This is a guest post from trade lawyer Adarsh Ramanujan:
In continuation of my earlier blog entry on the Article 12.7 jurisprudence arising from the Appellate Body Reports in US-Carbon Steel (India) (DS436), and US-CVD (China) (DS437), in this blog entry I will consider the discussions on Article 2 in these Reports. I will start with summarizing the findings in DS437 and DS436 and subsequently, share my thoughts (hopefully, not ramblings) when I read both Reports together. I hope the latter aspect of this post may be of interest to at least some readers. (Disclaimer: As part of the law firm I work for, I have been involved as the attorney for one of the parties in DS436 and as the attorney for one of the third participants in DS437. So, my thoughts may have to be taken with a pinch of salt when it comes to objectivity. I have attempted to use the language used by the Appellate Body as much as possible).
Let me first summarize the findings of the Appellate Body in DS437 on Article 2.1(c):
(1) Under the first factor in Article 2.1(c) ("use of a subsidy programme…"), the investigating authority must show "adequate evidence of the existence of a systematic series of actions" pursuant to which financial contributions that confer a benefit are provided to certain enterprises, which cannot be satisfied by the "mere fact that financial contributions have been provided to certain enterprises". (paras. 4.141, 4.143)
(2) Articles 2.1(a)-(c) does not "call[sic] for a strict sequential analysis", though one has to be cautious in directly assessing only under Article 2.1(c) without applying paragraphs (a) and (b) of Article 2 (para. 4.130). The tenor used by the Appellate Body is in-line with earlier findings.
(3) Apparently, even "unwritten measures" may be analysed under Article 2.1(a)-(c), so long as the granting authority or the legislation pursuant to which the granting authority operates "explicitly" limits access to the subsidy at issue (para. 4.129). It is not entirely clear what implications to draw from finding, which seems a little too theoretical. Subsidies contained in "law, regulation, or other official document" appear to be contained within the scope of "written measures" as per the Appellate Body's finding. This raises the question – which "unwritten measure" can "explicitly" limit the access to the subsidy?
(4) As per the chapeau to Article 2.1, there is a need for a "proper determination of whether the relevant jurisdiction is that of the central government or whether it is that of a regional or local government, and whether the granting authority therefore operates at a central, regional, or local level" (para. 4.166). But does this imply that the investigating authority must also identify the identity of the granting authority? This is what the Appellate Body observes on this issue:
4.168. …While an analysis of the jurisdiction of the granting authority could start with an identification of the granting authority, we do not see why the order of analysis suggested by China would always be required. Rather, as we see it, the identification of the jurisdiction of the granting authority involves a holistic analysis of the relevant facts and evidence in each case. Indeed, the notion of jurisdiction is linked to, and does not exist in isolation from, the granting authority. Thus, a proper identification of the jurisdiction of the granting authority will require an analysis of both the "granting authority" and its "jurisdiction" in a conjunctive manner. We therefore do not read Article 2.1 in a manner that focuses on the identity of the "granting authority" independently from its "jurisdiction". A holistic analysis of the jurisdiction of the granting authority is what provides the framework within which specificity is to be analysed. In sum, provided that an investigating authority adequately substantiates any finding it makes as to whether the jurisdiction covers the entire territory of the relevant WTO Member or is limited to a designated geographical region within that territory, in conducting this holistic assessment it would normally also identify the granting authority.
4.169. We also consider that the chapeau of Article 2.1 does not require an investigating authority to identify the jurisdiction of the granting authority in an explicit manner or in any specific form, as long as it is discernible from the determination…
(Emphasis supplied in bold and italics)
Let me now summarize the findings of the Appellate Body in DS436 on Article 2.1(c):
(1) The first factor under Article 2.1(c) does not require an authority to show any sort of discrimination – there is no need to engage in the "comparative assessment of subsidy recipients with some category of 'others' that are similarly situated" (para. 4.384).
(2) The first factor under Article 2.1(c) seeks only to examine evidence that the "certain enterprises" using a subsidy programme are limited in number, and does not denote that the actual recipients must form a subset of "certain enterprises" (para. 4.379).
(3) Article 2.1 does not preclude the possibility of finding that the provision of goods is de facto specific solely based on the inherent characteristics of the goods being provided (para. 4.398).
Clearly, some readers may wonder now what I meant by discussing the implications of reading both Reports together since the legal issues presented in both disputes under Article 2 are quite different. For starters, the factual bases leading to the disputes are almost identical – both involved subsidies that were found de facto specific under the first factor of Article 2.1(c) only because the end-users of the subsidy in question were inherently "limited" in number. The almost identical determination was challenged under the same Article 2.1(c) under totally different approaches. I somehow feel that this may be due to the unsettling and controversial nature of Article 2.1(c) itself (others may ascribe other reasons, including without limitation, legal creativity). Second, I believe that some observations of the Appellate Body in both disputes do not appear to sync well with each other. This specifically relates to the first point in the summaries presented earlier of both disputes.
In DS436, India was appealing from the Panel's Report, which contained an observation not challenged by the United States on appeal, that:
7.121. ...In both cases [i.e. Articles 2.1(a) and 2.1(c)], what matters is the existence of a restriction on access to the subsidy, in the sense that the subsidy is available to certain enterprises, industries, or groups of enterprises or industries, but not to others...
