UNITED STATES – CONTINUED DUMPING AND SUBSIDY OFFSET ACT OF 2000
Document: (ORIGINAL COMPLAINT BY CANADA) Recourse to Arbitration by the United States under Article 22.6 of the DSU DECISION BY THE ARBITRATOR
Date: 31 August 2004
Document codes: WT/DS234/ARB/CAN
Complainant: Canada, Mexico
Respondent: U.S.
Third parties: Argentina, Australia, Brazil, Costa Rica, EU, Hong Kong, India, Indonesia, Israel, Japan, South Korea, Norway, Thailand
Dispute stage: Implementation & Compliance
Agreements cited: Art. 5.4  Anti-dumpingArt. 5  Subsidies and Countervailing Measures (SCM)Art. VI  GATT 1994Art. 8, 18  Anti-dumpingArt. 11.4, 18, 32  Subsidies and Countervailing Measures (SCM)Art. XVI  Agreement Establishing the World Trade OrganizationArt. 10  Subsidies and Countervailing Measures (SCM)Art. X  GATT 1994Art. 1  Anti-dumping

UNITED STATES – CONTINUED DUMPING
AND SUBSIDY OFFSET ACT OF 2000

(ORIGINAL COMPLAINT BY CANADA)

Recourse to Arbitration by the United States
under Article 22.6 of the DSU

DECISION BY THE ARBITRATOR

The Decision by the Arbitrator on
(Original Complaint by Canada) – Recourse to Arb itration by the United States under Article 22.6 of
the DSU is being circulated to all Members, pursuant to the DSU. The Decision is being circulated as
an unrestricted document from 31 August 2004 pursuan t to the Procedures for the Circulation and
Derestriction of WTO Documents (WT/L/452).

I. INTRODUCTION
A. INITIAL PROCEEDINGS
1.1 On 27 January 2003, the Dispute Settlement B ody (DSB) adopted the report of the Panel in
this dispute, as modified by the report of the Appellate Body.1
1.2 The findings adopted by the DSB were that the measure at issue in this case – the Continued
Dumping and Subsidies Offset Act of 2000 (hereafter "CDSOA"):2
(a) is a non-permissible specific action agai nst dumping or a subsidy, contrary to
Articles VI:2 and VI:3 of the GATT 1994, Article 18.1 of the Agreement on
Implementation of Article VI of the Ge neral Agreement on Tariffs and Trade 1994
(hereafter the "Anti-Dumping Agreement" ) and Article 32.1 of the Agreement on
Subsidies and Countervailing Measures (hereafter the "SCM Agreement");
(b) is inconsistent with certain provision s of the Anti-Dumping Agreement and SCM
Agreement, so that the United States has fa iled to comply with Article 18.4 of the
Anti-Dumping Agreement, Article 32.5 of the SCM Agreement and Article XVI:4 of
the Marrakesh Agreement Establishing the (hereafter the
"WTO Agreement");
(c) pursuant to Article 3.8 of the DSU, to the exte nt that it is inconsistent with provisions
of the Anti-Dumping Agreement and the SCM Agreement, nullifies or impairs
benefits accruing to the complaining parties
3 under those Agreements;
1.3 On 13 June 2003, an arbitrator established under Article 21.3(c) of the DSU ruled that the
"reasonable period of time" for the United States to implement the recommendations and rulings of
the DSB in this case was 11 months from the da te of adoption of the Panel and Appellate Body
Reports by the DSB. The United States was con sequently awarded until 27 December 2003 to bring
the CDSOA into conformity with its obligati ons under GATT 1994, the Anti-Dumping Agreement,
the SCM Agreement and the WTO Agreement.4
1.4 On 16 January 2004, Canada requested authorization from the DSB5, under Article 22.2 of the
DSU, to suspend the application to the United Stat es of its concessions or other obligations in an
amount to be determined every year by reference to the amount of the offset payments made to
affected domestic producers in the latest annual distribution under the CDSOA.

1 Report of the Appellate Body on
(WT/DS217; WT/DS234/AB/R), (hereafter the "Appellate Body Report") and Report of the Panel on (WT/DS217; WT/DS234/R) (hereafter the "Panel
Report". Throughout this Decision, the original panel in this case will be referred to as the "Panel".
2 Enacted as part of the Agriculture, Rural Development, Food and Drug Administration and Related
Agencies appropriations Act, 2001, Public Law 106-387, 114 Stat. 1549, 28 October 2000, sections 1001-1003.
For a description of the CDSOA, see Panel Report, para. 2.1 to 2.7.
3 The Complaining Parties in the original procee dings were: Australia, Brazil, Chile, the European
Communities, India, Indonesia, Japan, Korea, Tha iland (WT/DS217), as well as Canada and Mexico
(WT/DS234).
4 WT/DS217/14; WT/DS234/22.
5 WT/DS234/25.

1.5 The amount would be established by adding:
(a) the amount of offset payments attributed to duties collected on products from Canada;
and
(b) a proportionate amount of the balance of total offset payments less the offset
payments attributed to duties collected on products of other Members that are
authorized by the DSB to suspend concessions or other obligations in this dispute.
1.6 The annual amount of offset payments would be based on information published by the US
Bureau of Customs and Border Protection or any successor entity.
1.7 Canada intended to implement the above th rough one or both of the following types of
measures:
(a) the imposition of additional import duties above bound custom duties on products
originating in the United States. Each y ear, prior to the imposition of the additional
duties, Canada would notify to the DSB a final list indicating the level of the duties to
be imposed on selected products in the light of the latest annual distribution of offset
payments under the CDSOA;
(b) the suspension of the application of the obligations under Article VI of GATT 1994,
Articles 3, 5, 7, 8, 9, 10, 11 and 12 of the Anti-Dumping Agreement, and Articles 11,
12, 15, 17, 18, 19, 20, 21 and 22 of the SCM Agreement to determine that the effect
of dumping or subsidization of products from the United States is to cause or threaten
material injury to an established domestic industry or is to retard materially the
establishment of a domestic industry.
B. R
EQUEST FOR ARBITRATION AND SELECTION OF THE ARBITRATOR
1.8 On 26 January 2004, the United Stat es submitted a communication to the DSB 6 objecting to
the level of suspension of concessions or other obligations proposed by Canada, on the grounds,
inter alia, that Canada's request failed to specify the level of suspension it proposed to implement, and
was therefore an inadequate basis for an arbitrator to make the determinations provided for in
Article 22.7 of the DSU.
1.9 At the DSB meeting of 26 January 2004, Canada 's request under Article 22.2 of the DSU and
the United States objection were referred to arbitration in accordance with Article 22.6 of the DSU.7
1.10 The arbitration was undertaken by the original panel, namely:
 Chairman: Mr Luzius Wasescha

 Members: Mr M. Maamoun Abdel-Fattah
 Mr William Falconer

6 WT/DS234/27.
7 Other complaining parties in the original pro ceedings had requested authorization to suspend
concessions or other obligations vis-à-vis the United States under Article 22.2 of the DSU. The United States
requested arbitration pursuant to Article 22.6 of the DSU with respect to each individual request. However, it
did not object to a joint review, provided the Arbitrator would issue a separate report in each case. The
complaining parties, having requested authorization to suspend concessions or other obligations in this case, are
hereafter referred to as the "Requesting Parties".

1.11 On 13 February 2004, the Arbitrator held a joint organization meeting with the United States
and all the parties who requested authorization to suspend concessions or other obligations pursuant to
Article 22.2 of the DSU 8, and in respect of which the United States had also requested arbitration.
During this meeting, the parties expressed their views on the draft timetable and working procedures
prepared by the Arbitrator covering all the arbitra tions requested. The Arbitrator adopted its working
procedures on 18 February 2004 and its timetable on 23 February 2004.9
1.12 On 19 February 2004, the United States subm itted a request for preliminary ruling from the
Arbitrator applicable to all requests for arbitra tion. Following consideration of the request, the
Arbitrator informed all parties on 23 February that, having regard to the issues raised in the request,
the Arbitrator deemed it more appropriate to addr ess the content of the United States' communication
of 19 February together with all the other issues and arguments that might be raised throughout the
proceedings. The Arbitrator added that parties should feel free to include comments on the
United States' request in their submissions, as they saw fit.
1.13 In accordance with the timetable, the Re questing Parties submitted communications
concerning the methodology supporting their request s for authorization to suspend concessions or
other obligations (hereafter the "methodology paper(s)") on 23 February.
10
1.14 The United States submitted a single written submission, applicable to all its requests for
arbitration, on 12 March 2004.
1.15 All the Requesting Parties filed their written submissions on 31 March 2004.11
1.16 On 15 April 2004, the Arbitrator informed the pa rties that a single, joint substantive hearing
with all parties present would be held. However, if a party so requested and if deemed necessary by
the Arbitrator, special sessions on specific issues affecting that party might be organized, at which
only the party concerned and the United States would be allowed to express their views.
1.17 The joint substantive meeting with all parti es present was held on 19 April 2004 and written
questions were submitted to the parties on 21 April. The parties replied in writing on 28 April 2004
and were given until 4 May to comment on each other' s replies. The Arbitrator submitted additional
questions on 28 May 2004. Parties replied on 7 June and were allowed to comment on each other's
replies by 14 June. The Arbitrator circulated its Decisions to Members on 31 August 2004.12
C. ORDER FOLLOWED BY THE ARBITRATOR IN ITS ANALYSIS
1.18 Section II of this Decision addresses the procedur al issues raised by th e United States, in
particular the United States' claims as to lack of specificity in the requests for authorization to suspend
obligations made to the DSB, and in the methodology papers submitted by the Requesting Parties. It
also addresses the related question of the burden of proof, as applicable to these proceedings.

8 Out of the ten complaining parties in the original proceedings, Brazil, Canada, Chile, the European
Communities, India, Japan, Korea, Mexico requested aut horization to suspend concessions or other obligations,
pursuant to Article 22.2 of the DSU.
9 The Arbitrator's working procedures are found in Appendix 3 of the DSU and in Annex A to this
Decision.
10 Brazil, Canada, the European Communities, Indi a, Japan, Korea and Mexico submitted a joint
communication. Chile submitted its own communication.
11 Brazil, the European Communities, India, Japa n, Korea and Mexico submitted a joint written
submission. Canada and Chile each submitted their own written submission.
12 Circulation to all Members was deemed to comply with the requirement of Article 22.7 of the DSU
that the DSB be informed promptly of the decision of the arbitrator, once it has been reached.

1.19 Pursuant to Article 22.7 of the DSU, our manda te is to "determine whether the level of
suspension [of concessions or other obligations] is equivalent to the level of nullification or
impairment." To this end, the Decision first determin es, in Section III, what may be considered to be
the correct level of nullification or impairment caus ed by the CDSOA. This course of action is in
conformity with previous arbitrations.
13 Also in line with previous arbitrations, the decision first
addresses the approach advocated by Canada for the assessment of the level of nullification or
impairment.
1.20 Then, in Section IV, the Decision addresses the le vel of suspension of concessions or other
obligations proposed by Canada, and considers the co mpatibility with Article 22 of the DSU of: (a) a
level of suspension of obligations expressed as a duty rather than as a total value of trade; (b) an
annual adjustment to the level of suspension; a nd (c) the suspension of obligations by one WTO
Member in relation to a measure also affecting other Members or non-Members.
1.21 Section V of the Decision contains the award of the Arbitrator. It is followed by some
concluding remarks in relation to certain wider issues raised in the course of the arbitration.
II. PRELIMINARY ISSUES
A. REQUEST OF THE UNITED STATES FOR A PRELIMINARY RULING
1. Summary of the United States' request
2.1 As mentioned in the previous section, on 19 Febr uary 2004, the United States filed a request
for a preliminary ruling from the Arbitrator that:
(a) a Requesting Party cannot suspend concessi ons or other obligations based on the
nullification or impairment suffered by other WTO Members; and consequently
offset payments for products other than the Requesting Parties' products that are
subject to anti-dumping or countervailing dut y orders are outside the scope of the
arbitration proceeding with respect to that Requesting Party;
(b) the Requesting Parties failed to specify the level of suspension and the level of
nullification or impairment in such a way that allows the Arbitrator to determine
equivalence; and consequently each party must provide the information necessary to
enable the Arbitrator to make the determ inations called for under the DSU in relation
to that party; and
(c) the proposition that a Requesting Party may establish a new level of suspension each
year is inconsistent with Article 22 of th e DSU; and is consequently outside the
scope of the arbitration proceeding for an y party requesting to proceed in that
manner.
2. Analysis of the Arbitrator
2.2 On 23 February 2004, we informed the parties that, having regard to the issues raised in the
United States' request for a preliminary ruling, they would more appropriately be addressed together
with all the issues and arguments that might be ra ised throughout the pro ceedings. We added that

13 See EC – Bananas III (US) (Article 22.6 – EC), para. 4.2:
"… as a prerequisite for ensuring equivalence between the two levels at issue we have to
determine the level of nullification or impairment."

parties should feel free to include comments on the United States' request in their submissions, as they
saw fit.
2.3 The United States has reiterated the claims made in its request for a preliminary ruling in its
subsequent submissions. As a result, we deem it n ecessary for the clarity of our findings to describe
how we dealt with these claims.
2.4 First, we note that neither paragraph 6 nor pa ragraph 7 of Article 22 of the DSU provide for
the possibility of a preliminary ruling and there is, strictly speaking, no practice of a preliminary
ruling at the request of a party in past arbitrations.
2.5 Second, some of the issues we were asked to rule upon by the United States were intimately
linked to questions central to this dispute. We c oncluded that the relatively expeditious process of a
preliminary ruling was not appropriate to the matte rs the United States had raised. The purpose of
that process is essentially to eliminate from an arb itration issues that could not be deemed to fall
within the mandate of the Arbitrator.14
2.6 Indeed, a core issue in this arbitration is wh ether the level of nullification or impairment
suffered by the Requesting Parties can be determined on the basis of the total disbursements made by
the United States under the provisions of the CDSOA. We address this question as part of our review
of the substantive issue, in Section IV.B.2 below.
2.7 Similarly, we concluded that consideration of whether the ability to set a new level of
suspension each year is allowed under Article 22 of the DSU had to form part of our broader
assessment of the level of nullification or impairment and of the level of suspension of concessions or
other obligations. We address this question in Section IV.B.3 below.
2.8 Finally, with respect to the alleged failure of the Requesting Parties to specify the level of
suspension and the level of nullification or impair ment sufficiently to enable the Arbitrator to
determine equivalence, we note that the Unite d States did not seek an immediate ruling on the
admissibility of the Requesting Parties' requests, but rather that the Arbitrator require the Requesting
Parties to provide the necessary information in th e course of the proceedings. We recall that other
arbitrators have reminded parties that they had an obligation to provide evidence in support of their
allegations and, more generally, a dut y to cooperate with the arbitrator. 15 We assumed that all parties
would cooperate in good faith and we did not deem it necessary to make any specific request at that
stage.
2.9 As an additional consideration, we note that this particular claim of "specificity" by the
United States is, with some exceptions 16, essentially based on the assumption that the approach
advocated by the United States to the determination of nullification and impairment is the only correct
one, and should have been followed by the Requesting Parties. Since a central question in this case is
whether the Requesting Parties are entitled, under Ar ticle 22 of the DSU, to proceed on the basis of
the level of nullification or impairment and the level of suspension they propose, it does not seem
appropriate in our opinion to address this question as a matter for a preliminary ruling. Rather, it
should be addressed as part of the substance of the case.

14 We noted that addressing these issues at a preliminary stage in a manner fully respecting due process
would most probably involve an amount of time close to the time nece ssary to review the case as a whole.
Indeed, we would have had to give a sufficient amount of time to the Requesting Parties to address the United
States' claims in writing and perhaps hold a specific hearing on these issues.
15 See, e.g., EC – Hormones (Canada) (Article 22.6 – EC) , para. 11, Brazil – Aircraft (Article 22.6 –
Brazil), para. 2.9.
16 This is the case, in our view, of the United States' claim concerning Canada's failure to specify how it
will implement its suspension of obligations under the Anti-Dumping Agreement and the SCM Agreement.

2.10 This said, we note that our decision not to issu e a preliminary ruling on the particular issues
raised by the United States does not preclude us from ruling on procedural issues in the Decision.
B. S
UFFICIENT SPECIFICITY OF CANADA'S REQUEST UNDER ARTICLE 22.2 OF THE DSU
1. Preliminary remarks
2.11 As mentioned above, some of the claims raised by the United States which could normally be
considered as "procedural" were essentially based on the assumption that the Requesting Parties ought
to follow the approach advocated by the United States in their assessment of the level of nullification
or impairment and of the level of suspension of c oncessions or other obligations. This is for instance
the case regarding the issue whethe r a single specific level of nullification or impairment and,
correlatively, of suspension of obligations should be provided by the Requesting Parties. This is also
the case, in our opinion, with th e United States' claim regarding the type of measure which the
Requesting Parties plan to apply, if they are a llowed to suspend concessions or other obligations. 17
We consider that such claims are more appropriately addressed as part of our review of the substance
of the case. We nonetheless found that certain aspects of these claims should be discussed separately
to the extent that they relate to specific proce dural rights of the United States in these proceedings,
which ought to be protected.
2.12 We consider this to be the case in relation to the claim that there should be a minimum degree
of specificity supporting any request for suspension of concessions or other obligations so as to allow
the respondent in the main dispute to exercise its right to request arbitration.18
2.13 We also deem it appropriate, in the light of the arguments of the parties, to address separately
the United States' claims related to the lack of speci ficity in Canada's request regarding how it intends
to suspend certain obligations under Article VI of the GATT 1994, the Anti-Dumping Agreement and
the SCM Agreement.
2. Main arguments of the parties
(a) United States
2.14 The United States claims that the Requesting Pa rties have failed to specify the level of
suspension of concessions and the level of nullifi cation or impairment, both in their requests under
Article 22.2 of the DSU and subsequently in the cour se of this arbitration, in a way that enables the
Arbitrator to determine equivalence. The United Stat es presents this issue as one of specificity of the
request under Article 22.2 of the DSU and, more gene rally as a question of duty to cooperate with the
Arbitrator by providing information on the level of nullification or impairment.19
2.15 The United States contends that the Requesting Pa rties have failed to quantify either the level
of suspension or the level of nullification or im pairment. The Requesting Parties replace specific
values with general concepts and ask the Arbitrator to determine that two amounts are equivalent to
one another without knowing what those amounts are. The United States adds that the Requesting

17 The United States contests in substance the intention of the Requesting Parties to impose a tariff
surcharge on a list of products to be calculated so as to generate, over a period of one year, an income equivalent
to the offset payments made in the latest annual dist ribution under the CDSOA. The United States argues that
this approach places no limit on the leve l of suspension th at will be effectively imposed and is contrary to past
practice.
18 We leave aside the question of the usefulness of a sufficiently specific request to allow the DSB to
reach an informed decision.
19 United States preliminary request, 19 February 2004, paras. 21-27.

Parties decline to provide any information on the level of suspension requested or to base their request
on trade effect.20
2.16 The United States notes that the Requesting Parties intend to impose a yet unidentified duty to
an unspecified value of imports, thus failing to iden tify the amount of trade that would be covered by
their request. Without more information, it is impossible to "determine" the level of suspension
proposed and the actual impact of the duty on imports from the United States.21
2.17 The United States also contests Canada's intenti on to suspend the application of some of its
obligations under Article VI of GATT 1994, the An ti-Dumping Agreement and the SCM Agreement.
The United States notes that, while arbitrators may not review the "nature" of the obligations to be
suspended, they nonetheless need to evaluate the im pact that a suspension proposal will have. This
requires a certain degree of specificity from reques ting parties in the description of the measures that
they plan to adopt to suspend obligations.22
(b) Canada
2.18 With respect to the quantification of the level of nullification or impairment and the level of
suspension, Canada replies that the Requesting Parties have directly linked those levels to the level, or
quantity, of disbursements made by the United St ates each year under the CDSOA. The requested
level of suspension has been stated in quantitative terms. Not only is the level quantified each year,
but the quantity is derived from figures reported by the United States itself.23
2.19 With regard to the United States' claims regard ing the suspension of certain obligations under
Article VI of GATT 1994, the Anti-Dumping Agre ement and the SCM Agreement, Canada argues
that this claim amounts to requesti ng the Arbitrator to examine the nature of the specific obligations
that Canada has requested authorization to suspen d, and that the manner in which Canada ultimately
chooses to suspend concessions is not something for the Arbitrator to review.24
3. Does Canada's request fail to meet the minimu m specificity standard applicable in an
Article 22.6 arbitration?
2.20 In EC – Bananas III (Ecuador) (Article 22.6 – EC) , the arbitrators stated that "the specificity
standards, which are well established in WTO ju risprudence under Article 6.2 of the DSU were
relevant for requests for authorization to suspe nd concessions under Article 22.2 and for requests for
referral of such matter to arbitration under Article 22.6".25 More particularly, the arbitrator considered
that:
(a) the request under Article 22.2 must set out the specific level of suspension (i.e. a level
deemed equivalent to the nullification or impairment caused by the WTO-inconsistent
measure, pursuant to Article 22.4 of the DSU); and
(b) the request must specify the agreement and sector(s) under which concessions or
other obligations would be suspended, pursuant to Article 22.3 of the DSU.

22 United States written submission, paras. 31-36.
24 Canada's written submission, paras. 62-64.
25 See EC – Bananas III (Ecuador) (Article 22.6 – EC) , paras. 20-29. See also EC – Hormones
(Canada) (Article 22.6 – EC), para. 16.

