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Citation: 2006 Eur. St. Aid L.Q. 695 2006

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product in their territory. Another party could requestconsultations - with a view to limiting the subsidies -where it considered that the subsidy in questioncaused or threatened to cause serious prejudice to itsinterests. Article VI also addressed export subsidies:First, aMember should seek to avoid the use of exportsubsidies on primary products; if a Member grantedsuch subsidies that operated to increase its exports ofthat primary product, then it had to ensure that thesubsidy in question did not result in the Member having more than an equitable share ofworld export tradein that product. Export subsidies to non primary products were to cease altogether as of January 1958where such subsidies resulted in the export price of theproduct being lower than its domestic price.

Article V1 GATT is also relevant. That Article concerns antidumping duties and countervailing ineasures. Para. 3 of Article VI sets out the basic principlethat countervailing duties (CVDs) may not exceed theamount of subsidisation ( bounty or subsidy deter-mined to have been granted, directly or indirectly, onthe manufacture, production or export of such product in the country of origin or exportation ).Articles XVI and VI still apply, but the basic disciplines they established were the subject of subsequentnegotiations, which have resulted in the UruguayRound SCM Agreement. The WTO disciplines on sub-sidies are therefore, today, primarily contained in theSCM Agreement. The SCM Agreement builds onrules that had already been agreed in one of the lokyoRound Plurilateral Agreements, the Subsidies Code.Whereas only some of the GATT Parties decided tosign up to the Tokyo Round Subsidies Code, the S MAgreement applies to all WTO Members. This is consistent with the Single Undertaking principle adopted in the Uruguay Round. There exist, however, besides the SCM Agreement, specific rules applicable toagricultural subsidies, which are found in the Agree-ment on Agriculture. We do not discuss these ruleshere as we are limiting our study to the general rulesaffecting industrial goods, and therefore falling withinthe scope of the SCM Agreement. Other WTO Agreements are potentially relevant, such as the TRIMSAgreement (Agreement on Trade Related InvestmentMeasures) and the GATS (General Agreement onTrade in Services) but are also not discussed here.b. The SCM AgreementThe SCM Agreement contains two broad sets of rules,respectively referred to as Track I and Track I . TrackI refers to the imposition by a WTO Member of coun-tervailing duties on imports from a Member grantinga subsidy, where that subsidy harms the former sdomestic industry; Track I therefore builds on ArticleVI GATT. Track II refers to the multilateral disciplines,i.e. the rules that aWTO Member must respect or elsefind itself in violation of the Agreement and risk being

the subject of a complaint before the WTO judicialinstances (Panel and, on appeal, Appellate Body). Inother words, the rules that originated in Article XV IGATT.T us, contrary to the EC system, there is no ex ante

control of subsidies in the WTO: a Member mustapply self-discipline, and other Members can eitherimpose countervailing duties to counter th ir effectson th ir domestic market under Track I or challengethe subsidies granted under Track 11.

2. Definition of subsidyThe SCM Agreement contains the irst definition ofsubsidy in GATT WTO history. While the definitionis rather all inclusive, as will be clear from the discussion below, it still leaves many questions unanswered.A subsidy is defined as a financial contribution , orprice/income support by a government or a publicbody, which confers a benefit on a recipient. We dis-cuss each of these requirements in turn below.a. Financial contribution and cost

to governmentArticle i.i(a)(i) SCM states that the following arefinancial contributions:Direct transfer of funds and potential direct trans

fers of funds or liabilities (loan guarantees) (subpara. (i)).

Defineds any roductf arm, orestr ishery; o any inel, in tsaturalform r hich as ndergone uch rocessings s ustomai equired to pre-paretfor arketingn ubstantialolume in interna l race .

6 On he relationshipetween the isciplines of ATT1994 nd hat of he SCMAgreement,the eneralnterpretativeote o nnex I of he Agreement provideshatInhe vent f onflictetween a provisionf the GA T]and provisionf nothergreement n nnex iA o the Agieement Establish-ing the orld ade Organizationsuch s he SCM Agieement],he rovisionfthe ther greementIallrevailo he xtentf the onflict.ee also he eportf he ppellateody, nited tates T Teatment or oreignalesorpoiations, 10DS18/AB/R,4 Februaiy000, US - FSC ),aragiaph ii7:

. the rovis ons f he Cr Agreement do no rovidexplicitss tancesto he elatnshipetween the xportubsidy visions h SMAgreement and rticleVIL4f he ATT 1994 [yet]i]t is learrom vencursoryxaminationf rticleVI:4 f he T-994 that tiffers very ub-stantiallyrom he ubsidyrovis ons f he Cr Agreement. as e haveobservedreviously,he CM Agreement containsbroad ackagef newexportubsidyisciplineshatgo elleyond merelypplying and nterpreting rticles, \i nd XIi f he G-T 194 . - hus wehe or otmeasure is n xport subsdy under ArticleVi:4f the /S_1 947 rovidesno guidancen etermininghether hateasure a a prohibitedxportubsidynder Article.1a) f the CM Agreement....footnotesmitted)

7 Servicesre ot uectto the CM Agreement and he ATS Agreement srovisionsre nlikelyo providepotentialomplainantith he oolso ffective y challenge any uch ubsidies See rticleWG-S and incklGoyette,upra ote age 51.e should lso ote he resence of hePlurilateralgreement on ade in ivilircraft.lso,e do not iscuss re he,specialnd ifferentialeatment provisions,.e.ertainerogatiomnsome ofwhich ave ow lapsed)rom he SCM Agreements disciplinesrom whichdeveloping countriesembers benefitnder art Ii f the Cr Agreement

8 For omprehensve descriptionf he CM s isciplines,ee laike/Horlick,I he gieement on Subsidiesnd Countervailingeasures ,nBronckers/Hoiiick,VVO urisprudencend Policy:ractitionerserspectivesLondon, Cameron ay,2004) pages 11 91.

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Government revenue that is otherwise due is fore-gone or not collected e.g. tax credits and other fis-cal incentives) subpara. ii))iProvision of goods or services other than generalinfrastructure or government purchase of goods(subpara. iii)).1Government payments to a funding mechanism orgovernment entrustment or direction to a privatebody to carry out one the type of functions illus-trated in subparas. (i) to iii) and which would normally be vested in the government and the practice,in no real sense, differs from practices normally followed by governments subpara. (ix)).

The use of the term i.e. in the chapeau of Articlei.i(a)(i) indicates that the list is exhaustive: onlythese four types or broad categories) of governmentmeasures constitute financial contributions underArticle i.i(a)(i)i But one notes the rather broadwording - and therefore presumably rather largescope - of the different types of measures that mayconfer a financial contribution.

9 The foregoingf evenue therwiseue isto e deteiminedy ompaison tothe eie therwisestablishedythe axationystem f the ember inquestion ee eportf the ppellateody in S - FSC, aragraph 90 andReport of the ppellateodyUnitedtatesTax Ieatment of ForeignalesCorpoiations,ecourse to rticle1.5 f he DSU bythe CW /DSIS8/AB/RW, 4 anuay 2002, ( US F (2)) paragraphs 89-90:

.the eaty hraseoi due'mplies a comparisonth a 'defined,ormativeenchmarK ,-e urposef thisomparisons o istguish betweensituationshere revenue oregone 'otherwreue' nd ituationsheresuch evenue s ot otherwiseue'.s embers, in rinciple,ave the vereign uthorityo determineheirwn rulesf axation,he omparisonnderArticle.1a)(i)(ii)fhe SCM Agreement most ecessarilye between herulesf axationontainedn the ontestedeasure nd therLlest taxa-tionf the Member in question.uch comparson enablesanelsnd heAppellateody o leach n bjective concusion,n the basisf erietaxationstablishedy a Member by itswn choice,sto hether he on-testedeasue involvesheoregoing of evenuehat ould e due in omeother ituationr,n he ords f he CM Agreement, 'omherwiseue,,,

in dentifyinghe ppropriateenchmarkfor omparison,anelsustobviouslynsurehat hey dentifynd xamine iscalituationshich tlegitimateo ompare.in her words,hereust be a rationalasisorcomparinghe iscalreatmentf he ncome subjecto the ontestedeasure nd he iscalreatmentf ertaintherncome.in eneralerms,n hiscomparson, likeille compaced with like.ornstance, if he easure tissuenvolvesncome earned n alesransactions,tmight ot e ppropri-ate o ompace the reatment of thisncome with employment income.

Also,ote that s e note to rticle. (a) (i), the exemptionf anexportedroductrom uties rtaxesorne by he likeroduct when destinedfor omesticonsumprton,rthe emissionf uch utiesr axes n mountsnotn excessf those hich ave ccrued not onsideredsubsidy.hisexceptionoes ot, oever, pply o he emissionfmport cuties, SeeReportf the ppellateody, anca Certain MeasuresffectingheAutomotivendustry,/DS.139/AB/R, T/DS142/AB/R, 1 May 2000,('Canada utos'),t aragraph.

