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WORLD TRADE ORGANIZATION

WT/DS353/RW

9 June 2017

(17-3038)

Original: English

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

RECOURSE TO ARTICLE 21.5 OF THE DSU BY THE EUROPEAN UNION

REPORT OF THE PANEL

BCI deleted, as indicated [***]
HSBI omitted, as indicated [[HSBI]]

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LIST OF ANNEXES

ANNEX A

WORKING PROCEDURES OF THE PANEL

ANNEX B

ARGUMENTS OF THE EUROPEAN UNION

ANNEX C

ARGUMENTS OF THE UNITED STATES

ANNEX D

ARGUMENTS OF THE THIRD PARTIES

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ANNEX E

RULINGS OF THE PANEL REGARDING ARTICLE 13 OF THE DSU

ANNEX F

OTHER PROCEDURAL RULINGS OF THE PANEL

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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 European Union¹

1.1. The European Union's complaint in this proceeding under Article 21.5 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) concerns the alleged failure of the United States to implement the recommendations and rulings adopted by the Dispute Settlement Body (DSB) in the original proceeding US – Large Civil Aircraft (2^nd complaint).

1.2. The panel report and Appellate Body report in the original proceeding were circulated to Members on 31 March 2011 and 12 March 2012, respectively. The DSB adopted the Appellate Body report and the panel report, as modified by the Appellate Body report, on 23 March 2012.²

1.3. In its report, as modified by the Appellate Body report, the original panel found that certain measures of the United States, including measures adopted at a sub-federal level, constituted specific subsidies to the U.S. large civil aircraft (LCA) industry³ and were inconsistent with the Agreement on Subsidies and Countervailing Measures (SCM Agreement).

1.4. First, the panel found that certain tax exemptions and tax exclusions provided to Boeing under the Foreign Sales Corporation (FSC) legislation and the FSC Repeal and Extraterritorial Income Exclusion Act of 2000 (ETI), including the transition and grandfather provisions of the ETI Act and the American Jobs Creation Act of 2004 (AJCA), were prohibited export subsidies under Articles 3.1(a) and 3.2 of the SCM Agreement.⁴ This finding was not appealed.

1.5. Second, the panel and the Appellate Body found that the following measures were inconsistent with Articles 5(c) and 6 of the SCM Agreement:

a. payments provided to Boeing by the National Aeronautics and Space Administration (NASA) pursuant to procurement contracts entered into under eight aeronautics research and development (R&D) programmes and access to facilities, equipment, and employees provided to Boeing pursuant to procurement contracts and Space Act Agreements entered into under these programmes;

b. payments and access to facilities provided to Boeing by the Department of Defense (DOD) pursuant to assistance instruments entered into under 23 Research, Development, Test and Evaluation (RDT&E) programmes;

c. tax exemptions and tax exclusions provided to Boeing pursuant to the FSC/ETI measures;

d. Washington State Business and Occupation (B&O) tax rate reduction for commercial aircraft and component manufacturers; and

e. property and sales tax abatements related to Industrial Revenue Bonds (IRBs) issued by the City of Wichita, Kansas.

1.6. These five groups of measures were found to involve specific subsidies, within the meaning of Articles 1 and 2 of the SCM Agreement, and to cause serious prejudice to the interests of the European Communities, within the meaning of Articles 5(c) and 6.3 of the SCM Agreement, as follows:

a. The NASA and DOD aeronautics R&D measures caused serious prejudice, within the meaning of Articles 5(c), 6.3(b), and (c), with respect to the 200-300 seat LCA product

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

² Dispute Settlement Body, Minutes of the Meeting held on 23 March 2012, WT/DSB/M/313 (circulated 29 May 2012), para. 79. ↩

³ The European Communities in the original proceeding used the term "U.S. large civil aircraft industry" to refer to the Boeing Company and the McDonnell Douglas Corporation prior to its merger with Boeing. (Panel Report, US – Large Civil Aircraft (2^nd complaint), paras. 2.1 and 7.1). ↩

⁴ Panel Report, US – Large Civil Aircraft (2^nd complaint), paras. 7.1434-7.1464 and 8.2. ↩

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market in the form of a threat of displacement and impedance of European Communities' exports in certain third-country markets and significant lost sales.

b. The tax exemptions and tax exclusions provided to Boeing pursuant to the FSC/ETI measures, together with the Washington State B&O tax rate reduction, caused serious prejudice, within the meaning of Articles 5(c) and 6.3(c), with respect to the 100-200 seat LCA product market in the form of significant lost sales.

c. Property and sales tax abatements related to IRBs issued by the City of Wichita, Kansas complemented and supplemented the price effects of the FSC/ETI subsidies and the Washington State B&O tax rate reduction, thereby causing serious prejudice to the interests of the European Communities, within the meaning of Articles 5(c) and 6.3(c), in the 100-200 seat LCA product market in the form of significant lost sales.

1.7. In relation to the finding that the FSC/ETI measures were prohibited subsidies, within the meaning of Articles 3.1 (a) and 3.2 of the SCM Agreement, the original panel refrained from making a new recommendation under Article 4.7. The panel noted "the conclusion of the Panel in US – FSC (Article 21.5 – EC II), which was upheld by the Appellate Body, that the recommendation made by the panel in the dispute in US – FSC continued to be 'operative'".⁵

1.8. In respect of the findings of serious prejudice caused by certain subsidies, the Appellate Body recommended that:

{T}he DSB request the United States to bring its measures, found in this report, and in the panel report as modified by this Report, to be inconsistent with the SCM Agreement, into conformity with its obligations under that Agreement. More specifically, having regard to the recommendation made by the Panel in paragraph 8.9 of its Report and the provisions of Article 7.8 of the SCM Agreement, the Appellate Body recommends that the United States take appropriate steps to remove the adverse effects found to have been caused by its use of subsidies, or to withdraw those subsidies.⁶

1.9. On 23 September 2012, the United States provided a notification to the DSB identifying "a number of actions to withdraw the subsidies found to have caused adverse effects or to remove their adverse effects", in light of which the United States considered that it "ha{d} fully complied with the recommendations and rulings of the Dispute Settlement Body in this dispute".⁷

1.10. On 25 September 2012, the European Union requested consultations with the United States, explaining that it was of the view that "{t}he actions and events listed by the United States in its 23 September 2012 notification do not withdraw the subsidies or remove their adverse effects, as required by Articles 4.7 and 7.8 of the SCM Agreement" and that "the United States has failed to achieve compliance with the recommendations and rulings of the DSB".⁸

1.11. The European Union and the United States held consultations on 10 October 2012, but the consultations failed to resolve the dispute.

1.2 Panel establishment and composition

1.12. On 11 October 2012, the European Union requested the establishment of a panel "in accordance with Articles 4.4 and 7.4 of the SCM Agreement and Article 21.5 of the DSU", with

⁵ Panel Report, US – Large Civil Aircraft (2^nd complaint), para. 8.7. ↩

⁶ Appellate Body Report, US – Large Civil Aircraft (2^nd complaint), para. 1352. (emphasis original) ↩

⁷ US – Large Civil Aircraft (2^nd complaint), Communication from the United States, WT/DS353/15 (dated 23 September 2012, circulated 26 September 2012) (United States' Compliance Communication), para. 2. ↩

⁸ US – Large Civil Aircraft (2^nd complaint), European Union's request for consultations, recourse to Article 21.5 of the DSU, WT/DS353/16 (dated 25 September 2012, circulated 2 October 2012) (European Union's request for consultations), p. 2. ↩

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standard terms of reference.⁹ At its meeting on 23 October 2012, the DSB referred this dispute to the original panel, if possible, in accordance with Article 21.5 of the DSU.¹⁰

1.13. 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 European Union in document WT/DS353/18 and to make such findings as will assist the DSB in making the recommendations or in giving the rulings provided for in those agreements.

1.14. In accordance with Article 21.5 of the DSU, the Panel was composed on 30 October 2012 as follows¹¹:

Chairperson: Mr Crawford Falconer
Members: Mr Francisco Orrego Vicuña
Mr Virachai Plasai

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

1.3 Panel proceedings

1.3.1 General

1.16. The Panel held an organizational meeting with the parties on 2 November 2012.

1.17. After consultation with the parties, the Panel adopted its Working Procedures¹² on 18 December 2012 and timetable on 14 January 2013. The Panel revised its timetable on 12 April 2013 and 4 July 2013. The Panel made additional modifications to its timetable over the course of the proceeding.

1.18. At the request of the parties and after consulting them, the Panel adopted Additional Procedures to Protect Business Confidential Information and Highly Sensitive Business Information (BCI/HSBI Procedures) on 18 December 2012.¹³

1.19. The European Union and the United States filed their first written submissions on 28 March 2013 and 27 June 2013, respectively and their second written submissions on 25 July 2013 and 22 August 2013, respectively. Brazil, Canada, Japan, and Korea as third parties filed written submissions on 23 July 2013.¹⁴

1.20. On 25 September 2013, the Panel sent the parties a list of issues which the parties were requested to address in their oral statements at the meeting with the parties. The Panel held one substantive meeting with the parties on 29-31 October 2013. A session with the third parties took place on 30 October 2013. At the request of the parties, the Panel's meeting with the parties was

⁹ US – Large Civil Aircraft (2^nd complaint), European Union's request for the establishment of a panel, recourse to Article 21.5 of the DSU, WT/DS353/18 (dated 11 October 2012, circulated 12 October 2012) (European Union's request for the establishment of a panel), para. 34. ↩

¹⁰ Dispute Settlement Body, Minutes of the Meeting held on 23 October 2012, WT/DSB/M/323 (circulated 13 December 2012), para. 81. At this meeting, the United States stated its view that the panel was being established only under Article 21.5 of the DSU. (Dispute Settlement Body, Minutes of Meeting held on 23 October 2012, WT/DSB/M/323 (circulated 13 December 2012), paras. 78 and 79). ↩

¹¹ US – Large Civil Aircraft (2^nd complaint), Recourse to Article 21.5 of the DSU by the European Union, Constitution of the Panel, Note by the Secretariat, WT/DS353/21 (dated 23 October 2012, circulated 5 November 2012), para. 3. ↩

¹² See the Panel's Working Procedures in Annex A-1. ↩

¹³ The BCI/HSBI Procedures were subsequently revised several times. The final version is attached in Annex A-2. ↩

¹⁴ Australia, China, and Russia did not make written submissions or oral statements to the Panel. ↩

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opened to the public by means of a delayed video showing.¹⁵ A portion of the Panel's meeting with the third parties was also opened to the public by means of a delayed video showing.¹⁶

1.21. In addition to the questions that the Panel had posed in December 2012 at the request of the parties that the Panel seek information under Article 13 of the DSU¹⁷, the Panel posed questions to the parties and third parties on 7 November 2013 and additional questions to the parties on 4 November 2014 and 17 September 2015.

1.22. On 11 August 2016, the Panel issued the descriptive part of its Report to the parties. The Panel issued its Interim Report to the parties on 16 September 2016. The Panel issued its Final Report to the parties on 20 December 2016.

1.3.2 The Panel's ruling and decisions regarding Annex V of the SCM Agreement and requests of the parties that the Panel seek information under Article 13 of the DSU

1.23. On 31 October 2012, eight days after the DSB established the Panel, the European Union filed a preliminary ruling request¹⁸ asking the Panel to rule that the conditions for the automatic initiation of an information-gathering procedure under Annex V of the SCM Agreement had been met in this case and that, consequently, automatic initiation of an Annex V procedure had occurred, was deemed to have occurred or should have occurred. The European Union also requested the Panel to exercise its right under Article 13 of the DSU to seek certain information by posing to the United States questions that the European Union had prepared for submission under Annex V of the SCM Agreement that it considered necessary for the Panel to carry out its mandate.

1.24. In a submission filed on 8 November 2012¹⁹, the United States disputed the European Union's interpretation of the provisions of the SCM Agreement relating to the initiation of procedures under Annex V and requested the Panel to reject the European Union's request regarding the initiation of procedures under Annex V. While the United States agreed with the European Union that there were unique reasons that would justify the Panel seeking information from the parties at an early point in the proceeding, the United States expressed its disagreement with the European Union regarding the timing, manner and extent to which the Panel should exercise its authority to seek information pursuant to Article 13 of the DSU.

1.25. On 15 November 2012, the Panel advised the parties that it would exercise its authority under Article 13 of the DSU to seek information from the United States, and that it would communicate the rationale for that decision and the modalities that the Panel intended to apply, in the near future.²⁰ The Panel also invited the United States to submit any specific comments on the questions proposed by the European Union. On 19 November 2012, in partial response to the Panel's invitation, the United States requested the Panel to seek information from the European Union pursuant to Article 13 of the DSU in order to assist the Panel with its examination of the matter before it.²¹

1.26. Regarding the European Union's request of 31 October 2012, and after hearing the views of both parties²², the Panel issued a communication to the parties and third parties on 26 November 2012, finding that Annex V procedures were available in compliance proceedings, the conditions for initiating an Annex V procedure had been met, and automatic initiation of an

¹⁵ See Additional Working Procedures for the partial opening to the public of the meeting of the Panel in Annex A-3. ↩

¹⁶ Brazil, Canada, and Japan consented to having their statements videotaped for delayed showing. Korea did not consent. ↩

¹⁷ See para. 1.27 below. ↩

¹⁸ European Union's request for a preliminary ruling and request for the Panel to exercise its authority pursuant to Article 13 of the DSU, dated 31 October 2012. ↩

¹⁹ United States' response to European Union's request for a preliminary ruling and request for the Panel to request information pursuant to Article 13 of the DSU, dated 8 November 2012. ↩

²⁰ The Panel did so in its communications of 5 and 18 December 2012. (See Annexes E-2 and E-3). ↩

²¹ United States' request for the Panel to exercise its authority pursuant to Article 13 of the DSU, dated 19 November 2012. ↩

²² The United States submitted its comments on 8 November 2012, and the European Union submitted further views on 5 and 9 November 2012. The European Union opposed the United States' request that the Panel seek information from the European Union pursuant to Article 13 of the DSU in a letter dated 23 November 2012. ↩

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Annex V procedure had occurred.²³ The Panel also noted that, while the European Union considered it was entitled to proceed with an Annex V procedure, the European Union had requested the Panel to seek information through an early exercise of its authority under Article 13 of the DSU. The Panel recalled that it had requested the United States to comment on the questions suggested by the European Union and indicated that it would make an information request to the United States under Article 13 of the DSU "as soon as possible taking into account the requests and comments made and responses received".²⁴ Regarding the United States' request that the Panel seek information from the European Union pursuant to Article 13 of the DSU, the Panel further indicated that it would make an information request to the European Union under Article 13 of the DSU, "as soon as possible taking into account the request and any comments received".²⁵

1.27. After receiving the comments of the parties on the questions that each party proposed the Panel ask the other party in exercise of the Panel's authority to seek information under Article 13 of the DSU, the Panel posed questions to the United States on 5 December and 18 December 2012, and to the European Union on 18 December 2012.²⁶ Following requests for extensions of time to respond to certain of the Panel's requests for information, the United States provided its responses to the questions posed by the Panel pursuant to Article 13 of the DSU on 25 January 2013, 1, 14, and 28 February, 22 March, and 2 May 2013.²⁷ The European Union provided its responses to the questions posed by the Panel pursuant to Article 13 of the DSU on 28 February 2013.

1.28. By letters dated 19, 20, and 21 December 2012, Brazil, Australia, and Canada respectively, as third parties to this dispute, noted that they were initially not made aware of a request by the European Union for a preliminary ruling regarding the interpretation of provisions relating to the initiation of procedures under Annex V of the SCM Agreement, and of requests by both the European Union and the United States for the Panel to exercise its right to seek information under Article 13 of the DSU. On 25 January 2013, the Panel issued a communication to the parties and third parties requesting the parties to serve upon the third parties their relevant submissions concerning the European Union's request for a preliminary ruling in regard to Annex V, to the extent that they had not already done so, on the grounds that these submissions could properly be considered to be "submissions", within the meaning of Article 10.3 of the DSU.²⁸ The Panel further considered that, in the circumstances of the present requests for information pursuant to Article 13 of the DSU, the communications concerning these requests and the parties' responses to the requests, were not "submissions" which the third parties were entitled to receive pursuant to Article 10.3 of the DSU. However, given the close link between the particular Article 13 requests and issues concerning the interpretation and application of Annex V of the SCM Agreement, the Panel considered it appropriate in this situation that the communications concerning the Article 13 requests (but not the parties' responses to those requests) be provided to the third parties. Accordingly, the Panel served upon the third parties the information requests that it had made to the United States and the European Union pursuant to Article 13 of the DSU.

1.3.3 Requests for preliminary rulings on the Panel's terms of reference and other procedural rulings

1.3.3.1 The United States' request for preliminary rulings

1.29. On 13 November 2012, the United States submitted a request for preliminary rulings, objecting to the inclusion of certain claims and challenged measures as outside the Panel's terms

²³ Preliminary ruling and decision regarding information-gathering under Article 13 of the DSU, dated 26 November 2012, para. 33, reproduced in Annex E-1. ↩

²⁴ Preliminary ruling and decision regarding information-gathering under Article 13 of the DSU, dated 26 November 2012, para. 52, reproduced in Annex E-1. ↩

²⁵ Preliminary ruling and decision regarding information-gathering under Article 13 of the DSU, dated 26 November 2012, para. 52, reproduced in Annex E-1. ↩

²⁶ Communications of the Panel dated 5 December 2012 and 18 December 2012, reproduced in Annexes E-2 and E-3, respectively. In addition, the Panel in its communication of 18 December 2012 invited the parties to make further submissions regarding the measures that properly fall within the scope of this proceeding in their first written submissions. ↩

²⁷ Such requests for extensions of time were made by letters from the United States dated 23 January 2013 and 14 February 2013, and by email dated 12 February 2013. ↩

²⁸ Communication regarding third-party rights, dated 25 January 2013, reproduced in Annex E-4. ↩

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of reference. The parties exchanged views on the merits of this request in a number of submissions, including their first and second written submissions.²⁹ The Panel addresses the issues raised by this request of the United States in Section 7 of this Report.

1.3.3.2 The European Union's request for leave to file an additional submission pertaining to Washington State Legislature Substitute Bill 5952

1.30. On 4 March 2014, the European Union requested leave from the Panel to file an additional submission detailing "the legal ramifications of the 2013 amendments to the Washington State measure".³⁰ The European Union asserted that these 2013 amendments (Washington State Senate Bill 5952 (SSB 5952)) constitute "additional measures taken to comply by the United States"³¹ that are properly within the scope of this proceeding. In a letter dated 21 March 2014, the United States requested the Panel to deny the European Union's request to file an additional submission, as inconsistent with the requirements of Article 6.2 of the DSU and the Panel's Working Procedures. The European Union responded on 31 March 2014, requesting that the Panel proceed to consider the substance of its arguments. On 9 April 2014, the United States reiterated its request that the Panel disregard the European Union's request.³²

1.31. In a communication to the parties dated 27 May 2014, the Panel advised that it had decided to decline the European Union's request and indicated that it would issue the reasons underlying its decision in due course. On 18 September 2014, the Panel issued to the parties its Reasons for Declining the European Union's Request for Leave to File an Additional Submission Regarding SSB 5952. These reasons as issued on 18 September 2014 are reproduced in Section 7.7 of this Report.

1.3.3.3 Other procedural rulings

1.32. On 23 October 2013, the Panel issued an additional ruling regarding renewed requests from the European Union for additional information in connection with certain NASA and DOD contracts, NASA, DOD, and FAA technical reports, NASA new technology reports, and documents related to certain sales campaigns.³³

2 PARTIES' REQUESTS FOR FINDINGS AND RECOMMENDATIONS

2.1. The European Union requests that the Panel find that the United States has failed to implement the DSB recommendations in US – Large Civil Aircraft (2^nd complaint) to withdraw the subsidies or take appropriate steps to remove the adverse effects, pursuant to Article 7.8 of the SCM Agreement.

2.2. In particular, the European Union requests that the Panel find that:

a. subsequent to the end of the implementation period, the United States grants or maintains the subsidies to the U.S. LCA industry through the following programmes and measures:

i. NASA aeronautics R&D measures;

²⁹ United States' request for preliminary rulings, dated 13 November 2012; European Union's letter to the Panel, dated 13 November 2012; European Union's response to the United States' request for preliminary rulings, dated 23 November 2012; and United States' reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012. In response to a communication of the Panel dated 6 May 2013 addressing an issue outlined in paragraph 55 of the European Union's first written submission, the European Union filed a "supplemental submission" on the United States' request for preliminary rulings on 13 May 2013 prior to the United States filing its first written submission. ↩

³⁰ European Union's letter to the Panel, dated 4 March 2014, para. 2. ↩

³¹ European Union's letter to the Panel, dated 4 March 2014, para. 1. ↩

³² United States' letter to the Panel, dated 9 April 2014. ↩

³³ Decision regarding requests for certain information, dated 23 October 2013, reproduced in Annex F-2. As noted in para. 2.5 of that ruling, certain of the categories of information identified by the European Union in its requests for additional information were within the scope of the Panel's Article 13 request to the United States in December 2012. ↩

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ii. the Federal Aviation Administration's Continuous Lower Energy Emissions, and Noise Program (FAA CLEEN);

iii. the DOD RDT&E Program;

iv. income tax exemptions/exclusions pursuant to FSC/ETI legislation and successor acts;

v. property and sales tax concessions for LCA component production facilities associated with IRBs issued by the City of Wichita;

vi. certain tax and other measures applied by the State of Washington and municipalities therein; and

vii. measures applied by the State of South Carolina and municipalities therein in the context of "Project Gemini" and "Project Emerald" as well as "Phase II";

b. each of these subsidies is also inconsistent with Articles 3.1(a), 3.1(b), and 3.2 of the SCM Agreement and Article III of the GATT 1994³⁴; and

c. the subsidies collectively cause present adverse effects to LCA-related interests of the European Union, in violation of Article 5 of the SCM Agreement. In particular, the subsidies are a genuine and substantial cause of:

i. displacement and impedance, or threat thereof, in the LCA product markets of the United States, within the meaning of Article 6.3(a) and footnote 13 of the SCM Agreement;

ii. displacement and impedance, or threat thereof, in the LCA product markets of several third countries, within the meaning of Article 6.3(b) and footnote 13 of the SCM Agreement;

iii. significant price suppression, or threat thereof, in the LCA product markets, within the meaning of Article 6.3(c) and footnote 13 of the SCM Agreement; and

iv. significant lost sales, or threat thereof, in the LCA product markets, within the meaning of Article 6.3(c) and footnote 13 of the SCM Agreement.

2.3. The European Union requests that the Panel make "appropriate consequential recommendations".³⁵

2.4. The United States requests the Panel to reject all claims of the European Union. The United States also requests that the Panel rule that certain claims are outside the Panel's terms of reference or otherwise outside the scope of this proceeding.³⁶

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-1 to B-4 and C-1 to C-3).

³⁴ The European Union in its subsequent submissions confines its claim under Article III of the GATT 1994 to paragraph 4 of that provision, see fn 606. ↩

³⁵ European Union's first written submission, paras. 1933 and 1934. ↩

³⁶ See Section 1.3.3 above. The Panel addresses the issues raised by this request of the United States in Section 7 of this Report. ↩

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4 ARGUMENTS OF THE THIRD PARTIES

4.1. The arguments of Brazil, Canada, Japan, and Korea are reflected in their executive summaries, provided in accordance with paragraph 12 of the Working Procedures adopted by the Panel (see Annexes D-1 to D-8).

5 INTERIM REVIEW

5.1 Introduction

5.1. The Panel issued its Interim Report to the parties on 16 September 2016. Both parties submitted written requests for review of precise aspects of the Interim Report on 14 October 2016, and written comments on each other's written requests on 28 October 2016. The parties also provided written comments on the treatment of certain information as BCI or HSBI in their respective requests. Neither party requested the Panel to hold an interim review meeting.

5.2. The Panel explains below its responses to issues of a substantive nature raised by the parties in their requests for review of precise aspects of the Interim Report. The Panel has also corrected a number of typographical and other non-substantive errors throughout the Interim Report, including those identified by the parties, which are not specifically referred to below. More specifically, the Panel has corrected stylistic and grammatical errors and errors in references to submissions and exhibits. The Panel has also corrected inconsistencies in terminology and has made changes to improve the clarity and accuracy of the Report. In addition, the Panel has added references to dispute settlement reports that were circulated subsequent to the date of issuance of the Interim Report to the parties.

5.3. Due to changes as a result of our review, the numbering of the footnotes and certain of the paragraphs in the Final Report has changed from the Interim Report. The text below refers to the footnote and paragraph numbers in the Interim Report, with the corresponding footnote numbers, and where applicable, paragraph numbers, in the Final Report provided in parentheses for ease of reference.

5.2 Specific requests for review submitted by the parties

5.2.1 Explicit attributions of arguments to the parties

5.4. The Panel has, in various places throughout the Interim Report, omitted explicit attribution of an argument to the United States or the European Union, as the case may be, where it considered the context made the attribution clear, albeit implicitly.

5.5. The European Union has requested a number of modifications to descriptions of the parties' arguments to explicitly attribute the argument to a party and thereby remove the possibility that the particular argument could be misunderstood as a finding of the Panel. The United States does not object to the omission of attributions to the parties where the argument in question occurs in a section labelled "main arguments of the parties" or "main arguments of the parties and third parties", as the context makes clear that the text summarizes arguments by one of the parties and the omission of attributions improves the readability of the Interim Report.³⁷ With respect to the requested specific attribution to the United States of an argument described in the sixth sentence of paragraph 8.1002 of the Interim Report (now paragraph 8.1006), which appears in an "Evaluation" section, the United States considers that the context of the sentence and the existence of a footnote citing a U.S. submission as the source of the statements in the sentence would lead an alert reader to understand that the statement was not a finding of the Panel. However, the United States does not oppose the insertion of a textual attribution of that sentence to the United States, for the avoidance of doubt.

³⁷ Indeed, the United States sees no grounds for the European Union's concerns, both in light of the drafting of the relevant paragraphs and the headings of the sections. Additionally, it considers that adding the attributions requested by the European Union could suggest an a contrario reading that unattributed sentences in the summaries of arguments were in fact findings of the Panel. The United States requests the Panel to take these concerns into account in evaluating the European Union's comments. ↩

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5.6. The Panel has decided to grant the European Union's requests to explicitly attribute arguments to the parties, even where those arguments appear in a section labelled as "main arguments of the parties" or "main arguments of the parties and third parties". While specific attributions make the text longer, the Panel has concluded that it is important to ensure that the reader clearly understands when an argument or assertion is that of a party, and when it is a legal or factual finding of the Panel. The Panel adds that in acceding to the European Union's requests for specific attributions of arguments to parties, even within sections clearly labelled as "main arguments of the parties" or "main arguments of the parties and third parties", it does not thereby suggest that arguments within those sections that are not specifically attributed to a party are findings of the Panel.

5.2.2 Introduction to Panel findings

Paragraph 6.21

5.7. The European Union requests that the Panel replace the word "subsidies" with "the subsidy" in the second sentence of paragraph 6.21, and that the words "from any subsidies that are not withdrawn" be added to the end of the same sentence, for the sake of clarity. The United States did not respond specifically to this aspect of the European Union's comment.

5.8. The Panel has modified the second sentence of paragraph 6.21 as requested by the European Union.

5.9. The European Union further requests that its position as to ways in which an implementing Member may achieve withdrawal of a subsidy be more comprehensively reflected in paragraph 6.21, specifically by adding the following sentence between the second and third sentences of that paragraph: "The European Union argues that the withdrawal of a subsidy can be achieved through the repayment of the financial contribution or the removal of the benefit." In support of this request, the European Union asserts that its position in the present dispute, consistent with its position in EC and certain member States – Large Civil Aircraft, has been that the withdrawal of a subsidy can be achieved through the removal of one or two constituent elements of the subsidy; i.e. the financial contribution or the benefit. In this regard, the European Union explains that repayment of the financial contribution, unlike refraining from providing an additional financial contribution, would achieve withdrawal of the subsidy. The European Union asserts that its position is that there is no "obligation" on an implementing Member to seek or secure repayment of a financial contribution; it is but one option available to a Member choosing to achieve compliance by withdrawing the subsidy, rather than by removing the adverse effects. The European Union asserts that "consistent with this position", it has argued in its submissions that, for each instance of a subsidy that had not been withdrawn, there continued to be both a (non-repaid) financial contribution and a benefit.³⁸

5.10. The United States requests the Panel to reject this aspect of the European Union's comment regarding paragraph 6.21 as the Panel's summary as currently drafted reflects the actual arguments and positions taken by the European Union and the interim review stage is not the appropriate stage for the European Union to recast its arguments. The United States argues that the European Union fails to provide a citation to support its assertion that its position in the present dispute has been that the withdrawal of a subsidy can be achieved through the removal of the financial contribution or benefit. The United States notes that the European Union points instead to paragraphs in its first written submission arguing for the existence of a financial contribution and benefit for a variety of measures. The United States considers that the existence of such arguments in no way communicates the overarching position that the European Union now seeks to assert. Moreover, the United States asserts that it is not aware of anywhere else in the European Union's submissions where the European Union summarizes its argument in the way in which it now requests the argument to be reflected.

5.11. While the Panel has carefully reviewed the relevant passages of the European Union's first written submission cited by the European Union in support of its request, it appears that they do not contain the specific statement that the European Union proposes to be added to paragraph 6.21 of the Interim Report. Significantly, the European Union itself does not provide a

³⁸ The European Union refers to the following examples from its first written submission: paras. 169-198, 363-389, 401-404, 417-422, and 434-441. ↩

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specific citation to particular paragraphs of its submissions that explicitly set out the idea that "the withdrawal of a subsidy can be achieved through the repayment of the financial contribution or the removal of the benefit". The Panel is therefore not persuaded that the addition proposed by the European Union is warranted to provide a more "comprehensive" description of the position of the European Union in this proceeding with regard to the interpretation of the term "withdraw the subsidy". The Panel thus declines the European Union's request.

Paragraph 6.37

5.12. The European Union requests the Panel to remove footnote 80, as the associated sentence in paragraph 6.37 (i.e. the fourth sentence of paragraph 6.37), in stating that the European Union does not argue that the United States was obligated under Article 7.8 of the SCM Agreement to seek repayment from Boeing of subsidies granted in the past, already fully and accurately reflects the views of the European Union on whether the payment of royalties should occur on a retroactive basis. The United States responds that it has no objection to the European Union's request.

5.13. The Panel has removed the footnote in question as requested by the European Union.

5.2.3 Whether certain measures and claims are outside the Panel's terms of reference or are otherwise outside the scope of this proceeding

Paragraph 7.44

5.14. The European Union requests the Panel to add a footnote defining the terms "tied subsidy" and "untied subsidy" in paragraph 7.44. The European Union suggests that the Panel either reproduce the explanation of "tied subsidy" in paragraph 9.71 as a footnote to paragraph 7.44 or add a cross-reference, in paragraph 7.44, to paragraph 9.71. The United States has no objection to either of the alternative proposals advanced by the European Union.

5.15. The Panel has added a footnote to paragraph 7.44 (footnote 146) to explain the concepts "untied" subsidy and "tied" subsidy as used in this proceeding.

Paragraph 7.127

5.16. The European Union requests that the Panel replace the words "{a}fter some reflection" at the beginning of the second sentence of paragraph 7.127 with the words "{a}fter considering the circumstances described above" to clarify the basis for the Panel's conclusion.

5.17. The United States objects to the European Union's proposal, because it sees no reason to limit the basis for the Panel's conclusion to "circumstances" described in the preceding paragraphs when, according to the United States, much of that discussion consists of a legal analysis of the Appellate Body's findings and citations to past reports.

5.18. Given the circumstances described in paragraph 7.128 of the Interim Report, the Panel considers it most appropriate to retain the current language of the second sentence of paragraph 7.127. The Panel thus declines the European Union's request.

Paragraph 7.198

5.19. The United States suggests that the Panel could consider referring in paragraph 7.198 to the nature of R&D under systems acquisition/military aircraft program elements in Sections 8.2.3.2.4 and 8.2.3.3.3 of the Interim Report. The European Union has no comment on the United States' request.

5.20. The Panel has added additional references in a footnote to the first sentence of paragraph 7.198 which it considers reflect the United States' suggestion.

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Paragraph 7.244

5.21. The European Union requests that the Panel delete the first sentence of paragraph 7.244 on the basis that this sentence does not appear to add anything new to the paragraph and the Panel's analysis would be clearer without it.

5.22. The United States objects to the European Union's suggestion. According to the United States, the first sentence of paragraph 7.244 indicates that the Panel does not consider it necessary to conduct the analysis described in paragraph 7.243 (namely, to identify and properly delineate the DOD aeronautics R&D measures that are within the Panel's terms of reference according to the Panel's evaluation of the potential for the R&D to lead to civil applications). The United States considers that the statement in the first sentence of paragraph 7.244 makes explicit the Panel's conclusion on the terms of reference issue that it raised, and as such, adds clarity to the discussion in paragraph 7.244.

5.23. The Panel has removed the first sentence of paragraph 7.244, as requested by the European Union, in order to improve the clarity of this paragraph.

Paragraphs 7.251, 7.283, 7.284 (and 8.505)

5.24. The United States requests the Panel to delete references in paragraphs 7.251, 7.283, 7.284, 7.289 (and 8.505) suggesting that Boeing has responsibility for managing the entire FAA CLEEN Program, rather than simply its activities under the Boeing CLEEN Agreement. The United States considers that the suggestion that Boeing has responsibility for managing the FAA CLEEN Program is incorrect. The United States asserts that Boeing does not manage the FAA CLEEN Program. Rather, as explained by the United States in its submissions, the FAA CLEEN Program is managed by the FAA on the basis of Other Transaction Agreements entered into with industry partners. The United States explains that the statement in the Boeing CLEEN Agreement referring to integrated programme management pertains to Boeing's management of its own performance under the Boeing CLEEN Agreement.

5.25. The European Union objects to the United States' request and asks that the Panel leave undisturbed the existing language related to Boeing's integrated management of the FAA CLEEN Program in paragraphs 7.251, 7.283, 7.284 (and 8.505). The European Union argues that the text of the Boeing CLEEN Agreement plainly provides that the Boeing team will manage the overall FAA CLEEN Program to ensure completion of all required elements in the program statement of work, and repeatedly references "Boeing's Integrated Program Management" as a work element in addition to, and distinct from, identified R&D activities. The European Union notes that these are the portions of the Boeing CLEEN Agreement upon which the Panel relies when it states, in paragraph 7.251, that Boeing is responsible for integrated management of the FAA CLEEN Program as well as two categories of R&D activities. The European Union considers that the Panel's characterization of Boeing's integrated management of the FAA CLEEN Program, including in the paragraphs identified by the United States in its request, is no different from the characterization in the Boeing CLEEN Agreement, and is simply a restatement of the language used in the Boeing CLEEN Agreement itself. Finally, the European Union argues that the United States' argument that the statement referencing integrated program management in the Boeing CLEEN Agreement pertains to Boeing's management of its own performance under the Boeing CLEEN Agreement finds no support in the text of the Agreement, which unambiguously refers to Boeing's management of the "overall CLEEN program", nor does the United States cite to any portion of the Boeing CLEEN Agreement or to any other evidence before the Panel, to support its conclusion.

5.26. In addressing the United States' request, the Panel has again reviewed the evidence before it regarding the FAA CLEEN Program and the Boeing CLEEN Agreement. Section C.3 of the Boeing CLEEN Agreement sets forth the work to be performed by Boeing. The "Overview" subsection to section C.3 explains that Boeing will increase the technology readiness level of three technologies as part of the FAA CLEEN Program. These are: (a) CMC/Oxide-Oxide Nozzle Technology; (b) Adaptive Trailing Edges (excluding Flaplets); and (c) Alternative Fuels – Aromatics and Seal Swell. The Overview also refers to "overall Integrated Program Management and Flight demonstration(s)".

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5.27. The next subsection to section C.3 of the Boeing CLEEN Agreement is entitled "Integrated Program Management and Technology Demonstrations". A further subheading to this subsection, entitled "Integrated Program Management", states that the "Boeing team will manage the overall CLEEN program to ensure completion of all required elements in the program SOW". A second subheading to this subsection is entitled "Technology Demonstration Tests". This subheading describes flight test demonstrations that Boeing will conduct "as part of the technology maturation program" in 2012 and 2013, respectively. In each case, "Boeing will conduct integrated program management, design, and safety reviews to ensure the technologies integrate onto the selected demonstration airplane, and to ensure compliance with required procedures and safety of flight."

5.28. There are three further subsections to section C.3 of the Boeing CLEEN Agreement. These deal with: (a) CMC/Oxide-Oxide Acoustic Nozzle Technology; (b) Adaptable Trailing Edge Technology; and (c) Alternative Fuels – Aromatics, Seals Technology. For each of these technology areas, there are separate subheadings that discuss "project management", "technology maturation", "systems engineering and integration", "technology demonstration tests", and "technology assessments". The Boeing CLEEN Agreement plainly states that "Boeing will manage the overall CLEEN program to ensure completion of all required elements in the program SOW".³⁹ This statement is made in a distinct subsection of section C.3 that refers to "integrated program management". Moreover, the concept of integrated program management appears to be distinct from the "program management" envisaged for each of the three technology areas and discussed elsewhere in section C.3.

5.29. The United States considers that the references to integrated program management pertain to Boeing's management of its own performance under the Boeing CLEEN Agreement. We do not discount the possibility that the "Integrated Program Management and Technology Demonstrations" work that is described in section C.3 of the Boeing CLEEN Agreement, understood in its proper context, in fact concerns the management of those aspects of the FAA CLEEN Program for which Boeing is the main contractor, and does not extend to management of the activities of the other FAA CLEEN main contractors under the FAA CLEEN Program (i.e. General Electric, Honeywell, Pratt & Whitney, and Rolls-Royce North America). However, the United States did not attempt such an explanation in its submissions and does not fully explain the basis for this position in its comments on precise aspects of the Interim Report. Indeed, the European Union, in its first written submission, asserted that "Boeing (the only aircraft producer in the CLEEN consortium) is responsible for integrated management of the entire CLEEN Program, allowing Boeing to benefit from FAA funding of other participants, all of whom are Boeing suppliers."⁴⁰ The European Union cited to section C.3 of the Boeing CLEEN Agreement in support of this assertion. The United States did not refute this assertion in its submissions.⁴¹

5.30. We consider that the Panel's interpretation of the Boeing CLEEN Agreement is reasonable on its face, and is not contradicted by other evidence before it, or by the United States in its submissions, despite the fact that the European Union, in its first written submission, made the very assertion to which the United States now objects. In light of these factors, we have decided to leave undisturbed the existing language related to Boeing's integrated management of the FAA CLEEN Program in paragraphs 7.251, 7.283, 7.284, 7.289, (and 8.505).

Paragraph 7.409

5.31. The United States requests the Panel to modify the first sentence of paragraph 7.409 referring to the European Union's argument that the Panel describes in paragraph 7.409 as relating to a "change in WTO law resulting from an intervening Appellate Body report" to clarify that the European Union's argument concerns a purported "clarification of relevant WTO law" and thus a "subsequent interpretation" of the WTO agreements, as opposed to a change in WTO law itself. The United States notes that the DSU provides that the findings and recommendations of panels and the Appellate Body cannot add to or diminish the rights and obligations provided in the covered agreements. Moreover, the United States does not understand the European Union to

³⁹ Emphasis added. ↩

⁴⁰ European Union's first written submission, para. 202. (fn omitted) ↩

⁴¹ While the United States provided information concerning the FAA CLEEN Program and the Boeing CLEEN Agreement in response to the Panel's Article 13 request, it did not specifically address the issue of whether Boeing had any responsibility for the management of the FAA CLEEN Program overall. ↩

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argue, in paragraph 7.390 (d) of the Interim Report, that WTO law has actually changed, but rather that the interpretation of WTO law has changed.

5.32. The European Union objects to the United States' request and requests that the Panel retain the current wording of paragraph 7.409. While the European Union does not disagree with the assertion that a report of the Appellate Body does not add to or diminish the rights and obligations provided in the covered agreements, it does not share the United States' concern that the current language in paragraph 7.409 would imply otherwise. The European Union considers that the Panel uses the phrase "a change in WTO law as a result of an intervening Appellate Body report" as a convenient way of referring to a scenario in which an Appellate Body report identifies, from the terms of a provision in the covered agreements, a meaning that is different from the one that was previously understood. In fact, the European Union regards the Panel's current formulation as the most appropriate one to describe the situation referenced, so as to achieve precision and clarity, and considers that the United States' proposed alternative formulation falls short in this regard. More specifically, the European Union argues that the United States' suggested formulation of "subsequent interpretation" conveys only a temporal relationship between two interpretations, while in the current circumstances, the relevant issue is that the subsequent interpretation is different from the earlier interpretation, not that it is "subsequent".

5.33. The Panel has modified the first sentence of paragraph 7.409 to more closely reflect the terms used by the European Union in making the argument in question in paragraphs 68-74 of its second written submission, which refers to a "clarification of relevant WTO law to be applied by the compliance panel", rather than a "change in WTO law resulting from an intervening Appellate Body report".

5.2.4 Whether the United States has failed to withdraw the subsidy within the meaning of Article 7.8 of the SCM Agreement

Subsection 8.1.2

5.34. The European Union requests the Panel, in its summary of the European Union's arguments, to set forth the European Union's position on patent ownership in situations where inventions are jointly made by NASA or DOD employees on the one hand, and Boeing employees on the other, in the same manner as the Panel summarized the United States' position on this issue in paragraph 8.20. The European Union considers that in its submissions it explains why, even in a situation where inventions arrived at by NASA or DOD employees jointly with a private contractor's employees, the private contractor may ultimately be provided with something more than an undivided share in rights under the patent. The European Union refers in this regard to its comments on the United States' response to Panel question No. 85, at paragraphs 217-221 and the European Union's opening statement, at paragraph 31. The European Union additionally requests that the Panel consider whether the European Union's position on patent ownership in the joint inventorship situation requires any modifications to paragraph 8.34(c) of the Interim Report.

5.35. The United States objects to the European Union's requests. The United States considers that granting the European Union's request to modify the summary of the European Union's arguments would deprive the United States of an opportunity to comment on the accuracy of the summary, or suggest relevant additions to the summary of the U.S. argument. Moreover, the United States considers that at this stage, the European Union (rather than the Panel) bears the responsibility for suggesting how the Panel should modify summaries of the European Union's own arguments. The United States also objects to the European Union's request to consider whether the referenced arguments of the European Union require a modification to the Panel's finding in paragraph 8.34(c) of the Interim Report. The United States notes that paragraph 8.34(c) is part of subsection 8.1.3.1 which covers "The allocation of intellectual property rights and data rights under NASA procurement contracts and under DOD assistance instruments and procurement contracts". The United States argues that the arguments referenced by the European Union, however, deal with the possibility that the United States might licence its joint rights to the contractor subsequent to the contract. Thus, according to the United States, such assertions have nothing to do with the allocation of rights under R&D contracts. Moreover, the United States adds that the European Union has not pointed to any procurement contract or assistance instrument that licences the government ownership of joint inventions to the contractor.

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5.36. The Panel considers that it has, in the summary of the European Union's arguments, set forth the European Union's position on patent ownership in situations where inventions are jointly made by NASA or DOD employees on the one hand, and Boeing employees on the other, in the same manner as the Panel has set forth in paragraph 8.20 the United States' position on this issue in its summary of the United States' arguments. Specifically, in paragraph 8.12 of the Interim Report, the Panel recounts the European Union's argument, from paragraph 309 of its second written submission, that under the NASA procurement contracts and agreements and the DOD assistance instruments, inventions made jointly between NASA and Boeing or DOD and Boeing are owned solely by Boeing as the commissioned party. The European Union requests that the Panel reflect paragraphs from the European Union's submissions explaining why, even where inventions are jointly made by NASA or DOD employees, and by Boeing employees, during the course of work under an R&D contract, the private contractor may ultimately be provided with something more than an undivided share in the rights under the patent.

5.37. The Panel considers that the arguments made by the European Union in the paragraphs of its submissions to which it refers address, not the issue of how patent ownership is allocated in cases of such joint inventorship by NASA/DOD and Boeing employees under R&D contracts as a matter of U.S. law, but a different issue; namely that, notwithstanding the formal ownership rights that the U.S. Government receives in such situations, the situation is similar to cases of sole inventorship by Boeing employees as a practical matter.⁴²

5.38. Paragraph 8.34 of the Interim Report sets forth the Panel's conclusions regarding the allocation of patent rights, by operation of U.S. law, under NASA procurement contracts and cooperative agreements and under DOD assistance instruments and procurement contracts, including in subparagraph (c), in the situation where a NASA or DOD employee and a Boeing employee jointly make an invention in the course of work under a NASA procurement contract or cooperative agreement, or under a DOD assistance instrument or procurement contract, as the case may be. The Panel has reflected the arguments of the parties on this particular issue in paragraphs 8.12 and 8.20 of the Interim Report, and has reached its own conclusion in paragraph 8.34(c), which it sees no need to modify.

5.39. In light of the foregoing, the Panel declines to make the modification requested by the European Union.

Footnote 943 (now footnote 959) to paragraph 8.20

5.40. The European Union requests the Panel to remove the reference to United States Code of Federal Regulations, chapter 37, section 501.6, (Exhibit USA-310) in footnote 943 to paragraph 8.20 (now footnote 959). The European Union notes that the cited U.S. federal regulation relates to inventions made solely by government employees, and not to inventions made jointly by government employees and contractors like Boeing. The European Union additionally requests the Panel to clarify that the proposition that, under U.S. law, the U.S. Government takes title and interest in inventions jointly made by DOD employees and by private contractors reflects an argument of the United States, and is not a finding by the Panel.

⁴² The European Union argues in this regard that, even though NASA/DOD, by operation of U.S. law acquires joint ownership over an invention jointly invented by a NASA/DOD employee jointly with Boeing employees as a result of work under a NASA or DOD contract or agreement, the European Union considers that contractors like Boeing nevertheless expect that NASA and DOD will not attempt to exploit additional rights they obtain from joint ownership, above and beyond those they would receive through the government use licence that they would obtain in the different situation in which Boeing as contractor owns the patent developed through government-funded R&D. (European Union's comments on the United States' response to Panel question No. 85, para. 217). The European Union similarly argues in its oral statement, that joint inventorship by U.S. Government and Boeing employees "effectively" leads to the same situation as inventorship by a Boeing employee alone, as the U.S. Government agrees to waive any additional rights acquired through joint inventorship to Boeing, if it finds that it would expedite the development of the invention. (European Union's opening statement at the meeting with the Panel, para. 31). The European Union refers in this regard to Patent Rights in Inventions Made with Federal Assistance, United States Code, chapter 35, sections 200-212, (Exhibit EU-220), section 202(e). The United States responds in its submissions that the European Union profoundly misstates the U.S. law. (United States' response to Panel question No. 85, para. 139 and fn 205). ↩

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5.41. The United States disputes the European Union's understanding of United States Code of Federal Regulations, chapter 37, section 501.6 as being limited to situations in which the government employee is the sole inventor of an invention. The United States refers to its submissions, wherein it explains that in situations where inventions are jointly made by NASA or DOD employees on the one hand, and by Boeing employees on the other, the respective laws and regulations governing invention by a government employee and by a contractor employee operate in parallel. Thus, according to the United States, the citation to United States Code of Federal Regulations, chapter 37, section 501.6 is correct, as that regulation gives the U.S. Government ownership of a patent issued for an invention made by a government employee as part of the employee's work, even where another person is a co-inventor. The United States suggests, for the sake of completeness and to address the European Union's concern, that the Panel could consider citing Inventions Patentable, United States Code, chapter 35 section 101, (Exhibit USA-466) and the Bayh-Dole Act and various related measures, as support for its findings regarding the situation where inventions are jointly made by NASA or DOD employees on the one hand, and Boeing employees on the other.

5.42. The Panel has revised footnote 943 (now footnote 959) to paragraph 8.20 to clarify that the assertions that, under U.S. law, NASA and DOD obtain ownership over inventions made solely by their employees during work under a procurement contract or assistance instrument, and joint ownership over inventions made jointly with Boeing employees, is part of a U.S. argument.

Footnote 964 (now footnote 980) to paragraph 8.33

5.43. The United States requests the Panel to add a sentence to footnote 964 (now footnote 980) to clarify, as the original panel had at footnote 2913 of its report, that the Bayh-Dole Act supersedes the National Aeronautics and Space Act of 1958, as amended (Space Act) with respect to title to inventions made pursuant to NASA procurement contracts with non-profit organizations and small businesses, which are governed by separate regulations and contract clauses. The European Union does not make any comment regarding the United States' request.

5.44. The Panel has made the modification to footnote 964 (now footnote 980) requested by the United States.

Paragraph 8.120

5.45. The European Union requests the Panel to add a reference to the block quote at the end of the paragraph, which it suggests is NASA, Research Opportunities in Aeronautics – 2008 (ROA-2008), NASA Research Announcement NNH08ZEA001N, (7 March 2008), as amended (Exhibit USA-61), Appendix A, pp. A1 and A2. The United States has no objection to the proposed citation for this block quotation.

5.46. The Panel has amended paragraph 8.120 to add a reference to the block quotation at the end of the paragraph on the basis requested by the European Union.

Paragraph 8.189

5.47. The United States requests the Panel to modify the second-to-last sentence in paragraph 8.189 to remove the suggestion that Boeing receives intellectual property rights and data rights from NASA under Space Act Agreements, in the sense that Space Act Agreements involve the transfer of patent rights from NASA to the other party. The United States notes that the Panel does not undertake an analysis of whether Space Act Agreements involve a transfer of intellectual property rights from NASA to the other party. It therefore suggests that the relevant sentence of paragraph 8.189 be modified to state that Boeing may nevertheless advance its R&D activities and commercial objectives by developing patentable inventions or data subject to copyright, in addition to contributing to NASA's particular mission or programme objectives.

5.48. The European Union objects to the United States' request and requests that the Panel retain the current wording of paragraph 8.189. The European Union argues that the statement in paragraph 8.189 that Boeing receives valuable intellectual property rights or data rights is not a finding that those rights are transferred by NASA, within the meaning of Article 1.1(a)(1) of the SCM Agreement. The European Union notes that in paragraph 8.158 of the Interim Report, the

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Panel found it unnecessary to address the European Union's alternative argument that what it refers to as the "transfers" to Boeing of patent and other intellectual property rights could separately be considered a financial contribution. The European Union also notes that in the DOD-related analysis, at paragraphs 8.388 and 8.389, the Panel considered whether DOD "provides" or "transfers" patents to Boeing pursuant to R&D contracts. The European Union argues that, by contrast, the Panel's reference in paragraph 8.189 to Boeing's receipt of valuable intellectual property rights is not a finding that those rights are transferred to Boeing by NASA, within the meaning of Article 1.1(a)(1). According to the European Union, it is merely an acknowledgement that Boeing receives ownership rights over intellectual property created in the course of working under the Space Act Agreements. The European Union asserts, referring to Articles 27, 29, 32, and 62 of the TRIPS Agreement, that patent rights, in particular, are rights that are granted and revoked under a legal regime put in place by governments.

5.49. The Panel considers that the European Union's interpretation of the second-to-last sentence of paragraph 8.189 is correct. In other words, in stating that Boeing receives valuable intellectual property rights or data rights, the Panel does not mean to suggest that those rights are "transferred" by NASA in the sense of Article 1.1(a)(1). The Panel considers this is clear from the context of paragraphs 8.158, and 8.388-8.389, as well as paragraph 8.192.

5.50. However, the Panel has modified the second-to-last sentence of paragraph 8.189 to remove the possibility that the discussion therein could be misinterpreted as suggesting that Boeing receives intellectual property rights and data rights from NASA under Space Act Agreements, in the sense that Space Act Agreements involve the transfer of patent rights from NASA to the other party.

Footnote 1209 (now footnote 1225) to paragraph 8.189

5.51. The United States requests the Panel to modify the first sentence of footnote 1209 (now footnote 1225) to clarify that NASA has determined that Space Act Agreements are not procurement contracts, agreements, understandings, or other arrangements, within the meaning of section 305(j) of the Space Act. As currently drafted, the United States considers that the first sentence of footnote 1209 (now footnote 1225) could be read to suggest, erroneously, that a Space Act Agreement is not a contract. The European Union does not make any comment on the United States request.

5.52. The Panel has made the modification requested by the United States.

Paragraph 8.228

5.53. The United States requests the Panel to modify the last sentence of paragraph 8.228 to clarify that this statement pertains also to other instruments, such as Executive Order 12591 and the NASA waiver regulations, which are not within the scope of the Bayh-Dole Act, its associated legislative instruments and implementing regulations. The European Union does not make any comment on the United States request.

5.54. The Panel has made the modification requested by the United States.

Paragraph 8.504

5.55. The United States requests the Panel to delete the reference to NASA in the first sentence of paragraph 8.504. The United States disputes that NASA was involved in the inauguration of the FAA CLEEN Program and argues that the statement that the FAA and NASA inaugurated the FAA CLEEN Program, as currently reflected in paragraph 8.504, is unsupported by the evidence. The United States argues that it has explained in its submissions, and the Panel has recognized in paragraph 7.249 of the Interim Report, that the FAA, not NASA, established the FAA CLEEN Program to accelerate aircraft technology development to reduce fuel burn, emissions and noise of civil subsonic jet aircraft, in partnership with industry through Other Transaction Agreements.

5.56. The European Union objects to the United States' request and suggests an alternative formulation of the first sentence of paragraph 8.504, along with a conforming modification to paragraph 7.249. More specifically, the European Union refers to a statement at paragraph 7.280

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of the Interim Report, on which the United States has not commented, that the FAA CLEEN Program was created in conjunction with the ERA Project of NASA's Integrated Systems Research Program. The European Union refers to confirmation for this statement in statements made by NASA and its representatives, noting in particular the statement of NASA's Associated Administrator to the U.S. Congress that, "{t}o facilitate the transition of advanced ideas and technologies into the aircraft fleet, NASA is partnering with the Federal Aviation Administration's (FAA) Continuous Low Emissions, Energy and Noise (CLEEN) Program to guide efforts to mature technologies that have already shown promise to the point where they can be adopted by the current and future aircraft fleet".⁴³ The European Union argues that, based on the foregoing, the Panel should leave unchanged its existing characterization of the inauguration of the FAA CLEEN Program by the FAA and NASA in paragraph 8.504. However, if the Panel disagrees, the European Union suggests that it could alternatively change the statement that the FAA and NASA inaugurated the FAA CLEEN Program to a statement that the FAA, in conjunction with NASA, inaugurated the FAA CLEEN Program, which it considers to be more closely in line with the Panel's discussion at paragraph 7.280. The European Union further suggests, in order to remove the existing inconsistency identified by the United States between paragraph 8.504 and paragraph 7.249, that the Panel modify paragraph 7.249 to refer to NASA's role in launching the FAA CLEEN Program.

5.57. The Panel does not consider that there is sufficient support on the record for the modification suggested by the European Union that the FAA in conjunction with NASA, inaugurated the FAA CLEEN Program. The Panel notes that the second sentence of paragraph 7.280 refers to a relationship between the FAA CLEEN Program and NASA's ERA Project, but not necessarily a direct involvement by NASA in inaugurating the FAA CLEEN Program. The Panel has decided to modify paragraph 8.504 by removing the reference to NASA in the first sentence and by adding a cross-reference to paragraph 7.280 in footnote 1664 (which was footnote 1649 in the Interim Report) to paragraph 8.504.

Paragraph 8.511

5.58. The United States requests the Panel to correct the second sentence of paragraph 8.511 to reflect the United States' argument, which is that the FAA (as opposed to NASA as currently appears in the second sentence of paragraph 8.511) does not transfer any patent to Boeing. The European Union does not make any comment on the United States' request.

5.59. The Panel has made the correction requested by the United States.

Paragraph 8.514

5.60. The United States requests the Panel to delete the second sentence of paragraph 8.514, in which the Panel states that the United States does not dispute that Boeing receives rights to patents and other data rights. The United States argues that this sentence is incorrect, because the United States explicitly disputed the European Union's assertion that the FAA transferred patent and intellectual property rights to Boeing under the FAA CLEEN Program. The European Union does not make any comment on the United States' request.

5.61. The Panel has made the correction requested by the United States.

Paragraph 8.552

5.62. The European Union requests the Panel to correct what it considers appear to be typographical errors in the third and fourth sentences of paragraph 8.552; namely, references to the Boeing CLEEN Agreement as opposed to the FAA CLEEN Program.

5.63. The United States objects to the European Union's request. The United States does not consider that the references to the Boeing CLEEN Agreement in paragraph 8.552 are typographical errors. The United States argues that the Panel frames the question in paragraph 8.546 as being

⁴³ Interim Report, para. 7.280 (quoting the statement of J. Shin, NASA Associate Administrator for Aeronautics Research Mission Directorate, Hearing before the U.S. House of Representatives Committee on Science, Subcommittee on Space and Aeronautics, 1 May 2008, (Exhibit EU-21)). ↩

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"whether the subsidies provided to Boeing under the Boeing CLEEN Agreement are specific within the meaning of Article 2.1(a) of the SCM Agreement". The United States considers that, as a substantive matter, the specificity analysis of the FAA CLEEN Program should be based on the programme itself, rather than the contractual instrument through which the FAA made payments to Boeing. However, the United States does not consider the Panel's framing of the question or its references to the Boeing CLEEN Agreement at paragraph 8.552 to be inconsistent with this view.

5.64. The Panel declines the European Union's request because the references in paragraph 8.552 of the Interim Report are not typographical errors. Rather, they reflect that the subsidies at issue which are the subject of the specificity analysis are subsidies resulting from financial contributions provided under the Boeing CLEEN Agreement. Accordingly, the question before us in this Section of the Report is whether "the subsidies provided to Boeing under the Boeing CLEEN Agreement are specific within the meaning of Article 2.1(a) of the SCM Agreement".⁴⁴ As explained in Section 8.2.8.6.3.3 of this Report, the Panel agrees that the analysis of whether a subsidy provided to an individual recipient is specific must take into account the broader programme in which context the subsidy is provided. However, that does not mean that we should treat that programme itself as the subsidy that is the object of the specificity analysis. In sum, we consider that the references to the Boeing CLEEN Agreement correctly reflect the measure that we find to be a subsidy and in no way prevent us from adequately taking into account, for purposes of the specificity analysis, the context within this measure is applied pursuant to the FAA CLEEN Program.

Paragraphs 8.614, 8.628 (now 8.627), 8.633 (now 8.632), and 8.634 (now 8.633)

5.65. The European Union requests that the Panel change the references to "IRB" in singular form in a number of places in paragraphs 8.614, 8.628 (now 8.627), 8.633 (now 8.632), and 8.634 (now 8.633) to reflect, consistent with the original panel report and Exhibit EU-419, that multiple IRBs were issued in any given year.

5.66. The United States agrees that Wichita typically issued more than one IRB per year. However, it considers the Panel's use of the singular to be typically consistent with this understanding and thus sees no need to pluralize "IRB" in the instances identified by the European Union in paragraphs 8.614, 8.628 (now 8.627), and the second through fourth sentences of paragraph 8.633 (now 8.632). In the first and last sentences of paragraph 8.633 (now 8.632), the United States suggests alternative formulations to address the concern raised by the European Union. The United States has no objection to the European Union's proposal regarding paragraph 8.634 (now 8.633).

5.67. The Panel has modified paragraphs 8.614, 8.628 (now 8.627), 8.633 (now 8.632), and 8.634 (now 8.633) of the Interim Report as requested by the European Union, consistent with the terminology used in the original panel report.

Paragraph 8.787 (now paragraph 8.786)

5.68. The United States requests the Panel to modify its summary of the United States' argument in the last sentence of paragraph 8.787 (now paragraph 8.786), to reflect the terms on which the argument was made in the United States' submission. The European Union does not make any comment on the United States request.

5.69. The Panel has made the modification requested by the United States.

Paragraph 8.947 (now paragraph 8.950)

5.70. The United States requests the Panel to modify the fifth sentence of paragraph 8.947 (now paragraph 8.950), for the sake of clarity and to mirror the text of Article 2.1(c) and the arguments contained in the United States' submissions. The European Union does not make any comment on the United States' request.

5.71. The Panel has made the modification requested by the United States.

⁴⁴ See para. 8.546 below. ↩

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Footnote 2603 to paragraph 8.1050 (now footnote 2614 to paragraph 8.1054)

5.72. The European Union requests the Panel to modify the description of its argument in its first written submission, at footnote 2603 to paragraph 8.1050 (now footnote 2614 to paragraph 8.1054), to clarify that its discussion of the three sales and use tax exemptions in its first written submission relates to the post-2011 period.

5.73. The United States considers such modification unnecessary because it is clear that the statement regarding the "three sales and use tax exemptions" refers to the post-2011 period.

5.74. The Panel has made the modification of footnote 2603 to paragraph 8.1050 (now footnote 2614 to paragraph 8.1054) as requested by the European Union, for the sake of greater clarity.

5.2.5 Whether the United States has failed to take appropriate steps to remove the adverse effects within the meaning of Article 7.8 of the SCM Agreement

Footnote 2646 (now footnote 2657) to paragraph 9.4(a)(iii)

5.75. The European Union requests the Panel to modify footnote 2646 (now footnote 2657) to clarify that the European Union's arguments and evidence regarding impedance of exports of the A350XWB (and threat thereof) in third-country markets were not limited to Boeing delivery market shares significantly exceeding 50%. The European Union asserts that its arguments and evidence also covered impedance (and threat thereof) based on sales lost in the relevant country markets, and more generally based on the causal mechanisms that the European Union asserted and that it argued indicated higher counterfactual sales volumes and market shares for Airbus, absent the U.S. subsidies. The European Union also requests the Panel to add the word "significantly" before "50%" in footnote 2646 (now footnote 2657) to reflect that the European Union's market share-based argument regarding impedance applied where Boeing's market share significantly exceeds 50%.

5.76. The United States does not make any comment with respect to the first aspect of the European Union's request. As to the requested modification concerning the insertion of the word "significantly" before 50%, the United States requests that if the Panel were to make the modification, it do so in a manner that clarifies that the European Union asserts that Boeing is projected to make significantly more than 50% of deliveries of the relevant aircraft, so as to avoid giving the impression that a characterization of the market share evidence by the European Union is a fact.

5.77. The Panel has modified footnote 2646 (now footnote 2657) in the manner requested by the European Union, and consistent with the United States' qualification.

Paragraph 9.11

5.78. The European Union requests the Panel to modify the second sentence of paragraph 9.11 to more accurately reflect the European Union's arguments that the pre-2007 and certain post-2006 aeronautics R&D subsides affect Boeing's technology development, while the remaining post-2006 subsides affect Boeing's LCA pricing behaviour.

