Statement of Facts
Both Sylvarius and Ferrovia are original members of the World Trade Organization, and on December 14, 2022, Sylvarius passed the Fair Trade Act, which Ferrovia sued Sylvarius in the World Trade Organization (WTO) for violating the provisions of the relevant WTO agreements.
In 2020, the pandemic led to a severe recession in the sylvarius economy, with GDP shrinking by 6.1%, and many businesses, especially small and medium-sized enterprises, facing closure or a severe slowdown. In light of this, Sylvarius is driving the digital agenda, emphasizing building a strong digital infrastructure and supporting innovation in key areas such as artificial intelligence, cybersecurity, and 5G networks. In 2021 and 2022, Sylvarius' economy began to rebound and has a technological competitive advantage in industries such as automotive, aerospace, machinery, and green technology.
Ferrovia is highly competitive in the aerospace, defense, pharmaceutical, semiconductor and technology hardware sectors, and its domestic semiconductor industry remains one of the largest and most innovative in the world. In recent years, Ferrovian's economy has experienced complex fluctuations and challenges, with slow economic growth and a decline in domestic manufacturing production due to offshoring and competition from East Asia and other low-cost countries. In order to revive the manufacturing sector, Ferrovia has begun to implement policy support measures for some key sectors (strategic industries such as semiconductors, electric vehicles, clean energy, etc.), such as the Sustainable Economy Act, which was signed on August 16, 2022, with the aim of promoting the manufacture of green technologies in the country and addressing climate change, healthcare and inflation.
On December 14, 2022, the Sylvarius Congress passed the Fair Investment Law, which came into force on July 12, 2023. The bill aims to investigate and respond to foreign subsidies that distort competition in the domestic market. 5. On 11 March 2024, Ferrovia submitted a request for consultation on the Fair Investment Law to Sylvarius, pursuant to Article 4 of the Understanding on Rules and Procedures for Dispute Settlement, Article 23 of the General Agreement on Trade in Services and Article 30 of the Agreement on Subsidies and Countervailing Measures.
On May 13, 2025, the negotiations failed to reach a mutually satisfactory outcome, and Ferrovia requested the establishment of a panel of experts.
Summary of arguments
The FIA does not comply with Article 32.1 of the SCM Agreement
The FIA falls within the jurisdiction of Article 32.1 of the SCM
The FTA, which is intended to investigate foreign subsidies that distort the domestic market and the rules and procedures for correcting such distortions, is consistent with and is subject to the FTS AgreementJurisdiction of Article 32, paragraph 1.
The subsidy determined by the FIA is in accordance with the SCM's regulations on subsidies
The Fair Investment Law, which is intended to investigate foreign subsidies that distort the domestic market and the rules and procedures for correcting such distortions, is governed by the FTA to determine the scope of foreign subsidies that coincides with the scope of subsidies under the Agreement on Subsidies and Countervailing Measures.
The FIA does not comply with Articles 10 and 11 of the SCM, and its measures against foreign subsidies conflict with the relevant provisions of the SCM
According to Articles 10 and 11 of the Agreement on Subsidies and Countervailing Measures, under the WTO framework, three conditions must be met for the implementation of countervailing measures: the existence of subsidies, the existence of damage, and the existence of a causal relationship between subsidies and damage. The FTA is clearly a countervailing investigative measure, but Sylvarius did not put forward the three conditions of "reasonable and sufficient" evidence to prove the existence of the subsidy, the existence of the damage, and the causal relationship between the subsidy and the damage, and could not immediately initiate a countervailing investigation on this basis.
It is also clearly not necessary to justify countervailing measures: (1) receipt of a written application from or on behalf of a domestic industry; (2) the application contains sufficient evidence to demonstrate the existence, extent and impact of the subsidy; (3) the damage falls within the scope of Article 6 of GATT 1994 as interpreted in this Agreement; and (4) there is a causal link between the subsidy and the damage. Sylvarian did not adduce evidence of receipt of a written application from domestic industry, nor evidence of a causal link between the Ferrovia subsidy and the distortion of domestic industry. Accordingly, in violation of Article 32, paragraph 1, of the Agreement on Subsidies and Countervailing Measures, no specific action may be taken against Ferrovia's subsidies.