10 Goods' as een intepreteds eferringo 'veryroad pectrumf hingshegovernment can rovide' angibler ovable ersonalropertyther hanmoney and n eneralncompassesalln-kindontributions.eport of hePi Unitedtates Preliminaryeterminationsith especto ertainSoftwoodumber rom Canada,WT/DS258/R, 7 September 002, ( USLumber W), aragraphs 7,23 n24. n his ase,he rovisionf standing timberto harvestingompaniesas heldo onstitutehe rovisionf oods. ee lsothe eportsf he anel nd ppellateody in nitedtates FinalCountervailinguty etermination with espect to ertainoftwoodumberfrom Canada, T/DS257/R and L]DS257iABiR i7February004, ( USLumber \V),t,espectively,aragiaphs 7 5730 and ccgraphs7-76

11 See eportf the i United tates easureseatingxportestraintssSubsides,T/DS194/R 9 June 001, US Exportestaint) aragraph8.73:

The concept of financial contribution ensures that notall government measures that confer benefits can bedeemed to be subsidies.2 The presence of a financialcontribution and that of a benefit are thus two separate, but equally necessary elements of a subsidyunder the SCM Agreement. The Appellate Body inBrazil - Aircraft sanctioned the Panel for commin-gling the concepts:

[In its interpretation of Article i.(a)(i), the Panelimported the notion of a benefit into the definitionof a financial contribution . This was amistake.Wesee the issues and the respective definitions ofa financial contribution and a benefit as two sep-arate legal elements in Article i.i of the SCMAgreement, which together determine whether asubsidy exists...

The last item of this list (subpara. iv) warrants further attention. Subpara. (iv) essentially seeks to pre-vent a Member from doing indirectly what it cannotdo directly. The issue of government entrustment ordirection was addressed by the Panel in the US

..he egotiatingistoryonfirmshat he ntroductionf the wo-partefini-tion f ubsidy,onsistingf 'financialontribution'andenefit',as intended specificallyo reventhe ounterailingf enefit rom ny ortf (forral,nforceable) government measues, y restrctingo finiteistheKinds f overnmenteasures hatould, fthey onferredenefits,onstitute u ie

i2 bid.,ciagicph 8.5; see lso aragraph69:The sutmissionsyparicipantso he egotions suggesthat he ropo

en li behind ncludingtheinancialontribution]lementas tolimithe inds f overnmentctionshat ould allithinhe cope f hesubsidynd ountervailingeasure Lles.n ther ords,he efintionti-matelygreed in he egotiatns efinitivelyeectedhe pproachspousedby the Unitedtatest defining subsdiess benefitsesultingrom an ov-ernmentction, byintroducinghe equirementhat the overnmentctionnquestiononstitute'financilontriLtion'caset cth n n exhaustiveist.

See lso the Reportf he Appellate Body,Unitedtates Countervaiiingutyinvestgtitonn ynamic Random Accessemory Semiconductorsrom orea,\T/DS296iAB/R 7 June 005), paigraph 07:Aricle.1a)(1) SCM makes clearhat financialontmution'y government or ublicody is n essentialomponent of ubsdy under the CM

Agreement.No productay be found o e subsidisedncer rticle 1.1a) 1)SCM or ay ite counteraiied,n the bsence of financialontribution.See lso eport of the ppellateody,US DRAMS t aragraphs 114andi15:This consistentith he ppellateody'statementn S SoftwoodLumber IV hat notll governmentmeasures capablef coning benefitswould ecessarilyallithinrticle.i (a)',therwisearagraphs (i)hrough(v) f Article(a) ould ot e necessarybecausellovernment measuiesonferring benefits,er e, ould e subsidies'Furthermore,uch n interpreationconsistentith he bjectnd ur

pose f he crvIgreement, which eflects a delicatealanceetween heMembers thatought to impose ore disciplinesn the se f ubsidiesndthose hat oughto impose ore disciplinesn the pplicationf countervailingeasures ndeed,he ppellateody has aidthe ohoct ndpuipose fhe SC1 Agiement is'totrengthennd improveA-T disci-plineselatingo he se f both ubsidiesnd ountervailingeasures,while,ecognizingt he ame time,he ightf embers to impose uchmeasures nder ertainonditions

i3 Reportf he ppellateody,BrazilExportinancingrogramme for ircraft,WT/DS46/AB/R, 2 August 999,('Brazilircraft'),aragraph5/ uoted ithapproval in,nteili,S - Exportestraints, at aragraph 8.20 ee lso,nfra,note 1and Report of he anel n anada Exportreditsnd LoanGuarantees foi egional Aiicraft,/DS222iR, 28 January002,('CanadaAircraftI'),aragraph /596:

..he termbenefit; relateso he ffectsf a tinancialontribution;hus, norder to emonstratehe xistencef benefit',complainingartyustdo more than stablishhe xistencef 'tinancialontribution;

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Export Restraints case. The Panel indicated that Arti-cle i.i(a)(iv) SCM contains five requirements:- agovernment entrustment or direction;to a private body;to carry out one or more of the types of functions

illustrated in subparas. (i)-(iii);- and those types of functions 'would normally bevested in the government';- 'the practice in no real sense differs from practices

normally followed by governments. The US Export Restraints Panel considered that government entrustment or direction 'refers to situationsin which the government executes a particular policyby operating through a private bod and that theaction of the government must contain a notion of delegation (in the case of entrustment) or command (inthe case of direction), and that both of these acts necessarily entail the following three elements: (i) anexplicit and affirmative action, be it delegation orcommand; (ii) addressed to a particular party; and (iii)the object of which action is a particular task or duty.16

Thus, for the Panel, there had to be an 'explicit andaffirmative act of delegation or command' for government entrustment or direction to exist. The Panel alsodistinguished government entrustment or directionfrom the situation in which governments intervene inthe market and which intervention produces results,which may not necessarily have been intended. Thus,in the Panel's view, the existence of a financial contribution by agovernment must be assessed with respectto the nature of the government action - rather thanthe reaction or results it produces on the market, ashad been advocated by the US in that case. 7 Thus,subpara. (iv) of Article i.i(a) closes a loophole byavoiding circumvention and preventing a governmentfrom acting through an intermediary (a private body)to confer the types of financial contributions foundunder subparas. (i) to (iii).Subsequent Panels, while agreeing generally withthe US Export Restraints Panel's approach and withthe necessity of an 'affirmative act' of delegation orcommand, questioned whether this act needed to be,explicit'. Rather, they considered that subpara. (iv),encompassed entrustment or direction irrespective ofthe precise form it takes'. The Appellate Body itselffinally addressed the issue of government entrustment or direction in US DRAMS. The AppellateBody agreed with the general idea that subpara. (iv)'covers situations where a private body is being usedas a proxy by the government to carry out one of thetypes of functions listed in paras. i) through (iii) eand that seen in this light, the terms entrusts and directs in para. (iv) identify the instances whereseemingly private conduct may be attributed to agov-ernment for purposes of determining whether therehas been a financial contribution within the meaning

of the SCM Agreement. ' The Appellate Body, howev-er disagreed with the interpretation of 'entrusts' and'directs' reached by the Panels. It found that the mean-ing of these terms could not be limited to that of 'delegation' and 'command'. Rather they should be construed more broadly to refer, respectively, to situationsin which a government gives responsibility to a pri-vate body and exercises authority over a private bodyto carry out one of the types of functions in subparas.(i) (iii). Otherwise, the Appellate Body agreed with theUS Export Restraints Panel that the difference between subparas. (i)-(iii) and subpara. (iv) has to dowith the identity of the actor, and not with the natureof the action at issue and that mere encouragement onthe part of government authorities cannot satisfy thetest, nor can entrustment or direction be inadvertentor a mere by product of government regulation. 2'The recognition in the SCM Agreement, that afinancial contribution is granted when a government'entrusts' or'directs' a private body to provide a finan-cial contribution under Article i.i(a)(i) (i)-(iii) sug-gests that the definition of a subsidy under the Agreement is broader than that of State aid' in EC law. EClaw requires that, for a measure to constitute State aid,it must correspond to agovernment expenditure (i.e. acost to the granting government). This is referred to asthe requirement of a 'charge on the public account'.The seminal case establishing this requirement is theSloman Neptun case. In that case, the EuropeanCourt of Justice examined a measure enabling certainshipping undertakings flying the German flag to sub-ject non-EU nationals seafarers to working and payconditions less favorable than those applicable toGerman nationals. The Court refused to consider sucha measure as State aid and affirmed that only advantages that are granted directly or indirectly throughState resources are to be regarded as State aid withinthe meaning of Article 87 (then Article 92 2514 See US Expert Restraints, at paragraph 8.24.15 Ibid paragraph 8.2816 Ibid., paragraph 8.29.17 Ibid, paragiaphs 834-8.3718 Ibid., paragraph 8.53.19 Re)ort of the Panel, Euiopean Communities - Countervailing measures onDvnamic Random Access Memory Chips from Korea, W /DS299/R

( EC DRA ) Simi ieasoning (and language) is found in Reoril of thePanel, United States Countervailing Duty Investigation on Dynamic RandomAccess Memory Semiconductors hem Korea, W1 DS296/R 2i Feiruary 2005,TS DRAMS ), paragraph /.33 and in Report of the Panel, Korea MeasuresAffectingrace in Commercial Vessels, /DS2/3/R, 7 March 2005, ( KoreaVessels ), paragiaph 7370

20 Ibid., paragraph i08.2 bid.22 lbid, at paiagiaph i2 cee, for an exhaustive analysis of the issue, Slotboom, Do Differer Tea y Pur-poses Matter for Iteary interpreai A Comparison ofVTO aid ECLaw London, Cameron ma, 2005), pages 97 126. TheaLthor ta

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In a more recent case, the ECJ held that legislationforcing private regional electricity suppliers to pur-chase electricity produced from renewable energy pro-ducers in their area of supply at fixed (and thereforeabove market) minimum prices did not constituteState aid.2 The Court found that the measure in question, while conferring an economic advantage onrenewable energy producers, [did] not involve anydirect or indirect transfer of State resources to under-takings which produce that type of electricity 27 andremarked that:

... he case law of the Court of Justice shows thatonly advantages granted directly or indirectlythrough State resources are to be considered aidwithin the meaning of Article 92(1) [now 87(1)].The distinction made in that provision between aidgranted by a Member State and aid grantedthrough State resources does not signify that alladvantages granted by a State, whether financedthrough State resources or not, constitute aid but isintended merely to bring within that definitionboth advantages which are granted directly by theState and those granted by apublic or private bodydesignated or established by the State ....

