Appellate Body Report, US – FSC (Article 21.5 – EC), para. 231.
3128 Panel Report, US – FSC (Article 21.5 – EC II), para. 7.65.
3129 Appellate Body Report, US – FSC (Article 21.5 – EC II), para. 96.

BCI deleted, as indicated [***]

7.1456 As noted above3130, in its factual description of the "FSC/ETI and successor act subsidies" that
are the subject of its complaint under Article 3, the European Communities refers to: (i) the original
FSC provisions; (ii) the ETI Act, including its transition and grandfather clauses with respect to the
FSC tax benefits; (iii) the AJCA, which repealed the ETI Act but maintained the FSC grandfather
clause and provided for new transiti on and grandfather clauses with respect to the ETI tax benefits;
and (iv) the TIPRA, which repealed the gra ndfather clauses for FSC and ETI tax benefits.
3131 Th e
original FSC provisions were repealed on 30 September 2000 and the ETI Act was repealed on
31 December 2004. With the exception of the TIPR A, all of the legal provisions identified by the
European Communities pursuant to which Boeing recei ved FSC and ETI tax benefits have been the
subject of panel and Appellate B ody reports that have found these measures to be inconsistent with
Articles 3.1(a) and 3.2 of the SCM Agreement and that have given rise to a recommendation
addressed to the United States pursuant to Article 4.7 of the SCM Agreement that it withdraw the
subsidy without delay.3132
7.1457 Against this background, the United States, while agreeing that FSC/ETI was a prohibited
export subsidy, submits that the European Comm unities' claim that FSC/ETI measures and successor
legislation is contingent in law on export perfo rmance is superfluous and provides no basis for the
Panel to make a finding or render a recommendation.3133
7.1458 Therefore, the question before the Panel is not wh at should be the correct legal analysis of the
FSC/ETI and successor act subsidies under Article 3 of the SCM Agreement. Nor is the question
whether the claim of the European Communities is within the Panel's terms of reference.
3134 Rather,
the key question before this Panel is whether the Panel should: (i) make a finding under Article 3 of
the SCM Agreement that FSC/ETI and successor act subsidies granted to Boeing are inconsistent with
Article 3 of the SCM Agreement, based on the reasoning and findings of the panels and the
Appellate Body in the FSC/ETI dispute, and ma ke a recommendation under Article 4.7 that the
United States withdraw the subsidy without delay; or (ii) refrain from making such a finding under
Article 3 and recommendation under Article 4.7 on the grounds that, as argued by the United States,
the DSB has already ruled that the FSC and ETI an d successor act subsidies are prohibited subsidies
under Article 3 and that "{a}nother finding that they are export contingent or another recommendation
that they be brought into compliance with the SCM Agreement will add nothing to the force or effect
of the earlier rulings or recommendations".
7.1459 The Panel notes that at the time of its estab lishment, in February 2006, the original FSC and
ETI legislation no longer applied. Pursuant to the provisions of the AJCA, however, ETI tax

3130 See above, paras. 7.1379-7.1385.
3131 European Communities' first written submission, paras. 923-945.
3132 Panel Report, US – FSC, para. 8.8. At the request of the United States, the DSB agreed to extend
the period for the withdrawal of the FSC subsidies from 1 October 2000 until 1 November 2000. The panels in
US – FSC (Article 21.5 –EC) and US – FSC (Article 21.5 – EC II) held that the original recommendation and
rulings made in 2000 remained operative. See e.g. Panel Report, US – FSC (Article 2.15 – EC II) , paras. 8.1-
8.2.
3133 United States' response to panel question no. 58, para. 163. The United States qualifies the
FSC/ETI measure as a "measure withdrawn based on prior recommendations and rulings of the Dispute
Settlement Body". United States' response to question 80, para. 209. It also states that "the DSB has already
ruled that this measure was inconsistent with the SCM Agreement, as it provided a prohibited subsidy. The
United States has terminated the measure. FSC/ETI is , therefore, not properly at issue in this case."
United States' response to question 92, para. 234.
3134 It is important to note that, with the exception of the TIPRA, the United States does not argue that
the claim of the European Communities with respect to FSC/ETI and successor act subs idies is not within the
Panel's terms of reference. Rather, the view of the Unite d States that the Panel shou ld not address the claim of
the European Communities regarding FSC/ETI and successor act subsidies appears to be based principally on
considerations relating to the role of the Panel under Article 3.7 of the DSU.

BCI deleted, as indicated [***]

advantages continued to be available in certain situations. First, transition clauses allowed for the ETI
measure to continue (albeit to a more limited exte nt) with respect to qualifying transactions entered
into between 1 January 2005 and 31 December 2006. Second, the AJCA provided for the
grandfathering, for an indefinite period, of transac tions that occurred pursuant to a binding contract
between the taxpayer and an unrelated person, which was in effect on 17 September 2003.
Moreover, the AJCA did not repeal or change secti on 5(c)(1) of the ETI Act, which provided for the
grandfathering, for an indefinite period, of FSC ta x benefits in respect of transactions entered into
pursuant to a binding contract which existed on 30 September 2000. The United States has not
contested in this dispute that Boeing has used the transition and grandfather pr ovisions of the AJCA.
The Panel therefore finds that at the time of its establishment, the FSC/ETI measures challenged by
the European Communities continued to exist inso far as Boeing used the transition and grandfather
provisions of the AJCA and ETI Act.
7.1460 The Panel is not persuaded that the existence of the DSB rulings and recommendations in the
FSC/ETI dispute, and the steps taken by the United States pursuant to those rulings and
recommendations, provide a compelling reason for this Panel not to make a finding under Article 3 of
the SCM Agreement with respect to the FSC and ETI tax measures as they applied to Boeing at the
time of the Panel's establishment.
7.1461 First, the findings made by the panels and the A ppellate Body in the FSC/ETI dispute were in
respect of the legislative provisions as such and not in relation to these provisions as applied in
particular cases. As explained above
3135, it is the Panel's understanding that in this dispute the
European Communities challenges specific FSC/ETI subsidies received by Boeing. The Panel
therefore is of the view that the subject matter of the present dispute is not exactly identical to the
subject matter of the FSC/ETI dispute. 3136 The Panel also takes into acc ount the fact that in this case,
as argued by the European Commun ities, a finding that the FSC/ETI and successor act subsidies are
export subsidies within the meaning of Article 3 provides the basis for finding that these subsidies are
specific by virtue of Article 2.3 of the SCM Agreement.
7.1462 Second, the Panel is aware that subsequent to its establishment deve lopments have occurred
that significantly affect the continued existence of the measures at issue. The transition provisions of
the AJCA expired at the end of 2006; the grandfat her provisions of the ETI Act and the AJCA were
repealed by the TIPRA, which was enacted in 2006; and, as argued by the United States, Boeing has
indicated that it will not use any FSC or ETI tax advantages post-2006. Assuming that these
developments mean that the FSC and ETI tax measur es no longer exist in respect of Boeing, this does
not imply that we should not make a finding on these measures. The Panel is of the view that these
developments might be relevant to the ques tion of whether it is appropriate to make a
recommendation but that they are not relevant to dete rmining whether the Panel should make a
finding. While "the fact that a measure has expired may affect what recommendation a panel may
make...it is not, however, dispositive of the prelim inary question of whether a panel can address
claims in respect of that measure".
3137
7.1463 In sum, the Panel finds that it is appropriate to make a finding under Article 3 with respect to
the FSC/ETI and successor act provided to Boeing. The reasoning and findings of the panels and the

3135 See above, para. 7.1394.
3136 The Panel notes that, apart from a claim under Article 3 of the SCM Ag reement, the European
Communities also makes a claim that the FSC/ETI subsidies, together with the other subsidies at issue, cause
adverse effects within the meaning of Article 5 of the SCM Agreement. While previous WTO dispute settlement
proceedings have addressed the question of whether legal provisions relating to the FSC/ETI measures at issue
in this dispute are inconsistent w ith Article 3 of the SCM Agreement, whether these measures have caused
adverse effects within the meaning of Article 5 of the SCM Agreement has never been addressed in WTO
dispute settlement.
3137 Appellate Body Report, US – Upland Cotton, para. 272.

BCI deleted, as indicated [***]

Appellate Body in US – FSC , US – FSC (Article 21.5 – EC) and US – FSC (Article 21.5 – EC II)
imply that the application of the FSC/ETI provisions to Boeing is inconsistent with Articles 3.1 and
3.2 of the SCM Agreement. The Panel thus finds th at with respect to the tax advantages enjoyed by
Boeing at the time of the establishment of the Panel under the transition and grandfather provisions of
the ETI Act and the AJCA, the United States acted inc onsistently with Articles 3.1(a) and 3.2 of the
SCM Agreement by granting subsidies contingent in law upon export performance.
(f) Conclusion
7.1464 For these reasons, the Panel finds that FSC /ETI measures challenged by the European
Communities that were in force at the time of the Panel's establishment are export-contingent
subsidies to Boeing's LCA division prohibited under Articles 3.1(a) and 3.2 of the SCM
Agreement.
2. State of Washington: HB 2294 tax incentives
(a) Introduction
7.1465 The European Communities argues that the grant of the subsidies under HB 2294 is
contingent in fact upon export performance because the grant is tied to actual or anticipated
exportation or export earnings. The grant is there by inconsistent with Article 3.1(a) of the SCM
Agreement.
7.1466 The United States contends that the European Communities has failed to establish any "tie"
between the grant of the subsidies and anticipated exportation or actual exportation and therefore HB
2294 is not inconsistent with Article 3.1(a) of the SCM Agreement.
(b) Measure at issue
7.1467 We recall that HB 2294 came into effe ct in December 2003 and is entitled "An Act Related to
Retaining and Attracting the Aerospace Industry to Washington State" .3138 A description of HB 2294
is provided at paragraphs 7.41-7.68 of this Report, which addresses the existence of taxation-related
subsidies in Washington State. HB 2294 in cludes five tax measures which the European
Communities challenges as subsidies to Boeing's LC A division. The measures include a B&O tax
reduction; B&O tax credits; sales and use tax exemptions; a leasehold excise tax exemption; and a
property tax exemption. The Panel has found that the B&O tax reduction, the B&O tax credits and
the sales and use tax exemption for construction se rvices and equipment are specific subsidies to
Boeing.
7.1468 Section 17(1)(a) of HB 2294 provides that the legislation takes "effect on the first day of the
month in which the governor and a manufacturer of commercial airplanes sign a memorandum of
agreement regarding an affirmative final decision to site a significant commercial airplane final
assembly facility in Washington state". Section 17(1)(b) also provides that HB 2294 is "contingent
upon the siting of a significant commercial airplane final assembly facility in the state of
Washington".

3138 HB 2294, 58th Leg., 2d Spec. Sess. (Wash. 2003), Exhibit EC-54.

BCI deleted, as indicated [***]

7.1469 A "significant commercial airplane final assembly facility" is defined as:
"{A} location with the capacity to produce at least thirty-six superefficient airplanes a
year."
A "superefficient airplane" is defined as:

"{A} twin aisle airplane that carries between two hundred and three hundred fifty
passengers, with a range of more than seven thousand two hundred nautical miles, a
cruising speed of approximately mach .85, and that uses fifteen to twenty percent less
fuel than other similar airplanes on the market."
7.1470 The parties to the dispute agree that the 787 meets the definition of a "superefficient
airplane".
3139
7.1471 Boeing satisfied the requirements of section 17 of HB 2294 upon signing the Project Olympus
Memorandum of Agreement, which confirms that the MSA constitutes an agreement to site the 787
final assembly facility in the City of Everett, as required under HB 2294. 3140 Specifically, the State
confirms in the Project Olympus Memorandum of Ag reement that the facilities site in Everett "meets
the definition of a significant commercial airplane final assembly facility".3141
(c) Arguments of the European Communities
7.1472 The European Communities argues that the subsidies provided by HB 2294 are contingent in
fact upon export performance under Article 3.1(a) of the SCM Agreement.3142
7.1473 In its first written submission, the European Communities advances its view of the correct
legal interpretation of Article 3.1(a) and makes submissions regarding why the subsidies provided
under HB 2294 meet the conditions of export contingent subsidies. At this point of its submissions,
the European Communities also makes various argu ments in the alternative regarding the correct
interpretation of Article 3.1(a). Further, in r esponse to Panel questions, the European Communities
advances new interpretations of the terms of Article 3.1(a), including an interpretation that it does not
advocate, and makes new submissions regarding why the subsidies provided under HB 2294 are
export contingent.
7.1474 In its first written submission, the European Co mmunities argues that three elements must be
established under Article 3.1(a) in order to make out a claim of de facto export contingency. These
elements are (i) the required condition (export performan ce); (ii) the required consequence; and (iii)
the required contingent relationship.3143 We understand the three elements to amount to a restatement
of Article 3.1(a), namely that the subsidy ("th e required consequence") be contingent upon ("the
required contingent relationship") export performance ("the required condition").
7.1475 In relation to the first element, the Eur opean Communities submits that the "required
condition" in Article 3.1(a) is that the subsidy be conditional on export performance and not just on
performance in general.3144 The European Communities refers to this as a requirement to demonstrate
"a favouring or discrimination in favour of a product that will inevitably be generally exported or

3139 United States' first written submission, para. 68 6, footnote 887 and European Communities' first
written submission, para. 974.
3140 European Communities' first written submission, para. 975.
3141 Memorandum of Agreement for Project Olympus, 19 December 2003, Exhibit EC-57, para. 975.
3142 European Communities' first written submission, paras. 971 and 977.
3143 European Communities' first written submission, paras. 980, 990 and 991.
3144 European Communities' first written submission, para. 980.

BCI deleted, as indicated [***]

incorporated within an exported product". 3145 The European Communities argues that the subsidy
measure in issue in this dispute, namely "H B 2294 and/or the Project Olympus Master Site
Agreement", and the instances of its application, demonstrate the existence of the "required condition"
(export performance). 3146 This is because, under the terms of HB 2294, only companies that
"contribute to a product that will necessarily gene rally be exported", namely manufacturers of
commercial airplanes and their components , benefit from the subsidies under HB 2294. 3147 I n t h i s
way, HB 2294 acts as a "filter", ensuring that onl y companies involved in producing a product that
will be exported, are eligible for the subsidies. 3148 Further, the European Communities argues that
HB 2294 is contingent upon the requ irement to establish a capacity to produce at least thirty-six
superefficient 787s per year. According to the Eu ropean Communities, market forecasts indicate that
the domestic United States market could not abso rb such a production level and that a significant
portion of 787 sales would consist of exports. 3149 Finally, the European Communities notes that
Boeing is a highly export-oriented company and cites evidence in support of this.3150
7.1476 According to the European Communities, the seco nd element that must be established to
succeed in an Article 3.1(a) claim is the "require d consequence". The European Communities states
that "HB 2294 provides for the grant of a subsidy … The consequence required by Article 3.1(a) and
footnote 4 … is thus apparent". 3151 We understand the "required con sequence" to be a requirement
that a subsidy be granted.
7.1477 Finally, the European Communities submits that the third element, the "required contingent
relationship", also exists in relation to HB 2294. We understand the European Communities to be
arguing that the second element, the grant of a subsid y, must be contingent upon the first element,
namely export performance. The European Communities argues that the required contingent
relationship exists because eligibility for the subs idy is contingent upon being a manufacturer of
commercial airplanes or components, which are produc ts that will necessarily be exported. Further,
HB 2294 is contingent upon building a plant with the capacity to produce at least thirty-six
superefficient airplanes per year.
3152
7.1478 Throughout its first written submission, largely in the footnotes, th e European Communities
also refers to various alternative arguments that it makes. 3153 In response to Panel questioning
regarding how many distinct legal arguments it ma kes, the European Communities explicitly sets out
three legal arguments that it advances, not all of which rely on the three elements referred to in its first
written submission.3154
7.1479 In answer to question 56, the European Communities sets out its first legal argument . The
argument relates to one particular component of HB 2294, namely the B&O tax rate reduction. The

3145 European Communities' first written submission, para. 980.
3146 European Communities' first written submission, para. 980, footnote 1711.
3147 European Communities' first written submission, para. 980 and European Communities' non-
confidential oral statement at the first meeting with the panel, para. 111.
3148 European Communities' first written submission, para. 989.
3149 European Communities' first written submission, para. 981.
3150 European Communities' first written submission, paras. 982-988.
3151 European Communities' first written submission, para. 990.
3152 European Communities' first written submission, para. 991.
1731; para. 992; para. 996 footnote 1735.
3154 European Communities' response to question 56. In particular, not all of its arguments contend that
the subsidy must be contingent upon export performance, in that there must be a favouring or discrimination in
favour of a product that will inevitably be generally expor ted or incorporated within an exported product, as the
European Communities argues in its first written submission. See para. 7.1491 of this Report regarding a fourth
legal argument that the European Communities outlines in response to question 56 but does not advance.

BCI deleted, as indicated [***]

European Communities argues that the value of the B&O tax rate reduction increases for each
additional sale of a Boeing LCA (it is an ad valorem subsidy), including export sales. 3155 In other
words, the amount of the subsidy is contingent upon sales, including export sales. According to the
European Communities, this is sufficient to establish that the subsidy is prohibited within the meaning
of the SCM Agreement because under Article 3.1(a) "it is suffici ent to demonstrate the existence of a
subsidy grant contingent upon sales, regardless of whether such sal es occur in the domestic market
(the United States) or with respect to exports. That is, there is no need to demonstrate that the subsidy
favours exports or is greater in the case of export".
3156 Therefore, in contrast to its first written
submission, the European Communities argues that under Article 3.1(a), it is sufficient to demonstrate
that the grant of a subsidy is contingent upon perfo rmance (sales) and there is no need to demonstrate
that it is contingent upon export performance or that there is "favouring" of exports.
7.1480 In relation to this first legal argument, although all of the European Communities'
submissions relate to export c ontingency "in fact" rather than "in law", in its second written
submission, the European Communities states:
"{D}uring the meeting of the Panel, the United States effectively admitted that the
HB 2294 B&O tax rate reductions are subsidies contingent in law or in fact upon
export performance." 3157
7.1481 The European Communities does not provide further submissions regarding export
contingency "in law". It is not clear whether, merely by stating the United States has admitted that the
B&O tax reduction is contingent in law upon export performance, that the European Communities
claims, in relation to its first legal argument, that th e subsidy is contingent in law, as well as in fact,
on export performance.
7.1482 The European Communities' second legal argument is one that it contends the United States
has advocated "elsewhere". 3158 The argument relates to HB 2294 in its entirety, rather than to a
particular taxation measure, such as the B&O tax re duction. The European Communities argues that
if the facts demonstrate that there was the "anticipa ting of" exports and that the grant of the subsidies
under HB 2994 was "tied to" such "anticipating of" exports, then HB 2294 constitutes a measure
contingent in fact upon export. 3159 The European Communities not es that the subsidies under HB
2294 were contingent upon siting an assembly fac ility in Washington that could produce at least
thirty-six 787s per year. This amounts to a gran t of subsidies contingent in fact upon anticipated
export sales of 787s because demand in the United States market was not such that all thirty-six 787s
could be sold domestically. Rather, some of the aircraft would need to be exported. 3160 Under this
argument, the European Communities asserts that th e State of Washington expected or anticipated
exports and if this expectation was a part of the c onsideration or motivation or intent in the provision
of the subsidy, this is sufficient to prove the necessary contingent relationship.3161
7.1483 The European Communities states that "it is assumed, for the purposes of this second
argument, that it is still necessary to demonstrate some element of 'favouring'". 3162 The reference to
favouring seems to be a reference to the first elemen t outlined in its first written submission, namely

3155 European Communities' response to question 56, paras. 190 and 192
3156 European Communities' response to question 56, para. 190.
3157 European Communities' second written submission, para. 642 (emphasis added).
3158 European Communities' response to question 56, para. 193 and European Communities' first
written submission, paras. 992-996.
3159 European Communities' response to question 56, para. 193.
3160 European Communities' first written submission, paras. 992-996.
3161 European Communities' non-confidential oral statement at the first meeting with the panel,
para. 108.
3162 European Communities' response to question 56, para. 193.

BCI deleted, as indicated [***]

the "required condition" of "export performance" (a nd not just performance in general), which the
European Communities argues requires a demonstration of a "favouring or discrimination in favour of
a product that will inevitably be generally exported or incorporated within an exported product".3163
7.1484 The European Communities submits that its third legal argument:
"{I}s the same as the second argument, but proceeds on the basis that it is
unnecessary to demonstrate any favouring of exports (a point admitted by the United
States during the first hearing). "3164
7.1485 In support of its second and third legal argumen ts, the European Communities argues that the
facts overwhelmingly demonstrate that production is anticipated to exceed domestic demand and that
the only reasonable inference to draw is that some aircraft will be exported.3165 Further, the enactment
of HB 2294 was "tied to" such anticipation. This is because the subsidies were granted contingent
upon the creation of a certain capacity and it was antic ipated that the capacity would entail production
and export.3166 In response to Panel questioning, the Eur opean Communities refers to evidence which
it alleges demonstrates that the granting authorities were aware of the capacity of the United States'
market.3167
7.1486 In response to the United States' argument that HB 2294 does not require the airplane
assembly facility actually to produce thirty-six aircraft, but only to have the capacity to produce at
that level, and that the European Communities fa ils to understand this cr ucial distinction, the
European Communities argues that, in the context of the LCA market, the capacity requirement is
tantamount to an export requirement.3168 This is because aircraft manufacturers do not create capacity
that will stand idle. Production capacity is decide d after a manufacturer knows how many aircraft it
will need to produce, based on the orders it has received. If Boeing did not use its capacity the
financial consequences would be grave. 3169 Therefore, the capacity requirement is equivalent to a
production requirement, which is tantamount to a requi rement to export, given the demand levels in
the domestic market.3170
7.1487 The European Communiti es characterizes the argument of the United States outlined in the
preceding paragraph as an objection to the absence of an express requirement, or a legal obligation, to
produce or to export. 3171 The European Communities notes that the United States has "elsewhere"
taken a different view, namely that there does not need to be a legal obligation to perform, that
necessarily involves export sales, in order successfully to argue that a subsidy is contingent in fact
upon anticipated exports. The European Communiti es submits that "it agrees with the general
proposition", only on the condition that it be applied consistently in all WTO disputes, which would
result in all of the United States' Article 3 claims being rejected in EC – Aircraft .3172 I n t h e
alternative, the European Communities argues that th e absence of a requirement to export is not fatal

3163 European Communities' first written submission, para. 980.
3164 European Communities' response to question 56, para. 194.
3165 European Communities' comments on United States' response to question 54, para. 191.
3166 European Communities' comments on United States' response to question 54, para. 192.
3167 European Communities' response to question 267.
3168 European Communities' response to question 54, para. 177.
3169 European Communities' response to question 54, paras. 175-177.
3170 European Communities' response to question 54, para. 179 and European Communities' non-
confidential oral statement at the first meeting with the panel, paras. 101-104.
3171 European Communities' response to question 54, para. 179 and European Communities' non-
confidential oral statement at the first meeting with the panel, para. 102.
3172 European Communities' non-confidential oral statement at the first meeting with the panel,

BCI deleted, as indicated [***]

to its claim.3173 The European Communities notes that in arguing that a subsidy is in fact contingent
upon export, regardless of what is expressly provided for in the text of the m easure, it is necessary to
assess the facts of the situation, including the reality of the marketplace, and to draw the reasonable
and necessary inferences from those facts.3174
7.1488 In question 57, the Panel asked the European Communities to clarify whether it is arguing
that the granting of the subsidies was tied to " actual" or to "anticipated" exportation. The
European Communities' response, which applies to all three of its legal arguments, was:
"{I}n order to be certain that it has made all the necessary arguments, the
European Communities submits that each of the relevant measures provides for a
subsidy contingent upon actual export; or alternatively contingent upon anticipated
export; or alternatively contingent upon actual or anticipated export; or alternatively
contingent upon actual and anticipated export."
 3175
7.1489 In relation to the correct legal interpreta tion of "actual" and "anticipated", the
European Communities does not submit its own view. Rather, the European Communities
characterizes the United States' position as bein g that the terms mean "real" and "potential"
respectively.3176 The European Communities also notes that another possible interpretation for the
terms, although one it does not advocate, is "past" and "future" respectively. 3177 In relation to its first
legal argument , the European Communities argues that on either interpretation, a claim under
Article 3.1(a) can be made out. If the correct in terpretation is in accordance with the United States'
submissions, the grant of the subsidies is conti ngent upon "actual" exports, in that the unconditional
right to the subsidies only arises when the sale takes place. In the alternative, if the correct meaning
of the terms is "past" and "future", the grant of the subsidies is tied to "an ticipated" exports because
they are in the future. 3178 In relation to its second and third legal arguments, the
European Communities reasons that if the United St ates' interpretation of the terms "actual" and
"anticipated" is correct, namely "real" and "pot ential" respectively, under its second and third
arguments the tie is to "anticipated" exports. This is because the exports were expected and this was a
consideration or motivation in the adoption of HB 2294. 3179 In what is really a reference to its first
legal argument, the European Communities continues that HB 2294 also provides for the grant of a
subsidy tied to "actual" exports, because the B&O tax reductions are tied to sales. 3180 T h e
European Communities also reasons that if "actual" or "anticipated" means "past" or "future", under
its second and third legal arguments the grant of the s ubsidies is tied to both actual and to anticipated
export. They are tied to actual (i.e. to past) exports because admission to the programme is based on a
pre-selection criteria that captures companies that contribute to a product that has been exported in the
past. They are also tied to anticipated (i.e. to fu ture) exports because of the continuing nature of the
programme and because of the B&O tax rate reduction.3181

3173 European Communities' non-confidential oral statement at the first meeting with the panel,
para. 104.
3174 European Communities' comments on United States' response to question 54, para. 189.
3175 European Communities' response to question 57, para. 195.
3176 European Communities' response to question 57, paras. 195, 198-200. However, we note at
para. 7.1502 of this Report, that the United States s ubmits that "anticipated" mean s "expected", rather than
"potential".
3177 European Communities' response to question 57, paras. 195, 198-200. See also,
European Communities' response to question 56, paras. 184-189 for the "reference interpretation", that the
European Communities does not advocate.
3178 European Communities' response to question 57, para. 198.
3179 European Communities' response to question 57, para. 200.
3180 European Communities' response to question 57, para. 200.
3181 European Communities' response to question 57, para. 199.

BCI deleted, as indicated [***]

7.1490 In sum, the arguments advanced by the European Communities in response to question 56 can
be expressed as:
(a) HB 2294 is de facto contingent upon export performance because the B&O tax
reduction, an ad valorem subsidy, is contingent upon sales, including export sales.
The European Communities asserts that the gran t of the subsidy is tied to "actual" or
"anticipated" exportation.
(b) HB 2294 is de facto contingent upon export performance because its grant was
conditioned upon the establishment of a fac ility with the capacity to produce 36
superefficient airplanes. The subsidi es under HB 2294 are tied to "actual" or
"anticipated" exportation. The legal test requires some element of "favouring" of
exports.
(c) The final legal argument is the same as the argument in the preceding bullet point,
except that no element of "favouring" of exports need be proven. 3182
7.1491 As well as advancing its three legal argum ents, the European Communities provides a
"reference interpretation", which it does not advance, but which it contends may "assist the Panel
in understanding the precise nature of the European Communities' claims". 3183 The
"reference interpretation" appears to be an interp retation that contradicts the position taken by the
United States' in EC and certain member States – Large Civil Aircraft regarding Article 3.1(a).
Although not explicitly expressed, the European Comm unities' purpose in including the "reference
interpretation" seems to be to suggest that if the Panel adopts the position in the "reference
interpretation", then the same reasoning should apply in EC and certain member States – Large Civil
Aircraft and lead to the rejection of all of the United St ates' Article 3 claims in that case. In essence,
the European Communities' position would appear to be that if Article 3 is interpreted consistently by
this Panel and the panel in EC and certain member States – Large Civil Aircraft , the prohibited
subsidy claims in each of the cases must either both be successful or both fail.
(d) Arguments of the United States
7.1492 The United States refutes the European Communities' claim that the tax measures in HB 2294
are prohibited subsidies because they are contingent upon export performance.3184

3182 We note that in its non-confidential oral stat ement at the first meeting with the Panel, the
European Communities refers to its "primary argument" and elaborates that HB 2294 acts as a "filter", with the
result that the defining characteristic of the companies that are eligible for the subsidy is that they contribute to a
product that will necessarily be ex ported. The European Communities concludes that there is a "clear
correlation" between actual or anticipated export performance and eligibility for the benefit. The
European Communities reasons that this demonstrates the "condition required" by Article 3.1(a). Although it
may be possible to interpret this is as a fourth, distinct argument, which asserts that if those eligible for a
subsidy are all exporters, contingency in fact can be found, it is unlikely that this is in fact a fourth argument.
The reference to demonstration of the "condition required" indicates that the "filter argument" merely goes to
establishing the first element detailed in the Euro pean Communities' first written submission ("export
performance" as a "required condition", to demonstrat e an element of "favouring" a product that will be
exported). Further, in its question asking the European Communities to clarify how many legal arguments it is
making, the Panel refers to this section of the non-confidential oral statement at the first meeting with the panel.
Therefore, presumably if it was an argument distinct to the three arguments advanced in response to question 56,
the European Communities would have so indicated in its response to question 56.
3183 European Communities' response to question 56, paras. 184-189 and European Communities'
response to question 270, para. 476.
3184 United States' first written submission, para. 684.

BCI deleted, as indicated [***]

7.1493 According to the United States, in Canada – Aircraft, the Appellate Body stated that
footnote 4 of the SCM Agreement requires that three substantive factual elements be established by a
complaining party seeking to demonstrate that a subsidy is de facto contingent upon export
performance. The three elements that must be proved are (i) the granting of a subsidy (ii) that is "tied
to" (iii) actual or anticipated exportation or export earnings. 3185 Further, footnote 4 to Article 3.1(a)
provides that "the mere fact that a subsidy is gr anted to enterprises which export shall not for that
reason alone be considered to be an export subsidy". In Canada – Aircraft, the Appellate Body held
that this footnote "precludes a Panel from making a finding of de facto export contingency for the sole
reason that the subsidy is granted to enterprises that export". 3186 Therefore, the United States argues
that the evidence the European Co mmunities submits in its first written submission regarding the fact
that Boeing is an export-oriented company does not meet the relevant legal standard for a claim under
Article 3.1(a). 3187 Further, to the extent the European Communities advances an argument that the
grant of the alleged subsidy is tied to actual or anticipated export perform ance because the defining
characteristic of the companies that benefit from the subsidy is that they contribute to a product that
will necessarily be exported, the United States argues th at this demonstrates nothing more than that "a
subsidy is granted to enterprises which export". Footnote 4 provides that this reason alone cannot
establish the existence of an export contingent subsidy.3188
7.1494 In relation to all three legal arguments 3189 advanced by the Eur opean Communities, the
United States argues that the European Communi ties has not proven element (i) identified in
Canada – Aircraft, namely the granting of a subsidy. 3190 In this regard, the United States relies on the
submissions on the existence of a subsidy in re lation to Washington taxation measures, found at
Part VII.D.2(a) of this Report.
7.1495 The United States refutes the European Communities' first legal argument , namely that the
B&O tax reduction is a subsidy contingent upon bo th domestic and export sales and therefore is an
export contingent subsidy.3191 The United States agrees with th e European Communities' submission
that it is not necessary to demonstrate that a "s ubsidy favours exports" in order for a claim to be
successful under Article 3.1(a). However, according to the United States, this does not imply that a
subsidy contingent upon sales is an export contingent subsidy.3192 The relevant enquiry is whether the
granting of the subsidy is tied to actual or an ticipated exportation or export earnings. The
United States argues, relying on the panel decision in Canada – Aircraft, that this is not the same as a
tie to mere sales. The United States notes that the European Communities has presented no evidence
of a tie between the grant of the subsidy and actua l or anticipated exportation or export earnings, for
example by presenting evidence that the State of Wash ington relied on projections of export sales in
providing Boeing with the tax treatment in HB 2294. 3193 The United States argues that the possibility
that the amount of a subsidy is contingent upon sales, which could include export sales, does not
establish the required tie. This is clear from footnote 4 to the SCM Agreement , which provides that
"the mere fact that a subsidy is granted to enterp rises which export shall not for that reason alone be
considered to be an export subsidy".
3194

3185 United States' first written submission, para. 690.
3186 United States' first written submission, para. 688.
3187 United States' first written submission, paras. 689-690.
3188 United States' second written submission, para. 157.
3189 Namely, the three legal arguments the European Communities identifies in its response to
question 56 and which are summarized at para. 7.1490 of this Report.
3190 United States' first written submission, para. 691.
3191 United States' comments on European Communities' response to question 56, paras. 183-188.
3192 United States' comments on European Communities' response to question 56, para. 184.
3193 United States' comments on European Communities' response to question 56, para. 186.
3194 United States' comments on European Communities' response to question 56, para. 187.

BCI deleted, as indicated [***]

7.1496 In relation to the European Communities' second legal argument , the United States repeats
its position that there is no requirement under Ar ticle 3.1(a) to demonstrate some element of
"favouring".3195 With respect to the second and third legal arguments , which focus on the fact that
HB 2294 was contingent upon Boeing establishing the capacity to produce thirty-six superefficient
aircraft, the United States argues that the Eur opean Communities has made out none of the
three elements set out by the Appellate Body in Canada – Aircraft .3196 In particular, the
European Communities has not proven that (i) there was a granting of a "subsidy" (ii) tied to (iii)
actual or anticipated exportation or export earnings.
7.1497 In relation to element (ii), namely the required "tie", the United States notes that in Canada –
Aircraft the Appellate Body held that the ordinary meaning of "tied to" is to "limit or restrict as to …
conditions" and that a relationshi p of "conditionality" or "depende nce" between subsidy and export
performance must be demonstrated. Further, the Appellate Body held that the "tie" is at the very heart
of the legal standard in footnote 4.3197
7.1498 The focus of the United States' arguments agai nst the European Communities' Article 3 claim
is that the European Communities has not demonstr ated the required "tie". In this regard, the
United States submits that the fact that HB 2294 was tied to the siting of a facility in Washington with
the "capacity" to produce thirty-s ix superefficient airplanes does not establish the relevant "tie". 3198
The United States contends that the European Commun ities' legal burden is to establish that, while as
a legal matter the provision of the tax treatment in HB 2294 was tied to nothing more than production
capacity, in fact the tie was to anticipated exportation or export earnings. The United States argues
that the European Communiti es has not met this burden.
3199 It notes that the European Communities
equates a tie to production capacity with a tie to e xport sales on the basis that Boeing will fully utilize
its production capacity and that this will result in export sales due to the level of demand in the
domestic market. However, the United States emphasizes that in making these arguments, the
European Communities relies on mere assumptions and assertions that are not substantiated with
adequate evidence.
3200 In fact, the United States argues th at the domestic market is capable of
absorbing thirty-six planes annually and it refers to past orders for 787s by customers located in the
United States to support this assertion.3201
7.1499 In its first written submission the United St ates repeatedly highlights that HB 2294 is
contingent on a requirement to build a facility with a capacity to produce thirty-six aircraft, rather
than a requirement that Boeing actually produce thirty-six aircraft. 3202 However, in its answers to
Panel questions the United States clarifies that its argument is not based upon the lack of an express
requirement to export. Rather, the European Commun ities' claim fails because of the absence of any
tie, whether in the form of an express requirement or some other form, between the granting of the
alleged subsidies and actual or anticipated exportation.3203

3195 United States' comments on European Communities' response to question 56, para. 189. The
"second legal argument" refers to the second argument identified by the European Communities in its response
to question 56 and which is included in the summary of arguments at para. 7.1490 of this Report.
3196 Where the "second and third legal arguments" refer to the second and third arguments identified by
the European Communities in its response to question 56 and which are included in the summary of arguments
3197 United States' first written submission, para. 692.
3198 United States' first written submission, para. 696.
3199 United States' response to question 55, para. 159.
3200 United States' second written submission, para. 154 and United States' response to question 54,
para. 153.
3201 United States' second written submission, para. 155.
3202 United States' first written submission, paras. 688 and 697-698.
3203 United States' comments on European Communities' response to question 54, paras. 176-178.

BCI deleted, as indicated [***]

7.1500 Further, in contrast to the European Commun ities' assertion, the United States does not argue
that the Boeing facility in Everett will stand idle. The United States contends that a finding that the
tax measures under HB 2294 are no t export contingent subsidies does not rest upon such a
proposition.
3204 Rather, the Article 3 claim must fail because a requirement to establish production
capacity is an insufficient basis to conclude that HB 2294 is tied to anticipated exports.3205
7.1501 In relation to a tie to "anticipated" exportation, the United States contends that even if the
State of Washington expected that Boeing would export some of the airplanes manufactured in the
final assembly facility cited in HB 2294, the Euro pean Communities has not demonstrated that the
granting of the HB 2294 tax incentives were tied to this anticipation. 3206 It has not demonstrated that
the expectation of exports was the condition upon which the alleged subsidies were granted.
7.1502 In this regard, in relation to the element (iii) identified by the Appellate Body in Canada –
Aircraft, namely the "actual or anticipated exportation or export earnings", the United States submits
that the correct interpretation of "anticipat ed" was established by the Appellate Body in Canada –
Aircraft and is "expected" and not "future", as suggested by the European Communities. 3207 It is
exportation that is expected to occur but may or may not actually occur. 3208 Further, it is the
United States' position that "actual" means "real " and not past, as suggested by the European
Communities. It is exportation that has occurred or will in fact occur in the future.3209
7.1503 The United States notes that in answer to a Panel question regarding whether the
European Communities argues that the subsidies are contingent upon "actual" or "anticipated"
exportation, the European Communities "cobbles together another enumerated list of possible
arguments" and it does this "in order to be certain that it has made all necessary arguments".
3210 The
United States submits that it is unclear what it mean s for a party to assert arguments in order to be
certain that it has made all th e necessary ones. The European Communities either has a legal and
factual basis for asserting a claim or it does not. In any event, the list of arguments is nonsensical and
when the European Communities attempts to explai n them, it admits that its explanations "do not
exhaust all alternative arguments". 3211 The United States alleges that the European Communities is
identifying arguments in extremely cursory terms and imposing upon the Panel the burden of
supporting such arguments with legal reasoning. Th e United States notes that the Appellate Body has
previously refused to rule on a "conditional appeal " by the European Communities that "did not set
out any specific arguments to support {the} appeal".
7.1504 The United States argues that the assertions made by the European Communities that exports
of 787s were "anticipated", in the sense that they were "expected", is based on mere assertion and not
supported by any evidence.3212 Further, the United States contends that the evidence referred to by the
European Communities to establish that the grantor of the subsidies was aware of the capacity of the
United States' market is not sufficient. Even if it were, awareness on the part of the grantor of the
capacity of the United States' market does not establis h that the grantor anticipated exports or that
there was a tie between any such anticipation and the granting of the alleged subsidies.3213

3204 United States' response to question 54, para. 154.
3205 United States' response to question 54, para. 154.
3206 United States' first written submission, para. 698.
3207 United States' first written submission, para. 693.
3208 United States' comments on European Communities' response to question 57, para. 196.
3209 United States' comments on European Communities' response to question 57, para. 196.
3210 United States' comments on European Communities' response to question 57, para. 194.
3211 United States' comments on European Communities' response to question 57, para. 195.
3212 United States' comments on European Communities' response to question 57, para. 197.
3213 United States' comments on European Communities' response to question 267.

BCI deleted, as indicated [***]

7.1505 Finally, the United States requests that the Panel ignore the "reference interpretation"
advanced by the European Communities. This is because the reference interpretation does nothing to
elucidate the claims in the dispute. It merely makes veiled references to claims in other disputes,
asserts arguments that the European Communities admits it is not making and misstates the legal
standard for export contingency.
3214
(e) Arguments of third parties
(i) Australia
7.1506 Australia advances arguments regarding the corr ect interpretation of Article 3.1(a) but does
not take a position on whether HB 2294 is c ontingent in fact upon export performance. 3215 In
particular, Australia recalls that accordi ng to the Appellate Body's finding in Canada – Aircraft ,
three elements must be established in order to prove that a subsidy is contingent in fact upon export
performance, namely that (i) the grant of a subsid y (ii) is "tied to" (iii) actual or anticipated
exportation or export earnings.3216
7.1507 Australia notes that in establishing the second element, namely the "tie", the relationship of
contingency "must be inferred fro m the total configuration of th e facts constituting and surrounding
the granting of the subsidy, none of which on its own is likely to be decisive in any given case".3217 In
Australia's view, such relevant facts could include an analysis of the nature of the product; the design
and form of the subsidy; the export propensit y of the product; performance requirements or
conditions attached to the granting of the subsidy, which could include a requirement to establish a
specified production capacity; any distinction be tween domestic and export sales in relation to
repayment requirements of a loan; the level of sal es requirements relative to domestic demand; and
official statements of the government indicating the intention behind the granting of the subsidy.3218
7.1508 According to Australia, the capacity requirement included in HB 2294, considered in the light
of estimated demand for the product in the domestic and export markets, is one relevant factor to
consider in determining if the grant of the subsid y was "tied to" export performance. However, it is
not conclusive of the issue. 3219 Similarly, the export orientation of the recipient of the subsidy is one
of several facts that may be considered in determ ining if a subsidy is contingent upon exports but it
cannot be the only fact in support of a finding of export contingency.3220
(ii) Canada
7.1509 According to Canada, a subsidy is contingent upon export performance if its grant was tied to
or made conditional upon an incentive or requirement to export. 3221 Canada argues that this view is
consistent with the reference to export subs idies under Article XVI of the GATT 1994, namely
subsidies granted "on the export of any product". In Canada's view, the phrase "on the export"
implies a "close connection between the act of expor ting and the act of granting a subsidy so as to
create a clear incentive to export". Canada argues that where the same terms are used in GATT 1994
and the SCM Agreement they should be read harmoniously where possible.3222

3214 United States' comments on European Communities' response to question 270, para. 472.
3215 Australia's response to question 15.
3217 Australia's written submission, para. 62, quoting the Appellate Body, Canada – Aircraft, para. 167.
3219 Australia's written submission, paras. 59 and 61.
3220 Australia's response to question 16.
3221 Canada's response to question 16, para. 20.
3222 Canada's response to question 16, para. 22.

BCI deleted, as indicated [***]

7.1510 As context for the interpretation of Article 3.1( a) of the SCM Agreement, Canada also relies
upon the draft definition proposals for "export subsidy" canvassed during the Tokyo Round.
Although the proposals it relies upon were not ultimately adopted, Canada argues that they
demonstrate that the concept of differential treatment of exports over products destined for domestic
consumption was central to the negotiators of the Round. Canada knows of no evidence that the
language in Article 3.1(a) was designed to negate this notion of differential treatment.
3223 Canada also
notes that all of the subsidies in the Annex I I llustrative List of Subsidies are either expressly
contingent upon exports or diffe rentially benefit exported produc ts over products destined for
domestic consumption. The complete absence from the list of any subsidy that is neutral in terms of
market orientation provides context for the interpretation of Article 3.1(a) of the SCM Agreement.3224
7.1511 In short, in Canada's view, the absence of an incentive or a requirement to export as a
condition precedent to the granting of a subsidy me ans that the subsidy is not export contingent. 3225
Applying this interpretation, Canada argues th at the European Communities' reliance upon the
capacity condition in HB 2294 falls well short of establishing export contingency. The capacity
condition does not require Boeing to make a single export sale or sell more than it otherwise would
have in export markets. It does not provide any incentives that could have the effect of distorting
Boeing's market orientation in favour of exports. 3226 Canada concludes that "a contingency that can
be satisfied without a single export sale (or a sale of any kind) and where the resulting subsidy
continues to be provided even if no export sales mate rialize is an unlikely instrument for promoting
exportation or export earnings. 3227 According to Canada, the "more compelling explanation" for the
capacity condition in HB 2294 is that Washington State wanted to retain aerospace manufacturing and
was not willing to accept a mere token facility. Canada notes that in any event, "inferring intent can
be a highly subjective matter, particularly when the intentions at issue are those of a government".3228
(iii) Korea
7.1512 According to Korea, in order to demonstrate that the requisite "tie" exists in establishing
export contingency, it is necessary to prove that the subsidy would not have been granted but for
anticipated exportation or export earnings. 3229 Korea notes that the simple fact that Boeing exports
many of its airplanes should not be the legal sta ndard for determining whether an export contingent
subsidy exists. 3230 The European Communities must prove that the benefit would not have been
granted to Boeing if the United States Government had known that no export sales may ensue from
the programme.3231 Korea concludes that "the Panel should not simply look at the export potential or
export sales of Boeing; instead it should evaluate the evidence provided by the EC as a whole, and
look into the very nature of the HB 2294".3232
(f) Evaluation by the Panel
7.1513 The issue before us is whether the tax measures under HB 2294 constitute subsidies
contingent upon export performance under Article 3.1(a) of the SCM Agreement, which provides:

3223 Canada's response to question 16, paras. 23-24.
3224 Canada's response to question 16, para. 25.
3225 Canada's response to question 16, para. 25.

BCI deleted, as indicated [***]

"3.1 Except as provided in the Agreemen t on Agriculture, the following subsidies,
within the meaning of Article 1, shall be prohibited:
(a) subsidies contingent, in law or in fact 4, whether solely or as one of several
other conditions, upon export performance, including those illustrated in
Annex I
5 ..."
The European Communities asserts that the gran t of the subsidy is tied to "actual" or
"anticipated" exportation.
(b) HB 2294 is de facto contingent upon e xport performance because its grant was
conditioned upon establishment of a facility w ith the capacity to produce thirty-six
superefficient airplanes. The subsidies ar e tied to "actual" or to "anticipated"
exportation. The relevant legal test requires some element of "favouring" of exports.
(c) The final legal argument is the same as th at outlined in (b) above, except that no
element of "favouring" of exports need be proven.
7.1515 Although in its second written submission the European Communities asserts that "the
United States effectively admitted that the HB 2294 B&O tax rate reductions are subsidies contingent
in law… upon export performance", nowhere else in its submissions does the European Communities
refer to HB 2294 as export contingent in law. In response to a specific question from the Panel
regarding how many legal arguments it is making in support of its claim that the subsidies are
contingent in fact upon export performance, the Eu ropean Communities does not assert that it is also
advancing legal arguments to support a cl aim that the subsidies are contingent in law upon export

3233 As indicated at footnote 3182 of this Report, in its first oral statement the European Communities
describes its "primary argument" in support of export contingency. The argument is that HB 2294 acts as a
"filter", with the result that the defining characteristic of the companies that are eligible for the subsidy is that
they contribute to a product that will n ecessarily be exported. As indicated in footnote 3182 of this Report, it is
not clear that this is a separate legal argument, rather than reasoning in support of its other legal arguments. For
completeness, we note that if this is intended to be a separate legal argument, it is not a strong one. The
argument essentially amounts to a contention that the taxation subsidies are export contingent simply because all
of the enterprises to which the subsidies are granted make products that will ultimately be exported. It is clear
from the final sentence in footnote 4 to Article 3.1(a) that such an argument cannot support a finding of de facto
export contingency.

BCI deleted, as indicated [***]

performance. Therefore, it is reasonable to conc lude that the European Communities' claim relates
only to de facto export contingency.
7.1516 Before addressing each of the European Communitie s' arguments in this case, it is useful to
review the way in which Article 3.1(a) of the SC M Agreement has been interpreted in adopted panel
and the Appellate Body reports.
7.1517 The Appellate Body interpreted Article 3.1(a) in the context of a de facto export contingency
claim in Canada – Aircraft .3234 Both the panel and the Appellate Body held that the evidence
demonstrated that the grant of the subsidy was tied to anticipated exportation and therefore was a
subsidy contingent upon export performance. The subsidy programme in issue was the Technology
Partnerships Canada ("TPC"), which involved the provision of financing for high-technology projects
in the Canadian regional aircraft sector. The repa yment terms were such that the recipients of the
financing were only required to make repayments if they made sales.
7.1518 In interpreting Article 3.1(a), the Appellate Body stated that the "key word" in the provision is
"contingent", which means "conditional" or "dep endent for its existence on something else". 3235 The
Appellate Body noted that de jure and de facto contingency are subject to the same legal standard
under Article 3.1(a). However, the evidence used to prove each type of contingency is different.
Whereas de jure contingency is established on the basis of the terms of the relevant legislation or legal
instrument, proof of de facto export con tingency is "a much more difficult task". 3236 De facto export
contingency must be inferred from the "total c onfiguration of facts constituting and surrounding the
granting of the subsidy, none of which on its own is likely to be decisive in any case". 3237 T h e
Appellate Body noted that the export-orienta tion of the recipient could be considered as a relevant
fact, but could not be the sole fact supporting a finding of export contingency.3238
7.1519 The Appellate Body indicated that the satisfac tion of the standard for determining de facto
export contingency, as set out in footnote 4 to Ar ticle 3.1(a), requires proof of three different
elements, namely (i) the granting of a subsidy (ii) tied to (iii) actual or anticipated exportation or
export earnings.3239
7.1520 According to the Appellate Body, the second el ement, namely "tied to", indicates that a
relationship of "conditionality or dependence" must be demonstrated and this second element "is at
the very heart of the legal standard in footnote 4". 3240 The Appellate Body equated "tied to" with
"contingent upon". It distanced itself from the " but for" test which the Panel had applied in
determining if the grant of the subsidy was tied to anticipated exports. The panel had reasoned that
the claimant was required to demonstrate that, "but for" the expectation of export sales ensuing from
the subsidy, the subsidy would not have been granted. To the panel, this was an effective indicator of
a "strong and direct link" between the granting of th e subsidy and the creation or generation of export
sales.3241 However, the Appellate Body held that, wh ile the panel was not in error in its overall
approach, it was necessary to interp ret and apply the language actually used in the treaty, rather than
applying a "but for" test.3242

3234 Appellate Body Report, Canada – Aircraft.
3235 Appellate Body Report, Canada – Aircraft, para. 166.
3236 Appellate Body Report, Canada – Aircraft, para. 167.
3237 Appellate Body Report, Canada – Aircraft, para. 167.
3238 Appellate Body Report, Canada – Aircraft, para. 173.
3239 Appellate Body Report, Canada – Aircraft, para. 169.
3240 Appellate Body Report, Canada – Aircraft, at 171.
3242 Appellate Body Report, Canada – Aircraft, para. 171, footnote 102.

BCI deleted, as indicated [***]

7.1521 In relation to the third element, the Appe llate Body held that "anticipated" means
"expected".3243 Whether exports were expected at the time of the grant of the subsidy needs to be
gleaned from an examination of objective evidence. The Appellate Body emphasized that the second
and third elements are distinct enquiries. It is no t sufficient to demonstrate that a subsidy was granted
with the anticipation that exports would result. 3244 It is necessary to prove that the granting of the
subsidy was tied to the anticipation of exportation. The Appella te Body stated that this is emphasized
by the second sentence of footnote 4, which provides that a finding of export contingency cannot be
based solely on the fact that it is "granted to enterprises which export". Merely knowing that a
recipient's sales are export-oriented does not demonstrate, without more, that the granting of a subsidy
is tied to actual or anticipated exports.
3245
7.1522 The Appellate Body agreed with the panel' s finding, based on sixteen different factual
elements, that the TPC assistance was "continge nt … in fact … upon export performance", on the
basis that the grant of the TPC assistance was tied to anticipated exportation. In reaching this
conclusion, the sixteen factual elements relied upon by the Panel in finding that the necessary "tie"
existed were that:
• the Canadian aerospace sector exported a large proportion of its output , due to the small size
of the Canadian domestic market;

• the TPC Business Plan noted that TPC's "appr oach" in the aerospace and defence sector was
to "{d}irectly support the near market R&D projects with high export potential";

• section 3.2.3 of the "Terms and Conditions" set forth in the TPC Interim Reference Binder
stated that "TPC will provide contributions to specific industrial development projects in
order to enable Canadian Aerospace and Defence Industries to compete fairly and openly on
the world competitive stage";

• the Industry Minister's Message, which was in cluded in the 1996-1997 TPC Annual Report,
stated:

"Aerospace and defense also make a significant contribution to our economic
wellbeing. The sector is highly export oriented. Exports accounted for about
70 percent of sales, or $7.4 billion, in 1995. And there is the prospect of real growth
in this area. Canada's aerospace sector currently ranks sixth in the world. With
investments from TPC, and with industry's concerted efforts, this sector will be better
equipped to compete effectively in the world marketplace and could grow to fourth
place";
• the TPC Annual Report stated that "{t}he 12 largest firms
{in the aerospace and defence
sector} account for most of the R&D and shipments, of which 80 percent are exported . …
TPC is proud to be an investment partner in this export-oriented success story";

• an Industry Canada press release, issued in r espect of the $100 million TPC contribution to a
specific firm, quoted Industry Minister Manley as st ating "{A}erospace is a critical sector for
Canada's economy, with exports growing at a rate of 10 per cent per year. TPC's investment in
these projects will help increase the global compe titiveness of this industry, while supporting
jobs in Montreal, in Halifax and across the country, generating economic growth and export
dollars";

3243 Appellate Body Report, Canada – Aircraft, para. 172.
3244 Appellate Body Report, Canada – Aircraft, para. 172.
3245 Appellate Body Report, Canada – Aircraft, para. 173.

BCI deleted, as indicated [***]

• concerning the $57 million contribution to a firm for the development of the Dash 8-400, the
Leader of the Government in the House of Commons and then-Solicitor General of Canada,
stated that "{t}hese two outputs of the Dash 8-400 project -- the creation of jobs and the
building of exports -- are just what the government had in mind when we established
Technology Partnerships Canada earlier this year";

• TPC website material stated that "TPC approved projects are forecasted to generate sales of
more than $65 billion (mostly exports) and create or maintain 13,166 direct and indirect jobs";

• the TPC Applications Kit required applicants to describe "potential broad economic and
social benefits, such as: job creation and retention, increased exports , new investment…".
The Applications Kit also stated that TPC " invests in projects that have the potential to create
jobs, generate exports , launch new industries, and transform or strengthen the
competitiveness of industry";

• according to the TPC Interim Reference Binder, the TPC Aerospace and Defence Sector
Generic Model Agreement required applicants to distinguish between domestic sales and
exports when reporting forecast and actual sales;

• the TPC Interim Reference Binder required TPC employees, when completing Project
Summary Forms, to explain the reasons for recommending support or rejection of the project.
In particular, employees were given the following instructions:

"Strategic Considerations, Benefits, Indicators

In justifying the recommendation in strategic terms emphasise "business results". The
following may be considered:
1. Link the project with departmental strategies and priorities as relevant:
a) Improvement of international competitiveness; when sales will result
directly from the project, report annual sales in terms of domestic and export
sales and any import replacement";
• the "Terms and Conditions" set forth in the TPC Interim Reference Binder stated that TPC
will "fill a financial void … where government action is required to level the competitive
playing field, at the near-market end of the spectrum" ; and that "{c}ontributions under the
Aerospace and Defence component will be direct ed to projects that will maintain and build
upon the technological capabilities and production, employment and export base extant in the
aerospace and defence sector";

• Industry Canada website material concerning TPC "Application information" stated that one
factor considered by TPC in determining th e need for federal government involvement was
whether assistance was required to level the playing field against international competitors;

• the TPC Charter stated that "{i}nvestments w ill be directed to projects that build on and
maintain technological capabilities and the production, employment and export base of the
sector";

• the TPC Business Plan recorded the proporti on of the aerospace and defence industry's
revenue allocable to exports; and

BCI deleted, as indicated [***]

• the TPC contributions identified by Brazil were for the development of specific products, and
were provided expressly on the basis of the projected sales of those products, the market for
which was known to be almost entirely outside Canada; the statistics maintained by TPC, and
the public statements about TPC, separately recount, and emphasize, the amount of export
sales "generated" by these contributions. 3246

7.1523 On the basis of this evidence, the panel in Canada – Aircraft concluded that the TPC funding
was expressly designed and structured to genera te sales of particular products, and that the
Canadian Government expressly took this into accoun t, and attached considerable importance to, the
proportion of those sales for export, when making TPC contributions in the regional aircraft sector.
On this basis, the panel concluded that the s ubsidy was tied to anticipated exportation or export
earnings.
3247
7.1524 In Australia – Automotive Leather II, the panel also concluded that the grant of one of the
subsidies in issue was contingent in fact upon e xport performance on the basis that it was tied to
anticipated exportation. 3248 The measure was a grant contract between a producer of automotive
leather, Howe, and the Australian Government. Th e contract provided for a series of three grant
payments to Howe. The first payment was made im mediately after conclusion of the contract, while
the other two were to be made on the basis of Ho we's performance against sales targets set out in the
contract. Under the contract, Howe was required to use its best endeavours to meet the targets.3249
7.1525 The panel held that the terms "contingent" a nd "tied to", mean "cond itional" and require a
"close connection" between the grant of the subsidy and export performance.3250
7.1526 The panel ultimately concluded that the grant contract was contingent in fact upon export
performance because there was a cl ose tie between anticipated exportation and the grant of the
subsidies. In reaching this decision, the panel relied upon the following evidence:
• At the time the contract was granted, Howe exported a significant proportion of its production
and the Australian Government was aware of this. 3251 In enacting the programme, there was
evidence to suggest that the Australian Govern ment was concerned to ensure that Howe
remained in business, after losing funding fro m another government programme. The panel
concluded that, in these circumstances, it w as clear that anticipated exportation was an
important condition in the provision of the assistan ce. In reaching this conclusion, the panel
noted that it was not prohibited from consider ing the fact that Howe was an exporter.
However, this could not be the sole basis for its decision.3252

• In order to meet the sales performance target s, Howe would have had to continue, and
perhaps increase, its exportation because the Australian market was too small to absorb the
level of production set by the targets. Ther efore, the sales performance targets were
effectively export performance targets. 3253 The Australian Government was aware of this at
the time of granting the subsidy and therefor e anticipated continued and perhaps increased

3248 Panel Report, Australia – Automotive Leather II.
3249 Panel Report, Australia – Automotive Leather II, para. 2.3
3250 Panel Report, Australia – Automotive Leather II, para. 9.55.
3251 Panel Report, Australia – Automotive Leather II, para. 9.66.
3252 Panel Report, Australia – Automotive Leather II, para. 9.66.
3253 Panel Report, Australia – Automotive Leather II, para. .9.67

BCI deleted, as indicated [***]

exports by Howe. Therefore, Howe's antic ipated export performance was one of the
conditions for the grant of the subsidy.3254

• The subsidy was provided only to Howe, the only exporter of automotive leather. It was not
provided to producers who supplied only the domestic market.3255

• At around the same time as the Australian Government entered the grant contract, a
settlement was reached between Australia and the United States which required Australia to
remove automotive leather from eligibility for two particular programmes. The panel in
Australia - Automotive Leather II found that the two programmes gave "incentives to
Australian companies to export certain products". Further, "Howe earned significant benefits
from its exports of automotive leather pur suant to those programmes" (although the
programmes were not challenged before any di spute settlement panel). The panel reasoned
that the Government of Australia entered into th e grant contract at least in part to tide Howe
over after it had lost eligibility for benefits under those programmes.3256

7.1527 As well as challenging the grant contracts, the Un ited States also alleged that a certain loan
contract between Howe and the Australian Government was a subsidy tied to anticipated exportation.
The panel found that this measure was not export contingent.
7.1528 The measure in issue was a 15-year preferentia l loan to Howe, which was secured over the
assets of the parent company of Howe (ALH).
3257 Although Howe was a highly export oriented
company, and despite the fact that it was likely that some of the money to repay the loan would be
generated through export sales, the panel found that the element of contingency between the grant of
the loan and export performance was not sufficiently established. Important in the panel's conclusion
were the following factors:
• there was "nothing in the loan contract that e xplicitly linked the loan to Howe's production or
sales, and therefore nothing in its terms, the design of the loan payment, or the repayment
provisions to tie the loan directly to export performance, or even sales performance".
3258

• it was ultimately up to Howe and its parent comp any to decide upon the source of funds to be
used to repay the loan. The source of fundi ng to repay the loan would not necessarily be
export sales and there was nothing to suggest that it was expected at the time the loan contract
was entered into that export sales would generate the funds to repay the loan.3259

• the loan was secured by a lien on the assets and undertakings of Howe's parent company,
ALH, which was ultimately responsible for repayment of the loan. ALH had other businesses
and produced other products from which it could generate the funds to repay the loan.3260

7.1529 Thus, in Australia – Automotive Leather II , the panel found that the Australian Government's
loan to a company whose commercial viability was dependent upon exports was, because of its
particular terms, not contingent upon export performance.

3254 Panel Report, Australia – Automotive Leather II, para. 9.67.
3255 Panel Report, Australia –Automotive Leather II, para. 9.69.
3256 Panel Report, Australia –Automotive Leather II, paras. 9.63-9.65.
3257 Panel Report, Australia –Automotive Leather II, para. 9.73.
3258 Panel Report, Australia –Automotive Leather II, para. 9.73.
3259 Panel Report, Australia –Automotive Leather II, para. 9.75.
3260 Panel Report, Australia –Automotive Leather II, para. 9.75.

BCI deleted, as indicated [***]

7.1530 From the preceding overview of adopted reports we gain guidance from the Appellate Body
regarding the way in which de facto export contingenc y must be demonstrated. In particular, proof of
three elements is required, namely (i) the granting of a subsidy (ii) tied to (iii) actual or anticipated
exportation or export earnings. At least in its fi rst written submission, the European Communities
argues that establishing that a subsidy is de facto contingent upon exports involves consideration of (i)
the required condition (export performance); (ii) th e required consequence (grant of a subsidy);
and (iii) the required contingent relationship (between the grant of the subsidy and the export
performance). The submissions of the Europ ean Communities in this regard amount to a
restatement of Article 3.1(a), namely that the gr ant of a subsidy must be contingent upon export
performance. The United States does not contest that this must be the case and nor does the European
Communities suggest that the elements listed by the Appellate Body in Canada – Aircraft, which set
out the criteria established by footnote 4 for demonstr ating de facto contingency, are inapplicable.
Therefore, in considering whether the European Communities has established on the evidence that HB
2294 is contingent in fact upon export performance, we follow the structure used by the Appellate
Body in Canada – Aircraft , namely we consider in turn each of the three elements drawn
from footnote 4.
7.1531 Before addressing the legal arguments made by the European Communities, we recall in
relation to the first element listed by the Appellate Body in Canada – Aircraft , namely the
requirement to demonstrate that a subsidy has been granted, that we have concluded that certain
taxation subsidies have been granted under HB 2294. 3261 Therefore, in analyzing each of the legal
arguments of the European Communities, we need consider only the remaining two elements, namely
whether the granting of the subsidy was tied to actual or anticipated exportation.
7.1532 In considering whether the granting of the subs idy was tied to anticipated exportation, the
Appellate Body cautioned in Canada – Aircraft that this requires two distinct enquiries, namely
whether there was anticipated exportation and whether this anticipated exportation was tied to the
grant of the subsidy.
7.1533 In its claim regarding "anticipated exportati on", the European Communities does not take a
position on the meaning of "anticipated". In contr ast, the United States submits that "anticipated"
means "expected" and not "future" as suggested in the European Communities' "reference
interpretation". In this regard, we note that the Appellate Body held in Canada – Aircraft that the
"dictionary meaning of the word 'anticipated' is 'expected'". The European Communities does not
advance any arguments regarding why this Panel should take an approach to the meaning of
"anticipated" that is different to th at taken by the Appellate Body. In Australia – Automotive
Leather II and Canada – Aircraft, whether or not there was "anticipated exportation" was considered
from the point of view of the grantor of the subsid y and the relevant enquiry was whether the granting
authority expected exports to ensue or arise out of the granting of the subsidy.
3262 However, the
Appellate Body cautioned that it is not sufficient to demonstrate that a subsidy is granted in the
knowledge, or with the expectation, that exports will result. Something more is required in order to
demonstrate that the grant of the subsidy is "tied to" the anticipated exports.
7.1534 In relation to each of its legal arguments, the European Communities' argues that the "tie"
may also be to "actual exportation". 3263 The previous cases discussing de facto export contingency
have all been cases in which the claim was that th e grant of the subsidy was tied to "anticipated",
rather than to "actual" exports. Therefore, the Panel has little guidance regarding the correct

3262 For example, the Panel in Canada – Aircraft referred to an expectatio n of export sales "ensuing
from the subsidy", while the Appellate Body in the same case referred to a subsidy granted "with the
anticipation that exports will result" (para. 172).
3263 See European Communities' response to question 57, para. 195.

BCI deleted, as indicated [***]

interpretation of "actual" exportation. The Eu ropean Communities does not take a position on the
meaning of the term "actual" in footnote 4. In its "reference interpretation", which it does not
advance, the European Communities suggests that "actual" means "already existing or in the past". In
contrast, the United States' position is that "actual" means "real" and does not mean "past". According
to the United States, the Spanish and the French ve rsions of the text of the SCM Agreement confirm
this interpretation.3264
7.1535 We note that in Canada – Aircraft , in dismissing Canada's submission that the subsidy was
not contingent upon anticipated exportation because the subsidy was "not conditional on exports
taking place" and because there were no "penalties if export sales {were} not realized", the panel held
that while this argument may have been releva nt in determining if the subsidy was tied to actual
exportation, it was not sufficient to rebut a pr ima facie case that th e subsidy was tied to anticipated
exportation.3265 This suggests that, in that panel's view, " actual" exportation is exportation that must
be realized or that must actually occur. This approach to the interpretation of "actual" exportation is
supported by the ordinary meaning of the term, which is "existing in act or fact; real" and "in action
or existence at the time, present; current". 3266 This is opposed to "anticipated" exportation, which is
expected but may or may not in fact take place.
7.1536 Having interpreted the meaning of "actual" and "a nticipated" exportation, this brings us to the
more difficult question of the meaning of "tied to" anticipated exports. The terms of footnote 4 do not
provide specific guidance regarding the meaning of "tied to" or the manner in which such a "tie"
should be demonstrated. In Canada – Aircraft , the Appellate Body held that it is necessary to
demonstrate a relationship of "conditiona lity or dependence". The panels in Australia – Automotive
Leather II and Canada – Aircraft refer variously to a "close tie", a "but for" test, a "strong and direct
link" and an "important condition". In its second and third legal arguments the European
Communities adopts an interpretation of "tied to " that it contends the United States advocates
"elsewhere". In particular, the European Communities argues that a "tie" exists where it can be shown
that the expectation of exports was a part of th e consideration or motiva tion or intent of the
government in providing the subsidy.
7.1537 In the Panel's view, a "tie" exists where a subsidy is granted because of the granting
authority's expectation of exports. In circumstances where a contingent relationship between the grant
of a subsidy and export performance is not explicit on the face of the relevant legislation, which is the
very nature of a de facto export contingency claim, to determine whether the grant of the subsidy was
dependent upon the expected exports requires a de termination of whether the subsidy was granted
because of the granting authority's expectation of exports.
7.1538 We acknowledge that establishing the existence of the "tie" under footnote 4 of Article 3.1(a)
by determining whether the subsidy was granted be cause of the granting authority's expectation of
exports could be considered problematic in some resp ects. The interpretation could lead to the result
that two subsidy programmes, which may operate iden tically and have the same distorting effect in
the market, may not necessarily be subject to the same finding regarding de facto export contingency
under Article 3.1(a) , where the evidence differs regarding th e government's reasons in providing the
subsidy. Further, in some circumstances, est ablishing the necessary "tie" through a focus on the
reasons for the grant of the subsidy may make circ umvention of Article 3.1(a) relatively easy. For
example, in Canada – Aircraft , the panel and the Appellate Body found that the subsidies in issue
were tied to anticipated exportation. Part of the evidence to support this finding included statements

3264 United States' comments on European Communities' response to question 54, para. 172.
3266 Shorter Oxford English Dictionary, L. Brown (ed.) (Clarendon Press, 1993), Vol. I, p. 23. It is also
supported by the ordinary meaning of the term in Webster's New Encyclopedic Dictionary , (Könemann, 1993),
p. 11, namely "existing in fact" and "really ... carried out".

BCI deleted, as indicated [***]

in programme documents to the effect that the programme was expected to result in increased
exports.3267 Perhaps an approach that considers th e reasons for the grant of the subsidy may
encourage governments to be more discrete wit hout necessarily changing their underlying policies.
Nevertheless, despite these issues, the Panel is of the view that to determine whether a "tie" exists
between the grant of a subsidy and the grantor's e xpectation of exports, it is necessary to determine
whether the subsidy was granted because of the expectation of exports.
7.1539 Before considering the three legal arguments of the European Communities 3268, the Panel
notes that in relation to each argument the Eur opean Communities refers to a possible requirement
under Article 3.1(a) to demonstrate that a subsidy "favours" exports or is greater in the case of
exports.3269 The European Communities' primary po sition, as enunciated in its first written
submission, is that such a requirement does exist. However, the European Communities notes that the
United States has "elsewhere" expressed the view that there is no requirement to demonstrate
"favouring" and the European Communities adopts th is as its alternative position (in its first and
third legal arguments).
3270 In its first written submission, the European Communities discusses
"favouring" of exports in relation to the requirement under Article 3.1(a) that the subsidy in issue be
contingent upon export performance and not mere performance. The European Communities then
refers to evidence that it alleges demonstrates "a favouring or discrimination in favour of a product
that will inevitably be generally exported or incorporated within an exported product". 3271 T h e
European Communities makes similar arguments in its "reference interpretation", which it does not
advance, where it notes:
"Finally, according to the terms of both Article 3.1(a) and footnote 4,
the prohibited condition relates to " export performance", not mere performance. For
a claim to be successful, the evidence must therefore support the conclusion that there
is a grant of a subsidy contingent upon specifically export performance.
This will generally involve demonstrating some favouring of exports.
Demonstrating the existence of a measur e contingent upon mere performance is
insufficient." 3272
7.1540 To the extent the European Communities is arguing that there is a requirement to
demonstrate that a subsidy is contingent upon export performance under Article 3.1(a), this
should be accepted as there is no basis to read the term "export" out of Article 3.1(a).
Export contingency is the very concern addressed by Article 3.1(a) and this is confirmed by
footnote 4, which refers to subsidies tied to actual or anticipated exportation or export earnings. As
established by the Appellate Body in Canada – Aircraft, the relevant legal standard to meet to succeed
in a claim of de facto export contingency is that (i) th e grant of a subsidy (ii) is tied to (iii) actual or
anticipated exportation or export sales. The Panel notes that it would be almost

3267 Panel Report, Canada – Aircraft (Article 21.5 – Brazil).
3268 Where the "three legal arguments of the European Communities" refers to the arguments identified
by the European Communities in its response to question 56 and which are summarized at para. 7.1490 of this
Report.
3269 The European Communities' submission regarding the "favouring" of exports has some parallels
with Canada's third party submission, in which Canada suggests that an export contingent subsidy must lead to
the recipient of the subsidy selling more than it otherwise would have in export markets or must provide
incentives that could have the effect of distorting Boeing's market orientation in favour of exports (Canada's
written submission, para. 45). However, in response to Panel questioning, the European Communities takes the
position that whether or not a subsidy provides an incentive that could have the effect of distorting the subsidy
recipient's market orientation is immaterial to the analysis of whether a de facto export contingent subsidy exists
(European Communities' response to question 269, para. 475).
3270 See European Communities' first written submission, para. 980, footnote 1712.
3271 European Communities' first written submission, para. 980.
3272 European Communities' response to question 56, para. 189.

BCI deleted, as indicated [***]

impossible to establish the necessary "tie" between a subsidy and actual or anticipated exports in
circumstances where there were not some "favouring" of exports, where favouring
does not necessarily mean differential treatment of exports compared with domestic sales,
but also refers to granting a subsidy to a compan y because it is expected to export or will actually
export.
(i) European Communities' first legal argument
7.1541 In its response to question 56, the Eu ropean Communities contends that its
"first legal argument" is based on the B&O tax reduction. In particular, according
to the European Communities, the B&O tax rate reduction is an export contingent subsidy
because it is an ad valorem subsidy. Therefore, it is a subsidy contingent upon sales,
whether domestic or export sales. In pursuing th is argument, the European Communities submits
that there is "no need to demonstrate that the s ubsidy favours exports or is greater in the case of
export".
7.1542 As previously indicated, to fall within the terms of Article 3.1(a), the grant of a subsidy must
be "tied to" actual or anticipated exportation. However, any form of conditionality or
dependence between the B&O tax re duction and exports arises simply because the recipient of the
subsidy is an exporter. If this is the case, the B&O tax reduction is contingent upon either domestic or
export sales. The European Communities does not make any other submissions regarding why the
grant of the B&O tax reduction is " tied to" exportation. Therefore, it is clear that a "tie" between the
B&O tax reduction and exportation arises simply becau se the subsidy is granted to an enterprise that
exports. However, the final sentence of footnote 4 to Article 3.1(a) provides that the grant of a
subsidy to an enterprise that exports "shall not for that reason alone be considered to be an
export subsidy". Therefore, it is clear from footnote 4 that the standard for de facto export
contingency is not met.
7.1543 For these reasons, the Panel finds that, based on its first legal argument, the European
Communities has not demonstrated that HB 2294 is contingent upon export performance.
(ii) European Communities' second and third legal arguments
7.1544 The only difference between the European Comm unities' second and third legal arguments is
that the second argument proceeds on the basis that it is necessary to demonstrate some element of
"favouring" of exports in a de facto export c ontingency claim, while the third does not. As
indicated previously, the relevant enquiry un der Article 3.1(a) is whether there is a
contingent relationship between the grant of the subsidy and export performance. It would be almost
impossible to establish the necessary "tie" between a subsidy and actual or anticipated exports in
circumstances where th ere were not some "favouring" of exports, where favouring does not
necessarily mean differential treatment of exports co mpared with domestic sales, but also refers to
granting a subsidy to a company because it is expected to export or will actually export. In the light
of this, the remaining issue to be decided in relation to the second and third legal arguments is
whether HB 2294 was tied to an "anticipating of ex ports" and is therefore a measure contingent upon
export performance. Although this is the way in which the European Communities expresses the
second and third legal arguments, which seems clearl y to be an argument that the grant of the
subsidies under HB 2294 was tied to anticipated exports, in response to a Panel question, the
European Communities states that its second and third legal arguments are also arguments in relation
to actual exports.3273 Therefore, our analysis considers bot h a tie to anticipated exportation and to
actual exportation.

3273 European Communities' response to question 57.

BCI deleted, as indicated [***]

Grant of a subsidy in fact tied to anticipated exportation
7.1545 To determine whether HB 2294 was in fact contingent upon export performance, it is
necessary to establish whether there was a (i) grant of a subsidy (ii) tied to (iii) anticipated
exportation or export earnings. We have prev iously concluded that in enacting HB 2294,
Washington State granted tax reduction, tax credit and tax exemption subsidies.
Whether the grantor of the subsidy anticipated exportation
7.1546 To demonstrate that the grantor of the subsidy anticipated exports, the European Communities
presents a range of evidence. The evidence can broadly be descr ibed as evidence relating to the
export orientation of Boeing and evidence rega rding the capacity condition in HB 2294. The
following sections of the Report summarize the eviden ce before the Panel and the final section draws
a conclusion about whether the grantor of the subs idy expected exports to arise from the project
benefiting from the subsidies, namely assembly of the 787.
Export Orientation of Boeing
7.1547 The European Communities provides a number of documents, including from the Decadal
Survey of Civil Aeronautics, from Boeing and fro m the Aerospace Industries Association, which
include statements that the United States aero space industry has historically made a major
contribution to a positive balance of trade for the United States economy. 3274 Further, the Boeing
LCA division has played a major role in this regard, with an average of 60 per cent of total LCA sales
between 1989-2005 being export sales. 3275 The European Communities also provides a transcript
from a speech of the Lieutenant Governor of Washington, which includes a statement that
Washington is the United States' most trade dependent state and that Boeing accounts for 50 per cent
of the State's exports.3276
7.1548 In addition to the objective evidence regarding the export orientation of Boeing, the
European Communities submits evidence regarding the awareness of the Governor of Washington of
the export orientation of Boeing. In one of his speeches, the Governor states:
"Now more than ever, we must aggressively capitalize on and protect our competitive
advantage in trade… Expanding trade and pressing our state's many advantages is
even more important as we strive to recover economically…
"We must…do everything possible to keep our top companies here – including
companies that strengthen our international trade. As you know, we are energetically
pursuing Boeing 7E7 final assembly. Boeing has historically been a major exporter
for our state and for our nation. We want to keep Boeing assembly and supplier jobs
right here where they belong…

3274 See European Communities' first written submissi on, paras. 981-982; Boeing Current Market
Outlook 2006 (September 2006), Exhibit EC-635; Boeing Current Market Outlook 2003 (June 2003);
Exhibit EC-636; Steering Committee for the Decadal Survey of Civil Aeronautics, National Research Council of
the National Academies, Decad al Survey of Civil Aeronautics: Found ation for the Future , 2006, Exhibit EC-
301; and Civil Aircraft Sales Fuel Record Year for Aerospace, Press Release, Aerospace Industries Association,
13 December 2006, Exhibit EC-639.
3275 See European Communities' first written submissi on, para. 986 and International Trade Resources
LLC, FSC/ETI Tax Benefits Provided to U.S. Large Civil Aircraft Producers, December 2006, Exhibit EC-12.
3276 European Communities' first written submission, para. 982 and Speech by Lt. Governor Brad
Owen, "Impact of Trade on the Regional Economy", National Forum on Trade Policy, 7 December 2006,
Exhibit EC-637.

BCI deleted, as indicated [***]

"Expanding international trade is part of my plan to create jobs." 3277
7.1549 Further, a letter written by Governor Locke, entitled "Restatement of Commitments", is
appended to the Master Site Agreement. The letter was submitted as a part of the offer by the State of
Washington for the 787 manufacturing facilities to be located in Washington. The letter provides:
"The recent trade mission I led to China is another example of how the state can play
a beneficial and significant role in helping keep Boeing and other Washington
companies competitive. I met with high-level government officials and airline
executives for the purpose of promoting the purchase of Boeing airplanes."
 3278
7.1550 Finally, although not referred to in the Eu ropean Communities' submissions regarding
anticipated exportation, we note that Article 10.6.1 of the MSA provides:
"Boeing's production and assembly of the 7E7 Aircraft is market-driven. The
commercial aircraft market is international and highly competitive. Despite Boeing's
extensive investments and good faith efforts to predict markets for the 7E7 Aircraft,
Boeing cannot guarantee that those markets will materialize or be sustained as
predicted or desired" (emphasis added).
The capacity condition
7.1551 To support its argument of export contingency, the European Communities variously submits
that the requirement in HB 2294 that Boeing build a facility with the capaci ty to produce at least
thirty-six superefficient airplanes per year amount ed to a requirement to export or created an
expectation of exports. 3279 To the extent the evidence of the European Communities is relevant to
whether or not there was an expectation that exports would ensue from the project benefiting from HB
2294, it is outlined in the following paragraphs. We note that the European Communities relies on
objective evidence regarding the effect of the capac ity condition and also refers to the subjective
knowledge of the government of this alleged effect.
7.1552 The European Communities submits a number of ex hibits to prove that the requirement that
Boeing build a facility in Washington with the capac ity to produce thirty-six superefficient airplanes
will ultimately result, or could be expected to result, in exports. The European Communities'
reasoning proceeds in two-steps; first, that once built, the required capacity will be fully utilized and
second, that Boeing could not sell 36 superefficient ai rplanes in the United States market alone and so
must export the excess.
7.1553 To support the notion that the requirement to build a facility with the capacity to produce
thirty-six aircraft leads to the production of at le ast thirty-six superefficient airplanes per year, the
European Communities reasons that companies do not create production capacity that is intended to
stand idle. The European Communities asserts that in the LCA industry, a manufacturer creates its
production capacity based on the number of orders al ready received for the airplane in question as
well as on orders that it forecasts it will secure. 3280 The requirement that thirty-six superefficient

3277 European Communities' first written submission, para. 983 and Governor Gary Locke Speech,
World Trade Club Annual Dinner, 29 May 2003, Exhibit EC-638.
3278 European Communities' first written submission, para. 984 and Schedule 3 to Project Olympus
Master Site Agreement, Restatement of Commitments, 10 November 2003, Exhibit EC-71.
3279 See e.g. European Communities' response to question 54, para. 177, where the
European Communities states that the capacity requirement is tantamount to a requirement to export. Also see
European Communities' first written submission, paras. 992-995, where the European Communities submits that
the capacity requirement created an expectation of exports.
3280 European Communities' response to question 54, para. 175.

