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Recourse to Arbitration by the United States under Article 22.6 of the DSU and Article 4.11 of the SCM Agreement - Decision of the Arbitrator

I. INTRODUCTION

A. INITIAL PROCEEDINGS

1.1.
On 20 March 2000, the Dispute Settlement Body (DSB) adopted the Panel and Appellate Body reports in this dispute. The DSB recommended, in particular, that the United States bring into conformity the measures found to be inconsistent with its obligations under the Agreement on Subsidies and Countervailing Measures (SCM Agreement) and the Agreement on Agriculture and that the United States withdraw the FSC subsidies "at the latest with effect from 1 October 2000".1 On 12 October 2000, the DSB agreed2 to accede to a request by the United States that the DSB modify the time-period in this dispute so as to expire on 1 November 2000.3 On 15 November 2000, the President of the United States signed into law an Act of the United States Congress entitled the "FSC Repeal and Extraterritorial Income Exclusion Act of 2000"4 (the "ETI Act"). With the enactment of this legislation, the United States considered that it had implemented the DSB's recommendations and rulings in the dispute and that the legislation was consistent with the United States' WTO obligations.5
1.2.
On 17 November 2000 the European Communities had recourse to Article 21.5 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (the "DSU"), considering that the United States had failed to withdraw the subsidies as required by Article 4.7 of the SCM Agreement and had thus failed to comply with the DSB recommendations and rulings. The Panel established under Article 21.5 of the DSU (the "Compliance Panel") found the ETI Act to be in violation of United States obligations under the SCM Agreement, the Agreement on Agriculture and Article III:4 of the GATT 1994. The Appellate Body upheld these conclusions. The reports of the Compliance Panel and the Appellate Body were adopted by the DSB on 29 January 2002.

B. REQUEST FOR ARBITRATION AND SELECTION OF THE ARBITRATOR

1.3.
On 2 October 2000, the parties informed the DSB of their Understanding on "Agreed Procedures under Articles 21 and 22 of the Dispute Settlement Understanding (DSU) and Article 4 of the SCM Agreement applicable in the follow-up to the United States – Tax Treatment for 'Foreign Sales Corporations' dispute", concluded between the parties on 29 September 2000.6 The agreed procedures in this Understanding foresaw that, if the European Communities considered that the situation described in Article 21.5 of the DSU existed and initiated consultations under that provision, it could request authorization to suspend concessions or other obligations pursuant to Article 22.2 of the DSU and to adopt countermeasures pursuant to Article 4.10 of the SCM Agreement.7 It was also agreed that, "[u]nder Article 22.6 of the DSU including Article 4.11 of the SCM Agreement [(sic)]", the United States would object to the appropriateness of the countermeasures and/or the level of suspension of concessions or other obligations and/or make an Article 22.3 claim, before the date of the DSB meeting considering the European Communities request, and that the matter would be referred to arbitration pursuant to Article 22.6 of the DSU.8 It was also agreed that where the European Communities requested the establishment of a compliance panel, both parties would request the arbitrator to suspend his work until either: (a) adoption of the Article 21.5 compliance panel report or, (b) if there was an appeal, adoption of the Appellate Body report.9
1.4.
On 17 November 2000, the European Communities requested authorization from the DSB to take appropriate countermeasures and to suspend concessions pursuant to Article 4.10 of the SCM Agreement and Article 22.2 of the DSU in the amount of US$4,043 million per year. On 27 November 2000, the United States objected to the appropriateness of the countermeasures proposed by the European Communities and the level of suspension of concessions proposed by the European Communities and requested that, "as required by Article 22.6 of the DSU (and consequently Article 4.11 of the SCM Agreement), 'the matter be referred to arbitration'".10
1.5.
At the meeting of the DSB on 28 November 2000, it was agreed that the matter raised by the United States in document WT/DS108/15 be referred to arbitration as required by Article 22.6 of the DSU and Article 4.11 of the SCM Agreement.11 In the light of the establishment of a compliance panel under Article 21.5 and in accordance with the Procedures agreed between the European Communities and the United States, the European Communities and the United States requested the Arbitrator to suspend the arbitration proceeding until adoption of the Panel Report or, if there was an appeal, adoption of the Appellate Body Report.12
1.6.
The panel and Appellate Body reports under Article 21.5 of the DSU were adopted by the DSB on 29 January 2002 and, in accordance with the parties' understanding referred to in paragraph 1.3 above, the Arbitrator then resumed its work.
1.7.
The Arbitration was carried out by the original panel, namely:

Chairman: Mr. Crawford Falconer

Members: Mr. Didier Chambovey

Prof. Seung Wha Chang.

II. PRELIMINARY ISSUES

A. MANDATE OF THE ARBITRATOR

2.1.
The United States has initiated these proceedings pursuant to Article 22.6 of the DSU and Article 4.11 of the SCM Agreement. Article 22.6 of the DSU provides in relevant part:

"When the situation described in paragraph 2 occurs, the DSB, upon request, shall grant authorization to suspend concessions or other obligations within 30 days of the expiry of the reasonable period of time unless the DSB decides by consensus to reject the request. However, if the Member concerned objects to the level of suspension proposed, (…) the matter shall be referred to arbitration. (…)"

2.2.
With regard to countermeasures taken in response to violations of Article 3.1 of the SCM Agreement on prohibited subsidies, however, Article 4.11 of that Agreement provides the following mandate for arbitrators:

"In the event a party to the dispute requests arbitration under paragraph 6 of Article 22 of the Dispute Settlement Understanding ('DSU'), the arbitrator shall determine whether the countermeasures are appropriate."10

(original footnote) 10 This expression is not meant to allow countermeasures that would be disproportionate in light of the fact that the subsidies dealt with under these provisions are prohibited.

2.3.
With regard to any amount of suspension of concessions that would be requested in relation to a violation of Article III:4 of the GATT 1994 or of the Agreement on Agriculture, our mandate is defined by Article 22.7 of the DSU, which provides in relevant part that:

"The arbitrator acting pursuant to paragraph 6 shall not examine the nature of the concessions or other obligations to be suspended but shall determine whether the level of such suspension is equivalent to the level of nullification or impairment …"

2.4.
The United States argues both that the amount of suspension of concessions requested by the European Communities is inconsistent with Article 4.10 of the SCM Agreement in that the countermeasures proposed are not "appropriate" within the meaning of that provision, and that the level of suspension of concessions requested by the European Communities is inconsistent with the provisions of Article 22.4 in that it is not "equivalent to the level of nullification or impairment" suffered by the European Communities.
2.5.
The European Communities clarified, in the course of the proceedings, that it based its request for authorization for countermeasures in the amount of US$4,043 million on both the SCM Agreement and DSU provisions. If we should decide that the appropriate amount of compensation under Article 4.11 of the SCM Agreement is less than the requested amount, then the European Communities is of the view that it will be necessary for us to consider whether an additional amount of suspension of concessions needs to be awarded under Article 22.7 of the DSU, in particular with regard to the violation of Article III:4 of GATT 1994.13 Therefore, we decide to first examine whether the European Communities's proposed countermeasures are appropriate within the meaning of Article 4.10 of the SCM Agreement. Then, if necessary, we shall proceed to examine whether the level of the European Communities requested suspension of concessions is inconsistent with Article 22.4 of the DSU.
2.6.
We also recall the terms of Article 30 of the SCM Agreement, which clarifies that the provisions of the DSU are applicable to proceedings concerning measures covered by the SCM Agreement. Article 22.6 of the DSU therefore remains relevant to arbitral proceedings under Article 4.11 of the SCM Agreement, as illustrated by the textual reference made to Article 22.6 of the DSU in that provision. However, the special or additional rules and procedures of the SCM Agreement, including Articles 4.10 and 4.11, would prevail to the extent of any difference between them.14
2.7.
Finally, we note that there is no dispute on the type of measure proposed in this case. Our mandate under Article 4.11 of the SCM Agreement in relation to the violation of Article 3 of that Agreement is therefore only to determine whether the level of countermeasures proposed is appropriate.

