WORLD TRADE

.

World Trade

Organization

WT/DS353/AB/R

12 March 2012

(12-1313)

Original: English

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

AB-2011-3

Report of the Appellate Body

BCI DELETED, AS INDICATED [***]

HSBI OMITTED, AS INDICATED [[HSBI]]

1I.Introduction

6A.The European Communities' Claims before the Panel

8B.The Panel's Findings

15C.Appellate Proceedings

20II.Arguments of the Participants and the Third Participants

20A.Claims of Error by the European Union – Appellant

201.Annex V to the SCM Agreement

242.Financial Contribution – Scope of Article 1.1(a)(1) of the SCM Agreement

283.Specificity – Allocation of Patent Rights

314.Adverse Effects

31(a)Collective assessment of the aeronautics R&D subsidies and the B&O tax rate reductions and their effects

35(b)Collective assessment of the tied tax subsidies and the remaining subsidies and their effects

375.Article 11 of the DSU

38B.Arguments of the United States – Appellee

381.Annex V to the SCM Agreement

442.Financial Contribution – Scope of Article 1.1(a)(1) of the SCM Agreement

483.Specificity – Allocation of Patent Rights

514.Adverse Effects

51(a)Collective assessment of the aeronautics R&D subsidies and the B&O tax rate reductions and their effects

55(b)Collective assessment of the tied tax subsidies and the remaining subsidies and their effects

575.Article 11 of the DSU

59C.Claims of Error by the United States – Other Appellant

591.NASA Procurement Contracts and USDOD Assistance Instruments

59(a)Financial contribution – Application of the "purchase of services" test

66(b)Benefit

712.Washington State B&O Tax Rate Reduction

71(a)Financial contribution – Revenue foregone

75(b)Specificity – Article 2.1(a) of the SCM Agreement

773.City of Wichita Industrial Revenue Bonds (IRBs) – Specificity

804.Adverse Effects

80(a)Technology effects of the aeronautics R&D subsidies

94(b)Price effects of the tied tax subsidies

103D.Arguments of the European Union – Appellee

1031.NASA Procurement Contracts and USDOD Assistance Instruments

103(a)Financial contribution – Application of the "purchase of services" test

110(b)Benefit

1172.Washington State B&O Tax Rate Reduction

117(a)Financial contribution – Revenue foregone

119(b)Specificity – Article 2.1(a) of the SCM Agreement

1213.City of Wichita Industrial Revenue Bonds (IRBs) – Specificity

1244.Adverse Effects

124(a)Technology effects of the aeronautics R&D subsidies

133(b)Price effects of the tied tax subsidies

145E.Arguments of the Third Participants

1451.Australia

145(a)Financial contribution

149(b)Specificity

150(c)Adverse effects

1532.Brazil

153(a)Annex V to the SCM Agreement

154(b)Financial contribution

155(c)Specificity

155(d)Adverse effects

1583.Canada

158(a)Annex V to the SCM Agreement

158(b)Financial contribution

159(c)Specificity

160(d)Adverse effects

1624.China

162(a)Annex V to the SCM Agreement

163(b)Specificity

164(c)Adverse effects

1645.Japan

164(a)Specificity

165(b)Adverse effects

1706.Korea

170(a)Annex V to the SCM Agreement

171(b)Specificity

171(c)Adverse effects

172III.Issues Raised in This Appeal

177IV.The Measures at Issue

177A.Introduction

177B.US Federal Government Measures

1781.Aeronautics R&D Measures

178(a)NASA

180(b)USDOD

1822.Allocation of Patent Rights

1853.FSC/ETI and Successor Legislation

186(a)Provisions of the US Internal Revenue Code relating to FSCs

187(b)FSC Repeal and Extraterritorial Income Exclusion Act of 2000

187(c)American Jobs Creation Act of 2004

188(d)Tax Increase Prevention and Reconciliation Act of 2005

189C.State and Local Measures

1891.State of Washington

189(a)Measures under House Bill 2294

192(b)City of Everett local B&O tax rate reduction

193(c)Project Olympus Master Site Agreement

1942.Wichita (Kansas) Industrial Revenue Bonds

1963.State of Illinois

198V.Procedures under Annex V to the SCM Agreement

198A.Introduction

198B.The Panel's Preliminary Ruling

201C.Overview of the Claims and Arguments on Appeal

204D.Evaluation of the European Union's Claim of Error on Appeal

2041.The European Union's Request for Reversal of the Panel's Findings in Paragraph 7.22 of the Panel Report

2082.The European Union's Request for Completion of the Analysis

208(a)Interpretation of relevant provisions of the SCM Agreement and the DSU

221(b)The European Union's remaining requests for completion of the analysis

227(c)The European Union's additional requests

228E.Conclusion

229VI.NASA Procurement Contracts and USDOD Assistance Instruments

229A.Financial Contribution

2291.Introduction

2302.The Panel's Findings

231(a)The Panel's interpretation of Article 1.1(a)(1)(i) of the SCM Agreement

234(b)The Panel's assessment of the NASA measures

238(c)The Panel's assessment of the USDOD measures

2423.The Panel's General Approach

2464.What is the Proper Characterization of the NASA/USDOD Measures at Issue?

246(a)NASA procurement contracts

250(b)USDOD assistance instruments

252(c)The Panel's description of the transactions in its analysis of serious prejudice

253(d)Summary of the main characteristics of the measures

2545.The Types of Financial Contributions Covered by Article 1.1(a)(1) of the SCM Agreement

2586.Do the NASA and USDOD Measures Raised on Appeal Constitute Financial Contributions within the Meaning of Article 1.1(a)(1) of the SCM Agreement?

260B.Benefit

2601.The Panel's Findings

260(a)NASA

261(b)USDOD

2632.Did the Panel Err in Determining Benefit?

278C.Scope of the Panel's Benefit Findings as regards the NASA Measures

2791.The Panel's Findings

2832.Is the United States' Claim Properly within the Scope of This Appeal?

2863.Did the Panel Err under Article 1.1(b) of the SCM Agreement?

290D.Article 11 of the DSU – Amount of USDOD R&D Funding Potentially Relevant to LCA

2911.The Panel's Findings

2932.Did the Panel Make an Objective Assessment of the Matter under Article 11 of the DSU in Making the Challenged Statement?

300VII.NASA/USDOD Allocation of Patent Rights – Specificity

300A.Introduction

303B.The Panel's Findings

306C.The Panel's Arguendo Approach

308D.Did the Panel Err in the Interpretation of Article 2.1(a) of the SCM Agreement?

313E.Did the Panel Err in the Application of Article 2.1(a) of the SCM Agreement?

327F.Did the Panel Err by Failing to Address the European Communities' Allegation of De Facto Specificity under Article 2.1(c)?

331VIII.Washington State Business and Occupation (B&O) Tax Rate Reduction

331A.Financial Contribution – Revenue Foregone

3311.The Panel's Findings

3342.When Does a Government Forego Revenue Otherwise Due?

3383.Assessment of the Panel's Analysis under Article 1.1(a)(1)(ii) of the SCM Agreement

344B.Specificity

3451.The Panel's Findings

3472.Assessment of the Panel's Analysis under Article 2.1(a) of the SCM Agreement

355IX.City of Wichita Industrial Revenue Bonds (IRBs) – Specificity

355A.Background

355B.The Panel's Findings

359C.Assessment of the Panel's Analysis under Article 2.1(c) of the SCM Agreement

367X.Adverse Effects

367A.Introduction

3711.Background Information

371(a)Relevant markets, the reference period, and the temporal assessment of relevant market phenomena

374(b)Key aspects of the LCA industry

3782.The Panel's Approach to Causation

3823.The Panel's Analysis of "Technology Effects" and "Price Effects"

382(a)The Panel's analysis of the "technology effects" of the aeronautics R&D subsidies

384(b)The Panel's analysis of the "price effects" of the subsidies

3854.Order of Analysis of the Issues on Appeal Relating to the Panel's Serious Prejudice Findings

385B.Technology Effects

3851.Introduction

3872.Background Information regarding the Boeing 787

3893.The Panel's Analysis of the Effects of the Aeronautics R&D Subsidies on Boeing

3944.The United States' Appeal

3985.Specific Grounds of Appeal Raised by the United States

398(a)Whether the Panel erred by "extrapolating findings" with respect to three NASA composites programmes to all of the R&D programmes

405(b)Whether the Panel erred by not finding that the NASA research was too far removed from the commercial technologies used on the 787

409(c)Whether the Panel erred in its appreciation of the role of Boeing and its suppliers in the development of the technologies used on the 787

417(d)Whether the Panel erred in its appreciation of the relevance of NASA's public dissemination of the results of the NASA R&D

420(e)Whether the Panel erred in its assessment of the magnitude of the NASA aeronautics R&D subsidies

422(f)Conclusion

4236.The Panel's Counterfactual Analysis

423(a)Introduction

428(b)The Panel's counterfactual analysis:  the first stage

432(c)The Panel's counterfactual analysis: the second stage

4347.The Panel's Analysis of the Effects of the Aeronautics R&D Subsidies on Airbus

4388.The United States' Appeal relating to the Second Stage of the Panel's Analysis of the Technology Effects of the Aeronautics R&D Subsidies

439(a)Significant lost sales

445(b)Threat of displacement and impedance

454(c)Significant price suppression

468(d)Conclusion

469C.Article 11 of the DSU

478D.Price Effects

4791.Background on the 100-200 Seat and 300-400 Seat LCA Markets

480(a)100-200 seat LCA market

481(b)300-400 seat LCA market

4812.The European Communities' Price Effects Claim before the Panel

4853.The Panel's Analysis and Findings

4924.Assessment of the Panel's Causation Analysis under Articles 5(c) and 6.3(b) and (c) of the SCM Agreement