BCI deleted, as indicated [***]

airplane be built was based on Boeing's determinati on that it would have sufficient orders to produce
and deliver thirty-six 787s per year. 3281 In addition, the European Communities argues that if Boeing
were to establish the capacity to pr oduce thirty-six aircraft per year it would suffer "grave" financial
consequences if it were not to produ ce at least thirty-six 787s each year. 3282 Establishing the capacity
to produce a certain number of aircraft requires not only the building of an assembly facility, but also
requires that Boeing have adequate capacity in its supply chain to produce and deliver thirty-six
aircraft. This requires order and delivery to the asse mbly facility of the necessary components. It is
difficult to reverse these capacity decisions without suffering "significant financial costs". 3283
Therefore, according to the European Communities, it is "implausible in the extreme" that Boeing
would build an assembly facility with the capacity to produce thirty-six 787s per year and then allow
that facility to stand idle, or to under-utilize it. 3284 Indeed, the European Communities provides a
statement from the Manager of Boeing's 787 programme that, at the time HB 2294 was enacted,
Boeing expected to make 1,750 Dreamliners over a period of twenty years, which the European
Communities calculates as equivalent to eighty-eight 787s per year, far higher than thirty-six.
3285
7.1554 The final step in the European Communities' argument that the capacity requirement amounts
to an export requirement, or at least could be expected to lead to exports, is that the level of demand in
the United States market is incapable of absorbing a production level of thirty-six 787s and therefore,
it is necessary for Boeing to export at least some of its production. The European Communities relies
upon a declaration by the Head of Market Analysis and Research at Airbus, Mr. Andrew Gordon, to
support this contention.3286 Mr. Gordon analyzes the backlog position of the 787, the historical share
and deliveries for aircraft in the 787 class and conc ludes that it is "extremely unlikely that production
of 36 aircraft per year for the 787 could be sustained by the United States market alone". 3287 I n
particular, Mr. Gordon notes that the 787 order book at the end of 2006 included orders for 448
aircraft, of which thirty-eight were for airlines domiciled in the United States. Mr. Gordon excludes
from this figure aircraft ordered by United States- based leasing companies, which supply aircraft on
an operating lease basis to customers worldwide, although the European Communities acknowledges
that it is unclear to what extent those orders indi rectly go to United States airlines. Mr. Gordon notes
that delivery of the thirty-eight 787s ordered by United States airlines is expected to take place over a
number of years. According to a forecast by Airc laims, the deliveries will take place over six years,
with between nine and four deliveries per year over this period.3288
7.1555 Mr. Gordon also considers the 2006 "Current Market Outlook" produced by Boeing. The
Current Market Outlook includes a statement by Bo eing that in North America 1,410 "twin aisle"
aircraft will be delivered between 2006-2025. 3289 As this figure includes exports to Canada and
aircraft in the twin-aisle category apart from the 787, namely the 767, 777, A330/A340 and A350,
Mr. Gordon makes a number of "conservative" assumptions to convert the figure into the number of
787s to be delivered to the United States market between 2006-2025. In particular, Mr. Gordon
makes a conservative estimate that 5 per cent of deli veries will be to the Canadian market and that

3281 European Communities' response to question 54, para. 175.
3282 European Communities' response to question 54, para. 177.
3283 European Communities' response to question 54, para. 176.
3284 European Communities' non-confidential statement at the first meeting with the Panel, para. 105.
3285 See European Communities' non-confidential statement at the first meeting with the Panel,
para. 105; Boeing Webcast, The Boeing Company Annual Investors Conference, 23 May 2007, at 787 Program
– Mike Bair, Q and A, 00h:24m:38s, Exhibit EC-1149; James Gunsalus, "Investors hope Boeing can avoid
delays of its own," International Herald Tribune, 18 June 2007, Exhibit EC-1150; and Boeing 787 Dreamliner
Program Fact Sheet, Exhibit EC-340.
3286 Declaration of A. Gordon Regarding 787 Export Sales, 21 February 2007, Exhibit EC-8.
3287 Declaration of A. Gordon Regarding 787 Export Sales, 21 February 2007, Exhibit EC-8, para. 8.
3288 Declaration of A. Gordon Regarding 787 Export Sales, 21 February 2007, Exhibit EC-8, para. 4.
3289 Declaration of A. Gordon Regarding 787 Export Sales, 21 February 2007, Exhibit EC-8, para. 4.

BCI deleted, as indicated [***]

half of the estimated deliveries will be 787s. 3290 This results in a very optimistic estimate of thirty-
three deliveries of 787s per year in the United States market. 3291 Using forecasts from the 2005 and
2004 Current Market Outlooks leads to estimates of twenty-nine and twenty-seven respectively. 3292
Finally, Mr. Gordon also uses the 2006 Airbus Global Market Forecast to estimate the level of
demand for 787s in the United States market. Th e Airbus forecast is that the United States will
demand 644 aircraft in the 250-300 seat category over 20 years. Using the same conservative
assumption of a 50/50 split in demand between 787s and all other 250-300 seat aircraft results in an
estimate of approximately sixteen 787 deliveries per year in the United States market. This estimate
drops to ten when the 2004 Airbus Global Market Forecast is used.
3293 Mr. Gordon concludes:
"An examination of the current backlog fo r the 787 and competing types, as well as
recent Boeing and Airbus forecasts, all suggest that deliveries of 36 787 aircraft per
year into the US market alone is highly unlikely." 3294
7.1556 In contrast to this evidence, the United States argues that its domestic market is capable of
absorbing "well in excess" of thirty-s ix superefficient airplanes per year. 3295 The United States refers
to documents which suggest that between Decemb er 2004 and June 2007, Boeing received orders for
140 787s from customers located within the United St ates. The United States divides this figure by
the number of months between December 2004 and June 2007 to conclude that this results in average
sales in the United States market of four 787s per month or 54.2 per year.3296
7.1557 The European Communities argues that the Unite d States' evidence is extremely misleading
because the United States' figures represent orders, rather than production.3297 The
European Communities states that, in fact, "Boeing … began producing the 787 only in 2007 and it
reported in April 2007 that its 787 deliv ery positions were sold out until 2014". 3298 Therefore Boeing
will produce the 140 orders between 2007-2014, at an average rate of approximately twenty 787s per
year, rather than over the period 2004-2007, as suggested by the United States. 3299 Further, the
European Communities objects to the inclusion in the United States' figures of orders placed by
United States-based leasing companies. According to the European Communities, the effect of this is
that even the estimate of the twenty deliveries to the United States market per year is an
overestimate.3300
7.1558 As well as submitting evidence that the effect of the capacity condition is to lead to exports,
the European Communities makes submissions to suppor t the notion that the Government of the State
of Washington was aware of or expected this when it granted the subsidies. In particular, the
European Communities asserts that the granting authority was aware of the capacity of the
United States market for 787 airplanes. 3301 The European Communiti es notes that, prior to the
enactment of HB 2294, Washington State estimated the value of the B&O tax reduction to Boeing
through until 2024. To calculate this , because the B&O tax reduction is an ad valorem subsidy,

3290 Declaration of A. Gordon Regarding 787 Export Sales, 21 February 2007, Exhibit EC-8, para. 9.
3291 Declaration of A. Gordon Regarding 787 Export Sales, 21 February 2007, Exhibit EC-8, para. 11.
3292 Declaration of A. Gordon Regarding 787 Export Sales, 21 February 2007, Exhibit EC-8, para. 12.
3293 Declaration of A. Gordon Regarding 787 Export Sales, 21 February 2007, Exhibit EC-8, paras. 13-
14.
3294 Declaration of A. Gordon Regarding 787 Export Sales, 21 February 2007, Exhibit EC-8, para. 16.
3295 United States' first written submission, para. 702.
3296 United States' first written submission, para. 702.
3297 European Communities' non-confidential statement at the first meeting with the Panel, para. 112.
3298 European Communities' non-confidential statement at the first meeting with the Panel, para. 113.
We assume the reference to "producing" the 787 is a reference to the assembly of the 787.
3299 European Communities' non-confidential statement at the first meeting with the Panel, para. 112.
3300 European Communities' non-confidential statement at the first meeting with the Panel, para. 114.
3301 European Communities' response to question 267.

BCI deleted, as indicated [***]

Washington officials necessarily had specific industr y information about Boeing's anticipated revenue
and sales of LCAs. 3302 Further, the European Communities contends that Washington officials
"certainly must have reviewed the most recent versions of Boeing's Current Market Outlook, given
Boeing's importance to the state economy".
3303 The Boeing Market Outlook enabled the grantors of
the subsidies to conduct the same type of analysis as was conducted by Mr. Gordon, market analyst at
Airbus, in order to determine the level of demand for 787s in the United States market.3304
7.1559 In response to the European Communities' submissions regarding the awareness of the grantor
of the subsidies of the level of demand in the United States market for 787 airplanes, the United States
asserts that the European Communities has provided no evidence of any such awareness of the market
or anticipation of exportation. 3305 The United States submits that the European Communities'
argument that Washington State officials "certainly must have reviewed the most recent versions of
Boeing's Current Market Outlook" is a mere assertio n. There is no evidence that Boeing provided the
Current Market Outlooks to Washington State as part of the decision making process preceding the
granting of the subsidies.
3306 Further, there is no evidence that the Washington State officials actually
performed the type of calculations required to conve rt the figures in the Current Market Outlook into
an estimation of the number of 787s to be sold in the United States market (by excluding Canada and
models apart from the 787 from the figures provided). 3307 The United States also argues that even if
the Washington officials estimated the value of the B&O tax reduction to Boeing, this does not
indicate an awareness of the capacity of the United States market or an anticipation of exportation.3308
Conclusion on "anticipated exportation"
7.1560 In our view, the European Communities has provi ded adequate evidence to demonstrate that
the grantor of the subsidy anticipated exportation.
7.1561 In reaching this conclusion, we accord some weight to the term of the MSA, namely
Article 10.6.1, which refers to the fact that the commercial aircraft market is "international". A
possible interpretation of this is that the market is one in which sales occur in the global market and
not only within the United States. Given that the refe rence to the "international" nature of the market
is found within a term of the MSA, this provides some evidence that the pa rties to the Agreement,
including the State of Washington, expected that the sale of the Boeing 787 would involve exports.
However, we do not consider it conclusive evidence because the "international" nature of the market
may be a reference to the fact that there are two main players in the commercial aircraft market, one
of which is not a United States company.
7.1562 Our conclusion is also based upon the evidence regarding the export orientation of Boeing.
3309
We acknowledge that footnote 4 to Article 3.1(a) indicat es that the mere fact that a subsidy is granted
to enterprises which export cannot be the sole reason fo r concluding that an export contingent subsidy
exists. However, in Canada – Aircraft the Appellate Body held that this second sentence in
footnote 4 is a "specific expression of the requirement in the first sentence to demonstrate the "tied to"
requirement".
3310 Therefore, while the export orientation of an entity cannot be the only evidence in
support of a "tie" between the grant of a subsidy an d anticipated exports, and therefore a conclusion
that an export contingent subsidy ex ists, it is relevant information to consider in determining whether

3302 European Communities' response to question 267, para. 468.
3303 European Communities' response to question 267, para. 469.
3304 European Communities' response to question 267, para. 469.
3305 United States' comments on European Communities' response to question 267, para. 453.
3306 United States' comments on European Communities' response to question 267, para. 455.
3307 United States' comments on European Communities' response to question 267, para. 456.
3308 United States' comments on European Communities' response to question 267, para. 457.
3309 See paras. 7.1547-7.1550 of this Report.
3310 Appellate Body Report, Canada – Aircraft, para. 173.

BCI deleted, as indicated [***]

exports are anticipated at all. We conclude that the extensive publicly available information presented
by the European Communities regarding the export or ientation of Boeing provides evidence that the
State of Washington anticipated that exports w ould ensue from the project benefiting from HB 2294,
namely assembly of the 787 in Washington. The statements from the Governor of Washington
regarding the contribution of Boeing to the State's export performance also indicate that the State of
Washington anticipated that exports would arise or continue as a result of the granting of the taxation
subsidies under HB 2294. At least one of the stat ements of the Governor, indicating an expectation
that the export performance of Boeing would be promoted under the agreement to site the 787
assembly facility in Washington, is included as a Schedule to the MSA. 3311 Its incorporation in the
agreement between the two parties indicates that th e statement is more than political rhetoric
delivered to promote a subsidy package to a constituency.
7.1563 In the light of this evidence, it would be unr ealistic to conclude that the grantor of the
subsidies did not have an expectation of exports.
7.1564 In reaching this conclusion, the Panel notes that the evidence submitted by the
European Communities in relation to the effe ct of the capacity condition upon exports seems
somewhat equivocal. We note that the European Communities' case that the United States market
cannot absorb a production level of 36 787s per year is quite a marginal one. In particular, the
estimate of the Airbus analyst that there is a le vel of demand in the market for 33 superefficient
airplanes per year seems relatively close to 36 ai rplanes per year which the European Communities
asserts Boeing will produce. Further, the statem ents regarding the knowledge of the State of
Washington regarding the capacity of the domestic market seem merely to be assertions, without
being concrete evidence. Neverthe less, given the statements made in the legal documents associated
with HB 2294, upon which both parties rely, regardi ng the international nature of Boeing's market,
and also given the export orientation of Boeing, we conclude that the State of Washington expected
exports to ensue from the project benefiting from HB 2294.
7.1565 For these reasons, the Panel finds that the grantor of the subsidy anticipated exportation.
Whether the grant of the subsidy was "tied" to the anticipated exportation
7.1566 The United States argues that the major flaw in the European Communities' Article 3.1(a)
claim is that it does not provide su fficient evidence of a "tie" between any expectations of exports and
the granting of the subsidies. The evidence relied upon by the Eu ropean Communities to support its
case that there was a "tie" between the enactment of HB 2294 and Washington State's anticipation of
exports is principally related to the capacity requirement. 3312 The European Communities contends
that the Washington officials envisaged that exports would arise as a result of this requirement and
that the granting of the subsidies, by the very terms of HB 2294, was con tingent upon, and therefore
"tied to", this requirement being met.3313
7.1567 In addition to the capacity requirement f ound in HB 2294, the following evidence could
potentially shed some light on whether the subsidies were granted because of anticipated exports:

3311 European Communities' first written submission, para. 984 and Schedule 3 to Project Olympus
Master Site Agreement, Restatement of Commitments, 10 November 2003, Exhibit EC-71.
3312 See European Communities' first written submission, paras. 991-996.
3313 European Communities' first written submission, paras. 992-996.

BCI deleted, as indicated [***]

(a) A speech by the Governor of Washington which included statements suggesting that
he wanted to keep Boeing in Washington because of its export performance:
"We must … do everything possible to keep our top companies here
– including companies that strengthen our international trade. As
you know, we are energetically pursuing Boeing 7E7 final assembly.
Boeing has historically been a major exporter for our state and for
our nation. We want to keep Boeing assembly and supplier jobs right
here where they belong."
(b) The letter attached to the Master Site Ag reement regarding the Governor's promotion
of Boeing sales in China:
"The recent trade mission I led to China is another example of how
the state can play a beneficial and significant role in helping keep
Boeing and other Washington companies competitive. I met with
high-level government officials and airline executives for the purpose
of promoting the purchase of Boeing airplanes."
(c) The fact that HB 2294 acts as a filter, such that only companies which produce
products that will necessarily be exported may be recipients of the subsidies.
3314
7.1568 In addition to the evidence cited by the Eu ropean Communities in relation to its export
contingency claim, there is other evidence before us regarding HB 2294, which was submitted by the
parties in the context of demonstrating that the tax incentives constitute subsidies under Article 1.1 of
the SCM Agreement, but which we consider to be relevant background evidence in determining if the
subsidies were granted because of anticipated exportation.
7.1569 The following evidence reveals that at least one of the reasons in granting the tax incentives
under HB 2294 was to encourage Boeing to loca te its final assembly facility for the 787 in
Washington rather than another state because this would have positive effects on the State's economy,
particularly its employment rate. Given that Ar ticle 3.1(a) of the SCM Agreement provides that a
subsidy is prohibited if it is contingent, whether solely or as one of several other conditions , upon
export performance, the fact that the subsidies were granted to encourage Boeing to locate its
assembly facility in Washington in order to increase employment does not rule out the possibility that
the subsidies are contingent in fact upon another condition, namely anticipated exports. Nevertheless,
we provide a summary of the evidence that indicat es that the subsidies were granted to encourage
Boeing to locate in Washington as relevant bac kground information to the circumstances surrounding
the grant of the subsidies.
• HB 2294

7.1570 A review of the legislation itself provides some insight regarding the reasons for the
introduction of the tax incentives:
3315
"Preamble: An Act relating to retaining and attracting the aerospace industry to
Washington state.3316

3314 For the "filter argument", see European Communities' first written submission, para. 991.
3315 HB 2294, 58th Leg., 2d Spec. Sess. (Wash. 2003), Exhibit EC-54, p. 20.
3316 HB 2294, 58th Leg., 2d Spec. Sess. (Wash. 2003), Exhibit EC-54, p. 1.

BCI deleted, as indicated [***]

Section 1. The legislature finds that the peopl e of the state have benefited from the
presence of the aerospace industry in W ashington state. The aerospace industry
provides good wages and benefits for the thousands of engineers, mechanics, and
support staff working directly in the industry throughout the state. The suppliers and
vendors that support the aerospace industry in turn provide a range of jobs. The
legislature declares that it is in the public interest to encourage the continued presence
of this industry through the provision of tax incentives. The comprehensive tax
incentives in this act address the cost of doing business in Washington state compared
to locations in other states.
3317
Section 16. (1) The legislature finds that ac countability and effectiveness are
important aspects of setting tax policy. In order to make policy choices regarding the
best use of limited state resources the legislature needs information on how a tax
incentive is used.
(2)(a) A person {eligible for the incentives under} this act shall make an annual
report to the department detailing employme nt, wages, and employer-provided health
and retirement benefits per job at the manuf acturing site. The report shall not include
names of employees. The report shall also de tail employment by the total number of
full-time, part-time, and temporary pos itions. The first report filed under this
subsection shall include employment, wage, and benefit information for the twelve-
month period immediately before first use of a preferential tax ...or tax exemption or
credit...The report is due by March 31st following any year in which a preferential tax
rate...is used, or tax exemption or credit... is taken.
(b) If a person fails to submit an annual report under (a) of this subsection by the
due date of the report, the department sh all declare the amount of taxes exempted
or credited, or reduced in the case of the preferential business and occupation tax
rate, for that year to be immediately due and payable. Excise taxes payable under
this subsection are subject to interest but not penalties, as provided under this
chapter."
• The MSA

7.1571 The MSA confirms that the tax incentives under HB 2294 will be provided to Boeing. It also
deals with a range of other alleged subsidies provi ded by the government to Boeing in the State of
Washington. It provides some insight regarding the reasons for the introduction of HB 2294 and the
other incentives. It provides:
"Recital D The Public Parties recognize that the {final assembly facility for the 787}
will have a significant positive impact on the welfare of the community {and} the
State including the creation of jobs, increased tax revenues and other benefits, and
therefore the Public Parties are desirous of having Boeing locate the {final assembly
facility} within the State; and
"Recital E The Public Parties recognize that Bo eing can locate the {final assembly
facility} in other states and that, by locating its facilities within the State, the citizens
and the constituents of the State…will be benefited."
 3318

3317 HB 2294, 58th Leg., 2d Spec. Sess. (Wash. 2003), Exhibit EC-54, p. 1.
3318 MSA, Exhibit EC-58, p. 2.

BCI deleted, as indicated [***]

• The Memorandum of Agreement

7.1572 Section 17 of HB 2294 provides that the legisla tion becomes effective when the Governor of
the State and a manufacturer of commercial airpla nes sign a memorandum of agreement regarding an
affirmative final decision to site a significant commerc ial airplane final assembly facility in the State.
The MOA is the agreement between the Gover nor and Boeing under section 17 of HB 2294. It
provides:
"Recital C. In order to enhance the desirability of the State as a place to do business
and to promote economic growth for the bene fit of its citizens, the State legislature
passed HB 2294."
 3319
• The House and Senate Floor Debates for HB 2294

7.1573 The European Communities submits an exhibit th at is the unofficial transcript of the House
and Senate Floor Debate for the third reading of HB 2294.3320 It provides:
"Representative Pettigrew: {T}his legislation is part of our effort to get the 7E7 built
here in our state, As you know we are one of several states that are vying for this
opportunity. Where in the past we were very, very confident that we
could compete with any region across the country as it relates to aerospace, but
what we're finding ourselves – finding out is th at we are in the economic fight of our
lives.
"What's at stake here is not only the futu re of Boeing but our state's economy. For
decades the aerospace industry has been a stable part of our economy and Boeing has
been the centerpiece of that industry…
"It's about supporting the suppliers that s upport Boeing. It's about supporting the
small businesses that as a result of Boeing succeed. This is about 130, 000 jobs. It's
about $700 million to $1 b illion in our general fund. This is about keeping our
community strong.
"The legislation…represents a good package fo r us to get the 7E7 here. It provides a
number of tax incentives, yes. It helps Boeing be competitive, yes…but there are
triggers in it that will allow us to have the accountability for our investment that we
want.
3321
"Senator Rossi: … we'd like to see the Boeing comp any stay in the State of
Washington.
"This is a tax incentive package, which w ill hopefully entice the 7E7, the Boeing
Company to build it here in the State of Washington…
"The idea is to make sure that we have these jobs in the State of Washington – good
paying jobs in the State of Washington.

3319 Memorandum of Agreement for Project Olympus, 19 December 2003, Exhibit EC-57.
3320 State of Washington, House and Senate Floor Debates, HB 2294, June 2003, Unofficial Transcript,
Exhibit EC-70.
3321 State of Washington, House and Senate Floor Debates, HB 2294, June 2003, Unofficial Transcript,
Exhibit EC-70, pp. 1-2.

BCI deleted, as indicated [***]

"The dollar amounts add up to $25 million in this biennium. In the next
biennium, $103 million…But look at what the potential is if Boeing leaves.
What is the potential? We could lose re venue to the state of about $540 million a
year.
"We need to do this. We need to make sure that our hand is strengthened so we
can be one of the three finalists, one of the states that will be in the finals to
have the 7E7 in their state… We believe that this will make us very competitive.
3322
"Senator Fairley: That's what this bill is about, keeping Boeing and our identity for
Boeing in our state. We like the jobs. We like the company. We like the planes.
This bill will help us."3323
• Speeches and statements by Governor Gary Locke

7.1574 Aside from the statements of Governor Locke re ferenced by the European Communities in its
prohibited subsidy claim, a number of other stat ements by the Governor on the record provide
relevant background to the introduction of the taxation incentives:
"Press Release from the Office of the Governor, 9 June 2003.
"Gov. Gary Locke today unveiled his tax in centives package to help the state land
final assembly of the Boeing 7E7, stressing the huge economic impact the project
would have on the state. Locke emphasized that the project would not only create
1,200 jobs directly related to assembling the 7E7, but would also create hundreds of
thousands of related jobs…
"The total expected economic impact of building the 7E7, and its derivatives, in
Washington state:
• As many as 150,000 jobs, including supp liers and other multiplier effects;
and
• As much as $540 million in tax revenue per year…
"This a thoughtful package to address how Boeing will do business in Washington in
the future….
"This tax incentives package is critical to the long-term competitiveness and
economic vitality of our state…the Action Washington team continues to develop a
creative, aggressive proposal to convince the Boeing Company that Washington is the
best place for final assembly of the 7E7."
 3324
"Press Release from the Office of the Governor, 9 June 2003.

3322 State of Washington, House and Senate Floor Debates, HB 2294, June 2003, Unofficial Transcript,
Exhibit EC-70, pp. 6-8.
3323 State of Washington, House and Senate Floor Debates, HB 2294, June 2003, Unofficial Transcript,
Exhibit EC-70, p. 9.
3324 News Release, Office of Gove rnor Gary Locke, Gov. Gary Locke Unveils Tax Incentives
Package to Help Land Boeing 7E7, Outlines Project's Significant Economic Impact on State, 9 June 2003,
Exhibit EC-69.

BCI deleted, as indicated [***]

"We've delivered to Boeing a very strong and compelling package. Now we will
leave it to Boeing to make the best possibl e choice for the 7E7 final assembly. And
we know that choice will be Washington!
…We responded with a dynamic, innovative a nd creative proposal that will prove to
Boeing that Washington state is the best place in the world to build the 7E7." 3325
7.1575 In our view, the European Communities has not established that the grant of the subsidies
under HB 2294 was "tied to" anticipated exportation.
7.1576 The European Communities' position appears to be that the capacity condition, requiring a
location with the capacity to produce at least thirty-s ix superefficient airplanes to be sited within the
State of Washington, is sufficient to establish the required "tie". The European Communities reasons
that the capacity condition creates an expectation of exports. Further, given that the grant of the
subsidies was contingent upon meeting the capacity condition, the subsidy was "tied to" anticipated
exportation. We do not agree that the capacity co ndition is sufficient to establish the required "tie"
between the grant of the subsidy and anticipated exportation.
7.1577 On a generous view of the European Communitie s' evidence it is possible to conclude that
fulfilment of the capacity condition created an expe ctation of exports. The European Communities
relies upon a declaration by Mr. Andrew Gordon, Head of Market Analysis and Research at Airbus, in
order to conclude that the United States' market was incapable of absorbing a production level of
thirty-six superefficient airplanes per year. Mr. Gordon's estimates of the demand per year for 787 in
the United States' market range from four to thirty-three. 3326 Such a large range in itself creates some
uncertainty regarding the strength of the estimates. Fu rther, the upper end of the range is close to the
capacity condition requirement of 36 superefficient ai rplanes. Nevertheless, even accepting that the
capacity condition could create an expectation of exports, in our view the condition is not sufficient to
establish the required "tie". A link between the capacity condition, upon which the grant of the
subsidy depended, and expected e xports is not explicit within the legislation or anywhere else.
Nevertheless, the evidence of Mr. Gordon provides so me suggestion that there may be such a link.
However, in order to establish a prima facie case of such a tie between the grant of the subsidy and
anticipated exportation, in our view, further eviden ce is required. It is possible that the capacity
condition was not in fact included as a pre-condition to the grant of the subsidies in HB 2294 because
of anticipated exports. Rather, as the United Stat es argues, the requirement that a "significant"
assembly facility be established may have been incl uded because of a concern to create "higher value
jobs, tax income, and upstream activity" in Washington State. 3327 Therefore, we require some further
corroborating evidence to support the European Communities' case that HB 2294 was granted because
of anticipated exports. Our approach in this regard is supported by the Appellate Body's statement in
Canada – Aircraft that "the relationship of contingency, between the subsidy and export performance,
must be inferred from the total configuration of facts constituting and surrounding the granting of the
subsidy, none of which on its own is likely to be decisive in any case".3328
7.1578 In relation to the additional evidence, aside fro m the capacity condition, that could potentially
support a finding of the required "tie", we attach a relatively low probative value to the statement of
Governor Locke, regarding his wish to keep compan ies that strengthen international trade within the
State of Washington, and his consequent energetic pursuit of Boeing. We note that this statement

3325 News Release, Office of Governor Gary Lock e, Gov. Locke, Business, Labor and Government
Leaders Celebrate Delivery of State's 7E7 Proposal at 'Action Washington' Rally, 20 June 2003, Exhibit EC-62.
3326 See paras. 7.1554-7.1555 of this Report.
3327 United States' response to question 268, para. 461. The United States argues that requiring a
"significant" final assembly facility to be located in Washington gives the State some certainty that its objectives
are being met.
3328 Appellate Body Report, Canada – Aircraft, para. 167.

BCI deleted, as indicated [***]

does not explicitly mention the tax incentives. Ho wever, we acknowledge that the statement was
made on 29 May 2003, less than two weeks before the passing of HB 2294 by the House and Senate
on 11 June 2003 3329, which provides some evidence that the ta xation-related subsidies were a part of
the "pursuit" of Boeing to which he refers. Even if this is the correct interpretation of his statement, in
our view it needs to be considered in the context in which it was delivered, namely that of a public
official emphasizing the potential benefits of a programme under which significant levels of public
revenue were to be foregone.
7.1579 Although Governor Locke's second statement regarding the trade mission he led to China is
an attachment to the MSA and therefore a part of the official documentation surrounding the siting of
the 787 assembly facility in Washington and the con sequent granting of the subsidies, the statement
does little to advance the European Communities' ar gument. The statement does not indicate that
Governor Locke was interested in China because it is an export market. The statement indicates that
the Governor was aiming to promote Boeing sales, but it does not indicate that he was targeting
particular markets by virtue of the fact that they were export markets. In our view, the statement does
not indicate that the subsidies were granted because of the expectation of exports.
7.1580 Finally, the European Communities notes that onl y companies that produce products that will
necessarily be exported may be recipients of the subsidies. Although according to footnote 4 of
Article 3.1(a), the fact that a subsidy is granted to an enterprise that exports cannot be the sole reason
for finding an export contingent subsidy, this is a f actor that we can consider, in combination with the
other evidence on the record. However, in our vi ew, an overall assessment of the evidence leads to
the conclusion that the European Communities ha s not established the required "tie" between HB
2294 and the grantor's anticipation of exportation.
7.1581 The evidence before the Panel in this case falls far short of that before the panel and Appellate
Body in Canada – Aircraft. In that case, there were sixteen f actual elements found within the official
documentation associated with the granting of the subsidy that indicated the subsidy was granted
because of the expectation of exports. The evidence indicated that the grantor of the subsidies relied
upon and attached importance to the expected expor t performance of applicants for the subsidies.
Although there was less evidence before the panel in Australia – Automotive Leather II , we note that
this decision was never appealed. Further, the decision was made against the background of the
Australian Government agreeing by settlement with the United States to remove automotive leather
from eligibility for two programmes pursuant to wh ich the exporter in issue earned significant
benefits from its exports. 3330 The Australian Government signed the grant contract eight days after
automotive leather was excised from the two pre-existing programmes. 3331 Although not always
explicit within the panel report, this background seems to have infl uenced the panel in reaching its
decision that the grant contracts were export contingent subsidies.3332
7.1582 In relation to the evidence indicating that HB 2294 was granted because of the State of
Washington's desire to have assembly of the 787 sited in Washington rather than another State, due to
the positive effects this would have on Washington's economy, particularly its employment rate, we
recall that Article 3.1(a) of the SCM Agreement provides that a subsidy is prohibited if it is

3329 See HB 2294, 58th Leg., 2d Spec. Sess. (Wash. 2003), Exhibit EC-54 and Governor Gary Locke
Speech, World Trade Club Annual Dinner, 29 May 2003, Exhibit EC-638.
3330 Panel Report, Australia – Automotive Leather II, para. 9.65.
3331 Panel Report, Australia – Automotive Leather II , see paras. 2.2 and 2.5 for the date on which the
grant contract was signed and the date on which automotive leather was removed from eligibility for the two
pre-existing programmes.
3332 At para. 9.63 the Panel states that it is "taking into consideration" the fact that the Australian
Government was providing assistance to the exporter in response to the removal of automotive leather from
eligibility for benefits under the two pre-existing progra mmes. See also, para. 9.65 where the Panel considers
the actions of the Australian Government.

BCI deleted, as indicated [***]

contingent, whether solely or as one of several other conditions, upon export performance. Therefore,
even if one of the conditions for the grant of the subsidies was that assemb ly of the 787 occur in
Washington in order to increase employment, this does not exclude the possibility of a tie between
HB 2294 and anticipated exportation. However, in our view, the clear and convincing evidence
indicating that the subsidies were granted because of the State's desire to attract the 787 assembly to
the Washington economy in order to boost employment, in comparison to the paucity of evidence
suggesting a tie between the grant of the subsi dy and anticipated exportation, reinforces our
conclusion that the European Communities has not made its case under Article 3.1(a).
7.1583 For theses reasons, the Panel finds that the Eu ropean Communities has not demonstrated a
"tie" between the grant of the subsidies and anticip ated exportation or export earnings. Consequently,
the Panel finds that the European Communities ha s not demonstrated that HB 2294 was de facto
contingent upon export performance on the basis of being tied to anticipated exportation.
Grant of a subsidy in fact tied to actual exportation
7.1584 The majority of the submissions of the European Communities are directed towards
establishing that the grant of the taxation incentives was contingent upon anticipated exportation.
However, in response to a Panel question regard ing whether the European Communities is arguing
that the grant of the subsidies is tied to "a nticipated" or to "actual" exportation, the
European Communities responds that:
"{I}n order to be certain that it has made all the necessary arguments, the
European Communities submits that each of the relevant measures provides for a
subsidy contingent upon actual export; or alternatively contingent upon anticipated
export; or alternatively contingent upon actual or anticipated export; or alternatively
contingent upon actual and anticipated export."
 3333
7.1585 In its response to the same Panel questi on, the European Communities provides some
explanation of its argument that the grant of the s ubsidies is tied to "actual" exportation. However,
the European Communities admits th at its explanation does "not exha ust all the alternative arguments
set out" in the preceding paragraph.3334
7.1586 In relation to its first legal argument, the European Communities argues, if the correct
interpretation of "actual" is "real", as we have found is the case, then the subsidy is tied to actual
exports in the sense that it is only when the sale ta kes place that the unconditional right to the subsidy
accrues.3335 However, for the reasons expressed at pa ras. 7.1541-7.1543 of this Report, we do not
accept the European Communities' first legal argument regarding the B&O tax reduction.
7.1587 In relation to its second and third legal argumen ts, the European Communities submits that if
"actual or anticipated" means "real or potential", then HB 2294 is contingent upon anticipated exports.
However, HB 2294 also provides for the grant of a subsidy in fact tied to actual exports, "because the
B&O tax rate reductions are tied to sales". 3336 Therefore, its submission regarding a tie to "actual"
exports in relation to its second a nd third legal arguments again reduces to its argument regarding the
B&O tax reduction, which we do not accept.

3333 European Communities' response to question 57, para. 195.
3334 European Communities' response to question 57, para. 197.
3335 European Communities' response to question 57, para. 198.
3336 European Communities' response to question 57, para. 200. The European Communities also
submits an argument that, if the correct meaning of "actua l" is "past", then its second and third legal arguments
amount to a claim that the subsidy is tied to actual exportation (European Communities' response to question 57,
para. 199). However, as we have rejected this interpretation of "actual", there is no need for us to consider the
merits of this argument.

BCI deleted, as indicated [***]

7.1588 On the arguments presented by the European Communities in response to question 57, we
find no basis to make a finding that HB 2294 is in fact tied to actual exportation. The
European Communities argues that its explanations in response to this question do not exhaust all the
alternative arguments it is making (namely, its arguments that the "subsidy is contingent upon actual
export; or alternatively contingent upon anticipated export; or alternatively contingent upon actual
or anticipated export; or altern atively contingent upon actual and anticipated export"). However,
where the European Communities has provided no ar guments or evidence to support a claim, we find
no basis to uphold it. 3337 For these reasons, the Panel finds th at the European Communities has not
demonstrated that the subsidies were tied to actual exportation.
7.1589 Consequently, in relation to the European Communities' second and third legal arguments 3338,
the Panel finds that the European Communities has not demonstrated that HB 2294 is contingent upon
export performance.
(g) Conclusion
7.1590 For these reasons, the Panel finds that the European Communities has not demonstrated
that the taxation measures enacted under HB 2294 are inconsistent with Articles 3.1(a) and 3.2
of the SCM Agreement.
F. WHETHER THE UNITED STATES CAUSES , THROUGH THE USE OF THE SUBSIDIES AT ISSUE ,
ADVERSE EFFECTS WITHIN THE MEANING OF ARTICLE 5(C) OF THE SCM AGREEMENT
1. Introduction
7.1591 The European Communities claims that the United States, thr ough the use of the subsidies to
Boeing, causes adverse effects to the European Communities' interests within the meaning of

3337 Although the European Communities does not explicitly make this argument in support of a claim
that the subsidies are tied to actual exportation, its only other argument that could possibly be interpreted as
supporting a claim that HB 2294 is in fact tied to "actual" exportation is th e argument that the capacity
requirement is tantamount to a requirement to expo rt (European Communities' response to question 54,
especially para. 177). If the capacity requirement in f act operates as a requirement to export, perhaps this could
be some evidence in support of a tie to exports that will actually occur, rather than to exports that are anticipated
to occur. The European Communities argues that if Boeing built a facility with a capacity to produce
36 superefficient airplanes per year, it would produce at this capacity, which would require exportation to occur
due to the level of domestic demand for superefficient airplanes. In our view, although it may be logical for
Boeing fully to utilize the capacity it has created, it is possible to think of any number of situations where this
may not occur. Indeed, Article 10.6.1 of the Master Site Agreement includes a clause that provides:

"Boeing's production and assembly of the 7E7 Aircraft is market-driven. The commercial
aircraft market is international and highly competitive. Despite Boeing's extensive
investments and good faith efforts to predict markets for the 7E7 Aircraft, Boeing cannot
guarantee that those markets will materialize or be sustained as predicted or desired."

Upon its attention being directed to this clause in a Panel question, the European Communities
distances itself from the argument that the capacity requirement is tantamount to a requirement to export and
emphasizes that HB 2294 is tied to anticipated export performance (European Communities' response to
question 271). Therefore, if the European Communities ever intended to assert that the capacity condition is
evidence in support of a ti e to actual exportation, on the basis that the capacity condition amounts to a
requirement for exports actually to occur, this is not ma de out on the facts. A contingency that can be satisfied
without a single sale being made, and where the resulting subsidy continues to be provided even if no export
sales are ever made, does not support the notion that the subsidies in issue are tied to actual exportation.
3338 As advanced in European Communities' response to question 56 and summarized at para. 7.1490 of
this Report.

BCI deleted, as indicated [***]

Article 5(c) of the SCM Agreement; i.e. "serio us prejudice" to the interests of the European
Communities. The European Communities makes what it asserts to be two, independent serious
prejudice claims.
7.1592 One claim is that the subsidies to Boeing cau se serious prejudice within the meaning of
Article 5(c) of the SCM Agreement in the form of "significant price suppression" and "significant lost
sales", and a threat thereof, in the world market, with in the meaning of Articles 5(c) and 6.3(c) of the
SCM Agreement, as well as displacement and im pedance in the United States and third country
markets, and a threat thereof, w ithin the meaning of Articles 5(c), 6.3(a) and 6.3(b) of the SCM
Agreement.3339 This serious prejudice claim is addressed below in section 2 of this Part of the Report.
7.1593 The other claim is that the United States causes serious prejudice to the European
Communities' interests by violating the Agreement concerning the application of the GATT
Agreement on Trade in Civil Aircraft on trade in large civil aircraft (the 1992 Agreement);
specifically, that the United States has violated agreed obligations concerning support to the LCA
sector that are set forth in the 1992 Agreement. 3340 According to the European Communities, this
alleged violation by the United States of its ob ligations under the 1992 Agreement constitutes serious
prejudice to the European Communities' interest in having its international obligations respected. 3341
This serious prejudice claim is further discussed in section 3 of this Part of the Report.
2. Whether the United States causes serious prejudice to the interests of the European
Communities in the form of significant price suppression and significant lost sales, and a
threat thereof, in the world market, and displacement and impedance, and a threat
thereof, in the United States and third country markets
(a) Main arguments of the parties and third parties
(i) European Communities
7.1594 The European Communities argues that the subsid ies to Boeing have resulted in serious
prejudice within the meaning of Article 5(c) of the SCM Agreement in the form of "significant price
suppression" and "significant lost sales", and a threat thereof, in the world market, within the meaning
of Article 6.3(c) of the SCM Agreement, as well as displacement and impedance in the United States
and third country markets, and a threat thereof, with in the meaning of Articles 6.3(a) and 6.3(b) of the
SCM Agreement.
3342
7.1595 The European Communities seeks to establish its serious prejudice claim by reference to
events that occurred between 2004 and 2006 in what it asserts are three specific LCA product
markets; namely, the 100-200 seat single-aisle LCA market, the 200-300 seat wide-body LCA market,
and the 300-400 seat wide-body LCA market. 3343 The table below sets forth the three LCA product

3339 European Communities' first written submissi on, para. 1000. In its panel request, the
European Communities alleged that the use of the cha llenged subsidies measures "causes adverse effects – i.e.,
material injury or threat of material injury to the European Community LCA industry – and serious prejudice
including threat of serious prejudice to the interests of the European Communities within the meaning of
Article 5(a) and (c) of the SCM Agreement "; Request for the Establishment of a Panel by the European
Communities, WT/DS353/2, 23 January 2006, p. 13. However, in its submissions to the Panel, the
European Communities did not present arguments and evid ence concerning material injury under Article 5(a),
thereby confining its adverse effects claim to serious prejudice within Article 5(c) of the SCM Agreement;
European Communities' first written submission, para. 22.
3340 European Communities' first written submission, para. 1016.
3341 European Communities' oral statement at the first meeting with the Panel, para. 117.
3342 European Communities' first written submission, para. 1000.
3343 European Communities' first written submission, para. 1151.

BCI deleted, as indicated [***]

markets identified by the European Communiti es, the Boeing "subsidized" aircraft and the
corresponding Airbus "like" aircraft that are alle ged to compete in each LCA product market, and the
specific forms of serious prejudice alleged in each LCA product market.
Structure of the European Communities' serious prejudice arguments in each of the
three LCA product markets

LCA Product
market
Alleged Boeing
"subsidized
product"
Competing
Airbus "like
product"
Serious prejudice alleged
Single aisle LCA
with a capacity of
approximately 100-
200 passengers and
a short to medium
range

 737NG A320 significant price suppression of the A320

significant lost sales of the A320

displacement and impedance of European
Communities' exports of the A320 from various
third country markets
3344

threat of significant price suppression with respect
to future orders of the A320

Wide-bodied LCA
with a capacity of
approximately 200-
300 passengers and
a medium to long or
ultra-long range

787 A330,
Original A350
and
A350XWB-
800
3345
significant price suppression of the A330,
Original A350 and A350XWB-800

significant lost sales of A330 and Original A350

displacement and impedance of European
Communities' imports of A330 and Original A350
into the United States

displacement and impedance of European
Communities' exports of A330 and Original A350
from various third country markets
3346

threat of significant price suppression with respect
to future orders of A330 and A350XWB-800

3344 The European Communities argues that the Panel should determine the existence of serious
prejudice in the form of significant price suppression, significant lost sales and displacement and impedance on
the basis of order data. The European Communities argues, in the alternative, that if the Panel finds that orders
(as opposed to deliveries) booked during the 2004-2006 reference period cannot serve as the basis for the
European Communities' serious prejudice claim, the argum ents and evidence it presen ts demonstrate threat of
significant price suppression, threat of significant lost sales and threat of displacement and impedance of exports
with respect to future deliveries of the A320; European Communities' first written submission, paras. 1552,
1563.
3345 The Original A350 LCA family was marketed by Airbus from December 2004 through 2006 but
was replaced by the A350XWB family, which Airbus bega n marketing in July 2006; European Communities'
3346 The European Communities argues that the Panel should determine the existence of serious
prejudice in the form of significant price suppression, significant lost sales and displacement and impedance on
the basis of order data. The European Communities argues, in the alternative, that if the Panel finds that orders
(as opposed to deliveries) booked during the 2004-2006 reference period cannot serve as the basis for the
European Communities' serious prejudice claim, the argum ents and evidence it presen ts demonstrate threat of
significant price suppression , threat of significant lost sales and threat of displacement and impedance of
imports and exports with respect to future deliveries of the A330 and A350XWB-800; European Communities'
first written submission, paras. 1446, 1469.

BCI deleted, as indicated [***]

LCA Product
market
Alleged Boeing
"subsidized
product"
Competing
Airbus "like
product"
Serious prejudice alleged
Wide-bodied LCA
with a capacity of
approximately 300-
400 passengers and
a long or ultra-long
range

777 A340 and
A350XWB-
900/-1000
significant price suppression of the A340

significant lost sales of the A340

displacement and impedance of European
Communities' exports of A 340 from various third
country markets
3347

threat of significant price suppression with respect
to future orders of the A350XWB-900/1000

7.1596 The European Communities argues that the subs idies to Boeing have resulted in significant
price suppression, significant lost sales and displ acement and impedance of exports and imports of
Airbus LCA through two causal mechanisms. 3348 First, the aeronautics R&D subsidies are said to
have provided Boeing with valuable technologies, knowledge, experience and confidence in certain
key technology areas which enabled Boeing to research, design, develop, produce and sell the
technologically innovative 787 years earlier than would otherwise have been possible. This subsidy-
enabled availability of an aircraft as technologically innovative as the 787 is said to have adversely
affected sales, market share and prices of the competing Airbus LCA in the 200 – 300 seat wide-body
product market. Second, the additional cash flow from a ll of the subsidies at issue in this dispute is
said to have enhanced Boeing's ability to reduce th e prices of its LCA in competitive sales campaigns
with Airbus. The lower Boeing LCA prices are argued to have affected sales, market share and prices
of the competing Airbus LCA in each of three LCA product markets.
7.1597 The European Communities thus makes a distin ction as to the effects of the subsidies on
Boeing's commercial behaviour between the 787, on the one hand, and the 737NG and the 777, on the
other. With regard to the 787, the European Co mmunities argues that the nature of the subsidies
benefiting Boeing's 787 family reveals that these subsidies have two principal effects on Boeing's
behaviour. On the one hand, the European Communities argues that the aeronautics R&D subsidies
have had what the European Communities terms "t echnology effects" in that they "have helped
Boeing develop, launch and produce a technol ogically-advanced 200-300 seat LCA much more
quickly than it could have on its own".
3349 The European Communities ar gues that it is through their
effects on Boeing's development of technologies for the 787 that the aeronautics R&D subsidies cause

3347 The European Communities argues that the Panel should determine the existence of serious
prejudice in the form of significant price suppression, significant lost sales and displacement and impedance on
the basis of order data. The European Communities argues, in the alternative, that if the Panel finds that orders
(as opposed to deliveries) booked during the 2004-2006 reference period cannot serve as the basis for the
European Communities' serious prejudice claim, the argum ents and evidence it presen ts demonstrate threat of
significant price suppression, threat of significant lost sales and threat of displacement and impedance of exports
with respect to future deliveries of the A340 and A350XWB-900/1000; European Communities' first written
submission, paras. 1640, 1652.
3348 For example, the European Communities states that it "demonstrates causation in two different
ways. First, it demonstrates that Boeing's prices would be higher but for the US subsid ies at issue. Second, it
demonstrates that Boeing's product offering, in particular with respect to the 787 in the 200-300 seat LCA
market, would be different but for the US subsidie s"; European Communities' second written submission,
para. 711.
3349 European Communities' first written submission, para. 1343. See also, European Communities'
first written submission, paras. 1335,1345.

BCI deleted, as indicated [***]

significant price suppression, significant lost sales, and displacement and impedance suffered by
Airbus in the 200-300 seat wide body LCA product market.3350
7.1598 On the other hand, the Eur opean Communities argues that all of the subsidies have what the
European Communities refers to as "price effects" in that they have enabled Boeing to charge lower
prices for its LCA and capture market share at the expense of Airbus.3351 The European Communities
argues that it is through their effects on Boeing's prices of its 737NG, 777 and 787 families of LCA
that all of the subsidies in totality cause signi ficant price suppression, significant lost sales, and
displacement and impedance suffered by Airbus in the 100-200 seat single-aisle, 300-400 seat wide-
body, and 200-300 seat wide-body LCA product markets, respectively.
7.1599 Set forth below is a description of the European Communities' arguments as to (i) the effects
of the aeronautics R&D subsidies on Boeing's developm ent of technologies in relation to the 787; and
(ii) the effects of the subsidies on Boeing's pricing behaviour with respect to the 737NG, 777 and 787.
Effects of the aeronautics R&D subsidies on Boeing's development of technologies in relation
to the 787
7.1600 The European Communities identifies the " aeronautics R&D support provided by NASA,
DOD and DOC" as being aeronautics R&D support provided by those U.S. government agencies
through specific R&D programmes. The NASA-funded aeronautics R&D programmes are: the
Advanced Composite Technology (ACT) Program, the High Speed Research (HSR) Program, the
Advanced Subsonic Technology (AST) Program, the High Performance Computing and
Communications (HPCC) Program, the Aviation Sa fety Program, the Quiet Aircraft Technology
(QAT) Program, the Vehicle Systems Program and the Research and Technology Base (R&T Base)
Program.
3352 The DOD-funded aeronautics R&D programme is the Research, Deve lopment, Testing,
and Evaluation (RDT&E) Program. 3353 The DOC-funded programme is the Advanced Technology
(ATP) Program.3354
7.1601 According to the European Co mmunities, the aeronautics R&D subsidies, "primarily through
NASA and DOD" gave rise to four effects in th e 200-300 seat wide-body LCA market; namely, they:
(i) accelerated Boeing's development of new and advanced LCA technologies, as well as design and
manufacturing processes, thereby enabling Boeing to bring the 787 to market much sooner than it
could have on its own 3355; (ii) limited and delayed Airbus' access to innovative R&D technologies;
(iii) increased the marketability of the 787; and (iv) allowed a rapid ramp-up of 787 deliveries. 3356
The European Communities has sought to demonstrate that the aer onautics R&D subsidies provided
Boeing with usable technologies in key technology areas, as well as knowledge, experience and
confidence toward developing successful commercial technologies and processes. 3357 The European

3350 European Communities' first written submission, paras. 1334, 1341, 1376 ("In sum, the nature of
the US subsidies for the 787, in terms of their structure, design, and operation, helps reveal that their effects
have been to: (1) accelerate Boeing's development, laun ch, production and future delivery of a technologically-
advanced 200-300 seat LCA family; and (2) enable Boeing to significantly reduce its sales prices for 787 family
LCA. These effects, in turn, caus e significant price suppression, signifi cant lost sales, displacement and
impedance, and a threat thereof, in the market for the 787 family and competition Airbus LCA.") .
3351 European Communities' first written submission, para. 1229.
3352 European Communities' first written submission, para. 1257.
3353 European Communities' first written submission, para. 1257.
3354 European Communities' first written submission, para. 1257.
3355 European Communities' first written submission, para. 1345.
3356 European Communities' first written submission, paras. 1350-1358.
3357 European Communities' first written submission, para. 1352. According to the European
Communities, the knowledge, experien ce and confidence gained by Boeing through its participation in U.S.
government-supported aeronautics R&D programmes enabled Boeing to accelerate its development, production

BCI deleted, as indicated [***]

Communities groups these key technologies into six technology areas, the most significant of which
concerns composites technologies, primarily the design, development and manufacturing of the 787
composite fuselage and wings.
3358
7.1602 The European Communities alleges that, pursu ant to the NASA's ACT, AST and R&T Base
programmes, NASA provided funding and support to Boeing through several R&D contracts and
agreements regarding composites research. 3359 In addition, the European Communities contends that
Boeing learned about composites technologies relevant to the 787 composite fuselage by participating
in a number of projects under DOD RDT&E pr ogrammes such as the ManTech Composites
Affordability Initiative, the ManTech Advanced Fi ber Placement Program, DUS&T High Rate Fiber
Placement Program, V-22 Aft Fuselage Demonstrat ion Program, and JSF Prototype Development
Program.3360 According to the European Communities, "{ b}ut for these US Government composites
R&D programmes, Boeing would not be able to build and promise deliveries of such an advanced 787
aircraft today. Nor would customers be as willing to buy it".3361
7.1603 In relation to the other technology areas, the European Communities alleges that Boeing and
McDonnell Douglas collaborated with NASA through the AST Program, and with DOD through a
number of programmes under the RDT&E Program, in developing more-electric systems for the
787.3362 The European Communities argues that th e open systems architecture on the 787 likely
benefited from the knowledge and experience that McDonnell Douglas gained from an R&D contract
under the Technology Reinvestment Program unde r DOD's RDT&E Program, as well as from dual-
use research that Boeing conducted pursuant to the JSF Program. 3363 The European Communities
argues that, through contracts under the HPCC Program (CAS project), the AST Program (IWD
project), HSR Program and R&T Base Program, as well as through dual-use research conducted under
the DOD F-22 Program, the JSF Demonstrator Program and the C-17 Program, Boeing developed
knowledge and experience in relatio n to various technologies, tools and concepts that it used to
enhance the aerodynamics and structural design of the 787.
3364 According to the European
Communities, Boeing's development of noise reduction technologies used on the 787 was accelerated

and delivery of the 787 and "is in fact the crux of the causal connection between the U.S. R&D subsidies and the
3358 The remaining five technology areas are: more electric architecture, ope n systems architecture,
enhanced aerodynamics and structural design, noise re duction technologies and health management systems;
European Communities' first written submission, paras. 1350-1351.
3359 European Communities' first written submission, Annex C, para. 26. NASA Contract NAS1-18862
with McDonnell Douglas Corporation regarding Innovative Composite Aircraft Primary Structures (ICAPS), 31
March 1989, Exhibit EC-331; NASA Contract NAS1-18889 with Boeing Commercial Airplanes regarding
Research and Development in Advance Technology Composite Aircraft Structures, 12 May 1989, Exhibit EC-
329; NASA Contract NAS1-18954 with Boeing Aerospace regarding Advanced Composite Fabrication and
Testing, 29 August 1989, Exhibit EC-798; NASA Contract NAS1-19349 with Boeing Commercial Airplanes
regarding Structures and Materials Technology for Aircraft Composite Primary Structures, 30 September 1991,
Exhibit EC-799; NASA Contract NAS1-20546 with McDonnell Douglas regarding Technology Verification of
Composite Primary Wing Structures for Commercial Transport Aircraft, 18 September 1995, Exhibit EC-324;
NASA Contract NAS1-20553 with Boeing Commercial Airplane Group regarding Technology Verification of
Composite Primary Fuselage Structures for Commercial Transport Aircraft, 25 September 1995, Exhibit EC-
334; NASA Contract NAS1-99070 with Boeing Commercial Airplane Group regarding Structures and Materials
Technology for Aerospace Vehicles, 25 January 1999, Exhibit EC-800.
3360 European Communities' first written submission, Annex C, para. 46. The European Communities
also alleges that Boeing gained substantial experience and confidence using ATL to fabricate wing skin panels
pursuant to DOD funding under the F-22, A-6 and B-2 programmes; European Communities' first written
submission, Annex C, para. 59.
3361 European Communities' first written submission, Annex C, para. 22.
3362 European Communities' first written submission, Annex C, para. 69.
3363 European Communities' first written submission, Annex C, para. 78.
3364 European Communities' first written submission, Annex C, paras. 83-99.

BCI deleted, as indicated [***]

by knowledge, experience and confidence that Boeing gained through NASA's AST, QAT and
Vehicle Systems programmes, and from collabor ation with NASA under two Quiet Technology
Demonstrator programmes which tested noise reduc tion technologies developed under the AST, QAT
and Vehicle Systems programmes. 3365 The European Communities ar gues that the aeronautics R&D
subsidies created and accelerated the development and application of the health management systems,
allowing Boeing to better monitor the health of different parts on the 787, as well as leading to lower
maintenance costs on the 787, and providing improved maintenance service.3366
7.1604 The European Communities argu es that the knowledge and experience that Boeing (and
McDonnell Douglas) gained through their work unde r the NASA contracts and agreements and DOD
contracts and agreements provided Boeing (and McDonnell Douglas) with a solid foundation of
tangible technologies, as well as knowledge, experien ce and confidence, which Boeing was able to
further develop into an optimal combination of technologies for the 787. 3367 According to the
European Communities, even when the technologi es applied to the 787 are not the same as those
studied under the contracts and agreements with NASA and DOD, the knowledge, experience and
confidence that Boeing derived from its work for NASA and DOD provided Boeing with the insight
to assess the validity of different design, manufact uring and assembly soluti ons, and ultimately to
come up with the 787 design. 3368 In this sense, the European Communities argues that the Panel
should assess the overall, cumulative knowledge effect of Boeing's participation in the NASA and
DOD programmes, which according to the European Communities, Boeing was able to leverage in its
own related R&D activity.3369
Effects of the subsidies on Boeing's pricing behaviour with respect to the 737NG, 777
and 787
7.1605 In its first written submission, the European Communities identifies 11 categories of subsidies
which it argues have affected Boeing's pricing behaviour. These categories are: (i) B&O tax
reductions provided by the State of Washington an d the City of Everett; (ii) waiver of 747 LCF
landing fees; (iii) FSC/ETI federal tax exemptions /exclusions; (iv) tax breaks and other incentives
provided by the State of Washington and munici palities therein; (v) tax breaks and bond interest
payments provided by the State of Kansas and muni cipalities therein; (vi) reimbursements, tax breaks
and grants provided by the State of Illinois and municipalities therein; (vii) aeronautics R&D support
provided by NASA, DOD and DOC; (viii) intellectua l property rights waivers/transfers provided by
NASA and DOD; (ix) IR&D and B&P reimburseme nts provided by NASA and DOD; (x) facilities,
equipment and employees provided by NASA and DOD; and (xi) worker training grants provided by
DOL.3370
7.1606 The European Communities estimates that th e total amount of subsidies in the above
categories that benefited Boeing's LCA divisi on between 1989 and 2006 was $19.1 billion. In

3365 European Communities' first written submission, Annex C, paras. 100, 103-104.
3366 European Communities first written submission, para. 1350. European Communities' first written
submission, Annex C, paras. 110 - 121.
3367 European Communities' confidential oral statement at the second meeting with the Panel, para. 8.
3368 Dominik Wacht, An Analysis of Selected NASA Research Programs and Their Impact on Boeing's
Civil Aircraft Programs, November 2006, Exhibit EC-15, p. 76.
3369 Statement by Patrick Gavin, Tim Sommer, Burkhard Domke, and Dominik Wacht, 8 November
2007, Exhibit EC-1175 (BCI), paras. 23, 27; Statement of Tim Sommer and Dominik Wacht, Exhibit EC-1336
(BCI), para. 27.
3370 European Communities' first written submission, paras. 1233-1278.

BCI deleted, as indicated [***]

addition, the European Communiti es estimates that Boeing will receive approximately $4.6 billion in
subsidies between 2007 and 2024.3371
7.1607 The European Communities argues that the Pane l should examine the cumulative effects of
all of the subsidies.3372 According to the European Communities, all of the subsidies have a significant
nexus with the price effects at issu e, in the sense that all of the subs idies have the effect of freeing up
cash for Boeing to use to reduce the prices of its airc raft, and it is therefore appropriate to aggregate
all of the subsidies for purposes of assessing their price effects. 3373 However, the European
Communities has also grouped the above-referenced categories of subsidies into two general
categories for purposes of analyzing their effects on Boeing's prices.
7.1608 The first general category consists of subs idies that the European Communities alleges
operate to reduce Boeing's marginal unit costs of production and sale of individual LCA. 3374 The
European Communities asserts that su bsidies within this category operate to lower the taxes and fees
paid by Boeing with respect to the production and sale of its LCA, and that the receipt of these
subsidies is essentially contingent on the production and sale of individual LCA.3375
7.1609 The second general category cons ists of subsidies that the European Communities argues
operate to increase Boeing's non-operating cash flow. 3376 The European Communities notes that
subsidies within this category are not linked to produ ction of particular families of Boeing LCA, or to
the production or sale of individual LCA. 3377 The European Communities argues that these subsidies
are "fungible" and should therefore be treated as th e functional equivalent of additional cash flow
available to Boeing's LCA division. 3378 Subsidies within this category account for approximately

3371 This figure comprises estimates of the future values of the following categories of subsidies: (i)
B&O tax rate reductions provided by the State of Washin gton and the City of Everett; (ii) waiver of 747 LCF
landing fees; (iii) tax breaks and other incentives pr ovided by the State of Washington and municipalities
therein; (iv) tax breaks and bond interest payments prov ided by the State of Kansas and municipalities therein;
(v) reimbursements, tax breaks and grants provided by the State of Illinois and municipalities therein; (vi)
intellectual property rights waivers /transfers provided by NASA and DOD; and (vii) worker training grants
provided by DOL; Amount of Subsidies to Boeing's LCA Division, Exhibit EC-17, p. 2.
3372 European Communities' first written submission, paras. 1070-1073.
3373 European Communities' second written submission, paras. 669, 671.
3374 European Communities' first written submission, para . 1233. The alleged subsidies said to operate
in this manner are the Washington State and City of Everett B&O tax reductions, Snohomish County 747 LCF
landing fee waivers, and federal FSC/ETI tax exempti ons/exclusions; European Communities' first written
submission, para. 1306.
3375 European Communities' first written submission, para. 1234.
3376 European Communities' first written submission, paras. 1244-1278. Alleged subsidies falling
within this category are (i) the aeronautics R&D fund ing and support provided by NASA, DOD and DOC; (ii)
intellectual property right waivers/transfers provided by NASA and DOD; (iii) IR&D and B&P reimbursements
provided by NASA and DOD; (iv) the facilities, equi pment and employees provided by NASA and DOD; (v)
the remaining tax breaks and other incentives provided by the State of Washington and municipalities therein;
(vi) the tax breaks and bond interest payments provided by the State of Kansas and municipalities therein; (vii)
the reimbursements, tax breaks and grants provided by the States of Illinois and municipalities therein; and (viii)
the worker training grants provided by DOL; European Communities' first written submission, para. 244.
3377 European Communities' first written submission, para. 1279. The European Communities explains,
however, that it considers that certain of the subsidies within this second general category; e.g. the "R&D grants
provided through NASA's ACT program" "specifically re late, in whole or in part, to the development and
production of the 787 family of LCA"; European Communities' first written submission, para. 1277;
European Communities' second written submission, para. 70 2. The amounts represented by these subsidies are
allocated to the 787 as part of ITR's calculation of th e per-aircraft subsidy "magnitudes"; International Trade
Resources LLC, Calculating on a Per-Aircraft Basis the Magnitude of the Subsidies Provided to US Large Civil
Aircraft, 20 February 2007, Exhibit EC-13, Table 7.
3378 European Communities' first written submission, para. 1279.

BCI deleted, as indicated [***]

$16.9 billion of the total $19.1 billion in subsidi es that the European Communities alleges was
received by Boeing between 1989 and 2006.
7.1610 The European Communities' key argument is that , notwithstanding the fact that the majority
of the subsidies at issue in this dispute are not directly related to Boeing's production of LCA,
Boeing's receipt of subsidies of the magnitudes allege d in this dispute, in the light of the strategic
incentives that result from the particular market st ructure of the LCA market, and Boeing's financial
condition, make it reasonable to infer that the su bsidies do in fact affect Boeing's LCA pricing
behaviour.3379 The European Communities argues that the combination of "LCA market factors and
dynamics of production" supports a finding that the subsidies to Boeing, even if not explicitly targeted
to lowering the costs of production of specific LC A models, nonetheless cause adverse effects to the
interests of the European Communiti es, because they allow Boeing to market its LCA at lower prices
than would otherwise be the case. 3380 The European Communities contends that, under the "right
conditions of competition – such as the intense duopoly competition existing in the LCA markets –
non-price or non-production-contingent subsidies can confer the ability to cause adverse effects" 3381
and that "certain tied subsidies may yield similar effects as certain unrestricted subsidies, depending
on the context of the specific subsidy at issue; i.e. the specific nature of the subsidy and its magnitude,
as well as on the condition of the recipient".3382
7.1611 The European Communities has presented various formulations of its analytical framework
for evaluating the effects of the subsidies on Boeing's pricing behaviour. Almost all of these
formulations refer to the same key factors. These fact ors are: (i) the nature of the subsidies, in terms
of their structure, design and operation; (ii) an economic model developed by Professor Luís Cabral
concerning the effect of what he refers to as "dev elopment subsidies", which purports to quantify the
degree to which Boeing was able to reduce its LCA prices in 2004 – 2006; (iii) the subsidy amounts
and "magnitudes"; (iv) the conditions of competition in the LCA markets; (v) the financial condition,
or "economic viability" of Boeing's LCA division in the absence of the subsidy amounts; and (vi)
selected individual LCA sales campaigns in each of the three LCA product markets, which are alleged
to demonstrate the serious prejudice in terms of Airbus' prices and sales.
7.1612 As to the nature of the subsidies at issue, th e European Communities argues that the extent to
which a particular subsidy enables Boeing to lo wer its LCA prices depends on the way in which it
operates in an economic sense. The European Co mmunities argues that subs idies that operate to
reduce Boeing's marginal unit costs have an eff ect on Boeing's LCA pricing that is commensurate
with their amount.
3383 In other words, the European Co mmunities argues that, for each additional
dollar of such subsidies, Boeing is able to reduce the prices of its LCA by an equivalent dollar.

3379 For example, the European Communities argues: "{ T}he nature of the subsidies, combined with
their amount and in light of the conditions of comp etition in the LCA markets, cause adverse effects";
European Communities' second written submission, para. 786; "The availability of {the} magnitude of subsidies
for Boeing to price down its LCA in competitive campaigns against Airbus, combined with the nature of those
subsidies, Boeing's ability and incentive to use them, as well as other evidence … supports the conclusion that
they cause significant price suppression, significant lost sales, and ma rket share displacement or impedance";
European Communities' response to question 78, para. 305.
3380 European Communities' first written submission, para. 1303.
3381 European Communities' non-confidential oral stat ement at the second meeting with the Panel,
para. 107.
3382 European Communities' response to question 379, para. 435.
3383 European Communities' first written submission, para. 1306. According to the European
Communities, this conclusion is supported by standard economic literature showing that cost-reducing subsidies
have a 100 per cent pass-through in competitive markets as well as other evidence relating to the effects on
Boeing's prices of the FSC/ETI subsidies, and of cost reductions arising from productivity improvements;
European Communities' first written submission, paras. 1307-1308, Steven Landsburg, Price Theory and its

BCI deleted, as indicated [***]

7.1613 The European Communities argues that subsid ies that operate to increase Boeing's non-
operating cash flow, on the other ha nd, although not directly tied to production or sales of specific
aircraft, also strongly influence Boeing's pricing and investment decisions. 3384 In support of this
contention, the European Communities refers to Pr ofessor Cabral's economic analysis of the effects
on Boeing's LCA pricing of "development subsidies". 3385 Professor Cabral posits that subsidies that
are not directly tied to production or sales volum e are essentially fungible with cash and would be
used by Boeing to (i) distribute to shareholders; (ii) invest in the development of new aircraft; and (iii)
"invest" in capturing market share and moving al ong the learning curve through "aggressive" pricing
of new and existing models of LCA. 3386 Professor Cabral conducts an economic modelling exercise
which purports to quantify the relative proportion of untied subsidy amounts that Boeing would
devote to additional investment (in lower pricing of its aircraft and in additional R&D) rather than to
payments of dividends to shareholders. 3387 Based on this allocation, Professor Cabral estimates the
total annual dollar value of LCA price reductions that have been made possible by the alleged receipt
of $19.1 billion in subsidies between 1989 and 2 006, for the years 2004 through 2006. Professor
Cabral also calculates these annual price reductions in terms of price reductions for the specific
Boeing LCA models over the 2004 -2006 period. According to Professor Cabral, the total of $19.1
billion in subsidies allegedly received by Boeing between 1989 and 2006 translates into the following
"price effects", or price reductions per model of Boeing aircraft in 2004 – 2006: 3388
Aircraft model Per-aircraft "price effect" ($ thousands)

 2004 2005 2006
737 Family 1,009 879 949
767 Family 1,443 1,248 1,354
787 Family 1,539 1,332 1,445
777 Family 2,324 2,010 2,169

Applications, South-Western College Publishing, Cincinnati, Ohio, Exhibit EC-725; European Communities'
response to question 289, paras. 612-625.
3384 European Communities' first written submission, para. 1309.
3385 Professor Cabral describes "development subsidies" as subsidies that are not directly tied to
production and sales volume; Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New
York University and CEPR, March 2007, Exhibit EC-4, paras. 2-3.
3386 Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and
CEPR, March 2007, Exhibit EC-4, paras. 29, 31; see also, European Communities' first written submission,
para. 1313.
3387 European Communities' first written submission, para. 1321. According to Professor Cabral,
Boeing would allocate each extra dollar of untied subsidies in the following manner: 15 cents to dividends to
shareholders; 59 cents to "aggressive pricing" of new LCA and sales of new or existing LCA to new buyers; and
26 cents to additional research and development.
3388 The European Communities generally uses the term "price effects" to refer to the extent to which
Boeing has been able to lower its LCA prices as a result of the subsidies. For example, see
European Communities' first written submission, para. 1306, where the European Communities submits that the
subsidies that directly reduce the marginal unit costs of Boeing LCA "have a pri ce effect commensurate with
their amount… {e}ach of these subsidy dollars has the effect of reducing the price of a Boeing LCA by exactly
$1". However, the European Communities also uses this term in a narrower sense, to refer to Professor Cabral's
quantification of the amount of subsidy dollars used directly and immediately by Boeing to "aggressively price"
its LCA, based on his analysis which treats all subsidies th at are not tied to the production of additional units of
LCA as fungible with cash (i.e. equivalent to additio nal non-operating cash to Boeing), and assumptions about
the optimal investment strategy of a company like Boeing given the particularities of the LCA market (learning
curve, switching costs etc.). For example, see Europe an Communities' first written submission, para. 1332 and
figures 22 and 23 (which are the same as the "price ef fects" calculations made by Professor Cabral in EC-4,
Tables 7 and 8).

BCI deleted, as indicated [***]

7.1614 The European Communities also argues that, in addition to operating to either reduce
Boeing's marginal unit costs of production and sale of additional LCA, or to increase Boeing's non-
operating cash flow, the subsidies are also "str uctured" and "designed" to increase Boeing's
competitiveness vis-à-vis Airbus, or to increase Boeing's market share at Airbus' expense.3389
7.1615 As to the subsidy amounts and "magnitudes", the European Communities estimates that the
$19.1 billion in subsidies that it alleges Boei ng's LCA division received between 1989 and 2006
translates into a subsidy "magnitude" of $5.1 billion over the 2004 – 2006 period. 3390 Moreover, the
European Communities estimates th at over the 2004 – 2006 period, "Boeing's LCA division enjoyed,
on average, $1.7 billion per annum in benefits from US subsidies" which it contends translates into an
average of $2.4 million per each 737NG, $4.6 million per each 787 and $5.5 million per each 777 sold
during that time. 3391 The European Communities argues that "the size of these subsidies alone
suggests that they cause Boeing to change its commercial behaviour in the LCA markets". 3392
However, the European Communiti es also argues that to properly appreciate the importance of the
subsidy "magnitudes", the Panel should consider the "magnitude" figures in the context of the
conditions of competition in the LCA markets, an d in terms of LCA orders from all LCA sales
campaigns, as well as from only "competitive" LCA sales campaigns.3393
7.1616 The per-LCA subsidy "magnitudes" to which th e European Communities refers are primarily
based on the total subsidy amounts that the Euro pean Communities alleg es that Boeing's LCA
division received between 1989 and 2006 (i.e. $19.1 billion) (i) allocated over time (with the addition
of an "opportunity benefit" to reflect the ti me value of the funds to Boeing); and (ii) allocated across
the various models of Boeing LCA (based on aircraft ordered during the allocation period). In other
words, the European Communities' annual subsidy "magnitude" estimates represent an allocation of
the $19.1 billion total subsidy "amount" which it alleges was received by Boeing's LCA division
between 1989 – 2006, to the 2004 – 2006 period and to the three Boeing subsidized LCA in this

3389 European Communities' first written submission, paras. 1066, 1227, 1238, 1240, 1243, 1247, 1249,
1251, 1260-1266, 1272, 1274, 1276.
3390 European Communities' first written submission, para. 1288. The European Communities also
estimates the "magnitudes" of the subsidies to Boeing's LCA division for the 2000 – 2003 period, which it
contends understate the degree of subsidization, but nevertheless demonstrate that Boeing was highly subsidized
in the past and that distortions in the LCA markets from the subsidies to Boeing were persistent even before
2004; European Communities' first written submission, para. 1289 and Figure 17. The Panel notes that the
ordinary meaning of the term "magnitude" (and the meaning of the term as used by panels and the Appellate
Body) is broader than the specialized sense in which the European Communities uses it (which is described in
para. 7.1616 of this Report). The "magnitude" of someth ing is generally understood as a reference to its size,
extent, degree, or numerical quantity or value. The European Communities sometimes also appears to use the
term "magnitude" in its ordinary sense; e.g. European Communities' comments on United States' response to
question 391, para. 356.
3391 European Communities' non-confidential oral statement at the first meeting with the Panel,
para. 142, referring to International Trade Resources LLC, Calculating on a Per-Aircraft Basis the Magnitude of
the Subsidies Provided to US Large Civil Aircraft, 20 February 2007, Exhibit EC-13, at para. 2.
3392 European Communities' non-confidential oral statement at the first meeting with the Panel,
para. 142.
3393 European Communities' first written submission, para. 1298. The European Communities defines a
"competitive" sales campaign as one in which both Airbus and Boeing were actively involved, and where
Airbus submitted a [***]; European Communities' first written submi ssion, para. 1222. Christian Scherer of
Airbus conducted a survey of all Airbus and Boeing orders during the 2000-2006 period and has classified them
as being orders resulting from competitive, or non- competitive sales campaigns; see Christian Scherer,
Commercial Aspects of the Aircraft Business From the Perspective of a Manufacturer, March 2007, Exhibit EC-
11 (BCI), Annex I and Annex II. The European Commun ities' identification of "competitive" sales campaigns
is based on Scherer's survey.

BCI deleted, as indicated [***]

dispute.3394 In addition, as explained in paragraphs 7.155-7.157, the European Communities has
included in its calculation of the annual subsid y "magnitudes" between 2004 – 2006, the amounts of
recurring subsidies that it estimated Boeing would receive in 2007 – 2009. The calculations were
performed by the European Communities' economic consultants, International Trade Resources LLC
(ITR).
3395 The European Communities asserts that the methodologies that ITR has used to calculate
the subsidy "magnitudes" during the 2004 – 2006 peri od are based on an allocation principle used by
investigating authorities in the United States and European Communities to allocate the full amount of
subsidies over imports on an ad valorem basis for purposes of assessing countervailing duties.3396
7.1617 Set forth below are the subsidy "magnitude " calculations and corresponding subsidization
rates made by ITR for the various versions of 737N G, 787 and 777 aircraft on the basis of all orders
(i.e. competitive and non-competitive sales):
Magnitude of 737NG Subsidies Per LCA and Subsidization Rates
(All Orders)3397

 737-600 737-700 737-800 737-900
Year
Per-LCA
Magnitude Rate
Per-LCA
Magnitude Rate
Per-LCA
Magnitude Rate
Per-LCA
Magnitude Rate
2004 n/a n/a $2,028,144 5.83% $2,607,614 6.27% $2,784,674 6.33%
2005 n/a n/a $1,908,956 6.06% $2,454,372 6.50% $2,621,027 6.55%
2006 $1,812,672 6.54% $2,076,333 6.48% $2,669,571 6.97% $2,850,838 6.97%
Average $1,812,672 6.54% $2,004,478 6.11% $2,577,186 6.57% $2,752,180 6.61%

3394 The subsidy programmes at issue and the corresponding "amounts" (i.e. annual benefit to Boeing's
LCA division) represented thereby are set forth in a ta ble prepared by the European Communities: Amount of
Subsidies to Boeing's LCA Division, Exhibit EC-17. The European Communities has also provided an exhibit
(Exhibit EC-1296) summarizing the various ways in which it derives the relevant "amounts" of each of the
disputed subsidy measures listed in Exhibit EC-17. The methodology used to calculate the "amount" of benefit
accrued by Boeing's LCA division varies according to the type of subsidy measure.
3395 International Trade Resources LLC, Calculating on a Per-Aircraft Basis the Magnitude of the
Subsidies Provided to US Large Civil Aircraft, 20 February 2007, Exhibit EC-13. ITR calculates the following
subsidy "magnitudes" over 2004, 2005 and 2006, respectively: for the 737NG: $2.38 million, $2.26 million and
$2.45 million per plane; for the 787: $4.51 million, $4.47 million, and $4.72 million per plane; and for the 777:
$5.56 million, $5.27 million and $5.54 million per plane; see European Communities' first written submission,
para. 1295.
3396 European Communities' response to question 275, para. 506; European Communities' comments on
United States' response to questions 387 and 388, para. 309.
3397 European Communities' first written submission, para. 1486, Figure 42; International Trade
Resources LLC, Calculating on a Per-Aircraft Basis the Magnitude of the Subsidies Provided to US Large Civil
Aircraft, 20 February 2007 , at para. 2, Table 11, and Table 12, Exhibit EC-13. Subsidization rates are based on
average price per family, per year, as derived by ITR.

BCI deleted, as indicated [***]

Magnitude of 787 Subsidies Per LCA and Subsidization Rates
(All Orders)3398

787-3 787-8 787-9
 Per-LCA
Magnitude Rate
Per-LCA
Magnitude Rate
Per-LCA
Magnitude Rate
2004 4,453,362 5.44% 4,453,362 4.99% 5,292,112 5.61%
2005 4,408,130 5.90% 4,408,130 5.41% 5,238,361 5.34%
2006 4,661,172 6.10% 4,661,172 5.62% 5,539,061 5.56%
Average 4,507,555 5.81% 4,507,555 5.33% 5,356,511 5.50%

Magnitude of 777 Subsidies Per LCA and Subsidization Rates
(All Orders)3399

 777-200ER/-200LR 777-300/-300ER
 Per-LCA
Magnitude Rate
Per-LCA
Magnitude Rate
2004 $4,904,773 3.95% $5,996,553 4.32%
2005 $4,652,768 4.14% $5,688,434 4.52%
2006 $5,120,987 4.48% $6,260,875 4.86%
Average $4,892,843 4.18% $5,981,947 4.56%

7.1618 The European Communities argues that the "mag nitudes" of the subsidies benefiting the
737NG, 787 and 777 families of LCA are large enough to have adversely affected the respective
Airbus LCA in these markets. The European Co mmunities presents diagrams purporting to depict
"counterfactual" analyses of A320, A330 and A340 pr icing in the absence of subsidization of the
737NG, 787 and 777, respectively, assuming that Boei ng uses all of its subsidy benefits to reduce
prices for all ordered aircraft by an identical amount. 3400 The European Communities argues that
factoring in the "magnitude" of the subsidies be nefiting the 737NG, 787 and 777 (whether viewed in
terms of all orders or only orde rs arising out of "competitive sales campaigns") shows the extent to
which the full use of these subsidies has the pot ential to cause significant price suppression of the
competing Airbus' LCA.3401 The European Communities provides similar "counterfactual" depictions
of the subsidy "magnitudes" on Airbus' [***] for the A320, A340 and A330.3402

3398 European Communities' first written submission, para. 1378, Figure 26. International Trade
Resources LLC, Calculating on a Per-Aircraft Basis the Magnitude of the Subsidies Provided to US Large Civil
Aircraft, 20 February 2007 , at para. 2, Table 11, and Table 12, Exhibit EC-13. No subsidies are allocated to
years in which there was no order of a certain model. S ubsidization rates are based on average price per family,
per year, as derived by ITR. The seating capacity for the 787-3 is assumed to be the same as the seating
capacity for the 787-8.
3399 European Communities' first written submission, para. 1584, Figure 57; International Trade
Resources LLC, Calculating on a Per-Aircraft Basis the Magnitude of the Subsidies Provided to US Large Civil
Aircraft, 20 February 2007 at para. 2, Table 11, and Table 12, Exhibit EC-13. Subsidization rates are based on
average price per family, per year, as derived by ITR.
3400 European Communities' first written submission, paras. 1396, 1501, 1597.
3401 European Communities' first written submission, para. 1503.
3402 European Communities' first written submission, paras. 1501, figure 47; 1401, figure 33; 1597,
figure 62. The [***]; Christian Scherer, Commercial Aspects of the Aircraft Business From the Perspective of a
Manufacturer, March 2007, Exhibit EC-11 (BCI), paras. 48-50.

BCI deleted, as indicated [***]

A320 Family Pricing and Counterfactual A320 Family Pricing Including
US Subsidization Rate for All 737NG Orders3403

Price Per Seat of A330 Family LCA in Constant Dollars, Compared to
Magnitude of 787 Subsidies, All Orders, 2004-20063404

A340 Family Pricing and Counterfactual A340 Family Pricing Including US
Subsidization Rate for All 777 Orders
3405

7.1619 The European Communities argues that the conditio ns of competition in the LCA market are
such that Boeing has the incentive to use the subsidies to lower its LCA prices in the three LCA
product markets, most particularly in so-ca lled "competitive" sales campaigns. The European
Communities argues that Boeing would use subsidies to lower its LCA prices in order to increase
sales, thereby reducing its marginal production cost s, and ultimately, increasing its profitability. The
European Communities identifies the following key characteristics of the LCA market which it argues
give rise to this pricing incentive: duopoly st ructure characterized by heavy price and quality
competition, increasing returns to scale, a steep learning curve, switching costs for customers,
heterogeneous products, customer specific configurations, high order volumes and small batch outputs
and the need for a continuous delivery stream.
3406
7.1620 The European Communities asserts that economi c theory indicates that the structure of
competition in the LCA industry gives rise to an inherent incentive for each duopolist to "out-price"
its rival, either through aggressive pricing or thro ugh additional investment in R&D (which it asserts
is economically equivalent to aggr essive "value-per-unit" pricing).3407 Moreover, lower LCA pricing
is argued to lead eventually to higher profits, b ecause lower prices imply higher market share, and

3403 European Communities' first written submission, para. 1501, Figure 47. Pricing information in this
figure is based on Airbus proprietary data. Estimates of the per-plane magnitude of the subsidies are by ITR.
3404 European Communities' first written submission, para. 1396, Figure 31. Pricing information in this
figure is based on Airbus proprietary data. Estimates of the per-plane magnitude of the subsidies are by ITR.
3405 European Communities' first written submission, para. 1597, Figure 62. Pricing information in this
figure is based on Airbus proprietary data. Estimates of the per-plane magnitude of the subsidies are by ITR.
3406 European Communities' comments on United States' response to question 391, para. 334.
3407 European Communities' comments on United States' response to question 391, para. 335, referring
to Professor Cabral's explanation that, as investment in additional R&D leads to higher quality aircraft, R&D
expenditures lower the effective price of LCA on a "per-value" unit basis, regardless of any increases in nominal
LCA prices. According to Professor Cabral, the "per-value-unit" measure of price is the relevant determinant of
market demand; Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University
and CEPR, March 2007, Exhibit EC-4, para. 72.