B. BURDEN OF PROOF

C. RELEVANT MEASURE AND DATE FOR CALCULATIONS

III. SUMMARY OF MAIN ARGUMENTS

3.1.
The United States has argued that the amount of countermeasures proposed by the European Communities is not appropriate because it is disproportionate to the trade impact of the inconsistent measure on the European Communities.31 It interprets Article 4.10 of the SCM Agreement as requiring countermeasures not to be disproportionate to the trade impact of the violating measure on the complaining Member.32 It also considers that, in this instance, the amount of the subsidy can and should be used as a "proxy" for the trade impact of the measure.33 The United States estimated the total value of the subsidy at US$4,125 milion for the year 200034, and suggested that, allocating to the European Communities its share of that amount, countermeasures in a maximum amount of US$1,110 million would be appropriate.35 It further encouraged the arbitrators to refrain from using economic modelling in the circumstances of this case, because of the range of uncertainties of the measurements and the range of possible "reasonable" outcomes under economic modelling. However, in response to questioning, the United States has also indicated that, were we to pursue economic modelling, certain considerations would have to be taken into account.
3.2.
The European Communities has argued that the amount of countermeasures it has proposed corresponds to the value of the subsidy, and that this amount is "appropriate" within the meaning of Article 4.10 of the SCM Agreement. In the European Communities view, Article 4.10 of the SCM Agreement sets out a unique benchmark for countermeasures in response to violations of a particular provision of the SCM Agreement – namely Article 3.36 In the European Communities view, Article 4.10 of the SCM Agreement allows for countermeasures which will induce compliance, and in this instance, countermeasures in the amount of the value of the subsidy to be withdrawn are appropriate, although they reflect a conservative approach.

IV. APPROACH OF THE ARBITRATOR

4.1.
We recall that Article 4.10 of the SCM Agreement provides as follows:

"In the event the recommendation of the DSB is not followed within the time-period specified by the panel, which shall commence from the date of adoption of the panel's report or the Appellate Body's report, the DSB shall grant authorization to the complaining Member to take appropriate9 countermeasures, unless the DSB decides by consensus to reject the request."

(footnote original) 9 This expression is not meant to allow countermeasures that are disproportionate in light of the fact that the subsidies dealt with under these provisions are prohibited.

4.2.
In addition, Article 4.11 of the SCM Agreement defines our mandate as follows:

"In the event a party to the dispute requests arbitration under paragraph 6 of Article 22 of the Dispute Settlement Understanding ("DSU"), the arbitrator shall determine whether the countermeasures are appropriate.10"

(footnote original) 10 This expression is not meant to allow countermeasures that are disproportionate in light of the fact that the subsidies dealt with under these provisions are prohibited.

4.4.
In doing this, we must aim at determining whether, in this particular case, the countermeasures proposed by the European Communities are "appropriate".
4.5.
We recall, in this regard, that the European Communities has proposed a certain amount of countermeasures and explained the rationale for that proposal. The United States, as noted above, is challenging that amount as being disproportionate to the trade impact of the violating measure on the European Communities. We understand the United States argument to be essentially two-fold. The United States seems to argue to the effect that the fundamental test for assessing whether countermeasures are appropriate or not is an "adverse effects" test and that, moreover, this is to be assessed in a manner broadly comparable to that which would occur pursuant to a case of nullification or impairment under Article 22.4 of the DSU. This is tantamount to a two‑pronged argument: (a) that the European Communities entitlement to respond to the illegal subsidy is limited to the trade effect on it; and (b) that the mode of calculation is comparable, although not identical in its precision, to an assessment under Article 22.4 of the DSU.
4.6.
In order to examine the United States challenge, we therefore need to consider first whether indeed, as argued by the United States, countermeasures under Article 4.10 are required to be proportionate, or at least not disproportionate, to the trade impact of the violating measure on the complaining Member. We will then be in a position to assess, in light of our conclusion on that point, whether in the circumstances of this case, the proposed countermeasures are "appropriate" or not.
4.7.
We will consider first the expression "appropriate countermeasures" contained in Articles 4.10 and 4.11 of the SCM Agreement. In this regard, we note that the scope of application of Article 3.2 of the DSU is not limited to panel and Appellate Body proceedings. Accordingly, in assessing the matter before us, we must clarify the relevant provisions, to the extent necessary, in accordance with the customary rules of interpretation of public international law. These rules are reflected in Articles 31, 32 and 33 of the Vienna Convention on the Law of Treaties ("Vienna Convention"). We recall in particular that Article 31.1 requires a treaty to be

"interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose."37

4.8.
We will therefore consider the terms of Article 4.10 of the SCM Agreement in accordance with these rules.

V. THE NOTION OF "APPROPRIATE COUNTERMEASURES" UNDER ARTICLE 4.10 OF THE SCM AGREEMENT

5.1.
In assessing the validity of the US proposition that countermeasures under Article 4.10 of the SCM Agreement should not be disproportionate to the trade impact of the measure on the complaining Member, in this instance the European Communities, we find it useful to consider first the terms of Article 4.10 in themselves.38 This initial textual analysis will inform the rest of our analysis, where we will address the detail of the US interpretation and, more generally, our understanding of the expression "appropriate countermeasures" in Article 4.10 of the SCM Agreement, taken in its context and in light of its object and purpose.

A. TEXT OF THE PROVISION

5.2.
We recall again that Article 4.10 of the SCM Agreement provides as follows:

"In the event the recommendation of the DSB is not followed within the time-period specified by the Panel, which shall commence from the date of adoption of the panel's report or the Appellate Body's report, the DSB shall grant authorization to the complaining Member to take appropriate9 countermeasures, unless the DSB decides by consensus to reject the request".

(Original footnote) 9 This expression is not meant to allow countermeasures that are disproportionate in light of the fact that the subsidies dealt with under these provisions are prohibited.

5.3.
This provision thus foresees the authorization of "appropriate countermeasures". We shall consider these terms in turn.

1. "Countermeasures"

5.4.
Dictionary definitions of "countermeasure" suggest that a countermeasure is essentially defined by reference to the wrongful action to which it is intended to respond. The New Oxford Dictionary defines "countermeasure" as "an action taken to counteract a danger, threat, etc".39 The meaning of "counteract" is to "hinder or defeat by contrary action; neutralize the action or effect of"40. Likewise, the term "counter" used as a prefix is defined inter alia as: "opposing, retaliatory"41. The ordinary meaning of the term thus suggests that a countermeasure bears a relationship with the action to be counteracted, or with its effects (cf. "hinder or defeat by contrary action; neutralize the action or effect of"42).
5.5.
In the context of Article 4 of the SCM Agreement, the term "countermeasures" is used to define temporary measures which a prevailing Member may be authorized to take in response to a persisting violation of Article 3 of the SCM Agreement, pending full compliance with the DSB's recommendations. This use of the term is in line with its ordinary dictionary meaning as described above: these measures are authorized to counteract, in this context, a wrongful action in the form of an export subsidy that is prohibited per se, or the effects thereof.
5.7.
We need, however, to broaden our textual analysis in order to see whether we can find more precision in how countermeasures are to be construed in this context. We thus turn to an examination of the expression "appropriate" countermeasures with a view to clarifying what level of countermeasures may be legitimately authorized.

