European Communities and Certain Member States –
Measures Affecting Trade in Large Civil Aircraft

Recourse to Article 21.5 of the DSU by the United States

AB-2016-6

Report of the Appellate Body

BCI redacted, as marked [BCI]

Table of Contents

1   Introduction.. 12

1.1   Original proceedings. 12

1.2   Compliance proceedings. 14

1.2.1   Panel proceedings. 14

1.2.2   Appellate proceedings and procedural issues. 17

2   Arguments of the Participants. 22

3   Arguments of the Third Participants. 22

4   Issues Raised on Appeal. 22

5   Analysis of the Appellate Body. 24

5.1   Article 21.5 of the DSU – the Mühlenberger Loch and Bremen Airport measures. 24

5.1.1   The Panel's findings. 25

5.1.2   Whether the Panel erred by declining to make a finding as to whether the European Union had "withdrawn" the Mühlenberger Loch and Bremen Airport measures. 27

5.2   Article 3.1(b) of the SCM Agreement 31

5.2.1   The Panel's findings. 31

5.2.2   Arguments on appeal 33

5.2.3   Whether the United States' appeal is within the scope of appellate review.. 34

5.2.4   The legal standard under Article 3.1(b) of the SCM Agreement 40

5.2.5   The United States' claim on appeal 42

5.2.6   Conclusion. 47

5.3   Benefit 47

5.3.1   Corporate borrowing rate. 47

5.3.1.1   The Panel's findings. 48

5.3.1.2   Overview of the relevant jurisprudence regarding the benefit analysis. 54

5.3.1.3   Whether the Panel erred in its application of Article 1.1(b) of the SCM Agreement by failing to identify properly the "corporate borrowing rate". 56

5.3.1.4   Whether the Panel acted inconsistently with Article 11 of the DSU by rejecting the yield of the relevant EADS bond on the day of conclusion of each A350XWB LA/MSF contract 64

5.3.1.5   The European Union's conditional appeal 68

5.3.1.5.1   Whether the Panel erred in its application of Article 1.1(b) of the SCM Agreement by including the six‑month average yield of the EADS bond in its determination of the corporate borrowing rate. 68

5.3.1.5.2   Whether the Panel acted inconsistently with Article 11 of the DSU by including the six‑month average yield of the EADS bond in its determination of the corporate borrowing rate. 71

5.3.1.6   Conclusion on the Panel's findings regarding the corporate borrowing rate. 74

5.3.2   Project-specific risk premium.. 76

5.3.2.1   The Panel's findings. 78

5.3.2.2   Whether the Panel committed legal error by failing to establish a project‑specific risk premium for the four A350XWB LA/MSF contracts based on the risks associated with the A350XWB project 81

5.3.2.2.1   Whether the Panel erred by failing to undertake a "progressive search" for a market benchmark and to adopt the most appropriate benchmark. 82

5.3.2.2.2   Whether the Panel erred by failing to make adjustments to the benchmark to ensure comparability  86

5.3.2.2.3   Whether the Panel acted inconsistently with Article 11 of the DSU. 89

5.3.2.3   Whether the Panel acted inconsistently with Article 11 of the DSU in its assessment of the risk differences that may affect the project-specific risk premium.. 92

5.3.2.3.1   Programme risk. 93

5.3.2.3.1.1   Development risk. 93

5.3.2.3.1.2   Market risk and comparison of development risk and market risk. 101

5.3.2.3.1.3   Overall conclusion on programme risk. 104

5.3.2.3.2   Contract risk. 105

5.3.2.3.2.1   Whether the Panel failed to compare properly the terms of the A350XWB LA/MSF contracts to the terms of the A380 LA/MSF contracts. 105

5.3.2.3.2.2   Whether the Panel failed to compare the terms of the A350XWB LA/MSF contracts to the terms of the A380 risk-sharing supplier contracts. 109

5.3.2.3.3   The price of risk. 110

5.3.2.3.4   Overall conclusion on the European Union's claim that the Panel acted inconsistently with Article 11 of the DSU in its assessment of the risk differences that may affect the project-specific risk premium   113

5.3.2.4   Whether the Panel erroneously adopted a single, undifferentiated project risk premium to benchmark all four of the A350XWB LA/MSF contracts. 113

5.3.2.4.1   Whether the Panel erred in its application of Article 1.1(b) of the SCM Agreement by adopting a single, undifferentiated project risk premium to benchmark all four of the A350XWB LA/MSF contracts. 114

5.3.2.4.2   Whether the Panel acted inconsistently with Article 11 of the DSU by adopting a single, undifferentiated project risk premium to benchmark all four of the A350XWB LA/MSF contracts. 116

5.3.2.5   Conclusion on the Panel's findings regarding the project-specific risk premium.. 117

5.3.3   Overall conclusions on the Panel's findings regarding "benefit" under Article 1.1(b) of the SCM Agreement 119

5.4   Article 7.8 of the SCM Agreement 120

5.4.1   Introduction. 120

5.4.2   Whether the Panel erred in its interpretation of Article 7.8 of the SCM Agreement 121

5.4.2.1   Claims and arguments on appeal 121

5.4.2.2   Interpretation of Article 7.8 of the SCM Agreement 123

5.4.3   Whether the Panel erred in finding that the ex ante "lives" of certain LA/MSF subsidies had expired – conditional appeal by the United States. 130

5.4.4   Whether the Panel erred in its finding regarding the repayment of financial contribution – conditional appeal by the European Union. 137

