Study of the WTO Dispute Settlement Body's conclusions on the issue of public institutions in subsidy regulations

Article 1.1(a)(1) of the WTO Agreement on Subsidies and Countervailing Measures (SCM) provides that a subsidy in international trade exists if:

- There is a financial contribution by a government or a public body in the territory of a Member (referred to in this Agreement as “the government”) where:

(i) the government actually transfers funds directly (e.g., grants, loans, or equity), has the ability to transfer or assume debt directly (e.g., loan guarantees);

(ii) Revenues due to the government have been forgone or not collected (e.g., fiscal incentives such as tax exemptions);

(iii) the government supplies goods or services other than general infrastructure, or purchases goods;

(iv) The government contributes money to a financing mechanism, or entrusts or orders a private entity to perform one or more of the functions listed in the three points above, which are functions normally vested in the government and the work of the private entity does not differ substantially from the normal activities of the government or

- There is any form of income support or price subsidy within the meaning of Article XVI of the GATT 1994;

- And constitutes a benefit.

Accordingly, Article 1.1 of the SCM Agreement provides that a 'subsidy' shall be deemed to exist if there is 'a financial contribution by the government or any public authority' and 'a benefit is conferred thereby.[1] “A ‘financial contribution’ and a ‘benefit’ [are] two separate legal elements in Article 1.1 of the SCM Agreement that together determine whether a subsidy exists”[2], representing situations in which a government transfers something of economic value for the benefit of a recipient[3].

In addition, Article 1 also refers to the concept of “public entity”. This issue has been addressed by the WTO dispute settlement body in many cases. This paper will analyze in depth some of the provisions of Article 1.1(a)(1) (financial contribution and public entity).

1. “Financial contribution”

Article 1.1(a)(1) provides a limited list of types of transactions that constitute a financial provision[4].

The negotiating history of Article 1 shows that the inclusion of the term “financial contribution” in the language was intended to ensure that not all government measures that constitute a benefit would be considered subsidies: paragraphs (i)-(iii): the government itself and directly provides something of value – money, goods or services – to a private party. Paragraph (iv) ensures that similar transfers of economic resources by a government, when carried out through the delegation of these functions to a private party, are also covered.[5]

The assessment of whether a financial contribution exists involves considering the nature of the transaction through which something of economic value is transferred by the government.[6]

The assessment of the legal characterisation of a transaction under Article 1.1(a)(1) is as follows: consider whether the measure falls within one of the prescribed categories of financial contribution. To do so, it is necessary to consider the design and operation of the measure and determine its main features. However, transactions can be complex and multifaceted, for example, different aspects of a transaction may fall within different categories of financial contribution, and therefore into more than one category. However, the fact that a financial contribution may fall into more than one category does not mean that the rules governing the different categories of financial contribution are the same.[7]

Because Article 1.1(a)(1) is not explicit about the relationship between the subparagraphs and the structure of the article does not preclude the possibility that a transaction may be covered by more than one subparagraph.[8] In the case of the United States, which was sued by the US Department of Commerce (USDOC), the investigating agency classified a financial contribution as a revenue foregone, while the petitioner argued that the investigating agency should classify it as a purchase of goods. The Panel concluded that the issue was not whether a financial contribution could be classified as two types of financial contributions at the same time, but whether the investigating agency had mistakenly classified the contribution. 2. “By a government or any public body”

- Government: there is a legal criterion in the definition of the term “government” under the SCM Agreement (government in the narrow sense and any public body within the scope of a Member.)[9]

+ Public body: In the European Community case against Korea at the WTO (Korea-Commercial Ship), the EC argued that the Export-Import Bank of Korea (KEXIM) is a public body because it was established and operates on the basis of a public statute that gives the Korean Government the power to make decisions. The Panel agreed with this argument because KEXIM is controlled by the government (or other public bodies).

In United States — Antidumping and Countervailing Duties (China), the Appellate Body reversed the Panel’s finding that “public entity” means “any government-controlled entity” and concluded that it “includes only entities that possess, exercise, or are vested with governmental authority.” The concept of “public entity” shares certain attributes with the concept of “government.” A public entity must be an entity that possesses, exercises, or is vested with governmental authority. However, just as no two governments are exactly alike, the specific characteristics of a public entity will vary from organization to organization, from country to country, and from case to case. A panel or investigating authority, when faced with the question of whether conduct falling within the scope of Article 1.1(a)(1) is that of a public entity, will be able to answer that question only by undertaking a proper assessment of the core characteristics of the entity concerned and its relationship to government in the narrow sense.