2. "Appropriate countermeasures"

5.8.
The term "appropriate" countermeasures in Article 4.10 is informed by footnote 9, which provides guidance as to what the expression "appropriate" should be understood to mean. For the sake of clarity, we will first consider the term "appropriate", and then the terms of the footnote. However, this is with the understanding that these two elements are part of a single assessment and that the meaning of the expression "appropriate countermeasures" should result from a combined examination of these terms of the text in light of its footnote.
5.9.
The ordinary dictionary meaning of the term "appropriate" refers to something which is "especially suitable or fitting".43 "Suitable", in turn, can be defined as "fitted for or appropriate to a purpose, occasion …"44 or "adapted to a use or purpose".45 "Fitting" can be defined as "of a kind appropriate to the situation".46
5.10.
As far as the amount or level of countermeasures is concerned, the expression "appropriate" does not in and of itself predefine, much less does it do so in some mathematically exact manner, the precise and exhaustive conditions for the application of countermeasures. That is, in itself, surely significant. There would have been no a priori reason why some defined and/or formulaic approach could not have been set down in advance for the application of countermeasures. The terms of the SCM Agreement on this point manifestly eschew any such approach. But the provisions actually used do not become any the less meaningful or of lower legal status by reason of that fact. Much less can there be some kind of inherent presumption that they must be contorted to fit some kind of procrustean bed in the proportions of a formula when it is manifestly not present in the text itself.
5.11.
It is, after all, scarcely a matter for debate that not all situations can be imagined in advance. But even if one takes the view that, as a consequence, there can be no manual which offers a precise course of action for a given situation, that does not mean that one is completely bereft of guidance or, as the case may be, that there are no bounds set to permissible action. This is clearly enough the situation we are dealing with here, where a Member might find itself resorting to countermeasures. The relevant provisions are not designed to lay down a precise formula or otherwise quantified benchmark or amount of countermeasures which might be legitimately authorized in each and every instance. Rather, the notion of "appropriateness" is used.
5.13.
We would underline that the adjective "appropriate" does not, in and of itself, make it clear whether the "countermeasures" at issue become so by reason of whether they are aimed at neutralizing the original wrongful action, its effects, or both. To that extent, we only say, at this point, that the test is in principle permissive of a range of possibilities.
5.14.
We must turn, therefore, to footnote 9 of the SCM Agreement to see whether this is capable of shedding any further light on this matter.

3. Footnote 9 to the SCM Agreement

5.15.
Footnote 9 of the SCM Agreement, which provides the only express indication of what the expression "appropriate countermeasures" encompasses, reads as follows:

"This expression [appropriate] is not meant to allow countermeasures that are disproportionate in light of the fact that the subsidies dealt with under these provisions are prohibited."

5.16.
This footnote effectively clarifies further how the term "appropriate" is to be interpreted. We understand it to mean that countermeasures that would be "disproportionate in light of the fact that the subsidies dealt with under these provisions are prohibited" could not be considered "appropriate" within the meaning of Article 4.10 of the SCM Agreement. We turn to a further examination of these terms.
5.17.
The term "disproportionate" can be defined as "lacking proportion, poorly proportioned, out of proportion".47 The term "proportion" refers, inter alia, to a "comparative relation or ratio between things in size, quantity, numbers" or a "relation between things in nature. etc".48 The term "disproportionate" thus suggests a lack of proper or due relationship between two elements.
5.20.
We receive, however, rather more specific guidance on these elements in the final part of the footnote, which reads:

" … disproportionate in light of the fact that the subsidies dealt with under these provisions are prohibited." (emphasis added)

5.21.
The use of the terms "in light of" directs that the final part of the footnote is a matter that must enter into consideration at all times. It seems reasonable also to conclude that it is not seen to be a minor or insignificant consideration. On the contrary, it is rather to be an element that is to pervade or colour the whole assessment. That, at least, is the only reasonable way to construe viewing something "in light of" something else.
5.22.
As we read it, the text refers us unambiguously to the provisions of Part II of the SCM Agreement and requires us to ensure that our perspective on countermeasures is invested with and coloured by consideration of the nature and legal status of the particular underlying measure in respect of which the countermeasures are applied. In short, this provides that, when assessing countermeasures under Article 4.10, account must be taken of the fact that the export subsidy at issue is prohibited and has to be withdrawn.
5.25.
Having considered the express terms of Article 4.10 of the SCM Agreement, we therefore note, at this stage of our analysis, that they do not suggest a specific quantum to be respected in each and every case in the determination of an amount of countermeasures which can be authorized under this provision. On the contrary, they direct us to consider whether the countermeasure proposed are in an adequate relation to the situation to be countered, instructing us specifically to consider that the subsidies under Part II of the SCM Agreement are prohibited in assessing whether the countermeasures proposed are disproportionate.
5.27.
With these observations in mind, we will consider further whether, when reading these terms in their context and in light of their object and purpose, this interpretative approach is confirmed and whether further clarification can be ascertained as to how the "appropriateness" of countermeasures under Article 4.10 should be assessed.

B. CONTEXTUAL ANALYSIS OF ARTICLE 4.10

5.28.
We thus turn to an examination of the terms of Article 4.10 of the SCM Agreement taken in their context, in order to ascertain further how the notion of "appropriate countermeasures" should be understood. In that regard, we will address the US arguments relating to the role of the trade impact of the measure in assessing whether countermeasures are appropriate under Article 4.10 of the SCM Agreement.
5.29.
In the view of the United States, "appropriate" countermeasures under Article 4.10 of the SCM Agreement must not be disproportionate to the "trade impact" of the measure on the complaining Member. The United States acknowledges that the standard under Article 4.10 – "not … disproportionate" – is not identical to the standard under Article 22.4 of the DSU – equivalence –. However, in its view, the standard under Article 4.10 of the SCM Agreement cannot be applied as if it existed in clinical isolation from the DSU, and in a manner which is inconsistent with the object and purpose of the DSU. The United States argues in particular that in light of Article 22.4 of the DSU and Articles 7.9 and 9.4 of the SCM Agreement, it would be untenable to interpret Article 4.10 of the SCM Agreement as permitting countermeasures that are disproportionate to the trade impact on the complaining Member.53 In the US view, the term "countermeasures" as used in the SCM Agreement does not have a special meaning and these countermeasures do not have a unique objective in inducing compliance. Rather, Article 4 of the SCM Agreement should be interpreted in light of the objectives of the WTO dispute settlement, including the objective of maintaining a proper balance between the rights of obligations of Members, as foreseen in Article 3.3 of the DSU. An assessment of the appropriateness of countermeasures under Article 4.10 by reference to the trade impact of the violating measure on the complaining Member is, in the US view, the only approach that is consistent with the object and purpose of Article 4.10.54
5.30.
To begin with, we recall that first, we have found not only that, via footnote 9, there is an entitlement to take account of the unlawful nature of the initial act which gives rise to the countermeasures, but also that this is the perspective for assessment specifically required for under the SCMAgreement. While we do not see the plain language of Article 4.10 as in any way precluding the application of countermeasures aimed at countering the effects of the wrongful act on a Member provided they otherwise satisfy the terms of the SCM Agreement, we do not find this to be the necessary standard of assessment laid down in Article 4.10 of the SCM Agreement. We saw nothing in the plain language of this text which, on its face, dictates that the term "appropriate countermeasures" must be limited in its meaning to "equivalence" or correspondence (or some synonym) with the "trade impact" on the complaining Member.55
5.31.
We therefore must address the question of whether there is otherwise, in reading the provision in context, some overriding requirement to assess the appropriateness of countermeasures under Article 4.10 from the perspective of demonstrated trade effects on the complaining Member.