BCI deleted, as indicated [***]

higher market share implies faster movement down the learning curve (i.e. lower marginal production
costs) as well as the realization of economies of scale and scope. The European Communities argues
that, by the same token, one duop olist's increased mark et share will indirectly result in higher
marginal costs to its rival, leading to an effective medium to long-term pay off from lower pricing.3408
7.1621 The European Communities also presents a counterfactual analysis of Boeing's financial
condition and "economic viability" had it not receive d an alleged $19.1 billion in subsidies between
1989 and 2006. The European Communities argues that, based on an examination of historical
financial information pertaining to the "US LCA in dustry" (i.e. the LCA divisions of Boeing and,
prior to 1997, McDonnell Douglas), it is possible to show that Boeing's LCA pricing and product
development decisions were contingent on the recei pt of the alleged subsidies because, absent the
receipt of $19.1 billion in subsidies over the 1989 – 2006 period, the pricing and product development
behaviour of the U.S. LCA industry would have been unsustainable and financially irrational. The
European Communities argues, based on material re lating to the economic viability of Boeing's LCA
division absent $19.1 billion in subsidies, that but for the alleged subsidies, Boeing would have been
forced to behave differently (i.e. increase its LCA prices and develop new aircraft more slowly), or
face complete commercial failure.
3409
7.1622 The European Communities argues that significant price suppression of Airbus' LCA is
reflected in Boeing's pricing activity, including in six individual LCA sales campaigns described in
Annex E to its first written submission 3410, three LCA sales campaigns in Annex D to its first written
submission3411 and the 2004 Lufthansa campaign as described in Annex F to its first written
submission. In support of the European Communities' a llegations that Airbus lost a number of sales in
each of the three LCA product markets since 2002, the European Communities points to evidence
from five LCA sales campaigns set forth in Annex E to its first written submission 3412, 10 specific
LCA sales campaigns in Annex D to its first written submission 3413 and three LCA sales campaigns
described in Annex F to its first written submission. 3414 The European Communities alleges
displacement and impedance of exports of Airbus ' A320 family LCA from the third country markets
of Singapore, Indonesia and Japan in the period 20 04-2006. As regards the 200 – 300 seat wide-body
LCA product market, the European Communities alleg es displacement and impedance of imports into
the United States of the A330 and Original A350 (as evidenced by the alleged lost sales campaigns
involving Continental and Northwest) and displace ment and impedance of exports from the third
country markets of Japan, Canada, Australia, Icela nd, Ethiopia, Morocco and Kenya. In the 300 –

3408 European Communities' comments on United States' response to question 391, para. 335.
3409 European Communities' second written submission, paras. 715-732. The European Communities
also uses the alternative assessment to rebut one of th e principal criticisms of the model developed by Professor
Cabral, namely, his assumption that Boeing's access to cap ital markets is not unconstrained. According to the
European Communities, if Boeing can be said to enjoy unconstrained access to the capital markets, this too is an
effect of the alleged subsidies. Ha d Boeing not received the alleged subs idies, the capital markets would not
have permitted it to become so highly leveraged and it could not have invested in lower prices and development
of new aircraft in the manner in which it did. European Communities' second written submission, para. 760;
Luís M. B. Cabral, Response to the U.S. Criticisms of My Analysis of 'The impacts of Development Subsidies
Granted to Boeing', 14 November 2007, Exhibit EC-1182, para. 8.
3410 The sales campaigns in question are: easy Jet (2002); Air Berlin (2004); Iberia (2005); Aegean
(2005); Air Asia (2005); Hamburg International (2005).
3411 The sales campaigns in question are Internatio nal Lease Finance Corporation (2005), CIT Group
(2005) and Air Europa (2005).
3412 The sales campaigns are: Ryanair (2000 – 2002); Japan Airlines (2005); Singapore Airline Leasing
Enterprise (2005); Lion Air (2005) and DBA (2005).
3413 The sales campaigns are: Continental Airlines (2003-2005); Northwest Airlines (2003-2005); All
Nippon Airways (2003-2005); Japan Airlines (2003-2005); Air Canada (2005); Qantas (2004-2005); Icelandair
(2005-2006); Ethiopian Airlines (2004-2005); Royal Air Maroc (2004-2005); and Kenya Airways (2005-2006).
3414 The sales campaigns are: Singapore Airlines (2 004); Air New Zealand (2004) and Cathay Pacific
(2005).

BCI deleted, as indicated [***]

400 seat LCA product market, the European Commun ities alleges displacement and impedance of
exports from the third country markets of Singapore, New Zealand and Hong Kong.
7.1623 The European Communities also argues that the subsidies benefiting the 737NG, 787 and 777
families of LCA cause a threat of signi ficant price suppression with respect to future orders of,
respectively, Airbus' A320, A330 and A350XWB-800, and A350XWB-900/1000 families of LCA.3415
The European Communities argues th at the present and future subsid ies give rise to a significant
likelihood that Airbus will suffer from significant price suppression for the above-referenced families
of Airbus LCA, based on the same types of ev idence that support its present serious prejudice
arguments.3416
(ii) United States
7.1624 The United States disputes the European Communities' contentions that Boeing's product
development and pricing behaviour was affected by the alleged subsidies. The United States argues
that Boeing's product development strategies and pric ing were "market driven", that the subsidies in
question did not increase Boeing's non-operating cash flow, and that Boeing generated sufficient cash
to fund its pricing and product de velopment behaviour. In short, the United States contends that the
European Communities has failed to demonstrate that Boeing's commercial behaviour would have
been any different in the absence of the subsidies.
7.1625 Set forth below is a description of the United Stat es' rebuttal arguments as to (i) the effects of
the aeronautics R&D subsidies on Boeing's development of technologies in relation to the 787; and
(ii) the effects of the subsidies on Boeing's pricing behaviour with respect to the 737NG, 777 and 787.
Effects of the aeronautics R&D subsidies on Boeing's development of technologies in relation
to the 787
7.1626 The United States advances several arguments in response to the European Communities'
arguments that the aeronautics R&D subsidies gave rise to "knowledge effects" that were instrumental
in the design, manufacture and timing of the 787.
7.1627 First, the United States argues that the materials and basic manufacturing techniques
employed by Boeing on the 787 are commercially av ailable. The United States alleges that global
suppliers provide significant components for the 787 and in many cases currently supply those or
other components to Airbus.3417 The United States argues that Boeing's use of commercially available
materials and technologies purchased from a globa l supply network in order to develop and
manufacture the 787 underscores the point that there was in fact no "technology gap" that prevented
Airbus from making the same decision that Boeing made in 2004; namely, to launch a composite
aircraft.3418 According to the United States, the key strategic technology choice made by Boeing for
the 787 was its decision to work with suppliers to leverage their tec hnology and know-how. The
United States contends that this is what expanded Boeing's technology base; not the U.S.
Government.3419 In relation to each of the six technol ogy areas in which the European Communities
alleges that Boeing was assisted by aeronauti cs R&D subsidies, the United States describes the

3415 European Communities' first written submission, para. 1654.
3416 The European Communities contends that the su ppressed prices for the respective Airbus LCA
"provide a strong indication" that prices for those LCA will continue to be suppressed in the future.
3417 United States' first written submission, para. 931; In this regard, the United States notes that Airbus
and Boeing both use the following suppliers: Alenia, Goodrich, Vought, C&D Aerospace, GKN, Spirit, Fischer,
Fuji, Latecoere, Messier-Dowty, Fokker, SAAB, CAC, HAC and Hawker de Havilland ; United States' first
written submission, para. 931, footnote 1146.
3418 United States' first written submission, para. 937.
3419 United States' first written submission, para. 938.

BCI deleted, as indicated [***]

problem-solving and innovation on the part of Boeing and its suppliers that it alleges were the true
causes of the technological advancements on the 787.
7.1628 Second, in relation to the NASA aeronautics R& D subsidies, the United States argues that
any knowledge acquired by Boeing through its R&D c ontracts and agreements with NASA has been
widely disseminated throughout the aerospace industry and forms part of a general, globalized pool of
industry knowledge.3420 Moreover, the lessons learned from co mposites research, in particular, have
been disseminated well beyond the aerospace industr y, and have informed the development of
composite usages in many industries. The United St ates claims that this is one reason why Boeing
has looked to suppliers and part ners outside the aerospace industry for useful experience and
innovation.3421 The United States also argues that, alth ough the European Communities makes much
of the experience gained by Boeing employees engaged on NASA R&D projects, including those
where the technologies were not considered to be fe asible, any "lessons learned" by Boeing, including
pitfalls to avoid, were accessible by Airbus. 3422 In this regard, the United States notes that the report
by Airbus engineer, Dominik Wacht, cites to ma ny of these publicly available research results, and
that several of the NASA and DOD conferences to which Wacht refers were conferences which
Airbus not only attended, but in which it was an active participant.3423
7.1629 Third, the United States argues that the b asic research that Boeing conducted for NASA
cannot be compared to the degree of technological refinement, testing and investment required for
Boeing to develop the 787. In terms of the na ture of the NASA-funded R&D, the United States
argues that the nature of the research conducted under NASA contracts and agreements is either
technologically irrelevant or too early stage and b asic to have a commercial impact, and thus did not
accelerate Boeing's decision or ability to build the 787.
3424 The United States notes that NASA has
typically aimed at technology research from basic principle observation (TRL 1) through component
validation (TRL 6).
3425 Moreover, according to the United St ates, from the cost perspective, NASA
R&D funding does not even begin to approach th e level required for LCA development, and is
insignificant compared to the costs of aircraft development. 3426 The United States here compares the
$750 million, which it argues was the amount that Boeing received from NASA under the challenged
NASA R&D programmes from 1989 to 2006, with the investment costs associated with developing
and launching an aircraft like the 787, including making arrangements to take maximum advantage of
supplier expertise. In this regard, the Un ited States notes that Boeing's BCA division spent
$2.39 billion in research and development in 2006 alone; while it has been reported that Airbus
expects to spend $15.4 billion developing the A350XWB.3427
7.1630 Fourth, as regards the knowledge effects of alleged DOD aeronautics R&D subsidies, the
United States argues that DOD funded-research on airc raft is for military use, designed to fulfil
military functions, and gives rise to technologies that are not relevant to commercial civil aircraft,
such as stealth technology, flight at supersonic sp eeds, unmanned flight and the ability to land in
harsh environments.3428 In addition, the United States argues that commercial aircraft production has
more stringent certification/maintenance require ments and demands a higher efficiency/production
rate than required for military aircraft, meaning that production methods sufficient for military aircraft
cannot work for the significantly higher rates of lower-cost commercial aircraft demanded by

3420 United States' first written submission, para. 931.
3421 United States' first written submission, para. 947, footnote 1189.
3422 United States' first written submission, para. 947.
3423 United States' first written submission, para. 947 and footnote 1191.
3424 United States' first written submission, para. 932.
3425 United States' first written submission, para. 946.
3426 United States' first written submission, para. 943.
3427 United States' first written submission, para. 943 and footnote 1185.
3428 United States' first written submission, para. 948.

BCI deleted, as indicated [***]

commercial customers. 3429 The United States contends that, on the contrary, it is technology
development within the commercial sector that is proving useful to DOD, and that DOD
acknowledges that it relies heavily on industr y as a way of accessing innovative technology and
knowledge and sharing the costs and associated risks with the commercial sector.
7.1631 In any case, the United States argues that to the extent that DOD-funded technology has a
theoretical civil application, it cannot reasonably be used commercially because of U.S. laws and
regulations which control the export of all defense articles and services. 3430 The United States here
refers to the ITAR which prevents any technologi es developed for a military purpose (including items
designed, developed, modified or configured for m ilitary applications, regardless of the intended end-
use of the item) from being exported without a license or applicable exemption. 3431 The United States
contends that, because of their military nature, technologies and products developed by Boeing under
DOD contracts and agreements are generally subject to the ITAR and require a licence, which is not a
commercially feasible proposition for technologies inco rporated in LCA which are to be sold to
commercial customers around the world. This, coupled with the difficulty of determining the heritage
of every item on a commercial aircraft, and the severe financial and commercial consequences of
inadvertently violating the ITAR, led Boeing to decl are the 787 to be "ITAR-free" and to ensure that
only technologies with a documented civil origin were used on the 787. This requirement also applies
to Boeing's suppliers, all of whom must certify th at all items and technologies supplied are of non-
military origin. According to the United States, the consequence is that none of the alleged DOD-
funded technologies are on the 787.3432
7.1632 Fifth, the United States notes that although th e European Communities has sought to support
its "technology effects" causation theory by pointi ng to similarities between research conducted under
NASA and DOD programmes and technology applied to the 787, for the bulk of the challenged
programmes, the European Commun ities "does not even find a semblance of a connection to the
787".3433 The United States argues that, even as regards the NASA R&D programme that the
European Communities argues had the clearest re levance to the 787 – the Advanced Technology
Composites Aircraft Structures (ATCAS) programme – most of the technologies studied under
ATCAS are fundamentally different to the technologies used on the 787.3434
7.1633 Sixth, the United States contends that knowle dge, experience and confidence are not the
"benefit" conferred by an R&D subsidy, but rath er are the natural result of engaging in R&D. 3435 In
this regard, the United States argues that the European Communities' theory of "technological benefit"
goes beyond the boundaries of Article 1.1(b) of the SCM Agreement. 3436 The architecture of the
definition of a subsidy in Article 1.1 is such that the extent of the financial contribution that is found
to exist sets the upper bounds of any benefit conf erred thereby. The United States considers any
knowledge, experience and confidence that Boeing deri ves from doing the research to be the result of
undertaking the research with the funds, goods and services provided by the government, just as it
would be the result of undertaking research with the same funds, goods and services received from the
market. Such knowledge, experience and confidence is therefore not an element of the financial

3429 United States' first written submission, para. 949. In this respect, the United States contends that
using materials developed for military aircraft would require completely redesigning their structural properties
to conform to commercial requirements, including safety, comfort and reparability.
3430 United States' first written submission, para. 951.
3431 United States' first written submission, paras. 951-952.
3432 United States' first written submission, para. 953.
3433 United States' confidential oral statement at the second meeting with the Panel, para. 22.
3434 United States' confidential oral statement at the second meeting with the Panel, para. 24.
3435 United States' response to question 275, para. 484.
3436 United States' comments on European Communities' response to question 373(b), para. 251.

BCI deleted, as indicated [***]

contribution and cannot be part of any benefit thereby conferred. 3437 The United States does not
dispute that Boeing gained specific knowledge, experience and confidence from performing R&D in
collaboration with NASA and DOD engineers. Howe ver, it argues that the European Communities
has failed to demonstrate that this knowledge, expe rience and confidence is a term of the financial
contribution that is more favourable than is available in the market.
7.1634 Finally, the United States argues that the Eu ropean Communities' argument that, through the
aeronautics R&D subsidies, the U.S. Government eff ectively provides Boeing with extra cash that it
did not otherwise have to spend to perform the resear ch is at odds with its argument that the result of
the government research support is knowledge that Boeing would not otherwise have had.
3438 In other
words, the United States argues that it is logically impossible to demonstrate on the basis of a single
counterfactual that an R&D subsidy has both "price effects" and "technology effects". According to
the United States, a counterfactual analysis of th e position absent the receipt by Boeing of the R&D
subsidies would be that, but for the R&D subsidies, Boeing would have been required to spend
additional funds to conduct the R&D that was financed by the subsidies. In this counterfactual world,
in which Boeing funded the R&D that was funded by the subsidies, Boeing would still have derived
the technologies, knowledge, experience and confidence from the R&D work.
Effects of the subsidies on Boeing's pricing behaviour with respect to the 737NG, 777 and
787
7.1635 The United States argues that the European Comm unities has failed to demonstrate that the
bulk of the subsidies at issue in this dispute is of a nature that would aff ect the product development
or pricing decisions of Boeing. In this regard , the United States disputes the European Communities'
argument that the "nature" of the NASA, DOD and DOC "contractual research payments" to Boeing
is such that they represent additional operating cash flow which Boeing is able to invest in lower
prices and additional R&D to lower its costs of r esearch, development, production and sale of LCA.
The R&D programmes that ar e said to involve contractual resear ch payments to Boeing had no effect
on Boeing's non-operating cash flow, and there is no evidence that Boeing's commercial airplanes
division would have spent any more for civil aircra ft research in the absence of the subsidies.
Moreover, even if Boeing would have incurred increased costs, the European Communities has
provided no evidence that Boeing's prices would have differed. 3439 The United States also considers
that the European Communities' argument that mo st of the subsidies at issue provide non-operating
cash flow in fact means that subsidies within th at general category are unlikely to affect Boeing's
product development or pricing decisions. 3440 In this regard, a central argument made by the

3437 United States' comments on European Communities' response to question 373(b), para. 256. The
United States argues that the European Communities is essentially asking the Panel to (i) calculate the benefit of
funds, goods and services provided to Boeing according to Articles 1.1(b) and 14 of the SCM Agreement based
on the adequacy of the remuneration; and then (ii) to double count it, or multiply it by a measure of what Boeing
learned as a result of performing the challenged research measures. Yet, when NASA provides the services of
employees to outside entities, including Boeing, the "cooperation" with those employees is the service provided
and the R&D contracts and agreemen ts between NASA and Boeing show that collaboration between the
purchaser and supplier of research services is a "term" of such transactions consistent with terms available in the
market. The United States argues ther efore that Boeing is not "better off" as a result of working with NASA
engineers than it would be by performing comparable work with comparable engi neers in the marketplace;
United States' comments on European Communities' response to question 373(b), para. 255.
3438 United States' comments on European Communities' response to question 375, para. 264;
United States' comments on European Communities' response to question 275, para. 485.
3439 United States' first written submission, para. 959.
3440 United States' response to question 370, para 263: "...characterizing an alleged subsidy to a
company with unfettered access to capital markets as 'nonoperating cash flow' means that the alleged subsidy is
unlikely to affect the reci pient's product development or pricing decisions; free cash to a company that has
access to capital markets to finance investment s it considers worthwhile is, by definition, not supply creating or

BCI deleted, as indicated [***]

United States regarding the nature of an alleged subsi dy in an analysis of serious prejudice is that the
effects of a subsidy depend upon whether or not the subsidy creates supply or maintains supply that
would not otherwise exist. 3441 The United States asserts that whether a subsidy is supply-creating or
supply-maintaining depends upon whether the subsidy is "tied to" the development, production or sale
of a particular product. If a subsidy that is not tied to the development, production or sale of a
particular product is provided to a company that enjoys unfettered access to capital markets, it is
unlikely to affect product and pricing decisions, unless the subsidy is such that, absent the subsidy, the
company would not be economically viable.
7.1636 The United States argues that Professor Cabral's analysis of the effects of the subsidies on
Boeing's LCA prices, which it regards as underpinni ng the European Communities' "price effects"
theory, in addition to being based on the European Communities' in flated estimates of the amounts of
subsidies received by Boeing's LCA division, rests on assumptions that are contrary to fact and on
dubious methodologies that are at odds with sound economic practice.
3442 The United States also
argues that the European Communities' general theo ry as to how the subsidies affected Boeing's LCA
pricing behaviour is inconsistent with the empirical evidence con cerning pricing activities of Airbus
and Boeing in the LCA markets between 2001 and 20 06. In this regard, the evidence shows that
Boeing's market share losses to Airbus were greatest in the period when the alleged "price effects" of
the subsidies calculated by Professor Cabral were supposedly at their highest, thus disproving the
European Communities' claim of a link between the subsidies and Boeing's pricing. 3443 According to
the European Communities' theory as to how the subsidies would affect Boeing's pricing behaviour,
Boeing should have been led to price aggressively wh en it was losing market share (i.e. in the period
2000 – 2004). However, the ad valorem levels of the total alleged "price effects" calculated by
Professor Cabral were declining through the period when, according to the United States, Airbus'
price undercutting compelled Boeing to respond.
7.1637 The United States disputes the European Co mmunities' calculation of the amounts of
subsidies received by Boeing's LCA division betw een 1989 and 2006. The United States argues that
the value of any subsidy benefit to Boeing's LCA division is, by any reasonable measure, a tiny
fraction of the amount asserted by the European Comm unities, and is also insignificant relative to the
value of the aircraft on which the alleged subsidies have allegedly been paid.3444
7.1638 The United States criticizes the European Comm unities' allocation of the subsidy amount
across the various Boeing LCA models to arrive at per-LCA subsidy "magnitudes" and the derivation
of alleged ad valorem rates of subsidization, both with resp ect to the relevance and appropriateness of
such an allocation methodology in the present context, as well as the bases on which various subsidies

supply maintaining"; see also, United States' response to question 387, para 278: "In this connection, even
accepting the EC's characterization of th e alleged nonrecurring subsidies as the equivalent of free cash to BCA,
the United States has shown that, by its nature, such fr ee cash (i) is untied to the supply or pricing of any
particular Boeing large civil aircraft models, and (ii) would not affect the investment or pricing decisions of a
company like Boeing, which does not face significant constraints in its access to capital markets."
3441 United States' response to question 391, para. 30 4: "the critical part of the U.S. adverse effects
argument is that the most important issue regarding the nature of an alleged subsidy is whether it is supply-
creating or supply-maintaining"; United States' response to question 391, para. 306: "The key point of the U.S.
argument is that because, with th e exception of certain low-value tax programs, the alleged subsidies about
which the EC complains are not tied to development, production or sale of any large civil aircraft, they are not
in any sense supply-creating and thus had no appreciable impact on market pricing."
3442 United States' first written submission, para. 954.
3443 United States' first written submission, para. 713.
3444 United States' first written submission, paras. 810-812; United States' second written submission, at
paras. 171-173.

BCI deleted, as indicated [***]

were allocated, and the ad valorem rates were calculated. 3445 The United States' key criticisms of the
European Communities' subsidy "magnitude" allocati ons are, first, that they are not required or
justified under the SCM Agreement, and are incons istent with the European Communities' arguments
about how the subsidies function. Moreover, the Eu ropean Communities' effort to allocate subsidy
amounts to specific LCA is arbitrary and contradi ctory given the European Communities' arguments
that the vast majority of the alleged subsidies are subsidies that increase Boeing's non-operating cash
flow, and are therefore not tied to the development, production or sale of LCA. 3446 Second, the
United States notes that in US – Upland Cotton , the panel rejected the United States' argument that it
was under an obligation to precisely quantify the subsid ies at issue in its serious prejudice analysis
under Part III of the SCM Agreement. 3447 There is similarly no textual basis in the SCM Agreement
for the European Communities' approach of calculating an ad valorem rate of subsidization for each
type of Boeing aircraft. 3448 Third, the United States questions the relevance of the magnitude
calculation, arguing that a simpler and more compre hensible approach would have been to compare
the annual subsidy values with the order values for all Boeing LCA in each year. 3449 Moreover, in
making the allegation that the magnitude of the subs idies is, of itself, sufficient to demonstrate the
causal link between the subsidies and the adverse effect s, and in the light of its failure otherwise to
show that Boeing's pricing would have been any diff erent without the alleged subsidies, the European
Communities has placed the quantification of the allege d subsidies at the center of its adverse effects
case.3450 According to the United States, if the Panel were to agree that a large portion of the value of
the European Communities' magnitude calculations is invalid, then "nothing remains of this key
element of the European Communities' adverse ef fects claim, and the Panel should reject the
European Communities' adverse effects claim".3451
7.1639 As regards the conditions of competition in the LCA markets, and more particularly, the
market incentives and other factors that influen ce Boeing's LCA pricing decisions, the United States
submits that Boeing's LCA pricing decisions seek the optimal or "profit-maximizing" price and that,
in general terms, Boeing sets it prices at th e maximum level that the market will bear.
 3452 In setting
its LCA prices, Boeing takes into account factors such as: (i) the pricing of Airbus, its competitor; (ii)
the strength and elasticity of demand; (iii) Boeing's expectations regarding fu ture market conditions;
(iv) Boeing's strategic interests in particular sales campaigns; (v) the implications of a price reduction
for future sales and for the residual values of aircra ft previously sold; and (vi) changes in Boeing's
product-specific fixed and variable costs, as well as in its general costs. 3453 The United States asserts

3445 United States' first written submission, paras. 813-822; United States' second written submission, at
paras. 174-177.
3446 United States' first written submission, para. 814; United States' response to question 281, para.
478.
3447 United States' first written submi ssion, para. 813; Panel Report, US – Upland Cotton , at
para. 7.1179.
3448 United States' first written submission, para . 813. According to the United States, the
European Communities' CVD-type analysis assumes, ra ther than proves, its cause and effect conclusion;
United States' comments on European Communities' response to question 370, para. 216.
3449 United States' first written submission, para. 815. The United States does this with respect to
FSC/ETI ("the only programme found to be a specific subsidy"), and on that basis, argues that the subsidies
have been small and declining in relation to the value of orders since 2000.
3450 United States' comments on the European Communities' response to question 78, para. 269 at
footnote 339. The United States contends that, although a complaining party in an adverse effects case is not
required to precisely quantify the amount of the subsid y, the European Communities has organized its case in a
way that requires it to demonstrate that it has accurately calculated the amount and magnitude of the alleged
subsidies.
3451 United States' comments on European Communities' response to question 78, para. 268;
United States' comments on European Communities' response to question 83, para. 281.
3452 United States' response to question 86, para. 299.
3453 United States' response to question 298, para. 522.

BCI deleted, as indicated [***]

that Boeing's decision to [***] in 2005 – 2006 was compelled by market conditions in the form of
steady market share losses to a co mpetitor that priced aggressively, and was unrelated to the
subsidies.3454
7.1640 The United States argues that, assuming arguendo that the alleged subsidies affect Boeing's
non-operating cash flow, the most logical way of assessing the significance of those subsidies is to
compare them with Boeing's total non-operating expe nditures (rather than revenues) in each year. 3455
In this regard, the United States notes that since 1998, Boeing has effected share repurchases in excess
of $14 billion. 3456 The $14 billion in capital returned to shareholders represents funds for which
Boeing did not consider that there were more a ttractive investment opportunities. Based on the
European Communities' own theory of causation, th e proper counterfactual conclusion is that, in the
absence of the alleged subsidies, Boeing would have followed the same pricing practices and pursued
the same research objectives that it did, but would have reduced the extent of its share repurchases.3457
7.1641 The United States also rejects the European Communities' efforts to demonstrate that Boeing's
LCA division would not have been "economically viable" had it maintained the same pricing and
product development behaviour in the absence of the subsidies. During the period under
consideration, Boeing had excess operating cash flow af ter it had spent all of the money that it could
economically justify on aircraft investments (includi ng research). The United States presents its own
analyses of financial data for Boeing's BCA division, which it argues demonstrates that, "even
accepting the European Communities' fantastical ma gnitude calculations, Boeing's profits and cash
flow were more than enough to absorb the portio ns of the Defense Department and NASA budgets
that the European Communities wants Boeing to bear".
3458 Moreover, Boeing's internal funds and
access to capital markets were more than sufficien t to enable Boeing to develop on its own any
technology that the European Communities alleges to have been created with government funds.3459
7.1642 The United States also refers to the facts of th e specific sales campaigns in order to rebut the
European Communities' allegations concerning the incentives that Boeing has to use subsidies to price
aggressively. Specifically, the United States argues that: (i) Boeing was the incumbent supplier in
most of the campaigns and therefore had no incentive to lower its prices, but a strong incentive to
respond to Airbus' pricing to retain its customers; (ii) Airbus "systematically" undercut Boeing's
prices in order to "flip" the Boeing customer, wh ile the European Communities presents no evidence
that Boeing undercut Airbus' price; (iii) once Boei ng decided to respond to Airbus' lower pricing (in
2005 and 2006) it recovered market sh are and profitability, thus demonstrating that its decision to
lower its prices was economically rational 3460; and (iv) although Boeing did share some of its
productivity gains in 2005 and 2006 with its customers (i.e. used cost savings to lower its prices and
increase market share), it did so while simultane ously increasing its operating margins, suggesting a
temporal link between productivity gains (or co sts savings), lower LCA prices and increased
operating margins.3461 By contrast, the United States notes that the average annual subsidy amounts
over this period (based on the Eur opean Communities' estimates) we re 11 per cent lower than during
2001 to 2003.

3454 United States' first written submission, HSBI Campaign Annex, para. 10.
3455 The United States argues, therefore, that the Eu ropean Communities use of Boeing's "net earnings"
figures is inconsistent with its causation theory; i.e. that the alleged subsidies have a cash flow effect;
United States' second written submission, para. 177.
3456 United States' second written submission, para. 176.
3457 United States' second written submission, para. 176.
3458 United States' comments on European Communities' response to question 78, para. 270.
3459 United States' first written submission, para. 961.
3460 United States' comments on European Communities' response to question 78, para. 271.
3461 United States' comments on European Communities' response to question 84, paras. 77-78. The
operating margins of Boeing's commercial aircraft division increased from 3.58 per cent to 6.32 per cent to
9.60 per cent in 2004, 2005 and 2006, respectively.

BCI deleted, as indicated [***]

(iii) Third parties
Australia
7.1643 Australia considers that it may be relevant to assess the effects of subsidies in terms of the
cumulative effects of certain subsidies, as has been advocated by the European Communities.
However, in doing so, Australia is concerned th at subsidies should only be aggregated where
appropriate for an adverse effects claim and that car e should be taken to ensure that an appropriate
nexus exists between those subsidies, based on the nature of the subsidies, to warrant their
aggregation.3462
7.1644 Australia considers that it is appropriate for the Panel to consider the nature of the subsidy in
assessing the "effect of the subsidy" under Articles 5 a nd 6.3 and, in this regard, that it is appropriate
to allocate over time the alleged non-recurri ng subsidies in order to assess their effects. 3463 Australia
recalls that the April 1985 adopted report of the GATT Committee on Subsidies and Countervailing
Measures, entitled Guidelines on Amortization and Depr eciation, recognized that "{c}ertain subsidies
exist which should be spread over time". 3464 Further, Australia notes that the Appellate Body in US –
Lead and Bismuth II and US – Countervailing Measures on Certain EC Products considered that "an
investigating authority may presume that a benefit continues to flow from an untied, non-recurring
'financial contribution'", so long as the presumption was not irrebuttable. 3465 In addition, the
implementation panel in US – Countervailing Measures on Certain EC Products examined whether a
benefit continues to exist and whether subsidizati on exists and is likely to continue or recur,
specifically citing as relevant context Articles 10, 14, 19.4, 21.1and 21.3 of the SCM Agreement and
Article VI:3 of GATT 1994.3466 Australia also considers that the principle that a non-recurring subsidy
may be allocated over time is also supported by the decision of the Appellate Body in US – Upland
Cotton.3467
7.1645 Australia agrees with Brazil that the causation analysis should not depend on whether alleged
subsidies can be traced through a subsidy recipient's cash flow statements. 3468 While a subsidy may
result in lowering a recipient's costs or increasing its revenue, the SCM Agreement does not require
such an analysis, either in terms of the existence of a subsidy under Article 1 or in terms of the effect
of the subsidy under Article 6.3. 3469 Moreover, the analysis of serious prejudice under Article 5 and
Article 6.3 relates to the interests of another Memb er as assessed by the effects of the subsidy in the
market. Therefore, it is the effects enumerated in Article 6.3 (for example, price undercutting,

3463 Australia notes that, although Article 6.1(a) of the SCM Agreement has lapsed, the Report by the
Informal Group of Experts to the Committee on Subsidies and Countervailing Measures, in clarifying issues for
the purposes of Article 6.1(a), recognized that some subsidies need to be a llocated over time depending on their
nature and that continuing benefits may be conferred; Australia's response to questions, 14 April 2008, referring
to recommendations contained in the Report (G/SCM/W/415/Rev.2) which, Australia notes, have not been
adopted by the Committee.
3464 Australia's response to question 17, 14 April 2008. GATT Committee on Subsidies and
Countervailing Measures, Guidelines on Amortization and Depreciation, (SCM/64, BISD 32S/154, para. 1).
3465 Australia's response to question 17, 14 April 2008, referring to Appellate Body Report, US – Lead
and Bismuth II , para 62; Appellate Body Report, US – Countervailing Measures on Certain EC Products ,
para. 84.
3466 Australia's response to question 17, 14 April 2008, referring to US – Countervailing Measures on
Certain EC Products (Article 21.5 - EC), in particular paras. 7.165 to 7.171.
3467 Australia's response to question 17, 14 April 2008, referring to Appellate Body Report, US –
Upland Cotton, para. 475.
3468 Australia's response to question 20, 14 April 20 08, referring to Brazil's written submission, at
3469 Australia's response to question 20, 14 April 2008.

BCI deleted, as indicated [***]

displacement of imports), and not other factors, th at should form the basis of the Panel's causation
determination.3470
Brazil
7.1646 Brazil disagrees with both the European Comm unities' and the United States' approaches
regarding the cumulation of subsidies. 3471 In Brazil's view, in making its findings under Article 6.3(c),
the Panel should cumulate the challenged subsidies on the basis of whether they would result in prices
lower than those that would have been charged ot herwise (the particular "effects-related variable"
under consideration). As a first step in this an alysis, the Panel should determine whether, on account
of their structure, design, and operation, the ch allenged subsidies tend to press prices downwards by,
for example, reducing costs (whether they be r esearch and development costs, production costs,
financing costs, selling costs, or any other rele vant costs), by freeing up cash flow, or through any
other mechanism. In conducting this test, the Pane l should bear in mind that there may be cases in
which the effects involved overlap. 3472 Brazil also considers that, if the Panel cumulates subsidies in
making its findings on price suppression, it should, in order to maintain consistency, cumulate
subsidies in making its findings on displacement/impedance and lost sales.3473
7.1647 Brazil argues that, if the calculation of the amount of subsidization is not necessary in serious
prejudice disputes, the "allocation" or "amortizati on" over time of alleged non-recurring subsidies is
not required to demonstrate whether the "effect" of the subsidies is serious prejudice within the
meaning of Articles 5 and 6.3. 3474 Brazil submits that the allocation of the "benefit" resulting from a
financial contribution over a particular period may not be a meaningful way of assessing the "effect"
of a subsidy for purposes of a serious prejudice dis pute and that the relevant allocation period need
not necessarily be coincident in time with the effect of a subsidy. Brazil argues that in conducting its
serious prejudice analysis, the Panel should cons ider the conditions of competition in the LCA
market.3475 Boeing and Airbus are the only surviving manufacturers of LCA, and a sale by one is a
sale lost to the other. Under these circumstances, adverse effects caused by subsidies are very
transparent, with gains to one company corresponding directly to losses by the other. 3476
7.1648 Brazil further submits that the LCA market is characterized by a small group of customers
that place large but infrequent orders involving deliver ies of multiple aircraft over extended periods.
The useful lives of LCA are also lengthy, extending for up to 20 years or more. This means that, after
making a purchase, a customer may not revisit the market to make new purchases for many years.
Therefore, subsidies that distort a customer's purch asing decisions have adverse effects that are far
greater than in most other sectors. 3477 Brazil also argues that when an airline decides to purchase a
subsidized aircraft model within an aircraft fam ily, it will very likely make follow-up orders of the
same aircraft model, and an airline that purch ases an aircraft model from one producer's aircraft
family is more likely to order additional aircraft models from the same family. 3478 Consequently, past

3470 Australia's response to question 20, 14 April 2008.
3474 Brazil's response to question 17, 14 April 2008, para. 15.
3478 Moreover, according to Brazil, an airline that operates aircraft from one manufacturer's family is
also more likely to purchase aircraft from a different family produced by the same manufacturer. The reasons
include commonality of spare parts, pilot and crew traini ng, special tooling, and ground support equipment, and
the fact that airlines tend to orde r large numbers of aircraft at the same time and to place such orders
infrequently; Brazil's written submission, para. 27.

BCI deleted, as indicated [***]

subsidies not only distort the market when the airc raft benefiting from the subsidies are delivered, but
they are also likely to affect future aircraft sales.3479
7.1649 Finally, Brazil argues that the nature of ai rcraft production is such that the continued
development of new aircraft and technology is necessary to remain competitive, and the launch of
new aircraft requires enormous initial investments in research and development, design, engineering,
and testing. To recoup this investment and to generate economies of scale in production, a producer
must sell a large number of aircraft. Subsidies, including research and development subsidies,
significantly distort competition in the LCA market because they enable a producer to reduce the costs
and risks of developing and launching new aircraft, di vert internal funds to other uses, and otherwise
make decisions that are inconsistent with normal commercial considerations.3480
7.1650 Brazil submits that, although the European Communities has decided to present its case by
using complex economic models and by tracing cash fl ows in Boeing's financial statements, the Panel
should focus in making its findings on a straightfo rward causation analysis consistent with that
adopted by the original panel and the implementation panel in US - Upland Cotton .3481 According to
Brazil, subsidies may cause adverse price effects by freeing up cash flow of the subsidy recipient for
use in lowering prices. The evidence and methodologi es for demonstrating this "cash flow" effect,
however, are not specified in the text of the SCM Ag reement, and the fact that the subsidies cannot be
explicitly traced through the subsidy recipient's cash flow financial statements should not be
determinative of causation. Brazil therefore submits that the Panel's findings regarding the European
Communities' claims of adverse price effects not be made contingent on whether the evidence of
additional cash flow is found in the financial data of the subsidized producer.3482
7.1651 Brazil also considers that the Panel should reject the position that a Member can avoid a
finding of serious prejudice by characterizing the alleged subsidies as add itional cash flow, and by
alleging that the "additional cash flow" was directed to uses other than investment in firm value (such
as the payment of dividends or repurchase of shares) on the basis of simple correlations between the
payment of dividends, for example, and the "additional cash flow". 3483 Even if not used to make
investments to increase a firm's value, subsidies ma y be directed to uses that improve a company's
financial situation, with the potential for trade- distorting effects in the market. The approach
apparently endorsed by the parties in this dispute, to the extent that it neglects this possibility, would
open a loophole in the SCM Agreement and does not reflect an appropriate causation analysis.3484
7.1652 Brazil disputes the logic of the U.S. argument th at Boeing establishes the price of its aircraft
based upon what the LCA market would bear, which s uggests, in turn, that Boeing's prices would not

3479 Brazil argues for example, that an airline that buys a subsidized Boeing aircraft is less likely to buy
an aircraft from Airbus in the future, thus magnifying and prolonging the adverse effects of the subsidies.
3483 Brazil's oral statement, para. 24. According to Brazil, even if the subsidies consisted of cash or
cash-equivalents and were simply redirected to shareholders as dividend payments, these increased dividend
payments would send a signal to financial markets of improvement in the company's financial situation and
could lower its cost of capital needed for investment. Similarly, if all subsidies were used to reduce a company's
debt, which the United States also alleges, this would directly lower a recipient's financial costs and would
represent a significant improvement in the company's financial situation at the government's expense. Brazil
submits that, when subsidies are used to improve a co mpany's financial situation, they may enable such
company to take actions that have trade-distorting effect s and that the market would otherwise not allow, such
as maintaining inefficient production capacity; Brazil's oral statement, para. 19.

BCI deleted, as indicated [***]

have been any different absent the challenged subsidies. 3485 According to Brazil, as long as it is
demonstrated that the challenged subsidies can potentially depress or suppress world prices, world
prices may be lower or not as high as they would have been otherwise. In this context, Brazil
considers that arguing that subsidization has no serio us prejudice effects in terms of prices where the
recipient firm sets its prices at the going world price neglects the obvious point that, absent
subsidization, world prices woul d have been different and the prices charged by the recipient
company would also have been different.
3486
Japan
7.1653 Japan submits that it is not aware of any textual requirement in the SCM Agreement to
allocate a non-recurring subsidy. Japan argues that if allocation were always required, it would lead
to an unreasonable result that even a benefit wh ich does not exist is always required to be
allocated.3487
(b) Preliminary considerations relating to the Pa nel's evaluation of the European Communities'
claim under Articles 5(c) and 6.3(a), (b) and (c) of the SCM Agreement.
(i) Interpretational and methodological issues
7.1654 Article 5(c) of the SCM Agreement provides:
" No Member should cause, through the use of any subsidy referred to in paragraphs
1 and 2 of Article 1, adverse effects to the interests of other Members, i.e.:

 (c) serious prejudice to the interests of another Member".
3488
7.1655 Article 6.3 of the SCM Agreement reads as follows:
"6.3 Serious prejudice in the sense of paragraph (c) of Article 5 may arise in any case
where one or several of the following apply:
(a) the effect of the subsidy is to disp lace or impede the imports of a like product
of another Member into the market of the subsidizing Member;
(b) the effect of the subsidy is to displace or impede the exports of a like product
of another Member from a third country market;
(c) the effect of the subsidy is a signi ficant price undercutting by the subsidized
product as compared with the price of a like product of another Member in the same
market or significant price suppression, price depression or lost sales in the same
market;
(d) the effect of the subsidy is an in crease in the world market share of the
subsidizing Member in a particular subsidized primary product or commodity
 as
compared to the average share it had during the previous period of three years and

3487 Japan's response to question 17, 14 April 2008.
3488 Footnotes omitted.

BCI deleted, as indicated [***]

this increase follows a consistent trend over a period when subsidies have been
granted".3489
7.1656 Article 6.3 of the SCM Agreement provides that serious prejudice within the meaning of
Article 5(c) may arise where "the effect of the subsidy" is one of the phenomena described in
Article 6.3(a) through (d). Article 6.3, howev er, does not provide extensive guidance as to the
sequence of steps to be followed in assessing whethe r the effect of the subsidy is displacement or
impedance of imports, displacement or impedance of exports, or significant price suppression or lost
sales, within the meanings of Articles 6.3(a), (b) a nd (c), respectively. Although Article 6.3 does not
use the word "cause", the Panel considers that the sub-paragra phs of Article 6.3 require the
establishment of a causal link between the subsidies in question and the particular form of serious
prejudice.
3490 This interpretation of Article 6.3 accords with the ordinary meaning of the terms "arise"
and "effect" 3491, and finds contextual support in Article 5(c) and Part V of the SCM Agreement.
Article 5(c) provides that no Member should cause serious prejudice to the interests of another
Member through the use of any subsidy. With regard to Part V, the Panel cons iders that the fact that
the more elaborate and precise "cau sation" and "non-attribution" language found in its trade remedy
provisions has not been expressly prescribed for an examination of serious prejudice under
Articles 5(c) and 6.3 of Part III of the SCM Agreem ent suggests that panels have a certain degree of
discretion in selecting an appropriate methodology fo r determining whether the "effect" of a subsidy
is any of the phenomena set forth in Articles 6.3(a) through (d).3492
7.1657 The European Communities' serious prejudice argum ents focus on the effects of the subsidies
on Airbus' prices and sales in the three LCA product markets, through their effects on Boeing's LCA
prices and product offerings. Indeed, the parties ag ree that determining whether the effect of the
subsidies at issue in the dispute is serious prej udice necessitates an economic analysis of how the
subsidies affected Boeing's commercial behaviour with respect to the pricing and product
development of particular LCA. 3493 Both parties express their view s on this issue in the form of
counterfactual conditional propositions: th e European Commun ities asserts that, but for the alleged
subsidies, Boeing's commercial behaviour with re spect to the pricing and product development of
certain LCA would necessarily have been different. 3494 The United States asserts that Boeing's

3489 Footnote omitted.
3490 See also, Panel Report, US – Upland Cotton , para. 7.1341; Appellate Body Report, US – Upland
Cotton (Article 21.5 – Brazil), para. 372.
3491 The ordinary meaning of "arise" in this context is "come into existence or notice; present itself,
occur", Shorter Oxford English Dictionary, L. Brown (ed.) (Clarendon Press, 2002), Vol. I, p. 116. The
ordinary meaning of "effect" in this context is "s omething accomplished, caused or produced; a result, a
consequence", Shorter Oxford English Dictionary, L. Brown (ed.) (Clarendon Press, 2002), Vol. I, p. 793.
3492 Appellate Body Report, US – Upland Cotton , para. 436. The Appellate Body in US – Upland
Cotton (Article 21.5 – Brazil ), in discussing the approach to causation and non-attribution taken by the
compliance panel in that dispute (in th e context of a claim of si gnificant price suppression), noted that "a panel
has a certain degree of discretion in selecting an appropriate methodology for determining whether the 'effect' of
a subsidy is significant price suppression"; Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil) ,
3493 See, e.g. European Communities' second written submission, para. 646:
"The European Communities agrees with the United States that, in order to cause adverse effects within
the meaning of Articles 5 and 6.3, subsidies must cause a change in the commercial behaviour of their
beneficiaries to an extent that results in adverse effects ("change in commercial behaviour"). Contrary to the US
assertion, however, compelling and cr edible evidence demonstrates that, but for the US subsidies, Boeing's
commercial behaviour today, like in the past, would be very different, in ways that are recognized as causing
adverse effects under Articles 5 and 6.3." Footnote omitted.
3494 European Communities' second written submission, paras. 646, 651.

BCI deleted, as indicated [***]

commercial behaviour with respect to the pricing and product development of the LCA at issue would
not have been different in the absence of the subsidies.3495
7.1658 The European Communities indicates that it has adopted a "unitary" approach to establishing
causation, under which prices, sales, market share and other indicators of competitive harm are not
assessed in isolation, but rather as part of an integrated analysis of causation. 3496 The European
Communities explains that, under this approach, which it alleges is the same approach to causation as
that adopted by the implementation panel in US – Upland Cotton , the existence of the particular
market effect that is alleged to constitute serious prejudice is not separated from the analysis of the
causal relationship between that serious prejudice effect and the subsidies at issue. 3497 T h e
United States does not object to the Panel's use of a " unitary" or "integrated" approach to determining
whether the effects of the subsidies are displacement or impedance, significant lost sales or significant
price suppression.3498 However, the United States argues that whatever approach it adopts, the Panel
needs to ensure that other factors that may have affected sales volume and prices, and thus the causal
link between the subsidies and the serious prejudice factors, are taken into account.3499
7.1659 We recall that in US – Upland Cotton (Article 21.5 – Brazil ), the Appellate Body explained
that an analysis of price suppression is counterf actual in nature, and that the adoption by the
implementation panel in that dispute of a "but for" approach to examining causation is consistent with
the definition of price suppression that had been endorsed by the Appellate Body in the original
proceedings.3500 The Panel proposes to adopt a counterfact ual approach to determining whether the
"effects" of the subsidies at issue in this dispute are displacement or impedance, significant lost sales
or significant price suppression. Consistent with the structure of the European Communities' serious

3495 United States' non-confidential oral statement at the second meeting with the Panel, para. 144. The
parties agree that a "but for" test is an appropriate and permissible causation methodology for determining
whether the effects of a subsidy is serious prejudice but that this test is not a legal requirement under Articles 5
and 6 of the SCM Agreement. See e.g. European Communities' comments on United States' response to
question 390, para. 569:

"… the United States and the European Communities both agree that the 'but for' test is a
methodology, not a standard, and as such not required by Articles 5 or 6.3 of the SCM
Agreement. That said, both parties ag ree that, for purposes of assessing the
European Communities' serious prejudice claim, the 'but for' test constitutes an appropriate
methodology."
United States' comments on the European Communities' response to question 300, para. 596: "The
United States and the EC agree that a 'but for' test is a useful framework, but not an obligatory standard, for
analysing causation." The United States observes elsewher e that while it "adopted a 'but for' methodology for
much of its rebuttal" of the European Communities' claim, "its observations regarding the lack of coincidence
between the alleged subsidies and the alleged serious prejudi ce is not a but/for analysis, but is still relevant to
the Panel's evaluation of the EC claims;" United States' response to question 300, para. 537 and footnote 674.
Moreover, both Australia and Brazil argue that the "but for" approach is but one methodology that panels may
select in order to determine whether there is the requisite causal relationship between the subsidy and its alleged
effect; Australia's response to question 20, 14 April 20 08, Brazil's written submission, para. 61, Brazil's oral
statement, para. 26. Japan similarly notes that there is no text in the SCM Agreement that clearly provides that a
"but for" test is required for an analysis of causation under Article 6.3(c) but submits that the "but for" test is an
effective methodology that the Panel may select in order to conduct its causation analysis in this dispute; Japan's
response to question 20, 14 April 2008.
3496 European Communities' confidential oral statement at the second meeting with the Panel, para. 54.
3497 European Communities' confidential oral statement at the second meeting with the Panel, para. 54;
referring to Panel Report, US – Upland Cotton (Article 21.5 – Brazil), paras. 10.46-10.49, 10.243.
3498 United States' response to question 295, para. 505.
3499 United States' response to question 295, paras. 505-506; response to question 300, para. 538.
3500 Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil ), paras. 370-371, referring to
Appellate Body Report, US – Upland Cotton, para. 433.

BCI deleted, as indicated [***]

prejudice arguments, we conduct this counterfactual an alysis first by examining the effects of the
subsidies on Boeing's LCA commercial behaviour (i.e. Boeing's prices and product offerings) and
secondly by examining the effects of the subsidi es, through their effects on Boeing's commercial
behaviour, on Airbus' prices and sales in the specific product markets.
7.1660 We recall further that the Appellate Body has st ated that Article 6.3(c) requires a panel to
ensure that the effects of other factors on prices do not dilute the causal link between the subsidies and
the price suppression.
3501 The Appellate Body also stated, how ever, that Article 6.3(c) leaves some
discretion to panels in choosing the methodology to be used to conduct this assessment of the effects
of the so-called "non-attribution" factors. 3502 The Panel agrees with the United States that there is no
requirement for panels to undertake a separate anal ytical step to evaluate potential non-attribution
factors, and that it is permissible to adopt an an alysis that takes these potential non-attribution factors
into account simultaneously with the effect of th e subsidies and in the context of conditions of
competition affecting the market. 3503 Given that our analysis of the effects of the subsidies occurs in
two stages; namely, by commencing with an analysis of the effects of the subsidies on Boeing's
pricing and product offerings, followed by an analysis of the effects of the subsidies, through their
effects on Boeing's pricing and product offerings, on Airbus' prices and sales, we will undertake our
evaluation of possible non-attribution factors relevant to each stage as a part of our causation analysis
at that stage. In other words, in conducting our analysis of whether the s ubsidies affected Boeing's
pricing and product offerings, we will also analyze the effects of other factors that are alleged to have
affected that behaviour. Similarly, in analyzing the effects of the subsidies on Airbus' prices and
sales, we will consider the eff ect of factors other than Boeing's pricing and product offerings on
Airbus' prices and sales in each of the three product markets.
7.1661 We are also mindful that a counterfactual an alysis of causation conducted by way of a "but
for" approach does not in itself imply a particular st andard of causation. In this regard, the Appellate
Body has observed:
"A subsidy may be necessary, but not suffici ent, to bring about price suppression.
Understood in this way, the 'but for' test may be too undemanding. By contrast, the
'but for' test would be too rigorous if it required the subsidy to be the only cause of
the price suppression. Instead, the 'but for' test should determine that price
suppression is the effect of the subsidy and that there is a 'genuine and substantial
relationship of cause and effect.'"
3504
7.1662 In adopting a "but for" approach to our analysis of whether the effects of the subsidies are any
of the forms of serious prejudice alleged by the European Communities in the manner which we have
outlined above, we will determine whether we are sa tisfied that there is a genuine and substantial
relationship of cause and effect between the subsidy in question and the displacement or impedance,
significant lost sales, or significant price suppression, as the case may be.
(ii) The organization of the European Communities' serious prejudice arguments
7.1663 It is important to clarify at the outset the distinction between the European Communities'
claim that the subsidies to Boeing cause serious pr ejudice within the meaning of Articles 5(c) and
6.3(a), (b) and (c) of the SCM Agreement, on th e one hand, and the arguments and evidence it
presents in relation to the effects of the subsidies in the three LCA product markets, on the other.

3501 Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 375.
3502 Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 375.
3503 United States' response to question 295, para. 506.
3504 Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), referring to Appellate Body
Report, US – Upland Cotton, para. 438, and Appellate Body Report, US – Wheat Gluten, para. 69.

BCI deleted, as indicated [***]

7.1664 The United States at first appears to have understood the European Communities to be
making three separate adverse effects claims; namely , that: (i) alleged subsidies to the 737NG cause
adverse effects to the A320; (ii) alleged subsid ies to the 787 cause adverse effects to the A330,
Original A350 and the A350XWB-800; and (iii) alle ged subsidies to the 777 cause adverse effects to
the A340 and A350XWB-900/100.3505
7.1665 However, the European Communities indicates that it is making a single serious prejudice
claim, while structuring its arguments and eviden ce in support of that claim on the basis of three
separate LCA product markets. 3506 According to the European Communities, this approach is
consistent with the requirement, under Articles 5 and 6.3 of the SCM Agreement, to assess the causal
link between the challenged subsidies and the a dverse effects based on actual competition. The
European Communities argues that, because the causation assessment must be undertaken on the basis
of the competitive relationship between particular subsidized products and particular competing
products of the complaining Member that are alleged to have been negatively impacted by the effects
of the subsidies, the Panel should assess the existen ce of adverse effects caused by the subsidies on
the basis of arguments and evidence concerni ng competition between Boeing LCA and competing
Airbus LCA in the three separate LCA product markets in which they compete.3507
7.1666 The United States has since indicated that it does not object to the way in which the European
Communities has chosen to structure and present the arguments and evidence in support of its serious
prejudice claim. However, the United States argues th at by identifying three specific sets of Airbus
LCA, each one of which allegedly competes with an allegedly subsidized Boeing LCA in one of three
distinct LCA product markets, the European Commun ities has, in practical terms, based its serious
prejudice claim "entirely on the alleged effects of the alleged subsidies on competition within each of
these three separate markets". 3508 According to the United States, the arguments and evidence
presented by the European Communities concern thr ee distinct Boeing "subsidized products" and the
alleged serious prejudice affecting three correspondi ng distinct groups of Airbus "like products" on
the basis of competition occurring in three distinct LCA product markets. The United States
considers that arguments and evidence structured on this basis are not capable of establishing a single
adverse effects claim pertaining to a "single" large civil aircraft market.3509
7.1667 The Panel considers that the European Comm unities is free to structure and present the
arguments and evidence in support of its serious pr ejudice claim in the manner it has chosen. Based
on the structure of Article 6.3 of the SCM Agreement, serious prejudice arises where the effect of the
subsidy is any one or more of the phenomena describ ed in paragraphs (a) through (d) of Article 6.3.

3505 United States' first written submission, para. 802.
3506 European Communities' response to question 63, paras. 220-222. The European Communities also
argues that its adverse effects claim is not dependen t on its identification of three separate LCA product
markets. According to the European Communities, th e arguments and evidence equally support findings of
serious prejudice (or threat of serious prejudice) to the European Communities' LCA-related interests if the
Panel were to assess causation of adverse effects on the basis of alternative market configurations, including a
single LCA product market.
3507 European Communities' response to question 63, para. 220.
3508 United States' comments on European Communities' response to question 63, para. 218.
3509 United States' comments on European Communities' response to question 63, paras. 218-219. The
United States notes, for example, that the European Communities' allegations regarding displacement or
impedance of imports pursuant to Article 6.3(a) pertain to imports of specific asserted "like products" within
each of the three asserted product markets. Accord ing to the United States, evidence supporting these
allegations would not be sufficient to establish displ acement or impedance of impor ts within the meaning of
Article 6.3(a) on the basis of a single product market. The United States argues that the European Communities
cannot evade its burden under the SCM Agreement to show serious prejudice by grouping products one way for
purposes of its claim, and another way for presenting its arguments and evidence; United States' comments on
the European Communities' response to question 63, para. 224.

BCI deleted, as indicated [***]

Provided the effect of the subsidy is found to be one or several of the effects described in paragraphs
(a) through (d) of Article 6.3, serious prejudice in the sense of paragraph (c) of Article 5 arises, and
the complaining Member will thereby establish that the alleged subsidies have caused adverse effects
to the interests of another Member, pursuant to Arti cle 5 of the SCM Agreement. We consider that
provided the European Communities demonstrates one of the forms of serious prejudice in paragraphs
(a) through (c) of Article 6.3 that it alleges in re lation to a particular Boeing subsidized LCA and a
corresponding Airbus like product (or significant price suppression or lost sales, in the "same
market"), it will establish serious prejudice to the European Communities' LCA-related interests for
purposes of Article 5(c) of the SCM Agreement.
3510
7.1668 Moreover, the Panel does not consider that ev idence supporting allegations regarding serious
prejudice based on competition between a subsidized product and corresponding like product in an
identified market will necessarily always be incapable of supporting an allegation of serious prejudice
based on competition in a differently delineated ma rket. In our view, much would depend on the
delineation of the markets and the scope of the subs idized and like products. This is not a question
that can or should be resolved at an abstract or theoretical level. 3511
(iii) Relevant "markets", subsidized products, like products
7.1669 The parties agree that the market for LCA is a global market geographically. 3512 The
European Communities delineates the global LCA mark et into five separate market segments (or
product markets) in which particular families of Boeing and Airbus LCA are alleged to compete.
These product markets or segments are based on the specific range and seating capacity of LCA:
• Single-aisle aircraft with a capacity of appr oximately 100 to 200 passengers in a two-class
configuration (or the respective cargo equivalent), and a short to medium range;

• Wide-body aircraft with a capacity of approxi mately 200 to 300 passengers in a three-class
configuration (or the respective cargo equivalent), and a medium to long or ultra-long range;

• Wide-body aircraft with a capacity of approxi mately 300 to 400 passengers in a three-class
configuration (or the respective cargo equivalent), and a long or ultra-long range;

3510 We recall that Article 7.8 of the SCM Agreement provides that the remedies for contraventions of
Article 5 are that the Member "take appropriate steps to remove the adverse effects" or withdraw the subsidy. In
our view, the contemplated remedies would relate to the particular subsidies found to have caused the specific
forms of serious prejudice, meaning that an adverse effects claim established on a "narrow" basis under
Article 6.3 (e.g. subsidization of one Boeing LCA causing serious prejudice to one group of Airbus "like
products") would result in a correspondingly "narrow" remedy.
3511 The Panel notes, however, that the European Communities agrees generally that, as a result of its
delineation of the LCA industry into five separate LCA product markets, and its identification of the three
"subsidized" Boeing LCA and three sets of corresponding "like" Airbus LCA in three separate product markets
for purposes of its claim, it is implicitly reques ting the Panel to confine itself to examining the causal
relationships among the above-referenced groups of subsidized and like products. According to the European
Communities, while the effects of subsidies benefiting one grouping of subsidized Boeing LCA may "spill over"
to Airbus LCA competing in a different LCA product market, such spill-over effects are infrequent. The
European Communities asserts such infrequency on the basis that "bundled sales" campaigns (i.e. sales
campaigns involving the provision of LCA from more than one LCA product mark et) represent a relatively
small total number of LCA sales campaigns (e.g. 5.7 per cent of sales transactions over the 2004-2006 period);
European Communities' response to questions 67 and 68, para. 242.
3512 European Communities' first written submission, para. 1186; United States' first written
submission, para. 877; See also Brazil's third party submission, para. 36 and Brazil's oral statement, para. 27.

BCI deleted, as indicated [***]

• Wide-body aircraft with a capacity of 400 to 5 00 passengers in a three-class configuration (or
the respective cargo equivalent), and a long range; and

• Super wide-body aircraft with a capacity in excess of 500 passengers in a three-class
configuration (or the respective cargo equivalent), and a long range.3513

7.1670 For purposes of its serious prejudice claim, the European Communities focuses on three
particular LCA product markets, namely, the 100 – 200 seat single-aisle product market, the 200 –
300 seat wide-body product market, and the 300-400 seat wide-body product market. Within these
product markets, the European Communities iden tifies the following three groups of Boeing
"subsidized products" and competing Airbus "like products", respectively: (i) the 737NG family of
LCA and A320 family of LCA; (ii) the 787 fam ily of LCA and A330/Original A350/A350XWB-800
families of LCA and (iii) the 777 family of LCA and A340/A350XWB-900/1000 families of LCA.
3514
The United States accepts the European Communities' five-way division of the market as the basis for
evaluating the European Communities' serious prejudice claim. 3515 The United States considers that a
complaining party is accorded considerable latitude in framing the arguments it makes in support of
its claims and submits that, as long as the compla inant identifies markets or products that are
reasonable and coherent, a panel should accept that definition, and should reject a complainant's
proposed definition only if it would make a market analysis impossible. 3516 According to the
United States, notwithstanding the "serious flaws" in the European Communities' division of the LCA
market into five discrete segments, the subsidized products that it identifies are sufficiently coherent
to permit a market analysis.3517
7.1671 The Panel is satisfied that the LCA market is a global market geographically. In this regard,
we note that Airbus and Boeing actively compete for the business of airlines and leasing companies
throughout the world, and receive orders from, and make deliveries to, customers based in almost all
geographic areas of the world. 3518 Both Airbus and Boeing display and market their aircraft at air
shows that are held around the world and which ar e attended by a world-wide audience of potential
customers and the interested public, while producti on and support facilities are also situated around
the world.3519 Aircraft financing also occurs on a global level, with financial institutions operating on
a global scale.

3513 European Communities' first written submission, para. 1159; Rod P. Muddle, The Dynamics of the
Large Civil Aircraft Industry, 2 March 2007, Exhibit EC-10, para. 37.
3514 European Communities' first written submission, para. 1154.
3515 United States' first written submission, para. 800. However, the United States notes that it accepts
this approach "solely as an organizational matter" akin to a stipulation, or simplifying assumption; United States'
response to question 71, para. 194.
3516 United States' first written submission, para. 800, referring to an argument made by the
European Communities before the panel in Korea – Commercial Vessels ; Panel Report, Korea – Commercial
Vessels, Annex F-1, para. 33 (Oral Statement of the European Communities at the Second Panel Meeting);
response to question 71, para. 196.
3517 United States' response to question 71, para. 194. The United States also argues that, as responding
party, it retains the latitude to frame its own arguments, and that the Panel should consider those arguments;
3518 European Communities' first written submission, para. 1186.
3519 European Communities' first written submission, paras. 1186 – 1187. For example, the
European Communities notes that even though Airbus has its corporate headquarters in Toulouse, France, it has
subsidiary headquarters in Washington, D.C., Tokyo, Dubai and Beijing, along with over 160 offices around the
world, 16 sites in Europe and an international presence with its network of suppliers and a customer base that
spans the globe. According to the European Commun ities, while Boeing's corporate headquarters are in
Chicago, it similarly has subsidiary headquarters in China and Japan and a support team of over 200
representatives based in 65 different countries.

BCI deleted, as indicated [***]

7.1672 The Panel accepts, for purposes of its analys is of the European Communities' serious
prejudice claim, the European Communities' delin eation of three product markets, as well as its
identification of three groups of "subsidized" Boeing LCA which correspond to three groups of
Airbus "like" products. In analyzing the European Communities' claims on this basis, the Panel does
not suggest that this is the only, or most appropria te way in which to divide the LCA market or to
identify the relevant subsidized products and corresponding like products. Rather, the evidence
before us indicates that the European Communities' identification of the relevant product markets and
subsidized and like products is but one way in which its serious prejudice arguments could be
organized. The European Communities has chosen to organize its serious prejudice arguments in this
way and the Panel considers that it is reasonable to examine those arguments on that basis.3520
7.1673 The European Communities also argues that e ach of the identified LCA product markets
operates in individual country markets as well as a world market geographically. 3521 According to the
European Communities, as Articles 6.3(a) and 6.3(b) of the SCM Agreement legally direct panels to
assess the evidence of displacement or impedance on the basis of certain country markets, panels
assessing claims under these two provisions are require d to limit the geographic scope of the markets
to the territorial boundaries of the countries at issue. 3522 The United States argues that the European
Communities has provided the Panel with no evidence to support its argument that the three product
markets it has identified can be divided into separate country markets for purposes of Article 6.3(c) of
the SCM Agreement.3523 The United States asserts that LCA producers easily trade LCA across large
distances, that barriers between buyers and sellers are low, and that prices for a sale in one country
routinely affect prices for subsequent sales in ot her countries (factors which point generally to the
existence of a global LCA market). According to the United States, a party asserting the existence of
a country market for large civil aircraft would have to provide an explanation as to why these sorts of
conditions of competition do not preclude the existen ce of smaller, discrete markets such as country
markets.
3524
7.1674 Although the European Communities argues that "each LCA product market also operates
within individual country markets, including th e US market and various third country markets" 3525 it
does not confine its arguments concerning the existence of significant price suppression or significant
lost sales, within the meaning of Article 6.3(c) of the SCM Agreement, to any individual country
market.
3526 Therefore, the Panel will assess the Eur opean Communities' arguments concerning the

3520 The Panel notes in this regard Brazil's arguments that the Panel should afford substantial discretion
to the European Communities as complaining party to define the "subsidized product" to which its claims apply,
and that, provided the European Communities identifies the "like products" corresponding to the "subsidized
products" in accordance with footnote 46 of the SCM Agreement, the Panel should not "second-guess" the
complainant; Brazil's third party submission, paras. 31-33, Brazil's oral statement, para. 22.
3521 European Communities' first written submission, para. 1151.
3522 European Communities' response to question 65, para. 232.
3523 United States' first written submission, para. 877.
3524 United States' first written submission, para. 878.
3525 European Communities' first written submission, para. 1190. The European Communities notes
that the panel in US – Upland Cotton considered that the existence of a world market does not preclude the
existence of other relevant geographic markets within the world market. Panel Report, US – Upland Cotton ,
paras. 7.1247-7.1248. The European Communities refers to the following factors in support of its argument that
each LCA product market operates with in individual country markets: (i) evidence contained in Annexes D, E
and F to its First Written Submission, which it asserts illustrates that LCA sales campaigns take place within
individual countries; (ii) the fact that airline and leasing companies have "identities" associated with individual
countries; (iii) the f act that since 2000, Airbus and Boeing have received orders from customers in 75 and 70
different countries, respectively; and (i v) the fact that airline order and de livery data can also easily be broken
down by any country; European Communities' first written submission, para. 1191.
3526 The European Communities indicates that its arguments concerning the existence of significant
price suppression and significant lost sales in each of the three LCA product markets are based on those markets

BCI deleted, as indicated [***]

existence of significant price suppression and significa nt lost sales on the basis that each of the three
LCA product markets have a worldwide geographical sc ope. The Panel recalls that Article 6.3(a) and
Article 6.3(b) expressly direct us to conduct our examination of displacement and impedance on the
basis of national markets; either the market of th e subsidizing Member for purposes of Article 6.3(a),
or third country markets for purposes of Article 6.3( b). In so doing, the Panel is not required to
consider whether the European Co mmunities has established the existen ce of such country markets.
Rather, the question for the Panel is whether, based on evidence of sales occurring in those countries,
the Panel is satisfied that there h as been displacement and impedance of imports or exports within the
meaning of Article 6.3(a) and 6.3(b), respectively in any of the three LCA product markets in the
particular country market.
7.1675 We note that the European Communities also subm its, "in the alternative", that in addition to
world and individual country LCA markets, e ach LCA sales campaign be considered an LCA
market.
3527 The Panel agrees with the United States th at the concept of a "market" for purposes of
Article 6.3(c) of the SCM Agreement requires more than the coming together of a buyer and a seller
to consummate a transaction, as such a definition would hold true for almost every transaction in the
world, and would reduce the concept of a "market" to a nullity. 3528 We therefore decline to examine
the European Communities' serious prejudice argumen ts on the basis that an individual LCA sales
campaign can itself constitute a relevant "market" for purposes of Article 6.3 of the SCM Agreement.
(iv) Issues pertaining to the temporal scope of the European Communities' claim
7.1676 The next issue that we address concerns the appropriate period of time over which the Panel
should assess the existence of "present" adverse effe cts, and whether, in making that assessment, the
Panel can take into account evidence and data pertaining to earlier periods.
7.1677 The European Communities argues that Articles 5 and 6.3 of the SCM Agreement require that
it establish a prima facie case of present adverse effects caused by the challenged subsidies under
present conditions of competition. According to the European Communities, this demonstration
necessitates the assessment of a causal link between the subsidies and present adverse effects during a
"reference period". 3529 The European Communities requests th at the Panel assess the existence of
present adverse effects over the period 2004 to 2006.3530
7.1678 The United States argues that, given the allega tions of subsidization from 1989 onwards and
the fact that product development cycles in the LCA industry often last decades, the correct approach
is to take a longer-term perspective on the Europ ean Communities' serious prejudice allegations and
market developments.3531 The United States submits that an "objective assessment" of the matter as
required by Article 11 of the DSU requires the Panel to select a "reference period" that is long enough
to enable it to distinguish between developments that were the result of the business cycle and those

being world markets geographically, European Communities' confidential oral statement at the first meeting
with the Panel, para. 91.
3527 European Communities' first written submission, para. 1193. The European Communities argues
that individual LCA sales campaigns involve buyers (i.e. airlines and leasing companies) and sellers (i.e. Airbus
and Boeing) coming together to agree upon prices and terms for a commercial transaction involving the sale of
LCA. According to the European Communities, these individual LCA sales campaigns therefore constitute
"markets" for purposes of the European Communities' serious prejudice claims under Article 6.3(c) of the SCM
Agreement.
3528 United States' first written submission, para. 885.
3529 European Communities' first written submission, pa ra. 1074; non-confidential oral statement at the
first meeting with the Panel, para. 126.
3530 European Communities' non-confidential oral statement at the first meeting with the Panel,
para. 126.
3531 United States' comments on European Communities' response to question 370, para. 203.

BCI deleted, as indicated [***]

that were related to other factors. 3532 The United States argues that the 2004 – 2006 period proposed
by the European Communities does not permit the Panel to make an objective assessment of the
matter before it as is required by Article 11 of the DSU 3533 and that the 2001 – 2006 period is the
shortest period that would enable the Panel to di scharge its obligations in accordance with Article 11
of the DSU.3534
7.1679 In our view, while the European Communities as complaining party is able to identify the
period of time over which it requests the Panel to assess the existence of serious prejudice, it may not
restrict the temporal scope of evidence that the Panel may consider in making that assessment. In
accordance with the requirement of Article 11 of th e DSU to make an objective assessment, the Panel
should evaluate the European Communities' serious pr ejudice claim on the basis of all of the evidence
presented to it, including evidence pertaining to peri ods prior to 2004, giving due weight to that
evidence in terms of its context, relevance, and pr obative value. Accordingly, in evaluating whether
the European Communities has demonstrated that th e effects of the subsidies at issue is present
serious prejudice within the meaning of Article 6.3 of the SCM Agreement, the Panel will assess
whether the European Communities has demonstrated the existence of serious prejudice within the
period 2004 to 2006 identified by the European Co mmunities. However, the Panel will not limit the
temporal scope of the evidence that it considers in undertaking that assessment, and therefore will
take into account all of the relevant evidence submitted in this dispute.
3535
(v) Use of order and delivery data
7.1680 The Panel next considers the parties' argumen ts concerning the point in time at which the
particular forms of serious prejudice may be said to ar ise, and the type of data that is relevant to
demonstrating the existence of a particular form of serious prejudice; namely, data pertaining to LCA
"orders" as opposed to data concerning LCA "deliveries".
7.1681 The European Communities argues that orders, as op posed to deliveries, are most relevant for
assessing the impact of the subsidies on Airbus. According to the European Communities, sales are
won or lost when orders are placed, and conseque ntly, "significant price suppression, significant lost
sales, and displacement and impedance are caused by the US subsidies at the time an LCA order is
placed by an airline or a leasing company."3536
7.1682 The United States argues that prices at the time of order provide the most appropriate basis
for discerning price trends and analyzing the effect of a subsidy on price competition between Airbus
and Boeing. According to the United States, pric e competition between LCA mostly occurs in sales
campaigns that end with a decision to order aircraft from Airbus or Boeing, and that the price for the
purchase of a large civil aircraft is generally determined at that time. 3537 Similarly the United States
argues that a "sale" is "lost" at the time when a customer make s a definitive decision to purchase a
competitor's aircraft, and that this occurs at the time of order. 3538 In other words, according to the
United States, "lost sales" are properly measured at the time of order.
7.1683 However, the United States argues that in assessi ng claims of displacement or impedance of
imports or exports under Article 6. 3(a) or 6.3(b) of the SCM Agreement, the terms "imports" and

3532 United States' response to question 72, para. 201.
3533 United States' first written submission, paras. 803, 807.
3534 United States' response to question 72, para. 201.
3535 The Panel notes in this regard Japan's submission that the Panel should consider all relevant
evidence provided to it, regardless of whether that eviden ce pre-dates, or post-dates the Panel's establishment;
3536 European Communities' first written submission, para. 1214.
3537 United States' first written submission, para. 890.
3538 United States' first written submission, para. 897.

BCI deleted, as indicated [***]

"exports" should be understood to refer to act ual deliveries of LCA rather than orders. 3539 This is
because the ordinary meaning of the terms "imports" and "exports" includes actual articles or things
that cross international borders; namely, deliveries.
3540 The United States submits that orders are, at
most, contracts for future imports and exports, and that while they may be relevant for an analysis of
threat of displacement or impedance, they do not provide any information about imports and exports
that have actually occurred. 3541 The United States argues that, by framing its displacement and
impedance arguments based on orde r data rather than delivery data, the European Communities has
failed to produce sufficient information to demons trate the existence of current displacement or
impedance.3542
7.1684 The Panel considers that the parties' arguments raise two issues. The first concerns the time at
which the specific serious prejudice phenomena can be said to exist. For example, does significant
price suppression occur only at the time at which an LCA is ordered, does it occur at the time the
LCA is actually delivered (which the parties agree is, on average, three years after the order), or does
the phenomenon continue from order until delivery? The European Communities submits that sales
of LCA occur at the time of order, and thus, that th e subsidies at issue in this dispute cause adverse
effects at the time of order, which is when a pr ice-suppressed, lost, displaced or impeded sale takes
place.
3543 However, the European Comm unities also argues that those adverse effects also continue
over a number of years commencing with the time of order, as Airbus' revenues are affected by
deliveries of aircraft at significantly suppressed pr ices, and lost revenues from aircraft that are not
delivered due to lost, displaced and impeded sales.
3544
7.1685 The Panel recalls that LCA are purchased through long term contracts that are frequently
worth billions of dollars, involving deliveries of ai rcraft over many years. The terms and conditions
of purchase (e.g. aircraft specification, net pri ce, discounts, non-price concessions and financing
arrangements) are set at the time of order. On signing a purchase agreement, customers pay a non-
refundable deposit for each aircraft ordered, and the cash flow relating to a specific sale therefore
begins with the order of the aircraft.
3545 Following the order there is, in principle, no re-negotiation of
the terms and conditions of the purchase contract, and assessment of the profitability of a certain
contract prior to delivery, as well as the profit marg ins actually generated, is based on the terms and
conditions established at the time of order. 3546 However, complete payment does not occur until
delivery of the aircraft. 3547 Moreover, Airbus and Boeing both provide for escalation of the basic
airframe price to account for the time that elapses be tween negotiation of price at the time of order,

3539 Japan agrees with the United States that, at least for purposes of this dispute, the terms "imports"
and "exports" within Articles 6.3(a) an d 6.3(b), respectively, should be interpreted to refer to actual deliveries
rather than orders; Japan's written submission, para. 20. Japan also argues that, in an industry such as the LCA
industry, in which there is typically a significant lapse of time between the dates of orders and deliveries, it is
not reasonable to interpret the terms "imports" and "e xports" as encompassing orders, because of the various
factors that may break the link between order and delivery (e.g. the orders are often cancelled, their terms are
subject to change prior to delivery, and delivery dates are often postponed for extended periods).
3540 United States' first written submission, para. 903, referring to New Shorter Oxford English
Dictionary, p. 889 (export defined as "an article that is exported"), p. 1323 (import defined as "something
imported or brought in"), Exhibit US-14.
3541 United States' first written submission, para. 903.
3542 United States' first written submission, para. 906.
3543 European Communities' first written submission, para. 1218.
3544 European Communities' first written submission, para. 1218.
3545 Christian Scherer, Commercial Aspects of the Aircraft Business From the Perspective of a
Manufacturer, March 2007, Exhibit EC-11 (BCI), para. 25. Manufacturers generally rely on the cash flow
generated by the non-refundable deposit for production financing.
3546 Christian Scherer, Commercial Aspects of the Aircraft Business From the Perspective of a
Manufacturer, March 2007, Exhibit EC-11 (BCI), para. 26.
3547 Christian Scherer, Commercial Aspects of the Aircraft Business From the Perspective of a
Manufacturer, March 2007, Exhibit EC-11 (BCI), para. 49.

BCI deleted, as indicated [***]

and delivery of the aircraft. Price escalation factors can significantly increase the purchase price to be
paid.3548 In the Panel's view, the phenomena of "pri ce suppression" and "lost sales" do not begin and
end at the time at which an LCA is ordered. Ra ther, given the particularities of LCA production and
sale, these forms of serious prejudice should be understood to begin at the time at which an LCA
order is obtained (or an order is lost), and to c ontinue up to and including the time at which that
aircraft is delivered (or not delivered). However, the Panel considers that the ordinary meaning of the
terms "imports" and "exports" in Articles 6.3(a) and (b) of the SCM Agreement, respectively,
suggests that these forms of serious prejudice arise onl y on delivery of the aircraft to the customer.
Therefore, while an order of an aircraft can be c onsidered to represent a futu re delivery, and in that
regard, constitute evidence of a future import or e xport that will be displaced or impeded, it does not
of itself evidence displacement or impedance of imports or exports within the meaning of
Article 6.3(a) or 6.3(b) of the SCM Agreement, each of which contemplate the existence of goods
which cross borders, and can therefore only arise at the point at which LCA deliveries take place.
7.1686 The second issue that is raised by the parties' arguments concerning orders and deliveries
relates to the type of data that is relevant to de monstrating the existence of specific serious prejudice
phenomena such as price suppression, lost sales a nd displacement and impedance of imports and
exports. Because we regard pri ce suppression and lost sales to exist from the time an order for LCA
is made, up to and including its de livery, data pertaining to both LCA orders and to LCA deliveries
will potentially be relevant to demonstrating the existence of significant price suppression and
significant lost sales.
 3549 As regards displacement and impeda nce or imports or exports, the Panel
considers that the existence of these serious prej udice phenomena can only be definitely established
by relevant delivery data. However, as indicated above, orders for LCA represent, by and large,
deliveries that will occur some years subsequen tly. The Panel therefore considers that evidence
concerning orders that occurred in 2004 – 2006 is cap able of showing that future imports or exports
will be displaced or impeded in the future, and theref ore the existence of a threat of serious prejudice.
The Panel applies these principles to its assessment of the arguments and evidence presented by the
parties.
(vi) Overview of the LCA industry
7.1687 The Panel undertakes its evaluation of the European Communities' serious prejudice
arguments with the foregoing considerations in mind. Before undertaking that evaluation, we
consider that it is useful to provide a short overvi ew of key aspects of the LCA industry, in order to
provide relevant factual background to our evaluation of the effects of the subsidies.
7.1688 The main participants in the LCA industry are the LCA airframe manufacturers, the airlines
that operate LCA, engine manufacturers that s upply engines, and leasing companies that purchase
LCA from both manufacturers and airlines and lease them out for operation by airlines. Boeing and
Airbus are the two major producers of LCA.
3550 The parties agree that the LCA market is presently a

3548 Christian Scherer, Commercial Aspects of the Aircraft Business From the Perspective of a
Manufacturer, March 2007, Exhibit EC-11 (BCI), para. 49.
3549 Australia argues that the Panel should consider both the status of orders and deliveries. According
to Australia, notwithstanding that delivery may not eventuate, orders are an indication of the effect of the
subsidies on the industry and the market, through future projected sales and market share. Australia considers
that they consequently provide an indication of how current subsidies are likely to affect the market in the future
and thus the threat of future serious prejudice; Australia 's third party submission, para. 69. Brazil argues that a
complainant may satisfy its burden to demonstrate serious prejudice using either order or delivery data,
depending on its relevance in the particular circumstances, and that the Panel should refrain from finding that
specific forms of serious prejudice under Article 6.3 must be demonstrated using order or delivery data; Brazil's
third party submission, paras. 59-60; Brazil's oral statement, para. 28.
3550 LCA produced by Boeing (including McDonnell Douglas) and Airbus accounted for 90.9 per cent
of the world fleet operated as of 31 December 2006; Rod P. Muddle, The Dynamics of the Large Civil Aircraft

BCI deleted, as indicated [***]

duopoly in which both Airbus and Boeing hold a significant share of the market and offer a full line of
competitive LCA. Airbus and Boeing each possess a degree of market power, meaning that each
manufacturer's decisions regarding the supply and pr icing of its products has the ability to influence
the pricing of the other, and more generally, the market price for LCA. 3551 Manufacturers of LCA
determine both the type and quantity of new LCA produced, although their decisions regarding the
type of LCA developed and prod uced are taken in consultation with major airlines and leasing
companies.3552 The number of LCA ordered and delivered is strictly a function of demand by airlines
and leasing companies, as Boeing and Airbus rarely produce speculative LCA.3553
7.1689 The customers for new Boeing and Airbus LCA are primarily airlines and leasing
companies.3554 Airlines either purchase LCA outright, finance the purchase of LCA through
instruments such as finance leases, or lease the LC A they operate. Airlines can either purchase LCA
directly from Boeing or Airbus or acquire used LCA from other airlines or leasing companies.
Aircraft leasing companies are also significant actors in the LCA markets.
3555 Leasing companies
operate on both the demand and supply sides of th e LCA industry. On the demand side, leasing
companies are significant purchasers of LCA, accounting for 17 per cent of orders placed with Boeing
and Airbus and approximately 25 per cent of Bo eing and Airbus deliveries over the period 2000-
2006.3556 On the supply side, leasing companies offer leased LCA to airlines that may not wish to
purchase LCA, thus creating an additional source of s upply for airlines and an alternative to the direct
purchase of new LCA from Boeing or Airbus and the purchase of used LCA from other airlines. As
providers of used leased aircraft, leasing compan ies are significant actors in the used LCA market,
buying used aircraft and leasing them to airlines. Prices obtained from Boeing and Airbus by leasing
companies can serve as a form of benchmarking on new aircraft prices.
3557
7.1690 Engines are the single most expensive component of an LCA, representing between 20 and 30
per cent of its total cost. A choice of engines is available for most LCA models, and LCA customers
make their engine choice independently from thei r negotiations with LCA manufacturers. Engine
pricing and other features, when negotiated sep arately between the LCA customer and engine

Industry, 2 March 2007, Exhibit EC-10, para. 16. Other producers of LCA, such as the Russian manufacturer
Tupolev, operate only in ce rtain regions and certain specific pro duct categories and do not account for a
significant volume of supply.
3551 The European Communities states that most airlin es that operate LCA are Boeing customers, and
provides the following figures: of 764 airlines that operate Airbus and/or Boeing aircraft, 645 operate Boeing
LCA, 507 operate only Boeing LCA, 119 operate only Airbus LCA; European Communities' non-confidential
oral statement at the second meeting with the Panel, para. 96; Airclaims CASE database, Fleet Summary, data
query as of 14 may 2007, Exhibit EC-1311.
3552 Rod P. Muddle, The Dynamics of the Large Civil Aircraft Industry, March 2007, Exhibit EC-10,
para 17.
3553 Rod P. Muddle, The Dynamics of the Large Civil Aircraft Industry, March 2007, Exhibit EC-10,
para. 17. Muddle indicates, however, that manufacturers can still influence demand for new aircraft by
accelerating or reducing the rate at wh ich airlines replace older, less fuel-e fficient aircraft, for example, by
offering a fuel-efficient and low priced aircraft.
3554 A small number of LCA are purchased for corporate or private use.
3555 Muddle identifies the following leading leasing companies worldwide : International Leasing
Finance Corporation (ILFC) ; GE Commercial Aviation Services (GECAS) ; Singapore Aircraft Leasing
Company (SALE) ; Aviation Capital Group ; AerCap ; RBS Aviation Capital ; CIT Group ; Rod P. Muddle, The
Dynamics of the Large Civil Aircraft Industry, March 2007, Exhibit EC-10, para. 19.
3556 Rod P. Muddle, The Dynamics of the Large Civil Aircraft Industry, March 2007, Exhibit EC-10,
para. 20. According to Muddle, leasing company sale s are especially important for Airbus, with leasing
company orders accounting for 20 per cent of Airbus' orders during the period 2000-2006, compared with 14 per
cent for Boeing.
3557 Rod P. Muddle, The Dynamics of the Large Civil Aircraft Industry, March 2007, Exhibit EC-10,
para. 26. Muddle notes, however, that prices obtained by leasing companies may not reflect some of the other
"non-price" benefits that airlines can receive.