In sum, State aid will only exist, under the currentCourt jurisprudence, where the measure entails adirect or indirect transfer of state resources to certainundertakings.29 This requirement is however not as

26 Case C-379/98 PreussenElektra ACv.Scvleswag AC [2001] ECR -2099.27 Ibid, paragraph 59 .28 Ibid., paragraph 58. The Court reected a Commission argument that the Stateaid concept ought to be inte ed in such a way as to include support meas-

ures whh ale decided upon by the State but financed by private undertakings.See ibid., paragraph 65. See also the Opinion of MrAdvocate General Jacobsdelivered on 6 October 2000.Foran overview of theCot s jurisprudence on the issue, see AG acobsOpinion in PieussenElektia, paragraphs 1 4-116:I he phrase granted by a Member State oi thiough State iesouices in Article92 ) might be read in two different way .

On the one hand, it might be argued that the second alternative aid granted through State resources covers measures financed through public funds,whilst the istltenative aid gianted by a Member State covers all remain-ing easures which are not financed through State resources. Undei thatextensive interpretation ofArtide 92(1) any measure which comers economicadvantages on specific undertakings, and which is the result of conduct attributable to the State, constitutes State Aid independently ofwhether it involvesany financial burden for the State.

On teoher hand, Article 92(1) may be iead as stating that aid must necessarily be financed through State resources and tth distinction betweenaid granted by a State and aid granted through State resources serves to

iing, within the definition of aid not only aid granted directly by the State, butalso aid granted by public or private bodies designated oi established by theState. Under that second narower intepretation the measuie at issue mustnecessarily cost the State money and financing through public resources aconstitutive element of the oefinitionf State aid.

it isnow weli-established case-law that the second leading prevails andthat only advantages which are granted directly or indiectly through Stateiesouices ale to be iegarded as State Aid within the meaning of Aricle 92(1).

29 Interestingly, the EU pplied the cost to government standard not only to itState aid rules, but also in the application of countervailing measures against toleign subs dised products See BronckeLis/Quick, What is aCounteivailabieSubsidy Under EEC race LawT journal of World ace, 23 6), (1989), pages 53i eading the definition of subsidy in the current CVDRegulation (CouncilRegulation (EC) No 2026/97 of 6 October 1997, Article 2 Of 1997 L 288), it

strict as it first appears. The Court has been ready toconsider as State aid measures granted through pri-vate resources where such resources are directly orindirectly under the control or at the disposal of theState. In such cases, measures taken by private actorscan be imputed to the State.By contrast, no cost to government requirementexists under WTO law with the result that various gov-ernment-mandated measures that do not impose a coston the granting government are nonetheless regarded assubsidies,31 meaning that a number of subsidies thatwould not constitute State aid under EC rules will nevertheless constitute subsidies under WTO law. As dis-cussed above, this result is evident from the text ofArticle i.i(a)(i)(iv) given that government instructionsto aprivate body (for instance aprivate bank) to grant afinancial contribution will satisfy the definition of subsidv. The different approaches retained in the EC andin the WTO apparently result from the fact that the EChad to somehow accommodate the views of the US inthe negotiations on the definition of subsidx . The EC sproposal that subsidies be limited to cases where acharge on the public account is incurred was not retained.

T hus, in principle, the requirement in EC law that ameasure correspond to acharge on the public accountsignifies that EC State aid law is more lenient than theWTO s disciplines on subsidies asomewhat counter-intuitive result). We have already noted, however thatthis requirement of a charge on the public account is

appears that the EChasnow adopted the SCMAgeement definition of a sub-sidy for the purpose of applying its countervailing duty legislation.

10 See, intei alia, Case C83/98 P Fiance v. Ladbioke Pacing and Commission,F2000] ECR I32/i, paragraph 50, Case C482/99 -France v. Commission(Stardust case), 002] ECR14397, paragraphs 50-56.

31 See Report of the Appellate Body, Canada easures Affecting the Export ofCivilian Aircralts, WT/DS/O/AB/R, 2 August 1999, paragraph 160 ( CanadaAiiras ) wheie the Appellate Body mace this veiy point in response toCanada s contention that the existence of a benefit had to be examined by ieference to c to the government criteria:

Canada insists h the concept of cost to government is relevant in the interpretatnot benefite note that this interpretation ot benefit would excLdefior the scope of that term those situations where a benefit is contened by aprivate body under the direction of government. T-ese situaton cannot Deexcluded from the definition of benefit in Article 1.1b), given that they arespecifically included in he definition of financialcontribution in Article1.1 a)(iv e ale, ti no persuaded by this argument ot Canada.

See, also, Report of the Panel, Canada easures Affecting the Export ofCivilian Aircrats, WT/DS/O/R, 14April 1999, ( Canada Aircraft ), at paragraphs996-9120 As one can see, the issue of cost to government was addressedsomewhat indirectly (Canada had aigued that the notion of benefit in the caseat hand included a net cost to the government requiement, but the AppellateBody rightly replaced the issue of net cost to the government in the contex offinancial contribution and found fault with the Pane to onsg the conceptsof financial contribution and of benefit. See Appellate Body Report, CanadaAircrat at paragraph 155.

32 \e note that State-owned or controled undertakings ale assimilated to theState uncr both ECandvO law.

3 in an apparent effort to limit the types of measuies that could be countervailedby the US (then the prime user of the CVD instrument), the EChad proposedthat subsidies only be found to exist where a financial charge is incurred bygovernment or administrative authoity on behalf of a benefici (UruguayRound Gioup of Negoiations on Goods (GAT), Negotiating Group onSubsidies and Countervailing Measures, Communication from the EECMTN.GNG/NGI0/W/7, 11June i987, quoted in Report of the Panel, USExport Restraints, at note 155.

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in fact mitigated to a certain degree by the manner inwhich certain actions of private actors can be imputedto the State under EC law.b. BenefitWTO and EC law contain a similar requirement: ameasure will only constitute asubsidy or State aid if itconfers an advantage on the recipient this followsfrom the wording of Article i.i(b) SCM ( and a ben-efit is thereby conferred') and the words which distorts or threatens to distort competition by favouringcertain undertakings or the production of certaingoods' in Article 87 (i)EC. As we see below, in both sys-tems, whether an advantage is conferred is defined inrelation to the marketplace.

In Canada Aircraft, the Appellate Body noted that,because there can be no benefit unless the financialcontribution makes the recipient better off than itotherwise would have been, the notion of benefitimplies a comparison. The market provides the rele-vant benchmark:the marketplace provides an appropriate basis forcomparison in determining whether a benefit hasbeen conferred because the trade distorting poten

tial of a financial contribution can be identified bydetermining whether the recipient has received afinancial contribution on terms more favourablethan those available to the recipient in the market.

The definition of subsidy was also discussed by thePanel in EC DRAMs. In that case, the question aroseof whether the EU was entitled to impose countervail-ing duties on Korean DRAMS; this also raised the pre-liminary question of whether asubsidy existed (exportsubsidies were concerned, but as the Panel andAppellate Body had to address the preliminary issue ofwhether asubsidy existed, they did not need to look atthe specific provisions concerning export subsidies).The Panel noted that the existence of a benefit is acon-stitutive element of the definition of a subsidy: only incases where the financial contribution provides therecipient with an advantage over and above what itcould have obtained on the market will the govern-ment's financial contribution be considered to haveconferred a benefit and will a subsidy thus be deemedto exist.' 5 The Panel noted that if the public or publicly directed financial contribution is provided underthe same conditions as a private market player wouldhave provided, then there would be no reason toimpose any discipline, simply because the financialcontribution was provided by the government.' 6It is also to be noted that benefit does not alwaysneed to be established. As will be explained below, theSCM Agreement contains an Illustrative List of exportsubsidies. Measures meeting the criteria of an item ofthe list per se constitute prohibited export subsidies;benefit therefore needs not be established separately37

Article 14 SCM, which concerns the Calculation of theAmount of a Subsidy in Terms of the Benefit to theRecipient was found to provide relevant context forthe interpretation of the concept of benefit.38 Article 14 SCM provides that:For the purpose of Part V [rules on countervailingduties], any method used by the investigatingauthority to calculate the benefit to the recipientconferred pursuant to paragraph of Article 1 shallbe provided for in the national legislation or implementing regulations of the Member concerned andits application to each particular case shall be transparent and adequately explained. Furthermore, nysuch method shall be consistent with the followingguidelines:(a)government provision of equity capital shall not

be considered as conferring a benefit, unless theinvestment decision can be regarded as inconsistent with the usual investment practice (in-cluding for the provision of risk capital) of pri-vate investors in the territory of that Member;

b) a loan by a government shall not be consideredas conferring a benefit, unless there is a difference between the amount that the firm receivingthe loan pays on the government loan and theamount the firm would pay on a comparablecommercial loan which the firm could actuallyobtain on the market. In his case the benefitshall be the difference between these twoamounts;(c) a loan guarantee by a government shall not beconsidered as conferring abenefit, unless there isa difference between the amount that the firmreceiving the guarantee pays on a loan guaranteed by the government and the amount that the

34 Appellateody Report,anada - Aircraft,t aragraph 1575 Reportf he anel,C DRAMs at aragraph.1/5.6 bid.n hatase,he aneloundhat a benefitxistedecause,ifhe overnment chargesesshan marketee or tsuaranteenlightf he pecificircumstancesf the ase,hereould e enefito the ecipient'Repot ofthe anel,C- DRAMs, aragraph 7189 it ound nhat case hat subsidyexistedecauseprivatearketperatorould otave providedn xpertguaranteeimilaro hene thatas providedy he ublicody (inact,hatpublicody itselfas ieluctantossue a guaranteeithoutpromiseromhegovernment thattould rovidedditionalundingn asehe rantingf heguaranteeould esultn shortagef ayment capacityn he ublicodyspart). It lsoound hathe ommercialank thatad rovidedoanso herecipientould im y not ave agreed o iant comparable commecial loanabsenthe government guaianteen otheiwords,he anelid ot eed ocompare the ostf he oaneceivedand ackedy overnment guarantee) nd commercialenchmark,sincehereereone of he atter.