492(a)Whether the Panel conducted a proper causation analysis

507(b)Whether the Panel conducted a proper analysis of significant price suppression, significant lost sales, and displacement and impedance

518(c)Overall assessment of the Panel's analysis of the price effects of the tied tax subsidies

519(d)Completion of the analysis

5335.Conclusion

533E.Collective Assessment of the Subsidies and Their Effects

5331.Introduction

5362.Assessment of the European Union's Claims of Error on Appeal

536(a)Introduction

537(b)Different approaches to collective assessment

543(c)The approach taken by the Panel to a collective assessment of the effects of the subsidies at issue

546(d)Whether the Panel erred in declining to assess collectively the effects of the aeronautics R&D subsidies and the effects of the B&O tax rate reductions

555(e)Whether the Panel erred in declining to assess collectively the effects of the tied tax subsidies and the effects of the remaining subsidies

5683.Conclusion

569XI.Findings and Conclusions

ANNEX INotification of an Appeal by the European Union

ANNEX IINotification of an Other Appeal by the United States

ANNEX IIIProcedural Ruling and Additional Procedures to Protect Sensitive Information

ANNEX IVProcedural Ruling and Additional Procedures on the Conduct of the Oral Hearing

ANNEX VHSBI Annex

CASES CITED IN THIS REPORT

Short Title

Full case title and citation

Australia – Salmon

Appellate Body Report, Australia – Measures Affecting Importation of Salmon, WT/DS18/AB/R, adopted 6 November 1998, DSR 1998:VIII, 3327

Brazil – Aircraft

Appellate Body Report, Brazil – Export Financing Programme for Aircraft, WT/DS46/AB/R, adopted 20 August 1999, DSR 1999:III, 1161

Brazil – Aircraft

Panel Report, Brazil – Export Financing Programme for Aircraft, WT/DS46/R, adopted 20 August 1999, as modified by Appellate Body Report WT/DS46/AB/R, DSR 1999:III, 1221

Brazil – Aircraft(Article 21.5 – Canada)

Panel Report, Brazil – Export Financing Programme for Aircraft – Recourse by Canada to Article 21.5 of the DSU, WT/DS46/RW, adopted 4 August 2000, as modified by Appellate Body Report WT/DS46/AB/RW, DSR 2000:IX, 4093

Brazil – Aircraft(Article 21.5 – Canada II)

Panel Report, Brazil – Export Financing Programme for Aircraft – Second Recourse by Canada to Article 21.5 of the DSU, WT/DS46/RW/2, adopted 23 August 2001, DSR 2001:X, 5481

Brazil – Retreaded Tyres

Appellate Body Report, Brazil – Measures Affecting Imports of Retreaded Tyres, WT/DS332/AB/R, adopted 17 December 2007, DSR 2007:IV, 1527

Canada – Aircraft

Appellate Body Report, Canada – Measures Affecting the Export of Civilian Aircraft, WT/DS70/AB/R, adopted 20 August 1999, DSR 1999:III, 1377

Canada – Autos

Appellate Body Report, Canada – Certain Measures Affecting the Automotive Industry, WT/DS139/AB/R, WT/DS142/AB/R, adopted 19 June 2000, DSR 2000:VI, 2985

Canada – Dairy(Article 21.5 – New Zealand and US)

Appellate Body Report, Canada – Measures Affecting the Importation of Milk and the Exportation of Dairy Products – Recourse to Article 21.5 of the DSU by New Zealand and the United States, WT/DS103/AB/RW, WT/DS113/AB/RW, adopted 18 December 2001, DSR 2001:XIII, 6829

Canada – Wheat Exports and Grain Imports

Appellate Body Report, Canada – Measures Relating to Exports of Wheat and Treatment of Imported Grain, WT/DS276/AB/R, adopted 27 September 2004, DSR 2004:VI, 2739

Chile – Price Band System

Appellate Body Report, Chile – Price Band System and Safeguard Measures Relating to Certain Agricultural Products, WT/DS207/AB/R, adopted 23 October 2002, DSR 2002:VIII, 3045 (Corr.1, DSR 2006:XII, 5473)

Chile – Price Band System (Article 21.5 – Argentina)

Appellate Body Report, Chile – Price Band System and Safeguard Measures Relating to Certain Agricultural Products – Recourse to Article 21.5 of the DSU by Argentina, WT/DS207/AB/RW, adopted 22 May 2007, DSR 2007:II, 513

China – Publications and Audiovisual Products

Appellate Body Report, China – Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, WT/DS363/AB/R, adopted 19 January 2010

EC – Asbestos

Appellate Body Report, European Communities – Measures Affecting Asbestos and Asbestos‑Containing Products, WT/DS135/AB/R, adopted 5 April 2001, DSR 2001:VII, 3243

EC – Bananas III

Appellate Body Report, European Communities – Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/AB/R, adopted 25 September 1997, DSR 1997:II, 591

EC – Bananas III(Article 21.5 – Ecuador II) /EC – Bananas III(Article 21.5 – US)

Appellate Body Reports, European Communities – Regime for the Importation, Sale and Distribution of Bananas – Second Recourse to Article 21.5 of the DSU by Ecuador, WT/DS27/AB/RW2/ECU, adopted 11 December 2008, and Corr.1 / European Communities – Regime for the Importation, Sale and Distribution of Bananas – Recourse to Article 21.5 of the DSU by the United States, WT/DS27/AB/RW/USA and Corr.1, adopted 22 December 2008

EC – Bed Linen

Appellate Body Report, European Communities – Anti‑Dumping Duties on Imports of Cotton‑Type Bed Linen from India, WT/DS141/AB/R, adopted 12 March 2001, DSR 2001:V, 2049

EC – Bed Linen(Article 21.5 – India)

Appellate Body Report, European Communities – Anti‑Dumping Duties on Imports of Cotton‑Type Bed Linen from India – Recourse to Article 21.5 of the DSU by India, WT/DS141/AB/RW, adopted 24 April 2003, DSR 2003:III, 965

EC – Computer Equipment

Appellate Body Report, European Communities – Customs Classification of Certain Computer Equipment, WT/DS62/AB/R, WT/DS67/AB/R, WT/DS68/AB/R, adopted 22 June 1998, DSR 1998:V, 1851

EC – Countervailing Measures on DRAM Chips

Panel Report, European Communities – Countervailing Measures on Dynamic Random Access Memory Chips from Korea, WT/DS299/R, adopted 3 August 2005, DSR 2005:XVIII, 8671

EC – Fasteners (China)

Appellate Body Report, European Communities – Definitive Anti-Dumping Measures on Certain Iron or Steel Fasteners from China, WT/DS397/AB/R, adopted 28 July 2011

EC – Hormones

Appellate Body Report, EC Measures Concerning Meat and Meat Products (Hormones), WT/DS26/AB/R, WT/DS48/AB/R, adopted 13 February 1998, DSR 1998:I, 135

EC – Poultry

Appellate Body Report, European Communities – Measures Affecting the Importation of Certain Poultry Products, WT/DS69/AB/R, adopted 23 July 1998, DSR 1998:V, 2031

EC – Sardines

Appellate Body Report, European Communities – Trade Description of Sardines, WT/DS231/AB/R, adopted 23 October 2002, DSR 2002:VIII, 3359

EC – Selected Customs Matters

Appellate Body Report, European Communities – Selected Customs Matters, WT/DS315/AB/R, adopted 11 December 2006, DSR 2006:IX, 3791

EC – Tube or Pipe Fittings

Appellate Body Report, European Communities – Anti‑Dumping Duties on Malleable Cast Iron Tube or Pipe Fittings from Brazil, WT/DS219/AB/R, adopted 18 August 2003, DSR 2003:VI, 2613

EC and certain member States – Large Civil Aircraft

Appellate Body Report, European Communities and Certain Member States – Measures Affecting Trade in Large Civil Aircraft, WT/DS316/AB/R, adopted 1 June 2011

EC and certain member States – Large Civil Aircraft

Panel Report, European Communities and Certain Member States – Measures Affecting Trade in Large Civil Aircraft, WT/DS316/R, adopted 1 June 2011, as modified by Appellate Body Report, WT/DS316/AB/R

Guatemala – Cement I

Appellate Body Report, Guatemala – Anti‑Dumping Investigation Regarding Portland Cement from Mexico, WT/DS60/AB/R, adopted 25 November 1998, DSR 1998:IX, 3767

India – Patents (US)

Appellate Body Report, India – Patent Protection for Pharmaceutical and Agricultural Chemical Products, WT/DS50/AB/R, adopted 16 January 1998, DSR 1998:I, 9

India – Quantitative Restrictions

Appellate Body Report, India – Quantitative Restrictions on Imports of Agricultural, Textile and Industrial Products, WT/DS90/AB/R, adopted 22 September 1999, DSR 1999:IV, 1763

Indonesia – Autos

Panel Report, Indonesia – Certain Measures Affecting the Automobile Industry, WT/DS54/R, WT/DS55/R, WT/DS59/R, WT/DS64/R and Corr.1 and 2, adopted 23 July 1998, and Corr. 3 and 4, DSR 1998:VI, 2201

Japan – Agricultural Products II

Appellate Body Report, Japan – Measures Affecting Agricultural Products, WT/DS76/AB/R, adopted 19 March 1999, DSR 1999:I, 277

Japan – Alcoholic Beverages II

Appellate Body Report, Japan – Taxes on Alcoholic Beverages, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996, DSR 1996:I, 97

Japan – Apples

Appellate Body Report, Japan – Measures Affecting the Importation of Apples, WT/DS245/AB/R, adopted 10 December 2003, DSR 2003:IX, 4391

