PRIVATIZATION ON SUBSIDIES PREVIOUSLY BESTOWED ON A STATE-OWNED ENTERPRISE............................................................................................................................ 50 B. H ISTORY OF US IMPOSITION OF US COUNTERVAILING DUTIES ON CERTAIN LEAD AND BISMUTH CARBON STEEL PRODUCTS ORIGINATING IN THE UNITED KINGDOM ........... 56 III. THE ECONOMICS OF PRIVATIZATION .......................................................................... 60 A. H OW MARKETS VALUE COMPANIES AND WHY PRIVATIZATION IN AN ARM’S- LENGTH MARKET-BASED SALE NECESSARILY EXTINGUISHES PRIOR SUBSIDIES TO THE STATE-OWNED FIRM....................................................................................................... 60 B. T HE BRITISH STEEL PRIVATIZATION ..................................................................................... 63 IV. PROCEDURE ........................................................................................................................ 65 V. LEGAL ARGUMENTS ...................................
Document: III. THE ECONOMICS OF PRIVATIZATION .......................................................................... 60 A. H OW MARKETS VALUE COMPANIES AND WHY PRIVATIZATION IN AN ARM’S- LENGTH MARKET-BASED SALE NECESSARILY EXTINGUISHES PRIOR SUBSIDIES TO THE STATE-OWNED FIRM....................................................................................................... 60 B. T HE BRITISH STEEL PRIVATIZATION ..................................................................................... 63 IV. PROCEDURE ........................................................................................................................ 65 V. LEGAL ARGUMENTS ......................................................................................................... 65 A. T HE OBJECT AND PURPOSE OF THE ASCM ESTABLISH THAT COUNTERVAILING DUTIES MAY OFFSET A SUBSIDY, BUT MAY GO NO FURTHER............................................. 66 B. T HE UNITED STATES HAS VIOLATED ARTICLE 10 ASCM BY IMPOSING COUNTERVAILING DUTIES WITHOUT HAVING ESTABLISHED THAT  A SUBSIDY EXISTS............................................................................................................................
Date: 27 April 1999
Document codes: WT/DS138/R
Complainant: EU
Respondent: U.S.
Third parties: Brazil, Mexico
Dispute stage: Consultation
Agreements cited: Art. 1.1(b), 10, 14, 19.4  Subsidies and Countervailing Measures (SCM)

I. INTRODUCTION
1. This dispute arises under Articles 1.1(b), 10, 14, and 19 of the WTO Agreement on Subsidies
and Countervailing Measures (“ASCM”). The dispute concerns the failure of the US authorities to
recognize the impact of an arm’s-length and fair market value privatization transaction on subsidies
granted to a state-owned enterprise prior to its privatization. Specifically, the United States has
persisted in its pre-ASCM practice of imposing countervailing duties on the products of private
companies that have purchased formerly state-owned firms, or productive units thereof, at fair market
value in transparent arm’s-length privatization transactions.
1 As a result, private companies that never
received a government financial contribution nor any benefit therefrom have been found to be liable
for countervailing duties by the United States. 22 This practice is a direct breach of the obligations of
the United States to the European Communities under the ASCM.
2. Under the ASCM, countervailing duties may be imposed to offset a subsidy, but they may go
no further. Countervailing duties are designed to offset, not punish. By imposing countervailing
duties where no “benefit” and hence no “subsidy” is enjoyed by a company under investigation, the
United States ignores both economic common sense and the “benefit to the recipient” standard for
which the United States successfully militated in the Uruguay Round negotiations. The US approach
is fundamentally at odds with the open rules-based trading system of the WTO. The WTO system is
designed to encourage economic rationality, privatization, and predictability of treatment for WTO
member nations. Instead, by imposing countervailing duties where no subsidy exists, the
United States has effectively created a major disincentive for privatization by exposing purchasers of
state-owned companies to massive, unjustified, and unpredictable US countervailing duties. The
ASCM allows for no such punitive measures.
3. This submission is divided into five sections . Section I discusses the evolution of the US
countervailing duty rules applicable to this dispute and examines the history of the US imposition of
countervailing duties in Certain Hot-Rolled Lead and Bismuth Carbon Steel Products Originating
from the United Kingdom (“ UK Leaded Bars ”) and subsequent administrative reviews of that
decision. Section II illustrates why arm’s-length privatization transactions capture the residual value
of any government subsidy previously conferred on a seller and examines the DOC practice as
specifically applied in these cases. Section III details the procedures between the European
Communities and the United States with respect to this dispute. Section IV sets forth the legal
arguments as to why the challenged US Department of Commerce (“DOC”) determinations in
particular, and, more generally, the US practice which they embody, violate US obligations to the

1 The European Communities are using the terms “arm’s-length transaction” and “fair market
value” in accordance with their accepted meanings:
- Arm’s length transaction. Said of a transaction negotiated by unrelated parties, each acting in
his or her own self interest; the basis for a fair market value determination. A transaction in
good faith in the ordinary course of business by parties with independent interests. . . . The
standard under which unrelated parties, each acting in his or her own best interest, would carry
out a particular transaction.
- Fair market value. The amount at which property would change hands between a willing buyer
and a willing seller, neither being under any compulsion to buy or sell and both having
reasonable knowledge of the relevant facts.
B
LACK'S LAW DICTIONARY, West Publishing Co. (6th Ed. 1990).
2 Since the introduction of the current US “privatization methodology” in 1993, the United States has
never found pre-privatization subsidies eliminated as the result of an arm’s-length market value privatization.
Nor has the United States ever examined whether a priv atized company was itself a recipient of a benefit from
financial contributions to state-owned enterprises.

European Communities pursuant to the ASCM. Section V contains the European Communities'
conclusion.
II. FACTUAL BACKGROUND
4. This Section is divided into two parts. Part A discusses the evolution of the US
countervailing duty rules applicable to this dispute. It begins in 1989 and traces the history of the
current US practice, which has not changed despite the entry into force of the ASCM as of
1 January 1995. Part B examines the imposition of countervailing duties by the United States on
certain lead and bismuth carbon steel products (“leaded bars”) originating from the United Kingdom.
These duties were originally imposed in 1993 follow ing an investigation by US authorities, under the
US approach of allocating non-recurring subsidies over time.
3 The practices that are the subject of
this dispute have been maintained in a number of administrative and judicial rulings since the
effective date of the ASCM (1 January 1995). The European Commission will describe first to the
evolution of the current US practice.
A. HISTORY OF UNITED STATES POLICY AND PRACTICE CONCERNING THE EFFECT OF
PRIVATIZATION ON SUBSIDIES PREVIOUSLY BESTOWED ON A STATE-OWNED ENTERPRISE
5. The impact of an arm’s-length privatization on the countervailability of subsidies previously
bestowed on a state-owned enterprise was first addressed by the United States in its 1989
administrative review of the US countervailing duty order on Lime from Mexico .4 The decision in
Lime from Mexico is attached as Exhibit EC-1 . The Government of Mexico requested that US
authorities examine the purchase of a former state-owned lime producer to determine (i) whether the
purchase of the former state-owned producer “was at arm’s-length”, and (ii) whether, as a result,
subsidies bestowed on the former state-owned enterprise no longer benefited the company’s new
owner.5 Mexico’s request was based on a fundamental economic principle -- that the residual value
of any subsidies previously bestowed on a stat e-owned enterprise is fully accounted for in the
purchase price and therefore does not provide any benefit to an arm’s-length purchaser paying fair
market value.
6. The US Department of Commerce examined two issues in detail in the Lime from Mexico
review: (i) whether ownership was actually transferred to private investors such that the government-
owned company ceased to exist as a government enterprise, and (ii) whether any subsidy benefits
earlier provided to the state enterprise continued to provide advantage to the new private owners.

3 This issue arises because of the US practice of a llocating the benefit of non-recurring subsidies over a
period of time corresponding to the useful life of the firm’s assets. Consequently, subsidies granted some years
before the investigation may be countervailed, and duties may continue to apply until the end of the depreciation
period.
4 Lime from Mexico ; Preliminary Results of Changed Circumstances Countervailing Duty
Administrative Review , 54 Fed. Reg. 1753, 1754-55 (17 January 1989) [“ Lime from Mexico ”]. The DOC
revoked the US countervailing duty order on lime from Mexico later that year (retroactively effective to 24
August 1986, the date of Mexico’s accession to the GATT), thus terminating the changed circumstances review.
Lime from Mexico; Final Results of Changed Circumstances Countervaili ng Duty Administrative Review and
Revocation of Countervailing Duty Order, 64 Fed. Reg. 49324 (30 November 1989).
Three years earlier the United States had been asked to address the substantially similar issue of
whether there was a “pass through” of prior subsidies in an arm’s-length sale of assets in the context of a
bankruptcy. See Final Affirmative Countervailing Duty Determ ination; Oil Country Tubular Goods from
Canada, 51 Fed. Reg. 15037, 15042 (22 April 1986) [“ OCTG from Canada ”]. In OCTG from Canada, the
DOC held that “in an arm’s-length transaction, such as this one, subsidies, if there are any, are not passed
through”. Id. (emphasis added).
5 Id. at 1754.

7. After examining the transaction and purchase contract, the DOC determined that ownership of
the enterprise had been transferred from the state to private investors and, as a result, the company
“was no longer a government-owned company” . Turning next to the question of whether subsidies
previously received by the state-owned enterprise continued to benefit the company’s new owners
after the privatization, the United States authorities based their analysis “on the proposition that, to the
extent that the price paid for a government-owned company reflects the company’s market value, we
believe it is reasonable to presume . . . that any countervailable benefits previously granted to the
company are fully reflected in the purchase price and that such benefits are not passed through to the
purchaser”.6
8. Finding that “[u]ltimately, a company’s value is whatever price the market will bear”, the
DOC examined the conditions of the sale, assuring itself that the bidding process was open, market
forces were allowed to operate, and indicators of the company’s value were central to the negotiation
and sale. Finding the transaction to have occurred at arm’s length, the DOC determined that the price
the private investors paid reflected the former state-owned enterprise’s “market value” and, therefore,
that “no benefits” to the former state-owned enterprise passed through to the new private owners.
7
9. The United States next examined the effect of a privatization sale in 1993. At that time, the
United States authorities responsible for assessing countervailing duties completely reversed course.
This change in position first took place in the context of a steel countervailing duty investigation
requested by the US domestic steel industry. As explained in greater detail below
8, in 1993 the US
authorities held that “a company’s sale of a ‘business’ or ‘productive unit’ does not alter the effect of
previously bestowed subsidies . . . the sale does nothing to alter the subsidies enjoyed by that
productive unit”.9
10. The US authorities ruled that henceforth in US countervailing duty determinations, subsidies
previously bestowed on state-owned enterprises woul d “travel” in their entirety to “their new home”
in the unrelated private companies purchasing the previously state-owned business at arm’s length for
fair market value. 10 By this ruling, the US authorities abandoned the principle they had earlier set
forth that, of necessity, an arm’s-length market price takes full account of the residual value of any
such prior subsidies, and that no benefit conferred on a former state-owned enterprise passes through
to the now-private company.
11. Among the rationales offered by US authorities for this new “pass through” practice was the
notion that the United States would otherwise “invite [previous] subsidy recipients to sell off units
that produce or export countervailed merchandise to the United States” [ e.g., the arm’s-length market
privatizations of previously state-owned enterprises]. The United States also noted that its approach
would “not examine the impact of subsidies on particular assets or tie the benefit level of subsidies to
changes in the company under investigation”.
11

6 Id. Benefits previously countervailed included equity infusions, interest-free loans, and other
preferential loans.
7 See page 1755 of Lime from Mexico.
8 See also paragraphs 34-37.
9 Final Affirmative Countervailing Duty Determinati on; Certain Hot Rolled Lead and Bismuth Carbon
Steel Products from the United Kingdom , 58 Fed. Reg. 6237, 6240 (27 January 1993) [“ UK Leaded
Bars”][“1992 Investigation”] (emphasis added). This document is attached as Exhibit EC- 4. Interestingly, in its
preliminary determination, the DOC had decided “not to attribute” to the buyer “any subsidies received by
BSC” prior to privatization. Id. at 6239 (emphasis added). Based on a “reconsideration of the preliminary
determination and upon reviewing the comments submitted by the interested parties”, the US adopted the
opposite position in its final determination. Id. at 6240.
10 Id. at 6240.
11 Id. at 6240.

12. Less than six months later, in July 1993, US authorities again changed course with respect to
the treatment of subsidies bestowed on state-owned enterprises that had subsequently been privatized.
In a “General Issues Appendix” (“GIA”) 12 referred to in several countervailing duty determinations
involving flat-rolled carbon steel products (the rele vant sections of which are included as Exhibit
EC-2 to this submission), the DOC announced a new “privatization methodology”, whereby the DOC
claimed that “to the extent that a portion of the price paid for a privatized company can reasonably be
attributed to prior subsidies, that portion of those subsidies will be extinguished”.
13
13. Under the GIA methodology, a “portion” of the purchase price in the sale of a state-owned
company is claimed to repay a “portion” of the “remaining” value of prior subsidies. 14 All subsidies
provided to the state-owned enterprise prior to privatization would now “travel” to the new private
purchaser in an arm’s-length market value transaction unless they were found to be “repaid” by the
terms of the GIA calculation formula. That formula, by its own terms , treats as “irrelevant” the
economic issue of whether the transaction was at arm’s length for fair market value. 15 Rather, as
discussed in Section II below, the GIA formula presumes “irrebuttably” that the private purchaser has
benefited from pre-privatization subsidies and, after assessing the existence of a subsidy to the prior
owner, simply determines the amount of such subsidies “passing through” to the buyer.
14. The “repayment” methodology of the US authorities purports to allocate past subsidies
between the recipient of those subsidies and the purchaser of the company or productive assets
previously owned by the recipient. The “allocation” is based on a DOC calculation where the value
of past subsidies is amortized over the useful li fe of assets. Under the DOC approach, the amount of
subsidies allocated to a given year before the privatization is divided by the “net worth” of the
company in that year. The same ratio is calculated for each pre-privatization year during the useful
life of the assets under consideration. The simple average of those ratios is referred to as the
“gamma”. The gamma is then multiplied by the cash portion of the purchase price of the business
paid by the private buyer. The result is subtracted from previously bestowed subsidies. The net
amount of subsidies is attributed by DOC as a “pass through” to the buyer.
16 See also Exhibit EC-3,
which contains a sample calculation using the DOC's "privatization methodology”.17
15. A simple example of this approach would be as follows: Assume a government company
received past subsidies during its DOC-assigned allocation period and that, under the DOC formula,
the simple average of the ratio of the company’s subsidies to net worth during that period was 0.30.
Further assume the company was sold in an arm’s- length transaction for the market price of £2,000
million, £600 million in cash and £1,400 million in assumed liability. Under its self-derived formula,
DOC would find that only 9 per cent of the purchase price (£180 million) “repays” the subsidy (0.30 x
£600 million = £180 million; and £180 million/£2000 million = 9%). If the seller had received
subsidies with a DOC-derived net present value of £700 million, DOC would find that £520 million of

12 “General Issues Appendix”, appended to Final Affirmative Countervailing Duty Determination;
Certain Steel Products from Austria, 58 Fed. Reg. 37217 (9 July 1993). The US authorities’ discussion of
“privatization” is found at 37259-65. A related discussion of “restructuring” meant to account for the US
treatment of “travelling” subsidies to privatized “spin- offs” (other than the company specifically under direct
investigation) is contained at page 37265 et seq.
13 See pages 37262-63 of the GIA.
14 See page 37263 of the GIA.
15 See page 37264 of the GIA.
16 See page 37263 of the GIA.
17 As discussed at length in Section II and Exhibit EC-3 below, under the GIA “repayment”
methodology it is effectively impossible to avoid the pass-through of subsidies previously bestowed on an
unrelated state-owned enterprise. Average prior subsid ies would need to exceed the average net worth of the
company. For instance, in an arm’s-length privatization of assets sold at book value (inclusive of the full
amount of a previous subsidy grant made five years prior to privatization), the GIA methodology results in only
a fraction of the value of the subsidy being “repaid” and eliminated. See Exhibit EC-3.

those subsidies “travel” to the buyer and £180 million remain with the seller. Whether a buyer pays
fair market value has no effect on the DOC calculations.
16. The 1993 GIA also sets forth pre-ASCM US practice in several other areas. First, the DOC
determined that it would “not require a subsidy bestowed on a steel producer to confer a demonstrable
‘competitive benefit’ on that producer in order to be countervailable”.18 Second, the DOC expressly
rejected any notion that “the fair market value price must include any remaining economic benefit
from the subsidies”, or that “privatization extingu ishes all remaining unamortized subsidies” as it
“rests on the assumption that subsidies must confer a demonstrated benefit on production in order to
be countervailable” and “this is contrary to the CVD law, in which is embedded the irrebuttable
presumption that non-recurring subsidies benefit merchandise produced by the recipient over time”
19
(emphasis added). Third, the DOC held that “the countervailable subsidy (and the amount of the
subsidy to be allocated over time) is fixed at the time the government provides the subsidy. The
privatization of a government-owned company, per se , does not and cannot eliminate this
countervailability”. (emphasis added).
17. In this new GIA “privatization methodology”, the DOC also set forth a method by which the
United States purports to account for the sale of a portion of the assets (a “productive unit”) of an
investigated company (“selling company”). 20 This is referred to as the “spin-off” methodology. 21
“Spin-off” refers to the sale of a productive unit or division other than the unit under investigation that
occurs before the privatization under consideration in a case. If, for example, a respondent in a
countervailing duty investigation sold a division prior to the period of investigation, the DOC would
purport to determine whether a portion of the amount of untied grants 22 received prior to the sale
would “travel” or “pass through” to this “spun-off” division. US authorities do not perform the “spin-
off” calculation by simply apportioning any previous untied grants on the basis of the ratio of assets of
the division to the company. Rather, as with the new privatization methodology, a portion of the sales
price is said to be allocable to previously received subsidies, and the DOC performs a “pass through”
calculation on this portion of the previous subsidies to set the amount to attribute to the spun-off
company. The amount that does not “pass through” to the spun-off company is not treated as
“extinguished”; rather, the subsidies not “passed through” are deemed to remain in the benefit stream
of the selling company. This approach also serv es to increase subsidies attributable to a company
under investigation by the United States.
23
18. The United States authorities’ new treatment of privatization and restructuring was shortly
thereafter challenged in a court action. 24 In ruling on the issue, the US Court of International Trade
(“CIT”) ruled that the DOC privatization methodology was unlawful “to the extent it states previously
bestowed subsidies are passed through to a successo r company sold in an arm’s-length transaction”.25
The Court reasoned:

18 See page 37261 of the GIA.
19 See page 37263 of the GIA.
20 See page 37268 of the GIA.
21 See page 37268 of the GIA.
22 Subsidies deemed to benefit all production are referred to as “untied ”.
23 See “Restructurings” section of the GIA at 37268-69. A few months after setting forth the new GIA
rules, US authorities applied them to the UK Leaded Bars case (see note and accompanying text, above). In
particular, DOC reversed its previous conclusion that “t he sale does nothing to alter the subsidies enjoyed” on
the basis that it was “not supported by substantial evidence and not otherwise supported by law”. Remand
Determination: Certain Hot Rolled Lead and Bismuth Carbon Steel Products from the United Kingdom
(12 October 1993) at 2.
24 Inland Steel Bar Co. v. United States , 858 F. Supp. 179 (CIT, 7 June 1994); Saarstahl, AG v.
United States, 858 F. Supp. 187 (CIT, 7 June 1994).
25 Saarstahl, 858 F. Supp. at 195.

Where a determination is made a given transaction is at arm’s-length, one must
conclude that the buyer and seller have negotiated in their respective self-interests,
the buyer has taken into consideration all relevant facts, and the buyer has paid an
amount which represents the market value of all it is to receive. Because the
countervailable benefit does not survive the arm’s length transaction, there is no
benefit conferred to the purchaser and, therefore, no countervailable subsidy within
the meaning of [the US CVD statute]. The purchaser, thus, will not realize any
competitive countervailable benefit and any countervailable duty assigned to it
amounts to a penalty. . . .
26
19. The CIT rulings regarding the GIA “privatization methodology” (as applied under pre-ASCM
law in the United States) were themselves challenged by US steel producers. The Court of Appeals
for the Federal Circuit (“CAFC”) reversed the CIT decision. 27 The Court reasoned that the DOC
methodology as set forth in the GIA “correctly recognizes that a number of scenarios are possible:
the purchase price paid by the new, private company might reflect partial repayment of the subsidies,
or it might not”.
28
20. These decisions, like the GIA itself, were based upon the US countervailing duty law prior to
the entry into force of the ASCM on 1 January 1995. The United States approved the ASCM and the
remainder of the Uruguay Round Agreements in December 1994 by virtue of the Uruguay Round
Agreements Act (“URAA”).
29 In proposing the adoption of the URAA, the Clinton Administration
transmitted to Congress a so-called “Statement of Administrative Action” (“SAA”), representing the
“authoritative expression by the Administration concerning its views regarding the interpretation and
application of the Uruguay Round Agreements, both for purposes of US international obligations and
domestic law”. 30 In a number of important areas, however, the transposition of the ASCM into
domestic law was incomplete. The URAA did not expressly amend the GIA with regard to
privatization. Rather the URAA simply provides:
[a] change in ownership of all or part of a foreign enterprise or the productive assets
of a foreign enterprise does not by itself require a determination by the administering
authority that a past countervailable subsidy received by the enterprise no longer
continues to be countervailable, even if the change in ownership is accomplished
through an arm’s length transaction.
31
21. The Statement of Administrative Action explained the US position in greater detail:
Section 771(5)(F) provides that a change in the ownership of “all or part of a foreign
enterprise” (i.e., a firm or a division of a firm) or the productive assets of a firm, even
if accomplished through an arm’s-length transaction, does not by itself require
Commerce to find that past countervailable subsidies received by the firm no longer
continue to be countervailable. . . . Section 771(5)(F) is being added to clarify that the
sale of a firm at arm’s-length does not automatically, and in all cases, extinguish any
prior subsidies conferred. Absent this clarification, some might argue that all that
would be required to eliminate any counte rvailing duty liability would be to sell
subsidized productive assets to an unrelated party. Consequently, it is imperative that
the implementing bill correct and prevent su ch an extreme interpretation. The issue

26 Saarstahl, 858 F. Supp. at 193-94.
27 Saarstahl, AG v. United States , 78 F.3rd 1539 (Fed. Cir. 1996); Inland Steel Bar Co. v. United
States, 86 F.3d 1174 (Fed. Cir. 1996).
28 Saarstahl, AG v. United States, 78 F.3rd at 1544.
29 Uruguay Round Agreements Act, Pub. L. No. 103-465, 108 Stat. 4809 (1994) (“URAA”).
30 Statement of Administrative Action, accompanying H.R. 103-5110 (1994), reprinted in 1994
U.S.C.C.A.N. 3773, 4040.
31 URAA Section 771(5)(F); 19 U.S.C. § 1677(5)(F).

of privatization of a state-owned firm can be extremely complex and multifaceted.
While it is the Administration’s intent that Commerce retain the discretion to
determine whether, and to what extent, the privatization of a government-owned firm
eliminates any previously conferred countervailable subsidies, Commerce [the US
Department of Commerce] must exercise this discretion carefully through its
consideration of the facts of each case and its determination of the appropriate
methodology to be applied.
32
22. The idea of including specific language in the URAA and SAA to express the view that
arm’s-length privatizations and changes in owners hip do not extinguish subsidies granted to former
state-owned enterprises was aggressively championed by lobbyists representing US domestic steel,
lumber, and semiconductor industries.
23. The URAA and SAA language on privatization was enacted over the contemporaneous
objections of many of the United States’ most important trading partners, including the European
Union and its Member States. Along with other government representatives, the European Union
informed the United States that the new US implementing legislation regarding treatment of
privatizations under the ASCM contradicted both the language and intent of the ASCM and, as a
result, contravened US obligations under the SCM Agreement.
33
24. DOC has not changed its practices subsequent to the passage of the URAA and entry into
force of the ASCM. 34 US authorities applied the pre-ASCM GIA methodology in the cases that are
the subject of this proceeding, all of which are post-ASCM. The US authorities have claimed that
“the Uruguay Round Agreements Act (URAA) is not inconsistent with and does not overturn the
Department’s [pre-ASCM] GIA me thodology”, despite revisions to US practice mandated by the
ASCM and despite objections to the US practice voiced by the European Union and a number of other
WTO Members.
35
25. The United States has never found pre-privatization subsidies fully “repaid” or extinguished
under the GIA. Indeed, as noted, DOC practice has effectively eliminated the possibility that an
arm’s-length privatization transaction could account for any pre-privatization subsidy. Rather, DOC
has forced these subsidies to “travel” to arm’s-length market value purchasers. The United States has
simply assumed irrebuttably the existence of subsidies without determining whether privatized
companies involved in US countervailing duty investigations are themselves the “recipients” of
“financial contributions” conferring a “benefit” within the meaning of US law. In sum, the US
authorities have not deviated from the privatization “pass through” calculation methodology set forth
in the GIA.
26. In its final countervailing duty regulations, published on 25 November 1998, the DOC did not
promulgate additional regulations regarding privatizat ion or change in ownership. Nonetheless, the
DOC did re-emphasize several points.
36 First, the DOC stated that the position that an arm’s-length
privatization transaction at market value extinguishes subsidy is an “extreme position” that would

32 SAA at 928 (1994), reprinted in 1994 U.S.C.C.A.N. 3773, 4240.
33 “GATT Signatories Warn US Over Implementing Legislation on AD, CVD”, Inside US Trade , Vol.
12, No. 28 (15 July 1994); “EU Warns Congress on Three Provisions of GATT Implementing Bill,” id., Vol. 12,
No. 35 (2 September 1994); see also “Foreign Governments Call on Commerce to Change CVD Policy”, id.,
Vol. 15, No. 28 (11 July 1997).
34 We recall that the pre-ASCM US practice regarding privatizations has been the subject of a GATT
dispute settlement panel between the US and the EC. See Section III below.
35 Certain Hot Rolled Lead and Bismuth Carbon Steel Products from the United Kingdom , 61 Fed.
Reg. 58377, 58379 (14 November 1996) [“ British Steel plc 1995 Ad ministrative Review ”]. This report is
attached as Exhibit EC-5.
36 US Department of Commerce, Final Countervailing Duty Regulations , 19 C.F.R. § 351.524, 63 Fed.
Reg. 65348, 65415 (25 November 1998).

require a “strained interpretation” of the URAA. Second, DOC restated its “refusal” to examine
“subsequent events”, i.e., whether new private owners enjoy benefits from subsidies conferred on
state-owned firms prior to privatization or “wheth er a subsidy confers a competitive benefit upon the
subsidy recipient or its successor”.37
27. In sum, the DOC has made no attempt in any of the above-referenced determinations to
examine or explain what benefits from pre-privatization subsidies were provided to companies
following an arm’s-length privatization or sale of assets at fair market value. The US methodology,
as applied by the DOC, has relied on a presumption based on pre-ASCM practice that benefits from
pre-privatization subsidies pass through to a private owner without the need to determine that “benefit
” has been conferred on that owner as mandated by the ASCM. This irrebuttable presumption has
been applied to imports of leaded bar products originating from the United Kingdom, as will be
shown in the following section.
B. H
ISTORY OF US I MPOSITION OF US C OUNTERVAILING DUTIES ON CERTAIN LEAD AND
BISMUTH CARBON STEEL PRODUCTS ORIGINATING IN THE UNITED KINGDOM
28. On 8 May 1992 the United States initiated a countervailing duty investigation against imports
of leaded bars originating from the United Kingdom and other countries. On 27 January 1993 the US
Department of Commerce issued a final determination imposing countervailing duties on imports of
such products. This determination is attached as Exhibit EC-4. Four administrative reviews have
since been carried out by the DOC to set the final CVD rates on imports of subject merchandise
entering the United States. The results of the second, third, and fourth reviews initiated pursuant to
applications made in 1995, 1996, and 1997, respectively, are the subject of this dispute under the
ASCM. These reviews are attached as Exhibit EC-5, EC-6 and EC-7.
29. British Steel Corporation (“BSC”) was created in 1967 by means of the Iron and Steel Act,
which brought into public ownership most of the UK ’s steelmaking facilities. The state-owned BSC
was thereafter the main producer and exporter of leaded bars from the United Kingdom.
30. United Engineering Steels (“UES”) was formed in 1986 as a joint venture corporation equally
owned by BSC and the privately-owned Guest, Keen and Nettlefolds (“GKN”). Both BSC and GKN
sold productive assets to the joint venture in exchange for a 50%/50% shareholding. More
particularly, BSC contributed a major portion of its Special Steel Business, which produced
engineering steels, while GKN contributed its Brymbo Steel Works and its forgings business. The
DOC determined that “UES was created after several years of difficult, arm’s length negotiations
between BSC and GKN”.38 The valuation and sale of assets to the UES joint venture fully reflected
commercial considerations, for neither BSC nor GKN controlled UES. The DOC determined in the
original CVD investigation that UES was “an independent joint venture company, managed as a
separate corporate entity from its parent companies BSC and GKN”.
399 Furthermore, the DOC “found
nothing during verification which indicates that the negotiations for UES were not held at arm's
length”.40.
31. BSC was privatized through a two-step process. In February 1988 the UK Government
introduced the British Steel Bill, which made provision for the property, rights and liabilities of BSC
to be transferred to a new public limited company named British Steel Public Limited Company
(“British Steel plc”). British Steel plc was created on 26 July 1988 and on 5 September 1988 assumed
the property, rights and liabilities of BSC. Then, in December 1988, British Steel plc was privatized

37 Id. (emphasis added).
38 1992 Investigation, 58 Fed. Reg. at 6240. See Exhibit EC-4.
39 Id.
40 Id. and comment 4 at 6244 (concluding that the UES transaction was “an arm’s length transaction in
which BSC acted consistently with commercial considerations”).

through an open offering of its shares in London and other major financial centres in what was a fully
transparent sale at fair market value. With regard to privatization by open share offering on the stock
exchange, the DOC found that “the sale of BS plc was at arm's length, for fair market value and
consistent with commercial considerations”.41
32. As a result of the privatization, UES’ shareholders -- GKN and British Steel plc -- were both
fully in private hands. The privatization had no effect on the pattern of leaded bar exports from the
United Kingdom to the United States. UES continued to be the main UK producer and exporter of the
product to the United States.
33. On 20 March 1995 British Steel plc purchased GKN’s holding in UES, giving British
Steel plc 100 per cent of the shares of UES. British Steel renamed UES British Steel Engineering
Steels (“BSES”). In an effort to take account of this transaction, the DOC made separate CVD
findings with respect to the time period before 20 March 1995 and the time period thereafter, i.e., the
DOC considered UES to be the relevant producer and exporter of leaded bars before 20 March 1995
(including for the 1995 administrative review and the initial portion of the 1996 administrative
review) and British Steel plc/BSES to be the relevant producer and exporter for the latter portion of
the 1996 administrative review and for the 1997 administrative review (see below).
42
US DOC Determinations
34. The original Leaded Bars investigation was initiated on 8 May 1992 and concluded on
27 January 1993 when the DOC published its final affirmative countervailing duty determination. As
stated, this determination is attached as Exhibit EC-4. That determination found that subsidies within
the meaning of the US CVD law had been provided to UES that were attributable, as a result of
amortisation, to the period of investigation (calendar year 1991). The DOC determined a
countervailing duty weighted average margin of 12.69 per cent for UES.
35. None of the financial contributions at issue had been granted to UES. Rather, each had been
provided to BSC prior to 1985/1986. In accordance with the methodology described in paragraph 4
above, they were considered non-recurring and therefore allocated over the useful life of assets, a
period which was originally 15 years but was subsequently extended to 18 years. Thus, all relevant
financial contributions countervailed had been made to BSC prior to UES’ formation (and to BSC’s
1988 privatization). UES had not received any subsidy and, but for the application of the US “pass
through” formula, no countervailing duties would have been imposed.
36. As stated, the DOC specifically determined that transactions between BSC, GKN, and UES
were conducted at arm’s length and fully reflected commercial considerations. Nonetheless, the DOC
found that “a company's sale of a business or productive unit does not alter the effect of previously
bestowed subsidies” and that disposed assets “take a portion of the benefits with them when they
‘travel to their new home’”.
43
37. The DOC thus found that pre-privatization financial contributions to the then state-owned
BSC had “passed through” to UES following the latter’s arm’s-length acquisition of assets from BSC
in 1986. The DOC further determined that these amounts were not tied to any particular product and

41 Final Results of Redetermination Pursuant to Court Remand on General Issues of Privatization,
British Steel plc v. United States , 17 July 1995 (unpublished) at 18; see also Remand Determination of US
Department of Commerce on General Issues of Privatization, Certain Hot Rolled Lead and Bismuth Carbon
Steel Products from the United Kingdom, 12 October 1993 (unpublished) [“1993 Remand Determination”].
42 The DOC chose to treat British Steel plc and BSES “as one company for purposes of this
proceeding”. See, e.g., Certain Hot Rolled Lead and Bismuth Carbon Steel Products from the United Kingdom ,
63 Fed. Reg. 18367, 18374 (15 April 1998) [“British Steel plc 1997 Administrative Review”]. See Exhibit EC-7.
43 1992 Investigation, 58 Fed. Reg. at 6240. See Exhibit EC-4.

should therefore be allocated over BSC's entire production including its leaded bar production. As a
result, the DOC attributed to UES subsidies that had been provided to BSC.
38. In October 1993, the DOC modified its previous determination with respect to UES. This
modification, set forth in the so-called Remand Determination , was based on revised US
“privatization” and “restructuring” practices set out in the General Issues Appendix to Certain Steel
Products from Austria in July 1993. 44 In the GIA, the DOC stated that it may no longer be assumed
that the entire amount of the subsidies allocated to a certain productive unit “travels” with that unit
when it is sold; rather, a portion of the sales price of the productive unit may represent the
“repayment” of prior subsidies.45
39. Following the original imposition of countervailing duties on UES in 1993, four
administrative reviews have been carried out by the DOC to set the CVD rate on imports of leaded
bars entering the United States in 1994, 1995, 1996, and 1997, respectively. The first of those
reviews (like the original determination itself) was initiated before the entry into force of the ASCM.46
Hence, this Panel concerns the second, third, and fourth administrative reviews regarding the years
1995, 1996, and 1997, respectively, which were initiated after the entry into force of the ASCM.47
The 1995 Review
40. The 1995 Review (attached as Exhibit EC-5) was initiated on 14 April 1995. It was the first
review of the leaded bars order subject to the requirements of the ASCM, which, as stated, the
United States was to have transposed into national legislation effective 1 January 1995. The 1995
Review covered entries of leaded bars exported to the United States by UES during calendar year
1994. In its final determination published on 14 November 1996, the DOC imposed a countervailing
duty of 1.69 per cent against UES; this was once more entirely attributable to subsidies previously
granted to BSC.
48 The DOC disregarded both (i) UES’ explanation that it had received no subsidies
of any sort and (ii) more particularly, UES’ explanation that it had received no benefit by virtue of
financial contributions provided to BSC before BSC’s 1988 privatization. On this latter point, the
DOC failed to examine whether UES was the recipient of any “benefit” conferred by the UK
Government, notwithstanding UES’ submissions to DOC that such a determination was now required
under Article 1.1(b) of the ASCM before countervailing duties could be legally imposed.
41. Rather, the DOC conducted the 1995 Review under the “privatization” and “restructuring”
rules set forth in the pre-ASCM DOC General Issu es Appendix. Both UES and the UK Government
expressed serious concerns regarding this approa ch. The DOC replied that the “URAA [transposing
the ASCM into US law] is not inconsistent with and does not overturn the Department’s General
Issues Appendix methodology or its findings in the [1993] Lead Bar Remand Determination”.
49 DOC
referred to the language of Section 771(5)(F) of the URAA, quoted above, which it claimed “leaves

44 58 Fed. Reg. 37217, 37225 (9 July 1993).
45This approach was also followed by the DOC in the first administrative review of the countervailing
duty order, concluded in August 1995 (the 1994 Review), which is not before this Panel, as it was initiated
before the entry into force of the ASCM. The DOC expressly stated in that review that all of its conclusions
were based on US law as it stood on 31 December 1994, i.e., on provisions not yet amended to take the ASCM
into account. It should be noted, however, that DOC ha s followed this very same approach in all later reviews,
notwithstanding the intervening entry into force of the ASCM.
46 The first review was initiated on 15 April 1994. A final determination was issued by the DOC on 24
August 1995, imposing a countervailing duty rate on UES of 5.05%. Certain Hot Rolled Lead and Bismuth
Carbon Steel Products from the United Kingdom , 60 Fed. Reg. 44009 (24 August 1995) [“British Steel plc 1994
Administrative Review ”].
47 Article 32:3 ASCM. These reviews are attached as Exhibits EC-5, EC-6 and EC-7 respectively.
48 Certain Hot Rolled Lead and Bismuth Carbon Steel Products from the United Kingdom , 61 Fed.
Reg. 58377 (14 November 1996) [“British Steel plc 1995 Administrative Review”], attached as Exhibit EC-5.
49 Id. at 58379.

discretion to the Department with regard to the impact of a change in ownership on the countervailing
of past subsidies”.50 DOC also referenced the Statement of Administrative Action, produced by the
Clinton Administration and submitted to the US Congress, also quoted above, which indicates that the
DOC has discretion “to determine whether, and to what extent, the privatization of a government-
owned firm eliminates any previously conferred countervailable subsidies”.51
42. In the 1995 Review final determination, DOC stat ed that the US Court of Appeals for the
Federal Circuit “recently issued a ruling supporting our determination that subsidies are not
necessarily extinguished as a result of the sale of an enterprise in an arm’s length transaction”. 52
DOC's reliance on the Court of Appeals decision ignored the fact that the ruling at issue expressly
concerned US law as it existed before the ASCM entered into force.
53 Thus, DOC plainly was relying
on court-made law that was inconsistent with the ASCM when DOC found a countervailable subsidy
to UES during the period covered by the 1995 Review.
The 1996 and 1997 Reviews
43. The 1996 and 1997 Reviews (attached as Exhibits EC-6 and EC-7) covered entries of leaded
bars exported to the United States by UES during the calendar years 1995 and 1996. The reviews
were initiated on 25 April 1996 and 29 April 1997, respectively. The final DOC determinations were
issued on 14 October 1997 and 15 April 1998, respectively.54
44. As explained above (see paragraph 33), during the period covered by the 1996 Review,
British Steel plc acquired GKN’s interest in UES. Pursuant to this transaction between the two
private companies that held stakes in UES, UES was changed from a 50-50 joint venture to a wholly-
owned subsidiary of British Steel plc, which renamed the firm British Steel Engineering Steels Ltd.
45. With respect to the 1996 Review, the DOC determined that imports during the period prior to
the acquisition of the remainder of UES by British Steel plc ( i.e., 1 January – 20 March 1995) should
be countervailed at a rate of 2.4 per cent. This rate was based on the same position DOC took in the
1995 Review that BSC subsidies “travelled” with th e assets sold to UES in 1988. DOC took this
position despite (i) UES’ purchase of these assets at arm’s length and for full commercial
consideration and (ii) the subsequent privatization of BSC at arm’s length and for full commercial
consideration.
46. With respect to the remaining portion of th e 1996 Review (21 March to 31 December 1995)
and to the 1997 Review (1 January to 31 December 1996), the DOC imposed substantially higher
countervailing duties at rates of 7.35 per cent and 5.28 per cent, respectively. These higher CVD rates
were based on a determination by DOC that British Steel plc’s acquisition of the remaining 50 per
cent of UES somehow allowed British Steel plc itself to benefit anew from subsidies given to the
formerly state-owned BSC, and that UES (newly renamed BSES) was also somehow now benefiting
from those subsidies. These hitherto unattribut ed subsidies had, in DOC’s view, somehow sprung

50 Id.
51 Id.
52 Saarstahl, AG v. United States , 78 F. 3d 1539 (Fed. Cir. 1996), cited in British Steel plc 1995
Administrative Review, 61 Fed. Reg. at 58378.
53 The Court of Appeals in its decision emphasized that the URAA has “profoundly changed the CVD
statute as of 1 January 1995”. Saarstahl, 78 F. 3d at 1543 n.*.
54 Certain Hot Rolled Lead and Bismuth Carbon Steel Products from the United Kingdom , 62 Fed.
Reg. 53306 (14 October 1997) [“ British Steel plc 1996 Administrative Review”] and Certain Hot Rolled Lead
and Bismuth Carbon Steel Products from the United Kingdom , 72 Fed. Reg. 18367 (15 April 1998) [“ British
Steel plc 1997 Administrative Review”], attached as Exhibits EC-6 and EC-7 respectively.

back to life and “rejoined BS plc’s pool of subsidies with the company’s 1995 acquisition [of
UES]”.55
47. In addition to this newly “rejoined pool”, the DOC continued to employ its “restructuring ”
and “privatization” approaches from the 1993 GIA in order to countervail pre-privatization subsidies
to BSC that DOC found had “passed through” to UES in 1986 and remained there despite BSC’s
privatization in 1988. DOC now found that these subsidies had “passed through” again, this time
back to British Steel plc.
48. Rather than assessing whether there existed a benefit to British Steel plc, DOC chose to take
the existence of such benefits for granted, supporting this assumption with a 1993 countervailing duty
investigation involving a different product from the United Kingdom (“1993 Certain Steel from the
UK”).
56 This investigation is attached as Exhibit EC-8. That decision was, once again, prior to the
entry into force of the ASCM. By relying on that DOC decision, DOC avoided examination of
whether BSC’s privatization eliminated pre-privatization benefits conferred on BSC or whether those
BSC benefits had “travelled” to British Steel plc, BSES, or UES. Rather, DOC again championed its
view that “[t]he URAA is not inconsistent with and does not overturn the Department’s 1993 General
Issues Appendix methodology”. 57 DOC simply assumed the existence of a benefit to “British
Steel plc/BSES/UES” and then calculated such benefits by applying, inter alia, findings from the pre-
ASCM 1993 Certain Steel from the UK.
49. As in the 1995 Review, the DOC made no attempt in the 1996 or 1997 Reviews to examine or
explain how financial contributions to BSC before that company’s privatization had conferred
benefits, if any, on British Steel plc, BSES, or UES. By its practice, DOC effectively disregarded the
effect both of BSC’ s privatization and of the sales of former BSC assets at market prices. Instead,
DOC simply assumed the continuous existence of “ben efits” to private firms, relying entirely on pre-
Uruguay Round US legislation and US practice and ignoring the new requirements of the ASCM.
The result has been the imposition of countervailing duties on UES and British Steel plc attributable
entirely to prior financial contributions made to BSC.
III. THE ECONOMICS OF PRIVATIZATION
A. HOW MARKETS VALUE COMPANIES AND WHY PRIVATIZATION IN AN ARM’S-LENGTH
MARKET- B ASED SALE NECESSARILY EXTINGUISHES PRIOR SUBSIDIES TO THE STATE-
OWNED FIRM
50. Although the European Communities submit that the concept of market valuation is both well
settled and intuitively obvious, it would appear appropriate to explain this term in greater detail. The
European Communities are of the view that when a private buyer purchases a company or assets
thereof in an arm’s-length transaction at market value, the price paid necessarily values and
incorporates within the transaction any subsidy previously conferred. If the subsidy increases the
value of the company, so will it increase the pr ice that the purchaser must pay. The payment of
market price thus necessarily precludes the notion that any “ benefit” would have “passed through” to
this new private owner as a basic matter of economics.
58 We set forth below four examples.

55 British Steel plc 1997 Administrative Review, 63 Fed. Reg. at 18369. See Exhibit EC-7.
56 Certain Steel Products from the United Kingdom , 58 Fed. Reg. 37393 (9 July 1993) (attached as
Exhibit EC-8), cited in British Steel plc 1997 Administrative Review, 63 Fed. Reg. at 18369 (Exhibit EC-7).
57 British Steel plc 1997 Ad ministrative Review , 63 Fed. Reg. at 18369, citing British Steel plc 1995
Administrative Review, 61 Fed. Reg. at 58379.
58 For a further description of the valuation techniques described herein, see Elhanan Helpman and Paul
R. Krugman, T RADE POLICY AND MARKET STRUCTURE (1994); Joseph H. Marren, M ERGERS & ACQUISITIONS:
A V ALUATION HANDBOOK (1993); Robert W. Kolb and Ricardo J. Rodriguez, F INANCIAL MARKETS (1996);
Erich A. Helfert, TECHNIQUES OF FINANCIAL ANALYSIS (1972); O. Letwin, PRIVATIZING THE WORLD: A STUDY

51. Example 1: The first example is the simplest. Consider a person (“A”) who is given £100
through a government financial contribution. This £100 confers a “benefit” on A, as the recipient of
the money. A then purchases a chair with the £100. He sells the chair to a unrelated purchaser, B, for
its fair market value, £100. This example shows th at the “benefit” of the £100 has not in any sense
“passed through” to B. The government is £100 poorer and A is £100 richer, both before and after the
sale of the chair. B has not benefited at all. He has exchanged £100 for a chair which is worth that
amount.
52. Example 2: Assume the same facts as Example 1. However, the chair that A purchased for
£100 is no longer worth £100, but instead has increased in value to £125. B purchases the chair for
£125. In this example, one readily sees that, like Example 1, no benefit has been conferred on B. A
received a benefit of £100 from the government, and made a profit of £25 due to the increased value
of his purchased asset, the chair. B has paid fair value for the chair, and the government is £100
poorer.
53. Example 3: Assume the same facts as Example 1, but the value of the chair after its purchase
has declined by £25. In this example, B buys the chair for £75, which is its fair market value. A
benefits by £100 from the government contribution. B does not benefit from the government
contribution, and the government has spent £100. The decline in market value does not benefit B,
because the value is market-based, i.e., a function of the productive potential of the asset.
54. Example 4: Firm A is owned by the state and has received financial contributions for some
years. The company is valued at £100 million. Firm B, in the same industry, has the identical type of
plant and equipment, but has never received any government assistance. The two companies are put
up for sale in a competitive bidding process. The companies will have the same value to prospective
purchasers, and they should sell for the same price. This is because a rational purchaser is indifferent
between the two firms. The rational purchaser would not offer a higher price for Firm A than for
Firm B simply because the former had received a subsidy. Nor would a purchaser value Firm B at a
higher amount because it had never received any government assistance.
55. A subsidy benefits its recipient by conferring an economic advantage that the recipient would
not otherwise have enjoyed. At its most basic, an economic advantage must either enhance revenue
or reduce cost for the benefited firm. For example, a subsidy conferred to support research and
development results in reduced current operating cost and enhanced future revenue as the benefits of
the research are realized in new or improved products. A grant for new capital equipment, on the
other hand, reduces both the operating cost of depreciation and the capital cost of debt financing for
the recipient of the grant. Whether in the form of enhanced potential revenue or reduced cost, any
advantage is reflected in higher earnings, cash flow, and return on investment than would have been
realized in the absence of the benefit.
56. The prospect of enhanced future profits and cash flow is reflected in a company’s market
value. A publicly traded company’s market value is reflected in its market capitalisation, the share
value multiplied by the number of shares outsta nding. For example, even after adjusting for
differences in the book value of equity, the market capitalisation of Microsoft is currently
approximately five times higher than that of General Motors. The market perception is that over time,
even with lower sales and fewer tangible assets, Microsoft's earnings will exceed those of General
Motors. The higher market capitalisation assures that, for a given level of risk, market returns are
equalized among available investments.

 OF INTERNATIONAL PRIVATIZATION IN THEORY AND PRACTICE (1988); Copeland, Long-Term Sources of Funds
and the Cost of Capital, in Altman, H ANDBOOK OF CORPORATE FINANCE (1986). See generally United States -
Imposition of Countervailing Duties in Certain Lead and Bismuth Carbon Steel Products Originating in France,
Germany and the United Kingdom , Report of the Panel (unadopted) at paragraphs 405-430 (attached as
Exhibit EC-9).

57. The principles of valuation are widely recognized. The value of a business is the net present
value of projected future cash flows. For publicly traded companies, equity markets value the shares
based on the combined perceptions of investors. For non-public companies, setting value is a matter
of accepted practice.
58. Investment bankers value companies for purposes of selling a controlling interest by
discounting projected future cash flows at a discount rate that reflects the probability that the cash
flows will be realized (the “risk”). The higher the certainty of realising the projected cash flow, the
lower the discount rate and the higher the present value of the business. Investment bankers use a
variety of techniques to estimate value. Although the techniques vary, all are aimed at estimating
future profits and cash flow and the level of risk. However, the best test of the value of a company is
the price that an informed buyer and informed seller agree on in an arm’s-length sales negotiation.
The agreed price will reflect the best possible measure of earnings potential of the business.
59. The benefit of a subsidy does not and cannot “pass through” to the buyer in an arm’s-length
sale at fair market value, as we have seen from the examples above. For the benefit of the grants to
Firm A to “pass through” to the new buyer and thus not to be imbedded in the purchase price, it would
be necessary for our buyer to purchase Firm A at less than the market value of the company -- if, for
example, the state were to set the selling price of the business on a basis other than market value.
Only if the buyer pays less than market value would the benefit of the previous financial contribution
“travel” to the buyer. However, this cannot occur in an arm’s-length negotiation and sale at fair
market value. There, buyer and seller are properly focused on the earnings potential and market
replacement value of both the equipment and the work force.
60. If a company is purchased at arm’s length and for fair value, there is no economic basis for
claiming that the buyer, or the business or productive unit purchased, receives a “benefit” by virtue of
the past financial assistance that the seller received. To convey benefit, the seller would effectively
have had to sacrifice income by agreeing to a price lower than fair market value.
61. Therefore, the proper economic inquiry in consideration of whether benefit or advantage has
“passed through” to a buyer should be the degree to which the authorities consider that “market
value” was paid. Such considerations include the fairness and transparency of the negotiation and
sales process and the adequacy of value received for the company based on commercially meaningful
criteria.
62. The European Communities note that the valuation techniques set forth above are generally
accepted practice in privatization and other business transactions. Indeed, the United States
Government employed these same valuation methods in its recent privatization of the formerly
government-owned US Enrichment Corporation (“USEC”). USEC is the leading US company in the
field of transforming natural uranium into enrich ed uranium fuel for nuclear reactors to produce
electricity. Until 1998, the US Government ow ned USEC, which enriched uranium for both
commercial reactors and military uses. USEC and its predecessors were created and nurtured by
subsidies amounting to billions of dollars over more than 50 years.
63. In authorising the USEC privatization, the US Congress articulated a single overriding
principle -- that the US Treasury obtain fair market value for this government-owned firm, with that
price defined by the US Congress as the “the net present value of the company”.
59
64. The US Treasury met this requirement through an initial public offering of USEC shares. 60
The valuation of the firm is useful in validating the merit of the economic principles discussed above.

59 42 U.S.C. 2297(d)(1); Pub. Law 102-486, §§ 1502(a)(1), (c)(2).
60 As JP Morgan informed the Congress, “[t]he IP O sales process is a well-established mechanism,
which, over a long period of time, has proven successful at ensuring that both buyers and sellers receive a fair

The valuation was conducted by JP Morgan, as financial advisers to USEC. JP Morgan was asked to
provide the US Congress with its independent valuation of the likely proceeds from such a public sale,
before Congress would agree to allow the US Government to sell the shares in USEC. JP Morgan
informed the Congress that USEC, which had received US Government benefits for decades, could be
valued using the two industry standard methods for such valuations -- estimating the net present value
of USEC’s projected future cash flows and anal ysing the company’s financial performance versus
comparable, publicly traded firms. As JP Morgan informed the US Congress:
Our net present value calculations involved developing an independent assessment of
the future financial performance of USEC and discounting the resulting free cash
flow at an appropriate rate, reflecting investors required rates of return for a business
with the risk profile of USEC. . . . In de veloping our forecast of USEC’s future cash
flows, JP Morgan performed extensive due diligence on all aspects of USEC’s
business and finances. . . . The basis for an appropriate discount rate is a cost of
capital analysis performed to estimate the cost of both debt and equity for USEC. . . .
To confirm the net present value calculations outlined above, we also estimated
USEC’s value using a comparable trad ing multiples analysis. This technique
involved utilizing the key financial valuation multiples of publicly-traded companies
that we considered comparable to USEC. This involved determining the appropriate
ranges of Price-to-Cash Flow multiples that are applicable to USEC. . . . [T]he
comparable trading multiples technique will be the most important valuation
technique in any public offering of USEC’s stock.
61
65. JP Morgan analysed the value of USEC entirely without regard to the substantial government
benefits previously bestowed upon the state-ow ned firm, including benefits immediately before
privatization. If JP Morgan had considered these benefits relevant to valu ing the company, it would
have discussed them in their valuation analysis, and prospective investors would have raised the issue.
This point is especially important for USEC, which is a major exporter of enriched uranium around
the world and would, if other WTO Members were to apply the US practice, be potentially vulnerable
to countervailing duty actions.
66. It is therefore plain as a matter of marketplace reality that there exist generally accepted
methods for valuation of business concerns and that a buyer purchasing a firm valued pursuant to
these methods will be paying a fair market price. Whatever the past sources of a company’s value, a
buyer of that firm will enjoy no benefit if the buyer has purchased the company for fair market value
as a result of a transparent and arm’s-length privatization transaction.
67. We now turn to the application of these principles in the context of the British Steel cases that
are the subject of this dispute.
B. THE BRITISH STEEL PRIVATIZATION
68. In this Section, the European Communities pr ovide the Panel with argument regarding the
arm’s-length market privatization of BSC. In particular, we wish to address the irrationality of the US
Department of Commerce’s practice as applied in the BSC privatization. The DOC practice -- while

price, given the underlying supply and demand for a Corporation’s securities”. Privatization of the US
Enrichment Corporation: Hearing on Serial 104-8 before the Subco mmittee on Energy and Power of the House
Committee on Commerce (104th Congress, 1st Session) 61 (Statement of JP Morgan).
61 Id. at 60.

purporting somehow to measure the amount of “subsidie s” that “passed through” in a privatization --
lacks rational basis and produces wholly arbitrary results.62
69. As set forth previously, in attempting to determine that previous subsidies “pass through” in a
privatization, the DOC purports to determine the por tion of the privatized company’s purchase price
that is attributable to prior su bsidies. DOC undertakes this apportionment by dividing the nominal
value of the privatized company’s subsidies by its net worth in the years preceding privatization and
then averaging the resulting ratios to compute a fa ctor referred to as the “gamma”. Without any
support from basic principles of economics, finance, accounting or accepted business practice, DOC
has declared that its self-derived “gamma” reasonably represents the ratio of past subsidies to the
overall value of the business. According to DOC, when the gamma factor is multiplied by the cash
portion of the purchase price, the result is the amount of subsidies that remain with the seller in the
privatization. Consistent with its apparent intent, this method seems unavoidably to find that the
majority of subsidies “pass through” to the purchaser.
70. DOC concluded, after thorough verification of relevant company and UK Government data,
that BSC was privatized at an arm’s-length, fair market price. Yet the DOC determined that only a
small part of the subsidies received by BSC were left behind in the company’s privatization. In other
words, the purchase price of BSC would have to have been many times higher than its fair market
value for DOC to determine that subsidies did not “pass through” to British Steel/UES. The
additional payment over and above the market value of BSC would have been far in excess of the
entire residual value of subsidies the DOC itself claimed st ill existed at the time of privatization. On
its face, such an outcome is absurd and cannot be sustained.
71. The details of the British Steel case are as follows. Under the DOC methodology set forth
above, DOC found that BSC’s “gamma” in 1988 -- the year of the company’s privatization -- was
0.46. At the same time, DOC recognized that the sales price of the company was £2,500 million.
Accordingly, DOC deemed British Steel plc, the private company, deserving of a “credit” of £1,150
million (0.46 x £2,500 million) against the unamortized amount of pre-privatization subsidies. The
£1,150 million credit was deemed to reduce the amount of the unamortized subsidies allegedly passed
through to the buyer.
72. Again using the actual example of British Stee l, it is plain that under the DOC methodology,
in order for the fair market sale of BSC to have fully eliminated the alleged pass-through of benefits
conferred to that company, the purchase price in the 1988 privatization would have had to have been
much greater than its market value to extinguish all subsidies.
73. There is no rational basis for an approach that requires such disparity between the amount of
the unamortized subsidies ( i.e., the present value of the future benefits from past subsidies to a prior
government-owned firm) and the value that unrelate d purchasers are willing to pay for that company
in a market value sales transaction.
74. The European Communities thus respectfully subm it that the US approach is fatally flawed.
This flaw is caused by the United States’ reluctance to conform its countervailing duty practice to US
ASCM obligations. We now turn to the procedural posture of this dispute and then to the
requirements of the ASCM in order to demonstrate that the ASCM mandates that countervailing

62 There are a number of fatal flaws in the DOC subsidies “methodology” which produce results that
are arbitrary and irrational. First, as a fundamental matter, DOC takes no account of an arm’s-length fair market
value transaction, considering its impact on the conferral of benefit “irrelevant”. Other such flaws include,
solely by way of example, (i) DOC’s simplistic assumption that the “purchase price” of a company includes
only cash paid, but not liabilities assumed (thus, “passing through” even more subsidies) and (ii) basing the so-
called “gamma” calculation on equity, thus forcing gamma to vary depending on a company’s degree of
financial leverage (the mix of debt and equity) -- which, needless to say, is unrelated to subsidy. These
irrationalities are detailed in a simple example provided hereto as Exhibit EC-3.

duties may not be imposed in circumstances where, as here, British Steel plc received no benefit from
any financial contribution provided to BSC prior to that company’s arm’s-length market value
privatization.
IV. PROCEDURE
75. The US practices regarding the treatment of pre-privatization subsidies was the subject of a
GATT 1947 dispute settlement panel between the United States and the European Communities in
1993.
63 The panel’s report, adoption of which was blocked by the United States, is provided as
Exhibit EC-9.
76. As a result of the continuing application by the United States of its illegal methodology
during reviews conducted after the entry into force of the ASCM, the European Communities
requested consultations with the United States on 12 June 1998 (Exhibit EC-10).64
77. The Consultations were held on 29 July 1998 in Geneva but did not lead to a satisfactory
resolution of the matter.
78. Accordingly, the European Communities requested the establishment of a Panel on
14 January 1999 in a letter to the Chairman of the Dispute Settlement Body (Exhibit EC-11).65
79. At its meeting on 17 February 1999 the Disput e Settlement Body (DSB) established the
present Panel. The terms of reference, as contained in Exhibit EC-12, are the following:
To examine, in light of the relevant provisions of the covered agreements cited by the
European Communities in document WT/DS138/3 and WT/DS138/3/Corr. 1, 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.
80. Brazil and Mexico have reserved their rights as third parties to the dispute.
V. LEGAL ARGUMENTS
81. After providing general comments on the object and purpose of the ASCM which are relevant
to this dispute (Section A), the European Communities establish below two distinct violations of the
ASCM. First, as demonstrated in Section B, the United States violates Article 10 ASCM in
conjunction with Articles 19, 1 and 14 ASCM by imposing countervailing duties on the imports of
privately-owned companies without first examining or establishing whether there exists any subsidy
relating to those imports. Second, the United States also violates Article 19.4 ASCM by imposing
duties in excess of the amount of any subsidy found to exist, calculated per unit of the subject
merchandise (Section C). Following presentation of these arguments, the European Communities
illustrate their case by applying the requirements of the ASCM to the case of British Steel/UES
(Section D).
82. The EC legal argument may be summarized as follows: Article 10 ASCM requires that a
WTO Member take “all necessary steps” to ensure that countervailing duties are imposed by its
authorities only in conformity with the terms of the ASCM. Most fundamentally, these include the
requirement of Article 19 ASCM that countervailing duties be assessed only if a subsidy exists within

63 United States - Imposition of Countervailing Du ties in Certain Lead and Bismuth Carbon Steel
Products Originating in France, Germany and the United Kingdom, Report of the Panel (1994) (unadopted).
64 Document WT/DS138/1.
65 Document WT/DS138/3 and WT/DS138/3/Corr.1

the meaning of the Agreement. Article 1 ASCM limits “subsidy” to those instances in which a
government has made a “financial contribution” and a “benefit” is thereby conferred. Consistent with
the context, object, and purpose of the Agreement, countervailing duties may not be imposed in other
circumstances, and such duties, when authorized, may not be in excess of the amount needed to
“offset” any subsidy found to exist, under the terms of Article 19.4 ASCM. The extent of a “benefit”
conferred, if any, is determined by reference to market benchmarks, as required by ASCM Article 14.
Without receipt of advantage by comparison to that market benchmark, no “benefit” exists. A private
purchaser of productive assets at fair market value obtains no “benefit” by virtue of any prior financial
contribution by a government to the former owner. By operation of basic economic principles, the
arm’s-length market price includes the residual value of any prior financial contributions and ensures
that the purchaser will enjoy no advantage that may have accrued to the former owner prior to the
purchase. As such, the purchaser -- i.e., the company now manufacturing, producing or exporting the
merchandise under investigation -- enjoys no “benefit” from any prior government funding to another
unrelated party and has received no subsidy. Therefore, imposing countervailing duties under such
circumstances violates the ASCM.
83. In the next Section, the European Communities examine the purposes of countervailing
duties, demonstrating that, pursuant to the ASCM and Article VI of GATT 1994, such duties are
designed to offset any advantage enjoyed by imported merchandise, but to go no further, as the
United States has done in the cases in dispute before this Panel.
A. T
HE OBJECT AND PURPOSE OF THE ASCM ESTABLISH THAT COUNTERVAILING DUTIES MAY
OFFSET A SUBSIDY, BUT MAY GO NO FURTHER
84. The general rules for interpretation of international treaty obligations are set forth in
Article 31 of the Vienna Convention on the Law of Treaties (“Vienna Convention”). Article 31.1
thereof provides, in relevant part, that “[a] treaty shall be interpreted in good faith in accordance with
the ordinary meaning to be given the terms of the tr eaty in their context and in the light of its object
and purpose”.
85. In the present dispute it is particularly important to bear in mind the structure of the ASCM as
context for the provisions to be examined, as well as the object and purpose of countervailing duties
as set forth in the ASCM. Therefore, the European Communities will first examine the context of the
ASCM and, in particular, the object and purpose of countervailing duties prior to considering relevant
legal provisions in greater detail.
86. The introductory provision of Chapter V of the ASCM on countervailing duties is Article 10
ASCM, which provides:
Members shall take all necessary steps to ensure that the imposition of a
countervailing duty on any product of the territory of any Member imported into the
territory of another Member is in accordance with the provisions of Article VI of
GATT 1994 and the terms of this Agreement. Countervailing duties may only be
imposed pursuant to investigations initiated and conducted in accordance with the
provisions of this Agreement and the Agreement on Agriculture.
87. The purpose of countervailing duties is made plain by footnote 36 to Article 10 ASCM, which
provides:
The term “countervailing duty” shall be understood to mean a special duty levied for
the purpose of offsetting any subsidy bestowed directly or indirectly on the
manufacture, production or export of any merchandise, as provided for in paragraph 3
of Article VI of the GATT 1994.

88. Article 10 ASCM incorporates into the ASCM the terms of Article VI of the GATT 1994.
Article VI of the GATT 1994 provides, in pertinent part:
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.
89. The plain language of these provisions makes clear that under the ASCM countervailing
duties are “special” duties which may be assessed on imported merchandise “ for the purpose of
offsetting any subsidy bestowed” on such merchandise. 66 The ordinary meaning of “offset” is clear:
“[t]o set off as an equivalent against something else; to balance by something on the other side or of
contrary nature”.67 The concept is further illustrated by the French text of Article 10, which provides
that countervailing duties are designed to “neutraliser toute subvention accordée”.68
90. The terms of the ASCM and of Article VI of GATT 1994 strike a careful and necessary
balance. They underscore that a Member may impose a countervailing duty that offsets (or
“neutralizes”) a subsidy, but may not go further. A Member may not impose such duties to more than
offset a subsidy.
91. While delineating appropriate conditions for the imposition of countervailing duties,
Article VI of the GATT 1994, as set forth above, also expressly provides that “no countervailing duty
shall be levied . . . in excess of an amount equal to the . . . subsidy determined to have been
granted”.
69 Article VI confirms the interpretation that the imposition of a countervailing duty must be
a measured response, rationally related to the subsidy conferring advantage to the manufacturer
and/or exporter of the relevant product and imposed only after such a subsidy is first found to exist.
92. Article 19.4 ASCM makes clear that this means that the amount of the countervailing duty
may not be “in excess of the amount of subsidy found to exist, calculated in terms of subsidization per
unit of the subsidized and exported product”.
93. It is therefore well established by the terms of the ASCM that when countervailing duties are
assessed in excess of an actual benefit conferred, they cease to “offset”, and rather themselves are
distortive. Countervailing measures in “excess” of the subsidy enjoyed calculated in terms of
subsidization per unit of the subsidized and exported product contravene the ASCM. It is self-evident
that imposing countervailing measures in the absence of a subsidy violates the ASCM.
70
94. Thus, the ASCM provides that WTO Members may redress the trade-distorting advantage of
a subsidy by means of an agreed remedy: the imposition of countervailing duties. However the

66 (Emphasis added).
67 The Oxford English Dictionary, Oxford University Press (1971).
68 This fundamental principle has been recogni zed in the United States for over two decades.
According to the United States Supreme Court, the purpose of the US countervailing duty law is “to offset the
unfair competitive advantage that foreign producers would otherwise enjoy from export subsidies paid by their
governments”. Zenith Radio Corp. v. United States, 437 US 443 (1978) (emphasis added).
69 Article VI:3 GATT 1994. See also Article 19.4 ASCM, discussed below.
70 Two recent panel reports underscore this point. In Brazil – Export Financing Programme for
Aircraft, the panel wrote that “the object and purpose of the SCM Agreement is to impose multilateral
disciplines on subsidies which distort international trade”. Brazil – Export Financing Programme for Aircraft :
Report of the Panel, WT/DS46/R (1999) at paragraph 7.26. The Canada Aircraft panel noted that “the object
and purpose of the SCM Agreement could . . . be summarized as the establishment of multilateral disciplines ‘on
the premise that some forms of government intervention distort international trade, [or] have the potential to
distort [international trade]’”. Canada - Measures Affecting th e Export of Civilian Aircraft : Report of the
Panel, WT/DS70/R (1 999) [“Canada Aircraft panel report”] at paragraph 9.119.

ASCM does not allow Members to impede trade by the imposition of countervailing duties in an
excessive or impermissible manner.
95. Therefore, consistent with the Vienna Convention rules of interpretation, the established
purpose for assessment of countervailing duties is to offset the advantage afforded imported
merchandise by a subsidy bestowed upon the manufacture, production or export of that merchandise.
In accordance with this purpose, the conditions which must be fulfilled for countervailing duties to be
levied are:
• the existence of a subsidy. The term “subsidy” is defined in Article 1 ASCM as comprising two
elements, a financial contribution by a government and a benefit which is thereby conferred. The
most important element for the purposes of the present dispute is “benefit”, which must be
interpreted in accordance with Article 14 ASCM.
• the subsidy must not have been “withdrawn” (Article 19.1 ASCM).
• that “through the effects of the subsidy, the subsidized imports are causing injury”. This
requirement is found, inter alia, in Article 19.1 ASCM but does not appear relevant in the present
case and will not be considered further;
• that countervailing duties are calculated “in terms of subsidization per unit of the subsidized and
exported product” at a level no more than necessary to offset the subsidy (Article 19.4 ASCM).
96. We now turn to the first of these obligations and show that, by imposing countervailing duties
where no subsidy exists, the United States has violated its obligations under Article 10 ASCM to take
“all necessary steps” to ensure that such duties are imposed only in accordance with the terms of the
ASCM.
B. T
HE UNITED STATES HAS VIOLATED ARTICLE 10 ASCM B Y IMPOSING COUNTERVAILING
DUTIES WITHOUT HAVING ESTABLISHED THAT A SUBSIDY EXISTS
1. Introduction
97. In order for a Member’s practice to meet the requirements of Article 10, as set forth in
Section A above, the Member must take “all necessary steps” to ensure that its imposition of
countervailing duties conforms to the requirements of the ASCM. To do otherwise is to fail to
comply with the express requirements of Article 10.
98. Pursuant to this requirement, the ASCM clearly mandates that a Member make a threshold
determination of the “existence” of a subsidy before examining other ASCM requirements. Such a
determination must occur prior to and wholly distinct from later determining the amount of a
subsidy, for which it is a necessary condition precedent. 71 This determination must be adequately
demonstrated and explained.72

71 As contextual interpretative support, Article 19.2 ASCM provides that the “decision whether or not
to impose a countervailing duty” and the “decision whether the amount of the countervailing duty to be imposed
shall be the full amount of the subsidy or less” are left to the discretion of the Member. These distinct decisions
may only be made “where all the requirements for imposition have been fulfilled”.
72 See United States – Restrictions on Imports of Cotton and Man-made Fibre Underwear: Report of
the Panel, WT/DS24/R (8 November 1996) at paragraph 7.45; United States – Measure Affecting Imports of
Woven Wool Shirts and Blouses from India: Report of the Panel, WT/DS33/R (6 January 1997) at
paragraph 7.26.

99. Consistent with the mandate of Article 10 ASCM, the fundamental requirement first to
determine that a “subsidy exists” is also found elsewhere in the ASCM, including Articles 19.1 and
19.4, and in Article VI of the GATT 1994. Article 19.1 establishes that a Member may impose
countervailing duties only after making “a final determination of the existence and amount of a
subsidy . . .” and “unless the subsidy or subsidies are withdrawn”. The fact that a government
recovers the residual value of any subsidies that it has granted in the past through a fair market value
and arm’s length sale of the assets of the previous beneficiary must be one of the means by which the
subsidy can be “withdrawn”. Article 19.4 ASCM re quires that “[n]o countervailing duty shall be
levied on any imported product in excess of the amount of the subsidy found to exist . . . .” (emphasis
added). Article VI:3 of the GATT 1994 sets forth the same obligation, requiring that “[n]o
countervailing duty shall be levied on any product . . . in excess of an amount equal to . . . the subsidy
determined to have been granted. . . .” (emphasis added).
100. The necessary premise that a Member must first determine the existence of a subsidy is
confirmed in the recent panel report in Canada -- Measures Affecting the Export of Civilian Aircraft:
[T]the need to calculate the value of a subsidy only arises once the existence of the
subsidy, and therefore the “financial contribution ” and “benefit ”, have been
established. . . . . “[B]enefit” must be established before the value of the alleged
subsidy may be considered. . . .73
101. Thus, the terms of the ASCM, interpreted in accordance with their ordinary meaning and read
in the context of the object and purpose of countervailing duties as set forth in Articles 10, 19.1, and
19.4, require that Members “take all necessary steps” to demonstrate the existence of a subsidy.
Consistent with this plain language, this inquiry must occur before a countervailing measure may be
imposed. A Member’s obligation in this regard cannot and does not end with a determination that an
unrelated party at some point in the past received a subsidy. It must be demonstrated as a result of all
available evidence that the party under investigation, whose goods are the ones subject to an offsetting
countervailing duty, was the recipient of a subsidy. This means that it must be demonstrated (not
arbitrarily assumed) that the party under investigation has either received itself a financial
contribution and a benefit, or has benefited from a financial contribution to a third party. By the clear
terms of the Agreement, calculating the amount or allocation of a “subsidy” may not take place
without first establishing its existence.
74
2. A Member May Find That A “Subsidy” Exists Only When A “Benefit” is Conferred by
a “Financial Contribution” Within the Meaning of Article 1 ASCM
102. In order to demonstrate that a “subsidy” exists within the meaning of the ASCM, it is
necessary by virtue of Article 1 ASCM to determine that there is a “financial contribution by a
government or any public body within the territory of a Member . . . and a benefit is thereby
conferred”.75
103. The word “thereby” signifies a causal relationship between the financial contribution and the
benefit. The European Communities submit that a “financial contribution” made by a government to
a state-owned company cannot causally confer a “benefit” on a privately-owned buyer of assets which
once belonged to the state-owned company, where those assets were purchased on an arm’s-length
basis at fair market value. In such circumstances, any “benefit” that was conferred on the previous
owner of those assets remains with the state-owned company. The United States refuses to accept this
position, instead “irrebuttably” presuming that a benefit automatically “travels” with the assets and

73 Canada Aircraft panel report at paragraph 9.116.
74 See text relating to the previous footnote.
75 Article 1.1(a)(1); Article 1.1(b).

“passes through” to the new owner. The European Communities cannot understand, and the
United States has never intelligibly explained, how this magical process occurs.
104. To examine whether a “benefit” exists according to the terms of Article 1.1(b) requires an
examination of what constitutes a “benefit” under the ASCM, and who is the recipient of any benefit
allegedly “conferred”.
a. The Existence of a “Benefit”, If Any, Is Determined by Reference to
Market Benchmarks Under the ASCM
105. The ordinary meaning of the term “benefit” as used in Article 1.1(b) ASCM is “advantage”.76
A “benefit” to a person within the meaning of Article 1.1 does not exist unless “advantage” is
conferred on that person as the result of a government “financial contribution”.77
106. Article 14 ASCM provides relevant context for the interpretation of Article 1.1 (b),
particularly in assessing whether such an advantage is enjoyed as the result of a financial contribution.
It prescribes the methods by which an investigating authority shall calculate the “benefit to the
recipient conferred”, if any, as a result of a government financial contribution. Article 14 therefore
establishes that this calculation is necessarily bounded by assessing whether a commercially
meaningful advantage has been given to the firm under investigation. This analysis requires a
comparison of the terms of the financial contribution under consideration with those that would have
prevailed in the marketplace.
107. Specifically, Article 14 provides that a variety of financial contributions by a government
“shall not be considered as conferring a benefit” unless they are inconsistent with commercially
meaningful benchmarks:
• Article 14(a): “inconsistent with the usual investment practice . . . of private investors”;
• Article 14(b): “a difference between the amount that the firm . . . pays on the government loan
and the amount the firm would pay on a comparable commercial loan which the firm could
actually obtain on the market”;
• Article 14(c): “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”; and
• Article 14(d): “the adequacy of remuneration shall be determined in relation to prevailing market
conditions”. (Emphasis added.)
108. The requirement that benefit be assessed by reference to the market is delineated clearly in the
recent panel report in Canada Aircraft:
In our view, the only logical basis for determining the position the recipient would
have been in absent the financial contribution is the market. Accordingly, a financial
contribution will only confer a “benefit”, i.e., an advantage, if it is provided on terms

76 See The Oxford English Dictionary, Oxford University Press (1971). See also Blacks Law
Dictionary, West Publishing Co. (6th Ed. 1990) (“Advantage; profit; fruit; gain; interest”).
77 This definition was recently adopted in the Canada Aircraft panel report, which noted that “[i]n
order to determine whether a financial contribution . . . confers a ‘benefit’, i.e., an advantage, it is necessary to
determine whether the financial contribution places the recipient in a more advantageous position than would
have been the case but for the financial contribution ”. Canada Aircraft panel report at paragraph 9.112
(emphasis added).

that are more advantageous than those that would have been available to the recipient
on the market.78
109. Further support for use of the market as the appropriate yardstick for measurement of benefit
is found in the recent panel report in Brazil – Export Financing Programme for Aircraft, which
underscores that in assessing the existence of a benefit:
[O]ne should examine objective benchmarks . . . involving a comparison of the terms
of the financial contribution to a market benchmark reflecting the terms under which
the beneficiary of the financial contribution would be operating in the absence of the
government financial contribution.79
110. Accordingly, where a privately-owned company has purchased a company at fair market
value in an arm’s-length transaction, there can be no benefit conferred on the purchaser within the
meaning of the ASCM. A purchaser of a formerly state-owned assets at market value is not in any
way put in a more advantageous position in comparison to the market. Indeed, as explained in
Section II above, a rational purchaser is indifferent between purchasing a firm which previously
received financial contributions from a government and one which did not if the two firms have
equivalent market value. An advantage would be granted to a buyer only if it were to purchase the
firm at less than fair market value as the result of a seller favouring one of the bidders unfairly. In
order to determine that the new privately-owned company has obtained a “benefit”, a Member’s
investigating authorities must prove that the current producer/exporter has obtained the assets under
circumstances inconsistent with commercial considerations.
b. A Benefit Must Be Conferred on the Company Whose Imports Are To Be
Countervailed Under the ASCM
111. The European Communities submit that when th e ASCM is interpreted in accordance with
Article 31.1 of the Vienna Convention, a “benefit”, as the term is employed in the ASCM, must be
conferred on the party whose imports may be countervailed.
112. Article 10 makes clear that countervailing duties are for the purpose of offsetting subsidies
“determined to have been granted”
80 to “the manufacture, production or export of any
merchandise”.81 The merchandise manufactured, produced or exported must be that of the party upon
whom a Member seeks to impose offsetting duties, or those duties will have no rational relationship to
the very “benefit” they are meant to offset.
113. Similarly, Article 19.1 establishes that, when undertaking the required examination of
“injury”, WTO Members shall examine whether “subsidized imports” are the cause of the injury.
Such imports must, self-evidently, be the products under investigation, and it is only the firm
manufacturing, producing, or exporting such products that is subject to the CVD inquiry. These
provisions would make little sense if the examination of merchandise under investigation were
designed to focus on an unrelated company which does not produce the relevant merchandise.
82
114. This position is supported by the available pre-WTO case law. In United States --
Countervailing Duties on Fresh, Chilled and Frozen Pork from Canada, the panel adopted an

78 Id. at paragraph 9.112 (emphasis added).
79 WT/DS46/R (1999) at paragraph 7.24 (emphasis added). The panel emphasized that Article 14
ASCM requires use of the market benchmark in all countervailing duty cases other than those involving a
presumption of serious prejudice under Article 6.1(a) ASCM.
80 Article VI:3 GATT 1994.
81 Article 10, footnote 36 (emphasis added).
82 We note that the recipient of the relevant financial contributions, BSC, has not produced steel since
1986.

equivalent approach finding that the United Stat es could not irrebuttably presume that a subsidy
conferred on pig farmers necessarily benefited pork, the product under investigation.83 Similarly, and
even more pertinently for the present case, the panel in United States - Imposition of Countervailing
Duties in Certain Lead and Bismuth Carbon Steel Products Originating in France, Germany and the
United Kingdom84 considered that
the fundamental legal requirement in light of which the consistency of this “pass
through” analysis with the Agreement had to be examined was the rule, reflected
inter alia in Article 1, footnote 4, that a determination of the existence of subsidy
bestowed on the production of the merchandise was a necessary condition for the
imposition of a countervailing duty on the importation of that merchandise.85
(The footnote 4 to Article 1, to which that panel was referring was that in the Tokyo Round Subsidies
Agreement which corresponds to footnote 36 of Article 10 of the ASCM referred to in Section A
above.)
115. The panel in that case was following exactly t he approach advocated by the European
Communities – that a subsidy must be shown to have been bestowed on the production of the
merchandise subject to the countervailing duty action. It necessarily follows from this that a subsidy
conferred on a person that is not producing the goods subject to the proceeding cannot be deemed to
be bestowed on those goods without any demonstration, as was and still is done by the United States.
116. If, as the United States has set forth in the countervailing duty determinations before this
Panel, Article 1.1(b) requires no finding of any benefit to the company whose products are under
investigation even when it is clear, as here, that advantage was bestowed only on an unrelated prior
owner, then the ASCM would have to be read to endorse countervailing duties on companies that no
longer produce the subject “merchandise” or “imports”. Consistent with the object and purpose of
countervailing duties as set forth, inter alia, in Article 10, this cannot be a proper interpretation of the
ASCM or of GATT 1994.
3. Conclusion
117. In sum, the benefit requirement of Article 1.1(b) mandates, as a prerequisite to imposition of
countervailing duties, that government authorities determine that a benefit is conferred that puts a
company under investigation and its products “in a more advantageous position than would have been
the case but for the financial contribution ”.
86 Absent an advantage resulting from a financial
contribution, there is no “benefit” conferred and therefore no “subsidy” that may be countervailed.
Imposing countervailing duties where no subsidy exists violates the terms of Article 10 ASCM as read
in conjunction with Articles 19, 1, and 14 thereof.
118. In the next Section, the European Communities demonstrate that the US practice also violates
Article 19.4 ASCM.
C. THE United States VIOLATES ARTICLE 19.4 ASCM BY IMPOSING COUNTERVAILING DUTIES
IN EXCESS OF THE AMOUNT OF SUBSIDY
119. As the European Communities have set forth above, it is impermissible under the ASCM to
deem an unrelated purchaser of a formerly state-owned enterprise to have received a subsidy solely on

83 United States -- Countervailing Duties on Fr esh, Chilled and Frozen Pork from Canada : Report of
the Panel, DS7/R-B I SD 38S/30 (11 July 1991) at paragraphs 4.6 and 4.9.
84 Cited in Section III above.
85 See paragraph 420.
86 Canada Aircraft panel report at paragraph 9.112 (emphasis added).

the basis that subsidies previously bestowed upon th at enterprise automatically “pass through” to the
purchaser, notwithstanding the fact that the enterprise was sold at arm’s length for fair market value.
However, even if the US assumption of the existence of a subsidy were permissible, the amount of
any subsidy calculated must necessarily be zero when measured against the requisite market
benchmark. As a result, the United States violates Article 19.4 ASCM when it imposes
countervailing duties on the products of such an unrelated private purchaser with respect to pre-
privatization subsidies.
120. Article 19.4 of the ASCM requires 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. (Emphasis added).
121. The requirement of Article 19.4 is a re-exposition of the terms of Article VI of the
GATT 1994 which, in pertinent part, provides:
No countervailing duty shall be levied on any product of the territory of any
contracting party . . . in excess of an amount equal to the estimated bounty or subsidy
determined to have been granted, directly or indirectly, on the manufacture,
production or export of such product in the country of origin or exportation . . . .
(Emphasis added).
122. The requirement that a Member not impose countervailing duties in amounts above what is
strictly necessary to offset a subsidy is also set forth in Article 21.1 ASCM, which provides, in
relevant part, that “a countervailing duty shall remain in force only as long as and to the extent
necessary to counteract subsidisation . . .” (emphasis added).
87 This requirement to eliminate
countervailing duties where subsidy no longer exists underscores the required rational relationship
between the amount of a subsidy and the level of countervailing measures. Similarly, Article 21.2
ASCM specifically calls on investigating author ities to examine the need for the “continued
imposition of the duty”. In particular, interested parties shall have the right to request authorities to
examine “whether the continued imposition of the duty is necessary to offset subsidization” (emphasis
added).
123. Further contextual support for this requirement that countervailing duties may not exceed the
amount of a subsidy is found in the last words of Article 19.1 ASCM, which provide that a
countervailing duty may not be imposed where “the subsidy or subsidies are withdrawn”. Clearly, no
countervailing duty is needed to neutralize a withdrawn or no longer existing subsidy, and hence any
countervailing duty imposed would be in excess of that allowed to offset “subsidy”.
88
124. Thus, in conformity with the context, object, and purpose of the countervailing duty rules, as
set forth in Section A above, Article 19.4 and Ar ticle VI of GATT 1994, read in conjunction with
Article 21.1, 21.2 and 19.1, establish that Members must ensure that trade is not impeded by
imposition of countervailing duties at a level more than necessary to offset the benefit enjoyed by
such imported merchandise.
125. The European Communities submit that the US privatization practice violates US obligations
under Article 19.4 ASCM because the countervailing duties are imposed at levels in excess of those

87 See also Article 21.4 ASCM which applies the evidence requirements of Article 12 ASCM to
Article 21 reviews.
88 It is difficult to conceive of what more a government may do to withdraw a subsidy than to privatize
a state-owned entity in a transparent process at arm’s length for fair market value.

needed to “offset” any subsidy bestowed directly or indirectly upon the manufacture, production or
export of subject merchandise.
126. It is self-evident that a requirement that countervailing duties not be in “excess of the amount
of the subsidy found to exist” requires a threshold determination of the “amount of the subsidy”.
Under the terms of Articles 1 and 14 ASCM, and as set forth in Section B above, a determination of
the “amount of subsidy” necessarily requires a measurement of the amount of “benefit” conferred.
This requires comparing the terms of the financia l contribution at issue with those that would have
prevailed in the marketplace absent the subsidy. The European Communities would emphasize that
this comparison must be made by reference to a market benchmark.
89
127. Pursuant to the requisite analysis under Article 14 ASCM, the European Communities submit
that a private purchaser of a company or productive assets thereof at fair market value obtains no
benefit from subsidies granted to the seller. Any benefit stream established for the purposes of
allocating the benefit granted to the previous owner ceases to apply. Put differently, consistent with
the market benchmark established in Article 14 ASCM, the price paid in an arm’s-length transaction
is equal to the fair market value. Hence, the “amount of the subsidy” is zero, and, self-evidently, there
can be no “subsidization per unit” of the product under investigation. However, as the European
Communities have shown in Section I.A above, the United States employs an self-derived formula
which provides arbitrary and unreasonable results to allocate an amount of subsidy to a purchaser of
assets and thus to its products exported to the United States.
128. As a result, the United States violates Article 19.4 ASCM when, as here, it imposes and
maintains countervailing duties on the products of such private purchasers.
129. We now turn to further examination of the requirements of the ASCM as applied to the facts
of the dispute before this Panel.
D. A
PPLICATION TO BRITISH STEEL/UES
130. The central issue in this dispute is whether ther e exist subsidies to UES, and in turn British
Steel plc, from financial contributions made to state-owned BSC, considering that, as the
United States has itself found 90, UES purchased the speciality steels division of BSC in an arm’s-
length transaction at fair market value and further considering that BSC was subsequently privatized
at arm’s length for fair market value. By th e plain terms of the ASCM, no such subsidy exists.
Therefore, the imposition and maintenance of countervailing duties on the products of UES and
British Steel plc on such basis by the United States is in violation of Articles 10 and 19 of the ASCM,
read in conjunction with Articles 1 and 14 thereof.
131. The European Communities acknowledge that a “financial contribution” was made by the UK
Government to BSC. The European Communities further acknowledge that such financial
contributions benefited BSC in the past and constituted “subsidies” to that firm.
91
132. The European Communities contend, however, that such prior contributions are not
“subsidies” in the cases that form the basis for the dispute before this Panel, because they confer no
“benefit” on UES or British Steel plc, the companies whose products are subject to the relevant US
CVD determinations and whose imports into the United States are being assessed countervailing
duties. Neither of those companies received a financial contribution from the UK Government.

89 See Section IV.B.2(a) above; Canada -- Measures Affecting the Export of Civilian Aircraft, at
paragraph 9.112; Brazil – Export Financing Programme for Aircraft, at paragraph 7.24.
90 See footnotes - and accompanying text above.
91 BSC last produced steel in 1986.

Rather, in arm’s-length market-based transactions, they simply acquired part (UES) or all (British
Steel plc) of another company (BSC) that had previously received a subsidy.
133. The record of the Leaded Bars determinations before this Panel makes clear that the
United States explicitly and repeatedly has refused to enquire as to whether a benefit, and therefore a
“subsidy”, was conferred on British Steel plc or UES, much less to demonstrate that such a benefit
was actually conferred. Rather, the United States improperly assumed such a benefit was conferred
by stating that a previous contribution to BSC “pas sed through” to UES and British Steel plc without
demonstrating the “pass through” as an economic reality or explaining the nature of the “pass
through” by reference to the ASCM or to any commercial or market benchmark. Then, treating the
payment of a fair market price as “irrelevant” to its analysis, the DOC simply applied its self-derived
formula in purporting to “allocate” the value of previous financial contributions between BSC, on the
one hand, and UES and British Steel plc, on the other.
134. While this approach may be administratively convenient for the United States investigating
authorities, the “pass through” methodology and the “irrebuttable presumptions” described in Section
I above that it entails are not an acceptable surrogate for adhering to the plain requirements of the
ASCM.92 Allocation of a subsidy is not permissible under the ASCM prior to establishing that a
subsidy exists.
135. The United States has never established the existence of an Article 1 “subsidy” to British
Steel plc/UES because the economic reality of an arm’s-length transaction for fair market value
mandates that it cannot be established. By definition, a purchase at fair market value necessarily
includes the residual value of any remaining subsidies at the time of the sale.
136. Contrary to US obligations to the European Communities under the ASCM, countervailing
duties have been levied on UES and, in turn, British Steel plc that go beyond “offsetting” any subsidy
bestowed directly or indirectly upon the manufacture, production or export of subject merchandise by
those companies.
137. The US Leaded Bars determinations violate the United States’ Article 10 ASCM obligation to
“take all necessary steps” to ensure that countervailing duties are imposed on imported products only
in accordance with the requirements of the ASCM. ASCM obligations include the Article 19
requirement to determine that a subsidy “exists” prior to levying a countervailing duty and making
that determination by virtue of the Article 1 definition of the term “benefit”, as measured by the
market standard set forth in Article 14. For these same reasons, the United States has also violated its
Article 19.4 ASCM obligation to ensure that countervailing duties not be imposed in excess of the
amount of the subsidy found to exist; here, the “amount of the subsidy” pursuant to the Article 14
ASCM market benchmark is plainly zero.
138. By failing to comply with its ASCM obligations in the foregoing respects, the United States
has done precisely what a WTO Member may not -- it has imposed duties going beyond what is
necessary for the purpose of countervailing a “subsidy”, as that term is set forth and properly
understood in the ASCM, and has maintained these duties following several administrative reviews.
The result of these duties has been to distort international trade unfairly and penalize European firms
impermissibly.

