Item 1. UNITED STATES - INVESTIGATION OF THE INTERNATIONAL TRADE COMMISSION IN SOFTWOOD LUMBER FROM CANADA

1. REQUEST FOR THE ESTABLISHMENT OF A PANEL BY CANADA (WT/DS277/2)

. The United States regrets that Canada has chosen to proceed with its panel request.

. The United States believes that Canada's claims lack merit. The conclusion of the U.S. International Trade Commission that a U.S. industry was threatened with material injury by reason of imports from Canada of softwood lumber was based on a proper establishment of the facts and an objective and unbiased evaluation of those facts. It was reached in a manner fully consistent with applicable WTO rules.

. The United States intends to vigorously defend the ITC's determination before the panel.

Item 2. UNITED STATES - TAX TREATMENT FOR "FOREIGN SALES CORPORATIONS"

A. RECOURSE BY THE EUROPEAN COMMUNITIES TO ARTICLE 4.10 OF THE SCM AGREEMENT AND ARTICLE 22.7 OF THE DSU

. Mr. Chairman, before turning to the EC request for authorization and the decision of the arbitrator underlying it, I would like to make one thing clear, and that is that it remains the intention of the United States to comply with the recommendations and rulings of the DSB in this case.

. Thus, while we appreciate the fact that the EC has the right to request authorization to impose countermeasures, we do not believe that it will be necessary to ever exercise that authorization.

. Turning to the decision of the arbitrator in this case, we note that this is the first time that the decision has been formally before the DSB.

. However, the decision here is similar to the arbitration decision in the Canada Aircraft dispute that Members discussed at the DSB meeting of March 18. As Members may recall, at that meeting Canada objected to the decision of the arbitrator in its case to increase by 20 percent the amount of the countermeasures. As Canada correctly noted, the arbitrator in that case offered no justification for the 20 percent increase, and the United States agrees with Canada that the adjustment was "determined capriciously."

. In the view of the United States, however, this capricious outcome is not a surprise, because the arbitrator in the Canada Aircraft case chose to follow the arbitration decision in the FSC case. Thus, to the extent that the Canada Aircraft decision is devoid of standards, it is because it was modeled on the FSC decision, which was itself devoid of any standard.

. Mr. Chairman, the FSC arbitration decision is a seriously flawed document. Today, I would like to focus on just a few aspects of that decision, and will leave to scholars a thorough deconstruction.

. First, there is the undefined standard used by the arbitrator.

. By way of background, the central issue in the FSC arbitration was whether the amount of countermeasures imposed in response to a prohibited subsidy have to bear a relationship to the trade effect of the subsidy on the complaining Member. This was critical, because a reasonable estimate of the effects of the FSC/ETI subsidies on EC trade interests was roughly $1 billion.

. The key provision at issue was Article 4.10 of the SCM Agreement, which refers to the imposition of "appropriate countermeasures" in the event of non-compliance. With respect to the phrase "appropriate countermeasures", footnote 9 to Article 4.10 states that "[t]his 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."

. Thus, the crucial question for the arbitrator was the following: What is footnote 9 referring to when it uses the phrase "disproportionate"? Or, put differently, "disproportionate" with respect to what?

. The United States will not repeat all of the arguments that it made to the arbitrator, but simply will note here that it continues to believe that a thorough - and objective - analysis of Article 4.10 based on its text, context, object and purpose, and negotiating history leaves no doubt that the proportionality (or disproportionality) of countermeasures must be assessed in terms of the trade effects of the prohibited subsidy on the complaining Member.

. Thus, while the relationship between countermeasures and trade effects under Article 4.10 is not one of 'equivalency' - as is the case under Article 22.4 of the DSU - countermeasures have to bear a relationship to the trade effects; i.e., they cannot be disproportionate to the trade effects.

. In particular, it is absolutely clear from the negotiating history that the drafters intended that countermeasures taken against prohibited subsidies would be based on trade effects.

- The minutes of the Uruguay Round Negotiating Group on Subsidies reveal that this was the position of every delegation that spoke on this issue.

- Not a single delegation expressed the view that countermeasures should be based on anything other than trade effects.

. Notwithstanding this, the arbitrator concluded, at para. 5.61 of its decision, that "a Member 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. This cannot be reduced to a requirement that constrains countermeasures to trade effects ... ."

. Translated, what the arbitrator essentially said is that because an export subsidy is a measure that is not permitted under the WTO, countermeasures could be disproportionate to the trade effects of that measure. However, the arbitrator never explained why export subsidies should be treated in a manner so radically different from any other measure inconsistent with the WTO.

. The arbitrator did suggest that the purpose of countermeasures is to induce compliance.

- However, as the arbitrator in the EC Bananas case stated, this also is the purpose of a suspension of concessions under Article 22.4. Therefore, this purpose cannot justify the radical approach taken by the FSC arbitrator.

