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EUROPEAN COMMUNITIES AND CERTAIN MEMBER STATES – MEASURES AFFECTING TRADE IN LARGE CIVIL AIRCRAFT

RECOURSE TO ARTICLE 21.5 OF THE DSU BY THE UNITED STATES

REPORT OF THE PANEL

BCI deleted, as indicated [***]

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LIST OF ANNEXES

ANNEX A

WORKING PROCEDURES OF THE PANEL

ANNEX B

ARGUMENTS OF THE UNITED STATES

ANNEX C

ARGUMENTS OF THE EUROPEAN UNION

ANNEX D

ARGUMENTS OF THE THIRD PARTIES

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ANNEX E

RULINGS WITH RESPECT TO DSU ARTICLE 13 REQUEST

ANNEX F

MAIN PROCEDURAL RULINGS OF THE PANEL

ANNEX G

THE EUROPEAN UNION'S COMPLIANCE COMMUNICATION OF 1 DECEMBER 2011

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CASES CITED IN THIS REPORT

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ABBREVIATIONS USED IN THIS REPORT

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1 INTRODUCTION

1.1 Complaint by the United States

1.1. The United States' complaint in this dispute, initiated under Article 21.5 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU), concerns the alleged failure on the part of the European Union¹ and certain member States to implement the recommendations and rulings adopted by the Dispute Settlement Body (DSB) in the original proceeding EC and certain member States – Large Civil Aircraft.

1.2. In the original proceeding, the panel found that the United States had demonstrated that the European Communities (EC) and certain member States had caused adverse effects, in the form of certain kinds of serious prejudice to the United States' interests, within the meaning of Articles 5(c), 6.3(a), (b) and (c) of the Subsidies and Countervailing Measures Agreement (SCM Agreement), through the use of the following specific subsidies:

a. "launch aid" or "member State financing" (LA/MSF) for the A300, A310, A320, A330, A330-200, A340, A340-500/600, and A380 models of large civil aircraft (LCA)²;

b. French and German government "equity infusions" provided in connection with the corporate restructuring of Aérospatiale and Deutsche Airbus³;

c. certain infrastructure and infrastructure-related measures provided by German and Spanish authorities⁴; and

d. research and technological development (R&TD) funding provided by the European Communities and certain member States.⁵

1.3. The original panel also concluded that the United States had established that the German, Spanish and UK A380 LA/MSF agreements constituted prohibited export subsidies within the meaning of Article 3.1(a) and footnote 4 of the SCM Agreement.⁶

1.4. In relation to the findings made under Articles 5 and 6.3(a), (b), and (c) of the SCM Agreement, the original panel recommended that:

{U}pon adoption of this report, or of an Appellate Body report in this dispute determining that any subsidy has resulted in adverse effects to the interests of the United States, the Member granting each subsidy found to have resulted in such adverse effects "take appropriate steps to remove the adverse effects or … withdraw the subsidy".⁷

1.5. As regards the findings made under Article 3.1(a) and footnote 4 of the SCM Agreement, the original panel recommended that:

{T}he subsidizing Member granting each subsidy found to be prohibited withdraw it without delay and specify that this be done within 90 days.⁸

1.6. The original panel report was circulated to the Members on 30 June 2010. Both parties appealed certain issues of law and legal interpretations developed by the original panel.⁹

¹ The European Union replaced and succeeded the European Communities as of 1 December 2009. ↩

² Panel Report, EC and certain member States – Large Civil Aircraft, paras. 7.290(a)(i)-(vii), 7.482-7.496, and 8.1(a)(i). ↩

³ Panel Report, EC and certain member States – Large Civil Aircraft, paras. 7.1245-7.1249, 7.1302, 7.1323-7.1326, 7.1380-7.1384, 7.1414, and 8.1(c) and (d). ↩

⁴ Panel Report, EC and certain member States – Large Civil Aircraft, paras. 7.1049-7.1053, 7.1097, 7.1100-7.1101, 7.1134, 7.1137-7.1139, 7.1191, 7.1205-7.1211, 7.1244, and 8.1(b)(i)-(iv). ↩

⁵ Panel Report, EC and certain member States – Large Civil Aircraft, paras. 7.1427-7.1456, 7.1459-1480, 7.1608, and 8.1(e). ↩

⁶ Panel Report, EC and certain member States – Large Civil Aircraft, paras. 7.689 and 8.1(a)(ii). ↩

⁷ Panel Report, EC and certain member States – Large Civil Aircraft, para. 8.7. ↩

⁸ Panel Report, EC and certain member States – Large Civil Aircraft, para. 8.6. ↩

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1.7. The Appellate Body reversed or modified several aspects of the original panel's findings.¹⁰ Where the Appellate Body found sufficient factual findings or undisputed facts on the record in relation to the matters it had reversed, it went on to "complete the analysis". Thus, after "completing the analysis" with respect to certain aspects of the original panel's subsidization and adverse effects findings, the Appellate Body ultimately upheld the original panel's conclusion that the United States had established that the effects of the challenged LA/MSF measures caused serious prejudice to the United States' interests within the meaning of Article 6.3(a), (b) and (c) of the SCM Agreement¹¹, and that the effects of the challenged "equity infusions" and infrastructure measures the Appellate Body had found to constitute specific subsidies, "complemented and supplemented" the effects of the challenged LA/MSF measures.¹² The Appellate Body also attempted to "complete the analysis" after having reversed the original panel's finding that the German, Spanish and UK A380 LA/MSF measures constituted prohibited export subsidies within the meaning of Article 3.1(a) and footnote 4 of the SCM Agreement. However, the Appellate Body found that it was unable to do so because there were insufficient factual findings or undisputed facts on the record.¹³

1.8. In the light of its findings, the Appellate Body concluded that:

{H}aving reversed the Panel finding, in paragraph 7.689 of the Panel Report, that certain A380 LA/MSF contracts amounted to prohibited export subsidies, the Panel's recommendation pursuant to Article 4.7 of the SCM Agreement, in paragraph 8.6 of the Panel Report, consequently must be reversed; however, to the extent we have upheld the Panel's findings with respect to actionable subsidies that caused adverse effects, as set out in paragraph 8.2 of the Panel Report, or such findings have not been appealed, the Panel's recommendation pursuant to Article 7.8 of the SCM Agreement, in paragraph 8.7 of the Panel Report, that "the Member granting each subsidy found to have resulted in such adverse effects, 'take appropriate steps to remove the adverse effects or … withdraw the subsidy'", stands.¹⁴

1.9. The Appellate Body report and the report of the original panel, as modified by the Appellate Body report, were adopted by the DSB on 1 June 2011.¹⁵

1.10. On 1 December 2011, the European Union informed the DSB that it had taken "appropriate steps to bring its measures fully into conformity with its WTO obligations, and to comply with the DSB's recommendations and rulings".¹⁶ The European Union explained that it had "adopted a course of action that addresses all forms of adverse effects, all categories of subsidies, and all models of Airbus aircraft covered by the DSB's recommendations and rulings".¹⁷ The European Union provided "{i}nformation concerning the steps" it had taken to achieve compliance in a list containing 36 numbered paragraphs attached to its communication.

1.11. On 9 December 2011, the United States requested consultations with the European Union and certain member States, explaining in the same request for consultations, that it was of the view that "the actions and events listed in the EU Notification do not withdraw the subsidies or remove their adverse effects for purposes of Article 7.8 of the SCM Agreement and the EU has therefore failed to implement the DSB's recommendations and rulings".¹⁸

⁹ WT/DS316/12/Rev.1 and WT/DS316/13. ↩

¹⁰ Appellate Body Report, EC and certain member States – Large Civil Aircraft, paras. 1414(a), (c), (d)(i)-(ii), (e)(ii), (g), (i), (j), (k), and (s), and 1415(b). ↩

¹¹ Appellate Body Report, EC and certain member States – Large Civil Aircraft, paras. 1414(e)(iv), (l), (m), (p), and (q). ↩

¹² Appellate Body Report, EC and certain member States – Large Civil Aircraft, paras. 1414(g) and (r). The Appellate Body reversed the original panel's finding that the R&TD subsidies "complemented and supplemented" the effects of the challenged LA/MSF measures. ↩

¹³ Appellate Body Report, EC and certain member States – Large Civil Aircraft, paras. 1414(j) and 1415(b). ↩

¹⁴ Appellate Body Report, EC and certain member States – Large Civil Aircraft, para. 1416. ↩

¹⁵ WT/DSB/M/297. ↩

¹⁶ Communication from the European Union dated 1 December 2011, WT/DS316/17, 5 December 2011, (Compliance Communication), para. 1. ↩

¹⁷ Compliance Communication, para. 3. ↩

¹⁸ WT/DS316/19, p. 3. ↩

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1.12. The United States and the European Union held consultations on 13 January 2012, but the consultations failed to resolve the dispute.

1.2 Panel establishment and composition

1.13. On 30 March 2012, the United States requested the establishment of a panel pursuant to Article 21.5 of the DSU with standard terms of reference.¹⁹ At its meeting on 13 April 2012, the DSB agreed, pursuant to Article 21.5 of the DSU, to refer the dispute to the original panel, if possible.²⁰

1.14. The Panel's terms of reference are the following:

To examine, in the light of the relevant provisions of the covered agreements cited by the parties to the dispute, the matter referred to the DSB by the United States in document WT/DS316/23 and to make such findings as will assist the DSB in making the recommendations or in giving the rulings provided for in those agreements.

1.15. In accordance with Article 21.5 of the DSU, the Panel was composed on 17 April 2012 as follows²¹:

Chairman: Mr Carlos Pérez del Castillo
Members: Mr John Adank
Mr Thinus Jacobsz

1.16. Australia, Brazil, Canada, China, Japan, and the Republic of Korea notified their interest in participating in the Panel proceedings as third parties.

1.3 Panel proceedings

1.3.1 General

1.17. The Panel held an organizational meeting with the parties on 1 May 2012.

1.18. After consulting the parties, the Panel adopted its Working Procedures²² and timetable on 11 May 2012. The Panel twice suspended its timetable on 10 August 2012 and 28 November 2012 in the light of the United States' and European Union's respective requests for the Panel to exercise its right to seek information under Article 13 of the DSU. The Panel made various other modifications to its timetable throughout the proceeding. On 5 October 2015, the Panel informed the parties of the expected date of the issuance of the Interim Report.

1.19. The United States and the European Union filed their first written submissions on 25 May 2012 and 6 July 2012, respectively. Third parties filed their written submissions on 27 July 2012. The second written submissions of the United States and the European Union were filed on 19 October 2012 and 15 January 2013, respectively.

1.20. The Panel held one substantive meeting with the parties on 16-18 April 2013. A session with the third parties took place on 17 April 2013. At the request of the parties, the Panel's meeting with the parties was opened to the public by means of a delayed video showing. A portion of the Panel's meeting with the third parties was also opened to the public by means of a delayed video showing.²³

¹⁹ EC and certain member States – Large Civil Aircraft, Recourse to Article 21.5 of the DSU by the United States: Request for the establishment of a panel, WT/DS316/23, (dated 30 March 2012, circulated 3 April 2012). ↩

²⁰ WT/DSB/M/314. ↩

²¹ WT/DS316/24. ↩

²² The Panel's Working Procedures are attached in Annex A-1. ↩

²³ See Annex A-2 for the procedures for the conduct of the meeting. Australia, Brazil, Canada and Japan consented to having their statements videotaped for delayed showing. China and Korea did not consent. ↩

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1.21. The Panel posed questions to the parties and third parties on 23 April 2013, and additional questions to the parties on 23 August 2013 and 31 March 2014.

1.22. On 5 October 2015, the Panel issued the descriptive part of its Report to the parties. The Panel issued its Interim Report to the parties on 11 December 2015. The Panel issued its Final Report to the parties on 11 March 2016.

1.3.2 Protection of Business Confidential Information and Highly Sensitive Business Information

1.23. At the organisational meeting, the parties requested the Panel to adopt additional procedures for the protection of confidential and highly sensitive business information, submitting a joint proposal. After considering the parties' request and their joint proposal, the Panel adopted the Additional Procedures to Protect Business Confidential Information and Highly Sensitive Business Information (BCI/HSBI Procedures) on 11 May 2012.²⁴

1.3.3 Preliminary ruling on the Panel's terms of reference

1.24. In its first written submission, the European Union objected to the inclusion of certain United States claims and challenged measures within the scope of this compliance proceeding. In particular, the European Union objected to the United States' challenge to the LA/MSF agreements entered into between Airbus and France, Germany, Spain and the United Kingdom for the Airbus A350 "eXtra widebody" aircraft (A350XWB), as well as the United States' prohibited subsidy claims against the A380 LA/MSF measures, and the United States' threat of displacement and impedance of imports claims.²⁵ The European Union asked the "Panel to grant the relief requested … through a preliminary ruling, or failing that in its final report".²⁶

1.25. On 27 March 2013, the Panel issued a preliminary ruling with respect to the European Union's objection to the United States' claims, finding that:

a. the United States' claim that the A380 LA/MSF measures are prohibited export subsidies within the meaning of Article 3.1(a) of the SCM Agreement, and the United States' threat of displacement and impedance of imports claims, are within the scope of this proceeding;

b. the United States' claim that the A380 LA/MSF measures are prohibited import substitution subsidies within the meaning of Article 3.1(b) of the SCM Agreement is outside the scope of this proceeding; and

c. the United States' claims of threat of displacement or impedance of imports pursuant to Article 6.3(a) of the SCM Agreement are within the Panel's terms of reference.

1.26. In the same communication, the Panel informed the parties that it would issue the reasons underlying its findings in due course.

1.27. The Panel's findings and underlying reasoning in relation to all of the objections raised by the European Union in its request for a preliminary ruling are set out in Section 6.4.

1.3.4 Information sought by the Panel

1.28. On 20 July 2012, the United States requested the Panel to exercise its right under Article 13 of the DSU to seek certain information that the United States considered to be necessary for the Panel to carry out its mandate. After considering the views of both parties, the Panel ruled on the United States' request on 4 September 2012, inviting the European Union to provide certain information. The European Union submitted information to the Panel on 5 October 2012.

²⁴ The BCI/HSBI Procedures were subsequently revised several times. The final version is attached in Annex A-3. ↩

²⁵ European Union's first written submission, section III. ↩

²⁶ European Union's first written submission, fn 184. ↩

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1.29. On 23 November 2012, the European Union also requested the Panel to exercise its right to seek information under Article 13 of the DSU. After considering the views of both parties, the Panel informed them on 14 December 2012 that it had decided to deny the European Union's request.

1.30. The Panel's rulings are reproduced in Annex E of this Report.

1.3.5 Procedural rulings

1.31. The Panel was asked to make numerous rulings in relation to procedural matters throughout this proceeding. The Panel's main rulings are reproduced in Annex F of this Report.

1.4 Product at issue

1.32. The product at issue in this dispute is the same as the product that was the subject of the original proceeding, i.e. LCA, as distinguished from smaller (regional) aircraft and military aircraft. LCA can generally be described as large (weighing over 15,000 kg) "tube and wing" aircraft, with turbofan engines carried under low-set wings, designed for subsonic flight. LCA are designed for transporting 100 or more passengers and/or a proportionate amount of cargo across a range of distances serviced by airlines and air freight carriers. LCA are covered by tariff classification heading 8802.40 of the Harmonized System ("Airplanes and other aircraft, of an unladen weight exceeding 15,000 kg").

2 PARTIES' REQUESTS FOR FINDINGS AND RECOMMENDATIONS

2.1. The United States requests that the Panel find that the European Union and certain member States have failed to comply with the recommendations and rulings of the DSB by withdrawing the subsidies or taking appropriate steps to remove the adverse effects and, in particular, that:

a. with the exception of the Bremen Airport runway subsidy, the European Union and relevant member States have not withdrawn the subsidies covered by the DSB recommendations and rulings;

b. French, German, Spanish, and UK LA/MSF for the A350XWB is a specific subsidy within the meaning of Articles 1 and 2 of the SCM Agreement;

c. French, German, Spanish, and UK LA/MSF for the A380 and the A350XWB confers (1) an export subsidy inconsistent with Article 3.1(a) of the SCM Agreement, and (2) an import substitution subsidy inconsistent with Article 3.1(b) of the SCM Agreement;

d. the European Union and relevant member States have not removed the adverse effects covered by the DSB recommendations and rulings;

e. the United States continues to experience serious prejudice in the form of significant lost sales under Article 6.3(c) of the SCM Agreement, including sales where the customer ordered the A350XWB;

f. the United States continues to experience serious prejudice in the form of displacement and impedance, and/or threat thereof, of its LCA imports into the European Union market under Article 6.3(a) of the SCM Agreement;

g. the United States continues to experience serious prejudice in the form of displacement and impedance of its LCA exports to 11 third country markets under Article 6.3(b) of the SCM Agreement; and

h. all subsidies provided to Airbus LCA, including LA/MSF provided to the A350XWB, have a genuine and substantial causal relationship with the effects found.²⁷

2.2. The European Union requests that the Panel reject the entirety of the United States' claims.²⁸

²⁷ United States' first written submission, para. 533; and second written submission, para. 748. ↩

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3 ARGUMENTS OF THE PARTIES

3.1. The arguments of the parties are reflected in their executive summaries, provided to the Panel in accordance with paragraph 12 of the Working Procedures adopted by the Panel (see Annexes B and C).

4 ARGUMENTS OF THE THIRD PARTIES

4.1. The arguments of the third parties are reflected in their executive summaries, provided in accordance with paragraph 12 of the Working Procedures adopted by the Panel (see Annex D).

5 INTERIM REVIEW

5.1 Introduction

5.1. The Panel issued its Interim Report to the parties on 11 December 2015. Both parties submitted written requests for review of precise aspects of the Interim Report on 22 January 2016, and written comments on each other's written requests on 12 February 2016. The parties also provided written comments on the treatment of certain information as BCI and/or HSBI in the Interim Report on 12 February 2016, with comments on each other's comments submitted on 26 February 2016. Neither party requested the Panel to hold an interim review meeting. Below we respond to the issues raised by the parties in the context of the interim review.

5.2. Due to changes as a result of our review, the numbering of the footnotes in the Final Report has changed from the Interim Report. The text below refers to the footnote numbers in the Interim Report, with the corresponding footnote numbers in the Final Report provided in parentheses for ease of reference. Apart from the specific changes described in the following section, we have also corrected a number of typographical errors and other non-substantive errors throughout the report, including those identified by the parties, which are not referred to specifically below.

5.2 The European Union's Compliance Communication

5.2.1 Paragraph 6.7, and sub-headings 6.2.1, 6.2.2, and 6.2.3 (now sub-headings 6.2.2, 6.2.3, and 6.2.4)

5.3. The European Union requests the Panel to explain the rationale for, and the implications of, the Panel's decision to discuss the European Union's "measures taken to comply" under the following three separate sub-headings: ("Actions taken after the adoption of the recommendations and rulings by the DSB"); ("Events that occurred before the adoption of the recommendations and rulings by the DSB"); and ("Alleged events that overlapped the adoption of the recommendations and rulings by the DSB"). The United States considers the sub-headings self-explanatory and further considers that the implications of the sub-headings are apparent from the remainder of the Interim Report. The United States, therefore, sees no reason for the Panel to provide the additional requested explanations.

5.4. The Panel chose to describe the European Union's alleged compliance "actions" under the three relevant sub-headings in order to better understand the nature of the European Union's responses to the United States' allegations of non-compliance, bearing in mind that the timing of the alleged compliance "actions" is pertinent to certain aspects of the European Union's refutation of the United States' claims. For example, the European Union argues that it has no compliance obligation at all in relation to subsidies that ceased to exist prior to the adoption of the recommendations and rulings. Considerations pertaining to the timing of the alleged compliance "actions" are also, more generally, a feature of other European Union arguments, including the submission that certain events that have taken place over the passage of time (including post-launch investments made in the A320 and A330 both prior to and after the adoption of the recommendations and rulings) have diluted the causal link established in the original proceeding such that the challenged subsidies are no longer a "genuine and substantial" cause of adverse effects. Thus, ultimately, the European Union's alleged compliance "actions" have been described under the relevant sub-headings as a first step in clarifying the arguments underlying the

²⁸ European Union's first written submission, para. 1242; and second written submission, para. 1696. ↩

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European Union's assertion of compliance, the full contours of which are fully explored and assessed in the remainder of the Report.

5.2.2 Paragraph 6.8

5.5. The European Union requests that the last sentence of paragraph 6.8 be revised to more accurately reflect the evidence submitted by the European Union and the United States in relation to the termination of certain LA/MSF agreements. The United States argues that one piece of evidence upon which the European Union relies in this context does not provide support for the European Union's requested language, and that another piece of evidence upon which the European Union relies was not supplied by the European Union, but by the United States. The United States asks the Panel to consider these factors when assessing the European Union's request.

5.6. Paragraph 6.8 has been modified to reflect the parties' positions in relation to the evidence submitted by the European Union regarding the termination of the French LA/MSF Agreements for the A310, A310-300, A330/A340, A330-200, and A340-500/600.²⁹ Consequential adjustments have also been made to paragraphs 6.9-6.12. The United States' evidence, which the European Union asserts demonstrates that the German LA/MSF Agreements for the A300B, A300B3/B4, A300-600, A310, A310-300, A320, and A330/A340 were terminated in 1997 and 1998, is discussed in paragraph 6.26.

5.2.3 Paragraphs 6.15, 6.16, 6.859, 6.869, 6.879, 6.895, 6.908, 6.918, and 6.928

5.7. The European Union requests that the Panel's characterization of the European Union's arguments in paragraphs 6.15, 6.16, 6.859, 6.869, 6.879, 6.895, 6.908, 6.918, and 6.928 be modified to reflect the fact that the European Union's submissions concerning the end of the "lives" of the relevant subsidy measures were focused on the end of the implementation period, not the beginning of the implementation period. The United States offers an alternative revision regarding paragraph 6.15, and argues that it is unnecessary to revise any of the other relevant paragraphs because they already accurately reflect the European Union's factual arguments regarding the time at which the "lives" of the relevant subsidy measures came to an end.

5.8. The relevant paragraphs have been amended to more accurately reflect the European Union's arguments.

5.2.4 Paragraphs 6.33-6.35

5.9. The European Union requests that paragraphs 6.33-6.35 be moved from sub-heading 6.2.2 (now 6.2.3) to sub-heading 6.2.3 (now 6.2.4), to reflect the fact the relevant post-launch investments occurred both after and before the adoption of the recommendations and rulings by the DSB. The United States did not comment on the European Union's request.

5.10. The text of paragraphs 6.33-6.35 now appears under sub-heading 6.2.4 (in paragraphs 6.36-6.38). A corresponding change has also been made to the title of sub-heading 6.2.4.

5.2.5 Paragraph 6.39

5.11. The European Union requests the replacement of the word "their" in paragraph 6.39 with the word "any", arguing that the wording "their present-day adverse effects", when applied to the challenged LA/MSF subsidies, appears to suggest that these subsidies do have present-day adverse effects, a question that the European Union considers the Panel is not pre-judging at this stage of the Interim Report. The European Union additionally requests the Panel to clarify the attribution of a quotation in the same paragraph to the European Union. The United States did not comment on the European Union's request.

²⁹ Although the letter of termination submitted in Exhibit EU-34 does not explicitly refer to the A310-300 programme, we are satisfied that when read together with Exhibit USA-396 (BCI), the information contained in Exhibit EU-34 demonstrates that the French A310-300 LA/MSF contract has also been terminated. ↩

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5.12. Paragraph 6.39 has been modified to address the European Union's concerns.

5.3 Scope of the compliance proceeding

5.3.1 Paragraphs 6.53 and 6.80

5.13. The United States requests that the description in paragraphs 6.53 and 6.80 of the findings made in the original proceeding in relation to the United States' claims against the alleged LA/MSF commitment for the Original A350 be modified to more accurately reflect the conclusions set out in paragraph 8.3 of the original panel report. The European Union objects to the United States' request insofar as it asks for the deletion of existing language in the Report, language that the European Union deems accurate. The European Union does not, however, object to the additional language proposed by the United States if the existing language is retained.

5.14. For the avoidance of confusion, the relevant passages of paragraphs 6.53 and 6.80 have been clarified.

5.3.2 Paragraphs 6.109 and 6.143

5.15. The European Union requests that the phrase "for the purpose of financing the development of each and every new model of Airbus LCA that has ever been launched and brought to market" in paragraphs 6.109 and 6.143 be replaced with the phrase "for the purpose of financing the development costs of Airbus LCA" in order to reflect the fact that: (i) no such agreements were entered into "for the purpose of financing the development of" the A321, A319 and A318 LCA; (ii) Germany, Spain and the UK did not enter into LA/MSF loan agreements for the A330-200; and (iii) Germany and the UK did not enter into LA/MSF loan agreements for the A340-500/600.

5.16. The United States considers that the European Union's objection to the wording of the Interim Report resembles an argument that the European Union made before the original panel. The United States recalls that the original panel, after considering that European Union argument, observed that: "{W}hile we understand that the Airbus governments did not provide LA/MSF for each and every model of LCA developed by Airbus, the evidence we have reviewed does show that whenever Airbus sought LA/MSF it was offered by each of the Airbus governments on the same four 'core terms', and in all but one case, the terms and conditions of that LA/MSF were agreed between the parties."³⁰ The United States has no objection to the Panel making conforming changes to paragraph 6.109 of the Interim Report.

5.17. Footnote 205 (now footnote 228) to paragraph 6.109 refers to a passage from the adopted panel report which, in our view, accurately reflects the relevant facts pertaining to the extent to which LA/MSF agreements were entered into by Airbus and the Airbus governments for the purpose of financing the development of every new model of Airbus LCA. Accordingly, we decline the European Union's request in relation to paragraph 6.109.

5.3.3 Footnote 224 (now footnote 247)

5.18. The European Union requests the Panel to insert the words "up to a maximum of" before the figure "33%" that appears in footnote 224 (now footnote 247) to accurately reflect the facts of the agreements at issue. The United States did not object to the European Union's request.

5.19. Footnote 224 (now footnote 247) has been modified to more accurately reflect the terms of the relevant LA/MSF agreements.

5.4 Whether LA/MSF for the A350XWB is a subsidy

5.4.1 Paragraph 6.229 et seq.

5.20. The European Union requests that the expression "successful aircraft delivery" that is used in various paragraphs of the Interim Report to denote the trigger of a repayment obligation, be

³⁰ Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.530. ↩

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replaced with the expression "aircraft delivery". According to the European Union, modifying the term "aircraft delivery" with the adjective "successful" is confusing because it "inaccurately" suggests that not all aircraft deliveries trigger repayment obligations. The United States did not comment on the European Union's request.

5.21. Paragraphs 6.229, 6.232, 6.238, 6.251, 6.254, and 6.261 have been modified to address the European Union's concern.

5.4.2 Footnote 377 (now footnote 401) to paragraph 6.231

5.22. The European Union requests that the words "even now", which appear in the final sentence of footnote 377 (now footnote 401) to paragraph 6.231, be replaced with "as of today" in order to avoid the impression that the Panel considers that a financial instrument with an interest rate that depends in part on the timing of [***], such as the French A350XWB LA/MSF contract, inherently confers a "benefit". The United States considers that the phrase "even now" does not have the connotation that the European Union believes that it has in this context, and that "even now" is synonymous with "as of today", rendering the European Union's request inutile.

5.23. Footnote 377 (now footnote 401) has been modified to address the European Union's concern.

5.4.3 Paragraphs 6.268-6.288

5.24. The European Union notes that paragraphs 6.268-6.288 describe how the A350XWB LA/MSF agreements compare with LA/MSF agreements provided for earlier aircraft programmes. The European Union requests that citations be added to the relevant paragraphs of the United States' submissions "from which the arguments reviewed in this comparative assessment were drawn".

5.25. The United States notes that paragraphs 6.268-6.288 contain detailed factual observations citing to the original panel report or derived by the Panel from evidence submitted by the parties in this proceeding. The United States observes that this passage represents the Panel's effort to organize facts that both parties have submitted as relevant to the evaluation of the matter before the Panel, rather than an attempt to capture the viewpoint of either party. Citation to "relevant paragraphs of the United States' submissions" is therefore, in the view of the United States, unnecessary. The United States also makes a general comment, detailed further below, that as a panel need not adopt the reasoning of one of the parties, and may rely on its own reasoning independent of the arguments put forward by the parties, its conclusions need not cite the arguments of the parties.

5.26. Paragraphs 6.268-6.288 are part of sub-section 6.5.2.3.1 of the Interim Report, in which the key features of the LA/MSF agreements for the A350XWB are described and factually assessed, first individually and then in comparison with the LA/MSF agreements challenged by the United States in the original proceeding. In performing this factual assessment, the compliance Panel found it useful to compare the A350XWB LA/MSF agreements with the LA/MSF agreements at issue in the original proceeding in order to develop a better understanding of their particular features.

5.27. We recall that the mandate of a panel is to make an objective assessment of the matter before it, including an objective assessment of the facts, in accordance with Article 11 of the DSU. In so doing, a panel must review the totality of the facts and evidence before it.³¹ We are not aware of a rule that prevents a panel from setting out its own factual understanding of measures in this context, or that a panel's factual understanding of the measures at issue must necessarily proceed from the arguments made by one or another of the parties. Accordingly, we see no basis for the European Union's request for review and, therefore, make no change to the relevant paragraphs.

³¹ Appellate Body Report, US – Wheat Gluten, paras. 150-151. See also Appellate Body Report, Korea – Dairy, para. 139. ↩

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5.4.4 Footnote 438 (now footnote 462) to paragraph 6.289

5.28. The European Union observes that footnote 438 (now footnote 462) to paragraph 6.289 reads:

With regards to the UK contract, the European Union initially stated that [***], as disbursements were scheduled to occur no earlier than [***]. However, the European Union later clarified that disbursements were made as follows: In [***]. Disbursements were scheduled and made by the UK Government in [***].

5.29. The European Union asserts that the final sentence in this section of the footnote is factually inaccurate, alleging that the [***], and that under the [***], the earliest disbursement was scheduled for [***]. The European Union requests this Panel's relevant finding be reviewed "to ensure factual accuracy". The United States considers that the European Union's request should be rejected because the relevant language in the Interim Report already accurately reflects the facts.

5.30. The description in the footnote at issue is based on our assessment of: (i) the HSBI revised schedule of disbursements contained at paragraph 2 of the exhibit to which the European Union refers – which replaced the schedule of disbursements also contained at paragraph 2 of the [***]; and (ii) the remaining paragraphs of Exhibit EU-133/EU-(Article 13)-33. While paragraph 3 of that exhibit indicates that a disbursement was indeed scheduled to occur on [***] and a further disbursement on [***], the same paragraph indicates those payments – as distinct from the earlier, scheduled disbursements – would be subject to additional conditions. This is further confirmed by the text of paragraph 4 of the exhibit.

5.31. We recall that the European Union was asked to clarify its submissions in this respect in Panel question Nos 86 and 128. In response to Panel question No. 86, the European Union provided an HSBI schedule of disbursements already made, and those to be made, confirming that payments would be made prior to [***]. In Panel question No. 128, the European Union was asked to reconcile this information with its submission at paragraph 276 of its second written submission that "[***]. Instead, amendments made to the [***]". In its response, the European Union "confirm{ed} that the information included in its response to Question 86 is accurate. The [***] does not, however, affect the overall EU argument". We note that Professor Whitelaw's calculations (for example in Exhibit EU-421 (HSBI)) also utilise figures involving disbursements made prior to [***]. The compliance Panel's understanding of the disbursements made and scheduled to be made is based on these submissions by the European Union.

5.32. Having reviewed the finding, and found it to be in accordance with the European Union's factual submissions, we accordingly make no change.

5.5 Programme risk for the A350XWB

5.5.1 Footnote 500 to paragraph 6.338

5.33. The European Union requests that the compliance Panel add a citation to the United States' submissions where the United States makes an argument which the European Union maintains is described in footnote 500. According to the United States, the footnote reflects the Panel's observation regarding the implications of an argument raised by the European Union, and a citation is unnecessary.

5.34. Footnote 500 of the Interim Report set out an observation made by the Panel about one of the possible implications of the European Union's decision not to provide certain pricing information. Our observation does not constitute an argument made by either of the parties. For the avoidance of confusion, the relevant footnote containing the observation has been deleted.

5.5.2 Paragraph 6.490

5.35. The European Union notes that the footnote to this paragraph appears to contain an erroneous attribution to the European Union. The European Union requests that the content of the footnote be corrected. The United States did not object to the European Union's request. The citation has been corrected to refer to the relevant part of the United States' submissions.

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5.5.3 Paragraphs 6.496-6.500, 6.502, 6.505, 6.513, and 6.526

5.36. The European Union requests that citations be added to the United States' submissions where the United States asserts the relevance of "the context of the development of the A350XWB" to the question of the mitigation of risks that is referenced in paragraphs 6.496-6.500, and where "the United States makes" certain arguments, which the European Union maintains are set out in paragraphs 6.502, 6.505, 6.513, and 6.526.

5.37. The United States asks the Panel to reject the European Union's request, arguing that there is no need to include any such citations. The United States notes that the DSU does not require panels to adopt the view of one party or the other. The United States considers that Article 11 of the DSU presupposes that a panel may assess the facts and relevant legal provisions differently from one or both parties with respect to a matter in dispute.³² The United States recalls that a panel may not "make the case" for a complaining party "which has not established a prima facie case of inconsistency based on specific legal claims asserted by it"³³, but that within these limitations, a panel has considerable latitude to formulate its conclusions. The United States comments that, as a panel need not adopt the reasoning of one of the parties, and may rely on its own reasoning independent of the arguments put forward by the parties, its conclusions need not cite the arguments of the parties. The United States considers that a panel is free to use such citations to explain its conclusions, either by comparison or contrast with the views expressed by one or both of the parties. However, absent some further additional consideration, a panel has no obligation or even reason to include citations to the arguments of a party even if it reaches conclusions favourable to that party. The United States considers that the European Union has not provided reasons why it is necessary or appropriate to include citations and asks that the Panel reject the European Union's requests in this regard.

5.38. The United States further observes that paragraphs 6.496-6.500 lay out the Panel's understanding of relevant facts as context for evaluating the European Union's argument that the risks associated with the A350XWB were mitigated. The United States observes that the passage contains numerous citations to documents submitted by both parties, and that the European Union does not dispute the accuracy of the Panel's observations or that the cited documents fully support them. The United States also observes that: in paragraph 6.502 the Panel was addressing an internal inconsistency within the arguments presented by the European Union; in paragraphs 6.503-6.504 the Panel evaluated evidence submitted by the European Union to determine whether it supported an inference that the European Union was seeking to draw; in paragraph 5.505 the Panel concluded that the evidence supported a different inference; paragraph 6.513 contains conclusions reached by the Panel after evaluating the European Union's arguments in light of the evidence submitted by both parties, and that in any event those conclusions agree in part with the European Union; and that paragraph 6.526 addresses matters relevant to evaluating the European Union's arguments. The United States considers that there is, accordingly, no need to include citations to United States arguments.

5.39. As the European Union appears to acknowledge in its request for review of paragraph 6.502, the paragraphs that are the focus of the European Union's request for review set out the compliance Panel's "respon{se} to the European Union's submissions on the mitigation of the risks associated with the A350XWB". These submissions were made as part of the European Union's rebuttal of the United States' arguments concerning the appropriate project-specific risk premium to use for the purpose of constructing the relevant market interest rate benchmark for the A350XWB LA/MSF measures. The European Union advanced two main arguments in this regard: First, that due to the technological challenges of the A350XWB, Airbus changed its development process, which significantly mitigated risks of the A350XWB compared with those of the A380; and second, that the later point in the development process at which the A350XWB LA/MSF contracts were concluded compared to the point when the A380 contracts were concluded also mitigated the risks associated with the A350XWB programme compared with the A380 programme. In our view, a full exposition of the context of the development of the aircraft was relevant to understanding whether the arguments made by the European Union with respect to risk mitigation were compelling. Thus, after summarising the European Union's submissions in

³² The United States refers to Appellate Body Report, US – Gambling, para. 280 (in turn citing Appellate Body Report, EC – Hormones, para. 156); and Appellate Body Report, US – Certain EC Products, para. 123. ↩

³³ The United States refers to Appellate Body Report, Japan – Agricultural Products II, para. 129. ↩

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paragraph 6.493, the compliance Panel evaluated their merits in paragraphs 6.494-6.527, exploring and drawing upon evidence submitted by both parties.

5.40. Accordingly, we see the entire content of paragraphs 6.493-6.527 to be consistent with (and, indeed, required by) our mandate under Article 11 of the DSU, which is to make an objective assessment of the matter, including an objective assessment of the facts. In this respect, we note that it is well established that a panel must examine and consider the totality of the facts and evidence before it, not just evidence submitted by one or another party, and evaluate the relevance and probative force of each piece of evidence.³⁴ It is also equally settled that a panel is entitled to develop its own reasoning, and that evidence before the panel can be used in favour of either party, regardless of which party presented it. Moreover, while panels are inhibited from addressing legal claims outside of their terms of reference, nothing in the DSU limits the faculty of a panel freely to use arguments submitted by any of the parties to support its own findings and conclusions on the matter under its consideration.³⁵ Indeed, a panel might well be unable to carry out an objective assessment of the matter, as mandated by Article 11 of the DSU, if in its reasoning it had to restrict itself solely to arguments presented by the parties to the dispute.³⁶ We have, therefore, left paragraphs 6.496-6.500, 6.502, 6.505, 6.513, and 6.526 unchanged.

5.5.4 Paragraphs 6.538, 6.546, 6.563, 6.570, and 6.579³⁷

5.41. The European Union requests that citations be added "to the relevant paragraphs of the United States' submissions at which the United States makes" the arguments or comparison, which the European Union maintains are set out in paragraphs 6.538, 6.546, 6.563, 6.570, and 6.579.

5.42. The United States refers to its general comment, detailed above, in respect of the European Union's request to include citations to United States arguments. The United States also observes that: paragraph 6.538 sets out certain Panel conclusions in respect of United States arguments cited in an earlier paragraph; paragraph 6.546 contains analysis undertaken by the Panel to address European Union arguments in light of relevant evidence; in paragraph 5.563 – as well as paragraph 6.561 – the Panel compares A350XWB and A380 orders at the date of the respective LA/MSF contracts in response to an EU argument cited in paragraph 6.559; in paragraph 6.570 the Panel makes a finding in response to a United States argument cited in paragraph 6.545; and that paragraph 6.579 contains the conclusions of the Panel based on arguments from the European Union and United States, which the preceding paragraphs cite. The United States therefore considers that it is not necessary to add citations to the United States' submissions as the European Union requests.

5.43. The relevant passages identified by the European Union form part of our evaluation of the merits of the submissions of either one or both of the parties in relation to various elements of the project risk associated with the A350XWB as compared to that associated with the A380, in the light of the evidence submitted by both parties, consistent with our task to make an objective assessment of the matter. We can, therefore, see no basis to support the European Union's request and, accordingly, make no change to the relevant paragraphs.

5.5.5 Paragraph 6.563

5.44. The European Union suggests that the phrase "a part share" that is found in paragraph 6.563 is tautological and requests the deletion of either the word "part" or the word "share". The United States did not specifically comment on this aspect of the European Union's request. The word "part" has been deleted from the relevant paragraph.

³⁴ Appellate Body Report, US – Wheat Gluten, paras. 150-151: See also Appellate Body Report, Korea – Dairy, para. 139. ↩

³⁵ Appellate Body Report, EC – Hormones, para. 156. See also Appellate Body Reports, US – Certain EC Products, paras. 122-123; and Korea – Dairy, para. 139. ↩

³⁶ Appellate Body Report, EC – Hormones, para. 156. ↩

³⁷ As observed by the United States, the European Union's comments refer to paragraph 6.759, but quote a passage that appears at paragraph 6.579. We therefore understand the European Union's comment to relate to paragraph 6.579. ↩

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5.6 Prohibited subsidy claims

5.45. The United States requests that the description of certain aspects of the A350XWB LA/MSF contracts in paragraph 6.774 be supplemented to include references to additional examples of "Domestic A350XWB Development Contingency" drawn from the evidence, and that the statements made in paragraph 6.776 concerning the United States' Article 3.1(b) claims be revised to better reflect certain pieces of evidence. The European Union asks the Panel to reject the United States' requests. Regarding paragraph 6.774, the European Union considers that the United States' requested revisions address issues that are sufficiently addressed elsewhere in the Report, and are thus unnecessary and would be inaccurate in this context. Regarding paragraph 6.776, the European Union considers that the United States' requested changes would improperly and unnecessarily create affirmative findings that the Panel currently does not make.

5.46. The United States' requested modifications to paragraph 6.774 would bolster the existing factual characterization and discussion of the A350XWB LA/MSF contracts; while the United States' requested amendments to paragraph 6.776 would introduce conclusions that the Panel does not currently make but instead assumes arguendo. In our view, the existing characterization and discussion of the relevant features of the A350XWB LA/MSF contracts set out in the Report are sufficient to resolve the United States' Article 3.1(b) claim. Moreover, insofar as the United States' requested modifications create conclusions that the Panel does not currently make but instead explicitly assumes arguendo, such changes are not only unnecessary, but would create confusion. Thus, we decline the United States' requests.

5.7 Expiry through the amortization of benefit

5.7.1 Paragraph 6.869, first bullet point

5.47. The European Union requests modification of the first bullet point to paragraph 6.869 to more fully reflect the European Union's submissions concerning the end of the "lives" of the relevant subsidy measures by means of amortization of "benefit". Specifically, the European Union requests that the phrase "before the end of the implementation period" be inserted immediately following the phrase "'Marketing life' of each of the financed LCA programmes would come to an end". The United States did not object to the European Union's request.

5.48. The first bullet point to paragraph 6.869 has been modified in response to the European Union's request.

5.7.2 Footnote 1496 (now footnote 1521) to paragraph 6.869

5.49. The European Union requests modification of footnote 1496 (now footnote 1521) to paragraph 6.869 to more clearly reflect the European Union's arguments concerning the dates by which the "benefit" of the subsidies mentioned in that footnote would amortize. The United States considers that the current text of the footnote, which the United States finds perhaps less precise than the revised text offered by the European Union, is nonetheless accurate, and therefore no change to the footnote is necessary.

5.50. We have modified the footnote to address the European Union's concerns.

5.7.3 Footnote 1497 (now footnote 1522) to paragraph 6.869

5.51. The European Union requests that the text of footnote 1497 (now footnote 1522) be moved to the body of paragraph 6.869 as a separate fourth bullet point to that paragraph in order to more clearly reflect the European Union's arguments. The United States did not comment on the European Union's request.

5.52. The bullet points to paragraph 6.869 identify the subsidy measures that the European Union maintains are demonstrated in the PwC Amortization Report to expire "prior to the end of the implementation period". The European Union does not argue that the "benefit" of the subsidies discussed in footnote 1497 (now footnote 1522) fully amortized "prior to the end of the implementation period". It would, therefore, be an inaccurate characterization of the

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European Union's argument to transform the text of footnote 1497 (now footnote 1522) into a fourth bullet point to paragraph 6.869. Accordingly, we decline the European Union's request.

5.7.4 Paragraph 6.894

5.53. The European Union requests modification of paragraph 6.894 to more clearly reflect the facts concerning the number of regional development grants involving Spanish authorities. The United States did not comment on the European Union's request.

5.54. We have modified the paragraph to address the European Union's concerns and more clearly reflect the subsidies at issue.

5.7.5 Footnote 1574 (now footnote 1599) to paragraph 6.906, and paragraph 6.1076

5.55. The European Union requests that, in footnote 1574 (now footnote 1599) to paragraph 6.906, we insert an explicit finding that the European Union has demonstrated that the German subsidies for the Nordenham facility and that Spanish subsidies provided for the Sevilla facilities have fully amortized as of present day. The European Union further requests that conforming changes be made to paragraph 6.1076. The United States did not comment on the European Union's request.

5.56. Footnote 1574 (now footnote 1599) appears at the end of a passage in which the Panel determines that it is not necessary to express a definitive view on what would be the most appropriate methodology for determining the ex ante lives of the seven regional development grant subsidies because even accepting the European Union's arguments in full, the European Union has not established that the relevant subsidies expired by the end of the implementation period. Thus, no finding is made on the appropriateness of the methodology relied upon by the European Union to establish the dates on which, according to the European Union, the "benefit" of the German and Spanish regional development subsidies were fully amortized. Accordingly, there is no factual basis to grant the precise modification requested by the European Union to either paragraphs 6.906 and 6.1076.

5.7.6 Paragraphs 6.1067-6.1068

5.57. The European Union requests that paragraphs 6.1067-6.1068 be modified to capture what the European Union asserts is the fact that the United States did not contest the fact that full repayment of principal and interest was effected in respect of the relevant subsidies on the dates indicated by the European Union. The United States considers that the European Union misunderstands the relevant United States arguments in the context of these paragraphs. The United States explains that it does not accept the European Union's proposed repayment dates, in part because the European Union improperly defined repayment as occurring once principal and interest payments are complete, but before royalty payments stop (in cases where royalty payments are required). The United States rejects that definition, instead having arguing that true "repayment" cannot occur while royalty payments continue.

5.58. We consider the requested change unnecessary. In the two paragraphs at issue, the Panel summarizes the United States' response to the European Union's argument that the "lives" of relevant LA/MSF loans came to an end when Airbus fully repaid the principal and interest associated with those measures. The United States contested this argument by asserting that the repayment of LA/MSF on subsidized terms could not bring about the end of the LA/MSF subsidies' lives. The Panel concluded that it is unnecessary to make any definitive findings with respect to the merits of the European Union's arguments because, inter alia, even accepting that the principal and interest of the relevant LA/MSF measures had been repaid when the European Union claimed, it would not avail the European Union. The extent to which the United States did or did not contest the validity of the repayment dates is therefore immaterial. We thus decline to make the requested change.

5.7.7 Paragraphs 6.1074, 6.1076, and 6.1077

5.59. The European Union requests that footnotes identical or substantially similar to footnote 1522 (now footnote 1547) be added to paragraphs 6.1074, 6.1076 and 6.1077 to more

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accurately reflect the entirety of the compliance Panel's findings on the expiry of the ex ante "lives" of the subsidies. The United States did not comment on the European Union's request.

5.60. Paragraphs 6.1074, 6.1076, and 6.1077 make and/or summarize findings on the extent to which the European Union has established that the challenged subsidies were "expired", "extinguished" or "extracted" by the end of the implementation period. On the other hand, footnote 1522 (now footnote 1547) simply confirms that we are satisfied that, on the basis of either of the methodologies advanced by the European Union, the ex ante "lives" of the LA/MSF subsidies for the A330-200 and A340-500/600 did not come to an end before the end of the implementation period, but rather in [***] and [***]. Thus, the finding made in footnote 1522 (now footnote 1547) is out of place in the findings made in paragraphs 6.1074, 6.1076 and 6.1077. It is also irrelevant to the question before the compliance Panel, namely, whether the fact that certain subsidies "expired" before the end of the implementation period means that those subsidies have been "withdrawn", within the meaning of Article 7.8 of the SCM Agreement. Accordingly, we decline to make the requested modifications.

5.8 Extraction of benefit

5.61. The European Union requests that the compliance Panel review the finding made in paragraph 6.927 where it concluded that it "will not consider the European Union's 'extraction' arguments any further in this dispute". The European Union asserts that "neither before the original panel, nor before the Appellate Body, did the European Union argue that the extraction events resulted in withdrawal of the subsidies, within the meaning of Article 7.8". Moreover, the European Union recalls that the Appellate Body found that "a determination as to whether any action taken to implement the recommendations made has actually resulted in the 'withdrawal' of subsidies and has brought about a Member's compliance with the SCM Agreement, is, if contested, best left to a compliance panel …". Thus, according to the European Union, no adopted findings exist on whether the "extraction" events achieved "withdrawal" of the subsidies, with the consequence that there are no such findings for the European Union to unconditionally accept under the terms of Article 17.14 of the DSU.

5.62. The United States asks the Panel to reject the European Union's request for two main reasons. First, the United States argues that the European Union's statement that it never argued before the original panel or Appellate Body that the relevant extraction events resulted in withdrawal of the subsidies within the meaning of Article 7.8 is factually incorrect. Rather, according to the United States, the European Union raised this precise argument and the Appellate Body explicitly rejected it. Second, the United States considers that European Union's argument that the relevant DASA and SEPI transactions resulted in "withdrawal" of the subsidies rests on the argument that, as a matter of law, they were "extractions" that affected the value of subsidies previously granted to those companies. As the Panel already notes in the Report, however, the Appellate Body rejected that argument.

5.63. In the Panel's view, contrary to the European Union's assertions, the European Union did argue in the original proceeding that the relevant "extraction" events constituted "withdrawals" within the meaning of Article 7.8 (and Article 4.7) of the SCM Agreement.³⁸ The original panel considered the European Union's arguments and dismissed them, explicitly finding:

Finally, we reject the European Communities' argument that the retention of cash and cash equivalents of Dasa and CASA, by DaimlerChrysler and SEPI, respectively, constituted a "withdrawal" or "repayment" of subsidies previously provided to those entities within the meaning of Articles 4.7 and 7.8 of the SCM Agreement.³⁹

5.64. The European Union appealed the original panel's finding.⁴⁰ The Appellate Body reviewed the European Union's appeal⁴¹, concluding as follows:

³⁸ Panel Report, EC and certain member States – Large Civil Aircraft, paras. 7.257, 7.262, and 7.278-7.279. ↩

³⁹ Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.289. ↩

⁴⁰ Notification of Appeal by the European Union under Article 16.4 and Article 17 of the DSU and under Rule 20(1) of the Working Procedures for Appellate Review, WT/DS316/12/Rev.1, paras. 2 and 3. ↩

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Accordingly, we uphold the Panel's ultimate finding, in paragraphs 7.283, 7.284, and 7.289 of the Panel Report, that the "cash extractions" did not result in the "withdrawal" of subsidies, within the meaning of Articles 4.7 and 7.8 of the SCM Agreement.⁴²

5.65. Thus, we find no factual basis to support the European Union's submission that no findings were adopted in the original proceeding in relation to the question whether the "extraction" events achieved the "withdrawal" of subsidies, within the meaning of Article 7.8 of the SCM Agreement. Accordingly, we decline the European Union's request for review of our findings in paragraph 6.927.

5.9 Extinction of benefit

5.9.1 Paragraph 6.994

5.66. The European Union requests that the finding made in paragraph 6.994 on the "fair-market" value of the ASM transaction be reviewed in the light of what the European Union asserts is "evidence clearly indicating that the value of Lagardère's commitment to the French State formed part of the information assessed by the relevant investment banks in determining the relative value of MHT to the combined company". The United States did not comment on the European Union's request.

5.67. We understand the evidence the European Union relies upon to be the following description found in the Aérospatiale-Matra Offering Memorandum:

In its role as a preferred strategic partner, Lagardère has made certain undertakings to the French State in respect of the trading price of Aérospatiale Matra's shares on the Paris Bourse as compared to the CAC 40 index for a period of two years. As a general matter, Lagardère has agreed to make a payment to the French State of up to FF 1.15 billion if the trading price of Aérospatiale Matra's shares underperforms the CAC 40 index by 8% or more during this period. If the trading price of Aérospatiale Matra's shares outperforms the CAC 40 index by 10% or more during this period, Lagardère will not be required to make any payment and its obligation will be terminated. If the trading price is between these two points a pro rata amount will be payable.⁴³

5.68. While this passage describes the undertaking given by Lagardère concerning the share price of ASM following the Aérospatiale-MHT merger, it does not explain whether or the extent to which its value to the French State was taken into account by the relevant investment banks in their valuations. In this regard, we note that because of the conditional nature of Lagardère's undertaking, Lagardère's final liability could range from FF 1.15 billion to zero, depending upon how the ASM shares traded following the merger. Thus, in the absence of any evidence disclosing what the relevant investment bank valuations were, we see no reason to alter the finding made in paragraph 6.994. Nevertheless, in the light of the European Union's request for review, we have sought to clarify the finding made in paragraph 6.994 and made a related change to paragraph 6.995.

5.9.2 Paragraph 6.1008

5.69. The United States requests that the last sentence of paragraph 6.1008 be modified to provide greater clarity in the Panel's findings concerning the implications of ASMs corporate governance structure on the "economic reality" of the ASM transaction. The European Union asks the Panel to reject the United States' request. In the European Union's view, the existing language in this paragraph is accurate and succinct. Further, according to the European Union, the Panel has elsewhere discussed the relevant issues discussed in this paragraph, making the modification unnecessary.

⁴¹ Appellate Body Report, EC and certain member States – Large Civil Aircraft, paras. 750-759. ↩

⁴² Appellate Body Report, EC and certain member States – Large Civil Aircraft, para. 759. ↩

⁴³ Aérospatiale-Matra Offering Memorandum, 25 May 1999, (Exhibit EU-58), p. 24. ↩

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5.70. For the avoidance of confusion, the final sentence of paragraph 6.1008 has been reworded along the lines suggested by the United States.

5.9.3 Paragraphs 6.1009 and 6.1010

5.71. The United States requests that the first sentence of paragraph 6.1010 and the accompanying footnote be deleted, because according to the United States, the European Union did not deny the accuracy of the statements contained in the BusinessWeek report quoted at the end of paragraph 6.1009, but only the United States' assertions in paragraph 20 of the United States' response to Panel question No. 8. The United States argues that the United States' assertions in paragraph 20 were distinct from the underlying evidence. The European Union asks the Panel to reject the United States' request. According to the European Union, the Panel properly understood the European Union's statement referred to in the United States' comment as a denial of the entirety of the assertions, including a denial that the materials cited by the United States (e.g. the statements contained in the BusinessWeek report) in support of the United States assertions.

5.72. In paragraph 20 of its response to Panel question No. 8, the United States made a number of assertions including that the "French government set for itself the political goal to 'create a national champion' in the aerospace and defense industry, which would be better positioned to negotiate with its British and German counterparts". In the footnote to this sentence, the United States made the following additional assertions:

Press reports also confirmed that the ASM merger plan was adopted in reaction to a prospective merger between Dasa and BAE, which would have resulted in the French industry being "clearly outgunned" and "threatened" its "traditional dominance of the Airbus partnership". … For this reason, "Prime Minister Jospin secretly endorsed a bold plan to privatize Aérospatiale and merge it with Matra, a large defense contractor controlled by Lagardère. Jospin reasoned that since the government would retain a large stake, it could still pretty much call the shots. 'We had to be as industrially strong as possible to stay in the game', remembers Frederic Lavenir, a key high-ranking Finance Ministry official who helped structure the merger."⁴⁴

5.73. We do not read the contents of this footnote, which accompanied the second sentence of paragraph 20 of the United States' response to Panel question No. 8, to be merely a citation of evidence in support of the assertion made in that paragraph. In our view, the United States reference to Prime Minister Jospin's alleged views concerning the strategic importance and continued national control of ASM formed part of its assertion that the French government wanted to create a "national champion" for the purpose of the merger between Dasa and BAE. Thus, in denying the accuracy of the assertions set out in paragraph 20 of the United States' response to Panel question No. 8, we understand the European Union to deny them in their entirety, including those set out in the United States' footnote quoting from the BusinessWeek report. Such a reading of the European Union's position would be consistent with the European Union's general line of argument concerning the "qualitative change in control" that resulted from the ASM merger, which according to the European Union, left Lagardère (not the French State) with "effective control" over the company's key decisions. Accordingly, we find the characterization of the European Union's position concerning the assertions made in paragraph 20 of the United States' response to Panel question No. 8 to be accurate. We, therefore, decline the United States' request to delete the first sentence of paragraph 6.1010 and the accompanying footnote.

5.10 Requests for findings of the existence, and consistency with the covered agreements, of measures taken to comply regarding the Bremen Airport runway extension and the Mühlenberger Loch aircraft assembly site subsidies

5.74. The European Union requests that the Panel find that the two declared measures taken to comply concerning the Mühlenberger Loch aircraft assembly site and the Bremen Airport runway extension achieved "withdrawal" of the respective subsidies, within the meaning of Article 7.8 of

⁴⁴ United States' response to Panel question No. 8, fn 16 (quoting Jean Rossant, "Birth of a Giant: The inside story of how Europe's toughest bosses turned Airbus into a global star: EADS", BusinessWeek, 10 July 2000, (Exhibit USA-561), p. 170). ↩

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the SCM Agreement. The European Union asserts that the right of an original respondent to have a compliance panel assess the WTO consistency of a measure taken to comply was explicitly recognised by the Appellate Body in US – Continued Suspension and Canada – Continued Suspension, where it found that: "absent any rebuttal by the original complainant, the Article 21.5 panel will make its determination on the basis of a prima facie case presented by the original respondent that its implementing measure has brought it into compliance with the DSB's recommendations and rulings".⁴⁵

5.75. The United States asks the Panel to reject the European Union's request. In doing so, the United States affirms that, as stated in its second written submission, it is not pursuing the claims included in its panel request with respect to the Mühlenberger Loch and Bremen runway measures. The United States neither seeks a finding that the European Union failed to comply with the recommendations and rulings of the DSB with respect to those measures, nor argues that those subsidies caused adverse effects after the end of the implementation period. Thus, there is no relevant disagreement between the parties for the Panel to resolve. The United States further argues that Appellate Body reports in US – Continued Suspension and Canada – Continued Suspension do not provide material support the European Union's request, and that the European Union's request is untimely.

5.76. We recall that the purpose of a panel established under Article 21.5 of the DSU is to make an objective assessment of whether a Member has complied with the rulings and recommendations adopted by the DSB in an original proceeding when there is a "disagreement as to the existence or consistency with a covered agreement of measures taken to comply". As described in paragraph 2.1(a), and footnotes 33 (now footnote 53), 87 (now footnote 109), and 1820 (now footnote 1847), neither party presently disputes the existence of the European Union's notified measures taken to comply with respect to the Mühlenberger Loch or the Bremen Airport runway subsidies, and there is, furthermore, no present disagreement between the parties regarding whether such measures taken to comply are consistent with the SCM Agreement's relevant disciplines or whether they achieve compliance with the recommendations and rulings of the DSB. The explicit terms of Article 21.5 of the DSU imply that in the absence of any such "disagreement", there is no question of WTO-consistency to determine in relation to the measures taken to comply.

5.77. The Appellate Body reports in US – Continued Suspension and Canada – Continued Suspension do not compel a different resolution. The European Union quotes a passage from these two reports that appears in sections in which the Appellate Body described what a hypothetical Article 21.5 panel would be expected to do in the following specific procedural scenario: (a) an original respondent initiates an Article 21.5 proceeding; (b) the original complainant refuses to participate in that Article 21.5 proceeding; and (c) the original complainant had already suspended concessions vis-à-vis the original respondent in accordance with applicable provisions of Article 22 of the DSU. The Appellate Body stressed, however, that in this hypothetical scenario there would be a "disagreement" between the parties for the compliance panel to resolve, i.e. whether the ongoing suspension of concessions continued to be justified under Article 22.8 of the DSU. Thus, in such a scenario, the compliance panel would be called upon to "make its determination on the basis of a prima facie case presented by the original respondent that its implementing measure has brought it into compliance with the DSB's recommendations and rulings"⁴⁶ in order to address the "abnormal state of affairs"⁴⁷ of ongoing suspension of concessions, a situation that "must be brought back to normality as soon as possible".⁴⁸ No such disagreement or associated exigency exists in this proceeding. Suspension of concessions has not been approved or implemented, and, moreover, the original complainant, the United States, initiated the present Article 21.5 proceeding, in which both parties participated.

⁴⁵ Appellate Body Reports, US – Continued Suspension, para. 358; and Canada – Continued Suspension, para. 358. ↩

⁴⁶ Appellate Body Reports, US – Continued Suspension, para. 358; and Canada – Continued Suspension, para. 358. ↩

⁴⁷ Appellate Body Reports, US – Continued Suspension, para. 310; and Canada – Continued Suspension, para. 310. ↩

⁴⁸ Appellate Body Reports, US – Continued Suspension, para. 348; and Canada – Continued Suspension, para. 348. ↩

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5.78. Thus, in the absence of any explicit refutation by the United States of the European Union's measures taken to comply with respect to the Mühlenberger Loch or the Bremen Airport runway subsidies, we find that there is no requirement under Article 21.5 of the DSU for the compliance Panel in this dispute to make any findings on the consistency of those measures with the covered agreements. Thus, it follows from the express terms of Article 22.2 of the DSU that the United States would not be entitled to request the suspension of concessions or other obligations under the covered agreements in relation the Mühlenberger Loch and the Bremen Airport runway measures. Accordingly, for all of the above reasons, we decline the European Union's request.