2. The countervailing measures taken by the FIA violated the principle of "national treatment" under GATS 17.1.
The original text of GATS 17.1 reads: "In the sectors listed in its Schedule, and subject to any conditions and qualifications set out in its annexes, each Member shall, in respect of all measures affecting the supply of services, accord to any other Member services and service providers no less favourable than those accorded to similar services and service providers in his country." ”
Sylvarius's determination of the scope of subsidies in the FIA is inconsistent with the scope of government subsidies that should be controlled under its domestic laws; and the inconsistencies between the FIA and Sylvari's domestic control of government assistance laws in providing for investigations and response measures demonstrate that Sylvari treats foreign countries through these countervailing measures is substantially worse than that provided by its own country. It also meets the elements of the claim set out in 17.1 of the GATS.
Measures at Issue
The measure in question is the Sylvarian Fair Investment Act (FIA Act), which was formally adopted in the Sylvarius Congress on December 14, 2022 and entered into force on July 12, 2023.
Legal pleadings
I. The FTA is inconsistent with Article 32, paragraph 1, of the Agreement on Subsidies and Countervailing Measures.
The countervailing measures taken by Sylvarian against Ferrovia enterprises in Sylvarian are not countervailing measures permitted under Article 32(1) of the Agreement on Subsidies and Countervailing Measures. Both countries are members of the WTO.
According to Article 32(1) of the Agreement on Subsidies and Countervailing Measures: "No specific action shall be taken with respect to a subsidy of another Member except in accordance with the provisions of the GATT 1994 as interpreted in this Agreement." ”
To determine whether a measure is incompatible with article 32, paragraph 1, of the Agreement on Subsidies and Countervailing Measures, the following three conditions must be ensured: the measure in question falls within the scope of application of article 32, paragraph 1; The subsidy identified by the measure is in accordance with the subsidy provisions of the Agreement on Subsidies and Countervailing Measures; The measures in question do not comply with the provisions of the Agreement on Subsidies and Countervailing Measures on countervailing measures, and do not justify countervailing measures. In the end, it was presumed that the measures in question were not countervailing measures permitted by article 32, paragraph 1, of the Agreement on Subsidies and Countervailing Measures.
As a basic condition, Sylvarian's measures fall within the scope of Article 32, paragraph 1, of the Agreement on Subsidies and Countervailing Measures, and the other two conditions need to be met for each of Ferrovia's claims.
A. The Fair Investment Law falls within the scope of Article 32, paragraph 1, of the Agreement on Subsidies and Countervailing Measures.
In the present case, Sylvararian passed a Fair Investment Act (FIA), article 1 of which states that the purpose of this Act is to ensure a level playing field by establishing a coordinated framework to address distortions caused directly or indirectly by foreign subsidies and thus to promote the proper functioning of the domestic market. The Act sets out the rules and procedures for investigating and correcting foreign subsidies that distort the domestic market. This Act applies to foreign subsidies received by enterprises engaged in economic activity in the domestic market. This measure relates to (1) foreign subsidies; (2) Investigation and correction of subsidies; and (3) distorting the domestic market, in which the measure can be regarded as a countervailing measure due to the broad application of the provision, falling within the scope of Article 32, paragraph 1.
In addition, Article 6 of the Fair Investment Law gives the audit department the power to proactively review any foreign subsidies suspected of distorting the domestic market. Article 13 allows the audit department to engage in dialogue with third countries to negotiate the suspension or modification of subsidies in order to eliminate the distortion of subsidies in the domestic market. Investigation of domestic foreign subsidies, suspension and modification of subsidies are all countervailing contents, which fall within the scope of Article 32, paragraph 1.
Therefore, the Sylvarian measures (countervailing investigations and suppression) contained in the FTA fall within the scope of application of Article 32, paragraph 1. It is now necessary to analyze whether the countervailing measures comply with the relevant provisions of the Agreement on Subsidies and Countervailing Measures.
B. The subsidies determined under the Fair Investment Law comply with the subsidy provisions of the Agreement on Subsidies and Countervailing Measures.
Article 1 of the Agreement on Subsidies and Countervailing Measures defines the scope of subsidies, including: (1) financial assistance provided by the government, any government agency, or government entrusted to direct private individuals, including direct fund transfers, potential fund transfers, direct debt transfers, exemptions or non-collection of government revenues that should have been collected, and the provision of goods and services or purchases of goods by the government that are not part of general infrastructure, government payments to fund institutions, and other government actions that are essentially subsidies; (2) any form of income support or price support within the meaning of Article 16 of the GATT 1994; and (3) a certain preference given as a result.
