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CLARA MOSCHINI

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Aircraft. WTO report confirms it: illegal EU subsidies to Airbus

The pronouncement by Appellate Body issued it yesterday

On 15 May the WTO’s Appellate Body issued its report in the case “European Communities and Certain Member States — Measures Affecting Trade in Large Civil Aircraft — Recourse to Article 21.5 of the DSU” (DS316).

On 15 May 2018, the Compliance Appellate Body report was circulated to Members.

Summary of key findings

A-350XWB subsidies: The Appellate Body upheld the Panel's finding that Airbus paid a lower interest rate for the A-350XWB LA/MSF than would have been available to it on the market and, consequently, a benefit was thereby conferred within the meaning of Article 1.1(b) of the SCM Agreement. The Appellate Body also upheld the Panel's finding that each of the French, German, Spanish, and UK A-350XWB LA/MSF contracts constitutes a subsidy within the meaning of the SCM Agreement.

Prohibited (import substitution) subsidies: The Appellate Body agreed with the Panel that the fact that a subsidy results in the use of domestic over imported goods cannot by itself demonstrate that that subsidy is contingent on the use of domestic over imported goods, whether in law or in fact.The Appellate Body dealt with a similar claim in United States — Conditional Tax Incentives for Large Civil Aircraft. Based on its analysis, the Appellate Body upheld the Panel's finding that the United States had failed to establish that the subsidies at issue are prohibited import substitution subsidies. The Panel finding rejecting the claim alleging prohibited subsidies contingent on export performance was not appealed.

Compliance obligation under Article 7.8 of the SCM Agreement with respect to expired subsidies: The Appellate Body agreed with the European Union that an implementing Member cannot be required to “withdraw” a subsidy that no longer exists, or to “remove” the “effects” of such subsidies that do not exist. The Appellate Body therefore disagreed with the manner in which the Panel characterized the scope of the compliance obligation under Article 7.8 of the SCM Agreement. Rather, having upheld the Panel's finding that certain LA/MSF subsidies had expired before the end of the implementation period on 1 December 2011, the Appellate Body found that the European Union had no compliance obligation with respect to these subsidies. The Appellate Body underscored that the pertinent question for purposes of these compliance proceedings was whether the subsidies existing in the post‑implementation period (i.e. after 1 December 2011) caused adverse effects.

Adverse effects: The Appellate Body upheld the Panel's finding that the United States had brought its adverse effects claims with respect to appropriately defined product markets for LCA, namely, the global markets for single-aisle LCA, twin‑aisle LCA, and very large aircraft. The Appellate Body then focused its review on the Panel's analysis and findings regarding the effects of the subsidies existing in the post-implementation period, that is, essentially the A-380 LA/MSF and the A-350XWB LA/MSF subsidies. The Appellate Body disagreed with the European Union's claim that the Panel erred in its analysis regarding the "product effects" of these subsidies, that is, the effects of these subsidies on Airbus' ability to bring the A380 and A-350XWB to the market as and when it did. Rather, in the Appellate Body's view, the Panel's findings, as well as relevant findings from the original proceedings, establish that the LA/MSF subsidies existing in the post-implementation period made it possible for Airbus to proceed with the timely launch of the A350XWB and to bring to market the A380, and that both events were crucial to renew and sustain Airbus' competitiveness in the post‑implementation period. The Appellate Body subsequently considered whether the “product effects” of the LA/MSF subsidies existing in the post-implementation period, in light of the competition in the relevant product markets as determined by the Panel, supported the conclusion that the LA/MSF subsidies caused adverse effects in the form of significant lost sales, displacement, and impedance of US LCA.

Conclusion: Based on its review of the Panel's analysis, the Appellate Body ultimately upheld the Panel's conclusion that insofar as significant lost sales in the twin-aisle markets (in which Airbus and Boeing sell the A-330, A-350XWB, 767, 777, and 787 product families) and significant lost sales and impedance in the very large aircraft markets (the A-380 and 747) are concerned, the European Union had failed to comply with the recommendations and rulings of the DSB in the original dispute because the underlying subsidies continued to exist and cause adverse effects. The Appellate Body, however, did not uphold the Panel's findings of displacement in these two markets or its finding of impedance in the twin-aisle market. With regard to the market for single-aisle aircraft (in which the A-320 and B-737 compete), the Appellate Body observed that the Panel's findings concerned primarily the effects of subsidies that had expired before 1 December 2011 (the time by which the European Union had been required to comply with the recommendations and rulings of the DSB in the original dispute). The Appellate Body was not convinced that the Panel's analysis in this regard provided a sufficient basis to find that subsidies provided to Airbus continued to cause adverse effects in the market for single-aisle aircraft.

On this basis, in respect of subsidies existing in the post-implementation period, the Appellate Body upheld, albeit for different reasons, the Panel's conclusions that “{b}y continuing to be in violation of Articles 5(c) and 6.3(a), (b) and (c) of the SCM Agreement” insofar as the twin-aisle LCA and VLA markets are concerned, “the European Union and certain member States have failed to comply with the DSB recommendations and rulings and … the obligation under Article 7.8 of the SCM Agreement ‘to take appropriate steps to remove the adverse effects or … withdraw the subsidy’”; and that, “{t}o the extent that the European Union and certain member States have failed to comply with the recommendations and rulings of the DSB in the original dispute, those recommendations and rulings remain operative".

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