WORLD TRADE ORGANIZATION


WT/DS70/RW

9 May 2000


(00-1750)

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Original: English


CANADA – MEASURES AFFECTING THE EXPORT OF CIVILIAN AIRCRAFT


Recourse by Brazil to Article 21.5 of the DSU


Report of the Panel


The report of the Panel on Canada – Measures Affecting the Export of Civilian Aircraft – Recourse by Brazil to Article 21.5 of the DSU is being circulated to all Members, pursuant to the DSU. The report is being circulated as an unrestricted document from 9 May 2000 pursuant to the Procedures for the Circulation and Derestriction of WTO Documents (WT/L/160/Rev.1). Members are reminded that in accordance with the DSU only parties to the dispute may appeal a panel report. An appeal shall be limited to issues of law covered in the Panel report and legal interpretations developed by the Panel. There shall be no ex parte communications with the Panel or Appellate Body concerning matters under consideration by the Panel or Appellate Body.

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TABLE OF CONTENTS

Page


  1. INTRODUCTION AND FACTUAL BACKGROUND 1

  2. FINDINGS AND RECOMMENDATIONS REQUESTED BY THE PARTIES 3

  3. ARGUMENTS OF THE PARTIES AND THIRD PARTIES 3

  4. INTERIM REVIEW 3

    1. COMMENTS BY BRAZIL 3

    2. COMMENTS BY CANADA 4

  5. FINDINGS 4

    1. TECHNOLOGY PARTNERSHIPS CANADA 4

      1. Summary of original Canada - Aircraft findings on TPC. 4

      2. Description of the measures taken by Canada to implement the DSB’s recommendations 5

      3. Summary of the parties' arguments 5

        1. Brazil 5

        2. Canada 6

      4. Evaluation by the panel 6

        1. Scope of the disagreement between the parties 6

        2. Burden of proof 7

        3. Substantive analysis 8

          1. Eligible industries remain specifically targeted because of their export orientation 8

          2. Interest in near-market projects. 9

          3. Export performance as an implicit selection and assessment criterion 12

          4. Documentation 14

        4. Alternative implementation methods 15

        5. Repayment of prior TPC assistance to the Canadian regional aircraft industry 16

        6. Summary 17

    2. CANADA ACCOUNT 17

      1. Summary of original Canada - Aircraft findings on Canada Account 17

      2. Summary of the parties' arguments 18

        1. The measure at issue 18

        2. Standard for assessing Canada’s implementation 19

        3. Sufficiency of the Policy Guideline 20

      3. Evaluation by the Panel 21

        1. Textual analysis of the second paragraph of item (k) 22

          1. What are “export credit practices” in the sense of item (k) of the Illustrative List of Export Subsidies? 23

          2. What are the Arrangement’s “interest rates provisions”? 24

          3. Which types of “export credit practices” could conceptually be “in conformity with” the “interest rates provisions” of the OECD Arrangement in its current form? 26

          4. What provisions and considerations are relevant to judging “conformity” with the Arrangement’s “interest rates provisions” and hence qualification for the safe haven in item (k)? 30

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        2. Considerations based on the context of the second paragraph of item (k) and the object and purpose of the SCM Agreement 35

        3. The sufficiency of the Policy Guideline to ensure that future Canada Account transactions in the regional aircraft sector will qualify for the safe haven of the second paragraph of item (k), and that prohibited export subsidies under Canada Account thereby have ceased 39

          1. Substance of the Policy Guideline 39

          2. Form of the Policy Guideline 41

        4. Summary 42

  6. CONCLUSION 43

ANNEX 1-1 (FIRST SUBMISSION OF BRAZIL) 44

ANNEX 1-2 (REBUTTAL SUBMISSION OF BRAZIL) 60

ANNEX 1-3 (FIRST ORAL STATEMENT OF BRAZIL) 81

ANNEX 1-4 (CONCLUDING STATEMENT OF BRAZIL) 88

ANNEX 1-5 (RESPONSES BY BRAZIL TO QUESTIONS FROM THE PANEL) 92

ANNEX 1-6 (COMMENTS OF BRAZIL ON CANADA'S RESPONSES TO

QUESTIONS FROM THE PANEL) 101

ANNEX 2-1 (FIRST SUBMISSION OF CANADA) 102

ANNEX 2-2 (REBUTTAL SUBMISSION OF CANADA) 122

ANNEX 2-3 (ORAL STATEMENT OF CANADA) 127

ANENX 2-4 (ANSWERS TO QUESTIONS POSED TO CANADA BY THE PANEL

AND BY BRAZIL) 142

ANNEX 2-5 (COMMENTS OF CANADA ON BRAZIL'S RESPONSES TO THE

QUESTIONS FROM THE PANEL) 160

ANNEX 3-1 (SUBMISSION OF THE EUROPEAN COMMUNITIES) 162

ANNEX 3-2 (SUBMISSION OF THE UNITED STATES) 168

ANNEX 3-3 (ORAL STATEMENT OF THE EUROPEAN COMMUNITIES) 174

ANNEX 3-4 (ORAL STATEMENT OF THE UNITED STATES) 183

ANNEX 3-5 (ANSWER OF THE UNITED STATES TO QUESTIONS POSED BY BRAZIL) 186

ANNEX 3-6 (ANSWERS OF THE UNITED STATES TO QUESTIONS POSED BY

THE PANEL) 187

ANNEX 3-7 (RESPONSES BY THE EUROPEAN COMMUNITIES TO THE

QUESTIONS FROM THE PANEL AND FROM BRAZIL) 193

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  1. INTRODUCTION AND FACTUAL BACKGROUND


      1. On 20 August 1999, the Dispute Settlement Body (“the DSB”) adopted the Appellate Body Report in WT/DS70/AB/R and the Panel Report and recommendations in WT/DS70/R as upheld by the Appellate Body Report in the dispute Canada – Measures Affecting the Export of Civilian Aircraft (“Canada – Aircraft”). In its report, the Panel found, regarding Canada Account, that the Canada Account debt financing at issue constituted “subsid[ies] contingent in law … upon export performance” prohibited by Article 3.1(a) of the Agreement on Subsidies and Countervailing Measures ("SCM Agreement"), and that in granting this prohibited export subsidy, Canada had necessarily acted in violation of Article 3.2 of the SCM Agreement, i.e., that Canada Account debt financing since 1 January 1995 for the export of Canadian regional aircraft constituted export subsidies inconsistent with Article 3.1(a) and 3.2 of the SCM Agreement. The Panel found with regard to Technology Partnerships Canada (“TPC”) that TPC assistance to the Canadian regional aircraft industry constituted “subsidies contingent … in fact … upon export performance”, contrary to Articles 3.1(a) and 3.2 of the SCM Agreement.


      2. The Panel recommended that Canada withdraw these subsidies within 90 days. The Appellate Body recommended that the DSB request that Canada bring its export subsidies found in the Panel Report, as upheld by the Appellate Body Report, to be inconsistent with Canada’s obligations under Articles 3.1(a) and 3.2 of the SCM Agreement into conformity with its obligations under that Agreement. Specifically, the Appellate Body recalled that the Panel had recommended that Canada withdraw the subsidies identified in sub-paragraphs (b) and (f) of paragraph 10.1 of the Panel Report within 90 days.


      3. On 18 November 1999, Canada submitted to the Chairman of the DSB, pursuant to Article 21.6 of the Dispute Settlement Understanding (“the DSU”), a status report (WT/DS70/8) on implementation of the recommendations of the DSB in the dispute. The status report described measures taken by Canada which in Canada’s view implemented the DSB’s rulings to withdraw the measures within 90 days.


      4. With respect to Canada Account debt financing for the export of Canadian regional aircraft, which was found to be inconsistent with Canada’s obligations under the SCM Agreement, the status report indicated that there would be no deliveries of regional aircraft after 18 November 1999 benefiting from such Canada Account financing. In addition, the Minister for International Trade had approved a policy guideline requiring that all Canada Account transactions after that date for all sectors, not only those involving the regional aircraft sector, comply with the OECD Arrangement on Guidelines for Officially Supported Export Credits (the "OECD Arrangement"). By this policy, the Minister undertook not to authorize any transaction under the Canada Account unless it complied with the OECD Arrangement, and no Canada Account transaction may proceed without such Ministerial authorization.


      5. Concerning TPC assistance to the Canadian regional aircraft industry which was found to be inconsistent with Canada’s obligations under the SCM Agreement, the status report stated that Canada would not make any disbursements pursuant to any existing TPC Contribution Agreement for the Canadian regional aircraft industry effective 18 November 1999. In this respect, Canada had amended TPC’s Contribution Agreements pertaining to the Canadian regional aircraft industry in order to terminate all obligations to disburse funds effective 18 November 1999. As a result, some

        $16.4 million of funding pursuant to those agreements would go undisbursed. In addition, Canada had cancelled the conditional approval given prior to the Appellate Body report for two other regional aircraft industry projects. Canada attached to this communication letters confirming cancellation of

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        such funding. Canada also had taken steps to restructure TPC in order to bring the structure and administrative practices of the Agency into conformity with the SCM Agreement and so to avoid future disputes in this matter. TPC had been re-mandated by the government and now operated under revised Terms and Conditions and Framework Document. The revisions covered such core activities as project eligibility, assessment criteria, and repayment principles.


      6. On 23 November 1999, Brazil submitted a communication to the Chairman of the DSB (WT/DS70/9) seeking recourse to Article 21.5 of the DSU. In that communication, Brazil indicated its view that the measures taken by Canada to comply with the recommendations and rulings of the DSB were not consistent with the SCM Agreement and the DSU, and that therefore Canada had not implemented the recommendations of the DSB concerning either Canada Account or TPC. In particular, regarding Canada Account, Brazil recalled that there were a large number of provisions in the OECD Arrangement that allowed for derogations from its general rules. Therefore, in Brazil’s view, Canada's vague statement that the new policy guideline complied with the OECD Arrangement was inconsistent with the recommendations and rulings of the DSB and Article 3 of the SCM Agreement. In addition, Brazil had not received any documentation with the revised policy guidelines of Canada Account. Regarding TPC, Brazil had no information on the new administrative framework for the programme, and since TPC payments were contingent in fact upon export performance, compliance by Canada with Article 3 of the SCM Agreement required more than a mere reformulation of some of the TPC rules and regulations.


      7. Accordingly, Brazil indicated, because "there [was] a disagreement as to the existence or consistency with a covered agreement of measures taken to comply with the recommendations and rulings of the DSB" between Brazil and Canada, within the terms of Article 21.5 of the DSU, Brazil sought recourse to Article 21.5 in the matter and requested that the DSB refer the disagreement to the original panel, if possible, pursuant to Article 21.5. Brazil attached1 the terms of an agreement reached by Brazil and Canada concerning the procedures to be followed pursuant to Articles 21 and 22 of the DSU. Brazil stressed that such agreement did not prejudge its rights concerning an appeal of the review panel report.


      8. At its meeting on 9 December 1999, the DSB decided, in accordance with Article 21.5 of the DSU, to refer to the original panel the matter raised by Brazil in document WT/DS70/9. At that DSB meeting, it also was agreed that the Panel should have standard terms of reference as follows:


        “To examine, in the light of the relevant provisions of the covered agreements cited by Brazil in document WT/DS70/9, the matter referred to the DSB by Brazil in that document and to make such findings as will assist the DSB in making the recommendations or in giving the rulings provided for in those agreements.”


      9. The Panel was composed as follows: Chairperson: Mr. David de Pury Members: Mr. Maamoun Abdel-Fattah

        Mr. Dencho Georgiev


      10. Australia, the European Communities and the United States reserved their rights to participate in the Panel proceedings as third parties.


      11. The Panel met with the parties and third parties on 6 February 2000.


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        1 See Annex to document WT/DS70/9.

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      12. The interim report of the Panel was sent to the parties on 31 March 2000. The parties submitted written comments on the interim report on 7 April 2000. On 14 April 2000, Canada responded to two comments made by Brazil. Brazil chose not to respond to Canada's comments on the interim report. Neither party requested an interim review meeting with the Panel. The final report of the Panel was sent to the parties on 28 April 2000.


  2. FINDINGS AND RECOMMENDATIONS REQUESTED BY THE PARTIES


      1. Brazil requests the Panel to “determine that Canada has not implemented the recommendations and rulings of the DSB or otherwise complied with its obligations under the Subsidies Agreement”.


      2. Canada requests the Panel to “reject Brazil’s claim”.


  3. ARGUMENTS OF THE PARTIES AND THIRD PARTIES


    3.1 With the agreement of the parties, the Panel has decided that in lieu of the traditional descriptive part of the Panel report setting forth the arguments of the parties, the parties’ submissions will be annexed in full to the Panel’s report. Accordingly, the submissions of Brazil are set forth in Annex 1, and the submissions of Canada are set forth in Annex 2. In addition, the third party submissions of the European Communities and the United States are set forth in full in Annex 3. Australia, the only other third party, made neither a written nor an oral submission.


  4. INTERIM REVIEW


      1. On 7 April 2000, both parties requested the Panel to review, in accordance with Article 15.2 of the DSU, precise aspects of the interim report issued on 31 March 2000. Neither party requested an additional meeting with the Panel. Canada responded to two of the comments made by Brazil.


        1. COMMENTS BY BRAZIL


      2. Brazil identified two typographical errors in the interim report, which have been corrected.


      3. Regarding para. 5.32, Brazil asked us to state that sales forecasts will in some instances be used in the context of "new" TPC assistance to the Canadian regional aircraft industry. There is nothing in the record to suggest that sales forecasts will definitely be used in the context of the new TPC. Furthermore, in responding to Brazil's comment, Canada asserted that "[I]t is not certain that sales forecasts will ever be used in the context of the 'new' TPC assistance to the regional aircraft industry". Accordingly, we have not made the change requested by Brazil.


      4. In respect of para. 5.33, Brazil asserted that the third sentence of this paragraph does not accurately reflect the factual record in these proceedings. Brazil argued that documentary evidence that it submitted establishes that "increased export performance" is in fact identified by Industry Canada as a "net economic benefit" to Canada as that term is defined by the "new" TPC. However, it is possible for a transaction to have "net economic benefit" without export performance. Although export performance may well provide net economic benefit, the opposite is not necessarily true. We have amended the third sentence of this paragraph, in order to clarify that nowhere in the "new" TPC Investment Decision Document or the "new" TPC Investment Application Guide (the two documents referred to in that paragraph) is export performance identified as a "technological" or "net economic benefit".


      5. With regard to para. 5.37, Brazil questioned our finding that "Brazil has failed to cite to any Canadian submission to the Panel which contains any such argument". Brazil referred to Exhibit

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        CAN-9 in support. However, Exhibit CDN-9 does not contain any argument by Canada that it has implemented the DSB recommendation on TPC by removing the word "export" from the "old" TPC documents referenced therein. It simply includes a list of TPC documents in effect prior to 17 November 1999. Indeed, some of the "old" TPC documents cited in Exhibit CDN-9 do not even contain the word "export" (see, for example, Repayment of Contributions Policy Guidelines, Project Summary Form, and Statement of Work). We have made no change to this paragraph.


      6. In order to avoid any misstatement of Brazil's arguments concerning the Appellate Body report in Chile - Alcohol (WT/DS87/AB/R and WT/DS110/AB/R), we have deleted former footnote 45.


      7. Brazil requested the inclusion of a new footnote at the end of the first sentence of paragraph

        5.50. Brazil asked the Panel to include text taken from para. 45 of Canada's first written submission (Annex 2-1) and para. 15 of Canada's second written submission (Annex 2-2). In response, Canada asserted that Brazil's proposed footnote "takes language from Canada's submission out of context. This could lead to the perpetuation of the misunderstanding of Canada's position on this point." We agree with Canada. In any event, we note that the relevant text is included in the aforementioned Annexes to the Panel's report. We have therefore not included the new footnote requested by Brazil.


        1. COMMENTS BY CANADA


      8. Regarding our findings on Canada Account, Canada indicated that it understood the reference in paragraph 5.147(d) of our report to Article 24 of Annex III of the OECD Arrangement to mean that humanitarian tied aid falls within the safe haven of the second paragraph of item (k) and therefore can be provided under Canada Account. Canada requested that we insert a statement in our findings to clarify this. We have made no finding in respect of humanitarian tied aid, and therefore have inserted footnotes 102 and 127 to so indicate.


      9. Canada further noted regarding our findings on Canada Account that in a given transaction, there could be a combination of a guarantee or an insurance policy by an export credit agency issued in favour of a lending bank and the provision of interest rate support by the participating country to the lending bank. Canada stated that Canada understood us to consider that such a transaction would fall within the safe haven of the second paragraph of item (k) because it includes "official financing support", and requested that we insert a statement in our findings to clarify this point. We have inserted footnotes 97 and 103 to reiterate and clarify our finding as to the provisions of the Arrangement that would need to be respected in order for such a transaction to be in conformity with the interest rate provisions of the Arrangement, and to recall our finding that conformity with the SCM Agreement of a guarantee or insurance as such could only be judged on the basis of Articles 1 and 3 of that Agreement.


      10. Canada requested that we insert an introductory sentence before paragraph 81 of its oral statement (Annex 2-3). We have inserted the requested sentence at the beginning of that paragraph.


  5. FINDINGS


    1. TECHNOLOGY PARTNERSHIPS CANADA


      1. Summary of original Canada - Aircraft findings on TPC


          1. In the original Canada - Aircraft proceeding, Brazil adduced evidence concerning five TPC transactions in the regional aircraft sector. The Panel noted that "three [of the five] transactions accounted for 68% of TPC contributions to the aerospace and defence sector during the period 1996- 1997." The Panel found "that Brazil's arguments concerning these three specific contributions

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            establish a prima facie case that TPC assistance to the Canadian regional aircraft industry confers 'benefits' within the meaning of Article 1.1(b) of the SCM Agreement". The Panel therefore found that "TPC assistance to the Canadian regional aircraft industry constitutes 'subsidies' within the meaning of Article 1.1 of the SCM Agreement". The Panel then found, on the basis of a number of "considerations" / "facts", that "TPC assistance to the Canadian regional aircraft industry is … 'contingent … in fact … upon export performance' within the meaning of Article 3.1(a) of the SCM Agreement". In light of the above, the Panel concluded that "TPC assistance to the Canadian regional aircraft industry constitutes 'subsidies contingent … in fact … upon export performance', contrary to Articles 3.1(a) and 3.2 of the SCM Agreement".


          2. The Appellate Body upheld the Panel's finding that "TPC assistance to the Canadian regional aircraft industry" is contingent on export performance, within the meaning of Article 3.1(a) of the SCM Agreement.


      2. Description of the measures taken by Canada to implement the DSB’s recommendations


          1. Canada has taken two types of action in order to implement the recommendation of the DSB concerning TPC assistance to the Canadian regional aircraft industry. First, Canada has terminated existing TPC activities in the Canadian regional aircraft sector. Thus, Canada (1) has cancelled funding under five TPC transactions identified by Canada, (2) has withdrawn approvals-in-principle for two new TPC funding projects in the regional aircraft sector, and (3) has closed all TPC files in the regional aircraft sector.


          2. Second, Canada has restructured the TPC programme and documentation so that, in its opinion, most of the factual considerations forming the basis for the Panel's finding of de facto export contingency no longer apply. According to Canada, the only factual consideration still applicable is the export orientation of the Canadian regional aircraft industry.


      3. Summary of the parties' arguments


        1. Brazil


            1. Brazil notes that, consistent with Article 4.7 of the SCM Agreement, the Panel and the DSB recommended that Canada "withdraw" its prohibited export subsidies. Brazil recalls that the Panel found that prohibited export subsidies were provided in the form of TPC assistance to the Canadian regional aircraft industry. Accordingly, Brazil considers that Canada should withdraw the TPC programme altogether with regard to the Canadian regional aircraft industry. At a minimum, Brazil considers that Canada's TPC implementation measures must ensure that prohibited export subsidies cannot be granted to the regional aircraft industry, and not merely that they might not be granted. Brazil states that withdrawal of the prohibited TPC subsidy programme should consist of measures that make it clear to the Panel that Canada is not simply going to continue the same TPC programme as before once the present Article 21.5 proceedings are completed. Brazil asserts that Canada's implementation measures change only the superficial evidence of export contingency (by purging from TPC documents any express reference to the word "export"), but make no substantive change whatsoever in the underlying programme.


            2. As an argument in the alternative, Brazil also requests repayment of prior TPC assistance to the Canadian regional aircraft industry, if either (1) the Panel considers itself required to follow the reasoning of the Australia - Leather Article 21.5 panel2, or (2) the Panel finds that there can be no


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              2 Australia - Subsidies Provided to Producers and Exporters of Automotive Leather - Recourse to Article 21.5 of the DSU by the United States, WT/DS126/RW, adopted 11 February 2000, hereinafter "Australia

              - Leather Article 21.5".

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              grounds for making a finding concerning de facto export contingency under the "new" TPC programme in the absence of actual financial contributions granted under the "new" TPC.


        2. Canada


          1. Canada submits that the measures it has taken fully satisfy the requirement to withdraw the TPC assistance to the Canadian regional aircraft industry that was found to constitute prohibited export subsidies. Canada considers that these measures "ensure" - through programmatic changes - that any future assistance under the TPC programme with respect to regional aircraft will be consistent with the SCM Agreement. Canada denies Brazil's assertion that it is obliged to withdraw / abolish the TPC programme in respect of the Canadian regional aircraft industry. Canada asserts that it can implement the Panel's recommendation by replacing the "old" WTO-inconsistent TPC programme with a "new" WTO-consistent programme.


          2. With regard to Brazil's qualified request for repayment, Canada asserts that it was the operation of TPC in the regional aircraft sector that was at issue in the previous proceeding, and that it is the operation of TPC, as newly constituted, that is at issue in this Article 21.5 proceeding. Canada asserts that since there is no evidence, and, indeed, no suggestion, that new subsidies have been granted to "circumvent" a Panel ruling, repayment of subsidies, even if such a remedy were available under the SCM Agreement, is not warranted.


      4. Evaluation by the panel


        1. Scope of the disagreement between the parties


            1. Brazil's primary3 claim concerns the measures taken by Canada to restructure the TPC programme insofar as it will apply in the future to the Canadian regional aircraft industry. In particular, Brazil's primary claim raises issues concerning the substance of the prospective implementation action undertaken by Canada. With respect to Brazil's primary claim, therefore, there is no disagreement between the parties resulting from the fact that, in order to implement the recommendation of the DSB concerning TPC assistance to the Canadian regional aircraft industry, Canada has taken prospective action. The parties agree that to "withdraw" the subsidy in this case requires some sort of prospective action on the part of Canada.