5.79. The United States does not consider the European Union's requested revision to be inaccurate. However, it notes that the Panel was laying out the general contours of the European Union's causation allegations, which are based on the alleged effects of subsidies on a horizontal basis rather than on the basis of a particular Boeing aircraft alleged to be subsidized. In this context, 2006/2007 serves as the general line of division between the subsidies alleged to cause technology effects and the subsidies alleged to cause price effects. The United States considers that this latter feature could be lost if the European Union's proposed phrasing of "certain post-2006" subsidies were adopted. The United States therefore proposes a modification to the second sentence of paragraph 9.11 which notes that "generally" the post-2006 subsides affect Boeing's pricing behaviour, with a footnote after the word "generally" to explain that the European Union argues that a relatively small number of post-2006 aeronautics R&D subsidies, like the pre-2007 aeronautics R&D subsidies, operate through a technology causal mechanism

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rather than a price causal mechanism, with a citation to paragraphs 9.198 and 9.199 of the Interim Report.

5.80. The Panel has decided that, given that paragraph 9.11 is part of the "Introduction" and provides only a general explanation of the European Union's arguments, it is preferable at this point in the discussion to refer to the basic distinction that the European Union draws between the effects of the pre-2007 aeronautics R&D subsidies, on the one hand, and those of the post-2006 subsidies (including the majority of the post-2006 aeronautics R&D subsidies), on the other.⁴⁵ However, it also considers that it is appropriate to add a footnote providing greater detail regarding the European Union's arguments concerning the causal pathway through which certain post-2006 aeronautics R&D subsidies are alleged to operate. The Panel has modified paragraph 9.11 accordingly.

Footnote 2679 (now footnote 2691) in Table 5 of paragraph 9.28

5.81. The United States requests the Panel to modify footnote 2679 (now footnote 2691) to indicate that it is the European Union's view that the 767, A340, and Original A350 are no longer in any LCA product market. The European Union does not make any comment on the United States request.

5.82. The Panel has made the modification requested by the United States.

Footnote 2710 (now footnote 2724) to paragraph 9.50

5.83. The United States requests the Panel to modify footnote 2710 (now footnote 2724) to clarify that the various top tier Boeing customers reportedly obtain the benefits of Boeing's "most-favoured customer" clause, to avoid giving the impression that the Panel is publicly revealing HSBI information as to the contractual terms extended to any specific Boeing customers. The European Union does not make any comment on the United States request.

5.84. The Panel has made the modification requested by the United States.

Paragraph 9.51

5.85. The European Union requests the Panel to delete the last two sentences of paragraph 9.51 because it considers that it is not factually correct that the Panel "does not have before it direct evidence of the airframe prices actually agreed between Boeing and the airline and leasing company customers in any sales campaigns". The European Union refers to the fact that the United States had provided pricing for a number of sales that Boeing had secured, which information the European Union had summarized in an exhibit.⁴⁶ The European Union also points to the fact that it had provided pricing summaries, in the form of Airbus' business control sheets, associated with final offers Airbus made to potential customers. The European Union notes that the Panel itself discusses pricing information for certain single-aisle sales campaigns, in non-confidential form in paragraphs 9.385-9.388 and 9.398-9.407 of the Interim Report (now paragraphs 9.382-9.385 and 9.395-9.404), and in confidential form in Appendix 2. Finally, the European Union notes that at paragraph 9.392 (now paragraph 9.389), in Table 13, the Panel includes (in the HSBI version of the Interim Report), average actual 2012 prices of certain Boeing aircraft, derived from information provided by the United States in response to the Panel's request for information pursuant to Article 13 of the DSU.

5.86. The United States does not object to clarification or deletion of the penultimate sentence of paragraph 9.51, which it considers could be confusing in light of the Panel's surrounding discussion. It also does not view the deletion of the last sentence identified by the European Union

⁴⁵ The Panel notes moreover, that although the European Union argues that certain post-2006 aeronautics R&D subsidies operate through a technology causal mechanism rather than a price causal mechanism, the European Union also makes an alternative argument that, should the Panel disagree that certain post-2006 aeronautics R&D subsidies operate at present through a technology causal mechanism, they would operate on a different basis through a price causal pathway. (European Union's response to Panel question No. 43, para. 279 and fn 352). Therefore, the overall description of the European Union's arguments in para. 9.11 is not inaccurate. ↩

⁴⁶ Comparison of Net Aircraft Price and Appraised Value, (Exhibit EU-1183) (HSBI). ↩

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as "particularly problematic" as the Report will read coherently without it. However, it considers that the last sentence of paragraph 9.51 is clearly and unambiguously supported by the evidence cited by the Panel.

5.87. The Panel has modified paragraph 9.51 to delete the second-to-last sentence of that paragraph, and replaced it with the text that previously appeared in footnote 2711.

Paragraph 9.64

5.88. The European Union requests the Panel to revise the first sentence of paragraph 9.64 to accurately reflect the European Union's argument, which is that all of the post-2006 subsidies, except certain aeronautics R&D subsidies, enable Boeing to lower the prices of its LCA in competitive sales campaigns. The United States has no objection to the European Union's request.

5.89. The Panel has modified the first sentence of paragraph 9.64 as requested by the European Union. The Panel has added additional references to the European Union's arguments that certain post-2006 aeronautics R&D subsidies, identified in Exhibit EU-1265, presently operate through a technology causal mechanism, while the remainder of the post-2006 aeronautics R&D subsidies operate at present through a price causal mechanism.⁴⁷ The Panel has also included cross-references to two conditional alternative arguments made by the European Union in footnote 352 to its response to Panel question No. 43, that should the Panel disagree that certain post-2006 aeronautics R&D subsidies operate, at present, through a technology causal mechanism, alternatively, they operate through a price causal mechanism under so-called "Category 2", and should the Panel disagree with that argument, alternatively, they operate "on a different basis", through a "price effects" causal pathway, as described for so-called "Category 3" subsidies.

Footnote 2834 to paragraph 9.128 (now footnote 2849 to paragraph 9.127)

5.90. The European Union requests the Panel to delete footnote 2834 to paragraph 9.128 (now footnote 2849 to paragraph 9.127). In footnote 2834 (now footnote 2849), the Panel contrasts the findings in the original proceeding regarding the nature and effects of the aeronautics R&D subsidies with those of the original panel in EC and certain member States – Large Civil Aircraft regarding the nature and effects of certain subsidies at issue in that dispute on Airbus' ability to launch and bring to market various Airbus LCA. The European Union appears to disagree with the Panel's description of the findings of the original panel in EC and certain member States – Large Civil Aircraft and, in any case, argues that the Panel's description is incomplete and unnecessary to the resolution of issues in this proceeding, and therefore should be deleted.

5.91. The United States objects to the European Union's request. The United States argues that footnote 2834 (now footnote 2849) contrasts the findings in the original dispute with those in EC and certain member States – Large Civil Aircraft in order to illuminate the discussion in paragraph 9.128 (now paragraph 9.127), which includes the statement that the aeronautics R&D subsidies were not found to have brought into existence any technology or product that would not otherwise exist. The United States considers that the comparison with EC and certain member States – Large Civil Aircraft is apt, drawing the distinction between subsidies that accelerate a product's entry into a market and subsidies that enable the very existence of a product. The United States considers that the Panel's characterization of EC and certain member States – Large Civil Aircraft is correct, referring to the statements of the panel in the paragraphs 7.1949 and 7.1993 of the panel report, and of the Appellate Body at paragraphs 1264, 1299 and 1300 of the Appellate Body Report. According to the United States, these statements leave no doubt that footnote 2834 (now footnote 2849) accurately describes the relevant findings in EC and certain member States – Large Civil Aircraft and there is no "nuance" that the Panel fails to capture and no unsettled "matter" from another dispute. Finally, the United States adds that it considers it entirely normal and appropriate for panels to illustrate a point by comparing or contrasting the dispute before it with a prior dispute.

5.92. The Panel does not consider that the discussion of certain of the causation findings made by the panel and accepted by the Appellate Body in EC and certain member States – Large Civil

⁴⁷ See European Union's response to Panel question No. 43, paras. 279 and 280. ↩

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Aircraft, can be misconstrued as attempting to comprehensively capture all aspects of the adverse effects findings in that dispute. However, the Panel has modified footnote 2834 (now footnote 2849) in order to clarify that this was not the Panel's intention. Rather, the Panel's intention is simply to highlight an important distinction between the "technology effects" findings of the panel in the original proceeding in this dispute, and the findings of the panel in EC and certain member States – Large Civil Aircraft regarding the nature, operation and effects of certain of the subsidies at issue in that dispute, because the difference, as explained in paragraph 9.129 (now paragraph 9.128), is highly relevant to the nature of the counterfactual question that the Panel should pose in determining whether the effects of the pre-2007 aeronautics R&D subsidies have been demonstrated to continue in the post-implementation period. The Panel therefore declines the European Union's request.

Paragraph 9.157 (now paragraph 9.156)

5.93. The United States requests the Panel to modify the second sentence of paragraph 9.157 (now paragraph 9.156) to better express the point that the Panel appears to be making, which is that, as the European Union itself observes, the European Union does not argue that, absent the subsidies, the technology in question would never have existed.

5.94. The European Union agrees with the United States that the second sentence of paragraph 9.157 (now paragraph 9.156) is somewhat difficult to follow and ambiguous. However, it also considers that the United States' proposed alternative formulation is equally difficult to follow. The European Union suggests alternative wording to avoid combining the phrase "as the European Union itself observes" with the phrase "the European Union does not argue that".

5.95. The Panel has made the requested modification in the terms suggested by the European Union.

Paragraph 9.181 (now paragraphs 9.180 and 9.181)

5.96. The European Union requests the Panel to clarify whether the discussion that follows the summary of the United States' arguments in the first two sentences of paragraph 9.181 (now paragraph 9.180) is also a summary of U.S. argument, or is intended to frame the Panel's own analysis of the issues raised by the arguments. In the case of the former, the European Union requests the Panel to revise the discussion to clearly indicate that the discussion represents the United States' arguments. In case of the latter, the European Union suggests that the Panel begin a new paragraph that commences from the end of the second sentence of paragraph 9.181 (now paragraph 9.181). The United States has no comment on the European Union's request.

5.97. The Panel confirms that the final three sentences of paragraph 9.181 of the Interim Report are intended to frame the Panel's analysis of the issues raised by the parties' arguments. We agree with the European Union's suggestion that, for the sake of clarity, it is preferable for the Panel to present those sentences in a new paragraph (now paragraph 9.181). We have revised the text accordingly.

Paragraph 9.184

5.98. The European Union requests the Panel to modify the final sentence of paragraph 9.184 to refer only to the 787-10, and not also to the 787-9/10. The European Union explains that Boeing launched the 787-9 as part of the original family of 787 LCA in 2004, with entry into service scheduled later than for the 787-8. The United States agrees with the revision requested by the European Union.

5.99. The Panel has made the modification requested by the European Union.

Footnote 3132 to paragraph 9.302 (now footnote 3152 to paragraph 9.300)

5.100. The European Union requests the Panel to add a summary of the European Union's arguments regarding the legal basis for finding significant price suppression across two product markets. More specifically, the European Union recalls that it argued that the omission from the second part of Article 6.3(c), of the requirement that the "subsidized product" and the "like

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product" be in the same market, means that significant price suppression, price depression, and lost sales may be established where the effects of a subsidy arise in a product market separate from the product market in which the subsidized product competes. The United States has no comment on the European Union's request.

5.101. The Panel has made the addition requested by the European Union.

Footnote 3164 to paragraph 9.324 (now footnote 3185 to paragraph 9.322)

5.102. The European Union requests the Panel to add the relevant finding by the original panel referenced in paragraph 7.1793 of that report as a quotation to this footnote which it considers comprises the sixth through eighth sentences of that paragraph.

5.103. The United States notes that footnote 3164 (now footnote 3185) cites to paragraph 7.1793 of the Panel Report in US – Large Civil Aircraft (2^nd complaint), which it argues includes relevant text that the European Union has not requested be included in the quotation from that paragraph. The United States considers that, rather than adding an incomplete quotation from paragraph 7.1793, as proposed by the European Union, or alternatively quoting virtually the entirety of the cited paragraph, the best course of action is to reject the European Union's request and leave footnote 3164 (now footnote 3185) unchanged.

5.104. The European Union has not adequately explained why it considers it appropriate to quote only the sixth through eighth sentences of paragraph 7.1793 of the panel report in US – Large Civil Aircraft (2^nd complaint) with the Panel's citation to that paragraph in footnote 3164 (now footnote 3185).

5.105. The Panel therefore declines to make the modification requested by the European Union.

Footnote 3277 to paragraph 9.392 (now footnote 3288 to paragraph 9.389)

5.106. The European Union requests the Panel to clarify, in the second sentence of footnote 3277 (now footnote 3288), that the cited number of aircraft alleged to be lost sales between 2007 and 2012 covers not only alleged lost sales of the A350XWB but also of the A320neo and A320ceo. The United States agrees with the requested correction.

5.107. The Panel has made the correction requested by the European Union.

Paragraph 9.461 (now paragraph 9.458)

5.108. The European Union requests the Panel to correct the second sentence of paragraph 9.461 (now paragraph 9.458) by adding the word "and" before the phrase "there were no other non-price factors that explain Boeing's success in obtaining the sale …".

5.109. The United States responds that the European Union's proposed revision would be confusing because the placement of the commas and the repeated use of the word "and" would leave uncertainty as to which phrase or phrases explain what the Panel means by "price-sensitive" and which phrase or phrases are criteria in addition to price sensitivity that together resulted in two of the examined sales campaigns. The United States proposes an alternative modification to the second sentence of paragraph 9.461 (now paragraph 9.458) in which the word "and" would be inserted as proposed by the European Union, but the comma that precedes that word would be deleted.

5.110. The Panel has modified the second sentence of paragraph 9.461 (now paragraph 9.458) taking into account the comments of both parties.

Paragraph 9.483 (now paragraph 9.480)

5.111. The European Union requests the panel to add the term "significant" in the last clause of paragraph 9.483 (now paragraph 9.480) to accurately reflect the European Union's arguments as presented in paragraphs 9.415 and 9.432 (now paragraphs 9.412 and 9.429). The United States has no comment on the European Union's request.

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5.112. The Panel has made the modification requested by the European Union.

5.2.6 Appendix 1

Paragraph 49

5.113. The United States argues that the evidence before the Panel does not support the conclusion, expressed in the final sentence of paragraph 49 of Appendix 1, that collaborative research and development agreements "typically" give [***]. The United States accordingly requests that the final sentence of paragraph 49 of Appendix 1 be modified to state only that [***].

5.114. The United States argues that the analysis of the Panel in the preceding section of Appendix 1 does not contain a comprehensive discussion of the amounts paid by the commissioning parties to use the intellectual property. Moreover, according to the United States, taking the 18 R&D agreements identified by Berneman and Razgaitis as the broadest example:

1. 14 required the commissioning party to pay royalties to the commissioned party in the event it made commercial sales of a product using the results of the contracted research, without regard to whether the sale was subject to an exclusive or non-exclusive licence;
2. a 15^th contract called for the payment of royalties in some situations and profit-sharing in others;
3. some of the agreements granted the commissioning party only an exclusive licence, either because that licence covered essentially all products or because the exclusive licence applied only to products that the commissioning party chose to commercialize, while the commissioned party retained all of the rights with respect to other products;
4. nine of the 18 agreements required the commissioning party to make milestone payments in addition to royalties, typically linked to the achievement of steps that lead to marketability of products resulting from the research.

5.115. On the basis of the foregoing, the United States argues that the evidence before the Panel does not support a conclusion that collaborative research and development agreements [***].

5.116. The European Union requests the Panel to leave unchanged the language of the text of the Interim Report in paragraph 49 of Appendix 1.

5.117. The European Union considers that the United States' comment appears to be focused on the Panel's reference to the "cost" of non-exclusive licences for the commissioning party (in the sense of the amounts paid by the commissioning parties to use the intellectual property), and the reference in the last sentence of paragraph 49 to [***]. It notes, however, that the United States requests the Panel to remove all reference to non-exclusive licences, and argues that such a request is inconsistent with the fact that the Panel correctly explains in paragraph 49 that, under the sample collaborative R&D agreements, the commissioning party obtains [***].

5.118. The European Union further argues that the United States' references to the agreements identified by Berneman and Razgaitis do not substantiate its request, including with respect to the specific question of cost. Rather, the European Union considers that those agreements support the Panel's conclusion that [***]. The European Union argues, more specifically that some of the 18 R&D agreements automatically provide the commissioning party with royalty-free licences to commercially use foreground intellectual property, while under other agreements in this group, the commissioning party receives patent ownership rights to some of the newly developed technology, and therefore does not need to acquire or pay for a licence to commercially use their own intellectual property. Both of these situations, according to the European Union, are situations where the commissioning party can [***], in parallel with the commissioned party, fully consistent with the line in the last sentence of paragraph 49 of Appendix 1 that the United States requests be deleted.

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5.119. The European Union further observes that the final sentence in paragraph 49 appears in the "Conclusions" section of Appendix 1, which considers evidence beyond the 18 agreements referred to by the United States in its comment above, and includes also the Panel's examination and findings under Contracts A through F, which fully support the conclusion in the final sentence of paragraph 49 that the United States requests be deleted. In this regard, the European Union notes that, under Contracts A through F, [***]. The European Union refers to the Panel's summary of Contracts A through F in paragraph 21 of Appendix 1, noting that the United States does not object to the Panel's conclusion that, with respect to Contracts A through F, [***]. The European Union accordingly argues that, in requesting deletion of an important aspect of the Panel's conclusion, the United States has chosen to ignore an entire section of the Panel's analysis upon which that conclusion is partially based.

5.120. We consider that it is possible to address the United States' objection to the accuracy of the last sentence of paragraph 49 of Appendix 1 without deleting the whole phrase that follows (b) in that sentence, which as the European Union suggests, is not warranted. The Panel has modified the last sentence of paragraph 49 of Appendix 1 accordingly.

5.3 The BCI or HSBI designation of certain information

5.121. The parties each made a number of requests regarding the bracketing and redaction of information in the Interim Report as BCI or HSBI. The United States agrees with the European Union's requests and the European Union did not comment with respect to the United States' requests.

5.122. The Panel has made the requested changes to the designations of certain information as BCI or HSBI.

6 INTRODUCTION TO PANEL FINDINGS

6.1 Alleged non-compliance of the United States with Article 7.8 of the SCM Agreement as the main subject of this compliance proceeding

6.1. Our task in this proceeding under Article 21.5 of the DSU is to resolve a "disagreement as to the existence or consistency with a covered agreement of measures taken to comply with the recommendations and rulings" of the DSB.⁴⁸ The central issue before us, in this regard, is whether the United States has complied with the recommendations and rulings adopted by the DSB in the original proceeding pursuant to Article 7.8 of the SCM Agreement.⁴⁹

6.2. The European Union claims that "the United States has failed to implement the DSB's recommendations in US – Large Civil Aircraft (2^nd complaint) i.e. that it withdraw the subsidies or take appropriate steps to remove the adverse effects, pursuant to Article 7.8 of the SCM Agreement".⁵⁰

6.3. The United States asserts that "the United States has either withdrawn the relevant subsidies or taken appropriate steps to remove their adverse effects. The United States has accordingly complied fully with the recommendations and rulings of the DSB".⁵¹

6.4. While the European Union's request for the establishment of a panel also refers to Article 4.7 of the SCM Agreement⁵², the European Union has indicated that it does not request the Panel to make a finding that the United States has failed to comply with that provision.⁵³

⁴⁸ We discuss relevant panel and Appellate Body decisions relating to the purpose and proper scope of proceedings under Article 21.5 of the DSU in Section 7 of this Report. ↩

⁴⁹ See para. 6.7 below. ↩

⁵⁰ European Union's first written submission, para. 1933. ↩

⁵¹ United States' first written submission, para. 1. ↩

⁵² Paragraph 6 of the European Union's request for the establishment of a panel reads: ↩

By communication dated 23 September 2012, the United States notified the European Union that the United States has taken a number of actions allegedly withdrawing the subsidies or removing their adverse effects (23 September notification). The actions and events listed by the United States in its

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6.5. We note that the European Union also claims that the measures at issue in this proceeding are inconsistent with Articles 3.1(a) and (b) and 3.2 of the SCM Agreement and Article III:4 of the GATT 1994. Insofar as these claims are within the scope of this proceeding, we address them in Section 10 of this Report.

6.2 Article 7.8 of the SCM Agreement and Article 19 of the DSU

6.6. Article 7.8 of the SCM Agreement provides:

Where a panel report or an Appellate Body report is adopted in which it is determined that any subsidy has resulted in adverse effects to the interests of another Member within the meaning of Article 5, the Member granting or maintaining such subsidy shall take appropriate steps to remove the adverse effects or shall withdraw the subsidy.

6.7. In the original proceeding in this dispute the Appellate Body recommended:

{T}hat the DSB request the United States to bring its measures, found in this Report, and in the Panel Report as modified by this Report, to be inconsistent with the SCM Agreement, into conformity with its obligations under that Agreement. More specifically, having regard to the recommendation made by the Panel in paragraph 8.9 of its Report and the provisions of Article 7.8 of the SCM Agreement, the Appellate Body recommends that the United States take appropriate steps to remove the adverse effects found to have been caused by its use of subsidies, or to withdraw those subsidies.⁵⁴

6.8. Article 19.1 of the DSU provides that where a panel or the Appellate Body concludes that a measure is inconsistent with a covered agreement, it shall recommend "that the Member concerned bring the measure into conformity with that agreement". It would appear from the Appellate Body's recommendation in the original proceeding that the Appellate Body regards the requirements of Article 7.8 of the SCM Agreement as a specific expression of this general compliance obligation.

6.9. We note, in this regard, that in disputes involving findings of actionable subsidies, the Appellate Body has consistently formulated its recommendations in the terms used in Article 19.1 of the DSU.

6.10. Thus, in US – Upland Cotton and US – Upland Cotton (Article 21.5 – Brazil), the Appellate Body upheld panel findings regarding actionable subsidies provided by the United States to U.S. cotton producers and recommended that "the Dispute Settlement Body request the United States to bring its measures, found in this report and in the panel report as modified by this report to be

23 September 2012 notification do not withdraw the subsidies or remove their adverse effects, as required by Articles 4.7 and 7.8 of the SCM Agreement. Instead, after the end of the implementation period on 24 September 2012, the United States maintains specific subsidies that cause present adverse effects to EU interests, that are prohibited subsidies contingent on export performance or on the use of domestic over imported goods, and that are inconsistent with the United States' national treatment obligations, as detailed below in section II. Accordingly, in the view of the European Union, the United States has failed to achieve compliance with the recommendations and rulings of the DSB.
(emphasis added)

See also European Union's first written submission, para. 11.

⁵³ European Union's second written submission, para. 107. Therefore, we see no need to rule on the request of the United States for a finding that Article 4.7 is not within the Panel's terms of reference. (United States' request for preliminary rulings, dated 13 November 2012, paras. 58 and 59). We agree with the European Union that the fact that it does not request the Panel to make findings under Article 4.7 in this proceeding does not mean that the Panel is precluded from addressing the European Union's claims under Article 3 of the SCM Agreement. (European Union's second written submission, para. 109). ↩

⁵⁴ Appellate Body Report, US – Large Civil Aircraft (2^nd complaint), para. 1352. (emphasis original) ↩

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inconsistent with the Agreement on Agriculture and the SCM Agreement, into conformity with its obligations under those Agreements".⁵⁵

6.11. Similarly, in EC and certain member States – Large Civil Aircraft, the Appellate Body observed that to the extent that it had upheld the Panel's findings regarding actionable subsidies or those findings had 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". The Appellate Body then recommended "that the DSB request the European Union to bring its measures, found in this Report, and in the Panel Report as modified by this Report, to be inconsistent with the SCM Agreement, into conformity with its obligations under that Agreement".⁵⁶

6.12. We also note the Appellate Body's discussion in US – Upland Cotton (Article 21.5 – Brazil) of the relationship of Article 7.8 of the SCM Agreement to the general DSU rules and procedures:

Article 7.8 is one of the "special or additional rules and procedures on dispute settlement contained in the covered agreements" that are identified in Article 1.2 and Appendix 2 of the DSU, which prevail over the general DSU rules and procedures to the extent that there is a difference between them. As we see it, Article 7.8 specifies the actions that the respondent Member must take when a subsidy granted or maintained by that Member is found to have resulted in adverse effects to the interests of another Member. This means that, in order to determine whether there is compliance with the DSB's recommendations and rulings in a case involving such actionable subsidies, a panel would have to assess whether the Member concerned has taken one of the actions foreseen in Article 7.8 of the SCM Agreement.⁵⁷

6.13. The fact that in the original proceeding in this dispute the Appellate Body formulated its recommendation under Article 7.8 of the SCM Agreement, as a specific instance of the general obligation in Article 19.1 of the DSU that a Member bring its measure into conformity with its obligations under a covered agreement, suggests to us that the Appellate Body does not consider that the compliance obligations under Article 7.8 of the SCM Agreement are of a fundamentally different nature than the compliance obligations under Article 19.1 of the DSU. That the Appellate Body interprets Article 7.8 in harmony with Article 19 of the DSU⁵⁸ is also apparent from the fact that when the Appellate Body discussed the scope of Article 7.8 in US – Upland Cotton (Article 21.5 – Brazil), it observed that "remedies in WTO law are generally understood to be prospective".⁵⁹

6.14. The Appellate Body has explained that Article 7.8 of the SCM Agreement will usually require a Member to take "affirmative action":

Pursuant to Article 7.8, the implementing Member has two options to come into compliance. The implementing Member: (i) shall take appropriate steps to remove the adverse effects; or (ii) shall withdraw the subsidy. The use of the terms "shall take" and "shall withdraw" indicate that compliance with Article 7.8 of the SCM Agreement

⁵⁵ Appellate Body Reports, US – Upland Cotton, para. 764; and US – Upland Cotton (Article 21.5 – Brazil), para. 449. Although in the latter case the Appellate Body did not refer to Article 7.8 in its own recommendation, elsewhere in its report it upheld the panel's finding that the United States had failed to comply with Article 7.8. (Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 447). ↩

⁵⁶ Appellate Body Report, EC and certain member States – Large Civil Aircraft, paras. 1416 and 1418. ↩

⁵⁷ Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 235 (fns omitted). See also para. 240 ("Article 7.8 informs the meaning and scope of the DSB's recommendations and rulings arising from the original proceedings. In our view, Article 7.8 specifies the actions that the United States had to take in order to comply with the DSB's recommendations and rulings"). ↩

⁵⁸ On the notion of harmonious treaty interpretation in the context of the WTO Agreement, see e.g. Appellate Body Report, US – Upland Cotton, para. 549. ↩

⁵⁹ Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), fn 494. Another illustration of the Appellate Body's perspective on the close relationship between Article 7.8 of the SCM Agreement and Article 19 of the DSU is its observation that "{a}lthough there is no specific provision in the SCM Agreement requiring a panel to make a recommendation of withdrawal with respect to actionable subsidies, a panel may do so pursuant to the general rule in Article 19.1 of the DSU". (Appellate Body Report, EC and certain member States – Large Civil Aircraft, fn 1740). ↩

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will usually involve some action by the respondent Member. This affirmative action would be directed at effecting the withdrawal of the subsidy or the removal of its adverse effects. 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.⁶⁰

6.15. The issues in dispute in this proceeding pertain to a large extent to the question of whether the United States has taken such "affirmative action" and, if so, whether that action has been adequate.⁶¹ The diverging positions of the parties with regard to whether the United States has taken such "affirmative action" reflect the very different narratives underlying the parties' respective cases.

6.16. The United States' basic narrative is that it has withdrawn most of the specific subsidies found to have caused adverse effects in the original proceeding and that the subsidies that have not been withdrawn are too small to cause adverse effects. The United States argues that NASA and DOD have greatly reduced the amount of research they pay Boeing to conduct under the relevant contracts and agreements and that NASA has also modified the way it conducts research so as to remove the aspects of its practices that led to the findings against the pre-2007 NASA procurement contracts. The U.S. Congress terminated the FSC/ETI measures in 2006 and Boeing has not received FSC/ETI deductions since then. The value of the tax abatements associated with the pre-2007 City of Wichita IRBs is tiny, the City of Wichita has not issued any new IRBs to Boeing, and the IRB programme is no longer specific. The United States considers that, by withdrawing the FSC/ETI measures, it has removed the adverse effects of the Washington State B&O tax rate reduction (the only remaining subsidy subject to the DSB recommendations and rulings which has not been withdrawn) because the amount of that tax rate reduction is too small by itself to cause adverse effects.⁶² The United States alleges that the European Union engages in a number of unsustainable efforts to inflate the value of, and expand the scope of, the measures it is challenging in order to mask the reality that the measures within the scope of this proceeding, which the United States has for the most part withdrawn and reduced in value, cannot be causing any adverse effects, let alone the magnified effects alleged by the European Union.⁶³

6.17. The European Union's basic narrative is that, far from withdrawing the subsidies found to have caused adverse effects to the European Union's LCA-related interests in the original proceeding, the U.S. federal, state, and local authorities have significantly increased those subsidies and worsened their adverse effects. The very same subsidies that were found in the original proceeding to have enabled the availability and advanced technology of the 787 and the lower prices of the 737NG, plus additional, closely related subsidies, exist at present and cause present significant competitive harm to the European Union's LCA-related interests. The European Union argues that none of the U.S. subsidies at issue in the original proceeding has been withdrawn. The European Union rejects the United States' arguments that adding allegedly lower annual amounts of post-2006 aeronautics R&D subsidies results in a reduction in subsidies. Rather, adding new subsidies to the earlier set of massive, non-withdrawn subsidies, even at a lower rate, increases the pool of subsidies and the adverse effects.⁶⁴ The European Union regards the United States' objections to the inclusion of certain measures within the scope of this proceeding as being without merit, and its arguments concerning the magnitudes of the subsidies as

⁶⁰ Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 236. (fn omitted) ↩

⁶¹ Brazil, a third party to this proceeding, argues that the obligation in Article 7.8 to take appropriate steps to remove the adverse effects means that a Member is generally expected to take affirmative action and to actively intervene to remove the adverse effects. In circumstances where adverse effects have been found to be caused by a subsidy that no longer exists at the time of implementation, the relevant question is whether the Member in question has taken steps that are appropriate to break the causal relationship between the subsidy and the adverse effects. Such steps will only be appropriate "if they impact on the specific adverse effects found to exist and are likely to lead to the removal of the specific adverse competitive advantage that resulted from the use of the subsidy". Brazil also recalls its position in the dispute in US – Upland Cotton (Art. 21.5 – Brazil) that a finding of adverse effects "applies beyond the historical period considered by the panel" and that Article 7.8 requires the Member whose subsidies have caused adverse effects "to take appropriate steps to fully withdraw the present, ongoing, and future effects of the subsidies". (Brazil's third-party submission, paras. 53-57). ↩

⁶² United States' opening statement at the meeting with the Panel, para. 2. The United States submitted an opening statement at the meeting with the Panel but did not submit a closing statement. ↩

⁶³ United States' opening statement at the meeting with the Panel, para. 3. ↩

⁶⁴ European Union's opening statement at the meeting with the Panel, para. 60. ↩

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depending on "atomising" the subsidy – an analysis the Appellate Body rejected.⁶⁵ The European Union alleges that the United States has provided Boeing with USD 8.85 billion in subsidies over the 2007-2014 period, with the annual amounts significantly increasing each year. Accordingly, the amount of subsidies available to Boeing for pricing down its LCA in strategic, price sensitive sales campaigns is substantial and not insignificantly small, as the United States suggests.⁶⁶

6.3 Structure of the European Union's case that the United States has failed to withdraw the subsidy and take appropriate steps to remove the adverse effects, within the meaning of Article 7.8 of the SCM Agreement

6.18. It is well established that the general rules on the allocation of the burden of proof in WTO dispute settlement also apply to Article 21.5 of the DSU⁶⁷, including in cases involving an alleged failure of a Member to take the steps required by Article 7.8 of the SCM Agreement. As a consequence, the European Union as complaining party in this proceeding bears the burden of demonstrating both that the United States has failed to withdraw the subsidy and that the United States has failed to take appropriate steps to remove the adverse effects, within the meaning of Article 7.8. This aspect of the allocation of the burden of proof is not in dispute between the parties.⁶⁸

6.19. In this regard, we also note, and agree with, the observation of the panel in US – Upland Cotton (Article 21.5 – Brazil) that there is "no support in the text of Article 7.8 of the SCM Agreement and Article 21.5 of the DSU for the proposition that in a proceeding under Article 21.5 involving an alleged failure to comply with Article 7.8 of the SCM Agreement, a Member which has not withdrawn the subsidy has the burden of showing that it has removed the adverse effects".⁶⁹

6.20. Given that the burden of proof is on the European Union to demonstrate that the United States has failed to comply with Article 7.8, our analysis in this Report proceeds on the basis of an examination of the arguments and evidence advanced by the European Union. We find it useful, in this respect, to set out in this Section of our Report how the European Union has structured its case in accordance with its interpretation of Article 7.8.

6.21. The European Union argues that a finding of non-compliance with Article 7.8 requires a determination that a Member grants or maintains subsidies after the end of the implementation period⁷⁰ and that these subsidies cause present adverse effects.⁷¹ Thus, the European Union interprets the obligation to "withdraw the subsidy" as an obligation not to grant or maintain the subsidy after the end of the implementation period⁷² and it interprets the obligation to "take appropriate steps to remove the adverse effects" as an obligation to ensure that no present adverse effects arise after the end of that period from any subsidies that are not withdrawn. In light of this interpretation, the European Union claims that the United States has failed to comply with its obligations under Article 7.8 on the basis that: (a) the United States has failed to withdraw

⁶⁵ European Union's opening statement at the meeting with the Panel, para. 61. ↩

⁶⁶ European Union's opening statement at the meeting with the Panel, para. 86. ↩

⁶⁷ Appellate Body Report, Chile – Price Band Systems (Article 21.5 – Argentina), paras. 134-136; and Panel Report, US – Upland Cotton (Article 21.5 – Brazil), para. 9.4. ↩

⁶⁸ European Union's first written submission, paras. 32, 45, and 48; United States' first written submission, paras. 40 and 41. ↩

⁶⁹ Panel Report, US – Upland Cotton (Article 21.5 – Brazil), fn 89. The panel made this statement in response to an argument of New Zealand as third party that "Article 7.8 of the SCM Agreement affects the distribution of burden of proof in this proceeding under Article 21.5 of the DSU", such that "a Member that fails to withdraw the measure in question then should have the burden of showing that it has removed the adverse effects". (Panel Report, US Upland Cotton (Article 21.5 – Brazil), fn 89). ↩

⁷⁰ "Implementation period" as used by the European Union in this case means the period of six months referred to in Article 7.9 of the SCM Agreement, which in this dispute ended on 23 September 2012. ↩

⁷¹ See e.g. European Union's first written submission, para. 816: ↩

In short, under Article 7.8 of the SCM Agreement, a compliance panel must find that the responding Member has failed to comply with the recommendations and rulings of the DSB if two conditions are met: (i) it is demonstrated that the responding Member grants or maintains subsidies after the end of the implementation period, which it has failed to withdraw; and (ii) these non-withdrawn subsidies presently cause adverse effects presently arising.

⁷² We consider that this interpretation of the phrase "withdraw the subsidy" is implicit in the European Union's arguments. The European Union does not explicitly discuss the meaning of this phrase. ↩

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the subsidy, within the meaning of Article 7.8, because it grants or maintains subsidies to Boeing after the end of the implementation period; and (b) the United States has failed to take appropriate steps to remove the adverse effects, within the meaning of Article 7.8, because these subsidies cause present adverse effects to the interests of the European Union, within the meaning of Article 5 of the SCM Agreement.⁷³ These present adverse effects to the interests of the European Union occur "in the form of tens of billions of U.S. dollars of lost revenue to Airbus through significant lost sales, significantly suppressed prices, and displaced or impeded market shares in various LCA product markets".⁷⁴

6.22. With respect to the European Union's interpretation of Article 7.8, the United States considers that "{i}n effect, the EU is asserting that a Member challenging compliance under Article 7.8 must make its entire case again". The United States notes that "the DSU and the SCM Agreement do not constrain a Member to adopt this approach" but that "as the EU does not advance any other arguments, the question of whether it is the only way to demonstrate noncompliance under Article 7.8 is not before the panel".⁷⁵

6.23. Thus, in light of how the European Union has framed its case, our task in this proceeding is to determine whether the United States has failed to withdraw the subsidy within the meaning of Article 7.8 because it grants or maintains subsidies to Boeing after the end of the implementation period and, if so, whether the United States has failed to take appropriate steps to remove the adverse effects, within the meaning of Article 7.8, because these subsidies cause present adverse effects. In proceeding on the basis, we do not mean to imply that we endorse the European Union's apparent view that a finding of non-compliance with Article 7.8 always requires this type of analysis.

6.24. While the central proposition advanced by the European Union in support of its claim that the United States has failed to comply with Article 7.8 is that the United States grants or maintains subsidies to Boeing after the end of the implementation period that cause present adverse effects, we see an important conceptual distinction in the manner in which the European Union purports to substantiate this assertion between two groups of measures: seven types of "post-2006" subsidies allegedly provided by the United States to Boeing since the reference period considered in the original proceeding, on the one hand, and certain "pre-2007" NASA and DOD aeronautics R&D subsidies at issue in the original proceeding, on the other.

6.25. The main argument of the European Union in support of its position that the United States grants or maintains subsidies to Boeing after the end of the implementation period that cause present adverse effects is that, subsequent to the 2004-2006 reference period considered in the original proceeding, the United States has granted or maintained subsidies to Boeing that are of "the same nature" as the subsidies that were found to be actionable in the original proceeding. In this respect, the European Union asserts that the United States grants or maintains seven categories of "post-2006 subsidies to Boeing's LCA Division".⁷⁶ These post-2006 subsidies include alleged subsidies provided pursuant to programmes that continue the programmes at issue in the original proceeding and additional subsidies allegedly introduced by the United States that the European Union considers to be within the scope of this proceeding because of their relationship with the measures at issue in the original proceeding.⁷⁷

6.26. The European Union submits that the post-2006 subsidies at issue are either "similar to, and essentially a continuation of" or "similar to" the subsidies the subject of the DSB recommendations and rulings in the original proceeding:

⁷³ See e.g. European Union's first written submission, paras. 5, 817, 818, and 1934. ↩

⁷⁴ European Union's first written submission, para. 818. ↩

⁷⁵ United States' first written submission, para. 41. ↩

⁷⁶ European Union's first written submission, para. 56, figure 1. See para. 8.55 below. ↩

⁷⁷ See e.g. European Union's request for the establishment of a panel, para. 7; and first written submission, section V. It would appear that by "additional subsidies" within the scope of this proceeding the European Union means: (a) NASA aeronautics R&D subsidies provided pursuant to "successor and other closely related programmes"; (b) the FAA CLEEN Program; (c) DOD aeronautics R&D subsidies provided under DOD RDT&E program elements that either did not exist at the time of the original panel or that previously existed but did not fund Boeing's dual-use LCA relevant research and development until 2007; (d) the Washington State Joint Center for Aerospace Technology Innovation; and (e) all of the South Carolina measures. (European Union's first written submission, paras. 60 and 197; 229 and 232; 388 and 389; 541; and 734 and 736). ↩

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In the present dispute, the European Union challenges a number of post-2006 subsidies maintained by the United States. With respect to these subsidies, the European Union demonstrated that NASA's post-2006 aeronautics R&D subsidies are similar to, and essentially a continuation of, NASA's pre-2007 aeronautics R&D subsidies. The European Union has also demonstrated that the FAA CLEEN Program is similar to, and essentially a continuation of, NASA's aeronautics R&D subsidies. Similarly, the European Union established that the "new" DOD subsidies are similar to, and essentially a continuation of, the NASA and DOD programmes at issue before the original panel. The European Union also demonstrated that the South Carolina subsidies are similar to the Washington, Kansas, and FSC/ETI subsidies at issue before the original panel. In respect of all these measures, the European Union has demonstrated that they are specific subsidies, within the meaning of Articles 1 and 2 of the SCM Agreement, that under current factual circumstances cause adverse effects, rendering them inconsistent with Articles 5 and 6.3 of the SCM Agreement.⁷⁸

6.27. The European Union submits that the post-2006 subsidies cause adverse effects in the post-implementation period mainly through a "price causal mechanism".

6.28. On the other hand, with respect to certain pre-2007 NASA and DOD aeronautics R&D subsidies that were found to be a cause of adverse effects by virtue of their technology effects in relation to the Boeing 787⁷⁹, the European Union submits that the United States grants or maintains subsidies to Boeing after the end of the implementation period and has thereby failed to withdraw the subsidy, within the meaning of Article 7.8, because the United States has failed to modify the terms of the measures found to be actionable subsidies in the original proceeding so as to remove the benefit conferred by these measures. With respect to these pre-2007 NASA and DOD aeronautics R&D subsidies, as well as the pre-2007 DOD procurement contracts which it considers are within the scope of this proceeding, the European Union argues that the United States has failed to take appropriate steps to remove the adverse effects, within the meaning of Article 7.8, because these subsidies continue to cause additional adverse effects in the post-implementation period through a "technology causal mechanism". Additionally, the European Union argues that the particular adverse effects found in the original proceeding to have been caused by the pre-2007 NASA and DOD aeronautics R&D subsidies to the 787 have not ceased to exist and that these adverse effects themselves continue into the post-implementation period.

6.29. Thus, it is possible to represent the main aspects of the European Union's case as follows:

1. The United States grants or maintains subsidies to Boeing after the end of the implementation period and has thus failed to withdraw the subsidy, within the meaning of Article 7.8 of the SCM Agreement:
   • Post-2006 subsidies: The United States grants or maintains seven categories of subsidies to Boeing that are similar to (and a continuation of) the measures found to be actionable subsidies in the original proceeding.
   • Pre-2007 NASA and DOD aeronautics R&D subsidies: The United States has failed to modify the terms of the particular NASA and DOD transactions at issue in the original proceeding in a manner that removes the benefit.⁸⁰

⁷⁸ European Union's response to Panel question No. 151, para. 8 (fns omitted). See also European Union's comments on United States' response to Panel question No. 151, para. 9 ("{i}n sum, the European Union has demonstrated that several of the post-2006 subsidies are of the same nature as, in the sense that they are similar to and essentially a continuation of, the original subsidies, and that such subsidies cause 'present' adverse effects (including a 'present' threat of various forms of serious prejudice). The compliance Panel should, therefore, find that the United States has failed to comply with Article 7.8 of the SCM Agreement." (fns omitted)) ↩

⁷⁹ Panel Report, US – Large Civil Aircraft (2^nd complaint), paras. 7.1773 and 7.1797. ↩

⁸⁰ Thus, the European Union uses the term "subsidies granted or maintained after the end of the implementation period" not only where an alleged financial contribution continues after the end of the implementation period but also where the financial contribution may have ended before the end of the implementation period but the benefit has not been removed. With regard to certain pre-2007 aeronautics R&D subsidies, the European Union argues that the United States maintains, and has thus failed to withdraw, its ↩

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2. The subsidies granted or maintained by the United States cause present adverse effects and the United States has thus failed to take appropriate steps to remove the adverse effects, within the meaning of Article 7.8 of the SCM Agreement⁸¹:
   • Post-2006 subsidies: the subsidies cause new adverse effects in the post-implementation period mainly through a price causal mechanism.
   • Pre-2007 NASA and DOD aeronautics R&D subsidies: (i) the subsidies continue to cause additional adverse effects in the post-implementation period through a technology causal mechanism; and (ii) adverse effects found in the original proceeding to have been caused by these subsidies have not ceased to exist and continue into the post-implementation period.

6.30. The European Union's approach to attempt to demonstrate non-compliance with Article 7.8 on the basis of certain pre-2007 subsidies the subject of the DSB recommendations and rulings, and alleged post-2006 subsidies and their effects, rests on the premise that Article 7.8 applies not only to the particular subsidy measures granted in the past that were the subject of the relevant DSB recommendations and rulings in the original proceeding, but also to measures taken subsequent to the conclusion of the original proceeding. We consider that this premise is consistent with the Appellate Body's interpretation of the concept of "withdrawal" of the subsidy and its analysis in US – Upland Cotton (Article 21.5 – Brazil) of the scope of Article 7.8.

6.31. The meaning of the term "withdraw" the subsidy has been discussed mainly in disputes involving Article 4.7 of the SCM Agreement, which provides that in case of a finding of a prohibited subsidy "the panel shall recommend that the subsidizing Member withdraw the subsidy without delay".

6.32. In Brazil – Aircraft (Article 21.5 – Canada), the Appellate Body observed that the word "withdraw" in Article 4.7 of the SCM Agreement "has been defined as 'remove' or 'take away' and as 'to take away what has been enjoyed; to take from'" and that "{t}his definition suggests that 'withdrawal' of a subsidy, under Article 4.7 of the SCM Agreement, refers to the 'removal' or 'taking away' of that subsidy".⁸² The Appellate Body considered that "to continue to make payments under an export subsidy measure found to be prohibited is not consistent with the obligation to 'withdraw' prohibited export subsidies, in the sense of 'removing or 'taking away'" and thus found that "the recommendation of the DSB requires Brazil to stop issuing NTN-I bonds as from 18 November 1999 pursuant to letters of commitment issued before 18 November 1999".⁸³

6.33. In US – FSC (Article 21.5 – EC II), the Appellate Body considered that:

Where a Member withdraws a prohibited subsidy only in part, it has failed to comply fully with its WTO obligation and the Article 4.7 recommendation continues to be in effect with respect to the part of the subsidy that has not been withdrawn. Similarly, full withdrawal of a prohibited subsidy within the meaning of Article 4.7 of the SCM Agreement cannot be achieved by a "measure taken to comply" that replaces the original subsidy with yet another subsidy found to be prohibited. In both instances, the Member cannot be said to have complied with the obligation to withdraw fully the prohibited subsidy.⁸⁴

6.34. In US – Upland Cotton (Article 21.5 – Brazil), the Appellate Body clarified that the obligation in Article 7.8 is not limited to the particular "subsidies granted in the past and which may have

subsidies, even where payments have ceased to be made pursuant to those measures, because the United States has failed to take action to remove the benefit within the meaning of Article 1.1(b) in respect of these measures. (European Union's second written submission, paras. 429 and 431; response to Panel question No. 58, para. 15).

⁸¹ For a more detailed discussion of the different aspects of the European Union's adverse effects case see, Section 9 of this Report. ↩

⁸² Appellate Body Report, Brazil – Aircraft (Article 21.5 – Canada), para. 45. (fn omitted) ↩

⁸³ Appellate Body Report, Brazil – Aircraft (Article 21.5 – Canada), para. 45. See also Appellate Body Report US – FSC (Article 21.5 – EC), paras. 229-231; and Panel Report, US – FSC (Article 21.5 – EC II), para. 7.62. ↩

⁸⁴ Appellate Body Report, US – FSC (Article 21.5 – EC II), para. 83. (emphasis original) ↩

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formed the basis of a panel's determination of present serious prejudice and adverse effects" but "is of a continuing nature, extending beyond subsidies granted in the past":

The question then becomes: With respect to which subsidies must the implementing Member take such action? Such action would certainly be expected with respect to subsidies granted in the past and which may have formed the basis of a panel's determination of present serious prejudice and adverse effects. However, we do not see the obligation in Article 7.8 as being limited to subsidies granted in the past. Article 7.8 expressly refers to a Member "granting or maintaining such subsidy". The verb "maintain" suggests, to us, that the obligation set forth in Article 7.8 is of a continuous nature, extending beyond subsidies granted in the past. This means that, in 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.⁸⁵

6.35. The Appellate Body found support for this view in the context provided by Article 4.7 of the SCM Agreement. Referring to the above-quoted passage from US – FSC (Article 21.5 – EC II)⁸⁶, the Appellate Body stated that "{s}imilarly, 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".⁸⁷

6.36. In light of the Appellate Body's interpretation of the term "withdraw" the subsidy and its analysis of the scope of Article 7.8, it is clear that the scope of our analysis under Article 7.8 is not inherently limited to the particular pre-2007 measures that were found to be inconsistent with the SCM Agreement in the original proceeding and that subsidies allegedly granted to Boeing subsequent to the reference period considered by the original panel can also be the basis for a finding of non-compliance under Article 7.8. Although the subsidies at issue considered in US – Upland Cotton (Article 21.5 – Brazil) were so-called recurrent subsidies, the reasoning of the Appellate Body in our view is not limited to such subsidies and applies more generally to situations in which a Member "leaves an actionable subsidy in place, either entirely or partially, or replaces that subsidy with another actionable subsidy".⁸⁸ We note that the United States does not argue in this proceeding that Article 7.8 does not apply to any measure taken subsequent to the conclusion of the original proceeding and that the Panel should therefore limit its analysis to the particular pre-2007 measures the subject of the DSB recommendations and rulings. The United States argues that many post-2006 measures raised by the European Union are not properly within the scope of this proceeding on the basis that those measures do not have a sufficiently close nexus with the measures the subject of the DSB recommendations and rulings to be considered "measures taken to comply".⁸⁹ However, the United States does not object to the inclusion of any measure simply because it is a post-2006 measure. Our view that Article 7.8 can in principle apply to measures introduced subsequent to the reference period considered in the original proceeding is without prejudice to whether the particular post-2006 measures challenged by the European Union are properly within the scope of this proceeding. We consider that matter below in Section 7 of this Report.

6.37. In addition to the notion that Article 7.8 applies to both the subsidies found to be actionable in the original proceeding and subsidies allegedly provided subsequent to the original proceeding,

⁸⁵ Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 237. (fns omitted) ↩

⁸⁶ See para. 6.33 above. ↩

⁸⁷ Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 238. ↩

⁸⁸ Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 238. ↩

⁸⁹ See Section 7 below. ↩

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another important aspect of the European Union's analytical approach in this proceeding is that it would appear to rest on a "prospective" interpretation of Article 7.8, both in respect of the obligation to "withdraw the subsidy" and the obligation to "take appropriate steps to remove adverse effects". The European Union expresses the failure of the United States to "withdraw the subsidy" as resulting from the fact that after the end of the implementation period the United States grants or maintains subsidies to Boeing that cause present adverse effects. The European Union does not argue that the United States has failed to comply with Article 7.8 by not taking retroactive action with respect to the particular subsidies found to be actionable subsidies in the original proceeding or to their effects. It has not argued that the United States was obligated under Article 7.8 to seek repayment from Boeing of subsidies granted in the past. With regard to the failure of the United States to take appropriate steps to remove the adverse effects, within the meaning of Article 7.8, the European Union states explicitly that the obligation in Article 7.8 to take appropriate steps to remove the adverse effects "does not refer to the removal of adverse effects in the past" but "to the withdrawal of adverse effects in the sense of ensuring that there are no adverse effects arising in the new reference period".⁹⁰

6.38. As noted above, the Appellate Body observed in US – Upland Cotton (Article 21.5 – Brazil) that "remedies in WTO law are generally understood to be prospective in nature".⁹¹ Thus, the Appellate Body does not consider that the fact that Article 7.8 uses a formulation that is different from the language of Article 19 of the DSU supports a retrospective reading of that provision. The Appellate Body's approach in this respect appears to be different from the reasoning of the compliance panel in Australia – Automotive Leather II (Article 21.5 – US). The panel in that proceeding concluded from an analysis of the ordinary meaning of the term "withdraw the subsidy" in Article 4.7 of the SCM Agreement, "read in context, and in light of its object and purpose, and in order to give it effective meaning, that this term is not limited to prospective action only but may encompass repayment of the prohibited subsidy". The panel also found that "repayment in full of the prohibited subsidy is necessary in order to 'withdraw the subsidy' in this case".⁹² The European Union does not rely on the reasoning contained in this panel report in this proceeding.⁹³

6.39. Aside from the Appellate Body Report in US – Upland Cotton (Article 21.5 – Brazil), we consider that the context provided by Articles 7.9 and 7.10 of the SCM Agreement provides further support for a prospective interpretation of Article 7.8.

6.40. Article 7.9 provides that:

In the event the Member has not taken appropriate steps to remove the adverse effects of the subsidy or withdraw the subsidy within six months from the date when the DSB adopts the panel report or the Appellate Body report, and in the absence of agreement on compensation, the DSB shall grant authorization to the complaining Member to take countermeasures, commensurate with the degree and nature of the adverse effects determined to exist, unless the DSB decides by consensus to reject the request.

6.41. Article 7.10 provides that:

In the event that a party to the dispute requests arbitration under paragraph 6 of Article 22 of the DSU, the arbitrator shall determine whether the countermeasures are commensurate with the degree and nature of the adverse effects determined to exist.

⁹⁰ European Union's first written submission, para. 49. ↩

⁹¹ Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), fn 494. ↩

⁹² Panel Report, Australia – Automotive Leather II (Article 21.5 – US), paras. 6.39 and 6.48. ↩

⁹³ Korea, a third party to this proceeding, argues that "the 'withdrawal' of subsidies described in Article 7.8 of the SCM Agreement occurs when the government in question ceases to give any additional subsidies" and that, notwithstanding the panel report in Australia – Automotive Leather II (Article 21.5 – US), the concept of "withdrawal" does not impose "an obligation to have the recipient repay the amount of subsidies received in the past". (Korea's third-party submission, fn 18). Brazil, a third party to this proceeding, argues that "where the finding of adverse effects was based on the use of a subsidy from the past which no longer existed at the time of the reference period for adverse effects, the 'withdrawal' of the subsidy will require more than the simple reiteration of the fact that the subsidy no longer exists" and that the additional action required must entail the "taking away" of the subsidy. (Brazil's third-party submission, para. 58). ↩

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6.42. The decision of the arbitrator in US – Upland Cotton (Article 22.6 – US II) suggests that a determination under Article 7.10 of the SCM Agreement whether proposed countermeasures are "commensurate with the degree and nature of the adverse effects determined to exist" should be made on the basis of the effects found to exist as at the end of the implementation period without consideration of past adverse effects that have occurred prior to that date.⁹⁴ We consider that this is relevant to the interpretation of the temporal scope of the obligation in Article 7.8 to take appropriate steps to remove the adverse effects because in our view, "the adverse effects determined to exist" in Articles 7.9 and 7.10 are "the adverse effects" in Article 7.8.

6.43. Finally, with regard to the requirement of Article 7.8 to "take appropriate steps to remove the adverse effects", it is important to note that the European Union does not argue that present adverse effects may be presumed to exist on account of the similarity of the post-2006 subsidies with the measures found to confer subsidies in the original proceeding. The European Union specifically states in this respect that it "disagrees that a finding of inconsistency with Article 7.8 of the SCM Agreement can be based on presumed, rather than established, similar effects from the new subsidies".⁹⁵

6.4 Organization of Panel's analysis

6.44. In Section 7 of the Report, we examine whether certain measures and claims of the European Union are outside the Panel's terms of reference or are otherwise outside the scope of this proceeding.

6.45. Having identified the measures and claims within our terms of reference and within the scope of this proceeding, we examine in Section 8 of the Report whether the United States has failed to withdraw the subsidy, within the meaning of Article 7.8 of the SCM Agreement. Our analysis in that Section is structured around the distinction discussed above between the arguments of the European Union regarding the pre-2007 NASA and DOD aeronautics R&D subsidies and its arguments with respect to the broader group of the post-2006 subsidies:

1. Regarding the particular pre-2007 NASA and DOD aeronautics R&D subsidies the subject of the DSB recommendations and rulings, we examine, in Section 8.1 of the Report, whether the United States has failed to withdraw the subsidy on the basis that the modifications made by the NASA-Boeing Patent Licence Agreement and DOD-Boeing Patent Licence Agreement to the terms of the NASA procurement contracts and DOD assistance instruments identified in annexes A and B of the United States' Compliance Communication have not removed the benefit, within the meaning of Article 1.1(b) of the SCM Agreement.
2. In Section 8.2 of this Report, we examine whether the United States has failed to withdraw the subsidy by granting or maintaining certain post-2006 subsidies to Boeing: NASA aeronautics R&D measures; DOD aeronautics R&D measures⁹⁶; FAA aeronautics R&D measure; tax exemptions and exclusions under FSC/ETI legislation and successor legislation; tax abatements provided through IRBs issued by the City of Wichita; Washington state and local measures; and South Carolina measures.

6.46. In Section 9 of the Report, we examine whether subsidies that the United States grants or maintains after the end of the implementation period and which we will have found to be specific, within the meaning of Article 2, cause present adverse effects in the form of certain kinds of serious prejudice to the interests of the European Union, within the meaning of Articles 5(c) and 6.3 of the SCM Agreement, and whether the United States has thus failed to take appropriate steps to remove the adverse effects. The Panel addresses the European Union's arguments concerning the effects of the various subsidies on Boeing's product development and pricing behaviour in the context of the particular LCA product markets and the particular Boeing LCA that are said to benefit from the subsidies. The Panel therefore examines: (a) whether subsidies

⁹⁴ Decision by the Arbitrator, US – Upland Cotton (Article 22.6 – US II), para. 4.118. ↩

⁹⁵ European Union's comments on United States' response to Panel question No. 151, fn 4. (emphasis original) ↩

⁹⁶ As explained below in para. 8.289, this Section of the Report also includes an analysis of whether pre-2007 DOD procurement contracts are specific subsidies within the meaning of Articles 1 and 2 of the SCM Agreement. ↩

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benefiting the 787 and 777X cause serious prejudice in respect of the A350XWB and A330; and (b) whether subsidies benefiting the 737 MAX and 737NG cause serious prejudice in respect of the A320neo and A320ceo, respectively, in each case, through the various causal mechanisms alleged by the European Union.

6.47. In Section 10 of the Report, we examine the European Unions' claims that the subsidies granted or maintained by the United States are inconsistent with Articles 3.1(a) and (b) and 3.2 of the SCM Agreement and Article III:4 of the GATT 1994, insofar as we will have found those claims to be within our terms of reference and within the scope of this proceeding.

7 WHETHER CERTAIN MEASURES AND CLAIMS ARE OUTSIDE THE PANEL'S TERMS OF REFERENCE OR ARE OTHERWISE OUTSIDE THE SCOPE OF THIS PROCEEDING

7.1 Introduction

7.1. In this Section of the Report, we address whether certain measures, and claims with respect to certain measures, are outside the Panel's terms of reference or are otherwise outside the scope of this proceeding. In Section 1.3.3, we indicate that on 13 November 2012, the United States submitted a request for preliminary rulings, objecting to the inclusion of certain claims and challenged measures as outside the Panel's terms of reference. Although the United States raises many specific objections, which we address in this Section, they are generally of one of the following three types:

1. objections based on a failure to comply with the requirements of Article 6.2 of the DSU to identify the specific measures at issue and to provide a brief summary of the legal basis of the complaint sufficient to present the problem clearly;
2. objections to the inclusion of certain measures within the scope of the compliance proceeding on the basis that the challenged measures are neither measures subject to the DSB recommendations and rulings, nor measures taken to comply, within the meaning of Article 21.5 of the DSU; and
3. objections that the European Union is precluded from bringing certain claims in respect of certain measures on the basis that these claims: (i) were unsuccessfully brought against certain measures in the original proceeding and therefore cannot be "re-litigated" in relation to those same measures in the compliance proceeding; or (ii) were not brought against certain measures in the original proceeding when they could have been and therefore cannot be brought against those same measures for the first time in the compliance proceeding.

7.2. For purposes of our discussion below, we refer to the objections involving conformity with the requirements of Article 6.2 of the DSU as "terms of reference" objections, while the other types of objections we refer to more generally as "scope" objections. Although these latter types of objections also pertain to the Panel's terms of reference, the issues raised by these objections relate to the permissible scope of compliance proceedings under Article 21.5 of the DSU.

7.3. In Section 7.2 below, we address the various objections made by the United States to the inclusion of certain Washington state and local measures within the scope of this proceeding. The scope objections regarding the DOD aeronautics R&D measures, the FAA aeronautics R&D measure and the South Carolina measures are addressed in Sections 7.3, 7.4 and 7.5, respectively. In Section 7.6 we address a number of objections pertaining to the European Union's claims under Articles 3.1(a), 3.1(b), and 3.2 of the SCM Agreement and Article III of the GATT 1994.

7.4. As explained in Section 1.3.3.2 of this Report, on 4 March 2014, the Panel received a request from the European Union for leave to file an additional submission dealing with the "legal ramifications" of SSB 5952, enacted in 2013 to amend the Washington State tax measures in certain respects, which it argued constituted "additional measures taken to comply by the United States" that are within the scope of this proceeding.⁹⁷ The Panel declined the European Union's request on 27 May 2014. The Panel issued its reasons for that decision to the

⁹⁷ European Union's letter to the Panel, dated 4 March 2014, para. 1. ↩

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parties on 18 September 2014, explaining that the Washington State tax measures, as amended by SSB 5952, are outside the Panel's terms of reference. The text of this ruling appears in Section 7.7 of this Report.

7.2 Washington state and local measures

7.5. The European Union's claims in this proceeding cover, among other measures, five tax measures enacted by the State of Washington or its municipalities, each of which was challenged and found to be a specific subsidy in the original proceeding:

1. Washington State B&O tax rate reduction for the aerospace industry;
2. Washington State B&O tax credits for preproduction/aerospace product development;
3. Washington State B&O tax credit for property taxes;
4. Washington State sales and use tax exemptions for computer software, hardware, and peripherals; and
5. City of Everett B&O tax rate reduction.

7.6. The European Union also identifies two additional measures enacted by the State of Washington that have come into existence since the end of the reference period in the original proceeding (i.e. the end of 2006). These two measures are:

1. Washington State B&O tax credit for leasehold excise taxes granted pursuant to House Bill 2466 (HB 2466)⁹⁸; and
2. the establishment and operation of the Washington State Joint Center for Aerospace Technology Innovation (JCATI).⁹⁹

7.7. The United States requests rulings that the Washington measures that were challenged by the European Communities in the original proceeding, other than the Washington State B&O tax rate reduction in subparagraph (a) of paragraph 7.5 above, are outside the scope of this compliance proceeding on the basis that those measures, while found to constitute specific subsidies, were not found to have caused adverse effects and therefore were not subject to the DSB recommendations and rulings.

7.8. The United States also objects to the inclusion of the Washington State B&O tax credit for leasehold excise taxes and the JCATI measure within the scope of this proceeding on the basis that those measures are neither declared measures taken to comply, nor have they been demonstrated to constitute "undeclared" measures taken to comply on the basis of their close nexus in terms of nature, effects, and timing, with any declared measures taken to comply, or with the DSB recommendations and rulings.

