NEWS RELEASES

July 10, 1998 No. 170

CANADA TO ASK FOR WTO PANEL

ON BRAZILIAN EXPORT PROGRAM

International Trade Minister Sergio Marchi announced today that Canada will ask the World Trade Organization (WTO) to establish a dispute settlement panel on PROEX, a Brazilian export program that Canada believes violates WTO rules.

Canada's request for a panel will be on the agenda at the July 23 meeting of the WTO's dispute settlement body. Canada will ask the panel to examine whether preferential interest rates provided by PROEX for purchasers of Brazilian exports are prohibited subsidies. In Canada, the harmful effects of PROEX have been most evident in the aerospace sector.

"Canada and Brazil have worked very hard to resolve this dispute, but we have clearly reached an impasse," said Minister Marchi. "The Canadian aerospace sector is being hurt by the PROEX program, and Canadian jobs are threatened. It's time to have the WTO rule on this dispute."

Under PROEX, foreign purchasers of Brazilian exports benefit from payments that reduce financing costs. Canada considers these payments to be an export subsidy that is prohibited under the WTO subsidies agreement.

Canada's request for a WTO panel follows two years of consultations with Brazil in efforts to solve the dispute, including the appointment of special envoys in January 1998. Canada believed that the envoys' report, submitted to both governments in May 1998, formed a strong framework to settle the dispute. Negotiations and exchanges of proposals proceeded in good faith throughout June and as recently as this week, but have not to date provided an adequate basis for a resolution of the dispute. Initiation of the WTO panel process does not preclude further negotiations.

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Backgrounders are attached.

For further information, media representatives may contact:

Leslie Swartman

Office of the Minister for International Trade

(613) 992-7332

Media Relations Office

Department of Foreign Affairs and International Trade

(613) 995-1874

This document is also available on the Department's Internet site: http://www.dfait-maeci.gc.ca

Backgrounder

THE PROEX DISPUTE

Summary

Canada's request for a World Trade Organization (WTO) panel on Brazil's PROEX program follows more than two years of intensive consultations with Brazil. This has included bilateral talks at the highest levels, formal WTO consultations, and a review and report by special envoys selected by each government.

In Canada's view, these consultations have reached an impasse, and a solution is now urgent. A ruling by a WTO panel is the only way to resolve the dispute.

Canada believes that PROEX is not consistent with WTO rules. PROEX is an illegal export subsidy that offers buyers of Brazilian exports below-market interest rates and, in the case of aircraft, reduces the price of each plane by more than US$2 million, or by about 15 per cent.

Over the past two years, commitments made under PROEX for Embraer exports are estimated to be as much as US$2.5 billion in grants.

PROEX is an export subsidy that directly affects the price of products. This kind of subsidy program -- direct grants to buyers -- distorts the market for aerospace products, and is the kind of blatant subsidy that WTO members consider to be a priority for elimination.

Canada believes that each day PROEX remains in effect, Canadian aerospace firms and their suppliers across Canada are prevented from winning major contracts for their world-class products, and high-value Canadian jobs are threatened. The government can no longer allow such a critical sector of Canada's high-technology economic future to be under siege.

Context and History

PROEX is a Brazilian export subsidy program used for promoting the purchase of a wide range of goods and services.

Canada first expressed concerns about the use of PROEX in Brazil's aerospace sector in 1996. In June 1996, Canada requested consultations under the WTO Subsidies Agreement. Following those consultations in July, Canada was even more convinced that PROEX violated WTO rules.

In October 1996, Canada asked the WTO Dispute Settlement Body to establish a panel on PROEX. Canada withdrew this request in October 1996 after Brazil's Foreign Minister visited Canada and a solution seemed more hopeful.

Talks again broke down, and Brazil then requested WTO consultations on a variety of programs that support Canadian industry.

Attempts to negotiate a solution were revived when Prime Minister Chrétien met President Cardoso in Brazil during the Team Canada '98 trade mission. In late January, Canada and Brazil each appointed a special envoy to recommend ways to resolve the dispute.

In early May 1998, after more than three months of work, the envoys delivered their recommendations to their leaders. They recommended that the two governments negotiate, within two months, a bilateral accord that:

is consistent with the WTO Agreement;

subjects export financing programs to a "common template," using the Organization for Economic

Co-operation and Development (OECD) Consensus as a model;

contains a dispute settlement mechanism, including annual consultations and recourse to a neutral and independent Monitor who can review support programs and provide an opinion on their consistency with the bilateral agreement;

provides for consultations with respect to domestic programs to determine their WTO consistency.