1. Article 4.10 in the context of the SCM Agreement

5.32.
Recourse to countermeasures is foreseen in three provisions of the SCM Agreement: Article 4.10, which we are concerned with here, Article 7.9 and Article 9.56 As regards actionable subsidies, Article 7.9 provides for authorization of countermeasures "commensurate with the degree and nature of the adverse effects determined to exist…". In a similar vein, Article 9.4 provides, in relation to non-actionable subsidies, for the authorization of countermeasures "commensurate with the nature and degree of the effects determined to exist". The explicit precision of these indications clearly highlights the lack of any analogous explicit textual indication in Article 4.10 and contrasts with the broader and more general test of "appropriateness" found in Articles 4.10 and 4.11.
5.33.
In short, as far as prohibited subsidies are concerned, there is no reference whatsoever in remedies foreseen under Article 4to such concepts as "trade effects", "adverse effects" or "trade impact". Yet, by contrast, such a concept is to be found very clearly in the context of remedies under Article 7, through the notion of "adverse effects".
5.34.
We believe that this difference must be given a meaning and that we should give due consideration to the fact that the drafters – who obviously could have used other terms in order to quantify precisely the permissible amount of countermeasures in the context of Article 4.10 – chose not to do so. It is not our task to read into the treaty text words that are not there.57 We are also cognizant that the terms that do appear in the text of the treaty must be presumed to have meaning and must be read effectively.58 The implications of the use of the term "appropriate" must therefore be acknowledged and we must give this expression in Article 4.10 its full meaning.59
5.36.
We consider that the rationale is not difficult to discern. These different wordings reflect, in our view, the distinct legal nature and treatment under the SCM Agreement of various types of subsidies. The fundamental distinction between actionable and prohibited subsidies which underlies the whole structure and logic of the SCM Agreement finds expression generally in the differences in the elements defining the applicable obligations and the differences of treatment given to these measures with regard to the remedies available to challenge them.60
5.37.
The distinction in the terminology relating to countermeasures is, in turn, a corresponding reflection of the distinction when it comes to substantive disciplines for export subsidies: i.e. a clear and unambiguous intent to apply different and more exacting disciplines when it comes to export subsidies viz. a prohibition.
5.38.
The underlying rationale for the distinction made is clear enough. The provisions regarding remedies pursuant to Articles 5 and 7 relate to subsidies that are accepted, in themselves, not to be illegal. But, while they are acceptable in themselves, other Members are, nevertheless, entitled to protection from their possible adverse effects. So the basis for actionability of such measures is their adverse effect on other Members.61 In the case of a nullification or impairment claim, this adverse effect is defined as that which is "caused to the interests of the Member requesting consultations".62
5.39.
This is, of course, quite different from the situation with export subsidies. We see in Article 4 of the SCM Agreement that the prohibited nature of export-contingent subsidies has justified more stringent (faster) dispute settlement procedures63 and a clear requirement to withdraw them without delay.64 More importantly, they are prohibited per se. Other Members are not obliged to make a case regarding any adverse effects to successfully challenge such measures. They are required simply to establish the existence of a measure that is, as a matter of principle, expressly prohibited. As an empirical matter they undoubtedly do have adverse effects. But that is not the legal basis upon which action may be taken to challenge them under the SCM Agreement.
5.40.
This is, in turn, reflected consistently in the provisions addressing remedies. Pursuant to the relevant provisions in Articles 5 and 7, a Member found to be in breach - having granted a subsidy which was not prohibited but has produced demonstrated adverse effects on another Member - has the alternative of withdrawing the measure or removing these adverse effects.65 What is important for present purposes is that, by contrast, there is, under Article 4 relating to prohibited export subsidies, no option for an infringing party to simply remove the adverse effects and retain the measure. A Member found to be in breach must withdraw the measure without delay. This contrasts with the remedies in Article 7 of the same Agreement that are available in relation to actionable subsidies. In all provisions relating to prohibited subsidies in Part II of the SCM Agreement, the remedies available are stronger and more rapid than those available in Part III of the SCM Agreement for actionable subsidies. This is clearly not just a random distinction. It reflects the legal status of a prohibition: if the measure is per se prohibited, irrespective of its effects, the only consistent remedy is to withdraw it.66
5.41.
This reading of the text in its context confirms us in our view that, rather than there being any requirement to confine "appropriate countermeasures" to offsetting the effects of the measure on the relevant Member, there is a clear rationale exhibited that reinforces our textual interpretation that the Member concerned is entitled to take countermeasures that are tailored to neutralizing the offending measure qua measure as a wrongful act. The expression "appropriate countermeasures", in our view, would entitle the complaining Member to countermeasures which would at least counter the injurious effect of the persisting illegal measure on it. However, it does not require trade effects to be the effective standard by which the appropriateness of countermeasures should be ascertained. Nor can the relevant provisions be interpreted to limit the assessment to this standard. Members may take countermeasures that are not disproportionate in light of the gravity of the initial wrongful act and the objective of securing the withdrawal of a prohibited export subsidy, so as to restore the balance of rights and obligations upset by that wrongful act.
5.42.
To conclude otherwise would effectively erode the fundamental distinction in the SCM Agreement between those provisions regarding purely "effects-oriented" remedies and those distinctly provided for pursuant to Article 4. Under the former provisions, it is clear that the premise is that the Member is to retain the entitlement to persist with certain subsidies, as they are not prohibited per se. The obligation of such a Member goes to attenuating their demonstrated trade effect. Accordingly, the remedy to which an affected Member is entitled goes only as far as countering those effects. In such a situation, there is an effective "rebalancing", but only a rebalancing on the level of reciprocal actual trade effects. In such a case, the legal status of the original measure is not itself affected.
5.43.
This contrasts with the situation vis-à-vis a prohibited export subsidy. To insist on a remedy limited to such effects would be precisely to entertain "rebalancing" at that level, which would neither specifically take into account the obligation to withdraw the original measure nor aim to restore the balance of rights and obligations that has been upset by the original wrongful action. It would be effectively to read away the fundamental distinction between the relevant provisions as well as to undermine the essential rationale of that distinction. In our view, footnotes 9 and 10, in their final part, require us specifically to account for, and give due force to, that distinction in our determination of whether countermeasures are "appropriate".

2. Article 4.10 and Article 22.4 of the DSU

5.44.
While the aforementioned provisions appear to us to be the most direct and relevant context, we examine also whether there is anything which, taking Article 22.4 of the DSU into account, would in any way lead us to modify our interpretation. We do so in particular bearing in mind the fact that the United States considers that the DSU is relevant on the matter of the role of trade effects pursuant to Article 4.10.
5.48.
Indeed, reading the text of Article 4.10 in its context, one might reasonably observe that if the drafters had intended the provision to be construed in this way, they could certainly have made it clear. Indeed, relevant provisions both elsewhere in the SCM Agreement and in the DSU use distinct terms to convey precisely such a standard as described by the United States, in so many words. Yet the drafters chose terms for this provision in the SCM Agreement different from those found in Article 22.4 of the DSU. It would not be consistent with effective treaty interpretation to simply read away such differences in terminology.
5.49.
We therefore find no basis in the language itself or in the context of Article 4.10 of the SCM Agreement to conclude that it can or should be read as amounting to a "trade effect-oriented" provision where explicitly alternative language is to be read away in order to conform it to a different wording to be found in Article 22.4 of the DSU.
5.50.
We would simply add that, while we consider that the precise difference in language must be given proper meaning, this goes no further than that. Our interpretation of Article 4.10 of the SCM Agreement as embodying a different rule from Article 22.4 of the DSU does not make the DSU otherwise inapplicable or redundant.