92 The United States has claimed that its privatization rules are justified by a desire to ensure that firms
do not engage in sham change of ownership transactions in an effort to escape the appropriate application of
countervailing duties. See, e.g., 1992 Investigation at 6240. This argument is irrelevant to the dispute before
this Panel, as, by definition, it has no application to bona fide arm’s length sales at fair market value.

VI. CONCLUSION
139. For the foregoing reasons, the European Communities respectfully request that the Panel find
that by imposing countervailing duties on leaded bar imports from the United Kingdom in the 1995,
1996, and 1997 administrative reviews, the United States has violated:
• ASCM Article 10, as read in conjunction with Articles 19, 1, and 14 ASCM and Article VI of
GATT 1994, by imposing countervailing duties where no subsidy exists; and
• ASCM Article 19.4 by levying countervailing duties on imported products in excess of the
amount of any subsidy found to exist under the terms of the ASCM.
140. In so doing, and in particular by applying its illegal policy to the exports of leaded bars
produced by British Steel/ UES in the UK, the United States has nullified and impaired benefits
accruing to the European Communities under the WTO Agreements.
141. The European Communities further request that the Panel recommend that the United States
immediately bring its measures into conformity with its WTO obligations.

EXHIBITS
Exhibit EC-1 Lime from Mexico ; Preliminary Results of Changed Circumstances
Countervailing Duty Administrative Review , 54 Fed. Reg. 1753, 1754-55
(17 January 1989) [“Lime from Mexico”].
Exhibit EC-2 Relevant Sections of the “General Issues Appendix”, appended to Final
Affirmative Countervailing Duty Determination ; Certain Steel Products
from Austria, 58 Fed. Reg. 37217 (9 July 1993).
Exhibit EC-3 Sample calculation using the DOC's "privatization methodology".
Exhibit EC-4 Final Affirmative Countervailing Duty Determination: Certain Hot Rolle d
Lead and Bismuth Carbon Steel Products from the United Kingdom, 58
Fed. Reg. 6237 (27 January 1993) [“1992 Investigation”].
Exhibit EC-5 Certain Hot Rolled Lead and Bismuth Carbon Steel Products from the
United Kingdom, 61 Fed. Reg. 58377 (14 November 1996) [“ British
Steel plc 1995 Administrative Review”].
Exhibit EC-6 Certain Hot Rolled Lead and Bismuth Carbon Steel Products from the
United Kingdom, 62 Fed. Reg. 53306 (14 October 1997) [“British Steel plc
1996 Administrative Review”].
Exhibit EC-7 Certain Hot Rolled Lead and Bismuth Carbon Steel Products from the
United Kingdom, 7 2 Fed. Reg. 18367 (15 April 1998) [“ British Steel plc
1997 Administrative Review”].
Exhibit EC-8 Final Affirmative Countervailing Duty Determination ; Certain Stee l
Products from the United Kingdom, 58 Fed. Reg. 37393 (9 July 1993).
Exhibit EC-9 United States - Imposition of Countervailing Duties in Certain Lead an d
Bismuth Carbon Steel Products Originating in France, Germany and the
United Kingdom, Report of the Panel (1994) (unadopted).
Exhibit EC-10 Document WT/DS138/1 (Request for Consultations).
Exhibit EC-11 Document WT/DS138/3 and WT/DS138/3 Corr 1. (Request for the
Establishment of the Panel).
Exhibit EC-12 Document WT/DS138/4 (Constitution of the Panel).

EXHIBIT EC-1
Lime from Mexico ; Preliminary Results of Changed Circumstances Countervailing Duty
Administrative Review, 54 Fed. Reg. 1753, 1754-55 (17 January 1989) [“Lime from Mexico”].
EXHIBIT EC-2
Relevant “Sections of the General Issues Appendix”, appended to Final Affirmative Countervailing
Duty Determination; Certain Steel Products from Austria, 58 Fed. Reg. 37217 (9 July 1993).
EXHIBIT EC-3
Sample calculation using the DOC's "privatization methodology"
EXHIBIT EC-4
Final Affirmative Countervailing Duty Determination: Certain Hot Rolled Lead and Bismuth Carbon
Steel Products from the United Kingdom, 58 Fed. Reg. 6237 (27 January 1993).
[“1992 Investigation”]
EXHIBIT EC-5
Certain Hot Rolled Lead and Bismuth Carbon Steel Products from the United Kingdom, 61 Fed. Reg.
58377 (14 November 1996)
[“British Steel plc 1995 Administrative Review ”].
EXHIBIT EC-6
Certain Hot Rolled Lead and Bismuth Carbon Steel Products from the United Kingdom, 62 Fed. Reg.
53306 (14 October 1997)
[“British Steel plc 1996 Administrative Review”].
EXHIBIT EC-7
Certain Hot Rolled Lead and Bismuth Carbon Steel Products from the United Kingdom, 72 Fed. Reg.
18367 (15 April 1998)
[“British Steel plc 1997 Administrative Review”].

EXHIBIT EC-8
Final Affirmative Countervailing Duty Determination : Certain Steel Products from the United
Kingdom, 58 Fed. Reg. 37393 (9 July 1993).
EXHIBIT EC-9
United States - Imposition of Countervailing Duties in Certain Lead and Bismuth Carbon Steel
Products Originating in France, Germany and the United Kingdom, Report of the Panel (1994)
(unadopted).
EXHIBIT EC-10
Document WT/DS138/1 (Request for Consultations).
EXHIBIT EC-11
Document WT/DS138/3 and WT/DS138/3 Corr 1 (Request for the Establishment of the Panel).
EXHIBIT EC-12
Document WT/DS138/4 (Constitution of the Panel).

ATTACHMENT 1.2
ORAL STATEMENT AND CONCLUDING STATEMENT
OF THE EUROPEAN COMMUNITIES
DURING THE FIRST SUBSTANTIVE MEETING WITH THE PANEL
(Geneva, 15 June 1999)
1. Introduction
1. Mr. Chairman, distinguished Members of the Panel. The Community wishes to thank you for
taking on this task. It also wishes to thank the WTO Secretarial Staff.
2. The EC's statement will briefly highlight the ma in points which were made in the EC's First
Written Submission. However, the EC would also like to take this opportunity to offer some
preliminary remarks regarding the US First Written Submission, while reserving the right to provide
more detailed comments in the EC's Second Written Submission.
3. The Community will not repeat in detail the arguments which it has already made in writing.
If the Panel has questions on the content of these arguments, the Community would be pleased to
respond to those questions either orally today, or otherwise -- as soon as possible -- in writing.
4. The EC's presentation today will be structured as follows :
5. First, the EC will explain the fundamental economic logic of its arguments, which are
strongly supported by basic economic principles. The EC will also set out why the US practice, if
applied by all WTO Members, constitutes a serious risk to international economic order and the WTO
system.
6. Second, the EC will set out briefly why the US has violated Articles 10, 19:1 and 19:4
Subsidies Agreement.
7. Then -- turning to the US legal argumentati on -- the EC will address selected serious flaws
and misstatements in the US First Written Submission, including:
• First, the inappropriate reliance by the US on rulings by its own national courts.
• Second, the relevant standard of review for this dispute, which cannot be based on
Article 17:6 Anti Dumping Agreement.
• Third, the false characterization of the EC position by the US, which has incorrectly
asserted that the EC relies on a so-called “use and effects” test.
• Fourth, the inaccurate assumption by the US that the Subsidies Agreement allows it
to make irrebuttable presumptions that the benefits of an subsidy to a state-owned
company flow automatically to the new owners of productive assets after an arm's
length fair market value privatization, without any demonstration of any benefit being
received by the privately owned company. The Subsidies Agreement does not allow
for such an extreme position.
• Fifth, the US assertion that a “subsidy recipient” can somehow be productive assets
themselves. This is not correct: the only beneficiary of the subsidy can be the owner
of the productive assets, i.e. a “legal person”.
• Sixth, the fact that the US claims that the object and purpose of the Subsidies
Agreement and countervailing duties is to “deter” subsidisation. This punishment

theory of countervailing duties, which serves, in part, as the US justification for
imposing countervailing duties on companies for which it has never demonstrated
even the simple receipt of a benefit, is bluntly wrong: the Subsidies Agreement
makes clear that the exclusive purpose of CVDs is to “offset” subsidies.
8. Finally, the EC will briefly address the US reliance on Article 27:13 Subsidies Agreement as
well as the irrelevance of EC State Aid rules.
2. Economic considerations
9. In the case before this Panel, the US has ir rebuttably presumed that the private company
which purchased specialty steel assets at arm’s length for fair market value somehow benefits from
subsidies provided to the former state-owned company. As a matter of basic economics, this is
untenable. In defense of its position, the US simply argues that it is entitled under the Subsidies
Agreement to draw this conclusion in the face of all available evidence, by refusing, as a matter of
state policy, to even consider the relevant economic facts prior to imposing countervailing duties
which are meant, under the explicit text of the Subsidies Agreement, to “offset” concrete benefits.
These facts lead to the inevitable conclusion that no benefit to the new owner of productive assets
survives.
10. Both the EC and Brazil have already offered the Panel extensive written comments and
examples on why this US practice ignores the economic realities of arm’s-length privatizations.
When a private buyer purchases the productive assets of a company in an arm’s-length transaction at
market value, the price paid necessarily values a nd incorporates within the transaction any subsidy
previously conferred. If the subsidy increases the value of the company, so will it increase the price
that the purchaser must pay in a fair market value transaction. The payment of a market price thus
necessarily precludes the notion that any “benefit” would have “passed through” to this new private
owner as a basic matter of economics. Simply put, markets value companies efficiently, including
any remaining value of prior government financial contributions. This is not open to serious
economic dispute and the US offers none -- the fair market value purchaser receives no benefit from a
subsidy provided to a former state owned enterprise in such a situation.
11. It is this economic logic on which the EC argumentation is based. It is this economic logic
which is supported by Brazil and Mexico, the Third Parties to this dispute. It is this economic logic
which the US itself applies in other areas of its countervailing duty practice and which it earlier
applied in privatization treatment prior to the institution of its current impermissible practice in 1993.
It is this economic logic which is confirmed by a noted international economist in the US who has
directly addressed the issue.
12. Professor Richard N. Cooper, Professor of International Economics at Harvard University and
former Under Secretary of State for Economic Affairs in the United States has written a short analysis
for the US “Consumers for World Trade.” They re cently published the text of his analysis on the
Internet and the EC submits this paper today as Exhibit EC-13. Let me quote from Professor Cooper's
paper :
"[t]he DOC deems the issue of whether or not the sale of a state-owned company was
for fair market value irrelevant to its calculation of CVD's on the merchandise of the
now-privatized company. From the perspective of analysing whether any benefit is
enjoyed by the privatized company, however, this inquiry is the most fundamental
issue. As stated above, competitive bidders will make a full assessment of the
expected economic value of the firm, and will bid accordingly. Thus they will pay in
full for any economic benefit remaining with the firm. If a bidder failed to do so, he

would leave value on the table and lose the bid to another bidder who took such value
into his bid1 ."
13. Therefore, when determining whether or not a benefit has "passed through" to the buyer, the
conditions surrounding the purchasing price should be examined, so as to verify whether or not a fair
market value was paid. In other words, apart from simply noting the level of the purchasing price, as
USDOC does under its methodology, a separate examination is needed if a privatization takes place.
USDOC conducts what it terms an "investigation" when it applies its contested methodology, but
claims it is allowed to refuse to examine the very c onditions of the purchase, which is in view of the
EC, Mexico, Brazil, as well as Professor Cooper, a fatal error, and which is the main reason why we
are here today.
14. Interestingly, when evaluating upstream subsidies, the US considers the fair market price
quite relevant. It examines and verifies whether or not a fair market price is paid.
2 For example,
when meat would be purchased by pork producers from subsidized swine producers (as in the Pork
case3), the US would now determine whether the swin e producers would have sold their raw material
for a price which was lower than the fair market price, thereby “ passing on” a benefit to the pork
producers.
15. However, the US explicitly refuses any examination or analysis of the conditions of a sale in
the framework of privatization. According to the US such analysis is not relevant. It says so clearly
in the General Issues Appendix :
"Given the Departments' methodology […] concerns regarding whether or not the
sale […] was at fair market price are irrelevant. "4
16. As demonstrated before, this position is untenable, arbitrary and economically irrational.
Therefore, this refusal to examine whether or not the sale of a government-owned company was
executed for a fair market price cannot be considered “reasonable”, as USDOC claims in its pre-
Subsidies Agreement General Issues Appendix that it continues to apply to this day.
5
3. US practice has negative effect on privatization efforts throughout the world
17. In addition to its serious legal and economic errors, the US approach has a significantly
negative effect on privatization efforts throughout the world, as Brazil and Mexico correctly note. If
the US approach were to be applied by all WTO Members, it would without doubt deter those
governments which are considering privatizing state-owned companies from doing so, by unfairly
punishing the company and its exported products with "countervailing" duties in the complete absence
of any countervailable benefit to offset. Such a policy would be contrary to an efficient world
economy and would be an incentive to keep subsidized state-owned enterprises in place, or at least
significantly impede privatizations by raising the price to be paid for such companies by an artificial
US penalty assessment, thus effectively requiring purchasers to pay an amount above and beyond
what the market justifies. As Professor Cooper notes in his analysis of the current US practice:
"U.S. countervailing duty practice ensures that countervailing duties will be assessed as financial
penalties on privatized firms that enjoy no economic benefit from government contributions provided
to state-owned predecessors. In these situations, the US is not countervailing any economic benefit

1 Emphasis added.
2 See Section 771A of the URAA and Section 351.523 of the final USDOC CVD regulations which
govern treatment of upstream subsidies by the US in CVD investigations.
3 After the US lost the Canada Pork Case (United States - Countervailing Duties on Fresh, Chilled and
Frozen Pork From Canada , Report by the Panel adopted on 11 July 1991, DS7/R, BISD 38S/30), the US was
obliged to change its policy.
4 Fed. Reg. at 37264. See also footnote 36, US First Written Submission. Emphasis added.
5 Fed. Reg. at 37263. See also US First Written Submission, at paragraph 52.

conferred on goods crossing our borders. The practice must be seen as purely protectionist on behalf
of US domestic firms in competition with the newly privatized firms.6
18. The EC is of the opinion that the US practice is contrary to the free world trade order. It
should not be followed by other WTO Members and should be abandoned by USDOC immediately.
The EC has provided the Panel with a number of legal arguments which demonstrate that the US is
not only pursuing an economic policy which is flawed, but also that it violates the Subsidies
Agreement. The EC will now set out in summary form the legal arguments which it set forth in its
First Written Submission.
4. EC Legal Arguments
19. The US, by imposing countervailing duties on leaded bar imports from the UK in the 1995,
1996 and 1997 administrative reviews, has violated the Subsidies Agreement in two respects :
1. the US violates Article 10 Subsidies Agreement in conjunction with Articles 19, 1 and 14
Subsidies Agreement by imposing countervailing duties on the imports of privately-owned
companies without first examining or establishing whether there exists any subsidy relating to
those imports.
2. the US also violates Article 19:4 Subsidies Agreement by imposing duties in excess of the amount
of any subsidy found to exist.
Let me set out these two claims in more detail.
20. First, Article 10 Subsidies Agreement requires WTO Members to ensure that CVD's are
imposed only in conformity with the terms of Article VI GATT 1994 and the Subsidies Agreement.
Footnote 36 to this key provision sets out clearly that CVD's may only be imposed for the purpose of
“offsetting” a subsidy. Furthermore, Article 19:1 Subsidies Agreement requires that a Member
determine the "existence" of a subsidy, as defined by Article 1 Subsidies Agreement. The extent of the
"benefit" considered to be conferred, if any, may not exceed certain market benchmarks set out in
Article 14 Subsidies Agreement. If there is no advantage by comparison to that market benchmark,
no "benefit" can exist. As explained earlier, if a government-owned company is purchased at arm's-
length for a fair market value, then the price necessarily includes the residual value of earlier
subsidies. Therefore, the company enjoys no advantage or "benefit" from any prior government
funding. The burden of proof, therefore, lies with the investigating authorities to show that a benefit
accrues to the new owner of the productive assets following privatization. Imposing CVD's without
such an examination violates the Subsidies Agreement.
21. Second, Article 19:4 Subsidies Agreement provides that CVD's may not be "in excess"
7 of the
amount needed to offset any subsidy found to exist. Therefore, if the US imposes CVD's on the
products of an exporter which has not received a "benefit", the amount of the CVD must necessarily
be zero. Therefore, the continuation of any CVD level after privatization at arm’s length is by
definition a violation of Article 19:4 Subsidies Agreem ent. This provision should be read in context
with Article 21 Subsidies Agreement, which sets out rules regarding the duration and review of
CVD's. If, at the time of a review (which the US is required to do either on its own initiative or upon
request by any interested party) USDOC were to find that a subsidy no longer exists, and it
nevertheless continued to require duties to countervail a no-longer-existing benefit, it would be acting
in violation of the Subsidies Agreement. It is thus clear that current production or merchandise must
be benefiting from subsidies in order for CVD's to be imposed on current imports.
22. These are the main legal considerations on which the EC has based its First Written
Submission. The US has failed to counter these argu ments. The EC will now deal with six of the

6 Emphasis added.
7 See also Article VI GATT 1994.

more important factual and legal errors made by the US in its first written submission and address
each of them in turn.
5. Panel cannot rely on interpretations made by US Courts
23. First, the US relies heavily in its First Written Submission on interpretations given by US
courts. The US suggests that these courts have repeatedly affirmed the conformity of USDOC
practice with the Subsidies Agreement
8 and that their judgments would therefore be useful for the
Panel. Mr. Chairman, this is not the case. The Panel should refrain from drawing any conclusions
from judgments by US courts, for the following reasons.
24. The Department of Commerce acts under delegated authority from Congress in administering
the US countervailing duty laws. Therefore, any analysis by a US court concerning how USDOC
treats the issue of privatization and the extinguishment of countervailable subsidies must be addressed
in the context of Congress’ intent in its enactment of the US Uruguay Round Agreements Act. From
a US court’s perspective, in exercising its discretion in implementing the change-of-ownership
provision in the Uruguay Round Agreements Act, USDOC must do so in faithful observance of its
Congress’ intent. The Subsidies Agreement is irrelevant to the reviewing court.
9 The US Supreme
Court has established the standard of review of an agency’s (e.g. USDOC’s) interpretation of a statute
entrusted to its administration to be as follows:
[i]f the intent of Congress is clear ... the court ... must give effect to the
unambiguously expressed intent of Congress. If, however, … the statute is silent or
ambiguous with respect to the specific issue, the question for the court is whether the
agency’s answer is based on a permissible construction of the statute.10
25. Thus, if the court finds that Congress has not expressed itself unambiguously, the court is
asked to determine merely whether the agency’s interpretation of the Congressional statute is merely
reasonable. Thus, the US assertion that its court decisions "represent an independent interpretation"
of the US CVD law and the Subsidies Agreement is, at best, disingenuous. Under Chevron, the courts
do not render an independent interpretation.
6. US applies inappropriate standard of review
26. Second, very closely linked to this issue is the US argument that the Panel should somehow
apply the standard of review which was set out in Article 17:6 of the Anti Dumping (AD) Agreement,
which expressly states that permissible interpretations should be deferred to. Mr. Chairman, this
suggestion is not new and has already been rejected by the Appellate Body in Hormones.11
27. Interestingly, in that case the US argued against the use of Article 17:6 outside the framework
of the Anti Dumping Agreement. The US is on the record12 as stating that "the Decision on Review of
Article 17.6 of the Agreement on Implementation of Article VI of the General Agreement on Tariffs
and Trade 1994 shows that Members have yet to decide if the standard of review set out in Article
17.6 of the Anti-Dumping Agreement is capable of general application."

8 See US First Written Submission, at paragraph 61.
9 The Uruguay Round Agreement is non-self executing under U.S. law and thus had no domestic force
absent congressional enactment of the URAA.
10 Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. , 467 U.S. 837, 842-43, 104 S.Ct.
2778, 2781-82, 81 L. Ed. 2d 694 (1984) (footnotes omitted) (emphasis added).
11 Report by the Appellate Body on 'EC Measures Concerning Meat and Meat Products' (Hormones),
WT/DS26/AB/R, WT/DS48/AB/R, 16 January 1998, at paragraph 119. Even though this dispute concerned the
application of Article 17:6(i) AD, there is no reason wh y a different reasoning should apply to the application of
Article 17:6(ii) AD.
12 Report by the Appellate Body on 'EC Measures Concerning Meat and Meat Products' (Hormones),
WT/DS26/AB/R, WT/DS48/AB/R, 16 January 1998, at paragraph 42.

28. It is clear that, if the negotiators had wanted to impose a similar standard of review as set out
in Article 17:6 AD Agreement on the Subsidies Agreement, they could have done so. The fact that
they did not do so makes it obvious that they did not want a similar standard to apply to the Subsidies
Agreement.
29. Finally, regarding the US argument that the Panel should apply the identical standard of
review in a case concerning countervailing duties as in cases concerning anti dumping duties because
a Declaration requires “consistent resolution"
13, the EC would make the following points
• The Declaration is not addressed to panels as it is not a covered agreement;
• The Declaration was made in conjunction with the Decision on review of Article 17:6
and is in the nature of a reminder to the Members when they review the application of
Article 17:6 to consider the desirability of consistent rules
• Members have not seen fit so far to modify the Agreements in this respect.
7. No "use and effects" test
30. Third, the US on numerous occasions misrepresents the EC’s position as requiring an
examination into the use and effects of subsidies14, i.e. looking what happens with the capital injection
once it is made: is the money used to organize a one-off grand party for the company's employees or
is it used to purchase the latest technology machinery?
31. Members of the Panel, the US has offered a fundamental mischaracterization of the EC
position. The answer to the question whether today's production by a privatized company "benefits"
from any subsidies received by a pre-privatized state-owned company does not necessitate an
econometric analysis of the effects of subsidies, or an analysis of the uses of the subsidy funds. The
EC asks the Member which imposes the CVD to simply explain and justify its basis for concluding
that the prior subsidies provide an advantage for the current producer and therefore for the production
of the exported product. Where it can be determined that a “ benefit” no longer exists, a previously
set and calculated duty should be abolished immediat ely. By definition, in the context of an arm's-
length fair market transaction, no benefit to the new owner of productive assets exists.
32. It is noteworthy that the US frequently ci tes USDOC’s own pronouncements or the US CVD
statute as support for its position. For example in paragraph 41 of the US First Written Submission,
the US quotes its US statute as saying that it “does not permit the amount of the subsidy ‘benefit’ to
be re-evaluated based upon the use or effect of the subsidy.”
33. Members of the Panel. The EC has never claimed that an Article 1 existence of a benefit
analysis constitutes or requires an effects test. Thus, a benefit existence analysis is not “based upon
the use or effect of the subsidy.” The EC’s position is merely that there has to be a basis for
concluding that the current production of the merchandise subject to countervailing measures is still
benefiting.
8. No room for "irrebuttable presumptions"
34. Fourth, a relevant question is the following: Under the Subsidies Agreement, may CVD
duties be imposed on the imports of particular merchandise absent a reasonable determination that the
manufacture, production, or export of that merchandise is benefiting from subsidies ? Phrased
another way, may a Member irrebuttably presume that a benefit continues over time regardless of any
event, other than the repayment to the government of the exact nominal amount of the subsidy?

13 See text of Declaration: "Ministers recognize […] the need for consistent resolution of disputes
arising from anti-dumping and countervailing duty measures".
14 See US First Written Submission, for example at paragraphs 23, 38, 39, 41, 43.

35. Members of the Panel, the EC does not disput e that the Subsidies Agreement allows for a
calculation method providing that a subsidy confers a benefit which can be allocated over a period of
time. However, the EC does not consider that this presumption is – as the US calls it – irrebuttable.
Indeed, there are a number of events which necessarily rebut this presumption, including when a
subsidy is either fully or partially repaid, when a subsidy is fully or partially withdrawn, or when there
is a change in ownership such as a privatization at fair market value.
This is where the EC and the US differ. The EC considers that allocation of a subsidy over time,
using either declining balance or straight line depreciation, is a reasonable and administratively
practical method of capturing the benefit of non-recu rring subsidies to the extent that they benefit
future production. However, the fact that such a method may be reasonable does not relieve the
investigating authority from its obligation to exam ine fundamental changes of circumstances so as to
ensure that the subsidy still confers a benefit.
36. In all these circumstances, the CVD should either be withdrawn or reviewed, in accordance
with Articles 19 and 21 Subsidies Agreement. The former confirms that " a countervailing duty shall
remain in force only as long and to the extent necessary to counteract subsidization which is causing
injury". Interestingly, even though USDOC claims that it is prevented by the US statute from re-
assessing the benefit determination, since it claims to be obliged to “irrebuttably” presume the
continuation of the once-obtained benefit by different owners of productive assets, USDOC
understands that, in reality, a change of ownership affects its presumption: indeed, USDOC came up
with a change of ownership methodology, so as to deal with a modified situation. USDOC recognizes
that there is something qualitatively different about privatization.
37. It is here where USDOC introduces its contested calculation of the benefit which has “passed
through” . As stated, when a privatization occurs, the US authorities are prepared to look into the
details of the case. However, they systematically ignore the most relevant evidence, refusing to
consider whether or not the change of ownership has taken place at arm's-length for fair market value.
In that sense, the US re-instates its automatic and impermissible “presumption” that subsidies
provided to a state-owned enterprise provide econom ic benefit to the new owner, and this without
regard to the conditions surrounding the price paid.
38. According to the EC, this lack of concern wi th the conditions surrounding the actual price
paid is a major omission on the part of investigating authorities. As Professor Cooper says: "[this
presumption] has no economic basis in the context of an arm's-length privatization at fair market
value", and "[this] presumption states an economic conclusion without having established the residual
economic benefit". On the US calculation of benefit during privatization, he notes that it "does not
comport with sound economic analysis, market valuation principles or standard business practice."
According to this Harvard Professor of Internatio nal Economics, "the key issue in any privatization
transaction is whether fair market value was paid for the productive unit purchased; if so, the residual
value of any previous subsidy will have been repaid in the purchase price".
The EC fully agrees. The result of the US methodology and its gamma-based calculation leads to
absurd and completely arbitrary results in practice. For example, in order to "extinguish" the subsidy
in the case of British Steel , the purchasing price would have to have been many times its market
value.
39. Finally, another argument which the US has put forward in this regard
15 is the fact that
Article 1 is drafted in the present tense. The EC disagrees that the use of the present tense in this
provision can somehow lead to the conclusion that an original “benefit” determination irrebuttably
remains intact.

15 US First Written Submission, at paragraph 118.

40. There is no textual support for this far-reaching conclusion. Indeed, the use of the present
tense throughout the text of Article 1, including in its chapeau, must lead to the opposite conclusion.
If the drafters had wanted to follow the US appr oach, whereby the subsidy and benefit would both be
granted once-and-for-all, surely they would have used contrasting tenses between the chapeau and the
rest. The use of the neutral present tense throughout the text as it stands now together with the words
"thereby conferred" simply requires that there is a clear causal link between the two.16
9. Recipient can only be a "legal person"
41. The fifth error by the US concerns the following question: under the Subsidies Agreement,
may countervailing duties be imposed on the importation of merchandise that is manufactured,
produced, or exported by a business enterprise that was not the beneficiary of the subsidy, in the
absence of a reasonable determination that the current producer, and hence its merchandise, is actually
"benefiting" in the same way from the subsidies that were in fact received by the former producer ?
42. The US position regarding privatization is that subsidies reside in the productive units of a
subsidy recipient (and “travel with the productive unit to its new home”). If subsidies are received by
(i.e., “reside in) the productive unit, then any produc er that subsequently owns that productive unit
owns a “subsidized productive unit.” In support of its position, the US cites the language of GATT
1994 Art. VI:3 and Art. 10 of the Subsidies Agreement: subsidies are “bestowed … upon the
manufacture, production or export of merchandise".
17 That language however does not mean that the
'merchandise' is the beneficiary/recipient of the subsidy, as the US claims.
43. The EC has a fundamentally different view on this issue, which has important repercussions:
the EC believes that the only possible “recipient of a subsidy” can be a legal person, never the assets
as such . A “productive asset” does not have a bank account into which a government financial
contribution may flow. It is the legal person which holds the assets and it is the legal person which
receives the subsidy.
44. The US position in this respect is contradictory to a principle supported by the US, i.e. that
'money is fungible'. It does not matter whether the subsidy arrives in the form of a capital injection
transferred directly to the owner or in the form of new machinery delivered at the door of the factory.
In both cases, a “financial contribution” is provided to (and benefits) the firm . “Production” (when
used as a noun) or “merchandise” do not receive contributions or benefits. A company’s production of
merchandise may benefit from a subsidy, but there is always an entity that produces “production” or
“merchandise”. Assets do not, in and of themselves, get money or make things.
45. Indeed, if subsidies were granted to assets, th e logical consequence of the US position would
be that a producer subject to countervailing duties should no longer receive a benefit if he replaced all
his assets. However, the US would never lift countervailing duties in such a situation.
46. The EC position is confirmed by Article 19:3 Subsidies Agreement, which deals with
newcomer reviews and focuses on the investigation of the "exporter". According to this provision,
"[a]ny exporter whose exports are subject to a definitive countervailing duty but who
was not actually investigated […] shall be entitled to an expedited review in order
that the investigating authorities promptly establish an individual countervailing duty
rate for that exporter."18
47. Thus, the authorities investigate whether or not the exporter received a subsidy. If so, for this
legal person a countervailing duty rate is set.

16 See also Brazil’s Third Party Submission, at paragraphs28 – 29 and following.
17 US First Written Submission, at paragraph 181.
18 Emphasis added.

48. The fact that recipients of subsidies must be persons rather than goods is also confirmed by
the text of Article 2:1 Subsidies Agreement, which lays down the fundamental requirement of
specificity of the subsidy to certain enterprises.
49. The consequence of this difference of view between the EC and the US is vital, since the EC
has asked the Panel to confirm that the WTO Member which applies a CVD identify that a particular
subsidy has been given to a particular beneficiary. The new owner of productive assets has obtained
no benefit and a continued countervailing is therefore wholly inappropriate.
10. The object and purpose of the Subsidies Agreement is not to "deter"
50. Sixth, the US in a true crusading spirit, claims 19 that the relevant object and purpose of the
Subsidies Agreement is “to deter and offset trade-distorting government subsidies benefiting
merchandise and causing injury to an industry in an importing country”. The EC strongly objects to
the introduction of such a misleading statement, for the following reason.
51. There is no justification for announcing that the Subsidies Agreement or CVD's are meant to
“deter” governments from granting subsidies. “Deterrence” contains the notion of threat and
punishment.20 There is no basis in the Subsidies Agreement or the decided cases for such an
aggressive approach. The US interpretation of the Subsidies Agreement as a "deterrence" to
governments is totally misplaced. On the contrary, the whole design and structure of the Subsidies
Agreement indicates that with the exception of the narrow prohibited subsidies category (export and
local content subsidies) governments can legitimately grant subsidies so long as these cause no
adverse effects; the spirit of the Subsidies Agreement therefore is towards disciplining subsidies in the
exceptional case they cause such adverse effects and not to deter governments from granting subsidies
in the first place. The object and purpose of the countervailing duty provisions is to allow Members
to protect their industry from the injurious effects of subsidies of other Members.
In the view of the EC the US approach, if accep ted, could risk governments imposing CVD's without
legal constraint or boundary. The US eagerness to use CVD's to deter and punish is particularly clear
from the “rich uncle” hypothetical. The claim that a subsidy (always ?) results in lowered market
prices, higher output, reduced value for companie s, and ultimately survival of firms that would
otherwise have failed is false.
21
52. In any event, the British Steel case concerns a totally different situation. Most of the subsidy
funds covered operating losses and payments to retiring workers. The funds did not “create” plants or
assets that wouldn’t have otherwise existed or that added future value to the enterprise. Rather, the
company’s capacity was significantly reduced during the period prior to privatization. The US is
aware of each of these facts.
53. There is another fundamental problem with the US approach itself. Although the allocation
over time methodology represents an acceptable presumption, this does not mean that it reflects the
real past and future benefit of the subsidies. In real life, the real amount of subsidy which remains
outstanding and is repaid when a company is privatized may be very different to the amount
outstanding under the US allocation methodology -- indeed, the US privatization methodology
contradicts its own allocation methodology. This does not mean that the US methodology is
unreasonable, but it is not for the US to second guess the market.

19 US First Written Submission, at paragraph 150.
20 The 1993 New Shorter Oxford English Dictionary explains "to deter" as to "restrain or discourage
(from acting or proceeding) by fear, doubt, dislike of effort or trouble, or consideration of consequences".
21 See US First Written Submission, at paragraphs 214, 218, 222, and note 137.

54. In addition, if the merchandise against which the CVD is imposed is not benefiting from
subsidies, there is no “offsetting” and, hence, the duty is not a countervailing duty. The US is in
effect redefining what it means to "countervail".
55. Finally, the US implicitly argues that CVD's should be imposed in certain circumstances to
avoid “circumvention”. There is absolutely no evidence of "circumvention" in the present British
Steel case and it is irrelevant, by definition, in arm's-length market value transactions.
11. Other legal arguments
56. The earlier-mentioned issues contain the six more important legal and factual errors made by
the US in its First Written Submission. As stated earlier, the EC will deal with each of these errors in
more detail in its Second Written Submission. Now, the EC would like to deal with two remaining
legal points which deserve attention.
12. Article 27:13 Subsidies Agreement
57. First, in order to find support for the argument that subsidies paid before privatization remain
in all cases allocable after privatization, the US relies heavily on Article 27:13 Subsidies Agreement.
The US draws quite sweeping a-contrario-based conclusions, which, Mr. Chairman, should not be
allowed so stand, for a number of reasons.
58. To begin with, Article 27:13 does not at all address the issue which is key to the present
dispute, i.e. whether a benefit will “pass through” to the new owner of a previously government-
owned and subsidized company, when it is sold at arm' s-length for fair market value. In spite of the
US' assertions, Article 27:13 also says nothing about the argument that a “benefit” should be
identified and measured only once.
59. Instead, Article 27:13 gives developing coun try governments a break by excluding certain
subsidies from Part III of the Subsidies Agreement. The US reads in this provision much more than
was ever intended. It, and I quote, sees not only a "strong implication", but also it builds on "unstated
premises" and "implicit assumptions", and concludes that these unilateral assumptions could
somehow trump the plain text of the Subsidies Agreement. Rather, the only implication of the
affirmative language in Article 27.13 is that there is no safe harbour from CVDs for non-developing
countries with regard to new subsidies provided in the context of a privatization. Its says absolutely
nothing about prior subsidies or their pass-through. The US interpretation is a significant
mischaracterization.
60. Moreover, Article 27:13 is far from applicable in the present dispute: the UK is not a
developing country and the subsidies given by the UK government at the time were not given, as is
required by Article 27:13, in the context of a privatization. Also, as Brazil correctly states in its Third
Party Submission
22, this provision addresses an exception to Part III, and "[t]hus, it can only be
presumed that the negotiators purposefully excluded any reference to Part V of the Subsidies
Agreement".
13. EU State Aids rules
61. A second argument of the US which deserves brief comment here is its contention that the EC
takes a different view of the relevance of a change of ownership in its internal State aid rules to that
which the EC argues should be followed with respect to countervailing duties.
23
Mr Chairman, Members of the Panel, this is a red herring. Let me briefly explain why.

22 Brazil’s Third Party Submission, at paragraph 83.
23 US First Written Submission, at paragraphs 227 to 233.

• The substantive rules applying to EC State aids are entirely different from those
applying to countervailing duty proceedings. Article 87 of the EC Treaty (formerly
Article 92) prohibits, subject to certain exceptions, State aid “which distorts or
threatens to distort competition by favouring certain undertakings or the production of
certain goods … insofar as it affects trade between Member States.”
• Further, the applicable procedure involves prior notification and approval or
disapproval by the EC Commission before the aid may be granted.24
• The remedy against the granting of state aids not allowed by the EC Treaty is never the
imposition of corrective duties but a retroactive declaration of illegality which may
entail the reimbursement of the aid. Countervailing duties can only be imposed on
merchandise which currently benefits from a subsidy.
• More fundamentally perhaps, the object and purpose of the EC State aid rules is to
avoid and if necessary to remedy distortions of competition within the EC arising from
the grant of State aid, at least to the extent that the distortions are contrary to the
common interest. The purpose of countervailing duty measures duties is quite
different, as we have explained above, and is to protect the internal market of another
WTO Member by means of an offsetting duty at its border. They do not seek to remove
any distortion of competition in the country where the producer is located, only to
shelter the importing country from the effect of the subsidy.
62. For all these reasons, the EC’s policy concerning its own internal State aids has no bearing on
the correct interpretation of the countervailing duty rules in the Subsidies Agreement. Indeed the US
admits that the EC has never applied a “pass-th rough ” methodology in its own countervailing duty
practice.
25 The US merely argues that the EC has stated that State aid rules may be relevant for the
EC’s countervailing duty regulation. 26 This is rather misleading. The statement in the EC
Commission calculation guidelines to which the US refers was not at all of general applicability but
related to a narrow and special case which had nothing to do with privatisation or the pass-through of
subsidies. Thus applying the principle of treaty interpretation on which the US itself relies
27 --
expressio unius es exclusio alterius -- one can even come to the conclusion that EC State aid rules are
not at all relevant in other respects!
63. In any event, what the Commission actually said 28 is that, as regards equity infusions, it
would make an assessment “on a case-by-case basis, taking account of the Commission’s practice as
regards state-aid policy in this area and the practice of the Community’s main trading partners.” That
hardly indicates that State aid rules will be followed in countervailing duty cases, even in the special
case to which this comment relates.
14. Conclusion
64. In conclusion, the EC respectfully requests that the Panel find that by imposing countervailing
duties on leaded bar imports from the EC in the 1995, 1996 and 1997 administrative reviews, the US
has violated Article 10 Subsidies Agreement, r ead in conjunction with Articles 19, 1 and 14 and
Article VI GATT 1994, by imposing countervailing dut ies where no subsidy exists. Equally, the
Panel is requested to find that the US violated Article 19:4 Subsidies Agreement by levying
countervailing duties on imported products in excess of the amount of any subsidy found to exist.
The EC requests that the Panel recommend that the US immediately bring its measures into
conformity with its obligations.

24 See Article 88 EC Treaty (formerly Article 93).
25 US First Written Submission, at paragraph 227.
26 US First Written Submission, at paragraph 232.
27 US First Written Submission, at paragraph 154.
28 Guidelines for the Calculation of the Amount of Subsidy in Countervailing Duty Investigations, OJ
C 394, 17.12.98, at page 10, 11.

65. However, Mr. Chairman, members of the Panel, such an outcome will not necessarily change
the US practice in future. Indeed, the US may well conclude that, as a result of such a limited Panel
recommendation, it would be allowed to maintain its countervailing duty laws as presently drafted.
This would, in the EC's view, be largely insufficient. The EC therefore requests the Panel, in line
with Article 19:1 DSU, to suggest that the US am end its countervailing duty laws to recognize the
principle that a privatization at market price extinguishes subsidies.
66. Thank you for your attention.
15. EC Concluding Statement
Mr. Chairman, distinguished Members of the Panel. The EC would like to make some
concluding statements. However, before doing so the EC wishes to thank you for the professional
way in which you have handled the proceedings over the last two days, which has allowed the parties
to engage in an interesting debate. We are looking forward to receiving your further questions in
writing. The EC would like to make the following brief points.
First, the EC understands that the US is asking the Panel to accept the proposition that it has
the right to impose countervailing duties on newly privatized companies without investigating
whether or not these companies have actually benefited from a subsidy. The US authorities claim that
it is sufficient for them to carry out only one ex amination regarding a subsidy to the former state-
owned company, many years in the past, while subsequently disregarding completely a fundamental
change in circumstances such as an arm’s-length privatization at fair market value. As well as
defying all economic logic (confirmed by Professor Richard N. Cooper), this approach is inconsistent
with the Subsidies Agreement, which contains the principle that a subsidy only exists if a benefit is
conferred on the company which is subject to countervailing measures.
Second, the EC would like to touch upon the question of the appropriate standard of review
for this case. The US has proposed that the Panel should consider interpretations of US national
courts on the subject of pre-privatization subsidies. The EC has already strongly rejected this idea in
its opening statement, for the following reason: the Chevron doctrine, where any permissible
interpretation must be respected by the national courts, is not applied within the framework of the
WTO, except in the case of Article 17:6 Anti Dumping Agreement. The US has requested that the
Panel rely on this provision in the framework of the Subsidies Agreement. Mr. Chairman, as
discussed earlier, this cannot be allowed.
The EC will set out its arguments regarding the appropriate standard of review for the present
dispute in its Second Written Submission in more detail, but would already today underline that,
compared to the situation before 1995, the WTO Agreement has significantly changed the applicable
standard of review. For example, before 1995 Ar ticles 3:2 DSU and 11 DSU did not exist, and thus
Panels were not following the rules of interpretation used in International Law. Therefore, the US
should not be able to rely on the two pre-WTO cases which it has mentioned in paragraphs 58 of its
Oral Statement, i.e. the United States Salmon case and the New Zealand Electrical Transformers case.
In addition, the United States Salmon case was dealt with by a panel under the Tokyo Round
Subsidies Code whose terms of reference were restricted to that Agreement. It is therefore not even a
GATT 1947 case.
Third, the US has laid great stress on the object and purpose of the Subsidies Agreement. It
has made it clear in its response to our questions that it considers the elimination of a benefit not a
sufficient reason for removing a countervailing duty, since it considers that the object and purpose of
Part V ASCM is to “deter” distortions of trade, even if no financial benefit remains with the company
after privatization. The EC contends that correction of any supposed market distortion (for which in
any case no evidence has been produced by the US in the present dispute) is not provided for in the
Subsidies Agreement. The WTO Agreement is designed to promote world trade, not to remove
market distortions. Countervailing duties, unless justified, restrict world trade, a point well made by

Mexico earlier. If British Steel plc. were required to pay countervailing duties, this would in fact
create a new market distortion.
Fourth, the US position that "subsidies travel with the assets" is in contradiction with the US
principle that "money is fungible. Subsidies which are "glued to the assets" are by definition not
fungible. The result of applying the principle that "subsidies travel with the assets" is that it would be
sufficient for a company to sell its existing assets in order to escape a previously imposed duty.
Therefore, the Panel should follow the EC position that a subsidy of the kind we are discussing here is
granted to the owner of the assets, not to the assets as such.
Fifth, the EC does not ask the Panel to confirm that any change in circumstances requires a
new investigation whereby the conditions for countervailing duties should be determined. During the
last two days many hypotheticals have been discussed which may constitute some change in
circumstances, but certainly not all of these would constitute a fundamental change in circumstances.
What the EC expects from the US is that if a fundamental change occurs, this would give rise to a
proper review of the justification for the duty. A change in ownership from the government to a
private owner is such a fundamental change and would therefore merit a new examination of the
existence of the "benefit" requirement for the new owner.
Thank you.

ATTACHMENT 1.3
RESPONSES OF THE EUROPEAN COMMUNITIES
TO WRITTEN QUESTIONS FROM THE PANEL
FIRST MEETING OF THE PANEL
(30 June 1999)
The European Communities respectfully provid es the following answers to the Panel’s
questions.
I. QUESTIONS FOR BOTH PARTIES
Q.1. If a new rate of subsidization is being established in the course of a review (either under
Article 19 or Article 21 of the SCM), according to data for the relevant period of review (POR),
are parties of the view that this involves de termining whether subsidization continued over the
POR ? Or could a new rate be determined without establishing whether subsidization
continued?
Response of the European Communities:
It is necessary to establish that subsidization continues before establishing a new rate. Article
21.2 ASCM is very clear on this. It requires an examination of “ whether the continued imposition of
the duty is necessary to offset subsidization"1 1 and, therefore, of whether subsidization continues. The
sentence would not make sense if it were possi ble for Members to continue to impose offsetting
countervailing duties without the need to examine whether subsidization continues. In addition, the
continuous aspect of subsidization is reflected in the use of the wording in Article 21.1 ASCM, which
speaks of “subsidization which is causing injury”.
Article 19.1 is even clearer, requiring a determination of the “ existence” of a subsidy. By
definition, if there is no “benefit”, no subsidy can “exist” for the purposes of Article 19. Article 19.3
also supports this conclusion. It refers to the imposition of countervailing duties on parties other than
those which “ have renounced any subsidies ”, thus indicating that renouncement of a subsidy
eliminates subsidization and, consequently, the need to impose duties. Finally, Article 19.4 also lends
significant support to this conclusion, referring to “ subsidies found to exist ”, not to “subsidies found
to have existed”.
Q.2. Are parties of the view that establishing whether subsidization continued over the POR
involves looking at whether a financial contribut ion conferring a benefit took place over the
POR ? Or could one establish the existence of subsidization during the POR without assessing
whether a financial contribution conferring a benefit was made during the same period ?
Response of the European Communities:
A subsidy must be found to exist during the POR before the goods of a company may be
legally countervailed under Part V ASCM. While it is not necessary that a financial contribution occur
during the POR, any benefit conferred thereby must be conferred in the POR in order for a
countervailing duty to “offset” a subsidy. According to Article 14 ASCM, the amount of the subsidy
must, for the purposes of Part V on countervailing duties, be limited to the amount of the benefit to
the recipient and therefore this is the element that must be present and measured during the POR.

1 See also Article 10, footnote 36 ASCM.

II. QUESTIONS FOR THE EUROPEAN COMMUNITIES
1. At para. 237 of its first written submissi on, the United States suggests that the
administrative reviews at issue were conducted under Article 21.2 of the SCM Agreement. This
was confirmed by the United States at the first substantive meeting. Does the EC agree that the
administrative reviews at issue were Article 21.2 reviews?
Response of the European Communities:
Yes. The European Communities agree that the administrative review appears to have been
conducted on the basis of Article 21.2 ASCM, but has requested confirmation by the US in the EC's
questions.
A review can only confirm or modify (include terminating) an original finding which led to
the imposition of a countervailing duty under Article 19.1 ASCM (“ … a Member …may impose a
countervailing duty …”). Article 21.2 ASCM contains guidance on reviews. Article 21.2 requires
reviews to be conducted (either on Members' own in itiative or upon request by any interested party),
but the conditions to be fulfilled before duties can be imposed or maintained remain those of
Article 19.2
The European Communities have not alleged a breach of Article 21 ASCM since the US did,
in fact, conduct reviews. We are alleging a breach of Articles 1, 10 and 19 since the conditions and
requirements set out in those provisions were not respected in conducting those reviews (please note
that the European Communities have referred in paragraph 124 of its First Written Submission to
Article 21.2.)
3
2. Does the EC consider that an arm’s length privatization at fair market value gives rise
to a presumption that non-recurring subsidies bestowed on a government-owned company are
extinguished through privatization?
Response of the European Communities:
Following a fundamental change in circumstances, such as a privatization, investigating
authorities have the burden to determine that the privatized company has obtained a benefit from the
pre-privatization financial contributions granted to the prior state-owned company. This
determination must be made on the basis of positive evidence, not
 on the basis of an “irrebuttable
presumption” that benefits established to unrelated prior state-owned companies automatically accrue
to the successor company simply because a privatization occurred within a benefit stream period
previously established for a prior state-owned company. An arm’s-length privatization for fair market
value, by definition, precludes the notion that any “benefit” can “pass through” to the new private
owner as a basic matter of economics. The EC would not term this a presumption so much as a basic
matter of economic reality. What is clear is that there is no benefit to the new company – it has no
advantage by reference to the market and the marketplace benchmarks set forth in Article 14.

2 For example, Article 19.4 does not allow a countervailing duty to exceed the amount of subsidy found
to exist. If Article 19 did not apply to review pro ceedings Members could impose duties - following reviews -
which far exceeded the amount of subsidy.
3 This paragraph reads as follows: “Thus, in conformity with the context, object, and purpose of the
countervailing duty rules, as set forth in Section A above, Article 19.4 and Article VI of GATT 1994, read in
conjunction with Article 21.1, 21.2 and 19.1, establish th at Members must ensure that trade is not impeded by
imposition of countervailing duties at a level more than necessary to offset the benefit enjoyed by such imported
merchandise”.

3. Please comment on USDOC’s findings regarding extinguishment of subsidies potentially
allocable to Richemont (Exhibit USA-30) in light of footnote 17 to the EC’s first written
submission.
Response of the European Communities:
The EC would very much appreciate the oppo rtunity to comment on USDOC’s findings with
regard to the Richemont spin-off in light of footnote 17 of its first written submission. However, the
Federal Register Notice provided by USDOC only draws a brief conclusion. It does not contain any
of the details of the sale or the essential figures used by USDOC to draw its mathematical conclusion.
As USDOC’s privatization and “spin-off” methodologies are based on an arbitrary formula rather than
an assessment of the existence of a benefit, the European Communities respectfully request that the
Panel ask the United States to provide all parties with those facts, including: (1) the essential USDOC
spin-off calculation worksheets containing all the specific numbers that led to the conclusions drawn
by USDOC regarding the spin-offs in the case, and (2) all supporting memorandums, including the
portion of the verification report dealing with Richemont cited by the USDOC at 64 Fed. Reg. 30776.
The European Communities then request the opportunity to respond to that information.
In the interim, the EC would make the fo llowing comments on the limited information
presented in the Federal Register Notice. First, in its oral statement the US implies that USDOC “pays
particular attention to the facts of each case” and, as a result, apportioned none of the subsidies to the
company under investigation in Stainless Steel Sheet and Strip in Coils from France (“SSSS in
Coils”).4 This is inaccurate. As the Federal Register Notice makes clear, Richemont was not the
company under investigation in the SSSS in Coils case. Rather, it was spun off prior to the
investigation of Usinor in SSSS in Coils . Under the USDOC spin-off methodology, subsidies are
never “extinguished.” Rather, “the full amount of the prior subsidies is allocated between the seller
and purchaser and remains countervailable."5 In this instance, USDOC apparently apportioned all of
the pre-privatization subsidies to the company it wa s investigating – Usinor. Most importantly, in its
examination of the “facts” USDOC took no account of whether any “benefit” as defined by Article 1
and 14 ASCM was ever conveyed on that purchaser. To USDOC, this fact is “irrelevant” in its spin-
off or privatization practice.6 Rather, it applied a self-derived formula on which the EC can provide
additional specific comments when provided with the information used by USDOC.
Second, from the information provided in Exhibit USA-30, the European Communities call to
the Panel’s attention an important inconsistency in the methodologies applied by USDOC in the case
provided.7 In considering whether Usinor received a countervailable subsidy from its 1994 sale of
CSR to a government entity, USDOC comments that it examined whether Usinor “received more than
a reasonable market price from the EDF in this transaction ,” including such factors as the
“independent valuations of the transaction based on detailed projections of future costs and
revenues”. USDOC “found no evidence to indicate that the transaction was anything other than an
arm's length transaction for full market value. A ccordingly, we determine that this programme does
not constitute a countervailable subsidy… ”.8 The USDOC concluded that the seller did not obtain a
benefit because the transaction was at arm's length for full market value. This analysis is consistent
with Articles 1 and 14 of the ASCM, but it is re markably never applied by USDOC in the context of
an arm’s-length market value privatization. Rather, USDOC instead applies its "irrebuttable
presumption" theory. There is no justification for the differential treatment illustrated in detail in this
rather revealing decision.

4 See US Oral Statement at paragraph 46.
5 See US First Written Submission at paragraph 54.
6 See GIA at page 37264.
7 See pages 30781-82 of the Federal Register Notice supplied in Exhibit USA-30 (“A. Purchase of
Power Plant”).
8 Id. at 30782 (in Exhibit USA-30).

ATTACHMENT 1.4
RESPONSE OF THE EUROPEAN COMMUNITIES
TO WRITTEN QUESTIONS FROM THE UNITED STATES
(30 June 1999)
The European Communities responds as follows to the written questions from the
United States:
SCM Agreement Requirements
Q.1. Does the EC agree that the SCM Agreem ent requires the invest igating authority to
establish a “benefit” within the meaning of Article 1.1 as of the time of the subsidy bestowal
with regard to each subsidy that it countervails ? For example, if a financial contribution is
made in 1985, and the period of investigation or the period of review is 1990, does the EC agree
that the SCM Agreement requires the investigatin g authority to establish the benefit from the
financial contribution based on the circumstances prevailing as of 1985?
Response of the European Communities:
By using the term “subsidy bestowal” the US appears to assume that a “financial
contribution” and a “benefit” are always simultaneous and instantaneous. This is not true. Nothing in
the ASCM requires a benefit to be conferred at the same time as a financial contribution. The
investigating authorities must establish the existence of a benefit to the producer under investigation
during the period of investigation (POI) or the period of review (POR). It is this producer on whose
goods a WTO Member may impose offsetting countervailing duties, if a subsidy is found to exist.
If, as in the US example, a non-recurring financial contribution was made in 1985, and the
POR is 1990, the investigating authority could assume that the financial contribution confers a
continuing benefit on the company under investigation in 1990, based on the circumstances prevailing
as of 1985. However, it should be noted that the investigating authorities assume that the subsidy is
not repaid, that the producer investigated in 1985 is the same in 1990, and that no fundamental change
in circumstances occurs such as a privatization. If any of these events occur, the assumption
necessarily is no longer valid and the conditions, including the existence of a 'benefit' have to be
determined under the changed circumstances.
In the present dispute, no financial contribution has been made to BS plc and no benefit has
been conferred on BS plc. The US has investigated and reviewed BS plc, a private company. The US
irrebuttably, automatically and incorrectly presumed that a benefit had been conferred on BS plc.
Q.2. If the EC contends that it is ever no t necessary for the investigating authority to
establish a “benefit” within the meaning of Article 1.1 as of the time of the subsidy bestowal
with regard to each subsidy that it countervai ls, please explain under what circumstances it is
not necessary for the investigating authority to do so. In addition, please cite to the particular
provision of the EC’s countervailing duty law, or the EC’s practice thereunder, if any, showing
how the EC has addressed the matter.

Response of the European Communities:
Not applicable. See answer to question 1.
Q.3. Does the EC contend that the SCM Agre ement requires the investigating authority to
establish a “benefit” within the meaning of Article 1.1 as of a time subsequent to the time of the
subsidy bestowal under any circumstances other than a privatization or other change in
ownership of a subsidized company?
Response of the European Communities:
The investigating authorities must, in all cases
, establish the existence of a benefit to the
producer under investigation during the period of in vestigation (POI) or the period of review (POR),
independently of whether or not the financial contribution was made before or during the POI or POR.
For a subsidy to exist, there must be a benefit. In the present dispute, the US has countervailed the
goods of a company for which it never first established the existence of a benefit.
Q.4. If the EC’s answer to the previous question is yes, please answer the following questions.
a. Explain under what circumstances it is necessary for the investigating authority
to establish a “benefit” within the meaning of Article 1.1 as of a time subsequent
to the time of the subsidy bestowal;
Response of the European Communities:
See answer to question 3.
b. Explain how the investigating authority would make the determination
regarding whether that “benefit” existed;
Response of the European Communities:
Investigating authorities must ascertain that non-recurring financial contributions
provide a benefit to the producer under investigation. Article 14 ASCM prescribes
the methods by which an investigating auth ority shall calculate the “benefit to the
recipient conferred”, if any, as a result of a government financial contribution.
Article 14 provides that a variety of financial contributions by a government “shall
not be considered as conferring a benefit” unless they are inconsistent with
commercially meaningful benchmarks.
c. Cite to the particular provision of the EC’s countervailing duty law, or the EC’s
practice thereunder, if any, showing how the EC has addressed the matter.
Response of the European Communities:
Article 15.1 of Regulation 2026/97 prevents a countervailing duty being imposed if
“it has been demonstrated that the subsidies no longer confer a benefit on the
exporters involved”.
Q.5. Does the EC contend that the SCM Agre ement requires the investigating authority to
establish that a “benefit” within the meaning of Article 1.1 continues to exist as of the time of
the period of investigation or the period of revie w? For example, if a financial contribution is
made in 1985, and the period of investigation or the period of review is 1990, does the EC

contend that the SCM Agreement requires the inve stigating authority to establish the benefit
from the financial contribution based on the circumstances prevailing as of 1990?
Response of the European Communities:
Yes. See, in particular, the European Communities’ response to Question 1, above.
Q.6. If the EC’s answer to the previous question is yes, please answer the following questions.
a. Explain how the investigating authority would make the determination
regarding whether that “benefit” existed.
Response of the European Communities:
This depends on the facts of each case but some situations have been described in the
answer to question 4(b) above.
b. Cite to the particular provision of the EC’s countervailing duty law, or the EC ’s
practice thereunder, if any, that reflects this requirement.
Response of the European Communities:
Please see the answer to Question 4(c).
Q.7. The EC seems to contend that the SCM Agreement requires the investigating authority
to establish a “benefit” within the meaning of Ar ticle 1.1 as of the time of the privatization or
other change in ownership of a subsidized comp any. Can the EC cite the specific language in
the SCM Agreement that establishes this supposedly mandatory rule? Here, the United States
is not seeking a reference to the Article on whic h the EC relies or an entire quotation of the
entirety of the Article, but rather the specific language in the Article on which the EC relies.
Response of the European Communities:
The EC’s position is that, in order for a countervailing duty to be imposed (or to continued to
be imposed), it must be demonstrated that a producer was granted countervailable subsidies during the
POI or POR. A benefit is required by Article 1.1 ASCM. “A benefit is thereby conferred” refers to
the company subject to investigation, during the pe riod of investigation. A basic duty under Part V
ASCM is to calculate countervailing duties that offset the subsidy found to exist. Article 19.3 ASCM
provides for individual countervailing duty rates for exporters. As the EC said in its concluding
remarks at the end of the First Substantive Meeting with the Panel: "the EC does not ask the Panel to
confirm that any change in circumstances requires a new investigation whereby the conditions for
countervailing duties should be determined. …. Wh at the EC expects from the US is that if a
fundamental change occurs, this would give rise to a proper review of the justification for the duty. A
change in ownership from the government to a private owner is such a fundamental change and would
therefore merit a new examination of the existence of the "benefit" requirement for the new owner".
Q.8. Assuming for the sake of argument that the SCM Agreement requires an investigating
authority to identify a “benefit” within the meaning of Article 1.1 accruing to the owners of the
successor, privatized company as of the time of a privatization transaction, as the EC argues,
can the EC cite the specific language in th e SCM Agreement that establishes the additional
mandatory rule that an arm’s length, fair market value privatization transaction eliminates all
previously bestowed subsidies? Here, again, th e United States is not seeking a reference to the
Article on which the EC relies or an entire quotation of the entirety of the Article, but rather the
specific language in the Article on which the EC relies.

Response of the European Communities:
There is, in particular, a requirement in Article 1.1 ASCM that a subsidy only exists where
there is a benefit. In addition, as the US revealingly notes in Exhibit USA--30, a " programme does
not constitute a countervailable subsidy” where USDOC finds “no evidence to indicate that the
transaction was anything other than an arm's length transaction for full market value”.1
Q.9. Can the EC describe how it determines, under its countervailing duty law or practice,
whether a subsidy has been repaid?
Response of the European Communities:
The European Communities have no practical experience with such a situation. The EC’s
approach would be to consider the subsidy elimin ated if the company concerned had repaid to the
granting authority an amount corresponding to the remaining benefit. In the case before the Panel, no
subsidy to BS plc exists so it does not have a subsidy to “repay”.
Q.10. The EC seems to take the position that the SCM Agreement requires the investigating
authority to treat an arm’s length, fair market value privatization transaction as extinguishing
all pre-privatization subsidies. The EC explains that the object and purpose of the SCM
Agreement focuses on what commercially meaningful advantage is accruing to the owners of the
successor, privatized company. In taking this position, the EC relies on Article VI:3 of GATT
1994 and Articles 10 and 19.4 of the SCM Agreement. Taking the foregoing into account, please
answer the following questions:
a. Does Article VI:3 of GATT 1994 make any express reference to the owners of
the producer or exporter of the merchandise?
b. Does Article VI:3 of GATT 1994 even make any express reference to the
producer or exporter of the merchandise?
c. Although the EC quotes Article VI:3 of GATT 1994 in its entirety in its First
Submission, the EC does not identify the precise textual language on which it
relies to support its view that the object and purpose of the SCM Agreement
focuses on what commercially meaningful advantage is accruing to the owners of
the successor, privatized company. Can the EC identify the precise textual
language on which it relies in this regard?
d. Does Article 10 of the SCM Agreement make any express reference to the
owners of the producer or exporter of the merchandise?
e. Does Article 10 of the SCM Agreement even make any express reference to the
producer or exporter of the merchandise?
f. Although the EC quotes Article 10 of th e SCM Agreement in its entirety in its
First Submission, the EC does not identify the precise textual language on which
it rely to support its view that the object and purpose of the SCM Agreement
focuses on what commercially meaningful advantage is accruing to the owners of
the successor, privatized company. Can the EC identify the precise textual
language on which it relies in this regard?

1 See page 30782 of the Federal Register Notice supplied in Exhibit USA-30.

g. Does Article 19.4 of the SCM Agreement make any express reference to the
owners of the producer or exporter of the merchandise?
h. Does Article 19.4 of the SCM Agreement even make any express reference to the
producer or exporter of the merchandise?
i. Although the EC quotes Article 10 of th e SCM Agreement in its entirety in its
First Submission, the EC does not identify the precise textual language on which
it relies to support its view that the object and purpose of the SCM Agreement
focuses on what commercially meaningful advantage is accruing to the owners of
the successor, privatized company. Can the EC identify the precise textual
language on which it relies in this regard?
Response of the European Communities:
The premise to these questions is not correct. The European Communities have not suggested
that “the object and purpose of the ASCM focuses on what commercially meaningful advantage is
accruing to the owners of the successor privatized company.” The EC’s position is that under the
ASCM it must be demonstrated that the current producer being investigated, and potentially subject to
countervailing duties, benefits during the POI or POR from a financial contribution.
As regards subparts (a), (b) and (c), Article VI :3 of GATT 1994 refers to a subsidy granted
“upon the manufacture, production or export” of the product concerned. Only subsidies granted to
these activities can be subject to countervailing duties. However, countervailing duties are not
imposed on activities. They can only be imposed on products from particular producers that have
benefited from financial contributions. The production process is an economic activity carried on by
producers. Accordingly, it is those producers that can be subsidized. “Production” or “merchandise”
do not receive contributions or benefits. The Article VI :3 language cannot and does not mean that
the merchandise is the recipient of the subsidy. The European Communities consider that this must
refer to the current manufacturer, producer or exporter of the product. Indeed, even US law
recognizes that a subsidy exists when a financial contribution is provided “to a person” and a benefit
is conferred.
2
Questions (d), (e) and (f) and (g), (h) and (i) repeat mutatis mutandis questions (a), (b) and (c)
and so the same answer applies mutatis mutandis.
Q.11. In the EC’s Oral Statement, the EC now argues that the recipient of the Article 1
“financial contribution” must be a “legal person,” meaning essentially a company. The
United States notes that the SCM Agreement does not expressly address this matter, but it
would seem that as a practical matter when a government provides subsidy funds, there must be
some entity that receives, or takes possession of, those funds. In any event, after stating this
notion, i.e., the notion that a “legal person” is what receives the subsidy funds, the EC then
extends it in two ways. In this regard, the EC first states, essentially, that because a “legal
person” is what as a practical matter receives the subsidy funds, Article 1.1's bare reference to
“benefit” really must mean “benefit to a legal person” or, in other words, “benefit to a
company.” Second, without even acknowledging that it is doing it, the EC then takes “benefit to
a company” and turns it into “benefit to the ow ners of a company.” Taking the foregoing into
account, please answer the following questions:
Response of the European Communities:

2 See 19 U.S.C. §1677(5)(B).

Again the premise of the question reflects a misunderstanding and mischaracterization of the
EC position. The European Communities consider that there must be a benefit to the producer
investigated.
a. With regard to its first extension, or leap of logic, can the EC clarify what
specific text in the SCM Agreement supports its conclusion that “benefit” in
Article 1.1 really means “benefit to a co mpany”? In the United States’ view,
even accepting the notion that, as a prac tical matter, there must be some entity
like a company that actually receives the subsidy funds, it is a separate issue as
to who or what the Article 1.1 “benefit” is conferred on. The United States
would note that, in its First Submission (at paragraphs 189-98), the
United States explains in some detail how Article VI:3 of GATT 1994 and
Articles 10 and 19.4 of the SCM Agreement focus on the benefit to the
merchandise rather than the benefit to the company. How does the EC consider
that these provisions support its conclusion that “benefit” in Article 1.1 really
means “benefit to a company”?
Response of the European Communities:
The fact that “benefit” refers to a benefit to the producer/exporter is supported in
particular by: Article 2 (specific to an enterprise), Annex I (a) (subsidies to a firm),
Annex IV.2 (recipient firm), Article 11.2(ii) (the identity of each known exporter or
foreign producer), and Article 14 (benefit to the recipient).
The focus on the merchandise of some provisions of Part V of the ASCM is because,
as discussed above, the method used to countervail subsidy is by imposing duties on
exported merchandise.
b. The EC’s second leap of logic is even more tenuous, and the EC provides no
explanation of it. Can the EC state its rationale for concluding that a “benefit to
a company” really means a “benefit to th e owners of a company”? In addition,
can the EC cite to the specific text in the SCM Agreement on which this
conclusion is based?
Response of the European Communities:
The question is based on a misunderstanding, as explained above.
Q.12. In taking the position that the SCM Ag reement requires the investigating authority to
treat an arm’s length, fair market value privatization transaction as extinguishing all
pre-privatization subsidies, it appears that the EC is assuming that 100 per cent of the
government-owned company is sold to a privately owned company or other private entity or to
an individual. Please answer the following questions which attempt to clarify the position being
taken by the EC:
a. Can the EC explain how the SCM Agreement treats a sale of 75 per cent of a
government-owned company to a privately owned company or other private
entity or to an individual? For example, would all of the prior subsidies still be
extinguished or only 75 per cent of them?
b. What if only 50 per cent of th e government-owned company were sold?
c. What if only 25 per cent of th e government-owned company were sold?

d. Please explain what the SCM Agreement requires in each of the above
situations.
Response of the European Communities:
The question is again based on a misstatement of the EC position. The European
Communities are asserting that the new producer/exporter must be shown to benefit
and that this cannot be “irrebuttably” presumed. Whether the new producer/exporter
which has purchased assets has obtained a benefit depends, of course, on the terms of
the transaction (fair market value, arm's length transaction). A member is not
excused from an existence of benefit analysis and the US itself performs this analysis
regularly in just these types of situations. See, for example, response to question 8
and footnote 2, above.
Q.13. In the EC’s view, how does the SCM Ag reement require an investigating authority to
handle the pre-privatization subsidies in the following situation. Here, assume that a
government-owned company which previously had received a grant of £100 million in 1985 is
privatized in an arm’ s length, fair market value transaction in 1988 and then, one year later, in
1989, the government re-nationalizes the company? If the period of investigation or the period
of review is 1990, and the investigating author ity is examining the re-nationalized company,
how does the SCM Agreement require the invest igating authority to treat the £100 million
grant? Please explain.
Response of the European Communities:
The investigating authorities must in all case s establish the existence of a benefit to the
producer under investigation during the period of investigation (POI). Whether the purchaser has
obtained a benefit depends on the circumstances of the transaction. Article 14 ASCM provides
several benchmarks. With regard to the privatization of a state-owned company, when a private buyer
purchases a company or assets thereof at arm’s length for fair market value, this precludes the notion
that any “benefit” passes through. With regard to the government purchase of a company, the
European Communities respectfully refer the US to its own analysis in the Stainless Steel Sheet and
Strip from France case submitted as Exhibit USA-30. 3 There, the US claims it examined whether
“more than a reasonable market price” was received from the government in the transaction. Because
USDOC “found no evidence to indicate that the transaction was anything other than an arm’s-length
transaction for full market value”, they held that “this programme does not constitute a
countervailable subsidy . . . ".4 The European Communities are in accord with this benefit analysis as
the proper framework. It examines whether the sale was at arm's length for fair market value and
whether the government decision to purchase the company was one where the government acted as a
player in the market competing with private investors on equal terms.
Q.14. In the case of a change in ownership other than the privatization of a
government-owned company, such as when a privately owned company is sold to another
privately owned company or other private entity or to a private individual, does the EC take the
position that the SCM Agreement requires the inve stigating authority to treat an arm’s length,
fair market value transaction as extinguishing all subsidies that had been provided to the
company before it was sold? If the EC’s answer is no, please explain. In addition, indicate how,
if at all, the treatment required by the SCM Agreement in this situation differs from the

3 See pages 30781-82 of the Federal Register Notice supplied in Exhibit USA-30 (“A. Purchase of
Power Plant”).
4 Id. at 30782 (in Exhibit USA-30) (emphasis added).

treatment required by the SCM Agreement when ad dressing prior subsidies in the wake of an
arm’s length, fair market value privatization transaction.
Response of the European Communities:
The investigating authorities must in all case s establish the existence of a benefit to the
manufacturer, producer or exporter under investig ation during the period of investigation (POI).
Whether the producer has changed and whether the purchaser of those assets has obtained a benefit
depends on the circumstances and, in particular, on the terms of the transaction (fair market value,
arm’s-length transaction). This applies to all producers of merchandise whether privately or state
owned. Although the present dispute concerns a privatization, an arms-length for fair market value
sale of productive assets between two private companies will also not lead to the “pass-through” of
prior subsidies, as they will be accounted for in the price paid by the purchaser and therefore remain
with the seller. By definition, in an arm’s-length fair market value sale, no benefit passes to the
buyer.
Q.15. Does the EC’s answer to the previous quest ion change depending on whether the sale of
the privately owned company is accomplished through a sale of shares versus a sale of assets?
Please explain.
Response of the European Communities:
The form of the change in the ownership should not take precedence over the substance, i.e.
whether there is a new producer on the market which is now operating on non-subsidized capital.
Q.16. Please answer the following questions with regard to a heavily subsidized, privately
owned company whose shares are publicly traded and are held by numerous shareholders:
a. If the ownership of the shares in the company were to turn over completely
within a period of, for example, thre e years, would the SCM Agreement require
that all of the subsidies bestowed on that company prior to this change in
ownership be treated as extinguished? Please explain the EC’s answer, and cite
to the precise textual language in the SCM Agreement that supports the EC’s
explanation.
b. If 75 per cent of the ownership of the shares in the compan y were to turn over
within a period of, for example, thre e years, would the SCM Agreement require
that all of the subsidies bestowed on that company prior to this change in
ownership, or perhaps only 75 per cent of those subsidies, be treated as
extinguished? Please explain the EC’s answer, and cite to the precise textual
language in the SCM Agreement that supports the EC’s explanation.
c. If 50 per cent of the ownership of the shares in the compan y were to turn over
within a period of, for example, thre e years, would the SCM Agreement require
that all of the subsidies bestowed on that company prior to this change in
ownership, or perhaps only 50 per cent of those subsidies, be treated as
extinguished? Please explain the EC’s answer, and cite to the precise textual
language in the SCM Agreement that supports the EC’s explanation.
d. If 25 per cent of the ownership of the shares in the compan y were to turn over
within a period of, for example, thre e years, would the SCM Agreement require
that all of the subsidies bestowed on that company prior to this change in
ownership, or perhaps only 25 per cent of those subsidies, be treated as

extinguished? Please explain the EC’s answer, and cite to the precise textual
language in the SCM Agreement that supports the EC’s explanation.
e. If 10 per cent of the shares in the co mpany were held by one shareholder, and
that shareholder had effective control over the company, what treatment would
the SCM Agreement require for previously bestowed subsidies if that
shareholder were to sell its entire owners hip interest in that company? Please
explain the EC’s answer, and cite to the precise textual language in the SCM
Agreement that supports the EC’s explanation.
f. If none of the shareholders held more than one per cent of the shares in the
company and then one of the shareholders increased its ownership interest to 10
per cent and gained effective control over the company, what treatment would
the SCM Agreement require for previously bestowed subsidies if that
shareholder were to sell its entire owners hip interest in that company? Please
explain the EC’s answer, and cite to the precise textual language in the SCM
Agreement that supports the EC’s explanation.
Response of the European Communities:
The situations described by the US relate to daily trading of shares under normal market
conditions; in these situations there is no change in the producer but shares representing a very small
part of the company’s equity are regularly bought and sold at different times by individual investors.
This situation is unrelated to the dispute before the Panel.
In the dispute before the Panel, the total fair market value of the assets (including the
outstanding balance of prior subsidies) was evaluated by the purchaser and the seller, and the
ownership and control of the assets changed hands in the course of an arm’s-length transaction. There
is a change in the producer and the investigating authority must examine whether the any benefit
under Article 1.1 of the SCM Agreement is conferred on the new producer.
Q.17. In its First Submission (at paragraph 131), the United States sets forth an example
involving an unrelated trading company. It says:
Here, assume that a heavily subsidized producer sells its products to an
unrelated trading company in an arm's length transaction at fair market value,
and then the trading company exports the same products. If Article 1.1 or any
other provision of the SCM Agreement required the identification of a benefit
continuing after the original subsidy bestowals, the subsidies previously
bestowed on the producer would arguably have to be treated as eliminated
because the trading company paid the market price for the products that it later
exported. According to the EC's reasoning, there would be no benefit to the
trading company from those subsidies and, consequently, there would be no
subsidies to countervail in the importing country. In this scenario, the result
would be irrational, particularly because the competing industry in the
importing country would have suffered the same injury regardless of whether
the imports came from the trading company or the producer. The SCM
Agreement avoids such irrational results by not requiring the identification of a
continuing benefit.
How does the EC respond to this example?
Response of the European Communities:

The situation described in the “trading company” example in the US First Written Submission
(paragraph 131) has nothing in common with an arms-length privatization. Please see the EC
response to the hypothetical in our Second Written Submission, at Section II.I.
A countervailing duty investigation of non-recurring capital injections into producers must, in
particular, assess the amount of the benefit to those producers. The authorities may seek to offset a
subsidy found to exist by imposing duties on their products insofar as they cause injury. The fact that
the product is sold at a full market price in the importing country has no effect on the calculation of
the benefit conferred on the producer with which we are concerned in this case.
EC Countervailing Duty Law
Q.18. In seeking to better understand the arguments which the EC makes in this dispute
regarding the text, context and object an purpose of the SCM Agreement, it is instructive to
examine how the EC, in its own countervailing duty practice, implements the SCM Agreement.
Indeed, Article 31.3(b) of the Vienna Conventi on on the Law of Treaties states that, in
interpreting a treaty, “[t]here shall be taken into account, together with the context ... (b) any
subsequent practice in the application of the treaty which establishes the agreement of the
parties regarding its interpretation ... .” Accordingly, please answer the following questions:
a. Under the EC’s countervailing duty law and practice, does the investigating
authority determine whether a subsidy “b enefit” within the meaning of Article
1.1 of the SCM Agreement exists as of the time of the subsidy bestowal?
b. Has the EC’s countervailing duty law or practice ever been interpreted or
applied by the investigating authority to require a determination as to the
existence of a subsidy “benefit” within the meaning of Article 1.1 of the SCM
Agreement as of any time after the subsid y bestowal? If the EC’s answer is yes,
please provide an explanation, and cite to the particular provision of the EC’s
countervailing duty law, or the EC’s practice thereunder, that supports this
explanation.
c. Are there any circumstances in which the EC does not allocate the benefits of
large or non-recurring subsidies over a period of years? If the EC’s answer is
yes, please provide an explanation, and cite to the particular provision of the
EC’s countervailing duty law, or the EC’s practice thereunder, that supports
this explanation.
d. Are there any circumstances in which the EC changes how it allocates the
benefits of large or non-recurring subsidies over a period of years based on
events taking place after the subsidy bestowal? If the EC’s answer is yes, please
provide an explanation, and cite to the particular provision of the EC’s
countervailing duty law, or the EC’s practice thereunder, that supports this
explanation.
Response of the European Communities:
Article 31.3(b) of the Vienna Convention on the Law of Treaties allows subsequent practice to
be taken into account in interpretation together w ith the context where this establishes an agreement
between the parties of the treaty as to its interpretation. This subsequent practice must be “concordant,

common and consistent” and must also be common to all the parties 5 and so will be particularly
difficult to establish in the case of a multilateral agreement.
Therefore, the European Communities do not consider that an examination of its own
countervailing duty practice is instructive in this case. The EC countervailing duty regulations and
EC practice in this area are fully consistent with the interpretation of the ASCM that the European
Communities are advocating in this case. The Euro pean Communities have never applied a “pass-
through” methodology in its own countervailing duty practice.
Economics of Privatization
Q.19. In its First Submission (at paragraphs 50-66), the EC states that, as an economic matter,
an arm’s length, fair market value privatization transaction extinguishes previously bestowed
subsidies. With regard to the privatizatio n of a company owned by an EU member State
government, which is subject to the rules set forth in the State Aids Code, is it the EC’s view
that, as an economic matter, an arm’s length , fair market value transaction extinguishes
previously bestowed subsidies?
Response of the European Communities:
The European Communities provide a detailed answer with respect to its State Aid Code for
the benefit of the Panel and US in its Second Written Submission (see Section II.H).
Q.20. Please explain the economic theory behind th e State Aids Code's treatment of State aid
provided prior to a privatization as automaticall y continuing, in full, to the benefit of the
successor company and its owners?
Response of the European Communities:
Please see Second Written Submission of the Eur opean Communities, at Section II.H. Under
State Aid law, aid granted illegally can be recovered from the successor company independent of
whether or not the successor company has obtained a benefit or of whether or not the sale was at fair
market value in an arm’s-length transaction. The granting of non-authorized aid is a breach of the EC
law for which the successor company may be held responsible independently of any economic
considerations. The US has mischaracterized the EC State Aid law.
Q.21. Does the EC agree that where the government provides massive subsidies to an industry,
this subsidization can distort trade by enabling companies in the industry to continue building
and modernizing production facilities and producing output even where output exceeds
demand? Please explain.
Q.22. Does the EC agree that the excess capaci ty and excess output resulting from massive
subsidization can drive down the value of the companies in this industry as well as the prices of
the industry's overall output? Please explain.
Q.23. Does the EC agree that if a particular company in an unsubsidized industry were to be
sold, it would command a higher market price than would the same company if the industry
were heavily subsidized because there would be no excess capacity or excess output from
inefficient, subsidized companies to depress the market price of the company? Please explain.

5 Sinclair, The Vienna Convention on the Law Treaties (2nd ed., 1984), p. 137; Yasseen,

Q.24. Does the EC agree that even if an arm’s length price is paid for a heavily subsidized
company in a heavily subsidized industry, the subsidies previously bestowed on that company
continue to distort trade, through artificially high output, through artificially low output prices
resulting from the excess capacity which th ey created and through the reduced value of
companies throughout the industry? Please explain.
Response of the European Communities:
The European Communities address the US argume nt in these questions at length in its
Second Written Submission, including a detailed response to the US “rich uncle” hypothetical. Please
see Section II.F. Some subsidies may have certain effects on the market. The purpose of
countervailing duties, however, is to offset injurious subsidies within the meaning of the ASCM, not
to correct market distortions. When countervailing duties are imposed for reasons other than to offset
subsidies, they serve to restrict world trade and become themselves a central instrument of market
distortion. The EC would point out that the ASCM does not allow countervailing duties to be
imposed where there is no benefit conferred on the producer.
Q.25. In British Steel’s 1984/85 Annual Report (at page 23) (see Exhibit USA-32), four years
prior to the 1988 privatization of British Steel, the company’s auditors expressed "uncertainty"
as to whether British Steel would remain "a going concern" without "sufficient finance ...
forthcoming to meet ongoing [cash] requirements." Does the EC agree that, but for the U.K.
government’s massive subsidization, it was likely that British Steel would not have remained a
"going concern"?
Response of the European Communities:
The state-owned British Steel Corporation (BSC) was, of course, not the company
investigated or reviewed in the investigations subjec t to this dispute. Further, the auditors did not
express uncertainty that BSC would remain a going concern if sufficient finance was forthcoming, as
the US falsely suggests in its question (“‘uncertainty’ . . . with sufficient finance forthcoming . . . .’”).
Rather, as reflected on p. 23 of the BSC Annual Report, the auditors explained that, at the time of
their report in July 1985, “there are uncertainties facing steel industries generally, including the
continuation of reasonable stability in the European steel market. In consequence, (i) there are doubts
as to the level of future trading results and (ii) if the trading conditions are significantly different from
those assumed in the projections underlying the external financing limit, the limit set by the
Government for the financial year ending March 1986 could prove inadequate.”
Whether or not BSC, the state-owned compan y, would have remained a “going concern”
without the subsidies that were provided by the British Government in the 1977-85 period is also a
moot and irrelevant question.
The US question incorrectly assumes that if BSC would not have continued as a going
concern producing and exporting steel, none of its plants or productive units would have continued in
operation producing or exporting steel to the US Not on ly is there no evidence in the record in this
regard, but the premise is contrary to economic logic and experience. Many companies in financial
straits do not continue as “going concerns” – but this does not mean that their productive facilities
cease to exist. As the experience of countless US companies demonstrates, what happens is that the
financial structure of the company is reorganized, or, if the company is liquidated, its productive
facilities that have a positive market value are sold.
Q.26. Does the EC agree that British Steel, immediately prior to its 1988 privatization, was
more competitive as a result of the more than £7 billion ($13 billion) in subsidies which it had
received from the U.K. government between 1978 and 1988? If the EC’s answer is no, please
explain the following acknowledgement in British Steel’s 1987/88 Annual Report (at page 5) (see

Exhibit USA-33) that its competitiveness be nefited from recent investment in plant and
equipment:
The present profit position is the reward for the radical measures taken over the
past years to rationalize and restructu re the operation of the business, allied
with benefits increasingly coming through from well-directed investment in
plant and equipment, which together have given us a more competitive base.
Q.27. Immediately after the 1988 privatization of British Steel, was British Steel more
competitive as a result of the more than £7 billion ($13 billion) in subsidies which it had received
from the U.K. government between 1978 and 1988? If the EC’s answer is no, please explain the
statement of British Steel's chairman, immediatel y after the 1988 privatization of British Steel
in its 1988/89 Annual Report (at page 4) (see Exhibit USA-34) that:
We are now benefiting from the restructuring programme we have been
maintaining in recent years. We have concentrated on a smaller number of
efficient sites which have been further improved by well-directed investment. As
a result, we have been able to respond to increased demand on the basis of
efficient plants operating at high throughput and utilization rates, giving rise to
lower costs and efficient margins.
Response of the European Communities:
The state-owned British Steel Corporation (BSC) was, of course, not the company
investigated or reviewed in the investigations subj ect to this dispute. Further, the quotation from
BSC’s 1987/88 Annual Report points out that BSC’s competitive and position at that time was the
result of two major factors: (1) the elimination of excess capacity and the rationalization of
productive capacity to better reflect market conditions, and (2) investment that had been made in plant
and equipment.
The first factor, which the US chooses to ignore, demonstrates that the aid received by BSC
was not designed to maintain or create steel-producing capacity that the private market would not
have maintained or created, but to eliminate such capacity and to bring BSC’s productive facilities in
line with market demands – just as would have been achieved if the company had gone through a
bankruptcy proceeding.
The US focuses on the second factor, with the unspoken assumption that private investors
would not have financed the particular investments in plant and equipment made by BSC during this
period. There is nothing in the record to support such an assumption, nor is there any credible
evidence that any such improvements would not have been financed by the private sector.
The critical issue in this proceeding is whether, after the market-value privatization of BSC’s
productive units, the operation of those units in the hands of the new private owners who had paid
market value to acquire them continued to benefit from the past financial contributions received by
the state-owned BSC. The answer is clearly no. If facilities acquired in the 1988 privatization were
more modern or efficient as a result of the investments made by BSC with subsidy funds, that fact was
reflected in the fair market value price paid in the privatization. As the European Communities have
set forth at length, if the plants had been less modern or efficient, the new owners would have paid a
lower price. In short, having paid market value for the facilities acquired – including any facilities
enhanced by prior investments – the new owners have paid for the value of those investments and are
not operating with “improved facilities” that they have not fully paid for.
Although it is irrelevant, the European Communities note that it does not accept the US
factual assertions made regarding the amount of countervailable subsidies received by the BSC.