2.21 The specificity issue whether requirement (a) has been met by Canada in its request, turns on
whether the "specific level of suspension" should be expressed "in dollars and cents", or monetary
terms. This in turn depends on the determination of the substantive issue before the Arbitrator of
whether the approach to nullification or impairme nt proposed by Canada and the other Requesting
Parties is compatible with Article 22 of the DSU. We revert to this matter in Section III below.
2.22 With regard to requirement (b) above, we not e that Canada's request expressly mentions
GATT 1994 provisions, as well as articles of the An ti-Dumping and SCM Agreements. In addition,
Canada's request, to the extent that it specifies th at the suspension would consist of the imposition of
"additional import duties above bound custom duties on products originating in the United States,"
26
unequivocally specifies the sector (trade in goods) concerned.
2.23 The question raised by the United States includes a second dimension if one applies mutatis
mutandis to this case the standards of specificity devel oped under Article 6.2 of the DSU. This is
whether the information provided by Canada as to its proposed level of suspension was such as to
prejudice the ability of the United States to defend it self (i.e., in this case, to make an informed
decision to request, or not, arbitration under Article 22.6 and to argue its case before the Arbitrator). 27
This question may be answered by reviewing the United States' submissions in these proceedings.
Having reviewed those submissions, we note that the degree of specification of the level of
suspension proposed by Canada in no way prejudi ced the ability of the United States to exercise its
rights under Article 22.6. Moreover, as explained below, a number of claims presented by the United
States as to a lack of specificity in Ca nada's request actually relates to the nature of the obligations to
be suspended rather than to the specificity of the request under Article 22.2.
2.24 We therefore conclude that Canada's request for authorization to suspend concessions or other
obligation, while it could have certainly been mo re informative, is acceptable in terms of the
minimum specificity requirement applicable to Article 22.2 requests. In this respect, we consider that
the United States did not demonstrate that either its ability to reach an informed decision to request
arbitration, or its ability to defend itself in these proceedings had been prej udiced as a result of the
way Canada's request was formulated.
4. Canada's suspension of obligations under Articl e VI of GATT 1994, Articles 3, 5, 7, 8, 9,
10, 11 and 12 of the Anti-Dumping Agreement and Articles 11, 12, 15, 17, 18, 19, 20, 21
and 22 of the SCM Agreement
2.25 As previously indicated, the question of the speci ficity of certain aspects of Canada's request
for suspension of obligations in terms of its equiva lence with the level of nullification or impairment
is addressed in paragraphs 4.7-4.11 below. This section is limited to addressing the "procedural"
question of whether the United States was prejudiced in its ability to defend itself as a result of the
alleged lack of specificity of Canada's request for suspension of obligations under Article VI of
GATT 1994, Articles 3, 5, 7, 8, 9, 10, 11 and 12 of the Anti-Dumping Agreement and Articles 11, 12,
15, 17, 18, 19, 20, 21 and 22 of the SCM Agreement.
2.26 Article 22.7 of the DSU provides that:
"The arbitrator acting pursuant to paragraph 6 shall not examine the nature of the
concessions or other obligations to be suspended ..."28

26 See WT/DS234/25.
27 See Appellate Body Report in Korea – Dairy, paras. 127-131.
28 See also EC – Hormones (Canada) (Article 22.6 – EC), para. 19.

2.27 In terms of this provision, prima facie, the choice of provisions of the GATT 1994, the Anti-
Dumping Agreement or the SCM Agreement to be suspended is a matter to be exercised by Canada at
its discretion.29 We agree with Canada that we do not ha ve a mandate to address its choice of WTO
obligations to be suspended.
2.28 It is our understanding that the United States does not contest the discretion of Canada to
suspend certain obligations rather than others. In stead, the United States seems to be concerned with
the lack of precision in Canada's request as to how those suspensions will be actually implemented.
The United States argues in effect that this leads to a situation where the Arbitrator is incapable of
assessing with sufficient certainty the level of susp ension of concessions or other obligations because
the request leaves it open to Canada to implement the suspensions proposed in many different ways.
2.29 In order to address the United States' concern, Canada's request would essentially have to
specify the measures proposed to be taken to implement the suspension of a given obligation. In
considering this, it is necessary to differentiate between the WTO obligation to be suspended and the
specific measures taken to implement such suspensions. We note that our mandate is to determine
whether the level of suspension of WTO obligations is equivalent with the level of nullification or
impairment. Article 22.7 of the DSU does not imply a review of the actual measures, which will
implement a suspension, to determine if they will exceed the level of nullification or impairment, and
in our view, the Arbitrator's mandate does not extend to addressing or approving the proposed
implementation of the suspension of the obligations.
2.30 Moreover, we do not believe it is appropriate to presume in this Decision that Canada will
breach its obligations when implementing the auth orization from the DSB to suspend concessions or
other obligations. Such a presumption would be contrary to the obligation on WTO Members to
comply with their treaty obligations in good faith (pacta sunt servanda).
2.31 Previous arbitrators have generally not review ed the obligations that the requesting party
proposed to suspend to verify that, once applied, th e level of nullification or impairment would not be
exceeded. Nor have they, for that matter, requested information on the way the suspensions would be
implemented.30 We note that risks of the level of nullification or impairment being breached arises
with most countermeasures, including where a Memb er imposes a 100 per cent tariff surcharge, the
most common type of suspension.31
2.32 We conclude therefore, that we do not have authority under our mandate to require Canada to
be more specific as to the measures it intends to apply to suspend its obligations. We note that, if the
DSB considers that Canada's request is not acceptabl e in this respect, it may reject Canada's request,
pursuant to the last sentence of Article 22.7 of the DSU. Similarly, if the United States were to
consider that the actual suspension of obligations by Canada exceeded the level of nullification or
impairment determined pursuant to this decision, it may have recourse to the dispute settlement
mechanism.32

29 See EC – Hormones (Canada) (Article 22.6 – EC), paras. 18-19.
30 Even the arbitrator in EC – Bananas III (Ecuador) (Article 22.6 – EC) , which had to determine
whether the principles and procedures set forth in Article 22.3 had been followed by Ecuador, reviewed only the
obligations and did not address the implementing measures.
31 We also note that, pursuant to Article 19.1 of the DSU, panels and the Appellate Body may only
recommend that the Member concerned bring its legisla tion into conformity with its obligations under the
agreement which has been breached.
32 See EC – Hormones (Canada) (Article 22.6 – EC), para. 71, US – 1916 Act (EC) (Article 22.6 – US),
para. 7.9.

2.33 Having regard to the above, we nonetheless ur ge Canada, as occurred in two arbitrations
where similar suspensions of obligations were proposed
33, to take appropriate steps to ensure, if it
decides to proceed with the suspension of certain of its obligations vis-à-vis the United States referred
to in document WT/DS234/25, that this will be done in such a way that equivalence between the level
of suspension and the level of nullification or impairme nt is respected. We also urge Canada, if and
when it submits a revised request for authoriza tion to the DSB to suspend concessions or other
obligations in this case, to provide a more deta iled request to ensure greater transparency and
predictability in its suspensions (and thus reduce the potential for a continuation of this dispute
through recourse by the United States to the dispute settlement mechanism).34
C. BURDEN OF PROOF
1. Main arguments of the parties
2.34 The parties have repeatedly raised the questi on of the burden of proof in these proceedings.
Canada argues that the United States, as the party claiming that Canada's requested level of
suspension is not equivalent to the level of nullif ication or impairment, must prove its case. The
United States also bears the burden of proving on a prima facie basis its allegation that the level of
nullification or impairment is "zero". Canada cons iders that, by contrast, the Requesting Parties have
demonstrated in their written submissions that the level of suspension they request authorization to
apply is equivalent to the level of nullification or impairment.
35
2.35 The United States acknowledges that it bears th e burden of proof in these proceedings.
However, it argues that it only has to submit eviden ce sufficient to establish a "presumption" that the
level of suspension proposed is not equivalent to the level of nullification or impairment. According
to the United States, it does not bear the burden to show that the level of nullification or impairment is
"zero". By contrast, the Requesting Parties failed to substantiate their claim that the level of
nullification or impairment corresponds to the fu ll amount of disbursements made under the CDSOA,
despite the fact that Canada itself asserts that the level of nullification or impairment must be based to
the extent possible, on credible, factual and verifiable information, and not on speculation.36
2. Position of the Arbitrator
2.36 Since burden of proof has been extensively addressed in previous Article 22.6 arbitrations, we
need not dwell on this matter. Like the arbitrator in EC – Bananas III (Ecuador) (Article 22.6 – EC) ,
we simply note the considerations of the arbitrator in EC – Hormones (Canada) (Article 22.6 – EC)
on this matter and conclude that, while it is for the United States to prove that Canada's request for
suspension exceeds the level of nullification or impa irment, Canada must also sufficiently support its
allegations that its request meets the requirement for equivalence of Article 22.4 of the DSU.
2.37 We also note that, in EC – Hormones (Canada) (Article 22.6 – EC) , the arbitrator recalled
that:

33 Brazil – Aircraft (Article 22.6 – Brazil) , para. 4.2; and Canada – Aircraft Credits and Guarantees
(Article 22.6 – Canada) , para. 4.2. See also EC – Hormones (Canada) (Article 22.6 – EC) , para. 71 and EC –
34 In general, a more detailed presentation of the m easures that may ultimately be applied to suspend
concessions or other obligations by the Member requesting authorization to suspend under Article 22.2 of the
DSU, would contribute to the transpar ency necessary to alleviate concerns that, once authorized, the level of
suspension of obligati ons may exceed the level of nullifi cation or impairment. See also EC – Hormones
(Canada) (Article 22.6 – EC), footnote 15, referring to articles 3.2, 3.3, 3.7 and 3.10 of the DSU.
35 Canada's written submission, para. 10. Canada's oral statement, paras. 6-8.
36 United States oral statement, paras. 5-6.

"11. The duty that rests on all parties to produce evidence and to collaborate in
presenting evidence to the arbitrators – an i ssue to be distinguished from the question
of who bears the burden of proof – is cruc ial in Article 22 arbitration proceedings.
The EC is required to submit evidence showing that the proposal is not equivalent.
However, at the same time and as soon as it can, Canada is required to come forward
with evidence explaining how it arrived at its proposal and showing why its proposal
is equivalent to the trade impairment it has suffered. Some of the evidence – such as
data on trade with third countries, export capabilities and affected exporters – may,
indeed, be in the sole possession of Canada , being the party that suffered the trade
impairment. This explains why we re quested Canada to submit a so-called
methodology paper."37
2.38 Having regard to the duty of the parties to supply evidence and, more generally, to collaborate
with the Arbitrator, and following th e approach of the arbitrators in Brazil – Aircraft (Article 22.6 –
Brazil)38 and in Canada – Export Credit and G uarantees (Article 22.6 – Canada) 39, we are of the
view that if a party makes a particular claim but fails to cooperate and provi de evidence sufficiently
supporting its claim, we may reach a conclusion on the basis of the eviden ce available, including
evidence submitted by the other party or data publicly available.
III. DETERMINATION OF THE LEVEL OF NULLIFICATION OR IMPAIRMENT
A. MAIN ARGUMENTS OF THE PARTIES
1. United States
3.1 The United States considers that the Requesting Pa rties, by arguing that a breach is itself a
nullification or impairment ignore the critical distin ction that the drafters of the WTO agreements
have drawn between, on the one hand, a breach of a WTO commitment and, on the other hand, the
economic impact that is "the result of" that breach. The United States refers to Article XXIII of
GATT 1994, but also to Article 22.8 of the DSU.
40 The United States further claims that the level of
nullification or impairment must be established on th e basis of the trade loss suffered directly by each
Requesting Party. The United States argues that an analysis of the level of nullification or impairment
must focus on the "benefit" allegedly nullified or im paired as a result of the failure of the responding
party to bring the measure at issue into confor mity with the recommendations and rulings of the
DSB.41 In previous cases, arbitrators have compared the actual amount of exports affected by the
WTO-inconsistent measure to the amount of exports in a "counterfactual". 42 The difference between
the two values typically represented the level of nullification or impairment. The United States is also
of the view that the Appellate Body confirmed this approach by focusing on the "trade effect" of the
CDSOA, as a non-permissible specific action against dumping or a subsidy. A change in the
"conditions of competition" arising from a governme nt payment to producers is different from a
subsidies analysis since there has been no finding ag ainst the CDSOA as an "actionable subsidy".
The focus on trade effect is consistent with past practice in Article 22.6 arbitrations.
43 Moreover, the
level of nullification or impairment must be measured in terms of the effect the CDSOA has on
producers/exporters subject to anti-dumping or countervailing duty orders.

37 See, e.g., EC – Hormones (Canada) (Article 22.6 – EC), paras. 9-11.
38 Paras. 2.9-2.11.
39 Para. 3.76.
40 United States oral statement, paras. 7-13.
42 i.e., the situation which would exist if the responding party had brought the WTO-inconsistent
measure into conformity within the reasonable period of time (United States written submission, para. 41).

3.2 The United States also cl aims that, under the Appellate Body analysis, any effect that the
CDSOA offset payments might have on competit ors that are not subject to anti-dumping or
countervailing duties (i.e. other United States' produ cers and foreign producers/exporters not subject
to an anti-dumping or countervailing duty order) was not relevant to the findings of the Panel or the
Appellate Body under Article 18.1 of the Anti- Dumping Agreement and Article 32.1 of the SCM
Agreement. A Member cannot suffer nullification or impairment as a result of a non-permissible
specific action against dumping or against a subsidy if no order is in place and if no duties can be
collected on that Member's products. The allocati on of the total annual disbursements advocated by
the Requesting Parties shows that the Requesting Parti es have not even attempted to relate the levels
of suspension proposed to the level of nullification or impairment suffered.
3.3 In addition, the United States argues that speci al accounts relating to revoked orders should
not be considered because, in the case of revoke d orders, a link does not exist between offset
payments and an anti-dumping or countervailing duty order. When there is no anti-dumping or CVD
order in place, any payment received by an affected domestic producer in 2003 cannot nullify or
impair any benefits related to Article 18.1 of th e Anti-Dumping Agreement or Article 32.1 of the
SCM Agreement.
44
3.4 The United States further claims that disbur sements under the CDSOA, i.e. the concrete
application of the CDSOA, are not part of the m easure found inconsistent with the WTO Agreement.
As a result, an examination of the actual dis bursements made under the CDSOA would go beyond the
terms of reference of the original disputes.45
3.5 Yet, even if one were to consider these pa yments, the United States recalls that the DSB
found that the CDSOA offset payments caused no adverse effect 46 and there is no evidence that
CDSOA offset payments have in reality affected Requesting Parties' dumped or subsidized trade.
There is no requirement under the CDSOA for how offset payments are to be used. Likewise, a
substantial share of the "qualifying expenditur es" reported reflect expenditures made after the
issuance of the anti-dumping duty finding or order or countervailing duty order, but long before the
US Congress even enacted the CDSOA. It is al so impossible for affected domestic producers to
predict whether they will receive offset payments an d, if so, how much they will receive in any given
year. Furthermore, in at least two instances, o ffset payments under the CDSOA flowed to companies
not involved in the production or sale of products covered by an anti-dumping or countervailing duty
order. Finally, offset payments represent a small fraction i.e. in most cases less than 1 per cent and in
no case more than 5 per cent of domestic producers' sales or production of the relevant product. The
United States deems it unlikely that such de minimis disbursements would have any real impact on
production and any discernible effect on trade. The United States notes in this respect that for the
purpose of Article 11.9 of the SCM Agreement, a subsidy is de minimis if it is less than 1 per cent
ad valorem.
47
3.6 Finally, the United States argues that there is no bar to a finding of "zero" nullification or
impairment in an Article 22.6 proceeding. Not ev ery violation will result in a measurable level of
nullification or impairment and the United States considers that the presumption of nullification or
impairment under Article 3.8 of the DSU can be rebutted before an Article 22.6 arbitrator.48

44 United States written submission, paras. 57-58.
45 United States written submission, paras. 15-19.
46 United States written submission, paras. 62-65.
47 United States written submission, paras. 66-74.
48 United States written submission, paras. 75-79.

2. Canada
3.7 Canada claims that the level of nullification or impairment in this case corresponds, at a
minimum, to the total amount of disbursements made by the United States' authorities under the
CDSOA.
3.8 According to Canada, Article 22.4 of the DSU does not itself elaborate on the concept of
"nullification or impairment". However, th e meaning of these terms can be understood by
considering how nullification or impairment relates to a violation of obligations. Article 3.8 of the
DSU provides for a presumption that a violation of rights will lead to nullification or impairment
because the covered agreements confer "benefits" on Me mbers in the form of "rights". A violation by
a Member of its obligations adversely affects – nu llifies or impairs – the rights of other Members.
Indeed, Articles 22.3(a) and 23.1 deem a violation of obligations to be a form of nullification or
impairment of benefits. It follows that the exte nt of a violation will determine the extent of the
nullification or impairment. This is consistent w ith the object and purpose of the DSU itself and the
WTO dispute settlement system more generally. The level of nullification or impairment is, therefore,
the extent to which any benefit accruing to a WTO Member under the WTO Agreement is affected by
the failure of another Member to carry out its obligati ons. In this case, the extent of the failure is the
failure of the United States to bring the CDSOA into compliance, including by continuing to make
illegal CDSOA distributions. Canada adds that the arbitrator in US – 1916 Act (EC) (Article 22.6 –
US) recognized that the existence of the non-complian t measure itself nullified or impaired benefits
and that each application of the measure increased or further nullified or impaired benefits.
49
3.9 As to the amount of nullification or impairme nt, Canada recalls that the arbitrator in US –
1916 Act (EC) (Article 22.6 – US) found that the term "level" refers to a quantitative measure. The
level of nullification or impairment must be based to the extent possible on credible, factual and
verifiable information and not on speculation. The concrete application of the CDSOA, in the form of
illegal monetary disbursements, is readily quantifiable. Each dollar of illegal disbursements, a direct
economic consequence of the CDSOA, further nu llifies or impairs benefits. Accordingly, the
quantitative level of nullification or impairment is determined, as a minimum, by the illegal
distributions under the CDSOA. In order to counter the whole amount disbursed, the Requesting
Parties have not only allocated among themselves the disbursements relating to duties imposed on
products from those Members, seven of them have also allocated among themselves the difference
between the disbursements relating to their ow n exports and the total disbursements under the
CDSOA.
50
3.10 Canada further disagrees with the United Stat es' position that the level of nullification or
impairment in this case and, hence, the level of suspension, is "zero". Canada contests the
United States' argument that the Arbitrator must divorce the application of a measure from the
measure itself. When a measure as such violates th e WTO Agreement, each and every application of
the measure is, by definition, a violation of the WTO Agreement
51 and every illegal disbursement
contributes to the level of nullification or impairment of benefits.52
3.11 Canada also contests the opinion of the United States that nullification or impairment should
be measured by the effect that the CDSOA has on the trade of each Requesting Party. Canada
considers that there is nothing in Article 22.4 of the DSU or elsewhere to support the United States'
interpretation that nullification or impairment refe rs exclusively to the trade effect of the illegal
measure. According to Canada, the benefits being impaired in this case are the rights of Members to

49 Canada's written submission paras. 11-20.
50 Canada's written submission paras. 21-27.
51 Canada's written submission, paras. 29-33.

expect that the United States will take no measu re other than those authorized under the WTO
Agreement to respond to dumping, and the correspondi ng obligation of the United States not to take
such measures. Canada refers to the arbitration in US – FSC (Article 22.6 – US) , where the arbitrator
rejected the United States' argument that the remedies for non-compliance under Article 4 of the SCM
Agreement had to be linked or limited to "trade e ffect". Likewise, the obligation being breached by
the United States is an erga omnes obligation, owed to each of the Requesting Parties. Each of the
Requesting Parties might therefore have requested a level of suspension equivalent to the total amount
of the disbursement.
53
B. ANALYSIS OF THE ARBITRATOR
1. Introduction
3.12 The approaches of the parties are – in appear ance at least – based on diametrically opposed
conceptions of "nullification or impairment". Ho wever, while the United States' approach seems to
rely largely on the practice of other arbitrations under Article 22.6 of the DSU, the approach defended
by Canada is, if one excludes the arbitrations carried out under Article 4.10/4.11 of the SCM
Agreement, novel in the context of Article 22.6 of the DSU.
3.13 Consistent with the practice of previous arbitrators 54, we proceed with the review of the
approach advocated by Canada. If we find it to be compatible with the DSU, we will proceed with a
determination of the level of nullification or impair ment on that basis. If we do not find it compatible
with the DSU, we will determine the level of nullif ication or impairment by applying a methodology
appropriate in this case.55
3.14 Canada's contention that the level of nullif ication or impairment corresponds, at the
minimum, to the total amount disbursed by th e United States under the CDSOA seems, in our
understanding, to be based essentially on the following premises:
(a) a violation is a form of nullification or impairment;
(b) the notion of "benefit" under Article XXIII of GATT 1994 and the DSU encompasses
rights under the WTO Agreement;
(c) Canada has a right under the WTO Agreemen t to expect that the CDSOA should not
exist. As a result, Canada, together with the other Requesting Parties in this case, has
a right to suspend concessions or other obligations up to the full amount of
disbursements under the CDSOA.
3.15 We will hereafter address these elements. We w ill also subsequently address a core issue for
our determination of the level of nullification or impairment, i.e. whether we can consider
disbursements under the CDSOA in our calculation.
2. Review of the approach proposed by Canada
(a) Article XXIII of GATT 1994 and the DSU
3.16 After careful consideration we are not persuaded that the pos ition of Canada is supported by
Article XXIII of GATT 1994 or the DSU, for the reasons stated below.

54 See, e.g., Brazil – Aircraft (Article 22.6 – Brazil), paras. 1.5 and 3.18.
55 EC – Hormones (Canada) (Article 22.6 – EC), para. 12.