C. OBJECT AND PURPOSE

VI. ASSESSMENT OF THE COUNTERMEASURES PROPOSED BY THE EUROPEAN COMMUNITIES

6.1.
As noted above, the parties agree that, in qualitative terms, the type of measure envisaged by the European Communities in this case is appropriate. Their disagreement is over whether the quantitative amount of the countermeasure is appropriate.
6.2.
The European Communities has requested an authorization to suspend concessions in an amount of US$4,043 million. It has argued, as a general matter, that Article 4.10 of the SCM Agreement would allow for an amount of countermeasures such as to effectively induce compliance, and that it could have, on that basis, requested a higher amount of countermeasures. However, it has explained that the amount which it has actually requested in this instance is based on the amount expended by the United States in granting the subsidy.
6.3.
We will therefore consider whether countermeasures in this amount can be considered "appropriate" within the meaning of Article 4.10, bearing in mind our analysis in the previous section.
6.4.
We recall that we are required, in our analysis, to apply the terms of footnote 9 and, in that regard, need to take into account its second part. We therefore need to consider whether the European Communities proposed countermeasures are not disproportionate "in light of the fact that the subsidies dealt with under these provisions are prohibited".
6.5.
In approaching this, we first wish to underline exactly what our responsibility is in making this determination. We are required, under Article 4.11 of the SCM Agreement, to ascertain whether the countermeasures proposed by the European Communities are "appropriate". In this assessment, we are guided in particular by the terms of footnote 10, which directs us to consider whether we are persuaded that the EC countermeasures are "disproportionate" in light of the fact that the subsidies at issue are prohibited. As we noted above, this is not exactly the same as being persuaded that they are "proportionate". In the absence of being effectively persuaded that they are disproportionate, we would conclude that the European Communities' proposed countermeasures are within the bounds of what they are entitled to apply pursuant to Article 4.10 of the SCM Agreement.
6.6.
As noted above, in assessing whether the proposed countermeasures are "disproportionate" in light of the fact that the subsidies dealt with in this provision are prohibited, "our perspective on countermeasures is invested with and coloured by consideration of the nature and legal status of the particular underlying measure in respect of which the countermeasures are applied".71 As we have outlined in paragraph 5.61 above, we consider that the European Communities is entitled to act with countermeasures that properly take into account the gravity of the breach and the nature of the upset in the balance of rights and obligations in question. In the case at hand, we consider what this entails.
6.7.
As regards the matter of the balance of rights and obligations between Members that is being upset through the granting of the subsidy, the European Communities has had the "right" to expect that there will be no export subsidies applied to those goods covered by the SCM Agreement. The United States, for its part, has had a corresponding obligation to refrain from applying such export subsidies. The persistence by the United States with this breach of its obligations upsets the "balance of rights and obligations" that we have referred to in the previous section of this report.
6.8.
As far as a trading partner is concerned, the matter does not become problematic, as a legal matter, contingent on any other factor such as, e.g. the actual effects of the measure itself. It is problematic in the form of an upset in the reciprocal balance of rights and obligations in and through the measure itself and, in this case, it is intrinsic to that measure as a wrongful act that the United States is incurring costs in granting and maintaining the export subsidy. Once such a measure is in operation, its real world effects cannot be separated from the inherent uncertainty that is created by the very existence of such an export subsidy. The measure is, by its very nature, inherently destabilizing. This is its essential character and it is reflected in the fact that the measure is per se prohibited. In this particular case, moreover, the subsidy at issue, the FSC/ETI scheme, is a measure which is extensive in its application and, indeed, is potentially available to a very wide range of goods for export. It is not at all like a product- or even a sector-specific measure with, e.g., a set rate or quantum of funds. It is a highly complex and comprehensive export subsidy being applied to a multiplicity of firms.
6.9.
The FSC/ETI scheme is available systemically and very widely. If anything, this can only intensify the degree to which, in this case, the measure concerned creates systematic uncertainty and instability of expectations as to trading conditions, as opposed to security and stability of such conditions based on the understandinggrounded in an express obligation – that export subsidies are prohibited. We consider that this is a matter that is relevant to the issue of the "gravity" of the initial wrongful act. The European Communities cannot, of course, itself counter the export subsidy at its source, i.e. effect its cessation. But, as regards the balance of rights and obligations between Members, it is entitled to "redress" the upsetting of that balance via countermeasures.72
6.10.
The quantitative element of the breach in this case is, in fact, that the United States has spent approximately US$4,000 million yearly in breach of its obligations.73 To our mind, each dollar is, as it were, as much a breach of the obligations of the United States as any other. Certain dollars do not become any less so – or effectively "quarantined" from their legal status of breach of an obligation – by virtue of some other criteria (such as trade effects). To put it another way, the United States' breach of obligation is not objectively dismissed because some of the products benefiting from the subsidy are, e.g., exported to another trading partner. It is an erga omnes obligation owed in is entirety to each and every Member. It cannot be considered to be "allocatable" across the Membership. Otherwise, the Member concerned would be only partially obliged in respect of each and every Member, which is manifestly inconsistent with an erga omnesper se obligation. Thus, the United States has breached its obligation to the European Communities in respect of all the money that it has expended, because such expenditure in breach – the expense incurred – is the very essence of the wrongful act.74
6.11.
Thus, legally speaking, in terms of redressing the balance of rights and obligations, this is a significant consideration in our assessment of the European Communities' proposed countermeasures. In this respect, we recall our earlier conclusion that countermeasures under Article 4.10 may be tailored to the initial wrongful act they are to counter. In this instance, the European Communities has proposed to take countermeasures which would precisely tailor the response to the amount of this initial wrongful act. In light of our interpretation, in the previous section, of the terms of Article 4.10 of the SCM Agreement, we find such an approach, which aims to challenge the wrongful act itself – the breach of the obligation – to be permissible in principle. Indeed, it is in our view entirely compatible with the essence of the notion of countermeasures, in that it seeks to respond exactly to the violation, the persistence of which generates the entitlement to countermeasures.
6.12.
We thus turn to a consideration of the proposed countermeasures in relation to the initial wrongful act which they are to counter, the prohibited subsidy.