Article 2 of the Fair Investment Law defines foreign subsidies as: "when a third country makes a financial contribution, directly or indirectly, to the benefit of enterprises engaged in economic activity in the domestic market of Sylvarius, and is de jure or de facto limited to one or more enterprises or industries." "Financial contributions here include: (1) transfers of funds or liabilities, such as capital injections, grants, loans, loan guarantees, financial incentives, set-off of operating losses, compensation for financial burdens imposed on public authorities, debt relief, debt-for-equity swaps or rescheduling; (2) waiver of income that should have been due, such as tax exemption or granting of special or exclusive rights without proper remuneration; (3) Provision of goods or services or purchase of goods or services. The scope of financial contributions in the FTA is clearly in line with the provisions of item 1 of the subsidy scope of the Agreement on Subsidies and Countervailing Measures, and is a financial contribution provided by the government or any government agency. Therefore, the investigation and restriction of such subsidies under the Fair Investment Law should be governed by the Agreement on Subsidies and Countervailing Measures.
C. The FTA does not comply with Articles 10 and 11 of the Agreement on Subsidies and Countervailing Measures, and its measures against foreign subsidies conflict with the relevant provisions of the Agreement on Subsidies and Countervailing Measures.
1. The Fair Investment Law does not meet the special conditions for the implementation of countervailing measures under the Agreement on Subsidies and Countervailing Measures
Paragraph 1 of Article 32 of the Agreement on Subsidies and Countervailing Measures is the key to determining whether the countervailing measures comply with the countervailing provisions of the Agreement on Subsidies and Countervailing Measures, that is, to determine the legitimacy of the countervailing measures.
Paragraph 6 of Article 11 of the Agreement on Subsidies and Countervailing Measures stipulates that the countervailing investigation is justified if there is sufficient evidence on the subsidy, damage and causal relationship. It can be concluded that under the WTO framework, three conditions must be met for the implementation of countervailing measures: (1) the existence of subsidies; (2) the existence of damage; and (3) there is a causal link between the subsidy and the damage. According to the Panel of Experts in the U.S. Carbon Steel case, "sufficient evidence on record is a necessary consequence of the investigative agency's assessment necessary to meet the legal standard of substantive obligation." If there is insufficient evidence in the records of the investigating body, additional evidence needs to be sought to be able to provide 'reasonable and sufficient' evidence to satisfy the requirements of the substantive obligation"1, hence the confirmation of theWhether the Fair Investment Law meets the above three conditions must be supported by "reasonable and sufficient" evidence.
With regard to the existence of a condition 1 subsidy, according to Article 11 of the Agreement on Subsidies and Countervailing Measures, "an investigation into the existence, extent and impact of any alleged subsidy shall be initiated upon receipt of a written application from or on behalf of the domestic industry." The FTA is intended to regulate financial assistance from foreign governments, and it must be proved in advance that the foreign country was aware of the existence of the financial assistance, i.e., the subsidy, and that "reasonable and sufficient" evidence is that of a written application made by or on behalf of a domestic industry. On the one hand, the application under article 10 of the Agreement on Subsidies and Countervailing Measures contains sufficient evidence to prove the existence, extent and impact of the subsidy, and on the other hand, the application must also be made by or on behalf of the domestic industry. The US-Offset Act states that "the quantity rather than the quality of domestic industry support needs to be 'checked'2According to Article 11 of the Agreement on Subsidies and Countervailing Measures, "when the total output of the application constitutes more than 50% of the total output of the same kind produced by the domestic producer of the same kind of product in the domestic industry who has expressed support or opposition to the application, it shall be deemed to be 'proposed by or on behalf of the domestic industry'", and when it is less than 25%, no investigation shall be initiated, which stipulates a clear quantitative criterion of 'proposed by or on behalf of the domestic industry'.
"Companies and industry associations are also frustrated by the level playing field created by foreign-subsidized competitors," Sylvarian's policymakers mentioned. "Sylvarian, however, has not adduced clear evidence that its competent authority has received an application from or on behalf of a domestic industry, and the mere use of the general term "frustrated" is not supportive, and it has not submitted sufficient evidence to demonstrate that a written application was made by or on behalf of domestic industry and that the written application contained sufficient evidence to demonstrate the existence, extent and impact of the subsidy, Failure to be "reasonable and sufficient" evidence of the existence of foreign subsidies is a clear violation of Condition 1 and does not prove the existence of foreign subsidies.
With regard to the existence of condition 2 injury, note 45 of the Agreement on Subsidies and Countervailing Measures makes it clear that injury means material injury to a country's domestic industry, a threat of material injury to a country's domestic industry, or a material impediment to the establishment of such industry. Article V of the Agreement on Subsidies and Countervailing Measures sets out the criteria for adverse effects, while article VI further specifies the economic criteria for serious violations. The criteria for damage can be summarized as (a) injury to the domestic industry of another Member, (b) loss or impairment of benefits obtained directly or indirectly by other Members, and (c) serious infringement of the interests of another Member.