            2. We recall that Article 21.5 disputes arise "[w]here there is disagreement as to the existence or consistency with a covered agreement of measures taken to comply with the recommendations and rulings"4 of the DSB. Since there is no disagreement between the parties5 that, in order to implement the recommendation of the DSB concerning TPC assistance to the Canadian regional aircraft industry, Canada is required to take some form of prospective action, we do not consider it necessary to provide a comprehensive interpretation of what is required for an implementing Member to "withdraw" a prohibited export subsidy. Rather, it is sufficient to conclude (and we note that the parties seem to agree with this) that a Member cannot be understood to have withdrawn a prohibited subsidy if it has not ceased to provide such a subsidy, as that Member therefore would not have ceased to violate its WTO obligations in respect of such a subsidy. In our view, therefore, Canada's obligation arising from the DSB's recommendation in this dispute includes the obligation to cease providing prohibited export subsidies to the regional aircraft sector under the TPC. We note that in the circumstances of


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              3 Only in the alternative does Brazil raise any claims concerning past TPC assistance to the regional aircraft industry. However, Brazil has explicitly stated that a remedy concerning (exclusively) future TPC assistance to the regional aircraft industry is preferred (see para. 5.45 below).

              4 Emphasis supplied.

              5 We recall that we are not, at this juncture, addressing Brazil's alternative claim regarding repayment of past TPC assistance to the Canadian regional aircraft industry.

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              this Article 21.5 proceeding concerning TPC, such an assessment is by nature forward-looking. Accordingly, we shall focus on Canada's restructuring of the TPC programme insofar as it will apply to the Canadian regional aircraft industry in the future. If necessary, we shall then examine Brazil's alternative claim regarding past TPC assistance to the regional aircraft industry.


            3. With regard to the future, Brazil claims that Canada should abolish / withdraw the TPC programme in respect of the Canadian regional aircraft industry. At a minimum, though, Brazil asserts that Canada must "ensure" that de facto export subsidies cannot be granted to the regional aircraft industry, and not merely that they might not be granted.6 According to Brazil, if Canada maintains funding to the Canadian regional aircraft industry under the "new" TPC, Canada must ensure that the program will operate in full compliance with the SCM Agreement.7 Canada denies that it is required to abolish / withdraw the TPC programme in respect of the Canadian regional aircraft industry, but asserts that it "has taken the steps within Canada's control to ensure that any assistance that TPC may provide in the future to the Canadian regional aircraft industry will not be contingent on export performance in law or in fact".8


            4. Thus, Brazil and Canada effectively agree on the need for Canada to satisfy Brazil's minimum implementation standard, i.e., to "ensure" that future TPC assistance to the Canadian regional aircraft industry will not be de facto contingent on export performance. The parties disagree, however, on whether Canada has taken sufficient steps to satisfy that standard. To resolve this disagreement, we must examine whether or not Canada has taken sufficient steps to ensure that future TPC assistance to the regional aircraft industry will not be de facto contingent on export performance.


        2. Burden of proof


            1. In examining this issue, we note that "Brazil recognises that it bears the burden of showing that Canada has failed to implement. … It then becomes Canada's burden to explain how Brazil was wrong and how Canada's purported changes actually constitute effective implementation."9 Canada agrees that the initial burden of proof falls on Brazil.


            2. We agree that Brazil, as the complaining party, bears the burden of proof in this proceeding. We agree with the Appellate Body's statement in EC - Hormones that "[t]he initial burden lies on the complaining party, which must establish a prima facie case of inconsistency …",10 and consider that this should apply in the context of Article 21.5 proceedings. Since the burden is on Brazil (i.e., the complaining party) to show that Canada has failed to implement the recommendation of the DSB (by reference to the minimum implementation standard agreed on by the parties), Brazil must establish that Canada has failed to "ensure" that future TPC assistance to the Canadian regional aircraft industry will not be de facto contingent on export performance.


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              6 Brazil could be understood to have proposed an impossible implementation standard, since no sovereign state will ever be able to provide an absolute guarantee that it will not in the future provide de facto export subsidies. Any such guarantee would effectively eliminate the totality of a state's discretionary authority. Brazil acknowledges this point, by stating that "[o]bviously, a sovereign state cannot [eliminate all of its discretionary authority] and remain a sovereign state" (Brazil's reply to TPC question 1(a) from the Panel). In light of Brazil's acknowledgement, we understand Brazil to argue that Canada need only ensure that de facto export subsidies cannot be granted to the regional aircraft industry within the context of the "new" TPC programme. This understanding is confirmed by Brazil's assertion that "Canada must ensure that the program will operate in full compliance with the [SCM] Agreement" (Second written submission of Brazil (Annex 1-2), para. 19, underline emphasis supplied).

              7Id.

              8 Canada's reply to the Panel's TPC question 2, para. 57 (Annex 2-4), emphasis supplied.

              9Brazil’s reply to the Panel’s TPC question 1(a) (Annex 1-5).

              10 EC - Hormones, WT/DS26/AB/R, WT/DS48/AB/R, para. 98, adopted 13 December 1998.

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        3. Substantive analysis


            1. Brazil considers that it has discharged its burden of proof by demonstrating "that all the essential elements of the [TPC] program remain unchanged, and that many of these elements will never change".11 In this regard, Brazil claims that the facts surrounding the "new" TPC still support an inference of de facto export contingency. In particular, Brazil refers to the following four factors which, in its opinion, lead to an inference that future TPC assistance to the Canadian regional aircraft industry continues to be de facto export contingent:


              • eligible industries remain "specifically targeted" because of their export orientation;


              • eligible activities continue to betray an interest in near-market projects;


              • export performance is an implicit selection and assessment criterion; and


              • many TPC documents have not yet been replaced or amended.


                We shall examine each of these factors in turn.


                1. Eligible industries remain specifically targeted because of their export orientation


            2. Brazil argues that the continued de facto export contingency of TPC may be inferred from the fact that the Canadian regional aircraft industry continues to be "specifically targeted" for TPC assistance because of its undisputed export orientation.12 Brazil asserts that "[n]othing, in short, has changed - neither the industries eligible for TPC contributions, nor the recognized export-orientation of the industry that enjoys the lion's share of those contributions, nor the significance of that industry's export orientation to Canadian government officials, nor that industry's prospects for continued dominance of TPC's treasury. None of these factors is destined for change."13 Brazil asserts that, to maintain the export orientation of the Canadian regional aircraft industry, "the Canadian aerospace industry receives the vast majority of the rapidly increasing pool of TPC finds available".14 Brazil further argues that "in choosing which industry would receive the lion's share of 'old' and 'new' TPC funds, Canada was not casually indifferent to the trading patterns of that industry. Instead, Canada chose, as TPC's showcase, an industry that exports significantly more than others, because it exports significantly more than others. The 'new' TPC retains a focus on contributions to the aerospace industry."15 According to Brazil, "the targeted industries of the 'old' TPC are the same recipients under the 'new' TPC".16


            3. Thus, we understand Brazil to argue that "nothing has changed" because TPC assistance continues to be "specifically targeted" at the Canadian aerospace or regional aircraft industries, in the sense that these industries will continue to receive the "vast majority", or "lion's share", of TPC assistance. In addressing this argument, we recall that the “specific targeting” concept (in those or other words) did not form part of our reasoning regarding contingency in fact on export performance in that dispute. While we do not exclude the possibility that, in a given case, a factual circumstance of "specific targeting" might be considered by a panel to be part of the totality of facts leading to an inference of export contingency, this was not the case in the original Canada - Aircraft dispute. That is, of the factual considerations enumerated by us at para. 9.340 of our Report, none concerned the


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              11 Brazil's reply to TPC question 1(a) from the Panel (Annex 1-5) (emphasis supplied).

              12 Brazil's reply to TPC question 2 from the Panel (Annex 1-5).

              13 Brazil's first written submission, para. 22, Annex 1-1).

              14 Brazil's first written submission, para. 23 (Annex 1-1).

              15 Brazil's second written submission, paras 32 and 33 (Annex 1-2).

              16 Brazil's concluding remarks, para. 9 (Annex 1-4).

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              alleged targeting of the Canadian aerospace industry generally, or the Canadian regional aircraft industry in particular, by TPC, none concerned the amount of total TPC funding directed at the Canadian aerospace or regional aircraft industries,17 and none concerned the fact that the aerospace or regional aircraft industries were eligible for TPC assistance. Arguing a failure to implement on the grounds that there has been no change in alleged factual circumstances, which themselves were not part of our original ruling, is of questionable merit and logic. Indeed, we consider that the question of whether TPC assistance is "specifically targeted" to the aerospace and regional aircraft industries is not relevant to the present dispute, which concerns the issue of whether or not Canada has implemented the DSB recommendation on TPC assistance to the Canadian regional aircraft industry. That recommendation cannot have required Canada to take implementation action to ensure that TPC assistance is not "specifically targeted" at the aerospace and regional aircraft industries, because such alleged "specific targeting" did not form part of the basis for the finding of de facto export contingency that gave rise to that recommendation.18 The fact that "nothing has changed" concerning the alleged "specific targeting" of the aerospace and regional aircraft industries therefore has no bearing on the present dispute.


            4. For these reasons, we do not consider it necessary to examine Brazil's argument that "nothing has changed" because TPC assistance continues to "specifically target" the Canadian aerospace and regional aircraft industries.


              1. Interest in near-market projects


            5. Brazil argues that the de facto export contingency of future TPC funding to the Canadian regional aircraft industry should be inferred from the fact that the available descriptions of eligible activities under the "new" TPC betray an interest in "near market" projects with high commercialization potential. Brazil also argues that essentially the same projects continue to be eligible for "new" TPC contributions as were eligible under the "old" TPC, such that "if funding for the development of commercial products was available in the 'old' TPC, it is similarly available in the 'new' TPC, and as it did before contributes to an inference of de facto export contingency".19



              image

              17 We recall that, in our original findings, we referred to the fact that three specific transactions examined by us accounted for approximately 68 per cent of TPC contributions to the aerospace and defence sector during the period 1996-1997 (see para. 9.307 of Canada - Aircraft, WT/DS70/R). However, we made this factual reference in the context of our original findings on subsidization. This factual reference played no part whatsoever in our original findings on de facto export contingency.

              18 We note the statement of the Australia - Leather Article 21.5 panel (which Brazil has quoted in its reply to the Panel's TPC question 5 (see Annex 1-5)) that "[t]he specific details of the factual evidence underlying the conclusion that the subsidies were in fact contingent upon export performance … do not, in our

              view, determine what is required in order to 'withdraw the subsidy' within the meaning of Article 4.7 of the SCM Agreement" (WT/DS126/RW, adopted 11 February 2000, note 24). We do not understand this statement to mean that factual considerations underlying a panel’s finding that a subsidy is de facto export contingent are irrelevant for determining what action must be taken to remove that de facto export contingency. Indeed, the context in which that statement was made by the Australia - Leather Article 21.5 panel was altogether different. In that case, the question of implementation of the DSB’s recommendation was addressed, in the first instance by the parties, on the basis of the “subsidy” element, rather than the “export contingency” element, of the prohibited subsidy. Specifically, the parties both made arguments concerning the amount of the subsidy that should be repaid, and Australia based its arguments concerning this point on its interpretation of the panel’s original finding of export contingency. The quoted statement of the panel was made in addressing this argument, and we believe was intended to express the view that the basis for the original finding of de facto export contingency was not useful or relevant for calculating the amount of the subsidy to be repaid.

              19 First written submission of Brazil (Annex 1-1) at para. 30.

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            6. We recall that our earlier findings in Canada - Aircraft were based in part on the express recognition in the 1996/1997 TPC Business Plan that "TPC's 'approach' in the aerospace and defence sector is to '[d]irectly support the near market R & D projects with high export potential'".20


            7. In its review of our findings, the Appellate Body asserted that, if a panel takes the "nearness- to-the-export-market factor" into account, "it should treat it with considerable caution". … [T]he mere presence or absence of this factor in any given case does not give rise to a presumption that a subsidy is or is not de facto contingent upon export performance". Accordingly, we shall proceed with caution when addressing Brazil's arguments regarding the alleged nearness-to-the-export-market of "new" TPC projects in the regional aircraft sector.


            8. We note that the 1996-1997 TPC Business Plan, which contained the aforementioned reference to "near market R & D projects with high export potential" is no longer valid, and no longer exists for the purposes of TPC as it is now constituted.21 The 1996-1997 TPC Business Plan is therefore irrelevant when considering whether future TPC assistance to the Canadian regional aircraft industry will be de facto contingent on export performance.22


            9. In order to substantiate its claim that eligible activities for "new" TPC funding betray an interest in near-market projects, Brazil states that, according to "new" TPC documentation, TPC will fund "projects 'aimed at the discovery of knowledge, with the objective that such knowledge may be useful in developing new products,' and those projects leading to 'translation of industrial research findings into a plan, blueprint or design for new, modified or improved products …'".23 In response, Canada asserts that the inclusion of Industrial Research as an Eligible Activity "permits TPC to support earlier stage research and development that is further removed from the production and sale of specific products. The pre-competitive development category of eligible activity enables TPC to support the development of horizontal technologies that cut across the operations of recipient firms … rather than the development of specific products". 24


            10. In our view, the mere fact that the results of a project may in the future be useful in the development of new products, or the modification / improvement of existing products, does not by itself render the project near-market. This view is confirmed by former footnotes 28 and 29 to former Article 8.2(a) of the SCM Agreement25, concerning non-actionable subsidies, which appears to have strongly influenced Canada's choice of wording in the "new" TPC documents cited by Brazil.26 In our


              image

              20 Canada - Aircraft, WT/DS70/R, para. 9.340, emphasis in original findings.

              21 Oral statement of Canada (Annex 2-3) at para. 45.

              22 For the reasons set forth at para. 5.40, we see no reason to draw any inferences concerning Canada's failure to provide the 2000/2001 - 2001/2002 TPC Business Plans, which are still under development.

              23 Second written submission of Brazil (Annex 1-2) at para. 35 (emphasis in Brazil's submission). Brazil is referring to the "new" TPC Terms and Conditions, and the "new" TPC Investment Application Guide, at this juncture.

              24 First written submission of Canada (Annex 2-1) at para. 34.

              25 Pursuant to Article 31 of the SCM Agreement, Articles 8 and 9 of that Agreement applied for an initial period of five years, ending 31 December 1999, and could have been extended beyond that date on the

              basis of a consensus by the SCM Committee. As of 31 December 1999, no such consensus had been reached.

              26 Former footnote 28 provided:

              The term "industrial research" means planned search or critical investigation aimed at discovery of new knowledge, with the objective that such knowledge may be useful in developing new products, processes or services, or in bringing about a significant improvement to existing products, processes or services.


              Former footnote 29 provided:


              The term "pre-competitive development activity" means the translation of industrial research findings into a plan, blueprint or design for new, modified or improved products, processes or services whether intended for sale or use, including the creation of a first prototype which would not be capable of commercial use. It may further include the conceptual formulation and design of products, processes or services alternatives and initial demonstration or pilot

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              view, the non-actionable subsidy projects referred to in former footnotes 28 and 29 concerned "industrial research" and "pre-competitive development activity" projects that were sufficiently removed from the market to suggest that their impact on the market was likely to be minimal. As a result, it would be incongruous for us to find similarly defined TPC projects to be "near-market".


            11. Brazil has also argued that "new" TPC eligible activities betray an interest in "near market" projects because they are similar to "old" TPC eligible activities which were found to be "near market". In this regard, Brazil relies exclusively on a description of "old" TPC activities contained in a January 1998 TPC website excerpt.27 According to Brazil, the description of "new" TPC eligible activities is similar to the description of "old" TPC eligible activities found in the January 1998 TPC website excerpt. We do not consider it necessary to pursue this argument, since our original finding that TPC funding in the aerospace & defence sector (and therefore in the regional aircraft industry component thereof) was focused on "near market" projects was based on the aforementioned statement in the 1996-1997 TPC Business Plan, and not the January 1998 TPC website excerpt. We therefore do not see the relevance of comparing the "new" description of eligible activities with the "old" description of TPC eligible activities contained in the January 1998 TPC website excerpt. Of far greater relevance, however, is the fact that the 1996/1997 TPC Business Plan, which contained the explicit reference to "near market" projects ("with high export potential”) is no longer valid for the "new" TPC. Aerospace & defence activities eligible for "new" TPC funding will necessarily differ from aerospace & defence activities eligible for funding under the "old" TPC, since - as provided for in the 1996/1997 TPC Business Plan - "old" TPC funding in the aerospace & defence sector was explicitly and exclusively focused on "near-market projects", which - on the basis of the evidence before us - is not the case for "new" TPC funding in the aerospace & defence sector28.


            12. Accordingly, Brazil has failed to demonstrate that the available descriptions of eligible activities under the "new" TPC betray an interest in "near market" projects with high commercialization potential, or that activities eligible for funding under the "new" TPC are essentially the same as those eligible for funding under the "old" TPC.29


              image

              projects, provided that these same projects cannot be converted or used for industrial application or commercial exploitation. It does not include routine or periodic alterations to existing products, production lines, manufacturing processes, services, and other on-going operations even though those alterations may represent improvements.


              27 First written submission of Brazil (Annex 1-1) at para. 29.

              28 We note as well the Industry Canada press release concerning the “new” TPC (Exhibit BRA-18),

              which was cited by Brazil in connection with its “specific targeting” argument (First oral statement of Brazil (Annex 1-3) at para. 20). Although this document has not been identified by Brazil in connection with its “near market” argument, nonetheless we have examined it in this context to determine the extent to which it might be relevant to the question of whether the same projects or similarly “near market” projects as were funded under the “old” TPC would continue to be funded under the “new” TPC. We conclude that this document does not contain information relevant to this question. In particular, this document indicates that the same companies are “free” to apply for funds under the “restructured” TPC on the basis of a new application form. In our view, this cannot be construed as meaning that the same projects would be considered eligible, specifically because of the reference to the fact that TPC has been restructured and the application form revised.


              29 We note Brazil's argument that "[r]emoving 'commercialization' or the 'near market R&D' focus from TPC's focus … and shifting instead to a focus on 'industrial research and pre-competitive development,' would not make it any less possible to infer from the facts that TPC constitutes a prohibited export subsidy" (First written submission of Brazil (Annex 1-1) at para. 25). We agree. For that reason, our conclusion in the preceding paragraph does not preclude us from examining other factual arguments adduced by Brazil to demonstrate that future TPC assistance to the regional aircraft industry will be de facto contingent upon export performance.

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              1. Export performance as an implicit selection and assessment criterion


            13. Brazil notes that the goals and objectives of the "new" TPC, like those of the "old" TPC,30 concern the creation of Canadian jobs, the increase of Canadian economic growth, or the increase of Canadian wealth. Brazil asserts that an inference of de facto export contingency may be drawn from an intimate "link" between (1) the fulfilment of these goals and objectives and (2) exports. Brazil asserts that, because of this "link", TPC assistance to the regional aircraft industry will be implicitly conditioned on, or tied to, export performance.


            14. Canada notes that the mandate and overall programme objective of the restructured TPC provide that "TPC is a technology investment fund established to contribute to the achievement of Canada's objectives of increasing economic growth, creating jobs and wealth, and supporting sustainable development".31 According to Canada, the restructured TPC's mandate and objectives do not encompass the enhancement of exports or Canada's export base.


            15. We recall that our original findings were based in part on the Terms and Conditions of the "old" TPC, which stated that the Aerospace & Defence component of the TPC would be "directed to projects that will maintain and build upon the … export base extant in the aerospace and defence sector".32 We note that the Terms & Conditions of the "new" TPC no longer explicitly direct the Aerospace & Defence component thereof at projects that maintain and build upon the "export base" of the aerospace & defence sector. It is presumably for this reason that Brazil refers to the alleged implicit conditionality between the grant of "new" TPC assistance to the Canadian regional aircraft industry and the export performance of that industry.


            16. While it is certainly true that the provision of funds on the basis of the "new" TPC’s mandate and objectives could result in additional exports by funded sectors, we recall the Appellate Body's ruling that the mere knowledge, or anticipation, that exports will result from a subsidy does not by itself render that subsidy de facto contingent on export performance, because it does not by itself demonstrate conditionality.


            17. Brazil has argued that the requisite conditionality may be inferred from the fact that recipients of "new" TPC assistance implicitly "commit to export performance". In this regard, Brazil has sought to draw an analogy with the facts of the Australia - Leather case33 where the panel, in Brazil's own words, "determined that requesting undifferentiated sales performance targets led to an inference of de facto export contingency because the Australian government knew that in order to reach those targets, the recipient would have to export".34 According to Brazil, "[t]he same logic applies in the case of the Canadian regional aircraft industry; the Canadian government knows that the industry exports virtually all its products, and thus to reach sales forecasts, it must export".35


            18. Without taking any view on the findings of the Australia - Leather panel, we note that Brazil has adduced no evidence that "new" TPC assistance to the Canadian regional aircraft industry will be



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              30 First written submission of Brazil (Annex 1-1) at para. 32.

              31 TPC Terms & Conditions, and SOA Framework (see First written submission of Canada (Annex 2-

              1) at para. 22).

              32 Canada - Aircraft, WT/DS70/R, para. 9.340, bullet 12 (emphasis supplied).

              33 Australia - Subsidies Provided to Producers and Exporters of Automotive Leather (hereinafter "Australia - Leather"), WT/DS126/R, adopted 16 June 1999.

              34 Second written submission of Brazil (Annex 1-2) at footnote 62.

              35 Id.

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              conditioned on the fulfilment of sales targets (as was found to be the case in Australia - Leather36). Brazil claims instead that the grant of "new" TPC assistance to the regional aircraft industry is contingent on the fulfilment of sales forecasts. However, in response to a question from the Panel, Brazil was unable to adduce any evidence to substantiate its claim of contingency on sales forecasts. Brazil only adduced evidence to the effect that sales forecasts will be used in the context of the "new" TPC programme.37 In response, Canada explicitly denied that the granting of TPC assistance to the regional aircraft sector is contingent on the fulfilment of sales forecasts.38 In the absence of any evidence to the contrary, we see no reason to doubt Canada's explicit denial. Furthermore, although sales forecasts may be used in the context of "new" TPC assistance to the regional aircraft industry, as they were under the "old" TPC,39 this does not by itself mean that "new" TPC assistance to the Canadian regional aircraft industry will be contingent on fulfilment of those sales forecasts. The fact that a subsidy repayment schedule may be based on royalties from forecast sales does not mean that compliance with the sales forecast becomes a condition for the bestowal of the subsidy; it simply means that a sales forecast was used to fix the repayment schedule.40 This situation is different from that before the Australia - Leather panel, where the relevant payments were "conditioned on Howe's agreement to satisfy, on the basis of best endeavours, the aggregate performance targets".41 For these reasons, we disagree with Brazil that the logic of the Australia - Leather panel applies in the present case.


            19. Furthermore, we note that Part 4 of the "new" TPC Investment Decision Document requires TPC administrators to record the "[b]enefits [of the project] to Canada". Section 5 of the "new" TPC Investment Application Guide defines "technological and net economic benefits to Canada" as "increasing economic growth, creating jobs and wealth, and supporting sustainable development". Nowhere in these documents is increased export performance identified as a "technological" or "net economic benefit" to Canada. Indeed, Part 4 of the aforementioned Investment Decision Document explicitly provides that "TPC will not accept or consider information concerning the extent to which a company does or may export". The only conclusion that we can reach from the face of these documents is that projects will be compared against one another, and eventually selected for funding, on the basis inter alia of the amount of technological and/or net economic benefits to which they are expected to give rise. While it is clear that for some projects, these benefits will derive largely or exclusively from exports, there is no factual basis in the documents (which are at this point the only available evidence) on which to conclude that projects generating the most exports will be those selected for funding. Indeed, the documents indicate that the administrators simply will not have specific information about the volume of exports that might result from any project for which TPC


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              36 The Australia - Leather panel found that relevant payments were "conditioned on Howe's agreement to satisfy, on the basis of best endeavours, the aggregate performance targets" (see Australia - Leather, WT/DS126/R, para. 9.71).