7.9. Although the European Union's submissions present the Washington State B&O tax credit for leasehold excise taxes as a separate measure from the Washington State B&O tax credit for property taxes, HB 2466 in fact modifies the scope of application of the B&O tax credit previously available with respect to property taxes, to additionally be available with respect to leasehold excise taxes.¹⁰⁰ Another Washington measure that was challenged in the original proceeding;

⁹⁸ European Union's first written submission, para. 491. This measure, while presented in the European Union's first written submission as a measure distinct from the B&O tax credit for property taxes, was enacted under House Bill 2466 (HB 2466) as an expansion of the B&O tax credit on property taxes. The European Union alleges that the United States maintains the Washington State B&O tax credit for leasehold excise taxes and that this subsidy contributes to present adverse effects when it is "aggregated" with other subsidies that operate through a price causal mechanism, and when the effects of those subsidies are "cumulated". ↩

⁹⁹ European Union's first written submission, para. 541. ↩

¹⁰⁰ HB 2466 section 10 provides as follows: ↩

Sec. 10. RCW 82.04.4463 and 2005 c 514 s 501 are each amended to read as follows:

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namely, the Washington State B&O tax credits for preproduction/aerospace product development, was similarly modified by section 7 of Washington State Substitute Senate Bill 6828 (SSB 6828) to expand: (a) the application of the tax credits to all aerospace product development, rather than just preproduction development; and (b) the eligible entities/persons that may claim the credit (so as to permit non-manufacturing entities to claim the credit for expenditures after 30 June 2008).¹⁰¹ The modifications to the Washington State B&O tax credit measures expand the availability of those tax credits and thus the existing original measures. In the circumstances, it seems somewhat artificial to analyse these modifications on the basis that they are "new" measures, separate from the original measures that they modify.¹⁰²

7.10. Therefore, in our analysis of the United States' objections to the inclusion of the Washington state and local measures within the scope of this proceeding, we treat the original B&O tax credit measure and the modification thereto as the same measure; i.e. the Washington State B&O tax credit for property taxes is as modified by HB 2466 to apply to leasehold excise taxes, and the Washington State B&O tax credits for preproduction/aerospace product development are as modified by section 7 of SSB 6828.¹⁰³

7.2.1 Whether the four original Washington tax measures are outside the scope of this proceeding

7.11. The United States' makes preliminary rulings requests concerning three tax measures maintained by the State of Washington and one tax measure maintained by the City of Everett (the four original Washington tax measures):

1. Washington State B&O tax credits for preproduction/aerospace product development;
2. Washington State B&O tax credit for property taxes;
3. Washington State sales and use tax exemptions for computer software, hardware, and peripherals; and
4. City of Everett B&O tax rate reduction.

(1) In computing the tax imposed under this chapter, a credit is allowed for property taxes and leasehold excise taxes paid during the calendar year.
(2) The credit is equal to:
(a)(i) (A) Property taxes paid on new buildings, and land upon which this property is located, built after December 1, 2003, and used exclusively in manufacturing commercial airplanes or components of such airplanes; and
(B) Leasehold excise taxes paid with respect to a building built after January 1, 2006, the land upon which the building is located, or both, if the building is used exclusively in manufacturing commercial airplanes or components of such airplanes … .
(House Bill 2466, sections 10(1) and (2)(a)(i)(B) (2006), (Exhibit EU-439), section 10 (underlining original))

The Final Bill Report for HB 2466 also characterized the B&O tax credit for leasehold excise taxes as being an expansion of the original tax credit for property taxes:

The B&O tax credit for property taxes paid on property used in the manufacture of commercial airplanes and airplane components is expanded to include leasehold excise taxes. The credit starts January 1, 2007.
(Summary of the Final Bill Report for House Bill 2466 (C 177 L 06), 1 January 2007, (Exhibit EU-436))

¹⁰¹ Substitute Senate Bill 6828, "Aerospace Tax Incentives", Washington Session Laws 365 (2008), (Exhibit EU-434). See European Union's first written submission, para. 450. ↩

¹⁰² For example, the European Union has argued that the Washington State B&O tax credit for leasehold excise taxes is within the scope of this proceeding as a measure taken to comply on the basis of its close nexus to the measure prior to its amendment, or to the DSB recommendations and rulings. ↩

¹⁰³ We therefore do not regard as being on point the United States' objection that the Washington State B&O tax credit for leasehold excise taxes is not within the scope of this proceeding because the European Union has failed to demonstrate that this "measure" meets the requirements of the close nexus test. (See United States' second written submission, paras. 80-84). Given the Panel's view that this so-called measure is in fact a modification to extend the scope of the original Washington State B&O tax credit for property taxes, we do not consider that the European Union was required to demonstrate that the modification as a standalone new measure satisfies the requirements of the close nexus test. ↩

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7.12. All four original Washington tax measures were previously challenged as actionable subsidies in the original proceeding, however, none was found to cause serious prejudice, within the meaning of Articles 5(c) and 6.3 of the SCM Agreement. Consequently, none of these measures was subject to the DSB recommendations and rulings.

7.13. In this proceeding, the European Union alleges that each of these measures is a specific subsidy, that the United States continues to maintain these subsidy programmes, and that they cause adverse effects to the European Union's interests.¹⁰⁴ The United States requests preliminary rulings that the four original Washington tax measures are outside the scope of the compliance proceeding because the original panel had found that these measures did not cause serious prejudice, and that finding was not disturbed by the Appellate Body.¹⁰⁵

7.2.1.1 Main arguments of the parties and third parties

7.14. The United States argues that the four original Washington tax measures are outside the scope of this compliance proceeding because they existed and were challenged on the merits in the original proceeding. They are accordingly not measures taken to comply with the DSB recommendations and rulings. The United States notes that Article 21.5 of the DSU provides for panel proceedings "{w}here there is disagreement as to the … consistency with a covered agreement of measures taken to comply with the recommendations and rulings" of the DSB. The United States submits that the "negative implication of this charging" is that Article 21.5 does not provide relief for disagreements about other types of measures, referring to the Appellate Body in Canada – Aircraft (Article 21.5 – Brazil):

Proceedings under Article 21.5 do not concern just any measure of a Member of the WTO; rather, Article 21.5 proceedings are limited to those "measures taken to comply with the recommendations and rulings" of the DSB. In our view, the phrase "measures taken to comply" refers to measures which have been, or which should be, adopted by a Member to bring about compliance with the recommendations and rulings of the DSB.¹⁰⁶

7.15. The United States argues that the Appellate Body has "defined" the term "measure taken to comply" to refer, inter alia, to "measures which have been, or which should be, adopted by a Member to bring about compliance with the recommendations and rulings of the DSB".¹⁰⁷ According to the United States, a measure that existed and was in fact unsuccessfully challenged on the merits in the original proceedings cannot be a measure adopted by a Member to bring about compliance with the DSB recommendations and rulings.¹⁰⁸ Accordingly, claims that those measures are inconsistent with the covered agreements are not properly within the terms of reference of a compliance panel.

7.16. Moreover, the United States submits that expanding the terms of reference of a compliance proceeding to include claims against measures on which the complaining party did not prevail on the merits in the original proceeding would seriously prejudice the responding party's interests. After the DSB adopts its recommendations and rulings in the original proceeding, the responding party has no reason to consider that it should modify or withdraw measures considered on the

¹⁰⁴ European Union's first written submission, para. 429. The European Union also claims that each of these measures is a prohibited subsidy within the meaning of Article 3 of the SCM Agreement and is inconsistent with Article III:4 of the GATT 1994. The United States has also raised preliminary objections pertaining to the European Union's claims under Article 3 of the SCM Agreement and Article III:4 of the GATT 1994, including with respect to the Washington state and local measures. We discuss the United States' objections to the inclusion of those claims within the scope of this proceeding in Section 7.6 of this Report. ↩

¹⁰⁵ United States' first written submission, paras. 77, 494, and 499. ↩

¹⁰⁶ United States' second written submission, para. 14 (referring to Appellate Body Report, Canada – Aircraft (Article 21.5 – Brazil), para. 36; quoted also in Appellate Body Report US – Zeroing (EC) (Article 21.5 – EC), para. 199). (emphasis original) ↩

¹⁰⁷ United States' first written submission, fn 796; response to Panel question No. 3, para. 12 (referring to Appellate Body Reports, Canada – Aircraft (Article 21.5 – Brazil), para. 36; and US – Softwood Lumber IV (Article 21.5 – Canada), para. 77). ↩

¹⁰⁸ See United States' response to Panel question No. 3, para. 13: "by definition a measure that existed at the time when the original panel was established and was not subject to any DSB recommendation is not a measure 'taken to comply' with any DSB recommendations" (emphasis original). See also United States' second written submission, para. 15; response to Panel question No. 3, para. 12; and comments on the European Union's response to Panel question No. 3, para. 23. ↩

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merits and not found to be WTO-inconsistent. An overly expansive reading of Article 21.5 would require responding parties to either assume that a compliance panel would reverse the DSB findings with respect to a measure, or risk potential countermeasures with no opportunity for a reasonable period of time in which to come into compliance.¹⁰⁹

7.17. The United States rejects the European Union's attempt to distinguish between the "instances of application" of the relevant subsidy programmes that were challenged in the original proceeding and the "instances of application" of those programmes presently being challenged in order to argue that the measures are within the scope of this proceeding.¹¹⁰ The United States regards the four original Washington tax "measures" that were before the original panel and the "measures" that the European Union is seeking to challenge now as being one and the same – there is no basis for treating "subsequent instances of application" of a measure as a separate measure.¹¹¹

7.18. The United States further rejects the European Union's assertion that the four original Washington tax measures are within the Panel's terms of reference on the basis of their close nexus to the Washington State B&O tax rate reduction.¹¹² According to the United States, the basis of the European Union's assertion is flawed because the four original Washington tax measures cannot be measures taken to comply: These measures existed at the time when the original panel was established and were not subject to any DSB recommendation or ruling. A panel cannot find that a measure unsuccessfully challenged on the merits in the original proceeding constitutes a measure taken to comply on the basis of the close nexus test.¹¹³

7.19. The European Union rejects the United States' objection that the four original Washington tax measures are outside the Panel's terms of reference. The fact that the original panel did not ultimately find that these measures caused adverse effects during the particular reference period at issue does not now create an issue of jurisdiction or terms of reference.

7.20. The European Union submits that a panel's terms of reference are fixed by the complaining Member in the panel request. It is when a matter is not set out in the panel request in accordance with the requirements of Article 6.2 of the DSU that it is outside the panel's terms of reference and the panel does not have the authority to rule on it.¹¹⁴ When a matter is properly within the jurisdiction and terms of reference of a WTO adjudicator, that adjudicator is required to assess and rule upon it (subject to the proper exercise of judicial economy which is not relevant for present purposes).¹¹⁵

7.21. The European Union argues that Article 21.5 of the DSU captures two types of disputes over the existence of measures taken to comply: disputes about whether a particular measure (whether an act or omission) exists, and disputes about whether a particular measure should exist.¹¹⁶ According to the European Union, the United States has failed to ensure that the measures in question, as they are maintained and currently applied, are in conformity with WTO law. There is

¹⁰⁹ United States' response to Panel question No. 3, para. 14. ↩

¹¹⁰ United States' comments on the European Union's response to Panel question No. 4, para. 25 (referring to the European Union's response to Panel question No. 4, para. 35). ↩

¹¹¹ United States' comments on the European Union's response to Panel question No. 4, para. 25; second written submission, para. 38. ↩

¹¹² Although the parties in their submissions address certain of their arguments concerning the measures and claims that are within the scope of this compliance proceeding as "terms of reference" issues, as we explain in paragraph 7.2 we refer to the objections involving conformity with the requirements of Article 6.2 of the DSU as "terms of reference" objections, while the other types of objections we refer to more generally as "scope" objections. ↩

¹¹³ United States' response to Panel question No. 3, para. 13. According to the United States, to do so would conflict with the basic definition of a "measure taken to comply" which is "in principle … a new and different measure" (quoting from Appellate Body Report, Canada – Aircraft (Article 21.5 – Brazil), para. 41). Second written submission, paras. 74-76. ↩

¹¹⁴ European Union's second written submission, para. 17. ↩

¹¹⁵ European Union's second written submission, para. 26. ↩

¹¹⁶ European Union's opening statement at the meeting of the Panel, para. 11; second written submission, paras. 31 and 32; and European Union's comments on the United States' response to Panel question No. 1, para. 8. ↩

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thus a "disagreement" between the parties as to whether the United States is under an obligation to do so: This matter clearly falls within the scope of Article 21.5 of the DSU.¹¹⁷

7.22. The European Union argues that in the original proceeding, each of the four original Washington measures "and their relevant instances of application" was found to be a specific subsidy, and these findings were not appealed by the United States. The European Union considers that the question of whether these specific subsidy programmes "and their present instances of application cause adverse effects in a new reference period" requires consideration of changing facts in the evolving market, as well as consideration of the Appellate Body's clarification of the law on aggregation and cumulation of subsidies. Thus, the measures and the facts and evidence with regard to the "instances of application of these programmes that post-date the original proceedings" have changed. Given that these instances of application are not separable from the programmes themselves, all of the relevant measures are therefore within the scope of the compliance proceeding.¹¹⁸

7.23. In addition, the European Union argues that the four original Washington tax measures are within the scope of this proceeding based on their particularly close relationship to declared measures taken to comply and to the DSB recommendations and rulings (i.e. on the basis that they can be considered "undeclared" measures taken to comply due to their close nexus with declared measures taken to comply and the DSB recommendations and rulings in the original proceeding). The first three of the original Washington tax measures were all part of the same "overarching measure" as the Washington State B&O tax rate reduction (which was subject to the DSB recommendations and rulings); namely, House Bill 2294 (HB 2294) and the Project Olympus Master Site Agreement. The European Union argues that there is a sufficiently close nexus, in terms of nature, effects, and timing, between the first three original Washington tax measures and the Washington State B&O tax rate reduction to satisfy the close nexus test and bring the first three original Washington tax measures within the scope of the compliance proceeding as "undeclared" measures taken to comply.¹¹⁹

7.24. As to the fourth original Washington tax measure, the City of Everett B&O tax rate reduction, the European Union argues that the nature of this measure is identical to the Washington State B&O tax rate reduction, being the same type of tax reduction enacted at the municipal rather than state level. Like the other original Washington tax measures, this measure is a tax reduction to lower Boeing's overall tax liability, it worsens the United States' existing situation of non-compliance by increasing the amount of revenue due that is foregone, and the value of the tax measure has increased subsequent to the adoption of the DSB recommendations and rulings (a factor that the European Union argues is relevant to the "timing" element of the close nexus test).¹²⁰

7.25. Brazil argues that, while it supports a "broad approach" to determining the scope of Article 21.5 proceedings, any such approach must ensure that compliance panels not be used as a forum for a complaining Member to re-litigate issues relating to measures that were not found to be inconsistent with a covered agreement in the original proceedings or as a forum for the remand of matters that could have been (but were not) taken up by the Appellate Body in response to a request to complete the analysis.¹²¹ Compliance proceedings should not unfairly give complainants a "second bite of the apple".¹²² However, Brazil considers that, with respect to claims that were not definitively resolved in the original proceeding, a distinction may need to be made between matters for which the Appellate Body was asked to fully consider the issues but was unable to complete its analysis, and matters for which the complaining party did not seek full consideration.¹²³

7.26. Canada considers that, as a general proposition, a complainant is prohibited from re-litigating matters that were decided and lost on the merits in the original proceedings.¹²⁴

¹¹⁷ European Union's second written submission, paras. 32 and 48. ↩

¹¹⁸ European Union's response to Panel question No. 4, paras. 34 and 35; second written submission, paras. 55 and 78. ↩

¹¹⁹ European Union's second written submission, paras. 126,127, 130, and 133. ↩

¹²⁰ European Union's second written submission, paras. 126, 129, 132, and 133. ↩

¹²¹ Brazil's third-party submission, para. 35; third-party response to Panel question No. 1, para. 5. ↩

¹²² Brazil's third-party response to Panel question No. 1, para. 5. ↩

¹²³ Brazil's third-party response to Panel question No. 1, para. 6. ↩

¹²⁴ Canada's third-party response to Panel question No. 1, paras. 4 and 6. ↩

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Specifically, claims in which the complainant did not establish a prima facie case, or where there was a finding of WTO-consistency are outside the scope of compliance proceedings.¹²⁵ However, Canada also considers that claims should not be excluded where the original panel or Appellate Body exercised judicial economy, or was unable to complete the analysis.¹²⁶ In either situation, the merits of the claim have not been decided and the respondent should thus not have an expectation of finality of the decision.¹²⁷

7.27. Japan, while noting that the scope of Article 21.5 proceedings is not limited to a measure declared by the implementing Member to be a measure taken to comply, submits that the scope of claims that may be raised is not "unbounded". Japan takes the general position that allowing re-litigation of issues that were the subject of the original proceedings, or otherwise providing the complainant with an "unfair second chance", should be avoided.¹²⁸ Like Canada, Japan points to the specific situation of a complainant failing to establish a prima facie case, or a finding of WTO consistency, as examples of situations in which claims are outside the scope of compliance proceedings.¹²⁹

7.28. Korea points out that Article 21.5 of the DSU operates to provide a prompt and efficient forum for addressing any claims that were not, for whatever reason, finally resolved in the original proceedings.¹³⁰ Korea emphasizes in particular that the requirement of "unconditional acceptance" of a panel or Appellate Body report only precludes a party from re-litigating those issues that were "actually addressed" and "finally decided by the panel or Appellate Body".¹³¹

7.2.1.2 Evaluation by the Panel

7.29. The United States' requests raise the question of whether each of the four original Washington tax measures is within the scope of this compliance proceeding, notwithstanding that there were no DSB-adopted recommendations and rulings in relation to these measures in the original proceeding.

7.30. It is well settled that Appellate Body findings and unappealed panel findings that are adopted by the DSB must be regarded as a final resolution to a dispute between the parties in respect of the particular claim and the specific component of the measure that is the subject of that claim.¹³² The Appellate Body based this conclusion on its analysis of the relevant provisions of the DSU:

Thus, a reading of Articles 16.4 and 19.1, paragraphs 1 and 3 of Article 21, and Article 22.1, taken together, makes it abundantly clear that a panel finding which is not appealed, and which is included in a panel report adopted by the DSB, must be accepted by the parties as a final resolution to the dispute between them, in the same way and with the same finality as a finding included in an Appellate Body Report adopted by the DSB – with respect to the particular claim and the specific component of the measure that is the subject of the claim.¹³³

With respect to Article 21.5 of the DSU, the Appellate Body stated:

Article 21.5 advances the purpose of achieving a prompt settlement of disputes by providing an expeditious procedure to establish whether a Member has fully complied with the recommendations and rulings of the DSB. … It would be incompatible with the function and purpose of the WTO dispute settlement system if a claim could be reasserted in Article 21.5 proceedings after the original panel or the Appellate Body has made a finding that the challenged aspect of the original measure is not inconsistent with WTO obligations, and that report has been adopted by the DSB. At

¹²⁵ Canada's third-party statement, para. 4; third-party response to Panel question No. 1, para. 5. ↩

¹²⁶ Canada's third-party response to Panel question No. 1, para. 8. ↩

¹²⁷ Canada's third-party response to Panel question No. 1, para. 8. ↩

¹²⁸ Japan's third-party response to Panel question No. 1, para. 4. ↩

¹²⁹ Japan's third-party response to Panel question No. 1, para. 1. ↩

¹³⁰ Korea's third-party submission, para. 13. ↩

¹³¹ Korea's third-party submission, para. 12; third-party statement, paras. 6-8. ↩

¹³² Appellate Body Report, EC – Bed Linen (Article 21.5 – India), para. 93. ↩

¹³³ Appellate Body Report, EC – Bed Linen (Article 21.5 – India), para. 93. (emphasis original) ↩

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some point, disputes must be viewed as definitely settled by the WTO dispute settlement system.¹³⁴

7.31. In EC – Bed Linen (Article 21.5 – India), the original panel found that the complaining party had failed to make a prima facie case with respect to its challenge to an element of a measure that remained unchanged in the compliance proceeding. The complaining party had not appealed the panel's finding that it had failed to make a prima facie case, and that finding formed part of the panel report adopted by the DSB. In those circumstances, the complaining party could not raise the same claim against the same aspect of the implementation measure in the compliance proceeding.¹³⁵

7.32. The Appellate Body has also referred to the "due process concerns" if a complaining party were provided, through an Article 21.5 proceeding, an unfair "second chance" to make a case it had failed to make in the original proceedings, in a manner that would compromise the finality of the DSB recommendations and rulings.¹³⁶

7.33. However, the Appellate Body has permitted complaining parties in compliance proceedings to reassert claims against aspects of measures where such claims were unsuccessfully asserted in the original proceeding. It appears to us that the Appellate Body has done so in situations where the finality of the DSB recommendations and rulings would not thereby be compromised. Thus, a complaining party in a compliance proceeding was able to reassert claims against aspects of measures that were unchanged from those unsuccessfully challenged in the original proceedings, where the original panel had exercised judicial economy with respect to one challenged aspect of an original measure, that aspect had become an integral part of the measure taken to comply, and the challenge was to that same aspect of the measure taken to comply.¹³⁷ The Appellate Body distinguished this situation from one in which the complaining party had been unsuccessful in the original proceedings, either because that aspect of the measure had been found WTO-consistent, or the complaining party had failed to make out a prima facie case.

7.34. Similarly, a complaining party in a compliance proceeding was permitted to challenge the same aspect of a measure taken to comply that it had unsuccessfully challenged on appeal in the original proceeding owing to a reversal of the panel's finding by the Appellate Body in favour of the complaining party, but an inability of the Appellate Body to complete the analysis due to insufficient factual findings or undisputed facts on record.¹³⁸

7.35. Our review of the case law suggests that, while panels and the Appellate Body have been careful not to permit complaining parties to use Article 21.5 proceedings as an opportunity to re-litigate issues that were resolved adversely to them in the original proceeding, this does not apply where the failure to achieve a definitive resolution of a claim cannot reasonably, in the circumstances, be laid at the feet of the complaining party. The Appellate Body has no power to remand a decision back to a panel to apply a corrected interpretation of the law to the facts. Moreover, in certain situations, the Appellate Body may simply be unable to complete the analysis by applying that corrected interpretation to the panel's factual findings or undisputed factual material on the record. In these circumstances, while a complaining party may in some senses have been "unsuccessful" in establishing its claims at the end of the compliance proceeding, it is more accurate to consider the claims unresolved. To permit a complaining party to seek resolution of those unresolved claims as part of a compliance proceeding does not necessarily afford it an unfair second chance.

¹³⁴ Appellate Body Report, EC – Bed Linen (Article 21.5 – India), para. 98. (italics original, underlining added, fn omitted) ↩

¹³⁵ Appellate Body Report, EC – Bed Linen (Article 21.5 – India), para. 96. ↩

¹³⁶ Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 210: ↩

Because adopted panel and Appellate Body reports must be accepted by the parties to a dispute, allowing a party in an Article 21.5 proceeding to re-argue a claim that has been decided in adopted reports would indeed provide an unfair "second chance" to that party.
(fn omitted)

See also Appellate Body Report, US – Zeroing (EC) (Article 21.5 – EC), para. 428.

¹³⁷ Appellate Body Report, US – Oil Country Tubular Goods Sunset Reviews (Article 21.5 – Argentina), para. 150. ↩

¹³⁸ Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 210. ↩

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7.36. We also recall that Article 3.3 of the DSU sets forth the principle that the prompt settlement of disputes is essential to the effective functioning of the WTO. The Appellate Body has stated that: "the aim of Article 21.5 of the DSU is to promote the prompt compliance with DSB recommendations and rulings and the consistency of 'measures taken to comply' with the covered agreements by making it unnecessary for a complainant to begin new proceedings and by making efficient use of the original panellists and their relevant experience."¹³⁹

7.37. The United States argues that the only measures susceptible to review in compliance proceedings are original measures in respect of which there are DSB-adopted recommendations and rulings, and measures properly characterized as being measures taken to comply with the DSB recommendations and rulings (whether declared by the responding party or "undeclared"). The United States says that in Canada – Aircraft (Article 21.5 – Brazil), the Appellate Body defined the phrase "measures taken to comply" in Article 21.5 of the DSU in a manner which logically prevents original measures from falling within the scope of a compliance proceeding under Article 21.5 of the DSU.

7.38. In Canada – Aircraft (Article 21.5 – Brazil), the Appellate Body said:

Proceedings under Article 21.5 do not concern just any measure of a Member of the WTO; rather, Article 21.5 proceedings are limited to those "measures taken to comply with the recommendations and rulings" of the DSB. In our view, the phrase "measures taken to comply" refers to measures which have been, or which should be, adopted by a Member to bring about compliance with the recommendations and rulings of the DSB. In principle, a measure which has been "taken to comply with the recommendations and rulings" of the DSB will not be the same measure as the measure which was the subject of the original dispute, so that, in principle, there would be two distinct and separate measures: the original measure which gave rise to the recommendations and rulings of the DSB, and the "measures taken to comply" which are – or should be – adopted to implement those recommendations and rulings.¹⁴⁰

7.39. In explaining the meaning of the phrase "measures taken to comply", in the above-referenced passage from its report in Canada – Aircraft (Article 21.5 – Brazil), the Appellate Body did not set forth a definitive list of measures that may properly be considered to be within the scope of proceedings brought under Article 21.5 of the DSU. Rather, the Appellate Body's statement that in principle, a measure taken to comply will not be the same as the measure challenged in the original proceeding, explained why the panel, in reviewing the consistency of the implementation measure in that compliance proceeding, was not confined to examining its consistency with the relevant provisions of the WTO agreements from the perspective of the reasoning adopted by the original panel when it had reviewed the original measure and found it to be WTO-inconsistent. The Appellate Body found that the proceedings in question in that case involved the consistency of the revised programme (i.e. a new measure) with Article 3.1(a) of the SCM Agreement.¹⁴¹ The Appellate Body sought to explain why, in compliance proceedings where the measure at issue is a new measure, the compliance panel should not confine its analysis of the consistency with the covered agreements of the measures taken to comply to the perspective of the claims, arguments and facts that related to the original measure.¹⁴²

7.40. As the European Union observes, the Appellate Body has also indicated that the scope of Article 21.5 proceedings includes disagreements as to the existence of measures taken to comply,

¹³⁹ See Appellate Body Report, US – Oil Country Tubular Goods Sunset Reviews (Article 21.5 – Argentina), para. 151. We further note that in two cases in which a complaining party in a compliance proceeding was permitted to reassert claims against unchanged aspects of original measures incorporated into a measure taken to comply, and which had not been definitively resolved on the merits in the original proceeding, one of the justifications advanced by the Appellate Body was that it would not be efficient for a new panel to examine those claims, while other aspects of the same measure were being considered by the compliance panel. (See Appellate Body Reports, US – Oil Country Tubular Goods Sunset Reviews (Article 21.5 – Argentina), para. 151; and US – Upland Cotton (Article 21.5 – Brazil), para. 212). ↩

¹⁴⁰ Appellate Body Report, Canada – Aircraft (Article 21.5 – Brazil), para. 36. (emphasis original, fns omitted) ↩

¹⁴¹ Appellate Body Report, Canada – Aircraft (Article 21.5 – Brazil), para. 37. ↩

¹⁴² Appellate Body Report, Canada – Aircraft (Article 21.5 – Brazil), para. 41. ↩

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including situations where the responding party has failed to adopt implementing measures.¹⁴³ In other words, Article 21.5 proceedings clearly encompass situations in which the responding party arguably should have revised an original measure, even if it did not. That being so, it is difficult to sustain the United States' argument that an original measure is, logically and by definition, outside the scope of a compliance proceeding.

7.41. In our view, the relevant issue is not whether original measures are per se outside the scope of a compliance proceeding because original measures not the subject of DSB recommendations and rulings can never logically be measures taken to comply. Rather, the issue is in which circumstances a complaining party may, in a compliance proceeding, pursue claims against original measures that it had pursued in the original proceedings. The answer depends on the way in which the claim against the particular original measure was resolved in the original proceeding. More specifically, as we have explained in paragraph 7.35 above, a panel should consider whether the original measure was "unsuccessfully" challenged on the merits in the original proceeding, such that it cannot be raised again without compromising the finality of the DSB recommendations and rulings.¹⁴⁴

7.42. Accordingly, in determining whether the European Union may reassert claims against any of the four original Washington tax measures in this proceeding, we will examine the status of the claims in respect of those measures at the conclusion of the original proceedings. If there was a positive finding that the particular measure was "not inconsistent" with the challenged provision of the covered agreements, then on the basis of EC – Bed Linen (Article 21.5 – India), the European Union would be precluded from reasserting the same claims against the such measures in this proceeding. This is because to allow it to do so would compromise the finality of the DSB recommendations and rulings.

7.43. We begin by recalling that all four original Washington tax measures were found by the panel in the original proceeding to be specific subsidies.¹⁴⁵ None of these findings was disturbed on appeal. Although the original panel found that none of the four original Washington tax measures caused serious prejudice, these findings were reversed on appeal owing to faults that the Appellate Body found with aspects of the panel's assessment of serious prejudice. We set forth in some detail below how the Appellate Body's modification of the panel's reasoning, in the context of the three LCA product markets at issue, ultimately affected whether any of the four original Washington tax measures could be definitively considered not to have caused serious prejudice in any of the LCA product markets. Based on those conclusions, we then determine whether a consideration of the same measures in this proceeding would compromise the finality of the DSB recommendations and rulings.

7.44. The European Communities argued in the original proceeding that the Washington State B&O tax credits for preproduction/aerospace product development, the Washington State B&O tax credit for property taxes and the Washington State sales and use tax exemptions for computer software, hardware, and peripherals, as "untied" subsidies, operated to increase Boeing's non-operating cash flow.¹⁴⁶ The panel found that these subsidies, when aggregated with the other subsidies that operated to increase Boeing's non-operating cash flow, were of an insufficient magnitude to have had any appreciable impact on Boeing's LCA prices, and thus on sales or prices

¹⁴³ Appellate Body Report, Canada – Aircraft (Article 21.5 – Brazil), para. 36: ↩

In our view, the phrase "measures taken to comply" refers to measures which have been, or which should be, adopted by a Member to bring about compliance with the recommendations and rulings of the DSB.
(emphasis added)

¹⁴⁴ We note that the United States' argument is that "a measure that was in existence at the time of the establishment of the original panel, and that was unsuccessfully challenged on the merits in the original proceeding, cannot constitute a measure taken to comply." (See United States' response to Panel question No. 3, para. 12 (emphasis added)). See also United States' second written submission, para. 15; and comments on the European Union's response to Panel question No. 4, para. 23. ↩

¹⁴⁵ The panel findings in relation to the existence of a subsidy and specificity are in Panel Report, US – Large Civil Aircraft (2^nd complaint), paras. 7.179, 7.212, 7.302, 7.333, and 7.346. ↩

¹⁴⁶ Panel Report, US – Large Civil Aircraft (2^nd complaint), para. 7.1609. By "untied" subsidies, the Panel refers to subsidies the receipt of which is not contingent on the production or sale of a particular product on a per-unit basis. Such subsidies may be contrasted with "tied" subsidies, which in the context of this dispute, refer to subsidies the receipt of which is contingent on the production or sale of a particular product on a per-unit basis. (See paras. 9.68-9.71 below). See also Appellate Body Report, US – Large Civil Aircraft (2^nd complaint), para. 1339. ↩

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of Airbus LCA.¹⁴⁷ Therefore, at the panel stage, none of those three Washington tax measures was found to cause serious prejudice in any LCA product market.

7.45. The European Communities further argued that the City of Everett B&O tax rate reduction, as a subsidy that was tied on a per-unit basis to the production or sale of LCA manufactured in Everett (and therefore applied to the 777 and 787 families of LCA), operated to reduce Boeing's marginal unit costs of production and sale of LCA.¹⁴⁸ The panel found that the effect of the City of Everett B&O tax rate reduction (when aggregated with the other tied tax subsidies that operated to reduce Boeing's marginal unit costs, i.e. the FSC/ETI subsidies and the Washington State B&O tax rate reduction) was significant price suppression, significant lost sales, and displacement and impedance of exports in the 300-400 seat LCA product market. The panel declined to aggregate the effects of the tied tax subsidies (i.e. the Washington State and City of Everett B&O tax rate reductions, since FSC/ETI did not apply to 787 sales) with those of the aeronautics R&D subsidies in the 200-300 seat LCA product market on the basis that the tied tax subsidies and the aeronautics R&D subsidies operated through distinct causal mechanisms.¹⁴⁹ Considered separately from the effects of the aeronautics R&D subsidies in the 200-300 seat LCA product market, the effects of the City of Everett B&O tax rate reduction (and the Washington State B&O tax rate reduction) would not have had such an effect on Boeing's 787 pricing as to cause serious prejudice to Airbus in the 200-300 seat LCA product market. Thus at the panel stage, the City of Everett B&O tax rate reduction was found to have caused serious prejudice in the 300-400 seat LCA product market, but not in the 200-300 seat LCA product market.

7.46. On appeal, the Appellate Body first dealt with the United States' appeals of the panel's findings that: (a) the FSC/ETI subsidies and Washington State B&O tax rate reduction caused serious prejudice in the 100-200 seat LCA product market; and (b) the FSC/ETI, Washington State B&O tax rate reduction and City of Everett B&O tax rate reduction caused serious prejudice in the 300-400 seat LCA product market. The Appellate Body reversed the panel's findings on the ground that the panel had not provided a proper legal basis for them.¹⁵⁰ It then attempted to complete the analysis with the following results:

1. the FSC/ETI subsidies and Washington State B&O tax rate reduction, in two LCA sales campaigns, caused serious prejudice in the 100-200 seat LCA product market¹⁵¹;
2. it was not possible to complete the analysis of the effects of the FSC/ETI subsidies, Washington State B&O tax rate reduction and City of Everett B&O tax rate reduction in the 300-400 seat LCA product market because the panel had not engaged with the evidence concerning the "other factors" that the United States alleged had attenuated the causal link between the subsidies and the adverse effects.¹⁵²

7.47. The Appellate Body then dealt with the European Union's appeals.¹⁵³ In short, it reached the following outcomes:

1. As to the European Union's appeal that the panel failed to assess collectively the effects of the Washington State and City of Everett B&O tax rate reductions with the effects of the aeronautics R&D subsidies:
   1. The panel erred in failing to consider whether the price effects of the Washington State and City of Everett B&O tax rate reductions could be cumulated with (i.e. complemented and supplemented) the technology effects of the aeronautics R&D subsidies in causing serious prejudice in the 200-300 seat LCA product market. The European Union did not request completion of the analysis on this issue.¹⁵⁴

¹⁴⁷ Panel Report, US – Large Civil Aircraft (2^nd complaint), para. 7.1834. ↩

¹⁴⁸ Panel Report, US – Large Civil Aircraft (2^nd complaint), para. 7.1608. ↩

¹⁴⁹ Panel Report, US – Large Civil Aircraft (2^nd complaint), para. 7.1824. ↩

¹⁵⁰ Appellate Body Report, US – Large Civil Aircraft (2^nd complaint), para. 1249. ↩

¹⁵¹ Appellate Body Report, US – Large Civil Aircraft (2^nd complaint), para. 1274. ↩

¹⁵² Appellate Body Report, US – Large Civil Aircraft (2^nd complaint), para. 1268. ↩

¹⁵³ The two specific alleged errors of law are described in Appellate Body Report, US – Large Civil Aircraft (2^nd complaint), para. 1275. ↩

¹⁵⁴ Appellate Body Report, US – Large Civil Aircraft (2^nd complaint), para. 1321. ↩

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2. As to the European Union's appeal that the Panel failed to assess collectively the effects of the tied tax subsidies and the effects of the untied subsidies (including the first three original Washington tax measures listed in paragraph 7.11 above):
   1. The panel erred in failing to consider whether the effects of the "untied" subsidies (including the first three original Washington tax measures listed in paragraph 7.11 above) could be cumulated with (i.e. complemented and supplemented) the price effects of the tied tax subsidies in the 100-200 seat LCA product market.¹⁵⁵ On completing the analysis for the 100-200 seat LCA product market (which was the only LCA product market in which the Appellate Body had found the tied tax subsidies caused adverse effects, because it had been unable to complete the analysis in the 300-400 seat LCA product market), the Appellate Body found:
   2. neither the Washington State B&O tax credits for preproduction/aerospace product development, nor the Washington State sales and use tax exemptions for computer software, hardware, and peripherals appeared to be received in connection with expenditures related to the 737NG and thus did not have effects in the 100-200 seat LCA product market¹⁵⁶;
   3. as the European Union's submissions revealed that the Washington State B&O tax credit for property taxes benefits only the 787, the Appellate Body did not attempt to cumulate the effects of this subsidy with the effects of the tied tax subsidies in the 100-200 seat LCA product market.¹⁵⁷

7.48. In sum, at the conclusion of the original proceeding, as a result of the Appellate Body's reversal of various panel findings, its completion of the analysis in some instances and its inability to complete the analysis in others (or the failure of the European Union to request completion of the analysis), none of the four original Washington tax measures was found to cause serious prejudice to the European Union's interests, within the meaning of Articles 5(c), 6.3(b), and 6.3(c) of the SCM Agreement.

7.49. Although none of the four original Washington tax measures was found to cause serious prejudice at the conclusion of the original proceedings, in many cases, this was because the Appellate Body did not complete the analysis fully for all relevant LCA product markets, either because it was unable to, or because it was not requested to do so. It was not because the four original Washington tax measures were adjudged on the merits, for all of the relevant LCA product markets, not to have caused serious prejudice.

7.50. In fact, had the Appellate Body been able to complete the analyses, it was potentially open for it to have found that the City of Everett B&O tax rate reduction, the Washington State B&O tax credits for preproduction/aerospace product development and the Washington State sales and use tax exemptions for computer software, hardware, and peripherals, caused serious prejudice.¹⁵⁸ The only original Washington tax measure that arguably may not have been found to have caused

¹⁵⁵ The 100-200 seat LCA product market was the only product market in which the Appellate Body had found the tied tax subsidies caused adverse effects, because it had been unable to complete the analysis in the 300-400 seat LCA product market. ↩

¹⁵⁶ Appellate Body Report, US – Large Civil Aircraft (2^nd complaint), paras. 1344-1346. ↩

¹⁵⁷ Appellate Body Report, US – Large Civil Aircraft (2^nd complaint), para. 1341. ↩

¹⁵⁸ The City of Everett B&O tax rate reduction could have been found to have caused serious prejudice in the 300-400 seat LCA product market except that the Appellate Body had been unable to complete the analysis of whether the effects of the tied tax subsidies (including the City of Everett B&O tax rate reduction) had caused serious prejudice, owing to the existence of disputed facts in the LCA sales campaigns in the 300-400 seat LCA market. The Washington State B&O tax credits for preproduction/aerospace product development, as well as the Washington State sales and use tax exemptions for computer software, hardware, and peripherals could have been found to have caused serious prejudice in the 300-400 seat LCA product market if the Appellate Body had been able to complete the analysis with respect to the effects of the tied tax subsidies in the 300-400 seat market (and had found that the tied tax subsidies did cause serious prejudice) and then that the effects of these two original Washington measures "complemented and supplemented" the effects of the tied tax subsidies in that product market. In addition, the price effects of the City of Everett B&O tax rate reduction could have been found to have "complemented and supplemented" the technology effects of the aeronautics R&D subsidies in the 200-300 seat LCA product market, and thus caused serious prejudice in that product market, except that the European Union did not request the Appellate Body to complete the analysis on this issue. ↩

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serious prejudice on the basis of the Appellate Body's ruling is the Washington State B&O tax credit for property taxes. This B&O tax credit (which was part of the group of "untied" or "remaining" subsidies) benefited only the 787 and thus, applying the Appellate Body's reasoning, would only potentially have had effects in the 200-300 seat LCA product market.¹⁵⁹ The European Union did not allege that the panel erred in not collectively assessing (whether by "aggregation" or "cumulation") the effects of the "untied" subsidies with the aeronautics R&D subsidies.¹⁶⁰

7.51. As explained above, the Appellate Body overruled the panel's approach to assessing whether the four original Washington tax measures listed in paragraph 7.11 above caused serious prejudice, but could not complete the analyses. Therefore, the Appellate Body did not find that, for every possible LCA product market, the European Union had failed to demonstrate that the measures caused serious prejudice. Thus, at the conclusion of the appeal process, there cannot be said to be findings that any of the four original Washington tax measures was "not inconsistent" with Articles 5(c) and 6.3 of the SCM Agreement for all LCA product markets.

7.52. In the particular circumstances of the outcome of the European Communities' original serious prejudice claims against these measures, and particularly the fact that the European Union successfully appealed the panel's failure to collectively assess the effects of the tied tax subsidies with the aeronautics R&D subsidies, and the effects of the untied subsidies with the tied tax subsidies, we consider that the reassertion of claims in respect of the original Washington tax measures would not compromise the finality of the DSB recommendations and rulings, or amount to an unfair second chance.¹⁶¹

7.53. On the basis of the foregoing, we consider that the European Union is not precluded from reasserting claims in respect of the four original Washington tax measures in this compliance proceeding. The Panel therefore rejects the United States' requests for rulings that the four original Washington tax measures are outside the scope of this compliance proceeding.

7.2.2 Whether the Washington State Joint Center for Aerospace Technology Innovation measure is outside the scope of this proceeding

7.54. In its panel request, the European Union makes claims in respect of the establishment by the State of Washington and its political subdivisions of a Joint Center for Aerospace Technology Innovation (JCATI) which it alleges is a specific subsidy to Boeing. The United States argues that the JCATI is not a declared measure taken to comply, nor does it share a close nexus to a declared measure taken to comply or to the DSB recommendations and rulings.¹⁶² Accordingly, the United States considers that this measure is outside the scope of this proceeding and requests a preliminary ruling to that effect.¹⁶³

¹⁵⁹ See Appellate Body Report, US – Large Civil Aircraft (2^nd complaint), para. 1341. ↩

¹⁶⁰ However, the European Union did successfully appeal: (a) the panel's failure to assess collectively the effects of the tied tax subsidies (i.e. the Washington State and City of Everett B&O tax rate reductions) with the technology effects of the aeronautics R&D subsidies; and (b) the panel's failure to assess collectively the effects of the "untied" subsidies with the effects of the tied tax subsidies (including the Washington State and City of Everett B&O tax rate reductions). If the European Union had requested completion of the analysis on (a), then the Appellate Body potentially could have found that the effects of the City of Everett B&O tax rate reduction complemented and supplemented the effects of the aeronautics R&D subsidies in the 200-300 seat LCA product market. Since the Appellate Body also thought that the panel should have collectively assessed the effects of the tied tax and "untied" subsidies, it was theoretically possible that the effects of the Washington State B&O tax credit for property taxes (as well as the two other "untied" original Washington tax subsidies) could have been found to have complemented and supplemented the effects of the tied tax subsidies in the 200-300 seat LCA product market. ↩

¹⁶¹ In the circumstances of the multiple appeals concerning the panel's collective assessment of the subsidies in its serious prejudice analysis, we also do not consider it would be reasonable to conclude that the Washington State B&O tax credit for property taxes are outside the scope of the proceeding owing to the European Union's failure to request completion of the analysis of the collective assessment of the tied tax and aeronautics R&D subsidies. ↩

¹⁶² United States' first written submission, para. 513; second written submission, para. 77. ↩

¹⁶³ United States' first written submission, para. 76. ↩

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7.2.2.1 Main arguments of the parties and third parties

7.55. The United States disputes the contention that the JCATI shares a close nexus with the Washington State B&O tax rate reduction: First, the European Union's unsupported assertion that the purpose of both measures is to convince Boeing to expand production in Washington says nothing about the nature of these two very different types of measures.¹⁶⁴ It is difficult to conceive how a programme developed to foster the education of engineering students is akin to the reduction of a B&O tax rate.¹⁶⁵ Second, in relation to the European Union's argument that both the JCATI and Washington State B&O tax rate reduction have the effect of reducing Boeing's costs of doing business in Washington State, the European Union fails to articulate a coherent theory as to how such effects would occur.¹⁶⁶ Moreover, the JCATI activities do not operate to negate the removal of any adverse effects relating to the Washington State B&O tax rate reduction.¹⁶⁷

7.56. As to the European Union's arguments concerning the alleged nexus with the NASA and DOD aeronautics R&D measures subject to the DSB recommendations and rulings, the United States argues that the JCATI does not function like, and its activities are not similar in any meaningful way to, the measures administered by NASA and DOD.¹⁶⁸ Unlike the NASA and DOD aeronautics R&D measures, the JCATI coordinates the development of higher education aerospace programmes at the University of Washington and Washington State University. Its activities with industry are structured differently from those under the NASA and DOD aeronautics R&D measures; for example, JCATI funding is allocated to projects by educational institutions, not participating parties.¹⁶⁹ As to the alleged links in terms of effects, NASA awards contracts to outside entities in order to obtain research into new scientific principles while the European Union asserts that Boeing will be able to use technology developed through the JCATI to further its own LCA-related research.¹⁷⁰

7.57. The European Union argues that the JCATI measure constitutes a measure taken to comply, within the scope of this proceeding, based on its close nexus with "the other Washington State subsidies subject to the DSB's recommendations and rulings", as well as with the "NASA and DOD aeronautics R&D subsidies subject to those recommendations and rulings".¹⁷¹ As to the links in terms of nature, the European Union makes the following arguments:

1. the JCATI shares the same purpose as the Washington State B&O tax rate reduction; namely, to convince Boeing to retain and expand its production in Washington State by lowering Boeing's cost of doing business in the State. Just like the Washington State B&O tax rate reduction, the JCATI's subsidies are limited to enterprises in the aerospace industry¹⁷²; and
2. the JCATI has the same nature as the NASA and DOD aeronautics R&D subsidies subject to the DSB recommendations and rulings because it supports Boeing's LCA-related R&D efforts and contributes to Boeing's development of, and access to, LCA-related technology.¹⁷³ Even where funding goes directly to the educational institutions involved, participating enterprises such as Boeing nevertheless receive direct support from the funded projects, and technologies owned by the universities are advanced in part through R&D funding provided through NASA's aeronautics R&D programmes and DOD's RDT&E Program.¹⁷⁴

¹⁶⁴ United States' second written submission, para. 78. ↩

¹⁶⁵ United States' first written submission, para. 515; second written submission, para. 78. ↩

¹⁶⁶ United States' second written submission, para. 78. ↩

¹⁶⁷ United States' first written submission, para. 515. ↩

¹⁶⁸ United States' first written submission, paras. 514 and 515. ↩

¹⁶⁹ United States' first written submission, para. 515; second written submission, para. 79. ↩

¹⁷⁰ United States' second written submission, para. 79. ↩

¹⁷¹ European Union's first written submission, para. 541. ↩

¹⁷² European Union's second written submission, para. 137. The European Union refers to a press article in which the Director of the Governor's Office of Aerospace says in relation to the JCATI that the focus is now on the next aircraft Boeing will design and build after the 737 MAX. (See S. Wilhelm, "State Fires Up New Efforts to Boost Aerospace Education", Puget Sound Business Journal, 29 June 2012, (Exhibit EU-456)). ↩

¹⁷³ European Union's second written submission, para. 138. ↩

¹⁷⁴ European Union's first written submission, para. 527; second written submission, para. 139. ↩

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7.58. The European Union argues that the effects of the JCATI measure are to worsen the existing situation of non-compliance regarding the Washington State B&O tax rate reduction and the NASA and DOD aeronautics R&D subsidies by expanding the adverse effects caused by such subsidies during the new reference period.¹⁷⁵ The JCATI measure undermines compliance with the DSB recommendations and rulings by enabling Boeing to use the technologies and research developed through JCATI to further its own LCA-related research without paying anything in return for such goods, services and grants and by lowering Boeing's costs of doing business in Washington State.

7.59. As to timing, the European Union notes that the JCATI issued its first round of grant awards in February 2013, which is after the date of the DSB recommendations and rulings (23 March 2012).

7.60. Brazil considers that an Article 21.5 panel is not confined solely to examining declared measures taken to comply.¹⁷⁶ Where an "undeclared" measure has a sufficiently close relationship to a declared measure taken to comply, and to the DSB recommendations and rulings, it may be within the scope of Article 21.5 compliance proceedings.¹⁷⁷ This requires a panel to "scrutinize the links, in terms of nature, effects, and timing" between the respective measures.¹⁷⁸ Brazil considers that while an "undeclared" measure must share more than "some features" with the original measure to be considered within the scope of Article 21.5, an overly narrow approach to an Article 21.5 panel's terms of reference could undermine the effectiveness of the dispute settlement process.¹⁷⁹

7.61. Canada considers that it is essential to the prompt settlement of disputes to include in the scope of Article 21.5 compliance proceedings those measures that have a "sufficiently close relationship" in "timing, nature and effects" with the declared measures taken to comply, and the DSB recommendations and rulings.¹⁸⁰ To do otherwise would allow a respondent to evade compliance with rulings and recommendations of the DSB.¹⁸¹

7.62. Japan considers that in order to ensure full compliance and prevent circumvention, certain "undeclared" measures taken to comply may also be included in the scope of compliance proceedings. These are those "undeclared" measures that virtually replace the declared measure taken to comply or that have "close links particularly in terms of their 'timing, nature and effects'" with the declared measures.¹⁸²

7.2.2.2 Evaluation by the Panel

7.63. The Joint Center for Aerospace Technology is an aerospace office created and funded by the State of Washington since July 2012. Its statutory purposes are to:

1. pursue joint industry-university research in computing, manufacturing, efficiency, materials/structures innovation, and other new technologies that can be used in aerospace firms;
2. enhance the education of students in the engineering departments of the University of Washington, Washington State University, and other participating institutions through industry-focused research; and
3. work directly with existing small, medium-sized and large aerospace firms and aerospace industry associations to identify research needs and opportunities to transfer off-the-shelf technologies that would benefit such firms.¹⁸³

¹⁷⁵ European Union's second written submission, para. 140. ↩

¹⁷⁶ Brazil's third-party response to Panel question No. 2, para. 3. ↩

¹⁷⁷ Brazil's third-party response to Panel question No. 2, para. 3. ↩

¹⁷⁸ Brazil's third-party response to Panel question No. 2, para. 3. (emphasis original) ↩

¹⁷⁹ Brazil's third-party response to Panel question No. 2, para. 4. ↩

¹⁸⁰ Canada's third-party response to Panel question No. 2, para. 10. ↩

¹⁸¹ Canada's third-party response to Panel question No. 2, para. 11. ↩

¹⁸² Japan's third-party response to Panel question No. 2, para. 12. (emphasis original) ↩

¹⁸³ Substitute Senate Bill 5982, Washington Session Laws 1920 (2012), (Exhibit EU-459). ↩

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7.64. The JCATI is operated and administered as a multi-institutional education and research center, conducting research and development programmes in various locations within Washington under the joint authority of the University of Washington and Washington State University. The JCATI is administered by a Board of Directors appointed by the Governor with voting members as follows: one voting member each representing small aerospace firms, medium-sized firms, large aerospace firms, and labor; and two voting members each, representing aerospace industry associations and higher education. The Board is directed to work with aerospace industry associations and aerospace firms of all sizes to identify the research areas that will benefit the intermediate and long-term economic viability of the Washington aerospace industry.¹⁸⁴ In February 2013, the JCATI announced that it had awarded 16 projects a total of USD 1.24 million to solve technological questions important to the aerospace industry in its first round of grant awards.¹⁸⁵ Six of those projects involved Boeing (partnering with Washington University with respect to three and Washington State University with respect to three).¹⁸⁶

7.65. The parties appear to agree that whether the JCATI measure is within the scope of this compliance proceeding depends upon whether it meets the requirements of the close nexus test and thus constitutes an "undeclared" measure taken to comply.

7.66. We recall that the close nexus test represents an attempt by panels and the Appellate Body to balance the competing interests of (a) providing a responding party with a reasonable period of time to bring its measures into conformity prior to authorization for retaliation, with (b) the efficient working of the dispute settlement system, and the importance of meaningful compliance. In striking this balance, the close nexus test looks to see whether "undeclared" measures have a "particularly close relationship" to the declared measure taken to comply, and to the DSB recommendations and rulings, such that they are susceptible to review by a compliance panel.¹⁸⁷ Compliance panels "scrutinize these relationships", which may, depending on the particular facts, call for an examination of the timing, nature, and effects of the various measures, as well as an examination of the "factual and legal background" against which a declared measure taken to comply is adopted. The task of a compliance panel is to determine whether there are "sufficiently close links" to be able to characterize the "undeclared" measure as being one "taken to comply" and consequently, for the panel to assess its consistency with the covered agreements in an Article 21.5 proceeding.¹⁸⁸ The focus or purpose of the exercise is to ascertain whether measures other than original measures, or the responding party's declared compliance actions, would in practical terms undermine or nullify the purported compliance actions with the result that a panel could not meaningfully undertake an assessment of whether there has been compliance without also considering those "undeclared" measures.

7.67. This being so, the close nexus test is not satisfied by merely identifying any links at all between the "undeclared" measure and the declared measures taken to comply or the DSB recommendations and rulings. For example, in the subsidies context, the close nexus test should not be applied in a manner that means that, once a Member is found to have granted a subsidy to a recipient that causes adverse effects, a complaining party can challenge in a compliance proceeding any subsequent financial contribution to that same recipient on the theory that it is a subsidy and will cause adverse effects.

7.68. Application of the close nexus test by previous panels and the Appellate Body provides some guidance as to the sufficiency of the links necessary in order to satisfy the close nexus test and conclude that the measure is within the scope of a compliance proceeding. We briefly discuss below the previous cases in which an "undeclared" measure was considered sufficiently closely linked to either the DSB recommendations and rulings, or to declared implementation actions taken by the responding party, that it was considered within the scope of the compliance proceeding.

¹⁸⁴ Substitute Senate Bill 5982, Washington Session Laws 1920 (2012), (Exhibit EU-459). ↩

¹⁸⁵ JCATI Press Release, "Research Center Promotes Washington Aerospace Industry Innovation", 5 February 2012 (formerly Exhibit US-13-150), (Exhibit EU-457). ↩

¹⁸⁶ JCATI Recommendations (formerly Exhibit US-13-147), (Exhibit EU-462). ↩

¹⁸⁷ Appellate Body Reports, US – Softwood Lumber IV (Article 21.5 – Canada), para. 77; and US – Zeroing (EC) (Article 21.5 – EC), para. 204. ↩

¹⁸⁸ Appellate Body Report, US – Softwood Lumber IV (Article 21.5 – Canada), para. 77. ↩

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7.69. The close nexus test was first articulated by the Appellate Body in US – Softwood Lumber IV (Article 21.5 – Canada) in referring with approval to the approach taken by compliance panels in two earlier cases.¹⁸⁹ In the first of those, Australia – Salmon (Article 21.5 – Canada), the compliance panel was required to determine whether Australia had complied with the DSB recommendations and rulings adopted in November 1999 regarding import restrictions on salmonid products that had been maintained through a federal quarantine proclamation. Australia announced changes to its quarantine policy in July 1999, these being measures that Australia considered brought it into full compliance with the DSB recommendations and rulings. However, in October 1999, the State of Tasmania adopted an import ban applying to the product at issue.¹⁹⁰ The compliance panel considered that, in the context of this dispute, at least any quarantine measure introduced by Australia subsequent to the adoption of the DSB recommendations and rulings, and within a more or less limited time thereafter, that applied to imports of fresh chilled or frozen salmon from Canada, was a measure taken to comply within the mandate of the compliance panel.¹⁹¹

7.70. The second, Australia – Automotive Leather II (Article 21.5 – US), concerned compliance with a DSB recommendation pursuant to Article 4.7 of the SCM Agreement, adopted in June 1999, that Australia withdraw subsidies found to be contingent on export performance, within the meaning of Article 3.1(a) of the SCM Agreement. The subsidies in question were payments under a grant contract between the Government of Australia, a recipient company and its parent company. Australia notified the DSB that it had complied with the DSB recommendations and rulings in September 1999, by requiring the recipient company to repay to the Australian Government an amount that covered any remaining WTO-inconsistent portion of the grants made under the grant contract and terminating all subsisting obligations under the grant contract. On the day after the company had repaid the prospective portion of the grant, Australia announced that it was providing a loan to the recipient's parent company, which was conditioned on the repayment of the original subsidy. The United States challenged the new loan in the compliance proceeding on the basis that it was simply a reimbursement of the non-commercial terms of the purported withdrawal of the prospective portion of the grant that was repaid by the company. The panel considered that the loan was "inextricably linked" to the steps taken by Australia to comply with the DSB recommendation, in view of both its timing and nature. The panel further reasoned that it could not exclude the loan from its consideration without severely limiting its ability to judge, on the basis of the U.S. panel request, whether Australia had taken measures to comply with the DSB recommendations and rulings.¹⁹²

7.71. The compliance proceeding in US – Softwood Lumber IV (Article 21.5 – Canada), involved a pass-through analysis used by USDOC in a First Assessment Review of a Final Countervailing Duty Determination calculating the rate of subsidization of softwood lumber from Canada (the "undeclared" measure). The declared measure taken to comply was a Section 129 Determination which replaced the Final Countervailing Duty Determination, and thereby became the basis for the continued imposition of countervailing duties. The USDOC adopted the same pass-through analysis in the First Assessment Review and in the Section 129 Determination. The panel found that the pass-through analysis in the First Assessment Review was so "inextricably linked" and "clearly connected" to both the Section 129 Determination and the Final Countervailing Duty Determination as to fall within the scope of the compliance proceeding. The United States objected, noting that the Section 129 Determination (and the Final Countervailing Duty Determination that it revised) considered the existence and amount of subsidization in the original period of investigation, while the First Assessment Review was concerned with the amount of subsidization in a different period of review. Moreover, Section 129 proceedings and assessment reviews had different legal consequences, and the First Assessment Review was requested eight months before the adoption of the panel and Appellate Body reports in the original proceeding. The Appellate Body rejected the U.S. arguments. Rather, the Appellate Body considered the links between the "undeclared" measure, the declared measure taken to comply, and the DSB recommendations and rulings in terms of "subject matter", "timing", and "effects" and upheld the panel's finding that the First

¹⁸⁹ Appellate Body Report, US – Softwood Lumber IV (Article 21.5 – Canada), para. 74. ↩

¹⁹⁰ Panel Report, Australia – Salmon (Article 21.5 – Canada), fn 141 of the preliminary ruling set forth at paras. 7.10 and 7.15. ↩

¹⁹¹ Panel Report, Australia – Salmon (Article 21.5 – Canada), para. 22 of the preliminary ruling set forth at para. 7.10. ↩

¹⁹² Panel Report, Australia – Automotive Leather II (Article 21.5 – US), para. 6.5. ↩

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Assessment Review, insofar as the pass-through analysis was concerned, fell within the scope of the compliance proceeding.¹⁹³

7.72. The Appellate Body next applied the close nexus test in the context of determining whether the United States had complied with the DSB recommendations and rulings regarding the methodology of zeroing. In US – Zeroing (EC) (Article 21.5 – EC), the Appellate Body considered the extent to which subsequent reviews that followed 15 original anti-dumping investigations and 16 administrative reviews in the original proceeding fell within the scope of the compliance proceeding. The panel had ruled that only the subsequent reviews that came into effect after the adoption of the DSB recommendations and rulings had a sufficiently close nexus with the original measures at issue and the DSB recommendations and rulings so as to come within the scope of the compliance proceeding.¹⁹⁴ The European Communities appealed the panel's conclusion regarding the timing factor and exclusion of the other subsequent reviews. The Appellate Body stated that the timing of a measure is not determinative of whether it bears a sufficiently close nexus with a Member's implementation of DSB recommendations and rulings so as to fall within the scope of a compliance proceeding. As compliance can be achieved before the adoption of DSB recommendations and rulings, a compliance panel may have to review events pre-dating the adoption of those recommendations and rulings.¹⁹⁵ While the timing of a measure was a relevant factor to consider in determining whether it is sufficiently closely connected to a Member's implementation of the DSB recommendations and rulings, the panel's formalistic reliance on the date of issuance of subsequent reviews in determining whether they had the requisite close nexus with the DSB recommendations was found to be in error.¹⁹⁶

7.73. The Appellate Body then examined whether any of the excluded subsequent reviews fell within the scope of the compliance proceeding based on a consideration of the links, in terms of nature and effects, between those measures, the declared measures taken to comply and the DSB recommendations and rulings.¹⁹⁷ It concluded that, with respect to the administrative reviews that had replaced assessment rates and cash deposit rates found to be WTO-inconsistent in the original proceeding with assessment rates and cash deposit rates that continued to reflect the zeroing methodology, there was a sufficient link, in terms of effects, with the DSB recommendations and rulings.¹⁹⁸ Similarly, the sunset review determinations that led to the continuation of the relevant anti-dumping duty orders (which in turn provided the legal basis for the continued imposition of assessment rates and cash deposit rates calculated with zeroing in subsequent administrative reviews) and which had continued effects after the end of the reasonable period of time, had a sufficiently close link in terms of effects with the DSB recommendations and rulings.¹⁹⁹

7.74. Stepping back from the specific facts of these cases, the close nexus test appears to be fundamentally directed to the question of whether, in the specific factual and legal context of the case, it would be feasible for a panel to undertake to determine whether the responding party has complied with the DSB recommendations and rulings without taking into account these "undeclared" measures. Thus, in Australia – Salmon, it made no sense to examine whether Australia had complied with the DSB recommendations and rulings by amending its federal quarantine regulations if the compliance panel had not taken into account the fact that the state of Tasmania had imposed its own import ban very shortly thereafter. Similarly, the compliance panel in Australia – Automotive Leather II (Article 21.5 – US) could not sensibly have determined whether Australia had complied with the DSB recommendations and rulings by requiring the recipient to repay the grant if it had ignored the fact that the next day, a loan in a similar amount that expressly made reference to repayment of the grant had been granted to the recipient's parent company.

7.75. Although the cases involving compliance in the context of the United States' retrospective system for assessing anti-dumping and countervailing duties are complex technically, the key issue in those cases seems to be that, whatever the technical legal distinctions between original

¹⁹³ Appellate Body Report, US – Softwood Lumber IV (Article 21.5 – Canada), paras. 83-85 and 92. ↩

¹⁹⁴ Panel Report, US – Zeroing (EC) (Article 21.5 – EC), paras. 8.115 and 8.121. ↩

¹⁹⁵ Appellate Body Report, US – Zeroing (EC) (Article 21.5 – EC), para. 224. ↩

¹⁹⁶ Appellate Body Report, US – Zeroing (EC) (Article 21.5 – EC), para. 226. ↩

¹⁹⁷ Appellate Body Report, US – Zeroing (EC) (Article 21.5 – EC), para. 229. ↩

¹⁹⁸ Appellate Body Report, US – Zeroing (EC) (Article 21.5 – EC), para. 231. By contrast, there was not a sufficient link, in terms of effects, with respect to excluded subsequent reviews the effects of which had been replaced by Section 129 Determinations in which zeroing was not applied. (Ibid. para. 232). ↩

¹⁹⁹ Appellate Body Report, US – Zeroing (EC) (Article 21.5 – EC), para. 233. ↩

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determinations and assessment reviews, if at the end of the day there would be duties imposed that reflected the WTO-inconsistency (e.g. zeroing or an impermissible pass-through methodology), the measures in question should be considered by the compliance panels, because to ignore this factor would mean that the complaining party may not truly receive the relief that it could be expected to receive in bringing its complaint and succeeding on that complaint in the original proceeding. Indeed, in these cases, a failure to take into account subsequent reviews would mean that, by the time the compliance proceeding was completed, the WTO-inconsistent reviews of a given anti-dumping or countervailing duty order would have been superseded by new reviews using the same WTO-inconsistent methodologies with respect to the same order.