Japan – DRAMs (Korea)

Appellate Body Report, Japan – Countervailing Duties on Dynamic Random Access Memories from Korea, WT/DS336/AB/R and Corr.1, adopted 17 December 2007, DSR 2007:VII, 2703

Japan – DRAMs (Korea)

Panel Report, Japan – Countervailing Duties on Dynamic Random Access Memories from Korea, WT/DS336/R, adopted 17 December 2007, as modified by Appellate Body Report WT/DS336/AB/R, DSR 2007:VII, 2805

Korea – Alcoholic Beverages

Appellate Body Report, Korea – Taxes on Alcoholic Beverages, WT/DS75/AB/R, WT/DS84/AB/R, adopted 17 February 1999, DSR 1999:I, 3

Korea – Commercial Vessels

Panel Report, Korea – Measures Affecting Trade in Commercial Vessels, WT/DS273/R, adopted 11 April 2005, DSR 2005:VII, 2749

Korea – Dairy

Appellate Body Report, Korea – Definitive Safeguard Measure on Imports of Certain Dairy Products, WT/DS98/AB/R, adopted 12 January 2000, DSR 2000:I, 3

Korea – Various Measures on Beef

Appellate Body Report, Korea – Measures Affecting Imports of Fresh, Chilled and Frozen Beef, WT/DS161/AB/R, WT/DS169/AB/R, adopted 10 January 2001, DSR 2001:I, 5

Mexico – Anti‑Dumping Measures on Rice

Appellate Body Report, Mexico – Definitive Anti‑Dumping Measures on Beef and Rice, Complaint with Respect to Rice, WT/DS295/AB/R, adopted 20 December 2005, DSR 2005:XXII, 10853

Mexico – Corn Syrup(Article 21.5 – US)

Appellate Body Report, Mexico – Anti‑Dumping Investigation of High Fructose Corn Syrup (HFCS) from the United States – Recourse to Article 21.5 of the DSU by the United States, WT/DS132/AB/RW, adopted 21 November 2001, DSR 2001:XIII, 6675

Norway – Trondheim Toll Ring

GATT Panel Report, Panel on Norwegian Procurement of Toll Collection Equipment for the City of Trondheim, GPR.DS2/R, adopted 13 May 1992, BISD 40S/319

Thailand – Cigarettes (Philippines)

Appellate Body Report, Thailand – Customs and Fiscal Measures on Cigarettes from the Philippines, WT/DS371/AB/R, adopted 15 July 2011

US – Anti-Dumping and Countervailing Duties (China)

Appellate Body Report, United States – Definitive Anti-Dumping and Countervailing Duties on Certain Products from China, WT/DS379/AB/R, adopted 25 March 2011

US – Carbon Steel

Appellate Body Report, United States – Countervailing Duties on Certain Corrosion‑Resistant Carbon Steel Flat Products from Germany, WT/DS213/AB/R and Corr.1, adopted 19 December 2002, DSR 2002:IX, 3779

US – Continued Zeroing

Appellate Body Report, United States – Continued Existence and Application of Zeroing Methodology, WT/DS350/AB/R, adopted 19 February 2009

US – Continued Zeroing

Panel Report, United States – Continued Existence and Application of Zeroing Methodology, WT/DS350/R, adopted 19 February 2009, as modified as Appellate Body Report WT/DS350/AB/R

US – Countervailing Duty Investigation on DRAMS

Appellate Body Report, United States – Countervailing Duty Investigation on Dynamic Random Access Memory Semiconductors (DRAMS) from Korea, WT/DS296/AB/R, adopted 20 July 2005, DSR 2005:XVI, 8131

US – Countervailing Measures on Certain EC Products

Appellate Body Report, United States – Countervailing Measures Concerning Certain Products from the European Communities, WT/DS212/AB/R, adopted 8 January 2003, DSR 2003:I, 5

US – Export Restraints

Panel Report, United States – Measures Treating Exports Restraints as Subsidies, WT/DS194/R and Corr.2, adopted 23 August 2001, DSR 2001:XI, 5767

US – FSC

Appellate Body Report, United States – Tax Treatment for "Foreign Sales Corporations", WT/DS108/AB/R, adopted 20 March 2000, DSR 2000:III, 1619

US – FSC

Panel Report, United States – Tax Treatment for "Foreign Sales Corporations", WT/DS108/R, adopted 20 March 2000, as modified by Appellate Body Report WT/DS108/AB/R, DSR 2000:IV, 1675

US – FSC(Article 21.5 – EC)

Appellate Body Report, United States – Tax Treatment for "Foreign Sales Corporations" – Recourse to Article 21.5 of the DSU by the European Communities, WT/DS108/AB/RW, adopted 29 January 2002, DSR 2002:I, 55

US – FSC(Article 21.5 – EC)

Panel Report, United States – Tax Treatment for "Foreign Sales Corporations" – Recourse to Article 21.5 of the DSU by the European Communities, WT/DS108/RW, adopted 29 January 2002, as modified by Appellate Body Report WT/DS108/AB/RW, DSR 2002:I, 119

US – FSC(Article 21.5 – EC II)

Appellate Body Report, United States – Tax Treatment for "Foreign Sales Corporations" – Second Recourse to Article 21.5 of the DSU by the European Communities, WT/DS108/AB/RW2, adopted 14 March 2006, DSR 2006:XI, 4721

US – FSC(Article 21.5 – EC II)

Panel Report, United States – Tax Treatment for "Foreign Sales Corporations" – Second Recourse to Article 21.5 of the DSU by the European Communities, WT/DS108/RW2, adopted 14 March 2006, as upheld by Appellate Body Report WT/DS108/AB/RW2, DSR 2006:XI, 4761

US – FSC(Article 22.6 – US)

Decision by the Arbitrator, United States – Tax Treatment for "Foreign Sales Corporations" – Recourse to Arbitration by the United States under Article 22.6 of the DSU and Article 4.11 of the SCM Agreement, WT/DS108/ARB, 30 August 2002, DSR 2002:VI, 2517

US – Gambling

Appellate Body Report, United States – Measures Affecting the Cross‑Border Supply of Gambling and Betting Services, WT/DS285/AB/R, adopted 20 April 2005, DSR 2005:XII, 5663 (Corr.1, DSR 2006:XII, 5475)

US – Gasoline

Appellate Body Report, United States – Standards for Reformulated and Conventional Gasoline, WT/DS2/AB/R, adopted 20 May 1996, DSR 1996:I, 3

US – Hot‑Rolled Steel

Appellate Body Report, United States – Anti‑Dumping Measures on Certain Hot‑Rolled Steel Products from Japan, WT/DS184/AB/R, adopted 23 August 2001, DSR 2001:X, 4697

US – Large Civil Aircraft

United States – Measures Affecting Trade in Large Civil Aircraft, WT/DS317

US – Large Civil Aircraft (2nd complaint)

Panel Report, United States – Measures Affecting Trade in Large Civil Aircraft (Second Complaint), WT/DS353/R, circulated to WTO Members 31 March 2011

US – Line Pipe

Appellate Body Report, United States – Definitive Safeguard Measures on Imports of Circular Welded Carbon Quality Line Pipe from Korea, WT/DS202/AB/R, adopted 8 March 2002, DSR 2002:IV, 1403

US – Oil Country Tubular Goods Sunset Reviews

Appellate Body Report, United States – Sunset Reviews of Anti‑Dumping Measures on Oil Country Tubular Goods from Argentina, WT/DS268/AB/R, adopted 17 December 2004, DSR 2004:VII, 3257

US – Section 211 Appropriations Act

Appellate Body Report, United States – Section 211 Omnibus Appropriations Act of 1998, WT/DS176/AB/R, adopted 1 February 2002, DSR 2002:II, 589

US – Shrimp

Appellate Body Report, United States – Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS58/AB/R, adopted 6 November 1998, DSR 1998:VII, 2755

US – Softwood Lumber III

Panel Report, United States – Preliminary Determinations with Respect to Certain Softwood Lumber from Canada, WT/DS236/R, adopted 1 November 2002, DSR 2002:IX, 3597

US – Softwood Lumber IV

Appellate Body Report, United States – Final Countervailing Duty Determination with Respect to Certain Softwood Lumber from Canada, WT/DS257/AB/R, adopted 17 February 2004, DSR 2004:II, 571

US – Softwood Lumber VI (Article 21.5 – Canada)

Appellate Body Report, United States – Investigation of the International Trade Commission in Softwood Lumber from Canada – Recourse to Article 21.5 of the DSU by Canada, WT/DS277/AB/RW, adopted 9 May 2006, and Corr.1, DSR 2006:XI, 4865

US – Sonar Mapping

GATT Panel Report, United States – Procurement of a Sonar Mapping System, GPR.DS1/R, 23 April 1992, unadopted

US – Steel Safeguards

Appellate Body Report, United States – Definitive Safeguard Measures on Imports of Certain Steel Products, WT/DS248/AB/R, WT/DS249/AB/R, WT/DS251/AB/R, WT/DS252/AB/R, WT/DS253/AB/R, WT/DS254/AB/R, WT/DS258/AB/R, WT/DS259/AB/R, adopted 10 December 2003, DSR 2003:VII, 3117

US – Upland Cotton

Appellate Body Report, United States – Subsidies on Upland Cotton, WT/DS267/AB/R, adopted 21 March 2005, DSR 2005:I, 3

US – Upland Cotton

Panel Report, United States – Subsidies on Upland Cotton, WT/DS267/R, Corr.1, and Add.1 to Add.3, adopted 21 March 2005, as modified by Appellate Body Report WT/DS267/AB/R, DSR 2005:II, 299

US – Upland Cotton (Article 21.5 – Brazil)