              37 Brazil's reply to the Panel’s TPC question 3 (Annex 1-5).

              38 Comments of Canada on Brazil's replies to questions (Annex 2-5) at para. 11.

              39 According to an Industry Canada News Release dated 18 November 1999 (Exhibit BRA-18, page 4)

              repayment schemes will be based on "e.g. royalties on total company or division sales …". We note that the use of sales forecasts in the context of royalty-based financing schemes in the civil aircraft sector is not uncommon, and on its own appears to have no particular implications under the SCM Agreement, as evidenced by footnote 16 of that Agreement ("Members recognize that where royalty-based financing for a civil aircraft programme is not being fully repaid due to the level of actual sales falling below the level of forecast sales, this does not in itself constitute serious prejudice …").

              40 Furthermore, we note that the royalties that will form the basis of any royalty-based financing scheme will be "royalties on total company or division sales", and not "royalties tied to product sales" (see 18 November 1999 Industry Canada press release (Exhibit BRA-18)). Presumably, therefore, the sales forecasts referred to by Brazil will be company- or division-wide. We are reluctant to conclude that the fulfilment of company- or division-wide sales forecasts could constitute a condition for the grant of product- or project- specific assistance.

              41 Australia - Leather, para. 9.71.

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              funding is sought. Thus, whereas TPC assistance is conditional on a project having certain technological or net economic benefits to Canada, in our view this simply cannot be assumed to be synonymous with export performance, and therefore it does not mean ipso facto that such assistance is contingent on export performance. This remains true even though TPC administrators know that fulfilment of net economic benefits in certain cases may be likely to result in increased exports. The fact that they will have no concrete quantifiable information on exports in our view will act in practical terms to limit their discretion to select projects on the basis of export performance.


            20. For the above reasons, we are not persuaded that "new" TPC assistance to the regional aircraft industry will be implicitly conditioned on, or tied to, export performance as a result of an intimate "link" between (1) the fulfilment of the "new" TPC goals and objectives and (2) exports.


              1. Documentation


            21. Brazil notes that a large proportion of "old" TPC documents, some of which were relied on by the Panel in our original findings of de facto export contingency, have not yet been replaced or amended or, if they have, they have not yet been provided to the Panel. Brazil considers that these documents have therefore not been cleansed of references to the term "export", despite Brazil's understanding that Canada claims to have implemented the recommendations and ruling of the DSB "by removing references to the term 'export' from TPC documents".42 Brazil claims that the failure to replace or amend the relevant "old" TPC documents demonstrates that Canada has failed to implement the DSB's recommendation by failing Canada's own measure of what constitutes effective implementation, namely the removal of references to "export" from TPC documents. In the alternative, Brazil claims that Canada's failure to provide certain "new" TPC documents supports a presumption that as-yet-unreplaced TPC documents supporting the Panel's original inference of de facto export contingency still apply.


            22. Canada acknowledges that not all TPC documents have yet been replaced. However, Canada asserts that the key TPC documents (the Terms and Conditions and the Special Operating Agency ("SOA") Framework Document ) are in place, and that all subsidiary TPC documents must respect the authority provided in these key documents. This authority explicitly requires that TPC be administered in accordance with Canada's international obligations, including its WTO obligations. Canada further asserts that no "old" TPC documents are valid under the "new" TPC programme, and that "old" TPC documents no longer exist for the purposes of the "new" TPC programme.


            23. As a preliminary matter, we do not understand Canada to have argued that it has implemented the DSB recommendation on TPC assistance to the Canadian regional aircraft industry by, in Brazil's own words, "removing references to the term 'export' from TPC documents". Brazil has failed to cite to any Canadian submission to the Panel which contains any such argument. We therefore reject Brazil's claim that Canada has failed to implement the DSB recommendation by Canada's own measure of what constitutes effective implementation.


            24. It is regrettable that Canada has not yet been able to finalize all documents concerning the operation of the "new" TPC programme, since those documents may have provided useful insight into the operation of the "new" TPC programme in respect of the Canadian regional aircraft industry. However, we note that the two key TPC documents are in place, and that Brazil has failed to demonstrate43 that anything in these documents leads to an inference of export contingency. We also


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              42 Second submission of Brazil (Annex 1-2) at para. 51.

              43 As discussed above, we are not persuaded by Brazil's arguments concerning the alleged "link"

              between export performance and fulfilment of the TPC goals and objectives set forth in the Terms and Conditions.

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              note Canada's assertion that all subsidiary TPC documents must respect the authority contained in those two key documents.


            25. Furthermore, we note Canada's assertion that "old" TPC documents are no longer valid, and "no longer exist for the purposes of TPC as it is now constituted".44 In the absence of any evidence from Brazil leading us to doubt this assertion, we see no reason why we should presume that as-yet- unreplaced -- but invalid -- TPC documents supporting the Panel's original inference of de facto export contingency still apply. Indeed, we recall that the "new" TPC Investment Application Guide provides that "TPC will not accept or consider information concerning the extent to which your company does or may export". The continued application of any of the "old" TPC documents relied on by the Panel in our original findings of de facto export contingency would be manifestly at odds with this statement.


            26. In light of the above, we see no basis for relying on previous TPC documents, which are no longer applicable, and which were a contributory factor that helped to demonstrate the de facto export contingency of "old" TPC assistance to the regional aircraft industry, to conclude that "new" TPC assistance to the regional aircraft industry will also be de facto contingent on export performance.


            27. For these reasons, we are unable to find that Canada has failed its own measure of what constitutes effective implementation (i.e., the removal of references to "export" from TPC documents), and we are equally unable to presume that as-yet-unreplaced -- but invalid -- TPC documents supporting the Panel's original inference of de facto export contingency still apply. Indeed, with regard to the "new" TPC documentation that has been made available by Canada, we find it difficult to imagine what additional elements could usefully have been included by Canada to demonstrate that future TPC assistance to the Canadian regional aircraft industry will not be de facto contingent on export performance.


              Conclusion


            28. For the above reasons, we are unable to accept Brazil's claim that Canada has not implemented the recommendation of the DSB concerning TPC assistance to the Canadian regional aircraft industry. Our conclusion is based on our analysis of those facts currently surrounding the application of the restructured TPC programme which are relevant to Canada's implementation of the DSB recommendation on TPC assistance to the regional aircraft industry. Of course, the facts surrounding the application of the restructured TPC programme may change. The above conclusion in no way prejudges the issue of whether TPC assistance to the regional aircraft industry granted in the context of changed factual circumstances would, or would not, be de facto contingent on export performance in the future.


        4. Alternative implementation methods


            1. We recall Brazil's argument that Canada be required to implement the recommendation of the DSB concerning TPC assistance to the Canadian regional aircraft industry by withdrawing the TPC programme altogether with regard to the Canadian regional aircraft industry. We note that withdrawal of the TPC programme from the Canadian regional aircraft industry would exceed the minimum implementation standard agreed on by the parties (i.e., to ensure that future TPC assistance to the Canadian regional aircraft industry will not be de facto contingent on export performance). Since we have concluded that Canada has fulfilled the minimum implementation standard agreed on by the parties, the question of whether or not Canada should do more (by withdrawing the TPC programme altogether from the Canadian regional aircraft industry) is not a relevant issue.


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              44 Oral statement of Canada (Annex 2-3) at para. 45.

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            2. In addition, Brazil also argued that Canada could implement the DSB recommendation on TPC assistance to the Canadian regional aircraft industry either by making TPC generally available, or by ensuring that future assistance did not take the form of a subsidy. However, we do not understand Brazil to argue that Canada has failed to implement the DSB recommendation by failing to take either course of action. It is therefore not necessary for us to consider this matter further.


        5. Repayment of prior TPC assistance to the Canadian regional aircraft industry


            1. We recall that Brazil made a conditional request for repayment of prior TPC assistance to the Canadian regional aircraft industry. Brazil has clearly stated that this "is an alternative, though not a preferred, remedy".45


            2. Brazil's request for repayment is conditional on either or both of two scenarios materialising: first, if the Panel considers itself required to follow the interpretation of Article 4.7 of the SCM Agreement offered by the panel in Australia - Leather Article 21.5; second, if the Panel considers that it cannot render a judgement concerning Brazil's allegations of de facto export contingency under the restructured TPC programme as a result of the absence of any financial contributions made under the restructured programme. In the latter case, Brazil considers that it will be left without an "effective remedy" apart from the retroactive repayment of past TPC assistance to the Canadian regional aircraft industry.


            3. With regard to the first condition, we are aware that the Australia - Leather Article 21.5 panel recently found that a DSB recommendation to "withdraw" a prohibited export subsidy under Article

          4.7 of the SCM Agreement "is not limited to prospective action only but may encompass repayment of the prohibited subsidy".46 However, Brazil has explicitly expressed the "hope"47 that the Panel does not consider itself bound to follow Australia - Leather Article 21.5. Indeed, Brazil "believes that the Panel in Australia - Leather [Article 21.5] reached a result that is not required by the language of the [SCM] Agreement"48, and "does not believe that this or any other Panel should follow Australia - Leather [Article 21.5]".49


            1. In light of these comments by Brazil, we consider that Brazil does not in fact want us to make any finding along the lines of Australia - Leather Article 21.5. The same is more obviously true of Canada50. As noted above, we consider that a panel's findings under Article 21.5 of the DSU should be restricted to the scope of the "disagreement" between the parties. In the present case, therefore, we do not consider it necessary to make any finding as to whether Article 4.7 of the SCM Agreement may encompass repayment of subsidies found to be prohibited.


            2. The second condition attached to Brazil's request for repayment of past TPC assistance to the Canadian regional aircraft is based on Brazil understanding Canada to argue that the Panel is precluded from finding whether "new" TPC assistance to the regional aircraft industry will be de facto contingent on export performance because Canada has not provided any such assistance under the "new" TPC programme. Brazil considers that if the Panel were to follow such an approach, Brazil would be left without any "effective remedy" other than repayment of past assistance.



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              45 Brazil's reply to the Panel’s TPC question 6 (Annex 1-5).

              46 Australia - Leather Article 21.5, para. 6.39, emphasis in original.

              47 Oral statement of Brazil (Annex 1-3) at para. 30.

              48 Id. at para. 27.

              49 Id. at para. 34.

              50 Canada informed the Panel that, in the Brazil - Aircraft Article 21.5 proceedings, Canada "indicated very clearly that its interpretation of the obligation to withdraw export subsidies under Article 4.7 of the [SCM]

              Agreement does not allow for a retroactive withdrawal of subsidies that have already been granted" (Oral statement of Canada (Annex 2-3) at para. 88).

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            3. We are in no doubt that Brazil has misunderstood Canada's position. Canada has asserted that it "manifestly did not take" the position understood by Brazil. Canada has confirmed that it "believes that this Panel can - and indeed should - assess whether the restructured TPC programme implements the DSB's rulings and recommendations regarding de facto export contingency".51 Thus, both Canada and Brazil agree that the Panel should examine the "new" TPC programme, even in the absence of any assistance to the Canadian regional aircraft industry having been granted under that "new" programme.


            4. In light of the above, neither of the conditions attached to Brazil's alternative request for repayment have been met. We therefore do not consider it necessary to address the substance of that request.


        6. Summary


          1. In summary, we are unable to accept Brazil's claim that Canada has not implemented the recommendation of the DSB concerning TPC assistance to the Canadian regional aircraft industry. Moreover, we have found that it is not necessary to consider the alternative implementation methods identified by Brazil. Finally, we have found that neither of the conditions attached to Brazil’s request for repayment have been met.


    2. CANADA ACCOUNT


      1. Summary of original Canada - Aircraft findings on Canada Account


          1. The Canada Account operates under the mandate of the EDC, and, per EDC’s 1995 annual report, is used to “support export transactions which the federal government deems to be in the national interest but which, for reasons of size or risk, [the EDC] cannot support through regular export credits”52.


          2. Regarding whether the Canada Account financing conferred subsidies, we found, on the basis of evidence concerning two financing transactions at “close to commercial” terms, that Canada Account financing in the regional aircraft sector provided subsidies, as, in our view, the reference to “close to commercial” terms constituted evidence which Canada failed to rebut that the financing was provided on below-market terms. Concerning the question of export contingency, the Panel found, on the basis of an admission by Canada that all debt financing from EDC (under which the Canada Account operates) in the civil aircraft sector since January 1995 had taken the form of export credits, and on the basis of the EDC’s announced purpose in providing financing to support and develop directly or indirectly Canada’s export trade, that Canada Account financing was contingent in law on export performance. Thus we found that “the Canada Account debt financing at issue constituted prohibited export subsidies”, and that “Canada Account financing since 1 January 1995 for the export of Canadian regional aircraft constitute[s] export subsidies inconsistent with Article 3.1(a) and 3.2 of the SCM Agreement”.53


          3. Neither party raised an appeal specifically concerning our finding on Canada Account, but Canada did appeal as a horizontal issue our determination that the existence of a “benefit” in the sense of SCM Article 1 should be determined on the basis of a comparison with the market. The Appellate Body upheld this market-based approach.


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            51 Oral statement of Canada (Annex 2-3) at para. 30.

            52 EDC 1995 Annual Report, “Canada Account Profile” (cited in para. 9.211 of our report in the original dispute (WT/DS70/R)).

            53 We recall that Canada did not seek to rely on the safe haven provided for in item (k) of the Illustrative List of Export Subsidies in Annex 1 of the SCM Agreement.

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      2. Summary of the parties' arguments


        1. The measure at issue


            1. Canada identifies two types of measures concerning Canada Account which it states implement the Panel’s recommendation, mandated by SCM Article 4.7, to “withdraw the subsidies without delay”.


            2. Canada argues first, that the two transactions examined by the Panel have been completed (in 1996 and 1998), so that there will be no further deliveries of regional aircraft under these transactions, and that no new Canada Account financing has been granted in the regional aircraft sector since 18 November 1999 (i.e., the expiry of the 90-day period for withdrawal of the prohibited Canada Account subsidies54). Thus, Canada asserts that it has completed the (past) financing transactions under the Canada Account found by the Panel to be subsidies contingent in law upon export performance55. Brazil does not challenge this assertion, nor does Brazil seek further action by Canada with respect to these past subsidies. Given that there is no “disagreement” between the parties concerning Canada’s implementation in respect of the past Canada Account subsidies, we do not consider further this aspect of that implementation.56


            3. Second, Canada indicates that it has adopted a new Policy Guideline to the effect that any future Canada Account financing for regional aircraft will comply with the OECD Arrangement on Guidelines for Official Supported Export Credits (“the OECD Arrangement” or “the Arrangement”)57. In Canada’s view, the Policy Guideline means that any such financing would not be considered prohibited export subsidies pursuant to the second paragraph of item (k) of the Illustrative List of Export Subsidies (“the Illustrative List”) found in Annex I to the SCM Agreement. The specific wording of the Guideline is that any transaction or class of transactions under Canada Account “which does not comply with the OECD Arrangement on Guidelines for Officially Supported Export Credits would not be in the national interest”58. Canada states that the Guideline operates such that any future Canada Account transactions that do not comply with the OECD Arrangement would not be in the national interest. Given that under the EDC legislation, the Minister for International Trade, whose authorization is required, can only authorize financing under the Canada Account that is found to be in the national interest, and as financing that does not comply with the OECD Arrangement will be deemed by the Minister not to be in the national interest, Canada argues that prohibited export subsidies can no longer be provided under Canada Account. That is, Canada maintains, to the extent that any future Canada Account financing constitutes export subsidies in the sense of SCM Articles 1 and 3, it will be covered by the “safe harbour” of the second paragraph of item (k) of the Illustrative List, under which (in Canada's words) export credits that “comply” with “the interest rates provisions” of the OECD Arrangement are not to be considered prohibited export subsidies59.


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              54 WT/DS70/R, para. 10.4.

              55 First submission of Canada (Annex 2-1) at para. 62.

              56 We recall that the scope of Article 21.5 proceedings is in principle defined by the scope of the "disagreement" between the parties as to implementation (see para. 5.10 above).

              57 Although the Panel’s ruling concerned Canada Account financing only in the regional aircraft sector, according to Canada the new policy guideline applies to all Canada Account financing.

              58 Exhibit CDN-13.

              59 See, e.g., Oral statement of Canada (Annex 2-3) at para. 68. We note that Canada uses the term “comply with” in the Policy Guideline and in certain of its arguments, while the second paragraph of item (k) uses the term “conformity with”. We understand Canada’s argument to be that any future Canada Account transactions will be eligible for the safe haven in the second paragraph of item (k). Thus we assume that

              Canada intends to refer to “conformity with” when it uses the term “comply with”. This assumption appears to be confirmed by Canada's assertion that the Policy Guideline "does ensure that any future Canada Account

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            4. We note that the scope of our ruling in the original dispute of necessity determines the nature/scope of the measures that Canada needs to take in order to implement our recommendation to withdraw the subsidy. In particular, the question is whether our ruling was limited to the two transactions that we examined in the original dispute60 or covered the Canada Account programme as a whole (at least in respect of the regional aircraft sector), as applied.


            5. In this regard, Brazil argues that our ruling was not limited to the two transactions that we examined in the original dispute. Rather, Brazil believes that our ruling went beyond these transactions and covered the Canada Account programme as a whole, as applied. Thus, Brazil argues, Canada has an obligation to do more than simply complete the two transactions and refrain from providing new financing, and must at a minimum demonstrate that prohibited export subsidies cannot be provided via the Canada Account in the future. Thus, for Brazil, the measure at issue in this dispute is the action taken by Canada in respect of the future application of the Canada Account programme.


            6. We note that Canada’s view concerning the scope of our original ruling and thereby the scope and nature of the measure at issue is consistent with that of Brazil. In particular, Canada states that "[a]lthough the Panel's conclusion concerned the programme as applied, it did not appear to be limited by its terms to the two transactions that had been before the Panel. Consequently, Canada understood the Panel ruling to mean that it was essential to take steps to ensure that any future financing transactions involving regional aircraft would be consistent with Canada's obligations under the SCM Agreement". Canada argues that it has done so, by issuing the Policy Guideline "making clear that any financing transaction not in compliance with the OECD Arrangement (necessarily including the interest rates provisions thereof), will not be approved for Canada Account financing"61. Thus, Canada argues, future Canada Account transactions will be consistent with Canada's obligations under the SCM Agreement in that they will qualify for the safe haven in the second paragraph of item (k) of the Illustrative List62.


            7. We agree with the parties concerning the scope of our original ruling. Specifically, that ruling covered Canada Account as applied in the regional aircraft sector. In our view, therefore, this gives rise to an obligation on Canada’s part to address elements of the Canada Account programme in order to implement the DSB's recommendation. Thus, the measure at issue in this dispute is the actions taken by Canada in respect of the Canada Account programme, namely, the Policy Guideline.


        2. Standard for assessing Canada’s implementation


            1. Our task is to assess whether the Policy Guideline is inconsistent with Canada's obligation to "withdraw" the prohibited subsidies under the Canada Account. We do not believe that it is necessary for us to develop a comprehensive definition of the term "withdraw the subsidy" (the only available remedy for prohibited subsidies pursuant to SCM Article 4.7) to be able to make this assessment. Rather, it is sufficient to conclude (and we note that the parties seem to agree with this) that a Member cannot be understood to have withdrawn a prohibited subsidy if it has not ceased to provide such a



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              financing transactions will be in conformity with the interest rate provisions of the [OECD] Arrangement …" (see para. 5.72 below).

              60 These were the only two Canada Account transactions involving the regional aircraft sector during the period covered by our initial review in this dispute (1 January 1995 - 30 June 1998).

              61 Canada's reply to the Panel’s Canada Account question 5 (Annex 2-4).

              62 We note here that there is no disagreement between the parties that Canada Account financing remains contingent on export performance, as Brazil has argued that this is the case and Canada has not contested this argument. In fact, Canada does not even argue that subsidies will not continue to be provided in

              the regional aircraft sector. Rather, Canada's argument is that any future Canada Account subsidies for regional aircraft will not be prohibited by virtue of qualifying for the safe haven of the second paragraph of item (k).

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              subsidy, as that Member therefore would not have ceased to violate its WTO obligations in respect of such a subsidy. In our view, therefore, Canada's obligation arising from the DSB's recommendation concerning prohibited subsidies under the Canada Account includes the obligation to cease providing prohibited export subsidies to the regional aircraft sector.


            2. We note that in the circumstances of this Article 21.5 proceeding concerning Canada Account, such an assessment is by nature forward-looking. That is, the simple absence of new Canada Account transactions in the regional aircraft sector since 18 November 1999 does not provide a sufficient basis for us to conclude one way or another as to whether prohibited export subsidies under that programme have ceased. Rather, to be able to reach a conclusion on this issue, we must consider the Policy Guideline in terms of its effects on the future application of the Canada Account programme. Here again, we note that the parties do not disagree.


            3. This raises the question of what standard we should use to make such a determination. We note that the parties’ arguments indicate that both consider the correct standard to be whether or not the Policy Guideline “ensures” that prohibited subsidies have ceased. Brazil states, for example, that Canada is required, through implementation, “at a minimum to ensure that prohibited export subsidies via the Canada Account cannot be granted”63. Canada for its part also accepts the appropriateness of the “ensure” standard, as it argues that the Policy Guideline “ensure[s] that any future Canada Account financing transactions will be in conformity with the interest rate provisions of the [OECD] Arrangement and therefore the provisions referred to in the second paragraph of item (k)”64.


            4. Since there is no disagreement between the parties on this matter, we consider that the standard put forward by the parties, that of "ensuring" the cessation of prohibited export subsidies in the future, is appropriate in this case. Thus, we shall examine whether the Policy Guideline is sufficient to “ensure” that in future the Canada Account programme, as it will be applied, will not provide prohibited export subsidies to the Canadian regional aircraft industry.


        3. Sufficiency of the Policy Guideline


          1. The parties disagree over the sufficiency of the Policy Guideline as a means of ensuring that in future Canada Account will not provide prohibited export subsidies to the regional aircraft sector, as to both its substance and its form.


          2. As noted, Brazil argues as a general matter that Canada is required, through implementation, “at a minimum to ensure that prohibited export subsidies via the Canada Account cannot be granted"65. In other words, Brazil seeks an assurance that prohibited export subsidies through Canada Account have definitively ceased. Brazil argues that the Policy Guideline lacks any precision and therefore is inadequate to constitute such an assurance. We recall as set forth in para. 5.14 that Brazil, as the complaining party, bears the burden of proof in this dispute, specifically to establish that Canada has failed to “ensure” that future Canada Account transactions in the regional aircraft sector will not provide prohibited export subsidies.


          3. Brazil argues that the Guideline simply states that as a policy matter, the Minister for International Trade will not approve transactions that are not in compliance with the OECD Arrangement. For Brazil, the Policy Guideline is a "vague hortatory statement[]" regarding Canada's intentions. Brazil specifically takes issue with Canada’s argument that the Guideline states an intention to meet the criteria to qualify for an exception under the second paragraph of item (k) of the Illustrative List of export subsidies through conformity with the “interest rates provisions” of the


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            63 Second written submission of Brazil (Annex 1-2) at para. 19. Emphasis supplied.