7.76. We are not persuaded that the European Union has demonstrated that the JCATI measure shares sufficiently close links in terms of nature or effects, with the Washington State B&O tax rate reduction, or with the NASA and DOD aeronautics R&D subsidies subject to the DSB recommendations and rulings, to warrant its inclusion within the scope of this proceeding as an "undeclared" measure taken to comply.

7.77. The Washington State B&O tax rate reduction, enacted under HB 2294, is a reduction in the B&O tax rate for manufacturers of commercial airplanes or components of such airplanes, which was to occur in two stages from October 2005 to July 2007, or at the commencement of final assembly of a super-efficient airplane, whichever was later.²⁰⁰ The B&O tax rate reduction was considered in the original proceeding to be a "tied" subsidy as it applies to the production and sale of each LCA manufactured in Washington State on a per-unit basis, increasing Boeing's after-tax revenue and profitability.²⁰¹ The JCATI measure, by contrast, is a joint industry-university research programme that seeks to pursue focused research of relevance to the aerospace industry and enhance the education of students in engineering departments of educational institutions in the State of Washington. The fact that both measures concern enterprises in the aerospace industry in the State of Washington is insufficient, in our view, to demonstrate a close nexus in terms of nature.

7.78. We also regard the JCATI measure as being insufficiently closely linked to the NASA procurement contracts and Space Act Agreements and DOD assistance instruments the subject of the DSB recommendations and rulings. These measures are multi-year R&D instruments that operated as collaborative research projects between NASA and DOD, respectively, funded through specific NASA and DOD aeronautics R&D programmes.²⁰² The JCATI measure will coordinate the development of higher-education aerospace programmes at certain universities in the State of Washington. As such, it appears to be significantly qualitatively different from the NASA and DOD aeronautics R&D measures the subject of the DSB recommendations and rulings. There is nothing before us to suggest that the JCATI will continue or develop R&D conducted under the NASA and DOD aeronautics R&D programmes, or that the JCATI replaces or replicates the NASA and DOD aeronautics R&D measures the subject of the DSB recommendations and rulings in a way that requires that the measure be included within the scope of this proceeding in order to enable the Panel to make a meaningful determination as to whether the United States has complied with the DSB recommendations and rulings.

7.79. The JCATI measure is not a declared measure taken to comply, nor has it been demonstrated to have a sufficiently close connection to a declared measure taken to comply, or to the DSB recommendations and rulings, to fall within the scope of this proceeding as an "undeclared" measure taken to comply. The Panel therefore grants the United States' request and rules that the JCATI measure is outside the scope of this proceeding.

7.80. In this Section of the Report, the Panel therefore finds that the following Washington tax measures, which were the subject of a request for preliminary rulings by the United States, are within the scope of this proceeding:

1. Washington State B&O tax credits for preproduction/aerospace product development, as amended by section 7 of SSB 6828;

²⁰⁰ Assembly of the 787 commenced in Washington in the first half of 2007 and the reduced taxation rate was set to continue until 2024. ↩

²⁰¹ Appellate Body Report, US – Large Civil Aircraft (2^nd complaint), paras. 1170 and 1252. ↩

²⁰² Panel Report, US – Large Civil Aircraft (2^nd complaint), paras. 7.1709 and 7.1746. ↩

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2. Washington State B&O tax credit for property taxes, as amended by HB 2466 to include leasehold excise taxes;
3. Washington State sales and use tax exemptions for computer software, hardware, and peripherals; and
4. City of Everett B&O tax rate reduction.

7.81. The Panel grants the United States' request for a preliminary ruling that the JCATI measure is outside the scope of this proceeding.²⁰³

7.3 DOD aeronautics R&D measures

7.3.1 Background

7.82. In this Section, we address the United States' scope objections relating to the European Union's challenge to the U.S. DOD's Research, Development, Test & Evaluation (RDT&E) Program as involving specific subsidies to Boeing. By way of background, we recall that DOD's budget has historically been divided into five broad budget categories: Military Personnel; Operations & Maintenance; Procurement; Research, Development, Test & Evaluation, and Military Construction.²⁰⁴ The RDT&E budget category funds research, development, test, and evaluation spending by DOD, including the three military departments of DOD (United States Army, Navy, and Air Force) and other DOD agencies, towards designing and developing military systems or technology.²⁰⁵ The RDT&E budget category is a distinct category from "Procurement" which funds the actual acquisition costs of military systems that are in production.²⁰⁶

7.83. RDT&E budget activities are subdivided into a number of program elements. DOD Financial Management Regulation explains that the "program element" is the major aggregation at which RDT&E efforts are organized, budgeted, and reviewed.²⁰⁷ Each program element is divided into one or more named and numbered projects, which may be further subdivided into activities.²⁰⁸ Each RDT&E program element has specific program objectives expressed in the "Mission Description" statement contained in the program budgets.²⁰⁹ Program elements are also identified by a particular "PE number" in the Future Years Defense Program (FYDP) budget estimates.²¹⁰

7.84. In its panel request in this proceeding, the European Union alleges that U.S. DOD maintains subsidies benefiting U.S. LCA producers through: (a) the RDT&E Program; as well as (b) through contracts, assistance instruments, and other agreements (as modified) entered into under the

²⁰³ We recall that, in addition to the Washington tax measures listed in subparagraphs a through d above, which we have ruled to be within the scope of this proceeding, the European Union also brings claims in respect of the Washington State B&O tax rate reduction for the aerospace industry, which was a measure that was successfully challenged by the European Communities in the original proceeding, and is the subject of DSB recommendations and rulings. ↩

²⁰⁴ Panel Report, US – Large Civil Aircraft (2^nd complaint), fn 2786; and CRA International, U.S Department of Defense (DOD) Research, Development, Test and Evaluation (RDT&E) Funding Support to the Boeing company for Dual-Use Aircraft R&D, (November 2006) (CRA Report), (Exhibit EU-29), p. 4. ↩

²⁰⁵ All non-classified DOD funding activities can be identified and tracked to some degree through the Future Years Defense Program (FYDP), which is the official DOD expression of historical and projected funding, by program, and by fiscal year. The FYDP contains data on all spending by DOD including personnel, acquisitions, operations and maintenance, and R&D activities. The FYDP information is contained in Budget Estimates that are published annually and contain actual prior year expenditures, estimated current year expenditures, and several projected budgeted years of program funding. (CRA Report, (Exhibit EU-29), pp. 4 and 5). ↩

²⁰⁶ Panel Report, US – Large Civil Aircraft (2^nd complaint), fn 2786; and CRA Report, (Exhibit EU-29), p. 4. ↩

²⁰⁷ Panel Report, US – Large Civil Aircraft (2^nd complaint), para. 7.1195 (referring at fn 2785 to DOD Financial Management Regulation, Vol. 2B, Chapter 5, June 2006, submitted in the original dispute as Exhibit EC-1324, p. 5). The original panel referred to the 23 RDT&E program elements as "programmes", although also explained that the 23 individual RDT&E programmes could be termed "programme elements", "project elements", or "PEs". (Panel Report, US – Large Civil Aircraft (2^nd complaint), para. 7.1195). For purposes of clarity, we refer to the individual RDT&E programmes under the RDT&E Program as "program elements". ↩

²⁰⁸ CRA Report, (Exhibit EU-29), p. 5. ↩

²⁰⁹ Panel Report, US – Large Civil Aircraft (2^nd complaint), para. 7.1147. ↩

²¹⁰ CRA Report, (Exhibit EU-29), p. 5. ↩

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RDT&E Program; in addition to (c) specified U.S. Air Force, Navy, Army, and Defense-wide program elements of the RDT&E Program; as well as (d) contracts, assistance instruments, and other agreements (as modified) entered into under these RDT&E program elements; and (e) contracts and other agreements (as modified) with Boeing listed in annex B of the United States' 23 September 2012 notification.²¹¹ The forms of the subsidies are described as: (a) the provision to Boeing of funding and access to government facilities, equipment, and employees for R&D applicable to the development, design, and production of LCA on terms more favourable than would be available on the commercial market; as well as (b) the provision to Boeing of royalty-free use of the technologies developed with such funding and support or use of such technologies on preferential terms.²¹²

7.85. The European Union's first written submission divides its discussion of the particular DOD RDT&E program elements through which DOD is alleged to provide actionable subsidies to Boeing into "original" RDT&E program elements (i.e. those that were also at issue in the original proceeding), and "additional" RDT&E program elements (i.e. those which allegedly have begun to fund what the European Union identifies as "dual-use LCA-relevant research" since 2007).²¹³

7.86. The European Union explains that its identification and discussion of the RDT&E program elements that it considers "contribute to Boeing's LCA division" was assisted by experts, Mr Richard Rumpf and Charles River Associates (CRA).²¹⁴ CRA had been engaged by the European Communities in the original proceeding to estimate the amounts of RDT&E funding received by Boeing that could be considered "dual-use" RDT&E, in the sense of R&D that was "relevant" to both military and commercial aircraft.²¹⁵ Mr Rumpf was similarly engaged by the European Union in this compliance proceeding to estimate the amounts of funding provided by the DOD RDT&E Program to Boeing for fiscal years (FY) 2007 through FY 2012 "which support the development of technologies or methods that could benefit Boeing's commercial airplane division".²¹⁶

7.87. Using a similar methodology to that employed by CRA in its 2006 Report, Mr Rumpf reviewed DOD's FYDP budget estimate statements for FY 2007 through FY 2013 to determine which RDT&E program elements, and which projects and activities within those program elements, funded "general aircraft" or "science and technology" R&D "that appeared to be dual-use to LCA".²¹⁷ On the basis of this analysis, Mr Rumpf identified 15 "general aircraft" RDT&E program elements, under 16 different program element numbers.²¹⁸ Eight of those "general aircraft" program elements had been identified by CRA in its 2006 Report and were challenged by the European Communities in the original proceeding.²¹⁹ The Rumpf Report does not identify six program elements that were identified by CRA in 2006 and which were the subject of the European Communities' claims in the original proceeding and are also being challenged by the European Union in this proceeding.²²⁰

²¹¹ European Union's request for the establishment of a panel, paras. 11-13. The panel request indicates that "Annex B of the 23 September 2012 notification is attached to this request, and the contracts listed therein are incorporated into this request". (Ibid. para. 13, p. 5, and annex B). ↩

²¹² European Union's request for the establishment of a panel, paras. 11 and 12. ↩

²¹³ European Union's first written submission, sections V.D.2.a and V.D.2.b., respectively. ↩

²¹⁴ European Union's first written submission, para. 245 (referring to CRA Report, (Exhibit EU-29); and R. L. Rumpf and R. J. Levinson, United States Department of Defense Research, Development, Test & Evaluation (RDT&E) Funding for the Boeing Company Applicable to Large Civil Aircraft: 2007-2012 Estimates, (12 March 2013) (Rumpf Report), (Exhibit EU-23)). ↩

²¹⁵ CRA Report, (Exhibit EU-29), para. 1.1. ↩

²¹⁶ Rumpf Report, (Exhibit EU-23), para. 1.1. ↩

²¹⁷ Rumpf Report, (Exhibit EU-23), para. 2.1. ↩

²¹⁸ Rumpf Report, (Exhibit EU-23), para. 3.2. ↩

²¹⁹ Defense Research Sciences (PE 0601102F), Materials (PE 0602102F), Aerospace Vehicle Technologies (PE 0602201F), Aerospace Sensors (PE 0602204F), Advanced Materials for Weapon Systems (PE 0603112F), Aerospace Technology Dev/Demo (PE 0603211F), Aerospace Propulsion and Power Technology (PE 0603216F), and RDT&E for Aging Aircraft (PE 0605011F). (See Rumpf Report, (Exhibit EU-23), para. 3.2). ↩

²²⁰ These are: Aerospace Propulsion (PE 0602203F), Dual-Use Science & Technology (PE 0602805F), Flight Vehicle Technology (PE 0603205F), Flight Vehicle Technology Integration (PE 0603245F), and two Manufacturing Technology/Industrial Preparedness program elements, Navy (PE 0708011N) and Air Force (PE 6603771F/0708011F). (See Rumpf Report, (Exhibit EU-23), para. 3.2, p. 8). In response to questioning by the Panel, the European Union explains that the fact that DOD has not continued, after 2006, to provide additional appropriated funding under a particular RDT&E program element does not mean that the subsidy associated with that program element has been withdrawn. In the absence of meaningful action by the United States, the benefit that Boeing receives from the intellectual property developed with DOD funding continues for a ↩

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7.88. In the original proceeding, the European Communities also challenged payments and access to DOD facilities provided by DOD to Boeing through procurement contracts and assistance instruments funded under 15 "military aircraft" or "systems acquisition" program elements in relation to 10 military aircraft. CRA had included "military aircraft" program elements related to four military aircraft in its estimate of the amount of RDT&E funding received by Boeing from DOD that could be considered "relevant" to both military and commercial aircraft (so-called "dual-use" RDT&E).²²¹ For this compliance proceeding, Mr Rumpf undertook a similar exercise to that conducted by CRA with respect to the "military aircraft" or "systems acquisition" program elements in the original proceeding. He first identified the military aircraft program elements in which Boeing is known or believed to have been involved during the 2007-2012 period, to determine the RDT&E program elements that, in his professional opinion, funded the development of technologies, processes, and other knowledge that were applicable to the design, development, production, and maintenance of LCA.²²² He identified five military aircraft program elements, only one of which (the C-17) had been the subject of claims by the European Communities in the original proceeding. The other four military aircraft program elements are: the Airborne Warning and Control System (AWACS), the KC-46, Next Generation Aerial Refueling Aircraft, the Multi-Mission Maritime Aircraft (P-8A), and the Long Range Strike Bomber.²²³

7.89. Based on the foregoing, the European Union identifies the following "original" RDT&E program elements in its first written submission:

1. Defense Research Sciences (PE 0601102F).
2. Materials (PE 0602102F).
3. Aerospace Flight Dynamics/Aerospace Vehicle Technologies (PE 0602201F).
4. Aerospace Propulsion (PE 0602203F).
5. Aerospace Avionics/Aerospace Sensors (PE 0602204F).
6. Dual-Use Science & Technology (PE 0602805F).
7. Advanced Materials for Weapons Systems (PE 0603112F).
8. Flight Vehicle Technology (PE 0603025F).
9. Aerospace Structures/Aerospace Technology Dev/Demo (PE 0603211F).
10. Aerospace Propulsion and Power Technology (PE 0603216F).
11. Flight Vehicle Technology Integration (PE 0603245F).
12. RDT&E for Aging Aircraft (PE 0605011F).
13. Manufacturing Technology/Industrial Preparedness.
    1. Air Force (PE 0603771F/0603680F/0708011F).²²⁴

significant period beyond the end point of the funding. (European Union's response to Panel questions No. 58, para. 15, and 60, para. 20). See also European Union's second written submission, paras. 429-430.

²²¹ CRA Report, (Exhibit EU-29), para. 1.1, p. 1. CRA considered RDT&E program elements funding the V-22/CV-22, the F/A-18, the Joint Strike Fighter and the C-17. (See CRA Report, (Exhibit EU-29), p. 13). ↩

²²² Rumpf Report, (Exhibit EU-23), para. 2.2. ↩

²²³ Rumpf Report, (Exhibit EU-23), para. 2.2. ↩

²²⁴ The United States indicated at paragraph 6 of its Compliance Communication that it had ceased funding this program element. (See United States' Compliance Communication, para. 6). The European Union in its first written submission explains that the Air Force Manufacturing Technology/Industrial Preparedness program element was PE 0708011F in DOD budgets for FY 1993 and FY 1997 through FY 2008, and PE 0603771F in FY 1996. In FY 2009, the Airforce Manufacturing Technology (ManTech) program element transferred to PE 0603680F from PE 0708011F. (European Union's first written submission, para. 275 and ↩

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2. Navy (PE 0708011N).²²⁵
3. Defense Logistics Agency (PE 0708011S).²²⁶
4. Defense Wide Manufacturing Science and Technology (PE 0603860D8Z).²²⁷

14. V-22/CV-22 (PE 0604262N/0401318F).²²⁸
15. F/A-18 Squadrons (PE 0204136N).
16. Joint Strike Fighter (PE 0603800F/0603800N/0603800E²²⁹/0604800F/0604800N).
17. C-17 (PE 0401130F/0604231F).
18. F-22 (PE 0604239F).
19. B-2 Advanced Technology Bomber (PE 0604240F).²³⁰
20. Comanche (PE 0604223A).²³¹
21. A-6 Squadrons (PE 0204134N).²³²
22. AV-8B Aircraft (PE 0604214N).

7.90. The European Union identifies a further eight program elements that had not been challenged in the original proceeding²³³:

1. Materials and Biological Technology (PE 0602715E).
2. Sustainment Science & Technology (PE 0603199F).
3. Technology Transfer (PE 0604317F).
4. Aviation Safety Technologies (PE 0606301D8Z).

fn 643). See also Air Force Industrial Preparedness/Manufacturing Technologies Budgets for FY 1993, FY1996-2013, (Exhibit EU-65), Manufacturing Technologies (PE 0603680F) FY 2011 Budget, p. 1.

²²⁵ The United States indicated at paragraph 6 of its Compliance Communication that it had ceased funding this program element. (See United States' Compliance Communication, para. 6). See also United States' response to the Panel's request for information pursuant to Article 13 of the DSU, dated 28 February 2013, response to question No.24, para. 49 (correcting the program element number for this program element). ↩

²²⁶ The European Communities only challenged the Air Force and Navy ManTech program elements in the original proceeding. It did not challenge the Defense Logistic Agency's Industrial Preparedness Manufacturing Technology program element. ↩

²²⁷ The European Communities only challenged the Air Force and Navy ManTech program elements in the original proceeding. It did not challenge the Defense Wide Manufacturing Science and Technology program element. ↩

²²⁸ Although presented together in its submissions in this proceeding, the European Communities in the original proceeding had presented these as two distinct program element challenges. (See Panel Report, US – Large Civil Aircraft (2^nd complaint), para. 7.1113). ↩

²²⁹ The United States indicated at paragraph 6 of its Compliance Communication that it had ceased funding this program element. (See United States' Compliance Communication, para. 6). ↩

²³⁰ The United States indicated at paragraph 6 of its Compliance Communication that it had ceased funding this program element. (See United States' Compliance Communication, para. 6). ↩

²³¹ The United States indicated at paragraph 6 of its Compliance Communication that it had ceased funding this program element. (See United States' Compliance Communication, para. 6). ↩

²³² The United States indicated at paragraph 6 of its Compliance Communication that it had ceased funding this program element. (See United States' Compliance Communication, para. 6). ↩

²³³ European Union's first written submission, paras. 291 and 301. The list of program elements in the European Union's first written submission includes all of the program elements identified in the European Union's request for the establishment of a panel, except for the following three program elements: Aviation Survivability (PE 0603216N), KC-105 (PE 0401219F), and Technology Transition (PE 0604858F). ↩

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5. Airborne Warning and Control System (AWACS) (PE 0207417F).
6. KC-46, Next Generation Aerial Refueling Aircraft (PE 0605221F).
7. Multi-Mission Maritime Aircraft (P-8A) (PE 0605500N).
8. Long Range Strike Bomber (PE 060415F).

7.91. According to the European Union, these further eight RDT&E program elements had begun to fund Boeing's "dual-use LCA-relevant research since 2007".²³⁴

7.92. We also recall that the "funding" and "support" provided to Boeing for its R&D activities on behalf of DOD under the RDT&E program elements occurs through two different types of legal instruments. The first are procurement contracts, which DOD is required to use when contracting for the performance of R&D services the principal purpose of which is for the direct benefit or use of the U.S. Government.²³⁵ The second are assistance instruments, which include cooperative agreements, technology investment agreements, and certain other transactions. Assistance instruments are used when the purpose of the R&D activity is to transfer a thing or value to the recipient instead of acquiring property or services for the direct benefit or use of the U.S. Government.²³⁶

7.93. The United States objects to the inclusion of some of the original DOD aeronautics R&D measures within the scope of this compliance proceeding on the basis that those measures were not subject to the DSB recommendations and rulings in the original proceeding. It also objects to the inclusion of some other "additional" DOD aeronautics R&D measures on the basis that they could have been challenged in the original proceeding and were not, and thus are not properly within the scope of the compliance proceeding. Specifically, the United States requests the Panel to make the following rulings:

1. The DOD procurement contracts funded under the original 23 RDT&E program elements that were at issue in the original proceeding, are outside the scope of this proceeding, because they were unsuccessfully challenged by the European Communities in the original proceeding.²³⁷
2. The DOD procurement contracts and assistance instruments funded under certain "additional" RDT&E program elements are outside the scope of this proceeding because they were either in existence at the time of the European Communities' panel request in the original proceeding, or continued work previously conducted under program elements then in existence, but were not challenged by the European Communities in the original proceeding.²³⁸
3. The provision of DOD "equipment and employees" is not within the scope of this proceeding because this measure was found to be outside the original panel's terms of reference and thus it is also outside the scope of this proceeding.²³⁹

7.94. We consider each of the above requests in this Section of the Report. We also address, of our own accord, whether it is necessary for the Panel to determine whether each of the RDT&E program elements identified by the European Union in its panel request in fact funds "dual-use"

²³⁴ European Union's first written submission, paras. 291 and 301. ↩

²³⁵ Panel Report, US – Large Civil Aircraft (2^nd complaint), paras. 7.1115 and 7.1140-7.1142. ↩

²³⁶ Panel Report, US – Large Civil Aircraft (2^nd complaint), paras. 7.1115 and 7.1140-7.1142. ↩

²³⁷ United States' request for preliminary rulings, dated 13 November 2012, paras. 5, 8, and 9; reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, paras. 26 and 34; and first written submission, paras. 61 and 64-66. ↩

²³⁸ United States' request for preliminary rulings, dated 13 November 2012, paras. 10, 13, and 14; reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 42; and first written submission, paras. 62 and 63. ↩

²³⁹ United States' request for preliminary rulings, dated 13 November 2012, paras. 10-12; reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 41; and first written submission, paras. 61, 67, and 68. ↩

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RDT&E (however defined), in order to determine which of the DOD aeronautics R&D measures identified by the European Union in its panel request are properly within our terms of reference.

7.3.2 Whether the pre-2007 DOD procurement contracts funded under the original 23 RDT&E program elements are outside the scope of this compliance proceeding

7.95. The United States requests a ruling that the DOD procurement contracts funded under the original 23 RDT&E program elements are outside the scope of this compliance proceeding because the DOD procurement contracts were challenged in the original proceeding, were not found to be WTO-inconsistent in that proceeding, and the European Union declined to pursue the issue on appeal.²⁴⁰

7.3.2.1 Main arguments of the parties and third parties

7.96. The United States argues that Article 21.5 of the DSU does not allow re-litigation of claims on which the complaining party did not prevail. It considers that the European Union did not prevail on its claims in respect of the DOD procurement contracts in the original proceeding because there was no finding of WTO-inconsistency against these measures at the conclusion of the original proceeding.²⁴¹

7.97. The United States asserts that, although the European Union appealed the legal interpretation on which the panel had based its finding that the DOD procurement contracts were not financial contributions, within the meaning of Article 1.1(a)(1), that appeal did not result in a finding against the DOD procurement contracts (and thus create a compliance obligation for the United States).²⁴² According to the United States, this is because the European Union specifically asked that, in the event that the Appellate Body rejected the panel's legal test, it not complete the analysis with respect to the DOD procurement contracts.²⁴³

7.98. The United States acknowledges the existence of an "exception" to the principle that a party may not re-litigate issues in compliance proceedings in which it did not prevail in the original dispute. This is where the approach of the panel only partially resolved the matter at issue.²⁴⁴ However, the difference in the present case is that the European Union bears responsibility for the partial resolution of its claims concerning the DOD procurement contracts because it declined to seek completion of the analysis.

7.99. The United States distinguishes the case of US – Upland Cotton (Article 21.5 – Brazil), in which Brazil was permitted to pursue claims against measures that it had pursued in the original proceeding but which had not resulted in a finding of WTO-inconsistency, owing to insufficient factual findings and undisputed evidence to enable the Appellate Body to complete the analysis. According to the United States, the present situation is different because "the EU took the issue of DOD procurement contracts out of contention, and the Appellate Body never had the opportunity to evaluate whether it was possible to complete the analysis."²⁴⁵ Indeed, the Appellate Body's findings underscore that the European Union did not appeal the panel's findings that the DOD procurement contracts were not inconsistent with the SCM Agreement.²⁴⁶ According to the United States, the fact that the Appellate Body declined to address the European Union's appeal because it was "unnecessary for purposes of resolving this dispute" indicates that the Appellate Body viewed the panel's finding that the DOD procurement contracts were not financial

²⁴⁰ United States' request for preliminary rulings, dated 13 November 2012, paras. 8, 9, and 60. ↩

²⁴¹ United States' reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 27; request for preliminary rulings, dated 13 November 2012, para. 9; and first written submission, para. 306. ↩

²⁴² United States' reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 28; response to Panel question No. 10, paras. 22 and 23. ↩

²⁴³ United States' reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 28; request for preliminary rulings, dated 13 November 2012, para. 8; and first written submission, para. 309. ↩

²⁴⁴ United States' reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 28 (referring to Appellate Body Reports, EC – Bed Linen (Article 21.5 – India), fn 115; and US – Oil Tubular Goods Sunset Reviews (Article 21.5 – Argentina), para. 148 and fn 322). ↩

²⁴⁵ United States' reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 33; opening statement at the meeting of the Panel, para. 62. ↩

²⁴⁶ United States' opening statement at the meeting of the Panel, para. 62. ↩

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contributions to be a finding that the European Union did not appeal, and therefore, addressing that issue on appeal was unnecessary for purposes of resolving the dispute.²⁴⁷

7.100. Finally, the United States submits that the systemic implication of permitting the European Union to reassert its claims against the DOD procurement contracts in the circumstances would be to enable complaining parties that are displeased with the outcome of a panel finding in an original proceeding to make limited appeals of legal issues and decline to request completion of the analysis, in order to prevent the Appellate Body from evaluating whether the party had made out its case. If the appeal on the limited issue is successful, it then has a "second chance" to make out its case in a compliance proceeding. This outcome is contrary to the limited scope of Article 21.5 of the DSU, and imposes an unfair burden on the responding party, which would be deprived a reasonable period of time in which to comply with any findings of breach.²⁴⁸

7.101. The European Union argues that it has the right to pursue claims in this compliance proceeding against any funding or support provided to Boeing through the RDT&E program elements at issue, regardless of the type of contracts or agreements pursuant to which that funding and support is provided.²⁴⁹

7.102. The European Union notes that it appealed the legal finding upon which the panel had based its decision that the DOD procurement contracts were not subsidies. However, given the lack of factual findings and uncontested facts related to benefit and adverse effects, it would have been impossible for the Appellate Body to complete the analysis of whether the DOD procurement contracts constitute specific subsidies that cause adverse effects. Consequently, the European Union did not request completion of the analysis that it knew the Appellate Body could not grant.²⁵⁰

7.103. The European Union notes that the Appellate Body declared "moot and without legal effect" the panel's interpretation that transactions properly characterized as purchases of services are excluded from Article 1.1(a)(1) and likewise declared "moot" the panel's finding that DOD procurement contracts were properly characterized as purchases of services and thus were not financial contributions.²⁵¹ The European Union argues that, because it had already succeeded in the original proceeding in demonstrating that the NASA aeronautics R&D measures and DOD assistance instruments were specific subsidies, the only practical reason it had to appeal the panel's finding that purchases of services are excluded from Article 1.1(a)(1) of the SCM Agreement was to "bring the DOD procurement contracts back into the scope of this dispute".²⁵² The European Union considers that it pursued the matter before the Appellate Body to the greatest extent possible, and the panel's findings were declared moot.²⁵³

7.104. The European Union argues that the United States' position regarding the European Union's failure to request completion of the analysis amounts to saying that if the Appellate Body is requested to complete the analysis but cannot, the claim and measure may be within the scope of the compliance proceeding, while failure to request completion of the analysis is "similar to a party not appealing" and triggers the obligation to accept unconditionally the finding left unappealed.²⁵⁴ This amounts to a false distinction between the Appellate Body's inability to complete the analysis, on the one hand, and a party's recognition that there are insufficient factual findings or undisputed facts on the record to allow the Appellate Body to

²⁴⁷ United States' opening statement at the meeting of the Panel, para. 63. ↩

²⁴⁸ United States' reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 30; first written submission, para. 66. ↩

²⁴⁹ European Union's response to the United States' request for preliminary rulings, dated 23 November 2012, para. 16. ↩

²⁵⁰ European Union's response to the United States' request for preliminary rulings, dated 23 November 2012, para. 17; second written submission, para. 46. ↩

²⁵¹ Indeed, the European Union submits that the United States' preliminary objection depends entirely on a distinction between DOD procurement contracts and assistance instruments that the Appellate Body had declared to be moot. To allow the United States to prevail would mean that such an erroneous distinction would be anything but moot. (See European Union's supplemental submission on the United States' request for preliminary rulings, para. 10; and opening statement at the meeting of the Panel, para. 15). ↩

²⁵² European Union's response to the United States' request for preliminary rulings, dated 23 November 2012, para. 20. (emphasis original) ↩

²⁵³ European Union's opening statement at the meeting with the Panel, para. 15. ↩

²⁵⁴ European Union's second written submission, para. 41. ↩

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complete the analysis.²⁵⁵ In the present case, the original panel had not even begun an analysis of the highly fact-intensive issues of benefit or adverse effects regarding the DOD procurement contracts, limiting that analysis exclusively to DOD assistance instruments. The European Union submits that, if the United States is correct that the European Union is at fault for failing to request completion of the analysis, the result will be that appellants will have to ask for completion of the analysis on every issue under appeal, in order to preserve their options before any compliance panel. This would lead to huge inefficiencies, creating new burdens on and delays in Appellate Body proceedings.²⁵⁶

7.105. Finally, the European Union asks the Panel to consider the practical result of excluding the DOD procurement contracts funded under the 23 original RDT&E program elements from this compliance proceeding: A new original panel would need to be constituted to consider claims against procurement contracts funded under the 23 original RDT&E program elements while the Panel in this compliance proceeding would be considering "identical" claims against procurement contracts funded under the other "additional" RDT&E program elements, as well as assistance instruments funded under all DOD RDT&E program elements. This would be "incredibly inefficient".²⁵⁷

7.106. Brazil argues that the DOD procurement contracts funded under the original 23 RDT&E program elements challenged in the original proceedings are outside the scope of this compliance proceeding, on the basis that the European Union could have chosen to pursue the DOD procurement contracts before the Appellate Body, but chose not to.²⁵⁸ Brazil considers that it may be necessary to draw a distinction between claims for which the Appellate Body was asked to fully consider the issues but was unable to complete its analysis, and matters for which the complaining Member did not seek full consideration.²⁵⁹ Without a substantial change in the facts, the latter measures cannot constitute a measure taken to comply, and are therefore outside the scope of compliance proceedings.²⁶⁰ Brazil also emphasizes that compliance proceedings should not be used to give complainants a "second bite of the apple" and that to do so would compromise the dispute settlement system's "functioning and predictability".²⁶¹

7.107. Certain of the third parties (Brazil, Canada, Japan, and Korea) make general arguments as to the situations in which a complaining party may be precluded from challenging a measure in a compliance proceeding that it had not successfully challenged in the original proceeding. These arguments are summarized at Section 7.2.1.1 of this Report.

7.3.2.2 Evaluation by the Panel

7.108. The question before us is whether the European Union can assert claims concerning DOD procurement contracts funded under the 23 original RDT&E program elements in this compliance proceeding, notwithstanding that there were no DSB recommendations and rulings with respect to the DOD procurement contracts in the original proceeding, and moreover, that the original panel's finding that the DOD procurement contracts did not involve financial contributions, within the meaning of Article 1.1(a)(1), was declared moot.

7.109. In Section 7.2.1.2 of this Report, we discuss the situations in which complaining parties have been permitted to reassert claims in compliance proceedings that they had unsuccessfully raised in the original proceeding. In that discussion, we conclude that the prior cases addressing

²⁵⁵ European Union's supplemental submission on the United States' request for preliminary rulings, para. 13; second written submission, paras. 44 and 46. ↩

²⁵⁶ European Union's supplemental submission on the United States' request for preliminary rulings, para. 14. ↩

²⁵⁷ European Union's response to the United States' request for preliminary rulings, dated 23 November 2012, paras. 22-25. ↩

²⁵⁸ Brazil's third-party submission, paras. 37 and 38; third-party statement, paras. 5 and 6; and third-party response to Panel question No. 4, paras. 1 and 2. ↩

²⁵⁹ Brazil's third-party response to Panel question No. 1, para. 6. ↩

²⁶⁰ Brazil's third-party submission, paras. 37 and 38. ↩

²⁶¹ Brazil's third-party submission, para. 36; third-party response to Panel question No. 1, paras. 4 and 5. ↩

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this issue suggest that the key issue is whether the reassertion of claims in the particular circumstances would compromise the finality of the DSB recommendations and rulings.²⁶²

7.110. We will therefore determine the status of the European Union's claims in respect of the DOD procurement contracts at the conclusion of the original proceeding. This includes a close examination of the European Union's appeal as it pertained to the DOD procurement contracts, as well as the way in which the Appellate Body dealt with that aspect of the European Union's appeal.

7.3.2.2.1 The European Union's appeal regarding the pre-2007 DOD procurement contracts

7.111. In the original proceeding, the panel found, at paragraph 7.970 of the panel report, that transactions properly characterized as purchases of services are excluded from the scope of Article 1.1(a)(1)(i) of the SCM Agreement. In a separate section of the panel report entitled "Department of Defense (DOD) aeronautics R&D", the panel concluded, at paragraph 7.1171, that the work that Boeing performed for DOD under the procurement contracts was properly characterized as a "purchase of services" and therefore found that the payments and access to facilities provided to Boeing under the DOD procurement contracts were not financial contributions, within the meaning of Article 1.1(a)(1).

7.112. In its notice of appeal, the European Union requested the Appellate Body to "reverse, modify or declare moot and of no legal effect the findings, conclusions and recommendations of the Panel" with respect to various enumerated errors of law and legal interpretations contained in the panel report.²⁶³ The third such alleged error enumerated by the European Union was that the panel erred in its interpretation of Article 1.1(a)(1) of the SCM Agreement when it found that transactions properly characterized as purchases of services are excluded from the scope of Article 1.1(a)(1) of the SCM Agreement.²⁶⁴ The footnote to this ground of appeal refers to the "Panel Report, paras. 7.953-7.970 and para. 7.1136, particularly para. 7.970, final sentence".²⁶⁵ There is no reference to paragraph 7.1171, which contained the panel's finding that the DOD procurement contracts were not financial contributions.²⁶⁶ In other words, the European Union in its third appeal point appealed only the panel's interpretation of Article 1.1(a)(1), not the application of that interpretation to any specific measures.

7.113. The European Union states in the portion of its appellant submission concerning the panel's allegedly erroneous interpretation of Article 1.1(a)(1) of the SCM Agreement:

As a direct consequence of this error of law, the Panel came to the erroneous conclusion that much of the provision of funding and other support to Boeing pursuant to the DOD RDT&E Program is excluded from the scope of the SCM Agreement.²⁶⁷

It concludes this portion of its appellant submission as follows:

In conclusion, the Appellate Body should reverse or modify the Panel's finding that transactions properly characterised as purchases of services are excluded from the scope of Article 1.1(a)(1) of the SCM Agreement. Because there are a number of contested facts related to the DOD RDT&E Program measures that were found to constitute purchases of services, the European Union does not request that the Appellate Body complete the analysis.²⁶⁸

7.114. This suggests that, although the European Union's appeal of the panel's interpretation of Article 1.1(a)(1) did not explicitly refer to the panel's findings concerning the DOD procurement

²⁶² See para. 7.42 above. ↩

²⁶³ European Union's notice of appeal, dated 4 April 2011, WT/DS353/8, second introductory para. ↩

²⁶⁴ European Union's notice of appeal, dated 4 April 2011, WT/DS353/8, para. 3. ↩

²⁶⁵ European Union's notice of appeal, dated 4 April 2011, WT/DS353/8, fn 4. ↩

²⁶⁶ The formulation of the third appeal point concerning the interpretation of Article 1.1(a)(1) can be contrasted with the other grounds of appeal, in which the European Union alleged that the panel erred in its interpretation and application of various provisions of the SCM Agreement (such as Article 7.4 and Annex V, Article 2.1, Article 3.1(a) and fn 4, and Articles 5 and 6.3). ↩

²⁶⁷ European Union's appellant submission, (Exhibit EU-1280), para. 93. ↩

²⁶⁸ European Union's appellant submission, (Exhibit EU-1280), para. 127. ↩

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contracts as purchases of services that are not covered by Article 1.1(a)(1)(i), the European Union considered that the Appellate Body's reversal of the panel's legal interpretation would have implications for the panel's finding regarding the DOD procurement contracts. The European Union also appears to have considered that it was entitled, on the basis of its appeal, to request the Appellate Body to complete the analysis concerning the DOD procurement contracts, even though the European Union ultimately elected not to do so on the grounds that there were insufficient factual findings by the panel or undisputed facts to make this feasible.

7.115. The United States appealed the panel's findings that the NASA procurement contracts and DOD assistance instruments were not properly characterized as purchases of services, and constituted financial contributions, within the meaning of Article 1.1(a)(1).²⁶⁹ The United States also appealed the panel's findings that the NASA procurement contracts and DOD assistance instruments conferred a benefit, within the meaning of Article 1.1(b).²⁷⁰ The European Union correctly observed in its appellee submission that, if the Appellate Body were to uphold the European Union's appeal regarding the interpretation of Article 1.1(a)(1), this would render moot the United States' appeal concerning the application of that interpretation to the NASA procurement contracts and DOD assistance instruments.²⁷¹

7.3.2.2.2 The Appellate Body's approach to the European Union's appeal of the panel's interpretation of Article 1.1(a)(1)

7.116. There are several aspects of the Appellate Body Report that suggest that the Appellate Body did not consider that the DOD procurement contracts were on appeal before it. The Appellate Body acknowledged that the European Union's appeal raised the issue of "{w}hether the Panel erred in finding that transactions that are properly characterized as 'purchases of services' are excluded from the scope of Article 1.1(a)(1)(i) of the SCM Agreement".²⁷² However, the section of the Appellate Body Report in which this issue is discussed is entitled "NASA Procurement Contracts and USDOD Assistance Instruments". Indeed, after summarizing the panel's findings and general approach (at paragraphs 550-591 of the Appellate Body Report), the Appellate Body stated:

We turn to the measures before us on appeal, namely the NASA procurement contracts and USDOD assistance instruments.²⁷³

7.117. The Appellate Body faulted the panel for not first characterizing the various aeronautics R&D measures based on an analysis of their "relevant characteristics" and then determining whether those measures, properly characterized, fell within any of the categories of "financial contribution" in Article 1.1(a)(1).²⁷⁴ The Appellate Body said that it would proceed by first undertaking an examination of the relevant characteristics of the "measures before us on appeal – that is, the NASA procurement and USDOD assistance instruments".²⁷⁵ It would then "consider the terms and scope of Article 1.1(a)(1)" before determining whether, in light of their relevant characteristics, the NASA procurement contracts and DOD assistance instruments fell within any of the four categories of financial contribution covered by Article 1.1(a)(1).

7.118. At paragraph 590 of its Report, the Appellate Body set forth the implications of this approach for the appeal points of both the European Union and the United States, foreshadowing that, if it were to find that the measures that the United States had appealed (NASA procurement contracts and DOD assistance instruments) were of a type that fall within Article 1 of the SCM Agreement, the European Union's appeal of the panel's interpretation of Article 1.1(a)(1) would be rendered moot:

²⁶⁹ Appellate Body Report, US – Large Civil Aircraft (2^nd complaint), para. 553. ↩

²⁷⁰ Appellate Body Report, US – Large Civil Aircraft (2^nd complaint), para. 626. The United States did not appeal the panel's findings that the NASA Space Act Agreements were financial contributions. The Appellate Body stated at footnote 1300 of its Report that its discussion of benefit concerning the NASA measures was thus limited to NASA procurement contracts. ↩

²⁷¹ European Union's appellee submission, para. 112. ↩

²⁷² Appellate Body Report, US – Large Civil Aircraft (2^nd complaint), para. 425(b). ↩

²⁷³ Appellate Body Report, US – Large Civil Aircraft (2^nd complaint), para. 592. (emphasis added) ↩

²⁷⁴ The Appellate Body found it odd that the panel had instead considered that transactions properly characterized as "purchases of services" are excluded from the scope of Article 1.1(a)(1), then sought to determine whether the DOD procurement contracts were properly characterized as "purchases of services". (See Appellate Body Report, US – Large Civil Aircraft (2^nd complaint), para. 585). ↩

²⁷⁵ Appellate Body Report, US – Large Civil Aircraft (2^nd complaint), para. 589. ↩

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We note that the conclusion as to the proper characterization of the measures may have consequences for the scope of our inquiry. For instance, if we were to find that the measures are of a type that fall within the scope of Article 1.1, there would be no reason for us to examine whether purchases of services fall within the scope of Article 1.1(a)(1) of the SCM Agreement. Whether or not purchases of services are covered by Article 1.1(a)(1) would be irrelevant to the question of whether the measures before us – the NASA procurement contracts and USDOD assistance instruments – constitute financial contributions. This would render moot the European Union's appeal of the Panel's interpretation that purchases of services are excluded from the scope of Article 1.1(a)(1)(i). It would also render moot the United States' appeal of the Panel's application of the test it developed for determining whether the measures could properly be characterized as purchases of services.²⁷⁶

7.119. We read this statement to say that, if the Appellate Body were to find that the NASA procurement contracts and DOD assistance instruments, properly characterized, fall within Article 1.1(a)(1) of the SCM Agreement (which it found), there would be no reason to examine whether transactions properly characterized as purchases of services are excluded from the scope of Article 1.1(a)(1)(i) because the answer to that interpretive question would be irrelevant to the disposition of the matter before it.

7.120. Moreover, at paragraph 620 of its Report, the Appellate Body reiterated its position that, given the approach it had taken to the characterization of the NASA procurement contracts and DOD assistance instruments, the interpretive question as to whether Article 1.1(a)(1)(i) excludes transactions properly characterized as purchases of services is "not relevant" to resolving the dispute before it. The Appellate Body stated:

This interpretive issue does not need to be resolved by us because it is not relevant for purposes of resolving the dispute before us, that is, whether the NASA procurement contracts and USDOD assistance instruments, which we have found to resemble joint ventures, constitute financial contributions within the meaning of Article 1.1(a)(1) of the SCM Agreement.¹²⁹⁷ We therefore declare the Panel's interpretation that "transactions properly characterized as purchases of services are excluded from the scope of Article 1.1(a)(1)(i) of the SCM Agreement"¹²⁹⁸ to be moot and of no legal effect.²⁷⁷

¹²⁹⁷ The Appellate Body proceeded in a similar manner in US – Upland Cotton with respect to the interpretation of Article 6.3(d) of the SCM Agreement.

¹²⁹⁸ Panel Report, para. 9.970. (emphasis omitted) Our findings of financial contributions regarding the payments and other support provided under the NASA procurement contracts and USDOD assistance instruments are based on the particular characteristics of those measures. We also declare moot the Panel's finding, in paragraph 7.1171 of its Report, that the USDOD procurement contracts are properly characterized as "purchases of services" and thus are not financial contributions under Article 1.1(a)(1). However, as neither participant has requested us to do so, we do not complete the analysis regarding the USDOD procurement contracts at issue in this dispute.

7.121. The first sentence of the quotation from paragraph 620 of the Appellate Body Report extracted above suggests that the Appellate Body regarded the "dispute" before it as being limited to the United States' appeal; namely, whether the NASA procurement contracts and DOD assistance instruments constitute financial contributions. The implications of the first sentence of the quotation from paragraph 620 extracted above are that the Appellate Body's approach to that issue had rendered the European Union's appeal of the panel's interpretation of Article 1.1(a)(1) (as well as the United States' appeal of the panel's application of that interpretation to the NASA procurement contracts and DOD assistance instruments), moot. This result was foreshadowed by the Appellate Body in paragraph 590 of its Report, as discussed above.

7.122. In footnote 1297, immediately following the first sentence of the quotation from paragraph 620 extracted above, the Appellate Body asserts that it "proceeded in a similar manner" in US – Upland Cotton. In the relevant part of the Appellate Body Report in US – Upland Cotton,

²⁷⁶ Appellate Body Report, US – Large Civil Aircraft (2^nd complaint), para. 590. ↩

²⁷⁷ Appellate Body Report, US – Large Civil Aircraft (2^nd complaint), para. 620. (italics original, underlining added) ↩

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Brazil had: (a) appealed the panel's legal interpretation of the phrase "world market share" in Article 6.3(d) of the SCM Agreement; and (b) requested the Appellate Body to complete the analysis of its serious prejudice claim under Article 6.3(d) and find that the effect of certain United States subsidies is an increase in the world market share of the United States in upland cotton. This second element of Brazil's appeal was expressed as being conditional on the Appellate Body reversing the panel's findings that the United States' price-contingent subsidies caused significant price suppression, within the meaning of Article 6.3(c) of the SCM Agreement.²⁷⁸ The Appellate Body had upheld the panel's finding regarding price suppression under Article 6.3(c), so the condition upon which Brazil's request for completion of the analysis was not fulfilled. However, the Appellate Body also said that it was "not necessary" to make a finding on the first element of Brazil's appeal – the interpretation of the phrase "world market share" in Article 6.3(d) – although Brazil had stressed that this first element of its appeal was not conditional. The Appellate Body said that, although an interpretation in the abstract of the phrase "world market share" in Article 6.3(d) of the SCM Agreement might offer at best some degree of guidance on that issue, it would not affect the resolution of this particular dispute (presumably because the Appellate Body would not complete the analysis under Article 6.3(d) since the condition specified by Brazil for doing so had not been fulfilled). Thus, even if the Appellate Body were to reverse the panel's finding on the interpretation of Article 6.3(d), upon adoption of the recommendations and rulings by the DSB, the United States would have been under no additional obligation regarding implementation. The Appellate Body concluded by reiterating that an interpretation of the phrase "world market share" in Article 6.3(d) was unnecessary for the purpose of resolving the dispute before it. It clarified "we neither uphold nor reverse the Panel's findings on the interpretation of the phrase 'world market share' in Article 6.3(d) of the SCM Agreement."²⁷⁹

7.123. In saying in footnote 1297 to the first sentence of the quotation from paragraph 620 of the Appellate Body Report extracted in paragraph 7.120. above that it proceeded in a "similar manner" in US – Upland Cotton with respect to the interpretation of Article 6.3(d) of the SCM Agreement as it was proceeding with the European Union's appeal regarding the interpretation of Article 1.1(a)(1), the Appellate Body suggests that it did not address the European Union's appeal for the same reason that it declined to address Brazil's appeal; namely, that a reversal of the interpretation would not affect the resolution of the dispute. This also seems to suggest that the Appellate Body considered that the DOD procurement contracts were not before it on appeal.

7.124. In the second sentence of the quotation from paragraph 620 of the Appellate Body Report, extracted in paragraph 7.120. above, the Appellate Body states that it "therefore" declares the panel's interpretation of Article 1.1(a)(1)(i) to be "moot and of no legal effect". In our view, the panel's interpretation of Article 1.1(a)(1)(i) could only be considered moot if: (a) the Appellate Body had likewise characterized the DOD procurement contracts as falling within Article 1.1(a)(1) independently of whether they involved purchases of services (which it did not do); or (b) the Appellate Body did not regard the DOD procurement contracts as being before it.

7.125. However, in footnote 1298 to the second sentence of the quotation from paragraph 620 of the Appellate Body Report extracted in paragraph 7.120. above, the Appellate Body "also" declared moot the panel's finding, at paragraph 7.1171 of the panel report, that the DOD procurement contracts were properly characterized as "purchases of services" and thus were not financial contributions. Footnote 1298 concludes with a statement that the Appellate Body did not complete the analysis as to whether the DOD procurement contracts were financial contributions because neither participant requested it to do so. Neither party could be expected to request completion of the analysis with respect to a claim that was not the subject of appeal. This declaration that the panel's finding at paragraph 7.1171 of the panel report is moot suggests that the DOD procurement contracts were regarded by the Appellate Body as being before it on appeal.

7.126. If we were to consider that the Appellate Body did not regard the DOD procurement contracts to be before it on appeal, this would imply that the Appellate Body considered that the European Union had not pursued its claims concerning the DOD procurement contracts on appeal. In these circumstances, we would be minded to conclude that the European Union is not able to reassert claims concerning the DOD procurement contracts at the compliance stage, when it had inadequately pursued them on appeal. To conclude otherwise would, in our view, compromise the

²⁷⁸ Appellate Body Report, US – Upland Cotton, paras. 501 and 506. ↩

²⁷⁹ Appellate Body Report, US – Upland Cotton, para. 511. ↩

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finality of the DSB recommendations and rulings and provide the European Union an "unfair second chance".

7.127. However, we note that, although the European Union did not appeal the application of the panel's allegedly erroneous interpretation of Article 1.1(a)(1) to the DOD procurement contracts, the Appellate Body nevertheless declared moot the panel's finding that the DOD procurement contracts are not financial contributions. After some reflection, we have concluded that this could only be because the Appellate Body did in fact regard the DOD procurement contracts to be before it on appeal. Thus, we have ultimately arrived at the conclusion that the application of the panel's interpretation of Article 1.1(a)(1) to the DOD procurement measures was before the Appellate Body.

7.128. We are also mindful of the fact that the panel's analysis of the DOD procurement contracts had stopped at the stage of financial contribution. The panel did not analyse whether the DOD procurement contracts conferred a benefit or caused adverse effects. We therefore agree with the European Union that it would have been impossible for the Appellate Body to complete the analysis regarding the DOD procurement contracts. Under these circumstances, we do not consider that the European Union's failure to request completion of the analysis should preclude our consideration of these measures in this compliance proceeding.

7.129. Additionally, given the time and resources that have been expended in this dispute in order to arrive at a resolution of the fundamental disagreement between the European Union and United States as to whether the U.S. Government subsidizes Boeing through the procurement of military research, and given that the aim of the dispute settlement system, as expressed in Article 3.7 of the DSU, is to secure a positive resolution to a dispute, we have concluded that it would simply not be a reasonable outcome for us to rule that the European Union is precluded from pursuing in this compliance proceeding claims regarding the DOD procurement contracts at issue in the original proceeding.

7.130. In light of the foregoing, we conclude that the European Union would not be "unfairly" getting a second chance to make a case that it failed to make out in the original proceeding if it were to reassert claims in this proceeding in respect of DOD procurement contracts funded under the original 23 RDT&E program elements. In Section 7.2.1.2 we explain that we are unable to agree with the argument that an original measure is, by definition, outside the scope of a compliance proceeding.²⁸⁰ We conclude that the DOD procurement contracts funded through the original 23 RDT&E program elements are within the scope of this compliance proceeding.

7.131. We reject the United States' request for a ruling that the DOD procurement contracts funded through the original 23 RDT&E program elements are outside the scope of this compliance proceeding and conclude that these measures are within the scope of this proceeding.

7.3.3 Whether the seven "additional" RDT&E program elements are outside the scope of this proceeding

7.132. The United States requests a ruling that the seven "additional" RDT&E program elements are outside the scope of this proceeding on the basis that those program elements either were in existence at the time of the European Communities' panel request in the original proceeding, or continue work that was previously conducted under a program element that was in existence at that time. According to the United States, because the European Communities could have brought challenges regarding those program elements in the original proceeding and did not, the European Union is precluded from challenging them now in this compliance proceeding.²⁸¹

²⁸⁰ See paras. 7.38-7.40 above. ↩

²⁸¹ United States' request for preliminary rulings, dated 13 November 2012, paras. 10, 13, and 14. Although the United States sometimes describes its request for a preliminary ruling on this issue as being limited to the European Union's claims concerning DOD assistance instruments or "agreements" funded under the additional program elements, it is clear in other contexts that the United States' objections cover both assistance instruments and procurement contracts funded under those additional program elements, or the program elements as measures themselves. (See United States' request for preliminary rulings, dated ↩

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7.3.3.1 Background

7.133. We recall from paragraphs 7.89 and 7.90 above that the European Union's DOD-related claims cover a number of "original" RDT&E program elements (i.e. those that were also at issue in the original proceeding), and "additional" RDT&E program elements (i.e. those which allegedly have begun to fund what the European Union identifies as "dual-use LCA-relevant research" since 2007).

7.134. The United States' formulation of its objection to the inclusion of certain of the "additional" RDT&E program elements within the scope of this proceeding could be read to suggest that the United States considers the DOD aeronautics R&D measures to be the RDT&E program elements themselves, rather than the payments and access to facilities, equipment, and employees provided to Boeing through procurement contracts and assistance instruments funded under various RDT&E program elements.²⁸² We understand that in making this request for preliminary rulings, the United States objects to the inclusion within the scope of this proceeding of payments and access to DOD facilities, equipment, and employees, whether prior to or after the date of the original panel request, provided to Boeing through procurement contracts and assistance instruments funded under the seven "additional" RDT&E program elements.

7.135. The United States first raised this objection in a request for preliminary rulings on 13 November 2012, some time prior to the European Union's first written submission, which was filed on 28 March 2013. The United States' request was at that time based on the European Union's panel request, dated 11 October 2012.²⁸³ The European Union responded to the United States' request for preliminary rulings on 23 November 2012, and the United States replied to that response on 3 December 2012. Pursuant to a communication from the Panel dated 6 May 2013 and subsequent to the filing of its first written submission, the European Union on 13 May 2013 provided a supplemental submission on the United States' request for preliminary rulings, including the United States' objection to the inclusion of certain "additional" RDT&E program elements within the scope of this proceeding. The United States filed its first written submission on 27 June 2013, reiterating its objections, but only as regards seven of the nine "additional" RDT&E program elements to which it had objected in its original request for preliminary rulings.²⁸⁴

7.136. The seven "additional" RDT&E program elements the subject of the United States' request for preliminary rulings are as follows:

1. Materials and Biological Technology (PE 0602715E).
2. Technology Transfer (PE 0604317F).²⁸⁵
3. Manufacturing Technology/Industrial Preparedness Program: Defense Logistics Agency (PE 0708011S).
4. Airborne Warning and Control System (AWACS) (PE 0207417F).
5. KC-46, Next Generation Aerial Refueling Aircraft (PE 0605221F).²⁸⁶

13 November 2012, para. 14; reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 42; and first written submission, para. 63).

²⁸² The relationship between the RDT&E program elements and the legal instruments through which the payments and access to facilities, equipment, and employees are provided is discussed in Section 7.3.1 of this Report. The measures at issue are discussed in Section 8.2.3.2 of this Report. ↩

²⁸³ European Union's request for the establishment of a panel. The Panel was established by the DSB on 23 October 2012. ↩

²⁸⁴ The United States had also originally challenged the inclusion of the Aviation Survivability (PE 0603216N) and KC-10S (PE 0401219F) program elements on the basis of the inclusion of these program elements in the European Union's panel request, however, as the European Union did not pursue claims regarding those program elements in its first written submission, the United States' request in relation to these two program elements is rendered moot. (See European Union's supplemental submission on the United States' request for preliminary rulings, para. 18). ↩

²⁸⁵ This program element continues work that was previously conducted under a program element entitled "Technology Link (PE 0603942D8Z)". ↩

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6. Multi-Mission Maritime Aircraft (P-8A) (PE 0605500N).
7. Long Range Strike Bomber (PE 0604015F).

7.137. We note that the United States does not object to the inclusion within the scope of this proceeding of the "Sustainment Science & Technology" or the "Aviation Safety Technologies" program elements, both of which were identified by the European Union in its first written submission as "additional" RDT&E program elements. The United States does, however, object to the inclusion of the "Manufacturing Technology/Industrial Preparedness Program: Defense Logistics Agency (PE 0708011S)" program element as an "additional" program element. This program element was presented by the European Union as an "original" RDT&E program element in its first written submission.²⁸⁷

7.3.3.2 Main arguments of the parties and third parties

7.138. The United States argues that the European Union has failed to provide a valid reason that would permit it to raise claims relating to the seven "additional" RDT&E program elements for the first time in this compliance proceeding, when it had omitted to make claims regarding those program elements in the original proceeding.²⁸⁸

7.139. Each of the seven "additional" RDT&E program elements, as measures that existed at the time of the original panel request, or measures that continue work that was previously conducted under a different program element number which was in existence at the time of the original panel request, but were not challenged in the original proceeding, cannot also be measures taken to comply with the DSB recommendations and rulings. According to the United States, a measure that existed at the time of the panel request cannot logically also be a measure taken to comply with DSB recommendations and rulings subject to the proceeding. There is thus no basis for their inclusion in the scope of this proceeding.²⁸⁹ Because the European Union could have challenged the seven RDT&E program elements at the time of its original panel request but did not, it cannot now raise claims related to these measures for the first time in a compliance proceeding.²⁹⁰

7.140. The United States argues that the fact that particular projects or activities under the RDT&E program elements may not have come into existence until after the date of the original panel request does not demonstrate that the European Union "could not have challenged the measures during the original proceeding, or that there is any legally relevant discontinuity between the programmes as they existed at the time of the original EU panel request and as they exist today".²⁹¹ Article 21.5 does not accord the complaining party the latitude to manipulate the compliance panel's terms of reference by "sculpting the temporal scope of its claims".²⁹²

7.141. The United States considers that the fact that a particular contract funded under any of the seven "additional" RDT&E program elements may have been awarded after the date of the original panel request is irrelevant if the measures being challenged by the European Union are payments, facilities, equipment, and employees under the program elements, without regard to the contract that made them available. Rather, if the European Union acknowledges that DOD only makes payments or provides facilities, equipment, and employees pursuant to contracts or agreements, and that those contracts and agreements are the relevant measures, the analysis "might be

²⁸⁶ This program element continues work that was previously conducted under a program element entitled "KC-135 Tanker Replacement (PE 0401221F)" which was not challenged in the original proceeding. ↩

²⁸⁷ Compare European Union's first written submission, para. 246, with European Union's supplemental submission on the United States' request for preliminary rulings, para. 20. On the other hand, the United States does not object to the inclusion of the Defense Wide Manufacturing Science and Technology (PE 0603860D8Z) program element in this proceeding although it was also listed by the European Union in its first written submission as an "original" RDT&E program element when it had not been challenged in the original proceeding. ↩

²⁸⁸ United States' reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 42. ↩

²⁸⁹ United States' second written submission, paras. 59 and 60. ↩

²⁹⁰ United States' request for preliminary rulings, dated 13 November 2012, para. 14; reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 45; and first written submission, para. 62, 429, and 435. ↩

²⁹¹ United States' first written submission, para. 63. ↩

²⁹² United States' second written submission, para. 61. ↩

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different". In any case, the United States notes that the largest contract funded through the "additional" RDT&E program elements (the P-8A) was awarded in 2004.²⁹³

7.142. Furthermore, the United States rejects the suggestion that the RDT&E program elements changed after establishment of the original panel in ways that led the European Union to consider that they subsequently involved technology applicable to LCA. According to the United States, it was obvious in the beginning of 2006 that the P-8A, the aerial refueling tanker and the AWACS were or would be military aircraft produced by militarizing civilian airframes.²⁹⁴

7.143. Finally, the United States argues that the European Union has failed to substantiate any allegation that the United States is withdrawing the subsidies provided under the 23 RDT&E program elements and now channelling them through the seven "new" program elements.²⁹⁵

7.144. The European Union rejects the United States' contention that it is precluded from challenging the "additional" RDT&E program elements in this proceeding because it could have challenged them in the original proceeding and did not. According to the European Union, while a particular RDT&E program element may have existed at the time of the original panel request, it could not have brought successful challenges against those program elements at the time of its original panel request because, on the basis of the information then available, they did not appear to be supporting LCA-related R&D at that time.²⁹⁶

7.145. The European Union argues that there are new or changed aspects of the "additional" RDT&E program elements such that the European Union now considers them to be providing subsidies to Boeing. The European Union notes that for six of the seven RDT&E program elements at issue, its claims are limited to aspects of those program elements that began in FY 2007 or later and thus could not have been challenged in the original proceeding. For the other, the Multi-Mission Maritime Aircraft (P-8A), the design and testing continued well after the date of the original panel request and the R&D had not progressed sufficiently prior to that time to allow the European Union to conclude that it was "LCA-relevant".²⁹⁷

7.146. The European Union states that it has never challenged "DOD PEs per se, but only to the extent that each PE provides subsidies that benefit U.S. LCA producers."²⁹⁸ The inclusion of each of the seven "additional" RDT&E program elements in the panel request in this compliance proceeding indicates that the European Union now has reason to believe that, since 20 January 2006 (the date of the European Union's panel request in the original proceeding) or sometime thereafter, those "additional" RDT&E program elements have been providing subsidies to benefit Boeing's LCA division.²⁹⁹

7.147. Finally, the European Union argues that the exclusion of the seven RDT&E program elements from the scope of this proceeding "could potentially open a huge loophole in the United States' compliance obligations".³⁰⁰ This is because of the potential for the United States to seek to show that it is "withdrawing" subsidies from the original 23 RDT&E program elements, while in reality it is shifting those subsidies to the seven RDT&E program elements.

7.3.3.3 Evaluation by the Panel

7.148. The issue before the Panel is whether the payments and access to facilities, equipment, and employees provided to Boeing through procurement contracts and assistance instruments

²⁹³ United States' second written submission, para. 63. ↩

²⁹⁴ United States' second written submission, para. 62. ↩

²⁹⁵ United States' reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 44. ↩

²⁹⁶ European Union's second written submission, para. 115; response to the United States' request for preliminary rulings, dated 23 November 2012, para. 37. ↩

²⁹⁷ European Union's second written submission, para. 114 and fn 120. ↩

²⁹⁸ European Union's supplemental submission on the United States' request for preliminary rulings, para. 19; response to the United States' request for preliminary rulings, dated 23 November 2012, para. 37. ↩

²⁹⁹ European Union's response to the United States' request for preliminary rulings, dated 23 November 2012, para. 37; supplemental submission on the United States' request for preliminary rulings, para. 19. ↩

³⁰⁰ European Union's response to the United States' request for preliminary rulings, dated 23 November 2012, para. 38. ↩

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funded under seven "additional" RDT&E program elements, which were not program elements challenged in the original proceeding, are within the scope of this compliance proceeding.³⁰¹

7.149. The Appellate Body has explained that the subject matter of compliance proceedings is determined not just by the Panel's terms of reference, but also by Article 21.5 of the DSU.³⁰² Thus, a measure will not be within the scope of a compliance proceeding simply because it has been duly identified in a complaining party's request for the establishment of a panel. It must additionally relate to the issue of compliance with the DSB recommendations and rulings in the original proceeding, including the existence or non-existence of measures taken to comply with such recommendations and rulings.