3.17 First, in order to assess Canada's arguments, it seems appropriate to re visit the source of the
concept of nullification or impairment, i.e., Article XXIII of GATT 1994, on which the DSU is
based.56 Article XXIII:1 of GATT 1994 provides – in relevant parts – as follows:
"If any contracting party should consider th at any benefit accruing to it directly or
indirectly under this agreement is being nullified or impaired [...] as a result of
(a) the failure of another contracting part y to carry out its obligations under this
Agreement, or
(b) the application by another contracting party of any measure, whether or not it
conflicts with the provisions of this Agreement, or
(c) the existence of any other situation,
The contracting party may, with a view to the satisfactory adjustment of the matter,
make written representations or proposals to the other contracti ng party or parties
which it considers to be concerned."
3.18 Considered in the context of Article XXIII of GATT 1994, nullification or impairment and
violation are clearly separate concepts. Article XXIII:1 basically provides that nullification or
impairment of benefits is what must be ultimately demonstrated. 57 Nullification or impairment may
essentially exist "as a result of": (a) a violation; (b) a situation of non-viola tion; or (c) "any other
situation". Therefore, violation is not to be confused with nullification or impairment of a benefit.
3.19 We find support for this position in Article 3.8 of the DSU, which reads as follows:
"In cases where there is an infringement of the obligations assumed under a covered
agreement, the action is considered prima facie to constitute a case of nullification or
impairment. This means that there is normally a presumption that a breach of the
rules has an adverse impact on other Members parties to that covered agreement, and
in such cases, it shall be up to the Member against whom the complaint has been
brought to rebut the charge."
3.20 As mentioned by Canada, a violation generat es, pursuant to Article 3.8 of the DSU, a
presumption of nullification or impairment. Article 3.8 does not treat violation as a form of
nullification or impairment. Article 3.8 merely ex empts the party having demonstrated the violation
from also having to demonstrate nullification or impairment. It does not modify the fundamental
requirement that what is ultimately to be demonstrated is nullification or impairment.
3.21 This is confirmed by the last sentence of Article 3.8, which provides the opportunity for the
alleged violating Party to rebut the presumption of nullification or impairment. If violation was
conceptually equated by Article 3.8 to nullifica tion or impairment, there would be no reason to
provide for a possibility to rebut the presumption. The theoretical possibility to rebut the presumption
established by Article 3.8 can only exist because vi olation and nullification or impairment are two
different concepts.

56 See Article 3.1 of the DSU. This provision makes clear that the DSU must be applied in a manner
consistent with the principles embodied in Article XXIII of GATT 1994.
57 Since "impediment of the attainment of an objective of th e Agreement" is not discussed in this case,
we refrain from referring to it.

3.22 Even if we were to follow Cana da's interpretation of Article 3. 8, the end result would be the
same as that from our interpretation: a nullification or impairment is deemed to exist, which implies
that the Member found in breach of its obligations has to bring its legislation into conformity with its
obligations under the WTO Agreement. However, this does not imply that the level of such
nullification or impairment is equal to the "value " of the violation. Article 3.8 deals with the
establishment of the existence of nullification or impairment dur ing proceedings before a panel, it
does not address the valuation or quantification of such nullification or impairment.
3.23 Canada argues that the presumption under Artic le 3.8, if not rebutted, implies that
nullification or impairment exists and cannot be "zero". Canada cites the US – 1916 Act (EC)
(Article 22.6 – US) arbitration in support of its position.
3.24 We accept the view that some nullification or impairment should exist if it has not been
rebutted. However, the quantification of the leve l of nullification or impairment remains to be
established. Article 3.8 does not address how nullification or impairment should be valued.
3.25 We note that Canada refers to Articles 22.3(a ) and 23.1 of the DSU in support of its position
that violation is a form of nullification or impairment.
3.26 Article 22.3(a) reads as follows:
"[T]he general principle is that the compla ining party should first seek to suspend
concessions or other obligations with respect to the same sector(s) as that in which
the panel or Appellate Body has found a violation or other nullification or
impairment."
3.27 Article 23.1 reads as follows:
"When Members seek the redress of a violation of obligations or other nullification or
impairment of benefits unde r the covered agreements or an impediment to the
attainment of any objective of the covered agreements, they shall have recourse to,
and abide by, the rules and procedures of this Understanding."
3.28 We are of the view that, taken in their c ontext, including Article XXIII of GATT 1994 and
Article 3.8 of the DSU, those provisions simply deal with the principles to be applied in the
suspension of concessions or more generally in di spute resolution. They reinforce, rather than
contradict, the basic distinction between violation, on the one hand, and nullification or impairment
the result of a violation, on the other hand.
3.29 Canada considers that the concept of "ben efit" in the DSU encompasses the rights of
Members under the WTO Agreement.
3.30 As mentioned above, pursuant to Article XXIII of GATT 1994, nullification or impairment of
a benefit may be "the result of" a violation of a ri ght, which implies that a violation is not to be
confused with the nullification or impairment itself. Rather, the violation is the cause of a nullification
or impairment of a benefit. In other words, rights confer benefits (e.g., predictable conditions of
competition), they are not themselves benefits within the meaning of Article XXIII of GATT 1994
and the DSU.
3.31 Canada also argues that, since violation is a fo rm of nullification or impairment, and since a
right generally applies erga omnes, each Member should be entitled to retaliate up to the full effect of
the violation.

3.32 Again, we consider that this argument fails to recognize the distinction between the violation
of a right and the consequence thereof, i.e., nu llification or impairment within the meaning of
Article XXIII:1 of GATT 1994. We therefore consid er that, while a violation of an obligation may
affect all Members, this does not ipso facto result in a nullification or impairment of a given Member's
benefits up to the "value" of the violation.
(b) Previous arbitrations
(i) Introduction
3.33 We note that previous arbitrations (a) support our approach regarding the interpretation to be
given to the provisions relating to nullification or impairment and (b) more specifically, have
concluded that the nullification or impairment of benefits resulting fro m a violation should be
expressed in terms of trade or, in two instances, economic effects.58
(ii) Interpretation of the provisions relating to nullification or impairment by previous arbitrators
3.34 Previous Article 22.6 arbitrators concluded, as we have, that violation and nullification or
impairment are two different concepts. The arbitrator in EC – Bananas III (US) (Article 22.6 – EC)
stated that the presumption of nullification or impairment contained in Article 3.8 of the DSU could
not, in and of itself, be taken simultaneously as evid ence proving a particular level of nullification or
impairment allegedly suffered by a Member request ing authorization to suspend concessions or other
obligations under Article 22 of the DSU. Such aut horization would only arise at a much later stage of
the dispute settlement process. The arbitrator added that:
"The review of the level of nullification or impairment by Arbitrators from the
objective benchmark foreseen by Article 22 of the DSU, is a separate process that is
independent from the finding of infringements of WTO rules by a panel or the
Appellate Body. As a result, a Member's potential interests in trade in goods or
services and its interest in a determinati on of rights and obligations under the WTO
Agreements are each sufficient to esta blish a right to pursue a WTO dispute
settlement proceeding. However, a Member 's legal interest in compliance by other
Members does not, in our view, automatically imply that it is entitled to obtain
authorization to suspend concessions under Article 22 of the DSU."59
(iii) Consideration of benefits nullified or impaired in terms of economic or trade effect
3.35 As a preliminary observation, we note that all pa rties to these proceedings agree that the level
of nullification or impairment must, in this case, be monetarily quantifie d. Disagreement arises
regarding whether this monetary quantification has to be based on some economic effect of the
violation, or whether it can be directly based on the disbursements made under the CDSOA.
3.36 We note that the arbitrators in US – Section 110(5) Copyright Act (Article 25.3) considered
that benefits for the purpose of Article XXIII of the GATT 1994 and the DSU were of an economic
nature:
"If it is assumed, then, that copyright ho lders exploit their exclusive rights by
granting licences for the use of their works, one of the benefits which arises from
those rights consists of the licensing royalties which right holders would receive.

58 See US – Section 110(5) Copyright Act (Article 25.3) , para. 3.18 and US – 1916 Act (EC)
(Article 22.6 – US), para. 5.23.
59 EC – Bananas III (US) (Article 22.6 – EC), para. 6.10.

Thus, exclusive rights such as those set forth in Articles 11 bis(1)(iii) and 11(1)(ii)
will normally translate into economic benefits for copyright holders.
In their submissions to the Arbitrators, the parties have focused on this type of benefit
accruing to copyright holders. The Arbitrators concur with the parties that, for
purposes of these arbitration proceedings, the relevant benefits are those which are
economic in nature.
60 This is consistent with previous decisions of arbitrators acting
under Article 22.6 of the DSU. 61 Moreover, like the parties to this dispute, the
Arbitrators will proceed on the assumption th at the licensing royalties realizable by
copyright holders constitute an adequate measure of the economic benefits arising
from Articles 11bis(1)(iii) and 11(1)(ii)."
3.37 We further note that, with the exception of the arbitrations carried out under Article 4.11 of
the SCM Agreement, previous arbitrators have relied on an approach based on the economic or trade
effect of the violation.
62 While most arbitrations have relied on the narrower concept of trade effect,
we note that both the US – Section 110(5) Copyright Act (Article 25.3) arbitrator and the US – 1916
Act (EC) (Article 22.6 – US) arbitrators referred to economic effects. 63 The use of direct trade effect
in most case reflects the fact that trade loss is gene rally more directly identifiable and quantifiable and
that, in such a context, arbitrators preferred to rely on verifiable figures.
3.38 In both US – Section 110(5) Copyright Act (Article 25.3) and US – 1916 Act (EC)
(Article 22.6 – US), reliance on the broader concept of economic impact was dictated by the nature of
the measures at issue. In US – Section 110(5) Copyright Act (Article 25.3), no actual trade took place,

60 (footnote original) This view is based on the object of th e present proceedings, which is to quantify
the economic harm suffered by the European Communities as a consequence of the continued application of
Section 110(5)(B). It does not necessarily follow that Members having recourse to Article 64 of the TRIPS
Agreement need to establish nullification or impairment of economic benefits accruing to them under the TRIPS
Agreement. The Arbitrators find s upport for their view in the following statement by the arbitrators in
European Communities – Regime for the Importation, Sale and Distribution of Bananas – Recourse to
Arbitration by the European Communities under Article 22.6 of the DSU : "[A] Member's potential interests in
trade in goods or services and its interest in a de termination of rights and obligations under the WTO
Agreements are each sufficient to establish a right to pursue a WTO disput e settlement proceeding. However, a
Member's legal interest in compliance by other Members does not, in our view, automatically imply that it is
entitled to obtain authorization to suspend concessions un der Article 22 of the DSU." See the Decision of the
Arbitrators on European Communities – Regime for the Importation, Sale and Distribution of Bananas –
Recourse to Arbitration by the European Communities under Article 22.6 of the DSU (hereafter "EC – Bananas
III (22.6) (US)", WT/DS27/ARB, 9 April 1999, para. 6.10.
61 (footnote original) See, e.g., the Decisions of the Arbitrators on EC – Bananas III (22.6) (US), supra,
para. 6.12 (benefits nullified or impair ed: losses in US exports of goods and losses by US service suppliers in
services supply); European Communities – Regime for the Importation, Sale and Distribution of Bananas –
Recourse to Arbitration by the European Communities under Article 22.6 of the DSU , WT/DS27/ARB/ECU,
24 March 2000, footnote 52 (benefits nullified or impair ed: losses by Ecuador of actual trade and of potential
trade opportunities in bananas and the loss of actual and potential distribution service supply); European
Communities - Measures Concerning Meat and Meat Products (Hormones) - Original Complaint by the United
States - Recourse to Arbitration by the Eu ropean Communities under Ar ticle 22.6 of the DSU (hereafter "EC -
Hormones (22.6) (US) "), WT/DS26/ARB, 12 July 1999, para. 41 (b enefits nullified or impaired: foregone US
exports of hormone-treated beef and beef products); European Communities - Measures Concerning Meat and
Meat Products ( Hormones) - Original Complaint by Canada - Recourse to Arbitration by the European
Communities under Article 22.6 of the DSU (hereafter " EC - Hormones (22.6) (Canada) "), WT/DS48/ARB,
12 July 1999, para. 40 (benefits nullified or impaired: foregone Canadian exports of hormone-treated beef and
beef products).
62 See the list in footnote 61 above, as well as US – 1916 Act (EC) (Article 22.6 – US), para. 5.23.
63 See US – Section 110(5) Copyright Act (Article 25.3), para. 3.18, US – 1916 Act (EC) (Article 22.6 –
US), para.7.2.

but rights had been breached which conferred economic benefits to the holders of intellectual property
rights in the form of royalties. In US – 1916 Act (EC) (Article 22.6 – US) , the law at issue dealt with
the possibility of civil and/or criminal proceedings being taken against companies importing dumped
imports. Since a judicial decision or settlement under the 1916 Act did not automatically restrict
trade, the broader concept of economic effect was more appropriate.
3.39 In the present case, we note that disbursements under the CDSOA operate, in economic terms,
as subsidies that may generate im port substitution production. Consid ering that the benefit nullified
or impaired in this case corresponds to the va lue of exports from Canada "replaced" by the
United States' domestic production would be consiste nt with the approach followed by previous
arbitrators. As a result, it would be possible, in theory, to rely on the effect of the CDSOA on
Canada's trade with the United States.
3.40 This said, our task is not to determine whet her this is the only approach acceptable under
Article 22.6 of the DSU.
64 On the contrary, it is to determin e whether the approach advocated by
Canada is compatible with the DSU.
3.41 From a review of the arbitrations which w ould seem to support Canada's approach, we note
that the only arbitration decisions based on the valu e of violation itself were those under Article 4.10
and 4.11 of the SCM Agreement.
3.42 The position adopted by Canada seems to be b ased essentially on the approach followed by
the arbitrator in US – FSC (Article 22.6 – US), who relied on the prohibited nature of the subsidy
concerned and the erga onmes nature of the violation to conclude that "appropriate countermeasures"
under Article 4.10 SCM could correspond to the fu ll amount of the subsidy illegally granted,
irrespective of its trade effect.
3.43 First, we note that disbursements under the CDSOA are different from the export subsidy
addressed by the US – FSC (Article 22.6 – US) arbitrator.
3.44 Second, we consider that the reasoning underlying the US – FSC (Article 22.6 – US) decision
cannot be extended to the present case. One r eason is that the mandate of arbitrators under
Article 4.11 of the SCM agreement is different from th at of arbitrators under Article 22.7 of the DSU.
In this regard, Article 4.11 reads as follows:
"In the event a party to the dispute requests arbitration under paragraph 6 of
Article 22 of the Dispute Settlement Unde rstanding ('DSU'), the arbitrator shall
determine whether the countermeasures are appropriate."65
3.45 The US – FSC (Article 22.6 – US) arbitrator expressly differentiated the situation under
Article 4.10 and 4.11 of the SCM Agreement and that under Article 22.4 of the DSU:
"We recall that Article 22.4 of the DSU provides as follows:
'The level of the suspension of concessions or other obligations
authorized by the DSB shall be equivalent to the level of the
nullification or impairment.'

64 As a matter of fact, we do not consider previous arbitrations to be constitutive of "subsequent
practice", within the meaning of that concept under public international law (see Vienna Convention on the Law
of Treaties, Article 31.3(b)).
65 (footnote original) This expression is not meant to allow countermeasures that are disproportionate in
light of the fact that the subsidies dealt with under these provisions are prohibited.

The drafters have explicitly set a quantitativ e benchmark to the level of suspension of
concessions or other obligations that might be authorized. This is similarly reflected
in Article 22.7, which defines the arbitrators' mandate in such proceedings as follows:
'The arbitrator acting pursuant to paragraph 6 … shall determine
whether the level of such suspensi on is equivalent to the level of
nullification or impairment….' (footnote omitted)
As we have already noted in our analysis of the text of Article 4.10 of the SCM
Agreement above, there is, by contrast, no such indication of an explicit quantitative
benchmark in that provision. It should be recalled here that Articles 4.10 and 4.11 of
the SCM Agreement are 'special or additional rules' under Appendix 2 of the DSU,
and that in accordance with Article 1.2 of the DSU, it is possible for such rules or
procedures to prevail over those of the DSU. There can be no presumption, therefore,
that the drafters intended the standa rd under Article 4.10 to be necessarily
coextensive with that under Article 22. 4 so that the notion of 'appropriate
countermeasures' under Article 4.10 would limit such countermeasures to an amount
'equivalent to the level of nullification or impairment' suffered by the complaining
Member. Rather, Articles 4.10 and 4.11 of the SCM Agreement use distinct language
and that difference must be given meaning."
66
3.46 Like the US – FSC (Article 22.6 – US) arbitrator, we consider that Article 4.11 of the SCM
Agreement is a special or additional dis pute settlement provision which provides for a sui generis
approach applicable to prohibited subsidies only. Article 4.11 instructs arbitrators to determine
"appropriate countermeasures" rather than whether the level of suspension of concessions or other
obligations is equivalent to the level of nullifica tion or impairment. This would seem to leave more
discretion to arbitrators in assessing the amount of countermeasures. This was confirmed by the
arbitrator in US – FSC (Article 22.6 – US):
"Thus, as we interpret Article 4.10 of the SCM Agreement, a Member is entitled to act
with countermeasures that properly take into account the gravity of the breach and the
nature of the upset in the balance of right s and obligations in question. This cannot
be reduced to a requirement that constrains countermeasures to trade effects, for the
reasons we have set out above."
3.47 While the arbitrator in US – FSC (Article 22.6 – US) did not exclude the application of a trade
effect test under Article 4.11, it would be difficult, in situations other than those relating to prohibited
subsidies, to conclude that any disbursement pursuant to an illegal measu re automatically causes
nullification or impairment at least equivalent to the total amount disbursed.
3.48 Canada also relies on the arbitrator's decision in US – 1916 Act (EC) (Article 22.6 – US) in
support of its position.
67 We do not agree with Canada th at the passages it relies upon support the
position that the violation resulting of the existen ce of an inconsistent measure itself nullified or
impaired benefits accruing to the European Co mmunities. We note that the arbitrator in US – 1916
Act (EC) (Article 22.6 – US) agreed with the arbitrators in EC – Bananas III (US) (Article 22.6 – EC)
that:

66 US – FSC (Article 22.6 –US), paras. 5.45-5.47.
67 US – 1916 Act (EC) (Article 22.6 – US), paras. 6.14 and 7.8.

"[T]he presumption of nullification or impairment, as provided in Article 3.8 of the
DSU, by no means provides evidence of the level of nullification or impairment
sustained by the Member requesting authorization to suspend obligations."68
3.49 We further note that, in that case, the arbitrat or relied on the economic impact of the measure.
The arbitrator refused to consider the "chilling effe ct" of the law as such, and it was determined that
the costs attached to any settlement or judgement under the 1916 Act – i.e., instances of application –
could be considered to correspond to the economic effect of the 1916 Act on EC companies.
3.50 Overall therefore, we conclude that the reasoni ng of previous arbitrators under Article 22.6 of
the DSU does not seem to support the approach proposed by Canada.
(c) Conclusion
3.51 We conclude from the above that Article XXIII of GATT 1994 and the DSU clearly
differentiate between two stages in WTO dispute settlement:
(a) one is the establishment of the existence of nullification or impairment by panels and
the Appellate Body. This is where Article 3.8 of the DSU plays its role by providing
that the existence of a violation creates a presumption of nullification or impairment
of a benefit; and
(b) a separate and subsequent process where a Member requests the authorization to
suspend concessions or other obligations a nd an arbitrator, under Article 22.6 of the
DSU, is requested to determine the level of the benefit nullified or impaired.
3.52 This implies, in our view, that no assimila tion can be made between, on the one hand, a
violation or the right breached and, on the other ha nd, the benefit nullified or impaired as a result of
that violation. Under the WTO dispute se ttlement mechanism, a violation is the precursor to
establishing the nullification or impairment of a benefit.
3.53 In that context, the benefit nullified or impair ed must necessarily be something else. In this
respect, we recall that past arbitrators under Article 22.6 of the DSU have deemed that benefit to
correspond to the trade directly affected by the maintenance of the illegal measure.
3.54 For the reasons stated above, we reject the approach proposed by Canada in this case.
3. Reliance on specific instances of disbursements to assess nullification or impairment
(a) Main arguments of the parties
3.55 The United States claims that an examination of the actual disbursements made under the
CDSOA would go beyond the terms of reference of the original disputes. Disbursements are not part
of the "measure found to be inconsistent with a covered agreement" under Article 22.2 of the DSU. In
the absence of an actual finding, it is not permissi ble under the DSU to assume that any application
breaches any WTO obligation or nullifies or impairs any benefit.
69 The United States adds that, since
there are no recommendations or rulings concerning any payments made under the CDSOA, there is
certainly no recommendation or ruling about future payments – i.e., there is no legal basis for the

68 US – 1916 Act (EC) (Article 22.6 – US), para. 5.50, emphasis in the original.
69 United States written submission, paras. 15-19.