I. INTRODUCTION
1. In both its First Written Submission and Oral Statement to the Panel, the United States has
advanced a series of remarkable propositions in support of the actions that are the subject of this
dispute. Most notably, the United States contends that the WTO Agreement on Subsidies and
Countervailing Measures (“ASCM” or the “Agreement”) imposes no obligation that the United States
find, on the basis of record evidence, the existence of a “benefit” and thus a “subsidy” to the very
producer under investigation before it imposes countervailing duties on that producer’s goods. After
setting aside this fundamental threshold requirement arising out of Article 1.1(b) ASCM, the US
irrebuttably presumes1 the existence of such a subsidy. The US claims discretion to do so on the
basis that when an unrelated state-owned company received a government financial contribution years
ago, the subsidy somehow became “glued to the assets,” travelling with them in a unique (and
inexplicable) way through an arm’s-length privatization at fair market value between unrelated
parties. In the words of the United States, “the privatization of a government-owned company, per se,
does not and cannot eliminate this countervailability”.2
2. Recognizing the difficulty of credibly a sserting to the Panel that its imposition of
countervailing duties in this situation in any manner “offsets” an existing subsidy to the unrelated and
“independent"3 private producer actually under investigation by the US, the US seeks to redefine the
object and purpose of countervailing duties. Countervailing duties are no longer “a special duty
levied for the purpose of offsetting any subsidy bestowed directly or indirectly upon the manufacture,
production or export of any merchandise." 4 Rather, the “real” object and purpose of the ASCM is,
according to the US, “to deter and offset trade-distorting government subsidies”.5
3. Thus reading a theory of deterrence into the ASCM, USDOC next seeks to justify the use of
countervailing measures to correct alleged “market distortions” it claims are due to subsidy. Even
leaving aside the fact that USDOC never established such a market distortion in its investigations of
British Steel plc, it is plain that the ASCM provides no basis for the use of countervailing duties to re-
create market conditions ex ante. Indeed, the US “market correction” claim in the present dispute is
also squarely at odds with the provisions of USDOC ’s General Issues Appendix. For example, while
the US suggests to the Panel that its methodology and the duties imposed therefrom “help to remedy
… injurious trade distortions” 6, it asserts in the GIA that “[t]he fact that productive capacity may have
been created or continues to exist is an irrelevant inquiry beyond the scope of the law”. 7 Simply put,
there is no basis in the ASCM for the claim that countervailing measures may be imposed for
purposes of deterrence.
4. The US also criticizes the European Communities for the claim that recipients of subsidies are
legal persons, not inanimate assets. Indeed, the claim that subsidies are given to assets, reside in those

1 “General Issues Appendix”, appended to Final Affirmative Countervailing Duty Determination;
Certain Steel Products from Austria, 58 Fed. Reg. 37217, 37263 (9 July 1993) (“GIA”). The US authorities’
discussion of “privatization” is found at 37259-65. A related discussion of “restructuring” meant to account for
the US treatment of “travelling” subsidies to privatized “spin-offs” (other than the company specifically under
direct investigation) is contained at page 37265 et seq.. Exhibit EC-2.
2 Id. (emphasis added).
3 Final Affirmative Countervailing Duty Determinati on; Certain Hot Rolled Lead and Bismuth Carbon
Steel Products from the United Kingdom , 58 Fed. Reg. 6237, 6240 (27 January 1993) [“ UK Leaded
Bars”][“1992 Investigation”]. See Exhibit EC-4.
4 Article 10, footnote 36 ASCM; Article VI:3 of GATT 1994 (emphasis added).
5 US First Written Submission at paragraph 21 (emphasis added).
6 US First Written Submission at paragraph 150.
7 See GIA at page 37264.

assets, and travel with those assets in the event of sale is central to the US position in this dispute. 8
This claim misreads the plain language of Article 10 ASCM, footnote 36 thereto, and Article VI:3 of
GATT 1994. Even US law makes plain that subsidies are given to “persons".9
5. In addition to its substantive claims, the US asserts that its plainly arbitrary privatization
methodology is entitled to deference as one of many “permissible” interpretations under Article 17.6
of the Antidumping Agreement.10 As a threshold matter, it is plain that the appropriate standard of
review in this dispute is set forth in Article 11 of the Dispute Settlement Understanding. The
United States asks the Panel to ignore the DSU standard, and argues for unprecedented deference to
US national courts which, the US claims, have already provided an “independent interpretation” of
the ASCM and the consistency of US privatization practice therewith. 11 As detailed below, the
standard of review suggested by the US has already been rejected by the Appellate Body as
inapplicable, and the US assertion that US courts have undertaken a substantive independent review
of the issues before this Panel is false.
6. While the US approach briefly summarized above is understandable in light of the enormous
pressure exerted by the US domestic steel industry on US authorities to impede foreign steel imports,
the US practice is not consistent with the text of the ASCM, nor with the object and purpose of
countervailing duties set forth in Article 10 ASCM and Article VI:3 of GATT 1994. By imposing
countervailing duties for the purposes of deterrence where no subsidy exists, the US has, quite simply,
gone beyond the limits of the ASCM. As Brazil noted in its oral statement to the Panel, the US
privatization practice has had “widespread adverse effects that extend far beyond the United Kingdom
companies involved”, with the US having “systemati cally targeted dozens of companies in countries
such as Germany, Israel, Brazil, Italy, Mexico, and the United Kingdom … the exports of these
companies have been effectively barred from the United States market”.
12 As a result of its attempt to
justify a practice which is in direct contravention of the ASCM, the United States, in its oral and
written submissions to the Panel, commits serious factual, economic and legal errors. The most
significant of these errors are detailed below.
7. This submission is divided into two substantive sections. Section I addresses the limited US
response to the fundamental economic principles set forth by the EC and the Third Parties to this
dispute. Section II sets forth the EC response to the main legal arguments made by the United States,
including:
• the inappropriate standard of review advocated by the US in this dispute and the
related US reliance on selected rulings by its own national courts;
• the false characterization of the EC position regarding the existence of a benefit and
existence of a subsidy by the US, which has incorrectly asserted that the EC rely on a
so-called “use and effects” test;
• the inaccurate assumption by the US that the ASCM allows it to make irrebuttable
presumptions that the benefits of a subsidy to a state-owned company flow
automatically to the new owners of productive assets after an arm's-length fair market
value privatization, without any demonstration whatsoever of a benefit being received
by the privately owned company as required by Article 1.1(b) and Article 14 ASCM;

8 See the repeated US reference to privatization as the mere “change of ownership of the subsidy
recipient”. US First Written Submission at, e.g., paragraphs 100,120, 129, 150, 181, and 183.
9 19 USC. §1677(5)(B).
10 See US First Written Submission at paragr aphs 102-104; see also US Oral Statement at
paragraphs 57-60.
11 See US First Written Submission at paragraph 61.
12 Statement by Brazil to the Panel at page 1 (June 16, 1999) (Brazil Oral Statement).

• the US assertion that a “subsidy recipient” can somehow be productive assets
themselves rather than the producer/exporter;
• the US claim that the object and purpose of the Subsidies Agreement and
countervailing duties is to “deter” subsidization; and
• the US reliance on Article 27:13 Subsidies Agreement and its mischaracterization of
the irrelevant EC State Aid rules; the inappropriate use by the US of the “trading
company example”; the incorrect US understanding of EC countervailing law and
practice; and finally, the inconsistent US view of the relevance and effect of an arm's-
length fair market value sale.
II. THE US POSITION ON THE ECONOMICS OF PRIVATIZATION
8. As a threshold matter, the European Communities must respectfully note that the
United States mischaracterizes the EC position regarding the economics of privatization and then
debates an economic proposition never asserted by the EC. The European Communities believe their
position was set forth with sufficient clarity in their earlier submissions: the US has irrebuttably
presumed that an independent private company that purchased production facilities for specialty steel
at arm’s length for fair market value somehow benefits from financial contributions provided to a
former state-owned company. As a matter of basic economic principles, the EC, Brazil, Mexico and a
distinguished US economist have noted that this is completely untenable.
13 Yet, the US ignores the
fact that the EC position is limited to market value transactions occurring at arm’s length, and falsely
informs the Panel that the European Communities ad vocate the complete extinguishment of any prior
subsidies “whenever” a company changes hands under any circumstances. 14 As the Panel is well
aware, the European Communities have made no such suggestion.
9. The economics of privatization are important in this dispute because establishing and
assessing “benefit”, a fundamental requirement for all Members under the ASCM, is an economic
inquiry. Without the existence of a benefit, there is no subsidy. Without the existence of a subsidy,
countervailing duties may not be imposed.
10. In their First Written Submission, the EC noted:
[W]hen a private buyer purchases a company or assets thereof in an arm’s-length
transaction at market value, the price paid necessarily values and incorporates within
the transaction any subsidy previously conferred. If the subsidy increases the value
of the company, so will it increase the price that the purchaser must pay. The
payment of market price thus necessarily precludes the notion that any “benefit”
would have “passed through” to this new private owner as a basic matter of
economics.
15
Markets value companies efficiently. This is not open to serious economic dispute -- the fair market
value arm’s-length buyer receives no benefit from a subsidy provided to a former state-owned
enterprise in such a situation. The US has not challenged this fundamental economic proposition,
instead preferring to argue that it is under no oblig ation to determine that the firm under investigation

13 See, e.g., First Submission of the European Communities at paragraph 50.
14 For example, the US claims the European Communities want the Panel to conclude that subsidies are
“automatically” extinguished, that the European Communities are promoting a “loophole”, “namely the
extinguishment of subsidies whenever the ownership of a subsidized company changes hands”, that the EC
“assumes away” government subsidization, and that the “E C’s approach to privatization basically calls for the
extinguishment of all prior subsidies”. See US First Written Submission at paragraph 220 and US Oral
Statement at paragraphs 9, 34, 77 and 79.
15 EC First Written Submission at paragraph 50.

was the “actual recipient”, or otherwise benefits from subsidy, before it imposes countervailing
duties.16
11. The European Communities have identified three claims of an economic nature advanced by
the US in support of its practice: (1) because subsidies are “glued” to assets, “subsidized production”
continues even after an arm’s-length fair market value privatization 17, (2) because state-owned
enterprises were subsidized and such subsidies may have caused a market distortion, the US may use
Part V ASCM to address those past or present distortions, as well as deter subsidies, by imposing
countervailing duties on companies that bought state-owned enterprises or productive units thereof 18,
and (3) because the state-owned British Steel Corporation (BSC) received significant subsidies in the
1970s and 1980s, those subsides must have benefited the company’s purchaser in some manner. 19
Each of these arguments lacks economic merit.
12. First, the US makes no economic showing that s ubsidies are somehow glued to assets or that
the purchaser of assets has in any manner benefited from a reduced cost or enhanced revenue as a
result of its purchase of those assets at arm’s length for fair market value . It cannot make such
showing, because the company demonstrably enjoys no benefit.
13. Second, seeking to avoid the requirement that it must establish a benefit before imposing
countervailing duties, the US argues that this focus is insufficient as it will not address “market
distortions”.
20 In this way, the US simply abandons the requisite benefit analysis. Instead, as
addressed more fully in Section II below, the US attempts to assert that the ASCM authorizes
Members to “deter” subsidies through countervailing duties in an effort to re-create the status quo
ante. This is simply not correct.
14. Third, the United States seeks to focus the Panel solely on the receipt of subsidies by the
state-owned British Steel Corporation, an approach, in our view, that amounts to trying to change the
subject. That the British Steel Corporation (BSC) received government financial contributions that
conferred a benefit to that State Corporation has never been in dispute.21 But BSC last produced steel
in 1988, and neither BSC nor its products were the subject of the relevant USDOC investigation or
reviews. By deeming the existence of a benefit relevant only with regard to an unrelated former state-
owned corporation (BSC) and then automatically imputing that benefit to an unrelated fair market
value purchaser, the US is countervailing the goods of a producer without ever examining whether
that producer is indeed benefiting from a financial contribution during the relevant period of review.
15. As noted in the European Communities’ oral st atement, both the EC and the Third Parties
have already offered the Panel extensive comments and examples on why the US automatic “travel
with the assets” approach ignores economic real ity. In addition, since the EC’s First Written
submission, a noted international economist, Professor Richard N. Cooper of Harvard University
22,
has also addressed the issue in comments provided to the US authorities in this dispute. His economic
analysis for the US Consumers for World Trade (“CWT”) directly addresses the issue of whether
prior subsidies to a state-owned enterprise conf er any economic benefit “to a company, a productive

16 US First Written Submission at paragraph 182.
17 US First Written Submission at paragraph 214.
18 US First Written Submission at paragraphs 214-216.
19 See, e.g., US Oral Statement at paragraphs 18 and 82.
20 See US First Written Submission at paragraph 224.
21 EC First Written Submission at paragraph 131.
22 As noted in Exhibit EC-13, Dr. Cooper has served as Chairman of the Federal Reserve Bank of
Boston, Undersecretary of State for Economic Affairs in the US State Department and Senior Staff Economist
for the Council of Economic Advisors.

unit of a company, or the merchandise produced by that company” after a fair market value
privatization.23 Dr. Cooper comments:
Basic economic analysis establishes that no economic benefit is enjoyed by the now-
privatized producer of the goods, a productive unit thereof, or the merchandise itself,
in comparison to competitors in the marketplace. . . . DOC deems the issue of
whether or not the sale of a state-owned company was for fair market value irrelevant
to its calculation of CVD’s on the merchandise of the now-privatized company.
From the perspective of analyzing whether any benefit is enjoyed by the privatized
company, however, this inquiry is the most fundamental issue. . . . US countervailing
duty practice ensures that countervailing duties will be assessed as financial penalties
on privatized firms that enjoy no economic benefit from government contributions
provided to state-owned predecessors. In these situations, the US is not
countervailing any economic benefit conferred on goods crossing our borders. The
practice must be seen as purely protectionist on behalf of US domestic firms in
competition with the newly privatized firms.24
16. While the US informs the Panel that its repa yment methodology is “sensible, logical and
reasonable”25, the European Communities respectfully submit that even a cursory examination
demonstrates that the methodology is irrational and arbitrary. The methodology makes no analysis of
the existence of a "benefit" after a fundamental change in circumstances has occurred, such as a
privatization, for the private company under investigation. It relies on assumptions directly
contradicted by record evidence, treating as “irrelevant” such central issues as whether the purchaser
paid fair market value. Contrary to express US assurances that it “pays particular attention to the facts
of each case”
26, the US practice is entirely formulaic, based on application of a self-derived pseudo-
scientific “gamma” to one portion (the cash portion) of the total purchase price. USDOC irrebuttably
labels the resultant sum a “credit” for prior subsidies. (In the case of a spin-off, USDOC “allocates ”
subsidy between seller and purchaser.27) In no instance does USDOC ever examine whether a benefit
was conferred on the purchaser or whether the transaction occurred at arm’s-length for fair market
value. The result is the imposition of countervailing duties in amounts meant to penalize market value
purchasers for not paying far above the entire market value of the productive assets at issue.
28
17. The USDOC methodology lacks any rational economic basis as a means to assess the
existence of a benefit and thus the existence of a subsidy prior to the imposition of a countervailing
duty. As Professor Cooper concludes:
[W]hile DOC openly expresses its view that privatization “affects” previous
subsidies, its current methodology to account for this event bears no relation to the
economics of the privatization itself or to an economic analysis of whether any
benefits are conferred on production of the now-private firm. . . . Th[e DOC
repayment calculation] is an arbitrary calculation.
The DOC calculation of residual past subsidies following privatization makes no
economic sense. It is at odds with policies championed by other segments of the US

23 Dr. Cooper’ s analysis, which was published by CWT on the Internet (see http://www.cwt.org/), has
been submitted to the Panel as Exhibit EC-13.
24 Emphasis added.
25 US Oral Statement at paragraph 5.
26 US Oral Statement at paragraph 46.
27 US First Written Submission at paragraph 54. The Richemont plant cited by the US in its oral
statement was accorded spin-off treatment as it was not the company DOC was investigating. See discussion of
Richemont, below. Under its automatic formula, DOC made no assessment of whether a benefit was conferred
to the purchaser of the productive unit. See also EC’s Response to question 3 from the Panel.
28 See also First Written Submission of the Government of Brazil at paragraphs 87-92.

Government, such as the US Departments of Treasury and State. . . . The arbitrary
and transparently absurd methodology of the DOC will go far to discredit the
frequently professed claim that the US Government favours and practices fairness in
its trade policies.29
18. The US refusal to take into account whethe r the sale of a government-owned company
occurred at arm’s length for fair market value is unreasonable and economically irrational. The US
ignores whether any benefit was conferred on the buyer and new owner of the productive assets. In
the words of Professor Cooper, this “makes no economic sense.” The European Communities again
respectfully submit that this practice violates the ASCM requirements under Articles 10 and 19 that
the existence of a benefit and thus the existence of a subsidy first be established with regard to the
company under investigation, before the goods of that company are assessed countervailing duties.
19. Policymakers around the globe have come to recognize the importance of privatization of
state-owned enterprises as a means of achieving economic rationalization and more efficient
allocation of the world’s resources. The US approach, however, has a significantly negative effect on
privatization efforts throughout the world. Were the US approach applied by all WTO Members, it
would erect unwarranted barriers to trade and deter those governments which are considering
privatizing state-owned companies from doing s o. The US approach unfairly punishes private
companies and restricts exports with “countervailing” duties in the complete absence of any
countervailable benefit to offset. The European Communities are of the opinion that the US practice
is contrary to the world trade order. It should not be followed by other WTO Members and should be
abandoned by USDOC immediately.
III. LEGAL ARGUMENT
A. T
HE APPROPRIATE STANDARD OF REVIEW FOR THIS DISPUTE IS ARTICLE 11 OF THE DISPUTE
SETTLEMENT UNDERSTANDING (DSU), N OT ARTICLE 17.6 OF THE ANTIDUMPING
AGREEMENT
20. In both its written and oral submissions to the Panel, the US has stated that the standard of
review applicable to this dispute is Article 17.6 of the Antidumping Agreement. Under this proposed
standard, the US claims entitlement to an unwarranted measure of deference for actions it deems
“permissible”, apparently hoping to avoid close examination of those practices by the Panel.
30 For
the reasons outlined below, however, the Panel may not accord any deference to the US actions that
are the subject of this dispute.
21. Article 30 ASCM sets forth that the terms of the DSU apply to the settlement of all disputes
under the ASCM. Under the terms of the DSU, th e Panel must determine “whether there is an

29 Emphasis added.
30 As Professor John Jackson, one of the world’s leading WTO scholars, has explained, the extreme
deference sought by the United States for its actions is not warranted even under an Article 17.6 standard of
review. See Steven P. Croley & John H. Jackson, WTO Dispute Procedures, Standard of Review, and
Deference to National Governments, 90 Am. J. Int’l L. 193 (1996). Based on a detailed review of Article 17
AD Agreement and the Vienna Convention, Professor Jackson notes that the purpose of the Vienna Convention
is to help resolve any ambiguities in the text. The range of “permissible” interpretations advanced by the US
will rarely be relevant because there usually will not be “more than one permissible interpretation” under
Article 17.6. Analyzing the US domestic Chevron decision which was the model for US negotiators in
proposing what became Article 17.6(ii), Professor Jackson illustrates why none of the rationales for deference to
administrative agencies that apply to DOC’s benefit in US legal proceedings are relevant in the context of WTO
panel reviews. No WTO Member has any greater expertise relative to other WTO Members regarding the
interpretation and application of provisions of the Agre ement – they are “interested parties whose own interests
may not always sustain a necessary fidelity to the terms of international agreements.” Id. at 209.

infringement of obligations assumed under a covered agreement," 31 “in accordance with customary
rules of interpretation of public international law."32 Article 11 DSU sets forth the standard of review
required of panels33 and should guide the Panel in this dispute:
The function of panels is to assist the DSB in discharging its responsibilities under
this Understanding and the covered agreements. Accordingly, a panel should make
an objective assessment of the matter before it, including an objective assessment of
the facts of the case and the applicability of and conformity with the relevant covered
agreements, and make such other findings as will assist the DSB in making the
recommendations or in giving the rulings provided for in the covered agreements.
Panels should consult regularly with the parties to the dispute and give them adequate
opportunity to develop a mutually satisfactory solution.34
22. No equivalent to Article 17.6 of the Antidumping Agreement is found in the text of the
ASCM. Indeed, while the Article 17.6 standard was purposely included in the AD Agreement, it was
purposely excluded from the ASCM. As both Brazil and the US have noted, the inclusion of one is
the exclusion of the other (inclusio unius est exclusio alterius). If negotiators had intended the ASCM
to have a standard of review similar to that found in Article 17.6 AD Agreement, the negotiators
would surely have included it. They did not, and instead issued the Decision on Review of
Article 17.6 of the Agreement on Implementation of Article VI of the General Agreement on Tariffs
and Trade 1994:
The standard of review in paragraph 6 of Article 17 of the Agreement on
Implementation of Article VI of GATT 1994 shall be reviewed after a period of three
years with a view to considering the question of whether it is capable of general
application.
The Decision makes clear that Members have yet to decide whether Article 17.6 is capable of
application outside the AD Agreement.
35
23. In the Hormones case, the US cited to the Decision on Review of Article 17.6 in support of the
proposition that Members have yet to decide if the standard of review set out in Article 17.6 of the
AD Agreement is applicable elsewhere.
36 In its decision in Hormones, the Appellate Body was clear:
“The Ministerial Decision evidences that the Ministers were aware that Article 17.6 of the Anti-
Dumping Agreement was applicable only in respect of that Agreement.”37

31 Article 3.8 DSU.
32 Article 3.2 DSU.
33 The panel in Argentina– Safeguard Measures on Imports of Footwear confirmed that Article 11
DSU establishes the appropriate standard of review with respect to disputes under covered agreements.
WT/DS121/R, Report of the Panel, adopted on 25 June 1999, at paragraph 8.124.
34 Emphasis added.
35 The Note by the Secretariat, Committee on Trade and Development, A Description of the Provisions
Relating to Developing Countries in the Uruguay Roun d Agreements, Legal Instruments and Ministerial
Decisions comments on the Decision on Review of Article 17.6 that “Ministers decided that the standard of
review - i.e. the scope of analysis and judgement of any panel established under the DSB on anti-dumping cases
- will be reviewed in three years with a view to considering whether it is capable of general application (more
specifically in the case of countervailing duties).” (COM.TD/W/510).
36 Report by the Appellate Body on EC Measures Concerning Meat and Meat Products (Hormones),
WT/DS26/AB/R, WT/DS48/AB/R, 16 January 1998, at paragraph 42.
37 Report by the Appellate Body on Hormones, WT/DS26/AB/R, WT/DS48/AB/R, 16 January 1998, at
paragraph 114, footnote 79 (emphasis added). The Hormones dispute concerned the application of
Article 17:6(i) AD Agreement. There is no reason that different analysis should apply to the application of
Article 17:6(ii) AD Agreement.

24. Despite the decision of the Appellate Body in the Hormones case, the US asserts that the
Panel should apply an Article 17.6 standard in countervailing duty cases solely as a result of the
Declaration on Dispute Settlement Pursuant to the Agreement on Implementation of Article VI of the
General Agreement on Tariffs and Trade 1994 or Part V of the Agreement on Subsidies and
Countervailing Measures (“Declaration”). As the Government of Brazil correctly notes, the very
existence of the Declaration demonstrates that Members have noted there is a disparity between the
standard of review set forth in the ASCM and that provided for in the AD Agreement. Further, the
European Communities do not view the Declaration as “meaningless,” as the US alleges.
38 I t was
made in conjunction with the Decision on Review of Article 17:6, and serves to outline the desirability
of consistent rules for the Members at the time wh en they review the application of Article 17.6.
Members have yet to make any decision in this regard, and, given the US practice with regard to
Article 17.6, they may collectively decide on some other uniform standard. The Declaration is also
not addressed to the Panel, as it is not a covered agreement since it is not listed in Appendix 1 to the
DSU. The Declaration therefore falls outside the scope of Article 11 DSU.
25. Recognizing the infirmities in its contentions regarding Article 17.6, the United States, in its
oral statement during the First Substantive Meeting with the Panel, has suggested that the Panel turn
to selected pre-WTO antidumping and countervailing duty panel determinations.
39 G i v e n t h a t t h e
DSU is clearly applicable to this dispute, the pre-WTO cases cited by the US are irrelevant.
Furthermore, even if they were relevant, they concern only technical factual calculations by national
authorities in areas in which the relevant GATT codes were silent. As such, they are particularly
lacking in relevance here, where a fundamental precept of the ASCM is at issue. The first decision
cited by the US is United States - Imposition of Countervailing Duties on Imports of Fresh and
Chilled Atlantic Salmon from Norway, a Tokyo Round Subsidies Code determination whose terms of
reference were restricted explicitly to that agreement.
40 As the European Communities noted during
their concluding oral presentation, it is therefore not even a GATT 1947 case. In United States-
Salmon, the panel found no grounds for ruling US practice inconsistent with the Subsidies Code,
which was silent on the applicable details of how Members should calculate secondary tax effects of
payroll tax reductions and the interest rate benc hmark for measuring the benefits from certain loan
programmes. The second case cited by the US, New Zealand Electrical Transformer 41, is an
antidumping panel report. Again, apart from its irrelevance given the obligations and standard set
forth in the DSU, that case involved a panel faced with no agreed GATT rules on how to calculate
cost of production and evidence of a “highly technical nature” concerning the cost of production for
sophisticated custom-built electrical transformers used by utility companies. In the light of the lack of
clear guidance regarding cost of production, the panel “considered that there was no basis on which to
disagree with the New Zealand authorities finding of dumping.
42
26. In contrast, the present case does not involve complex facts and technical evidence. Rather, it
concerns the fundamental issue of whether the ASCM requires that a "benefit" must be found before a
subsidy can exist. Indeed, notwithstanding the clear application of the DSU, if any pre-WTO panel
reports should be considered as regards this issue, the European Communities respectfully suggest
that it would be the 1994 Leaded Bars report which, while unadopted, recognized the “pass though”

38 US Oral Statement at paragraph 60.
39 US Oral Statement during First Substantive Meeting with the Panel, at paragraph 62.
40 United States - Imposition of Countervailing Duties on Imports of Fresh and Chilled Atlantic Salmon
from Norway, SCM/153, Report of the Panel adopted on 4 December 1992.
41 New Zealand – Imports of Electrical Transformers from Finland , L/5841 – 32S/55, Report of the
Panel adopted on 18 July 1985.
42 Id. at paragraph 4.3.

issue as legal, not simply technical in nature, and therefore one cognizable under the Subsidies
Code.43
27. Finally, even the inapplicable Article 17.6 (ii) standard of review would afford no deference
to the practices of USDOC authorities in this dispute. This provision reads as follows:
The panel shall interpret the relevant provisions of the Agreement in accordance with
customary rules of interpretation of public international law. Where the panel finds
that a relevant provision of the Agreement admits of more than one permissible
interpretation, the panel shall find the author ities' measure to be in conformity with
the Agreement if it rests upon one of those permissible interpretations.
Accordingly, deference would be appropriate under that standard only if the ASCM, once
interpreted in accordance with the customary ru les of interpretation of public international law
“admits of more than one permissible interpretation” on the issues in dispute. Nothing could be
further from the truth. The ASCM is not “silent
44, as the US claims, on the fundamental obligation of
a Member to establish the existence of a subsidy to the company under investigation prior to imposing
countervailing duties on its merchandise (see Article 19 ASCM). Nor is the Agreement “silent” on
the appropriateness of assessing countervailing duties on a company which has received no benefit to
offset (Article 1, 10 ASCM). It is true that the EC and the US are advancing different interpretations
of these provisions. But this is not a reason for allowing each party to adopt its own interpretation.
The very purpose of applying the customary rules of interpretation of public international law is to
resolve differences of view of interpretation and to arrive at a single correct interpretation.
45 Thus,
the Article 17.6 (ii) standard -- even if applied -- would afford no deference to the contested US
practices.
28. In sum, the task of the Panel is clear. It should apply the relevant provisions of the DSU in its
review of this dispute, including the customary rules of interpretation of public international law,
making an objective assessment of the matter before it, including an objective assessment of the facts
of the case and the applicability of and conformity with the ASCM. No other standard of review is
applicable to the deliberations of this Panel.
B. THE US H AS MISCHARACTERIZED THE DETERMINATION OF ITS COURTS AND THE PANEL
SHOULD ACCORD NO RELEVANCE TO THEIR CONCLUSIONS IN ITS INDEPENDENT ANALYSIS
OF THE CONSISTENCY OF US ACTIONS WITH THE ASCM
29. The US statement that its court decisions “represent an independent interpretation of a
countervailing duty law that is indistinguishable from the ASCM in the areas relevant to this matter”
is false.
46 The Panel should reject the US attempt to encourage the Panel to rely on the fact that a US
appeals court has allowed USDOC pre-privatization practice to this point.
30. USDOC acts under delegated authority from the US Congress in administering the US
countervailing duty laws. Therefore, any analysis by a US court concerning how USDOC treats the
issue of privatization and the existence of countervailable subsidies must be addressed in the context
of the US Congress’ intent in its enactment of the Uruguay Round Agreements Act (“URAA”).47 As
cited in the EC’s First Written Submission, the URAA provides:

43 United States - Imposition of Countervailing Duties in Cert ain Lead and Bism uth Carbon Steel
Products Originating in France, Germany and the United Kingdom, Report of the Panel (unadopted).
44 See US Oral Statement at paragraph 58.
45 See Steven P. Croley & John H. Jackson, op. cit. footnote 30.
46 US First Submission at paragraph 61.
47 Uruguay Round Agreements Act, Pub. L. No. 103-465, 108 Stat. 4809 (1994).

[a] change in ownership of all or part of a foreign enterprise or the productive assets of a foreign
enterprise does not by itself require a determination by the administering authority that a past
countervailable subsidy received by the enterprise no longer continues to be countervailable, even if
the change in ownership is accomplished through an arm’s length transaction.48
31. This provision does not of course correspond to anything in the ASCM and its presence is
already sufficient to refute the US argument that its law is indistinguishable from the ASCM. Indeed,
the fact that it was considered necessary at all demonstrates that, contrary to what it now claims, the
US did not read the ASCM as allowing it to apply its “pass-through” doctrine.
32. The Statement of Administration Action (“SAA”) to the URAA, which represents the
“authoritative expression by the Administration concerning its views regarding the interpretation and
application of the Uruguay Round Agreements, both for purposes of US international obligations and
domestic law"49 explains:
Section 771(5)(F) provides that a change in the ownership of “all or part of a foreign
enterprise” (i.e., a firm or a division of a firm) of the productive assets of a firm, even
if accomplished through an arm’s-length transaction, does not by itself require
Commerce to find that past countervailable subsidies received by the firm no longer
continue to be countervailable. . . Section 771(5)(F) is being added to clarify that the
sale of a firm at arm’s-length does not automatically, and in all cases, extinguish any
prior subsidies conferred. Absent this clarification, some might argue that all that
would be required to eliminate any counte rvailing duty liability would be to sell
subsidized productive assets to an unrelated party. Consequently, it is imperative that
the implementing bill correct and prevent su ch an extreme interpretation. The issue
of privatization of a state-owned firm can be extremely complex and multifaceted.
While it is the Administration’s intent that Commerce retain the discretion to
determine whether, and to what extent, the privatization of a government-owned firm
eliminates any previously conferred countervailable subsidies, Commerce must
exercise this discretion carefully through its consideration of the facts of each case
and its determination of the appropriate methodology to be applied.
50
33. These provisions are found nowhere in the ASCM and they were not included in the initial
Uruguay Round implementing legislation proposed by the US Administration to its Congress. Rather,
according to a US participant involved in the UR AA and SAA drafting process, the idea of including
specific language in the URAA and SAA to express a US view concerning changes in ownership was
first presented to several US congressional staff by attorneys representing US domestic steel, lumber
and semiconductor industries. 51 In a detailed memorandum to the key congressional officials
responsible for the implementing legislation, counsel for the US domestic steel industry noted:
The proposals released by the Administration to amend the US countervailing duty
(CVD) law and implement the SCM Agreement are wholly inadequate. . . .
Legislation must address …the incorrect notion that changes in ownership …of a firm

48 URAA Section 771(5)(F); 19 USC. § 1677(5)(F).
49 Statement of Administrative Action, accompanying H.R. 103-5110 (1994), reprinted in 1994
USC.C.A.N. 3773, 4040.
50 SAA at 928 (1994), reprinted in 1994 USC.C.A.N. 3773, 4240.
51 David A. Codevilla, Discouraging the Practice of What We Preach: Saarstahl I, Inland Steel and the
Implementation of the Uruguay Round of GATT 1994 , 3 Geo. Mason Independent L. Review 435, at n. 13
(1995) (“At this briefing for Finance Committee staffers, attorneys representing the steel industry described the
omission of a ‘change in ownership ’ amendment to the Administration’s initial legislative proposal as ‘the
biggest loophole’ in the implementing bill. They also specifically criticized the Court of International Trade’s
economic reasoning in Inland Steel and Saarstahl I.”). Id. at n. 171.

producing the merchandise change the subsidy. . . . The fact that the new owners are
not subsidized is irrelevant because the production of their facility is.52
Only later was the URAA and SAA language eventually adopted in the US presented by
authorities representing the US Administration. 53 As a result of their lobbying efforts, the domestic
US steel industry was successful in its effort to ensure the “change in ownership amendment” was
included as a part of the URAA and SAA.
34. That the US privatization language in both the URAA and accompanying SAA is
conspicuously absent from the text of the ASCM is, of course, inconsequential to a US court. From a
US court’s perspective, in exercising its discretion in implementing Section 771(5)(F), USDOC must
do so in faithful observance of Congress’ intent, not the ASCM, which is irrelevant to the reviewing
court. Under the Chevron standard of review of an agency’s ( e.g., USDOC ’s) interpretation of a
statute entrusted to its administration,
[i]f the intent of Congress is clear . . . the court . . . must give effect to the
unambiguously expressed intent of Congress. If, however, . . . . the statute is silent or
ambiguous with respect to the specific issu e, the question for the court is whether the
agency’s answer is based on a permissible construction of the statute.54
35. This US Supreme Court ruling has led to the so-called Chevron two-step analysis utilized by
US courts in reviewing administrative determinati ons such as those made by USDOC with regard to
privatization. Under Chevron step one the court asks “whether Congress has directly spoken to the
precise question at issue.” 55 If so, then the court “must give effect to the unambiguously expressed
intent of Congress.”56 If the Congress has not addressed the issue, however, then under Chevron step
two the court must determine whether the agency’s interpretation of the Congressional statute is
merely reasonable. Id.
36. In light of the carefully constricted Chevron analysis mandated for US court review of
USDOC decisions, the US assertion that its court de cisions “represent an independent interpretation”
of the US CVD law and the “indistinguishable” ASCM is, at best, disingenuous. Under Chevron, the
courts do not render an independent interpretation of the ASCM -- they are only addressing US laws
passed by Congress and implemented by USDOC.
57 As the US Court of Appeals for the Federal
Circuit notes in one of the very opinions cited by USDOC:
Commerce’s construction must be sustained if it falls within the range of permissible
construction [of the Congressional statute]. . . . The duty of the reviewing court is not
to weigh the wisdom of, or to resolve any struggle between, competing views of the
public interest, but rather to respect legitimate policy choices made by the agency in
interpreting and applying the [Congressional] statute. . . . To sustain an agency’s
interpretation of a statutory term, we need not find that its construction is the only

52 Memorandum from John Ragosta, Esq. of Dewey Ballantine LLP to Congressional Staff,
Administration Proposals On Key CVD Issues Are Inadequate and Must Be Revised, June 29, 1994, at page 1.
Exhibit EC-14.
53 Codevilla at n. 13.
54 Chevron USA., Inc. v. Natural Resources Defense Council, Inc. , 467 US 837, 842-43, 104
S.Ct. 2778, 2781-82, 81 L. Ed. 2d 694 (1984) (footnotes omitted).
55 Chevron, 467 US at 842.
56 Id., at 843 (emphasis added).
57 As Section 102(a)(1) of the URAA provides: “UNITED STATES LAW TO PREVAIL IN
CONFLICT -- No provision of any of the Uruguay Round Agreements, nor the application of any such
provision to any person or circumstance, that is inconsistent with any law of the United States shall have effect.”

reasonable one, or even that it is the result we would have reached had the question
arisen in the first instance in judicial proceedings.58
37. While suggesting to the Panel in this dispute th at US courts have independently affirmed the
conformity of USDOC practice with the ASCM, US authorities have expressed a different viewpoint
in their own submissions to US courts, pressi ng for an extreme level of deference to USDOC
interpretation of the US statute. In the appeal of the sole post-URAA US appeals court challenge to
USDOC’s privatization methodology, USDOC notes that:
[E]ven though Saarstahl II and later British Steel III both construed the pre-URAA
countervailing duty statute, those deci sions continue to support Commerce’s
approach to privatization under the post-URAA statute. None of the provisions added
to the statute by the URAA alters the principles on which Commerce ’s methodology
is based.
59
38. The US authorities then instruct the US appeals court that it is to accord “great deference to
the interpretation given the statute by the officers or agency charged with its administration.” 60
USDOC informs the court that Chevron “requires the court to defer to the agency’s interpretation of
its own statute as long as that interpretation is reasonable.” 61 Finally, attempting to ensure a standard
of US court review favorable to its position, US DOC reminds the court that it should “ accord
Commerce an even greater deference when reviewing, as here, Commerce’s development and
application of a complex methodology for use in a . . . countervailing duty determination."
62
39. The purpose of the United States’ attempted use of the Chevron standard is clear. At the
same time it has argued to US courts that it is ent itled to “great deference” in its interpretation of the
US statute and SAA, it has asserted to the Panel that US court decisions represent an “independent”
interpretation of the “indistinguishable” ASCM. In combination with its argument that Article 17.6 of
the Antidumping Agreement somehow applies to the ASCM, the US is seeking to avoid any
independent review by any competent authority of USDOC’s practice. The Panel should respectfully
reject this attempt, conducting the full and thorough review mandated by the DSU.
C. T
HE EUROPEAN COMMUNITIES HAVE NEVER SUGGESTED APPLICATION OF A “USES” OR
“EFFECTS” TEST
40. In both its First Written Submission and its oral remarks to the Panel, the United States has
argued that the European Communities are championi ng an inquiry into the “uses or effects” of
subsidies. The US claims the EC would require such an inquiry “on a continuing basis”.63 According
to the United States, if it adopts the EC’s “proposed effects inquiry”, the Panel would be “making a

58 Saarstahl AG v. United States, 78 F.3d 1539, 1541 (Fed. Cir. 1996) (citations and quotations
omitted) (emphasis added).
59 Brief of Defendant-Appellee United States at 15, Delverde SrL v. United States (Fed. Cir. Apr. 27,
1999) (No. 99-1186). In its brief, the DOC drew the same conclusion it asserted prior to the entry into force of
the ASCM, claiming that:
[W]ith regard to the “subsidy” requirement, it is sufficient merely to establish that a subsidy
was bestowed on the government-owned company prior to privatization. It is not necessary to
determine whether or to what extent that company may be benefitting from the subsidy after
privatization.
Id. at 14-15.
60 Id. at 32 (citations omitted) (emphasis added).
61 Id. at 33 (citations omitted) (emphasis added).
62 Id. at 33 (citations omitted).
63 US First Written Submission at paragraph 23 (emphasis in original).

fundamental change in the SCM Agreement’s approach to the identification of subsidies”. 64
Moreover, the US states, any such inquiry would be fruitless for it would require “an extensive
econometric analysis” which “at best, it would be administratively infeasible to undertake ... [and at
worst] would be an expensive, resource-intensive exercise that would still be subjective....”.65
41. The US sorely mischaracterizes the views of the European Communities. The European
Communities are not advocating a “uses or effects” test under Article 1 ASCM and has never taken
any such extreme position.
66 The sole effects test set forth in the ASCM concerns the Article 15
determination of injury. The parade of horribles set forth by the United States simply has no bearing
on the Article 1 inquiry at issue.
42. The European Communities are of the view that WTO Members have an ongoing obligation
to ensure that they impose countervailing duties only on a producer of merchandise who is benefiting
from a financial contribution and in no other circumstance. A Member may not blindly assume that a
private firm during an investigation period benefits from a financial contribution received by an
unrelated, prior state-owned firm. Rather, a Member must inquire whether -- and justify its position
that -- a past financial contribution to that unrelated firm provides current benefit to the producer (or
manufacturer or exporter) at issue with respect to the product then under investigation.
67 I t i s t h e
European Communities’ view both that such an inquiry is required under ASCM Articles 1 and 14
and that no subsidy may lawfully be found to exist where, as here, the state-owned firm in question
was sold in an arm’s-length fair market value transaction. As we have emphasized above, in an
arm’s-length fair market value transaction, any benefit that may once have been enjoyed by the state-
owned firm has been fully paid for by, and thus cannot “pass through” to, the new private company.
Hence, no basis exists for imposing duties on the products of that private firm.
43. The US appears to argue in its defence that the ASCM does not require the revisiting of a
benefit already established and supplements this by putting forward a claim of administrative
convenience. In that respect, the US is wrong on both fronts: First, as explained immediately above,
the issue is not one of re-visiting, re-doing, or performing an additional benefit analysis as the US
seems to claim; rather, it is one of establishing directly the benefit with regard to the company under
investigation for the period of investigation. Thus, the starting point of the analysis can only be the
producer being investigated, and it is with regard to this producer that a benefit analysis has to be
undertaken. To make a benefit analysis with regard to another state-owned producer and prove that a
benefit had been granted in the past to that producer is irrelevant with regard to the current producer.
Thus, USDOC, by focusing for the purpose of its benefit analysis on the wrong producer (the state-
owned company) rather than the producer actually investigated, has come to erroneous conclusions
and the consideration that focusing on the current producer amounts to a second benefit analysis.
Secondly, the US conjectures that introduction of an “additional” benefit analysis would
prove administratively overwhelming. There is nothing administratively overwhelming about abiding
by the clear mandate of the ASCM that Members examine whether a company under a current
countervailing duty investigation or review currently benefits from a government financial
contribution. The tools for this inquiry are set forth in the Agreement. Moreover, USDOC has
performed an analysis of whether a transaction was at arm's length and at a fair market value in a
recent case in the context of a sale. This is de tailed below at Section II.K discussing the Richemont
sale. There is nothing on the record to indicate th at the said analysis was particularly cumbersome or
that it could not have been performed within the tim e limits of a countervailing duty investigation. If
the investigating authorities were to find that the transaction took place at arm’s-length and at fair

64 Id. at paragraphs 23, 38, 39, 41, and 43.
65 Id. at paragraph 49 and note 31.
66 See also Third Party Submission of Brazil at paragraphs 40-49.
67 See ASCM, Article 10 and footnote 36.

market value, they would necessarily have to conclude that no “benefit” existed and thus no
countervailing duties could be imposed on the purchaser's goods.
D. UNTIED SUBSIDIES ARE CONFERRED ON PRODUCERS AND DO NOT RESIDE IN ASSETS OR
PRODUCTION OR MERCHANDISE
44. In the view of the European Communities, the ASCM precludes a Member from imposing
countervailing duties on the importation of merchandise that is manufactured, produced, or exported
by a private company that has never itself received a subsidy without a determination that the private
company -- and hence the merchandise it manufactures, produces, or exports -- is presently benefiting
from financial contributions provided pre-privatization to a then state-owned firm.
45. By contrast, the United States submits that no such determination is necessary. An essential
feature of the US position in this dispute is that subsidies are conferred not on companies or legal
persons, but on assets. Under this novel view, subs idies become imbedded in assets and then “travel
to their new home.”68 Thus, in the US view, once a subsidy “resides” in an asset, it will remain glued
there until the end of the appropriate allocation period, regardless of subsequent developments,
including fundamental changes of circumstances, such as a privatization at arm's length at fair market
value. This will be true regardless of who owns the asset, or how much has been paid to purchase it.
46. The US case rests on an interpretation of footnote 36 ASCM and Article VI:3 of the
GATT 1994, which provide, in relevant part, that subsidy is “bestowed . . . upon the manufacture,
production or export of any merchandise.” The US reads this provision as indicating that subsidy is
given to a productive asset; hence, throughout its First Written Submission, the US speaks of
privatization as a simple “change in ownership of the subsidy recipient”.69
47. The European Communities submit that there is no logical basis for reading these provisions
as providing that plants or assets or productive units are themselves the recipients of an untied
subsidy. In our view, footnote 36 ASCM and Article VI:3 of the GATT 1994 as properly understood
are providing that financial contributions benefit the act of production, manufacture, or export.
Financial contributions provide an advantage for economic activities carried on by business
enterprises. They are received by legal persons, not inanimate objects. Steel rolling machines do not
have bank accounts.
48. The fact that recipients of subsidies must be persons rather than goods is confirmed by the
text of Article 2.1 ASCM, which lays down the fundamental requirement of specificity of the subsidy
to certain enterprises, and by Article 19.3 ASCM, which provides for newcomer (or “new shipper”)
reviews and focuses on the investigation of the “exporter”.
70 The US position is all the more
surprising because it runs counter to one of the basic precepts the US claims for itself -- that money is
fungible. That is the principle that when a company receives an untied subsidy, in whatever form, it
must be presumed to affect its entire production and any countervailing duty must be calculated on
this basis.

68 Final Affirmative Countervailing Duty Determina tion; Certain Hot Rolled Lead and Bismuth
Carbon Steel Products from the United Kingdom , 58 Fed. Reg. 6237, 6240 (27 January 1993). See
Exhibit EC-4.
69 US First Written Submission at, e.g., paragraphs 100,120, 129, 150, 181, and 183.
70 According to this provision,
[a]ny exporter whose exports are subject to a definitive countervailing duty but who was not
actually investigated [. . .] shall be entitled to an expedited review in order that the
investigating authorities promptly establish an individual countervailing duty rate for that
exporter”. (Emphasis added.)

49. USDOC's position in the present case even runs counter to the express provisions of US law.
The US countervailing duty statute recognizes that subsidy exists when a financial contribution is
provided “to a person” and a benefit is thereby conferred. 71 This same understanding that subsidies
are conferred on producers/exporters, not inanimate objects, is found throughout US judicial opinions.
Just by way of example, in the Saarstahl II opinion quoted approvingly by the United States in
paragraph 57 of its First Written Submission and attached thereto as Exhibit USA-19, the US Court of
Appeals for the Federal Circuit notes that a subsidy is provided to “producers of the subject
merchandise.”72 Finally, the implications of the USDOC position are inconsistent with other
important aspects of US countervailing duty policy. For example, if, after an amortizable subsidy has
been received, the company acquires a new productive unit, the production of that unit is
countervailable.73 If the subsidy recipients were assets owned by the company at the time it received
the subsidy, no amount of the subsidy benefit could logically be apportioned to an after-acquired
productive unit. Thus to the US, either money is fungible or it is glued to assets, depending on
whether a privatization transaction is at issue. This is incoherent.
50. This disagreement is not semantic. It is central to the current dispute and to the meaning of
the ASCM. In the US view, because “the productive assets which benefited from the subsidy before
the change in ownership are the same ones used by the new owners after the change in ownership...,
the successor firm really is no different from the subsidy recipient .
74 First of all, even under US law,
the new, private firm is legally “unrelated” to the former state-owned firm. Even more
fundamentally, this approach allows USDOC to ignore that the new, private company has paid for the
productive assets at issue. Thus, while the European Communities appreciate that the US defence of
its practice fails unless it convinces the Panel that untied subsidies are “imbedded” in assets and that a
private firm purchased at arm’s length for fair market value “is no different from” the state-owned
company, the European Communities respectfully submit that these propositions defy logic.
E. T
HE ASCM D OES NOT ALLOW FOR “IRREBUTTABLE PRESUMPTIONS” T HAT IGNORE
WHETHER A SUBSIDY EXISTS IN THE PERIOD OF INVESTIGATION
51. As argued in their First Written Submission and at the first substantive meeting of the Panel,
the European Communities submit that the ASCM prohibits the imposition of countervailing duties on
producers under investigation without a determination that this producer is benefiting from a
financial contribution. Integral to this understanding of the requirements of the ASCM is the EC’s
conviction that a Member may not “irrebuttably presume” the existence of a benefit with respect to a
company under investigation, and hence the merchandise it produces, simply because an unrelated
state-owned firm received a financial contribution prior to that other firm’s privatization at arm’s
length and for fair market value. Simply to assu me that a subsidy exists, without determining that a
benefit exists, as the US has done, is to contravene the ASCM in the most fundamental manner.
52. Article 19 ASCM provides that countervailing duties may be imposed only where a subsidy
has been determined to exist and all requirements for imposition of such duties have been fulfilled.
75
Equally fundamentally, under the express terms of Ar ticle 21.1 ASCM, “[a] countervailing duty shall
remain in force only as long as and to the extent necessary to counteract subsidization which is
causing injury.” These provisions preclude a Member from simply ignoring fundamental events
subsequent to the initial subsidy bestowal. The European Communities submit that they impose on

71 19 USC. §1677(5)(B).
72 Saarstaahl AG v. United States, 78 F. 3d 1539, 1543 (Fed. Cir. 1996) (emphasis added).
73 This is the apparent theory behind USDOC’s treatment of BS plc as the producer of lead bar after it
acquired 100 per cent of UES in 1995.
74 US First Written Submission at paragraph 181 (emphasis added).
75 In addition to the Article 19.1 requirement that a subsidy exist before countervailing duties may be
imposed, Article 19.3 precludes imposition of duties on parties that “have renounced any subsidies” and
Article 19.4 limits duties to instances in which subsidies are “found to exist” -- not instances in which subsidies
are found to have existed.

Members an ongoing obligation to ensure that countervailing duties are imposed only if permitted
under the Agreement and, consistent with the object and purpose of countervailing duties, i.e., only to
the extent necessary to “offset” subsidization.76
53. It should be stated at the outset that the European Communities take no issue with the
authority of Members to allocate certain subsidies over a period of time. However, it is obvious that
before the allocation may be allowed, a subsidy must be found to exist. This means, as a practical
matter, that an inquiry into the existence of subs idy may not end with the finding that an unrelated
person once received a subsidy that “presumptively” benefits the company at issue. In our view, the
ASCM will not countenance a Member making such presumptions “irrebuttably” so as to disregard
whether a subsidy has been fully or partially repaid, fully or partially withdrawn, or left behind when
a state-owned firm is sold to private owners at arm’s length and for fair market value.
54. Nor is this “irrebuttable presumption” saved by the ironic fact that the US employs a “pass
through” credit formula (even though it says it is under no obligation to do so). 77 The fact that
USDOC applies its own self-derived formula in some instances does not validate the approach taken
or otherwise absolve the US of its obligation to conform its countervailing duty practice to ASCM
requirements. The European Communities and the Third Parties in this dispute have detailed a
number of the more prominent ways in which the USDOC formula distorts reality, and we need not
recap those deficiencies here.78
55. The most important “irrebuttable presumption” in this dispute is the USDOC view that it is
“irrelevant” whether the change of ownership at issue has taken place at arm’s length and for fair
market value.79 The US therefore has chosen irrebuttably to ignore the most relevant evidence as to
whether the company under investigation -- and, by extension, its products -- enjoys a subsidy in the
real world.
56. It is the view of the European Communities that privatizations such as the sales of UES and
BS plc are economic events so fundamental that they must be evaluated -- and not presumptively
ignored -- by investigating authorities of a WTO Member. The core of this position is that, as the
result of an arm’s-length privatization transaction, the private firm under investigation cannot be said
to have received any benefit from a prior financial contribution to a state-owned enterprise. As such,
consistent with the provisions of Articles 1, 14, 19, and 21, no “subsidy” exists, and imposition of
countervailing duty would constitute penalty, not offset.
80

76 Likewise, the European Communities find no basis for the US claim that the use of the present tense
in Article 1 indicates that a benefit determination, once made, need not be examined. There is no textual
support for this far-reaching argument. If the drafters had wished to follow a “once-and-for-all” approach, they
surely would have used contrasting tenses between the chapeau and the remainder of the text. Instead, the use
of the neutral present tense, along with the words “thereby conferred” requires a clear causal link between
financial contribution and benefit.
77 US First Written Submission at paragraph 148. It should be noted that the US “no obligation”
statement is puzzling in light of the earlier DOC reversal of its conclusion that “the sale does nothing to alter the
subsidies enjoyed” on the basis that it was “not supported by substantial evidence and not otherwise supported
by law”. Remand Determination: Certain Hot Rolled Lead and Bismuth Carbon Steel Products from the
United Kingdom (12 October 1993) at 2.
78 EC First Written Submission at paragraph 68 and footnote 62 ; Analysis of Dr. Cooper (see
Exhibit EC-13) at pages 3-4; and Section I, above.
79 General Issues Appendix of Final Affirmative Countervailing Duty Determination; Certain Steel
Products from Austria, 58 Fed. Reg. 37217, 37264 (July 9, 1993). See Exhibit EC-2.
80 As noted at paragraph 114 of the EC’s First Written Submission, this issue was taken up by the 1994
GATT panel in United States - Imposition of C ountervailing Duties in Certain Lead and Bismuth Carbon Steel
Products Originating in France, Germany and the United Kingdom, which considered that

57. The European Communities’ reading of the ASCM has the added benefit of comporting with
economic reality. Once again, as Professor Richard Cooper has written, whether or not the sale of a
state-owned company was for fair market value is “the most fundamental” issue that authorities
should consider. Irrebuttably presuming that private arm’s-length purchasers benefit from pre-
privatization subsidies to state-owned firms “states an economic conclusion without having
established the residual economic benefit.” As Professor Cooper opines:
The methodology currently utilized by DOC does not comport with sound economic
analysis, market valuation principles or st andard business practice. As explained
above, the key issue in any privatization transaction is whether fair market value was
paid for the productive unit purchased; if so, the residual value of any previous
subsidy will have been repaid in the purchase price.81
58. Once such an impermissible presumption is removed, an investigating authority would be free
to perform the ASCM-required examination of whether a subsidy has indeed been conferred on a firm
producing, manufacturing, or exporting the merchandise under investigation. In the European
Communities’ view, any such examination would necessarily find that there is no “benefit” to the
private company under investigation purchased at arm’ s-length for fair market value, as any benefit
from prior financial contributions was enjoyed only by the unrelated former firm. As a result, any
countervailing duty imposed would be used not to “offset” advantage, but rather to “punish” an
innocent private firm and to “deter” governments from granting subsidies, as explained in the
following section.
F. T
HE OBJECT AND PURPOSE OF THE ASCM IS NOT TO “DETER” SUBSIDIZATION
59. The United States defence of its “pass through” methodology is founded on the view that the
“real” object and purpose of the ASCM is “to deter and offset trade-distorting government subsidies
benefiting merchandise and causing injury to an industry in an importing country”. 82 The
United States is also of the view that countervailing duty measures specified in Part V of the ASCM
are an appropriate vehicle to cure “market distortions.” The European Communities submit that the
object and purpose of the ASCM in general, and countervailing duties in particular, are different. In
our view, a countervailing duty is a “special duty” -- a narrowly drawn exception to otherwise
applicable free trade rules. Such duties may not be imposed for reasons of deterrence or punishment
or to “teach lessons” to trading partners. That the US countervailing duty practice depends on this
extreme theory is indicative of the degree to which the US has exceeded the requirements of the
ASCM.
60. The European Communities have previously set forth their position regarding the object and
purpose of countervailing duties. In the European Communities view, in accord with footnote 36
ASCM and Article VI:3 of GATT 1994, countervailing duties may be imposed only for the purpose of
“offsetting” a subsidy. They may be imposed in no other circumstance. In our view, the entire
structure of the ASCM indicates that with the exception of the narrow prohibited subsidies category
(export and local content subsidies), governments are not prohibited from granting subsidies. Thus,

the fundamental legal requirement in light of which the consistency of this “pass through”
analysis with the Agreement had to be examined was the rule, reflected, inter alia , in
Article 1, footnote 4, that a determination of the existence of subsidy bestowed on the
production of the merchandise was a necessary condition for the imposition of a
countervailing duty on the importation of that merchandise.
The European Communities note that the footnote 4 to Article 1, to which that panel was referring
corresponds to footnote 36, ASCM. Report of the Panel (1994) (unadopted), paragraph 420. Exhibit EC-9.
81 Professor Cooper’s Analysis at page 4 (see Exhibit EC-13).
82 See, e.g., US First Written Submission, at paragraphs 150, 185 (emphasis added).

when countervailing duties are imposed for reasons other than to offset a subsidy, they serve to
restrict world trade and become themselves a central instrument of market distortion.
61. It is the view of the European Communities, as well as the Third Parties, that there is no
ambiguity on these points in the ASCM. Members may apply CVDs to the products of a particular
company, during a particular period, after finding the existence of several fundamental prerequisite
conditions, including the existence of a benefit and thus a subsidy to a specific enterprise. In contrast,
the approach followed by the United States al lows for the imposition of countervailing duties as
punishment or penalty for “market distortions”. The US view is without legal constraint or boundary.
62. The US statements in the present dispute are all the more surprising because they run counter
to the express provisions of US law, which provides no basis for the use of countervailing duties in an
attempt to create market conditions ex ante. As the USDOC’s General Issues Appendix provides:
[I]t does not follow that the statute requires us to somehow ‘correct’ market
distortions which may have occurred due to the provision of subsidies beyond
countervailing the benefits received. The CVD law is designed to provide remedial
relief as a result of subsidies; it is not intended to recreate the ex ante conditions that
existed prior to the bestowal of such subsidies. . . . The fact that productive capacity
may have been created or continues to exist is an irrelevant inquiry beyond the scope
of the law”.
83
63. Given the plain meaning of the relevant ASCM provisions, the US attempt to redefine what it
means to “countervail” is breathtaking. Yet, the United States offers no meaningful justification for
its position. Rather, it attempts to support its view by presenting the Panel with an example of a
young man with a rich uncle. 84 The young man constructs a new apartment complex with the rich
uncle’s funds. In this example, the existence of increased supply makes apartment prices soften and
as a result when the nephew sells the building at current market price, he cannot recover cost.
64. How it is that this “rich uncle” hypothetical demonstrates the correctness of the US view of
countervailing duties is a matter of speculation. The EC note that the initial contribution of funds
came from a private party, not a state treasury. Moreover, the US itself admits that “[w]hether the
purchaser of the apartment building received a ‘commercially meaningful advantage’ as a result of the
rich uncle’s gift to the nephew is open to conjecture”.
85 The US then continues that “the more
appropriate consideration is the market distortions caused by that gift.” It is remarkable that the US
would state that whether benefit passes through to the buyer of the nephew’s building is a matter
“open to conjecture”, for this statement alone would seem to shatter any claim for a presumption of
any kind with respect to an alleged pass-through of subsidy from seller to buyer in an arm’s-length
fair market value transaction. Additionally, there is absolutely no basis in the ASCM for
counteracting the market distortions caused by the actions of the “rich uncle” or his nephew. The
Agreement is not an antidote for all the world’s ills. Moreover, by focusing on market distortion, the
United States has managed to confuse an analysis under Article 15 regarding the existence of injury
with the appropriate analysis under Article 1 regarding the existence of benefit. There is no basis for
such a fusion; these two issues are, and should remain, distinct ASCM analyses.
65. The European Communities believe that the US eagerness to punish the “rich uncle” and his
nephew reveals a great deal about the US views towards a company such as British Steel plc. In the
US view, British Steel plc must somehow be held responsible for the aid granted to the state-owned
BSC, thus entitling the USDOC to penalize the unrelated, unsubsidized and privately held BS plc as a
result.

83 See GIA at 37264.
84 US First Written Submission at paragraph 223.
85 Id. at paragraph 224 (emphasis added).

66. More fundamentally, there is absolutely no indication in the record of the administrative
reviews before this Panel that would lend support to s u c h a v i e w a s r e g a r d s B S p l c . M o s t o f t h e
subsidy funds provided to the state-owned BSC co vered operating losses and payments to retiring
workers. The funds did not “create” plants or assets that would not otherwise have existed or that
added substantial future value to the enterprise. 86 Rather, the company’s capacity was significantly
reduced during the period prior to privatization.
67. One final point: the US also argues that countervailing duties should be imposed in certain
circumstances to avoid and deter “circumvention”. 87 There is no evidence of circumvention in the
case before the Panel, and the US alleged no circumvention rationale in the arm’s-length fair market
value privatization of British Steel. Indeed, circumvention would have been exceedingly difficult,
given that British Steel was privatized long before the US articulated its current pass-through
methodology. The US view in the first years after the privatization of British Steel was that no
subsidies passed through to a company privatized at arm’s length for fair market value. 88
Circumvention concerns are, by definition, irrelevant in arm’s-length market value transactions.
68. The panel is faced with two very different views on the object and purpose of ASCM and, in
turn, the object and purpose of countervailing duties. The European Communities respectfully request
that the Panel confirm their view that countervailing duties are meant to offset subsidies and reject the
US view that countervailing duties are the appropriate mechanism to “deter and offset trade-distorting
government subsidies.”
G. T
HE UNITED STATES HAS SIGNIFICANTLY MISCHARACTERIZED THE MEANING AND
IMPORTANCE OF ASCM ARTICLE 27.13 AND AS A RESULT DRAWS SEVERAL UNSUPPORTED
CONCLUSIONS FROM THE PROVISION
69. The United States places substantial emphasis on the text of Article 27.13 ASCM. The US
argues that, by implication, this provision, although expressly limited to developing countries,
demonstrates that “all types of pre-privatization subsidies provided by a developed country Member
are allocable to the privatized company’s production”.89
70. The United States submits that this is the “only reasonable conclusion” that may be drawn
from Article 27.13. The European Communities will show that the US’ arguments are entirely
specious. The European Communities submit that a proper reading of Article 27.13 offers no support
for the US position.
71. It is noteworthy that the US does not attempt to base its argument on Vienna Convention
principles except to claim vaguely that Article 27:13 “provides context” for interpreting Article 1.1
ASCM.
90 Instead it invokes the principle described in McNair, “expressio unius es exclusio alterius”
, meaning “to specify the one thing is to exclude the other”. 91 The EC will first explore the meaning
of Article 27.13 and then discuss its significance as possible “context” for Article 1.1 ASCM before
finally dealing with the “expressio unius es exclusio alterius” argument.
1. The wording of Article 27.13
72. As the Appellate Body has made clear, the starting point of a Vienna Convention analysis
must be the text of the provision.

86 As the European Communities have noted repeatedly, any such future value would be properly
captured in an arm’s-length fair market value transaction.
87 See, e.g., UK Leaded Bars 1992 Investigation, 58 Fed. Reg. at 6240.
88 See EC First Written Submission at paragraphs 5-8.
89 US First Written Submission at paragraph 153.
90 Paragraph 155 of the US First Written Submission.
91 See Lord McNair, The Law of Treaties at 400-10 (1961) (Exhibit USA-25).

A treaty interpreter must begin with, and focus upon, the text of the particular
provision to be interpreted. It is in the words constituting that provision, read in their
context, that the object and purpose of the states parties to the treaty must first be
sought.92
73. Article 27.13 provides that:
The provisions of Part III shall not apply to direct forgiveness of debts, subsidies to
cover social costs, in whatever form, including relinquishment of government
revenue and other transfer of liabilities when such subsidies are granted within and
directly linked to a privatization programme of a developing country Member,
provided that both such programme and the subsidies involved are granted for a
limited period and notified to the Committee and that the programme results in
eventual privatization of the enterprise concerned.
74. Article 27.13 offers preferred treatment to less developed countries that choose to privatize
and thus rationalize state industry. In order to promote such desired behaviour, Article 27.13 allows
for special, more lenient treatment under the ASCM of subsidies given by developing countries,
whether before or after a privatization, so long as those subsidies are given “within and directly linked
to” a privatization programme, that programme is notified to the WTO, and the privatization is, in
fact, consummated.
75. The European Communities submit that the proper reading of Article 27.13 is that it shelters
developing countries in certain circumstances from otherwise applicable provisions of the ASCM. It
offers no support for the US claim that all pre-privatization subsidies in a developed nation
automatically benefit the new private company under investigation. Article 27.13 applies to subsidies
granted “in connection with privatization”, not pre-privatization subsidies as such. There are many
ways in which subsidies can be granted to a privatized company apart from them being inherited from
the previously state-owned company. In other words, Article 27.13 shelters a new private firm in an
LDC from actions under Part III of the ASCM even if the privatization at issue does not occur at
arm’s length and for fair market value or a subsidy was granted in some other way.
76. The unsoundness of the US view is indeed demonstrated when it argues (at paragraph 153 of
the US First Written Submission ) that “all types of pre-privatization subsidies provided by a
developed country Member, are allocable . . . and therefore continue to be actionable”.
93 S u r e l y ,
subsidies have to be actionable and indeed exist before they may be allocated.
77. The Panel does not need to be reminded that the United Kingdom is not a developing country,
the prior subsidies to the BSC were not granted within or directly linked to that company’s
privatization, and those subsidies were never notified to the Subsidies Committee. Fundamentally,
the provision is an express exception to the otherwise applicable provisions of Part III of the ASCM
and is clearly not applicable in the present case.
2. Article 27.13 as context for Article 1.1
78. To be relevant as context for the purpose of Article 1.1 ASCM in accordance with the Vienna
Convention, Article 27.13 must shed light on the meaning of the terms used in Article 1.1. It does
not. Indeed, Article 27.13 presupposes the existence of a subsidy before it becomes relevant.

92 See Report by the Appellate Body on United States – Import Prohibition of Certain Shrimp and
Shrimp Products, adopted 12 October 1998, WT/DS58/AB/R, paragraph 114.
93 See US First Written Submission at paragraph 153.

79. Also, Article 27.13 says nothing about whether benefits “pass through” to purchasers of
previously state-owned entities when those entities are privatized at arm’s length and for fair market
value. Similarly, the provision offers no guidance as to how such “benefits”, if any, should be
identified or measured.
80. Fundamentally, a provision such as Article 27.13 cannot become “context” for the
interpretation of the basic definitions in Article 1.1 simply because it is built on a hypothesis that the
conditions of Article 1.1 are satisfied. This can be seen from the absurd results that would occur if
the same technique were used for other exceptions in the ASCM. For example, Article 8.2(b) ASCM
exempts “assistance to disadvantaged regions” under certain conditions. Just like Article 27.13, this
provision assumes that the “assistance” would otherwise be an actionable subsidy. It cannot be used
as “context” to argue that if the conditions are not specified then the “assistance to disadvantaged
regions” must be considered to satisfy the definition of Article 1.1 ASCM.
3. The expressio unius es exclusio alterius principle
81. Latin maxims such as expressio unius es exclusio alterius are, as McNair also remarked
94 in
the extract from his book supplied by the US in Exhibit US-25, sometimes valuable servants but must
not be allowed to become dangerous masters and must be applied with caution. They often give
misleading and conflicting results, especially when used as the US has done in a superficial manner to
avoid conducting a proper analysis. It is significant that the rules of the Vienna Convention do not
refer to them. The purpose of treaty interpretation is, as McNair also remarked 95, to give effect to the
intention of the parties to the treaty as expresse d in the words used by them in the light of the
surrounding circumstances, a principle that one can see clearly reflected in Article 31.1 of the Vienna
Convention.
82. The maxim expressio unius es exclusio alterius can be a guide to the intent of the parties
where it may be assumed that the parties, in listing a number of items but not others, deliberately
intended to exclude the non-listed items. But what is the “ alterius” or “other” that the parties to the
ASCM are supposed to have excluded in formulating Article 27.13 the way they did? The US
suggests that they have excluded the EC view of the meaning of Article 1.1 ASCM that there is only a
subsidy where the company under investigation has received a benefit as a result of a financial
contribution. But as explained above, Article 27.13 presupposes the existence of a subsidy and can
only apply once the existence of a subsidy has been established.
83. In reality, the US is simply making an a contrario argument and is using expressio unius es
exclusio alterius as a superficially more plausible synonym. The problem with interpreting
Article 27.13 a contrario is that there are so many conditions in this provision. Is the opposite of
Article 27.13 supposed to prevail when any one of the conditions is reversed? Is the US in effect
arguing that since Article 27.13 requires a subsidy to be present, a contrario the opposite result
applies and Part III (and therefore by necessary implication Part V) ASCM does apply where a
subsidy is not present?
84. Why cannot the EC argue that since the negotiators of Article 27.13 ASCM chose to specify
that this provision applied to Part III of the Agreement this therefore excludes any relevance for
Part V thereof ?
4. Conclusion
85. In conclusion, the European Communities submit that the wording of Article 27.13 does not
support the US position, it is not relevant context for the interpretation of Article 1.1 and indeed

94 Lord McNair, The Law of Treaties (1961) at page 400.
95 Id. at page 365.

cannot shed light on the meaning of Article 1.1, and finally, that the US a contrario argument based
on this provision is misleading and wrong.
H. THE US H AS MISCHARACTERIZED BOTH THE MEANING AND USE OF THE EC S TATE AID
RULES
86. The US contention that the European Communities express a different view of the relevance
of a change of ownership in their internal State aid rules to that which the European Communities
argue should be followed with respect to countervailing duties is deserving of brief comment.
96 As
the EC demonstrated during the first meeting with the Panel, the US argument is not correct.
87. The substantive rules applying to EC State aids are entirely different from those applying to
countervailing duty proceedings. Article 87 of the EC Treaty (formerly Article 92) prohibits, subject
to certain exceptions, State aid “which distorts or threatens to distort competition by favouring certain
undertakings or the production of certain goods … insofar as it affects trade between Member States.”
88. The applicable procedure involves prior notification and approval or disapproval by the EC
Commission before the aid may legally be granted.97
89. The remedy against the granting of state aids not allowed by the EC Treaty is never the
imposition of corrective “offsetting” duties but a retroactive declaration of illegality which may entail
the reimbursement of the aid. Under the EC rules, consistent with their position before the Panel,
countervailing duties can only be imposed on merchandise which currently benefits from a subsidy.
90. More fundamentally perhaps, the object and purpose of the internal EC State aid rules is to
avoid and, if necessary, to address distortions of competition within the EC arising from the grant of
State aid, at least to the extent that the distortions are contrary to the common interest. The purpose of
countervailing duties under the ASCM is quite different, as we have set forth in detail. It is to protect
the internal market of another WTO Member by means of an offsetting duty at its border. CVDs do
not seek to remove any distortion of competition in the country where the producer is located, only to
shelter the importing country from the injurious effect of an existing and actionable subsidy.
91. For all these reasons, the EC’s policy concerning their own internal State aids has no bearing
on the correct interpretation of the countervailing duty rules in the ASCM. The US merely argues that
the European Communities have stated that State aid rules may be relevant for the EC’s
countervailing duty regulation. 98 This is misleading. The statement in the EC Commission
calculation guidelines to which the US refers was not one of general applicability, but rather, related
to a narrow and special case which had nothing to do with privatization or the “pass through” of
subsidies. If the EC were to apply US logic 99 and invoke the latin maxim expressio unius es exclusio
alterius, this would lead to the conclusion that EC State aid rules are not at all relevant in other
respects.
92. In any event, what the Commission actually said is that, with regard to equity infusions, it
would make an assessment “on a case-by-case basis, taking account of the Commission’s practice as
regards state-aid policy in this area and the practice of the Communities’ main trading partners." 100
That does not indicate that State aid rules will be followed in countervailing duty cases, even in the
special case to which the comment relates.

96 US First Written Submission, at paragraphs 227 to 233.
97 See Article 88 EC (formerly Article 93 EC Treaty).
98 US First Written Submission, at paragraph 232.
99 US First Written Submission, at paragraph 154.
100 Guidelines for the Calculation of the Amount of Subsidy in Countervailing Duty Investigations,
OJ C 394, 17.12.98, at page 10, 11.

I. THE US “TRADING COMPANY” EXAMPLE IS INAPPOSITE
93. The United States has set forth an example involving an unrelated trading company which it
claims demonstrates the correctness of the US view that the ASCM does not require “identification of
a benefit continuing after the original subsidy bestowals”. 101 The US presumes that a subsidized
producer has sold goods at fair market value to an unrelated trading company that has, in turn,
exported those products. The US explains that countervailing duties may be imposed on those
products. However, the US then argues that under the position taken by the European Communities
in this dispute, such countervailing duties would no longer be permissible, “because the trading
company paid the market price for the products it later exported”.
102 This view is mistaken.
94. The ASCM, as well as US and EC law, allow for the imposition of countervailing duties on
the exports of such a trading company for the simple reason that the manufacture or production of the
merchandise currently at issue has benefited from subsidy. This would not change under the ASCM
interpretation advocated by the EC in this dis pute. The fact that a trading company purchases
subsidized products at fair market value has no bearing on the fact that the producer at issue has
benefited from subsidy or that its products are countervailable. Thus, the “trading company” analogy
used twice by the United States lends no support to the US argument.103
J. EC C OUNTERVAILING LAW AND PRACTICE REQUIRE THE ESTABLISHMENT OF BENEFIT
DURING THE PERIOD OF INVESTIGATION.
95. The US has mischaracterized the EC position concerning the treatment of privatization in
countervailing duty investigations conducted by the European Commission. As a matter of fact and to
put the record straight, the European Communities have not yet come across a countervailing duty
case where the issue of privatization was raised. I ndeed the US is forced to acknowledge that the
European Communities have never applied a “pass through” methodology in its own countervailing
duty practice.104 The US merely argues that the European Communities have stated in an internal
preparatory document that in some instances subsidies may still benefit the privatized company. This
is misleading. The statement in the draft EC Co mmission calculation guidelines to which the US
refers, apart from the fact it was never adopted as such, related to a narrow and special case
concerning subsidies granted in conjunction with the privatization process which had nothing to do
with the “pass-through” of previously granted subsidies.
96. Indeed the provisions of the EC's countervailing duty Regulation (Council Regulation
2026/97- Exhibit EC-15) make it clear that the inves tigating authority must in all cases examine the
existence of benefit during the period of investigation and cannot simply irrebuttably presume that a
benefit conferred some time in the past still continues. In particular, Article 5 of Regulation 2026/97
provides that "the amount of countervailable subsidies … shall be calculated in terms of benefit to the
recipient which is found to exist during the investigation period for subsidization ”.
105 Similarly,
Article 15.1 of the Regulation permits the imposition of a countervailing duty "… unless the subsidy
or subsidies are withdrawn or it has been demonstrated that the subsidies no longer confer a benefit
on the exporters involved”.106 Thus, the US argument finds no support in actual EC law or practice.

101 US First Written Submission, at paragraph 131 (emphasis in original).
102 Id.
103 US First Written Submission at paragraphs 131 and 198.
104 US First Written Submission at paragraph 227.
105 Emphasis added.
106 Emphasis added.

K. THE UNITED STATES IS INCONSISTENT IN ITS EXPRESSED VIEW OF THE RELEVANCE AND
EFFECT OF AN ARM’S-LENGTH FAIR MARKET VALUE SALE
97. In its oral statement, the US cites to the sale of the Richemont power plant in France as
evidence that “Commerce’s approach can even come up with the result sought by the EC in this
dispute, which is to have none of the prior subsidies apportioned to the successor company." 107
Leaving aside the fact that the company under in vestigation was the seller and not the “successor
company” as claimed by the United States, closer examination of this sale reveals an important
inconsistency in the US practice.
98. The Richemont sale was a spin-off, not a pr ivatization. In fact, according to USDOC,
Richemont was sold from one government-owned enti ty (Usinor Sacilor) to another (Electricité de
France). The Federal Register Notice provided by the USDOC draws only a brief conclusion, and
does not provide any of the figures used by USDOC in its formula, which deemed that all subsidy
remained with Usinor, the company under investig ation. The European Communities have requested
that the US provide details of the transaction at i ssue so as to allow the EC to comment fully on this
unusual transaction. 108 The limited Notice provided by the US does, however, illustrate a
fundamental point.
99. In considering whether Usinor (the seller) received a countervailable subsidy from its 1994
sale of Richemont, USDOC examined whether Usinor “received more than a reasonable market price
from the EDF in this transaction ,” by comparison to such factors as the “independent valuations of
the transaction based on detailed projections of future costs and revenues”. 109 USDOC “ found no
evidence to indicate that the transaction was anything other than an arms-length transaction for full
market value. Accordingly, [USDOC] determine[d] that this programme does not constitute a
countervailable subsidy… ”.110
100. This analysis is remarkable, because it appears to employ for purposes of the Richemont sale,
central elements of the benefit analysis proposed by the EC (and rejected by the US) as regards
privatizations. In the Richemont sale, of c ourse, USDOC was examining whether benefit was
conferred on a seller in a transaction with a government entity. The European Communities submit
that the considerations of the USDOC are also fully relevant to the possible receipt of benefit by a
buyer in a transaction with a government entity. Thus, far from supporting the US claim, therefore,
this decision amounts to an apparent USDOC admissi on that (i) no benefit is obtained in a market-
based sale; (ii) benefit is properly measured by reference to market benchmarks; and (iii) there is
nothing administratively overwhelming about exam ining the relation between amount paid and what
USDOC called the “reasonable market price”.111 The ASCM, in our view, does not allow for such an
inconsistency of approach.
IV. CONCLUSION
101. For the foregoing reasons, the European Communities respectfully submit that the US
countervailing duty practice as regards privatization fails to conform with th e requirements of the
Agreement on Subsides and Countervailing Measures, as set forth by the European Communities and
the Third Parties in their Submissions and Oral Statements to the Panel.

107 See US Oral Statement at paragraph 46 and Exhibit USA-30 (emphasis in original).
108 See EC Request in Response to Question 3 from the Panel.
109 See pages 30781-82 of the Federal Register Notice supplied in Exhibit USA-30 (“A. Purchase of
Power Plant”).
110 Id. at 30782 (in Exhibit USA-30).
111 Id.

102. At issue in this dispute are several of the most fundamental precepts of the ASCM. The
European Communities are of the view that the United States fails to comply with its obligations
under the ASCM by a practice of imposing countervailing duties on the products of private firms that
have received no subsidy, solely on the basis of a US irrebuttable presumption that subsidies “pass
through” sales at arm’s-length for fair market value to these new owners. At the core of this practice
is the economically irrational view that whether a company pays fair market value for assets is
“irrelevant” to an inquiry as to whether it has received countervailable benefit. In this inquiry, the
United States vacillates between the well-settled notion that “money is fungible” and a sui generis
notion that subsidies are “glued” to assets and somehow “travel” with those assets to their new home.
The United States has justified this remarkable practice through a theory of “deterrence” -- a limitless
concept that would sweep aside the established notion that countervailing duties are “special” duties
that may be imposed only to offset subsidy. Finally, the Untied States believes that USDOC practice
is not subject to meaningful review by this Panel. The standard of review in this dispute is plain and
well settled, and the Panel should not retreat from its obligations to examine, under Article 11 DSU,
the conformity of US practice with US obligations to the European Communities under the
Agreement on Subsidies and Countervailing Measures.

ATTACHMENT 1.6
ORAL STATEMENT
OF THE EUROPEAN COMMUNITIES
DURING THE SECOND SUBSTANTIVE MEETING WITH THE PANEL
(Geneva, 14 July 1999)
Introduction
1. Mr. Chairman, Members of the Panel. The Panel has already had the opportunity to hear
extensive argument on this case from the European Communities, the United States and the Third
Parties. It is not our intention today, you will be pleased to know, to belabour points already
discussed at length. Our oral statement will con centrate on a number of key issues. In doing so, the
EC will take the opportunity to reply to some of the more egregious assertions by the US in its Second
Written Submission.
2. The issues the EC will address are:
• Are Subsidies Given to Producers, Products or Assets?
• Are UES and British Steel plc the same as the British Steel Corporation?
• Article 19.3 Subsidies Agreement
• The Changes of Producer in the Present Case
• Share sales and asset sales
• Whether untied subsidies "attach" to assets
• The US Position on Article 27.13
• Appropriate Standard of Review
• The USDOC Gamma “methodology” is Arbitrary and Irrational
• Areas Where the US has Moved Closer to the EC Position
1. Are Subsidies Given to Producers, Products or Assets?
3. To examine whether a “subsidy” exists according to the terms of Article 1.1 Subsidies
Agreement requires, inter alia, an examination of what constitutes a “benefit” under the Subsidies
Agreement, and who is the recipient of any benefit allegedly “conferred”. The EC has argued that a
benefit is established by reference to Article 14 market benchmarks and that the recipient of a benefit
must be the producer under investigation or review during the relevant period. The US has argued
that the benefit must somehow be conferred on assets and that it must follow the assets when an
independent company or group purchases ownership control of the assets at arm’s-length for fair
market value. The European Communities detect understandable doubt on the part of the US with
regard to their fundamental premise: that under Articles 1 and 14 Subsidies Agreement they are free
to ignore the existence of a benefit at any point after a financial contribution to a state-owned
company and under no obligation to find that the private firm under investigation was the recipient of
a subsidy. In their Second Written Submission and the answers to the questions, however, the US

now appears to acknowledge that it is benefit to the company under investigation that must be found
to exist.1
4. In the event there remains any doubt, the EC would make the following brief comments:
• Article 14 Subsidies Agreement, which all parties accept as relevant context, expressly
requires subsidies to be measured in terms of the “benefit to the recipient” by reference
to market benchmarks;
• The panel report in Canada –Aircraft, which the US has also referenced, also defines
benefit in terms of advantage to the recipient
2;
• The US found the subsidies granted to the state-owned BSC (which was not the
company investigated in the reviews subject to this dispute) to be untied, non-recurring
subsidies and in fact measured them in terms of the benefit to the producer which it
then allocated across the production. Having done this how can the US now argue that
the relevant benefit is that conferred on productive assets? If this were so why did it
not measure the benefit to the productive assets?
2. Are UES and British Steel plc the same as the British Steel Corporation?
5. Having established that it is the benefit to the producer that is relevant in this case, the next
question is: which producer? Here we reach the question of whether countervailing duties may be
imposed on the importation of merchandise that is manufactured, produced, or exported by a business
enterprise that was not the recipient of financial contributions absent a determination that the current
producer, and hence its merchandise, is benefiting from the financial contributions that may have been
received by another party? Under the Subsidies Agreement, it is undoubtedly the existence of a
benefit to the current producer during the period of investigation that is relevant to countervailing duty
determinations. A benefit must be conferred on the party whose merchandise may be countervailed.
Here we come to another essential difference between the EC and the US.
6. The US position is based squarely on the view that the privately owned producer of leaded
bars, British Steel plc/UES, is the same as the former state-owned producer, British Steel Corporation.
Throughout the US submissions there is remarkable failure to distinguish between these producers
where one, the other or both are referred to as “British Steel” and the US sometimes offers express
statements that they are the same company.
3
7. By ignoring the private purchase of the assets for fair market value, the US continues to claim
wrongly that the EC is asking it to carry out two benefit determinations 4 or to “revisit” a benefit
determination5 or to carry out a new benefit determination on change of ownership or privatization.
8. Mr Chairman, Members of the Panel, the European Communities trust that their position is
clear to the Panel:

1 Panel Question 3 : Is the US of the view that, when de termining the existence of benefits under the
SCM Agreement, it is not required to ta ke into consideration events subsequent to the time of bestowal that may
offset a subsidy? The initial US answer, prior to its attempts to quickly qualify the statement, was: No. The US
then goes on to apparently disavow what it has just stated. See 30 June 1999, US Response to questions from
the Panel (US Response to Panel Questions) at paragraph 22.
2 See e.g. paragraph 9.112 of the report.
3 See, e.g., paragraph 35 of the US Second Written Submission.
4 See, e.g., paragraph 30 of the US Second Written Submission.
5 See paragraphs 9, 119, 128, 135 and 145 of US Second Written Submission.

• First, that a company such as British Steel plc is fundamentally different from the
former state-owned producer, British Steel Corporation. Not only were the assets
purchased at arm’s-length for fair market value by private buyers, there is also a
difference in the way a private company is required to operate and its relationship to its
capital. As Brazil has pointed out, the privatized company has no subsidized capital. 6
We have already discussed this fundamental concept at considerable length.
• Second that the EC is not now and has never asked for “multiple” benefit
determinations. It simply requests what the Subsidies Agreement requires – that the US
make the correct benefit determination the first time -- that the producer under
investigation whose products bear a countervailing duty be shown to have actually
received a “benefit”. It should be noted that in the case before the Panel, BSC is not
and never was a respondent. Rather, UES and BS plc were subject to investigation, and
in each instance the US refused to examine whether UES or BS plc was itself the
recipient of a “benefit”.
9. Statements such as that in paragraph 7 of the US Second Written Submission that “according
to the EC, Article 1.1 also addresses specifically how to deal with the situation where the ownership
of the subsidy recipient has changed hands” (please note again the US view that subsidies are given to
and glued to assets) are simple misrepresentations. The EC has not claimed that Article 1 Subsidies
Agreement “specifically addresses” privatization. The EC approach is simply to apply the clear
guidance of the Subsidies Agreement to the facts of the case and these require it to be shown that a
producer must have received a subsidy in order for its products to be subject to countervailing duties.
10. Mr Chairman, Members of the Panel, let me add one further point before leaving this issue.
The US persists in trying to dismiss the EC position by saying that the EC insists on the benefit being
attributed to a “legal person”. The European Communities have referred to legal persons, just as the
US law correctly acknowledges that subsidies are granted to “persons”, for the purpose of illustration
and explanation. We would stress that we are not suggesting by this that form should prevail over
substance. Rather, the European Communities ask for the producer to be correctly identified. A
simple change of legal personality would not in itself require the conclusion that the producer has
changed for the purposes of the Subsidies Agreement.
Throughout, the oral statement of the US this morning there are references in quotation marks
to an alleged reliance of the EC on the legal personality of the recipient. Most of these are not
quotations from any EC statement and the only one for which a source is cited in paragraph 74 of the
US oral statement is in fact taken misleadingly out of context. Footnote 24 to the US oral statement
refers to paragraph 47 of the EC Second Written Submission where the EC had actually stated:
“47. The European Communities submit that there is no logical basis for reading
these provisions as providing that plants or assets or productive units are themselves
the recipients of an untied subsidy. In our view, footnote 36 ASCM and Article VI:3
of the GATT 1994 as properly understood are providing that financial contributions
benefit the act of production, manufacture, or export . Financial contributions
provide an advantage for economic activities carried on by business enterprises.
They are received by legal persons, not inanimate objects. Steel rolling machines do
not have bank accounts.” (emphasis added.)
It is clear therefore that the EC was stating that financial contributions are received by legal persons,
not subsidies as the US alleges.

6 See Statement of the Government of Brazil at the First Substantive Meeting with the Panel, at page 2.

3. Article 19.3 Subsidies Agreement
11. The EC would also draw the attention of the Pa nel to the fact that the US has expressed a
general refusal to consider a private company to be a different producer from the state-owned
predecessor in its answer to the EC’s question 10 on whether it would conduct a newcomer review
under Article 19.3 Subsidies Agreement. 7
12. In the present case, if British Steel Corporation had been investigated and then privatized after
the imposition of the original countervailing duty, British Steel plc could clearly have requested a
newcomer review under Article 19.3, since it is unaffiliated to British Steel Corporation and would
not have been investigated for reasons other than a failure to cooperate (the reason being that it did
not exist at the time of the original investigation). Whether it received a subsidy and the amount
would then have had to be individually assessed, as provided for by Article 19.3.
13. The US, in its answer, denies that it would grant newcomer status, but does not explain why.
It cannot properly answer this question, of course, because its practice involves continuing to impose
countervailing duties, originally assessed on subsidies granted to a producer which no longer produces
the subject merchandise, on imports of the subject merchandise from an unrelated producer, without
any possibility that the presumption of subsidies passing through to the unaffiliated producer can be
rebutted.
4. The Changes of Producer in the Present Case
14. Mr. Chairman, Members of the Panel, let me now come briefly to the concrete facts of this
case since they illustrate well the arguments.
15. Two arm’s-length fair market value privatization transactions occurred. The first was the sale
of the leaded bar production assets of BSC to UES. This occurred two years before the privatization
of BSC and six years before the initial countervailing duty investigation.
16. In paragraphs 33-35 of its Second Written Submission the US attempts both to shift its
approach and to gloss over the importance of the sale to UES by arguing that even if the sale were
considered a sale of assets (a fact it acknowledged in its own investigation
8) the result would have
been that all the subsidies remained with “British Steel” (the US presumably means British Steel
Corporation). The US then suggests that this would make no difference “at the end of the day”, as the
privately owned, controlled and operated British Steel plc purchased UES 7 years after privatization at
arm’s-length for fair market value. The US draws its conclusion on the basis that BSC and BS plc are
“the same company”.
17. Mr Chairman, Members of the Panel it would make a difference. The initial countervailing
duty investigation in May 1992 did not concern British Steel plc but only UES, as that company was
the only producer and exporter of leaded bars. Despite the statement referenced above, the US
assessed a countervailing duty weighted average margin of 12.69 per cent on UES for financial
contributions provided to BSC prior to 1985/1986. UES was also the only producer and exporter of
leaded bars when the first administrative review in this case was carried out (the 1995 review). As the
EC has explained in paragraph 40 of its First Written Submission, the 1995 review was an
examination of UES only. In that review, USDOC simply disregarded UES's explanation that it had
received neither “financial contributions” of any sort nor any “benefit” from financial contributions
paid to BSC. The US assessed countervailing duties, with USDOC simply presuming that UES
benefited from subsidies conferred on British Steel Corporation.

7 See paragraph 19 of the US response to EC questions.
8 See, e.g., EC First Written Submission at paragraph 30.

18. Mr. Chairman, Members of the Panel the US cannot credibly claim that UES was in reality
the same producer as British Steel Corporation.
19. The conclusion is the same for the transfer between British Steel Corporation and British
Steel Plc, despite the similarity of the names of these companies. There is no substantive difference
between selling one productive unit and selling all productive units.
20. British Steel plc acquired UES during the period covered by the second of the reviews subject
to this proceeding - the 1996 review. The private British Steel plc purchased GKN's interest in UES
and integrated it into its business as a wholly owned subsidiary renamed British Steel Engineering
Steels Limited.9 USDOC found, however, that a portion of the subsidies it attributed to UES passed to
British Steel plc (glued to the UES assets) and combined them with the “dormant” subsidies USDOC
considered to reside in the private British Steel plc. The US then subjected the exports of leaded bars
by British Steel Engineering Steels Limited to a higher countervailing duty rate than it applied to
UES.
21. The US practice defies even the most basic precepts of fairness to the private producers it
investigated. They paid fully for the purchased assets. It makes no economic sense to consider that
production of leaded bars today is conducted either with the use of subsidized capital or with the use
of subsidized assets. The result of the US interpretation of the Subsidies Agreement is that any
Member can impose countervailing duties on any producer if some nexus can be shown between that
producer and a subsidy recipient. The US can then refuse to justify or support its claim that the
producer is benefiting from the subsidies received by the other company by saying “we only have to
look at benefit at the time of the financial contribution”. This is unsupportable.
5. Share sales and asset sales
22. Mr Chairman and Members of the Panel, this brings me to a further comment on the US
Second Written Submission. In paragraph 8(b) the US falsely states that the EC draws some
distinction as a result of a decision by investment bankers to privatize a company through a sale of
shares rather than via individual sales of productive units or assets. Then, in paragraphs 34 and 35 the
US utilizes this mischaracterization of the EC position to argue that some importance attaches to the
fact that both the 1988 privatization and the purchase of UES were accomplished through a sale of
shares. The US argues that because of these features of the transactions they should have no effect on
the pre-privatization subsidies granted to BSC.
23. Mr. Chairman, Members of the Panel let me make quite clear the EC does not consider that
form should prevail over substance. We do not argue that structuring a transaction as a share sale
rather than an individual sale of each productive unit changes the analysis which is required under the
Subsidies Agreement. Bankers may structure transactions in a number of ways, and it is the economic
reality that must be examined to determine whether a producer has received a subsidy or not.
24. The BSC privatization was carried out through a series of transactions which involved a
creation of a share capital company to which the assets of a state corporation were transferred and
then the shares of this sh are capital company were sold at arm’s-length for fair market value. These
transactions form part of an overall process: privatization. It is the overall process that must be
examined, that is the sale of productive assets from a state-owned corporation to a privately owned
share company. Whether this takes the form of an asset sale or a sale of the stock of the company is a
matter of form over substance for our purposes; ul timately what is being sold is the ownership and
control of the productive units and a stock sale is merely one way of achieving that kind of transfer.