5.11 Adverse effects

5.11.1 Paragraph 6.1155 and footnote 1908 (now footnote 1935)

5.79. The United States requests that the last sentence of footnote 1908 (now footnote 1935) to paragraph 6.1155 be modified to more accurately reflect the United States' arguments and data submitted in relation to freighter aircraft. The European Union asks the Panel to reject the United States' request. In the European Union's view, the requested modification would reflect a claim regarding freighters that the United States did not substantiate during the course of the dispute.

5.80. We have modified footnote 1908 (now footnote 1935) to more accurately capture the scope of the United States' arguments.

5.11.2 Paragraph 6.1672

5.81. The European Union requests that the finding made in paragraph 6.1672 regarding the relevance of EADS' gross cash as a source of financing for part of the development costs of the A350XWB be modified, and for the Panel to consequently find that the gross cash figures further strengthen the finding in paragraph 6.1690 that "EADS had significant cash that it could have diverted to the A350XWB programme". The European Union argues that gross cash is relevant in this context "because, even though it would be reduced when a financial liability falls due, it can simultaneously be replenished thorough {sic} borrowing, such that EADS' overall cash and borrowing position does not change." As described in paragraph 6.1672, the European Union made the same argument in a footnote to its second written submission. The United States asks the Panel to reject the European Union's request. The United States considers that even if EADS could have issued debt to "replenish" its gross cash as financial liabilities fell due, this is a question of EADS' counterfactual ability to raise debt. Because the Panel already addresses that counterfactual ability elsewhere in the Report, there is no need to address that issue in the context of discussing gross cash.

5.82. We decline the European Union's request. As explained in the Report, the portion of any of EADS' gross cash positions (actual or projected) that must cover financial liabilities would be unavailable to divert to the A350XWB programme. Deducting that portion of the gross cash positions yields EADS' associated net cash positions. We therefore considered net cash to be a more reliable indicator of how much cash EADS had to divert to the A350XWB programme. This relationship between gross and net cash positions endures no matter how much debt EADS could raise or when EADS raised it. Insofar as EADS could have raised cash with which to help fund the A350XWB programme by selling debt, that is addressed – consistent with how the parties structured their arguments and presented their evidence – under our EADS-debt-capacity analysis. In other words, we have analysed the ability of EADS to fund the development costs of the A350XWB programme through debt, as a debt-capacity issue, rather than under the rubric of gross cash.

5.11.3 Paragraph 6.1788

5.83. The European Union requests that citations be added to the relevant paragraphs of the United States' submissions "at which the United States makes" the argument stated in the last two sentences of paragraph 6.1788.

5.84. The United States refers to its general comment, detailed above, in respect of the European Union's request to include citations to US arguments. The United States also observes

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that the paragraph contains the Panel's conclusions and is based on the Panel's preceding discussion of the parties' arguments and the evidence, including the parties' agreement as to the observed failure of the several new entrants to play a significant role in LCA competition and the likelihood that this situation would continue in the immediate future. The United States considers that citations to the United States' submissions are, accordingly, unnecessary.

5.85. The two sentences that are the subject of the European Union's request for review are found in a passage of the Interim Report where the merits of the parties' positions in respect of the conditions of competition that would exist after the end of the implementation period, in the light of the two "plausible" counterfactual scenarios, are evaluated. The two sentences form part of our objective assessment of the conditions of competition that we believe would exist in the "plausible" counterfactual scenario in which Boeing would have been a monopoly producer of LCA. Accordingly, we see no basis for the European Union's request for review and, therefore, make no change to the relevant paragraph.

5.12 Designation of certain information as BCI

5.86. The United States requests that certain specific information appearing in seven paragraphs of the Interim Report be designated as BCI in order to prevent the disclosure of non-public information in the Final Report that could cause harm to the originators of the information. The European Union did not object to the United States' requests.

5.87. The United States' requests have been granted, and the relevant information bracketed in the Final Report.

5.88. The European Union requests that certain specific information appearing in 59 paragraphs and 25 footnotes of the Interim Report be designated as BCI in order to prevent the disclosure of non-public information in the Final Report that could cause harm to the originators of the information. In its comments to the European Union's requests, the United States observes that two of the European Union's requests (concerning paragraph 6.561, and paragraphs 6.728 and 6.729) related to information appearing unbracketed in the European Union's first and second written submissions. The United States also notes that the information the European Union proposed should be bracketed in paragraphs 6.682 and 6.272 appeared unbracketed in paragraph 177 of the United States' first written submission and is based on publicly available information.

5.89. The information that is the focus of the European Union's request for BCI treatment in paragraphs 6.561, 6.728 and 6.729 is the date on which the first A350XWB LA/MSF contract was concluded. The European Union designated this date as BCI when it provided the LA/MSF contracts in response to the Panel's request for information pursuant to Article 13 of the DSU, after filing its first written submission. As the United States notes, however, the same date can be found explicitly identified in two paragraphs of the European Union's first and second written submissions in which it is not given a BCI designation. Apart from these few instances of disclosure, the European Union has generally sought to bracket the dates of the conclusion of all of the LA/MSF contracts for the A350XWB. We note, moreover, that neither party argues that the relevant information is within the public domain. In our view, these facts suggest that the European Union's disclosure of the relevant information in the paragraphs cited by the United States was unintentional. In this light, and given the voluminous submissions and extensive pieces of evidence that have been presented in this proceeding, we have decided to grant the European Union's request, bearing in mind that to do so would not prejudice the United States' due process rights in the resolution of this dispute.

5.90. Turning to the United States' observations concerning the European Union's requests in relation to paragraphs 6.682 and 6.272, we are unable to find any reference to the information that is the focus of the European Union's request in connection with paragraph 6.272 in paragraph 177 of the United States' first written submission. Moreover, on the basis of the information in paragraph 177 of the United States' first written submission, we understand the United States' second observation to be focused on paragraph 6.681 of the Interim Report, not paragraph 6.682. We have modified the text of paragraph 6.681 with a view to responding to both parties' comments on the confidentiality of the relevant information.

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5.91. With respect to all other European Union requests for the treatment of certain information as BCI, we have either bracketed the specific text or otherwise modified the relevant passages to secure the level of protection requested by the European Union.

5.13 Designation of certain information as HSBI

5.92. The European Union requests that the Panel bracket various words and passages of text from the Interim Report as HSBI in order to avoid the disclosure of non-public information in the Final Report that could cause exceptional harm to the originators of the information. The United States does not object to the European Union's requests.

5.93. We have granted the European Union's requests for HSBI protection by either eliminating the relevant text or by modifying it in a way that does not reveal HSBI or make it possible to infer HSBI from the context in which it appears. In this respect, we recall that while, pursuant to paragraph 59 of the BCI and HSBI Procedures, HSBI is not to be disclosed in the Panel report, we are nevertheless entitled to "make statements or draw conclusions that are based on the information drawn from the HSBI". We have decided not to bracket the relevant words and passages that are the focus of the European Union's request, as we do not consider it would be necessary to create an HSBI version of the Final Report in order to fully respond to the European Union's requests for HSBI protection.

6 FINDINGS

6.1 Introduction

6.1. It is well established that the task of a panel established under Article 21.5 of the DSU is to make an objective assessment of whether a Member has complied with the recommendations and rulings adopted by the DSB directing it to bring one or more measures found to be WTO-inconsistent in an original proceeding into conformity with its obligations under the covered agreements. To this end, Article 21.5 contemplates that a panel may be required to examine two main compliance questions: (a) the "existence" of "measures taken to comply" with the rulings and recommendations; and (b) the "consistency with a covered agreement" of any such measures.⁴⁹ In compliance disputes involving actionable subsidies, such as the present, a panel's evaluation of these questions will be informed by Article 7.8 of the SCM Agreement.⁵⁰

6.2. Article 7.8 of the SCM Agreement is one of the "special or additional rules and procedures on dispute settlement contained in the covered agreements"⁵¹, which prevail over the general DSU rules and procedures to the extent that there is a conflict between them.⁵² Article 7.8 specifies what an implementing Member must do following the adoption of a panel and/or Appellate Body report in which it is determined that any subsidy has caused adverse effects within the meaning of Article 5 of the SCM Agreement. In particular, Article 7.8 prescribes that any "Member granting or maintaining such subsidy shall take appropriate steps to remove the adverse effects or shall withdraw the subsidy". It follows that in order to determine whether an implementing Member has complied with the recommendations and rulings adopted by the DSB in cases involving actionable subsidies, one of the questions that an Article 21.5 panel will have to evaluate is whether the Member concerned has acted in conformity with the requirement to "take appropriate steps to remove the adverse effects" or "withdraw the subsidy".

6.3. In this proceeding, the United States maintains that the European Union and certain member States have failed to comply with the recommendations and rulings adopted by the DSB in the original proceeding for two main reasons. First, the United States claims that the European Union and certain member States have failed to act in conformity with the obligation in Article 7.8 of the SCM Agreement to "take appropriate steps to remove the adverse effects" or "withdraw the subsidy" because not only do the subsidies found to have caused adverse effects in the original

⁴⁹ Appellate Body Report, Canada – Aircraft (Article 21.5 – Brazil), para. 40. ↩

⁵⁰ Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 235. ↩

⁵¹ Article 1.2 and Appendix 2 of the DSU. ↩

⁵² Appellate Body Reports, US – Upland Cotton (Article 21.5 – Brazil), para. 235; Guatemala – Cement I, fn 55; and US – FSC, para. 159. ↩

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proceeding allegedly continue to cause adverse effects today⁵³, but also because by agreeing to provide Airbus with LA/MSF for Airbus' latest model of LCA, the A350XWB, the United States submits that France, Germany, Spain and the United Kingdom have "continued and even expanded"⁵⁴ the subsidization of Airbus' LCA activities, thereby causing "additional adverse effects"⁵⁵, within the meaning of Articles 5(c) and 6.3 of the SCM Agreement. Second, the United States claims that France, Germany, Spain and the United Kingdom have failed to comply with the recommendations and rulings adopted by the DSB because, according to the United States, the A350XWB LA/MSF measures are prohibited export and/or import substitution subsidies, within the meaning of Articles 3.1 and 3.2 of the SCM Agreement, claims that the United States also makes in relation to the A380 LA/MSF subsidies.

6.4. The European Union rejects the entirety of the United States' claims, arguing that the European Union and certain member States have fully implemented the recommendations and rulings adopted by the DSB. In particular, the European Union submits that the subsidies found to cause adverse effects in the original proceeding have either been "withdrawn" or no longer cause "adverse effects", thereby bringing the European Union and certain member States into conformity with their obligations under Article 7.8 of the SCM Agreement. Moreover, the European Union maintains that the United States' claims against the A350XWB LA/MSF measures and the prohibited subsidy claims the United States raises against the A380 LA/MSF subsidies are outside of the scope of this compliance proceeding or, in any case, are without merit.

6.5. The parties' positions raise essentially three broad sets of issues pertaining to: (a) the scope of the claims and measures that can be challenged in this proceeding; (b) the extent to which the A350XWB and A380 LA/MSF measures are prohibited subsidies, within the meaning of Articles 3.1 and 3.2 of the SCM Agreement; and (c) whether the European Union and certain member States have complied with their obligations under Article 7.8 of the SCM Agreement. Our Report evaluates the merits of the parties' submissions in relation to each of these matters in turn. However, before proceeding to this analysis, we first review the European Union's stated compliance "actions" and address the European Union's conviction that the United States has failed to make a prima facie case of non-compliance in this dispute⁵⁶ and, therefore, that the European Union and certain member States have "no case to answer".⁵⁷

6.2 The European Union's Compliance Communication of 1 December 2011

6.2.1 Introduction

6.6. On 1 December 2011, the European Union informed the DSB that it had "taken appropriate steps" to bring its measures "fully into conformity with its WTO obligations", thereby ensuring "full implementation of the DSB's recommendations and rulings".⁵⁸ In its communication, the European Union declared that it had adopted "a course of action that addresses all forms of adverse effects, all categories of subsidies, and all models of Airbus aircraft covered by the DSB's recommendations and rulings".⁵⁹ The European Union described this "course of action" to include: (a) the repayment and/or termination of LA/MSF; (b) the imposition of increased fees and lease payments on infrastructure support in accordance with market principles; and (c) ensuring that capital contributions and regional aid subsidies have, "in the Appellate Body's words, 'come to an

⁵³ The United States' claims in this respect do not include the subsidy measures relating to the Mühlenberger Loch and the extension of the Bremen Airport runway that were found to cause adverse effects in the original proceeding. See below paras. 6.19-6.22. ↩

⁵⁴ United States' first written submission, para. 1. ↩

⁵⁵ United States' first written submission, para. 1. ↩

⁵⁶ After recalling the exposition in its first written submission of the alleged "legal framework and the principles" that should guide the Panel's evaluation of the United States' non-compliance claims and inter alia drawing attention to "the highly laconic nature of the US First Written Submission, which in, substantial measure, simply sought to presume rather than demonstrate much of what is asserted by the United States", the European Union explained in its second written submission that "{t}o the extent that the United States might be successful in its attempts to induce the compliance Panel into error on these issues, the European Union will challenge the relevant findings and seek their reversal on appeal". (European Union's second written submission, paras. 14 and 17) (emphasis original) ↩

⁵⁷ European Union's first written submission, paras. 44 and 200. ↩

⁵⁸ Communication from the European Union dated 1 December 2011, WT/DS316/17, 5 December 2011 (Compliance Communication). ↩

⁵⁹ Compliance Communication, para. 3. (emphasis original) ↩

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end' and are no longer capable of causing adverse effects".⁶⁰ The European Union provided "information concerning" the "steps that have been taken" and "other intervening market events" it considered to have enabled it to achieve compliance in a two-page document comprising 36 numbered paragraphs attached to its communication.⁶¹

6.7. When considered in the light of the explanations provided by the European Union during the course of this proceeding, it is apparent that the "course of action" the European Union relies upon to claim that it has fully implemented the recommendations and rulings of the DSB refers to not only "actions" taken after the adoption of the recommendations and rulings, but also "events" that occurred before the recommendations and rulings were adopted by the DSB (sometimes even before the United States' request for consultations in the original dispute), as well as "events" that allegedly occurred over a period of time that overlapped the date on which the recommendations and rulings were adopted by the DSB. In this part of our Report we describe our understanding of all three categories of European Union compliance "actions", as articulated in the European Union's Compliance Communication of 1 December 2011 and further explained and explored in the parties' submissions in this dispute.

6.2.2 Actions taken after the adoption of the recommendations and rulings by the DSB

6.2.2.1 Termination of French and Spanish LA/MSF agreements ("steps" 1-3, 7-11, 14-16, 18-19, and 21-24)

6.8. Two-thirds of the European Union's declared compliance "actions" took the form of the termination of LA/MSF agreements, the majority of which were terminated after the adoption of the recommendations and rulings by the DSB.⁶² In its first written submission, the European Union presented evidence showing that the French LA/MSF agreements for the A300B, A300B2/B4, A300-600, A310, A310-300, A320, A330/A340 basic, A330-200, and A340-500/600 programmes and the Spanish LA/MSF agreements for the A300B, A300B2/B4, A300-600, A320, and A330/A340 basic had been terminated between September and November 2011.⁶³

6.9. We note that in a number of instances, the formal termination of the French and Spanish LA/MSF agreements between September and November 2011 occurred many years after the European Union maintains the loaned principal had been "fully repaid" in accordance with the subsidized terms of the relevant agreements.⁶⁴ In three cases involving the French State, the LA/MSF agreements were terminated after a settlement was reached on Airbus' "outstanding payment obligations" as of November 2011, in accordance with the subsidized terms of the

⁶⁰ Compliance Communication, para. 4. ↩

⁶¹ Compliance Communication, para. 4. The 36 "steps" identified by the European Union are described and explained in more detail below at paras. 6.8-6.42. ↩

⁶² Fourteen of the 24 termination "steps" identified in the European Union's Compliance Communication concern "actions" taken after the adoption of the recommendations and rulings by the DSB. The European Union clarified during the interim review that seven of the 24 termination "steps", pertaining to the German LA/MSF agreements for the A300B, A300B2/B4, A300-600, A310, A310-300, A320, and A330/A340 basic programmes, were evidenced by the 1997 and 1998 settlement between the German government and DaimlerChrysler Aerospace AG (DASA) (see below paras. 6.25-6.26). ↩

⁶³ Letter, French State to Airbus dated 24 October 2011 terminating A300 LA/MSF contracts, (French A300 LA/MSF contract Termination Letter), (Exhibit EU-25); Letter, Spanish State to Airbus dated 30 September 2011 terminating A300 LA/MSF contracts, (Spanish A300 LA/MSF contract Termination Letter), (Exhibit EU-31); Letter, French State to Airbus dated 24 October 2011 terminating A310 LA/MSF contract, (French A310 LA/MSF contract Termination Letter), (Exhibit EU-34); Letter, French State to Airbus dated 24 October 2011 notifying Airbus that A320 LA/MSF contract had terminated, (French A320 LA/MSF Letter notifying Airbus that contract had terminated), (Exhibit EU-36); Letter, Spanish State to Airbus dated 30 September 2011 terminating A320 contracts, (Spanish A320 contract Termination Letter), (Exhibit EU-40); Joint Letter, Spanish State and Airbus, dated 5 October 2011 terminating by common agreement LA/MSF contracts for A330/A340, (Spanish A330/A340 contract Termination Letter), (Exhibit EU-49); and Letter, French State to Airbus dated 22 November 2011 terminating, as of 8 November 2011, A330/A340 basic, A330-200, and A340-500/600 LA/MSF contracts, (French A330/A340 basic, A330-200, and A340-500/600 contract Termination Letter), (Exhibit EU-47). ↩

⁶⁴ These terminations concern French LA/MSF for the A300B/B2/B4, A300-600, A310, A310-300, and A320, and Spanish LA/MSF for the A300B/B2/B4, A300-600 and A320, which according to the European Union had all been "fully repaid" between 1994-1999. (European Union's first written submission, paras. 168-178). The European Union's submissions with respect to the repayment of LA/MSF on its subsidized terms and the relevance of this fact to its compliance claims are addressed elsewhere in this Report at paras. 6.1066-6.1074. ↩

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relevant LA/MSF agreements.⁶⁵ We also note that the formal termination of the relevant A300 and A310 LA/MSF contracts occurred four years after the end of the respective aircraft programmes⁶⁶, with the termination of French LA/MSF for the A330/A340 basic and A340-500/600 coinciding with the termination of the A340 programme.

6.10. Thus, in essence, the French and Spanish LA/MSF termination "steps" the European Union relies upon and has provided evidence of involve instances where either a LA/MSF agreement has already run its course, in accordance with its subsidized terms and conditions, or in the case of French LA/MSF for the A330/A340 basic, A340-500/600 and A330-200, the remaining outstanding repayment obligations have been settled in accordance with their subsidized terms and conditions.

6.11. The United States describes the alleged terminations as "meaningless formalities without repayment of subsidies" that "appear to be no more than acts of a ministerial, formalistic nature" having "no impact on the adverse effects" they cause – namely, "the effects that flow from the market presence of Airbus LCA that could not have been launched as and when they were (if at all) without {LA/MSF}".⁶⁷

6.12. The European Union acknowledges that the formal termination of a debt instrument that has run its course "does not by itself remove or take away the money that the debtor received under the agreement".⁶⁸ However, the European Union states that this is "beside the point", because, in its view, the operative question for the purpose of the compliance question before this Panel is whether or not the subsidy has ended.⁶⁹ In particular, the European Union maintains that the obligation in Article 7.8 of the SCM Agreement to "take appropriate steps to remove the adverse effects" or "withdraw the subsidy" applies only in relation to subsidies found to cause adverse effects in an original proceeding that continue to exist after the adoption of recommendations and rulings by the DSB. Furthermore, the European Union submits that the fact that a particular subsidy may have expired and, therefore, no longer exists, means that the European Union has procured its "withdrawal", also bringing it into compliance with its obligations under Article 7.8 of the SCM Agreement.⁷⁰ Thus, while the European Union accepts that the termination of a LA/MSF contract does not answer the question "whether or not the existence of the subsidy under WTO law has also ended"⁷¹, it nevertheless argues that termination is "an additional piece of evidence, even if not necessary or sufficient in and of itself, constituting recognition by the parties of withdrawal (or cessation of adverse effects)".⁷² Accordingly, the European Union does not accept that the termination events identified in its Compliance Communication "do not form part of the array of measures taken to comply in this dispute".⁷³

6.13. Ultimately, therefore, we do not understand the European Union to argue that the formal termination of LA/MSF agreements already repaid or settled on their subsidized terms before the end of the implementation period brings it into compliance with the adopted recommendations and rulings of the DSB. Rather, the European Union relies upon the formal termination of such LA/MSF instruments as part of the configuration of facts, which it maintains demonstrates its full implementation of the adopted recommendations and rulings of the DSB.

6.2.2.2 Ensuring that subsidies have "come to an end" ("step" 26)

6.14. One of the 36 "steps" identified in the European Union's Compliance Communication is the "bringing 'to an end'" of all of the subsidies found to cause adverse effects in the original proceeding with the exception of the French, German, Spanish and UK A380 LA/MSF measures. The United States characterizes this "step" as "a legal argument" "based on contentions that the

⁶⁵ These terminations concern French LA/MSF for the A330/A340 basic and the A330-200. (European Union's first written submission, paras. 177 and 181) ↩

⁶⁶ European Union's first written submission, paras. 168-172. ↩

⁶⁷ United States' first written submission, paras. 39, 260, and 264. ↩

⁶⁸ European Union's first written submission, para. 164 (citing United States' first written submission, para. 39). ↩

⁶⁹ European Union's first written submission, para. 164. ↩

⁷⁰ We examine the merits of both of the European Union's lines of argument below at paras. 6.794-6.1102. ↩

⁷¹ European Union's first written submission, para. 164. ↩

⁷² European Union's second written submission, para. 101. ↩

⁷³ European Union's second written submission, para. 101. ↩

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passage of time" has "resulted in the subsidies or their adverse effects fading to insignificance". Recalling that the Appellate Body has explained that "when faced with a finding covered by Article 7.8 of the SCM Agreement, 'a Member would normally not be able to abstain from taking any action on the assumption that the subsidy will expire or that the adverse effects of the subsidy will dissipate on their own'", the United States argues that the European Union is not entitled to claim that it has achieved compliance in the absence of taking any "action" because, according to the United States, the European Union has "no basis to believe that the situation here deviates from what the Appellate Body has found would normally be the case". Accordingly, the United States submits that "the purported 'bringing to an end'" of subsidies does not achieve compliance with Article 7.8.⁷⁴

6.15. The European Union clarified in its first written submission that what it meant when it referred to "bringing 'to an end'" the relevant subsidies was simply undertaking an exercise to determine whether, in the light of its own interpretation of certain findings made by the Appellate Body in the original proceeding, the ex ante "lives" of those subsidies came to an end before the end of the implementation period. The European Union engaged PricewaterhouseCoopers (PwC) to perform this assessment. Thus, in the light of the European Union's understanding of certain findings made by the Appellate Body in the original proceeding, PwC was asked to determine the period of time over which it was anticipated that certain subsidies would benefit Airbus at the time they were provided, and whether, on the basis of that time period, they were fully amortized as of 1 December 2011, using the following methodologies: (a) the anticipated repayment period under each of the LA/MSF agreements; (b) the anticipated marketing life of the subsidized model of LCA; and/or (c) the useful life of the tangible and intangible assets allegedly purchased with the relevant funding.⁷⁵

6.16. According to the European Union, the conclusions reached by PwC demonstrate that the benefit conferred through all of the challenged subsidies with the exception of the French and Spanish A340-500/600 LA/MSF measures, the French, German, Spanish, and UK A380 LA/MSF measures, and a number of the Spanish Government regional development grants, was fully amortized prior to the end of the implementation period.⁷⁶ For the European Union, this result is significant because, as already noted, the European Union argues that the obligation in Article 7.8 of the SCM Agreement to "take appropriate steps to remove the adverse effects" or "withdraw the subsidy" applies only in relation to subsidies found to cause adverse effects in an original proceeding that continue to exist after the adoption of recommendations and rulings by the DSB. Therefore, to the extent that the results produced by PwC show that the relevant subsidies did not exist at the time that the recommendations and rulings in this dispute were adopted on 1 June 2011, the European Union submits that they prove that the European Union and certain member States have no compliance obligations at all with respect to those subsidies⁷⁷ or that the European Union has "withdrawn" those subsidies for the purpose of Article 7.8 of the SCM Agreement. Furthermore, and in any case, the European Union maintains that the fact that a particular subsidy may have expired and, therefore, no longer exists by the end of the implementation period, means that the European Union has procured its withdrawal, also bringing it into compliance with its obligations under Article 7.8 of the SCM Agreement.

6.17. Thus, ultimately, the European Union's reference to "bringing 'to an end'" certain subsidies, is not a reference to any specific action undertaken with respect to subsidies or the adverse effects found to have been caused by subsidies in the original proceeding. Rather, we understand the European Union to be referring to the analysis performed by PwC on the alleged amortization of the benefit of the relevant subsidies, and the assertion, on the basis of that analysis, that the ex ante "lives" of those subsidies have "come to an end".

⁷⁴ United States' first written submission, paras. 43, 260, and 267 (quoting Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 236). ↩

⁷⁵ PricewaterhouseCoopers, "Analysis of the expected life of subsidies to Airbus conferred by Member State Financing Loans, Capital contributions and regional development grants as found in the WTO dispute DS316", 29 November 2011 and 2 July 2012, (PwC Amortization Report), (Exhibit EU-5) (BCI/HSBI). ↩

⁷⁶ European Union's first written submission, paras. 205-223. ↩

⁷⁷ European Union's first written submission, paras. 232-233 and 244; second written submission, paras. 98, 195, and fn 742; and response to Panel question No. 6. ↩

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6.2.2.3 Isolation of certain Spanish regional development grants from use in LCA activities ("step" 27)

6.18. In the light of the explanations provided by the European Union in its first written submission, we understand this "step" to have involved engaging PwC to undertake an assessment of the extent to which certain subsidized facilities owned by European Aeronautic Defence and Space Company N.V. (EADS)/Construcciones Aeronáuticas S.A. (CASA) in San Pablo, Spain, are used for the purpose of the production of Airbus civil or military aircraft.⁷⁸ The PwC report concludes that "there is no indication that the San Pablo site has been used or will be used for manufacturing, assembling or transforming civil aircraft".⁷⁹ Thus, we do not understand the European Union's reference to the "isolation of certain Spanish regional development grants" to describe any specific action undertaken after the adoption of the recommendations and rulings with respect to those subsidies. Rather, we understand the European Union to be simply referring to the analysis performed by PwC on the extent to which the San Pablo South site is used for the purpose of civil or military aircraft, with a view to substantiating its assertion that the subsidized facilities in question are not (and, indeed, have never been) used for civil aircraft purposes and, for this reason, cannot be the subject of the United States' "adverse effects" claims.

6.2.2.4 Imposition of additional fees for use of Bremen Airport runway extensions ("step" 28)

6.19. The European Union explained in its first written submission that the fee schedule for Airbus' right to use the Bremen Airport runway was revised to include the extensions with respect to which Airbus did not previously pay a fee. The European Union states that the revision took effect on 1 December 2011 and that the amount of the additional fee is proportionate to the length of the runway extension, compared to the length of the general runway.⁸⁰

6.20. The United States' claims of non-compliance do not include the Bremen Airport runway extension measure.⁸¹

6.2.2.5 Revision of the terms of the Mühlenberger Loch lease agreement ("step" 29)

6.21. The European Union asserted in its first written submission that the Mühlenberger Loch lease agreement was amended on 30 November 2011 to include a premium of EUR [***] per square metre per year (paid monthly in the amount of EUR [***] per square metre).⁸² According to the European Union, this change aligned the terms of the lease with the market so that it no longer conferred a "benefit" upon Airbus, within the meaning of Article 1.1(b) of the SCM Agreement, thereby procuring the withdrawal of the subsidy for compliance purposes.⁸³

6.22. Although initially including the Mühlenberger Loch lease agreement within the scope of its challenge to the European Union's alleged compliance, the United States subsequently explained that it had decided not to pursue "its claim with regard to this measure" for the time being, after having reviewed the explanation of the European Union's "methodology for adjusting the rental for the Mühlenberger Loch site to a market rate, which the EU provided for the first time in its first written submission".⁸⁴

6.2.2.6 Termination of the A340 programme ("step" 33)

6.23. The European Union identifies the termination of the A340 programme as one of its 36 compliance "steps". The European Union relies upon the termination of this programme to support

⁷⁸ European Union's first written submission, paras. 220-221. ↩

⁷⁹ PricewaterhouseCoopers, "Assessment of the use of the San Pablo South industrial site relating to the WTO Dispute DS316", 30 November 2011, (Exhibit EU-6) (BCI/HSBI), p. 16. ↩

⁸⁰ European Union's first written submission, paras. 194-195. ↩

⁸¹ United States' first written submission, paras. 5 and 35. ↩

⁸² European Union's first written submission, para. 192; and 14^th Amendment to Mühlenberger Loch Land Lease Agreement, 30 November 2011, (Exhibit EU-53) (BCI), section 1.1. ↩

⁸³ European Union's first written submission, para. 33. ↩

⁸⁴ United States' second written submission, para. 265. ↩

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its submission that there can no longer be any present adverse effects related to the A340.⁸⁵ We note, however, that the United States makes no claims of "serious prejudice" in relation to any market displacement or impedance, or lost sales, involving the A340 in the post-implementation period. Nevertheless, the United States asserts that the termination of the A340 programme "had nothing to do with compliance", but rather reflected the fact that the A340 was "no longer competitive and had been replaced by newer, LA/MSF-funded Airbus LCA", in particular, the A350XWB-900 and A350XWB-1000. In addition, referring to a passage from EADS Financial Statements Q3 2011, the United States argues that termination of the A340 programme actually "gave Airbus a EUR 312 million boost to its earnings as LA/MSF liabilities were cleared off its books".⁸⁶

6.24. We observe that the reason given for the termination of the A340 programme in the decision of the Airbus Shareholder Committee formally bringing the programme to an end on 19 October 2011 related to the fact that "[***]".⁸⁷ In particular, the decision of the Airbus Shareholder Committee explains that "[***]", with the members of the Shareholder Committee furthermore noting that "[***]".⁸⁸ Moreover, the European Union has explained in this proceeding that the A340 programme "fail{ed} because of its fuel-burn penalty compared to the 777."⁸⁹ Thus, it is apparent that the decision to terminate the A340 programme in October 2011 was not taken in response to the recommendations and rulings adopted by the DSB, but rather simply because of its commercial "failure".

6.2.3 Events that occurred before the adoption of the recommendations and rulings by the DSB

6.2.3.1 Payment by Airbus of outstanding LA/MSF obligations of EUR 1.7 billion ("step" 25)

6.25. The European Union's Compliance Communication describes one of its 36 alleged compliance "steps" as "{p}ayment by Airbus, other than on deliveries under previously existing contractual terms, with respect to outstanding MSF obligations in the amount of approximately EUR 1,704,775,000".⁹⁰ The United States asserts that this "step" refers to the payment made by DaimlerChrysler Aerospace AG (DASA⁹¹) to the German Federal Government pursuant to a debt settlement in 1997 and 1998. According to the United States, the same debt settlement was considered by the panel in the original proceeding.⁹²

6.26. The European Union has not responded to the United States' assertions. Neither has the European Union further expanded upon what it was referring to in its Compliance Communication when it identified the EUR 1.7 billion "payment by Airbus" as one of its 36 alleged compliance "steps". Thus, we do not understand the European Union to continue to rely upon this "step" for the purpose of rebutting the United States' claims of non-compliance in this dispute. We note, however, that during the interim review, the European Union argued that information contained in United States Exhibit USA-105 demonstrates that the 1997 and 1998 debt settlement between DaimlerChrysler Aerospace AG (DASA) and the German government resulted in the termination of the German LA/MSF agreements for the A300B, A300B2/B4, A300-600, A310, A310-300, A320, and A330/A340 basic programmes. To this extent, we understand the European Union to rely upon

⁸⁵ European Union's first written submission, paras. 209 and 1216; and second written submission, para. 1205. ↩

⁸⁶ United States' first written submission, paras. 60, 260, and 269-270 (citing EADS Financial Statements Consolidated for the nine-month period ended 30 September 2011, 9 November 2011 (EADS Financial Statements Q3 2011), (Exhibit USA-107), p. 14: "The release of the liabilities has positively affected the consolidated income statement before taxes by 192 M € in other operating income and by 120 M € in interest result."). ↩

⁸⁷ Airbus Shareholder Committee Decision Taken by Resolution in Writing, 19 October 2011, (Exhibit EU-111) (BCI). ↩

⁸⁸ Airbus Shareholder Committee Decision Taken by Resolution in Writing, 19 October 2011, (Exhibit EU-111) (BCI). ↩

⁸⁹ European Union's first written submission, para. 1108. ↩

⁹⁰ Compliance Communication, p. 3. ↩

⁹¹ The European Union explains that "DASA" stood for Deutsche Aerospace AG (from 1992), Daimler-Benz Aerospace AG (from 1995) and DaimlerChrysler Aerospace AG (from 1998). (European Union's first written submission, fn 351) ↩

⁹² United States' first written submission, paras. 40-42. ↩

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the description of the 1997 and 1998 DASA debt settlement in Exhibit USA-105 as evidence of "steps" 4-6, 12-13, 17, and 20, described in the European Union's Compliance Communication.

6.2.3.2 Share transactions and cash extractions involving subsidy recipients ("step" 30)

6.27. In its first written submission, the European Union clarified that the "subsequent share transactions and cash extractions involving subsidy recipients" referred to in its Compliance Communication were events that took place well before the adoption of the recommendations and rulings by the DSB. In particular, the European Union revealed that the alleged compliance "steps" were the following: (a) the partial privatization of Aérospatiale in 1999, the sale and issuance of EADS shares to the general public by the EADS partners in the context of the creation of EADS and its public float in 2000, the 2006 sale by British Aerospace Systems (BAE Systems) of its 20% ownership stake in Airbus SAS to EADS (as "extinction" events); and (b) two one-time removals of cash and cash equivalents by DaimlerChrysler and Sociedad Estatal de Participaciones Industriales (SEPI) from their respective subsidiaries, DASA and CASA, in the lead up to the creation of EADS in 2000 (as "extraction" events).⁹³

6.28. In the original proceeding, the European Communities argued that the same events had "extinguished" and "extracted" all of the challenged subsidies. In this compliance dispute, the European Union makes the same submission, arguing in the light of its own interpretation of what it means to comply with the terms of Article 7.8 of the SCM Agreement, that the alleged "extinction" and "extraction" of the relevant subsidies means that they have been "withdrawn" or are no longer causing present "adverse effects".

6.29. The United States recalls that the panel and Appellate Body already examined and rejected the European Union's "extraction" arguments in the original proceeding, and submits that for this reason, the European Union's "claim that such extractions were an appropriate step to withdraw those same subsidies is an effort to reargue a point the EU lost … , and is not properly part of this proceeding under Article 21.5 of the DSU".⁹⁴ Moreover, recalling that the Appellate Body had stated in the original proceeding that it did "not consider that the sales transactions and 'cash extractions' resulted in the 'withdrawal' of subsidies within the meaning of Articles 4.7 and 7.8 of the SCM Agreement", the United States submits that the "extinction" events the European Union relies upon for a second time in this compliance dispute "cannot have withdrawn the subsidies in question for purposes of Article 7.8 of the SCM Agreement".⁹⁵

6.2.3.3 Termination of A300 and A310 programmes ("steps" 31 and 32)

6.30. The A300 and A310 programmes were terminated on 31 July 2007.⁹⁶ The European Union relies upon the termination of these programmes to support its submission that there can no longer be any present adverse effects related to the A300 and A310.⁹⁷ We note, however, that the United States makes no claims of "serious prejudice" in relation to any market displacement or impedance, or lost sales, involving the A300 and A310. Nevertheless, the United States asserts that the termination of the A300 and A310 programmes "had nothing to do with compliance", but rather reflected the fact that the "terminated models were no longer competitive and had been replaced by newer, LA/MSF-funded Airbus LCA", in particular, the A330, A350XWB-800 and "sometimes" the A350XWB-900.⁹⁸

6.31. Unlike the termination of the A340 programme, the European Union has not submitted any specific evidence attesting to a decision to terminate the A300 and A310 programmes on the part of Airbus' management, relying instead on the contents of an Airbus press release from March 2006. This document quotes the Airbus then-President and Chief Executive Officer (CEO), Gustav Humbert, as having stated:

⁹³ European Union's first written submission, paras. 197-354; and second written submission, paras. 117-268. ↩

⁹⁴ United States' first written submission, para. 46. ↩

⁹⁵ United States' first written submission, para. 47. ↩

⁹⁶ Airbus Press Release, "A300, A310 Final Assembly To Be Completed by July 2007", 7 March 2006, (Exhibit EU-116); French A300 LA/MSF contract Termination Letter, (Exhibit EU-25); and French A310 LA/MSF contract Termination Letter, (Exhibit EU-34). ↩

⁹⁷ European Union's second written submission, para. 1205. ↩

⁹⁸ United States' first written submission, paras. 260 and 269-270. ↩

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It is in Airbus' best interest to optimise the use of its resources at this time. We are implementing a major production ramp-up across our business as the A300/A310 programme nears completion. This is in response to growing demand from our customers for the newer Airbus products like the A321, the A330/A340 family and the new A350 aircraft, that cover or even go beyond the market segment of our original aircraft programme.⁹⁹

6.32. In our view, this statement makes clear that, as with the termination of the A340 programme, the decision to terminate the A300 and A310 programmes was solely motivated by Airbus' commercial interests and, therefore, unrelated to the WTO dispute concerning the alleged subsidization of Airbus that was ongoing at the time between the United States and the European Union and certain member States.

6.2.4 Events and alleged events that overlapped the adoption of the recommendations and rulings by the DSB

6.2.4.1 Completed deliveries and performance of sales contracts ("step" 34)

6.33. Another alleged compliance "step" identified in the European Union's Compliance Communication is the completion of deliveries of "relevant LCA to markets for which displacement was found" in the original proceeding, and the completion of performance under sales contracts pertaining to orders for LCA found to constitute "lost sales" in the original proceeding.

6.34. The European Union explained in its written submissions that what it meant when it referred to the completion of performance of a sales contract, was the delivery of an LCA to a customer in accordance with the terms of the order found to constitute a "lost sale" causing serious prejudice to the United States' interests in the original proceeding. The European Union maintains that by delivering the LCA to its customer in this way, "the {lost} sales are … completed and cease to exist in the present".¹⁰⁰ For the European Union, this implies that the "United States has failed to demonstrate that significant lost sales … , as found in the original proceedings, have not been removed"¹⁰¹ and, therefore, that the European Union and certain member States have not achieved compliance with respect to those specific transactions. In other words, the European Union submits that the delivery of an LCA under a sales contract that was the subject of a finding of "lost sales" in the original proceeding brings that "lost sale" to an end and, therefore, also ends the "serious prejudice" to the United States' interests.

6.35. The United States submits that the European Union's reliance on "completed deliveries" and "completed performance of sales contracts" suggests that "the EU views the very indicia of adverse effects (e.g. the deliveries in country markets that served as the basis for the Appellate Body's displacement findings) as something that it could cite to assert compliance". The United States argues that this is "untenable" because it "seems to ask the WTO to accept that the occurrence of adverse effects means that the EU has complied in this case".¹⁰²

6.2.4.2 Post-launch investments in Airbus A320 and A330 programmes ("step" 35)

6.36. The European Union revealed in its first written submission that the post-launch investments identified in its Compliance Communication as the thirty-fifth compliance "step" were the, allegedly non-subsidized, investments Airbus has made into the A320 and A330 families of LCA since they were launched in, respectively, 1984 and 1987. In particular, the European Union explains that since the A320 and A330 were launched, Airbus has invested, respective to these two LCA, at least EUR [***] billion and EUR [***] billion into the following activities: (a) "Continuing Development"; (b) "Continuing Support"; (c) the design and manufacture of three non-subsidized variants (the A321, A319 and A318) between 1988 and 1999; and (d) the setting-up of three new A320 final assembly lines (FALs) in Hamburg (Germany) between 1993 and 2005, and one in

⁹⁹ Airbus Press Release, "A300, A310 Final Assembly To Be Completed by July 2007", 7 March 2006, (Exhibit EU-116). ↩

¹⁰⁰ European Union's second written submission, para. 1212. ↩

¹⁰¹ European Union's first written submission, paras. 805-816, 1034-1042, and 1218-1219; and second written submission, para. 1212. ↩

¹⁰² United States' first written submission, para. 271. ↩

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Tianjin (China) in 2008. The European Union maintains that the value of these investments "dwarf{s}" the initial development cost of the A320 and A330/A340 programmes, and that it has resulted in significant technological advancements, enhanced production rates, improved lead-times and lower costs of production.¹⁰³

6.37. According to the European Union, these facts demonstrate that the "genuine and substantial" cause of the ongoing market presence of the A320 and A330 families is not the challenged LA/MSF subsidies, but rather the above-mentioned, allegedly non-subsidized, investments. Thus, the European Union relies upon the post-launch investments in the A320 and A330 as events which it asserts have diluted the causal connection between the challenged LA/MSF subsidies and the present-day market presence of the A320 and A330.

6.38. For the United States, however, the European Union's reliance on Airbus' post-launch investments is "not at all a step to remove adverse effects, but an attempt by the EU to re-argue causation issues that it lost in the underlying proceeding". In particular, the United States recalls that the original panel and Appellate Body found that the challenged LA/MSF subsidies were a "genuine and substantial" cause of the market presence of the A320 and A330 in the 2000 to 2006 period, that is, after most of the relevant post-launch investments had been allegedly undertaken. Thus, the United States maintains that Airbus' post-launch investments "cannot attenuate the adverse effects caused through the presence of {the A320 and A330} on the market".¹⁰⁴

6.2.4.3 "Attenuation" of "any causal link" through "further intervening events" ("step" 36)

6.39. Although the European Union does not explicitly refer to any particular "intervening events" in its Compliance Communication, in its written submissions the European Union identifies a number of important changes to the markets into which the different Airbus and Boeing LCA are sold, the "passage of time", and a number of non-attribution factors allegedly not related to subsidization, as events that have had the effect of attenuating the causal connection between the challenged LA/MSF subsidies and any present-day effects, such that those subsidies can no longer be found to be a "genuine and substantial" cause of the instances of serious prejudice that the United States continues to claim.¹⁰⁵

6.40. According to the United States, the European Union's "attenuation" arguments do not amount to compliance "actions in even the most superficial sense, but reflect EU inaction and/or legal argumentation based on contentions that the passage of time and other intervening events have resulted in the subsidies or their adverse effects fading to insignificance". The United States submits that "attenuation of a causal link" is not something that a Member does, but rather "a legal conclusion that a Panel reaches based on the evidence as to what the responding Member has done". In the view of the United States, because the European Union's alleged compliance "steps" have not withdrawn the subsidies or removed the adverse effects, they "cannot have attenuated the causal link found by the original Panel and the Appellate Body".¹⁰⁶

6.2.5 Conclusion

6.41. Overall, the United States submits that the "steps" described in the European Union's Compliance Communication "can be characterized as an 'inaction plan'" that "did essentially nothing to move toward WTO compliance".¹⁰⁷ Indeed, according to the United States, the European Union and certain member States have only "worsen{ed} … the compliance situation" by

¹⁰³ European Union's first written submission, paras. 731-798 and 876-924; and second written submission, paras. 743-821. ↩

¹⁰⁴ United States' first written submission, para. 272; and second written submission, paras. 503 and 505. ↩

¹⁰⁵ See e.g. European Union's first written submission, paras. 39, 486, 493, 500, 507, 511, 628, and 644-645; and second written submission, paras. 11, 502, 677, 1269, 1282, 1330, 1347, 1373, 1388, and 1585. ↩

¹⁰⁶ United States' first written submission, paras. 260 and 274. ↩

¹⁰⁷ United States' first written submission, paras. 242 and 257. ↩

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continuing to provide Airbus with "billions of dollars" of allegedly subsidized LA/MSF for the A350XWB, which the United States claims are causing "additional adverse effects".¹⁰⁸

6.42. In our view, only two of the 36 "steps" notified by the European Union can be characterized as "actions" relating to the degree of ongoing subsidization of Airbus LCA – namely, "step" 28, the imposition of additional fees for the use of the Bremen Airport runway extension, and "step" 29, revision of the terms of the Mühlenberger Loch lease agreement.¹⁰⁹ On the other hand, the remaining 34 alleged compliance "steps" are not "actions" relating to the ongoing (or even past) subsidization of Airbus LCA, but rather merely the assertion of facts or presentation of arguments for the purpose of supporting the European Union's theory of compliance based on the following main contentions: (a) the adopted rulings and recommendations give rise to no compliance obligation at all, under the terms of Article 7.8 of the SCM Agreement, with respect to expired subsidies; (b) an expired subsidy means that it has been "withdrawn" for the purpose of Article 7.8 of the SCM Agreement; (c) an expired subsidy cannot cause adverse effects in the context of a proceeding initiated under Article 21.5 of the DSU; and (d) the passage of time, and events that have taken place over the passage of time, have diluted the causal link established in the original proceeding such that the challenged subsidies are no longer a "genuine and substantial" cause of adverse effects in the post-implementation period. Thus, ultimately, apart from the "actions" identified in "steps" 28 and 29, the European Union's affirmation of compliance is not grounded in any specific conduct on the part of the European Union and certain member States with respect to the subsidies provided to Airbus or the adverse effects those subsidies were found to have caused in the original proceeding. Fundamentally, the European Union's view that it has achieved full compliance is, rather, based on its understanding of the scope and nature of the obligations arising out of the adopted recommendations and rulings as well as its own interpretation of the applicable law and legal provisions, including Article 7.8 of the SCM Agreement.

6.43. With these observations in mind, we now proceed to examine the merits of the United States' non-compliance complaint.

6.3 Whether the United States has presented a prima facie case

6.44. The European Union maintains that the United States has failed to satisfy its burden of presenting a prima facie case of non-compliance and, therefore, that the entirety of the United States' complaint must be rejected.¹¹⁰

6.45. The European Union submits that in order to make a prima facie case of non-compliance in this dispute, the United States was required to "make a claim, assert fact, adduce evidence and develop argument"¹¹¹ in respect of each of its claims of WTO-inconsistency in its first written submission. However, according to the European Union, the United States' first written submission is "so deficient and so bereft of substance" that it falls short of this standard.¹¹² In particular, the European Union argues that the United States' first written submission not only neglected to address the need to establish the existence of subsidies after the end of the implementation period, taking into account the Appellate Body's guidance on inter alia the extent to which the "life" of a subsidy will come to an end¹¹³, but it also failed to speak to the need to show that any existing subsidies are a "genuine and substantial" cause of present adverse effects, taking into account inter alia the properly determined "lives" of subsidies, an appropriate reference period and correctly defined product markets.¹¹⁴ The European Union maintains that the United States' failure

¹⁰⁸ United States' first written submission, paras. 1-16 and 240-246. ↩

¹⁰⁹ As already noted, the United States includes neither of these two measures in its claims of non-compliance against the European Union and certain member States in this dispute. ↩

¹¹⁰ European Union's first written submission, paras. 39-55; second written submission, paras. 3 and 12-17; and response to Panel question No. 1. ↩

¹¹¹ European Union's first written submission, paras. 9-12; and second written submission, para. 12. ↩

¹¹² European Union's first written submission, paras. 44-48 and 51-52. ↩

¹¹³ Specifically, the European Union submits that the United States' first written submission should have taken into account: "{R}epayments of principal and interest; modifications aligning measures with a market benchmark; amortisation of benefit; extinction; and extraction". (European Union's first written submission, paras. 36, 165, 198-199, 228, 246, and 293; and second written submission, para. 75) ↩

¹¹⁴ In particular, the European Union argues that the United States' first written submission should have taken into account: "{A} properly identified present reference period starting no sooner than the end of the implementation period; properly defined present product markets; properly delineated present geographic markets; properly defined temporal markets; a reasonable estimate of the present amounts of the alleged ↩

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to address these matters in its first written submission is "fatal" to the United States' complaint, "a matter {that} cannot be rectified without infringing {the European Union's} due process rights".¹¹⁵ Consequently, the European Union submits that, as a matter of law, the Panel must dismiss the entirety of the United States' claims of non-compliance.¹¹⁶

6.46. The United States rejects the European Union's contentions¹¹⁷, arguing that the European Union's characterization of what is required to discharge its prima facie burden of proof seeks to force the United States into bearing the burdens of both establishing the European Union's non-compliance and addressing in advance the arguments that the European Union raised in its first written submission to attempt to establish compliance.¹¹⁸ According to the United States, the burden that falls upon a complaining Member in an Article 21.5 compliance dispute requires it to advance a prima facie case that measures taken to comply do not exist or, if they do exist, that such measures are inconsistent with the covered agreements. In the specific context of Article 7.8 of the SCM Agreement, the United States argues that the burden of demonstrating that any declared measures taken to comply do not exist will have been satisfied if the complaining Member shows that those measures do not withdraw the subsidy or remove its adverse effects. Similarly, the United States submits that the burden of establishing that declared measures taken to comply are inconsistent with the covered agreements will have been met by a complaining Member if it demonstrates that those measures are insufficient to bring the implementing Member fully into conformity with its obligations under Article 7.8.¹¹⁹

6.47. As regards the "lengthy list" of matters the European Union argues the United States was required to address in its first written submission, the United States maintains that the issues the European Union identifies "might provide defenses to a claim under Article 5 of the SCM Agreement, in circumstances not present in this dispute", or "represent novel legal theories … that find no support in the SCM Agreement or WTO jurisprudence", or even be "potentially, but not necessarily, relevant to a finding under Article 5".¹²⁰ However, according to the United States, they have "little to do" with what is required to make out a prima facie case of non-compliance with Article 7.8 of the SCM Agreement.

6.48. We do not understand there to be any disagreement between the parties that it is for the United States to establish the European Union's non-compliance in this dispute, and that it is for the European Union to rebut any prima facie case advanced by the United States, including by raising and substantiating its own affirmative defences. Not surprisingly, however, when it comes to understanding exactly what the United States must demonstrate in order to discharge its prima facie burden of proof, the parties have presented diverging positions, in large part, due to the different views expressed about the scope of this compliance dispute, how the notion of compliance should be given effect under the terms of Article 7.8 of the SCM Agreement and the substance and implications of the legal and factual findings made by the panel and the Appellate Body in the original proceeding. For instance, one of the main reasons the European Union advances to support its contentions about the United States' failure to make a prima facie case is that the United States made no attempt in its first written submission to establish that subsidies exist in the post-implementation period. Yet, in order to accept that the United States' submissions were deficient in this regard, we must first of all be satisfied that the United States was legally required to make such a demonstration. According to the United States, it was under no such obligation. Similarly, the European Union maintains that the United States' causation arguments should have taken into account inter alia the "present amounts of alleged subsidies". Again, however, the extent to which the United States was required to do so in order to establish a prima facie case is a matter in dispute between the parties.

6.49. Ultimately, therefore, the merits of the European Union's submission that it has "no case to answer" in this proceeding rests in large part upon the correctness of its own legal theory of

subsidies, taking into account withdrawal of the subsidy through the elimination of any financial contribution and … the alignment with a market benchmark, amortisation, extinction or extraction; and intervening events (non-attribution factors)". (European Union's first written submission, paras. 37-39)

¹¹⁵ European Union's first written submission, para. 54. ↩

¹¹⁶ European Union's first written submission, paras. 44, 51-55, and 200. ↩

¹¹⁷ United States' second written submission, paras. 32-39. ↩

¹¹⁸ United States' second written submission, para. 37. ↩

¹¹⁹ United States' second written submission, para. 33. ↩

¹²⁰ United States' second written submission, paras. 38-39. ↩

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compliance and understanding of the scope of this dispute, its own interpretation of the findings made in the original proceeding and its own views about the meaning and probative value of the facts and evidence the parties have, or allegedly should have, submitted. It follows that in order to address the European Union's allegations concerning the United States' failure to make a prima facie case, we must assess the merits of the parties' arguments with respect to all of these matters.

6.50. Finally, we recall that as we have previously noted¹²¹, it is well established that a panel must not make a "prima facie case" for a party who bears the burden of proof in relation to a claim or a defence.¹²² However, this does not mean that a panel must make a specific finding that a complainant has met its burden to establish a prima facie case in respect of a particular claim, or that a respondent has effectively rebutted a prima facie case.¹²³ Similarly, a panel is not required to make a finding as to whether a complainant has established a prima facie case before it examines the respondent's arguments and evidence.¹²⁴ Indeed, WTO dispute settlement proceedings do not involve any particular temporal sequence of proof. Both parties will adduce evidence in support of their own arguments or to rebut the arguments made by the other at various stages of a dispute, sometimes simultaneously, throughout the entirety of a proceeding.

6.51. Given the voluminous submissions and complex issues raised in this dispute, we have sought to conduct our evaluation of the merits of the parties' positions on the basis of a full appreciation of all of their arguments and the evidence adduced in support of those arguments throughout the course of this proceeding. To this end, three sets of questions were posed to the parties over a 12-month period following the substantive meeting with the parties and third parties in order to clarify their submissions and generally explore the legal and factual matters raised in this proceeding. We have also carefully assessed and responded to numerous requests for procedural rulings concerning the acceptability of certain pieces of evidence and arguments submitted for consideration at various stages. Needless to say, however, in performing our "objective assessment of the matter", we have at all times been guided by the basic requirement of due process that each party be afforded a meaningful opportunity to comment on the arguments and evidence adduced by the other party. We have also been mindful of the fact that this due process interest must be balanced against other interests, including systemic interests such as those reflected in Articles 3.3 and 12.2 of the DSU¹²⁵ and that, ultimately, panels are best situated to determine how this balance should be struck in any given proceeding, provided that they are vigilant in the protection of due process and remain within the bounds of their duties under Article 11 of the DSU.¹²⁶

6.52. We now turn to review the substance of the United States' complaint of non-compliance, starting by first of all addressing the parties' arguments concerning the scope of this compliance proceeding.

6.4 The scope of this compliance proceeding

6.4.1 The A350XWB LA/MSF measures

6.4.1.1 Introduction

6.53. We recall that in the original proceeding, the United States challenged the alleged provision of subsidized LA/MSF by the Airbus governments for the purpose of the Airbus A350 aircraft design proposed between 2004-2006 (Original A350) programme launched in December 2004. Although the original panel found that, by the time that its terms of reference had been set, the Airbus governments had committed to support the Original A350 through the provision of LA/MSF, the

¹²¹ See Panel's Procedural Ruling of 12 June 2013 in relation to the European Union's requests of 28 May 2013 concerning: (i) the United States' Full HSBI Version Appendix and HSBI Exhibits submitted in conjunction with its answers to the Panel's first set of questions; and (ii) the United States' alleged violations of the BCI/HSBI Procedures. (Annex F-2) ↩

¹²² Appellate Body Reports, Japan – Agricultural Products II, para. 129; US – Shrimp (Thailand)/US – Customs Bond Directive, para. 300; US – Wool Shirts and Blouses, p. 14; and EC – Hormones, para. 104. ↩

¹²³ Appellate Body Report, Thailand – H-Beams, para. 134. ↩

¹²⁴ Appellate Body Report, India – Quantitative Restrictions, para. 142. ↩

¹²⁵ Appellate Body Report, Thailand – Cigarettes (Philippines), para. 150. ↩

¹²⁶ Appellate Body Report, Thailand – Cigarettes (Philippines), para. 150. ↩

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precise details and content of that LA/MSF had yet to be settled and remained subject to negotiation. Accordingly, the panel concluded that the United States had failed to demonstrate that a commitment to provide Airbus with LA/MSF for the Original A350 on the specific terms and conditions asserted by the United States actually existed, as a matter of fact, by the time of the panel's establishment on 20 July 2005.¹²⁷ In other words, the United States failed to establish the existence, as of July 2005, of a LA/MSF commitment measure for the Original A350 constituting a specific subsidy within the meaning of Articles 1 and 2 of the SCM Agreement. As LA/MSF for the A350XWB did not exist during the relevant time, no findings were made and no specific DSB recommendations and rulings were adopted in the original proceeding with respect to any A350XWB LA/MSF measures.

6.54. Airbus abandoned the Original A350 programme less than two years after its launch, with key Airbus clients and industry analysts questioning its ability to compete effectively with the lighter, more fuel-efficient, Boeing 787.¹²⁸ Airbus publicly unveiled a "concept" for a substantially redesigned version of the Original A350 – the A350XWB – at the Farnborough Air Show in July 2006¹²⁹, formally launching it on 1 December 2006.¹³⁰

6.55. As they did with respect to prior models of Airbus LCA, the governments of France, Germany, Spain, and the United Kingdom supported the A350XWB programme with LA/MSF. After publicly signalling their support for the new programme in July 2006¹³¹, the Airbus governments formally entered into negotiations with Airbus for LA/MSF in late 2008, individually agreeing on its terms on different dates between [***].¹³²

6.56. The United States claims that the new A350XWB LA/MSF measures are subsidies, which either alone or in conjunction with the pre-A350XWB LA/MSF subsidies found to cause adverse effects in the original proceeding, continue to cause adverse effects today, thereby evidencing the relevant European Union member States' failure to comply with the recommendations and rulings adopted by the DSB. Accordingly, and despite not being identified as a "measure taken to comply" in the European Union's Compliance Communication, the United States maintains that the A350XWB LA/MSF measures fall within the scope of our terms of reference in this compliance dispute. We examine the merits of the United States' position in the following analysis.

¹²⁷ Panel Report, EC and certain member States – Large Civil Aircraft, paras. 7.296-7.314. ↩

¹²⁸ See e.g. Dominic Gates, "Airplane Kingpins tell Airbus: Overhaul A350", The Seattle Times, 29 March 2006, (Exhibit USA-24); "Time for a new, improved model: Airbus gets to work on its medium-sized aircraft, but deeper problems remain", The Economist, 20 July 2006, (Exhibit USA-28); "Airbus to decide by July on A350 design" Seattle Post - Intel, 16 May 2006, (Exhibit USA-356); and Gordon McConnell, Michel Lacabanne, Chantal Fualdes, François Cerbelaud and Burkhard Domke, A350XWB Chief Engineering and Future Projects Office, Airbus, "A350XWB Chief Engineering Statement", 3 July 2012 (A350XWB Chief Engineering Statement), (Exhibit EU-18) (BCI/HSBI), para. 6. ↩

¹²⁹ See e.g. Ameet Sachdev, "Airbus redesigns its strategy for long haul: A350 line to carry bulk of the load", Chicago Tribune, 18 July 2006, (Exhibit EU-99); Goldman Sachs Investment Analysis, A350: Not an option but essential for Airbus' future, in our view, 21 November 2006, pp. 20-22, (Exhibit USA-30), p. 20; and UK House of Commons Hansard, written answers for 24 July 2006, (Original Exhibit US-141), (Exhibit USA-31). ↩

¹³⁰ Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.296; Dominic Gates, "Airplane Kingpins tell Airbus: Overhaul A350", The Seattle Times, 29 March 2006, (Exhibit USA-24); EADS Press Release, "A350 XWB launch: EADS Gives Go Ahead for Airbus to Launch the A350 XWB", 1 December 2006, (Exhibit USA-569); "Time for a new, improved model: Airbus gets to work on its medium-sized aircraft, but deeper problems remain", The Economist, 20 July 2006, (Exhibit USA-28); "Airbus to decide by July on A350 design" Seattle Post - Intel, 16 May 2006, (Exhibit USA-356); A350XWB Chief Engineering Statement, (Exhibit EU-18) (BCI/HSBI), para. 6; and European Union's first written submission, para. 1113. ↩

¹³¹ UK House of Commons Hansard, written answers for 24 July 2006, (Original Exhibit US-141), (Exhibit USA-31); UK House of Commons Hansard Debates, Column 1692W, Colloquy of Mr. Gordon Prentice and Minister for Industry and the Regions Margaret Hodge, 23 October 2006, (Exhibit USA-35); UK House of Commons Hansard Debates, Column 82W-83W, Colloquy of Mr. Patrick Mercer and Minister for Industry and the Regions Margaret Hodge, 30 October 2006, (Exhibit USA-36); "Airbus to decide by July on A350 design" Seattle Post - Intel, 16 May 2006, (Exhibit USA-356); Katrin Bennhold, "Airbus looks likely to seek state assistance", International Herald Tribune, 18 June, 2006, (Exhibit USA-357); and Hans Peter Ring, Chief Financial Officer, "Safe Harbor Statement", "Roadmap", and "Recent Press Quotes", slides 2, 11 and 12 from "A New Base for the Future", EADS presentation, Global Investor Forum, 19-20 October 2006, (Exhibit USA-358). ↩

¹³² Statement by Tom Williams, Executive Vice President, Programmes, Airbus SAS, 17 May 2013, (Exhibit EU-354) (BCI), para. 3; and European Union's response to Panel question No. 101. ↩

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6.4.1.2 Arguments of the United States

6.57. The United States argues that the alleged A350XWB LA/MSF subsidies fall within the scope of this compliance proceeding on the basis of three related grounds. The first, and we believe principal, line of argument advanced by the United States draws from the case law developed by panels and the Appellate Body concerning the question whether a measure that is not a declared "measure taken to comply" (i.e. an "undeclared" measure) may fall within a compliance panel's terms of reference. The United States submits that the relevant case law in this area establishes that an "undeclared" measure may properly fall within the scope of a compliance panel's terms of reference when it has a particularly close relationship (i.e. a "close nexus") to the original measures subject to DSB recommendations and rulings and the declared "measures taken to comply", based on a consideration of the nature, effects and timing of those measures and the factual and legal background against which any compliance measures are adopted.¹³³ The United States maintains that an examination of all of these factors confirms that, in the present instance, a "close nexus" exists between the alleged A350XWB LA/MSF subsidies, the LA/MSF subsidies found to cause adverse effects in the original proceeding and the European Union's alleged compliance measures, implying that the A350XWB LA/MSF measures must fall within the scope of this compliance proceeding.