Pursuant to article 15, paragraph 1, of the Agreement on Subsidies and Countervailing Measures, affirmative evidence for the determination of damage includes: (a) the quantity of subsidized imports and the effect of subsidized imports on the prices of similar products in the domestic market, and (b) the consequent impact of those imports on domestic producers of such products. According to Article 15(1) and (4) of the Agreement on Subsidies and Countervailing Measures, and the Appellate Body in the Japan-DRAMs (Korea) case, "information relating to the quantitative and price effects of subsidized imports and the consequent impact on domestic industries may be used as evidence to prove that the damage was caused by 'subsidizing imports through subsidy effects'." "3 Sufficient evidence of the existence, extent and impact of subsidies should include: (a) the impact of subsidies on the prices of imported products, and (b) an assessment of all economic factors and indicators relevant to the impact of subsidies on domestic industries, including actual and potential declines in production, sales, market share, profits, productivity, investment returns or equipment utilization.
Sylvarian's policymakers argue that "Ferrovia's subsidies could lead to Farorian companies gaining an unfair competitive advantage in the global market." This is particularly troubling for Sylvarian's industry, as they are also working to increase the production of clean technologies. "Sylvarian did not adduce clear evidence to prove a series of economic factors related to the determination of damage, such as the competitive advantage gained by Ferrovia's subsidies and the impact on Sylvarian's domestic industry, which obviously did not meet Condition 2 and could not prove the existence of damage.
With regard to the existence of a causal link between the subsidy and the damage in condition 3, the Appellate Body in the Japan-DRAMs (Korea) case mentioned that "proving that there is an additional causal link between the effect of the subsidy and the damage is a prerequisite for determining the damage." "4. In order for a Contracting State to investigate and restrictive measures against subsidies in another Contracting State, it must submit the necessary evidence to establish a causal link between the subsidies and the injury to the domestic industry.
Article 3 of the Fair Investment Law defines domestic market distortion as: "foreign subsidies have the potential to improve the competitive position of enterprises in the domestic market, and in the process, the foreign subsidies actually or may have a negative impact on competition in the domestic market", and the indicators of domestic market distortion are: (a) the amount of foreign subsidies; (b) the nature of the foreign subsidy; (c) the circumstances of the business, including its size and the market or sector in which it operates; (d) the level and evolution of the enterprise's economic activity in the domestic market; (e) The purpose of the foreign subsidy, its conditionality and its use in the domestic market. Accordingly, it can be concluded that the FTA itself is intended to investigate the existence of damage caused by foreign subsidies to domestic industries, assuming the premise that foreign subsidies will have a negative impact on competition in the domestic market, but there is no actual evidence to prove that there is a causal relationship between the subsidies in the country of Ferrovia and the distortion of Sylvarian's domestic industry, i.e., the damage itself, and the indicators of the damage are not specified. It is clear that Sylvarian itself was not able to prove the impact of Ferrovia's subsidies on Sylvarian's domestic industry, but instead used the Fair Investment Law to investigate the actual circumstances of the damage when the damage was likely to exist, and did not provide clear evidence to support the causal relationship between the existence of foreign subsidies and domestic distortions, which clearly did not meet Condition 3. It is not possible to prove a causal link between the subsidy and the damage.
2. The Fair Investment Law does not comply with the necessary steps for the implementation of countervailing measures under the Agreement on Subsidies and Countervailing Measures
In addition, Article 10 of the Agreement on Subsidies and Countervailing Measures provides for the necessary steps for the justification of countervailing investigations, i.e., the countervailing measures taken by a Contracting State on subsidies from other countries must comply with the necessary steps for countervailing investigations under the Agreement on Subsidies and Countervailing Measures. "Article 11 of the Agreement on Subsidies and Countervailing Measures contains a number of substantive requirements that must be met in order to initiate a countervailing duty investigation," the report of the Mexico-Olive Oil Panel also mentioned. "The necessary steps include: (1) receipt of a written application from or on behalf of the domestic industry; (2) the application contains sufficient evidence to demonstrate the existence, extent and impact of the subsidy; (3) the damage falls within the scope of Article 6 of GATT 1994 as interpreted in this Agreement; and (4) there is a causal link between the subsidy and the damage.
Regarding steps 1 and 2, Sylvarian's policymakers mentioned: "Companies and industry associations are also frustrated by the level playing field created by foreign-subsidized competitors. However, Sylvarian did not provide clear evidence that its competent authority had accepted the application from or on behalf of the domestic industry, and the mere use of the general term "frustrated" was not supportive and clearly did not comply with steps 1 and 2.