BCI deleted, as indicated [***]

manufacturers, can determine whether Airbus or Boeing wins a sale from an airline or leasing
company customer.3558 In many cases, neither the airline nor the engine manufacturers disclose the
terms of the engine contracts to the airframe manufacturer.3559
7.1691 The production of large civil aircraft involves h eavy upfront development costs, with a return
over a considerably longer period. Aircraft are de veloped over a period of several years with a view
to their being sold over a period of 18 years, on averag e. The marketing life of an aircraft is largely
determined by the life of the technology that defines the model. Once the technology has been
superseded, the LCA manufacturer will no longer be able to sell the model without making major
capital investments to incorporate the latest available technologies.
3560 LCA production is also
generally characterized by steep learning curves. 3561 Initial units of a new LCA are produced at a
much higher cost than subsequent units will be , once the LCA manufacturer has begun to realize
learning curve efficiencies. Learning curve effici encies are factored into an LCA manufacturer's
projected costs at the time of the launch of th e new aircraft programme, and manufacturers price
initial units of LCA as though they were already at the bottom of the learning curve.3562 At the time of
launch, the LCA manufacturer projects pricing targets for the new aircraft that, over its projected life,
must exceed the manufacturer's fully-loaded average production costs by an amount sufficient to
justify the investment.3563
7.1692 The LCA characteristics demanded by airlines and leasing companies have triggered the
development of broadly similar LCA models by Air bus and Boeing. In addition, Airbus and Boeing
models are subject to the same rules of physics and economics that largely dictate the design of the
aircraft, while operating costs and interior designs of aircraft are similar. Moreover, the costs of
manufacture incurred by Airbus and Boeing are increasingly similar and transparent because both
manufacturers source material and technology worldwide, often from the same suppliers.3564
7.1693 Aircraft acquisitions are not isolated transactions , but rather the key element in an airline's
business and strategic plan, and the basis for an ai rline's commercial success in the marketplace.
Thus, every sales campaign involves a unique focus on th e needs of the particular airline or leasing
company. Such needs, in turn, are informed by the overall business strategy of the airline or leasing
company.3565 In general, the "net flyaway price" of an airc raft consists of the "total aircraft price" less
credits and price concessions offered by the LCA manufacturer 3566; and estimated engine

3558 Rod P. Muddle, The Dynamics of the Large Civil Aircraft Industry, March 2007, Exhibit EC-10,
para. 28.
3559 Rod P. Muddle, The Dynamics of the Large Civil Aircraft Industry, March 2007, Exhibit EC-10,
para. 31.
3560 International Trade Resources LLC, Calculating on a Per-Aircraft Basis the Magnitude of the
Subsidies Provided to US Large Civil Aircraft, 20 February 2007, Exhibit EC-13, para. 11.
3561 The learning curve refers to the negative correlation between cumulative output and unit cost: the
more aircraft of a given type of LCA produced by a firm, the less it costs to produce the next unit of that
aircraft; Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and
3562 Jordan and Dorman Report, Exhibit US-3, p. 15.
3563 United States' first written submission, para. 848.
3564 Rod P. Muddle, The Dynamics of the Large Civil Aircraft Industry, March 2007, Exhibit EC-10,
para. 47.
3565 Rod P. Muddle, The Dynamics of the Large Civil Aircraft Industry, March 2007, Exhibit EC-10,
para. 48; Christian Scherer, Commercial Aspects of the Aircraft Business From the Perspective of a
Manufacturer, March 2007, Exhibit EC-11 (BCI), para. 43.
3566 Concessions provided by the engine manufacturers and suppliers of buyer furnished equipment are
negotiated between the customer and the supplier, withou t the direct involvement of the LCA manufacturer.
Pricing offered by engine manufacturers and suppliers of buyer furnished equipment can have a significant
impact on the net fly-away price in a manner that is largely unknown to the LCA manufacturers; Christian

BCI deleted, as indicated [***]

manufacturer discounts and other discounts offered by suppliers of buyer furnished equipment. The
"total aircraft price" in turn, is composed of the basic airframe basic price (catalogue price) plus
charges for changes to standard specifications, buyer furnished equipment, supplier furnished
equipment and the engine basic list price.
7.1694 In general terms, differences in price, capac ity and direct operating cost are the most
significant factors that determine the outcome of LCA sales campaigns. 3567 However, the significance
of individual factors varies from campaign to campaign, depending on fleet and business plans as well
as the strategic goals of the buyers.
3568 Moreover, the value of each factor to an LCA customer may
be different than its cost to the LCA manufactur er. During the negotiation phase, customers make
extensive technical and economic evaluations of LCA manufacturers' proposals to assess the total cost
and anticipated revenue stream (i.e. the overall eco nomic value) presented by a particular proposal.
This evaluation involves arriving at an estimate of the present value of costs associated with the
acquisition of a new fleet of aircraft (e.g. price, ma intenance costs, direct and indirect operating costs,
financing, training costs, costs associated with the introduction of new LCA) against the present value
of the revenue stream that would be expected to be generated by the proposed fleet. The resultant
calculation is the "net present value" (NPV) to the customer of the proposal. 3569 In addition to
differences in price, capacity and direct operating co st, various non-price factors generally form part
of an overall assessment of the net present value of a particular offer from an LCA manufacturer.
Price concessions can offset disadvantages associ ated with non-price factors. In certain cases,
however, offsetting non-price factors through pricing concessions can be very expensive.3570
(vii) European Communities' approach to the nature of the subsidies at issue and their consequent
effects on the three products at issue
7.1695 The parties agree that the nature of the subsidi es plays an important role in an analysis of
whether their effects are any of the forms of serious prejudice alleged in this dispute and both refer to
statements of previous WTO pane ls in support of this proposition. 3571 In US – Upland Cotton , the
panel stated that "{w}e consider it axiomatic that the nature of the United States subsidies at issue – in
terms of their structure, design and operation – is re levant in assessing whether or not they have price

Scherer, Commercial Aspects of the Aircraft Business From the Perspective of a Manufacturer, March 2007,
Exhibit EC-11 (BCI), para. 47.
3567 Rod P. Muddle, The Dynamics of the Large Civil Aircraft Industry, March 2007, Exhibit EC-10,
para. 49; Christian Scherer, Commercial Aspects of the Aircraft Business From the Perspective of a
Manufacturer, March 2007, Exhibit EC-11 (BCI), para. 43. There is perhaps a di fference with respect to
purchases by leasing companies. As Scherer notes, unlike airlines, leasing companies own aircraft for financial,
rather than operational reasons, and are therefore focussed on price and how that price will relate to leasing rates
and profits; Christian Scherer, Commercial Aspects of the Aircraft Business From the Perspective of a
Manufacturer, March 2007, Exhibit EC-11 (BCI), para. 36.
3568 Muddle notes further that the importance of the individual factors also varies between airlines
purchasing to satisfy their own demand, leasing companies purchasing to satisfy known demand from particular
customers, and leasing companies purchasing to satisfy speculative demand; Rod P. Muddle, The Dynamics of
the Large Civil Aircraft Industry, March 2007, Exhibit EC-10, para. 49.
3569 Christian Scherer, Commercial Aspects of the Aircraft Business From the Perspective of a
Manufacturer, March 2007, Exhibit EC-11 (BCI), para. 76. According to Scherer, most disadvantages
compared with the proposal of the competing LCA manufacturer can be compensated for by providing
additional concessions, subject to pr ofitability constraints. Conversely, every advantage over the competitor's
proposal can be used to avoid making additional concessions; Christian Scherer, Commercial Aspects of the
Aircraft Business From the Perspective of a Manufacturer, March 2007, Exhibit EC-11 (BCI), paras. 77-78.
3570 See Rod P. Muddle, The Dynamics of the Large Civil Aircraft Industry, March 2007, Exhibit EC-
10, paras. 98-102.
3571 European Communities' first written submission, para. 1064; United States' first written
submission, para. 728.

BCI deleted, as indicated [***]

suppressing effects."3572 In Korea – Commercial Vessels , the panel stated "{in} conducting this 'but
for' analysis, we will certainly be mindful of the nature of the subsidies alleged to be causing price
suppression and price depression." 3573 We agree that it is appropriate to consider the nature of a
subsidy in order to properly assess its effects.
7.1696 The Panel considers that it is necessary to struct ure its analysis in a manner that takes into
account the fact that, based on the nature of the subsidies at issue, the European Communities makes a
distinction as to the effects of the subsidies on Boeing's commercial behaviour3574 between the 787, on
the one hand, and the 737NG and the 777, on the other.
7.1697 With regard to the 787, the European Commun ities argues that the nature of the subsidies
benefiting Boeing's 787 family reveals that these subsidies have two principal effects on Boeing's
behaviour. On the one hand, the European Communities argues that the aeronautics R&D subsidies
have had what the European Communities terms "t echnology effects" in that they "have helped
Boeing develop, launch and produce a technol ogically-advanced 200-300 seat LCA much more
quickly than it could have on its own". 3575 On the other hand, the European Communities argues that
all of the subsidies benefiting the 787 have what the European Comm unities terms "price effects" in
that "they provide Boeing with the ability to ch arge very low prices for such a technologically-
advanced LCA".3576 These price effects arise because "{e}ach of the subsidies either reduces Boeing's
marginal unit costs for its 787 family LCA or increases Boeing's non-operating cash flow". 3577 The
European Communities argues that it is through these technology effects and price effects on Boeing's
commercial behaviour that the subsidies cause significa nt price suppression, significant lost sales, and
displacement and impedance suffered by Air bus in the 200-300 seat wide body LCA product
market.3578
7.1698 With regard to the 737NG and the 777, the Eu ropean Communities argues that the nature of
the subsidies benefiting these two Boeing aircraft reveals that they have one principal effect on
Boeing's behaviour in that all of the subsidies benefiting these aircraft have price effects by providing
Boeing with the ability to charge lower prices for these aircraft. 3579 These price effects arise because
each of the subsidies either reduces Boeing's marg inal unit costs for its 737NG and 777 family LCA
or increases Boeing's non-operating cash flow. 3580 The European Communities argues that it is
through these price effects on Boeing's behaviour that the subsidies cause significant price

3572 Panel Report, US – Upland Cotton, para. 7.1289.
3573 Panel Report, Korea – Commercial Vessels, para. 7.616.
3574 It is important to note that the European Communities generally uses the term "effect" of the
subsidies to refer to the alleged impact of the subsidies on Boeing's commercial behaviour, not the impact of the
subsidies on Airbus's sales and prices.
3575 European Communities' first written submission, para. 1343. See also, European Communities'
first written submission, paras. 1335,1345.
3576 European Communities' first written submission, para. 1343. See also, European Communities'
first written submission, paras. 1340, 1347.
3577 European Communities' first written submission, para. 1340.
3578 European Communities' first written submission, paras. 1334, 1341, 1376 ("In sum, the nature of
the US subsidies for the 787, in terms of their structure, design, and operation, helps reveal that their effects
have been to: (1) accelerate Boeing's development, laun ch, production and future delivery of a technologically-
advanced 200-300 seat LCA family; and (2) enable Boeing to significantly reduce its sales prices for 787 family
LCA. These effects, in turn, caus e significant price suppression, signifi cant lost sales, displacement and
impedance, and a threat thereof, in the market for the 787 family and competition Airbus LCA.") .
3579 European Communities' first written submission, paras. 1471, 1474, 1565, 1568. See also,
European Communities' first written submission, paras. 1476, 1489, 1570 and 1587.
3580 European Communities' first written submission, paras. 1476, 1570.

BCI deleted, as indicated [***]

suppression, significant lost sales, and displacement and impedance suffered by Airbus in the 100-200
seat single-aisle LCA product market and in the 300-400 seat wide-body LCA product market.3581
7.1699 In sum, whereas for all three aircraft at i ssue the European Comm unities argues that the
subsidies have caused serious prejudice through th eir impact on Boeing's ability to charge lower
prices for its aircraft (price effects), it is only w ith respect to the 787 that the European Communities
argues that certain subsidies at issue also cause serious prejudice through their impact on Boeing's
development of technologies (technology effects). The Panel first examines, in subsection (c)(i)
below, whether the aeronautics R&D subsidies at issue have caused serious prejudice to the interests
of the European Communities by reason of their e ffects on Boeing's development of technologies for
the 787. The Panel then examines, in subsection (c)(ii), with respect to all three aircraft at issue ,
whether all of the subsidies at issue have caused serious prejudi ce to the interests of the European
Communities in that they have had price effects either by reducing Boeing's marginal unit costs for
particular aircraft or by increasing Boeing's non-operating cash flow.
7.1700 We recall that we have found that the total amount of subsidies at issue in this dispute is at
least $5.3 billion. 3582 Of that amount, approximately $2.6 billion relates to the NASA aeronautics
R&D subsidies, while $2.2 billion represents the amount of the FSC/ETI subsidies. Given that these
subsidies comprise the vast majority of the total subsidy amount, we consider the effects of these
subsidies first. Accordingly, our analysis begi ns with an evaluation of the effects of the NASA
aeronautics R&D subsidies, as part of our consid eration of the effects of the aeronautics R&D
subsidies more generally, followed by an evalua tion of the FSC/ETI subsidies, as part of our
consideration of the effects of the tax subsidies that are alleged to operate to reduce Boeing's marginal
unit costs of production and sale of individual LCA.
(c) Evaluation
(i) Whether the aeronautics R&D subsidies cause serious prejudice to the interests of the
European Communities by reason of their effect s on Boeing's development of technologies in
relation to the 787
7.1701 The Panel recalls that our serious prejudice analysis includes the following measures which
we have found to constitute specific subsidies: (i) R&D procurement contracts, assistance
instruments and Space Act Agreements with Boei ng and McDonnell Douglas that were funded under
eight NASA R&D programmes
3583; and (ii) assistance instruments with Boeing and McDonnell
Douglas that were funded under various pr ogrammes under the the DOD RDT&E Program. 3584 The

3581 European Communities' first written submission, paras. 1474, 1484 ("In sum, the nature of the US
subsidies for the 737NG, in terms of their structure, desi gn, and operation, helps reveal that their effect is to
enable Boeing to significantly reduce its sales prices for 737NG family LCA, thereby causing significant price
suppression, significant lost sales, displacement and impe dance, and a threat thereo f, in the market for the
737NG family and competing Airbus LCA."), 1568, 1582 ("In sum, the nature of the US subsidies for the 777,
in terms of their structure, design, and operation, helps reveal that their effect is to enable Boeing to significantly
reduce its sales prices for 777 family LCA, thereby causin g significant price suppression , significant lost sales,
and a threat thereof, in the market for the 777 family and competing Airbus LCA.")
3583 These programmes are: Advanced Composites T echnologies (ACT) Program, Advanced Subsonic
Technology (AST) Program, Research and Technology Base (R&T Base) Program, High Speed Research
(HSR) Program, Computational Aerosciences Project (CAS) of the High Performance Computing and
Communications (HPCC) Program, Aviation Safety Program, Quiet Aircraft Technology (QAT) Program, and
Vehicle Systems (VSP) Program.
3584 As noted in para. 7.1114 of this Report, the European Communities has challenged funding related
to "dual use" technologies allegedly provided to Boeing under 13 "general aircraft" programmes, and under 10
"military aircraft" programmes

BCI deleted, as indicated [***]

Panel has found that not all of the challenged DOD R&D measures constitute specific subsidies.
Specifically, the Panel has found that DOD's R&D procurement contracts with Boeing funded under
the RDT&E programmes are properly characterized as purchases of services falling outside the scope
of Article 1.1(a)(1).
3585 In conducting its analysis of the e ffects of the DOD subsidies in accordance
with Articles 5 and 6.3 of the SCM Agreement, the Panel is aware of the need to ensure that it
considers the effects only of those DOD measures th at it has found constitute specific subsidies. The
European Communities has, for the most part, presen ted its serious prejudice arguments regarding the
effects of the DOD measures on the basis of the specific DOD "project elements" or programmes
under the RDT&E Program, without distinguishing between effects which are attributable to
procurement contracts under those programmes and those which are attributable to assistance
instruments. While there is evid ence on the record linking specifi c assistance instruments to funding
provided through particular RTD&E programmes, there is insufficient evidence of the effects of those
assistance instruments as distinct from the effects of the RDT&E programmes (including the effects
of procurement contracts funded under those progr ammes) more generally. However, as noted at
paragraph 7.1148 of the Report, the ManTech a nd DUS&T programmes had the explicit objective of
developing "dual use" R&D and were predominantly funded through cooperative agreements or other
assistance instruments.3586 In these circumstances, the Panel cons iders that it is highly likely that the
effects of the ManTech and DUS&T programmes pertain to the effects of assistance instruments
funded through those programmes. The Panel is unab le to make a similar assumption in relation to
the arguments and evidence concerning the effect s of the other RDT&E programmes, on the one
hand, and the effects of assistance agreements f unded under those programmes, on the other. The
Panel considers that there is insufficient eviden ce on the record that those other RDT&E programmes
funded predominantly assistance inst ruments, as opposed to procurement contracts, or a mixture of
assistance instruments and procurement contracts. The end result is that the European Communities
has not advanced sufficient argument or evidence re garding the effects of assistance instruments
funded through RTD&E programmes other than in relation to the ManTech and DUS&T
programmes.
7.1702 The European Communities argues that overall, but for the aeronautics R&D subsidies, (i)
Boeing could not have launched, in April 2004, a 787 family of LCA offering the many operating cost
savings and enhancements in passenger comfort that have made it such a commercial success relative
to the A330 and Original A350
3587; and (ii) Boeing could not have contractually bound itself to make
significant deliveries of the 787 starting in 2008. 3588 The European Communities considers that the
most important of the technical characteristics of the 787 that are "derived from US Government-
supported aeronautics R&D subsidies" are its com posite fuselage, composite wing and composite
manufacturing tools and processes. 3589 In evaluating the merits of these arguments, the Panel will
focus primarily on the material pertaining to r esearch conducted by Boeing and McDonnell Douglas
under the aeronautics R&D programmes in the field of composites, and the composites technologies
applied to the 787, particularly under the ACT, AST and R&T Base programmes, which appear from
the evidence to be the most commercially and technologically significant programmes in this regard.

3585 See paras. 7.1171 and 7.1187 of this Report.
3586 See also United States' response to question 321 , para. 22. We note that the United States has
identified two procurement contracts that were funded under the ManTech Program; United States' response to
question 321, para. 22 at footnote 32. The effects of these procurement contracts have not been taken into
account in the Panel's assessment of the effects of assistance instruments funded through the ManTech Program.
3587 Rather, according to the European Communities, it would have taken Boeing "years longer" as well
as much more of its own money to do so; European Communities' first written submission, Annex C, para. 199.
3588 European Communities' first written submission, Annex C, para. 199.
3589 European Communities' first written submission, para. 1351. See also, European Communities'
first written submission, para. 750, and Annex C, para. 188. The United States refers to composites technology
as "the centerpiece of the EC's technology arguments", United States' first written submission, para. 17.

BCI deleted, as indicated [***]

7.1703 The Panel has carefully reviewed the evidence before it regarding the nature of the U.S.
federal aeronautics R&D subsidies. The Panel consid ers that, viewed together with other contextual
factors, this evidence supports the argument of th e European Communities that these subsidies have
had "technology effects" in relation to the 787 and have, through this route of transmission, caused
serious prejudice within the meaning of Articles 5 and 6.3 of the SCM Agreement. We explain the
basis for that conclusion below.
7.1704 The Panel considers that its analysis of the natu re of the U.S. federal aeronautics subsidies at
issue needs to be viewed in the context of their overall policy objectives. Numerous statements on
record demonstrate that a key objective of these subsidies was the enhancement of the
competitiveness and increase of the ma rket share of the U.S. industry, and Boeing in particular, vis-à-
vis its international competitors.3590
7.1705 For example, NASA's Langley Director has stated:
"The reason there is a NASA Langley and the other aeronautics centers is to
contribute technology to assure the pre-emin ence of U.S. aeronautics. When Boeing
brings out a flagship product like the 777, that uses as many products of NASA
technology as are on this plane, it reaffirms the reason that we exist and is very
gratifying to us."3591
7.1706 The U.S. Congressional Budget Office for its part observed:
"The National Aeronautics and Space Administration (NASA) funds the development
of technology and systems intended for use in commercial airliners – both subsonic
and supersonic – with the explicit objective of preserving the U.S. share of the current
and future world airliner market."
3592
7.1707 More specifically, as regards the ACT Program, a NASA Contractor Report makes the
following observations regarding the benefits from NASA funding:
"World dominance in transport aircraft sales by US. industry is threatened by foreign
competitors. The lower left corner of Figure 2-1 shows the European consortium,
Airbus Industrie, has captured market shar e at the expense of US manufacturers.
Boeing has remained the only US. aircraft manufacturer to meet the Airbus challenge
without loss of market share. US. gove rnment research funding, such as the NASA
ACT program, helps Boeing and other US. aircraft manufacturers to develop
advanced technology and remain competitive in world markets.

Boeing is the world's largest producer of co mmercial transport aircraft, maintaining a
market share of over 57% for the world and over 80% for the United States. This
provides a large benefit to the US. economy. Approximately 75% of Boeing sales are
exports, helping to reduce the US. trade defic it. Every $1 billion in US airplane sales

3590 The Panel recalls that in the context of its anal ysis of whether the NASA R&D measures at issue
constitute purchases of services it has found that a pr incipal purpose of NASA's aeronautics R&D in general,
and of the eight aeronautics programmes at issue, is to tr ansfer technology to U.S. industry with a view to
improving U.S. competitiveness vis-à-vis foreign competitors.
3591 Video clip of Langley Director Dr. J.F. Creedon on visit of Boeing 777, Langley Research Center,
LV-1998-00023, Exhibit EC-287.
3592 Reducing the Deficit: Spending and Revenue Options, Congressional Budget Office, March 1997,
Exhibit EC-307, p. 152.

BCI deleted, as indicated [***]

creates about 30,000 labor years of work, of which 87% is performed in the US. The
Boeing Commercial Airplane Group has spen t up to $10 billion a year on goods and
services produced by over 5,000 suppliers throughout the United States (see Figure 2-
2). Maintenance of the United States aircraft industry's market position is critical for
the preservation of high paying skilled jobs, a capable industrial base, and balance of
trade."
3593
7.1708 As regards the AST Program, Wesley L. Harris, NASA Associate Administrator for
Aeronautics, stated that "NASA's objective in th e Advanced Subsonic Technology (AST) program is
to provide U.S. industry with a competitive edge to recapture market share, maintain a strongly
positive balance of trade, and increase U.S. jobs." 3594 A NASA contractor report also stated that it
evaluates the long-term success of the AST Program in terms of, among other things, "how well it
contributes to an increased market-share for U.S. civil aircraft and aircraft component producers". 3595
A study commissioned by NASA of the impact of Integrated Wing Design technologies provides
estimates of increases in U.S. manufacturers' sales revenues expected to result from those
technologies.3596 Regarding the R&T Base Program, NASA has stated that this program is "critical to
technological pre-eminence in the worldwide aerosp ace market" and that the goals of this programme
are "driven by the need to reduce product costs and capture increased market share".3597
Structure and design of the aeronautics R&D subsidies
7.1709 The aeronautics R&D subsidies are structured as multi-year R&D contracts which are funded
through specific aeronautics R&D programmes. Th e aeronautics R&D programmes have what might
be described as overall objectives or purposes, which are sought to be achieved through the attainment
of specific technical objectives. The R&D subs idies that comprise the programmes reflect the
objectives of the R&D programmes through which they are funded, and to that end, specify their own
objectives as well as more specific technical performance goals. The Panel summarizes below
evidence regarding the design of the aeronautics R&D programmes at issue. The Panel's review of
this evidence shows that NASA consistently and pervasively expresses the objectives of, and
motivations behind, its aeronautics R&D programm es in terms of promoting the competitiveness of
the U.S. aeronautics industry through technology development leading to superior and lower cost
products. The particular areas covered by these R& D programmes appear to have been selected on
the basis of their likely contribution toward the commercial development of technologies that were
viewed as being of particular strategic importance to the enhancement of th e competitiveness of the
U.S. industry. Closely related to this, the evid ence shows that the R&D w as often undertaken at the
behest of and in close collaboration with the U.S. industry. While the research performed by Boeing
under the NASA R&D programmes was not undertaken directly in the context of the development
and production of particular civil aircraft, th e NASA R&D programmes aimed at enhancing Boeing's
ability to develop technology for commercial purposes.
3598

3593 Advanced Technology Composites Fuselage – Program Overview, pp.2-1-2-2, Exhibit EC-330.
3594 Statement of Wesley L. Harris, NASA Associate Administrator for Aeronautics, before the House
Subcommittee on Technology, Environment, and Aviation, 10 February 1994, Exhibit EC-359, p. 5.
3595 Eileen Roberts et al., Aviation Systems Anal ysis Capability Executive Assistant Development,
NASA/CR-1999-209119, Logistics Management Institute, March 1999, Exhibit EC-358, p.1-1.
3596 Abel A. Fernandez, An Impact Analysis of a NA SA Aeronautics Research Project: The Integrated
Wing Design Project, Exhibit EC-31.
3597 NASA R&T Base Budget Estima tes, FY 2002, Exhibit EC-398, SAT 4.1-4,; NASA R&T Base
Budget Estimates, FY 1996, Exhibit EC-398, SAT 4-4.
3598 The Panel emphasizes that because the NASA R& D programmes at issue are clearly linked to
industrial and commercial objectives, the R&D programmes at issue do not in volve "fundamental research" that
until 1 January 2000 was "non-actionable" under the provisions of Article 8 of the SCM Agreement.

BCI deleted, as indicated [***]

Advanced Composites Technology Program
7.1710 In 1988, NASA launched the ACT Program as a major new programme for composite wing
and fuselage primary structures. 3599 The programme was aimed at developing materials, structural
mechanics methodology, design concepts and fabri cation procedures that offered the potential to
make composite structures cost-effective compared with aluminium structures. NASA's ACT Budget
Estimates for 1997 described the goal of the ACT Program in the following manner:
"{T}o increase the competitiveness of the U. S. aeronautics industry by putting the
commercial transport manufacturers in a position to expand the application of
composites beyond the secondary structures in use today to wings and fuselages by
the end of this decade. Industry's resistan ce to using composites is one of economics.
While the current demonstrated level of composites technology can promise
improved aircraft performance and lower ope rating costs through reduced structural
weight, it does so with increased manufactur ing costs, currently twice the cost of
aluminium. The goal of this program is to verify composite structure designs that
will have acquisition costs 20-25% less and weigh 30-50% less than an aluminium
aircraft sized for the same payload and mission".
3600
7.1711 Fifteen contracts were awarded by NASA by th e first quarter of 1989 to participants that
included commercial and military airframe manu facturers (e.g. Boeing, McDonnell Douglas and
Lockheed Corporation), materials developers and suppliers, universities and government
laboratories.3601 The ACT Program established primary research teams in the specific technical areas
of automated fibre placement, RTM/stitched tech nologies and textile preforms. Each of these
technical areas had a lead airframe contr actor: Boeing (Automated Fibre Placement), 3602 McDonnell
Douglas (RTM/Stitched) 3603 and Lockheed (Textile preforms). 3604 In addition, various organizations
supported generic R&D that was initiated early in the programme.3605

3599 The European Communities identifies NASA's AC T Program, including its continuation through
the AST Program and the R&T Base Program as the most important U.S. government programme that
contributed to Boeing's development of composites technologies for the 787; European Communities' first
written submission, Annex C, para. 26. Emphasis added.
3600 NASA ACT Budget Estimates, FY 1989-FY 1997, Exhibit EC-321, at FY 1997, SAT 4-21.
3601 John G. Davis, Jr., Overview of the ACT Program, in John G. Davis, Second NASA Advanced
Composites Technology Conference, NASA Conference Publication 3154, 4-7 November 1991, Exhibit EC-
810, p. 8.
3602 Other members of the AFP research team were He rcules, Stanford University, University of Utah,
NASA Langley Materials Division and NASA Langley Structural Mechanics Division; John G. Davis, Jr.,
Overview of the ACT Program, in John G. Davis, Second NASA Advanced Composites Technology
Conference, NASA Conference Publication 3154, 4-7 November 1991, Exhibit EC-810, p. 8.
3603 Other members of the RTM/Stitched research team were Dow Chemical, NASA Langley Materials
Division and NASA Langley Structural Mechanics Division; John G. Davis, Jr., Overview of the ACT Program,
in John G. Davis, Second NASA Advanced Composites Technology Conference, NASA Conference
Publication 3154, 4-7 November 1991, Exhibit EC-810, p. 8.
3604 Other members of the textile preforms research team were Grumman, Rockwell International,
BASF, NASA Langley Materials Division, NASA Langley Structural Mechanics Division and NASA Langley
Structural Dynamics Division; John G. Davis, Jr., Overview of the ACT Program, in John G. Davis, Second
NASA Advanced Composites Technology Confer ence, NASA Conference Publication 3154, 4-
7 November 1991, Exhibit EC-810, p. 8.
3605 These organizations were University of Utah, Siko rsky, University of California-Davis, University
of Delaware, Northrop, and various NASA divisions; John G. Davis, Jr., Overview of the ACT Program, in John
G. Davis, Second NASA Advanced Composites Technology Conference, NASA Conference Publication 3154,
4-7 November 1991, Exhibit EC-810, p. 8.

BCI deleted, as indicated [***]

7.1712 The contract awarded to Boeing formed the Advanced Technology Composite Aircraft
Structures (ATCAS) element of the ACT Program. 3606 The primary objective of ATCAS was "to
develop an integrated technology and demonstrate a confidence level that permits the cost- and
weight-effective use of advanced composite materials in primary structures of future aircraft with the
emphasis on pressurized fuselages". 3607 The contract awarded to Douglas Aircraft Company
(subsequently McDonnell Douglas) formed the Innovative Composite Primary Structures (ICAPS)
element of the ACT Program. 3608 The overall objective of this contract was to develop and
demonstrate technology to manufacture composite prim ary structures for transport and fighter aircraft
representing 1990 technology.3609
7.1713 The ACT Program formally ended in 1995, in the early stages of Phase C of the programme.
Phase C of the programme had been envisaged as the designing, building and testing of major
components of the airframe and the demonstration the technology readiness for applications in the
next generation of subsonic comme rcial transport aircraft. Alt hough the ACT Program ended in the
early stages of Phase C, funding for advanced co mposites research related to a composite fuselage
continued from 1996 to 2000 under the "Materials and Structures" element of NASA's R&T Base
Program, while funding for advanced composites resear ch related to composite wings continued from
1996 to 1999 under the "Composites" element of NASA's AST Program.3610
Advanced Subsonic Technology Program
7.1714 As explained above, following the termin ation of the ACT Program in 1995, NASA
continued funding the composite wing aspects of th at research programme (i.e. ICAPS) through a
newly initiated composites element that had been added to the AST Program in 1995. 3611 The element
of the AST Program relevant to the European Communities' arguments regarding the aerodynamics
and structural design of the 787 is the Integrated Wing Design project (IWD). The element of the
AST Program relevant to the European Communities' arguments regarding the "more-electric"
architecture of the 787 is the "Fly-by-Light/Power-b y-Wire"(FBL/PBW) project and in particular, the

3606 In a 1997 NASA Contractor Report, Boeing describes the ATCAS programme as having been
initiated in 1989 as NASA Contract NAS1-18889; an integral part of the NASA sponsored ACT initiative. The
report then describes Task 2 of Materials Development Omnibus Contract (NASA Contract NAS1-20013)
which was awarded in 1993, as extending the ATCAS wo rk. The report states that these two contracts
addressed Phases A and B relating to concept selection and technology development. An additional contract
(NASA Contract NAS1-20553 , referred to as Phase C) was initiated to verify the technology at a large scale;
L.B. Ilcewicz et al., Advanced Technology Composite Fuselage—Program Overview, NASA Contractor Report
4734, April 1997, Exhibit EC-808, para. 2-0.
3607 L.B. Ilcewicz et al., Advanced Technology Composite Fuselage—Pro gram Overview, NASA
Contractor Report 4734, April 1997, Exhibit EC-808, para. 4-1.
3608 The ICAPS Program was implem ented as NASA Contract NAS1-18862 with McDonnell Douglas
Corporation regarding Innovative Composite Aircraft Primary Structures, 31 March 1989, Exhibit EC-331.
3609 Specific objectives included (i) development and demonstration of innovative woven/stitched fibre
preforms and resin matrix impregnation concepts for transport wing and fuselage structures; (ii) demonstration
of advanced tow placement processes fo r transport fuselage structures; and (iii) demonstration of the use of
thermoplastic materials with advanced manufacturing techniques for fighter aircraft fuselage structures.
3610 NASA ACT Budget Estimates, FY 1989-FY 1997, Exhibit EC-321, at FY 1997, SAT 4-21.
3611 The FY 1996 NASA AST Budget Estimates state that, in 1996, based on the technology developed
in the recently completed Phase B of NASA's ACT Program, the new AST composites element will accelerate
the effort to validate the application of composites to commercial transport wings by completing the baseline
aircraft and requirements docu ment for composite airframes, candidate ma terials identification, along with cost
and weight trade and sensitivity issues; NASA AST Budget Estimates, FY 1992 - FY 2001, Exhibit EC-357, at
FY 1996, SAT 4-42.

BCI deleted, as indicated [***]

Power-by-Wire subtask (PBW). 3612 The element of the AST Program relevant to the European
Communities' arguments concerning the noise reduction technologies on the 787 is the noise
reduction element of the AST Program.
7.1715 The initial goal of NASA's AST Program was to accelerate the development of key, high-
payoff technologies to maintain the performance/cost advantage of U.S. subsonic transport aircraft in
the world market, and to ensure their efficient and safe operation in the National Airspace System.
3613
NASA's Budget Estimates for 1998 indicate that one of the indicia of success of the programme is
how well NASA contributes to "technology readiness that will enable U.S. manufacturers to capture a
larger share of the world market for civil aircraft".3614
7.1716 The objective of the composites element of the AST Program was described as being "to
develop and verify at full-scale the composites stru ctures technology, including verification of design
concepts, structural materials and manufacturing methods, required for joining composite wings to
composite fuselages while saving weight and cost compared to conventional metal commercial
transports".3615 By 1996, the objectives for the compos ites element of the AST Program were
described as follows:
"The aircraft industry's resistance to using composites is one of economics. While the
current demonstrated level of composites technology can promise improved aircraft
performance and lower operating costs through reduced structural weight, it does so
with increased manufacturing costs, currently twice the cost of aluminium. The goals
of the composites element are to reduce the weight of civil transports by 30-50% and
their cost by 20-25% compared to today's me tallic transports. This translates into a
potential 16% direct operating cost-sav ings to the airlines and increases the
competitiveness of the U.S. built transports. In cooperation with industry and the
FAA, research is performed to validate th e technology for the application of new
composites manufacturing techniques, such as through-the-thickness stitching and
resin transfer moulding, textile preforms and advanced fiber placement, on transport
wings".
3616
7.1717 NASA described the goals of the IWD project in the following manner:
"Current approaches to the aerodynamic design of commercial transport rely on
methods that develop the design of vari ous wing components independently, which
results in an aerodynamic design cycle that is both long and expensive. New design
methodology is being developed that tr eats the wing aerodynamic technologies and
components in an integrated manner. To accomplish this, research is being
conducted in test/measurement techniques and the aerodynamic disciplines of high-
lift, propulsion/airframe integration, wing design and laminar flow control. New
concepts, design methodologies, model fabrication and test techniques are being

3612 Fly-by-light means replacing the current fly-by-wire control systems with lightweight, highly
reliable fiber optical systems that elim inate the concerns of electromagnetic interference associated with fly-by-
wire. Power-by-wire involves replacing hydraulics with an electrical power actuation system.
3613 NASA AST Budget Estimates, FY 1992 - FY 2001, Exhibit EC-357, at FY 1993, RD12-27.
3614 NASA AST Budget Estimates, FY 1992 - FY 2001, Exhibit EC-357, at FY 1998, SAT 4.1-30.
3615 NASA AST Budget Estimates, FY 1992 - FY 2001, Exhibit EC-357, at FY 1995, SAT 4-33.
3616 NASA AST Budget Estimates, FY 1992 - FY 2001, Exhibit EC-357, at FY 1996, SAT 4-38. In
1997, this objective was modified to recognize indust ry's concern not just with the comparative costs of
composites, but also the robustness and reparability of co mposites. In addition, the weight and cost reduction
targets were modified as follows: reduce the weight of civil transports by 10-30 per cent and their cost by 10-20
per cent, translating into a potential five per cent direct operating cost-savings to the airlines; NASA AST
Budget Estimates, FY 1992 - FY 2001, Exhibit EC-357, at FY 1997, SAT 4-37.

BCI deleted, as indicated [***]

developed to provide industry an integrated capability to achieve increased aircraft
performance at lower cost. In addition, the new methodologies will be integrated into
a design and testing process that redu ces the aerodynamic design cycle time by
25%."3617
Further, in 1997, NASA stated that the integrated design and test procedures would:

"{P}rovide an overall reduction in the tota l aircraft development time of one year
compared to an established 1995 baseline product development cycle time. In
addition, the new design and test procedures will be used to deliver validated, highly
efficient wing designs for cruise and low-speed operation which include the effects of
propulsion system integration. This will yield a 4-per cent reduction in Total
Airplane Operation Costs (TAROC) relativ e to established 1995 baseline technology
levels."
 3618
7.1718 The FBL/PBW subtask of NASA's AST Program aimed to develop a more-electric systems
architecture for civil aircraft. More specifically, it aimed "to develop and demonstrate the technology
for a more-electric secondary power system and to provide enough confidence in this technology
through testing that the airline industry will begin to transfer this technology into the civil fleet". 3619
NASA AST Budget Estimates indicate that the gene ral goal of the FBL/PBW subtask of the AST
Program was to provide lightweight, highly reliable, electromagnetically immune control and power
management systems for advanced subsonic civil transport aircraft.3620
7.1719 The noise reduction element of the AST Program was a focused technology programme for
developing noise reduction technologies for the U.S. commercial aircraft industry to enhance its
competitiveness to meet national and internationa l environmental requireme nts and to facilitate
market growth.3621 The noise reduction element was designe d to develop noise reduction technology
for source noise reduction, nacelle aeroacoustics, engine/airframe integration, interior noise, and flight
procedures to reduce airport community noise, wh ile maintaining high efficiency via systematic
development and validation of noise reduction technology.3622
7.1720 The NASA AST Budget Estimates for 1998 also note that, with competition from foreign
competitors greatly increasing, technology is "criti cally needed to help pr eserve the U.S. aeronautics
industry market share, jobs and balance of trade".3623
7.1721 The AST Program was terminated in 1999 in order to focus resources on high priority
national goals like aircraft engine emissions and airport crowding. 3624 The 2000 and 2001 Budget
Estimates indicate that, under the AST Program, aggr essive technology transition plans were pursued
in order to mitigate the significant risk to successful technology transfer to industry as a result of early
termination of the programme.3625

3617 NASA AST Budget Estimates, FY 1992 - FY 2001, Exhibit EC-357, at FY 1996, SAT 4-36.
3618 NASA AST Budget Estimates, FY 1992 - FY 2001, Exhibit EC-357, at FY 1997, SAT 4-36.
3619 Power-by-Wire Development and Demonstration for Subsonic Civil Transport, Exhibit EC-366;
NASA AST Budget Estimates, FY 1992 - FY 2001, Exhibit EC-357, at FY 1994, RD 9-36.
3620 NASA AST Budget Estimates, FY 1992 – FY 2001, Exhibit EC-357, at FY 1995, SAT 4-29.
3621 NASA Memorandum to Research and Focused Branch, at 4, Exhibit EC-365.
3622 NASA AST Budget Estimates, FY 1992 - FY 2001, Exhibit EC-357, at FY 1996, SAT-4-36.
3623 NASA AST Budget Estimates, FY 1992 - FY 2001, Exhibit EC-357, at FY 1998, SAT 4.1-30.
3624 NASA AST Budget Estimates, FY 1992 – FY 2001, at FY 2001, Exhibit EC-357.
3625 NASA AST Budget Estimates, FY 1992 – FY 2001, Exhibit EC-357, at FY 2000, at FY 2001, SAT
4.1-36.

BCI deleted, as indicated [***]

Research & Technology Base Program
7.1722 As of 1996, funding for work on composite fusel age structures that had previously been
allocated to the ACT Program continued under the "Materials and Structures" element of the R&T
Base Program (subsequently to become the "A irframe Systems Program" when the R&T Base
Program was reorganized in 1997).
7.1723 The element of the R&T Base Program relevant to the European Communities' arguments
concerning the aerodynamics and structural design of the 787 is the "aerodynamics research and
technology programme". This component of the R&T Base Program was formed in 1992.
3626 The
R&T Base Program was reorganized in 1997, af ter which aerodynamics research was performed
across more than one of the components of the programme.3627
7.1724 The element of the R&T Base Program relevant to the European Communities' arguments
concerning the health management systems on the 787 was the "flight systems research and
technology programme".
7.1725 The goal of NASA's R&T Base Program is described by NASA as follows:
"{T}o serve as the vital foundation of expertise and facilities that consistently meets a
wide range of aeronautical and technology ch allenges for the nation. The program is
intended to provide a high-technology, diverse-discipline environment that enables
the development of new, even revolutio nary, aerospace concepts and methodologies
for applications in industry."
3628
7.1726 NASA's R&T Base Budget Estimates for 1997 cont ain the following statement as a strategy
for achieving its goals:
"Today, the U.S. leadership position in aer onautics is being seriously challenged by
aggressive international competition. Futu re U.S. competitiveness is dependent upon
sustained NASA advances in aeronautics. Critical elements of NASA's contribution
to the aviation industry are the flow of new ideas and concepts, the ability to react
quickly to unanticipated technical challenges, and the fundamental knowledge
produced by the R&T Base."3629
7.1727 The objectives of the Materials and Structures element of the R&T Base Program included
the development of structures and materials technol ogies for increasing effici ency, reducing the cost
of the next generation of aircraft and increasing the competitiveness of the next generation of aircraft
by making available advanced materials for primary airframe and engine structures. 3630 The objective
of the Aerodynamics Research and Technology elem ent of the R&T Base Program was to provide
new, validated technology applicable to future U.S. military and civil aircraft from subsonic to
hypersonic speeds.3631

3626 NASA R&T Base Budget Estimates, FY 1991 – FY 2004, at FY 1992, Exhibit EC-398, RD 12-3.
3627 See Dominik Wacht, an Analysis of Selected NASA Research Programs and Their Impact on
boeing's Civil Aircraft Programs, November 2006, Exhibit EC-15, p. 126, in which Wacht discusses the
programme achievements by aeronautical discipline rather than by prog ramme classification, due to the change
in the structure of the programme.
3628 NASA R&T Base Budget Estimates, FY 1991 – FY 2004, Exhibit EC-398, at FY 1999, SAT 4.1.2.
3629 NASA R&T Base Budget Estimates, FY 1991 – FY 2004, Exhibit EC-398, at FY 1997, SAT 4-5.
See also, NASA R&T Base Budget Estimates, FY 1991 – FY 2004, Exhibit EC-398, at FY 1998, SAT 4.1-3.
3630 NASA R&T Base Budget Estimates, FY 1991 – FY 2004, Exhibit EC-398, at FY 1995, SAT 4.7.
3631 NASA R&T Base Budget Estimates, FY 1991 – FY 2004, Exhibit EC-398, at FY 1995, SAT 4.5.

BCI deleted, as indicated [***]

High Speed Research Program
7.1728 NASA's HSR Program was a focused technology development programme intended to enable
development of a high-speed (i.e. supersonic) civil transport ("HSCT"). 3632 The programme
proceeded in two phases, with Phase I commenc ing in 1990 and Phase II commencing in 1994. 3633
The object of Phase I was to define "HSCT environm ental compatibility requirements in the areas of
atmospheric effects and community noise and sonic boom, and…establish{ing} a technology
foundation to meet these requirements". 3634 The objective of the HSR Program was expressed at the
beginning of Phase I as follows :
"Studies have indicated that, under certain economic conditions with sufficient
technology development, future high-s peed aircraft could be economically
competitive with long-haul subsonic ai rcraft. Currently, however, critical
environmental concerns about atmospheri c impact, airport noise, and sonic boom
present powerful disincentives to the privat e sector to pursue such research and
technology. The high-speed research progr am will address the resolution of these
barrier environmental issues and develop the basis for evaluating technology
advances that can provide the necessary environmental compatibility."3635
7.1729 Phase II of the programme was directed at "addressing essential technologies needed by the
U.S. aeronautics industry in order to make inform ed decisions regarding future HSCT development
and production".3636 At the beginning of Phase II, the goal of the HSR Program was expressed as:
"Industry studies…have identified a substan tial market for a future high-speed civil
transport (HSCT) aircraft to meet the rapidly growing long-haul market…While
current technology is insufficient, the studies further indicate that an environmentally
compatible and economically competitive HSCT could reach fruition through
aggressive technology development and application."
 3637
7.1730 Boeing and McDonnell Douglas were the prim ary airframe contractors under the HSR
Program, with this area of research commencing in Phase II. Although Phase II of the HSR Program
was originally planned as an eight year project, the programme was cancelled at the end of 1999.
NASA explained this decision in its Budget Estimates:
"In the early 1990's, studies indicated that an environmentally compatible and
economically competitive HSCT could be possible through aggressive technology
development. Since then, NASA concentrated its investments in the pre-competitive,
high-risk technologies. While NASA has continued to be successful and is on track to
meet the original program goals, recent market analyses and estimated industry
development costs of $15 to $18 billion ha ve made the HSCT considerably less
attractive to NASA's industry partners. Cost of development in this amount puts the
aircraft industry at significant financial ri sk. Current analyses indicate that further
significant investments in technology development are required to ensure an
economically viable HSCT. Consequently, th e cost of development has led the major
aircraft manufacturer to the conclusion that the introduction of an HSCT cannot

3632 "US Supersonic Commercial Aircraft, Assessing NASAs High Speed Resear ch Program", Exhibit
EC-319, p. 1.
3633 NASA HSR Budget Estimates, FY 1991 – FY 2001, Exhibit EC-343, at FY 1994, RD 9-31, and
RD 9-33.
3634 NASA HSR Budget Estimates, FY 1991 – FY 2001, Exhibit EC-343, at FY 1994, RD 9-31.
3635 NASA HSR Budget Estimates, FY 1991 – FY 2001, Exhibit EC-343, at FY 1991, RD 12-35.
3636 NASA HSR Budget Estimates, FY 1991 – FY 2001, Exhibit EC-343, at FY 1994, RD 9-33.
3637 NASA HSR Budget Estimates, FY 1991 – FY 2001, Exhibit EC-343, at FY 1994, RD 9-31.

BCI deleted, as indicated [***]

reasonably occur prior to the year 2020. Fo r these reasons, industry has reduced their
commitment to this area and has scaled b ack their investments. Given other pressing
needs in the Agency in general, and aerona utics in particular, the HSR program will
be concluded by the end of FY 1999." 3638
Computational Aerosciences Project of the High Performance Computing and
Communications Program
7.1731 The HPCC Program was designed as a multi-agency effort, with the involvement of all major
agencies interested in high sp eed computing and communications, including NASA, the Department
of Energy, the National Science Foundation, the De fense Advanced Research Projects Agency, the
Department of Commerce, the National Institut es of Health and the Environmental Protection
Agency.3639 The 1992 Budget Estimates for the HPCC Progr am describe the goal of NASA's portion
of the HPCC as:
"{T}o accelerate the development and application of high-performance computing
technologies to meet NASA's science and engineering requirements." 3640
7.1732 Further, a HPCC fact sheet produced by NASA claims that the goal of the HPCC Program
was to:
"{F}oster the development of high-risk, high-payoff systems and applications that
will most benefit America…to increase the speed of change in research areas that
support NASA's aeronautics, Earth and space missions." 3641
7.1733 The HPCC Program consisted of four components, one of which was the computational
aerosciences project ("CAS"), the component most relevant to the aeronautics industry. 3642 The aim
of the CAS project has been described variously as "to significantly shorten the design cycle time for
advanced aerospace products such as future high-speed civil transports" 3643 and to "accelerate the
development, availability and use of high-perform ance computing technology by the U.S. aerospace
industry, and to hasten the emergence of a viab le commercial market for hardware and software
vendors to exploit this lead".3644 Further, according to the HPCC Budget estimates:
"CAS targets advances in aeroscience algor ithms and applications, system software
and machinery that will enable more than 1000-fold increases in system performance
early in the twenty-first century. These computational capabilities will be sufficiently
characterized such that they can be rapi dly integrated into economical design and

3638 NASA HSR Budget Estimates, FY 1991 – FY 2001, Exhibit EC-343, at FY 2000, SAT 4.1-29.
3639 NASA HPCC Budget Estimates, FY 1992 – FY 2003, Exhibit EC-373, at FY 1992, Budget RD 2-
12.
3640 NASA HPCC Budget Estimates, FY 1992 – FY 2003, Exhibit EC-373, at FY 1992, Budget RD 2-
12.
3641 The National Aeroautics and Space Administration's (NASA) High Performance Computing and
Communications (HPCC) Program, Exhibit EC-372, at p. 1.
3642 Dominik Wacht, An Analysis of Selected NASA Research Programs and Their Impact on Boeing's
Civil Aircraft Programs, November 2006, Exhibit EC-15, at page 122. The other components of HPCC were
the Earth and Space Sciences project, the Informatio n Infrastructure and Technology and Applications
component, and the Remote Exploration and Experimentation project; The National Aeroautics and Space
Administration's (NASA) High Performance Computing and Communications (HPCC) Program, Exhibit EC-
372.
3643 NASA HPCC Budget Estimates, FY 1992 – FY 2003, Exhibit EC-373, at FY 1996, SAT 4-18.
3644 The National Aeroautics and Space Administration's (NASA) High Performance Computing and
Communications (HPCC) Program, Exhibit EC-372, p. 3.

BCI deleted, as indicated [***]

development processes for use by the U.S. industry. Although CAS does not develop
production computing systems, CAS technolog y and the characterization of existing
hardware and software will enable the de velopment of full-scale systems by industry
and will make commercial ventures into this area more attractive." 3645
7.1734 The HPCC fact sheet provides:
"The U.S. aerospace industry can effectiv ely respond to increased international
competition only by producing across-the-board better quality products at affordable
prices. High performance computing cap ability is a key to the creation of a
competitive advantage, by reducing pr oduct cost and design cycle times; its
introduction into the design process is, howev er, a risk to a commercial company that
NASA can help mitigate by performing th is research. The CAS project catalyzes
these developments in aerospace computing, while at the same time pointing out the
future way to aerospace markets for domestic computer manufacturers." 3646
Quiet Aircraft Technology and Vehicle Systems Programs
7.1735 The QAT Program built upon the noise reduction element of the AST Program. 3647 QAT,
along with its predecessor noise reduction element of the AST Program, focused on "developing noise
reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet
national and international environmental requirements and to facilitate market growth".3648
7.1736 Beginning in 2003, NASA classified the QAT Program as a component of the Vehicle
Systems Program. The VSP Program is focused on the development of breakthrough technologies for
future aircraft and air vehicles. One of the stated justifications for the VSP Program is as follows:
"U.S. competitors are targeting aviation leadership as a stated strategic goal. Without
careful planning and investment in new t echnologies, near-term gridlock, constrained
mobility, unrealized economic growth, and th e continued erosion of U.S. aviation
leadership could result."
3649
Aviation Safety Program
7.1737 The Aviation Safety Program commenced in 2000 with the goal of developing and
demonstrating technologies that contribute to a redu ction in aviation and accident fatality rates by a
factor of five by the year 2007, compared with the 1994 – 1996 average. 3650 Under the Aviation
Safety Program, NASA conducts high-payoff resea rch that builds upon and advances the agency's
safety-related research capabilities. In partic ular, the research conducted under this programme

3645 NASA HPCC Budget Estimates, FY 1992 – FY 2003, Exhibit EC-373, at FY 2000, SAT 4.1-24.
3646 The National Aeroautics and Space Administration's (NASA) High Performance Computing and
Communications (HPCC) Program, Exhibit EC-372, at p. 3.
3647 NASA QAT Budget Estimates, FY 2001-FY 2007, Exhibit EC-384, at FY 2002, SAT 4.1-75.
Beginning with its FY 2003 Budget Estimates, NASA co nsidered the QAT Program to be a component of the
Vehicle Systems Program; however, it provided a separate line item for the QAT Program through its FY 2005
Budget Estimates. The European Comm unities considers the QAT Program as a separate programme through
FY 2005, and excludes figures for the QAT Program accordingl y in its analysis of the non-engine LCA
components of the Vehicle Systems Program.
3648 NASA Memorandum to Research and Focused Branch, Exhibit EC-365, at 4.
3649 NASA Vehicle Systems Budget Estimates, FY 2003 – FY 2007, Exhibit EC-396, at FY 2003, SAT
4-23.
3650 NASA Aviation Safety Budget Estimates, FY 2000 – FY 2007, Exhibit EC-382, at FY 2000, SAT
4.1-49.

BCI deleted, as indicated [***]

encompasses (i) foundational science and discipline-cen tric research; (ii) multidisciplinary, coupled
effects, and component-based research; (iii) sub-sy stem or multidisciplinary integration; and (iv)
system level design.3651
Industrial Preparedness/Manufacturing Technology Program
7.1738 The DOD ManTech Program is a corporate Air Force programme that establishes and
demonstrates advances in manufacturing process technologies, manufacturing engineering systems
and industrial practices, and transitions these advancements into weapons systems design,
development, acquisition and/or sustainment. 3652 The Air Force ManTech major programme tenets
are described as: "improvement of manufacturi ng processes and technologies; collaboration with
Government program offices, industry, and academ ia; investments in technologies beyond reasonable
risk level for industry alone; cost-sharing, multip le system/customer app lications; potential for
significant return on investment; and customer commitment to implement." 3653 The ManTech
Program provides cost reduction processes a nd practices and new manufacturing capabilities
applicable to existing as well as new weapon sy stems under development. The ManTech Program
"strives to make superior mission enabling technolog ies an affordable life cycle reality by expanding
access to a capable, responsible, multi-use industrial b ase with efficiencies comparable to world class
enterprises." 3654
Dual-Use Science and Technology Program
7.1739 DOD Budgets for the DUS&T Program described the programme in the following way:
"This program allows the Air Force to le verage industry investments in advanced
technologies that are mutually advantageous to both the Air Force and industry. One
of the program's objectives is to establish a tool for the Air Force to stimulate the
development of dual-use technologies that will provide greater access to commercial
technologies, and will result in affordable defense systems that maintain battlefield
superiority. A key component of the program is the cost sharing requirement from
both industry and the Air Force, which affirms commitment to the development
effort. Specific projects are determined through annual competitive solicitation(s). A
second objective is to use FY 1997 Defense Authorization Act Section 804, Other
Transactions Authority, as part of the Du al Use S&T program to educate the Air
Force S&T workforce in non-traditiona l or commercial contracting practices.
Technology development areas considered include advanced materials and
manufacturing, affordable sensors, advanced propulsion, power and fuel efficiency,
information and communications systems, and weapons systems sustainment."
 3655
7.1740 In the light of the weight of the evidence linking the NASA R&D programmes to competitive
advantages for the U.S. aeronautics industry, c oupled with the amounts involved and period of time
over which the assistance was provided, it is very difficult for the Panel to envisage how the
aeronautics R&D subsidies to Boeing could not have had a meaningful effect on its competitive
position in relation to Airbus. The Panel does not consid er that it is very realistic to believe that the

3651 NASA Aviation Safety Budget Estimates, FY 2000 – FY 2007, Exhibit EC-382, at FY 2007, SAE
ARMD 2-7.
3652 Air Force Industrial Preparedness/Manufacturing Technology Budgets for FY 1993, Exhibit EC-
431.
3653 Air Force Industrial Preparedness/Manufacturing Technology Budgets for FY 1993, Exhibit EC-
431.
3654 Air Force Industrial Preparedness/Manufacturing Technology Budgets for FY 1993, FY 1996-FY
2007 (PE# 0708011F for FY 1993, FY 1997-FY 2007; PE# 0603771F for FY 1996), Exhibit EC-431.
3655 Dual Use Science & Technology Budgets for FY 2000-FY 2007 (PE# 0602805F), Exhibit EC-424.

BCI deleted, as indicated [***]

United States Government would have provide d aeronautics R&D subsidies of the magnitude
received by Boeing (and McDonnell Douglas) be tween 1989 and 2006 without those subsidies
contributing in a genuine and substantial way to improving Boei ng's competitiveness. The objectives
of DOD's ManTech and DUS&T programmes are not specifically expressed as being to provide a
competitive advantage to the U.S. aeronautics indus try. Rather, these programmes have the explicit
objective of developing "dual-use" R&D. To that end, they envisage collaboration with industry in
developing technologies, including cost reduction processes and practices that have application in the
civil sector. In our view, the objectives of th ese DOD RDT&E programmes suggest that subsidies
funded under those programmes contribute to pr oviding Boeing with competitive advantages.
Nevertheless, the Panel' s conclusion that the aeronautics R&D subsidies have had "technology
effects" in relation to the 787 does not rest solely, or even primarily, on the general considerations set
out in the preceding paragraphs regarding the struct ure and design of the R&D programmes at issue.
The Panel has also undertaken a detailed examina tion of the actual operation of the aeronautics R&D
subsidies.
Operation of the aeronautics R&D subsidies

7.1741 As we have already concluded in the context of our analysis of whether the aeronautics R&D
subsidies at issue constitute purchases of services, the evidence relating to NASA aeronautics R&D
indicates that the work that Boeing performed under its aeronautics R&D contracts and agreements
with NASA was principally for its own benefit or use, rather than for the benefit or use of the United
States Government (or unrelated third parties).
3656 The aeronautics R&D conducted under the
ManTech and DUS&T programmes was funded through cooperative agreements or other cost-shared
arrangements and was directed to the development of "dual use" R&D.3657
7.1742 We do not consider that the NASA R&D subsid ies were directed to general aeronautics
research or to research of incidental importance to the development of a product. Had it been so
directed, it may be reasonable to doubt whether the s ubsidies could be consider ed to have made an
integral and enduring contribution to the developm ent of a product. On the contrary, the NASA R&D
subsidies the subject of our analysis are precisel y focused on those areas which, from a commercial
perspective, are considered to be the most crucial to the LCA industry, in th e sense that they carry the
greatest prospect of creating significant competitiv e advantage. These are technologies that promise
airline customers lower direct operating costs and those that reduce the time to market.
7.1743 As McDonnell Douglas engineers explained to participants at a NASA/DOD Advanced
Composites Technology Conference, "the measure of merit for our technology is DOC {direct
operating cost}... It is apparent that a technology wh ich could reduce the cost of the total aircraft and
also reduce the weight would have a marked a dvantage over a technology that saved weight but
increased cost by the same percentage." 3658 In the context of Boeing's work under the ACT Program,
a Boeing engineer explained, "{t}he biggest thing we need to do is to reduce manufacturing costs.
Now we have NASA adhering to the idea that they need to help us with these costs, and not just with
the technology itself." 3659 This engineer described the fo cus of Boeing's work under the ACT
Program in the following manner:
"The main thing we're after is manufacturing productivity and cutting costs, as well as
design concepts that produce advantages from a maintenance stand-point. They

3658 Mark J. Shuart, Sixth NASA/DOD Advanced Composites Technology Conference, NASA
Conference Publication 3294, Vol. I, Part 1, June 1996, Exhibit EC-279, p. 7.
3659 Guy Norris, "Boeing homes in on carbon-composite production costs," Flight International,
6 September 1995, Exhibit EC-335, quoting Boeing's director of aircraft-structures engineering, Jack McGuire.

BCI deleted, as indicated [***]

should also be lightweight, have increased fatigue resistance and better resistance to
corrosion .... This is the only way of getting the use of graphite {carbonfibre
composite} to be competitive, and has the pot ential to give operators a drop in direct
operating costs of around 9%."
3660
7.1744 In addition to focussing on technologies that offer lower costs, both to the airframe
manufacturer as well as airlines, the research funded under the NASA R&D programmes was also
directed towards technologies that reduce the time to market, for example, by reducing development
and production cycles. In describing the goals of the IWD project element of the AST Program,
NASA said:
"Currently, the U.S. commercial transport aircraft manufacturing industry is focused
on reduced costs and improved time to ma rket through reduced product development
cycle time. In cooperation with U.S. industry, NASA is developing efficient,
integrated design and test procedures fo cused on streamlined aerodynamic design
cycle times reduced by 50%. This will provide an overall reduction in the total
aircraft development time of one year compared to an established 1995 baseline
product development cycle time."
3661
7.1745 In short, the aeronautics R&D subsidies are focused on particular types of technologies;
namely, those that industry considers to be of th e greatest potential commercial benefit. Indeed, the
focus of the research under the aeronautics R& D programmes on areas of primary strategic
importance to the U.S. civil aircraft industry is ha rdly surprising given that the definition of the scope
and programme of research was arrived at in co llaboration with industry. For example, NASA
reported that during a series of meetings with aviati on industry CEOs in late 1996, it was agreed that
the dramatic reduction of airplane acquisition cost w as a high-priority need. In order to address this
need, NASA refocused the IWD, Propulsion and Com posite Wing elements of the AST Program "to
satisfy the early milestones of a more revolutionary technology to satisfy this goal."3662
7.1746 The aeronautics R&D subsidies not only operate d as collaborative research projects with and
for Boeing, but also complemented Boeing's in ternal product development efforts. This
complementarity between the research that Bo eing performed pursuant to the aeronautics R&D
subsidies and its own internal R&D efforts is apparent from the length of the research and
development cycle in the LCA industry and the tim ing of Boeing's product development, as well as
from the extensive breadth and depth of technologies that are required to produce a superior aircraft
and Boeing's collaboration with NASA in specifyi ng and planning the research tasks that it would
undertake for NASA and the technical performance goals of the particular R&D subsidies. For
example, in a 1992 Boeing conference paper discussing the critical path to development of a
composite fuselage that was originally envisaged under the ATCAS element of the ACT Program, the
author states that the combined r esults of the three phases of the AC T Program (originally planned to
run from 1989 to 2002), "if combined with Boeing internally funded efforts (e.g. other fuselage
section, material and process standards, design manuals, and structural allowables), would prepare
Boeing for commitment to a composite fuselage application" by 2002 – 2003.
3663 Indeed, the research
that Boeing conducted for NASA on the technologies in question mostly occurred between 1989 and
early 2000. Boeing was working on developing a predominantly composite, high-speed aircraft (the

3660 Guy Norris, "Boeing homes in on carbon-composite production costs," Flight International,
6 September 1995, Exhibit EC-335, quoting Boeing's director of aircraft-structures engineering, Jack McGuire.
3661 NASA AST Budget Estimates, FY 1992 – FY 2001, Exhibit EC-357, at FY 1997, SAT 4-36.
3662 NASA AST Budget Estimates, FY 1992 – FY 2001, Exhibit EC-357, at FY 1998, SAT 4.1-30. See
also, FY 1999, SAT 4.1-36.
3663 See Larry B. Ilcewicz, "Advanced Composite Fuselage Technology" Third NASA Advanced
Composites Technology Conference, NASA CP-3178 Vol 1, 1992, Exhibit EC-1338, at 110.

BCI deleted, as indicated [***]

Sonic Cruiser) before it shifted its focus in 2000 - 2001 to development of the 7E7/787. 3664 Boeing
nevertheless acknowledges that it adapted the technologies being considered for the Sonic Cruiser for
the 7E7/787.3665
7.1747 Another important aspect of the operation of th e aeronautics R&D subsidies is their role in
reducing Boeing's R&D risk. According to NASA, there are large disincentives for private sector
investment in long-term, high risk aeronautical R& T. NASA considers that these disincentives stem
from the inability of individual compan ies to fully capture the benefits of these research efforts, as
well as the length of the aircraft research and de velopment cycle and investment recoupment period,
and the extensive breadth and depth of technolog ies required to produce a superior aircraft. 3666 As
explained in a NASA publication:
"As aeronautical technology became more co mplex and expensive, it was also more
difficult for individual companies to shoulder the entire financial burden for
researching and developing new technolog y and products by themselves ... For a
manufacturer to be willing to invest the m oney into a new technol ogy, it had to have
short-term, concrete payoffs . Industry did not have the capability or incentive to
pursue long term or high-risk projects, or research areas with uncertain benefits."
3667
7.1748 The research conducted under the NASA R&D s ubsidies occurs through a gradual, iterative
process in which failures and abandonment of furthe r development of particular technologies serve as
building blocks for newer technologies. In ot her words, even unsuccessful research generates
important knowledge and experience that is applie d to subsequent technology developments. This
process leads to a gradual reduction of risk as, th rough a process of trial and error, development
efforts are progressively focused on the most promis ing technologies. NASA introduced a system to
categorize technologies according to their level of maturity ("technology readiness level" or TRL),
ranging from the highest risk, lowest maturity technology (TRL 1), to the lowest risk, highest maturity
technology (TRL 9). NASA's research efforts fo cus on the development of higher risk technologies
up to TRL 6 (prototype demonstration). A 1999 NASA study of the average time taken for
technologies to mature from initial concept to ma rketable product based on NASA's defined TRLs
found that, with respect to the airframe technologies selected as part of the st udy, the average time
from TRL 1 to TRL 6 was 11.3 years (with a standard deviation of 3.9), while the average time from
TRL 1 to TRL 9 was 16.5 years (with a standard deviation of 4.2).
 3668 While we do not mean to
suggest that it would have taken Boeing as much as 11 years longer to develop the 787 in the absence
of the aeronautics R&D subsidies, there is clearl y evidence that the development of higher risk
technologies up to TRL 6 results in an acceleration of the overall technology development process for

3664 United States' second written submission, para. 922; comments on the European Communities'
response to question 87, para. 320; Boeing 2002 Annual Report, p. 18, Exhibit US-1230.
3665 Bair Affidavit, Exhibit US-7, para. 10; see also, Boeing 2002 Annual Report, p. 18, Exhibit US-
1230.
3666 NASA R&T Base Budget Estimates, at FY 1997, SAT4.5; at FY 1999, SAT 4.1.3, Exhibit EC-398.
3667 Airborne Trailblazer, Exhibit EC-288, p. 2.
3668 Deborah J. Peisen et al., Case Studies: Time Required to Mature Aeronautic Technologies to
Operational Readiness, SAIC and GRA, Inc., November 1999, Exhibit EC-795, at p. 11. The study was based
on 18 civil aeronautics products from the major aeronautic technology divisions of airframes, propulsion, flight
systems and ground systems. The study found that there is considerable variability in the time it takes for
technologies to mature, with average maturation times va rying by technology type, by the technology's primary
benefit or goal, and to a lesser extent, by the need for additional technologies or NASA testing for the successful
maturation of the technology. The average for the flight systems technologies selected as part of the study was
21.6 years (with a standard deviation of 15.3) to progress from TRL 1 to TRL 9, and 8.3 years (standard
deviation 6.9) from TRL 1 to TRL6.

BCI deleted, as indicated [***]

an airframe manufacturer like Boeing and would ther efore facilitate an earlie r product launch than
would otherwise have been possible.3669
7.1749 The Panel's analysis of the operation of the R&D subsidies has also included a careful review
of evidence presented by the parties concerning th e technology concepts that Boeing and McDonnell
Douglas studied pursuant to the NASA R&D subsidies, on the one hand, and the technologies that are
being applied to the 787, on the other. The United States has sought to emphasize the differences
between the two. 3670 The European Communities emphasizes th e continuities. Appendix VII.F.1 to
this Report sets forth a description of the partic ular technology areas and the parties' arguments
pertaining to the technologies developed under the aeronautics R&D programmes and those applied to
the 787.
7.1750 The Panel is aware that it is required to undertake an objective assessment of the matter,
based on the arguments and evidence presented. In reviewing the parties' arguments and weighing the
evidence, the Panel has come to the general conc lusion that to focus on the differences between
various technologies which may exist at particular points in time would artifically and inaccurately
obscure the important links that exist between them. One such link is the fact that the evidence before
us is consistent with the technologies properly bei ng viewed essentially as efforts directed to solving
enduring technological problems; for example, how to construct a composite barrel fuselage and
composite wing in a way that not only reduces the wei ght of the aircraft but also its total cost.
Another is that the evidence before us is consiste nt with a pattern whereby the technology concepts
studied under the NASA R&D subsidies and the technologies applied to the 787 are essentially part of
the same process in which solu tions to technological problems ar e developed (through a collective
exercise of progressive learning through trial and error involving largely the same teams of people
over an extended period of time). Viewed from this perspective, we have concluded that technologies
that may, at any given moment, be portrayed as discrete and unrelated, are in fact more appropriately
regarded as being part of a single process of ite rative learning and advancement in pursuit of a
common technological goal.
7.1751 For example, the United States argues that th e research that Boeing performed under the
ATCAS contract did not relate to a single barrel fu selage, but instead to four quadrant, panelized
fuselage sections.
3671 The European Communities acknowledges that under ATCAS Boeing designed,
built and tested fuselage from four separate panel sections (rather than 360º barrel sections), but
contends that the research under ATCAS served as a "r oadmap" for Boeing to arrive at the composite
fuselage barrel solution that it later applied on the 787. 3672 According to the European Communities,
"on the long road to Boeing's successful devel opment of a composite fu selage barrel, ATCAS
provided Boeing with quintessential foundational know ledge and technologies, by supporting the

3669 Indeed, we recall that the initial goal of NASA's AST Program was to accelerate the development
of key, high-payoff technologies to maintain the performance/cost advant age of U.S. subsonic transport aircraft
in the world market, and to ensure their efficient and safe operation in the National Airspace System; NASA
AST Budget Estimates, FY 1992 – FY 2001, Exhibit EC-357, at FY 1993, RD12-27. Emphasis added.
3670 Affidavit of Alan Miller, Exhibit US-1258, Affidavit of Michael Bair, Exhibit US-7. The
United States refers to statements by various Boeing en gineers as "affidavits". The Panel's use of the titles
assigned to these statements by the United States does no t imply that the Panel considers these statements to be
affidavits.
3671 United States' comments on European Communities' response to question 87, para. 21.
Specifically, the United States explains that the ATCAS crown panel was built as a standalone section using
outer mould line (OML) tools and inner mould line (IML) cauls to co-cure the skin and stringers, while the 787
fuselage, by contrast, is being built as a single solid piece of composite created a nd cured around enormous
multi-section mandrels which are IML tools (designed by suppliers for Boeing) with OML cauls.
3672 European Communities' confidential oral statement at the second meeting with the Panel, para. 44.

BCI deleted, as indicated [***]

achievement of significant milestones in this long-term, step-by-step process." 3673 As the European
Communities notes, under ATCAS, Boeing did undertake preliminary costing studies to substantiate
the advantages of 360° barrel fuselage sections.3674 Moreover, the planning timeline originally devised
for Boeing's work under the ATCAS contract show s that research into the separate panels was
envisaged to precede and ultimately lead to testing of a full barrel fuselage. 3675 The importance of the
work on the separate panel sections to the developm ent of a 360° barrel section is also evident from a
NASA contractor report which observed that the advantages of a 360° barrel could be developed only
after the complexities of the separate panel sections were better understood.3676
7.1752 To take an example from the "more-electri c systems" technology area, the European
Communities asserts that in [***], the 787 will use electro-mechanical actuators akin to those that
McDonnell Douglas studied and devel oped pursuant to its PBW cont ract, which was funded through
the power-by-wire/fly-by-light subtask of NASA's AST Program. 3677 The United States argues that
the flight controls developed by Boeing for the 787 are not the same as the electronic actuation
technology that was originally developed under th e power-by-wire/fly-by-light subtask of NASA's
AST Program, and that the subtask was terminated before any new technolog y related to advanced
power management and distribution systems was built and tested.
3678 The European Communities
argues that this subtask of the AST Program enabled McDonnell Douglas to gain knowledge and
experience with regard to power system definiti ons and requirements by designing, fabricating,
testing and demonstrating power ma nagement and distribution architectures, electrical actuators and
starter/generators.3679 According to the European Communities, all of this knowledge and experience
contributed to Boeing's design and development of the more-electric architecture of the 787,
particularly its ability to integrate more-electri c components into the aircraft. The NASA PBW
contract with McDonnell Douglas noted that three prior studies had shown operational, weight and
cost advantages for commercial subsonic transpor t aircraft using all-electric/more-electric
technologies in secondary electric power systems. 3680 This is despite the fact that the studies were
completed on different aircraft, using different cr iteria and applying a variety of technologies. The
objective of the PBW contract with McDonnell Do uglas was expressed as being the development and
demonstration of technology for a more-electric secondary power system that would provide enough
confidence through testing that industry would begin to transfer the technology to their civil fleet. 3681
In these circumstances, we consider it artificial to suggest that the research into more-electric systems
architecture that Boeing and McDonnell Douglas conducted under the aeronautics R&D programmes
did not contribute in a genuine a nd substantial way to Boeing's deve lopment of more-electric systems

3673 European Communities' confidential oral statement at the second meeting with the Panel, para. 44.
See also, Dominik Wacht, An Analysis of Selected NASA Research Progra ms and Their Impact on Boeing's
Civil Aircraft Programs, November 2006, Exhibit EC-15, pp. 72-76.
3674 European Communities' confidential oral statement at the second meeting with the Panel;
European Communities' first written submission, Annex C, para. 47.
3675 Larry B. Ilcewicz, "Advanced Composite Fuselage Technology," Third NASA Advanced
Composites Technology Conference, NASA CP-3178 Vol 1, 1992, at 110, Exhibit EC-1338; see also, Dominik
Wacht, An Analysis of Selected NASA Research Programs and Their Im pact on Boeing's Civil Aircraft
Programs, November 2006, Exhibit EC-15, p. 70.
3676 Larry B. Ilcewicz et al., Advanced Technology Composite Fuselage – Program Overview, NASA
Contractor Report 4734, April 1997, p. 6-6.
3677 European Communities' first written submission, Annex C, para. 71. NASA Contract NAS3-27018
with McDonnell Douglas Aerospace regarding Power-By-Wi re Development and Dem onstration for Subsonic
Civil Transport, 29 September 1993, Exhibit EC-826, at C-5.
3679 European Communities' first written submission, Annex C, para. 71.
3680 NASA Contract NAS3-27018 with McDonnell Douglas Aerospace regarding Power-By-Wire
Development and Demonstration for Subsonic Civil Transport, 29 September 1993, Exhibit EC-826, at C-2.
3681 NASA Contract NAS3-27018 with McDonnell Douglas Aerospace regarding Power-By-Wire
Development and Demonstration for Subsonic Civil Transport, 29 September 1993, Exhibit EC-826, at C-2.

BCI deleted, as indicated [***]

for the 787 because, for example, the flight contro ls for the 787 are not the same electronic actuation
technology studied by McDonnell Douglas under the PBW contract.
7.1753 In the Panel's view, it is reasonable to expect that it is necessary to conduct research into
many different potential technologies as part of th e process of identifying and developing the most
promising technologies for commercial application. The fact that much of the research is
unsuccessful, or surpassed, or that the precise technol ogy concepts studied under an industry-focused
R&D programme at one particular point in the tech nology development process may not be the same
as the technologies that are ultimately applied to a product does not, in our view, necessarily detract
from the contribution of that research to the development of a product.
7.1754 We note the statement of a Boeing engineer submitted by the United States expressing the
opinion that the research performed by Boeing under the ATCAS contract did not provide any
experience or data relevant to the 787 design. 3682 According to this engineer, in designing the 787,
Boeing used research and production experience and data from its other commercial airline
programmes, particularly the 777, and also invented many new technologies and processes "from
scratch" during the course of 787 development. We consider this view to be somewhat exaggerated
in the light of other evidence before the Panel c oncerning the objectives of the R&D subsidies, the
length of time over which they operated, the colla boration with Boeing and complementarity with
Boeing's own internal R&D efforts and the nature of the technological problems that were the focus of
the research. In short, the evidence presented by the United States, assessed along with all of the
evidence concerning the nature of the aeronautics R&D subsidies, does not persuade us that the
differences between the technology concepts st udied under the R&D subsidies and the technologies
applied to the 787 are such that it is no longer po ssible to consider the R&D subsidies as having
contributed in a genuine and substantial way to Boeing's development of technologies for the 787.
7.1755 We now address the other main arguments adva nced by the United States contesting the
importance of the aeronautics R&D subsidies to Bo eing's ability to develop and launch the 787 as and
when it did.
7.1756 First, the United States argues that the 787 is a product of Boeing's past commercial
experience and its significant internal R&D efforts.
3683 However, as should be clear from the Panel's
discussion of the operation of the aeronautics R&D subsid ies, we consider that this perspective as to
the technological origins of the 787 seeks to sever artificially the contribution of earlier significant
research efforts which are nevertheless an inherent part of the technology development process. The
Panel considers that its assessment of the effects of the aeronautics R&D subsidies on Boeing's
development of technologies for its aircraft should be made on the basis of the cumulative effect of
Boeing's decades-long participation in NASA and DOD programmes 3684, taking into account factors
such as the specific technical objectives of the R&D programmes and the complementarity and
interdependence between the work that Boei ng and McDonnell Douglas performed for NASA and
Boeing's own internal R&D efforts.

3682 Affidavit of Alan Miller, Exhibit US-1258, para. 21.
3683 Affidavit of Alan Miller, Exhibit US-1258, para. 4, 21; Bair Affidavit, Exhibit US-7, paras. 7, 75;
Affidavit of Branko Sarh, Exhibit US-1254, para. 15.
3684 The Panel agrees with the European Communitie s that the real value of the aeronautics R&D
subsidies was in having dozens of Boeing engineers immersed in composite design and manufacturing for
several years, thus enabling Boeing to leverage the substantial accumulated knowledge and experience in any
future composite-related R&D activity; Statement by Patrick Gavin, Tim Sommer, Burkhard Domke, and
Dominik Wacht, 8 November 2007, Exhibit EC-1175 (BCI), para. 27; Dominik Wacht, An Analysis of Selected
NASA Research Programs and Their Impact on Boeing's Civil Aircraft Programs, November 2006, Exhibit EC-
15, p. 67 (stating that the "most important benefit that the ACT program provided to Boeing was the ability for
its engineers to gain experience and work under real development program restrictions with clear cost targets".)