Appellate Body Report, United States – Subsidies on Upland Cotton – Recourse to Article 21.5 of the DSU by Brazil, WT/DS267/AB/RW, adopted 20 June 2008, DSR 2008:III, 809

US – Upland Cotton (Article 21.5 – Brazil)

Panel Report, United States – Subsidies on Upland Cotton – Recourse to Article 21.5 of the DSU by Brazil, WT/DS267/RW and Corr.1, adopted 20 June 2008, as modified by Appellate Body Report WT/DS267/AB/RW, DSR 2008:III, 997 to DSR 2008:VI, 2013

US – Wheat Gluten

Appellate Body Report, United States – Definitive Safeguard Measures on Imports of Wheat Gluten from the European Communities, WT/DS166/AB/R, adopted 19 January 2001, DSR 2001:II, 717

US – Wool Shirts and Blouses

Appellate Body Report, United States – Measure Affecting Imports of Woven Wool Shirts and Blouses from India, WT/DS33/AB/R, adopted 23 May 1997, and Corr.1, DSR 1997:I, 323

ABBREVIATIONS USED IN THIS REPORT

Abbreviation

Description

1983 Presidential Memorandum

Memorandum to the Heads of Executive Departments and Agencies: Government Patent Policy, Public Papers 248, 18 February 1983 (Panel Exhibit EC-560)

1987 Executive Order

Executive Order 12591, Facilitating Access to Science and Technology, 10 April 1987 (Panel Exhibit EC-561)

1992 Agreement

Agreement between the European Economic Community and the Government of the United States of America concerning the application of the GATT Agreement on Trade in Civil Aircraft on trade in large civil aircraft, done at Brussels on 17 July 1992, Official Journal of the European Union, L Series, No. 301 (17 October 1992) 32

ACT programme

NASA Advanced Composites Technology Program

Additional Procedures

Additional Procedures to Protect Sensitive Information adopted by the Appellate Body Division in its Procedural Ruling dated 15 April 2011 (contained in Annex III to this Report)

AJCA

American Jobs Creation Act of 2004, Public Law No. 108-357, 118 Stat. 1418 (Panel Exhibit EC-626)

Anti-Dumping Agreement

Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994

AS programme

NASA Aviation Safety Program

AST programme

NASA Advanced Subsonic Technology Program

ATCAS

Advanced Composite Technology Fuselage Program

ATP

USDOC Advanced Technology Program

B&O

business and occupation

B&P

bid and proposal

Bayh-Dole Act

Patent and Trademark Law Amendments Act of 1980, codified at United States Code, Title 35, chapter 18, sections 200‑212 (Patent Rights in Inventions Made with Federal Assistance) (Panel Exhibit EC-558)

BCA

Boeing Commercial Airplanes

BCI

business confidential information

Board

NASA Inventions and Contributions Board

Cabral model

Economic model developed by Luis M.B. Cabral, Professor of Economics at New York University's Stern School of Business, in the Cabral Report

Cabral Report

Professor L.M.B. Cabral, "Impact of Development Subsidies Granted to Boeing" (New York University and CEPR, March 2007) (Panel Exhibit EC-4)

CHRA

Corporate Headquarters Relocation Act of 2001, Illinois Public Act 92‑0207 (Panel Exhibit EC‑216)

DSB

Dispute Settlement Body

DUS&T programme

USDOD Dual Use Science and Technology Program

EDGE

Economic Development for a Growing Economy

ETI

extraterritorial income

ETI Act

FSC Repeal and Extraterritorial Income Exclusion Act of 2000, Public Law No. 106-519, 114 Stat. 2423 (Panel Exhibit EC-625)

FAR

Federal Acquisition Regulation

FIP

foreground intellectual property

FPDS

Federal Procurement Data Base

FPDS-NG

Federal Procurement Data Base – Next Generation

FSC

Foreign Sales Corporation

House Bill 2294

Washington State House Bill 2294, 58th Legislature, 2nd Special Session (Washington, 2003) (Panel Exhibit EC-54)

HPCC programme

NASA High Performance Computing and Communications Program

HSBI

highly sensitive business information

HSR programme

NASA High-Speed Research Program

IDS

Integrated Defense Systems

ILFC

International Lease Finance Corporation

IR&D

independent research and development

IRBs

industrial revenue bonds

ITAR

International Traffic in Arms Regulations

ITR

International Trade Resources

JAL

Japan Airlines

KDFA bonds

Kansas Development Finance Authority Bonds

LA/MSF

launch aid/member State financing

LCA

large civil aircraft

LCF

Boeing 747 large cargo freighter

LERD

Limited Exclusive Rights Data

ManTech programme

USDOD Manufacturing Technology Program

MSA

Project Olympus Master Site Development and Location Agreement between the Boeing Company and the State of Washington, County of Snohomish, City of Everett and Certain Other Governmental Units and Authorities of or in the State of Washington, 19 December 2003 (Panel Exhibit EC-58)

NASA

United States National Aeronautics and Space Administration

OTAs

other transaction agreements

Panel Report

Panel Report, United States – Measures Affecting Trade in Large Civil Aircraft (Second Complaint), WT/DS353/R

Peisen Study

Peisen et al., Case Studies: Time Required to Mature Aeronautic Technologies to Operational Readiness (SAIC and GRA, Inc., November 1999) (Panel Exhibit EC‑795)

QAT programme

NASA Quiet Aircraft Technology Program

R&D

research and development

R&T Base programme

NASA Research and Technology Base Program

R&TD

research and technological development

RDT&E

research, development, test, and evaluation

RTM

resin transfer moulding

SALE

Singapore Aircraft Leasing Enterprise

SCM Agreement

Agreement on Subsidies and Countervailing Measures

Space Act

National Aeronautics and Space Act of 1958, Public Law No. 85-568, as amended (Panel Exhibit EC-286)

Space Act Agreements

agreements between NASA and Boeing undertaken pursuant to NASA's authority under the Space Act

Spirit

Spirit AeroSystems

Subsidies Committee

Committee on Subsidies and Countervailing Measures

TIPRA

Tax Increase Prevention and Reconciliation Act of 2005, Public Law No. 109-222, 120 Stat. 345 (Panel Exhibit EC-627)

Tokyo Round Subsidies Code

Tokyo Round Agreement on Interpretation and Application of Articles VI, XVI and XXIII of the General Agreement on Tariffs and Trade, BISD 26S/56, entered into force 1 January 1980

TRL

technology readiness level

USDOC

United States Department of Commerce

USDOD

United States Department of Defense

USDOL

United States Department of Labor

Vienna Convention

Vienna Convention on the Law of Treaties, done at Vienna, 23 May 1969, 1155 UNTS 331; 8 International Legal Materials 679

VS programme

NASA Vehicle Systems Program

Working Procedures

Working Procedures for Appellate Review, WT/AB/WP/6, 16 August 2010

WTO

World Trade Organization

WTO Agreement

Marrakesh Agreement Establishing the World Trade Organization

World Trade Organization

Appellate Body

United States – Measures Affecting Trade in Large Civil Aircraft (Second Complaint)

European Union, Appellant/Appellee

United States, Other Appellant/Appellee

Australia, Third Participant

Brazil, Third Participant

Canada, Third Participant

China, Third Participant

Japan, Third Participant

Korea, Third Participant

AB-2011-3

Present:

Bautista, Presiding Member

Unterhalter, Member

Zhang, Member

I. Introduction

1. The European Union and the United States each appeals certain issues of law and legal interpretations developed in the Panel Report, United States – Measures Affecting Trade in Large Civil Aircraft (Second Complaint) (the "Panel Report"). The Panel was established on 17 February 2006 to consider a complaint by the European Communities regarding a number of US measures affecting trade in large civil aircraft ("LCA"). The European Communities claimed that the United States has provided subsidies to US producers of LCA, namely, The Boeing Company and the McDonnell Douglas Corporation (prior to its merger with Boeing), and that such subsidies are prohibited and/or actionable under the Agreement on Subsidies and Countervailing Measures (the "SCM Agreement").

2. The European Communities' claims before the Panel related to measures from three US States and municipalities therein, as well as to a number of US Federal Government measures, all allegedly providing subsidies to Boeing, as follows:

(a) State and local measures:

(i) State of Washington and municipalities therein: the provision of tax incentives by the State of Washington through five measures under House Bill 2294 ("House Bill 2294"); the provision of tax reductions from the City of Everett's business and occupation ("B&O") tax pursuant to Ordinance No. 2759-04; and the provision of various incentives, including training facilities and infrastructure improvements, in connection with the production of Boeing's 787 under the Project Olympus Master Site Development and Location Agreement between the Boeing Company and the State of Washington (the "MSA");

(ii) State of Kansas and municipalities therein: the provision by the City of Wichita of property and sales tax abatements through the issuance of industrial revenue bonds ("IRBs");  and the issuance by the State of Kansas of Kansas Development Finance Authority Bonds ("KDFA bonds") to fund the development and production of a portion of the fuselage for Boeing's 787 in Wichita, along with payments by the State of Kansas of the interest on such bonds; and

(iii) State of Illinois and municipalities therein: the provision by Cook County and the City of Chicago of four separate incentives in consideration for Boeing's decision to relocate its corporate headquarters from Seattle, Washington State to Chicago in 2001; and

(b) Federal measures:

(i) US National Aeronautics and Space Administration ("NASA"): payments to Boeing and the provision of access to NASA facilities, equipment, and employees pursuant to contracts and agreements entered into under eight aeronautics research and development ("R&D") programmes;

(ii) US Department of Defense ("USDOD"): payments to Boeing and the provision of access to USDOD facilities for aeronautics R&D relating to "dual use" technologies, pursuant to contracts and agreements entered into under 23 research, development, test, and evaluation ("RDT&E") programmes;

(iii) NASA/USDOD: the allocation of intellectual property rights to Boeing under contracts and agreements entered into with NASA and the USDOD; and payments by NASA and the USDOD for independent research and development ("IR&D") expenditures and bid and proposal ("B&P") reimbursements, notably relating to basic research, applied research, development, and systems and other concept formulation studies;

(iv) US Department of Commerce ("USDOC"): payments to Boeing and the provision of access to USDOC facilities, equipment, and employees to perform aeronautics R&D under eight Advanced Technology Program ("ATP") projects, falling into three general categories;

(v) US Department of Labor ("USDOL"): a payment of $1.5 million, made to Edmonds Community College under the High Growth Job Training Initiative, for the training of aerospace industry workers for the development and production of Boeing's 787; and

(vi) Foreign Sales Corporation ("FSC") / extraterritorial income ("ETI") and successor legislation: the provision of federal tax exemptions to Boeing under the original provisions of the US Internal Revenue Code relating to foreign sales corporations and successor legislative acts, including grandfathering clauses and transitional rules.