A. THE PROPOSED COUNTERMEASURES IN RELATION TO THE PROHIBITED SUBSIDY

6.13.
In order to proceed with an analysis of the proposed countermeasures in relation to the wrongful act they are to counter, we must first define the elements of that wrongful act. It seems to us that the relevant factors that can be used when it comes to defining the prohibited subsidy itself cannot be artificially constructed. They should be discerned from and grounded in the SCM Agreement itself. We recall in this respect the guidance provided in particular by footnote 9, which directs us to take into consideration that the underlying subsidy is prohibited under Part II of the SCM Agreement.
6.14.
We turn first to what we consider to be fundamental when it comes to characterizing the measure qua measure, namely the "financial contribution", given that it is a core element of the definition of a subsidy within the meaning of Article 1 of the SCM Agreement.
6.15.
In this regard, we first note that the amount of the countermeasures proposed certainly exhibits a manifest relationship of proportionality, as we understand the term75, in regard to the amount of the export subsidy granted. In this instance, the parties effectively do not fundamentally disagree on the actual value of the export subsidy in respect of which the United States has been found to be in persistent violation.76 Their disagreement rests only on the issue of whether that amount of countermeasures is "appropriate" within the meaning of Article 4.10.
6.16.
As noted above, the quantitative element of the breach in this case is, in fact, that the United States has spent approximately US$4,000 million in breach of its obligations.77 The European Communities, for its part, is requesting an authorization to take countermeasures in an amount of US$4,043 million.
6.17.
The values concerned are not disproportionate. In purely numerical terms, they are in fact in virtual correspondence.78
6.18.
But this is not just a matter of merely arithmetic proportionality in the abstract. There is an underlying more "structural" element of proportionality that is exhibited in the countermeasures proposed which provides a legally relevant relationship between measure and countermeasure. Firstly, the granting of a subsidy involves a financial contribution, thus an expense incurred by the government. That is, stricto sensu, the "measure" at issue as the wrongful act of the responsible State party. In this instance, an amount of approximately US$4,000 million has been granted in the year 2000, in a manner found to be inconsistent with the SCM Agreement, by the US government to its exporters. That is the expense incurred by the United States Government in granting that measure, through the FSC/ETI scheme. As a wrongful act – as breach of an obligation owed to the European Communities in this case – this is the essential act of the government itself.
6.19.
Thus, following our reasoning above, this is a central perspective from which to view the "appropriateness" of the countermeasures at issue. The United States has effectively incurred an expense which can be valued at around US$4,000 million for the year 2000, as an act of Government in breach of its obligations under the SCM Agreement. In the instant case the European Communities cannot, of course, directly thwart that expenditure at source. As we see it, the European Communities is proposing to respond by suspending a numerically equivalent obligation which it owes to the United States. Absent those countermeasures, the United States would enjoy those rights, just as, absent the expenditure by the United States, the European Communities would enjoy its rights. It appears to us that this is a proper manner from which to judge the congruence of the countermeasure to the measure at issue, i.e. to view it under its legal category: on the one hand an expense to government of a certain value constituting an upsetting of the balance of rights and obligations; and therefore, on the other hand, a congruent duty imposed by a responding government as a mirror withdrawal of an obligation.
6.20.
We have evidently assigned fundamental importance to the role of the financial contribution as the act in respect of which countermeasures should be evaluated. That reflects the fact that it is the element reflecting most accurately the act of the Member itself, over which it exerts direct control.79
6.21.
Of course, the second element that is central to the subsidy as defined by Article 1 of the SCM Agreement itself is the benefit to the recipient. In this case, there is manifestly a benefit conveyed through the FSC/ETI scheme. It is conveyed to US firms. At the broadest level, the EC countermeasures would be viewed as aiming to deprive such firms of an advantage they would otherwise receive in relation to access to the EC market. There is no doubt that the character of the EC response, in addition to being an act of response to a quantifiable breach of an obligation with a congruent response, also has the consequence of effecting that via US firms. Yet it is also a fact that US firms are benefiting from the prohibited subsidy. To that extent, a certain basic proportionality is respected. In this case, the European Communities' powers are limited to its own jurisdiction. One way of countering an absolute benefit to firms is to impose an equivalent absolute expense. Certainly, the overall effects will vary as will the impact on firms. There will not be pure equivalence in terms of economic impact. But within the realistic constraints that states operate in, and in dealing with an all-pervasive regime such as the FSC/ETI scheme, the principle being effectively followed here is the imposition on firms of the Member concerned of expenses at least equivalent to those initially incurred by the treasury of the Member concerned in granting benefits to its firms. In that sense, there is a certain correlation between the benefits initially conferred to US firms and the European Communities' proposed response.
6.22.
It is certainly true that the European Communities' proposed countermeasures would not in a literal sense amount to (nor are they claimed to be) an exact counter to the benefits to recipients of the FSC/ETI subsidy. This does not, in our view, represent a fundamental problem in this case. It is almost inevitable that it will, in many situations, be impracticable to devise a countermeasure that would exactly counter the benefits conferred, nor is there, in our view, a requirement to do so, precisely because the terms justifying countermeasures are, for the reasons we have given, entitled to be viewed essentially from the perspective of countering the legal breach as a wrongful act. Be that as it may, in the case of a programme such as this, which applies to firms across a considerable range of industries and products, it is clearly impossible for a foreign government to counter precisely the specific benefits to specific firms. The task of calculation alone would be near impossible, let alone tailoring responses to particular firms.
6.23.
In this instance, the European Communities has based its proposed amount of countermeasures on the face value of the subsidy, rather than directly on the benefits conferred by it.80 The United States has not sought to object to the level of countermeasures on these grounds. Taking all of this into account, we, for our part, have certainly found no reason to consider that, to the extent that this aspect is relevant in the first place, it provides any reason to depart from our judgement that the entitlement to the level of countermeasures stemming from the wrongful act as measured by the expense to government is not disproportionate.
6.24.
Thus, it is our view, in light of these considerations, that the countermeasures proposed are not disproportionate to the initial wrongful act to which they are intended to respond.
6.25.
Our analysis above and the fact that we have concluded that the countermeasures proposed in this case are not disproportionate to the initial wrongful act – the maintenance by the United States of an unlawful export subsidy in violation of its obligations under Article 3 of the SCM Agreement –, would in themselves, in our view, be sufficient to allow us to consider that, in the circumstances of this case, the proposed amount of countermeasures would be "appropriate" within the meaning of Article 4.10 of the SCM Agreement. We recall in this respect our conclusion in Section V above regarding the entitlement to take countermeasures tailored to restore the balance of rights and obligations upset by the original wrongful act, and taking into account its gravity. In this instance, this is the approach followed by the European Communities, and we find it to be consistent with the terms of Article 4.10 of the SCM Agreement.81
6.26.
This is an appropriate point at which to underline that there is one matter that is particular to the circumstances of this case and is material to this conclusion, yet has not – up to this point – been expressly dealt with.
6.27.
In the circumstances of this case, the European Communities is the sole complainant seeking to take countermeasures in relation to this particular violating measure. That is also, in our view, a relevant consideration in our analysis. Had there been multiple complainants each seeking to take countermeasures in an amount equal to the value of the subsidy, this would certainly have been a consideration to take into account in evaluating whether such countermeasures might be considered to be not "appropriate" in the circumstances. That is not, however, the situation before us.
6.28.
The reasoning we have followed above could be construed – in a purely abstract manner – to be as inherently applicable to any other Member as to the complainant in this case viz. the European Communities.82 We would simply underline, in this regard, that in this case, we were not presented with a multiple complaint but a complaint by one Member. Thus we have not been obliged to consider whether or how the entitlement to countermeasures based on our reasoning above should be allocated across more than one complainant. Thus to the extent that there would be an issue of allocation, as it were, it need not – and did not – enter into consideration as an element to otherwise "discount" the European Communities' entitlement to countermeasures in this particular case.
6.29.
Understandably, it would be our expectation that this determination will have the practical effect of facilitating prompt compliance by the United States. On any hypothesis that there would be a future complainant, we can only observe that this would give rise inevitably to a different situation for assessment. To the extent that the basis sought for countermeasures was purely and simply that of countering the initial measure (as opposed to, e.g., the trade effects on the Member concerned) it is conceivable that the allocation issue would arise (although due regard should be given to the point made in footnote 84 above). We take note, on this point, of the statement by the European Communities:

"…it may well be that the European Communities would be happy to share the task of applying countermeasures against the United States with another member and voluntarily agree to remove some of its countermeasures so as to provide more scope for another WTO Member to be authorized to do the same. This will be another fact that future arbitrators could take into consideration.".83

6.30.
It must be stressed, however, that there is no mechanical automaticity to this. The essence of such assessments is that it is a matter of judging what is appropriate in the case at hand. There could well be other factors to take into account in their own right, e.g., if for instance the matter of bilateral trade effects were essentially at issue.
6.31.
At this point of our analysis, we therefore have, in our view, elements sufficient to allow us to find that the countermeasures proposed could be considered "appropriate" within the meaning of Article 4.10, on the basis of their relation to the initial violating measure.
6.32.
In doing so, we are conscious that we have not precisely considered the contention that the matter should be determined by means of reference to the adverse trade effects of the subsidy on the European Communities. We recall, moreover, that the United States has argued that the basis for assessing the "appropriateness" of countermeasures should precisely be these adverse trade effects (or "trade impact"). We address this issue further below.