For steps 3 and 4, Article 3 of the FTA proposes that the indicators of distortion in the domestic market are: (a) the amount of foreign subsidies; (b) the nature of the foreign subsidy; (c) the circumstances of the business, including its size and the market or sector in which it operates; (d) the level and evolution of the enterprise's economic activity in the domestic market; (e) The purpose of the foreign subsidy, its conditionality and its use in the domestic market. Accordingly, it can be concluded that the FTA itself is intended to investigate the existence of damage caused by foreign subsidies to domestic industries, assuming the premise that foreign subsidies will have a negative impact on competition in the domestic market, but there is no actual evidence to prove that there is a causal relationship between the subsidies in the country of Ferrovia and the distortion of Sylvarian's domestic industry, i.e., the damage itself, and the indicators of the damage are not specified. Obviously, Sylvarian itself was not able to prove the impact of Ferrovia's subsidies on Sylvarian's domestic industry, but used the Fair Investment Act to investigate the actual circumstances of the damage when the damage was likely, which clearly did not comply with steps 3 and 4. As a result, the FTA is clearly inconsistent with the necessary steps for the implementation of countervailing measures under the Agreement on Subsidies and Countervailing Measures.
3. The Fair Investment Law does not meet the requirements for the legitimacy of the implementation of countervailing measures under the Agreement on Subsidies and Countervailing Measures
In addition, article 10 of the Agreement on Subsidies and Countervailing Measures sets out the general criteria for the legitimacy of countervailing investigations, i.e., that the countervailing measures taken by a contracting party on subsidies from other countries must comply with the necessary steps for countervailing investigations under the Agreement on Subsidies and Countervailing Measures. "Article 11 of the Agreement on Subsidies and Countervailing Measures contains a number of substantive requirements that must be met in order to initiate a countervailing duty investigation," the report of the Mexico-Olive Oil Panel also mentioned. "5 The necessary steps include: (1) receipt of a written application from or on behalf of a domestic industry; (2) the application contains sufficient evidence to demonstrate the existence, extent and impact of the subsidy; (3) the damage falls within the scope of Article 6 of GATT 1994 as interpreted in this Agreement; and (4) there is a causal link between the subsidy and the damage. As noted above, the FTA does not comply with the special provisions on the legitimacy of countervailing investigations, i.e. article 4 of the general case, and Sylvarian has not adduced either evidence of receipt of a written application from the domestic industry or evidence of a causal link between the Ferrovia subsidy and the distortion of the domestic industry. Therefore, it is also clearly inconsistent with the necessary steps in the general situation and still violates the provisions of the Agreement on Subsidies and Countervailing Measures with regard to countervailing investigations.
In summary, the legitimacy of a countervailing investigation can be summarized as follows: a countervailing investigation can be initiated when there is sufficient evidence on the relationship between subsidies, damage and causation, that is, under the WTO framework, three conditions must be met for the implementation of countervailing measures: (1) the existence of subsidies; (2) the existence of damage; and (3) there is a causal link between the subsidy and the damage. In addition, if the above special circumstances cannot be met, four necessary conditions need to be met: (1) receipt of a written application from or on behalf of the domestic industry; (2) the application contains sufficient evidence to demonstrate the existence, extent and impact of the subsidy; (3) the damage falls within the scope of Article 6 of GATT 1994 as interpreted in this Agreement; and (4) there is a causal link between the subsidy and the damage. After the above analysis, the FTL does not comply with the above-mentioned provisions on the legitimacy of countervailing investigations, and therefore violates Articles 10 and 11 of the Agreement on Subsidies and Countervailing Measures.
Article 32(1) of the Agreement on Subsidies and Countervailing Measures provides that no specific action may be taken with respect to subsidies from another Member, except in accordance with the provisions of the GATT 1994 as interpreted in this Agreement. In the present case, the rules and procedures for the investigation and correction of foreign subsidies that distort the domestic market under the FTA clearly fall within the scope of countervailing investigations, which need to meet the standard of legitimacy.
In the event of a breach of the provisions of the Agreement on Countervailing Measures, Sylvarian shall not take any specific action against Ferrovia's subsidy. Based on the foregoing analysis, the FTL does not have the legitimacy of a countervailing investigation under Articles 10 and 11 of the Agreement on Subsidies and Countervailing Measures, and therefore violates Article 31, Paragraph 1 of the Agreement on Subsidies and Countervailing Measures.
II. The countervailing measures taken by the FIA are in violation of the principle of "national treatment" under GATS 17.1.