            64 Oral statement of Canada (Annex 2-3) at para. 67. Emphasis supplied.

            65 Second written submission of Brazil (Annex 1-2) at para. 19. Emphasis supplied.

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            OECD Arrangement. Brazil argues that the Guideline does not say this, and that even if it did, Canada does not define the interest rate provisions with which it intends to comply, or how it will apply those provisions. Without such precision, it is not evident to Brazil that Canadian practices would qualify for the specific “safe haven” in the second paragraph of item (k). In particular, Brazil points to the fact that, whereas the second paragraph of item (k) refers specifically to conformity with "the interest rates provisions” of the OECD Arrangement, the Policy Guideline refers to compl[iance] with "the OECD Arrangement” more generally. In Brazil’s view, this difference in terminology, along with the absence of any detail in the Policy Guideline as to what Canada means by compliance with "the OECD Arrangement" and the basis on which eligibility of Canada Account transactions for the safe haven in the second paragraph of item (k) will be judged, means that the Policy Guideline is insufficient to implement the DSB’s recommendation.


          4. In Brazil’s view, Canada’s “minimum burden” with respect to implementation concerning the Canada Account is to “explain with some precision what ‘comply with the OECD Arrangement’ will mean, so that Members are informed of the terms on which a measure previously judged to be or to provide a prohibited export subsidy will operate in future”; and Canada has failed to discharge this burden. In other words, for Brazil, Canada has the burden of demonstrating its entitlement to the “positive defense” offered by the second paragraph of item (k).


          5. Concerning the question of substantive compliance with the OECD Arrangement, Canada agrees with Brazil that the burden would be on Canada, as the one making use of the “exception” to the SCM Agreement set forth in the second paragraph of item (k) of the Illustrative List, to prove that it is entitled to that exception. Canada appears to differ with Brazil concerning the timing, however. Whereas Brazil believes that this burden exists now, Canada argues that it would need to be satisfied only at such future point as Canada invoked the second paragraph of item (k) and were challenged with respect to that defense.


          6. In terms of effectiveness, however, Canada argues that the Policy Guideline “does ensure that any future Canada Account financing transactions will be in conformity with the interest rate provisions of the [OECD] Arrangement and therefore the provisions referred to in the second paragraph of item (k)”. That is, Canada argues that any future Canada Account financing that otherwise would constitute an export subsidy will fall within the safe haven of the second paragraph of item (k) and thus not be prohibited under the SCM Agreement.


      3. Evaluation by the Panel


      1. As noted, Canada’s defense to Brazil’s claim is that the Policy Guideline ensures that all future Canada Account transactions in the regional aircraft sector will qualify for the safe haven of the second paragraph of item (k). Thus, to be able to determine whether this is the case, we must resolve basic interpretational issues concerning that provision.


      2. First, we must determine what constitute “export credit practices” in the sense of the second paragraph of item (k). Thereafter, we must consider how to make a determination in respect of the “conformity” of such practices with the “interest rates provisions” of the relevant “international undertaking”, specifically, the OECD Arrangement. In considering this issue, we turn to a detailed examination of the text66 of the OECD Arrangement67, as whatever the scope of the term “export


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        66 We recall that Article 31.1 of the Vienna Convention on the Law of Treaties provides that a treaty shall be interpreted "in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose".

        67 We recall that the EC - Bananas III panel found it necessary to interpret certain provisions of the

        Lomé Convention, since it was referred to in the WTO General Council's Lomé waiver (WT/DS27/R/USA, para.

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        credit practices” in the sense of the second paragraph of item (k), at present only such practices that are “in conformity with the interest rates provisions” of that Arrangement qualify for the safe haven of the second paragraph of item (k).


      3. After our review of the Arrangement's text, we next consider a number of systemic issues that arise in the context of the second paragraph of item (k). In particular, we evaluate our conclusions drawn from the texts of item (k) and of the Arrangement in the light of the context of item (k) and the object and purpose of that provision and the SCM Agreement. In particular, we consider whether our conclusion based on the texts is consistent with the overall object and purpose of the SCM Agreement of disciplining trade distorting subsidies while at the same time maintaining special and differential treatment for developing countries in respect of export subsidies.


      4. In the light of our conclusions on the above issues, we then need to consider whether the Policy Guideline does, as Canada argues, ensure in respect of the Canada Account programme that any future Canada Account transactions in the regional aircraft sector will qualify for the safe haven of the second paragraph of item (k).


        (a) Textual analysis of the second paragraph of item (k)


      5. Before commencing our detailed textual analysis, we recall that the second paragraph of item

        (k) reads as follows:


        "Provided, however, that if a Member is a party to an international undertaking on official export credits to which at least twelve original Members to this Agreement are parties as of 1 January 1979 (or a successor undertaking which has been adopted by those original Members), or if in practice a Member applies the interest rates provisions of the relevant undertaking, an export credit practice which is in conformity with those provisions shall not be considered an export subsidy prohibited by this Agreement".


      6. It is well accepted that the OECD Arrangement is an "international undertaking on official export credits" in the sense of the second paragraph of item (k).68 Moreover, in practice the OECD Arrangement is at present the only international undertaking that fits this description. Thus, we understand the essence of the second paragraph of item (k) at least at present to be that “an export credit practice" which is in "conformity" with "the interest rates provisions" of the OECD Arrangement "shall not be considered an export subsidy prohibited by" the SCM Agreement69.


        image

        7.97). We likewise consider it necessary to interpret certain provisions of the OECD Arrangement, since it is referred to in the second paragraph of item (k) of Annex I of the SCM Agreement.

        68 This was confirmed by the Appellate Body in Brazil - Aircraft, WT/DS46/AB/R, para. 180, adopted 20 August 1999.

        69 We take note of the reference to “a successor undertaking” in the second paragraph of item (k). In this regard, first, it is clear from this reference that to the extent that the Arrangement today is the only

        undertaking of the kind referred to in the second paragraph of item (k), if in the future a "successor undertaking" were to take effect, export credit practices conforming with the interest rate provisions of that undertaking also would be eligible for the safe haven in that paragraph. Thus, our detailed analysis of the Arrangement in its present form is not in any way intended to exclude this possibility. Second, for purposes of our analysis of the Arrangement, we assume that the Sector Understandings on Export Credits for Ships, for Nuclear Power Plant, and for Civil Aircraft, contained in Annexes I-III of the Arrangement, form an integral part of the Arrangement itself. Even if in the strict sense this were not the case (an issue that we do not here decide), in our view these Sector Understandings at a minimum would constitute “successor undertakings” in the sense of the second paragraph of item (k), as the Arrangement as originally implemented in 1979 did not contain these Annexes. Rather, its very brief sector-specific provisions (which at the time pertained to conventional power plants, to ground satellite communications stations, and to ships) were contained in paragraph 4 of its main text. The

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      7. Given this, in practice eligibility for item (k)’s safe haven from the prohibition on export subsidies is defined entirely in terms of the OECD Arrangement, at least for the time being. Thus, the critical element of our analysis must be to examine the Arrangement in detail, to determine what it applies to and how conformity with its interest rate provisions can be determined. We consider therefore that before we can come to any judgement as to the sufficiency or insufficiency of the Policy Guideline to ensure that all transactions under the Canada Account will be eligible for the safe haven in item (k), as Canada argues, we must determine the answers to the following questions: (1) what are “export credit practices” in the sense of item (k) of the Illustrative List; (2) what are the “interest rates provisions” of the OECD Arrangement; (3) which types of export credit practices conceptually could be in conformity with the interest rate provisions of the Arrangement in its current form; (4) what provisions and considerations are relevant to judging conformity with the Arrangement’s interest rates provisions? Only once we have answered these questions will we be in a position to judge whether the Canada Account Policy Guideline is sufficient to ensure that Canada Account transactions in the future will qualify for the safe haven of the second paragraph of item (k) (or at any rate should be presumed to qualify therefor, in the absence of evidence to the contrary).


        1. What are “export credit practices” in the sense of item (k) of the Illustrative List of Export Subsidies?


      8. Because at the most basic level the safe haven in the second paragraph of item (k) is available only for certain "export credit practices", we must first consider the definition and scope of this term. We consider that in its ordinary meaning, this must be a relatively broad term. That is, this term on its own suggests any practices that might be associated in some way with export credits (i.e., export financing). This certainly would involve export credits as such, but presumably other sorts of practices as well. The first paragraph of item (k) provides useful context in this regard. In particular, we note that the first paragraph refers exclusively to "export credits" and "credits", in contrast to the second paragraph’s reference to "export credit practices". This supports the conclusion that the second paragraph of item (k) concerns a broader range of "practices" than export credits as such.


      9. In our view, the OECD Arrangement provides further context for understanding the term “export credits”, particularly in view of the role of the Arrangement in determining qualification of the safe haven in the second paragraph of item (k). Here we note in particular the stated “scope of application” of the Arrangement, found in its Article 2, namely “all official support for exports of goods and/or services, or to financial leases” with repayment terms of two years or more, as well as tied aid70. This supports our view of the broad meaning of “export credit practice”. Furthermore, we can conceive of no basis to consider any practice associated with export credits as a priori not constituting an “export credit practice” in the sense of the second paragraph of item (k). 71



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        Sector Understandings were negotiated and implemented later, and incorporate by reference provisions of the Arrangement. Thus, if they are not formally integral to the Arrangement, there is no doubt that these Understandings at a minimum constitute successor undertakings, and thus, conformity with the "interest rates provisions” of the Understandings would qualify an export credit practice for the safe haven in the second paragraph of item (k).

        70 Canada states that, pursuant to the Arrangement's Sector Understanding on Export Credits for Civil

        Aircraft, tied aid for aircraft is not permitted except for humanitarian purposes. (Oral statement of Canada (Annex 2-3) at Attachment, footnote 1.)

        71 As discussed below, this does not mean that all such practices can be "in conformity with" the interest rate provisions of the OECD Arrangement. However, while there may be no basis in the Arrangement in its current form to judge the “conformity” of all such practices with the Arrangement’s “interest rates provisions” (i.e., those provisions simply may not apply to all such practices), this clearly does not a priori

        exclude the possibility that new provisions or undertakings might be developed in the future that would permit such a judgement in respect of such practices.

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        1. What are the Arrangement’s “interest rates provisions”?


      10. Before considering in detail the question of the OECD Arrangement’s “interest rates provisions” and “conformity” therewith, we note that in its own words, the Arrangement is a "Gentlemen's Agreement" among its participants, which "seeks to encourage competition among exporters from the OECD-exporting countries based on quality and price of goods and services exported rather than on the most favourable officially supported export credits", by placing "limitations on the terms and conditions of export credits that benefit from official support", including minimum premium benchmarks, the minimum cash payments to be made at or before the starting point of credit, maximum repayment terms and minimum interest rates which benefit from official financing support. Thus, it "sets out the most generous repayment terms and conditions that may be supported". The Arrangement applies to officially supported export credits with repayment terms of two years or more, relating to exports of goods and/or services or to financial leases, and addresses the circumstances in which official support in the form of trade-related tied and partially untied aid may be given and/or mixed with officially supported export credits72. It contains, in addition to its main text, special Sector Understandings which apply to aircraft, ships and nuclear power plant. The Participants to the Arrangement, as listed in Article 1(a) thereof, are “Australia, Canada, the European Community (which includes the following countries: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom) Japan, Korea, New Zealand, Norway, Switzerland, and the United States”73.


      11. To answer the question of which are the interest rate provisions of the Arrangement, we once again turn to its ordinary meaning. Here we note that there is no section of the Arrangement entitled "Interest rates provisions", nor does the Arrangement use or define this term. Nevertheless, we note that there are a number of provisions that specifically address interest rates as such. These are Article 15 –Minimum Interest Rates; Article 16 – Construction of CIRRs; Article 17 – Application of CIRRs; Article 18 – Cosmetic Interest Rates; and Article 19 – Official Support for Cosmetic Interest Rates. (In addition, in the specific context of this dispute, Article 22 of the Sector Understanding on Export Credits for Civil Aircraft74 covers minimum interest rates with respect to all new aircraft except large aircraft75, along with spare engines, spare parts, maintenance and service contracts in respect of those aircraft76, and Article 28(b) covers minimum interest rates with respect to used aircraft.)


      12. Among these provisions, Article 15 appears to contain the basic interest rate provisions of the Arrangement, as the other provisions identified that specifically address interest rates seem to be dependent on and thus subordinate to it. Specifically, Article 15 establishes the basic rule that “minimum interest rates” are to be applied, i.e., respected, by all Participants when providing “official financing support”. After establishing as a general principle the application of “minimum interest rates”, Article 15 goes on to specify that the Commercial Interest Reference Rates (“CIRRs”), "shall"


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        72 OECD Arrangement, "Introduction" section. Emphasis added.

        73 Article 1(b) further provides that “[o]ther countries willing to apply these Guidelines may become Participants following prior invitation of the existing Participants”.

        74 Annex III of the OECD Arrangement.

        75 We note that, according to the list of aircraft models in the Sector Understanding on civil aircraft, aircraft with up to 70 seats are classified as other than large aircraft. This is consistent with information

        provided during the original dispute, i.e., that regional aircraft generally are in the 30-70 seat range. (WT/DS70/R, at footnote 535).

        76 Spare engines, spare parts, maintenance and service contracts are covered by Part 3 of the Sector Understanding concerning civil aircraft. Article 27 of that Understanding provides that except as specifically set forth in Part 3, the relevant provisions of Parts 1 and 2 apply to spare engines, spare parts, and maintenance and service contracts. As there are no specific provisions in Part 3 concerning interest rates, the applicable

        interest rates for spare engines, spare parts, maintenance and service contracts in respect of regional aircraft thus would be those in Part 2 (i.e., the CIRRs).

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        be applied. Specifically in respect of regional aircraft, Articles 22 and 28(b) of Annex III (the Sector Understanding for civil aircraft) provide that the CIRRs “shall” apply.


      13. We note that the basic rule, that "minimum interest rates shall apply" is worded in a general manner, suggesting the possibility that more than one framework or system of “minimum interest rates” (i.e., other than the CIRRs) could be agreed under the Arrangement, and that to the extent that this is the case, these other systems also would constitute particular "minimum interest rates" in the sense of the Arrangement. Indeed this is the case with respect to the Sector Understandings for ships (which applies a minimum interest of 8 per cent in all cases) and for nuclear power plant (which applies "Special Commercial Interest Reference Rates"). We note further, however, that at present, the only “minimum interest rates” referred to in (and thus covered and regulated) by the main text of Arrangement are the CIRRs, and that as indicated, the CIRRs apply to regional aircraft, pursuant to the Articles 22 and 28(b) of the Sector Understanding for civil aircraft.


      14. With respect to the CIRRs, Article 15 contains a number of general rules, all essentially oriented toward ensuring that the CIRRs reflect commercial fixed-interest lending rates and practices. In particular, Article 15 states that the CIRRs should represent final commercial lending interest rates in the domestic market of the currency concerned, that they should closely correspond to the rate for first-class domestic borrowers, that they should be based, where appropriate, on the funding cost of fixed interest-rate finance over a period of no less than five years, that they should not distort domestic competitive conditions, and that they should closely correspond to a rate available to first- class foreign borrowers.


      15. Article 16 puts into concrete technical terms how CIRRs are to be constructed, i.e., on the basis of a fixed margin over government bond yields of varying maturities. More specifically, this Article provides that the CIRR for a currency generally should be at a fixed margin of 100 basis points above a base rate, which in turn is set at either a three-year, five-year or seven-year government bond yield, depending on the repayment terms of the financing in question, or at a five-year government bond yield for all maturities, at the option of the country providing the support77. Article 16 also provides that countries lending in a currency other than their own shall apply the CIRRs for that currency. Finally, Article 16 contains provisions whereby a country can change the base rate system that it applies, and whereby a CIRR can be established for the currency of a non-Participant (if a Participant wishes to provide official support in that currency).


      16. Article 17, concerning the application of CIRRs, limits the amount of time in which interest rates can be fixed, and imposes an additional margin over the CIRR where financing terms are fixed in advance of the contract date. In addition, where official financing support for floating rate loans is provided, the lender is not allowed to offer the borrower the option of applying the lower of the CIRR at the time of the contract or the short-term lending rate, over the life of the loan. That is, the borrower is not permitted during the life of a loan to switch between the CIRR as of the contract date and a short-term rate, depending on which is lower at a given time78.


      17. Finally, Articles 18 and 19 impose limits on “cosmetic interest rates”, which the Arrangement describes as rates below the relevant CIRR which benefit from official support, and which may involve a compensatory measure including a corresponding increase in the contract value or other


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        77 Specific exceptions are set forth for the Yen and for the Euro.

        78 Canada argues in its answers to questions (see Canada’s replies to the Panel’s Canada Account questions 2(b), 2(d) (Annex 2-4)) that Article 17(b) of the Arrangement means that official support in the form of floating rate financing is in conformity with the Arrangement. While Article 17(b) does refer to floating rate financing, it contains no minimum interest rate rule in respect of such financing, and indeed makes clear that the

        CIRR is not applicable thereto. The issue of floating rate financing and Article 17(b) is discussed in more detail in paras. 0 - 5.106, infra.

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        contractual adjustment. These Articles provide, inter alia that official financing support by means of direct financing shall not be provided at rates below the CIRR, and that other official financing support also shall not be offered at below-CIRR (cosmetic) rates. Thus, these provisions appear to be intended to prevent Participants from offering official financing support for lower-than-CIRR financing, whether or not the below-CIRR rate is achieved directly through the face interest rate or through adjustment of the other terms and conditions of the financing to circumvent the CIRR minimum.


      18. In particular, we note that pursuant to Article 19(c), a Participant intending to support a transaction should clarify, in response to an inquiry from another Participant, the "financial terms and mechanisms, including the compensatory measure" (emphasis supplied), while pursuant to Article 19(d) a Participant with information suggesting that "non-conforming terms" may have been offered by another Participant shall try to determine whether the transaction benefits from official financing support and whether or not the terms of the support conform to the provisions of Article 15 ("minimum interest rates"). An important conclusion that we draw from this is that the mechanism in 19(c) and (d) clearly implies that conformity with the CIRR cannot be judged unless all terms and conditions of a transaction, including any "compensatory measures", are known.


      19. There are no other provisions of the Arrangement that directly or explicitly pertain to the interest rate, and thus it would seem that the natural reading of the Arrangement is that the above- mentioned articles constitute the entirety of the Arrangement's “interest rates provisions” (at least in respect of regional aircraft). Clearly the central one of these provisions is the CIRR, which as noted is the only minimum interest rate system defined and thus regulated by the Arrangement in this sector79.


      20. We note that our view as to which are the interest rate provisions of the Arrangement is very different from that of Canada. Canada presented a list of what it considers those provisions to be80, which, as Canada explains, encompasses all provisions of the Arrangement that in Canada's view affect the interest rate as such or the amount of interest paid in a transaction. In support of its position, Canada argues that compliance with the CIRR alone should not be enough to qualify an “export credit practice” for the safe haven in item (k)81. We agree that this is an important consideration, and as noted above, Article 19 (which both we and Canada have identified as one of the "interest rate provision") seems to suggest a way to address this question of "circumvention". Thus, it is by no means evident to us that the best or only way to address this question is through an expansive definition, such as that proposed by Canada, of what constitute the “interest rates provisions” of the Arrangement. (This issue is discussed in detail in paras. 5.107-5.114, infra.)


        1. Which types of “export credit practices” could conceptually be “in conformity with” the “interest rates provisions” of the OECD Arrangement in its current form?


      21. Having identified the "interest rates provisions" of the OECD Arrangement, we are next faced with the question of the types of "export credit practices" in respect of which interest rate provisions exist and therefore apply. This is a critical question, because, as noted above, qualification for the safe haven of the second paragraph of item (k) at present is exclusively determined by the conformity of an "export credit practice" with the interest rate provisions of the Arrangement. Thus, before we


        image

        79As noted, the other Sector Understandings (on export credits for ships and for nuclear power plant) also have interest rate rules, which are specific to those sectors.

        80 See, Oral statement of Canada (Annex 2-3) at paras. 69-80 and Attachment. In this list, Canada identifies the following Articles of the Arrangement as its interest rates provisions relevant to regional aircraft: 2, 3, 7, 9, 10, 13, 14, 15, 16, 17, 19, 21(a), 26, and 29, and identifies as well the following Articles of the Sector Understanding: 21, 22, 23, 24, and 25 of Annex III, Part 2 (new aircraft other than large aircraft), and 28, 29, 30 and 31 of Annex III, Part 3 (spare engines, spare parts, maintenance and service contracts).

        81 Oral statement of Canada (Annex 2-3) at para. 76.

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        can be in a position to determine the conformity of a given export credit practice with those interest rate provisions, we will need to know whether it is of the type that conceptually could be subject to, and thus in conformity with, those provisions. This means, as a matter of logic, that conformity with the interest rate provisions is a meaningful issue only in respect of types of export credit practices for which such provisions exist.


      22. Thus, we return to Article 15 which, as we noted, is the Arrangement's central interest rate provision in that it sets forth the basic minimum interest rate rule. The chapeau of Article 15 reads in relevant part as follows:


        "The Participants providing official financing support through direct credits/financing, refinancing and interest rate shall apply minimum interest rates; the Participants shall apply the relevant Commercial Interest Reference Rates (CIRRs)."


      23. Thus Article 15 makes very clear what is subject to its minimum interest rate rule. That is, Article 15 states explicitly that what is subject to the minimum interest rate rules is not all forms of “official support” covered by the Arrangement but rather “official financing support”, which is limited to “direct credits/financing, refinancing or interest rate support82. In other words, this provision of the Arrangement seems to specify that at present these, and only these, forms of “official support" covered by the Arrangement are subject to the minimum interest rate rule.


      24. We note that the minimum interest rate rule specifically applicable to regional aircraft83 (i.e., paragraph 22 of Part 2 of Annex III of the Arrangement, the part of the Sector Understanding on civil aircraft other than large aircraft), is identical to that in Article 15 of the Arrangement. In particular, this provision states:


        “The Participants providing official financing support shall apply minimum interest rates; the Participants shall apply the relevant CIRR set out in Article 15 of the Arrangement”.


      25. Thus, we conclude that in the case of regional aircraft, as is the general rule under the Arrangement, what is subject to the minimum interest rate rule is official financing support – direct credits/financing, refinancing or interest rate support.


      26. On the basis of our identification of the Arrangement’s "interest rates provisions" and of the types of "export credit practices" to which those provisions apply, the only logical conclusion that we can draw is that the only forms of export credit practices which at present are potentially eligible for the safe haven are those subject to the interest rate provisions of the Arrangement in its current form, namely direct credits/financing, refinancing and interest rate support84. By implication, this means that the other forms of official support for export credits covered by the Arrangement (e.g., guarantees and insurance), are simply not eligible for the safe haven, because they are not covered by the existing interest rate rule, and therefore cannot be "in conformity" or out of conformity with it. Thus, for now,


        image

        82 The Introduction section of the Arrangement contains the same definition of “official financing support” as that in Article 15.