3. According to the European Communities, all of the above measures provided Boeing's LCA division with subsidies amounting to $19.1 billion over the period 1989-2006.

A. The European Communities' Claims before the Panel

4. The European Communities requested the Panel to find that the United States acted inconsistently with its obligations under the SCM Agreement. First, the European Communities submitted that the State of Washington's House Bill 2294 tax incentives and the FSC and ETI federal taxation schemes constitute prohibited subsidies, within the meaning of Article 3.1(a) and in violation of Article 3.2 of the SCM Agreement.

5. Second, the European Communities argued that, through various measures provided by the US Federal Government and the States of Washington, Kansas, and Illinois, and municipalities therein, the United States provided actionable subsidies to Boeing's LCA division, which caused serious prejudice to the interests of the European Communities, within the meaning of Articles 5(c) and 6.3 of the SCM Agreement. In particular, the European Communities requested the Panel to find that serious prejudice was caused by means of:

(c) significant price suppression, within the meaning of Article 6.3(c) of the SCM Agreement, with respect to orders of Airbus' A330, Original A350, A350XWB‑800, A320, and A340 families of LCA, or, in the alternative, threat of significant price suppression with respect to deliveries of Airbus' A330, A350XWB‑800, A320, and A340 families of LCA;

(d) significant lost sales, within the meaning of Article 6.3(c) of the SCM Agreement, with respect to orders of Airbus' A330, Original A350, A320, and A340 families of LCA, or, in the alternative, threat of significant lost sales with respect to deliveries of Airbus' A330, A320, and A340 families of LCA;

(e) displacement and impedance, within the meaning of Article 6.3(a) of the SCM Agreement, with respect to orders of Airbus' A330 and Original A350 families of LCA, or, in the alternative, threat of displacement or impedance with respect to deliveries of Airbus' A330 and A350XWB-800 families of LCA;

(f) displacement and impedance, within the meaning of Article 6.3(b) of the SCM Agreement, with respect to orders of Airbus' A330, Original A350, A320, and A340 families of LCA, or, in the alternative, threat of displacement or impedance with respect to deliveries of Airbus' A330, A350XWB-800, A320, and A340 families of LCA; and

(g) threat of significant price suppression with respect to future orders of Airbus' A330, A350XWB-800, A320, and A350XWB-900/1000 families of LCA.

6. Third, the European Communities contended that the United States acted inconsistently with its obligations regarding support to the LCA industry, as set forth in the 1992 Agreement between the European Economic Community and the Government of the United States of America concerning the application of the GATT Agreement on Trade in Civil Aircraft on trade in large civil aircraft  (the "1992 Agreement"), and that the United States' breach of that Agreement constitutes serious prejudice to the European Communities' interests, within the meaning of Article 5(c) of the SCM Agreement.

7. On 24 November 2006, the European Communities filed a request for preliminary rulings concerning the information-gathering procedure contained in Annex V to the SCM Agreement. The European Communities submitted two alternative requests. First, it requested the Panel to rule that the Annex V procedure had been initiated and that, consequently, the United States had an obligation to respond to certain questions put to it by the European Communities in a communication dated 25 May 2006. In the alternative, the European Communities asked the Panel to exercise its discretion under Article 13 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (the "DSU") to put some or all of these questions to the United States.

B. The Panel's Findings

8. During the course of the Panel proceedings, the Panel adopted additional procedures for the protection of business confidential information ("BCI") and highly sensitive business information ("HSBI"), and issued a number of rulings relating to these procedures and other issues. On 30 July 2007, the Panel issued a Preliminary Ruling declining the requests that had been made by the European Communities relating to the information-gathering procedure set out in Annex V to the SCM Agreement. The Panel considered that initiation of an Annex V procedure requires some form of action on the part of the Dispute Settlement Body ("DSB"). Having examined the minutes of the various DSB meetings where the European Communities' request to initiate such a procedure was considered, the Panel found it "clear" that "the DSB never took any action to initiate an Annex V procedure", or designate a DSB representative, as required by Annex V. Accordingly, the Panel denied the European Communities' request to rule that an Annex V procedure had been initiated, as well as various additional requests that were dependent upon that request. The Panel also declined the European Communities' alternative request, explaining that it did not, in the circumstances of this dispute, consider it necessary or appropriate to exercise its discretion under Article 13 of the DSU to seek information from the United States before having reviewed the parties' first written submissions.

9. The Panel Report was circulated to Members of the World Trade Organization (the "WTO") on 31 March 2011. In its Report, the Panel found the following state and local measures to constitute specific subsidies within the meaning of Articles 1 and 2 of the SCM Agreement:

(h) State of Washington and municipalities therein:  (i) the Washington State B&O tax rate reduction provided for in House Bill 2294; (ii) the B&O tax credits for preproduction development, computer software and hardware, and property taxes provided for in House Bill 2294; (iii) the sales and use tax exemptions for computer hardware, peripherals, and software provided for in House Bill 2294; (iv) the City of Everett B&O tax rate reduction; and (v) the workforce development programme and the Employment Resource Center provided under the MSA;

(i) State of Kansas and municipalities therein: the state and local property and sales tax abatements granted to Boeing through the issuance of IRBs; and

(j) State of Illinois and municipalities therein: (i) the reimbursement of a portion of Boeing's relocation expenses provided for in the Corporate Headquarters Relocation Act of 2001 (the "CHRA"); (ii) the 15-year Economic Development for a Growing Economy ("EDGE") tax credits provided for in the CHRA; (iii) the abatement or refund of a portion of Boeing's property taxes provided for in the CHRA; and (iv) the payment to retire the lease of the previous tenant of Boeing's new headquarters building.

10. The Panel was not satisfied, however, that the European Communities had established that the following state measures constitute specific subsidies within the meaning of the SCM Agreement: (i) the Washington State sales tax exemptions for construction services and equipment, the leasehold tax exemption, and the property tax exemption granted pursuant to House Bill 2294; (ii) the measures—other than the workforce development programme and the Employment Resource Center—granted pursuant to the MSA; or (iii) the State of Kansas' issuance of KDFA bonds.

11. The Panel also found the following US Federal Government measures to constitute specific subsidies within the meaning of Articles 1 and 2 of the SCM Agreement:

(a) NASA: (i) the payments made to Boeing pursuant to procurement contracts entered into under the eight aeronautics R&D programmes at issue; and (ii) the access to NASA facilities, equipment, and employees provided to Boeing pursuant to procurement contracts and agreements under the National Aeronautics and Space Act of 1958 (the "Space Act") entered into under the eight aeronautics R&D programmes at issue ("Space Act Agreements");

(b) USDOD: (i) the payments made to Boeing pursuant to assistance instruments entered into under the 23 RDT&E programmes at issue; and (ii) the access to USDOD facilities provided to Boeing pursuant to assistance instruments entered into under the 23 RDT&E programmes at issue; and

(c) FSC/ETI and successor legislation: the tax exemptions and tax exclusions provided to Boeing under FSC/ETI legislation, including the transition and grandfathering provisions of the FSC Repeal and Extraterritorial Income Exclusion Act of 2000 (the "ETI Act") and the American Jobs Creation Act of 2004 (the "AJCA").

12. The Panel was not persuaded that the European Communities had demonstrated that the following federal measures constitute specific subsidies: (i) the USDOD's payments to Boeing pursuant to procurement contracts under the 23 aeronautics RDT&E programmes at issue; (ii) the USDOD's grant of access to government facilities pursuant to procurement contracts under the 23 aeronautics RDT&E programmes at issue; (iii) the USDOC's payments to joint ventures/consortia in which Boeing participated through the ATP; (iv) the allocation of intellectual property rights under NASA/USDOD R&D procurement contracts and agreements; (v) the reimbursement of IR&D and B&P expenses under NASA/USDOD R&D procurement contracts and agreements; or (vi) the USDOL's payment to Edmonds Community College under the High Growth Job Training Initiative.

13. The Panel further found that the FSC/ETI and successor act subsidies constitute prohibited export subsidies within the meaning of Articles 3.1(a) and 3.2 of the SCM Agreement. However, the Panel considered that the European Communities had failed to demonstrate that the Washington State tax measures provided for in House Bill 2294 are inconsistent with Articles 3.1(a) and 3.2 of the SCM Agreement.

14. The Panel determined that the above measures provided Boeing's LCA division with subsidies amounting to "at least $5.3 billion" over the period 1989-2006. The Panel declined to take account of the estimated future subsidy amounts associated with these measures.