Arbitrator to make an award for alleged nullifi cation or impairment supposedly caused by measures
not even in existence.
70
3.56 Canada argues that where a measu re as such has been found to violate the WTO Agreement,
every application of the WTO-inconsistent measur e by that Member further nullifies or impairs
benefits to other WTO Members. If the successful ch allenge of the application of a measure does not
impugn the whole measure (because there may be other ways to apply that measure consistent with
that Member's obligations), where a measure as such violates the WTO Agreement, each and every
application of that measure is by definition also a violation. If one were to follow the United States'
logic, Canada argues, a complaining party seeki ng appropriate retaliation rights would have to
challenge a law each and every time it is applied, which could only be done after the damage has been
done. Any application of the measure not addressed in the challenge would be unaffected by the DSB
recommendations and rulings. This would make the prompt settlement of disputes impossible.
71
(b) Analysis of the Arbitrator
3.57 First, we recall that the requesting parties ha ve not identified nullification or impairment
beyond that resulting from the instances of application of the CDSOA.
3.58 Second, we note that the United States raised two separate questions regarding this issue: one
is whether disbursements already made under the CD SOA can be considered by the Arbitrator, the
other one is whether future disbursements may be considered.
3.59 At this stage, the question before us is wh ether we may take into account the economic or
trade effects resulting from the instances of appli cation of the CDSOA, give n the United States claim
that the CDSOA was challenged as such, and, had not been applied when it was first challenged.
3.60 We agree with the United States that the DSB never issued recommendations or rulings with
respect to the application of the CDSOA. We also note the arguments of the requesting parties that
once a measure has been found illegal, any instance of application of this measure is ipso facto illegal.
3.61 We take the view that the CDSOA mandates disbursements whenever certain conditions are
met; that these disbursements have been found by the Panel and the Appellate Body to be a core
element in their conclusion that the CDSOA violates the WTO Agreement 72, and that there is no
reason, for the purpose of assessing nullification or impairment , to exclude instances of the
application of the CDSOA from our consideration.
3.62 This approach is in line with the practice of ot her arbitrators. For instance, the arbitrator in
US – 1916 Act (EC) (Article 22.6 – US) considered that instances of application could be taken into
account in assessing nullification or impairment by a law as such.73
3.63 We also recall that, in reply to one of our questions 74, the United States referred to two cases,
US – Section 110(5) Copyright Act (Article 25.3) and EC – Hormones (US) (Article 22.6 – EC). In

70 United States oral statement, paras. 39-40.
71 Canada's written submission, paras. 42-46.
72 See Panel Report, paras. 7.35-7.39 and 8.1; Appellate Body Report, para. 256.
73 US – 1916 Act (EC) (Article 22.6 – US), para. 7.8.
74 Reply of the United States of 28 April 2004 (paras. 11 and 12) to question 12 of the Arbitrator of
21 April 2004, which reads as follows:

"Considering its reasoning in paragraphs 15 to 19 of its written submission and more generally its
position on nullification or impairment, could the United States give an example of a situation where a law as
such would cause more than "zero" nullification or impairment?"

those two cases, a law had been challenged as such. Nevertheless, the arbitrators determined the level
of nullification or impairment on the basis of an anal ysis of lost royalties in the first case and lost
trade in the second case.
3.64 We fail to see any meaningful difference between the US – Section 110(5) Copyright Act
(Article 25.3), the EC – Hormones (US) (Article 22.6 – EC) arbitrations and this arbitration. In these
two cases, the arbitrators relied, for all practical purposes, on the economic result of the application of
the law. In this case, Canada requests us to rely on disbursements made under the CDSOA to assess
the level of nullification or impairment it suffered. The only difference which may exist is that, under
the CDSOA, the United States' authorities are expect ed to implement the law through the application
of a number of administrative steps. The Unite d States seems to claim that, as a result, these are
"measures" separate from the CDSOA on which no fi nding was ever made. The difference, in our
view, is a matter of degree, not of nature.
3.65 As a result, we conclude that we are entitled, for the purpose of assessing the trade effect and,
thus, the level of nullification caused by the CDS OA to Canada, to take into account instances of
application of the CDSOA.
3.66 The second question raised by the United States is addressed in Section IV.B.3 below.
4. Approach to be followed by the Arbitrator in this case
3.67 Given our conclusion that the approach advo cated by Canada is not compatible with
Article XXIII of GATT 1994 and Article 22 of the DSU, and consistent with past arbitrations, it falls
to us to determine the approach we consider to be compatible.
3.68 We do not agree with the United States that nullific ation or impairment is to be limited in all
instances to the direct trade loss resulting from the violation. We agree with the Requesting Parties
that the terms "trade effect" are found neither in Article XXIII of GATT 1994, nor in Article 22 of the
DSU. Previous arbitrators' decisions based on direct trade impact are not binding precedents.
3.69 However, as already mentioned, the "trade ef fect" approach has been regularly applied in
other Article 22.6 arbitrations and seems to be generally accepted by Members as a correct
application of Article 22 of the DSU.
3.70 On that basis, we conclude that we should a pply an approach based on determining the trade
effect, on the Requesting Parties, of the violation by the United States of its WTO obligations through
the application of the CDSOA. Indeed, while the Requesting Parties contest the view of the United
States that nullification or impairment may only be assessed in relation to the trade effect of the
challenged measure and the conclusion that the actual trade effect of the CDSOA is "zero", they have
not convincingly argued that an approach based on the trade effect of the CDSOA could not be
applicable in this case.
3.71 In selecting the methodology to be applied in determining the level of nullification or
impairment suffered by Canada in this case, we noted the importance attached by the Requesting
Parties to the view that suspension of concessi ons or other obligations is intended to induce
compliance, and the view of the Requesting Parties that this purpose should gui de our determinations
under Article 22.7 of the DSU.
3.72
The concept of "inducing compliance" was first raised in the EC – Bananas III (US)
(Article 22.6 – EC)75 arbitration and has been referred to since in other arbitrations. However, it is not

75 EC – Bananas III (US) (Article 22.6 – US), para. 6.3.

expressly referred to in any part of the DSU and we are not persuaded that the object and purpose of
the DSU – or of the WTO Agreement – would suppor t an approach where the purpose of suspension
of concessions or other obligations pursuant to Artic le 22 would be exclusively to induce compliance.
Having regard to Articles 3.7 and 22.1 and 22.2 of the DSU as part of the context of Articles 22.4
and 22.7, we cannot exclude that inducing complian ce is part of the objectives behind suspension of
concessions or other obligations, but at most it can be only one of a number of purposes in authorizing
the suspension of concessions or other obligatio ns. By relying on "inducing compliance" as the
benchmark for the selection of the most appropriate a pproach we also run the risk of losing sight of
the requirement of Article 22.4 that the level of suspension be equivalent to the level of nullification
or impairment.
3.73 Moreover, we note from past arbitrations that, in all instances, arbitrators have quantified or
valued the benefit nullified or impaired. In the present case, both parties have also attempted to
quantify the level of nullification or impairment. Such quantification or valuation exercises show, in
our view, that even though each party relies on a radically different legal approach, the economic
rationales underlying these approaches seem to be ve ry close. We consider that, beyond the legal
argumentation of the Requesting Parties, their choice of the total disbursement made under the
CDSOA is ultimately a benchmark, which they exp ect to yield a higher level of nullification or
impairment than the more "classical" benchmark based on lost trade. All the more so as the United
States has taken the view that the level of nullifi cation or impairment caused by the CDSOA was in
fact "zero" in terms of direct trade loss. As we see it, the Requesting Parties in effect use the amount
of disbursements under the CDSOA as simply a proxy for the conduct of an economic analysis of the
impact of the CDSOA disbursements on their export s or, more generally, on the competitive situation
of the businesses concerned. Under those circumstances, we believe that our decision to rely on the
trade effect resulting from the violation to determin e the level of nullification or impairment does not,
in economic terms, significantly depart from the rationale of the Requesting Parties' approach.
3.74 We are also mindful that other arbitrators have taken a prudent approach by avoiding claims
that were "too remote", "too speculative" or "not meaningfully quantified".
76 We recall that parties
have also cautioned us against the risk of relying on overly speculative data.77
3.75 For this reason, we considered it inappropriate to try to apply a counterfactual based on a
relatively simple equation and simple parameters, as in EC – Hormones (US) (Article 22.6 – EC), EC
– Hormones (Canada) (Article 22.6 – EC) or EC – Bananas III (US) (Article 22.6 – EC). Rather ,
given the number of factors potentially influenc ing the eventual trade effect of the CDSOA
disbursements, it would be more appropriate to identify and apply an economic model reflecting those
factors and allowing us, on the basis of a clearly identifiable amount – the disbursements made under
the CDSOA – to assess the extent to which those payments could nu llify or impair benefits accruing
to the Requesting Parties.
3.76 To this end, we requested the parties to subm it data and relevant econom ic literature so as to
assess the feasibility of an economic model that w ould measure the extent to which disbursements
under the CDSOA affect exports from the Requesting Parties to the United States. 78 On the basis of
the elements available, we concluded that such a model was feasible and produced more credible
results than if we applied the total disbursement as a proxy for the level of nullification or impairment.
Indeed, while the model we have chosen to apply is based on a number of assumptions, we also note
that the evidence before us does not demonstrate th at using the total disbursement as a proxy for the

76 See, e.g., EC – Hormones (US) (Article 22.6 – EC) , para. 77; US – 1916 Act (EC) (Article 22.6 –
US), paras. 5.54 -5.57.
77 See, e.g. United States written submission, para. 40, Canada's written submission, para. 50.
78 See paras. 3.126-3.127 below.

level of nullification or impairment would produce a mo re credible result. Our analysis is described
in Section III.C; below.
3.77 We recognize that, in relying on an economic m odel in this arbitration, we may be breaking
new grounds. This impression may be correct to th e extent that we base our determinations on the
results of this model. However, we note that economic modelling has already been applied in the
US – FSC (Article 22.6 – US) arbitration. We are also mindful that applying economic models in
arbitrations under Article 22.6 of the DSU may make such proceedings more complex and costlier.
We acknowledge that economic analysis requires expe rtise that may not be readily available to all
WTO Members. We do not believe, however, that this should be a reason to deprive ourselves of a
means to reach a credible result through a transp arent process in complex cases such as this one.
Rather, we see the option of using economic mode ls in Article 22.6 arbitrations as creating an
opportunity to ensure full cooperation from the parties and, hence, more precise and credible results
where the alternative may be to choose between simplistic and perhaps irreconcilable approaches.
C. CALCULATION OF THE LEVEL OF NULLIFICATION OR IMPAIRMENT THROUGH AN ECONOMIC
MODEL
1. Introduction
3.78 As mentioned above, we consider that an appr opriate way to assess the trade effect of a law
operating, in economic terms, like a domestic subsidy 79 was to endeavour to establish an economic
model. This model, when applied to the facts of this case, would identify a coefficient which, when
multiplied by the amount of disbursements over a given period, would produce a figure corresponding
to a trade effect which could reasonably be deemed to correspond to the level of nullification or
impairment for that period.
3.79 We also noted that when establishing an economic model, we would need to address a
number of arguments made by the United States in relation, inter alia, to the calculation proposed by
the Requesting Parties: its own view that the level of nullification or impairment would, in fact, be
"zero"; the combined effect of offset payments and an anti-dumping or countervailing duty order; and
the effect of CDSOA payments vi s-à-vis the United States or foreign competitors not subject to
anti-dumping or countervailing duties. 80 These arguments are addressed in the relevant parts of this
section in relation to the determination of the amount of disbursements to be used in the application of
the model, together with the United States' argument s regarding the fact that the figures published by
the United States' authorities may either not be accurate or not definitive.81
2. Review of the approaches of the parties regarding economic models
(a) United States
3.80 The United States originally took the view that the trade effect of the CDSOA disbursements
can be estimated to be zero. 82 This position is grounded in the view that benefiting firms would not

79 We are mindful of the United States views that the CDSOA is a subsidy not found to cause any
adverse trade effect (United States written submission, paras. 62-65). We nonetheless note that the United
States does not object to a model which would rely on the price effect of CDSOA disbursements (see, e.g.,
Exhibit US-18, p. 2).
80 See United States written submission, para. 52.
81 See United States written submission, paras. 13, 14, 26 and 27.
82 The Arbitrator asked the United States to submit a model that would justify its claim that
nullification and impairment is "zero". The United States did not submit a model in response to this question,
but outlined the basic parameters of the Armington model, which was submitted at a later stage in the
proceedings. Instead, the United States argued that a formal m odel was not required, since in its view the facts

expend the CDSOA disbursements to enhance their co mmercial position. Instead, the funds would be
used elsewhere. The United States did not disagre e that modelling was appropriate in this case, but
because the input to the model would be zero, the output, or conclusion about trade effects would also
necessarily be zero.
83 The United States added that even if the firms concerned did use the funds to
enhance their competitive position, there would be a de minimis effect on output and hence on trade.
In other words, the United States considered that the pass-through effect of the government transfers,
i.e. the ad valorem effect of the transfers on the recipients' prices, would be zero or close to zero.
3.81 However, the United States ultimately acknow ledged that modelling could actually be done
with some precision and volunteered a possible model.84
3.82 The model proposed by the United States adopts a disaggregated approach to estimating trade
effects. Instead of treating the United States' ec onomy as a whole and estimating a single trade effect
number, it estimates the trade effect at the product level for each importer. These individual values
are then summed to obtain the total trade effect . The model proposed by the United States also
divides the countries in the world into three groups : the United States, WTO Members affected by the
CDSOA disbursements and other exporters to the Un ited States, thereby isolating the effects of the
CDSOA payments only on the WTO Members subj ect to active anti-dumping or countervailing duty
orders. The inputs required to run the model include:85
• A current market value share for each source of the products;
• An ad valorem measure of the CDSOA distribution that actually affected production;
• An estimate of the elasticity of substitutability as between products produced in the
United States and imports (the elasticity of substitution);
• An estimate of the price sensitivity of supply for each product (the elasticity of the
United States' supply, complaining party import supply, and rest-of-the-world import
supply); and
• An estimate of the market demand elasticity.

3.83 Estimates of the supply, demand and substitu tion elasticities were ta ken from various US
International Trade Commission reports. Suppl y elasticities for WTO Members with dumped or
subsidized exports into the United States were arbitrar ily set at 100 to reflect that they would not be
able to adjust the price of their product downwards.
86 Trade and production data for the model is
sourced from the Bureau of the Census, US Department of Commerce, and USITC investigations.87
3.84 The output of the model for each WTO Member affected by the CDSOA payments and each
industry is as follows:88
• "An estimate of the decrease in US domestic shipments"; and

are such that the CDSOA payments would not result in a ny increase in production. (United States replies to the
Arbitrator's questions of 21 April 2004, paras. 16-26).
83 United States replies to the Arbitrator's questions of 21 April 2004, para. 26.
84 In commenting on the view of the Requesting Parties that modelling would be "complex and
burdensome" and Chile's comment that modelling would be "tedious", the United States stated that:
"The fact that an exercise is complex, tedious, or even burdensome does not mean it can be
dispensed with."
Comments of the United States of 4 May 2004 on answers of the Requesting Parties to the questions of
the Arbitrator, para. 3.
85 Exhibit US-18.
86 Exhibit US-18.
87 Exhibit US-18
88 Exhibit US-18.

• "An estimate of changes in foreign trade part ner exports to the United States, specifically
breaking out the gain to the individual complaining party, the exemption of whose duty
payments from CDSOA served as the basis for the particular counter factual estimation."

3.85 While the model is straightforward and b ased on the standard literature in applied
international economics, implementation of the mode l by the United States in this case was not. The
United States made a number of assumptions, which in its view were specific to the current case.
These assumptions affect the input of the model, the values of the elasticities and the treatment of
unavailable data.
3.86 These are:
• ignoring cases that do not exceed the de minimis threshold advocated by the United States
in this arbitration;
• making certain assumptions about which payments affect production;
• making certain assumptions about the pass-through effect of payments.

3.87 The United States considers that only those payments that are above a de minimis level should
be analysed. Citing Article 6.1(a) of the SCM Agreement and Article 6.4(a) of the Agreement on
Agriculture, the United States argues that a 5 per cent de minimis threshold is appropriate.
89 I n
implementing the model, however, the United States assumes a 1 per cent de minimis level.
3.88 The United States also deducts certain payments, which it assumed did not affect
production.90
3.89 The United States further deducts payments ma de in respect of products for which the
anti-dumping or countervailing duty was revoked on the ground that the "nullification or impairment
should be measured in terms of the effect th e CDSOA has on producers/exporters subject to
antidumping or countervailing duty orders". 91 This point is further clarified in the United States'
statement that "a Member cannot suffer nullificatio n or impairment as a result of a non-permissible
specific action against dumping (or against a subsidy) if no order is in place and no duties can be
collected on that Member's products."
92
3.90 Only once the industries that meet the United States' definition of de minimis are identified
and the various deductions are calculated does the United States apply its assumption of the
proportion of disbursements that affect production. Its initial argument is that the pass-through figure
should be "zero", which implies that none of the CDSOA disbursements would have an affect on
trade. The United States provides four reasons for this assumption:
• the disbursements are untied, hence there is no requirement to expand production with
these payments93;
• there is no link between "qualifying expend itures" under the CDSOA and the expansion
of production;
• the unpredictability of the disbursements makes it difficult for beneficiary firms to rely on
the expenditures in a commercially meaningful way;

89 United States replies to the Arbitrator's second set of questions, para. 27.
90 Citing the example of a company called Torrington, which was sold to another company (Timken)
without the payments, the United States argues that these payments should be deducted, since they do not affect
production.
91 United States replies to the Arbitrator's second set of questions, para. 23.
92 United States replies to the Arbitrator's second set of questions, para. 24.
93 United States replies to the Arbitrator's second set of questions, paras. 5-7.

• offset payments reflect a small fraction of production, hence they cannot have a
discernable impact on trade.

3.91 However, in response to the Arbitrator's query on the validity of a zero pass-through value,
the United States indicated that a pass-throug h level of 25 per cent would be "reasonable".
94 I t
qualified this response by indicating that the econo mic literature did not point towards any specific
value. However, the United States cited a value of 75 per cent for a United States policy contingent
on export (the Domestic International Sales Cor poration programme), which was reported in an
academic study. 95 The United States also cites a study that concludes that 60 per cent of an
investment tax incentive was received by the recipients.96
3.92 The results of the United States' model as app lied according to its assumptions are outlined in
Table 1.
(b) Requesting Parties
3.93 The original position of the Requesting Parties was that modelling need not be considered by
the Arbitrator to determine the award. Inst ead, they argued that the value of the CDSOA
disbursements was a proxy for the minimum level of nullification or impairment caused by the
measure found to be illegal. The position of the Reques ting Parties is that the level of nullification or
impairment can be quantified on the basis of the va lue of the CDSOA payments; since their view is
that economic modelling of the trade effects in this case would be too difficult.97
3.94 However, in response to a question posed by th e Arbitrator regarding whether or not a model
for estimating the trade effects that meets their crite ria exists, the Requesting Parties submitted such a
model. Their model is based on the level of CDSO A payments, a gross measure of the elasticity of
substitution between domestic and imported products and the ratio of US manufacturing imports to
domestic shipments of US manufacturing industries.

94 United States replies to the Arbitrator's second set of questions, para. 13.
95 United States replies to the Arbitrator's second set of questions, para. 11.
96 United States replies to the Arbitrator's second set of questions, para. 12.
97 According to the Requesting Parties, "specific quantification of the trade effects of the CDSOA
would be an extremely complex and bu rdensome exercise. It would involve taking into account every payment
to every US producer, in respect of every product, now and in the future".

Table 1: Estimated Level of Nullification or Impairment Revised Pursuant to the Model Proposed by the United States

 2001 2002 2003
Country
 Model results
No production
data
adjustments
Total
nullification and
impairment
Model results
No production
data
adjustments
Total
nullification
and impairment
Model results
No production
data
adjustments
Total
nullification and
impairment
Brazil $0 $7 $7 $176,783 $0 $176,783 $124,264 $0 $124,264
Canada $342,357 $0 $342,357 $0 $0 $0 $0 $0 $0
Chile $0 $0 $0 $0 $0 $0 $0 $0 $0
EC $651,736 $147,474 $799,210 $154,538 $80,620 $235,158 $119,810 $102,176 $221,986
India $0 $336 $336 $85,584 $1,083 $86,667 $46,537 $935 $47,472
Japan $1,149,255 $23,442 $1,172,697 $1,061,395 $3 9,144 $1,100,539 $1,036,507 $46,484 $1,082,991
Korea $130,631 $6,684 $137,315 $52,041 $41,121 $93,162 $65,329 $31,461 $96,790
Mexico $0 $0 $0 $0 $0 $0 $0 $203 $203
 Total $2,273,979 $177,943 $2,451,922 $1,530,341 $161,968 $1,692,309 $1,392,447 $181,259 $1,573,706

Source: United States

3.95 The formal specification of the model proposed by the Requesting Parties, as submitted to the
Arbitrator, is:
98
Reduction in imports () ⎟⎟
⎠
⎞
⎜⎜
⎝
⎛
∆
⎟
⎟
⎟
⎟
⎠
⎞
⎜
⎜
⎜
⎜
⎝
⎛
∆
∆
∆
= QP
MPQP
P
P
MM
q
m
q
q
q
*** (1)

where,
M = volume of imports
∆ M = change in the volume of imports
Pm = the price of imports
Q = the volume of domestic shipments
P
q = the price of domestic goods
qP∆ = change in the price of domestic goods

3.96 The Requesting Parties further simplify this e xpression by reducing it to the following three
components:
• the elasticity of substitution (η), which is the first term and can be expressed as:
⎟
⎟
⎟
⎟
⎠
⎞
⎜
⎜
⎜
⎜
⎝
⎛
∆
∆
∆
=
q
q
P
P
MM
η (2)

• the total value of the payments expressed as a margin of the price reduction on domestic
production financed by payments (S), the second term in the equation and can be expressed
as: QPS q *∆= (3)

• the ratio of the value of imports to the value of domestic shipments in the markets in question:
(R), the third term in the equation and can be expressed as ⎟⎟
⎠
⎞
⎜⎜
⎝
⎛
= QP
MPR
q
m (4)

3.97 Taken together, the model of the Requesting Parties as expressed by equation (1) can be
presented as the product of the above three variables (equations (2)-(4)).