The determination of the scope of subsidies in the FIA is inconsistent with the scope of government subsidies that should be controlled under its domestic laws
The FIA defines the existence of a subsidy as a financial contribution made directly or indirectly by a third country to benefit an enterprise engaged in economic activity in the domestic market of Sylvarius, which is de jure or de facto limited to one or more enterprises or industries. "Financial contributions" include: transfers of funds or liabilities, such as capital injections, grants, loans, loan guarantees, financial incentives, set-off of operating losses, compensation for financial burdens imposed on public authorities, debt relief, debt-for-equity swaps or rescheduling; waiver of income that should have been due, such as tax exemption or granting of special or exclusive rights without proper remuneration; or the provision of goods or services or the purchase of goods or services. "Third countries" include the central government and other public authorities at all levels; its conduct is attributable to a foreign public entity in a third country, taking into account factors such as the characteristics of the entity and the legal and economic environment in force in the country in which the entity operates, including the role of the government in the economy; or, taking into account all the relevant circumstances, its conduct is attributable to a private entity in a third State. In particular, according to FIA 3.1, "if the foreign subsidy actually has or is likely to have a negative impact on competition in the domestic market, it shall be deemed to have a distortion in the domestic market", which can be determined that the FIA identifies a foreign subsidy that "actually or may have a negative impact on competition in the domestic market" as a subsidy for which remedial measures should be taken in the FIA.
In the Sylvarius system of state aid control, "state aid" is defined as any benefit given or threatened by a public authority of Sylvarius to distort or threaten to distort competition through government resources, i.e. in favour of certain enterprises or sectors in its domestic market. These include direct subsidies, tax exemptions, concessional loans, guarantees, or the provision of public goods and services at below-market prices. Competition is considered distorted if it is shown that the assistance provided by the public authority (assistance not specifically exempted) strengthens the competitive position of the beneficiary enterprise vis-à-vis its competitors.
The scope of the subsidy is inconsistent
The scope of foreign subsidy entities identified in the FIA is: (a) central government and other public authorities at all levels; (b) its conduct is attributable to a foreign public entity in a third country, taking into account factors such as the characteristics of the entity and the legal and economic environment in force in the country in which the entity operates, including the role of the Government in the economy; (c) or, taking into account all the relevant circumstances, its conduct is attributable to a private entity in a third State.
In contrast, the subject of subsidies in the Sylvarius State Aid Control System is only "public authorities". It does not include other public entities whose actions are attributable to public authorities and private entities whose actions are attributable to public authorities, and the scope of the subject is significantly smaller than that of the subsidized entities defined in the FIA.
The scope of the form of the subsidy is inconsistent
The scope of forms of foreign subsidies identified in the FIA includes transfers of funds or liabilities, such as capital injections, grants, loans, loan guarantees, financial incentives, set-off of operating losses, compensation for financial burdens imposed on public authorities, debt relief, debt-to-equity swaps or rescheduling; waiver of income that should have been due, such as tax exemption or granting of special or exclusive rights without proper remuneration; or the provision of goods or services or the purchase of goods or services.
However, Sylvarius' state aid control system stipulates that the form is "any benefit that distorts or threatens to distort competition through government resources", and the scope is unclear and there is more room for interpretation, and in the FIA, the form of foreign subsidies is accurately and clearly marked in the form of enumeration, and it is impossible to determine whether the scope delineated in its actual connotation is the same.
The different scopes of exemptions
Sylvarius' State Aid Control System recognizes regional development assistance, research, development and innovation assistance, environmental protection and energy, assistance to small and medium-sized enterprises, support for small and medium-sized enterprises, and crisis-related assistance as appropriate to the domestic market, regardless of the amount of subsidies, and is exempt. However, the FIA identifies only two situations that are not considered to distort the domestic market: (a) foreign subsidies totalling no more than $4 million for three consecutive years and (b) are intended to compensate for damage caused by natural disasters or unusual events, and cannot be considered distorted to the domestic market. The FIA grants fewer exemptions and more stringent conditions to foreign subsidies. In fact, before the pandemic, Sylvarius approved $12 billion to $150 billion in state aid per year, and from 2020 to 2022, the total amount allocated to businesses was $746 billion.
The criteria for determining whether a subsidy should be subject to control measures are inconsistent
Sylvarius law provides that aid that distorts competition should be controlled, and that it is considered distorted if the assistance provided by the public authority strengthens the competitive position of the beneficiary enterprise vis-à-vis its competitors.