15. At the outset of its analysis of the European Communities' claims of serious prejudice, the Panel made a number of findings regarding the relevant "markets", "subsidized products", and "like products" for purposes of its analysis. The parties agreed, and the Panel found, that "the LCA market is a global market geographically". The European Communities further divided the global LCA market into five market segments, or product markets, on the basis of the flight range and seating capacity of the various LCA families. Its serious prejudice claim focused on three of these product markets: (i) the 100-200 seat LCA market; (ii) the 200-300 seat LCA market; and (iii) the 300-400 seat LCA market. The relevant Boeing "subsidized product(s)" and Airbus "like product(s)" in each market are set out at Table 3 in paragraph 897 of this Report. The United States accepted the European Communities' division of the market as the basis for evaluating the European Communities' serious prejudice claim, and so did the Panel. The Panel further expressed the view that, provided that the European Communities demonstrated one of the alleged forms of serious prejudice in subparagraphs (a) through (c) of Article 6.3 in relation to a particular Boeing subsidized LCA and a corresponding Airbus like product, it would establish serious prejudice to the European Communities' LCA-related interests for purposes of Article 5(c) of the SCM Agreement.

16. The Panel further noted that, in presenting its arguments, the European Communities drew a distinction "based on the nature of the subsidies" between, on the one hand, the effects of the subsidies benefiting Boeing's 787 family of LCA and, on the other hand, the effects of the subsidies benefiting Boeing's 737NG and 777 families of LCA. With regard to the 787, which competes in the 200-300 seat LCA market, the European Communities argued that the subsidies have two principal effects, whereas, with respect to the 737NG and 777, which compete in the 100-200 seat and the 300‑400 seat LCA markets, respectively, the subsidies were alleged to have only one of those effects. For all three product markets, the European Communities alleged that all of the subsidies have "price effects" because they provide Boeing with the ability to charge lower prices either by reducing Boeing's marginal unit costs or by increasing Boeing's non-operating cash flow. For the 200‑300 seat LCA market, the European Communities alleged that, in addition to those price effects, the aeronautics R&D subsidies have "technology effects" in that they "have helped Boeing develop, launch and produce a technologically-advanced 200-300 seat LCA much more quickly than it could have on its own". Thus, the Panel understood the European Communities to argue that the subsidies cause significant price suppression, significant lost sales, and displacement and impedance (and a threat thereof), in the 200‑300 seat LCA market through both the technology effects and the price effects that they have on Boeing's commercial behaviour with respect to the 787. For the 100‑200 seat and 300‑400 seat LCA markets, the Panel understood the European Communities to argue that the subsidies cause the same market phenomena, but only through the price effects on Boeing's commercial behaviour with respect to the 737NG and 777.

17. The Panel concluded as follows with respect to the European Communities' claims concerning the technology effects of the aeronautics R&D subsidies:

{T}he effect of the aeronautics R&D subsidies is a threat of displacement and impedance of European Communities' exports from third country markets within the meaning of Article 6.3(b) of the SCM Agreement, with respect to the 200‑300 seat wide-body LCA product market, and significant lost sales and significant price suppression, within the meaning of Article 6.3(c) of the SCM Agreement with respect to that product market, each of which constitute serious prejudice to the interests of the European Communities within the meaning of Article 5(c) of the SCM Agreement.

18. As regards the European Communities' claim of price effects of the FSC/ETI subsidies and the Washington State and City of Everett B&O tax rate reductions (the "tied tax subsidies"):

... the Panel {was} satisfied that the effects of the FSC/ETI subsidies and the Washington State B&O tax subsidies in the 100-200 seat single aisle LCA product market were to significantly suppress Airbus' prices in sales in which it competed against Boeing and to cause Airbus to lose significant sales, and to displace and impede European Communities' exports from third country markets in that product market. {The Panel was} also satisfied that the effects of the FSC/ETI subsidies, the Washington State B&O tax subsidies and the City of Everett B&O tax subsidies in the 300-400 seat wide-body LCA product market were to significantly suppress Airbus' prices in sales in which it competed against Boeing and to cause Airbus to lose significant sales, and to displace and impede European Communities' exports from third country markets in that product market.

19. In its assessment of the effects of the subsidies in the 200-300 seat LCA market, the Panel observed that the NASA and USDOD aeronautics R&D subsidies, on the one hand, and the State of Washington and City of Everett B&O tax rate reductions, on the other hand, "operate through entirely distinct causal mechanisms". Given the different ways in which these two groups of subsidies operate, the Panel considered that it was not "appropriate to aggregate the effects of the B&O tax subsidies on Boeing's pricing of the 787 with the effects of the aeronautics R&D subsidies on Boeing's development of technologies applied to the 787". The Panel therefore evaluated the effects of the two B&O tax rate reductions on their own, and found that there was "insufficient evidence before {it} … to conclude that these subsidies are of a magnitude that would enable them, on their own, to have such an effect on Boeing's prices of the 787 as would lead to a finding that their effects in the 200‑300 seat wide-body market were significant price suppression, significant lost sales or displacement or impedance of European Communities imports into the United States or exports to third countries."

20. With respect to the remaining eight subsidies that the Panel found to be specific, the Panel was not satisfied that the European Communities had established that, through their effects on Boeing's LCA pricing behaviour, these subsidies have caused serious prejudice to the European Communities' interests in any of the three LCA product markets relevant to this dispute.

21. The Panel exercised judicial economy with respect to the European Communities' claim that certain of the subsidies at issue threaten to cause significant price suppression with respect to future orders of Airbus LCA, and with respect to the European Communities' claim that the United States' violation of the 1992 Agreement constitutes serious prejudice to the European Communities' interests within the meaning of Article 5(c) of the SCM Agreement.

C. Appellate Proceedings

22. On 1 April 2011, the European Union notified the DSB of its intention to appeal certain issues of law covered in the Panel Report and certain legal interpretations developed by the Panel, pursuant to Articles 16.4 and 17 of the DSU, and filed a Notice of Appeal pursuant to Rule 20 of the Working Procedures for Appellate Review (the "Working Procedures").

23. Also on 1 April 2011, the Appellate Body received a request from the European Union that the Appellate Body adopt additional procedures to protect BCI and HSBI in these appellate proceedings. The European Union explained that the reasons for this request were substantially the same as the reasons given by the participants in EC and certain member States – Large Civil Aircraft, namely, that disclosure of confidential information (which in this dispute includes company-specific data on productivity, costs, prices, sales campaigns, commercial agreements, and privileged advice) could be "severely prejudicial" to the originators of the information, that is, to the manufacturers of LCA, as well as their customers and suppliers. The European Union requested the adoption of a procedural ruling with substantially the same terms as the one adopted by the Appellate Body in EC and certain member States – Large Civil Aircraft. On the same day, the Appellate Body Division selected to hear this appeal invited the United States and the third parties to comment in writing on the European Union's request, and informed the participants and third parties of its decision to adopt temporary precautions to protect confidential information. Given that the Panel record was, in accordance with Rule 25 of the Working Procedures, to be transmitted to the Appellate Body immediately upon the filing of a Notice of Appeal, the Division decided to provide additional protection to all BCI and HSBI transmitted to the Appellate Body as part of that record, pending its final decision on the European Union's request.

24. Written comments were received from the United States on 6 April 2011 and from Australia, Brazil, Canada, China, and Japan on 12 April 2011. The United States shared the European Union's view that it was necessary for the Division to adopt BCI/HSBI procedures in this appeal. Overall, the United States agreed that the Appellate Body procedural ruling in EC and certain member States – Large Civil Aircraft would serve as an appropriate basis for a procedural ruling on the protection of sensitive information in this appeal, with certain modifications made in the light of the previous experience. The third participants expressed their support for, or did not oppose, the request of the European Union, and suggested certain modifications to the proposed procedures in order to ensure that the rights of third participants to participate meaningfully in these appellate proceedings would be fully protected. On 15 April 2011, the Division issued a Procedural Ruling adopting Additional Procedures to Protect Sensitive Information (the "Additional Procedures"), pursuant to Rule 16(1) of the Working Procedures. The Procedural Ruling and Additional Procedures are attached as Annex III to this Report.

25. On 19 April 2011, pursuant to paragraph 19(xiv) of the Additional Procedures, the participants each provided a list of persons designated as "BCI-Approved Persons" and persons designated as "HSBI-Approved Persons". On the same day, in accordance with paragraph 19(xvi) of the Additional Procedures, the third participants each provided a list of up to eight individuals designated as "Third Participant BCI-Approved Persons". Requests to change the BCI/HSBI Approved Persons and Third Participants BCI-Approved Persons lists were subsequently submitted by the European Union, the United States, Australia, Brazil, Canada, and Korea. The Division provided the participants and third participants with the opportunity to comment on each request. No objections were made and all of the requests were authorized by the Division.

26. Upon receipt of the European Union's request for additional procedures for the protection of BCI and HSBI in these proceedings, the Division decided to suspend the deadlines that would otherwise apply under the Working Procedures for the filing of a Notice of Other Appeal and for the filing of written submissions.  On 20 April 2011, after issuing its Procedural Ruling, the Division provided the participants and third participants the deadlines for filing written submissions, pursuant to Rule 26 of the Working Procedures. In that communication, the Division also invited the participants to address in their appellees' submissions, and the third participants in their written submissions, the implications for the legal issues in this appeal arising from the Appellate Body report in EC and certain member States – Large Civil Aircraft, which was subsequently circulated on 18 May 2011.

27. The European Union filed an appellant's submission on 21 April 2011. On 28 April 2011, the United States notified the DSB of its intention to appeal certain issues of law covered in the Panel Report and certain legal interpretations developed by the Panel, pursuant to Articles 16.4 and 17 of the DSU, and filed a Notice of Other Appeal pursuant to Rules 23 and 26(2) of the Working Procedures. On the same day, the United States filed an other appellant's submission.