B. THE TRADE EFFECTS OF THE SUBSIDY ON THE EUROPEAN COMMUNITIES

6.33.
As discussed in the previous section, we have not interpreted Article 4.10 to preclude a Member from taking countermeasures that are tailored to counter the adverse effects it has suffered as a result of the illegal measure. We therefore do not rule out a priori that trade effects of the measure on the affected Member can enter into consideration in a particular case, as a relevant factor, in determining the "appropriate" amount of countermeasures within the meaning of Article 4.10 of the SCM Agreement. Indeed, as we have previously noted, the expression "appropriate countermeasures", in our view, would entitle the complaining Member to countermeasures which would at least counter the injurious effect of the persisting illegal measure on it.84
6.34.
However, we have also determined that Article 4.10 of the SCM Agreement does not require trade effects to be the effective standard by which the appropriateness of countermeasures should be ascertained. Nor can the relevant provisions be interpreted to limit the assessment to this standard.
6.35.
Bearing in mind, however, our view that trade effects are not a priori to be ruled out as relevant in a particular case, we see merit in examining whether, even if one addressed the matter of trade effects in this case, there would be any reason to reach a different conclusion. In this case, in fact, we find no reason to reach a different conclusion after examining the arguments presented by the United States in respect of the trade effects of the FSC/ETI scheme on the European Communities.
6.36.
We recall in that regard that the United States presented essentially two lines of argument in relation to the assessment of the trade effects of the FSC/ETI scheme on the European Communities. Firstly, the United States principally suggested that in this case, the face value of the subsidy should be taken as a "proxy" for the trade impact of the measure and that this sum then should be apportioned on a percentage basis to the EC share of world trade as a proxy for the trade effect of the subsidy on the European Communities. Secondly, in the event that we would nonetheless decide to examine the economic data pertaining to the trade effects of the measure, the United States has presented a range of possible estimates of the trade impact of this measure using methodologies other than the "proxy" approach. The United States nonetheless argued in the first instance that these should not be used to estimate the trade effects of the measure in this case, by reason of their unreliability and the excessively broad range of the results of calculations. We will consider these two arguments in turn.
6.37.
Turning first to the proposed "proxy" approach, under that approach, if the US$4,125 million85 figure suggested by the United States is used as the starting-point, representing the value of the subsidy, and retaining 26.8 per cent of that figure as the European Communities' share of the global trade effects of the subsidy, as suggested by the United States86, the appropriate amount of countermeasures would be in a range of approximately US$1,110 million.87
6.38.
We have stated that we see nothing in the text that directs a trade effects test and that it cannot be construed to be limited to this. There is furthermore nothing in the text which would expressly direct how trade effects are to be estimated in a case relating to countermeasures in response to export subsidies. The "proxy" approach proposed by the United States, however, does not appear to have any sound support in the provisions at issue or in the facts of the case.
6.41.
Indeed, were it a matter of merely determining the expenditure, this would completely obviate the need for any such precise concepts to be applied when ascertaining the effects. Bearing that in mind, it would scarcely be coherent to consider that, when it comes to the manifestly more stringent requirements relating to export subsidies, there should be any presumption of an implicit methodology which is less likely to bear an objective relationship to the facts of the case.
6.42.
Nor has the United States convinced us of why this particular predetermination would be any more inherently plausible than any other. The arbitrator in the Brazil – Aircraft case suggests in fact that, if anything, a more likely presumption would be that the relationship of expenditure to effect is to be multiplied rather than static.88 We take no position on that point in this case. We note, however, that the United States approach in fact amounts to assigning implicit values to the economic variables which the United States otherwise argues are too uncertain to devise, in the context of economic modelling.89 It is not at all clear to us why these implicit values would be inherently more plausible than any of those that can be assigned in the context of economic modelling, which at least represents analytical estimates rather than an unreasoned assumption. This underlines, in our view, the inherently arbitrary nature of the US proposed approach.
6.43.
We turn now to the alternative methodologies presented by the parties for estimating the trade effects of the measure on the European Communities. These methodologies are similar in nature. Nevertheless, different estimations were obtained, both below and above the amount of countermeasures proposed by the European Communities, due to differing assumptions about the values to be assigned to the relevant parameters in the calculations.90
6.44.
The European Communities suggested that the Arbitrators should consider the methodology used by the US Treasury Department in 1997 in its report to the United States Congress on the trade impact of the FSC Scheme.91 The United States objected to this methodology on the following grounds: (1) the price elasticity of export demand is estimated to be too high; (2) the price elasticities of export supply are also estimated to be too high and (3) the pass through of the subsidy to prices is overstated.
6.45.
The methodology of the US Treasury is more sophisticated than the proposal by the United States to simply use the value of the subsidy as a proxy. In recognition of this fact, the United States made two further proposals for our consideration. The first was an alternative methodology that the United States claimed was more suitable for an estimation of trade effects on the European Communities.92 The second was to resort to a different set of parameters for the US Treasury model.93
6.46.
The United States itself subsequently questioned its own alternative proposed methodology due to the fact that it contained incomplete data.94 Hence, the options before us for evaluating the trade effects would be limited to the US Treasury model, as proposed by the European Communities, and amendments to this model as suggested by the United States.
6.47.
To the extent that we might consider it appropriate in this case to assess the trade effects of the measure on the European Communities, our task would not be to judge, with absolute precision, which is the single correct model or which are the correct parameters, but to examine the results of these models to see if they provide an insight into the range of trade effects caused by the FSC/ETI scheme carrying sufficient weight to materially affect our judgement on whether the countermeasures proposed are disproportionate.
6.48.
In this regard, the very fact that the US Treasury report was submitted to Congress is, in our view, of considerable weight. That report did suggest that it may have somewhat overstated the results. Indeed, it may not be absolutely exact. Nonetheless, the US Treasury obviously made the judgement that, in the context of presenting the effects of the FSC scheme to US Congress (the authors, we note, of the legislation concerned), this report, including the modelling assumptions on which it is based, had sufficient credibility to represent a reliable reflection of the impact of the scheme when it came to the matter of informing the US Congress on its operation and effects. That was presumably not undertaken lightly and, at the very least, it was presumably considered to be not manifestly misleading. That perspective, it seems to us, is akin to the kind of judgement that is to be properly applied when an assessment is to be made of whether something is disproportionate. One is not expecting, or looking for, mathematical exactitude, but whether or not (to a reasonable eye) something is out of proportion. In these circumstances, it is not a matter of whether or not the US Treasury study might not be certain as to its conclusions. It is a matter of whether there is, available to us, a more fundamental reason to reliably reject the Treasury study. In this sense, we see that there is, in practical terms, a burden on the United States in this case, in our view, to successfully challenge the model that its own Treasury Department had developed to evaluate the scheme before the US Congress.
6.50.
In our view, however, the United States has, in any event, failed to demonstrate that alternative assumptions leading to lower estimates would be more plausible than those used in the US Treasury study and relied on by the European Communities in this case. First, the United States has argued that different elasticities of export demand should be used95 and that the pass through rates should be lower. The basis upon which these should be preferred to those which their own Administration actually applied in the study were not, however, persuasively explained. The United States submitted re-estimated parameters for the Treasury model using more recent data, but these were imputed from estimates of US imports, instead of US exports, which are our concern in this case.96
6.51.
Secondly, with respect to the issue of pass through, the economic reasoning provided by the United States for adjusting the rate to a lower figure was no more inherently compelling than that which was used for its own study (US Treasury). The EC estimate of the trade impact assumes a full pass through effect of the subsidy onto the price of US products.97 The United States argues that such an assumption is not necessarily supported by the empirical facts and hence would bias the results upward.98 It argues that two factors could act in concert to result in a less than 100 per cent pass through of the subsidy onto the price of world products.99 First, if firms are operating on the positively sloped segment of their average cost curve, an increase in production could result in an increase in costs that may not be compensated by the subsidy.100 Second, if firms in an industry have market power, they would not necessarily have an incentive to lower prices.101
6.52.
However, empirical evidence shows that the pass through effect of a similar programme was 75 per cent in the 1970s.102 Today, more than 25 years later it is not unreasonable to suggest that the world market is now more competitive, thereby increasing the pass through effect.103 We certainly found no plausible reason to give credence to a view that it was reasonable to assume that pass through was in the lower rather than the higher end. Again, we cannot say with mathematical precision the exact figure for the pass through, but we can put a lower and upper limit to the range of possible effects.104
6.55.
Not that, in this case, it is the situation we would in fact find ourselves in. It appears to us that, on balance, the European Communities figures are at least as plausible as the low estimates put forward by the United States. The wording of footnote 9 makes it clear that we must make our assessment in light of the fact that the subsidy concerned is prohibited. Here we recall that the last part of footnote 9 suggests that this is an aggravating rather than mitigating consideration, and that in assessing the "appropriateness" of such countermeasures – in light of the gravity of the breach – a margin of appreciation is to be granted.105 That can only reasonably be construed to entail that, in a situation where there is no more inherently plausible reason to opt for a lower rather than higher number, it would be inconsistent with the direction of the footnote to automatically default to the lower option. That would be effectively to go in the opposite direction from that laid down in footnote 9.
6.56.
Moreover, to the extent that there is an even chance of error, any presumption for a lower number would systematically bias the risk in favour of creating a disincentive to conforming with withdrawal of the subsidy. That would be entirely contrary to the direction of footnote 9. Thus, the objective of the requirement must be to ensure that the incentive is more likely to ensure respect for the objective of withdrawal of a prohibited export subsidy as the sole way to restore the preexisting balance of rights and obligations.106 For these additional reasons, we are all the more comfortable in our judgement in this case.
6.57.
Consequently, even if consideration is given to the adverse trade effects of the measure on the European Communities in this case, we would not have any reliable basis to conclude that, based on the trade effects of the measure on the European Communities (and taking account of the manner in which these are to be judged), the amount of countermeasures proposed by the European Communities would be out of proportion with these effects.107
6.58.
Moreover, we recall that beyond the reasonable margin of appreciation that might exist in assessing the actual trade effects of the measure on the European Communities, Article 4.10 would in any event not only allow for, but indeed directs that, in our assessment, we provide for a consideration of the prohibited nature of the subsidy. As we have noted above, this entails, in our view, a consideration of the gravity of the initial breach, and of the fact that, in itself, the maintenance of the measure in violation of the United States' obligations under the SCM Agreement upsets the balance of rights and obligations between Members, and more specifically, between the United States and the European Communities. As we have seen, in this case, the prohibited measure is a scheme that is available systemically and on a very wide scale. It thus has the potential of creating instability in the trading conditions across a broad range of sectors. This is in itself an appropriate consideration in an assessment of whether the proposed countermeasures are relevant, even if an assessment were to be made on the basis of actual trade effects of the measure on the complaining Member.
6.59.
Such an element can only be conceived, in quantitative terms, as ensuring an entitlement to a Member taking countermeasures that it is at a level somewhat higher than what a very precisely constructed estimate of trade effects (should such a calculation be feasible) would lead to. For the reasons outlined elsewhere above, to conclude otherwise would effectively reduce the terms of Article 4.10 and footnote 9 thereto to a pure "trade effects" standard, thereby undermining the whole object and purpose of ensuring that such a distinction be made, respected and enforced effectively in the SCM Agreement.
6.60.
We therefore do not find any reason to reach a different conclusion from that already reached on the basis of the European Communities proposed approach, having now also examined the proposed level of countermeasures from the perspective of the measure's trade effects on the European Communities.