        83 Canada, in its list of Arrangement provisions that it considers to be the interest rate provisions, refers to this provision as relevant in the context of regional aircraft. As noted in footnote 75 above, this is consistent with information provided in the original dispute.

        84 With repayment terms of two years or more, recalling that the Arrangement’s coverage is limited to transactions of this maturity.

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        there is no safe haven from the prohibition on export subsidies for these forms of official support85. Rather, their conformity with the SCM Agreement can only be judged on the basis of Articles 1 and 3 of that Agreement.

      27. We note that Canada takes a very different position, arguing that export credit insurance and guarantees (“pure cover”) also are subject to the “interest rates provisions” of the Arrangement and thus are eligible for the safe haven. Specifically, Canada argues that export credit guarantees involve an interest rate in respect of the underlying loan, and that the guaranteed loan itself must respect the relevant interest rate provisions, which for Canada means that the “interest rates provisions” apply to guarantees/insurance as such86. On the basis of the above discussion, however, Canada’s reading of the Arrangement does not seem to be supported by the text thereof, given that Article 15 explicitly omits from its own scope of application guarantees and insurance.

      28. Moreover, we note that the Arrangement establishes explicit rules concerning guarantees and insurance, specifically by establishing minimum premium benchmarks. The minimum benchmarks are set with respect to adequacy of premiums to cover the "sovereign" and "country" credit risk involved in supported transactions. These benchmarks also apply explicitly to official financing support. Thus, both the minimum premium rule and the minimum interest rate rule on their faces make clear whether or not they apply to guarantees and insurance.


      29. The conclusion that only official financing support is potentially eligible for the safe haven does not necessarily mean, however, that all official financing support would be eligible. Rather, continuing the logic of the analysis, it would appear that the safe haven could only be potentially available to those specific kinds of official financing support to which the CIRRs (or if applicable, the special minimum interest rates under the Sector Understandings) apply, given that these are the only existing systems of minimum interest rates under the Arrangement. Thus, in the case of regional aircraft, as the CIRRs are the relevant minimum interest rates, it is only support that is subject to the CIRRs with respect to which “conformity” with minimum interest rates – which are exclusively defined in terms of the CIRRs – even would be relevant and could be judged. Thus, the question of which export credit practices pertaining to regional aircraft are potentially eligible for the safe haven in the second paragraph of item (k) cannot be fully answered without considering the nature of the CIRRs.


      30. Perhaps the most important aspect of the CIRRs87 in this regard is that they are fixed interest rates established for various currencies, rather than floating rates. In particular, under Article 15 of the Arrangement, as a general principle CIRRs are to be established on the basis of fixed interest rate finance over a period of no less than five years. Article 16 provides more specifically that CIRRs generally are to be set at 100 basis points above the medium- to long-term yields on government bonds issued in the relevant currencies. Given that they are expressed solely as fixed interest rates, the CIRRs can only meaningfully be applied to transactions with fixed interest rates. That is, there is simply no practical or meaningful way to apply rules concerning minimum fixed interest rates to floating rate transactions88. Thus, we conclude that only official financing support at fixed interest rates is subject to minimum interest rates, given that the CIRRs are expressed as, and thus can only apply to, fixed rate transactions.


        image

        85 As noted above, this by no means rules out the possibility that in the future interest rate provisions might be developed for other types of export credit practices, in which case the safe haven would potentially be available for such practices.

        86 Canada’s reply to the Panel’s Canada Account question 2(b) (Annex 2-4) at para. 9.

        87 As is the case as well for the other specific interest rates in certain of the Sector Understandings.

        88 Canada also is of this view. (Canada’s reply to the Panel’s Canada Account question 2(b) (Annex 2-

        4) at para. 8.)

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      31. As noted above, Canada argues that Article 17(b) of the Arrangement authorizes, and thus makes eligible for the safe haven of item (k), official financing support at floating rates, even where such financing is at a below-CIRR interest rate. In particular, Canada states that Article 17(b) establishes that “the minimum floating interest rate is the ‘short-term market rate’”89, and further argues that this is “generally understood to refer to international benchmarks such as LIBOR”.


      32. Article 17(b) reads as follows:


        "b) Where official financing support is provided for floating rate loans, banks and other financing institutions shall not be allowed to offer the option of the lower of either the CIRR (at the time of the original contract) or the short- term market rate throughout the life of the loan."


        Thus, as Canada notes, Article 17(b) does contain a reference to official support for floating rate loans. In our view this text does not, as Canada argues, clearly authorize official support for floating rate financing at rates below CIRR90, or establish that any such financing is “in conformity” with the interest rate provisions of the Arrangement and therefore qualifies for the safe haven in item (k).


      33. Indeed, Article 17(b) does not set forth any specific rules with respect to the absolute or relative levels of interest rates at which floating rate financing can be offered. Rather, Article 17(b) appears exclusively to pertain to (and to prohibit) the possibility that a lender could offer a borrower the option to switch between an interest rate at the CIRR that was prevailing on the date of the original contract and the short-term market rate prevailing at any given moment during the life of the loan. Thus, in our view, the reference to the "short-term market rate" is only a descriptor of the prevailing floating interest rate. In our view, this provision simply recognizes that, over the life of a loan, short-term interest rates may move above and/or below the fixed interest rate that was prevailing at the original date of the loan contract, and establishes a rule prohibiting switching between fixed and floating-rate financing throughout the life of the loan to take advantage of such movements. This is not the same as affirmatively authorizing the provision of floating rate financing at interest rates below the relevant CIRR, or indeed as establishing any rule whatsoever concerning minimum levels for floating interest rates. We can find no basis for reading into this provision any such rule, let alone any implicit reference to LIBOR or any other putative "minimum" floating interest rate.


      34. Thus, on the basis of the foregoing analysis we conclude that the safe haven in the second paragraph of item (k) at present is potentially available only to export credit practices in the form of direct credits/financing, refinancing, and interest rate support at fixed interest rates with repayment terms of two years or more91. In other words, any such practices involving floating interest rates, as well as official support for export credits with shorter maturity or in the forms of guarantees and insurance, because none are subject to the Arrangement’s “interest rates provisions”, most especially the CIRR but also the sector-specific minimum interest rates in the Sector Understandings, would not


        image

        89 Canada’s reply to the Panel’s Canada Account question 2(b) (Annex 2-4) at para. 8.

        90 We are aware that the subject of official support at floating interest rates has been under discussion among Arrangement Participants for some time (See, e.g., Canada’s reply to the Panel’s Canada Account question 2(b) (Annex 2-4) at para. 8). Our understanding is that some Participants believe that such support is fully authorized and fully qualifies for the safe haven in the second paragraph of item (k), while others believe

        that it is permitted but not subject to any minimum interest rate rule, and still others believe that it is outright prohibited under the Arrangement. We note that in any case, Canada has indicated that “except in cases of matching or humanitarian tied aid, all Canada Account financing transactions in the regional aircraft sector will take the form of fixed-rate financing at interest rates at or above CIRR.” (Canada’s reply to the Panel’s Canada Account question 3(d) (Annex 2-4) at para. 1.)

        91 Here, we again emphasize that in our view, it would be perfectly possible for minimum interest rates

        to be negotiated in respect of floating rate transactions. Were this to be done, such transactions in our view would be potentially eligible for the safe haven.

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        be eligible for the safe haven, as it simply would not be possible to judge their “conformity” with the relevant interest rate provisions of the Arrangement, all of which pertain exclusively to fixed rates.


        1. What provisions and considerations are relevant to judging “conformity” with the Arrangement’s “interest rates provisions” and hence qualification for the safe haven in item (k)?


      35. Having determined which export credit practices are potentially eligible for the safe haven in the second paragraph, we recall that of course, not every individual transaction that is so eligible will necessarily qualify for that safe haven. Rather, to take advantage of the safe haven, eligible export credit practices must be “in conformity with the interest rates provisions”92 of the Arrangement. Thus, we turn next to the question of how, i.e., on the basis of what provisions and considerations, conformity with the interest rate provisions should be judged.


      36. It is in this context of “conformity”, rather than the context in which it was provided by Canada, that Canada’s list of the provisions that it considers to be the “interest rates provisions”93 arguably is most relevant. That is, as noted above, Canada has identified a sizeable list of provisions which it argues must be considered part of the Arrangement’s “interest rates provisions”, because these provisions directly or indirectly affect the amount of interest charged and the timing of when it is paid. In Canada’s view, the fact that item (k) refers to “interest rates provisions” and not simply to the “interest rate” means that it must refer to more than the CIRR standing alone. In other words, Canada argues, if this term referred only to the CIRR, the benefit of the safe haven would be extended to financing transactions that apply the CIRR, but do not abide by any of the other Arrangement rules, such as those relating to maximum terms and minimum risk premiums, thereby circumventing the disciplines of the SCM Agreement94.


      37. As discussed above, the text of the Arrangement itself seems to define its “interest rates provisions” much more narrowly than argued by Canada. Nevertheless, Canada’s basic point is very important, and seems to us to go to the issue of conformity. That is, if not supported and reinforced by provisions related to the financing terms and conditions other than the interest rate, a minimum interest rate rule standing alone could exercise no real discipline on the generosity of terms of official support for export credits. Obviously, any financing transaction has a number of terms and conditions, many of which do directly or indirectly affect the interest rate. These include, as Canada points out, the amount of the cash down payment, the maximum repayment term, the timing of principal and interest payments, maximum “holding periods” or lock-in periods for interest rates, risk premiums, and similar terms. To use an example, if the interest rate of a transaction were fixed at CIRR, but for example the repayment term was 30, 50 or 100 years, or no amortization of principal was required over the life of the loan, the fact that the interest rate respected the CIRR would not in any real sense discipline the terms of the financing. Thus, if the generosity of the other terms and conditions were unlimited, such terms and conditions could completely circumvent any limiting effect that the minimum interest rate rule was intended to exercise.


      38. Of course, the Arrangement does address and set limits with respect to many such terms and conditions, not limited to the minimum interest rate. Thus, in developing an approach for determining whether a given “official financing support” transaction qualifies for the safe haven of the second paragraph of item (k), it would seem appropriate to adopt an approach to the question of “conformity” with the interest rate provisions that is sufficiently broad to capture not just conformity with the CIRR standing alone, but also respect for the Arrangement’s limits on the generosity of the other financing


        image

        92 Second paragraph, item (k), emphasis supplied.

        93 Oral statement of Canada (Annex 2-3) at paras. 69-80 and Attachment.

        94 Id. at paras. 75-77.

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        terms having an effect on the interest rate. That is, recalling95 that the stated purpose of the Arrangement is, inter alia, to “encourage competition among exporters...based on quality and price of goods and services exported rather than on the most favourable officially supported terms”, by placing “limitations on the terms and conditions of export credits that benefit from official support”, it would not make sense from the standpoint of the Arrangement to so narrowly interpret the concept of “conformity” with the interest rate provisions as to provide an exemption under the SCM Agreement for transactions that unabashedly circumvent that purpose. Nor would such a narrow interpretation make sense from the standpoint of the SCM Agreement, as doing so would have the effect of exempting from the prohibition on export subsidies practices that respected the CIRRs in name only, even if their other terms were so generous as to remove any limiting effect of the minimum interest rate rule.


      39. In our view, Articles 19(c) and (d) of the Arrangement (which concern official support for cosmetic interest rates) appear in effect to establish this very approach to judging conformity with the Arrangement's interest rate provisions. That is, as discussed above96, Articles 19(c) and (d) provide for an evaluation by a Participant of all terms and conditions of a transaction in order to judge whether it "conform[s] to the provisions of Article 15", i.e., the minimum interest rate rule.


      40. Article 27 of the Arrangement, concerning the “no derogation engagement”, provides further contextual support for this approach to judging conformity with the interest rate provisions, in the sense that it refers to all elements of a financing transaction as parts of a single package. Specifically, under this provision, Participants are not to derogate from “maximum repayment terms, minimum interest rates, premium benchmarks, the six-month limitation on the validity period for export credit terms and conditions, or extend the repayment term by extending the repayment date of the first instalment of principal set out in the Arrangement”. Thus, the Arrangement seems to recognize that financing terms and conditions must be treated as a package, and that derogation from one will undercut the others.


      41. By the same token, however, we do not agree with the very broad reading advocated by Canada of what “conformity” with the interest rate provisions would be, as this reading would sweep in inter alia all of the provisions that permit various kinds of exceptions and derogations from some provisions of the Arrangement that affect interest rates. In particular, we cannot reconcile identifying as “conforming” with the interest rate provisions any practice that on its face breaks, i.e., does not conform with, the interest rate rules (even where this is tolerated as matching). Such a reading would seriously undermine the disciplines of the SCM Agreement in the field of export credits. (We discuss the provisions of the Arrangement concerning exceptions and derogations in more detail in paragraphs 5.120 - 5.125, infra.)


      42. Thus, we conclude that full conformity with the “interest rates provisions” – in respect of “export credit practices” subject to the CIRR – must be judged on the basis not only of full conformity with the CIRR but in addition full adherence to the other rules of the Arrangement that operate to support or reinforce the minimum interest rate rule by limiting the generosity of the terms of official financing support.


        Provisions of the Arrangement imposing disciplines or limits that reinforce the minimum interest rate rule


      43. A review of the Arrangement in the light of the above discussion suggests that the provisions that would need to be respected in order for official financing support to be in full conformity with the interest rate provisions would include, in addition to the provisions concerning the CIRR, most of the


        image

        95 See para. 5.82 supra.

        96 At paras. 5.89-5.92, supra.

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        articles of Chapter II of the Arrangement, along with (for this dispute) most of the articles of Annex III, Parts 2 and 3 (Sector Understanding on Export Credits for Civil Aircraft, All New Aircraft Except Large Aircraft (Part 2) and Used Aircraft, Spare Engines, Spare Parts, Maintenance and Service Contracts (Part 3)). These provisions are discussed in detail in this section.


      44. Taking Chapter II of the Arrangement first, the first provision thereof, Article 7 on cash payments, limits the generosity of financing terms by establishing a minimum percentage that must be paid in cash (i.e., a maximum percentage that can be financed). Article 8 defines the starting and ending point of the repayment term, Article 9 defines the starting point of credit for different types of contracts, and Article 10 establishes specific maximum repayment terms for different categories of countries. Article 12 establishes criteria and procedures for classifying countries for maximum repayment terms. Article 13 establishes rules concerning the schedule for repayment of principal. Again, the underlying purpose of all of these provisions is to set limits on the generosity of the financing terms.


      45. Article 14 establishes rules governing the schedule and other aspects relating to the payment of interest, with a view to ensuring that interest is paid at regular intervals over the life of a loan, rather than deferred, again imposing limits on the generosity of the financing terms. Article 20 requires the application of risk premiums at least sufficient to cover sovereign credit risk and country credit risk97. (Subsidiary to Article 20, Articles 21, 22, 23, and 24 establish various rules and procedures for setting and verifying the minimum premium benchmarks, on a Participants’-wide basis.) Article 25 sets limits on the amount and kind of official support that can be provided for so- called “local costs”98. (According to Canada, the local cost provision is not relevant in the context of aircraft finance99.) Finally, Article 26 establishes the maximum validity period for credit terms and conditions for an individual export credit or line of credit, again limiting the generosity of the financing terms and thus reinforcing the minimum interest rate rule.


      46. Similar provisions pertaining directly to regional aircraft are found in Part 2 of the Sector Understanding for civil aircraft (Annex III), pertaining to new aircraft other than large aircraft100, as well as in Part 3 of that Understanding, which pertains to used aircraft (of all sizes), spare engines, spare parts, maintenance and service contracts101. Specifically, Article 21 of the Sector Understanding fixes maximum repayment terms for different categories of new “non-large” aircraft and Article 28 does the same for different categories of used aircraft. In addition, Article 23 of the Sector Understanding, pertaining to “non-large” aircraft, provides that the insurance premium or guarantee fee shall not be waived in whole or in part. Article 24 of that Annex prohibits aid support except in the form of untied grants, although it appears to permit tied aid for humanitarian purposes102. Article 29 (a) – (c) of the Sector Understanding establish limits on the financing terms for spare engines and spare parts, while Article 30 establishes limits on official financing support for maintenance and service contracts.


        image

        97 The Arrangement's risk premium rules apply equally to direct financing, refinancing, guarantees and insurance.

        98 Article 25 defines local costs as expenditures for goods and services in the buyer’s country that are necessary either for executing the contract or for completing the project of which the exporter’s contract forms a part, which costs exclude commissions payable to the exporter’s agent in the buyer’s country.

        99 Canada’s reply to the Panel’s Canada Account question 2(a) (Annex 2-4) at para. 4

        100 As indicated above, regional aircraft, i.e. aircraft with no more than 70 seats, are covered by Part 2 of the Sector Understanding on civil aircraft.

        101 There are also similar provisions in the other Sector Understandings, but these are not relevant to this dispute and so are not mentioned here.

        102 We note that in our view it is unlikely that any tied aid for truly humanitarian purposes would be challenged under the SCM Agreement as a prohibited subsidy. As this issue is not before us, we do not consider

        it necessary to make a finding regarding whether any such aid would qualify for the safe haven of the second paragraph of item (k).

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      47. Thus, all of the provisions identified above limit the generosity of some aspect of the financing terms where official financing support is provided, and thereby reinforce the minimum interest rate rule. While not all of these provisions would necessarily apply in respect of any given instance of official financing support, under the approach described, those that did apply would need to be respected fully for that transaction to be “in conformity” with the Arrangement’s interest rate provisions and thus to qualify for the safe haven in the second paragraph of item (k) of the Illustrative List of Export Subsidies103.


        Provisions of the Arrangement providing for exceptions and derogations


      48. The final Articles of Chapter 2 (in particular Articles 27 and 29), as well as Articles 25, 29(d) and 31 of Annex III, concern inter alia various situations in which certain variations, exceptions and derogations from the Arrangement’s terms are foreseen and explicitly permitted or not prohibited. Articles 47-53 contain procedures (notifications, etc.) to be followed in these situations. In our view, it is not obvious on its face that sweeping all of these provisions into the group of provisions that must be respected for a transaction to be in “conformity” with the interest rate provisions would be consistent with the approach outlined above. This is because these provisions essentially run counter to, rather than reinforcing, the Arrangement’s minimum interest rate rule and other limits on the generosity of financing terms. Thus, the issue is whether a transaction that makes use of flexibilities and/or outright departures from the rules through any or all of these Articles or any part(s) thereof can be considered to be “in conformity” with the interest rate provisions in the sense of item (k). On the one hand, an argument could be made that anything that is explicitly not prohibited by the Arrangement must be ipso facto “in conformity” with it, even if it is recognized as a derogation. (This is in fact what Canada argues104.) On the other hand, if even matched derogations (i.e., non- conforming departures from the rules) are considered to be “in conformity”, then the notion of “conformity” cannot be understood to represent a discipline or limitation of any kind.


      49. We note in this context as an initial matter that not all exceptions under the Arrangement are necessarily equal. In this regard, Canada itself makes a distinction between “variations”, which are “permitted” “within limits” under the Arrangement, and the “matching” of terms and conditions that are “outside of the Arrangement’s rules”105. In its answers to questions, Canada confirms that this distinction is the same as that in the Arrangement’s Chapter IV (procedures) between “permitted exceptions” and “derogations”106. Chapter IV makes clear on the one hand that permitted exceptions in fact refer to certain variations in terms that are foreseen and permitted, subject to limits, under various specific provisions of the Arrangement. Chapter IV further makes clear on the other hand that derogations are terms and conditions that depart from the Arrangement’s provisions, i.e., in a way not foreseen and not permitted, even within limits, under the plain language of the Arrangement.


      50. We turn to the specifics of the Articles in question while bearing in mind all of these general considerations. Article 27 of Chapter 2, entitled the “no derogation engagement for export credits”, in fact envisages certain deviations. That is, as noted, this Article provides that Participants shall not derogate from maximum repayment terms, minimum interest rates, minimum premium benchmarks,


        image

        103 In this connection, we note that a transaction that involved interest rate support and a guarantee or insurance would need to respect the interest rate provisions of the Arrangement, as well as the requirements pertaining to minimum premia and all of the other provisions identified above that applied to the transaction, for that transaction to be "in conformity" with the interest rate provisions of the Arrangement. As noted above (at para.5.98) the conformity of insurance or guarantees as such with the SCM Agreement can only be judged on the basis of Articles 1 and 3 of the Agreement.

        104 See, e.g., Canada’s reply to the Panel’s Canada Account question 3(i) (Annex 2-4).

        105 Oral statement of Canada (Annex 2-3) at Attachment, introductory paragraph and paragraph concerning Article 29.

        106 Reply of Canada to the Panel’s Canada Account questions 3(k) and 3(l) (Annex 2-4).

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        the limitation on the validity period for credit terms and conditions, and shall not extend the repayment term by extending the repayment date of the first instalment of principal per Article 13(a).


      51. Nevertheless, Article 27 goes on to provide that countries may go below the relevant minimum premium benchmark in certain cases where the country credit risk is “externalised/removed or limited/excluded for the entire life of the debt repayment obligation”. Chapter IV (Article 48) explicitly refers to this deviation as a “permitted exception”. Article 49 identifies a list of “permitted exceptions” having to do inter alia with maximum repayment terms, principal and interest payments, and discounts to minimum sovereign risk premium benchmarks.


      52. Article 29, on matching, further clarifies the distinction between “derogations” and “permitted exceptions”. In particular, while under this Article there is a general permission to match terms and conditions offered by both Participants and non-Participants, some matching, i.e., where Participants “match credit terms and conditions by supporting terms that comply with the Arrangement”107 is not considered a derogation. Rather, this seems to refer to matching another country’s offer of terms that are within the permitted variations that exist under certain provisions. (For example, under Article 10, there is a certain amount of permitted variation concerning maximum repayment terms, which is explicitly recognized in Article 49 as a permitted exception. Article 51 specifically deals with the matching of permitted exceptions.) Thus, if a country offers terms that are within permitted variations, the Arrangement appears to consider that such terms “comply” with the provisions of the Arrangement, and that any matching of those terms therefore also “complies”. Canada agrees with this interpretation108.


      53. On the other hand, Article 29 further provides that if an initiating offer “does not comply with the Arrangement”109, competing Participants are permitted to match those non-complying terms. The Arrangement defines “derogation” as terms and conditions that “depart from” the rules of the Arrangement110; thus, this reference in Article 29 equates non-compliance with derogation. This reading is confirmed in Article 47(b), which refers to derogations as “non-conforming terms and conditions”. That is, these parts of the matching provisions confirm that, although matching of derogations is in certain cases not prohibited, this does not alter the fact that both the original derogation and the matching remain, by the Arrangement’s own terms out of conformity with the provisions of the Arrangement111. We note that Canada takes the opposite view, namely that the initial derogation does not comply with the Arrangement, but that matching, because tolerated, does fully comply therewith112. For the reasons discussed above, however, we disagree. In our view, Canada’s approach would directly undercut real disciplines on official support for export credits113.


        image

        107 Emphasis supplied.

        108 Canada’s reply to the Panel’s Canada Account question 3(k) (Annex 2-4).

        109 Emphasis supplied.

        110 OECD Arrangement Article 47(a).

        111 We also note, in the context of “derogations”, Article 28 of the Arrangement which allows action to avoid or minimise losses, i.e., establishment of more favourable terms and conditions than permitted, after the contract award, where the sole intention is to avoid or minimise losses from events which could give rise to non- payment or claims. In other words, where a default or similar event has occurred or is likely, renegotiation of

        more favourable terms than permitted is not prevented by the Arrangement. Under the approach outlined, if there were such a renegotiation, a transaction that had previously qualified for the safe haven would fall outside of it to the extent that the renegotiated terms were in fact “more favourable than permitted”.