6.58. In terms of the nature of the A350XWB LA/MSF measures, the United States argues that they have essentially the same nature as the LA/MSF measures found to cause adverse effects in the original proceeding because both sets of LA/MSF measures are: (a) loans; (b) concluded between the same parties; (c) with the same core success-dependent, levy-based, back-loaded and unsecured repayment terms; and (d) for the purpose of developing new models of LCA to compete against Boeing (and, specifically, in the case of A350XWB LA/MSF, a twin-aisle LCA product like A300, A310, A330 and A340 LA/MSF).¹³⁴

6.59. The United States recalls that the Appellate Body has examined the effects of an undeclared measure in the context of a close nexus analysis by considering whether it "undermine{s}"¹³⁵ or "potentially negate{s}"¹³⁶ a valid compliance measure¹³⁷, and whether it "may have an effect on … whether the original measure, which was found to be inconsistent … has been brought into conformity".¹³⁸ The United States submits that applying this standard to the alleged A350XWB LA/MSF subsidies leads to the conclusion that their effects are such that they should be brought into the scope of this compliance proceeding. In particular, the United States argues that the alleged A350XWB LA/MSF subsidies have similar, or even identical, effects to the LA/MSF subsidies found to cause adverse effects in the original proceeding. The United States asserts in this regard that A350XWB LA/MSF enabled Airbus to launch the A350XWB as a new model of LCA intended to "fill the holes in the product line created by the A340's inability to compete with the 777 and the aging of A330 technology".¹³⁹ In other words, according to the United States, A350XWB LA/MSF was provided for the purpose of bringing one Airbus LCA product into existence with a view to replacing another subsidized Airbus LCA product in the same twin-aisle segment in which the United States was found to have suffered adverse effects in the original proceeding.¹⁴⁰ Thus, while denying that the measures declared in the European Union's Compliance Communication moved the European Union and relevant member States closer to achieving compliance, the United States considers that these effects of A350XWB LA/MSF would "directly negate" any valid compliance measures.¹⁴¹

¹³³ United States' first written submission, paras. 4, 18, 30, and 146 (quoting Appellate Body Report, US – Softwood Lumber IV (Article 21.5 – Canada), para. 77 and citing Appellate Body Report, US – Zeroing (EC) (Article 21.5 – EC), para. 203); and second written submission, paras. 73 and 84. ↩

¹³⁴ United States' first written submission, paras. 140, 143-144, and 147; and second written submission, paras. 85 and 89-101. ↩

¹³⁵ United States' first written submission, para. 148. ↩

¹³⁶ United States' first written submission, para. 149. ↩

¹³⁷ United States' first written submission, para. 148 (heading 2), and para. 149 (citing Appellate Body Report, US – Zeroing (EC) (Article 21.5 – EC), para. 251). ↩

¹³⁸ United States' first written submission, para. 149. ↩

¹³⁹ United States' first written submission, para. 148. ↩

¹⁴⁰ United States' second written submission, para. 61. ↩

¹⁴¹ United States' first written submission, paras. 148 and 151; and second written submission, para. 86. ↩

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6.60. The United States submits that a consideration of the timing of the relevant measures and the adopted recommendations and rulings "cements the conclusion" that a close nexus exists between them and, therefore, that the A350XWB LA/MSF measures fall within the scope of this compliance proceeding.¹⁴² In particular, drawing from the case law in this area, the United States recalls that it has been previously held that measures pre-dating the DSB's adoption of recommendations and rulings, such as the A350XWB LA/MSF measures, may properly fall within the scope of a compliance proceeding.¹⁴³ The United States notes in this regard that the Appellate Body affirmed in US – Zeroing (EC) (Article 21.5 – EC) that a close nexus existed even when the "undeclared" measure was enacted one to two years before the DSB's recommendations and rulings.¹⁴⁴ The United States asserts that the timing of the negotiation, grant and disbursement of the A350XWB LA/MSF measures overlaps with the issuance of the original panel and Appellate Body reports, their adoption by the DSB and the European Union's declared compliance measures.¹⁴⁵ Thus, the United States argues that the "evolution of LA/MSF for the A350XWB has moved in tandem with this dispute" as well as the European Union's efforts to comply with the DSB recommendations and rulings, revealing the existence of a close relationship between the "most recent LA/MSF measures and the subsidized LA/MSF" measures found to cause adverse effects in the original proceeding.¹⁴⁶

6.61. Finally, the United States argues that the close relationship existing between the alleged A350XWB LA/MSF subsidies, the LA/MSF subsidies found to cause adverse effects in the original proceeding and the European Union's alleged compliance measures is also apparent when the factual and legal background to the A350XWB LA/MSF measures is considered. In this regard, the United States points to, for example, "the more than 40 years of history of EU member State funding for all Airbus civil aircraft models" in the form of LA/MSF, the fact that EADS' financial statements account for A350XWB LA/MSF in the same way as all prior LA/MSF, and a statement in the preamble to the Spanish A350XWB LA/MSF contract noting the existence of a "system of refundable advances" that has been used to fund all previous Airbus LCA programmes.¹⁴⁷

6.62. The second line of argument the United States advances to support its contention that the alleged A350XWB LA/MSF subsidies fall within the scope of this proceeding is that they replace the subsidies found to cause adverse effects in the original proceeding in respect of the same twin-aisle segment of the market for LCA. The United States recalls in this regard that the Appellate Body has found that "a Member would not comply with the obligation in Article 7.8 to withdraw the subsidy if it leaves an actionable subsidy in place, either entirely or partially, or replaces that subsidy with another actionable subsidy".¹⁴⁸ To this extent, the United States argues that the A350XWB LA/MSF measures would allow the European Union to "evade its obligations by replacing one WTO-inconsistent measure with another".¹⁴⁹

6.63. Lastly, the United States maintains that the A350XWB LA/MSF measures should be considered in this compliance proceeding because excluding them would allow the European Union to circumvent its obligation to comply with the DSB recommendations and rulings with respect to LA/MSF for the A300, A310, A330 and A340. The United States argues that a measure that would allow a Member to circumvent the recommendations and rulings of the DSB may also fall within the scope of a compliance proceeding regardless of its nature and/or timing. Thus, according to the United States, LA/MSF for the A350XWB needs to be evaluated within the terms of reference of

¹⁴² United States' first written submission, para. 154. ↩

¹⁴³ United States' first written submission, para. 153 (citing Appellate Body Report, US – Zeroing (EC) (Article 21.5 – EC), paras. 234-235). ↩

¹⁴⁴ United States' second written submission, para. 110 (citing Appellate Body Report, US – Zeroing (EC) (Article 21.5 – EC), paras. 234-235). ↩

¹⁴⁵ United States' first written submission, paras. 141 and 154; and second written submission, paras. 87 and 106-112. ↩

¹⁴⁶ United States' first written submission, para. 154. ↩

¹⁴⁷ United States' first written submission, paras. 155-156 (quoting Real Decreto 1666/2009, de 6 noviembre, por el que se regula la concesión directa de anticipos reembolsables a la filial española de Airbus SAS denominada Airbus Operations S.L para su participación en el programa de desarrollo de la nueva familia de aviones Airbus A350XWB, Boletín Oficial del Estado, 9 November 2009, (Exhibit USA-46); and citing UK Department for Business, Innovation and Skills, "The UK Strategic Investment Fund: Interim Report", October 2009, p. 15, (Exhibit USA-43); and EADS Financial Statements, 2010, (Exhibit USA-6), p. 63). ↩

¹⁴⁸ United States' first written submission, paras. 32 and 158-162 (citing Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), paras. 237-238); and second written submission, paras. 115-118. ↩

¹⁴⁹ United States' first written submission, paras. 161-162. ↩

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this dispute to properly determine if the European Union and relevant member States have complied. Otherwise, the distinction between the A350XWB and other models of subsidized Airbus twin-aisle LCA would provide the European Union with a mechanism to circumvent compliance with respect to the DSB recommendations and rulings concerning the A330 and A340 and their derivatives.¹⁵⁰

6.4.1.3 Arguments of the European Union

6.64. The European Union submits that "implicit" in every Appellate Body report that has considered whether an undeclared measure may be properly determined to fall within the scope of a compliance proceeding is an "understanding" that any such measures "should be limited" to instances of the application of the same "overarching measure" at issue in the original proceeding and before the compliance panel.¹⁵¹ The European Union notes that the United States failed to allege the existence of an "overarching measure" in its request for the establishment of the compliance panel, and submits that, for this reason alone, the A350XWB LA/MSF measures must be found to fall outside of the scope of this proceeding.¹⁵² In any case, the European Union argues that the A350XWB LA/MSF measures and the pre-A350XWB LA/MSF measures at issue in the original proceeding did not result from the application of an "overarching measure". In this respect, the European Union maintains that the United States' arguments purporting to demonstrate the existence of a close nexus between these measures rest on the same submissions concerning the alleged existence of the LA/MSF Programme that were rejected by the panel in the original proceeding.¹⁵³ The European Union argues that, although the Appellate Body declared the original panel's findings with respect to the existence of the alleged LA/MSF Programme to be moot and of no legal effect, the reasoning underlying the panel's factual determinations is nevertheless instructive.¹⁵⁴ Accordingly, the European Union asks the Panel to "remain consistent with the findings of fact that it made sitting as the original panel in the original proceedings"¹⁵⁵ and conclude that the A350XWB LA/MSF measures are outside of the scope of this compliance dispute because no "overarching measure" was found to exist with respect to the pre-A350XWB LA/MSF measures in the original proceeding.¹⁵⁶

6.65. The European Union argues that an examination of the relevant measures' nature, effects and timing, within the context of the application of the close nexus test, "serves to confirm" this conclusion.¹⁵⁷

6.66. As to the nature of the relevant measures, the European Union argues that LA/MSF for the A350XWB targets a different product to the LA/MSF measures at issue in the original proceeding.¹⁵⁸ Moreover, even leaving aside the question whether the A350XWB is a similar product to prior Airbus twin-aisle LCA, the European Union argues that similar product coverage and country coverage, alone, are not enough to establish the requisite close nexus.¹⁵⁹ The European Union furthermore submits that the nature of A350XWB LA/MSF is significantly different from the nature of previous LA/MSF because it was provided more than two years after the first order was received for the A350XWB; whereas LA/MSF provided for other Airbus aircraft was "generally" entered into much closer to the launch of the relevant LCA.¹⁶⁰ Similarly, the European Union notes that, unlike the LA/MSF provided for certain older models of Airbus LCA, LA/MSF for the A350XWB was not provided pursuant to any intergovernmental agreement related

¹⁵⁰ United States' first written submission, para. 165; and second written submission, para. 120. ↩

¹⁵¹ European Union's first written submission, paras. 67-74 (citing Appellate Body Reports, US – Softwood Lumber IV (Article 21.5 – Canada); US – Zeroing (EC) (Article 21.5 – EC); and US – Upland Cotton (Article 21.5 – Brazil)); second written submission, para. 28; and response to Panel question No. 80. ↩

¹⁵² European Union's first written submission, para. 96. ↩

¹⁵³ European Union's second written submission, paras. 20, 22, and 98 (citing Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.577). See also European Union's response to Panel question No. 80; and comments on the United States' response to Panel question Nos. 80, 81, 82, and 84. ↩

¹⁵⁴ European Union's first written submission, para. 97. ↩

¹⁵⁵ European Union's response to Panel question No. 80; and comments on the United States' response to Panel question No. 80. ↩

¹⁵⁶ European Union's response to Panel question No. 80; and comments on the United States' response to Panel question Nos. 80, 81, 82, and 84. ↩

¹⁵⁷ European Union's first written submission, para. 95; and second written submission, para. 23. ↩

¹⁵⁸ European Union's first written submission, para. 108. ↩

¹⁵⁹ European Union's first written submission, paras. 82 and 108. ↩

¹⁶⁰ European Union's first written submission, para. 105. ↩

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to the development of the A350XWB.¹⁶¹ The European Union also argues that the United States' reliance on the alleged similarity between the core terms of LA/MSF for the purpose of showing that the nature of the relevant measures is alike is misplaced. According to the European Union, the alleged similarity simply reflects the terms of long-term project financing, which is "ubiquitous in many Members".¹⁶²

6.67. As to the effects of the various measures, the European Union argues that the United States has not put forward an adequate analysis of the relationship of the measures' effects, as it has not demonstrated that any of the A350XWB LA/MSF measures: (a) is a subsidy or (b) causes adverse effects.¹⁶³ For example, the European Union submits that the United States has not explained how financing that was provided several years after the launch of the A350XWB can be said to have the effect of enabling its launch.¹⁶⁴ In any case, the European Union submits that the questions that are the focus of the United States' arguments concerning the effects of the relevant measures go to the substantive issues that are before the Panel in this compliance dispute. The European Union maintains that such matters cannot properly be part of a jurisdictional analysis.¹⁶⁵

6.68. As to the timing of the respective measures, the European Union submits that the terms and conditions of A350XWB LA/MSF were agreed to approximately [***] prior to the DSB's adoption of the recommendations and rulings in the original proceeding, and were not adopted "on or around" the time of adoption of the declared "measures taken to comply.¹⁶⁶

6.69. The European Union also submits that neither of the two additional grounds the United States advances to support its contention that the A350XWB LA/MSF measures fall within the scope of this proceeding are independent or stand-alone bases for making such a determination. Rather, according to the European Union, both additional United States arguments are simply potentially relevant considerations for an application of the close nexus test.¹⁶⁷

6.70. Finally, the European Union argues that the United States' position with respect to the A350XWB LA/MSF measures must be dismissed because it is ultimately premised on a view of the types of measures that may affect a Member's compliance with DSB recommendations and rulings that suggests that once a Member is found to have granted an actionable subsidy in a particular sector, any future alleged subsidy in the same sector may be a matter for a compliance proceeding. According to the European Union, this would represent an "extremely expansive notion" of the scope of a compliance proceeding, which would have significant implications for other areas of WTO law.¹⁶⁸

6.4.1.4 Arguments of the third parties

6.4.1.4.1 Australia

6.71. Australia considers that LA/MSF for the A350XWB is within the scope of the compliance proceeding.¹⁶⁹ Australia considers that a Member that has successfully argued that its interests are adversely affected by payment of a subsidy should not be required to bring a fresh action with respect to financial contributions made on the same legal basis as those found to be WTO-inconsistent. In Australia's view, to find otherwise would oblige the complaining Member to become embroiled in a litigation loop of periodic challenges under the SCM Agreement and would

¹⁶¹ European Union's first written submission, para. 106. ↩

¹⁶² European Union's second written submission, para. 33. ↩

¹⁶³ European Union's first written submission, para. 109. ↩

¹⁶⁴ European Union's first written submission, para. 111. ↩

¹⁶⁵ European Union's first written submission, paras. 110 and 112. ↩

¹⁶⁶ European Union's first written submission, para. 103; and second written submission, para. 37. ↩

¹⁶⁷ European Union's first written submission, paras. 85-92. ↩

¹⁶⁸ European Union's second written submission, paras. 33-35. For example, the argument would imply that once a fiscal measure is found to be inconsistent with Article III:2 of the GATT 1994, any future fiscal measure of the same type and touching the same sector, would be subject to compliance proceedings, for an indefinite period and without any requirement of continuity with respect to the measure. ↩

¹⁶⁹ Australia's third-party response to Panel question No. 3. ↩

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deny that Member a remedy under Article 7.8 of that Agreement, a result contrary to the object and purpose of the WTO dispute settlement system, including DSU Articles 3 and 21.¹⁷⁰

6.72. For Australia, a finding that only the original LA/MSF measures are within the scope of this Article 21.5 proceeding would lead to the compliance proceeding being restricted to the re-examination of the same measures at issue in the original proceeding, rather than the existence or consistency of measures taken to comply. Australia considers that such an unduly restrictive interpretation has previously been rejected by the Appellate Body, and ignores the fact that Article 21.5 proceedings often concern the consistency of a new measure taken to comply with the recommendations and rulings in the dispute.¹⁷¹

6.4.1.4.2 Brazil

6.73. According to Brazil, the principles of protecting the effectiveness of the WTO dispute settlement system and ensuring prompt compliance and an effective resolution of disputes suggest that LA/MSF for the A350XWB is within the scope of the compliance proceeding. Brazil considers that the Panel should not adopt an overly formalistic approach to its terms of reference, and rather approach the issue in terms of the context in which the measures taken to comply are being applied.¹⁷² Brazil notes that, while it does not consider that just any measure that shares features with the original measure or the measure taken to comply could be challenged in an Article 21.5 proceeding, an overly narrow approach to a compliance panel's terms of reference would undermine the effectiveness of the dispute settlement process. In Brazil's view, a very similar type of subsidy, in support of a very similar product, produced by the same recipient company around that time that closely related subsidy measures were found to be WTO-inconsistent, is a measure that can and must be included in an examination of "measures taken to comply".¹⁷³

6.74. In terms of the nature of the measures, Brazil considers that the subject matter of LA/MSF for the A350XWB – LA/MSF to support Airbus twin-aisle large civil aircraft – is sufficiently similar to the subsidies to Airbus twin-aisle large civil aircraft analysed in the original proceeding to warrant its inclusion in the scope of this compliance proceeding. Moreover, Brazil considers that, given the competitive overlap between the A350XWB and similar Airbus twin-aisle aircraft covered by the recommendations and rulings of the DSB, LA/MSF support for the A350XWB could affect implementation. Brazil considers that whether this is ultimately the case is a substantive issue to be demonstrated by the United States; however, the similarity in possible effects of LA/MSF for the A350XWB further reinforces the close nexus between the original LA/MSF measures addressed in the original panel and Appellate Body reports, the alleged measures taken to comply, and the LA/MSF measures for the A350XWB. Finally, Brazil refers to Appellate Body statements that measures that predate the adoption of the original panel and Appellate Body reports can be included in the context of an Article 21.5 proceeding as "measures taken to comply" so long as there is a sufficiently close nexus in terms of the nature and effects of the measures.¹⁷⁴

6.4.1.4.3 China

6.75. China submits that, in order for a measure to be subject to review by a compliance panel, it must be either: (a) a declared "measure taken to comply", (b) a measure otherwise constituting a "measure taken to comply" because of its "express link" with the recommendations and rulings of the DSB in the original proceeding, (c) a measure not in itself a "measure taken to comply" but having a "particularly close relationship" to the declared "measure taken to comply" and to the DSB's recommendations and rulings, or (d) in a subsidy case, a replacement subsidy which replaces the one found to be WTO-inconsistent in the original proceeding.¹⁷⁵ China considers that LA/MSF for the A350XWB does not fall within any of these four categories, and is therefore not within the panel's terms of reference.

¹⁷⁰ Australia's third-party response to Panel question No. 3 (citing Australia's third-party submission in US – Upland Cotton (Article 21.5 – Brazil)). ↩

¹⁷¹ Australia's third-party response to Panel question No. 3 (citing Appellate Body Reports, US – Softwood Lumber IV (Article 21.5 – Canada), para. 89; and Canada – Aircraft (Article 21.5 – Brazil), para. 36). ↩

¹⁷² Brazil's third-party submission, para. 23. ↩

¹⁷³ Brazil's third-party submission, para. 31. ↩

¹⁷⁴ Brazil's third-party submission, para. 28. ↩

¹⁷⁵ China's third-party submission, para. 5. ↩

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6.76. China argues that there is no "declared" measure taken to comply with respect to the A350XWB, nor is there a measure that could be considered a "measure taken to comply" on the basis of an "express link" with the recommendations and rulings of the DSB. China notes that the panel in the original proceeding dismissed the United States' claim that an alleged commitment to provide LA/MSF for the Original A350 constituted a specific subsidy. Neither party appealed this finding, and the conclusion adopted by the DSB should be treated as a final resolution of that claim.¹⁷⁶ As there were no recommendations or rulings concerning the A350, the European Union bears no obligation to take any measure to bring about compliance in this respect. China considers that it is therefore not possible for any measure to have an "express link" to the non-existing DSB's recommendations and rulings concerning the A350. Because LA/MSF for each Airbus LCA model was considered to be separate and distinct, and because no LA/MSF Programme covering all Airbus LCA was found to exist, there is no basis for the United States to assert that LA/MSF for the A350XWB has a particularly close relationship to either LA/MSF for the A350 or other LA/MSF for twin-aisle LCA.¹⁷⁷

6.77. China considers erroneous the United States' argument that A350XWB is a replacement subsidy for earlier LA/MSF measures that the European Union claims to have withdrawn. According to China, in US – Upland Cotton (Article 21.5 – Brazil), the Appellate Body's conclusion that the marketing loan payments and counter-cyclical payments were properly within the scope of the compliance proceeding was made in the context where the payments were annual, recurring payments made under unchanged regulatory provisions.¹⁷⁸ China distinguishes this from the present proceeding, in which there are no findings on the existence of a LA/MSF Programme. Additionally, the disbursements of funds under each of the challenged LA/MSF measures are not recurrent. China considers there is no factual basis to establish that A350XWB LA/MSF is a "replacement subsidy" in relation to "any earlier WTO-inconsistent LA/MSF measures" which are actually all separate from and parallel to each other. Finally, China submits that there is no distinct ground for including a measure within the scope of a compliance proceeding according to whether its exclusion would permit circumvention of the DSB's recommendations and rulings. Rather, this is a factor to be considered as part of the integrated analysis of whether there is a "particularly close relationship" between the "undeclared" measure, the "declared" measures taken to comply and the recommendations and rulings of the DSB.¹⁷⁹

6.4.1.4.4 Japan

6.78. Japan considers that the "close nexus" test should be applied in this and any compliance proceeding, to determine whether a measure is properly before the compliance panel.¹⁸⁰ In Japan's view, overly narrow terms of reference for an Article 21.5 panel would undermine the effectiveness of the dispute settlement process. Japan notes that the Appellate Body has found that a relatively wide range of measures not covered by the original proceeding were within the scope of Article 21.5 proceedings.¹⁸¹ Japan considers that the concern expressed by the Appellate Body in US – Upland Cotton (Article 21.5 – Brazil)¹⁸² is sufficiently addressed by the criteria of the "close nexus" test. When properly applied, the requirements contained in the close nexus test, such as the timing, nature and effects of the contested measures, ensure the effectiveness of the disciplines of the SCM Agreement.

6.79. Japan has concerns with the European Union's "overarching measure" approach.¹⁸³ Japan does not deny that the presence of a common overarching measure may be a relevant factor in determining whether the undeclared measure at issue has a sufficiently "close nexus" with the

¹⁷⁶ China's third-party submission, para. 14; and third-party response to Panel question No. 3. ↩

¹⁷⁷ China's third-party submission, paras. 25-26. ↩

¹⁷⁸ China's third-party submission, paras. 30-31; and third-party response to Panel question No. 3. ↩

¹⁷⁹ China's third-party submission, paras. 37-38. ↩

¹⁸⁰ Japan's third-party response to Panel question No. 3. ↩

¹⁸¹ Japan's third-party response to Panel question No. 3 (citing Appellate Body Reports, US – Zeroing (EC) (Article 21.5 – EC); and US – Softwood Lumber IV (Article 21.5 – Canada)). ↩

¹⁸² Panel question No. 3 referred to Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), paras. 137 and 245. ↩

¹⁸³ Japan's third-party response to Panel question No. 3 (citing European Union's first written submission, para. 76). ↩

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declared measure taken to comply, and the recommendations and rulings of the DSB.¹⁸⁴ However, Japan submits that the existence of a common overarching measure may be one of several factors to be considered in the assessment of whether there are sufficiently close links, in terms of timing, nature, and effects, between the undeclared measure at issue and the declared measure taken to comply and the recommendations and rulings of the DSB, and is neither a prerequisite nor a decisive factor as the European Union appears to posit.

6.4.1.5 Evaluation by the Panel

6.4.1.5.1 Introduction

6.80. The issue that is before us is whether the merits of the United States' claims with respect to the alleged adverse effects of the A350XWB LA/MSF measures may be properly considered in this dispute in order to determine whether the European Union and relevant member States have complied with the DSB recommendations and rulings adopted in the original proceeding. As already noted¹⁸⁵, the A350XWB LA/MSF measures did not exist and were not before the panel in the original proceeding. Moreover, the European Union did not identify the A350XWB LA/MSF measures in its Compliance Communication of 1 December 2011. Thus, the question we must resolve is whether a set of measures that were not expressly "declared" by the European Union to be "measures taken to comply" and were not the specific subject of the adopted DSB recommendations and rulings in the original proceeding may fall within the scope of this compliance dispute.

6.81. We note that whenever any measure reviewed in a proceeding initiated under Article 21.5 of the DSU is found to demonstrate a failure to comply with the recommendations and rulings of the DSB in an original proceeding, a complaining Member would generally be entitled to request compensation or authorization to suspend concessions.¹⁸⁶ At this stage of a dispute, the DSU does not afford a responding Member with the right to a second "reasonable period of time"¹⁸⁷ to bring its measures into conformity with the covered agreements. A finding that a measure which is neither a declared "measure taken to comply" nor the subject of specific DSB recommendations and rulings (i.e. a so-called "undeclared" measure) falls within the scope of a compliance proceeding may, therefore, have important implications for a WTO Member's rights and obligations under the DSU and the covered agreements in general. Thus, as cautioned by the Appellate Body, characterizing an act by a Member as a "measure taken to comply" when that Member maintains otherwise "is not something that should be done lightly by a panel".¹⁸⁸

6.82. Nevertheless, there may well be situations when a measure that a responding Member argues falls outside of the scope of a compliance proceeding operates to undermine or effectively nullify the declared "measures taken to comply" or otherwise circumvent that Member's compliance obligations. To require that a complaining Member in these circumstances initiate a new proceeding under Article 6 of the DSU in order to challenge such an undeclared measure, may not only be at odds with the very notion of compliance that is advanced under the DSU but it might also be perceived as an inefficient use of the WTO's dispute settlement procedures, particularly if the undeclared measure is intrinsically linked to the WTO-inconsistent measures subject to the relevant recommendations and rulings of the DSB. One approach that we believe panels and the Appellate Body have developed to come to terms with such situations in a way that

¹⁸⁴ Japan's third-party response to Panel question No. 3 (citing Appellate Body Report, US – Softwood Lumber IV (Article 21.5 – Canada), para. 77). See also Appellate Body Report, US – Zeroing (EC) (Article 21.5 – EC), para. 203). ↩

¹⁸⁵ See above para. 6.53. ↩

¹⁸⁶ Article 22.1 of the DSU prescribes that "{c}ompensation and the suspension of concessions or other obligations are temporary measures available in the event that the recommendations and rulings are not implemented within a reasonable period of time". Furthermore, Article 22.2 provides that a "request for authorization from the DSB to suspend … concessions or other obligations granted under the covered agreements" cannot be made unless the responding Member fails to comply with the adopted recommendations and rulings "within the reasonable period of time determined pursuant to paragraph 3 of Article 21". ↩

¹⁸⁷ Article 21.3 of the DSU provides that a responding Member "shall have a reasonable period of time" within which to comply with the recommendations and rulings adopted by the DSB. ↩

¹⁸⁸ Appellate Body Report, US – Softwood Lumber IV (Article 21.5 – Canada), para. 74. ↩

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respects the limited nature of the types of claims that can be brought in WTO compliance proceedings is referred to as the "close nexus" test.

6.83. Under the "close nexus" test, as elucidated by the Appellate Body in US – Softwood Lumber IV (Article 21.5 – Canada), any undeclared measure with a "particularly close relationship" to the declared measure taken to comply, and to the recommendations and rulings of the DSB, may be susceptible to review by a compliance panel. Determining whether this is the case requires panels to "scrutinize these relationships" in the context of the "factual and legal background" against which a declared measure taken to comply is adopted, which may, depending on the particular facts, call for an examination of the timing, nature and effects of the various measures. A compliance panel must on this basis determine whether there are "sufficiently close links" between the relevant measures and the DSB recommendations and rulings such that it would be appropriate to characterize the undeclared measure as a "measure taken to comply" and, consequently, to assess its consistency with the covered agreements in a proceeding initiated under Article 21.5 of the DSU.¹⁸⁹

6.84. Although the close nexus test may not be the only basis for resolving the general question that is before us¹⁹⁰, we note that it has been the main focus of the parties' arguments. Accordingly, we begin our evaluation of the parties' positions with respect to the question whether the A350XWB LA/MSF measures fall within the scope of this compliance dispute by examining the merits of their submissions concerning the application of the "close nexus" test, starting by, first of all, assessing the European Union's arguments with respect to the relevance and relationship of the existence of an "overarching measure" to this analysis.

6.4.1.5.2 The relevance and relationship of the existence of an "overarching measure" to the close nexus test

6.85. In its first and second written submissions, the European Union argued that as part of the analysis of the relevant "factual and legal background" that informs the application of the close nexus test, a panel must, as a threshold matter, consider whether there is an "overarching measure". According to the European Union, where a complaining Member cannot make this "requisite threshold showing", there would be no need for a panel to proceed to examine the "additional factors" of the close nexus test, and the relevant undeclared measure could not be brought into the scope of the compliance dispute.¹⁹¹ The clearest example of this line of argument is, in our view, captured by the following passage from the European Union's first written submission:

Beyond the "particular factual and legal background" that must be considered in applying the "close nexus" test (including the threshold issue of whether there is an overarching measure, as discussed above), the Appellate Body has stated that determining jurisdiction over an alleged undeclared measure taken to comply "may, depending on the particular facts, call for an examination of the timing, nature, and effects of the various measures". In other words, these elements of "timing", "nature", and "effects" are additional factors that may be considered, depending on the facts. As explained above, if a complaining Member can not make the requisite threshold showing that the alleged undeclared measure taken to comply is an application of the overarching measure at issue in the original proceedings, or an application of the declared measure taken to comply, then there is no need for a compliance panel to proceed with any additional steps of the "close nexus" analysis.¹⁹² (emphasis original; footnote omitted)

6.86. However, in its comments on the United States' responses to the Panel's questions following the substantive meeting, the European Union clarified that it does not argue "there must always be an overarching measure"¹⁹³, recognizing "the possibility that close nexus might be demonstrated

¹⁸⁹ Appellate Body Report, US – Softwood Lumber IV (Article 21.5 – Canada), para. 77. ↩

¹⁹⁰ We do not exclude that there may be situations where the factual circumstances and legal provisions at issue in a particular compliance dispute call for a different approach to be taken. ↩

¹⁹¹ European Union's first written submission, paras. 70, 76, and 77; and second written submission, paras. 22, 25, and 36. ↩

¹⁹² European Union's first written submission, para. 76. ↩

¹⁹³ European Union's comments on the United States' response to Panel question No. 85. ↩

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without expressly referring to an overarching measure".¹⁹⁴ Nevertheless, for the European Union, "the alleged existence of an overarching measure derived from the identification of an alleged pattern in instances of the application of such measure" and the close nexus test are "two ways of approaching what is essentially the same issue"; and, according to the European Union:

{T}his issue, under the heading of whether or not there is an overarching measure (i.e., an unwritten MSF Programme), was vigorously argued before the original panel in this particular dispute, and the United States lost. All the European Union is asking is that, now that the United States is pursuing essentially the same issue under the heading of whether or not there is a close nexus, the compliance Panel should remain consistent with the findings of fact that it made sitting as the original panel in the original proceedings. In short, in the original proceedings there was no overarching measure (because the measures were so different), and likewise there is no close nexus (because the measures are still different).¹⁹⁵

6.87. In the light of these clarifications, we understand the European Union's argument to be essentially based on the following submissions: (a) an affirmative close nexus analysis and the existence of an overarching measure are two ways of showing that an undeclared measure may be found to be sufficiently connected with the "measures taken to comply" and the recommendations and rulings of the DSB, such that it may be brought into the scope of a compliance dispute; (b) the fact that the original panel found that the United States had failed to demonstrate the existence of an unwritten LA/MSF Programme means that there is no overarching measure and, therefore, no close nexus between the A350XWB and pre-A350XWB LA/MSF agreements and the adopted recommendations and rulings in this dispute; and (c) the findings of every Appellate Body report that has considered whether an undeclared measure may properly fall within the scope of a compliance proceeding support its approach. We are not persuaded by the European Union's submissions.

6.88. First of all, we detect an unexplained tension in the European Union's arguments. On the one hand, the European Union accepts that a complaining Member is not required to demonstrate the existence of an overarching measure in order to demonstrate that an undeclared measure may fall within the scope of a compliance dispute. On the other hand, the European Union maintains that, in the present instance, the United States' failure to identify the existence of an unwritten LA/MSF Programme (the alleged overarching measure) implies that the panel is ipso facto precluded from having jurisdiction over the United States' substantive claims against the A350XWB LA/MSF measures. The European Union "can only agree with the United States that the assessment must 'depend on the facts' about whether or not there is a 'close relationship' or whether or not the measures are different".¹⁹⁶ Yet, according to the European Union, the mere fact that an unwritten LA/MSF Programme (the alleged overarching measure) does not exist should be decisive in determining the merits of the United States' scope claims, notwithstanding the multiple other factors the United States relies upon to demonstrate the existence of the requisite "close relationship". In our view, the European Union has failed to adequately explain why the non-existence of an unwritten LA/MSF Programme must necessarily direct us to reject the United States' scope claims with respect to the A350XWB LA/MSF, given that: (a) it believes there is, in principle, no requirement to demonstrate the existence of an overarching measure, and (b) it recognizes that all relevant facts must be taken into account when assessing whether an undeclared measure falls within the scope of a compliance proceeding. In other words, we are unable to find merit in the European Union's submissions because we do not understand the European Union's reasons for believing that the principles it accepts should apply in general have no application on the basis of the facts of the present dispute.

6.89. Second, we do not understand the Appellate Body's findings in the disputes the European Union relies upon to support its position. The European Union maintains that an overarching measure was implicitly at the centre of the Appellate Body's findings and analyses in three compliance disputes: US – Softwood Lumber IV (Article 21.5 – Canada); US – Zeroing (EC) (Article 21.5 – EC); and US – Upland Cotton (Article 21.5 – Brazil). In our view, however, and as we explain in more detail below, no overarching measure of the kind described in the

¹⁹⁴ European Union's comments on the United States' response to Panel question No. 80. ↩

¹⁹⁵ European Union's comments on the United States' response to Panel question No. 80. ↩

¹⁹⁶ European Union's comments on the United States' response to Panel question No. 84. ↩

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European Union's submissions existed in the first two disputes; and although it could be argued that an overarching measure was present in the US – Upland Cotton (Article 21.5 – Brazil), it was certainly not because of this fact alone that the Appellate Body found the relevant undeclared measures to fall within the scope of the compliance dispute. Rather, in this latter dispute, the existence of what could be argued to be an overarching measure was one of several facts that became important considerations in the light of the Appellate Body's interpretation of the United States' compliance obligation under Article 7.8 of the SCM Agreement.

6.90. The European Union asserts that the overarching measure in US – Softwood Lumber IV (Article 21.5 – Canada) was the final countervailing duty order, pursuant to which the European Union alleges the United States "adopted": (a) the measure at issue in the original proceeding (a final countervailing duty determination made by the United States Department of Commerce (USDOC)); (b) the declared measure taken to comply (a revised determination of the final countervailing duty determination at issue in the original proceeding pursuant to Section 129 of the US Uruguay Round Agreements Act); and (c) the undeclared measure found to be a "measure taken to comply" (the first administrative review conducted in the same countervailing duty proceeding).¹⁹⁷ However, contrary to the European Union's assertions, the declared "measures taken to comply" and the undeclared measures in US – Softwood Lumber IV (Article 21.5 – Canada) were not "adopted" pursuant to the same legal provision or by means of the application of the same measure. Rather, as explained by the Appellate Body:

{The} two distinct measures were taken under two separate legal provisions: (i) a determination under Section 129, which is the United States' legal framework for issuing new determinations to comply with recommendations and rulings of the DSB; and (ii) an administrative review determination, which was required to be issued in the ordinary course of the application of the United States' countervailing duty laws.¹⁹⁸

6.91. Moreover, the Appellate Body articulated the logic underpinning its ruling in US – Softwood Lumber IV (Article 21.5 – Canada) in the following terms:

Because the administrative review determination had the effect of undermining compliance with the DSB's recommendations and rulings, and because both measures concerned the same analysis of subsidies for softwood lumber production, the Appellate Body found that the administrative review determination was so "inextricably linked" and "clearly connected" to the Section 129 determination as to fall within the scope of the Article 21.5 panel's mandate. … The dispute in US – Softwood Lumber IV (Article 21.5 – Canada) concerned the identification of closely connected measures so as to avoid circumvention.¹⁹⁹ (footnote omitted)

6.92. Thus, it was not because the relevant measures at issue in US – Softwood Lumber IV (Article 21.5 – Canada) resulted from the application of any "overarching measure" that the Appellate Body ultimately found the undeclared measure to fall within the scope of the compliance proceeding, but rather because the undeclared measure "had the effect of undermining compliance with the DSB's recommendations and rulings" and because, in addition, both the declared and undeclared measures "concerned the same analysis of subsidies for softwood lumber production". While this latter fact was a point in common between the declared "measure taken to comply" and the undeclared measure, it did not result from the application of the "overarching measure" the European Union asserts existed in this dispute – namely, the final countervailing duty order. Indeed, the only place in the Appellate Body's findings where the final countervailing duty order is referred to is when the United States' request for a preliminary ruling in the compliance panel proceeding is quoted in the introduction to the Appellate Body's analysis.²⁰⁰ The alleged "overarching measure" is neither relied upon nor discussed anywhere else in the Appellate Body's findings.

6.93. Likewise, the European Union argues that multiple "overarching measures" arose in the US – Zeroing (EC) (Article 21.5 – EC) dispute. In its first written submission, the European Union

¹⁹⁷ European Union's first written submission, paras. 72 and 80. ↩

¹⁹⁸ Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 205. ↩

¹⁹⁹ Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 205. ↩

²⁰⁰ Appellate Body Report, US – Softwood Lumber IV (Article 21.5 – Canada), para. 56. ↩

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identifies the relevant "overarching measures" to be the anti-dumping duty orders pursuant to which the United States allegedly "adopted": (a) the measures at issue in the original proceeding (16 original anti-dumping investigations and 15 administrative reviews); (b) the declared "measures taken to comply"²⁰¹; and (c) the undeclared measures found to be "measures taken to comply" (determinations made in subsequent reviews, changed circumstances reviews and sunset reviews conducted under the various anti-dumping proceedings).²⁰² In its second written submission, the European Union appears to suggest that there was another "overarching measure" in US – Zeroing (EC) (Article 21.5 – EC), namely, the "zeroing" "instruction in a computer programme", as evidenced by "a general computer programme designed to be adapted and used in particular cases" and various instances of the computer programme's application.²⁰³

6.94. We are not convinced that the European Union's reliance on US – Zeroing (EC) (Article 21.5 – EC) is based on an accurate characterization of the relevant facts or the analytical approach adopted by the Appellate Body. In US – Zeroing (EC) (Article 21.5 – EC), the Appellate Body considered the extent to which a number of administrative, changed circumstances and sunset review determinations that followed the 15 original anti-dumping investigations and 16 administrative reviews challenged in the original proceeding fell within the scope of the compliance proceeding. All of these measures were, in fact, adopted in the ordinary course of the application of the United States' anti-dumping regime and, to this extent, closely connected to the relevant anti-dumping duty orders the European Union argues were the "overarching measures" in this case. However, as in US – Softwood Lumber IV (Article 21.5 – Canada), the United States' declared compliance measures, which we understand to be the focus of the European Union's arguments, were "Section 129 Determinations" adopted under the United States Uruguay Round Agreements Act²⁰⁴ and, therefore, enacted under a different legal basis to the undeclared measures at issue. Thus, the European Union errs when it asserts that the United States' declared "measures taken to comply" in US – Zeroing (EC) (Article 21.5 – EC) were "adopted" pursuant to the same anti-dumping duty orders that provided the legal basis for the measures challenged in the original proceeding and the undeclared measures.

6.95. It is true that the anti-dumping duty orders the European Union argues were the "overarching measures" in US – Zeroing (EC) (Article 21.5 – EC) were in fact considered by the Appellate Body in the context of determining whether the relevant nexus existed between the "nature or subject matter" of the relevant measures and the DSB recommendations and rulings. The existence of the anti-dumping duty orders enabled the panel and the Appellate Body to link each of the undeclared measures with the measures challenged in the original proceeding and the rulings and recommendations adopted by the DSB. To this extent, the anti-dumping duty orders were clearly part of the relevant "factual and legal background" against which the declared measures had been adopted. However, it was the use of zeroing that was explicitly found to be the point in common between the undeclared measures and the declared "measures taken to comply":

In our view, the use of zeroing in the excluded subsequent reviews provides the necessary link, in terms of nature or subject matter, between {the undeclared} measures, the declared measures "taken to comply", and the recommendations and rulings of the DSB. All the excluded subsequent reviews were issued under the same respective anti-dumping duty order as the measures challenged in the original proceedings, and therefore constituted "connected stages … involving the imposition, assessment and collection of duties under the same anti-dumping order". Moreover, as the Panel correctly noted, the issue of zeroing was the precise subject of the recommendations and rulings of the DSB, the only aspect of the original measures

²⁰¹ We note that the European Union did not specifically identify the relevant declared "measures taken to comply" in its first written submission, citing Appellate Body Report, US – Zeroing (EC) (Article 21.5 – EC), para. 212. In our view, this citation discusses the relevant undeclared measures that were ultimately found to be "measures taken to comply", but not the declared "measures taken to comply". ↩

²⁰² European Union's first written submission, para. 73. ↩

²⁰³ European Union's second written submission, para. 29. It is not clear to us whether the European Union refers to the "zeroing" "instruction in a computer programme" as an "overarching measure" or as an example of the commonality between the "overarching measures" (the relevant anti-dumping duty orders) and the declared and undeclared "measures taken to comply". ↩

²⁰⁴ Other declared "measures taken to comply" in this dispute included: (a) the United States' termination of the use of "model zeroing" in original investigations in which the weighted average-to-weighted average comparison methodology is applied; and (b) the revocation of anti-dumping duty orders in four cases. (Appellate Body Report, US – Zeroing (EC) (Article 21.5 – EC), para. 209) ↩

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that was modified by the United States in its Section 129 determinations, and is the only aspect of the excluded subsequent reviews challenged by the European Communities in these proceedings. These pervasive links, in our view, weigh in favour of a sufficiently close nexus, in terms of nature or subject matter, between the excluded subsequent reviews, the declared measures "taken to comply", and the recommendations and rulings of the DSB, insofar as the use of zeroing is concerned.²⁰⁵ (emphasis original; underline added; footnotes omitted)

6.96. Thus, while the Appellate Body relied upon the fact that the undeclared measures could all be linked to the relevant underlying anti-dumping duty orders to establish the necessary close nexus in terms of "nature and subject matter", we do not understand the Appellate Body's findings to have implicitly elevated the existence of those anti-dumping duty orders to be a determinative element of the overall close nexus test. Indeed, it is apparent that the existence of the anti-dumping duty orders was simply one relevant fact in the context of scrutinizing the relationships between the undeclared measures and the measures examined in the original proceeding with respect to which the DSB adopted recommendations and rulings. Moreover, we note once more that, as in US – Softwood Lumber IV (Article 21.5 – Canada), the anti-dumping duty orders did not connect the undeclared measures or the DSB recommendations and rulings with the declared "measures taken to comply". Rather, the one critical point in common between the declared "measures taken to comply", the undeclared measures and the DSB recommendations and rulings was the use of zeroing.

6.97. The Appellate Body relied upon a very similar line of reasoning to dispose of the United States' "other appeal" to the original panel's close nexus analysis in US – Zeroing (EC) (Article 21.5 – EC) with respect to two administrative reviews in which the USDOC had adopted a different zeroing methodology to the zeroing methodology applied in the original investigation and found to be WTO-inconsistent in the original proceeding. The United States argued that the original panel had erred in finding that "successive determinations of different types in the context of a single trade remedy proceeding {that is, under the same anti-dumping duty order} 'form part of a continuum of events and measures that are all inextricably linked'". According to the United States, "a 'closer connection between the declared measure taken to comply and the alleged additional measure' must exist for the latter to fall within the scope of Article 21.5 proceedings, because by definition administrative reviews will usually have the same product and country coverage as the original investigation".²⁰⁶ The Appellate Body agreed with the United States that "identity in terms of product and country coverage alone would be an insufficient basis for" establishing the necessary close nexus, recalling that in US – Softwood Lumber IV (Article 21.5 – Canada) it had recognized that "not 'every assessment review will necessarily fall within the jurisdiction of an Article 21.5 panel'."²⁰⁷ However, in the light of the particular factual circumstances of the case at hand, the Appellate Body considered that:

{T}he use of zeroing in the 2004-2005 administrative reviews {(the relevant undeclared measures)} … establishes a link in terms of nature or subject matter between those reviews, the recommendations and rulings of the DSB, and the declared measures "taken to comply" – that is, the Section 129 determinations … .²⁰⁸ (emphasis added)

6.98. The Appellate Body once again relied upon the existence of anti-dumping duty orders underlying the relevant administrative reviews to connect the nature and subject matter of the administrative reviews (the undeclared measures) with the investigations at issue in the original proceeding²⁰⁹, observing furthermore that:

Each of these proceedings involved the calculation of a margin of dumping, either for the purposes of establishing the existence of dumping and the initial cash deposit rate of the estimated dumping duty liability, or for the final assessment of dumping duty liability on past entries. In each instance, the use of the zeroing methodology arose in

²⁰⁵ Appellate Body Report, US – Zeroing (EC) (Article 21.5 – EC), para. 230. ↩

²⁰⁶ Appellate Body Report, US – Zeroing (EC) (Article 21.5 – EC), para. 237. (emphasis added; footnote omitted) ↩

²⁰⁷ Appellate Body Report, US – Zeroing (EC) (Article 21.5 – EC), para. 239. (footnote omitted) ↩

²⁰⁸ Appellate Body Report, US – Zeroing (EC) (Article 21.5 – EC), para. 239. ↩

²⁰⁹ Appellate Body Report, US – Zeroing (EC) (Article 21.5 – EC), para. 240. ↩

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the context of calculating estimated margins of dumping for particular exporters, or assessment rates for particular importers.²¹⁰ (emphasis added; footnote omitted)

6.99. Indeed, the Appellate Body found it:

{S}ignificant that the use of zeroing was the only aspect of the original measures at issue that was corrected by the United States in response to the recommendations and rulings of the DSB. Indeed, the Section 129 determinations in Cases 1 and 6, which are the United States' declared measures "taken to comply", simply recalculated—without zeroing—the margins of dumping calculated in the original proceedings. This, in our view, tends to confirm the close nexus, in terms of subject matter and nature, between the declared measures "taken to comply", the recommendations and rulings of the DSB in the original proceedings, and the use of zeroing in the 2004-2005 administrative reviews in Cases 1 and 6 {the undeclared measures}.²¹¹ (emphasis added)

6.100. Finally, the Appellate Body recalled that it had determined in US – Continued Zeroing that the use of zeroing in "successive determinations" under the same anti-dumping duty order constitutes a measure that is challengeable in WTO dispute settlement. For the Appellate Body, it followed from its findings with respect to the existence of this unwritten zeroing norm that "the subsequent reviews at issue in this case, in which that zeroing methodology is applied, are sufficiently connected in nature or subject matter so as to fall within the scope of these Article 21.5 proceedings".²¹²

6.101. Thus, while it is apparent that the existence of the anti-dumping duty orders underlying the United States' undeclared measures (the two administrative reviews) was a consideration that informed the Appellate Body's evaluation of the United States "other appeal" in US – Zeroing (EC) (Article 21.5 – EC), we do not understand the Appellate Body to have considered it to be anything more than one of features of the relationship between the undeclared measures and the original measures that were the subject of the adopted DSB recommendations and rulings. The Appellate Body did not rely upon the anti-dumping duty orders to establish a relevant relationship with the United States' declared "measures taken to comply", which were instead found to be connected to the undeclared measures and the DSB recommendations and rulings because of the use of zeroing.

6.102. Turning finally to US – Upland Cotton (Article 21.5 – Brazil), we note that the European Union characterizes the subsidy programme that was the legal basis for the subsidy measures challenged in the original proceeding and the undeclared measures – in both cases, marketing loans and counter-cyclical payments – as the "overarching measure".²¹³ We find the European Union's reliance on US – Upland Cotton (Article 21.5 – Brazil) to be misplaced. The relevant scope question in this dispute was whether certain "marketing loan and counter-cyclical payments" made under a subsidy programme that was the same legal basis for the marketing loan and counter-cyclical payments found to be WTO-inconsistent in the original proceeding, could be challenged in the compliance proceeding. The European Union maintains that the Appellate Body's approach in this appeal is "a specific example of the close nexus test in operation".²¹⁴ While this might be one way to characterize the Appellate Body's approach in US – Upland Cotton (Article 21.5 – Brazil), as already noted, it was not because of the existence of the relevant subsidy programme that the Appellate Body found the relevant undeclared measures to fall within the scope of the compliance dispute. Rather, the existence of what could be argued to be an overarching measure was one of several facts that became important considerations in the light of the Appellate Body's interpretation of the United States' compliance obligation under Article 7.8 of the SCM Agreement.²¹⁵

6.103. In confirming the panel's finding that the United States' undeclared subsidy measures could be brought within the scope of the compliance proceeding, the Appellate Body relied heavily

²¹⁰ Appellate Body Report, US – Zeroing (EC) (Article 21.5 – EC), para. 240. ↩

²¹¹ Appellate Body Report, US – Zeroing (EC) (Article 21.5 – EC), para. 242. ↩

²¹² Appellate Body Report, US – Zeroing (EC) (Article 21.5 – EC), para. 245. ↩

²¹³ European Union's first written submission, para. 74; and response to Panel question No. 81. ↩

²¹⁴ European Union's response to Panel question No. 81. ↩

²¹⁵ Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 247. ↩

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on its interpretation of the text, context and object and purpose of Article 7.8, as well as considerations related to the effectiveness of the actionable subsidies disciplines of Articles 5 and 6 of the SCM Agreement and various provisions of the DSU.²¹⁶ While the Appellate Body's analysis also referred to the fact that the undeclared measures had been adopted pursuant to the same subsidy programme as the subsidy measures challenged in the original proceeding²¹⁷, it is apparent that this was only one of a constellation of facts and considerations the Appellate Body used to support its reasoning. Ultimately, the Appellate Body decided to uphold the panel's findings, not because of the existence of the subsidy programme as the "overarching measure", but rather because it found that that the undeclared subsidy measures fell within the scope of the United States' compliance obligation under the terms of Article 7.8:

{I}n the case of recurring annual payments, the obligation in Article 7.8 would extend to payments "maintained" by the respondent Member beyond the time period examined by the panel for purposes of determining the existence of serious prejudice, as long as those payments continue to have adverse effects. Otherwise, the adverse effects of subsequent payments would simply replace the adverse effects that the implementing Member was under an obligation to remove. Such a reading of Article 7.8 would not give meaning and effect to the term "maintain", which is distinct from the term "grant", and has also been included in that Article. Indeed, it would render the term "maintain" redundant. In addition, it would fail to give meaning and effect to the obligation to "take appropriate steps to remove the adverse effects" in Article 7.8, and to the requirement under Article 21.5 to "comply" with the DSB's recommendations and rulings, including the requirement to take the remedial action foreseen in Article 7.8 as a consequence of a finding of adverse effects.

Our interpretation of Article 7.8 is consistent with the context provided by Article 4.7 of the SCM Agreement, which applies in cases involving prohibited subsidies. In US – FSC (Article 21.5 – EC II), the Appellate Body stated that, "if, in an Article 21.5 proceeding, a panel finds that the measure taken to comply with the Article 4.7 recommendation made in the original proceedings does not achieve full withdrawal of the prohibited subsidy—either because it leaves the entirety or part of the original prohibited subsidy in place, or because it replaces that subsidy with another subsidy prohibited under the SCM Agreement—the implementing Member continues to be under the obligation to achieve full withdrawal of the subsidy". Similarly, a Member would not comply with the obligation in Article 7.8 to withdraw the subsidy if it leaves an actionable subsidy in place, either entirely or partially, or replaces that subsidy with another actionable subsidy.²¹⁸ (emphasis original; footnotes omitted)

{T}he approach advocated by the United States would have serious implications for a complaining Member's ability to obtain relief against adverse effects of actionable subsidies. Under such an approach, a complaining Member that has demonstrated that subsidies provided by another Member have resulted in adverse effects would obtain relief only with respect to any lingering effects of the subsidies provided during the period examined by the panel. As Australia notes, such panel findings would essentially be declaratory in nature, because there would be no impact on subsidies granted or maintained after the panel made its finding. The complaining Member would have to initiate another dispute to obtain relief with respect to payments made after the period examined by the panel, even if those subsidies are recurring payments or otherwise of the same nature as those found to have resulted in adverse effects. Even if the complaining Member were to succeed in its claims a second time, the subsidizing Member could provide further subsidies after the second panel's ruling, and the complaining Member would have to initiate yet another dispute, and this cycle could continue. As Brazil and several of the third participants have warned, the inability of a complaining Member to obtain relief against subsidies that result in

²¹⁶ Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), paras. 236-248. ↩

²¹⁷ Indeed, at the beginning of its analysis, the Appellate Body stated that it had "difficulty accepting the notion that a subsidy programme and the payment provided under that programme can be assessed separately". (Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 234) ↩

²¹⁸ Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), paras. 237-238. ↩

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adverse effects to its interests would seriously undermine the disciplines contained in Articles 5 and 6 of the SCM Agreement.²¹⁹ (footnotes omitted)

6.104. Thus, our reading of the facts and findings made in the three compliance disputes the European Union relies upon leads us to conclude that, contrary to the European Union's assertions, countervailing and anti-dumping duty orders were not overarching measures pursuant to which the declared "measures taken to comply" and the undeclared measures were "adopted" in the US – Softwood Lumber IV (Article 21.5 – Canada) and US – Zeroing (EC) (Article 21.5 – EC) proceedings. Moreover, although the relevant subsidy programme that was at issue in US – Upland Cotton (Article 21.5 – Brazil) could be characterized as an overarching measure, as conceived by the European Union, we do not understand the Appellate Body to have considered the relationship between the subsidy programme and the undeclared subsidy measures as anything more than one of several factors upon which to base its finding. In the two former trade remedy compliance disputes, the Appellate Body used the "factual and legal background" of the declared "measures taken to comply" to inform its analyses of the relationships between the various measures and the DSB recommendations and rulings; whereas in the latter dispute (the only one of the three dealing with actionable subsidies), the Appellate Body's analysis focused primarily on understanding the extent to which the undeclared subsidy measures fell within the scope of the compliance obligation prescribed in Article 7.8 of the SCM Agreement. The fact that the undeclared measures in US – Upland Cotton (Article 21.5 – Brazil) were subsidy payments made under the same subsidy programme at issue in the original proceeding became an important consideration because of the Appellate Body's finding that the United States' compliance obligation extended to subsidies that it continued to "maintain".²²⁰ In other words, the existence of the alleged overarching measure (the subsidy programme) was used to show that the United States had "maintained" the same subsidies.

6.105. Finally, we note that apart from the US – Softwood Lumber IV (Article 21.5 – Canada) and US – Zeroing (EC) (Article 21.5 – EC) disputes, there have been two other compliance disputes in which panels have found undeclared measures to fall within the scope of their terms of reference in the absence of the existence of an overarching measure of the kind described by the European Union. At issue in the first of these two cases, Australia – Salmon (Article 21.5 – Canada), was whether the compliance panel could examine an import ban on salmon that had been adopted by the Australian state of Tasmania shortly after the Australian federal government had notified a number of steps that it had taken in order to remove the inconsistencies identified by the original panel regarding its treatment of imported salmon. In reaching the conclusion that it could examine this ban, the panel looked at the timing of the ban, in particular, the fact that it was introduced "subsequent to the adoption on 6 November 1998 of DSB recommendations and rulings in the original dispute—and within a more or less limited period of time thereafter"²²¹; as well as the nature of the ban, which was, like the measures challenged in the original proceeding, "a quarantine measure … that applies to imports of fresh chilled or frozen salmon from Canada".²²²

6.106. In the second dispute, Australia – Automotive Leather II (Article 21.5 – US), Australia withdrew from a company a grant that had been found to be a prohibited subsidy. At the same time, Australia granted a loan on non-commercial terms to a related company. The loan was specifically conditioned on repayment of the original subsidy. Although Australia argued that the loan was "not part of the implementation of the DSB's ruling and recommendation" and did not, therefore, fall within the scope of the Article 21.5 proceeding²²³, the panel disagreed. It found that the loan fell within the scope of its terms of reference because, inter alia, the loan at issue was "inextricably linked" to the measure that Australia itself stated it had taken to comply, "in view of both its timing and its nature".²²⁴ The panel in Australia – Automotive Leather II (Article 21.5 – US) also explained that, to have excluded the new loan offered by Australia from its mandate,

²¹⁹ Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 245. ↩

²²⁰ As already noted, however, the Appellate Body had also earlier stated that it had "difficulty accepting the notion that a subsidy programme and the payment provided under that programme can be assessed separately". (Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 234) ↩

²²¹ Panel Report, Australia – Salmon (Article 21.5 – Canada), para. 7.10, subparagraph 22. ↩

²²² Panel Report, Australia – Salmon (Article 21.5 – Canada), para. 7.10, subparagraph 22. ↩

²²³ Panel Report, Australia – Automotive Leather II (Article 21.5 – US), para. 6.1. ↩

²²⁴ Panel Report, Australia – Automotive Leather II (Article 21.5 – US), para. 6.5. ↩

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would have "severely limit{ed its} ability to judge, on the basis of the United States' request, whether Australia ha{d} taken measures to comply with the DSB's ruling."²²⁵

6.107. In both Australia – Salmon (Article 21.5 – Canada) and Australia – Automotive Leather II (Article 21.5 – US), there was clearly no overarching measure, as conceived by the European Union. Neither were there any measures akin to the countervailing and anti-dumping duty orders that were part of the relevant "factual and legal background" in US – Softwood Lumber IV (Article 21.5 – Canada) and US – Zeroing (EC) (Article 21.5 – EC). Yet the Appellate Body in US – Softwood Lumber IV (Article 21.5 – Canada) explicitly endorsed the panels' findings, describing them as "useful illustrations" of when it would be appropriate to conclude that an undeclared measure falls within the scope of a compliance proceeding.²²⁶

6.108. We conclude, therefore, that there is no basis in the relevant WTO case law to accept the European Union's contention that the existence of an overarching measure and an affirmative close nexus analysis are "two ways of approaching what is essentially the same issue".²²⁷ Rather, as we see it, the existence of an overarching measure as conceived by the European Union may be one fact – one piece of evidence – that could be used to support the existence of a relationship between an undeclared measure, a "measure taken to comply" and the recommendations and rulings of the DSB, that is sufficiently close to bring the undeclared measure into the scope of a compliance proceeding. Thus, ultimately, in our view, the appropriate place to consider the merits of the European Union's submissions concerning the non-existence of an overarching measure in this dispute (namely, the unwritten LA/MSF Programme), is in the context of our analysis of the parties' arguments with respect to the application of the close nexus test. We evaluate the merits of the parties' submissions in the following subsection.