9 See, e.g., EC First Written Submission at paragraphs 34-39.

6. Whether untied subsidies "attach" to assets
25. The next point which the EC would like to discuss is the contradiction between the principle
that untied subsidies paid to a company must be considered as benefiting the whole of that company's
production (the “money is fungible principle”) and the contradictory notion relied on by the US that
benefits from financial contributions “attach” to assets and “travel” with them to the new producer.
The US submissions, of course, never explain or justify their initial claim that a subsidy is given to
and resides in assets, “travelling” with them wherever they are sold. In fact, the implications of this
US position are inconsistent with several other aspects of US CVD policy. If a company that received
an untied subsidy closes a productive unit, under US practice no portion of the unamortized subsidies
“goes to the grave” with that unit. The US cont inues to apply the full amount of the unamortized
subsidies to the remaining enterprise. If, after an untied amortizable subsidy has been received, a
company acquires a new productive unit, the US also countervails the production of that unit. If the
subsidy recipients were the productive units or assets owned by the company at the time it received
the subsidies, how could any amount of the subsidy benefit or be apportioned to an after-acquired
productive unit? It could not, but this is exactly what the US does.
26. The US is incapable of explaining this contradiction. In reply to question 9 of the Panel
regarding this issue, the US incomprehensibly asserts in paragraph 37 that it
“rejects the notion that subsidies “attach” to assets or to companies through the
operation of any mechanism independent of the SCM Agreement.”
The US then quickly takes refuge behind its much-used rationale for failure to address many of the
fundamental issues in this dispute, claiming that the Subsidies Agreement is silent on the issue.
27. The European Communities have already explained that untied subsidies may, by definition,
be used by a producer to benefit all of its production. This means that when certain production ceases,
untied subsidies are deemed to benefit all remaining production of the producer at issue. Another
company purchasing the relevant productive assets in an arms-length fair market value sale, would
similarly not receive any part of the subsidy, which remains with the seller.
28. The EC would simply note again that it is clear that untied subsidies are not glued to assets
sold at arm’s-length for fair market value. There simply is no merit to this US claim.
7. The US Position on Article 27.13
29. The next comment the EC would make would be to refer briefly to the arguments made by the
US on Article 27.13 of the Subsidies Agreement. The EC can be brief because it has replied in some
detail in this issue in its Second Written Submissi on. The essential error of the US is to interpret
Article 27.13 a contrario and not relating it in any way to any of the provisions which are relevant for
this dispute. The US has not explained how Article 27.13 helps to understand the meaning of any of
the terms used in Articles 1, 10 and 19 of the Subsidies Agreement. Simply put, Article 27.13 has no
relevance to the dispute before this Panel.
8. Appropriate Standard of Review
30. The US takes three alternative positions in its rebuttal submission and in the answers to the
Panel's questions regarding the appropriate standard of review. First, the US briefly argues, at least in
response to the Panel questions, that Article 17.6 AD is applicable as a result of the Ministerial
Declaration, which stresses the “need for consistent resolution of disputes arising from anti-dumping
and countervailing duty measures”.

31. Second, recognizing the lack of support it can offer for this position, the US states that if the
Panel decides that the AD standard of review is not appropriate in the present case, the Hormones
Appellate Body ruling applies, i.e. that Articles 3.2 and 11 of the DSU apply, but only in certain
circumstances.
32. Third, terming the Subsidies Agreement effectively silent on every major issue facing the
Panel, the US then suggests these provisions do not apply and, therefore, the standard of review set
out in US - Salmon and New Zealand - Electrical Transformers should be followed, effectively
limiting the Panel to assessing whether the approach used by the national authorities was
“reasonable”.
33. Mr. Chairman, Members of the Panel. While reiterating that the US practice meets no
conceivable standard of reasonableness, we would also express our objection to the US’ constantly
evolving positions on the standard of review. There should be no question but that Articles 3.2 and 11
of the DSU set the standard of review applicable in this dispute.
34. The US argument that Article 17.6 Antidumping Agreement should be determinative, is based
on the premise that -- and I quote -- "the Ministerial Declaration must have some meaning." 10 The
meaning which the US proposes to give to the Declaration is that -- and I quote again -- "a Panel
should use the AD Agreement's standard of review when reviewing a countervailing duty
proceeding." On top of this already bold interpretation the US adds the even bolder statement that,
and I quote for the last time that -- "th[e] Ministerial Decision is not relevant in this dispute."
11
35. The European Communities take issue with this unfounded interpretation of the Declaration
as well as with the fact that the US ignores the Decision. First, a “consistent resolution” of disputes
does not allow for an “adoption” of Article 17.6 AD in a different Agreement than for which it was
written. The meaning of the Declaration is much more limited, requiring only that parallel provisions
in the two Agreements should be dealt with in a consistent way. For example, an allegation that an
investigating country had exceeded the maximum 18 months for an investigation should not be treated
differently in an anti-dumping and countervailing duty case
12Taking the far-reaching step of adopting
textual provisions into an Agreement which are not there would "add to or diminish the rights and
obligations provided in the covered agreements", and would therefore violate Article 3.2 DSU.
36. Second, there is no ground for ignoring the text of the Decision and the US offers none. The
text of the Decision is clear, in that it should be decided at a later time whether or not Article 17.6
could be capable of “general application”. The European Communities believe that the ordinary
meaning of the term “general application” is the “use outside the Anti-Dumping Agreement”, or the
“use in all other covered agreements of the WTO”. The text of the Decision does not contain any
preferential treatment for the Subsidies Agreement, which would somehow allow the adoption of the
17.6 standard already at this moment in time in the Subsidies Agreement, and the Ministerial
Declaration cannot be considered one.
37. Therefore, the first step in the US argumentation on the appropriate standard of review is
unfounded. As stated earlier, the European Communities believe the second step conceded by the US
is in fact the only appropriate standard of review. It is based on Article 11 DSU and supported by
Article 3.2 DSU. This standard should be applied with regard to all covered Agreements (except of
course the AD Agreement), for both factual and legal questions.

10 See paragraph 57 of the US Response to Panel Questions.
11 See paragraph 59 of the US Response to Panel Questions.
12 Thus, for example, disputes regarding Articles 5.10 AD Agreement and 11.11 Subsidies Agreement
should be resolved in a consistent way.

38. Then, the US introduces its third step, arguing, although at this stage somewhat tepidly, that
the relevant agreement is “silent” on the key issues in dispute. As stated already numerous times by
the EC, the Subsidies Agreement is not “silent” on the fundamental obligation of a Member to
establish the existence of a “benefit”, and therefore a “subsidy” which may be “offset” by
countervailing duties, to the company under investigation. This determination of this fundamental
Subsidies Agreement requirement cannot be equated, as the US has done, with methodological issues
such as how to calculate adjustments for inflation or the cost of production of custom-made goods.
Finally, there is no room for a reliance on the tw o pre-WTO cases, for reasons set out in the EC's
Second Written Submission
13.
39. In conclusion, the only applicable standard of review in this case is found in Article 11 DSU.
9. The USDOC Gamma “methodology” is Arbitrary and Irrational
40. The US obviously feels ill at ease defending its “gamma methodology”. It even argues that
the EC has not challenged the methodology as being unreasonable.14
41. Mr. Chairman, Members of the Panel, while the EC would note that it did term the
methodology “unreasonable” at paragraph 127 of its First Written Submission, we would also note
that the EC was far more damning in its analys is. The European Communities stated that the
methodology was irrational, absurd and produced wholly arbitrary results. 15 The EC and others have
also repeatedly set forth why this is the case.
42. The Panel has also sought to elicit a rational explanation of the methodology with its
questions 6 and 7. The US has, not surprisingly, been unable to produce one in its responses. This
inability results from the serious flaws in the USDOC ’s self-derived creation. Even if a company is
sold at fair-market value, a low “gamma” (in itself a meaningless number) may result in a substantial
amount of subsidies “passing through” to the buyer, despite the complete absence of any benefit. This
is because no matter the price paid, the proportion of repayment remains constant. The approach
defies logic.
43. As the European Communities have stated a number of times, even the most cursory
examination evidences that the USDOC “methodology” is both arbitrary and irrational. A simple
example utilizing the facts of the present dispute amply illustrates the point. USDOC has conceded
on the record that UES and BSC were privatized at arm’s-length for fair market value. Demonstrably,
no benefit is conferred on the private company in this situation. In the absurd case, however, that the
buyers of BSC had agreed to (1) first purchase the assets at their full fair market value
(£2,500 million), and then, (2) pay the UK Government (as a penalty) the full balance of the pre-
privatization financial contributions to BSC th at USDOC maintained were somehow outstanding
(approximately £3,400 million, despite the complete absence of any benefit to the private company),
the total cost to the buyers would have been appr oximately £5,900 million. Yet, “repayment” of the
same pre-privatization financial contributions under the USDOC’s gamma-based privatization
methodology would have required a sale price of approximately £7,560 million -- nearly 30 per cent
more than the arm’s-length fair market value of the assets plus an additional penalty payment of all
pre-privatization subsidies to the state-owned BSC. On its face, such an outcome cannot be sustained.
44. If the Panel needed any further demonstration of the arbitrary nature of the methodology, the
US has provided it in answer to the Panel's question n o 10. In paragraph 39 of its response, the US
attempts to explain how it would be possible for all subsidies to be allocated to the selling company
under its methodology.

13 See paragraphs 25 and 26.
14 See paragraph 72 of the US Second Written Submission.
15 See, e.g., paragraphs 68 to 70 of the EC First Written Submission.

45. Incredibly, the US first refuses to provide the Panel details of the Richemont transaction,
despite having offered this specific government-to-government spin-off to the Panel and EC as the
US’ prototypical example justifying the reasonableness and rationality of its privatization
methodology. Now dropping Richemont, the US instead proposes a new “hypothetical scenario” to
the Panel, carefully offering no assurances that the new hypothetical bears any resemblance to the
facts of the Richemont sale. It uses an example of a company worth £1 million pounds which has
received nonrecurring subsidies of £250,000. It then asks the Panel to assume that the ratio of
nonrecurring subsidies to net worth is one quarter or 25 per cent. This is a very convenient assumption
since this results in precisely £ 250,000 being allocated to the seller.
46. All that this new hypothetical establishes is that one-quarter of a million is 250,000.
Fundamentally the reason the US example is misleading is that in the situation described, the US
methodology would not ever give rise to a gamma of one quarter. Rather, the US would look at a
number of years corresponding to the useful life of assets, for example 18 years. If the 250,000
pounds had been received in one year and no subsidies would have been received in the other 17 years
the US would then take a simple average of one quarter and 17 zeros and come up with a gamma of
about 1 per cent! Similarly, if £250,000 pounds had been spread over the AUL period, the ratio of
subsidies received in any year to net worth in any year would mutatis mutandis, also be well below
25 per cent. Footnote 17 of the EC First Submissi on highlights this serious flaw in the USDOC’s use
of its self-created gamma.
47. Let us return to the Richemont example briefly, for the US had claimed that it shows that
USDOC sometimes does not apportion prior subsidies to a successor company.
16 The US neglects to
note that Richemont was not a successor company and was not even the company under investigation.
It fails to note that the Richemont sale was not a privat ization, but rather a sale to a government, and
the US approach had the effect of the highest possible countervailing duties being imposed on the
company (Usinor) that was under investigation.
48. The Richemont example provided by the US does, however, illustrate one further point. As
the EC explained in paragraphs 99 and 100 of its Second Written Submission, USDOC did examine in
that case whether the sale was conducted at arm’s-length for fair market value in order to determine
whether the sale resulted in an additional subs idy being provided to the seller (which was the
company under investigation). This demonstrates that it is perfectly feasible for an investigating
authority to examine whether a sale occurs at arm’s-length for fair market value and to consider, using
market benchmarks that any difference between the price paid and the fair market value price could
constitute a subsidy. Richemont, in our view, simply demonstrates that the emperor indeed has no
clothes.
10. Areas Where the US has Moved Closer to the EC Position
49. Although very clear differences continue to sepa rate the US and EC positions in this dispute,
we feel that it is important to conclude by noting two areas in which the Parties apparently do now
agree.
Financial Contributions/Benefit
50. The EC believes that there has been an important revision in the US view regarding the
Article 1 “benefit” requirement. (There never has been much of a practical difference between the
parties on the issue of “financial contribution”. All parties apparently agree that no financial
contribution has ever been provided to BS plc and that financial contributions were made in the 1980s
to BSC.)

16 US First Oral Statement at paragraph 46 and Exhibit USA-30.

51. On the issue of benefit, the EC had understood that the Parties differed substantially, in that
the US seemed to deny that a benefit must be determined to exist during the period of investigation or
review. We had understood that the US believed that “benefit” could simply be irrebuttably presumed
to continue throughout an allocation period fixed by reference to US domestic tax tables, regardless of
any and all subsequent events, including the sale of assets or a productive unit to an independent
enterprise for fair market value. We note that this view is apparently no longer held by the
United States, which has plainly stated in Response to Panel Questions at paragraphs 12 and 15.
The United States is also of the view that authorities must determine whether there is
Clearly, the legal requirements of Article 1, including financial contribution, benefit,
and specificity, must be met in each POR.
17
52. This is, of course, the EC position as well. In the face of these US statements, it must be
noted, however, that the US never made any such de terminations with respect to British Steel plc
during any of the administrative reviews before the Panel, but rather simply assumed the existence of
such benefit due to financial contributions given the British Steel Corporation.18
Market distortions
53. In US Response to Question 13 from the Panel, the United States backs away, at least on
occasion, from its claim that the purpose of countervailing duties is to cure market distortion and deter
subsidy. For example, at paragraph 46, the US states that “The SCM Agreement permits
countervailing duties to offset subsidies, not the amount of economic distortion caused by subsidies.”
That statement, with which the European Communities fully agrees, seems a long way from the US
example of the “Rich Uncle”, but we appreciate it nonetheless.19
54. We note, however, that the US does not seem to be able to discard its prior theory altogether.
By way of example, we would point the Panel to US statements in the very next paragraphs that
arm’s-length market value privatizations do not “automatically eliminat[e] whatever economic
distortions remain from pre-privatization subsidies” (paragraph 48) and that investigation of a private
firm, as opposed to the state-owned subsidy recipient is “inadequate because it does not address the
trade distortions which subsidies cause...” (paragraph 52).

17 Similarly, the US has expressly recognized that the use of an allocation methodology is permissible
only where a benefit exits during each of the years within the relevant AUL. US Rebuttal Submission at
paragraph 22: (“the subsidy ‘benefit’ ... continues over time, and therefore may be amortized over time”); US
Response to Panel Questions at paragraph 10 (in the case of a subsidy to the widget industry with an AUL of 10
years, “the United States considers that it is appropriate for authorities to find that a financial contribution and a
benefit exist in each of those 10 years”).
18 We further emphasize that the US has continued to mischaracterize the EC “benefit” position as
requiring a “continuation of the economic effects of a subsidy”, as set forth in the US Response to Panel at
paragraph 12. The European Communities have never argued that.
19 US First Written Submission at paragraph 223; EC Second Written Submission at paragraphs 64-68.

Conclusion
55. Mr. Chairman, Members of the Panel, this case raises some fundamental and important
issues:
• May countervailing duties be imposed without violating the Subsidies Agreement on
the imports of the goods of a producer absent a determination that the producer and
thus his merchandise is benefiting from a financial contribution? May a Member
instead irrebuttably presume such benefit irrespective of intervening events? The
answer is clearly no.
• Under the Subsides Agreement, does a business enterprise (UES) that acquired
productive assets, at arm’s-length for fair market value, from a subsidy recipient
(British Steel Corporation) benefit in comparison to Article 14 market benchmarks
from the subsidies previously received by the seller? In the same light, is there a basis
for treating the arm’s-length fair market value privatization of all a state-owned
company’s (British Steel Corporation’s) assets differently from the fair market value
sale of one or more productive units to another business enterprise? The answer is
clearly no.
56. Mr. Chairman, Members of the Panel the EC has sought in the remarks it has just presented to
avoid repeating arguments that it has already made in its Written Submissions while still responding
to the new arguments put forward by the US in its Second Written Submission and in its Answers to
the Questions. We hope that we have succeeded but if there are any issues which the Panel considers
that the position of the EC is not entirely clear or if there are any points made by the US which the
Panel considers the EC has not answered, we will be very happy to do so in reply to questions. Thank
you for your kind attention.
Concluding Remarks of the European Communities
57. Mr Chairman, Members of the Panel, the EC would first of all like to thank you for the effort
you have put into this case and the discussion we have had over the last two days.
58. The EC would like to underline at this st age the following points arising out of our
discussion:
11. Article 1.1 – Existence of a Benefit
59. The US has stated in paragraph 7 of its oral statement this morning that the USDOC “has
determined a benefit in each of the reviews”. However, the US explains that what this really means is
that it has deduced the existence of a benefit from the “allocated benefit stream” which it has
calculated on the basis of past circumstances. Thus in reality the US is not examining whether there is
a benefit in a period of review and is not taking into account changed circumstances. In fact it only
takes into account changed circumstances when a subsidy is repaid.
60. The US justifies this by saying that it cannot look at the effects of subsidies (because of its
internal law). In fact it is refusing to examine the existence of the subsidy.
61. The related question which we have discussed at some length today is of course on whom or
on what the benefit required to create a subsidy must be conferred. The EC has explained that at least
in the case of the capital infusions involved in the present case the only basis of examination can be
the producer. When was it ever established that UES or British Steel plc were ever “unequityworthy”
or un-creditworthy?

12. Fungibility vs Pass Through
62. The discussion we have had shows even more clearly than ever the irreconcilable conflict that
exists between the “money is fungible” principle applied to large untied subsidies such as capital
injections and the approach taken by the US to the “pass through” of subsidies. Basically untied
subsidies cannot attach to assets or “travel with them” to the new owner. This is a matter of definition.
13. The Application of the pass through methodology to private companies
63. The fallacy of the US methodology and the fact it is really only meant to address distortions
of trade in the absence of any benefit to a purchaser who has paid fair market value for the assets is
simply demonstrated by the fact the same methodology is applied in transactions between private
parties (e.g. the UES purchase by British Steel plc). In a transaction between private parties there is no
reason to assume that both the seller and the purchaser have not tried to maximize benefits under the
transaction so there can be no passing of benefit from previous subsidies to the purchaser (as this
would mean that the seller did not properly defe nd his interests and would have granted something to
the purchaser for free. In the real world, of cour se, this does not occur. To argue that somehow the
sold assets (e.g. by GKN) were offered to the buyer with a hidden bonus (the presumed "benefit")
only demonstrates the irrationality of the US benefit stream irrebutable presumption and its
incompatibility with the Subsides Agreement.
14. The “Assets are the Same” argument
64. In answer to the objection that UES and British Steel Plc were not the same as British Steel
Corporation, the US has often stated that the productive assets are the same. For example at
paragraph 78 of its statement to this meeting the US said:
“it was appropriate to countervail imports from the successor company because it was
continuing to use the very same productive assets as the predecessor company, i.e.,
the company that originally received the subsidy.”
65. Mr Chairman, Members of the Panel, this cannot be the right test for many reasons as we
have explained. The EC would only add that assets are also the same before and after a subsidy is
repaid but does this mean that there is no change to the “allocated benefit stream”? Indeed in the case
of British Steel Corporation, the assets were the same before and after payment of the subsidies. They
were paid in large part to shut down productive capacity, no to create it.
15. Cases in which the US would re-examine benefit
66. We have witnessed a certain amount of attempted backtracking by the US today when it has
stated that it would not necessarily apply its pass through principle if it were really shown that a
producer were different or if the assets of a liquidated company were shipped of elsewhere and
reconstructed.
67. The only comment that the EC need make is that USDOC refused to consider the argument
that UES and British Steel Plc were different from the British Steel Corporation in the present case.
The EC refers the Panel to the uncontested description of the situation in paragraphs 34 to 49 of the
EC’s First Written Submission and the clear statements in paragraph 87 of the US First Written
Submission.

16. “Hopeless Morass” Argument
68. The US has also argued that determining whether the producer is the same or different “as a
practical matter, the EC’s approach would seem to involve the investigating authority in a hopeless
morass.”
69. The EC’s response is that the whole purpose of countervailing duty investigations is to clarify
sometimes-complex factual situations and the US often does so. It established that UES was
independent of British Steel Corporation.
On the related question of whether it would be difficult to establish whether a sale was at fair
market value and at arm’s length, the EC would point out that the US did this in the Richemont case
which it has invoked.
17. Standard of Review
70. We have not directly discussed the standard of review but the US has repeatedly relied on the
argument that the Subsidies Agreement is silent on all the key issues and that therefore it does not
restrict the US from adopting the rules it chooses. The EC has often said that this is not the correct
approach and that the Agreement is not silent on the issues of concern to us. All the rules and
principles on which the EC relies to establish its position are contained in the Agreement. Of course
the Agreement does not specifically address change of ownership but that situation is nonetheless
regulated by the rules and principles that it does contain.
71. The other comment the EC would make is that Article 32.1 of the Subsidies Agreement
specifically provides that all action under the agreement shall comply with its provisions and
Article VI GATT 1994.
18. Mr Hufbauer
72. A lot could be said about the opinion of Mr Hufbauer but the EC will limit itself to pointing
out that he seems to have been misinformed about the factual situation when he says:
“[O]nce a nation abandons socialism, its exports are free from US countervailing
duties unless the government slips back into subverting market mechanisms with new
subsidies -- a temptation countervailing duties are intended to deter.”
73. British Steel Plc is not an instrument of socialism and it has not been determined to have
received any subsidies, let alone “new subsidies”.
74. Finally the EC would only refer the Panel and the US to the opinion of another celebrated US
economist, Mr Greenspan who has made pertinent comments on the use of protectionist legislation in
a recent speech which the EC attaches with the permission of the Panel as Exhibit EC-14.
Mr Chairman, Members of the Panel thank you for your attention.

ATTACHMENT 1.7
RESPONSES OF THE EUROPEAN COMMUNITIES
TO WRITTEN QUESTIONS FROM THE PANEL
DURING THE SECOND SUBSTANTIVE MEETING WITH THE PANEL
(Geneva, 30 July 1999)
Introduction
1. In Section A below the EC answers the questions put to it by the Panel at the Second Meeting.
In Section B the EC responds to the invitation of the Panel to comment on the issues raised in some of
the Panel’s questions to the US.
Section A – EC answers to questions from the Panel
Q.1. What is your understanding of the requirement found in Article VI:3 of GATT 1994,
whereby: "No countervailing duty shall be le vied on any product of the territory of any
contracting party … in excess of an amount equal to the estimated bounty or subsidy
determined to have been granted, directly or indirectly, on the manufacture, production , or
export of such product in the country of origin ...". (Emphasis added). Does this provision, in
the opinion of the [European Communities], requi re the investigating authorities of the parties
to determine that a subsidy has been granted on the manufacture or production of the specific
product on which a CV duty is imposed?
Would it be permissible, under this provision, to base the imposition of such a duty on a
determination of subsidization that has been granted seven-ten years earlier and/or to a
different company, and/or on a production of different products taking place under different
circumstances? Should this provision be understood as to require the investigating authority to
determine that such a past subsidy is at least benefitting present production?
2. Yes. The EC considers that Article VI:3 requires that it is always necessary to establish the
existence of a benefit and therefore a subsidy on the manufacture, production or export of the specific
product on which a countervailing duty is imposed. The reference in Article VI:3 to the
"manufacture, production, and export" in no way supports the US position. This reference clearly
limits the application of countervailing duties to no more than the subsidy found to benefit the
manufacture of a product. This limitation does not undermine the observation that a company must
receive a subsidy before it could possibly be applied to benefit the manufacture of a product. The
finding that a benefit is granted to a recipient (pursuant to Article 1) is a condition precedent to a
finding that a subsidy then benefited the manufacture, production or export of merchandise. The
granting and receipt is required as a threshold matter to the application of countervailing duties.
3. Countervailing duties may be imposed on a product as a result of subsidies made years earlier
where it is established on the basis of positive evidence that the payments constitute a lasting financial
contribution and provide a continuing existent benefit to the company over a period of years. This
can be the case with capital injections. In such cases, where the financial contribution is not tied to
any particular product (as will normally be the ca se with capital injections), all the company’s
production can be considered to be subsidized, including products that were not manufactured at the
time of the injection or were not manufactured under the same circumstances (e.g. with different
machinery).
4. Where, however, there has been a privatization at arm’s-length for fair market value and the
current producer of the product is not the same as the one which received the subsidy, there will not
normally be any basis for considering the privatized company’s products subsidized. A basis to

consider a benefit to exist occurs only in the event the criteria set forth in the ASCM and the European
Communities prior submissions to the Panel are not satisfied, i.e. that an advantage has been
conferred by reference to market benchmarks. This might occur in a transaction that is not made at
fair market value or when there has been no substantive change of producer (for example where the
new producer is controlled by the same interests as the former). There is accordingly no basis for
considering the products of the new producer subsidized where it has merely purchased assets from
the former producer at arm’s-length and for fair market value.
5. In other words, a countervailing duty may only be imposed where the investigating authority
determines that the past subsidy to a state-owned entity is benefiting the present production of the
private party under investigation or review. Such benefit must be established on the basis of positive
evidence. Evidence may not be ignored and the existence of a benefit may not be simply assumed as
the result of an “allocated benefit stream ”, which is itself based on a benefit found to have existed
only in the past for a state-owned entity. There is no basis for such an irrebuttable presumption.
Q.2. In the EC's 2nd submission you keep empha sizing that the fact that the subsidies have
been granted in the past to another unrelated producer – not the producer under investigation –
is irrelevant. How would the EC relate to a si tuation where a previously subsidized company is
privatized through the sale of its shares to a private new owner – in an arms-length fair market
value transaction? Would you consider that as always and necessarily extinguishing all past
subsidies? If so why? Has the company under investigation in fact received a subsidy?
6. The EC’s position is that the correct focus of an investigation is the current producer of the
allegedly subsidized goods on which offsetting countervailing duties may potentially be imposed. The
question raised, therefore, is whether the current producer obtains a benefit from financial
contributions made to other producers including to the previously state-owned company. The EC has
explained that a company privatized at arm’s-leng th for fair market value is fundamentally and
necessarily different from the previous state-owned producer. It is in particular not subject to the
same control and does not operate with subsidized capital or subsidized assets, having purchased them
in an arm’s length fair market value transaction. It has paid fully and completely for everything it has
received. Therefore, it has received no benefit by reference to market benchmarks as the result of a
prior financial contribution made to a state-owned company. The private company under
investigation has not received a subsidy in this situation.
Q.3. How would the EC relate to the case, mentioned by the US, where a non-recurring
subsidy was specifically granted in order to purchase machinery, and after three years the
machinery became obsolete because of technolo gical advance? Since you have stated in your
responses to the questions of the US (p. 2) that "the investigating authorities must in all cases
establish the existence of a benefit to the producer under investigation during the period of
investigation or period of review", wouldn't that mean that if you were conducting a new review
in the case mentioned above, that you would have to conclude that there is no longer any benefit
to the company in question?
7. If the subsidy were provided to the company subject to a requirement that it purchase the
specific machinery it would constitute a tied financial contribution which would no longer confer a
benefit once it had become obsolete (in the sense that it can no longer be used to produce the goods in
question). If, however, the company were to resell the machinery to a party which wanted to use it,
then the subsidy originally provided to purcha se the machinery could provide a benefit to the
company after the machinery had become obsolete up to the amount of the sales price.
Q.4. In its written reply to written question 11 from the panel, the US asserts that the EC
contemplates two benefit determinations (i.e., at the time of subsidy bestowal and at the time of
change-in-ownership) to be made during the origin al investigation. The US argues that the EC

would not re-visit these determinations in any subsequent review. Please comment on the US
understanding of the EC position.
8. The EC position is that there is no need to “r evisit” a determination for the state-owned BSC
– simply a need to conduct a proper examination and determination of the existence of benefit and
subsidy for the relevant private producer concerned in each investigation, respectively, UES and
British Steel plc.
9. As regards its own practice, the EC has explained that its legislation clearly requires it to
establish that a benefit exists. Article 5 of Regulation 2026/97 provides that "the amount of
countervailable subsidies … shall be calculated in terms of benefit to the recipient which is found to
exist during the investigation period for subsidization”.1 Similarly, Article 15.1 of the Regulation
permits the imposition of a countervailing duty "… unless the subsidy or subsidies are withdrawn or it
has been demonstrated that the subsidies no longer confer a benefit on the exporters involved”.2
Q.5. Please respond to the three questions set forth in para. 27 of the US second written
submission.
10. The US questions were:
“27. Indeed, any number of scenarios can be imagined where a change in
ownership is not accomplished through a straight sale of shares or a straight sale of
assets, and the corporate laws of various Member countries come up with different
answers as to whether the company is the sa me or different. Is the EC arguing that
Article 1.1 requires the investigating authority to make a general distinction between
a sale of shares and a sale of assets, but leaves it to the discretion of the investigating
authority to determine the significance of more complicated transactions? Or, is the
EC arguing that Article 1.1 even explains how the investigating authority is to handle
the more complicated transactions? And, whichever position the EC takes, where can
any of it be found in the SCM Agreement? Plainly, the EC is going far beyond the
terms of the SCM Agreement when it begins distinguishing between a sale of shares
and a sale of assets.”
11. The general answer to the first two questions is in each case no, as the EC trusts it has made
amply clear in its submissions. The EC has not argued for a general distinction between privatizations
accomplished through arm’s-length fair market value asset sales or the same privatization transaction
accomplished through an arm’s-length fair market value share sale. The EC has also not argued that
Article 1.1 provides specific detailed instructions on “more complicated transactions”. Article 1.1
sets forth, inter alia, that for a subsidy to exist, a benefit must exist.
12. As regards the third question, the EC’s position may be found throughout the ASCM, as it has
set forth in its previous submissions. The EC recognizes that the ASCM does not specifically lay
down detailed rules for changes of ownership, just as it does not lay down detailed rules for many
other important factual circumstances. In all such cases it is simply necessary to apply the clear rules
and principles provided in the Agreement.
Q.6. At para. 53 of its second written submission , the EC "take[s] no issue with the authority
of Members to allocate certain subsidies over a pe riod of time." Furthermore, in response to
written question 1 from the US, the EC accepts th at if "a non-recurring financial contribution
was made in 1985, and the POR is 1990, the inve stigating authority could assume that the

1 Emphasis added.
2 Emphasis added.

financial contribution confers a continuing benefit on the company under investigation in 1990
…"
Is the fact that an authority is entitled to allocate non-recurring subsidies over time based on the
assumption that both the financial contribution and the resultant benefit continue over time? If
not, what is the basis for such allocation? If so, what is the basis for the assumption that both
the financial contribution and the resultant benefit continue over time? Isn't the assumption
based on an understanding that both the financial contribution and benefit are embodied in a
company's productive assets, and therefore benefit the company's production over the useful
life of those assets?
13. As the EC explained, notably at paragraph 55 of its First Written Submission, a financial
contribution constitutes a subsidy when it benefits a producer by conferring an economic advantage
that it would not otherwise have enjoyed. This economic advantage or benefit may be enjoyed or
consumed immediately or may persist for a number of years. It is the latter hypothesis that is relevant
in the present case.
14. A financial contribution that confers a lasting benefit can also be considered as being made
over a correspondingly extended period of time. Although the payment (of a loan or an equity
infusion) is normally effected at a single point in time it is in economic terms a continuous stream of
financial contribution equal to the difference between the remuneration of the loan or equity infusion
and the market rate. In this way one can consider the financial advantage as existing throughout the
relevant period in the same way as the benefit.
15. Where the subsidy consists in the government making available a piece of machinery for a
specific purpose, the subsidy may benefit the company throughout the useful life of that machinery.
However, in the case of capital injections untied to any assets, the subsidies (financial contribution
and benefit) can only be considered embodied in the capital of the company rather than the assets.
That is why they can not pass through to a subsequent arm’s length purchaser of the assets for fair
market value.
16. Coming back to the facts of the present case, this explains why the capital injections provided
to the state-owned British Steel Corporation demonstrably provided no benefit to UES and British
Steel Plc under investigation by USDOC.
Q.7. Are there circumstances in which a producer's production may "benefit" from a
"financial contribution", without the producer itself "benefiting" from a "financial
contribution"? Please explain, and provide examples if relevant.
17. The EC is not currently aware of such circumstances.
18. Of course, a financial contribution may sometimes be provided to a different person than the
person obtaining the benefit, but if the production benefits then so must the producer.
Q.8. Smith Ltd., a producer of widgets, is wholly owned by Mr. Smith. The government
commits itself to pay Mr. Smith (not Smith Ltd.) $0.02 for every widget sold by Smith Ltd.,
provided Smith Ltd. cuts its widget resale price by $0.01. Does the $0.02 per unit payment to
Mr. Smith constitute a subsidy on production by Smith Ltd.? Please explain.
19. Yes. As the sole owner of Smith Ltd., Mr Smith controls Smith Ltd. The situation described
is somewhat analogous to a payment made to a holding company rather than directly to the producing
company. Also, the example describes a tied recurring subsidy directly linked to the sale of widgets.

20. In discussing the relevance of this question for the case at hand there was discussion with the
Panel of the case of upstream subsidies. Here the clear rule is that which was established in Pork
from Canada.3 An upstream subsidy, for example to the production of pigs which are not exported,
cannot be considered to be a subsidy to the downstream product (which is exported). It is necessary to
establish a separate benefit to the downstream product in the form of lower input prices. The amount
of the benefit is then the reduction in the price that the downstream producer has to pay for the input.
The same approach applied to privatization would require it to be shown that the subsidy to the
original producer caused the new producer to be able to obtain the assets at a price lower than would
have otherwise been the case in comparison to market benchmarks. The US, of course, has made no
such demonstration or even attempted to demonstrate this is the case in the present dispute. It has not
done so because the US itself has conceded that th e privatizations occurred at arm’s-length for fair
market value. Instead, it terms this central established fact “irrelevant” to privatizations despite its
own upstream subsidy practice.
Q.9. In response to written question 12(d) from the US, the EC asserts that "[w]hether the
new producer / exporter which has purchased the assets has obtained a benefit depends, of
course, on the terms of the transaction (fair market value, arm's length transaction)." Does this
suggest that a "financial contribution" potentia lly conferring a "benefit" passes through in a
change-in-ownership transaction? If not, what could be the relevant "financial contribution"
for the purpose of imposing countervailing duties on imported goods produced by the privatized
company. Please explain how the terms of th e change-in-ownership transaction demonstrate
whether or not the relevant "financial contri bution" has conferred a "benefit" on the new
producer/exporter which has purchased the assets?
21. As the EC has set forth in prior submissions, a financial contribution and benefit may be
conferred in circumstances where the transaction was not for fair market value. In such
circumstances, consistent with Article 14 ASCM, the financial contribution and benefit would be the
difference between the price paid and the market value of the assets (as the EC explained in
paragraphs 59 to 61 of its First Written Submission). The arm’s-length fair market value analysis set
forth in the Richemont case provides one example of how such a possible subsidy can be investigated
and established.
22. In the case of UES/British Steel Plc, USDOC found as facts in each case that the assets were
acquired in arm’s-length transactions for fair market value (see paragraphs 30, 31, 36 and 45 of the
EC’s First Written Submission).
Q.10. The EC claims that, in th e three administrative reviews at issue, USDOC should have
determined whether "financial contributions" conferred any "benefit" on UES or BSPLC.
What, according to the EC, are the relevant "financial contributions" that should be
demonstrated to have conferred the "benefit".
23. As explained in answer to the previous question, it would have been necessary to determine
that the sales was not at arm’s-length and for fair market value and to calculate the undervalue. That
would have been the “financial contribution”.
Q.11. What does the EC mean by the terms "productive assets" and "productive unit"?
24. The EC believes that it has used the terms “productive unit” and “productive assets” in the
same way as the US – indeed it has used these terms principally to describe the contested “pass

3 United States -- Countervailing Duties on Fr esh, Chilled and Frozen Pork from Canada : Report of
the Panel, DS7/R-BISD 38S/30 (11 July 1991). See paragraphs 4.6 and 4.9 of the report and discussion in EC’s
First Written Submission at paragraph 114 et seq.

through ” philosophy of the US. The EC understands that the US uses the term “productive unit” to
denote productive assets sold as a going concern, that is notably with its goodwill. The EC considers
goodwill (or whatever additional element is included in the sale) to be an asset like any other and does
not see how the inclusion of goodwill can change the analysis and justify the adoption of the US “pass
through” approach. The US seems to accept this since it explained during the discussion at the
Second Meeting with the Panel that the only reason it did not apply its “pass through” philosophy to
mere asset sales was the administrative difficulty of following every single asset (e.g. a typewriter).
Q.12. Were BSC's Special Steels Business assets acquired by UES, or by the owners of UES?
Were the terms of the transaction negotiated by UES, or by the owners of UES? Did the owners
of UES pay any price for the BSC assets acquired by UES?
25. The assets of BSC’s Special Steel Business were acquired by UES and USDOC treated that
acquisition for purposes of its countervailing duty analysis as a purchase of the assets by UES. See
EC First Written Submission at paragraph 30, and Exhibit EC-4. Because USDOC found that UES
was an entity independent of BSC and not controlled by it, USDOC treated the transaction as one in
which one company acquired a productive unit from an unaffiliated seller.
26. UES was not in existence at the time that BSC and GKN negotiated the terms for establishing
their joint venture (which became UES). In t hose negotiations, which USDOC found to have been
conducted at arm’s-length and on a commercial basis (see 58 Fed. Reg. at 6240 in Exhibit EC-4),
BSC and GKN determined the terms on which the joint venture would acquire the assets of the
Special Steel Business from BSC and the forging-related assets from GKN. Accordingly, the correct
response is that the terms under which UES acquired the BSC assets were negotiated between BSC
and GKN.
27. The final question by the Panel concerns whether the owners of UES paid any price for the
BSC assets acquired by UES.
28. In one significant sense, the price for the BSC assets was paid by UES since BSC received
shares in UES as its compensation for the transfer of the assets to UES. This is the view adopted by
USDOC.
29. In another significant sense, since the owners of UES (BSC and GKN) negotiated the terms of
the transaction, each of the owners can also be view ed as having “paid the price” for the assets UES
acquired from the other owner. In other words, because GKN had to agree on the value of the BSC
assets and how much of the ownership of UES s hould be given to BSC in compensation for BSC’s
transfer of the assets to UES, GKN can be considered as having “paid the price” for the BSC assets
acquired by UES. In the end, there is no functio nal difference between vi ewing the transaction as
one in which UES paid for the assets or the owners of UES paid for the assets.
30. The EC would further refer the Panel to the fo llowing US comments on these issues in the
formal record of its investigation and reviews:
• The USDOC Remand Determination of 12 October 1993 states (at page 7) that: “[t]he
Department found that the transaction involving the Special Steels Business was a sale
between BSC and UES.”
• The US Government Brief on the case before the US Court of International Trade (US
CIT Brief) of 11 February 1994 states (at page 5): “This case presented Commerce
with the novel situation in which a subsid ized, state-owned company sold a productive
unit to a private party.”
• The US CIT Brief also states at page 6: “Government-owned BSC sold to United
Engineering its Special Steels Business which produced engineering steels, such as

lead and bismuth steel products, the subject merchandise in issue. Guest, Keen &
Nettlefolds, a privately-owned company, sold to United Engineering its Brymbo Steel
Works and its forgings business. In return, United Engineering transferred to each of
these respective parties stock of equal value to their assets.” At page 13 the US refers
to “the price United Engineering paid to acquire [the Special Steels Business] from
BSC . . .”
• The USDOC verification report for UES of 9 November 1992 describes the GKN-BSC
negotiations in some detail at pages 9-12. The official verification report states at page
9 that : “During the negotiation process, GKN dealt directly with BSC, not with the
UK Government, according to company officials.”
Q.13. The US appears to argue that an arm's le ngth privatization transaction at fair market
value does not preclude benefit passing through. Suppose a subsidized, government-owned steel
company is sold at arm's length for fair market value. Assume that, in the absence of such sale,
the only alternative for the purchaser would have been to build a Greenfield plant. However,
the cost of building that plant would be much higher than the abovementioned fair market
value paid to the government, to the extent that th e production of steel would not be viable if a
Greenfield plant had to be built. Does the pu rchaser "benefit" from the fact that there is a
subsidized steel plant for sale which, although priced at fair market value, can be bought for
less than it would cost to build a Greenfield plan t? In other words, is there a "benefit" because
the purchaser is now able to produce steel, whereas it would not have been able to produce steel
had it been necessary to construct a Greenfield plant?
31. The EC considers that the cost of construction of a purchased plant (which includes the cost
of the land, the building and the machinery on a greenfield site) is not the relevant benchmark.
Article 14 ASCM requires that the benefit to the recipient be compared to market benchmarks, not
cost of construction benchmarks. For example, Article 14(d), in addressing the sale of goods by
governments states that "the adequacy of remuneration shall be determined in relation to prevailing
market conditions … including price, quality, availability, marketability, transportation and other
conditions of purchase or sale". In no place is there reference to cost of production as a relevant
factor so that if a government were to sell goods at below their cost of production but above their
market value there would be no subsidy.
32. A simple example demonstrates why the ASCM provides for this market-based approach.
Suppose a government sells in the centre of its capital a famous and strategically placed office
building. Because of its central position the building has a market value several times its cost of
buying the land and building it. If the government were to sell the building with its land at a price
reflecting its cost of production (which would be far below its market price) it would be granting a
subsidy to the purchaser to the extent of the difference between the purchase price and the market
value of the building. If, on the other hand, the situation were reversed in the case of a residential
house with a large garden, which has a market value much below what it would cost to buy the land
and build, the government would not be granting a subsidy if it sold the house at its market value
which would be far below the cost of construction.
33. In the “greenfield” example above, the same principles apply.
Q.14. At its second substantive meeting with the parties, the Panel asked the US the following
question:
12. With regard to its written reply to written question 11 from the EC, the
US notes "that the EC has not raised any claims in this dispute under Article
21.2 of the SCM Agreement". What is the purpose of this note, in light of the
EC's claim under Article 10? Does the US suggest that the administrative

reviews at issue may only be challenged under Article 21.2 of the SCM
Agreement?
The US replied that it does not suggest that th e reviews at issue may only be challenged under
Article 21.2 of the SCM Agreement. The purpose of the US note was to suggest that, to the
extent the Panel were to look at Article 21.2, and possibly find that the US had somehow
violated Article 21.2, the Panel would be precl uded from finding a violation of Article 21.2
because it fell outside the Panel's terms of reference (because the EC had not made a claim
under Article 21.2). The Appellate Body has made clear that the mere invocation of Article 10
by the EC does not mean that any and all violations of SCM Agreement provisions concerning
countervailing duties are now considered to be alleged. The Appellate Body has made clear that
the complaining party must cite the specific provi sion allegedly violated, and that a violation of
a provision cannot be found if the violation of that provision has not been alleged. The US
referred the Panel to the Appellate Body repor ts in Guatemala Cement, India Patents, and
Bananas III.
Please comment on the US response.
34. A review can only confirm or modify (include terminating) an original finding which led to
the imposition of a countervailing duty under Article 19.1 ASCM. Article 21.2 ASCM requires
reviews to be conducted (either on Members' own in itiative or upon request by any interested party),
but the conditions to be fulfilled before duties can be imposed or maintained remain those of
Article 19. For example, Article 19.4 does not allow a countervailing duty to exceed the amount of
subsidy found to exist. If Article 19 did not apply to review proceedings Members could impose
duties - following reviews - which far exceeded the amount of subsidy.
35. The EC did not allege a breach of Article 21 ASCM since the US did, in fact, conduct
reviews. It alleged breaches of Articles 1, 10 and 19 ASCM since the conditions and requirements set
out in those provisions were not respected in conducting those reviews.
36. It may be that the US has also violated Article 21 ASCM by not conducting out the reviews it
should have conducted or not carrying them out in conformity with Article 21.2 ASCM.
37. The EC has invoked Article 21 in support of its other arguments – as relevant context for the
interpretation of other provisions which is entirely admissible and is regularly done in Panel and
Appellate Body Reports. The EC would refer the Panel to the distinction made by the Appellate Body
in Bananas where it stated that:
“Article 6.2 of the DSU requires that the claims, but not the arguments, must all be
specified sufficiently in the request for the establishment of a panel in order to allow
the defending party and any third parties to know the legal basis of the complaint."
4
38. Indeed the US seems to arguing that in considering an EC argument based, in part, on
Article 21 ASCM, the Panel might find it difficult to avoid implying that the US has violated this
provision and that it would this would be tantamount to finding a violation of Article 21. The EC
would observe that if this is the US argument, it is invoking its own fault in its favour – something
that should not be allowed (nemo auditur turpidudem suam allegans ). The Panel need not be
concerned with the implications that readers may draw from its Report as regards a possible violation
of Article 21 ASCM, it need only make clear that it is making no finding on the issue of a direct
violation of this provision standing alone.

4 European Communities - Regime for the Importation, Sale and Distribution of Bananas ,
WT/DS27/AB/R of 9 September 1997

Section B – Comments on the issues raised in the questions to the US
Q.2. to the US
Article 19.3 requires CVDs to be imposed on a non-discriminatory basis on imports of
the relevant product coming "from all sources found to be subsidized …". Thereafter, Article
19.3 refers to "sources which have renounced any subsidies in question or from which
undertakings under the terms of this Agreement have been accepted." Article 18.1 provides for
undertakings to be granted by (1) "the government of the exporting Member" and (2) "the
exporter".
Does Article 19.3 not suggest that CVDs may only be imposed on imported goods when
the "source" of the imported goods is found to be subsidized? If not, why not? Irrespective of
your response to the preceding question, are the "sources which have renounced any subsidies
in question or from which undertakings under the terms of this Agreement have been accepted"
the same "sources found to be subsidized"? If not, why not? If so, what are these "sources"?
Please explain whether Article 18.1 is relevant for the purpose of identifying these "sources"?
39. The EC considers that, whatever its historical origins, the phrase “all sources found to be
subsidized” in the context of Article 19.3 ASCM can only be referring to producers/exporters. It
cannot be referring to productive assets or countries as falsely suggested by the US.
40. Only producers/exporters can renounce subsidies in the sense that the term is used in
Article 19.3 and give undertakings.
41. Although Article 18.1 refers to undertakings being offered by and accepted from exporters
and governments, governments do not export and so cannot be included in the term “source”.
42. The conclusion that the term “source” refers to producers/exporters is confirmed by the
immediately following sentence which, as the EC has already observed a number of times, requires a
new countervailing duty to be calculated for new exporters.
43. The same conclusion is required if one takes into account the use of the term in the equivalent
provision in the antidumping agreement. Article 9.2 Antidumping Agreement provides that :
“… anti-dumping duty shall be collected in the appropriate amounts in each case, on
a non-discriminatory basis on imports of such product from all sources found to be
dumped and causing injury, except as to imports from those sources from which price
undertakings under the terms of this Agreement have been accepted.”
44. Only companies can give antidumping undertakings and so the term “sources” can only refer
to companies.
Q.4. to the US
In its written reply to written question 6 from the EC, the US explains why it believes
that the issue of whether a financial contribution continues to confer a benefit involves an effects
test. If this is the case, wouldn't the assessment required by Article 21.3 (i.e., whether the expiry
of CVDs would be likely to lead to "continuation" of subsidization) also involve an effects test?
Is it possible to determine whether there is a likelihood of continued subsidization without
examining whether there is a likelihood of continued benefit?
45. In the discussion relating to the question of how to assess the continuing benefit from a
financial contribution the US confirmed that it would never re-evaluate the originally assessed benefit

even if the assumptions on the basis of which the benefit was originally determined had changed. The
discussion of the case of advantageous government loans well illustrated the inadequacy of the US
approach and the fact that it did not comply with the requirements of the ASCM.
46. If the government offers a company a loan repayable at will at an advantageous interest rate
compared with what the company would otherwise have had to pay, it is clearly bestowing a subsidy.
This is also a subsidy that has a lasting effect over the duration of the loan and which could therefore
be countervailed over that period.
47. The US would attempt to measure the total amount of the benefit when the loan is first made
and then allocate it over the amortization period and subsequently irrebuttably deem the benefit in any
year to be the relevant part of the “allocated benefit stream”. This would give rise to the absurd result
that if market conditions or the company’s credit rating were to improve so that the company could
after a number of years borrow on the market at a more favourable rate than that of the loan, the US
would continue to countervail its deemed “allocated benefit stream”. A further absurd result is that,
according to the US, the countervailing duties would cease if the loan were repaid and an identical
loan taken from the private sector, whereas they would continue if the company continued with the
original loan.
48. The ASCM clearly requires the subsidization and therefore the benefit to be established in the
relevant POI or POR. The correct approach a nd the one that the EC would apply would be to
consider the amount of the benefit and therefore the subsidy to be the difference between the
payments under the loan and the corresponding market amount in the POI or POR.
Q.7. to the US
At para. 20 of its second written submission, the US asserts that neither Articles 1 nor 14
"is intended as an indication of whether the financial contribution will benefit the `legal person'
who received the financial contribution". The Panel notes that Article 14 (b) provides that a
government loan confers a benefit when "the firm receiving the loan" receives the loan on terms
more favourable than a comparable commercial loan. A similar approach is adopted in Article
14(c). Furthermore, the chapeau of Article 14 refers to benefit to the "recipient". Do these
provisions not support the view that Article 14 focuses on benefit to the legal person, by
determining whether the legal person received government assistance on terms more
advantageous than those it could have obtained on the market?
Furthermore, the US explained at para. 80 of its first written submission that equity
infusions to BSC conferred a benefit because BSC was unequityworthy. Does this not support
the view that the US determined benefit to BSC, i.e., the legal person, by determining whether
BSC obtained equity on terms more advantageous than those it could have obtained on the
market?
49. The US answer to this question relied on the absurd contention that “benefit to the recipient”
was a term used in US countervailing duty law and was really shorthand for benefit to the
merchandise. Whether this is true or not is a question of US law that need not concern the Panel. The
real point is that “benefit to the recipient” is a clear term used in the ASCM and agreed to by all WTO
Members. It has its own plain meaning which is unaffected by any suddenly revised meaning that the
US may attempt to claim in the current proceeding.
50. The fact that the US based its calculation of the subsidy to British Steel Corporation in large
part on the notion that it was “unequityworthy” further underlines the fallacy of the US approach.
USDOC never asked itself the question whether UES or British Steel Plc were “unequityworthy” – it
simply deemed the benefit to be the relevant part of the “allocated benefit stream” that it calculated
for British Steel Corporation.

Q. 9. to US
Please comment on the argument at para. 48 of the EC's second written submission that
"[t]he fact that recipients of subsidies must be persons rather than goods is confirmed by the
text of Article 2.1 ASCM, which lays down the fundamental requirement of specificity of the
subsidy to certain enterprises …".
51. The US denies that Article 2.1 ASCM is context for the purpose of interpreting Article 1.1
ASCM since it is not addressing the question of who or what receives the subsidy.
52. The EC cannot accept this argument. Article 2.1 addresses the question of to whom the
subsidy is to be provided for the disciplines of the ASCM to apply. Different provisions always
address different questions otherwise they would be redundant. That does not stop them from being
relevant context for each other, especially when they use the same terms.
Q.16. to US
In its written reply to written Panel question 9, the US "rejects the notion that subsidies
'attach' to assets or to companies …" In the 1995 administrative review at issue, USDOC stated
that "when BSC sold its Special Steels Business, that productive unit took a portion of the
benefits with it." Is USDOC's statement consistent with the above-mentioned extract from the
US response to written Panel question 9? If so, please explain how. Furthermore, please
explain how the Special Steels Business "productive unit took a portion of the benefits with it" if
those "benefits" were not attached to that "productive unit".
53. The US is unable to provide any rational explanat ion of how untied subsidies can attach to or
“travel with” assets. Its explanations refer to th e need to “capture” subsidies, to the conviction that
subsidies cannot disappear and the need to address market distortions, which it never even established
or claimed during the investigations themselves.
54. These explanations demonstrate that the US has adopted its “pass through ” approach to pre-
privatization subsidies in a protectionist attempt to shield its domestic industry from market-based
private competitors who enjoy no subsidy. The US seeks to avoid any possibility that protection once
obtained can be lost or “circumvented” because of subsequent changes in the exporters.
55. These are not proper objectives under the ASCM. Market distortions such as the creation of
capacity may exist for all sorts of reasons – including the activities of private rich uncles – but the
ASCM is clear that offsetting countervailing duties are not an appropriate remedy. The ASCM only
allows countervailing duties to be applied to the products of a producer or exporter who has actually
received a subsidy within the meaning of Article 1 of the ASCM.
56. There is no basis in the ASCM for holding that once a domestic industry has obtained
countervailing duty protection this must continue throughout an amortization period in all
circumstances and in all situations.
57. Subsidies can be removed or “disappear”. They can be repaid. The beneficiary can go
bankrupt or its assets be destroyed by a war. Similarly, the producer could stop any business activity
and sell its assets to others. Such fundamental changes in circumstances require a examination of the
existence of subsidization and if none is found there is no basis for applying countervailing duties.
The US is violating the ASCM by refusing to adm it this and clinging to the belief that subsidies
automatically pass through. In the US view articulated to the Panel, someone, even an unrelated
private purchaser of assets paid for at arm’s-length fair market value, must pay a duty despite the
complete absence of any benefit to countervail with offsetting duties.

58. “Circumvention” of otherwise appropriate duties is, of course, not even relevant in the present
case. The sale to UES and the privatization of British Steel Corporation were transactions that were
completed years before there was any suggestion of countervailing duty action by the US.
59. Contrary to one of its claimed purposes, the current US “pass through” practice actually
encourages opportunities for circumvention.
60. If it is possible for untied subsidies to travel with assets, it becomes possible for producers
with countervailing duty liability to reduce it by tr ading in productive units. The simplest example is
the swapping of productive units between an exporter and a non-exporter. The sale of the original
productive unit will reduce the pool of subsidies for the exporter since part will travel with the assets
according to the US approach, as the US expressly confirmed during discussion of this question. The
purchase of an equivalent productive unit from a company not subject to countervailing duty liability
will further reduce the rate of countervailing duty liability since the reduced pool of subsidies will be
spread over more assets.
Q.17. In the context of the privatization of government-owned assets, the Panel understands
that the reason why USDOC considers it ne cessary to apply its change-in-ownership
methodology is because "a private party purchasing all or part of a government-owned
company (e.g., a productive unit) can repay prio r subsidies …" (GIA, page 37262). A similar
statement was made in the US written reply to the Panel's written question 8. Is this
understanding correct? If not, please explain why USDOC applies its change-in-ownership
methodology in the case of (full or partial) privatization.
In its written reply to written question 12 from the Panel, the US asserted that the
USDOC change-in-ownership methodology would a pply when privately-owned assets are sold
to private companies, but that any subsidies bestowed on the assets before sale would not be
repaid through the sale ("because the seller is no t the government"). What is the justification
for applying the change-in-ownership methodol ogy in the case of a transaction between two
private parties? Presumably, USDOC does not do so because of the potential repayment of
subsidies.
61. The EC would merely observe that in an arm’s length transaction between private parties it is
not possible to argue that the seller has somehow pa ssed on a benefit to the purchaser as this would
imply that the seller did not realize the full value of the assets he sold.
For the term “repayment” to be appropriate a subsidy must first actually exist. The US
automatically and irrebuttably assumes this by refusing to examine the sale transaction at issue. The
Panel is correct that in a rational world with a rational methodology USDOC should not consider
private-to-private transactions as “repaying” subsid ies. It can only do by considering that subsidies
automatically live in and travel with assets and neve r examining the actual transaction. It assumes a
subsidy which does not exist.
Q.24. to the US
At para. 93 of its second oral submission, the US cites to extracts from an article by Mr.
Hufbauer's. The first paragraph of that extract states that "whether British Steel's new owners
benefitted from the prior subsidies has no bear ing on the competitivene ss of the steel mills --
which the subsidies pumped up massively." Please give the full title of the entity described as
"British Steel" in this extract. Whose "competitiveness" has been "pumped up". Is it the fact
that an entity's "competitiveness" has been "pumped up" that demonstrates the existence of
"benefit" within the meaning of Article 1.1(b) of the SCM Agreement?

In his article (Exhibit USA-40), Mr. Hufbauer states that "[a]ssuming British Steel
shares were fairly priced, the government's fina ncial position was unchanged by the sale. So
how can it have been repaid for the prior su bsidies?" We understand Mr. Hufbauer to argue
that the privatization of BSC could not have led to the repayment of subsidies conferred on
BSC. How is this consistent with the US assertion at para. 95 of its first written submission that
"[t]he portion [of BSC subsidies] allocated to the U.K. government was considered to have been
repaid to the government …"?
62. Mr. Hufbauer’s reasoning is essentially based on the discredited “rich uncle” market
distortion hypothetical set forth in the US First Written Submission.
5 Unfortunately, Mr. Hufbauer
appears to have been misinformed regarding several central facts of this dispute by the USDOC and
this colours his opinion.
63. Mr. Hufbauer asserts that “privatization does not erase distortions” and declares this the “
nub” of the dispute. 6 Yet, in response to Question 13 from the Panel after the First Substantive
Meeting, the US appropriately backed away fr om its initial sweeping and legally unbounded claim
that the purpose of countervailing duties is to cure alleged market distortion and deter subsidy. The
US states at paragraph 46 that “[t]he SCM Agreement permits countervailing duties to offset
subsidies, not the amount of economic distortion caused by subsidies.” (emphasis added). The US
further asserts in its own GIA that:
“[I]t does not follow that the statute re quires us to somehow ‘correct’ market
distortions which may have occurred due to the provision of subsidies beyond
countervailing the benefits received. The CVD law is designed to provide remedial
relief as a result of subsidies; it is not intended to recreate the ex ante conditions that
existed prior to the bestowal of such subsidies. . . . The fact that productive capacity
may have been created or continues to exist is an irrelevant inquiry and beyond the
scope of the law”.7
64. These statements, with which the EC broadly agrees, are a long way from the US “ rich
uncle” hypothetical.
65. Mr. Hufbauer further offers no analysis of benefit to the privatized company, instead
apparently arguing that their mere existence entitles them to be countervailed. He then discusses daily
share sales of a few shares which are not at issue at all in this case. Lastly, and perhaps most
revealingly, Mr. Hufbauer notes:
“[O]nce a nation abandons socialism, its exports are free from US countervailing
duties unless the government slips back into subverting market mechanisms with new
subsidies -- a temptation countervailing duties are intended to deter.”
66. Of course, in the dispute before the Panel nothing approaching this description happened. All
alleged financial contributions were to the state-owned British Steel Corporation prior to its arm’s-
length privatization. None were made to British Steel plc. However, the exports of the private British
Steel plc, privately purchased at arm’s-length for fair market value, were not “freed” from US
countervailing duties. Instead benefits were automatically and irrebuttably presumed to exist by
USDOC, when demonstrably no such benefit exists. Further, as the EC have noted at length, the
purpose of countervailing duties is
 set forth explicitly in Article 10, footnote 36 ASCM. They are

5 US First Written Submission at paragraph 223; EC Second Written Submission at paragraphs 64-68.
6 Exhibit USA-40 at paragraph 1.
7 See GIA at page 37264.

“special” duties for the purpose of “offsetting” subsidy. The unbounded concept of deterrence is
found nowhere in Part V ASCM.
67. While one easily identifies several factual flaws (as well as several contradictions with the
US’ own statements on the record in this very dispute) in the Hufbauer article, the US offers no
concrete rebuttal of the conclusions drawn by Dr. C ooper. Instead, the US informs the Panel that Dr.
Cooper’s economic analysis “only analyzes the privatization transaction from the perspective of the
new owner of the successor, privatized company."8 This is, of course, false, and, the US again draws
a fake distinction here that it does not even recognize itself with respect to privatization. The US
identifies no citation for its assertion, perhaps because Dr. Cooper explicitly notes in his analysis that:
“Basic economic analysis establishes that no economic benefit is enjoyed by the now-
privatized producer of the goods, a productive unit thereof, or the merchandise itself,
in comparison to competitors in the marketplace.9
For the benefit of prior government financial contributions to “pass through” to the
new buyer/company/merchandise, the seller would have to act in an economically
irrational manner and forgo income by agreeing to a price lower than fair market
value.10
From the perspective on analyzing whether any benefit is enjoyed by the privatized
company, however, this inquiry is the most fundamental economic issue.11
US countervailing duty practice ensures that countervailing duties will be assessed as
financial penalties on privatized firms that enjoy no economic benefit from
government contributions provided to state-owned predecessors.12
When a buyer pays fair market value at arm’s length, no economic advantage is
conveyed to the buyer, the assets purchased by the buyer, or the goods produced with
those assets. The buyer has paid fully for everything it has received.13 ”

8 US Second Oral Statement at paragraph 92 (emphasis in the original).
9 See Exhibit EC-13 at page 1.
10 See Exhibit EC-13 at page 2.
11 See Exhibit EC-13 at page 3 (emphasis added).
12 See Exhibit EC-13 at page 4 (emphasis added).
13 See Exhibit EC-13 at page 4 (emphasis added).

I. INTRODUCTION AND SUMMARY OF ARGUMENT
1. The challenges raised by the European Co mmunities (“EC”) in this matter relate to
determinations made by the US Department of Commerce (“USDOC”) in three successive annual
administrative reviews of the countervailing duty order covering imports of certain hot-rolled lead and
bismuth carbon steel products (referred to herein as “lead bar” products) from the United Kingdom
(“UK”).
2. The USDOC determinations at issue concern more than £7 billion of UK Government
subsidies bestowed on British Steel Corporation (“BSC”), a government-owned company, prior to
three change-in-ownership transactions in which BSC later was involved. In the first of these
transactions, in 1986, BSC spun off lead bar-producing assets from its Special Steels Business to an
independent joint venture, which became known as United Engineering Steels (“UES”). The second
transaction took place in 1988, when the UK Government privatized BSC, which then became known
as British Steel plc (“BS plc”). In the third and final transaction, which took place in 1995, BS plc re-
acquired UES.
3. The EC’s challenges are directed at USDOC determinations allocating a portion of the
massive BSC subsidization -- UK.. government equity infusions and grants -- to the production of the
UES joint venture and, later, BS plc.
4. As the United States shows below, in ad dressing the massive BSC subsidization, USDOC
adhered strictly to the provisions of the Agreement on Subsidies and Countervailing Measures (“SCM
Agreement”), to the extent that those provisions addressed matters relevant to this issue. In addition,
where the SCM Agreement did not provide direct guidance, USDOC approached its task permissibly
and in a manner that was fully consistent with the object and purpose of the SCM Agreement.
5. As contemplated by the SCM Agreement, USDOC first sought to identify the existence of
potentially countervailable subsidies. Addressing each of the alleged subsidies in turn, USDOC
applied Article 1.1 of the SCM Agreement and found the existence of a “subsidy,” i.e., a “financial
contribution” which thereby conferred a “benefit.” USDOC also addressed whether these subsidies
were “specific” as required by Article 1.2, and it found that they were. USDOC therefore considered
these subsidies to be countervailable.
6. Next, USDOC measured the "benefit" of each of the subsidies in a manner consistent with the
guidelines set forth in Article 14. Thus, with regard to the equity infusions, USDOC followed
Article 14(a) and examined the usual investment practice as of the time of the equity infusions in
order to come up with an appropriate measurement of their benefits. In addition, although Article 14
does not address grants, USDOC followed the general principles of Article 14 and looked only at the
time of the subsidy bestowals to measure the grants’ benefits, which were simply the amounts of the
grants.
7. The next step for USDOC under its practice was to allocate the measured benefits over time,
meaning to future production of what USDOC terms the "subject merchandise," i.e., the lead bar
products. The SCM Agreement itself does not a ddress how or even under what circumstances a
subsidy should be allocated over time, although it does generally recognize the principle that subsidies
may be allocated over time, as can be seen from Annex IV, for example. In any event, USDOC
applied its normal allocation methodology, which is consistent with similar methodologies applied by
other WTO Members, including the EC. Given the record facts, USDOC's application of this
methodology resulted in an amortization of the benefi ts over a time period of 18 years. In other
words, for each subsidy, USDOC created an 18-year benefit stream, with the net present value of the
subsidy benefits being divided between each of the 18 years pursuant to a standard declining balance
formula.

8. In its final step, USDOC addressed the changes in ownership at issue. Here, there was no
direct guidance from the SCM Agreement, at least in the context of a WTO Member's countervailing
duty proceeding under Part V of the SCM Ag reement. Thus, USDOC had to decide whether and, if
so, how to take into account the changes in ownership at issue, which occurred years after the original
subsidy bestowals but well before the end of the relevant 18-year allocation periods. USDOC
followed its existing change-in-ownership methodology, which reflected USDOC's decision to take
into account a change in ownership essentially through the application of a second allocation
methodology.
9. The basic principle underlying USDOC’s methodol ogy is that US countervailing duty law,
like the SCM Agreement, focuses on how a subsidy benefits the production of merchandise and does
not envision ever re-visiting the original determination of the existence of a subsidy benefit, which is
made as of the time of the subsidy bestowal. This principle rules out an approach, like that being
advocated by the EC in this dispute, which is founded on a re-valuation of the benefit as of a time that
was years after the subsidy bestowal.
10. What USDOC’s methodology does is to take into account the change in ownership by re-
allocating the subsidy benefit. Specifically, it takes the benefit which had already been allocated over
time under USDOC's normal allocation methodology and, based on the price that the purchaser paid
for the company, among other things, further allocates the benefit -- or, perhaps more precisely,
apportions it -- between the seller and the purchaser . As an example, if USDOC's normal allocation
methodology had allocated £100 million of subsidy benefits to a particular year of the allocation
period, USDOC's change-in-ownership methodology may have further allocated the £100 million of
subsidy benefits between the seller and the purchaser so that, for that year, £40 million would be
allocated to the seller and £60 million would be allocated to the purchaser.
11. Notably, USDOC's approach to the changes in ow nership at issue in this dispute is consistent
with the approach suggested by Article 27.13 for WTO subsidy challenges under Part III of the SCM
Agreement, where the implied rule is that subsidies bestowed on a government-owned company's
production prior to privatization are actionable and remain allocable to the privatized company's
production.
12. During the first half of the three one-year periods of review ("PORs") at issue, which were the
years 1994, 1995 and 1996, the UES joint venture alone produced the subject merchandise. Thus,
after performing the analysis discussed abov e and applying USDOC's change-in-ownership
methodology, USDOC countervailed the portion of the subsidies originally bestowed on BSC's
production which were allocable to the production of the UES joint venture following its spin-off
from BSC. For the remainder of the review periods, when BS plc was the sole producer of the subject
merchandise (because it had re-acquired the UES joint venture), USDOC applied the same analysis,
including its change-in-ownership methodology, and countervailed the portion of the original BSC
subsidies that were allocable to BS plc production following BSC's privatization as well as the portion
of the original BSC subsidies that re-joined BS plc following BS plc's re-acquisition of UES.
13. Before this Panel, the EC attempts to discredit USDOC's approach to changes in ownership
essentially by urging the adoption of two rules which it views as being required by the SCM
Agreement. The first rule is that the investigating authority is required to identify and measure the
continuing benefit of a subsidy as of a point in time that may be years after its bestowal, such as when
the ownership of the subsidy recipient changes hands. The second rule, which would become relevant
only if the Panel were to accept the first rule, is that a change in ownership accomplished through an
arm’s length, fair market value transaction by definition eliminates all previously bestowed subsidies.
The EC explains that, as an economic matter, the purchaser has paid exactly what the subsidies are
worth at the time of the change-in-ownership transaction, and therefore it realizes no continuing

benefit -- or, in the EC's words, no continuing "commercially meaningful advantage" -- from the
subsidies within the meaning of Article 1.1(b) of the SCM Agreement.
14. In the EC's view, this approach is the only one that is permissible under the SCM Agreement.
15. The result in this dispute, under the EC’s s cenario, would be no allocation of subsidies to
either the UES joint venture or BS plc and therefore no levying of countervailing duties. When the
EC's proposed rules are applied to the record facts, the £7 billion of subsidies bestowed on BSC's
production by the UK Government simply vanish because the changes in ownership at issue took
place in arm’s length, fair market value transactions.
16. The EC’s argument is unsupportable, both in its failure to establish the relevant legal
prerequisites under the SCM Agreement and in the misplaced and inaccurate economic assumptions
on which it also depends.
17. Fundamentally, it is the provisions of the SCM Agreement that must determine whether the
USDOC determinations at issue are permissible. The EC, however, has offered no sound basis under
the SCM Agreement for overturning them.
18. The key legal point that the EC must demonstrate to support its proposed rules is that the
SCM Agreement requires the investigating authorit y to identify a subsidy "benefit" within the
meaning of Article 1.1.(b) not just as of the time of the original subsidy bestowal, but also a second
time -- here, as of the time of a change in ownership. In attempting to make this demonstration,
however, the EC does not focus on the ordinary mean ing of the provision dealing directly with the
identification of the subsidy benefit -- namely, Article 1.1 -- nor does it focus on the ordinary meaning
of Article 14, which provides context for Article 1.1 when it addresses the measurement of the
subsidy benefit. Instead, the EC seeks support for its proposed rules principally in what it views as
the object and purpose of the SCM Agreement, which it derives from Articles 10 and 19.4. The EC
(erroneously) states this object and purpose as the imposition of duties to offset the continuing subsidy
benefit received by the firm under investigation in a countervailing duty proceeding. The EC then
reads this object and purpose into Articles 1.1 and 14 as support for a requirement that the
investigating authority must re-identify a "benefit" as of a time that may be years after the bestowal of
the subsidy, such as when the ownership of a subsidized recipient changes hands.
19. In this dispute, the controlling legal principle is that the SCM Agreement only contemplates
that the investigating authority will identify a subsidy "benefit" under Article 1.1(b) once, as of the
time of the subsidy bestowal. The SCM Agreement does not require that the investigating authority
make this determination a second time, either gene rally or in the circumstances where the ownership
of the subsidy recipient has changed hands. The SCM Agreement simply does not envision the
investigating authority attempting to determine whether there exists a benefit on a continuing basis.
Rather, it contemplates that a subsidy bestowed on the production of, for example, lead bar will be
countervailable against lead bar imports until fully amortized, regardless of whether, how often or at
what price ownership of the subsidized production changes hands. For this reason, contrary to the
EC's position, USDOC's methodology does not violate the SCM Agreement by virtue of the fact that
it only identifies the benefit as of the time of the subsidy’s bestowal.
20. A careful review of the SCM Agreement shows that it simply does not dictate what
methodology USDOC must follow in accounting fo r subsidies bestowed prior to a change in
ownership. Rather, the SCM Agreement leaves the selection of an appropriate methodology largely
to the discretion of the Member's investigating authority.

21. Given these circumstances, USDOC permissibly dealt with a situation for which the SCM
Agreement provided no direct guidance. USDOC applied a methodology that is grounded in
fundamental SCM Agreement principles set forth in Article 1.1 and Article 14 and is consistent with
the real object and purpose of the SCM Agreement, which is to deter and offset trade-distorting
government subsidies benefiting merchandise and causing injury to an industry in an importing
country.
22. The SCM Agreement certainly does not require the competing approach advocated by the
EC, which calls for an examination of whether there exists any continuing benefit from the previously
bestowed subsidies as of the time when the ownership of the subsidy recipient changes hands. As
explained above, the SCM Agreement simply does not envision the investigating authority attempting
to determine whether there exists a benefit on a continuing basis.
23. Indeed, it is questionable whether the EC's approach is even permissible under the SCM
Agreement. By calling for an examination of whether a benefit exists on a continuing basis, the EC's
approach asks the investigating authority to inquire into the effects of subsidies. The SCM
Agreement, however, does not contemplate any inquiry into the effects of subsidies outside the
Article 15 “injury” context (in the case of a countervailing duty proceeding) or the Article 5 “adverse
effects” context (in the case of a WTO dispute). Indeed, if this Panel were to require the EC’s
proposed effects inquiry, it would be making a fundamental change in the SCM Agreement’s
approach to the identification of subsidies, and that change would seriously undermine the
effectiveness of the SCM Agreement's agreed disciplines on subsidies. If it became necessary to
establish a continuing benefit before imposing countervailing duties, as suggested by the EC's
argument, an importing Member's ability to remedy the trade distortions caused by another Member's
subsidies would be significantly circumscribed, given the difficulties inherent in any attempted
showing of the effect of a subsidy on the subsidy re cipient as of a time that may be years after its
bestowal.
24. Furthermore, independent of these legal infirmities, it bears noting that the economic
component of the EC’s argument is not only overly simplistic, but it is also, more fundamentally,
misplaced. Moreover, its is an economic component that the EC conspicuously ignores in its own
internal regime for disciplining subsidies. Constricted by the EC’s misinterpretation of the object and
purpose of the SCM Agreement as the imposition of duties to offset the continuing subsidy benefit
received by the firm under investigation in a countervailing duty proceeding, the EC’s economic
analysis adopts the wrong focus. It focuses on the purchaser and, in particular, the effects which an
arm’s length, fair market value privatization transaction has on the purchaser. The more appropriate
focus of any analysis of the economics of privatization should be on market distortions, in recognition
of the SCM Agreement’s basic object and purpose of deterring and offsetting trade-distorting
government subsidies benefiting merchandise and ca using injury to an industry in the importing
country. In a heavily subsidized industry like the steel industry, such things as excess capacity, often
brought on by the very same massive government subsidization which the EC assumes away, can
distort the market tremendously, both in terms of the value of firms and in terms of the price for
outputs. These distortions are not cured by an arm’s length, fair market value sale of a heavily
subsidized government-owned company.
25. Consequently, for all of these reasons, and as explained in more detail below, the Panel
should reject the EC’s challenge and find that the United States did not violate the SCM Agreement
when making the determinations at issue.
II. PROCEDURAL BACKGROUND
26. On 12 June 1998, the EC requested World Trade Organization ("WTO") consultations with
the United States regarding the imposition of countervailing duties in the context of three successive

administrative reviews of the countervailing duty order covering imports of lead bar products from the
United Kingdom .1
27. The three USDOC determinations at issue were (a) the final results of the third administrative
review of the countervailing duty order covering imports of lead bar products from the United
Kingdom, also known as the 1994 review, 2 (b) the final results of the fourth, or 1995, administrative
review,3 and (c) the final results of the fifth, or 1996, administrative review.4
28. In its consultations request, the EC stated that USDOC's determinations in the three reviews
constituted breaches of US WTO obligations under Articles 1.1(b), 10, 14 and 19.4 of the SCM
Agreement.
29. Consultations were held on July 29, 1998, but failed to settle the dispute.
30. On 14 January 1999, after the one round of consultations, the EC requested establishment of
a panel pursuant to Article 4 of the Understanding on Rules and Procedures Governing the Settlement
of Disputes ("DSU"), Article XXII:1 of the Ge neral Agreement on Tariffs and Trade 1994 ("GATT
1994") and Article 30 of the SCM Agreement. 5 In its panel request, the EC challenged the three
measures addressed by its consultations request -- USDOC’s determinations in the 1994, 1995 and
1996 administrative reviews of the countervailing duty order covering imports of lead bar from the
United Kingdom -- as well as one new measure, namely, USDOC’s 1993 decision to impose
countervailing duties as a result of its original investigation of UK lead bar imports, 6 which pre-dated
the coming into force of the Marrakesh Agreement Establishing the World Trade Organization

1 WT/DS138/1. Unlike the systems of some WTO Members, the United States uses a “retrospective”
assessment system under which final liability for countervailing duties is determined after merchandise is
imported. Generally, the amount of duties to be assessed is determined in an “administrative review” of the
countervailing duty order covering a discrete period of time, usually one year, known as the period of review, or
POR. Prior to a particular “administrative review,” the importer pays a non-final estimate of the duties based
either on the original countervailing duty investigation or a prior administrative review.
2 Final Results of Countervailing Du ty Administrative Review; Ce rtain Hot-rolled Lead and Bismuth
Carbon Steel Products from the United Kingdom , 61 Fed. Reg. 58377 (14 Nov. 1996) (cited herein as “ 1994
Review”) (attached as Ex. USA-1).
3 Final Results of Countervailing Du ty Administrative Review; Ce rtain Hot-rolled Lead and Bismuth
Carbon Steel Products from the United Kingdom , 62 Fed. Reg. 53306 (14 Oct. 1997) (cited herein as “ 1995
Review”) (attached as Ex. USA-2).
4 Final Results of Countervailing Du ty Administrative Review; Ce rtain Hot-rolled Lead and Bismuth
Carbon Steel Products from the United Kingdom , 63 Fed. Reg. 18367 (15Apr. 1998) (cited herein as “ 1996
Review”) (attached as Ex. USA-3).
5 WT/DS138 /3. In its panel request, the EC alleged violations of Articles 1.1(b), 10, 14, and 19.4 of
the SCM Agreement. However, in its first submission, the EC only alleged violations of Articles 10 and 19.4 of
the SCM Agreement. See, e.g., EC’s First Submission, para. 139.
6 USDOC’s final determination in the investigation of UK lead bar products -- the decision that lead to
the imposition of a countervailing duty order -- is found in Final Affirmative Countervailing Duty
Determination; Certain Hot-rolled Lead and Bismuth Carbon Steel Products from the United Kingdom , 58 Fed.
Reg. 6237 (27 Jan. 1993) (attached as Ex. USA-4). In ensuing litigation before the US Court of International
Trade, USDOC voluntarily reconsidered its final determination and modified its change-in-ownership
methodology to coincide with the methodology that it subsequently had used in the General Issues Appendix of
Final Affirmative Countervailing Duty Determina tion; Certain Steel Products from Austria , 58 Fed. Reg.
37217, 37269 (9 July 1993) (“General Issues Appendix”) (attached as Ex. USA-5). See Final Results of
Redetermination Pursuant to Court Remand in Inland Steel v. United States , Consol. Court No. 93-04000234
(CIT), dated 12 Oct. 1993, at 2-4 (“Remand Determination”) (attached as Ex. USA-6).

(“WTO Agreement”). The EC claimed that these four measures violated the WTO provisions cited in
its earlier consultations request.
31. On 25 January 1999, the EC submitted a “corrigendum” to its panel request in which it sought
to clarify the reasoning for its challenges to these measures.7
32. A panel was established at the meeting of the Dispute Settlement Body (“DSB”) held on
17 February 1999.
33. Standard terms of reference, incorporating the January 14 panel request and the 25 January
corrigendum, were established on 9 March 1999.
34. Brazil and Mexico have reserved their rights as third parties in this dispute.
35. The United States notes that, in its First Submission, the EC only challenges the final results
of the 1994, 1995 and 1996 administrative reviews. Although its panel request suggested that it was
also challenging the USDOC decision that lead to the imposition of the countervailing duty order, i.e.,
USDOC’s 1993 final determination, the EC has not done so, presumably because that decision pre-
dated the SCM Agreement and therefore cannot be challenged under the SCM Agreement. Under
these circumstances, the United States reserves the ri ght to object to any future challenge that the EC
may make to that decision in this proceeding.
III. FACTUAL BACKGROUND
A.
USDOC'S CHANGE-IN-OWNERSHIP METHODOLOGY8
36. In this case, USDOC used its change-in-ownership methodology to determine how to treat the
subsidies received by BSC prior to the various changes in ownership at issue, including its own
privatization. USDOC has explained the rationale for this methodology in some detail over the years,
with the fullest explanation being found in th e pre-Uruguay Round General Issues Appendix, 9 which
USDOC referenced and endorsed in the challenged, post-Uruguay Round administrative reviews.
37. USDOC’s change-in-ownership methodology is based on fundamental principles of the US
countervailing duty law, and these same principles are found in the SCM Agreement.
38. The starting premise of the methodology is that while subsidies are considered to be
“distortions in the market process for allocating an economy’s resources,” 10 it is neither required nor

7 WT/DS138/3/Corr. 1.
8 USDOC's change-in-ownership methodology is addressed in this section of the United States'
submission because it is an accepted principle of internatio nal law that municipal law and practice is a fact to be
proven before an international tribunal, such as this Panel. Case Concerning Certain German Interests in Polish
Upper Silesia [1926], PCIJ Rep., Series A, No. 7, at 19 (attached as Ex. USA-7); Case Concerning the Payment
in Gold of Brazilian Federal Loans Contracted in France [1929], PCIJ Rep., Series A, No. 15, at 124-25
(attached as Ex. USA-8). See also I. Brownlie, Principles of Public International Law , 4th ed. (Clarendon Press
1990), pp. 40-42 (attached as Ex. USA-9). Consequently, this Panel should review each party's presentation of
the relevant facts -- here, the United States' change-in-ownership methodology -- and be guided by the Appellate
Body's recent statement in the Wool Shirts case, i.e., "the party who asserts a fact, whether the claimant or the
respondent, is responsible for providing proof thereof." United States – Measures Affecting Imports of Woven
Wool Shirts and Blouses from India , WT/DS33/AB/R, Report of the Appellate Body, adopted 23 May 1997, at
16.
9 See note 6 supra.
10 General Issues Appendix, 58 Fed. Reg. at 37260.

feasible for the investigating authority to show how those distortions may have occurred in any
particular instance of subsidization. As USDOC explained in the General Issues Appendix, which
construed the US countervailing duty statute as it existed prior to the Uruguay Round,
[n]othing in the statute directs the Department to consider the use to which subsidies
are put or their effect on the recipient’s subsequent performance ... . Nothing in the
statute conditions countervailability on the use or effect of a subsidy. Rather, the
statute requires the Department to countervail an allocated share of the subsidies
received by producers, regardless of their effect.
11
39. Consequently, under US countervailing duty la w, USDOC identifies whether a "benefit"
exists once, which is as of the time of the alleged subsidy bestowal. Subsequent uses or effects of the
subsidy funds, or subsequent events in the marketplace, are irrelevant to this determination. As the
United States explains below in Part IV.B.1.a., Article 1.1 of the SCM Agreement reflects this same
approach.
40. Building on this principle, which continues to be applicable under the United States' post-
Uruguay Round countervailing duty law according to USDOC 12 and the US courts, 13 USDOC
reasons:

11 Id. At one point in its First Submission, the EC notes that the purpose of the US countervailing duty
law has been expressed as “to offset the unfair competitive advantage that foreign producers would otherwise
enjoy from export subsidies paid by their governments.” EC’s First Submission at 31 n.68 (quoting Zenith
Radio Corp. v. United States , 437 US 443 (1978)). The EC seems to use this quotation to suggest that US
countervailing duty law does, in fact, look into the actual effect of a subsidy on the subsidy recipient and,
specifically, into whether there exists a continuing benefit at some point after the subsidy’s bestowal. To the
contrary, however, as USDOC explains in the General Issues Appendix, neither the US Congress nor the courts
have ever required it to make an inquiry into the use or effect of a subsidy, and it does not do so. See General
Issues Appendix, 58 Fed. Reg. at 37260-61.
12 As is explained in Final Results of Redetermination Pursuant to Court Remand in Delverde, SrL v.
United States, Consol. Court No. 96-08-01997 (CIT), dated April 2, 1998, at 35-41 (“ Delverde Remand
Determination”) (attached as Ex. USA-10), although the requirement that a subsidy confer a “benefit” upon the
recipient in order to be countervailable was expressly incl uded in the US countervailing duty statute for the first
time following the Uruguay Round and the coming into force of the SCM Agreement, the requirement is not
new to US countervailing duty law. It has long been established as a fundamental principle of US
countervailing duty law that there must be a benefit, and USDOC has applied this principle in every
countervailing duty proceeding that it has ever conducted. Specifically, since USDOC began implementing the
US countervailing duty statute in 1980, USDOC through its practice has defined a “subsidy” as (a) an act or
practice of a foreign government, normally referred to as a “programme,” (b) which confers a “benefit” on the
recipient. A subsidy becomes a countervailable subsidy if it is also “specific” to an enterprise or industry or a
group of enterprises or industries, a concept which has been referred to as “selective treatment.” This definition
was set forth in Section 355.42 of USDOC’s first set of proposed substantive regulations in the countervailing
duty area, issued in 1989, which attempted to re-state USDOC’s practice up to that point. See Notice of
Proposed Rulemaking and Request for Public Comments (Countervailing Duties), 54 FR 23366, 23374 (31 May
1989) (“1989 Proposed Regulations ”) (emphasis added) (attached as Ex. USA-11). The term “benefit” was
defined, in turn, in Section 355.44 of the 1989 Proposed Regulations, although it did so by way of example
rather than through a generic statement, much like Article 14 of the SCM Agreement. Thus, this section
describes grants, below-market rate loans, equity infusions made on terms inconsistent with commercial
considerations, the provision of goods or services at preferential rates, and the like. See 1989 Proposed
Regulations, 54 FR at 23380-83. Following the Uruguay Round, USDOC continued to follow the same
requirement that a subsidy confer a benefit on the recipi ent, although this requirement now appeared in the US
countervailing duty statute itself (in Section 771(5)(B)), which had been amended to comply with the SCM
Agreement. The Statement of Administrative Action ("SAA") accompanying the amendments to the statute
explains this point:

[W]hether subsidies confer a demonstrable competitive benefit upon their recipients,
in the year of receipt or any subsequent year, is irrelevant -- the statute embodies the
irrebuttable presumption that subsidies confer a countervailable benefit upon goods
produced by their recipients.14
USDOC added that this "statutory presumption ... must, in order to have the intended effect, be
applied over a reasonable period of time," just as the Department "allocates non-recurring subsidies
over time in recognition of the fact that the statutory goal of providing a remedy against subsidies
would be defeated by allocating the subsidies to a single moment or year."
15
41. In other words, consistent with Article 14 of the SCM Agreement, the identified subsidy
"benefit" is measured as of the time that the government bestowed the subsidy, and the amount
thereby measured is fixed for purposes of applying USDOC's normal allocation methodology. It is
this fixed amount which is then allocated over time in accordance with USDOC's normal allocation
methodology. As USDOC explained, a subsequent event, such as the sale of a company, per se, does
not and cannot eliminate this potential countervailability because the US countervailing duty statute
does not permit the amount of the subsidy "benefit" to be re-evaluated based upon the use or effect of
the subsidy.16
42. In the General Issues Appendix, USDOC gave tw o examples to help explain this conclusion.
First, it stated that
if a government were to provide a specific producer with a smokestack scrubber in
order to reduce air pollution, the Department would countervail the amount that the
company would have had to pay for the sc rubber on the market, notwithstanding that
the scrubber may actually reduce the company’s output or raise its cost of
production.17
USDOC further stated:
Similarly, the Department does not take account of subsequent developments that
may reduce any initial cost savings or increase in output from a subsidy. For instance,
if a government provides a piece of capital equipment to a company, the Department
continues to countervail the value of that equipment as received, regardless of
whether it subsequently becomes obsolete or is taken out of production.
18

In general, the Administration intends that the definition of ‘subsidy’ will have the same
meaning that administrative practice and courts have ascribed to the term . . . ‘subsidy’ under
prior versions of the statute, unless that practice or interpretation is inconsistent with the
definition contained in the bill. Absent such inconsistency, . . . practices countervailable
under the current law will be countervailable under the revised statute.
SAA at 255 (emphasis added) (attached as Ex. USA-12). In its subsequent analysis of the elements of a
“subsidy,” the SAA does not identify any instances in which prior US practice is inconsistent with the “benefit”
requirement. It simply says that the statute “reflects the ‘benefit-to-the-recipient’ standard which long has been
a fundamental basis for identifying . . . subsidies under US CVD practice.” Id. at 257. Accord, 1994 Review, 61
Fed. Reg. at 58378-79.
13 See Delverde, SrL v. United States, 24 F. Supp. 2d 314 (CIT 1998) (“Delverde”) (Ex. USA-13).
14 General Issues Appendix, 58 Fed. Reg. at 37260.
15 Id. at 37261.
16 Id. at 37263.
17 Id. at 37261.
18 Id. (citation omitted).