BCI deleted, as indicated [***]

7.1757 The Panel is not, of course, of the view that the technologies applied to the 787 are entirely
and exclusively attributable to work that Boeing and McDonnell Douglas conducted for NASA and
DOD pursuant to the aeronautics R&D subsidies. The Panel is well aware that, from 2000 onwards,
Boeing and its suppliers have made significant i nvestments in R&D in th e respective technology
areas, first in the context of the development of the Sonic Cruiser, and subsequently, the 7E7/787.
Moreover, as regards the technologies on the 787 in particular, the Panel notes that, prior to
performing the research under the aeronautics R&D c ontracts at issue in this dispute, Boeing had
already developed expertise in the application of composites in secondary structures, as well as in
primary structures such as the 777 empennage. It is also clear that during the 1990s, Boeing suppliers
on the 787, such as Kawasaki Heavy Industries and Fuji Heavy Industries were developing expertise
in the use of composites in primary aircraft stru ctures contemporaneously with Boeing's development
efforts.3685 The Panel acknowledges that Boeing had also derived valuable knowledge and experience
from lessons learned over the course of the 777 and 737NG production programmes.
7.1758 Boeing's technology developments are clearly the product of a variety of factors. Indeed, it is
reasonable to assume that at some point in time, the contribution of the NASA-funded research will
diminish in relation to other, more recent or revolutionary technological developments that are
attributable to other factors, and that it will no longer be possible to char acterize the NASA research
conducted in the 1990s as having contributed in a ge nuine and substantial way to new technologies
applied to future Boeing LCA. The United States c onsiders that this point had already been reached
by 2004. For the reasons that we have set forth above, we do not agree.
7.1759 Second, the United States argues that, to the ex tent that Boeing considered that any of the
research that it performed under the NASA and DOD R&D contracts and agreements was of
independent value to its commercia l aircraft development, Boeing had the financial capability and
ability to conduct that R&D in the absence of any NASA and DOD funding. 3686 Therefore, according
to the United States, in the absence of any subsid ies, Boeing could and would have funded any R&D
necessary for the 787. 3687 As we explain in paragraphs 7.1830- 7.1831, we are not persuaded that the
European Communities has demonstrated that Boeing inherently lacked the financial means to price
and develop its LCA in the manner in which it did. What does, however, appear clear to the Panel is
that NASA's role in aeronautical research has been explained precisely on the basis of, among other
things, the large disincentives for private sector i nvestment in long term, high risk aeronautical R&D
(stemming from the inability of indi vidual firms to fully capture the benefits from the research
efforts).3688 We have no reason to doubt this evidence. That must at the very minimum mean that, as
applied in this particular instance, even if Bo eing could have eventually achieved through its own
resources the gains that in fact accrued to it through NASA's assistance (a matter on which we express
no view), it is not reasonable to believe that Boeing could have done so within the time frame, and/or
at the lower cost to itself that were the product of the aeronautics R&D subsidies.

3685 For example, by the mid-1990s, Kawasaki Heavy Industries had designed and built an all
composite wing for the Japanese FS-X fighter aircraft. Th e Japan Aircraft Development Corporation is reported
as having contributed 21 per cent to the Boeing 777 project for the design and production of the fuselage, centre
wing and wing body fairings for the life of the 777 programme; Richard N. Hadcock, A Chronology of
Advanced Composite Applications, in Louis F. Vosteen and Richard N. Hadcock, Composite Chronicles: A
Study of the Lessons Learned in the Development, Production and Service of Composite Structures, NASA
Contractor Report 4620, November 1994, pp. 35, 49, Exhibit EC-792. Kawasaki Heavy Industries, Mitsubishi
Heavy Industries and Fuji Heavy Industries, operating through the Japan Aircraft Development Corporation, are
also reported to be building and co-designing approximately 35 per cent of the 787, Dominic Gates, "Boeing
Shares Work, but Guards its Secrets", Seattle Times, 15 May 2007, Exhibit EC-1167.
3686 United States' comments on the European Communities' response to question 187, para. 324.
3687 United States' comments on the European Communities' response to question 187, para. 324.
3688 NASA R&T Base Budget Estimates, at FY 1997, SAT 4.5; at FY 1999 SAT 4.1.3, Exhibit EC-398.

BCI deleted, as indicated [***]

7.1760 The aeronautics R&D subsidies in quest ion amount to at least $2.6 billion 3689, a considerable
amount of money from the perspective of a government agency. The Panel is aware, however, that
this amount perhaps may not appear significant when compared to Boeing's consolidated revenues or
R&D expenditures over 1989 - 2006. Indeed, as th e United States points out, Boeing repurchased
over $16 billion in stock between 1986 and 2006. 3690 However, this sort of numerical comparison
presupposes that the effects of the aeronautics R&D s ubsidies can essentially be reduced to their cash
value, a proposition that we do not accept. As ca n be seen from the analysis above, the value to
Boeing of the particular aeronautics R&D progra mmes in question is essentially a function of the
technological advancements that those programmes provide. Precisely because the nature of this kind
of subsidy is that it is intended to multiply the be nefit from a given expenditure, the Panel considers it
unlikely that the effects of such expenditure (to th e extent that it was successfully deployed) would be
reducible to its face amount. The United States' invitation to compare the amounts of the aeronautics
R&D subsidies with Boeing's payments to shareholde rs may be taken also to imply that the ultimate
effect of the aeronautics R&D subsidies was merely to increase payments to Boeing's shareholders.
The Panel does not accept the proposition that the effect of the aeronautics R&D subsidies was
essentially to benefit Boeing's shareholders by re placing funds that Boeing would otherwise have
spent on R&D. As we have noted above in pa ragraph 7.1759, we have no reason to doubt the
evidence that there are large disin centives for private sector investment in research of the kind that
was conducted under the aeronautics R&D subsidies, a nd any suggestion that a firm such as Boeing
would have conducted such research is subject to the same fundamental objection here. Moreover, we
consider that it is implausible that such specifi cally earmarked and scrutinized R&D funds disbursed
over such a period of time were effectively nothing more than a transfer to shareholders.
7.1761 Finally, as regards the United States' genera l arguments concerning the DOD subsidies, the
Panel is not persuaded that technologies developed under the DOD R&D programmes are neither
"technologically applicable" to commercial aircra ft (because of the different missions and cost-
sensitivities of military and commercial aircraft), nor "legally applicable" to commercial aircraft
(because of Boeing's decision to ensure that the 787 is "ITAR free".)3691
7.1762 With respect to the first of these arguments, we have already concluded, in the context of our
analysis of whether DOD aeronautics R&D measur es constitute a subsidy within the meaning of
Article 1 of the SCM Agreement, that the United St ates has failed to substantiate its assertion that
only a minor amount of the R&D conducted by Boeing under the DOD R&D programmes at issue
was "technologically applicable" to commercial airc raft. Among other things, the United States'
argument that DOD-funded research on military aircraft is designed to fulfil military functions, and
does not translate well to the different commercia l imperatives of commercial aircraft production (in
terms of FAA certification/maintenance requirements and efficiency of production) overlooks the fact
that at least some of the DOD programmes, fo r example, the ManTech Composites Affordability
Initiative related to Advanced Fibre Placement, ha d the explicit objective of funding R&D to be
applied towards both military and civil aircraft and emphasized the development of lower cost
technologies.
7.1763 With respect to the second of these arguments, we have already concluded, in the context of
our analysis of whether DOD aeronautics R&D meas ures constitute a subsidy within the meaning of
Article 1 of the SCM Agreement, that the United Stat es has failed to substantiate its assertion that the
ITAR make it effectively impossible for Boei ng to utilize any of the R&D performed under DOD
R&D contracts and agreements towards LCA. Among other things, while we accept the United
States' assertions that the ITAR restrict Boeing's ability to u se certain R&D performed for DOD
towards its civil aircraft, and while we accept that Boeing complies with ITAR in general and took

3690 United States' comments on the European Communities' response to question 78, para. 270.

BCI deleted, as indicated [***]

steps to ensure that the 787 is "ITAR free", and wh ile we further accept that the situation with respect
to the scope and coverage of the ITAR is not en tirely clear, the United States has failed to explain
how its assertions regarding the ITAR can be reconc iled with the fact that some of the R&D funded
by DOD – including R&D performed by Boeing unde r assistance instruments entered into under the
ManTech and DUS&T programmes, which were subject to the ITAR – had the explicit objective of
being applied towards civil aircraft.
7.1764 For the reasons set forth above, we would characterize the NASA R&D subsidies as
strategically-focused R&D programmes with a sign ificant and pervasive commercial dimension,
undertaken in collaboration with U.S. industry to pr ovide competitive advantages to U.S. industry by
funding research into high risk, high pay-off r esearch of the sort that individual companies are
unlikely to fund on their own. The DOD R&D s ubsidies funded through the ManTech and DUS&T
programmes under DOD's RDT&E Program are focuse d on pursuing "dual use" technologies through
collaborative efforts with U.S. in dustry. The aeronautics R&D subsid ies are designed to develop and
validate new technologies for Boeing to commercialize, and we consider that it would be artificial to
treat their contribution as having been exhausted or so diminished as to no longer be making a
genuine and substantial contribution to Boeing's development of technologies for the 787.
The conditions of competition
7.1765 A further factor that we consider to be rele vant to our evaluation of whether the aeronautics
R&D subsidies have caused serious prejudice to the interests of the European Communities by reason
of their "technology effects" concerns the particul ar conditions of competition in the LCA industry.
As explained by the United States' economic cons ultants, NERA Consulting, the real competition
between Airbus and Boeing occurs through their respective investments in R&D to build better
airplanes:
"The essence of the intense competition betw een Boeing and Airbus is to design and
build better airplanes – improved versi ons of existing models as well as new
models."3692
7.1766 In a 2005 Airbus document, Airbus explains that the only way that it was able to penetrate a
market that was largely dominated by U.S. manuf acturers was to "offer a unique value with its
products through innovation":3693
"Airbus has evolved into a formidable comp etitor in the large civil aircraft (LCA)
industry as a result of its careful development of a family of products in response to
market demand while pursuing a product de velopment strategy of exploiting both
new technologies and the benefits of commonality."
3694
7.1767 Airbus describes itself as having followed th is "product innovation strategy" successfully
from its very first product (the A300) and notes that many of Boeing's new aircraft were introduced in
response to new Airbus models: the A300/310 w as followed by the 767; the A320 was followed by
the 737NG; the A340/330 was followed by the 777 a nd according to Airbus (in early 2005), the 787
project "appears to be a response to the market success of the A330-200".3695

3692 Jordan and Dorman Report, Exhibit US-3, p. 11.
3693 Airbus, Key Determinants of Competitiveness in the Global Large Civil Aircraft Market: An
Airbus Assessment, March 2005, Exhibit EC-719 (BCI), p. 12.
3694 Airbus, Key Determinants of Competitiveness in the Global Large Civil Aircraft Market: An
Airbus Assessment, March 2005, Exhibit EC-719 (BCI), p. 2.
3695 Airbus, Key Determinants of Competitiveness in the Global Large Civil Aircraft Market: An
Airbus Assessment, March 2005, Exhibit EC-719 (BCI), p. 11, footnote 2.

BCI deleted, as indicated [***]

7.1768 A NASA publication also points to the impor tance of competition through technological
development, suggesting that it was Airbus' position as a new entrant in the market that led it to
compete on the basis of innovation:
"Airbus Industries, for example, has incor porated more advanced technology into its
aircraft, including full flybywire controls, than the U.S. transport aircraft
manufacturers have. But the European cons ortium had more motivation to innovate
and less to lose than its U.S. counterparts. Boeing and McDonnell Douglas held such
a commanding market position that unless Airbus distinguished itself significantly in
some manner, it would be lost in Boeing's shadow."
3696
7.1769 It is clear to us that the conditions of compe tition in the LCA industry are such that a subsidy
that enhances an LCA manufacturer's ability to de velop innovative technologies for application to its
aircraft will potentially give rise to a significant competitive advantage to that manufacturer.
7.1770 The United States argues that the NASA R&D subsidies do not confer a competitive
advantage on Boeing vis-à-vis Airbus because NASA-funded research is generally applicable,
conceptual research, the results of which are publicly disseminated and therefore widely known and
well understood within the global community of engi neers and scientists working in a particular
area.
3697 Moreover, according to the United States, many of the technologies that the European
Communities attempts to link to the research that Boeing and McDonnell Douglas performed for
NASA and DOD pursuant to the aeronautics R&D subsidies are supplied by third parties and are
commercially available.
3698
7.1771 The Panel notes that there are restrictions on the dissemination of certain aspects of NASA-
funded research results, and that public dissemination does not occur immediately. 3699 Moreover, the
nature of the aeronautics R&D subsidies suggests that Boeing gains a significant advantage from
performing the R&D work itself, in collaboration with NASA, as well as from conducting research
under the R&D subsidies in tandem with its own rela ted R&D efforts. In any case, we do not think
that it is very realistic to believe that NASA woul d so consistently and prominently state that the
objectives of the aeronautics R&D programmes were to provide a competitive advantage to U.S.
subsonic transport by accelerating the development of key, high payoff technologies if all of the
NASA-funded R&D were in fact research that was publicly disseminated and equally available to
Airbus. Nor is the Panel persuaded that th e critical technologies that Boeing developed in
collaboration with its suppliers are equally available to Airbus. The Panel notes that the United States

3696 Airborne Trailblazer, Chapter 1, Exhibit EC-288, p. 4.
3697 See e.g. Bair Affidavit, Exhibit US-7, paras. 33-34; Affidavit of Branko Sarh, Exhibit US-1254,
para. 5.
3698 Bair Affidavit, Exhibit US-7, paras. 18-20, 58, 61, 64, 66, 69, 73. For example, components of the
787 that relate to its more-electric architecture, such as the starter engines, de-icing system, air conditioning
system, secondary flight controls and brakes were s upplied to Boeing by third parties, as were certain
components relating to the 787's reduced noise, such as the joint-less inlet liners and landing gear. The Panel
notes also that the Product Lifecycle Management Tools (including CATIA, DELMIA, ENOVIA and
SMARTEAM) are supplied by Dassault.
3699 For example, certain NASA a nd DOD contracts with Boeing cont ained limited access rights such
as (i) limited exclusive data rights, (ii) for early domes tic dissemination, and (iii) requirements for prior written
approval before the release of certain technical informa tion. Although differing in their nature and scope, each
of these limited access rights seek to delay the foreign transfer of commercially sensitive information or prevent
its public release without prior written approval of NASA or DOD; see European Communities' first written
submission, Annex C, paras. 135-159.

BCI deleted, as indicated [***]

has failed to rebut a critical assertion made by the European Communities in its HSBI submissions
and evidence in this regard.3700
7.1772 Moreover, the argument that many of the t echnologies applied to the 787 are commercially
available to Airbus from third party suppliers overlooks the importance of the knowledge and
experience that Boeing obtained pursuant to the aer onautics R&D subsidies as an integrator of the
various technologies. We agree with the following submission by the European Communities:
"The critical question in developing and building LCA is not how to get the different
technologies and design and manufacturing tool s. The critical question is how to use
them. Which tools out of many available tools should be used, in which way, by
whom, and at which step of the design and build process? The ability to define and
manage the complex interaction of design processes, organization and tools so as to
enable the robust development and manufacturing of an aircraft at minimum time and
cost is one of the core competencies of an aircraft manufacturer. This is the true
challenge LCA integration poses to both Airbus and Boeing, and it is a challenge that
Boeing can meet thanks in large part to NASA and DOD funding and support."
3701
7.1773 The Panel concludes that the aeronautics R& D subsidies contributed in a genuine and
substantial way to Boeing's development of tec hnologies for the 787 and that, in the light of the
conditions of competition in the LCA industry, th ese subsidies conferred a competitive advantage on
Boeing. The Panel now proceeds to analyse whet her the aeronautics R&D subsidies, as a result of
this competitive advantage, affected Airbus' sa les and prices in the 200 – 300 seat wide-body LCA
product market in the 2004 – 2006 period.
Effects of the aeronautics R&D subsidies on Airbus' sales and prices in the 200 – 300 seat
wide-body LCA product market
7.1774 We recall that the European Communities argues that, but for the aeronautics R&D subsidies,
(i) Boeing could not have launched, in April 2004, a 787 family of LCA offering the many operating
cost savings and enhancements in passenger comf ort that have made it such a commercial success
relative to the A330 and Original A350 3702; and (ii) Boeing could not have contractually bound itself
to make significant deliveries of the 787 starting in 2008. 3703 The Panel is aware that it should
proceed with caution in attempting to assess, thr ough the use of counterfactual analysis, how the
aeronautics R&D subsidies affected Boeing's devel opment of the 787. However, we are satisfied
from the evidence that Boeing's asse ssment in the late 1990s that ro ute fragmentation would lead to a
larger number of lower-volume routes, best served by a mid-sized, extended range aircraft (a
commercial assessment unrelated to the subsidies), along with the age of the 767, likely meant that
Boeing needed to develop an LCA to replace the 767 in the 200 – 300 seat wide-body product market,
and that it would have done so in the early- to mid- 2000s. 3704 The question is what sort of aircraft
Boeing could have developed, and when that aircraft could have been launche d and first entered into
service, in the absence of the aeronautics R&D subsidies.

3700 European Communities' second written submi ssion, Full Version HSBI Appendix, para. 4;
Statement by Patrick Gavin, Tim Sommer, Burkhard Domke, and Dominik Wacht, 8 November 2007, Exhibit
EC-1175 HSBI, at para. 19.
3701 European Communities' confidential oral statement at the first meeting of the Panel, para. 14.
3702 Rather, according to the European Communities, it would have taken Boeing "years longer" as well
as much more of its own money to do so; European Communities' first written submission, Annex C, para. 199.
3703 European Communities' first written submission, Annex C, para. 199.
3704 One could presumably also argue that Boeing would not have launched a new aircraft in this
product market and would have continued to offer the 767, however, even the European Communities does not
argue this.

BCI deleted, as indicated [***]

7.1775 We consider that two scenarios are most likely: Boeing would have developed a 767-
replacement that incorporated all of the technologi es that are incorporated on the 787, but its launch
would have been significantly later than 2004 and it would not have been able to promise first
deliveries for 2008, or Boeing would have la unched a 767-replacement in 2004 that was
technologically superior to the 767, but did not offer the degree of technological innovation of the
787. We do not have to reach any definitive view on which of these outcomes would have occurred.
What is clear to us is that, absent the aeronautics R&D subsidies, Boeing would not have been able to
launch an aircraft incorporating all of the technol ogies that are incorporated on the 787 in 2004, with
promised deliveries commencing in 2008.
7.1776 The Panel recalls that European Communities a lleges that subsidies benefiting the 787 caused
the following forms of serious prejudice:
(a) Significant price suppression of the A330, Original A350 and A350XWB-800;
(b) Significant lost sales of A330 and Original A350;
(c) Displacement and impedance of imports into the United States for the A330 and
Original A350;
(d) Displacement and impedance of exports fro m various third country markets for the
A330 and Original A350; and
(e) Threat of price suppression with respect to future orders of A330 and A350XWB-
800.3705
7.1777 Before we evaluate the specific market effect s of the aeronautics R&D subsidies in this LCA
product market, it is useful to recall the events l eading to Airbus' development of the A350XWB in
2006. The European Communities asserts that, wh en Boeing launched the 787 in 2004, Airbus' A330
was the "undisputed market leader in the 200-300 seat LCA market". 3706 The Panel is satisfied based
on the evidence that, at the beginning of 2004, Airbus expected that its A330 would remain the
standard for the 200-300 seat LCA market for at least another 10 years of deliveries.
3707 In late 2004,
in response to customer demands that Airbus offer an aircraft to match the 787 in terms of operating
costs, Airbus designed an aircraft programme th at would retain the A330 fuselage, but add a new
composite wing and cabin improvements. Then in Ap ril 2005, Airbus redesigned that aircraft (now
called the A350) to include a composite aft fuselag e (but still sharing the same fuselage cross-section
as the A330) and to make further improvements to the aerodynamics, increase the maximum take-off
weight, add new landing gear and other improvements.3708 Various models of the Original A350 were
marketed from December 2004, however the Orig inal A350 that featured a composite wing and

3705 The European Communities also makes an alte rnate claim, conditional on the Panel disagreeing
with the European Communities that all of its serious prejudice arguments should be assessed on the basis of
orders rather than deliveries, of threat of significant pric e suppression, threat of signif icant lost sales and threat
of displacement and impedance of im ports and exports with respect to future deliveries of A330 and
A350XWB-800 LCA; European Communities' first written submission, para. 1342.
3706 European Communities' second written submission, Full Version HSBI Appendix, para. 10. The
United States does not appear to dispute that the A330 was the market leader in this product market prior to the
launch of the 787, see e.g. United States' first written submission, para. 981.
3707 Christian Scherer, Commercial Aspects of the Aircraft Business From the Perspective of a
Manufacturer, March 2007, Exhibit EC-11 (BCI), para. 94.
3708 Christian Scherer, Commercial Aspects of the Aircraft Business From the Perspective of a
Manufacturer, March 2007, Exhibit EC-11 (BCI), para. 102.

BCI deleted, as indicated [***]

composite fuselage having the same cross-se ction as the A330 was launched in October 2005. 3709
Evidence before the Panel indicates that, notwithstanding the launch of the Original A350 in
October 2005, certain key customers requested that Airbus launch a whole new LCA with technology
equivalent to that on the Boeing 787.
3710 Accordingly, in December 2006, Airbus announced the
launch of the redesigned A350XWB programme. 3711 First deliveries of the A350XWB-800 were not
scheduled to be made until 2013, some five years after promised first deliveries of the 787.3712
7.1778 The European Communities argues that Airbus lost a significant number of sales of its A330
and Original A350 to the 787 because of the operating cost advantages of the 787, the fact that Boeing
could provide the 787 in a shorter timeframe than Ai rbus could provide the Original A350, or because
of the low price of the 787. 3713 The European Communities also argues that, although Airbus tried to
compete against the 787 by offering the Original A350 in 2005, because Airbus did not have access to
similar R&D subsidies, the Original A350 "fe ll short of the 787 in terms of technological
advancements and delivery schedule". 3714 Moreover, the European Co mmunities contends that the
787's subsidy-enhanced low prices and advanced tec hnologies forced Airbus to lower the prices of its
A330 and Original A350 in order to secure orde rs, thereby causing significant suppression of A330
and Original A350 prices.3715
7.1779 In addition, the European Communities argues that, although Airbus was able to launch the
A350XWB-800, a technologically-comparable aircraft to the 787, in 2006, prices for the A350XWB-
800 were also suppressed by the subsidies to the 787 because [***.]3716
7.1780 The Panel is satisfied that the European Communities has est ablished that the technological
and operating cost advantages of the 787 over the A 330 and Original A350, as well as its scheduled
delivery dates commencing in 2008, caused Airbus to lose a significant number of sales of its A330
and Original A350 between 2004 and 2006, and significantly suppressed the prices of those aircraft
during that period. We are not persuaded, howev er, that the European Co mmunities has adequately
substantiated its argument that the technological and operating cost advantages of the 787, or its 2004
launch and scheduled first delivery date of 200 8, has resulted in significant suppression of
A350XWB-800 prices. We explain the basis for these conclusions below.
7.1781 First, we accept the proposition that with th e launch of a technologically-advanced aircraft,
the price of the competing, older technology aircra ft can be expected to decline (along with its
residual values). We are satisfied that this is what happened to the A330 when the 787 was launched

3709 Christian Scherer, Commercial Aspects of the Aircraft Business From the Perspective of a
Manufacturer, March 2007, Exhibit EC-11 (BCI), para. 103.
3710 Christian Scherer, Commercial Aspects of the Aircraft Business From the Perspective of a
Manufacturer, March 2007, Exhibit EC -11 (BCI), para. 110; United States' second written submission, HSBI
Appendix, para. 16; Andrea Rothman and Susan Ray, "Red esign A350, Airbus told", Seattle Post-Intelligencer,
8 April, 2006, Exhibit US-1172; Scott Hamilton, Redesigning the A350: Airbus' tough choice, leeham.net,
4 April 2006, Exhibit EC-1251.
3711 This family of LCA would span two LCA product markets: the 200-300 seat market (through the
A350XWB-800, which would compete directly with the 787-8 and 787-9), and the 300-400 seat market
(through the A350XWB-900/1000 which would compete with the 777 family).
3712 The Panel is of course aware that Boeing was not ultimately able to deliver the 787 in 2008,
however, the relevant fact for purposes of our analysis is that in 2004, Boeing believed that it would be able to
make its first deliveries in 2008 (and made contractual promises to its customers to this effect).
3713 European Communities' first written submission, paras. 1426-1455; European Communities'
second written submission, Full Version HSBI Appendix, para. 10.
3714 European Communities' first written submission, para. 1410.
3715 European Communities' first written submission, paras. 1392-1393, 1410-1412.
3716 The parties do not appear to dispute that the A350XWB-800, unlike the A330 and Original A350,
was technologically competitive with the 787; see e.g. European Communities' second written submission, Full
Version HSBI Appendix, para. 13.

BCI deleted, as indicated [***]

in 2004. We are persuaded that this left Airbus in a position in which it had to lower the price of the
A330 in order to try to mitigate its loss of market share to the 787. 3717 We see in the data submitted
to us an indication that price trends for the A330 declined after 2004 and that, from its former position
as market leader in this product market, it lost market share to Boeing.
7.1782 We note that, as demonstrated in the diagra m below, while demand for 200-300 seat wide-
body LCA fell in 2002 (largely due to 9/11 and the SARS epidemic), but then rebounded in
subsequent years, [***]3718
Orders for 200-300 Seat LCA vs. Price Per Seat of A330 Family LCA in
Constant Dollars, 2000-20063719

7.1783 Neither party has submitted global market share da ta based on orders for aircraft in the 200 –
300 seat wide-body LCA product market over the 2000 – 2006 period. However, based on data
presented by the European Communitie s, the Panel has been able to reconstruct the following global
market share data for orders of aircraft in the 200 – 300 seat wide-body LCA product market for the
period 2000-2006.
Market share in the 200 – 300 seat wide-body LCA market (based on order data)
in 2000 - 2006
3720

Year Airbus A330 and A350 Airbus Market
share
Boeing 767 and 787 Boeing market
share
2000 95 91% 9 9%
2001 52 57% 40 43%
2002 24 75% 8 25%
2003 49 82% 11 18%
2004 51 46% 59 54%
2005 129 34% 251 66%
2006 117 40% 173 60%

3717 See e.g. Christian Scherer, Commercial Aspects of the Aircraft Business from the Perspective of a
Manufacturer, March 2007, Exhibit EC-11 HSBI at para. 109. Because customers did not perceive the Original
A350 to be as technologically advanced as the 787, its position in the market was similar to that of the A330;
European Communities' second written submission, Full Version HSBI Appendix, para. 12; Scott Hamilton,
"Redesigning the A350: Airbus' Tough Choice", leeham.net, 4 April 2006, Exhibit EC-1251. The United States
asserts that the Original A350 "could not even come close to matching the operatin g efficiencies of Boeing's
787", United States' first written submission, U.S. Campaign Annex, paras. 7-8.
3718 European Communities' first written submission, para. 1389; European Communities' response to
question 306, para. 784.
3719 European Communities' response to question 306, para . 784, Figure 3. Pricing information in this
figure is based on Airbus proprietary data. Order information is based on Airclaims CASE database, data query
as of 19 January 2007, Exhibit EC-3.
3720 Compiled from data in Airclaims CASE Database, Data Query as of 19 January 2007, 2004 – 2006
Orders, Exhibit EC-1287 and Airclaims CASE Database, Data Query as of 19 January 2007, Exhibit EC-3.

BCI deleted, as indicated [***]

7.1784 The European Communities has illustrated the above market share trends on a graph as
follows:3721

7.1785 The above market share figures show the rather dramatic erosion of Airbus' market share in
the 2004 to 2006 period, compared with the 2000 – 2003 period. This erosion of the dominance of the
A330 in this product market coincides with th e introduction of the 787 in 2004. The evidence
concerning the pricing trends for the A330, combined with the market share data, are consistent with
what we would expect to occur from the introduction of a technologically-superior aircraft, offering
operating cost advantages over older-technology aircra ft, for around the same price. Clearly, one
would expect that prices of the A330 would fall, and that it would lose market share, even in the face
of significantly increased demand in that product market.
3722
7.1786 Second, we are satisfied that evidence regardi ng specific sales campaigns that occurred in the
200 – 300 seat wide-body LCA product market between 2004 and 2006 demonstrates that the
customer decided to purchase Boeing's 787 family LC A because either (i) it perceived that Airbus'
A330 family and Original A350 family LCA were not as capable as Boeing's 787 family LCA in
fulfilling its technical or delivery schedule requirements; or (ii) it considered Airbus' A330 family and
Original A350 family LCA to be capable of meetin g its technical and delivery schedule requirements,
but was "swayed by the extremely low pricing offered by Boeing". 3723 In several of the sales
campaigns in which the European Communities argu es that the customer favoured the 787 owing to
its technological features or availability in 2008 3724, it appears that factors other than the performance
characteristics of the 787 over the A330 or Original A350, and the 2008 delivery date for the 787,

3721 European Communities' confidential oral statement at the first meeting with the Panel, para. 33.
3722 For example, the United States asserts that the performance gap between the Original A350 and the
787 was too large to bridge through price discounts (implying an erosion in both Airbus' prices and market
share). In the Panel's view, the same reasoning is applicable to the A330; United States' first written
submission, U.S. Campaign Annex, para. 8. For a concrete example, see the campaign discussed by the
United States in its U.S. Campaign Annex at paras. 52-5 7. The United States explains that, despite Airbus
offering extremely large discounts on the Original A350, it could not overcome the 787's value advantages and
earlier availability; United States' first written submission, U.S. Campaign Annex, paras. 56-57.
3723 European Communities' first written submission, para. 1427.
3724 These sales campaigns are: All Nippon Airways (2004); Japan Airlines (2004); Continental
Airlines (2004-2006); Icelandair (2005); Northwest (2005); Air Canada (2005); Qantas (2005); Kenya Airways
(2006); Ethiopian Airlines (2005); Royal Air Maroc (2005).
0%
50%
100%
2000 2001 2002 2003 2004 2005 2006
Boeing
Airbus

BCI deleted, as indicated [***]

played a significant part in the Boeing sale. 3725 However, the performance characteristics of the 787
and/or its scheduled entry into service in 2008 app ear to have been the decisive factors in the
outcomes of the Qantas, Ethiopian Airlines and Ic elandair campaigns in 2005 and the Kenya Airways
campaign in 2006.
7.1787 In the Panel's view, the Qantas, Ethiopian Ai rlines and Icelandair campaigns in 2005 and the
Kenya Airways campaign in 2006, are evidence of sales that Airbus did not secure due to the
advanced technological features of the 787, the availa bility of which at that time was accelerated by
the aeronautics R&D subsidies. As such, they are ev idence of lost sales that are the effects of the
aeronautics R&D subsidies.
7.1788 The Panel notes that the Qantas sale in particular involved an order of 45 787s plus 20 options
and a further 50 purchase rights. 3726 HSBI evidence submitted to the Panel supports other evidence
indicating that this sales campaign was extremely competitive for various strategic reasons.3727 Taking
into account the size of the order, as well as these va rious other factors that singled out this campaign
as being of particular importance to both Boeing and Airbus, we are satisfied that Airbus' loss of the
Qantas sales campaign alone is evidence of a "signifi cant" lost sale. The Panel is therefore satisfied
that there is sufficient evidence to support its conclusion that, but for the effects of certain aeronautics
R&D subsidies, Airbus would have made additional sales of the Original A350, and to that extent,
would not have suffered significant lost sales within the meaning of Article 6.3(c) of the SCM
Agreement.
7.1789 The market impact of the effects of the aeronautics R&D subsidies on Airbus aircraft were
initially felt with the launch of the 787 in 2004, and is reflected in market share data on the basis of
orders obtained in the 2004 – 2006 period. The Europ ean Communities argues that, to the extent that
it has identified orders as the cause of displace ment or impedance that has not yet resulted in
deliveries, future deliveries resulting from those orders are evidence of a threat of displacement and
impedance.
3728 In this regard, the European Communities argues that the subsidies cause a threat of
displacement and impedance of exports from third country markets related to future deliveries of
relevant Airbus LCA that result from orders booked in 2004-2006.3729
7.1790 The European Communities has presented the fo llowing market share data for the relevant
third country markets pertaining to the Qantas, Et hiopian Airlines, Kenya Airways and Icelandair

3725 These factors include Boeing's relationship with the airline (Continental Airlines, All Nippon
Airways, Japan Airlines), the particular routes to be serviced and range of the aircraft (Northwest, All Nippon
Airways, Japan Airlines), the effect of the A340/777 co mpetition and preference of the airline for a mixed fleet
(Air Canada), and the failure to submit a formal offe r within the time limit specified by the airline (Royal Air
Maroc).
3726 Boeing/ Airbus Press Reports, Exhibit EC-1157, pp. 430-432, 467-469.
3727 Christian Scherer, Commercial Aspects of the Aircraft Business from the Perspective of a
Manufacturer, March 2007, Exhibit EC-11 HSBI, paras. 108-109. See also, Boeing/ Airbus Press Reports,
Exhibit EC-1157, pp. 430-432, 467-469.
3728 European Communities' first written submission, paras. 1455-1458, 1466-1468, 1552-1555, 1562,
1640-1643, 1650-1651; European Communities' confidential oral statement at the first meeting with the Panel,
para. 90.
3729 European Communities' first written submission paras. 1455, 1552 and 1640. This argument is part
of the European Communities' more general alterna tive argument that, should the Panel reject the
European Communities' use of orders as the basis for its present serious prejudice claim, the subsidies benefiting
the relevant Boeing LCAs cause a threat of serious prejudice with respect to future deliveries of the "like"
Airbus LCA. The Panel notes that Australia also argues that, notwithstanding that delivery of an LCA may not
eventuate, orders are an indication of the effect of the subsidies on the industry and the market, through future
projected sales and market share. A ccording to Australia, they therefore gi ve an indication as to how current
subsidies are likely to affect the market in the future and thus the threat of serious prejudice; Australia's written
submission, para. 69.

BCI deleted, as indicated [***]

campaigns referred to above, based on actual deliver y data (for the years up to and including 2006)
and projected future deliveries (for the years 2007 onwards) on the basis of actual order data:3730

 Airbus Boeing
2002 2 100% -- --
2003 4 100% -- --
2004 5 100% -- --
2005 3 100% -- --
2006 1 100% -- --
2007 4 100% -- --
2008 4 50% 4 50%
2009 3 27% 8 73%
2010 1 10% 9 90%
2011 -- -- 7 100%
2012 -- -- 14 100%
Australia
2013 -- -- 3 100%
2003 -- -- 1 100%
2004 -- -- 1 100%
2005 -- -- 1 100%
2006 -- -- -- --
2008 -- -- 1 100%
2009 -- -- 1 100%
2010 -- -- 3 100%
2011 -- -- 2 100%
Ethiopia
2012 -- -- 3 100%
2001 -- -- 3 100%
2010 -- -- 2 100%
2011 -- -- 4 100%
Kenya
2012 -- -- 3 100%
2010 -- -- 2 100% Iceland 2012 -- -- 2 100%

7.1791 Given the delay between the order of an aircraft and its delivery, the impact of the aeronautics
R&D subsidies on Airbus' sales in these country market s will not be reflected in delivery data until
the 787 is delivered, some years after 2006. However, it is clear that at that time, the European
Communities will suffer serious prejudice in the form of displacement and im pedance of its exports
from these third country markets. In these circum stances, the Panel considers that the sales that
Airbus has lost due to the effects of the aeronautics R&D subsidies also constitute evidence a threat of
of serious prejudice. The Panel is therefore satisfied that, but for the effects of certain of the
aeronautics R&D subsidies, Airbus would have obta ined additional orders for its A330 or Original

3730 Airbus and Boeing Deliveries and Projected De liveries in the Challenged Markets, Exhibit EC-
1173.

BCI deleted, as indicated [***]

A350 LCA from customers in third country markets in Australia, Ethiopia, Kenya, and Iceland, and
thus would not have suffered the threat of displacement or impedance of its exports from third country
markets within the meaning of Article 6.3(b) of the SCM Agreement.
7.1792 The European Communities has also identified certain sales that Airbus was able to secure by
offering [***] in order to offset the technological advantages and operating cost savings offered by
the 787.3731 As we have already indicated, we are satis fied that the technologies applied to the 787
resulted in an aircraft that offered substantial opera ting cost reductions to its customers, and that the
combination of the superior technology and lower operating costs of the 787 clearly affected the
comparative value of Airbus' A330 and Original A350, leaving Airbus no other option but to reduce
the prices of its aircraft in order to compete.
3732 The evidence concerning the degree of price
concessions that Airbus offered in order to secure sales of its A330 and Original A350 indicates that a
further effect of the aeronautics R&D subsidies w as significant price suppression with respect to the
A330 and Original A350.3733
7.1793 The European Communities also alleges that a further effect of the aeronautics R&D
subsidies is significant price suppression of the A350XWB-800. There is no evidence before the
Panel as to price trends for the A350XWB-800, nor has the European Communities presented
evidence concerning the actual pricing of the A3 50XWB in the context of specific LCA sales
campaigns. Evidence before the Panel indicates that Airbus regards the A350XWB-800 as being
technologically equal, if not superior, to the 787, meaning that there would be no need for Airbus to
offer price discounts in order to offset the valu e of technological innovation of the 787, as was the
case with the A330 and Original A350. 3734 The European Communities asserts that [***].3735 In
addition, Airbus' Christian Scherer asserts th at, even though the A350XWB is technologically
competitive with the 787, it is still at a competitive disadvantage due to the fact that it is not available
for delivery until 2013.
3736 Although the Panel considers it quite credible that customers that had
previously ordered the Original A350 would request , in their negotiations with Airbus, that they
receive the same price for an admittedly superior product, we do not consider that it necessarily
follows that Airbus had no other option but to acced e to such requests, particularly if the A350XWB-
800 is regarded as a technologically superior product to the Original A350. We also consider it quite
plausible that sales of the A350XWB-800 may be disadvantaged relative to the 787 because the
A350XWB-800 will not be ready for delivery until 2013 . However, the Panel would require some
evidence in this regard in order to make an objective assessment of this issue.

3731 European Communities' first written submission, para. 1393; European Communities' second
3732 The United States argues that Boeing's 787 manufacturing costs have been lowered significantly by
using commercially available product life cycle management and design software, sourcing common materials
across suppliers, and standardizing cu stomer-selected options; United States' second written submission, HSBI
Campaign Annex, para. 22. While the Panel has no reason to doubt that th ese commercial decisions did result
in manufacturing cost savings, we note that one of the major focuses of the aeronautics R&D subsidies was the
development of innovative technologies that result in lower direct operating costs to airlines.
3733 For example, Airbus sold the Original A350 to one customer for significantly less than it had sold
the A330 to that same cu stomer several years earlier, European Communities' second written submission, Full
Version HSBI Appendix, para. 71.
3734 See, for example, Christian Scherer, Commercia l Aspects of the Aircraft Business from the
Perspective of a Manufacturer, Marc h 2007, Exhibit EC-11 (BCI), para. 115; "Airbus goes for extra width",
Flight International, 25 July 2006, Exhibit US-302.
3735 European Communities' first written submission, para. 1424; Christian Scherer, Commercial
Aspects of the Aircraft Business from the Perspectiv e of a Manufacturer, March 2007, Exhibit EC-11 (BCI),
para. 114.
3736 Christian Scherer, Commercial Aspects of the Aircraft Business from the Perspective of a
Manufacturer, March 2007, Exhibit EC-11 BCI, para. 115.

BCI deleted, as indicated [***]

7.1794 The Panel is therefore satisfied, based on the evidence reviewed in the preceding paragraphs,
that the aeronautics R&D subsidies contributed in a genuine and substantial way to Boeing's
development of technologies for the 787 and that, as a result, but for the effects of these subsidies (i)
Airbus would have obtained additional orders for its A330 and Original A350 LCA from customers in
third country markets Australia, Ethiopia, Kenya and Iceland in 2005 and 2006, and the European
Communities would not have suffered the threat of di splacement or impedance of exports from third
country markets within the meaning of Article 6.3( b) of the SCM Agreement; (ii) Airbus would have
made additional sales of the A330 and Original A350 over the same period, and to that extent, would
not have suffered significant lost sales in the 200 – 300 seat wide-body LCA product market, within
the meaning of Article 6.3(c) of the SCM Agreement; and (iii) prices of the A330 and the Original
A350 in the 2004 to 2006 period would have been significantly higher, and to that extent, Airbus
would not have suffered significant price suppr ession in the 200 – 300 seat wide-body LCA product
market, within the meaning of Article 6.3(c) of the SCM Agreement.
7.1795 In reaching the above conclusions, the Panel has also taken into account the evidence and
arguments advanced by the United States regardi ng certain factors that, in the view of the
United States, explain the difficulties initially expe rienced by Airbus in competing with the 787
during the 2004 – 2006 period. 3737 We recall that the United States' principal argument in this regard
is that Airbus' problems with the Original A350, and its inability to launch the A350XWB earlier than
2006 were not due to its lacking access to key technol ogies, but because Airbus' resources in the early
2000s were committed to the A380. 3738 According to the United States, Airbus' position in the 200-
300 seat wide-body market segment was a matter of its strategic choice to focus on mastering the
technology of a super-jumbo that was designed to service hub-to-hub routes, while Boeing decided to
focus on a smaller, more fuel-effici ent point-to-point aircraft that could build on existing, generally
available developments in composite tec hnology and reductions in composite costs. 3739 T h e
United States also argues that, having decided to go in a different direction to Boeing, Airbus
compounded its own problems after th e 787 launch by trying to rush the development of a competing
A350 based on a quick reworking of the A330.3740
7.1796 In our view, the United States' arguments concerning the effect of the A380 and A400M
programmes on Airbus' product development in th e 200 - 300 seat product market are not exactly
germane. The proper focus of the Panel's analysis is on the effects of the aeronautics R&D subsidies
on Boeing's product development behaviour, and it is clear to us that the aeronautics R&D subsidies
conferred a competitive advantage on Boeing. Even if we were to assume arguendo that Airbus had
made a strategic decision that risked leaving it commercially vulnerable in the 200 – 300 seat wide-
body LCA product market if Boeing decided to launch a new-technology aircraft before 2006, what is
of relevance to the Panel's assessment is the role of the R&D subsidies in enabling Boeing to launch a
new technology aircraft before 2006 and thereby exploit that vulnerability to Airbus' detriment.

3737 United States' first written submissions, paras. 916-928; United States' comments on
European Communities' response to question 87, para. 310; Interview with Noel Forgeard: "I wanted to limit the
costs for Airbus", Süddeutsche Zeitung, 20 May 2006, Exhibit US-1228; Interview with Thomas Enders, "We
have made mistakes", Welt am Sonntag, 14 May 20 06, Exhibit US-1229; Unite d States' second written
submission, HSBI Appendix, para. 12; "Airbus/EADS officials concede Boeing advantage, question A350
viability", Air Transport Daily News, 6 October 2006, Ex hibit US-1167; Robert Wall, "A350 Faces Busy Time
Until Industrial Launch", Aviation We ek & Space Technology, 20 June 20 05, Exhibit US-296 ; Noel Forgeard
and the A380, Commercial Aviation Report, January 1 and 15, 2007, Exhibit US-297.
3738 United States' first written submission, para. 714. During this pe riod, according to the
United States, Airbus was also developing the A400M military transport.
3739 United States' first written submission, para. 714.
3740 United States' first written submission, para. 714.

BCI deleted, as indicated [***]

Conclusion
7.1797 In conclusion, the Panel finds that the effect of the aeronautics R&D subsidies is a threat of
displacement and impedance of European Commun ities' exports from third country markets within
the meaning of Article 6.3(b) of the SCM Agreem ent, with respect to the 200-300 seat wide-body
LCA product market, and significant lost sales and significant price suppression, within the meaning
of Article 6.3(c) of the SCM Agreement with respect to that product market, each of which constitute
serious prejudice to the interests of the European Communities within the meaning of Article 5(c) of
the SCM Agreement.
(ii) Whether the subsidies at issue in this disput e cause serious prejudice to the interests of the
European Communities by reason of their effect on Boeing's pricing behaviour with respect to
the 737NG, 777 and 787.
7.1798 As explained above in subsection 2(b)(ii), th e difference between the European Communities'
arguments in respect of the 787, on the hand, and th e 737NG and 777 on the other, is that in the case
of the 787, the European Communities submits that there are two principal effects of the subsidies that
cause serious prejudice ("technology effects" and "price effects"), whereas in the case of the 737NG
and the 777, the European Communities argues that serious prejudice is caused by one principal effect
of all the subsidies ("price effects").
7.1799 In subsection 2(c)(i) above, the Panel has f ound that the aeronautics R&D subsidies, through
their effects on Boeing's development of technologi es (so-called "technology effects"), have caused
serious prejudice to the interests of the Europ ean Communities in the 200-300 seat wide-body LCA
product market. In this subsection, the Panel exam ines whether all of the subsidies at issue have
caused serious prejudice to the interests of the Eu ropean Communities by reason of their effect on
Boeing's pricing behaviour with respect to 737NG, 777 and 787.
7.1800 The European Communities asserts that the subsidies at issue have "price effects" in that they
either reduce Boeing's marginal unit costs or ope rate to increase Boeing's non-operating cash flow.
The Panel first analyzes the effects of the subsid ies that are said to reduce Boeing's marginal unit
costs before turning to consider th e effects of the other subsidies at issue in this dispute on Boeing's
pricing, and ultimately, on Airbus' prices and sales in each of the three LCA product markets.
Effects on Boeing's pricing of subsidies alleged to affect Boeing's marginal unit costs
7.1801 The European Communities has id entified three of the challenged measures as operating to
reduce the marginal unit costs that Boeing incurs in relation to the production and sale of individual
LCA. These measures are (i) the FSC/ETI exemptions and exclusions, (ii) the Washington State and
City of Everett B&O tax reductions and (iii) the waiver of landing fees granted by Snohomish County
for 747LCFs carrying 787 parts and components to Everett for final assembly. 3741 We recall that the
Panel has found that only the FSC/ETI measures a nd the state and municipal B&O tax reductions are
specific subsidies 3742 and we therefore examine the effects of these two subsidies on Airbus' prices
and sales in the 2004 – 2006 period.
7.1802 The FSC/ETI subsidies are tax measures that ar e structured as reductions in Boeing's overall
tax liability by excluding a portion of export-rela ted foreign-source income from taxation. The
FSC/ETI tax exemptions/exclusions are realized on the delivery of every LCA that Boeing exports, as
well as on LCA that Boeing produces and sells to domestic carriers and leasing companies for use
predominantly on foreign routes. In other words, the FSC/ETI subsidies directly relate to revenue

3741 European Communities' first written submission, para. 1233.
3742 See paras. 7.1406, 7.212, 7.302, 7.346, 7.516 of this Report.

BCI deleted, as indicated [***]

realized from export LCA sales and operate to reduce the revenues that are subject to taxation, thereby
lowering Boeing's taxes and increasing its after-tax profits. As we explain in the Part of this Report in
which we make a finding that the FSC/ETI meas ures are prohibited export subsidies within the
meaning of Article 3.1(a) of the SCM Agreement 3743, the U.S. government, through the TIPRA 3744,
repealed certain aspects of the grandfathering of FS C and ETI tax breaks for tax years beginning after
2006, and as Boeing will not deliver the 787 to any of its customers before that date, Boeing will not
realize FSC/ETI tax exemptions and exclusions in relation to the sale of the 787. Indeed, the European
Communities does not suggest that the FSC/ETI subsid ies have affected the prices of the 787 and has
not allocated the FSC/ETI subsidies to the 78 7 for purposes of its serious prejudice arguments. 3745
Our analysis of the effects of the FSC/ETI subs idies therefore proceeds on the basis that these
subsidies can only have affected Boeing's pricing of the 737NG and 777, and thus can only have had
effects in the 100-200 seat single-aisle, a nd 300-400 seat wide-body LCA product markets,
respectively.
7.1803 The Washington State B&O tax subsidies were among the various tax incentives introduced
by the Washington State Legislature under Hou se Bill 2294 (HB 2294). Evidence before the Panel
indicates that the purpose or intent behind the tax reform package in HB2294 was to reduce Boeing's
cost structure and thereby significan tly improve Boeing's competitiveness. 3746 The City of Everett's
B&O tax reduction was a component of the incentives provided through the MSA. The Ordinance
enacting the City of Everett B&O tax reduction states that the B&O tax reduction is intended to create
an estimated net present value reduction of approxi mately $35 million, based on current estimated
aircraft production and sales, and a six per cent di scount rate over a 20 year period beginning in
2004.
3747 The Washington State B&O tax reductions apply to the production and sale of LCA
manufactured in Washington State, and therefore potentially affect the production and sale of the
737NG, 777 and 787 families of Boeing LCA. The C ity of Everett B&O tax reductions affect the
production and sale of LCA manufactured in Everett, and therefore apply to the 777 and 787 families
of Boeing LCA.
7.1804 The Panel recalls that in US – Upland Cotton, the panel considered that it was entitled, under
Articles 5(c) and 6.3(c) of the SCM Agreement, to conduct an integrated examination of the effects of
any subsidies with a sufficient nexus with the subs idized product and the particular effects-related
variable under consideration.
3748 The panel stated:
"Thus, in our price suppression analysis under Article 6.3(c), we examine one effects-
related variable – prices – and one subsidi zed product – upland cotton. To the extent
a sufficient nexus with these exists among the subsidies at issue so that their effects
manifest themselves collectively, we believe that we may legitimately treat them as a
"subsidy" and group them and their effects together." 3749
7.1805 We note that the European Communities has grouped the FSC/ETI subsidies and the B&O tax
subsidies together as subsidies that operate to redu ce Boeing's marginal unit costs. The United States
also submits that the FSC/ETI subsidies and B&O ta x subsidies share certain similarities in structure
and operation such that it is appropriate that th e Panel conduct an aggregate analysis of their
effects.3750 The Panel considers that it is appropriate to aggregate the FSC/ETI subsidies and the B&O

3743 See paras. 7.1450-7.1464 of this Report.
3744 See above, para. 7.1385 of this Report.
3745 European Communities' first written submission, para. 1230, Figure 15.
3746 Washington State 7E7 Presentation, slide 9, Exhibit EC-66.
3747 Everett Ordinance 2759-04 (2004), § 1, Exhibit EC-61.
3748 Panel Report, US – Upland Cotton, para. 7.1192.
3749 Panel Report, US – Upland Cotton, para. 7.1192.
3750 United States' first written submission, paras. 767, 768.

BCI deleted, as indicated [***]

tax subsidies for purposes of analyzing their effects. In our view, in order to conduct an aggregated
analysis of the effects of subsidies in the context of this dispute, it should be possible to discern from
their structure, design and operation that they affect Boeing's behaviour in a similar way.
7.1806 The European Communities has an alyzed the FSC/ETI subsidies and B&O tax subsidies as
subsidies that are realized on the production and delivery of individual LCA, and which directly
reduce Boeing's marginal unit costs for the pr oduction and sale of each LCA that benefits from
them.
3751 While the United States does not consider th at it is accurate to describe the subsidies as
reducing Boeing's marginal unit costs 3752, it considers that both subsidies lead to an increase in
revenues after the transaction (the sale of an LCA). 3753 In this sense, both subsidies are directly tied
to sales of individual LCA. The United States agrees that, as a matter of economics, subsidies that are
tied to sales have an impact on those sales. 3754 It also acknowledges that Boeing's LCA prices are
affected by, inter alia, changes in Boeing's product-specific fixed and variable costs 3755 and endorses
the view that product-specific subsidies can have a significant impact on prices and output.3756
7.1807 The FSC/ETI subsidies reduce the revenues from certain sales of aircraft on which Boeing is
taxed, while the B&O tax subsidies directly reduce the rate at which Boeing's gross revenues from the
manufacture of aircraft are taxed. The State of Washington B&O tax is levied on the gross proceeds
of sale, gross incomes of a business or the value of products. 3757 The City of Everett B&O tax is a tax
on gross revenues which, with respect to manufacturing, are generally treated as the value of products
manufactured.3758 In general terms, the subsidies lower ta xes that Boeing pays and thereby increase
Boeing's after-tax profits. Both the FSC/ETI and B& O tax subsidies increase the profitability of LCA
sales in a way that enables Boeing to price its LCA at a level that would not otherwise be
commercially justified. In short, the FSC/ETI s ubsidies and the B&O tax subsidies, by lowering the
taxes incurred in connection with sales of LCA, clearly have a far more direct and immediate
relationship to aircraft prices and sales than other subsidies at issue in this dispute, such as the
aeronautics R&D subsidies.
7.1808 In addition, we recall that the FSC/ETI subsid ies have been the subject of previous WTO
dispute settlement and in that context, have been found to be prohibited export subsidies within the
meaning of Article 3.1(a) of the SCM Agreement. 3759 We also make a finding in this Report that the
FSC/ETI measures are prohibited export subsidies. 3760 The FSC/ETI subsidies not only bear a more
direct relationship to Boeing's LCA prices than the aeronautics R&D subsidies, but they are also, by
virtue of their very nature as export subsidies, more likely to cause adverse trade effects. We note in
this regard that the Appellate Body has stated:
"There is no logical reason why the Members of the WTO would, in conceiving and
concluding the SCM Agreement, have granted panels the au thority to draw inferences
in cases involving actionable subsidies that may be illegal if they have certain trade

3751 European Communities' first written submission, para. 1241.
3752 United States' first written submission, para. 751.
3753 United States' first written submission, paras. 751-752.
3754 United States' comments on the European Communities' response to question 289, para. 540.
3755 United States' response to question 298, para. 522.
3756 Stiglitz and Greenwald, On the Question of the Impact of Subsidies on Supply and Prices in the
LCA Market, US-1309, para. 4.
3759 See paras. 7.1452-7.1455 of this Report.

BCI deleted, as indicated [***]

effects, but not in cases that involve prohibited export subsidies for which the adverse
effects are presumed."3761
7.1809 The panel in Brazil – Aircraft explained the inherently trade-distorting nature of export
subsidies as follows:
"In our view, the object and purpose of the SCM Agreement is to impose multilateral
disciplines on subsidies which distort internati onal trade. It is for this reason that the
SCM Agreement prohibits two categories of subsidies -- subsidies contingent upon
exportation and upon the use of domestic over imported goods -- that are specifically
designed to affect trade."3762
7.1810 In our view, precisely because the FSC/ETI subsidies are contingent on Boeing making
export sales, we are entitled to determ ine, absent reliable ev idence to the contrary, that by their very
nature, they will have trade distortive effects.3763
7.1811 We have previously estimated the amount of FSC/ETI subsidies related to sales of LCA that
Boeing and McDonnell Douglas received from FSC a nd ETI tax exemptions and exclusions from
1989 through 2006 to be approximately $2.2 billion. 3764 The European Communities' consultants,
ITR, estimate that, of the $2.2 billion in FSC/ETI s ubsidies received by Boeing with respect to its
sales of LCA between 1989 and 2006, Boeing receive d approximately $153 million, $142 million and
$140 million, respectively, in the years 2004 to 2006.3765 As set forth in paragraphs 7.254 and 7.353 of
this Report, the Panel has estimated that the am ount of the State of Washington B&O tax reduction
that was received directly by Boeing through 2006 is $13.8 million, while the amount of the City of
Everett B&O tax reduction received by Boeing through 2006 is $2.2 million.
7.1812 As discussed in paragraphs 7.155-7.157 of this Report , the European Communities has
allocated the full amount of the value of B&O tax subsidies estimated to be received by Boeing in
2007 – 2009 to the period 2004 – 2006 as part of ITR' s allocation of subsidy amounts over time, to
arrive at estimates of pe r-LCA subsidy "magnitudes". 3766 Although the Panel does not disagree with
the general proposition that the expectation of the receipt of a subsidy may affect a recipient's
behaviour, and thus give rise to a market effect pr ior to its actual receipt, the Panel does not consider
that this should automatically lead to the mechani cal allocation of amounts of recurring subsidies that
reduce Boeing's marginal unit costs back in time by three years. The implication of such an allocation
would be that the subsidy does not give rise to serious prejudice, within the meaning of Article 6.3, in
the year of its receipt. As we have explained in paragraph 7.1685, the Panel does not accept this
implication. Rather, the Panel considers that gi ven the particularities of LCA production and sale, the
effects of the subsidies should be understood to begi n at the time at which an LCA order is obtained

3761 Appellate Body Report, Canada – Aircraft, para. 202. Emphasis added.
3762 Panel Report, Brazil – Aircraft , para. 7.26. Emphasis added. See also the statement of the
arbitrator in US - FSC (Article 22.6 – US): "Export subsidies do, after all, have "adverse effects" on third parties.
Systemically speaking they are, as a category of subsidy, more inherently prone to do so than any other".
Decision by the Arbitrator, US – FSC (Article 22.6 – US), para. 5.35.
3763 That being said, as we note below, there is in fact in this case reliable evidence which confirms that
determination; see e.g. paras. 7.1806-7.1807, 7.1811, and 7.1817-7.1823.
3765 International Trade Resources LLC, Calculating on a Per-Aircraft Basis the Magnitude of the
Subsidies Provided to US Large Civil Aircraft, 20 February 2007, Exhibit EC-13, Appendix A, p. 3.
3766 International Trade Resources LLC, Calculating on a Per-Aircraft Basis the Magnitude of the
Subsidies Provided to US Large Civil Aircraft, 20 February 2007. The European Communities' methodology
for allocating subsidy amounts to arrive at annual an d per-LCA subsidy "magnitudes" is described in
paras. 7.1616-7.1617 of this Report.

BCI deleted, as indicated [***]

(or an order is lost) and to continue up to and incl uding the time at which that aircraft is delivered (or
not delivered).
7.1813 Moreover, we note that the European Commun ties' allocation of the post-2006 amounts of
B&O tax subsidies estimated to be received by Boeing in 2007 – 2009 to the period 2004 – 2006
arises in the specific context of ITR's allocati on of subsidies received by Boeing between 1989 and
2006, over time and across particular models of LCA, for purposes of estimating per-LCA subsidy
"magnitudes" and ad valorem rates of subsidization for each family of Boeing LCA. ITR's per-LCA
subsidy "magnitude" estimates play no part in the Panel' s analysis of the effects of the subsidies. We
therefore see no reason or need to effectively shift the amounts of recurring subsidies received by
Boeing backwards through time for purposes of our ser ious prejudice analysis in the way in which
ITR has done for purposes of its subsidy "magnitude" calculations.
7.1814 The issue before the Panel is whether the av ailability of FSC/ETI subsidies and B&O tax
subsidies enabled Boeing to compete on price in individual sales, and secure sales that it would not
otherwise have made, and where it did not win those sales, led to Airbus securing those sales at lower
prices than it would otherwise have obtained. The United States argues that the amounts of the
FSC/ETI subsidies received by Boeing were too sm all relative to Boeing's order revenues to have
affected Boeing's pricing to a degree that would l ead to it winning sales that it would not otherwise
have won, or forcing Airbus to win sales only at lower prices than it would otherwise have obtained.
It presents the following calculations in this regard:
3767

 Value of orders FSC/ETI magnitude Ratio of subsidy to
order value

2000 $32,591 $266 1:122
2001 $16,588 $197 1:84
2002 $12,585 $179 1:70
2003 $9,771 $107 1:91
2004 $16,650 $153 1:109
2005 $67,193 $142 1:473
2006 $61,579 $140 1:440

7.1815 ITR criticizes the United States' allocation of FSC/ETI subsidy amounts over order values,
which it argues fails to reflect the reality that th e FSC/ETI subsidies accrue against aircraft sales
revenues, not orders.
3768 ITR notes that the FSC/ETI subsidy is based on a fixed percentage of
broadly defined export revenue or earnings, and argues that any ad valorem rates of subsidization
should be based on the sales revenue against which the subsidies accrued. ITR presents the following
table showing FSC/ETI subsidies calculated as a per centage of Boeing's annual revenue from aircraft
deliveries between 2000 and 2006:3769

3767 United States' first written su bmission, para. 815; see also United States' second written
submission, para. 175 and footnote 272; United States' comment on European Communities' response to
question 229, paras. 418-420; United States' comment on European Communities' response to question 269,
para. 469. The European Communities disagrees with th e United States' position that the alleged tax benefits
were not significant enough to affect Boeing's supply of LCA; European Communities comments on
United States' response to question 389, para. 403.
3768 ITR LLC Response to US Criticisms of ITR Subsidy Magnitude Report, 1 November 2007, Exhibit
EC-1181, para. 15.
3769 ITR LLC Response to US Criticisms of ITR Subsidy Magnitude Report, 1 November 2007, Exhibit
EC-1181, para. 16.

BCI deleted, as indicated [***]

FSC/ETI Subsidies Year Delivery Revenue
Amount % Delivery Revenue
2000 24,792 266 1.07%
2001 27,251 197 0.72%
2002 22,100 179 0.81%
2003 16,637 107 0.64%
2004 15,905 153 0.96%
2005 14,777 142 0.96%
2006 21,562 140 0.65%

7.1816 We do not consider that either measure is pa rticularly informative or illustrative of the
capacity for the FSC/ETI subsidies to have affected Boeing's prices, and by extension, Airbus' prices
and sales.
7.1817 It is important to bear in mind that the FSC/ETI subsidies are export subsidies that are
designed to increase Boeing's competitiveness through its pricing of LCA for export. The European
Communities has provided evidence concerning a sales campaign in 1996 in which an Airbus
negotiator states that, owing to Boei ng's lower pricing due to its receipt of FSC subsidies, his team
was asked by the customer to reduce its pr ice by a further $4 million per aircraft. 3770 The U.S. Trade
Representative described the general purpose of the FSC/ETI provisions as being to enhance the
international competitiveness of U.S. companies. 3771 A 2003 report on FSC/ETI beneficiaries
indicates that, over the six-year period ended in 2002, Boeing was the largest FSC/ETI beneficiary.3772
Moreover, Boeing itself seems to have regarded th e FSC/ETI measures to be an important aspect of
its ability to compete. In 2003, Mr. James H. Zrust, Vice President of Tax at Boeing, delivered a
statement to the United States Senate regarding the importance of the FSC/ETI tax benefits to Boeing.
As Vice President of Tax at Boeing, Mr. Zrust would have been very highly qualified to speak to this
issue. In his statement, Mr. Zrust made clear that repealing Boeing's ETI be nefits without a "suitable
replacement" would have an advers e effect on Boeing's position "vis-a-vis foreign competitors", and
stated that while repealing ETI without a suitable replacement would have an adverse impact on the
"international competitiveness" of all U.S. exports, it would be "especially devastating to the U.S.
aerospace industry".
3773 He spoke about the importance of ETI for "U.S. companies competing
against foreign firms, which are often heavily subsidized by their governments". 3774 He reiterated that
any repeal of ETI benefits without a suitable repla cement would be "particularly detrimental to U.S.
competitiveness", and that the loss of a tax benefit that:

3770 Christian Scherer, Commercial Aspects of the Aircraft Business from the Perspective of a
Manufacturer, March 2007, Exhibit EC-11 (BCI), para. 56.
3771 Statement of Robert B. Zoellick, U.S. Trade Representative before the Committee on Finance of
the U.S. Senate, 30 July 2002, Exhibit EC-629, at p. 74; WTO's Extraterritorial Income Decision: Hearing
before House Comm. on Ways and Means 107 th Cong. 35 (2992) (response to questions by Barbara Angus,
International Tax Counsel, U.S. Department of the Treasury), Exhibit EC-630, at p. 35.
3772 European Communities' first written submission, para. 947, Jose Oyola, FSC-ETI Beneficiaries: An
Updated Profile, Tax Notes International, 6 October 2003, Exhibit EC-632.
3773 Statement of James H. Zrust, Vice President of Tax, the Boeing Compan y, before the Committee
on Finance of the U.S. Senate, 8 July 2003, Exhibit EC-631, p. 187.
3774 Statement of James H. Zrust, Vice President of Tax, the Boeing Compan y, before the Committee
on Finance of the U.S. Senate, 8 July 2003, Exhibit EC-631, p. 187.

BCI deleted, as indicated [***]

"{A}llows U.S. exporters to compete fair ly with European exporters may well
translate into a reduction in R&D investments, higher capital costs, and lost market
share over time."
3775
7.1818 These considerations point quite clearly to th e significance of the FSC/ETI subsidies to
Boeing's ability to compete on price against Airbus. We have no doubt that the availability of the
FSC/ETI subsidies, in combination with the B&O ta x subsidies, enabled Boeing to lower its prices
beyond the level that would otherwise have been econom ically justifiable, and that in some cases, this
led to it securing sales that it would not otherwise have made, while in other cases, it led to Airbus
being able to secure the sale only at a reduced pric e. We note further that, to the extent that these
subsidies have enabled Boeing to win sales from Air bus in the past, they have served to entrench
Boeing as the incumbent supplier, thereby putting it at an important switching cost advantage over
Airbus in future sales of aircraft of the same family to that same customer.
3776
7.1819 The FSC/ETI programme was in operation prior to 2000, and it is therefore not possible for
the Panel to ascertain the effects of the subsidies from direct observation of market share and pricing
trend data over the 2000 – 2006 period. The United States' explanations of factors that it considers
explain the prices and performance of Airbus LC A relative to Boeing LCA in the 100 – 200 seat
single aisle, and 300 – 400 seat wide-body product markets in the 2004 – 2006 period similarly do not
reverse or attenuate the pervasi ve and consistent pricing adva ntage that Boeing had in LCA
campaigns in the 2001 – 2003 period due to the availability of the FSC/ETI subsidies.3777
7.1820 The Panel considers that in these circumstances, it is necessary and appropriate to deduce the
effects of the FSC/ETI subsidies and the B&O tax subsidies on Airbus' sales and prices over the 2004
– 2006 period, based on commonsense reasoning and the drawing of inferences from conclusions
regarding the nature of these subsides as subsidies that increase the profitability of LCA sales in a way
that enables Boeing to price its LCA at a level that would not otherwise be commercially justified, the
duration of the FSC/ETI subsidies, as well as from wh at we understand of the nature of competition
between Airbus and Boeing, particularly the pri ce-sensitive nature of certain significant LCA sales
campaigns and the pricing advantage afforded to incumbent suppliers through the phenomenon of
buyer switching costs. We consider this appro ach to be consistent with our obligation under
Article 11 of the DSU to make an objective assessment of the facts. In this regard, we note that the
Appellate Body, in Canada – Aircraft, indicated that drawing inferences from facts on the record is a
routine and inherent aspect of a panel's discharging its obligation under Article 11 of the DSU:
"The DSU does not purport to state in what detailed circumstances inferences,
adverse or otherwise, may be drawn by pa nels from infinitely varying combinations
of facts. Yet, in all cases, in carrying out their mandate and seeking to achieve the
"objective assessment of the facts" required by Article 11 of the DSU, panels
routinely draw inferences from the facts placed on the record. The inferences drawn
may be inferences of fact: that is, from fact A and fact B, it is reasonable to infer the
existence of fact C. Or the inferences deri ved may be inferences of law: for example,
the ensemble of facts found to exist warrant s the characterization of a "subsidy" or a
"subsidy contingent … in fact … upon export performance". The facts must, of

3775 Statement of James H. Zrust, Vice President of Tax, the Boeing Compan y, before the Committee
on Finance of the U.S. Senate, 8 July 2003, Exhibit EC-631, p. 190.
3776 Switching costs refer to the costs that buyers w ho operate one particular fa mily of aircraft must
incur to switch to a new supplier (s uch costs stem from pilot training, aircraft maintenance etc.). See
Rod P. Muddle, The Dynamics of the Large Civil Aircraft Industry, March 2007, Exhibit EC- 10, para. 97;
Christian Scherer, Commercial Aspects of the Aircraft Business From the Perspective of a Manufacturer, March
2007, Exhibit EC-11 (BCI), para. 53; Jordan and Dorman Report, Exhibit US-3, p. 15.
3777 E.g. United States' first written submission, paras. 1064-1080, 1138-1155.

BCI deleted, as indicated [***]

course, rationally support the inferences ma de, but inferences may be drawn whether
or not the facts already on the record deserve the qualification of a prima facie case.
The drawing of inferences is, in other words, an inherent and unavoidable aspect of a
panel's basic task of finding and characterizing the facts making up a dispute."3778
7.1821 The other option potentially open to us is to decline to make a serious prejudice finding
because of the difficulty of calculating with math ematical certitude the precise degree to which
Boeing's pricing of the 737NG and 777 families of aircraft was affected by the FSC/ETI subsidies and
B&O tax subsidies. In our view, such an approach would be inconsistent with our obligations under
Article 11 of the DSU, as well as contrary to considerations of basic commonsense and reason.
7.1822 The Panel considers that it is reasonable to infe r, based on the fact that the effects of the
subsidies on Airbus' prices would be most acutely felt in particular sales campaigns of strategic
importance to Boeing and/or Airbus, that the effects of the subsidies are therefore significant in the
sense that Boeing's success in such sales campaigns necessarily constitutes a significant lost sale to
Airbus, and that such sales secured by Airbus in the face of Boeing's reduced prices necessarily
constitute sales secured at significantly suppressed prices. It is thus inescapable to also arrive at the
conclusion that in law the effects of the subsidies on Airbus' prices and sales constitute significant lost
sales and significant price suppression, within the meaning of Article 6.3(c) of the SCM Agreement,
as well as displacement and impedance of exports fro m third country markets, within the meaning of
Article 6.3(b).
7.1823 In sum, the Panel is satisfied that the effect s of the FSC/ETI subsidies and the Washington
State B&O tax subsidies in the 100 – 200 seat single aisle LCA product market were to significantly
suppress Airbus' prices in sales in which it compet ed against Boeing and to cause Airbus to lose
significant sales, and to displace and impede European Communities' exports from third country
markets in that product market. We are also satisfi ed that the effects of the FSC/ETI subsidies, the
Washington State B&O tax subsidies and the City of Everett B&O tax subsidies in the 300 – 400 seat
wide-body LCA product market were to significantly suppress Airbus' prices in sales in which it
competed against Boeing and to cause Airbus to lose significant sales, and to displace and impede
European Communities' exports from third country markets in that product market.
7.1824 We note that the B&O tax subsidies also a pply to the production and sale of the 787.
However, there is insufficient evidence before us that would enable us to conclude that these subsidies
are of a magnitude that would enable them, on their own, to have such an effect on Boeing's prices of
the 787 as would lead to a finding that their effects in the 200 – 300 seat wide-body market were
significant price suppression, significant lost sal es or displacement or impedance of European
Communities imports into the United States or exports to third countries. We recall that we have
previously found that the aeronautics R&D subsidie s, through their effects on Boeing's development
of technologies for the 787, gave rise to serious prejudice in that product market.
3779 However, owing
to the very different way in which the aeronautics R&D subsidies operate, we do not consider that it is
appropriate to aggregate the effects of the B&O ta x subsidies on Boeing's pricing of the 787 with the
effects of the aeronautics R&D subsidies on Boeing's development of technologies applied to the 787,
as it is clear that the two groups of subsidies operate through entirely distinct causal mechanisms.
Effects on Boeing's pricing of subsidies alleged to increase Boeing's non-operating cash flow
7.1825 We now turn to consider the effects of the cat egory of subsidies identified by the European
Communities as operating to increase Boeing's non- operating cash flow, thereby allegedly giving
Boeing the ability to engage in "aggressive pricing" of its LCA in order to win market share from

3778 Appellate Body Report, Canada – Aircraft, para. 198.

BCI deleted, as indicated [***]

Airbus. First, the Panel recalls that this group of subsidies comprises all of the challenged measures
that the Panel has found to be specific subsidies within the meaning of Articles 1 and 2 of the SCM
Agreement, other than the FSC/ETI subsidies a nd B&O tax subsidies discussed above. In other
words, the European Communities purports to in clude within this category of subsidies the
aeronautics R&D subsidies, the Washington State and City of Everett taxation subsidies other than the
B&O tax subsidies, the property and sales tax abatem ents provided to Boeing pursuant to IRBs issued
by the State of Kansas and municipalities therein, an d the tax credits and other incentives provided to
Boeing by the State of Illinois and municipalities therein, each as set forth in paragraph 7.1433 of this
Report. The aeronautics R&D subsidies represent th e overwhelming majority of the subsidy amount
within this category of subsidies received by Boeing between 1989 and 2006.
7.1826 The Panel recalls that it has previously found that the aeronautics R&D subsidies, through
their effects on Boeing's development of technol ogies for the 787, caused serious prejudice to the
European Communities in the 200 – 300 seat wide-body LCA product market.
3780 The European
Communities' "price effects" causation argument effec tively asks the Panel to analyze the effects of
the aeronautics R&D subsidies again, this time on th e basis that they freed up additional cash which
Boeing was able to use to engage in aggressive pr icing of its three families of LCA (i.e. the 737NG,
777 and 787) resulting in serious prejudice to the Eu ropean Communities' interests in the three LCA
product markets. We have previously indicated that we do not consider that it is appropriate to reduce
the effects of the aeronautics R&D subsidies at issue in this dispute to their cash value. 3781 Moreover,
the European Communities has indicated, in respon se to a question from the Panel, that the Panel
should not over-count the effects of the aeronautics R& D subsidies by analyzing their effects in terms
of their "knowledge" effects as well as, or in addition to, their "financial" effects. 3782 Having analyzed
the effects of the aeronautics R&D subsidies on the basis of their contribution to Boeing's
development of technologies for the 787, we consider that it would be over-counting to additionally
analyze their effects based on a different understanding of their operation, namely, as freeing up
additional cash for Boeing to use to lower the prices of its LCA.
7.1827 When the aeronautics R&D subsidies are subtract ed from this category of subsidies that are
said to operate by increasing Boeing's non-operating cash flow, the amount remaining is
comparatively small, being approximately $550 m illion. As importantly, the subsidies in this
category, unlike the FSC/ETI subsidies and B&O tax subsidies discussed above, are not directly
related to Boeing's production or sale of LCA.
3783 Rather, as the European Communities appears to
acknowledge, these subsidies are not "explicitly targeted to lowering Boeing's costs of production of
specific LCA models". 3784 According to the European Commun ities, "LCA market factors" and
"dynamics of production" combine to support a finding that subsidies of this nature nonetheless allow
Boeing to market its LCA at lower prices than would otherwise be the case. The European
Communities argues that, under the "right condition s of competition – such as the intense duopoly

3782 European Communities' response to question 375, para. 322.
3783 European Communities' first written submission, para. 1277; European Communities' second
written submission, paras. 697-740. Although the Eur opean Communities argues that some of the subsidies
within this category "specifically relate to the develo pment and production of the 787 family of LCA" and are
therefore "tied" to the 787, it uses this concept to denote the allocation of a subsidy amount to particular
products, rather than to denote that a subsidy is "tied" to a product in the sense that its receipt is in some way
contingent on production or sale of a particular product; European Communities' response to question 374,
paras. 297-298, footnote 392.
3784 European Communities' first wrriten submission, para. 1303.

BCI deleted, as indicated [***]

competition existing in the LCA markets – non-pri ce- or non-production-cont ingent subsidies can
confer the ability to cause adverse effects".3785
7.1828 Indeed, while the United States has emphasized th at subsidies that are not tied to production
of a particular product are unlikely to affect producti on, it has explicitly stated that it agrees with the
European Communities that this fact is not determinative.3786 Thus, it would appear that the parties do
not disagree on the proposition that where a subsidy is not tied to production of a particular product,
the subsidy may still affect the behaviour of the recipient of the subsidy in a manner that causes
serious prejudice, depending upon the context in which it is used. However, an important element of
the European Communities' arguments as to why s ubsidies of this nature would affect Boeing's
pricing behaviour relates to the total amount of th e subsidies that the European Communities alleges
to exist, as well as their allocation over time and across the particular models of LCA to arrive subsidy
"magnitudes". One might reasonably expect that a total amount of $19.1 billion in subsidies received
between 1989 and 2006 would have a greater potential to affect Boeing's LCA prices than
$550 million received over the same period. As we have explained, the Panel is assessing the effects
on Boeing's LCA pricing of approximately $550 milli on in subsidies, the receipt of which is not
directly tied to the production or sale of particular LCA. We are not persuaded that subsidies of this
nature and of this amount have affe cted Boeing's prices in a manner that could be said to give rise to
serious prejudice to the European Communities' interests.
Other causation arguments made by the European Communities

7.1829 The European Communities has also, in the contex t of its arguments that the subsidies caused
serious prejudice through their effects on Boeing's LCA prices, presented certain arguments which the
Panel does not find persuasive. In particular, the European Communities argues that Boeing's LCA
division would not have been "economically viab le" had it not received $19.1 billion in subsidies
between 1989 and 2006. The European Communities also presents an econometric simulation model
that purports to support the European Communities' argument that Boeing would have invested the
subsidies in lower LCA pricing and additional inv estments in R&D. We briefly explain what we
consider to be the principal weaknesses in these arguments.
"Economic viability" of Boeing's LCA division in the absence of the subsidies
7.1830 The European Communities' arguments concerning the "economic viability" of Boeing's LCA
division between 1989 and 2006 had it not received an alleged $19.1 billion in subsidies initially arose
out of its rebuttal of the United States' argument that the subsidies had no effect on Boeing's pricing or

3785 European Communities' non-confidential oral stat ement at the second meeting with the Panel,
para. 107. See also, European Communities' response to question 379, para. 435: "certain tied subsidies may
yield similar effects as certai n unrestricted subsidies, depending on the context of the specific subsidy at issue;
i.e., the specific nature of the subsidy and its magnitude, as well as the condition of the recipient."
3786 United States' comments on European Communities' response to question 301, paras. 601-602:
"The United States also agrees with the EC that the absence of a direct link between subsidies and the
development, production, or sale of large civil aircraft 'should not be determinative of the outcome of the Panel's
causation analysis'. At the same time, without a direct link between an alleged subsidy and the development,
production or sale of large civil aircraft, a complaini ng member bears the burden of identifying persuasive
evidence that the subsidy was used by th e recipient in a way that caused the ad verse effects at issue, or that, but
for' the subsidy, the recipient could not have competed in the market as it did.

Because the bulk of the alleged subsidies in this disp ute are, by the EC's own admission, 'untied' to the
development, production or sale of any Boeing large civil aircraft, the evidence cited by the EC regarding the
ways in which Boeing supposedly used the alleged subsid ies is critical to its causation arguments. Yet, that
'evidence' is essentially non-existent ..."

BCI deleted, as indicated [***]

product development behaviour. With each success ive submission, the parties presented new and
more complex financial information concerning the appropriate basis on which to conduct a
counterfactual analysis of whether the Boeing LCA division's pricing and product development
behaviour would have been possible had it not recei ved an alleged $19.1 billion in subsidies between
1989 and 2006.3787
7.1831 The parties disagree generally as to the appropriate metric for assessing the "economic
viability" of Boeing's LCA division and the approp riate adjustments that should be made to the
operating profit figures for Boeing's LCA division as pa rt of that assessment. The Panel recalls that
third parties such as Australia and Brazil question whether it is even appropriate for panels to
undertake a causation analysis under Articles 5(c) and 6.3 of the SCM Agreement by attempting to
trace subsidies through a recipient's cash flow statem ents. It is not necessary for the Panel to address
these issues in order to evaluate the merits of the European Communities' economic viability
argument for purposes of this dispute. We recall that all of the economic viability calculations are
based on the assumption that Boeing's LCA division received $19.1 billion in subsidies between 1989
and 2006. By contrast, the Panel has found that the amount of subsidies received by Boeing over this
period is substantially less than $19.1 billion. Even if the Panel were to accept the adjustments to the
operating profit figures for Boeing's LCA division pr oposed by the European Communities, and even
if the Panel were to consider it appropriate to an alyze the effects of the aeronautics R&D subsidies on
Boeing's behaviour as being equivalent to the effects on Boeing of the receipt of an equivalent amount
of unrestricted cash (which we do not), once the am ount of the subsidies received by Boeing between
1989 and 2006 is reduced from $19.1 billion to our own estimate of the total amount of the
subsidies
3788, the argument that Boeing's LCA division would not have been "economically viable" in
the absence of the subsidies unless it altered its pr ices or product development behaviour becomes
untenable, whichever basis for assessing economic viability is used.
Cabral Report
7.1832 The European Communities presents an econom etric simulation model by Professor Luís
Cabral which seeks to address the question of how the provision of subsidies affects the business
decisions of Boeing; specifically, how the receipt of an additional dollar of a particular category of
subsidy affects the amount that Boeing chooses to inv est in the development of new aircraft, and to

3787 ITR, Alternative Assessment of the Effect of US Subsidies on the US LCA Industry's Profit and
Debt, Exhibit EC-1180; United States' Comments on European Communities' response to question 78,
para. 270; European Communities' non-confidential oral statement at the second meeting with the Panel,
para. 117; ITR, Economic Viability of Boeing Commercial Airplanes without US Subsidies, 10 April 2008,
Exhibit EC-1393, Robert F. Whitelaw, Report on M easuring Economic Viability, 3 April 2008, Exhibit EC-
1395 and European Communities' response to question 292; Statement of Ruud Roggekamp, Exhibit US-1321;
Greenwald Comments on Whitelaw Economic Viability Report, Exhibit US-1324 and United States' comments
on European Communities' response to question 292; Professor David Wessels, The Economic Viability of
Boeing's Commercial Aircraft Division (30 July 2009 ), Exhibit US-1358; Stern Stewart & Co. Comments on
Economic Viability Analysis (29 July 2009), Exhibit US -1359 and United States' response to question 370; ITR
Report on Reconciliation of EC, Wessels and Stern Analyses of BCA's Economic Viability, 20 August 2009,
Exhibit EC-1448; Whitelaw Declaration on Effects of Removal of Cash on WACC and Earnings for Economic
Viability Analysis, Exhibit EC-1499; Zarowin Declarat ion on Treatment of Certain Pension and Other Post-
Retirement Obligations, 20 August 2009, Exhibit EC-1450 and European Communities' comments on
United States' response to question 370; ITR Report on BCA's Return on Invested Capital, 29 July 2009, Exhibit
EC-1429; Declaration of Paul Zarowin, 29 July 2009, Exhibit EC-1431 and European Communities' response to
question 378, para. 357; United States' comments on European Communities' response to question 378, and
Commentary on ITR's ROIC analysis and the Wessels Economic Viability Reports (Annex A) and Commentary
on ITR's ROIC analysis and the Stern Stewart Economic Viability Report (Annex B).
3788See para. 7.1433 of this Report.