6.4.1.5.3 Application of the close nexus test

6.4.1.5.3.1 Nature

6.109. We do not understand the European Union to deny that the A350XWB LA/MSF measures and the pre-A350XWB LA/MSF measures were all loan agreements entered into by essentially the same parties (Airbus and the Airbus governments) for the purpose of financing the development of each and every new model of Airbus LCA that has ever been launched and brought to market.²²⁸ The European Union does, however, contest the United States' assertion that there are similarities in the "core" terms of all LA/MSF measures and that such alleged similarities support the view that the A350XWB LA/MSF agreements have essentially the same nature as the pre-A350XWB LA/MSF measures. According to the European Union, the United States' submissions with respect to the "core" terms of LA/MSF were already rejected by the panel in the original proceeding "because of the differences between the various measures and the fact that there is nothing that inherently binds them together as necessarily involving subsidies."²²⁹ Indeed, the European Union recalls that in analysing the United States' allegations concerning the existence of an unwritten LA/MSF Programme in the original proceeding, the panel found that:

{T}he vast majority of terms and conditions of each LA/MSF contract are different, reflecting not only the individual characteristics of the Airbus entity and LCA

²²⁵ Panel Report, Australia – Automotive Leather II (Article 21.5 – US), para. 6.5. ↩

²²⁶ Appellate Body Report, US – Softwood Lumber IV (Article 21.5 – Canada), para. 74. ↩

²²⁷ European Union's comments on the United States' response to Panel question No. 80. ↩

²²⁸ The panel found in the original proceeding that "{s}ince its establishment in 1970, the governments of France, Germany, Spain and the UK have to varying degrees entered into LA/MSF agreements with Airbus for the purpose of funding the development of six new models of LCA (the A300, A310, A320, A330, A340 and A380) as well as three variants (the A330-200 and A340-500/600). The proportion of development costs financed through LA/MSF has diminished over the years, from close to 100% for the early projects (the A300 and A310) down to a maximum of 33% of development costs for LCA projects financed after the entry into force of the 1992 Agreement (the A330-200, A340-500/600 and A380)." (Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.369) (footnotes omitted) ↩

²²⁹ European Union's second written submission, para. 32. (emphasis original; footnotes omitted) ↩

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development project being funded, but also the policy objectives, legal culture and particular demands of the relevant EC member State funding the project.²³⁰

6.110. The European Union also points to the original panel's conclusion that "below-market interest rates are not an explicit feature of LA/MSF contracts" and that there is "nothing inherent in the LA/MSF contracts which, in and of itself, renders them a form of financing that by definition will always involve below-market interest rates".²³¹ For the European Union, these original panel findings demonstrate that the United States errs when it argues that all of the LA/MSF measures have similar "core" terms and that this implies that they all have essentially the same nature. We are not convinced by the European Union's submissions.

6.111. The European Union characterizes the United States' arguments with respect to the similarities in the "core" terms of the LA/MSF agreements to be focused on the allegation that their repayment terms are all success-dependent, back-loaded, levy-based, unsecured and on interest rate terms that are more favourable than would be available on the market. However, in our view, the United States' submissions have been consistently focused on only the first four of these five allegedly common features of the LA/MSF measures, namely, success-dependent, back-loaded, levy-based and unsecured repayment terms. The United States does not rely upon the allegedly below-market interest rates associated with the A350XWB LA/MSF measures for the purpose of substantiating its assertions with respect to the similarities in the nature of all of the LA/MSF measures.²³²

6.112. Neither do we believe that the United States was required to demonstrate that the A350XWB LA/MSF measures are provided at below-market interest rates (as all pre-A350XWB LA/MSF) in order to establish that all of the LA/MSF measures have essentially the same nature. We agree with the European Union that whether the A350XWB LA/MSF measures are provided at below-market interest rates is a question of substance that is outside of the boundaries of the jurisdictional matter with which we are concerned in this part of our Report, namely, whether the A350XWB LA/MSF measures fall within the scope of this compliance proceeding. It is only if this question is answered affirmatively that the United States would be entitled to have us consider its claims concerning the alleged subsidization of the A350XWB. Thus, the fact that the original panel found that there is "nothing inherent in the LA/MSF contracts which, in and of itself, renders them a form of financing that by definition will always involve below-market interest rates", does not undermine the United States' scope arguments. Indeed, to require that undeclared measures share the same WTO legal characteristics as the original measures in order to be within the scope of a compliance panel's terms of reference, and then to decline to exercise jurisdiction on the grounds that such a legal question is outside a compliance panel's jurisdiction, would be to place complainants in a Catch-22 situation.

6.113. Moreover, contrary to the European Union, we do not understand the United States' assertions concerning the allegedly success-dependent, back-loaded, levy-based and unsecured repayment terms of all LA/MSF measures to be "tantamount to reasserting"²³³ the unsuccessful submissions it made in the original proceeding with respect to the alleged existence of an unwritten LA/MSF Programme. We recall that in the original proceeding, the United States argued that the governments of France, Germany, Spain, and the United Kingdom had maintained "a formal and institutionalized industrial policy towards Airbus, a central part of which {was} the 'systematic and coordinated' provision of LA/MSF subsidies to assist Airbus develop a family of LCAs" evidencing "the existence of {an unwritten} LA/MSF Programme".²³⁴ According to the United States, the existence of the unwritten LA/MSF Programme could be established on the basis of several alleged facts, which considered together demonstrated that "the Airbus governments have systematically provided Airbus with a significant portion of the capital needed and sought by Airbus to develop each and every new LCA model through unsecured loans granted on back-loaded

²³⁰ European Union's first written submission, para. 99 (quoting Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.525). ↩

²³¹ European Union's first written submission, para. 98 (quoting Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.531). ↩

²³² See e.g. United States' first written submission, paras. 106, 140, and 147; and second written submission, para. 89. ↩

²³³ European Union's first written submission, para. 107. ↩

²³⁴ Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.498. ↩

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and success-dependent repayment terms, at below-market interest rates".²³⁵ The alleged facts the United States relied upon for this purpose were: "(i) the existence of institutional apparatus established under various inter-governmental agreements to support the systematic application of LA/MSF; (ii) the provision of LA/MSF on essentially the same terms and conditions in respect of each new model of LCA developed by Airbus; (iii) statements by officials of the Airbus governments expressing their alleged commitment to the continuity of the LA/MSF Programme, (iv) statements by executives of Airbus and EADS allegedly evidencing reliance on LA/MSF; and (v) the perceptions of LA/MSF held by different credit rating agencies."²³⁶ Thus, it is apparent that the arguments advanced by the United States in the original proceeding with respect to the alleged existence of the unwritten LA/MSF Programme were very different to the submissions the United States makes in this compliance dispute with respect to the four "core" terms of LA/MSF and, in particular, with respect to the relevance of these terms to showing that all LA/MSF measures are of essentially the same nature.

6.114. We note, furthermore, that although the original panel rejected the United States' assertions concerning the existence of the unwritten LA/MSF Programme, this was not because the United States had failed to establish that the "core" terms of LA/MSF were similar. On the contrary, the findings made by original panel confirmed that while the terms and conditions of no two LA/MSF agreements were identical, they all could be said to contain the same "core" repayment terms:

As to the differences that exist between the terms and conditions of the various LA/MSF contracts, it is true that the EC member States did not adopt a standard approach or apply the same contractual template when entering into LA/MSF agreements. Overall, the vast majority of terms and conditions of each LA/MSF contract are different, reflecting not only the individual characteristics of the Airbus entity and LCA development project being funded, but also the policy objectives, legal culture and particular demands of the relevant EC member State funding the project. For instance, the financing provided under the first series of LA/MSF contracts represented a much larger proportion of development costs compared with the LA/MSF contracts entered into after the entry into force of the 1992 Agreement. Not all of the EC member State governments required the payment of royalties; and when royalties were called for, they were envisaged in different forms and over varying periods of time. Moreover, the structure of the back-loaded and success-dependent repayment terms found in each contract was not always the same; and in terms of interest rates, where these were identified in the contracts, they were usually set at different levels, at times through the application of different formulas. There are other terms and conditions that vary between the contracts. However, in the light of our findings in respect of the individual LA/MSF measures, there is no doubt that all of the challenged LA/MSF contracts may be characterised as unsecured loans granted to Airbus on back-loaded and success-dependent repayment terms, at below-market interest rates, for the purpose of developing various new models of LCA. While not demonstrating that the LA/MSF Programme described by the United States actually exists, the contracts do show that every time LA/MSF was provided in the past, it involved the four "core terms" the United States identifies.²³⁷ (emphasis added; footnotes omitted)

6.115. Indeed, the United States' characterization of the "core" terms of the pre-A350XWB LA/MSF subsidies is also supported by more specific findings made by the original panel with respect to each of the relevant LA/MSF measures. Thus, for example, the original panel found:

Repayment of LA/MSF takes essentially the same form under each contract. In almost all cases, Airbus is required to reimburse all funding contributions, plus any interest at the agreed rate, exclusively from revenues generated by deliveries of the LCA model that is financed. Such repayments are made in the form of per-aircraft levies and follow a pre-established repayment schedule. Usually, repayments start with the delivery of the first aircraft. However, in some instances, repayment begins only after

²³⁵ Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.499. ↩

²³⁶ Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.499. ↩

²³⁷ Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.525. ↩

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Airbus has made a specified number of aircraft deliveries. Although the amount of the per-aircraft levies varies between the different contracts, it appears in all cases to be graduated, such that repayment amounts at the beginning of the repayment period are lower than at the end. In addition, for [***] of the contracts, royalty payments on a per-aircraft basis are called for on deliveries made in excess of the number needed to secure repayment of the disbursed principal plus any interest.

LA/MSF is provided without any guarantee of repayment in the event that Airbus fails to make the number of deliveries needed to reimburse the full amount of financing obtained from the EC member States. In other words, the scheduled repayments are not secured by any lien on Airbus assets nor are they guaranteed by any third party. The European Communities points out that the governments' claims on revenues generated from the delivery of LCA are, in some cases, guaranteed by one of the companies forming part of the Airbus economic entity. However, notwithstanding this form of guarantee there is no obligation on Airbus (or any company forming part of the Airbus economic entity) to fully (and sometimes even partially) repay LA/MSF in the event that the delivery targets stipulated in the contractual repayment schedules are not achieved. Thus, we agree with the United States that Airbus' obligation to fully repay the loans provided under the challenged LA/MSF measures is entirely dependent upon the success of the particular LCA project. The fact that it is possible, under certain contracts, for Airbus to make voluntary repayments notwithstanding the number of sales achieved, does not, in our view, alter this conclusion.²³⁸ (emphasis added; BCI brackets original; footnotes omitted)

6.116. Turning to the "core" terms of the A350XWB LA/MSF measures, we note that apart from asserting that the original panel had rejected the United States' contentions with respect to the similarities in the "core" terms of the pre-A350XWB LA/MSF measures, the European Union has not specifically responded to the United States' allegation that the repayment terms of A350XWB LA/MSF are success-dependent, back-loaded, levy-based and unsecured just like all other LA/MSF measures. Thus, we do not understand the European Union to contend that the repayment terms of the A350XWB LA/MSF measures are not overall success-dependent, back-loaded, levy-based and unsecured.²³⁹ Indeed, for the reasons we explain elsewhere in this Report where we evaluate the merits of the United States' claims of subsidization²⁴⁰, it is clear to us that although each of the relevant A350XWB loan contracts has its own particular characteristics and features (not unlike all other LA/MSF measures), each contract also contains the same "core" repayment terms identified by the United States.

6.117. The European Union advances three additional grounds which it considers demonstrate that the nature of the A350XWB LA/MSF measures and the pre-A350XWB LA/MSF measures are "significantly different".²⁴¹

6.118. First, the European Union points out that the A350XWB LA/MSF measures were concluded more than [***] years after the launch of the A350XWB programme, explaining that, in contrast, the pre-A350XWB LA/MSF measures were all "generally entered into much closer in time to the launch of the related aircraft", on average [***] after launch.²⁴² For the European Union, this difference shows that "the A350XWB does indeed make a significant departure from previous programs".²⁴³ Relying upon its own analysis of the period of time between the launch of an Airbus LCA and the conclusion of a related LA/MSF agreement²⁴⁴, the United States argues that "the EU

²³⁸ Panel Report, EC and certain member States – Large Civil Aircraft, paras. 7.374-7.375. ↩

²³⁹ We note, in this regard, that the European Union did not object to the United States' assertion that "the parties both agree that LA/MSF for the A350XWB was granted by France, Spain, Germany and the UK to Airbus, for the purpose of developing a new model of large civil aircraft, on unsecured, success-dependent, levy-based, and back-loaded terms". (United States' second written submission, para. 90 and fn 138) ↩

²⁴⁰ See below paras. 6.225-6.287. ↩

²⁴¹ European Union's first written submission, para. 104. ↩

²⁴² European Union's first written submission, para. 105; second written submission, para. 37; and PricewaterhouseCoopers, "Analysis Addressing the United States' Comments on PwC's Report on the Expected Life of Subsidies to Airbus", 30 November 2012, (PwC Rebuttal Report), (Exhibit EU-120) (BCI), table 2. ↩

²⁴³ European Union's second written submission, para. 37. ↩

²⁴⁴ The United States explains that its analysis "may not be exhaustive, since the EU has not accounted for all past LA/MSF contracts with Airbus in a transparent manner" recalling that in the original proceeding, ↩

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member States frequently issued documents granting LA/MSF after (and in some cases, long after) the formal launch of the relevant aircraft".²⁴⁵ The United States recalls that "these past differences in timing did not prevent the conclusion that LA/MSF enabled Airbus to bring the aircraft to market when and as it did". Accordingly, the United States maintains that the fact that A350XWB LA/MSF was provided after the launch of the A350XWB does not differentiate it "in any meaningful way" from the pre-A350XWB LA/MSF measures.²⁴⁶

6.119. We note that the data the parties have used to substantiate their assertions concerning the period of time between the launch of an Airbus LCA and the conclusion of a related LA/MSF agreement are not identical. Nevertheless, on the basis of the information presented by the European Union, it is apparent that over two-thirds of the pre-A350XWB LA/MSF agreements were entered into after the launch of an Airbus LCA. Thus, a first conclusion it is possible to draw from the European Union's data is that, in general, the pre-A350XWB LA/MSF agreements were concluded after launch, as were all four of the A350XWB LA/MSF contracts.

6.120. The information the European Union relies upon also reveals that of the pre-A350XWB LA/MSF measures entered into before the launch of a relevant Airbus LCA, the vast majority of these concerned Airbus' earliest models of LCA (the A300, A310, and A320), at a time when Airbus had little or no experience with twin-aisle or single-aisle aircraft and little or no revenue from LCA sales. Thus, of the nine LA/MSF agreements reported in the European Union's data as having been concluded before or at the same time as the launch of a financed Airbus LCA, seven related to the A300, A310, and A320. Moreover, it is apparent from the same data that the pre-A350XWB LA/MSF agreements were, on average, concluded much closer in time to the launch date of Airbus' three earliest models of LCA compared with its three subsequent models of LCA (the A330, A340, and A380), when Airbus would have had relatively more LCA experience and sales revenue. In particular, whereas 13 out of the 17 LA/MSF measures for the A300, A310, and A320 were entered into either before or within 10 months of the launch of the relevant LCA, eight of the 11 LA/MSF agreements concluded for the purpose of the A330, A340, and A380 were entered into only 12 months or more after launch.

6.121. In our view, these facts suggest that the provision of pre-A350XWB LA/MSF has followed an evolving pattern of financing that has seen the Airbus governments and Airbus enter into LA/MSF agreements, on average, later in time relative to the launch of a particular Airbus LCA as Airbus' position in the LCA sector has matured. In this regard, we see a parallel between the evolution of the timing of the conclusion of the pre-A350XWB LA/MSF agreements and the gradually decreasing amounts of principal loaned under each of the pre-A350XWB LA/MSF agreements²⁴⁷ and, in general, the progressively lower levels of subsidization granted by the Airbus governments over time²⁴⁸, as Airbus has emerged as a credible and increasingly sophisticated player in the LCA industry. In this light, the fact that all four of the A350XWB LA/MSF measures were entered into several years after the launch of the A350XWB might well be considered to be simply another step in the evolution of LA/MSF that reflects Airbus' own, by now well-established, position in the LCA industry. Thus, rather than demonstrate that the nature of A350XWB LA/MSF is different to all other LA/MSF measures, the data concerning the timing relative to launch of the various LA/MSF measures which the European Union relies upon could, to this extent, be interpreted to suggest that, not unlike all other LA/MSF, the conclusion of the A350XWB LA/MSF contracts was timed in a way that reflected Airbus' status as a mature producer of LCA in 2006 and the years that immediately followed.

6.122. In any case, even excluding these considerations, we do not see how the difference in the timing of the conclusion of the A350XWB LA/MSF contracts compared with the pre-A350XWB

"the EU refused to provide the German A330/A340 contract even though the Panel had specifically asked the EU for it". (United States' second written submission, fn 144)

²⁴⁵ United States' second written submission, para. 91. ↩

²⁴⁶ United States' second written submission, para. 92. ↩

²⁴⁷ The development costs covered by the principal provided under the respective LA/MSF agreements were: close to 100% for the A300; between 90% and 100% for the A310; between 70% and 90% for the A320; between 60% and 90% for the A330 and A340 basic; and up to a maximum of 33% for the A330-200, A340-500/600 and A380. (See e.g. Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.369) ↩

²⁴⁸ See e.g. Panel Report, EC and certain member States – Large Civil Aircraft, paras. 7.482-7.490; and Appellate Body Report, EC and certain member States – Large Civil Aircraft, paras. 923-929. ↩

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LA/MSF measures demonstrates that they have a "significantly different" nature, given that they are all: (a) loan agreements; (b) containing the same four "core" repayment terms; (c) entered into by essentially the same parties (Airbus and the Airbus governments); and (d) for the purpose of financing the development costs of Airbus LCA. The European Union does not deny that the A350XWB LA/MSF agreements challenged by the United States are intended to finance part of the development costs of the A350XWB. Yet, according to the European Union, the fact that the A350XWB LA/MSF agreements were concluded much later in time relative to the launch of the A350XWB compared with pre-A350XWB LA/MSF means that the former must be found to have a "significantly different" nature. In our view, the European Union has failed to explain and substantiate its position. The pre-A350XWB LA/MSF measures were found in the original proceeding to have financed from 33% to 100% of the development costs of each and every model of Airbus LCA²⁴⁹, thereby enabling Airbus to "launch, develop, and introduce to the market" its full range of LCA.²⁵⁰ As the United States points out, the fact that a number of the pre-A350XWB LA/MSF agreements were concluded only after the relevant Airbus LCA were launched did not preclude the panel from making those findings, which were left undisturbed by the Appellate Body. Moreover, we note that in several instances, part of the principal loaned under the pre-A350XWB LA/MSF contracts could be used to cover costs incurred prior to the conclusion of the relevant LA/MSF contract.²⁵¹ The same possibility is made available under the French and UK A350XWB LA/MSF agreements.²⁵² To this extent, the fact that any such LA/MSF agreement postdates the launch of a relevant LCA does not render its nature any different to a LA/MSF agreement that predates the launch of an LCA, as in both cases, they are intended to finance the development costs of Airbus LCA.

6.123. Thus, we are not convinced that the differences in the mere timing of the conclusion of the A350XWB LA/MSF measures compared to the pre-A350XWB LA/MSF measures means that they are "significantly different" in terms of their nature for the purpose of the close nexus test.

6.124. The second additional ground the European Union appears to raise in support of its view that A350XWB LA/MSF and other LA/MSF measures have a different nature is that the former were not entered into pursuant to an intergovernmental agreement.²⁵³ We note, however, that not all of the pre-A350XWB LA/MSF measures were provided under intergovernmental agreements, with French LA/MSF for the A330-200, French, and Spanish LA/MSF for the A340-500/600 and all four of the A380 LA/MSF measures concluded under separate national level contracts, not unlike (in this sense) the A350XWB LA/MSF measures.²⁵⁴

6.125. The third additional submission the European Union appears to make to substantiate its position concerning the difference in the nature of A350XWB LA/MSF compared with other LA/MSF is a response to an argument we do not understand the United States to be making. In particular, the European Union argues that in attempting to demonstrate that A350XWB LA/MSF is of the same nature as previous LA/MSF, the United States maintains that "a critical aspect of the 'nature' element is whether a measure targets 'the same products and the same parties'".²⁵⁵ The European Union goes on to state that:

Beyond the fact that the A350XWB is simply not the "same product" as the A300, A310, A330, or A340, this argument is unavailing as a legal matter, as the Appellate Body, in both US – Softwood Lumber IV (Article 21.5 – Canada) and US –

²⁴⁹ See above fn 247. ↩

²⁵⁰ Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.1949. ↩

²⁵¹ Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.373. ↩

²⁵² See discussion below at paras. 6.227 and 6.259-6.260. ↩

²⁵³ Although the European Union raises this argument in the context of its discussion of the nature of the A350XWB LA/MSF contracts for the purpose of the close nexus test, it is not clear to us whether the European Union advances it for this purpose or simply to show that the United States has failed to identify any "overarching measure" and, therefore, failed (for this reason alone) in its attempt to bring A350XWB LA/MSF within the scope of this compliance dispute. To the extent that the European Union intended the latter, we recall that we have previously found that the United States is under no obligation to identify an "overarching measure" in order to make out its claims. Thus, the fact that the A350XWB LA/MSF agreements may have been concluded in the absence of any intergovernmental agreements does not undermine the United States' claims. ↩

²⁵⁴ Panel Report, EC and certain member States – Large Civil Aircraft, paras. 7.371 and 7.534-7.548. ↩

²⁵⁵ European Union's first written submission, para. 108 (quoting United States' first written submission, paras. 143-144). ↩

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Zeroing (Article 21.5 – EC), made it clear that identity of the product and country coverage … does not suffice to establish a close nexus.²⁵⁶ (underline original; footnote omitted)

6.126. However, the United States does not argue that the A350XWB LA/MSF is of the same nature as other LA/MSF because it finances the development of a product that is identical to the A300, A310, A330, or A340. Rather, the United States' contention is that A350XWB LA/MSF is of the same nature to other LA/MSF because it finances the development of a twin-aisle LCA product – that is, a product which the United States argues is sold into the same twin-aisle product market – with respect to which pre-A350XWB LA/MSF was found to be a "genuine and substantial" cause of serious prejudice to its interests in the original proceeding.²⁵⁷ Although we recognize that the fact that two measures may have the same product scope will not necessarily imply that they should be considered (for that reason alone) to be of the same nature for the purpose of a close nexus analysis, the fact that the A350XWB is the latest version of Airbus twin-aisle LCA, in our view, supports the United States' submissions concerning the close connection between the nature of the A350XWB LA/MSF measures and the LA/MSF measures at issue in the original proceeding.

6.127. Finally, we agree with the United States that several other pieces of evidence²⁵⁸ provide strong support for the view that the pre-A350XWB LA/MSF measures and A350XWB LA/MSF have a similar nature. One such piece of evidence comes from the preamble of the Spanish A350XWB LA/MSF contract, in which the following statement is made:

Our country, similar to France, Germany, and the United Kingdom, which host the other national subsidiaries of Airbus SAS, has been supporting the development of earlier models of Airbus aircraft through refundable advances given to the current subsidiary of Airbus SAS established in Spain or earlier to the company Construcciones Aeronauticas, S.A. The system of refundable advances through which the state shares the risks of the project with the company has produced as a result the facilitation of financing for the companies without cost for the taxpayer.²⁵⁹

6.128. In our view, this statement very clearly demonstrates that the parties to the Spanish A350XWB LA/MSF agreement (i.e. the Spanish State and Airbus Spain) see A350XWB LA/MSF to be part of the same "system of refundable advances" used to fund the development of Airbus' previous LCA programmes, in this way revealing that both Airbus Spain and the Spanish State recognize that A350XWB LA/MSF is, to this extent, of essentially the same nature as pre-A350XWB LA/MSF.

6.129. A similar recognition is, in our view, found in certain HSBI evidence from a document prepared by a different Airbus government in the first half of 2009 concerning the A350XWB project.²⁶⁰ As we read them, the statements contained in the relevant passage quoted by the United States very clearly reveal that one of the Airbus governments considered that A350XWB LA/MSF could be affected by the outcome of the ongoing WTO dispute because of its similarity with pre-A350XWB LA/MSF, again, in our view, implying that this government also considered A350XWB LA/MSF was of the same nature as previous LA/MSF.

²⁵⁶ European Union's first written submission, para. 108. ↩

²⁵⁷ United States' first written submission, para. 147. ↩

²⁵⁸ The United States also points out that the EADS financial statements report the funding of A350XWB as an undifferentiated component of the broader historic total of LA/MSF. In our view, this fact reveals that, at least for accounting purposes, EADS considers that A350XWB LA/MSF to be of the same nature as pre-350XWB LA/MSF. (United States' first written submission, para. 156 and fn 233 (citing EADS Financial Statements, 2010, (Exhibit USA-6), p. 63)) ↩

²⁵⁹ United States' first written submission, paras. 155-156 (quoting Real Decreto 1666/2009, de 6 noviembre, por el que se regula la concesión directa de anticipos reembolsables a la filial española de Airbus SAS denominada Airbus Operations S.L para su participación en el programa de desarrollo de la nueva familia de aviones Airbus A350XWB, Boletín Oficial del Estado, 9 November 2009, (United States' English Translation), (Exhibit USA-46), pp. 93091-93092; and citing UK Department for Business, Innovation and Skills, "The UK Strategic Investment Fund: Interim Report", October 2009, p. 15, (Exhibit USA-43); and EADS Financial Statements, 2010, (Exhibit USA-6), p. 63). ↩

²⁶⁰ United States' second written submission, para. 100 (quoting HSBI evidence in the same paragraph and fn 194). ↩

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6.130. In conclusion, therefore, we find that the United States has established that the challenged A350XWB LA/MSF measures have essentially the same nature as the LA/MSF measures found to cause adverse effects in the original proceeding. As we have noted above, A350XWB LA/MSF and pre-A350XWB LA/MSF are of a very similar nature because of at least the following four important commonalities – they are all: (a) loan agreements; (b) containing the same four "core" repayment terms; (c) entered into by essentially the same parties (Airbus and the Airbus governments); and (d) for the purpose of financing the development costs of Airbus LCA (in particular, a new model of Airbus twin-aisle LCA).

6.4.1.5.3.2 Effects

6.131. The parties agree that one of the questions that is relevant to the assessment of the effects of an undeclared measure for the purpose of applying the close nexus test is whether that measure undermines a responding Member's compliance with the recommendations and rulings of the DSB.²⁶¹ In essence, the United States argues that to the extent that LA/MSF was found in the original proceeding to cause adverse effects, in the form of certain types of serious prejudice to the United States' LCA industry in the market for twin-aisle LCA, new LA/MSF for Airbus' latest version of twin-aisle LCA, the A350XWB, undermines any compliance that the European Union might have otherwise achieved with respect to the adopted recommendation calling upon "the Member granting each subsidy found to have resulted in … adverse effects"²⁶² to "take appropriate steps to remove the adverse effects" or "withdraw the subsidy".²⁶³ The European Union, on the other hand, submits that there is no support for the United States' contentions concerning the effects of A350XWB LA/MSF because, in its view, they are based on the United States' unsubstantiated claim that the A350XWB LA/MSF measures are "subsidies" that cause "adverse effects" within the meaning of the SCM Agreement. The European Union emphasizes that whether the challenged measures are "subsidies" that cause "adverse effects" is a substantive question beyond the scope of the jurisdictional matter that is before this compliance Panel. Thus, according to the European Union, it would not be appropriate for a compliance panel to accept jurisdiction over a measure on the basis of that panel's actual or anticipated ultimate finding on the merits of the alleged violation at issue.²⁶⁴

6.132. As already noted, the question that is before us in this part of our Report is a jurisdictional one, i.e. whether the A350XWB LA/MSF measures fall within the scope of this compliance proceeding. Whether the A350XWB LA/MSF measures are "subsidies" that cause "adverse effects" within the meaning of the relevant provisions of the SCM Agreement is a contested matter of substance, which the United States would be entitled to have us examine only if the United States were able to demonstrate that A350XWB LA/MSF is within our jurisdiction. To this extent, we agree with the European Union that it would be inappropriate to evaluate the United States' submissions concerning the scope of this proceeding on the basis of any "actual or anticipated" findings with respect to the merits of the United States' substantive adverse effects claims.

6.133. We note, however, the United States maintains that it has "never taken the position that the 'effects' examined in the close nexus test are the same as the 'adverse effects' described in Articles 5 and 6 of the SCM Agreement". Furthermore, the United States asserts that the "effects" of A350XWB LA/MSF that are the focus of its close nexus analysis are limited to the financing made available to Airbus through A350XWB LA/MSF, which the United States submits enabled Airbus to launch and develop the A350XWB as and when it did.²⁶⁵ According to the United States, these effects are "not in and of themselves adverse effects" within the meaning of Articles 5 and 6 of the SCM Agreement.

²⁶¹ United States' first written submission, paras. 148-150 (citing Appellate Body Reports, US – Zeroing (EC) (Article 21.5 – EC), paras. 247, 250, and 251; and US – Softwood Lumber IV (Article 21.5 – Canada), paras. 71 and 87); and European Union's first written submission, para. 83. ↩

²⁶² Appellate Body Report, EC and certain member States – Large Civil Aircraft, para. 1416. ↩

²⁶³ United States' first written submission, paras. 148, 379, and 395; and second written submission, paras. 61, 104-105, and 548-551. The United States also argues that the effects of pre-A350XWB LA/MSF subsidies alone enabled Airbus to launch the A350XWB as and when it did. ↩

²⁶⁴ European Union's first written submission, paras. 109-112 and 1083-1204; and second written submission, paras. 37 and 870-1202. ↩

²⁶⁵ United States' second written submission, paras. 61 and 105. ↩

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6.134. Although we find the United States' submissions concerning the effects of A350XWB LA/MSF for the purpose of the close nexus test to be, at times, difficult to separate from the arguments it has advanced to support its subsidization and adverse effects claims, a number of the effects of A350XWB LA/MSF which the United States identifies can, in our view, be established without having to determine the merits of its substantive non-compliance complaint. Before proceeding to examine these effects, we note the Appellate Body's guidance that it may not always be possible for a compliance panel exploring the effects of an undeclared measure for the purpose of the close nexus test to determine whether it "actually undermine{s} the compliance otherwise achieved by the implementing Member".²⁶⁶ This is because:

{A}t the time of the jurisdictional inquiry into its terms of reference, a panel might not be in a position to determine whether this is the case, because it will not be possible to determine whether the "connected" measures potentially undermine compliance without determining first whether the declared measures "taken to comply" fully achieved compliance with the recommendations and rulings of the DSB. … To find otherwise would limit compliance proceeding{s} to examining whether closely connected measures affect compliance achieved by the declared measures "taken to comply"; situations where a Member has taken measures achieving only partial compliance, or has omitted to take measures, would be excluded from scrutiny. As we have found earlier, the scope of Article 21.5 proceedings is not limited in such a way.²⁶⁷ (emphasis added)

6.135. Consistent with this line of reasoning, and in the light of the United States' request that the Panel find that the European Union's alleged compliance "steps" have not brought the European Union and relevant member States into conformity with their obligations under the covered agreements, we will proceed with our analysis of the effects of A350XWB LA/MSF with a view to understanding the extent to which A350XWB LA/MSF could undermine any compliance that the European Union might otherwise have achieved with the adopted recommendations and rulings in this dispute.²⁶⁸

6.136. Turning to the effects of A350XWB LA/MSF, we recall that the A350XWB is a redesigned version of the Original A350, which was the subject of the United States' unsuccessful claims of adverse effects in the original proceeding because no commitment to provide LA/MSF for the Original A350 was found to exist at the time of the establishment of the original panel.²⁶⁹ According to Christophe Mourey, Airbus Senior Vice President for Contracts, the Original A350 was launched "as a significantly improved version of the A330".²⁷⁰ Similarly, Mourey explains that the smaller versions of the A350XWB are considered to be "eventual replacement{s} of the A330"²⁷¹, with the largest version of the A350XWB expected to bring an end to the alleged "effective" monopoly that Boeing experienced with the 777 for "several years" due to the relatively poor performance of the A340 and the ultimate termination of that programme in 2011.²⁷² Numerous other pieces of evidence are consistent with these views, revealing that there is a close relationship between not only the general design, physical characteristics and end-uses of the A350XWB and, in particular, the A330, A340 and A380, but also how Airbus chose to position the A350XWB on the market relative to the A330 and A340.²⁷³ Such evidence includes the A350XWB Business Case itself as well as an explicit statement by Airbus in [***], which clearly establish

²⁶⁶ Appellate Body Report, US – Zeroing (EC) (Article 21.5 – EC), para. 256. (emphasis original) ↩

²⁶⁷ Appellate Body Report, US – Zeroing (EC) (Article 21.5 – EC), para. 256. ↩

²⁶⁸ We note in this regard that the Appellate Body in US – Zeroing (EC) (Article 21.5 – EC) found that the undeclared measures at issue in that dispute "could" or "may" have undermined the United States' implementation of the recommendations and rulings of the DSB, to the extent they involved the use of zeroing. (Appellate Body Report, US – Zeroing (EC) (Article 21.5 – EC), paras. 250, 251, 252, and 256). ↩

²⁶⁹ See above para. 6.53. ↩

²⁷⁰ Christophe Mourey, Senior Vice President Contracts, Airbus, "Statement on Current Competitive Conditions in the LCA Industry", 4 July 2012, (Mourey Statement), (Exhibit EU-8) (BCI), para. 89. ↩

²⁷¹ Mourey Statement, (Exhibit EU-8) (BCI), para. 89. ↩

²⁷² Mourey Statement, (Exhibit EU-8) (BCI), para. 116. ↩

²⁷³ See e.g. Ameet Sachdev, "Airbus redesigns its strategy for long haul: A350 line to carry bulk of the load", Chicago Tribune, 18 July 2006, (Exhibit EU-99); Scott Hamilton, "A350 Redesign Threatens Boeing 777; Boeing prepares 787 for Challenge", Leeham.net, 6 June 2006, (Original Exhibit US-141), (Exhibit USA-27); "Time for a new, improved model: Airbus gets to work on its medium-sized aircraft, but deeper problems remain", The Economist, 20 July 2006, (Exhibit USA-28). This and other evidence is examined and discussed in various parts of our Report, including below at paras. 6.1296-6.1369 and 6.1724-6.1760. ↩

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that the A350XWB family was originally conceived and designed by Airbus to win sales against a range of Boeing LCA that includes aircraft falling within the market for twin-aisle LCA in which the pre-A350XWB LA/MSF subsidies were found to cause adverse effects in the original proceeding.²⁷⁴ While the European Union argues that the A350XWB today competes in its own separate "product market" with only the Boeing 787, the United States contests the European Union's assertions, submitting that all twin-aisle Airbus and Boeing LCA continue to compete in the same product market.²⁷⁵ In any case, even accepting the European Union's submissions in full would imply that any A350XWB sales won by Airbus would be lost sales of the 787 for Boeing.²⁷⁶

6.137. Finally, we recall that A350XWB LA/MSF was intended, has been and is being used, to finance part of the development costs of the A350XWB in a similar proportion to the development costs financed by the pre-A350XWB LA/MSF agreements concluded after the 1992 Agreement.²⁷⁷ Thus, it is apparent that, as the United States argues, one of the effects of A350XWB LA/MSF was the financing of a significant portion of the development costs of a new twin-aisle LCA²⁷⁸ that Airbus anticipated would effectively replace the two models of twin-aisle LCA (the A330 and A340) that had been: (a) launched, developed and brought to market with the assistance of pre-A350XWB LA/MSF; and (b) sold into a customer space in which the United States' LCA industry was found to have suffered serious prejudice in the original proceeding. Recalling that the adopted recommendation in this dispute called upon the European Union and relevant member States to "take appropriate steps to remove the adverse effects" or "withdraw the subsidy", we find that this effect, when considered in the light of the nature of A350XWB LA/MSF compared with the pre-A350XWB LA/MSF subsidies, could undermine the European Union's compliance actions.

6.4.1.5.3.3 Timing

6.138. In evaluating the compliance panel's analysis of the timing of the undeclared measures at issue in US – Zeroing (EC) (Article 21.5 – EC), the Appellate Body agreed with the parties (the European Communities and the United States) that the timing of a measure "cannot be determinative" of whether it bears a sufficiently close nexus with a Member's implementation of the recommendations and rulings of the DSB so as to fall within the scope of a proceeding initiated under Article 21.5 of the DSU.²⁷⁹ Thus, the Appellate Body explained that the relevant inquiry for the purpose of determining whether an undeclared measure may fall within the scope of a compliance proceeding is not whether it was taken after the adopted recommendations and rulings with the intention to comply, but rather whether despite being "issued before the adoption of the recommendations and rulings of the DSB, {that measure} still {bears} a sufficiently close nexus, in terms of nature, effects, and timing, with those recommendations and rulings, and with the declared measures 'taken to comply', so as to fall within the scope of Article 21.5 proceedings".²⁸⁰

6.139. After examining the nature and effects of the undeclared measures relative to the adopted recommendations and rulings, and the declared measures "taken to comply", the Appellate Body in US – Zeroing (EC) (Article 21.5 – EC) went on to find that the undeclared measures fell within

²⁷⁴ "Presentation to the EADS Board", 7 November 2006 (slides 1-45) and "A350XWB Business Case: Assumptions, Sensitivities and Limitations, Presentation to EADS BoD – status", 2 November 2006, (slides 46-68), (A350XWB Business Case Presentation), (Revised), (Exhibit EU-130) (HSBI), slides 11, 21, 51, 92, and 93; and Letter, Airbus [***], [***] (Exhibit EU-393) (HSBI). ↩

²⁷⁵ We evaluate the merits of the parties' submissions with respect to the relevant "product markets" for LCA below, starting at para. 6.1155. ↩

²⁷⁶ By referring to Boeing lost sales of the 787, we are simply highlighting that were the European Union's product market arguments to be correct, the A350XWB would be in competition only with the 787, necessarily implying that as a matter of fact, Boeing would lose sales of the 787 to the A350XWB, the development costs of which are partly financed by A350XWB LA/MSF. Thus, our reference to Boeing lost sales in this passage is not a reference to "lost sales" within the meaning of Article 6.3(c) of the SCM Agreement. ↩

²⁷⁷ Agreement between the European Community and the Government of the United States concerning the Application of the GATT Agreement on Trade in Civil Aircraft on Trade in Large Civil Aircraft (the 1992 Agreement). See also Panel Report, EC and certain member States – Large Civil Aircraft, paras. 7.66-7.69. ↩

²⁷⁸ In making this factual finding, we are not saying that Airbus could not have launched and developed the A350XWB without A350XWB LA/MSF. We are merely noting that one of the undisputed effects of A350XWB LA/MSF was that it financed part of the development costs of the A350XWB. The merits of the United States' submissions concerning the extent to which Airbus could have launched and brought to market the A350XWB in the absence of LA/MSF are examined below at paras. 6.1535-6.1723. ↩

²⁷⁹ Appellate Body Report, US – Zeroing (EC) (Article 21.5 – EC), para. 224. ↩

²⁸⁰ Appellate Body Report, US – Zeroing (EC) (Article 21.5 – EC), para. 226. (emphasis original) ↩

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the scope of the compliance dispute because the fact that their issuance predated the adoption of the recommendations and rulings of the DSB was "not sufficient to sever the pervasive links that {were} found to exist, in terms of nature and effects".²⁸¹ In our view, a similar conclusion is warranted with respect to the A350XWB LA/MSF measures.

6.140. The A350XWB LA/MSF measures were formally concluded between [***]²⁸², that is, approximately between [***] before the recommendations and rulings in the original proceeding were adopted. Likewise, while some of the European Union's alleged compliance "steps" took place after the recommendations and rulings were adopted²⁸³, others relate to events that occurred over a period of time that either ended well before the recommendations and rulings were adopted (indeed, in some cases, even before the United States' made its request for consultations in this dispute) or overlapped with the adoption of the recommendations and rulings.²⁸⁴ Thus, the conclusion of the A350XWB LA/MSF measures as well as most of the European Union's alleged compliance "actions" took place prior to the adoption of the recommendations and rulings by the DSB.

6.141. We recall that among the different events pre-dating the adopted recommendations and rulings of the DSB, which the European Union maintains have brought it into conformity with its obligations under the SCM Agreement, is the alleged "amortization of benefit" of the LA/MSF subsidies provided for the A330/A340 and A330-200 by virtue of the end of the anticipated marketing lives of these LCA. As already noted, the European Union considers that these events, which in terms of their timing are closely connected with the launch of the A350XWB and the conclusion of the four A350XWB LA/MSF agreements²⁸⁵, demonstrate that the relevant LA/MSF subsidies have been "withdrawn", within the meaning of Article 7.8 of the SCM Agreement and, therefore, that it has complied with the recommendations and rulings of the DSB. We examine the European Union's submissions concerning the relevance of the alleged "amortization of benefit" for the purpose of compliance with Article 7.8 of the SCM Agreement elsewhere in this Report. However, for the purpose of the close nexus test, we note that the events the European Union relies upon to demonstrate compliance are consistent with our finding, based on evidence including Airbus' own stated views, that the A350XWB was anticipated to be a replacement for the A330 and A340. In particular, to the extent that the timing of the launch of the A350XWB reflected Airbus' own expectations about when the marketing lives of the A330 and A340 would come to an end and, therefore, when it would need to launch a replacement LCA model, it could be argued that the timing of the A350XWB LA/MSF measures, to the extent that they are intended to fund part of the A350XWB's development costs, is related to the same essential considerations motivating the European Union's claim that it has "withdrawn" A330/A340 and A330-200 LA/MSF subsidies – that is, the anticipated end of the relevant aircraft's marketing lives.

6.142. The United States maintains that the timing of the A350XWB LA/MSF measures can be connected with the adoption of the recommendations and rulings by the DSB because all four agreements were concluded after the panel issued its interim report to the parties in September 2009. Moreover, according to the United States, certain HSBI evidence from a document prepared by one of the Airbus governments in the first half of 2009 concerning the A350XWB project demonstrates that "the A350XWB grew from a deliberative process that took place in the shadow of the DSB's future rulings and recommendations".²⁸⁶

6.143. We recall that Airbus launched the A350XWB as a redesigned version of the Original A350 at a time when it must have been aware that the original panel was considering the merits of the United States' challenge to the WTO-consistency of: (a) the LA/MSF agreements entered into between Airbus and the Airbus governments with respect to each and every new model of Airbus

²⁸¹ Appellate Body Report, US – Zeroing (EC) (Article 21.5 – EC), para. 234. ↩

²⁸² The precise dates on which the various legal instruments making up the A350XWB LA/MSF measures are set out below at paras. 6.226, 6.236, 6.249 and 6.257-6.258 where we evaluate the merits of the United States' claims of subsidization. ↩

²⁸³ See above paras. 6.8-6.24. ↩

²⁸⁴ See above paras. 6.25-6.40. ↩

²⁸⁵ The European Union asserts that the anticipated marketing lives of the A330/A340 and A330-200 came to an end in [***] and [***], respectively. We examine the European Union's submissions in more detail below at paras. 6.872-6.879. ↩

²⁸⁶ United States' second written submission, para. 108 (quoting HSBI evidence in the same paragraph and footnote 205). ↩

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LCA ever brought to market; (b) an alleged commitment on the part of the Airbus government to provide LA/MSF for the Original A350; and (c) an alleged unwritten LA/MSF Programme. The A350XWB Business Case reveals that Airbus launched the A350XWB in December 2006 contemplating that the Airbus governments would provide financial assistance of a different kind to LA/MSF. In April 2007, the UK Minister for Industry and the Regions, Margaret Hodge, revealed in the House of Commons Trade and Industry Committee, that the UK Government was in "discussions" and "negotiations" with Airbus on "the support that might be required with developing" the A350XWB, explaining further that it would "have to be very conscious of the WTO rules and constraints in the support" eventually provided.²⁸⁷ At the same Committee meeting, it was also disclosed that in terms of "launch investment or something equivalent to launch investment, given the WTO issues, so far they {i.e. Airbus} have been non-specific".²⁸⁸

6.144. In January 2008 it was reported in the New York Times that Airbus executives had said that they expected to "begin discussions with European governments in the second half of {2008} about providing some of the initial financing for its new widebody jet, the A350-XWB".²⁸⁹ Airbus commenced formal negotiations with the Airbus governments for A350XWB LA/MSF in [***] after the launch of the A350XWB.²⁹⁰ Three of the four A350XWB LA/MSF agreements were finally concluded shortly after the issuance of the interim report by the panel to the parties; and although the "framework" agreement of the fourth LA/MSF agreement had been entered into shortly before the original panel's interim report was issued to the parties, the "implementing" legal instrument under this contract was concluded, like the other three LA/MSF measures, shortly after the original panel issued its interim report.²⁹¹

6.145. While we do not believe the coincidence in the timing of the conclusion of the A350XWB LA/MSF contracts and the issuance of the panel's interim report to the parties demonstrates that the former was tied to the latter, the facts described in the previous paragraphs strongly suggest that Airbus and the Airbus governments were considering their options with respect to how to finance the A350XWB, including by means of LA/MSF, in the light of the ongoing WTO dispute. This understanding is, in our view, confirmed by the statements contained in one of the HSBI documents referred to by the United States, which we believe reveals not only that it was the opinion of one of the Airbus governments that A350XWB LA/MSF could be affected by the outcome of the WTO dispute because of the fact that it was of the same nature as previous LA/MSF, but also that this particular government was proceeding in negotiations with Airbus with these considerations in mind.²⁹²

6.146. Finally, the European Union observes that the United States could have requested the establishment of a new panel to review the WTO consistency of the four A350XWB LA/MSF measures several years ago²⁹³, suggesting that this fact should also weigh against bringing the A350XWB LA/MSF measures into the scope of this proceeding. We disagree. In our view, the fact that it may have been possible for a party to challenge an undeclared measure in an original proceeding initiated under Article 6.2 of the DSU does not preclude it from bringing a claim against the same measure in an Article 21.5 compliance proceeding if it considers it has a "particularly close relationship" to the adopted DSB recommendations and rulings, and the measures declared to be "measures taken to comply". Provided that an undeclared measure satisfies the close nexus test, we do not see why a complaining Member should be barred from having recourse to the original panel in an Article 21.5 proceeding to determine whether that measure affects a

²⁸⁷ UK House of Commons Trade and Industry Committee, "Recent Developments with Airbus", Ninth Report of Session 2006-07, Volume II: Oral and written evidence, 25 July 2007, (Exhibit EU-177), pp. 4-5. ↩

²⁸⁸ UK House of Commons Trade and Industry Committee, "Recent Developments with Airbus", Ninth Report of Session 2006-07, Volume II: Oral and written evidence, 25 July 2007, (Exhibit EU-177), p. 5. ↩

²⁸⁹ Nicola Clark, "Airbus to seek government aid for A350 in second half", The New York Times, 16 January 2008, (Exhibit USA-434). ↩

²⁹⁰ European Union's response to Panel question No. 101 (citing Statement by Tom Williams, Executive Vice President, Programmes, Airbus SAS, 17 May 2013, (Exhibit EU-354) (BCI), para. 3; Meeting agenda, [***], (Exhibit EU-392) (BCI); Letter, Airbus [***], [***], (Exhibit EU-393) (HSBI); and Letter, Airbus Operations GmbH, [***], (Exhibit EU-394) (HSBI)). See also UK Department of Trade and Industry Annual Report 2006-2007, p. 107, (Exhibit USA-38) in relation to the receipt of an application for launch investment for the Airbus A350. ↩

²⁹¹ See above fn 282. ↩

²⁹² United States' second written submission, para. 108 (quoting HSBI evidence in the same paragraph and fn 205). ↩

²⁹³ European Union's first written submission, para. 103. ↩

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responding Member's compliance with the adopted recommendations and rulings, regardless of whether it could have been challenged in an original proceeding prior to the end of the compliance period.

6.147. Moreover, in the context of the present dispute, we note that the United States' claims with respect to A350XWB LA/MSF are not only focused on the alleged effects of those measures considered in isolation, but also their effects considered together with the effects of the pre-A350XWB LA/MSF subsidies. In this light, the fact that the United States chose to pursue its claims against the A350XWB LA/MSF measures in a compliance dispute in which the alleged continued effects of the pre-A350XWB LA/MSF will be determined (instead of an original panel), not only avoids the parties having to address essentially the same questions in two separate proceedings, but it also reflects the nature of one part of the United States' claims of non-compliance with respect to the effects of the pre-A350XWB LA/MSF measures, which could only be resolved by an evaluation of the parties' submissions concerning the effects of the pre-A350XWB LA/MSF and A350XWB LA/MSF together.

6.148. In conclusion, therefore, although we can find some similarities and common connections between the timing of the A350XWB LA/MSF measures and the European Union's alleged compliance "actions", as well as the recommendations and rulings adopted by the DSB, we are not convinced that the evidence conclusively demonstrates that the timing of A350XWB LA/MSF, in and of itself, is such that the A350XWB LA/MSF agreements must be considered to be "closely connected" measures for the purpose of this compliance dispute. Nevertheless, in the light of the above facts and considerations, we are of the view that the fact that the A350XWB LA/MSF measures predate the adoption of the recommendations and rulings by the DSB in this dispute, does not sever the links we have found to exist, in terms of nature and effects.

6.4.1.5.4 Conclusion

6.149. We have found above that the A350XWB LA/MSF measures have a similar nature to the pre-A350XWB LA/MSF measures, which are, of course, the subject of both the adopted DSB recommendations and rulings and most of the European Union's alleged compliance actions, because they are all: (a) loan agreements; (b) containing the same four "core" repayment terms; (c) entered into by essentially the same parties (Airbus and the Airbus governments); and (d) for the purpose of financing the development costs of Airbus LCA (in particular, a new model of Airbus twin-aisle LCA). In addition, we have concluded that to the extent that A350XWB LA/MSF was intended to be used to finance part of the development costs of a model of Airbus LCA that was anticipated to replace the A330 and A340 (both of which had been: (a) launched, developed and brought to market with the assistance of pre-A350XWB LA/MSF; and (b) sold into a customer space in which the United States' LCA industry was found to have suffered serious prejudice in the original proceeding), the effects of A350XWB LA/MSF could undermine the European Union's compliance. Finally, although there are indications that the timing of A350XWB LA/MSF may have taken account of the outcome of the original panel proceeding, the evidence is not conclusive in this respect, confirming only that Airbus and the Airbus governments were considering their options with respect to how to finance the A350XWB, including by means of LA/MSF, in the light of the ongoing WTO dispute. Accordingly, we have found that the fact that the A350XWB LA/MSF measures were concluded before the recommendations and rulings were adopted by the DSB does not sever the link we have found to exist in terms of their nature and effects with those recommendations and rulings and the European Union's alleged compliance "actions".

6.150. For these reasons, we find that the United States has established that the A350XWB LA/MSF measures satisfy the close nexus test and, therefore, that they are "closely connected" with the adopted DSB recommendations and rulings and the European Union's alleged compliance "actions", such that they should be brought within the scope of this proceeding. We find additional support for this conclusion in two considerations.

6.151. First, we note that the European Union has stated in this proceeding that, in the light of the guidance provided by the Appellate Body in US – Large Civil Aircraft (2^nd complaint), it does not generally disagree with the view that all of the LA/MSF measures challenged in this dispute, from A300 LA/MSF to A350XWB LA/MSF, "may be aggregated for purposes of assessing their alleged present causal link to the launch of a particular product" provided that they are "shown to

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exist at present and thus not withdrawn".²⁹⁴ In US – Large Civil Aircraft (2^nd complaint), the Appellate Body explained that:

{A} panel may group together subsidy measures that are sufficiently similar in their design, structure, and operation in order to ascertain their aggregated effects in an integrated causation analysis and determine whether there is a genuine and substantial causal relationship between these multiple subsidies, taken together, and the relevant market phenomena identified in Article 6.3 of the SCM Agreement … .²⁹⁵ (emphasis added)

6.152. Because the European Union maintains that the only limitation on the aggregation of all of the LA/MSF measures at issue in this dispute is that they currently exist and, therefore, that they have, to this extent, not been "withdrawn", it seems to us that, ultimately, the European Union itself does not deny that all of the LA/MSF measures are "similar in their design, structure, and operation", or that, for this reason, it would be appropriate to consider "their aggregated effects in an integrated causation analysis". In our view, the European Union's position with respect to the permissibility of the aggregation of the effects of the LA/MSF measures supports our conclusion with respect to the close nexus that exists between the A350XWB LA/MSF measures and the pre-A350XWB LA/MSF measures.

6.153. Second, as already noted, the United States' non-compliance claims with respect to pre-A350XWB LA/MSF is partly based on its view that these subsidies continue to cause adverse effects in the post-implementation period when considered in conjunction with the alleged effects of the A350XWB LA/MSF measures. In our view, were the A350XWB LA/MSF measures excluded from the scope of this compliance proceeding, this aspect of the United States' non-compliance complaint with respect to the pre-A350XWB LA/MSF measures could not be fully resolved. This is an additional reason why we believe that, in the light of the close nexus that exists between the A350XWB LA/MSF measures, the pre-A350XWB LA/MSF subsidies and the adopted recommendations and rulings, the A350XWB LA/MSF measures fall within the scope of our terms of reference.

6.154. Finally, having found that A350XWB LA/MSF falls within the scope of this compliance proceeding, we consider it unnecessary to pursue the United States' additional independent arguments that A350XWB LA/MSF falls within our terms of reference solely on the grounds that it: (a) replaces an original actionable subsidy with a new subsidy; or (b) circumvents the European Union's compliance by negating or undermining a "measure taken to comply".

6.155. We now turn to examine the European Union's three other objections to the scope of the United States' claims in this dispute.

6.4.2 Whether certain claims made by the United States are within the scope of this compliance proceeding

6.4.2.1 Introduction

6.156. The European Union submits that the United States' prohibited subsidy claims against the A380 LA/MSF subsidies, and the United States' threat of serious prejudice claims in relation to the market for LCA in the European Union, are outside of the scope of this compliance proceeding. In its first written submission, the European Union requested that the Panel issue a preliminary ruling to this effect or grant the requested relief in its final Report.²⁹⁶ The Panel communicated its decision in relation to the European Union's requests on 27 March 2013, finding that the United States' prohibited export subsidy claims under Articles 3.1(a) and 3.2 of the SCM Agreement and the United States' threat of serious prejudice claims were within the scope of the compliance dispute, but excluding the United States' prohibited import substitution claims under Articles 3.1(b) and 3.2 of the SCM Agreement. In the communication informing the parties of its decision, the Panel announced that it would issue the reasoning motivating its findings in due course. This reasoning is set out in the following subsections.

²⁹⁴ European Union's response to Panel question No. 38, para. 105. (emphasis original) ↩

²⁹⁵ Appellate Body Report, US – Large Civil Aircraft (2^nd complaint), para. 1285. ↩

²⁹⁶ European Union's first written submission, para. 161, fn 184. ↩

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6.4.2.2 The United States' claims under Article 3.1(a) of the SCM Agreement

6.4.2.2.1 Arguments of the European Union

6.157. The European Union argues that the United States' claims under Article 3.1(a) of the SCM Agreement against the A380 LA/MSF measures are outside of the Panel's terms of reference because, in the absence of any adopted recommendations and rulings pursuant to Article 4.7 of the SCM Agreement, the relevant European Union member States had no compliance obligation in relation to the United States' original Article 3.1(a) claims against the same LA/MSF measures. According to the European Union, this means that there is no basis for the Panel to accept jurisdiction over the United States' renewed Article 3.1(a) claims under Article 21.5 of the DSU and, consequently, that those claims should be excluded from the scope of this compliance proceeding.²⁹⁷

6.158. The European Union finds support for its position in inter alia the EC – Bed Linen (Article 21.5 – India) case, which the European Union maintains stands for the proposition that a complainant in an Article 21.5 dispute should not "ordinarily" be entitled to bring a claim against an unchanged measure that was unsuccessfully challenged (in the sense that there were "no relevant recommendations and rulings" in relation to the same claim) in an original proceeding.²⁹⁸ Moreover, the European Union submits that the United States errs when it relies upon the panel and Appellate Body findings in US – Upland Cotton (Article 21.5 – Brazil) and US – Oil Country Tubular Goods Sunset Reviews (Article 21.5 – Argentina) to substantiate its view that a compliance panel is entitled to "re-consider the same claims against the same unchanged measure whenever the Appellate Body was unable to complete the analysis in the original proceedings".²⁹⁹ According to the European Union, the facts of both disputes relied upon by the United States can be distinguished from the present set of circumstances as they each involved "measures taken to comply" within the meaning of Article 21.5 of the DSU. The European Union emphasizes that the same cannot be said for the situation that is before the Panel in the present proceeding.³⁰⁰

6.159. The European Union furthermore argues that by seeking to have its Article 3.1(a) claims re-heard, the United States is attempting to use the present compliance dispute as if it were established to provide an opportunity for "remand" back to the original panel to complete the analysis that could not be completed by the Appellate Body, regardless of whether jurisdiction over those claims could independently be established under Article 21.5 of the DSU.³⁰¹ The European Union maintains that the United States is not entitled to use Article 21.5 proceedings in this way; and that should the United States want to pursue Article 3.1(a) claims against the A380 LA/MSF subsidies, the United States would need to initiate a new original panel proceeding.³⁰²

6.160. Finally, the European Union submits that accepting the United States' Article 3.1(a) claim regarding the A380 LA/MSF subsidies would undermine the European Union's due process rights. According to the European Union, if the United States were permitted to renew its claims under Article 3.1(a), the European Union would be deprived of a compliance period to remedy any Article 3.1(a) violation before the United States pursues countermeasures.³⁰³

6.4.2.2.2 Arguments of the United States

6.161. The United States submits that its Article 3.1(a) claims against the A380 LA/MSF measures are properly within the scope of this compliance proceeding. The United States recalls that in the original proceeding, the Appellate Body overturned the panel's findings but was unable to complete the analysis in relation to the Article 3.1(a) claims against the A380 LA/MSF measures. The United States submits that where a Member raises a legal issue before the original panel, but the panel and the Appellate Body make no findings on that issue, the party may raise the issue again

²⁹⁷ European Union's first written submission, paras. 115, 119-120, 125-129, and 131-133; and second written submission, paras. 40-45. ↩

²⁹⁸ European Union's first written submission, paras. 124-125. ↩

²⁹⁹ European Union's second written submission, para. 43. (emphasis original) ↩

³⁰⁰ European Union's second written submission, paras. 45-47. ↩

³⁰¹ European Union's first written submission, para. 132. ↩

³⁰² European Union's first written submission, para. 115. ↩

³⁰³ European Union's first written submission, para. 133; and second written submission para. 42. ↩

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under Article 21.5.³⁰⁴ The United States recalls that an Article 21.5 proceeding does not allow parties to re-litigate claims that the DSB has already decided.³⁰⁵ However, according to the United States, a compliance panel may properly reconsider a claim against an unchanged measure when the Appellate Body was unable to complete the analysis in the original proceeding and that such claims are not precluded from the scope of a subsequent compliance proceeding.³⁰⁶

6.162. The United States argues that preventing a complaining party from raising claims in a compliance proceeding that were left unresolved on appeal in the original proceeding would mean that complaining parties would always have to begin new proceedings in order to obtain a ruling on their merits. The United States argues that such a result would make it impossible to make efficient use of the original panelists and their relevant expertise and, thereby, undermine the purpose and effect of compliance proceedings.³⁰⁷

6.163. The United States submits that the mere absence of adopted recommendations and rulings with respect to its Article 3.1(a) claims from the original proceeding does not preclude it from properly raising the same claims again in this compliance dispute.