3 onversely,hiseans that the llustrativeistiouldot e sed s ontextodeine the otionf subsidynderrticle.ee he aneleportnanadaAircraf,t cicgraph 9. 7:

.. e are nableo cceptanada'sigument hattem (k) t the llustrativeListf nnex I theCM Agreementonsttutesontextualuidanceordetermininghe xistencef benefitn the pecificontextf overnmentcredit under rticlen oui iew, temk) of the Illustrativeis,appliesndetermininghethe r no' prohibitedxportubid xists.do o con-side;nd he arts ave ot rgued,hattem ) ceterminesether ornot subsidyxistsithinhe eaning of Arrele i of theCM Agreement...'

8 Paneleport,anada-Aircraft,t aragraph.113nd ppellateody Report,Canada-Aircraft,t aragraphs55 58.


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firm would pay on a comparable commercial loanabsent the government guarantee. In this case thebenefit shall be the difference between these twoamounts adjusted for any differences in fees;d) he provision of goods or services or purchase ofgoods by a government shall not be considered asconferring a benefit unless the provision is madefor less than adequate remuneration, or the pur-chase is made for more than adequate remunera-tion. The adequacy of remuneration shall bedetermined in relation to prevailing market conditions for the good or service in question in thecountry of provision or purchase (including price,quality, availability, marketability, transportationand other conditions of purchase or sale).

We note, however, that there may not always be a 'market' to serve as a benchmark. In Lumber IV the US hadargued that the price of lumber in Canada did not rep-resent a valid commercial benchmark because of theoverwhelming presence (supply) of allegedly) sub-sidised lumber originating in public land, which meantthat the price of the lumber from private forests wasdepressed The US authorities had used a so calledcross-border benchmark, i.e. they used as a benchmarkthe price of lumber of comparable species in neigh-boring US States. As we have seen, Article 14(d) SCMrequires that the adequacy of remuneration for thegoods provided be determined by reference to 'prevailing market conditions... in the country of provision orpurchase'. The issue was therefore whether the USauthorities' use of a cross-border benchmark was at allacceptable. The Appellate Body found that althoughdomestic market conditions provided the startingpoint of the analysis, certain conditions prevailing onthe market might justify the use of other benchmarks.In other words, the Appellate Bod accepted - at leastin principle - that the overwhelming presence of theState on the market for a given good may invalidatethe market as the relevant benchmark for the determination of whether a benefit exists. a9

EC State aid law includes a concept similar to thatof 'benefit'. In order for State aid to exist, it is neces-sary that there is an aid favoring certain undertakings39 Appellate odyRepor, US - LumQer V,paragraphs 80-122.40 See, inter alia CaseC 353/95 Tierce Ladbroke v. Commission, F199/]

ECR 700741 See Case C39/94 Syndicat francais de Express international SFEI) and oth

ers v. LaPoste and others, [i996] ECR-03547 paragraphs 60 62.42 See e.g. Case C 301/87 France v. Commission, [1990] ECR1307.43 See e.g. Case C342/96 Spain v. Commission F1999]ECR1-02459, paragraph

46.44 Article 2.3 SCM. nterestingly, the Panel, in Korea Vessels, at paragraph/.514,held that a subsidy that a specific by virtue of Article 2.3 SCM (by virtue of

export contingency) is automatically specific for the pupose of both Part Ii pro-hibited export subsidy) and Part if actionable subsdy) claims5 Article 2I a) SOM.

46 Article . b) SCM.

or the production of certain goods, in other words thatit confer an advantage on the recipient. While some-times frnmulated differently, the operation is similarto the determination of a benefit under WTO law. Thetest is whether the benefit would not have beenreceived in the normal course of business, or under'normal market conditions .4 Thus, also under ECState aid la, the relevant benchmark is the market.

For instance, in the case of investments made bygovernments, the government's conduct will beassessed in comparison to a 'private investor' principle.42 This means that the situation in question underthe prevailing market conditions will be assessed incomparison with how private investors would behavein a similar situation. The granting government, if itbehaves like a private investor, will not be consideredto have granted an advantage. A second principle, thatof the 'private creditor, means that a government willconfer an advantage where it neglects to collect moneythat it is due.In conclusion, the EC and WTO disciplines on theissue are similar.c. SpecificitySpecificity is not, per se, a requirement for a subsidyto exist under WTO law. But a subsidy is only subjectto the provisions of Parts II (prohibited subsidies), III(actionable subsidies) and V (CVDs) of the SCMAgreement if it is specific (to an enterprise, industryor group of enterprises or industries collectivelyreferred to as 'certain enterprises') within the jurisdic-tion of the granting authority. Prohibited subsidies aredeemed specific, meaning that even if they are avail-able to all enterprises, the disciplines of Parts II and Vwill apply.4Article 2.1 SCM provides principles to determinewhether subsidies are specific:- De jure specificity: De jure specificity exists where

access to a subsidy is explicitly limited to certainenterprises or groups or enterprises, or industries,etc.) by the granting authority, or the legislationpursuant to which it operates.'5

- Presence of objective criteria: specificity does notexist where the granting authorit), or the legislationpursuant to which the granting authority operates,establishes objective criteria or conditions defined as criteria or conditions which are neutral, whichdo not favor certain enterprises over others, andwhich are economic in nature and horizontal inapplication, such as number of employees or size ofenterprise - governing the eligibility for, and theamount of, a subsidy, and provided that the eligibility is automatic and that such criteria and conditions are strictly adhered to. in addition, the 'criteria or conditions must be clearly spelled out in law,regulation, or other official document, so as to becapable of verification'.

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De facto specificity: asubsidy may be considered tobe specific even in the absence of explicit limitationto certain enterprises or the presence and adher-ence to objective criteria or conditions. If there arereasons to believe that asubsidy may in fact be specific, other factors will be considered:use of a subsidy programme by a limited number

of certain enterprises;predominant use by certain enterprises;the granting of disproportionately large amountsof subsidy to certain enterprises; andthe manner in which discretion has been exercised by the granting authority in the decision togrant a subsidy (the frequency with which appli-cations for a subsidy are refused or approved andthe reasons for such decisions shall be considered).

The Panel in Lumber IV held that a determination ofde facto specificity does not need to be based on anexamination of all four of these factors listed underArticle 2.1 c) SCM, but can be based on an exarmination of only some (for instance 2). 48Also, Article 2.1 c) requires that due account betaken of the extent of diversification of economicactivities within the jurisdiction of the grantingauthorit , s well s of the length of time during whichthe subsidy programme has been in operation'. Whilethis provision is not very explicit, one can imaginethat, for instance, it may help push into the non specific category a programme that has only benefitedone or two industries in acountry where the economyis dependant on a few sectors or where the programhas not been in use long enough for data on its use tobe reflective of an intent to grant subsidies only to certain enterprises, industries, or groups thereof, It maybe hard for a developed country to make use of thefirst element of that provisionf 9

Article 2.2 SCM contains special rules for regionalaid. According to Article 2.2 first sentence, a subsidy,which is limited to certain enterprises located within adesignated geographical region within the jurisdictionof the granting authority, shall be specific. This word-ing suggests that a subsidy granted to all enterprisesin a certain region is non-specific. '

Article 2.2 second sentence addresses the specialcase of subsidies granted through fiscal measures.According to this sentence, the setting or change ofgenerally applicable tax rates by all levels of govern-ment entitled to do so shall not be deemed to be aspe-cific subsidy for the purposes of this Agreement'.Different tax rates of different provinces, autonomousregions, Lander, etc. are therefore 'non specific'.

There is relatively little WTO jurisprudence andno Appellate Body guidance - on the issue of speci-ficit and most of the issues addressed have been rel-atively basic ones. For instance, Panels have examined

the concept of limitation to certain enterprises orindustries. The US - Cotton Panel found that anindustry , or group of industries could generally bedefined by reference to the type of products they produce. In the Panel's vie a subsidy would cease to bespecific because it is sufficiently broadly availablethroughout an economy as not to benefit a particularlimited group of producers of certain products'.5'Thus, it considered that subsidies limited de jure to arestricted number of agricultural products (even ifgranted to farmers who may produce other types ofcommodities) and not widely or generally available inrespect of all agricultural production, let alone theentire universe of United States production of goods'were specific. While the Panel avoided decidingwhether subsidies limited to all agricultural productswould be specific, it left no doubt that limitation to aportion of the US agricultural sector was sufficient toreach a finding of specificit .