43. Proceeding to the argument that the sale of a company automatically extinguishes prior
subsidies because “the fair market price must include any remaining economic benefit from the
subsidies,”19 which is the argument on which the EC’s challenges are based, USDOC carefully and
thoroughly considered it and then expressly rejected it. USDOC noted that this argument rests on the
assumption that subsidies must confer a demonstrated continuing benefit on production in order to be
countervailable.20 This assumption was contrary to the US countervailing duty statute, according to
USDOC, just as it is contrary to the SCM Agreement. As USDOC explained, the US countervailing
duty statute contains “the irrebuttable presumption that nonrecurring subsidies benefit merchandise
produced by the recipient over time,” without requiring any re-evaluation of those subsidies based on
the use or effect of those subsidies or subsequent events in the marketplace.21
44. The "irrebuttable presumption" concept, as used in this context, is simply a reference to
USDOC's normal allocation methodology. Under that methodology, which applies to so-called “non-
recurring” subsidies, 22 USDOC allocates the measured subsidy benefit over time, i.e., to future
production, pursuant to a standard declining balance formula that generates a net present value equal
to the amount of the subsidy. The period of time selected for this allocation is based on the subsidy
recipient's average useful life of assets. For example, in the administrative reviews at issue, USDOC
would have allocated -- or, essentially, amortized -- a £100 million grant over an 18-year period
running from the bestowal of the grant, with the following amounts allocated to each of the 18 years:23
Year Benefit
1 15,555,600
2 15,000,000
3 14,444,500
4 13,888,900
5 13,333,300
6 12,777,800
7 12,222,200
8 11,666,700
9 11,111,100
10 10,555,600
11 10,000,000
12 9,444,500
13 8,888,900
14 8,333,300
15 7,777,800
16 7,222,200
17 6,666,700
18 6,111,100

19 Id. at 37263.
20 Id.
21 Id.
22 The subsidies at issue in this dispute were quite large and were provided on an irregular basis and/or
required prior government approval for their disburse ment. USDOC’s practice is to allocate these types of
subsidies -- known as "non-recurring" subsidies -- over time. General Issues Appendix, 58 Fed. Reg. at 37226.
USDOC expenses certain other types of subsidies -- known as "recurring" subsidies -- in the year of receipt, i.e.,
subsidies that are provided on a regular basis and that are automatic, in that each subsidy is not conditioned on
prior government approval. Id.
23 For administrative ease, the United States has used a discount rate of 10 per cent in this example.

Essentially, by allocating the measured subsidy benefit over time, USDOC is irrebuttably presuming
that non-recurring subsidies benefit production over time. This means that USDOC does not
undertake an inquiry into whether and, if so, to what extent the subsidy continues to benefit
production at any subsequent point in time. Rather, USDOC simply will countervail the amount of
the subsidy originally allocated to the year that is the POR. In the above example, if year 10 were the
POR, USDOC would countervail a subsidy benefit equal to £10,555,600.
45. This type of allocation methodology is contemplated by the SCM Agreement, 24 and it is used
in various forms by other WTO Members, including the EC. 25 It also has been endorsed by an
Informal Group of Experts appointed by the Committee on Subsidies and Countervailing Measures.26
46. On the basis of these principles, USDOC affirmatively adopted the approach of treating non-
recurring subsidies previously provided to the se ller as potentially allocable to the production
transferred to the purchaser in a privatization or other change-in-ownership transaction, such as when
a government-owned company sells one of its productive units. At the same time, however, USDOC
needed to resolve the issue of whether, or under what circumstances, to allocate the prior subsidies to
the seller, to the purchaser, or to both the seller and the purchaser.
47. Historically, USDOC addressed this allocation issu e, in the first instance, in the privatization
context, when it considered specifically whether some portion of the prior subsidies should be
allocated to the seller (i.e. , the government) and considered to be repayment of the prior subsidies.
This particular inquiry was prompted by the fact that it has been USDOC’s longstanding practice
generally that subsidies can be extinguished by being repaid to the government.
27
48. On this issue, as the General Issues Appendix reflects, some parties had argued that
“privatization at fair market value necessarily constitutes repayment of the residual value of any
remaining benefit.”
28 Other parties had argued that privatization per se does not eliminate any of the
prior subsidies. Still others had made an argument that fell in between these two positions, with their
position being that some portion of the remaining value of the prior subsidies should be treated as
offset by the purchase price paid by the new owner. 29 USDOC adopted this last approach, as it was
consistent with its past practice. USDOC explained:
As part of our administration of the law, we have determined that there must be an
allowance for the repayment of prior subsidies. ... In the context of privatization, we
have concluded that a payback to the government by the new company or its owners
(which we regard essentially as one and the same in these circumstances), regardless
of how it is patterned, can indeed repay at least some amount of the subsidies
remaining..
30

24 See, e.g., SCM Agreement, Annex IV, para. 7.
25 See, e.g., Guidelines for the Calculation of the Amount of Subsidy in Countervailing Duty
Investigations, published in the Official Journal of the European Communities at OJ C 394, 17.12.98, and
notified to the Committee on Subsidies and Countervailing Measures in document G/SCM/N/1/EEC/2/Suppl.2
(8 January 1999) (“EC Countervailing Duty Regulations”) (attached as Ex. USA-14).
26 See G/SCM/W/415/Rev.2.
27 See General Issues Appendix, 58 Fed. Reg. at 37261.
28 Id. USDOC rejected this argument, as it again was premised on an assessment of the value of the
prior subsidies -- or, in other words, the continuing “competitive benefit” from the prior subsidies -- as of the
time of the privatization transaction. Id.
29 Id. at 37261.
30 Id. at 37264 (citation omitted).

49. The problem that USDOC faced at this point was how to calculate the portion of the purchase
price attributable to the repayment of prior subsid ies. The most reasonable starting point in this
analysis was to determine the percentage of the company’s value attributable to prior subsidies.
Unfortunately, there is no economic analysis available that can identify the percentage of a company’s
value attributable to prior subsidies.31 Certainly, however, given that the purchaser was paying for the
entire company, at least some portion of the comp any’s value, however large or small, realistically
could be attributable to prior subsidies.
50. Absent guidance in the US countervailing duty statute (or the GATT Subsidies Code, which
was then in force), USDOC resolved this problem by developing a calculation which yields a
reasonable estimate of the percentage of the company’s value attributable to prior subsidies. In the
context of a privatization, this calculation essentially divides the amount of non-recurring subsidies 32
received by the company prior to privatization by the company’s net worth over time in order to
obtain the percentage of the company’s value reasonably attributable to prior subsidies. USDOC then
multiplies this percentage by the purchase price to obtain the amount of the purchase price
representing the portion of prior subsidies allocable to the seller. In other words, if the ratio of non-
recurring subsidies to net worth is 75 per cent, USDOC will allocate subsidies totalling 75 per cent of
the purchase price to the seller. Because the seller is the government, this allocated amount is
considered to be repaid to the government and, therefore, extinguished. The remainder of the prior
subsidies, meanwhile, is allocable to the production transferred to the purchaser and remains
countervailable.
51. It bears noting that the universe of subsidy funds that can be allocated between the seller and
the purchaser under USDOC's change-in-ownership methodology is not in any way based upon a re-
valuing of prior subsidies. Rather, the universe of subsidy funds equals the same amount of prior
subsidies already allocated to the POR under USDOC’s normal methodology for allocating non-
recurring subsidies over time. USDOC's change-in-ownership methodology further apportions that
amount between the seller and the purchaser.
52. When USDOC first adopted this approach, it explained:
The estimate so obtained of the proportion of prior subsidies repaid through
privatization is the most reasonable that we have been able to devise. Although the
“all-or-nothing” alternatives proposed by respondents and petitioners avoid difficult
allocation problems inherent in the Department’s approach, they are dependent on
assumptions which we believe are incorrect.
33
53. The methodology developed by USDOC theoretically can result in the full pass through of
benefits from prior subsidies, or absolutely no pass through of benefits, or anything in between,
depending on the facts of a particular case. Th is aspect of USDOC’s methodology was noted and
endorsed by the US Court of Appeals for the Federal Circuit when it stated: “Commerce’s

31 Arguably, an extensive econometric analysis could accomplish this task. However, at best, it would
be administratively infeasible to undertake this type of analysis in a countervailing duty proceeding, given the
tight time deadlines appearing in Articles 11.11 and 21.4 of the SCM Agreement. At worst, it would be an
expensive, resource-intensive exercise that would still be subjective and not necessarily any more accurate
32 USDOC’s change-in-ownership methodology only applies to non-recurring subsidies, which, as is
explained in note 22 above, are allocated over time. It does not apply to recurring subsidies because they are
expensed in the year of receipt.
33 Id. at 37263.

methodology correctly recognizes that a number of scenarios are possible: the purchase price paid by
the new private company might reflect partial repayment of the subsidies, or it might not.”34
54. When this approach is applied to a spin-off rather than a full privatization, such as the
transaction creating the UES joint venture, there is no “extinguishment” of prior subsidies. Instead,
the full amount of the prior subsidies allocated between seller and purchaser remains countervailable,
although what actually will be countervailed in a particular case depends on whether the seller or the
purchaser, or both, are under investigation. For example, if USDOC investigates subsidies benefiting
a government-owned company -- the seller -- which has spun off a productive unit, USDOC will
countervail, inter alia, the portion of the prior subsidies which has been allocated to the seller
pursuant to the formulas which it has developed.
35 Or, if USDOC is investigating the purchaser of the
productive unit, it will countervail the portion of the prior subsidies allocated to the purchaser, as it
did, in effect, with regard to the UES joint ventur e transaction in the three challenged administrative
reviews.
55. USDOC’s methodology applies regardless of how high or how low the purchase price might
be. USDOC's methodology is designed to use what ever the purchase price turns out to be. The
amount of the purchase price simply affects the allocation of subsidies between seller and purchaser.
Consequently, it is not relevant, from a methodolog ical standpoint, whether the purchase price is at
fair market value or above or below fair market value.36
56. To date, the US courts have upheld USDOC’s methodology under pre-Uruguay Round law,
both in the context of privatization, where USDOC found repayment to the government, 37 and in the
context of spin-offs, where USDOC allocated subsidy amounts to the seller and the purchaser, without
any repayment to the government. 38 These holdings also have been extended by the US courts to
post-Uruguay Round law.39
57. The US courts have expressly rejected the argument, put forth by the EC here, that “the arm’s
length sale of a [government-owned] company extinguished any remaining ‘competitive benefit’ from
the prior subsidies, because the price presumably included the market value of any continuing

34 Saarstahl AG v. United States , 78 F.3d 1539, 1544 (Fed. Cir. 1996) (“ Saarstahl II ”) (attached as
Ex. USA-15).
35 See General Issues Appendix, 58 Fed. Reg. at 37269 (in Swedish and UK steel investigations, Final
Affirmative Countervailing Duty Determinati ons; Certain Steel Products from Sweden , 58 Fed. Reg. 37385
(9 July 1993) (attached as Ex. USA-16), and Final Affirmative Countervailing Du ty Determination; Certain
Steel Products from the United Kingdom , 58 Fed. Reg. 37393 (9 July 1993) (“ UK Steel Final Determination ”)
(attached as Ex. USA-17), where the respondent was a government-owned company that had spun off a
productive unit, USDOC allocated a portion of the prior subsidies to the spun-off productive unit and the
remainder to the government-owned company and, then, countervailed the portion allocated to the government-
owned company, the company that happened to be under investigation).
36 As USDOC explained in the General Issues Appendix:
Given the Department’s methodology, petitioners’ and respondents’ concerns regarding
whether or not the sale ... was at a fair market price are irrelevant. To the extent that the
purchase price may have been lower than the offer made by a different bidder,
correspondingly less of any pre-existing subsidies were repaid.
58 Fed. Reg. at 37264.
37 See British Steel plc v. United States , 127 F.3d 1471 (Fed. Cir. 1997) (“ British Steel”) (attached as
Ex. USA-18); Saarstahl II, supra.
38 See Inland Steel Bar Co. v. United States , 86 F.3d 1174 (Fed. Cir. 1996) (per curiam) (citing
Saarstahl II rationale) (attached as Ex. USA-19).
39 See Delverde, supra.

competitive benefit.”40 The courts have explained that this argument is based on a faulty premise,
namely, that “subsidies may not be countervailed unless they confer a demonstrable competitive
benefit upon the merchandise exported to the United States.” 41 The courts rejected any notion that it
was proper for USDOC to re-evaluate subsidy benefits based on the use or effect of the subsidies. As
one court stated,
the statute makes clear that Congress did not require Commerce to determine the
effect of the subsidy once bestowed. Indeed, Congress has expressed the contrary
view that “an ‘effects’ test for subsidies has never been mandated by the law and is
inconsistent with effective enforcement.” North American Free Trade Agreement
Implementation Act, S. Rep. No. 189, 103d Cong., 1st Sess. 42 (1993). It would be
“burdensome and unproductive for the Department of Commerce to attempt to trace
the use and effect of a subsidy demonstrated to have been provided to producers of
the subject merchandise.” Id. at 42-43.42
Consequently, according to the US courts, an arm’s length transaction, at fair market value, does not
automatically extinguish previously bestowed subsidies because the US countervailing duty statute
does not make the existence of a continuing “competitive benefit” a condition of countervailability.43
58. The US courts have identified what is necessary in order for USDOC to impose
countervailing duties on a company after its ownership has changed hands. According to the US
courts, USDOC is authorized to impose duties on th e showing that two statutory requirements are
satisfied: “(1) a subsidy is provided with respect to the manufacture, production, or sale of a class or
kind of merchandise; and (2) a domestic industry is injured by reason of imports into the
United States of that class or kind of merchandise.” 44 In other words, with regard to the “subsidy”
requirement, it is only necessary for the investig ating authority to establish that a subsidy was
bestowed on the company's production prior to the change in ownership, i.e., that there was a
“financial contribution” which thereby conferred a “benefit.” There is no requirement to identify a
continuing “competitive benefit” after ownership of the company changes hands.45
59. Even though several of the relevant US court decisions construed the pre-Uruguay Round
countervailing duty statute, those decisions continue to be applicable under the post-Uruguay Round
statute. None of the provisions added to th e US statute to reflect the Uruguay Round’s SCM
Agreement altered the principles on which USDOC’s original methodology was based.46

40 Saarstahl II , 78 F.3d at 1541 (citing Saarstahl AG v. United States , 858 F. Supp. 187, 193 (CIT
1994)).
41 Id. at 1543.
42 Id.
43 Id.
44 Id. (citing 19 U.S.C. § 1671(a)).
45 Id.
46 See Delverde, 24 F. Supp. 2d at 315-17. Accord, Delverde Remand Determination at 26-34, 34-35.
One provision in the post-Uruguay Round statute specifically addressed changes in ownership. That provision,
Section 771(5)(F), states:
A change in ownership of all or part of a foreign enterprise or the productive assets of a
foreign enterprise does not by itself require a determination by the administering authority that
a past countervailable subsidy received by th e enterprise no longer continues to be
countervailable, even if the change in ownership is accomplished through an arm's length
transaction.
Section 771(5)(F), like the SCM Agreement, does not dictate any particular approach that USDOC must follow
in addressing a change in ownership. It only acts to preserve the ability of USDOC to exercise its discretion.

60. Recognizing this fact, the one US court to have addressed the issue has held that USDOC’s
methodology is consistent with the post-Uruguay Round statute.47
61. Although the US court decisions discussed above are in no way binding on a WTO panel,
they may be useful to the Panel to consider, given that they represent an independent interpretation of
a countervailing duty law that is indistinguishable from the SCM Agreement in the areas relevant to
this matter.48
62. Indeed, a review of the negotiating history of the SCM Agreement shows that the
United States promoted language regarding the subsidy "benefit" which reflected USDOC's pre-
Uruguay Round practice. It was substantially identical language that was adopted and now appears in
the SCM Agreement as well as in the post-Uruguay Round US countervailing duty statute.49
B. THE CHANGES IN OWNERSHIP
63. Below, the United States sets forth the basic facts surrounding the three changes in ownership
which are the subject of the EC’s challenges, i.e., the 1986 transaction spinning off a major portion of
BSC’s Special Steels Business to the UES joint venture, the 1988 transaction in which BSC was
privatized, and the 1995 transaction in which the priv atized BSC, known as BS plc, re-acquired full
ownership of the UES joint venture.
1. The 1986 Spin-off Creating the UES Joint Venture
64. In 1986, government-owned BSC and a private company, Guest, Keen & Nettlefolds
(“GKN”), entered into an arm’s length transaction and formed a joint venture company, to be known
as United Engineering Steels or UES. In retu rn for shares in UES, BSC contributed lead bar-
producing assets from its Special Steels Business, along with certain other assets. Similarly, GKN
contributed various steel facilities and other assets in return for UES shares.
50
65. USDOC treated this transaction as a change in ownership for various reasons. For one thing,
BSC did not retain a controlling interest in the UES joint venture; both BSC and GKN held 50 per
cent of the voting shares. In addition, various circumstances surrounding the management and
operation of the joint venture indicated that BSC did not dominate GKN. Rather, the UES joint
venture was an independent corporate entity.51
66. Following this transaction, BSC itself no longer produced the subject merchandise. Only the
UES joint venture produced it.52

The US Congress enacted this provision in order to over turn the precedent (temporarily) established by a lower
court decision construing pre-Uruguay Round US countervailing duty law, in which the lower court had
mandated that USDOC find that an arm’s length transaction, in and of itself, precludes any pass-through of
subsidies to the purchaser. (It was this lower court decision that was overturned on appeal in Saarstahl II.) See
id. at 53.
47 See Delverde, supra.
48 See note 12 supra.
49 See MTN.GNG/NG10/W/29 at 6 (22 November 1989) (att ached as Ex. USA-20) (discussed in 1 The
GATT Uruguay Round: A Negotiating History (1986-1992) at 861, 892 (1993) (attached as Ex. USA-21)).
50 See 1996 Review, 63 Fed. Reg. at 18368; 1995 Review, 62 Fed. Reg. at 53308-09; 1994 Review, 61
Fed. Reg. at 58378; Remand Determination at 7; Final Determination, 58 Fed. Reg. at 6238, 6240.
51 See Remand Determination at 7; Final Determination, 58 Fed. Reg. at 6240.
52 See 1994 Review, 61 Fed. Reg. at 58378, 58383; Final Determination, 58 Fed. Reg. at 6240.

2. The 1988 Privatization of BSC
67. The next change-in-ownership transaction took place two years later in 1988. At that time,
the UK Government fully privatized BSC at a price of £2.5 billion, with the privatized company being
known as BS plc.53
68. Following this transaction, as before, the independent UES joint venture continued to produce
the subject merchandise. BS plc did not produce the subject merchandise until it re-acquired the UES
joint venture in 1995.
3. The 1995 Re-acquisition of the UES Joint Venture
69. The last relevant change in ownership took place in 1995. At that time, the privatized
company, BS plc, acquired full ownership of the UES joint venture. Until then, BS plc had only held
a partial ownership interest in the UES joint venture (which it had assumed when BSC was privatized
into BS plc in 1988). Thus, the UES joint venture became a wholly owned subsidiary of BS plc, and
it was re-named British Steel Engineering Steels (“BSES”).
54
70. Following this transaction, the producer of the subject merchandise was BS plc, through
BSES, now a wholly owned subsidiary of BS plc.
C. USDOC'S DETERMINATIONS IN THE 1994, 1995 AND 1996 REVIEWS
71. In the administrative reviews at issue, USDOC followed the general approach contemplated
by the SCM Agreement for deriving the subsidy am ount allocable to the POR out of the more than
seven billion pounds of UK Government subsidies that had been bestowed on BSC. 55 Thus, USDOC
first identified the existence of potentially countervailable subsidies in accordance with Article 1.
Next, USDOC measured the subsidy amounts consistent with the guidelines set forth in Article 14.
Then, USDOC allocated those subsidy amounts over a period of years.
72. USDOC identified the existence of countervailable subsidies by looking only at the
circumstances as they existed when the UK Government provided the subsidies at issue. USDOC
began this task by referring to the investigation segment of the proceeding and noting that it had
previously determined -- meaning in the original lead bar investigation -- that subsidies under three
programmes had been bestowed. The three programmes were (a) Equity Infusions, (b) Regional
Development Grant Programme, and (c) National Loan Fund (or NLF) Loan Cancellation. 56 USDOC

53 See 1996 Review, 63 Fed. Reg. at 18368; 1995 Review, 62 Fed. Reg. at 53307.
54 See 1996 Review, 63 Fed. Reg. at 18368-69; 1995 Review, 62 Fed. Reg. at 53307-08.
55 USDOC’s practice is to calculate the per-unit subsidy rate essentially by dividing the amount of the
subsidy by the subsidized firm's sales. Specifically, in the numerator of this calculation, USDOC places the
total amount of the subsidy allocable to the POR. In the denominator, USDOC places the appropriate portion of
the firm's sales. In order to determine the appropriate sales to place in the denominator, USDOC undertakes its
so-called “tying” analysis. For example, a subsidy may be “tied” to a particular product; in that event, USDOC
would place only sales of that product in the denominator. If a subsidy is “untied,” USDOC would place the
firm's total sales in the denominator.
56 See 1996 Review, 63 Fed. Reg. at 18369-70; Preliminary Results of Administrative Review; Certain
Hot-rolled Lead and Bismuth Carbon Steel Products from the United Kingdom , 62 Fed. Reg. 64568, 64570-71
(8 December 1997) (“1996 Preliminary Results ”) (attached as Ex. USA-22); 1995 Review , 62 Fed. Reg. at
53308; Preliminary Results of Administrative Review; Certain Hot-rolled Lead and Bismuth Carbon Steel
Products from the United Kingdom, 62 Fed. Reg. 16555, 16558-59 (7 April 1997) (“ 1995 Preliminary Results”)
(attached as Ex. USA-23); 1994 Review, 61 Fed. Reg. at 58378; Preliminary Results of Administrative Review;

also noted that a fourth subsidy programme, i. e., ECSC Article 54 Loans and Interest Rebates 57, had
been identified in the investigation of Certain Steel Products from the United Kingdom ,58 which had
taken place shortly after the lead bar investigation. USDOC then found that no new information had
been presented in the 1994, 1995 and 1996 reviews -- ag ain, with regard to the events at the time of
the subsidy bestowals -- and, accordingly, did not change the determinations in the original lead bar
and steel investigations that countervailable subsidies had been bestowed.
73. As the record evidence showed, all of th e subsidies provided to BSC under these four
programmes pre-dated the first change-in-ownership transaction, which was the spin-off of the UES
joint venture from BSC in 1986.
74. Pursuant to Section 18(1) of the Iron and Steel Acts of 1975, 1981 and 1982, the UK
Government, through the Secretary for Trade and Indus try, provided "financial contributions" within
the meaning of Article 1.1(a) by making equity infusions into BSC. The UK Government made these
infusions in every fiscal year from 1977-78 through 1985-86. USDOC found each of the infusions to
confer a "benefit" within the meaning of Article 1.1(b) because they were inconsistent with
commercial considerations, i.e., they were inconsistent with the usual investment practice of private
investors, as of the time of each of the infu sions. USDOC also found that the infusions were
"specific" within the meaning of Articles 1.2 and 2 because BSC was the sole recipient of infusions
under this programme.
59
75. BSC received financial contributions in the form of outright grants under the Regional
Development Grant Programme between fiscal years 1977-78 and 1984-85. USDOC identified the
benefit here simply as the amount of the grant, and it found the grants to be regionally specific.60
76. The UK Government also made financial contributions by cancelling BSC’s NLF loans,
together with accrued interest thereon, at the end of BSC’s 1980-81 fiscal year as part of a capital
reconstruction of BSC. USDOC treated these loan cancellations as equivalent to grants, and therefore
the benefit was the amount of the forgiven principal and interest. These loan cancellations were
specific because the UK Government only cancelled loans to BSC.
61
77. The EC provided financial contributions to BSC in the form of two ECSC Article 54 loans in
1977, along with a series of interest rebates. USDOC found a benefit from the loans because the
terms of the loans were inconsistent with commercial considerations. Specifically, after accounting
for the interest rebates, the interest rates on the loans were lower than the benchmark interest rate
prevailing in 1977 for uncreditworthy62 companies like BSC. USDOC treated these loans as specific
because the EC only provided them to the coal and steel industries.63

Certain Hot-rolled Lead and Bismuth Carbon Steel Products from the United Kingdom , 61 Fed. Reg. 20238,
20239-41 (6 May 1996) (“1994 Preliminary Results”) (attached as Ex. USA-24).
57 1995 Review , 62 Fed. Reg. at 53308; 1995 Preliminary Results , 62 Fed. Reg. at 16559; 1994
Review, 61 Fed. Reg. at 58378; 1994 Preliminary Results, 61 Fed. Reg. at 20241.
58 See UK Steel Final Determination, 58 Fed. Reg. at 37397.
59 1996 Preliminary Results , 62 Fed. Reg. at 64570; 1995 Preliminary Results , 62 Fed. Reg. at 16558;
1994 Preliminary Results, 61 Fed. Reg. at 20239. See Final Determination, 58 Fed. Reg. at 6242.
60 1996 Preliminary Results , 62 Fed. Reg. at 64570; 1995 Preliminary Results , 62 Fed. Reg. at 16558-
59; 1994 Preliminary Results, 61 Fed. Reg. at 20241. See Final Determination, 58 Fed. Reg. at 6242.
61 1996 Preliminary Results , 62 Fed. Reg. at 64570-71; 1995 Preliminary Results , 62 Fed. Reg. at
16559; 1994 Preliminary Results, 61 Fed. Reg. at 20241. See Final Determination, 58 Fed. Reg. at 6242.
62 Under USDOC's practice, a company is generally considered "uncreditworthy" if the information
available at the time that the terms of the government's loan were agreed upon indicated that the recipient
company could not have obtained long-term financing from conventional commercial sources. USDOC

78. None of these findings are challenged by the EC in this dispute.
79. Next, USDOC measured the benefits from these subsidies.
80. For the UK Government equity infusions, USDOC looked to the usual investment practice of
private investors as of the time of each of the infu sions, just as it did when identifying the benefit of
the infusions. USDOC found that a reasonable private investor would not have made the infusions
which the UK Government made, given that BSC was unequityworthy64 when it received each of the
infusions. USDOC therefore treated the infusions as equivalent to outright grants and measured the
benefit as the entire amount of the infusions.65
81. USDOC measured the benefits from the grants under the Regional Development Grant
Programme simply by using the face amounts of the grants.66
82. With regard to the NLF loan cancellations, USDOC treated them as grant equivalents and
measured the benefits as the face amounts of the principal and interest that had been cancelled.67
83. USDOC measured the benefits from the ECSC Article 54 loans and interest rebates as the
difference between the actual, effective interest rates on the loans and the benchmark interest rate
prevailing in 1977 for uncreditworthy companies like BSC.68
84. Again, none of these findings are challenged by the EC in this dispute.
85. The next step under USDOC’s practice was to allocate the benefits from these various
subsidies over time, 69 i.e., to future production. 70 Here, USDOC applied its standard allocation
methodology, which, under the facts in the record, required allocating the benefits from each subsidy

generally will select a higher benchmark interest rate, for use in assessing whether the government loan at issue
confers a benefit, when the recipient company is uncreditworthy as opposed to creditworthy
63 1995 Preliminary Results, 62 Fed. Reg. at 16559; 1994 Preliminary Results, 61 Fed. Reg. at 20241.
See UK Steel Final Determination, 58 Fed. Reg. at 37397.
64 When, as here, a market price for the shares purchased by the government was not available,
USDOC conducts a test to determine whether the compan y at issue was "equityworthy" at the time that the
government purchased the shares. Under this test, if the company were deemed equityworthy, i.e., it appeared
capable of generating a reasonable rate of return within a reasonable period of time, the government infusion of
equity through the purchase of the shares would not confer a benefit. A finding that the company was
unequityworthy would mean that the government's investment was inconsistent with the usual investment
practice of private investors, and USDOC would find a benefit conferred.
65 1996 Preliminary Results , 62 Fed. Reg. at 64570; 1995 Preliminary Results , 62 Fed. Reg. at 16558;
1994 Preliminary Results, 61 Fed. Reg. at 20239. See Final Determination, 58 Fed. Reg. at 6242.
66 1996 Preliminary Results , 62 Fed. Reg. at 64570; 1995 Preliminary Results , 62 Fed. Reg. at 16558-
59; 1994 Preliminary Results, 61 Fed. Reg. at 20241. See Final Determination, 58 Fed. Reg. at 6242.
67 1996 Preliminary Results , 62 Fed. Reg. at 64570-71; 1995 Preliminary Results , 62 Fed. Reg. at
16559; 1994 Preliminary Results, 61 Fed. Reg. at 20241. See Final Determination, 58 Fed. Reg. at 6242.
68 1995 Preliminary Results, 62 Fed. Reg. at 16559; 1994 Preliminary Results, 61 Fed. Reg. at 20241.
See UK Steel Final Determination, 58 Fed. Reg. at 37397.
69 See Part III.A., paras. 43-45 supra.
70 As a preliminary matter, USDOC had first recognized that all of the subsidies at issue were for the
benefit of BSC's entire UK operations. As the EC concedes, the subsidies received by BSC were not restricted
to particular UK units of BSC, but rather benefite d and therefore were attributable to BSC’s entire UK
operations. Consequently, USDOC's allocation analysis focused on the future production of BSC’s entire UK
operations rather than some subset thereof.

over an 18-year period, measured from the year of the subsidy’s bestowal.71 This allocation created a
separate 18-year benefit stream for each subsidy, with the appropriate portions of the subsidy benefit
being allocated to each of the 18 years pursuant to a standard declining balance formula. Generally,
the amount allocated to the year that is the POR is what USDOC will allocate to exports of the subject
merchandise and will countervail in the POR.
86. Again, the EC does not challenge how USDOC applied its normal allocation methodology to
the record facts.
87. In its final step, USDOC accounted for the changes in ownership at the core of this dispute.
Here, USDOC applied a second allocation methodolo gy, i.e., its change-in-ownership methodology,
described above in Part III.A. Because the subsidies at issue had already been identified and
measured, USDOC did not inquire into whether the subsidies at issue continued to exist, and it did not
attempt to re-value any of the subsidies. Inst ead, for each subsidy, USDOC essentially took the
amount already allocated to each year of the 18-year allocation period falling after the change in
ownership and further apportioned that amount between the seller and the purchaser. This
computation did not reduce the aggregate amount already allocated to any given year; rather, the total
of the amount allocated to the seller and the amount allocated to the purchaser in a given year
equalled the aggregate amount already allocated to that year. The amount actually countervailed in
the POR could only be considered reduced as a result of the change in ownership in the sense that the
amount apportioned to the purchaser and therefore countervailed was less than the aggregate amount
88. For the 1994 POR, when the UES joint venture was the sole producer of the subject
merchandise, the only relevant change in ownership was the 1986 spin-off of lead bar-producing
assets of BSC's Special Steels Business to the UES joint venture.
72 USDOC therefore only addressed
the UES joint venture and, specifically, what subsid ies could be attributed to the UES joint venture
following its 1986 spin-off from BSC under USDOC's change-in-ownership methodology.
89. USDOC began its analysis of the spin-off by establishing the pro rata share of the massive
subsidies previously bestowed on BSC that were attributable to BSC's Special Steels Business, as
opposed to other BSC operations, prior to the spin-off. Then, USDOC applied its change-in-
ownership methodology and allocated a portion of the subsidies attributable to the Special Steels
Business (57 per cent of them) to the UES joint venture, while the remaining portion of these
subsidies (43 per cent) was allocated to BSC. US DOC arrived at its allocation between seller (BSC)
and purchaser (the UES joint venture) pursuant to the calculation described in the General Issues
Appendix.
73
90. Overall, in the 1994 review, USDOC countervail ed only the portion of the prior subsidies
allocated to the UES joint venture through USDOC’s change-in-ownership methodology.

71 In the final determination and the 1994 review, USDOC applied a 15-year allocation period. See
Final Determination , 58 Fed. Reg. at 6245. Beginning with the 1995 review, USDOC revised the allocation
period upward to 18 years because of decisions of the US Court of International Trade in the litigation arising
out of the UK Steel final determination, which required USDOC to base the allocation period on the average
useful life of assets for BSC, as calculated from BSC's financial statements. See 1995 Review , 62 Fed. Reg. at
53315-16.
72 USDOC had no reason to address the 1988 privatization of BSC, given that BSC at the time of that
transaction and through the 1994 POR did not produce the subject merchandise. Any subsidization of BSC or
its successor, BS plc, from the time of the 1986 spin-off of the UES joint venture through the 1994 POR had no
impact on how the UES joint venture -- the entity producing the subject merchandise in 1994 -- was benefiting
from prior subsidies. BS plc’s 1995 re-acquisition of the UES joint venture was also not relevant, given that this
transaction took place after the 1994 POR.
73 1994 Review , 61 Fed. Reg. at 58378; 1994 Preliminary Results , 61 Fed. Reg. at 20239-41. See
Remand Determination at 2-4.

91. USDOC ultimately set duties on the UES joint venture’s lead bar imports at the rate of 1.69
per cent ad valorem for the 1994 review.74
92. The 1995 review was divided into two parts, as the UES joint venture continued to be the sole
producer of the subject merchandise for the first half of 1995, and then BS plc became the sole
producer of the subject merchandise for the remainder of 1995 after it re-acquired the UES joint
venture.
93. For the first part of the 1995 POR, USDOC coun tervailed the portion of the prior subsidies
allocated to the UES joint venture as a result of the 1986 spin-off, just as it had in the 1994 review.
94. Then, in addressing the remainder of the 1995 POR, when BS plc was the sole producer of the
subject merchandise, USDOC examined all three of the changes in ownership at issue.
95. First, USDOC handled the 1986 spin-off of the UES joint venture, just as it did in the 1994
review and the first part of the 1995 review, and al located a portion of the prior subsidies to the UES
joint venture. Second, setting aside those allocated subsidies, USDOC turned to the 1988
privatization of BSC and applied basically the same methodology that it had used for the 1986 spin-
off of the UES joint venture. Here, USDOC was working with all of the subsidies previously
bestowed on BSC, with the exception of the subsidy amounts earlier allocated to the UES joint
venture. In other words, it was working with the 43 per cent of the prior subsidies that had been
allocated to BSC (as explained in paragraph 89 above) in connection with the spin-off of the UES
joint venture. Using the calculation that it had developed in the General Issues Appendix, USDOC
allocated a portion of these subsidies (74 per cent of them) to the purchaser, BS plc, and it allocated
the remaining portion of these subsidies (26 per cent) to BSC’s seller, the UK Government. The
portion allocated to the UK Government was consider ed to have been repaid to the government and
therefore no longer subject to countervailing duties.
75 Third, turning to BS plc’s 1995 re-acquisition
of the UES joint venture, USDOC considered only the subsidies previously allocated to the UES joint
venture after its creation in 1986, i.e., 57 per cent of the original BSC subsidies (as explained in
paragraph 89 above). Following its change-in-ownership methodology, USDOC allocated a portion
of these subsidies (92 per cent) to the purchaser, BS plc, and it allocated the remaining portion of
these subsidies (8 per cent) to the sellers.76
96. Overall, for the last half of the 1995 POR, when BS plc was the sole producer of the subject
merchandise, USDOC countervailed (a) the prior subsidies allocated to BS plc as a result of the 1988
privatization of BSC and (b) the portion of the prio r subsidies allocated to the UES joint venture after
its creation in 1986, minus that portion of those subsidies which was later allocated to GKN as a result
of BS plc’s 1995 re-acquisition of the UES joint venture.
97. Ultimately, for the 1995 review, USDOC set duties on the UES joint venture’s lead bar
imports at the rate of 2.40 per cent ad valorem and set duties on BS plc’s lead bar imports at the rate
of 7.35 per cent ad valorem.77
98. In the 1996 POR, BS plc continued to be th e only producer of the subject merchandise.
USDOC therefore followed the same approach that it had used for the last part of the 1995 POR.78

74 1994 Review, 61 Fed. Reg. at 58378, 58383.
75 1995 Review, 62 Fed. Reg. at 53308-09; 1995 Preliminary Results, 62 Fed. Reg. at 16556-58.
76 1995 Review, 62 Fed. Reg. at 53308-09; 1995 Preliminary Results, 62 Fed. Reg. at 16556-58.
77 1995 Review, 62 Fed. Reg. at 53308, 53317.
78 1996 Review, 63 Fed. Reg. at 18368-69; 1996 Preliminary Results, 62 Fed. Reg. at 64568-70.

99. USDOC ultimately set duties on BS plc’s lead bar imports at the rate of 5.28 per cent ad
valorem for the 1996 review.79
IV. LEGAL ARGUMENT
100. The United States submits that the EC has failed to carry its burden of establishing that the
United States violated Articles 1.1(b), 10, 14 or 19.4 of the SCM Agreement through USDOC’s
determinations in the 1994, 1995 and 1996 administrative reviews of the countervailing duty order on
UK lead bar products.
80 In its First submission, the EC attempts to satisfy its burden essentially by
advocating an approach to changes in ownership which, unlike USDOC's approach, focuses on
whether a continuing "benefit" can be found to exist after the ownership of the subsidy recipient
changes hands. However, the EC's approach, at best, is not required by the SCM Agreement and, at
worst, conflicts with the basic framework of the SCM Agreement.
101. Below, the United States first discusses the appropriate standard of review for this Panel to
apply. It then explains why USDOC’s approach to changes in ownership is fully consistent with the
SCM Agreement. Lastly, the United States addresses the legal infirmities and erroneous economic
assumptions of the competing approach advocated by the EC.
A. THE PANEL SHOULD APPLY A STANDARD OF REVIEW IN THIS DISPUTE WHICH UPHOLDS THE
USDOC DETERMINATIONS AT ISSUE IF THEY ARE BASED ON A PERMISSIBLE INTERPRETATION
OF THE SCM AGREEMENT
102. Article 17.6 of the Agreement on Implementation of Article VI of the General Agreement on
Tariffs and Trade 1994, also known as the WTO Anti-Dumping Agreement, sets forth, in turn, the
standards governing the panel’s review of an investigating authorities’ factual determinations and
determinations interpreting WTO provisions. With regard to the latter type of determination, which is
the only type of determination challenged by the EC in this dispute,81 Article 17.6 provides:
Where the panel finds that a relevant provision of the Agreement admits of more than
one permissible interpretation, the panel shall find the [investigating] authorities’
measure to be in conformity with the Agreement if it rests upon one of those
permissible interpretations.

79 1996 Review, 63 Fed. Reg. at 18369, 18374.
80 It is now well-established that the EC, as the complainant in this dispute, has the burden of
establishing a violation of a provision of a WTO agreement. As the Appellate Body explained in Wool Shirts,
supra:
[W]e find it difficult, indeed, to see how any system of judicial settlement could work if it
incorporated the proposition that the mere assertion of a claim might amount to proof. It is,
thus, hardly surprising that various international tribunals, including the International Court of
Justice, have generally and consistently accepted and applied the rule that the party who
asserts a fact, whether the claimant or the respondent, is responsible for providing proof
thereof. Also, it is a generally-accepted canon of evidence in civil law, common law and, in
fact, most jurisdictions, that the burden of proof rests upon the party, whether complaining or
defending, who asserts the affirmative of a particular claim or defence.
WT/DS33/AB/R, at 14 (footnote omitted).
81 To the extent that the Panel does conclude that factual determinations made by USDOC in the
administrative reviews at issue are in dispute, the Panel should apply the standard of review for factual
determinations set forth in Article 17.6.

103. The Declaration on Dispute Settlement Pursuant to the Agreement on Implementation of
Article VI of the General Agreement on Tariffs and Trade 1994 or Part V of the Agreement on
Subsidies and Countervailing Measures states “the need for consistent resolution of disputes arising
from anti-dumping and countervailing duty measures”.
104. The United States submits that the standard of review set forth in Article 17.6 of the Anti-
Dumping Agreement should apply in the current dispute under the SCM Agreement. It is clearly
what is contemplated by the above Declaration, and no sound reason exists for not applying it in
disputes involving a Member’s countervailing duty determinations, just as it is already applied with
regard to a Member’s anti-dumping determinations. In this regard, the Anti-Dumping Agreement and
the SCM Agreement both address unfair trade, and one of the basic elements that must be established
under both of the agreements -- injury to the importing Member's domestic industry -- is essentially
the same.
82 In addition, the two agreements lay dow n similar procedural rules for a Member’s
investigating authority to follow during the course of an investigation, and they authorize similar
remedies, i.e., the levying of duties or, alternatively, an undertaking.
105. Even if the Panel does not apply the Article 17.6 standard of review in this dispute, it should
recognize the principle that the SCM Agreement, like many WTO agreements, leaves room for
Members to develop and apply different methodologies and procedures when implementing the terms
of the agreement. This principle is particularly true where, as in this dispute, the agreement is silent
regarding the methodology or procedure to be applied.
B. THE USDOC DETERMINATIONS AT ISSUE ARE FULLY CONSISTENT WITH THE SCM AGREEMENT
106. The USDOC determinations at issue in this dispute are fully consistent with the
United States’ obligations under the SCM Agreement and, in particular, Articles 1.1, 10, 14 and 19.4.
107. Stated simply, the SCM Agreement is silent as to whether and, if so, how the investigating
authority should take into account a change-in-ownership transaction in a countervailing duty
proceeding. Consequently, USDOC acted permissi bly when it addressed the massive BSC subsides
as it did, given that its approach is grounded in fundamental SCM Agreement principles and is
consistent with the object and purpose of the SCM Agreement. The Panel therefore should find that
the United States has acted consistently with the SCM Agreement.
1. In Analysing the Subsidies at Issue, USDOC St rictly Adhered to all Relevant Provisions
of the SCM Agreement
108. Below, the United States reviews, on a step-by-step basis, how USDOC analyzed the
subsidies at issue, i.e., the subsidies bestowed on BSC's production prior to the changes in ownership
at issue. This review shows that, at each step, USDOC strictly adhered to the SCM Agreement, to the
extent that it provides direct guidance. In addition, where it does not provide direct guidance,
USDOC used a permissible approach.
109. Thus, it will be seen that the SCM Agreement only directs (in Article 1) that the investigating
authority identify the existence of a "subsidy," including a subsidy "benefit," as of the time of the
subsidy bestowal and (in Article 14) that the investigating authority measure the identified subsidy
"benefit" through certain market-rate benchmarks as of the time of the subsidy bestowal. In addition,
the SCM Agreement contemplates that the measured subsidy “benefit” will be allocated over time,
although it does not direct how this allocation must be done. Beyond that, however, the SCM

82 Under the Anti-Dumping Agreement, the two basic requirements that must be satisfied before duties
may be imposed are (1) dumping and (2) injury, while the SCM Agreement requires (1) subsidization and (2)
injury. Notably, the injury element under the Anti-Dumping Agreement is essentially the same as the injury
element under the SCM Agreement.

Agreement is silent. It does not address a change in ownership, at least in the context of a
countervailing duty proceeding. Specifically, it does not explain whether and, if so, how the
investigating authority should take account of a change in ownership taking place after the subsidy
bestowal.
110. In fact, the only place where the SCM Agreement addresses changes in ownership is in a
provision dealing not with countervailing duty pr oceedings (under Part V of the SCM Agreement),
but rather with WTO subsidy challenges under Part III of the SCM Agreement. That provision,
Article 27.13, strongly implies a general rule that previously bestowed subsidies remain actionable
and are allocable to the successor company's production following a change in ownership, which is
consistent with USDOC’s approach but exactly th e opposite of the approach advocated by the EC.
While Article 27.13 by its terms only applies to WTO proceedings, it is difficult to find support, in
these particular circumstances, for the notion that the SCM Agreement envisions one rule for WTO
proceedings and another -- contrary -- rule for countervailing duty proceedings.
111. As is shown below, USDOC complied fully with each of the provisions of the SCM
Agreement discussed above in addressing the subsidies at issue. In addition, in accounting for the
changes in ownership that occurred after the subsidy bestowals, where no SCM Agreement provision
directed a particular methodology, USDOC reas onably developed and applied a methodology based
on fundamental principles underlying the SCM Agreement.
(a) USDOC Followed Article 1.1 of the SCM Agreement, which only requires the Investigating
Authority to make a Finding of a Subsidy "Benefit" once as of the Time of the Subsidy
Bestowal
112. The first step in USDOC’s analysis was to determine whether the subsidies allegedly
bestowed on BSC's production prior to the changes in ownership were potentially countervailable.
113. In this regard, the SCM Agreement imposes two basic requirements for a subsidy to be
countervailable under the provisions of Part V. Article 1 requires a determination of the existence of
a “subsidy” which is “specific” in nature, and Article 15 requires a determination of “injury.”
114. In this dispute, the EC challenges how USDOC applied Article 1 and, in particular,
paragraph 1(b) of Article 1, which addresses the "benefit" element of a "subsidy." It does not
challenge the determination under Article 15.
115. Article 1.1 is brief and does not go into any relevant detail. According to Article 1.1, “a
subsidy shall be deemed to exist” if (a) there is some type of “financial contribution” by the
government,
83 and (b) “a benefit is thereby conferred.”84
116. Article 1.1 does not address whether or, if so, how a change in ownership might affect the
determination identifying the elements of a subsidy. It is silent on this issue.

83 SCM Agreement, Art. 1.1(a)(1). Article 1.1(a)(1) describes various forms that a "financial
contribution" can take. Although not relevant in this matter, a subsidy also can be deemed to exist if, instead of
a “financial contribution,” there is some form of income or price support in the sense of Article XVI of GATT
1994. Id., Art. 1.1(a)(2).
84 Id., Art. 1.1(b). Article 1.2 provides that a subsidy satisfying this definition becomes potentially
countervailable if it also is “specific” within the meaning of Article 2. Id., Art. 1.2.

117. Consequently, absent direct guidance in Ar ticle 1.1, USDOC set out to analyze the BSC
subsidies at issue in a manner that was consistent with the basic principles of subsidy identification
found in Article 1.1.
118. Most importantly, the text of Article 1.1 (like its counterpart under the US countervailing duty
statute)85 reflects that the determination identifying the elements of a subsidy will be made once, as of
the time of the subsidy bestowal. In this regard, the requisite “financial contribution” is described by
Article 1.1(a) in the present tense, so that a “financial contribution” exists as soon as “there is” a
direct transfer of funds,
86 or government revenue “is foregone,”87 or the government “provides goods
or services,” 88 or the government “makes payments to a funding mechanism.” 89 The requisite
“benefit” is also described in the present tense , as Article 1.1(b) provides that the requisite "benefit"
arises if "a benefit is thereby conferred," i.e., conferred by the "financial contribution." The ordinary
meaning arising from the use of the present tense to describe both elements is that Article 1.1 is
concerned with, and requires the identification of, the "benefit" that is conferred at the time that the
government provides the "financial contribution."
119. Nothing in the text of Article 1.1 suggests re -visiting the original determination identifying
the elements of a subsidy as of the time of the subsidy bestowal. More particularly, nothing in the text
of Article 1.1 suggests that it is necessary to inquire into whether there is any “benefit” from a subsidy
continuing after the subsidy bestowal, as the EC argues.
120. Certainly, nothing in the text of Article 1.1 requires the investigating authority to make a new
“benefit” determination simply because the ownership of the original subsidy recipient has changed
hands.
121. Significantly, the context provided by Article 14, which addresses the measurement of the
subsidy “benefit,”90 supports this reading of Article 1.
122. Article 14 provides especially important context for interpreting how Article 1.1 contemplates
that the "benefit" is to be identified. When the investigating authority uses the benefit-to-recipient
measurement standard (as does USDOC), the act of identifying the "benefit" (under Article 1.1) is
normally the same as the act of measuring the "benefit" (under Article 14).
123. The text of Article 14 (like its counterpart under the US countervailing duty statute) 91 is not
comprehensive, in that it does not purport to expl ain how to measure the identified subsidy benefit in
every possible situation. Instead, it selects four common forms of subsidy and then describes how the
investigating authority should measure the benefit for each of these forms of subsidy.
124. Like Article 1.1, Article 14 does not address whether or, if so, how a change in ownership
might affect the measurement of the identified subsidy benefit. It is silent on this issue.

85 Section 771(5)(B) of the US countervailing duty statute, 19 U.S.C. § 1677(5)(B), is the counterpart
to Article 1.1. of the SCM Agreement.
86 Id., Art. 1.1(a)(1)(i).
87 Id., Art. 1.1(a)(1)(ii).
88 Id., Art. 1.1(a)(1)(iii).
89 Id., Art. 1.1(a)(1)(iv).
90 Article 14 is the only provision of the SCM Agreement addressing how the investigating authority
may measure the subsidy “benefit” identified pursuant to Article 1.1 in a countervailing duty proceeding.
91 Section 771(5)(E) of the US countervailing duty statute, 19 U.S.C. § 1677(5)(E), is the counterpart to
Article 14 of the SCM Agreement.

125. Nevertheless, in each of the four examples which it provides, Article 14 looks only to the time
of the subsidy bestowal, and not to any subsequent point in time, for the measurement of the identified
subsidy benefit.
126. Thus, Article 14(a) directs the investigatin g authority to examine the usual investment
practice of private investors as of the time of the equity infusion at issue. Article 14(b) directs the
investigating authority to examine the terms of a co mparable commercial loan that the loan recipient
could have obtained at the time the government loan at issue was made. Article 14(c) directs the
investigating authority to examine what the loan recipient would have paid on a comparable
commercial loan absent a government guarantee based on the terms and conditions prevailing at the
time the government provided the guarantee. Ar ticle 14(d) directs the investigating authority to
examine what would have been adequate remuneration at the time of the government’s provision of
the goods or services at issue.
127. If there is a general rule that can be derived from the text of Article 14, it is that the
investigating authority should look to the time of the subsidy bestowal for the measurement of the
subsidy benefit. The four examples take this approach, and there is nothing in the text of Article 14
that suggests that the investigating authority should measure -- or re-measure -- the subsidy benefit at
any time after the subsidy bestowal.
128. Meanwhile, nothing in the text of Article 14 su ggests ever re-visiting the measurement of the
subsidy benefit made as of the time of the subsidy bestowal.
129. Certainly, nothing in the text of Article 14 requires the investigating authority to make a new
measurement simply because the ownership of the original subsidy recipient has changed hands.
130. Thus, given that the act of identifying the "benefit" (under Article 1.1) is normally the same as
the act of measuring the "benefit" (under Article 14), and given that Article 14 only contemplates a
measurement of the "benefit" as of the time of the subsidy bestowal, Article 14 provides compelling
contextual support for an interpretation of Article 1.1 as envisioning only that the investigating
authority would identify the "benefit" as of the time of the subsidy bestowal.
131. The example of an unrelated trading company helps to clarify these principles. Here, assume
that a heavily subsidized producer sells its products to an unrelated trading company in an arm's
length transaction at fair market value, and then the trading company exports the same products. If
Article 1.1 or any other provision of the SCM Agreement required the identification of a benefit
continuing after the original subsidy bestowals, the subsidies previously bestowed on the producer
would arguably have to be treated as eliminated because the trading company paid the market price
for the products that it later exported. According to the EC's reasoning, there would be no benefit to
the trading company from those subsidies and, consequently, there would be no subsidies to
countervail in the importing country. In this scenario, the result would be irrational, particularly
because the competing industry in the importing country would have suffered the same injury
regardless of whether the imports came from th e trading company or the producer. The SCM
Agreement avoids such irrational results by not requiring the identification of a continuing benefit.
132. For the same reasons, the SCM Agreement avoids such irrational results in the more
fundamental example of an unrelated importer which purchases the subsidized product directly from
the producer at an arm's length, fair market price. Indeed, if the SCM Agreement required the
identification of a continuing benefit here, there would be no grounds for a Member to impose
countervailing duties, given that, under the EC's reasoning, the producer by definition would not pass
on its advantage to the unrelated importer.

133. Essentially, these examples reflect the fact that the SCM Agreement is a practical agreement,
and it uses reasonable assumptions without which there would likely be no effective remedy for the
trade distortions caused by subsidies. In particular, the SCM Agreement assumes that subsidies
satisfying the requirements of Article 1.1 benefit the merchandise produced as a result of those
subsidies, regardless of who owns the compan y or the productive assets used to produce the
merchandise and regardless of who purchases the merchandise.
134. Turning to the USDOC determinations at issue, it is clear that USDOC fully complied with
Article 1.1. As is shown in the Factual Background section above, 92 USDOC first looked at the
circumstances as of the time of the alleged subsidy bestowals and identified the requisite “financial
contributions” and “benefits” thereby conferred. It then found these subsidies to be “specific”.
135. USDOC did not violate Article 1.1 by refusing to revisit its original determinations -- and, in
particular, by not attempting to re-identify the subsidy benefits -- as of the time of the changes in
ownership at issue. Article 1.1 simply does not require the investigating authority to revisit these
determinations.
136. As we explain below in Part IV.C.1.a., the EC does not focus its contrary argument on the
ordinary meaning of Article 1.1. Rather, it emphasizes what it views as the object and purpose of the
SCM Agreement, and even then it misstates what that object and purpose is.
(b) USDOC followed Article 14 of the SCM Agreement, which Contemplates that the
Investigating Authority will Measure the Subsidy "Benefit" once as of the time of the Subsidy
Bestowal
137. The next step in USDOC’s analysis was to measure the subsidy benefits identified under
Article 1.1.
138. As is shown in the Factual Background section above, 93 USDOC fully complied with
Article 14 when it measured the benefits from the subsidies at issue, i.e., the equity infusions and
grants. With regard to the equity infusions, USDOC followed Article 14(a) and examined the usual
investment practice as of the time of the equity infusions in order to derive an appropriate
measurement of their benefits. In addition, although Article 14 does not address grants, USDOC
followed the general principles of Article 14 and looked only at the time of the subsidy bestowals to
measure the grants’ benefits.
139. USDOC did not violate Article 14 by failing to re-measure the identified subsidy benefits as
of the time of the changes in ownership at issue. As is shown above in Part IV.B.1.a., there is nothing
in Article 14 that requires the investigating authority to re-measure the identified subsidy benefit
based upon any event occurring after the subsidy bestowal.
(c) USDOC Acted Consistently with the SCM Agreement when it Applied its Normal Allocation
Methodology and Allocated the Subsidies at Issue over Time
140. The next step required under USDOC’s practice was to allocate the subsidies at issue over
time, i.e., to future production.
141. Although the SCM Agreement does not address the issue of allocation directly, it does
contemplate that subsidies will be allocated over time. In particular, Annex IV, paragraph 7, which
addresses how to calculate the ad valorem subsidization of a product for purposes of a “serious

92 See Part III.C., paras. 72-78 supra.
93 See Part III.C., paras. 79-84 supra.

prejudice” under Part III and Article 6.1(a), refers to pre-WTO subsidies whose benefits were
“allocated to future production.” This reference suggests that the allocation of subsidies is foreseen in
the context of calculating the ad valorem subsidization of a product.94
142. Beyond that, the SCM Agreement does not take a position on how or even under what
circumstances a subsidy should be allocated over time. Nevertheless, USDOC’s use of its normal
allocation methodology in the administrative reviews at issue is not in dispute.
143. Although the EC does not dispute USDOC's normal allocation methodology, repeatedly
throughout its First Submission, the EC does negatively refer to the “irrebuttable presumption” that
USDOC uses when applying its change-in-ownershi p methodology. In fact, the EC is confusing
USDOC’s change-in-ownership methodology with USDOC’s normal allocation methodology. The
“irrebuttable presumption” concept only applies to USDOC’s normal allocation methodology, as can
be seen from the discussion above at Part III.A., paragraphs 40-45. Moreover, this concept simply
means that USDOC (like the investigating author ities in the EC and other Members) treats non-
recurring subsidies as benefiting the subject merchandise over time, i.e., for a period of years.
144. Indeed, the EC uses an allocation methodology in its countervailing duty investigations that is
similar to the United States’ normal allocation me thodology. A similar approach has also been
endorsed by an Informal Group of Experts appointed by the Committee on Subsidies and
Countervailing Measures to examine matters not specified in Annex IV.95
145. Notably, the allocation methodologies found in the countervailing duty laws of the
United States and the EC and in the Informal Group of Experts’ report do not require a determination
in each year of the allocation period that there is a continuing benefit from a subsidy. Rather, the
benefit determination is not re-visited, and the allocation of the benefit is based solely on the
conditions prevailing at the time of the subsidy bestowal.
146. In any event, as is shown in the Factual Background section above, 96 after identifying and
measuring the subsidy benefits as of the time of the subsidy bestowals, USDOC followed its normal
allocation methodology. It allocated the subsidy benefits over the period of years dictated by the facts
in the record.
(d) In Accounting for the Changes in Ownership at Issue, USDOC Applied an Approach that is
Grounded in Fundamental Principles of the SCM Agreement and is Consistent with the
Object and Purpose of the SCM Agreement
147. The final step taken by USDOC was to take a ccount of the changes in ownership at issue,
which it did through the methodology described at length in the Factual Background section above.97

94 Although Annex IV applies for purposes of WTO subsidy proceedings under Part III of the SCM
Agreement, and it calls for the use of a cost-to-government measurement standard, most of the principles found
in Annex IV would seem to apply equally to countervailing duty investigations under Part V of the SCM
Agreement. For example, in countervailing duty investigations under Part V, the United States and other
Members routinely apply the aggregation principles of paragraphs 2 and 6 of Annex IV when calculating de
minimis rates, the principle of calculating benefits acco rding to the most recent 12-month period espoused in
paragraphs 2 and 3, the attribution principle of paragraph 3, the inflation principle of paragraph 5 and the
allocation principle of paragraph 7.
95 See G/SCM/W/415/Rev.2.
96 See Part III.C., paras. 85-86 supra.
97 See Part III.C. supra.

148. USDOC’s methodology was not dictated by the SCM Agreement, given that there is no direct
guidance in the SCM Agreement about how to take into account a change in ownership. Indeed, the
SCM Agreement does not even direct whether a change in ownership has to be taken into account, at
least in the context of a Member's countervailing duty investigation under Part V of the SCM
Agreement.
149. Nevertheless, USDOC's methodology is grounded in fundamental principles of the SCM
Agreement found in Article 1.1 and Article 14. As is explained more fully above, consistent with
Article 1.1, one basic premise of USDOC’s methodology is that the subsidy “benefit” should be
identified only once, as of the time of the s ubsidy bestowal, rather than be re-identified on a
continuing basis at the time of any number of subsequent events. 98 In addition, consistent with
Article 14, another basic premise of USDOC’s methodology is that the subsidy “benefit” should be
measured only once, as of the time of the subsid y bestowal, rather than re-measured at the time of
some subsequent event.99
150. Meanwhile, beyond those premises, USDOC’s methodology is consistent with the object and
purpose of the SCM Agreement. As is explained more fully below in Parts IV.C.1.a. and b., the
object and purpose of the SCM Agreement is to deter and offset trade-distorting government subsidies
benefiting merchandise and causing injury to an industry in an importing country. Consistent with
this object and purpose, USDOC’s methodology helps to remedy the injurious trade distortions that
result from government subsidization even after the ownership of the subsidy recipient has changed
hands in an arm’s length, fair market value transaction.
151. USDOC’s methodology is also consistent with the only provision in the SCM Agreement that
mentions a change in ownership, i.e., Article 27.13, one of the provisions setting out the rules
governing subsidies actionable in a proceeding before the WTO under Part III of the SCM
Agreement.
152. Article 27.13 provides:
The provisions of Part III shall not apply to direct forgiveness of debts, subsidies to
cover social costs, in whatever form, including relinquishment of government
revenue and other transfer of liabilities when such subsidies are granted within and
directly linked to a privatization programme of a developing country Member,
provided that both such programme and the subsidies involved are granted for a
limited period and notified to the Committee [on Subsidies and Countervailing
Measures] and that the programme results in eventual privatization of the enterprise
concerned.
153. This provision gives special and differential treatment to developing country Members. It
creates an exception by establishing that certain types of subsidies provided by a developing country
Member prior to privatization under certain circumstances will not be actionable after privatization.
The strong implication -- indeed, the only reasonable conclusion -- is that the normal rule
contemplated by the SCM Agreement is that subsidies bestowed on a government-owned company's
production prior to privatization normally are actionable after privatization, i.e. the pre-privatization
subsidies are allocable to the surviving privatized company's production. Specifically, it would seem
to be contemplated that any types of pre-privatization subsidies provided by a developing country
Member other than those described in Article 27.13, and all types of pre-privatization subsidies
provided by a developed country Member, are allocable to the privatized company's production and
therefore continue to be actionable after privatization.

98 See Part III.C., paras. 38-39 supra.
99 See Part III.C., paras. 40-43 supra.

154. The principle of treaty interpretation expressio unius es exclusio alterius, meaning "to specify
the one thing is to exclude the other," supports this interpretation of Article 27.13.100
155. While Article 27.13 by its terms only applies to WTO proceedings, it does provide context for
interpreting Article 1.1 and its application in countervailing duty investigations. Moreover, given the
nature of this issue, it is difficult to find support for the notion that the SCM Agreement envisions one
rule for WTO proceedings and another rule -- especially one that is directly the opposite, as the EC
would have it -- for countervailing duty investigations. Indeed, Article 27.13 is consistent with
fundamental principles of the SCM Agreement -- par ticularly, the “benefit” analysis contemplated by
Article 1.1(b) -- which apply to both WTO proceedings and countervailing duty investigations.
156. In this regard, consistent with the text of Article 1, one unstated premise of Article 27.13 is
that the identification of a subsidy "benefit" under the SCM Agreement is to be made once, as of the
time of the subsidy bestowal. By contemplating a general rule that the previously bestowed subsidies
remain actionable and are allocable to the production of the surviving privatized company, i.e., the
purchaser, Article 27.13 implicitly rejects the contrary notion that a subsidy "benefit" must be re-
identified as of the time of the change in ownership.
101
157. Consistent with Article 14, another unstated premise of Article 27.13 is that the measurement
of an identified subsidy "benefit" under the SCM Agreement is to be made once, as of the time of the
subsidy bestowal. Because Article 27.13 contemplat es a general rule that the previously bestowed
subsidies remain actionable and are allocable to the production of the purchaser, it also implicitly
rejects the contrary notion that an identified subsidy "benefit" must be re-measured as of the time of
the change in ownership.102
158. Further, implicit in Article 27.13 is the assumption that a subsidy benefits a product over time
and, therefore, the subsidy should be allocated over time. This is the same assumption that generally
underlies the SCM Agreement, as is evidenced by paragraph 7 of Annex IV, the practice of the
investigating authorities in both the United Stat es and the EC, and the Informal Group of Experts'
report on Annex IV.
103
159. Importantly, these same fundamental principles are found in US countervailing duty law, and
they also underlie USDOC's change-in-ownership methodology, as is discussed above.104
160. Article 27.13, meanwhile, does not provide any guidance regarding the extent to which pre-
privatization subsidies continue to benefit the privatized company's production. Article 27.13's
implicit general rule that pre-privatization subsid ies continue to benefit the privatized company's
production would seem to permit continuation of all pre-privatization subsidies or, as is true of
USDOC's change-in-ownership methodology, continuation for only a portion of those subsidies. It is
not possible to be any more specific. Either one of these approaches could be derived from
Article 27.13's express exception stating that in certain situations no subsidies will remain actionable.

100 See Lord McNair, The Law of Treaties at 400-10 (1961) (attached as Ex. USA-25).
101 See Part IV.B.1.a. supra.
102 See Part IV.B.1.b. supra.
103 See Part IV.B.1.c. supra.
104 Because USDOC developed its change-in-ownership methodology prior to the coming into force of
the SCM Agreement, it did not then have occasion to reference Article 27.13. It did, however, address each of
the fundamental SCM Agreement principles discussed abov e, given that these principles formed the foundation
of US countervailing duty law both before and after the coming into force of the SCM Agreement. See notes 12
and 13 supra.

161. Given all of these circumstances, USDOC’s methodology for accounting for a change in
ownership does not violate -- indeed, it is consistent with -- the SCM Agreement.
(e) The unadopted EC Lead Bar GATT Panel Report does not provide Relevant Guidance
162. The unadopted EC Lead Bar GATT panel report -- which involved USDOC’s 1993 final
determination in the UK lead bar products investigation and which lead to the imposition of the
countervailing duty order on UK lead bar products giving rise to the three administrative reviews now
before this Panel -- does not provide relevant guidance in connection with this dispute.
105
163. In EC Lead Bar , the circumstances were unusual. USDOC had adopted a methodology
calling for full continuation of pre-privatization subsidies when initially conducting its countervailing
duty investigation. However, during ensuing litigation before the US Court of International Trade,
USDOC voluntarily obtained a remand in order to change its methodology to coincide with its
subsequent determination in the General Issues Appendix, which is USDOC's current partial
continuation approach. Because the EC challenged USDOC's methodology prior to the court
litigation, the only issue before the GATT panel was whether the initial methodology, which called
for full continuation of prior subsidies, was consistent with the GATT Subsidies Code.
106
164. Before the GATT panel, the EC argued, as it does here, that there was no continuing benefit
to the purchaser following a privatization that took place at arm's length and for fair market value. In
the EC's view, all prior subsidies were extinguished.107
165. The United States, meanwhile, did not attempt to defend an approach that called for full
continuation of prior subsidies. 108 It instead referenced its current approach and argued that it was
reasonable to "allocate" the subsidy benefit found as of the time of the subsidy bestowal between the
seller and the purchaser in a privatization transaction based, in part, on the amount of the purchase
price.109
166. In its ruling, the panel did not adopt either the EC view or the United States view. It instead
explained simply that both the EC and the United States agreed that the purchase price should have
been taken into account in some way, and solely on that basis the panel found the full continuation
approach to be inconsistent with the GATT Subsidies Code. Thus, the panel noted that
the parties differed on the question of how the purchase price paid ... should have
been taken into account by the DOC. However, the common element in the
approaches of the parties as presented to the Panel was that the purchase price was at
least a relevant fact to consider.110

105 United States - Imposition of a Definitive Countervailing Duty on Im ports of Certain Steel Products
Originating In France, Germany, and the United Kingdom , Report of the GATT Panel, SCM/185, issued
15 November 1994 (unadopted) ("EC Lead Bar").
106 Id., paras. 406-11.
107 Id., para. 413.
108 Id., para. 425.
109 Id., paras. 415, 423-25.
110 Id., para. 426.

The panel concluded that the full continuation approach "was not based on a consideration of all
relevant facts," as required by Article 1 of the GATT Subsidies Code.111
167. USDOC's current methodology, which is at issue in this dispute, does take into account the
purchase price. In fact, USDOC makes the purchase price in a change-in-ownership transaction one
of the principal factors influencing its apportionment of the subsidy benefit between the seller and the
purchaser.
168. Thus, USDOC's methodology is wholly consistent with whatever guidance can be
extrapolated from the unadopted EC Lead Bar GATT panel report.
C. THE EC FAILS TO ESTABLISH THAT THE UNITED STATES VIOLATED ANY OF ITS OBLIGATIONS
UNDER THE SCM AGREEMENT
169. In its First Submission, the EC's principal ar gument is that USDOC did not comply with
Article 10 of the SCM Agreement because it did not take all necessary steps to ensure that its
imposition of countervailing duties conformed to the requirements of the SCM Agreement. The key
step which USDOC failed to take, in the EC's view, was the identification of a subsidy "benefit"
within the meaning of Article 1.1(b) after owners hip of the subsidy recipient changed hands. In a
related argument, the EC invokes Article 19.4 and asserts that USDOC imposed countervailing duties
in excess of the amount of the subsidy that should have been found to exist and measured after the
ownership change.
170. The United States explains in detail below why the EC's two arguments lack merit.
171. The United States also notes that the practice of the EC under its State Aids Code, which the
EC follows in significant respects when implemen ting its countervailing duty law, is directly the
opposite of the legal and economic positions which it advocates in its two arguments.
1. USDOC did not Violate Article 10 of the SCM Agreement because it did not fail to take
all necessary steps to ensure that its Imposi tion of Countervailing Duties Conformed to
the Requirements of the SCM Agreement
172. In this dispute, the EC attempts to discredit USDOC's approach to changes in ownership
essentially by urging the adoption of two rules which it views as being required by the SCM
Agreement. The first rule is that the investigating authority is required to identify and measure the
continuing benefit of a subsidy as of a time that was years after its bestowal. The second rule is that a
change in ownership accomplished through an arm’s length, fair market value transaction by
definition eliminates all previously bestowed subsidies. The EC insists that, as an economic matter,
the purchaser of the government-owned company paid what the prior subsidies were worth, and
therefore no subsidies -- specifically, no subsidy "benefits" within the meaning of Article 1.1(b) -- can
be identified with regard to that company on ce it is operating under its new owner, i.e., the
purchaser.
112 The EC also urges this same approach with regard to the sale of a unit of a government-
owned company, i.e., the 1986 spin-off of UES.
173. Before the Panel could adopt these rules, as the EC itself recognizes, certain legal
prerequisites must be established under the SCM Ag reement. At a minimum, it must first be shown

111 Id., para. 427. The requirement under Article 1 of the GATT Subsidies Code to consider all relevant
facts is now found in Articles 12 and 22 of the SCM Agreement, neither of which the EC invokes in this
dispute.
112 It is the purchaser in each of the change-in-ownership transactions at issue which is the producer of
the subject merchandise and, consequently, the focus of the analysis.

that the SCM Agreement requires the investigating authority to make a "benefit" determination under
Article 1.1(b) as of a time years after the subsidy bestowal, i.e., as of a change in ownership.
174. In any event, the EC begins its argument by stating that Article 10 requires the investigating
authority to take “all necessary steps” to ensure that its imposition of countervailing duties conforms
to the requirements of the SCM Agreement. 113 The EC then attempts to show that USDOC did not
follow this mandate.
175. First, the EC makes the point that the investigat ing authority must identify the existence of a
“subsidy” before addressing other SCM Agreement requirements, such as measuring and allocating
the amount of the subsidy found to exist or imposing a countervailing duty.114
176. Then, the EC turns to the provision that directly addresses the identification of the subsidy
“benefit,” namely, Article 1.1. Here, the EC begins by endorsing the definition of the Article 1.1 term
“benefit” put forth by the panel in Canada Civilian Aircraft , which is that “benefit” means “an
advantage."115 However, the EC then argues that Article 14's use of various commercial benchmarks
to measure the subsidy benefit provides relevant context for interpreting Article 1.1, and from there it
extrapolates to a new definition of “benefit” as meaning a “commercially meaningful advantage.”116
177. Next, the EC reaches the crux of its legal argument. It argues that the investigating authority
is required to establish that a "benefit" within the meaning of Article 1.1(b), or a "commercially
meaningful advantage," was not simply conferred with the subsidy at issue but also that it was
"conferred on the party whose imports [are to] be countervailed," i.e., the firm under investigation.
117
Citing only to the object and purpose of the SCM Agreement rather than the text of Article 1.1 or the
context provided by Article 14,
118 the EC asserts that the investigating authority’s obligation to first
identify the existence of a subsidy
cannot and does not end with a determination that an unrelated party at some point in
the past received a subsidy. It must be demonstrated . . . that the party under
investigation, whose goods are the ones subject to an offsetting countervailing duty,
was the recipient of a subsidy.119
178. The EC then explains what this principle means in the context of a change in ownership.
Essentially, according to the EC, it means that the investigating authority must identify a continuing
benefit to the purchaser -- or, more precisely, a continuing "commercially meaningful advantage" to
the purchaser -- as of the time that the ownership of the subsidy recipient changes hands.120
179. Finally, to support its conclusion that there is no continuing benefit under the record facts in
the administrative reviews at issu e, the EC makes an economic, rather than a legal, argument.

113 EC's First Submission at 28, 33.
114 Id. at 33-34.
115 Id. at 35 n.77 (quoting Canada Civilian Aircraft, para. 9.112).
116 Id. at 35-36 (emphasis in original).
117 Id. at 37.
118 During the course of this argument, the EC also refers to Article 19.1 for the proposition that a
Member cannot impose a countervailing duty if the subsidy is “withdrawn.” The EC then insists that “[t]he
fact that a government recovers the residual value of any subsidies that it has granted in the past through a fair
market value and arm’s length sale of the assets of the previous beneficiary must be one of the means by which
the subsidy can be ‘withdrawn.’” Id. at 33. The United States addresses this argument in Part C.2. below.
119 Id. at 34 (emphasis in original).
120 Id. at 34, 35-36, 37-38.

According to the EC, the benefits provided to a company by previously bestowed subsidies would not
be realized by the purchaser because the purchaser would have paid in full for those benefits as part of
the purchase price, assuming that the transaction was made at arm’s length and the purchase price
therefore represented the fair market value of the company.121 On this basis, the EC concludes that
where a privately-owned company has purchased a company at fair market value in
an arm's-length transaction, there can be no benefit conferred on the purchaser ... .
[The] purchaser ... is not in any way put in a more advantageous position in
comparison to the market. ... An advantage would be granted to a buyer only if it
were to purchase the firm at less than fair market value as the result of a seller
favouring one of the bidders unfairly. In order to determine that the new privately-
owned company has obtained a "benefit", a Member's investigating authorities must
prove that the current producer/exporter has obtained the assets under circumstances
inconsistent with commercial considerations.
122
180. Below, the United States addresses, and refutes, the EC's argument. As will be shown, the
EC errs at every step in its analysis, and the Panel therefore should reject the EC's argument.
(a) The SCM Agreement does not Require the Investigating Authority to Establish that the Firm
under Investigation was the Recipient of the Subsidy before it Levies Duties; Consequently,
there is no Legal Basis for a Requirement that the Investigating Authority Identify a
Continuing Benefit to the Purchaser when the Ownership of the Subsidy Recipient Changes
Hands
181. The EC is making a crucial -- yet unsupportable -- assumption when it argues that the
investigating authority is required to make another "benefit" determination when the ownership of the
subsidy recipient changes hands, given that the SCM Agreement requires the investigating authority
to establish that the firm under investigation was the subsidy recipient before it may impose duties.
The EC is assuming that when the ownership of the subsidy recipient changes hands, the successor
firm is unrelated to, and different from, the subsidy recipient. Plainly, while the owners may be
different and unrelated, the productive assets which benefited from the subsidy before the change in
ownership are the same ones used by the new owners after the change in ownership. Which factor is
determinative? The SCM Agreement, of course, does not specifically answer this question, as it does
not directly address changes in ownership. More to the point, however, the SCM Agreement does not
contemplate that the investigating authority will make a benefit determination other than the one made
as of the time of the subsidy bestowal. Nevertheless, if there is an answer in the SCM Agreement, it
would seem to be that the productive assets -- not the owners -- would be the determinative factor,
given that GATT 1994 Article VI:3 and Article 10 of the SCM Agreement refer to the "subsidy" as
having been "bestowed, directly or indirectly, upon the manufacture, production or export of" the
product, as is discussed more fully below. What this means, then, is that the successor firm really is
no different from the subsidy recipient, and consequently there is no need -- even under the EC's
theory -- for a second benefit determination after the change in ownership.

121 Id. at 20-25, 35, 37. Here, it is important to note that the EC is not asserting that the purchaser paid
the full amount of the subsidy benefit identified, measured and allocated as of the time of the subsidy bestowal.
Rather, the EC's assertion of no benefit is based on a re-evaluation of the subsidy benefit's worth as of the time
of the change-in-ownership transaction. The EC is not act ually able to state what the subsidy benefit is worth at
that time. However, according to the EC, the purchaser pays exactly what the company is worth at that time,
and part of the value of the company is represented by the actual present value of all previously bestowed
subsidies attributable to it.
122 Id. at 37 (emphasis in original).

182. Independent of this flaw in the EC's argument, the United States also strongly disagrees with
the EC's equally crucial assertion that it is necessary for the investigating authority to demonstrate that
the firm under investigation was the actual recipient of the subsidy before it may impose duties.
183. First of all, this assertion in no way follows from the fact that the investigating authority must
first identify the existence of a subsidy before measuring and allocating the amount of the subsidy
found to exist or imposing a countervailing duty. The simple requirement that the investigating
authority begin its analysis by first identifying th e existence of a subsidy does not shed any light on
the question whether the identified benefit must be the one bestowed originally or whether a
continuing benefit must be identified with regard to the new owner of the subsidy recipient.123 In fact,
as is shown in Part IV.B.1.a. above, the SCM Agreement only requires that the investigating authority
find a benefit to the original recipient of the subsidy.
184. The same assessment is true of the EC's asse rtion that "benefit" really means "commercially
meaningful advantage." Even if this assertion were correct, 124 it begs the question of whether the
SCM Agreement requires the benefit to be established once, as of the time of the subsidy bestowal, or
also as of a time years later when the ownership of the subsidy recipient changes hands.
185. Furthermore, it is especially significant that the EC does not rely on the text of the provision
that directly governs the identification of the subsid y benefit, i.e., Article 1.1(b), or even the context
provided by the measurement provisions of Article 14, when it attempts to support its crucial assertion
that it is necessary for the investigating authority to demonstrate that the firm under investigation was
the subsidy recipient before it may impose duties. Instead, the only support that the EC offers is what
it (erroneously) views as the object and purpose of the SCM Agreement, which, according to the EC,
is the imposition of duties to offset the continuing subsidy benefit received by the firm under
investigation.
125
186. As a preliminary matter, it should be noted that the panel in Canada Civilian Aircraft recently
cautioned that

123 The United States agrees that the investigating authority must first identify the existence of a
subsidy, i.e., a “financial contribution” and a “benefit,” before measuring and allocating the amount of the
subsidy found to exist or imposing a countervailing duty. The United States notes, however, that when the
investigating authority uses the benefit-to-recipient measurement standard, the act of identifying the benefit
(under Article 1) is normally the same as measuring the benefit (under Article 14). The separate act of
allocating the identified and measured benefit over time can only be done afterwards.
124 The United States does not dispute that the ordinary meaning of the term “benefit” in Article 1.1(b)
is “advantage.” Nevertheless, the United States would suggest that the term “benefit” in Article 1.1(b) is
essentially defined in Article 14, where the SCM Agre ement addresses four common forms of subsidies and
states precisely what the benefit is in each situation. Beyond that, the only definition of “benefit” necessary in
this dispute is already provided by Article 14 for the subsidies at issue. For example, paragraph (a) of Article 14
describes the benefit when the government provides equity capital to a firm, as it did in this case. It is precisely
this provision that controls here. The EC is arguing that the financial contribution originally provided by the
UK Government, in the form of equity infusions benefiting the production of the subsidy recipient, BSC, does
not confer a benefit on the production of BSC’s successor, BS plc. In other words, the EC is addressing the
originally bestowed equity infusions, and it argues that while they did initially confer a benefit, they no longer
confer a benefit several years later as of the time of the change in ownership of the subsidy recipient. The EC is
trying to assess whether the originally bestowed equity infusions continue to provide the requisite benefit under
Article 1.1(b) after the change in ownership of BSC (even though the EC does not contest the 18-year allocation
period used by USDOC). The basis for making that determination, the United States submits, is set forth in
Article 14(a), not some abstract notion of whether a “commercially meaningful advantage” has been conferred.
As shown above in Part III.C., paragraph 74, moreover, the UK Government's equity infusions did confer the
requisite benefit under Article 1.1(b).
125 Id. at 29-32, 34, 37-39.

the SCM Agreement does not contain any express statement of its object and purpose.
We therefore consider it unwise to attach undue importance to arguments concerning
the object and purpose of the SCM Agreement.126
The EC, of course, attaches extreme importance to (its interpretation of) the object and purpose of the
SCM Agreement. It relies almost exclusively on it to support its assertion that the investigating
authority must demonstrate that the firm under invest igation was the recipient of the subsidy. Under
these circumstances, this Panel should follow Canada Civilian Aircraft and not allow the EC to
support this assertion with (its interpretation of) the object and purpose of the SCM Agreement.
187. What this means, as a practical matter, is that the Panel should reject the EC’s assertion that
the investigating authority must demonstrate that the firm under investigation was the recipient of the
subsidy. Without (the EC’s interpretation of) the object and purpose of the SCM Agreement, there is
no support for it. The only other support which th e EC offers consists of two pre-WTO GATT panel
reports, and the EC only cites these reports -- which are inapposite, as shown below -- to confirm (its
interpretation of) the object and purpose of the SCM Agreement.
127
188. Perhaps even more fundamentally, in the United States’ view, the EC has misstated the object
and purpose of the SCM Agreement as being the imposition of duties to offset the continuing subsidy
benefit received by the firm under investigation. The object and purpose of the SCM Agreement is, in
fact, to deter and offset trade-distorting government subsidies benefiting merchandise and causing
injury to an industry in the importing country.
189. In this regard, a review of the SCM Agreement reveals two fundamental requirements that
must be met before a Member's investigating authorities may impose countervailing duties. First, a
subsidy must have been provided with respect to the manufacture, production or sale of a product, as
can be seen from Articles 1, 10 and 19.4 of the SCM Agreement and GATT 1994 Article VI:3.
Second, a domestic industry must be suffering injury by reason of imports of the product into the
territory of the Member, as can be seen from Article 15 of the SCM Agreement and GATT 1994
Article VI:6(a).
190. The EC only addresses the first of these two fundamental requirements, and even then it
misstates it.
128
191. With regard to the first fundamental requirement, the SCM Agreement does not focus on the
subsidy recipient, as the EC maintains. Rather, it focuses on the merchandise and, in particular, on
subsidies bestowed on the manufacture, production or export of the merchandise.
192. The SCM Agreement’s focus on the merchandise is evident, in the first instance, in Article VI
of GATT 1994, the provision of GATT 1994 which the SCM Agreement applies in establishing the
rules for Members’ countervailing duty proceedings. Specifically, paragraph 3 of Article VI provides:
No countervailing duty shall be levied on any product of the territory of any Member
imported into the territory of another Member in excess of the amount equal to the
estimated bounty or subsidy determined to have been granted, directly or indirectly,
on the manufacture, production or export of such product in the country of origin or
exportation ... . The term “countervailing duty” shall be understood to mean a special

126 Canada - Measures Affecting th e Export of Civilian Aircraft , WT/DS70/R, Report of the Panel,
dated 14 April 1999, at para. 9.119 (“Canada Civilian Aircraft”), Notice of Appeal filed 3 May 1999.
127 See EC's First Submission at 38-39.
128 See id. at 29-32.

duty levied for the purpose of offsetting any bounty or subsidy bestowed, directly, or
indirectly, upon the manufacture, production or export of any merchandise .
(Emphasis added.)
193. These same principles are re-stated in Articles 10 and 19.4 of the SCM Agreement in virtually
the same terms.
194. Article 10 provides in relevant part:
Members shall take all necessary steps to ensure that the imposition of a
countervailing duty on any product of the territory of any Member imported into the
territory of another Member is in accordance with the provisions of Article VI of
GATT 1994 and the terms of this Agreement. ... (Emphasis added.)
In an accompanying footnote, it adds:
The term "countervailing duty" shall be understood to mean a special duty levied for
the purpose of offsetting any subsidy bestowed directly or indirectly upon the
manufacture, production or export of any merchandise , as provided for in
paragraph 3 of Article VI of GATT 1994. (Emphasis added.)
195. Similarly, Article 19.4 provides:
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. (Emphasis added.) (Footnote omitted.)
196. All of these provisions focus on the subject merchandise and provide that the countervailing
duty shall be imposed on the product, not the subsidy recipient. Nowhere do these provisions mention
the producer or exporter of the merchandise, whether it be the original subsidy recipient, the firm
under investigation or any other firm.
197. Similarly, these provisions set the countervailing duty that may be imposed by the
investigating authority at an amount equal to th e subsidy bestowed on the manufacture, production or
export of the product. Again, there is no mention of the producer or exporter itself, as the SCM
Agreement remains focused only on the product being exported (and causing injury) rather than the
identity of the producer or exporter.
198. Importantly, these points go beyond mere semantics. Again, the so-called “trading company”
example provides helpful clarification. Here, as will be recalled, it is assumed that a heavily
subsidized UK producer sells a quantity of its products to an unrelated UK trading company in an
arm's length transaction at fair market value, a nd then the trading company turns around and sells the
products in the United States. In this scenario, if Article 1.1 or any other provision of the SCM
Agreement required the producer or exporter of the subject merchandise to have been the direct
recipient of the subsidies being countervailed, th e sale to the UK trading company automatically
would have extinguished the subsidies previously bestowed on the UK producer. The result would be
irrational, particularly because the US domestic industry would have suffered the same injury
regardless of whether the imports came from the UK trading company or the UK producer. The SCM
Agreement again avoids such irrational results by not requiring the producer or exporter of the subject
merchandise to be the direct recipient of the subsidies being countervailed.

199. Even more importantly, these provisions do not require the investigating authority to
determine the actual effect of the subsidy on the subsidy recipient at any time after its bestowal,
contrary to the EC's argument that the investig ating authority must determine whether there is a
continuing benefit from the subsidy (in the circumstance where the ownership of the subsidy recipient
changes hands). Instead, these provisions authorize the imposition of the countervailing duty simply
in the amount of the subsidy, without any regard for its actual effect on the subsidy recipient.
200. Indeed, the only “effects” inquiry contemplated by the SCM Agreement -- which is the one
referred to in Article 19.2 -- applies to the investigating authority’s determination of “injury.”
Specifically, in Article 15.5, the SCM Agreement provides that “[i]t must be demonstrated that the
subsidized imports are, through the effects of subs idies, causing injury within the meaning of this
Agreement.” An accompanying footnote explains that the phrase “the effects of subsidies” refers to
certain effects of the subsidies on the domestic industry in the importing country. These effects are
set forth in paragraphs 2 and 4 of Article 15 and include the volume of subsidized imports, their effect
on prices and the consequent impact on domestic producers.
201. It is true that the SCM Agreement does permit the investigating authority to impose a
countervailing duty in an the amount that would be less than the amount of the subsidy. In this
regard, Article 19.2 provides that "[i]t is desirable that ... the duty should be less than the total amount
of the subsidy if such lesser duty would be adequate to remove the injury to the domestic industry ...
." Nevertheless, Article 19.2 is still not concerned with the effect of the subsidy on the subsidy
recipient. Rather, as with injury under Article 15, it is only the effect of the subsidy on the domestic
industry in the importing country with which the SCM Agreement is concerned.
202. Otherwise, the SCM Agreement does not inquire into the effects of a subsidy.
203. Certainly, the two provisions which directly address the identification of the subsidy benefit --
Article 1.1 and Article 14 -- do not contemplate an inquiry into the effects of a subsidy. As is
discussed above, these two provisions only direct the investigating authority to the circumstances as
they existed at the time of the subsidy bestowal when undertaking the identification and measurement
of the subsidy "benefit." Like US countervailing duty law, these two provisions seem to reflect an
assumption that the subsidy will have effects over time, i.e., that the subsidy will benefit future
production of the subject merchandise. Although the SCM Agreement does not explain why it makes
this assumption, one likely reason is the one offered by USDOC in the context of US countervailing
duty law. As USDOC explained, while subsidies are considered to be “distortions in the market
process for allocating an economy’s resources,”
129 it is not feasible -- indeed, it is burdensome and
unproductive, if not impossible -- for the investigat ing authority to show how those distortions may
have occurred in any particular instance of subsidization.130
204. Thus, these various provisions confirm that the first fundamental requirement of the SCM
Agreement is that a subsidy have been provided with respect to the manufacture, production, or sale
of a product. When this requirement is read to gether with the injury determination required by
Article 15, the appropriate formulation of the object and purpose of the SCM Agreement becomes
clear. The object and purpose of the SCM Agreement is to deter and offset trade-distorting
government subsidies benefiting merchandise and causing injury to an industry in an importing
country.
205. Notably, the panel in Canada Civil Aircraft basically agreed with this formulation of the
object and purpose of the SCM Agreement. It stated that “the object and purpose of the SCM

129 General Issues Appendix, 58 Fed. Reg. at 37260.
130 See Part III.A., paras. 49 and 57 supra.

Agreement could more appropriately be summarized as the establishment of multilateral disciplines
‘on the premise that some forms of government intervention distort international trade, [or] have the
potential to distort [international trade].’”131
206. Indeed, the EC itself, in its own countervailing duty law, has previously described the object
and purpose of the SCM Agreement in line with the United States’ view. According to the EC, a
countervailing duty may be imposed
for the purpose of offsetting any subsidy granted, directly or indirectly, for the
manufacture, production, export or transport of any product whose release for free
circulation in the Community causes injury.132
207. Meanwhile, the two pre-WTO GATT panel reports to which the EC cites -- Canadian Pork133
and the unadopted EC Lead Bar report -- also do not support the EC's formulation of the object and
purpose of the SCM Agreement.
208. In Canadian Pork, the panel focused entirely on production, not the owners of the subsidy
recipient. The panel determined that a subsidy benefiting the raising of hogs did not necessarily
benefit pork production. According to the panel, in this type of "upstream subsidy" situation, it is
necessary to show that the subsidy on the upstream product (hogs) benefits the downstream product
(pork), which was the product under investigation. In contrast, in this dispute, there is no upstream
subsidy issue. All of the subsidies at issue were provided to benefit steel production. The issue in the
dispute before this Panel is whether the benefit which the EC concedes was originally provided to
BSC's production must be disregarded because the ownership of BSC's lead bar production assets
changed hands. Thus, to the extent that Canadian Pork is relevant to this dispute, it is because it
supports the United States' argument that the proper focus of the Panel's analysis should be on the
merchandise, not on the subsidy recipient.
209. EC Lead Bar is no different. Indeed, the EC relies on it because of the panel's discussion of
Article 1, footnote 4, of the GATT Subsidies Code, which is essentially the same as Article 10,
footnote 36, of the SCM Agreement. Here, the panel refers to the "subsidy" as being "bestowed on
the production of the merchandise."
134 Again, this language is virtually identical to the language
found in GATT 1994 Article VI:3 and the footnote to Article 10 of the SCM Agreement, which, as
discussed at length above, supports the United States' formulation, rather than the EC's formulation, of
the object and purpose of the SCM Agreement.
210. Thus, unable to rely on anything other than its own erroneous interpretation of the object and
purpose of the SCM Agreement, the EC is left with no support for its crucial assertion that the
investigating authority must demonstrate that the firm under investigation was the recipient of the
subsidy before it may impose duties.
211. Without any support for this assertion, the EC is left with no legal basis for its ensuing
explanation of what this assertion (if accepted as accurate) means in the change-in-ownership context.
In other words, there is no legal basis for a requ irement that the investigating authority identify a
continuing benefit to the purchaser when the ownership of the subsidy recipient changes hands.