In some cases, such as where a statute or other legal instrument clearly establishes the authority of the relevant entity, determining that the entity is a public entity may be a straightforward exercise. In other cases, the picture may be more mixed and the challenge more complex. The same entity may have some features that suggest it is a public entity and others that suggest it is a private entity. For example, determining that a particular entity is a public entity does not necessarily depend solely on whether it has been given explicit statutory authority. What is important is whether an entity has been empowered to perform governmental functions, rather than how that authority was obtained. There are many different ways in which governments in the narrow sense may grant organizations a certain authority. Consequently, there may be different types of evidence in demonstrating that authority has been granted to a particular entity. In practice, evidence that an organization is performing governmental functions may be evidence that the organization possesses or has been vested with governmental authority, particularly where such evidence points to a systematic and consistent practice. Evidence that a government exercises meaningful control over an organization and its conduct may, in certain circumstances, be evidence that the organization concerned possesses governmental authority and exercises it in the performance of governmental functions. However, apart from express authorization in a legal instrument, it is not sufficient to demonstrate the necessary possession of governmental authority if there are merely formal links between an organization and the government in the narrow sense. Thus, for example, the fact that a government is a major shareholder in an entity does not demonstrate that the government exercises meaningful control over the conduct of that entity, any more than the fact that the government has conferred governmental power upon it.

Mere ownership or control of an entity by a government is not sufficient to demonstrate that it is a public entity. In determining whether a particular entity is a public entity, consideration should be given to ‘whether the functions or conduct are governmental under the law of the Member concerned.’ The classification and functions of entities within WTO Members are also often based on the question of what characteristics would typically characterize an entity as a public entity. It is not necessary for an entity to have the power to regulate, control or supervise individuals, or otherwise restrict the conduct of others, in order to be considered a public entity. Although certain organizations that are considered public organizations may have regulatory powers, it is not necessary for an organization to have this characteristic to conclude that it is vested with governmental authority or performs governmental functions and therefore constitutes a public organization.[10]

The Panel in United States – Steel Pipe (Türkiye) rejected USDOC’s assertion that Erdemir and Isdemir of Türkiye are public entities through Ordu Yardimlasma Kurumu (OYAK). OYAK holds a majority stake in Erdemir, and Erdemir in turn owns more than 92% of Isdemir’s shares. The Panel did not consider that the fact that OYAK’s management consists of military personnel and certain government employees (which elect an eight-person board of directors), the fact that OYAK is guaranteed mandatory contributions for pension purposes, and that OYAK may benefit from certain property and tax statuses, is sufficient to establish that OYAK acts on the authority of or is under the meaningful control of the Government of Türkiye. The Appellate Body explained that evidence of ‘indications of formal control’, such as the government’s power to appoint and nominate the directors of an entity, may be relevant to assessing whether an entity’s conduct is that of a public entity. However, the Appellate Body also found that ‘the government’s power to appoint the directors of an entity and the question of whether those directors are independent appear to be distinct factors in assessing the governmental character of an entity. The USDOC’s evidence in its analysis of OYAK did not show that military and government personnel in OYAK made decisions under the direction of the Turkish Government in pursuing the government’s economic policies.

Article 1.1(a)(1) does not impose a “duty” to seek and accept evidence in determining whether a particular entity is a public entity. If the investigating authority does not have sufficient evidence in the record to make a determination, it may need to seek or accept additional evidence to be able to provide a 'reasonable and adequate' explanation that meets the requirements of the fundamental obligation.[11]

- Legal standards of public entities: In considering the issue of the legal standards to be applied by investigating authorities in decisions relating to public entities, the Compliance Panel in United States-Countermeasures (China) (Article 21.5 - China) held that the disagreement between the parties was "whether Article 1.1(a)(1) requires the investigating authority to demonstrate that an entity is performing a governmental function when making a specific financial contribution in order to establish that the entity possesses, exercises, or is vested with governmental authority."

The Panel disagrees with China’s argument that the appropriate question for the Tribunal is whether an entity is performing a governmental function when it performs the relevant acts under Article 1.1(a)(1), i.e. when it makes a financial contribution.

The Panel notes that: in analyzing a public entity issue, the Tribunal must take into account all relevant facts about the entity’s character and function as appropriate in the particular circumstances of the case. The Panel disagrees with China’s understanding of the legal standard for public entity determinations as requiring a specific degree/nature of the connection (in all cases) between a specified governmental function and a specific financial contribution. Instead, the Panel held that “the legal standard requires the investigating authority to evaluate the totality of the evidence at its disposal. Similarly, the Panel must consider whether its determination of an entity as a public entity is based on relevant evidence and is adequately explained when assessing whether the investigating authority properly concludes that the entity possesses, exercises, or is vested with the authority of the government to perform a governmental function.”

The Appellate Body in United States – Countervailing Measures (China) (Article 21.5 – China) upheld the Panel’s finding on public entities and stated that the focus of the analysis is “on the entity itself …, its core characteristics and its relationship with the government”, while “the conduct of an entity – particularly when it is ‘systematic and stable’ – is one of the different types of evidence that can illuminate the core characteristics of an entity and its relationship with the government in the narrow sense.

