We start our analysis by examining the basis in WTO law for the obligation to conduct a pass-through analysis in a countervailing duty investigation. This issue has been addressed specifically in two prior disputes, notably in US – Canadian Pork, a case under the GATT 1947, and more recently by the Appellate Body in US – Softwood Lumber IV.172 Both of these disputes have established that Article VI:3 of the GATT requires an investigating authority in a countervailing duty investigation to conduct a pass-through analysis in certain circumstances, and in Softwood Lumber IV,the panel and the Appellate Body found the same requirement in footnote 36 of Article 10 of the SCM Agreement.
US – Canadian Pork was brought by Canada, under Article VI of the GATT 1947. In that case, the United States had applied countervailing measures on imports from Canada of fresh, chilled and frozen pork, while the subsidies that were the subject of the investigation had been provided to Canadian producers of live swine. The United States had effectively concluded that 100 per cent of the subsidies to swine producers had "passed through" to the producers of pork, although the subsidies were provided to the swine producers, not the pork producers, and the swine and pork producers were not vertically integrated, but rather were two separate industries composed of unrelated firms. Under US law at the time, subsidies provided to the producers of a raw agricultural product were deemed to be provided in respect of production of processed products made from the raw products if the demand for the raw product was "substantially dependent" on the demand for the processed product and the processing operation added only limited value to the raw product.
Canada complained that the US measures were inconsistent with Article VI:3 of the GATT 1947 because the approach under US law did not correctly establish the amount of subsidization in respect of the imported product, pork. Canada's argument was that the US approach did not ensure that the countervailing measures were not applied "in excess" of the amount of subsidization of the product, contrary to the provisions of Article VI:3 of the GATT 1947 requiring that:
No countervailing duty shall be levied on any product of the territory of a Member imported into the territory of another Member in excess of an amount equal to the estimated bounty or subsidy determined to have been granted, directly or indirectly, on the manufacture, production or export of such product in the country of origin or exportation…..
The panel in US-Canadian Pork noted that Article VI:3 of the GATT 1947 limited the amount of countervailing duties to the amount of the subsidy "granted directly or indirectly on the production of 'such product'"173, (i.e., the imported product), and found that the United States could apply countervailing measures on imports of pork only if a subsidy had been determined to be bestowed on the production of pork. In this regard, the panel found that application of the two-part test under US law did not result in such a "determination", because it did not take into account "all facts necessary to meet the requirements of Article VI:3". The reasoning of the panel was that the pork and swine industries were separate, and operated at arms' length, such that the subsidies granted to the swine producers could only be considered to have been "bestowed on the production" of pork (as required by Article VI:3 of the GATT 1947) if they had led to a decrease in the level of prices that pork producers paid for live swine to below the level they would have had to pay for swine from other commercially available sources. Because the US two-part test did not address this issue, the panel found that it did not meet the requirements of Article VI:3 of the GATT 1947.174
The dispute in US - Softwood Lumber IV addressed a similar issue. In that case, the United States applied countervailing duties on imports of softwood lumber, including remanufactured lumber, from Canada on the basis of subsidies to the harvesting of timber, i.e., the production of raw logs, the input into the production of primary lumber. In particular, the subsidies arose from the fact that timber harvesters paid "less than adequate remuneration" for a government-provided good, standing timber. When the timber was harvested, some of the raw logs were converted to lumber by sawmills, and some of that lumber was then further processed into remanufactured lumber. The United States applied countervailing measures on the imported lumber, including remanufactured lumber, to offset the stumpage subsidies.
Canada claimed that the United States had improperly assumed, rather than analyzing and determining, that the stumpage subsidies had passed through to producers of the primary and remanufactured lumber products that were subject to the countervailing measures, and that the United States thus had acted inconsistently with Articles 10, 19 and 32 of the SCM Agreement and Article VI:3 of the GATT 1994.
The panel found in favour of Canada's claims under Article 10, and consequentially Article 32 of the SCM Agreement, as well as Article VI:3 of the GATT 1994, in respect of the situations in which producers of logs were unrelated to the sawmills that processed the logs into primary lumber and in which producers of remanufactured lumber were unrelated to the lumber manufacturers (sawmills) from which the remanufacturers obtained their lumber inputs. The panel found that no pass-through analysis was required where the producer of the inputs was related to the lumber producer (i.e., where the production was vertically integrated). The panel exercised judicial economy in respect of Canada's Article 19 claim.