Reduction in imports RS **η= (5)

3.98 The Requesting Parties operationalize their m odel for the year 2002 with data from public
sources. For the elasticity of substitution, they adopt the highest elasticity in the classification of
sectors used by the Global Trade Analysis Project of 5.2. 99 They argue that this is appropriate since
"the kinds of products that are typically subject to anti-dumping and countervailing duties tend to be

98 Box 1 of the joint replies of the Requesting Pa rties to the questions of the Arbitrator, dated
28 April 2004.
99 See joint replies of the Requesting Parties to th e questions of the Arbitrator of 21 April 2004,
para. 36.

commodities and commoditised manufactured goods th at compete under conditions much closer to
perfect competition".100 They further argue that:
"elasticities of substitution specific to the products benefiting from the CDSOA
payments would be higher than the aggreg ated average GTAP or NAIC data because
CDSOA disbursements typically relate to commodities and commoditised
manufactured products, for which preference of buyers is largely determined by price.
Moreover, it is generally acknowledged in the economic literature that the more
disaggregate the sample the higher the estimated substitution elasticity. Therefore the
Requesting Parties consider that an elastic ity drawn from the upper end of the GTAP
range (5.2) is justified as typical degree of price sensitivity".101
3.99 In addition to the homogeneity of products as implied by the assumption of commoditized
manufactured products, the Requesting Parties s ubmit that elasticity values should be taken from
long-run estimates and not short-run estimates. They note that these estimates are "on average, twice
as large as short-run elasticities".102
3.100 Data on domestic shipments are sourced fro m public sources. The Requesting Parties
estimate that in the year 2002 the ratio of imports to domestic production was 0.295.
3.101 Using total payments for 2002 of US$329 million, the Requesting Parties, therefore, conclude
that the total trade effect of the CDSOA progra mme is US$505 million. In simple terms, they
conclude that for the year 2002 the trade effect coefficient would be 1.54 times the level of
disbursements. At this point we should note that this coefficient is independent of the value of
disbursements. It depends only on the assumed valu e of the elasticity of substitution and the import
penetration ratio. Changes in either one of these values will change the overall value of the
coefficient.
3.102 We also recall that, in commenting on the m odel submitted by the Requesting Parties, the
United States observed that the Requesting Parties include the amount of all CDSOA offset payments.
This is equivalent to assuming that every CD SOA dollar disbursed by the United States under the
CDSOA would be put towards reducing the price of domestic products (i.e. pass-through effect). The
United States also notes that an aggregate measure of import penetration is used as opposed to a
measure specific to those industries where there is an incidence of CDSOA payments. In addition to
these criticisms, the United States not es that the Requesting Parties u sed the highest elasticity value
available.
3. Analysis of the Arbitrator
(a) Comparison of the models
3.103 We note at the outset that the modelling approaches of the parties differ in terms of their level
of aggregation and also in terms of their specification.
3.104 The model proposed by the Requesting Parties is aggregated and contains two terms in
addition to the level of disbursements. Certai n known elements of the CDSOA programme are not

100 Ibid.
101 Joint replies of the Requesting Parties to the second set of questions from the Arbitrator,
7 June 2004, para. 6.
102 Comments of the Requesting Parties on the replie s of the United States to the second set of
questions from the Arbitrator, page 14.

taken into account, such as the industry distribution of the payments and the fact that one variable in
their computation, the import penetration ratio, can vary significantly across industries.
3.105 We also note that the Requesting Parties have not explained the basis on which they chose the
highest value for the elasticity of substitution.
3.106 The model proposed by the United States, while qualitatively similar to that of the Requesting
Parties, is slightly more sophisticated. The e ffect of a CDSOA disbursement depends upon a number
of parameters beyond the elastic ity of substitution between domest ic and imported products. In
particular, the response of domestic and foreign firms to any change in the domestic price plays a role
in determining the overall trade effect.
3.107 The level of sophistication and the heavy data requirements of this model prevented the
United States from applying it at the desired level of detail. We note that of the 66 country-product-
year data points, the United States applied its model to 21 such points.
103 This indicates, roughly, that
estimation of the CDSOA disbursements could only be done for around a third of the cases. The rest
of the cases would require the use of proxy data. In our view, such a heavy reliance on proxy data
would cast doubt on the reliability of that model. Furthermore, it would seem to us that the use of
proxy data is open to the same criticisms as t hose made by the United States with respect to the
Requesting Parties' model in terms of its degree of aggregation.
3.108 Despite the differences between the parties as to the appropriate model to be used, the two
models submitted have qualitativel y similar characteristics. Both multiply an assumed level of
disbursements by a factor, or coefficient, to arri ve at the total trade effect. In the case of the
Requesting Parties, this factor is 1.54. In the case of the United States, this factor would appear to be
on a product and importer basis for each year as illustrate d in Table 2. The range of coefficients as
estimated by the United States for the seven products for which they have data is 0.27 to 1.41.
3.109 Table 2 illustrates that, with product-specific data , the aggregate trade effect coefficient could
exceed 1. At the same time, it also highlights the different effects that one could obtain at different
levels of disaggregation.

103 An estimate for a given product, in a given year for a given exporter is considered to be one
observation. There are considerably more periods of observations, however, the United States chose not to
submit the data for those observations that did not meet its assumption of de minimis effect.

Table 2: Aggregate Trade Effect Coefficient for Products Estimated by the United States

Product Exporter Year Aggregate trade
effect coefficient
Alloy magnesium Canada 2001 1.24
Ball bearings EC, Japan 2001 0.77
Ball bearings EC, Japan 2002 0.74
Ball bearings EC, Japan 2003 0.70
Pasta EC, Japan 2001 0.27
Preserved mushrooms India 2002 0.82
Preserved mushrooms India 2003 0.86
Silicon metal Brazil 2002 1.24
Silicon metal Brazil 2003 1.24
Stainless steel butt-welded pipe fittings EC, Japan, Republic of
Korea
2002 0.67
Stainless steel butt-welded pipe fittings EC, Japan, Republic of
Korea
2003 0.91
Top of the stove stainless steel cookware Republic of Korea 2001 1.39
Top of the stove stainless steel cookware Republic of Korea 2002 1.40
Top of the stove stainless steel cookware Republic of Korea 2003 1.41
Source: Estimated using data supplied by the United Stat es. The coefficient is calculated for each product,
exporter and year by dividing the estimated total reduction in trade by the value of the disbursement. The
numerator is the sum of the loss in imports of exporters under active orders and those not under active orders.

3.110 In reviewing the model proposed by the United Stat es, we note that in fact the coefficient is
specific to each industry and is independent of th e level of the disbursement. Hence, for the ball-
bearing industry the aggregate trade effects for the European Communities and Japan are identical
(Table 2). The absolute amount of the trade effect varies according to their share of exports to the
United States in the ball-bearing industry.
3.111 Thus, the differences in modelling have more to do with differences in the assumptions about
the values of the elasticities and the pass-through values used rather than with the model itself, or the
level of aggregation. For example, as illustrated by the Requesting Parties, a ceteris paribus doubling
of the elasticity of substitution can have a substantiv e impact on the overall trade effect. Similarly, an
assumption that only 50 per cent of a given CDSOA di sbursement will have an impact on output, will
necessarily reduce any estimate of the trade effect by 50 per cent.
(b) Choosing an appropriate model
3.112 The previous sections presented the appro aches to economic modelling submitted by the
parties and a number of shortcomings we identified w ith both approaches. In general, we considered
the approach of the Requesting Parties to be too aggregated, hence not specific enough to this case.
While the model specification proposed by the Unite d States is disaggregated and well specified, we
concluded that there is insufficient data to run that model with any degree of accuracy.
3.113 Our preference would have been to employ a model endorsed by all parties, and we gave
ample opportunity to the parties to try and find common ground on this ques tion. Failing this, our
preference would have been for the disaggregated mode l proposed by the United States. However, as
mentioned above, the United States failed to provide sufficient data to employ such a model, despite it
being in the United States' inter est to do so. Moreover, the United States decided to apply a
de minimis threshold for assessed trade impacts. The result was that the United States' model could
not be implemented independe ntly. This left us with the option of either accepting or rejecting the

United States' model in its entirety. Our decision is to reject the United States' model in favour of a
modified version of the model proposed by the Requesting Parties.
3.114 We have two principal reasons for taking this deci sion. The first is the lack of available data
to implement the United States' model. As we have noted before, relevant data was available for only
a third of the samples proposed by the United St ates and the United States did not provide any
indication as to whether or not additional data would be made available. Our second reason is that the
only objections the United States had about the Reques ting Parties' model concerned the value of the
parameters used in the model and the level of aggr egation. We agree with the Requesting Parties in
their assessment of the United States' view on thei r submitted model that the United States "does not
critique the economic theory supporting the model, but argues that the parame ter values used in the
model are inappropriate".
104 This implies that if due account is taken of the legitimate concern of both
sides regarding the variance in the values of the pa rameters, then the model of the Requesting Parties
could be used to estimate the trade effect of the measure in question.
3.115 A basic economic model to derive a coefficient for the trade effects of disbursements
operating as subsidies can be described as the product of four variables: the value of the subsidy, a
measure of the ad valorem price reduction caused by the CDSOA disbursements (i.e., "pass-
through"), a substitution elasticity of imports, and im port penetration. The b asic relationship of the
trade effect can be expressed as follows:
Trade effect = (value of disbursements)*[(pass-through)* (import penetration)*(elasticity of
substitution)]

3.116 The term in the square brackets can be define d as a trade effect coefficient. For a given
expenditure of CDSOA disbursements that is deemed to affect trade, the product of that expenditure
and the coefficient provides the overall trade effect.
3.117 The above expression is identical to the m odel proposed by the Requesting Parties as
presented in equation (5). 105 It differs only in the addition of a separate multiplicative term to reflect
the pass-through effect of the disbursements on produc tion. In the Requesting Parties' model, this
term was implicitly assigned a value of one. It can be rewritten as:
Reduction in imports RS ***ηα= (6)

Where, α, is a parameter which reflect the value of the pass through effect of the disbursement.

3.118 As noted earlier and as pointed out by the United States, the model as specified in
equation (5) and the variant as specified in equation (6 ) is too aggregated to take into account some of
the specific aspects of the CDSOA scheme. Chart 1 illustrates how the payments vary across
industries at the 3-digit level of the North American Industry Classification. The issue more generally
is that while the CDSOA programme is technica lly open to any sector, and hence potentially has
economy-wide effects, in practice the use of the programme, and hence the disbursements, are quite
concentrated. While 67 per cent of the CDSOA dis bursements in 2002 have been identified by the
United States as either being miscellaneous manufactur ing or non-classifiable, in fact a review of the
specific recipient industries identified allows a more precise breakout. In particular, the majority of
the disbursements to "miscellaneous manufacturing" went to producers of ball and roller bearings, and
the majority of the disbursements identified by the United States as "non-classifiable" went to

104 Requesting Parties comments of 14 June 2004 on the United States replies to the second set of
105 See Box 1 of the joint replies of the Requesting Parties to questions from the Arbitrator, dated
28 April 2004.

companies in the electronics, machinery and primary and fabricated metals industries. In addition, the
United States identifies a further 21 per cent of 2002 disbursements as going to the primary and
fabricated metal industries. The comparable figures for 2001 are 66 per cent for "miscellaneous
manufacturing and not elsewhere specified" (with a si milar distribution to that in 2002) and 20 per
cent classified as primary and fabricated metal. Ch art 1 also highlights the fact that the inter-industry
distribution of payments can also vary over time.
Chart 1: Distribution of CDSOA Disbursements by 3-Digit

North American Industry Classification, 2001-2003

0%
10%
20%
30%
40%
50%
60%
Mi
sc. manu
factu
res
n.e.s.
Primary metal Food
Fabricated metal
Chemicals
Non
 metallic min
eral
Tran
sport equ
ipment
Plastics and
 rubber Paper
Fish p
rod
ucts
Non el
ectrical machinary
Agriculture
Textiles m
ill produ
cts
Textiles and
 fabri
cs
Wo
od p
rod
ucts
Furn
iture and
 fixtu
res
Per cent of annual payment
2001
2002
2003

3.119 We account for the industry distribution variation of the CDSOA payments by calculating the
trade effects at the industry level and then aggregati ng the result. This approach is broadly similar to
the approach of the United States, which is to calculate the trade effects at th e detailed product level.
Even though this approach is a practical way to proceed, we did not use the United States approach
due to some shortcomings in the implementation of the model. The United States identified only
18 product categories out of 71 that met their criteria for a de minimis trade effect. Of these
18 categories, complete data was available for only 7 of the categories. In essence, the United States
made assumptions in addition to those required to model the trade effects in order to arrive at a result.
3.120 While it may be that, had the United States modelled all 71 industries by not introducing the
de minimis threshold, a more reliable estimate could have been put forward, we are not, however,
convinced by that argument. When the 18 categorie s analysed by the United States are multiplied by
the relevant year and the relevant requesting party, we obtain 66 country-year-product data points that
are analysed. Of these 66, complete data to r un the fully specified model proposed by the United
States was available for only 21 points. This imp lies that the United States fully specified model
could only be used for a third of the overall cases that needed to be estimated.
3.121 The approach we are adopting, while disaggreg ated compared to the Requesting Parties'
approach, but aggregated when compared to the United States' approach, has less intensive data

requirements. Instead of using the detailed product level data, we adopt the 3-digit North American
Industry Classification for our model. Therefore, eac h of the parameters of the model requires data at
that level and both parties were able to submit all the data necessary to run the model. The trade
effect expression is, therefore, applied at each industr y level for each year to estimate the trade effect
of each industry. The sum of these trade effects is then divided by the total annual disbursements for
the year to arrive at a trade effect coefficient for that year. This coefficient, by definition, is a
weighted average of the CDSOA payments.
3.122 We have also taken into account the reservati ons of the United States in adopting this
approach. The United States underlines four reser vations towards this approach: (i) the total
payments should not be used; (ii) the total price re duction should not be equivale nt to the size of the
payments; (iii) industry-specific data should be used; and (iv) greater care should be taken in choosing
appropriate elasticity values instead of arbitrarily choosing the highest value. The manner in which
these are taken into account is explained later in this section. At this point, we wish simply to recall
that the United States' reservations are with how th e model is implemented, not with the specification
of the model per se.
3.123 Our approach is not immune from data difficulti es. We are in agreement with the views of
the arbitrators in US – FSC (Article 22.6 – US) regarding the reliability of economic modelling when
they stated that they were "mindful that the task of evaluating the trade effects of the scheme cannot
be accomplished with mathematical precision".
106 Their statement reflects the fact that there can be a
genuine debate about an appropria te model to be adopted and about the various assumptions required
to implement any particular model. We are also in agreement with them when they state that
"economic science does allow us to consider a range of possible trade effects with a certain degree of
confidence".107 We would like to make it clear that we also share the reservations expressed by the
parties to this arbitration about the degree of precisi on that may be attached to the results of economic
modelling. The next section addresses some of these concerns and also presents the various
parameters that we must consider.
3.124 However, before moving on, we would like to re iterate that, as Arbitrator, we have been
obliged to accept the intrinsic difficu lties attached to the use of an economic model. However, such
difficulties should not be confused with those resulti ng from the failure of the parties to supply data,
where those parties are generally the source of the relevant information. While the first type of
difficulty (the intrinsic difficulties attached to the use of an economic model) is one of the elements
arbitrators must consider in deciding whether to apply an economic model, the second type of
difficulty (that resulting from the failure of the par ties to supply data) should not be part of that
consideration. We therefore re main convinced that it is appropr iate to rely on the information
available when the arbitrator is of the view that an economic mode l would be the most effective way
of calculating the level of nullification or impairme nt and one or more par ties do not fully cooperate
with the arbitrator in providing data and do not s ubmit convincing reasons for not doing so. In other
words, we consider that we are expected to produ ce, at a minimum, an outcome which is robust in a
lowest common denominator sense, but which is none theless, in our opinion, a fair measure of the
level of nullification or impairment.
4. Data issues
(a) Introduction
3.125 A complete explanation of the approach we have adopted is appended as Annex B. This
section addresses the data issues related to economic modelling in this case. It discusses the value of

107 Ibid.

the payments, the pass-through effect and the elastic ity of substitution. It does not discuss import
penetration, since there is only one source for this data, the United States' Government. We therefore
used the figures provided by the United States regarding import penetration.
3.126 Another issue that needs to be addressed in advance of parameterizing the model is the
relevant market to be examined. The Requesting Parties claim that the CDSOA disbursements have
an impact on their exports to the United Stat es and also their exports to other markets. 108 Hence, in
their view, any analysis of trade effects should take into account the trade effects on the world
market.
3.127 We consider that neither the approach advocat ed by the Requesting Parties, nor the model
they proposed would allow us to assess the trade impact of CDSOA disbursements on markets outside
the United States. In our opinion, any quantification of this effect would have to heavily rely on
speculations and we recall that parties agree that we should not address effects that are too remote or
speculative. We are also of the view that, having re gard to the nature of the measure at issue, the
trade effect of any disbursement to US companies that have supported an anti-dumping or
countervailing duty investigation against imports into the United States is more likely to be on the US
market than abroad. We therefore limit our analys is to the imports into the United States that are
displaced as a result of CDSOA disbursements.
(b) Value of payments
3.128 The Requesting Parties have claimed that, when modelling the trade effects of the
disbursements, the total value of all disbursements should be used. In contrast, the United States
claims that certain deductions must be applie d prior to determining the relevant value of
disbursements for modelling purposes.
3.129 In our view, a decision on this issue is not required for modelling purposes. The reason for
this is based on the difference between the absolute trade effect and the relative trade effect of a
CDSOA disbursement. Unquestionably, a higher va lue of disbursements used to model the trade
effect will yield a higher absolute trade effect valu e. However, the model we propose is based on the
concept of a trade effect coefficient (square brackets in our expression),
109 which is independent of the
value of the disbursement.
3.130 In fact, the model proposed by the United States, the so called Armington model, has a similar
characteristic. As noted above, the United States has only furnished the Arbitrator with a fully
specified model for seven product categories. Howeve r, in cases where the model is applied in the
same industry to different WTO Members, the rela tive trade effect is always identical. Only the
absolute trade effect varies. For example, take the impact of CDSOA payments on ball bearing
imports from the European Communities and Japan in the year 2001. In both cases the aggregate
trade effect, according to the United States' model, is 0.77.
110 Similarly, for the years 2002 and 2003
the aggregate trade effects are, respectively, 0.74 and 0.7. Therefore, despite the fact that the
payments attributable to the European Communities and Japan are different, the total trade effect in
relative terms is identical.
3.131 We recall the United States' arguments that the value of disbursements should be adjusted to
take into account administrative errors, reimburse ments, revoked anti-dumping or countervailing duty

108 Joint replies of the Requesting Parties to the se cond set of written questions from the Arbitrator,
7 June 2004, paras. 13-14.
109 See para. 3.115 above.
110 Aggregate trade effects are defined as the to tal imports reduced as a result of the CDSOA
disbursements.

orders. We consider that we should, as a matter of transparency, rely on figures published by the
United States' authorities when it comes to assess the value of CDSOA disbursements. As a result,
we will disregard administrative errors that have not been corrected at the ti me of the publication of
the relevant figures.
111 Likewise, we see no reason to adjust the figures published by the
United States' authorities because reimbursements ha ve been requested but the requests have not yet
been finally settled.112
3.132 With respect to the United States' argument that disbursements relating to revoked orders
should be deducted, we note that, under the CDS OA, payments made in, say, 2004, actually
correspond to revenue collected in 2003. If an order was revoked on imports from a given Requesting
Party in 2004, this has no influence on the fact th at offset payments in 2003 corresponded to duties
collected at the time when the order was in place. Under these circumstances, we see no reason to
exclude payments made in a given year, even though in that year no duty may have been collected due
to the revocation of an existing order, if the pa yments are based on duties collected while the order
was in place. We believe this interpretation to be consistent with the Panel and Appellate Body
findings in this case.
3.133 As a result, we decide to use the amount of disbursements published by the United States,
without any adjustment.
3.134 The United States has also raised the issue of de minimis deductions. We do not have any
legal guidance as to why such deductions should be made in these proceedings. In making the
deductions, the United States referred to two prov isions of the Anti-Dumping Agreement and the
SCM Agreement that we do not cons ider relevant in an arbitrati on pursuant to Article 22.6 of the
DSU. Furthermore, we do not see any rationa le for making the deductions on economic grounds. The
purpose of an economic model is to estimate the trad e effect of the measure. Any result derived from
that model should then be assessed in terms of its relevance. Any methodology that a priori excludes
certain industries will automatically bias the end resu lt. In any case, assuming that the final result of
any economic model is that the total trade effe ct is 1 per cent of the value of the CDSOA
disbursement, then we do not see any grounds, lega l or economic, to round that value down to zero
and issue an award of "zero".
(c) Elasticity of substitution
3.135 The views of the parties also differ on the appr opriate value of the elasticity of substitution to
be used in modelling, although they are all in agr eement that it is possible to calculate values at the
3-digit NAIC level.113 The Requesting Parties submitted a set of elasticities at that level. The United
States did not submit these elasticities when requested , and failed to convincingly contest the validity
of the values submitted by the Requesting Parties. As a result, we used in our model the values
submitted by the Requesting Parties.
3.136 In recognition of the fact that different aggreg ation methodologies exist, we decided to vary
the elasticity values submitted by the Requesting Parties by 20 per cent. Therefore, three different
sets of simulations are performed; one using the su bmitted elasticities and one each for values that are
20 per cent lower and 20 per cent higher than these elasticities.

111 We also note the possibility that such correction may be reflected in the figures subsequently
published.
112 See United States written submission, para. 13.
113 Exhibit JR-15.