6.4.2.2.3 Evaluation by the Panel

6.164. In this compliance proceeding, the United States seeks to raise claims under Article 3.1(a) of the SCM Agreement against the same unchanged A380 LA/MSF measures it challenged on the same legal basis in the original proceeding.

6.165. We recall that in the original proceeding the panel found that the United States had substantiated its Article 3.1(a) claims with respect to the German, Spanish and UK A380 LA/MSF measures, but not the French A380 LA/MSF measures.³⁰⁸ On appeal, the Appellate Body reversed the original panel's findings, concluding that the panel had erred in interpreting and applying Article 3.1(a) and footnote 4 of the SCM Agreement.³⁰⁹ After articulating the correct interpretation of these provisions, the Appellate Body found itself unable to "complete the analysis" due to a lack of sufficient factual findings or undisputed facts on the panel record.³¹⁰ Thus, the Appellate Body reversed the original panel's recommendation under Article 4.7 of the SCM Agreement that "the subsidizing Member granting each subsidy found to be prohibited withdraw it … within 90 days"³¹¹, leaving the United States' claims unresolved.

6.166. As we see it, the main question raised by the parties' arguments is whether the United States is entitled to have its unresolved Article 3.1(a) claims settled in this compliance dispute, given that no specific recommendations and rulings were adopted by the DSB in relation to those claims in the original proceeding.

6.167. The European Union finds support for its position in EC – Bed Linen (Article 21.5 – India).³¹² We note, however, that in that dispute, India was not allowed to bring its claims against a particular measure in the compliance proceeding because India had failed to make out a prima facie case in relation to exactly the same claims in the original proceeding. Thus, the Appellate Body ruled that a complainant who had failed to make out a prima facie case in the original proceeding regarding an element of the measure that remained unchanged since the original proceeding was not entitled to re-litigate the same claim with respect to the unchanged

³⁰⁴ United States' first written submission, para. 33. ↩

³⁰⁵ United States' first written submission, para. 33 (citing Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 210). ↩

³⁰⁶ United States' first written submission, para. 33; and second written submission, paras. 124-131 (citing Appellate Body Reports, US – Upland Cotton (Article 21.5 – Brazil), para. 210; US – Oil Country Tubular Goods Sunset Reviews (Article 21.5 – Argentina), paras. 149-150; and US – Zeroing (EC) (Article 21.5 – EC), para. 424). ↩

³⁰⁷ United States' second written submission, para. 131. ↩

³⁰⁸ Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.689. ↩

³⁰⁹ Appellate Body Report, EC and certain member States – Large Civil Aircraft, paras. 1102-1103. ↩

³¹⁰ Appellate Body Report, EC and certain member States – Large Civil Aircraft, paras. 1104 and 1415(b). ↩

³¹¹ Appellate Body Report, EC and certain member States – Large Civil Aircraft, paras. 1104 and 1416. ↩

³¹² European Union's first written submission, paras. 124-125 (citing Appellate Body Report, EC – Bed Linen (Article 21.5 – India), paras. 87-88). ↩

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element of the measure in the Article 21.5 proceeding.³¹³ In the same vein, in US – Shrimp (Article 21.5 – Malaysia), the Appellate Body ruled that a complainant may not reassert the same claim against an unchanged aspect of the measure that had been found to be WTO-consistent in the original proceeding.³¹⁴ The claims that the complainant sought to re-argue had been definitively rejected in the original proceeding.

6.168. In our view, both EC – Bed Linen (Article 21.5 – India) and US – Shrimp (Article 21.5 – Malaysia) may be distinguished from the present dispute. As already noted, the reason why no recommendations and rulings were adopted in respect of the United States' original Article 3.1(a) claims is that those claims were left unresolved on appeal. The United States is not attempting to re-litigate claims with respect to which it failed to make out a prima facie case or that were otherwise definitively rejected in the original proceeding. The United States' reassertion of the Article 3.1(a) claims made in the original proceeding against the unchanged A380 LA/MSF measures thus materially differs from the situations in EC – Bed Linen (Article 21.5 – India) and US – Shrimp (Article 21.5 – Malaysia).

6.169. Questions concerning unresolved claims with respect to which there were no DSB recommendations and rulings also arose in the US – Oil Country Tubular Goods Sunset Reviews (Article 21.5 – Argentina) and US – Upland Cotton (Article 21.5 – Brazil) disputes.

6.170. In US – Oil Country Tubular Goods Sunset Reviews (Article 21.5 – Argentina) Argentina attempted to re-argue a claim against an aspect of the original measure. Not unlike the United States' position in the present dispute, Argentina sought to raise a claim that was heard in the original proceeding but that was left unresolved and that did not give rise to the adoption of any specific recommendations and rulings, and, therefore, the imposition of a specific compliance obligation on the United States. In the original proceeding, Argentina had challenged the volume of imports analysis undertaken in the USDOC's original sunset review determination. The claim was left unresolved due to the panel's exercise of judicial economy. In the compliance proceeding, Argentina raised the same claim. The volume of imports analysis from the USDOC's original sunset review determination had been relied upon by the USDOC in the "Section 129 Determination" that implemented the United States' compliance obligations. The compliance panel concluded that because the USDOC's original volume of imports analysis had become an "integral part" of the Section 129 Determination (the "measure taken to comply"), Argentina could properly pursue the same claim that was left unresolved in the original proceeding.³¹⁵

6.171. The Appellate Body upheld the compliance panel's ruling, relying on a similar line of reasoning. The Appellate Body recalled that the volume of imports analysis that Argentina sought to challenge in the compliance dispute had formed part of the factual basis of the USDOC's original likelihood of dumping determination that was found to be inconsistent with Article 11.3 of the AD Agreement for other reasons. The Appellate Body then explained that the DSB's adoption of this ruling of inconsistency meant that the United States had an obligation to bring its measure into conformity with Article 11.3 of the AD Agreement, and that it was up to the United States to decide how best to achieve that conformity. The Appellate Body found that the analysis had become "an integral part" of the "measure taken to comply", and could therefore be challenged on the basis of the same claims left unresolved in the original proceeding.³¹⁶

6.172. We note that the Appellate Body's findings in US – Oil Country Tubular Goods Sunset Reviews (Article 21.5 – Argentina) addressed a number of more systemic concerns that the

³¹³ In EC – Bed Linen (Article 21.5 – India), the Appellate Body found that a complainant who had failed to make out a prima facie case in the original proceeding regarding an element of the measure that remained unchanged since the original proceeding was not entitled to re-litigate the same claim with respect to the unchanged element of the measure in the Article 21.5 proceeding. (Appellate Body Report, EC – Bed Linen (Article 21.5 – India), para. 93) ↩

³¹⁴ In US – Shrimp (Article 21.5 – Malaysia), the Appellate Body ruled that a complainant may not reassert the same claim against an unchanged aspect of the measure that had been found to be WTO-consistent in the original proceeding. (Appellate Body Report, US – Shrimp (Article 21.5 – Malaysia), paras. 96-97) ↩

³¹⁵ Panel Report, US – Oil Country Tubular Goods Sunset Reviews (Article 21.5 – Argentina), paras. 7.91 and 7.97. ↩

³¹⁶ Appellate Body Report, US – Oil Country Tubular Goods Sunset Reviews (Article 21.5 – Argentina), paras. 142-152. ↩

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United States argued weighed in favour of excluding Argentina's claims. In particular, the United States submitted that allowing Argentina to pursue a claim with respect to which there were no specifically adopted rulings and recommendations would place it in the position of having to guess what the original panel might have thought were the WTO-inconsistencies in USDOC's original volume of imports analysis. Moreover, were USDOC's analysis to be found WTO-inconsistent at the compliance stage, the United States would not be able to benefit from a "reasonable period of time" to bring itself into conformity. The Appellate Body rejected the United States' concerns, ruling that because the original panel had found that USDOC's original likelihood of dumping determination had lacked a proper factual basis, "USDOC could not assume that its findings regarding the alleged decline in the volume of imports were WTO-consistent". Furthermore, the Appellate Body noted that the parties had made arguments and counter-arguments on the volume of imports analysis in both the original and compliance proceedings, and that this was not a situation where Argentina was unfairly getting a "second chance", as would be the case where the measure had been found to be WTO-consistent in the original proceeding, or where the complainant had failed to make out a prima facie case.³¹⁷ Finally, the Appellate Body pointed to the aim of Article 21.5 of the DSU, which it explained was to promote "prompt compliance … by making it unnecessary for a complainant to begin new proceedings and by making efficient use of the original panelists and their relevant experience". For the Appellate Body, these considerations supported the compliance panel's finding that the volume of imports analysis was properly before it.³¹⁸

6.173. The question that arose in US – Upland Cotton (Article 21.5 – Brazil) was whether Brazil was entitled to re-argue a claim against one specific aspect of the United States' "measure taken to comply", with respect to which the Appellate Body had reversed the original panel's findings, but failed to "complete the analysis" because of insufficient factual findings or undisputed facts on the record. Again, not unlike the United States' position in the present dispute, Brazil sought to re-litigate a claim that was left unresolved and did not give rise to the adoption of any specific recommendations and rulings, or, therefore, the imposition of a specific compliance obligation on the United States.

6.174. In the original proceeding, Brazil had claimed that the United States' export credit guarantees provided under the General Sales Manager 102 (GSM 102) programme for a number of agricultural products (including pig and poultry meat) circumvented the United States' export subsidy commitments under the Agreement on Agriculture. The panel dismissed Brazil's claim as it related to the application of the programme to pig and poultry meat. However, on appeal, the Appellate Body reversed the panel's finding, but was unable to "complete the analysis" because there were insufficient factual findings or undisputed facts on the record. Thus, Brazil's original claim concerning the WTO-consistency of the United States' export credit guarantees for pig and poultry meat under the GSM 102 programme was left unresolved. The GSM 102 programme was found to be WTO-inconsistent for other reasons, and was ultimately subject to adopted recommendations and rulings calling on the United States to bring its measures into conformity with its WTO obligations.

6.175. In implementing the adopted rulings and recommendations, the United States revised the GSM 102 programme with respect to all agricultural products, including pig and poultry meat. In the compliance proceeding, Brazil renewed its claim that the export credit guarantees provided for pig and poultry meat under the revised programme were inconsistent with the Agreement on Agriculture. The United States, however, argued that Brazil's claims were outside of the scope of the compliance proceeding because the export credit guarantees for pig and poultry meat were individual measures that were not subject to the DSB's recommendations and rulings in the original proceeding.

6.176. While recognizing that the provision of export credit guarantees for pig and poultry meat had not been the subject of specific rulings and recommendations in the original proceeding, the compliance panel found that Brazil was nevertheless entitled to pursue its claim on the basis of a number of considerations, including the particularly close relationship between the export credit

³¹⁷ Appellate Body Report, US – Oil Country Tubular Goods Sunset Reviews (Article 21.5 – Argentina), para. 150. ↩

³¹⁸ Appellate Body Report, US – Oil Country Tubular Goods Sunset Reviews (Article 21.5 – Argentina), para. 151. ↩

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guarantees and the revised GSM 102 programme, which was itself the "declared measure taken to comply".³¹⁹

6.177. The Appellate Body agreed with the compliance panel's conclusions, but relied upon a somewhat different line of reasoning. The Appellate Body's evaluation of the matter proceeded in two parts. First, the Appellate Body determined whether Brazil's claims concerned the properly identified "measure taken to comply"; and second, the Appellate Body assessed whether there were any limitations on the claims that Brazil was entitled to raise in respect of that measure.

6.178. The Appellate Body began the first of its two inquiries by stating that while "the DSB's recommendations and rulings are a relevant starting point for identifying the 'measures taken to comply' … they are not dispositive as to the scope of such measures."³²⁰ The Appellate Body then explained that it could "not see why the scope of the DSB's recommendations and rulings should necessarily limit the scope of the 'measures taken to comply' … when the measures actually 'taken' … are broader than the DSB's recommendations and rulings".³²¹ Thus, after recalling how the revised GSM 102 programme applied to all eligible commodities (including pig and poultry meat) in the same way, the Appellate Body found that it was appropriate to consider the revised GSM 102 programme in an "integrated manner" and, accordingly, find the totality of the new programme (including its coverage of pig and poultry meat) to be a "measure taken to comply". The Appellate Body thereby concluded that the changes made to the export credit guarantees provided for pig and poultry meat could be challenged in the compliance proceeding, even though they were not the subject of any specific recommendations and rulings in the original proceeding.³²²

6.179. Turning to the limitations on the claims that Brazil was entitled to raise against the "measure taken to comply", the Appellate Body found that Brazil was not precluded from renewing the claim it had made in the original proceeding with respect to the export credit guarantees for pig and poultry meat because the merits of that claim had not been resolved. Thus, the Appellate Body distinguished Brazil's situation from that of India in EC – Bed Linen (Article 21.5 – India), finding that to permit Brazil to raise its claim in the compliance proceeding would not mean that it is "unfairly getting a 'second chance' to make a case that it failed to make out in the original proceeding such that the finality of the DSB's recommendations and rulings would be compromised".³²³

6.180. Finally, as it did in US – Oil Country Tubular Goods Sunset Reviews (Article 21.5 – Argentina), the Appellate Body found support for its conclusions in the purpose of Article 21.5 proceedings, which it recalled it had previously described to be the promotion of "prompt compliance … by making it unnecessary for a complainant to begin new proceedings and by making efficient use of the original panelists and their relevant experience".³²⁴

6.181. We understand the panel and Appellate Body findings in US – Oil Country Tubular Goods Sunset Reviews (Article 21.5 – Argentina) and US – Upland Cotton (Article 21.5 – Brazil) to stand for the proposition that where a particular claim has been left unresolved in an original proceeding for reasons of judicial economy or because of the Appellate Body's inability to "complete the analysis", a complainant will not ordinarily be precluded from pursuing that claim against the same aspect of the originally challenged measure in an Article 21.5 compliance dispute when it forms an "integral part" of the "measure taken to comply".³²⁵ In such circumstances, the fact that an

³¹⁹ The compliance panel's main considerations were that: (a) the revised GSM 102 export credit guarantees as applied to pig and poultry meat were measures with a "particularly close relationship to the declared measure taken to comply and to the recommendations and rulings of the DSB"; (b) Brazil's claim against the original GSM 102 programme as applied to pig and poultry meat was left unresolved in the original proceeding; and (c) the Appellate Body had "recently" found in US – Oil Country Tubular Goods Sunset Reviews (Article 21.5 – Argentina) that "a claim relating to an aspect of a measure on which the panel in the original proceeding had exercised judicial economy was properly within the scope of Article 21.5 of the DSU". (Panel Report, US – Upland Cotton (Article 21.5 – Brazil), paras. 9.25-9.26). ↩

³²⁰ Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 202. ↩

³²¹ Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 202. ↩

³²² Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), paras. 202-207. ↩

³²³ Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 210. ↩

³²⁴ Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 212 (citing Appellate Body Report, US – Oil Country Tubular Goods Sunset Reviews (Article 21.5 – Argentina), para. 151). ↩

³²⁵ We understand the Appellate Body's guidance in EC – Fasteners (Article 21.5 – China) to accord with this reading. See Appellate Body Report, EC – Fasteners (Article 21.5 – China), para. 5.15 and fn 90 thereto. ↩

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original claim may not have given rise to any specific recommendations and rulings adopted by the DSB will not prevent a compliance panel from bringing it within its scope of consideration. Indeed, to allow a complainant to bring such a claim would be an efficient use of WTO dispute settlement procedures and consistent with the goal of achieving prompt compliance with the covered agreements.

6.182. In our view, the circumstances in US – Oil Country Tubular Goods Sunset Reviews (Article 21.5 – Argentina) and US – Upland Cotton (Article 21.5 – Brazil) are similar to the situation in this dispute. Like the complainants in those cases, in this compliance proceeding the United States attempts to re-argue claims that: (a) were left unresolved in the original proceeding; and (b) were not subject to any specific recommendations and rulings adopted by the DSB.

6.183. As the European Union observes, one difference between the current proceeding and US – Oil Country Tubular Goods Sunset Reviews (Article 21.5 – Argentina) and US – Upland Cotton (Article 21.5 – Brazil) is that, in those disputes, the question of the permissibility of the complainants' renewed claims arose in the context of the existence of a "measure taken to comply" that incorporated or covered a particular aspect of an original measure whose WTO-consistency was challenged (but left undecided) in the original proceeding. In contrast, there is no dispute between the parties that the A380 LA/MSF measures are neither "measures taken to comply" within the meaning of Article 21.5 of the SCM Agreement, nor part of, or covered by, any one or more other "measures taken to comply".

6.184. We do not consider this distinction to mean that we must exclude the United States' claims from the scope of this compliance proceeding. In this regard, we note that it is common ground between the parties that the A380 LA/MSF measures are properly before us for the purpose of evaluating the merits of the United States' claims concerning the European Union's compliance with the requirements of Article 7.8 of the SCM Agreement. Thus, by raising claims against the A380 LA/MSF measures that were left unresolved in the original proceeding, the United States is not asking the Panel to review the consistency with the covered agreements of a measure that does not already fall within the scope of this compliance proceeding, albeit not as a "measure taken to comply". Moreover, by allowing the United States' to pursue its unresolved claims it would not be "unfairly getting a 'second chance' to make a case that it failed to make out in the original proceeding such that the finality of the DSB's recommendations and rulings would be compromised".³²⁶

6.185. In these circumstances, we can see no reason why we should be prevented from considering the United States' claims simply because the A380 LA/MSF measures are neither "measures taken to comply" within the meaning of Article 21.5 of the SCM Agreement, nor part of, or covered by, any one or more other "measures taken to comply". As we see it, to accept that the United States' unresolved Article 3.1(a) claims should be excluded because of the absence of any relevant "measures taken to comply", in a situation where the A380 LA/MSF measures are already properly before us would unduly elevate form over substance.

6.186. The European Union argues that accepting the United States' Article 3.1(a) claim would undermine its due process rights, and, in particular, its right to a "reasonable period of time" to remedy any Article 3.1(a) violation before the United States pursues countermeasures.³²⁷ Essentially the same argument made by the United States in US – Oil Country Tubular Goods Sunset Reviews (Article 21.5 – Argentina) was dismissed by the Appellate Body on the grounds that inter alia the parties to that dispute had made extensive arguments and counter-arguments in relation to the relevant claims, and that it would be consistent with the purpose of Article 21.5 disputes to allow the complainant to pursue those claims.³²⁸ In our view, the same reasoning can be used to dismiss the European Union's due process concerns in the present dispute.

³²⁶ Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 210. See also Appellate Body Report, EC – Fasteners (Article 21.5 – China), para. 5.15 and fn 90. ↩

³²⁷ European Union's first written submission, para. 140 (citing Panel Report, US – Countervailing Measures on Certain EC Products (Article 21.5 – EC), paras. 7.72 and 7.76). ↩

³²⁸ Appellate Body Report, US – Oil Country Tubular Goods Sunset Reviews (Article 21.5 – Argentina), paras. 150-151. ↩

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6.4.2.2.4 Conclusion

6.187. Thus, for all of the above reasons, we find that the United States' claims under Articles 3.1(a) and 3.2 of the SCM Agreement concerning the A380 LA/MSF subsidies are within the scope of this compliance proceeding.

6.4.2.3 The United States' claims under Article 3.1(b) of the SCM Agreement

6.4.2.3.1 Arguments of the European Union

6.188. The European Union submits that the United States' claims under Article 3.1(b) of the SCM Agreement against the A380 LA/MSF subsidies are outside the scope of this compliance proceeding for a number of reasons. First, as argued in relation to the United States' claims against the same measures under Article 3.1(a), the European Union submits that the United States' Article 3.1(b) claims must fall outside of the scope of this compliance proceeding because no relevant recommendations and rulings were adopted by the DSB and, therefore, no "measures taken to comply" exist in relation to the United States' particular claim.³²⁹

6.189. According to the European Union, the United States' allegations under Article 3.1(b) constitute new claims, which the United States could have been pursued in the original proceeding against the same A380 LA/MSF measures, but which the United States chose to abandon.³³⁰ The European Union maintains that there is nothing in Article 21.5 of the DSU or any considerations in equity that would justify allowing a complaining Member to abandon a claim during the original proceeding, only to then attempt to revive it during the compliance proceeding.³³¹ Indeed, the European Union recalls that "a complaining Member ordinarily would not be allowed to raise claims in an Article 21.5 proceeding that it could have pursued in the original proceeding, but did not".³³²

6.190. The European Union does not accept that the United States should be permitted to pursue its Article 3.1(b) claims against the A380 LA/MSF subsidies in this dispute because of the United States' alleged lack of awareness of the relevant facts at the relevant time. According to the European Union, a Member cannot pursue a new claim in a compliance proceeding on the basis that at the time it submitted its original panel request, it was not aware of facts that serve as the basis for that new claim.³³³ The European Union submits that the jurisdiction of a compliance panel cannot turn on assertions by a complaining Member about the facts it allegedly did not know at a particular point in time. Moreover, the European Union submits arguendo that even if such a justification were acceptable, at the time the United States submitted its original panel request, the United States was already aware of the facts on which it relies in support of its Article 3.1(b) claims, as shown by the explicit reference to these facts in some of the documents identified by the United States as available evidence during the original consultation process.³³⁴ The European Union submits that relevant information with respect to the A380 LA/MSF measures was communicated to the United States pursuant to the transparency provisions of the "1992 Agreement" between the United States and the European Union.³³⁵ Thus, the European Union argues that nothing was preventing the United States from raising its 3.1(b) claims in the original proceeding.³³⁶

6.191. The European Union also argues that the United States' right to raise its Article 3.1(b) claim lapsed with the authority of the panel established under the United States' second panel

³²⁹ European Union's first written submission, paras. 143-144 and 150; and second written submission, paras. 50 and 57. ↩

³³⁰ European Union's first written submission, paras. 134-140, 146, and 150; and second written submission, para. 53. ↩

³³¹ European Union's first written submission, para. 140. ↩

³³² European Union's first written submission, paras. 145 and 146 (citing Appellate Body Reports, US – Upland Cotton (Article 21.5 – Brazil), para. 211; and US – Zeroing (EC) (Article 21.5 – EC), para. 432); and second written submission, para. 50. ↩

³³³ European Union's second written submission, para. 55. ↩

³³⁴ European Union's second written submission, para. 55, and fns 49 and 50. ↩

³³⁵ Referring to the 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. ↩

³³⁶ European Union's first written submission, paras. 141, 147, and 148. ↩

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request against the alleged subsidization of Airbus LCA in DS347. The European Union recalls that the United States' April 2006 panel request in DS347 included an Article 3.1(b) claim against the A380 LA/MSF measures. Thus, according to the European Union, since the DSB's authority for the establishment of that second panel lapsed on 7 October 2007, the United States is not permitted to nullify the effect of that lapse by raising the same claims anew in this compliance proceeding.³³⁷

6.192. Finally, the European Union submits that allowing the United States to raise claims under Article 3.1(b) during this proceeding would violate principles of due process, as it would deprive the European Union of its entitlement to a compliance period.³³⁸ The European Union adds that should the United States choose to pursue these claims it must request the establishment of a new panel.³³⁹

6.4.2.3.2 Arguments of the United States

6.193. The United States accepts that in a compliance proceeding, complainants are ordinarily precluded from bringing claims against unchanged measures if "they could have been litigated before the original Panel, but were not".³⁴⁰ However, the United States argues that when it submitted its original panel request in 2005, it was not aware that French, German, Spanish and UK LA/MSF subsidies for the A380 were contingent on the use of domestic over imported goods, and that such information was not publicly available.³⁴¹ The United States argues that it could not have raised its Article 3.1(b) claims in 2005.³⁴² According to the United States, it should therefore be permitted to raise those claims in this compliance proceeding.

6.194. The United States additionally argues that its Article 3.1(b) claim is closely related to the claims the United States did bring in the original proceeding as well as the corresponding recommendations and rulings of the DSB. Thus, the inclusion of this claim in this proceeding would promote the prompt compliance of those rulings and recommendations as well as the efficient use of the original panelists and their relevant experience.³⁴³

6.195. Finally, the United States submits that the fact that it included the same Article 3.1(b) claim in its second panel request (i.e., in DS347), and that the authority for the constitution of the panel in that dispute lapsed in 2007, does not preclude the possibility of raising this claim once again in this compliance proceeding.³⁴⁴

6.4.2.3.3 Evaluation by the Panel

6.196. The key question that lies at the centre of the parties' disagreement about whether the United States' Article 3.1(b) claims against the A380 LA/MSF subsidies fall within the scope of this proceeding is whether the United States is entitled to raise a claim in this compliance dispute against an unchanged measure that was challenged in the original proceeding on the basis of other legal provisions – in other words, can the United States bring a claim against the A380 LA/MSF subsidies that it did not bring in the original proceeding?

6.197. We recall that the Appellate Body indicated in US – Upland Cotton (Article 21.5 – Brazil) that "{a} complaining Member ordinarily would not be allowed to raise claims in an Article 21.5 proceeding that it could have pursued in the original proceeding, but did not".³⁴⁵ A complainant may not ordinarily use a compliance proceeding to raise, for the first time, a new claim about an unchanged measure, as this may improperly provide a "second chance" to that complainant to make a claim, jeopardizing the principles of fundamental fairness and due process.

³³⁷ European Union's first written submission, para. 142; and second written submission, para. 52. ↩

³³⁸ European Union's first written submission, para. 149; and second written submission, para. 51. ↩

³³⁹ European Union's second written submission, para. 56. ↩

³⁴⁰ United States' second written submission, para. 133. ↩

³⁴¹ United States' second written submission, para. 135. ↩

³⁴² United States' second written submission, para. 136 (citing Appellate Body Reports, US – Upland Cotton (Article 21.5 – Brazil); and EC – Bed Linen (Article 21.5 – India)). ↩

³⁴³ United States' second written submission, para. 137. ↩

³⁴⁴ United States' second written submission, para. 137. ↩

³⁴⁵ Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 211. ↩

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6.198. Both parties agree with this principle³⁴⁶, and the United States does not contest that it would not ordinarily be permitted to introduce Article 3.1(b) claims against the A380 LA/MSF measures.³⁴⁷ However, the United States maintains that it was unable to raise the relevant claim in 2005 due to insufficient information. According to the United States, it was not at that time aware that the French, German, Spanish and UK LA/MSF agreements for the A380 were each allegedly contingent on the use of domestic over imported goods because the relevant information was not public.³⁴⁸ The United States argues that in these circumstances, it may properly introduce claims under Article 3.1(b) in this compliance proceeding that it did not raise in the original proceeding.

6.199. We are not convinced that, as a matter of law, the United States is entitled to introduce a claim under Article 3.1(b) against the unchanged A380 LA/MSF contracts in this compliance proceeding on the basis that it did not have sufficient information at the time of the original panel request. We note that it is generally accepted that a complainant may not amend its panel request to include new claims, nor cure defects in its panel request in subsequent submissions to the panel³⁴⁹, including in situations where new information may come to light for either of the parties once the panel request has been filed. That being so, we find it difficult to see how the acquisition of new information could alone justify a complainant pursuing a new claim about an unchanged measure in a compliance proceeding.

6.200. Moreover, even if the acquisition of new information could, as a matter of law, justify a complainant pursuing a new claim in a compliance proceeding, we are not convinced that the facts before us support the United States' contention that it was unaware of facts that could potentially be relevant to its present Article 3.1(b) claim when it submitted its original panel request.³⁵⁰ For example, in its submissions concerning Article 3.1(b) in this compliance proceeding, the United States emphasizes how "{t}he governments are open about the quid pro quo, … this means that Airbus must use domestic components instead of imports"; that all "of the parties are open about how this system operates"³⁵¹; and that "the parties openly tout how the workshare agreements allocate parts of the production process to particular countries and sites within those countries."³⁵² The United States also refers to evidence "{a}s of 2001".³⁵³ Other evidence the United States relies upon also appears to have been publicly available by the time the United States filed its first panel request in this dispute.³⁵⁴ It is furthermore apparent that by the time the United States submitted its first panel request on 31 May 2005, it did in fact already have other information that was potentially relevant to a claim that the A380 LA/MSF contracts were inconsistent with Article 3.1(b) of the SCM Agreement. As noted by the European Union, such

³⁴⁶ European Union's first written submission, paras. 145 and 146; and United States' second written submission, para. 133. ↩

³⁴⁷ United States' second written submission, para. 133 (referring to Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), paras. 210-211, as qualified by the Appellate Body Report, US – Zeroing (EC) (Article 21.5 – EC), paras. 426-432). ↩

³⁴⁸ United States' second written submission, paras. 135 and 136. ↩

³⁴⁹ See e.g. Appellate Body Reports, EC and certain member States – Large Civil Aircraft, para. 642; and EC – Bananas III, para. 142. ↩

³⁵⁰ European Union's second written submission, para. 55 and fn 49. ↩

³⁵¹ United States' first written submission, para. 203. (underline added) ↩

³⁵² United States' first written submission, para. 205. (underline added) ↩

³⁵³ United States' first written submission, para. 205 and fn 317 (citing "Integrated Airbus building up for A380", Interavia Business & Technology, Vol. 5, Issue 654, 1 June 2001, (Exhibit USA-304); and Pierre Sparaco, "Airbus Thinks Bigger, Not Faster: A symbol of Europe's transformation, the manufacturer – now a unified company – is offering a complete product line from narrowbodies to an aircraft larger than a 747", Aviation Week & Space Technology, 18 June 2001, (Exhibit USA-305)). ↩

³⁵⁴ "Integrated Airbus building up for A380", Interavia Business & Technology, Vol. 5, Issue 654, 1 June 2001, (Exhibit USA-304); M. Portilla, "El Estado aportará hasta 406,5 millones hasta 2013 para el desarrollo de Airbus A380", ABC Periódico Electrónico S.A., 3 October 2003, (Exhibit USA-89); "Renégotiation du Programme A3XX", Response from the Ministry of Economy, Trade and Industry to Question n. 21523 from M. Louis Souvet, published in the JO Sénat, 22 June 2000, p. 2227, (Exhibit USA-90); "Le gros-porteur d'airbus pourrait créer 10.000 emplois en Midi-Pyrénées en 2008: Le lancement de l'Airbus 380 soutient l'activité aéronautique", Les Echos, p. 50, n. 18765, 21 October 2002, (Exhibit USA-91); "Airbus A380: Jacques Chirac se fait le chantre de la coopération transatlantique", Les Echos, p. 10, n. 18698, 17 July 2002, (Exhibit USA-92); "Avec l'A3XX, la nouvelle société Airbus accentue la pression sur Boeing", Les Echos, p. 12, n. 18180, 26 June 2000, (Exhibit USA-93); "EADS agrees to raise Spanish share of A380-report", Reuters, 22 January 2004, (Exhibit USA-308). ↩

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information was identified in the Statement of Available Evidence attached to the United States' consultations request in the original proceeding.³⁵⁵

6.201. In our view, the above considerations suggest that the United States was, or should have been, aware of information potentially relevant to an Article 3.1(b) claim when it requested the establishment of the original panel. Thus, even if it were possible for a complainant in an Article 21.5 proceeding to raise a claim that it did not pursue in the original proceeding in relation to an unchanged measure in a situation where it was unaware of potentially relevant facts at the moment of filing its original panel request, we consider that the facts and circumstances of the present dispute would not support the United States' submission that it is entitled to raise such a claim in this proceeding.³⁵⁶

6.202. Finally, the United States argues that its Article 3.1(b) claims against the A380 LA/MSF subsidies should be brought into this compliance proceeding because they are allegedly "closely related" to both the Article 3.1(a) claims the United States did raise in the original proceeding and the adopted recommendations and rulings, and finding that they fall within the compliance Panel's terms of reference would promote prompt compliance with the adopted recommendations and rulings and the efficient use of the original panel's experience.³⁵⁷ We recall that the Appellate Body has clarified that certain measures that are closely related to the declared measures to comply, based on their respective nature, timing and effects, may fall within the scope of an Article 21.5 proceeding. However, we observe that this principle applies to the measures at issue, not the claims that may be raised against them. Moreover, we must bear in mind that Article 21.5 of the DSU strikes a balance between, on one hand, the promotion of "prompt resolution of disputes" and the "efficient use of the original panel and its relevant experience", and on the other hand, the "limitations on the types of claims that may be raised in Article 21.5 proceedings".³⁵⁸ In the light of the availability to the United States, at the time of the original proceeding, of the information it now relies on for this claim in this compliance proceeding, allowing the United States to introduce new claims under Article 3.1(b) against the unchanged A380 contracts would, as we see it, upset this balance.

6.4.2.3.4 Conclusion

6.203. Thus, for all of the above reasons, we find that the United States' claims under Articles 3.1(b) and 3.2 of the SCM Agreement concerning the A380 LA/MSF measures are outside the scope of this compliance proceeding.

³⁵⁵ Statement of Available Evidence, Panel Report, EC and certain member States – Large Civil Aircraft, annex A. The exhibits identified by the European Union as potentially having relevance are: Boletín Oficial de las Cortes Generales, Congreso de los Diputados, Contestaciones del Gobierno, Serie D, Núm. 547, 5 June 2003, (Original Exhibit US-38); Collin (Yvon), Senate Report No. 73 (2003-2004), (Original Exhibit US-120); Collin (Yvon), Senate Report No. 87 (2001-2002), (Original Exhibit US-121); French Ministry of Transport Press Release, "Accord pour le Financement de l’Airbus A380", 15 March 2002, (Original Exhibit US-45); House of Commons, Minutes of evidence taken before the Welsh Affairs Committee, testimony of Mr. Fleet (BAE), 11 February 2004, (Original Exhibit US-227); "Le président de la République a inauguré hier le chantier de construction du site d'assemblage de L'A380", Les Echos No. 18.698, 17 July 2002, (Original Exhibit US-220); "Lending Support: Modernising the Government’s Use of Loans, A Performance and Innovation Unit Report", March 2002, (Original Exhibit US-102); Press Release, Ministry of Science and Technology, "El Ministerio Aportará al Desarollo {de A380} 376 Millones de Euros Hasta 2013", 2 October 2003, (Original Exhibit US-126); Welsh Enterprise Institute, "Reaching for the Skies or Waiting for the Wings to Fall off? The Welsh Assembly, Grant Aid and British Aerospace", Paper 8, November 2000, (Original Exhibit US-228). ↩

³⁵⁶ The Panel observes that on 23 September 2005, four months after the United States submitted its request for the establishment of the first panel (DS316), the DSB agreed to initiate procedures for developing information concerning serious prejudice under Annex V of the SCM Agreement. On 24 February 2006, less than two months before the United States submitted its second panel request, i.e. DS347, which already included Article 3.1(b) claims, the Facilitator in the Annex V procedures submitted his report to the Panel. (See Panel Report, EC and certain member States – Large Civil Aircraft, paras. 1.7, 1.8 and annex C). We do not fail to see that the information contained in that report could have improved the United States' knowledge of the measures at issue in the original proceeding, including the specific terms of the A380 financing agreements. However, in light of the evidence submitted by the United States itself in this and the original proceedings, we consider that sufficient information was accessible to the United States to formulate claims under Article 3.1(b) of the SCM Agreement when it filed its first panel request. ↩

³⁵⁷ United States' second written submission, para. 137. ↩

³⁵⁸ Appellate Body Report, US – Softwood Lumber IV (Article 21.5 – Canada), para. 72. ↩

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6.4.2.4 The United States' claim of threat of displacement or impedance under Article 6.3(a) of the SCM Agreement

6.4.2.4.1 Arguments of the European Union

6.204. The European Union submits that claims concerning the alleged threat of displacement and impedance of imports are outside the Panel's terms of reference.³⁵⁹ The European Union submits that a claim of threat of serious prejudice is distinct from a claim of actual, present serious prejudice.³⁶⁰ The European Union asserts that, contrary to the requirements of Article 6.2 of the DSU, it was not clear from the United States' compliance panel request which "problem" the United States was alleging was caused by the measures at issue.

6.205. The European Union contrasts the United States' compliance panel request with its panel request in the original proceeding. The European Union points out that in that panel request, the United States specifically referred to subsidies "causing or threatening to cause serious prejudice to the interests of the United States through displacement and impedance of imports".³⁶¹ The European Union considers that the "clear contrast" between the wording of the claims in the panel request in the original proceeding, and the wording of the claim in the Article 21.5 compliance panel request "must be given meaning".

6.206. The European Union argues that the plain meaning of the claims under Article 6.3(a) in the United States' compliance panel request, interpreted in the light of the different language used in the panel request for the original proceeding, suggests that the panel request in the compliance proceeding refers only to actual, rather than threatened, displacement and impedance of imports.³⁶² The European Union submits that the United States thus failed to provide a brief summary of the legal basis of the complaint sufficient to present the problem clearly, pursuant to Article 6.2 of the DSU. The European Union argues that the United States cannot broaden the scope of the compliance proceeding by introducing a separate claim of threat of displacement and impedance of imports after the filing of its compliance panel request.

6.4.2.4.2 Arguments of the United States

6.207. The United States rejects the European Union's contentions that its compliance panel request does not comply with the requirements of Article 6.2 of the DSU and that its claims under Article 6.3 (a) of the SCM Agreement are outside the Panel's terms of reference. The United States considers that the European Union misinterprets both the SCM Agreement and the panel request in this proceeding.

6.208. The United States observes that the SCM Agreement explicitly states that "the term 'serious prejudice' … includes threat of serious prejudice".³⁶³ The United States considers that the interpretations set out in past panel and Appellate Body reports confirm that "serious prejudice" includes the threat of serious prejudice.³⁶⁴ The United States points out that in Indonesia – Autos,

³⁵⁹ European Union's first written submission, paras. 58, 151, 157, and 159-161. ↩

³⁶⁰ European Union's first written submission, para. 159 (citing Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 244 ("{A} threat of serious prejudice claim does not necessarily capture and provide a remedy with respect to the same scenario as a claim of present serious prejudice")). ↩

³⁶¹ European Union's first written submission, paras. 158-159 (comparing WT/DS316/23, (dated 30 March 2012, circulated 3 April 2012), para. 8(c)(i), with WT/DS316/6, (dated 10 April 2006, circulated 11 April 2006), para. 8, subpara. 3, point 2 (we note this second document is in fact the lapsed second panel request, also numbered WT/DS347/3, although the relevant wording does not differ to the first panel request, WT/DS316/2 (dated 31 May 2005, circulated 3 June 2005) – both provide that the United States claims that the measures at issue "are causing or threatening to cause serious prejudice to the interests of the United States through displacement and impedance of imports of large civil aircraft of the United States into the EC", within the meaning of Article 6.3 of the SCM Agreement). ↩

³⁶² European Union's first written submission, para. 159 (citing Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 244). ↩

³⁶³ United States' second written submission, para. 72 (citing footnote 13 to Article 5(c) of the SCM Agreement, which reads: "The term 'serious prejudice to the interests of another Member' is used in this Agreement in the same sense as it is used in paragraph 1 of Article XVI of GATT 1994, and includes threat of serious prejudice"). ↩

³⁶⁴ United States' second written submission, paras. 69-71 (citing Panel Report, US – Upland Cotton (Article 21.5 – Brazil), para. 7.1493 and fn 1555; and Panel Report, Korea – Commercial Vessels, para. 7.589 ↩

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neither the United States nor the European Communities referenced "threat of serious prejudice" in their panel requests³⁶⁵, yet both made specific threat claims in their written submissions, and the panel ultimately made findings on those claims³⁶⁶; similarly, in Korea – Commercial Vessels, the European Communities made no specific threat claims in its panel request³⁶⁷, yet the panel itself raised the question of threat of serious prejudice, indicating that it saw no need to differentiate claims of actual and threatened prejudice.³⁶⁸ The United States refutes the European Union's reliance on the Appellate Body's statement that "a threat of serious prejudice claim does not necessarily capture and provide a remedy with respect to the same scenario as a claim of present serious prejudice".³⁶⁹ The United States considers that this statement merely indicates that a threat of serious prejudice claim may not encompass an actual serious prejudice claim – it says nothing about the reverse situation, arising here, in which a serious prejudice claim encompasses a threat of serious prejudice claim.³⁷⁰

6.209. The United States argues that its compliance panel request does not refer to either actual serious prejudice or threatened serious prejudice, but refers to "subsidies … inconsistent with Articles 5(c), 6.3(a), 6.3(b), and 6.3(c)".³⁷¹ The United States notes that the original panel request described the relevant violation as consisting of subsidies that "appear to be causing adverse effects to U.S. interests within the meaning of … Articles 5(c), 6.3(a), 6.3(b), and 6.3(c) of the SCM Agreement because the measures … are causing or threatening to cause serious prejudice to the interests of the United States".³⁷² Thus, referring to the original panel request, which the United States "emphasizes is unnecessary", would suggest that the inconsistency with Articles 6.3(a) and (b) is the same: serious prejudice and threat of serious prejudice.³⁷³

6.4.2.4.3 Evaluation by the Panel

6.210. The question before the Panel is whether the United States' panel request, in referring to a claim of displacement and impedance of imports within the meaning of Article 6.3(a), but not explicitly to a threat of displacement and impedance, satisfies the requirements of Article 6.2 of the DSU such that the threat of displacement and impedance of exports is within the Panel's terms of reference and may properly be considered by this Panel.

6.211. Article 6.2 of the DSU provides, in relevant part, that "{t}he request for the establishment of a panel shall … provide a brief summary of the legal basis of the complaint sufficient to present the problem clearly". If the measures or the claims are insufficiently identified, the "matter" is outside the panel's terms of reference. The Appellate Body has indicated that to satisfy the requirements of Article 6.2, the panel request should explain succinctly how or why the measure at issue is considered by the complaining party to be violating the WTO obligation in question. While the identification of the relevant treaty provision claimed to have been violated is always necessary for meeting the standard of clarity required by Article 6.2 of the DSU, it may not always

("{T}he concept of serious prejudice includes threat of serious prejudice (just as the term 'injury' in the SCM Agreement includes 'threat of material injury')")).

³⁶⁵ United States' second written submission, para. 71 (citing Indonesia – Autos, United States' request for the establishment of a panel, WT/DS59/6, 12 June 1997; and Indonesia – Autos, European Communities' request for the establishment of a panel, WT/DS54/6, 12 May 1997). ↩

³⁶⁶ United States' second written submission, para. 71 (citing Panel Report, Indonesia – Autos, paras. 8.445 and 8.448). ↩

³⁶⁷ United States' second written submission, para. 71 (citing Panel Report, Korea – Commercial Vessels, European Communities' request for the establishment of a panel, WT/DS273/2, 11 June 2003). ↩

³⁶⁸ United States' second written submission, para. 71 (citing Panel Report, Korea – Commercial Vessels, paras. 7.529 and 7.589). ↩

³⁶⁹ United States' second written submission, para. 69 (citing Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 244). ↩

³⁷⁰ United States' second written submission, para. 69. ↩

³⁷¹ United States' second written submission, para. 69 (citing WT/DS316/23, (dated 30 March 2012, circulated 3 April 2012), para. 8). ↩

³⁷² United States' second written submission, para. 69 (citing WT/DS316/6, (11 April 2006), para. 8 (We note this document is in fact the lapsed second panel request, also numbered WT/DS347/3, although the relevant wording does not differ to the first panel request, WT/DS316/2 (dated 31 May 2005, circulated 3 June 2005) – both provide that the United States claims that the measures at issue "are causing or threatening to cause serious prejudice to the interests of the United States through displacement and impedance of imports of large civil aircraft of the United States into the EC", within the meaning of Article 6.3 of the SCM Agreement). ↩

³⁷³ United States' second written submission, para. 69. ↩

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be sufficient. The Appellate Body has stated that the simple listing of an article of an agreement may, in some circumstances, be sufficient. However, there may also be circumstances where this would not satisfy the standard of Article 6.2 – for example, where an article sets out not one distinct obligation, but rather multiple obligations, the listing of articles of an agreement may fall short of the standard required by Article 6.2.³⁷⁴

6.212. The United States' panel request states in relevant part:

8. The subsidies listed in paragraph 5 also result in the following inconsistencies with the SCM Agreement:

…

(c) all of the subsidies listed in paragraph 5 are inconsistent with Articles 5(c), 6.3(a), 6.3(b) and 6.3(c) because they are specific subsidies within the meaning of Articles 1 and 2, and result in

(i) displacement and impedance of imports of large civil aircraft of the United States into the market of the EU within the meaning of Article 6.3(a).³⁷⁵

6.213. In its first written submission, the United States alleges that it continues to experience serious prejudice in the form of displacement and impedance, and/or threat thereof, in its LCA imports into the EU market under Article 6.3(a) of the SCM Agreement.³⁷⁶

6.214. While actual, or present serious prejudice is a distinct phenomenon from threatened serious prejudice, and the evidence required to demonstrate each is necessarily different³⁷⁷, we note that as a legal interpretative matter, the term "serious prejudice to the interests of another Member" as used in the SCM Agreement explicitly includes the threat of serious prejudice. The obligation with respect to serious prejudice is contained in Article 5(c) of the SCM Agreement. Article 5(c) of the SCM Agreement provides, in footnote 13, that: "The term 'serious prejudice to the interests of another Member' is used in this Agreement in the same sense as it is used in paragraph 1 of Article XVI of GATT 1994, and includes threat of serious prejudice".³⁷⁸ Article 6.3(b) of the SCM Agreement provides that "{s}erious prejudice in the sense of paragraph (c) of Article 5 may arise in any case where … the effect of the subsidy is to displace or impede the exports of a like product of another Member from a third country market".

6.215. The United States' panel request did not refer only to the article of the SCM Agreement, but also identified the obligation and the specific form of serious prejudice it was alleging. By referring to inconsistency with Article 5(c) of the SCM Agreement, the United States indicated the obligation in question was the obligation not to cause serious prejudice to the interests of another Member, including the threat of serious prejudice. As the threat of serious prejudice is expressly included in the definition of serious prejudice in the SCM Agreement, the European Union could have anticipated that the United States' concern might cover both actual and threatened serious prejudice. The reference to "displacement or impedance of imports of large civil aircraft of the United States into the market of the EU within the meaning of Article 6.3(a)" put the European Union on notice as to the particular form of serious prejudice alleged, and the particular

³⁷⁴ Appellate Body Report, Korea – Dairy, para. 124. ↩

³⁷⁵ EC and certain member States – Large Civil Aircraft, Recourse to Article 21.5 of the DSU by the United States: Request for the establishment of a panel, WT/DS316/23, (dated 30 March 2012, circulated 3 April 2012). ↩

³⁷⁶ United States' first written submission, para. 247. See also United States' first written submission paras. 276, 279, 359, 514, 519, and 533. ↩

³⁷⁷ See Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 244 ("A claim of serious prejudice may relate to a different situation than a claim of threat of serious prejudice. A claim of present serious prejudice relates to the existence of prejudice in the past, and present, and that may continue into the future. By contrast, a claim of threat of serious prejudice relates to the prejudice that does not yet exist, but is imminent such that it will materialize in the near future. Therefore, a threat of serious prejudice claim does not necessarily capture and provide a remedy with respect to the same scenario as a claim of present serious prejudice."). (emphasis original) ↩

³⁷⁸ (emphasis added) ↩

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market in which it was alleged to have occurred. Whether that displacement or impedance is actual or threatened could then be elaborated and appropriately developed through argumentation and evidence in the parties' submissions.³⁷⁹

6.216. We consider that, on balance, the reference to an alleged inconsistency with SCM Agreement Article 6.3(a) in the form of "displacement or impedance of imports … within the meaning of Article 6.3(a)" as set out in the United States' panel request, in these circumstances encompasses the threat of displacement or impedance such that it satisfies the requirements of Article 6.2 in this regard.

6.217. As to whether this conclusion should be altered in light of the different wording used by the United States in its panel request in the original proceeding and in the panel request for this compliance proceeding, we note that the two panel requests are distinct procedural documents. We are aware of situations where, within the same proceeding, panels have examined the terminology used in requests for consultations to confirm the interpretation of terms in the related panel request.³⁸⁰ However, in this instance the separate panel requests relate to separate proceedings. There does not, in our view, appear to be a basis for treating the language of the United States' original panel request as probative of the meaning to be attributed to the compliance panel request.

6.4.2.4.4 Conclusion

6.218. For all of the above reasons, we find that the United States' panel request adequately provides a summary of the legal basis of the complaint in satisfaction of the requirements of Article 6.2 of the DSU, and that the United States' claim of threat of displacement or impedance under Article 6(3) of the SCM Agreement is within the Panel's terms of reference in this compliance proceeding.

6.5 Prohibited subsidy claims

6.5.1 Introduction

6.219. We now proceed to address the second of the three sets of issues raised by the parties in this compliance dispute, namely, whether the United States has demonstrated that the A380 and A350XWB LA/MSF measures are prohibited subsidies within the meaning of Articles 3.1 and 3.2 of the SCM Agreement. We start by examining the merits of the United States' allegation that the A350XWB LA/MSF measures constitute specific subsidies under the terms of Article 1.1 of the SCM Agreement.

6.5.2 Whether LA/MSF for the A350XWB is a subsidy

6.5.2.1 Arguments of the United States

6.220. The United States claims that France, Germany, Spain and the United Kingdom each contractually agreed to provide LA/MSF of, in total, EUR 3.5 billion³⁸¹ to Airbus entities for developing the A350XWB aircraft, and that each of the relevant agreements is a specific subsidy. The United States argues that LA/MSF is a financial contribution within the meaning of Article 1.1(a)(1) of the SCM Agreement, which confers a benefit pursuant to Article 1.1(b) of the

³⁷⁹ We note that in this dispute, particular features of the facts may imply present and future effects; given the ordinary time lag between orders and deliveries of LCA, in certain situations, order data may be indicative to some degree of future displacement or impedance when those aircraft are eventually delivered. (Panel Report, EC and certain member States – Large Civil Aircraft, paras. 7.1783-7.1784. See also Appellate Body Report, EC and certain member States – Large Civil Aircraft, para. 1199; and United States' first written submission, para. 514 ("Notwithstanding the arguments and data above, should the Panel find that there is no impedance of Boeing single aisle LCA based on the delivery data, the United States requests that the Panel conduct a threat analysis based on order data. The order data demonstrates that Boeing LCA are also threatened with displacement and/or impedance in the EU single-aisle market")). ↩

³⁸⁰ See e.g. Panel Report, US – Lamb, para. 5.36. ↩

³⁸¹ See, for example, United States' first written submission, para. 8. We note that the sum of the amounts to be provided under the contracts appears to be in the order of EUR [***] when the amounts denominated in GBP are converted to EUR at historical conversion rates as at the date of the UK contract. ↩

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SCM Agreement because it is provided on terms more favourable than the market would provide.³⁸² In support of this position, the United States refers to various government statements and media reports, which it argues demonstrate that LA/MSF was provided on non-commercial terms, and compares the alleged rates of return anticipated in the relevant LA/MSF contracts to a constructed market benchmark; a comparison which the United States considers demonstrates that LA/MSF is provided at below-market rates of return.

6.5.2.2 Arguments of the European Union

6.221. The European Union agrees that the A350XWB LA/MSF agreements are each financial contributions within the meaning of Article 1.1(a)(1) of the SCM Agreement, but considers that the United States has failed to demonstrate that those measures confer a benefit pursuant to Article 1.1(b) of the SCM Agreement. While the European Union agrees that the proper question regarding "benefit" is whether each of the relevant LA/MSF measures is provided at below-market rates of return³⁸³, it submits that the United States understates the rates of return expected under the contracts, and overstates the market benchmark rates of return.³⁸⁴ The European Union disagrees with the United States with respect to the risks involved with both the form of financing and the project in question, and the implications of those risks for what returns a market lender would likely have sought in return for providing financing of a comparable project on comparable terms and conditions. The European Union states that, for various reasons, the approach proposed by the United States "is a methodology that lacks financial and economic robustness and that does not withstand scrutiny".³⁸⁵

6.5.2.3 Evaluation by the Panel

6.222. We recall that the existence of a subsidy is to be determined pursuant to Article 1.1 of the SCM Agreement.

6.223. Article 1.1 of the SCM Agreement provides that:

1.1 For the purpose of this Agreement, a subsidy shall be deemed to exist if:

(a)(1) there is a financial contribution by a government or any public body within the territory of a Member (referred to in this Agreement a "government"), i.e. where:

(i) a government practice involves a direct transfer of funds (e.g. grants, loans, and equity infusion), potential direct transfers of funds or liabilities (e.g. loan guarantees); …

and

(b) a benefit is thereby conferred.

6.224. Thus, there is a subsidy where: (a) a financial contribution by a government or public body within the territory of a Member (b) confers a benefit.³⁸⁶ Before turning to evaluate the merits of the parties' arguments with respect to these two elements of the definition of a subsidy, we first set out our understanding of the terms and conditions of LA/MSF for the A350XWB.

6.5.2.3.1 Key features of LA/MSF for the A350XWB

6.225. The terms under which the French, German, Spanish and UK LA/MSF measures were agreed and provided for the A350XWB are set out in separate national-level contracts or other legal instruments entered into by each relevant European Union member State government or government body and the various Airbus entities. The European Union provided the relevant

³⁸² United States' first written submission, paras. 8, 105, 106, 113, 136-138, and 366-368. ↩

³⁸³ European Union's second written submission, para. 280. ↩

³⁸⁴ See e.g. European Union's second written submission, paras. 280, 291, 294-304, and 305-352. ↩

³⁸⁵ European Union's second written submission, para. 293. ↩

³⁸⁶ SCM Agreement Articles 1.1(a)(1) and 1.1(b). ↩

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contracts on 5 October 2012 following our decision to agree to the United States' request of 20 July 2012 to seek this information in accordance with Article 13 of the DSU. The key features of the LA/MSF measures as described in the documents submitted by the European Union are set out in the following subsections.

6.5.2.3.1.1 French A350XWB LA/MSF

6.226. The terms of French government LA/MSF for the A350XWB are set out in two legal instruments: a Protocole d'accord (French A350XWB Protocole) dated [***]³⁸⁷; and a Convention d'avance recuperable (French A350XWB Convention) dated [***].³⁸⁸ Airbus SAS and the French State were parties to both instruments, with no other Airbus entity being involved.

6.227. Under the terms of the French A350XWB Protocole, the French Government agreed to provide Airbus with [***].³⁸⁹ Eligible expenses are defined as technical feasibility studies and validation work for the A350XWB programme up to the date of Aircraft Type Certification³⁹⁰ [***].³⁹¹ The French A350XWB Protocole envisages that such expenses would cover [***]³⁹², including: [***].³⁹³

6.228. Annex 4 of the French A350XWB Protocole contains an anticipated schedule of disbursements which reveals when and in what amounts the parties envisaged the government funding would be provided over a period of years. The same schedule of disbursements is affirmed in the French A350XWB Convention. The French A350XWB Protocole provides that in the event of [***].³⁹⁴

6.229. The amounts of funding disbursed by the French Government are to be repaid with interest through [***] levies charged on revenues generated from aircraft deliveries.³⁹⁵ The obligation to repay the LA/MSF is therefore triggered only if there is an aircraft delivery. Thus, both the reimbursement of principal and the payment of interest are dependent upon the success of the A350XWB programme.

6.230. The French A350XWB Protocole provides for [***] levies in the following amounts: [***]³⁹⁶ [***].³⁹⁷ However, the French A350XWB Protocole specifies that the final levies to be charged are to be determined on [***] depending on whether [***].³⁹⁸ If, as of that date, [***]. After [***], levy amounts will only be re-calculated if there are delays or if deliveries are not made according to the anticipated schedule. Moreover, in the event of either: (a) a

³⁸⁷ Protocole d'accord entre l'État et la Société Airbus relatif au programme A350XWB [***], (French A350XWB Protocole), (Exhibit EU-(Article 13)-01) (BCI), and annexes (Exhibits EU-(Article 13)-02 to EU-(Article 13)-13) (BCI/HSBI). ↩

³⁸⁸ French A350XWB Convention d'avance récupérable (CAR) [***], (French A350XWB Convention), (Exhibit EU-(Article 13)-11) (BCI). ↩

³⁸⁹ French A350XWB Protocole, (Exhibit EU-(Article 13)-01) (BCI), art. 3.1. ↩

³⁹⁰ Annex 2 to the French A350XWB Protocole: Liste des dépenses éligibles [***], (Annex 2 to the French A350XWB Protocole), (Exhibit EU-(Article 13)-03) (BCI), para. 1. See also French A350XWB Protocole, (Exhibit EU-(Article 13)-01) (BCI), art. 2.3. Aircraft Type Certification is determinative of certain airworthiness and noise requirements. ↩

³⁹¹ See Annex 1 to the French A350XWB Protocole: Définition du programme et de la famille d'avions A350XWB (Annex 1 to the French A350XWB Protocole), (Exhibit EU-(Article 13)-02) (BCI). ↩

³⁹² French A350XWB Protocole, (Exhibit EU-(Article 13)-01) (BCI), art. 2.3; Annex 2 to the French A350XWB Protocole, (Exhibit EU-(Article 13)-03) (BCI), para. 1; and French A350XWB Convention, (Exhibit EU-(Article 13)-11) (BCI), art. 2. ↩

³⁹³ French A350XWB Protocole, (Exhibit EU-(Article 13)-01) (BCI), annex 2, para. 2. See also Exchange of Letters between Fabrice Brégier, Director General of Airbus, and French Director General of Civil Aviation (DGAC) [***] and [***], (Exhibit EU-(Article 13)-10) (BCI). ↩

³⁹⁴ French A350XWB Protocole, (Exhibit EU-(Article 13)-01) (BCI), arts. 4.2, 4.3, and 3.2. ↩

³⁹⁵ French A350XWB Protocole, (Exhibit EU-(Article 13)-01) (BCI), art. 6. ↩

³⁹⁶ The [***]. Neither the value of global sales nor the anticipated amount of the [***] is specified in the French A350XWB Protocole, nor is it specified in the French A350XWB Convention. (See French A350XWB Protocole, (Exhibit EU-(Article 13)-01) (BCI), art. 6.3). ↩

³⁹⁷ French A350XWB Protocole, (Exhibit EU-(Article 13)-01) (BCI), art. 6.3. We note that no information on the anticipated sales price or amount of revenue is included in the LA/MSF contract. ↩

³⁹⁸ The A350XWB programme industrial launch on 1 December 2006 was for [***], the A350-800, -900 (baseline variant), and -1000. [***]. (See e.g. Annex 1 to the French A350XWB Protocole, (Exhibit EU-(Article 13)-02) (BCI)). ↩

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rescheduling of disbursements, or (b) delays in deliveries, the precise amount of levies (as we understand it, for the next tranche of deliveries) are to be recalculated according to a formula, so as to achieve the required interest rate.

6.231. The French A350XWB Protocole states that the expected amount of interest payable will be [***]. The interest of [***] is expected to be realised upon delivery of [***] aircraft, which is less than the overall expected number of deliveries.³⁹⁹ The French A350XWB Protocole states that once the last payment (we understand this to mean disbursement) has been effected and within three months, the definitive rate of return is to be determined, taking into account the disbursements made by the French State over the whole duration of the operation, as the average of the following two rates:

(i) [***]; and

(ii) [***]⁴⁰⁰ [***].⁴⁰¹

6.232. Royalties are payable under the French LA/MSF contract. The obligation to pay a royalty is triggered if there is an aircraft delivery once the principal has been reimbursed, which the contract states is expected to be by delivery [***], which is less than the overall expected number of deliveries.⁴⁰² The amount of the royalty is expressed as 1% of the [***]⁴⁰³ [***]. The obligation to pay royalties [***].⁴⁰⁴

6.233. An anticipated schedule of deliveries is included as an annex to the French A350XWB Protocole. It is the same as that included in the Spanish and UK LA/MSF contracts, and detailed in the document identified by the European Union as the A350XWB business case-related document seen by the member States.⁴⁰⁵ The anticipated schedule includes [***].