FIA 3.1: "A foreign subsidy is deemed to have a domestic market distortion if, in the process, it has the potential to improve an enterprise's competitive position in the domestic market and, in the process, the foreign subsidy actually or is likely to have a negative impact on competition in the domestic market." "The basic indicators used to judge are the amount, nature, purpose, conditionality and use of foreign subsidies in the domestic market; the circumstances of the business, including its size and the market or sector in which it operates; The level and evolution of the enterprise's economic activity in the domestic market.
Sylvarius does not include "likely to have a negative impact on competition in the domestic market" as a judgment that competition is distorted. Compared to FIA, the criteria for judging are simpler and more relaxed.
These differences reflect the inconsistency between the determination of the scope of subsidies in the FIA and the scope of government subsidies to be controlled under domestic law, in which Sylvarius essentially provides for the less favourable treatment of Ferrovia in the FIA.
The FIA is inconsistent with the domestic control government assistance law in providing for investigation and response measures
According to Sylvarius' state aid control system, unless aid falls under a specific exemption from Sylvarius, any public authority must notify the audit department before granting state aid. In practice, once the audit department has been notified, the audit department has two months to decide: According to FIA 6.1: "The Audit Department may, on its own initiative, examine information from any source, natural or legal person or association on foreign subsidies suspected of distorting the domestic market." "If, after a preliminary examination, an in-depth investigation, and internal and external inspections of Sylvarius, the audit finds that foreign subsidies distort the domestic market, it may decide to impose restrictive measures ("Restrictive Measures Decisions"), except in the case of acceptance of commitments made by the enterprise under investigation under paragraph 2.
(1) The audit department will review the foreign subsidies ex officio and the notice of state subsidies
According to FIA 6.1: "The Audit Department may, on its own initiative, examine information from any source, natural or legal person or association on foreign subsidies suspected of distorting the domestic market." "The Audit Department is given ex officio powers to review foreign subsidies by providing that it may, on its own initiative, examine information on foreign subsidies suspected of distorting the domestic market from any source, natural or legal person or association. However, there is no ex officio review of domestic subsidies, and the review process can only be initiated after the national public authority notifies the Audit Office.
(2) The investigation period varies greatly
According to the Sylvarius law, the audit department has two months from the time the notice is received to investigate the subsidy and make a decision. However, FIA 8.5 stipulates that "the audit department shall make a decision within 18 months, if possible". The Audit Office was not given a completely absolute investigation period when reviewing foreign subsidies, and the 18-month period was much longer than the two-month period in China.
The restrictive measures taken were inconsistent
The restrictive or committed measures set out in the FIA include (a) granting access to infrastructure, including research facilities, production capacity or infrastructure, that is obtained or supported by foreign subsidies that distort the domestic market on fair, reasonable and non-discriminatory terms; (b) reduction of production capacity or market presence, including through temporary restrictions on commercial activities; (c) restrict certain investments; (d) licensing assets acquired or developed with the help of foreign subsidies on fair, reasonable and non-discriminatory terms; (e) publication of research and development results; (f) divestment of certain assets; (g) require the enterprise to lift the relevant concentration; (h) repayment of foreign subsidies, including appropriate interest rates; (i) Require the relevant enterprises to adjust their governance structures.
However, according to the Sylvarius law, if there are affirmative findings of state aid and distortion in the investigation, the audit department can decide:(a) Notification measures may be implemented under certain conditions. In practice, this situation may require the beneficiary to make an implicit payment to the audit department. Otherwise, (a) the notification aid is incompatible with the domestic market, the notification measure may not be implemented and the public authority must withdraw the aid. For domestic subsidies, the restrictive measures adopted by the review level are only aimed at the aid itself, or require implicit payments, and do not impose more restrictions on the operation and development of beneficiary enterprises. In contrast, the restrictive measures adopted by the FIA, especially those in paragraphs (e), (f), (g) and (i), are mainly aimed at the production and operation of enterprises, which may lead to a relative decline in the competitiveness and market share of foreign enterprises.
(4) The scope of subsidies for which notification measures can be taken is different
In the law of Sylvarius, there is no legal provision for the audit department on (a); (b) Assistance that is compatible with the domestic market may be subject to notification measures. The FIA stipulates that, after a preliminary or in-depth review by the audit department, the company under investigation may be notified if it is found that (a) there are no foreign subsidies or there are no signs of distortion in the domestic market, or (b) there may be insufficient indications to conduct an in-depth investigation.
The Sylvarius domestic review considers subsidies that "do not have legal provisions" as subsidies for which notification measures can be applied, but does not classify this in the review of foreign subsidies.