The Appellate Body upheld the panel's findings that Article 10 of the SCM Agreement and Article VI:3 of the GATT 1994 require a pass-through analysis in circumstances in which a subsidy is received by a producer of an input product, and the imported product subject to the countervailing duty investigation is a different, downstream product produced by an unrelated producer using the subsidized input.
The Appellate Body began its analysis with Article VI:3, noting that this provision "prohibits levying countervailing duties on an imported product 'in excess of an amount equal to the estimated ... subsidy determined to have been granted, directly or indirectly, on the manufacture, production or export of any merchandise'".175 On this basis, the Appellate Body held that it would not be possible to determine whether countervailing duties were imposed in excess of the amount of the total subsidy accruing to a processed product without establishing whether, and in what amount, the subsidies bestowed on the input product flowed through to the downstream, imported product. The Appellate Body noted that this interpretation was supported by the definition of a "countervailing duty" in footnote 36 to Article 10 of the SCM Agreement, that is, that a countervailing duty is a special duty levied for the purpose of "offsetting" a subsidy bestowed directly or indirectly upon the manufacture, production or export of any merchandise. 176
More specifically, the Appellate Body found that if a subsidy is conferred on the production of an input product used to produce the imported product, and the producer of the input product is unrelated to the producer of the imported product, it would not be possible to establish that the countervailing duties on the imported product were not in excess of the amount of the subsidy if no analysis was performed to determine the extent to which the subsidy on the input product was transferred to the imported product. In the absence of a pass-through analysis, the Appellate Body emphasized, "it cannot be shown that the essential elements of the subsidy definition in Article 1 are present in respect of the processed product", such that "the right to impose a countervailing duty on the processed product for the purpose of offsetting an input subsidy [...] would not have been established in accordance with Article VI:3 of the GATT 1994, and, consequently, would also not have been in accordance with Articles 10 and 32.1 of the SCM Agreement."177Here, the Appellate Body quoted the panel's finding in US – Canadian Pork that the United States could apply countervailing measures on imports of pork "only if a subsidy had been determined to have been bestowed on the production of pork", and the Appellate Body's ruling in United States – Countervailing Measures on Certain EC Products that Article VI:3 of the GATT 1994, in conjunction with Article 10 of the SCM Agreement, require that "investigating authorities, before imposing countervailing duties, must ascertain the precise amount of a subsidy attributed to the imported products under investigation."178
In US - Softwood Lumber IV, The Appellate Body emphasized that not every situation in which a subsidy provided on the production of an input product gives rise to an obligation to conduct a pass-through analysis. This also depends on the relationship between the producer of the input product and the producer of the imported, processed product. In that case, the panel's finding that where the input producer (the timber harvester) itself also was a lumber producer (i.e., owned a sawmill), no pass-through analysis was required. Regarding the situation in which the timber harvester either did not own its own sawmill, or sold some of its raw logs to unrelated sawmills, the Appellate Body upheld the panel's finding that a pass-through analysis was required to establish the amount, if any, of the stumpage subsidies that had flowed through to the further processed product, i.e., lumber.179 Finally, the Appellate Body overturned the panel's finding that a pass-through analysis was required where inputs in the form of lumber were sold by sawmills to unrelated lumber remanufacturers, because both the lumber inputs and the remanufactured lumber products were imported products covered by the countervailing duty investigation. Thus, the fact that the sawmills and the remanufacturers were unrelated was not, in the Appellate Body's view, sufficient in itself to require a pass-through analysis. Because the lumber, produced by the sawmills, and the remanufactured lumber, produced by the remanufacturers, were both imported products covered by the countervailing duty investigation, the Appellate Body found that a pass-through analysis was not required.180
The disputes in US – Lead and Bismuth II and US – Countervailing Measures on Certain EC Products addressed a different question concerning transmission of subsidy benefits between unrelated parties, based on entirely different fact situations those in US – Canadian Pork and US – Softwood Lumber IV.181 The issue in those cases related to the effect of the privatization of state-owned firms on the continued existence of benefits from non-recurring subsidies that those firms had received in the past. In both of those cases, inconsistencies were found with Articles 10, 19.1, and 19.4 of the SCM Agreement, as well as, in the case of US-Lead and Bismuth II, Article 21.2 of the SCM Agreement and Article VI:3 of the GATT 1994, and in the case of US – Countervailing Measures on Certain EC Products, with Article 14 of the SCM Agreement. All of these provisions were found to have been violated because the investigating authorities had presumed, instead of analyzing and determining, that the benefits from the past non-recurring subsidies continued to exist and had been fully transferred to the firms' new owners after the privatizations had taken place, in spite of the fact that the new owners had paid fair market value for the firms. The United States was found therefore to have improperly continued to apply countervailing duties to imports produced by the privatized firms, without having established whether any subsidies continued to exist.