6.234. In the event of default on the obligations to make payments, there is no security over assets of the contracting company, or assets of any related company. There is no surety or guarantee implicating any other entity.

6.235. Finally, the French A350XWB LA/MSF contract does not make specific provision for what is to occur in the event of discontinuation of the A350XWB programme. However, as the obligations to pay levies, interest and royalties are dependent on successful deliveries, were the programme to be discontinued, no new payment obligations would be triggered (though Airbus would have a continued obligation to pay any levies or royalties due on any aircraft already delivered). The French State has [***]. Airbus may [***].⁴⁰⁶ Due to the success-dependent nature of the repayment obligations, programme discontinuation would not [***].

6.5.2.3.1.2 German A350XWB LA/MSF

6.236. German LA/MSF is set out in the Darlehensvertrag (German KfW A350XWB Loan Agreement)⁴⁰⁷ and annexes, dated [***]. The parties are the Kreditanstalt für Wiederaufbau

³⁹⁹ French A350XWB Protocole, (Exhibit EU-(Article 13)-01) (BCI), art. 6.3. ↩

⁴⁰⁰ [***]. ↩

⁴⁰¹ French A350XWB Protocole, (Exhibit EU-(Article 13)-01) (BCI), art. 6.5. We note that [***]. We also note that [***]. Thus, under the French contract, the ultimate rate remains, as of today, undetermined. ↩

⁴⁰² The total number of expected deliveries is HSBI, but is included in the [***] at Annex 4 to the Protocole (Exhibit EU-(Article 13)-05) (HSBI). ↩

⁴⁰³ [***] is to be determined [***]. Neither the value of global sales nor the anticipated amount of [***] is specified in the agreement. ↩

⁴⁰⁴ French A350XWB Protocole, (Exhibit EU-(Article 13)-01) (BCI), art. 7.4. ↩

⁴⁰⁵ [***] presentation, [***], (Business case-related document), (Exhibit EU-(Article 13)-35) (HSBI), p. 12. This is also the same schedule as that included in the document the European Union refers to as the "business case", which the European Union asserts was never seen by the member States: that is, the A350XWB Business Case Presentation, (Exhibit EU-130) (HSBI), slides 50-51. ↩

⁴⁰⁶ French A350XWB Protocole (Exhibit EU-(Article 13)-01) (BCI), art. 7.4. ↩

⁴⁰⁷ Darlehensvertrag, or Loan Agreement, between Kreditanstalt für Wiederaufbau (KfW) and Airbus Operations GmbH and Airbus SAS to grant a loan to part-finance the development costs of the Airbus A350XWB, [***] (German KfW A350XWB Loan Agreement), (Exhibit EU-(Article 13)-14) (English translation) (BCI/HSBI). ↩

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(KfW) (a development bank of the German Government⁴⁰⁸); and Airbus Operations GmbH, Hamburg, which is identified as the borrower, and Airbus SAS, Toulouse, which is identified as a co-borrower.

6.237. Under the German KfW A350XWB Loan Agreement, KfW agreed to provide Airbus with [***] of eligible costs incurred by the borrower for the A350XWB programme, to a maximum of [***]. Three tranches of funding were envisaged: [***].⁴⁰⁹ Eligible costs include: [***].⁴¹⁰

6.238. Reimbursement of the principal is by per-aircraft levies. The obligation to make levy payments is triggered only if there is an aircraft delivery. Levy amounts are [***]: [***].⁴¹¹ Full repayment of the loan is envisaged to occur with the delivery of [***]. [***]. The agreement states that [***].⁴¹²

6.239. An HSBI anticipated delivery schedule is included in an annex. Unlike the other contracts, this schedule differs to that included in the A350XWB business case-related documents.⁴¹³ The German delivery schedule [***]. The European Union submits that overall deliveries were expected to be in line with the total stated in the Airbus base case for the A350XWB, and has explained that the schedule in the German LA/MSF agreement is different to the delivery schedule in the other agreements and in the business case because [***].⁴¹⁴ The German delivery schedule [***].

6.240. Periodic interest is payable on outstanding principal. This interest is charged separately to the levies. The interest is calculated from the date on which the first disbursement sum is debited from the KfW account, with a period of three months, and is payable for the first time on 30 September 2010. [***].⁴¹⁵ Apart from the specific set of circumstances described below⁴¹⁶, the obligation to make periodic interest payments on the outstanding principal appears to continue for as long as the programme continues.

6.241. An annual [***] fee of [***], and a semi-annual [***] fee of [***] are also charged.⁴¹⁷ Additionally, KfW will [***].

6.242. Royalties are due on deliveries that occur once the principal has been reimbursed. Royalties are payable for [***] after the date on which the principal is repaid, which is expected to be by delivery [***].⁴¹⁸ The payment of royalties is thus dependent on the programme's continuation past delivery [***]. The royalty is expressed as a percentage of the borrower's share of the sales price, and are [***]: [***]. The anticipated sales price or the borrower's share of that sales price is not specified in the agreement.

⁴⁰⁸ See Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.1248. ↩

⁴⁰⁹ German KfW A350XWB Loan Agreement, (EU-(Article 13)-14) (English translation) (BCI/HSBI), section 3.2. The European Union submits that [***]. (See Statement of Airbus Operations GmbH Account with KfW as at 31 August 2012, dated 8 September 2012, (Exhibit EU-(Article 13)-36) (BCI)). ↩

⁴¹⁰ Annex 1.4(b)(ii) to German KfW A350XWB Loan Agreement, (Exhibit EU-(Article 13)-19) (English translation) (BCI), para. 2. ↩

⁴¹¹ German KfW A350XWB Loan Agreement, (EU-(Article 13)-14) (English translation) (BCI/HSBI), sections 6.1-6.3. ↩

⁴¹² German KfW A350XWB Loan Agreement, (EU-(Article 13)-14) (English translation) (BCI/HSBI), section 6.7. ↩

⁴¹³ Compare: German KfW A350XWB Loan Agreement, (EU-(Article 13)-14) (English translation) (BCI/HSBI); with Business case-related document, (Exhibit EU-(Article 13)-35) (HSBI), p. 12; and A350XWB Business Case Presentation, (Exhibit EU-130) (HSBI), slides 50-51. ↩

⁴¹⁴ European Union's response to Panel question No. 131, paras. 93-95. ↩

⁴¹⁵ The United States' expert, Dr Jordan, applies these terms and using historical data provides an estimate of 3.34%, to which the European Union does not object, and which the European Union's expert, Professor Whitelaw, subsequently uses in his own calculations. ↩

⁴¹⁶ See below para. 6.245. ↩

⁴¹⁷ Annex 13.1(a) to German KfW A350XWB Loan Agreement, (Exhibit EU-(Article 13)-26) (English translation) (BCI), arts. 4.1 and 4.4. ↩

⁴¹⁸ This is [***] deliveries referenced in the German KfW A350 Loan Agreement [***]. (German KfW A350XWB Loan Agreement, (EU-(Article 13)-14) (English translation) (BCI/HSBI), section 1.1). ↩

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6.243. In terms of [***], the contract refers to: [***]⁴¹⁹, [***]. In a letter from EADS N.V., annexed to the loan agreement, dated [***] and titled [***], EADS [***].⁴²⁰ [***] and [***] guarantee the performance of Airbus' payment obligations but do not ensure repayment of the loan in the event that the programme is not as successful as anticipated and deliveries are not made in accordance with the expected schedule. Default interest is payable where either the borrower (Airbus Operations GmbH), or Airbus SAS, fails to make payments (except for interest payments). The applicable default interest rate is a rate set out in the German Civil Code.

6.244. In addition, the German Federal Government has provided [***]⁴²¹, [***].⁴²²

6.245. If the programme is discontinued, [***].⁴²³ Further, [***]. Additionally, [***]. The European Union states that fees are non-refundable, and that Airbus would not get back sums it paid out as fees.

6.246. There are a number of conditions to Airbus' release from obligations on discontinuation of the programme. The programme [***]. [***].

6.247. The contract also includes a [***].⁴²⁴ [***].

6.248. The contract is not time limited; rights and obligations under the contract continue until Airbus' obligations have been discharged in full.

6.5.2.3.1.3 Spanish A350XWB LA/MSF

6.249. The LA/MSF agreement with Spain is formalised in a Convenio de Colaboración⁴²⁵ (Spanish A350XWB Convenio) dated [***], between the Spanish Ministry of Industry, Tourism and Commerce and Airbus Operations S.L. A prior Real Decreto⁴²⁶ dated 6 November 2009 and published 9 November 2009 indicated the government's commitment to provide the sums and, broadly, some conditions of LA/MSF.

6.250. Under the Spanish A350XWB Convenio, Spain agreed to provide a maximum of EUR 332,228,670⁴²⁷ for eligible expenses for non-recurrent costs for the participation of Airbus Operations S.L. in the A350XWB development programme, corresponding to preliminary design, engineering design, wind tunnel tests, structural tests, wing tests, certification documentation, and cost of fabrication of prototype and trial aircraft, including modifications, tools and equipment.⁴²⁸

⁴¹⁹ European Aeronautical Defence and Space Company (EADS). The company is now called the Airbus Group. We primarily use the title EADS in this proceeding, reflecting its name during the relevant time-period. ↩

⁴²⁰ Annex 13.1(a) to German KfW A350XWB Loan Agreement, (Exhibit EU-(Article 13)-26) (English translation) (BCI). ↩

⁴²¹ European Union's comments on the United States' response to Panel question No. 161, para. 10 (citing German KfW A350XWB Loan Agreement, (Exhibit EU-(Article 13)-14) (English translation) (BCI/HSBI), sections 4.4 and 12.5(b)(ii)). ↩

⁴²² European Union's comments on the United States' response to Panel question No. 161, para. 10. ↩

⁴²³ German KfW A350XWB Loan Agreement, (Exhibit EU-(Article 13)-14) (English translation) (BCI/HSBI), section 8.8. ↩

⁴²⁴ Annex 13.1(a) to German KfW A350XWB Loan Agreement, (Exhibit EU-(Article 13)-26) (English translation) (BCI), [***]. ↩

⁴²⁵ Convenio de Colaboración entre el Ministerio de Industria, Turismo y Comercio y la Empresa Airbus Operations S.L relativo a su participación en el programa de desarrollo del avión Airbus A350XWB [***] (Spanish A350XWB Convenio), (Exhibit EU-(Article 13)-29) (BCI/HSBI). ↩

⁴²⁶ Real Decreto 1666/2009, de 6 noviembre, por el que se regula la concesión directa de anticipos reembolsables a la filial española de Airbus SAS denominada Airbus Operations S.L para su participación en el programa de desarrollo de la nueva familia de aviones Airbus A350XWB, Boletín Oficial del Estado, 9 November 2009, (Exhibit USA-46). ↩

⁴²⁷ Spanish A350XWB Convenio, (Exhibit EU-(Article 13)-29) (BCI/HSBI), Tercera, p. 3; Real Decreto 1666/2009, de 6 noviembre, por el que se regula la concesión directa de anticipos reembolsables a la filial española de Airbus SAS denominada Airbus Operations S.L para su participación en el programa de desarrollo de la nueva familia de aviones Airbus A350XWB, Boletín Oficial del Estado, 9 November 2009, (Exhibit USA-46), art. 6.1. ↩

⁴²⁸ Real Decreto 1666/2009, de 6 noviembre, por el que se regula la concesión directa de anticipos reembolsables a la filial española de Airbus SAS denominada Airbus Operations S.L para su participación en el programa de desarrollo de la nueva familia de aviones Airbus A350XWB, Boletín Oficial del Estado, 9 November 2009, (Exhibit USA-46), art. 4.2. ↩

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The Spanish A350XWB Convenio and the Real Decreto envisage EUR 41,493,300 being disbursed in 2009.⁴²⁹ The schedule of remaining disbursements is HSBI.

6.251. As we understand it, under the terms of the Spanish agreement [***]. The obligation to make levy payments is triggered only if there is an aircraft delivery.

6.252. Levy amounts are [***]: [***]⁴³⁰ [***]. The rate of interest, set by reference to the interest rate of 10-year government bonds, is [***].⁴³¹

6.253. The contract on the Panel record does not include a delivery schedule. However, the Spanish contract anticipates payments in line with the delivery schedule anticipated by business case-related documents⁴³² and included in the French and UK A350XWB contracts.

6.254. Royalties are due on deliveries that occur once the principal has been reimbursed. The royalty amount is [***] per aircraft. The obligation to pay a royalty is triggered if there is an aircraft delivery once the principal has been repaid. The payment of royalties is dependent on the success of the program. The [***].

6.255. In the event of default on obligations to make payments, there is no security over assets of the contracting company, or assets of any related company. There is no surety or guarantee implicating any other entity.

6.256. In the event that the participation of Airbus Operations SL in the A350XWB programme is cancelled by Airbus SAS, [***]. In the event of [***]. If, [***].⁴³³ [***].

6.5.2.3.1.4 UK A350XWB LA/MSF

6.257. A Repayable Investment Agreement⁴³⁴ dated [***] was concluded between the UK Secretary of State for Business, Innovation and Skills, and both Airbus Operations Ltd and the European Aeronautic Defence and Space Company (EADS) NV.

6.258. A [***] was set out in an exchange of letters dated [***].⁴³⁵ A [***] was set out in an exchange of letters dated [***].⁴³⁶ A [***] was set out in a letter dated [***].⁴³⁷ These [***].⁴³⁸ We refer to the UK A350XWB Repayable Investment Agreement and these [***] letters collectively as the "UK A350XWB LA/MSF contract".

⁴²⁹ The European Union submits that this disbursement occurred in [***]: European Union's response to Panel question No. 133, fn 182. ↩

⁴³⁰ "[***]": Spanish A350XWB Convenio, (Exhibit EU-(Article 13)-29) (BCI/HSBI), Novena, p. 5. ↩

⁴³¹ Real Decreto 1666/2009, de 6 noviembre, por el que se regula la concesión directa de anticipos reembolsables a la filial española de Airbus SAS denominada Airbus Operations S.L para su participación en el programa de desarrollo de la nueva familia de aviones Airbus A350XWB, Boletín Oficial del Estado, 9 November 2009, (Exhibit USA-46), art. 5. ↩

⁴³² Business case-related document, (Exhibit EU-(Article 13)-35) (HSBI), p. 12. This schedule was included in the document the European Union refers to as the "business case", which the European Union asserts was never seen by the member States: that is, A350XWB Business Case Presentation, (Exhibit EU-130) (HSBI), slides 50-51. ↩

⁴³³ Spanish A350XWB Convenio, (Exhibit EU-(Article 13)-29 (BCI/HSBI), [***]. ↩

⁴³⁴ Repayable Investment Agreement in relation to the Airbus A350XWB, [***], (UK A350XWB Repayable Investment Agreement), (Exhibit EU-(Article 13)-30) (BCI/HSBI). ↩

⁴³⁵ Exchange of letters between the UK Department for Business, Innovation and Skills, and Airbus Operations Ltd and EADS NV [***], (First set of [***] to UK A350XWB LA/MSF contract), (Exhibit EU-(Article 13)-31) (BCI/HSBI). ↩

⁴³⁶ Exchange of letters between the UK Department for Business, Innovation and Skills, and Airbus Operations Ltd [***], (Second set of [***] to UK A350XWB LA/MSF contract), (Exhibit EU-(Article 13)-32) (BCI/HSBI)). ↩

⁴³⁷ Exchange of letters between the UK Department for Business, Innovation and Skills, and Airbus Operations Ltd [***], (Third set of [***] to UK A350XWB LA/MSF contract), (Exhibit EU-(Article 13)-33) (BCI/HSBI). ↩

⁴³⁸ The first iteration of the agreement contains the material terms and conditions. The [***] did not materially modify those terms and conditions, [***]. However, the last [***], occurring [***] after the initial agreement, provided that [***]. It provided an [***], up to the total amount initially agreed. It may ↩

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thus be possible to characterize the UK LA/MSF as having been provided via [***]. However, both parties appear to agree that LA/MSF was provided by the United Kingdom in the form of a single instance of LA/MSF and under a single contract, albeit with some [***] at various stages. The UK LA/MSF is therefore treated as a single loan in this proceeding. (See [***] documents (First set of [***] to UK A350XWB LA/MSF contract, (Exhibit EU-(Article 13)-31) (BCI/HSBI); Second set of [***] to UK A350XWB LA/MSF contract, (Exhibit EU-(Article 13)-32) (BCI/HSBI); and Third set of [***] to UK A350XWB LA/MSF contract, (Exhibit EU-(Article 13)-33) (BCI/HSBI)); United States' response to Panel question No. 110, paras. 2-3; and European Union's comments on the United States' response to Panel question No. 110, para. 1.

6.259. Under each iteration of the contract, the United Kingdom agreed to finance [***] of costs incurred by Airbus Operations Ltd to a maximum of GBP 340,000,000.⁴³⁹ [***]. This would cover design and development costs which Airbus either paid or incurred a commitment to pay. Eligible cost items include: [***].⁴⁴⁰

6.260. Disbursements are only available during an "availability period", from [***].⁴⁴¹ [***]. Further changes to the disbursements schedule [***]. The final disbursements schedule is HSBI.

6.261. Reimbursement of the principal is envisaged by per-aircraft levies. The obligation to make levy payments is triggered only if there is an aircraft delivery. [***].⁴⁴² [***].⁴⁴³ In the UK agreement, [***].⁴⁴⁴ The agreement contains a clause stating that [***].⁴⁴⁵

6.262. The agreement contains an HSBI anticipated delivery schedule, which is the same as that included in the A350XWB business case-related documents provided by the European Union⁴⁴⁶, and in the French contract. It differs to that included in the German contract.

6.263. Periodic interest is payable on outstanding principal, due [***] at a rate of [***].⁴⁴⁷ The obligation to pay periodic interest only applies either [***], or [***], whichever is later.⁴⁴⁸ Thus, while the interest falls due periodically and is not in this respect dependent on the success of the programme, as it is only payable for a period that is either [***], payment of interest [***] is therefore dependent on the success of the programme [***].

6.264. Royalties are due on deliveries that occur once the principal has been reimbursed. The first royalty payment is expected on [***]. The royalty amount is expressed as a percentage of actual revenue: [***]. The anticipated actual revenue is not specified in the agreement. The obligation to pay a royalty ends on delivery [***].

6.265. [***] is provided in the form of a [***]. If there is a change in control [***]. Additionally, while [***], the contract expressly [***]. Airbus Operations Ltd [***].

6.266. In the event that obligations are not performed, default interest is also due at [***] above the relevant interest rate, that is, [***].

⁴³⁹ UK A350XWB Repayable Investment Agreement, (Exhibit EU-(Article 13)-30) (BCI/HSBI), clauses 2.1 and 4.3(c)(i). ↩

⁴⁴⁰ UK A350XWB Repayable Investment Agreement, (Exhibit EU-(Article 13)-30) (BCI/HSBI), p. 43, schedule 3 (Eligible Cost Parameters). ↩

⁴⁴¹ UK A350XWB Repayable Investment Agreement, (Exhibit EU-(Article 13)-30) (BCI/HSBI), p. 2, section 1 (Interpretation: 'Availability period'). ↩

⁴⁴² [***]. ↩

⁴⁴³ UK A350XWB Repayable Investment Agreement, (Exhibit EU-(Article 13)-30) (BCI/HSBI), p. 11, section 4 (Repayment, Prepayment and Cancellation), clause 5.3. ↩

⁴⁴⁴ UK A350XWB Repayable Investment Agreement, (Exhibit EU-(Article 13)-30) (BCI/HSBI), p. 11, section 4 (Repayment, Prepayment and Cancellation), clause 5.5. ↩

⁴⁴⁵ UK A350XWB Repayable Investment Agreement, (Exhibit EU-(Article 13)-30) (BCI/HSBI), p. 11, section 4 (Repayment, Prepayment and Cancellation), clause 5.4. ↩

⁴⁴⁶ Business case-related document, (Exhibit EU-(Article 13)-35) (HSBI), p. 12. This schedule was included in the document the European Union refers to as the "business case", which the European Union asserts was never seen by the member States: that is, the A350XWB Business Case Presentation, (Exhibit EU-130) (HSBI), slides 50-51. ↩

⁴⁴⁷ UK A350XWB Repayable Investment Agreement, (Exhibit EU-(Article 13)-30) (BCI/HSBI), p. 4. ↩

⁴⁴⁸ UK A350XWB Repayable Investment Agreement, (Exhibit EU-(Article 13)-30) (BCI/HSBI), p. 4, section 1.1 [***] and p. 13, section 5, clauses 7.1 and 7.2 (Interest). ↩

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6.267. If the principal is not repaid by either [***], or [***], whichever is later, then the [***].⁴⁴⁹ Nor, if the programme effectively ends after [***], is there any further obligation to pay interest. Therefore, in the event of programme discontinuation at a point beyond ten years after the date of the first drawdown, it appears Airbus has no further obligation to repay the principal, or to pay interest.

6.5.2.3.1.5 Similarities and differences between the A350XWB LA/MSF contracts and the LA/MSF measures examined in the original proceeding

6.268. The following section describes features in common and differences between the contracts at issue in this proceeding and the contracts at issue in the original proceeding.⁴⁵⁰

6.269. Disbursements operate via substantially the same mechanisms as in the original proceeding. Funds are either: (a) transferred in advance of actual development costs being incurred, or (b) disbursed up to the agreed amounts after actual costs have been incurred. As in the original proceeding, when funds are disbursed in advance, costs actually incurred may be subsequently audited or reviewed by the governments and the funding amounts adjusted to ensure that total borrowing does not exceed the level of development costs it was agreed would be financed.⁴⁵¹ In several of the contracts currently at issue (the French and Spanish contracts), provision is made for the [***].

6.270. Like the contracts in the original proceeding, reimbursement of the loan principal in all four contracts currently at issue is by per-aircraft levies. The levy is charged upon aircraft delivery, and thus levies are expected to be paid according to a pre-determined anticipated aircraft delivery schedule. Repayment of the principal may thus be said to be levy-based. In the original proceeding, the levy-based nature of repayment obligations was an important aspect of the contracts. Because loan repayments and, in general, any additional returns (interest payments) were charged via levies, this made the loans essentially success-dependent – the obligation to make a levy-based payment was not triggered until a successful delivery was made.

6.271. In two of the current contracts (the French and Spanish A350XWB contracts), [***], which will be achieved if deliveries are made in accordance with the anticipated schedule.

6.272. In two of the current contracts (the German and UK A350XWB contracts), interest payments are [***]. For those two contracts, while the [***]. The German A380 LA/MSF contract examined in the original proceeding also included a [***].⁴⁵²

6.273. As in the original proceeding, repayments usually start with the delivery of the first aircraft.⁴⁵³ In some instances, repayment begins only after Airbus has made a specified number of aircraft deliveries. Although the amount of the per-aircraft levies varies between the different contracts, it appears in nearly all cases to be [***]. In this way, the contracts are back-loaded. This is significant because the repayment structure puts off a significant proportion of expected payments until later in time. In principle, the further into the future returns are expected, the less certain are returns because, in general, there is less certainty regarding the occurrence of potentially negative effects of possible intervening events. Further, if the number of expected deliveries turns out to have been too optimistic, it is the latter payments that will not be made. If, then, it is with latter payments that the bulk of reimbursement was to be made, the lender stands to lose more than had the repayment schedule involved equal payments or if it had been front-loaded. The back-loaded nature of such a reimbursement schedule contributes to the overall risk associated with LA/MSF.

⁴⁴⁹ UK A350XWB Repayable Investment Agreement, (Exhibit EU-(Article 13)-30) (BCI/HSBI), p. 11, section 4 (Repayment, Prepayment and Cancellation), clause 5.4. ↩

⁴⁵⁰ See Panel Report, EC and certain member States – Large Civil Aircraft, paras. 7.373-7.375. ↩

⁴⁵¹ See Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.373. ↩

⁴⁵² See Loan Contract between the Federal Republic of Germany and Airbus Deutschland GmbH on the grant of an interest-bearing, conditionally repayable loan for the partial financing of the development costs for the Airbus A380, 19 March 2002, (German A380 LA/MSF contract), (Original Exhibit US-72), (Exhibit USA-83) (BCI), section 6. ↩

⁴⁵³ See Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.374. ↩

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6.274. The Spanish and UK A350XWB contracts, like some of the contracts at issue in the original proceeding, provide a "[***]"; [***]. However, the UK contract differs from those other contracts in that it [***]. Thus, the UK contract provides for interest payments for a period [***]. The UK LA/MSF contract is also the only one of the LA/MSF contracts that [***], which is expected and required by delivery [***]. Although it provides a "[***]" during which [***] on initial deliveries and [***], it: (a) nonetheless requires [***] during that time and so ensures at least [***]; and (b) because the levy amounts, once due, [***], they are not weighted more heavily towards [***]. The UK agreement for the A350XWB therefore has some elements in respect of which it is not as back-loaded as the other contracts ([***] that are applied), and some elements in which it is more back-loaded than the French and German contracts ([***]).

6.275. Royalties operate via substantially the same mechanisms as in the original proceeding. Royalty payments on a per-aircraft basis are called for on deliveries made in excess of the number needed to secure repayment of the disbursed principal plus any interest. In all four A350XWB LA/MSF contracts, royalties become due once the principal has been repaid and upon the successful delivery of the remaining aircraft that are expected to be delivered under the business case and anticipated delivery schedule, and in some cases upon any aircraft deliveries that occur beyond those anticipated by Airbus. Royalties are thus also success-dependent. This was also the case under those of the contracts in the original proceeding that involved royalties. We note that the number of aircraft expected to generate royalties may be different under the four contracts because some contracts charge a different levy amount and so may achieve repayment of the principal sooner, thereby commencing generating royalty revenues earlier and over a longer period.

6.276. In the original proceeding, there was no form of security for the repayment of the loan principal and interest; no assets or collateral were nominated against which the lender could make a claim in the event that payment obligations were not met.⁴⁵⁴ The loan was thus said to be unsecured. In the original proceeding, the governments' claims on revenues generated from the delivery of LCA were, in some cases, guaranteed by one of the companies forming part of the Airbus economic entity. The obligation to make a levy payment remained triggered by a successful delivery, and thus remained success-dependent. The guarantee of the performance of this obligation did not alter the fact that the loan was to be repaid only by the cash flows associated with the project (that is, the loan was levy-based and success-dependent) and no other form of security existed for the repayment of the loan principal and interest (that is, the loan was unsecured). Thus, in the original proceeding the panel noted that, notwithstanding this form of guarantee or surety, there was no obligation on Airbus or any company forming part of the Airbus economic entity to fully or partially repay LA/MSF in the event that the delivery targets stipulated in the contractual repayment schedules were not achieved.

6.277. Similarly, in this proceeding, no security or collateral is nominated or provided by another entity for repaying LA/MSF either if Airbus does not fulfil its obligations or in the event that delivery targets are not met or if the programme fails or is discontinued. While the UK contract [***].

6.278. In this proceeding, other entities – [***].⁴⁵⁵ As in the original proceeding, [***] with respect to LA/MSF for the A350XWB do not ensure repayment of loan principal in the event that Airbus fails to make the number of deliveries needed to reimburse the full amount of financing obtained from the European Union member States. In this instance neither the [***] nor the [***] therefore overcomes the levy-based, success dependent and unsecured nature of the LA/MSF contracts. However, the [***] would provide some assurance of the payment of [***] under the two contracts in question, thus ensuring some return beyond the cash flows generated by the project itself.

6.279. As described above, three of the contracts currently at issue – the German, Spanish and UK contracts – make provision for what is to happen in the event of discontinuation of either the programme as a whole or the participation of the Airbus entity operating in the relevant EU

⁴⁵⁴ See Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.375 ("{T}he scheduled repayments are not secured by any lien on Airbus assets"). ↩

⁴⁵⁵ Both the UK and German A350XWB LA/MSF contracts directly [***] to ensure that payments that fall due (thanks to aircraft deliveries) are made. [***] A350XWB LA/MSF contracts [***]. ↩

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member State's territory. The Spanish contract's discontinuation provision confirms that no repayment must be made if the programme is discontinued.

6.280. The UK A350XWB LA/MSF contract provides that in the event the programme fails or is discontinued, then Airbus' interest payment obligation effectively ends on a date [***] years after the first disbursement.⁴⁵⁶ Under the UK contract, the United Kingdom will receive cash inflows from interest payments for a period of [***] years from commencement of disbursements, even despite programme discontinuation.

6.281. The German A350XWB LA/MSF contract provides that in the event the programme fails or is discontinued, then Airbus may [***], and that in that case Airbus will be [***]. It is our understanding that this therefore refers to [***]. This would mean that, barring some limited circumstances, Airbus [***]. Under the German A350XWB contract, Airbus' [***].⁴⁵⁷ This results in a [***].

6.282. We note that without such [***] provisions in the German and UK contracts, there would have been [***], despite a failure to make deliveries. That is, [***]. However, the inclusion of the [***], renders the full repayment of these contracts more success-dependent.

6.283. As the French and Spanish contracts [***], these two contracts would not require an explicit [***] to be success-dependent; they will remain success-dependent in any event because the entirety of the return is earned via successful deliveries. The Spanish [***] provision appears to merely confirm the full success dependency of Spanish LA/MSF for the A350XWB.

6.284. The French and Spanish A350XWB LA/MSF contracts [***] that are different to the contracts examined in the original proceeding. Neither do they incorporate provisions that [***]. Thus, while the French A350XWB LA/MSF contract [***] in the event of programme discontinuation, [***].

6.285. In summary, we consider that though the German and UK contracts might differ to all other LA/MSF contracts in respect of the [***] provisions, the effect of this difference is to act as a counterpoint to the provisions on [***], so that they remain effectively success-dependent (although under the UK contract, [***] is payable for [***] years after the first disbursements are made, [***]).

6.286. In the original proceeding, despite a number of variations in the terms and conditions of each of the legal instruments making up the contractual framework of the challenged LA/MSF measures, the panel ultimately agreed with the parties that numerous similarities in the type and form of financing could be found.⁴⁵⁸ Overall, we consider that the LA/MSF contracts for the A350XWB resemble the contracts at issue in the original proceeding, based on the type of terms, including the similarity of disbursement mechanisms, the levy-based repayments of the principal along an anticipated schedule of deliveries and the imposition of royalties, the fact that no security is provided for the debt amount, and the existence of conditional guarantees that are limited only to the performance of obligations. There are some pertinent differences, including provisions regarding programme discontinuation, which may contribute to lessening the success-dependent aspect of the LA/MSF provided under the German and UK A350XWB contracts. However, as described above, we consider that this effect is limited in both instances, as in the case of the UK contract it is time limited, with a [***] on the interest that might be paid despite failure to make deliveries, and in the case of the German contract because we consider it is a rather narrow preservation of the KfW's right to continued interest payments on the principal. Despite these differences between the A350XWB contracts, we consider that, overall, the repayment of the LA/MSF is back-loaded, primarily levy-based, dependent on the sales of aircraft and unsecured. To this extent, the A350XWB LA/MSF contracts share the same core features as the LA/MSF measures considered in the original proceeding.

⁴⁵⁶ Dr James Jordan, NERA, "Comparison of A350 XWB LA/MSF Interest Rates with Market Benchmarks", 18 October 2012, (Jordan Report), (Exhibit USA-475) (BCI/HSBI), para. 11. ↩

⁴⁵⁷ See German KfW A350XWB Loan Agreement, (EU-(Article 13)-14) (English translation) (BCI/HSBI), section 8.8. ↩

⁴⁵⁸ Panel Report, EC and certain member States – Large Civil Aircraft, paras. 7.374, 7.410, and 7.525. ↩

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6.287. Finally, we note that the European Union has at no stage argued that a project-specific risk premium should not be used in the construction of the appropriate market benchmark for LA/MSF. In our view, this recognises that the full repayment of the A350XWB LA/MSF contracts is, overall, dependent upon revenues from sales of A350XWB, like LA/MSF for other aircraft.

6.288. We now proceed to consider whether the A350XWB LA/MSF is a subsidy.

6.5.2.3.2 Financial contribution

6.289. The parties do not dispute the characterization of LA/MSF for the A350XWB as a financial contribution falling under Article 1.1(a) of the SCM Agreement.⁴⁵⁹ The United States describes LA/MSF as "funding" and "financing" that shares characteristics of the LA/MSF measures at issue in the original proceeding.⁴⁶⁰ The European Union characterises LA/MSF as a "loan" within the meaning of Article 1.1(a)(1)(i) of the SCM Agreement⁴⁶¹, explaining furthermore that while disbursements have begun, [***].⁴⁶²

6.290. We recall that in the original proceeding, the panel found that despite the fact that some of the amounts due under the French, German and Spanish A380 LA/MSF contracts had not yet been disbursed, the fact that such disbursements represented part of the total (and maximum) amount of funding that it was agreed and planned would be transferred to Airbus for that programme, meant that the relevant LA/MSF measures involved a direct transfer of funds within the meaning of Article 1.1(a)(1)(i) of the SCM Agreement.⁴⁶³ In our view, the same conclusions can be reached in relation to the A350XWB LA/MSF measures. Thus, to the extent that some of the disbursements specifically envisaged under the A350XWB LA/MSF contracts are yet to be made, we do not consider that this should preclude the entirety of the envisaged LA/MSF measures from being characterised as a direct transfer of funds.

6.291. The European Union's characterisation of LA/MSF as direct transfers of funds in the form of "loans" is consistent with the approach taken by this panel in the original proceeding⁴⁶⁴, and we see no reason to take a different approach in this compliance proceeding. However, we note that LA/MSF differs substantially from conventional loans involving the scheduled repayment of a loan's principal plus a pre-determined amount of interest.⁴⁶⁵ For example, the success-dependent nature

⁴⁵⁹ See European Union's first written submission para. 366; and United States' second written submission, paras. 98 and 279. Neither party questions whether LA/MSF is provided by a government or any public body within the territory of a member within the meaning of Article 1.1(a)(1) of the SCM Agreement. With respect to the French, Spanish, UK and German LA/MSF contracts, the entities providing the financing are, respectively: the French State, as represented by the Minister for Ecology, Energy and Sustainable Development, the Defence Minister, the Minister for the Budget, and the Secretary of State in charge of Transport, and the Management Unit of Aeronautical Armament Operations of the Defence Ministry; the Spanish State, as represented by the Spanish Ministry of Industry, Tourism and Commerce; the UK State, as represented by the UK Secretary of State for Business, Innovation and Skills; and the German Kreditanstalt für Wiederaufbau (KfW). The European Union has not contested KfW's status as a public body. We agree that LA/MSF is provided by a government or public body within the territory of a Member within the meaning of Article 1.1(a)(1) of the SCM Agreement. ↩

⁴⁶⁰ United States' first written submission, para. 147. ↩

⁴⁶¹ European Union's first written submission, para. 366. ↩

⁴⁶² European Union's second written submission, paras. 276-277. With regards to the UK contract, the European Union initially stated that [***], as disbursements were scheduled to occur no earlier than [***]. However, the European Union later clarified that disbursements were made as follows: In [***]. Disbursements were scheduled and made by the UK Government in [***]. With respect to the [***], the European Union stated that [***]. (See European Union's response to Panel question Nos. 47 (para. 157) (citing, inter alia, KfW bank account statement, (Exhibit EU-134) (BCI)), 86 (para. 335), 128 (para. 86); UK A350XWB Repayable Investment Agreement, (Exhibit EU-(Article 13)-30) (BCI/HSBI), section 1 and clause. 4.3(d); First set of [***] to UK A350XWB LA/MSF contract, (Exhibit EU-(Article 13)-31) (BCI/HSBI); Second set of [***] to UK A350XWB LA/MSF contract, (Exhibit EU-(Article 13)-32) (BCI/HSBI); and Third set of [***] to UK A350XWB LA/MSF contract, (Exhibit EU-(Article 13)-33) (BCI/HSBI)). ↩

⁴⁶³ Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.378. ↩

⁴⁶⁴ Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.379. ↩

⁴⁶⁵ With respect to how LA/MSF may differ to a conventional loan, we note that EADS does not appear to treat LA/MSF as a financial liability. (See CompetitionRx Report, "Supplementary expert report on the financial viability and funding of the A350XWB development programme", 19 September 2013 (Supplemental CompetitionRx Report), (Exhibit EU-420) (BCI/HSBI), paras. 99-102). EADS also represents its enterprise value to investors both "with" and "without" LA/MSF, indicating that it does not appear to treat LA/MSF as a ↩

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of LA/MSF means that, if Airbus fails to achieve a particular level of deliveries, it would not be required under the contracts to fully repay the principal, much less provide the lenders the stated rate of return. On the other hand, Airbus would be required to make payments beyond those necessary to reimburse the principal amount and achieve the stated rate of return if it achieves higher levels of deliveries. The significant differences between conventional loans and LA/MSF play an important role in our analysis of whether the financial contribution confers a benefit, below.

6.292. As the parties do not appear to dispute the characterisation of LA/MSF as a financial contribution, and as we have characterised LA/MSF to be a "direct transfer of funds" within the meaning of Article 1.1(a)(1)(i) of the SCM Agreement, the remainder of our evaluation is concerned with the "benefit" element of the subsidy analysis pursuant to Article 1.1(b) of the SCM Agreement.

6.5.2.3.3 Benefit

6.293. The parties disagree as to whether LA/MSF for the A350XWB confers a "benefit" pursuant to Article 1.1(b) of the SCM Agreement. While there is no definition of "benefit" in the SCM Agreement, it is well established that a benefit is conferred if a "financial contribution" is offered on terms that are more advantageous than those that would have been available to the recipient on the market.⁴⁶⁶ In this respect, the parties have advanced multiple lines of argument, various expert reports and considerable evidence in support of their respective positions.

6.294. The United States initially argued that the A350XWB LA/MSF measures conferred a "benefit" upon Airbus on the basis of various government statements and media reports adduced in its first written submission, which it submits reveal that the fundamental purpose of LA/MSF "is to provide financing that is not commercially available due to the enormous risks and costs associated with launching new models of LCA".⁴⁶⁷ According to the United States, this evidence is enough, on its own, to establish "a prima facie case as to the existence of a subsidy, because it establishes the existence of a financial contribution, and that the market would not have provided Airbus with that financing on the terms that it obtained from the government".⁴⁶⁸

6.295. After receiving copies of the relevant A350XWB LA/MSF contracts following our decision to accept the United States' request to "seek information" in accordance with Article 13 of the DSU, the United States focused its submissions on demonstrating that the "rates of return" associated with each of the challenged LA/MSF measures were below the interest rates that would have been charged by a market lender for financing on the same terms and conditions as A350XWB LA/MSF. Recalling that the panel and the parties agreed in the original proceeding that the appropriate question was whether "the rates of return obtained by the member States {are} lower than a corresponding market benchmark"⁴⁶⁹, the United States advances its own estimates of the "rates of return" associated with each of the four A350XWB LA/MSF measures as well as comparable market interest rate benchmarks, arguing that this evidence demonstrates that the A350XWB LA/MSF measures are subsidies.

conventional debt instrument. (See Gerard Adsuar, Corporate Executive, EADS Finance and Treasury, "Cash Drivers and Enterprise Value", EADS presentation, Global Investor Forum, 1-2 April 2009, (Exhibit USA-33)).

⁴⁶⁶ Panel Report, Canada – Aircraft, paras. 9.112 and 9.120; and Appellate Body Report, Canada – Aircraft, paras. 155 and 157-158 (affirming the panel in relevant respects). ↩

⁴⁶⁷ United States' first written submission, para. 137 (citing UK House of Commons Business, Innovation and Skills Committee, "Full Speed ahead: maintaining UK excellence in motorsport and aerospace", Sixth Report of Session 2009-10, Report, formal minutes, and oral and written evidence, 9 March 2010, (Exhibit USA-44), p. 10; "Repayable Launch Investment", UK Department for Business, Innovation and Skills website, accessed February 2012, (Exhibit USA-63); Investissements d’avenir, convention 'opérateur ONERA' Action: 'recherche dans le domaine de l’aéronautique', 31 July 2010, (ONERA Agreement), (Exhibit USA-54), art. 3.1; and J. Hartmann and J. Hildebrand, "Wie Airbus und Boeing um die Luftoheit kampfen", Welt Online, 22 March 2010, (Exhibit USA-67)); second written submission, paras. 280-282; and HSBI version of the United States' second written submission, para. 281 (citing HSBI material in the UK Industrial Development Advisory Board memorandum, 16 April 2010, (UK Appraisal), (Exhibit EU-(Article 13)-34) (HSBI)). ↩

⁴⁶⁸ United States' second written submission, para. 282 (citing Appellate Body Report, Canada – Aircraft, para. 157). See also United States' first written submission, para. 137. ↩

⁴⁶⁹ European Union's second written submission paras. 282-283 (citing Appellate Body Reports, EC and certain member States – Large Civil Aircraft, paras. 834 and 838; and Japan – DRAMs (Korea), para. 174); and United States' second written submission para. 283 (citing Appellate Body Report, EC and certain member States – Large Civil Aircraft, paras. 873-874 and 924). ↩

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6.296. In relation to the first element of the comparison, the United States proposes to use the "rates of return" "cited in the LA/MSF Agreements".⁴⁷⁰ However, because the United States argues that there is no funding instrument available on the market that offers all of the particular features of LA/MSF, the United States submits that, for the second element of the comparison, a proxy market interest rate benchmark should be used.⁴⁷¹

6.297. The United States constructs its proposed market interest rate benchmarks on the basis of the interest rate that would have been offered to Airbus by a market lender for Airbus' general borrowing activities, plus a project-specific risk premium that represents the additional return that a lender would require for offering financing on the particular project-specific terms of LA/MSF.⁴⁷² The United States argues that a comparison of its estimated rates of return for each of the challenged A350XWB LA/MSF measures and the corresponding market interest rate benchmarks reveals that "the commercial benchmark rates are higher than the actual rates that France, Germany, Spain and the UK actually charged Airbus for LA/MSF for the A350XWB."⁴⁷³ Thus, the United States concludes that the A350XWB LA/MSF measures confer a "benefit" upon Airbus within the meaning of Article 1.1(b) of the SCM Agreement.⁴⁷⁴

6.298. The European Union argues that the government statements and media reports which the United States relies upon are not sufficient to demonstrate that the A350XWB LA/MSF measures confer a "benefit" upon Airbus. In order for the United States to make out its case, the European Union submits that the United States must demonstrate that the rates of return achieved by the European Union member States are, in fact, below those that would have been obtained by a market lender for similar financing.⁴⁷⁵ Moreover, the European Union adds that to the extent that the United States argues that the relevant evidence suggests that LA/MSF and its key features would never be available on the market under any circumstances⁴⁷⁶, this is both: (a) contrary to the original panel's finding that certain features of LA/MSF do not inherently involve below-market rates⁴⁷⁷, and (b) factually false: the European Union points to the existence of other market instruments as evidence against such a proposition.⁴⁷⁸

6.299. While the European Union agrees that the proper question regarding "benefit" is whether the LA/MSF is provided at below-market rates⁴⁷⁹, it submits that the United States understates the rates of return expected under the contracts, and overstates market benchmark rates of return.⁴⁸⁰ The European Union states that, for various reasons, the approach proposed by the United States "is a methodology that lacks financial and economic robustness and that does not withstand scrutiny".⁴⁸¹ In particular, the European Union disagrees with the United States with respect to what rates were anticipated under the contracts, the risks involved with both the form of financing and the project in question, and the returns a market lender would likely have sought for financing for the project under such terms and conditions.

6.300. Before turning to evaluate the merits of the parties' arguments, we first clarify our understanding of the United States' reliance on the government statements and media reports submitted with its written submissions.

⁴⁷⁰ United States' second written submission, para. 284. ↩

⁴⁷¹ United States' first written submission, paras. 129-138, 365, and 389; and second written submission, paras. 283, 288, and 289; United States' opening statement (public), para. 37 ("{T}he benchmark advocated by the United States … uses a constructed benchmark precisely because there is no market analog for LA/MSF".) ↩

⁴⁷² United States' second written submission, para. 285 (citing Appellate Body Report, EC and certain member States – Large Civil Aircraft, paras. 860-62 and 874; and Jordan Report, (Exhibit USA-475) (BCI/HSBI), paras. 12-22). ↩

⁴⁷³ United States' second written submission, para. 286. ↩

⁴⁷⁴ E.g. United States' second written submission, paras. 286 and 413. ↩

⁴⁷⁵ European Union's first written submission, para. 370; and second written submission, para. 283 (citing Appellate Body Reports, EC and certain member States – Large Civil Aircraft, paras. 834 and 838; and Japan – DRAMs (Korea), para. 174). ↩

⁴⁷⁶ European Union's first written submission, paras. 371-373, and 352 (third bullet point); and second written submission, paras. 284-289. ↩

⁴⁷⁷ Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.531. ↩

⁴⁷⁸ European Union's second written submission, paras. 285-286. ↩

⁴⁷⁹ European Union's second written submission, para. 280. ↩

⁴⁸⁰ See e.g. European Union's second written submission paras. 291, 280, 294-304, and 305-52. ↩

⁴⁸¹ European Union's second written submission, para. 293. ↩

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6.301. As already noted, the United States submits that certain government statements and media reports demonstrate that LA/MSF is not commercially available and, therefore, that the A350XWB LA/MSF measures confer a "benefit" to Airbus. In making this submission, we do not understand the United States to argue that LA/MSF-like financing instruments could never exist in the marketplace, but only that such measures would not be provided on the terms and conditions of the challenged LA/MSF contracts (including rates of return).⁴⁸² In our view, the United States' line of argument is not inconsistent with the original panel's approach to the question of benefit, because it pertains to the particular terms and conditions of the instruments, and does not imply that all LA/MSF, by definition, would necessarily involve below-market rates of return. Further, we consider that the government statements and media reports in question are not inconsistent with how we understand the United States to be arguing its case. The statements in question, as we understand it, concern not whether the market would provide funding for LCA on any terms whatsoever, but rather whether the market would provide financing – with the particular characteristics – on terms and conditions (including rates of return) that would make it functionally available to the borrower.

6.302. To the extent that the European Union's submissions imply that the only evidence relevant to the benefit analysis that we must perform in this dispute is a comparison of rates, we disagree. While the analysis of whether a financial contribution involving a direct transfer of funds confers a "benefit" would usually involve comparing rates of return with a market benchmark rate, we do not preclude that other evidence may be relevant as to whether or not a benefit is conferred.

6.303. With respect to whether the government and press statements offered by the United States are sufficient to establish a prima facie case in this dispute⁴⁸³, we recall that these statements were primarily submitted with the United States' first written submission, before the actual A350XWB LA/MSF contracts were made available by the European Union in responding to our request for information pursuant to Article 13 of the DSU. As we see it, our evaluation of whether LA/MSF confers a benefit should proceed from a consideration of the entirety of the parties' arguments and evidence. In addition to the cited statements, the United States' case involves, inter alia, the use of rates of return under the A350XWB LA/MSF contracts as compared against a benchmark. We therefore do not consider that our evaluation of whether the United States has made its case should exclusively focus on the statements presented by the United States mainly in its first written submission.

6.304. In keeping with the treatment of similar evidence in the original proceeding, we will therefore take the cited government and press statements into account as relevant, making our own judgment as to their weight and probative value.⁴⁸⁴ We will likewise take other evidence concerning the availability of funding into account as relevant.

6.305. We now turn to evaluate the evidence and arguments before us, following the approach developed by the parties in the course of their submissions. In the light of the parties' arguments, we will examine whether the rates of return expected by the relevant European Union member States under the A350XWB LA/MSF contracts are lower than what would have been required by a market lender for financing on similar terms. This is the same basic approach as that taken by the panel in the original proceeding.

6.5.2.3.3.1 Expected rates of return of the A350XWB LA/MSF contracts

6.306. We commence our benefit analysis by determining the rates of return⁴⁸⁵ of the A350XWB LA/MSF contracts in order to compare these to a market benchmark. The parties' arguments in

⁴⁸² United States' first written submission, paras. 8, 106, 117, 129-38, and 330; and second written submission, paras. 278-293. ↩

⁴⁸³ We recall that the Appellate Body has defined a "prima facie" case in WTO proceedings as "one which, in the absence of effective refutation by the defending party, requires a panel, as a matter of law, to rule in favour of the complaining party presenting the prima facie case". (Appellate Body Report, EC – Hormones, para. 104). ↩

⁴⁸⁴ See Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.1919. ↩

⁴⁸⁵ The United States uses the terms "rate of return" and "interest rate" of the contracts, and refers to various rates, including a rate of periodic interest charged on outstanding principal. (See e.g. United States' second written submission, para. 284). The European Union refers to the "internal rate of return" (IRR) of the contracts. (See e.g. European Union's second written submission, paras. 291 and 294-304). For the sake of ↩

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relation to the different rates of return they have advanced raise the following main questions: (a) whether the expected rates of return of the LA/MSF contracts should include cash inflows expected from royalties; (b) whether the German contract's expected rate of return should include cash inflows from certain fees; and (c) issues concerning the accuracy of internal rates of return estimated by the European Union.

Whether rates of return should include cash inflows expected from royalties

6.307. The parties disagree about whether, in principle, revenue from royalty payments should be included in the cash inflows used to calculate the expected rates of return of the A350XWB LA/MSF contracts. The parties appear to agree that revenues from royalty payments should be treated in accordance with the original proceeding⁴⁸⁶, but appear to differ in their interpretation of how royalties were treated in that proceeding.

6.308. According to the United States' expert, Dr Jordan, in the original proceeding the panel "validated" the approach of excluding royalties, and "doubted the legitimacy of interest rate calculations that factored in royalty payments".⁴⁸⁷ The United States submits that:

Although the {p}anel described this approach as not fully accounting for the effects of royalty payments, it discounted the importance of such royalty payments, saying "although ostensibly required by the terms of the LA/MSF agreements, royalty payments may never be made if attached to a number of aircraft sales, which … cannot realistically ever be achieved". Moreover, the {p}anel did not endorse the EU's methodology for determining the actual rates of return, instead describing it as "at most, the outer limit".⁴⁸⁸ (emphasis added by the United States)

6.309. The United States adds, however, that "{s}ince the true rates of return lie somewhere between the approach used by {United States' experts} NERA and that used by the EU during the merits phase, NERA relies on its own approach for the purposes of this compliance dispute".⁴⁸⁹

6.310. The European Union argues that using the rates identified by the United States inappropriately excludes revenues from royalties on aircraft that are anticipated by the "base case" number of expected aircraft deliveries, and therefore underestimates the returns expected under the LA/MSF contracts.⁴⁹⁰ The European Union submits that such an approach is, in fact, inconsistent with the panel's approach in the original proceeding.⁴⁹¹ The European Union provides its own estimates of the rates of return, in the form of internal rates of return (IRRs) including cash inflows from royalty revenues expected in the base case, calculated using certain aircraft price information.⁴⁹²

6.311. In addition, the European Union also states that even these figures "are conservatively low … because all four of the A350XWB agreements would require [***]".⁴⁹³ That is, the IRRs offered by the European Union are stated to be a reflection only of the return to the member States that could be anticipated based on [***]. The European Union considers that "actual programme life deliveries can be expected to be higher than the conservative number of deliveries used for capital budgeting in the launch business case".⁴⁹⁴

clarity, we use "rates of return" as a generic term, and refer to the European Union's proposed rates as "internal rates of return", or IRR estimates.

⁴⁸⁶ European Union's second written submission, para. 297; and United States' response to Panel question No. 91, paras. 350-351. ↩

⁴⁸⁷ Jordan Report, (Exhibit USA-475) (BCI/HSBI), para. 8. ↩

⁴⁸⁸ United States' second written submission, para. 284 (quoting Panel Report, EC and certain member States – Large Civil Aircraft, paras. 7.412 and 7.414). ↩

⁴⁸⁹ United States' second written submission, fn 421. ↩

⁴⁹⁰ European Union's second written submission, paras. 291 and 294-304. ↩

⁴⁹¹ European Union's second written submission, para. 297. ↩

⁴⁹² The aircraft price information is not disclosed in the A350XWB contract documentation and has not been made available to the Panel or the United States in this proceeding. ↩

⁴⁹³ European Union's second written submission, para. 301. ↩

⁴⁹⁴ European Union's second written submission, para. 302. ↩

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6.312. We observe that the panel stated in the original proceeding, with regards to the contracts then at issue:

As we understand it, the royalties foreseen under these contracts represent a share in the revenues generated from sales of the financed LCA after the full amount of LA/MSF has been repaid. In our view, the fact that such payments were expressly provided for in these contracts indicates that the EC member State governments to some degree anticipated they could enhance the rate of return that would otherwise be achieved on their investment.⁴⁹⁵

… like the IRRs determined for contracts that did not provide for royalties, the IRRs established on the basis of royalty payments are inherently speculative and depend on achieving the number, timing, and (for some contracts) the forecast prices of deliveries projected in the relevant Airbus business case. Thus, while we recognize the inclusion of royalty payment provisions into the LA/MSF contracts is itself evidence of a certain expectation that royalties would be paid; we nevertheless consider that the IRRs established by the European Communities, taking royalty payments into account, could only represent, at most, the outer limit of what the EC member State governments could have reasonably expected at the time of concluding the contracts.⁴⁹⁶

6.313. While the original panel noted that the royalties due in accordance with the base case represented the "outer limit" of what the relevant member States could have expected at the time of concluding the contracts, the original panel did proceed with its analysis using IRRs that included royalty revenues. We therefore disagree with the United States' interpretation that the panel "validated" the approach of excluding revenues from royalties.

6.314. We consider that if there is no relevant factual difference in how royalties are envisaged under the LA/MSF contracts in this proceeding, royalties should, in principle, be included in the calculations determining the expected rates of return of the LA/MSF contracts in this proceeding, consistent with the original panel's approach.

6.315. The parties appear to agree that there are no relevant factual differences in how royalties are envisaged under the contracts that would necessitate a deviation from the panel's approach in the original proceeding.⁴⁹⁷ In particular, the parties appear to agree that royalty payments for the A350XWB are [***].⁴⁹⁸ We are satisfied that royalties are generally expected under the A350XWB LA/MSF contracts in proportions that are similar to those for the A380 contracts.⁴⁹⁹ For the A380 contracts, the panel accepted in the original proceeding to proceed using the royalty revenues expected on deliveries up to the level of deliveries anticipated in the base case.

6.316. Like in the original proceeding, we accept that royalties are more speculative than other payments because they are both success-dependent and premised on the deliveries forecast farther into the future, and are thus more subject to uncertainty compared with payments made

⁴⁹⁵ Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.410. ↩

⁴⁹⁶ Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.414. ↩

⁴⁹⁷ European Union's second written submission, para. 297; and United States' response to Panel question No. 91, paras. 350-351. ↩

⁴⁹⁸ United States' comments on the European Union's response to Panel question No. 91, para. 250; European Union's comments on the United States' response to Panel question No. 91, paras. 799-800; and Percentage of aircraft deliveries forecast in program business case anticipated to fully repay MSF, (Exhibit EU-376) (HSBI). ↩

⁴⁹⁹ See Percentage of aircraft deliveries forecast in program business case anticipated to fully repay MSF, (Exhibit EU-376) (HSBI), p. 4. The contracts anticipate deliveries after repayment of principal as follows. French contract: Repayment of principal expected by delivery [***], which is less than the overall expected HSBI number of deliveries included in the schedule. German contract: Repayment expected by delivery of the "first [***] aircraft". While the German payment schedule [***], the German contract cites the HSBI base case as being relevant to the [***]. Spanish contract: Repayment of principal expected by delivery [***]. The contract [***]. The UK contract delivery schedule [***], and thus expects royalties on that basis. (Annex 8 to the French A350XWB Protocole, (Exhibit EU-(Article 13)-09) (HSBI); German KfW A350XWB Loan Agreement, (EU-(Article 13)-14) (English translation) (BCI/HSBI), section 6.1; UK A350XWB Repayable Investment Agreement, (Exhibit EU-(Article 13)-30) (BCI/HSBI). See also European Union's comments on the United States' response to Panel question No. 91, paras. 738-740). ↩

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for the purpose of repaying principal. We consider they are nevertheless relevant to include in order to reflect the maximum rates of return that the governments could expect if the base case number of deliveries were to occur in accordance with the anticipated schedules of deliveries expected under the contracts.⁵⁰⁰ Uncertainties that are relevant to the risks that a market lender may take into account when determining the rate of return it would seek for financing a particular project, on particular terms, are dealt with further below in determining the project-specific risk premium a market lender might add for such financing.

6.317. Therefore, consistent with the panel's approach in the original proceeding, the value of royalty payments – up to the level of deliveries in the base case and anticipated delivery schedule – is relevant to establishing the rates of return the European Union member States could have expected, taking the A350XWB LA/MSF contracts and base case at face value. In this proceeding, we therefore include revenues from royalties expected on deliveries foreseen in the base case in determining the rates of return expected under the LA/MSF contracts.

6.318. With regard to the European Union's statement that including only royalties based on the total number of deliveries forecast by Airbus in its base case results in a "conservative" estimate because the A350XWB contracts provide for [***], we do not agree. The European Union's submissions appear to rest on the premise that the actual outcome of the A350XWB programme may differ, that is, be more successful, than the projected outcome in terms of deliveries. This may be the case. However, there is no evidence that this is what was anticipated by the relevant European Union member States at the time that the relevant LA/MSF contracts were concluded. Thus, just as we accept the inclusion of royalties into the calculation of the rates of return, despite the possibility that the delivery forecast upon which they are based might never be achieved, so too do we find it unnecessary to qualify the European Union's member States' expectations as "conservative" because of the possibility that the A350XWB programme might be more successful than anticipated. Moreover, if the number of deliveries "used for capital budgeting in the launch business case"⁵⁰¹ is ordinarily understood to be "conservative", as the European Union suggests, such conservative nature of estimates would presumably be taken into account by a sophisticated lender such as a the relevant European Union member States when deciding upon the acceptability of a rate of return. We therefore do not agree with the European Union that the rates of return calculated on the basis of the base case delivery schedule and the relevant contractual repayment provisions would necessarily be "conservatively low".⁵⁰² Indeed, we note in this regard, that analyses conducted by Steer Davies Gleave and CompetitionRx suggest that the numbers of aircraft produced and delivered per year anticipated in the A350XWB base case scenario are, in historic terms, not conservative.⁵⁰³

6.319. Having recalled that the original panel accepted the inclusion of royalties in the calculation of the maximum returns under the relevant LA/MSF contracts, and given that the parties agree there is no relevant factual difference in this proceeding with respect to how royalties become due under the A350XWB LA/MSF contracts compared with the pre-A350XWB LA/MSF contracts, we conclude that, in principle, it would be appropriate to include revenues from royalties in accordance with the "base case" expectations and anticipated schedule of deliveries in calculating the rates of return of the A350XWB LA/MSF measures. We are therefore prepared to accept the European Union's IRRs to the extent that they reflect such anticipated revenues.

⁵⁰⁰ Moreover, as will be discussed in greater detail in the section concerning an appropriate market benchmark below, the United States proposes to judge the A350XWB contracts' expected returns as being over a period of around 20 years. That time-frame would only be relevant if aircraft sales attracting royalty payments were accepted as contributing to the expected returns. (Repayment of the principal in full via levies is expected to occur [***].) It appears that under this argument (which will be detailed later), the United States seeks to acknowledge the full amount of time over which anticipated cash outflows and inflows are expected to occur, including royalties. ↩

⁵⁰¹ European Union's second written submission, para. 302. ↩

⁵⁰² Only those royalties payable in accordance with the anticipated delivery schedule are included in Professor Whitelaw's estimation of the IRRs. ↩

⁵⁰³ Professor Thomas Hoehn, CompetitionRx, "Financial Viability and Funding Implications of the A350XWB Development Programme", 13 January 2013, (CompetitionRx Report), (Revised), (Exhibit EU-127) (BCI/HSBI), paras. 116 and 117. See also Max Kingsley-Jones, "Paris Air Show: A350 XWB ready to rock", FlightGlobal News, 5 June 2009, (Exhibit USA-428), p. 5. ↩

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Whether rates of return should include cash inflows from fees

6.320. The parties disagree about whether cash inflows from certain fees should be incorporated into the estimate of the returns of the German A350XWB LA/MSF contract. In particular, the United States excludes, while the European Union includes, revenues from two types of fees charged by Germany in estimating the returns.⁵⁰⁴ The United States further submits that if the fees are included in the calculation of the German contract's rate of return, then an amount should likewise be included for such fees for the benchmark⁵⁰⁵, on the basis that they are normal fees for services that would have been charged by a market lender.⁵⁰⁶ In addition, the United States proposes to add an amount to the benchmark for all the other contracts, whether or not administrative fees were considered in the contract, on the basis that such other amounts would have been incurred by Airbus in connection with market lending and that the waiver of such normal fees is an advantageous feature of the LA/MSF contracts.⁵⁰⁷ We address in this section the question of whether to include each of the German fees in the IRR calculations.