132 Council Regulation (EC) No. 2026/97 of 6 October 1997 on protection against subsidized imports
from countries not members of the European Community, OJ L 288, at Article 1.1 (Principles) (attached as Ex.
USA-26).
133 United States - Countervailing Duties on Fres h, Chilled and Frozen Pork from Canada , DS/7R,
Report of the GATT Panel, adopted 11 July 1991.
134 EC's First Submission at 38 (quoting EC Lead Bar, para. 420).

(b) The Economic Component of the EC's Argument is not only Overly Simplistic, but also, more
Fundamentally Misplaced
212. The highlighted discussion of the “economics of privatization” in the EC's First Submission
should not distract the Panel from the legal prerequisites that must be established under the SCM
Agreement before economic theory even becomes rele vant in this dispute. Indeed, as shown above,
the EC fails to meet its burden of establishing these legal prerequisites, and therefore the soundness of
the EC's economic theory need not even be addressed by the Panel. Nevertheless, it still may be
important for the Panel to understand that the economic component of the EC's argument is overly
simplistic and, more fundamentally, misplaced.
213. The EC cites to various sources regarding accepted valuation techniques in various types of
business transactions, and from there it extrapolates to the conclusion that the purchaser in an arm’s
length, fair market value privatization transaction pays exactly what the government-owned company,
including all previously received subsidies, is worth. On that basis, the EC asserts that the purchaser
realizes no continuing “commercially meaningful advantage”.
214. The EC’s discussion of the economics of privatization is misplaced from the start due to its
focus on the purchaser rather than on what is being purchased, i.e., subsidized production.
Specifically, the EC’s economic analysis is constricted by the EC’s own misinterpretation of the
object and purpose of the SCM Agreement as being the imposition of duties to offset the continuing
subsidy benefit received by the firm under investigation in a countervailing duty proceeding. More
appropriately, any discussion of the economics of privatization should begin with a recognition that
the object and purpose of the SCM Agreement is to deter and offset trade-distorting government
subsidies benefiting merchandise and causing injury to an industry in an importing country.
135
215. From this perspective, the inadequacy of th e EC’s focus on the purchaser becomes evident.
This focus does not address the trade distortions which subsidies cause, particularly in the context of
the market in a heavily subsidized industry like the steel industry.
216. In an industry like the steel industry, excess capacity, often brought on by the very same
massive government subsidization which the EC assumes away, can distort the market
tremendously.136 Where the government provides massive subsidies to an industry, companies are
enabled to continue building and modernizing produ ction facilities and producing output even where
output exceeds demand. The resulting excess capacity and excess output drive down the value of the
companies in this industry as well as the prices of the industry's overall output.
217. In contrast, under normal market conditions, where the government has not provided massive
subsidies to an industry, the marketplace would perform its accustomed role as impartial arbiter in the
allocation of resources. If the market signalled through increased demand that more output were
needed, companies would respond to those signals by devoting more resources to output. If the
market signalled through stagnant (or declining) demand that no more (or even less) output were
needed, no additional (or even fewer) resources would be devoted to production. Efficient companies

136 Notably, the EC itself recognizes in its State Ai ds Code, discussed below in Part IV.C.1.c., that a
more relevant economic analysis would attempt to take into account the serious economic effects of the excess
capacity likely created by a government's massive subsidi zation, given that it is a problem that would survive an
arm's length, fair market value change-in-ownership transaction. In fact, the EC lists the creation of excess
capacity as one of the principal problems resulting from government subsidization. See Guidelines for State Aid
for Rescuing and Restructuring Firms in Difficulty, OJ C 283/02, 19.09.97, at paras. 2.1 and 3.2.2(ii) (attached
as Ex. USA-27).

would survive, and inefficient ones would not (and should not) survive, while output prices would not
be artificially depressed.
218. Consequently, under normal market conditions, if a particular company in this unsubsidized
industry were to be sold, it would command a higher market price than would the same company if
the industry were heavily subsidized because there would be no excess capacity or excess output from
inefficient, subsidized companies to depress the market price of the company. What this means for a
company in a heavily subsidized industry is that, but for government subsidization of the industry, the
market price of that company (and all other companies) would be higher.
219. These dynamics, at the very least, call into question the significance of a depressed fair
market price in a privatization transaction, even accepting arguendo the EC’s focus on the
“commercially meaningful advantage” to the purchaser.137
220. More fundamentally, these dynamics call into question whether it is sound to treat the price
paid for a government-owned company in a h eavily subsidized industry as automatically
extinguishing the considerable amount of subsidies previously bestowed upon it, as the EC wants the
Panel to conclude. Despite the fair market nature of the price paid for the company, the original
subsidies continue to distort trade, through artificially high output, through artificially low output
prices resulting from the excess capacity which they created and through the reduced value of
companies throughout the industry.
221. For example, government subsidization, particularly when it reaches levels like seven billion
pounds as in this dispute, can dramatically increase the competitiveness of a steel company by
financing extensive modernization of facilities and the use of the most advanced production
technologies, along with whatever training of work ers is necessary, among other things. The sale of
that company at a fair market price does not remove the subsidy-induced distortion caused by the
company's strengthened steel production capabilities.
222. The EC, meanwhile, uses the example of a subsidized chair being sold at different prices
under different scenarios in order to support its theory about the arm’s length, fair market value nature
of a privatization transaction. This example, however, fails to capture the economic aspects of
privatization in industries like the steel industry, where privatizations typically take place. Simply
put, a chair is not a steel company. The sale of an additional unneeded chair is unlikely to adversely
affect the price of chairs in the marketplace or cause other distortions. On the other hand, the
continued existence of a subsidized steel company, which otherwise would have been idled by, or had
its output substantially restricted by, the impartial marketplace, has severe economic repercussions, as
shown above.
223. A better understanding of the economic aspects of privatization in an industry like the steel
industry can be seen in the following example. Suppose that a young man who lives in a small town
has a very rich uncle. One day, the rich uncle decides that the young man needs a career, and he
builds and gives to his nephew a large apartment building, notwithstanding the fact that there is no
need for additional rental units in the town. By the time the apartment building is completed, the
vacancy rate for dwellings in the town has doubled, thereby depressing the entire real estate market.
Consequently, the nephew decides to sell the building at a price established by competent,

137 Additionally, in an industry like the steel industry, government subsidies or other policies often are
used to keep a company (like BSC) afloat and available for purchase well after it likely would have ceased to
exist under normal market conditions. Not only does this lead to excess capacity and a reduced fair market
price, as discussed above, but it also can provide a benefit to any purchaser of that company in another way.
Here, a benefit arises to the extent that the purchaser is able to obtain that company at a price below the cost of
building comparable new steel facilities, when that company should not even exist under normal market
conditions and no comparable companies in the industry are available for sale.

independent appraisers. Because the excess capacity in the town has depressed the rental price for
apartment units, the price at which the apartment building (or any other residential rental properties)
can be sold has fallen significantly. The nephew can only sell it at a price about one-half of what it
cost to build. Nevertheless, this price represents 100 per cent of the apartment building's current
market value on the date of sale.
224. Whether the purchaser of the apartment bu ilding received a “commercially meaningful
advantage” as a result of the rich uncle’s original gift to the nephew is open to conjecture. The more
appropriate consideration is the market distortions caused by that gift. Simply because the purchaser
paid the current market price, it does not follow that the apartment building no longer has any adverse
effect on the real estate market or on competitors in that market. To the contrary, other owners of
residential rental properties have seen their rents de cline as a result of that building, just as they have
also seen the overall value of their properties decline. The fact that the purchaser of the nephew’s
apartment building cannot charge more than the other property owners does not immunize the other
property owners from the adverse effects caused by the continued existence of that building.
225. The point of this example is that it makes no difference whether the price at which the
nephew’s apartment building is sold is based on what is deemed to be an arm’s length, fair market
price. Rather, the fact that there are now additional rental units, for which the market did not signal a
need, is continuing to have adverse effects on both rental prices and the value of residential rental
properties generally. Moreover, these adverse effects are the same ones that were caused by the
apartment building when it was first built.
226. For these reasons, independent of the legal infirmities confronting the EC's argument, the
Panel would not have a sound basis for finding th e economic component of the EC's argument to be
required by the SCM Agreement.
(c) The EC's own Practice is Directly the Opposite of the Rule which, according to the EC, is
required by the SCM Agreement
227. Although the EC has not yet addressed the change-in-ownership issue under its countervailing
duty law, it has done so under its State Aids Code, a law pursuant to which the EC internally regulates
member State subsidization. Significantly, the appr oach taken by the EC under its State Aids Code
directly contradicts its position in this dispute.
228. Under its State Aids Code, the EC does not treat an arm’s length, fair market value change-in-
ownership transaction as extinguishing prior subsidies. Rather, it takes the exact opposite approach
and treats the prior subsidies as automatically continuing, in full, to the benefit of the purchaser.
229. Paragraph 2.3 of the EC’s Guidelines for State Aid for Rescuing and Restructuring Firms in
Difficulty
138 is the actual provision that addresses this issue. It provides in relevant part:
The assessment of rescue and restructuring aid is not affected by changes in
ownership of the business aided. Thus, it will not be possible to evade control by
transferring the business to another legal entity or owner.
230. Notably, the State Aids Code -- including the EC’s Guidelines for State Aid for Rescuing and
Restructuring Firms in Difficulty -- has underpinnings that are similar to those of the countervailing
duty law. Just as the countervailing duty law regulates the subsidization of firms, so does the State
Aids Code, although its focus is on the subsidiza tion of firms within and among the member States

138 OJ C 283/02, 19.09.97.

that comprise the EC’s single market. In addition, like the countervailing duty law, the State Aids
Code is founded on a general recognition of the “distortive effect” of State aid and how this distortive
effect “is magnified as other government-induced distortions are eliminated and markets become
more open and integrated.” 139 For these reasons, the EC generally prohibits internal subsidization,
although there are exceptions for special circumstances. One of these exceptions involves State aid
for rescuing or restructuring firms in difficulty, which is the subject of the Guidelines discussed
above. Here, the EC continues to recognize that “State aid for rescuing or restructuring firms in
difficulty will, by its very nature, tend to distort competition and affect trade between Member
States,” but it permits certain limited types of State aid in certain circumstances where it is “in the
Community interest.”140
231. Although the United States recognizes that the State Aids Code may have a different overall
purpose from the EC's countervailing duty law, the United States submits that the underlying rationale
for the two sets of rules -- and, in particular, the underlying rationale with regard to changes in
ownership -- is the same for both sets of rules.
232. Indeed, the EC itself has confirmed the relevance of the State Aids Code to the application of
its own countervailing duty law. In particular, in its recently issued regulations implementing its
countervailing duty law, the EC uses the State Aids Co de as a guide. There, in addressing the issue
of when government provision of equity capital confers a "benefit," the EC expressly states that it will
"tak[e] account of the Commission’s practice as regards State aid policy in this area" when
determining whether a "benefit" exists.141
233. Under these circumstances, it is disingenuous for the EC to argue before this Panel in favor of
a rule that an arm’s length, fair market value transaction extinguishes prior subsidies when that
argument is directly contrary to its own settled practice under the State Aids Code.
2. USDOC did not Violate Article 19.4 of the SCM Agreement because it did not Levy
Countervailing Duties in Excess of the Amount of the Subsidy
234. The EC's one other challenge to USDOC's determinations is based on Article 19.4 of the
SCM Agreement. Here, the EC explains that Article 19.4 requires that the investigating authority not
impose a countervailing duty "in excess of the amount of the subsidy found to exist." The EC adds
that other provisions provide contextual support for this requirement, including Article 19.1 and
Articles 21.1 and 21.2. The EC then states that the only way to determine if the countervailing duty is
in excess of the subsidy found to exist is to m easure the Article 1.1(b) subsidy benefit, as is
contemplated by Article 14. Then, insisting that the appropriate measurement is made as of the time
of a change in ownership, the EC asserts that an arm's length, fair market value change-in-ownership
transaction eliminates the entire amount of the subsidy benefit. In the EC's words,
a private purchaser of a company or productive assets thereof at fair market value
obtains no benefit from subsidies granted to the seller. Any benefit stream
established for the purposes of allocating the benefit granted to the previous owner
ceases to apply. Put differently, consistent with the market benchmark established in
Article 14 [of the SCM Agreement], the price paid in an arm's-length transaction is
equal to the fair market value. Hence, the "amount of the subsidy" is zero, and, self-

139 Id., para. 1.1.
140 Id., paras. 2.3 and 2.4.
141 EC Countervailing Duty Regulations, OJ C 394, 17.12.98, pp. 10-11.

evidently, there can be no "subsidization per unit" of the product under
investigation.142
235. This argument is essentially the same as the EC's Article 10 argument above, where the EC
contends that there is a requirement that the investigating authority identify a continuing benefit under
Article 1.1(b), i.e., as of the time of the change in ownership. Here, the EC focuses on Article 14 and
argues that there is a requirement that the investigating authority measure the benefit as of the time of
the change in ownership.
236. Because the identification of the subsidy benefit and the measurement of the subsidy benefit
are the same act under the benefit-to-recipient standard, much of the EC's legal support for the two
arguments is the same. Thus, once again, the EC principally relies on its unsupportable view of the
object and purpose of the SCM Agreement -- to impose duties to offset the continuing subsidy benefit
received by the firm under investigation -- as the basis for measuring the subsidy benefit as of the
time of the change in ownership. The United States has explained at length above in Part IV.C.1.a.
that this view of the object and purpose of the SCM Agreement is erroneous, and therefore it cannot
support the EC's measurement argument.
237. The EC also cites, for the first time, to Ar ticles 21.1 and 21.2 in an effort to support its
measurement argument. These provisions, however, merely provide that "[a] countervailing duty
shall remain in force only as long as and to the extent necessary to counteract subsidization which is
causing injury" and that interested parties shall have the right to request that the investigating
authorities to "examine whether the continued imposition of the duty is necessary to offset
subsidization, whether the injury would be likely to continue or recur if the duty were removed or
varied, or both." In other words, these provisions simply give interested parties, like the UK
respondents in this dispute, the right to request an administrative review of the countervailing duty
order. Indeed, the determinations at issue in this dispute were made by USDOC in the course of three
separate administrative reviews of the countervailing duty order on UK lead bar. Through each of
those administrative reviews, moreover, USDOC adjusted the countervailing duty rate applicable to
UK lead bar imports, in full compliance with Articles 21.1 and 21.2. Those provisions do not require
anything more of USDOC, and certainly they do not even address the measurement issue which the
EC is raising here.
238. Finally, the EC cites to Article 19.1, which provides that, at the conclusion of a countervailing
duty investigation finding both the existence of a subsidy and the requisite injury, the investigating
authority "may impose a countervailing duty ... unless the subsidy or subsidies are withdrawn." The
EC states that "no countervailing duty is needed to neutralize a withdrawn or no longer existing
subsidy, and hence any countervailing duty imposed would be in excess of that allowed to offset
'subsidy.'"
143 The EC then tries to characterize an ar m's length, fair market value privatization
transaction as one way in which the subsidizing government could withdraw a subsidy. It opines that
"[i]t is difficult to conceive of what more a government may do to withdraw a subsidy than to
privatize a state-owned entity in a transparent process at arm's length for fair market value."144
239. As a general matter, USDOC does recognize and apply the concept of withdrawal, or
repayment, of subsidies, although its approach -- which does not benefit from any direct guidance in
Article 19.1 -- differs depending on whether a "recur ring" subsidy or a "non-recurring" subsidy is at
issue.

142 EC's First Submission at 41-42 (emphasis in original).
143 Id. at 41.
144 Id. at 41 n.88.

240. When addressing "recurring" subsidies, i.e., subsidies that are provided on a regular basis and
that are automatic, in that each subsidy is not conditioned on prior government approval, such as an
automatically available tax credit, USDOC's practice is simply to treat a subsidy as withdrawn when
the government terminates the subsidy programme.
241. The concept of withdrawal is more complicated in the case of "non-recurring" subsidies, i.e.,
subsidies provided on an irregular basis and/or subsidies that required prior government approval for
disbursement. Under USDOC's practice, as is explained above in Part III.A., paragraph 44, the
benefit of a non-recurring subsidy is allocated -- or, essentially, amortized -- over a period of years
running from the bestowal of the subsidy pursuant to a standard declining balance formula that
generates a net present value equal to the amount of the subsidy. Within this context, USDOC
normally considers the subsidy to have been repaid when the subsidy recipient pays the government
the net present value of the remaining benefit stream. This approach reflects USDOC's continued
adherence to a fundamental interpretation of the SCM Agreement as not contemplating any re-valuing
of the subsidy benefit after it has been identified and measured (and then allocated over time) as of the
time of the subsidy bestowal.
242. USDOC, of course, also recognizes the concept of withdrawal of subsidies when it applies its
change-in-ownership methodology to a privatization. Indeed, in this dispute, USDOC found that a
significant amount of the subsidies originally bestowed on BSC -- all of which were non-recurring in
nature -- were withdrawn, or repaid, when BSC was privatized in 1988.
243. What it comes down to is that the EC is pr oposing one method for measuring the withdrawal
of subsidies in the context of a privatization, and USDOC is applying another method. Nothing in
Article 19.1, however, provides a basis for a panel to choose between these two methods, although it
remains difficult to square the EC's proposed method with the object and purpose of the SCM
Agreement.
145
244. It is noteworthy that the EC itself, in applying its State Aids Code, does not treat an arm's
length, fair market value privatization transaction as constituting the withdrawal of the subsidies
previously provided to the government-owned company. 146 Rather, it treats all of the subsidies as
continuing in full. In addition, in those situations where the EC does require a firm to repay a
subsidy, the EC does not base the required repayment on some measurement of the then-current value
of the subsidy, as is the concept underlying its proposal in this dispute with regard to privatizations.
Rather, the EC requires the firm to pay the full fa ce amount of the original subsidy, plus interest
running from the date of the subsidy's bestowal.
147
245. For all of these reasons, the Panel should reject the various arguments that the EC makes
under Article 19.4.

145 In this dispute, the subsidies at issue are "non-recurring" subsidies. No WTO panel (or GATT
panel) has ever ruled on what might constitute withdrawal of a non-recurring subsidy, either in the context of a
privatization or otherwise, and Article 19.1 certainly does not address this issue.
146 See Part IV.C.1.c. supra.
147 See, e.g., Council Regulation (EC) No. 659/1999 of 22 March 1999 laying down detailed rules for
the application of Article 93 of the EC Treaty, OJ L 83, 27.3.99, at pp. 2, 6 (attached as Ex. USA-28); Notice to
submit comments under Article 6(5) of the Steel Aid Code concerning the aid C 10/99 (ex NN 55/98) -
Germany - Salzgitter AG, Preussag Stahl AG and iron and steel subsidiaries of the SAG group, OJ C 113/06,
24.4.99, at p. 12 (attached as Ex. USA-29).

V. CONCLUSION
246. Based on the foregoing, the United States respectfully requests the Panel to find that by
imposing countervailing duties on leaded bar imports as a result of the 1994, 1995 and 1996
administrative reviews of the countervailing duty order on imports of lead bar products from the UK,
the United States has not violated Articles 1.1, 10, 14 or 19.4 of the SCM Agreement, nor has the
United States nullified and impaired benefits accruing to the EC under the WTO Agreements.

ATTACHMENT 2.2
ORAL STATEMENT OF THE UNITED STATES
AT THE FIRST MEETING OF THE PANEL
15 June 1999
Introduction
1. Thank you, Mr. Chairman and members of the Panel. The United States appreciates this
opportunity to present its views regarding the issues in this dispute.
2. In general terms, what we are talking about in this dispute is how, if at all, the SCM
Agreement envisions that an investigating authority in a countervailing duty proceeding would handle
the privatization of a heavily subsidized, government-owned company. Does the SCM Agreement
mandate a particular approach, or does the SCM Agreement allow the investigating authority to
choose from among various possible approaches?
3. Before getting into the details of this dispute, I would first like to touch upon a few of the key
aspects of the EC’s position. Perhaps more than anything else, these aspects highlight the flaws in the
EC’s position.
4. First, the EC is asking the Panel to strike down the US Department of Commerce’s
privatization methodology in the absence of any provision in the text of the SCM Agreement that
prohibits that methodology. No provision of the SCM Agreement dictates even generally how an
investigating authority is to allocate subsidies over time and across products, much less how an
investigating authority is to do so in the specific case where a change in ownership occurs during the
subsidy amortization period. Even if the Panel were to conclude that one or more provisions of the
SCM Agreement bear generally on the allocation of subsidies, it is still a fact that none of those
provisions prohibits the approach followed by Commerce.
5. Second, the EC is asking the Panel to strike dow n a methodology that is sensible, logical and
reasonable. The uncontested fact is that the British Government gave £7 billion -- which equals
$13 billion -- of subsidies benefitting the “manufacture, production or export” of steel. What
Commerce did in this case was simply to offset an allocated share of those subsidies through
countervailing duties on lead bar imports into the United States.
6. Third, Commerce’s methodology is consistent with the object and purpose of the SCM
Agreement. The SCM Agreement has as its core pu rpose the disciplining subsidies that are linked to
“injury” (in countervailing duty proceedings under Part V) or “adverse effects” (in proceedings before
the WTO under Part III). The loophole promoted by the EC -- namely, the extinguishment of
subsidies whenever the ownership of a subsidized company changes hands -- would undercut the
discipline which it is the SCM Agreement’s fundamental purpose to ensure.
7. In this type of situation, Article 17.6(ii) of the Anti-Dumping Agreement, which is applicable
to this dispute by virtue of the Ministerial Decl aration on Dispute Settlement, makes clear that the
Panel should uphold Commerce’s methodology. Specifi cally, Article 17.6(ii) provides that “[w]here
the panel finds that a relevant provision of the Agreement admits of more than one permissible
interpretation, the panel shall find the authorities’ measure to be in conformity with the Agreement if
it rests upon one of those permissible interpretations.”
8. I would also point out, however, that the Panel’s decision on the appropriate standard of
review should not be determinative of the outcome of this dispute. Even if the Panel were to use the

standard of review that normally applies in WTO and GATT panel proceedings, the Panel would still
have to find that Commerce’s methodology is not inconsistent with the provisions of the SCM
Agreement on which the EC bases its challenge.
9. The final noteworthy aspect of the EC’s position is that the EC would have the Panel believe
that an arm’s length, fair market value privatization automatically, and in all cases, extinguishes prior
subsidies. However, for purposes of its own State Aids Code – which is the EC’s internal analogue to
the remedies authorized by the SCM Agreement – the EC takes exactly the opposite position. In its
State Aids Code, the EC maintains that an arm’s length, fair market value privatization has no effect
on prior subsidies.
The Economics of Privatization
10. In its First Submission, the EC places considerable emphasis on what it terms the “economics
of privatization” and largely ignores the ordinary meaning of the textual provisions which it invokes
in this dispute.1 Consequently, before we get into the text of the SCM Agreement, it may be helpful
to take a step back and look at the practical, economic implications of what each side in this dispute is
advocating. As the Panel well knows, however, rega rdless of the parties’ economic arguments, it is
the text of the SCM Agreement that must govern the Panel’s decision in this dispute.
11. The entire focus of the EC's economic analysis is on who now owns the subsidized company
and, specifically, whether the new owners of the subs idized company can be said to be benefitting
from the deal they reached to buy the subsidized co mpany. The EC, like the third parties, ignores the
impact of the massive subsidies on the company itself -- that is, the company's production facilities
and how modern and efficient they are, the company's production capacity, the products that the
company produces, the company's workers and the position the company has been able to achieve
among its competitors as a result of government subsidization.
12. The SCM Agreement takes a different focus, as does the United States. The SCM Agreement
focuses on the subsidized company and, more sp ecifically, the subsidized company’s production.
Consistent with this focus, the SCM Agreement se eks to deter and offset the trade distortions that
typically result when a company’s production is subsidized.
13. From this perspective, the EC’s focus on the new owners of the subsidized company is simply
inadequate. It does not address the trade distortions which subsidies cause, particularly in the context
of a market like steel, where the industry is heavily subsidized.
14. In this dispute, we are not talking about a sale of chairs or pencils. What is really at issue is a
company -- more specifically, a heavily subsidized company in a heavily subsidized industry.
15. In this type of industry, excess capacity, often brought on by the very same massive
government subsidization which the EC’s theory assumes away, can distort the market tremendously.
Where the government provides massive subsidies to an industry, resources are misallocated.
Companies are enabled to continue building and modernizing production facilities and producing
output even where output exceeds demand. The resulting excess capacity and excess output drive
down the value of the companies in this industry as well as the prices of the industry's overall output.
These dynamics certainly call into question whether it is sound to treat an arm’s length price paid for
a government-owned company in a heavily subsidiz ed industry as automatically extinguishing the
considerable amount of subsidies previously bestowed upon it, as the EC wants the Panel to conclude.
The original subsidies continue to distort trade, through artificially high output, through artificially
low output prices resulting from the excess capacity which they created and through the reduced value
of companies throughout the industry.

1 See EC First Submission at paras. 50-66.

16. The industry at issue in this dispute well illustrates this point.
17. Plainly, government subsidization -- particularly when it reaches levels like £7 billion in the
case of British Steel -- can dramatically increase the competitiveness of a steel company by financing
extensive modernization of facilities and the use of the most advanced production technologies, along
with whatever training of workers is necessary, among other things. The sale of that company at a
fair market price does not remove the subsidy-induced distortion caused by the company's
strengthened steel production capabilities.
18. Indeed, look at British Steel today. It has just purchased the Dutch company, Hoogovens, and
has become not only competitive and profitable, but is now the third largest steel company in the
world. This is the same company that was described as “uncompetitive” prior to the massive
subsidization undertaken by the UK Government in the years leading up to British Steel’s 1988
privatization.
19. Mr. Chairman, let me now address how the EC earlier in its Oral Statement refutes the
United States’ analysis above. The EC’s refutation, in its entirety, can be found in the last sentence of
paragraph 51 on page 14 of the EC’s Oral Statement (page 44 of the Panel Report). That sentence
reads: “The claim that a subsidy (always?) results in lowered market prices, higher output, reduced
value for companies, and ultimately survival of firms that would otherwise have failed is false.”
That’s it, Mr. Chairman. The EC does not say anythi ng other than that the United States’ analysis is
“false.”
20. Meanwhile, if we look at the EC’s own Guidelines for the Calculation of the Amount of
Subsidy in Countervailing Duty Investigations (which is Exhibit USA-14), in paragraph D, we find
that it contradicts the EC’s position here. It states that, in its regulations, the EC “assumes that an
important effect of a subsidy is always to reduce a firm’s costs ... .”
21. Mr. Chairman, I would also like to briefly address the new exhibit which the EC attaches to
its Oral Statement, Exhibit EC-13, a short article written by Professor Cooper. I have not seen this
article before this morning, and I have only had a chance to peruse it quickly. However, I would like
to make a few preliminary comments about it. First, if you turn to page 3 of Professor Cooper’s
article and look at the third full paragraph, you will see that Professor Cooper admits that he is not
looking at the privatization issue from a legal perspective; rather, he is only providing an economic
analysis. And, if you look at the rest of the article, as I have done rather quickly, I believe that you
will not find any mention whatsoever of any provisions of the SCM Agreement or what the SCM
Agreement requires as a legal matter. It may be for this reason that the article does not address in any
way the economics of privatization from the economic perspective that is consistent with the object
and purpose of the SCM Agreement. In this regar d, although I have only been able to read through
the article quickly, I have found no references to or discussions of the trade distortions caused by
subsidization.
The Text of the SCM Agreement
The EC’s Claim Under Article 10
22. Turning to the actual text of the SCM Agreement, let’s look at the EC’s principal claim,
which invokes Article 10. Here, the EC is arguin g that Commerce did not “take all necessary steps”
to ensure that its imposition of countervailing duties conformed to the requirements of the SCM
Agreement. The specific requirement that Comme rce allegedly failed to follow is the Article 1
requirement of identifying a subsidy “benefit”.
23. In looking at this claim, it is useful first to clarify what is and what is not in dispute.

24. First, the EC does not dispute that Commerce acted consistently with Article 1 when it began
its analysis by identifying the elements of a subsidy -- a "financial contribution" and a "benefit" -- for
each of the subsidies at issue, as of the time of their bestowal.
25. Second, the EC does not dispute that Commerce acted consistently with Article 14 when it
next measured the subsidy benefits based on the circumstances prevailing as of the time of the
subsidy bestowals.
26. Third, the EC does not dispute that Commerce acted consistently with the SCM Agreement
when it then allocated the measured subsidy benefits over a period of 18 years, which is the average
useful life of assets for British Steel.
27. What the EC does dispute is Commerce’s refusal to re-visit the determination identifying the
subsidy “benefit.” The EC maintains that Article 1 requires -- not permits, but rather requires -- the
investigating authority to identify the subsidy “benefit” not just as of the time of the subsidy bestowal,
but also as of the time when the ownership of the subsidized company changed hands.
28. On this issue, however, the SCM Agreement is silent. The SCM Agreement does not address
how an investigating authority should take into account a change in the ownership of the subsidized
company. Indeed, the SCM Agreement does not even expressly address whether the investigating
authority should take into account a change in the ownership of the subsidized company in the first
place.
29. In fact, the text of the SCM Agreement suggests that none of this type of analysis is required.
As the United States explains at length in its First Submission, the text of Article 1 of the SCM
Agreement envisions that the investigating authority will identify the subsidy “benefit” as of the time
of the subsidy bestowal. The text of Article 1 is concerned with, and requires the identification of, the
“benefit” that is conferred at the time when the government provides the “financial contribution.”
Beyond that, the text of Article 1 is silent. It certainly does not address specifically what an
investigating authority should do when confronted with the privatization of the subsidized company.
30. Article 14, meanwhile, provides relevant context for interpreting Article 1, as Article 14
addresses the measurement of the subsidy “benefit.”
31. The text of Article 14 supports the United States’ interpretation of Article 1. As the text of
Article 14 shows in a very straightforward way, Ar ticle 14 looks only to the time of the subsidy
bestowal, and not to any subsequent point in time, for the measurement of the subsidy “benefit.”
32. Furthermore, there is one place in the SCM Agreement where a provision addresses the
privatization issue, and that is in Article 27.13. While Article 27.13 by its terms only applies to WTO
proceedings under Part III against developing country Members, it still provides context for
interpreting Article 1 and how Article 1 is applied in countervailing duty proceedings under Part V,
given that Article 1 itself is applicable in proceedings under both Part III and Part V.
33. Article 27.13 reflects the general rule contemplated by the SCM Agreement, which is that
subsidies bestowed on a government-owned company's production prior to privatization normally are
actionable after privatization.
34. Article 27.13 squarely contradicts the EC’s stated position in this dispute that, under Article 1,
previously bestowed subsidies are extinguished by a privatization transaction. Indeed, if the EC’s
position were accepted, it would render Article 27.13 wholly superfluous. In other words, if Article 1
really meant that a privatization transaction au tomatically eliminated any continuing subsidy
“benefit,” there would be no need for Article 27.13 to say, as it does, that certain pre-privatization
subsidies do not remain actionable after privatization.

35. Mr. Chairman, in its Oral Statement this morning, the EC says that Article 27.13 is not
relevant because it only applies to new subsidies, granted as part of the privatization transaction itself,
and not to subsidies granted prior to privatization. The United States disagrees with this interpretation
of Article 27.13, as the language shows that it applies to subsidies granted prior to privatization. I
would note that Brazil in its Third Party Submission at paragraphs 83-86 agrees with the United States
on this point, although Brazil does go on and attempts to distinguish Article 27.13 on a different
ground. For now, we will simply let the Panel read the language of Article 27.13 itself.
36. So, the obvious question that arises at this point is, on what precisely does the EC base its
position that Article 1 requires the investigating authority to identi fy the subsidy “benefit” as of the
time when the ownership of the subsidized company changed hands? The answer is not found in the
text of Article 1 or in the context provided by Article 14. The EC relies instead on what it views as
the object and purpose of the SCM Agreement. That is the foundation of the EC’s argument.
37. As a preliminary matter, it is difficult to imagine how a Panel could ever be expected to
identify a specific, methodological requiremen t in the SCM Agreement -- perhaps in any WTO
agreement -- based almost entirely on the agreement's object and purpose, as interpreted by a
Member. But, that is what the EC is attempting to do here.
38. In any event, the EC basically is arguing that the object and purpose of the SCM Agreement
demonstrates a concern with the subsidized company and, in particular, the current owners of the
subsidized company and how they are affected by the subsidy. From this concern, the EC
extrapolates to a requirement that the investigating authority identify a current subsidy “benefit” to
these owners. In the privatization context, this means that the investigating authority would have to
identify a current “benefit” to the new owners of the government-owned company, i.e., the owners of
the successor, privatized company.
2
39. As we explain in our First Submission, the EC’s reliance on the object and purpose of the
SCM Agreement fails for two basic reasons.
40. First, as the panel recently held in the Canadian Civilian Aircraft case, it is unwise to rely
heavily on the object and purpose of the SCM Agreement to support the interpretation of a particular
provision of the SCM Agreement, given the absence of any express statements in the SCM
Agreement setting forth its object and purpose. This admonition is especially appropriate in this
dispute. Here, the EC uses its interpretation of the SCM Agreement's object and purpose as the basic
support for its challenge; it is not simply using it, as is normally the case, as a supplement to textual
and contextual interpretations of particular terms.
41. The second defect in the EC's argument is that the EC reads into the SCM Agreement an
object and purpose that is not supported by the text of the SCM Agreement, even at its most basic
level.
42. The EC is mistaken, in particular, because the SCM Agreement does not focus on the current
owners of the subsidized company and how they are being affected by the subsidy. Rather, the SCM
Agreement focuses on the merchandise and, in particular, on subsidies bestowed on the manufacture,
production or export of the merchandise. It is with this focus that the SCM Agreement sets out to
deter and offset trade-distorting government subsidies benefitting merchandise and causing injury to
an industry in the importing country.

2 See EC First Submission at 29-32, 34, 37-39.

43. Given the SCM Agreement’s silence on the basic issue before the Panel, Commerce had to
develop its own methodology. We explained this methodology in detail in our First Submission,3 and
I will not repeat it here.
44. The basic point is that Commerce developed a methodology that is sensible and well-
reasoned.
45. To begin with, this methodology does not wholly ignore a change in ownership. Indeed, it
takes it into account. The EC seeks a rule that requires an examination of whether there is a
continuing “benefit” to the new owners at the time of the change in ownership. However, Article 1
simply cannot be read as requiring this type of examination. Commerce reasonably decided to take a
change in ownership into account through the way in which it allocates the prior subsidies over time.
46. Commerce’s approach is also reasonable because it pays particular attention to the facts of
each case. As a consequence, Commerce’s approach can result in either a small percentage or a large
percentage of the prior subsidies being apportioned to the successor company, depending on the facts.
In this dispute, for example, Commerce apportioned only 57 per cent of the prior subsidies to the
successor company in the first of the three change-in-ownership transactions at issue. I would note
also that, again depending on the facts, Commerce’s approach can even come up with the result
sought by the EC in this dispute, which is to have none of the prior subsidies apportioned to the
successor company. Commerce recently ended up with this result in an investigation of stainless steel
sheet and strip from France, where the transaction at issue was Usinor’s 1994 sale of Centrale
Sidérurgique de Richemont.
4
47. Furthermore, as we explain in our First Submission, 5 Commerce's approach is well-grounded
in fundamental principles of the SCM Agreement, particularly those found in Articles 1 and 14.
48. Commerce's approach also displays a sound economic concern for the trade distortions that
subsidization can cause.
49. Beyond these considerations, it can also be seen that the methodology developed by
Commerce does not conflict with any provisions of the SCM Agreement raised by the EC in this
dispute. Indeed, it does not conflict with any provisions of the SCM Agreement at all.
50. We would also note, as well, that Commerce's methodology is consistent with the object and
purpose of the SCM Agreement, as it seeks to remedy the trade distortions that subsidization can
cause.
51. Under these circumstances, Commerce’s methodology for handling the pre-privatization
subsidies at issue in this dispute cannot be considered to be in violation of Articles 1, 10 or 14 of the
SCM Agreement.

3 See US First Submission at paras. 36-62.
4 The cite for this determination is Final Affirmative Countervailing Du ty Determination; Stainless
Steel Sheet and Strip in Coils from France, 64 Fed. Reg. 30774 (8 June 1999) (attached as Exhibit USA-30).
5 See US First Submission at paras. 147-61.

The EC’s Claim Under Article 19.4
52. The EC’s other claim in this dispute is very similar to its first claim. Instead of focusing on
how Commerce identified the subsidy “benefit” under Article 1, the EC invokes Article 19.4 and
addresses Commerce’s measurement of the subsidy “benefit.” Here, the EC is arguing that, just like
Article 1, Article 14 requires the investigating authority to measure the subsidy “benefit” as of the
time of a privatization, not just as of the time of the subsidy bestowal.
53. This argument is not new, and it fails for essentially the same reasons as does the EC’s first
claim.
54. The EC does, however, raise one new concept when it cites to Article 19.1 and then argues
that an investigating authority may not impose a countervailing duty if a subsidy has been
“withdrawn.” The EC’s ultimate point is that an arm’s length, fair market value privatization
transaction constitutes the withdrawal of all previously bestowed subsidies.
55. We address this argument in some detail in our First Submission. 6 The fundamental point
that we make is that Article 19.1 does not explai n what it means by the term “withdrawn” or how a
withdrawal of subsidies should be measured, either generally or in the privatization context. Indeed,
Article 19.1 does not even indicate that there is an y withdrawal of subsidie s that takes place in a
privatization transaction.
56. Commerce, of course, does recognize and apply the concept of withdrawal in the privatization
context. The EC’s complaint is that Commerce doe s not apply this concept in the way that the EC
wants Commerce to. But, that is no basis fo r finding a violation of Article 19.1, given that
Article 19.1, again, does not even indicate that there is any withdrawal of subsidies that takes place in
a privatization transaction, and it certainly does not address how any withdrawal of subsidies should
be measured.
Standard of Review
57. In terms of the applicable standard of review, which, in the United States’ view, is the
standard of review set forth in Article 17.6 of the WTO Anti-Dumping Agreement, Commerce's
methodology certainly represents a "permissible" interpretation of the SCM Agreement.
58. Given that the SCM Agreement is silent, even after giving its terms their ordinary meaning in
their context and in light of the SCM Agreement’s object and purpose, Commerce came up with a
“permissible” interpretation of the SCM Agreement. It did this by developing a methodology that is
sensible and well-reasoned, grounded in fundamental SCM Agreement principles, not in conflict with
any provisions of the SCM Agreement, and consistent with the SCM Agreement’s object and purpose.
59. As the Panel is aware, however, the third parties in their First Submissions do not agree that
Article 17.6 provides the relevant standard of review, even though the Ministerial Declaration on
Dispute Settlement states “the need for consistent resolution of disputes arising from anti-dumping
and countervailing duty measures.” The third parties argue that the Declaration has no effect on what
the standard of review should be in SCM Agreement disputes.
60. The United States submits that it cannot be correct to interpret the Declaration as being
meaningless, as do the third parties. It must have some meaning. In the United States' view,
Members were aware of the many similarities between the anti-dumping proceedings and the
countervailing duty proceedings that a panel would be reviewing, and they did not want inconsistent
resolutions for disputes under the Anti-Dumping Agreement and the SCM Agreement simply because

6 See US First Submission at paras. 238-44.

of the use of different standards of review. The import of the Declaration is that a panel should use
the Anti-Dumping Agreement's standard of review when reviewing a countervailing duty proceeding.
61. Nevertheless, the United States also submits that the Panel's decision on the appropriate
standard of review should not be determinative of the outcome of this dispute. Regardless of whether
the Panel were to use the Article 17.6 standard of review or the standard of review found in GATT
panel cases deciding anti-dumping and countervailin g duty disputes prior to the specification of a
standard of review in the WTO Anti-Dumping Agreement, the Panel would still have to find that the
EC has not carried its burden of showing a violation of the SCM Agreement.
62. In GATT panel cases, when the panel has found a provision to be silent about a certain matter
after giving its terms their ordinary meaning in thei r context and in light of the relevant agreement’s
object and purpose, the panel has taken one of two approaches. In a case like United States Salmon,
once the panel determined that the agreement did not address whether a particular subsidy calculation
adjustment should be made, it stopped its analysis and found the challenged approach to be not
inconsistent with the agreement. The panel also followed the same approach after finding that the
agreement did not specify a methodology for calculating the amount of the subsidy.
7 In New Zealand
Electrical Transformers , the panel took a slightly different approach. After concluding that the
agreement was silent because it did not provide any sp ecific guidelines for the calculation of the cost
of production in an anti-dumping case, the panel stated that “the method used in this particular case
appeared to be a reasonable one,” and it therefore found no violation of the agreement.
8
63. Under either of these pre-WTO formulations of the standard of review, we submit that
Commerce’s determinations in this dispute are not inconsistent with any provision of the SCM
Agreement.
The EC's Own Contrary Practice
64. There is one other matter that needs to be addressed to put this dispute in proper perspective,
and that is the EC’s own practice.
65. The question that arises is, why does the EC, in its own practice, not follow the approach that
it is advocating before the Panel in this dispute? Here, I am not just talking about the EC's internal
anti-subsidy law, its State Aids Code. I am also talking about the EC’s countervailing duty law.
66. But, let's first look at the EC's State Aids Code. Under this law, the EC internally regulates
member State subsidization. In other words, it focuses on the subsidization of firms within and
among the member States that comprise the EC’s single market. This law is quite similar to the EC's
countervailing duty law. It is similarly founded on a general recognition of the “distortive effect” of
State aid and how this distortive effect “is magnified as other government-induced distortions are
eliminated and markets become more open and integrated.”
9 The EC even uses this law, the State
Aids Code, as a guide when applying its countervailing duty law.10

7 The relevant part of the United States Salmon panel report is found in United States - Imposition of
Countervailing Duties on Imports of Fresh and Chilled Atlantic Salmon from Norway , SCM/153, Report of the
Panel (unadopted), dated 4 December 1992, at paras. 243-46 and 247-49.
8 The relevant part of the New Zealand Electrical Transformers panel report is found in New Zealand -
Imports of Electrical Transformers from Finland , L/5814, Report of the Panel, adopted on 18 July 1985,
32/S55, 66-67, at paras. 4.2-4.3.
9 See EC Guidelines for State Aid for Rescuing and Restructuring Firms in Difficulty, OJ C 283/02,
19.09.97, paras. 1.1, 2.3 and 2.4 (Exhibit USA-27).
10 See EC Countervailing Duty Regulations, OJ C 394, 17.12.98, pp. 10-11 (Exhibit USA-14).

67. So, how does the State Aids Code handle privatizations? It takes an approach that is exactly
the opposite of what the EC is advocating in this dispute. It does not treat an arm’s length, fair market
value change-in-ownership transaction as extinguishing prior subsidies. To the contrary, it treats the
prior subsidies as automatically continuing, in full, to the benefit of the successor company.
68. Thus, while the EC argues in this dispute that no rational person could disagree with its
position that, as an economic mater, an arm’s length, fair market value privatization transaction
extinguishes all prior subsidies, DG-IV of the European Commission plainly does disagree with that
position.
69. Now, let’s turn to the EC’s countervailing duty law. What can we see from an examination of
this law?
70. First of all, when this law seeks to identify the subsidy “benefit,” it looks only at events as of
the time of the bestowal of the subsidy. The EC has no provision that ever calls for a current
“benefit” test. In other words, it does not ever look at events subsequent to the subsidy bestowal and
attempt to determine, as of that time, whether there is a continuing benefit from the subsidy, even
though that is what the EC is advocating in this dispute.
71. It is true that the EC’s countervailing duty law does not address how a privatization might or
might not affect previously bestowed subsidies. It is similar to the SCM Agreement in this regard.
But, it is noteworthy that the EC has, in fact, deliberated about what would be an appropriate rule for
handling pre-privatization subsidies.
72. During our consultations in this dispute, the EC mentioned that it was considering a draft
regulation on privatization, although the EC did not then provide us with a copy of that draft
regulation.
73. We now have a copy of that draft regulation. It was recently submitted to us by the US steel
industry in response to a request for public comments on this dispute.
74. The draft regulation at issue can be found in paragraph (h) of Section D of a Draft
Communication from the European Commission, dated 3 January 1998, and entitled “Calculation of
the amount of subsidy in countervailing duty investigations.” The United States is submitting a copy
of this Draft Communication as Exhibit USA-31.
75. Paragraph (h) begins by stating a general rule. It says:
If the privatization is carried out by means of an open market sale to the highest
bidder, any subsidies granted to the company before privatization should be
extinguished by such a transaction.
That is clear enough. But, paragraph (h) then proceeds to make an exception for certain types of
subsidies, which would not be extinguished by a privatization. Here, looking at the subsidies granted
to the company before privatization, paragraph (h) says: “[S]ubsidies which relieve the new owners of
normally inherited obligations ... would still benefit the privatized company.” Paragraph (h) gives one
example of the types of subsidies that would fall into this category, and that example is “the
forgiveness of debts”.
76. So, what does all of this mean? It means that DG-I of the European Commission, during the
pendency of this dispute, was considering a proposed regulation that did not treat all previously
bestowed subsidies as extinguished by an arm’s length, fair market value privatization transaction.

77. It also means that, at a minimum, this draft regulation reflects a view held by some within the
EC that the SCM Agreement does not require the approach that it is advocating in this dispute --
namely, that all previously bestowed subsidies are ex tinguished by an arm’s length, fair market value
privatization transaction. It would seem to be the view of the authors of paragraph (h) that the SCM
Agreement allows the investigating authority fl exibility in determining how to handle pre-
privatization subsidies and does not dictate any particular approach.
78. Thus, again, while the EC argues in this dispute that no rational person could disagree with its
position that an arm’s length, fair market value privatization transaction extinguishes all prior
subsidies, apparently some persons in DG-I of the European Commission did, and perhaps still do,
disagree with that position.
79. I would note that the EC did not include paragraph (h) -- or any other regulation addressing
privatization -- in the final countervailing duty regulations which it issued in December of last year.
This raises one further question. Why did the EC not include a final regulation that simply stated its
position in this dispute -- namely, that an arm’s length, fair market value privatization extinguishes all
of the prior subsidies -- given that, according to the EC, the SCM Agreement requires this approach?
Policy Considerations
80. Finally, because the EC makes an issue of it in its First Submission, it may also be helpful to
take a step back and examine the policy implications of each of the privatization approaches
advocated by the parties in this dispute. Again, however, we would first emphasize that it is the text
of the SCM Agreement that must govern the Panel’s decision in this dispute.
81. The EC's approach to privatization basically calls for the extinguishment of all prior subsidies
-- whether they were bestowed ten years before or only one year before privatization, and regardless
of whether those subsidies totaled £700 or £7 billion. What government policies are being
encouraged by this approach, and what government policies are being discouraged by this approach?
82. We submit that, in the world the EC wants the Panel to create, governments would be
encouraged to subsidize. Indeed, particularly where a government may be contemplating an eventual
sale of a government-owned company, the government could pour massive subsidies into that
company to make it one of the most modern and ef ficient companies in the industry, safe in the
knowledge that all of those subsidies -- even if they totaled more than £7 billion -- would simply
vanish as a legal matter once the company was sold.
83. Now, let's look at the United States' approach to privatization. Under this approach, the
successor to the government-owned company does retain some of the countervailing duty liability that
originally resided with the government-owned comp any, but at the same time a significant portion of
the countervailing duty liability is also treated as extinguished. What is being encouraged and
discouraged by this approach?
84. Here, governments are being encouraged to privatize, not subsidize. Through a privatization,
a government can get rid of a portion of the countervailing duty liability generated by its past
subsidization of a government-owned company; therefore, there is an incentive for the government to
privatize. At the same time, this approach does not encourage further subsidization. If the
government were to try to turn the government-o wned company into a more modern and efficient
company through massive subsidization, the government would only be increasing the countervailing
duty liability of the successor company.
85. So, which of these competing approaches is consistent with the object and purpose of the
SCM Agreement? I would submit that a detailed statement of the object and purpose of the SCM
Agreement might be difficult to agree on. But, certainly, at its most basic level the object and purpose

of the SCM Agreement is to discourage subsidization, like the United States' approach, not to
encourage subsidization, as would be the result under the EC's approach.
Observations Regarding the Third Parties’ Submissions
86. The third party submissions of Brazil and Mexico both attempt to support the EC’s view that
Article 1 of the SCM Agreement requires the investigating authority to identify a subsidy “benefit” as
of the time when the ownership of the subsidized company changed hands. In fact, however, their
attempts at providing support only serve to reinforce the fact that Article 1 does not address this issue.
87. As can be seen from their submissions, Brazil and Mexico interpret what is required by
Article 1 differently, and their conflicting interpretations are also different from the EC’s
interpretation. In other words, between them, the EC, Brazil and Mexico come up with three different
interpretations of Article 1.
88. What is common to all of these interpretations is that they are not supported by the terms of
Article 1 when given their ordinary meaning in th eir context and in light of the SCM Agreement’s
object and purpose.
89. As is discussed above, the EC seems to interpret Article 1 as meaning that the investigating
authority must identify a “benefit” as of the time of the subsidy bestowal and, also, as of the time
when the ownership of the subsidized company changed hands.
90. Brazil argues, however, that the investigating auth ority is to identify the “benefit” only once,
during the period of investigation.11
91. Mexico asserts that the investigating authority is to identify the “benefit” at least on three
occasions, and possibly four. Here, Mexico refers to the initiation of the investigation, the
preliminary determination and the final determination, and it adds that a “benefit” also must be
identified in a review of the countervailing duty order.
12
92. If nothing else, these divergent interpretatio ns show that the EC, Brazil and Mexico are
attempting to read into Article 1 what is not there.
93. As the United States has shown in its First Submission, Article 1 is silent when it comes to
changes in ownership. Neither Article 1, nor any other provision of the SCM Agreement, addresses
whether and, if so, how the investigating authority should take into account a change in ownership of
the subsidized company.
Observations Regarding the EC’s Oral Statement
94. Mr. Chairman, I would now like to make just a few more observations regarding the EC’s
Oral Statement.
95. At one point, the EC addresses certain decisions of US courts which the United States
discusses in its First Submission. The EC says that the Panel should not consider them when reaching
its decision in this dispute. In our First Submission, we simply point out that these court decisions are
interpreting a countervailing duty law – the United States’ countervailing duty law – which is not
materially different from the SCM Agreement with re gard to any of the provisions at issue in this
dispute. That is why those decisions may be useful to the Panel. But, the Panel still should come up
with its own independent decision interpreting the provisions relevant to this dispute.

11 See Brazil Third Party Submission at para. 42.
12 See Mexico Third Party Submission at para. 9-10.

96. The EC also questions the relevance of the United States’ citations to decisions of the US
Department of Commerce. Let me state that the United States does not cite Commerce’s own
decisions as basis for showing how the SCM Agreement should be interpreted. Rather, the
United States describes those decisions to establish, as a matter of fact, what Commerce’s
privatization methodology is. As it turns out in this dispute, it is especially important that we did so
because the EC mischaracterizes that methodology re peatedly in its First Submission and again in its
Oral Statement.
97. One example is that the EC continues to make negative references to Commerce’s
privatization methodology because, in the EC’s wo rds, this methodology uses an “irrebuttable
presumption” that the previously bestowed subsidies pass through to the successor company.
98. On this point, the EC fundamentally misunderstands Commerce’s privatization methodology.
As the United States has established as a matter of fact in its First Submission, 13 Commerce’s
privatization methodology does not use an “irrebuttable presumption”. It is a different methodology -
- Commerce’s normal methodology for allocating non-recurring subsidies over time -- which uses an
“irrebuttable presumption”. And, in this regard, Commerce’s allocation methodology is no different
from the allocation methodologies used by the EC and other Members and endorsed by the Informal
Group of Experts. Like Commerce, all of these enti ties treat non-recurring subsidies as automatically
benefitting the subsidized merchandise for a period of years. Indeed, the EC’s own countervailing
duty regulations expressly state that the EC has “assumed” this automatic benefit.
14
99. In contrast, Commerce’s privatization methodo logy plainly does not make an “irrebuttable
presumption” that the previously bestowed subsidies pass through to the successor company. As we
have already explained, Commerce’s privatization methodology is dependent on the facts of the
particular case, and normally it results in the apportionment of only a percentage of those subsidies to
the successor company. In some circumstances, moreover, the facts dictate that none of the subsidies
be apportioned to the successor company, as recently happened in a countervailing duty investigation
of stainless steel sheet and strip from France.
100. Thus, the Panel should view the EC’s repeated references to a non-existent “irrebuttable
presumption” as no more than an attempt -- an unsupportable attempt -- to make Commerce’s
privatization methodology appear as though it is somehow unreasonable.
Summary
101. In summary, the United States believes that the US Department of Commerce handled a
situation not addressed by the SCM Agreement in a sound and well-reasoned manner, and there is no
basis for the Panel to find that Commerce acted in any way that was inconsistent with the SCM
Agreement.
Conclusion
102. Mr. Chairman, that concludes my presentation. The United States looks forward to answering
any questions that the Panel may have.

13 See US First Submission at paras. 85-86 and 143-45.
14 See EC Countervailing Duty Regulations, OJ C 394, 17.12.98, p. 12 (Exhibit USA-14).

ATTACHMENT 2.3
RESPONSES OF THE UNITED STATES
TO QUESTIONS FROM THE PANEL
AT THE FIRST MEETING WITH THE PANEL
30 June 1999
QUESTIONS FOR BOTH PARTIES
Q.1. If a new rate of subsidization is being established in the course of a review (either under
Article 19 or Article 21 of the SCM), according to data for the relevant period of review (POR),
are parties of the view that this involves de termining whether subsidization continued over the
POR? Or could a new rate of subsidization be determined without establishing whether
subsidization continued?
1. The United States is of the view that authorities must determine whether subsidization
continues during each POR and makes this determination for each POR. Such a determination does
not entail re-valuing the benefit from past subsidies. Among the many factors that could change the
rate of subsidization in a review are the following:
2. First, there could be new subsidy programm es, which could provide new non-recurring or
recurring subsidies. The new non-recurring subsidies would have to be identified, valued and
allocated for the first time, and that portion of the countervailable benefit under such programmes
allocable to the period of review would be distributed over either the production of subject
merchandise during that period (in the case of a domestic subsidy) or exports of the subject
merchandise during that period (in the case of an export subsidy). In the case of a new recurring
subsidy, the entire benefit granted during the period of review would be “expensed” during the review
period, that is, allocated over either the total production or exports of the subject merchandise during
the period of review.
3. Second, the level of benefit in a recurring subsidies programme could change. For example, a
programme that initially granted the producer $1 for every unit exported could be changed to grant the
producer $2 for every unit exported. This change would be accounted for in the review.
4. Third, for non-recurring subsidies, that portion of the benefit from the original financial
contribution allocable to the period of review must be determined. Under the US methodology, this
amount declines each year. Under the EC methodol ogy, this amount remains constant for each year.
Where the CVD order covers a number of subsidy programmes, the amortization of one or more
subsidies could expire during the period of review, terminating CVD liability for subsidies under that
programme.
5. Fourth, all of the recurring and non-recurring subsidies allocated to the period of review must
be divided over the production of the subject merchandise during that period (in the case of domestic
subsidies) or the total exports of the subject merchandise during that period (in the case of export
subsidies). The ad valorem rate of subsidization will increase or decrease in inverse proportion to the
total amount of production or exports over which each subsidy is allocated.
6. Fifth, new exporters could have shipments during the review period that would have to be
reviewed. The level of subsidies these exporters received could differ from that of the other
exporters.

7. All of these examples involve determining the extent to which recurring subsidies are paid
during the review period, or to which the benefits fr om either past (and, therefore, previously valued)
or new non-recurring subsidies are allocable to the POR and attributable to the exports covered by the
review. In the case of non-recurring subsidies, like all of those provided to British Steel, USDOC
does not look at events occurring during the POR to determine whether the subsidy recipient received
a "benefit" within the meaning of Article 1.1 that is countervailable, unless the particular subsidy at
issue was provided during the POR. Rather, USDOC looks only at the time of the subsidy bestowal
to determine whether the requisite "benefit" exists.
8. For example, if two subsidies had been found in the original investigation ten years before the
POR, one non-recurring and the other recurring, the non-recurring subsidy had been allocated over
nine years, and the recurring subsidy discontinued, no subsidization would be found in the POR. This
finding that subsidization did not continue would not entail re-determining the amount of the benefit
from the original non-recurring subsidy. The amount of the benefit for non-recurring subsidies is
determined at the time such subsidies are bestowed. Once the amount of the benefit (and its
specificity) have been established, the Agreement permits that benefit to be amortized over time
without any reevaluation. The EC’s practice recognizes this principle.
Q.2. Are parties of the view that establishing whether subsidization continued over the POR
involves looking into whether a financial contribu tion conferring a benefit took place over the
POR? Or could one establish the existence of subsidization during the POR without assessing
whether a financial contribution conferring a benefit was made during the same period?
9. The United States is of the view that, in order to establish whether subsidization continued
over the POR, authorities must determine that a benefit conferred by a financial contribution is
allocable to the POR. However, the United States does not believe that the financial contribution
must have been made during the POR. A financial contribution conferring a benefit may have been
made for a non-recurring subsidy many years before the POR, with that benefit being amortized over
a period that includes the POR.
10. When dealing with non-recurring subsidies, such as large grants or equity infusions that occur
only once and that benefit the production or export of merchandise over time, it is not necessary to
find a physical disbursement of fund s, or an administrative or legislative decision to forego revenue,
in each year of the benefit stream in order to determine that a financial contribution and a benefit
exist. In fact, for most large non-recurring subsidies, it is unusual for there to be any government
action at all throughout the life of the benefit stream, once the decision to bestow the subsidy has been
taken. However, this does not mean that there is no financial contribution, within the meaning of
Article 1.1, in each year of the benefit stream. If a government gave $1 million to the widget industry,
and the average useful life of assets in the widget industry was 10 years, the United States considers
that it is appropriate for authorities to find that a financial contribution and a benefit exist in each of
those 10 years, even though the physical act of disbursement occurred only once – in year one. To
our knowledge, all authorities that impose counterv ailing measures, including the EC, consider that a
financial contribution and a benefit exist for non-recurring subsidies in each year of the benefit
stream, regardless of whether an actual physical disbursement of funds or decision to forego revenue
takes place in each of those years.
11. In the case of recurring subsidies, a one-time-event approach is more logical. For example, in
the case of a tax credit that is given each year on a continuing basis, authorities would look to see
whether the single act of disbursement, or the single decision to forego revenue, took place during the
POR. For example, if a tax credit were granted in each of the first four years after an investigation,
authorities could find a financial contribution and a bene fit in each of the first four PORs. If that tax
credit was not granted in the fifth POR, authorities should find no financial contribution and,
consequently, no benefit, in that POR.

12. The United States is also of the view that authorities must determine whether there is a benefit
in the POR. When we say (as in para.119 of the US First Submission) that Article 1.1 does not
require a determination that there is any continuing benefit after the subsidy bestowal, we mean that
there is no requirement that authorities assess the continuing economic effects of a subsidy, such as in
the form of increased output or lower prices, on a company’s production from year to year after the
subsidy has been bestowed. To our knowledge, no authorities that impose countervailing measures,
including the EC, assess the continuing economic effects of subsidies before imposing duties. It is the
view of the United States that assessing the continuing benefit of a subsidy on the subsidized
company or subsidized productive units constitutes assessing the continuing economic effects of a
subsidy. The SCM Agreement embodies the presumption that subsidy benefits continue over time
and thus does not require the annual (or episodic) reassessment of whether the effect of the original
benefit may have been augmented or diminished by subsequent events.
13. When we say (as in para. 118 of the US First Submission) that the identification and
measurement of a subsidy will be made only once, as of the time of the subsidy bestowal, we mean
that a subsidy is analysed as of the time that it is bestowed. Article 1 of the SCM Agreement states
that a “...subsidy shall be deemed to exist...” if there is a financial contribution and “... a benefit is
thereby conferred.” Article 1 contemplates that the existence of a “benefit” will be determined on the
basis of market-based benchmarks. Article 14 provides that a “benefit” will be measured on the basis
of such benchmarks. Articles 1 and 14 presume that the identification of a subsidy and the
measurement of the benefit refer back to the time of bestowal. A grant received in 1988 is presumed
to exist as of 1988, when the money is actually received.
14. With respect to long-term subsidies, the benefit stream – i.e., the number of years over which
a subsidy is allocated and the fraction of the total benefit to be offset in each year of that allocation
period – is dictated by the terms and conditions that prevail in the year of bestowal of the subsidy.
For example, a 10-year, fixed-rate loan received in 1988 would have a benefit stream consisting of a
10-year allocation period and, in each of those 10 years, a fraction of the total interest savings over the
10-year period that would be calculated by refe rence to the interest differential between the
government rate and the market benchmark prevai ling in 1988. Any changes in the spread between
the government rate and the market benchmark that might occur after 1988 would have no effect on
the benefit stream calculated with respect to the 1988 long-term loan. Similarly, an equity infusion
received in 1988 would be evaluated by reference to the usual investment practices of private
investors prevailing in 1988. Even though market conditions may change after 1988, and private
investors might find investment in a particular industry more or less attractive than they did in 1988,
such changes would have no effect on the calculation of the benefit stream. In both of these instances,
the identification of the subsidy and measurement of the benefit must be performed by reference to
the date of bestowal. Otherwise, the provisions of Articles 1 and 14 would be rendered meaningless.
15. None of this is to say that investigating authorities do not need to determine whether there is a
benefit in the POR. Clearly, the legal requirements of Article 1, including financial contribution,
benefit, and specificity, must be met in each POR. By referring to the benefit stream originally
calculated with reference to benchmarks prevailing in the year of the subsidy bestowal, allocating a
portion to subsequent years, including the POR, calculating the per unit subsidy amount based on
production or exports during the POR, and taking into account other changes required by the SCM,
such as whether a subsidy has been withdrawn by being repaid, the United States is of the view that
investigating authorities do in fact determine whether there is a benefit in the POR.

QUESTIONS TO THE UNITED STATES
Q.1. Is the US of the view that verifying the existence of benefits during the POR merely
requires (a) valuing the subsidy at the time of bestowal, and (b) deciding on an appropriate
method to amortize the subsidy over time?
16. Generally, yes. All that the SCM Agreement requires is for the investigating authority to
identify and measure a subsidy "benefit" within the meaning of Article 1.1 as of the time when the
"financial contribution" was made or, in other words, as of the time of the subsidy bestowal. The
investigating authority performs this task during th e original countervailing duty investigation, and it
also allocates -- or amortizes -- the measured subsidy "benefit" over a period of years at this same
time. In a subsequent administrative review, the in vestigating authority does not re-identify, or re-
value, the "benefit," although it may modify the allocated "benefit" stream based on events occurring
during the POR, as is explained more fully above in response to question 1 of the Panel's Questions to
the Parties.
17. To our knowledge, this is the practice of every country that imposes CVD measures,
including the EC. The EC has not argued that non-recurring subsidies generally may not be allocated
over time, without re-valuing the benefit in each year - - only that privatization is a special case
requiring an exception to the normal rule of non-re-valuation.
18. The United States also notes that in both the original countervailing duty investigation and in
any administrative review, USDOC will examine whether any of the subsidies at issue could be
considered to have been repaid, in whole or in part, subsequent to their bestowal. USDOC will
recognize any monies returned to the government for the purpose of repaying a subsidy, and it does it
essentially by subtracting the amount repaid from the allocated "benefit" stream calculated in the
original investigation. Thus, there is no re-identifying, or re-valuing, of the subsidy “benefit” based
on events occurring after the subsidy bestowal. USDOC continues to use the allocated "benefit"
stream, as originally calculated based on events as of the time of the subsidy bestowal. USDOC
considers post-subsidy bestowal events, in the case of repayment, only for the purpose of determining
the appropriate allocation of the subsidy “benefit” over time. In other words, USDOC essentially
allocates the subsidy “benefit” back to the govern ment, without re-identifyi ng, or re-valuing, the
subsidy “benefit” based on events occurring after the subsidy bestowal.
Q.2. If this statement accurately portrays the methodology applied by the US, is the US of the
view that under the SCM Agreement it is not required to take into consideration events that
may offset a subsidy at the time of bestowal?
19. When identifying and measuring the subsidy "b enefit," the investigating authority is only
required to take into consideration events as of the time when the "financial contribution" was made
or, in other words, as of the time of the subsidy bestowal. If there is an event occurring as of that
time, such as the offset referenced in this ques tion, the investigating authority would take it into
account when identifying and measuring the subsidy "benefit."
20. The United States notes that the term "offset" is not defined in this question, and that term
does not appear anywhere in the SCM Agreement in the context of the identification and
measurement of the subsidy "benefit." It only appears in Article 10, footnote 36, and in Article 21.2,
where the SCM Agreement talks about a countervailing duty being designed to offset the
subsidization found to exist. In these contexts, the SCM Agreement used the term “offset” only to
define the action that Members may take in imposing countervailing measures to counteract subsidies
on imported merchandise. However, the only re ference in the SCM Agreement to a post-bestowal
modification in the subsidizing Member country is the concept of withdrawal in Article 19.1.

21. In its countervailing duty law, however, the United States does recognize and take into
account certain "offsets" to the subsidy "benefit" that may exist as of the time of the subsidy bestowal.
These "offsets" are set forth in Section 771(6) of the United States' countervailing duty statute, 19
U.S.C. § 1677(6), and they include:
(A) any application fee, deposit, or similar paym ent paid in order to qualify for, or to re-
ceive, the benefit of the countervailable subsidy,
(B) any loss in the value of the countervailable subsidy resulting from its deferred receipt,
if the deferral is mandated by Government order, and
(C) export taxes, duties, or other charges levied on the export of merchandise to the
United States specifically intended to offset the countervailable subsidy received.
As can be seen, the first two listed offsets simply recognize that the net benefit received may be
different from the nominal benefit received. The third offset essentially permits the government of
the exporting country to levy special duties, in place of countervailing duties imposed by the
United States, for the express purpose of offsetting the subsidy. None of these offsets involves the re-
valuation of benefits from non-recurring subsidies af ter their original bestowal. Furthermore, these
offsets described in US law should not be confused with the term “offset” as it appears in Article 10
and in Article 21.2.
Q.3. Is the US of the view that, when determining the existence of benefits under the SCM
Agreement, it is not required to take into consideration events subsequent to the time of
bestowal that may offset a subsidy?
22. No. The United States is of the view that, in determining the existence of benefits under the
SCM Agreement, investigating authorities are not required to determine whether events subsequent to
the time of bestowal of the subsidy may, if the subsidy is re-evaluated as of the time of such events,
eliminate any continuing competitive advantage fr om the subsidy to the owner of the company on
which the subsidy was bestowed. In its First Submission, the United States provided two examples
of this point. One example was that
if a government were to provide a specific producer with a smokestack scrubber in
order to reduce air pollution, the Department would countervail the amount that the
company would have had to pay for the sc rubber on the market, notwithstanding that
the scrubber may actually reduce the company’s output or raise its cost of production.
General Issues Appendix, 58 Fed. Reg. at 37261. The other example was as follows:
Similarly, the Department does not take account of subsequent developments that
may reduce any initial cost savings or increase in output from a subsidy. For instance,
if a government provides a piece of capital equipment to a company, the Department
continues to countervail the value of that equipment as received, regardless of
whether it subsequently becomes obsolete or is taken out of production.
Id. (citation omitted).
23. Indeed, as the United States explained at the first panel meeting, the USDOC similarly does
not take into account subsequent developments that just as arguably may have increased the value of a
subsidy. The example that the United States gave involved a subsidy for research and development
that led to a brilliant discovery and turned out to generate unexpectedly large profits for the subsidized
company.

24. The United States notes, however, that the USDOC does take into account post-subsidy
bestowal events in the separate context of allocating the subsidy "benefit," as explained more fully
above in response to question 1 of the Panel's Questions to both Parties. The USDOC explicitly
recognizes repayment of a subsidy to the governme nt as a subsequent event that eliminates the
subsidy repaid. Repayment is of the unamortized portion of the subsidy remaining. Recognizing
repayment does not entail re-valuing the subsidy, an exercise which would involve redetermining the
original benefit and calculating a new amortization table.
Q.4. The US has asserted that it would cease co llecting countervailing duties in the event that
a non-recurring subsidy is repaid at some time during the period over which that subsidy is
allocated. Does the US consider that the SCM Agreement requires the cessation of collection of
countervailing duties in such circumstances? If so, please indicate which provision(s) of the
SCM Agreement contain(s) this obligation. If not, why would the US cease the collection of
countervailing duties in such circumstances?
25. Where it is clear that a subsidy has been repaid in full or withdrawn, the United States
believes that Article 19.1 requires the cessation of the collection of countervailing duties. The
United States has recognized that repaying the unamortized portion of a non-recurring subsidy (which
effectively includes interest on the principal amount) terminates the subsidy, so that the United States
would be required to cease collecting countervailing duties in such cases.
Q.5. Can the methodology described in para. 50 of the US first submission be seen as a way
to address the issue of possible offsets to subsidies?
26. The United States agrees that its repayment methodology is a way to determine that amount
of the price paid for a subsidized company that may be treated as a payment for the prior subsidies. It
would be fair to call this a “partial withdrawal,” provided it were clear that the partial withdrawal was
of the unamortized part of the subsidy originally received and allocated over time. The United States
would not agree that whether the benefit originally received and allocated over time continued to
constitute a competitive advantage to the new owners of the privatized company is a relevant
consideration. The United States would not agree that the concept of “offset” is a relevant
consideration in the context of a post-bestowal modification of subsidies, as explained above. The
only relevant post-bestowal concept under the SCM Agreement in this context is withdrawal, as
defined in Article 19.1. Therefore, we would not agree that the “offset” of a benefit (in the sense of
the continuing advantage from the original subsidy) was a relevant consideration.
27. In other words, the United States does not consider the term “offset” to be equivalent to the
withdrawal of a subsidy. Withdrawal of a subsidy must be of the unamortized portion of the benefit
originally determined. The term “offset” should only be used in the context that it is used under
Article 10 and Article 21.2 – i.e., the right of Members to counteract subsidies on imported
merchandise.
Q.6. The methodology described in para. 50 of the US first submission allegedly indicates
how much of the surviving benefits "pass through" to a privatized company, by allocating such
benefits between sellers (the government) and buyers (private investors). How can this
allocation be represented by the ratio of non-rec urring assets to net worth, times the purchase
price? What is the principle involved?
28. USDOC concluded that privatization could entail the repayment of prior subsidies to the
privatized company to the government as part of th e purchase price. To the extent this occurred, the
prior subsidies would be extinguished. This raised the question -- to what extent did the purchase
price constitute the repayment of subsidies? USDOC answered that question by posing another --
how much of what was being purchased consisted of subsidies? Put another way -- to what extent
was the price paid for the privatized company attribut able to prior subsidies? In order to answer this

final question, USDOC attempted to determine the proportion that subsidies historically comprised of
the company's net worth.
29. From USDOC's point of view, this approach addressed the privatization issue without doing
violence to a basic premise of the SCM Agreement and its law -- that benefits received by foreign
producers from their government on terms inconsistent with commercial considerations constituted
countervailable subsidies. On the other hand, the solution did not require USDOC to ignore the fact
that the price paid for a subsidized company may have been higher than it would have been absent
any subsidies, so that at least some of that price should be treated as a repayment of those subsidies.
30. The United States also notes that, in this dispute, the EC has only claimed that any
privatization methodology that does not treat an arm's length, fair market value transaction as cutting
off previously bestowed subsidies violates Articles 1.1, 10, 14 and 19.4. The EC has not claimed that
even if USDOC's privatization methodology does not violate Articles 1.1, 10, 14 and 19.4 by failing
to treat an arm's length, fair market value transaction as cutting off the prior subsidies, it nevertheless
violates Articles 1.1, 10, 14 and 19.4 on the ground that the calculation, or the principle underlying it,
used by USDOC actually to allocate the prior su bsidies between the government and the successor,
privatized company is somehow unreasonable.
31. The United States also notes that the SCM Agreement, in any event, does not get down to the
level of detail of prescribing the specific calculations that an investigating authority must use when
allocating subsidies. As the United States explains in its Rebuttal Submission, while the SCM
Agreement recognizes the concept of allocating subsidies over time, it is silent on the mechanics of
allocation.
Q.7. According to the method described in para . 50 of the US first submission, the lower the
proportion of non-recurring assets to a compan y's net worth, the larger the share of benefits
that is passed on to the privatized firm. Why is this so?
32. The United States first notes one point of clarification. The United States assumes that the
reference to "the ratio of non-recurring assets to net worth" means "the ratio of non-recurring
subsidies to net worth."
33. It is generally true, as this question suggests, that the smaller the ratio of non-recurring
subsidies received by the government-owned company to the government-owned company’s net
worth, the larger the share of benefits that is passed on to the privatized company. This result obtains
because USDOC's calculation multiplies the ratio of non-recurring subsidies to net worth times the
purchase price, and it is the resulting product -- an amount equal to a portion of the purchase price --
that is first allocated to the seller and deemed the repayment of subsidies; the remaining portion of the
prior subsidies -- not the remaining portion of the purchase price -- is then allocated, or passes
through, to the privatized company. When the ratio of non-recurring subsidies to net worth is
relatively small, correspondingly less of the purchase price will be deemed the repayment of subsidies
to the government and, therefore, correspondingly more of the prior subsidies will be passed through
to the privatized company. The converse, of course, is also true. When the ratio of non-recurring
subsidies to net worth is relatively large, correspondingly more of the purchase price will be deemed
the repayment of subsidies to the government and, therefore, correspondingly less of the prior
subsidies will be passed through to the privatized company.
34. The result that the share of prior subsidies allo cated to the privatized firm decreases with the
proportion of non-recurring subsidies to net worth over time is the result of increasing the proportion
of the purchase price as dedicated to the retirement of subsidies, to the extent that non-recurring
subsidies have constituted a high proportion of net worth over time. This may seem counter-intuitive
at first, because it seems to make relatively small subsidies harder to repay than big ones. However,
we believe that it makes perfect sense to allocate only a small portion of the price paid for a company

that has received relatively small subsidies as repayment for those subsidies. Of course, because such
subsidies are small, they actually are more easily repaid than large ones. The small proportion is
taken from a relatively larger price, so that the total amount (if not proportion) dedicated to repayment
of the prior subsidies may be very large.
Q.8. At para. 181 of its first written submissi on, the US argues that there is no need to
determine whether the private firm under investigation benefited from any financial
contribution if that firm purchased assets from a government-owned company that received
non-recurring subsidies. Does the US consider that an arm's length privatization at fair market
value has no impact on the presumption that subsidies conferred on the government-owned
company will pass through to the new owners of the privatized company?
35. The United States considers that an arm’s-length privatization at fair market value does not
require investigating authorities to revalue the be nefit conferred by the financial contribution that
created the subsidy. However, the United States does consider that privatization effectively may
entail the repayment of some such subsidies and, to the extent that it determines repayment to have
occurred, treats the subsidies as having been retired, so that liability for CVDs on those subsidies does
not “pass through” to new owners of the privatized company.
36. USDOC takes into account the privatization transaction not by re-identifying, or re-valuing,
the subsidy "benefit" as of the time when the privatization occurred. Rather, USDOC only identifies
and measures the subsidy "benefit" once, based on events as of the time when the "financial
contribution" was made, i.e., as of the time of the subsidy bestowal. As is explained above in
response to questions 1 and 2 of the Panel's Questions to Both Parties, USDOC instead takes the
privatization transaction into account through the way in which it allocates the subsidy "benefit."
Essentially, it takes the "benefit" stream as originally allocated over a period of years under its normal
allocation methodology and reapportions this "benefit" stream between seller and purchaser for the
years following the privatization. The normal result under USDOC's approach is that a portion of the
prior subsidies are allocated to and deemed repaid to the seller, which is the government, and a
portion of the prior subsidies are allocated, or pass through, to the successor, privatized company.
Q.9. If this is so, the US appears to effectively argue that the benefit of the financial
contribution is attached to the assets, and that the benefit of the financial contribution passes
through to the new owner with those assets. If the benefit is attached to the assets, why is it that
the full benefit of any prior financial contribution does not automatically pass through to the
new owner when it acquires all of the assets of a government-owned company? If the benefit is
attached to the assets, how will the benefit be neutralized on repayment of the subsidy?
37. The United States rejects the notion that subsidies “attach” to assets or to companies through
the operation of any mechanism independent of the SCM Agreement. The SCM Agreement does not
remotely address this question. The SCM Agreement requires simply that there be a financial
contribution and that a benefit be thereby conferred. If this benefit is specific (and non-recurring), the
Agreement permits the subsidy to be allocated over time, without regard to whether some subsequent
event may have eliminated the competitive advantag e to the owners of the subsidized company (be
they the original owners or new ones) from having received the subsidy. The USDOC treats prior
subsidies as having been withdrawn only to the exte nt that they have been repaid. The sale of a
productive unit may be structured as either a sale of assets or a sale of shares, and it is reasonable to
allocate some of the purchase price for either to the repayment of prior subsidies.
Q.10. Please explain how and why, in the case of the sale of the Richemont facility (see
Exhibit USA-30), the USDOC found that all subsidies potentially allocable to Richemont were
returned to the seller through the price paid by Usinor. Please comment on footnote 17 to the
EC's first written submission in light of USDOC's findings regarding Richemont.

38. In the countervailing duty investigation of Stainless Steel Sheet and Strip in Coils from
France, 64 Fed. Reg. 30774 (8 June 1999), USDOC applied its privatization methodology to the sale
of Centrale Sidérurgique de Richemont ("Richemont"), which was a wholly owned subsidiary of
Usinor, a company owned by the French government. The facts surrounding this transaction dictated
that all of the previously bestowed subsidies be allocated back to Usinor, with no portion of these
subsidies being allocated to the successor, privatized company. Specifically, when the simple average
of the yearly ratios of non-recurring subsidies received by Richemont to Richemont's net worth was
multiplied by the purchase price paid to Usinor, the resulting product was sufficiently high that all
previously bestowed subsidies were allocated to Usinor. Consequently, none of the prior subsidies
potentially allocable to Richemont passed through with it when it was privatized.
39. Because most of the data pertaining to this Richemont privatization transaction is of a
business proprietary nature, it cannot be divulged in the context of this explanation. Nevertheless, a
hypothetical scenario may help to clarify how th e above result could occur. Assume that the
government-owned company has a ratio of non-recurring subsidies to net worth equal to 1/4, or 25 per
cent, and prior non-recurring subsidies of £250,000, and it is purchased at a price of £1,000,000. In
this scenario, the portion of the purchase price allocable to the seller as representative of the prior
subsidies would be .25 x £1,000,000, or £250,000. This amount, £250,000, is sufficient to cover all
of the prior subsidies, which themselves totalled £250,000. As a result, none of the prior subsidies
would be left to be allocated, or passed through, to the successor, privatized company. Instead, they
would remain with the seller.
40. As the case of Richemont shows, the EC is wrong when it asserts in footnote 17 of its First
Submission that "it is effectively impossible to avoid the pass-through of subsidies previously
bestowed" under USDOC's privatization methodology. Rather, as the United States emphasized in its
Oral Statement at the first panel meeting, one reason that USDOC's methodology is reasonable is that
it pays particular attention to the facts of each case and does not predetermine one result or another.
When the facts dictate that the product of the ratio of non-recurring subsidies to net worth and the
purchase price is sufficiently high in relation to the prior subsidies, as in the case of Richemont, the
result that obtains under USDOC's methodology is no pass-through of subsidies to the privatized
company.
41. It is also apparent from footnote 17 of the EC's First Submission that the EC does not
understand how USDOC's calculation works. The EC asserts "[a]verage prior subsidies would need
to exceed the average net worth of the company" -- or, in other words, the ratio of non-recurring
subsidies to net worth would have to exceed one -- for there to be no pass-through of subsidies to the
privatized company.
1 As the above hypothetical scenario shows, the facts of a privatization
transaction can lead to a determination that none of the prior subsidies pass through to the privatized
company when the product of the ratio of non-recurring subsidies to net worth and the purchase price
is sufficiently high in relation to the amount of the prior subsidies.
Q.11. At para. 181 of its first written submission , the United States submits that "there is no
need … for a second benefit determination after the change in ownership." Is it the US position
that USDOC did not, and was not required to, find "benefit" (within the meaning of
Article 1.1(b) of the SCM Agreement) to UES and BSPLC in the relevant administrative
reviews? If this is the US position, please explain why, in Section III ("Calculation of benefit")
of the administrative review covering calendar year 1996, USDOC "first determined BS plc's
benefits in 1996", and subsequently added "BS plc's and UES's benefits for each programme".
Is it possible that such terms could imply that USDOC found benefit to UES and BSPLC?

1 The United States explained at the first panel m eeting that USDOC caps the ratio of non-recurring
subsidies to net worth at one.