7.150. In Section 7.3.2 of this Report, concerning the United States' objections to the inclusion within the scope of this proceeding of the DOD procurement contracts that were before the original panel, we conclude that a compliance panel may properly consider measures that were challenged in the original proceeding where the claims against those measures were not definitively resolved in the original proceeding, in situations where the assertion of claims against those measures at the compliance stage would not compromise the finality of the DSB recommendations and rulings.³⁰³ The DOD aeronautics R&D measures the focus of this particular ruling request do not, however, concern such "original measures". Rather, the measures the focus of this objection concern measures that were not part of the original proceeding.

7.151. The European Union asserts that the measures in question all came into existence after the original panel request; in other words, the measures are post-2006 procurement contracts and assistance instruments, albeit funded through RDT&E program elements other than the 23 RDT&E program elements at issue in the original proceeding.

7.152. For purposes of evaluating the United States' request for preliminary rulings regarding the DOD aeronautics R&D measures, it is helpful to categorize these measures in the following manner:

1. pre-2007 procurement contracts or assistance instruments funded under the original 23 RDT&E program elements (i.e. the procurement contracts and assistance instruments that were before the panel in the original proceeding);
2. post-2006 procurement contracts or assistance instruments funded under the original 23 RDT&E program elements (i.e. procurement contracts and assistance instruments that were entered into after the date of the original panel request in January 2006 but funded through the same program elements that were the focus of the European Communities' claims in that proceeding); and
3. post-2006 procurement contracts or assistance instruments funded under other "additional" RDT&E program elements that are different from the original 23 RDT&E program elements, or their successor programmes (i.e. procurement contracts and assistance instruments entered into after the date of the original panel request in January 2006 but funded through different program elements from those that were the focus of the European Communities' claims in that proceeding).

7.153. The United States' request currently before us concerns certain measures in category (c) above.³⁰⁴ The United States objects to our consideration of these measures because the "additional" RDT&E program elements that funded the relevant instruments (procurement contracts and assistance instruments) existed at the time of the panel request in the original

³⁰¹ We address the overlapping challenge to the provision of access to DOD "equipment and employees" provided to Boeing through procurement contracts and assistance instruments funded under all of the challenged RDT&E program elements in Section 7.3.4. ↩

³⁰² "{p}roceedings under Article 21.5 do not concern just any measure of a Member of the WTO". (See Appellate Body Report, Canada – Aircraft (Article 21.5 – Brazil), para. 36). See also Appellate Body Report, EC – Bed Linen (Article 21.5 – India), para. 78. ↩

³⁰³ See paras. 7.108 to 7.110 above. ↩

³⁰⁴ The United States does not allege that the post-2006 procurement contracts funded under the original 23 RDT&E program elements (i.e. the measures in category (b) above), are outside the scope of this proceeding. ↩

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proceeding, and therefore, could have been challenged by the European Communities at that time. According to the United States, the European Union cannot retroactively attempt to enlarge the scope of its original case by seeking to bring these measures within the scope of the compliance proceeding.³⁰⁵

7.154. The European Union justifies the inclusion of these measures within the scope of this compliance proceeding by arguing that the particular RDT&E program elements were not a defining aspect of the European Communities' claims in the original proceeding. Rather, the original challenge involved any DOD RDT&E program element that subsidized Boeing LCA at that time.

7.155. The European Union's characterization of the DOD-related measures in the original proceeding does not accord with our understanding of those measures, as expressed by the original panel. We note that the panel in the original proceeding considered the nature of the European Communities' challenges to the DOD-related measures to be narrowly defined:

The scope of the European Communities' claim relating to DOD R&D measures is clear: it challenges the payments (and access to facilities) provided to Boeing through R&D contracts and agreements entered into under the 23 programmes identified in the European Communities' panel request. The scope of the European Communities' claim is relatively narrow in several respects.

First, the European Communities does not challenge the RDT&E Program as a whole. Rather, it challenges only certain funding provided to Boeing under the 23 RDT&E programmes at issue. In addition, the European Communities does not challenge all of the funding that Boeing received under these 23 programmes. Rather, it challenges only the subset of funding that is, in the European Communities' view, related to "dual use" technologies.³⁰⁶

7.156. The original panel's formulation makes clear that the DOD-related measures before it were particular forms of funding and support provided to Boeing under specific RDT&E program elements. It was within those program elements that the European Communities challenged a narrower subset of "funding" and "support" that it considered to relate to "dual-use" technologies.

7.157. Therefore, we do not agree that, regardless of the RDT&E program element, any payments or provision of access to DOD facilities, equipment or employees provided by DOD to Boeing for any activities that the European Union may now consider to relate to "dual-use" technologies, regardless of the program element under which it is budgeted and funded, is within the scope of this compliance proceeding. This would be contrary to our understanding of the scope of the European Communities' DOD-related claims in the original proceeding and an impermissible enlargement of the scope of this compliance proceeding.

7.158. The United States argues that the European Union is precluded from raising claims concerning the "additional" RDT&E program elements in this proceeding because those program elements existed at the time of its original panel request and could have been challenged in the original proceeding. We are also unable to endorse this argument, insofar as it concerns procurement contracts and assistance instruments entered into after the date of the European Communities' original panel request (i.e. post-2006 procurement contracts and assistance instruments), albeit funded through program elements that already existed at that time. In this situation, the issue of "preclusion" does not arise because, even if the RDT&E program elements (or their antecedent program elements) were in existence at the time of the European Communities' original panel request, the legal instruments were not. It would not have been possible for the European Communities to have challenged the program elements independently of the legal instruments because the only way that Boeing receives payments or access to DOD facilities, equipment, and employees under the RDT&E program elements is through specific legal instruments, whether procurement contracts or assistance instruments.

³⁰⁵ We recall that for the reasons explained in Section 7.3.2 of this Report, we have ruled that the procurement contracts in categories (a) and (b) above are within the scope of this proceeding. ↩

³⁰⁶ Panel Report, US – Large Civil Aircraft (2^nd complaint), paras. 7.1116 and 7.1117. (italics and underlining added) ↩

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7.159. We will therefore examine the United States' objections to the inclusion within the scope of this proceeding of procurement contracts and assistance instruments funded under "additional" RDT&E program elements by determining whether the procurement contract or assistance instrument existed at the time of the European Communities' original panel request. If it did, and we consider that the European Union could have challenged that measure in the original proceeding, we will find that the European Union is precluded from bringing claims against that measure in this proceeding.

7.160. If the procurement contract or assistance instrument came into existence after the date of the panel request in the original proceeding, or we otherwise conclude that the European Communities could not have challenged the measure in the original proceeding, we will examine whether there are sufficiently close links, in terms of nature, effects, and timing, between that measure and the aeronautics R&D measures the subject of the DSB recommendations and rulings, and any declared compliance actions by the United States, as to warrant inclusion of the measure within the scope of this proceeding.

7.161. In the Sections that follow, we evaluate the United States' objections according to each of the challenged "additional" RDT&E program elements.

Materials and Biological Technology (PE 0602715E)

7.162. The Materials and Biological Technology (PE 0602715E) program element is administered by the Defense Advanced Research Project Agency (DARPA) and develops novel metallic and non-metallic materials, material processing techniques, mathematical models, and fabrication strategies for advanced structural materials, functional materials, and components.³⁰⁷

7.163. The United States notes that this program element existed at the time of the European Communities' panel request in the original proceeding.³⁰⁸ The European Union does not dispute that the program element itself existed at the time of the original panel request. Rather, it responds that its claims with respect to this program element are limited to the specific LCA-relevant R&D activities identified by Mr Rumpf, and that these activities did not exist, or at least were not publicly disclosed, prior to 2007.³⁰⁹ The Rumpf Report refers to six general activities undertaken pursuant to a Materials Processing Technology Project between FY 2007 and FY 2012.³¹⁰ The United States acknowledges that during the 2007-2012 period, DARPA funded three procurement contracts and four assistance instruments under the "Materials Processing Technology" Project of this program element for a total of somewhat less than USD 24 million.³¹¹

7.164. Of the procurement contracts and assistance instruments identified by the United States, one procurement contact (HR0011-05-C-0068) and one cooperative agreement (MDA972-03-2-0003), are dated prior to the date of the European Communities' panel request in the original proceeding.³¹² As these two instruments existed at the time of the European

³⁰⁷ Materials and Biological Technology Budgets for FY 2007-FY 2013 (PE 0602715E), (Exhibit EU-73), p. 1. ↩

³⁰⁸ United States' request for preliminary rulings, dated 13 November 2012, para. 13. See also U.S. DOD Budget, Fiscal Year 2006, RDT&E Programs (R-1), February 2005, (Exhibit USA-2), at p. D-4 which shows budget allocations for this program element for FY 2005 and FY 2006. ↩

³⁰⁹ European Union's supplemental submission on the United States' request for preliminary rulings, para. 20. ↩

³¹⁰ Rumpf Report, (Exhibit EU-23), annex A, pp. 11-15. Although the Rumpf Report itself lists the Project number MBT-01 as the "Structures" project, the European Union subsequently explained that this was a clerical error in Annex A of the Rumpf Report, and that the correct title of Project number MBT-01 is "Materials Processing Technology" (European Union's comments on the United States' response to Panel question Nos. 72-74, para. 85). See also European Union's first written submission, para. 292, which refers to the "Materials Processing Technology" Project. ↩

³¹¹ United States' first written submission, para. 438; response to Panel question No. 72, para. 48. The procurement contracts are: DARPA Contract HR001-05-C-0068, (Exhibit USA-160) (HSBI); DOD Contract List, (Exhibit USA-161), p. 16: Contract HR0011-06-C-0073, dated 28 September 2006, (Exhibit USA-415) (HSBI); and DARPA Contract HR0011-08-C-0044, (Exhibit USA-162) (HSBI). The assistance instruments are: DARPA Agreement MDA972-03-2-0003, (Exhibit USA-163) (HSBI); DARPA Agreement HR0011-06-2-0008, (Exhibit USA-164) (HSBI); DOD Contract FA8650-07-2-7716, (Exhibit USA-165) (HSBI); and DARPA Cooperative Agreement HR0011-10-2-0001, (Exhibit USA-166) (HSBI). ↩

³¹² The effective date of DARPA Contract HR0011-05-C-0068 is 1 May 2005. The effective date of DARPA Agreement MDA972-03-2-0003 is 29 September 2003. ↩

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Communities' original panel request and were not challenged in the original proceeding, the European Union cannot challenge these measures in this compliance proceeding.

7.165. The remaining procurement contracts and assistance instruments identified by the United States bear effective dates subsequent to the date of the European Communities' panel request in the original proceeding. These post-2006 procurement contracts and assistance instruments were funded under RDT&E program elements that were in existence at the time of the original panel request, but not challenged by the European Communities in the original proceeding. As we explain in paragraph 7.160, in order to find these instruments within the scope of this proceeding, the Panel must be satisfied that there are sufficiently close links in terms of nature, effects, and timing between those measures and the aeronautics R&D measures the subject of the DSB recommendations and rulings.

7.166. In undertaking this close nexus analysis, we recall that in the original proceeding, the panel found that the R&D performed under the NASA and certain of the DOD measures at issue focused on the development of particular technologies that were considered to be the most crucial to the LCA industry, in that they carried the greatest prospect of creating significant competitive advantage by promising airline customers lower direct operating costs and reducing the time to market.³¹³ The key technology areas involved composites technologies, open systems architecture, enhanced aerodynamics and structural design, noise reduction technologies, and health management systems.³¹⁴ In concluding that the aeronautics R&D subsidies were designed to develop and validate new technologies for Boeing to commercialize, and that they contributed in a genuine and substantial way to Boeing's development of technologies for the 787, thereby conferring a competitive advantage on Boeing, the panel characterized the aeronautics R&D subsidies in the following manner:

{W}e would characterize the NASA R&D subsidies as strategically-focused R&D programmes with a significant and pervasive commercial dimension, undertaken in collaboration with U.S. industry to provide competitive advantages to U.S. industry by funding research into high risk, high pay-off research of the sort that individual companies are unlikely to fund on their own. The DOD R&D subsidies funded through the ManTech and DUS&T programmes under DOD's RDT&E Program are focused on pursuing "dual use" technologies through collaborative efforts with U.S. industry.³¹⁵

7.167. We have reviewed these procurement contracts and assistance instruments, all of which are HSBI, and certain of which contain International Traffic in Arms Regulations (ITAR) controls regarding the objectives of the efforts³¹⁶, as well as the parties' submissions regarding them, which are also HSBI. While we note that, unlike the aeronautics R&D subsidies before the original panel, the measures before us clearly have solely military objectives, it nevertheless appears to us that the nature of the technologies is closely related to certain of the key technologies that were the focus of the research efforts under the original aeronautics R&D subsidies, particularly as regards non-autoclave manufacturing technologies and [[HSBI]]. On the basis of this technological link, we consider that in order for the Panel to undertake a meaningful review of whether the United States has complied with the DSB recommendations and rulings, it is appropriate to include the European Union's claims regarding payments and access to DOD facilities, equipment, and employees provided through the procurement contracts HR0011-06-C-0073 and HR-0011-08-C-0044 statement of work (SOW) and assistance instruments HR0011-06-2-0008, FA8650-07-2-7716, and HR0011-10-2-0001 funded through the Materials Processing Technology Project of the Materials and Biological Technology program element as within the scope of this proceeding.³¹⁷

³¹³ Panel Report, US – Large Civil Aircraft (2^nd complaint), paras. 7.1742 and 7.1745. ↩

³¹⁴ These technologies and the parties' arguments as to the relationship between the R&D measures and Boeing's development of 787 technologies in specific technology areas is discussed in appendix VII.F.1 of the Panel Report, US – Large Civil Aircraft (2^nd complaint). ↩

³¹⁵ Panel Report, US – Large Civil Aircraft (2^nd complaint), para. 7.1764. ↩

³¹⁶ The instruments subject to ITAR restrictions are those submitted as: DARPA Contract HR001-05-C-0068, (Exhibit USA-160) (HSBI); DARPA Contract HR0011-08-C-0044, (Exhibit USA-162) (HSBI); and DARPA Cooperative Agreement HR0011-10-2-0001, (Exhibit USA-166) (HSBI). ↩

³¹⁷ For the sake of completeness, we note that while the European Union at paragraph 292 of its first written submission refers also to a "Disruptive Manufacturing Technology Initiative" in relation to the Materials and Biological Technology program element, the United States has indicated that none of the procurement ↩

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7.168. The Panel finds that procurement contracts HR0011-06-C-0073 and HR-0011-08-C-0044 SOW and assistance instruments HR0011-06-2-0008, FA8650-07-2-7716, and HR0011-10-2-0001 funded through the Materials Processing Technology Project of the Materials and Biological Technology program element are within the scope of this proceeding.

Technology Transfer (PE 0604317F)

7.169. The Technology Transfer (PE 0604317F) program element is an Air Force program element, the objectives of which are three-fold: (a) integrating advanced commercial-sector technologies into DOD systems, particularly from non-traditional defense contractors; (b) spinning off DOD-developed technologies to industry to make these technologies available for military acquisition; and (c) establishing collaborative R&D projects with the private sector for cost-sharing of new dual-use technology development.³¹⁸

7.170. The European Union asserts in its first written submission that this RDT&E program element was initiated in FY 2012³¹⁹, however, it responds in its supplemental submission³²⁰ (filed after its first written submission but before its second written submission) that its claims with respect to this program element are limited to the Partnership Intermediary Agreement(s) Project, which began in 2012.³²¹ The Partnership Intermediary Agreement(s) Project is described in the FY 2012 budget estimates as an effort to enhance and expand transfer of technologies between DOD and the commercial sector. The 2012 base plans indicate that this would be done by promoting and brokering cooperative research and development agreements between DOD laboratories and industry for development of technology with both commercial and military applications with the intention that this activity will help lower the expense of new defense-related technology development through cost-sharing with industry and to help DOD benefit from private-sector technology investments and innovations.³²²

7.171. The United States notes that the Technology Transfer (PE 0604317F) program element continues work that was previously undertaken under the Technology Link (PE 0603942D8Z) program element.³²³ Moreover, it indicates in response to questioning by the Panel that there were no assistance instruments or procurement contracts with Boeing funded through the Technology Transfer program element.³²⁴

7.172. The situation before us therefore appears to be that: (a) the European Union makes claims in respect of certain measures under the Technology Transfer program element; (b) the United States requests preliminary rulings that such claims are outside the scope of this proceeding because the program element in question existed at the time of the original panel request and was not challenged in the original proceeding; (c) the European Union clarifies that its

contracts or assistance instruments it has identified as being funded under the Materials and Biological Technology program element were part of the Disruptive Manufacturing Technology Initiative. (United States' response to Panel question No. 72, para. 48).

³¹⁸ Technology Transfer Budgets for FY 2012-FY 2013 (PE 0604317F), (Exhibit EU-75), FY 2012, pp. 1 and 2, and FY 2013, p. 1. ↩

³¹⁹ European Union's first written submission, para. 298. ↩

³²⁰ See para. 7.135 above. ↩

³²¹ European Union's supplemental submission on the United States' request for preliminary rulings, para. 20. The Rumpf Report refers to a project entitled "Partnership Intermediary Agreement(s)" (646003) from FY 2012. (See Rumpf Report, (Exhibit EU-23), annex A, p. 25). ↩

³²² Technology Transfer Budgets for FY 2012-FY 2013 (PE 0604317F), (Exhibit EU-75), FY 2012, p. 2. ↩

³²³ United States' request for preliminary rulings, dated 13 November 2012, para. 14. See also U.S. DOD Fiscal Year (FY) 2012 Budget Estimates: Research, Development, Test & Evaluation, Air Force, Vol. 2, February 2011, (Exhibit USA-4), p. 255 (which indicates that the Technology Transfer program element was called Defense Technology Transfer in previous Office of Secretary of Defense budgets and prior to that, Defense Technology Link (TechLink)); U.S. DOD Budget, Fiscal Year 2011 RDT&E Programs (R-1), February 2010, (Exhibit USA-5), p. D-7; and U.S. DOD Budget, Fiscal Year 2006, RDT&E Programs (R-1), February 2005, (Exhibit USA-2), p. D-6 (which shows the funding allocated to the Technology Link program element for FY 2004, FY 2005, and FY 2006). ↩

³²⁴ United States' response to Panel question No. 75, para. 51. The United States explains that its previous assertion, at paragraph 440 of its first written submission, that the Technology Transfer program element funded one procurement contract during the 2007-2012 period (a contract to develop, test, and demonstrate a multi-shot and multi-target aerial high power microwave demonstrator that is capable of degrading, damaging or destroying electronic systems) was mistaken. This procurement contract was in fact funded through the Technology Transition (PE 0604858F) program element which has not been challenged by the European Union in this proceeding. The European Union makes no comment on this response. ↩

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claims in respect of this program element in fact concern a project under that program element that began in 2012 and therefore could not have been challenged in the original proceeding; and (d) it emerges from the European Union's clarification and the evidence provided by the United States that Boeing is not a party to any instruments (procurement contracts or assistance instruments) funded through either the 2012 project identified by the European Union or the Technology Transfer program element.

7.173. The end result, at least from a practical perspective, is that the European Union has not demonstrated that the requisite measures exist in relation to its claims concerning this program element.

7.174. Given that there are no procurement contracts or assistance instruments with Boeing funded through the relevant project under the Technology Transfer program element, the Panel is not satisfied that there is a measure in existence involving this RDT&E program element.

Manufacturing Technology/Industrial Preparedness (IP ManTech) (PE 0708011S)

7.175. The Manufacturing Technology/Industrial Preparedness (IP ManTech) (PE 0708011S) program element is the Defense Logistics Agency ManTech Program. The European Union presents this program element as being part of a collection of Manufacturing Technology/Industrial Preparedness program elements administered individually by the Defense Logistics Agency, Air Force, Navy, and Office of Secretary of Defense, respectively.³²⁵ The European Communities' claims in the original proceeding covered only the Air Force and Navy ManTech program elements.³²⁶ In other words, the European Communities did not challenge the Defense Logistics Agency's IP ManTech (PE 0708011S) program element in the original proceeding.

7.176. The DOD Budget for RDT&E programmes for FY 2006, however, shows allocations for this program element for FY 2004, FY 2005, and FY 2006. This supports the United States' position that the Defense Logistics Agency's IP ManTech program element was in existence prior to 2006.³²⁷

7.177. The European Union argues that its claims with respect to this RDT&E program element are limited to the Procurement Readiness Optimization-Advanced Casting Technology (PRO-ACT) Project, which began in 2011.³²⁸ According to the European Union, this project aims to develop digital radiography for non-destructive evaluation of castings, and builds on a related Air Force ManTech Project.³²⁹ As the PRO-ACT Project (which is the subject of the European Union's claims in respect of the Defense Logistics Agency's IP ManTech program element) commenced in 2011, we do not consider that the European Union can be faulted for not challenging this program element in the original proceeding.

7.178. The United States argues, however, that the PRO-ACT Project was a USD 350,000 effort involving six other "participants" and that DOD did not make any payments to Boeing.³³⁰ In response to further questioning by the Panel, the United States explains that Boeing was not given a contract or a subcontract on any Defense Logistics Agency casting research and development project.³³¹ Rather, the relevant contracts were awarded to an entity now called "Advanced Technology International", doing business as "SCRA Applied R&D".³³² While Boeing is listed as one

³²⁵ European Union's first written submission, paras. 270, 275, 277, 280, and 281. ↩

³²⁶ Panel Report, US – Large Civil Aircraft (2^nd complaint), para. 7.1114 (listing the challenged program elements as "Manufacturing Technology/Industrial Preparedness (PE 0603771F/0708011F/0708011N)"). ↩

³²⁷ U.S. DOD Budget, Fiscal Year 2006, RDT&E Programs (R-1), February 2005, (Exhibit USA-2), pp. D-14 and D-39. ↩

³²⁸ European Union's supplemental submission on the United States' request for preliminary rulings, para. 20; Rumpf Report, (Exhibit EU-23), annex A, p. 27. ↩

³²⁹ European Union's first written submission, para. 280 (referring to Use of Digital Radiography for Final Part Acceptance of Aerospace Castings project). See also U.S. DOD, Manufacturing Technology Program, "Use of Digital Radiography for Final Part Acceptance of Aerospace Castings", available at <https://www.dodmantech.com/ManTechPrograms/Files/AirForce/AF_Digital%20Radiography_Sept11_Final.pdf>, accessed 29 August 2016, (Exhibit EU-297). ↩

³³⁰ United States' first written submission, para. 443. ↩

³³¹ United States' response to Panel question No. 77, para. 60. ↩

³³² "SCRA" is an abbreviation for South Carolina Research Authority. United States' response to Panel question No. 77, para. 60. ↩

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of the "participants" in the project, the United States speculates that this could reflect some involvement by Boeing with a subcommittee of the American Society for Testing and Materials, which is a broad-based association dedicated to the generation of standards for industrial use.³³³ In any case, the fact that the Defense Logistics Agency cannot find any information recording the nature of Boeing's involvement in the project indicates that any role it had as a "participant" was insignificant.³³⁴

7.179. The European Union responds by alleging that Boeing does not receive any contracts or subcontracts directly from DOD because DOD "funnels its funds" through the American Metalcasting Consortium (AMC), which is managed and operated by the South Carolina Research Authority.³³⁵ The European Union notes that the South Carolina Research Authority is a "quasi-public economic development agency", which is located adjacent to Boeing's South Carolina facilities. The Chairman of the Board of Trustees of the South Carolina Research Authority is a Boeing executive.³³⁶

7.180. We see nothing in the evidence before us to suggest that the AMC and South Carolina Research Authority operate as organizations that act as conduits for providing payments and access to DOD facilities, equipment, and employees to Boeing that would otherwise be provided by DOD directly through procurement contracts and assistance instruments. We have no reason to suspect that the United States' assertions that, whatever the nature of Boeing's apparent "participation" in the USD 350,000 PRO-ACT Project, it did not involve the receipt of payments or access to DOD facilities, equipment, or employees though procurement contracts or assistance instruments, have not been made in good faith. The Panel therefore is not satisfied that there are any procurement contracts or assistance instruments with Boeing funded through the PRO-ACT Project within the Defense Logistics Agency's IP ManTech program element.

7.181. The Panel considers this situation to be similar to that of the Technology Transfer program element, described above. As a result of the European Union's clarification of the limited nature of its challenge to this program element, and the absence of evidence demonstrating that Boeing was in fact party to any procurement contracts or assistance instruments funded under the identified project, we conclude that the European Union has not demonstrated that the requisite measures exist in relation to this program element.

7.182. Given that there are no procurement contracts or assistance instruments with Boeing that are funded through the PRO-ACT Project (which is the subject of the European Union's claims concerning the IP ManTech program element), the Panel is not satisfied that there is a measure in existence involving this RDT&E program element.

Airborne Warning and Control System (AWACS) (PE 0207417F)

7.183. The Airborne Warning and Control System (AWACS) (PE 0207417F) program element is an early warning and control system based on a variant of the Boeing 707 (the E-3 Sentry), which first entered service in 1977.³³⁷ The United States points to DOD budget documentation showing allocations for this program element in FY 2004, FY 2005, and FY 2006, indicating that this project element was in existence (and could have been challenged by the European Communities) at the time of the original panel request.³³⁸ The European Union responds that its claims with respect to this RDT&E program element are limited to the Diminishing Manufacturing Sources Replacement of

³³³ The United States refers more specifically to the ASTM Committee E07.02 on Reference Radiological Images, under the ASTM Committee E07 on Non-destructive Testing. ↩

³³⁴ United States' response to Panel question No. 77, para. 61. ↩

³³⁵ European Union's comments on the United States' response to Panel question No. 77, para. 92. ↩

³³⁶ European Union's comments on the United States' response to Panel question No. 77, para. 92. The material to which the European Union refers indicates that this Boeing executive "has become a high profile member of the Charleston community" who has also served on the Medical University of South Carolina Board of Visitors and as 2^nd Vice Chairman of the South Carolina Manufacturers Alliance. (B. Kearney, "Boeing S.C. executive to oversee supply chain in Italy", The Post and Courier, 6 September 2012, (Exhibit EU-1408)). ↩

³³⁷ Boeing Backgrounder, E-3 Airborne Warning and Control System (AWACS), (June 2012), (Exhibit EU-338), p. 1. ↩

³³⁸ U.S. DOD Budget, Fiscal Year 2006, RDT&E Programs (R-1), February 2005, (Exhibit USA-2), p. F-9. ↩

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Avionics for Global Operations and Navigation (DRAGON) Project, in which Boeing has been involved since 2010.³³⁹

7.184. Throughout its history, AWACS has undergone extensive enhancements, with fleets from the United States, North Atlantic Treaty Organization (NATO), United Kingdom, and France upgrading their communications, computers, and navigation.³⁴⁰ The DRAGON Project aims to equip the E-3 fleet with flight deck and other avionics capabilities that will allow AWACS to comply with mandated global Required Navigation Performance, surveillance, and communication standards.³⁴¹ DRAGON seeks to achieve these upgrades using commercial off-the-shelf components supplied by companies such as Rockwell Collins, Telephonics, Raytheon, Thales, and EMS.³⁴²

7.185. The United States explains that the DRAGON Project is a joint effort between the United States and NATO, with NATO contributing 34% of the total cost.³⁴³ Under Air Force Contract F10628-01-D-0016 between the U.S. Air Force and Boeing, Boeing was awarded Delivery Order (D.O) 73 to perform Engineering, Manufacturing and Development (EMD) – Phase I of the DRAGON Project.³⁴⁴ In this initial phase, which commenced on 18 July 2011, Boeing conducted a Subcontractor System Readiness Review and began working with subcontractors Rockwell Collins and Telephonics on their subsystem requirements effort.³⁴⁵ The United States asserts that Boeing's work under Phase I consisted in essence of evaluating the capabilities of certain subcontractors to provide the required flight deck and avionics subsystems intended for installation in AWACS aircraft, as well as beginning the subcontracting process.³⁴⁶ Phase I ended upon the award of Phase II on 14 November 2011 under modification 2 to D.O. 73.³⁴⁷ Under DRAGON EMD Phase II, Boeing is to: (a) incorporate the new commercial off-the-shelf avionics and communications systems from other suppliers into the existing systems; (b) develop a design to install the new equipment; (c) upgrade one aircraft for each AWACS fleet; (d) flight test the new systems; (e) develop logistics support data; and (f) train flight crews and maintenance personnel.³⁴⁸

7.186. The United States argues that it was "obvious" at the beginning of 2006 that the AWACS involved military aircraft produced by "militarizing" civilian airframes. As this fact lies at the heart of all of the European Union's arguments regarding this program element, the United States considers it difficult to see how the European Union discovered something about the dual-use potential of this program element in 2007 that changed its views.³⁴⁹

7.187. We note that the AWACS budget estimates for FY 2007 refer to the Avionics Modernization Program which would complete the FAA/ICAO/EUROCONTROL mandated air traffic control system

³³⁹ European Union's supplemental submission on the United States' request for preliminary rulings, para. 20; and Rumpf Report, (Exhibit EU-23), para. 4.2. Mr Rumpf expresses the opinion, at paragraph 4.3.1 of the Rumpf Report, that the DRAGON Avionics Project is the only effort under the AWACS program element to involve "dual-use" R&D. ↩

³⁴⁰ Boeing Backgrounder, E-3 Airborne Warning and Control System (AWACS), (June 2012), (Exhibit EU-338), p. 1. ↩

³⁴¹ Rumpf Report, (Exhibit EU-23), para. 4.2. See also Airborne Warning and Control System (AWACS) Budgets for FY 2007-FY 2013 (PE 0207417F), (Exhibit EU-76), exhibit R-2, item 148, p. 1, frame 86/98. ↩

³⁴² "Enter the DRAGON – NATO & USSA Upgrading E-3 AWACS Cockpits", Defense Industry Daily, 14 June 1012, (Exhibit USA-506). ↩

³⁴³ United States' second written submission, para. 405, fn 550. This means that the amount obligated under Air Force Contract F19628-01-D-0016, D.O. 73 are 66% funded by DOD and 34% funded by NATO. ↩

³⁴⁴ United States' first written submission, para. 450; response to Panel question No. 78, para. 66; and Air Force Contract F19628-01-D-0016, D.O. 73, (Exhibit USA-170) (HSBI). ↩

³⁴⁵ United States' response to Panel question No. 78, para. 66; and Air Force Contract F19628-01-D-0016, D.O. 73, (Exhibit USA-170) (HSBI), p. 2. ↩

³⁴⁶ United States' response to Panel question No. 78, para. 66. ↩

³⁴⁷ United States' response to Panel question No. 82, para. 79. ↩

³⁴⁸ United States' response to Panel question No. 82, para. 80; and Boeing Press Release, "Boeing to Modernize Flight Deck and Avionics for US and NATO AWACS Fleets", 23 May 2013, (Exhibit EU-1334). ↩

³⁴⁹ United States' second written submission, para. 62. United States notes that the statement of work for Delivery Order 73 is subject to Distribution F limitations, which restrict distribution of the contents to DOD and NAPMO/NATO. According to the United States, this restriction clearly indicates that any technology and related technological data/computer software developed under this Delivery Order has little application in the civilian sphere. (See United States' first written submission, para. 450). The European Union requested the Panel to require the United States to remove the Distribution F limitations on the statement of work for Delivery Order 73 under DOD contract F10628-01-D-0016 in a communication to the Panel date 9 September 2013. In a communication dated 23 October 2013, the Panel said that it had decided not to grant the request at that time. See Section 1.3.3.3 of this Report and Annex F-1. ↩

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upgrades and equip the E-3 fleet with flight deck and other avionics capabilities that will allow AWACS to comply with mandated global Required Navigation Performance, surveillance, and communication standards.³⁵⁰ While the project cost analysis in the budget estimates indicates that Boeing would be involved in the Avionics Modernization Program, the schedule profile envisages that the core work under the Avionics Modernization Program would not commence until FY 2008.³⁵¹ In these circumstances, it is difficult to imagine how the European Communities could feasibly have challenged any activities related to the DRAGON Project of the AWACS RDT&E program element in its original panel request in 2006. The work had clearly not commenced until much later in the process.³⁵² We therefore do not agree with the United States that the European Union is precluded from bringing claims in relation to the DRAGON Project under the AWACS program element in this compliance proceeding.

7.188. The further question, however, is whether the Air Force Contract F19628-01-D-0016, D.O. 73 awarded to Boeing under the DRAGON Project is sufficiently closely connected, in terms of its nature, effects, and timing, to the aeronautics R&D subsidies the subject of the DSB recommendations and rulings so as to be within the scope of this proceeding as an "undeclared" measure taken to comply.

7.189. Mr Rumpf considers that DRAGON upgrades the E-3 flight deck in ways that give rise to the development of an improved system engineering and open systems architecture that can be applied by Boeing to LCA.³⁵³ The United States responds that: (a) the DRAGON Project is remedial in nature, aiming to update systems to enable the E-3 to transit civil airspace in the same way that commercial aircraft already do; (b) elements of the DRAGON system upgrades are strictly military in nature, therefore it is incorrect to consider that the project's avionics have "100%" relevance to LCA development; and (c) the project addresses problems with the E-3 that are not shared by Boeing's LCA. Indeed, the DRAGON Project's use of commercial off-the-shelf avionics from other suppliers underscores that the project is focused on leveraging existing civil technology to improve outdated military equipment.³⁵⁴

7.190. We refer to our discussion in Section 8.2.3.2.3 of this Report of the nature of R&D conducted under systems acquisition/military aircraft program elements such as the AWACS program element. RDT&E activities conducted under these program elements are specifically directed to the development of a new weapon system or upgrading or enhancing of an existing weapon system, and more particularly, addressing particular problems with respect to a particular product. In this context, we are not satisfied that a general allegation by the European Union that upgrading the flight deck and avionics subsystems for a particular military aircraft could give rise to improved systems engineering and open systems architecture of more general applicability is sufficient, without more, to demonstrate the required close nexus between the Air Force Contract F19628-01-D-0016, D.O. 73, and the NASA and DOD aeronautics R&D subsidies subject to the DSB recommendations and rulings. In particular, there is nothing before us to suggest that our failure to consider the European Union's claims concerning the relevant instrument funded under the AWACS DRAGON Project as part of this compliance proceeding would undermine our ability to undertake a meaningful assessment of whether the United States has complied with the DSB recommendations and rulings in the original proceeding. We are therefore not satisfied that the European Union has demonstrated that this measure is within the scope of this proceeding as an "undeclared" measure taken to comply.

³⁵⁰ Airborne Warning and Control System (AWACS) Budgets for FY 2007-FY 2013 (PE 0207417F), (Exhibit EU-76), exhibit R-2, p. 1428. ↩

³⁵¹ Airborne Warning and Control System (AWACS) Budgets for FY 2007-FY 2013 (PE 0207417F), (Exhibit EU-76), exhibits R-3, p. 1433 and R-4, p. 1434. ↩

³⁵² The United States explains that the AWACS DRAGON cockpit upgrade was defined in EMD Project Arrangement 3 pursuant to the six-party memorandum of understanding concerning project for the E-3 fleets. (United States' response to Panel question No. 82, para. 78; and Memorandum of Agreement Between the United States of America and the NATO AEW&C Programme Management Organization signed at Washington and Brunssum, 10 and 30 August 1999, (Exhibit USA-459)). However, while the United States refers to the DRAGON EMD Project Arrangement 3 (which would have listed the scope of the work envisaged for the DRAGON cockpit upgrade and potentially therefore, have provided a basis for the European Communities to have challenged the work in the original proceeding as potentially involving "dual-use" R&D), it does not provide this instrument or indicate when it was signed. ↩

³⁵³ Rumpf Report, (Exhibit EU-23), para. 4.2; and European Union's first written submission, para. 302. ↩

³⁵⁴ United States' response to Panel question No. 78, para. 72. ↩

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7.191. The Panel grants the United States' request and finds that Air Force Contract F19628-01-D-0016 funded under the DRAGON Project of the AWACS (PE 0207417F) program element is outside the scope of this proceeding.

KC-46, Next Generation Aerial Refueling Aircraft (PE 0605221F)

7.192. The KC-46, Next Generation Aerial Refueling Aircraft (PE 0605221F) program element is the initial increment of the Air Force's tanker modernization programme, involving conversion of a commercial derivative aircraft into an aerial refueling tanker. The existing KC-135 Stratotanker fleet is over 50 years old on average and is increasingly costly to maintain and support. The U.S. Air Force plans to develop, test and field 18 KC-46 tankers by August 2017 and eventually have a total of 179 aircraft in operation by 2027.³⁵⁵

7.193. The United States objects to the inclusion of this program element within the scope of this proceeding on the basis that the KC-46, Next Generation Aerial Refueling Aircraft program element continues work that was previously conducted under the KC-135 Replacement Tanker (PE 0401221F) program element, which existed at the time of the original panel request and was not challenged in the original proceeding.³⁵⁶

7.194. The European Union responds that the EMD Contract for the KC-46 aerial refueling tanker was awarded to Boeing in February 2011, which is clearly after the date of the original panel request.³⁵⁷

7.195. The United States notes that the EMD Contract was awarded to Boeing in 2011 after a process which had involved cancellation in 2005 of an initial effort to acquire use of new tankers, a second procurement effort commenced by the Air Force in 2006, in which Northrop Grumman was successful in 2008, but which decision was subsequently overturned by the U.S. Comptroller General in 2008 after a protest by Boeing, and a third procurement effort in which Boeing was successful in 2011.³⁵⁸ The United States argues that it was obvious in 2006 that the KC-46 aerial refueling tanker would be a military aircraft produced by militarizing civilian airframes. It is thus difficult to see how the European Union discovered something about the dual-use potential of this program element in 2007 that changed its view.³⁵⁹

7.196. Although the KC-46, Next Generation Aerial Refueling Aircraft program element continues work previously conducted under the KC-135 Replacement Tanker program element, it seems clear to the Panel that, at the time of the European Communities' panel request in the original proceeding (January 2006), the request for proposal for the KC-X tanker had not been issued by the Air Force, let alone had a successful proposal been selected. Indeed, Northrup Grumman was the successful tenderer in the previous procurement effort in 2008, with a derivative Airbus aircraft. In these circumstances, it is not unreasonable that the European Communities did not include claims regarding the KC-135 Replacement Tanker program element in the original proceeding.

³⁵⁵ U.S. Government Accountability Office, KC-46 TANKER AIRCRAFT: Program Generally Stable but Improvements in Managing Schedule Are Needed, Report 13-258, (February 2013), (Exhibit USA-237), p. 1. ↩

³⁵⁶ United States' request for preliminary rulings, dated 13 November 2012, para. 14. See also KC-46, Next Generation Aerial Refueling Aircraft, Budgets for FY 2009-FY 2013, (PE 0605221F), (Exhibit EU-1072), budget for FY 2009, p. 1, which indicate that RDT&E funds for FY 2009 and beyond were transferred from the KC-135 Replacement Tanker (PE 401221F) program element; and U.S. DOD Budget, Fiscal Year 2006, RDT&E Programs (R-1), February 2005, (Exhibit USA-2), p. F-13, which shows a budget allocation for the KC-135 Replacement Tanker (PE 0401221F) program element for FY 2006. ↩

³⁵⁷ European Union's supplemental submission on the United States' request for preliminary rulings, para. 20; first written submission, para. 304; Rumpf Report, (Exhibit EU-23), para. 4.2, p. 10; and Air Force Contract FA8625-11-C-6600 (KC-46 Contract), (Exhibit USA-365) (HSBI). In its Annual Report on Form 10-K for the year ended 31 December 2014, Boeing disclosed that in the second quarter of 2014 it declared a reach-forward loss of USD 425 million on the KC-46A tanker contract, which was a fixed-price development contract, owing to higher estimated costs. Boeing's Commercial Airplanes segment recorded USD 238 million of this loss. (Subsidies to Boeing's LCA Division (2013-2014 Update), (Exhibit EU-1451), annex A, "Annual Report on Form 10-K for the year ended 31 December 2014", pp. 79 and 80). ↩

³⁵⁸ United States' first written submission, paras. 451 and 452; and C. Drew, "Boeing Wins Contract to Build Air Force Tankers", New York Times, 24 February 2011, (Exhibit USA-236). ↩

³⁵⁹ United States' second written submission, para. 62. ↩

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7.197. We have reviewed Mr Rumpf's assessment of the R&D involved in this program element that is potentially dual-use to LCA.³⁶⁰ This assessment refers in a very generalized way to technological areas such as the use of performance based logistics incorporating micro-sensors in the KC-46 airframe, avionics R&D related to communications, navigation and adverse weather capabilities, physics-based modelling and simulation activities for improved design of the test and evaluation flight and ground tests, and multiple systems management technologies and processes.

7.198. We refer to our discussion in Section 8.2.3.2.3 of this Report of the nature of R&D conducted under systems acquisition/military aircraft program elements such as the KC-46, Next Generation Aerial Refueling Aircraft program element. RDT&E activities conducted under these program elements are specifically directed to the development of a new weapon system or upgrading or enhancing of an existing weapon system, and more particularly, addressing particular problems with respect to a particular product.³⁶¹ We are not satisfied that generalized allegations regarding the potential applicability to LCA of certain broad technology areas, without an explanation of how those technology areas overlap with the technology areas that were the focus of the NASA and DOD aeronautics R&D subsidies the subject of the DSB recommendations and rulings³⁶², are sufficient to demonstrate the required close nexus, in terms of nature or effect, between the measures identified with respect to the KC-46, Next Generation Aerial Refueling Aircraft program element and the NASA and DOD aeronautics R&D subsidies the subject of the DSB recommendations and rulings.

7.199. The Panel grants the United States' request and finds that Air Force Contract FA8625-11-C-6600 funded through the KC-46, Next Generation Aerial Refueling Aircraft (PE 0605221F) program element is outside the scope of this proceeding.

Multi-Mission Maritime Aircraft (P-8A) (PE 0605500N)

7.200. The Multi-Mission Maritime Aircraft (P-8A) (PE 0605500N) program element provides the replacement systems for the P-3 and EP-3 aircraft. In 2002, the U.S. Navy decided on an acquisition strategy for the concept and design phase of a multi-mission maritime aircraft to replace the ageing P-3 and EP-3 submarine-chasing aircraft. Boeing, as one of the two "concept and design" contractors, subsequently competed in the engineering and manufacturing development phase, proposing a modified version of Boeing 737 aircraft.³⁶³ In June 2004, the Navy awarded Boeing contract N00019-04-C-3146 to develop and demonstrate the system, with plans to enter production and deployment in 2010.³⁶⁴ Following a critical design review in 2007, Boeing received approval to fabricate the flight test aircraft in 2007. The programme then moved into low rate initial production (LRIP) as part of the production and deployment phase in 2010.³⁶⁵ The Navy issued separate contracts N00019-09-C-0022 and N00019-12-C-0112 for the subsequent LRIP lots.³⁶⁶

7.201. The United States asserts that "by far" the largest contract funded through the "additional" RDT&E program elements is the System Development and Design contract for the P-8A, which was awarded in 2004. The United States considers that, if the European Union is recognizing that DOD only makes payments or provides facilities, equipment, and employees pursuant to a contract or agreement, and that those are the relevant measures, the P-8A Contract is clearly outside the scope of this proceeding.³⁶⁷ On the other hand, if the European Union is challenging design and testing without regard to the contract, those activities took place both before and after 2006, and the "measure" was in place at the time of the original panel request, and therefore cannot be

³⁶⁰ Rumpf Report, (Exhibit EU-23), para. 4.3.3. ↩

³⁶¹ See Sections 8.2.3.2.3 and 8.2.3.2.4 below. ↩

³⁶² See para. 7.166 above. ↩

³⁶³ United States' first written submission, para. 458. The other contractor, Lockheed Martin, had proposed a P-3 derivative known as Orion 21. ↩

³⁶⁴ United States' first written submission, para. 458; and Navy Contract N00019-04-C-3146 (submitted on 16 January 2014), (Exhibit USA-367) (BCI). The contract is described as a system development and demonstration contract. The primary objectives of system development and demonstration are to perform the system detailed design, develop and produce Systems Integration Labs and develop and build ground and flight test articles and prepare for "Milestone C" which is production and deployment. See e.g. MMA 2006 Budget, Exhibit R-2, February 2005, (Exhibit USA-172), p. 1 ↩

³⁶⁵ United States' first written submission, para. 458. ↩

³⁶⁶ United States' first written submission, para. 458. ↩

³⁶⁷ United States' second written submission, para. 63. ↩

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treated as a measure taken to comply in this proceeding.³⁶⁸ In any case, the United States considers it was obvious in the beginning of 2006 that the P-8A would be military aircraft produced by militarizing civilian airframes, so it is difficult to see how the European Union discovered something about the dual-use potential of this programme in 2007 that changed its view.³⁶⁹

7.202. The European Union acknowledges that the Multi-Mission Maritime Aircraft (P-8A) program element existed at the time of the original panel request. The European Union makes a number of arguments to justify why it was not possible to have identified activities conducted by Boeing that were funded under this program element as potentially having "dual-use" application at the time of the original panel request in January 2006. First, the project had not in early 2006 progressed to the point at which the European Communities and its experts believed it was funding R&D relevant to Boeing's LCA division. According to the European Union, significant steps in the system development and demonstration process occurred after the date of the European Communities' original panel request.³⁷⁰ Second, the DOD budget estimates gave no indication that "dual-use" R&D was being carried out. Indeed, the European Union argues that in this proceeding, it relied not on the RDT&E budget estimates in describing the "LCA-relevance" of work under the P-8A Program, but on the expert opinion of Mr Rumpf.³⁷¹ In this regard, the European Union submits a supplemental statement from Mr Rumpf, indicating that the conclusions he had reached in the Rumpf Report regarding the developments in the Multi-Mission Maritime Aircraft (P-8A) program element since 2006 were based on his "knowledge of developments with the P-8A Program since 2006, gained from press reports, defense-community and industry events, and conversations (to the extent permissible) with government and industry personnel (including former DOD colleagues)", viewed in light of his background knowledge and experience.³⁷² In short, the European Union argues that "almost all" of the information upon which it and its experts rely in concluding that the P-8A Program funds R&D that is "dual-use" to LCA, was first made public only after 20 January 2006 (this being the date of the European Communities' original panel request).³⁷³

7.203. We are not persuaded by the European Union's argument that it was unable to identify the relevant aspects of this RDT&E program element in January 2006 that would have enabled it to include it within the scope of its challenge in the original proceeding. Mr Rumpf states that the budget estimates for the P-8A program element since FY 2005 do not of themselves provide sufficient information to conclude that the R&D carried out under the P-8A program element is "dual-use" to LCA. We have no doubt that is correct, not only for the budget estimates for the P-8A program element, but for the budget estimates for all of the RDT&E program elements. It is not the purpose of the FYDP budget estimates to describe the particular research or to explain the specific technologies that are being developed under program elements at any time. For example, the budget estimates for the KC-46, Next Generation Aerial Refueling Aircraft program element, which like the P-8A, involves a derivative Boeing commercial aircraft (the 767), similarly do not provide information that points to the specific technologies that are being developed for application to the KC-46. The information on the "dual-use" potential of the KC-46 R&D work allegedly being conducted by Boeing, which is stated in the Rumpf Report is, as Mr Rumpf explains in his report, based on a combination of publicly available information such as the RDT&E budget estimates, along with his specific expertise in aerospace engineering, RDT&E budgeting and the markets for aerospace and defense products.³⁷⁴ We note that Mr Rumpf purports to provide an "expert opinion" on the "dual-use" proportion of funding in the budget categories of "airframe", "propulsion", "avionics", "integration assembly & test", "armament", "test & evaluation", "systems engineering", and "data training and support equipment", under the KC-46 program element when Boeing was not awarded the EMD Contract for the KC-46 until February 2011. We do not find it credible that the European Communities' experts in the original proceeding, CRA, were unable in late 2005, based on what appears to be the same methodology later employed by Mr Rumpf, to

³⁶⁸ United States' second written submission, para. 63. ↩

³⁶⁹ United States' second written submission, para. 62. ↩

³⁷⁰ European Union's supplemental submission on the United States' request for preliminary rulings, para. 20; response to Panel question No. 63, para. 28, fn 66. Moreover, while Boeing was awarded the contract in 2004, the European Union did not have access to that contract until this compliance proceeding was under way. (European Union's response to Panel question No. 63, para. 28, fn 65). ↩

³⁷¹ European Union's response to Panel question No. 63, para. 29. ↩

³⁷² European Union's response to Panel question No. 63, para. 30 (referring to Supplemental Statement of R. L. Rumpf, M.S.A.E., November 2014, (Exhibit EU-1348) (HSBI), paras. 11 and 12). ↩

³⁷³ European Union's response to Panel question No. 63, para. 37. ↩

³⁷⁴ Rumpf Report, (Exhibit EU-23), para. 2. ↩

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identify potential "dual-use" technologies likely to be involved in Boeing's work under the Multi-Mission Maritime Aircraft (P-8A) program element, when Boeing had been awarded the EMD Contract for that project in June 2004.³⁷⁵

7.204. This is especially so, since it was widely known in 2004 that the P-8A would be developed as a derivative of the existing Boeing 737. The 2006 CRA Report noted that similarities between the C-17 aircraft and large civil aircraft justified the allocation of a larger proportion of RDT&E for the C-17 as potentially "dual-use".³⁷⁶ It would seem logical for CRA to have considered the possibility at least, that Boeing's development of the P-8A as a derivative 737 would involve technologies with a similar potential relevance to large civil aircraft as it surmised to be the case with respect to the RDT&E for the C-17.

7.205. We conclude that, given that the Multi-Mission Maritime Aircraft (P-8A) program element had been in existence at the time of the European Communities' original panel request, and moreover, in light of the fact that the system development and demonstration Contract under the Multi-Mission Maritime Aircraft (P-8A) program element had already been awarded to Boeing in June 2004, the European Communities could have challenged payments and the access to facilities, equipment, and employees provided to Boeing through this instrument. We consider that it would be an inappropriate and unjustified enlargement of the scope of this proceeding to include measures in respect of the 2004 system development and demonstration Contract, as well as the subsequent contracts for low-rate initial production arising out of the work conducted under the 2004 system development and demonstration Contract, within the scope of this proceeding.

7.206. The Panel grants the United States' request and finds that the measures related to the Multi-Mission Maritime Aircraft (P-8A) RDT&E program element are outside the scope of this proceeding.

Long Range Strike Bomber (PE 0604015F)

7.207. The Long Range Strike Bomber (PE 0604015F) program element is a highly classified programme to develop a new large stealth bomber. The Long Range Strike Bomber program element was initially funded in FY 2011 and followed an earlier effort, which ended in 2009, to develop a "Next Generation Bomber".³⁷⁷

7.208. The United States argues that the Long Range Strike Bomber program element is the continuation of the "Next Generation Bomber" program element, which was in existence at the time of the original panel request and also carried the same program element number (PE 0604015F) in DOD budget documents.³⁷⁸ The United States submits that, "although the budget request for 2011 refers to the effort in that year as a 'new start effort', there is a striking degree of overlap in the descriptions of the work conducted in 2008 and 2011."³⁷⁹ The United States also asserts that "industry observers" share the perception that the current work

³⁷⁵ In this respect, we note the backgrounds of the CRA principals responsible for preparing the 2006 CRA Report. One had previously worked as an industrial and financial analyst in the Office of the Secretary of Defense. The other had a 14 year career in engineering, design, and management with Lockheed Martin Corporation (CRA Report, (Exhibit EU-29), appendix L: CRA Staff Qualifications, L.1 and L.2). Lockheed Martin, along with Boeing, was one of the contractors awarded a CAD contract in 2002 prior to Boeing's selection as the contractor for the System Development and Design phase of the project in June 2004. In light of these connections, we find it difficult to believe that in 2005, the experts at CRA were unable to draw any conclusions as to whether Boeing's work under the Multi-Mission Maritime Aircraft (P-8A) program element at least potentially involved "dual-use" R&D. ↩

³⁷⁶ "The C-17 aircraft much more closely resembles an LCA than the other military aircraft programmes examined above. For example, it is very similar to LCA in size, weight and operating envelope (cruise speed, altitude, etc). In addition, it shares many configuration similarities with LCA … Finally it shares many internal system similarities with LCA … Consequently, solutions to the design and engineering challenges of the C-17 are logically more transferable to LCA." (CRA Report, (Exhibit EU-29), pp. 23 and 24). ↩

³⁷⁷ European Union's first written submission, para. 314; and Rumpf Report, (Exhibit EU-23), para. 4.2. ↩

³⁷⁸ United States' request for preliminary rulings, dated 13 November 2012, para. 13; response to Panel question No. 80, para. 74. See also U.S. DOD Budget, Fiscal Year 2006, RDT&E Programs (R-1), February 2005, (Exhibit USA-2), p. F-4; and Long Range Strike Bomber Budgets for FY 2007-FY 2013 (PE 0604015F), (Exhibit EU-78), p. 693. ↩

³⁷⁹ United States' response to Panel question No. 80, para. 74. ↩

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under the Long Range Strike Bomber program element is part of an ongoing effort.³⁸⁰ According to the United States, DOD "cancelled" the Next Generation Bomber program element in order to allow time to refine the programme objectives. The resulting Long Range Strike Bomber program element is thus a "successor" to, and the work under that program element continues the work that was undertaken under, the "Next Generation Bomber" program element of the same PE number.³⁸¹

7.209. The European Union notes that it is challenging the RDT&E conducted under the Long Range Strike Bomber program element beginning in 2011.³⁸² It refers to a DOD description of the Long Range Strike Bomber program element as a "new start" in 2011, thus implying that it is distinct from, and not a continuation of, the "Next Generation Bomber" program element.³⁸³ The European Union argues that the Next Generation Bomber and Long Range Strike Bomber program elements were both intended to develop new bomber capabilities for the U.S. Air Force, however, the fact that the two program elements may have similar "missions" does not make the latter a continuation of the former.³⁸⁴

7.210. The United States indicates that the PE 0604015F program element provided funding in the 2007-2012 period for one assistance instrument and four procurement contracts.³⁸⁵ The four procurement contracts identified by the United States all have effective dates prior to 2011.

7.211. The European Union indicates that instruments that pre-date the 2011 Long Range Strike Bomber (PE 0604015F) program element do not fall within the scope of its claims.³⁸⁶ It explicitly concedes that delivery orders for contracts F33615-00-D-3052, D.O. 90, FA8650-08-D-3857, D.O. 1, and F33165-03-D-2358, D.O. 7 are outside the scope of its claims. It would appear that for the same reasons, contract FA8650-09-C-3902, which the United States indicates has an effective date of 2009, as evidenced by the "09" in the seventh and eighth digits of its contract number, is also outside the scope of its claims.³⁸⁷

7.212. The assistance agreement identified by the United States (FA8650-04-2-3449), is a 2004 instrument that was also funded through the Advanced Materials for Weapons Systems (PE 0603211F) program element, an original RDT&E program element. This assistance instrument was therefore covered by the European Communities' claims in the original proceeding and was modified by the Supplemental Subject Invention and Patent License Agreement concluded between DOD and Boeing on 21 September 2012 (DOD-Boeing Patent Licence Agreement).³⁸⁸ It is clearly within the scope of this proceeding as an original measure.

7.213. Based on the above exchange between the parties, we conclude that there is no evidence before the Panel of any assistance instruments or procurement contracts with Boeing funded under the Long Range Strike Bomber program element that have effective dates from 2011 or later that would fall within the scope of the European Union's claims concerning this RDT&E program element, as delimited by the European Union.

7.214. The European Union notes that the Long Range Strike Bomber Program is highly classified. It refers to public reports that Boeing and Lockheed Martin will team to compete on the program element, which aims to deliver 80-100 long range stealth bombers to the Air Force, with an initial operational capability in 2024 to 2026³⁸⁹ as well as public reports of statements by Air Force

³⁸⁰ United States' response to Panel question No. 80, para. 75 (referring to L. B. Thompson, "America Needs to Develop a New Bomber Now", Lexington Institute, 2013, (Exhibit USA-458), p. 9). ↩

³⁸¹ United States' response to Panel question No. 80, para. 75. ↩

³⁸² European Union's supplemental submission on the United States' request for preliminary rulings, para. 20; response to Panel question No. 64, para. 38. ↩

³⁸³ European Union's supplemental submission on the United States' request for preliminary rulings, para. 20 (referring to Long Range Strike Bomber Budgets for FY 2007-FY 2013 (PE 0604015F), (Exhibit EU-78), p. 1 which contains a note saying "PE0604015F is a new start effort in FY11"). ↩

³⁸⁴ European Union's comments on the United States' response to Panel question No. 80, para. 104. ↩

³⁸⁵ United States' first written submission, paras. 467 and 468. ↩

³⁸⁶ European Union's response to Panel question No. 64, para. 38. ↩

³⁸⁷ See European Union's response to Panel question No. 64, para. 38; and United States' comments on the European Union's response to Panel question No. 64, para. 58. ↩

³⁸⁸ United States' first written submission, para. 467. ↩

³⁸⁹ B. Sweetman, "Boeing, Lockheed Martin Team on New Bomber", Aviation Week, 25 October 2013, (Exhibit EU-1360). ↩

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officials suggesting the Air Force may be planning to award a contract to build a long range strike bomber by as early as the spring or summer of 2015.³⁹⁰ The European Union also refers to a U.S. Congressional Research Bulletin which speculates that significant development work for a long range strike bomber may already have been completed, "presumably in classified budgets".³⁹¹ The European Union thus considers it to be "almost certain" that Boeing has received "significant amounts of classified R&D funding" under the post-2011 Long Range Strike Bomber program element that the United States has not acknowledged.³⁹²

7.215. The United States responds by noting that the Long Range Strike Bomber budget documents state that the program element is reported in accordance with a provision of U.S. law that restricts information to members of the defense committees in Congress, and restricts even that information to high-level summaries of what the programme is studying. According to the United States, the only reasonable inference therefore is that any funding under this program element does not produce technology that Boeing's military division would be able to share with its civil aircraft division.³⁹³

7.216. Given that there is no evidence before the Panel of any procurement contracts or assistance instruments with Boeing funded through the Long Range Strike Bomber program element that have effective dates from 2011 or later that would fall within the scope of the European Union's claims concerning this program element, as delimited by the European Union, the Panel is not satisfied that there is a measure in existence involving this RDT&E program element.

7.217. As a result of the conclusions we have reached in this Section, we make the following rulings regarding the scope of this proceeding as regards the seven "additional" RDT&E program elements the subject of the United States' objections:

1. Materials Processing Technology Project of the Materials and Biological Technology (PE 0602715E) program element: procurement contracts HR0011-06-C-0073 and HR-0011-08-C-0044 SOW and assistance instruments HR0011-06-2-0008, FA8650-07-2-7716, and HR0011-10-2-0001 funded through this program element are within the scope of this proceeding;
2. DRAGON Project of the Airborne Warning and Control System (AWACS) (PE 0207417F) program element: Air Force Contract F19628-01-D-0016 funded under this program element is outside the scope of this proceeding;
3. KC-46, Next Generation Aerial Refueling Aircraft (PE 0605221F) program element: Air Force Contract FA8625-11-C-6600 funded through this program element is outside the scope of this proceeding;
4. Multi-Mission Maritime Aircraft (P-8A) (PE 0605500N) program element: measures funded through this program element are outside the scope of this proceeding; and
5. the Panel is not satisfied of the existence of any procurement contracts or assistance instruments funded through the Technology Transfer (PE 0604317F) program element, the PRO-ACT Project of the IP ManTech (PE 0708011S) program element, or the Long Range Strike Bomber (PE 0604015F) program element. It will therefore not further consider these alleged measures in its analysis of whether the DOD aeronautics R&D measures involve specific subsidies that cause adverse effects.

³⁹⁰ K. Osborn, "Air Force Plans Major Step in Long Range Strike Bomber Program", Defense Tech, 15 September 2014, (Exhibit EU-1361). ↩

³⁹¹ J. Gertler, "Budget Highlight: Air Force Long Range Strike Bomber", Congressional Research Service, 2 July 2014, (Exhibit EU-1363). ↩

³⁹² European Union's response to Panel question No. 64, para. 40. ↩

³⁹³ United States' comments on the European Unions' response to Panel question No. 64, para. 59. ↩

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7.3.4 Whether DOD "equipment and employees" provided through procurement contracts and assistance instruments funded under the challenged RDT&E program elements are outside the scope of this compliance proceeding

7.218. We next consider the United States' request for a ruling that DOD "equipment and employees" provided through procurement contracts and assistance instruments funded under the challenged RDT&E program elements are outside the scope of this proceeding because the DOD aeronautics R&D measures challenged in the original proceeding were limited to payments and access to DOD facilities provided through procurement contracts and assistance instruments funded under the relevant RDT&E program elements.³⁹⁴

7.3.4.1 Main arguments of the parties

7.219. The United States notes that, unlike the corresponding challenges to NASA aeronautics R&D measures, which covered "payments" and "access to NASA facilities, equipment and employees", the European Communities' challenges regarding the DOD aeronautics R&D measures in the original proceeding were confined to "payments" and "access to DOD facilities".³⁹⁵ Although the European Communities advanced arguments in the original proceeding regarding DOD "facilities, equipment and employees", the panel found that the panel request only identified DOD "facilities" and not DOD "equipment" and/or "employees".³⁹⁶ The panel found that, to the extent that a measure was not identified in the panel request, it fell outside the scope of the panel's terms of reference.³⁹⁷ The European Union did not appeal this finding of the panel. According to the United States, although the European Communities could have made claims with respect to DOD equipment and employees in the original proceeding, it did not. It cannot do so in the compliance proceeding.³⁹⁸

7.220. Further, the United States considers that the European Union's argument that the provision of equipment and employees is merely one of the ways that the European Union alleges that the RDT&E program elements provide subsidies to Boeing, is essentially an argument that no distinction can be drawn between equipment and employees, and other ways subsidies could be provided. However, the panel in the original proceeding already ruled that such a distinction was appropriate and required in light of the European Communities' panel request.³⁹⁹ According to the United States, that finding cannot be reconciled with the European Union's position.