(d) Pass-through
3.137 While the concept of pass-through is generally referred to in the economic literature as the
extent to which exchange rate changes affect dom estic prices, in this case we use the concept in a
similar fashion to that used by the arbitrator in the US – FSC (Article 22.6 – US) case. The arbitrators
in that case noted, in the context of an export subsidy that:
"[P]ass through relates to the degree to wh ich a company uses a subsidy it receives to
lower the price of the product that it exports. At one extreme the company may
choose to apply the full amount of the subs idy to the price of its products, thereby
lowering its price. At the other, it may choose not to lower the price of the
product."
114
3.138 Therefore, pass-through, in the context of the case before us, is the extent to which a CDSOA
disbursement will be applied to reducing the price of a beneficiary firm's products. A 100 per cent
pass-through assumption implies an application of the total amount, whereas a zero assumption
implies that none will be so employed.
3.139 The United States' position that the pass-through f actor is zero is highly unrealistic. A factor
of zero would presume that no recipient of a CDSO A payment would ever use the funds in any way
that could have a price effect. While this may be the case for some firms, it would seem impossible
that it would always and inevitably be the case for al l firms, since as a basic rationale of economics,
firms are expected to use their money efficiently, an d at least some will use that money to lower their
prices.
3.140 The Requesting Parties' argument of full pass-th rough is based on the presumption that every
firm receiving CDSOA payments in every case woul d fully use those payments to finance price
reductions on the products subject to the anti-dumping or countervailing duty order in question. This
would seem to be quite unlikely in reality. In particular, while some firms may use CDSOA receipts
in this way, the progamme leaves re cipients free to use the funds as they wish. Furthermore, many or
most firms producing a product that is subject to an anti-dumping or countervailing duty order also
produce other products (often, many other products). Thus, it is possible for CDSOA benefits to be
applied to products that are not subject to orders. In addition, some recipient firms may use their
payments to train their workers, to upgrade their t echnology or machinery, or to expand their capacity
and/or production. While using the funds in these so rts of ways clearly will have supply side effects
that may have eventual consequential effects on pr ices, these price effects will be inter-temporal.
Finally, some firms may, as the United States argues, not use the funds in any way that would have
price effects.
3.141 In order to identify a suitable value for the pass-through coefficient we sought supplemental
submissions and guidance from the parties.
115 On the one hand, the United States responded that a
study of their Domestic International Sales Cor poration programme had iden tified a pass-through of
that export subsidy of 75 per cent of the payment, but expressed the belief that "a pass-through of 25
per cent is reasonable". 116 This statement was not supported by any methodology or based on any
factual evidence. On the other hand, the Requesti ng Parties did not alter their position that the only
reliable pass-through is 100 per cent.
3.142 In the absence of precise information on the va lue of the pass-through, we adopt the same
approach as we adopted for the value of the elastic ity of substitution; instead of using one specific

114 US – FSC (Article 22.6 – US), footnote 97.
115 Second set of questions from the Arbitrator, dated 28 May 2004.
116 United States replies to the second set of questions of the Arbitrator, para. 13.

value we have used the range of 25 per cent to 100 per cent derived from the comments of the parties.
The lower point of the range is provided by the United States, whereas the 100 per cent assumption is
based, as we stated above, on the assumption that a firm has every incentive to use the funds in a
commercially meaningful way. We acknowledge that 100 per cent pass-through is, in practice, not
realistic for the reasons mentioned above, and we do not wish to give any credit to the Requesting
Parties for not having justified their position that th e pass-through is 100 per cent. However, we were
not provided with any better information allowing us to apply another percentage as the upper end of
our range and we are intuitively of the view that, if the upper end of the range is not 100 per cent, it is
probably very close to that percentage.
5. Application of the model
3.143 We now proceed to apply the model. Tabl e 3 summarizes our results for the range of
assumed elasticities of substitution and for a range of assumed pass-through values for 2001, 2002
and 2003. For each year we have 12 values, giving us 36 values in all. At the outset we note that the
range for 2003 differs from the ranges for the other tw o years. This arises due to the change in the
industry distributions for that year (see Chart 1 above). The yearly change in the industry distribution
is also one of the reasons why we use an averag e based on 2001-2003, even though the United States
was not required to bring its legislation into conf ormity with its WTO obligations until 27 December
2003.
3.144 Since our approach is based on assigning a single value of a trade effect coefficient we need a
methodology to reduce the 36 estimates to a single value. Since we have no guidance from the
literature or from the submissions of the parties, we have decided to take for each year, the average of
the middle two rows and the middle column and aver age these three values. In doing so, we obtain a
value of 0.68 for 2001, 0.78 for 2002 and 0.70 for 2003 and an overall value of 0.72.
3.145 The United States contests the right of the Reques ting Parties to "retaliate on behalf of other
Members" and we now proceed to address how this point is taken into account in our modelling. Our
core rationale is that the trade effect of the CDSOA measure can be estimated to be the nullification or
impairment that the Requesting Parties have suffe red as a result of the measure having not been
withdrawn. Based on our analysis, we have estimat ed that the trade effect coefficient of the
disbursements can be estimated to be 0.72. Th erefore, the total annual trade effect of the
disbursements, taking an average of the disbur sements over the years 2001-2003, is US$136,943,784
based on total disbursements on Requesting Par ties products of US$190,199, 701.02. Our remaining
task is to allocate this total trade effect amongst th e Requesting Parties. One possibility is to use the
aggregate share of total imports for each Request ing Party. This, however, has an obvious bias,
especially due to the industry concentration of the di sbursements as discussed earlier. More detailed
trade data could circumvent the problem of industr y concentration, but, in our view, this is also
problematic, due to the fact that the trade data w ould be biased since they reflect import values when
the anti-dumping and countervailing duties were in place.
3.146 In our view, a better measure is based on the distribution of CDSOA payments, which is in
turn based on aggregate duty collections on impor ts of products subject to anti-dumping duty or
countervailing duty orders, but which can be analysed to determine the distribution of those imports
amongst the various exporting countries. From this we may conclude that a WTO Member's share of
the total disbursements is a better indicator of th e share of their exports that will be lost in
consequence of the disbursement than the aggregat e share of imports. Therefore, we decide to
allocate the total trade effect amongst the Request ing Parties on the basis of the share of CDSOA
disbursements attributable to duties collected on their respective exports. In doing so, we note that the
level of nullification or impairment will not ex ceed, for each Requesting Party, the level of
nullification or impairment that results from the disb ursements relating to that party's exports subject
to anti-dumping or countervailing duty orders.

Table 3: Summary of Trade Effect Coefficient Values by Elasticity
and Pass-Through, 2001-2003

2001
 Elasticity values
Pass through Low Medium High
25 0.22 0.27 0.33
50 0.43 0.54 0.65
75 0.65 0.81 0.98
100 0.87 1.09 1.30
2002
 Elasticity values
Pass through Low Medium High
25 0.25 0.31 0.37
50 0.50 0.62 0.74
75 0.74 0.93 1.12
100 0.99 1.24 1.49
2003
 Elasticity values
Pass through Low Medium High
25 0.22 0.28 0.34
50 0.45 0.56 0.67
75 0.67 0.84 1.01
100 0.89 1.12 1.34

D. CONCLUSION: LEVEL OF NULLIFICATION OR IMPAIRMENT
3.147 As mentioned above, the purpose of the developm ent of an economic model in this case was
to define a coefficient by which future disbur sements under the CDSOA would be multiplied to reach
a value of trade effect. In line with past arbitra tions, we consider this trade effect to represent the
level of nullification or impairment suffered by Canada.
3.148 We note that this solution is hybrid to the extent that it combines a fixed coefficient calculated
on the basis of actual disbursement patterns over a particular period of time – in this case 3 years 117,
with variable amounts of future disbursements. We also acknowledge that this coefficient is based on
past disbursements (2001-2003) which may reflect ne ither the amount nor the categories of products
which will be subject to anti-dumping or co untervailing duty orders and lead to CDSOA
disbursements in the future. We nevertheless note that this approach is consistent with past
arbitrations where representative periods where used to determine volumes and prices of exports 118 in
order to calculate levels of nullification or impairme nt and levels of suspension fixed once and for all.
It is also consistent with the practice under Ar ticle XIII of GATT 1947 an d 1994 for allocation of
quotas or tariff quotas.
3.149 As a result we conclude that: the level of nu llification or impairment in this case may be
deemed to correspond, for Canada and for a given year, to the following:

117 The reasons for using a three-year period are explained in more detail in Annex B, para. 38.
118 EC – Hormones (Canada) (Article 22.6 – EC), paras. 57-61.

Amount of disbursements under CDSOA for the most recent year
119 for which data are
available relating to anti-dumping or counterva iling duties paid on imports from Canada at
that time, as published by the United States' authorities.
multiplied by
0.72
IV. EQUIVALENCE OF THE LEVEL OF SUSPENSION OF CONCESSIONS OR
OTHER OBLIGATIONS WITH THE LEVEL OF NULLIFICATION OR
IMPAIRMENT
A. I
SSUES RAISED BY THE UNITED STATES IN RELATION TO THE LEVEL OF SUSPENSION OF
CONCESSIONS OR OTHER OBLIGATIONS PROPOSED BY CANADA
4.1 The United States has argued, in relati on to Canada's request for suspension 120, that Canada
has failed to specify the level of suspension of con cessions or other obligations in a way that allows
the Arbitrator to determine equivalence. The United States also claims that other features of Canada's
request are not compatible with Article 22 of th e DSU. The United States considers that Canada's
request to collect additional duties based on o ffset payments places no limits on the level of
suspension proposed. It also considers that Canada should not be allowed to, as the United States puts
it, "retaliate for other Members". Finally, Canada should not be allowed to impose a variable level of
suspension each year.
4.2 We have already addressed the question of whether Canada's request was sufficiently specific
in order to allow the United States to fully exerci se its rights under Article 22.6 of the DSU. Our
conclusions are found in Section II.B.4 above.
4.3 In the previous section, we concluded that Ca nada's approach based on the premise that a
violation was a form of nullification or impairment – thus justifying countermeasures equivalent to
the amount of disbursements under the CDSOA – was not supported by the DSU. However, this does
not ipso facto render Canada's proposed suspension invalid. The issue before us now is to what extent
Canada's request for suspension remains equivalent to the level of nullification or impairment as we
have decided to determine it (i.e., in terms of trade e ffect). This issue is addressed in relation to the
following features of Canada's request, which are challenged by the United States:
(a) Suspension of concessions or other obligations expressed as a duty on an
undetermined quantity of trade rather than as a suspension of concessions and tariff
surcharges on a determined value of trade;
(b) Suspension of concessions or other obligations by some of the Requesting Parties so
as to cover the total amount of disbursements under the CDSOA; and
(c) Determination of a variable level of suspension of concessions or other obligations.
4.4 In doing so, we are mindful that, pursuant to Article 22.7 of the DSU, we should not examine
the nature of the concessions to be suspended.

119 We assume that the United States will continue to publish the amount of disbursements under the
CDSOA on a yearly basis.
120 Canada's request is described in paras. 1.5-1.6 above.

B. THE LEVEL OF SUSPENSION OF CONCESSIONS OR OTHER OBLIGATIONS DETERMINED BY THE
ARBITRATOR TO BE EQUIVALENT TO THE LEVEL OF NULLIFICATION OR IMPAIRMENT
1. Suspension of concessions or other obligatio ns expressed as a duty on an undetermined
quantity of trade rather than as a suspension of concessions on a determined value of
trade
(a) Arguments of the parties
(i) United States
4.5 The United States contests the Requesting Par ties' intention to impose additional import
duties on US products which rate will be set so as to collect, over one year, additional duties
equivalent to certain offset payments under th e CDSOA. The United States contends that the
Requesting Parties set no limits on the amount of tr ade that would be covered by their request.
Depending on the amount of duty, the impact on United States exports could exceed by many
multiples any impact that the CDSOA may have on exports from the Requesting Parties. The
Requesting Parties' suspension proposal stands in star k contrast to the proposals that arbitrators have
approved in previous Article 22.6 proceedings.
121 Since equivalence between the amount of
disbursement and the duty that the Requesting Parti es intend to collect does not, in the view of the
United States, ensure a level of suspension equivalent to the level of nullification or impairment, the
United States considers that it has established a prima facie case that the level of suspension is not
equivalent to the level of nullification or impairment.122
(ii) Canada
4.6 Canada argues that the amount of trade that w ould be covered by the suspension is limited to
the level of concessions, which will be limited to the level of the United States' illegal disbursements.
Canada adds that the implication of the United States' argument is that the Arbitrator should
determine equivalence between the measures the Requesting Parties have proposed to implement the
suspension of concessions or other obligations, and the level of suspension they have requested.
Referring to the decisions in US – 1916 Act (Article 22.6 – US) citing with approval the arbitrator in
EC – Hormones (Canada) (Article 22.6 – EC) , Canada notes that the suspension of tariff concessions
against certain products rather than others, the extent of the proposed tariff increase and the modalities
of the suspension, all relate to the nature of the c oncessions to be suspended, which, in application of
Article 22.7 of the DSU, fall outside the mandate of the Arbitrator.123
(b) Analysis of the Arbitrator
4.7 In the approach we decided to follow in orde r to determine the level of nullification or
impairment, disbursements made under the CDSOA were only a starting point in assessing the trade
effect of the CDSOA on each Requesting Party. The figure reached as a result of the application of an
economic model by the Arbitrator is, consequently, a value of trade.
4.8 Comparatively, Canada's proposed suspension of concessions or other obligations is not
based on a value of trade but aims at equating, through the imposition of a special duty, the amount
disbursed by the United States under the CDSOA in relation to imports from Canada and "a
proportionate amount of the balance of total offset pa yments less the offset payments attributed to

121 United States written submission, paras. 28-30.
122 United States oral statement, paras. 16-17.
123 Canada's written submission, paras. 60-61.

duties collected on products of other Members that are authorized by the DSB to suspend concessions
or other obligations in this dispute."
124
4.9 With the exception of its link with the amount of disbursements under the CDSOA, nothing in
the Canadian proposal enables us to conclude at this stage that Canada's proposed suspension of
concessions or other obligations will or will not be equivalent to the level of nullification or
impairment in terms of affected trade determined according to this Decision. We are nonetheless
concerned that the total impact on trade of an addi tional duty may not only be difficult to predict in
general, but also may vary on the basis of the rate applied and the products subject to that additional
duty.
4.10 We are therefore of the view that, in order for the level of suspension of concessions or other
obligations proposed by Canada to be equivalent to the level of nullification or impairment
determined by this Decision:
(a) either Canada will have to take appropriat e steps to ensure that the total value of
United States trade subject to the prop osed additional duty does not exceed the total
value of trade determined to constitute the level of nullification or impairment, or
(b) if and when it submits a revised request fo r authorization to suspend concessions or
other obligations to the DSB further to this arbitration, Canada will have to propose
other forms of suspension of concessions or obligations that are less likely to have
effects on trade exceeding the identified level of nullification or impairment in terms
of value of United States exports to Canada.
4.11 It does not fall within our mandate to recommend the suspension of specific obligations or the
adoption of specific measures by Canada. 125 We therefore refrain from taking a decision on this
matter. We nonetheless note that the imposition of a 100 per cent ad valorem duty on imports of
certain goods from the United States, as proposed by requesting parties – including Canada – in other
arbitrations, would be a relatively transparent way of addressing the concern expressed above.
2. Suspension of concessions or other obligations by Canada and other Requesting Parties
so as to cover the total amount of disbursements made under the CDSOA
(a) Main arguments of the parties
(i) United States
4.12 The United States notes that all the Requesting Par ties, except Chile, include in their requests,
authorization to impose countermeasures in an amount that corresponds to duties collected on dumped
and subsidized products from all other countri es, including non-WTO Members and WTO Members
who either were not complainants in the original dispute or were complainants but did not request
authorization to suspend obligations under article 22.2 of the DSU. Th e United States is of the view
that a Member cannot suffer nullification or impair ment as a result of the CDSOA if no order is in
place and no duty can be collected on that Memb er's products. The United States notes that,
according to the methodology paper submitted by th e seven Requesting Parties concerned, each
Requesting Party would assume 1/7 th of the remaining annual disbursement under the CDSOA, no
matter what level of exports each of these parties has with the United States.

124 See para. 1.5(b) above.
125 See Section II.B.4 above. We note in this respect that no claim was raised in relation to Article 22.3
of the DSU.

(ii) Canada
4.13 According to Canada, the approach pursuant to which all the disbursements under the
CDSOA are WTO-inconsistent, constitute in their to tality the "level of nullification or impairment"
and may be allocated between the Requesting Parties is based on an objective concept of nullification
or impairment in relation to the violating measure as such. Article 22.4 of the DSU only mandates the
equivalence between two objective levels in relati on to the measure. Thus, as all offset payments
constitute "nullification or impair ment", the suspension of obligations should be authorized in the
same amount. Contrary to the arbitrator in US – FSC (Article 22.6 – US) , the Arbitrator is confronted
with a multiple request. Since the question of allo cation arises, most Requesting Parties, including
Canada, have proposed the allocation described in their joint methodology paper.126
(b) Position of the Arbitrator
4.14 For reasons already stated above, we are of th e view that the reasoning applied in the context
of arbitrations pursuant to Article 4.10 and 4. 11 of the SCM Agreement is not automatically
applicable to arbitrations under Article 22.6 of the DSU, inter alia because the test applied under
Article 4.10 and 4.11 of the SCM Agreement is not the same – the terms of Article 4.10 and 4.11 and
Article 22.6 are different – and relates to the specific context of prohibited subsidies.
4.15 We have already mentioned in Section III.B above , in the context of the determination of the
level of nullification or impairment, that we ar e not convinced by the reasoning of the Requesting
Parties in support of authorizations based on the full amount of CDSOA disbursements without
further assessment of the economic or trade effect of the measure.
4.16 Since the Requesting Parties' approach to shar ing the disbursements relating to orders on
imports from other Members and non-WTO Members is based on the same premise of an objective
violation erga omnes, which we have already rejected in Section III.B.2 above, we come to the
conclusion that a Requesting Party may only request suspension of concessions or other obligations

126 The relevant part of the methodology paper submitted by the Requesting Parties (except Chile) on
23 February 2004 reads as follows:

"4. Each of the requesting parties intends to impose additional import duties on products
originating in the United States and suspend the application of obligations to the United States
up to an amount corresponding to an appropriate share for each requesting party of the total
annual disbursements under the CDSOA. For each requesting party, the annual level of
suspension would be fixed on the basis of tw o elements, one specific to the requesting party
and one shared among the requesting parties:

- First, each requesting party would include in its level of suspension the total share of
illegal disbursements attributable to antidumping and countervailing duties imposed
on products of its origin.

- Second, Brazil, Canada, the EC, India, Japan Korea and Mexico would add to this
first element a share of the remaining annual illegal disbursements. Those requesting
parties consider that this share should be 1/7 for each of them. (footnote omitted)

5. The level of suspension for each requesting party would be determined annually in accordance
with the above methodology and on the basis of information published by the U.S. Bureau of Customs
and Border Protection or any successor entity. As these levels would be fixed in relation to the
disbursements made by the United States in the latest annual distribution, each year the requesting
parties would inform the DSB as to their respective levels of suspension and the products concerned."

with respect to the trade effect caused by disbursements under the CDSOA relating to its own
exports.
127
3. Determination of a variable level of suspension of concessions or other obligations
(a) Main arguments of the parties
(i) United States
4.17 The United States considers that the Arbitrator should establish a single level of suspension
for each Requesting Party, and that the DSU does not permit a requesting party to alter the level of
suspension in the future. It is of the view that, in this case, it would be impossible to create a formula
that would equate allowable levels of suspension in the future to varying levels of nullification or
impairment. The level of nullification or impairment, it is argued, must be determined at the time the
matter is referred to arbitration pur suant to Article 22.6 of the DSU. Articles 22 and 23 only refer to
"the level", which is a single and definite amount. There is no basis in the DSU for multiple, varying
and indefinite "levels" of suspension. All request ing parties in prior arbitrations have requested a
single amount. Articles 22.6 and 22.7 also provide a single opportunity to adjudicate the question of
equivalence between the level of nullification or im pairment and the level of suspension. The United
States notes that, in US – 1916 Act (EC) (Article 22.6 – US) , the arbitrator found that the European
Communities' right need not be frozen in time as of the date it made its request under Article 22.2 of
the DSU. It also note that the arbitrat or did not cite any authority other than Canada – Aircraft
Credits and Guarantees (Article 22.6 – Canada) , in which the arbitrator dec lined to consider future
applications of the illegal subsid y. One difference between the US – 1916 Act (EC) (Article 22.6 –
US) arbitration and this case is that, as of the date of the Article 22.2 request in US – 1916 Act (EC)
(Article 22.6 – US), there was no quantifiable level of nullification or impairment. This is not the case
in these proceedings. The difference between the ch allenge of a measure "as such" rather than "as
applied" does not justify alterations in the level of suspension from year to year. Setting a single,
unalterable annual level of suspension is consistent with the text of the DSU and with past practice.
128
4.18 Even if an alterable level were permitted unde r the DSU, no alteration would be appropriate
in this case. First the challenge relates to the CD SOA "as such", not to the payments made under the
CDSOA. The United States considers that it is not po ssible to specify in advance the trade effect of
the CDSOA in the future. It is not even possible to specify the level of payments under the CDSOA
given the uncertainties attached to its calculation. The United States concludes that if requesting
parties were permitted to refigure and revise their ow n level of suspension on an annual basis, these
arbitrations would generate, rather than resolve, disputes between parties.
129
(ii) Canada
4.19 Canada argues that there is no reason that "the level" referred to in Article 22.4 of the DSU
could not be understood to vary from year to year, in lock-up steps with the level of nullification or
impairment which will vary with the level of the Un ited States' illegal disbursements. Canada claims
that the position defended by the United States has already been rejected by the arbitrator in US –
1916 Act (EC) (Article 22.6 – US) . Canada considers that the methodology chosen by the Requesting
Parties ensures that the level of suspension will always remain equivalent to the amount of the
United States' illegal disbursements. Under that methodology, the Arbitrator is not required to
speculate on, or extrapolate future levels of nullif ication or impairment. Canada claims that the

