Disputes Roundup: Rulings Issued in Brazil Tax Incentives, Boeing Cases; AB Impasse Continues

14 September 2017

The past month has seen a series of dispute-related developments at WTO headquarters, with rulings circulated in a case on Brazilian tax incentives (DS472, 497) and a separate dispute over US aircraft subsidies to manufacturer Boeing (DS487), along with panels being requested in other cases.

Meanwhile, WTO members remain at odds over how to proceed with filling three slots on the organisation’s highest court, the Appellate Body. An informal meeting of the Dispute Settlement Body (DSB) is slated for Friday 15 September on the subject, according to a Geneva trade official.

WTO panel rules on Brazil tax incentive programmes

A dispute panel ruled in late August on cases filed by the EU and Japan, respectively, regarding Brazil’s long-running tax incentive programmes for two major industrial sectors – information and communications technology (ICT) and automobiles. (See Bridges Weekly, 1 October 2015)

The EU and Japan had challenged Brazilian requirements that certain parts of a good’s manufacturing process take place domestically in order for that company to receive tax cuts or benefits.  The panel found that those steps cover the key “value-adding” sections in a manufacturing chain, such as converting raw materials into components, along with integrating components into final products.

The panel noted that Brazil has also imposed such requirements for making some of the components that are sourced for producing the final versions of a good, which has already faced similar requirements along its overall value chain.

The type of tax incentive provided depended on the programme, with the EU and Japan citing seven programmes in their respective complaints.

After reviewing different aspects of the production and sourcing process, from raw material inputs to the final product, the panel deemed that Brazil’s requirements were in effect prioritising the sourcing of domestic components over foreign ones, in violation of WTO rules. Brazil had raised other points in its defence, which were ultimately rejected by the panel.

All parties have the option of appealing the panel’s findings, and must do so within a 60-day window from when the ruling was circulated.

Boeing update: WTO Appellate Body reverses panel finding

Earlier this month, the WTO’s Appellate Body also circulated a ruling (DS487) deeming that tax benefits provided by Washington state to Boeing, the airplane manufacturer, did not violate global trade rules – overturning the findings of an earlier panel.

The case is separate from an ongoing US-EU dispute on Boeing subsidies (DS353). The EU and the US have spent over a decade embroiled in duelling disputes regarding their support schemes for their respective aerospace industries, with the US pursuing its own case on EU subsidies to Airbus (DS316). In both of those disputes, the WTO’s Appellate Body found trade rule violations.

Under DS487, the measures involved are more recent, dating back only four years. They were considered separately from the other case involving Boeing, where WTO adjudicators are assessing questions over whether the US has made sufficient changes to comply with past rulings.

The panel report in this newer case was circulated last year, and was subsequently appealed by both sides. (See Bridges Weekly, 1 December 2016)

The WTO Appellate Body had examined the requirement that an aircraft manufacturer make its plane and wings within Washington state itself in order to benefit from a lower tax rate. The panel had found that this requirement is indeed about the origin of the wings used in making commercial planes, and meant that in practice these subsidies were conditional on that.

The WTO’s subsidy rules do not allow financial aid by governments that are contingent on using domestic goods over imported ones. However, the Appellate Body said that the “contingency” prohibited by WTO rules is not based on “whether a condition for eligibility under a subsidy may result in the use of more domestic and fewer imported goods.”

For those subsidies that cause harm to imports and that do not qualify as prohibited subsidies, the Appellate Body noted that these could be examined under other parts of WTO subsidy rules.

The Appellate Body found that the Washington state programmes do not make the lower tax rates conditional on using locally-produced goods versus their foreign counterparts. It therefore overturned this panel finding, which was the only area where the panel had said the US was in violation of WTO rules.

Panel requests made in China TRQs, Canada-Brazil Bombardier cases

During a meeting of the DSB on 31 August, the US also made a first request for a panel to examine whether China’s administration of tariff rate quotas (TRQs) on certain agricultural products are in line with global trade rules (DS517). The US and China held consultations on the subject earlier this year, which failed to yield a resolution.

Tariff-rate quotas mean that imports up to a certain threshold will face lower duties than they would otherwise – with often significant differences. The US has raised concerns over whether China’s administration of these TRQs for wheat, corn, and rice imports have gone against global trade rules, with the North American nation citing in its panel request WTO provisions relating to transparency, general elimination of quantitative restrictions, and non-discriminatory administration of quantitative restrictions. (See Bridges Weekly, 19 January 2017

China blocked the first panel request at the 31 August meeting. However, the US has already tabled the request a second time, which will be heard at a 22 September DSB meeting – meaning that a panel will automatically be established to hear the case.

Meanwhile, Brazil has asked that a panel hear its complaint (DS522) against Canada on allegedly illegal subsidies to Bombardier, the aircraft manufacturer. This particular case was filed in February, though the two parties have also been involved in airplane-related cases at the WTO in the past (DS46, DS70).

Brazil has taken issue with state aid provided by Canada’s federal and provincial governments in support of Bombardier’s commercial aircraft programme.  The South American country argues that this support appears to violate WTO rules by being linked either to export performance or to prioritising local over foreign-made products. Brasilia also alleges that this support has made it harder for its own aircraft manufacturers to remain competitive.

In a press release, Brazil’s Ministry of Foreign Affairs said that “it hopes that the dispute will allow for the fast rebalancing of the conditions of international competitiveness in the aeronautical sector, which has been artificially affected by Canadian subsidies.”

While Canada blocked the panel request in August, Brazilian officials say that they plan to table the request again for a 29 September meeting of the DSB, at which point the panel will automatically be established.

Appellate Body vacancies

WTO members are slated to meet informally tomorrow regarding how to fill a series of vacant seats on the Appellate Body, Geneva trade officials confirmed.

The seven-member court will have three open seats by year’s end unless a selection process begins, with two seats already vacant due to the departures of Ricardo Ramírez-Hernández in late June and Hyun Chong Kim at the beginning of August. Peter Van den Bossche’s term is set to end in December.

While the EU has proposed launching a selection process for all three slots at once, a group of Latin American countries has instead proposed starting with the post left open by Ramírez-Hernández. The latter group includes Argentina, Brazil, Colombia, Chile, Guatemala, Mexico, and Peru.

However, at the 31 August DSB meeting, the US said it could not support either option, raising concerns instead over certain “systemic” issues, such as the continued participation of these former Appellate Body members in ongoing cases. The global trade court’s working procedures do allow for this scenario, subject to certain conditions.

In its statement, the US said that under WTO dispute settlement rules, “the DSB has a responsibility to decide whether a person whose term of appointment has expired should continue serving, as if a member of the Appellate Body, on any pending appeals. We consider the DSB should also discuss this issue so it can take appropriate decisions.”

The statement drew questions from various WTO members, according to a Geneva trade official, particularly in light of the heavy workload facing the Appellate Body and the additional burden on the dispute settlement system should these vacancies remain unfilled for a prolonged period.

ICTSD reporting.

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