7.221. Moreover, the United States says that the European Union effectively admits that it has no reason to believe that DOD has, with the compliance proceeding in mind, shifted the manner in which it provides support to Boeing from payments and access to facilities, to access to equipment and employees.⁴⁰⁰ Indeed, in light of the European Union's failure in its supplemental submission to support prior suggestions that DOD may have shifted the manner of supporting Boeing under the RDT&E program elements, the European Union has abandoned its claim that the provision of DOD equipment and employees is within the scope of the compliance proceeding.⁴⁰¹

7.222. The European Union argues that the original proceeding, like the compliance proceeding, involved challenges to the particular RDT&E program elements only to the extent they provided subsidies that benefit U.S. LCA producers by providing Boeing with funding and other support applicable to the development, design, and production of LCA. What matters is whether DOD is

³⁹⁴ United States' request for preliminary rulings, dated 13 November 2012, paras. 11 and 60; reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 41. ↩

³⁹⁵ United States' request for preliminary rulings, dated 13 November 2012, para. 11; reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 37; and Panel Report, US – Large Civil Aircraft (2^nd complaint), paras. 7.1116-7.1120. ↩

³⁹⁶ Panel Report, US – Large Civil Aircraft (2^nd complaint), para. 7.1120. ↩

³⁹⁷ Panel Report, US – Large Civil Aircraft (2^nd complaint), paras. 7.1120 and 7.1121. ↩

³⁹⁸ United States' request for preliminary rulings, dated 13 November 2012, paras. 11 and 12. ↩

³⁹⁹ United States' response to European Union's request for a preliminary ruling and request for the Panel to request information pursuant to Article 13 of the DSU, dated 8 November 2012, paras. 36-38. ↩

⁴⁰⁰ United States' reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 40. ↩

⁴⁰¹ United States' first written submission, para. 67. ↩

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providing its equipment and employees to assist Boeing with R&D related to its LCA at the present time.⁴⁰²

7.223. The European Union refers to its panel request in this proceeding, in which it challenges DOD's provision of access to government facilities, equipment, and employees through the relevant RDT&E program elements. According to the European Union, the provision of "equipment and employees" is simply one of the ways that the European Union alleges that the RDT&E program elements provide subsidies to Boeing, along with payments and provision of access to government facilities.⁴⁰³

7.224. The European Union argues that, in relation to measures taken to comply, within the meaning of Article 21.5 of the DSU, the European Union is not precluded from challenging unchanged aspects of such measures so long as such aspects are integral to the measure. The provision of equipment and employees is an "integral" part of the RDT&E measures.⁴⁰⁴

7.225. The European Union also suggests, in its initial response to the United States' request for preliminary rulings, that DOD may possibly have shifted the manner in which it transfers resources to Boeing's LCA division such that the payments and facility use have decreased, while the provision of equipment and employees has increased. The European Union refers to the fact that DOD's operations and practices are not transparent from publicly available documents and recalls that in the original proceeding, it had been relying on the Annex V process to provide the necessary information.⁴⁰⁵

7.226. Finally, the European Union asserts that there is no efficiency in requiring the European Union to assert claims against the DOD RDT&E payments and the provision of access to DOD facilities, and then requiring it to launch a new dispute where a separate panel would consider the provision of equipment and employees under those same program elements.⁴⁰⁶

7.3.4.2 Evaluation by the Panel

7.227. The third issue raised by the United States' objections is whether the "funding and support" provided to Boeing under the procurement contracts and assistance instruments funded through the various RDT&E program elements, i.e. through the original 23 RDT&E program elements as well as through those aspects of the "additional" program elements that we have found to be within the scope of this proceeding, covers not just payments and access to DOD facilities, but also access to DOD equipment and employees.

7.228. The United States' position is that the measures properly before this Panel cannot include access to DOD equipment and employees because the provision of access to DOD equipment and employees was not challenged in the original proceeding. The European Union counters that the original proceeding involved challenges to particular RDT&E program elements to the extent they provided subsidies to benefit United States LCA producers. If DOD is, at the present time, providing its equipment and employees to assist Boeing with R&D which benefits its LCA division, then the European Union may validly challenge such measures in this proceeding.

7.229. The pertinent items of the European Communities' panel request in the original proceeding are as follows:

1. allowing the US LCA industry to participate in DOD-funded research, making payments to the US LCA industry for such research, or enabling the US LCA industry to exploit the results of such research, by means including but not limited to the foregoing or waiving

⁴⁰² European Union's response to the United States' request for preliminary rulings, dated 23 November 2012, para. 31. ↩

⁴⁰³ European Union's response to the United States' request for preliminary rulings, dated 23 November 2012, para. 30. ↩

⁴⁰⁴ European Union's supplemental submission on the United States' request for preliminary rulings, para. 17. ↩

⁴⁰⁵ European Union's response to the United States' request for preliminary rulings, dated 23 November 2012, paras. 31 and 32. ↩

⁴⁰⁶ European Union's response to the United States' request for preliminary rulings, dated 23 November 2012, para. 34. ↩

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of valuable patent rights, and the granting of exclusive or early access to data, trade secrets and other knowledge resulting from government funded research; and

2. allowing the US LCA industry to use research, test, and evaluation facilities owned by the U.S. Government, including the Major Range Test Facility Bases.⁴⁰⁷

7.230. In the original proceeding, the panel explained that the European Communities' DOD-related claims were narrower in various respects than its NASA-related claims. In particular, the panel noted:

{W}hereas the scope of the European Communities' claim relating to NASA R&D covers NASA "facilities, equipment and employees", the scope of the European Communities' claim relating to DOD only covers DOD "facilities".⁴⁰⁸

7.231. The panel also recalled that Article 6.2 of the DSU requires that a panel request identify the specific measures at issue, and provide a brief summary of the legal basis of the complaint sufficient to present the problem clearly. To the extent that a measure is not identified in the complaining party's panel request, that measure falls outside the panel's terms of reference.⁴⁰⁹ The panel thus proceeded to examine the European Communities' claims regarding the payments and provision of access to DOD facilities (but not DOD equipment and employees) through the procurement contracts and assistance instruments funded under the original 23 RDT&E program elements.

7.232. Although the European Union's panel request in this proceeding refers more broadly to the provision of access to DOD facilities, equipment, and employees, the issue is whether the provision of access to DOD equipment and employees through the relevant procurement contracts and assistance instruments is within the scope of this proceeding given that the European Communities had not challenged such measures in the original proceeding.

7.233. In paragraph 7.152 above, we explain that the European Union's asserted DOD-related claims in this proceeding cover measures involving three categories of instruments:

1. pre-2007 procurement contracts or assistance instruments funded under the original 23 RDT&E program elements (i.e. the procurement contracts and assistance instruments that were before the panel in the original proceeding);
2. post-2006 procurement contracts or assistance instruments funded under the original 23 RDT&E program elements (i.e. procurement contracts and assistance instruments that were entered into after the date of the original panel request in January 2006 but funded through the same program elements that were the focus of the European Communities' claims in that proceeding); and
3. post-2006 procurement contracts or assistance instruments funded under other "additional" RDT&E program elements that are different from the original 23 RDT&E program elements, or their successor programmes (i.e. procurement contracts and assistance instruments entered into after the date of the original panel request in January 2006 but funded through different program elements to those that were the focus of the European Communities' claims in that proceeding).

7.234. We consider that the answer to the question whether the provision of access to DOD equipment and employees through the relevant procurement contracts and assistance instruments is within the scope of this proceeding will differ depending on the category of the instrument above.

7.235. In relation to the pre-2007 procurement contracts and assistance instruments at issue in the original proceeding (i.e. those in category (a) above), we see no basis on which the European Union could seek to enlarge the scope of its claims regarding the pre-2007 procurement

⁴⁰⁷ European Union's request for the establishment of a panel, item 3(a) and 3(b), pp. 9 and 10. ↩

⁴⁰⁸ Panel Report, US – Large Civil Aircraft (2^nd complaint), paras. 7.1118 and 7.1120. (emphasis added) ↩

⁴⁰⁹ Panel Report, US – Large Civil Aircraft (2^nd complaint), para. 7.1121. ↩

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contracts and assistance instruments at the compliance stage to also cover "access to DOD equipment and employees". The European Communities could have challenged DOD's provision of access to DOD equipment and employees in connection with these procurement contracts and assistance instruments in the original proceeding but did not. We do not consider that the European Union can enlarge the scope of its original claims in this manner at the compliance stage.

7.236. In relation to the claims concerning the post-2006 procurement contracts and assistance instruments, funded under both the original 23 RDT&E program elements and the "additional" RDT&E program elements (i.e. those in categories (b) and (c) above) we are of the view that it is not an impermissible enlargement of the scope of the dispute for the European Union to more broadly formulate its claims in respect of these "new" measures to encompass access to DOD equipment and employees, as well as facilities.

7.237. In reaching these conclusions, we are mindful of the United States' assertion that access to DOD equipment and employees is not significant in relation to general aircraft/science and technology program elements and that DOD does not provide access to facilities or equipment, or reference pooling of employees in relation to systems acquisition/military aircraft program elements.⁴¹⁰ We are mindful that our resolution of this issue may appear somewhat technical, especially as there is nothing before us to suggest that the addition or exclusion of access to DOD equipment and employees is of any great significance to the core issue of whether the United States has complied with the DSB recommendations and rulings. However, the United States' objection involves important systemic considerations such as the fairness of permitting a complaining Member to retroactively enlarge the scope of the original dispute through a compliance proceeding, and the overall role of panels in promoting the prompt settlement of disputes and assisting Members in achieving satisfactory resolution of their disputes. We have attempted to strike an appropriate balance regarding these two important underlying values.

7.238. We grant the United States' request in relation to access to DOD equipment and employees through pre-2007 procurement contracts and assistance instruments funded under the 23 original RDT&E program elements and rule that the provision of access to DOD equipment and employees through these instruments is outside the scope of this proceeding.

7.239. We reject the United States' request in relation to access to DOD equipment and employees through (a) post-2006 procurement contracts and assistance instruments funded under the 23 original RDT&E program elements; and (b) post-2006 procurement contracts and assistance instruments funded under "additional" RDT&E program elements that we have found are within the scope of this proceeding and conclude that the provision of access to DOD equipment and employees through these instruments is within the scope of this proceeding.

7.3.5 Summary of the Panel's rulings as to whether various certain DOD aeronautics R&D measures are outside the scope of this proceeding

7.240. In this Section of the Report, we make a number of rulings as to whether certain of the DOD aeronautics R&D measures identified by the European Union in its panel request are outside the scope of this proceeding. In sum, we rule as follows:

1. We reject the United States' request for a ruling that the DOD procurement contracts funded through the original 23 RDT&E program elements are outside the scope of this proceeding. The Panel finds that these measures are within the scope of this proceeding.
2. We reject the United States' request in respect of the Materials and Biological Technology (PE 0602715E) program element and rule that procurement contracts HR0011-06-C-0073 and HR-0011-08-C-0044 SOW and assistance instruments HR0011-06-2-0008, FA8650-07-2-7716, and HR0011-10-2-0001, funded through the Materials Processing Technology Project of the Materials and Biological Technology

⁴¹⁰ United States' first written submission, paras. 388, 418, and 473. ↩

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program element are within the scope of this proceeding. The Panel finds that these measures are within the scope of this proceeding.

3. We grant the United States' request in respect of the Airborne Warning and Control System (AWACS) (PE 0207417F) program element and rule, on the basis of the claims in respect of that program element as identified by the European Union, that Air Force Contract F19628-01-D-0016 funded under the DRAGON Project is outside the scope of this proceeding.
4. We grant the United States' request in respect of the KC-46, Next Generation Aerial Refueling Aircraft (PE 0605221F) program element and rule, on the basis of the claims in respect of that program element as identified by the European Union, that Air Force Contract FA8625-11-C-6600 is outside the scope of this proceeding.
5. We grant the United States' request in respect of the Multi-Mission Maritime Aircraft (P-8A) (PE 0605500N) program element and rule that measures funded under this program element, including those funded through Navy contracts N00019-04-C-3146, N00019-09-C-0022, and N00019-12-C-0112 are outside the scope of this proceeding.
6. The Panel does not further consider measures funded under the Technology Transfer (PE 0604317F) program element, the Defense Logistics Agency IP ManTech (PE 0708011S) program element or the Long Range Strike Bomber (PE 0604015F) program element, because the Panel is not satisfied of the existence of any procurement contracts or assistance instruments with Boeing which the European Union identifies as relevant to its claims, and which are funded under these program elements.
7. We grant the United States' request in relation to the provision of access to DOD equipment and employees through pre-2007 procurement contracts and assistance instruments funded under the original 23 RDT&E program elements and rule that the provision of access to DOD equipment and employees to Boeing through these instruments is outside the scope of this proceeding.
8. We reject the United States' request in relation to the provision of access to DOD equipment and employees through: (a) post-2006 procurement contracts and assistance instruments funded through the 23 original RDT&E program elements; and (b) post-2006 procurement contracts and assistance instruments funded through "additional" RDT&E program elements that we have found are within the scope of this proceeding; we rule that the provision of access to DOD equipment and employees through these instruments is within the scope of this proceeding.

7.3.6 Whether the alleged "dual-use" nature of research conducted under the procurement contracts challenged by the European Union is relevant to the Panel's terms of reference

7.241. As explained in paragraphs 7.86 through 7.87 above, the European Union has identified the relevant RDT&E program elements the focus of its challenge according to whether, in its view, those program elements "support the development of technologies or methods that could benefit Boeing's commercial airplane division".⁴¹¹ The European Union refers to R&D to develop technologies that it regards as having potential civil applications, as "dual-use" RDT&E. In response to a question from the Panel asking how the alleged "dual-use" nature of research conducted under the DOD procurement contracts is relevant to whether the procurement contracts constitute specific subsidies, the European Union responded that "the dual-use nature of such DOD-supported R&D is primarily relevant to the Panel's terms of reference, as defined by the European Union's panel request".⁴¹² According to the European Union, once the Panel is satisfied that the RDT&E program elements in question do in fact fund R&D that "leads to technologies and knowledge with potential or actual civil, in addition to military applications", the dual-use nature of

⁴¹¹ Rumpf Report, (Exhibit EU-23), para. 1.1. See also 2006 CRA Report, (Exhibit EU-29), para. 1.1: "{o}n behalf of the European Communities, CRA International Inc. … has examined and estimated the amount of {RDT&E} funding received by {Boeing} from {DOD} that can be considered relevant to both military and commercial aircraft (i.e. 'dual-use' RDT&E)". ↩

⁴¹² European Union's response to Panel question No. 30, para. 187. ↩

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the R&D conducted under the DOD procurement contracts is of limited relevance to the questions of financial contribution or benefit, other than with respect to valuation of the subsidy.⁴¹³

7.242. The European Union's response seems to imply that the Panel should undertake a factual analysis of whether the R&D conducted by Boeing pursuant to the procurement contracts and assistance instruments funded under the RDT&E program elements identified by the European Union gives rise to technologies with potential civil applications in order to identify the DOD aeronautics R&D measures that are properly within its terms of reference. In responding to the European Union's statement that the "dual-use" nature of the R&D is primarily relevant to the Panel's terms of reference, the United States asserts that the European Union has effectively "admitted" that any procurement contracts that involve research with military objectives (as opposed to dual-use objectives) fall outside the Panel's terms of reference.⁴¹⁴

7.243. The parties express significant disagreement as to whether the R&D conducted by Boeing pursuant to the procurement contracts and assistance instruments funded under the specific RDT&E program elements identified by the European Union in fact results in technologies with civil applications that assist Boeing's development of LCA.⁴¹⁵ While they do not appear to disagree that at least some of the R&D may have "potential" civil applications, they dispute the extent of that potential, and whether there is an "objective" way of assessing it. Although the United States has not requested the Panel to rule that any of the DOD-related measures are outside the Panel's terms of reference on the basis that they do not in fact fund so-called "dual-use" R&D, the parties' exchange as recounted above suggests that the Panel should, of its own motion, identify and properly delineate the DOD aeronautics R&D measures that are within its terms of reference according to our own evaluation of the potential for the R&D to lead to civil applications.

7.244. Based on our understanding of the European Union's panel request, the DOD aeronautics R&D measures within our terms of reference are not measures that involve Boeing conducting R&D that the Panel considers have the "potential to", or actually do, lead to civil applications. Therefore, it is not necessary for us, as a jurisdictional matter, to make factual determinations as to whether any particular DOD aeronautics R&D measure potentially or actually leads to development of technologies applied to Boeing LCA.

7.245. We recall that in the original proceeding, the panel noted that the European Communities' DOD-related claims were limited in several respects.⁴¹⁶ One limitation was that it challenged only that subset of funding received by Boeing under the original 23 RDT&E program elements that, in the European Communities' view, related to "dual-use" technologies.⁴¹⁷ Similarly in this proceeding, the European Union identifies a number of RDT&E program elements under which, in its view, "DOD provides Boeing with funding and support for aeronautics R&D, as well as access to technologies, applicable to Boeing LCA."⁴¹⁸ The United States argues that the European Union's identification of the relevant RDT&E program elements is subjective to the European Union, noting that neither CRA nor Mr Rumpf provide a definition of what, in their view, makes research "dual-use", beyond their subjective opinion.⁴¹⁹

7.246. The European Union describes the DOD aeronautics R&D measures it challenges in this proceeding by reference to certain RDT&E program elements set forth in its panel request. Those RDT&E program elements have been identified based on the European Union's view that the

⁴¹³ European Union's response to Panel question No. 30, para. 188. ↩

⁴¹⁴ United States' comments on the European Union's response to Panel question No. 30, para. 171. ↩

⁴¹⁵ United States' first written submission, paras. 297, 448, and 461-465; response to Panel question No. 30, paras. 132 and 133; and comments on the European Union's response to Panel question No. 29, paras. 157, 162, and 163. European Union's second written submission, paras. 389-392; response to Panel question No. 29, paras. 171-174; and comments on the United States' response to Panel question No. 30, paras. 190 and 191. They also employ the term "dual-use" in different senses, as we explain in paragraphs 8.339 to 8.347 of this Report. ↩

⁴¹⁶ Panel Report, US – Large Civil Aircraft (2^nd complaint), paras. 7.1116-7.1120. ↩

⁴¹⁷ Panel Report, US – Large Civil Aircraft (2^nd complaint), para. 7.1117. ↩

⁴¹⁸ European Union's first written submission, para. 243. See also European Union's request for the establishment of a panel, para. 12. ↩

⁴¹⁹ United States' first written submission, para. 297. Moreover, the United States largely disputes that work conducted by Boeing under the RDT&E program elements identified by the European Union would realistically have civil applications, and argues that any realistic civil use is implausible. See e.g. United States' first written submission, paras. 334, 337, 355, 370, 374, and 375. ↩

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program elements fund Boeing's development of technologies applicable to LCA. In its first written submission and in expert evaluations submitted with its first written submission, the European Union explains why and how it identified the DOD aeronautics R&D measures that it has chosen to challenge in this proceeding.⁴²⁰ Contrary to the suggestion in the European Union's response to Panel question No. 30, the Panel need not agree with the European Union that the identified DOD aeronautics R&D measures potentially or actually give rise to technologies applied to Boeing LCA in order to delimit the measures within our terms of reference. Nor does our consideration of the DOD aeronautics R&D measures identified by the European Union in its panel request imply that we consider such measures to potentially or actually give rise to "dual-use" technologies applicable to Boeing LCA. Rather, the question of whether the identified measures in fact support Boeing's development of LCA goes to the merits of the European Union's serious prejudice claims.

7.4 FAA aeronautics R&D measure

7.247. In its panel request, the European Union alleges that the Federal Aviation Administration (FAA), working in collaboration with NASA under the FAA CLEEN Program, maintains subsidies that presently benefit U.S. LCA producers by: (a) "provid{ing} Boeing with funding and access to government facilities, equipment, and employees for R&D applicable to the development, design, and production of LCA"; or (b) "providing Boeing with royalty-free use of the technologies developed with such funding and support, or use of such technologies on preferential terms".⁴²¹ The European Union's panel request states that: "{s}uch R&D support is authorized by 49 U.S.C. §§ 44501-44517, 48102, and periodic reauthorization legislation".⁴²²

7.248. The United States requests a ruling that the "FAA CLEEN measure" is outside the scope of this proceeding because this measure was not challenged in the original proceeding, there were no DSB recommendations and rulings adopted in relation to it, it is not a declared measure taken to comply, and the European Union has not demonstrated that it can be characterized as an "undeclared" measure taken to comply on the basis of any close nexus to the DSB recommendations and rulings or to any declared measures taken to comply.⁴²³

7.249. FAA's R&D activities are focused on "civil aviation research and development".⁴²⁴ The FAA inaugurated the FAA CLEEN Program in early 2008 in furtherance of the National Aeronautics Research and Development Plan, with the objective to develop aeronautics R&D programmes focused on inter-agency environmental and performance goals for the "N+1 generation" of LCA designed to enter service in the 2015 to 2018 time-frame.⁴²⁵ The FAA created the FAA CLEEN Program, while NASA created the Environmentally Responsible Aviation (ERA) Project under its Integrated Systems Research Program, to "guid{e} coordinated efforts to bring to maturity new technologies to reduce fuel burn, emissions, and noise".⁴²⁶ In 2009 the FAA solicited research proposals for the FAA CLEEN Program from industry.⁴²⁷ In June 2010, it entered into five-year R&D agreements with, respectively, Boeing and four propulsion-focused companies⁴²⁸, in each case on

⁴²⁰ See paras. 7.85 to 7.91 above. ↩

⁴²¹ European Union's request for the establishment of a panel, para. 15. ↩

⁴²² European Union's request for the establishment of a panel, para. 15. ↩

⁴²³ United States' request for preliminary rulings, dated 13 November 2012, paras. 19-22, 36-44, and 60; first written submission, para. 480. ↩

⁴²⁴ Airport and Airway Trust Fund Authorizations, United States Code, Title 49, chapter 481, sections 48102 and 48103, (Exhibit EU-266), section 48102(a). ↩

⁴²⁵ The FAA CLEEN Program focuses on the most well-developed, near-term commercializable technologies. (R. Jefferies, FAA, "CLEEN (Continuous Lower Energy, Emissions and Noise) Program Technologies Development" Presentation at the NASA ERA Bidder's Conference, 19 February 2010, (Exhibit EU-253), pp. 5, 6 and 8; Executive Office of the President, National Science and Technology Council, National Aeronautics Research and Development Plan, (December 2011), (Exhibit EU-254), pp. 27-30 and 50-53; and J. Wolfe, NASA, "Aeronautics Research Mission Directorate Update with Emphasis on Integrated Systems Research", Presentation at the 48th AIAA Aerospace Sciences Meeting, 4 January 2010, (Exhibit EU-255), p. 10). ↩

⁴²⁶ Executive Office of the President, National Science and Technology Council, National Aeronautics Research and Development Plan, (2 February 2010), (Exhibit EU-16), p. 11. ↩

⁴²⁷ FAA CLEEN Request for Offer – Amended SIR, DTFAWA-09-R-03293, (12 May 2009) (CLEEN Solicitation), (Exhibit EU-20); and R. Jefferies, FAA, "Continuous Lower Energy, Emissions, and Noise (CLEEN) Program Technologies Development", Presentation, 27 October 2010, (Exhibit EU-256), p. 6. ↩

⁴²⁸ General Electric, Honeywell, Pratt & Whitney, and Rolls-Royce North America. ↩

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a 50% cost-sharing basis. The total FAA contribution under all of the agreements was set at USD 125 million.⁴²⁹

7.250. Boeing's work under the FAA CLEEN Program is governed by the CLEEN Other Transaction Agreement DTFAWA-10-C-0030 (the Boeing CLEEN Agreement), which entered into effect on 22 June 2010.⁴³⁰ Under this agreement, the FAA maintains the authority to determine the work that will be undertaken⁴³¹, while Boeing manages the project, conducts the work and prepares reports on that work for the FAA.⁴³²

7.251. Under the Boeing CLEEN Agreement, Boeing is responsible for integrated management of the FAA CLEEN Program as well as two categories of R&D activities⁴³³:

1. technology maturation (i.e. research to mature specified technologies through to the prototype development stage) on three research projects: wing adaptive trailing edges; ceramic matrix composite acoustic exhaust nozzles; and the use of alternative fuels; and
2. flight testing and assessment, including flight testing of a broad suite of technologies through Boeing's ecoDemonstrator programme.

7.252. Both parties agree that the issue of whether the FAA aeronautics R&D measure is within the scope of this compliance proceeding depends upon whether the Boeing CLEEN Agreement meets the requirements of the close nexus test; i.e. whether, despite not having been part of the original proceeding, or a declared implementation measure by the United States, the Boeing CLEEN Agreement can nevertheless be characterized by the Panel as a so-called "undeclared" measure taken to comply, if there is a sufficiently close connection between the Boeing CLEEN Agreement, the DSB recommendations and rulings and any declared measures taken to comply.⁴³⁴

7.4.1 Main arguments of the parties and third parties

7.253. The United States argues that the European Union has failed to meet its burden of demonstrating the existence of a close nexus between the Boeing CLEEN Agreement, the DSB recommendations and rulings and the U.S. declared measures taken to comply, such that the Boeing CLEEN Agreement should be characterized as a measure taken to comply within the scope of this proceeding.⁴³⁵

⁴²⁹ FAA Fact Sheet, "Continuous Lower Energy, Emissions, and Noise (CLEEN) Program", 24 June 2010, (Exhibit EU-257). Below, paras. 8.64 and 8.69. ↩

⁴³⁰ Contract between Boeing and FAA, "Other Transaction Agreement", DTFAWA-10-C-00030 (21 June 2012) (Boeing CLEEN Agreement), (Exhibit EU-17), p. 1. Note that the period of performance commenced to run on 21 June 2010. ↩

⁴³¹ Boeing CLEEN Agreement, (Exhibit EU-17), parts B.3 and F.2. ↩

⁴³² Boeing CLEEN Agreement, (Exhibit EU-17), parts C and E.3. In its first written submission, the European Union's financial contribution arguments refer to the proper characterization of the Boeing CLEEN Agreement, an Other Transaction Agreement which governs Boeing's work under the FAA CLEEN Program. (European Union's first written submission, para. 218; and Boeing CLEEN Agreement, (Exhibit EU-17)). In response to a question from the Panel, the European Union explained that its challenge is directed at the Boeing CLEEN Agreement, as this "is the only contract or agreement with Boeing under the FAA CLEEN Program". (European Union's response to Panel question No. 11, para. 77). ↩

⁴³³ Boeing CLEEN Agreement, (Exhibit EU-17), part I, sections C.1.2 and C.3. ↩

⁴³⁴ European Union's response to Panel question No. 66, paras. 58-68; second written submission, para. 119; United States' request for preliminary rulings, dated 13 November 2012, para. 19; and first written submission, paras. 72, 73, and 474-480. ↩

⁴³⁵ United States' request for preliminary rulings, dated 13 November 2012, paras. 20, 21, 36, 37, and 44; reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 65; first written submission, paras. 202, 475, 476, and 480; and second written submission, para. 69. The United States notes that while the European Union refers, in its response to the United States' request for preliminary rulings, to a close nexus to NASA and DOD measures that were subject to the DSB recommendations and rulings, the European Union's subsequent submissions narrow the close nexus assertion to the NASA aeronautics R&D measures subject to the DSB recommendations and rulings. (United States' first written submission, fns 766 and 767). The European Union does not argue that a close nexus exists between the FAA CLEEN Program and any Washington, Wichita, or FSC/ETI measure. (United States' reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 65). ↩

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7.254. The United States argues that the European Union has failed to demonstrate that the FAA CLEEN Program bears a close nexus in terms of nature with any of the measures that were subject to the DSB recommendations and rulings, or to the United States' declared measures taken to comply.⁴³⁶ The United States disputes the European Union's contention that there is technological continuity between the FAA CLEEN Program and NASA aeronautics R&D programmes.⁴³⁷ While the FAA CLEEN Program and the original NASA aeronautics R&D programmes might share common environmental or technological goals of "making LCA more efficient, quieter, and less polluting"⁴³⁸, it is not sufficient to establish that the programmes share common goals, particularly as environmental goals are common to most governmental agencies and are government-wide objectives for most WTO Members.⁴³⁹ Rather, the European Union must show that the measure at issue shares enough features with a particular measure covered by the DSB recommendations and rulings, such that a close nexus in terms of nature exists between the two measures.⁴⁴⁰ The United States argues that the two NASA aeronautics R&D programmes that the European Union identified as having been covered by the DSB recommendations and rulings (i.e. the Advanced Subsonic Technology and Quiet Aircraft Technology programmes) only dealt with noise reduction; while the subject matter of the FAA CLEEN Program is broader than noise reduction; including also aircraft emissions and energy use.⁴⁴¹ The United States acknowledges that the NASA ERA Project under the Integrated Systems Research Program deals with aircraft emissions and energy use. However, this is not relevant as the Environmentally Responsible Aviation Project was not challenged in the original proceeding and is not challenged in the compliance proceeding.⁴⁴²

7.255. In response to the European Union's claim that there is organizational continuity between the FAA CLEEN Program and the NASA aeronautics R&D measures, the United States argues that establishing a link between the FAA CLEEN Program and NASA is not sufficient to meet the close nexus test.⁴⁴³ In any case, to the extent that there is such a link, it has been misstated by the European Union.⁴⁴⁴ According to the United States, there is no substantial NASA involvement in the FAA's administration of the FAA CLEEN Program.⁴⁴⁵ The FAA CLEEN Program is solely administered by the FAA on the basis of agreements entered into with companies. NASA is not a party to, nor does it have a role under, the Boeing CLEEN Agreement entered into between the FAA and Boeing.⁴⁴⁶ The United States confirms that the FAA consulted NASA experts as it developed the CLEEN solicitation, but adds that the FAA also consulted various other experts inside and outside of government.⁴⁴⁷ The NASA support alleged "is simply the unremarkable and routine consultations by government agencies that are conducted as part of responsible government".⁴⁴⁸ The United States also disputes the contention that, under the FAA CLEEN Program, Boeing's

⁴³⁶ United States' first written submission, paras. 477 and 478; second written submission, para. 70; and reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, paras. 66, 68, and 71. ↩

⁴³⁷ United States' second written submission, para. 70. ↩

⁴³⁸ United States' reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 67; first written submission, fn 766, paras. 470 and 477; and second written submission, para. 120. ↩

⁴³⁹ United States' reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 67; first written submission, para. 477; second written submission, para. 70; and response to Panel question No. 12, para. 27. ↩

⁴⁴⁰ United States' reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, paras. 67 and 68. ↩

⁴⁴¹ United States' reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 67. ↩

⁴⁴² United States' reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 67; first written submission, para. 477. ↩

⁴⁴³ United States' reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 67; response to Panel question No. 12, para. 28. ↩

⁴⁴⁴ United States' second written submission, para. 71 (referring to European Union's second written submission, para. 120). ↩

⁴⁴⁵ United States' response to Panel question No. 12, para. 28. ↩

⁴⁴⁶ United States' response to Panel question No. 12, paras. 25 and 27. ↩

⁴⁴⁷ United States' first written submission, para. 477; second written submission, para. 71; opening statement to the meeting of the Panel, para. 87; and response to Panel question No. 12, para. 26. ↩

⁴⁴⁸ United States' response to Panel question No. 12, para. 26. ↩

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research involves NASA facilities⁴⁴⁹ and denies that the FAA provides Boeing with access to employees.⁴⁵⁰

7.256. The United States submits that the structure of the measure in question is an important consideration when determining whether it shares a close nexus in terms of nature with a measure that was subject to the DSB recommendations and rulings.⁴⁵¹ The FAA CLEEN Program has a different structure and operation to the NASA aeronautics R&D programmes that were subject to the DSB recommendations and rulings in two important respects.⁴⁵² First, the agreements entered into under the FAA CLEEN Program are cost-sharing arrangements only.⁴⁵³ The United States notes that the DOD assistance instruments considered by the Appellate Body in the original proceeding involved 50:50 cost-sharing arrangements, and argues that the European Union cannot point to any NASA contracts that share this characteristic.⁴⁵⁴ Furthermore, the European Union must show that the measure at issue shares enough features with a particular original measure such that a close nexus in terms of nature exists between the two measures; the European Union cannot establish a close nexus by demonstrating that the FAA CLEEN Program shares one feature with one original measure and another feature with a different original measure.⁴⁵⁵ Second, foreign companies were equally welcome to submit proposals to participate in the FAA CLEEN Program, as evidenced by the fact that Rolls-Royce is one of the five participating companies.⁴⁵⁶ The United States argues that these two structural differences between the FAA CLEEN Program and the NASA aeronautics R&D programmes distinguish this situation from previous disputes where measures were considered to share a close nexus with respect to the nature of the measures.⁴⁵⁷

7.257. The United States also argues that the European Union has failed to establish a close nexus in terms of the effects of the measure.⁴⁵⁸ The United States notes the legal standard for "effects" set out by the European Union in its submissions: "a compliance panel may consider whether the alleged undeclared measure taken to comply has the effect of undermining compliance (if any) that is achieved through the declared measures taken to comply. As the

⁴⁴⁹ United States' first written submission, para. 482; second written submission, para. 71 (referring to European Union's second written submission, para. 120). ↩

⁴⁵⁰ United States' first written submission, para. 483. ↩

⁴⁵¹ The United States notes, for example, that in Australia – Salmon (Article 21.5 – Canada), both measures were quarantine measures applicable to imports of Canadian salmon, and in US – Zeroing (EC) (Article 21.5 – EC), both measures consisted of the United States' Department of Commerce's use of its zeroing methodology in anti-dumping proceedings. ↩

⁴⁵² United States' request for preliminary rulings, dated 13 November 2012, para. 40; first written submission, para. 478. ↩

⁴⁵³ United States' request for preliminary rulings, dated 13 November 2012, para. 40; first written submission, para. 478; and second written submission, para. 72. ↩

⁴⁵⁴ United States' reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 67 (referring to Appellate Body Report, US – Large Civil Aircraft (2^nd complaint), para. 597); first written submission, para. 478; and second written submission, para. 72. The United States notes that the European Union has not argued that there is a close nexus in terms of nature between the FAA CLEEN Program and the DOD measures subject to the DSB recommendations and rulings. The United States notes that while the European Union refers, in its response to the United States' request for preliminary rulings, to a close nexus to NASA and DOD measures that were subject to the DSB recommendations and rulings, the European Union's subsequent submissions narrow the close-nexus assertion to the NASA measures subject to the DSB recommendations and rulings. (United States' first written submission, fns 766 and 767; reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 67). ↩

⁴⁵⁵ United States' reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 68. ↩

⁴⁵⁶ United States' request for preliminary rulings, dated 13 November 2012, para. 40. The United States asserts that the European engine maker Rolls-Royce is participating in the programme in order to demonstrate increased engine efficiency and reduced engine weight, as well as to test advanced sustainable alternative jet fuels that could be approved for commercial use. (Rolls-Royce, "FAA Continuous Lower Energy, Emissions & Noise (CLEEN) Technologies: Rolls-Royce Program Overview", 2 November 2011, (Exhibit USA-8), p. 9). The United States asserts that Rolls-Royce is using this participation to deliver on 2020 ACARE goals, the purpose of the European Union's equivalent Clean Sky Program through which it budgeted 800 million euros for 50/50 cost-sharing arrangements with industry (including Airbus). (Clean Sky, "Innovating together, flying greener: About us", available at <http://www.cleansky.eu/content/homepage/about-us>, accessed 29 August 2016, (Exhibit USA-7); and United States' response to the Panel question No. 12, para. 27). ↩

⁴⁵⁷ United States' request for preliminary rulings, dated 13 November 2012, para. 39. ↩

⁴⁵⁸ United States' reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 69; opening statement at the meeting of the Panel, para. 88; and response to Panel question No. 12, para. 28. ↩

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Appellate Body emphasized in US – Zeroing (21.5 – EC), the test requires a showing of potential rather than actual effects".⁴⁵⁹ The United States argues that the European Union makes no allegations about how the potential effects of the FAA CLEEN Program would undermine compliance achieved through the United States' declared measures taken to comply and thus has failed to establish any close nexus in terms of effect concerning the FAA CLEEN Program.⁴⁶⁰ The United States argues that the European Union fails to meet that standard with its "single, conclusory statement{s}" that the FAA CLEEN Program has the same effect as the NASA and DOD aeronautics R&D programmes, which is to contribute to the development of Boeing LCA technology (and lower prices) to the detriment of Airbus⁴⁶¹, and that if the declared measures did, in fact, bring the measures into compliance, the European Union would nevertheless consider the FAA CLEEN Program to undermine such compliance.⁴⁶²

7.258. The United States asserts that it complied with the DSB recommendations and rulings when, during the six-month compliance period in 2012, NASA modified the rights accorded to the parties under the contracts and agreements covered by the DSB recommendations and rulings to make them consistent with commercial practice, while at the same time also making modifications to contracts and agreements entered into subsequent to the DSB ruling.⁴⁶³ The United States contends that the FAA did not begin an environmental programme, available to foreign as well as domestic companies, to undermine or counteract the reallocation of patent rights taken in response to the DSB recommendations and rulings.⁴⁶⁴ Moreover, the existence of the FAA CLEEN Program does not undermine the existence of the reallocation of patent rights.⁴⁶⁵

7.259. Finally, the United States argues that the timing element of the close nexus test has been singled out by the Appellate Body as a non-dispositive factor.⁴⁶⁶ Nonetheless, the timing of the FAA CLEEN Program is not analogous to disputes where timing was relevant to a finding of close nexus.⁴⁶⁷

7.260. The European Union argues that there is a sufficiently close nexus, in terms of nature, effects, and timing, between the Boeing CLEEN Agreement, the DSB recommendations and rulings and the United States' declared measures taken to comply, such that the Boeing CLEEN Agreement should be characterized as a measure taken to comply within the scope of this proceeding.⁴⁶⁸

7.261. With regard to the connections in terms of nature between the Boeing CLEEN Agreement on the one hand, and the NASA aeronautics R&D measures that were subject to the DSB recommendations and rulings, on the other hand, the European Union argues that the FAA CLEEN Program represents a continuation of the NASA aeronautics R&D subsidies that are the subject of the DSB recommendations and rulings, merely under a new name and shifted to a different agency.⁴⁶⁹ The European Union considers this is evident from the technological and organizational continuities between the Boeing CLEEN Agreement and the NASA aeronautics R&D subsidies and the structural similarities between the measures.

7.262. As to technological continuity, the European Union argues that the Boeing CLEEN Agreement, under the FAA CLEEN Program, and the NASA aeronautics R&D subsidies, under the NASA aeronautics R&D programmes, are part of a coordinated U.S. Government aeronautics R&D

⁴⁵⁹ United States' reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 70 (citing European Union's response to the United States' request for preliminary rulings, dated 23 November 2012, para. 67). (emphasis original) ↩

⁴⁶⁰ United States' reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 70; first written submission, para. 479; and second written submission, para. 73. ↩

⁴⁶¹ United States' reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 69. ↩

⁴⁶² United States' second written submission, para. 73. ↩

⁴⁶³ United States' request for preliminary rulings, dated 13 November 2012, para. 43. ↩

⁴⁶⁴ United States' request for preliminary rulings, dated 13 November 2012, para. 43; first written submission, para. 479. ↩

⁴⁶⁵ United States' request for preliminary rulings, dated 13 November 2012, para. 43. ↩

⁴⁶⁶ United States' request for preliminary rulings, dated 13 November 2012, para. 41. ↩

⁴⁶⁷ United States' request for preliminary rulings, dated 13 November 2012, para. 41. ↩

⁴⁶⁸ European Union's response to the United States' request for preliminary rulings, dated 23 November 2012, para. 82. ↩

⁴⁶⁹ European Union's first written submission, para. 230; response to Panel question No. 12, para. 85. ↩

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strategy "to guide efforts to mature technologies that have already shown promise to the point where they can be adopted by the current and future aircraft fleet".⁴⁷⁰ The FAA CLEEN Program complements NASA (and DOD) aeronautics R&D programmes by focusing on the most well-developed, near-term commercializable technologies.⁴⁷¹

7.263. According to the European Union, the subject matter of the FAA CLEEN Program research – aircraft emissions, energy use, and noise – is identical to the subject matter of research conducted under certain of the NASA aeronautics R&D programmes; notably, NASA Advanced Subsonic Technology and Quiet Aircraft Technology programmes (which were noise reduction programmes that were considered by the panel in the original proceeding)⁴⁷²; and the ERA Project under the Integrated Systems Research Program (which is focused on technologies to reduce fuel burn, emissions, and noise).⁴⁷³ Moreover, under the FAA CLEEN Program, Boeing is continuing research that has been transitioned from NASA aeronautics R&D programmes.⁴⁷⁴ The European Union argues that Boeing's R&D on the adaptive trailing edge and ceramic matrix composite acoustic exhaust nozzle, undertaken pursuant to the Boeing CLEEN Agreement, builds on technologies that were previously developed under the NASA aeronautics R&D programmes and that the Boeing ecoDemonstrator programme builds on NASA's earlier Quiet Technology Demonstrator programmes.⁴⁷⁵ In addition, the European Union notes that the companies participating in the FAA CLEEN Program also conduct R&D under the NASA aeronautics R&D programmes.⁴⁷⁶ The European Union argues, therefore, that the technologies being developed under the NASA and FAA CLEEN programmes should be "appropriately regarded as being part of a single process of iterative learning and advancement in pursuit of a common technological goal".⁴⁷⁷

7.264. The European Union also argues that the respective measures are closely connected in terms of their nature on the basis of alleged organizational continuity between the FAA CLEEN Program and NASA, because NASA helped to establish the FAA CLEEN Program and collaborates on the programme's operation.⁴⁷⁸ The European Union notes that NASA officials have described the relationship between NASA and the FAA CLEEN Program as a partnership.⁴⁷⁹ The FAA CLEEN Program solicitation discussed how research results would be built upon and used by both the FAA and NASA, and required that reports and other documentation be submitted to both the FAA and to the head of NASA's ERA Project.⁴⁸⁰ NASA has assisted the FAA in setting the technical direction of the programme: creating the solicitations; reviewing proposals; and monitoring technical progress.⁴⁸¹ The European Union further asserts that under the FAA CLEEN Program, Boeing's research makes use of NASA facilities⁴⁸², and NASA personnel.⁴⁸³

7.265. The European Union points to the United States' admission, in its first written submission, that the Boeing CLEEN Agreement is the same sort of "collaborative relationship 'akin to a species of joint venture'" as the NASA procurement contracts and DOD assistance instruments which were

⁴⁷⁰ European Union's response to the United States' request for preliminary rulings, dated 23 November 2012, para. 86; first written submission, para. 201 (both quoting Statement of J. Shin, NASA Associate Administrator for Aeronautics Research Mission Directorate, Hearing before the U.S House of Representatives Committee on Science, Subcommittee on Space and Aeronautics, 1 May 2008, (Exhibit EU-21)). ↩

⁴⁷¹ European Union's first written submission, para. 201. ↩

⁴⁷² European Union's response to the United States' request for preliminary rulings, dated 23 November 2012, para. 83. ↩

⁴⁷³ European Union's response to the United States' request for preliminary rulings, dated 23 November 2012, para. 83 and fn 88. ↩

⁴⁷⁴ European Union's first written submission, paras. 201 and 203; second written submission, para. 120; and response to the Panel question No. 12, para. 81. ↩

⁴⁷⁵ European Union's response to Panel question No. 12, para. 81. ↩

⁴⁷⁶ European Union's response to Panel question No. 12, para. 84. ↩

⁴⁷⁷ European Union's first written submission, para. 230 (quoting Panel Report, US – Large Civil Aircraft (2^nd complaint), para. 7.1750). ↩

⁴⁷⁸ European Union's response to the United States' request for preliminary rulings, dated 23 November 2012, para. 86; second written submission, para. 120. ↩

⁴⁷⁹ European Union's first written submission, para. 201; second written submission, para. 120. ↩

⁴⁸⁰ European Union's response to Panel question No. 12, para. 80. ↩

⁴⁸¹ European Union's first written submission, para. 231. ↩

⁴⁸² European Union's second written submission, para. 120; response to Panel question No. 12, para. 82. ↩

⁴⁸³ European Union's first written submission, para. 231; second written submission, para. 120; and response to Panel question No. 12, para. 82 (referring to second written submission, para. 338). ↩

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subject to the DSB recommendations and rulings.⁴⁸⁴ In this regard, the European Union notes that the Appellate Body recognized that a principal characteristic of the NASA procurement contracts and DOD assistance instruments was the contribution of financial and non-financial resources by both parties.⁴⁸⁵ The Boeing CLEEN Agreement similarly involves both monetary and non-monetary contributions from the parties.⁴⁸⁶

7.266. As to the connections in terms of effects, the European Union argues that the FAA CLEEN Program has the same effects as the NASA and DOD aeronautics R&D programmes: it contributes to the development of Boeing LCA technology (and lower prices), to the detriment of Airbus.⁴⁸⁷ The European Union considers its argument that the FAA CLEEN Program is a continuation of the NASA aeronautics R&D programmes also demonstrates a close nexus between the FAA and NASA measures in terms of effects.⁴⁸⁸ Finally, although the European Union does not consider that the United States' declared measures taken to comply have brought the United States' aeronautics R&D subsidies into compliance, the Boeing CLEEN Agreement would have the effect of undermining any such compliance.⁴⁸⁹

7.267. With respect to the timing of the Boeing CLEEN Agreement, the European Union submits that the Boeing CLEEN Agreement was awarded in June 2010⁴⁹⁰, and funding for Boeing under the FAA CLEEN Program is ongoing.⁴⁹¹

7.268. Certain of the third parties (Brazil, Canada, and Japan) make general arguments as to the proper application of the close nexus test to determine when so called "new measures" may be considered within the scope of a compliance proceeding as "undeclared" measures taken to comply. These arguments are summarized at Section 7.2.2.1 of this Report.

7.4.2 Evaluation by the Panel

7.269. The issue before us is whether the European Union has demonstrated that there is a sufficiently close connection, in terms of nature, effects, and timing, between the Boeing CLEEN Agreement, on the one hand, and the aeronautics R&D measures that were subject to the DSB recommendations and rulings, on the other, such that the payments and access to facilities, equipment, and employees provided through the Boeing CLEEN Agreement can be considered to be within the scope of this compliance proceeding as an "undeclared" measure taken to comply.

7.270. We explain in paragraphs 7.66 through 7.75 of Section 7.2.2.2 of this Report our understanding of the close nexus text applied by panels and the Appellate Body in order to determine whether "undeclared" measures with a particularly close relationship to declared measures taken to comply, and to the DSB recommendations and rulings, are susceptible to review by a compliance panel.

7.271. There is no dispute that there are some connections between the Boeing CLEEN Agreement and at least some of the NASA aeronautics R&D measures at issue in the original proceeding. The European Union's position is that these connections satisfy the close nexus test, while the United States' is that the connections are superficial and inadequate to justify bringing the Boeing CLEEN Agreement within the scope of this proceeding.

7.272. The parties' arguments concerning the application of the separate elements of the close nexus test to the Boeing CLEEN Agreement and the particular NASA aeronautics R&D measures set forth the general range of possibilities in determining whether there are sufficiently close connections between these two sets of measures in terms of nature, effects, and timing.

⁴⁸⁴ European Union's second written submission, para. 121. ↩

⁴⁸⁵ European Union's response to Panel question No. 13, para. 87. ↩

⁴⁸⁶ European Union's first written submission, para. 218. ↩

⁴⁸⁷ European Union's response to the United States' request for preliminary rulings, dated 3 December 2012para. 87. ↩

⁴⁸⁸ European Union's response to Panel question No. 12, para. 85. ↩

⁴⁸⁹ European Union's second written submission, para. 121. ↩

⁴⁹⁰ European Union's response to Panel question No. 12, para. 89. ↩

⁴⁹¹ European Union's first written submission, para. 219. ↩

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7.273. On nature, the European Union says that the Boeing CLEEN Agreement continues the subject areas of research that the United States had originally subsidized under various NASA aeronautics R&D programmes and in a sense, represents the "next stage" of that subsidized research, i.e. subsidizing research related to commercialization and testing of the technologies developed from that earlier research. Although the government agency is no longer NASA but FAA, the involvement of NASA in the FAA CLEEN Program is further evidence of this continuity. The measures themselves have the same "joint venture" structure as the aeronautics R&D measures found to have caused adverse effects in the original proceeding. The United States says that the European Union's allegations are not sufficiently specific. Similarities in the goals of programmes or overlapping areas of research pursued by particular programmes are insufficient to satisfy the close nexus test. The measures themselves must be shown to be closely connected. According to the United States, this requires the European Union to demonstrate the links between the Boeing CLEEN Agreement and particular NASA procurement contracts and Space Act Agreements (and DOD assistance instruments), which it has not done. Moreover, NASA is not significantly involved in the FAA CLEEN Program and has no involvement in the Boeing CLEEN Agreement. Even if NASA were involved in the FAA CLEEN Program, this would not be sufficient to satisfy the close nexus test on nature. Finally, the cost sharing feature of the Boeing CLEEN Agreement is only relevant if it is possible to point to a specific aeronautics R&D measure from the original proceeding that covers the same research and technologies and employs cost sharing. It is insufficient to argue that the close nexus is established merely because some instruments such as DOD assistance instruments used cost sharing, in the absence of any other link.

7.274. On effects, the European Union argues that the FAA CLEEN Program has the same effects as the NASA and DOD aeronautics R&D programmes: contributing to Boeing developing technologies, being able to lower its prices and adverse effects on Airbus. The United States says that this is insufficient to demonstrate close nexus in terms of effects. The European Union should show how the Boeing CLEEN Agreement could potentially undermine any purported compliance by the United States, which the United States reminds the Panel, involves a reallocation of the intellectual property rights between NASA, DOD, and Boeing under the NASA procurement contracts and DOD assistance instruments.

7.275. The timing aspect does not appear to give rise to an issue.⁴⁹²

7.276. We begin our evaluation by recalling that, in the original proceeding, the panel found, inter alia, that the "payments" and "access to facilities, equipment and employees" provided by NASA to Boeing through the NASA procurement contracts and Space Act Agreements constituted specific subsidies to Boeing, that the effect of these subsidies was various forms of serious prejudice, within the meaning of Article 6.3 of the SCM Agreement, in the 200-300 seat LCA product market and thus, that these subsidies caused adverse effects to the European Union's interests, within the meaning of Article 5(c) of the SCM Agreement.⁴⁹³ This finding was upheld (albeit on the basis of a smaller selection of LCA sales campaigns in the 200-300 seat LCA product market).⁴⁹⁴

7.277. As we explain in Section 8.2.2.2.1, the European Union has directed its challenge to NASA procurement contracts, cooperative agreements, and Space Act Agreements funded through eight NASA aeronautics R&D programmes that were identified in the original proceeding, as well as NASA procurement contracts, cooperative agreements, and Space Act Agreements funded under additional NASA aeronautics R&D programmes that arose from a reorganization of NASA Aeronautics Research Mission Directorate (ARMD).

7.278. Of particular relevance to the Boeing CLEEN Agreement's links with the NASA aeronautics R&D measures at issue are NASA's Fundamental Aeronautics and Integrated Systems Research programmes. Fundamental Aeronautics is carried out through four projects, the largest of which is the Subsonic Fixed Wing Project.⁴⁹⁵ The Subsonic Fixed Wing Project develops tools, technologies, and concepts to enable transport aircraft to achieve significant improvements in emissions, noise,

⁴⁹² Ordinarily, timing would be expected to become an issue if the "undeclared" measure precedes the adoption of DSB recommendations and rulings (or even the panel request in the original proceeding), raising the potential that the complaining party is in reality using compliance proceedings to retroactively enlarge the scope of its original panel request. ↩

⁴⁹³ Panel Report, US – Large Civil Aircraft (2^nd complaint), paras. 7.1797 and 8.3. ↩

⁴⁹⁴ Appellate Body Report, US – Large Civil Aircraft (2^nd complaint), paras. 1350(d) (i) (4), (5), and (6). ↩

⁴⁹⁵ NASA Fundamental Aeronautics Budget Estimates for FY 2007-FY 2013, (Exhibit EU-40), FY 2013, p. AERO-20. ↩

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and performance, including fuel efficiency.⁴⁹⁶ The focus of the Subsonic Fixed Wing Project is currently the development and assessment of concepts and technologies that enable the "N+3 generation" of civil transport aircraft.⁴⁹⁷ Boeing's role in the Subsonic Fixed Wing Project has included three significant research efforts: Pultruded Rod Stitched Efficient Unitized Structure (PRSEUS) composite materials research; research related to a Blended Wing Body and Subsonic Ultra Green Aircraft Research and related advanced concepts research. The PRSEUS and Blended Wing Body research efforts were taken up by the ERA Project of the NASA Integrated Systems Research Program in FY 2010.

7.279. The NASA Integrated Systems Research Program was established in 2010 to take an integrated system-level approach to mature and integrate technologies in major vehicle systems and subsystems for accelerated transition to practical application.⁴⁹⁸ The goal of the Integrated Systems Research Program is to serve as a "technology transition bridge" between the more basic research conducted in NASA's other aeronautics R&D programmes and the higher levels of technological development needed by potential commercial users.⁴⁹⁹ Within the Integrated Systems Research Program, the ERA Project targets research into technologies and integrated aircraft systems for subsonic transport aircraft entering into service in 2025 or beyond (i.e. "N+2") to achieve the goals of reduced noise, emissions and fuel burn simultaneously.⁵⁰⁰ The ERA Project complements the N+3 generation subsonic research being undertaken in the Subsonic Fixed Wing Project under the Fundamental Aeronautics Program, focusing on more developed technologies for commercial application within a shorter period of time.⁵⁰¹ Phase I of the ERA Project ran from FY 2010 through to the end of FY 2012. Many of the Phase I projects were transitioned from the Fundamental Aeronautics Subsonic Fixed Wing Project, as technologies that are considered ready to advance to technology readiness level (TRL) 6 (the stage before a technology is turned over to industry for prototyping, commercialization, and certification).⁵⁰² In particular, Boeing's research work under the Blended Wing Body and PRSEUS projects was shifted to the ERA Project.⁵⁰³ As part of the ERA Project, NASA and Boeing also conduct research into noise, emissions, and efficiency-related technological challenges and develop specific technologies necessary to enable development of a full-sized, high-performance Blended Wing Body transport aircraft.⁵⁰⁴

7.280. We recall that the FAA CLEEN Program was created in conjunction with the ERA Project of NASA's Integrated Systems Research Program to "guid{e} coordinated efforts to bring to maturity new technologies to reduce fuel burn, emissions, and noise".⁵⁰⁵ In a statement to U.S. Congress, NASA Associate Administrator said:

To facilitate the transition of advanced ideas and technologies into the aircraft fleet, NASA is partnering with the Federal Aviation Administration's (FAA) Continuous Low Emissions, Energy and Noise (CLEEN) Program to guide efforts to mature technologies

⁴⁹⁶ R. del Rosario, R. Wahls, G. Follen, and N. Madavan, NASA, "Subsonic Fixed Wing Project", Presentation at the Technical Conference of the NASA fundamental Aeronautics Program, 15-17 March 2011, (Exhibit EU-92), pp. 4, 7, and 8. ↩

⁴⁹⁷ NASA Fundamental Aeronautics Budget Estimates for FY 2007-FY 2013, (Exhibit EU-40), FY 2013, p. AERO-21. ↩

⁴⁹⁸ NASA Integrated Systems Research Budget Estimates for FY 2010-FY 2013, (Exhibit EU-41), FY 2010, p. AERO-39. ↩

⁴⁹⁹ NASA, Research Opportunities in Aeronautics – 2010 (ROA-2010), NASA Research Announcement NNH10ZEA001N, (2 June 2010), (Exhibit EU-133), appendix D.2, p. D-1. ↩

⁵⁰⁰ NASA Integrated Systems Research Budget Estimates for FY 2010-FY 2013, (Exhibit EU-41), FY 2010, p. AERO-39. ↩

⁵⁰¹ ASA Integrated Systems Research Budget Estimates for FY 2010-FY 2013, (Exhibit 41), FY 2010, p. AERO-40. ↩

⁵⁰² F. Collier, NASA, "Overview of NASA's Environmentally Responsible Aviation (ERA) Project" Presentation at the 48th AIAA Aerospace Sciences Meeting, 4 January 2010, (Exhibit EU-154), p. 4. ↩

⁵⁰³ R. Coppinger, "Blended wing body is NASA's green focus", Flight International, 16 March 2010, (Exhibit EU-155). ↩

⁵⁰⁴ R. Coppinger, "Blended wing body is NASA's green focus", Flight International, 16 March 2010, (Exhibit EU-155). ↩

⁵⁰⁵ Executive Office of the President, National Science and Technology Council, National Aeronautics Research and Development Plan, (2 February 2010), (Exhibit EU-16), p. 11. ↩

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that have already shown promise to the point where they can be adopted by the current and future aircraft fleet.⁵⁰⁶

7.281. There appears to be a clear connection between the FAA CLEEN Program and the noise reduction and emissions reduction research carried out under the former NASA Advanced Subsonic Technology (AST) and Vehicle Systems programmes (which were carried over into specific projects under NASA's Fundamental Aeronautics Program and Integrated Systems Research Program). Those NASA programmes focus on research for application to the N+3 and N+2 generation of LCA, while the FAA CLEEN Program is focused closer to the commercialisation end of the R&D process, targeting technologies for application to the N+1 generation of LCA. We can see that in many senses, the FAA CLEEN Program represents a continuation of earlier stage R&D conducted under NASA aeronautics R&D programmes, as is further borne out by NASA's involvement in the FAA CLEEN Program.

7.282. However, the United States argues that the close nexus test focuses on the measures, which in this case comprise the Boeing CLEEN Agreement (not the FAA CLEEN Program more generally) and the NASA procurement contracts and Space Act Agreements as well as and DOD assistance instruments⁵⁰⁷ funded under the various NASA and DOD programmes, rather than the aeronautics R&D programmes under which they are funded.

7.283. The question whether a measure falls within the scope of a compliance proceeding on the basis of its close nexus to the measures the subject of DSB recommendations and rulings, or declared compliance measures, can only be answered against a careful consideration of the facts and legal context, which in the particular circumstances of this case, includes the aeronautics R&D programmes that fund the particular R&D instruments. While the challenged measure is the Boeing CLEEN Agreement, and not the FAA CLEEN Program in general, the Boeing CLEEN Agreement is funded under the FAA CLEEN Program. More generally, as is apparent from the approach taken by the panel in the original proceeding, the NASA and DOD aeronautics R&D programmes themselves play an important role in understanding the nature and operation of the procurement contracts, cooperative agreements, Space Act Agreements, and assistance instruments funded under those programmes. This is also the case with the FAA CLEEN Program in relation to the Boeing CLEEN Agreement. In addition, under the Boeing CLEEN Agreement, Boeing is responsible for the integrated management of the FAA CLEEN Program itself. Thus, we regard it as appropriate in this specific factual and legal context, to treat the links between the FAA CLEEN Program and the particular projects of NASA's Fundamental Aeronautics and Integrated Systems Research programmes as being highly relevant to our assessment of the links, in terms of nature and effects, between the Boeing CLEEN Agreement and the NASA procurement contracts and Space Act Agreements the subject of the DSB recommendations and rulings.

7.284. Under the Boeing CLEEN Agreement, Boeing is responsible for two categories of R&D activities as well as for the integrated management of the programme as a whole: (a) technology maturation through to the prototype development stage of: (i) wing adaptive trailing edges, (ii) ceramic matrix composite acoustic exhaust nozzles, and (iii) the use of alternative fuels; and (b) flight testing and assessment. In relation to its technology maturation R&D activities under the Boeing CLEEN Agreement, Boeing has acknowledged that the multiple adaptive trailing edge concepts it is studying, as well as technologies relating to the ceramic matrix composite acoustic exhaust nozzle, could be transitioned for use on new and derivative LCA models.⁵⁰⁸ Boeing was working on these technologies prior to the FAA CLEEN Program.⁵⁰⁹ Moreover, the wing adaptive trailing edges and ceramic matrix composite acoustic exhaust nozzle are technologies that were previously developed by NASA⁵¹⁰, while Boeing had also previously worked with Rolls-Royce and ATK on the ceramic matrix composite acoustic exhaust nozzle.⁵¹¹

⁵⁰⁶ Statement of J. Shin, NASA Associate Administrator for Aeronautics Research Mission Directorate, Hearing before the U.S House of Representatives Committee on Science, Subcommittee on Space and Aeronautics, 1 May 2008, (Exhibit EU-21), p. 7. (emphasis added) ↩

⁵⁰⁷ Including those measures as amended by the respective Patent Licence Agreements. ↩

⁵⁰⁸ Boeing, "Continuous Lower Energy, Emissions and Noise (CLEEN) Program Technologies Development – Boeing Program Update", Presentation at the CLEEN Consortium Public Session, 2 November 2011 (Boeing CLEEN Program Update), (Exhibit EU-258), p. 8. ↩

⁵⁰⁹ N. A. Hullings, "A CLEEN Future", Boeing Frontiers, May 2013, (Exhibit EU-1021), p. 27. ↩

⁵¹⁰ C. Wilsey and R. Stoker, "CLEEN Technologies Development, Boeing Program Overview", CLEEN Consortium Public Session, 27 October 2010 (formerly Exhibit US-13-154), (Exhibit EU-1019), p. 15 (indicating ↩

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7.285. The flight testing under the Boeing CLEEN Agreement is to be conducted by Boeing using its ecoDemonstrator programme.⁵¹² Boeing's ecoDemonstrator programme is a multi-year program of flight testing suites of environmental technologies which Boeing uses to test technologies additional to those it is required to test under the Boeing CLEEN Agreement.⁵¹³ Boeing describes the FAA CLEEN Program as the "foundational element & enabler of Boeing's ecoDemonstrator strategy" which leverages synergies with government programmes, industry partners, suppliers, and internally-funded development.⁵¹⁴ Adaptive trailing edge concepts were among the technologies included in the initial set of flight tests in August and September 2012.⁵¹⁵ The ceramic matrix composite acoustic exhaust nozzle was scheduled for testing in the 2013 ecoDemonstrator flight test, which will use a 787-800 from Boeing's test fleet.⁵¹⁶

7.286. Like the NASA procurement contracts and Space Act Agreements funded under the NASA aeronautics R&D programmes that were at issue in the original proceeding, the Boeing CLEEN Agreement involves funding by FAA of research activities undertaken by Boeing on a contract basis for activities directly relevant to LCA. There are some differences in the structure of the Boeing CLEEN Agreement on the one hand, and the NASA procurement contracts and Space Act Agreements: while both parties commit resources, the nature of those respective contributions differs somewhat from those under the NASA aeronautics R&D measures. Moreover, the parties dispute whether, in addition to providing funding, FAA also provides Boeing with access to FAA equipment, employees, and facilities.⁵¹⁷

7.287. In any case, the differences in the structure of the various measures do not detract from the closeness of the links that they share in other respects. Nor do we consider fatal to the existence of sufficiently close links between the measures the differences in the governmental agencies funding the respective measures. While FAA and NASA are different government agencies, they share overlapping objectives with respect to civil aviation. These commonalities are expressly recognized with respect to environmental and energy efficiency goals.⁵¹⁸ In any case, we note that a close nexus has been found in instances where the respective measures have involved different levels of government⁵¹⁹, so we see no reason why the fact that FAA funds the Boeing CLEEN Agreement and NASA funds the NASA aeronautics R&D measures should be fatal to the existence of a sufficiently close link in terms of nature between those two sets of measures.

7.288. While the FAA CLEEN Program was established in 2009 and the Boeing CLEEN Agreement was awarded in 2010, the fact that the Boeing CLEEN Agreement precedes the adoption of the DSB recommendations and rulings does not mean that the Boeing CLEEN Agreement cannot be considered relevant to the question of the United States' compliance. The original proceeding was under way at the time that the FAA CLEEN Program was established and Boeing began its work. The FAA CLEEN Program complements certain of the NASA aeronautics R&D measures the subject

NASA research in 2008 and 2010); M. C. Halbig, M. H. Jaskowiak, J. D. Kiser, and D. Zhu, "Evaluation of Ceramic Matrix Composite Technology for Aircraft Turbine Engine Applications", NASA Glenn Research Center, 41^st AIAA Aerospace Sciences Meeting, 7 January 2013, (Exhibit EU-1020), p. 10; and NASA Dryden Fact Sheet "F/A-18 Active Aeroelastic Wing", 9 December 2009, (Exhibit EU-1281).