127 See also our comments in para. 6.7 below.
128 United States written submission, paras. 80-90.

United States' rights are protected. It needs only reduce or eliminate its illegal disbursements to
correspondingly reduce or eliminate the level of retaliation against it.130
(b) Analysis of the Arbitrator
4.20 We first address the textual arguments. While we note that Article 22.4 refers to "the level"
(singular) of nullification or impairment and to "the level" (singular) of suspension of concessions or
other obligations, we are not persuaded that these terms impose an obligation to identify a single and
enduring level of nullification or impairment. The re quirement of Article 22.4 is simply that the two
levels be equivalent. As long as the two levels are equivalent, we do not see any reason why these
levels may not be adjusted from time to time, provided such adjustments are justified and
unpredictability is not increased as a result. In f act, we see no limitation in the DSU to the possibility
of providing for a variable level of suspension if the level of nullification or impairment also varies.
4.21 Most previous arbitrators have established one single level of nullification or impairment at
the level that existed at the end of the reasonabl e period of time granted to the responding party to
bring its legislation into conformity.
131 We do not disagree that this appr oach is, in the large majority
of cases, the most appropriate. However, we do not read anything in Article 22 of the DSU that
would preclude us from following a different path if the circumstances of this case clearly required it.
4.22 The economic analysis carried out above suggest s that the value and industry distribution of
the trade impact of the CDSOA could vary widely from one year to the next, because of the numerous
factors affecting the amounts that may be disburse d, the nature of the recipients and how each
category of recipient is likely to use the monetary amounts awarded to them under the CDSOA. This
variability is, in our opinion, very different in natu re and degree from the more steady evolution of
exports recorded in other cases where counterfactuals 132 were applied, such as EC – Bananas III (US)
(Article 22.6 – EC) or EC – Hormones (US) (Article 22.6 – EC). In those cases, the trade loss
identified on the basis of a counterfactual was artific ially fixed once for all. In the present case, there
is an economic justification for allowing a variab le level of nullificati on or impairment and,
correlatively, a variable level of suspension of concessions or other obligations.
4.23 We are mindful of the United States' arguments that the ability to vary the level of
suspensions could make the level of countermeasures applied unpredictable from one year to the next,
and that no formula could be developed to introduc e sufficient predictability. We do not find these
arguments compelling. Indeed, the level of nullifica tion or impairment in terms of the trade effect
that we have calculated above is based on th e CDSOA, a law designed and adopted by the
United States' authorities, which disbursements are al so determined by the Unit ed States' authorities.
It should be straightforward for the United States' authorities to apply the formula developed in this
Decision to find the amount of United States trade that may be subject to the suspension of
concessions or other obligations in each following year. Any unpredictab ility ought correspondingly
to be minimal.
4.24 Moreover, in this case, the United States would cont rol the levers to make the actual level of
suspension of concessions or other obl igations go down. Indeed, in ot her arbitrations where the level
of nullification or impairment was set once and for all, the responding party could not influence the
level of countermeasures applied to its trade, unless th e requesting party agreed to modify it. In this
case, the level of suspension of concessions will automatically depend on the amount of

130 Canada's written submission, paras. 56-59.
131 See, e.g., EC – Hormones (Canada) (Article 22.6 – EC) , para. 37; Brazil – Aircraft (Article 22.6 –
Brazil), paras. 3.63-3.65; US – FSC (Article 22.6 – US) , paras. 2.12-2.15; Canada – Aircraft Credits and
Guarantees (Article 22.6 – Canada), paras. 3.67-3.73.
132 For a definition of "counterfactual", see footnote 42 above.

disbursements made under the CDSOA in a given year . If this amount decreases, so will the level of
suspension of concessions or other obligations that the Requesting Parties will be entitled to impose.
If no disbursements are made, the level of suspension will have to be "zero".
4.25 Finally, while we have expressed some re servations about the notion of "inducing
compliance", we note that variable levels coul d achieve this objective without affecting the
requirement of "equivalence" between the level of nullification or impairment and the level of
suspension under Article 22.4 of th e DSU. We have been presented with convincing evidence that, if
the CDSOA remains in force, the amount of disbursem ents is likely to increase in the coming years.
We are conscious of the fact that higher counter measures may not actually induce compliance in all
instances. However, if we were to decide on a le vel of suspension fixed once for all on the basis of
the first years of application of the CDSOA, it is possible that the level of suspension of concessions
or other obligations would become, as time goe s by, significantly less than the actual level of
nullification or impairment resulting from the continue d application of the CDSOA. In other words,
the cost of the violation for the United States could decrease. In such a case, the incentive to comply
would most probably decrease too. We believe that su ch a risk exists in the present case and justifies
that we determine a variable level of nullification or impairment and, consequently, a variable level of
suspension of concessions or other obligations.
4.26 We also consider this approach to be consiste nt with the principle of prompt and effective
resolution of disputes, contained in Article 3.3 and 3.4 of the DSU.
133
4.27 Finally, like the arbitrators in EC – Hormones (US) (Article 22.6 – EC) 134 and US – 1916 Act
(EC) (Article 22.6 – US) 135, we note that the United States may have recourse to the appropriate
dispute settlement procedures in the event that it co nsiders that the application of the suspension by
Canada exceeds, for a given period, the level of nu llification or impairment that Canada has sustained
as a result of the violation of the United States' ob ligations by the CDSOA, as calculated using the
formula developed above.136
V. AWARD OF THE ARBITRATOR
5.1 For the reasons set out above, we determine that, in the matter (Original Complaint by Canada), the level of nullification or
impairment suffered by Canada in a particular year can be deemed to be equal to the total of
disbursements made under the CDSOA for the preceding year relating to anti-dumping or
countervailing duties paid on imports from Canada , multiplied by the coefficient identified in
Section III.D above.
5.2 Accordingly, we decide that the suspension by Canada of concessions or other obligations in
the form of:
(a) the imposition of additional import duties above bound custom duties on products
originating in the United States; and
(b) the suspension of the application of the obligations under Article VI of GATT 1994,
Articles 3, 5, 7, 8, 9, 10, 11 and 12 of the Anti-Dumping Agreement, and Articles 11,
12, 15, 17, 18, 19, 20, 21 and 22 of the SCM Agreement to determine that the effect
of dumping or subsidization of products from the United States is to cause or threaten

133 See EC – Hormones (Canada) (Article 22.6 – EC), para. 38.
134 See para. 82.
135 See para. 9.2.
136 See also Panel and Appellate Body Reports on US – Certain EC Products.

material injury to an established domestic injury, or is to retard materially the
establishment of a domestic industry;
covering, on a yearly basis, a total value of trade not exceeding, in US dollars, the amount resulting
from the following equation:

 Amount of disbursements under CDSOA for the most recent year for which data are available
relating to anti-dumping or countervailing duties paid on imports from Canada at that time, as
published by the United States' authorities.

multiplied by:

 0.72

would be consistent with Article 22.4 of the DSU.

5.3 In this respect, we urge Canada to ensure that , if it decides to pro ceed with the suspension,
vis-à-vis the United States, of obligations referred to in paragraph 5.2(b) above, that this will be done
in such a way that the maximum value of trade referred to the previous paragraph is not exceeded.
We also urge Canada, if and when it submits a revised request for authorization to suspend
concessions to the DSB pursuant to this Decision, to be specific about the terms of the measures that
will be adopted to implement the suspension, so as to promote additional transparency in this process.
5.4 In addition, we suggest that Canada notify to the DSB, every year, the amount of trade that
will be subject to suspension of concessions, as we ll as the measures that will be adopted for that
purpose.
5.5 Finally, we remind that Article 22.8 of the DSU provides that:
"The suspension of concessions or other obligations shall be temporary and shall only
be applied until such time as the measure f ound to be inconsiste nt with a covered
agreement has been removed, or the Member that must implement recommendations
or rulings provides a solution to the nullifi cation or impairment of benefits, or a
mutually satisfactory solution is reached. …"
VI. CONCLUDING REMARKS
6.1 Some of the issues raised in these proceedings lead us to make the following remarks for
wider consideration.
6.2 As mentioned above, the DSU does not expressly explain the purpose behind the
authorization of the suspension of concessions or other obligations. On th e one hand, the general
obligation to comply with DSB recommendations a nd rulings seems to impl y that suspension of
concessions or other obligations is intended to induce compliance, as has been acknowledged by
previous arbitrators.
137 However, exactly what may induce comp liance is likely to vary in each case,
in the light of a number of factors including, but not limited to, the level of suspension of obligations
authorized.138

137 EC – Bananas III (US) (Article 22.6 – EC), para. 6.3.
138 While the value of the suspension or concessions or other obligations easily comes to mind as a
relevant factor in inducing compliance, it must also be acknowledged that the actual role of the value of such

6.3 On the other hand, the requirement that the level of such suspensions remain equivalent to the
level of nullification or impairment suffered by th e complaining party seems to imply that suspension
of concessions or other obligations is only a means of obtaining some form of temporary
compensation, even when the negotiation of compensations has failed.
6.4 In other words, it is not completely clear what role is to be played by the suspension of
obligations in the DSU and a large part of the c onceptual debate that took place in these proceedings
could have been avoided if a clear "object and purpose" were identified.
6.5 The WTO dispute settlement system authorizes Members to challenge a law as such, i.e.
irrespective of whether it has been applied or not. The "classical" approach based on an assessment of
the trade effect of a given measure may not always contribute to the identification of the actual level
of nullification or impairment , in particular if no instances of app lication had arisen at the time. This
may be because the trade impact of a measure may be difficult to assess due to the lack of verifiable
figures. We are of the view that, while parties sh are a duty to cooperate with the Arbitrator in the
establishment of the facts, there is no reason a priori to sanction the requesting party or the
respondent if supporting figures are difficult or impossible to find. We believe that this is a situation
that has to be addressed in order to reach a deci sion on what may be achievable through recourse to
suspension of obligations in such cases.
6.6 In this arbitration, we have interpreted the concept of nullification or impairment, inter alia,
from the terms of Article XXIII of GATT 1994 and Ar ticle 3.8 of the DSU. We believe, however,
from the extensive discussion of this concept by the parties, that th e actual meaning of this provision
is disputed and needs to be addressed in the appropriate forum.
6.7 Finally, we note that an issue that arose as a consequence of following the approach whereby
each party would be granted the right to suspend oblig ations exclusively in relation to its own exports
is that there will remain disbursements under th e CDSOA in respect of goods from other Members
and non-WTO Members for which no suspension of concessions or other obligations have been
authorized.

suspension in securing compliance or not may vary from one case to the next. In some cases, even a very high
amount of countermeasures may not achieve compliance, whereas in some others a limited amount may.

ANNEX A

WORKING PROCEDURES OF THE ARBITRATOR

 The Arbitrator will follow the normal working procedures of the DSU where relevant and as
adapted to the circumstances of the present proceedings, in accordance with the timetable it has
adopted. In this regard,--

(a) the Arbitrator will meet in closed session;
(b) the deliberations of the Arbitrator and th e documents submitted to it shall be kept
confidential. However, this is without prejudice to the parties’ disclosure of
statements of their own positions to the pub lic, in accordance with Article 18.2 of the
DSU;
(c) at any substantive meeting with the parties, the Arbitrator will ask the United States
to present orally its views first, followed by the party(ies) having requested
authorization to suspend concessions or other obligations;
(d) each party shall submit all factual evidence to the Arbitrator no later than in its
written submission to the Arbitrator, except with respect to evidence necessary during
the hearing or for answers to questions. Derogations to this procedure will be granted
upon a showing of good cause, in which case th e other party(ies) shall be accorded a
period of time for comments, as appropriate;
(e) the parties shall provide an electronic copy (on a computer format compatible with
the Secretariat’s programmes) together with the printed version (6 copies) of their
submissions, including the methodology paper, on the due date. All these copies must
be filed with the Dispute Settlement Registrar, [...]. Electronic copies may be sent by
e-mail to [...]. Parties shall provide 6 copi es and an electronic version of their oral
statements during any meeting with the Ar bitrator or no later than noon on the day
following any such meeting.
(f) except as otherwise indicated in the timetable , submissions should be provided at the
latest by 5.00 p.m. on the due date so that there is a possibility to send them to the
Arbitrator on that date. As is customary, distribution of submissions to the other
party(ies) shall be made by the parties themselves;
(g) if necessary, and at any time during the proceedings, the Arbitrator may put questions
to any party to clarify any point that is unclear. Whenever appropriate, a right to
comment on the responses will be granted to the other party(ies);
(h) any material submitted shall be concise and li mited to questions of relevance in this
particular procedure.
(i) Parties have the right to determine th e composition of their own delegations.
Delegations may include, as representatives of the government concerned, private
counsel and advisers. Parties shall have responsibility for all members of their
delegations and shall ensure that all memb ers of their delegations act in accordance
with the rules of the DSU and these Working Procedures, particularly in regard to
confidentiality of the proceedings. Parties sh all provide a list of the participants of
their delegation prior to, or at the beginning of, any meeting with the Arbitrator.

(j) to facilitate the maintenance of the record of the arbitration, and to maximize the
clarity of submissions and other documents, in particular the references to exhibits
submitted by parties, parties shall sequentia lly number their exhibits throughout the
course of the arbitration.

ANNEX B

METHODOLOGY FOR CALCULATING THE TRADE EFFECT
OF CDSOA DISBURSEMENTS

A. I
NTRODUCTION
1. Section III.C.2 of this Decision outlines the proposed approaches of the parties to estimating
the decline in imports arising from the disbursement of funds as part of the United States Continued
Dumping and Subsidy Offset Act. The purpose of th is Annex is to explain the methodology used to
calculate the values in Table 3 in the main text . Section B outlines this methodology. This is
followed, in Section C, by an explanation of the changes made to the Requesting Parties' model by the
Arbitrator in its application of this model. S ection D discusses the issue of the values to be assigned
to the various parameters. The last section presents the overall results.

B. M
ETHODOLOGY
2. The role of economic modelling of trade effects is discussed at length in the US – FSC
(Article 22.6 – US) Arbitration decision. 139 The arbitrator in that case f aced an issue similar to that
faced by us, which is the selection of an appropriate model. Its approach, however, differs from the
one we have taken, since the arbitrator decided to use, in its entirety, the model proposed by one of
the parties. In support of its decision, the arbitrator in that case pointed to the fact that the model it
used, although proposed by the European Commun ities, had actually been developed by the United
States Government to explain the trade effects of the FSC programme to the United States Congress.
Hence, the arbitrator concluded that, if the m odel was suitable for the United States Congress, it
would be suitable for the arbitration.140

3. In this case, we received two models in res ponse to our request to all parties to submit what
they viewed as suitable models to simulate the trad e impact of the CDSOA disbursements. However,
as explained in Section III.C.2, the models proposed by the Requesting Parties and the United States,
although broadly similar, differed in their level of a ggregation and, to some extent, in the variety of
parameters that estimate the counterfactual dec line in the value of imports arising from CDSOA
payments. 141 The model of the Requesting Parties relied on aggregate numbers for each of the three
parameters, whereas the model of the United Stat es calculated results at the product level for each

139 Section VI.B of WT/DS108/ARB.
140 On this point the arbitrator in the US – FSC (Article 22.6 – US) case states: "In this regard, the very
fact that the US Treasury report was su bmitted to Congress is, in our view, of considerable weight. That report
did suggest that it may have somewhat overstated the results. Indeed, it may not be absolutely exact.
Nonetheless, the US Treasury obviously made the judgement that, in the context of presenting the effects of the
FSC scheme to US Congress (the authors, we note, of the legislation concerned), this report, including the
modelling assumptions on which it is based, had sufficient credibility to represent a reliable reflection of the
impact of the scheme when it came to the matter of informing the US Congress on its operation and effects.
That was presumably not undertaken lightly and, at th e very least, it was presumably considered to be not
manifestly misleading." Para 6.48.
141 The US model, although based on the same basic economic framework as the model proposed by
the Requesting Parties, is specified differently, since it includes separate parameters for the supply elasticity and
the own-price elasticity of demand. It is based on Fr ancois and Hall (1997), "Partial Equilibrium Modelling" in
Francois, J. and Rennert, K. (eds.), Applied Methods for Trade Policy Analysis: A Handbook , Cambridge:
Cambridge University Press. By similar framework we mean that the m echanism by which CDSOA
disbursements affect imports is the same. Imports are di splaced due to an increase in their price relative to
domestic goods sold by US firms benefiting from CDSOA disbursements.

affected WTO Member. The aggregate estimate using this approach was obtained by summing the
individual estimates for each product.

4. Despite the relative merits of the proposed models, as presented in these proceedings, each
possessed fundamental flaws that made them unworkabl e for this case. The model of the Requesting
Parties required economy wide values. Hence, a si ngle elasticity parameter was used to capture the
substitutability between domestic and imported goods. Similarly, the im port penetration value in this
model was assumed to be the economy-wide average. The difficulty with this approach is that it
ignores the substantial industry variation in CDSOA disbursements. Intuitively, one would expect the
values for the elasticity of substitution and import pe netration for industries with relatively larger
shares of CDSOA disbursements to have a greater weight in the overall number.

5. The US model, although well accepted in the lite rature, could not be applied to all products
for which there are CDSOA disbursements. This meant that, for these products, an assumption was
required to proxy the trade effect. This raised th e question whether or not the greater complexity of
the US model would be warranted if, in the end, assumptions about key parameters would have to be
made in a seemingly ad hoc fashion.

6. Furthermore, precise estimates for each of the elasticity parameters were not available.
Hence, a range of values would have been required for the own-price elasticity of demand, elasticity
of substitution and the supply elasticities of domes tic and foreign producers. As stated by the
Requesting Parties this introduces "greater parame ter shortcomings than the Requesting Parties'
proposed model".
142

7. Since it is difficult, technically, to run the US model on an independent basis we have opted
for a modified version of the model proposed by the Requesting Parties. In particular, we adjusted it
to take into account technical concerns identified by the United States. While the principal reason for
using the model of the Requesting Parties is the ease with which it can be employed, we also take note
of the fact that the United States did not criticise th e specification of the Requesting Parties' model.
Thus criticisms were focussed predominantly on the values assigned to the various parameters.
143

8. The basic model of the Requesting Parties is specified below as equation (A1). This equation
is identical to equation (5) in the main text:

Reduction in imports from CDSOA Disbursements
RS **η= (A1)

Where144,
• η is the elasticity of substitution
⎟
⎟
⎟
⎟
⎠
⎞
⎜
⎜
⎜
⎜
⎝
⎛
∆
∆
∆
=
q
q
P
P
MM
η

• S is the total value of the payments expressed as a margin of the price reduction on domestic
production financed by payments and can be expressed as QPS q *∆=

142 Comments of the Requesting Parties to additional questions of the Arbitrator, para. 23.
143 "The United States does not critique the economic theory supporting the model, but argues that the
parameter values used in the model are inappropriate", Comments of the Requesting Parties to additional
144 All the variables are explained in paragraph 3.96.

• R is the ratio of the value of imports to the value of domestic shipments in the markets in
question and can be expressed as ⎟⎟
⎠
⎞
⎜⎜
⎝
⎛
= QP
MPR
q
m

9. Turning first to the specification of the model and concerns about its robustness. In the first
instance, we share the view of the United States th at one cannot be 100 per cent certain that the entire
disbursement given to a firm will be expended to reduce imports . While the economic rationale
behind a 100 per cent pass-through is strong, the mo del specification needs to be adjusted to account
for cases where the pass-through effect will be less th an 100 per cent. Accordingly, we can include a
fourth multiplicative term to equation A1 to account for less than 100 per cent pass through and re-
specify equation A1 as equation A2 (equation (6) in the main text):

Reduction in imports RS ***ηα= (A2)

Where, α is the pass-through factor and takes on a values: 0 < α < 1.

10. A value of zero for α implies no expenditure is used to reduce price, therefore the estimated
trade effect would be zero. This is the case pres ented by the United States. The opposite case,
presented by the Requesting Parties is that α takes on a value of 1, which represents a 100 per cent
pass-through.

11. The principal focus of our appr oach to analysing trade effect is the determination of a trade
effect coefficient, which is defined as a number th at can be multiplied by the applicable level of
disbursements to estimate the total trade effect. By focussing on the coefficient as the basis of our
award, it is easier to simplify and bridge the diffe rences in the models that have been proposed by the
Requesting Parties. In expression A2 above, the coefficient can be defined as the product of α, η
and R. Accordingly, equation A2 can be reduced to A3:

Reduction in imports =
β*S (A3)
Where β is the trade effect coefficient and can take on a va lue greater than or equal to zero. It is also
important to note that this coefficient does not assign specific values to the elasticity of substitution or
pass-through values. Different combinations of the values of these variables could be used to
determine a single value for β.
12. The second issue is the level at which to im plement the model. Technically, the model could
be implemented at the product level as suggested by the United States. Or, as suggested by the
Requesting Parties, implemented at the national, or aggregate level.

13. For the task at hand, there is no question that a disaggregated approach would be preferable.
The CDSOA scheme collects duties at the product le vel and disburses them to petitioning firms.
However, as pointed out by the United States, production data, which is key to implementing any
economic model, is not available for some products. If a higher degree of aggregation is used, it is
more likely that data will be available, albeit at the expense of greater precision.

14. In order to examine the feasibility of implem enting a model at a leve l of aggregation above
the product level and below the national level, we re quested the United States to provide us with data
for each of the parameters of equation A2.
145 Although the request was for the 2-digit level of the

145 Question 16 of first set of questions of the Arbitrator.

Standard Industrial Classification, the United States provided the necessary data at the 3-digit level of
the North American Industrial Classification ("NAIC"), which is more appropriate.

15. In a subsequent set of questi ons, we requested each of the parties to submit the additional data
required to run an economic model at the 3-digit level of the NAIC system.
146 In responding to these
questions, both the Requesting Parties and the Un ited States expressed concern about conducting a
counterfactual trade effects analysis at the 3-dig it NAIC level. Consequently, before proceeding we
should state and address these concerns.