To summarize, the US - Softwood Lumber IV and US – Canadian Pork cases haveestablished that a pass-through analysis is required in circumstances in which both of the following conditions are present: (1) a subsidy is provided in respect of a product that is an input into the processed, imported product that is the subject of the countervail investigation; and (2) the producer of the input product and the producer of the imported product subject to the countervail investigation are unrelated. This obligation to conduct a pass-through analysis arises under Article VI:3 of the GATT and Article 10 of the SCM Agreement. As the Appellate Body stated in US - Softwood Lumber IV, "because Article VI:3 permits offsetting, through countervailing duties, no more than the 'subsidy determined to have been granted ... on the manufacture [or] production ... of such product', it follows that Members must not impose duties to offset an amount of the input subsidy that has not passed through to the countervailed processed products."182 There is also jurisprudence that in cases in which non-recurring subsidies were provided to state-owned enterprises that were later privatized at fair market values, the investigating authorities must conduct examinations to determine whether any of those past subsidies continued to exist following the privatization. We do not find this latter jurisprudence to be relevant in the case before us, and therefore we will focus on the cases relating to subsidies provided on input products.
The US - Softwood Lumber IV and US – Canadian Pork jurisprudence does not support the European Communities' argument that whenever there is any arms'-length transaction between unrelated companies in the chain of the production of an imported product subject to a countervail investigation, a pass-through analysis must be conducted. To the contrary, as discussed above, in US – Softwood Lumber IV, the Appellate Body found that where an input product and a further manufactured product both are covered by the definition of the product subject to the countervailing duty investigation, a pass-through analysis is not required even if the producers of the respective products are unrelated and operating at arms' length.183 If this is the case for certain arms'-length sales of inputs between unrelated firms, then a fortiori the mere existence of an arms'-length transaction between firms involving the product under investigation somewhere between the receipt of the subsidy and the export of the merchandise should not, by itself, give rise to an obligation to conduct a pass-through analysis under Article VI:3 of the GATT 1994 and Article 10 of the SCM Agreement.
In this respect, we recall that the SCM Agreement and Article VI:3 of the GATT 1994 both explicitly permit the application of countervailing measures to "offset" subsidies "bestowed upon [...] the manufacture, production or export" of a product (emphasis added). Taking the simplest hypothetical example, where a subsidy is provided directly to a producer of a product coming within the scope of a countervailing duty investigation, we do not see how that company's eventual sale of the product to an unrelated firm (e.g., a distributor) would have a bearing on the fact that a subsidy has been bestowed in respect of the "production" of that product. Taken to its logical conclusion, the argument by the European Communities, that a pass-through analysis must be conducted in every case in which there are transactions between unrelated firms relating to the product under investigation, would mean that a pass-through analysis would be required in almost every countervail investigation, even when the subsidy was provided directly on the investigated product. We now turn to examine the claims of the European Communities in relation to this issue.
Claim of the European Communities pursuant to Article 1.1 of the SCM Agreement
For reasons not clear to us, and in spite of the fact that the legal bases for a "pass-through" obligation in the past jurisprudence were found in Article VI:3 of the GATT 1994 and Article 10 of the SCM Agreement, the European Communities has based its "pass-through" claims in this case solely on the basis of Articles 1 and 14 of the SCM Agreement. The Request for Establishment of a Panel makes no reference in this context to either Article VI:3 of the GATT 1994 or to Article 10 of the SCM Agreement. In its written submissions and in response to questions from the Panel, the EC based its "pass-through" claims on Articles 1 and 14 of the SCM Agreement. We are therefore obliged to consider the European Communities' "pass-through" claims exclusively under the provisions it has cited.184 This requires us to consider an entirely novel legal argument: that an obligation to conduct a "pass-through" analysis in a countervail investigation exists in Articles 1 and 14 of the SCM Agreement.185
Turning first to the European Communities' claim pursuant to Article 1.1 of the SCM Agreement, it is well established that the definition of "subsidy" set forth in that provision applies to the entire SCM Agreement186 as well as to the relevant provisions of Article VI of the GATT 1994. This definition provides, in relevant part: