Dispute Settlement
Panel Cases to which Canada is a Party
Canada/Brazil WTO Panels - Aircraft
A Summary of Canada's Submission in the Case Against the Brazilian PROEX Programme
(Submitted to the WTO Panel on November 3, 1998).
At issue in this dispute is whether the Programa de Financiamento às Exportações Exportações (PROEX), the export financing support programme of Brazil, confers export subsidies on sales of Brazilian regional aircraft that are prohibited under Article 3 of the the Agreement on Subsidies and Countervailing Measures (SCM Agreement).
Canada will show that payments made by the Government of Brazil under the "Interest Equalisation" component of PROEX on export sales of Brazilian regional aircraft constitute subsidies within the meaning of Article 1. Canada will further prove that such subsidies are contingent on export performance and are therefore prohibited by Article 3.
PROEX payments are financial contributions by the Government of Brazil that, in the case of exported Brazilian aircraft, reduce the cost of such aircraft to the purchaser. The purchaser (for example, an airline) may receive these payments in one of two ways. First, PROEX payments may be used to lower the rate of interest paid by a purchaser by up to 3.8 percentage points per year. The net benefit conferred on a purchaser as a result of such an interest rate reduction can amount to as much as half of the total interest that would be payable by a purchaser in the absence of the payments. Second, a purchaser may, instead, receive these payments in the form of a lump-sum payment that reduces the cost of the aircraft by at least 13 to 15 percent.
The payments are made even where the financing is done by a non-Brazilian entity. The payments are made even in circumstances where the purchaser borrows funds, at commercial rates based on its own credit-worthiness, from non-Brazilian creditors in financial markets outside of Brazil. The payments are made even where elements of the financing are guaranteed by non-Brazilian multinational corporations. The payments are not made in return for any goods or services. The payments are never repaid and are not required to be repaid. The payments operate directly to increase the exports of Brazilian regional aircraft.
In short, in the regional aircraft market, PROEX payments are grants tied to the purchase of Brazilian regional aircraft exports. Such grants are subsidies within the meaning of Article 1. As they are contingent on export performance, these grants constitute prohibited subsidies within the meaning of Article 3.
PROEX subsidies to Brazilian regional aircraft have resulted in serious distortions in the regional aircraft market -- the market for jet and turboprop aircraft that have between 20 and 90 seats. The significant reduction in the cost of Brazilian regional jet aircraft in a highly competitive market has resulted in a five-fold increase in the market share of exported Brazilian regional aircraft over the past two years and the displacement of not only other regional jet aircraft, but also turboprop aircraft in the market.
In view of the damage caused by PROEX subsidies, Canada brought this matter to the attention of Brazil two years ago and attempted to resolve it through negotiation, both within and outside the framework of the WTO dispute settlement mechanism. Despite expressions of concern by Canada and other members of the WTO, Brazil has, contrary to Article 3.2, continued to grant and maintain such prohibited subsidies.
Further, Brazil has done nothing to phase out these export subsidies. Indeed, it has expanded the scope and availability of PROEX subsidies. It has progressively increased expenditures under PROEX, both generally and more specifically with respect to regional aircraft. It has increased the value of the financing to which PROEX subsidies apply from 85 percent to 100 percent of the purchase amount. It has, in practice, waived Brazilian content requirements and increased the period in which PROEX subsidies are available from ten to fifteen years. It has increased the term for which PROEX subsidies are available for spare parts and engines for regional aircraft. Finally, it has made PROEX subsidies available as lump-sum grants and therefore more attractive to purchasers.
Canada seeks a resolution of this matter before the WTO that will put an end to the serious market distortions caused by PROEX subsidies. Canada seeks a finding that payments made under PROEX on export sales of Brazilian regional aircraft constitute export subsidies prohibited by Article 3. Canada requests that the panel recommend, in accordance with Article 4.7, that Brazil withdraw without delay PROEX subsidies granted under the "Interest Equalization" component of PROEX.
A Summary of Canada Submission in Defense of Canadian Programmes
(Submitted to the WTO Panel on November 16, 1998).
In this dispute, Brazil alleges that Canada grants or maintains an extensive array of subsidies for the Canadian industry producing civil aircraft which are inconsistent with Canada's obligations under Article 3.1(a) and Article 3.2 of the Subsidies Agreement. Canada submits that this allegation is false.
Brazil proceeds under the expedited process of Article 4 of the the Agreement on Subsidies and Countervailing Measures (SCM Agreement) and seeks a remedy for one kind of violation only: the alleged inconsistency of certain Canadian programmes, activities and transactions with the prohibition on export subsidies in Article 3.
Brazil has challenged a large number of disparate programmes, activities and transactions. Brazil's interpretations of the legal provisions in question are not based on the principles of treaty interpretationin customary international law. Brazil's case rests on inaccurate facts and unsupported assumptions. Canada notes that Brazil, as the complainant, has the responsibility of establishing its claims. To do so in this case with respect to each of the impugned Canadian programmes, activities, and transactions, Brazil must demonstrate two distinct and necessary elements:
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that as a result of that programme, transaction or activity, a subsidy exists (SCM Agreement Article 1); and
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that the subsidy is contingent, in law or in fact, upon export performance (SCM Agreement Article 3).
If Brazil fails to demonstrate either one of the two necessary elements, its allegations must be dismissed. Canada submits, therefore, that it is enough for Canada to show, in respect of each impugned programme, activity or transaction, that Brazil has failed to demonstrate inconsistency with either one or the other condition. Similarly, in accordance with the principle of judicial economy, if the Panel finds that Brazil has not demonstrated its claim with respect to either prong of the test, it is not necessary to enter upon an enquiry in respect of the other element of the test; that is, it is not necessary
for the Panel to determine whether the impugned programmes, activities or transactions are subsidies, if it finds that they are not contingent upon export performance. Indeed, given the accelerated time-frame of the Article 4 process, the Panel should address only those claims that must be addressed in order to resolve the matters at issue.
Canada will demonstrate that Brazil's interpretation of Article 3 of the SCM Agreement is not consistent with the ordinary meaning of its terms, read in the light of its context and the object and purpose of the SCM Agreement. Moreover, without admitting that the following programmes, activities or transactions challenged by Brazil constitute subsidies within the meaning of Article 1, Canada requests that this Panel find that the following programmes, activities or transactions are not contingent upon export performance, and therefore the requirements of the second element of Brazil's case are not met: Technology Partnerships Canada (TPC), the sale of de Havilland by the Government of Ontario, benefits under the Canada-Québec Subsidiary Agreement on Industrial Development (the Subsidiary Agreement) and benefits under the Société de Développement Industriel du Québec (SDI). Canada will show that Brazil has failed to demonstrate the inconsistency of these programmes, activities or transactions with Article 3 of the SCM Agreement.
More specifically, Canada will demonstrate that:
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TPC contributions by the Canadian Department of Industry are made for research and development projects with respect to enabling technologies (technological developments cutting across manufacturing sectors to increase productivity), environmental technologies (technologies developed, in any industrial or agricultural sector, for the protection of the environment), and aerospace and defence. TPC contributions are not, in law or in fact, contingent upon export performance: contributions are not madeon condition that exports take place, there are no penalties if no exports take place and repayment is not reduced if exports are made.
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On January 28, 1997, the Government of Ontario exercised its option, agreed to by Ontario and Bombardier Inc., a Canadian aircraft manufacturer, to sell its 50 percent interest in de Havilland, a manufacturer of turboprops and aircraft parts, for C$49 million. Bombardier agreed, in return, to maintain de Havilland operating as a manufacturer of aircraft and aircraft parts in accordance with commercial considerations. The sale price was paid in the form of a promissory note from Bombardier to Ontario; Bombardier has already made its first interest payments on the note. The sale was in no way contingent upon export performance: the sale price will not increase if there are no exports and will not be reduced if exports are increased.
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The Subsidiary Agreement was entered into on March 31, 1992 by the Governments of Canada and Québec for a period of five years, subject to a one-year extension. It expired on March 31, 1998. Contributions under the Subsidiary Agreement were intended to increase the competitiveness of Quebec's economy and were available for domestic as well as export projects. These contributions were in no way contingent upon export performance.
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The SDI is a generally available programme of the Government of Québec aimed at improving the competitiveness of Québec's economy. Loans, loan guarantees and repayable contributions are available for domestic projects as well as projects related to exportation out of the province of Québec (to the other provinces of Canada as well as to other countries). These contributions are in no way contingent upon export performance.
Canada further requests that this Panel find that Canada Account and Export Development Corporation (EDC) financing in the civil aircraft sector are not inconsistent with Article 3. More specifically, Canada will demonstrate that:
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Brazil's portrayal of EDC activities is both inaccurate and incomplete. The EDC operates on commercial principles. The financial transactions it enters into are based on commercial pricing practices. Such activities, conducted on the corporate account of the EDC, are not subsidies and are therefore not inconsistent with Article 3. (EDC corporate account financing or other activity is referred to in this Submission as EDC financing or other activity).
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As an official export credit agency and agent in all respects for the Government of Canada, the EDC has a public policy function that it carries out while applying commercial disciplines and principles. It may also conduct financial activities that the Government may deem to be in the national interest; any obligations under such activities would be funded by the Government of Canada. (This is called the Canada Account; any activity conducted by the EDC under the Canada Account is referred to in this Submission as Canada Account activity.) The EDC conducts Canada Account activities in accordance with its broad mandate, prudent risk management and international export credit disciplines. CanadaAccount loans and loan guarantees on exports committed following the entry into force of the WTO Agreement are consistent with the interest rate provisions of the OECD Consensus and are therefore not inconsistent with Article 3.
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Brazil's factual allegations with respect to loan guarantees, residual value guarantees and equity infusions by the EDC are not accurate. The EDC does not provide loan guarantees to supplement its financing activities. The EDC does not provide residual value guarantees in support of civil aircraft. The EDC does not make equity infusions into special purpose corporations that purchase and lease civil aircraft.
As the complaining Party, Brazil has the onus of establishing its claims. As it has not done so, its claims must fail.
Updated on June 11, 1999
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