        112 Canada does not appear to disagree with the reading that both derogations and matching are out of accord with the Arrangement’s rules, but nevertheless argues that matching is “compliant” with the Arrangement (Canada’s replies to the Panel’s Canada Account questions 3(i) and 3(l) (Annex 2-4)).

        113 Our analysis of matching of derogations and permitted exceptions applies equally to the relevant provisions of Parts 2 and 3 of the Sector Understanding for civil aircraft (i.e., its Articles 25, 29(d) and 31).

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        Conclusion based on textual analysis


      54. As the foregoing discussion indicates, the text of the Arrangement provides considerable guidance concerning how the term “conformity” in the second paragraph of item (k) of the Illustrative List should be understood. In the first place, the Arrangement text provides explicitly that derogations from provisions of the Arrangement, and the matching of such derogations, do not “conform” with the provisions of the Arrangement.114 Thus, any transaction that involves derogations or matching of derogations by definition cannot be in conformity with the interest rate provisions of the Arrangement, as under the approach outlined above, conformity with the interest rate provisions requires conformity not just with the minimum interest rate rule but also with the other provisions that support/reinforce that rule. As such, an otherwise eligible transaction115 involving derogations or matching of derogations could not qualify for the safe haven of the second paragraph of item (k). On the other hand, the Arrangement explicitly defines permitted exceptions and the matching of permitted exceptions, within the allowed limits, to be in compliance, i.e., in conformity with the relevant provisions of the Arrangement. Therefore, under this approach, making use of permitted exceptions, within the specified limits, would not disqualify an eligible transaction from the safe haven, so long as the transaction conformed with the minimum interest rate and all of the other applicable disciplines.


      55. Through the above textual analysis, we have arrived at a process for judging the conformity of a specific, individual transaction with the interest rate provisions of the Arrangement, and thus qualification for the safe haven in item (k). Under this approach, first, it would need to be determined that the transaction was in the form of either direct credits/financing, refinancing or interest rate support with repayment terms of at least two years, at fixed interest rates, and therefore was subject to the Arrangement generally and to the CIRRs (or a sector-specific minimum interest rate, if applicable) specifically. Second, it would need to be determined whether the interest rate was at or above the CIRR (or the applicable sector-specific rate). Third, it would need to be determined which of the other provisions of the Arrangement that operate to reinforce the minimum interest rate rule applied to that particular transaction (a determination that would need to be made on a case-by-case, transaction- specific basis). Fourth, the details of the transaction would need to be examined to determine whether or not it respected all such additional provisions, and did not involve any derogations or matching of derogations.


        (b) Considerations based on the context of the second paragraph of item (k) and the object and purpose of the SCM Agreement


      56. It is clear from the above that a textual analysis leads us to a tentative conclusion that the safe haven in the second paragraph of item (k) of the Illustrative List of Export Subsidies is considerably narrower than argued by Canada. That is, the textual analysis suggests that a number of export credit practices covered by the Arrangement would not qualify for the safe haven because of their form or maturity alone (i.e., those not in the form of official financing support, and those with repayment terms of less than two years). The textual analysis also suggests that application of the CIRR (or relevant sector-specific minimum interest rate) by itself, while a necessary condition for "conformity with the interest rates provisions" of the Arrangement, is not a sufficient condition therefor; in addition, the other provisions supporting the minimum interest rate rule, to the extent that they apply to a given transaction, also would need to be fully respected for a transaction to be "in conformity" with the interest rate provisions. Thus to the extent that a transaction derogated in some respect from


        image

        114 Canada does not appear to disagree with the reading that both derogations and matching are out of accord with the Arrangement’s rules, but nevertheless argues that matching is “compliant” with the Arrangement (Canada’s replies to the Panel’s Canada Account questions 3(i) and 3(l)).

        115 That is, a transaction at a fixed interest rate involving official financing support.

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        any of those provisions, or involved matching of another country's derogation, that transaction would not be "in conformity" with the Arrangement's interest rate provisions.


      57. In our view, this reading of the text of the second paragraph of item (k) and of the OECD Arrangement is the most natural and logical reading, as it flows from the words of those texts. We recognize, however that there is another possible reading of these provisions, namely the broad reading advocated by Canada. In considering this alternative reading, we note that it is incumbent upon us to try to resolve any ambiguities in the texts in a manner which is the most consistent possible with the object and purpose of the SCM Agreement and of the WTO Agreement. In our view, the object and purpose of the SCM Agreement and the WTO Agreement do not support the textual analysis proposed by Canada. Rather, they support the textual analysis developed by the Panel above.


      58. In particular, under Canada’s approach, all substantive provisions of the OECD Arrangement would be considered its “interest rates provisions” and all "export credit practices" which conformed to those of the "interest rates provisions" applicable to them would be "in conformity with" the interest rate provisions of the OECD Arrangement. That is, under this approach, the term “interest rates provisions” would be understood as a means of distinguishing the substantive from the procedural provisions of the Arrangement, in recognition of the fact that non-Participants cannot use those procedural provisions. In other words, the safe haven would be understood to apply to all types of practices covered by the Arrangement that are in compliance with the relevant substantive provisions of the Arrangement, whether or not any minimum interest rate applied in respect of the export credit practice in question116.


      59. One implication of the broad approach in this context is that any practice that is not out of conformity with the relevant provisions of the Arrangement, whether or not even covered by provisions explicitly pertaining to interest rates, would qualify for the safe haven in item (k)117. In this regard, matching of derogations, because tolerated although not in compliance, would be considered to be "in conformity" under this approach. We note that the main argument in support of this sort of a broad reading of the term “in conformity with the interest rates provisions”, would be that the Participants to the OECD Arrangement would not have on the one hand negotiated for themselves a set of rules in the OECD with a broad scope, covering, regulating in different ways, and permitting a variety of practices, and on the other hand negotiated a safe haven in item (k) of the SCM Agreement covering only a subset of those practices.


        image

        116 Thus, under Canada’s approach, in addition to direct financing, refinancing and interest rate support, which are subject to the minimum interest rate rule, guarantees and insurance, which are subject to other rules but not to the minimum interest rate rule, would be eligible for the safe haven. In addition, Canada argues that “matching” of “derogations” also would be eligible for it, on the basis that such matching is not prohibited. Derogations are terms and conditions that do not comply with the Arrangement. As noted, the Arrangement does not prohibit Participants from matching the terms of such derogations/non-compliant terms offered by Participants as well as non-Participants.

        117 One example is that of export credit guarantees, which as discussed above, are subject under the Arrangement to rules concerning minimum premiums, but are not subject to any specific provision on interest rates. Under this broad approach, so long as this general rule was respected, such guarantees would qualify for the safe haven, even if the provision of the guarantee allowed the interest rate to fall below the minimum interest

        rate (the CIRR). Because the minimum interest rate rule does not apply to guarantees, under this interpretation that rule would not act to limit the eligibility of the guarantee for the safe haven, in spite of the guarantee’s effect on the interest rate. Another example would be the provision of floating rate financing. Here again, because the CIRR is only expressed in terms of fixed interest rates, it cannot be applied to floating rate financing. Thus, this approach would say that floating rate financing which respected other provisions concerning financing (e.g., cash payments, maximum financing terms, etc.) would qualify for the safe haven, even if the interest rate were set far below the market rate, on the basis that by not being covered by the CIRR it was not out of conformity with it, and thereby was in conformity with it.

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      60. In considering this alternative approach, we note first that the second paragraph of item (k) is quite unique in the sense that it creates an exemption from a prohibition in a WTO Agreement, the scope of which exemption is left in the hands of a certain subgroup of WTO Members – the Participants, all of which as of today are OECD Members – to define, and to change as and when they see fit. Given this, it is important that the second paragraph of item (k) not be interpreted in a manner that allows that subgroup of Members to create for itself de facto more favourable treatment under the SCM Agreement than is available to all other WTO Members. The OECD Arrangement, as a plurilateral arrangement to which most WTO Members are not Participants, clearly has the potential to give rise to such differential treatment of Participants and non-Participants.


      61. Related to this, i.e., because the Arrangement as such is in the hands of a subgroup of WTO Members, it is important that any interpretation of the second paragraph of item (k) provide clarity and certainty concerning what the (SCM Agreement) rules are and how to comply with them. Thus, any interpretation should be clear and transparent, and capable of application by all Members, rather than left to the discretion of individual Members or groups of Members.


      62. In our view, the reading advocated by Canada would pose serious problems in respect of these important considerations. In particular, information about the actions of Participants is available only to Participants. None of this information is published, nor can it be obtained upon request by non- Participants. Thus, a reading that would, for example, include within the safe haven in the second paragraph of item (k) a transaction involving matching of a derogation, would put all non-Participants at a systematic disadvantage as they would not have access to the information about the terms and conditions being offered or matched by Participants. This concern obviously is relevant as well to the issue of transparency and clarity of the rules. We note that the CIRRs and the sector-specific interest rates are published. Therefore, all WTO Members, whether Participants or not, can offer financing on terms consistent with the minimum interest rates118. Similarly, the text of the Arrangement itself sets forth the limits to most of the permitted exceptions. Thus these as well can be applied by all WTO Members, whether Participants or not119. Financing terms and conditions known only to Participants clearly cannot be universally applied.


      63. We note further in this context the particular potential for different, indeed stricter, rules de facto applying to developing than to developed countries, or at a minimum for developed countries to be able de facto to enjoy the same less strict rules as are provided de jure, through the SCM Agreement's special and differential treatment provisions, to developing countries. Arguably, such situations would be out of keeping with one of the key stated purposes of the WTO Agreement,


        image

        118 We note that, by contrast, no information is published on the minimum premium benchmarks. Thus, only Participants have access to this information. Given this, it is at present impossible for a non- Participant to have any idea whether a given transaction respects the rules concerning minimum premiums. Thus, until such time as the Participants make this information publicly available, non-Participants should be presumed to be respecting the minimum premium rules in the context of any analysis under the second paragraph of item (k). Canada also has recognized this issue and come to the same conclusion. In particular, Canada states that “it would be unreasonable to expect a non-OECD WTO Member to charge a premium level which is unknown to such Member, in order for that Member to be in full compliance with the interest rates provisions of the Arrangement. Canada is prepared to accept the consequence that in relation to premiums and for the purpose of the second paragraph of Item (k), a higher threshold is imposed on those WTO Members that are also OECD Participants” (Canada’s reply to the Panel’s Canada Account question 3(h)).

        119 As in the case of minimum premiums, however, where the Arrangement text does not set forth explicit limits to permitted variations (e.g., Article 49(a)(2) of the Arrangement) and no information is published

        concerning specific cases of such variations, non-Participants should be presumed to be respecting such limits in the context of any analysis under the second paragraph of item (k).

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        namely the need for positive efforts on behalf of developing countries (which is the basis for the extensive special and differential treatment provisions of the SCM Agreement)120.


      64. In particular, the broad approach advocated by Canada would in fact raise the issue of structural inequity in respect of developing countries. Specifically, this approach could result in either more favourable treatment, de facto, for developed compared to developing countries, or the de facto elimination of special and differential treatment for developing countries. An example of the first case would be provision of a government guarantee, which on its face is not subject to any interest rate rule. In practical terms, an interpretation of item (k) that would allow any government to make available to a borrower its own cost of borrowing through the provision of a guarantee and have that guarantee qualify for the protection of the second paragraph of item (k), irrespective of the interest rate applied, would generate a result that was systematically skewed in favour of developed countries. This is because developing countries’ cost of borrowing will normally be higher than that of developed countries, meaning that the former arguably could never meet the financing terms offered by the latter. An example of the second case would be a reading of item (k) whereby a developed country could match the (subsidized, but because of SCM Article 27 not prohibited) terms offered by a developing country, and qualify for the protection of the second paragraph of item (k). In this case, special and differential treatment de facto would be eliminated.


      65. Third, it is important to keep in mind the role of the safe haven in the second paragraph of item (k) in the overall context of the prohibition on export subsidies. In particular, we note that export subsidies are prohibited because of their direct trade-distortive effects, and that among the various forms of export subsidies, subsidized export credits arguably have the most immediate and thus greatest potential to distort trade flows. In view of this, we believe that an interpretation of item (k) that would create a very broad exemption from prohibition in respect of export credits would not be consistent with the purpose of that prohibition in the context of the SCM Agreement. In particular, the broad reading would significantly weaken any actual disciplines on export credits and related practices. In effect, this approach would say that practices not explicitly subject to the CIRR but in conformity with other provisions of the Arrangement could have effective interest rates well below CIRR and nevertheless be protected by the second paragraph of item (k). Under this approach as well, matching of derogations no matter how low the interest rate or how generous the other terms also would qualify for that protection, even where the initiator of the derogation was not a WTO Member. In such circumstances, there would be no real disciplines of any kind on export credits. Such a reading of the Arrangement and of item (k) at a minimum would raise the question of why either of these sets of rules was necessary.


      66. Moreover, this latter situation would have the unheard-of result of allowing WTO Members to opt out of WTO rules on the basis of the behaviour of non-WTO Members. An interpretation that would excuse non-conformity with the SCM Agreement on the grounds that such behaviour was necessitated by the behaviour of non-WTO Members, would be unacceptable121, and would represent a radical and unjustifiable departure from all practice under GATT and WTO. In no case to date has any Member's conformity with GATT/WTO rules been defined by the behaviour of non-Members.


      67. Finally, in our view the negotiating history of this provision does not support the broad reading advocated by Canada. In particular, we note that an early (if not the first) Tokyo Round


        image

        120 The Preamble to the WTO Agreement states that “there is need for positive efforts designed to ensure that developing countries, and especially the least-developed among them, secure a share in the growth in international trade commensurate with the needs of their economic development”. Article 27 of the SCM Agreement, special and differential treatment of developing country Members, makes operational this principle in the context of the WTO rules on subsidies.

        121 E.g., if there were no limits on offering equivalent terms and conditions to those offered by a non- WTO Member.

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        proposal concerning this provision referred to the broad term "substantive guidelines", rather than the narrower term "interest rates provisions". (Proposal of the United States dated 6 December 1978.) The proposal did not identify or define this term, however. The reference to "substantive” provisions was not pursued in the negotiations, as the first version to be included in a Chairman's draft text of the Tokyo Round Subsidies Code of what became the second paragraph of item (k) (dated 15 December, 1978, just two weeks after the US proposal), already referred to the narrower term "interest rates provisions".


      68. In sum, we recognize that there is another possible reading of the second paragraph of item

        (k) and of the OECD Arrangement. In our view, however, such a reading generates a result that in addition to being much more difficult to sustain on the basis of a textual analysis, is simply inconsistent with the overarching principles and purposes of the WTO Agreement and the SCM Agreement, including by introducing an imbalance of Members' rights and obligations to the detriment of developing countries.


        1. The sufficiency of the Policy Guideline to ensure that future Canada Account transactions in the regional aircraft sector will qualify for the safe haven of the second paragraph of item (k), and that prohibited export subsidies under Canada Account thereby have ceased


          1. Substance of the Policy Guideline


      69. Having confirmed our approach to determining whether an individual transaction qualifies for the safe haven of the second paragraph of item (k), we turn now to the question at the heart of this dispute in respect of Canada Account, namely whether the Policy Guideline is sufficient to ensure that future Canada Account transactions in the regional aircraft sector will qualify for that safe haven, and that prohibited export subsidies under Canada Account in that sector thereby have ceased. We note as an initial matter the case-by-case nature of the required analysis outlined above. Because of this, there is a limit on the extent to which we can judge definitively today whether a given future Canada Account transaction in the regional aircraft sector will qualify for the safe haven of the second paragraph of item (k).


      70. This being said, however, we recall that in Brazil’s view, “the minimum burden accorded to Canada must be to explain with some precision what ‘comply with the OECD Arrangement’ will mean, so that Members are informed of the terms on which a measure previously judged to be or to provide a prohibited export subsidy will operate in the future”. Given that Canada has stated that the Policy Guideline “ensure[s] that any future Canada Account financing transactions will be in conformity with the interest rate provisions of the [OECD] Arrangement and therefore the provisions referred to in the second paragraph of item (k)”122, in our view it is incumbent upon Canada to provide an explanation not only of what in its view constitutes conformity with the interest rate provisions of the OECD Arrangement, but also how the Policy Guideline ensures such conformity.


      71. We note that Canada has in fact provided certain explanations on these points123. As discussed in the previous sections, the approach to this question that we have adopted differs considerably in substance from the approach advocated by Canada, however. Thus, even if the Policy Guideline contained all of the details that Canada has provided in its arguments concerning “conformity” with the “interest rates provisions” of the Arrangement, we would find on substantive grounds that it would not ensure that future Canada Account transactions would so conform. We note, however, that in fact the Policy Guideline contains no details at all, but simply indicates that transactions that “do not comply” with “the OECD Arrangement” will not be considered to be in the


        image

        122 Oral statement of Canada (Annex 2-3) at para. 67.

        123 Id. at paras. 69-80 and Attachment.

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        national interest. Thus, we find that the Policy Guideline is insufficient to accomplish what Canada says it will accomplish, namely to “ensure that any future Canada Account financing transactions will be in conformity with the interest rate provisions of the [OECD] Arrangement and therefore the provisions referred to in the second paragraph of item (k)”.


      72. In particular, the Policy Guideline is both generally worded and worded in the negative. In both of these aspects it seems to fall considerably short of what might reasonably be considered the minimum sufficient assurance which Canada wishes to provide. Concerning the generality of the wording, as just noted, the Policy Guideline simply refers to compliance with the OECD Arrangement. As has been discussed in detail, however, general conformity with whichever provisions of the Arrangement happen to apply to a given transaction would not appear to be sufficient to qualify for the relatively narrow safe haven in the second paragraph of item (k). Rather, only conformity with the Arrangement’s interest rate provisions, which presupposes that those provisions apply (i.e., that the practice in question is in the form of official financing support at fixed interest rates), along with conformity with the Arrangement’s other disciplines on financing terms, would qualify a practice for the safe haven.


      73. The negative wording of the Policy Guideline raises a similar concern. Specifically, the Guideline provides that any transaction or class of transactions that “does not comply with the OECD Arrangement on Guidelines for Officially Supported Export Credits would not be in the national interest”124, which under the governing legislation means that they cannot be authorized. This is not necessarily the same thing, however, as saying that only transactions that do comply will be considered to be in the national interest (and thereby can be authorized). In particular, this wording leaves open the possibility that transactions that are not subject to the interest rate provisions of the Arrangement (i.e., the CIRR) might be authorized on the grounds that they could not be deemed to be out of compliance, as the relevant provisions would not even apply. As discussed, however, we have found that any such transactions would not qualify for the safe haven.


      74. In response to a question from the Panel concerning the negative wording of the Guideline, Canada argues that the use of the negative is necessary to preserve the discretion of the Minister not to authorize a transaction even if it does comply with the Arrangement, if the transaction is otherwise considered not to be in the national interest. We are not persuaded by this answer, however, as in our view it would be possible to craft affirmatively-worded language that would leave open this discretion125.


      75. We consider that for Canada to reasonably ensure (which it indicates is its intention) that future Canada Account transactions in the regional aircraft sector will qualify for the safe haven of the second paragraph of item (k) and therefore will not be prohibited export subsidies, a great deal more detail than is contained in the Policy Guideline would be needed, in particular, the following:


        1. That all Canada Account transactions in the regional aircraft sector would take the form of either direct credits/financing, refinancing or interest rate support (i.e., official financing support) with repayment terms of two years or more;


        2. That such official financing support would be at fixed interest rates;


          image

          124 Exhibit CDN-13. Emphasis supplied.

          125An example of such language could be along the lines that conformity with the interest rate

          provisions of the Arrangement would be treated by the Minister as a necessary but not necessarily sufficient condition for a Canada Account transaction to be considered to be in the national interest.

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        3. That the net interest rates126 of all such transactions would be at or above the relevant CIRR;


        4. That all applicable provisions of Articles 7-10 and 12-26 of the Arrangement, and of Articles 18-24127 and Articles 27-29(a)-(c) of Annex III would be respected in full;


        5. That any permitted exceptions would be within the limitations specified in the relevant provisions of the Arrangement;


        6. That no derogations would be made, either at Canada’s initiative or via matching.


      76. Given the lack of such detail, therefore, we find that Canada has not accomplished what it states it intends to accomplish through the Policy Guideline, namely to ensure cessation of prohibited export subsidies to the regional aircraft under Canada Account by ensuring that all future Canada Account transactions in the regional aircraft sector will qualify for the safe haven in the second paragraph of item (k).


        1. Form of the Policy Guideline


      77. In conjunction with its substantive criticisms of the Policy Guideline, Brazil appears also to consider its legal form inadequate, as in Brazil’s view it contains only a general hortatory intention to comply with the OECD Arrangement. That is, Brazil argues that “at the implementation stage of dispute settlement proceedings, when a Member has already been found to be in violation of its WTO obligations, … unelaborated policy guidelines offering vague hortatory statements regarding the Member’s intentions do not constitute effective implementation”128. In answer to a Panel question seeking clarification of why Brazil believes the Guideline to be only hortatory, Brazil argues that under Canadian law, Policy Guidelines are not binding and cannot fetter Ministerial discretion. That is, they provide guidance on how decision makers will exercise their discretion but they are not binding and do not require a specific outcome. In Brazil’s view, for the Guideline to become mandatory under Canadian law, at a minimum mandatory language would need to be used, and provision would need to be made for consequences in the event of non-compliance129.


      78. Canada argues that through the Policy Guideline, the Minister for International Trade has adopted the policy that “only those transactions that comply with the OECD Arrangement will be considered to be in the national interest”130. Canada further argues that “by this policy, the Minister informs EDC and the world that he will not authorize any financing transaction under the Canada Account programme unless it complies with the OECD Arrangement”131.


      79. In response to a question from the Panel as to whether Canada considers that it has “undertaken” to respect all of the provisions of the OECD Arrangement and whether Canada considers that any such undertaking is legally binding on Canada, Canada states that Canada has “undertaken” to respect all of the provisions of the OECD Arrangement with respect to financing transactions under the Canada Account, and that through the Policy Guideline the Minister has



        image

        126 In the case of interest rate support, the concept of net interest rates is key, as it is the interest rate

        after the support that must respect the CIRR.

        127 The reference to Article 24 of Annex III in this context is in respect of the requirement that no aid support be provided except in the form of an untied grant. As indicated above (at footnote 102) we make no finding concerning tied aid for humanitarian purposes.