28. On 19 May 2011, pursuant to Rule 30(1) of the Working Procedures, the European Union notified the Appellate Body Division hearing this appeal, as well as the United States and the third participants, that it was withdrawing its appeal insofar as it related to subsidies contingent upon export, with immediate effect.

29. On 15 June 2011, the European Union and the United States each filed an appellee's submission and, on 23 June 2011, Australia, Brazil, Canada, China, Japan, and Korea each filed a third participant's submission.

30. On 4 July 2011, the Chair of the Appellate Body informed the Chair of the DSB that, due to the considerable size of the record and complexity of the appeal, the need to hold multiple sessions of the oral hearing, and the overall workload of the Appellate Body, the Appellate Body would not be able to circulate its Report by 31 May 2011—that is, by the expiration of the 60‑day period provided under Article 17.5 of the DSU. The Chair of the DSB was also informed that the Appellate Body would hold a first session of the oral hearing in August and a second session in October 2011, and would provide thereafter an estimate for when its Report would be circulated.

31. By joint letter dated 11 July 2011, the participants requested that the oral hearing in this appeal be opened to public observation to the extent that this would be possible given the need for protection of sensitive information. The participants suggested that the Division adopt a further procedural ruling pursuant to Rule 16(1) of the Working Procedures to regulate the conduct of the oral hearing in the light of the request for public observation and the Additional Procedures, and proposed specific modalities for that purpose. On 12 July 2011, the Division invited the third participants to comment on the participants' request and proposed modalities. On 15 July 2011, Canada and China submitted comments on the participants' request to open the oral hearing to public observation. Canada agreed with the joint proposal of the participants that the Division adopt the same additional procedures that were adopted in EC and certain member States – Large Civil Aircraft. China expressed its wish that the Division follow the same practice as in EC and certain member States – Large Civil Aircraft to allow third participants the opportunity to request confidential treatment of their oral statements. On 26 July 2011, the Division issued a Procedural Ruling authorizing the participants' joint request for opening the hearing to public observation via closed-circuit broadcasting and adopted Additional Procedures on the Conduct of the Oral Hearing, including the protection of certain sensitive information during the oral hearing. The Procedural Ruling is attached as Annex IV to this Report.

32. The oral hearing in this appeal took place in two sessions:  the first on 16-19 August 2011, and the second on 11-14 October 2011. Pursuant to the Procedural Ruling of 26 July 2011, the participants and third participants did not refer to any BCI or HSBI in their opening statements at either session of the oral hearing. The opening statements of the participants and third participants, with the exception of China and Korea, were videotaped at both the first and second sessions of the oral hearing. Upon confirmation that no BCI or HSBI had been inadvertently uttered, the videotapes of the opening statements were broadcast on 23 August and 18 October 2011 to those members of the public who had registered for the viewing. No participant or third participant made a closing statement at either session of the oral hearing.

33. Following the first session of the hearing, the Division invited the participants and third participants to submit additional written memoranda, pursuant to Rule 28 of the Working Procedures. The European Union and the United States each submitted an additional memorandum on 5 September 2011, and Brazil, Canada, Japan, and Korea each submitted an additional memorandum on 12 September 2011. The participants and third participants were given an opportunity at the second session of the oral hearing to make comments on the others' additional memoranda.

34. Pursuant to paragraph 19(xiii) of the Procedural Ruling of 15 April 2011, the Division informed the participants and third participants, on 23 February 2012, that it had found it necessary to include in the Appellate Body Report some references to information that was treated by the Panel as BCI or HSBI. Also pursuant to paragraph 19(xiii) of the Procedural Ruling, an advance copy of the Appellate Body Report was provided to the European Union and the United States on 29 February 2012. Both participants were requested to indicate, by 5 March 2012, whether there was a continuing need to treat all of the business sensitive information in the same manner as the Panel, and whether any BCI or HSBI had been included in the Appellate Body Report without having been identified as such. On 5 March 2012, the European Union indicated that it had not identified any BCI or HSBI that was not designated as such in the Appellate Body Report, and that it was willing to remove BCI protection with respect to two sentences consisting of EU BCI. On that date, the United States identified one instance in which it considered that BCI had been inadvertently disclosed, and indicated that the relevant text should be designated as BCI, or revised so as to avoid the need for BCI protection. The United States also identified a number of instances, consisting of US BCI or EU BCI, for which it suggested, or did not object to, the removal of BCI protection. On the same day, the Division requested the participants to respond to each other's comments by 7 March 2012. On 6 March 2012, the European Union indicated that it had no objection to the United States' proposal to remove BCI protection for information that related to the United States' interests, but objected to doing so with respect to such information relating to the European Union's interests. On 7 March 2012, the United States stated that it had no objection to the removal of BCI protection for the two sentences identified by the European Union in its letter of 5 March 2012. The Division modified the one inadvertent disclosure of BCI information, as suggested by the United States, so as to avoid the need for BCI protection. The Division decided to remove BCI protection in certain instances in which the participants suggested, or did not object to, such removal.

II. Arguments of the Participants and the Third Participants

B. Claims of Error by the European Union – Appellant

1. Annex V to the SCM Agreement

35. The European Union asserts that the Panel erred by refusing to rule that the information-gathering procedure under Annex V to the SCM Agreement had been initiated, and by denying a number of related requests. The European Union submits that, in proceeding in the way it did, the Panel failed to make an objective assessment of the matter within the meaning of Article 11 of the DSU and erred in its interpretation and application of Article 7.4 the SCM Agreement and paragraph 2 of Annex V thereto. The European Union requests the Appellate Body to find that the Panel erred in not ruling on whether the Annex V procedure had been initiated, and to complete the analysis and make a finding that the Annex V procedure is initiated by negative consensus or automatically. In addition, and independently of these requests, the European Union urges the Appellate Body to "constantly bear in mind the circumstances of this case", in particular the withholding of information and non‑cooperation by the United States. On that basis, the Appellate Body should preclude the United States from criticizing the Panel for its assessment of the facts or drawing of factual inferences and, "{i}n case of doubt or evidentiary conflict or equipoise, the Appellate Body should rule in favour of the European Union".

36. In its appellant's submission, the European Union draws a distinction between DSB "action" and issues that call for a "decision" by the DSB. The European Union notes that, under Article 2.4 of the DSU, "decisions" require consensus, but the requirement for "actions" to occur by negative consensus permeates the DSU. By way of example, the European Union points out that the final sentence of Article 2.1 indicates that, "where the DSB 'administer{s}' dispute settlement rules, it proceeds by way of 'decisions or actions'"; and Article 6.1 confirms that a panel is not established by a consensus decision, but by way of DSB action by negative consensus on the one condition that a request for the establishment of a panel is received, which is something different from a consensus decision. That is why a WTO document recording the establishment of the panel "in accordance with Article 6 of the DSU" is subsequently distributed. Moreover, Articles 16.4, 17.14, 22.6, and the final sentence of Article 22.7 also describe DSB actions that take place on the one condition that a request is received. Like Annex V to the SCM Agreement, the second sentence of Article 22.6 of the DSU, regarding referrals to arbitration on the level of suspension of concessions or other obligations, does not expressly refer to negative consensus. Yet, it must be the case that a Member can seek review of a request for suspension of concessions without that review being blocked by the complaining Member through a refusal to support a consensus decision.

37. The European Union submits that this "action" versus "decision" distinction likewise applies to Annex V to the SCM Agreement. In support of its position, the European Union refers to: Article 7.4 of the SCM Agreement, which provides for the establishment of a panel "unless the DSB decides by consensus not to establish a panel"; paragraph 1 of Annex V, which states that "{e}very Member shall cooperate in the development of evidence to be examined by a panel in procedures under paragraphs 4 through 6 of Article 7"; and paragraph 2 of Annex V, which states that, "{i}n cases where matters are referred to the DSB under paragraph 4 of Article 7, the DSB shall, upon request, initiate the procedure to obtain such information".

38. The European Union asserts that the following ten considerations relating to the text and context of Annex V support its position that action is initiated by negative consensus. First, the direct cross‑reference in paragraph 2 of Annex V to Article 7.4 of the SCM Agreement provides a "strong textual basis" for negative consensus to initiate an Annex V procedure, particularly in the light of the arguments made in relation to Article 22.6 of the DSU above.

39. Second, the terms used in paragraph 2 of Annex V indicate that "the provision creates {a mandatory} obligation on the DSB to proceed according to the terms of the treaty". No such mandatory language is used in the DSU where decision is required by consensus. The European Union argues that "Members would not oblige the DSB to act, and yet at the same time provide the defending Member in a dispute with the means to frustrate such action". Such "internal incoherence" would make the treaty provision "wholly ineffective", thus, an interpretation requiring a consensus decision must be avoided.

40. Third, paragraph 2 of Annex V uses the term "request", which is also used in Articles 6.1, 22.6, and 22.7 of the DSU. This provides further support for mandatory DSB initiation upon the satisfaction of the one condition of receiving a request.

41. Fourth, the ordinary meaning of the word "under" in paragraph 2 of Annex V includes "covered by", "subject to the authority". The initiation of an Annex V procedure is, therefore, subject to the negative consensus rule in Article 7.4 of the SCM Agreement. The references to "cases" and "matters" in paragraph 2 of Annex V also provide this link to Article 7.4.

42. Fifth, Article 2.1 of the DSU provides that the DSB administer relevant "rules and procedures". Appendix 2 to the DSU includes Annex V to the SCM Agreement as relevant rules and procedures for DSB rulings. The use of the term "procedure" in Annex V thus "clearly falls within the scope of a DSB action by negative consensus administering the rules and procedures referred to in the DSU".