Canada considered that the envoys' report provided a good framework and sound basic principles for resolving the dispute over government support for sales of regional aircraft.

It soon became apparent, however, that a negotiated solution on the basis of the envoys' report was not possible, and that Brazil was not prepared to freeze the application of PROEX for even a short period during which negotiations could be completed.

At that point, Canada decided that a WTO panel was the only way to resolve the dispute.

Canada remains open to a negotiated settlement with Brazil based on the May 1998 envoys' report.

The Stakes: Canada's Aerospace Industry

The Canadian aerospace sector consists of more than 400 companies and employs approximately 60 000 people across Canada (1997 figures).

The Canadian aerospace industry influences the output and performance of many other sectors of the Canadian economy. Leading aerospace firms work with numerous suppliers and sub-contractors across Canada in the production of complete aircraft, engines, structural components, repair and overhaul, satellites, flight simulators and many other products.

The aerospace sector depends heavily on trade for its success. In 1997, Canada exported $9.4 billion worth of aircraft industry products to world markets, or about 70 per cent of total sales of $13.4 billion.

Aerospace is a vitally important incubator of advanced technologies, bringing together a critical mass of Canadian firms that are helping to build a future economy based on high-technology, value-added products. The sector spends about $880 million a year on research and development.

Canada is among only a handful of nations with an advanced, diversified aerospace sector. The range of design and manufacturing expertise in Canada is comparable to that of many larger economies.

Canada has the sixth-largest share in global aerospace markets, competing with many larger economies such as the United States, France, Germany and Japan.

Chronology

June 1996: Canada first expresses concerns about the use of PROEX in the aerospace sector, and requests consultations.

July 1996: Consultations on PROEX take place in Geneva under WTO Subsidies Agreement.

October 1996: Canada sends letter asking the WTO to establish a dispute settlement panel.

October 1996: Foreign Minister Lampreia visits Canada, meets Minister for International Trade.

October 1996: Canada withdraws request for WTO panel pending further negotiations.

November 1996: Consultations on PROEX took place with Brazil in Geneva.

November 1996: Consultations on PROEX took place with Brazil in Brasilia.

December 1996 to May 1997: Exchange of draft proposals for a bilateral agreement.

March 1997: Brazil requests WTO consultations on programs that support Canadian industry.

April 1997: Consultations in Geneva on Canadian programs.

November 1997: Prime Minister Chrétien and President Cardoso discuss the issue by telephone.

January 16, 1998: Prime Minister Chrétien visits Brazil on Team Canada, speaks to President Cardoso about PROEX. They agree to appoint special envoys.

January 29: Canada and Brazil appoint special envoys.

May 7: Envoys deliver recommendations to Prime Minister Chrétien and President Cardoso.

June 8-9: Consultations in Brasilia.

June 25-26: Consultations in Washington, D.C.

July 10: Canada informs WTO of intention to request dispute settlement panel.

Backgrounder

FLOW CHART OF WTO TRADE DISPUTE

The purpose of this indicative flow chart is twofold. First, to highlight the main steps in the evolution of a trade dispute based on standard proceedings under the WTO Dispute Settlement Understanding (DSU) and, secondly, to provide a synoptical view of DSU time frames.

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Request for Consultations

If responding party does not reply within 10 days, or if it does

not enter into consultations within 30 days, or at period

mutually agreed, the complaining party can request the

establishment of a panel (other WTO Members with substantial

trade interest have 10 days to join the consultations).

Consultations

60 days

Complaining State May Request Panel

The complaining State may request a panel at any

time after 60 days from the date the request is received by the

other State, provided consultations have not resolved

the issue.

Dispute Settlement Body (DSB) Establishes Panel

(usually within 10-30 days)

Panel's Terms of Reference

Composition of the Panel

(within 20 days of the establishment of the panel)

Panel Examination

Unless otherwise agreed, this should not exceed 6 months from composition of the panel.

For cases on prohibited subsidies, it should not exceed 3 months

(includes circulation of interim report within 13 to 22 weeks).

Final Panel Report Circulated to Members and DSB

(report circulated to disputing parties a few weeks in advance).

DSB Monitors Implementation of Adopted

Panel/Appellate Body Recommendations

Within 30 days of adoption, the responding party must inform the

DSB of its intentions regarding the implementation of the

recommendations.