- Moreover, if "inducing compliance" is the standard, that is no standard at all, as we found out in the Canada Aircraft arbitration. It appears that the amount of countermeasures that will induce compliance in any given case will depend entirely upon the whim of the arbitrator.

. In any event, as a result of its flawed reasoning, the FSC arbitrator awarded countermeasures of over $4 billion.

- Given that a reasonable (and generous) estimate of the effects of the FSC/ETI subsidies on EC trade interests was in the range of $1 billion, the arbitrator's award exceeded the trade effects by at least four times.

- Under the arbitrator's so-called "standard", however, the result could just as easily have been forty-four times or four hundred and forty-four times the trade effects.

- Or, as in the Canada Aircraft case, the arbitrator could have tacked on an arbitrary 20, 40 or 100 percent.

. In addition to the fact that the standard used is no standard at all, there is another aspect of the FSC arbitration decision that I would like to call to Members' attention because of its systemic implications for the entire dispute settlement system. This is the arbitrator's treatment - or, to be precise, lack of treatment - of the negotiating history.

. As I indicated previously, an examination of the negotiating history of the SCM Agreement leaves no doubt that the drafters intended that countermeasures taken against prohibited subsidies must be proportionate (or not disproportionate) to the trade effects on the complaining Member.

. Although the United States presented detailed arguments to the arbitrator regarding this negotiating history, there is absolutely no reference to this negotiating history - or the U.S. arguments relating thereto - in the arbitration decision.

. The absence of any discussion of the negotiating history is surprising.

- Given the lack of clarity in Article 4.10, which relies entirely on terms like "appropriate" and "disproportionate", one would think that this would be the precise situation contemplated by Article 32(a) of the Vienna Convention on the Law of Treaties, which calls for recourse to a treaty's preparatory work when the application of Article 31 "leaves the meaning ambiguous or obscure".

- At a minimum, one would think that the arbitrator would refer to the negotiating history in order to confirm the meaning derived by the arbitrator from the text.

. Mr. Chairman, although there are many, many aspects of this arbitration decision with which the United States takes issue, we find the arbitrator's disregard of the negotiating history and the U.S. arguments relating thereto extremely troubling.

- The United States agrees with the general proposition that an arbitrator, a panel, or the Appellate Body should not have to address every single argument made by the parties that appear before it.

- On the other hand, in any given dispute, there will be arguments presented that are of sufficient weight that they must be addressed by the tribunal in question in order to render a decision that is based on - and that is perceived as being based on - the law.

- In the view of the United States, the arguments that it presented in the FSC arbitration regarding the negotiating history fall into the latter category, and it was incumbent upon the arbitrator to either agree with them or explain why the United States was wrong.

. Finally, Mr. Chairman, I would briefly like to address the arbitrator's declaration in paragraph 6.10 that the U.S. obligation in this dispute was an erga omnes obligation owing to each and every Member.

- First, the United States notes the dubious quality of a legal analysis which, without foundation in the DSU, incorrectly and inappropriately purports to import into WTO jurisprudence the concept erga omnes. This concept is drawn from public international criminal law, and describes an obligation which is owed to all states.

- The concept erga omnes is squarely at odds with the fundamentally bilateral nature of WTO and GATT dispute settlement and with the notion that WTO disputes concern nullification and impairment of negotiated benefits to a particular Member. WTO adjudicators are tasked with resolving disputes between specific complaining and defending parties. Adjudicators may not, through improper importation of the concept erga omnes, enforce WTO obligations on behalf of non-parties to a dispute.

- Moreover, the arbitrator makes no attempt to explain how erga omnes or any other concept of public international law could have been relevant to its analysis. DSU Article 1.1 limits WTO adjudicators to applying the covered agreements, although DSU Article 3.2 provides that adjudicators may apply rules of interpretation of public international law. The concept of erga omnes is not a rule of interpretation of public international law, and it is not reflected in Articles 31 or 32 of the Vienna Convention on the Law of Treaties. Reliance on public international legal concepts outside of rules of interpretation is not permitted under either DSU provision, and the arbitrator erred in importing this concept as a means to justify its award.

. Mr. Chairman, the United States finds the performance of the arbitrator extremely troubling.

- And let me be clear that what concerns us is not the $4 billion in countermeasures that the arbitrator awarded.

- $4 billion is a large figure, to be sure. However, as I indicated at the outset, the United States intends to comply with its obligations, regardless of what the amount of countermeasures is.

. Rather, what concerns us is that in the case of a regime like the WTO dispute settlement system, which ultimately depends upon voluntary compliance in order to function properly, it is essential that the legal analysis of adjudicators carefully adhere to the terms of the WTO Agreement, based on cautious, well-explained analyses that address major arguments of the parties.

. Unfortunately, the FSC arbitration did not display these qualities.