3. The Fair Investment Law falls within the scope of the national treatment obligations under GATS 17
(1) The original text of GATS 17.1: "In the sectors listed in its schedule, and subject to any conditions and qualifications set out in its annexes, each Member shall, in respect of all measures affecting the supply of services, accord to any other Member services and service providers no less favourable than those accorded to similar service and service providers in his own country." It provides that the jurisdiction of the GATS is: "all measures affecting the supply of services in the sectors listed in the schedule". However, the Expert Group on Electronic Payment Services noted that the scope of market access obligations under Article 16(2) of the GATS "applies to six clearly defined categories of measures, primarily those of a quantitative nature", but that the scope of national treatment obligations under Article 17 generally extends to "all measures affecting the supply of services"6.
4. The countervailing measures adopted by the Fair Investment Law meet the elements of claims under the principle of national treatment
The Fair Investment Law deals with foreign subsidies to enterprises engaged in economic activities in the domestic market. "Economic activity in the domestic market" means the acquisition of control of a business established in Sylvarius or a merger with a company established in Sylvarius. Sylvari's adoption of the Fair Investment Law was taken by Sylvari's central, regional or local governments and competent authorities to influence the provision of financial support by foreign countries7.
According to the overview of the Expert Group in the Field of Publications and Audiovisual Products in China – Publications and Audiovisual Products, the wording of Article 17 indicates that we need to determine: whether the disputed service, i.e. the FIA adopted by Svlvari on the basis of the protection of the domestic market, is included in Sylvari's schedule; the scope of the national treatment commitments made by them for these services as set out in the Schedule, including any conditions or eligibility; whether the controversial measures affect the supply services sector of these; and whether these measures treat other members' service providers less favourably than comparable local providers. 8
With regard to the element of "no less than preference" treatment in Article 17, the Chinese Group of Experts - Publications and Audiovisual Products is of the view that we must now examine whether a formal ban on the provision of certain services by foreign service providers, while similar domestic suppliers may undertake, constitutes 'non-inferior' treatment within the meaning of Article 17. Such treatment shall be assessed in accordance with the "race conditions" between similar services and service providers as set out in Article XVII:3 of GATS: if the same form or different forms of treatment alter the race conditions, such treatment shall be deemed less favourable compared to any other Member's similar services or service providers.
In the Argentina-Financial Services case,9 the Appellate Body elaborated on its understanding of the phrase "treatment not less favourable" in Article II(1) and Article XVII of the General Agreement on Trade in Services (GATS): while Article XVII:3 refers to a modification of the competitive conditions in favour of domestic services or service suppliers, the legal criteria set out in Article XVII:3 require a review of whether a measure modifies the competitive conditions, thereby harming the services or service providers of any other member. Less favourable treatment of foreign services or service suppliers is the opposite of the same coin as favourable treatment of domestic services or service suppliers of the same kind. The "inherent competitive disadvantage" is due to the "foreign nature" of the relevant service or service provider, not to the controversial measures taken by the importing member. Therefore, the phrase "inherent competitive disadvantage" in footnote 10 must be distinguished from the effect of the measure on competitive conditions of the market. By stating that members are not required to "compensate" for such "inherent competitive disadvantages", footnote 10 thus makes it clear that the national treatment obligation under Article XVII:1 is not about the relative competitive advantages or disadvantages of services and service providers that are not caused by controversial measures. Rather, the 'non-inferior' criterion must be based on the effect of the contested measure on the conditions of competition.
GATS 1.2 provides that "a Contracting Party may meet the requirements of paragraph 1 of this Article by giving the same or different treatment to any other Contracting Party to the same service or service supplier in the same form as it does to its own State". It can be seen from this that the concept of national treatment required by GATS is different from that of the same treatment, and the difference here should be limited to the form, not the substance. The distinction between substantive differences and non-differences may be made by reference to the principle of "equality of competitive opportunity" as set out in GATS 17.3, i.e., whether the treatment "modifies the conditions of competition in favour of domestic service and service providers". The question touches on whether national treatment really provides an equal opportunity playing field for domestic and foreign services and service providers
In fact, Sylvarius' determination of the scope of subsidies in the FIA is inconsistent with the scope of government subsidies that should be controlled under its domestic laws; The inconsistencies between the FIA and Sylvari's domestic control of government aid laws in providing for investigations and response measures demonstrate that Sylvari's countervailing measures on third-country subsidies may be more likely to weaken third countries than its restraints on domestic subsidiesThe competitiveness of the enterprise concerned and the reduction of its market share, and the possible result is not the inherent competitive disadvantage of the third country, but the result of the contested measureIt is for this reason that Ferrovia argues that it violates the principle of national treatment as set out in Article 17.1 of the GATS.