⁵¹¹ M. C. Halbig, M. H. Jaskowiak, J. D. Kiser, and D. Zhu, "Evaluation of Ceramic Matrix Composite Technology for Aircraft Turbine Engine Applications", NASA Glenn Research Center, 41^st AIAA Aerospace Sciences Meeting, 7 January 2013, (Exhibit EU-1020), p. 10. ↩

⁵¹² Boeing CLEEN Program Update, (Exhibit EU-258), p. 22; and Boeing CLEEN Agreement, (Exhibit EU-17), section C.2, p. 10. ↩

⁵¹³ Boeing, Backgrounder, 2012 ecoDemonstrator Program Shows Boeing's Long Commitment to Environmentally Progressive Technology, (June 2012), (Exhibit EU-261), pp. 1 and 2. ↩

⁵¹⁴ Boeing CLEEN Program Update, (Exhibit EU-258), p. 22. ↩

⁵¹⁵ FAA Fact Sheet, "Continuous Lower Energy, Emissions, and Noise (CLEEN) Program", 18 September 2012, (Exhibit EU-18). ↩

⁵¹⁶ FAA Fact Sheet, "Continuous Lower Energy, Emissions, and Noise (CLEEN) Program", 18 September 2012, (Exhibit EU-18); and Boeing CLEEN Program Update, (Exhibit EU-258), p. 26. ↩

⁵¹⁷ Our conclusion regarding this issue is set forth in paras. 8.516 to 8.522 below. ↩

⁵¹⁸ R. Jefferies, FAA, "CLEEN (Continuous Lower Energy, Emissions and Noise) Program Technologies Development" Presentation at the NASA ERA Bidder's Conference, 19 February 2010, (Exhibit EU-253), pp. 4 and 8; Executive Office of the President, National Science and Technology Council, National Aeronautics Research and Development Plan, (December 2011), (Exhibit EU-254), pp. 27-30 and 50-53; and J. Wolfe, NASA, "Aeronautics Research Mission Directorate Update with Emphasis on Integrated Systems Research", Presentation at the 48th AIAA Aerospace Sciences Meeting, 4 January 2010, (Exhibit EU-255), p. 10. ↩

⁵¹⁹ For example, in Australia – Salmon (Article 21.5 – Canada), the "undeclared" compliance measure was an import ban adopted by the Australian State of Tasmania while the measure subject to the DSB recommendations and rulings had been a national quarantine regulation. ↩

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of the DSB recommendations and rulings in the original proceeding and there is a close degree of technological continuity between research commissioned under the Boeing CLEEN Agreement and under certain of the NASA procurement contracts and Space Act Agreements.

7.289. Indeed, the technological continuities between the research carried out under the FAA CLEEN Program (including by Boeing in its management role under the FAA CLEEN Program) and the research performed by Boeing under certain of the NASA aeronautics R&D measures at issue in the original proceeding mean that, potentially at least, it would be possible for the United States to have purported to comply with the DSB recommendations and rulings as regards the NASA procurement contracts and Space Act Agreements, while continuing to assist Boeing in the commercialization of the more mature technologies arising from those efforts through the Boeing CLEEN Agreement. We therefore consider the links in terms of the effects of the measures to be such that it would be difficult for this Panel to meaningfully assess whether there has been compliance in respect of the NASA procurement contracts and Space Act Agreements without also considering the Boeing CLEEN Agreement.⁵²⁰

7.290. The Panel is therefore satisfied that there are sufficiently close links in terms of nature, effects, and timing, between the Boeing CLEEN Agreement and the NASA procurement contracts and Space Act Agreements the subject of the DSB recommendations and rulings in the original proceeding to warrant the conclusion that the payments and access to facilities, equipment, and employees provided to Boeing through the Boeing CLEEN Agreement are within the scope of this compliance proceeding.

7.291. We therefore dismiss the United States' request for a ruling that the FAA aeronautics R&D measure is outside the scope of this compliance proceeding and conclude that the Boeing CLEEN Agreement is within the scope of this proceeding.

7.5 South Carolina measures

7.292. In its panel request, the European Union claims that the State of South Carolina and its political subdivisions maintain various specific subsidies for Boeing, related to the production of LCA and LCA components at facilities in North Charleston, South Carolina, through two packages of investment incentives, namely: (a) "Project Gemini" measures; and (b) "Project Emerald" measures.⁵²¹

7.293. The United States objects to the inclusion of the South Carolina measures within the scope of this proceeding. It first raised this objection regarding the Project Gemini and Project Emerald measures in its request for preliminary rulings made prior to the European Union's first written submission, and has maintained that request in subsequent submissions.⁵²² It responded to the European Union's inclusion of claims concerning the Phase II measures in the European Union's second written submission, requesting the Panel to reject the European Union's claims concerning the Phase II measures on the basis that the European Union has failed to demonstrate that such claims are "properly within this compliance Panel's terms of reference".⁵²³

7.294. The Project Gemini measures are the package of financial incentives offered by the State of South Carolina in 2009, allegedly in order to induce Boeing to locate its second 787 final assembly and delivery facility adjacent to the Vought-Global Aeronautica 787 fuselage fabrication and integration complex at Charleston International Airport. The European Union's panel request describes the following eight measures that it challenges as part of the Project Gemini package⁵²⁴:

⁵²⁰ We note that our analysis of the links between the measures in terms of their effects is based on an examination of how the FAA aeronautics R&D measure operates and its potential effects in terms of advancing commercial application of technologies to LCA rather than its potential to cause adverse effects, within the meaning of Articles 5(c) and 6.3 of the SCM Agreement. To focus on the latter at this preliminary stage would be to confuse a preliminary scope issue with the substantive question of whether the measures are inconsistent with Articles 5(c) and 6.3 of the SCM Agreement. ↩

⁵²¹ European Union's request for the establishment of a panel, para. 23. ↩

⁵²² United States' request for preliminary rulings, dated 13 November 2012, paras. 23-35; reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, paras. 65-71; first written submission, paras. 69-71; and second written submission, paras. 85-92. ↩

⁵²³ United States' second written submission, paras. 619 and 620. ↩

⁵²⁴ European Union's request for the establishment of a panel, para. 24. ↩

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1. Provision of a long-term lease of government-owned land at preferential rates, pursuant to a Ground Lease Agreement between the Charleston County Aviation Authority and South Carolina Public Railways, as amended, and a Ground Sublease between South Carolina Public Railways and Boeing, as amended.
2. Provision of facilities and infrastructure at the Charleston International Airport site, as provided for in the Project Gemini Agreement between Boeing and the State of South Carolina, dated 1 January 2010, funded through state general obligation bonds issued pursuant to Title 11, chapter 41 of the South Carolina Code, as amended by section 5 of H3130, Act No. 124, 2009 S.C. Acts 1092 (H3130), and South Carolina Code § 55-11-520, at no cost to Boeing.
3. Property tax reductions under a fee-in-lieu-of taxes agreement between Charleston County and Boeing dated 1 December 2009, as authorized by Title 12, chapter 44 of the South Carolina Code, including the provision of special source credits as provided for in such agreement, and authorized by South Carolina Code § 4-1-175.⁵²⁵
4. Property tax exemption for Boeing's Large Cargo Freighters (LCFs) pursuant to South Carolina Code §12-37-220(B)(33), as amended by section 1 of H3482, Act No. 45, 2009 S.C. Acts 763.
5. Reductions of state corporate income taxes through an income allocation and apportionment agreement, entered into pursuant to South Carolina Code § 12-6-2320(b), as amended by section 1 of H3130.
6. Provision of corporate income tax credits, as provided for in South Carolina Code § 12-6-3360(E)(1), by virtue of designating the Boeing site in North Charleston as part of a business/industrial park jointly established and developed by Charleston County and Colleton County, South Carolina.
7. Exemption from state sales and use taxes for aircraft fuel, computer equipment, and construction materials, established by sections 2, 3, and 4 of H3130, respectively, and codified at South Carolina Code § 12-36-2120(9)(e) and (f), (65)(b), and (67).
8. Establishment of workforce recruitment, training, and development programmes for Boeing.

7.295. The Project Emerald measures comprise the package of financial incentives offered by the State of South Carolina to Vought in 2006 in connection with the 787 fuselage fabrication and integration complex at a site at Charleston International Airport. The European Union's panel request identifies the following four measures as part of the Project Emerald package⁵²⁶:

1. Provision of a long-term lease of government-owned land at below-market rates, pursuant to a Ground Lease Agreement between Charleston County Aviation Authority and South Carolina Public Railways, as amended, and a ground sublease between South Carolina Public Railways and Boeing, as amended.
2. Provision of facilities and infrastructure at the Charleston International Airport site, as provided for in the Project Emerald Confidential Site Development Agreement, funded through state general obligation bonds issued pursuant to Title 11, chapter 41 of the South Carolina Code, at no cost to Boeing.
3. Property tax reductions under a fee-in-lieu-of taxes Agreement between Charleston County and Vought Aircraft Industries, Global Aeronautica, and Boeing, dated 19 December 2006, and assigned to Boeing on or about 10 February 2010, as authorized

⁵²⁵ The European Union has subsequently advised that the above-referenced FILOT Agreement was a draft, which had been provided by Charleston County. The final FILOT Agreement is dated 1 December 2010. It is this final agreement to which the European Union refers in its arguments. (European Union's first written submission, para. 550 and fn 1309). We refer to this instrument as the Boeing FILOT Agreement, see para. 8.857 below. ↩

⁵²⁶ European Union's request for the establishment of panel, para. 25. ↩

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by Title 12, chapter 44 of the South Carolina Code, and provided for in the Project Emerald Confidential Site Development Agreement, including the provision of infrastructure credits as provided for in such agreement, and authorized by South Carolina Code § 12-44-70.

4. Provision of corporate income tax credits, as provided for in South Carolina Code § 12-6-3360(E)(1), by virtue of designating the Project Emerald site at Charleston International Airport as part of a business/industrial park jointly established and developed by Charleston County and Colleton County, South Carolina.⁵²⁷

7.296. In its second written submission, the European Union additionally challenges so-called Phase II measures which it alleges are further incentives intended to support Boeing's ongoing and planned expansions of its LCA manufacturing operations in South Carolina.⁵²⁸ These Phase II measures are identified in the European Union's second written submission as⁵²⁹:

1. Sale of at least 320 acres of government property adjacent to Boeing's Project Site at less than market value.
2. Funding the acquisition and preparation of land for Boeing with the proceeds of USD 120 million in state general obligation economic development bonds.
3. Amendment of the Boeing FILOT Agreement to provide for the reduction or elimination of Boeing's property taxes related to its Phase II expansion.⁵³⁰

7.297. We first consider the United States' objections to the inclusion of claims regarding the Project Gemini and Project Emerald measures within the scope of this proceeding, before considering whether the Phase II measures are properly before this Panel.

7.5.1 Whether the Project Gemini and Project Emerald measures are outside the scope of this proceeding.

7.5.1.1 Main arguments of the parties and third parties

7.298. The United States argues that the Project Gemini and Project Emerald measures are outside the scope of this compliance proceeding because those measures were not challenged in the original proceeding, and are not the subject of the DSB recommendations and rulings. They are not declared measures taken to comply, nor can they be considered "undeclared" measures taken to comply, because the European Union has not demonstrated that they meet the requirements of the close nexus test.⁵³¹

7.299. The United States argues that the application of the close nexus test for determining whether a measure can be considered an "undeclared" measure taken to comply, and thus within the scope of a compliance proceeding, requires careful consideration of the measures in terms of

⁵²⁷ The Project Emerald and Project Gemini measures are described in greater detail in Section 8.2.8 of this Report. ↩

⁵²⁸ European Union's second written submission, para. 742. Boeing has announced the following plans for expansion of its South Carolina operations: (a) establishing a "Dreamlifter Operations Center" at its Charleston International Airport facility; (b) location of the design and manufacturing of the composite inlets and nacelle linings for the 737 MAX; and (c) creating a new IT center in North Charleston as part of its plans to consolidated its IT operations. The European Union says that industry analysts expect this planned expansion will pave the way for South Carolina to compete with Washington and other states for the 777X final assembly line, as well as for production of the 777X composite wings. (European Union's second written submission, para. 745). ↩

⁵²⁹ European Union's second written submission, para. 742. The European Union indicated at the meeting with the Panel in October 2013 that it had obtained directly from the local government a copy of the precise agreement evidencing the existence of the Phase II measures. (European Union's opening statement at the meeting of the Panel, para. 43 (referring to First Amendment to Fee Agreement by and between Charleston county, South Carolina and the Boeing Company (1 May 2013), (Exhibit EU-1264))). ↩

⁵³⁰ The Boeing FILOT Agreement is the instrument referred to in para. 7.294(c) above. ↩

⁵³¹ United States' request for preliminary rulings, dated 13 November 2012, paras. 23-35; first written submission, para. 71; and second written submission, para. 620 (with a respect to the Phase II measures). ↩

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their nature, effects, and timing, with the measures subject to the DSB recommendations and rulings.

7.300. According to the United States, the nature of the eight Project Gemini measures does not resemble the nature of the measures covered by the DSB recommendations and rulings.⁵³² While the Washington State B&O tax rate reduction (the only Washington State tax measure that was subject to the DSB recommendations and rulings) was part of the "Project Olympus" incentive package offered by the State of Washington, the United States argues that Project Olympus was not itself found to be WTO-inconsistent. The United States considers that it is insufficient therefore, for the European Union to allege a close nexus between the Project Gemini and Project Emerald measures, and the Washington State B&O tax rate reduction, simply on the basis that the measures in question were part of incentive packages.⁵³³ The United States argues that, to the extent that the European Union invokes the "Washington subsidies" in its close nexus analysis, the European Union must show a close nexus to the Washington State B&O tax rate reduction in particular, not some broader package of subsidies for which there were no DSB recommendations and rulings.⁵³⁴

7.301. The United States points to the following specific differences between certain individual components of the Project Gemini incentive package and the Washington State B&O tax rate reduction in terms of their structure, design, and operation:

1. an alleged exemption from property tax administered by South Carolina on property in that state shares almost no features with a reduction in a B&O tax;
2. the Income Allocation and Apportionment Agreement concerns the sourcing and apportionment of corporate income taxes, while the B&O tax in the State of Washington is not a corporate income tax; and
3. the value of the corporate income tax credits for job creation (job tax credits) available by virtue of designating the Boeing site in North Charleston as part of a multi-county industrial park (MCIP) increases with the number of jobs created, while the B&O tax rate reduction does not have this feature.⁵³⁵

7.302. In addition to the above differences in the nature of the Project Gemini measures that are tax measures, as compared with the Washington State B&O tax rate reduction, the United States argues that the European Union does not even attempt to argue a close nexus in terms of nature regarding the Project Gemini (or Project Emerald) measures that are non-tax related.⁵³⁶ The United States points to the fact that five of the 12 Project Gemini and Project Emerald measures have nothing to do with taxes: two measures concern a long-term land lease, two measures concern provisions of facilities and infrastructure, and one concerns the establishment of workforce, recruitment, training, and development programmes.

7.303. The United States disputes also the European Union's argument that the Project Gemini Income Allocation and Apportionment Agreement has a close nexus with the FSC/ETI subsidies the subject of the DSB recommendations and rulings. For the Panel to accept the European Union's argument that the Income Allocation and Apportionment Agreement "substantially replicates the prohibited FSC/ETI subsidy on a state level", it would have to resolve the European Union's claims on the merits as to how the Income Allocation and Apportionment Agreement operates. The determination of whether a measure is within the scope of the proceeding cannot depend on the

⁵³² United States' first written submission, para. 577. ↩

⁵³³ United States' opening statement at the meeting of the Panel, para. 73. ↩

⁵³⁴ United States' reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 50. ↩

⁵³⁵ United States' first written submission, para. 577. ↩

⁵³⁶ United States' reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 51. The United States also argues that a sufficiently close connection between the South Carolina measures and the Washington State B&O tax rate reduction cannot be established simply by describing the South Carolina measures as involving "tax incentives". The generic label of "tax breaks" merely distinguishes one particular method of transmitting funds from others, such as a provision of grants or loans, rather than the conditions under which the alleged subsidy is paid out and the incentives it generates for the recipient. (United States' reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 52). ↩

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outcome of the substantive analysis of that measure, rather it should be a consequence of the design and nature of the measures at issue. The European Union has not provided any analysis in this regard.⁵³⁷

7.304. Furthermore, the granting authority for the Project Gemini (and Project Emerald) measures is different from, and independent of, any of the granting authorities responsible for the measures at issue in the original proceeding. Indeed, the United States asserts that every past application of the close nexus test has involved measures with overlapping geographical scope, which is another aspect of the nature and effects of a measure. By contrast, neither the Project Gemini nor Project Emerald measures geographically overlap in any way with the Washington State measures.⁵³⁸

7.305. As to the alleged similarities in effects of the Project Gemini measures and the Washington State tax measures, the United States considers purely speculative and hypothetical the European Union's arguments that if South Carolina had not incentivized Boeing to locate its second 787 production line there, production of the 787 would have been located in Washington and would have resulted in increased Washington State subsidies.⁵³⁹ Many factors influenced Boeing's decision to establish a second 787 assembly line in South Carolina, including the fact that it enabled Boeing to capture logistical efficiencies as a result of its proximity to the Global Aeronautica fuselage fabrication and integration site and added geographical diversity to Boeing's operations, as well as political support from a key state.⁵⁴⁰ According to the United States, the European Union's legal position boils down to arguing that any subsidy to Boeing, regardless of its form or nature, would be a "measure taken to comply" for purposes of this proceeding.⁵⁴¹

7.306. As regards timing, the United States argues that there similarly is no nexus between the Project Gemini measures and the measures the subject of the DSB recommendations and rulings . According to the United States, Project Gemini began after the original proceedings were initiated, but before the DSB recommendations and rulings were adopted. The Project Gemini measures cannot therefore be considered a "measure taken to comply".⁵⁴²

7.307. With respect to Project Emerald, the United States rejects the European Union's argument that the Project Emerald measures are "closely connected" in terms of nature to the tax subsidies associated with the tax abatements related to the City of Wichita IRBs, as both are subsidies for Boeing's LCA-component manufacturing facilities and consist primarily of property tax concessions related to such facilities.⁵⁴³ First, the largest component of Project Emerald (as alleged by the European Union) is the provision of facilities and infrastructure, which is clearly not a "tax break" related to LCA component manufacturing facilities.⁵⁴⁴ In addition, the European Union fails to explain how the Project Emerald FILOT agreement, the Project Site Lease, the provision of facilities and infrastructure or the provision of income tax credits for job creation bear a close nexus in terms of nature to property and sales tax abatements provided through the issuance of IRBs. These are different types of policy tools used by different granting authorities at different times in non-overlapping geographical areas.⁵⁴⁵

7.308. Moreover, there is no nexus in terms of timing between the Project Emerald measures and the DSB recommendations and rulings in the original proceeding, as the Project Emerald measures

⁵³⁷ United States' opening statement at the meeting of the Panel, para. 80 (quoting European Union's first written submission, para. 735). ↩

⁵³⁸ United States' opening statement at the meeting of the Panel, para. 74. ↩

⁵³⁹ United States' reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 54; first written submission, para. 542. ↩

⁵⁴⁰ United States' second written submission, para. 91 (referring to Boeing Board of Directors, "Gemini Update", Presentation, 19 October 2009, (Exhibit USA-323), p. 6). The United States also asserts that confidential information confirms that the Project Gemini incentives did not drive the Boeing Board's decision to locate its second 787 assembly line in South Carolina. (United States' opening statement at the meeting of the Panel, para. 76). ↩

⁵⁴¹ United States' first written submission, para. 580; second written submission, para. 89; and opening statement at the meeting of the Panel, para. 76. ↩

⁵⁴² United States' first written submission, para. 579. ↩

⁵⁴³ See European Union's first written submission, para. 735. ↩

⁵⁴⁴ United States' first written submission, para. 543. ↩

⁵⁴⁵ United States' first written submission, para. 544. ↩

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date from 2004, when South Carolina designed the Project Emerald incentive package for Vought and Alenia, well before the European Communities' panel request in the original proceeding.⁵⁴⁶

7.309. More generally, the United States argues that to find that the Project Gemini and Project Emerald measures satisfy the close nexus test in this proceeding would run counter to the application of the close nexus test in prior jurisprudence in the following respects:

1. Prior cases have required similarities between the design and architecture of the measure at issue and the measure in the original dispute. The European Union has not attempted to show such similarity on a measure-by-measure basis. Rather, the European Union's arguments rely on assertions that the South Carolina measures are part of incentive packages (Project Gemini and Project Emerald), and that the Washington State B&O tax rate reduction was part of the Project Olympus package, as evidence of a close nexus. However, "Project Olympus" was not found to be a WTO-inconsistent measure in the original proceeding and in any case, "coming in packages" is not enough of a resemblance to warrant a finding of close nexus.⁵⁴⁷
2. Second, prior applications of the close nexus test have involved measures with overlapping geographical scope (another aspect of the nature and effects of a measure). Here, the measures have completely non-overlapping geographical scope.⁵⁴⁸
3. Third, prior applications of the close nexus test have required commonality in terms of effects. Here, the European Union's effects argument is based on alleged competition between the states and a supposition that, if South Carolina had not provided the Project Gemini package to Boeing in 2009, Boeing would have located the second 787 assembly line in Washington State, leading to a higher value of Washington State subsidies. The South Carolina measures did not drive the location decision.⁵⁴⁹

7.310. The European Union argues that its claims concerning the Project Gemini and Project Emerald measures are within the scope of this proceeding on the basis of the "close connection" between these measures and the Washington, Kansas, and FSC/ETI subsidies at issue before the original panel.⁵⁵⁰

7.311. The European Union argues that the Project Gemini and Project Emerald measures are essentially two integrated packages of incentives for Boeing's 787 production-related facilities and as such, should be considered together for the purposes of the scope analysis.⁵⁵¹ In this regard, the European Union explains:

1. the Project Site Lease is a component of both the Project Gemini and Project Emerald incentive packages;
2. the bond-funded facilities and infrastructure for both Project Gemini and Project Emerald support both facilities;
3. the sales and use tax exemptions benefit operations at both facilities;
4. the Charleston-Colleton MCIP includes both facilities; and

⁵⁴⁶ The United States notes that the European Commission was notified of the acquisition of the interests of Vought and Alenia in 2009 through a merger notification and approved the transaction. (See United States' first written submission, para. 537 (referring to Commission of the European Communities, Merger Procedure, Case No. COMP/M.5151-Boeing/Alenia NA/JV (3 June 2008), (Exhibit USA-203))). ↩

⁵⁴⁷ United States' opening statement at the meeting of the Panel, para. 73. ↩

⁵⁴⁸ United States' opening statement at the meeting of the Panel, paras. 74 and 75. ↩

⁵⁴⁹ United States' second written submission, paras. 91 and 92. The United States argues that, in any case, the European Union's argument does not justify the inclusion of the Project Emerald measures or the Phase II measures within the scope of this proceeding. (United States' opening statement at the meeting of the Panel, para. 76). ↩

⁵⁵⁰ European Union's first written submission, para. 734; response to the United States' request for preliminary rulings, dated 23 November 2012, paras. 69-73; and supplemental submission on the United States' request for preliminary rulings, para. 27. ↩

⁵⁵¹ European Union's second written submission, para. 151. ↩

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5. the Boeing FILOT Agreement⁵⁵² and Emerald FILOT Agreement⁵⁵³ cover property at the same site, permitting Boeing to shift property between the two fee-in-lieu-of taxes arrangements.⁵⁵⁴

7.312. The European Union considers that the Project Gemini measures, like Washington State's "Project Olympus" measures in the original proceeding, represent the outcome of a competition between states as to the location of Boeing's 787 final assembly line. These measures are "effectively substitutes" for the Washington State subsidies in the sense that, if not for the South Carolina measures, Boeing's second final assembly line for the 787 would have been located in Washington State and Boeing would currently be receiving greater subsidies in the State of Washington. For example, the Washington State B&O tax rate reduction reduces taxes that apply to every aircraft produced in Washington State. Each 787 produced in South Carolina rather than Washington State thus reduces the amount of the B&O tax rate subsidy that Boeing would otherwise receive.⁵⁵⁵ Moreover, as the Project Emerald measures were integral to attracting the second 787 final assembly line to South Carolina, these too are effectively substitutes for Washington State subsidies.⁵⁵⁶ The European Union therefore argues that the Project Gemini and Project Emerald measures undermine the United States' compliance with the DSB recommendations and rulings.⁵⁵⁷

7.313. As to the similarities in nature between the Project Gemini and Project Emerald measures and the DSB recommendations and rulings, the European Union argues:

1. The Project Gemini and Project Emerald measures are similar in nature to the "Washington State subsidies", described by the original panel and Appellate Body as a "package of tax incentives" relating to "retaining and attracting the aerospace industry to Washington State" and "designed to lure Boeing to establish its new production facilities for the 787 in the State of Washington".⁵⁵⁸
2. The Project Gemini and Project Emerald measures, and the "Washington State subsidies" are packages that include: (i) tax breaks; (ii) provided to Boeing; (iii) for the 787; (iv) related to the location of production facilities.⁵⁵⁹
3. The reduction of income taxes through the Project Gemini Income Allocation and Apportionment Agreement is similar in nature to the tax exemptions under FSC/ETI subsidies as both are methods of excluding export sales from Boeing's taxable income, with the South Carolina measure reducing Boeing's state income taxes in proportion to Boeing's South Carolina foreign sales, just as the FSC/ETI subsidies reduced Boeing's federal income taxes based on export sales.⁵⁶⁰
4. The Project Emerald measures are closely connected to the Wichita Kansas IRBs that were found to be subsidies that caused adverse effects in the original proceeding as both are subsidies for Boeing's LCA-component manufacturing facilities and consist primarily of property tax breaks related to such facilities.⁵⁶¹

7.314. On the similarities in effects between the Project Gemini and Project Emerald measures and the DSB recommendations and rulings, the European Union argues that the Project Gemini and Project Emerald measures, as "substitutes and supplements" for subsidies subject to the DSB

⁵⁵² The Boeing FILOT Agreement is the instrument referred to in para. 7.294(c) above. ↩

⁵⁵³ The Project Emerald FILOT Agreement is the instrument referred to in para. 7.295(c) above. ↩

⁵⁵⁴ European Union's second written submission, para. 152. ↩

⁵⁵⁵ European Union's supplemental submission on the United States' request for preliminary rulings, paras. 30-32; first written submission, para. 735 and fn 1607; and second written submission, para. 148. ↩

⁵⁵⁶ European Union's second written submission, para. 152. ↩

⁵⁵⁷ European Union's first written submission, para. 735. ↩

⁵⁵⁸ European Union's response to the United States' request for preliminary rulings, dated 23 November 2012, para. 70 (quoting Panel Report, US – Large Civil Aircraft (2^nd complaint), paras. 7.41 and 7.45). ↩

⁵⁵⁹ European Union's response to the United States' request for preliminary rulings, dated 23 November 2012, para. 71. ↩

⁵⁶⁰ European Union's response to the United States' request for preliminary rulings, dated 23 November 2012, para. 73. ↩

⁵⁶¹ European Union's first written submission, para. 735. ↩

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recommendations and rulings, effectively negate or undermine purported U.S. compliance.⁵⁶² If the United States were allowed to shift subsidies for Boeing from one state to the next and evade review by a compliance panel, the disciplines of the SCM Agreement would be rendered almost meaningless as applied to WTO Members with an internal federal structure.⁵⁶³

7.315. As to the timing element of the close nexus test, the European Union notes that the Project Gemini and Project Emerald measures were not provided to Boeing until after the establishment of the original panel on 17 February 2006, and all of the European Union's claims relate to subsidies for Boeing that began at the earliest in the latter half of 2009.⁵⁶⁴

7.316. Certain of the third parties (Brazil, Canada, and Japan) make general arguments as to the proper application of the close nexus test to determine when so called "new measures" may be considered within the scope of a compliance proceeding as "undeclared" measures taken to comply. These arguments are summarized in Section 7.2.2.1 of this Report.

7.5.1.2 Evaluation by the Panel

7.317. The question before us is whether the Project Gemini and Project Emerald measures are within the scope of this compliance proceeding, despite the fact that these measures were not challenged in the original proceeding (and therefore were not subject to the DSB recommendations and rulings) and are not declared measures taken to comply by the United States. The parties generally agree that, in order to be within the scope of this proceeding, the Project Gemini and Project Emerald measures must be demonstrated to be "undeclared" measures taken to comply, on the basis of their "particularly close relationship" to measures that were the subject of the DSB recommendations and rulings, or to the United States' declared compliance actions.

7.318. We explain in paragraphs 7.66 through 7.75 of Section 7.2.2.2 of this Report our understanding of the close nexus test applied by panels and the Appellate Body in order to determine whether "undeclared" measures with a particularly close relationship to declared measures taken to comply, and to DSB recommendations and rulings, are susceptible to review by a compliance panel. The parties disagree in several respects as to how the Panel should determine whether such a particularly close relationship exists in the particular context of the South Carolina measures. One difference concerns the original measures against which the South Carolina measures are to be compared in conducting the close nexus analysis. More specifically, the parties dispute whether the "baseline" measures are necessarily always confined to the measures subject to the DSB recommendations and rulings and measures that have been declared by the responding party as being measures taken to comply, or can also cover other original measures that were unsuccessfully challenged in the original proceeding.

7.319. The European Union in many places throughout its submissions argues that the Project Gemini and Project Emerald measures have a close nexus to the "Washington State subsidies at issue before the original panel", when the only subsidy provided by the State of Washington that was found to have caused adverse effects by the conclusion of the appeal process was the Washington State B&O tax rate reduction. The United States thus considers that the "baseline" measures for purposes of the close nexus inquiry are those that were subject to the DSB recommendations and rulings in the original proceeding, or the measures that the responding party declares are the measures it has taken to comply; which in this case is the Washington State B&O tax rate reduction (rather than all of the Washington State measures that were challenged in the original proceeding as part of the Project Olympus package), along with the FSC/ETI subsidies and the tax abatements in connection with the City of Wichita IRBs.

7.320. The basic function of a panel in a compliance proceeding is to determine whether a responding party has complied with the DSB recommendations and rulings in the original proceeding. The close nexus test developed as a means for panels to assess which measures,

⁵⁶² European Union's response to the United States' request for preliminary rulings, dated 23 November 2012, para. 77. ↩

⁵⁶³ European Union's response to the United States' request for preliminary rulings, dated 23 November 2012, para. 78; supplemental submission on the United States' request for preliminary rulings, para. 32. ↩

⁵⁶⁴ European Union's response to the United States' request for preliminary rulings, dated 23 November 2012, para. 80. ↩

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beyond those the subject of the DSB recommendations and rulings, and any measures explicitly adopted by the responding party in purported compliance with those recommendations and rulings, a compliance panel should consider in making its determination under Article 21.5 of the DSU. As we have explained in the context of our ruling that the JCATI measure is outside the scope of this proceeding, the fundamental issue for a panel in applying the close nexus test is whether it is possible to meaningfully assess whether a responding party has complied with the DSB recommendations and rulings without also considering the "undeclared" measures as part of that determination.⁵⁶⁵

7.321. In contrast to previous cases involving the application of the close nexus test, there remained, at the conclusion of the original proceedings in this case, a number of measures in respect of which there were no findings of WTO-inconsistency or WTO-consistency, including with respect to the Washington State measures that were part of the Project Olympus package (other than the Washington State B&O tax rate reduction). In Section 7.2 of this Report, we rule that those three other Washington State tax measures enacted under HB 2294, as original Washington tax measures⁵⁶⁶, are within the scope of this proceeding.⁵⁶⁷ Given that there were no definitive findings of the WTO-consistency of these measures at the conclusion of the original proceeding, and bearing in mind that the Washington tax measures are within the scope of this compliance proceeding, we have concluded that it is appropriate to undertake the close nexus analysis on the basis of a consideration of the links between the Project Gemini and Project Emerald measures and the Washington State tax measures enacted under HB 2294, that were challenged in the original proceeding, including those for which there was no definitive resolution of their WTO-consistency at the conclusion of that process. In other words, we will consider whether the Project Gemini and Project Emerald measures bear a sufficiently close nexus, in terms of their nature, effects, and timing, not just to the Washington State B&O tax rate reduction, which was subject to the DSB recommendations and rulings, but also to the three other Washington State tax measures enacted under HB 2294 that were at issue in the original proceeding and that we have elsewhere found to be within the scope of this compliance proceeding.

7.322. The other difference of view concerns the types of commonalities or links that demonstrate a close nexus in terms of nature. The parties disagree as to the significance of the legal form of the various measures and the relevance of their connection to other measures (e.g. as part of an incentive package). It is difficult to say in the abstract which aspects of a measure may be relevant to demonstrating a sufficiently close link in terms of "nature" to the measures subject to the DSB recommendations and rulings, or to other original measures, for purposes of conducting a close nexus analysis. The relevance or otherwise of certain aspects of the measures depends very much on the circumstances of the case. For example, in a dispute involving a quarantine measure found to be WTO-inconsistent, the fact that an "undeclared" measure is also a quarantine measure covering the same products (or subset of products), or otherwise operating in the same manner as the quarantine measure the subject of the DSB recommendations and rulings, will clearly be an important and relevant element of a panel's assessment of the closeness of the links, in terms of nature, between the "undeclared" measure and the original measure.

7.323. On the other hand, it is not obvious that, in a dispute involving subsidies to a particular recipient in respect of a number of that recipient's products, the "type" of subsidy should be determinative in demonstrating whether any "undeclared" measures are within the scope of the compliance proceeding. When determining whether a compliance panel could meaningfully assess whether the responding party has complied with the DSB recommendations and rulings under Article 7.8 of the SCM Agreement, without also considering the "undeclared" measure as part of that determination, the fact that the "undeclared" measure is a similar type of subsidy (e.g. a tax concession) may not be especially informative. That said, we acknowledge that the close nexus test in most cases would require more than that an "undeclared" measure is alleged to subsidize the same recipient. As we explain in our discussion of the jurisprudence concerning the development and application of the close nexus test in Section 7.4.2 of this Report, the focus of the close nexus test (and accordingly the relevance of certain aspects of the measures) fundamentally concerns the links that indicate the potential for the "undeclared" measures to undermine, impair or nullify any purported compliance by the responding party.

⁵⁶⁵ See paras. 7.66 through 7.75 of Section 7.2.2.2 above. ↩

⁵⁶⁶ See para. 7.11 above. ↩

⁵⁶⁷ See Sections 7.2.1 and 7.3.2 above. ↩

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7.5.1.2.1 The relevant original measures

7.324. With the foregoing considerations in mind, we first recall the original Washington State tax measures enacted under HB 2294 as part of Project Olympus, including the Washington State B&O tax rate reduction, as well as the FSC/ETI subsidies and tax abatements related to the City of Wichita IRBs which, along with the Washington State B&O tax rate reduction, are the measures the subject of the DSB recommendations and rulings that the European Union argues are relevant to the analysis of whether the Project Gemini and Project Emerald measures satisfy the requirements of the close nexus test.

7.325. The Washington State tax measures enacted under HB 2294, which we have concluded are within the scope of this proceeding, were challenged by the European Communities in the original proceeding. As the original panel explained, HB 2294 was entitled "An Act Related to Retaining and Attracting the Aerospace Industry to Washington State", and was expressed to include "comprehensive tax incentives" directed at achieving this aim.⁵⁶⁸ HB 2294 took effect in December 2003 when Boeing entered into a "Memorandum of Agreement for Project Olympus" with the State of Washington.⁵⁶⁹ The Memorandum of Agreement confirmed that the Project Olympus Master Site Agreement between Boeing and the State of Washington constituted an agreement to site a significant commercial airplane final assembly facility in Washington, specifically in the City of Everett, for purposes of HB 2294.⁵⁷⁰ In the original proceeding, the European Communities alleged that HB 2294, the Project Olympus Master Site Agreement and an Ordinance enacted within the City of Everett constituted a "Boeing Incentive Package" designed to lure Boeing to establish its 787 production facilities in the State of Washington.⁵⁷¹

7.326. The Washington State tax measures enacted under HB 2294 that were challenged by the European Communities in the original proceeding consist of: (a) the B&O tax rate reduction for manufacturers of commercial airplanes or components of such airplanes⁵⁷²; (b) B&O tax credits for preproduction development and for computer software and hardware; (c) B&O tax credits for property taxes; and (d) sales and use tax exemptions for computer software, hardware, and peripherals to manufacturers of commercial airplanes.⁵⁷³

7.327. The B&O tax rate reduction was a "tied" subsidy, in that it applied to the production and sale of each LCA manufactured in Washington State on a per-unit basis, increasing Boeing's after-tax revenue and profitability.⁵⁷⁴ The B&O tax rate reduction applied in respect of Boeing aircraft produced in Washington State, and not just the 787.⁵⁷⁵

⁵⁶⁸ Panel Report, US – Large Civil Aircraft (2^nd complaint), para. 7.41. ↩

⁵⁶⁹ Panel Report, US – Large Civil Aircraft (2^nd complaint), para. 7.43. Section 17(1)(a) of HB 2294 provided that the legislation takes "effect on the first day of the month in which the governor and a manufacturer of commercial airplanes sign a memorandum of agreement regarding an affirmative final decision to site a significant commercial airplane final assembly facility in Washington state." Section 17(1)(b) also provided that HB 2294 is "contingent upon the siting of a significant commercial airplane final assembly facility in the state of Washington". A "significant commercial airplane final assembly facility" was defined as a "location with the capacity to produce at least thirty-six superefficient airplanes a year", while a "superefficient airplane" was defined as "a twin aisle airplane that carries between two hundred and three hundred fifty passengers, with a range of more than seven thousand two hundred nautical miles, a cruising speed of approximately mach .85, and that uses fifteen to twenty % less fuel than other similar airplanes on the market". (See Panel Report, US – Large Civil Aircraft (2^nd complaint), para. 7.44). ↩

⁵⁷⁰ Panel Report, US – Large Civil Aircraft (2^nd complaint), para. 7.45. ↩

⁵⁷¹ Panel Report, US – Large Civil Aircraft (2^nd complaint), para. 7.45. ↩

⁵⁷² The business and occupancy (B&O) tax is Washington State's primary business tax. It is a tax on the gross receipts (i.e. gross proceeds of sales, gross income, or value of products, as applicable) of all businesses operating in Washington State. Taxpayers are taxed based on the activities in which they engage in the State of Washington, such as manufacturing, wholesaling, retailing, or the provision of services. (See Appellate Body Report, US – Large Civil Aircraft (2^nd complaint), para. 458). ↩

⁵⁷³ HB 2294 also consisted of sales and use tax exemptions for construction services and equipment, a leasehold excise tax exemption and a property tax exemption. The panel, however, found insufficient evidence that Boeing had ever claimed these and thus insufficient evidence of the existence of a financial contribution. (See Panel Report, US – Large Civil Aircraft (2^nd complaint), para. 7.151). This finding was not appealed. ↩

⁵⁷⁴ Appellate Body Report, US – Large Civil Aircraft (2^nd complaint), paras. 1170 and 1252. ↩

⁵⁷⁵ Panel Report, US – Large Civil Aircraft (2^nd complaint), paras. 7.43 and 7.1803 and fn 1057. In its Compliance Communication on 23 September 2012, the United States advised that the State of Washington is applying the rate of B&O tax for aerospace manufacturing and retailing consistent with Article 5(c) of the SCM Agreement. The European Union argues that this subsidy has been maintained and has not been withdrawn ↩

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7.328. The other HB 2294 tax measures at issue in the original proceeding (i.e. the B&O tax credits for preproduction development and computer software and hardware, the B&O tax credits for property taxes and the sales and use tax exemptions for computer software, hardware, and peripherals) were considered to be "untied" subsidies in that they were not directly tied to sales of individual LCA. In the original proceeding, the European Communities identified these other HB 2294 tax measures as subsidies that benefited multiple aircraft families and not solely the 787.⁵⁷⁶ The B&O tax credits for preproduction development and computer software and hardware applied against Boeing's liability for B&O taxes which accrued in connection with the manufacture and sale of all Boeing LCA produced in the State of Washington.⁵⁷⁷ The B&O tax credits for property taxes related to new construction and in reality would have benefited only the 787 at the time of the original proceeding.⁵⁷⁸ The sales and use tax exemptions were in principle available in respect of all Boeing aircraft manufactured in Washington State, and not only in respect of the 787.⁵⁷⁹

7.329. The original panel found that the purpose or intent behind the HB 2294 package was to reduce Boeing's cost structure and thereby significantly improve its competitiveness.⁵⁸⁰

7.330. The FSC/ETI subsidies are tax exemptions and exclusions in relation to foreign source income provided under the FSC and successor legislation (namely, the FSC Repeal and Extraterritorial Income Exclusion Act of 2000, the American Jobs Creation Act of 2004, and the Tax Increase Prevention and Reconciliation Act of 2005). For present purposes, the key aspects of the FSC/ETI subsidies are that they involved a tax exemption on a portion of "foreign trade income" for corporations organized as "foreign sales corporations" (FSCs) pursuant to the particular requirements of the U.S. Internal Revenue Code. The FSC measures also permitted U.S. parent companies of FSCs to defer paying taxes on certain "foreign trade income" and to avoid paying taxes on dividends received from their FSCs related to "foreign trade income". FSC/ETI exemptions and exclusions were realized on the delivery of every LCA that Boeing exported, as well as on LCA that Boeing produced and sold to domestic carriers and leasing companies for use predominantly on foreign routes.

7.331. The FSC/ETI subsidies were considered in the original proceeding to be "tied" subsidies, in that they related directly to revenue realized from export LCA sales and operated to reduce the revenues that were subject to taxation, thereby lowering Boeing's taxes and increasing its after-tax profits.⁵⁸¹ There was no evidence that the FSC/ETI subsidies applied to sales of the 787, and the Panel and Appellate Body analysis focused on the effects of these subsidies on the 737 and 777 only.

7.332. The tax abatements related to the City of Wichita IRBs were available in respect of industrial revenue bonds (IRBs) purchased not by the public or bondholders, as is typically the case, but by the companies for which they were issued. As Boeing (or Spirit) owned the IRBs, any principal or interest payments on the bonds were ultimately transferred to themselves. Boeing and Spirit did not use the IRBs to finance the development of property, but rather, to take advantage of certain property and sales tax exemptions available to private entities for which IRBs are issued, namely: (a) property tax abatements for up to ten years on Project Property; and (b) sales tax exemptions on project property and services acquired with the proceeds of IRBs.⁵⁸²

7.333. The panel found the tax benefits to Boeing arising from the property and sales tax abatements related to the IRBs issued by the City of Wichita to be a specific subsidy. The Appellate Body considered that the subsidies provided through the property and sales tax exemptions related to the IRBs issued by the City of Wichita were specifically aimed at, and were used for the purpose of, enhancing, Boeing's manufacturing facilities in Wichita, Kansas. It therefore found that

and that the subsidy values are actually increasing each year. (See European Union's first written submission, para. 447).

⁵⁷⁶ International Trade Resources LLC, Calculating on a Per-Aircraft Basis the Magnitude of the Subsidies Provided to US Large Civil Aircraft, (20 February 2007), (Original Exhibit EC-13). ↩

⁵⁷⁷ In the original proceeding, the evidence upon which the panel relied in calculating the amount of these tax credits suggested that the tax credits were applied in relation to expenses incurred in the production of the 787. (See Appellate Body Report, US – Large Civil Aircraft (2^nd complaint), para. 1344, fn 2704). ↩

⁵⁷⁸ Appellate Body Report, US – Large Civil Aircraft (2^nd complaint), para. 1341. ↩

⁵⁷⁹ Appellate Body Report, US – Large Civil Aircraft (2^nd complaint), para. 1345, fn 2707. ↩

⁵⁸⁰ See Panel Report, US – Large Civil Aircraft (2^nd complaint), para. 7.1803. ↩

⁵⁸¹ Appellate Body Report, US – Large Civil Aircraft (2^nd complaint), paras. 1170 and 1252. ↩

⁵⁸² Appellate Body Report, US – Large Civil Aircraft (2^nd complaint), paras. 472-474. ↩

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the effects of these subsidies complemented and supplemented the price effects of the FSC/ETI subsidies and the Washington State B&O tax rate reduction, causing serious prejudice in the form of significant lost sales in the 100-200 seat LCA product market.⁵⁸³

7.5.1.2.2 The Project Gemini measures and Project Emerald measures

7.334. We now describe in greater detail the links between the Project Gemini and Project Emerald measures.

7.335. As previously explained, the Project Gemini measures date from 2009 and concern various incentives allegedly provided to Boeing by the State of South Carolina and Charleston County in order to induce Boeing to locate its second 787 final assembly and delivery facility in North Charleston, South Carolina. They involve the alleged provision of land, infrastructure, and facilities, as well as a number of tax incentives implemented at both the state and municipal level.

7.336. The Project Emerald measures were initially approved in 2004 and involve various incentives which were provided originally to Vought and Global Aeronautica, in connection with the location of their respective 787 fuselage fabrication and integration operations in South Carolina.⁵⁸⁴ The Project Emerald measures involve the alleged provision of land on which Vought and Global Aeronautica constructed their facilities (the same tract of land on which Boeing subsequently located its 787 final assembly and delivery facility as part of Project Gemini), financial assistance in connection with the preparation of the land and the construction of the infrastructure and facilities, and tax incentives that are similar to some of those subsequently provided by South Carolina in connection with Project Gemini.

7.337. There are a number of links between the Project Gemini and Project Emerald measures. The first is that both are location incentives offered by South Carolina in connection with the manufacture of the 787. The Project Gemini measures relate to the 787's final assembly and delivery facility, while the Project Emerald measures, originally provided to Vought and Global Aeronautica, concern the manufacture of sections 47 and 48 of the 787 rear fuselage barrels (by Vought) and the structural integration of the 787 fuselage (by Global Aeronautica).⁵⁸⁵

7.338. Moreover, the facilities for both Project Gemini and Project Emerald are located on the same 240 acre tract of land adjacent to Charleston International Airport in North Charleston (the Project Site). As we explain further in Section 8.2.8.5.1, the right to occupy and use the land in relation to both Project Gemini and Project Emerald is granted under the same ground sublease instrument. The Project Gemini facilities and infrastructure and Project Emerald facilities and infrastructure are both part of the same Charleston-Colleton MCIP.

⁵⁸³ Appellate Body Report, US – Large Civil Aircraft (2^nd complaint), paras. 1348 and 1350(d)(iv)(C). The panel had noted that Boeing had sold its Wichita facilities to Spirit Aerosystems (Spirit), on 16 June 2005. However, for IRBs issued to Boeing prior to the sale of its Wichita facilities to Spirit, where the ten-year tax exemptions period continued beyond 2005, Boeing continued directly to receive the tax benefits deriving from the IRBs because Boeing maintained its leasehold interest in the Project Property and subleased the Project Property to Spirit. The City of Wichita continued to issue IRBs to Boeing following the sale of the Wichita facilities to Spirit in 2005. (See Panel Report, US – Large Civil Aircraft (2^nd complaint), paras. 7.649 and 7.662). In January 2012, Boeing announced that it would close all of its Wichita operations by the end of 2013. (A.G. Sulzberger, "Boeing Departure Shakes Wichita's Identity as Airplane Capital", New York Times, 18 January 2012 (Exhibit USA-338)). ↩

⁵⁸⁴ Confidential Initial Site Development and Incentive Agreement between Vought Aircraft Industries, Inc. (on behalf of itself and the two entities that comprise Project Emerald), the South Carolina Department of Commerce, South Carolina Public Railways, Charleston County, and the Charleston County Airport District (29 November 2004) (Initial Project Emerald Incentive Agreement), (Exhibit EU-560). The Vought and Global Aeronautica facilities opened in 2006. (R. Bundrett, "Anatomy of an Incentives Deal", The Nerve, 25 January 2010, (Exhibit EU-547)). The 2004 Initial Emerald Incentive Agreement was replaced by a 2006 agreement: Project Emerald Confidential Site Development and Incentive Agreement, between Vought Aircraft Industries, Inc. (on behalf of itself and the two entities that comprise Project Emerald), the South Carolina Department of Commerce, South Carolina Public Railways, and Charleston County (2006) (Final Project Emerald Incentive Agreement), (Exhibit EU-550). ↩

⁵⁸⁵ M. Mecham, "A visit to Vought and Global Aeronautica", Aviation Week, Blog Things With Wings, 11 June 2008, (Exhibit EU-549). Boeing acquired Vought's 787 business in South Carolina in July 2009, as explained in further detail in para. 8.706 of this Report. ↩

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7.339. There is also evidence indicating that the fact that Vought and Global Aeronautica had established the Project Emerald facilities and infrastructure on the Project Site in 2006 contributed to the formation of an "aviation infrastructure" in South Carolina, and thereby enhanced the attractiveness to Boeing of locating its second 787 final assembly and delivery line (i.e. the Project Gemini facilities and infrastructure) at that same Project Site in 2009, adjacent to the Project Emerald facilities and infrastructure operated by Vought and Global Aeronautica.⁵⁸⁶ The Project Gemini measures were, it seems, provided against the particular historical background of the Project Emerald measures, as well as the initial competition in 2003 between Washington State, South Carolina, and certain other U.S. states for the location of Boeing's first 787 assembly facility.

7.340. Given this relationship between the Project Gemini and Project Emerald measures, we consider them together for purposes of evaluating the sufficiency of the links in terms of nature and effects between those measures, on the one hand, and the relevant original measures that we have discussed in Section 7.5.1.2.1 above.

7.5.1.2.3 Whether there is a sufficiently close nexus between the Project Gemini and Project Emerald measures, and the relevant original measures

7.341. As we explain in paragraph 7.323, where a close nexus analysis involves measures that are components of location incentive packages provided to the same recipient in respect of the same product, we see no need for a complaining Member to additionally demonstrate that the incentive packages comprise identical or similar measures.⁵⁸⁷ Indeed, one might reasonably expect that states that compete for private investment would do so by offering somewhat different incentive packages, playing to their perceived comparative advantages in terms of availability and location of land and infrastructure, the skills of the workforce, and the taxation regimes in place in the particular state. We therefore consider that, in such circumstances, the closeness of links in terms of nature and effects between the original measures and the measures at issue should be undertaken on a more holistic basis. In other words, differences in the measure-by-measure composition of the Project Olympus and Project Gemini (or Project Emerald) incentive packages do not preclude the possibility that, considered as a whole, the incentive packages (and their constituent measures) are sufficiently closely connected in terms of their nature and effects.⁵⁸⁸

7.342. In our view, the key commonality in terms of nature between the Washington State tax measures enacted under HB 2294, and the Project Gemini and Project Emerald measures, is that they are packages of incentives which, despite the differences in the individual measures comprising each package, have been granted by a state of the United States conditional upon the location in that state of manufacturing facilities related to the same Boeing product, namely the 787.⁵⁸⁹ We reach this conclusion despite the fact that we do not agree with the European Union that the Project Gemini measures are "replacement" measures for the Washington State tax measures enacted under HB 2294. We do not consider there is sufficient evidence before us to

⁵⁸⁶ A. Shain, "S.C. travelled a long road to land Boeing", Charlotte Observer, 1 November 2009, (Exhibit EU-9). ↩

⁵⁸⁷ Moreover, a similarity in the design and architecture of the measure at issue and the original measure is not indispensable to concluding that the measures are closely connected. For example, in Australia – Leather II (Article 21.5 – US) the measure at issue that was found to be closely connected to the original measure was a loan while the original measure was a grant. ↩

⁵⁸⁸ To be clear, this does not mean that simply because the measures "come in packages" they are closely connected in terms of nature. Rather, it is the similarity in the overall nature of the incentive packages (e.g. their objectives to induce a recipient to locate its facilities in a particular place, the focus on one or more intended recipients and products of the recipients) that in our view is more relevant to assessing whether the constituent measures are sufficiently closely linked to warrant the inclusion of so-called new measures within the scope of a compliance proceeding, than whether the measures themselves are of the same type as the original measures. ↩

⁵⁸⁹ This being so, it logically follows that we do not regard the fact that there is no geographical overlap between the Washington State tax measures enacted under HB 2294 and the measures enacted by South Carolina as part of Project Gemini and Project Emerald as being fatal to finding that the measures are nonetheless closely connected in terms of nature or effects. In our view, the relevance to the close nexus analysis of any overlapping geographical scope of the measures depends very much on the context. For example, when the measures involve import bans, their respective geographical scope of application may be highly relevant to an assessment of whether they are sufficiently closely connected. However, where the measures under consideration are location incentive packages offered by different states in competition with one another, it is much less relevant to whether they are sufficiently closely connected that they apply in different geographical areas. ↩

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show that Boeing would necessarily have located its second 787 assembly facility in Washington "but for" the Project Gemini incentives. We therefore do not accept the European Union's arguments that, but for the Project Gemini incentives: (a) Boeing would have decided to locate its second 787 assembly facility in Washington State; (b) the subsidies provided under HB 2294 would have been larger; and (c) this therefore demonstrates a close nexus in terms of nature between the Washington State tax measures and the Project Gemini measures.

7.343. We also find a sufficiently close connection in terms of effects of the Project Gemini and Project Emerald measures, on the one hand, and the Washington State tax measures enacted under HB 2294, on the other. The Project Gemini and Project Emerald measures, like the Washington State tax measures enacted under HB 2294, in very general terms induce Boeing to locate manufacturing operations in a particular place by offering tax and other concessions that represent the functional equivalent of additional cash to Boeing.

7.344. In relation to timing, we note that the Project Gemini measures took effect on or after 2009, which is subsequent to the European Communities' panel request in the original proceeding. The United States argues that this timing indicates that there is no close nexus because the DSB recommendations and rulings were not adopted until 23 March 2012, meaning that the Project Gemini measures cannot be considered to be "undeclared" measures taken to comply. However, the Appellate Body has considered that the fact that measures are adopted after the original panel request but prior to the DSB recommendations and rulings in the original proceeding does not necessarily sever the close links in terms of nature and effects, and has accordingly found a measure to satisfy the requirements of the close nexus test notwithstanding that it preceded the adoption of DSB recommendations and rulings.⁵⁹⁰ We do not see that there is anything about the timing of the Project Gemini measures that weakens the close nexus in terms of nature and effects that we consider exists between the Project Gemini measures and the Washington State tax measures enacted under HB 2294.

7.345. We have had greater difficulty in determining whether the timing of the Project Emerald measures severs the close connection we have found to exist between those measures and the Washington State tax measures enacted under HB 2294. The United States argues that elements of Project Emerald commenced in 2004, and to the extent that the European Union challenges those elements as they related to Boeing in 2004, the European Union could have challenged them in the original dispute, but elected not to.⁵⁹¹ The United States disputes that South Carolina provided any financial contributions to Boeing through the Project Emerald measures, which if anything, were financial contributions provided to Vought, not Boeing.⁵⁹² The European Union, on the other hand, asserts that all of its claims relate to subsidies to Boeing (as opposed to Vought and Global Aeronautica) that began, at the earliest, in the latter half of 2009; i.e. following Boeing's assumption of the 787 fuselage fabrication and integration operations from Vought in 2009.⁵⁹³

7.346. We recall that the Project Emerald measures comprise the package of financial incentives related to the 787 fuselage fabrication and integration complex. The Project Emerald measures were originally provided to Vought and Global Aeronautica in connection with their 787 fuselage fabrication and integration operations. As we explain in Section 8.2.8.5.1, owing to unforeseen production difficulties with these suppliers, Boeing subsequently took a series of steps to acquire ownership and control of the production and assembly of the 787 fuselage components (and thus the Project Emerald facilities and infrastructure) in 2008 and 2009. As a result, the Project Emerald facilities and infrastructure have been owned and operated by Boeing South Carolina since late 2009.

⁵⁹⁰ Appellate Body Report, US – Zeroing (EC) (Article 21.5 – EC), paras. 224-226. ↩

⁵⁹¹ United States' first written submission, para. 539. ↩

⁵⁹² The United States argues, moreover, that in order for financial contributions provided to Vought to involve subsidies to Boeing (from 2009 onwards), the European Union would need to demonstrate that the benefit conferred by those financial contributions to Vought had "passed through" to Boeing. According to the United States, as the European Union has not attempted to demonstrate that such benefits passed through to Boeing, it has failed to demonstrate the existence of any subsidies to Boeing arising out of the Project Emerald measures. ↩

⁵⁹³ European Union's response to the United States' request for preliminary rulings, dated 23 November 2012, para. 80. ↩

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7.347. Given the European Union's assertion as to the nature of its claims regarding the Project Emerald measures, i.e. as covering only the period after Boeing's assumption of Vought's interests in the Project Emerald measures in 2009, and not the prior period, we do not regard the timing element, of itself, to sufficiently weaken the close nexus in terms of nature and effects that we find to exist between the Project Emerald measures and the Washington State tax measures enacted under HB 2294. The United States' arguments concerning a lack of close nexus in terms of timing in reality go to the question of whether the Project Emerald measures involve subsidies to Boeing. This issue is therefore better dealt with in the context of our consideration of whether the European Union has demonstrated that any of the Project Emerald measures are specific subsidies to Boeing, which we address in Section 8.2.8 of this Report.

7.348. In sum, we are satisfied that there are sufficiently close connections, in terms of their nature and effects, between the Project Gemini and Project Emerald measures, on the one hand, and the Washington State tax measures enacted under HB 2294, on the other, to conclude that the Project Gemini and Project Emerald measures are within the scope of this proceeding. We do not regard any aspects of the timing of the Project Gemini or Project Emerald measures as sufficiently negating those close connections in terms of nature or effects, as to warrant a conclusion that the measures in question are outside the scope of this proceeding.

7.349. It remains to note that we are not persuaded of the existence of sufficiently close links, in terms of nature or effects, between the Project Gemini and Project Emerald measures, and the tax abatements related to the City of Wichita IRBs, or between the Project Gemini and Project Emerald measures and the FSC/ETI subsidies. The Project Gemini and Project Emerald measures concern the production of the 787. It may be possible to point to superficial similarities between: (a) the property tax abatements related to the City of Wichita IRBs and the property tax reductions provided through the Boeing and Project Emerald FILOT Agreements; and (b) FSC/ETI's exclusion of certain sales from Boeing's corporate income tax liability and the income sourcing rules for apportioning Boeing's LCA sales under the Income Allocation and Apportionment Agreement that is part of the Project Gemini incentive package. However, the Wichita IRBs were found by the Appellate Body to be linked to the production of the 737⁵⁹⁴ and not the 787. Similarly, the European Communities in the original proceeding did not allege that the FSC/ETI subsidies benefited the 787.⁵⁹⁵ We therefore consider there is an insufficient basis for finding a close connection in terms of nature or effects between either of those measures and the Project Gemini or Project Emerald measures, which relate to the manufacture of the 787. Put another way, we are not persuaded that, in assessing whether the United States has complied with the DSB recommendations and rulings in respect to the tax abatements related to the City of Wichita IRBs or the FSC/ETI subsidies, it is relevant or necessary for the Panel to consider the Project Gemini measures or Project Emerald measures.

7.350. We therefore dismiss the United States' request for a ruling that the Project Gemini and Project Emerald measures are outside the scope of this proceeding and rule that these measures are within the scope of this proceeding.

7.5.2 Whether the Phase II measures are outside the Panel's terms of reference

7.5.2.1 Main arguments of the parties

7.351. The United States argues that the European Union has failed to articulate any valid basis for concluding that the Phase II measures are within the Panel's terms of reference. It further argues that the European Union has failed to establish that the Phase II measures even exist, or to advance sufficient evidence to establish a prima facie case for any of its Phase II-related claims.⁵⁹⁶

7.352. The United States considers that the European Union's justification for the inclusion of the Phase II measures within the scope of this proceeding is confined to a footnote in the European Union's second written submission, to the effect that the Phase II measures are a "further expansion and supplement of the previous subsidy packages" to Vought and Boeing.⁵⁹⁷

⁵⁹⁴ Appellate Body Report, US – Large Civil Aircraft (2^nd complaint), para. 1347. ↩

⁵⁹⁵ Panel Report, US – Large Civil Aircraft (2^nd complaint), para. 7.1802. ↩

⁵⁹⁶ United States' second written submission, para. 613. ↩

⁵⁹⁷ United States' second written submission, para. 619 (referring to European Union's second written submission, para. 151 and fn 190). ↩

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For the United States, such a "simplistic explanation" presumes that any future action taken by South Carolina with regard to Boeing automatically affects the United States' obligations in this dispute. However, a compliance panel's terms of reference extend only to measures that are measures taken to comply, within the meaning of Article 21.5 of the DSU. There are no declared measures taken to comply related to Phase II and the European Union has not argued that there are any "undeclared" measures taken to comply.⁵⁹⁸

7.353. The European Union argues that the Phase II measures are properly within the Panel's terms of reference because they constitute amendments or supplements to or extensions of, the South Carolina measures addressed in the European Union's panel request, and first written submission.⁵⁹⁹ The European Union notes that in its panel request, in addition to the measures specifically identified therein, it stated that it considered that "any amendments, supplements, extensions, replacement measures, renewal measures, related measures, or implementing measures", in addition to those specifically listed in section I of the panel request, constitute specific subsidies.⁶⁰⁰

7.354. The European Union argues that the Phase II measures are generally "extensions" of the subsidies provided for Project Gemini and Project Emerald. Thus, the Phase II fee-in-lieu-of taxes agreement is "literally an extension of the FILOT for Project Gemini", provided by means of an amendment to the Boeing FILOT Agreement.⁶⁰¹ Similarly, the Phase II economic development bond issuance "replicates" the earlier bond issuances for Project Gemini and Project Emerald, with the proceeds being used to fund the acquisition and preparation of real property for Boeing's use (including the purchase of land which South Carolina plans to provide to Boeing by means of a long-term ground lease for nominal rent).⁶⁰²

7.355. The European Union asserts that the Phase II measures are part of South Carolina's incentive offer to Boeing arising from the "competition" between states to locate production of Boeing's recently launched 777X.⁶⁰³ According to the European Union, Boeing's decision to locate the 777X in South Carolina and to benefit from the Phase II measures, rather than to locate the 777X in Washington State, would decrease the value of future subsidies in Washington State, while increasing those subsidies in South Carolina. In assessing the close nexus between the various South Carolina measures and the Washington state and local subsidies, the Panel should consider the fact that they are all provided in the context of a competition between various U.S. states, or parts thereof, to secure the location of various Boeing facilities.⁶⁰⁴

7.5.2.2 Evaluation by the Panel

7.356. As we stated in paragraph 7.296 above, the European Union challenges, as "Phase II" measures, an alleged sale of government land adjacent to Boeing's existing Project Site, the funding, acquisition and preparation of that land through the proceeds of USD 120 million in state general obligation economic development bonds and the amendment of the Boeing FILOT Agreement to provide for the reduction or elimination of Boeing's property taxes related to the Phase II expansion.⁶⁰⁵

7.357. As explained in paragraphs 7.294-7.295 above, item I.G of the European Union's panel request identifies a number of measures as "Project Gemini-Related Subsidies" and "Project Emerald-Related Subsidies". The European Union did not identify the "Phase II" measures in its panel request, as these measures had not come into existence at the time of the European Union's panel request in October 2012. The European Union first sought to make claims in respect of the "Phase II measures" in its second written submission, dated 25 July 2013, some nine months after its panel request, based on public reports appearing in the first quarter of 2013 that Boeing

⁵⁹⁸ United States' second written submission, para. 619. ↩

⁵⁹⁹ European Union's second written submission, para. 743. ↩

⁶⁰⁰ European Union's second written submission, para. 743 (referring to para. 27 of the European Union's request for the establishment of a panel). ↩

⁶⁰¹ European Union's response to Panel question No. 8, para. 61. The Boeing FILOT Agreement is the instrument referred to in para. 7.294(c) above. ↩

⁶⁰² European Union's response to Panel question No. 8, para. 61. ↩

⁶⁰³ European Union's response to Panel question No. 8, para. 59. ↩

⁶⁰⁴ European Union's response to Panel question No. 8, para. 59. ↩

⁶⁰⁵ The Boeing FILOT Agreement is the instrument referred to in para. 7.294(c) above. ↩

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planned to make further investments in South Carolina and that the South Carolina legislature had approved a Bill to issue USD 120 million in bonds for site development by Boeing.⁶⁰⁶

7.358. In our view, these circumstances raise a jurisdictional issue; namely, whether the Phase II measures, not having been explicitly identified in the European Union's panel request, and indeed which did not exist at the time of that request, are nonetheless properly within the Panel's terms of reference. As this issue goes to the root of our jurisdiction, we must deal with it, if necessary, on our own motion, in order to satisfy ourselves that we have authority to proceed.⁶⁰⁷ This issue raises similar issues to those the Panel considered in a ruling which was issued on 18 September 2014 (the SSB 5952 ruling).⁶⁰⁸ In that ruling, we addressed whether the Washington State tax measures, as amended by SSB 5952, were within this Panel's terms of reference although SSB 5952 was not explicitly identified in the European Union's panel request and was neither enacted nor came into effect until over a year after the panel request.