BCI deleted, as indicated [***]

price more aggressively. 3789 Professor Cabral's analysis focuses on the effects of a category of
subsidies that he refers to as "development subsid ies". These are subsidies in which the amount of
subsidy does not vary in direct proportion to the number of aircraft produced or sold. 3790 Professor
Cabral's analysis is based on a specific economic model of Boeing's behaviour; namely, that when
Boeing receives so-called "development subsidies" , management seeks to maximize a trade-off
between shareholder income and shareholder value, with the result that it directs a certain portion of
the subsidy towards dividends, and the remainder towards "investments that increase firm value". 3791
Appendix VII.F.2 to this Part of the Report explains the Cabral model in greater detail, along with the
United States' criticisms of the model, and the Pane l's evaluation of its principal weaknesses in the
context of its use in this dispute.
Conclusion
7.1833 For the foregoing reasons, the Panel concludes: (i) that the effect of the FSC/ETI subsidies
and State of Washington B&O tax subsidies is displacement and impedance of European
Communities, exports from third country markets with in the meaning of Article 6.3(b) of the SCM
Agreement with respect to the 100 – 200 seat single-aisle LCA product market, and significant price
suppression and significant lost sales within the meaning of Article 6.3(c) in that product market; and
(ii) that the effect of the FSC/ETI subsidies, th e State of Washington B&O tax subsidies and the City
of Everett B&O tax subsidies is displacement and impedance of European Communities' exports from
third country markets within the meaning of Article 6.3(b) of the SCM Agreement with respect to the
300 – 400 seat wide-body LCA product market, and si gnificant price suppression and significant lost
sales within the meaning of Article 6.3(c) in that product market.
7.1834 The Panel is not satisfied that the Europ ean Communities has demonstrated that the
Washington State taxation subsidies other than th e B&O tax subsidies, or the property and sales tax
abatements provided to Boeing pursuant to IRBs issued by the State of Kansas and municipalities
therein, and the tax credits and other incentives provided to Boeing by the State of Illinois and
municipalities therein, through their effects on Boeing's LCA pricing behaviour, cause serious
prejudice to the European Communities' interests in any of the three LCA product markets identified
by the European Communities in this dispute.
Whether the subsidies at issue in this disput e cause a threat of significant price suppression in
each of the three LCA product markets
7.1835 In addition to its arguments that the subsid ies cause "present" serious prejudice to the
European Communities' interests, the European Communities argues that the subsidies at issue in this
dispute cause a threat of serious prejudice with respect to future orders of LCA in each of the three
LCA product markets.3792

3789 Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and
3790 Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and
CEPR, March 2007, Exhibit EC-4, paras. 2-3. It appear s that the category of subsid ies that Professor Cabral
refers to as "development subsidies" encompasses the same subsidies that the Euro pean Communities analyzes
as operating to increase Boeing's non-operating cash flows (as distinguished from the subsidies that the
European Communities characterizes as reducing Boeing's marginal unit costs of production and sale of LCA).
3791 Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and
3792 Specifically, the European Communities argues that the subsidies cause a threat of significant price
suppression with respect to future orders of: the A330 and A350XWB-800 families of LCA, A320 family of
LCA and A350XWB-900/1000 families of LCA; European Communities' first written submission, paras. 1446,
1542 and 1632.

BCI deleted, as indicated [***]

Arguments of the European Communities
7.1836 The European Communities' arguments regardi ng the existencee of a threat of serious
prejudice based on future orders of Airubs LCA are structured in the same manner with respect to
each LCA product market. The European Communiti es argues that the present and future subsidies
give rise to a significant likelihood that Airbus will suffer from significant price suppression with
respect to future orders of each of the competi ng Airbus LCA families, based on the "same types of
evidence" that support the European Co mmunities' present serious prejudice claim. 3793 In this regard,
the European Communities contends: (i) Boeing will receive "guaranteed subsidies" benefiting each
of its Boeing LCA families in the post-2006 period; ( ii) the nature of the subsidies indicates that the
"technology effects" (relevant only in relation to the 200 – 300 seat wide-body LCA product market)
and "price effects" (relevant with respect to each of the three LCA product markets) will continue in
the future; (iii) the magnitude of the past, present a nd "guaranteed future subsidies" benefiting each of
the Boeing LCA families will continue to be very large 3794; (iv) conditions of competition in the post-
2006 period will continue to give Boeing the abilit y and incentive to use the "subsidy benefits" to
"price down" its subsidized LCA families to the detriment of the like Airbus LCA families3795; and (v)
the already suppressed prices in each of the three Ai rbus LCA markets at issue, coupled with the
nature and magnitude of the subsides, estimated price effects of the subsidies and conditions of
competition in each of the three LCA markets give rise to a significant likelihood that Airbus' future
orders of "like" LCA products will be at significantly suppressed prices.3796
7.1837 According to the European Communities, the suppressed prices for Airbus' LCA (which are
caused by subsidies) provide a strong indication that prices will be suppressed in the future. The
European Communities considers that the evidence provided in support of its present price
suppression arguments is "equally relevant" to its th reat of price suppression arguments insofar as it
shows already suppressed prices for the Airbus LCA at issue. 3797 Further, the European Communities
argues that "having established the existence of serious prejudice from the actionable subsidies,
demonstrating the existence of threat of serious prejudice from the effects of the same subsidies is a
relatively straight-forward exercise".3798
7.1838 In response to a question from the Panel, th e European Communities indicates that it does not
agree with the implication that its threat of serious prejudice argument is dependent on it
demonstrating the existence of present serious pr ejudice. The European Communities states that
although the evidence relied upon in support of its present and threat of serious prejudice arguments
may overlap, the evidence is "being adduced to support different legal conclusions".
3799 Further, in
response to a United States' argument, the European Communities contends that its threat of serious
prejudice arguments with respect to future LCA or ders are not based merely on "the existence of
present serious prejudice, and the continuation of that serious prejudice into the future".3800

3793 European Communities' first written submission, paras. 1447, 1542 and 1632.
3794 European Communities' first written submission, paras. 1450, 1545 and 1635. The
European Communities here presents projections of what it claims are per-LCA subsidization magnitudes and
ad valorem rates for each model of the 787, 737NG and 777 for the years 2007-2010; Figures 36, 37, 53, 54, 69
and 70 of European Communities' first written submission, paras. 1450, 1545 and 1635.
3795 European Communities' first written submission, para.s 1451, 1546 and 1636.
3796 European Communities' first written submission, paras. 1452-1454, 1547-1549 and 1637-1639.
3797 European Communities' first written submission, paras. 1453, 1548 and 1638.
3798 European Communities' first written submission, para. 1148.
3799 European Communities' response to question 103, para. 544.
3800 European Communities' comments on United States' response to question 105, para. 414.

BCI deleted, as indicated [***]

Arguments of the United States
7.1839 The United States argues that the European Communities' threat of serious prejudice
arguments rest almost exclusively on the notion th at the "technology effects" and the "price effects"
alleged in relation to its present se rious prejudice claim will "continue". 3801 By asserting that the
evidence presented in relation to present serious prejudice demonstrates a threat of serious prejudice
on the basis of unsupported assertions that the curr ent situation will "continue" in the future, the
European Communities' threat of serious prejudice case does nothing more than repeat the erroneous
assertions it made in relation to its present serious prejudice case. The United States argues that the
alleged subsidization did not cause present serious prejudice. Therefore, in the absence of any new
information from the European Communities, continua tion of the existing situation is "likely to lead
to more of the same".
3802 In other words, if the Panel does not find the existence of present serious
prejudice, the European Communities has provided no basis for finding a threat of serious
prejudice.
3803 Further, the United States argues that the European Communities has provided no
evidence to support its assertion that the current situ ation is likely to "continue". According to the
United States, the situation for Airbus is in fact likely to improve.3804
7.1840 In response to the European Communities' argu ment that the conditions of competition will
continue to give Boeing the ability and incentive to use its subsidy benefits to price down its LCA, the
United States argues that it has demonstrated in response to the present serious prejudice case that
Boeing does not have such an incentive. Further, it asserts that the conditions of competition are
evolving in Airbus' favour. 3805 According to the United States, the European Communities' reliance
upon the magnitude of the subsidies does not advan ce its threat of serious prejudice case because the
European Communities has grossly overstated the ma gnitude and price effect figures, both on an
absolute and a per-aircraft basis.3806
7.1841 The United States also argues that if the Panel finds the existence of present serious prejudice,
this warrants the exercise of judicial economy in relation to the European Communities' arguments
regarding threat of serious prejudice. 3807 This is because a finding of present serious prejudice
triggers the obligation under Article 7.8 of the SCM Agreement for the United States to remove the
adverse effects of the subsidy or to withdraw the subsidy. The United States argues that in such
circumstances, an additional finding of threat of serious prejudice "will not change the obligation on
the subsidizing Member or the recommendation of the Panel".3808
Arguments of third parties
Australia
7.1842 Australia argues that a threat of serious prejudice does not constitute a distinct form of serious
prejudice. According to Australia, footnote 13 to th e SCM Agreement makes clear that, whatever the
overall scope of serious prejudice may be, that sc ope includes the concept of threat of serious

3801 United States' first written submission, paras. 1014, 1103 and 1183.
3802 United States' first written submission, paras. 1009-1010, 1098-1099 and 1178-1179.
3803 This is because the European Communities' threat claim is prem ised on the existence of present
serious prejudice and the continuation of that serious prejudice into the fu ture. United States' response to
question 313, para. 560.
3804 United States' first written submission, paras. 1011, 1100 and 1180.
3805 United States' first written submission, para. 1015.
3806 United States' first written submission, paras. 1016, 1104 and 1184.
3807 United States' response to question 313, para. 559.
3808 United States' response to question 313, para. 559. The United States contends that its approach is
consistent with the reasoning of the Appellate Body in US – Upland Cotton (Article 21.5 – Brazil), para. 244.

BCI deleted, as indicated [***]

prejudice within its bounds. 3809 Australia argues that both threat of serious prejudice and the broader
concept of serious prejudice can be seen to exist on the same continuum and are defined by the same
effects listed in Article 6.3, as elaborated by the rest of Article 6.3810
7.1843 Australia considers that the report of the panel in US - Upland Cotton suggests that the threat
of serious prejudice can be established by an examin ation of the likely existence of serious prejudice
at some future point in time. 3811 Australia argues that current eff ects of the subsidies are therefore
relevant because, in the absence of a significant change in circumstances, they will indicate the
likelihood that the subsidies would continue to cau se serious prejudice in the future. Consequently,
according to Australia, the same facts may be rele vant in establishing both present serious prejudice
and threatened serious prejudice.3812
7.1844 Australia notes that, although "material injury" is a distinct concept from "serious prejudice"
and that the factors to be considered in each dete rmination are set out in Article 15 and Article 6.3
respectively, the Appellate Body has observed that, wh ile provisions that relate to a determination of
"injury" rather than "serious prejudice" must not au tomatically be transposed into Part III of the SCM
Agreement, they may nevertheless be relevant.3813 Australia considers that an examination of whether
there is a "change in circumstances" which is "cl early foreseen and imminent" would be relevant to
the assessment of a "threat of serious prejudice". Howe ver, in Australia's view there is nothing in the
Agreement that would require that "threat of serious prejudice" must arise from a "change in
circumstances" which is "clearly foreseen and imminent".3814
Brazil
7.1845 Brazil notes that the term "threat of serious prejudice" is not defined under the SCM
Agreement and submits that the Pa nel may rely upon the "threat of material injury" standard in
Article 15.7 broadly to inform its interpretation of "threat of ser ious prejudice" under footnote 13.
Brazil cautions, however, that the Panel should not transpose the standard from Article 15.7 into a
standard that is also required to de monstrate "threat of serious prejudice". 3815 Brazil considers that
"threat of serious prejudice" within the meaning of footnote 13 arises where the provision of the
challenged subsidies is inevitable within the near fu ture on account of the fact that they are already
committed (e.g. scheduled), where th ere are no limits to the recipien t's future production and exports
of the subsidized good, and where there is evidence that the challenged subsidies have already caused
present serious prejudice. In such circumstances, it is reasonable to infer that there will be continuing
subsidies, continuing subsidized exports, and continuing serious prejudice.3816
7.1846 Brazil considers that imposing a requirement to demonstrate a "change in circumstances" in
order to establish a threat of serious prejudice w ould substantially increase the burden of proof for
complainants in serious prejudice disputes in a manner not contemplated by the text of the SCM
Agreement. However, should the Panel conclude that "threat of serious prejudice" should depend
upon a "change in circumstances", an analysis of ai rcraft orders, for example, could be used to

3809 Australia's response to questions, 5 December 2007.
3810 Australia's response to questions, 5 December 2007.
3811 Australia's written submission, para. 67, referring to Panel Report, US – Upland Cotton ,
para. 7.1496.
3813 Australia's response to question 19, 14 April 2008, referring to Appellate Body Report, US –
Upland Cotton, para. 438.
3814 Australia's response to question 19, 14 April 2008.
3815 Brazil's response to question 19, 14 April 2008, para . 27. According to Brazil, if this had been the
intention of the drafters, they would have defined "threat of serious prejudice" by cross-referencing Article 15.7
in footnote 13 or vice versa.
3816 Brazil's response to question 19, 14 April 2008, para. 28.

BCI deleted, as indicated [***]

demonstrate a threat of serious prejudice. The f act that these orders are likely to result in actual
deliveries would be sufficient under th e circumstances to constitute a ch ange in circumstances that is
clearly foreseen and imminent.3817
China
7.1847 China notes that the relevant provisions of the SCM Agreement are silent on the
determination of threat of serious prejudice. It submits that, given the structure of Article 5 and the
general framework of the SCM Agreement, Artic les 15.7 and 15.8 of the SCM Agreement on the
determination of threat of injury provide importa nt guidance. China notes that Article 5 includes both
injury and serious prejudice as tw o parallel adverse effects and subm its that, through cross-reference
to Part V, footnote 11 to Article 5 clarifies that the concept of "injury" used in Article 5 includes
threat of material injury. China argues that footnot e 13 to Article 5 stipulates that threat of serious
prejudice constitutes "serious prejudice to the interests of another Member".3818
7.1848 China submits that the threat of serious prej udice must be clearly foreseen and imminent, and
that a finding of such threat must be based on facts and made with special care. 3819
Japan
7.1849 Japan argues that, although the SCM Agreemen t does not provide a specific standard for
determining "threat" of serious prejudice, the chap eau of Article 15.7 of the SCM Agreement serves
as a reference for such a determination. Japan notes that the first sentence of Article 15.7 provides that
a determination of "threat ... shall be based on facts and not merely on allegation, conjecture or remote
possibility" and that the second sentence of Article 15.7 provides that "threat" arises from a "change
in circumstances" which is "clearly foreseen and i mminent". Japan argues that not all events that
constitute a "change in circumstances" cause "threat" of serious prejudice. According to Japan, the
sentence provides that the change of circumstanc es whose imminency is demonstrated by objective
evidence is appropriate for the assessment of the threat of serious prejudice. 3820
Conclusion with respect to the European Communities' threat of serious prejudice
arguments
7.1850 The Panel notes that the European Communities' arguments concerning the existence of a
threat of serious prejudice based on future orders of Airbus LCA are made only with respect to threat
of price suppression within the meaning of Article 6.3(c) and not any other form of serious
prejudice.3821 Its central arguments in support of the existence of a threat of price suppression are
that:
(a) the "price effects" and, in the case of th e market in which the 787 competes, the
"technology effects" of the subsidies will continue in the future3822;
(b) the magnitude of the past, present and guara nteed future subsidies benefiting Boeing
LCA will continue to be very large3823;

3817 Brazil's response to question 19, 14 April 2008, para. 29.
3818 China's oral statement, para. 9. See also, China's written submission, paras. 35-47.
3819 China's oral statement, paras. 9-14.
3820 Japan's response to question 19, 14 April 2008.
3821 European Communities' first written submission, paras. 1446, 1541 and 1631.
3822 European Communities' first written submission, paras. 1449, 1544 and 1634. Emphasis added.
3823 European Communities' first written submission, paras. 1450, 1545 and 1635. Emphasis added.

BCI deleted, as indicated [***]

(c) conditions of competition similar to those that existed in 2004-2006 will continue to
give Boeing the ability and incentive to use its subsidy benefits to price down its
LCA3824; and
(d) the already suppressed prices for Airbus LCA caused by the subsidies to Boeing
provide a strong indication that the prices will continue to be suppressed as a result of
the United States subsidies.3825
7.1851 The Panel recalls its conclusions that the effects of certain of the subsidies is significant price
suppression in each of the three LCA product markets. 3826 The European Communities' threat of
serious prejudice arguments are based on the continua tion into the future of the subsidization and
market conditions which the Panel has already found to cause present serious prejudice in the form of
significant price suppression. The result of our finding of serious prejudice within the meaning of
Articles 5(c) and 6.3 of the SCM Agreement, based on the existence of significant price suppression
within the meaning of Article 6.3(c), is that the Un ited States is obligated to take appropriate steps to
remove the adverse effects or withdraw the subsidy. 3827 This means that the serious prejudice, or the
continuation of the subsidization in the manner which we have found to cause present serious
prejudice to the European Communities' interests, will no longer occur, thereby removing the basis for
the European Communities' arguments concerning thr eat of serious prejudice with respect to future
orders of Airbus LCA. The Panel considers that in these circumstances, it is appropriate to exercise
judicial economy with respect to this aspect of the European Communities' serious prejudice claim.
7.1852 The Panel recalls that its exerci se of judicial economy in this manner is consistent with the
panel's decision in US – Upland Cotton in which the panel held:3828
"{U}pon required implementation by the Unite d States of this Panel's prohibited
subsidy findings and present serious prejudice findings, the basket of measures in
question may be so significantly transformed or manifestly different from the
measures that are currently in question th at it is not necessary to address Brazil's
claims of threat of serious prejudice".
7.1853 We also note the Appellate Body's statement in US – Upland Cotton (Article 21.5 – Brazil)
that "a claim of present serious prejudice relates to the existence of prejudice in the past, and present,
and that may continue in the future".
3829 This also supports the notion that the continuation of serious
prejudice into the future is caught by the obliga tion under Article 7.8 of the SCM Agreement, which
requires removal of the present serious prejudice whic h we have found to exist, including that which
exists into the future.
(d) Conclusion
7.1854 In conclusion, the Panel finds:
(a) that the effect of the aeronautics R&D subsidies is a threat of displacement and
impedance of European Communities ex ports from third country markets
within the meaning of Article 6.3(b) of the SCM Agreement with respect to the
200-300 seat wide-body LCA product market and significant price suppression

3824 European Communities' first written submission, paras. 1451, 1546 and 1636. Emphasis added.
3825 European Communities' first written submission, paras. 1453, 1548 and 1638. Emphasis added.
3826 See paras. 7.1797 and 7.1833 of this Report.
3827 See Article 7.8 of the SCM Agreement.
3828 Panel Report, US – Upland Cotton, para. 7.1503.
3829 Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 244.

BCI deleted, as indicated [***]

and significant lost sales, within the meaning of Article 6.3(c) of the SCM
Agreement, in that product market, each of which constitutes serious prejudice
to the interests of the European Communities within the meaning of Article 5(c)
of the SCM Agreement.
(b) that the effect of the FSC/ETI subsidies and the State of Washington B&O tax
subsidies is displacement and impedan ce of European Communities' exports
from third country markets within the meaning of Article 6.3(b) of the SCM
Agreement with respect to the 100 – 200 seat single-aisle LCA product market
and significant price suppression and significant lost sales within the meaning of
Article 6.3(c) of the SCM Agreement in that product market, each of which
constitutes serious prejudice to the interests of the European Communities
within the meaning of Article 5(c) of the SCM Agreement;
(c) that the effect of the FSC/ETI subsidies and the State of Washington and the
City of Everett B&O tax subsidies is di splacement and impedance of European
Communities exports from third count ry markets within the meaning of
Article 6.3(b) of the SCM Agreement with respect to the 300-400 seat wide-body
LCA product market, and significant price suppression and significant lost sales
within the meaning of Article 6.3(c) of the SCM Agreement in that product
market, each of which constitutes seri ous prejudice to the interests of the
European Communities within the meaning of Article 5(c) of the SCM
Agreement.
7.1855 The Panel is not satisfied that the Europe an Communities has demonstrated that the
Washington State and City of Everett taxation subsidies other than the B&O tax subsidies, or
the property and sales tax abatements provided to Boeing pursuant to IRBs issued by the State
of Kansas and municipalities therein, and the tax credits and other incentives provided to
Boeing by the State of Illinois and municipaliti es therein, each as set forth in paragraph 7.1433
of this Report, through their effects on Boeing's LCA pricing behaviour, cause serious prejudice
to the European Communities' interests in any of the three LCA product markets identified by
the European Communities in this dispute.
3. The European Communities' claim that violation of the 1992 Agreement constitutes
serious prejudice to the European Communiti es' interests within the meaning of
Article 5(c) of the SCM Agreement
7.1856 In this section of the Report, the Panel consid ers the European Communities' claim that the
United States causes serious prejudi ce to the European Communities' interests by violating agreed
obligations concerning support to the LCA sector that are set forth in the 1992 Agreement.
3830
(a) Arguments of the parties and third parties
(i) European Communities
7.1857 The European Communities claims that "vio lation by the United States of the {1992
Agreement} constitutes serious prejudice to the inte rests of the European Communities within the
meaning of Article 5(c) of the SCM Agreement." 3831 On the basis of Article 5(c), which refers to
serious prejudice "to the interests of another Member", the European Communities contends that

3830 European Communities' first written submission, para. 1016.
3831 European Communities' first written submission, para. 1016.

BCI deleted, as indicated [***]

"{t}he analysis is necessarily bilateral". 3832 The European Communities argues that, "{a}s the United
States has breached the terms of that agreement by giving indirect support exceeding the agreed
levels, along with prohibited pr oduction support, it has violated the rights of the European
Communities and this violation must be considered to constitute serious prejudice".3833
7.1858 The European Communities explains that the firs t international agreement related to the LCA
sector to which the European Communities and th e United States were parties was the Tokyo Round
Agreement on Trade in Civil Aircraft (the "1979 Agreement"), which was followed by the bilateral
1992 Agreement.3834 Both the SCM Agreement and the recast 1979 Agreement entered into force in
1995, as annexed agreements to the WTO Agreem ent and the 1992 Agreement remained in force
between the same parties following the entry into force of the SCM Agreement (together with the
recast 1979 Agreement). The European Communities su bmits that, by regulating the application of
the 1979 Agreement, the 1992 Agreement also bound the parties as regards measures concerning LCA
potentially falling under the SCM Agreement.3835
7.1859 The European Communities notes that in the firs t recital to the 1992 Agreement, the parties
recognized the need to "reduce trad e tensions in the area" of large civil aircraft, while in the second
recital, they further agreed th at the disciplines in the 1979 Agreement shall "be strengthened with a
view to progressively reducing the role of govern ment support". Moreover, the parties agreed to
detailed disciplines on support "in pursuit of their common goal of preventing trade distortions
resulting from direct or indirect government support for the development and production of large civil
aircraft."
3836 The European Communities argues that the 1992 Agreement set forth a detailed set of
disciplines regarding the use of "indirect support". In particular, each party committed to ensure that
indirect support does not confer unfair advantage on LCA manufacturers or lead to distortions in
international trade in LCA and agreed that identifia ble benefits to the development or production of
any LCA derived from indirect support could not ex ceed, on an annual basis and net of recoupment:
(i) three per cent of the commercial turnover of the ci vil aircraft industry of the Party concerned, or
(ii) four per cent of the annual commercial turnover of any one firm in the Party concerned.3837
7.1860 The European Communities asserts that regular consultations under the 1992 Agreement took
place between it and the United States between 1993- 2004, and that many of the issues discussed in
the dispute before this Panel were dealt with in these consultations. 3838 As regards "indirect support"
under Article 5 of the 1992 Agreement, the Europ ean Communities contends that it made repeated
inquiries vis-à-vis the United States, and in particular that it complained about government-funded
aeronautical R&D as conferring unfair advantage, distorting trade and providing "identifiable
benefits" in violation of the terms of the 1992 Agreement.
3839 The European Communities states that
the prohibition of "production support" under Article 3 of the 1992 Agreement played a less
prominent role in the consultations. According to the European Communities, after the adoption of
the Boeing Incentive Package by Washington State, it could not raise the issue of its compatibility
with the 1992 Agreement in formal consultations because none were held that year. The European
Communities refers to several high-level communications, from European Community
Commissioners for Trade to their U.S. counterpart s, regarding the United States' compliance with
Articles 3 and 5 of the 1992 Agreement.3840 The European Communities recalls that the United States

3832 European Communities' first written submission, para. 1017.
3833 European Communities' first written submission, para. 1019.
3834 European Communities' first written submission, paras. 1020 – 1022.
3835 European Communities' first written submission, para. 1023.
3836 European Communities' first written submission, para. 1024. 1992 Agreement, Fourth Recital.
3837 European Communities' first written submission, para. 1025.
3838 European Communities' first written submission, para. 1026.
3839 European Communities' first written submission, paras. 1027 -1028.
3840 European Communities' first written submission, paras. 1028, 1030.

BCI deleted, as indicated [***]

notified it that it was abrogating the 1992 Agreement on 6 October 2004, on the pretext that the
European Communities had breached its oblig ations on direct support under Article 3. 3841 T h e
European Communities indicates that it did not accept this abrogation and considered the 1992
Agreement to remain in force.3842
7.1861 The European Communities alleges that th ere are "many instances" in which the
United States did not comply with the 1992 Agreement. 3843 First, the United States violated
Article 5.1 of the 1992 Agreement by failing to ta ke necessary action to ensure that indirect
government support did not confer unfair advantage upon LCA manufacturers benefiting from such
support and did not take action to prevent such s upport from leading to distortion in international
trade in LCA. 3844 Second, the annual indirect support provided by the U.S. Government, including
R&D-related subsidies, exceeded the three per cent threshold set forth in Article 5.2 (a) of the 1992
Agreement.3845 Third, the subsidies granted by the Stat es of Washington, Kansas and Illinois, as well
as the municipalities therein, are in consistent with Article 3 of the 1992 Agreement, as they conferred
benefits on Boeing that reduced its costs, either by foregoing of revenue otherwise due or by taking
over costs that would otherwise be funded by Boeing. 3846 The European Comm unities alleges that
because these measures are not cove red by the specific provisions on development support contained
in Article 4 of the 1992 Agreement, or indirect s upport contained in Article 5 of the 1992 Agreement,
Article 3 of the 1992 Agreement covers such other production support.3847
7.1862 The European Communities argues that the "non- compliance of US subsidies with Articles 3
and 5 of the 1992 Agreement is relevant for the adver se effects analysis in this dispute because of the
link between the 1992 Agreement and the GATT/WTO." 3848 The European Communities recalls that
the 1979 Agreement was included in the list of c overed agreements under Annex IV to the WTO
Agreement and submits that footnotes 15, 16 and 24 in the SCM Agreement emphasize the special
features of the LCA sector for certain issues under that agreement. The European Communities also
recalls that the parties maintained the 1992 Agreement in its original form after the entry into force of
the SCM Agreement, and asserts that both sides considered the 1992 Agreement of continuing
relevance and continued to organize the bilatera l consultations foreseen under the Agreement to
discuss the measures covered by it.3849
7.1863 The European Communities contends that the 1992 Agreement constitutes "context for the
interpretation of the SCM Agreement in this dis pute", on the basis that the 1992 Agreement is a
"relevant rule of international law", within the m eaning of Article 31(3)(c) of the Vienna Convention
on the Law of Treaties (Vienna Convention), to be taken into account when interpreting the SCM
Agreement in a dispute between the Un ited States and the European Communities. 3850 The European
Communities makes two arguments in support of this c ontention. First, that "rules of international
law" in the sense of Article 31(3)(c) of the Vi enna Convention may stem from all accepted sources of
international law, including other treaty law. In this connection, the European Communities submits
that "the 1992 Agreement is a treaty containing legal commitments and concluded in due form
between the US and the EC under international law" , and further states that "Article 4 {of the 1992

3841 European Communities' first written submission, para. 1031; Note verbale No. 55 of the US
mission to the EU to the General Secretariat of the Council of the EU, 6 October 2004, Exhibit EC-644.
3842 European Communities' first written submission, para. 1031; Note verbale of the European
Commission to US note verbale No. 55 of 6 October 2004, Exhibit EC-645.
3843 European Communities' first written submission, para. 1032.
3844 European Communities' first written submission, para. 1033.
3845 European Communities' first written submission, para. 1034.
3846 European Communities' first written submission, para. 1035.
3847 European Communities' first written submission, para. 1035.
3848 European Communities' first written submission, para. 1037.
3849 European Communities' first written submission, para. 1040.
3850 European Communities' first written submission, para. 1041.

BCI deleted, as indicated [***]

Agreement} had expressis verbis established a dynamic link to the GATT/WTO legal order." 3851
Second, that, contrary to the view expressed by the panel in EC – Approval and Marketing of Biotech
Products, the term "parties" in the text of Article 31( 3)(c) of the Vienna Convention refers to the
parties to the particular dispute only – and not the entire membership of the WTO. 3852 In support of
that proposition, the European Communities refers to the Appellate Body reports in EC-Poultry, EC –
Computer Equipment, US – Shrimp, and United States – FSC (Article 21.5 - EC) , the panel report in
US – Shrimp (Article 21.5 – Malaysia) , the practice of other international bodies and tribunals,
International Law Commission's 2006 Report of the Study Group on Fragmentation of International
Law, contemporary authorities, the drafting history and ILC commentary to the draft of
Article 31(3)(c) of the Vienna Convention, and the object and purpose of that provision.
3853
7.1864 The European Communities submits that the 1992 Agreement is a "relevant rule of
international law" to be taken into account wh en interpreting the SCM Agreement in a dispute
between the United States and the European Comm unity, and that "{i}t allows the Panel to have
recourse to an additional source of law which reflect s in great detail the precise legal positions of the
Parties of the dispute with respect to the subject matter before it."3854 As a consequence, the European
Communities requests the Panel to find that "the US subsidies have caused adverse effects to its
interests within the meaning of Article 5 of the SCM Agreement because the United States has
breached the international obligations it ow ed to the European Communities under the 1992
Agreement."3855 The European Communities submits that, "as can be drawn from the preamble and
Article 5.1 of the 1992 Agreement, these obligations were specifically set to avoid distortions of
international trade in large civil aircraft." 3856 The European Communities "therefore claims that by
granting these subsidies, the United States violated its legal rights. This constitutes a particularly
severe form of causing serious prejudice to the interests of the European Communities."3857
7.1865 The European Communities argues that the concep t of "serious prejudice to the interests of
another Member" in Article 5(c) of the SCM Agreem ent is correctly interpreted as covering forms of
serious prejudice "not enumerated in Article 6.3". 3858 The European Communities considers that this
correct interpretation of the SCM Agreement results from an analysis of the ordinary meaning,
context, and object and purpose of the SCM Agreem ent. The European Co mmunities argues that an
examination of the ordinary meaning of the text of Articles 6.3 and 5(c) of the SCM Agreement does
not reveal any statement that expressly limits the meaning of "serious prejudice" to the forms
enumerated in Article 6.3.
3859 This is confirmed by the term "may " in Article 6.3, particularly when
used as an auxiliary verb, as in Article 6.3. 3860 Several dictionary meani ngs of the term "may" all
confirm that this term indicates a "possibility," or similar concept. 3861 The European Communities
argues that the possibility in question is not that one of the instances enumerated in Article 6.3 is
demonstrated, but that there is no serious prejudice. 3862 Thus, according to the European

3851 European Communities' first written submission, para. 1044.
3852 European Communities' first written submission, para. 1045.
3853 European Communities' first written submission, paras. 1049 – 1053.
3854 European Communities' first written submission, para. 1054.
3855 European Communities' first written submission, para. 1055.
3856 European Communities' first written submission, para. 1055.
3857 European Communities' first written submission, para. 1055.
3858 European Communities' response to question 61, para. 209.
3859 European Communities' response to question 61, para. 211.
3860 European Communities' response to question 61, para. 211.
3861 European Communities' response to question 61, para. 211, referring to Shorter Oxford English
Dictionary, fifth edition (2202), page 1725: "may: … {h}ave ability or power to … have the possibility,
opportunity …" etc.
3862 The European Communities explains that if it is dem onstrated that the effect of the subsidy is (for
example) to displace imports of a lik e product of another Member into th e market of the subsidizing Member,
then serious prejudice has been dem onstrated; referring to Panel Report, US – Upland Cotton , at para. 7.1389:

BCI deleted, as indicated [***]

Communities, the possibility introduced by the term "may" in Article 6.3 can only be the possibility
that there are other forms of serious prejudice, in addition to those enumerated in Article 6.3.3863
7.1866 The European Communities argues that this view is also supported by context. First,
footnote 13 to the SCM Agreement which, as an integr al part of Article 5(c), is immediate context,
states expressly that the term "serious prejudice" is used in the same sense as in paragraph 1 of
Article XVI of the GATT 1994.3864 Therefore, if something falls within paragraph 1 of Article XVI of
the GATT 1994, it constitutes serious prejudice with in the meaning of Article 5(c) of the SCM
Agreement, even if it is not enumerated in Article 6.3. 3865 Second, the immediate context of
footnote 13 further provides that serious prejudice includes threat of serious prejudice and that
Article 6.3 at no point refers to threat of serious prejudice. This confirms that "serious prejudice"
within the meaning of Article 5(c) includes threat of serious prejudice, even though this is not
enumerated in Article 6.3.
3866 The European Communities argues that this confirms that Article 6.3
does not purport to exhaustively enumerate all possibl e forms of serious prejudice and that such an
interpretation is consistent with the object and pu rpose of the SCM Agreement, which is to provide a
remedy for all types of serious prejudice to the interests of another Member resulting from subsidies,
within the meaning of Article 1 of the SCM Agreement.3867
7.1867 The European Communities argues that, a lthough the 1992 Agreement does not expressly
address the question of whether or not Article 6.3 of the SCM Agreement exhausts Article 5(c), it
does expressly state that it is enacted in pursuit of the Parties' "common goal" or interest. 3868 In other
words, the 1992 Agreement expressly sets out in deta il what the interests of the United States and the
European Communities are with resp ect to large civil aircraft, and the manner in which the Parties
agree that those interests are to be preserved, par ticularly with respect to "the role of government
support."3869 Those interests and the means to preserve them reflect partially, but not entirely, the
provisions of Article 6.3 of the SCM Agreement. 3870 Therefore, the very existence of the 1992
Agreement, as well as its overall content, strongly suppor ts the view that the Par ties agreed to a set of
mutual "interests" in this area, which interests c ould, by definition, extend beyond those enumerated
in Article 6.3, and could be "seriously prejudiced " within the meaning of Article 5(c) of the SCM
Agreement.3871
(ii) United States
7.1868 The United States contends that the 1992 Agreem ent does not create legal obligations under
the SCM Agreement. The United States submits that the European Communities cites no valid
authority for the proposition that its unilateral determination that the United States violated the
bilateral 1992 Agreement constitutes serious prejudice for purposes of the multilateral SCM

"We would therefore be permitted to find that serious pr ejudice has arisen upon fulfill ment of the elements in
one or more of the paragraphs of Article 6.3."
3863 European Communities' response to question 61, para. 211.
3864 European Communities' response to question 61, para. 212.
3865 European Communities' response to question 61, para. 212.
3866 European Communities' response to question 61, para. 212.
3867 European Communities' response to question 61, para. 213.
3868 European Communities' response to question 61, para. 215, referring to 1992 Agreement,
Preamble, penultimate recital.
3869 European Communities' response to question 61, para. 215.
3870 European Communities' response to question 61, para. 215.
3871 European Communities' response to question 61, para. 215.

BCI deleted, as indicated [***]

Agreement, and that the European Communities' a pproach would require the Panel to disregard not
only the text of the SCM Agreement but also the relevant articles of the DSU.3872
7.1869 The United States advances two arguments as to why the European Communities' claim with
respect to the 1992 Agreement should fail. First, the 1992 Agreement is not a "covered agreement"
for purposes of the DSU, and the Panel's terms of reference do not permit the Panel to examine a
claim based on an alleged breach of that agreemen t. Second, while the European Communities' claim
is based on a theory relating to the rule of treaty interpretation set out in Article 31(3)(c) of the Vienna
Convention, what the European Communities really seeks to have the Panel do is apply the 1992
Agreement as substantive law rather than as a basis for interpreting the SCM Agreement.3873
7.1870 In relation to the first argument, the United States submits that the 1992 Agreement is not a
covered agreement under Article 1.1 of the DSU, an d that there is accordingly no basis for the Panel
to examine the European Communities' claim. The DSU cannot be used to examine any question of
compliance with the 1992 Agreement or the interpre tation or application of the 1992 Agreement. In
this connection, the United States refers to the Panel's terms of reference in this dispute, which are:
"{T}o examine, in the light of the relevant provisions of the covered agreement(s)
cited by the European Communities in docum ent WT/DS353/2, the matter referred to
the DSB by the European Communities in th at document, and to make such findings
as will assist the DSB in making the recommendations or in giving the rulings
provided for in that/those agreement(s)."
3874
7.1871 The United States submits that other provision s of the DSU that refer to the "covered
agreements", including Article 11 (" the relevant covered agreements"), Article 3.2, (" the covered
agreements"), Article 3.4 ("the covered agreemen ts") and Article 19.1 (" a covered agreement")
confirm that this claim is outside of the purview of this proceeding. 3875 The United States notes that
the European Communities conceded in its request for establishment of a panel that the 1992
Agreement is not a covered agreement. 3876 Because the 1992 Agreement is not one of the covered
agreements, there is no basis for the Panel even to reach the European Communities' claim with
respect to the alleged breach of the 1992 Agreement.3877
7.1872 As regards the European Communities' conten tion that there is a "link" between the 1992
Agreement and the WTO Agreement because the Uruguay Round included the 1979 Agreement in the
list of covered agreements under Annex IV to the WTO Agreement, the United States submits that the
European Communities fails to explain the legal signi ficance of a "link", that such a link would have
no legal significance, and that in any event, cont rary to the European Co mmunities' assertions, the
1979 Agreement is not a "covere d agreement" under the DSU. 3878 Appendix 1 to the DSU identifies
the 1979 Agreement as a plurilateral agreement that could be subject to the DSU, but that such
coverage was made "subject to the adoption of a decision by the parties . . . setting out the terms for
the application of the {DSU} to the {1979 Agreemen t}." No such decision has been adopted; thus,

3872 United States' first written submission, para. 1191. The United States further notes that, in
responding to the European Communities' arguments with respect to the 1992, Agreement, it does not endorse
the European Communities' characterization of the 1992 Agreement or related events. The United States
indicates that it does not address in detail the European Communities' characterization of the 1992 Agreement or
related events because, in its view, the European Commun ities' argument is without me rit. United States' first
written submission, para. 1191, footnote 1436.
3873 United States' first written submission, para. 1192.
3874 WT/DS353/3. Footnote omitted.
3875 United States' first written submission, para. 1194, footnote 1437.
3876 United States' first written submission, para. 1194, footnote 1438.
3877 United States' first written submission, para. 1194.
3878 United States' first written submission, para. 1194, footnote 1439.

BCI deleted, as indicated [***]

the European Communities' claim that the 1979 Agreement is a "covered agreement" within the
meaning of Article 3.2 of the DSU is erroneous.
7.1873 As to the relevance of the 1992 Agreement to the interpretation of the SCM Agreement, the
United States recalls at the outset that the Europ ean Communities sets forth a claim that the alleged
breach of the 1992 Agreement constitutes serious prejudice under the SCM Agreement. In other
words, in the European Communities' view, the 1992 Agreement contains substantive obligations
relevant to settlement of this dispute; and by a llegedly breaching those obligations, the United States
has breached an obligation under the SCM Agreement. 3879 However, the European Communities
presents its theory by contending that the 1992 Agreement "constitute{s} context for the interpretation
of the SCM Agreement in this dispute", asserting that Article 31.3(c) of the Vienna Convention is the
"legal rule" supporting this claim.3880 The European Communities' theory is wholly without merit.
7.1874 The United States considers that the Europ ean Communities appears to conflate two
arguments with respect to the 1992 Agreement. Th e European Communities first argues that the 1992
Agreement is a source of substantive law, such that a breach of the 1992 Agreement constitutes
serious prejudice under the SCM Agreement. 3881 The European Communities then argues that
Article 31(3)(c) of the Vienna Convention is the legal rule supporting the view that the 1992
Agreement constitutes "context" for the SCM Agreem ent. Even if the 1992 Agreement were context
for the SCM Agreement, that contention is unrelat ed to the question whether the 1992 Agreement is a
source of substantive law under the SCM Agreement. According to the United States, the European
Communities presents these two contentions as if they are part of the same argument.3882
7.1875 The United States argues that, in attempting to bring the 1992 Agreement within the Panel's
terms of reference, the European Communities is not alleging that the 1992 Agreement assists in
interpreting the serious prejudice provisions of the SCM Agreement. Rather, the European
Communities is alleging that a breach of the 1992 Agreement itself constitutes serious prejudice under
the SCM Agreement.
3883 The European Communities would like the Panel to apply the 1992
Agreement as a matter of substan tive law, and its reliance on the customary rule of interpretation
reflected in Article 31(3)(c) of the Vienna Conven tion is misplaced and irrelevant to the Panel's
examination of the European Communities' claim. As a result, the Panel need not consider the other
flaws in the European Communities' citation to Arti cle 31(3)(c), including the fact that not all WTO
Members are parties to the 1992 Agreement, and th at neither the United States nor the European
Communities is any longer a party to the 1992 Agreem ent, since it is no longer in force. Moreover,
the Panel need not consider whether the 1992 Agreem ent is "applicable" in the relations between "the
parties", since it is no longer in force.3884
7.1876 The United States argues that an interpretation of the term "serious prejudice to the interests
of another Member" in Article 5(c) of the SCM Agreement to cover forms of serious prejudice not
enumerated in Article 6.3 would not be in accordance with customary rules of interpretation of public
international law reflected in the Vienna Convention.
3885 The ordinary meaning of Article 5(c) and
Article 6.3 of the SCM Agreement, the context, and the object and purpose of the SCM Agreement
make clear that the list of effects enumerated in Article 6.3 is exhaustive and that effects not
enumerated do not constitute "serious prejudice" under the SCM Agreement. 3886 The United States

3879 United States' first written submission, para. 1195.
3880 United States' first written submission, para. 1195.
3881 United States' first written submission, para. 1195, footnote 1440.
3882 United States' first written submission, para. 1195, footnote 1440.
3883 United States' first written submission, para. 1196.
3884 United States' first written submission, para. 1197.
3885 United States' response to question 61, para. 168.
3886 United States' response to question 61, para. 168.

BCI deleted, as indicated [***]

notes that neither Article 5(c) of the SCM Agreement, which declares "serious prejudice" to be one of
the types of adverse effects covered by Part III of the SCM Agreement, nor paragraph 1 of
Article XVI of the GATT 1994 (to which footnote 13 of the SCM Agreement refers) contains a
definition of the words "serious prejudice". 3887 However, Article 6 of the SCM Agreement, entitled
"Serious Prejudice" does contain a more detailed expl anation of the concept of "serious prejudice" as
used in Article 5(c) of the SCM Agreement. The chapeau of Article 6.3 states: "{s}erious prejudice
in the sense of paragraph (c) of Article 5 may ari se in any case where one or several of the following
apply." Thus, serious prejudice may arise if one of the forms of serious prejudice enumerated in
Article 6.3 is found to exist.
3888 The United States contends that this interpretation of Article 6.3 is
further confirmed by the language of paragraph 6.2:
"Notwithstanding the provisions of paragra ph 1, serious prejudice shall not be found
if the subsidizing Member demonstrates th at the subsidy in question has not resulted
in any of the effects enumerated in paragraph 3."3889
7.1877 The United States argues that the use of the word "shall" clearly indicates that where none of
the effects enumerated in paragraph 3 of Article 6 exists, serious prejudice does not exist and that
such an interpretation is also conf irmed by the structure of Article 6. 3890 When read together, Articles
6.1, 6.2 and 6.3 originally created two ways for a complaining Member to show serious prejudice. 3891
First, under Article 6.1, prior to its lapsing, th e complainant could demonstrate that one of the
situations enumerated under Article 6.1(a) through (d) existed. If that was the case, a rebuttable
presumption of serious prejudice was established, wh ile Article 6.2 allowed the subsidizing Member
to rebut that presumption by demonstrating that the effects enumerated in Article 6.3 did not exist. If
the complaining Member was not able to demonstrate th at one of the situations in Article 6.1 existed,
its second option was to demonstrate that one of th e situations in Article 6.3 exists, in which case
"serious prejudice …. may arise." 3892 In other words, the structure of Article 6 confirms the
interpretation following from the ordinary meaning of Article 6.3 and from the context provided to
that provision by Article 6.2; namely, that ser ious prejudice cannot be found to exist unless the
complainant demonstrates that one of the effects enumerated in Article 6.3 exists.
3893
7.1878 The United States submits that the following statement of the panel in US – Upland Cotton is
directly relevant in this regard and confirms the foregoing analysis of the United States:
"Article 6.2 serves to clarify that a prerequi site for a finding of serious prejudice is
that one of the four effects-based situations in Article 6.3 must be demonstrated. It
indicates to us that demonstration that at least one of the four effects-based situations
in Article 6.3 exists is a necessary basis to conclude that serious prejudice exists."
3894

3887 United States' response to question 61, para. 169.
3888 United States' response to question 61, para. 170.
3889 United States' response to question 61, para. 171.
3890 United States' response to question 61, paras. 171-172.
3891 United States' response to question 61, para. 172. The United States argues that, although
Article 6.1 of the SCM Agreement has lapsed, the panel in US – Upland Cotton, para. 7.1377, n. 1487 found
that it could nevertheless provide relevant guidance as to the interpretation of Article 6.3.
3892 United States' response to question 61, para. 172.
3893 United States' response to question 61, para. 172.
3894 Panel Report, US – Upland Cotton, para. 7.1380.

BCI deleted, as indicated [***]

(iii) Third Parties
Australia
7.1879 Australia submits that the concept of serious prejudice in Article 5(c) of the SCM Agreement
should not be considered as covering forms of serious prejudice not already enumerated in Article 6.3
of the same agreement. The chapeau of Article 6.3 explicitly links Article 6.3 to Article 5(c) as an
elaboration of the forms that serious prejudice may take. 3895 The absence of any reference in Articles
5 and 6 of the SCM Agreement to additional forms of serious prejudice that could trigger the remedies
contained in Article 7 favours an exhaustive interpre tation of the list set forth in Article 6.3. This
silence on additional forms of serious prejudice contr asts strongly with the detail provided in the rest
of Article 6 on the further elements re levant to the Article 6.3 examination. 3896 Furthermore, Australia
considers that Article 6.2 "serves to clarify that a pr erequisite for a finding of serious prejudice is that
at least one of the four effects-based situa tions in Article 6.3 must be demonstrated." 3897 This means
that no additional forms of serious prejudice, indepe ndent of Article 6.3, can activate the remedies in
Article 7 of the SCM Agreement.3898
7.1880 Australia argues that there is no legal basis fo r the European Communities' assertion that the
1992 Agreement constitutes context for the interpre tation of the SCM Agreement in this dispute. 3899
Under the terms of Article 1 of the DSU, the DSU applies to WTO covered agreements and that, as
the 1992 Agreement is not a covered agreement, it does not fall within the scope of Article 7.2 of the
DSU and does not constitute applicable law in this dispute. Australia submits that the Appellate Body
has made it clear that the DSU operates in relation to covered agreements only and that it is not the
function of panels to seek to clarify the provisions of non-covered agreements.3900
7.1881 Australia argues that there is a body of WTO case law to support the view that
Article 31(3)(c) of the Vienna Conve ntion refers to the rules of inte rnational law applicable in the
relations between the States which have consen ted to be bound by the treaty which is being
interpreted, and for which that treaty is in force. 3901 The Appellate Body has recognized that
Article 31(3)(c) permitted it to seek additional in terpretative guidance from general principles of
international law. 3902 These principles are rules of interna tional law applicable between the WTO
membership as a whole and not a subset of that membership. Australia does not consider that the rules
of international law contained in the 1992 Agreemen t, which is only applicable in the relations
between subsets of parties to the SCM Agreement, can be taken into account under Article 31(3)(c) of
the Vienna Convention in interpreting the SCM Agreement. More generally, given that the application
of Article 31(3)(c) has potentially significant syst emic implications for the WTO dispute settlement
system, the Panel in this dispute should approach the issue with a degree of caution.3903

3895 Australia's response to questions, 5 December 2007.
3896 Australia's response to questions, 5 December 2007.
3897 Australia's response to questions, 5 December 2007, referring to Panel Report, US - Upland Cotton,
para. 7.1380.
3898 Australia's response to questions, 5 December 2007.
3900 Australia's written submission, para. 71, citing, Appellate Body Report, Mexico – Taxes on Soft
Drinks, para. 49.
3902 Australia's written submission, para. 72, referring to Appellate Body Report, US – Shrimp ,
para. 158.
3903 Australia's written submission, paras. 72-73.

BCI deleted, as indicated [***]

Brazil
7.1882 Brazil argues that the Panel should reject the European Communities' argument that the
subsidies constitute serious prejudice to the inte rests of the European Communities within the
meaning of Article 5(c) of the SCM Agreement because the United States violated its obligations
under the 1992 Agreement.3904
7.1883 First, the SCM Agreement is the appropriate instrument to address subsidies in the civil
aircraft industry in a WTO dispute settlement proceeding. The 1992 Agreement is not a WTO
covered agreement, and is outside the Panel's terms of reference. Because the Panel lacks jurisdiction
to determine the rights and obligations of the par ties under the 1992 Agreement, the Panel necessarily
cannot determine whether the United States violat ed the substantive provisions of the 1992
Agreement.3905
7.1884 Second, because the European Communities is alleging that a violation of the 1992
Agreement is sufficient to succeed on its claim of serious prejudice, it is seeking to apply the 1992
Agreement as substantive law between the parties rath er than as context for the interpretation of any
particular provision of the SCM Agreement. An appr opriate analysis should lead the Panel to find
that an alleged substantive violation of the 1992 Agreement cannot constitute "serious prejudice" with
the meaning of Article 5(c) of the SCM Agreement.3906
7.1885 Third, Brazil objects to the use of the 1992 Agreement to interpret provisions of the SCM
Agreement, to the extent that th e European Communities is, in fact, attempting to do so. Consistent
with the findings of the panel in EC – Approval and Marketing of Biotech Products3907, the reference
to "parties" in Article 31(3)(c) of the Vienna Convent ion must be interpreted to mean all of the parties
to the treaty being interpreted, in this case, the SCM Agreement. Brazil considers that a bilateral
treaty such as the 1992 Agreement simply does not reflect the common intentions of all WTO
Members, and as a result, cannot be used to info rm what WTO Members intended when drafting the
SCM Agreement. Any other interpretation would lead to absurd and prejudicial results, with third
parties seeing their WTO rights affected by a bilateral treaty to which they were not a party and with
the provisions of the SCM Agreement potentially be ing interpreted differently for different WTO
Members.3908 Brazil submits alternatively that, if the Panel interprets the term "parties" in
Article 31(3)(c) of the Vienna Convention narrowly to refer to the parties to the 1992 Agreement, any
interpretation of the SCM Agreement based on th e 1992 Agreement can only apply to the bilateral
relations between the United States and the Eur opean Communities, as confirmed by Articles 34 and
41(1)(b)(i) of the Vienna Convention.3909
Canada
7.1886 Canada argues that read together, footnote 13 of Article 6.2 and Article 6.3 of the SCM
Agreement suggest that a panel may only make a findi ng of serious prejudice if it can establish one of
the effects listed in Article 6.3 or the threat of such an effect. However, once having made such a
finding, a panel has the flexibility to characterize ot her effects of the subsidy at issue as a form of
serious prejudice, provided those other effects are closely linked to the effects listed in Article 6.3.3910

3904 Brazil's written submission, para. 75; response to questions, 5 December 2007, paras. 7 and 8.
3907 Panel Report, EC-Approval and Marketing of Biotech Products, para. 7.68.
3910 Canada's response to questions, 5 December 2007, pa ras. 7-11. See also, Canada's oral statement,
paras. 29-36.

BCI deleted, as indicated [***]

7.1887 Canada submits that footnote 13 to Article 6. 2 imports into the SCM Agreement an unbroken
chain of meaning for the term serious prejudice, enco mpassing the concepts set out in Article 6.3, but
also recognizing the possibility of additional forms of serious prejudice closely linked to those core
concepts.3911 Article 6.2 appears to suggest that serious prejudice cannot be established if none of the
core concepts in Article 6.3 are present. Canada argues that Article 6.3 itself is drafted to permit non-
enumerated forms of serious prejudice, while providi ng particular guidance on the core concepts that
have given life to the term serious prejudice since its inception in GATT 1947.3912
Japan
7.1888 Japan argues that the text of Article 5 clearly requires a Member to show that serious
prejudice was caused "through the use of any subsidy {as defined in Article 1}." 3913 Japan considers
that the European Communities' arguments concerning serious prejudice do not properly apply the
causation test of Article 5. It is the "use of an y subsidy" that must be shown to cause serious
prejudice. The European Communities has not applied this causation formula as set out in Article 5,
but instead argues that the provision of subs idies in excess of commitments under the 1992
Agreement by itself constitutes serious prejudice. This argument is inconsistent with Article 5, which
requires a showing that the use of the subsidies at issue is the cause of adverse effects.
3914
7.1889 Japan also observes that the Eu ropean Communities appears to alternatively argue that the
United States has caused serious prejudice merely by "granting" subsidies in supposed violation of the
1992 Agreement.3915 Not only is this not the analysis requir ed by the SCM Agreement, but it remains
unclear what constitutes the serious prejudice suffered by the European Communities.3916
Korea
7.1890 Korea argues that Article 6.3 of the SCM Agre ement provides an exhaustive list of instances
of serious prejudice as mentioned in Article 5(c) of the SCM Agreement. The terms used in
Article 6.3 are definitive in nature, by providing that "{s}erious prejudice…may arise in any case
where one or several of the following apply." Korea argues that the ordinary meaning of this sentence
is that, for there to be a serious prejudice, one or mo re conditions listed in the article must exist. This
indicates that what is provided in Article 6.3 is an exhaustive list.
3917 Furthermore, Article 6.3 does
not use a term indicating an exemplary nature, such as "including," " inter alia," "for instance," "such
as". Rather, Article 6.3 uses the rather broad term "any case" where one or several enumerated
conditions apply. This suggests that the drafte rs attempted to confine the instances of serious
prejudice to only these enumerated situations.
3918
(b) Evaluation by the Panel
7.1891 The Panel recalls that the practice of judicial economy allows a panel to refrain from making
multiple findings that a measure is inconsistent with various provisions when a single, or a certain
number of findings of inconsistency, would suffice to resolve the dispute.3919

3911 Canada's response to questions, 5 December 2007, para. 12; Canada's oral statement, para. 30.
3912 Canada's response to questions, 5 December 2007, para. 12.
3915 European Communities' first written submission, para. 1055.
3917 Korea's response to questions, 5 December 2007.
3918 Korea's response to questions, 5 December 2007.
3919 Appellate Body Report, Canada – Wheat Exports and Grain Imports, para. 133.

BCI deleted, as indicated [***]

7.1892 The Panel recalls that Article 11 of the DSU provides, in relevant part:
"...a panel should make an objective assessme nt of the matter before it, including an
objective assessment of the facts of the cas e and the applicability of and conformity
with the relevant covered agreements, and make such other findings as will assist the
DSB in making the recommendations or in gi ving the rulings provided for in the
covered agreements." (Emphasis added)
7.1893 The Panel does not consider that making findings in relation to this serious prejudice claim
would assist the DSB in making the recommendations or in giving the rulings provided for in the
SCM Agreement. The Panel therefore exercises judicial economy with respect to this claim.

BCI deleted, as indicated [***]

Appendix VII.F.1: Parties' arguments regarding the links between the U.S. Government funded
R&D and the specific technologies applied to the 787
A. INTRODUCTION

1. The European Communities has sought to dem onstrate that the aeronautics R&D subsidies
provided Boeing with usable technologies in key technology areas, as well as knowledge, experience
and confidence toward developing successful commercial technologies and processes. 3920 It has then
sought to demonstrate how those technologies, as well as the knowledge, experience and confidence
with respect to various technolog ies was applied to, or facilitated the development of, the innovative
technological features of the 787. The European Communities groups these key technologies into the
following six technology areas:

(a) Composites technologies, primarily the design, development and manufacturing of
787 composite fuselages and wings;
(b) More-electric architecture;
(c) Open systems architecture;
(d) Enhanced aerodynamics and structural design;
(e) Noise reduction technologies; and
(f) Health management systems.
3921
2. This Appendix first describes the technol ogy areas identified above as they relate to
technologies that are applied to the 787. To provide further context to the Panel's analysis, this
Appendix next explains its unders tanding of the process for designing and manufacturing the 787. 3922
Finally, this Appendix provides a summary of the specific arguments made by the parties concerning
the links between the research that Boeing cond ucted under the aeronautics R&D subsidies and the
technologies applied to the 787.

B. DESCRIPTION OF THE RELEVANT TECHNOLOGY AREAS

3. A " composite" is a composition of two or more materials on a macroscopic scale, working
together to produce material properties that are diffe rent to the properties of those elements on their
own. Most composites consist of a bulk material (the matrix), a reinforcement, usually in fibre form
which is added primarily to increase the strength and stiffness of the matrix, a resin and a curing
agent. The resin acts to ho ld the fibres together and to transfer th e load to the fibres in the fabricated
composite part. The curing agent (or hardener) acts as a catalyst in curing the resin to a hard plastic.
The most common composites appear to be divided in to three groups: (i) polymer matrix composites,
or fibre-reinforced plastics; these materials use a polymer-based resin as the matrix and a variety of

3920 European Communities' first written submission, para. 1352. According to the European
Communities, the knowledge, experience and confidence gained by Boeing through its participation in US
government-supported aeronautics R&D programmes enabled Boeing to accelerate its development, production
and delivery of the 787 and "is in f act the crux of the causal connection between the US R&D subsidies and the
3921 European Communities' first written submission, para. 1350.
3922 The background factual material presented in this Appendix is based on evidence submitted to the
Panel by the parties in the course of these proceedings and therefore generally refers to events or developments
that occurred in 2006 as being "recent".

BCI deleted, as indicated [***]

fibres such as glass, carbon and aramid as the reinforcement 3923; (ii) metal matrix composites, which
use a metal such as aluminium as the matrix, reinfo rced with fibres such as silicon arbide; and (iii)
ceramic matrix composites (used in very high te mperature environments) which use a ceramic as the
matrix reinforced with short fibres such as those made from silicon carbide and boron nitrade.3924

4. In general, composites manufacturing pro cesses involve (i) various processes for the
combination of the resin, fibre and matrix material; (ii) the "curing" of the composite material in an
autoclave, a high-pressure, high-temperature oven; (iii) post-processing, in which machine tools are
used to drill holes and cut shapes; and (iv) non- destructive inspection (NDI) testing for faults.3925 The
European Communities alleges that a substantial fo cus of the U.S. government's composites research
efforts was on the first stage of composites manufactur ing described in (i) above; i.e. finding the best
and most cost-effective way of combining and shaping composite materials.3926

5. There are two general and distinct methods fo r combining and shaping the elements that form
the composite material. The first (pre-impregnation) involves combining the resin and fibre before
shaping that material on a mandrel (a special mould in the shape of the part that is being produced).
One example of this first general method involves the combination of resin and curing agent to create
a "prepreg" material which is then "impregnated" in to the reinforcing fibre, either by dipping the
reinforcement through the liquid resin or thr ough the application of heat or pressure.
3927 The second
general method for combining the elements of the composite materials (pre-forming) involves first
shaping the fibre into the desired shape, and then combining it with the resin by infusing the resin
into the "pre-form", using techniques such as resin film infusion (RFI) or resin transfer moulding
(RTM). Resin film infusion involves dry fabrics being arranged in a mould, interleaved with layers of
semi-solid resin film. The structure is vacuum-ba gged to remove air through the dry fabrics and then
heated in an autoclave. The heating allows the resin to melt a nd flow into the air-free fabrics, before
curing. Resin transfer moulding also involves placing dry fabrics in a mould, however they are held
together by a binder. A second mould tool is then clamped over the first mould, and resin is injected
into the cavity. Once the fabric is fully wet with resi n, the resin inlets are closed and the laminate is
allowed to cure in an autoclave. Where vacuum pressure is used to assist the infusion of the resin
through the fibre, the process is referred to as vacuum-assisted resin infusion.

6. The aerospace industry has traditionally re garded the use of carbon-fibre reinforced
composites (CRFPs) manufactured through pre-impr egnation to be extremel y expensive, because
individually cut pre-pregs needed to be manually a pplied by highly trained technicians. Automated
tape laying (ATL) and automated fibre place ment (AFP) technologies presented significant
opportunities for cost and efficiency improvement s. The ATL and AFP processes are functionally
similar, but each is used differently to achieve specific structure construction goals to provide strength
or stiffness. In both processes, the fibre is shap ed first and then shaped on a mandrel. In both

3923 One example of a polymer matrix composite is th e carbon fibre reinforced plastic (CFRP) on the
787 primary structure.
3924 Tim Sommer et al., Composite Technologies, November 2006, Exhibit EC-14 (BCI), pp. 3-4.
3925 Nondestructive inspection (NDI) is a wide group of analysis techniques used in science and
industry to evaluate the properties of a material, co mponent or system without causing damage. Because NDI
does not permanently alter the article being inspected, it is a highly-valuable technique that can save both money
and time in product evaluation, troubleshooting, and research. Common NDI methods include thermal,
ultrasonic, electromagnetic, radiography and optical methods; Tim Sommer et al., Composite Technologies,
November 2006, Exhibit EC-14 (BCI), pp. 48-50.
3926 European Communities' first written submission, Annex C, para. 41.
3927 The impregnated reinforcements (or prepregs) can take three main forms: woven fabrics, roving
and unidirectional tape. Fabrics and tapes are provided as continuous rolls in various widths and lengths. The
fabric or tape thickness constitutes one ply in the constr uction of a multi-ply lay up. The prepreg material is
wound onto spools and is used for filament winding, in which the prepreg material is laid down over a mandrel
with the resin-coated fibres being laid down in the desired pattern.

BCI deleted, as indicated [***]

processes, a delivery head mounted on a robotic arm lays or places pre-impregnated tape or fibre on a
mandrel. The main difference is that ATL machiner y lays tape (which consists of fibres aligned
together in a single direction), while AFP lays down multiple tape sections over highly contoured
surfaces in multiple fibre axes (i.e. the fibres need not be aligned in a single direction). Tape is wider
than individual fibres, meaning that ATL can c over a greater area in a shorter period of time,
however, it cannot produce complicated three-dimens ional shapes. AFP takes longer to cover the
same size area, but can produce shapes with complex three-dimensional curvatures.3928

7. A 1994 NASA report on composites indicates that the first structural composite aircraft
components, made from glass fibre reinforced pl astics (GFRP) were introduced between 1950 and
1960.
3929 Boron filaments and carbon fibres first became available in about 1965. Their high
compression strength and stiffness, in combination w ith low density, enabled boron fibre reinforced
plastics (BFRP) and CFRP to be used instead of aluminium for high performance airplane
structures.3930 Since the mid-1960s, many composite structural components have been designed and
produced for U.S. and foreign military aircraft. Mu ch of the advanced com posite structures research
and development in the United States between the mi d-1960s until the mid-1990s has been associated
with military aircraft applications. 3931 According to a 1994 report by NASA consultant, Richard
Hadcock, U.S. military R&D programmes provided much of the technology base for production of
composite structures. Until 1973, the price of boron filaments was less than the price of carbon or
graphite fibres, and boron/epoxy also had higher specific strength and stiffness than the carbon/epoxy
materials that were then available. For these reas ons, BFRP was the advanced composite of choice in
the late 1960s.
3932 Some of the major European aircraft companies initiated advanced composite
structures development programmes in the early 1970s. These included British Aircraft Company and
Hawker Siddeley Aviation (both subsequently part of BAE Systems plc) which were involved in
structural development of CFRP components.3933

8. Based on data presented by a NASA consultant, the following military aircraft had at least
one part of the fuselage (forward, mid or rear) fabricated from composite materials: MD AV-8B,
Bell/Boeing V-22, Northrop B-2, Dassault Rafale C/M, Eurofighter EFA, MD F-18E/F, Lockheed F-

3928 Tim Sommer et al., Composite Technologies, November 2006, Exhibit EC-14 (BCI), pp. 18-31.
3929 Richard N. Hadcock, "A Chronology of Advanced Composite Applications", in Louis F. Vosteen
and Richard N. Hadcock, Composite Chronicles: A Study of the Lessons Learned in the Development,
Production and Service of Composite Structures, NASA Contractor Report 4620, November 1994, p. 27,
Exhibit EC-792. These components included the fins and rudders of the Grumman E-2A. By 1967, the entire
airframe of the small Windecker Eagle was made from GFRP. Since then, GFRP has become one of the
standard materials for light aircraft and lightly loaded structural components.
3930 Richard N. Hadcock, "A Chronology of Advanced Composite Applications", in Louis F. Vosteen
and Richard N. Hadcock, Composite Chronicles: A Study of the Lessons Learned in the Development,
Production and Service of Composite Structures, NASA Contractor Report 4620, November 1994, Exhibit EC-
792, p. 27.
3931 Richard N. Hadcock, "A Chronology of Advanced Composite Applications", in Louis F. Vosteen
and Richard N. Hadcock, Composite Chronicles: A Study of the Lessons Learned in the Development,
Production and Service of Composite Structures, NASA Contractor Report 4620, November 1994, Exhibit EC-
792, p. 27.
3932 Richard N. Hadcock, "A Chronology of Advanced Composite Applications", in Louis F. Vosteen
and Richard N. Hadcock, Composite Chronicles: A Study of the Lessons Learned in the Development,
Production and Service of Composite Structures, NASA Contractor Report 4620, November 1994, Exhibit EC-
792, p. 27.
3933 Richard N. Hadcock, "A Chronology of Advanced Composite Applications", in Louis F. Vosteen
and Richard N. Hadcock, Composite Chronicles: A Study of the Lessons Learned in the Development,
Production and Service of Composite Structures, NASA Contractor Report 4620, November 1994, Exhibit EC-
792, pp. 33-34. Other companies included Aeritalia (Italy), SAAB (Sweden), Dassault Aviation (France),
Aérospatiale (France, now part of EADS), Fuji (Japan), Kawasaki (Japan), Mitsubishi (Japan) as well as Russian
and Ukrainian aircraft companies.

BCI deleted, as indicated [***]

22; while the following aircraft used composites for e ither the covers or substructure of the wing box:
MD AV-8B, Grumman A6-E, SAAB Gripen, Bell/Boe ing V-22, Northrop B-2A, Dassault Rafale
C/M, Eurofighter EFA, MD F-18E/F, Mitsubishi FSX and Lockheed F-22. In addition, composite
fuselage pieces or wings were then (in the mid- 1990s) being developed for various other military
aircraft; e.g. Alphajet, Vought VSTOL A, Grumman VSTOL A, GD F-16XL, Grumman X-29,
Dassault Rafale A, BAe EAP, IAI Lavi, Northr op YF-23, Lockheed YF-22, and Rockwell/MBB X-
31, GD/MD A-12. 3934 By the mid-1990s, Kawasaki Heavy Industries had designed and built an all
CFRP wing for the Japanese FS-X fighter aircraft. 3935 The FS-X (later called the F-2) was developed
as a semi-indigenous replacement for the McDonnell D ouglas F-4. One of the advancements of this
aircraft was its innovative use of co-cured composite structures in a larger wing, enabling the curing
and bonding of the wing box and skin to take place in a single process. 3936

9. The Airbus A300, which first flew in 1972, incorporated the following composite
components: CFRP/GFRP elevators and rudders, CF RP spoilers, nose landing gear doors, and main
landing gear leg fairings, GFRP wing upper surfa ce trailing edge panels and AFRP wing-body
fairings and flap track fairings.
3937 Use of composites was extended in 1985 by changing the Airbus
A310 vertical stabilizer material from aluminium al loy to CFRP, and again in 1987 for the Airbus
A320. On the A320, both horizontal and vertical stabilizers are made from CFRP, as well as the
elevators, rudder, ailerons, spoilers, flaps, wi ng leading and trailing e dge access and fixed panels,
landing gear doors, and engine cowls and doors.
3938 The larger A330/A340 models use composites for
similar components. Prior to Boeing's 787, the Ai rbus A380 had the highest percentage of composite
materials on an LCA, including (i) the vertical tail (an area of 1,238 sq. feet, compared to 573 sq. feet
for the composite vertical tail area of the 777), (ii) the horizontal stabilizer (an area of 2,207 sq. feet,
compared to 1,090 sq. feet for the 777 horizontal st abilizer), (iii) the center wing box (the first use of
composites), and (iv) the rear unpressurized fuselage section. 3939 Following various design changes
between 2005 and 2007, Airbus' A350XWB (launche d in December 2006 and scheduled for first
delivery in 2013), will be approximate ly 52 per cent composites by weight. 3940 The fuselage will be

3934 Richard N. Hadcock, "A Chronology of Advanced Composite Applications", in Louis F. Vosteen
and Richard N. Hadcock, Composite Chronicles: A Study of the Lessons Learned in the Development,
Production and Service of Composite Structures, NASA Contractor Report 4620, November 1994, Exhibit EC-
792, p. 35, Table A-2.
3935 Richard N. Hadcock, "A Chronology of Advanced Composite Applications", in Louis F. Vosteen
and Richard N. Hadcock, Composite Chronicles: A Study of the Lessons Learned in the Development,
Production and Service of Composite Structures, NASA Contractor Report 4620, November 1994, Exhibit EC-
792, p. 35. Fuji was also a major subcontractor under this programme.
3936 In addition, in 1995, Raytheon launched a six-passenger light business jet (Raytheon 390 Premier I)
with an all-composite fuselage. The fuselage was a carbon fibre/honeycomb-sandwich construction, produced in
two pieces that were bonded at the aft pressure-bul khead. The fuselage pieces were formed on a wooden
mandrel using automated fibre placement (AFP) proce sses developed on prototyp e tow-placement machines
supplied by Cincinnati Milacron. Graham Warwick, "Raythe on's First" Flight International (October 4, 1995),
Exhibit US-306.
3937 Richard N. Hadcock, "A Chronology of Advanced Composite Applications", in Louis F. Vosteen
and Richard N. Hadcock, Composite Chronicles: A Study of the Lessons Learned in the Development,
Production and Service of Composite Structures, NASA Contractor Report 4620, November 1994, Exhibit EC-
792, p. 37.
3938 Richard N. Hadcock, "A Chronology of Advanced Composite Applications", in Louis F. Vosteen
and Richard N. Hadcock, Composite Chronicles: A Study of the Lessons Learned in the Development,
Production and Service of Composite Structures, NASA Contractor Report 4620, November 1994, Exhibit EC-
792, p. 37.
3939 Bair Affidavit, Exhibit US-7, paras. 51-52. The European Communities points out that a crucial
advance of the 787 is its use of [***]; Statement by Patrick Gavin, Tim Sommer, Burkhard Domke, and
Dominik Wacht, 8 November 2007, Exhibit EC-1175 (BCI), para. 9.
3940 "Qatar Airways Signs MOU for 80 A350XWBs wo rth $16-18 billion; EIS in 2013", Air Transport
World Daily News, 31 May 2007, Exhibit US-1003.

BCI deleted, as indicated [***]

constructed from CFRP panels with composite fram es, and the wings and empennage will be also be
CFRP.3941

10. Boeing started design of both the 757 and 767 models of LCA in the late 1970s.
3942 Boeing
used CFRP composites for the elevators, rudders, spoilers, landing gear doors and engine cowlings for
both airplanes. The flaps of the 757 were also CFRP. When Boeing introduced the 737-300 in 1985,
CFRP composites were selected for the ailerons, elev ators, rudder, fairings and engine cowl doors.
The 777, which commenced service in 1994, uses CFRP for the control surfaces, floor beams, main
landing gear doors, engine nacelles and, most significantly, the entire empennage. 3943 O t h e r
composite components on the 777 include the wing -fuselage fairings and wing fixed trailing edge
panels. The CFRP horizontal and vertical stabili zers on the 777 are manufact ured by Boeing, while
many of the other composite components are supplied to Boeing by U.S. and foreign subcontractors.
For example, the Japan Aircraft Development Co rporation is reported as having contributed 21
percent to the Boeing 777 project for design and production of the fuselage, center wing and wing
body fairings for the life of the 777 programme.
3944 Grumman (U.S.) was reportedly awarded a 10-
year, $400 million contract to produce the 777 compos ite inboard flaps and spoilers, Alenia (Italy)
was producing the outboard flaps, CASA (Spain, no w part of EADS), the ailerons and Rockwell
(U.S.), the floor beams.3945

11. A discussion of the application of composites technology on the 787 is included as part of the
discussion in Section C of this Appendix.

12. A " more-electric" aircraft uses electrical power to drive secondary mechanical systems,
instead of a combination of hydraulic, pneumatic and electrical power.
3946 The 787 is a more-electric
aircraft. Unlike existing LCA, electrical systems will be used on the 787 to generate power, as well as
to operate components such as the (i) engine starters , (ii) brakes, (iii) de-icing system, (iv) secondary
flight controls, and (v) air conditioning systems. The "more-electric" systems architecture of the 787
uses fly-by-wire flight controls 3947, and electrical power instead of pneumatic or hydraulic power to
operate a variety of the aircraft's secondary mech anical systems. The 787 will eliminate all of its
pneumatic bleed-air systems 3948, while maintaining certain hydraulic systems. 3949 One of the most

3941 “Airbus confirms switch to composite frame on A350 XWB,” ATW Daily News,
20 September 2007, Exhibit EC-1301.
3942 The 767 made its first flight in 1981, followed by the 757 in 1982; Richard N. Hadcock, "A
Chronology of Advanced Composite Applications", in Louis F. Vosteen and Richard N. Hadcock, Composite
Chronicles: A Study of the Lessons Learned in the Development, Production and Service of Composite
Structures, NASA Contractor Report 4620, November 1994, Exhibit EC-792, p. 37.
3943 The "empennage" refers to the tail section of the aircraft. It gives stability to the aircraft and
controls the flight dynamics of pitch and yaw.
3944 Richard N. Hadcock, "A Chronology of Advanced Composite Applications", in Louis F. Vosteen
and Richard N. Hadcock, Composite Chronicles: A Study of the Lessons Learned in the Development,
Production and Service of Composite Structures, NASA Contractor Report 4620, November 1994, Exhibit EC-
792, p. 49.
3945 Richard N. Hadcock, "A Chronology of Advanced Composite Applications", in Louis F. Vosteen
and Richard N. Hadcock, Composite Chronicles: A Study of the Lessons Learned in the Development,
Production and Service of Composite Structures, NASA Contractor Report 4620, November 1994, Exhibit EC-
792, p. 49.
3946 Andrew Doyle, "More and more electric," Flight International, 28 August-3 September 1996,
Exhibit EC-821, p. 124.
3947 Boeing Presentation #16, Exhibit EC-807 (BCI), p. 1.
3948 Boeing Presentation #3, Exhibit EC-353 (BCI), p. 1; James Wa llace, "Introducing … Boeing's
electric 7E7," Exhibit EC-820.
3949 Elimination of all pneumatic and hydraulic systems would result in an "all-electric" aircraft.
Andrew Doyle, "More and more electric," Flight International, 28 August-3 September 1996, 124, Exhibit EC-

BCI deleted, as indicated [***]

significant accomplishments of the 787's "more-electr ic" architecture is the replacement of pneumatic
systems with electrical systems. Pneumatic systems are complex, prone to failure, and require
frequent maintenance checks.
3950 They entail extracting bleed ai r (pressurized, hot air) from the
aircraft engines and carrying that air via heavy duc ts throughout the plane to operate a variety of
mechanical systems.3951 Instead of using these pneumatic syst ems, each 787 will have four 250 kVA
generators on the engines and two 225 kVA genera tors on the auxiliary power unit to generate
power3952, with no need for ducts that carry bleed air throughout the aircraft. 3953 By replacing bleed air
with electric generators as the source of energy, up to 35 per cent less power is extracted from the
engines of the 787 than LCA with traditional pneumatic systems. 3954 As bleed air is not diverted from
the engines, the high-speed air flowing through the engine can fo cus on thrust, thereby lowering the
787's overall fuel consumption.3955

13. " Open systems architecture" relates to the avionics of an aircraft and how onboard systems
are installed to interact with each other.
3956 Under a traditional aeronautics model, software runs on
customized hardware, with separate computing system s for each function. This means that systems
such as radios and displays on the flight deck or entertainment systems in the passenger cabin cannot
easily be upgraded. The 787 utilizes a common core computing system based on open systems
architecture principles. The open nature of the archite cture is such that all software functions can be
run on a central host computing platform using an industry-specified standard interface. The open
systems architecture of the 787 makes it possible fo r Boeing to simply plug in a new component, and
let installation software integrate the new equipment with the airplane's central computer system. The
software is separable from the host hardware, such that software can be developed by third party
providers using the industry standards interface, an d runs on the host computing platform without
changing the hardware. This will allow for easier upgr ade of the airplane functionality over time, and
will also alleviate some of the hardware.
3957

14. " Enhanced aerodynamics and structural design " technologies refer to various computer
design software codes (CFD codes such as TRANAIR and OVERFLOW as well as "Product
Lifecycle Management" tools such as CATIA) a nd specific aerodynamic and structural improvements
to the wings of the 787. CFD codes are computer design software which enable aeronautic engineers
to understand the aerodynamic forces acting on an airplane by evaluating the flowfield around the
vehicle. Through the use of the CFD codes, engin eers are able to quickly and accurately simulate
complex airflows about an aircraft. This enables th e engineers to arrive at the optimum aerodynamic
design for the aircraft, minimizes the number of wind tunnel tests required, and in so doing, speeds up
the design process and makes it less costly. CFD cod es were first used in aerodynamic design in the
1960s.
3958 Since that time, they have acquired in creasing importance in the aerodynamic design

821. Final CRAD Report, Evaluation of All-Electric S econdary Power for Transport Aircraft, Report Number
MDC 91K0418, January 1992, Exhibit EC-822.
3950 Passing the Value Test: The Boeing Technology Advantage, Boeing Point-to-Point, June 2006,
Exhibit EC-784.
3951 Boeing publication "Point to Point", June 2006, Volume 1 Issue 4, Exhibit EC-784.
3952 Boeing 787 Dreamliner Program Fact Sheet, Exhibit EC-340.
3953 James Wallace, "Introducing … Boeing's electri c 7E7," Seattle Post-Intelligencer, 20 May 2004,
Exhibit EC-820.
3954 Boeing 787 Dreamliner Program Fact Sheet, Exhibit EC-340.
3955 Passing the Value Test: The Boeing Technology Advantage, Boeing Point-to-Point, June 2006,
Exhibit EC-784; Meryl Getline, "Dreaming of a more plea sant flight," USA Today, 9 June 2006, Exhibit EC-
824.
3956 European Communities' first written submission, Annex C, para. 79.
3958 Dominik Wacht, An Analysis of Selected NASA Research Programs and Their Impact on Boeing's
Civil Aircraft Programs, November 2006, Exhibit EC-15, p. 143.

BCI deleted, as indicated [***]

process.3959 Most CFD codes are based upon partial di fferential equations, known as the Navier-
Stokes equations, which show how the velocity, pr essure, temperature and density of a moving fluid
(both liquids and gases) are related. The CFD code s usually incorporate some simplifications of the
equations to reduce the complexity of the computation. A central issue in computational fluid
dynamics is how to treat continuous fluids in a discrete manner on a computer so that the model is
suitable for numerical evaluation. This is usually do ne by dividing the space in issue into a grid or
mesh. The grid generation process has typically presented a bottleneck in the overall CFD process
time.
3960 For complex flow analyses, the task of generating the grid is a labour-intensive and slow
process.