The Panel in Lumber IV adopted a similar ap-proach. Interestingly, in that case, Canada had arguedthat provincial 'stumpage' programmes (programmesgiving the right to harvest standing timber on publicland against allegedly below market compensation were not de facto specific s had been deter-mined by the US Department of Commerce. Canadaargued that standing timber was by its nature only ofinterest to a limited number of industries and that forspecificity, in law or in fact, to exist, the authoritiesmust have deliberately limited access to the subsidy toa group of enterprises producing similar products.The Panel rejected Canada's arguments: it found nosupport in Article 2 for an interpretation that speci-ficity could only exist, where the inherent characteristics of a good provided by the government limit thepossible use of the subsidy to a certain industry,whereaccess to the subsidy is limited to a sub-set of thisindustry (i.e. to certain enterprises within the poten-

47 Article 2.1 c)SCM48 Report of the Panel in US Lumber IV t paragrap 7123.49 For instance, in US Lumber IV he Panel rejected arguments by Canada in thisrespect, notng that it is a publicly known fact that the Canadian economv and

the Canadian provincial economies in particular ae dve eJiedconomies. Seepciagiaph 7i24.

50 We note that an earlier draft of Article 2.2 first sentence SCM (the 'DunkeDraft') would have made iegional subs dies specific, even if hese subs dieswere available to all enterprises:

12.2 A subsidy Which a available t 7; -nterprises located within a designatedgeogiaphical region shall be specific irrespective of the natuie of the giantinguthority

Contrast with the present language of Artele 2.2 first sentence, SCM:12.2 A subsidy Which a limited to ertoin enterprises located within a desig

nated geographical region within the isdiction of the ganting authoity shallbe specificSee Dunkel Draft (Draft Final Act Embodying the Results of the Uruguay

Round of Multilateral Trade Negotiations, GATT ocument MTN.TNC/W/FA 20Decemberi99i, page l. 3 Article 2.2) Horick and Cirke ieport that thechange was apparently a iesut of a deal between the US and Canada. SeeClarke/HoricK, supra note 8 page 333 note 82.

5i Report of the Panel, United States - Subsdies on Upland Cotton, W/DS267/R8 September 2004, US Cotton ), at paragraph 7.1142.


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tial users of the subsidy engaged in the manufactureof similar products)?' For the Panel, Article 2 address-es the limitation to or predominant use of asubsidy bya limited number of enterprises, not of the use by alimited number of certain eligible enterprises. In fact,the Panel found that in the case of a good that is provided by the government as opposed to money) andthat has utility only for certain enterprises, it was allthe more likely that a subsidy conferred via the provi-sion of that good would be specific." Finally, the Panelheld that specificity is examined at the enterprise orindustry not product level: what matters is not theend products that are manufactured by the industry orindustries using the programme but rather the factthat the subsidy is limited to these industries orgroups of industries.

The Panel in EC DRAMs also addressed thenotion of specificity. The Panel in that case reviewedthe findings of the EU authorities in imposing CVDsagainst Korean DRAMS. The EU authorities had con-cluded that the subsidies in questions were de factospecific because the programme under which theyhad been granted was only used by six of more than2oo eligible companies, and had been disproportionately used (41 of the total funds under the pro-gramme in question) by the DRAMS manufacturers.Korea argued that it was not sufficient in this respectthat a programme only be used by a limited numberof companies if, for example, the eligibility criteria arebroad enough and the restricted use of the programmedepends on the willingness of eligible enterprises tomake use of it rather than on the government. Th ePanel disagreed and found no flaw in the authorities'finding of de facto specificity.5 Unsurprisingly thePanel also validated a finding of de facto specificitywith respect to the tailormade restructuring operations: the EU authorities had concluded that thesewere not simply the application of a generally avail-able support programme', but rather, had been provid-

52 US Lumber IV Panel Repor t paragraph /.116.53 Ibd54 Id paragraph 7.12.55 Report of the Panel in EC DRAMs, at paragraph /.223. T e EC authorities had

consideed that the progiam was not d e specific yet found that the subsi-dies gicnted under it to were de facto specific They had ieached that conclu-sion based on an examination of three of the four criteria mentioned above (theuse of the programme by a limited number of companies, predominant use bycertain companies and the gicnting of disproportionately large amounts of subsdy to certain companies).

56 But the Pane also noted that the EChad taken into consideration the mannerin which the authoities had exercised ther discretion in admitting companies tothe programme in question. The fact that (accorcing to the ECauthoities)there was a lot of crit cism within Korea from companies in similarly difficult situations complaining about the lack of transparency and the eligibility criteafter the progiamme was announced seems to have played a ioe in thisrespect.

57 Re)ort of the Pine in EC DRAMs, paragiaph 7231.58 See e.g Case C 1_3/99 - Adria-Ven Ppeline GmbH and WieteisdorberPeggauer Zementweike GmPH v Finanziandesdirektion fur Kdrnten, [2001] ECR

ed under a procedural framework for restructuringthat did not in itself involve any financial contribu-tions.Thus, a number of questions have not yet beenresolved with respect to how the concept of specifici

ty should be applied in WTO law. For instance, it is notyet totally clear whether the concept of predominantuse is to be assessed with respect to eligible enterpris-es. Our reading of the cases discussed above is that, apriori the predominant use by only a part of the eligi-ble enterprises or industry is sufficient for a finding ofspecificity but that, in a broader sense, access to thesubsidy need not be limited to a sub-set of eligibleenterprises to be specific where eligibility s limited bynatural factors. In any case, as can be seen from thesefew examples, specificity determinations are verymuch fact specific.

The concept of selectivity in EC State aid law doesnot differ fundamentally from the notion of specifici-ty under WTO law Article 87(1) EC requires an assess-ment of whether under a particular scheme, a Statemeasure is such as to favour certain undertakings orthe production of certain goods' in comparison withother undertakings.The notion of selectivity, as interpreted by the ECJ,is rather broad and embraces all measures that are notof general application. The ECJ has held that neitherthe large number of eligible undertakings nor thediversity and size of the sector to which those undertakings belong, provide sufficient ground to concludethat a measure is ageneral measure of economic poli-cy.5' Also, a measure that favors virtually all enterpris-es, but excludes large enterprises, is selective.5" Thus,unlike under WTO law, aid that is limited to SMEs isselective." The fact that some firms or sectors benefitmore than others does not necessarily make ameasureselectivec' but aid granted under measures of generalapplication may become selective where the adminis-tering authority is granted a wide discretion in apply-

18565, paragraph 5-41 (rebate of certain energy taxes limited to uncertakingswhose activties consists primarily in the manufacture of goods, found to beselective); Case C75/97 - Kingdom of Belgium v Commission of the EuiopeanCommunities, [ 999] ECR1-3671,pdiagiaphs 28-3i (limitation of increasedreductions of social security contributions to certain sectors rendered the measures selective), Case 173//3 Italian Republic v. Commission of the EuropeanCommunities, [1974] ECR, page 709 (partial neducton of social charges toempioyeis in the textiles sector found to be selective)

59 See Case C-351/98 Spain v. Commission, F2002] ECR1-8031, paragraph43.in that case, the ECJ i note a discrepancy between the notion of State aidn EC aw a nde the SCr Agreement (ibid., paragraph ,14).

60 But such aid can nevertheless be authorized under Article 87 3)EC. See, infra,the sect on on 'State aid . We say that such measures would not be specifiunder WTO law because Artcle 2.1 b) specifics that subsidies granted pursuantto legis ation containing objective criteiia and conditions, for instance withrespect to the size of the enteiprise oi the number of employees, ale not spe-cific.

See Commission Notice on the application of the State aid rules to measuresrelating to direct business taxation, 4 j99384/3, point 14.2. See also, onde facto selectivity - wheie a measure isacially general but, in fact, fivous cer-tain enterprises - Case 203/82 - Commission v italy, [1983] ECR I2525

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ing it and in determining the modalities of the aidgranted.2

In addition, in the area of fiscal measures, specialrules apply. In spite of the formally selective nature ofa tax, the measure may be justified by the nature orgeneral scheme of the system, in which case the ineasure will not be considered selective and will hence notconstitute State aid.c

However, one important difference between V\,TOand EC law is that of regional selectivity. As we haveseen above subsidies applying only to part of aMember s territory are non specific in the sense of theSCM Agreement, if these subsidies are available to allenterprises in the region. Under EC law, these subsi-dies could well be specific.Of particular interest are measures adopted byregional authorities in the field of taxation. In therecent Azores case, the Court rejected arguments putforward by the Commission that a reduction in thenational tax rate, decided by regional authorities, andwhich applied only in the territory subject to theirjurisdiction was necessarily selective. Rather, theCourt held that:It is possible that an intra State body enjoys a legal

and factual status which makes it sufficientlyautonomous in relation to the central governmentof a Member State, with the result that, by themeasures it adopts, it is that body and not the central government which plays a fundamental role inthe definition of the political and economic environment in which undertakings operate. In such acase it is the area in which the intra-State bodyresponsible for the measure exercises its powers,and not the country as a whole, that constitutes therelevant context for the assessment of whether ameasure adopted by such a body favours certainundertakings in comparison with others in a com-parable legal and factual situation, having regard tothe objective pursued by the measure or the legalsystem concerned.6

The Court held that in such a case, it is appropriate toexamine whether the measure was adopted by thebody in question in the exercise of powers sufficient-ly autonomous vis-a-vis the central power. TheCourt indicated that where all local authorities at thesame level have the autonomous power to set the taxrate applicable in the territory for which they are com-petent, such a measure would not be selective becauseit is impossible to determine a normal tax rate capableof constituting the reference framework .6 Anothersituation is where a regional or local authority adopts,in the exercise of sufficiently autonomous powers inrelation to the central power, a tax rate lower than thenational rate and which is applicable only to under-takings present in the territory within its competence.The Court enunciated a number of factors relevant to

determine whether a decision adopted in this contextcan be regarded as having been adopted in the exer-cise of sufficiently autonomous powers: First, the deci-sion must have been taken by a regional or localauthority which has, from a constitutional point ofview, a political and administrative status separatefrom that of the central government . Second, it musthave been adopted without the central governmentbeing able to directly intervene as regards its content .Finally, the financial consequences of a reduction ofthe national tax rate for undertakings in the regionmust not be offset by aid or subsidies from otherregions or central government .