6.321. Several fees are mentioned in the German A350XWB LA/MSF contract. A [***] is expressly mentioned in the contract as forming part of the [***] and is not at issue as it has been included by both the United States' expert, Dr Jordan, and the European Union's expert, Professor Whitelaw, in their reports setting out their estimations of returns under the A350XWB LA/MSF contracts.⁵⁰⁸

6.322. Two further fees are mentioned in the German A350XWB contract: an annual [***] fee, at the rate of [***] and a semi-annual [***] fee, at the rate of [***], due in [***] and [***] each year.⁵⁰⁹ The United States' expert, Dr Jordan, did not include these fees in estimating the German rate. The European Union's expert, Professor Whitelaw, responded that this was inappropriate and provided an estimate of the German IRR that purports to include the two fees.⁵¹⁰ The annual [***] fee appears to total approximately EUR [***] over the anticipated period of LA/MSF according to the German schedule of deliveries and Airbus' base case; and the semi-annual [***] fee appears to total approximately EUR [***] over the same anticipated period of LA/MSF.

6.323. In this section, we discuss the characterisation of the fees and whether revenues from those fees should be included in the IRR estimates. The parties make related arguments regarding an adjustment to a market benchmark rate of return. Those arguments are introduced here to provide context, but are dealt with in the section below concerning the market benchmark rate of return.

6.324. In response to Professor Whitelaw's addition of the fees to the IRR calculation, Dr Jordan opined that "the fees Professor Whitelaw includes, as well as the fee included in the Jordan Report, are fees for particular services. Such fees should be added as well to the market benchmark under

⁵⁰⁴ Jordan Report, (Exhibit USA-475) (BCI/HSBI), para. 7 and table 1; Professor Robert Whitelaw, "Response to Dr Jordan's report on the benefits of MSF", 13 December 2012, (Whitelaw Response to Jordan), (Exhibit EU-121) (BCI/HSBI), para. 4; Professor Robert Whitelaw, "Rebuttal of Dr Jordan's Reply to My Comments on His Initial Report", 21 June 2013, (Second Whitelaw Response to Jordan), (Exhibit EU-396) (BCI/HSBI), paras. 28-9. ↩

⁵⁰⁵ Dr James Jordan, NERA, "Reply to Professor Whitelaw's Response to Jordan Report", 20 May 2013, (Jordan Reply), (Exhibit USA-505) (BCI), para. 12 and fn 20. ↩

⁵⁰⁶ United States' response to Panel question No. 161. ↩

⁵⁰⁷ Jordan Reply, (Exhibit USA-505) (BCI), para. 12 and fn 20. ↩

⁵⁰⁸ Jordan Report, (Exhibit USA-475) (BCI/HSBI), para. 7 and table 1, n 2; Whitelaw Response to Jordan, (Exhibit EU-121) (BCI/HSBI), para. 4. This fee expressly comprises part of the periodic interest rate under the contract. ↩

⁵⁰⁹ Whitelaw Response to Jordan, (Exhibit EU-121) (BCI/HSBI), para. 7 and table thereto; Annex 13.1(a) to German KfW A350XWB Loan Agreement, (Exhibit EU-(Article 13)-26) (English translation) (BCI), arts. 4.1 and 4.4. ↩

⁵¹⁰ Our review of Professor Whitelaw's submission leads us to believe that fee amounts used in the calculation of the IRR have not always been taken into account on the precise dates on which they are envisaged to occur. We note, however, that this apparent error does not make a significant difference to the overall IRR of the German A350XWB LA/MSF contract. ↩

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the assumption that market lenders would charge the same fees for the same services. Alternatively, the fees can be omitted from both LA/MSF rates and market benchmarks".⁵¹¹

6.325. The United States additionally argues that "by turning to the {member State} governments to finance the A350XWB program, Airbus avoided {underwriting fees, loan commitment fees, and administrative} fees. Accordingly, if the actual IRR for LA/MSF for the A350XWB is understood to include fees like the "[***]" and "[***]" fees in the German LA/MSF contract, then the corresponding Airbus corporate borrowing rates for all four governments also should include underwriting and other fees."⁵¹²

6.326. As discussed below, the European Union considers that commercial fees – administrative and other fees charged on a commercial loan – would be properly included in a benchmark only if they are analogous to those charged by the relevant member State. Moreover, according to the European Union:

To determine whether and what "analogous commercial fees" should be included in a benchmark, it is first necessary to understand the nature and characteristics of the fees included in the challenged instrument; without that understanding, it is impossible to know what "commercial fees" would be "analogous" and properly included in a benchmark.⁵¹³

6.327. The European Union submits that the United States has failed to establish that the [***] fee and the [***] fee under the German contract are analogous to underwriting fees, loan commitment fees, and/or administrative fees and, thus, that the United States has failed to establish that those fees should properly form part of a suitable benchmark.⁵¹⁴

6.328. The European Union argues that the [***] and [***] fees due under the German A350XWB LA/MSF contract are not charged "for the costs of issuing and administering" the loan, but are instead a part of the return earned by KfW, as the lender. The European Union submits that both fees "enhance the return to the lender".⁵¹⁵ The European Union considers that the cash inflows from fees should be added to the calculation of the expected internal rates of return.⁵¹⁶

6.329. The European Union submits that the [***] fee "is merely another form of interest payment" that is "[***]".⁵¹⁷ The European Union asserts that there is nothing that Airbus receives in return for the [***] fee, other than the loan itself.⁵¹⁸

6.330. In terms of the [***] fee, the European Union maintains that this fee is:

{S}imilarly part of the return to the lender, as a form of interest payment. This element of the structure of KfW's return was designed to segregate a portion of the return that KfW would earn [***]. For convenience purposes, and to [***], the loan agreement foresees Airbus paying KfW separately [***]. Collectively, these payments constitute the return to KfW, [***]. Obtaining that [***].⁵¹⁹

6.331. Accordingly, the European Union states that there is nothing that Airbus receives in return for the [***] fee, other than the loan itself.⁵²⁰

6.332. As regards the parties' characterisation of the [***] and [***] fees due under the German A350XWB LA/MSF contract, we observe that the nature of the fees is not entirely clear from the contract and is not expressly set out in the contract. Neither of these fees is described in the contract in terms of either reimbursing the loan principal or contributing to the amount of

⁵¹¹ Jordan Reply, (Exhibit USA-505) (BCI), para. 12 and fn 20. ↩

⁵¹² United States' response to Panel question No. 161, para. 6. ↩

⁵¹³ European Union's comments on the United States' response to Panel question No. 161, para. 6. ↩

⁵¹⁴ European Union's comments on the United States' response to Panel question No. 161, para. 12. ↩

⁵¹⁵ European Union's comments on the United States' response to Panel question No. 161, para. 3. ↩

⁵¹⁶ European Union's comments on the United States' response to Panel question No. 161, para. 9. ↩

⁵¹⁷ European Union's comments on the United States' response to Panel question No. 161, para. 9. ↩

⁵¹⁸ European Union's comments on the United States' response to Panel question No. 161, para. 11. ↩

⁵¹⁹ European Union's comments on the United States' response to Panel question No. 161, para. 10. ↩

⁵²⁰ European Union's comments on the United States' response to Panel question No. 161, para. 11. ↩

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periodic interest payable on the outstanding principal. By contrast, as already noted, the [***] – that is not at issue – is mentioned in the contract as forming part of the periodic interest rate.

6.333. With respect to the [***] fee, we note that the German contract's structure includes "[***]" versus "[***]" amounts. Different obligations apply to sums due in different forms. This lends some weight to the European Union's explanation that the [***] fee is only given the name of a "fee" to highlight that it is actually a [***] portion of the interest rate. We note the European Union's submission that both fees "enhance the return to the lender".⁵²¹ We note that commercial lenders may well include fee obligations in a loan contract as a means to enhance or secure revenues sought in return for providing the loan. We are willing to proceed with the remainder of the benefit analysis using an IRR that includes revenues from this fee as reflecting the returns to Germany under the contract.

6.334. With respect to the [***] fee, we consider that it would be appropriate to include cash inflows from this fee in the IRR estimates. The distinction applied for the [***] fee (in terms of "[***]" versus "[***]" rules) similarly applies to the [***] fee. However, we also recognise that the [***] fee is essentially a function of the fact that the loan is provided by KfW: the [***] and corresponding fee means that, functionally, the [***]. We note that the [***] makes the lending offered on essentially the same terms as for the other contracts (that is, [***]). In these circumstances, we do not distinguish between the Member and its public body, and the distinction between which State entity is the lender and which [***] is, in our view, immaterial. We therefore include the fee as part of the returns Airbus must pay in return for the transfer of risk to Germany, and as relevant to the question of what a market lender would require to assume the same risks.

6.335. In general, fees and charges associated with, for example, the administration, processing or management of a market loan might not form part of the returns on that loan per se, and may be intended to compensate the lender for the value of services that they perform for the recipient, but are ultimately revenue that comes to the lender in return for providing the loan. Such fees and charges could, in principle, vary depending on the lender and type of lending. However, in our view, this does not make them irrelevant for an analysis of whether a "benefit" has been conferred pursuant to Article 1.1(1)(b) of the SCM Agreement. We consider that in this proceeding it is appropriate to view such amounts as part of the borrowing rate, in order to see whether an advantage has been conferred on the recipient compared to what would have been available on the market. We therefore consider that the amounts charged by the member State should in any event be factored into a consideration of whether a benefit has been conferred.

6.336. Thus, it is in our view appropriate to include the amounts expected to be paid by Airbus in the form of fees due under the German A350XWB LA/MSF contract in the estimation of that contract's IRR.

Quality and accuracy issues and the European Union's failure to provide the panel with information

6.337. We now turn to highlight several quality and accuracy issues with the IRR estimates provided by the European Union. At the outset, we wish to note that, despite being requested, the European Union has not provided information and explanations that would have enabled us to resolve the quality and accuracy issues we have identified. This has impacted our ability to independently verify the European Union's estimates of the IRRs. The United States urges us to discard the IRR estimates because of the quality and accuracy issues, mainly because the revised estimates provided by the European Union cannot be verified.⁵²²

6.338. The first of the quality and accuracy issues we have identified primarily concerns undisclosed aircraft pricing information on the basis of which royalty amounts have been determined in three of the LA/MSF contracts, and repayment levies for one of the contracts.⁵²³ The

⁵²¹ European Union's comments on the United States' response to Panel question No. 161, para. 3. ↩

⁵²² See United States' comments on the European Union's response to Panel questions Nos. 163-165 (consolidated answer). ↩

⁵²³ For the [***] contracts, royalty payments are based on a percentage of actual aircraft prices. By contrast, in the [***] contract royalty amounts are not based on a percentage of aircraft prices but are ↩

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anticipated aircraft prices on which the value of these payments depend are not included in the contracts. It is therefore not possible to know the precise value of such payments from the terms of the contracts themselves. Anticipated aircraft prices do not appear in the presentation purportedly provided to the relevant European Union member States as the basis for their decision to provide LA/MSF.⁵²⁴ Nor are anticipated aircraft prices included in, for example, the document identified by the European Union as the Business Case for the A350XWB.⁵²⁵

6.339. The European Union did not disclose the calculations or cash flow amounts underlying its estimated IRRs when it first submitted them.⁵²⁶ Moreover, when specifically requested to provide the relevant calculations, the European Union submitted cash flow analyses in which the anticipated pricing and royalty revenue information had been redacted.⁵²⁷ However, in the context of its arguments concerning the appropriate market interest rate benchmark to apply to the A350XWB LA/MSF measures, the European Union submitted calculations that included the anticipated royalty revenue information that had been used to determine the IRRs.⁵²⁸ We reviewed this information and found several potential errors in the calculation of the IRRs (and the additional benchmark calculations).

6.340. A first error we discovered was a failure to convert USD into GBP, a mistake that was confirmed by the European Union⁵²⁹ and had a material effect on the IRR estimates. The European Union provided recalculations of the IRRs, but with the revised expected royalty and levy revenue information fully redacted. This meant that no further verification could be made of the European Union's revision of the proposed IRRs. In respect of the redacted information, the European Union referred to the Panel's communication of 16 September 2013. That communication concerned recurring cost data redacted from an A350XWB business-case related document, and revenue data redacted from the CompetitionRx Report. In that communication, the Panel stated that:

Given the exceptional nature of the European Union's acute sensitivities to disclosing the specified recurring cost and revenue data, the Panel has decided to grant the European Union's request to exclude this information from its answer to Panel Question 126. The Panel does so, however, without prejudice to further consideration of this matter at a later stage in these proceedings, should the Panel conclude that the information not provided by the European Union is necessary for it to complete its work.⁵³⁰

6.341. The European Union's request not to disclose certain information that had been sought in Question 126 was granted in the context of the exploration of a different issue: the viability of the A350XWB programme. Importantly, in our communication, we never excluded the possibility that we might need or that we might ask for the same, or other, information of a sensitive nature at a later stage in the course of this proceeding.

6.342. A second error we identified in the European Union's calculations is an inconsistency between Professor Whitelaw's estimate of the number of aircraft expected to repay the loan principal for the [***] A350XWB LA/MSF contract and the number stated in the relevant contract

expressly set out and are independent of aircraft prices. With respect to the [***] contract, the value of the levy payments is also based on aircraft prices. However, as we understand it, under the [***] contract, returns are to be [***]. This makes the value of revenues due from levies under the [***] contract somewhat less dependent on aircraft prices.

⁵²⁴ Business case-related document, (Exhibit EU-(Article 13)-35) (HSBI). Exhibit EU-(Article-13)-35 (HSBI) is a twelve-slide EADS presentation containing overviews of then-current A350XWB orders, anticipated air traffic growth worldwide, the A350XWB LCA family, and projected A350XWB deliveries. ↩

⁵²⁵ A350XWB Business Case Presentation, (Exhibit EU-130) (HSBI), slide 55. The implications of the lack of key information for the question whether the relevant European Union member States provided LA/MSF on non-commercial terms are discussed elsewhere in this report, following our market benchmark analysis. ↩

⁵²⁶ Whitelaw Response to Jordan, (Exhibit EU-121) (BCI/HSBI), para. 7. ↩

⁵²⁷ Professor Robert Whitelaw, "Internal rates of return anticipated under A350XWB EU Member State loans", Further Report, 19 September 2013, (Further Whitelaw Response), (Exhibit EU-421) (BCI/HSBI), tables 1-5. ↩

⁵²⁸ Professor Robert Whitelaw, "Calculation of the Macaulay Duration of the Financing Agreements for the A350XWB", (Exhibit EU-380) (BCI/HSBI). ↩

⁵²⁹ European Union's response to Panel question No. 163, paras. 2 and 4. ↩

⁵³⁰ Panel's communication of 16 September 2013, para. 4. ↩

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itself.⁵³¹ In response, the European Union and Professor Whitelaw first stated only that the error resulted from a misunderstanding concerning aircraft revenues.⁵³² Professor Whitelaw corrected the number of aircraft deliveries on which he based his conclusions for the French contract without providing further explanation or underlying calculations. Professor Whitelaw did not initially correct any other figures on the basis of such a misunderstanding.⁵³³ Subsequently, when again asked what the mistake was⁵³⁴, the European Union described, in a submission that is HSBI⁵³⁵, how it related to the use of economic conditions from a different time-period than those used in the base case and contract. The European Union then stated that the same mistake would have affected the German contract.⁵³⁶ We are unable to verify whether the apparent error has been satisfactorily corrected and whether it would affect the German contract's IRR as alleged by the European Union.

6.343. In addition, we also identified that Professor Whitelaw's calculation of the German contract's IRR appears to be based on the more ambitious schedule of anticipated deliveries that was included in the earlier-produced business case documents and in the other A350XWB LA/MSF contracts, rather than the [***] schedule of deliveries actually included in the German contract.⁵³⁷ If Professor Whitelaw had used the schedule of anticipated deliveries and the detailed schedule of anticipated payments based on that anticipated schedule, which were both actually included in the contract, he would have estimated a different IRR. For example, Professor Whitelaw's calculations expect the amortization of the loan principal occurring in [***], whereas the German schedule does not expect this until [***]. Professor Whitelaw's calculations of the levy, interest and royalty revenues would appear to have been affected by this error.⁵³⁸ Additionally, Professor Whitelaw's calculation of the interest and the fees also do not appear to commence from the date of anticipated first drawdown, contrary to what is required under the contract, [***].⁵³⁹ However, based on our own interpretation of the schedule of expected revenues included in the German contract, we consider that the difference is not material enough to discard the IRRs proposed by the European Union.

6.344. The United States, in the context of our questions seeking to confirm the above errors and requesting accurate calculations, submits that the "numerous opportunities for inadvertent errors in these types of calculations … raises the possibility that the new calculations are themselves flawed." The United States argues that the inability to verify the IRRs should invalidate them altogether and that, instead, the rates initially proposed by the United States, which do not include royalty revenues, should be preferred and used as representations of the returns to the relevant European Union member States.⁵⁴⁰

⁵³¹ See Panel question No. 129. ↩

⁵³² On 23 August 2013, the Panel asked the European Union, in Panel question No. 129(a): "Please explain how Professor Whitelaw derived this figure and why it differs from the relevant figure on page 4 of Exhibit EU-376 (HSBI) and in Article 6.3 of the French Protocole d'Accord (Exhibit EU(Article 13)-1 (BCI and HSBI))". The European Union responded that: "Professor Whitelaw [***]". (European Union's response to Panel question No. 129, para. 88). ↩

⁵³³ Further Whitelaw Response, (Exhibit EU-421) (BCI/HSBI), paras. 18-20. ↩

⁵³⁴ On 31 March 2014, the Panel asked the European Union in Panel question No. 164 (ii): "What was the mistake that Professor Whitelaw made in [***] provided by Airbus that caused him to initially [***] for the French A350XWB LA/MSF contract?". The European Union's response is in the HSBI version of the European Union's response to Panel question No. 164, para. 5 (lines 5-6 and 6-7) and HSBI version of European Union's response to Panel question No. 165, para. 11 (line 6). ↩

⁵³⁵ See HSBI version of the European Union's response to Panel question No. 164, para. 5 (lines 5-6 and 6-7), and the HSBI version of European Union's response to Panel question No. 165, para. 11 (line 6); we also note what is at A350XWB Business Case Presentation, (Exhibit EU-130) (HSBI), slide 66; and CompetitionRx Report, (Exhibit EU-127) (BCI/HSBI), paras. 133-136. ↩

⁵³⁶ European Union's response to Panel question No. 164. ↩

⁵³⁷ Compare Professor Whitelaw's calculation of the Internal Rate of Return for the A350XWB LA/MSF contract with Germany [***] (Further Whitelaw Response, (Exhibit EU-421) (BCI/HSBI), table 2), with [***] (Annex 1.4(f) to German KfW A350XWB Loan Agreement [***], (Exhibit EU-(Article 13)-23) (Original German version (Revised) and English translation) (BCI/HSBI)). ↩

⁵³⁸ This may also have affected Professor Whitelaw's calculation of the Macaulay duration of the German contract, discussed below. ↩

⁵³⁹ [***]. ↩

⁵⁴⁰ United States' comments on the European Union's response to Panel question Nos. 163-165, paras. 1-12 (consolidated answer). ↩

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6.345. The European Union's earlier provision of estimated revenues in the context of its submissions concerning the appropriate market benchmark⁵⁴¹ was followed by a choice to withhold the same or very similar information that would have enabled verification of its purported corrections to the IRR calculations. The European Union justified its failure to disclose the requested information on grounds of sensitivity.⁵⁴² We find this difficult to square with the European Union's provision of the same or similar information – from which we were able to identify errors and other inconsistencies – in order to corroborate its arguments concerning one aspect of the appropriate market benchmark. In the absence of the relevant information, we are unable to judge whether or not the initial errors have been corrected, and whether or not there are new ones.⁵⁴³ Without the full information underlying the European Union's estimates, we cannot be certain that those expected IRRs are correct and are not overstated.

Conclusion on expected rates of return of the A350XWB LA/MSF contracts

6.346. In summary, we conclude that subject to the understanding that IRR estimates including the expected returns from royalties represent the complete return that could be expected under the relevant A350XWB LA/MSF contracts if the base case number of deliveries were to occur as forecast, it is in principle appropriate to include those revenues in the calculation of the maximum rate of return that the relevant European Union member States could have anticipated under the contracts. With respect to the fees due under the German A350XWB LA/MSF contract, we accept the inclusion of such fee revenues as cash flows that should be included in calculating the contract's estimated IRR, both in view of the probable nature of the fees in this proceeding – in particular involving the assumption of risks by the relevant member State – and so that any advantage conferred by the difference between what would have been available on the market and what was accepted by the member States, may be gauged.

6.347. We have noted some concerns about the European Union's IRR estimates, including that the [***] levies and the revenues from royalties for three contracts appear to have been subject to multiple errors deriving from the underlying aircraft pricing information, and the recalculations are unable to be verified, therefore not permitting us or the United States to know whether the identified errors persist or further errors have been made. However, we consider that it is preferable to proceed on the basis of the European Union's unvalidated IRRs than to use the rates of return advanced by the United States, which do not take into account: (a) expected royalty revenues up to the base case, and (b) revenues from fees and charges. We thus proceed with the remainder of our analysis on the basis of the IRR estimates presented by the European Union.

6.348. As a result of our conclusions above, the following IRRs will be used in our analysis to represent the expected rates of return of the A350XWB LA/MSF contracts, for the purposes of comparison with a market benchmark rate of return:

⁵⁴¹ Professor Robert Whitelaw, "Calculation of the Macaulay Duration of the Financing Agreements for the A350XWB", (Exhibit EU-380) (BCI/HSBI). ↩

⁵⁴² Certain (subsequently impugned) information was provided, as HSBI, supporting the European Union's factual claims with respect to the Macaulay durations of the LA/MSF contracts. (Professor Robert Whitelaw, "Calculation of the Macaulay Duration of the Financing Agreements for the A350XWB", (Exhibit EU-380) (BCI/HSBI)). ↩

⁵⁴³ For example, it appeared from the initial calculations that a particular escalation rate had been applied to the royalty revenues, contrary to what is provided in HSBI contained in the A350XWB Business Case Presentation, (Exhibit EU-130) (HSBI), at slides 52 and particularly the HSBI at slide 66. We are unable to tell whether this was also the case in the revised calculations. ↩

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Table 1: European Union's proposed IRRs including royalties to base case and fees

6.5.2.3.3.2 Market benchmark rate of return

6.349. We now proceed with our evaluation of the parties' submissions concerning the rate of return that a market lender would have demanded for providing financing on the same or similar terms as LA/MSF for the A350XWB.

6.350. The United States argues that no market instrument exists that would offer all of the key features of LA/MSF on the terms and conditions accepted by the EU member State governments.⁵⁴⁴ Accordingly, in seeking to show that the A350XWB LA/MSF measures are provided at below-market rates, the United States compares the LA/MSF rates of return with a constructed market benchmark rate. To this end, the United States proposes a market benchmark rate constructed from: (a) a general borrowing rate that the recipient (Airbus) would have to pay to a market lender, plus; (b) a project-specific risk premium that represents the additional return that a lender would require for offering financing on the particular terms of the relevant LA/MSF contracts.

6.351. We recall that the parties adopted a similar approach to derive the market benchmark rate of return used in the original proceeding, with the European Union disagreeing with the values proposed by the United States only as regards the project-specific risk premium.⁵⁴⁵ In this dispute, however, the parties have expressed differing views about both the general corporate borrowing rate and the project-specific risk premium, disagreeing about not only what the values of the two components should be, but also from what bases these values should be derived. We examine the parties' positions in relation to both of these matters in the following subsections, starting with the parties' arguments concerning the general corporate borrowing rate.

General corporate borrowing rate

6.352. The parties' submissions concerning the appropriate general corporate borrowing rate that should be used for the purpose of constructing the market benchmark rate of return raise one initial threshold question – whether to use the rates derived from the data and regression models used in the original proceeding or evidence of EADS' actual general borrowing costs at the relevant times.

6.353. The general corporate borrowing rates proposed by the United States are based on the same data used to derive the general corporate borrowing rates applied in the original proceeding, updated to account for the timing of the conclusion of the relevant A350XWB LA/MSF contracts. We recall that in the original proceeding, the United States constructed a corporate borrowing rate for each of the four European Communities member States, using limited bond data then available regarding the relevant Airbus companies for the time periods in question, and regression models and other techniques to fill data gaps.⁵⁴⁶ The constructed corporate borrowing rate for each of the four European Communities member States was the sum of a government borrowing rate (said to be a "risk free" borrowing rate) derived from government bonds and a "general corporate risk premium", or credit spread, derived from Aérospatiale and BAE Systems bond data for borrowing

⁵⁴⁴ United States' second written submission, paras. 288 and 289. ↩

⁵⁴⁵ Panel Report, EC and certain member States – Large Civil Aircraft, paras. 7.433-7.434. ↩

⁵⁴⁶ A full explanation of the approach may be found in the Ellis-Jordan Report, 10 November 2006 (Exhibits USA-474 and 506) (BCI). ↩

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in France and the United Kingdom (that is, the spread between French and UK risk-free rates) and the performance of similarly-rated bonds. The corporate risk premium was applied over the relevant country-specific risk-free rate to arrive at a corporate rate for each contract.⁵⁴⁷

6.354. The United States maintains that this approach was "accepted by the Panel, the Appellate Body, and the parties to the dispute"⁵⁴⁸ in the original proceeding. Thus, in this proceeding, the United States proposes to use the same data and regression models applied in relation to the bonds issued by BAE Systems and Aérospatiale, but to update the results on the basis of the recent performance of a selection of similarly-ranked but otherwise unrelated bonds.⁵⁴⁹ The United States' expert Dr Jordan also updates the government bond-based risk-free rates.⁵⁵⁰ Dr Jordan reports that he "also considered alternative methods for determining the Airbus corporate borrowing rate based on European and UK corporate bond markets". However, according to Dr Jordan, the use "of these methods would not change the overall conclusion that A350XWB LA/MSF is granted at below-market interest rates".⁵⁵¹

6.355. The results of Dr Jordan's calculations to determine the Airbus corporate borrowing rate, during the relevant years⁵⁵² are as follows:

Table 2: United States' proposed Airbus corporate borrowing rate for [***]

⁵⁴⁷ See Ellis-Jordan Report, 10 November 2006 (Exhibit USA-474/506) (BCI), pp. 1 and 7. ↩

⁵⁴⁸ United States' second written submission, para. 285 (citing Appellate Body Report, EC and certain member States – Large Civil Aircraft, paras. 860-862, and 874); and United States' opening statement (public), para. 38, first bullet point. ↩

⁵⁴⁹ The United States' expert Dr Jordan explains that he updates the government borrowing rates for each of France, Germany, Spain and the United Kingdom using 10-year government bond data for the years now in question, obtained from the OECD. To arrive at the updated general corporate risk premium, he uses "the regression models described in the Original NERA report" to extend the corporate risk premium analysis from the original proceeding to [***]. (Jordan Report, (Exhibit USA-475) (BCI/HSBI), para. 13, table 2, and n 2 thereto). The Original NERA report is exhibited in this proceeding as the Ellis-Jordan Report, 10 November 2006 (Exhibit USA-474/506 (exhibited twice)) (BCI). ↩

⁵⁵⁰ Jordan Report, (Exhibit USA-475) (BCI/HSBI), para. 13, table 2, and n 1 thereto. ↩

⁵⁵¹ Jordan Report, (Exhibit USA-475) (BCI/HSBI), para. 13, table 2, and n 2 thereto. ↩

⁵⁵² Jordan Report, (Exhibit USA-475) (BCI/HSBI), para. 13 and table 2. ↩

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Table 3: United States' proposed Airbus corporate borrowing rate for [***]

6.356. In the original proceeding, the European Communities did not reject the entirety of the United States' construction of the proposed interest rate benchmarks but sought to discredit only the project-specific risk premium component. The European Communities applied the same general government risk-free rates and corporate borrowing premium used in the United States' calculations when deriving its own proposed market-based benchmark rates of return.⁵⁵³ However, in this proceeding, the European Union rejects the United States' approach, arguing that it is "exaggerated" when compared to the observed borrowing rate of the Airbus parent company, EADS – the availability of which, the European Union argues, is a relevant factual difference.⁵⁵⁴

6.357. The European Union considers that, unlike in the original proceeding, the borrowing history and bond data of Airbus' parent company, EADS, was directly observable at the time the A350XWB LA/MSF contracts were concluded.⁵⁵⁵ The European Union concedes that the use of what it terms "surrogates" for the corporate rate was "arguably understandable" in the original proceeding because, prior to the formation of EADS in July 2000, there was no readily observable market indication of company-specific borrowing cost for all of the member companies of the four-company consortium that constituted Airbus.⁵⁵⁶ However, "the situation had changed dramatically" by the time the A350XWB LA/MSF agreements were concluded. "{B}y that point in time Airbus was no longer a four-company consortium, and instead had become, many years earlier, an integrated company".⁵⁵⁷ The European Union's expert, Professor Whitelaw, asserts that it "is possible to establish from market data the company's actual cost of long-term borrowing", that is, "EADS' actual, long-term borrowing rates at the date of the agreements, expressed as the yield on its longest-term bond".⁵⁵⁸

6.358. The European Union refers to the EADS Finance B.V. 5.5% coupon 03/18 medium-term note (MTN)⁵⁵⁹, a bond issued 24 September 2003 and maturing 25 September 2018.⁵⁶⁰ The European Union cites the relevant yield on this bond as a rate of 4.14% for EADS' actual cost of long-term debt for the agreements with France, Germany and Spain, and 4.69% for the agreement with the United Kingdom due to conversion from EUR to GBP.⁵⁶¹ The European Union considers that "there is no need, let alone justification, for Dr. Jordan to estimate, using a

⁵⁵³ Panel Report, EC and certain member States – Large Civil Aircraft, paras. 7.432-7.433. ↩

⁵⁵⁴ European Union's second written submission, paras. 309-310. ↩

⁵⁵⁵ Whitelaw Response to Jordan, (Exhibit EU-121) (BCI/HSBI), paras. 10-11. ↩

⁵⁵⁶ European Union's second written submission, para. 309. ↩

⁵⁵⁷ European Union's second written submission, para. 310. ↩

⁵⁵⁸ Whitelaw Response to Jordan, (Exhibit EU-121) (BCI/HSBI), paras. 8 and 11-12, and fns 10 and 13. ↩

⁵⁵⁹ EADS Finance B.V. 03/18 MTN 5.5% coupon Eurobond (effective interest rate 5.6%) maturing 25 September 2018, ISIN XS0176914579, traded on the Frankfurt Stock Exchange. It was swapped during 2005 into variable rate of 3M-Euribor + 1.72%. See EADS Financial Statements 2009, (Exhibit EU-163), p. 65. ↩

⁵⁶⁰ Whitelaw Response to Jordan, (Exhibit EU-121) (BCI/HSBI), paras. 8 and 11-12, and fns 10 and 13. ↩

⁵⁶¹ Whitelaw Response to Jordan, (Exhibit EU-121) (BCI/HSBI), para. 12. ↩

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surrogate approach, what can be directly observed as the premium the markets charge EADS for corporate debt".⁵⁶²

6.359. The results of Dr Jordan's calculations to determine the Airbus corporate borrowing rate, during the relevant years⁵⁶³, compared to the rate cited by the European Union's expert, Professor Whitelaw, are as follows:

Table 4: Respective proposals for Airbus corporate borrowing rate for [***]

Table 5: Respective proposals for Airbus corporate borrowing rate for [***]

6.360. We agree with the European Union that while the corporate borrowing rate was derived in the original proceeding in the same way that the United States proposes in this proceeding, the integration of the Airbus entities and the availability of the EADS bond data are relevant factual differences between the original proceeding and this proceeding that justify a departure from the approach taken in the original proceeding.

6.361. As we see it, it is preferable to derive a market benchmark on the basis of data pertaining to the borrowing entities' own market-based borrowing, rather than generic estimates, where it is possible to do so.

6.362. We recall that it is well established that a "financial contribution" will confer a "benefit" upon a recipient when it places that recipient in a more advantageous position compared with the position of that recipient in the absence of the financial contribution.⁵⁶⁴ We consider that a market

⁵⁶² European Union's second written submission, para. 311 (citing Whitelaw Response to Jordan, (Exhibit EU-121) (BCI/HSBI), para. 12.) (emphasis original) ↩

⁵⁶³ Jordan Report, (Exhibit USA-475) (BCI/HSBI), para. 13 and table 2. ↩

⁵⁶⁴ See Panel Report, EC and certain member States – Large Civil Aircraft, paras. 7.1090-7.1091, 7.1123-7.1124, and 7.1181-1182 (citing Panel Report, Canada – Aircraft, para. 9.112), cited with approval in ↩

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benchmark should approximate as closely as possible lending on the same, or similar, terms and conditions to the particular recipient. We find support for this understanding in the context provided by Article 14(b) of the SCM Agreement, which provides that:

A loan by a government shall not be considered as conferring a benefit, unless there is a difference between the amount that the firm receiving the loan pays on the government loan, and the amount the firm would pay on a comparable commercial loan which the firm could actually obtain on the market. In this case the benefit shall be the difference between these two amounts. (emphasis added)

6.363. In our view, the actual market borrowing observable for the economic entity indicated as the recipient in the contract would appear to be a logical starting point. We consider that this is consistent with the panel's approach, albeit in a different context, in the original proceeding:

In principle, we agree with the view that the returns associated with market financing actually provided to Airbus for the same project as LA/MSF would serve as an appropriate basis from which to derive the relevant project-specific risk premium. Indeed, such an approach would be preferable to the one used by the United States to calculate its own proposed project-specific risk premium.⁵⁶⁵

6.364. We consider that using relevant bond data directly observable at the time that the A350XWB LA/MSF contracts were concluded – to the extent that such data reflects borrowing by the relevant entities – would, in principle, be similarly preferable to a regression model estimate that uses data from a generic selection of bonds that are rated similarly to the old Aérospatiale and BAE Systems bonds. In this regard, we note that in the original proceeding, the United States' own experts also expressed a preference for using directly observable data in the methodology they used to derive the general corporate risk premium:

In some of the more recent years, the credit spread has been directly observable for two of the Airbus operating companies, BAE Systems and Aerospatiale, as they issued publicly traded bonds. … Because BAE and Aerospatiale did not issue new bonds in each year since 1967, we developed a regression model to estimate what the credit spread for those issuers would have been in the years for which no data points are available.⁵⁶⁶

6.365. Thus, the United States' experts in the original proceeding used directly observable data where such data were available, relying on regression models only where directly observable data were not available for the relevant companies.

6.366. In this proceeding, however, the United States questions the extent to which the EADS bond data may be used to construct the relevant corporate borrowing rates, arguing that the data do not reflect the borrowing costs of the relevant national-level Airbus entities that were parties to the LA/MSF contracts. In any case, the United States considers that even if the EADS bond data were used, the LA/MSF measures would still constitute subsidies, if they were adjusted to properly account for the relevant dates of the A350XWB LA/MSF agreements and the differences in the maturity and duration of the EADS bond instrument compared with the LA/MSF contracts. We examine the United States contentions in the following subsections.

Whether the EADS bond reflects the identity of the borrower

6.367. The United States questions whether the bond representing the corporate borrowing of EADS – Airbus' parent company⁵⁶⁷ – is a good reflection of the general corporate rate associated

Appellate Body Report, Canada – Aircraft, para. 149. See also Appellate Body Report, Canada – Aircraft, paras. 157-158; and Appellate Body Report, US – Countervailing Measures on Certain EC Products, para. 102.

⁵⁶⁵ Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.480. ↩

⁵⁶⁶ Ellis-Jordan Report, (Original Exhibit US-80), (Exhibit USA-474/506 (exhibited twice)) (BCI), p. 12. ↩

⁵⁶⁷ As the panel described in the original proceeding, EADS N.V. is the parent company of Airbus. In October 2006 EADS purchased BAE Systems' 20% interest in Airbus SAS, and Airbus SAS became a wholly-owned subsidiary of EADS. (See Panel Report, EC and certain member States – Large Civil Aircraft, section VII.E.1 Attachment: Corporate History of Airbus, p. 360, paras. 1-7 and fns thereto, and para. 7.183). ↩

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with the recipients or borrowers, which are principally Airbus entities or subsidiaries based in the territory of the member States with which the relevant contract is concluded.

6.368. The United States and Dr Jordan state that the assumption that EADS is the only company whose corporate risk must be considered is "a questionable and unexplained simplification".⁵⁶⁸ In this regard, the United States observes that "[***]".⁵⁶⁹ The United States appears to consider that this means the yield on the EADS bond reflects only the corporate borrowing rate of EADS and not the specific entities that are party to the contracts, and thus does not accurately represent the cost of corporate risk involved with each of the contracts at issue.

6.369. The European Union counters that "Professor Whitelaw's reference to EADS' corporate borrowing rate is entirely appropriate, because EADS [***]. Thus, the yield on the EADS bond he selected represents the cost of corporate risk for these instruments".⁵⁷⁰ The European Union continues: "While certain of EADS' subsidiaries are also party to the loan agreements, that does not mean that the corporate risk of these loans could be any greater than the corporate risk of EADS, which [***]. If anything, adding an entity would lower the risk."⁵⁷¹

6.370. In respect of the four contracts, the Airbus subsidiary operating in the relevant country is, as we understand it, the party that receives LA/MSF. There is no evidence before us of directly observable borrowing rates for those subsidiaries. In the German and UK contracts, Airbus SAS (Toulouse) is an additional obligor, incurring liability for obligations therein. There is no evidence of directly observable borrowing rates for Airbus SAS (Toulouse). In only one of the contracts – the UK contract – is EADS a party to the contract. As EADS is not the recipient, or a party to the remaining three contracts, we now consider whether its borrowing appropriately reflects borrowing for the recipient entities, given that entity-specific borrowing rates do not appear to be available.

6.371. As we understand it, the degree to which the borrowing risks, and therefore borrowing costs, for a firm will mirror those of its parent or a related entity may vary according to: (a) how closely the entities are linked, and (b) the degree to which the particular terms and conditions of a borrowing instrument implicate the related entity or assets of a related entity.⁵⁷² There is evidence before the Panel that credit rating agencies, on whose ratings bond-purchasers and other investors rely, view the debt of EADS and the other Airbus entities as closely related, so that the performance of one entity affects the risk associated with the other.⁵⁷³ Some credit rating agencies appear to view the entities as interchangeable.⁵⁷⁴ In practice, it appears that Airbus subsidiary entities would be rated no higher than the parent and their general corporate borrowing costs would consequently be the same, or higher.⁵⁷⁵ In relation to a contract where there is an explicit

⁵⁶⁸ United States' response to Panel question No. 105, para. 378. ↩

⁵⁶⁹ United States' response to Panel question No. 105, para. 378. ↩

⁵⁷⁰ European Union's comments on the United States' response to Panel question No. 105 (citing Second Whitelaw Response to Jordan, (Exhibit EU-396) (BCI/HSBI), paras. 4-10 and 31). ↩

⁵⁷¹ Second Whitelaw Response to Jordan, (Exhibit EU-396) (BCI/HSBI), para. 31. ↩

⁵⁷² Moody's Investors Service, Rating Methodology, The Application of Joint Default Analysis to Government Related Issuers, April 2005, (Exhibit EU-138/381 (exhibited twice)), p. 1. See also Moody's Investors Service, Special Comment, The Incorporation of Joint-Default Analysis into Moody's Corporate, Financial and Government Rating Methodologies, February 2005, (Exhibit USA-507). ↩

⁵⁷³ Moody's Rating Action, Moody's confirms EADS A1 rating: Approximately €6 Billion of Debt Securities Affected, Global Credit Research, Moody's Investors Service, 9 March 2007, (Exhibit EU-384). ↩

⁵⁷⁴ For example, in March 2001, when Airbus was still partly owned by BAE Systems and not fully owned by EADS, CreditSuisse/First Boston stated that "{w}e believe EADS is a proxy for Airbus". (CreditSuisse/First Boston, "European Aeronautic Defence and Space Company (EADS): Valuation remains inconsistent with risks", Equity Research, 14 March 2001, (Exhibit EU-405)). ↩

⁵⁷⁵ We note that Standard & Poor's describe how, even if a subsidiary is stronger, it will not be rated higher than its parent: ↩

A strong subsidiary owned by a weak parent generally is rated no higher than the parent. The key reasons {are}:
The ability of and incentive for a weak parent to take assets from the subsidiary or burden it with liabilities during financial stress; and
The likelihood that a parent's bankruptcy would cause the subsidiary's bankruptcy, regardless of its stand-alone strength.

(Standard & Poor's, Corporate Criteria: Parent/Subsidiary Links; General Principles; Subsidiaries/Joint Ventures/Nonrecourse Projects; Finance Subsidiaries; Rating Link to Parent, October 28 2004, p. 2). We also

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joint obligation or guarantee by the parent, borrowing costs are closer to that parent's borrowing rate than if there is no explicit guarantee and only implicit support that might arise from a parent-subsidiary relationship.⁵⁷⁶

6.372. The borrowing rate is thus expected to be closest to the parent company's borrowing rate where the parent is explicitly a co-contractor [***]. The German and UK contracts implicate EADS directly as a co-contractor [***].⁵⁷⁷ We therefore agree with the European Union that the reference to EADS' corporate borrowing rate is appropriate for those two contracts.⁵⁷⁸

6.373. General borrowing rates may, however, be higher than the parent company rate where the parent does not expressly ensure performance of the contractual obligations.⁵⁷⁹ With respect to the French and Spanish contracts, the extent to which EADS debt would reflect the borrowing costs of the subsidiaries might reflect only the implicit, uncertain support that might arise from the relationship. A market participant might thus demand a return under a similar agreement – where EADS does not guarantee performance – that is higher than the yield on the EADS bond. We therefore consider that the benchmark rate for borrowing by solely the French Airbus entity, Airbus SAS (Toulouse) or the Spanish Airbus entity, Airbus Operations SL, could be higher than the EADS borrowing rate. We agree with the United States that it may indeed be a simplification to use the unadjusted price of EADS debt as directly representing the quantified corporate risk associated with the Airbus entities' debt with respect to the French and Spanish contracts.

6.374. We note therefore that for the French and Spanish contracts the EADS bond may be an understatement of the corporate credit rate. However, we consider that using the EADS bond for all four contracts, on the understanding that it may well be an underestimate for at least the French and Spanish contracts, is preferable than the United States' proposed alternative. We proceed with the remainder of this analysis on the assumption that for the French and Spanish contracts the EADS bond may be somewhat low, and will evaluate the significance of this possible understatement once we are in a position to perform the comparison between the IRRs of the A350XWB LA/MSF contracts and the market benchmark, further below.

6.375. To the extent that the United States argues that country-specific rates are required only because the LA/MSF agreements were concluded in different countries, we do not consider this justifies using the Aérospatiale and BAE Systems bond data regression models rather than the EADS bond as a basis for the corporate rate for all recipient entities. While the contracts in question were negotiated with the member States and thus in different countries, that is no reason to assume that the relevant market on which financing would be available would be limited to the country within which in the present instance the LA/MSF agreements were concluded, particularly as regards financing that pertains to a transnational group of entities. There is no evidence that the market for finance is limited to single countries, particularly in a situation, like the present one, where the relevant firms are transnational and operating across a highly integrated market. EADS itself is an issuer incorporated in The Netherlands and the bond in question was traded on the Frankfurt stock exchange. In other words, we consider that in the present case financing from any country that would have been available to EADS or Airbus would be relevant. Thus, we see no reason why a country-specific rate would necessarily be preferable in this regard. Further, if we were to accept that EADS' borrowing would be stronger than that of the national Airbus entities, it

note that Moody's states that a "joint-default analysis" "formally incorporates the following principle: The risk that two obligors will both default should be less than or equal to the default risk of the stronger obligor". (Moody's Investors Service, Rating Methodology, The Application of Joint Default Analysis to Government Related Issuers, April 2005, (Exhibit EU-138/381 (exhibited twice)), p. 1). See also Moody's Investors Service, Special Comment, The Incorporation of Joint-Default Analysis into Moody's Corporate, Financial and Government Rating Methodologies, February 2005, (Exhibit USA-507)).

⁵⁷⁶ See also Moody's Investors Service, Special Comment, The Incorporation of Joint-Default Analysis into Moody's Corporate, Financial and Government Rating Methodologies, February 2005, (Exhibit USA-507). ↩

⁵⁷⁷ See "Key Features of LA/MSF for the A350XWB" section, above. ↩

⁵⁷⁸ European Union's comments on the United States' response to Panel question No. 105 (citing Second Whitelaw Response to Jordan, (Exhibit EU-396) (BCI/HSBI), paras. 4-10 and 31). ↩

⁵⁷⁹ Standard & Poor's, Corporate Criteria: Parent/Subsidiary Links; General Principles; Subsidiaries/Joint Ventures/Nonrecourse Projects; Finance Subsidiaries; Rating Link to Parent, 28 October 2004, p. 2; Moody's Investors Service, Rating Methodology, The Application of Joint Default Analysis to Government Related Issuers, April 2005, (Exhibit EU-138/381 (exhibited twice)), p. 1. See also Moody's Investors Service, Special Comment, The Incorporation of Joint-Default Analysis into Moody's Corporate, Financial and Government Rating Methodologies, February 2005, (Exhibit USA-507). ↩

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does not necessarily follow that the spread between country-specific "risk-free" rates would be the measure of the difference in borrowing by the entities. We do not consider that the United States' preferred approach would necessarily address the United States' concerns. In sum, we consider that those concerns are not enough to reject the use of the EADS bond as an observable reference point for general borrowing rates for those entities, in this proceeding.

6.376. Having disposed of the United States' arguments for preferring its proposed constructed corporate borrowing rate, and having determined the threshold question in favour of using the EADS bond as the basis for the general corporate borrowing rate to be used in the construction of the market benchmark (subject to the understanding that it may well underestimate the cost of lending for the French and Spanish Airbus entities) we now turn to the United States' criticisms of the methodology used by the European Union to derive the relevant corporate borrowing rate from the EADS bond. The United States concerns relate to: (i) the proper point in time to observe the EADS bond yield; and (ii) whether the resulting corporate borrowing rates should be adjusted to reflect the differences between the structure and term of LA/MSF borrowing compared with the EADS bond. Finally, we deal with the point raised by the United States in the context of the inclusion of normal fees and charges in making an assessment of "benefit".

Relevant dates for observing the EADS bond yield

6.377. The first main issue presented by the United States concerning the EADS bond rate involves the relevant time at which the value of the EADS bond yield to maturity should be observed. There are two sub-issues that arise in this regard: first, whether the approach of the European Union's expert, Professor Whitelaw – which averages the yield over a period representing the time during which the contracts were concluded – is an appropriate way of determining the EADS bond rate; and second, which date is relevant for deriving the yield at the time of the French contract.

6.378. The European Union's expert, Professor Whitelaw, obtains the figures that he proposes as the relevant benchmark corporate borrowing rate by averaging the EADS bond's yield to maturity over [***] months. He takes as his start point [***] (the date of the French A350XWB Convention), and his end point is [***], the date of the UK LA/MSF agreement [***]. Professor Whitelaw derives the average yield to maturity of the EADS 5.5% 03/18 MTN bond for the period of [***]. According to the European Union and Professor Whitelaw this is the period over which all four LA/MSF agreements were concluded. Professor Whitelaw reveals that the average yield to maturity (YTM) on the bond was computed for the [***] for each of the three euro denominated LA/MSF contracts, with an adjustment based on the average EUR to GBP swap rates being made for the UK LA/MSF contract.⁵⁸⁰ Professor Whitelaw's results are a rate of 4.14% for EADS' actual cost of long-term borrowing for the French, German and Spanish LA/MSF agreements, and 4.69% for the UK LA/MSF agreement.⁵⁸¹

6.379. Dr Jordan, the United States' expert, criticises the manner in which Professor Whitelaw derives the results for EADS' actual cost of long-term debt based on the EADS bond, submitting that the seven-month averaging period used by Professor Whitelaw is an "inconsistent approach to selecting a yield based on the signing dates of the agreements" and produces a downward bias in the selected yield.⁵⁸² In particular, Dr Jordan maintains that:

Professor Whitelaw's corporate borrowing rates are based on yields that include time periods after the LA/MSF loan agreements were finalized. They also do not use consistent periods of time around the loan agreement dates, and they are affected by the downward trends in yields … the borrowing cost of EADS after [***] has no relevance for the analysis of the EADS corporate borrowing rate in the case of the French loan. Yet Professor Whitelaw's corporate borrowing rate is nonetheless based on later dates. The inclusion in Professor Whitelaw's seven-month average of irrelevant periods after the agreement dates also similarly occurs in the case of the

⁵⁸⁰ Whitelaw Response to Jordan, (Exhibit EU-121) (BCI/HSBI), para. 12, fn 12 ("The methodology is as follows. Based on the average 10-year interest rate swap rates in EUR and GBP, I convert the EADS Euro yield to a multiplicative credit spread. I then apply this multiplicative credit spread to the GBP swap rate to get the GBP equivalent EADS yield. Source: Bloomberg."). ↩

⁵⁸¹ Whitelaw Response to Jordan, (Exhibit EU-121) (BCI/HSBI), para. 12. ↩

⁵⁸² Jordan Reply, (Exhibit USA-505) (BCI), para. 16. (footnote omitted) ↩

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[***] [***] Because the yield of the EADS Finance MTN was decreasing during [***].⁵⁸³

6.380. The United States and Dr Jordan thus first criticise the approach of averaging the yield over a [***]-month period, and second, argue that the relevant date of the French contract is not [***] and that the [***] date should be used instead.

6.381. First, as regards the averaging approach, Dr Jordan presents the following chart to illustrate his arguments:

Figure 1: EADS bond yield to maturity during contracting period

Chart 2-
EADS Finance MTN 2018 - Yield to Maturity
[***] through [***]

Yield to Maturity (%)
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00

Pr. Whitelaw averages the yield from [***] to [***]
France Loan Agreement - [***]
Spain Loan Agreement - [***]
UK Loan Agreement - [***]
Germany Loan Agreement - [***]

[***]

Data from Bloomberg LP

6.382. Dr Jordan's observation of the EADS bond yield according to various dates⁵⁸⁴ (with Professor Whitelaw's average for comparison) are illustrated in the following table:

⁵⁸³ Jordan Reply, (Exhibit USA-505) (BCI), paras. 24-28. ↩

⁵⁸⁴ Jordan Reply, (Exhibit USA-505) (BCI), table 6; and Jordan Materials in Response to Panel Questions Nos. 110, 111, 112, and 114, (Exhibit USA-567) (BCI/HSBI), supplement to table 6. ↩

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Table 6: Respective proposals for EADS bond yield values

6.383. This table shows the rates available for certain periods in the lead up to, and on the date of conclusion of the contract. For the French agreement, under Professor Whitelaw's averaging approach, the EADS yield is between 157 and 97 basis points lower than it would be under Dr Jordan's approach. For the German agreement, the EADS yield is between 0 and 17 basis points higher than under Dr Jordan's approach. For the Spanish agreement, under Professor Whitelaw's averaging approach the EADS yield is between 55 and 18 basis points lower than under Dr Jordan's approach. For the UK agreement, under Professor Whitelaw's averaging approach, the EADS yield is between 30 and 20 basis points lower than it would be under Dr Jordan's approach.

6.384. We recall that the Appellate Body has also explained that:

Under a "benefit" analysis, a comparison is made between the terms and conditions of the financial contribution when it is granted with the terms and conditions that would have been offered on the market at that time … a panel's assessment of benefit should focus on the relevant market benchmark at the time the financial contribution is granted to the recipient. That benchmark entails a consideration of what a market

⁵⁸⁵ In their submissions, the parties have referred to the date of the conclusion of the French A350XWB Protocole as [***]. We note that the French A350XWB Protocole is signed and dated [***]. [***] is the date of a cover letter enclosing copies of the French A350XWB Protocole sent to the Director General of Airbus. A subsequent letter from the Direction générale de l'aviation civile (DGAC) (French Civil Aviation Authority), dated 10 October 2009, Exhibit EU-(Article 13)-10, referring to the French A350XWB Protocole, describes it as "le protocole du [***] entre l'Etat et Airbus relative au programme A350XWB", and provides the French A350XWB Protocole in an annex. (Exchange of Letters between Fabrice Brégier, Director General of Airbus, and French Director General of Civil Aviation (DGAC) [***] and [***], (Exhibit EU-(Article 13)-10) (BCI)). Additionally, the CompetitionRx Report states that "{t}he first RLI {repayable launch investment} funding agreement was signed on [***]" and uses this day for a relevant pinpoint reference date. (CompetitionRx Report, (Exhibit EU-127) (BCI/HSBI), para. 84 and fn 2, p. 18). We consider the correct date for the French A350XWB Protocole to be [***]. Yields on both dates are shown in the tables of calculations for the sake of completeness. ↩

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participant would have been able to secure on the market at that time.⁵⁸⁶ (emphasis original)

The Appellate Body further stated that:

The comparison is to be performed as though the {actual and benchmark} loans were obtained at the same time … the assessment focuses on the moment in time when the lender and borrower commit to the transaction⁵⁸⁷

6.385. Mindful of this guidance, we consider that borrowing costs should be observed at the time that each particular contract was concluded. Averaging the borrowing rate of contracts concluded over a time-period during which there were different market borrowing rates may lead to distortions. Professor Whitelaw's averaging approach could artificially lower a higher market borrowing rate, leading to a misplaced finding that there was no subsidisation. It could also artificially increase a lower market borrowing rate, and create a danger that a benefit might be found in a case where LA/MSF was really obtained at, or above, market rate. In such an instance there could be a misplaced finding of subsidisation.

6.386. As observed by Dr Jordan, Professor Whitelaw's averaging approach would result in the application of corporate borrowing rates derived over time periods that are different for the four LA/MSF contracts.⁵⁸⁸ For example, in the present case, the market rate for the UK loan agreement, coming later, would be distorted upwards by higher yields from the time when the French agreement was concluded – some [***] earlier (according to Professor Whitelaw). The market rate for the French loan agreement, however, would not be judged against market rates from [***] prior to its conclusion, when the bond yields were even higher and would have likewise distorted the rates upwards. We do not see a justification for judging the four LA/MSF agreements by different standards in this respect. We are concerned that doing so would give unjustifiably inconsistent results for each of the agreements.

6.387. Professor Whitelaw's averaging approach would also incorporate data from after the conclusion of three of the four contracts. Market rates for debt after the conclusion of a contract do not seem to us to be a good measure of what the market would have offered at the time it was concluded. While market rates for debt in the lead-up to the conclusion of a contract could provide empirical evidence of the "going market rates" and may be indicative of what the market might have been willing to offer and accept, and may thus inform what is known and predicted about market rates at the time of conclusion, we find it difficult to see how what actually happens after the conclusion of an agreement is relevant for the purposes of establishing a market benchmark against which to assess whether a benefit is conferred pursuant to Article 1.1 of the SCM Agreement. Rather, the expectations of future performance may be relevant.

6.388. The Panel therefore considers that Professor Whitelaw's approach of observing the average daily yield to maturity over a [***]-month period during which the four contracts were signed, does not provide the yields "at the time" that the terms, and thus rates, of the individual contracts were negotiated and agreed. We are therefore unable to accept that Professor Whitelaw's approach is consistent with the Appellate Body's guidance that: (a) the benchmark entails a consideration of what a market participant would have been able to secure on the market at that time, and (b) that the assessment focuses on the moment in time when the lender and borrower commit to the transaction. We therefore reject the averaging approach in favour of the yields from a consistent time-period up to the date of the conclusion of the individual contract, as calculated by Dr Jordan.

6.389. In terms of which of the consistent periods provided by Dr Jordan – the average yield over the six months prior to the date of the relevant contract, the average yield over the month prior to the contract, and the yield on the day of the contract – we consider that the yield on the day of the signature of contract may reflect atypical fluctuations. Parties agreeing to a complex loan contract may rather set the rates in the lead-up to the conclusion of the contract, and prior to the

⁵⁸⁶ Appellate Body Report, EC and certain member States – Large Civil Aircraft, para. 706. ↩

⁵⁸⁷ Appellate Body Report, EC and certain member States – Large Civil Aircraft, paras. 835-836. ↩

⁵⁸⁸ Jordan Reply, (Exhibit USA-505) (BCI), para. 27. Professor Whitelaw's use of the [***] period gives an average yield for [***]. ↩

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actual day on which the contract is signed. To this extent, the one-month average would appear to be a reasonable proxy for the parties' expectations. This also seems consistent with the approach taken in the CompetitionRx Report in relation to finding the cost of EADS debt at the reference date of [***].⁵⁸⁹ The six-month average may be less likely to reflect expectations during the finalisation period, but may also be a helpful indication of market expectations. We therefore carry out our benchmarking assessment using the average yields one-month prior and six-months prior to the conclusion of the contract, in the form of a range.

6.390. We next address the second issue raised by the United States' criticism of how the European Union observes the EADS bond yield: the date used by Professor Whitelaw for the French LA/MSF contract. The United States argues that the date [***] (the date of the French A350XWB Convention) that is used by Professor Whitelaw is not the relevant date, and that, rather, the date of the French A350XWB Protocole, [***], [***], should be the relevant date.⁵⁹⁰ The United States and its expert, Dr Jordan, consider that taking the [***] date is "arbitrary" and, when combined with Professor Whitelaw's averaging approach, "leads to a significant downward bias in the corporate borrowing rate".⁵⁹¹ Dr Jordan states that:

[***]⁵⁹²

6.391. The European Union submits that the date of the French A350XWB Convention, [***], should be used rather than the date of the French A350XWB Protocole. The European Union submits that the Protocole was a preparatory act to the Convention, and simply defines the financing agreement in broad terms, giving rise to only limited legal rights and obligations. According to the European Union, such rights and obligations were subject to, and entered into force only with, the conclusion of the French A350XWB Convention. The European Union adds that for previous Airbus financing, termination measures terminated the second instrument, which it views as confirmation that the operative document for establishing the entry into force of the relevant instrument is that of the second instrument.⁵⁹³

6.392. We note that in this proceeding, this would be a material issue only if Professor Whitelaw's averaging approach were used. Having rejected that approach, whichever of the dates, either [***] or [***], is used, we note that there is not a material difference in the yields. However, for the sake of completeness, we lay out our analysis of the issue below.

6.393. We note again that the Appellate Body has stated that in the context of a benefit analysis under Article 1.1 of the SCM Agreement, "the assessment focuses on the moment in time when the lender and borrower commit to the transaction".⁵⁹⁴

6.394. Although it came earlier in time, the French A350XWB Protocole is in fact the substantive agreement. The French A350XWB Protocole sets out the terms and conditions, including the amounts to be disbursed to Airbus and the terms on which the sum was to be repaid, and any royalties paid, and including the anticipated schedule of deliveries – thus determining the returns that could be expected by the member State government. At that point in time, both parties had committed to the financial contribution's form and understood it to involve a particular anticipated rate of return (subject to our concerns about the royalty revenue, discussed above, which issues were not resolved by the French A350XWB Convention in any event). We note that a letter dated [***] provides that the amount "is to be attributed via the subsequent French A350XWB

⁵⁸⁹ CompetitionRx Report, (Exhibit EU-127) (BCI/HSBI), para. 84 and fn 2 (p. 18). ↩

⁵⁹⁰ United States' comments on the European Union's response to Panel question No. 99, para. 275 and fn thereto. The United States also cites Jordan Reply, (Exhibit USA-505) (BCI), paras. 24-33; and CompetitionRx Report, (Exhibit EU-127) (BCI/HSBI), para. 7, which refers to [***] as the date "when Airbus concluded the first funding agreement with a Member State". ↩

⁵⁹¹ United States' response to Panel question No. 113, para. 10 (citing Jordan Reply, (Exhibit USA-505) (BCI), para. 25). ↩

⁵⁹² Jordan Reply, (Exhibit USA-505) (BCI), paras. 26-27. As we have noted above, this appears to be a slight error: the date of the contract is [***]. ↩

⁵⁹³ European Union's comments on the United States' response to Panel question No. 105, paras. 890-891. (footnotes omitted) ↩

⁵⁹⁴ Appellate Body Report, EC and certain member States – Large Civil Aircraft, paras. 835-836. ↩

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Convention, according to the conditions detailed in the French A350XWB Protocole of [***]".⁵⁹⁵ We consider that, as a factual matter, the earlier French A350XWB Protocole committed the sums on the particular terms, while the later French A350XWB Convention dealt with the practicalities of providing those sums to the recipient. In other words, the French A350XWB Convention was the means of carrying out the commitment made in the earlier French A350XWB Protocole, or the step that implemented the commitment made under the French A350XWB Protocole.