C. CONCLUDING REMARKS

6.61.
Finally, although we are satisfied that the countermeasures are not disproportionate, we wish to address any possible residual concern that the European Communities cannot be entitled to de facto act erga omnes on behalf of the WTO membership, as it were.
6.62.
That is not how we see the matter before us. First, to the extent that there was any suggestion that entitlement to countermeasures to the level we have determined was reflecting "trade effects" on parties other than the European Communities, this would have no foundation. To repeat, we consider that our finding is warranted, based on the equivalence in the breach of the original rights and obligations taking into account the gravity of the breach. Where we addressed the issue of trade effects, we have in any case done so only in respect of those relating to the European Communities.
6.63.
Second, the conclusion we have reached is not in any sense, a matter of "entitling" the European Communities to act "on behalf" of Members other than itself. As we have underlined in our reasoning above, it is proposing countermeasures relating to the redress of rights and obligations as between those two Members. In the facts of this case, we are dealing with the precise situation at hand. That precise situation at hand is that it is the European Communities that has sought the entitlement to take countermeasures. In doing so, the fact that this is a matter between two Members is a relevant factor which we have taken into account. Should the matter ever arise, our finding does not affect the ability of other complainants to subsequently request, and, if warranted, obtain an authorization to take appropriate countermeasures in accordance with Article 4.10 of the SCM Agreement. By definition, in the event that any such case could arise hypothetically, it need only be stated that there is, in our view, no reason to presume that an arbitrator who might be required to address such a complaint in future would not take into account all the relevant factors in determining what might, at the time it is ruling, constitute "appropriate countermeasures" in such future case.108
6.64.
In light of the above, we find that the amount of countermeasures proposed by the European Communities in this case is "appropriate" within the meaning of Article 4.10 of the SCM Agreement.

VII. EC REQUEST IN RESPECT OF THE VIOLATION OF ARTICLE III:4 OF THE GATT 1994

7.1.
We note that the European Communities has requested a specific amount of countermeasures, and has clearly limited its request to this amount. The European Communities made clear its view that it would be necessary for us to consider whether an additional amount of suspension of concessions needs to be awarded under Article 22.7 of the DSU, in particular with regard to the violation of Article III:4 of the GATT 1994109in the event that we were todecide that the appropriate amount of countermeasures under Article 4.11 of the SCM Agreement is less than the requested amount. We have concluded that countermeasures in the amount of $4,043 million, as proposed by the European Communities, would constitute "appropriate countermeasures" in the circumstances of this case. We therefore do not need to address the issue of suspension of concessions or other obligations in relation to the violation of Article III:4 of the GATT 1994.

VIII. AWARD OF THE ARBITRATOR

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