42. The US position is that a “benefit” under Article 1 must be identified and measured only
once, when the financial contribution is made. Once the benefit (from a non-recurring subsidy) has
been identified and measured, it may then be allocated over time. After this allocation has been made,
an investigating authority may find a benefit within a subsequent period of time by finding that the
period over which the benefit from the original financial contribution is allocated includes that
subsequent period, and determining the amount allocated to that period. The investigating authority
need not re-value and re-allocate the original subsidy. In its administrative determinations, when the
USDOC uses the term “benefit” it is referring to the process (or result) of determining the amount of
the originally-determined benefit to be allocated to a particular period of investigation or review.
43. This question suggests that the two Article 1.1 “benefit” determinations advocated by the EC
are (a) a “benefit” determination in the original countervailing duty investigation and (b) a “benefit”
determination in a subsequent administrative review. To the contrary, the EC contends that
Article 1.1 requires the investigating authority to establish, first, that a “benefit” was conferred by the
“financial contribution” as of the time when the financial contribution was made, i.e., as of the time of
the subsidy bestowal, and, second, that a “benefit” was conferred by the very same “financial
contribution” as of the time when the ownership change took place. The EC contemplates that the
investigating authority would make both of these de terminations in the original countervailing duty
investigation and would not re-visit these determinations in any subsequent review.
44. The United States is of the view that the investigating authority is only required to identify the
Article 1.1 subsidy “benefit” once, based on events as of the time when the “financial contribution”
was made, i.e., as of the time of the subsidy bestowal. Normally, this “benefit” determination is made
in the original countervailing duty investigation, and the investigating authority does not re-visit the
determination in any subsequent review.
Q.12. Does the USDOC change-in-ownership me thodology only apply in the event that
government-owned assets are sold to private comp anies, or can it also apply when privately-
owned assets are sold to private companies? If such methodology does not apply in the context
of privately-owned assets, why is this so?
45. The methodology also applies when privately-owned assets or shares are sold to other private
companies. As in the case of privatization, a portion of the purchase price is allocated to payment of
the unamortized subsidies of the company that is sold. Because the seller is not the government,
however, these subsidies are not treated as having been repaid. Instead, the amount of subsidies that
would have been retired in the case of a privatization simply remains with the seller. USDOC’s
methodology is explained in some detail in Exhibit USA-10, which sets out the Final Results of
Redetermination Pursuant to Court Remand in Delverde, SrL v. United States, Consol. Court No. 96-
08-01997 (CIT), dated 2 April 1998.
Q.13. In its concluding remarks at the first su bstantive meeting, the US referred to the market
distortion caused by the transformation of a failed steel company into a new and improved steel
company through subsidization. The US noted the EC argument that, when that steel company
changes hands, the purchase price reflects the fact that it is now new and improved. The US
asserted, however, that the new and improved company does not "shrivel up"; it is the new and
improved steel company that is transferred. The US stated that therefore "the benefits [to the
steel company] continue. The distortion that was introduced into the market-place by the
original subsidy is still there. This is what we mean when we say that there is still a benefit, and
still a subsidy."
Does the US suggest that a "benefit" (withi n the meaning of Article 1.1(b) of the SCM
Agreement) will remain after an arm's length privatization so long as a market distortion
caused by pre-privatization subsidization continues? If so, please explain the basis for this
interpretation of the term "benefit" in Articl e 1.1(b), and please indicate whether the mere

existence of the market distortion therefore ju stifies the imposition of countervailing duties on
the privatized company.
At para. 188 of its first written submission, the US states that "the object and purpose of
the SCM Agreement is, in fact, to deter and offset trade-distorting government subsidies
benefiting merchandise and causing injury to an industry in the importing country." Does the
US consider that it is also the purpose of countervailing duties to "offset trade-distorting
government subsidies benefiting merchandise and causing injury to an industry in the
importing country"? If so, please explain in detail if, and how, this approach is consistent with
the definitions of "countervailing duty" contai ned in footnote 36 of the SCM Agreement and
Article VI.3 of GATT 1994.
46. The United States does not suggest that the amount of market distortion actually caused by a
subsidy can be measured and serve as the basis for assessing countervailing duties. The SCM
Agreement permits countervailing duties to offset subsidies, not the amount of economic distortion
caused by subsidies. This is true regardless of whether or not subsidized companies are privatized.
The only basis for finding a benefit from a subsidy in the tenth year of the period over which that
subsidy is allocated is the reasonable presumption that the benefit from that subsidy extends over
time. This is the presumption that is embodied in the Agreement. The actual competitive advantage
to a firm from receiving a subsidy may be more or less than the amount of the subsidy and may last
for a longer or shorter period of time than the actual amortization period selected. If proof and
measurement of the precise amount of economic distortion were conditions of imposing
countervailing measures, the imposition of countervailing measures would become impossible. More
to the point, the SCM Agreement requires no such demonstration.
47. To rebut the EC’s argument that the arm’s-length sale of a subsidized company necessarily
eliminates such distortions, the United States emphasized the point that the arm’s-length sale of a
subsidized firm does not cause the company to “shr ivel up,” thus automatically eliminating whatever
economic distortions remain from pre-privatization subsidies.
48. One weakness in the EC’s argument is that Article 1.1 does not impose any requirement that
the benefit inherent in the financial contribution be re-examined and demonstrated to confer a
continuing advantage over time. If that were the case, investigating authorities would have to re-
examine every non-recurring benefit every year, regardless of whether the ownership of the subsidy
recipient had changed. In practice, investigating authorities determine the benefit as of the moment of
the financial contribution and, if a specific subsidy is found to exist, allocate that subsidy over a
reasonable period. Once an injury determination is made, the economic distortion is presumed to last
over the amortization period and to end when the amortization period ends.
49. The United States does not rely on subsidies having any particular economic impact as a
condition of countervailability. It relies on being able to countervail subsidies when the conditions for
doing so in the SCM Agreement have been satisfied. These conditions are that there is a financial
contribution which creates a benefit, specificity, and injury. The SCM Agreement embodies the
presumption that subsidies continue to benefit production over time, and therefore does not require a
demonstration or quantification of their continued effect. The essence of the EC’s argument is to
transform this presumption into a new condition that must be satisfied before countervailing duties
may be imposed. To accept the EC’s argument and impose this new condition would be tantamount
to amending the SCM Agreement without the consent of the Members.
50. Finally, the United States would like to clarify that it was not attempting to argue, at the first
panel meeting, that the existence of a "benefit" under Article 1.1 of the SCM Agreement following a
privatization is in any way dependent on any inquiry into whether the market distortions caused by the
pre-privatization subsidies are still there. The SCM Agreement -- and, in particular, Article 1.1 --
does not require the investigating authority to re-identify, or re-value, the "benefit" following a

privatization. It is silent regarding what effect, if any, a privatization has on prior subsidies.
Article 1.1 only requires the investigating authority to identify and measure the "benefit" once, based
on the events surrounding the original subsidy bestowal.
51. In referring to the market distortions caused by pre-privatization subsidies, the United States
was only trying to address the likely reasoning behind the absence of any requirement in the SCM
Agreement to treat an arm's length, fair market value privatization transaction as cutting off prior
subsidies. The United States was also attempting to offer an alternative economic rationale to that
proposed by the EC -- a rationale which itself is not contained in the SCM Agreement. As the
United States explained in its First Submission, the object and purpose of the SCM Agreement is to
deter and offset trade-distorting government subsidies benefiting merchandise and causing injury to
an industry in an importing country, and any focus on the purchaser in a privatization transaction --
meaning the new owner of the privatized company -- is therefore inadequate because it does not
address the trade distortions which subsidies cause, particularly in the context of the market in a
heavily subsidized industry like the steel industry.
52. Regardless of how the new owner may or may not be benefiting as a result of the
privatization transaction, the subsidization continues to distort trade through artificially high output,
through artificially low output prices resulting from the excess capacity which they created and
through the reduced value of companies throughout the industry. Particularly when it reaches levels
like £7 billion as in this dispute, the subsidization can also, for example, dramatically increase the
competitiveness of a steel company by financing extensive modernization of facilities and the use of
the most advanced production technologies, along with whatever training of workers is necessary,
among other things. The sale of that company at a fair market price does not remove the subsidy-
induced distortion caused by the company's strengthened steel production capabilities.
53. That being said, the United States is also of the view that the purpose of countervailing duties
is to "offset trade-distorting government subsidies benefiting merchandise and causing injury to an
industry in an importing country," provided that th is formulation is not seen as suggesting that the
existence of trade distortions is in any way relevant to whether a "benefit" exists within the meaning
of Article 1.1 of the SCM Agreement. As the United States explained in its First Submission at
paragraphs 189-206, the only inquiry into any type of trade distortion is found with regard to the
determination of "injury" under Article 15 of the SCM Agreement. In contrast, the "benefit"
determination under Article 1.1 is defined by Article 14, and it is simply based on a comparison of the
terms of the "financial contribution" to the appropriate market benchmark as of the time when the
"financial contribution" was made.
54. It is true that Article 10, footnote 36, of the SCM Agreement sets the countervailing duty that
may be imposed by the investigating authority at an amount equal to the subsidy bestowed on the
manufacture, production or export of the product, wi thout referring to whether the subsidy is causing
"injury" within the meaning of Article 15. However, to give any meaning at all to Article 15, it would
seem necessary to interpret footnote 36 as contemplating that the imposition of the countervailing
duty would only be imposed after a determination of "injury" under Article 15.
55. Article VI:3 of GATT 1994 reads essentially the same as footnote 36, and therefore it also
does not expressly refer to any required "injury" determination. However, paragraph 6 of Article VI
provides that "[no Member shall levy any ... count ervailing duty on the importation of any product of
the territory of another Member unless it determines that the effect of the ... subsidization ... is such as
to cause or threaten material injury to an established domestic industry, or is such as to retard
materially the establishment of a domestic industry."
Q.14. At paras. 102 - 104 of its first written submission, the United States argues that the
Panel should apply the standard of review pr ovided for in Article 17.6 of the AD Agreement.
Please explain in detail whether and, if so, ho w the application of the Article 17.6 standard of

review in the present case would be consistent with paras. 114 - 119, and especially para. 118, of
the Appellate Body's findings in Hormones (WT/DS26/AB/R). In light of the Appellate Body's
findings in Hormones, please explain in detail why the standard of review contained in
Article 11 of the DSU should, or should not, apply in the present case.
56. The Appellate Body's decision in the Hormones case addresses whether the standard of
review set forth in Article 17.6 of the Anti-Dumping Agreement should apply in disputes under the
SPS Agreement, which is a WTO Agreement that does not have any standard of review expressed in
it. The United States would agree that Hormones now means that the standard of review set forth in
Article 17.6 of the Anti-Dumping Agreement does not apply in disputes under a WTO agreement, like
the SPS Agreement, which does not have any standard of review expressed in it. Rather, the
applicable standard of review is set forth in Articles 3.2 and 11 of the DSU.
57. However, it is the United States' position that the standard of review set forth in Article 17.6
of the Anti-Dumping Agreement is expressly made applicable to disputes under the SCM Agreement
by virtue of the Ministerial Declaration on Dispute Settlement Pursuant to the Agreement on
Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 or Part V of the
Agreement on Subsidies and Countervailing Measur es, which states “the need for consistent
resolution of disputes arising from anti-dumping and countervailing duty measures.” This Ministerial
Declaration must have some meaning. In the United States' view, Members were aware of the many
similarities between the anti-dumping proceedings and the countervailing duty proceedings that a
panel would be reviewing, and they did not want in consistent resolutions for disputes under the Anti-
Dumping Agreement and the SCM Agreement simply because of the use of different standards of
review. The import of the Ministerial Declaration is that a panel should use the Anti-Dumping
Agreement's standard of review when reviewing a countervailing duty proceeding.
Q.15. In addition to the Ministerial Declaration cited at para. 103 of the US first written
submission, on 15 December 1993 Ministers also adopted a Decision on Review of Article 17.6 of
the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade
1994. That Decision provides for a review of the standard of review set forth in Article 17.6 of
the AD Agreement, "with a view to considering the question of whether it is capable of general
application." Could the fact that Members are to review whether the Article 17.6 standard of
review is capable of "general application" suggest that the Article 17.6 standard of review is not
at present of "general application"? What is the relevance, if any, of the abovementioned
Decision in the present case?
58. The United States would agree that the standard of review set forth in Article 17.6 of the
Anti-Dumping Agreement is not now generally applicable to WTO agreements. As explained above
in response to question 14 of the Panel's Questions to the United States, the standard of review set
forth in Article 17.6 of the Anti-Dumping Agreement does not apply in disputes under a WTO
agreement, like the SPS Agreement, which does not have any standard of review expressed in it.
59. The Ministerial Decision on Review of Article 17.6 of the Agreement on Implementation of
Article VI of the General Agreement on Tariffs and Trade 1994 supports the view that the standard of
review set forth in Article 17.6 of the Anti-Dumping Agreement is not now generally applicable to
WTO agreements. However, this Ministerial Decision is not relevant in this dispute. The
United States is not arguing that the standard of review set forth in Article 17.6 of the Anti-Dumping
Agreement should be applied in this dispute because it is generally applicable. Rather, this dispute
involves the SCM Agreement, and it is the United States' position that the Ministerial Declaration
discussed in question 14 therefore makes the standard of review set forth in Article 17.6 of the Anti-
Dumping Agreement expressly applicable to this dispute.

ATTACHMENT 2.4
RESPONSES OF THE UNITED STATES
TO THE QUESTIONS FROM THE EUROPEAN COMMUNITIES
AT THE FIRST MEETING OF THE PANEL
30 June 1999
QUESTIONS FOR THE UNITED STATES
Q.1. In the present case, the EC bases its int erpretation of the Subsidies Agreement on “the
ordinary meaning to be given to the terms of the treaty in their context”, as Article 31:1 Vienna
Convention requires. As this provision sets out, however, the object and purpose is of assistance
in confirming this interpretation. Since the US has very different views regarding the object
and purpose of the Subsidies Agreement and countervailing duties, the EC requests the US to
clarify the following: the EC understands the object and purpose of Part V of the Subsidies
Agreement to be intended to cover remedies applied by WTO Members to protect their
domestic industries from the injurious effect of subsidized imports. Can the US explain where
in Part V of the Subsidies Agreement it finds any basis for asserting that the object and purpose
of countervailing duties is deterring and discouraging subsidization and preventing market
distortions?
1. As a preliminary matter, the United States would reiterate that the panel in Canada Civilian
Aircraft recently cautioned that
the SCM Agreement does not contain any express statement of its object and purpose.
We therefore consider it unwise to attach undue importance to arguments concerning
the object and purpose of the SCM Agreement.
Canada - Measures Affecting the Export of Civilian Aircraft , WT/DS70/R, Report of the Panel, dated
14 April 1999, at para. 9.119, Notice of Appeal filed 3 May 1999.
2. The United States would also note that it formulated the object and purpose of the SCM
Agreement differently from how the EC does in this question. In its First Submission at
paragraph 188, the United States explained that the object and purpose of the SCM Agreement is "to
deter and offset trade-distorting government subsidies benefiting merchandise and causing injury to
an industry in the importing country." In addition, in its Oral Statement at paragraph 85 (emphasis in
original), the United States stated that "a detailed statement of the object and purpose of the SCM
Agreement might be difficult to agree on. But, certainly, at its most basic level the object and purpose
of the SCM Agreement is to discourage subsidization ... ".
3. These formulations of the object and purpose of the SCM Agreement are not expressly found
in Part V of the SCM Agreement. As discussed above, "the SCM Agreement does not contain any
express statement of its object and purpose." Canada Civilian Aircraft, para. 9.119. Nevertheless, the
fact that Part V of the SCM Agreement authorizes a Member's investigating authority to impose
countervailing duties once it determines that a "subsidy" within the meaning of Article 1 is causing
"injury" within the meaning of Article 15 logically would seem to deter and discourage other
Members from providing injurious subsidies.
4. The United States notes that the panel in Canada Civilian Aircraft basically agreed with the
United States' formulations of the object and purpose of the SCM Agreement. It stated that "the
object and purpose of the SCM Agreement could more appropriately be summarized as the
establishment of multilateral disciplines 'on the pr emise that some forms of government intervention

distort international trade, [or] have the potential to distort [international trade].'" Id. The panel in
Brazil - Export Financing Programme for Aircraft , WT/DS46/R, Report of the Panel, dated 14 April
1999, at para.7.80, Notice of Appeal filed 3 May 1999, similarly stated that “the object and purpose of
the SCM Agreement is to impose multilateral disciplines on trade-distorting subsidization”.
Q.2. In paragraph 14 of its oral statement, the US st ates that what is at issue in this case is "a
heavily subsidized company in a heavily subsidized industry". To which company is the US
referring? Is it referring to British Steel Corporation or does it consider the privately-owned
British Steel plc to be a “heavily subsidized” co mpany? Please indicate where in the record of
its published determinations that is before this Panel, the alleged subsidies provided to the
private company British Steel plc (as opposed to the state-owned BS Corporation) are detailed
and their benefits explained (including the US examination of the existence of any “benefit”
conferred on British Steel plc).
5. The United States is referring to the gove rnment-owned company, British Steel, and the
successor, privatized company, BS plc, in paragr aph 14 of its Oral Statement at the first panel
meeting.
6. The record citations requested by the EC are detailed in paragraphs 71 through 99 of the US
First Submission.
Q.3. The US has also privatized companies that have received subsidies during their period
of State ownership. Does the US consider for example the company USEC to still be a
subsidized company? Does the US consider that USEC’s subsidies still distort trade?
7. With regard to the EC’s specific questions here, the EC has not provided any evidence
concerning the alleged subsidies received by USEC or the details of its privatization. Therefore, the
United States is not in a position to respond to these specific questions. However, as a general
proposition, if a subsidized, US government-owned company were privatized on terms that properly
resulted in the allocation of some portion of the pr ior subsidies to the succes sor, privatized company,
the United States would have no basis for objecting to the imposition of countervailing duties if
exports of products produced by the successor, privatized company caused injury to the domestic
industry of another country.
Q.4. How could USDOC explain the apparent contradiction of accepting the market
benchmark for the purposes of establishing a benefit to the state-owned company at the time of
bestowal of the subsidy but rejecting it for th e purposes of establishing a benefit to the
privatized company following privatization? Is this contradiction consistent with Article 14
ASCM?
8. There is no contradiction. This question wrongly assumes that the SCM Agreement requires
the investigating authority to identify and m easure a subsidy "benefit" within the meaning of
Article 1.1 not only as of the time when the "financial contribution" was made or, in other words, as
of the time of the subsidy bestowal, but also as of the time when the privatization took place. The
SCM Agreement does not, however, require the inve stigating authority to identify and measure a
subsidy "benefit" within the meaning of Article 1.1 as of the time when a privatization took place.
Under USDOC’s practice, once USDOC has identified and measured a subsidy "benefit" as of the
time when the "financial contribution" was made, USDOC (like the EC) allocates it over time,
without reassessing its value in each year of the amortization period. Neither the SCM Agreement nor
USDOC ever addresses what an appropriate ma rket benchmark might or might not be if an
investigating authority were to attempt to follow an approach that did identify a subsidy "benefit"
within the meaning of Article 1.1 as of the time when a privatization took place.

Q.5. If a subsidy is “repaid” to the government and is therefore extinguished under
USDOC’s practice, does this mean that the subsidy “benefit” is in fact re-valued in response to
an event subsequent to the original determination? If so, is such re-valuation not in
contradiction with the policy of not examining the use made of subsidies?
9. No. See the United States' responses to questions 1 and 2 of the Panel's Questions to Both
Parties.
Q.6. The EC has made clear that its position is that the Subsidies Agreement requires the
existence of a benefit and the corresponding existence of a subsidy before the goods of a
company being investigated may be countervaile d. Why has the US mischaracterized the EC
approach as involving an inquiry into the 'use and effects' of the subsidy? How does the EC
approach require an examination of the use and effects of the subsidy in the case of a state-
owned enterprises which is privatized at fair market value?
10. As a preliminary matter, the United States notes that, in its view, an inquiry into the use and
effects of a subsidy includes any inquiry into how a subsidy was used by the subsidized company after
its bestowal, or what effect the subsidy had on the subsidized company after its bestowal, or how post-
subsidy bestowal events in the marketplace may have affected the value of the subsidy.
11. Using the example of British Steel, the EC is looking at a "financial contribution," such as an
equity infusion made in 1985, which, the EC admits, conferred a "benefit" when the "financial
contribution" was made in 1985. The EC is calling for a second determination, which is whether that
same 1985 "financial contribution" continued to confer a "benefit" when British Steel was privatized
in 1988. This second "benefit" determination necessarily involves a re-examination of the "benefit"
found to exist as of 1985 based on events subsequent to the 1985 "financial contribution."
Specifically, as the EC has made plain in this disput e, the EC contemplates that this second "benefit"
determination would involve an examination of how the "benefit" found to exist as of 1985 was re-
valued in the 1988 privatization transaction and whether, as a result of this re-valuation, it could be
said that a "benefit" continues from the perspective of the new owner of the privatized company, BS
plc, or perhaps from the perspective of BS plc itself.
12. In the United States' view, the EC’s approach would overturn the presumption that the effect
of a non-recurring subsidy is to provide a benefit over time -- which is a presumption that underlies
the allocation methodologies used by the United States, the EC and other Members and endorsed by
the Informal Group of Experts -- and replace it with a test of whether some post-subsidy bestowal
event has eliminated this presumed effect of the subsidy. That is why the United States calls the EC’s
approach an “effects test”.
Q.7. Under its methodology, USDOC attributes a portion of the purchase price to subsidies
previously bestowed; considering that th e factors taken into account in the gamma
methodology involve events occurring after bestowal of the subsidy (e.g. the net worth of the
company in the years before privatization but after bestowal of the subsidy) is this not an
application in practice of an effects test?
13. No. See paragraphs 49-53 of the United States' Rebuttal Submission.
Q.8. On what basis does the US consider in paragraphs 182 and 187 of its First Written
Submission that the Community argues that it is necessary to demonstrate that the firm under
investigation is the actual recipient of the subsidy?
14. See paragraphs 101, 110, 111 and 112 of the EC's First Submission.

Q.9. If a company which received countervailable subsidies declares bankruptcy, is
liquidated and its assets sold at auction for ma rket value, would the US consider that each
purchaser of assets or productive units received part of the subsidies and that the exports of
each of those purchasers to the US could be appropriately countervailed under the Subsidies
Agreement?
15. The SCM Agreement does not address what significance the sale of a subsidized company's
assets or productive units in bankruptcy has with regard to previously bestowed subsidies. It is silent
on this matter.
16. Consequently, at a minimum, if the investigating authority were to develop and apply a
reasonable approach to this type of situation, it is the United States’ view that the approach would not
be inconsistent with the SCM Agreement.
17. As to how USDOC would handle this type of s ituation under its own practice, it is not clear.
In all likelihood, it would depend, among other things, on the precise nature of the relevant
bankruptcy laws and how they are enforced.
18. The United States notes that, well prior to the development of its current privatization
methodology, the USDOC addressed the sale of assets in the context of a bankruptcy that took place
in Canada, as the EC cites in footnote 4 of its First Submission. That case was Final Affirmative
Countervailing Duty Determination; Oil Country Tubular Goods from Canada , 51 Fed. Reg. 15037
(April 22, 1986) (“OCTG from Canada”). As USDOC explained when discussing the significance of
this case in the General Issues Appendix,
OCTG from Canada involved a situation where a company had become defunct and
non-operational. Its assets were disposed of through a bankruptcy proceeding. This
is a unique situation not involving the sale of an ongoing operating company
exporting subsidized merchandise to the United States. That is not the case in any of
the current steel investigations. Also, ... the issue of "privatization" [was not]
specifically before the Department.
58 Fed. Reg. at 37263.
Q.10. Under Article 19.3 of the SCM Agreement :
" Any exporter whose exports are subject to a definitive countervailing duty but
who was not actually investigated for re asons other than a refusal to cooperate,
shall be entitled to an expedited review in order that the investigating authorities
promptly establish an individual countervailing duty rate for that exporter.”
Supposing the US were to impose a countervailing duty on imports of a product from a
state-owned company, and this company was subs equently privatized by means of an arm’s-
length sale to an unrelated purchaser for fair market value. Since the new exporter has never
been investigated and has never refused to coop erate, it would presumably be entitled to an
expedited review under this provision. Does the US agree with this conclusion?
On this basis, is it not clear that also at the time of the original investigation, it is the
benefit to exporter (i.e. the exporting firm) during the investigation period which has to be
established, rather than a benefit to the original recipient of the subsidy?
19. The United States does not agree with the EC's conclusion regarding a "new exporter" in this
question. It appears that USDOC has not addressed the situation described in this question, and
therefore the United States cannot say definitively how USDOC would handle it. The United States

nevertheless expects that USDOC would not consider the successor, privatized company to be a new
exporter.
Q.11. Article 21:1 Subsidies Agreement sets out that a CVD cannot remain if a subsidy is no
longer “causing” injury (note that the drafters used the present/continuous tense here,
indicating an ongoing injury). If a subsidy no longer exists because a benefit has been
eliminated, how can the US claim that injury could be continuing?
Please confirm whether the US administrative reviews which are the subject of this case
were conducted under Article 21:2 Subsidies Agreement.
20. Because the changes in ownership at issue in this case did not eliminate the previously
bestowed subsidies, the situation assumed by the question – the absence of a subsidy – does not exist.
21. The United States confirms that USDOC conducted the administrative reviews at issue in this
dispute pursuant to Section 751(a) of the US countervailing duty statute, 19 U.S.C. § 1675(a), which
implements Article 21.2 of the SCM Agreement.
22. The United States notes that the EC has not raised any claims in this dispute under
Article 21.2 of the SCM Agreement.
Q.12. Where in the text of Article 27.13 Subsidies Agreement is there an implied rule that
subsidies provided before privatization at fair market value remain allocable to a private
company after an arm’s-length privatization?
23. The United States answers this question in detail in paragraphs 151-60 of its First Submission,
paragraphs 32-35 of its Oral Statement at the first panel meeting, and paragraphs 56-66 of its Rebuttal
Submission.
Q.13. In any event, what is the link between Article 27.13 Subsidies Agreement and
countervailing duty investigations, and where does Article 27.13 Subsidies Agreement address
the issue of privatization at fair market value in the context of such investigations?
24. See the United States' answer to question 12 above.
Q.14. In its First Written Submission to the Pane l, the US asserted that US court decisions
“represent an independent interpretation of a countervailing duty law that is indistinguishable
from the SCM Agreement in the areas relevant to this matter” Although the EC does not
accept that US court decisions are at all relevant in this case, it would nonetheless be interested
to know where the US privatization language and treatment is set forth in the US Uruguay
Round Agreements Act, the US interpretive Statement of Administrative Action and the US
General Issues Appendix found in the text of the ASCM?
25. The United States is not certain that it understands this question. If the EC is asking for
citations to where the privatization issue is addressed in the US countervailing duty statute, the
accompanying Statement of Administrative Action and the General Issues Appendix, the citations are
as follows.
26. In the US countervailing duty statute, it is Section 771(5)(F), which is quoted in its entirety in
footnote 46 of the US First Submission. This section was added to the statute by the Uruguay Round
Agreements Act (“URAA”).
27. The Statement of Administrative Action (at page 258) addresses Section 771(5)(F). It
explains:

Section 771(5)(F) provides that a change in the ownership of "all or part of a
foreign enterprise" ( i.e., a firm or a division of a firm) or the productive assets of a
firm, even if accomplished through an arm's-length transaction, does not by itself
require Commerce to find that past countervailable subsidies received by the firm no
longer continue to be countervailable. For purposes of Section 771(5)(F), the term
"arm's-length transaction" means a transaction negotiated between unrelated parties,
each acting in its own interest, or between related parties such that the terms of the
transaction are those that would exist if the transaction had been negotiated between
unrelated parties.
Section 771(5)(F) is being added to clarify that the sale of a firm at arm's-
length does not automatically, and in all cases, extinguish any prior subsidies
conferred. Absent this clarification, some might argue that all that would be required
to eliminate any countervailing duty liabilit y would be to sell subsidized productive
assets to an unrelated party. Consequently, it is imperative that the implementing bill
correct and prevent such an extreme interpretation.
The issue of the privatization of a state-owned firm can be extremely
complex and multifaceted. While it is the Administration's intent that Commerce
retain the discretion to determine whether, and to what extent, the privatization of a
government-owned firm eliminates any previously conferred countervailable
subsidies, Commerce must exercise this discretion carefully through its consideration
of the facts of each case and its determination of the appropriate methodology to be
applied.
28. The relevant parts of the General Issues Appendix, which pre-dated the URAA, can be found
in Exhibit USA-5.
Q.15. In considering its authority to review th e USDOC’s treatment of privatization in CVD
cases, the US court held that:
Commerce’s construction must be sustai ned if it falls within the range of
permissible construction [of the Congressional statute]. . . . The duty of the
reviewing court is not to weigh the wisdom of, or to resolve any struggle
between, competing views of the public interest, but rather to respect legitimate
policy choices made by the agency in interpreting and applying the
[Congressional] statute.
In the US court appeal of the first post-A SCM challenge to the USDOC’s privatization
methodology, USDOC asserted to the reviewing US court that the court is to accord “great
deference to the interpretation given the stat ute by the officers or agency charged with its
administration” and that the court should “a ccord Commerce an even greater deference when
reviewing, as here, Commerce’s development and application of a complex methodology for use
in a . . . countervailing duty determination.” How is the position that the USDOC has asserted
to its own courts (that they are required to accord DOC “great deference”) consistent with the
position that the US has advanced to this Pa nel that US courts render an “independent”
interpretation of the ASCM?
29. In the cited court cases, the courts interpreted a countervailing duty law – the United States’
countervailing duty law – which is not materially different from the SCM Agreement with regard to
any of the provisions at issue in this dispute. The courts undertook their interpretation independent of
USDOC, and they found the US statute to be silent with regard to the particular methodology that
USDOC should apply to changes in ownership. In th is regard, the courts agreed with USDOC. The

courts then proceeded to determine whether USDOC's methodology represented a permissible
construction of the statute, given its silence. In this part of the analysis, the courts gave deference to
USDOC, as the expert agency charged with implementing the statute, with regard to how it filled in
the statute's silence.
30. The review conducted by the US courts is very similar to what the Panel should do in this
dispute. First, the Panel should determine for it self, using the customary rules of interpretation of
public international law, whether Article 1.1 is silent with regard to how an investigating authority is
to handle previously bestowed subsidies following a change in the ownership of the subsidized
company. Assuming that the Panel finds Articl e 1.1 to be silent, it then should examine the
methodology developed by USDOC and find that it represents a reasonable approach under the SCM
Agreement.
Q.16. In Paragraph 145 of their first submission the US claim that the Informal Group of
Experts report as well as EC's own countervailing duty laws "do not require a determination in
each year of the allocation period that there is a continuing benefit from a subsidy". As regards
the Informal Group of Experts report, is it not true that this report deliberately does not
address the issue of benefit at all? Concern ing the EC’s countervailing methodology, please
explain the basis for your conclusion with the appropriate documentary references.
31. The report of the Informal Group of Experts does not address the meaning of "benefit" in
Article 1.1. It does, however, address whether the SCM Agreement requires a determination in each
year of the allocation period that there is a continuing benefit from a subsidy. As is shown at
pages 3-5, 5-6, 25-27 and 28-29 of that report, the Informal Group of Experts does not believe that the
SCM Agreement requires a determination in each year of the allocation period that there is a
continuing benefit from a subsidy.
32. The methodology used by the EC under its countervailing duty law is set forth in Guidelines
for the Calculation of the Amount of Subsidy in Countervailing Duty Investigations, published in the
Official Journal of the European Communities at OJ C 394, 17.12.98, p.12 (Exhibit USA-14). There,
for example, in paragraph E(f)(vi), the EC makes clear that it only looks at events as of the time of the
subsidy bestowal to identify the requisite “benefit.” Addressing equity infusions, this
paragraph states:
The existence of a subsidy is determined by the information available to the parties at
the time the equity infusion is made. Thus, if an investigation considers an equity
injection that was made several years before, the fact that the company has performed
less well than expected does not mean that a subsidy exists, provided that the
expectation of a reasonable return was justified in the light of the facts know [sic] at
the time of the provision of equity.
On the other hand, a subsidy might exist even if a reasonable return has been
achieved, if at the equity injection the prospect of such a return was so uncertain that
no private party would have made the investment.
Later, in paragraph F(a)(ii), the EC specifically addresses how it relies on the original allocation of the
subsidy “benefit,” rather than any re-identification, or re-valuation, of that “benefit” during the period
of investigation. It explains:
For non-recurring subsidies, which can be linked to the acquisition of fixed assets, the
total value of the subsidy has to be spread over the normal life of the assets
(Article 7(3) of Regulation 2026/97). Therefore the amount of subsidy from, for
example, a grant (for which it is assumed that it is used by the beneficiary to improve
its competitiveness in the long term, and thus to purchase product assets of one kind

or another), can be spread over the normal period used in the industry involved for
the depreciation of assets. This will normally be done using the straight-line-method.
For example, if the normal depreciation period was five years, 20 per cent of the
value of the grant would be allocated to the investigation period (see example 6).
The approach of allocating over time means that non-recurring subsidies granted
several years before the investigation period can still be countervailed provided that
they still have an effect during the investigation period.
Conceptually, this kind of allocation is equivalent to a series of annual grants, each
having an equal amount. In order to determine the benefit to the recipient, the
appropriate annual commercial interest rate should be added to each grant, to reflect
the benefit of not having to borrow the money on the open market. In addition, in
order to reflect the full benefit to the recipient of having a lump sum of money at its
disposal from the beginning of the allocation period, the amount of subsidy should be
increased by the average amount of interest which the recipient would expect to earn
on the non-depreciated amount of total grant over the whole period.
33. An example where the EC has applied this methodological approach in its practice is Council
Regulation (EC) No. 2450/98 of 13 November 1998 imposing a definitive countervailing duty on
imports of stainless steel bars originating in India and collecting definitively the provisional duty
imposed, OJ L 304/1, 14.11.98, at p.5 (attached as Exhibit USA-34).

I. INTRODUCTION
1. At the first meeting of the Panel, the discussion focused principally on four issues, which
included (a) the EC’s evolving interpretation of the SCM Agreement provision at the core of this
dispute, namely, Article 1.1, (b) the contextual significance of Article 27.13, (c) the relevance of
repayment under Article 19.1 and (d) the standard of review. The United States addresses each of
these issues in turn below.
II. ARGUMENT
A. THE EC'S INTERPRETATION OF ARTICLE 1.1 EVEN AS MODIFIED AT THE FIRST MEETING OF THE
PANEL, FINDS NO SUPPORT IN THE ORDINARY MEANING OF THE TERMS IN ARTICLE 1.1 GIVEN
THEIR CONTEXT AND IN LIGHT OF THE OBJECT AND PURPOSE OF THE SCM AGREEMENT
1. The Parties' Basic Disagreement
2. The EC’s principal claim in this dispute -- that USDOC did not “take all necessary steps”
under Article 10 of the SCM Agreement to ensure that its imposition of countervailing duties
conformed to the requirements of the SCM Agreement -- hinges on the proper interpretation to be
given to Article 1.1 of the SCM Agreement.
3. Article 1.1 is a provision that is quite brief and has virtually no relevant details. It simply
provides that a subsidy exists if there is some type of "financial contribution" by the government and
"a benefit is thereby conferred."
4. In its most basic form, the question which the Panel must resolve is, what is meant by the
phrase “a benefit is thereby conferred”?
5. As the United States explained in its First Submission,
1 the ordinary meaning of the phrase “a
benefit is thereby conferred,” when read together with the context provided by Article 14, is clear. It
means that the investigating authority must establish that a “benefit” was conferred by a “financial
contribution” at the time when the "financial contribution" was made. To identify this “benefit,” the
investigating authority compares the terms of the “financial contribution” to the relevant market
benchmark prevailing at the time when the “financial contribution” was made. For example, if the
government made an infusion of equity into a company in 1985, and the period of investigation (or
the period of review)
2 were 1990, the investigating authority would examine the prevailing market
conditions in 1985 to determine whether the equity infusion conferred a “benefit”.
6. The EC does not dispute this interpretation of Article 1.1. In fact, the EC acknowledged, in
response to the United States’ oral questions during the first meeting of the Panel, that it interprets
Article 1.1 in precisely this way under its own countervailing duty law, just as does the United States
under its countervailing duty law. Indeed, to the United States’ knowledge, this interpretation of
Article 1.1 is the only way in which any Member has ever interpreted Article 1.1 under its
countervailing duty law.
7. The parties to this dispute disagree, however, when the EC contends that Article 1.1. also
means something else. According to the EC, Article 1.1 also addresses specifically how to deal with
the situation where the ownership of the subsidy recipient has changed hands several years after the

1 US First Submission, paras. 112-36.
2 The United States explains the difference between an investigation and an administrative review in its
responses to questions 1 of the Panel’s Questions to Both Parties and question 11 of the Panel’s Questions to the
United States.

"financial contribution" was made -- in the above example, it might be 1988 -- but prior to the period
of investigation (or period of review).
2. The EC's Unsupported Interpretation of Article 1.1
8. The EC’s interpretation of Article 1.1, as it stood at the end of the first panel meeting, had
evolved considerably since the EC’s First Submission. It now is as follows:
(a) According to the EC, Article 1.1 requires the investigating authority to determine
whether a previously identified “benefit” from a financial contribution continued to
exist after the time when the financial contribution was made and, specifically, as of
the time when the ownership of the subsidized company changed hands.
(b) The EC finds this requirement in Article 1.1 by interpreting the term “benefit” in
Article 1.1 as meaning a benefit to the “legal person” -- meaning the company -- who
received the financial contribution. According to the EC, when a change in
ownership of the subsidized company takes place through a sale of assets (but not a
sale of shares), the successor company is a different company, and therefore a
“benefit” cannot be said to exist with regard to this different company until the
investigating authority actually examines whether this different company received
any benefit as a result of the change-in-ownership transaction which created it.
(c) The EC asserts that an arm’s length, fair market value change-in-ownership
transaction involving a sale of assets cuts off all previously bestowed subsidies.
9. To understand the significance of the modifications that the EC has made to its interpretation
of Article 1.1, and why they wholly undermine the EC’s position in this dispute, it is first necessary to
review specifically how the EC’s interpretation of Article 1.1 has changed over time.
10. In its First Submission, the EC stated that Article 1.1 requires the investigating authority to
establish not only that a “benefit” was conferred by the “financial contribution” as of the time when
the financial contribution was made, but also that a “benefit” was conferred by the very same
“financial contribution” as of the time when the ownership change took place. In addition, focusing
expressly on the purchaser, meaning the new owner of the subsidized company,
3 the EC contended
that, as an economic matter, a "benefit" within the meaning of Article 1.1 could not be considered to
have continued following the change in ownership, assuming that it was accomplished through an
arm's length, fair market value transaction. Acco rding to the EC, the new owner of the subsidized
company would have paid exactly what the subsidized company and its subsidies were worth, and
therefore the new owner by definition did not receive any of the benefit from the subsidies.
11. The United States, in its First Submission, pointed out that the EC had failed to tie its
interpretation of Article 1.1 to the text of Article 1.1 or even the context provided by Article 14. As a
result, the EC erroneously read into Article 1.1 a requirement that does not exist, namely, the
supposed requirement that the investigating authority determine whether a “benefit” already identified
as of the time when the “financial contribution” was made, continued to exist years later and,
specifically, as of the time when the ownership of the subsidized company changed hands.
4 The
United States also pointed out that the EC had erroneously defined “benefit” in terms of a benefit to
the new owner of the subsidized company, again without any textual support, and in contradiction of
the SCM Agreement’s focus on the benefit to the merchandise.5

3 EC First Submission, paras. 50-66, 103, 110, 127.
4 US First Submission, paras. 182-84.
5 Id., paras. 181.

12. In its Oral Statement at the first meeting of th e Panel, the EC introduced for the first time the
concept of a "legal person." Specifically, the EC argued that the only possible recipient of a financial
contribution can be a “legal person.”6 The EC then extended this notion, i.e., the notion that a “legal
person” is the entity that receives the financial c ontribution, in two ways. First, the EC stated that
because a “legal person” is the entity that, as a practical matter, receives the subsidy funds,
Article 1.1's bare reference to “benefit” really must mean benefit to the “legal person” who received
the financial contribution.
7 Second, the EC then took benefit to the “legal person” who received the
financial contribution and turned it into benefit to the owner of that “legal person.”8
13. During the first panel meeting, the EC later conceded that the “benefit” contemplated by
Article 1.1 is not a benefit to the owner of the “legal person.” The EC stated that "benefit" refers to a
benefit to the “legal person,” meaning a benefit to the company. It was precisely the EC’s focus on
the new owner, however, which had enabled the EC to argue in the first place that an arm's length, fair
market value transaction cuts off any continuing benefit from prior subsidies. The EC’s entire
discussion of the economics of privatization was based on the notion that an arm’s length, fair market
value transaction eliminates the benefit of prior subsidies when the existence of a benefit is considered
from the perspective of the new owner.
9 The arm’s length, fair market value nature of a transaction
loses its significance when the existence of a benefi t is instead considered from the perspective of the
company or its production, as is discussed more fully below.
14. The EC further took the position for the first time that where a change in ownership is
accomplished through a sale of shares, the subsidized company does not change. According to the
EC, it is the same company, or “legal person,” as before the change in ownership, and therefore any
prior subsidies continue to benefit the subsidized company. The EC explained that only a sale
structured as a sale of assets means -- again, under Article 1.1 -- that the subsidies are cut off. In the
EC’s view, in this situation, the subsidized company is a differen t company, and the investigating
authority is therefore required to determine whether the prior subsidies continue to provide a benefit
to this different company following the sale (and a sale of assets accomplished through an arm’s
length, fair market value transaction cuts off any continuing benefit).
3. Why the EC's Interpretation of Article 1.1 is Unsupportable
15. Given the way in which the EC’s position has evolved, it is first necessary to resolve the
meaning of the term "benefit" in Article 1.1, to the exte nt that it can be discerned. It is this term and
the meaning that it is given, more than anything else, that shapes the analysis of the EC’s two basic
conclusions regarding the overall meaning of Article 1.1, i.e., the EC’s conclusion, first, that
Article 1.1 requires a second “benefit” determination, based on circumstances as they stand at the time
of a change in the ownership of the subsidiz ed company (where the change in ownership is
accomplished through a sale of assets), and the EC’s second conclusion that Article 1.1 treats an
arm’s length, fair market value change-in-ownership transaction (accomplished through a sale of
assets) as cutting off the remaining "benefit" from previously bestowed subsidies.
16. In arguing that the term "benefit" in Articl e 1.1 means benefit to the “legal person” who
received the financial contribution, the EC makes a series of assertions and assumptions which are
unsupportable.
17. The EC’s first assertion is that it is a “legal person” who receives the financial contribution.
The United States notes that the SCM Agreement does not expressly address the matter of who or
what receives the financial contribution. Certainly, neither Article 1.1 nor any other provision of the

6 EC Oral Statement, paras. 41-49.
7 Id., para. 49, EC Concluding Statement section.
8 Id., paras. 7, 31 and 49.
9 EC First Submission, paras. 50-66.

SCM Agreement uses the term “legal person.” To the extent that “legal person” is a term used in the
corporate law of some Member countries, moreover, there is no basis in the SCM Agreement for
interpreting Article 1.1 as requiring an investigating authority to read that term into Article 1.1.
18. Nonetheless, as a practical matter, when a government provides a financial contribution, there
must be an entity such as a company, or an individual, who receives, or takes possession of, the
financial contribution.
19. But, even if it were assumed for the sake of argument that a “legal person” is the entity that
receives the financial contribution, this circumstance has no relevance to what Article 1.1 means by
the term “benefit”. The EC treats it as relevant, without explaining why, and then turns “benefit” into
“benefit to the ‘legal person’ who received the financial contribution.” However, the nature of the
entity or individual who receives, or takes posse ssion of, the financial contribution has no bearing on
what Article 1.1 means by the term “benefit.”
20. Neither Article 1.1 nor the provision which provides the relevant context, Article 14, suggests
that the “benefit” found to exist under Article 1.1 is intended as an indication of whether the financial
contribution will benefit the “legal person” who received the financial contribution, as the EC argues.
In addition, as the United States has previously explained, the EC’s focus on the “legal person”
conflicts with the SCM Agreement’s focus on the manufacture, production or export of the
merchandise.
21. All that can be said is that the ordinary meaning of “benefit” is “advantage”, as the Canada
Civilian Aircraft panel has held.10 Beyond that, Article 14 provides the relevant context. In fact, it is
the only provision in the SCM Agreement that addresses the meaning of the term “benefit,” and it
simply states what the “benefit” is for four common types of financial contribution. The “benefit” is
no more than, and no less than, the difference between the terms of the government financial
contribution and the appropriate market benchmark prevailing at the time when the financial
contribution was made.
22. Essentially, the SCM Agreement assumes that the subsidy “benefit”, once identified and
measured as of the time when the financial contribution was made, continues over time, and therefore
may be amortized over time, without any further inquiries as to the continued existence of that
“benefit”.
23. At this point, it is now possible to consider the EC’s first basic conclusion regarding the
overall meaning of Article 1.1, which is that Article 1.1 requires the investigating authority to make
the “benefit” determination not only once, as of the time when the “financial contribution” was made,
but also a second time, based on the circumstance s as they existed when the ownership of the
subsidized company changed hands. Here, regardless of whether the Panel adopts the EC’s or the
United States’ concept of “benefit”, the analysis shows that Article 1.1 does not contain the
requirement of a second “benefit” determination.
24. First, even assuming that the term “benefit” in Article 1.1 means benefit to the “legal person”
who received the financial contribution, as the EC maintains, what is it about this definition that
requires the investigating authority to determine whether the financial contribution continues to
benefit the subsidized company after its ownership has changed hands? The EC views this definition
as requiring the investigating authority to determ ine whether the subsidized company is the same or
different following a change in its owners. In other words, the EC seems to say, if “benefit” really
means benefit to the “legal person” who received the financial contribution, this definition is not
satisfied if that “legal person” no longer exists and another “legal person” has taken its place.

10 Canada - Measures Affecting th e Export of Civilian Aircraft , WT/DS70/R, Report of the Panel,
dated 14 April 1999, at para. 9.119 (“Canada Civilian Aircraft”), Notice of Appeal filed 3 May 1999.

25. But, even accepting this rationale, the further question that arises is, how is the investigating
authority to determine whether a company is the same or different following a change in its owners?
Here again, nothing in the text of Article 1.1 addresses this matter.
26. The EC takes the position that the subsidized company is the same company if the change in
ownership is accomplished through a sale of shares, but it is a different company if the change in
ownership is accomplished through a sale of assets. It is not clear on what the EC bases this position.
It appears to be a general distinction drawn by the corporate law of some Member countries, but it is
even further removed from the SCM Agreement than any of the other concepts that the EC has read
into Article 1.1.
27. Indeed, any number of scenarios can be imagined where a change in ownership is not
accomplished through a straight sale of shares or a straight sale of assets, and the corporate laws of
various Member countries come up with different answers as to whether the company is the same or
different. Is the EC arguing that Article 1.1 requires the investigating authority to make a general
distinction between a sale of shares and a sale of assets, but leaves it to the discretion of the
investigating authority to determine the significance of more complicated transactions? Or, is the EC
arguing that Article 1.1 even explains how the investigating authority is to handle the more
complicated transactions? And, whichever position the EC takes, where can any of it be found in the
SCM Agreement? Plainly, the EC is going fa r beyond the terms of the SCM Agreement when it
begins distinguishing between a sale of shares and a sale of assets.
28. The United States recognizes that nothing in Article 1.1 may preclude an investigating
authority from taking the approach advocated by the EC. It may be reasonable for an investigating
authority to fill in Article 1.1’s silence with an approach based on the distinctions drawn by some
version of corporate law, as the EC does when it advocates the use of a “legal person” concept and,
further, differentiates between a sale of shares and a sale of assets. However, Article 1.1 does not
require this approach. Rather, it would seem that a number of possible approaches could be used to
fill in Article 1.1's silence, and the approach used by USDOC is one of them.
29. The United States views the term “benefit” in Article 1.1 as no more than, and no less than,
the difference between the terms of the government financial contribution and the appropriate market
benchmark prevailing at the time when the financial contribution was made. With this definition of
“benefit,” there is no basis for reading into Articl e 1.1 any of the additional requirements which the
EC sees.
30. Consequently, regardless of which view of “benefit” is used, there is no basis for reading into
Article 1.1 a requirement that the investigating authority make a second “benefit” determination, as of
the time when the ownership of the subsidy recipient changed hands. Without this requirement, the
EC’s further conclusion that an arm’s length, fa ir market value change-in-ownership transaction
accomplished through a sale of assets cuts off previously bestowed subsidies becomes moot, given
that it only becomes relevant if Article 1.1 is read as requiring a “benefit” determination as of the time
when the ownership of the subsidy recipient changed hands.
31. Nevertheless, even if it were assumed that a second “benefit” determination were necessary,
as of the time when the ownership of the subsidy recipient changed hands, there is no basis in the
SCM Agreement for the notion that an arm’s length, fair market value transaction cuts off previously
bestowed subsidies. The original basis for that no tion, offered by the EC in its First Submission, was
that the term “benefit” in Article 1.1 meant “benefit to the new owner of the subsidized company.” It
was expressly from the perspective of the new owner, not from the perspective of the company or its
production, that the EC’s economic analysis attempted to show the discontinuance of any benefit. In
response to the United States’ oral questions, however, the EC conceded that it is not proper to look at
what benefit might be accruing to the new owner. The EC repeatedly stated that it only considered
the perspective of the company to be correct. When an arm’s length, fair market value transaction is

viewed from the perspective of the company, the ec onomic analysis changes. As the United States
explained in its First Submission,11 the company itself is not materially different following the change
in ownership. The productive assets which benefited from the subsidies before the change in
ownership are the same ones used by the new owner after the change in ownership.
32. Finally, even if all of the EC’s extensions of Article 1.1 were accepted for the sake of
argument, what would it mean for purposes of this dispute?
33. The first of the changes in ownership at issue -- the creation of the UES joint venture in 1986
-- was a complicated transaction in which the two companies forming the joint venture, British Steel
and GKN, contributed assets in return for shares in UES. The EC has suggested that this transaction
was essentially a sale of assets. Assuming that it was, that would mean that all of the subsidies
previously bestowed on British Steel would have remained with British Steel after the creation of
UES.12
34. When British Steel was subsequently privatized in 1988, this transaction was accomplished
through a sale of shares. Under the EC’s approach, this transaction would have no effect on the
subsidies previously bestowed on British Steel. In other words, the previously bestowed subsidies
would not be cut off. All of them would pass thr ough (without any of the repayment allowed by
USDOC’s approach) to British Steel’s successor, BS plc, because it was the same company.
35. The final change in ownership, in which BS plc acquired UES, was also accomplished
through a sale of shares. It would have no effect on the subsidies previously bestowed on British
Steel and passing through to BS plc, not because of the nature of the transaction, but rather because,
under the EC’s new approach, none of these subsidies would have been treated as passing through to
UES in the first place when it was created in 1985.
36. At the end of the day, after all of the changes in ownership at issue have been accounted for,
the result, under the EC’s new approach, would be that all of the subsidies previously bestowed on
British Steel would have passed through, and remained with, BS plc, the current producer of lead bar.
B. THE SCM AGREEMENT PROVIDES LITTLE GUIDANCE REGARDING THE REPAYMENT OF
SUBSIDIES
37. During the first panel meeting, the Panel inquired into how the SCM Agreement directs an
investigating authority to handle the repayment of a subsidy and, further, whether it involved a re-
examination of the subsidy “benefit” based on events taking place after the subsidy bestowal. The
United States would like to clarify these matters here.
38. As a preliminary matter, the United States notes that the only provision in the SCM
Agreement that addresses repayment is Article 19.1, and the EC has not made any claim in this
dispute under that provision.
39. Turning to the actual text of Article 19.1, it can be seen that very little is actually said about
repayment of a subsidy. In fact, the term “repayment” is not even used. Article 19.1 simply says that
the investigating authority “may impose a countervailing duty in accordance with the provisions of
this Article unless the subsidy or subsidies are withdrawn.”

11 US First Submission, para. 181.
12 At the first panel meeting, the EC clarified its view that, in this situation, an arm’s length, fair market
value transaction would not extinguish prior subsidies, but rather would only cut them off, meaning that they
would stay with British Steel and not pass through to UES.

40. Assuming that the withdrawal of a subsidy is the same as, or at least includes, the concept of
repayment of a subsidy, the text of Article 19.1 is silent on at least three relevant questions.
41. First, Article 19.1 does not address under what circumstances a subsidy can be considered
repaid. In particular, for purposes of this dispute, Article 19.1 says nothing about whether a
privatization -- or any other event -- is a circumstance where repayment of a subsidy takes place.
42. Second, Article 19.1 does not address how the investigating authority is to measure the
amount of repayment. Thus, even it were assumed for the sake of argument that Article 19.1
somehow did identify a privatization as a circumstance where repayment of a subsidy takes place,
Article 19.1 still says nothing about how the investigating authority must measure the amount of
repayment. It certainly does not say that an arm’s length, fair market value privatization transaction
necessarily constitutes full, or even partial, repayment of a subsidy.
43. Third, Article 19.1 does not address whether it is necessary for the investigating authority to
re-value the subsidy “benefit” when accounting for the repayment of a subsidy.
44. The United States can explain how USDOC answers these questions in its approach to the
repayment of subsidies. Notably, at the first pa nel meeting, the EC endorsed USDOC’s approach, at
least in the non-privatization context.
45. In the repayment approach normally used by USDOC, i.e., outside the specific context of a
privatization, there is no re-valuation of the subsidy “benefit,” based on events taking place after the
subsidy bestowal. The allocated “benefit” is instead reapportioned between the government and the
subsidized company.
46. Under USDOC’s approach, before USDOC even considers whether repayment has occurred,
it would have already identified and measured the subsidy “benefit” and allocated it over time, all
based on events as they stood at the time of the bestowal of the subsidy. More specifically, USDOC
would have already allocated -- or, essentially, amortized -- the subsidy “benefit” over a period of
years (known as the allocation period) running fr om the bestowal of the subsidy pursuant to a
standard declining balance formula that generates a net present value equal to the amount of the
subsidy. As is explained in paragraph 44 of the United States’ First Submission, this allocation
assigns a portion of the subsidy “benefit” to each year of the allocation period. Using the example of
a £100 million grant set out in paragraph 44, the benefit stream might look as follows:
Year
Benefit
1 15,555,600
2 15,000,000
3 14,444,500
4 13,888,900
5 13,333,300
6 12,777,800
7 12,222,200
8 11,666,700
9 11,111,100
10 10,555,600
11 10,000,000
12 9,444,500
13 8,888,900
14 8,333,300
15 7,777,800
16 7,222,200
17 6,666,700

18 6,111,100
47. It should be emphasized that Commerce’s allocation methodology is no different from the
allocation methodologies used by the EC and other Members and endorsed by the Informal Group of
Experts. Like Commerce, all of these entities treat non-recurring subsidies as automatically
benefiting the subsidized merchandise for a period of years. 13 Indeed, the EC’s own countervailing
duty regulations expressly state that the EC has “assumed” this automatic benefit.14
48. When USDOC proceeds to consider whether the subsidy has been repaid, it examines the
allocated “benefit” stream. Here, USDOC normally considers the subsidy to have been repaid when
the subsidy recipient pays the government the net present value of the remaining benefit stream. For
example, in year 10, the subsidy recipient would ha ve to return to the government the net present
value of £75,000,100, which is the total of the amounts allocated to years 10 through 18.
49. As can be seen, this approach reflects USDOC's continued adherence to a fundamental
interpretation of the SCM Agreement as not contempl ating any re-identifying, or re-valuing, of the
subsidy “benefit” based on events occurring after the subsidy bestowal. However, this does not mean
that USDOC does not consider events after the subsidy bestowal in any part of its countervailing duty
analysis. In fact, it does consider post-subsidy bestowal events, as in the case of repayment, when
determining how to allocate the subsidy “benefit” over time.
50. Essentially, USDOC recognizes repayment by allocating the subsidy “benefit” back to the
government.
51. USDOC recently addressed this point when issuing its countervailing duty regulations.
There, it stated:
When we say we do not consider “subsequent events” in the calculation of a subsidy,
we generally are referring to events that arguably affect the subsequent performance
(normally in terms of output or prices) of the subsidy recipient or its successor. We
have never implied, however, that no subsequent event could ever affect the
allocation of a subsidy. The Department may consider whether government or
private actions occurring after the receipt of a subsidy should result in the reallocation
of a subsidy as long as there is no tracing of the uses of the subsidy or the effect of
the subsidy on the output or price of subject merchandise.
15
52. In the particular context of a privatizati on, USDOC also recognizes the possibility of
repayment of subsidies. Thus, in its recently issued countervailing duty regulations, after explaining
that it was not adopting a regulation on privatization because various approaches were possible and
the complicated and continually changing nature of privatization transactions warranted flexibility
rather than rigidity, USDOC explained:
Clearly, a post-subsidy change in ownership is an event that occurs subsequent to the
receipt of the subsidy, and we have reallocated subsidies based on changes in
ownership. It is entirely appropriate and consistent with the statute to consider

13 See US First Submission, paras. 143-45; US Oral Statement, para. 98; Responses of the
United States to the EC’s Questions to the United States, response to question 16.
14 See EC Countervailing Duty Regulations, OJ C 394, 17.12.98, p. 12 (Exhibit USA-14).
15 Countervailing Duties; Final Rule, 63 Fed. Reg. 65348, 65354 (Nov. 25, 1998) (emphasis added)
(attached as Exhibit USA-33).

whether a change in ownership is an appropriate occasion to reallocate countervailing
duty liability for prior subsidies to the company that is sold.16
53. USDOC’s practice in the privatization context is essentially the same as in the normal
situation where the subsidy recipient simply returns money to the government. The amount of the
required repayment is figured in exactly the same way. There is no re-identifying, or re-valuing, of
the subsidy “benefit.” The one difference is that, in the privatization context, it is a much more
difficult task to determine the amount that has actually been paid back to the government. That is the
task that USDOC set out to accomplish in develo ping a methodology involving the ratio of subsidies
to net worth and the purchase price for the government-owned company.
54. What all of this means for purposes of this dispute is, first, that there is no requirement in
Article 19.1 that USDOC failed to follow when addr essing the privatization of British Steel. In
particular, the United States is of the view that Article 19.1 does not require it to treat an arm’s length,
fair market value privatization per se as constituting the withdrawal of a subsidy.
55. It also means that USDOC’s approach to repayment, both generally and in the specific
context of a privatization, is entirely consistent with the United States’ interpretation of Article 1.1.
C.
THE EC'S ATTEMPTS TO DISTINGUISH ARTICLE 27.13 ARE NOT SUPPORTED BY THE ORDINARY
MEANING OF THE TERM IN ARTICLE 27.13
56. In its First Submission, the United States explained that the EC’s position regarding how
Article 1.1 addresses changes in ownership is square ly contradicted by Article 27.13 and the context
that it provides. In this regard, Article 27.13 creates an exception by establishing that certain types of
subsidies provided by a developing country Member prior to privatization under certain circumstances
will not be actionable under Part III of the SCM Agreement after privatization. Although 27.13 does
not expressly state the general rule to which this exception applies, the only reasonable conclusion is
that the general rule is that subsidies bestowed on a government-owned company's production prior to
privatization normally are actionable after privatization.
17 In other words, they are not cut off by the
privatization transaction, but rather pass through to the successor, privatized company. If this were
not the case, Article 27.13 would serve no purpose.
57. The EC attempts to distinguish Article 27.13 in two ways. First, it insists that Article 27.13
only applies "with regard to new subsidies provided in the context of a privatization. Its [sic] says
absolutely nothing about prior subsidies or their pass-through." 18 Second, the EC says that
Article 27.13 is not applicable to the UK Government subsidies at issue in this dispute because
Article 27.13 only applies in the context of Part III of the SCM Agreement and, further, it only applies
to subsidies granted by developing country Members.
19
58. It is not clear why the EC insists that Article 27.13 is confined to subsidies provided as part of
the privatization transaction and does not apply to any subsidies bestowed prior to privatization. The
EC simply makes this assertion without citing to any language in Article 27.13 that supports this
interpretation.
59. A careful review of the language of Article 27.13 shows that it does apply to certain subsidies
granted prior to privatization. The first sentence of Article 27.13 states that its exception from
actionability applies to the enumerated types of subsidies when "granted within and directly linked to"
a privatization programme. The second sentence then makes clear that these subsidies need not be

16 Id.
17 US First Submission, paras. 151-60.
18 EC Oral Statement, para. 59 (emphasis in original).
19 Id., para. 60.

part of the privatization transaction itself, as the EC insists, but rather can be provided prior to
privatization as a means of making the government-owned company a more attractive candidate for
privatization. In this regard, the second sentence states two provisos, which are that the enumerated
subsidies must be "granted for a limited period" and further that the privatization programme "result[ ]
in eventual privatization of the enterprise concerned." Plainly, if the enumerated subsidies can be
granted for any period of time, even a limited one, they can be provided prior to privatization rather
than simply as part of the privatization transaction itself. Moreover, if the enumerated subsidies must
only result in the "eventual" privatization of the government-owned company, they indisputably can
be provided prior to privatization.
60. Notably, the third parties do not dispute that Article 27.13 is addressing pre-privatization
subsidies. Rather, they accept this interpretation of Article 27.13, but attempt to distinguish it on
other (inapposite) grounds.
20
61. Thus, the Panel should conclude that Article 27.13 does refer to pre-privatization subsidies,
and it does provide an exception for certain types of pre-privatization subsidies. The exception, again,
is that they are not actionable under Part III, and the only reasonable conclusion is that the unstated
but contemplated general rule is that all other types of subsidies pass through to the successor,
privatized company and are actionable after privatization.
62. Meanwhile, the EC misses the point when it argues that Article 27.13 is simply not relevant to
this dispute because it only applies in the context of a WTO proceeding under Part III of the SCM
Agreement and, further, it only applies to subsidies granted by developing country Members. The
United States is not arguing that Article 27.13 directs how an investigating authority must address
subsidies in a Member's countervailing duty proceeding under Part V of the SCM Agreement, nor is it
arguing that the United Kingdom is a developing country Member. Rather, the United States is
making a contextual argument.
63. Certainly, Article 27.13 provides relevant context.
64. Article 27.13 is the only provision in the SCM Agreement that specifically addresses the issue
of privatization, and the United States notes that it does so in a manner that is totally at odds with the
EC’s position in this dispute.
65. In addition, by contemplating that pre-privatization subsidies normally are actionable in a
WTO proceeding under Part III after privatization, Article 27.13 necessarily assumes that the
elements of a “subsidy” required by Article 1.1 -- a “financial contribution” and a “benefit” -- exist
for these subsidies after privatization. This means that, in Part III proceed ings, any interpretation of
Article 1.1 which treats the "benefit" of pre-privatization subsidies as being cut off by privatization
conflicts with Article 27.13. Meanwhile, given that the very same Article 1.1 findings of a “financial
contribution” and a “benefit” must also be made with regard to any pre-privatization subsidies
addressed in a countervailing duty proceeding under Part V, the question that arises is whether, under
the circumstances, there is any support for the notion that the SCM Agreement envisions a different,
directly contradictory rule for identifying the Article 1.1 “benefit” -- like the one advocated by the EC
-- for Part V proceedings. The United States sees no reason for any such distinction between Part III
and Part V proceedings in this context, and the EC has offered none.

20 In its Third Party Submission, at paragraph 84, Brazil argues that the general rule implied by
Article 27.13 is only that “Members may investigate whether pre-privatization subsidies are passed through to
the post-privatization owners.” It is unclear where Braz il finds this distinction in Article 27.13, as it does not
cite to any of the text. In any event, given that Article 27.13 is directly applicable to WTO proceedings under
Part III, the concept of an “investigation” by a Member is out of place. Members only conduct investigations
under Part V. In its Third Party Submission, at paragraph 11 Mexico only seems to argue about whether
Article 27.13 would be applicable to the case of a certain Mexican company.

66. For all of these reasons, Article 27.13 should be viewed as providing relevant context for
interpreting Article 1.1, and this context supports the United States’ interpretation of Article 1.1.
D. IN THE EVENT THAT THE PANEL FINDS THE STANDARD OF REVIEW SET FORTH IN ARTICLE 17.6
OF THE ANTI-DUMPING AGREEMENT INAPPLICABLE TO THIS DISPUTE , THE APPELLATE BODY'S
DECISION IN HORMONES STATES THE APPLICABLE STANDARD OF REVIEW , EXCEPT THAT THE
HORMONES DECISION DOES NOT ADDRESS WHAT A PANEL SHOULD DO IN THE SITUATION
WHERE THE AGREEMENT AT ISSUE IS SILENT
67. In the event that the Panel finds the standard of review set forth in Article 17.6 of the Anti-
Dumping Agreement inapplicable to this dispute, the United States would agree that the Appellate
Body’s decision in EC Measures Concerning Meat and Meat Products (Hormones), WT/DS26/AB/R,
WT/DS48/AB/R, Report of the Appellate Body, adopted on 19 February 1998, at paragraphs 114-19,
states the applicable standard of review.
68. The United States notes, however, that the Hormones decision does not represent a complete
statement of the standard of review that must be ap plied by the Panel in this dispute. In particular,
with regard to legal questions, the Hormones decision explains only that a panel must apply the
customary rules of interpretation of public international law. It does not address what a panel should
do in the situation where the agreement at issue is sile nt with regard to a particular matter even after
applying the customary rules of interpretation of public international law. That is precisely what is at
issue, here, however. The key provision in the SCM Agreement -- Article 1.1 -- is silent regarding
how an investigating authority is to handle previously bestowed subsidies following a change in the
ownership of the subsidized company.
69. This same type of situation would be presented if a dispute were to center on, for example,
any number of other issues relating to the allocation or amortization of subsidies, such as when to
expense or allocate subsidy benefits, the appropriate allocation period, the time value of money,
adjustments for inflation and interest and the appropriate sales denominator in the ad valorem subsidy
rate calculation. With regard to these issues, the SCM Agreement is silent, and indeed it is for this
reason that the Committee on Subsidies and Countervailing Measures commissioned the Informal
Group of Experts to make recommendations on these issues, albeit for purposes of Annex IV and
Part III of the SCM Agreement.
70. When the Tokyo Round Subsidies Code was in force, a similar study was commissioned
specifically with regard to countervailing duty proceedings, again because of the silence of the
Subsidies Code in this area. This study resulted in recommendations, to which the Contracting Parties
later agreed, as set out in the Guidelines on Amortization and Depreciation.
21 There are no similar
guidelines for a Member to follow under the SCM Agreement.
71. In any event, the United States submits that, when the agreement is silent, a panel addressing
a dispute under Part V of the SCM Agreement should follow either United States Salmon, where the
panel stopped its analysis and found the challenged approach to be not inconsistent with the
agreement after determining that the agreement was silent,22 or New Zealand Electrical Transformers,

21 BISD 32S/154.
22 The relevant part of the United States Salmon panel report is found in United States - Imposition of
Countervailing Duties on Imports of Fresh and Chilled Atlantic Salmon from Norway , SCM/153, Report of the
Panel (unadopted), dated 4 December 1992, at paras. 243-46 and 247-49.

where the panel took a slightly different approach and found no violation of the agreement after
concluding that the approach used by the investigating authority “appeared to be a reasonable one.”23
72. In this dispute, moreover, the USDOC determin ations at issue must be upheld, regardless of
whether the Panel follows United States Salmon or New Zealand Electrical Transformers . Under
United States Salmon, of course, the Panel would stop its analysis after finding Article 1.1 silent and
find no violation of the SCM Agreement. Meanwhile, under New Zealand Electrical Transformers ,
which seems to require a reasonableness showing, the United States has explained in some detail why
USDOC’s change-in-ownership methodology is sound and well-reasoned. The EC, on the other hand,
has not challenged this methodology on the ground that it is unreasonable. The EC has only argued
that the SCM Agreement is not silent and, in fact, requires USDOC to use a different approach.
73. Finally, the United States notes that, at one point during the first meeting of the Panel, the EC
took the position that if the Panel were to find the SCM Agreement to be silent with regard to how an
investigating authority is to handle previously bestowed subsidies foll owing a change in the
ownership of the subsidized company, the Pa nel should find that USDOC’s methodology is
inconsistent with the SCM Agreement. This position finds no support in any WTO Appellate Body or
panel report or any GATT panel report, and it is directly contradicted by reports such as United States
Salmon and New Zealand Electrical Transformers.
III. CONCLUSION
74. For the reasons discussed above, and for the reasons discussed in the United States’ First
Submission and the United States’ Oral Statement at the first panel meeting, the United States
respectfully requests the Panel to find that by imposing countervailing duties on leaded bar imports as
a result of the 1994, 1995 and 1996 administrative reviews of the countervailing duty order on imports
of lead bar products from the UK, the United States has not violated Article 1.1, 10, 14 or 19.4 of the
SCM Agreement, nor has the United States nullifie d and impaired benefits accruing to the EC under
the WTO Agreements.

23 The relevant part of the New Zealand Electrical Transformers panel report is found in New Zealand -
Imports of Electrical Transformers from Finland , L/5814, Report of the Panel, adopted on 18 July 1985,
32/S55, 66-67, at paras. 4.2-4.3.

ATTACHMENT 2.6
ORAL STATEMENT OF THE UNITED STATES
SECOND MEETING WITH THE PANEL
14 July 1999
Introduction
1. Thank you, Mr. Chairman and members of the Panel. The United States appreciates this
opportunity once again to present its views regarding the issues in this dispute.
2. As you know, the EC has filed a rather extens ive Rebuttal Submission. In fact, it makes
eleven different legal arguments.
3. But, with all of the arguments that the EC makes, one argument is tellingly missing. At no
point in its submission does the EC address the ordinary meaning of the terms found in Article 1.1 and
the context provided by Article 14. The EC continues to avoid addressing this crucial topic. Instead,
the EC continues to press for an interpretation of these provisions which ignores their actual terms and
instead promotes a reading of the SCM Agreement that incorporates and focuses narrowly on the
concept of a “legal person,” together with various misapplied corporate law principles which the EC
apparently views as emanating from it.
4. Before we get to the EC’s “legal person” theory and its ramifications, let me first attempt to
crystallize the issues before the Panel.
The Issues Before the Panel
5. In this dispute, the Panel certainly is confro nted with a multitude of complex concepts and
considerations which the parties have raised. The change-in-ownership transactions at issue here are
complicated enough, and the nature of change-in-ownership transactions generally continues to
evolve and become more sophisticated every day. Questions have also been raised in this proceeding
about whether the SCM Agreement’s focus is on the company or its merchandise, or whether it is
instead on the owner of the company. In additi on, the parties differ regarding how economists view
change-in-ownership transactions and even regarding whether economic theory is relevant in the first
place. Then, switching from economic theory to co rporate law, there have been assertions regarding
the applicability of corporate law concepts such as “legal person” and how corporate law (in some
countries) views change-in-ownership transactions accomplished variously through a full or partial
sale of shares or sale of assets or any number of hybrid or mixed transactions.
6. Perhaps we should take a step back and simply ask, does Article 1.1 of the SCM Agreement
really address these complicated matters? In the United States’ view, it does not.
7. The EC tries to simplify this dispute by urging the Panel to look at one “fundamental”
question.
1 It describes this question as whether the SCM Agreement requires that a “benefit” be
found before a “subsidy” can exist and duties can be imposed. On this point, however, the EC and the
United States are in complete agreement. There can be no question that a “benefit” must be found
first. As explained in response to the Panel’s written questions, the United States maintains that
USDOC has determined that a “benefit” existed in each of the reviews at issue. The question before
the Panel, therefore, is not whether an investigating authority must identify a “benefit” before a
“subsidy” can be found to exist and duties can be imposed.

1 EC Rebuttal Submission, paragraph 26.

8. The United States submits that if the Panel is to understand what the real dispute is in what
has become a rather complicated matter, it should focus on two basic questions.
9. The first question concerns who or what is the beneficiary of a subsidy. Basically, the EC
says it is “who,” and the United States says it is “what.” As we will see, according to the EC, it is
effectively the owner of the company that is the beneficiary. Although the EC several times states
that the only proper focus is on the company, the rationale underlying its interpretation of Article 1.1
continues to be based on the new owner of the company following a change in ownership. The
United States, on the other hand, views subsidies as benefiting the manufacture, production or export
of merchandise.
10. This first question is especially important because it lays the foundation for the answer to the
second basic question before the Panel, which is whether or not Article 1.1 requires a separate
“benefit” determination when a change in ownership takes place.
11. Here, with its focus on the owner of the company, the EC takes the position that a separate
“benefit” determination is required when the ownership of a company changes hands through a sale of
assets (but not a sale of shares). If the new owner purchased the company through a sale of assets, the
EC seems to be saying that the new owner would not be legally responsible for all of the liabilities of
the company, and this fact somehow means that the company following the change in ownership is
now different from the company before the change in ownership. It is a new, unrelated company, the
EC says. In this situation, according to the EC, given that Article 1.1 requires that there be a “benefit”
to the company under investigation during the period of investigation (or period of review), the
investigating authority must determine whethe r the post-change in ownership company -- the
company under investigation -- has received a “benefit”.
12. The United States, meanwhile, arrives at the opposite conclusion. Because the United States
focuses on the benefit to the manufacture, production or export of merchandise, and the productive
assets are the same both before and after the ownership of the company changes hands, the United
 States does not make a separate “benefit” determination following the change in ownership.
13. As we explain below, and indeed as the EC has already conceded, it is incorrect to interpret
Article 1.1 as addressing a “benefit” to the owner of a company. Yet, that is what the EC does.
However, when “benefit” is no longer viewed from the perspective of the owner, the EC’s
interpretation of Article 1.1 in the change-in-ownershi p context falls apart. At the very least, the EC
can no longer argue that a separate “benefit” determination is required following a change in
ownership. As a result, the EC has no basis for cl aiming that the actions of USDOC in the reviews at
issue are inconsistent with any provisions of the SCM Agreement.
The Identification of a "Benefit" in the Or iginal Countervailing Duty Investigation and
in an Administrative Review
14. Before proceeding further, it is important to clarify one matter so that it does not confuse the
Panel’s resolution of the real dispute between the parties. I am referring to how Members apply
Article 1.1 in the original countervailing duty investigation versus in administrative reviews like the
ones at issue in this dispute.
15. This explanation is necessary because the EC, at times, has suggested that the investigating
authority's analysis of the Article 1.1 "benefit" differs depending on whether it is undertaken in the
original investigation or in an administrative revi ew. The EC has implied that, in an administrative
review, unlike in the original investigation, the inve stigating authority would have to look at current
circumstances, i.e., circumstances as they existed in the period of review, to identify the requisite
“benefit”.

16. Let me begin by stating plainly that, for purposes of this dispute, there is no difference
between what the investigating authority does in th e original investigation and what it does in an
administrative review.
17. Moreover, there is no real dispute between the parties -- or, at least, there should not be any
dispute between the parties -- on this matter. What I am about to describe is exactly how the United
 States, the EC and, to the United States' knowledge, every other Member interprets the requirements
of Article 1.1 in the original investigation and in an administrative review.
18. In both the original investigation and an administrative review, the investigating authority
examines events as they existed as of the time when the financial contribution was made in order to
identify and measure the “benefit.” For example, if the government made an infusion of equity into a
company in 1985, and the period of investigatio n were 1990, the investigating authority would
examine the prevailing market conditions in 1985 to determine whether, and to what extent, the equity
infusion conferred a “benefit.” Similarly, if the period of review were 1992, the investigating
authority would still examine the prevailing market conditions in 1985 to determine whether, and to
what extent, the equity infusion conferred a “benefit”. The investigating authority next allocates this
"benefit" over a period of years using one method or another. Then, at this point, the investigating
authority is in a position to determine whether the subsidy provides a “benefit” that is countervailable
in the period of investigation or the period of review, whichever is the case. It does this simply by
examining the “benefit” stream that has already b een calculated, as we explain more fully in our
responses to the Panel’s written questions from the first panel meeting.
2 Thus, in the original
investigation, if the “benefit” stream allocated a portion of the “benefit” to the year that is the period
of investigation (1990 in the above example), the in vestigating authority would find a countervailable
“benefit” in that period. Similarly, in an administrative review, if the “benefit” stream allocated a
portion of the “benefit” to the year that is the pe riod of review (1992), the investigating authority
would find a countervailable “benefit” in that period.
19. That being said, at least in the United States, the investigating authority will look at events
that took place after the time when the financial contribution was made for purposes other than to
identify a subsidy “benefit” under Article 1.1. For example, USDOC will look at whether the
subsidized company may have repaid the subsidy in whole or in part to the government. As the
United States explains fully in its Rebuttal Submission
3, this analysis does not involve the re-
identification of, or the re-valuation of, the Article 1.1 "benefit". It involves only a re-allocation of
this "benefit." Specifically, USDOC examines the original "benefit" stream, which was calculated
based on events as they existed as of the time when the financial contribution was made, and it
reapportions it between the government and the su bsidized company in order to recognize the extent
of any repayment.
20. I would note, moreover, that repayment is an issue that the investigating authority could face
in either the original countervailing duty investigation or in an administrative review. This is because
the act of repaying a subsidy could take place at any time after the financial contribution was made. It
is not an act that could only take place during the period of review.
21. In any event, the fundamental point is that, in both the original investigation and an
administrative review, the common practice among Members is, first, to identify, measure and
allocate the Article 1.1 "benefit" based on events as they existed as of the time when the financial
contribution was made. Then, the investigating authority determines whether a countervailable
"benefit" exists during the period of investigation or the period of review by reference to the already
allocated "benefit" stream.

2 See US Responses to Panel’s Questions, responses to questions 1 and 2 of questions to both parties.
3 See US Rebuttal Submission, part II.B.

22. Now, let’s turn to what is really in dispute here.
The Real Dispute Between the Parties
Regarding the Proper Interpretation of Article 1.1
23. Article 1.1 is a provision that is quite brief and has virtually no relevant details. It simply
provides that a subsidy exists if there is some type of "financial contribution" by the government and
"a benefit is thereby conferred."
24. The ordinary meaning of the phrase “a benefit is thereby conferred,” when read together with
the context provided by Article 14, is as follows . It means that the investigating authority must
establish that a “benefit,” in the sense of an advantage, was conferred by a “financial contribution” at
the time when the "financial contribution" was made . To identify this “benefit,” the investigating
authority compares the terms of the “financial contribution” to the relevant market benchmark
prevailing at the time when the “financial contribution” was made.
25. The “benefit” is no more than, and no less than, the difference between the terms of the
government financial contribution and the appropriate market benchmark prevailing at the time when
the financial contribution was made.
26. The EC does not dispute this interpretation of Article 1.1.
27. In fact, not only does the EC interpret Article 1.1 in precisely this way under its own
countervailing duty law, but also, to the United States' knowledge, it is the only way in which any
Member has ever interpreted Article 1.1 in a countervailing duty proceeding.
28. The real dispute begins when the EC takes the position that Article 1.1 requires the
investigating authority to establish not only that a “benefit” was conferred by the financial
contribution as of the time when the financial contribution was made, but also that a separate
“benefit” was conferred by the very same financial contribution as of the time when the ownership
change took place. For the EC, this means that the investigating authority must look at the events
surrounding the change in ownership, including the market conditions prevailing at that time, and on
that basis identify whether the "benefit" of the earlier financial contribution continues to exist.
The Rationale Underlying the EC’s Interpretation of Article 1.1
Erroneously Focuses on the Owner of the Company
29. Where does the EC’s interpretation of Article 1.1 come from?
30. In its Rebuttal Submission, the EC makes several statements that cloud the position that it is
taking. I will do my best to state, in plain and direct terms, what the EC's position is. As we will see,
the EC’s interpretation of Article 1.1 comes from its erroneous focus on whether the new owner of the
company following a change in ownership can be said to be benefiting from a subsidy. The EC never
explains why this is the focus required by Article 1.1. It just seems to assume it, without support from
the SCM Agreement.
31. In coming up with its interpretation of Article 1.1, the EC argues first that only a “legal
person” can be the entity that receives the Article 1.1 "financial contribution." The EC uses the term
"legal person" in the technical sense that it is used in the corporate law of some Member countries.
The United States does not agree that it is necessarily a "legal person" who receives the financial
contribution, but the United States has acknowledged that as a practical matter there must be some
entity or individual who receives the financial contribution.
32. The more crucial matter is what the EC does with its "legal person" theory.

33. First, the EC turns the term "benefit" in Articl e 1.1 into "benefit to the 'legal person' that
received the financial contribution."
34. But, that is not what Article 1.1 says. It simply says “benefit.” It does not say benefit to the
entity or individual who physically receives the financial contribution, whether that person could be
considered a “legal person” under corporate law or not.
35. As I explained earlier, all that can be said is that the ordinary meaning of “benefit” is
“advantage.” Beyond that, Article 14 provides the relevant context. In fact, it is the only provision in
the SCM Agreement that addresses the meaning of th e term “benefit,” and it simply states what the
“benefit” is for four common types of financial contribution. The “benefit” is no more than, and no
less than, the difference between the terms of the government financial contribution and the
appropriate market benchmark prevailing at the time when the financial contribution was made.
36. Of course, nothing in the SCM Agreement precludes an investigating authority from adding
to the “benefit” requirement of Article 1.1. It may even be possible for an investigating authority, in
its own practice, to add the requirement of a showing that a benefit was conferred on the "legal
person," as the EC advocates. Such an approach perhaps cannot be said to be inconsistent with
Article 1.1. However, again, it must be recognized that Article 1.1 does not go that far, and therefore
it would not be proper for the Panel to impose that interpretation on Members.
37. But, let’s set this matter aside. Let’s assume for the sake of argument that, in addition to the
meaning given the term “benefit” by Article 14, it also means “benefit to the 'legal person' that
received the financial contribution,” as the EC advocates. The more crucial error that the EC makes is
when it explains what is meant by “benefit to the 'legal person' that received the financial
contribution” in the context of a change in ownership.
38. Here, in this context, the EC further changes the meaning of "benefit" to “benefit to the new
owner of the ‘legal person’ that received the financial contribution,” and that is another fundamental
misinterpretation of Article 1.1.
39. Now, the EC has previously conceded that it is not proper to interpret Article 1.1 as focusing
on the benefit to the owner of the "legal person", or as the EC also says, the owner of the company.
Indeed, at the first panel meeting and in its various submissions for this second panel meeting, the EC
has repeatedly acknowledged that it is the comp any itself that must benefit, not the owner.
4 I t h as
even acknowledged, in one instance, that a financial contribution benefits the act of production,
manufacture or export5, as is the United States' position.
40. But, the EC is only paying lip service to the notion that it is the company itself (or perhaps the
act of production, manufacture or export) that must benefit, not the owner. Despite mouthing its
acceptance of this principle, the EC continues to base its interpretation of Article 1.1 in the change-in-
ownership context on a personal benefit to the new owner of the company.
6
41. For example, the EC states emphatically: “The European Communities have not suggested
that ‘the object and purpose of the ASCM focuses on what commercially meaningful advantage is
accruing to the owners of the successor privatized company’. The EC’s position is that under the

4 EC Rebuttal Submission, paras. 42, 43, 47 and 56; EC Responses to United States’ Questions,
responses to questions 3, 4.b., 7, 10, 11, 12, 13, 14 and 24.
5 EC Rebuttal Submission, paragraph 47.
6 Id., paras. 42, 43, 47 and 56; EC Responses to United States’ Questions, responses to questions 3,
4.b., 7, 10, 11, 12, 13, 14 and 24.

ASCM it must be demonstrated that the current producer being investigated ... benefits ... from a
financial contribution.”7
42. But, the EC then turns around and treats Article 1.1 as really being about a "benefit" to the
owner of the company. Thus, it says: “A change in ownership ... merit[s] a new examination of the
existence of the ‘benefit’ requirement for the new owner”.8
43. Then, assessing a change-in-ownership transaction from the perspective of the new owner, the
EC adds: “The payment of a market price ... necessarily precludes the notion that any ‘benefit’ would
have ‘passed through’ to this new private owner as a basic matter of economics.”9
44. The EC also continues to criticize the United States because the United States “ignores
whether any benefit was conferred on the buyer and new owner of the productive assets.”10
The EC’s Interpretation of Article 1.1 Falls Apart When “Benefit” is No Longer Viewed
From the Perspective of the New Owner Following a Change in Ownership
45. Now, what does all of this mean?
46. As we will see, the EC’s interpretation of Article 1.1 falls apart when “benefit” is no longer
viewed from the perspective of the new owner following a change in ownership.
47. The EC’s focus on the new owner is crucial to the EC’s interpretation of Article 1.1. Once it
is assumed (as we are doing for the sake of argu ment) that “benefit” means “benefit to the company
that received the financial contribution,” it becomes necessary (in the EC’s view) to establish whether
the company -- the “legal person” -- following a change in ownership is the same as, or different
from, the company before the change in ownershi p, given that the company before the change in
ownership is the company that actually received the financial contribution. According to the EC, if
the company is the same, no separate “benefit” inquiry would have to be made. If the company is
different, a separate “benefit” inquiry would have to be made.
48. So, how does the investigating authority establish whether the company is the same or
different? According to the EC, Article 1.1 requires that the investigating authority look at the new
owner. It is not clear how the EC derives this requirement from Article 1.1. It may be that the EC is
relying on the reading that it gave to Article VI:3 of GATT 1994 and Article 10 of the SCM
Agreement in its First Submission
11, even though it has since expressly abandoned that position. 12 In
any event, the EC has taken the position that if the new owner purchased the company through a sale
of shares, the company is the same, apparently because the new owner would be legally responsible --
under corporate law -- for all of the liabilities of the company. But, according to the EC, if the new
owner purchased the company instead through a sale of assets, the company is different, again
apparently because, under corporate law, the new owner would not be legally responsible for all of the
liabilities of the company.
49. Thus, it is only through its focus on the owner of the company that the EC is able to argue that
a company (in some cases) is different after a change in ownership and therefore warrants a separate
"benefit" inquiry.

7 EC Responses to United States’ Questions, response to question 10 (emphasis added).
8 Id., response to question 7 (emphasis added).
9 EC Rebuttal Submission, paragraph 10.
10 Id., paragraph 18.
11 See EC First Submission, paras. 50-66, 85-91, 103, 110, 116 and 127.
12 See EC Rebuttal Submission, paras. 42, 43, 47 and 56; EC Responses to United States’ Questions,
responses to questions 3, 4.b., 7, 10, 11, 12, 13, 14 and 24.

50. Let's see what happens when the EC's focus on the owner of the company actually is
abandoned, as the EC has conceded it should be.
51. Now, when the EC inquires into whether the company following a change in ownership is the
same as, or different from, the company before the change in ownership, and it can no longer argue
that Article 1.1 requires the outcome to be based on a distinction which equates the owner with the
company, there are perhaps several possible approaches that could be used. But, nothing in
Article 1.1 dictates one approach or another.
52. It may even be that an approach that focused on the new owner of the company, such as the
EC’s shares versus assets approach, would be possible, although, in the view of the United States,
there are several considerations that strongly counsel against it.
53. The EC’s approach is, of course, far removed from the SCM Agreement’s focus on the
manufacture, production or export of the merchandise.
54. In addition, it is not even clear what the basis is for the EC’s distinction between a sale of
shares and a sale of assets in the first place. The EC seems to be saying that the new owner is legally
responsible for all of the liabilities of the company only when the change in ownership is
accomplished through a sale of shares, and therefore that is the only scenario where the company
remains the same following a change in ownership. But, that is not the law in the United States, and
it also does not appear to be the law in the EC.
55. Under US corporate law, if the change in ownership is accomplished through a sale of shares,
the new owner steps into the shoes of the prior owner and becomes legally responsible for all existing
and potential liabilities of the company, absent contractual agreement to the contrary. In the case of a
sale of assets, it is a factual question as to whether the new owner becomes legally responsible for all
existing and potential liabilities of the company. Specifically, it is a question of whether the company
carries on substantially the same business under the new owner. Here, the factors examined include
whether there is a continuation of management, personnel, locality, assets and general business
operations, whether the seller exits the business after the transaction, and whether the company under
the new owner holds itself out to be the effective continuation of the original enterprise. If an
examination of these factors shows that the company is carrying on substantially the same business
under the new owner, the new owner is legally responsible for all existing and potential liabilities of
the company.
13
56. In the EC, it appears that similar factors gove rn the determination of whether the new owner
is legally responsible for the liabilities of the company. The factors here include whether the
company under the new owner “continued to manufacture the same product at the same place with the
same staff.” It is not enough that the company “merely changed its name”.14
57. Moreover, as a practical matter, the EC’s approach would seem to involve the investigating
authority in a hopeless morass. For one thing, change-in-ownership transactions are often extremely
complex transactions, particularly when they involve a privatization. They often do not involve a
simple sale of shares or a simple sale of assets. It would seem to require an expert in corporate law
even to begin to figure out how to analyze some of these transactions, and even then it is unclear
which Member’s version of corporate law is supposed to be used.

13 See, e.g., Corporation Practice Guide, paragraph 2710 (Aspen Law & Business 1997) (attached as
Exhibit USA-37).
14 SCA Holding Ltd. v. Commission of the European Communities , Case T-327/94, 1998 ECJ CELEX
LEXIS 1139 (Ct. First Instance 1998) (attached as Exhibit USA-38).