In the present case, the measures were found to beselective because reductions in tax rates decided bythe regional authorities were offset by budgetarytransfers from the central government.It is not totally clear how the same situation wouldbe addressed by WTO Panels and the Appellate Body.Again, under Article 2 2 second sentence, a horizontaltax rate decided by a regional government which hasthe constitutional power to establish a tax rate for itsterritory would not be specific, even if that tax rate islower than the national rate. While one can suspectthat the WTO judicial instances would regard withsuspicion a situation where (as in Azores) the nation-al authorities offset reductions of the national tax ratedecided by regional authorities, the words or changein Article 2 2 second sentence would seem to mandatea finding of non specificity.

In short, it seems that, although generally similar intheir basic tenets, the concept of selectivity under EClaw and the concept of specificity under WTO law dif-fer in some respect. It seems that the EC law concepthas a broader reach in certain cases (e.g. regionalspecificity or aid limited to SMEs). Yet, any definitiveconclusion in this respect would seem to be prematuregiven the lack of guidance received from WTO Panelsand the Appellate Body on the exact scope of the speci-ficity concept.

62 See Case C-241/94 - French Republic v Commission of the EuropeanCommunities [1996] ECR 1-4551 paragraphs 23-24. in that case, the Courthel that even though proceeding under a general scheme, the conferral ofwide discretion to national authorties in he administration powers enjoyed bythe body implementing the schene (enabling the body to adjust its financialassistance -aving regard to a number of co sideration such as, in particular,the choice ofbnf ir th onof the financial assistance and the condtions under which it is provided) could make contributions under the geneilscheme selective See also Case C 256/97 - Demenagements-Manutentionransport SADMT), [1999] 1-03913 paragraph 27.

63 See Commisson Notice on the application of the State Ace ules to measuresrelating to direct business taxation cit., point 12 Spain v.Commission supranote 59 paragraph 42.

64 Case C 88/03 Portugal v. Commission judgment of 6 September 2006 notyet reported.65 Ibid. paragraph 566 Ibid, paragiaph 867 Ibid, paragiaph 62.68 Ibid. paragraph 64.



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d. Other criteria of the definition of Stateaid in EC lawWe might add that in the EU, a measure of supportonly constitutes State aid if in addition to the above,it also affects trade between Member States, and distorts the competition in the common market. Primafacie, these requirements are additional to those of theWTO, such that they may result in some EU measuresnot being recognised s State aid, but nonetheless con-stituting subsidies under the SCM Agreement. Thiswould, however, seem to be more of a theoretical thana practical concern: First, the Commission and European Courts have interpreted the requirement broad-ly, for instance, not necessarily requiring that the ben-eficiary of the aid participate directly in intra-Commu-nity trade. Second, one cannot really imagine thatfinancial support which is either de minimis, does notaffect trade between the Member States or does notdistort competition in the Common Market wouldever be challenged before the \VTO.

7 1

e. State aid that is compatible withthe common marketAnother important difference between the two ytems is that the presumption in Article 87 1) that Stateaid is incompatible with the common market is notabsolute. Articles 87(2) and 87 3) EC mandates in thecase of Article 87 2), or allows (in the case of Article87(3 , the Commission to declare that certain State aidmeasures are, in fact, compatible with the commonmarket.Thus, whereas under Article 87(2) the Commissionmust authorise the aid once it has determined that itfalls under one of the listed categories, Article 87 3)only provides that the different categories of aid listedmay be authorised. The Commission will thereforeassess whether authorising the aid is in the Commu-nity s interest, weighing the benefits provided y themeasures to their potential detrimental effects oninternal competition. The Commission has developeda body of Guidelines, Communications and Block

69 See e.g., CaseC 66/02 italian Republic v. Commission of the EuropeanCommunities, [2005] ECR1-10901, at pcicgraph 1i7

70 T e issue is not worth further consideraton, but Lne might imagine that aer State measure that oniy affects the domestic industry of a neigboning,non IMembei, country; could fit the bill

71 Subject to the Communication on Multisectora Framework on iegional aid forlarge investment projects, 0J 2002 C70/8.72 See the Commiss on Communication on the Cormunity Guidelines on State

Aid foi Rescuing and Restructuiing Firms in Difficulty, 0J 2004 C 214/2.73 See Part IVof the SCr Agreement Article 31 SCr provided that Part Vwould

only apply toi a period of five years unless extended by the WTO MembeisSince no extension was agreed, the provisions of Part IV apsed on I januar2

74 Worth noting are the (surprising) provisions of Article 9.4 SCV which allowedMember WTO to impose countermeasures w n itwas established before theSubsdes Committee that non-actonable subs dies granted by another \Member caused adveise trade effects to its industry. r his shows that non-actionable subsidies were in fac not totally non actionable.

Exemptions to guide the exercise of the discretionunder Article 87(3), as well s to provide some pre-dictability to the Member States and affected under-takings or sectors. These soft law' measures are eitherhorizontal or sectoral in nature.

The fact that State aid may be so authorised createsa real risk of conflict with WTO law. This is because,since the disappearance of the concept of non-action-able subsidies, the SCM Agreement recognises noexception to its disciplines on the basis of the objectives of a measure. Conversely, the Commission doesnot assess the international trade effects of a measurebefore authorising it. As a result, measures, which theCommission finds are compatible with the commonmarket, may run afoul of the SCM Agreemen t s provi-sions.The risk of conflict with the WTO disciplines isreal. Of particular concern are the following:- Aid authorised on the basis of Article 87(3)(a), such

s ad hoc regional aid to large investment projects:given that they concern large investment projects,such aid, where provided to undertakings exportingto the world market, are likely to cause adversetrade effects]7

- Aid authorised on the basis of Article 87 (j)b), i.e.aid to promote the execution of an important proj-ect of European interest, such s aid for Airbus.Aid authorised under Article 87 3) c), such as rescue and restructuring aid : such aid would seem tooffer the greatest danger of a reaction by the EU'sinternational counterparts s aid to firms in finan-cial difficulties will often take the form of operatingaid - which a priori has the potential of causingadverse trade effects. 72

3. Types of subsidies under WTO lawa. Multilateral rulesIntroductionThe SCM Agreement recognises two different categories of subsidies: prohibited subsidies and action-able subsidies. They are, in common parlance, referredto as respectively, red light and yellow light subsidies.Such subsidies can be either countervailed (Track I orsubject to dispute settlement (Track II). From the ou tset, and until 1999, a third type existed: non actionable (or green light) subsidies. This was in fact ameans of shielding certain subsidies regarded s non-distortive from challenge under Track II or actionunder Track I certain R D, regional assistance andenvironmental subsidies.74 Non specific subsidieswere also included in the category of non actionablesubsidies.There are two types of prohibited subsidies: exportsubsidies and import-substitution subsidies. The for-

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mer refers to subsidies de jure or de facto contingent -whether solely or as one of several conditions - uponexport performance. The latter are subsidies where thepayment is conditional also whether solely or as on eof several conditions upon the use of domestic, asopposed to imported, goods. Thus, in both cases, thecharacterisation as prohibited subsidies depends onthe conditions attached to the granting of the subsidy.

By contrast, actionable subsidies are defined not bytheir nature, but by their effects: a subsidy is actionable when it causes adverse effects on anotherMember s interests.

We examine below both categories of subsidies inmore detail.Prohibited subsidiesThe main question that has arisen so far in the contextof WTO dispute settlement is whether the subsidies inquestion are indeed export subsidies . We thereforeconcentrate on this category of subsidies.De jure and de facto export subsidiesWe note, with respect to de facto export contingency,that footnote 4 to the SCM Agreement provides that:

This standard is met when the facts demonstratethat the granting of a subsidy, without having beenmade legally contingent upon export performance,is in fact tied to actual or anticipated exportation orexport earnings. The mere fact that a subsidy isgranted to enterprises which export shall not forthat reason alone be considered to be an export sub-sidy within the meaning of this provision.

