The European Communities claims that Mexico has acted inconsistently with Articles 1 and 14 of the SCM Agreement by failing "to calculate the benefit conferred on the recipient pursuant to paragraph 1 of Article 1 of the SCM Agreement and to apply the method used to each particular case in a transparent way which is adequately explained, in violation of Article 14 of the SCM Agreement."
Arguments of the parties
The European Communities claims that Mexico has acted inconsistently with Articles 1 and 14 of the SCM Agreement by failing "to calculate the benefit conferred on the recipient pursuant to paragraph 1 of Article 1 of the SCM Agreement and to apply the method used to each particular case in a transparent way which is adequately explained, in violation of Article 14 of the SCM Agreement."150 In its submissions before us in support of this claim, the European Communities argues that Mexico acted inconsistently with Articles 1 and 14 because Economía failed to conduct a "pass-through" analysis to determine the extent to which any benefits received by olive growers for the production of olive oil were transmitted to the exporters of olive oil to Mexico.151 In particular, the European Communities argues that a "pass-through" analysis was required because: (1) the oil obtained by simple crushing of the olives was an input into the product finally exported; and (2) the persons upon whom the countervailing measures were imposed (identified by the European Communities as the exporters) were not related to the initial recipients of the subsidy, the olive growers, and the product had been the subject of arms' length transactions while moving between them.152 According to the European Communities, olives are an input into the production of olive oil, and the olive oil obtained from extraction is an input into the olive oil exported to Mexico, because the extracted oil had to undergo further processing (refining, blending, bottling, packaging) before it was exported.153 In response to questioning from us, the European Communities clarified that, in its view, a "pass-through" analysis is required even when only the second of the two conditions is met, i.e., when the exporters of olive oil are not related to the olive growers who receive the subsidies.154
Concerning its allegation of inconsistency with Article 1.1 of the SCM Agreement, the European Communities argues that the crucial issue is whether the olive oil imported into Mexico from the European Communities is "subsidized" in the sense of the SCM Agreement. According to the European Communities, although the SCM Agreement says little about the relationship between the subsidy and the product in relation to countervail, Article VI:3 of the GATT 1994 makes clear that countervailing duties may only be imposed where there is a "'bounty or subsidy ... on the manufacture, production or export of [an imported] product'", such that "the subsidy must be linked to some activity concerning the product".155 We note here, however, that the European Communities brings no claim under Article VI:3 of the GATT 1994 in relation to the "pass-through" issue. As regards Articles 1 and 14, the European Communities argues that "the Agreement does have a lot to say about [...] the notion of benefit", first, in Article 1 which explicitly makes benefit an element of "the notion of subsidy"156; and, second, in Article 14, which "addresses the 'calculation of the amount of a subsidy in terms of the benefit to the recipient'."157 The European Communities then states that what is to be "offset" in the sense of Article VI:3 of the GATT 1994 is the benefit conferred by the subsidy.158 The European Communities elaborates that "benefit is addressed by Article 1.1 of the Agreement, which defines it as one of the basic constituents of the concept of subsidy"159, and that "[b]enefit is also addressed by Article 14" which, in "lay[ing] down explicit rules for the methods by which benefit is to be calculated, does nothing to detract from the notion of pass through as elaborated by the EC".160 The European Communities also argues that "Article 14 puts beyond doubt the principle that the calculation of subsidy is one that is based absolutely on commercial realities, and ... that it is on these realities that the notion of pass-through is founded."161
The European Communities argues that because the subsidy was given to the olive producers, while other persons exported the product, olive oil, to the Member applying the countervailing measure, the investigating authorities needed to establish that the subsidy was passed through to the other persons.162 The European Communities cites the panel report in US – Canadian Pork which arose under the GATT 1947, as indicating that the existence of pass-through of the subsidy from live swine to pork producers would need to be determined by examining the degree to which the prices of the subsidized input product (live swine) were below market levels when the input was sold to the producers of the investigated processed product (pork). The European Communities further argues that the criterion of arms'-length sales has been established by the Appellate Body in the context of privatization of subsidized state-owned companies. In that context, according to the EC, "the criterion of arm's-length sale was coupled with that of sale for 'fair market value'".163
Mexico argues that no pass-through analysis was necessary in the olive oil investigation. According to Mexico, the subsidy programme at issue was a direct subsidy on the production of the imported product, olive oil, and had been notified as such by the European Communities to the WTO Committee on Agriculture.164 Mexico asserts that since the investigation was not related to an input product (olives) but to olive oil, which was the same product exported to Mexico, the investigating authority was not bound to conduct a pass-through analysis.165 Mexico submits that the product that was subject to the investigation was olive oil in all its forms, from first crushed to blended and refined.166 Mexico argues that the EC Regulation establishing the programme, and the amendments thereto, make clear that the programme concerned a subsidy for olive oil and not for olives.167 Mexico argues that for these reasons, the jurisprudence on pass-through in the US – Canadian Pork and US – Softwood Lumber IV disputes is not applicable in this case.168
Concerning the provisions of the SCM Agreement cited by the European Communities, Mexico argues that neither Article 1 nor Article 14 contains obligations to conduct a pass-through analysis as claimed by the European Communities. Regarding Article 1, Mexico submits that its text contains no requirement to provide a reasoned explanation of the existence of a subsidy or the need to undertake a pass-through analysis of the benefit. Rather, Article 1 only establishes, in a conceptual way, which elements must be present in order to determine that a subsidy exists.169 Mexico recalls that the European Communities is not arguing before the Panel that the aid scheme for olive oil was not a subsidy.170 Regarding Article 14, Mexico argues that this provision neither contains nor envisages any obligation to conduct a pass-through analysis of the benefit of a subsidy, and instead only provides guidelines applicable to the calculation of a benefit.171