(Emphasis supplied in italics)
India's argument was essentially that this so-called 'others' that the Panel refers must be 'similarly situated' entities who would otherwise be eligible to the financial contribution in question. The Panel had ruled that the identity of these 'others' was irrelevant to the analysis (Panel Report, paras. 7.122). On appeal, the Appellate Body upheld the Panel's findings and rejected India's argument:
4.384. …We do not see a textual basis in Article 2.1(c), and specifically in the terms "certain" and "limited number", for a requirement to identify which enterprises or industries are "similarly situated" prior to then having to assess whether only a subset of those "similarly situated" have de facto access to, or are otherwise eligible for, the subsidy. As the Appellate Body has explained, eligibility is key to a consideration of de jure specificity under subparagraphs (a) and (b) of Article 2.1 of the SCM Agreement: "Article 2.1(a) describes limitations on eligibility that favour certain enterprises, whereas Article 2.1(b) describes criteria or conditions that guard against selective eligibility." We do not see that this focus on the eligibility of subsidy recipients, however, conveys a comparative assessment of subsidy recipients with some category of "others" that are similarly situated…
(Emphasis supplied in bold and italics)
To support its arguments, India had placed reliance on certain observations of the Appellate Body in US – Large Civil Aircraft (2nd complaint), which provided confirmation that specificity analysis required a comparative assessment between the expected and actual allocations of a subsidy, which, in India's view, supported its position (para. 4.387). While the Appellate Body agreed with India that such observations were indeed made by the Appellate Body in US – Large Civil Aircraft (2nd complaint) (para. 4.388), it nonetheless found these observations to be limited only to the third factor mentioned in Article 2.1(c):
4.389. In our view, the Appellate Body's analysis in US – Large Civil Aircraft (2nd complaint) was particular to the third factor in Article 2.1(c) and the circumstances of that case. The Appellate Body further noted that the language of the third factor necessarily involves a "relational concept" that assesses whether the actual allocation of the subsidy is too large relative to what the allocation would have been if administered in accordance with the conditions for eligibility for that subsidy. We do not see that an investigating authority or a panel could assess whether "amounts of subsidy" that were granted were "disproportionately large" without having some benchmark, perhaps informed by who was expected to receive that subsidy, against which to compare those granted amounts. This suggests that different considerations inform an assessment under the first and third factors of Article 2.1(c). We therefore do not consider that the Appellate Body's reasoning in US – Large Civil Aircraft (2nd complaint) concerning the third factor of Article 2.1(c) is apt in assessing whether the first factor entails an assessment of whether there has been discrimination between a limited number of subsidy users representing a subset of "certain enterprises".
(Emphasis supplied in bold and italics)
Ten 10 days later in time, in DS437, the Appellate Body observes:
4.140. As the Appellate Body has previously found, the starting point of an analysis of specificity is the measure that has been determined to constitute a subsidy under Article 1.1. This is supported by the fact that the chapeau of Article 2.1 establishes that "a subsidy, as defined in paragraph 1 of Article 1", is the measure under scrutiny for purposes of determining whether it is specific…Importantly, however, a specificity analysis under Article 2.1 focuses not only on whether a subsidy has been provided to particular recipients, "but focuses also on all enterprises or industries eligible to receive that same subsidy". As such, an inquiry into whether a particular subsidy is specific to certain enterprises may require determining "what other enterprises or industries also have access to that same subsidy under that subsidy scheme". It is relevant therefore to consider not only the actual, but also the past and potential recipients of a particular subsidy.
(Emphasis in italics are in original; emphasis supplied in bold and italics)
The Appellate Body in DS437 is referencing its earlier findings in US – Large Civil Aircraft (2nd complaint) in footnotes (specifically, para. 753 of that Report, among others). Curiously, the reference used in DS437 is to a section where the Appellate Body was analyzing Article 2.1(a). However, the claim under discussion in DS437 is under Article 2.1(c). Is the Appellate Body in DS437 hinting that one needs to examine the "actual…past and potential recipients", even under the first factor to Article 2.1(c)? Consider also, the following observation in US – Large Civil Aircraft (2nd complaint), which was made directly in the context of Article 2.1(c):
877. We have explained that Article 2.1(c) proceeds where "there are reasons to believe that the subsidy may in fact be specific". This means that, having reached the conclusion that there is an "appearance of non-specificity" following the application of the principles set out in Article 2.1(a) and (b), a panel must consider whether, in the light of the arguments and evidence submitted by the parties, there are "reasons" for it to consider that an assessment under Article 2.1(c) is warranted. The inquiry under Article 2.1(c) thus focuses on whether a subsidy, although not apparently limited to certain enterprises from a review of the relevant legislation or express acts of a granting authority, is nevertheless allocated in a manner that belies the apparent neutrality of the measure. This inquiry requires a panel to examine the reasons as to why the actual allocation of "amounts of subsidy" differs from an allocation that would be expected to result if the subsidy were administered in accordance with the conditions for eligibility for that subsidy.
(Emphasis supplied in bold and italics)
The penultimate sentence in the above quote appears to be generally worded. The initial sentences of that paragraph also appear to suggest that as a matter of general rule under Article 2.1(c), one has to examine "allocat[ion] in a manner that belies the apparent neutrality" of the measure. Can an investigating authority examine "allocation…that…belies…neutrality" without considering the identity of the entities not receiving the subsidy? After all 'neutrality' can be 'belied' only when the entities / person not receiving the subsidy de facto would normally be 'potential recipients'.
Therefore, now, we have a Panel observation (not reversed on appeal) from DS436 that even under the first factor of Article 2.1(c), the examination involves a subsidy being available to certain enterprises but not to "others", though the identity of the 'others' is considered irrelevant. On the other hand, we seem to have observations in both DS437 and US – Large Civil Aircraft (2nd complaint) that, perhaps, the identity of those not receiving the subsidy is relevant even for a de facto specificity analysis under Article 2.1(c).