        128 Second submission of Brazil (Annex 1-2) at para. 72.

        129 Brazil’s answer to the Panel’s Canada Account question 1 to Brazil (Annex 1-5).

        130 First submission of Canada (Annex 2-1) at para. 57. (Emphasis in original.)

        131 Id. at para. 58. (Emphasis supplied.)

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        “undertaken” not to authorise any financing transaction under Canada Account that does not comply with the OECD Arrangement. In Canada’s view, for all practical purposes the effect of the Guideline is “almost the same” as that of a legislative instrument, because the exercise of discretion under the Canada Account programme is in the hands of the Minister and it is the Minister who has given the undertaking. Canada states that in addition, officials administering the programme and/or referring financing transactions to the Minister for authorization will act in accordance with the Guideline. In Canada’s view, the Guideline is effective in requiring that all Canada Account financing transactions in the regional aircraft sector will comply with the OECD Arrangement and thereby comply with the interest rates provisions of the Arrangement132. Thus Canada emphasizes that, contrary to Brazil’s argument, the Guideline is “serious and effective” and “not at all hortatory”133.


      80. We recall Brazil’s statement concerning what it believes Canada’s implementation obligation to be in respect of Canada Account, namely that “vague hortatory statements of a Members intentions” are not enough, and that Canada’s “minimum burden … must be to explain with some precision what ‘comply with the OECD Arrangement’ will mean, so that Members are informed of the terms on which a measure previously judged to be or to provide a prohibited export subsidy will operate in the future”134. Thus, Brazil’s arguments concerning the Guideline’s form are closely linked to its arguments concerning the Guideline’s substance. As discussed above, we have found that the Policy Guideline’s substance is not sufficiently precise to accomplish what Canada claims it will accomplish, that is, to ensure the definitive cessation of prohibited export subsidies to the regional aircraft sector under Canada Account. Accordingly, we do not need to, and do not, make a separate finding concerning the sufficiency of the legal form of the Guideline. We do note in principle, however, that whatever form a Member’s implementation of a Panel ruling takes, it should involve sufficient limitation of discretion as to render that implementation legally effective.


        1. Summary


      81. In summary, we have established a process for judging the conformity of a specific, individual transaction with the interest rate provisions of the Arrangement, and thus qualification for the safe haven in item (k). This process is based on the text of the SCM Agreement and the OECD Arrangement, read in the light of the object and purpose of the SCM Agreement. Under this approach, first, it would need to be determined that the transaction was in the form of either direct credits/financing, refinancing or interest rate support with repayment terms of at least two years, at fixed interest rates, and therefore was subject to the Arrangement generally and to the CIRRs (or a sector-specific minimum interest rate, if applicable) specifically. Second, it would need to be determined whether the interest rate was at or above the CIRR (or the applicable sector-specific rate). Third, it would need to be determined which of the other provisions of the Arrangement that operate to reinforce the minimum interest rate rule applied to that particular transaction (a determination that would need to be made on a case-by-case, transaction-specific basis). Fourth, the details of the transaction would need to be examined to determine whether or not it respected all such additional provisions, and did not involve any derogations or matching of derogations. We have applied this process to the Policy Guideline, and found that the Policy Guideline is not sufficient to ensure that future Canada Account transactions in the regional aircraft sector will be in conformity with the interest rate provisions of the OECD Arrangement, and thereby qualify for the safe haven in the second paragraph of item (k) of Annex I of the SCM Agreement.


    image

    132 Canada’s reply to the Panel’s Canada Account question 4 (Annex 2-4).

    133 Canada’s comments on Brazil’s answers to question 1 from the Panel to Brazil (Annex 2-5).

    134 Second submission of Brazil (Annex 1-2) at para. 76. (Emphasis supplied.)

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  6. CONCLUSION


    1. For the reasons set forth in this Report, and on the basis of those facts currently surrounding the application of the restructured TPC programme which are relevant to Canada's implementation of the DSB recommendation on TPC assistance to the regional aircraft industry, we conclude that Canada has implemented the DSB recommendation in respect of TPC assistance to the Canadian regional aircraft industry. However, we conclude that the measures taken by Canada to comply with the DSB recommendation on the application of the Canada Account programme are not sufficient to ensure that future Canada Account transactions in the Canadian regional aircraft sector will be in conformity with the interest rate provisions of the OECD Arrangement, and are therefore not sufficient to ensure that such Canada Account transactions will not be prohibited export subsidies.


    2. Accordingly, we conclude that (1) Canada has implemented the 20 August 1999 DSB recommendation that Canada withdraw TPC assistance to the Canadian regional aircraft industry within 90 days, and that (2) Canada has failed to implement the 20 August 1999 recommendation of the DSB that Canada withdraw the Canada Account assistance to the Canadian regional aircraft industry within 90 days.


    3. Canada requests that we suggest, pursuant to Article 19.1 of the DSU, the establishment of verification procedures in respect of Canada's future arrangements to bring any subsidies in respect of Canada Account financing transactions for regional aircraft into compliance with the SCM Agreement, provided that such procedures are also applicable to Brazil with respect to its implementation of the rulings and recommendations in Brazil- Export Financing Programme for Aircraft. Canada asks only that the Panel endorse the establishment of such verification procedures, and is not proposing an ongoing role for the Panel should a verification process be established. Brazil does not, in principle, oppose the establishment of such verification procedures, but considers that they are not compatible with the spirit, if not the letter, of Article 19 of the DSU. Brazil believes that such procedures are better agreed to by the parties in the course of bilateral consultations.


    4. We note that, by virtue of Article 19.1 of the DSU, the Panel "may suggest ways in which the Member concerned could implement the recommendations". In our view, Article 19.1 envisions suggestions regarding what could be done to a measure to bring it into conformity or, in the case of Article 4.7 of the SCM Agreement, what could be done to "withdraw" a prohibited subsidy. It does not address the issue of surveillance of those steps. For that reason, we decline to make the suggestion requested by Canada.135


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135 This does not mean that the Panel in any way discourages agreements between WTO Members that may facilitate transparency with regard to the implementation of WTO obligations.

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ANNEX 1-1


FIRST SUBMISSION OF BRAZIL


(23 December 1999)


TABLE OF CONTENTS


Page


  1. INTRODUCTION 45

  2. CANADA’S AMENDMENTS TO THE TPC PROGRAMME DO NOT MAKE IT CONSISTENT WITH THE SUBSIDIES AGREEMENT, AND DO NOT CONSTITUTE EFFECTIVE IMPLEMENTATION OF THE DSB’S RECOMMENDATIONS AND RULINGS 45

    1. CANADA SHOULD WITHDRAW THE TPC PROGRAMME ENTIRELY, AS IT RELATES TO THE REGIONAL AIRCRAFT INDUSTRY 45

    2. CANADAS IMPLEMENTATION STRATEGY DOES NOT CHANGE THE STATUS OF

      TPC CONTRIBUTIONS AS SUBSIDIES UNDER ARTICLE 1 OF THE SUBSIDIES AGREEMENT 46

    3. THE AMENDMENTS TO THE TPC PROGRAMME ARE COSMETIC, AND DO NOT CHANGE THE STATUS OF TPC CONTRIBUTIONS TO THE CANADIAN REGIONAL AIRCRAFT INDUSTRY AS DE FACTO EXPORT CONTINGENT UNDER ARTICLE 3 OF THE SUBSIDIES AGREEMENT 47

      1. The Canadian Regional Aircraft Industry Remains Export-Oriented, and the Canadian Government’s Recognition of the Significance of that

        Export-Orientation Is Still Evident 48

      2. Canada’s Removal of the “Near to Market” Terminology from TPC Documents Is Irrelevant 50

      3. The Goals and Objectives of the TPC Programme Remain Intimately Linked to Export 52

      4. Canada Has Failed to Provide Many Documents Necessary to Determine Whether the ‘New’ TPC Programme Remains De Facto

        Contingent on Export 54

  3. CANADA’S AMENDMENTS TO THE CANADA ACCOUNT DO NOT MAKE IT CONSISTENT WITH THE SUBSIDIES AGREEMENT, AND DO NOT CONSTITUTE EFFECTIVE IMPLEMENTATION OF THE DSB’S RECOMMENDATIONS AND RULINGS 55

  4. CONCLUSION 57

    LIST OF EXHIBITS. 58

    1. INTRODUCTION

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      1. In Canada – Measures Affecting the Export of Civilian Aircraft1, subsidies by the Canadian government to the regional aircraft industry via two programmes – Canada Account and Technology Partnerships Canada (“TPC”) – were determined by this Panel and the Appellate Body to constitute prohibited export subsidies under Article 3.1(a) of the Agreement on Subsidies and Countervailing Measures (“Subsidies Agreement”). Pursuant to Article 4.7 of the Subsidies Agreement, the Panel and the Appellate Body identified the subsidies to be withdrawn by Canada: Canada Account debt financing for the export of Canadian regional aircraft, and TPC assistance to the Canadian regional aircraft industry.2


      2. The Panel’s and the Appellate Body’s recommendations and rulings regarding Canadian withdrawal of these subsidies were adopted by the Dispute Settlement Body (“DSB”) on 20 August 1999. On 18 November 1999, the 90-day period for implementation of the DSB’s recommendations and rulings expired. On 19 November 1999, Canada announced measures ostensibly constituting implementation of the DSB’s recommendations and rulings. Brazil has attached Canada’s 19 November 1999 letter to the DSB, and its 19 November 1999 statement to the DSB, as Exhibits Bra-1 and Bra-2, respectively.


      3. The Canadian measures do not adequately implement the DSB’s recommendations and rulings, and the impugned programmes remain inconsistent with the Subsidies Agreement. As a result, and under Article 21.5 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (“DSU”), Brazil requested that the DSB refer the matter to this Panel for resolution.3 Pursuant to that request, the Panel was established on 9 December 1999.


      4. Brazil will demonstrate in this submission that the measures heralded by Canada as effective implementation of its obligations under the Subsidies Agreement are little more than cosmetic, and make no substantive changes to the underlying subsidy programmes. Accordingly, Brazil reiterates its request that the Panel resolve, in these proceedings, the disagreement between Brazil and Canada regarding “the existence or consistency with [the Subsidies Agreement] of measures taken to comply with the recommendations and rulings of the DSB.”4


    2. CANADA’S AMENDMENTS TO THE TPC PROGRAMME DO NOT MAKE IT CONSISTENT WITH THE SUBSIDIES AGREEMENT, AND DO NOT CONSTITUTE EFFECTIVE IMPLEMENTATION OF THE DSB’S RECOMMENDATIONS AND RULINGS


      1. CANADA SHOULD WITHDRAW THE TPC PROGRAMME ENTIRELY, AS IT RELATES TO THE REGIONAL AIRCRAFT INDUSTRY


          1. Canada’s amendments to the TPC programme neither implement the recommendations and rulings of the DSB, nor bring TPC into conformity with the Subsidies Agreement. First, Canada’s actions do not remove TPC contributions from the category of government financial contributions that confer a “benefit” and constitute a “subsidy.” Second, de facto export contingency is still “inferred from the total configuration of the facts constituting and surrounding” any TPC contributions to the Canadian regional aircraft industry.5


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            1 WT/DS70/R (14 April 1999) (Adopted as modified by the Appellate Body, 20 August 1999) [hereinafter “Panel Report”]; WT/DS70/AB/R (2 August 1999) (Adopted 20 August 1999) [hereinafter “Appellate Body Report”].

            2 Panel Report, paras. 10.1 ((b) and (f)), 10.3; Appellate Body Report, para. 221.

            3 Brazilian Letter to DSB, 23 November 1999 (Exhibit Bra-3).

            4 DSU, Article 21.5.

            5 Appellate Body Report, para. 167.

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          2. Particularly with regard to de facto export contingency, the cosmetic changes undertaken by Canada and described below are simply not enough. Were they sufficient, the entire purpose behind the prohibition of de facto export contingency in Article 3.1(a) of the Subsidies Agreement – to prevent circumvention of the provision prohibiting de jure export contingency – would be undermined.6 Withdrawing a de facto export subsidy like TPC, the very design and structure of which betrays its de facto export contingency, cannot adequately be achieved without complete and total abolition of the TPC programme altogether, as it applies to the Canadian regional aircraft industry.


          3. The facts surrounding TPC’s structure, objectives and economic backdrop, and the facts surrounding assistance to the regional aircraft industry, require this result to rid the programme of any remaining “inference” of de facto export contingency. This result, in fact, is also supported by the textual interpretation of the term “subsidy” proposed by Canada itself. Before the Appellate Body, Canada argued that the terms “‘[s]ubsidy’ and ‘subsidy programme’ are used interchangeably” in the Subsidies Agreement, and that TPC was a “subsidy programme” cognizable under the Subsidies Agreement.7 If this is the case, then the DSB’s recommendation, pursuant to Article 4.7 of the SCM Agreement, that Canada “withdraw the subsidy,” further confirms that Canada is required to withdraw TPC, in its entirety, as it relates to the regional aircraft industry.


      2. CANADA’S IMPLEMENTATION STRATEGY DOES NOT CHANGE THE STATUS OF TPC CONTRIBUTIONS AS SUBSIDIES UNDER ARTICLE 1 OF THE SUBSIDIES AGREEMENT


          1. The status of TPC contributions as “subsidies” under Article 1 of the Subsidies Agreement remains unchanged by Canada’s implementation strategy. TPC contributions are still “financial contribution[s] by a government,” under Article 1.1(a)(1) of the Subsidies Agreement. TPC’s Special Operating Agency Framework Document (“TPC Framework Document”) – the document that replaced, with only slight modifications, the “old” TPC Charter8 – states that “TPC’s activities are funded through Parliamentary appropriations.”9 Canada’s announcements regarding implementation also do not suggest that TPC contributions are no longer provided in one of the forms listed in sub- paragraphs (i) through (iv) of Article 1.1(a)(1) to the Subsidies Agreement.


          2. Canada has not, moreover, demonstrated that TPC contributions will no longer confer a “benefit” within the meaning of Article 1.1(b). The “benefit to recipient” standard adopted by the Panel, and affirmed by the Appellate Body, states that a “benefit” exists if a recipient has “received a ‘financial contribution’ on terms more favourable than those available to the recipient in the market.”10 Indeed, the Panel determined that while TPC’s rate of return on its contributions to the regional aircraft industry was projected at a maximum of [ ] per cent,11 a commercial investor would expect a rate of return of 19.91 – 21.92 per cent on a similar investment. TPC contributions, therefore, are still on terms more favourable than those available to the recipient on the market.


          3. TPC’s most recent annual report, moreover, distinguishes TPC from commercial financial lenders: “[U]nlike commercial financial institutions that measure return solely in financial terms, the return to TPC is also measured in terms of a broad range of non-financial benefits to Canada that flow


            image

            6 Appellate Body Report, para. 19.

            7 Submission of Appellant Canada, 13 May 1999, paras. 45-46 (Exhibit Bra-28).

            8 Superceded TPC Charter (in TPC Interim Reference Binder, March 1998) (Exhibit Bra-4).

            9 TPC Special Operating Agency Framework Document, pg. 6 (Exhibit Bra-5) [hereinafter “TPC Framework Document”].

            10 Appellate Body Report, para. 157; Panel Report, para. 9.112.

            11 Panel Report, para. 9.312. See also Canada’s reply to questions from the Panel, dated 21 December 1998, reply to question 33.

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            from successful projects.”12 The annual report also notes that given the failure of some TPC-funded projects, “TPC’s expected repayment may be less than nominal.”13


          4. Under these circumstances, TPC contributions, even after implementation of Canada’s purported compliance measures, continue to confer “benefits” and continue to constitute “subsidies” under Article 1.1(b) of the Subsidies Agreement.


      3. THE AMENDMENTS TO THE TPC PROGRAMME ARE COSMETIC, AND DO NOT CHANGE THE STATUS OF TPC CONTRIBUTIONS TO THE CANADIAN REGIONAL AIRCRAFT INDUSTRY AS DE FACTO EXPORT CONTINGENT UNDER ARTICLE 3 OF THE SUBSIDIES AGREEMENT


        1. Canada’s amendments to TPC are merely cosmetic, and do not constitute effective implementation of its obligations under the Subsidies Agreement. Even after the amendments to TPC:

          the same three industry sectors will receive TPC assistance;


          • the same types of projects will be eligible for TPC funds;


          • the same objectives and fundamental economic realities underlie TPC’s creation and continued existence;


          • the aerospace industry continues to receive far and away the greatest share of TPC contributions and disbursements; and,


          • the Canadian aerospace industry in general, and the regional aircraft industry in particular, remains export-oriented.


        2. The only real difference – apart from the fact that Canada forecasts available TPC funds to increase by 396 per cent between now and 200314 – is that the word “export” is less ubiquitous than it was previously, at least in those documents made publicly available by the Canadian government.


        3. This is not enough. As the Panel is aware, subsidies provided to the Canadian regional aircraft industry under the auspices of the TPC were found to be prohibited export subsidies in fact, rather than in law. A determination that subsidies are “contingent . . . in fact . . . upon export performance,” in the words of the Appellate Body, “must be inferred from the total configuration of the facts constituting and surrounding the granting of the subsidy . . .”15 This is distinct from a determination of de jure export contingency, which is demonstrated “on the basis of the words of the relevant legislation, regulation or other legal instrument.”16


        4. Merely sanitizing publicly-released documents to remove references to the word “export” is not sufficient to bring Canada into compliance with this Panel’s determination of de facto export contingency. According to the Appellate Body, demonstration of de facto export contingency depends not upon uncovering express reference to “export” as a condition for receipt of a subsidy (although such references abound in Canadian materials), but rather depends on the inference of



          image

          12 TPC Annual Report, 1998-1999, pg. 20 (Exhibit Bra-6).

          13 Id. at pg. 21.

          14 TPC Annual Report, 1998-1999, pg. 28 (row titled “Total funds available for new contributions in future years,” comparing 1999-2000 figure with 2002-2003 figure) (Exhibit Bra-6).

          15 Appellate Body Report, para. 167 (emphasis in original).

          16 Id.

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          export contingency drawn from the totality of the facts. This is the entire purpose of the de facto export contingency provision – to prevent Members from circumventing the prohibition of de jure export contingency by merely purging all references to the term “export.”17 It is this question of proof

          • demonstrating express contingency on export versus inferred contingency on export – that defines the very difference between a de jure, as opposed to a de facto, case.


        5. Canada’s implementation measures change only the superficial evidence of export contingency, but make no substantive change whatsoever in the underlying programme. De facto export contingency is still, in the words of the Appellate Body, “inferred from the total configuration of the facts constituting and surrounding” any TPC contributions to the Canadian regional aircraft industry, regardless of Canada’s efforts to purge from its documents express reference to the word “export.”18 TPC’s structure, objectives and economic backdrop require this inference, and thus require a determination that Canada has not complied with the recommendation and ruling of the DSB that Canada “withdraw the subsidy.”


        6. Canada may assert, as it has previously, that Brazil’s claim of Canadian non-compliance rests solely on the fact that TPC subsidies are granted to “enterprises that export,” a fact that, while certainly relevant to the Panel’s review,19 cannot (under footnote 4 to the Subsidies Agreement) form the entire basis of a determination of de facto export contingency. In the sections to follow, however, Brazil will describe a series of facts both related to and apart from the export orientation of the Canadian regional aircraft industry. These facts, together, lead to the very same inference derived by the Panel in its original decision: TPC contributions to the Canadian regional aircraft industries remain de facto contingent upon and in fact tied to export performance.


1. The Canadian Regional Aircraft Industry Remains Export-Oriented, and the Canadian Government’s Recognition of the Significance of that Export-Orientation Is Still Evident


  1. An expert report included with Brazil’s submissions to the Panel, and the Panel itself, noted the export orientation or the export propensity of the Canadian regional aircraft industry.20 This fact remains unchanged. Brazil has attached, as Exhibit Bra-7, a series of tables and supporting documentation updating the results of this expert report. This update demonstrates that during the period from 23 October 1998 (the end date for the earlier expert report) through 15 December 1999, every sale of Canadian regional aircraft – without exception – was for export.


  2. Moreover, the appeal of this export orientation to the Canadian government has not been eliminated by Canada’s amendments to TPC:

  3. Like any other “fact” relevant under footnote 4 to the Subsidies Agreement, the Canadian government’s acknowledgement of the overwhelming export orientation of the industry, and its admission that this factor drives the government’s commitment to fund that industry, can serve in part as the basis for an inference that, without that export orientation, the abundant funding sources of TPC would not be available to the industry.


  4. The crucial role the regional aircraft industry specifically, and the aerospace industry generally, play in Canada is translated into the funding priorities of Canadian subsidy programmes: as before the amendments announced by the Canadian government on 19 November, TPC continues to provide contributions to the same three categories of industry as before (Aerospace and Defence,


    image

    23 Industry Canada News Release, 17 December 1996 (emphasis added) (Exhibit Bra-10).

    24 “Think Canada, Think Bottom Line, Think Aerospace Industry, Think Investment,” October 1999, pgs. 3, 33 (emphasis added) (Exhibit Bra-11).

    25 Id. at pg. 20.

    26 Industry Canada, “Results of the 1998/99 Survey of the Canadian Aerospace and Defence Industry,” 29 November 1999 (emphasis added) (Exhibit Bra-12).

    27 “Canadian Aerospace Suppliers Base Strategy for Change,” 25 June 1999, pgs. 1, 16-17 (relevant excerpt included at Exhibit Bra-13).

    28 Id. at pg. 17(emphasis added).

    29 Aerospace Industries Association of Canada Annual Report, 1999, pg. 4 (Exhibit Bra-14).

    30 Id. at pg. 13 (emphasis added).

    31 Id. at pg. 12.

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    Enabling Technologies, and Environmental Technologies),32 and continues, as before, to be captive to the regional aircraft and the aerospace industry. Since inception of the programme, 65 per cent of TPC contributions have gone to the aerospace industry;33 in the period 1998-1999, 76 per cent of TPC disbursements went to that industry.34 The economic significance of this bias will become increasingly relevant to the industry in the coming years, since available TPC funds are slated to increase by 396 per cent between now and 2003.35


  5. Nothing, in short, has changed – neither the industries eligible for TPC contributions, nor the recognized export-orientation of the industry that enjoys the lion’s share of those contributions, nor the significance of that industry’s export orientation to Canadian government officials, nor that industry’s prospects for continued dominance of TPC’s treasury. None of these factors is destined for change.


  6. When the Canadian government grants TPC funds to the Canadian regional aircraft industry – today as in the past – it is eminently aware, as its statements reveal, of that industry’s overwhelming export-orientation. To keep it that way, the Canadian aerospace industry receives the vast majority of the rapidly increasing pool of TPC funds available. These facts lead directly to the unavoidable conclusion that, without exceptional export performance, the Canadian regional aircraft industry would not receive TPC subsidies. The inescapable inference is, therefore, that continued receipt of those subsidies is in fact tied to export performance.


2. Canada’s Removal of the “Near to Market” Terminology from TPC Documents Is Irrelevant


  1. As part of its implementation strategy, Canada announced that it will now “focus on promoting technological innovation and enhancing the technological capability of Canadian industry, rather than commercialization,” and that eligible activities will now be for “industrial research and pre-competitive development.”36 Canada then goes on to specify three categories of TPC “Eligible Activities” – “industrial research,” “pre-competitive development,” and “studies.”37 Brazil makes the following three observations regarding this aspect of Canada’s implementation strategy.