58. Finally, independent of these considerations, the fundamental point remains that nothing in
the SCM Agreement requires an approach that distinguishes between a sale of shares and a sale of
assets in order to figure out whether a new “benefit” inquiry is required following a change in
ownership. Certainly, nothing in Article 1.1 -- or anywhere else in the SCM Agreement -- directs the
investigating authority to fill in the SCM Agreement’s silence on changes in ownership with corporate
law principles.
59. Now, let’s briefly look at the next step in the EC’s interpretation of Article 1.1, where the EC
actually inquires into whether a “benefit” can be id entified following an arm’s length, fair market
value change-in-ownership transaction . Here, t oo, the EC’s focus on the owner of the company is
crucial to the EC’s analysis. The entire thrust of the EC's First Submission was to view an arm's
length privatization transaction from the perspective of the new owner, not from the perspective of the
company. It was from the perspective of the new owner that the EC’s economic analysis attempted to
show the discontinuance of any Article 1.1 "benefit." The EC continues to press that perspective in its
Rebuttal Submission 15, again despite its acknowledgement of the impropriety of using that
perspective.16
60. If the EC's focus on the owner of the company is abandoned with regard to this part of the
EC’s interpretation of Article 1.1, what happens? Clearly, the economic analysis changes if this
transaction is not viewed from the perspective of the new owner but instead from the perspective of
the company. It is no longer meaningful to argue that the new owner paid what the company and all
of its subsidies may have been worth. Rather, as the United States explained in its First
Submission17, what is now relevant is that the company itself is not materially different following the
change in ownership. The productive assets used in the manufacture, production or export of
merchandise before the change in ownership are the same ones used after the change in ownership.
61. Thus, the EC’s challenge to the actions taken by USDOC in the reviews at issue loses all
merit when the EC's focus on the owner of th e company actually is abandoned, as the EC has
conceded it should be.
The Context Provided by Article 27.13
62. Now, I would like to turn to Article 27.13, which is the only provision in the SCM Agreement
that specifically addresses the issue of privatization.
63. The EC knows that Article 27.13 is the on ly provision in the SCM Agreement that
specifically addresses the issue of privatization, and the EC also knows that it does so in a manner that
is totally at odds with the EC’s position in this dispute. As a result, the EC has sought to render
Article 27.13 inapposite in several different ways. None of these attempts, however, withstands
scrutiny.
64. Previously, the United States has explained that the EC’s position regarding how Article 1.1
addresses changes in ownership is squarely contradicted by Article 27.13 and the context that it
provides. In this regard, Article 27.13 creates an exception by establishing that certain types of
subsidies provided by a developing country Member prior to privatization under certain circumstances
will not be actionable under Part III of the SCM Agreement after privatization. Although
Article 27.13 does not expressly state the general rule to which this exception applies, the only
reasonable conclusion is that the general rule is that subsidies bestowed on a government-owned

15 Id., paragraph 10.
16 Id., paras. 42, 43, 47 and 56; EC Responses to United States’ Questions, responses to questions 3,
4.b., 7, 10, 11, 12, 13, 14 and 24.
17 US First Submission, paragraph 181.

company's production prior to privatization normally are actionable after privatization. 18 In other
words, they are not cut off by the privatization transaction, but rather pass through to the successor,
privatized company. If this were not the case, Article 27.13 would serve no purpose.
65. In its Oral Statement at the first panel meeting, the EC gave two reasons why Article 27.13
should not be considered relevant by the Panel in this dispute. The United States addressed and
refuted these arguments in its Rebuttal Submission. Now, the EC presents two new reasons for the
Panel to ignore Article 27.13. It is these arguments that I will now address.
66. First, the EC argues that Article 27.13 applies only to “subsidies granted ‘in connection with
privatization’, not pre-privatization subsidies as such.” 19 On that basis, the EC then contends that
Article 27.13 shelters the successor, privatized comp any even when it receives a subsidy directly as
part of the privatization transaction, not just when it inherits previously bestowed subsidies from the
government-owned company. It is irrelevant, however, if Article 27.13 also shelters subsidies
provided to the successor, privatized company directly as part of the privatization transaction. The
fundamental point is that Article 27.13 does apply to, and provide shelter for, certain pre-privatization
subsidies. Given that fact, which the EC (like third parties Brazil and Mexico) now seems to concede,
the obvious reason that Article 27.13 needs to apply to any pre-privatization subsidies at all is that,
otherwise, those subsidies would be actionable following a privatization. Again, if the SCM
Agreement did not contemplate that pre-privatization subsidies would be actionable following a
privatization, Article 27.13 would serve no purpose.
67. The EC’s other new argument is that Article 27.13 sheds no light on the meaning of the terms
in Article 1.1 because “Article 27.13 presupposes the existence of a subsidy before it becomes
relevant.”
20 According to the EC, Article 27.13 cannot become context for interpreting Article 1.1
“simply because it is built on a hypothesis that the conditions of Article 1.1 are satisfied.” 21 But, that
is the point. The EC has made precisely the point that establishes why Article 27.13 does provide
context for interpreting Article 1.1.
68. By contemplating that pre-privatization subsidies normally are actionable in a WTO
proceeding under Part III after privatization, Article 27.13 necessarily reflects an assumption that the
elements of a “subsidy” required by Article 1.1 -- a “financial contribution” and a “benefit” -- exist
for these subsidies after privatization. At the very least, this means that, in Part III proceedings, any
interpretation of Article 1.1 which treats the "benefit" of pre-privatization subsidies as being cut off by
privatization (as does the EC’s interpretation of “benefit”) necessarily conflicts with Article 27.13.
69. Is there any reason for confining the context provided by Article 27.13 solely to
interpretations of Article 1.1 in Part III proceedings and not also to interpretations of Article 1.1 in
countervailing duty proceedings under Part V? Article 1.1 is the SCM Agreement’s basic definitional
provision, and it applies equally in Part III proceedings and Part V proceedings. The United States
sees no reason for interpreting it differently depending on whether it is being applied in a Part III
proceeding or a Part V proceeding, nor has the EC has offered any reason for doing so.
70. Article 27.13 therefore should be considered to provide context for interpreting Article 1.1
when Article 1.1 is being applied in either a Part III proceeding or, as in this dispute, a Part V
proceeding.
71. As the United States has explained previously, moreover, Article 27.13 implicitly rejects the
EC’s notion that a subsidy “benefit” under Article 1.1 must be re-identified as of the time of a change

18 Id., paras. 151-60.
19 EC Rebuttal Submission, paragraph 75.
20 Id., paragraph 78 (emphasis in original).
21 Id., paragraph 80.

in ownership, given that it contemplates a general rule that previously bestowed subsidies remain
actionable and are allocable to the production of the successor, privatized company.
Other Matters
72. Mr. Chairman, that concludes my basic presentation. Nevertheless, the United States is
compelled to address several of the arguments made by the EC in its Rebuttal Submission, even
though they do not relate to the core of this dispute. The United States feels this need because, in
many instances, the EC attempts to refute an argument that the United States has not made, or it
simply misstates the United States’ position. In order to avoid any confusion that the EC's arguments
might cause, I will now address the more significant of the EC's errors as briefly as I can.
Productive Assets as the Recipient of a Subsidy
73. For one thing, the EC mischaracterizes the United States’ view of the subsidy recipient.
74. The EC states that the United States interprets Article VI:3 of GATT 1994 and Article 10 of
the SCM Agreement as meaning that a subsidy “is given to a productive asset.”
22 The EC even claims
that this interpretation is "central to the US position in this dispute." 23 The EC emphatically counters,
in an argument extending for more than three pages, that subsidies “are received by legal persons, not
inanimate objects.”24
75. As I have stated above, while the United States does not agree that it is necessarily a "legal
person" who receives the financial contribution, the United States has previously stated that as a
practical matter there must be some entity or individual who receives the financial contribution. The
United States has never maintained that the actual physical recipient of a financial contribution is a
productive asset.
76. What the United States has said is that Article VI:3 of GATT 1994 and Article 10 of the
SCM Agreement provide that the purpose of imposing countervailing duties is to offset subsidies
bestowed on the manufacture, production or export of the merchandise. In other words, these
provisions contemplate that a subsidy benefits the manufacture, production or export of merchandise.
And, again, the EC itself has acknowledged this po int in its Rebuttal Submission. It states that
“financial contributions benefit the act of production, manufacture, or export” and “provide an
advantage for economic activities carried on by business enterprises.”25
77. That does not mean, however, that the actual physical recipient of the subsidy is the
productive assets themselves or the merchandise.
78. Thus, when the United States previously argued that "the productive assets which benefited
from the subsidy before the change in ownership ar e the same ones used by the new owners after the
change in ownership," it was not somehow sugges ting that the subsidy recipient was the productive
assets. Rather, consistent with the focus of Article VI:3 of GATT 1994 and Article 10 of the SCM
Agreement, the United States was simply stating that it was appropriate to countervail imports from
the successor company because it was continuing to use the very same productive assets as the
predecessor company, i.e., the company that originally received the subsidy.
Whether the SCM Agreement Seeks Not Only to Offset But Also to Deter Subsidization

22 Id., paragraph 46.
23 Id., paragraph 4.
24 Id., paragraph 47.
25 Id., paragraph 47 (emphasis in original).

79. The EC also spends considerable time arguing that the SCM Agreement only seeks to offset
subsidization, not to deter it. At first, it is not clea r why the EC is even making this point. Then, the
EC actually suggests that the United States has attempted to support its change-in-ownership
methodology as a legitimate effort to “deter” subsidization, not to “offset” subsidization.26
80. Let me clarify the United States’ position. In the United States’ view, USDOC imposes
countervailing duties in a change-in-ownership situation in order to offset the subsidization found to
exist, just as is contemplated by Article 19.4 of the SCM Agreement. The United States does not
impose any additional duties in an effort to deter subsidization.
81. That being said, the United States remains of the view that the mere existence of the
disciplines found in the SCM Agreement inherently deters governments from subsidizing, and
deterrence is indeed one of the purposes of the SCM Agreement.
The Richemont Change in Ownership
82. The EC next looks at how USDOC handled th e Richemont change-in-ownership transaction
in Stainless Steel Sheet and Strip in Coils from France, 64 Fed. Reg. 30774 (8 June 1999), which is an
example of where USDOC's methodology can result in no pass-through of subsidies to the successor
company. Here, the EC fundamentally misrepresents USDOC's analysis as actually turning on
whether or not the change in ownership was accomplished in an arm's length, fair market value
transaction.
27
83. Briefly, in the Stainless Steel Sheet and Strip investigation, USDOC applied its change-in-
ownership methodology just as it has been described in this dispute 28, and it was on the basis of that
methodology that USDOC found that none of the pr ior subsidies passed through from Richemont to
the purchaser, which was a government-owned company. USDOC did not base this determination on
the fact that the change in ownership was accomplished in an arm's length, fair market value
transaction, as the EC represents to the Panel.
84. USDOC did find the fair market price of this transaction to be relevant, but not with regard to
any of the prior subsidies. USDOC looked at the nature of the transaction price solely in order to
determine whether the government could be considered to have provided new subsidies directly to
Usinor, the parent company that sold Richemont to the government-owned company, as part of the
change-in-ownership transaction itself.
The State Aids Code
85. In its Rebuttal Submission, the EC continues to maintain that its State Aids Code has “no
bearing” on this dispute
29, despite the fact that the EC uses the State Aids Code as a guide when
applying its countervailing duty law and the State Aids Code treats changes in ownership exactly the
opposite of the position taken by the EC in the countervailing duty law context of this dispute.
86. The EC insists that no comparison is appropriate between the EC’s State Aids Code and
countervailing duty law because the two sets of laws use different procedural rules and provide for
different remedies when subsidization takes place. The EC also adds that “[t]he substantive rules

26 See id., paras 59-68.
27 See id., paras. 95-100.
28 See US First Submission, paras. 36-62.
29 EC Rebuttal Submission, paragraph 91.

applying to EC State aids are entirely different from those applying to countervailing duty
proceedings”.30
87. First of all, it is hardly clear why the procedures and remedies of the two sets of laws are
relevant to the issue of whether subsidization exists in the first place. That is the issue here, namely,
whether subsidization is cut off or whether it survives a change in ownership.
88. Second, it is also not apparent what the EC mean s when it says that the substantive rules of
the two sets of laws are entirely different. Plainly, both discipline subsidization. Meanwhile, the only
substantive difference that stands out is the very matter that is at issue here. That is, the State Aids
Code treats pre-privatization subsidies as passing through, in full, to the successor, privatized
company, while the EC maintains that under countervailing duty law those same subsidies are cut off
by the change in ownership.
89. The United States submits that there is no sound basis for arguing that different change-in-
ownership rules are appropriate under the State Ai ds Code and countervailing duty law. The two
laws plainly are attempting to discipline the same problems of subsidization. The United States
therefore agrees with the following statements re cently made in a speech by an EC commentator,
familiar with the two sets of laws, speaking in his personal capacity:
Most regional and international trade groupings have developed rules to control the
granting of subsidies to enterprises by Member governments, particularly in the area
of trade in goods. For example, WTO Members have undertaken to discipline
subsidies through the Agreement on Subsidies and Countervailing Measures, while
EU Member States’ ability to grant subsidies is limited by the State aid rules defined
by the EC Treaty. This discipline exists because it is recognized that subsidies on the
whole involve a misallocation of resources, which can potentially distort trade and
cause adverse effects to competing non-subsidized enterprises.
31
The Cooper Article
90. Throughout its Rebuttal Submission, the EC quotes from the Article written by Professor
Cooper, which is Exhibit EC-13, to support its position that an arm's length, fair market value change-
in-ownership transaction cuts off prior subsidies.
91. Briefly, the Cooper Article was prepared as part of a submission commenting on
countervailing duty regulations being proposed by USDOC. The submission was made by a group
advocating that USDOC adopt a methodology that ca lled for the extinguishment of prior subsidies
following an arm's length, fair market value privatization transaction.
92. For purposes of this dispute, there are two key aspects of this Article which render it
inapposite. First, the Article itself admits that it is not looking at the privatization issue from a legal
perspective. It does not reference or discuss any provisions of the SCM Agreement or any provisions
of the US countervailing duty law. Rather, the Article expressly purports to provide only an analysis
from an economic perspective.32 Second, when the Article provides its economic analysis, it only
analyzes the privatization transaction from the perspective of the new owner of the successor,
privatized company. Again, as I have discussed at some length above, the EC itself has

30 Id., paragraph 87 (emphasis in original).
31 “Subsidies: Environmental friends or foes?”, presented at the Cameron May International Law
Conferences’ 4th Annual Conference on Dispute Resolution on the WTO (18 June 1999), at paragraph 3
(attached as Exhibit USA-39).
32 See Exhibit EC-13, p. 3.

acknowledged that it is not appropriate to "focus[ ] on what commercially meaningful advantage is
accruing to the owners of the successor privatized company."33
93. The appropriate perspective can be found in an Article written by Gary Hufbauer, who served
as the US Treasury Department's chief negotiator on subsidies during the Tokyo Round and is
currently the Reginald Jones senior fellow at the Institute for International Economics. In his article,
Mr. Hufbauer explains:
The EU ... argues that the new shareholders who paid "fair market value" for a
company are not subsidized and shouldn't be penalized. But whether British Steel's
new owners benefitted from the prior subsidies has no bearing on the competitiveness
of the steel mills -- which the subsidies pumped up massively.
Does a subsidized firm's advantage somehow vanish as the company's shares are
bought and sold from one day to the next? Under that theory, subsidies will
evaporate as the firm's shareholder roster changes. This theory might gladden the
hearts of shareholders, but it would eliminate much of the WTO discipline on
subsidies to capital equipment.
The EU next claims that the US authorities must somehow prove that the subsidies
survived privatization -- by quantifying the current price and output effects of $13
billion granted over a period of years -- before imposing countervailing duties.
As a participant in crafting multilateral subsidy rules, I find this burden-shifting
argument to be particularly dangerous. Longstanding General Agreement on Tariffs
and Trade guidelines allow governments to assume -- without proving empirically --
that subsidies create lasting competitive benefits. WTO members have recognized
that it would be impractical or even impossible to prove subsidy effects in later years.
Too much else is happening in the dynamic world economy. Hence it is enough to
show that a subsidy has been provided and has not yet been fully amortized.
Then, assuming the injury test is also met, countervailing duties can be lawfully
imposed. Requiring the importing country to demonstrate the effect of the subsidy
years after it was granted -- as the EU recklessly insists -- would undermine the
discipline the Subsidies Agreement seeks to impose.
The hypocrisy of this effort to excuse $13 billion in subsidies is astounding. In 1996,
British Steel complained bitterly about subsidies being pumped into Irish Steel --
even though Irish Steel was about to be privatized. Why worry if the competitive
distortion was about to vanish? Indeed, the EU itself requires illegal subsidies to be
repaid in full with interest to the offending government, even if the recipient company
has changed owners in the interim.
34
94. Mr. Chairman, at a minimum, Mr. Hufbauer’s Article shows that economists differ on the
significance of a privatization transaction, contrary to the impression that the EC tries to make in this
dispute.
95. Mr. Hufbauer’s Article is also noteworthy for its recognition that the SCM Agreement takes a
practical approach to subsidies and allows governments to assume that subsidies have lasting benefits.
As Mr. Hufbauer explains, any approach that were to treat pre-privatization subsidies as cut off by an

33 EC Responses to United States’ Questions, response to question 10.
34 "Why is the EU defending subsidies?", by Gary Hufbauer, guest opinion appearing in the Journal of
Commerce (June 28, 1999) (attached as Exhibit USA-40).

arm’s length transaction would undermine the discipline that the SCM Agreement seeks to impose on
subsidies.
Summary
96. In summary, the United States believes that the issue before the Panel, when properly
understood, is a relatively simple one. The SCM Agreement does not direct how an investigating
authority is to handle pre-privatization subsidies. It is silent. Under these circumstances, USDOC
developed a sound and well-reasoned approach, and there is no basis for the Panel to find that
USDOC acted in any way that was inconsistent with the SCM Agreement.
Conclusion
97. Mr. Chairman, that concludes my presentation. The United States looks forward to
answering any questions that the Panel may have.

ATTACHMENT 2.7
CONCLUDING STATEMENT OF THE UNITED STATES
SECOND MEETING WITH THE PANEL
15 July 1999
1. Mr. Chairman, I will attempt to be brief and to focus on what is the core matter in dispute.
2. In this dispute, the Panel must decide how an investigating authority is to handle a change in
ownership under the SCM Agreement. Specifically, what does the SCM Agreement require? As we
have explained, the SCM Agreement is silent on this matter. It does not direct an approach that must
be taken by the investigating authority.
3. Given these circumstances, USDOC developed and applied its own approach. It is an
approach that is sound and well-reasoned. It is not the only approach that an investigating authority
could develop. There are other possible ones. But, USDOC's approach is a possible approach, and it
is not inconsistent with the SCM Agreement.
4. The EC, on the other hand, seeks a per se rule. The EC wants the Panel to establish a rule
that there is no pass-through of previously bestowed subsidies following an arm's length, fair market
value change in ownership. That is unacceptable. It is simply not required by the SCM Agreement.
5. Mr. Chairman, at this stage of the proceedings, it has become clear that one question is at the
core of this dispute. This question has been fo rmulated in two similar ways. According to the
United States, the question is whether the manufacture, production and export of merchandise prior to
the change in ownership is essentially the same as the manufacture, production and export of
merchandise after the change in ownership. The other way in which this question has been
formulated is whether the company prior to the change in ownership is the same as or different from
the company after the change in ownership.
6. For purposes of this dispute, there is not much of a practical distinction between these two
formulations of the question.
7. The United States answers this question essentially by looking at whether the operations of
the company are the same, or different, following the change in ownership. The United States uses
this focus because the SCM Agreement itself expressly states a focus on a subsidy as benefiting the
manufacture, production or export of merchandise.
1
8. Now, are there other possible ways to answer this question? Yes, there are. One approach
even might be to base the answer on how a Member's own corporate law would analyze the situation.
And, there are probably several other possible ways to do it as well. But, there is no required way.
9. It is important to note, moreover, that USDOC's approach complies with all of the relevant
SCM Agreement requirements that do exist. In particular, USDOC does find a "benefit" to exist
during the period of investigation and the period of review. As we have explained, USDOC does this
through an examination of the allocated "benefit" stream, just as all other Members do.2

1 See US First Submission, paras. 188-206.
2 See US Oral Statement (2d), paras. 14-21.

10. Now, let's look at how the EC answers this same question. How does it answer it? Well, it
doesn't. The EC actually asks a different question. It asks whether the owners of the company are the
same or different following the change in ownership.
11. As we have seen, in its Oral Statement at this second panel meeting, the EC first states that
any distinction between a sale of shares and a sale of assets is a distinction based on form and
therefore is meaningless. Then, it says that it is instead necessary to -- it is required by the SCM
Agreement to -- look at the "economic reality" of the transaction to determine whether the company is
the same or different following the change in ownership.3 So, how does an investigating authority do
this? Well, we are still waiting to hear. The EC never says. Instead, the next thing that the EC says is
that an arm's length, fair market value transact ion cuts off the previously bestowed subsidies. 4 But,
what does that have to do with the "economic reality" of the transaction? Specifically, how is a
company the same or different based solely on the amount of the purchase price? It is not clear. It
appears that the EC is essentially saying that all changes in ownership result in a new company. On
what basis does the EC take this position? What is it in the SCM Agreement that requires it? Again,
the EC does not say. What is apparent, however, is that the EC is exclusively focusing on the owner
of the company, even though that is something that the EC repeatedly has conceded is contrary to the
SCM Agreement.
5
12. Mr. Chairman, let me just conclude by saying that $13 billion in subsidies do not simply
vanish.
13. Thank you, Mr. Chairman.

3 EC Oral Statement (2d), para. 23.
4 See id., para. 24.
5 EC Rebuttal Submission, paras. 42, 43, 47 and 56; EC Responses to United States’ Questions,
responses to questions 3, 4.b., 7, 10, 11, 12, 13, 14 and 24.

ATTACHMENT 2.8
RESPONSES OF THE UNITED STATES
TO QUESTIONS FROM THE PANEL
AT THE SECOND MEETING OF THE PANEL
30 July 1999
QUESTIONS FOR THE UNITED STATES dated 14 July 1999
Q.1. What is your understanding of the requirement found in Article VI:3 of GATT 1994,
whereby: "No countervailing duty shall be le vied on any product of the territory of any
contracting party … in excess of an amount equal to the estimated bounty or subsidy
determined to have been granted, directly or indirectly, on the manufacture, production , or
export of such product in the country of origin ...". (Emphasis added). Does this provision, in
the opinion of the United States, require the investigating authorities of the parties to determine
that a subsidy has been granted on the manufacture or production of the specific product on
which a CV duty is imposed?
Would it be permissible, under this provision, to base the imposition of such a duty on a
determination of subsidization that has been granted 7-10 years earlier and/or to a different
company, and/or on a production of different products taking place under different
circumstances? Should this provision be understood as to require the investigating authority to
determine that such a past subsidy is at least benefitting present production?
1. The United States’ answer to the first of the Panel’s questions is, generally, yes, Article VI:3
of GATT 1994 requires the investigating authority to determine that a subsidy has been granted on the
manufacture or production of the product under investigation or review. The United States notes that
Article VI:3 refers only to the type of product being manufactured, produced or exported, which is
what USDOC in its practice calls the "class or kind of merchandise"; it does not refer to each
exported item of merchandise, as may be suggested by the use of the term “specific product.”
2. The United States believes it would be “permissible” to base the imposition of a
countervailing duty on a determination of subsidization that has been granted 7-10 years earlier. We
assume that the subsidy at issue is a non-recurring subsidy and that the period over which the subsidy
benefit is allocated extends for at least 7-10 years. In that event, regardless of whether the proceeding
is an investigation or an administrative review, it would be permissible for the investigating authority
to find a subsidy to exist 7-10 years after its bestowal on the basis that the allocated “benefit” stream
assigns a part of the subsidy benefit to the period of investigation or period of review. While the
SCM Agreement does not require this approach, the United States believes that this type of allocation
is reasonable and not inconsistent with any provision of the SCM Agreement.
3. The Panel next asks whether it would be permissible to base the imposition of a
countervailing duty on a determination of subsidization that has been granted to a different company.
Using the plainest meaning of the term “different,” the United States considers as a general matter that
it is inappropriate to impose countervailing duties on a company for which investigating authorities
have not found a subsidy. That is to say, we would not impose duties on a totally unrelated, non-
successor company for which we had not found a subsidy. However, a full answer to this question
would depend on what is meant by a “different company.” Under USDOC’s practice, if there has
been a change in the ownership of a company for which we had previously determined a subsidy to
exist, USDOC normally will impose some amount of duties on the successor company where the
operations of the subsidized company before the change in ownership are essentially the same as the
operations of the successor company after the change in ownership. Even though the “new” company

may be considered a “different company” in some corporate or legal sense, we would not consider the
successor company in this instance (i.e., where the operations of the successor company are
essentially the same as those of the prior company) to be a “different company” for purposes of
imposing countervailing measures.
4. The next question asks whether it would be permissible to base the imposition of a
countervailing duty on a determination of subsidization that has been granted on a production of
different products taking place under different circumstances. The United States’ answer depends on
whether the subsidy at issue is “tied” or “untied.” For example, if a subsidy is “tied” to a product
other than the product under investigation, USDOC would not countervail it. Otherwise, if the
subsidy is “tied” to the product under investigati on or not “tied” to any particular product, USDOC
would countervail it.
5. We believe that this is a reasonable interpretation not inconsistent with any provision of the
SCM Agreement. It is also consistent with paragraph 3 of Annex IV, the only provision that mentions
the concept of tying, albeit in the context of calculating an ad valorem subsidy rate under the cost-to-
government measurement standard for purposes of Article 6.1(a).
6. The last question asks whether Article VI:3 of GATT 1994 should be understood so as to
require the investigating authority to determine that such a past subsidy is at least benefiting present
production. The United States’ answer is yes, in the sense that the investigating authority must at
least examine the allocated “benefit” stream and determine whether an amount has been allocated to
the period of investigation or period of review, as the United States explained in its Oral Statement (at
paragraphs 14-21) at the second panel meeting.
Q.2. Article 19.3 requires CVDs to be imposed on a non-discriminatory basis on imports of
the relevant product coming "from all sources found to be subsidized …". Thereafter,
Article 19.3 refers to "sources which have renounced any subsidies in question or from which
undertakings under the terms of this Agreement have been accepted." Article 18.1 provides for
undertakings to be granted by (1) "the government of the exporting Member" and (2) "the
exporter".
Does Article 19.3 not suggest that CVDs may only be imposed on imported goods when
the "source" of the imported goods is found to be subsidized? If not, why not? Irrespective of
your response to the preceding question, are the "sources which have renounced any subsidies
in question or from which undertakings under the terms of this Agreement have been accepted"
the same "sources found to be subsidized"? If not, why not? If so, what are these "sources"?
Please explain whether Article 18.1 is relevant for the purpose of identifying these "sources"?
7. The United States does not agree that the first sentence of Article 19.3 suggests that
countervailing duties may only be imposed on imported goods when the “source” of the imported
goods is found to be subsidized. It is not intended to address that issue.
8. Admittedly, the first sentence of Article 19.3, containing the phrase “from all sources found to
be subsidized ...”, is not written with clarity. Nevertheless, in the phrase “from all sources found to be
subsidized ...”, the term “sources” would seem to be referring to the countries from which the imports
were sourced. In other words, “found to be subsidized” modifies not “sources,” even though that
word appears immediately after it, but rather an earlier phrase found in the first sentence of
Article 19.3, i.e., “imports of such product”.
9. Three points support this interpretation. First, the sentence at issue is concerned expressly
with non-discrimination, which relates to the GATT 1994 Article 1 principle of MFN, i.e., basically a
prohibition against treating one Member differently from another. This is confirmed by examining
the Second Report of the Working Party on Trade and Customs Regulations, Antidumping and

Countervailing Duties, BISD 9th Suppl., p. 198 at paragraph 26 (May 27, 1960). Where MFN is the
topic, it only makes sense to talk about countries, not individual firms or exporters. Second, it is
instructive to look at the corresponding provision in the Antidumping Agreement. There, Article 9.2
(like its predecessor in the Tokyo Round Antidumping Code) uses the phrase “from all sources found
to be dumped ...” in a similar, non-discrimination context. There, “sources” could not possibly refer
to the producer/exporter, as a producer/exporter cannot be found to be dumped. Third, Article 20.6
and Annex IV, note 65, similarly refer to “products” benefiting from subsidies.
10. Given this interpretation of the term “sources” where it first appears in Article 19.3, i.e., in the
phrase “from all sources found to be subsidized ...” found in the first sentence, it would seem that the
same meaning would have to be accorded to it when it later appears in the same sentence in the phrase
“sources which have renounced any subsidies in question or from which undertakings under the terms
of the Agreement have been accepted”. Nothing in Article 19.3 suggests that “sources” has two
different, alternating meanings in this sentence.
11. Even if it is accepted for the sake of argument that it is the “sources” that must be “found to
be subsidized,” and that “sources” means producers/exporters, the United States has previously
explained that when USDOC finds a firm to be subsidized following a change in its ownership, it does
so in a manner that is not inconsistent with the SCM Agreement.
12. Finally, the term “undertakings” later in the first sentence of Article 19.3 would seem to be a
reference to Article 18.1(a) undertakings, i.e., undertakings by the government of the exporting
Member. Although Article 18.1 itself lists two types of undertakings -- undertakings by the
government of the exporting Member and undertakings by an exporter -- it would seem that the
Article 19.3 reference is to undertakings by the government of the exporting Member, given that it
specifically refers to “sources” from which undertakings have been accepted.
Q.3. At paragraph 22 of its second written submission, the US argues that the SCM
Agreement assumes that the "benefit" from non-recurring, untied subsidies continue in time,
"without any further inquiries as to the continued existence of that `benefit'." Is this approach
consistent with Article 21.3 of the SCM Agreement, whereby an authority must terminate CVDs
unless it finds that the expiry of CVDs would be likely to lead to "continuation" or recurrence
of subsidization? Doesn't a finding of likely "continuation" of "subsidization" require a finding
of likely "continuation" of "financial cont ribution" and likely "continuation" of "benefit"?
Wouldn't the US approach lead to the automatic extension of CVDs through the useful life of
assets (beyond the initial five-year period of validity), without any determination that expiry
would be likely to lead to "continuation" of "subsidization" (i.e., "continuation" of "financial
contribution" and "continuation" of "benefit")? What provision[s] of the SCM Agreement
form[s] the basis for the assumption that th e "benefit" of non-recurring, untied subsidies
continues over time?
13. As a preliminary matter, the EC has not made any claim under Article 21.3, which deals with
five-year sunset reviews. Indeed, the reviews at issue were not sunset reviews under Article 21.3, but
rather annual reviews under Article 21.2.
14. USDOC has just begun to conduct sunset reviews under Article 21.3, and has not yet
encountered a case where it has had to determine the likelihood of continuation or recurrence of a
non-recurring subsidy for which the benefit stream has not expired. However, USDOC has issued
some relevant guidelines. With respect to long-term, non-recurring subsidies, USDOC has stated that
it generally would consider there to be a likelihood of continuation of a subsidy if the benefit stream
was not yet fully allocated. With respect to short-term, recurring subsidies, USDOC has stated that it
would look to see whether the subsidy programme still existed, whether the company in question had
a history of using the programme, and other relevant factors. See, Policies Regarding the Conduct of
Five-year ("Sunset") Reviews of Antidumping and Countervailing Duty Orders; Policy Bulletin , 63

Fed. Reg. 18871, 18875 (April 16, 1998). If the allocated “benefit” stream for a particular non-
recurring subsidy continues beyond the sunset period, it is consistent with Article 21.3 to consider that
there is a likelihood of continuation or recurrence of the subsidy (until the end of the allocation period
for the subsidy). This does not mean, however, that countervailing duties necessarily would continue,
as Article 21 also requires an examination of the likelihood of the continuation or recurrence of injury.
There certainly is nothing automatic about US like lihood determinations with respect to continuation
or recurrence of either a subsidy or injury. Rather, likelihood determinations are based on an
examination of the facts and evidence on the record.
15. As to what SCM Agreement provisions reflect an assumption that it is proper to allocate non-
recurring subsidies over time, there is Annex IV, paragraph 7, which reads as follows:
Subsidies granted prior to the date of entry into force of the WTO Agreement, the
benefits of which are allocated to future production, shall be included in the overall
subsidization. (Emphasis added.)
Although Annex IV deals with serious prejudice cases involving Article 6.1(a) of the SCM
Agreement, the wording of paragraph 7 makes clear that insofar as the allocation of subsidies is
concerned, the drafters did not intend paragraph 7 to be a special rule applicable exclusively to those
cases. Instead, the drafters took as a given the notion that the benefits of certain types of subsidies
should be allocated to future production -- i.e., should be allocated over time -- and added paragraph 7
in order to clarify how these types of subsidies figured into the calculation of the ad valorem subsidy
rate for purposes of Article 6.1(a). The phrase “the benefits of which are allocated” connotes a
proposition that is universally applicable, regardless of the context.
16. The United States notes that the allocation of non-recurring subsidies over time is a common
practice among Members and has been endorsed by the Informal Group of Experts, as the
United States explained in its First Submission (at paragraph 45). Furthermore, the United States and
the EC do not disagree on the propriety of allocati ng non-recurring subsidies over a period of years,
nor do they disagree on the propriety of finding a “benefit” during the period of investigation or
period of review by reference to the allocated “benefit” stream.
Q.4. In its written reply to written question 6 from the EC, the US explains why it believes
that the issue of whether a financial contribution continues to confer a benefit involves an effects
test. If this is the case, wouldn't the assessment required by Article 21.3 (i.e., whether the expiry
of CVDs would be likely to lead to "continuation" of subsidization) also involve an effects test?
Is it possible to determine whether there is a likelihood of continued subsidization without
examining whether there is a likelihood of continued benefit?
17. In its response to questions posed by the EC, the United States stated that the EC was
implying that investigating authorities had to determine whether there was a continuing competitive
benefit to the new owners of a privatized company, such as an ability to undercut competitors, and
that this was effectively an effects test. The United States does not believe that the question of
whether the expiry of the duty would be likely to lead to continuation of a subsidy involves an effects
test. When the United States refers to effects, it is referring to the potential effect of a subsidy on a
company’s subsequent performance, mainly output and pricing. Nothing in Article 1.1 or Article 21.3
requires this type of analysis.
18. The United States does not believe it is possible to determine whether there is a likelihood of
continued subsidization without examining whether there is a likelihood of continued benefit. The
United States believes that the type of analysis and considerations described above in response to
question 3 would satisfy the inquiry required by Artic le 21.3. The considerations described do not in
any way constitute an effects test.

Q.5. At paragraph 13 of its second written submission, the US attaches significance to the
difference between (i) a company and (ii) the owners of that company. The US asserts that the
EC's discussion of the economics of privatizat ion breaks down if one focuses on the company,
rather than the owners of the company. At page 37262 of the General Issues Appendix,
however, USDOC states that "[a]lthough plainly there is some distinction between a company
and its owners, it is a distinction without a diff erence in the context of privatization." Please
comment.
19. In the cited portion of the General Issues Appendix, USDOC was responding to the US
domestic industry’s argument that no repayment of subsidies should be allowed in the context of a
privatization transaction. The US domestic industry argued specifically that the monies being paid to
the seller -- i.e., the government -- in the form of the purchase price represent the owner’s funds, not
the funds of the successor, privatized company. The US domestic industry’s point was that the
company’s financial position had not changed because of the transaction ; rather, only the new
owner’s financial position had changed. According to the US domestic industry, repayment should
only be allowed if the monies paid to the government somehow were “disgorged” from the company.
20. In response, USDOC first noted that this argument “rest[ed] entirely on the proposition that
there is a complete and absolute distinction between a company and its owners.” General Issues
Appendix, 58 Fed. Reg. at 37261. USDOC stated, how ever, that “[a]lthough plainly there is some
distinction between a company and its owners, it is a distinction without a difference in the context of
privatization.” Id., 58 Fed. Reg. at 37262. USDOC then explained these statements at some length.
21. Taking a practical approach, USDOC first explained that the US domestic industry’s
argument placed form over substance. It stated:
Merely because a company has been incorporated to protect its owners from the
company's legal liabilities or for beneficial tax and accounting purposes (or both), it
does not follow that the financial condition of the owners is irrelevant to the financial
position of the firm. The form in which new owners purchase the government
company creates no appreciable difference in how that company will be operated
overall. The fact that the owners are shareholders and raise capital to purchase the
government-owned company through new share issuings, rather than the company
itself taking on debt, does not mean that the owners can be indifferent to the profit
margin the company generates, as petitioners assert.
Id. Rather, USDOC continued, “in the real-world ma rketplace, the owner-shareholders' expectations
of a return on their investment cannot be separated from the profitability of the newly privatized
company.” Id. In essence,
the privatized company now has an obligation to provide to its private owners a
market return on the company's full value. The owners will seek to extract a rate of
return from their company at least equal to that of alternative investments of similar
risk. There is, then, no appreciable difference, as reflected in the marketplace,
between the profit-making ability of the company and the owners' realization of a
profitable return on their investment in that firm.
To adopt the petitioners' rationale that only a full repayment by the new company can
extinguish past subsidies would create a te st that would elevate form over substance
and produce incentives for foreign governments merely to alter the form of the
privatization to satisfy this artificial distinction. If the Department were to ratify such
a test, owners could simply lend the company the money to repay at least some
portion of the past subsidies, taking the capital out as loan payments, rather than
dividends.

Id.
22. USDOC ultimately took the position that it was reasonable to conclude that, to some extent,
the payment made by the owner would be extracte d from the company over time. For that reason,
USDOC determined that
a private party purchasing all or part of a government- owned company (e.g., a
productive unit) can repay prior subsidies on behalf of the company as part or all of
the sales price. Therefore, to the extent that a portion of the price paid for a
privatized company can reasonably be attributed to prior subsidies, that portion of
those subsidies will be extinguished.
Id., 58 Fed. Reg. at 37262-63.
23. The point of this discussion was to demonstrate that it is appropriate to consider a portion of
the sales price to be repayment of prior subsidies, whether that repayment emanates from the
company or the owners of the company. In this context, the distinction between a company and its
owners is a “distinction without a difference.” As explained in response to question 22, below, there
are other contexts where the distinction between a company and its owners is not particularly relevant.
As also explained in response to question 22, there are still other contexts where the distinction is
relevant, as in those cases where USDOC has found that tax credits on dividends benefit owners but
not the company or the merchandise produced, manufactured, or exported by the company.
24. What all of these examples show is that, when these complex questions arise about whether a
government practice benefits the owner, the company, and the merchandise manufactured, produced,
or exported by that company, USDOC performs a complete and thorough analysis of all of these
issues. Based on that analysis, we determine whether there is a basis for imposing duties. USDOC
does not impose countervailing duties unless it determines that a government programme benefits the
manufacture, production, or export of the merchandise. By contrast, the EC’s arm’s length approach
concentrates solely on the owner of the company to the exclusion of the much more fundamental
question of whether there is a benefit on the manufacture, production, or export of the merchandise
made by the successor company that is essentia lly the same company as before the change in
ownership. This is the fundamental flaw in the EC’s position.
Q.6. Were BSC's Special Steels Business assets acquired by UES, or by the owners of UES?
Were the terms of the transaction negotiated by UES, or by the owners of UES? Did the owners
of UES pay any price for the BSC assets acquired by UES?
25. The details of this transaction are described in the First US Submission at paragraphs 64-66.
26. The first question asked by the Panel is, were BSC’s Special Steel Business assets acquired
by UES or by the owners of UES? It would seem that BSC sold its Special Steel Business assets to
UES, not the owners of UES, in exchange for shares in UES.
27. The Panel’s second question asks whether the terms of the transaction were negotiated by
UES or by the owners of UES. As far as the United States knows, the terms of the transaction were
negotiated by BSC and GKN, who became the owners of UES as a result of the transaction. It would
seem that UES did not negotiate the terms because it did not exist until the transaction was
consummated.
28. The Panel’s last question asks whether the owners of UES paid any price for the BSC assets
acquired by UES. The answer here would seem to be no. The BSC assets were the price that BSC
paid for its shares in UES. To the extent that UES itself (as opposed to the owners of UES) could be

considered to have paid a price for these assets, the price was the shares that BSC received in UES,
i.e., a 50 per cent share in UES.
Q.7. At paragraph 20 of its second written submission, the US asserts that neither Articles 1
nor 14 "is intended as an indication of whether the financial contribution will benefit the `legal
person' who received the financial contribution" . The Panel notes that Article 14 (b) provides
that a government loan confers a benefit when "the firm receiving the loan" receives the loan on
terms more favourable than a comparable comm ercial loan. A similar approach is adopted in
Article 14(c). Furthermore, the chapeau of Articl e 14 refers to benefit to the "recipient". Do
these provisions not support the view that Article 14 focuses on benefit to the legal person, by
determining whether the legal person received government assistance on terms more
advantageous than those it could have obtained on the market?
Furthermore, the US explained at paragraph 80 of its first written submission that
equity infusions to BSC conferred a benefit because BSC was unequityworthy. Does this not
support the view that the US determined benefit to BSC, i.e., the legal person, by determining
whether BSC obtained equity on terms more advantageous than those it could have obtained on
the market?
29. As the United States has previously acknowledged, as a practical matter, there must be some
entity or individual that receives the Article 1.1 financial contribution. Although Articles 14(b) and
(c) state that it is a “firm” that receives a loan or lo an guarantee, this by itself does not mean that the
Article 1.1 “benefit” is a benefit to the recipient "firm." It is a separate question as to who or what is
the beneficiary of the financial contribution. Article 1.1 is silent on this matter, as is Article 14.
30. Elsewhere, Article VI:3 of GATT 1994 and Article 10 of the SCM Agreement provide that
the purpose of imposing countervailing duties is to offset subsidies bestowed on the manufacture,
production or export of the merchandise. In other words, these provisions contemplate that a subsidy
benefits the manufacture, production or export of merchandise.
31. As to the reference in Article 14 to the "benefit to recipient" measurement standard, several
observations can be made.
32. Under the SCM Agreement, it is contemplated that Members can use either of two (and
possibly more) basic approaches in measuring subsidy benefits. One is the "benefit to recipient"
approach, and the other is the "cost to government" approach. Article 14 itself sets out the basic
guidelines for an investigating authority's use of the "benefit to recipient" approach.
33. Contrary to an assertion made by the EC at the second panel meeting, the United States does
not agree that Article 14 requires Members to use the "benefit to recipient" approach for purposes of
measuring subsidy benefits in countervailing duty proceedings. Article 14 merely states that, if an
investigating authority uses this approach, it must comply with the guidelines in Article 14. The only
express requirement in the SCM Agreement regarding the use of one approach or another for purposes
of subsidy measurement is found in Part III, which deals with proceedings where one Member
challenges an actionable subsidy of another Member in a proceeding before the WTO. Specifically,
Annex IV requires the use of the "cost to government" approach for purposes of calculating the ad
valorem percentage under Article 6.1(a) and establishing a presumption of "serious prejudice."
34. The use of the term “benefit to recipient” in Article 14 should be understood primarily as a
contrast to the term “cost to government” in Anne x IV. These two approaches deal with competing
views on how best to measure subsidy benefits. U nder the "cost to government" approach, which the
EC followed prior to the entry into force of the SCM Agreement, a subsidy generally is measured on
the basis of what it would have cost the government to raise the funds to provide the subsidy. Under
the “benefit to recipient” approach, which is the United States' longstanding measurement standard,

the focus is on how much the firm benefited from the subsidy, which normally is the difference
between the cost to the firm of obtaining the f unds from the government and what it would have cost
the firm to raise the funds itself in the marketplace.
35. Notably, the term “benefit to recipient” pre-dates the SCM Agreement. It has long been used
by USDOC as a short-hand reference to its measurement standard. USDOC uses this term even
though it always evaluates a subsidy in the context of whether there is a benefit to the manufacture,
production or export of merchandise. The United States further notes that, outside of the
privatization/successorship context, there is usually not a question of whether there is a distinction
between the company and the merchandise it produces. The two are usually treated as one and the
same.
36. For all of these reasons, the Panel should not read too much into the term “benefit to
recipient” in Article 14, especially since other relevant provisions, such as Article VI:3 of GATT 1994
and Article 10 of the SCM Agreement, expressly convey the notion that a subsidy benefits the
manufacture, production or export of merchandise rather than the subsidy recipient. Instead, as a
review of the entire SCM Agreement shows, the SCM Agreement simply does not treat the nature or
identity of the actual subsidy recipient as a significant matter. Indeed, one way to view the actual
recipient of a subsidy is merely as a conduit by which a subsidy benefits the manufacture, production
or export of merchandise.
37. The subsidy recipient itself should not be th e focus of the inquiry envisioned in the SCM
Agreement, especially if a legalistic, corporate law identity like that advocated by the EC were used to
define the subsidy recipient. If it were, countless creative legal schemes could be devised to avoid the
disciplines of the SCM Agreement. In USDOC's experience, USDOC has seen privatizations, partial
privatizations, private-to-private transactions, spin-offs of company divisions, “spin-ins” of company
divisions, sales of productive units, sales of shares, sales of assets, corporate restructurings and
countless hybrid transactions too complex to describe. Even if these transactions are considered to
create “new” companies under some version of corp orate law, the investigating authority’s analysis
cannot stop there. Rather, the task of the investigating authority is to determine whether the financial
contribution originally provided to the subsidy recipient continues to benefit the manufacture,
production or export of merchandise after a change in ownership occurs. Investigating authorities can
make this determination by analyzing whether the successor company or productive unit is essentially
the same as the prior company.
38. The Panel’s last question is whether USDOC’s equityworthiness determination supports the
view that USDOC, in the administrative reviews at issue, determined a “benefit” to BSC. The
United States answers this question with the following observations.
39. First, it should be understood that USDOC determined that the UK Government equity
infusions into BSC conferred a benefit by comparing those infusions to the appropriate market
benchmark. The analysis of whether BSC was equityworthy at the time of the infusions aided
USDOC in making this determination. Where, as here, a market price for the shares purchased by the
government was not available, USDOC conducts a test to determine whether the company at issue
was "equityworthy" at the time that the government purchased the shares. Under this test, if the
company were deemed equityworthy -- i.e., if it appeared capable of generating a reasonable rate of
return within a reasonable period of time -- the government infusion of equity through the purchase of
the shares would not confer a benefit. A finding that the company was “unequityworthy” would mean
that the government's investment was inconsistent with the usual investment practice of private
investors, and USDOC would find a benefit conferred.
40. None of this, however, even remotely suggests that investigating authorities are not to
determine whether there is a benefit on the manufacture, production, or export of the merchandise.
Almost all subsidy analyses must be performed from the point of view of the company, or even in

some sense from the point of view of the principals of the company. Clearly, merchandise cannot pay
interest, buy equity, receive loan guarantees, or purchase inputs. If one were to draw a sharp, literal
distinction between the recipient, as the company itself or a live person, and the merchandise
produced, one would not need a change in ownership to claim that the merchandise did not receive a
benefit. As stated above, in the overwhelming majority of cases, there is not a question as to whether
there is a distinction between the company and the merchandise produced by that company. When
there is a change in ownership, investigating authorities can determine whether the successor
company is essentially the same as the prior company. If so, it is reasonable to conclude that the
merchandise produced by the successor company continues to benefit from prior subsidies.
Q.8. Please comment on the argument at par agraph 49 of the EC's second submission that
"[t]he US countervailing duty statute recognizes that [a] subsidy exists when a financial
contribution is provided `to a person' and a benefit is thereby conferred." (footnote omitted)
41. The EC misstates US law through its argument at paragraph 49 of its Rebuttal Submission.
42. The US countervailing duty statute, in Section 771(5)(B) of the Tariff Act of 1930, as
amended, 19 U.S.C. § 1677(5)(B), states that a “financial contribution” is provided to a “person.”
This does not mean that the “benefit” conferred by the “financial contribution” is also necessarily a
“benefit” to the “person”.
43. As explained previously, in the context of the SCM Agreement, there must be, as a practical
matter, some entity or individual that receives the Article 1.1 financial contribution. However, this by
itself does not mean that the Article 1.1 “benefit” is to that recipient entity or individual. In fact,
Article 1.1 itself is silent regarding who or what is the beneficiary of a subsidy. Article VI:3 of
GATT 1994 and Article 10 of the SCM Agreement, meanwhile, provide that the purpose of imposing
countervailing duties is to offset subsidies bestowed on the manufacture, production or export of the
merchandise. In other words, these provisions contemplate that a subsidy benefits the manufacture,
production or export of merchandise.
44. Consequently, in the change-in-ownership context, USDOC essentially looks at the
operations of a company, as is explained below in response to question 25. Basically, if USDOC
finds that the entire company has been sold, or that enough of the company’s operations to constitute
a “productive unit” have been sold, USDOC will allocate the prior subsidies to the company or
productive unit after the change in ownership, su bject to any repayment deemed to occur under
USDOC’s methodology.
45. Section 771(5)(B) is entirely consistent with the position that the United States has taken in
this dispute under the SCM Agreement. Section 771(5)(B) states nothing more than that the
“financial contribution” is provided to a “person”. It does not further state that the “benefit” is to that
“person”.
Q.9. Please comment on the argument at paragr aph 48 of the EC's second written submission
that "[t]he fact that recipients of subsidies must be persons rather than goods is confirmed by
the text of Article 2.1 ASCM, which lays down the fundamental requirement of specificity of the
subsidy to certain enterprises …".
46. The EC's argument at paragraph 48 of its Rebuttal Submission misinterprets Article 2.1, the
"specificity" provision in the SCM Agreement.
47. Article 2.1 uses the terms "enterprise" and "industry" simply as an aid in determining whether
a government is limiting its largesse to certain se ctors of the economy. Subsidies that benefit all
industries, for example, are not countervailable. Subsidies limited to certain sectors are potentially
countervailable.

48. The United States notes that although USDOC itself normally uses the terms “firm” and
“enterprise” interchangeably in its practice, it does not wholly clear that Article 2.1 necessarily
intends “enterprise” to mean “firm.” The term "enterprise" means a “design of which the execution is
attempted; a piece of work taken in hand, an undertaking ...” or “engagement in such undertakings,”
according to the Compact Edition of the Oxford English Dictionary (Oxford University Press 1971).
49. Certainly, at a minimum, there is no basis for equating the term "enterprise" in Article 2.1
with the corporate law term "legal person," as the EC is suggesting.
50. Meanwhile, nothing in Article 2.1 conflicts with the United States’ interpretation of
Article VI:3 of GATT 1994 and Article 10 of the SCM Agreement as providing that the purpose of
imposing countervailing duties is to offset subsidies bestowed on the manufacture, production or
export of the merchandise, or in other words, that these provisions contemplate that a subsidy benefits
the manufacture, production or export of merchandise.
51. Finally, the United States notes that, contrary to the implication in the EC argument quoted by
this question, USDOC does not view the Article 1.1 financial contribution as being received by the
goods themselves. See US Oral Statement (2d), paras. 73-78.
Q.10. At paragraph 17 of its second written submis sion, the US notes that "the SCM does not
expressly address the matter of who or what rec eives the financial contribution." The Panel
notes that Annex I (a) of the SCM Agreement refers to "[t]he provision by governments of
direct subsidies to a firm or an industry …". Please indicate whether and why this extract from
Annex I(a) does or does not have any bearing on whether the SCM Agreement expressly
addresses the matter of who or what receives the financial contribution.
52. Looking at Annex I(a)’s reference to the provision of subsidies “to a firm or industry ,” it
appears that Annex I(a) is not attempting to shed light on who or what is the actual recipient of the
financial contribution. It arguably could have been construed as addressing the recipient if it only
referred to “a firm.” But, the additional reference to an “industry” suggests that Annex I(a) is not
intended to address the issue of the recipient.
53. As explained previously, the more basic point is that, as a practical matter, there must be
some entity or individual that receives the Article 1.1 financial contribution. However, even if this
entity could be construed as a “firm” or an “industry” by virtue of Annex I(a), that fact by itself would
not mean that the Article 1.1 “benefit” is to that recipient firm or industry. It is a separate question as
to who or what is the beneficiary of the financial contribution. Article 1.1 is silent on this matter.
Article VI:3 of GATT 1994 and Article 10 of the SCM Agreement, meanwhile, provide that the
purpose of imposing countervailing duties is to offset subsidies bestowed on the manufacture,
production or export of the merchandise. In other words, these provisions contemplate that a subsidy
benefits the manufacture, production or export of merchandise, which is the United States’ position.
54. By referring to a subsidy being provided to "a firm or industry," it appears that Annex I(a) is
more likely reflecting the notion found elsewhere in the SCM Agreement that a subsidy is considered
to benefit the manufacture, production or export of merchandise. What both a firm and an industry
have in common is that they carry on business activities, i.e., they manufacture, produce or export
merchandise. Arguably, it is those business activities to which, according to Annex I(a), a subsidy is
provided.
55. The United States notes that other paragraphs of Annex I more expressly seem to reflect this
focus on the manufacture, production or export of merchandise. See Annex I(d), (f), (g), (h) and (i).

Q.11. With regard to its written reply to writ ten question 10 from the EC, please explain in
detail why the US "expects that USDOC would no t consider the successor, privatized company
to be a new exporter"
56. In its question, the EC posits that a government-owned company has been a respondent in a
countervailing duty investigation and the investigating authority has imposed duties, and then the
company is subsequently privatized. The EC then asks if the successor privatized company would be
entitled to an expedited, new exporter review under Article 19.3.
57. As a preliminary matter, the United States notes that, in the area of new exporter reviews, the
SCM Agreement simply does not provide direct guidance regarding how an investigating authority is
to determine whether a new exporter exists. Article 19.3 is silent. Consequently, the likely USDOC
approach outlined below should not be viewed as required by the SCM Agreement, and conversely
any different approach advocated by the EC in this dispute should not be viewed as necessarily
precluded by the SCM Agreement.
58. It is difficult for the United States to explain in detail how USDOC would handle the situation
described in the EC’s question for the simple reason that USDOC has never addressed this situation.
That being said, the United States expects that USDOC would address this situation in the same
manner that it would address a change in ownership that took place prior to a countervailing duty
investigation. Thus, the United States expects that USDOC would act consistently with the SCM
Agreement’s focus on the manufacture, production or export of merchandise and, because the
operations of the company are essentially the same both before and after the change in ownership,
would find that the successor, privatized company is not a new exporter.
59. Furthermore, in the United States' view, the new exporter provision of Article 19.3 is intended
to apply in situations where a company only began to produce and export the investigated product
after the countervailing duty investigation, a company that previously only produced for domestic
consumption has begun to export since the countervailing duty investigation, or a company producing
and exporting the investigated product was not a re spondent in the countervailing duty investigation
because there were too many companies for the investigating authority to investigate. The
Article 19.3 new exporter provision is not intended to apply in situations like those involved in this
dispute, where the ownership of an investigated company (or a productive unit of an investigated
company) has changed hands since the countervailing duty investigation, given that in these types of
situations the company’s operations have not really changed.
60. The United States notes that the EC, in its practice, apparently agrees with this view. For
example, in Thermal Paper from Japan , OJ EC No. L 232/1 (Sept. 13, 1993), in the anti-dumping
context, the European Commission found that the sale of an exporter to a new owner had no effect on
that exporter’s dumping margin.
61. The United States also notes that a major company within the EC, the French company,
Usinor Sacilor, did not request a new exporter review, despite the fact that it was privatized in 1995,
two years after the issuance of USDOC countervailing duty orders imposing duties in excess of 10 per
cent on lead bar imports and certain steel imports. Consistent with the above analysis, this may
suggest that it did not even occur to Usinor Sacilor that it might be eligible for a new exporter review
simply because a new owner had taken over.
Q.12. With regard to its written reply to written question 11 from the EC, the US notes "that
the EC has not raised any claims in this di spute under Article 21.2 of the SCM Agreement".
What is the purpose of this note, in light of the EC's claim under Article 10? Does the US
suggest that the administrative reviews at issue may only be challenged under Article 21.2 of the
SCM Agreement?

62. In this dispute, the United States is not suggesting that the administrative reviews at issue can
only be challenged under Article 21.2. The United States is only suggesting that, to the extent that the
Panel might be inclined to find that USDOC some how violated Article 21.2, which USDOC did not,
the Panel is precluded from doing so because the EC made no claims under Article 21.2. The EC’s
mere invocation of Article 10 does not mean that any and all violations of SCM Agreement provisions
in the countervailing duty context are somehow considered to be alleged. The Appellate Body has
been clear that the specific relevant provision must be alleged in the complaining Member’s panel
request for a violation to be found. See India - Patent Protection for Pharmaceutical and
Agricultural Chemical Products , WT/DS50/AB/R, Report of the Appellate Body adopted
16 January 1998, at paragraph 88-91; and European Communities – Regime for the Importation, Sale
and Distribution of Bananas , WT/DS27/AB/R, Report of the Appellate Body adopted
25 September 1997, at paragraph 141.
Q.13. In Canada Aircraft (WT/DS70/R) the Pane l examined (at paras. 9.232 - 9.246) whether
the sale to Bombardier by the Ontario Space Corporation of a 49 per cent interest in de
Havilland Inc. constituted a subsidy. In determin ing that the sale did not confer any "benefit"
on Bombardier, the panel did not refer to prior subsidies bestowed on de Havilland Inc. prior to
the change-in-ownership. The Panel is aware th at this case did not concern the imposition of
CVDs on imports from a privatized company. Nevertheless, does the US consider that the Panel
should have taken prior subsidies bestowed on de Havilland Inc. into account? Does the US
consider that the panel should have found that prior subsidies to de Havilland Inc. passed
through to Bombardier? Why, or why not?
63. Technically, the panel in Canada Aircraft should not have taken prior subsidies bestowed on
de Havilland Inc. into account because the complaining Member did not make any claim addressing
previously bestowed subsidies.
64. The United States further addresses this question below in response to question 2 of the
Panel’s questions dated 16 July 1999.
Q.14. At paragraph 131 of its first written submission, the US sought to demonstrate the
"irrational results" of the EC's approach to change-in-ownership by invoking a trading house
hypothetical. During the first substantive meeting, the US pursued this hypothetical further by
replacing the trading house with an unrelated im porter in the importing country. At the first
substantive meeting, the EC responded that its approach would not produce irrational results in
such circumstances, because an investigating authority would still be able to determine whether
subsidies were bestowed on the producer whos e goods are sold by the trading company /
unrelated importer. The EC's response to the US trading house / unrelated importer
hypothetical is explained further at paras. 93 and 94 of its second written submission. Please
comment on the EC's response to the US trading company / unrelated importer hypothetical.
65. In its argument in response to the trading company/unrelated importer hypothetical, the EC
refuses to address, or perhaps simply misunderstands, the United States’ point.
66. The United States assumes for the sake of argument that it is correct to use the EC’s economic
approach to analysing the possible pass-through of prior subsidies following a change in ownership.
The United States then applies this same econom ic approach to scenarios involving a trading
company and an unrelated importer to show how it would lead to absurd results if actually adopted by
the Panel. The EC’s response wholly ignores th e assumption that the scenarios involving a trading
company and an unrelated importer are being analysed by the United States from the perspective of
the EC’s own economic approach in order to assess whether or not that approach makes any sense.
Instead, to rationalize these scenarios, the EC abandons its economic approach and instead reverts to
what it should have been using all along in this dispute, which is a legal approach under the
provisions of the SCM Agreement, and argues that the absurd results described by the United States

would not occur. It remains clear, however, that the absurd results noted by the United States do
occur if the economic approach advocated by the EC in this dispute is applied to the hypothetical
scenarios involving a trading company and an unrelated importer. If, as the EC maintains, an arm’s
length, fair market value transaction cuts off the prior subsidies because the new owner of the
subsidized company has paid what that company, including its subsidies, were worth and therefore
receives no benefit, the same rationale means that the prior subsidies are cut off when a trading
company or unrelated importer pays a market price for the subsidized merchandise, including any
subsidies benefiting it.
67. The point of these hypothetical scenarios is to demonstrate that there is no economically
principled distinction between the EC’s basic position in this dispute and the hypothetical scenarios
proffered by the United States. If the EC is correct that countervailing duties can only be imposed to
offset the continuing benefit from a subsidy as demonstrated by current circumstances (as opposed to
by reference to the allocated “benefit” stream), th en an arm’s length, fair market value sale of a
manufactured product (to a trading company or an unrelated importer) cuts off that benefit exactly to
the same extent that an arm’s length, fair market value sale of a subsidized company does.
Q.15. Please comment on the argument at par agraph 49 of the EC's second submission that
"[i]f the subsidy recipients were assets owned by the company at the time it received the
subsidy, no amount of the subsidy benefit could logically be apportioned to an after-acquired
productive unit."
68. First of all, the premise of the EC’s argument is incorrect. The subsidy recipient is not the
company’s assets, nor has the US made that argument. As the United States has explained previously
(see, e.g., US Oral Statement (2d), paras. 29-37), as a practical matter, there must be some entity or
individual that receives the financial contribution. That is the subsidy recipient, not the assets. It is a
separate question as to who or what the beneficiary is. Article VI:3 of GATT 1994 and Article 10 of
the SCM Agreement suggest that a subsidy benefits the manufacture, production or export of
merchandise, as the EC has conceded.
69. If the erroneous premise is removed from the EC's argument, a proper assessment of whether
any amount of the subsidy benefit could be apportioned to the after-acquired productive unit would
involve, first, a determination of whether the su bsidy at issue is tied or untied, at least under
USDOC’s practice. If, for example, the subsidy at issue were an untied one, the USDOC would treat
it as benefiting the firm’s entire operations. Consequently, when the firm acquires an additional
productive unit after receiving the untied subsid y, that subsidy would be treated by USDOC as
benefiting the new productive unit as well, regardless of whether that productive unit involves a new
product line, given that it has become a part of the firm’s entire operations.
70. The United States notes that, in this area as well, the SCM Agreement provides no direct
guidance, and therefore it cannot be said that the SCM Agreement requires one particular approach.
Q.16. In its written reply to written Panel question 9, the US "rejects the notion that subsidies
'attach' to assets or to companies …" In the 1995 administrative review at issue, USDOC stated
that "when BSC sold its Special Steels Business, that productive unit took a portion of the
benefits with it." Is USDOC's statement consistent with the abovementioned extract from the
US response to written Panel question 9? If so, please explain how. Furthermore, please
explain how the Special Steels Business "productive unit took a portion of the benefits with it" if
those "benefits" were not attached to that "productive unit".
71. The use of the phrase "took a portion of the benefits with it" in the 1995 administrative review
of UK lead bar imports should be understood as a metaphor. It does not literally mean that the
company or the productive unit physically carried some of the subsidy benefits with it somewhere
when it was purchased by a new owner.

72. In the United States' view, subsidies do not attach to companies, productive units or assets.
Rather, subsidies benefit the manufacture, production or export of merchandise, as can be seen from
Article VI:3 of GATT 1994 and Article 10 of the SCM Agreement.
73. In its practice, USDOC gives effect to Article VI:3 of GATT 1994 and Article 10 of the SCM
Agreement, in the change-in-ownership context, by examining whether the operations of the company
or the productive unit, as the case may be, are essentially the same both before and after the change in
ownership, as is explained above in response to question 8 and below in response to question 25.
Basically, if USDOC finds that the entire company has been sold, or that enough of the company’s
operations to constitute a “productive unit” have been sold, it will allocate the prior subsidies to the
company or productive unit after the change in owne rship, subject to any repayment deemed to occur
under USDOC’s methodology.
74. USDOC’s methodology is essentially an exercise in the allocation of subsidies, and in this
area the SCM Agreement does not mandate a particular approach. What is needed is a reasonable
approach, and that is what USDOC has developed.
Q.17. In the context of the privatization of government-owned assets, the Panel understands
that the reason why USDOC considers it ne cessary to apply its change-in-ownership
methodology is because "a private party purchasing all or part of a government-owned
company (e.g., a productive unit) can repay prior subsidies …" (GIA, page 37262). A similar
statement was made in the US written reply to the Panel's written question 8. Is this
understanding correct? If not, please explain why USDOC applies its change-in-ownership
methodology in the case of (full or partial) privatization.
In its written reply to written question 12 from the Panel, the US asserted that the
USDOC change-in-ownership methodology would a pply when privately-owned assets are sold
to private companies, but that any subsidies bestowed on the assets before sale would not be
repaid through the sale ("because the seller is no t the government"). What is the justification
for applying the change-in-ownership methodol ogy in the case of a transaction between two
private parties? Presumably, USDOC does not do so because of the potential repayment of
subsidies.
75. The Panel’s understanding of the repayment component of USDOC’s methodology is
generally correct.
76. USDOC addresses this issue in Exhibit USA-6, which is the Final Results of Redetermination
Pursuant to Court Remand in Inland Steel v. United States , Consol. Court No. 93-04-00234 (CIT),
dated Oct. 12, 1993. There, in response to an argument made by the petitioning US domestic
industry, USDOC explained that its change-in-ow nership methodology is essentially an allocation
methodology, with technical “repayment” to the government taking place only when the government-
owned company is sold in its entirety. Specifically addressing statements about repayment in the
General Issues Appendix, USDOC stated:
In its discussion of subsidy allocation in the Certain Steel General Issues Appendix,
the Department did not intend the term “repayment” to be construed as narrowly as it
has been by petitioners. We wish to clarify that the Department used the term
“repayment” in Certain Steel in a broader context to include situations where
subsidies are “allocated” between the seller and the entity being sold.
When a productive unit is sold by a company which continues to operate (such as
BSC), the potentially allocable subsidies which could have travelled with the
productive unit, but did not because they were accounted for as part of the purchase
price, simply stay with the selling company. As such, they have not been

extinguished. Instead, they continue to benefit the seller and our calculation
represents the allocation of the subsidies between the seller and the productive unit it
has sold. However, when productive units are bought outright from the government
itself, leaving no remaining government-owned company which can manufacture or
produce (as in the privatization of BSC), then subsidies may be extinguished as the
result of the sale. Under this scenario, the buyer is actually making a “repayment” to
the government which potentially can extinguish subsidies.
Id., pages 5-6.
77. Thus, in the context of a full privatization, USDOC applies its change-in-ownership
methodology first by apportioning the prior subsidies between the seller, i.e., the government, and the
successor, privatized company. Because the seller is the government, USDOC then deems the portion
allocated to the seller as the repayment of subsidies.
78. In the case of a partial privatization -- which USDOC defines as a sale of less than the entire
ownership interest in a government-owned company, such as the sale of a 40 per cent of the shares of
that company -- USDOC follows same approach that it uses for a full privatization, based on the same
considerations, except that USDOC’s methodology is only applied to the percentage of the ownership
interest sold. An example of how the methodology would work in this situation can be seen from the
US response to question 2 of the Panel’s questions dated 16 July 1999.
79. In the case of a spin-off of a productive unit of a government-owned company, USDOC
technically does not treat it as a type of privatization. Here, there is no possibility of repayment of the
prior subsidies to the government because the seller is not the government ; rather, the seller is a
government-owned company which continues its remaining operations. Nevertheless, USDOC
follows the same basic approach that it uses for pr ivatizations. It apportions the prior subsidies
between the surviving government-owned compan y and the sold productive unit, now under new
ownership. However, at that point, its analysis is over. USDOC does not proceed to deem the portion
of the prior subsidies allocated to the surviving government-owned company -- the seller -- to be a
repayment to the government itself. Rather, it treats this portion as continuing to benefit the surviving
government-owned company.
80. In the case of a purely private change in ownership, USDOC follows the same approach that
it uses for spin-offs, based on the same considerations.
81. Stated differently, when the entire government-owned company is being sold, or a partial
ownership interest in a government-owned company is being sold, the part of the purchase price
considered paid to the seller on account of previous ly bestowed subsidies is paid to the government,
so that the subsidies are considered to be “repaid” to the government. When the seller is not the
government but rather the government-owned company or a private company, the part of the purchase
price considered paid on account of previously bestowed subsidies is simply considered to be
“payment for” those subsidies.
82. The United States notes that the evolution of USDOC's practice in the change-in-ownership
area – where USDOC first applied its methodology to a full privatization and then to partial
privatizations and purely private changes in ownership – is detailed in Exhibit USA-10, the Delverde
remand determination, at pages 11-20.
Q.18. If privatization (full or partial) can lead to (full or partial) termination of prior subsidies
bestowed on the privatized company (see US written response to written question 4 from the
Panel), is the subsidy terminated because there is no longer any government "financial
contribution", because there is no longer any "b enefit", or because there is no longer both
"financial contribution" and "benefit"? If the subsidy is terminated because there is no longer

any "benefit" (irrespective of whether or not the "financial contribution" remains), is it correct
to state that there is no re-identification or re -valuation of the original "benefit" (see, for
example, paragraph 19 of the US second oral submission)?
83. Turning to the Panel’s first question, it is not so much a question of whether the “financial
contribution” remains. The “financial contribution” is an act made at one point in time. Rather, the
issue is whether the “benefit” conferred by the “financial contribution” continues to exist or,
alternatively, has been terminated. Under USDOC’s practice, when a subsidy is repaid in full or in
part to the government, the “benefit” is terminated in full or in part.
84. As the Panel’s second question states, it is also correct that when accounting for a repayment
of subsidies, as the United States explains in its Rebuttal Submission at paragraphs 37-55, USDOC
does no more than reapportion the allocated “benefit” stream, which itself was calculated based on
events as of the time when the “financial contribution” at issue was made.
85. Thus, in the case of a full repayment of subsidies in the change-in-ownership context,
USDOC apportions an amount equal to the entire remaining allocated “benefit” stream to the
government, and it is this amount that is deemed to have been paid back to the government. The
Article 1.1 “benefit” is considered terminated or withdrawn in its entirety, just as it would be
terminated at the end of the amortization period.
86. With regard to a partial repayment, the same analysis applies to that portion of the prior
subsidies deemed to be repaid to the government. USDOC apportions a part of the allocated “benefit”
stream back to the government as partial repayment, and that amount of the “benefit” is considered
terminated.
Q.19. At paragraph 50 of its second written submission, the US asserts that "USDOC
recognizes repayment by allocating the subsidy `benefit' back to the government." Is the US
referring to "benefit" within the meaning of Article 1.1(b) of the SCM Agreement? If so, what
is the "benefit" to the government in such circumstances?
87. With regard to the Panel's first question, the United States is referring to the term “benefit” as
it is used in Article 1.1.
88. With regard to the Panel's second question, assuming a full repayment of the subsidy, an
amount representing the remaining net present value of the allocated “benefit” stream is what is
considered paid back to the government. This does not mean, however, that the government
somehow has received a “benefit” as contemplated by Article 1.1. Rather, the Article 1.1 "benefit" is
considered terminated or withdrawn, without any re-ide ntification or re-valuing of that "benefit," just
as it would be terminated at the end of the amortization period.
Q.20. In its written reply to written question 3 from the Panel, the US submits that
"[r]ecognizing repayment does not entail re-valuing the subsidy, an exercise which would
involve redetermining the original benefit and calculating a new amortization table." Is the
subsidy not re-valued when repayment is only part ial? Doesn't partial repayment lead to the
calculation of a new amortization table?
89. Under USDOC's practice, there is no re-identific ation or re-valuing of the subsidy benefit
when partial repayment occurs. When the subsid y recipient makes a repayment of a prior subsidy,
USDOC does not immediately know whether it is a full or partial repayment. USDOC first must
calculate the net present value of the remaining a llocated "benefit" stream as of the time of the
repayment, and then subtract the amount of the repayment from this net present value figure to
determine whether there has been a full or partial repayment of the subsidy.

90. If the result of this subtraction is zero (or less than zero) -- i.e., if there is nothing left of the
calculated net present value of the remaining allocated "benefit" stream -- USDOC treats the
repayment as a full repayment and the Article 1.1 "benefit" is considered terminated or withdrawn, as
explained above in response to questions 18 and 19 and in the United States' Rebuttal Submission at
paragraphs 37-55.
91. On the other hand, if the result of the subtraction is greater than zero -- i.e., if some amount of
the calculated net present value of the remaining allocated "benefit" stream remains, USDOC treats
the repayment as a partial repayment and, therefor e, a partial termination or withdrawal of the
Article 1.1 "benefit." Here, USDOC takes what is left of the calculated net present value of the
remaining allocated "benefit" stream and allocate it over the years remaining in the allocation period.
USDOC does this without any “re-identification” or “re-valuing” of the subsidy benefit. Instead,
what USDOC is doing is reducing the original allocated “benefit” stream in proportion to the amount
of partial repayment. What this means is that the resulting amortization table is the same as the
original amortization table, except that for each of the remaining years in the allocation period a
constant percentage of the amount originally allocated to each of those years has been apportioned to
the government and deemed repaid, while the remaining percentage continues to be apportioned to the
subsidized company. USDOC does not consider this reapportionment exercise to constitute re-
identification or re-valuation of the subsidy benefit because we do not revisit or re-examine the
original programme that gave rise to the subsid y, the legal basis for the receipt of the subsidy,
specificity, market conditions at the time of bestowal, market benchmarks, or any other of the many
factors that must be examined at the time of the subsidy bestowal in order to determine whether a
countervailable subsidy exists.
Q.21. Are there circumstances in which a prod ucer's production may "benefit" from a
"financial contribution", without the producer itself "benefiting" from a "financial
contribution"? Please explain, and provide examples if relevant.
92. The United States has been unable to identify examples in which a producer's production --
meaning the manufacture or production of merchandise -- may "benefit" from a "financial
contribution", without the producer itself "benefiting" from a "financial contribution." It would seem
that if the producer's production is benefiting, the producer itself is benefiting as well. This does not
necessarily mean that all of a producer’s production receives a benefit from a subsidy. For example,
if a subsidy were "tied" to product A and the product under investigation were product B, the
producer would be benefiting from the subsidy but the production relevant to the countervailing duty
investigation would not be benefiting. Or, if a subsidy were "tied" to services performed by the
producer, and those services were unrelated to th e product produced by the producer, the producer
would be benefiting from the subsidy but the producer's production of merchandise subject to a
countervailing duty investigation would not be benefiting. In both instances, USDOC would not find
a benefit.
93. The United States notes that, for purposes of this dispute, where all of the subsidies are
"untied", there is not much of a practical distinction between an approach which focuses on a benefit
to production and an approach which focuses on a benefit to the producer. Either approach supports
USDOC's change-in-ownership methodology, which centers on the company’s operations, whether it
be the operations of a company or a productive unit, before and after a change in ownership. At the
same time, either approach wholly undermines the EC's position. As the United States has explained
previously, the EC's basic position is that the SCM Agreement requires the investigating authority to
find that prior subsidies automatically, and in all instances, are cut off by an arm's length, fair market
value transaction, regardless of whether the “new ” company is essentially the same as the “old”
company. This position is based on the notion that a subsidy can only benefit the owner of a
company, without any further analysis of whet her the merchandise produced by that company
benefits, which is contrary to either a focus on the producer or the producer’s production.

Q.22. Smith Ltd., a producer of widgets, is wholly owned by Mr. Smith. The government
commits itself to pay Mr. Smith (not Smith Ltd.) $0.02 for every widget sold by Smith Ltd.,
provided Smith Ltd. cuts its widget resale price by $0.01. Smith Ltd. widgets normally sell for
$10.00, of which $1.00 constitutes profit. Does the $0.02 per unit payment to Mr. Smith
constitute a subsidy on production by Smith Ltd.? Please explain.
94. Given the facts as stated in the Panel’s question, USDOC probably would find a subsidy
benefiting the production of widgets. In this regard, regardless of whether Mr. Smith or Smith Ltd.
actually receives the subsidy, it would seem that the subsidy is being provided to encourage the
production of widgets, given that the government’s payments are to be made for every widget sold.
95. The United States notes that USDOC does not always treat financial contributions provided to
owners as benefiting the manufacture, production or export of merchandise. For example, where
governments exempt from tax the dividends paid by a manufacturer, USDOC normally treats the
exemption as benefiting the shareholders but not the manufacturer itself, or the merchandise produced
by that manufacturer. See, e.g., Final Affirmative Countervailing Duty Determination; Ball Bearings
and Parts Thereof from Thailand, 54 Fed. Reg. 19130 (May 3, 1989) ("[T]he taxes are on the parent's
dividend income, and the exemption bestows no benefit on respondents [i.e., exporters of subject
merchandise] ... ."); Final Results of Administrative Review of Countervailing Duty Order; Bicycle
Tires and Tubes from Korea, 48 Fed. Reg. 32205 (July 14, 1983) (tax exemption on dividends paid to
parent company "would bestow no benefit on the subsidiary").
Q.23. Please comment on the conclusions draw n in paragraph 46 of the EC's second oral
submission.
96. In responding to a written question from the EC asking how USDOC found full repayment of
subsidies in the countervailing duty investigation of Stainless Steel Sheet and Strip in Coils from
France, 64 Fed. Reg. 30774 (June 8, 1999), with regard to the sale of Richemont, the United States
would first like to point out that it cannot use the actual data from that investigation. That data was
submitted by the French company, Usinor, as business proprietary information, and USDOC is
therefore precluded by US law from divulging it. However, in an effort to describe how USDOC's
calculation nevertheless works in this type of situation, the United States discussed a hypothetical
involving £250,000 that resulted in full repayment of the prior subsidies, as in the Richemont
transaction. In its Oral Statement at the second panel meeting, the EC criticized the United States for
using an allegedly unrealistic hypothetical that resu lts in full repayment of the prior subsidies. The
EC then used an extreme hypothetical of its ow n, ostensibly to show that USDOC's change-in-
ownership methodology normally results in little or no repayment of prior subsidies.
97. As should be clear, the United States was not presenting its £250,000 hypothetical as
representative of the result that normally obtains under USDOC's methodology. It was only using it
to demonstrate what did, in fact, happen with regard to the Richemont transaction.
98. At the same time, it should be equally clear that the extreme hypothetical used by the EC is
also not representative. Indeed, it is hardly representative of what normally happens under USDOC's
methodology, and more importantly, it bears no relation to what happened, as a matter of fact, in the
administrative reviews at issue in this dispute. In the first BSC change in ownership, which involved
the spin-off of a BSC special steels productive un it to the UES joint venture in 1986, USDOC found
57 per cent of the prior subsidies (meaning the pro rata portion of the untied subsidies previously
received by BSC which were attributable to the productive unit) to have been repaid (in the sense that
they were allocated back to the government-own ed company, BSC). In the other BSC change in
ownership, when BSC itself was fully privatized in 1988, USDOC found 26 per cent of the prior BSC
subsidies to have been repaid to the UK Government. Because the total amount of UK Government
subsidies provided to BSC over the years leading up to these transactions was more than $13 billion,
this was an enormous amount of repayment recognized by USDOC.

Q.24. At paragraph 93 of its second oral submission , the US cites to extracts from an article by
Mr. Hufbauer. The first paragraph of that extract states that "whether British Steel's new
owners benefitted from the prior subsidies has no bearing on the competitiveness of the steel
mills -- which the subsidies pumped up massively." Please give the full title of the entity
described as "British Steel" in this extract. Whose "competitiveness" has been "pumped up".
Is it the fact that an entity's "competitiveness" has been "pumped up" that demonstrates the
existence of "benefit" within the meaning of Article 1.1(b) of the SCM Agreement?
In his article (Exhibit USA-40), Mr. Hufbauer states that "[a]ssuming British Steel
shares were fairly priced, the government's fina ncial position was unchanged by the sale. So
how can it have been repaid for the prior su bsidies?" We understand Mr. Hufbauer to argue
that the privatization of BSC could not have led to the repayment of subsidies conferred on
BSC. How is this consistent with the US assertion at paragraph 95 of its first written
submission that "[t]he portion [of BSC subsidies] allocated to the UK Government was
considered to have been repaid to the government …"?
99. It appears that, when Mr. Hufbauer refers to “British Steel,” he means the company both
before and after the privatization, which he regards as essentially the same company. He is not
concerned with the change in the company's name from British Steel Corporation to British Steel plc,
nor is he concerned with the mere fact that the ownership of the company has changed hands.
100. As to whose competitiveness is "pumped up" by the UK Government's massive subsidization,
it would seem that Mr. Hufbauer means again that the competitiveness of the company both before
and after the change in ownership is pumped up.
101. Next, the fact that the company's competitiveness has been “pumped up” does not
demonstrate the existence of a "benefit" within the meaning of Article 1.1(b) of the SCM Agreement,
nor does Mr. Hufbauer suggest that it does. The "benefit," as the United States explained in its Oral
Statement at the second panel meeting, is the difference between the original financial contributions --
here, predominantly equity infusions -- and the appropriate market benchmarks, and this "benefit" is
found to exist after the change in ownership and, specifically, during the period of investigation or
period of review through an examination of th e unamortized portion of the allocated "benefit"
streams. The allocated "benefit" stream itself is based on an identification and measurement of the
subsidy "benefit" as of the time when the financial contribution was made. USDOC’s benefit
calculation does not attempt to reflect how the subsidy may or may not have affected the
competitiveness of the company at any time after the subsidy bestowal.
102. Mr. Hufbauer seems to agree with this view. At the same time he points out that when
interpreting and applying the SCM Agreement, it is important not to lose sight of the reason why
subsidies are subject to SCM Agreement disciplines in the first place -- they misallocate resources and
distort production. In particular, Mr. Hufbauer emphasizes that the company is still “pumped up” -- in
other words, it has not shrivelled up as a result of the privatization -- in order to illustrate why the
EC's economic attack on USDOC’s methodology is mi splaced. As he states, the arm’s-length, fair
market value nature of the transaction does not eliminate the increased competitiveness of the
company because it takes nothing out of the company. However, again, he does not suggest that the
SCM Agreement actually requires any inquiry into the degree of trade distortion for the purpose of
identifying the Article 1.1(b) “benefit”.
103. Finally, as to Mr. Hufbauer's argument that no amount of the purchase price in a privatization
transaction like that involving British Steel should be considered as a repayment to the government,
the relevant point is that Mr. Hufbauer is ma king an economic argument. USDOC developed its
repayment approach largely for other reasons, and not as a simple matter of economics. The
United States notes that the SCM Agreement itself does not preclude USDOC from adopting the
approach advocated by Mr. Hufbauer; rather, USDOC has chosen not to adopt that approach.

Q.25. What does the US mean by the terms "productive assets" and "productive unit"?
104. USDOC adopted the concept of “productive unit” to deal with the many complex types of
corporate restructurings and changes in ownership that it encountered in numerous, contemporaneous
1993 countervailing duty investigations involving steel imports from various countries. As explained
in the General Issues Appendix, 58 Fed. Reg. at 37268, in order to be considered a "productive unit",
a spun-off operation must be capable of (1) generating sales and (2) operating independently.
105. USDOC adopted this broad definition because other definitions were too restrictive to deal
with the myriad different factual scenarios and th e various legal environments in various countries
that USDOC encountered. USDOC avoided concepts such as division, subsidiary, separately
incorporated company, or even whether a separate profit center existed. USDOC found that no single
term commonly used in the corporate law of the coun tries involved was sufficient to cover all of the
scenarios that it encountered where either a whole company or a part of a company was sold, merged,
acquired, transferred, spun off or spun in and yet remained essentially the same operations or part of
the same operations as it was before.
106. It makes no sense, in the United States' view, to apply a different countervailing duty analysis
simply because the ownership or structure of the subsidized operations has changed hands. USDOC’s
practice recognizes this by providing that, where new owners take over a company in its entirety, as in
the case of BSC/BS plc, a relevant change for countervailing duty purposes has not occurred. The
post-privatization company, BS plc, had essentially the same operations as pre-privatization BSC. It
had the same facilities, same production, same sales and same workers, among other things.
107. While easier to see in the case where a whole company is sold, the same reasoning applies
when a productive unit, such as BSC's Special Steels Business in 1986, is sold. Here, USDOC’s
practice recognizes that there may be circumstances where an unincorporated division has the
characteristics of a company – facilities, production, sales, workers, etc. – and that transferring that
division to new owners yields the same result as the sale of an entire company. Pre- and post-1986,
the Special Steels Business continued unchanged as a “productive unit” capable of generating sales
and operating independently even though its legal status as a corporate division of BSC may have
changed. It had the same facilities and produced and sold the same products, with the same workers.
(Indeed, BSC did not change the division’s operations at all ; rather, it just changed the divisions’s
corporate form and part of its ownership.) This is the essence of USDOC’s concept of “productive
unit.”
108. Meanwhile, the United States has assigned no special meaning to the term "productive
assets." The United States has simply used this term to describe the production facilities of a
company or division both before and after a change in ownership, as in the company or division "had
the same productive assets both before and after privatization."
Q.26. In response to written question 12(d) from the US, the EC asserts that "[w]hether the
new producer / exporter which has purchased the assets has obtained a benefit depends, of
course, on the terms of the transaction (fair market value, arm's length transaction)." Does this
suggest that a "financial contribution" potentia lly conferring a "benefit" passes through in a
change-in-ownership transaction? If not, what could be the relevant "financial contribution"
for the purpose of imposing countervailing duties on imported goods produced by the privatized
company.
109. As far as the United States can tell, the EC's response suggests that a "benefit" from a
previously bestowed subsidy can pass through in a change in ownership transaction only if the new
owner has paid less than a fair market value price for the company. It appears that, according to the
EC, the "financial contribution" that could give rise to a "benefit" that passes through to the new
owner is the original "financial contribution," ma de perhaps several years prior to the change in

ownership. In the view of the United Stat es, prior subsidies and the potential for a new subsidy to be
bestowed in the process of a change in ownership are two separate issues.
110. In theory, the United States would agree that the sale of a company at less than fair market
value could give rise to a new subsidy (over and above the remaining value of prior subsidies).
However, as explained, USDOC’s reallocation/repayment methodology does not focus on the arm’s
length nature of the sales price per se. The sales price is relevant in USDOC’s calculation in the sense
that the higher the price, the more “credit” toward prior subsidies the purchaser would get and, hence,
a lower subsidy rate. In the case of the Richemont sale in Stainless Steel Sheet and Strip from France,
as explained previously, USDOC did not reach the issue of whether a new subsidy was bestowed in
the process of the change-in-ownership transaction because it found that the transaction was at fair
market value. USDOC treated the issue of a new subsidy as separate from the issue of whether prior
subsidies continued to benefit the production of the “old” and “new” companies.
111. The EC's response suggests that the exclusive focus under the SCM Agreement is on the new
owner of the company following a change in ow nership and, specifically, how that new owner
receives a benefit. The United States has shown that the owner of a company is not the correct focus
under the SCM Agreement, and the EC itself has conceded that the owner should not be the focus.
112. That being said, as the United States pointed out in its Concluding Statement at the second
panel meeting, the EC still bases its position in this dispute on an inquiry into whether the owner of
the company is the same or different following a change in ownership. As we have seen, the EC’s
final formulation of its position is that any distinction between a sale of shares and a sale of assets is a
distinction based on form over substance and theref ore is meaningless. According to the EC, it is
instead necessary to -- it is required by the SCM Agreement to -- look at the "economic reality" of the
transaction to determine whether the company is the same or different following the change in
ownership. EC Oral Statement (2d), paragraph 23. The EC, however, never explains how or on what
basis an investigating authority is to do this. Instead, the EC says only that an arm's length, fair
market value transaction cuts off the previously bestowed subsidies. See id., paragraph 24. However,
in the view of the United States, the arm’s length nature of the transaction has nothing to do with the
"economic reality" of whether the new company is essentially the same as the old company. How
can a company be the same or different based solely on the amount of the purchase price?
113. It appears, therefore, that the EC is essentially saying that all changes in ownership result in a
new company. But, the question that then immediately arises is, on what basis does the EC take this
position? What is it in the SCM Agreement that requires it? The EC does not say. What is apparent,
however, is that the EC is exclusively focussing on the owner of the company, even though the EC
maintains that the SCM Agreement does not focus on the owner. See EC Rebuttal Submission,
paragraphs 42, 43, 47 and 56 ; EC Responses to United States’ Questions, responses to questions 3,
4.b., 7, 10, 11, 12, 13, 14 and 24.
114. Consequently, as the United States has previously demonstrated, the EC’s position in this
dispute is not supported by the SCM Agreement because of its erroneous focus on the owner of the
company.
QUESTIONS FOR THE UNITED STATES dated 16 July 1999
Q.1. Let us suppose that there are two compan ies, company A and company B, that company
A received subsidies while company B did not, that company A exports while company B only
sells domestically, and that company A was subject to a CVD investigation as a result of which it
is subject to CVDs. Suppose that company A trades its assets, or exchanges its whole plant, for
the assets (or plant) of company B. Would th is mean that company A is no longer liable to
CVDs since the assets embodying the benefits rece ived through subsidies are not benefitting its
production any more? The Panel assumes that the US would not deal with this situation

through the "allocation of the benefit" method ology (the "gamma" ratio) since such situation
does not involve a change-in-ownership. Further, what would happen if company A did not
receive an asset in exchange, but just cash?
115. As a preliminary matter, the two hypothetical transactions posited by this question appear to
be quite unusual, and USDOC certainly has not encountered either of them in its practice. If it were
to encounter them, a significant question would be raised as to whether these transactions were shams,
or whether they were conducted to evade counterv ailing duties, in which event USDOC likely would
ignore the transactions.
116. Nevertheless, for the sake of argument, the United States is assuming that USDOC would find
the transactions to be legitimate and, further, that they involve an asset exchange or a sale of assets
that qualifies, at a minimum, as a "productive unit" within the meaning of USDOC's practice. As the
United States explained at the second panel meeting, USDOC does not apply its change-in-ownership
methodology to a sale of a bare asset that does not rise to the level of a "productive unit." One
obvious example is the sale of a typewriter, but it is also true that much more substantial assets, such
as a fleet of trucks or a stamping machine, would not necessarily qualify as a “productive unit.”
117. With regard to the first hypothetical transa ction, USDOC likely would apply its change-in-
ownership methodology to it, contrary to the assump tion in the Panel's question. For one thing, this
transaction would appear to involve a change in the ownership of the assets of the subsidized
company, company A. In exchange for company B's assets, the assets of company A now belong to
company B. In addition, regardless of whether a change in ownership took place within the meaning
of some Member's corporate law, USDOC, like th e SCM Agreement, focuses on the operations of a
company and its productive assets rather than on corporate law technicalities. Thus, the asset
exchange, assuming it constitutes a productive unit, would be enough to trigger USDOC's
methodology. What this would mean is that USDOC would take the allocated "benefit" stream for
each of the subsidies previously bestowed on company A and apportion it between company A and
company B. Assuming that company A continues to export and company B continues to sell only
domestically, company A alone would (continue to) be liable for countervailing duties, although the
amount of its liability would have been reduced as a result of the application of USDOC's
methodology.
118. With regard to the second hypothetical transaction, which involves a sale of assets for cash
rather than an asset exchange, USDOC again would likely apply its change-in-ownership
methodology, and essentially the same apportionment of prior subsidies would result. In this case,
however, assuming that company A no longer was in business following this transaction, and further
assuming that company B continued to sell only domestically, there would not be any exports on
which to impose countervailing duties.
Q.2. For the purposes of question 13 to the US (14 July 1999), please assume that the
complaining party had included any relevant claims in its request for establishment, and that
the existence of subsidies to de Havilland Inc. between 1992 and 1997 had been acknowledged
by the respondent Member.
119. In responding to this question, in addition to the assumptions contained in this question, the
United States is assuming that the other relevant facts are as follows: Bombardier and the Ontario
Government purchased 51 per cent and 49 per cent, respectively, of Boeing's de Havilland division in
1992. Pursuant to a 1992 contract between Bombardier and Ontario regarding this purchase, the
parties had agreed to a put/call provision, exercisable by Bombardier or Ontario, contemplating that
Ontario would later sell its 49 per cent stake to Bombardier for $49 million. Over the next five years,
Ontario provided various subsidies to the new de Havilland entity, de Havilland Inc., thereby
increasing the value of the put/call provision. In 1997, Ontario finally did sell its shares to
Bombardier, at the price agreed to in 1992.

120. As to whether the panel should have taken the subsidies bestowed on de Havilland Inc.
between 1992 and 1997 into account, the answer is yes.
121. Under its practice, when USDOC encounters a sale of the government's ownership interest in
a company, as here, it applies its change-in-ow nership methodology. Specifically, it applies that
methodology to the relevant percentage of the company sold, which in this case is Ontario's 49 per
cent share in de Havilland Inc. that was sold to Bombardier. In other words, USDOC would examine
49 per cent of the allocated “benefit” stream of the subsidies previously bestowed on de Havilland
Inc. and apportion part of it to de Havilland Inc. and part of it to the seller of the 49 per cent share in
de Havilland Inc., which would be considered repaid because the seller is the Ontario Government. In
the end, the amount of the previously bestowed subsidies allocated to de Havilland Inc. would include
51 per cent of the allocated “benefit” stream of the previously bestowed subsidies plus that part of the
remaining 49 per cent of the allocated “benefit” stream of the previously bestowed subsidies that was
apportioned to de Havilland Inc. through USDOC’s change-in-ownership methodology.
122. The United States notes that, in applying its methodology, USDOC does not attempt to
determine whether the price paid in the change-in-ownership transaction is a market price, which
would otherwise seem to be an issue raised by Onta rio’s sale of its 49 per cent stake in de Havilland
Inc. to Bombardier. Again, the price is relevant in USDOC’s calculation in the sense that the higher
the price, the more “credit” toward prior subsidies the purchaser would get and, hence, a lower
subsidy rate.