15. The European Communities focuses on two cod es in its submissions, namely TRANAIR and
OVERFLOW. TRANAIR is a CFD code that enables multipoint design optimization. This means
that the design of the aircraft can be optimized fo r multiple flight conditions and that the aerodynamic
objectives can be balanced by other constraints imposed by structures or by manufacturing, for
example.
3961 OVERFLOW is a 3-D Navier-Stokes flow so lver. It can use an "overset grid scheme",
in which grids are generated about individual components, such as a wing or fuselage. The
overlapped grids are then tied together to cr eate a grid system about the entire vehicle. 3962
OVERFLOW was developed in the early 1990s by NAS A alone and not under contract to Boeing or
any other entity. 3963 It was created as part of a colla borative effort between NASA Johnson Space
Center and NASA Ames Research Center.3964

16. The CATIA software progra mme is used by Boeing in the 787 production and assembly
process in combination with other software , known collectively as the "Product Lifecycle
Management" tools.3965 These tools, as used on the 787, allo w every aspect of the airplane and its
manufacturing processes to be designed, built and tested digitally before production begins. 3966
Boeing has standardized the CATIA software packag e as the basis of its digital design process across
the entire company as well as across its globa l system of partners and suppliers. 3967 The common
system allows real-time collaboration among engineers spread throughout the world, all working from

3959 Dominik Wacht, An Analysis of Selected NASA Research Programs and Their Impact on Boeing's
Civil Aircraft Programs, November 2006, Exhibit EC-15, p. 143; Testimony of Michael Garrett, Director,
Airplane Performance, Boeing Commercial Airplanes, Before the United States Senate Committee on
Commerce, Science and Transportation, Subcommittee on Technology, Innovation, and Competitiveness,
19 July 2006, Exhibit EC-379, p. 3.
3960 Dominik Wacht, An Analysis of Selected NASA Research Programs and Their Impact on Boeing's
Civil Aircraft Programs, November 2006, Exhibit EC-15, p. 150; Insights "Overflow code empowers
computational fluid dynamics", Exhibit EC-1346, p. 2.
3961 Dominik Wacht, An Analysis of Selected NASA Research Programs and Their Impact on Boeing's
Civil Aircraft Programs, November 2006, Exhibit EC-15, pp. 147-148; Calmar Research Corporation:
TRANAIR++, Exhibit US-1235.
3962 Dominik Wacht, An Analysis of Selected NASA Research Programs and Their Impact on Boeing's
Civil Aircraft Programs, November 2006, Exhibit EC-15, pp. 149-152; Insights "Overflow code empowers
computational fluid dynamics", Exhibit EC-1346.
3963 See e.g. Insights "Overflow code empowers computational fluid dynamics", Exhibit EC-1346, p.1
and Affidavit of Douglas Ball, Exhibit US-1257, para. 10.
3964 Insights "Overflow code empowers computational fluid dynamics", Exhibit EC-1346, p.1.
3965 Bair Affidavit, Exhibit US-7, para. 66. Boeing uses CATIA in combination with DELMIA, for
engineering lean manufacturing processes, ENOVIA fo r decision support and lif e-cycle management, and
SMARTEAM.
3967 See e.g. CRA International Report on IR&D and B&P, Exhibit EC-5, p. 40 and Design News; Beth
Stackpole, "Boeing's Brave New World of Product Development; The Global Collaboration Environment lets
787 Partners Design, Build and Test Components and Manufacturing Processes for the Aircraft Digitally, Prior
to Physical Production," Design News, 4 June, 2007, Exhibit US-317.

BCI deleted, as indicated [***]

a 3-D digital copy of the airplane held on the central Boeing server. 3968 This ensures that all partners
in the global team have access to the same product definition data at the same time and avoids the
difficulties that arise when data must be translat ed or exchanged between different computer-aided
design tools.3969 The use of CATIA and other related so ftware throughout the global network means
that when the components of the airplane are shi pped to the common assembly facility, there is less
likelihood that the parts will not fit together, or that successive iterations of the manufacturing process
will be required.3970

17. The European Communities' allegations in re lation to the specific aerodynamic and structural
improvements to the wings of the 787 concern (i) the 787's "high-lift" system; and (ii) Boeing''s use
of hydraulically actuated spoilers on the 787. The "h igh-lift" system of an aircraft refers to the
elements of the wing that can be extended at the leading or the trailing edge to provide lift, such as the
flaps, slats, flaperons and ailerons. CFD analysis for the high-lift components on a wing has
traditionally been difficult due to the complex geometry involved.
3971 The difficulty lies in generating
a grid to model the fluid flow over the high-lift co nfiguration. Spoilers are small hinged plates that
can be used to slow an aircraft, make it descend or generate a rolling motion. Hydraulically actuated
spoilers are spoilers that are driven by hydraulic power.

18. " Noise reduction technologies " refer to a group of technologies that reduce the noise
generated by an aircraft and, in the case of the 787, involve the chevrons, joint-less acoustic treatment,
quiet slats and flaps, low noise landing gear, low weight structures and improved airline performance.
Aircraft noise is generated by anything related to the aircraft that creates pressure fluctuations. In
most cases, it is some form of flow distortion or turbulent flow. Noise heard on the ground is
composed of engine noise and airframe noise. Landing gear noise is a major contributor, along with
flap noise, to airframe noise.
3972 During take-off, engine noise is the dominant source of noise and
airframe noise less so, while, during landing, both engine noise and airframe noise are important
contributors to overall aircraft noise. 3973 NASA research indicates that when an airliner is on
approach, air rushing past the complex structure of the lowered landing gear can produce noise almost
as loud as that of the engines. 3974 Chevrons are zigzag or saw-tooth shapes at the end of the
nacelle3975, with tips that are bent very slightly into the flow and reduce the jet noise component of the
engine noise.3976 Chevrons reduce jet blast noise by contro lling the way that air mixes after passing
through and around the engine. 3977 The serrated design produces a better mix of engine's exhaust gas
and air passing through and around th e nacelle, which reduces the exhaust noise that hits the rear of

3968 The Seattle Times, "Boeing shares work, but guards its secrets", Exhibit EC-1167.
3969 Beth Stackpole, "Boeing's Brave New World of Product Development; The Global Collaboration
Environment lets 787 Partners Design, Build and Test Components and Manufacturing Processes for the
Aircraft Digitally, Prior to Physical Production," Design News, 4 June, 2007, Exhibit US-317.
3970 Edward Cone, "Boeing: New Jet, New Way of Doing Business," Eweek.com, 25 April, 2007,
Exhibit US-318.
3971 Dominik Wacht, An Analysis of Selected NASA Research Programs and Their Impact on Boeing's
Civil Aircraft Programs, November 2006, Exhibit EC-15, p. 150.
3972 William H. Herkes, The Quiet Technology Demonstrator Program: Flight Validation of Airplane
Noise-Reduction Concepts, AIAA 2006-2720, 8-10 May 2006, Exhibit EC-849.
3973 This is partly due to the fact that the landing g ear is stowed and the flaps are only deployed to a
small deflection.
3974 Results of NASA Aircraft Noise Research, Exhibit EC-390
3975 A nacelle is the streamlined outer casing of an aircraft engine.
3976 Jet noise is due to turbulent mixing between jets and the noise generation mechanism is very
complex. When the chevrons enhance mixing by the right amount, the total jet noise is reduced. Too much
mixing increases the noise, while too little results in no noise reduction benefits; Hushing the roar, Aerospace
America, June 2006, Exhibit EC-1342.
3977 Boeing Team Working to Make Jetliners Quieter, Exhibit EC-391.

BCI deleted, as indicated [***]

the fuselage, resulting in quieter take-offs. 3978 Joint-less acoustic treatment refers to acoustic nacelle
inlet liners. The inlet nacelle surface is usually made of an acoustically absorbent surface. The
acoustic absorber (called the acous tic lining) usually cons ists of a perforated sheet at the surface,
behind which is a layer of honeycomb core materi al, followed by a non-porous back sheet. The depth
of the honey comb core and the properties of th e perforated face sheet (e.g. hole diameter, sheet
thickness, core depth) determine the frequency at which sound is absorbed, with a deeper liner
absorbing a lower frequency of sound. Quiet flaps and slats relate to an aircraft's high-lift system.
High-lift systems include the flaps and slats used to increase the lift performance of the wing,
allowing the airplane to take off and land safely and efficiently. Low-noise landing gear relates to
technologies that reduce landing gear noise. Th e Panel understands the European Communities'
reference to "low weight structures" to be a refe rence to the composites solutions applied throughout
the 7873979 and its reference to "improved airplane perfo rmance" to mean that one aspect of overall
improved airplane performance is reduced noise, not that improved airplane performance is a specific
low noise technology that enables the 787 to be a quiet aircraft.

19. " Health management systems" refer to systems that allow for the monitoring of the health of
the different parts of an aircraft, including aircraft systems and certain aircraft structures, leading to
lower maintenance costs for airline operators.
3980 The 787 will employ health monitoring technologies
to monitor aircraft flight systems such as th e hydraulic systems and electric braking systems. 3981
Structural health monitoring technologies, includi ng embedded sensors, will also monitor structural
health around the 787's cargo doors and landing gear. 3982 Mathematical algorithms and neural
networks process the information collected by these sensors.3983 The health management system of the
787 has "new enabling technologies that turn airpla ne operating data into actionable information and
knowledge."3984 These new enabling technologies include the "sensors being built into the 787 {that}
will track the performance of different parts and send out alerts if something starts to fail." 3985 These
sensors will also help pilots in th e cockpit report problems they see. 3986 The information from these
sensors can be relayed to the ground via satellite in real-time 3987, which allows Boeing to offer
immediate maintenance service to its airline custom ers and makes regular routine inspections at short
intervals less necessary.3988

3978 Boeing Flight Test Journal, Future Looks Quiet, 20 September 2005, Exhibit EC 393.
3979 This understanding is confirmed by a Boeing presentation submitted by the European
Communities, indicating that the use of composites means th at the 787 is lighter, with less thrust and therefore
less noise; Larry Craig, "Boeing Noise Technology," Los Angeles World Airports Community Noise
Roundtable, 13 September 2006, Exhibit EC-1341.
3980 European Communities' first written submission, Annex C, paras. 110 - 113. Boeing Presentation
#20, Exhibit EC-854 (BCI), p.4.
3981 Boeing Presentation #3, Exhibit EC-353 (BCI), p.8.
3982 Boeing Presentation #19, Exhibit EC-829 (BCI), p.5.
3983 Boeing Presentation #19, Exhibit EC-829 (BCI), pp. 1-2. Boeing Presentation #20, Exhibit EC-854
(BCI), p. 5. Boeing, "A golden opportunity to become a lo wer-cost carrier. Guaranteed. 787 Dreamliner,
GoldCare," Exhibit EC-855, p. 3.Boeing Presentation #19, Exhibit EC-829 (BCI), p. 5. Boeing Presentation #3,
Exhibit EC-353 (BCI), p. 10.
3984 GoldCare – The 787 Revolution Now Revolutionizes Service, Boeing Website, Exhibit EC-852.
3985 Bryan Corliss, "Boeing stressing its 787 'GoldCare' service," HeraldNet, 8 May 2006, Exhibit EC-
856. Bill Sweetman, "Boeing, Boeing, Gone?" Aviation & Space, May 2004, Exhibit EC-857.
3986 Bryan Corliss, "Boeing stressing its 787 'GoldCare' service," HeraldNet, 8 May 2006, Exhibit EC-
856.
3987 Bryan Corliss, "Boeing stressing its 787 'GoldCare' service," HeraldNet, 8 May 2006, Exhibit EC-
856. Boeing, "A golden opportunity to become a lowe r-cost carrier. Guaranteed. 787 Dreamliner, GoldCare,"
Exhibit EC-855, p. 3.
3988 European Communities' first written submission, Annex C, para. 113. 7E7 Dreamliner, Structural
Health Management Technology Implementation on Commercial Airplanes, undated, Exhibit EC-829 (BCI),
p. 18.

BCI deleted, as indicated [***]

C. DESIGN, MANUFACTURE AND ASSEMBLY OF THE 787

20. This section of the Appendix provides some background information regarding the design and
manufacture of the fuselage of an aircraft in order to facilitate understanding of the parties' arguments
concerning the composite fuselage of the 787. It al so describes the process by which the 787 is being
constructed; namely, by the outsourcing of cer tain design and manufacturing functions to key
suppliers throughout the world as this aspect of the development and production of the 787 is
important to an understanding of certain of the United States' rebuttal arguments.

21. The fuselage of an airplane (whether constr ucted from aluminium or from composites) is built
around a hollow, cylindrical skeleton, which can be vi sualized as a birdcage laid on its side. Narrow
hoops called "frames" trace the circ umference of the cage. "Stringe rs" run lengthwise, perpendicular
to the frames which are used to create stiffness.
3989 Each frame contains openings (mouse holes) that
allow the frames to be placed crosswise over the stringers. 3990 To form the smooth, aerodynamic
exterior, this lattice is enclosed by "skins" which ar e attached to the outside of the structure. The
skins are less than a quarter of an inch thick in most places. 3991 The fuselage of an aircraft has
traditionally been made from several large panels that are bolted together to form a cylinder.
However, bolting composite panels together requires th at the edges of the panels be made thicker to
accommodate the bolts, adding to the weight and necess itating seams and joints that fatigue like their
aluminium counterparts and require additional rounds of maintenance.

22. The 787 fuselage is constructed from seamless 360º barrel sections that are pieced together
during final assembly. The 360º barrel sections are ma de from a solid laminate "skin" that is built
around a skeleton made up of frames and stringers. Production of the 360º composite barrel sections
involves (i) wrapping the prepreg material around a mould (or mandrel) having the shape of the inside
surface of the fuselage, referred to as inside mould line (IML) tooling 3992; (ii) securing the composite-
wrapped mandrels with outer mould line cauls (OMLs) to give the desired shap e to the outside of the
composite fuselage and covering the whole struct ure with vacuum curing bags; (iii) curing the
fuselage sections as a single piece in a pressurized oven; and (iv) after curing, collapsing the internal
mandrel and removing it from the stiffened composite structure.3993

23. The frames, stringers and skin of the 787 ar e all constructed of composite material. The
frames of the 787 fuselage are created using a bulk resin infused (BRI) technique, in which the dry
carbon fibre pre-form is placed onto a bed of resin in a single open mould. The resin infusion process
occurs after the pre-form fibre and the resin are placed under vacuum pressure, and the resin is heated
and drawn through the pre-form fiber. The stringe rs are constructed using a forming process that
entails the use of mechanical pressure to form a fl at piece of composite material (the stringer charge)
into an automated, movable mould. Each such st ringer must be tailored for its unique location on the
fuselage; thus, once formed, the 787 stringers under go a multiple axis machine trim, which allows
them to be cut into required profiles.
3994 The composite skin is made using AFP processes from Toray
T3900 intermediate modulus fibre prepreg material , an epoxy-infused material supplied by Toray
Industries (of Japan), which was originally developed and used on the 777.3995

3989 Boeing Bets Big On A Plastic Plane, Chicago Tribune (January 12, 2005), Exhibit US-310, p. 3.
3990 Tim Sommer et al., Composite Technologies, November 2006, Exhibit EC-14 (BCI), pp. 30, 64-67.
3991 Boeing Bets Big On A Plastic Plane, Chicago Tribune (January 12, 2005), Exhibit US-310, p. 3.
3992 These are large cylindri cal, collapsible mandrels that have the shape of each fuselage section;
Affidavit of Alan Miller, Exhibit US-1258, para. 12.
3993 Affidavit of Alan Miller, Exhibit US-1258, para. 12.
3994 Affidavit of Alan Miller, Exhibit US-1258, para. 14.
3995 Bair Affidavit, Exhibit US-7, pa ras. 49, 57; Affidavit of Alan M iller, Exhibit US-1258, para. 11.
According to Boeing's Michael Bair, this material was originally developed and certified for commercial aircraft
production (i.e. to meet requirements relating to strength, heat resistance, toughness and stiffness) in May 1990.

BCI deleted, as indicated [***]

24. In developing the 787, Boeing has shifte d responsibility for detailed component design to
suppliers, and focuses on systems integration, mana ging overall requirements, as well as the assembly
process. The 787 is essentially assembled from larg e substructures designed and produced by
suppliers. A number of suppliers are risk-sharing partners in the 787 programme, responsible for their
own development and production costs and, in some instances, contribution of funds toward overall
development and certification costs. Foreign suppliers, especially the Japanese heavy industrial
companies and the Italian company Alenia, are re ported to play a significant role in the 787
programme.3996 Analysts' reports in 2007 estimated the development costs for the 787 to be between
$7 and 9 billion, about half of which was to be provided by Boeing's risk-sharing suppliers. 3997 In
particular, the three Japanese industrial corporati ons (Kawasaki Heavy Industries, Mitsubishi Heavy
Industries and Fuji Heavy Industries), operating through the Japan Aircraft Development Corporation,
are co-designing and building approximately 35 per cent of the 787. 3998 The Japanese government has
been reported to have provided loans of up to $2 billion to finance the development project. 3999 The
Italian government has also been reported to have provided infrastru cture support to the Italian risk-
sharing supplier, Alenia Aeronautica.4000 Boeing has been reported as stating that a partner's ability to
invest, reducing Boeing's upfront costs, was an important consideration in Boeing's selection of
partners, as was the need to ensure engineering talent and technical capacity.4001

25. Completion of sub-assemblies and integration of systems takes place in Everett, Washington,
with many components being pre-installed before de livery to Everett. The 787 composite wings are
being manufactured by Mitsubishi Heavy Industries.
4002 The horizontal stabilizers are being
manufactured by Alenia Aeronautica in Italy, and various parts of the fuselage sections are being built
by Alenia in Italy, Vought in Charleston, South Carolina, Kawasaki Heavy Industries and Fuji Heavy
Industries in Japan, Alenia in Italy a nd Spirit Aerosystems in Wichita, Kansas. 4003 The main landing
gear and nose landing gear are being supplied by the French company Messier-Dowty, while
passenger doors are being made by Latécoère in France, and the cargo, access and crew escape doors
by Saab in Sweden. 4004 The integrated avionics platform is designed and supplied by Smiths/GE,
while flight controls and other avionics syst ems are being supplied by Honeywell and Rockwell-
Collins.4005

3996 Dominic Gates, Boeing 787: Parts from around world will be swiftly integrated, The Seattle Times,
11 September 2005, Exhibit EC-114.
3997 R. Aboulafia, Boeing 787 Dreamliner Program Br iefing, World Military & Civil Aircraft Briefing,
Teal Group, February 2007, Exhibit EC-1170.
3998 Boeing shares work, but guards its secrets, The Seattle Times, 15 May 2007, Exhibit EC-1167.
3999 Boeing shares work, but guards its secrets, The Seattle Times, 15 May 2007, Exhibit EC-1167.
4000 Boeing shares work, but guards its secrets, The Seattle Times, 15 May 2007, Exhibit EC-1167.
4001 Boeing shares work, but guards its secrets, The Seattle Times, 15 May 2007, Exhibit EC-1167,
quoting Bob Noble, Boeing Vice President responsible for global partners on new programmes.
4002 Dominic Gates, Boeing 787: Parts from around world will be swiftly integrated, The Seattle Times,
11 September 2005, Exhibit EC-114.
4003 Dominic Gates, Boeing 787: Parts from around world will be swiftly integrated, The Seattle Times,
11 September 2005, Exhibit EC-114.
4004 Dominic Gates, Boeing 787: Parts from around world will be swiftly integrated, The Seattle Times,
11 September 2005, Exhibit EC-114.

BCI deleted, as indicated [***]

D. ARGUMENTS REGARDING THE RELATIONSHIP BETWEEN THE AERONAUTICS
R&D MEASURES AND BOEING'S DEVELOPMENT OF 787 TECHNOLOGIES IN
SPECIFIC TECHNOLOGY AREAS

26. This section of the Appendix sets forth the parties' specific ar guments concerning the
relationship between work that Boeing perform ed pursuant to the aeronautics R&D measures and
Boeing's development of technologies in the six specific technology areas for application to the 787.

1. Composites technologies, primarily the design, development and manufacturing of 787
composite fuselages and wings

(a) European Communities

27. The European Communities alleges that, pur suant to the NASA's ACT, AST and R&T Base
programmes, NASA provided funding and support to Boeing through several contracts regarding
composites research.
4006 In addition, the European Communities contends that Boeing learned about
composites technologies relevant to the 787 composite fuselage by participating in a number of
projects under DOD RDT&E programmes such as the ManTech Composites Affordability Initiative,
the ManTech Advanced Fiber Placement project, DUS&T High Rate Fiber Placement project, V-22
Aft Fuselage Demonstration Program, and JSF prototype development programme.
4007 According to
the European Communities, "{ b}ut for these US Government composites R&D programmes, Boeing
would not be able to build and promise deliveries of such an advanced 787 aircraft today. Nor would
customers be as willing to buy it."4008

28. The European Communities iden tifies the following characteristics of the construction of the
787 fuselage as "deriving" from knowledge and experience that Boeing gained by participating in
U.S. government R&D programmes:

(a) manufacture of the forward section of the 787 fuselage using Automatic Fibre
Placement (AFP) and the centre fuselage sections of the fuselage using Automatic
Tape Laying (ATL);
(b) production of all of the 787 fuselage sec tions as 360º barrel sections which are
produced on large, rotating, collapsible mandrels and the design of the mandrels with
notches for "co-cured" stringers
4009;
(c) the use of resin infused braided fibres to manufacture the frames, which are then
bolted to the fuselage skins; and
(d) the design of the cut-outs in the fuselag e frames using the same process as on the
ATCAS panel.4010

4006 European Communities' first written submission, Annex C, para. 26: NASA Contract NAS1-18889
regarding Research and Development in Advanced Technology Composite Aircraft Structures, 12 May 1989,
Exhibit EC-329; NASA Contract NAS1-18954 regarding Advanced Composite Fabrication and Testing,
29 August 1989, Exhibit EC-798; NASA Contract NAS1-19349 regarding Structures and Materials Technology
for Aircraft Composite Primary Structures, 30 September 1991, Exhibit EC-799; NASA Contract NAS1-20553
regarding Technology Verification of Composite Primary Fuselage Structures for Commercial Transport
Aircraft, 25 September 1995, Exhibit EC-334; NASA Contract NAS1-99070 regarding Structures and Materials
Technology for Aerospace Vehicles, 25 January 1999, Exhibit EC-800.
4007 European Communities' first written submission, Annex C, para. 46.
4008 European Communities' first written submission, Annex C, para. 22. Emphasis in original.
4009 European Communities' first written submission, Annex C, para. 44.

BCI deleted, as indicated [***]

29. The European Communities id entifies the following characteristics of the 787's composite
wings as deriving from U.S. government-supported aeronautics R&D programmes:

(a) Boeing's decision to manufacture the entire wing box (i.e. the wing skins and spars)
of the 787 from composite materials as large one-piece structures, which the
European Communities alleges stems prim arily from the knowledge and experience
that Boeing (and McDonnell Douglas prior to its merger with Boeing) gained under
NASA's ACT and AST programmes4011;
(b) Boeing's decision to use ATL techniques fo r the construction of the wing box, which
the European Communities alleges stems primarily from the knowledge and
experience that Boeing (and McDonnell Douglas prior to its merger with Boeing)
gained under NASA's ACT and AST progr ammes, as well as DOD RDT&E funding
on a number of military aircraft programmes4012;
30. The European Communities argues that U.S. government-supported research helped Boeing
to develop some of the post-processing tools an d techniques that it uses to machine the large
composite parts for the 787. Its particular allegations are as follows:

(a) Specifications used by Boeing for aligning and drilling holes in multiple layers of
composite materials in order to fasten the 787's wings to its fuselage derive from
DOD-supported R&D that Boeing conducted for the B-2 programme4013;
(b) Boeing employs "polycrystalline diamond tools" to drill its composite parts, while it
explored similar diamond-coated rotating tools under the DOC ATP project on CVD
Diamond-Coated Rotating Tools for Machining Advanced Materials4014;
31. According to the European Communities, as a result of the knowledge and experience in
advanced NDI techniques which Boeing obtai ned under NASA's ACT, AST and R&T Base
programmes, as well as under DOD RDT&E programmes (including Materials, Advanced Materials
for Weapons Systems, and Ageing Aircraft), Boei ng has developed NDI techniques that it uses to
detect faults in the composite fuselage and wing pa rts of the 787 after they have been shaped and
cured.4015

32. In relation to Boeing's manufacture of the va rious fuselage sections of the 787 using AFP and
ATL technologies, the European Communities alleges th at Boeing studied the application of AFP and
ATL techniques to the manufacture of large co mposite fuselage sections under NASA and DOD
programmes, particularly the Advanced Technology Composite Aircraft Structures (ATCAS) element

4010 Joint Declaration by Dominik Wacht and Tim Sommer, Exhibit EC-1336 (BCI), para. 23; Dominik
Wacht, An Analysis of Selected NASA Research Programs and Their Im pact on Boeing's Civil Aircraft
Programs, November 2006, Exhibit EC-15, p. 71.
4011 European Communities' first written submission, Annex C, paras. 56-57.
4012 European Communities' first written submission,, Annex C, paras. 58-59. The military
programmes in question include the F-22, A-6, B-2 and JSF programmes.
4013 European Communities' first written submission, Annex C, para. 62.
4014 European Communities' first written submission, Annex C, para. 63. Composite cutting is different
from cutting metal because composites are not homogenous materials; rather, the matrix has different properties
from the stronger reinforcement (whi ch is much more difficult to cut). The use of conventional machining
techniques to cut composites creates th e potential for greater tool wear with significant heat generation, which
can be damaging to the composite; Robert B. Aronson, "Cutting Composites," Manufacturing Engineering,
March 2006, Exhibit EC-554, p. 2.
4015 European Communities' first written submission, Annex C, para. 63.

BCI deleted, as indicated [***]

of NASA's ACT Program. 4016 As discussed in paragraph 7.1713 of the Report, the formal ACT
Program lasted from 1989 through 1995. Funding fo r advanced composites r esearch related to a
composite fuselage continued from 1996 to 2000 u nder the "Materials and Structures" element of
NASA's R&T Base Program. 4017 The European Communities al so alleges that knowledge and
experience with respect to AFP and ATL techniques th at Boeing gained through its participation in a
number of DOD RDT&E programmes; most importantly, the ManTech Composites Affordability
Initiative and Advanced Fibre Placement progra mmes, the DUS&T High Rate Fibre Placement
project, the V-22 Aft Fuselage Demonstration Progr am and the JSF prototype development Program,
"likely contributed to its decision to use AFP and ATL techniques to manufacture the 787's fuselage
skin sections."
4018

33. The European Communities argues that "the 360 degree barrel concept for the 787 fuselage
sections also derives from Boeing's part icipation in NASA and DoD programmes." 4019 The European
Communities acknowledges that, under ATCAS, Boeing designed, built and tested a fuselage from
four separate panel sections (rather than 360º barrel sections). However, it contends that the research
under ATCAS served as a "roadmap" for Boeing to arri ve at the key solution that it later applied on
the 787; namely, a composite fuselage barrel. 4020 According to the European Communities, "on the
long road to Boeing's successful development of a composite fuselage barrel, ATCAS provided
Boeing with quintessential foundationa l knowledge and technologies, by supporting the achievement
of significant milestones in this long-term, step-by-step process."
4021 The European Communities
notes that, under ATCAS, Boeing undertook several studies to substantiate the advantages of 360º
sections.4022 The European Communities asserts that ther e are in fact a number of reasons why 360º
barrel sections are "more advantageous" than separ ate panels, "which Boeing likely learned from its
experience in the ATCAS programme." 4023 The European Communities therefore contends that the
knowledge and experience that Boeing gained from th is ATCAS programme work "led to its ultimate
selection of a full barrel concept with desi gn features such as co-cured stringers". 4024 As for the

4016 In a 1997 NASA Contractor Report, Boeing describes the ATCAS programme as having been
initiated in 1989 as NASA Contract NAS1-18889, an inte gral part of the NASA sponsored ACT initiative. The
report then describes Task 2 of Materials Development Omnibus Contract (NASA Contract NAS1-20013)
which was awarded in 1993, as extending the ATCAS wo rk. The report states that these two contracts
addressed Phases A and B relating to concept selection and technology development. An additional contract
(NASA Contract NAS1-20553 , referred to as Phase C) was initiated to verify the technology at a large scale;
L.B. Ilcewicz et al., Advanced Technology Composite Fuselage—Program Overview, NASA Contractor Report
4734, April 1997, Exhibit EC-808, para. 2-0. Airbus' Dominik Wacht also explains that the NASA contracts
awarded to Boeing under the ACT Program were grouped together to form the ATCAS programme, which he
alleges was aligned with Boeing's independent research efforts focused on the introduction of large scale
composites on civil aircraft; Dominik Wacht, An Analys is of Selected NASA Res earch Programs and Their
Impact on Boeing's Civil Aircraft Programs, November 2006, Exhibit EC-15, p. 49.
4017 NASA ACT Budget Estimates, FY 1989-FY 1997, Exhibit EC-321, at FY 1997, SAT 4-21.
4018 European Communities' first written submission, Annex C, para. 46.
4019 European Communities' first written submission, Annex C, para. 47.
4020 European Communities' confidential oral statement at the second meeting with the Panel, para. 44.
4021 European Communities' confidential oral statement at the second meeting with the Panel, para. 44.
4022 European Communities' first written submission, Annex C, para. 47.
4023 European Communities' first written submission, Annex C, para. 48. The European Communities
identifies the most important of these advantages as (i) the fact that large composite barrels enable the
manufacturer to reduce the number of parts to make the fuselage, substantially reducing cost and assembly time;
and (ii) that the use of large barrels saves approximately 1,500 aluminium sheets and 40,000 – 50,000 fasteners,
entailing a far less complex manufacturing process that reduces the need for human labour. The
European Communities notes that Boeing itself considers that this translates directly into reduced manufacturing
times of between 30 to 40 per cent; European Communities' first written submission, Annex C, para. 48.
4024 European Communities' first written submission, Annex C, para. 47. The European Communities
argues that the U.S. government aeronautics R&D subsid ies in question enabled Boeing to confidently take the

BCI deleted, as indicated [***]

influence of DOD military programmes on Boeing's d ecision to construct the 787 composite fuselage
from 360º barrel sections, the European Communities argues that (i) Boeing gained knowledge and
experience in using large, collapsible, rotating ma ndrels to build the 360º fuselage barrel sections
through its participation in the V-22 and JSF programmes; and (ii) that Boeing's "ability to piece
together the 360º composite barrel sections during final assembly was also "enhanced" by the work
Boeing did under the V-22 programme in researching and conducting final assembly of a 360º
composite aft fuselage section.4025

34. The European Communities ar gues that Boeing's decision to use braided resin infusion
techniques for manufacturing the composite fuselage frames derives from work done under NASA's
ACT Program.
4026 In particular, the European Communiti es contends that the research on resin-
infused braided frames which Boeing carried out as part of the construction of the crown fuselage
panel under the ATCAS Program, and its conclusion that this was the most cost efficient means of
frame fabrication, "likely led to Boeing's decision to use resin-infused braided frames for the 787." 4027
In addition, the European Communities argues that Boeing's decision to bolt "mouse holed"
composite fuselage frames to the fuselage skins of the 787 also derives from the knowledge and
experience that Boeing gained under the ATCAS Program. 4028 The European Communities contends
that the knowledge and experience that Boeing gain ed from the problems it en countered from the use
of bonded (rather than bolted) frames when ma nufacturing the fuselage crown panel under the
ATCAS Program "led to its ultimate decision to use mouse holed bolted frames on the 787." 4029
According to the European Communities, Boeing w as able to "optimize" its mouse holed design
through its work under the ACT Program.4030

35. Finally, the European Communities alleges th at the "door and window reinforcements on the
ATCAS Program were integrated directly into the skin, similar to the 787 barrel."
4031

36. The European Communities argues that a numbe r of the technical characteristics of the 787's
composite wings derive from R&D conduc ted under NASA's ACT and AST programmes
(particularly the Innovative Composite Primary Stru ctures (ICAPS) and composites elements of those
programmes4032), as well as DOD RDT&E programmes. 4033 The European Communities notes that
under the composite wing element of the AST Program, McDonnell Douglas tested a semi-span
advanced composite wing. 4034 The manufacturing technology used for the construction of the semi-
span composite wing fabricated and tested in the composite wing element of the AST Program was

"last steps" at an acceptable level of risk and cost for the company; European Communities' non-confidential
oral statement at the second meeting with the Panel, para. 44.
4025 European Communities' first written submission, Annex C, paras. 49 and 50.
4026 European Communities' first written submission, Annex C, para. 53.
4027 European Communities' first written submission, Annex C, para. 53.
4028 European Communities' first written submission, Annex C, para. 54.
4029 European Communities' first written submission, Annex C, para. 54.
4030 European Communities' first written submission, Annex C, para. 54.
4031 Joint Declaration by Dominik Wacht and Tim Sommer, Exhibit EC-1336 (BCI), para. 23;
Dominik Wacht, An Analysis of Se lected NASA Research Programs and Their Impact on Boeing's Civil
Aircraft Programs, November 2006, Exhibit EC-15, p. 71.
4032 The ICAPS element of the ACT Program was im plemented as NASA Contract NAS1-18862 with
McDonnell Douglas regarding Innovative Composite Primary Structures, 31 March 1989, Exhibit EC-331.
When the ACT Program ended prematurely in 1995, fu nding for advanced composites research related to
composite wings continued until financial year 1999 under the AST Program; NASA AST Budget Estimates,
FY 1989 - FY 1997, Exhibit EC-357, at FY 1996, SAT 4-42.
4033 European Communities' first written submission, Annex C, para. 56.
4034 European Communities' first written submission, Annex C, para. 57.

BCI deleted, as indicated [***]

stitched/resin film infusion (S/RFI) 4035, while Boeing used ATL technology to construct 787
composite wings. The European Communities argues that, even though Boeing and McDonnell
Douglas used S/RFI techniques to manufacture the AST semi-span composite wing, "this experience
nonetheless led Boeing to its ultimate design of the 7 87's composite wing box and its decision to use
ATL to manufacture the 787's wing box components."4036

37. The European Communities argues that U. S. government-supported research has helped
Boeing to develop some of the post-processing tools a nd techniques that it uses to machine the large
composite parts for the 787. In particular, it alleges that (i) specifications used by Boeing for aligning
and drilling holes in multiple layers of composite mate rials in order to fasten the 787's wings to its
fuselage derive from DOD-supported R&D th at Boeing conducted for the B-2 programme 4037; (ii)
Boeing employs "polycrystalline diamond tools" to dr ill its composite parts, while it explored similar
diamond-coated rotating tools under the DOC ATP project on CVD Diamond-Coated Rotating Tools
for Machining Advanced Materials
4038; and as a result of the knowledge and experience in advanced
NDI techniques which Boeing obtained under NASA' s ACT, AST and R&T Base programmes, as
well as under DOD RDT&E programmes (including Mate rials, Advanced Materials for Weapons
Systems, and Ageing Aircraft), Boeing has developed the NDI techniques that it uses to detect faults
in the composite fuselage and wing parts of the 787 after they have been shaped and cured.4039

(b) United States

38. The United States argues that, although the European Communities has sought to support its
"technology effects" causation theory by pointi ng to similarities betwee n research conducted under
NASA and DOD R&D programmes and technology applie d to the 787, for the bulk of the challenged
programmes, the European Commun ities "does not even find a semblance of a connection to the
787."
4040 The United States argues that, even as regards the NASA R&D programme that the
European Communities argues had the clearest re levance to the 787 – the Advanced Technology
Composites Aircraft Structures (ATCAS) Program – most of the technologies studied under ATCAS
are fundamentally different to the technologies used on the 787.
 4041

39. According to the United States, the generic technology concept that Boeing studied under the
ATCAS contract was for a paneli zed fuselage section, which from a technological point of view,
differs fundamentally from the seamless 360º barrel sections that Boeing has developed for the
787.
4042 In addition, the United States argues that the key (albeit limited) technology findings of the
ATCAS Program were widely known throughout the aerospace engineering community long before
Boeing began work on the 787. 4043 In relation to the specific links between knowledge and
technologies developed under the ATCAS Program and technologies applied to the 787, the
United States argues: (i) that only $26 million was disbursed to Boeing under the ATCAS contract;
(ii) that the research done under the ATCAS contra ct (as acknowledged by Airbus' Wacht) did not
relate to a single-barrel fuselage, but instead to four quadrant panelized fuselage sections; (iii) that
three sections of the panelized fuselage concep t studied under ATCAS were made using a mixed
honeycomb core stiffened concept that is a very different technology to the solid laminate technology

4035 Michael Karal, AST Composite Wing Program – Executive Summary, NASA/CR-2001-210650,
March 2001, Exhibit EC-819, p. 1. This process involves stitching pre-woven dry material together with wing
components such as stringers and spar caps, followed by introducing resin just before curing in the autoclave.
4036 European Communities' first written submission, Annex C, para. 52.
4037 European Communities' first written submission, Annex C, para. 62.
4038 European Communities' first written submission, Annex C, para. 63.
4039 European Communities' first written submission, Annex C, para. 63.
4040 United States' confidential oral statement at the second meeting with the Panel, para. 22.
4041 United States' confidential oral statement at the second meeting with the Panel, para. 24.
4042 United States' confidential oral statement at the second meeting with the Panel, para. 24.
4043 United States' confidential oral statement at the second meeting with the Panel, para. 25.

BCI deleted, as indicated [***]

used on the 787; and (iv) that the one panel studied under ATCAS that was designed using co-cured
solid laminate technology which is similar to the 787 fuselage (the ATCAS crown panel) was
constructed in a different way to the 787 fuselage sections.4044

40. According to the United States, because of the clear differences between ATCAS and 787
technologies, the only similarity between tec hnologies developed under the ATCAS Program and
those applied to the 787 is the co-cured hat stringer used on both the ATCAS crown panel and the 787
fuselage. However, the United States contends that there are significant differences in stringer
formation, co-curing methods and load requirements between the two. Specifically, the United States
alleges that the ATCAS research was limited to pane l sections using only constant gauge stringers,
while Boeing had to invent and design methods fo r creating multi-gauge stringers to manage the
changing loads over the length of the 787 composite fuselage.
4045

41. The United States denies that the composite wing developed by Boeing for the 787 was in any
way enabled by the research th at Boeing and McDonnell Douglas conducted under the NASA R&D
programmes. The United States contends that the scope of the NASA composite wing work was very
limited, in that it focused on structural issues, but did not fully address the systems integration for
pumps, sensors, electrical and thermal integration required for a commercial aircraft design.
Moreover, the United States notes that the composite wing designed and tested under the ICAPS
element of the NASA ACT Program and then under NASA's AST Composite Wing Program used
stitching and resin infusion technologies that were not commercialized by Boeing or McDonnell
Douglas, while the 787 composite wi ngs are made using ATL technology.
4046 Finally, the
United States alleges that Boeing shared any valu able learning that arose from the NASA composite
wing work with visiting personnel from BAE Systems and the U.K. Department of Trade and Industry
(DTI) in 1996, which resulted in DTI initiating a car bon wing demonstration project (in which Airbus
participated), using a very similar stitched approach for designing and manufacturing.4047

42. In relation to the European Communities' allegations concerning composites manufacturing
tools and processes, the United States argues that th e composite maintenance and repair processes for
the 787 are based on those developed for use on the 777 composite structures and that their
development preceded the work that was done under the ATCAS contract. 4048 According to the
United States, material selection for the 777 (and late r, for the 787) necessitated the development of a
repair concept to accommodate that particular mate rial. Moreover, the United States contends that
repair concepts in general are widely known and relatively uniform within the aerospace industry,
because airlines that own aircraft from multiple manuf acturers must be able to efficiently maintain
and repair their entire fleet. In this regard, the Un ited States asserts that the "familiarity" of the bolted
repair techniques selected for the 777 and 787 which makes them attractive to airlines is in fact a

4044 United States' comments on European Communities' response to question 87, para. 21.
Specifically, the United States explains that the ATCAS crown panel was built as a standalone section using
outer mould line (OML) tools and inner mould line (IML) cauls to co-cure the skin and stringers, while the 787
fuselage, by contrast, is being built as a single solid piece of composite created a nd cured around enormous
multi-section mandrels which are IML tools (designed by suppliers for Boeing) with OML cauls.
4045 United States' comments on European Communities' response to question 87, para. 330; Airbus
engineers Sommer and Wacht have responded that the fact that the 787 fuselage features multi-gauge stringers,
rather than the constant-gauge stringers developed under ATCAS is irrelevant. They contend that the ATCAS
structure established basic design data which can then be used to design actual aircraft fuselage sections in
which stringer and panel thickness can be adapted to the actual load requirements of each part of the fuselage.
According to Sommer and Wacht, the design data established during tests of the ATCAS panel sections enables
this adaptation; Joint Declaration by Dominik Wacht and Tim Sommer, Exhibit EC-1336 (BCI), para. 23,
footnote 44.
4046 Bair Affidavit, Exhibit US-7, para. 55; Affidavit of Branko Sarh, Exhibit US-1254, para. 13.
4048 Affidavit of Alan Miller, Exhibit US-1258, para. 19.

BCI deleted, as indicated [***]

familiarity borne of their origin in use on meta llic structures, not studies done with airlines under the
ATCAS contract.4049

43. With respect to links to DOD-funded aeronau tics R&D, the United States argues that military
technologies are not technologically geared toward commercial aircraft production and design, and
that in any case, that Boeing's policy is not to use ITAR-controlled defence technologies on the
787.
4050

2. More-electric systems architecture

(a) European Communities

44. The European Communities argues that th e knowledge, experience, and confidence Boeing
gained through (i) the NASA AST Program, in par ticular, the Power-by-Wire (PBW) subtask of the
Fly-by-Light/Power-by-Wire (FBL/PBW) element of that programme; and (ii) the Aerospace
Propulsion and Power Technology, and Dual Use Science and Technology programmes under DOD's
RDT&E Program, allowed Boeing to develop and u se extensive "more-electric" systems on the 787,
while maintaining certain efficient hydraulic systems. The European Communities argues that without
this more-electric architecture, Boeing would not have been able to obtain the efficiencies and
operating cost savings it now guarantees 787 operators, which contribute significantly to the
commercial success of the 787.
4051 The European Communities argues that, in addition to any direct
application of U.S. Government-supported mo re-electric technologies on the 787, Boeing's
development of the final more-electric architecture of the 787 "surely benefited from the knowledge,
experience, and confidence it gained under these programmes."4052

45. With respect to the FBL/PBW element of the AST Program, the European Communities
argues that McDonnell Douglas gained knowledge a nd experience with regard to power system
definitions and requirements through a NASA contr act by designing, fabricating, testing, and
demonstrating power management and distribution architectures, electrical actuators, and
starter/generators.
4053 The European Communities argues that this knowledge and experience
contributed to Boeing's design and development of the more-electric architecture of the 787,
particularly as regards Boeing's ability to integrate more-electric components into the 787.
 According
to the European Communities, Boeing's integra tive capabilities likely benefited from the knowledge
and experience McDonnell Douglas gained under the AST Program with respect to flight actuator
designs.4054 In addition, the European Communities asserts that [***], the 787 will utilize electro-
mechanical actuators akin to those that McDonnell Douglas studied and developed pursuant to its
PBW contract.4055

4049 Affidavit of Alan Miller, Exhibit US-1258, para. 20.
4050 United States' first written submission, paras. 163 -176 and 951-953; Bair Affidavit, Exhibit US-7,
paras. 5, 23-32; United States' second written submission, paras. 55-59.
4051 European Communities' first written submission, Annex C, para. 77.
4052 European Communities' first written submission, Annex C, para. 77.
4053 European Communities' first written submission, Annex C, para. 71; NASA Contract NAS3-27018
with McDonnell Douglas Aerospace regarding Power-By-Wi re Development and Dem onstration for Subsonic
Civil Transport, 29 September 1993, C-5, Exhibit EC-826. Power-by-Wire Development and Demonstration for
Subsonic Civil Transport, Exhibit EC-366.
4054 European Communities' first written submission, An nex C, para. 71. Dominik Wacht, An Analysis
of Selected NASA Research Programs and Their Impact on Boeing's Civil Aircraft Programs, November 2006,
Exhibit EC-15, pp. 105-106; Boeing Presentation #16, Exhibit EC-807 (BCI), p. 3; Power-by-Wire
Development and Demonstration for Subsonic Civil Transport, Exhibit EC-366.
4055 Power-by-Wire Development and Demonstration for Subsonic Civil Transport, Exhibit EC-366.

BCI deleted, as indicated [***]

46. The European Communities argues that a nu mber of specific aspects of the 787's more-
electric architecture derive from knowledge and experience that Boeing gained from dual-use research
that it conducted pursuant to the Aerospace Propulsi on and Power Technology, and Dual Use Science
and Technology programmes under DOD's RDT&E Pr ogram. In this regard, the European
Communities argues first, that Boeing's use of el ectrically actuated brakes on the 787 stems from its
"existing military experience." 4056 According to the European Comm unities, this experience consists,
inter alia, of work that McDonnell Douglas performed pursuant to a 1992 contract with the United
States Air Force with regard to Electrically Actuated Brake System ("ELABRAT") technology. 4057
Second, the European Communities argues that Boeing's decision to maintain and improve certain
hydraulic systems, thereby making the 787 a "more-elect ric" (as opposed to all-electric) aircraft, also
stems from its dual-use DOD-supported military airc raft research. The European Communities
explains that the 787 maintains some hydraulic act uation, but uses an innovative 5,000 psi operating
pressure, as opposed to the 3,000 psi on older Boeing LCA like the 777 4058 and argues that this is
precisely the same concept that Boeing studied, developed, and used for its DOD-funded JSF
demonstrator. The European Communities indicat es that, unlike Lockheed Martin, which used
electro-hydrostatic actuators for its JSF concept, Boeing used a 5,000 psi hydraulic system because
"modern 5,000-psi hydraulics systems compare better than EHAs in terms of cost, weight and
supportability."
4059

(b) United States

47. The United States argues that Boeing's decision to use a more-electric architecture for the 787
became possible because of a critical Boeing d esign innovation as well as supplier innovations.
4060
According to the United States, by using larger st arter generators supplied by Hamilton Sundstrand,
Boeing and its suppliers have been able to desi gn non-pneumatic systems aimed at fuel and energy
efficiency to power the aircraft's de-icing sy stem, air conditioning and electronically-actuated
brakes.4061 The United States argues that the most sign ificant developments with respect to more-
electric technology in the 787 are the "no-bleed" envi ronmental control system (e.g. air conditioning),
supplied by Hamilton Sundstrand and the anti-ice/ de-ice system, supplied by Ultra Electronics
Holdings and GKN Aerospace. 4062 In addition, the United Stat es notes that the electro-mechanical
actuators used in the spoilers are supplied by Smiths, the primary flight control actuation system (both
the hydraulic and electric elements) is supplied by Moog, and the electrically-actuated brakes are
supplied by Goodrich and Messier-Bugatti.
4063 Moreover, according to the United States, these
companies all provide similar systems to Airbus.

48. The United States contends that the advances in electric motor technology that are the key to
the more-electric aircraft are, in large part, due to increasing demand in a broad range of industries,
and that both Boeing and Airbus are benefiting from the billions of dollars in technology investments

4056 European Communities' first written submission, Annex C, para. 75; Boeing Presentation #3,
Exhibit EC-353 (BCI), pp. 5-7.
4057 Air Force Contract F33615-92-C-3406 with McDonnell Douglas Corporation regarding Electrically
Actuated Brake System (ELABRAT), 29 September 1992, Exhibit EC-827; Boeing Presentation #16, Exhibit
EC-807 (BCI), p. 9; Boeing Presentation #3, Exhibit EC-353 (BCI), p. 9.
4058 Boeing Presentation #3, Exhibit EC-353 (BCI), pp. 5-7; Boeing Presentation #16, Exhibit EC-807
(BCI), pp. 6-8; Boeing Presentation #18, Exhibit EC-823 (BCI), p. 3.
4059 European Communities' first written submission, Annex C, para. 76; James W. Ramsey, "Power-
by-Wire," Avionics Magazine, 1 May 2001, Exhibit EC-828.
4060 United States' first written submission, para. 941.
4061 United States' first written submission, para. 941; Bair Affidavit, Exhibit US-7, para. 53; Joseph
Ogando, "Boeing's 'More Electric' 787 Dreamliner Spurs Engine Evolution", Exhibit US-314.

BCI deleted, as indicated [***]

being made for applications such as hybrid cars, electric trains and efficient power generation and
distribution methods for commercial and residential power.4064

49. The United States argues that Boeing's switch to more-electric systems has also been driven
by another key supplier innovation, namely, the "no- bleed" engine, which is available through engine
makers GE and Rolls Royce.
4065 The United States asserts that the new engine technology accounts
for at least one-third of the increased operating cost efficiencies of the 787, and that Airbus will
benefit from supplier engine experience on the 787 as it has selected Rolls Royce to provide the Trent
XWB engine series for the A350XWB.4066

50. As regards the European Co mmunities' allegations concerning knowledge and experience that
Boeing obtained from McDonnell Douglas' work unde r the FBL/PBW element of the AST Program,
the United States asserts that the FBL/PBW subt ask was terminated before any new technology
related to advanced power manage ment and distribution systems was built and tested, and that in any
case, the flight controls developed by Boeing for the 787 are not the same as the electronic actuation
technology that was originally envisioned under that terminated programme.4067 In relation to Boeing's
use of a 5,000 psi hydraulic system that the Europ ean Communities alleges is the same concept that
Boeing studied, developed, and used for its DOD-f unded JSF demonstrator, the United States asserts
that the first 5,000 psi hydraulic system used in a commercial aircraft was actually designed and
supplied by Eaton for the Airbus A380.4068

3. Open systems architecture

(a) European Communities

51. The European Communities argues that th e open systems architecture on the 787 likely
benefited from the knowledge and experience th at McDonnell Douglas gained pursuant to a 1996
contract on the VMS Integrated Technology for Affordable Life Cycle Cost ("VITAL") program
under DOD's Technology Reinvestment Project. Th e European Communities indicates that work
pursuant to this contract aimed to reduce the Life Cycle Cost (LCC) of current and future military and
commercial aircraft by developing the necessary building blocks for an open and affordable Vehicle
Management System (VMS). The European Communities indicates that under this contract,
McDonnell Douglas, inter alia, "define{d} generic VMS open architecture specifications," worked on
interface standards, and demonstrat ed "plug and play" interchangeability.
4069The European
Communities argues that these are key elements of the 787's open systems architecture. 4070 The
European Communities notes that the contract sti pulates that "the VITAL team shall perform a
research and development program designed to develop and mature the affordable Vehicle
Management System technologies …. {T}he princi pal purpose of this agreement is for the VITAL
Team to provide its best research efforts in the support and stimulation of advanced research and

4064 Bair Affidavit, Exhibit US-7, para. 59; Joseph Ogando, "Boeing's 'More Electric' 787 Dreamliner
Spurs Engine Evolution", Exhibit US-314.
4065 United States' first written submission, para. 941; Bair Affidavit, Exhibit US-7, para. 58.
4066 United States' first written submission, para. 94 1; "Fully Optimised for the Airbus A350XWB
family", Rolls-Royce.com, Exhibit US-316.
4069 Navy Contract N00019-96-H-0118 with McDonnell Douglas Corporation, Statement of Work,
Exhibit EC-830, pp. 1-2.
4070 Boeing Presentation #3, Exhibit EC-353 (BCI), p. 13; Passing the Value Test: The Boeing
Technology Advantage, Boeing Point-to-Point, June 2006, Exhibit EC-784.

BCI deleted, as indicated [***]

technology development and not the acquisition of property or services for the direct benefit or use of
the Government."4071

52. The European Communities al so argues that the open system s architecture on the 787 likely
benefited from dual-use research Boeing conducte d pursuant to the JSF Program. The European
Communities explains that open systems architectur e was in fact an emphasis of the JSF Program
from the very beginning, and that Boeing successf ully implemented an open systems architecture on
its JSF design.
4072 The European Communities asserts that Bo eing specifically studied integrating
avionics into a core processor that utilizes open architecture as part of its DOD-supported JSF
development programme and that this experience likely contributed to its ability to utilize open
systems architecture on the 787. 4073 Relying on a statement by a Boeing official in a press report, the
European Communities asserts that Boeing would not be as far ahead on many of its programs
without the experience gained on the JSF progr am and the many technologies and processes
developed and validated on it, such as open systems architecture.4074

53. Finally, in response to the United States ' argument that components were purchased by
suppliers, the European Communities argues that for the common core of the 787's open system
architecture, Boeing still retains the overall integration responsibility.4075

(b) United States

54. The United States argues that the open system s architecture of the 787 is based on Boeing's
decision to rely on supplier technical expertise in identifying the best systems for the aircraft. The
United States indicates that the common core of this system, an integrated common data network that
runs the aircraft's systems, is provided by Sm iths/GE, in partnership with Rockwell Collins and
Honeywell. According to the United States, the fi ber optic Ethernet system used to run the 787's
central processing is not only available commercia lly, but a version of it has been designed by
Rockwell Collins for use on the A380's Integrated Modular Avionics system, a data network that
relies on separate computers rather than on a central core.
4076 Finally, the United States asserts that the
"plug-in" elements are available on the market, such as the integrated standby flight display purchased
from Thales and the flight control electronics purchased from Honeywell.4077

4071 European Communities' first written submission, Annex C, para. 184. Navy Contract N00019-96-
H-0118 with McDonnell Douglas Corporation, 15 May 1996,Exhibit EC-830, p. 3. Emphasis added.
4072 JSF X-32 and X-35, International Air Power Review, Volume 1 (2001), Exhibit EC-455, pp. 60-61;
John D. Morocco, "Admiral Believes Navy JAST Also Could Fill USAF Need," Aviation Week and Space
Technology, 24 April 1995, Exhibit EC-831, p. 22; Air Power for the 21st Century, Boeing Photo Release, 25
February 2000, Exhibit EC-832.
4073 Boeing Demonstrates JSF Avionics Multi-Sensor Fusion, Boeing News Release, 9 May 2000,
Exhibit EC-833.
4074 William Cole, "The value of lessons learned," Boeing Frontiers Online, December 2003/January
2004, Exhibit EC-464, quoting Frank Statkus, former JSF Program Manager. Emphasis added.
4075 Statement by Patrick Gavin, Tim Sommer, Burkhard Domke, and Dominik Wacht,
8 November 2007, Exhibit EC-1175 (BCI), para. 21, citing Boeing 787: Integration's Next Step, Avionics
Magazine, 1 June 2005.
4076 Unites States' first written submission, para. 94 1 citing James W. Ramsey, "Integrated Modular
Avionics: Less is More," Avionics Magazine (Feb. 1, 2007), Exhibit US-321.

BCI deleted, as indicated [***]

4. Enhanced aerodynamics and structural design

(a) European Communities

55. The European Communities argues that, thr ough participating in four NASA aeronautics
R&D programmes, namely HPCC (CAS project ), AST (IWD project), HSR and R&T Base
programmes, Boeing used and enhanced CFD codes, in particular OVERFLOW and TRANAIR.
More specifically, the European Co mmunities argues that, under the CAS project that was part of the
HPCC Program, the OVERFLOW CFD code, which was originally developed by NASA, was further
enhanced.
4078 TRANAIR was developed by Boeing under a contract that precedes the existence of the
NASA R&D programmes at issue in this dispute. The European Communities' arguments therefore
focus on the contributions to the design of the 787 arising out of NASA contracts under which the
TRANAIR code was enhanced.

56. According to the European Communities, the research carried out under the IWD project
(AST Program) resulted in the capability to deve lop highly optimized, high performance wings at
substantially reduced development time and cost.
4079 The European Communities argues that under
the Airframe Technology contract awarded to Bo eing in 1994 as part of the HSR Program, Boeing
further refined CFD methods, including enhanc ing TRANAIR and integrating OVERFLOW into the
overall design process. 4080 Finally, although the R&T Base Program was of a more general nature
than the other NASA programmes, spanning a wide array of technical domains, the European
Communities argues that this programme neverthel ess provided the basic scientific and engineering
understanding underpinning further enhancements of the CFD and design codes.4081

57. According to the European Communities, this led to direct application of the codes in the
design process for the 787 and also provided Bo eing employees with "knowledge, experience and
confidence", which "surely benefited" the final aerodynamic and structural design of the 787.
4082 In
this regard, the European Communities submits th at, as well as gaining the "explicit knowledge", or
the "tangible data…recorded in…software codes", Boeing also accrued "tacit knowledge" as a result
of its work on the CFD codes.
4083 According to the European Co mmunities, only when experienced
personnel use the CFD codes in an appropriately in tegrated manner in the overall design process, will
the design cycle time reductions promised by CFD codes be achieved.

58. The European Communities ar gues that Boeing applied the knowledge and experience that it
gained with respect to computer-assisted design and manufacturing tools from DOD supported dual-
use research to the 787.
4084 In this regard, the European Co mmunities submits that Boeing developed
"advanced 3-D modelling and simulation techni ques under the F-22 programme" and that these
techniques "became the basis for the Computer-Aid ed Three-Dimensional Interactive Application
("CATIA") design and manufacturing tools, which Boeing is now making use of in designing and

4078 Dominik Wacht, An Analysis of Selected NASA Research Programs and Their Impact on Boeing's
Civil Aircraft Programs, November 2006, Exhibit EC-15, pp. 142, 145.
4079 Dominik Wacht, An Analysis of Selected NASA Research Programs and Their Impact on Boeing's
Civil Aircraft Programs, November 2006, Exhibit EC-15, pp. 85-87.
4080 Dominik Wacht, An Analysis of Selected NASA Research Programs and Their Impact on Boeing's
Civil Aircraft Programs, November 2006, Exhibit EC-15, p. 112.
4081 Dominik Wacht, An Analysis of Selected NASA Research Programs and Their Impact on Boeing's
Civil Aircraft Programs, November 2006, Exhibit EC-15, p. 145.
4082 European Communities' first written submission, Annex C, para. 99.
4083 Statement by Patrick Gavin, Tim Sommer, Burkhard Domke, and Dominik Wacht,
4084 European Communities' first written submission, Annex C, para. 90.

BCI deleted, as indicated [***]

building the 787". 4085 The European Communities also alleg es that the 787 team is using the same
CATIA-based digital design approach as Boeing used in designing the JSF demonstrator.4086

59. In response to the United States' argument th at the CATIA software was developed by, and is
commercially available from, the French compan y Dassault, the European Communities argues that
Boeing gained "tacit and explicit know ledge" regarding "which design tool should be used in which
way, by whom, and at which step of the design process".
4087 The European Communities argues that
under certain DOD RDT&E programmes (JSF and F-22), Boeing gained experience regarding how to
use the CATIA software and how to integrate it into the design process, which Boeing then applied to
the 787 design and assembly process.

60. The European Communities ar gues that NASA funding and support under the IWD project of
the AST Program provided Boeing with the ability and confidence to integrate the aerodynamic,
structural and systems design aspects of the design of a wing in order to reduce design cycle time and
cost, while at the same time improving the wing's aerodynamics and structural design.
4088 T h e
European Communities also argues that (i) the hydraulically actuated drooped spoilers on the 787 are
"precisely the same concept that Boeing used on the C-17, a programme for which Boeing received
billions of dollars in dual-use funding from DOD"; (ii) the "slimmer wings" used on the 787 arise out
of NASA and DOD composites R&D programmes; and (iii) the simplified trailing edge for the 787's
wings is the result of a combination of improved CFD tools and the integrated design techniques
developed under the IWD project.
4089

(b) United States

61. The United States argues that the cornerstone of the efficiency gains achieved under the 787
programme is Boeing's extensive use of digital da ta which was achieved in partnership with the
French supplier, Dassault.
4090

62. The United States argues that the CFD cod es enhanced under the NASA programmes "are not
the same codes that Boeing uses in its product design process".
4091 Rather, the NASA codes are
generic CFD codes that are publicly available. The United States argues that Boeing was required to
enhance the generic codes so that they would "fit its own product design processes".
4092 Moreover,
the United States asserts that the versions of TR ANAIR that Boeing developed with NASA funds are
publicly available, and that it has been possibl e to commercially license the TRANAIR code since
2004.4093 According to the United States, OVERFLO W was developed by NASA alone, is widely
used by both NASA and industry and can be commercially licensed. The United States also denies
that OVERFLOW was developed or enhanced under any contract between Boeing and NASA.

4085 European Communities' first written submission Annex C, para. 90.
4086 European Communities' first written submission, Annex C, para. 90.
4087 Statement by Patrick Gavin, Tim Sommer, Burkhard Domke, and Dominik Wacht,
8 November 2007, Exhibit EC-1175 (BCI), paras. 39-40.
4088 European Communities' first written submission, Annex C, para. 92; Dominik Wacht, An Analysis
of Selected NASA Research Programs and Their Impact on Boeing's Civil Aircraft Programs, November 2006,
Exhibit EC15, pp. 94-98.
4089 European Communities' first written submission, Annex C, paras. 96-98.
4091 United States' non-confidential oral statement at the second meeting with the Panel, para. 22.
4092 United States' non-confidential oral statement at the second meeting with the Panel, para. 22.
4093 United States' comments on the European Communities' response to question 87, para. 327; US
Department of Defense Website, DOD 101, An Introducto ry Overview of the Department of Defense, "What
We Do", Exhibit EC-1234, p. 4.

BCI deleted, as indicated [***]

63. The United States denies that the R&D work that Boeing performed under NASA's HSR
Program and the IWD element of the AST Program is linked to the technologies developed for the
787. According to the United States, the HSR Pr ogram was aimed at developing concepts for a
supersonic passenger aircraft, and the results of su ch research have no appli cability to the challenges
of designing the 787, which is a subsonic aircraft that flies under very different conditions, and
accordingly, is designed with a different fundament al structure to the high speed civil transport
aircraft studied under the HSR Program. 4094 In relation to the use of CFD codes as part of the IWD
element of the AST Program, the United States acknowledges that one CFD code used under the IWD
contract demonstrated a slight improvement in design time, and was disseminated to industry, but
contends that Boeing subsequently invested its ow n funds outside of the contract to achieve an
additional significant time reduction relative to the time reduction achieved under the IWD
contract.4095 Moreover, the United States argues that the reduction in design cycle time related to the
code does not affect the overall 787 development cy cle because it is not in the critical path sequence
of work that determines the total development cycle time for the aircraft.4096

64. The United States agrees with the European Communities that the computer-aided design and
manufacturing tools used on the 787 are fundamental to the improvements in the design process for
the 787.4097 However, the United States contends that these tools are a commercially available suite
of technologies, the Product Lifecycle Management Tools (including CATIA, DELMIA, ENOVIA
and SMARTEAM), which are purchased from Dassau lt, and that Airbus France has purchased and
implemented the same technology from Dassault.
4098

65. The United States agrees with the European Communities as to the importance of integration
skills, and specifically, the proposition that it is the ability to define and manage the complex
interaction of design processes, organization and tools so as to enable the development and
manufacture of an aircraft at minimum time and cost that is one of the core competencies of an
aircraft manufacturer.
4099 However, the United States disputes the contention that Boeing performs
better as an integrator of commercial technologies and products because of its experience as an
integrator on military projects; it asserts that such a contention is at odds with the views of most DOD
analysts who consider that DOD should learn more from commercial enterprises, rather than vice-
versa.
4100 The United States argues that in any case, Boeing's integration knowledge develops from its
role as a prime contractor on most of its DOD systems production contracts, and from NASA
contracts with Boeing related to the space shuttle , both of which are outside the scope of the
aeronautics R&D programmes challenged in this dispute.4101

66. The United States acknowledges that the fundamental structural design of a large commercial
aircraft, notably its aerodynamic shape, is the primary responsibility of Boeing, notwithstanding that
Boeing conducts much of the work on the 787 in conjunction with suppliers . However, the United
States denies that the aerodynamic design of the 787 wing is the result of government funding.
4102
According to the United States, Boeing aerodynami cists review the same NASA-sponsored research
as the rest of the world, but the most significant learning is the knowledge developed within the

4094 Affidavit of Douglas Ball, Exhibit US-1257, paras. 4, 7.
4099 United States' second written submission, pa ra. 203, referring to European Communities'
confidential oral statement at the first meeting of the Panel, para. 14.
4100 United States' second written submission, para. 204; Louis Rodriguez, Defense Acquisition:
Improved Program Outcomes are Possible, Exhibit US-1151, p. 3.
4101 United States' second written submission, para. 205.

BCI deleted, as indicated [***]

company from over 80 years of commercial aircraft designing.4103 Moreover, the United States argues
that the IWD project explored initial wing design optimization on generic wing configurations, with
little applicability to the specific 787 wing platform or airfoil development.4104

67. In response to the European Communities' ar guments concerning the similarities between the
high-lift system on the 787 and the C-17, including al l of the elements required to power, actuate and
monitor the flap and slat system, the United States argues that the connection is that the systems for
both aircraft are designed and supplied by the supp lier Smiths/GE, a supplier that also provides the
high lift system for the Airbus A330, A340 and A380.
4105

5. Noise reduction technologies

(a) European Communities

68. The European Communities argues that th e knowledge, experience, and confidence Boeing
gained from US Government-supported R&D, prim arily through NASA's AST, QAT and Vehicle
Systems programmes, accelerated Boeing's deve lopment of noise reduction technologies used on the
787.
4106 The European Communities argues that und er the NASA R&D programmes, Boeing and
McDonnell Douglas conducted research with respect to noise reduction technologies that are very
similar to the noise reduction technologies on the 787. 4107 The noise reduction technologies in
question include the following technologies, each of which the European Communities argues derives
at least in part from NASA funding and support: (i) low weight structures, (ii) improved airplane
performance, (iii) chevrons, (iv) joint-less acoustic treatment, (v) quiet flaps and slats, and (vi) low-
noise landing gear. 4108 In addition, the European Comm unities argues that industry and NASA
collaborated on two Quiet Technology Demonstrator (QTD) programmes to test the noise reduction
technologies developed under the AST, QAT, and Vehicle Systems programmes. 4109 According to the
European Communities, there is no questio n that these NASA-supported and QTD-tested
technologies have benefited Boeing's development of the 787. 4110 The European Communities argues
that, but for , the aeronautics R&D subsidies, Boeing w ould not be able to build such an
environmentally-friendly 787 aircraft and customers would not be as willing to buy it.4111

69. The European Communities argues that Boeing has been able to develop and apply the noise
reduction technologies on the 787 when it did because of the knowledge, experience, and confidence
that it gained through participating in NASA's AST, QAT, and Vehicle Systems programmes. The
European Communities contends that under th ese programmes, pursuant to a number of NASA
contracts, Boeing and McDonnell Douglas conducted r esearch with respect to such noise reduction
technologies as scarfed inlets, chevron nozzles, swept and lean stators, adva nced liner treatments,
quiet high-lift systems, and quiet landing gear, all of which it alleges are very similar to the noise
reduction technologies on the 787.
4112

70. The European Communities also argues that Boeing's development of noise reduction
technologies for the 787 has benefited from the te sting of noise reduction technologies developed

4105 United States' first written submission, para. 941; Bair Affidavit, Exhibit US-7, para. 68.
4106 European Communities' first written submission, Annex C, para. 100.
4107 European Communities' first written submission, Annex C, para. 102.
4108 European Communities' first written submission, Annex C, para. 101.
4109 "Boeing, Rolls-Royce Work On A Quieter Future For Commercial Aviation," Boeing News
Release, 20 November 2001, Exhibit EC-387.
4110 European Communities' first written submission, Annex C, para. 104.
4111 European Communities' first written submission, Annex C, para. 100.
4112 European Communities' first written submission, Annex C, para. 102.

BCI deleted, as indicated [***]

under the AST, QAT and Vehicle Systems progra mmes that occurred pursuant to the two QTD
programmes that were undertaken as a collaborativ e effort between NASA and industry, including
Boeing. The European Communities asserts th at, under the initial QTD Program, with NASA
sponsorship, Boeing tested technologies such as chevrons and acoustic inlet liners, 4113 while under the
QTD2 Program, which NASA funded in part thr ough the QAT portion of its Vehicle Systems
Program,4114 Boeing tested additional technologies such as covered landing gears, redesigned
chevrons including shape-memory alloys, and a new acoustic inlet liner for the front of the engine
nacelles.4115

71. Finally, the European Communities argues th at NASA's work in other technological areas
have also had spill-over effects for noise reduction on the 787. First, the composite fuselage, which
the European Communities alleges was develope d with US Government assistance, provides
increased sound attenuation when compared to comparable aluminium structures.
4116 Second, the CFD
codes and integrated design concepts, which th e European Communities al leges were used and
enhanced through the aeronautics R&D subsidies, not only helped Boeing to enhance the
aerodynamics and structural design of the 787, but also to reduce its noise.4117

(b) United States

72. The United States argues that the noise reduction technologies used on the 787 are largely the
product of supplier technology, and as such, are available to Airbus.
4118 According to the United
States: (i) the engine nacelle chevrons that will da mpen engine noise are supplied by GE (as are the
improved engines), and were actually first flight test ed on an Airbus A321 aircraft; (ii) the joint-less
inlet liners were developed and supplied by Goodrich, which is also an Airbus supplier; and (iii) the
landing gear was developed and is being supplied by Messier-Dowty, a French company.4119

73. Moreover, the United States argues that the Quiet Technology Demonstrator project was an
industry-led effort involving, among others, Boeing, GE and Goodrich. The United States asserts that
Boeing has contributed its privately-funded noise datab ase as well as its acoustic array facility for the
testing and that the other participants have desi gned, built and installed their various technologies on
an aircraft on loan from an airline for which it was destined, which was then flight-tested in order to
generate full-scale data on these in-development technologies. 4120 Of the two tests that have occurred
to date, the United States asserts that, while NASA participated in QTD1 in order to gain access to the
generated data for use in the validation of its noise prediction codes, it contributed very little
money.4121 The United States contends that in QTD2, NASA "bought its way into the effort" in order

4113 "Boeing, Rolls-Royce Work On A Quieter Future For Commercial Aviation," Boeing News
Release, 20 November 2001, Exhibit EC-387.
4114 Results of NASA Aircraft Noise Research, Exhibit EC-390.
4115 Boeing Flight Test Journal, Future Looks Quiet, 20 September 2005, Exhibit EC-393; James
Wallace, Boeing makes 'quiet' advances, Seattle-Post In telligencer, 11 August 2005, Exhibit EC-389; James
Wallace, Shhhh! Noise tests for planes in progress, Seattle Post-Intelligencer, 30 November 2005, Exhibit EC-
394; Tad Calkins and Walter Polt, "Not so loud," Boeing Frontiers Online, March 2006, Exhibit EC-392; Jia Yu
et al., Quiet Technology Demonstrator 2 Intake Liner Design Validation, AIAA 2006-2458, 8-10 May 2006,
Exhibit EC-848; William H. Herkes, The Quiet Technology Demonstrator Program: Flight Validation of
Airplane Noise-Reduction Concepts, AIAA 2006-2720, 8-10 May 2006, Exhibit EC-849.
4116 John Gillie, An inch saved might mean an order earned for Boeing, The News Tribune (Tacoma,
WA), 18 November 2005, Exhibit EC-338.
4117 European Communities' first written submission, Annex C, para. 107.
4118 United States' first written submission, para. 941.

BCI deleted, as indicated [***]

to test certain technologies it had developed in partnership with supplier companies, including
"toboggan" landing gear fairings developed with Goodrich.4122

6. Health management systems

(a) European Communities

74. The European Communities argues that th e aeronautics R&D subsidies created, and
accelerated the development and application of the health management systems, allowing Boeing to
better monitor the health of different parts on the 787, lower maintenance costs on the 787, and
provide improved maintenance service.
4123 In this respect, the Eur opean Communities refers to
Boeing's "GoldCare" service, a comprehensive life- cycle management service through which Boeing
offers fleet maintenance management and parts support, as well as services for the repair and overhaul
of components. 4124 The European Communities argues that Bo eing is able to provide GoldCare, in
part, because of the integrated vehicle health manage ment system of the 787 that was enabled by the
aeronautics R&D subsidies.

75. The European Communities ar gues that Boeing gained knowledge and experience regarding
health management technologies, as well as confid ence in the application thereof, through its
participation in U.S. government-supported aeronautics R&D programmes, and that this has enabled it
to implement these technologies on the 787 so quickly.
4125 First, the European Communities argues
that Boeing conducted research on health mana gement technologies under the NASA R&T Base and
Aviation Safety programmes. 4126 The European Communities has submitted various contracts that
NASA awarded to Boeing to explore health management technologies. 4127 Second, the European
Communities argues that Boeing developed health management technologies pursuant to a number of
its DOD RDT&E contracts. The European Communities argues that research into health management
and sensor technology conducte d under a number of DOD RDT&E programmes has likely benefited
the health management system on Boeing's 787. The European Communiti es refers to research
conducted under the Aerospace Flight Dynamics/Vehicle Systems Program, the Aerospace
Avionics/Sensors Program and the DUS&T Program. The European Communities argues that under
these programmes, McDonnell Douglas and Boeing studied, developed, and patented technologies
related to aircraft health monitoring and that Boeing developed techniques that improve damage
assessment of advanced composite structures.
4128

76. Finally, the European Communities argues that Boeing gained knowledge and experience
with respect to advanced NDI techniques under a number of DOD RDT&E programmes, including
the Materials, Advanced Materials for Weapons Systems Program, and the Aging Aircraft Program.
The European Communities argues that working un der these R&D programmes, Boeing gained the
confidence to apply advanced NDI techniques for th e health management of the 787. Further, the

4123 European Communities first written submission, para. 1350. European Communities' first written
submission, Annex C, paras. 110 - 121.
4124 GoldCare – The 787 Revolution Now Revolutionizes Service, Boeing Website, Exhibit EC-852;
"Ready for the upturn," Flight International, 10 January 2003, Exhibit EC-853. Boeing Presentation #20, Exhibit
EC-854 (BCI), p. 1.
4125 European Communities' first written submission, Annex C, para.114.
4126 NASA Aviation Safety Budget Estimates, FY 2000, Exhibit EC-382, SAT 4.1-51.
4127 NASA Contract NAS1-00106 with The Boeing Company regarding Flight Critical Systems
Research, 2000, Exhibit EC-858, Section C.1, Article 2.3; NASA Contract NAS1-99070 with Boeing
Commercial Airplane Group regarding Structures an d Materials Technology for Aerospace Vehicles,
25 January 1999, Exhibit EC-800, p. 4; and US Patent No. 6,920,790, Exhibit EC-579.
4128 European Communities' first written submission, Annex C, para.116 and European Communities'
second written submission, para. 423; CRA RDT&E Report, Exhibit EC-7, Appendix A, pp. 15, 21-24.

BCI deleted, as indicated [***]

European Communities argues that the sensors and other specific health management technologies
researched pursuant to DOD-supported military aircraft R&D facilitate the use of NDI on the 787.4129

(b) United States

77. The United States argues that the 787 health management systems derive primarily from
Boeing's own proprietary 777 technology, devel oped 15 years earlier and supplied by Honeywell.
4130
In addition, Boeing engineer Michael Bair expl ains that the on-board health management/crew
information system on the 787 is a "plug-in" element of the "more electric" architecture.4131

78. Bair argues that the "Aircraft Health Monitori ng services" that Boeing offers for the 787 is the
same basic service that Boeing offers for all models of its aircraft. He alleges that the service was first
developed in 1991/1992, and has been in producti on on both the 777 and 747 airplanes since 2004.
According to Bair, the 787's health management sy stem is more extensive simply because the "more
electric architecture" allows for monitoring of more system components. Bair asserts that Boeing has
not deployed Structural Health Monitoring capability on the 787 and that structural inspections for the
787 will be accomplished using normal visual inspection methods. According to Bair, the
maintenance benefits that the 787 offers to airline customers are simply the result of meeting design
requirements and validating these design requirements through a comprehensive testing program. 4132
Finally, Bair argues that the virtual "Crack Clos ure Technique" is commercially available through a
company formerly known as ABACUS, now called Si mulia, which is part of Dassault Systemes. 4133
He notes, in addition, that Boeing has no contract s under the Integrated Vehicle Health Management
Program and that data generated from that project have, however, been made widely available, as was
the data generated by the Flight Critical Systems Research Program.4134

4129 European Communities' first written submission, Annex C, paras. 117-120.
4130 United States' first written submission, paras. 937 and 941; Bair Affidavit; Exhibit US-7, paras. 71-
74.

BCI deleted, as indicated [***]

Appendix VII.F.2: The Cabral Model
A. OVERVIEW

1. The purpose of this Appendix is to explai n an economic model presented by the European
Communities as part of its serious prejudice case and to evaluate key assumptions on which the model
is based. The model is constructed by Professor Luís Cabral of the Stern School of Business at New
York University.
4135 Professor Cabral states that his report seeks to address the question of how the
provision of subsidies affects the business decisions of Boeing; specifically, how the receipt of an
additional dollar of a particular category of subsidy affects the amount that Boeing chooses to invest
in the development of new aircraft, and to price more aggressively.
4136 The category of subsidies the
focus of Professor Cabral's analysis is what he calls "development subsidies". These are subsidies in
which the amount of subsidy does not vary in direct proportion to the number of aircraft produced or
sold.4137

2. Professor Cabral's analysis is based on a specific economic model of Boeing's behaviour;
namely, that when Boeing receives so-called "development subsidies", management seeks to
maximize a trade-off between shareholder income and shareholder value, with the result that it directs
a certain portion of the subsidy towards dividends , and the remainder towa rds "investments that
increase firm value."
4138 His conclusions about the types of activities that constitute "investments in
firm value" are based on particular assumptions a bout the LCA markets; particularly the nature of
LCA production and importance of learning curve e fficiencies and switching costs, and the role
played by product quality. As discussed further in Section B below, Professor Cabral's model of
Boeing's investment behaviour is based on the underl ying premise that Boeing's access to capital is
constrained, and thus that Boeing's investment behavi our is sensitive to changes in its cash flow (e.g.
the receipt of subsidies).

3. Professor Cabral's analysis is not a unifie d model of Boeing's pricing and investment
behaviour, but rather, two separate models. This is not immediately obvious from the way that the
analysis has been presented in this dispute, a lthough it becomes clear once the Annexes to Professor
Cabral's Report are examined in greater detail. Although we refer to the "Cabral model" in this
Appendix, we describe the two models that comprise Professor Cabral's analysis separately. For ease
of discussion, we refer to the two models that c onstitute Professor Cabral's analysis as the "Objective
Function Model" and the "Price Competition Model".

4. The main purpose of the Objective Function Model is to obtain an estimate of the share of
each additional dollar of subsidies that Boeing woul d devote to payments to shareholders, on the one
hand, and to "investment" (in the form of "aggressi ve pricing of new LCA and mature LCA to new
customers, and additional R&D), on the other. Prof essor Cabral concludes that the allocation would
be 15 cents : 85 cents.

4135 Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, CEPR and New York
University, March 2007, Exhibit EC-4.
4136 Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and
4137 Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and
CEPR, March 2007, Exhibit EC-4, paras. 2-3. It appear s that the category of subsid ies that Professor Cabral
refers to as "development subsidies" encompasses the same subsidies that the Euro pean Communities analyses
as operating to increase Boeing's non-operating cash flows (as distinguished from the subsidies that the
European Communities characterizes as reducing Boeing's marginal unit costs of production and sale of LCA).
4138 Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and

BCI deleted, as indicated [***]

5. The main purpose of the Price Competition Model is to determine Boeing's division of the
85 cents in every additional dollar of subsidies th at it devotes to "investment" between the following
three uses: (i) aggressive pricing of new models of LCA implied by learning curve efficiencies; (ii)
aggressive pricing of mature aircraft through th e phenomenon of buyer switching costs; and (iii)
additional investments in R&D. Professor Cabral finds that, from 85 cents in the dollar that Boeing
would "invest": 12 cents goes to aggressive pricing of new models due to the learning curve effect; 47
cents goes to aggressive pricing due to switching cost s; and 26 cents goes to additional R&D. Due to
the time profile of R&D investments (which Pr ofessor Cabral sees as representing future price
reductions where price is considered the "effective price on a per-value unit basis"), the 26 cents in
R&D investments result in a cumulated net present value of 40 cents when the time period 2007 to
2022 is taken into account.

6. Based on the above estimates, and on other calcu lations that are described in greater detail
below, Professor Cabral calculates that the total of $19.1 billion in subsidies allegedly received by
Boeing between 1989 and 2006 translates into the follo wing "price effects", or price reductions per
model of Boeing aircraft in 2004 – 2006:
 4139

Aircraft
model
Per-aircraft "price effect"
($ thousands)
Ad valorem price effect (%)
 2004 2005 2006 2004 2005 2006
737 Family 1,009 879 949 2.59 2.47 2.64
747 Family 2,834 2,597 2,986 2.10 1.90 1.95
767 Family 1,443 1,248 1,354 1.78 1.70 1.81
787 Family 1,539 1,332 1,445 1.75 1.67 1.77
777 Family 2,324 2,010 2,169 1.72 1.62 1.72

B. THE OBJECTIVE FUNCTION MODEL

1. Structure and Mechanics of the Objective Function Model

7. The first model presented in the Cabral Repor t consists of Boeing's objective function. The
main purpose of this model is to obtain an estimate of the share of each additional dollar of subsidies
that would be devoted to total "investment" in ag gressive pricing (in relation to both learning curve
and switching cost effects) and in R&D. This value is found to be 85 cents.