The Appellate Body has interpreted the meaning ofexport contingency in Canada Aircraft. In theAppellate Body s vie, the legal standard expressed bythe word contingent is the same for both de jure andde facto contingency - the difference lies in the typeof evidence that will support a conclusion of exportcontingency: de jure export contingency will bedemonstrated on the basis of the legislative texts creating the subsidy whereas de facto export contingencywill be inferred from the total configuration of thefacts constituting and surrounding the granting of thesubsidy, none of which on its own is likely to be deci-sive in any given case. The Appellate Body also notedthat, as per the terms of footnote 4 three elementsneed to be established for export contingency: i) thegranting of a subsidy, 2) that it is ... tied to 3) actu-al or anticipated exportation or export earnings. Inthe Appellate Body s view, the first element is whetherthe granting authority imposed a condition based onexport performance in providing the subsidy theanalysis focuses on the granting authority, not therecipient s knowledge.7 Tied to the Appellate Bodyfound, confirms the linkage of contingency with con-ditionality in Article 3.1 a), so that the facts must, in

the Appellate Bod) s words, demonstrate that thegranting of a subsid) is tied to or contingent uponactual or anticipated exports. Merely demonstratingthat the granting authority anticipated that exportswould result is not sufficient. The third element( anticipated ) refers, in the Appellate Body s vie, toan expectation. Importantly, the Appellate Bod rea-soned that the sole fact that a subsidy may be grantedin the knowledge, or with the anticipation, thatexports will result is not sufficient. It relied on thefootnote, which precludes a finding of de facto contingency on the sole basis that a subsidy is granted toenterprises which export . Thus, merely knowing thata recipient s sales are export-oriented is not sufficientto demonstrate that the granting of a subsidy is tied toactual or anticipated exports. Such export orientationmay, however, be taken into account as a relevant fact,provided that it is one of several facts which are considered and is not the only fact supporting a finding.

In Canada - Aircraft, the Panel s finding of exportcontingency was based on an examination of 16 fac-tual elements (including the granting authority srecord of funding in the export field and the importance of projected export sales by applicants for funding to the export orientation of the firms concerned)and was considered adequate by the Appellate Body.7The llustrative ist of xport SubsidiesIn some cases, the SCM Agreement helps complainingWTO Members to establish that a measure is a prohibited export subsidy. It provides, in its Annex A, foran Illustrative List of Export Subsidies. The List has 12entries, most of which are either self-explanatory ornot especially problematic:The provision by governments of direct subsidies

to a firm or an industry contingent upon exportperformance (item a).

- Currency retention schemes or any similar prac-tices, which involve a bonus on exports (item b).Internal transport and freight charges on exportshipments, provided or mandated by governments,on terms more favorable than for domestic shipments (item c).

- The provision, directly or indirectly, of imported ordomestic products or services for use in the pro-duction of exported goods on terms or conditions

75 Article 5 SCM.76 See Appellate Body Report in Canada Aircraft, paragraphs 162180.77 Ibid, paragiaph i6778 Ibid, paragraph 170.79 On ce facto export contingency see also the Panel Report in Australia

Subsidies provided to Pioducers and Expoteis of Automotive Leather,W DS126/R 25 May 1999 (Australia - Leather ), paragiaphs 9.50 9.76. r hePanel in that case took several factual elements into consideration in reachingits conclusion that the challenged measures were ce facto specific, notably thefact that the recipient was, because of its export orientation, in fact obliged tomeet exportt agets established by the grant contract

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more favorable than for provision of like productsor services for use in the production of goods fordomestic consumption, where such terms or con-ditions are more favorable than those commerciallyavailable on world markets to their exporters(item d).- The full or partial exemption, remission, or deferralspecifically related to exports, of direct taxes orsocial welfare charges paid or payable by industrialor commercial enterprises (item e).The allowance of special deductions directly relatedto exports or export performance, over and abovethose granted in respect to production for domesticconsumption, in the calculation of the base onwhich direct taxes are charged (item f).The exemption or remission, in respect of the production and distribution of exported products, ofindirect taxes in excess of those levied in respect ofthe production and distribution of like productswhen sold for domestic consumption (item g).- The exemption, remission or deferral of prior-stagecumulative indirect taxes on goods or services usedin the production of exported products in excess ofthe exemption of like prior stage cumulative indirect taxes on goods or services used in the produc-tion of like products when sold for domestic con-sumption (item h).The remission or drawback of import charges inexcess of those levied on imported inputs that areconsumed in the production of the exported product (item i).

- The provision of export credit guarantee or insur-ance programmes, of insurance or guarantee pro-grammes against increases in the cost of exportedproducts or of exchange risk programmes, at pre

8O We notehat item a phrased n erms f ost o he overnment.81 Re)ort of the ine , BiazilExportinancing Piogramme for icraft,ecourse

by anada to rticle 21.5 f he SU WT/DS46/RW May 2000 (BrazilAircraft21.5) ),t aragraph.30.

82 Article.1a) CM.83 On thisont ee, intra note3.84 Re)ort of the ine , BiazilAicraft21.5), at aragiaph 6.3185 Ibid.,aragraph.42:

.In ui iew,he rimaryole of he Illustrativeis notto rovideuid-ance s o hen measures are no' rohibitedxportubsidiesalthoughfootnote allowst o e used or his urpose n ertainases but atherto rovidelarityhatertaineasuresre rohibitedxportubsidies.nusit ould e poss le o emonstratehat measure tallsithin the scope fan item fhe Illustrativeistnd as thus roht withouteng requiredto emonstratehatArtic3 rticleas satisfied.o orrowconcept rom he ieldf compettion aw,he llustatiVeistould e seenas analogouso a listf er se vioations

86 The Panil n anada Aircraft,t aragraph 9.11/as faced ith n rgumentby anada thattem (k) f he iustrativeistonstitutedontextualuidancefor etermining the xistencef benefit'n he peciticontextf governmentcreditder Artcle. s e have lreadyoted,upra,ote7 the anelejectedanada'srgumentsnd tatedhat,n tsiewtem (k)f the llustratve istppliesneterminig whetheir o a prohibited export ubsy exists.We do not onsidei,nd he artiesave no' igued,hat item K) etermineswhetherr ot subsicyxistsithinhe eaning of rticleof heCMAgreement.'ee lsohe ppl Body Reportn S FSCItaragraph 95

miumn rates which are inadequate to cover the long-term operating costs and losses of the programmes(item j 8 The grant of export credits at rates below those thatgovernments actually have to pay for the funds soemployed or the payment by governments of all orpart of the costs incurred by exporters or financialinstitutions in obtaining credits, in so far as theyare used to secure a material advantage in the fieldof export credit terms (item k).Any other charge on the public account constituting an export subsidy in the sense of Article XVI ofGATT 1994 item 1).

A few comments on the nature of the List:First it is not exclusive. The very title of the List( Illustrative List ) and the terms of Article 3.1(a):( ...subsidies contingent upon export performance,including those illustrated in Annex I) indicate this.The list contains examples of prohibited export subsi-dies, but it does not exclude the existence of othersuch subsidies under the terms of Article 3.1.'

Second, under the terms of note 5 to Article 3.1,measures referred to in the List as not constitutingexport subsidies are not prohibited under eitherArticle 3.1 or any other provision of the SCM.82 This,however only applies to those situations where theList contains a clear indication that the measures inquestion are not prohibited export subsidies. Themere fact that a measure does not meet conditions listed under one of the items for it to constitute a pro-hibited export subsidy is not sufficient.

Third, measures that fall under the scope of theIllustrative List are deemed to be prohibited exportsubsidies, i.e. the List allows a Member to directly goto the List to show that a measure is a prohibited subsidy, without having to first demonstrate that themeasure falls within the scope of Article 3.1(a) SCM."'Thus, the List provides a shortcut for an aggrievedMember to establish that another member grants aprohibited export subsidy. It cannot, however, berelied on as context in the interpretation of the general definition of subsidy contained in Article 1 s6Export credits and the OE D rrangement

fficially Supported Export reditsMost of the items on the List are of no particular interest. However, item (k) has led to some controversy, andwarrants further discussion.The full text of item (k) is as follows:'The grant by governments (or special institutions

controlled by and/or acting under the authority ofgovernments) of export credits at rates below thosewhich they actually have to pay for the funds soemployed (or would have to pay if they borrowedon international capital markets in order to obtain

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funds of the same maturity and other credit termsand denominated in the same currency as theexport credit), or the payment by them of all or partof the costs incurred by exporters or financial institutions in obtaining credits, in so far s they areused to secure a material advantage in the field ofexport credit terms.Provided, however, that if a Member is a party toan international undertaking on official exportcredits to which at least twelve original Members tothis Agreement are parties s of i January 1979 (orasuccessor undertaking which has been adopted bythose original Members), or if in practice aMemberapplies the interest rates provisions of the relevantundertaking, an export credit practice which is inconformity with those provisions shall not be considered an export subsidy prohibited by thisAgreement.'