16. The Requesting Parties' view was that:

"3-digit NAIC levels cannot accurately re present substitution elasticities for products
receiving CDSOA payments. The 3-digit NAIC level is not at a sufficiently
disaggregated level and covers too broad a range of products. In fact, most products
under dumping orders are specified at a hi ghly disaggregated level. The use of
aggregate estimates of substitution elasticities for disaggregated products would result
in biased results for the calculated trade effects."
147
17. They further submitted that this bias is lik ely to be downward, since the product specific
elasticities are likely to be highe r than the aggregate elasticities. 148 This assertion is substantiated
through the example of pasta. This product would be included with breakfast cereals and candy bars,
which tend to be branded produc ts. The Requesting Parties also highlighted a similar problem
associated with various categories of bearings by distinguishing between high-precision bearings used
in aircraft and those used in the automotive industries and home appliances.

18. The United States shared the same view as th e Requesting Parties that a 3-digit analysis
would necessarily be biased. They stated, "all of th e parties agree that any model based on data from
the three-digit North American Industry Classification or from the Global Trade Analysis Project
(GTAP) would result in a relatively imprecise estimat e of the effect the CDSOA has on the trade of
the Requesting Parties".
149

19. The parties have placed us in a difficult positi on with respect to choosing an appropriate level
of aggregation. We agree with the United St ates that a more product specific methodology is
preferable to an aggregate methodology. Howeve r, given that if the product-specific methodology
lacks the appropriate data, we do not see how a di saggregated methodology would be more accurate
than an aggregate methodology. Furthermore, we note that the solution of the United States for cases
where necessary data was missing was to assume the results of their analysis with available data
applied to those products for which data was not available.
150 The United States, in effect, assumes
that the analysis for one set of products could au tomatically be applied to another set of products,
which must implicitly introduce the very same sorts of biases and inaccuracies that the United States
argued against.

146 Question 1 of the second set of questions of the Arbitrator.
147 Replies of the Requesting Parties to the second set of questions of the Arbitrator.
148 Replies of the Requesting Parties to the second set of questions of the Arbitrator, para. 6.
149 Comments of the United States to replies of the Requesting Parties to the second set of questions of
the Arbitrator, para. 1.
150 See footnote 6 of US Exhibit 18. The United States adopts the same approach that we adopt, which
is to assume a trade effect coefficient. It defines the level for these products for which information is not
available by the product of the offset payments and th e ratio of the modelled trade impact for all complaining
parties in the given year and the total modelled offset payments for all complaining parties in the given year.

20. While reiterating that economic modelling is not always precise, we consider that the issue is
whether or not the broad parameters of an outc ome derived through a trade-effects analysis is
"unreasonable".151 In this context, our assessment is that an analysis at the 3-digit level effectively
bridges the problems of a too highly aggregated model that assumes single values for each variable
and a disaggregated analysis, which does not have all the required data.

21. Therefore, the adopted approach is to estimate the trade effect, for a given year, at the 3-digit
level and then sum these values to obtain a total trade effect. 152 This total trade effect is subsequently
divided by the level of disbursements to obtain the trade effect coefficient ( β in equation A3). This is
done for each of the years 2001 through to 2003. The final value of the coefficient is then calculated
as the simple average of these three numbers. The results arising from the implementation of this
approach are explained and presented in the last section of this Annex.

C. V
ALUES ASSIGNED TO PARAMETERS
1. Pass-through
22. The positions of the parties with respect to pass-through are completely opposite. The United
States asserts that the value is zero, whereas the Requesting Parties assert that it is 100 per cent.
Section III.4(d) presents the rationale of the parties' positions and our views on the appropriate values.
In summary, we have opted for a range of pass-th rough values of between 25 and 100 per cent. We
were not persuaded by the US argument that the value should be zero. Although they identified
certain cases where firms that benefited from CD SOA disbursements did not utilize the funds, the
United States was not convincing in establishing that this would arise for every single dollar disbursed
under the CDSOA programme.153

23. Similarly, the fact that the United States was ab le to identify at least one firm that did not use
the funds to divert imports suggests that an ab solute 100 per cent pass-th rough would be unrealistic.
The problem we face, however, is that there is no evidence to suggest what the upper-bound value
might be if it is not 100 per cent. The weight of economic theory and commercial pressures point to
100 per cent, but not any other specific number. As we state in paragraph 3.142 we are intuitively of
the view that the upper end of the range would be close to 100 per cent.

2. Elasticities
24. As the parties have pointed out, the debate over the appropriate values to assign to the various
elasticities used in modelling is intense. Not only are there differences at the specific product level,
but, as the United States has pointed out, there woul d be differences about the relevant aggregation
methodology to be employed if calculations are not done at the product level.

25. The model of the Requesting Parties relies on a single elasticity value – the elasticity of
substitution. In contrast, the model of the United States employs three elasticity values in addition to
the elasticity of substitution. We agree with the Requesting Parties that any avenue to minimize the

151 See US – FSC (Article 22.6 – US) para. 6.49.
152 Aggregating the individual industries to get the total value should not be confused with analysing
the effects in the United States market using general equilibrium analysis. Each estimate at the individual level
is done assuming no changes in any other industry.
153 The United States provided anecdot al evidence of a few firms that did not use the funds to expand
output on pages 30-34 of its written submission. When asked (Question 13 of the Arbitrator) to provide
additional evidence, the United States responded that it has "been unable to determine how affected domestic
producers use CDSOA payments, beyond the information provided on pages 30-34 of [its] written submission".

variance in values should be explored. In this rega rd, the model of the Requesting Parties narrows the
debate over relevant elasticity values to only the elasticity of substitution.

26. The Requesting Parties themselves acknowledge the difficulties in obtaining precise
estimates. They submitted two sets of elasticities as evidence of possible values that could be used to
model the trade effect. One set was sourced from the Global Trade Analysis Project ("GTAP") based
on the sectors within their basic model. The sec ond submitted set for the same sectors was sourced
from United States International Trade Commission ("USITC") researchers. The two sets differed
considerably (Annex Table 1). The standard GTAP range has a lower mean (2.7) than the USITC
estimates (3.1), smaller range (4 compared to 3.4), but both have the same median (2.8). The USITC
has higher values in 22 of the categories and the same value in eight of the categories.

27. In an attempt to develop a workable framewo rk for modelling, the parties were requested to
submit elasticities of substitution at the 3-digit NAIC level.
154 The Requesting Parties, while
expressing some reservations, responded positively to th is request and provided the data. The United
States did not, but stated many of the difficulties confronting any methodology to concord data from
one classification to another. It also offered to respond positively to the request, but only at a later
stage.155 As a result, we did not have any choice, but to proceed with the elasticity estimates provided
by the Requesting Parties. However, before doi ng so, we reviewed the estimates submitted by the
United States according to the product categories for which CDSOA disbursements were made. Basic
summary statistics are presented in Annex Table 1 for each of the four sets of elasticity values:
GTAP, USITC estimates of GTAP, US submitted elasticities (low, high and mid-point) by CDSOA
product categories and NAIC 3-digit industry category as submitted by the Requesting Parties.

Annex Table 1: Summary Statistics of Sets of Elasticities of Substitution

GTAP
USITC
GTAP
Requesting
Parties NAIC
US Product
Low*
US Product
Mid-Point*
US Product
High*
Mean 2.68 3.09 2.67 2.83 3.99 5.17
Median 2.8 2.80 2.8 3 4 5
Std. Deviation 0.8 1.18 0.79 0.87 0.92 1.12
Minimum 1.8 1 1.8 1 2 3
Maximum 5.2 5 5.2 5 6.5 8
Count 41 41 31 65 65 65

* Does not include values for seamless pipe and sugar, since specific values for these products were not
provided. They were only listed as "high" and "perfect" respectively.

28. The table confirms the view of the Requesti ng Parties that aggregate elasticities tend to be
lower. The first three columns reflect the va lues from the GTAP classification, including the
concorded classification into the NAIC category. The median for all three sets is 2.8 and the mean
ranges from 2.67 to 3.09. In contrast, the mean of the mid-point values of the US product elasticity
estimates is 3.99 and the median value is 4. The highest value for this category is 6.5, whereas the
highest value for the aggregated values is 6.2. In general terms the descriptive statistics of the low
category proposed by the United States corresponds to the statistics of the first three columns.

29. The table also confirms that the issue of wh at values to assign to the various elasticities of
substitution that a modeller may use is far from bei ng resolved. Our case is complicated by the fact

154 Question 1 of the additional set of questions of the Arbitrator.
155 "If the Arbitrators so request, the United States could calculate such concorded elasticity estimates
using where necessary, either simple averages or trade- weighted averages." Replie s of the United States to
additional questions of the Arbitrator, para. 2.

that, despite asking specifically for values that we could use, we only have one set of values for the
3-digit NAIC level. In order to account for measure ment error and, of course, aggregation bias, we
propose to use the Requesting Parties' set of elasticity estimates, but vary them by 20 per cent in order
to have a range of effects. That is, the calcula tions will be done using elasticity values that are both
20 per cent above the submitted elasticities and 20 pe r cent below. The figure of 20 per cent was
chosen as a conservative adjustment, given that the differences between the means of the US low and
medium and US medium and high values is approximately 25 per cent.

3. Import penetration
30. The import penetration values were calculated using data provided by the United States.
They are defined by the Requesting Parties as the "ratio of imports to domestic shipments". The latter
is defined as total shipments less exports.

31. The figures reported in the table correspond to what might intuitively be expected, with the
exception of the very high figure for fish and fish products. The reported production figures for the
years 2000 through to 2002 are respectively: US$3.5 5 billion, US$3.23 billion and US$3.09 billion.
The respective export figures were: US$2.66 billion, US$2.85 billion and US$2.8 billion. When these
figures are combined with the import figures of US$8 .12 billion, US$7.71 billion, and US$7.8 billion
for the respective years, the resulting import penetration figures are very high relative to those
calculated for the other industries.
156

156 Imports divided by the residual of production minus exports.

Annex Table 2: Import Penetration Ratios by 3-digit NAIC Industry, 2001-2003

Industry NAIC
Code 2001 2002 2003
Agricultural products 111 0.16 0.16 0.17
Livestock and livestock products 112 0.03 0.04 0.03
Fish, fresh, chilled, or frozen and other marine products 114 20.60 26.89 23.79 *
Food manufacturing 311 0.05 0.05 0.05
Beverages and tobacco products 312 0.08 0.09 0.11
Textiles and fabrics 313 0.16 0.19 0.21
Textile mill products 314 0.25 0.27 0.30
Apparel and accessories 315 1.30 1.29 1.38
Leather and allied products 316 3.34 2.64 2.55
Wood products 321 0.18 0.19 0.19
Paper 322 0.13 0.13 0.13
Printing, publishing and similar products 323 0.04 0.05 0.05
Petroleum and coal products 324 0.17 0.16 0.17
Chemicals 325 0.22 0.25 0.28
Plastics and rubber products 326 0.11 0.11 0.12
Non-metallic mineral products 327 0.15 0.16 0.18
Primary metal manufacturing 331 0.30 0.28 0.30
Fabricated metal products, n.e.s 332 0.11 0.12 0.13
Machinery, except electrical 333 0.38 0.37 0.42
Computer and electronic products 334 0.69 0.75 0.70
Electrical equipment, appliances and components 335 0.43 0.48 0.52
Transportation equipment 336 0.44 0.44 0.45
Furniture and fixtures 337 0.22 0.26 0.29
Miscellaneous manufactured commodities 339 0.59 0.61 0.60
Source: Calculated from data provided by the United States. Only those industries for which there is a non-zero
CDSOA payment in any year between 2001 and 2003 are included.
 * Average of 2001 and 2002.

4. Value of disbursements
32. The data on the level of the CDSOA disburseme nts at the 3-digit NAIC level was provided by
the United States in response to a request for this information. In providing the data, the United States
noted that it was unable to classify 17 products. Th e total of these unclassified disbursements is not
insignificant and presents a problem with respect to estimating the total effect. Upon reviewing these
disbursements, it would appear that some of the paym ents could be classified into relevant categories.
However, since the United States chose not to cl assify these disbursements, we can only assume that
some information relevant to the classification of th e disbursements is not known to us. Accordingly,
these payments will be listed as "Not Elsewhere Classified" and without an NAIC code.

33. Unclassified disbursement data creates a problem of assigning values of elasticities and value
of import penetration. Our solutio n to this problem, in this case, is to assume an elasticity of
substitution of 2.8, which is the median value, and an import penetration value, which is the average
of the relevant NAIC categories for the given year.
157 In calculating the latter value, we exclude fish
and fish products, since it is clear from the da ta presented by the United States that none of the
unclassified fish products would fall under this cat egory. Furthermore, we note that the resulting

157 Relevant categories in this context are NAIC categories for which there were positive CDSOA
disbursements in any of the years 2001, 2002 or 2003.

values for each of the years are not too dissimila r from the overall value of 0.295 presented by the
Requesting Parties, which could also be used as a proxy.

D. I
MPLEMENTING THE MODEL
34. Having dealt with the specification and various parameters of the model, we turn now to its
implementation. The adopted aggregation methodology for the results at the 3-digit industry level is
similar to that of the United St ates. Each counterfactual estimat ion of the trade loss arising from
CDSOA disbursements at the 3-digit industry level is summed to obtain the total trade effect. This
total trade effect is then divided by the total CDSO A disbursements for that year to obtain a value of
the trade effect coefficient. This value, by definition, would be specific to the assumptions about the
values of the elasticities of substitution and the pass- through effect. Changes in the assumptions of
these variables will necessarily alter the final result. As explained previously, the approach with
respect to the values of the elasticities of substitutio n is to vary the values by 20 per cent below and
above the submitted values.

35. This process is repeated for each ye ar from 2001 through to 2003, assuming a value of
100 per cent pass-through. Annex Tables 3-5 present the results of these simulations. In these tables,
the relevant NAIC industry and code is presented fi rst. After this, the CDSOA disbursement for the
industry, as submitted by the United States, is liste d. The fourth column is the elasticity of
substitution followed by the market penetration variable. As indicated above, three values of
elasticities are used. The resulting tr ade effect from each of these assumptions is listed in the last
three columns as low, mid-point and high.

36. The second last row in the tables entitled "Totals" is the sum, where relevant, of all of the
preceding rows. Therefore, the simulated reducti ons are found under "Reduction in Imports". The
last row entitled "Trade Effect Coefficient" is th e value obtained by dividing the total trade effect
(from the row above) by the total CDSOA disburse ments. For 2001, these values (listed in Annex
Table 3) are 1.09 for the mid-point range, 0.87 fo r the low value and 1.30 for the high values.
Similarly, the results for 2002 and 2003 are listed in Annex Tables 4 and 5 respectively.

37. In order to adjust the simulation results fo r various assumptions of pass-through, as proposed
by the United States, we simply reduce the valu e of the disbursements. For example, for an
assumption of a 25 per cent pass-through, only 25 per cen t of the applicable disbursement is used to
calculate the trade effect. With respect to equation A3, this would imply an assumption of 0.25 for
the value of α. Annex Table 6, which is also Table 3 in the main text, presents the various results for
the different assumptions about the values of the elasticity of substitution and pass-through.

38. What remains to calculate is th e final trade coefficient. In doing so, we have decided to take a
sample average of the trade coefficients for the three years (2001-2003) . The reason for this choice is
the changing values and distribution of the payments. A broader time period is more reflective of the
value and type of distribution one could expect from the operation of the programme over time. As
stated in paragraph 3.144, we take for each year the middle two rows and the middle column and
average these three values. In doing so, we obtain 0.68 for 2001, 0.78 for 2002 and 0.70 for 2003. A
simple average of these three values is 0.72. Accordingly, the value for B in equation A3, or the trade
effect coefficient, is 0.72.

Annex Table 3: Counterfactual Trade Effect of CDSOA Disbursements
Assuming 100 per cent Pass-through by 3-digit NAIC, 2001

 Reduction in imports
(US dollars)
NAIC
Code Industry Disbursements
(US dollars) Elasticity Market
Penetration Low Mid-point High
111 Agriculture 25251.96 2.2 0.16 7111 8889 10666
114 Fish products 63576.45 2.8 20.60 2933672 3667090 4400508
311 Food 22086937.38 2.2 0.05 1943650 2429563 2915476
313 Textiles and fabrics 0 2.2 0.18 0 0 0
314 Textiles mill products 2167 3.08 2.2 0.25 9536 11920 14304
321 Wood products 0 2.8 0.18 0 0 0
322 Paper 413729.38 1.8 0.13 77450 96813 116175
325 Chemicals 5444564.42 1.9 0.22 1820662 2275828 2730994
326 Plastics and rubber 694385.83 1.9 0.11 116101 145127 174152
327 Non metallic mineral 3253 894.67 2.8 0.15 1093309 1366636 1639963
331 Primary metal 31938114.29 2.8 0.30 21462413 26828016 32193619
332 Fabricated metal 13801060.19 2.8 0.11 3400581 4250727 5100872
333 Machinery, except electrical 27551.75 2.8 0.38 23452 29315 35178
336 Transportation equipment 714537.7 5.2 0.44 1307890 1634862 1961835
337 Furniture and fixtures 0 2.8 0.22 0 0 0
339 Misc. manufactures 108862859.3 2.8 0.59 143873155 179841444 215809732
Not elsewhere classified 43853754.39 2.8 0.23 22724431 28405539 34086646
Total 231201890.8 200793413 250991767 301190120
Trade Effect Coefficient 0.87 1.09 1.30

Annex Table 4: Counterfactual Trade Effect of CDSOA Disbursements
Assuming 100 per cent Pass-through by 3-digit NAIC, 2002

 Reduction in imports
(US dollars)
NAIC
Code Industry Disbursements
(US dollars) Elasticity Market
Penetration Low Mid-point High
111 Agriculture 535685.42 2.2 0.16 150849 188561 226274
114 Fish products 261675.49 2.8 26.89 15761657 19702071 23642485
311 Food 18886033.44 2.2 0.05 1661971 2077464 2492956
313 Textiles and fabrics 0 2.2 0.19 0 0 0
314 Textiles mill products 6734 180.07 2.2 0.27 3200082 4000103 4800124
321 Wood products 0 2.8 0.19 0 0 0
322 Paper 128975.29 1.8 0.13 24144 30180 36216
325 Chemicals 5463401.14 1.9 0.25 2076092 2595116 3114139
326 Plastics and rubber 1091701.37 1.9 0.11 182532 228166 273799
327 Non metallic minera l 3564.22 2.8 0.16 1277 1597 1916
331 Primary metal 36423770.47 2.8 0.28 22844989 28556236 34267483
332 Fabricated metal 27606835.88 2.8 0.12 7420717 9275897 11131076
333 Machinery, except electrical 1970105.76 2.8 0.37 1632824 2041030 2449235
336 Transportation equipment 2094362.23 5.2 0.44 3833521 4791901 5750281
337 Furniture and fixtures 0 2.8 0.26 0 0 0
339 Misc. manufactures 168327408 2.8 0.60 226232036 282790045 339348055
 Not elsewhere classified 37935918.13 2.8 0.24 20281048 25351310 30421571
 Totals 307463616.9 305303740 381629675 457955610
 Trade Effect Coefficient 0.99 1.24 1.49

Annex Table 5: Counterfactual Trade Effect of CDSOA Disbursements
Assuming 100 per cent Pass-through by 3-digit NAIC, 2003

 Estimated Reduction in Imports
(US dollars)
NAIC
Code Disbursements
(US dollars) Elasticity Market
Penetration Low Mid-point High
111 Agriculture 417142.63 2.2 0.17 124809.1 156011 187214
114 Fish products 668638.52 2.8 23.75 35571569.3 44464462 53357354
311 Food 19378335.76 2.2 0.05 1705293.5 2131617 2557940
313 Textiles and fabrics 92126.35 2.2 0.21 34049.9 42562 51075
314 Textiles mill products 4153133 .37 2.2 0.30 2192854.4 2741068 3289282
321 Wood products 71164.16 2.8 0.19 30287.5 37859 45431
322 Paper 354593.19 1.8 0.13 66379.8 82975 99570
325 Chemicals 1185138.69 1.9 0.25 450352.7 562941 675529
326 Plastics and rubber 17779.87 1.9 0.12 3243.0 4054 4865
327 Non metallic mineral 160876. 92 2.8 0.18 64865.6 81082 97298
331 Primary metal 37658237.68 2.8 0.30 25306335.7 31632920 37959504
332 Fabricated metal 58308377.14 2.8 0.13 16979399.4 21224249 25469099
333 Machinery, except electrical 303535.69 2.8 0.42 285566.4 356958 428350
336 Transportation equipment 47777.55 5.2 0.45 89439.6 111799 134159
337 Furniture and fixtures 347.89 2.8 0.29 226.0 282 339
339 Miscellaneous manufactures 63033167.58 2.8 0.60 84716577.2 105895722 127074866
Not elsewhere classified 4397052.27 2.8 0.25 2488614.3 3110768 3732921
Totals 190247425.3 170109863.5 212637329 255164795
 Trade Effect Coefficient 0.89 1.12 1.34

Annex Table 6: Summary of Results for Various Values
for Substitution Elasticity and Pass-through, 2001-2003

2001

 Low Medium High
25 per cent 0.22 0.27 0.33
50 per cent 0.43 0.54 0.65
75 per cent 0.65 0.81 0.98
100 per cent 0.87 1.09 1.30

2002

 Low Medium High
25 per cent 0.25 0.31 0.37
50 per cent 0.50 0.62 0.74
75 per cent 0.74 0.93 1.12
100 per cent 0.99 1.24 1.49

2003

 Low Medium High
25 per cent 0.22 0.28 0.34
50 per cent 0.45 0.56 0.67
75 per cent 0.67 0.84 1.01
100 per cent 0.89 1.12 1.34