The Appellate Body further considered that “the focus on the entity, as opposed to the alleged financial contribution, is consistent with the fact that ‘governments’ (in the narrow sense) and public entities ‘share’ a degree of similarity or overlap in their essential characteristics’ – that is, both are ‘governmental’ in nature, and similar to a government, ‘all the conduct’ of an entity that is demonstrated to be a public entity “shall be attributed to the Member concerned under Article 1.1(a)(1).” In this regard, the Appellate Body rejected China’s argument that, in considering whether the entities concerned are public entities, a government must be found to exercise “significant control” over the conduct at issue under Article 1.1(a)(1)(i) – (iii) or the first clause of subparagraph (iv), and the Appellate Body stated that this type of investigation is more akin to an investigation by an arbitral tribunal. With regard to the second paragraph of Article 1.1(a)(1)(iv) of the SCM Agreement. The Appellate Body noted that:

 

Where it is alleged that the conduct of a private entity constitutes a financial contribution, the investigating authority must further demonstrate a ‘governmental connection’ in the form of ‘entrustment or direction’ … Conversely, if it is demonstrated that an entity is a public entity within the domestic system of a Member, its conduct is directly attributable to the Member concerned.

In United States – Countervailing Measures (China) (Article 21.5 – China), an Appellate Body member expressed a separate opinion on what the Appellate Body considered to be an essential criterion for determining whether an entity is a public entity, namely the requirement that the entity “possesses, exercises or is vested with the authority of a government”. The Appellate Body member’s separate opinion noted that the phrase, used by the majority in this case, is “rigid and restrictive”. Therefore, this person further clarified: Whether an organization is a public organization or not must be determined on a case-by-case basis taking into account the characteristics of the organization concerned, its relationship with the government and the legal and economic environment prevailing in the country in which it operates. An organization may be considered a public organization when the government has the ability to control the organization and/or its conduct to convey financial value. There is no provision for the investigating agency to determine whether the organization under investigation 'possesses, exercises or is vested with government authority' in each case.

- The standard of proof of the public entity issue: The Appellate Body found that determining whether conduct, falling within the scope of Article 1.1(a)(1), is that of a public entity requires “a proper assessment of the core characteristics of the entity concerned and its relationship with the government in the narrow sense.” In addition, the investigating authority should consider “all relevant characteristics of the entity” and should therefore avoid focusing exclusively or excessively on any single characteristic without giving due consideration to other characteristics that may be relevant.

In United States – Carbon Steel (India), the Appellate Body disagreed with the Panel's interpretation that the Appellate Body in United States – Antidumping and Countervailing Duties (China) had “implicitly accepted” that the arbitral tribunal's determination could be based solely on the single aspect of an entity's relationship with a government, namely, whether an entity is government-controlled in the sense that its executives are “government-appointed”.

The Panel in United States – Carbon Steel (India) (Article 21.5 – India) rejected India’s argument that the Panel could be allowed to consider information submitted during the investigation but that the USDOC was legally barred from considering it: “Although technically the ‘new factual information’ was included in the record, the key point is that, according to the United States, the USDOC was legally barred from considering this information in its investigation. The standard of review for a panel under the SCM Agreement is that ‘a panel shall examine whether, on the basis of the evidence on record, the conclusions reached by the USDOC are reasonable and adequate’.” “The new factual information cannot be considered to be ‘on the record’ in this sense. This is because USDOC did not base its conclusions on that information, since USDOC is legally prohibited from considering that information.

India argues that the Panel may permit consideration of the ‘new factual information’. For India, ‘the evidence is already on the record and within the knowledge of the United States’. India explains that the relevant annexes were submitted during the original proceedings and that some of the information can be found in websites that have been provided in the relevant investigations while other aspects of the information relate to concepts, terms, or evidence that USDOC itself has stated in its documents and decisions. However, nothing in India’s reasons refute the finding that the ‘new factual information’ was not on the record for the purposes of USDOC’s assessment.…”

3. Financial Contributions “by” Public or Private Entities

In Korea – Commercial Vessels, the Panel rejected Korea’s argument that there was no financial contribution “by” public or private entities in the restructuring of Korean shipyards because the restructuring was undertaken jointly, either by creditors’ committees, meetings of interested parties, or by judicial decision. The Panel concluded that where a public entity participates in a loan agreed by a creditors’ committee, the portion of the loan made by that public entity constitutes a financial contribution by that public entity. The Panel held that: “The entities that make financial contributions are responsible for that participation. Therefore, to the extent that a public entity participates in a loan that is approved by the creditors’ committee, the portion of the loan paid by that public entity may be treated as a financial contribution by that public entity. Otherwise, the principles of the SCM Agreement could easily be circumvented by groups of public entities deciding jointly, or with the approval of the court, to provide financial contributions.