43. Sixth, the requirement in paragraph 1 of Annex V for every Member to cooperate in the development of evidence and comply with the procedures "informs the remainder of Annex V" and provides strong support for the inability of a Member to block initiation of an Annex V procedure and therefore also for mandatory action by negative consensus. Article 1.2 of the DSU requires the same interpretation in order to avoid conflict between different provisions. The European Union argues that the drafters of the SCM Agreement could not have intended to make initiation of an Annex V procedure mandatory ("the DSB shall … initiate") and at the same time enable a Member to block such initiation.

44. Seventh, pursuant to paragraph 5 of Annex V, the information-gathering process shall be completed within 60 days from the matter's referral to the DSB. Therefore, there is an implicit assumption that an Annex V procedure will be established contemporaneously with the panel for the same "matter" following the same negative consensus action.

45. Eighth, paragraphs 6 to 9 of Annex V in effect create penalties for the non-cooperation of a Member. Permitting a WTO Member to block initiation of an Annex V procedure by requiring a consensus decision would defeat the purpose of these provisions.

46. Ninth, consequences for non-cooperation in countervailing duty investigations under Article 12.7 of the SCM Agreement are evidence that the drafters recognized the importance of gathering information in subsidies disputes. Therefore, in the context of subsidies disputes involving claims of serious prejudice, there is no reason why a Member should be free to prevent information-gathering with impunity.

47. Tenth, the Appellate Body report in Canada – Aircraft confirms the general principle that Members must cooperate during information-gathering procedures, and that it may be appropriate to draw adverse inferences when they fail to do so.

48. The European Union contends that the Panel erroneously "re-state{d}" part of the European Communities' complaint as a request for a ruling on "a narrow factual proposition", namely, that the DSB had initiated an Annex V procedure by action by negative consensus. In the European Union's view, the Panel's reasoning is "circular and unreasonable" because the Panel used as a justification for rejecting the European Communities' request precisely what the European Communities was challenging: the absence of an Annex V procedure.

49. The European Union also relies on the object and purpose to support its view that the initiation of the Annex V procedure "is and must be by action by negative consensus". It claims that the Annex V procedure is a "corollary and integral part" of panel establishment in a dispute settlement proceeding that is launched by negative consensus. Finding that initiation of an Annex V procedure requires decision by consensus, hence allowing a veto of the defending party, would "severely limit the ability of a complaining party to successfully bring a serious prejudice case", and the SCM Agreement "would be severely hampered". The European Union adds that the complaining party must have a tool to prepare its serious prejudice case by obtaining the necessary information prior to its written submissions to the panel.

50. The European Union finds confirmation of its interpretation in the preparatory work of the SCM Agreement. In this respect, the European Union recalls that the substantive provisions of Annex V to the SCM Agreement first appeared in the third draft text circulated by the Chairman of the Negotiating Group on Subsidies and Countervailing Measures, and that "{i}t remains clear from this and subsequent drafts that the Annex V procedure was tied-to the panel request". In the European Union's view, this explains why, when the reference to negative consensus was subsequently added to Article 7.4 of the SCM Agreement, it was well understood that the same decision-making rule would apply to the linked Annex V procedure.

51. The European Union characterizes as "particularly instructive" the fact that the Annex V procedure was added to the SCM Agreement following a proposal made by the United States. The European Union recalls that, in the Uruguay Round negotiations, the United States "eloquently explained" the object and purpose of its proposal, the essential elements of which were agreed to by all Members by consensus. The European Union summarizes the United States' proposal as a "wish{}" for "an information gathering procedure hand-in-hand with a panel procedure that is mandatory (that is, by negative consensus) backed up with a threat of adverse inferences in case of failure to co-operate".

52. In the light of the above, the European Union requests the Appellate Body to reverse the Panel's findings denying the European Communities' requests and to complete the analysis and make the following findings: (i) that the initiation of an Annex V procedure is by action by negative consensus; (ii) that, as a matter of law, all the conditions for the initiation of an Annex V procedure were fulfilled in this case, and such procedure was initiated and/or is deemed to have been initiated and/or should have been initiated; (iii) that, in refusing to cooperate in the information-gathering process, the United States failed to comply with its obligations under the first sentence of paragraph 1 of Annex V to the SCM Agreement; and (iv) that the European Communities was entitled to present its serious prejudice case based on the evidence available to it, that the Panel was entitled to complete the record as necessary relying on best information otherwise available, and that the Panel was entitled to draw adverse inferences.

53. At the oral hearing, the European Union placed less emphasis on the alleged distinction between DSB "actions" and "decisions". Instead, the European Union focused its arguments on the reasons why it considers that the DSB may decide to initiate Annex V procedures by negative consensus. The European Union also provided additional arguments to support its view that the Appellate Body has jurisdiction to make a ruling on this matter.

2. Financial Contribution – Scope of Article 1.1(a)(1) of the SCM Agreement

54. The European Union requests reversal or modification of the Panel's finding that Article 1.1(a)(1) excludes "purchases of services" by a government from the scope of the SCM Agreement. However, the European Union does not request the Appellate Body to complete the analysis by examining the USDOD RDT&E programme measures that were found by the Panel to constitute purchases of services.

55. The European Union argues that, in adopting an interpretation of Article 1.1(a)(1) that excludes purchases of services by a government from the scope of the SCM Agreement—even if those transactions included "direct transfers of funds", "provi{sion} {of} goods", or other activities specifically covered by Article 1.1(a)(1)—the Panel failed to apply properly the customary rules of treaty interpretation codified in Articles 31 to 33 of the Vienna Convention on the Law of Treaties (the "Vienna Convention"). The Panel's interpretation provides "a road map for entirely avoiding the disciplines of the SCM Agreement", and "would allow Members to massively distort international trade in goods, by transferring enormous amounts of funding to specific industries and companies on non‑market terms, as long as those 'transfers of funds' are pursuant to transactions properly characterised as purchases of services". The European Union contends that the Panel failed to consider, in a holistic manner and in accordance with Article 31(1) of the Vienna Convention, the ordinary meaning of the terms of Article 1.1(a)(1), in their context, and in the light of their object and purpose. In particular, the European Union objects to the Panel's evaluation of "context" and "object and purpose".

56. The European Union recalls that the Panel derived two conclusions from the context provided by Article 1.1(a)(1)(iii) and Article 14(d) of the SCM Agreement, which reference the provision of "goods or services" and the purchase of "goods", but not the purchase of services. First, that the drafters intended such an exclusion, even if the transactions could be covered by other elements of the definition of financial contribution; and, second, that such an interpretation would render the term "purchases {of} goods" under Article 1.1(a)(1)(iii) inutile. The European Union notes that the Appellate Body has, in previous cases, emphasized the holistic nature of treaty interpretation and cautioned that an interpretation that excessively narrows the meaning of a term in a manner that frustrates the object and purpose of the treaty cannot constitute a "holistic" interpretation. In finding that the ordinary meaning of the term "direct transfer of funds" in its context excludes a significant class of direct transfers of funds (that is, those that occur pursuant to transactions properly characterized as "purchases of services"), the Panel did not rely on the context and object and purpose to "narrow the range of possible meanings of the treaty term". Nor did the Panel seek to "ascertain the common intention of the parties" to the treaty, which is the goal of treaty interpretation under Article 31 of the Vienna Convention. Instead, the Panel put aside concerns over object and purpose, and found that there is "every reason to believe" that future panels will somehow be able to deal effectively with "the enormous loophole potentially created by the interpretation".

57. The European Union further alleges that the Panel erred in concluding that the European Communities' interpretation could render the term "purchases {of} goods" "inutile". Specifically, the Panel failed to appreciate, as pointed out by the panel in Japan – DRAMs (Korea), that "certain … transactions might be covered simultaneously by different sub‑paragraphs of Article 1.1(a)(1)", and that such overlap is not unexpected. Consequently, an interpretation that would allow purchases of goods to be covered by two different subparagraphs of Article 1.1(a)(1) is neither unexpected nor discouraged in some way, and there is no need to attempt to interpret the ordinary meaning so as to avoid that result. Moreover, the text of the SCM Agreement itself acknowledges that overlaps between categories of financial contributions are an integral feature of Article 1.1(a)(1), and therefore do not indicate "inutility" of certain subparagraphs of that provision. As an illustration, the European Union notes that an equity infusion could fall both under Article 1.1(a)(1)(i) as a "direct transfer of funds", as well as under Article 1.1(a)(1)(iii) as a "purchase{} {of} goods".

58. Moreover, the European Union asserts that the Panel also erred by dismissing the European Communities' interpretation on the ground that "the scope and coverage of Article 1.1(a)(1) of the SCM Agreement would be precisely the same if those words {i.e., 'purchases goods'} had not been added to Article 1.1(a)(1)(iii)". In the European Union's view, the scope of application of Article 1.1(a)(1)(iii) may serve an important purpose that is not covered under any other subparagraph of Article 1.1(a)(1).

59. With respect to the Panel's evaluation of the object and purpose, the European Union notes that the SCM Agreement aims to "impose multilateral disciplines on subsidies which distort international trade" in goods. Moreover, the Appellate Body has held that "measures that involve a service relating to a particular good" properly fall within the scope of the Multilateral Agreements on Trade in Goods in Annex 1A of the Marrakesh Agreement Establishing the World Trade Organization (the "WTO Agreement"). Thus, transactions properly characterized as "purchases of services" that nonetheless relate to a particular "good" should not fall outside the scope of the SCM Agreement. The Panel's approach would create "a considerable gap" in the coverage of the SCM Agreement as it would allow a Member to avoid entirely the SCM Agreement simply by asking for some type of service from a goods producer in exchange for s