As can be seen, item k) is composed of two para-graphs. The first establishes the general rule: exportcredits at rates below the government's cost of fundsand payments of costs incurred by exporters or financial institutions in obtaining credits, provided theyconfer a material advantage, constitute prohibited ex-port subsidies. The second paragraph provides forwhat has been termed a safe harbour' or safe haven':export credit practices which would otherwise be prohibited under the first paragraph will nevertheless notbe prohibited if they are in conformity with the interest rate provisions of an international undertaking onofficial export credits to which at least twelve originalMembers to [the SCM] Agreement are parties s of iJanuary 1979 (or a successor undertaking which hasbeen adopted by those original Members)'. In practice,the OECD Arrangement on Guidelines for OfficiallySupported Export Credits is the only such interna-tional undertaking.The OECD Arrangement does not impose hardrules' on the countries seeking to conform to its provisions rather, it is in the nature of a Gentlemen'sAgreement. It provides a framework for the orderlyuse of officially supported export credits and essen-tially seeks to avoid a race to the bottom among OECDcountries trying to offer the best possible export cred-it terms. In order to do so the Arrangement sets forthcertain guidelines with respect to the terms and conditions of export credits benefiting from official support (on the basis of so-called Commercial InterestReference Rates or CIRRs).The incorporation by reference into the secondparagraph of item k) of rules developed in anotherforum is remarkable. Even more surprising is the factthat this agreement in question is one developed bythe OECD, a club of developed nations. Moreover, thereference to the OECD Arrangement is an evolvingone: by the very terms of para. 2 of item (k), the refer-

ence is to the version of the Arrangement currently inforce. This means that the Arrangement can be modi-fied by the OECD Members without the approval ofthe rest of the WTO membership."In other words, a sub group of the WTO com-posed of its most developed Members can unilaterally alter the terms of the SCM Agreement. Unsur-prisingly, this interpretation has irked some of theWTO's non-OECD Members, such s Brazil. Brazilfought against the interpretation of the reference tothe OECD Arrangement s a moving target on thesevery grounds.s9 Also, in a recent proposal in the context of the Doha negotiations, Brazil made a proposalthat would cure this perceived injustice.9Going back to the text of item k), the Panel andAppellate Body in Brazil Aircraft devoted a lot ofattention to the interpretation of the first paragraph ofitem (k). They did so because Brazil argued in theoriginal proceedings and the first and second 21.5 pro-ceedings9 - that the first paragraph, and particularlyits last clause (I...or the payment by them of all or partof the costs incurred by exporters or financial institutions in obtaining credits, in so far s they are used tosecure amaterial advantage in the field of export credit terms') could be read acontrario: payments not con-ferring a material advantage, Brazil argued, not onlyare not prohibited export subsidies, but are in factpermitted by the SCM Agreement. Further, Brazilclaimed that material advantage' had to be read inrelation to what other Members provide their ex

87 Report of the Panel, Canada - Measures Affecting the Export of Civilian Aircraft,Recourse by Brazil o Artcle 21.5 of the DSU,WT/DS70/R, 9 Miav( Canaa Aircraft (21.5) ), at paragraph 5 /s

88 In the words of the Panel in Canada-Aircraft (21.5), at paragraph 5.132:... the second paragraph of item (k) is quite unique in he sense that it creates an exemption from a prol in W Agreement, the scope ofwhich exer Don is left in the hands of a certain subgroup of W Member

the Par cipants, all of which as of today are OECDMemers to define,and to change as and when they see fit.

See also Panel Report in Canada - Aircraft (21.5), at paragraph 5.C8, cited bythe Pine in Brazil- Export Finance Programme fto Aircraft, Second Recourseby Canada to Article 21.5 of the DSU,VT/DS46/RW/2 26 July 2001, ( BrazilAircrat (2 1.5 II) ),at paragraph 5 86

89 See Brazil Aircraft (21.5 II), at paragraph 5 68 (Brazilwanted to prevent thepanel from holding that the current version on the Arrangement was thatreferred to by the second paragraph of item k))

90 See WO, Negotiating Group on Rules, Treatment omGovernment Support forExport Credits and Guarantees under the Agreement on Subsidies andCountervailing measures, TN/RL EN/66, 1 October 2005, paragraphs 4 tfwere Brazilargues that this evolutionary interpretat on (incorporation o thecurrent version of the OECD Arrangement, by reference, in paragraph 2 of item(K)) raises profound systemic concerns regarding procedural fairness and soveleignty, as not all v rMembers are Participants to the Arrangement . Biazilmakes the point that [u]nder no dcumstances, however, should a small groupof CT0embers be allowed to change those rules through decsion taken inanother horum . India takes a similar stance. See WTO Negotiating Group onRules, Intervention by India on the Proposal by the EECCaptioned WNegotiations Concening the WTO Agreement on subsidies and CountervailingMeasures, TN/RLiW/V0, TN/RL/W/40, 10 December 2002.

91 2i.5 proceenga proceedings launched by a .ember that considers thatanother has nor correctly implemented the conclusions of an original Panel orthe Appellate Body (and is therefore still in violation of its WVV bligations)

hem can be more than one such proceeding, hence the reference, in theBrazil Aircraft case, to the first and second 21.5 Panels .


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porters. Thus, Brazil s argument was essentially thatwhether apayment 'is used to secure a material advan-tage in the field of export credit terms should bedetermined by comparing the export credit terms ofthe transaction supported by the payment with thoseof potential competing transactions; in other words,that the benchmark be the support that other Mem-bers (here, Canada) grant their exporters.

Brazil's argument was rejected by two of the threePanels. 9a The Panels based their rejection of Brazil'sarguments on the fact that Brazil s reading of item (k)was at odds with the general manner in which theSCM Agreement determines benefit.14 'Material ad-vantage was interpreted to mean that the net interestrate (actual interest rate applicable minus governmentpayment) must be compared to the CIRRs or alternatively, an alternative benchmark, the appropriatenessof which must be demonstrated by the Party seekingto make use of it.

Thus, the Panels and the Appellate Body refused areading that makes compliance dependant on anotherMember s practices.

This leads us to the second paragraph of item (k )where the issue of matching came up even moredirectly. Is matching , which is permitted under theOECD Arrangement, also part of the 'safe harbourunder the second paragraph such that a Membermatching another Member s support would also be

92 See Report of the Pane n Brazil- Aircraft at paragiaphs 715 ff., nd AppeIateBody Report at paragraphs i65 ff.,BrazilAircraft (21.5), Panic Report at paragraphs 6.24 ff, and Appellate Body Report at paragiaphs 48 ff.;Report of thePane , Brazil Aircraft (21.5 II),pciagiaphs 5.209 ff.

93 l he original Panel did not reach this issue as t considered that Brazilhad notestablished that PROEX (Brazil s export credit scheme) payments were not useto secure a material advantage in the fied of export credit terms it neverthelessexpressed doubts as to the admissibility of Brazil s arguments. See Reportof the Panel, Brazil- Aircraft, paragraph 718 and Report of the AppellateBody, Brazil Export Financing Programme orAircraft, \ LDS46/ABiR,2 August 1999, ('Brazil Aircraft ), at paragraph 187.The Panel in Braziiicraf (21. ) reached the issue and iejected Brazil's aigu-ments. in doing so, it relied especially on note 5 to the SCM,which states thatMeasures referred to in Annex i as not constituting export subsidies shall not beprohibited uncer this or any other provisions of this Agreement . The Panelernphasised that footnote 5 refers to situations in the llustrative list where ameasure is referiredo as not constituting an export subsidy (i.e. it containssome affirmative incication that a measure is not a prohibited export subsidy)for instance the 2nd pciagicph of item k) offering a safe haboui to measuresin conformity with the OECD's Arrangement on Export Credits. The Panel BrazilAircraft (21.5) ieasoning was endorsed by the Pane in Korea - Vessels, at pcia-graphs/.309 ff.The Report of the Appellate Body in Brazil Aircra (2.)however, suggests that the Appellate Body was of a different opinion eventhough it did not formaliy rule on the issue:

If Brazilhad demonstrated that the payments mace uncer the revised PROEXweire not used to secure a material advantage in the ield of export creditterms , and that such paymt were payments by Brazil of all or part of thecosts incurred by exportels or financial nstitutions in obtaining credits' thenve would h ve beer, prepcred to find hrt the pgymenrs made under therevisedPROE X erejustifiedunde; tem k of the Pi utT e List. However,Brazilhasnot demonstrated that those conditions of item k) aie met in thiscase. in making the observation, we wish to emphasize that we are not interpret ng footnote 5 of the SCr Agreement, and we do no' opine on thescope of footnote 5 or o ih nngm a oher items of the lllustativeList. paragraph 80 emphasis acced)

Finally, the Panel in Brazil Aircraft (215 ii), paragraphs 5.269-5.275 iejectedBrazil's argument and referred to its findings in the Brazil Aircraft (21.5).

94 See Panel in Brazil Aircraft, paragraphs .24 26:

covered by the safe harbour? Again, the discussiontook place in the context of the Aircraft cases.The main pronouncement on the issue came in theCanada Aircraft 21.5) case. The Panel in that caseexamined in detail the various components of the safeharbour. First, it examined what constitutes an exportcredit practice for the purpose of the second para-graph of item (k). It found that the term is broaderthan exportcredits and credits n the irst paragraphof item (k). ' Thus, or the panel, the export creditpractices that could potentially qualify for the safeharbour of item (k) were a broad category of measures. The Panel then turned to the Arrangement sinterest rate provisions with which an export creditpractice ought to conform in order to benefit from thesafe harbour and found that they were the OECDArrangement s provisions which specifically, directlyor explicitly address interest rate support in the formof direct credits/financing, refinancing, and rate sup-port at fixed interest rates with repayment terms oftwo years or more. Last, the Panel examined whatconstitutes conformity with the Arrangement s interest rate provisions. It found that this refers to confornity with the rules mentioned above as well as theother ancillary rules that support or reinforce them. Itthen examined whether, as argued by Canada, theArrangement s matching derogation (which allows anOECD Party to match the terms of another Member s

in no cases finderhe CM Agreement]st suggestedhat whete r notbenefitxsts ould epend upon comparisonith dvantagesvailable tom producsrom anth ercber Nor an e fine any uggesti

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