7.359. Article 6.2 of the DSU provides, in relevant part:

The request for the establishment of a panel shall be made in writing. It shall indicate whether consultations were held, identify the specific measures at issue and provide a brief summary of the legal basis of the complaint sufficient to present the problem clearly.

7.360. In evaluating whether the European Union's panel request meets the requirements of Article 6.2 of the DSU as regards the identification of the Phase II measures, we must also take into account that this is a compliance proceeding brought pursuant to Article 21.5 of the DSU. The Appellate Body has stated that, although Article 6.2 is generally applicable to panel requests under Article 21.5: "the requirements of Article 6.2, as they apply to an original panel request, need to be adapted to a panel request under Article 21.5."⁶⁰⁹ As the Appellate Body stated in US – FSC (Article 21.5 – EC II), in Article 21.5 proceedings, the "specific measures at issue" are measures "that have a bearing on compliance with the recommendations and rulings of the DSB".⁶¹⁰ This indicates that the "requirements of Article 6.2 of the DSU, as they apply to an Article 21.5 panel request, must be assessed in light of the recommendations and rulings of the DSB in the original … proceedings that dealt with the same dispute."⁶¹¹

7.361. In our SSB 5952 ruling, we examined a number of cases in which panels and the Appellate Body considered that measures not explicitly identified in a panel request, which came into existence in whole or in part after the date of the panel request, were nevertheless within a panel's terms of reference.⁶¹² We concluded on the basis of that examination that: (a) the requirements of Article 6.2 of the DSU are such that the measures included in a panel's terms of reference will ordinarily be in existence at the time of the establishment of the panel; and (b) there are particular, limited circumstances in which measures coming into existence subsequent to the panel request are within a panel's terms of reference. These circumstances, in one way or another, involve new measures that amend, modify, supplement, extend, replace, renew, relate to, or implement the measures that were explicitly identified in the panel request without changing their essence, in light of the claims made by the complaining party. The Appellate Body has thus

⁶⁰⁶ European Union's second written submission, paras. 744 and 745 (referring to M. Tomsic, "State leaders praise Boeing Co. expansion, incentives bill", Charleston Regional Business Journal, 9 April 2013, (Exhibit EU-1128); and J. McDermott, "Boeing S.C. confirms North Charleston expansion", The Post and Courier, 9 April 2013, (Exhibit EU-1129)). ↩

⁶⁰⁷ We note that the Appellate Body has previously referred to the widely accepted rule that an international tribunal is entitled to consider the issue of its own jurisdiction on its own initiative, and to satisfy itself that it has jurisdiction in any case that comes before it. (See Appellate Body Reports, US – 1916 Act, para. 54 and fn 30; Mexico – Corn Syrup (Article 21.5 – US), para. 36; and EC and certain member States – Large Civil Aircraft, para. 791). See also Panel Reports, US – Anti-Dumping Measures on Oil Country Tubular Goods, para. 7.20; EC – IT Products, para. 7.196; and China – Broiler Products, para. 7.515. ↩

⁶⁰⁸ See Reasons for Declining the European Union's Request for Leave to File an Additional Submission Regarding SSB 5952 at Section 7.7. ↩

⁶⁰⁹ Appellate Body Reports, US – FSC (Article 21.5 – EC II), para. 59; and US – Zeroing (Japan) (Article 21.5 – Japan), para. 109. ↩

⁶¹⁰ Appellate Body Report, US – FSC (Article 21.5 – EC II), para. 61. ↩

⁶¹¹ Appellate Body Report, US – FSC (Article 21.5 – EC II), para. 61. See also Appellate Body Report, US – Zeroing (Japan) (Article 21.5 – Japan), para. 109. ↩

⁶¹² See Reasons for Declining the European Union's Request for Leave to File an Additional Submission Regarding SSB 5952 at Section 7.7, paras. 7.506-7.526. ↩

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interpreted the requirements of Article 6.2 of the DSU in a manner that prevents a measure evading review merely because of amendments or modifications to the legal form of the measure during the course of dispute settlement proceedings that do not change its essence in light of the nature of the claims at issue, while still fully respecting the due process rights of responding parties and potential third parties to be informed of the specific measures at issue and the nature of the claims raised by the complaining party.

7.362. The European Union argues that its panel request, through its references to "any amendments, supplements, extensions, replacement measures, renewal measures, related measures, or implementing measures", in addition to those specifically listed in section I of the panel request encompasses the Phase II measures, which are amendments or supplements to, or extensions of, the South Carolina measures identified in the panel request.

7.363. However, as we have previously explained in the context of our SSB 5952 ruling, the limited circumstances in which measures coming into existence subsequent to the panel request may be considered to be within a panel's terms of reference in conformity with the requirements of Article 6.2 of the DSU cannot be artificially enlarged through the inclusion of very general and extensive "catch-all" phrases in a panel request. Otherwise, a specific and quite limited set of circumstances in which measures coming into existence after the request for the establishment of a panel may be found to be within a panel's terms of reference would be transformed into a situation in which, provided a panel request includes a sufficiently broad catch-all description, any subsequent measures that come into existence during the course of a panel proceeding will be within a panel's terms of reference.

7.364. To the extent that the Phase II measures can be considered to "amend", "supplement", or "extend" the Project Gemini or Project Emerald measures identified in the European Union's panel request, such amendments, supplements, or extensions would change the essence of the Project Gemini measures and Project Emerald measures, and thus fall outside the limited circumstances in which measures coming into existence after the date of a panel request can nevertheless fall within the terms of reference of a panel consistently with the requirements of Article 6.2 of the DSU. The Phase II measures are alleged to involve a new sale of land to Boeing, a new bond issuance, and an amendment to the Boeing FILOT Agreement to cover the new property in relation to corporate activities and objectives extending beyond the manufacture of the 787.⁶¹³ We do not regard the Phase II measures as being formal, non-substantive clarifications or amendments that do not change the essence of the Project Gemini and Project Emerald measures.⁶¹⁴ Rather, they appear to be a distinct, additional set of measures, provided in consideration for a further expansion of Boeing's operations in South Carolina. As the European Union recognizes, that expansion appears to cover the creation of a new IT centre in North Charleston, as part of Boeing-wide plans to consolidate its IT operations, the establishment of a Dreamlifter Operations Center and the location of the design and manufacture of composite inlets and nacelle linings for the 737 MAX.⁶¹⁵

7.365. We therefore consider that paragraph 27 of the European Union's panel request does not provide a basis for including the Phase II measures within the panel's terms of reference, consistently with the requirements of Article 6.2 of the DSU to "identify the specific measures at issue".

7.366. We conclude that the European Union's panel request does not meet the requirements of Article 6.2 of the DSU, read in the light of Article 21.5 of the DSU, to

⁶¹³ As previously noted, the Boeing FILOT Agreement is the instrument referred to in para. 7.294(c) above. ↩

⁶¹⁴ The Phase II measures can be contrasted in this regard with the new measures in cases such as Chile – Price Band System, Argentina – Footwear (EC), US – Zeroing (Japan) (Article 21.5 – Japan), EC – IT Products, and EC – Fasteners (China), where the new measures either "clarified" the measure or essentially replicated the explicitly identified measures through new legislative action, and thus concerned the same measure (in a substantive sense) that was either the subject of the panel request or that had been found WTO-inconsistent in the original proceeding. ↩

⁶¹⁵ See European Union's second written submission, para. 745. The European Union also asserts, in response to a question from the Panel, that the Phase II measures are "simply (part) of South Carolina's incentive offer to Boeing as part of the competition to locate production of Boeing's recently launched 777X". (European Union's response to Panel question No. 8, para. 59). ↩

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specifically identify the measures at issue, as regards the Phase II measures. We thus find that the Phase II measures are outside the Panel's terms of reference.

7.6 Claims under Articles 3.1(a) and (b) of the SCM Agreement and Article III of the GATT 1994

7.6.1 Conformity of the panel request with Article 6.2 of the DSU

7.367. As previously noted, the European Union argues that the measures at issue in this proceeding (identified in items I.A to I.G of its panel request) demonstrate that the United States has failed to withdraw the subsidy or take appropriate steps to remove the adverse effects, within the meaning of Article 7.8 of the SCM Agreement.

7.368. The European Union additionally makes claims in respect of all of the subsidy measures identified therein (in items I.A to I.G) under Articles 3.1(a), 3.1(b), and 3.2 of the SCM Agreement and under Article III of the GATT 1994.⁶¹⁶

7.369. The United States requests a preliminary ruling that the European Union's panel request fails to satisfy the requirements of Article 6.2 of the DSU in respect of the claims under Articles 3.1(a), 3.1(b), and 3.2 of the SCM Agreement and Article III of the GATT 1994.⁶¹⁷

7.6.1.1 Main arguments of the parties

7.370. The United States argues that the panel request fails to connect the challenged measures with the provisions of the covered agreements claimed to have been breached, in a manner that presents the problem clearly.⁶¹⁸ According to the United States, it is not clear which "problem" is caused by which measure. Rather, the European Union's panel request, in a section entitled "Measures", lists a large number of measures in items I.A through I.G, then in a section entitled "Legal Basis", describes the violation of four groups of treaty provisions, stating that all measures listed in items I.A through I.G are inconsistent with the relevant provisions.⁶¹⁹ The United States says it is not plausible that the European Union is making the dozens of claims implied by the language in the panel request that all measures in items I.A through I.G violate all of the treaty provisions discussed in paragraphs 30-32.⁶²⁰

7.371. The United States likens the deficiencies in the European Union's panel request to those in the panel requests in China – Raw Materials. In that case, one section of the panel requests (section III) first briefly described, in narrative paragraphs, a number of different allegations of violation relating to different types of restraints, then provided a bullet point list of the legal instruments alleged to reflect the Chinese measures, and concluded with the statement that "these measures" were inconsistent with 13 listed treaty provisions.⁶²¹ The Appellate Body concluded that because the complainants had not, in either the narrative paragraphs or in the final listing of the provisions of the covered agreements alleged to have been violated, provided the basis on which the panel and China could determine with sufficient clarity which "problem" or "problems" were alleged to have been caused by which measures, they failed to present the legal basis for their

⁶¹⁶ European Union's request for the establishment of a panel, paras. 30-32. While paragraph 32 of the European Union's panel request alleges that the measures in items I.A through I.G are inconsistent with Articles III:1, III:4, and III:5 of the GATT 1994, in its first and second written submissions, the European Union's claims in relation to Article III of the GATT 1994 are limited to alleged inconsistency with Article III:4 of the GATT 1994. (See European Union's first written submission, paras. 777-788; and second written submission, paras. 851-864). The European Union therefore appears not to pursue its other claims under Article III of the GATT 1994. ↩

⁶¹⁷ United States' request for preliminary rulings, dated 13 November 2012, paras. 45 and 54; first written submission, para. 90; and second written submission, para. 55. ↩

⁶¹⁸ United States' request for preliminary rulings, dated 13 November 2012, para. 45; first written submission, para. 89. ↩

⁶¹⁹ United States' request for preliminary rulings, dated 13 November 2012, para. 47 (referring to European Union's request for the establishment of a panel, paras. 29-32). ↩

⁶²⁰ United States' request for preliminary rulings, dated 13 November 2012, para. 54; reply to the European Union's response to the United States' request for preliminary rulings, dated 23 November 2012, para. 74. ↩

⁶²¹ United States' request for preliminary rulings, dated 13 November 2012, para. 55 (referring to Appellate Body Reports, China – Raw Materials, paras. 222-225). ↩

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complaints with sufficient clarity to comply with Article 6.2 of the DSU.⁶²² The United States argues that the Panel should reach the same conclusion with respect to the European Union's panel request in this proceeding, as the European Union's panel request fails to connect the various treaty provisions in paragraphs 30-32 with the long list of measures included in paragraphs 8-26 (items I.A through I.G).⁶²³

7.372. The European Union argues that the specific basis for the United States' request is the assertion that it is evident that the European Union is not making each claim for each measure, while also acknowledging that the panel request expressly states that the claims are made with respect to all of the measures identified in the panel request.⁶²⁴ The European Union argues that it is clear from the panel request that the European Union makes the claims with respect to all of the measures, and that the United States has understood this to be the case.⁶²⁵ That being so, there is no basis for the United States' preliminary ruling request.

7.373. In its response to the United States' request for preliminary rulings, the European Union also "confirms" the express wording of its panel request; i.e. that the claims are made with respect to all of the measures.⁶²⁶ In a supplemental submission made by the European Union after filing its first written submission⁶²⁷, the European Union notes that it did, indeed, make the relevant claims in its first written submission with respect to all of the identified measures.⁶²⁸ According to the European Union, "by its own terms" there is no longer any basis for the United States' challenge with respect to this matter.⁶²⁹ The United States' arguments concerning the "implausibility" of the claims in reality go to the merits of those claims.⁶³⁰

7.6.1.2 Evaluation by the Panel

7.374. Article 6.2 of the DSU requires that a panel request clearly identify "the specific measures at issue" and provide a "brief summary of the legal basis of the complaint sufficient to present the problem clearly".⁶³¹ A panel request forms the basis for the terms of reference of a panel, in accordance with Article 7.1 of the DSU.⁶³² It also serves the due process objective of notifying the respondent and third parties of the nature of the complainant's case.⁶³³ The identification of the specific measures at issue and the provision of a "brief summary of the legal basis of the complaint sufficient to present the problem clearly" are therefore central to defining the scope of the dispute to be addressed by the panel.⁶³⁴

7.375. A panel must carefully scrutinize the language used in a panel request in order to determine whether the panel request is sufficiently precise to comply with Article 6.2 of the DSU. Submissions may be referenced in order to confirm the meaning of words used in a panel request, but the content of those submissions cannot have the effect of curing the failings of a deficient

⁶²² United States' request for preliminary rulings, dated 13 November 2012, para. 55 (referring to Appellate Body Reports, China – Raw Materials, para. 231). ↩

⁶²³ United States' request for preliminary rulings, dated 13 November 2012, para. 57. ↩

⁶²⁴ European Union's response to the United States' request for preliminary rulings, dated 23 November 2012, paras. 92 and 93. ↩

⁶²⁵ European Union's response to the United States' request for preliminary rulings, dated 23 November 2012, para. 96. ↩

⁶²⁶ European Union's response to the United States' request for preliminary rulings, dated 23 November 2012, para. 96. ↩

⁶²⁷ See para. 7.135. ↩

⁶²⁸ European Union's supplemental submission on the United States' request for preliminary rulings, para. 34. ↩

⁶²⁹ European Union's supplemental submission on the United States' request for preliminary rulings, para. 34; second written submission, para. 104. ↩

⁶³⁰ European Union's response to the United States' request for preliminary rulings, dated 23 November 2012, para. 99; supplemental submission on the United States' request for preliminary rulings, para. 34. ↩

⁶³¹ Together, these two elements constitute the "matter referred to the DSB" so that if either of them is not properly identified, the matter would not be within the Panel's terms of reference. (See Appellate Body Reports, China – Raw Materials, para. 219; and US – Carbon Steel, para. 125). ↩

⁶³² Appellate Body Reports, China – Raw Materials, para. 219; Guatemala – Cement I, paras. 72 and 73; US – Carbon Steel, para. 125; US – Continued Zeroing, para. 160; and US – Zeroing (Japan) (Article 21.5 – Japan), para. 107. ↩

⁶³³ Appellate Body Reports, China – Raw Materials, para. 219; and EC and certain member States – Large Civil Aircraft, para. 786. ↩

⁶³⁴ Appellate Body Reports, China – Raw Materials, para. 219. ↩

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panel request.⁶³⁵ In particular, the Appellate Body has explained that whether a panel request challenging a number of measures on the basis of multiple WTO provisions sets out a "brief summary of the legal basis of the complaint sufficient to present the problem clearly" may depend on whether it is sufficiently clear which "problem" is caused by which measure or group of measures.⁶³⁶

7.376. The European Union's panel request in this proceeding cites all of the measures listed in items I.A through I.G in relation to each of Article 3.1(a) of the SCM Agreement, Article 3.1(b) of the SCM Agreement, and Article III of the GATT 1994. Thus, the European Union requests, in paragraphs 30 through 32 of its panel request, that the panel find that:

1. the measures listed in items 1.A through 1.G of the panel request are inconsistent with Articles 3.1(a) and 3.2 of the SCM Agreement;
2. the measures listed in items 1.A through 1.G of the panel request are inconsistent with Articles 3.1(b) and 3.2 of the SCM Agreement; and
3. the measures listed in items 1.A through 1.G of the panel request are inconsistent with Articles III:4 and III:5 of the GATT 1994.⁶³⁷

7.377. We see pertinent differences between the European Union's panel request in this proceeding and the complainants' panel requests in China – Raw Materials. In China – Raw Materials, section III of the complainants' panel requests contained a series of paragraphs setting out in narrative fashion different allegations of violation relating to varied situations in which obligations under the WTO Agreements might not be satisfied, followed by a bullet point list of 37 legal instruments introduced by the phrase: "{the complainant} understands that these Chinese measures are reflected in, among others …" with the listed legal instruments ranging from entire codes or charters to specific administrative measures, without identifying any of the specific sections or provisions of the listed instruments. The final paragraph of section III consisted of a list of 13 treaty provisions with which the measures were alleged to be inconsistent.⁶³⁸ The Appellate Body concluded that the panel requests did not make clear which allegations of error pertained to which particular measures or sets of measures identified in the panel requests.⁶³⁹ Moreover, it was unclear whether each of the listed measures related to one specific allegation described in the narrative paragraphs or to several or even all of those allegations, and whether each of the listed measures allegedly violated one specific provision of the covered agreements, or several of them.⁶⁴⁰ As a result, the complainants had failed to provide the basis on which the panel and China could determine with sufficient clarity what "problem" or "problems" were alleged to have been caused by which measures, thus failing to present the legal basis for their complaints with sufficient clarity to comply with Article 6.2 of the DSU.⁶⁴¹

7.378. Items I.A through I.G of the European Union's panel request identify the following measures that are alleged to constitute specific subsidies: (A) "NASA R&D Subsidies"; (B) "Department of Defense R&D Subsidies"; (C) "Federal Aviation Administration R&D Subsidies"; (D) "Washington State and Local Subsidies"; (E) "FSC/ETI Legislation and Successor Acts"; (F) "State of Kansas and City of Wichita Subsidies"; and (G) "South Carolina State and Local Subsidies". On its face, the European Union's panel request alleges in paragraphs 30 through 32 that "the measures listed in items I.A to I.G" are inconsistent with, respectively, Articles 3.1(a) (including footnote 4), 3.1(b), and 3.2 of the SCM Agreement, and Articles III:4, III:5 and III:1 of the GATT 1994.

7.379. The United States argues that it is implausible that the European Union would in reality seek to pursue all of the "hundreds of possible measure-provision combinations" apparent from a

⁶³⁵ Appellate Body Reports, China – Raw Materials, para. 220; and EC – Fasteners (China), para. 562 (referring to Appellate Body Reports EC and certain member States – Large Civil Aircraft, para. 642; EC – Bananas III, para. 143; and US – Carbon Steel, para. 127). ↩

⁶³⁶ Appellate Body Reports, China – Raw Materials, para. 220. ↩

⁶³⁷ European Union's request for the establishment of a panel, paras. 30-32. ↩

⁶³⁸ See Appellate Body Reports, China – Raw Materials, paras. 221-225. ↩

⁶³⁹ Appellate Body Reports, China – Raw Materials, para. 226. ↩

⁶⁴⁰ Appellate Body Reports, China – Raw Materials, para. 226. ↩

⁶⁴¹ Appellate Body Reports, China – Raw Materials, para. 231. ↩

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reading of the panel request at face value.⁶⁴² According to the United States, as it is simply implausible that the European Union would actually advance all of the claims in relation to all of the measures, the European Union's panel request therefore fails to "present the problem clearly".⁶⁴³

7.380. It appears to us that the United States' argument that the European Union's panel request is insufficiently clear is based on a belief that the European Union could not credibly consider that each of the listed measures is inconsistent with each of the listed WTO provisions.⁶⁴⁴ This, however, reflects the United States' assessment of the merits of the European Union's claims, rather than the clarity of their expression for purposes of Article 6.2 of the DSU.

7.381. We recall that the requirement in Article 6.2 of the DSU to provide a "brief summary of the legal basis of the complaint sufficient to present the problem clearly" refers to the description in the panel request of a party's claims, rather than its arguments.⁶⁴⁵ A "claim" is an allegation that the respondent party has violated, or nullified or impaired the benefits arising from, an identified provision of a particular covered agreement.⁶⁴⁶ An "argument" comprises the statements made in support of a claim to demonstrate that a responding party's measure infringes an identified treaty provision. These are "set out and progressively clarified in the first written submissions, the rebuttal submissions, and the first and second panel meetings with the parties".⁶⁴⁷

7.382. In section VI of its first written submission, the European Union sets forth its claims under Articles 3.1(a) and 3.1(b) of the SCM Agreement and under Article III:4 of the GATT 1994.⁶⁴⁸ The United States characterizes the European Union's first written submission as presenting measures comprising a "system of subsidies" which collectively are inconsistent with Articles 3.1(a) and 3.1(b) of the SCM Agreement and Article III of the GATT 1994. For the United States, this "clarification" only confirms that the European Union's panel request fails to "present the problem clearly", as required by Article 6.2 of the DSU, as the phrase "system of subsidies" does not appear in the panel request, nor is it apparent from the panel request how the measures could possibly operate collectively so as to induce export performance, import substitution, or preferential treatment of domestic products.⁶⁴⁹ The European Union denies that its claims seek to identify a "system of subsidies" as a measure at issue.⁶⁵⁰ It would seem that these arguments go to the merits of the European Union's claims under Articles 3.1(a) and 3.1(b) of the SCM Agreement and Article III of the GATT 1994, rather than to the question of whether those claims are presented sufficiently clearly in the panel request to satisfy the requirements of Article 6.2 of the DSU.

7.383. In conclusion, we consider that the European Union's panel request, in alleging that the measures listed in items I.A through I.G are inconsistent with, respectively, Articles 3.1(a), 3.1(b), and 3.2 of the SCM Agreement, and various paragraphs of Article III of the GATT 1994, meets the requirements of Article 6.2 of the DSU in presenting the problem clearly. The Panel therefore dismisses the United States' request for preliminary rulings that the European Union's panel request fails to satisfy the requirements of Article 6.2 of the DSU with respect to the claims under Articles 3.1(a), 3.1(b), and 3.2 of the SCM Agreement, and Article III

⁶⁴² United States' reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 73. ↩

⁶⁴³ United States' reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, paras. 72 and 74. ↩

⁶⁴⁴ See e.g. United States' request for preliminary rulings, dated 13 November 2012, paras. 49 and 54; and reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 74. We are mindful that Article 3.7 of the DSU requires Members to exercise judgment in deciding whether action under the DSU would be fruitful. ↩

⁶⁴⁵ Appellate Body Reports, Guatemala – Cement I, para. 72; and EC – Bananas III, paras. 141-143. ↩

⁶⁴⁶ Appellate Body Report, Korea – Dairy, para. 139. ↩

⁶⁴⁷ Appellate Body Report, Korea – Dairy, para. 139. ↩

⁶⁴⁸ While paragraph 32 of the European Union's panel request alleges that the measures in items I.A through I.G are inconsistent with Articles III:1, III:4, and III:5 of the GATT 1994, in its first and second written submissions, the European Union's claims in relation to Article III of the GATT 1994 are limited to alleged inconsistency with Article III:4 of the GATT 1994. (See European Union's first written submission, paras. 777-788; and second written submission, paras. 851-864). The European Union therefore appears not to pursue its other claims under Article III of the GATT 1994. ↩

⁶⁴⁹ United States' first written submission, para. 89. ↩

⁶⁵⁰ European Union's second written submission, para. 105. ↩

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of the GATT 1994. The Panel rules that the European Union's claims under Articles 3.1(a), 3.1(b), and 3.2 of the SCM Agreement, and under Article III of the GATT 1994, are within the Panel's terms of reference.⁶⁵¹

7.6.2 Whether claims under Articles 3.1(a), 3.1(b), and 3.2 of the SCM Agreement and under Article III of the GATT 1994, in respect of certain measures, are outside the scope of this proceeding

7.384. The United States additionally requests preliminary rulings that the European Union is precluded from bringing claims under Articles 3.1(a), 3.1(b), and 3.2 of the SCM Agreement and under Article III of the GATT 1994 in respect of various original measures.⁶⁵² The United States advances different bases for these requests depending on the identity of the original measures and the claims to which they were subject in the original proceeding. In summary, the United States makes the following objections:

1. To the inclusion of claims under Articles 3.1(a) and 3.2 of the SCM Agreement against the original Washington State tax measures enacted under HB 2294 on the basis that they were the subject of claims under Articles 3.1(a) and 3.2 of the SCM Agreement in the original proceeding and those claims were rejected.⁶⁵³
2. To the inclusion of claims under Articles 3.1(a) and 3.2 of the SCM Agreement against all other original measures (aside from the original Washington State tax measures enacted under HB 2294 which are the subject of the above objection, and the FSC/ETI measures) on the basis that the European Communities did not make such claims in the original proceeding and thus is precluded from bringing those claims against those same measures at the compliance stage.⁶⁵⁴
3. To the inclusion of claims under Articles 3.1(b) and 3.2 of the SCM Agreement and Article III:4 of the GATT 1994 in relation to all original measures on the basis that the European Communities did not make such claims in the original proceeding and thus is precluded from bringing those claims against those same measures at the compliance stage.⁶⁵⁵

7.385. We consider the objection in (a) above first in Section 7.6.2.1 before considering those in (b) and (c), which raise common legal issues, together in Section 7.6.2.2.

7.6.2.1 Claims under Articles 3.1(a) and 3.2 of the SCM Agreement with respect to original Washington State tax measures enacted under HB 2294

7.386. We first consider the United States' request that the Panel rule that the European Union's claims under Articles 3.1(a) and 3.2 of the SCM Agreement against the following measures are precluded:

⁶⁵¹ The Panel's ruling that the European Union's claims under Articles 3.1(a), 3.1(b), and 3.2 of the SCM Agreement, and under Article III of the GATT 1994, are within its terms of reference is without prejudice to its further rulings, in Section 7.6.2, as to whether these claims in respect of certain measures are nevertheless outside the scope of this compliance proceeding. ↩

⁶⁵² United States' request for preliminary rulings, dated 13 November 2012, paras. 16 and 17. While paragraph 32 of the European Union's panel request alleges that the measures in items I.A through I.G are inconsistent with Articles III:1, III:4, and III:5 of the GATT 1994, in its first and second written submissions, the European Union's claims in relation to Article III of the GATT 1994 are limited to alleged inconsistency with Article III:4 of the GATT 1994. (See European Union's first written submission, paras. 777-788; and second written submission, paras. 851-864). The European Union therefore appears not to pursue its other claims under Article III of the GATT 1994. Accordingly, the Panel refers hereafter to the European Union's claims under Article III:4 of the GATT 1994. ↩

⁶⁵³ United States' request for preliminary rulings, dated 13 November 2012, paras. 5-7 and 60; reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 25; first written submission, para. 80; and second written submission, paras. 16 and 35. ↩

⁶⁵⁴ United States' request for preliminary rulings, dated 13 November 2012, para. 17; reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 25; first written submission, para. 84; and second written submission, para. 44. ↩

⁶⁵⁵ United States' request for preliminary rulings, dated 13 November 2012, para. 16; reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, para. 16; first written submission, para. 84; and second written submission, paras. 46 and 48. ↩

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1. Washington State B&O tax rate reduction;
2. Washington State B&O tax credits for preproduction/aerospace product development;
3. Washington State B&O tax credit for property taxes; and
4. Washington State sales and use tax exemptions for computer hardware, peripherals, and software.

7.6.2.1.1 Main arguments of the parties and third parties

7.387. The United States argues that the European Union "did not appeal" the finding of the original panel that the taxation measures enacted under HB 2294 had not been demonstrated to be inconsistent with Articles 3.1(a) and 3.2 of the SCM Agreement, and the European Union should not now be given an "unfair second chance" to make its case.⁶⁵⁶ The United States refers to the Appellate Body Reports in US – Upland Cotton (Article 21.5 – Brazil) and EC – Bed Linen (Article 21.5 – India) as standing for the proposition that a compliance proceeding is not the proper forum for a complaining party to re-litigate the original dispute by repeating unsuccessful claims.⁶⁵⁷

7.388. The United States says that, given that the European Union has not argued that the Washington State B&O tax rate reduction itself is new, or has changed, it is the same measure considered by the original panel. The European Union's Article 3.1(a) and 3.2 claims are therefore not within the compliance panel's terms of reference.⁶⁵⁸ Additionally, although the European Union has argued (for the first time in its second written submission) that the Washington State B&O tax credits for preproduction/aerospace product development have been modified, it has failed to demonstrate that these tax credits are a "new measure" or a "measure taken to comply".⁶⁵⁹ The United States faults the European Union for attempting to conflate the separate measures and the legislation under which they were enacted (HB 2294) to argue that, because the preproduction tax credits are a "new measure", the Panel must now assess HB 2294 and the associated tax provisions, as revised, in their totality and in an integrated manner. The United States says that the original panel was clear that the measures were the exemptions themselves, not HB 2294. Modification of an individual measure does not authorize a complaining party to re-litigate any claim it wants with respect to distinct measures that may have been enacted under the same legislation.⁶⁶⁰

7.389. The United States argues that the European Union cannot attempt to circumvent this restriction on the scope of Article 21.5 proceedings by asserting "artificial distinctions between a measure and the 'subsequent incidences' of applying that measure".⁶⁶¹ There is no basis for treating "subsequent incidences of application" of a measure as a separate measure. The United States says that the European Union's argument is similar to an argument made by the United States in US – Upland Cotton (Article 21.5 – Brazil) – that payments under a subsidy programme could, in a compliance proceeding, be analysed separately from the programme at issue in the original proceeding – an argument rejected by the Appellate Body.⁶⁶²

7.390. The European Union observes that the issue raised by the United States is not in truth whether these claims are within the Panel's terms of reference, but rather, whether the European Union is seeking an adjudication of the same matter that was adjudicated by the original panel.⁶⁶³ As such, this is not an issue for a preliminary ruling but relates to the substantive merits of the European Union's claim. In any case, the European Union submits that it is not seeking an adjudication of the same matter. It argues that claims of de facto export contingency must be considered on the basis of all of the facts. It makes the following arguments:

⁶⁵⁶ United States' second written submission, para. 36. ↩

⁶⁵⁷ United States' second written submission, para. 36. ↩

⁶⁵⁸ United States' second written submission, para. 39. ↩

⁶⁵⁹ United States' second written submission, para. 42. ↩

⁶⁶⁰ United States' second written submission, para. 43. ↩

⁶⁶¹ United States' second written submission, para. 37. ↩

⁶⁶² United States' second written submission, para. 38. ↩

⁶⁶³ European Union's response to the United States' request for preliminary rulings, dated 23 November 2012, para. 8. ↩

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1. The European Union's claim in the original proceeding was that HB 2294 was inconsistent with Articles 3.1(a) and 3.2 owing to five categories of fiscal subsidies. The panel found that four of these (i.e. the four original Washington State tax measures listed in paragraph 7.386 above, which were treated as three by the panel) were subsidies, and assessed the European Union's claim of de facto export contingency with respect to those four (three) Washington State tax measures enacted under HB 2294. Some of these measures have since been modified. The Panel should now assess HB 2294 and the associated tax measures, as revised, in their totality and in an integrated manner.⁶⁶⁴
2. The measures before this Panel are not the same as the measures at issue in the original proceeding. Also at issue in this proceeding are the "subsequent incidences of application" of the measures which were not before the original panel.⁶⁶⁵ These subsequent incidences of application are actually new measures that have a close nexus to the "overarching measure" of which they are discrete applications.⁶⁶⁶
3. The de facto export contingency challenge brought in this proceeding does not relate to the same aspect of the measures challenged in the original proceeding (i.e. that they are contingent upon sales) but rather to the fact that the measures are subsidies, and "in the nature of encouragement or direction and/or reward".⁶⁶⁷
4. The "clarification of relevant WTO law" to be applied by the Panel is different from that followed by the original panel, especially following the "confirmations and clarifications" provided by the Appellate Body Report in EC and certain member States – Large Civil Aircraft.⁶⁶⁸ These clarifications form part of the WTO acquis and subsequent panels, including this compliance Panel, are expected to follow the same interpretations.
5. The evidence and facts on which the European Union relies are different.⁶⁶⁹

7.391. In its second written submission, the European Union sets forth its understanding of concepts such as jurisdiction and terms of reference, and submits that there is no rule of res judicata in WTO dispute settlement proceedings or any possibility of non liquet. It also discusses what it considers are the limited circumstances in which the Appellate Body Report in EC – Bed Linen (Article 21.5 – India) would apply.⁶⁷⁰ At several places throughout this discussion, the European Union makes the following argument:

{O}nce particular measures are properly within the scope of compliance proceedings, because they are declared or undeclared measures taken to comply, any claim may be made against them, whether or not made in the original proceedings, and the compliance panel must assess and rule on such claim, such ruling being subject to scrutiny on appeal.⁶⁷¹

7.392. Certain of the third parties (Brazil, Canada, Japan, and Korea) make general arguments as to the situations in which a complaining party may be precluded from challenging a measure in a compliance proceeding that it had not successfully challenged in the original proceeding. These arguments are summarized in Section 7.2.1.1 of this Report.

7.6.2.1.2 Evaluation by the Panel

7.393. The question before us is whether the European Union can bring prohibited subsidy claims under Articles 3.1(a) and 3.2 of the SCM Agreement in respect of the four Washington State tax measures enacted under HB 2294 which were the subject of unsuccessful claims under Article 3.1(a) of the SCM Agreement in the original proceeding.

⁶⁶⁴ European Union's second written submission, para. 85. ↩

⁶⁶⁵ European Union's second written submission, para. 58. ↩

⁶⁶⁶ European Union's second written submission, para. 61. ↩

⁶⁶⁷ European Union's second written submission, para. 76. ↩

⁶⁶⁸ European Union's second written submission, paras. 68-74. ↩

⁶⁶⁹ European Union's second written submission, para. 77. ↩

⁶⁷⁰ European Union's second written submission, paras. 9-40. ↩

⁶⁷¹ European Union's second written submission, paras. 22, 24, and 26. (emphasis original) ↩

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7.394. To recall, in the original proceeding, the European Communities challenged the subsidies granted under HB 2294 (including the above-referenced measures) as being de facto export-contingent subsidies inconsistent with Articles 3.1(a) and 3.2 of the SCM Agreement.⁶⁷² The panel found that the European Communities had not demonstrated the existence of a "tie" between the grant of the subsidies and anticipated exportation or export earnings. Nor had it established that the subsidies were tied to actual exportation. Consequently, the panel found that the European Communities had not demonstrated that the Washington State tax measures enacted under HB 2294 were inconsistent with Articles 3.1(a) and 3.2 of the SCM Agreement.⁶⁷³

7.395. In its notice of appeal, the European Union appealed the panel's interpretation of Article 3.1(a) and footnote 4 of the SCM Agreement, and also argued that the panel failed to make an objective assessment as required by Article 11 of the DSU, in finding that "the European Union had not demonstrated that HB 2294 and the B&O tax rate reductions and instances of application are subsidies contingent/conditional in fact upon export."⁶⁷⁴ The European Union requested the Appellate Body to complete the analysis.⁶⁷⁵ However, on 19 May 2011, pursuant to Rule 30(1) of the Appellate Body's Working Procedures, the European Union notified the Appellate Body, as well as the United States and third participants, that it was withdrawing its appeal insofar as it related to subsidies contingent upon export, with immediate effect.⁶⁷⁶ Consequently, the panel's findings concerning the Article 3.1(a) and 3.2 claims were not disturbed by the Appellate Body and were adopted as part of the DSB recommendations and rulings. Thus, the DSB recommendations and rulings in the original proceeding included a finding that the European Communities had failed to demonstrate that the challenged Washington State tax measures enacted under HB 2294 were inconsistent with Articles 3.1(a) and 3.2 of the SCM Agreement.

7.396. In Section 7.2 of this Report, we dismiss the United States' request for preliminary rulings that the four original Washington tax measures (three of which are the subject of this preliminary rulings request regarding the permissibility of allowing the European Union to reassert claims under Article 3.1(a)) are outside the scope of this proceeding on the grounds that they were original measures not subject to the DSB recommendations and rulings.⁶⁷⁷ That issue dealt with the question of whether original measures that did not conclusively result in findings of WTO-inconsistency in the original proceeding may be subsequently challenged in a compliance proceeding.

7.397. The question before us in this Section is whether a complaining party may re-litigate the same claims of WTO-inconsistency in relation to unchanged aspects of original measures in circumstances where those claims were found not to have been established in the original proceeding. In our view, the key consideration is that the panel rejected the European Communities' Article 3.1(a) claims in respect of the original Washington State tax measures, and the European Union did not ultimately appeal that finding. This situation appears to be similar to the situation addressed in EC – Bed Linen (Article 21.5 – India), where India did not appeal a finding of the panel and then sought to raise the same claim in relation to an unchanged aspect of the implementation measure. The Appellate Body said that an unappealed finding in a panel report that is adopted by the DSB must be regarded as a final resolution to a dispute between the parties in respect of that particular claim and the specific component of the measure that is the subject of that claim.⁶⁷⁸

7.398. The European Union seeks to narrow the application of the reasoning in EC – Bed Linen (Article 21.5 – India) to the particular facts of that case. Thus, it argues that the principle expressed in EC – Bed Linen (Article 21.5 – India) is confined to scenarios where one or more of following is present:

⁶⁷² Panel Report, US – Large Civil Aircraft (2nd complaint), paras. 7.1465 and 7.1472. ↩

⁶⁷³ Panel Report, US – Large Civil Aircraft (2nd complaint), para. 7.1590. ↩

⁶⁷⁴ European Union's notice of appeal, dated 4 April 2011, WT/DS353/8, para. 4. ↩

⁶⁷⁵ European Union's notice of appeal, dated 4 April 2011, WT/DS353/8, para. 4. ↩

⁶⁷⁶ Appellate Body Report, US – Large Civil Aircraft (2nd complaint), para. 28. ↩

⁶⁷⁷ We take this opportunity to explain that the "original Washington tax measures" the focus of our ruling in Section 7.2.1 overlap with the Washington State tax measures enacted under HB 2294 which are the focus of this ruling, with the exception of the City of Everett B&O tax rate reduction, which is a municipal tax, and therefore is an original Washington tax measure, but not a Washington State tax measure enacted under HB 2294. ↩

⁶⁷⁸ Appellate Body Report, EC – Bed Linen (Article 21.5 – India), para. 93. ↩

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1. the measures or aspects of measures challenged have not changed and the aspect of the measure challenged was "separable" from other aspects of the measure;
2. the facts and evidence are exactly the same as the facts and evidence in the original proceeding; and
3. the law does not change between the original proceeding and the compliance proceeding.⁶⁷⁹

7.399. Moreover, it notes that every subsequent case has distinguished EC – Bed Linen (Article 21.5 – India).⁶⁸⁰ In short, the European Union's case is that these claims are not the same claims it made in the original proceeding; the measures are different, the applicable law is different, and the facts are different.

7.400. The European Union argues that the Washington State tax measures before this Panel are not the same as those at issue in the original proceeding; rather they are "subsequent incidences of application" of an overarching measure to which both are closely connected. We are not persuaded by the European Union's portrayal of the "subsequent instances of application" of a measure as being a new measure, distinct from the original measure, and for this to affect the question of whether the Article 3.1(a) claims against the original measure can be re-litigated. The Appellate Body was critical of the United States' attempts to distinguish the payments made under a subsidy programme from the subsidy programme itself in the Upland Cotton compliance proceeding.⁶⁸¹ The Appellate Body said:

We have some difficulty accepting the notion that a subsidy programme and the payments provided under that programme can be assessed separately. While the payments may cause adverse effects, the amount of the payments, beneficiaries, and the terms and conditions of eligibility will be provided in the subsidy programme or legislation authorizing those payments.⁶⁸²

7.401. The European Union also argues that measures and instances of their application are "inseparable", as are cases involving subsidies that are prohibited and/or actionable, or where subsidies may be cumulated or aggregated for purposes of the serious prejudice analysis.⁶⁸³ However, the European Union appears to take out of context a reference to "separability" between aspects of a measure that the Appellate Body made in a case subsequent to EC – Bed Linen (Article 21.5 – India) to the effect that a complaining party can challenge an aspect of a measure that it did not challenge in the original proceeding in situations where that aspect is an "inseparable" part of the "measure taken to comply".⁶⁸⁴ The notion of "inseparability" of aspects of a measure referred to in that case is not relevant to the present discussion.

7.402. We also do not consider the reasoning in EC – Bed Linen (Article 21.5 – India) to be confined to cases where there is absolutely no change in the facts or evidence. EC – Bed Linen (Article 21.5 – India) concerned a challenge by India to an aspect of a European Commission anti-dumping determination. None of the facts or evidence regarding the investigation changed; it was simply a question of challenging one aspect of the Commission's determination that had not been challenged in the original proceeding because the panel had found that India had not made a prima facie case. Nevertheless, we do not see a basis for limiting the reasoning of the Appellate Body in that case to situations in which the claim does not involve any changed facts or evidence. A claim of WTO-inconsistency raised for a second time in a compliance proceeding could be expected to involve different facts, at least in the subsidies context, which presumably would deal with events at a different point in time. It is almost always possible for a complaining party in a compliance proceeding to present new facts and evidence on the record to support a claim. To

⁶⁷⁹ European Union's second written submission, paras. 12 and 33-38. ↩

⁶⁸⁰ European Union's second written submission, para. 39. ↩

⁶⁸¹ The United States in that case had argued that the DSB recommendations and rulings covered only payments made under marketing loan and counter-cyclical programmes in marking years 1999-2002 and did not extend to payments under those same programmes made in subsequent years. Thus it argued that subsequent payments under those programmes were outside the scope of the compliance proceeding. (See Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), paras. 22-27). ↩

⁶⁸² Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 234. ↩

⁶⁸³ European Union's second written submission, paras. 12 and 78-80. ↩

⁶⁸⁴ Appellate Body Report, US – Zeroing (EC) (Article 21.5 – EC), paras. 432 and 433. ↩

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limit the application of the notion of finality of DSB recommendations and rulings expressed in EC – Bed Linen (Article 21.5 – India) to situations in which there are no new facts or evidence on the record presented in support of the claim in the compliance proceeding would be to implicitly overrule EC – Bed Linen (Article 21.5 – India).

7.403. We are mindful that there is a legitimate question as to whether de facto claims relate so inherently to the particular facts on which the claims are argued that whenever the constellation of facts supporting the claim changes, the "claim" of de facto export contingency made in a compliance proceeding should be considered to be a new and different claim to that made in the original proceeding. Thus we do not exclude the possibility that, owing to fundamental changes in the factual situation between the original proceeding and compliance proceeding, a measure that was originally found not to be de facto export contingent could subsequently become so. In this situation, it may be that the complaining party would not be precluded from demonstrating de facto export contingency in a compliance proceeding. However, this is not the present situation. For reasons that we explain below, we regard the individual claims of inconsistency with Articles 3.1(a) and 3.2 that the European Union makes in relation to the Washington State tax measures enacted under HB 2294 in this proceeding as the same claims of de facto export contingency that it made in the original proceeding with respect to those measures.

7.404. Comparing the claims of de facto export contingency made in the original and compliance proceedings, we see that in the original proceeding, the European Communities' Article 3.1(a) claim concerned "the grant of subsidies under HB 2294" as being contingent in fact upon export performance because the grant is tied to actual or anticipated exportation or export earnings.⁶⁸⁵ The contention was that the entering into effect of HB 2294 was explicitly contingent on the siting of a "significant commercial airplane final assembly facility in Washington State" that could produce "at least thirty-six superefficient airplanes {i.e. 787s} per year". The European Communities presented evidence to seek to demonstrate that it was highly unlikely that Boeing could sustain a production rate of 36 787 aircraft per year for the U.S. market alone. The panel described the issue before it as "whether the tax measures under HB 2294 constitute subsidies contingent upon export performance under Article 3.1(a) of the SCM Agreement".⁶⁸⁶ It also said that the "European Communities' claim is that HB 2294 is de facto contingent upon export performance" before referring to a series of arguments advanced by the European Communities regarding HB 2294 (as opposed to each of the individual taxation measures enacted under it).⁶⁸⁷ The panel concluded that the European Communities "has not demonstrated that HB 2294 is contingent upon export performance"⁶⁸⁸ and on that basis found that the European Communities had not demonstrated that the taxation measures enacted under HB 2294 are inconsistent with Articles 3.1(a) and 3.2 of the SCM Agreement.⁶⁸⁹

7.405. In the present proceeding, the European Union claims that the subsidies (i.e. all measures at issue in this proceeding, including the four Washington State tax measures enacted under HB 2294) are "contingent/conditional, in fact, whether solely or as one of several other conditions, upon export performance, and are prohibited by Articles 3.1(a) and 3.2 and footnote 4 of the SCM Agreement".⁶⁹⁰ The European Union argues that Boeing's actual and anticipated sales are "skewed" toward exports, that through its repeated actions over time, the United States has "conditioned Boeing's behaviour so as to induce or incentivise such skewing" and that, "taken as a whole, or in any permutation" the facts and evidence demonstrate that the granting or maintaining of the subsidies, without having been made legally contingent/conditional upon export performance, is nevertheless in fact tied to actual or anticipated exportation or export earnings.⁶⁹¹ The European Union clarified any apparent confusion over the nature of these claims in its second written submission:

Thus, contrary to the manner in which the United States seeks to reformulate the EU claims, the European Union does not argue that the measures only become

⁶⁸⁵ Panel Report, US – Large Civil Aircraft (2nd complaint), paras. 7.1465 and 7.1472. See also para. 4.254: "the European Communities argues that the State of Washington's HB 2294 tax incentives are contingent in fact on export performance, within the meaning of Article 3.1(a) of the SCM Agreement". ↩

⁶⁸⁶ Panel Report, US – Large Civil Aircraft (2nd complaint), para. 7.1513. ↩

⁶⁸⁷ Panel Report, US – Large Civil Aircraft (2nd complaint), para. 7.1514. ↩

⁶⁸⁸ Panel Report, US – Large Civil Aircraft (2nd complaint), paras. 7.1543 and 7.1589. ↩

⁶⁸⁹ Panel Report, US – Large Civil Aircraft (2nd complaint), para. 7.1590. ↩

⁶⁹⁰ European Union's first written submission, para. 763. ↩

⁶⁹¹ European Union's first written submission, para. 763. ↩

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inconsistent when considered collectively and does not make a claim that seeks to identify a "system of subsidies" as a measure at issue. Rather, we argue that each of the measures is inconsistent; and we specify, as recalled above, the facts and evidence on which we rely for that purpose. Thus, each subsidy is viewed individually, but not in clinical isolation from the totality of the facts and evidence (including the other subsidies) supporting the claim.⁶⁹²

7.406. The European Union does not seek to justify raising its Article 3.1(a) and 3.2 claims against the Washington State tax measures enacted under HB 2294 in the compliance proceeding on the basis of fundamental factual changes that have taken place between the original and compliance proceedings. Rather, the European Union adopts a different underlying theory as to how the measures in question are de facto export contingent, and seeks to adduce different facts in support of that different theory. In other words, the arguments the European Union now relies upon to show de facto export contingency are different from those that the European Communities made in the original proceeding. They no longer concern the condition upon which the HB 2294 tax incentives were to become effective, but rather an allegation that the United States has created a state of interdependence and mutual expectation regarding exportation and the receipt of further subsidies.⁶⁹³

7.407. Despite the different argumentation, the claims under Articles 3.1(a) and 3.2 of the SCM Agreement in respect of the Washington State tax measures enacted under HB 2294 remain the same. Those Article 3.1(a) and 3.2 claims were resolved in a panel report that was adopted by the DSB and must be regarded as a final resolution of the dispute between the parties in respect of those claims and the measures the subject of those claims. The European Union is not permitted to reassert those claims against those measures in a compliance proceeding based on a new theory of how the measures are de facto export contingent.

7.408. We are aware that two of the taxation measures enacted under HB 2294 have been modified: (a) the B&O tax credits for preproduction/aerospace development were amended by SSB 6828 to expand their application beyond preproduction development to include all aerospace product development, as well as to permit non-manufacturing entities to claim the credit for expenditures after 30 June 2014; and (b) the B&O tax credits for property taxes were amended by HB 2466 to extend the availability of the tax credits to leasehold excise taxes and not just property taxes. However, it is not apparent that the nature of these modifications is relevant to the European Union's arguments as to why the measures are now contingent in fact upon export performance when they were not previously so. Accordingly, we do not consider that this factor changes our analysis.⁶⁹⁴

7.409. Finally, it remains to consider the European Union's argument regarding the clarification of relevant WTO law to be applied by the compliance Panel, which will be different from that followed by the original panel, owing to the confirmations and clarifications of the Appellate Body in EC and certain member States – Large Civil Aircraft. Specifically, the Appellate Body in EC and certain member States – Large Civil Aircraft clarified the interpretation of Article 3.1(a) of the SCM Agreement in a number of respects which differ from the original panel's interpretation of that provision.⁶⁹⁵

7.410. The difficulty we see with the argument that the principle expressed in EC – Bed Linen (Article 21.5 – India) does not apply in respect of claims decided on the basis of "outdated" interpretations of the covered agreements is that, in contrast to bringing a new proceeding in which the claim is made against that measure, a reconsideration of the unsuccessful claim at the

⁶⁹² European Union's second written submission, para. 53. (emphasis added, fns omitted) ↩

⁶⁹³ See European Union's first written submission, para. 758: ↩

The United States has thus come to associate subsidies with exports, and Boeing has come to associate exports with subsidies, each becoming a reflex to the other, so deeply ingrained that it can no longer be disguised … Boeing has thus been transformed into precisely what US industrial policy was designed to create: a US national champion in a global market, skewed towards exports.

⁶⁹⁴ For the reasons explained in our ruling "Reasons for Declining the European Union's Request for Leave to File and Additional Submission Regarding SSB 5952", the text of which may be found in Section 7.7 of this Report, we do not consider in this Report the amendments effected by SSB 5952 to the provisions of the Revised Code of Washington that reflect the Washington State tax measures enacted under HB 2294. ↩

⁶⁹⁵ See European Union's second written submission, paras. 68-74. ↩

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compliance stage amounts to re-litigating an issue that was conclusively decided on the merits in the original proceeding in a manner that compromises the finality of DSB recommendations and rulings.⁶⁹⁶ As the Appellate Body said:

{A}n unappealed finding included in a panel report that is adopted by the DSB must be treated as a final resolution to a dispute between the parties in respect of the particular claim and the specific component of a measure that is the subject of that claim.⁶⁹⁷

7.411. Clarifications of interpretations of the covered agreements can be expected to emerge over time. This should not affect the finality of DSB recommendations and rulings. As the Appellate Body in EC – Bed Linen (Article 21.5 – India) observed: "{a}t some point, disputes must be viewed as definitely settled by the WTO dispute settlement system".⁶⁹⁸ Moreover, in the present proceeding, the European Union does not seek to make the same case of export contingency that it tried to make in the original proceeding, but on the basis of a clarified understanding of the interpretation of Article 3.1(a). Rather, the arguments the European Union makes in support of its export contingency claims in this proceeding and the evidence it provides in support of those arguments are altogether different from those in the original proceeding, no longer focusing on the condition on which HB 2294 was enacted, but on the "Pavlovian effect" of the United States' continued subsidization of Boeing in return for increased exports.⁶⁹⁹

7.412. On the basis of the foregoing considerations, the Panel grants the United States' request and rules that the European Union is precluded from bringing claims under Articles 3.1(a) and 3.2 of the SCM Agreement against the following four original Washington State tax measures enacted under HB 2294:

1. Washington State B&O tax rate reduction;
2. Washington State B&O tax credits for preproduction/aerospace product development⁷⁰⁰;
3. Washington State B&O tax credit for property taxes⁷⁰¹; and
4. Washington State sales and use tax exemptions for computer hardware, peripherals, and software.

7.6.2.2 Claims under Articles 3.1(a) and 3.2 of the SCM Agreement against certain original measures; and claims under Articles 3.1(b) and 3.2 of the SCM Agreement and Article III:4 of the GATT 1994 against all original measures

7.413. We now consider the United States' request that the Panel rule that the European Union is precluded from making the following claims in respect of the following measures:

1. Claims that all original measures, other than the Washington State tax measures enacted under HB 2294 and the FSC/ETI measures, are inconsistent with Articles 3.1(a) and 3.2 of the SCM Agreement.⁷⁰²

⁶⁹⁶ The European Union was free to bring a new proceeding alleging violations of Articles 3.1(a) and 3.2 of the SCM Agreement in relation to these measures, and to support the claims based on the interpretation of Article 3.1(a) as clarified by the Appellate Body in EC and certain member States – Large Civil Aircraft. ↩

⁶⁹⁷ Appellate Body Report, EC – Bed Linen (Article 21.5 – India), para. 93. (emphasis original) ↩

⁶⁹⁸ Appellate Body Report, EC – Bed Linen (Article 21.5 – India), para. 98. (emphasis original) ↩

⁶⁹⁹ As noted above, the European Union initially appealed the panel's findings regarding the export contingency of the Washington State tax measures enacted under HB 2294 in the original proceeding but then withdrew its appeal on 19 May 2011, the day after the Appellate Body Report in EC and certain member States – Large Civil Aircraft was circulated. It seems to us that if the European Union had wanted to pursue its export contingency claims in relation to the HB 2294 taxation measures on the basis of the newly clarified interpretation of Article 3.1(a) of the SCM Agreement, it could have done so by continuing with its appeal of the panel's findings regarding its 3.1(a) claim in the original proceeding. ↩

⁷⁰⁰ Including amendments thereto pursuant to SSB 6828. ↩

⁷⁰¹ Including amendments thereto pursuant to HB 2466. ↩

⁷⁰² United States' request for preliminary rulings, dated 13 November 2012, paras. 18 and 60. ↩

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2. Claims that all original measures are inconsistent with Articles 3.1(b) and 3.2 of the SCM Agreement.
3. Claims that all original measures are inconsistent with Article III of the GATT 1994.⁷⁰³

7.414. The United States objects to the inclusion of these claims in respect of the above categories of original measures on the basis that these claims were not made in the original proceeding with respect to these measures and could have been, such that the European Union is precluded from bringing them in the compliance proceeding.⁷⁰⁴

7.6.2.2.1 Main arguments of the parties and third parties

7.415. The United States argues that the European Union did not make Articles 3.1(a), 3.1(b), and 3.2 claims against the above-referenced measures in the original proceeding and is precluded from making those claims now.⁷⁰⁵ Similarly, the European Union could have pursued Article III:4 GATT claims in the original proceeding but it chose not to. Indeed, in its panel request in the original proceeding, the European Communities did make claims under Article III:4 of the GATT 1994 with respect to all of the measures listed in its panel request, but it later abandoned those claims. A party may not invoke Article 21.5 of the DSU to pursue a claim that it could have, but did not, pursue in the original proceeding.⁷⁰⁶

7.416. The United States disputes the European Union's contention that the measures before this Panel are not the measures that were before the original panel, asserting that most of the NASA, DOD, Washington State and Kansas measures covered by the European Union's Article III claim were in fact before the original panel.⁷⁰⁷ Although the European Union contends that the facts and evidence have changed significantly, it does not point to any specific facts or evidence that might warrant allowing the European Union to make claims that it could have raised in the original proceeding, but opted not to. The European Union's assertion that the facts and evidence on which the claims are based only came into existence after 17 February 2006 is "demonstrably false" because its Article III claims rest at base on a series of quotations reproduced in Exhibit EU-583, many of which predate 17 February 2006.⁷⁰⁸

7.417. The European Union argues that the claims in question are based on facts and evidence that only came into existence after the date on which the original panel was established (17 February 2006) and that these are not therefore claims that the European Communities could have raised in the original proceeding.⁷⁰⁹ The premise on which the United States' objection is based is therefore groundless.

7.418. In addition, the European Union argues, as it did in relation to the United States' objections to the European Union's Article 3.1(a) claims in respect of the Washington State tax measures enacted under HB 2294, (see Section 7.6.2.1.1 above) that the measures before this Panel at the compliance stage are not the same measures that were before the original panel. Rather, these measures are "instances of application" that are different from the original measures. In addition, the law has changed, the measures have been altered, the facts and

⁷⁰³ While paragraph 32 of the European Union's panel request alleges that the measures in items I.A through I.G are inconsistent with Articles III:1, III:4, and III:5 of the GATT 1994, in its first and second written submissions, the European Union's claims in relation to Article III of the GATT 1994 are limited to alleged inconsistency with Article III:4 of the GATT 1994. (See European Union's first written submission, paras. 777-788; and second written submission, paras. 851-864). The European Union therefore appears not to pursue its other claims under Article III of the GATT 1994. ↩

⁷⁰⁴ United States' request for preliminary rulings, dated 13 November 2012, paras. 15-17 and 60; reply to the European Union's response to the United States' request for preliminary rulings, dated 3 December 2012, paras. 14 and 25; and first written submission, paras. 81 and 84. ↩

⁷⁰⁵ United States' first written submission, paras. 82, 84, and 89; request for preliminary rulings, dated 13 November 2012, paras. 16 and 17. ↩

⁷⁰⁶ United States' first written submission, paras. 85, 670, and 671; second written submission, para. 48. ↩

⁷⁰⁷ United States' second written submission, para. 50. ↩

⁷⁰⁸ United States' first written submission, para. 83; second written submission, para. 50. ↩

⁷⁰⁹ European Union's second written submission, paras. 95 and 100. ↩

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evidence relied upon have changed and the measures are not separable from other measures that are within the scope of this compliance proceeding.⁷¹⁰

7.419. As regards the claim under Article 3.1(a) of the SCM Agreement, the European Union clarifies also that it is not arguing that each of the identified measures, viewed in isolation from all of the other measures, is prohibited. Rather, taking into account all of the facts, each of the identified measures is prohibited.⁷¹¹ This is not a claim that could have been made in the original proceedings because a substantial part of the facts relied upon only materialized in the intervening period.⁷¹²

7.420. Brazil argues that a Member cannot invoke Article 21.5 of the DSU to pursue a claim that it could have pursued in the original proceeding, but chose not to raise or otherwise abandoned at some stage in the dispute settlement process. An implementing Member should be entitled to presume that it need not address those unchallenged aspects in attempting to comply with the DSB recommendations and rulings.⁷¹³ Brazil therefore considers that the claims made by the European Union under Article III:4 of the GATT 1994 are outside the scope of this proceeding, since allowing a party to invoke Article 21.5 of the DSU to pursue claims that it could have pursued in the original proceeding, but instead chose to abandon, would undermine the dispute settlement system's functioning and predictability.⁷¹⁴ Where the situation involves new claims relating to a measure for which the original panel rejected the complaining Member's claims of inconsistency with a covered agreement, Brazil argues that the measures should be presumed to be consistent with WTO obligations. To include such a measure within the scope of a compliance proceeding would require the complaining Member to demonstrate that the measure has undergone such significant changes that it is a "measure taken to comply" with the adverse WTO decision.⁷¹⁵

7.421. Canada considers that a complaining party should generally be precluded from raising claims in compliance proceedings that it could have brought in the original proceeding but did not. To allow a complaining party to make a claim that it could have, but did not, raise in the original proceeding would jeopardize fundamental fairness and due process rights since, in the absence of a finding of a violation of its obligations, a respondent should be allowed to assume that its measure is WTO-consistent.⁷¹⁶ Canada considers that this principle applies to the claims advanced under Articles 3.1(a) and 3.1(b) with respect to the Washington State B&O tax rate reduction.⁷¹⁷

7.422. Japan considers that respect for the due process rights of the responding party requires that a complaining party generally should not be permitted to bring a claim in a compliance proceeding that could have been brought in the original proceeding. If an unchanged measure (or unchanged elements of that measure) were subject to review by a compliance panel pursuant to a claim that could have been, but was not, raised in the original proceeding, this would effectively give the complaining party an unfair "second chance". However, the question of whether a claim could or could not have been brought in the original proceeding is fact-specific and should be addressed on a case-by-case basis.⁷¹⁸

⁷¹⁰ European Union response to the United States' request for preliminary rulings, dated 23 November 2012, paras. 9, 43, and 44; supplemental submission on the United States' request for preliminary rulings, paras. 21-23; and second written submission, paras. 97 and 102. ↩

⁷¹¹ European Union's supplemental submission on the United States' request for preliminary rulings, para. 23. ↩

⁷¹² European Union's supplemental submission on the United States' request for preliminary rulings, para. 23; second written submission, paras. 89, 95, and 100. ↩