4139 Extracted from the Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New
York University and CEPR, March 2007, Exhibit EC-4, para. 89, Table 7. The term "price effects" generally
refers to the extent to which Boeing has been able to lower its LCA prices as a result of the subsidies. For
example, see European Communities' first written subm ission, para 1306 where the European Communities
submits that the subsidies that directly reduce the ma rginal unit costs of Boeing LCA "have a price effect
commensurate with their amount… {e}ach of these subsidy dollars has the e ffect of reducing the price of a
Boeing LCA by exactly $1" However, the European Communities also uses this term in a narrower sense, to
refer to Professor Cabral's quantifica tion of the extent to which subsidy dollars enable Boeing to directly and
immediately "aggressively price" its LCA, based on his particular theory that equates all subsidies that are not
tied to the production of additional units of LCA as fungible with cash (i.e. equivalent to additional non-
operating cash to Boeing), and assumptions about the optimal investment strategy of a company like Boeing
given the particularities of the LCA market (learning curv e, switching costs etc.). For example, see European
Communities' first written submission, para. 1332 and figures 22 and 23 (which are the same as the "price
effects" calculations made by Professor Cabral in EC-4, Tables 7 and 8).

BCI deleted, as indicated [***]

8. Boeing maximizes its "utility" by choosing the optimal combination of dividend payments
and investments in future value of the firm (whi ch are the only two uses of funds permitted in the
model). The maximization problem is constrained by the condition that dividends plus investment
together cannot exceed cash flow from development subsidies and other sources of funds. Boeing's
objective function is of the Cobb-Douglas type, where the parameter α specifies the relative "weight"
that Boeing's shareholders attach to dividends, so that (1- α) is the weight attached to investments in
future firm value.4140 From the first-order condition for a maximum, Professor Cabral obtains α as an
increasing function of (i) Boeing's internal rate of return on investment; and (ii) the ratio between
dividends and firm value; two observable variabl es for which data can be obtained. The objective
function is consistent with the assumption that incr eases in Boeing's cash flow will lead it to increase
its level of investment. Professor Cabral notes that his framework depends on the assumption that
Boeing's access to capital is constrained. If Boeing had unconstrained access to capital, then
according to the Modigliani-Miller theorem, it could be assumed to always be investing at optimal
levels. In this scenario, an increase in government subsidies would be entirely reflected in higher
dividends, and would have no effect on Boeing's investment levels.4141

9. Having determined the respective weights of dividends and investment in Boeing's objective
function, Professor Cabral subjects Boeing's utility maximization problem to the "cash flow
constraint" that is partly determined by the amount of subsidies received. From this, he is able to
calculate the marginal increase in investment for a given marginal increase in "development
subsidies" (β) which is approximately 85 per cent.

10. Professor Cabral's calibration of the model parameters is as follows:

• To estimate the value of α (the relative weight that Boeing shareholders attach to dividends)
Professor Cabral uses (i) data on Boeing's ratio of payments to shareholders, compared with
firm value and (ii) an estimate of the internal rate of return on investment for Boeing.
Professor Cabral calculates that ratio of payments to shareholders : firm value on the basis of
Boeing's publicly reported annual payments to shar eholders and its market capitalization. On
the basis of publicly-available data, Professor Cabral calculates that Boeing distributed
$14.74 billion to shareholders between 2000 and 2 006 (in the form of dividend payments and
repurchases of stock), which represents an averag e of $2.1 billion per year. In addition,
Professor Cabral calculates that the average market capitalization of Boeing (i.e. Boeing's
share price multiplied by the number of outst anding shares) between 2000 and 2006 was
$43.59 billion. From these numbers, Professor Ca bral calculates that Boeing's "dividend to
value ratio" was 4.8 per cent.
4142 Professor Cabral estimates that Boeing's internal rate of
return on investment is 10 per cent, which is not a figure derived from Boeing data, but rather,
is a mid-range figure from a 1988 study estima ting rates of return on R&D capital in the

4140 Professor Cabral says that the virtue of the Cobb-Douglas functional form is that it embodies the
concept of decreasing marginal returns. In other wo rds, it embodies the phenomenon that the additional degree
of shareholder satisfaction from dividend payments will decrease as dividend payments increase, and similarly,
the additional degree of shareholder satisfaction from increases in firm value decreases as the level of firm value
increases. Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and
CEPR, March 2007, Exhibit EC-4, paras. 17-18.
4141 Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and
CEPR, March 2007, Exhibit EC-4, para. 22. The Modigl iani-Miller theorem is a neo-classical model of firm
investment behaviour in which firms make investments to the point that their return on investment equals the
market rate. Their optimal investment level is independent of the way in which the investment is financed (e.g.
through subsidies, borrowings, cash flow from operations etc.).
4142 Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and

BCI deleted, as indicated [***]

transportation equipment industry.4143 From these figures, Professor Cabral calculates that the
value that Boeing's shareholders attach to dividends ( α) is approximately 5 per cent and
therefore, that they attach a weight of 95 per cent to future increases in firm value.
• To estimate the impact of subsidies on investment ( β), Professor Cabral needs data on actual
investment spending by Boeing in relation to dividends, and on the response to the marginal
rate of return on investment to the investment level. For the former, Professor Cabral uses
Boeing data on actual dividend payments and share repurchases from 2000 - 2006
($2.1 billion) and arrives at his own estimate of Boeing's actual "investments" on the basis of
Boeing data on R&D expenditures between 2000 and 2006 ($1.073 b illion average annual
R&D expenditures) plus his own derivations of investments in "aggressive pricing of new and
mature LCA" which he obtains from the Price Competition Model ($483 million and $1.936
billion, respectively, discussed in the followi ng section of this Appendix). From these
figures, he calculates that Boeing's ratio of dividends to investment is: $2.1 billion : $3.492
billion, or approximately 0.60.
4144 Professor Cabral obtains his estimate for the value of the
elasticity of the marginal rate of return on investment to the investment level from a 2000
study of the elasticity of marginal return to i nvestment of a portfolio of patents. Professor
Cabral also refers to "evidence from other manufacturing industries" which he claims
suggests that the greater the amount of resour ces devoted to R&D, the lower the marginal
returns to investment.4145 From this information, Professor Cabral selects a value of -0.2.
11. On the basis of the foregoing, Professor Cabral arrives at the estimate that 85 cents of each
additional dollar of subsidies is spent on three t ypes of "investment". He estimates the precise
allocation of the 85 cents of each additional subs idy dollar across these three forms of investment
using the Price Competition Model which is described in Section C of this Appendix.

2. U.S. Criticisms and Professor Cabral's responses

12. The United States criticizes Professor Cabral 's reasoning on the following general grounds: (i)
Professor Cabral's reliance on what the United Stat es considers to be the European Communities'
"grossly overstated" calculation of the magnitude of the subsidies; (ii) the structure of Professor
Cabral's model, in that it does not accurately reflect business decision-making by a company like
Boeing; (iii) the key theoretical assumption on whic h it is predicated (i.e. that Boeing's investment
decisions depend on its cash flow) which the United States considers to be invalid in the light of
Boeing's unconstrained access to capital markets; and (iv) assumptions of fact which the United States
alleges find no support in empirical evidence (e .g. that Boeing's sales in 2004 – 2006 involved
significant switching costs or that its production during 2004 – 2006 involved significant learning
curve gains, and that Boeing's only discretiona ry use of non-operating cash is payments to
shareholders or "investment" in "aggressive pricing").
4146

13. The United States argues that the flawed assumptions underlying Professor Cabral's model
dictate the results that he purports to demonstrate; namely, that the untied subsidies cause Boeing to

4143 Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and
CEPR, March 2007, Exhibit EC-4, para. 41. The rate of 10 per cent appears relatively high. Professor Cabral
claims that this is a plausible value for the marginal rate of return, althou gh average rates of return are usually
much lower due to high fixed costs; Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing,
New York University and CEPR, March 2007, Exhibit EC-4, para. 42.
4144 Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and
4145 Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and
CEPR, March 2007, Exhibit EC-4, paras. 46-47.
4146 United States' response to question 90, para. 224.

BCI deleted, as indicated [***]

lower its LCA prices. 4147 The United States argues, therefore, that Professor Cabral's analysis can
provide no support for the European Communities' at tempt to establish a genuine and substantial link
between the alleged subsidies and the alleged serious prejudice. These alleged flawed assumptions, as
well as more technical criticisms of the calibrations of certain of the parameter values, are discussed
in greater detail by the U.S. economic consulta nts, Professor Bruce Greenwald of the Columbia
Business School and Drs. James Jordan and Gary Dorman of NERA Economic Consulting.

14. As part of the European Communities ' Second Written Submission, Professor Cabral
submitted an additional report in response to the U.S. criticisms of his analysis.
4148 In this Report,
Professor Cabral addresses criticisms of his model. Professor Cabral concludes that the United States
and its consultants are unjustified in their criticisms of his report, and that none of those criticisms
undermine the validity of the methodology that he employed, or its conclusion that the subsidies
Boeing received led Boeing to lower its LCA prices.
4149 The U.S. criticisms and Professor Cabral's
responses to those criticisms are summarized in greater detail below.

(a) Assumption that Boeing's access to capital is constrained

15. Professor Greenwald's central criticism of Pr ofessor Cabral's model is its assumption that
Boeing's access to capital is constrained. He argu es that, having assumed this fundamental premise,
against the weight of the evidence, Professor Ca bral then embeds his conclusions in other
"assumptions". Professor Greenwald says that, while markets may be imperfect and firms may make
less than optimal decisions, "as long as firms have largely unconstrained access to capital, non-
specific subsidies which amount to fixed transfers – the kind of subsidy at issue in the Cabral Report –
will not affect firm investment decisions."
4150 According to Professor Greenwald, funds that flow
from transfers (i.e. subsidies) will simply substitu te for funds that flow from other sources (e.g.
borrowing) and investment decisions will remain unaffected. 4151 Professor Greenwald argues that a
company like Boeing, which has relatively little de bt and which regularly repurchases large amounts
of its stock, is obviously not subject to the sort of investment constraints that are the foundation of
Professor Cabral's model.
4152 NERA makes a similar criticism, stating that the assertion that increases
in a firm's internal cash flow lead to higher levels of firm investment is not clearly supported in the
research literature. 4153 NERA argues, moreover, that Professor Cabral does not empirically show
whether subsidies are correlated with increases in investment for Boeing.

16. Professor Cabral responds with several reasons why, in his view, the U.S. arguments that
Boeing's investment decisions do not depend on variati ons in its cash flow are implausible. First, he
argues that, to the extent that Boeing is not financ ially constrained, this is itself a result of the
subsidies.4154 Second, he argues that the balance betw een dividends and investments that increase

4147 United States' comments on the European Communities' response to question 383, paras. 354-355.
4148 Luís M. B. Cabral, Response to the U.S. Cr iticisms of my Analysis of "The impacts of
Development Subsidies Granted to Boeing", 14 November 2007, Exhibit EC-1182.
4149 Luís M. B. Cabral, Response to the U.S. Criticisms of my Analysis of The impacts of Development
Subsidies Granted to Boeing", 14 November 2007, Exhibit EC-1182, para. 60.
4150 Greenwald Paper, Exhibit US-8, pp. 1-2.
4151 Greenwald Paper, Exhibit US-8, p. 2.
4152 Professor Greenwald also disagrees with Professo r Cabral as to the interpretation of the economic
literature on the question whether firms' investment d ecisions are sensitive to changes in their cash flow.
Professor Greenwald asserts that the empirical literature generally concludes that, while many firms are
constrained in their access to capital, a nd do adjust their investment levels in response to current cash flows,
firms like Boeing (with low debt levels and high dividend/share repurchase levels) are not; Greenwald Paper,
Exhibit US-8, p. 2.
4153 Jordan and Dorman Report, Exhibit US-3, p. 5.
4154 Professor Cabral considers what Boeing's debt-to-equity ratios would have been had it financed an
amount equivalent to the amount of subsidies over 1989 – 2006 through increases in debt and foregoing share

BCI deleted, as indicated [***]

firm value depends not just on whether a firm faces financial constraints, but also on market
imperfections (e.g. information asymmetries between firms and financial markets have a significant
impact on a firm's behaviour).4155 According to Professor Cabral, given such additional factors, a firm
will find it optimal to balance its various objectives with the constraints imposed on it by various
sources of funds. Moreover, Professor Cabral argues th at the fact that Boeing is able to borrow funds
does not imply that Boeing is "financially unconstr ained" in the sense understood by the Modigliani-
Miller theorem. According to Professor Cabral, th e costs associated with different sources of funds
and the market signals associated with such choices, may lead a firm to choose sources or uses for its
capital that would not otherwise represent the cheapest source or optimal use. 4156 Professor Cabral
concludes therefore that, in terms of its investment behaviour, "the firm effectively behaves according
to a function of the sort I considered in my model." 4157 Third, he argues that, consistent with this
reasoning, statements by Boeing executives and empirical data contradict the U.S. theory.4158

17. Professor Cabral contends that, if Boeing had not invested any of its subsidies, but had instead
distributed them to shareholders through divide nds and repurchases, one woul d expect a substantial
correlation between the historical levels of subs idies, on the one hand, and dividends and share
repurchases, on the other. Moreover, Professor Ca bral argues that one would expect to find no
significant correlation between dividends and shar e repurchases (which would vary with the amount
of subsidies) and the level of firm value that resu lts from investments (which would not vary with the
amount of subsidies).
4159 Professor Cabral asserts that, contrary to what would be expected if the U.S.
arguments were true, there is no statistically significant correlation between subsidies and dividends
plus share repurchases, while there is a clear correlation between firm value and dividends plus share
repurchases. According to Professor Cabral, these trends fit closely with his model, and suggest that
Boeing does optimally trade-off the benefits of curr ently distributed cash, future investments and the
costs of obtaining funds.4160

(b) Assumption that Boeing maximizes a Cobb-Douglas function.

18. Professor Greenwald argues that it is not appropriate to assume that Boeing maximizes a
Cobb-Douglas function of dividends and investment re lated to market value. He explains that, for
example, a consumer who maximizes a Cobb-Dougl as objective function over consumption levels of
goods spends a constant fixed proportion of his in come on each type of good, regardless of the

repurchases. He concludes that Boeing could not have sustained such debt, and that it therefore could not have
made the investments that were financed by the subsidies; Luís M. B. Cabral, Response to the U.S. Criticisms of
my Analysis of The impacts of Development Subsidies Granted to Boeing", 14 November 2007, Exhibit EC-
1182, paras. 6-8.
4155 Professor Cabral argues that, contrary to the assumptions underlying the Modigliani-Miller
theorem, because of asymmetries of in formation (e.g. firms having better k nowledge that investors of the risks
and potential returns from investments), as well as taxation, and the possibility of financial distress, various
sources of funds are not equivalent; Luís M. B. Cabral, Response to the U.S. Criticisms of my Analysis of The
impacts of Development Subsidies Granted to Boeing", 14 November 2007, Exhibit EC-1182, para. 11.
4156 Luís M. B. Cabral, Response to the U.S. Criticisms of my Analysis of The impacts of Development
Subsidies Granted to Boeing", 14 November 2007, Exhibit EC-1182, para. 13.
4157 Luís M. B. Cabral, Response to the U.S. Criticisms of my Analysis of The impacts of Development
Subsidies Granted to Boeing", 14 November 2007, Exhibit EC-1182, para. 5.
4158 Cabral points to various statements of Boeing executives which he considers to indicate that,
consistent with the objective function in the Cabral m odel, Boeing management balances direct value (i.e.
dividends and share repurchases) and indirect value (investments in the firm), and that Boeing management is
sensitive to cash flow.
4159 Luís M. B. Cabral, Response to the U.S. Criticisms of my Analysis of The impacts of Development
Subsidies Granted to Boeing", 14 November 2007, Exhibit EC-1182, para. 18.
4160 Luís M. B. Cabral, Response to the U.S. Criticisms of my Analysis of The impacts of Development
Subsidies Granted to Boeing", 14 November 2007, Exhibit EC-1182, paras. 19-20. Moreover, Professor Cabral
argues that his model appropriately captures this trade-off through a reduced-form objective function.

BCI deleted, as indicated [***]

relative prices of the goods, or the consumer's leve l of income. Therefore, if the price of one good
doubles, the consumer would not increase the propor tion of his income allocated to that good, but
rather, would halve his consumption of that good. Professor Greenwald says that this particular,
widely known property of the Cobb-Douglas u tility function makes it highly unsuitable as a
description of how a firm like Boeing would make its investment decisions in reality. Moreover,
Boeing's actual behaviour strongly argues agains t the assumption that subsidies are always
proportionately divided between dividends and investments.4161

19. Professor Cabral agrees with Professor Greenwa ld that the Cobb-Douglas functional form has
had limited success in modeling demand curves, how ever, he states that he does not use the Cobb-
Douglas functional form to model the trade-off face d by Boeing in its choice of dividends versus
investment. According to Professor Cabral, the Cobb-Douglas functional form provides a useful and
accurate approximation of the way Boeing actually bala nces investments that increase firm value and
current returns to its shareholders (without meani ng to imply that Boeing expressly uses such a model
to make its investment decisions), a fact which is confirmed by the relative stability of Boeing's ratio
of dividends to firm value.
4162

20. Professor Cabral argues that the value of the ra tio of dividends and investments to firm value
that he calculated as part of his model is in any case quite close to the value one would obtain from
estimating the value of the same ratio on the basi s of 2000-2006 historical data, showing that the
functional form that he chose was appropriate. He also argues that he performed extensive sensitivity
analyses as part of his original report, in order to ensure that his results did not depend critically on
the value of key parameters, and found that they do not.
4163

(c) Static model that places unrealistic restri ctions on Boeing's sources and uses of cash

21. According to NERA, while Professor Cabral's Objective Function Model is based on a line of
research that asks how a firm manages its sources and uses of cash in order to maximize the value of
its equity, it departs from the approach of the models in that literature "by placing unrealistic
restrictions on the sources and uses of cash", with such restrictions driving the results of the model.
4164
NERA notes that the model allows (i) only tw o uses of Boeing's cash; namely, dividends and
investment, (ii) only three forms of investment; namely, R&D pric e reductions, learning curve price
reductions and switching cost pr ice reductions, and does not consider other uses of cash (e.g.
repayment of debt, acquisitions, contributions to th e corporate pension fund, payments for operating
expenses and interest). Moreover, NERA argues th at Professor Cabral's model does not incorporate
the effect of other sources of cash (e.g. Boeing's profits, changes in net working capital, cash from
asset sales, access to external financing, the i ssuance of stock). According to NERA, these
restrictions essentially ensure the result that wh enever Boeing receives a subsidy, it increases its
investment spending.4165

22. NERA also claims that investment models in the literature are multi-period and dynamic, in
which firms continually respond to current and e xpected economic and firm-specific conditions by
adjusting sources and uses of cash in order to maximize equity value.
4166 NERA argues that, by

4161 Greenwald Paper, Exhibit US-8, p. 3.
4162 Luís M. B. Cabral, Response to the U.S. Criticisms of my Analysis of The impacts of Development
Subsidies Granted to Boeing", 14 November 2007, Exhibit EC-1182, paras. 22-30.
4163 Luís M. B. Cabral, Response to the U.S. Criticisms of my Analysis of The impacts of Development
Subsidies Granted to Boeing", 14 November 2007, Exhibit EC-1182, para. 26.
4164 Jordan and Dorman Report, Exhibit US-3, p. 4.
4165 Jordan and Dorman Report, Exhibit US-3, p. 4.
4166 NERA provides some examples of the types of financial constraints that are considered in the
literature and built into the models, or used in empirical testing. NERA argues that the Cabral model contains

BCI deleted, as indicated [***]

contrast, Professor Cabral's model is static – pr oducing the "completely unrealistic" result that Boeing
makes the same decision about the use of its subs idy cash every year from 1989 to 2006 (i.e. that it
invests 85 per cent of each subsidy dollar), regardle ss of the business cycle and other factors affecting
its sources and uses of funds. 4167 NERA considers that, although the Cabral model is specified as a
maximization problem in which firm equity is maxi mized, it is an unrealistically restricted problem,
because in the model, Boeing gets to make onl y one decision; the allocation of cash between
dividends and investment. According to NERA, th e Cabral model, "by assumption rather than by a
well-specified theory backed up by empirical an alysis" imposes a dividend/investment trade-off on
Boeing in which Boeing does not have enough money to carry out a desired investment
programme.
4168

23. Professor Cabral's response to criticisms that his model unrealistically concludes that Boeing
allocates a constant proportion of subsidy (85 per cent) to investments every year, regardless of
general economic conditions or the business cycle, is to note that his calculations are of "average
impact", and that, although they may be too high or two low in particular years, "on average they are
about right and represent a reasonable approximation of reality."
4169 To demonstrate, Professor
Cabral notes that if he divides 2000 – 2006 in to two sub-periods, the differences in resulting
parameter values are minimal (instead of 85 per cent of the subsidy going to investment, he calculates
that 87 per cent goes to investment in 2000 – 2003 and 83 per cent in 2004 – 2006). He notes that in
these two sub-periods, economic conditions for the LCA industry were sharply different.
4170

(d) Assumption that in-kind subsidies and dir ect subsidies are functionally equivalent.

24. Professor Greenwald disputes Professor Cabral's assertion that the value of in-kind (i.e. non-
cash) subsidies can be measured by the cost that Bo eing would have to incur to achieve the effective
value provided by the in-kind subsidies. Accord ing to Professor Greenwald, the problem with this
assertion is that it assumes that the cost of achieving the same effective value as the in-kind subsidies
can be defined independently of other variables (e.g. Boeing's financial condition, level of cash
subsidies, prices of labor and other inputs, output levels), when in general, it cannot.
4171 Professor
Cabral responds that, on the contrary, NASA is more likely better able to do what it does than Boeing,
and that his assumption therefore effectively under estimates the effect of the in-kind subsidies
provided by NASA.4172

(e) Assumption that Boeing's preference for dividend s is comparable with its total market value.

25. Aside from the use of a Cobb-Douglas functi on, Professor Greenwald also faults Professor
Cabral's use of dividends (which are annual flows of funds) with total market value of the company (a
stock, the value of which is fixed at any moment in time) in the same function.
4173 Professor
Greenwald alleges that, as a result, Professor Cabral is able to assert that, because annual dividends
are a small fraction of the company' market value, Boeing will devote a comparably small fraction of

none of this rich literature which allows the models in the literature to capture the degree of financial constraint
of a firm, nor is it based on an empirical analysis to determine whether Boeing should be modeled as though it is
materially financially constrained; Jordan and Dorman Report, Exhibit US-3, p.9
4167 Jordan and Dorman Report, Exhibit US-3, p. 5.
4168 Jordan and Dorman Report, Exhibit US-3, p. 8.
4169 Luís M. B. Cabral, Response to the U.S. Criticisms of my Analysis of The impacts of Development
Subsidies Granted to Boeing", 14 November 2007, Exhibit EC-1882, para. 43.
4170 Luís M. B. Cabral, Response to the U.S. Criticisms of my Analysis of The impacts of Development
Subsidies Granted to Boeing", 14 November 2007, Exhibit EC-1182, para. 44.
4171 Greenwald Paper, Exhibit US-8, p. 5.
4172 Luís M. B. Cabral, Response to the U.S. Criticisms of my Analysis of The impacts of Development
Subsidies Granted to Boeing", 14 November 2007, Exhibit EC-1182, para. 33.
4173 Greenwald Paper, Exhibit US-8, p. 3.

BCI deleted, as indicated [***]

any additional cash flow to dividends. Professor Gr eenwald says that Professor Cabral should have
either had Boeing maximize a function of dividends and changes in market value, or a function of a
net present value of dividends and the market value of the firm. 4174 In response to this criticism,
Professor Cabral acknowledges the importance of maki ng the distinction between stocks vs. flows,
but demonstrates that a re-writing of his analysis us ing the flow equivalent of firm value along with
dividends (or vice-versa) does not change the results.4175

(f) Criticisms of Professor Cabral's estimation of values of certain parameters

26. NERA also criticizes Professor Cabral's estimati on of the values of certain parameters. For
example, NERA considers that the parameters that Professor Cabral estimates to measure the relative
importance of dividends versus other investment opportunities to shareholders (i.e. the parameters that
are key to yielding the result that Boeing would allocate 15 cents of each additional dollar to
dividends and 85 cents to investments) are either (i ) counter-intuitive, in that they imply that, as the
rate of return of a potential investment increases, Boeing will invest less and return more to
shareholders; (ii) not based on Boeing empirical da ta; or (iii) not found in the general literature
regarding firm investment behaviour and a ppear to be unique to the Cabral model.
4176 Moreover,
NERA argues that Professor Cabral's estimate th at Boeing would devote 85 cents of each dollar of
subsidy to additional investment seems extraordinar ily high for a company like Boeing, which has all
the hallmarks of a financially unconstrained firm (e.g. large corporation with access to global capital
markets, a diverse set of individual and instituti onal shareholders, and wid espread coverage by bond
rating firms and stock analysts).4177 NERA argues that there are no signs that Boeing had a shortfall of
cash during the period of Professor Cabral's analysis; on the contrary, Boeing's financial data indicates
that, even if the alleged cash subsidies were taken away, Boeing still gene rated more than enough
cash to fund its investment programme.4178

27. This leads to NERA's next criticism of Cabral's model, which is that Professor Cabral fails to
empirically test its validity, both as a model for predic ting the investment behaviour of firms, and also
as a model of how Boeing would invest any subsidies. According to NERA, Professor Cabral's model
is particularly in need of empirical testing because of (i) its basic structure, which is unlike other
economic models of firm investme nt behaviour; and (ii) its dubi ous implications, including that
shareholders would prefer higher dividends wh en a firm's expected return on investments increases
and that a firm like Boeing is so financially cons trained that it would increase investment spending by
85 per cent of any subsidy.4179

28. Professor Cabral responds by noting the actual st ability of this ratio in Boeing data between
1989 and 2006 and regressing firm value on dividends, obtaining a coefficient that is close to his
model estimate. Finally, with respect to the Un ited States' observation that his model would imply
higher dividend payments in face of investment opportunities offering higher returns, Professor
Cabral explains the difference between model calib ration, to which the relationship implied by the
United States should be applied, and comparative st atics that show the response of a model to an
exogenous change on its equilibrium values. Professor Cabral explains that the above relationship

4174 Greenwald Paper, Exhibit US-8, p. 4.
4175 Luís M. B. Cabral, Response to the U.S. Cr iticisms of My Analysis of 'The Impacts of
Development Subsidies Granted to Boeing', 14 November 2007, Exhibit EC-1182, paras. 21-30. Professor
Cabral argues that with current firm value being equivalent to a corresponding perpetual annuity, it can be
shown that the objective function used would only change by a multiplicative constant that does not affect the
outcomes of the model.
4176 Jordan and Dorman Report, Exhibit US-3, pp. 10-11.
4177 Jordan and Dorman Report, Exhibit US-3, p. 11.
4178 Jordan and Dorman Report, Exhibit US-3, p. 11.
4179 Jordan and Dorman Report, Exhibit US-3, p. 12.

BCI deleted, as indicated [***]

between dividends and the marginal rate of return to investment is the result of a "reverse
engineering" process involved in model calibration th at seeks to derive model parameters that are
consistent with historical data. In other words, a high marginal rate of return on investment implies a
high weight placed by the firms on dividends, or else the firm would have invested up to a higher
level, resulting in a lower marginal return on investment. Conversely, Professor Cabral shows that the
comparative static outcome from a positive profitab ility shock is a higher investment level, not a
higher level of dividends, featuring as a multiplicative factor in his model.
4180

29. Professor Cabral dismisses as inappropriate NERA 's criticism that he failed to empirically test
his model using real world data. Professor Cabral explains that he addresses the absence of certain
Boeing data by including a sensitivity analysis, whic h determines how variations in the estimates of
certain data would affect his ultimate calculations of price effects resulting from his model. Professor
Cabral notes his conclusion from that analysis was that even if there were significant changes in the
relevant parameters, this would not substantially alter the model's results.
4181

C. THE PRICE COMPETITION MODEL

1. Structure and mechanics of the Price Competition Model

30. As previously mentioned, the main purpose of this second model is to determine Boeing's
division of subsidies between the three types of in vestment: (i) "aggressive pricing" due to learning
curve efficiencies; (ii) "aggressive pricing" due to buyer switching costs; and (iii) R&D
expenditures.4182

31. Professor Cabral chooses a standard Hotelli ng model of price competition in a duopoly
market as his basic framework. The essential features of the Hotelling model are that competition
between the two competitors is on the basis of price (rather than quantities) and that the products are
differentiated. The more differentiated the produc ts, the less likely it is that producers will compete
the prices down to average cost (the competitive outcome of the Bertrand model of price
competition). While Professor Cabral uses the basic Hotelling framework, he introduces an additional
variable that denotes product qua lity or "value" (z). One important feature of Professor Cabral's
model is that increases in product quality lead to increases in nominal prices, but decreases in quality-
adjusted prices. In other words, when a firm increases its product quality, Professor Cabral assumes
that it will raise its price by less than the inhere nt value of the rise in product quality. Professor
Cabral does not explain why or how this rather mechanical outcome of his definition of "quality-
adjusted price" is necessarily cons istent with the optimal behaviour of a firm. In addition, Professor
Cabral uses a fixed 2:3 relationship between prices and cost reductions, based on the simplest set up
of the Hotelling model.

32. Professor Cabral considers that Boeing enga ges in essentially three types of "investment":
interpreting the concept of "investment" as a "curre nt expenditure that increases future profits".
4183
The first two types relate to "aggressive pricing" of new and mature models of aircraft. The third is

4180 Luís M. B. Cabral, Response to the U.S. Criticisms of my Analysis of The impacts of Development
Subsidies Granted to Boeing", 14 November 2007, Exhibit EC-1182, paras. 34-41.
4181 Luís M. B. Cabral, Response to the U.S. Criticisms of my Analysis of The impacts of Development
Subsidies Granted to Boeing", 14 November 2007, Exhibit EC-1182, para. 58.
4182 As noted in the discussion of the Objective Function Model, the values of the first two are plugged
into the parameters for the Objective Function Model to arrive at the conclusion of the Objective Function
Model that 85 cents of every additional subsidy dollar will be applied to investments to increase firm value.
4183 Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and

BCI deleted, as indicated [***]

development (and pre-development) expenditures to create new aircraft or increase the value of
aircraft that it is in the process of developing, which are discussed further in (c) below.

(a) "Aggressive pricing" of new aircraft implied by learning curve efficiencies

33. According to Professor Cabral, aggressive pricing of new models of aircraft (i.e. aircraft at
early stages of production) leads to higher sales in the current year and, through the dynamics of the
learning curve, leads to lower production costs in future years.
4184 The "learning curve" refers to the
negative correlation between cumulative output and unit cost: the more aircraft of a given type
produced by a firm, the less it costs to produce the next unit of that aircraft.4185

34. Professor Cabral sets out to estimate the dolla r value of Boeing's investment in aggressive
pricing while moving down the learning curve. He considers that the learning curve is defined by
three elements: (i) the cost of the first unit of pro duction; (ii) the steepness of the learning curve; and
(iii) the number of units after which learning ceases. Professor Cabral notes that previous research on
aircraft manufacturing suggests that the learning cu rves are very steep, thus creating an incentive for
LCA producers to price aggressively to generate more sales and move more rapidly down the learning
curve in order to reduce per-unit production costs. His calculations are based on the assumption that
the learning curve is particularly steep over the first 100 units of any LCA model and that Boeing
strategically prices as though its costs for these aircraft produced at the steep part of the learning curve
were the costs for aircraft produced at the botto m of the learning curve (i.e. approximately the 200
th
unit).4186

35. Since the learning curve portrays cost as a function of learning by increasing output, Professor
Cabral links this "cost function" to pricing using a formula defining the "break-even" level of output
(which he estimates at 300 units, based on reports of the break-even points for the A380, A350 and
787).
4187 Using, among other parameter estimates, data on Boeing average annual aircraft sales and
development expenditures between 2000 and 2006, he then calculates the remaining unknown
parameter; i.e. the cost of the first unit. He is then able to calculate th e highest possible cost of
production to Boeing, when it does not take into acc ount the effect of learning curve efficiencies, and
the lowest possible cost of production, when the learning curve is flat.4188

36. Professor Cabral estimates that for an "ave rage Boeing aircraft" during the production stage
of the first 100 units, the learning curve implies pricing that is $9.53 million lower per plane. 4189 This
estimate is based on an "average" Boeing aircraft (i.e. number of seats, price and number of annual
deliveries) which he calculates from data on Boeing's aircraft deliveries and estimated market prices

4184 Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and
4185 Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and
4186 Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and
4187 Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and
4188 The difference between these two figures would exaggerate the average loss if learning curve
effects were ignored, because produc ers would still produce more than one unit, price each unit according to
cost and move down the learning curve. Therefore, Pr ofessor Cabral assumes that Boeing would price its
aircraft somewhere in the middle of the learning curve, as an average up to a point where the cost reductions
become less steep (this he assumes to be at 100 units, w ithout offering a justification for this assumption); Luís
M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and CEPR,
March 2007, Exhibit EC-4, para. 60.
4189 Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and

BCI deleted, as indicated [***]

(based on a discount of 45.75 per cent from published list prices) for the various models of Boeing
aircraft.4190 Professor Cabral also estimates that 13.5 per cent of aircraft sold by Boeing are "new" in
the sense that Boeing is still moving down the steep portion of the learning curve. 4191 In other words:
13.5 per cent of 378 average annual deliveries of planes involved $9.53 million of learning curve-
related cost reductions. Professor Cabral therefor e concludes that Boeing's annual "investment" in
"aggressive pricing" due to the learning curve is $483 million.4192

(b) "Aggressive pricing" implied by buyer switching costs

37. Professor Cabral considers that the "investme nt" nature of increasing current sales through
aggressive pricing is also present for mature aircraft through the phenomenon of buyer switching
costs. Switching costs refer to the costs that buyers who operate one particular family of aircraft must
incur to switch to a new supplier (such costs stem from pilot training, aircraft maintenance etc.).
Professor Cabral states that, to the extent that a bu yer will be in the market for the same family of
planes in the future, having previously bought fro m one supplier increases th e chances that the same
supplier will be chosen the next time around. For th is reason, Professor Cabral claims that it makes
strategic sense for Boeing to aggressively price its mature LCA models to new customers.
4193

38. Professor Cabral estimates the dollar amount of subsidies targeted at new buyers of Boeing
aircraft who may become repeat buyers in the fu ture. He does this by interpreting the Hotelling
demand function as a "probability of making a repeat sale", and solving this function with respect to
switching costs (expressing other variables in terms of a demand elasticity and likelihood of
switching, taking values for these parameters from other LCA studies and his own estimates,
respectively).
 4194 Professor Cabral therefore estimates in percentage terms how much higher prices
would be if switching costs were not taken into account by Boeing. He calculates that switching costs
induce price discounting of 25 per cent on current sales when Boeing sells to new customers, in order
to lock in those new customers who would then face switching costs if they were to order from Airbus
in future. Since pricing to take account of switching costs applies to new buyers, he also estimates the
average share of Boeing's annual sales that are to airlines that have not previously bought from
Boeing an aircraft of the same family and generation . Based on Boeing 2000 – 2006 data, that
percentage is 37.4 per cent.
4195 Cabral therefore concludes that 37.4 per cent of 378 annual aircraft
deliveries involved discounts of 25 per cent from the average market price of $54.7 million. This
corresponds to an average annual "investment" in "aggressive pricing" through switching costs of
$1.936 billion.4196

4190 Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and
CEPR, March 2007, Exhibit EC-4, para. 52. The result is that Professor Cabral's "average Boeing aircraft" has a
seating capacity of 190, a market price of $54.7 million and 378 annual deliveries.
4191 Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and
4192 Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and
4193 Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and
CEPR, March 2007, Exhibit EC-4. Professor Cabral considers that the strategic benefit from subsidizing sales
of mature aircraft is also true, "if to a lesser extent" for ongoing buyers (i.e. existing customers).
4194 Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and
CEPR, March 2007, Exhibit EC-4, para. 65. Profesor Cabral says that his estimate that there is 25 per cent
probability of switching sellers is consistent with the observation of demand patterns for wide-body aircraft.
4195 Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and
4196 Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and

BCI deleted, as indicated [***]

(c) R&D expenditures can be considered equivale nt to future price reductions where price is
considered the "effective price on a per-value unit" basis

39. Professor Cabral considers that, where subsid ies are applied to investments in aggressive
pricing of new planes (learning curve), or of mature aircraft to new customers (switching costs), their
impact is "immediate".
4197 However, the impact of a portion of each subsidy dollar is that is applied
to investments in R&D is "only felt in terms of future pricing." 4198 He reasons that greater investments
in R&D will lead to a higher quality aircraft, a nd thus, to a "greater buyer willingness to pay". 4199
According to Professor Cabral, if nominal LCA prices were to remain constant, this would mean that
the "effective price on a per value unit basis" would be lower. In other words, higher R&D
expenditures lead to higher nominal prices, but lower prices on a per value unit basis. 4200 Professor
Cabral concludes that for a given unit of "aircraf t value", Boeing is thus able to charge a lower
"price".4201 On the basis of Boeing data for the years 2000 – 2006, he determines average annual
spending on R&D to be $1.073 billion.4202 As noted above, the price impact of annual R&D spending
is felt in terms of pricing over the whole lifetime of an aircraft design. The total price impact of R&D
subsidies in a given year then depends on the R&D subsidies provided in this and previous years.4203

2. U.S. Criticisms and Professor Cabral's responses

(a) Professor Cabral's theory of how Boeing woul d behave is at odds with empirical evidence
regarding Boeing's actual pricing strategies between 2000 and 2006

40. The United States argues that the implications of Professor Cabral's theory about how Boeing
would have operated in the LCA mark ets are not borne out by the events that actually occurred in the
markets. The United States submits that, over the 2000 - 2006 period, Boeing's share of the global
LCA market measured by volume of deliveries dropped from 61 to 47 per cent, indicating that, far
from pricing "aggressively", Boeing was being systematically under priced by Airbus, which gained
the market share that Boeing lost.
4204

41. According to the United States, Boeing in fact resisted pressure to reduce its prices in
response to Airbus' price undercutting until 2004, when it could no longer sustain the consequent
market share losses. The United States argues that Boeing resisted the pressure to reduce its prices for
so long because of the significant long-term costs entailed in price reductions, which tend to condition
the market for lower prices. In this regard, th e United States makes a further criticism of Professor
Cabral's analysis; namely, that Professor Cabral assumes that "aggressive pricing" increases firm
value, without accounting for the negative consequences to the value of the business.
4205

4197 Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and
4198 Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and
4199 Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and
4200 Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and
4201 Cabral also considers that the per value unit price (or "corrected price") is the relevant determinant
of market demand, a conclusion he attempts to demonstrate formally.
4202 Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and
CEPR, March 2007, Exhibit EC-4, para. 45, Table 2.
4203 Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and
CEPR, March 2007, Exhibit EC-4, para. 85, Table 5.
4204 United States' first written submission, para. 858.
4205 United States' first written submission, para. 859. The United States argues that a robust analysis of
a firm's propensity to invest its cash in "aggressive pricing" instead of distributing it to shareholders would have

BCI deleted, as indicated [***]

42. In response to these criticisms, the European Communities argues that the Cabral model does
not analyze the absolute levels of deliveries or market shares held by Boeing and Airbus, but the
marginal pricing effects on order pricing of additi onal subsidies to Boeing. The European
Communities says that the question whether or not the marginal pricing effects on order pricing lead
to Boeing actually gaining or losing market share at any point in time is not answered by the model,
and is not relevant to assessing the model's accuracy.4206

(b) Nature of pricing incentives related to "learning curve efficiencies"

43. The United States agrees with Professor Cabral that significant learning curve efficiencies
occur over production of the first one hundred or so units of a new aircraft.
4207 However, the
United States argues that Professor Cabral is wr ong to assert that an LCA producer will lower its
prices in a campaign-specific context to achieve learning curve gains. According to the United States,
learning curve efficiencies are factored into a producer's projected costs at the time the launch
decision is made .4208 At this time, the producer projects pric ing targets for the new aircraft that, over
its projected life, must exceed the producer's fu lly-loaded average production costs by an amount
sufficient to justify the investment. 4209 According to the United States, these pricing projections
account for concessions that are routinely grante d to launch customers before the volume of
production is sufficient to generate learning curve efficiencies. The United States argues that, because
the learning curve is factored into the pricing targ ets at the time the programme is launched, there is
no expectation of subsequent, campaign-specific learning curve adjustments to price.4210

44. The United States also considers that Professo r Cabral is wrong to assert that learning curve
efficiencies apply to the production of the first 100 units of each (or any) subsequent variants of a
new model.
4211 The United States argues that, of the 2,640 Boeing LCA deliveries between 2000 and
2006 that form the basis for Professor Cabral's analysis, none involved significant learning curve
gains; i.e. the production of each major model delivered between 2000 a nd 2006 had exceeded 100
before the year 2000. 4212 The United States argues that, between 2000 and 2006, Boeing's learning
curve investment in the pricing of these sales was in fact "zero", or "close to zero", not $438 million
per annum, as calculated by Professor Cabral.4213

45. NERA also argues that, although there is no di spute that there are "substantial" learning curve
effects associated with the manufacture of LCA, they have no direct effect on LCA pricing. 4214
NERA agrees that LCA manufacturers price initial un its of LCA as though they were already at the
bottom of the learning curve, however, NERA argues th at this is a feature of the nature of production
and competition in the industry, and would occur whether or not an LCA manufacturer had received

to factor into the analysis the costs of aggressive pricing in terms of profit margin reductions and the impact of a
reduction in profit margins on the market value of the firm.
4206 European Communities' second written submission, para. 781.
4207 The United States notes that it has "serious reserv ations" about Cabral's conclusion that learning
curve efficiencies only occur over the first 100 units produced, but assumes arguendo for purposes of this
discussion, that the assumption is not incorrect; United States' first written submission, para. 848, footnote 1043.
4208 United States' first written submission, para. 848.
4209 United States' first written submission, para. 848.
4210 United States' first written submission, para. 848. The United States refers to a statement of Clay
Richmond, Vice President of Revenue Management at Boeing Commercial Airplanes, who states that, "{w}hile
included in Boeing's program cost projections, learning curve efficiencies are not separately factored into
pricing in individual sales campaigns", Statement of Clay Richmond, Exhibit US-275, para. 3.
4211 United States' first written submission, para. 847.
4212 United States' first written submission, para. 853.
4213 United States' first written submission, para. 853.
4214 Jordan and Dorman Report, Exhibit US-3, p. 13.

BCI deleted, as indicated [***]

subsidies.4215 According to NERA, Professor Cabral's an alysis implicitly assumes that, in the absence
of the subsidies, Boeing would not have priced as though it were at the bottom of the learning curve,
and that, if Boeing had received a lower amount of s ubsidies, it would have raised its LCA prices to
initial customers.4216 NERA identifies this as a fundamental flaw in Professor Cabral's analysis.

46. NERA also criticizes Professor Cabral's quantif ication of the learning curve price reductions
in that it is based on there being steep learni ng curve effects for the first 100 units of every version of
each Boeing LCA model built between 1989 – 2006 (e .g. the Boeing 737-600, 737-700, 737-800 and
737-900 were each assumed to experience steep lear ning curve effects during the production of the
first 100 units of each version). 4217 NERA considers that this does not reflect the reality of the LCA
business. For example, NERA notes that, given that all four current versions of the 737 are assembled
in the same factory, and share a common wing, fuselag e, cockpit and most other components, there is
no reason to expect that each of the four vers ions of each LCA model benefits separately from
learning curve effects that are particularly steep during the first 100 units.4218

47. The European Communities responds to these cr iticisms in the following manner. First, in
relation to the criticism that learning curve effects are factored into the pricing targets at the time of
launch of an LCA programme, and not in the contex t of campaign-specific adjustments to price, the
European Communities notes that the Boeing ex pert on whom the United States relies for its
statement that learning curve efficiencies are not separ ately factored into pricing individual sales, but
rather, are included in Boeing's programme cost pr ojections, far from contradicting Professor Cabral's
reasoning, confirms that Boeing has an incentive to (and does) offer additional launch concessions for
the initial aircraft sold under a programme. 4219 According to the European Communities, the level of
interest that Boeing has in convincing the market that demand is significant and thereby moving down
the learning curve is impacted by the subsidy fu nds that it has available to justify accepting lower
margins on particular sales.4220

48. Second, the European Communities rejects the U.S. criticism that learning curve efficiencies
do not also apply to the first 100 units of subsequent variants of LCA models. The European
Communities submits that "available evidence" dem onstrates that learning curve effects benefit the
entire production life of an aircraft, and that add itional learning curve effects apply to new models
within an aircraft family. On this basis, th e European Communities argues that Professor Cabral's
estimate of the percentage of Boeing aircraft th at benefited from learning curve effects during the
2000 to 2006 period is therefore reasonable. 4221

4215 NERA argues that the intense competition betw een Airbus and Boeing to launch successful new
models means that they must price on a forward-looking basis; they ca nnot hope to succeed by charging higher
prices to launch customers to reflect the higher costs of producing those initial airplanes; Jordan and Dorman
Report, Exhibit US-3, p. 15.
4216 Jordan and Dorman Report, Exhibit US-3, p. 15.
4217 Jordan and Dorman Report, Exhibit US-3, p. 15.
4218 Jordan and Dorman Report, Exhibit US-3, p. 15.
4219 European Communities' second written submission, para. 771. The European Communities
identifies the Boeing expert as James Hayes, Boeing's Director for 787 Pricing, but the Boeing expert is Clay
Richmond (see United States' first written submission, paras. 847-848).
4220 European Communities' second written submission, para. 771.
4221 European Communities' second written submission, para. 772. The European Communities argues
that, in any event, Professor Cabral's sensitivity analysis demonstrated that even where the share of aircraft
benefiting from learning curve effects was significantly lower than the model parameter, the overall impact to
his conclusions was negligible.

BCI deleted, as indicated [***]

(c) Estimation of the degree to which prices are affected by buyer switching costs

49. The United States acknowledges that, unlike the impact of learning curve efficiencies, the
phenomenon of switching costs does arise in the sales campaign-specific context. However, the
United States argues that Professor Cabral mistak enly ascribes switching costs to sales in which
switching costs did not arise; thereby greatly exaggerating the frequency with which Boeing considers
a price concession for switching cost reasons. Ac cording to the United States, switching costs occur
when an airline decides to buy a new supplier' s current generation aircraft, instead of buying
additional current generation aircraft from the incu mbent supplier. The United States says that, in
contrast, price concessions relating to switching cost s do not factor in sales of (i) a new type of LCA
(e.g. the 787); (ii) a new generation of a type of aircraft that an airline already operates (e.g. the
purchase of a 737-800 by an airline that operates 737-300s); or (iii) a new variant of a type of aircraft
that an airline already operates (e.g. the purch ase of a 737-800 by an airline that operates 737-
700s).
4222

50. The United States argues that Professor Cabr al mistakenly assigns switching costs to all
purchases by airlines that have not bought aircraft of the same generation and family before, and
therefore estimates that 37.4 per cent of Boeing's sales are to new customers of that particular aircraft
family.4223 According to the United States, an analysis of the 2,644 deliveries made by Boeing during
2000 – 2006 shows that no more than 120 (i.e. only 4. 5 per cent) involved the type of switching costs
that could have led Boeing to make switching cost price concessions.4224

51. In addition, the United States argues that Prof essor Cabral's understanding of the nature of the
pricing incentives related to switching costs is at odds with the realities of the LCA industry. 4225
According to the United States, Professor Cabral c onceives of the price incentives related to future
switching costs as being based on a link between the probability of future switching and current price
discounts. The United States argues that, in reality, the question whether a current buyer switches
suppliers in the future will depend more than anythi ng on whether, at that future time, the challenging
supplier offers a discount large enough to offset the customer's switching cost. The challenging
supplier's ability to offer such a discount in the fu ture is not affected by historical data on the
probability of switching across suppliers. Therefore, according to the United States, a supplier has no
incentive to offer current discounts based on the hist orical probability data that Professor Cabral
uses.4226

52. NERA agrees with Professor Cabral that there can be switching costs associated with
purchasing LCA, whether for replacement or fleet gr owth. However, NERA says that the magnitude
of these costs will vary widely depending on the ex isting fleet of the airline and the new airplane
alternatives under consideration.
4227

4222 United States' first written submission, para. 855; referring to the Statem ent of Clay Richmond,
para. 6, Exhibit US-275.
4223 United States' first written submission, para. 854.
4224 United States' first written submission, paras. 851, 85,; referring to the Statement of Clay
Richmond, para. 8, Exhibit US-275; United States ' comments on the European Communities' response to
question 95, para. 244. In addition, the United States argues that, where Boeing was the incumbent, the
evidence shows that it resisted price concessions, and as a result, lost major sales campaigns to Airbus on price,
despite the costs that those airlines incurred in switching to Airbus.
4225 United States' comments on the European Communities' response to question 95, para. 243.
4226 United States' comments on the European Communities' response to question 95, para. 243.
4227 Jordan and Dorman Report, Exhibit US-3, pp. 15-16. The authors note, for example, that there is
typically substantial commonality across versions of a model that are of the same generation (e.g. Boeing 737
family, or the Airbus A320 family) and there can also be commonality across models, such as between the A330
and A340.

BCI deleted, as indicated [***]

53. Moreover, NERA considers that Professor Cabral's formula for estimating that switching
costs induce price discounting of 25 per cent when selling to new buyers is overly simplistic, not
based on data relating to any actual Boeing price concessions offered to any customer in a sales
campaign, and fails to take account of the comple xities of competition between Airbus and Boeing in
which each sales opportunity generates an individualized sales campaign targeted at the circumstances
of the particular customer.
4228 In this regard, NERA notes that during the 2004 – 2006 "reference
period", Boeing delivered 973 airplanes of which 37.4 per cent (i.e. 364 planes) would, based on
Professor Cabral's methodology, be assumed to involve switching cost price reductions. NERA
considers this to be an unrealistic assumption given that 366 deliveries were made to long-time
operators of Boeing airlines or to leasing companies, neither of which would have been affected by
switching costs.4229

54. NERA also argues that Professor Cabral's anal ysis necessarily implies that, in the absence of
the subsidies, Boeing would not have priced as it did in order to offset prospective buyers' switching
costs (and as a corollary, that had Boeing received one less dollar of subsidy, it would have raised its
prices to new customers). NERA considers that such an assumption ignores the intense competition
between Airbus and Boeing in their LCA campaigns to prospective customers.
4230

55. The European Communities mak es the following points in response to these criticisms. First,
the European Communities disagrees that no switching costs could arise when an airline orders a new
generation of a type of aircraft that an airline already operates. In th is regard, the European
Communities contends that customers have publicly affirmed that switching costs from moving to a
new generation of one producer's aircraft can be even greater than those of changing from one
producer to another.
4231 Second, the European Communitie s argues that the United States has
misrepresented the relevance of switching costs in Professor Cabral's model. According to the
United States, Professor Cabral's model focuses on Boei ng considering in its current pricing decisions
the possibility of future switching costs that would be incurred by an airline (i.e. as a justification for
Boeing to offer lower prices to a customer today). 4232 From this perspective, switching costs can be
relevant in sales of a new type of LCA, or ne w generations of existing LCA, because there is the
possibility of locking in the customer for future sales. In addition, the European Communities argues,
the related U.S. criticism that the share of Boeing sales that involved switching costs was dramatically
less than Professor Cabral's assumption (4.5 per cen t compared to 37.4 per cent) similarly misses the
point. In any case, the European Communities argu es that Professor Cabral's sensitivity analysis
shows that even if the share of aircraft sales aff ected by switching cost considerations were different
from his estimate, the impact on his overall result is negligible.4233

(d) R&D expenditures as future price reductions

56. NERA criticizes Professor Cabral's attemp t to convert Boeing's R&D expenditures on
commercial airplanes into price reductions. Ac cording to NERA, the essence of the intense
competition between Boeing and Airbus is to design and build better airplanes (improved versions of
existing models as well as new models). Yet, according to NERA, Professor Cabral's implicit

4228 Jordan and Dorman Report, Exhibit US-3, pp. 15-16.
4229 Jordan and Dorman Report, Exhibit US-3, p. 17, footnote 14.
4230 Jordan and Dorman Report, Exhibit US-3, p. 17.
4231 European Communities' second written submission, para. 775, footnote 1179. The
European Communities refers to an ar ticle in which the easyJet CEO said that easyJet faced higher switching
costs in adding Boeing 737-700 aircraft to its existing line of 737-300s than it would in adding Airbus A319
models to its fleet. Part of the switching costs involved in moving from one Boeing generation to the next was
the fact that 30 per cent of easyJet pilots were only certified to fly one or other of the 737 types; "Easy Does It"
Airline Business, 12 January 2002, Exhibit EC-1247.
4232 European Communities' second written submission, paras. 776-778.
4233 European Communities' second written submission, para. 778.

BCI deleted, as indicated [***]

assumption is that, in the absence of the subsidies, Boeing would not have made the same investments
in R&D.4234

57. NERA notes Professor Cabral's conclusions that, over the 1989 – 2006 period, subsidies to
Boeing have resulted in "R&D price reductions" by Boeing of $4.43 billion (plus an additional $2.41
billion for 2007 – 2022). NERA considers that this could only be true where either: (i) those R&D
expenditures would not have been productive investments for Boeing absent the subsidies, but Boeing
had no alternative productive investments, so it ma de them anyway; or (ii) such R&D expenditures
would have been productive investments for Boei ng absent the subsidies, but Boeing lacked the
necessary capital to make them, absent the subsidies.
4235 NERA argues that there is no logical or
empirical basis for either proposition.

(e) Choice of the Hotelling model of oligopoly beha viour as representative of the nature of price
competition between Airbus and Boeing

58. The United States argues that Professor Cabral's choice of a Hotelling model for his analysis
of duopoly pricing between Airbus and Boeing is ba dly flawed (although it stresses that the flawed
modeling assumption described above would invalidate Professor Cabral's results even if his choice of
a Hotelling model were correct).
4236 According to the United States, the most egregious flaw in the
choice of the Hotelling model for an analysis of pr ice competition between Airbus and Boeing is that
under the Hotelling/Bertrand models, each competitor makes a single, simultaneous price offer .
According to the United States, this is at odds with the nature of pricing in the LCA market, where
there is typically a vigorous sequence of competing price bids .4237 The United States argues that the
correct pricing model for the LCA market is wh at is known as a "repeated Bertrand competition".
The United States contends that the literature of re peated Bertrand pricing generally concludes that
any rational price outcome (from monopoly to competitive) is a possible equilibrium outcome of this
form of oligopoly competition and that the actual outcome in any concrete case will depend on factors
such as the competitive attitudes and cultures of the competitors. The United States notes that
Professor Cabral's "highly deterministic pricing model" is completely at odds with this conclusion.4238

59. Professor Greenwald also criticizes the assumptions made regarding the basic model of price
competition underlying Professor Cabral's conclusions. He argues that Professor Cabral's model
assumes that prices cannot be tailored to individual airlines, either because, in a sales campaign,
neither Boeing nor Airbus has knowledge of an airlin e's preferences when setting price, or because
they are somehow constrained to keep their prices the same for all airlines.
4239 Professor Greenwald
considers that this assumption bears no relationship to the reality of extended bidding by Airbus and
Boeing for individual orders, their respective know ledge of well-established airline preferences, or
"painstakingly negotiated" final sales contracts. Professor Greenwald argues that, in a market
characterized by individual bargaining with airlines with well-known preferences, the final price each
airline pays depends on whether its preference for one LCA manufacturer over the other makes it a
Boeing or Airbus buyer. Professor Greenwald also explains that a realistic model would need to
account for this reality and that such a model would have been simpler than Professor Cabral's model.

4234 Jordan and Dorman Report, Exhibit US-3, p. 18. The United States also independently makes this
argument. The United States contends that neither the European Communities nor Professor Cabral has proven
that the government fundi ng that Boeing received for R&D work that it carried out was for work that Boeing
would otherwise have carried out on its own, and in amounts that Boeing would otherwise have spent on its
own; United States' first written submission, para. 841.
4235 Jordan and Dorman Report, Exhibit US-3, p. 19.
4236 United States' comments on the European Communities' response to question 382, para. 342.
4237 United States' comments on the European Communities' response to question 382, para. 347.
4238 United States' comments on the European Communities' response to question 382, para. 348.
4239 Greenwald Paper, Exhibit US-8, p. 5.

BCI deleted, as indicated [***]

60. In response, Professor Cabral notes that his m odel considered the impact of subsidies on an
"average" buyer of Boeing and Airbus aircraft, rather than a model incorporating LCA pricing tailored
to specific customers. 4240 However, this latter type of m odel would have resulted in greater
mathematical complexity. Moreover, modeling one single buyer with an average preference therefore
provides a good approximation of the average price and of the average impact of subsidies on prices
as explicitly as modeling the entire distributions of buyer types.4241 Professor Cabral also observes that
the repeated Bertrand model of price competitio n suggested by the United States may not be
appropriate for the LCA market because there is no evidence of collusion between Airbus and Boeing
that would require that their interaction be modelled as a repeat game.
4242

D. EVALUATION OF THE CABRAL MODEL

1. Preliminary considerations regarding the Panel's evaluation of the Cabral model

61. The Cabral model is a particular type of empirical simulation model which is known as a
"calibrated model". Economists create calibrated models by assuming the existence of a relationship
between different variables; for example, the rela tionship between subsidies and prices. They also
make assumptions about the nature of that relations hip, which is reflected in the parameters of the
model. Calibration of the model involves choosing values for the parameters that ensure that the
model assumptions and the observed data are consistent. Calibrated models can be distinguished from
estimated econometric models which use statistical techniques (i.e. regression analysis) to test the
validity of the assumptions on which the model is based.

62. In evaluating the Cabral model in the c ontext of the European Communities' causation
arguments, it is important to note that, while the Cabral model may indicate that a causal link between
the subsidies and the "event" (in this case, the price of Boeing LCA) is logically possible, it does not
of itself indicate how plausible this logical possibility actually is. In other words, Professor Cabral's
model necessarily assumes (on the basis of the assumptions embedded in the model) that there is a
positive relationship between the receipt of the s ubsidies and the lower Boeing prices: It does not,
however, purport to test that proposition. Howeve r, if the Panel were to accept the assumptions
embedded in the model (including those made regardi ng the values of the different parameters), then
the Cabral model could assist in quantifying the impact of the subsidies on Boeing's prices.

2. The role of the Cabral model in the Eu ropean Communities' "price effects" arguments

63. In its first written submission, the Europ ean Communities introduces the Cabral Report by
saying that, in addition to ITR's calculations of th e "magnitudes" of the subsidies benefiting Boeing
aircraft, it relies on Professor Cabral's work to "d emonstrate that during 20 04-2006, the US subsidies
caused Boeing's 787, 737NG and 777 prices to be significantly lower."
4243 Later in that submission,
the European Communities says th at its causation argument; namely, that Boeing has a strong
incentive to use a portion of the additional non-operating cash flow from the $16.9 billion in untied

4240 Luís M. B. Cabral, Response to the U.S. Criticisms of my Analysis of The impacts of Development
Subsidies Granted to Boeing", 14 November 2007, Exhibit EC-1182, para. 54. Such a model would consider
the following factors: sellers' costs, the component of the buyer's preference that is known by the sellers, and the
component of the buyer's preference that is known only by the buyer.
4241 Luís M. B. Cabral, Response to the U.S. Criticisms of my Analysis of The impacts of Development
Subsidies Granted to Boeing", 14 November 2007, Exhibit EC-1182, paras. 54-55.
4242 Luís Cabral, Investment and Pricing Behaviour Model: Literature Review of Theories Dealing with
Strategic Interaction in Duopolies, July 2009, Exhibit EC-1435, para. 30.
4243 European Communities' first written submission, para. 1007.

BCI deleted, as indicated [***]

subsidies to lower its LCA prices is confirmed by Professor Cabral's analysis. 4244 The European
Communities then describes Professor Cabral as providing an "economic analysis of why US
subsidies received by Boeing that are not direc tly tied to production or sales volumes of specific
aircraft … strongly influence Boeing's investment and pricing decisions." 4245 The European
Communities describes the conclusions of Professor Cabral's model as being that subsidies that
increase Boeing's non-operating cash flow have a direct and substantial effect on Boeing's investment
and pricing behaviour. 4246 This suggests that the Eur opean Communities seeks to use
Professor Cabral's model as additional evidence in support of its causation argument (that the
subsidies caused Boeing to lower its LCA prices) as well as to quantify the extent of the price
reductions.

64. In its second written submission, the Europ ean Communities describes the report prepared by
Professor Cabral as "offer{ing} quantitative estimates" of the extent to which subsidies that increase
Boeing's non-operating cash flow led Boeing to lower its LCA prices. 4247 However, it then describes
Professor Cabral's contribution in the following terms:

"In his report, Professor Cabral developed a model to determine how Boeing spends
additional cash, i.e., how it allocates the subsidy funds it receives between
investments in future firm value and distributions to shareholders. He concluded that
the majority of the US subsidies are cha nneled into investments in firm value, and
result in price effects of approximately the same magnitude as the amount of the
subsidies."4248
65. The European Communities' discussion of th e Cabral Report in its second written submission
concludes with the statemen t that the "price effects determined by Professor Cabral, therefore, stand
and support the EC arguments and other evidence dem onstrating the adverse effects caused by the US
subsidies."4249

66. As indicated by the foregoing, the Cabral Report appears to be relevant to the European
Communities' causation arguments in two ways. Th e first is to support its general (and critical)
argument that Boeing used the subsidies to lo wer its LCA prices (i.e. supporting the European
Communities' principal contentions that the cond itions of competition in the LCA market, coupled
with the magnitude of the subsidies, created in centives, opportunities and the ability for Boeing to
lower its LCA prices). The second is to quantify the extent to which the subsidies flowed through to
lower Boeing LCA prices. Moreover, Professor Cabral 's analysis of the ways in which a firm like
Boeing will use subsidies that are not directly tied to the production or sale of specific LCA mirrors
and provides the theoretical underpinnings of the European Communities' key arguments about why
and how, given the pricing incentives related to LCA production and sale, and the nature of
competition in the LCA market, Boeing will use a si gnificant portion of the subsidies to lower the
prices of its LCA and increase market share.

3. Principal weaknesses of Professor Cabra l's model as support for the European
Communities' arguments that Boeing uses the subsidies to lower the prices of its LCA

67. The Panel here sets forth what we see as the pr incipal flaws in Professor Cabral's analysis of
the ways in which the category of subsidies that he identifies as development subsidies allegedly

4244 European Communities' first written submission, para. 1309.
4245 European Communities' first written submission, para. 1309. Emphasis added.
4246 European Communities' first written submission, para. 1309.
4247 European Communities' second written submission, para. 753.
4248 European Communities' second written submission, para. 753. Emphasis added.
4249 European Communities' second written submission, para. 785. Emphasis added.

BCI deleted, as indicated [***]

affect Boeing's LCA pricing behaviour. The Pane l does not address the many criticisms made by the
United States and its consultants of Professor Cabral 's estimates of particular parameters, as in our
view, these factors primarily affect the quantification of the "price effects".

(a) Consistency with Boeing's pricing behaviour in the LCA markets between 2000 and 2006

68. In the Panel's view, the most apparent weakness in Professor Cabral's analysis, in so far as it
purports to demonstrate that Boeing would use a significant proportion of each additional dollar of
subsidy to engage in aggressive pr icing of its LCA, is the fact that it is not supported by empirical
evidence concerning Boeing's actual pricing behaviour between 2000 and 2006. The Panel recalls that
Professor Cabral's theory as to the way in which th e receipt of "development subsidies" would affect
Boeing's pricing behaviour is that Boeing would directly and immediately apply a significant
proportion of any such subsidies that it receives in a ny year to "investments" in aggressive pricing in
order to capture market share from Airbus. Th e Panel accepts evidence that Boeing changed its
pricing policy in late 2004/2005 and became much more "aggressive" on price. Indeed, the Panel
notes that the European Communities' version of events in the LCA markets between 2000 and 2006
is that Boeing suddenly became much more aggressiv e on price in late 2004, with the appointment of
a new sales manager and a clear change in pricing policy.
4250 However, the very suggestion that
Boeing could suddenly decide to change its policy and become more aggressive on price in 2004/2005
(using the subsidies to do so) appears to contradict Professor Cabral's theory about how Boeing would
optimally be applying addi tional dollars of subsidies to "investments" in aggressive pricing, unless it
were possible to show that from 2004/2005 onwards, the amount of subsidies paid to Boeing
increased significantly (which it did not).

69. When asked by the Panel to explain this a pparent inconsistency, the European Communities
replied that Cabral's model refl ects Boeing's "average" behaviour with respect to its use of the
subsidies over the 2000 – 2006 period. According to the European Communities, the fact that post-
2004, Boeing used a greater portion of subsidies than previously is consistent with a model that
assesses Boeing's "average" behaviour during 2004 – 2006.
4251 The European Communities also does
not dispute that Boeing may contribute its own funds – in addition to the subsidies it receives – to
invest in lower pricing. According to th e European Communities, Boeing's 2004 decision to
dramatically reduce its pricing for, inter alia, the 737NG was made possible partly by "greater use of
these subsidies" and partly by Boeing's decision to use its own funds to reduce prices. 4252 T h e
European Communities argues that, for purposes of assessing the European Communities' arguments
and evidence, it does not matter which of the two f actors made the greatest contribution to Boeing
lowering its prices – what is important is the "marginal effect of the US subsidies on Boeing's
price."
4253

70. The United States argues that this explan ation by the European Communities merely
illustrates the contradictions betwee n reality and theory. The United States recalls that the European
Communities, in its first written submission, argued that the price effects that increase Boeing's non-
operating cash flow are immediate and direct for both the case of investment in aggressive pricing of
new planes (via pricing down the learning curve) and for aggressive pricing of sales of mature

4250 European Communities' confidential oral statement at the first meeting with the Panel, paras. 53
and 75-76; Christian Scherer, Co mmercial Aspects of the Aircraft Business from the Perspective of a
Manufacturer, March 2007, Exhibit EC-11 (BCI), para. 117. Both parties appear to accept that Boeing adopted a
more aggressive pricing policy in late 2004 or early 2005 (they disagree somewhat as to the precise timing).
See, for example, United States' comments on the European Communities' response to question 86, para. 307.
4251 European Communities' response to question 86, para. 394.
4252 European Communities' response to question 86, para. 396.
4253 European Communities' response to question 86, para. 397.

BCI deleted, as indicated [***]

aircraft.4254 The United States argues that, in its attempt to explain the consistency of Professor
Cabral's analysis with post-2004 market events, the European Communities admits that Boeing may
significantly change its distribution of the amount of the alleged non-operating cash flow benefit
among various spending options. The United States notes that it is only through Professor Cabral's
assumption that Boeing uses any subsidy cash in a fixed proportion between investments leading to
lower LCA prices and payments to shareholders th at Professor Cabral can claim that the alleged
subsidies that increase Boeing's non-operating cash flows will always affect Boeing's prices.
Otherwise, Professor Cabral's model would provide no reason why, at any given time, the proportion
of the subsidy invested in lower pricing w ould not be zero, and the proportion passed onto
shareholders would not be 100 per cent. 4255 Thus, according to the United States, Professor Cabral's
model positively precludes that Boeing may invest a somewhat higher percentage of its subsidies in
pricing down its LCA in some years, but not in others.

71. The United States also argues that if Professor Cabral's theory that "aggressive pricing" is a
rational "investment" were true, one would have expected that in 2000 – 2004 Boeing would have
been pricing aggressively to take market share from Airbus, instead of resisting price reductions and
losing market share. The Europ ean Communities argues that subsidies to Boeing also caused adverse
effects during the 2001 – 2003 period, however, a number of factors "prevented Boeing from
maximizing the effects of these subsidies to incr ease its market share at Airbus' expense."
4256 These
factors included: Boeing's poor customer relationshi ps, the fact that its order book was dominated by
distressed U.S. airlines, Boeing's failure to launch new LCA and its decision to compete with leasing
companies. The European Communities says that, by late 2004, "these factors had changed, and the
full effects of the subsidies were again felt by Airbus."4257

72. The Panel is persuaded by the United States' cr iticism of the Cabral model in this regard. To
the extent that Professor Cabral's analysis purports to demonstrate, not just that it is "logically
possible" that Boeing used the "development subsidi es" to lower the prices of its LCA, but that
Boeing actually did use the subsidies to lower the prices of its LCA, we would expect that the
implications of Professor Cabral's theory about how Boeing would behave in the LCA markets would,
at least to some degree, be borne out by events that occurred in those markets. Professor Cabral
himself said, in his discussion of the various mode ls of oligopoly behaviour that he could have
potentially chosen for the basis of his model, that while it may be difficult to choose a model based on
purely theoretical grounds, one can ask whether their assumptions are reasonable given the industry at
issue and whether their predicted outcomes are consistent with the reality of that industry and the
actual market outcomes.
4258 The Panel considers that the same can be said of Professor Cabral's
model, and we do not consider that his model an d its predicted outcomes are consistent with the
evidence as to pricing behaviour and market share in the LCA industry between 2000 and 2006.4259

4254 United States' comments on the European Co mmunities' response to question 86, para. 303;
referring to European Communities' first written submission, para. 1322.
4255 United States' comments on the European Communities' response to question 86, para. 304.
4256 European Communities' response to question 85, para. 390.
4257 European Communities' response to question 85, para. 391.
4258 L. Cabral, Investment and Pricing Behaviour Model: Literature Review of Theories Dealing with
Strategic Interaction in Duopolies, July 2009, Exhibit EC-1436, para. 11.
4259 See also paras. 74 and 75 in (c) below.

BCI deleted, as indicated [***]

(b) Are "untied" subsidies the functional eq uivalent of additional cash to Boeing?

73. Professor Cabral's analysis rests on the assump tion that "in kind" subsidies such as the NASA
R&D subsidies are fungible with cash.
4260 The European Communities and Professor Cabral both
argue that this is because the R&D subsidies lower Boeing's costs of conducting R&D and thereby
free up additional cash that Boeing can use to engage in aggressive pricing. We are not persuaded
that the nature of the particular ae ronautics R&D subsidies at issue in this dispute, particularly in the
light of NASA's role in supporting long-term, high risk aeronautical R&T, is such that it is appropriate
to analyse the effects of the aeronautics R&D subsidies as being equivalent to the receipt of additional
cash.4261

(c) Cabral's theory as to how the subsidies influe nce Boeing's pricing of its LCA is at odds with
evidence as to how Boeing sets its LCA prices

74. Even assuming that it is appropriate to anal yse the effects of the aeronautics R&D subsidies
as cost savings that generate additional cash for Bo eing, the Panel is not persuaded that such cost
savings influence Boeing's LCA pricing in the way suggested by Professor Cabral. Both Airbus and
Boeing officers acknowledge that the LCA prices they set relate to the development costs for a
particular LCA programme.
4262 However, Professor Cabral's analysis does not indicate how a
reduction in Boeing's general costs (e.g. a reduction in Boeing's general R&D costs) would affect the
development costs for a specific LCA programme. Moreover, as shown by the evidence, the nature of
the LCA market is such that LCA prices are al so influenced by the prices of competing LCA. 4263 In
short, we consider that the relationship between co st savings arising from the receipt of development
subsidies and LCA prices is less direct than is suggested by Professor Cabral.

75. A similar criticism relates to Professor Cabral's analysis of the effects of learning curve
efficiencies on Boeing's LCA pricing. The Un ited States asserts that, because learning curve
efficiencies are factored into a producer's project ed costs at the time of the launch of an aircraft
programme, there is no basis for any expectation of subsequent, campaign-specific learning curve
adjustments to price. The Panel is satisfied that the evidence submitted by the United States in

4260 Luís M. B. Cabral, Impact of Development Subsidies Granted to Boeing, New York University and
CEPR, March 2007, Exhibit EC-4, p. 41; Luís M. B. Cabral , Response to the U.S. Criticisms of my Analysis of
The impacts of Development Subsidies Granted to Boeing", 14 November 2007, Exhibit EC-1182, paras. 32-33.
The Panel observes that the proof of the fungibility of "in-kind" subsidies with cash contained in Annex A.2 of
Professor Cabral's March 2007 report is simply a rewriting of the budget constraint of the firm in a highly
abstract model.
4261 See also paras. 7.1760, 7.1831 of the Report.
4262 See, e.g. Statement of Clay Richmond, Exhibit US-275 HSBI; According to Richmond, at the time
of the decision to launch an LCA programme, Boeing bases its pricing on (i) the price it believes the LCA will
command over its lifetime, and (ii) the projected volume of sales for that LCA, against (iii) the costs of the LCA
programme (including non-recurring investments and recurring costs such as anticipated learning curve
efficiencies). Richmond says that once the launch decision is made, pricing is "market driven" in the sense that
Boeing aims to achieve the highest market value for its products in light of market conditions. See also
Christian Scherer, Commercial Aspects of the Aircraft Business from the Persp ective of a Manufacturer,
4263 See, e.g. Christian Scherer, Commercial Aspects of the Aircraft Business from the Perspective of a
Manufacturer, March 2007, Exhibit EC-11 (BCI), para. 105; Greenwald Paper, Exhibit US-8, p. 6. European
Communities' second written submission, Full Version HSBI Appendix, para. 86 : "As a profit maximizer,
Airbus has no incentive to offer very low pricing. Thus, in competitive sales campaigns, Airbus pricing is, to a
large extent, the result of Boeing's behaviour."

BCI deleted, as indicated [***]

support of this assertion is credible and consistent with other evidence as to how Boeing sets prices
for its LCA. 4264

4. Conclusion
76. In conclusion, Professor Cabral's model does not support the existence of a causal link
between the receipt by Boeing of "development subsidies", and lower Boeing LCA pricing. The
Panel is not convinced that the assumptions underl ying Professor Cabral's model are an appropriate
representation of Boeing's actual commercial behavi our. As we are unable to accept the assumptions
on which the model is based, we do not consider th e model to provide evidentiary support for the
European Communities' argument that Boeing's receipt of the subsidies enables it to lower the prices
of its LCA.

4264 See, e.g. Statement of Clay Richmond, Exhibit US-275 HSBI; Jordan and Dorman Report, Exhibit
US-3, pp. 14-15.

BCI deleted, as indicated [***]

VIII. CONCLUSIONS AND RECOMMENDATION
A. CONCLUSIONS
8.1 We recall that in this dispute, the claims of the European Communities with respect to the
challenged measures fall into two categories. First, the European Communities claims that two of the
alleged subsidies, namely the tax breaks provide d by the U.S. Federal Government pursuant to
legislation concerning foreign sales corporations and exclusion of extraterritorial income and the tax
incentives provided by the State of Washington unde r the legislation adopted in 2003, are prohibited
under Articles 3.1(a) and 3.2 of the SCM Agreement. Second, the European Communities claims that
all of the alleged subsidies are actionable under th e SCM Agreement and that by using these subsidies
the United States causes adverse effects to the inter ests of the European Communities, in violation of
Article 5(c) of the SCM Agreement.
8.2 With respect to the European Communities' prohibited subsidy claims under Articles 3.1(a)
and 3.2 of the SCM Agreement, we conclude that:
(a) the FSC/ETI measures that have been ch allenged by the European Communities and
that were in force at the time of the Pa nel's establishment are inconsistent with
Articles 3.1(a) and 3.2 of the SCM Agreement;
(b) the European Communities has not demonstr ated that the Washington State tax
measures provided for in HB 2294 are inconsis tent with Articles 3.1(a) and 3.2 of the
SCM Agreement.
8.3 With respect to the European Communities' adve rse effects claims under Article 5(c) of the
SCM Agreement:
(a) we conclude that the United States causes serious prejudice to the interests of the
European Communities within the meaning of Articles 5(c) and 6.3(b) and 6.3(c) of
the SCM Agreement in that:
(i) the effects of the NASA and DOD aerona utics R&D subsidies are significant
price suppression, significant lost sales and threat of displacement and
impedance of exports from third country markets, with respect to the 200 –
300 seat wide-body LCA product market;
(ii) the effects of the FSC/ETI subsidies and the B&O tax subsidies provided by
the State of Washington under HB 2294 are significant price suppression,
significant lost sales and displacement and impedance of exports from third
country markets, with respect to the 100-200 seat single-aisle LCA product
market;
(iii) the effects of the FSC/ETI subsidies and the B&O tax subsidies provided by
the State of Washington under HB 2294 and by the City of Everett are
significant price suppression, significant lost sales and displacement and
impedance of exports from third country markets, with respect to the 300-400
seat wide-body LCA product market;
(b) we exercise judicial economy with respect to the European Communities' claim that
violation of the 1992 Agreement constitutes serious prejudice to the European
Communities' interests within the meaning of Article 5(c) of the SCM Agreement.

BCI deleted, as indicated [***]

8.4 Under Article 3.8 of the DSU, in cases where there is an infringement of the obligations
assumed under a covered agreement, the action is considered prima facie to constitute a case of
nullification or impairment. We conclude that, to the extent that the United States has acted
inconsistently with the SCM Agreement, it has nullified or impaired benefits accruing to the
European Communities under that Agreement.
B. RECOMMENDATION
8.5 Article 4.7 of the SCM Agreement provides that , having found a measure in dispute to be a
prohibited subsidy:
"the Panel shall recommend that the s ubsidizing Member withdraw the subsidy
without delay. In this regard, the pane l shall specify in its recommendation the time
period within which the measure must be withdrawn."
8.6 The Panel has found that the European Comm unities has demonstrated that FSC/ETI and
successor act subsidies to Boeing are export subsidies that are prohibited under Articles 3.1(a) and 3.2
of the SCM Agreement. As to whether the Pane l should make a recommendation under Article 4.7 of
the SCM Agreement with regard to the subsidies which it has found to be prohibited under Article 3,
there are two basic considerations that the Panel needs to take into account. First, the FSC/ETI
measure in force at the time of the Panel's esta blishment has been substa ntially changed during the
course of the present proceedings and indeed it appear s that the measure is no longer in force with
respect to Boeing. 4265 The Panel considers that it is well established in WTO dispute settlement
practice that when a measure has expired, it is appropriate for a panel to refrain from making a
recommendation with respect to such a measure. 4266 Second, to the extent that FSC/ETI tax benefits
remained applicable to Boeing at the time of the esta blishment of this Panel, pursuant to the transition
and grandfather clauses of the AJCA, the Panel not es that the panel and Appellate Body reports in US
– FSC (Article 21.5 – ECII) concluded that the recommenda tion made by the panel in US – FSC
remained operative. The Panel considers it importa nt not to disturb this recommendation. A new
recommendation under Article 4.7 of the SCM Agreem ent would not add to the legal force of the
existing recommendation. The findi ngs made in prior cases regardin g the legal provisions as such
necessarily imply that the application of these prov isions in individual cases was also inconsistent
with Article 3. The obligation of the United States to withdraw the prohibited subsidies at issue thus
also entails an obligation to cease applying the measures in individual cases. If anything, a new
recommendation could detract from the legal force of the existing obligation insofar as it would give
rise to a new period for implementation.4267

4265 We note that the European Communities argues that there has been no "final resolution" as to
whether FSC/ETI benefits will continue. We also note, however, that this issue is limited to certain transactions
that are authorized under the TIPRA provisions as in terpreted in the December 2006 memorandum of the
Internal Revenue Service and that th e European Communities has not provid ed sufficient evidence that Boeing
has actually made use of those provisions.
4266 See, for example, Appellate Body Report, US – Certain EC Products , paras. 81-82. The panel in
EC – Approval and Marketing of Biotech Products concluded that "WTO jurisprudence supports the inference
that panels are to avoid making recommendations which would apply to measures that are no longer in existence
or have been amended." Panel Report, EC – Approval and Marketing of Biotech Products, para. 7.1316.
4267 A recommendation by this Panel under Article 4.7 of the SCM Agreement would provide the
United States with a new period within which to withdr aw the subsidy provided to Boeing. The implication
would be that while the United States has since November 2000 been under an obligation to withdraw the FSC
measures at issue, with respect to the application of those measures to Boeing, the obligation to withdraw the
subsidy would come into existence only upon completion of the present proceeding. Such a result would be
fundamentally illogical.

BCI deleted, as indicated [***]

8.7 In the light of the foregoing, the Panel refrains from making a recommendation under Article
4.7 of the SCM Agreement. To the extent that the United States has not already withdrawn the
FSC/ETI export subsidies to Boeing, the Pa nel notes the conclusion of the Panel in US - FSC
(Article 21.5 – ECII), which was upheld by the Appellate Body, that the recommendation made by the
Panel in the dispute in US – FSC continued to be "operative".4268
8.8 Article 7.8 of the SCM Agreement provides that:
"Where a panel report or an Appellate Body report is adopted in which it is
determined that any subsidy has resulted in adverse effects to the interests of another
Member within the meaning of Article 5, the Member granting or maintaining such
subsidy shall take appropriate steps to rem ove the adverse effects or shall withdraw
the subsidy."
8.9 Accordingly, in the light of our conclusions with respect to adverse effects set out above, we
recommend that, upon adoption of this Report, or of an Appellate Body report in this dispute
determining that any subsidy has resulted in adverse effects to the interests of the
European Communities, the United St ates "take appropriate steps to re move the adverse effects or ...
withdraw the subsidy".
8.10 Article 19.1 of the DSU provides that a panel "may" suggest ways in which a
recommendation could be implemented. It is well established that Article 19.1 does not oblige panels
to make a suggestion. In this case, neither pa rty has requested that the Panel make any such
suggestion. Accordingly, we make no suggestions concerning the steps that might be taken to
implement this recommendation.

4268 See, for example, Panel Report, US – FSC (Article 21.5 – ECII), para. 8.2.