5.5   European Union's consequential appeal under Article 7.8 of the SCM Agreement 138

5.6   Articles 5, 6, and 7.8 of the SCM Agreement – adverse effects. 140

5.6.1   Non-subsidized like product 142

5.6.1.1   Findings in the original proceedings. 143

5.6.1.2   Arguments before the Panel and Panel findings in the compliance proceedings. 144

5.6.1.3   Claims and arguments on appeal 147

5.6.1.4   Whether the Panel erred in declining to address the arguments raised by the European Union  148

5.6.1.4.1   The relationship between Article 6.3(b) and Article 6.4 of the SCM Agreement 150

5.6.1.5   Conclusion. 152

5.6.2   The relevant product markets. 153

5.6.2.1   Arguments before the Panel and Panel findings. 153

5.6.2.2   Claims on appeal 160

5.6.2.3   Whether the Panel erred in interpreting the term "market" in Article 6.3 of the SCM Agreement 161

5.6.2.3.1   Single-aisle LCA market 165

5.6.2.3.2   Twin-aisle LCA market 169

5.6.2.3.3   VLA market 172

5.6.2.4   Whether the Panel erred in its application of Article 6.3 of the SCM Agreement 179

5.6.2.5   Article 11 of the DSU. 180

5.6.2.6   Overall conclusion. 183

5.6.3   "Product effects" of LA/MSF subsidies on Airbus LCA. 184

5.6.3.1   Introduction. 184

5.6.3.2   Summary of Panel findings. 186

5.6.3.2.1   Findings on the "product effects" of pre‑A350XWB LA/MSF subsidies on the A320, A330, and A380  186

5.6.3.2.2   Findings on the "product effects" of the challenged LA/MSF subsidies on the A350XWB  188

5.6.3.2.2.1   Findings on the "direct effects" of the A350XWB LA/MSF subsidies on the A350XWB. 189

5.6.3.2.2.2   Findings on the "indirect effects" of the pre‑A350XWB LA/MSF subsidies on the A350XWB  192

5.6.3.3   Causation under Articles 5(c) and 6.3 of the SCM Agreement 193

5.6.3.4   Findings in the original proceedings and their relevance for these compliance proceedings  195

5.6.3.5   Whether the Panel erred in its findings on the "product effects" of the LA/MSF subsidies existing in the post-implementation period. 198

5.6.3.5.1   "Product effects" of A380 LA/MSF subsidies on the A380. 200

5.6.3.5.2   "Product effects" of LA/MSF subsidies on the A350XWB. 204

5.6.3.5.2.1   The Panel's assessment of the "direct effects" of the A350XWB LA/MSF subsidies. 206

5.6.3.5.2.2   The Panel's assessment of the "indirect effects" of the A380 LA/MSF subsidies. 214

5.6.3.5.2.3   Conclusion on the "product effects" of existing LA/MSF subsidies on the A350XWB. 217

5.6.3.6   Overall conclusion. 217

5.6.4   Lost sales, displacement, and impedance. 219

5.6.4.1   Introduction. 219

5.6.4.2   Summary of Panel findings. 221

5.6.4.2.1   Findings on significant lost sales. 221

5.6.4.2.2   Findings on displacement and impedance. 223

5.6.4.3   Claims and arguments on appeal 225

5.6.4.4   Whether the Panel erred in its interpretation of "displacement" and "impedance". 228

5.6.4.5   Whether the Panel failed to examine the "closeness of competition". 232

5.6.4.6   Whether the Panel erred in its findings of significant lost sales and "displacement and/or impedance"  233

5.6.4.6.1   The data set examined by the Panel 233

5.6.4.6.2   The single-aisle LCA market 235

5.6.4.6.3   The twin-aisle LCA market 237

5.6.4.6.3.1   Significant lost sales. 237

5.6.4.6.3.2   "Displacement and/or impedance". 241

5.6.4.6.4   The VLA market 243

5.6.4.6.4.1   Significant lost sales. 243

5.6.4.6.4.2   Displacement and/or impedance. 246

5.6.4.7   United States' request for completing the legal analysis regarding "displacement and/or impedance"  249

5.6.4.8   Overall conclusion. 251

5.6.4.8.1   The single-aisle LCA market 252

5.6.4.8.2   The twin-aisle LCA market 253

5.6.4.8.3   The VLA market 254

6   Findings And Conclusions. 256

6.1   Article 21.5 of the DSU – the Mühlenberger Loch and Bremen Airport measures. 256

6.2   Article 3.1(b) of the SCM Agreement 256

6.3   Benefit 256

6.3.1   The calculation of general corporate borrowing rate. 256

6.3.2   The calculation of project-specific risk premium.. 258

6.4   Article 7.8 of the SCM Agreement 259

6.5   Conditional appeals under Article 7.8 of the SCM Agreement 259

6.6   European Union's consequential appeal under Article 7.8 of the SCM Agreement 260

6.7   Articles 5, 6, and 7.8 of the SCM Agreement – adverse effects. 260

6.7.1   Non-subsidized like product 260

6.7.2   The relevant product markets. 261

6.7.3   "Product effects" of LA/MSF subsidies on Airbus LCA. 261

6.7.4   Lost sales, displacement, and impedance. 263

6.7.4.1   The single-aisle LCA market 263

6.7.4.2   The twin-aisle LCA market 264

6.7.4.3   The VLA market 265