6.395. As we see it, this aspect of our benchmark analysis in this proceeding involves comparing the market rates at the time that the contracting parties agreed on the details that gave rise to the expected rates of return. It is our view that the relevant bargain that fixed these rates of return took place in [***], whether or not the later French A350XWB Convention was solely an act by which the government provided the funds.

6.396. We also note that in its earlier submissions, the European Union expressly recognised that the earlier date is relevant:

{T}he United States claims, again, that the 2006 "commitments" by France, Germany, Spain and the United Kingdom to support the A350XWB – in a yet unspecified form and on unspecified terms and conditions – are tantamount to a subsidy that causes adverse effects. The United States does so despite recognising that the terms of A350XWB MSF were agreed to between Airbus and each of the member States considerably later, and over a significant period of time, beginning in June 2009. Thus, MSF for the A350XWB could, at most, constitute a measure subject to challenge as an alleged subsidy after each of the four loans was brought into existence over a period of time beginning in June 2009 … .⁵⁹⁶ (footnotes omitted)

6.397. In another example, the European Union stated in its submission:

Each of these factors relates to the period after the launch of the A350XWB in December 2006, but before the conclusion of the first financing agreement in June 2009, and demonstrates that the financing agreement played no role in Airbus' commitment to the A350XWB.⁵⁹⁷

6.398. In addition, the CompetitionRx Report, submitted by the European Union, uses [***] as the "Reference Date" for "when Airbus concluded the first funding agreement with a member State"⁵⁹⁸, and states that "{t}he first RLI {repayable launch investment} funding agreement was signed on [***]", using that date for a pinpoint reference date.⁵⁹⁹

6.399. In summary, we consider that the date of the French A350XWB Protocole, signed on [***], copies of which were relayed with a cover letter dated [***], should be used as the relevant point in time when the French Government committed to the terms and conditions of LA/MSF, rather than the date of the French A350XWB Convention signed on [***] that attributed the funds.

Whether to adjust the EADS bond yield: maturity and duration

6.400. We now evaluate the United States' argument that the EADS bond yield should be adjusted to account for the fact that its duration and repayment structure is different to the LA/MSF agreements.⁶⁰⁰ The United States seeks to adjust the EADS bond yield based on similarly-rated bonds with a term of 20 years, on the grounds that the LA/MSF loans have a much longer term to maturity, or period, than the EADS bond. The European Union counters that the term to maturity is not determinative because LA/MSF and the EADS bond have similar exposure when payment

⁵⁹⁵ Exchange of Letters between Fabrice Brégier, Director General of Airbus, and French Director General of Civil Aviation (DGAC) [***] and [***], (Exhibit EU-(Article 13)-10) (BCI)). ↩

⁵⁹⁶ European Union's first written submission, para. 360. ↩

⁵⁹⁷ European Union's first written submission, para. 1105. ↩

⁵⁹⁸ CompetitionRx Report, (Exhibit EU-127) (BCI/HSBI), paras. 7, 8, and 12 (pp. 8 and 9). ↩

⁵⁹⁹ CompetitionRx Report, (Exhibit EU-127) (BCI/HSBI), para. 84 and fn 2 (p. 18). ↩

⁶⁰⁰ United States' response to Panel question No. 102, paras. 368-369; and comments on the European Union's response to Panel question Nos. 163-165, para. 6 (consolidated answer). See also Jordan Reply, (Exhibit USA-505) (BCI), para. 3, p. 2, and fn 3. ↩

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structure is taken into account. The European Union considers this is shown when the "Macaulay duration" measure is used as a basis for comparison. For the European Union, this negates the need for the United States' proposed 20-year adjustment. The parties disagree as to whether the contracts' and bond's Macaulay durations appropriately reflect all relevant differences associated with the different terms of the instruments.

6.401. The EADS bond is a medium-term note (MTN) issued on 24 September 2003 and maturing 25 September 2018⁶⁰¹, and thus had a term to maturity of 15 years when issued. By the time the various contracts were concluded, the bond had a remaining term to maturity of between 8 and 9 years. The LA/MSF contracts are expected to reimburse the principal approximately [***] years after the commencement of disbursements and are expected to deliver a return, via levies and royalties, for [***] years after the commencement of disbursements.⁶⁰²

6.402. The United States and its expert, Dr Jordan, observe that, as a general principle, investors holding a longer-term instrument would typically require a higher yield – that is, annual return realized by holding the instrument to maturity – than investors holding a shorter-term instrument.⁶⁰³ The United States argues that, "ideally, the corporate borrowing rate component of the benchmark rates of return would be based on a debt instrument with the same maturity as the actual loan under analysis. Otherwise, the comparison between the benchmark rate of return and the rate of return for the actual loan under consideration could be affected by the differences in maturities, and would thus distort the determination of the existence and/or magnitude of the subsidy".⁶⁰⁴ The United States points out that while the EADS bond's term to maturity, or length of borrowing, would be 8-9 years, the LA/MSF borrowing period would be "much longer than 10 years".⁶⁰⁵ The United States submits that using a debt instrument with a maturity of 8-9 years would artificially reduce, or understate, the corporate borrowing rate component of the benchmark rate.⁶⁰⁶ The United States also submits that using 10-year instruments, as it did in its preferred approach to deriving a corporate rate, and before the original panel, is "quite conservative" and "by using 10-year financing to construct the commercial benchmark rate, the parties and the Panel have been underestimating the magnitude of the subsidies".⁶⁰⁷

6.403. The United States submits that in order to correct for the difference in maturities, the EADS yield should be adjusted. The United States' expert proposes to add the term spread (or term premium) of corporate bonds with 20-year maturities, and with the same credit rating as EADS' debt, to the yield of the EADS bond.⁶⁰⁸ To support its proposal to adjust the bond yield for a 20-year term to maturity, the United States points to EU arguments made elsewhere in the current proceeding that LA/MSF should be amortized over a period of 21 years⁶⁰⁹, and to evidence that the

⁶⁰¹ EADS Finance B.V. 03/18 MTN 5.5% coupon Eurobond maturing 25 September 2018, ISIN XS0176914579, traded on the Frankfurt Stock Exchange. Details of this bond issue are provided with Professor Robert Whitelaw, "Comments on Elements of the 'Responses of the United States to the Second Set of Additional Questions from the Panel'", 1 May 2014, (Whitelaw Comments on US Responses), (Exhibit EU-508) (BCI). ↩

⁶⁰² According to the "corrected'" figures provided by the European Union, the French LA/MSF contract expects the loan principal to be paid off after a period of [***], with the maximum life of the instrument with royalties expected to extend to a period of approximately [***]; the German LA/MSF contract expects the loan principal to be paid off after a period of [***], with the maximum life of the instrument with royalties expected to extend to a period of approximately [***]; the Spanish LA/MSF contract expects the loan principal to be paid off after a period of [***], with the maximum life of the instrument with royalties expected to extend to a period of approximately [***]; and the UK LA/MSF contract expects the loan principal to be paid off after a period of approximately [***], with the maximum life of the instrument with royalties expected to extend to a period of approximately [***]. (See also Whitelaw Comments on US Responses, (Exhibit EU-508) (BCI), para. 10). ↩

⁶⁰³ United States' response to Panel question No. 95, para. 352. ↩

⁶⁰⁴ United States' response to Panel question No. 95, para. 353. ↩

⁶⁰⁵ United States' response to Panel question No. 95, paras. 353-354. ↩

⁶⁰⁶ United States' response to Panel question No. 95, paras. 353-354. ↩

⁶⁰⁷ United States' response to Panel question No. 95, para. 355. ↩

⁶⁰⁸ Jordan Reply, (Exhibit USA-505) (BCI), para. 20 (providing the following example at fn 30: "As an example of the use of term spreads to adjust maturity, suppose we take the maturity of the EADS note to be 9 years in January 2010 with a yield of 4.15%. Further suppose that the 10-year to 9-year yield spread is 0.15% and the 20-year to 10-year yield spread is 0.70%. The adjusted 20-year yield of the EADS note is then 5.00%, (i.e., 4.15% + 0.15% + 0.70%)"). ↩

⁶⁰⁹ Jordan Reply, (Exhibit USA-505) (BCI), p. 3 and fn 8 (citing European Union's first written submission, para. 206). ↩

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UK Government's assessment used [***] as a basis for suggesting appropriate rates of return on the UK contract, consistent with a view that an instrument with a life of 20 years is appropriate to benchmark LA/MSF.⁶¹⁰

6.404. The United States' proposal to correct for what the EADS bond yield would be if it had 20 years remaining until maturity would appear to add between [***] and [***]⁶¹¹ basis points to the general corporate borrowing rate component of the benchmark.

6.405. With respect to the fact that it did not propose such an adjustment in the original proceeding, the United States points out that in the original proceeding it had noted that the use of a 10-year maturity would understate the actual maturity and therefore it had understated the actual credit spreads associated with the LA/MSF contracts, which were open ended or had a maturity that was significantly longer than 10 years.⁶¹²

6.406. In response to the United States' proposal to adjust the yield to take into account the differences in the terms of the instruments, the European Union submits that if the Macaulay duration financial analysis measure is used to compare the EADS bond with the LA/MSF contracts, the instruments are in fact similar and no adjustment need be made. The European Union argues that the Macaulay duration measure is appropriate for comparing the relative risks to an investor relating to the remaining term of the EADS bond and the term of the LA/MSF contracts. The European Union states in this regard that:

In assessing the comparability of two financial instruments, it is not their absolute maturity (i.e., the date of their final payment) that is decisive, but the average life of their cash flows, which adjusts for the characteristics of their cash flow profiles. For example, it is not meaningful to compare, without adjustment, (i) the maturity of a loan with periodic repayments of principal and interest to (ii) the maturity of a bond without periodic repayments. In fact, a bond, with principal due at maturity, will have a longer effective cash flow life than a loan with the same maturity that requires principal repayments throughout the life of the loan. To measure the effects of differences in the timing and magnitude of cash flows, financial analysts determine what is known as the "Macaulay duration" of a financing instrument, which is equivalent to its weighted average cash flow life.

When available market instruments have a cash flow profile different in some respects from that of the financing agreements for the A350XWB, it is necessary to compare their respective Macaulay durations {– equivalent to their weighted average cash flow lives –} to assess the suitability of the market instrument. Indeed, to serve as the basis for an element of the benchmark for the A350XWB-related financing agreements, a bond should have approximately the same Macaulay duration as the expected repayment stream associated with the A350XWB financing agreements.⁶¹³

6.407. The European Union submits that the Macaulay duration of the EADS bond, to its remaining term, is similar to the Macaulay durations of the LA/MSF contracts. To support its

⁶¹⁰ Jordan Reply, (Exhibit USA-505) (BCI), p. 3 and fn 8 (citing UK Appraisal, (Exhibit EU-(Article 13)-34) (HSBI). Additionally, we note that the contracts are expected to deliver the anticipated return over the projected life of the A350XWB programme, and that in a different context Professor Whitelaw has noted that "US estimates of programme life cycle for capital budgeting – 5 years of development followed by 15 years of deliveries – although not identical to, is consistent with the programme life assumed by Airbus in capital budgeting". (Professor Robert Whitelaw, "Comments on US and NERA's Discussion of MSF Benefit and Effects on Product Launch", 27 June 2012, (Exhibit EU-7) (BCI/HSBI), para. 25). ↩

⁶¹¹ Using the approach accepted by the Panel in the preceding sections, the adjustment would be between [***] and [***] basis points. (See Jordan Materials in Response to Panel Questions Nos. 110, 111, 112, and 114, (Exhibit USA-567) (BCI/HSBI), supplements to tables 6, 7 and 9 (pp. 2-7)). Using Professor Whitelaw's averaging approach the adjustment seems to be between [***] and [***] basis points for the individual contracts. (Jordan Reply, (Exhibit USA-505) (BCI), para. 20 and table 4; European Union's response to Panel question No. 166, para. 18; and United States' comments on the European Union's response to Panel question No. 166, para. 16). ↩

⁶¹² United States' response to Panel question No. 95, para. 355 (citing Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.432 and fn 2579). See also Ellis-Jordan Report, (Original Exhibit US-80), (Exhibit USA-474/506 (exhibited twice)) (BCI), pp. 7-8 and 11. ↩

⁶¹³ United States' response to Panel question No. 92, paras. 351-352. ↩

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contention, the European Union provides a number of calculations by Professor Whitelaw⁶¹⁴, which it revised to take into account errors identified by the Panel but without providing revised underlying revenues to enable a verification of the updated results.⁶¹⁵

6.408. The United States contends that the Macaulay duration measure is not a useful metric in this context for two reasons: because: (a) it "captures only one type of risk – interest rate changes – and does not account for others, such as the increased uncertainty associated with repayments scheduled for a more distant point in time", and "the maturity of a debt instrument is highly probative of general riskiness, because a longer time horizon increases the amount of time over which events can upset expectations"⁶¹⁶; and (b) because a Macaulay duration "is an accurate tool only if the timing and amount of repayments are fixed in advance. … Where the repayment schedule is flexible, as with success-dependent, levy-based LA/MSF, that tool is not useful, and can be deceptive".⁶¹⁷ In respect of this latter point, the United States submits that LA/MSF is provided "without an actual maturity", is "open-ended borrowing" and involves "variability in the repayment stream that is undetermined ex ante"⁶¹⁸ which is more akin to a bond with embedded options.⁶¹⁹ The United States submits that the Macaulay duration measure is thus "a flawed measure of a bond's price sensitivity to interest rate changes for a bond with embedded options {and} misleads the user because it masks the fact that changes in the expected cash flows must be recognised for bonds with embedded options".⁶²⁰

6.409. The European Union counters that the Macaulay durations of the LA/MSF contracts are appropriate to measure interest rate risk, and would reflect the compensation that lenders require for bearing interest rate risk.⁶²¹ With respect to the variability of the cash flows under the LA/MSF contracts, the European Union considers that the United States' argument is based on principles that do not apply to LA/MSF (that is, the decision to exercise embedded options is itself dependent on interest rate risk), and that, in any event, "any variability of the repayment stream is reflected in the … project-specific risk premium".⁶²²

6.410. We note that the risk, and thus the rates of return, implied by the term and structure of a particular debt instrument is a complex matter. In our view, an instrument's maturity or term to maturity is relevant, as under normal circumstances borrowing via longer-maturity instruments costs more than borrowing via shorter-maturity instruments.⁶²³ It is our understanding that this is due to, inter alia: the potential for intervening events (for example macroeconomic factors) to negatively affect returns; opportunity cost compared to other more favourable investment opportunities that arise and could have been pursued if one had invested in a shorter-term instrument; and the chance that future returns could be worth less – for example through inflation.

6.411. We note that experts' analyses submitted in this proceeding refer to the length of the term of the instrument as defining whether it is an appropriate basis for a comparison borrowing rate. The experts refer to the "longest-term" bond available as the best match for the LA/MSF

⁶¹⁴ Professor Whitelaw addresses the graduated nature of disbursements by generating a Macaulay duration for the disbursements too, and subtracting this from the initial estimate of the LA/MSF duration to arrive at a (shorter) final result. (See Professor Robert Whitelaw, "Calculation of the Macaulay Duration of the Financing Agreements for the A350XWB", (Exhibit EU-380) (BCI/HSBI); and Professor Robert Whitelaw, "Update on certain calculations of IRRs and Macaulay durations", 14 April 2014, (Whitelaw Updated Calculations), (Exhibit EU-507) (BCI/HSBI)). ↩

⁶¹⁵ Professor Robert Whitelaw, "Calculation of the Macaulay Duration of the Financing Agreements for the A350XWB", (Exhibit EU-380) (BCI/HSBI); and Whitelaw Updated Calculations, (Exhibit EU-507) (BCI/HSBI). We note that we would expect the corrections would not be so significant as to change the basic arguments made by the parties. ↩

⁶¹⁶ See United States' response to Panel question No. 166, paras. 36 and 41. ↩

⁶¹⁷ United States' response to Panel question No. 166, para. 36. (footnotes omitted) ↩

⁶¹⁸ United States' comments on the European Union's response to Panel question No. 92, para. 254. ↩

⁶¹⁹ United States' response to Panel question No. 166, paras. 39-44. ↩

⁶²⁰ Frank J Fabozzi (ed.), The Handbook of Fixed Income Securities, (McGraw-Hill, 2005), p. 187; and Frank J. Fabozzi (ed.), Fixed Income Analysis, 2^nd edn (Wiley, 2007), pp. 175-176, (Exhibit USA-589) (cited in United States' response to Panel question No. 166, 16 April 2014, para. 39). ↩

⁶²¹ See Whitelaw Comments on US Responses, (Exhibit EU-508) (BCI), comment on Panel question No. 166, paras. 11-12. ↩

⁶²² European Union's comments on the United States' response to Panel question No. 166, para. 166. ↩

⁶²³ Neither party has argued that the circumstances in question were anything other than normal, or that there was a relevant flat or inverted yield curve pattern prevailing in market borrowing rates. ↩

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instruments. For example, when initially proposing the EADS bond as a basis for the value of general corporate borrowing, the European Union's expert, Professor Whitelaw, asserts that "the company's actual cost of long-term borrowing" is shown by "EADS' actual, long-term borrowing rates at the date of the agreements, expressed as the yield on its longest-term bond".⁶²⁴ CompetitionRx likewise chose the longest-term bond as the best basis for comparison rates.⁶²⁵

6.412. However, an instrument's structure is also relevant. The risk of lending long might be different depending on the rate at which a debt is amortised under the relevant instrument, because if the principal is reduced more quickly, then less is at stake into the future. While a debt might extend over the same period of time as another, an instrument that amortises more quickly reduces the sum that is exposed to the risks of lending long. Absolute maturities do not demonstrate how rapidly the loan principal will be amortised where payments are made throughout the life of the instrument, and thus how much of the debt is exposed to the risks of lending long.

6.413. As we understand it, a bond's Macaulay duration is derived from the weighted average time to each coupon or principal payment.⁶²⁶ Both parties appear to agree that, "{i}n layman's terms, the more bond payments occur later in a bond's life, the higher the Macaulay duration".⁶²⁷

6.414. The Macaulay duration measure is typically used for a different purpose to the one for which the European Union is currently asking the Panel to use it. Macaulay durations provide information to a potential investor about certain risks involved with bonds. Bonds have assured payments, and the instrument's price as traded may vary when general interest rates rise or fall. The Macaulay duration measure is a tool that gives standardised information about the comparative interest rate sensitivity of the prices of bonds that make more than one coupon payment throughout the bond's life, compared to the interest rate sensitivity of the prices of zero-coupon bonds that only make one payment, due at maturity (where the full amount of the debt is exposed to risks).⁶²⁸ The Macaulay duration measure is used most often to compare how volatile, responsive or sensitive are the prices of fixed-income securities (bonds) to changes in general interest rates.

6.415. We note that the instruments being compared in this proceeding are not two bonds, but a bond and a specific type of loan. There are differences between how the two types of instrument work.

6.416. Nevertheless, in our view, the Macaulay duration measure is useful for illustrating how an instrument's term structure – in addition to its maturity or term period – is relevant to its risk profile.⁶²⁹ The measure illustrates the principle that an instrument that amortises more quickly reduces the sum that is exposed to the risks of lending long. For example, it can illustrate the difference between a 10-year loan, where the principal is due at year 10, compared to a loan with yearly repayments. For the latter loan, with part of the principal paid off each year, the lower

⁶²⁴ Whitelaw Response to Jordan, (Exhibit EU-121) (BCI/HSBI), paras. 8 and 11-12, and fns 10 and 13. ↩

⁶²⁵ See e.g. CompetitionRx Report, (Exhibit EU-127) (BCI/HSBI), paras. 72-74 and, in particular, para. 76. ↩

⁶²⁶ Zvi Bodie, Alex Kane, and Alan J. Marcus, Investments, 9^th edn (McGraw-Hill/Irwin, 2011), pp. 509-518, (Exhibit EU-379), p. 513; and Frank J Fabozzi (ed.), The Handbook of Fixed Income Securities, (McGraw-Hill, 2005), pp. 206-207. We note commentary that while measures of duration are expressed in years, it is not useful to think of duration as a measure of time. Rather, "the proper interpretation is that duration has the price volatility of a zero-coupon bond with that number of years to maturity. Thus, when a manager says that a bond has a duration of four years, it is not useful to think of this measure in terms of time, but rather that the bond has the price sensitivity to rate changes of a four-year zero-coupon bond. … As a second example, consider the duration of an option that expires in one year. Suppose that it is reported that its duration is 60. … It simply means that the option tends to have the price sensitivity to rate changes of a 60-year zero-coupon bond". (Frank J Fabozzi (ed.), The Handbook of Fixed Income Securities, (McGraw-Hill, 2005), pp. 206-207.) ↩

⁶²⁷ United States' response to Panel question No. 166, para. 37; and European Union's comments on the United States' response to Panel question No. 166, para. 162. ↩

⁶²⁸ Frank J Fabozzi (ed.), The Handbook of Fixed Income Securities, (McGraw-Hill, 2005), pp. 206-207. ↩

⁶²⁹ As Professor Whitelaw noted in the original proceeding, "yields are a function of the combination of the probability of default and the expected loss given default". The Macaulay duration measure appears to give an indication of the expected loss given default, while term to maturity or term period bears on probability of default. (See Professor Robert Whitelaw Rebuttal Report, 24 May 2007, (Whitelaw Rebuttal Report), (Original Exhibit EC-11), (Exhibit EU-123/USA-483 (exhibited twice)) (BCI/HSBI), para. 39). ↩

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Macaulay duration reflects the lower risk that the full amount of the principal will not be repaid over time. Thus, when assessing the comparability of a bond and a loan, the instruments' absolute maturity may not fully account for varying exposure due to their different repayment structures.

6.417. In principle, then, if an adjustment is made to take into account differences in maturity, account must also be taken of differences that may exist in term structure. Thus, we consider it would be an oversimplification to adjust the EADS bond yield solely by adding the term spread, or term premium, of similarly-ranked 20-year corporate bonds, given that the structure of the A350XWB LA/MSF contracts means the loan principal will not be exposed for the full length of that term.

6.418. However, we are not convinced that similarities in Macaulay durations render any differences in terms to maturity entirely irrelevant. The amount of time into the future over which an instrument is projected to exist has its own relevance. That is, the further into the future certain events are anticipated to take place, the more likely it is that one or more intervening events may occur to impede their fulfilment.⁶³⁰ We agree with the United States that the Macaulay duration measure does not account for the increased uncertainty associated with repayments scheduled for a more distant point in time.⁶³¹ This contributes to the probability of default. Thus, while we do not believe it would be appropriate to adjust the EADS bond yield by adding the term spread, or term premium, of similarly-ranked 20-year corporate bonds, neither do we think that it would be appropriate to fully ignore the relevance of a longer term or loan period.

6.419. We additionally note that, comparing the instruments' Macaulay durations, it seems that several of the LA/MSF contracts' term structures involve more exposure than the EADS bond. Professor Whitelaw calculates the Macaulay duration of the EADS bond to be 7.42 "years". The (corrected) Macaulay durations of the contracts, as calculated by Professor Whitelaw, are: France: [***] "years", Germany: [***] "years", Spain: [***] "years", and the United Kingdom between [***] and [***] "years".⁶³²

6.420. Finally, with respect to the United States' submission that LA/MSF involves "variability in the repayment stream that is undetermined ex ante"⁶³³ which is more akin to a bond with embedded options⁶³⁴ and that Macaulay's duration is thus "a flawed measure"⁶³⁵, we agree with the European Union that such variability of the repayment stream is to be reflected in the project-specific risk premium.⁶³⁶

6.421. The European Union has satisfied us that the United States' proposal to adjust the EADS bond by adding the term spread of similarly-ranked 20-year bonds is not appropriate. As the United States has not presented us with any alternative adjustment, we therefore proceed on the basis of the unadjusted EADS bond yields, noting that: (a) the increased uncertainty with respect to repayments scheduled for a more distant point in time means that the EADS bond yield likely gives a conservative estimate of the corporate borrowing rate component of the benchmark rate for all four contracts; and (b) the higher Macaulay durations of the [***] contracts, when compared to the Macaulay duration of the EADS bond, further suggests that the EADS bond yield would represent a conservative estimate for those three contracts.

⁶³⁰ See Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.414. ↩

⁶³¹ United States' response to Panel question No. 166, para. 36. ↩

⁶³² See Professor Robert Whitelaw, "Calculation of the Macaulay Duration of the Financing Agreements for the A350XWB", (Exhibit EU-380) (BCI/HSBI); Second Whitelaw Response to Jordan, (Exhibit EU-396) (BCI/HSBI), para. 7; Whitelaw Updated Calculations, (Exhibit EU-507) (BCI/HSBI). We note that when questioned concerning the accuracy of the initial calculations, the European Union failed to disclose the underlying figures on which these calculations were based. ↩

⁶³³ United States' comments on the European Union's response to Panel question No. 92, para. 254. ↩

⁶³⁴ United States' response to Panel question No. 166, paras. 39-44. ↩

⁶³⁵ United States' response to Panel question No. 166, para. 39. ↩

⁶³⁶ European Union's comments on the United States' response to Panel question No. 166, para. 166; and Whitelaw Comments on US Responses, (Exhibit EU-508) (BCI), comment on Panel question No. 166, para. 13. ↩

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Whether to add to the corporate rate an amount for normal fees and charges associated with general corporate borrowing on the market

6.422. As a final matter, the United States proposes an adjustment to represent normal fees and charges that Airbus would incur for market financing. In response to Professor Whitelaw's addition of the fees to the calculation of the German contract's IRR, Dr Jordan, the United States' expert, opined that "the fees Professor Whitelaw includes, as well as the fee included in the Jordan Report, are fees for particular services. Such fees should be added as well to the market benchmark under the assumption that market lenders would charge the same fees for the same services. Alternatively, the fees can be omitted from both LA/MSF rates and market benchmarks".⁶³⁷

6.423. The United States additionally argues that "by turning to the {member State} governments to finance the A350XWB program, Airbus avoided {underwriting fees, loan commitment fees, and administrative} fees. Accordingly, if the actual IRR for LA/MSF for the A350XWB is understood to include fees like the "[***]" and "[***]" fees in the German LA/MSF contract, then the corresponding Airbus corporate borrowing rates for all four governments also should include underwriting and other fees."⁶³⁸ Thus, the United States proposes to add to the corporate borrowing rates for all four governments a sum representing underwriting fees⁶³⁹, loan commitment fees⁶⁴⁰ and administrative fees.

6.424. The European Union maintains that to determine whether and what "analogous commercial fees" should be included in a benchmark, it is first necessary to understand the nature and characteristics of the fees included in the challenged instrument. Without that understanding, the European Union argues that it is impossible to know what "commercial fees" would be "analogous" and properly included in a benchmark.⁶⁴¹ The European Union submits that the United States has failed to establish that the [***] fee and the [***] fee under the German LA/MSF contract are analogous to underwriting fees, loan commitment fees and/or administrative fees and, thus, that they should properly form part of a suitable market benchmark rate.⁶⁴²

6.425. We note that the European Union does not reject the principle that it may be appropriate to include commercially charged fees as part of a market benchmark, and provides its own calculation of potentially relevant fee amounts, were we to decide to adjust the market benchmark for that purpose.⁶⁴³

6.426. In our view, it is not necessary that any fees charged for the lending at issue be "analogous" to the commercial fees charged by a market lender in order for it to be appropriate to include such fees into the relevant market benchmark. Indeed, such an approach would neglect the potentially advantageous waiver of any such fees that might be relevant to a benefit analysis.

6.427. As we see it, in this proceeding it is appropriate to have regard to fee amounts normally charged as part of the borrowing rate, in order to determine whether the A350XWB LA/MSF measures confer an advantage on Airbus to compared against what would have been available on the market. We therefore consider that, in principle, a difference between the sums that the

⁶³⁷ Jordan Reply, (Exhibit USA-505) (BCI), para. 12 and fn 20. ↩

⁶³⁸ United States' response to Panel question No. 161, para. 6. ↩

⁶³⁹ United States' response to Panel question No. 161, para. 4 (arguing in the light of the results of a study concerning the underwriting fees associated with equity-linked securities and the incremental increase in underwriting fees for debt instruments with longer maturities and non-investment grade credit risk, that "the total underwriting fees for a complex, risky, and long-maturity debt instrument like LA/MSF likely would be even higher than 2.44 percent", referring to Enrique Schroth, "Innovation, Differentiation, and the Choice of an Underwriter: Evidence from Equity-Linked Securities", The Review of Financial Studies (2006), Vol. 19, No. 3, pp. 1041-1080, (Exhibit USA-585), p. 1049, table 3, and panel b). ↩

⁶⁴⁰ United States' response to Panel question No. 161, para. 5 and fn 8 (indicating that in 2001, banks would charge loan commitment fees on general corporate lines of credit which could include, on average, an upfront fee of 18.6 basis points, annual fees of 4.5 basis points, and usage fees of 19.6 basis points.) The United States also notes that other administrative fees including accounting and legal fees are charged by banks and other financial intermediaries but does not expressly offer a numerical estimate of the value of such fees. ↩

⁶⁴¹ European Union's comments on the United States' response to Panel question No. 161, para. 6. ↩

⁶⁴² European Union's comments on the United States' response to Panel question No. 161, para. 12. ↩

⁶⁴³ European Union's comments on the United States' response to Panel question No. 161, paras. 13-30, and especially para. 16. ↩

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market would have generally charged by way of normal fees and expenses for comparable financing to LA/MSF, and the amounts, if any, charged by the relevant member State for LA/MSF financing, should be factored into a consideration of whether a benefit has been conferred.

6.428. However, we have concerns about the applicability of some of the estimates provided by the United States. We agree with the European Union that the United States' underwriting fee estimate – more than 244 basis points⁶⁴⁴ – derives from an analysis of complex, equity-linked, derivative and innovative instruments that it is not clear would match the kind of normal fees Airbus would face if it turned to the market for funding for the A350XWB.⁶⁴⁵ While we note that there is evidence that underwriting fees for various types of debt instruments were on average 14 basis points over the 1975-2004 period⁶⁴⁶, we are prepared to accept, in this instance, the underwriting fee for the EADS bond itself, estimated by the European Union to translate to an adjustment to the bond yield of approximately [***] basis points, calculated on 23 September 2003.⁶⁴⁷ The United States offers estimates of average additional fees on corporate lines of credit such as upfront fees of 18.6 basis points, annual fees of 4.5 basis points, and usage fees of 19.6 basis points, as well as noting the existence of other fees for services including accounting and legal services, but not offering express estimates to be added in this instance.⁶⁴⁸ We note that corporate lines of credit are different instruments to a bond or a success-dependent loan and it is thus not clear what types of fees would be appropriate to add to this particular benchmark instrument. In addition, the evidence provided by the United States dates from 2001.⁶⁴⁹ In view of the different instrument types and potential market fluctuations between the time of the data on which the evidence is based and the time the contracts were concluded, we consider that it would be appropriate to use estimates that reflect the fees associated with the particular market benchmark. We therefore decline to use the estimates offered by the United States of fees additional to the underwriting fees, and use only the estimate of a fee for the EADS bond put forward by the European Union. We note, however, that were we to add further average fees, this would adjust that amount upwards.

Conclusion on the appropriate general corporate borrowing rate

6.429. In conclusion, we have determined to use the yield on the EADS bond identified by the European Union as the basis for the corporate borrowing rate. We consider, however, that the EADS bond yield may be lower than rates that would be required for borrowing by its Airbus subsidiaries alone (that is, the EADS bond yield may understate the corporate borrowing rate for the French and Spanish contracts). We have also determined that the EADS bond's yields should be observed over consistent time periods in the lead up to each of the four individual contracts, in the form of a range of the one-month and six-month average yields prior to the date of the individual contracts. We find that the United States' proposal to adjust the EADS bond yield for a 20-year maturity by adding the term premium of similarly-ranked bonds with a 20-year remaining term is not appropriate. However, we use the unadjusted yields of the EADS bond on the understanding that it is likely to be a conservative reflection of the corporate borrowing rate that should be used to construct the relevant market benchmark for the LA/MSF contracts given that: (a) the increased uncertainty with respect to repayments scheduled for a more distant point in time means that the EADS bond yield likely gives a conservative estimate of the corporate borrowing rate component of the benchmark rate for all four contracts; and (b) the higher Macaulay durations of the [***] contracts, when compared to the Macaulay duration of the EADS bond, further suggests that the EADS bond yield would represent a conservative estimate for those three contracts. Finally, we have also accepted, in principle, the addition of a sum representing

⁶⁴⁴ United States' response to Panel question No. 161, (BCI), para. 4. ↩

⁶⁴⁵ European Union's comments on the United States' response to Panel question No. 161, paras. 14-16. ↩

⁶⁴⁶ See Kim Dongcheol et al, "The Impact of Commercial Banks on Underwriting Spreads: Evidence from Three Decades", Journal of Financial and Quantitative Analysis (2008), Vol. 43, No. 4, pp. 975-1000, (Exhibit USA-586), p. 976. ↩

⁶⁴⁷ European Union's comments on the United States' response to Panel question No. 161, para. 16 and fn 41; and Whitelaw Comments on US Responses, (Exhibit EU-508) (BCI), para. 16. ↩

⁶⁴⁸ The evidence on the panel record covers a sample period of 13 September 1996 to 3 October 1997. (See Arie Melnik and Doron Nissim, "Debt Issue Costs and Issue Characteristics in the Market for U.S. Dollar Denominated International Bonds", European Finance Review (2003), Vol. 7, pp. 277–296, (Exhibit USA-588), p. 281). ↩

⁶⁴⁹ O. Emre Ergungor, "Theories of Loan Commitments", Cleveland Federal Economic Review (2001), Q3, pp. 2-19, (Exhibit USA-587). ↩

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market based fees and, for the purposes of this proceeding, will use the amount proposed by the European Union.

6.430. The quantitative implications of our findings on the corporate borrowing rate are as follows:

Table 7: Corporate borrowing rate estimates

Project-specific risk premium

6.431. The parties agree that the final component of a market interest rate benchmark against which to compare the rates of return anticipated under the A350XWB LA/MSF measures should be a project-specific risk premium reflecting the risk associated with providing financing on the same or similar terms as LA/MSF for the A350XWB programme.⁶⁵⁰

6.432. In the original proceeding, a premium was added to the price of general corporate borrowing to reflect the fact that LA/MSF involves more risk for a lender than such general corporate borrowing. This additional risk derived, in part, from the fact that rather than being repaid from the firm's general assets, the LA/MSF loans "are model-specific, that is, they are provided to fund the development of specific aircraft models and are to be repaid from the cash flows associated with the same specific model and so a commercial lending rate would reflect not only the riskiness of the borrower but also the riskiness of the individual projects."⁶⁵¹ The project-specific risk premium was thus added to reflect certain risks for the lender associated with the form of financing as well as the risks associated with the particular aircraft development project.⁶⁵²

6.433. The United States presents two alternatives for a project-specific risk premium in this proceeding. The first, and preferred, United States' project-specific risk premium is a figure calculated by its expert, Dr Jordan, which we call the Jordan Risk Premium (JRP).⁶⁵³ The JRP is the average of two figures introduced by the parties in the original proceeding in relation to the risk associated with the A380 programme. As a secondary argument, the United States relies upon the risk premium proposed by Professor Whitelaw in the original proceeding for the A380 programme (the Whitelaw Risk Premium (WRP)⁶⁵⁴) on the understanding that it was found to be understated

⁶⁵⁰ See e.g. European Union's response to Panel question No. 94, fn 578 ("As both Parties agree, the benchmark would also include a risk premium to reflect to {sic} risk-sharing features of the MSF loans"). ↩

⁶⁵¹ Ellis-Jordan Report, (Original Exhibit US-80), (Exhibit USA-474/506 (exhibited twice)) (BCI), p. 4. ↩

⁶⁵² See Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.432 (citing Ellis-Jordan Report, (Original Exhibit US-80), (Exhibit USA-474/506 (exhibited twice)) (BCI), pp. 1-23). The project-specific risk was defined as the "risk that the particular project will fail to perform as originally forecast and, therefore, that repayments, if any, will be insufficient to cover the full investment and interest". (Ellis-Jordan Report, (Original Exhibit US-80), (Exhibit USA-474/506 (exhibited twice)) (BCI), p. 6 (cited in Appellate Body Report, EC and certain member States – Large Civil Aircraft, para. 860)). ↩

⁶⁵³ The JRP is a figure derived from two HSBI figures and is therefore itself HSBI. See Jordan Report, (Exhibit USA)-475)(BCI/HSBI), para. 14. ↩

⁶⁵⁴ The WRP is an HSBI figure. See Jordan Report (Exhibit USA-475) (BCI/HSBI), para. 15; and Jordan Reply, (Exhibit USA-505) (BCI/HSBI), para. 5, table 2, n 2. ↩

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or a "minimum" project-specific risk premium. The United States argues that even if the "too-low" WRP is used, this would bring the market benchmark above the internal rates of return of the A350XWB LA/MSF contracts, showing that there is a "benefit" and, therefore, that the A350XWB LA/MSF measures are subsidies.⁶⁵⁵ Thus, both of the United States' proposed risk premia use figures that the United States argues were advanced as project-specific risk premia in the original proceeding.

6.434. The European Union has not proposed a project-specific risk premium of its own for the A350XWB programme, and rejects both of the risk premia advanced by the United States. According to the European Union, the JRP was not used as a project-specific risk premium in the original proceeding⁶⁵⁶; and the United States has not shown that the WRP is an appropriate risk premium for the A350XWB.⁶⁵⁷

6.435. The parties' arguments raise the following main questions: first, whether the JRP was applied for the A380 in the original proceeding or whether, even if not applied in the original proceeding, the JRP is sufficiently argued to be a relevant premium in this proceeding; and, second, whether the risks associated with the A350XWB and A380 aircraft development programmes are sufficiently similar such that the same "understated" project-specific risk premium applied for the A380 may be used to reflect the project-specific risk associated with the A350XWB.

6.436. We commence our evaluation by examining the United States' preferred alternative, the JRP.

United States' preferred project-specific risk premium

6.437. The United States' preferred project-specific risk premium, the JRP, is an HSBI figure calculated by its expert, Dr Jordan.⁶⁵⁸ To derive the JRP, Dr Jordan explains that he uses "the average of two very similar risk premia"⁶⁵⁹ introduced during the original proceeding and applied for the A380. The two figures that Dr Jordan averages to obtain the JRP are both HSBI numbers. The first we call the Supplier Pass-On Figure (SPOF); the second we call the Corrected Interpolated Bond-Based Figure (CIBBF).

6.438. The United States submits that the JRP is an appropriate project-specific risk premium for the A350XWB. The United States recalls that in the original proceeding the WRP was found to be an "understated" or "too low" premium for the A380.⁶⁶⁰ The United States notes that the JRP is higher than the WRP. In the United States' view, this appropriately accounts for higher risks associated with the A350XWB project when compared against the A380.⁶⁶¹ However, according to the United States, the JRP is still "conservative" because its inputs, the CIBBF and the SPOF, continue to reflect the "understated" nature of the WRP.⁶⁶² The United States characterises the JRP

⁶⁵⁵ Given United States arguments on the methodology of deriving the corporate general borrowing rate, discussed above. (Jordan Report, (Exhibit USA-475) (BCI/HSBI), para. 24; and Jordan Reply, (Exhibit USA-505) (BCI), p. 3 (para. 3)). ↩

⁶⁵⁶ European Union's first written submission, paras. 313-315 (citing Whitelaw Response to Jordan, (Exhibit EU-121) (BCI/HSBI), para. 15); and Whitelaw Rebuttal Report, (Original Exhibit EC-11), (Exhibit EU-123/USA-483 (exhibited twice)) (BCI/HSBI), paras. 31-32). ↩

⁶⁵⁷ European Union's second written submission, para. 321. ↩

⁶⁵⁸ The JRP is [***] basis points above the HSBI figure that was introduced by Professor Whitelaw as a premium for LA/MSF for the A380 and other Airbus LCA projects and eventually applied, on the understanding that it was understated, by the panel and the Appellate Body in the original proceeding. See Jordan Report, (Exhibit USA)-475)(BCI/HSBI), para. 14. ↩

⁶⁵⁹ Jordan Report, (Exhibit USA-475) (BCI/HSBI), para. 14. ↩

⁶⁶⁰ United States' second written submission, para. 285 (citing Jordan Report, (Exhibit USA-475) (BCI/HSBI), paras. 14-22). ↩

⁶⁶¹ Jordan Report, (Exhibit USA-475) (BCI/HSBI), para. 22. ↩

⁶⁶² Dr Jordan states that the CIBBF and the SPOF "only sought to address issues raised by the United States and to confirm the original risk-sharing supplier analysis" and do "not address the flaws in the original risk-sharing supplier analysis pointed out by the Panel and Appellate Body". Hence, "the Panel and Appellate Body's criticism of Professor Whitelaw's first risk premium – i.e., that it is artificially depressed as the result of LA/MSF from the Airbus governments to Airbus for the A380 – continues to apply" to the JRP. (See Jordan Report, (Exhibit USA-475) (BCI/HSBI), para. 20 (citing Appellate Body Report, EC and certain member States – Large Civil Aircraft, para. 921)). ↩

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as based on "the method advanced by the EU and Professor Robert Whitelaw during the merits phase, further adjusted based on the specific criticisms of that approach reflected by the Panel and the Appellate Body".⁶⁶³ Dr Jordan states that the SPOF and the CIBBF "were higher than the original Whitelaw risk premium, and they are remarkably consistent with each other", concluding that the "two risk premia were a valid (though still conservative) basis on which to assess the project-specific risk premium for LA/MSF for the A350XWB".⁶⁶⁴

6.439. The European Union rejects the suggestion that it proposed or accepted the JRP, the CIBBF or the SPOF as reflecting an appropriate risk premium in the original proceeding.⁶⁶⁵ The European Union states that the JRP would be "an overstated benchmark for the A380" contracts⁶⁶⁶, and questions the applicability of this "overstated benchmark" to the A350XWB contracts.⁶⁶⁷ The European Union asserts that the United States has failed to properly substantiate its assertion that the risk associated with the A350XWB contracts should be higher than that for the A380 contracts, such that employing a premium applied for the A380 is "conservative" for the A350XWB.⁶⁶⁸

6.440. In our view, if the JRP inputs – the CIBBF and SPOF – were not accepted or even presented as an appropriate risk premium in the original proceeding, then the United States cannot rely on the JRP without further adequately explaining why it or its inputs can be used as a risk premium or the basis for a risk premium in this proceeding, and how it responds to any need for adjustment. In making our assessment of these matters we first review how the SPOF and CIBBF were treated in the original proceeding.

6.441. The SPOF was raised in the original proceeding in the context of using Airbus' risk-sharing supplier contracts to derive a market risk premium. The United States had argued that Professor Whitelaw's estimate of the risk premium charged by risk sharing suppliers to Airbus "was affected by the fact that [***] and that this reduced the suppliers' required rates of return"⁶⁶⁹, implying that the returns on supplier contracts "cannot be viewed as fully commercial".⁶⁷⁰ In response, Professor Whitelaw calculated the SPOF to represent the maximum premium that might be charged by a risk sharing supplier if the full benefits of any government funding had been passed on to Airbus⁶⁷¹, a prospect that he doubted, stating that he was "not aware of any evidence to suggest" it would happen, and that suppliers "may have considerable negotiating power and little incentive"⁶⁷² to act in this way. The European Union argued in the original proceeding that the United States "offered no evidence that government financing for the risk sharing suppliers affects the terms of the finance contracts agreed with Airbus. Moreover, … even if this were the case, the resulting change to the benchmark rate would be negligible".⁶⁷³ It thus appears to us that neither Professor Whitelaw nor the European Union proposed the SPOF as an appropriate premium for the A380 but only used it in a comparative manner, to indicate that its own premium was sound. The United States did not propose or accept the SPOF or Professor Whitelaw's risk-sharing supplier-based premium.⁶⁷⁴

6.442. Moreover, we note that the Appellate Body questioned one of the assumptions on which the SPOF was based, noting that "from an economic perspective, any subsidies that the risk-sharing suppliers may have received need not have been necessarily passed on to Airbus in the form of a lower rate of return. Whether any subsidy given to the risk-sharing suppliers passed

⁶⁶³ United States' second written submission, para. 285 (citing Jordan Report, (Exhibit USA-475) (BCI/HSBI), paras. 14-22). ↩

⁶⁶⁴ Jordan Reply, (Exhibit USA-505) (BCI), para. 37. ↩

⁶⁶⁵ European Union's first written submission, para. 315 (citing Whitelaw Response to Jordan, (Exhibit EU-121) (BCI/HSBI), para. 15); and second written submission, para. 314 (citing Whitelaw Rebuttal Report, (Original Exhibit EC-11), (Exhibit EU-123/USA-483 (exhibited twice)) (BCI/HSBI), paras. 31-32). ↩

⁶⁶⁶ European Union's second written submission, paras. 316-318. ↩

⁶⁶⁷ European Union's second written submission, paras. 317-318. ↩

⁶⁶⁸ European Union's second written submission, para. 321. ↩

⁶⁶⁹ Jordan Report, (Exhibit USA-475) (BCI/HSBI), para. 16 (citing Whitelaw Rebuttal Report, (Original Exhibit EC-11), (Exhibit EU-123/USA-483 (exhibited twice)) (BCI/HSBI), paras. 30-31). ↩

⁶⁷⁰ Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.476. ↩

⁶⁷¹ See European Union's second written submission, para. 314 (citing Whitelaw Rebuttal Report, (Original Exhibit EC-11), (Exhibit EU-123/USA-483 (exhibited twice)) (BCI/HSBI), paras. 31-32). ↩

⁶⁷² Whitelaw Rebuttal Report, (Original Exhibit EC-11), (Exhibit EU-123/USA-483 (exhibited twice)) (BCI/HSBI), para. 30. ↩

⁶⁷³ Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.478. ↩

⁶⁷⁴ Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.475. ↩

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through to Airbus would have depended on Airbus' market power or negotiating leverage."⁶⁷⁵ We note that the United States has not presented arguments to support the underlying assumptions of the SPOF in this regard.

6.443. We therefore consider that the SPOF was not presented, argued, agreed, or accepted as a basis for a risk premium for the A380 in the original proceeding, and that in this proceeding the United States must present additional argumentation and evidence to support its use as a basis for a premium for the A350XWB.

6.444. The CIBBF was an arguendo modification by the European Union of a cross-check advanced by the United States. The United States' expert, Dr Ellis, had used a statistical probability analysis of A380 project risk from the UK Department of Trade and Industry (DTI)'s critical project appraisal, as well as "market information, including bond ratings and yields"⁶⁷⁶ to generate likely credit ratings for the A380 project. His analysis had generated B to CCC ratings, which are "low-grade junk bond credit classifications".⁶⁷⁷ This confirmed the United States' risk premium in that proceeding.⁶⁷⁸ The European Union's expert, Professor Whitelaw, then corrected the results of the analysis using certain original data⁶⁷⁹, the source of which was apparently not available to the United States.⁶⁸⁰ Professor Whitelaw's correction resulted in what he considered would be best matched by a BB rating for the A380 project, although in fact it was not quite within that category.⁶⁸¹ Professor Whitelaw then used the difference between yields on B-rated bonds and the yields on BB-rated bonds to derive a figure which he stated "compared favourably" with the WRP.⁶⁸² Professor Whitelaw then stated that "even if I were to interpolate between the BB and B categories", to account for the fact that his result was not quite within the BB category, this would give the CIBBF as a figure which, he noted, is "substantially lower than the … risk premium applied by Ellis".⁶⁸³ Thus, the CIBBF results from the interpolation made by Professor Whitelaw.⁶⁸⁴

6.445. It appears that the CIBBF was not proposed as a premium by the European Union in the original proceeding. Professor Whitelaw advocated not the interpolation between BB and B bond yields, but only the BB bond yields, as "comparing favourably" with the WRP.⁶⁸⁵ Professor Whitelaw criticised the bond-based approach of the United States' expert, Dr Ellis, because he stated that it would not take into account the difference in the repayment mechanisms of a typical corporate bond and LA/MSF⁶⁸⁶, with which the panel agreed.⁶⁸⁷ Further, the European Communities only relied on the underlying bond-based analysis as a cross-check.⁶⁸⁸ The United States objected to the correction Professor Whitelaw made, on the grounds that it was

⁶⁷⁵ Appellate Body Report, EC and certain member States – Large Civil Aircraft, paras. 915-916. ↩

⁶⁷⁶ Panel Report, EC and certain member States – Large Civil Aircraft, paras. 7.441 and 7.449; Jordan Report, (Exhibit USA-475) (BCI/HSBI), para. 17; and Jordan Reply, (Exhibit USA-505) (BCI), para. 38. ↩

⁶⁷⁷ Whitelaw Rebuttal Report, (Original Exhibit EC-11), (Exhibit EU-123/USA-483 (exhibited twice)) (BCI/HSBI), para. 41. We note that these were stated to be based on Moody's credit rating methodology. ↩

⁶⁷⁸ Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.441. ↩

⁶⁷⁹ Jordan Report, (Exhibit USA-475) (BCI/HSBI), para. 17 (citing Whitelaw Rebuttal Report, (Original Exhibit EC-11), (Exhibit EU-123/USA-483 (exhibited twice)) (BCI/HSBI), paras. 36-45); and Jordan Reply, (Exhibit USA-505) (BCI), para. 38, fns 39 and 40. ↩

⁶⁸⁰ See Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.477. ↩

⁶⁸¹ Whitelaw Rebuttal Report, (Original Exhibit EC-11), (Exhibit EU-123/USA-483 (exhibited twice)) (BCI/HSBI), paras. 41-44. ↩

⁶⁸² Whitelaw Rebuttal Report, (Original Exhibit EC-11), (Exhibit EU-123/USA-483 (exhibited twice)) (BCI/HSBI), para. 43. ↩

⁶⁸³ Whitelaw Rebuttal Report, (Original Exhibit EC-11), (Exhibit EU-123/USA-483 (exhibited twice)) (BCI/HSBI), para. 41. ↩

⁶⁸⁴ Jordan Report, (Exhibit USA-475) (BCI/HSBI), para. 17. ↩

⁶⁸⁵ Whitelaw Rebuttal Report, (Original Exhibit EC-11), (Exhibit EU-123/USA-483 (exhibited twice)) (BCI/HSBI), paras. 5 and 36. See also Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.449. ↩

⁶⁸⁶ See e.g. Whitelaw Rebuttal Report, (Original Exhibit EC-11), (Exhibit EU-123/USA-483 (exhibited twice)) (BCI/HSBI), para. 38; and Professor Robert Whitelaw, "Economic Assessment of Member State Financing", 3 February 2007, (Whitelaw Report), (Original Exhibit EC-11), (Exhibit USA-482) (HSBI), p. 8. ↩

⁶⁸⁷ See Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.466. ↩

⁶⁸⁸ Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.474. ↩

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based on information of which the source was undisclosed, and consequently was not able to be verified.⁶⁸⁹

6.446. We therefore consider that the CIBBF was not accepted or even argued to be an appropriate risk premium for the A380 in the original proceeding, and that in this proceeding the United States must present additional argumentation and evidence to support its use as a basis for a premium for the A350XWB.

6.447. Having found that the JRP inputs – the SPOF and the CIBBF – were not accepted or even argued to be an appropriate risk premium for the A380 in the original proceeding, we now turn to evaluate whether the reasons that the United States offers for relying on the SPOF and the CIBBF could otherwise justify the use of the JRP as a premium in this proceeding.

6.448. The United States' expert, Dr Jordan, states that his reasons for using the CIBBF and SPOF numbers to derive the JRP were that "{t}hese calculations were higher than the original Whitelaw risk premium, and they are remarkably consistent with each other. Therefore, I concluded that these two risk premia were a valid (though still conservative) basis on which to assess the project-specific risk premium for LA/MSF for the A350 XWB".⁶⁹⁰ Dr Jordan also notes that his average is "similar" to the [***].⁶⁹¹

6.449. In our view, the simple fact that the CIBBF and SPOF figures are higher than the original risk premium⁶⁹², and that they are similar to one or more other figures, does not demonstrate that an average of the CIBBF and SPOF is an appropriate risk premium in this proceeding. It appears that the United States considers that because the WRP was considered to be understated in the original proceeding, an appropriate figure would necessarily be higher – and because the CIBBF and SPOF are higher, then they are a good basis for a risk premium. We disagree. That a figure is higher than an understated figure is not of itself sufficient reason to accept it as an appropriate risk premium. Nor is any similarity between two or more figures, if none of those figures are convincingly argued to be a good reflection of the risks involved. Any project-specific risk premium would still need to have a valid basis that links it to the risks involved with the form of funding and the risks of the particular project.

6.450. The United States claims that the JRP is a preferable premium because it is "adjusted based on the specific criticisms … reflected by the Panel and the Appellate Body".⁶⁹³ As we see it, if the JRP were preferable because it was adjusted based on particular criticisms of the WRP, then the adjustment would need to correct for the reason or reasons the WRP was found to be understated. The main reason that Professor Whitelaw's original premium was, ultimately, found to be understated was that it was based on distorted risk perceptions.⁶⁹⁴ Neither the SPOF nor the CIBBF appear to relate to this criticism. The SPOF does not correspond to the amount by which LA/MSF to Airbus reduces the perceived level of risk associated with financing the A380. Rather, it is an estimate of the additional benefit to suppliers from other government funding to them directly, if the full amount of that benefit were to be passed on to Airbus. Like for the SPOF, the United States does not link the CIBBF input to the main reason for the WRP being "too low" – its basis on distorted risk perceptions. The United States' justification for using the SPOF and the CIBBF appears limited to the fact that they are similar, and higher than the WRP.

⁶⁸⁹ See Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.477. Dr Jordan appears to accept the correction made by Professor Whitelaw to the original bond-based analysis and thus the question of whether or not Professor Whitelaw's re-running of the statistical analysis is independently verifiable is, as we understand it, no longer an issue. (See Jordan Reply, (Exhibit USA-505) (BCI), para. 38 and fns 39 and 40). ↩

⁶⁹⁰ Jordan Reply, (Exhibit USA-505) (BCI), para. 37. ↩

⁶⁹¹ See Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.453. ↩

⁶⁹² We note that the CIBBF is 114 basis points above the WRP (Professor Whitelaw's project-specific risk premium from the original proceeding). The SPOF is 122 basis points above the WRP. The JRP is above the WRP by some 118 basis points. ↩

⁶⁹³ United States' second written submission, para. 285 (citing Jordan Report, (Exhibit USA-475) (BCI/HSBI), paras. 14-22). ↩

⁶⁹⁴ Appellate Body Report, EC and certain member States – Large Civil Aircraft, para. 921 ("It was reasonable for the Panel to conclude that LA/MSF reduces the level of risk of an LCA project perceived by the risk-sharing suppliers"). ↩

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6.451. We note that Dr Jordan states that the JRP is based on figures that "do not address the flaws" identified in the original proceeding.⁶⁹⁵ Instead of rendering the proposed number "conservative", it simply seems to us that that the JRP is not connected to the original criticisms and so does not respond to them in a way that would make the JRP more valid than the understated WRP proposed by the European Union in the original proceeding. Rather than seeking to explain that the numerical difference between the JRP and the WRP corresponds to and accounts for the reasons the WRP was understated, the United States only observes that its inputs are "higher". To us, this is not sufficient reason to conclude that the JRP is a valid premium. Indeed, by such reasoning any number higher than the WRP would be appropriate: an approach which would be highly unlikely to accurately gauge the particular risks. Accordingly, we consider that this reasoning fails to show that the JRP is preferable to the WRP because it is "adjusted" based on the specific criticisms of the WRP made by the panel and the Appellate Body in the original proceeding.

6.452. Thus, the United States has not offered sufficient argumentation to explain why the JRP might be a good potential risk premium. The United States has not addressed criticisms made in the original proceeding about the reliability of the input figures as an accurate reflection of project risks.

6.453. Lastly, the United States submits that the JRP is confirmed by observing the spread, or difference, between rates of return on generic investment-grade and below-investment grade debt. According to the United States, the general corporate borrowing rate would correspond to investment-grade debt, and the project-specific LA/MSF would correspond to below-investment grade debt – therefore the difference between these two is a good match for the project-specific risk premium that would be charged by a general market finance participant.⁶⁹⁶ In this regard, the United States submitted that:

{T}he yield spread between investment-grade industrial companies and below-investment grade industrial companies between June 2009 and June 2010 indicates that the project-specific risk-premium for LA/MSF is approximately 3 to 5 percent.⁶⁹⁷

6.454. The JRP falls within this range. However, the United States has not explained why the general corporate borrowing rate would correspond to investment-grade debt, and the project-specific LA/MSF would correspond to below-investment grade debt. Nor has the United States addressed the criticism originally raised by the European Union regarding the different repayment structures of bonds and the relative risk associated with LA/MSF agreements, which the panel noted undermined the use of such a bond-based analysis in the original proceeding.⁶⁹⁸

6.455. In summary, as neither the CIBBF basis nor the SPOF basis for the United States' proposed JRP premium were proposed by either party, used, or accepted as a project-specific risk premium in the original proceeding, we consider that the United States should in this proceeding provide evidence and argument to demonstrate that the JRP nonetheless provides a good reflection of project risk for the challenged LA/MSF measures. In our view, the reasons that the United States advances to justify its reliance on the JRP, (namely that: (a) the JRP uses the method advanced by the European Union and Professor Whitelaw in the original proceeding, (b) the JRP responded to specific criticisms of the WRP made by the panel and Appellate Body in the original proceeding, (c) the two figures on which the JRP is based were "higher" than the WRP and (d) the two figures on

⁶⁹⁵ Jordan Report, (Exhibit USA-475) (BCI/HSBI), para. 20 (citing Appellate Body Report, EC and certain member States – Large Civil Aircraft, para. 921). ↩

⁶⁹⁶ United States' response to Panel question No. 114, para. 12 (stating that "investment grade debt can provide a good proxy for EADS' corporate borrowing rate, and non-investment-grade debt can provide a good proxy for EADS' project specific borrowing rate for the A350XWB. Therefore, the difference between them is a valid proxy for the project-specific borrowing rate for the A350XWB" and "these figures … confirm the conclusions of the Jordan Report."). ↩

⁶⁹⁷ United States' response to Panel question No. 116(b), para. 20. We additionally address the United States' arguments regarding the 3-5% yield spread in a different context – how it reflects lending conditions – further below. ↩

⁶⁹⁸ Panel Report, EC and certain member States – Large Civil Aircraft, para. 7.466. ↩

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which the JRP is based are "similar" to one another) are not convincing and we are thus unable to accept the JRP in this proceeding.

6.456. We now turn to consider the United States' alternative line of argument, whereby it proposes that even if the original "understated" risk premium used for the A380 is applied, a subsidy will result.

United States' alternative argument for a project-specific risk premium

6.457. The United States argues that even if the "understated" risk premium proposed by Professor Whitelaw in the original proceeding in connection with the A380 (the WRP) is used, this would bring the market benchmark above the internal rates of return of the A350XWB LA/MSF contracts from [***], resulting in a benefit and thus a subsidy; and that in the case of [***] LA/MSF, a subsidy would also result if the WRP were added to the general corporate borrowing rate component of the market benchmark adjusted to account for the differences between the EADS bond instrument and LA/MSF identified by the United States (discussed above).⁶⁹⁹