  2. First, TPC’s “new” emphasis on “technological innovation” rather than “commercialization” is presumably in response to the Panel’s identification of TPC’s focus on “‘near market R & D’” projects as one factor supporting a finding of de facto export contingency.38 This “new” emphasis, however, does not immunize TPC from characterization as a prohibited export subsidy. The Appellate Body noted that “[i]t is. . . no ‘less . . . possible’ that the facts, taken together, may demonstrate that a pre-production subsidy for research and development is ‘contingent . . . in fact . . . upon . . . export performance.’”39 Removing “commercialization” or the “near market R & D” focus from TPC’s focus, therefore, and shifting instead to a focus on “industrial research and pre-



    image

    32 See Framework Document, pgs. 5-6 (Exhibit Bra-5). See also TPC Terms and Conditions, pg. 1 (Exhibit Bra-15); TPC Investment Application Guide, pgs. 3-4 (Exhibit Bra-16).

    33 TPC Current Statistics, 6 December 1999 (Exhibit Bra-17).

    34 TPC Annual Report, 1998-1999, pg. 27 (Exhibit Bra-6).

    35 Id. at pg. 28 (row titled “Total funds available for new contributions in future years,” comparing 1999-2000 figure with 2002-2003 figure).

    36 Industry Canada News Release, 18 November 1999, pg. 3 (Exhibit Bra-18).

    37 TPC Terms and Conditions, pg. 2 (Exhibit Bra-15); TPC Investment Application Guide, pg. 4 (Exhibit Bra-16).

    38 Panel Report, paras. 9.339, 9.340, 9.341.

    39 Appellate Body Report, para. 174.

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    competitive development,”40 would not make it any less possible to infer from the facts that TPC constitutes a prohibited export subsidy.41


  3. Second, and to the extent that this factor is still relevant as one among many contributing to an inference of de facto export contingency,42 Canada’s amendments to TPC do not in fact rid it of considerations regarding “commercialization.” TPC’s most recent “Current Statistics,” published on the TPC website on 6 December 1999, state that “TPC contracted projects, if successful, are forecasted to generate sales of more than $89.6 billion . . .”43 TPC still considers that its subsidies are to be used to “generate sales” – a virtual synonym for “commercialization.”


  4. Moreover, two of the categories of TPC “eligible activities” betray an interest in projects linked to actual products. Under the category of “Industrial research,” TPC funds projects “aimed at the discovery of new knowledge, with the objective that such knowledge may be useful in developing new products, processes or services, or in bringing about a significant improvement to existing products, processes or services.”44 Eligible projects in the category of “Pre-competitive development” specifically include the “translation of industrial research findings into a plan, blueprint or design for new, modified or improved products, processes or services.”45


  5. Finally, immediately after noting that “Canada’s aerospace and defence industries supply regional and business jet and turboprop aircraft, commercial helicopters, propulsion and major avionics systems, and electronics parts and components, and aviation support systems such as air traffic control systems,” TPC’s website states that “[i]nvestments by Technology Partnerships Canada help this vital part of the Canadian economy maintain and expand its position of technological excellence and so contribute to the country’s well-being.”46 The industry’s successful commercialization of broad product lines, and TPC’s role in “helping” the industry “maintain and expand” its position through commercialization of those products, are two factors that do not escape the Canadian government.


  6. Third, the three categories of TPC “eligible activities” are remarkably similar pre- and post- implementation. Brazil has attached as Exhibit Bra-20 an excerpt from the TPC website, dated 21 January 1998, describing certain of the prerequisites for TPC assistance:


    The project activities must include one of the following: development or demonstration of a product, process and/or technology; certain preproduction activities; technical or marketing feasibility studies.47


  7. These descriptions exhibit considerable similarity to the “new” TPC categories of eligible activities: what was previously “development or demonstration” or “preproduction activities,” for example, is now “pre-competitive development”; what was then the category of “feasibility studies” is now simply “studies.”48 Nothing of substance has changed; if funding for the development of commercial products was available in the “old” TPC, it is similarly available in the “new” TPC, and as it did before contributes to an inference of de facto export contingency.


image

40 Industry Canada News Release, 18 November 1999, pg. 3 (Exhibit Bra-18).

41 Appellate Body Report, para. 167.

42 Id.

43 TPC Current Statistics, 6 December 1999 (emphasis added) (Exhibit Bra-17).

44 TPC Terms and Conditions, pg. 2 (emphasis added) (Exhibit Bra-15); TPC Investment Application Guide, pg. 4 (emphasis added) (Exhibit Bra-16).

45 Id. (emphasis added).

46 TPC website, “Aerospace and Defence,” pg. 1 (Exhibit Bra-19).

47 TPC website, “Project Identification and Description,” 21 January 1998 (Exhibit Bra-20).

48 Compare Id. with TPC Terms and Conditions, pg. 2 (Exhibit Bra-15).

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3. The Goals and Objectives of the TPC Programme Remain Intimately Linked to Export


  1. Canada’s materials regarding the “new” TPC are replete with references to the programme’s objectives, most commonly phrased as “increasing economic growth, creating jobs, and supporting sustainable development.”49 These same objectives are at times characterized as the “new” TPC’s “programme objectives,”50 but are repeated elsewhere in the TPC materials as part of the programme’s mandate,51 selection criteria,52 assessment criteria,53 or examples of strategic benefits to be established by an applicant to secure TPC funds.54


  2. These same objectives were also central to the “old” TPC. TPC’s Charter and its Business Plan formerly stated that the programme’s mandate was “to stimulate economic growth and create jobs in Canada,” and that two of its objectives were “to increase growth and wealth creation.”55 The “Terms and Conditions” document for the “old” TPC stated that the programme was to “contribute to achieving Canada’s objectives of: (a) increasing economic growth and wealth creation; (b) supporting sustainable development,” etc.56 Similarly, the closing paragraph of Industry Canada News Releases announcing contributions under the “old” TPC included a statement that TPC “is a central element of the government’s agenda to promote technological development as a catalyst for economic growth and job creation, through increased productivity and competitiveness.”57


  3. More importantly, achieving these objectives – increasing or creating economic growth, wealth and jobs – has been expressly linked, by the Canadian government itself, as well as by other organizations, to the export performance of Canadian industry:


    image

    49 Industry Canada News Release, 18 November 1999, pg. 3 (Exhibit Bra-18).

    50 TPC Framework Document, pg. 4 (Under section titled “Program Objectives,” Canada states that

    “[c]ontributions under TPC will be administered in a way that will contribute to: increasing economic growth and creating jobs and wealth; supporting sustainable development . . .” etc.) (Exhibit Bra-5).

    51 Id. at pg. 4 (Under section titled “Mandate,” Canada states that “TPC is a technology investment fund established to contribute to the achievement of Canada’s objectives such as increasing economic growth, jobs and wealth creation, and supporting sustainable development.”).

    52 TPC Investment Application Guide, pg. 6 (Under section titled “What are the criteria that TPC uses

    for selecting investments,” Canada notes that investment outlines and proposals are assessed on the extent to which they demonstrate, among other things, “that the project contributes to the strategic objectives of the government, including technological and net economic benefits to Canada (increasing economic growth, creating jobs and wealth, and supporting sustainable development).”) (Exhibit Bra-16).

    53 TPC Terms and Conditions, pg. 2 (Under section titled “Assessment Criteria,” Canada states that applications for TPC funds will be assessed according to the extent to which they demonstrate, among other

    things, “that the project contributes to the strategic objectives of the government, including technological and net economic benefits to Canada.”) (Exhibit Bra-15).

    54 TPC Investment Application Guide, pg. 8 (Under section titled “What is the format for preparing a TPC investment outline,” Canada states that certain information regarding “strategic benefit” must be demonstrated, including “[p]otential economic benefit to Canada (for example, jobs created or maintained,

    economic growth, wealth creation, sector or supplier development, contribution to sustainable development, new corporate mandates, leveraged investments, strategic alliances, etc.).” (Exhibit Bra-16).

    55 Superceded TPC Charter (in TPC Interim Reference Binder, March 1998), pg. 3 (Exhibit Bra-4); TPC Business Plan, 1996-1997, pg. iii (Exhibit Bra-21).

    56 Superceded TPC Terms and Conditions (in TPC Interim Reference Binder, March 1998), pg. 1 (Exhibit Bra-22).

    57 See, e.g., Industry Canada News Release, 10 January 1997 (Exhibit Bra-9); Industry Canada News Release, 17 December 1996 (Exhibit Bra-10).

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  4. The significance of the link between export performance and growth, wealth or jobs has not changed with Canada’s amendments to TPC. When TPC makes the increase or creation of economic growth, wealth and jobs part of its selection criteria,65 its assessment criteria,66 or a “strategic benefit” to be demonstrated by an applicant to secure a TPC subsidy,67 the Panel should infer that it is implicitly conditioning receipt of that subsidy on export performance. Without committing to export performance, an applicant cannot meet TPC’s selection or assessment criteria, cannot demonstrate that it will provide the requisite strategic benefits imposed by the TPC programme, and will not receive a TPC subsidy.


4. Canada Has Failed to Provide Many Documents Necessary to Determine Whether the ‘New’ TPC Programme Remains De Facto Contingent on Export


  1. Although Canada has made certain documents regarding the “new” TPC publicly available, many others have not been provided. The Panel’s decision regarding TPC’s de facto export contingency relied, for example, upon the TPC Business Plan, the TPC Aerospace and Defence Generic Model Agreement, TPC Project Summary Forms, and the two-volume, 350-page TPC Interim Reference Binder.68 “Business confidential” documents provided by Canada with its replies to questions from the Panel in the original proceedings, moreover, were also relevant to a review of the question of de facto export contingency. These documents include Programme Forecasts and Progress Reports.69


  2. Yet, none of these documents has been made publicly available with regard to the “new” TPC. Since Canada has not produced replacements for these documents, the Panel should consider that the original documents still apply, and still, as before, constitute facts demonstrating that TPC subsidies are contingent in fact on export performance, as detailed in paragraph 9.340 of the Panel Report.


  3. The “new” TPC Framework Document, moreover, refers to several new documents that Canada has not provided, including the Treasury Board’s “repayable contributions policy,”70 TPC’s “Evaluation Framework,”71 any “specialized reports” developed for the TPC Advisory Board,72 “case


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    64 Conference Board of Canada, Performance and Potential 1999, “Working Smarter, Not Harder,” pg.

    107 (footnote omitted) (emphasis added) (Exhibit Bra-27).

    65 TPC Investment Application Guide, pg. 6 (Section titled “What are the criteria that TPC uses for selecting investments”) (Exhibit Bra-16).

    66 TPC Terms and Conditions, pg. 2 (Section titled “Assessment Criteria”) (Exhibit Bra-15).

    67 TPC Investment Application Guide, pg. 8 (Section titled “What is the format for preparing a TPC investment outline”) (Exhibit Bra-16).

    68 Panel Report, para. 9.340.

    69 These documents were included behind “BCI Tab 1” and “BCI Tab 2,” respectively, to Canada’s 21 December 1998 replies to questions from the Panel.

    70 TPC Framework Document, pg. 7 (Exhibit Bra-5). The press release announcing Canada’s implementation strategy suggests that TPC’s repayment policies have in fact been changed. Industry Canada News Release, 18 November 1999, pg. 4 (“Repayments will no longer be primarily based on royalties tied to product sales but will take different forms depending on the project . . .”) (Exhibit Bra-18).

    71 TPC Framework Document, pg. 10 (Exhibit Bra-5).

    72 Id.

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    evaluation” forms,73 the “Memorandum of Understanding” between TPC and the Industry Sector,74 “records of decisions” issued by the Secretariat of the Programmes and Services Board,75 minutes of Interdepartmental Advisory Committee meetings and TPC Management Board meetings,76 and “sector strategies, technical assessments, priorities and technology roadmaps” developed by the Sector Branches.77


  4. Canada cannot seriously claim compliance with the DSB’s recommendations and rulings on the basis of amendments made to TPC – a programme judged to be a prohibited export subsidy – without actually demonstrating that those changes were made. As demonstrated in paragraph 9.340 of the Panel Report, the devil is indeed in the details of the TPC programme. Canada’s failure to provide the documents listed in the preceding paragraph – which presumably detail its efforts at compliance – should lead the Panel to presume that the documents do not in fact demonstrate compliance.78


    1. CANADA’S AMENDMENTS TO THE CANADA ACCOUNT DO NOT MAKE IT CONSISTENT WITH THE SUBSIDIES AGREEMENT, AND DO NOT CONSTITUTE EFFECTIVE IMPLEMENTATION OF THE DSB’S RECOMMENDATIONS AND RULINGS


  5. Although Canada’s 19 November 1999 statement to the DSB first claims that “there will be no deliveries of regional aircraft after 18 November 1999 benefitting from such Canada Account financing,” it goes on to say that “any delivery of regional aircraft after 18 November 1999 which benefits from Canada Account financing will comply with the [OECD] Arrangement.”79 Brazil presumes, therefore, that Canada intends to retain the discretion to support sales or deliveries of Canadian regional aircraft with Canada Account financing.


  6. Canada Account financing is still, under Article 3.1(a), contingent in law on export. Canada Account debt financing “takes the form of export credits and, in Canada’s own words, was granted ‘for export of goods’.”80 Canada Account export credits are issued, moreover, “‘for the purpose of supporting and developing, directly or indirectly, Canada’s export trade.’”81


  7. Confirming the Panel’s conclusion of de jure export contingency, the President of the Export Development Corporation, which administers the Canada Account, has stated that “Canada Account funds are used to support export transactions which the federal government deems to be in the national interest but which, for reasons of size or risk, the Export Development Corporation (EDC) cannot support through regular export credits.”82


  8. The materials submitted by Canada to the DSB purportedly demonstrating implementation do not speak to, much less alter, Canada Account’s de jure export contingency. Brazil submits,



    image

    73 Id. at pg. 18, 20.

    74 Id. at pg. 18.

    75 Id. at pg. 19.

    76 Id.

    77 Id. at pg. 20.

    78 The Panel may, of course, request these documents from Canada. Any refusal to provide these documents should lead to the inference and presumption that the documents reveal something short of Canadian

    compliance with the recommendations and rulings of the DSB regarding TPC.

    79 Exhibit Bra-2, pg. 2.

    80 Panel Report, para. 9.230.

    81 Id.

    82 Export Development Corporation, Chairman and President’s Message (emphasis added) (Exhibit Bra-29). See also Panel Report, para. 6.149.

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    therefore, that the Panel should maintain its previous ruling that Canada Account financing is de jure

    contingent on export, within the meaning of Article 3.1(a) of the Subsidies Agreement.


  9. Regarding the status of Canada Account financing as a “subsidy” under Article 1 of the Subsidies Agreement, Canada’s comments do not suggest that its implementation strategy removes such financing from the category of “financial contribution[s] by a government,” under Article 1.1(a)(1) of the Subsidies Agreement. The press release announcing Canada’s implementation, for example, states that “the collection risk” for Canada Account transactions “ultimately rests with the Government of Canada.”83 Similarly, Canada’s announcements do not suggest that Canada Account financing is no longer provided in one of the forms listed in sub-paragraphs (i) through (iv) of Article 1.1(a)(1) to the Subsidies Agreement.


  10. Canada’s statements outlining its implementation strategy do not, moreover, directly address the Panel’s finding that Canada Account financing could be at rates “below the market,”84 and thus on terms constituting a “benefit” under Article 1.1(b) of the Subsidies Agreement, i.e., terms “more advantageous for the recipient than those available on the market.”85


  11. To implement the DSB’s recommendations and rulings, Canada simply states that under a “policy guideline” issued by the Minister for International Trade, no Canada Account transactions will be authorized unless they “comply with the OECD Arrangement on Guidelines for Officially Supported Export Credits.”86


  12. Canada appears to suggest that even if Canada Account financing otherwise constitutes a prohibited export subsidy, it is exempted by the so-called “safe harbor” in item (k) of the Illustrative List of Export Subsidies, included as Annex 1 to the Subsidies Agreement. This rather cryptic suggestion, however, is not sufficient to satisfy Canada’s significant burden of establishing entitlement to what is an affirmative defence. Had Canada opted for this defence in the original Panel proceedings, it would have carried the significant burden of proving entitlement to it; leaving reliance on this defence to the implementation phase of dispute settlement proceedings does not change Canada’s burden. Mere assertion of the defence, without more, is not enough.


  13. For example, the OECD Arrangement on Guidelines for Officially Supported Export Credits

  14. For these reasons, Canada has not brought itself into compliance with either the recommendations and rulings of the DSB, or the terms of the Subsidies Agreement, with regard to the Canada Account.


    image


    Bra-1).

    83 Industry Canada News Release, 18 November 1999, pg. 2 (Exhibit Bra-18).

    84 Panel Report, para. 9.224.

    85 Panel Report, para. 9.222.

    86 Canadian Statement to the DSB, pg. 2 (Exhibit Bra-2). See also Canadian Letter to the DSB (Exhibit


    87 Id. Should the Panel request this document from Canada, any refusal to provide it should lead to the

    inference and presumption that the document would reveal something short of Canadian compliance with the recommendations and rulings of the DSB regarding the Canada Account.

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    1. CONCLUSION


  15. Canada has not withdrawn the subsidies determined by the Panel and the Appellate Body to be prohibited export subsidies. The amendments proposed to TPC are inadequate to implement the recommendations and rulings of the DSB, and are not otherwise in compliance with Canada’s obligations under the Subsidies Agreement. The cosmetic changes included in Canada’s implementation strategy consist of little more than an effort to strike the word “export” from TPC documents. This is not sufficient to cure a programme rendered de facto export contingent, since de facto export contingency “must be inferred from the total configuration of the facts constituting and surrounding the granting of the subsidy . . .”88 Under the “facts constituting and surrounding” TPC subsidies, implementation of the DSB’s recommendations and rulings and compliance with the Subsidies Agreement requires nothing short of complete and total withdrawal of TPC, as it relates to the regional aircraft industry.


  16. With regard to the Canada Account, Canada’s cryptic statement that debt financing under the programme will in future conform to the terms of the OECD Arrangement is not sufficient to discharge its burden of proving what amounts to an appeal to an affirmative defence.


  17. Accordingly, Brazil requests that the Panel determine that Canada has not implemented the recommendations and rulings of the DSB or otherwise complied with its obligations under the Subsidies Agreement.


    image

    88 Appellate Body Report, para. 167 (emphasis in original).

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    LIST OF EXHIBITS


    Canadian Letter to DSB, 19 November 1999 Exhibit Bra-1


    Canadian Statement to DSB, 19 November 1999 Exhibit Bra-2


    Brazilian Letter to DSB, 23 November 1999 Exhibit Bra-3


    Superceded TPC Charter (in TPC Interim Reference Binder, March 1998)

    Exhibit Bra-4


    TPC Special Operating Agency Framework Document Exhibit Bra-5 TPC Annual Report, 1998-1999 Exhibit Bra-6

    Updated Expert Report Exhibit Bra-7


    TPC Annual Report, 1996-1997 Exhibit Bra-8


    Industry Canada News Release, 10 January 1997 Exhibit Bra-9 Industry Canada News Release, 17 December 1996 Exhibit Bra-10

    “Think Canada, Think Bottom Line, Think Aerospace Industry, Think Investment,” October 1999

    Exhibit Bra-11


    Industry Canada, “Results of the 1998/99 Survey of the Canadian Aerospace and Defence Industry,” 29 November 1999

    Exhibit Bra-12


    “Canadian Aerospace Suppliers Base Strategy for Change,” 25 June 1999

    Exhibit Bra-13


    Aerospace Industries Association of Canada Annual Report, 1999

    Exhibit Bra-14


    TPC Terms and Conditions Exhibit Bra-15


    TPC Investment Application Guide Exhibit Bra-16


    TPC Current Statistics, 6 December 1999 Exhibit Bra-17 Industry Canada News Release, 18 November 1999 Exhibit Bra-18 TPC website, “Aerospace and Defence” Exhibit Bra-19

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    TPC website, “Project Identification and Description,” 21 January 1998

    Exhibit Bra-20


    TPC Business Plan, 1996-1997 Exhibit Bra-21


    Superceded TPC Terms and Conditions (in TPC Interim Reference Binder, March 1998)

    Exhibit Bra-22


    Industry Canada, CIBS Overview, “Executive Summary” Exhibit Bra-23


    Industry Canada, CIBS Strategic Overview, “International Business Development Priorities”

    Exhibit Bra-24


    Industry Canada, CIBS Geographic Overview Exhibit Bra-25


    Industry Canada, CIBS Aerospace and Defence Exhibit Bra-26


    Conference Board of Canada, Performance and Potential 1999, “Working Smarter, Not Harder”

    Exhibit Bra-27


    Submission of Appellant Canada, 13 May 1999, paras. 45-46 Exhibit Bra-28


    Export Development Corporation, Chairman and President’s Message

    Exhibit Bra-29

    WT/DS70/RW

    Page 60


    ANNEX 1-2


    REBUTTAL SUBMISSION OF BRAZIL


    (17 January 2000)


    TABLE OF CONTENTS


    Page


    1. INTRODUCTION 62

    2. CANADA’S AMENDMENTS TO THE TPC PROGRAMME DO NOT MAKE IT CONSISTENT WITH THE SUBSIDIES AGREEMENT, AND DO NOT CONSTITUTE EFFECTIVE IMPLEMENTATION OF THE DSB’S RECOMMENDATIONS AND RULINGS 62

      1. TPC CONTRIBUTIONS STILL CONSTITUTE SUBSIDIES UNDER ARTICLE 1 OF THE

        SUBSIDIES AGREEMENT 62

      2. DETERMINING WHETHER CANADA HAS IMPLEMENTED THE RECOMMENDATIONS AND RULINGS OF THE DSB DOES NOT REQUIRE EVIDENCE OF TPC CONTRIBUTIONS SUBSEQUENT TO 18 NOVEMBER 1999 62

        1. Canada Mischaracterizes the Appellate Body’s Test for De Facto

          Export Contingency 63

        2. Canada’s Argument Reduces Article 21.5 to ‘Inutility’ 63

      3. COSMETIC CHANGES DO NOT CURE TPC OF DE FACTO EXPORT CONTINGENCY...64

        1. TPC Remains Focused on the Aerospace Industry and the Regional Aircraft Industry, the Export Orientation of Which Has Been Singled

          out by the Canadian Government As Significant 66

        2. Removing the ‘Near to Market’ Terminology from TPC Documents is Irrelevant 69

        3. To Qualify for TPC Funds, Applicants Must Demonstrate a Contribution to Goa ls and Objectives Requiring a Commitment to

          Export Performance 69

          1. Export Contingency Need Not Be the Sole Condition for Receipt of a Subsidy 71

          2. Brazil Has Relied on Valid Evidence 71

        4. References to the Term ‘Export’ Have Not Been Removed from All

          TPC Documents 73

    3. CANADA’S AMENDMENTS TO THE CANADA ACCOUNT DO NOT MAKE IT CONSISTENT WITH THE SUBSIDIES AGREEMENT, AND DO NOT CONSTITUTE EFFECTIVE IMPLEMENTATION OF THE DSB’S RECOMMENDATIONS AND RULINGS 75

      1. DETERMINING WHETHER CANADA HAS IMPLEMENTED THE RECOMMENDATIONS AND RULINGS OF THE DSB DOES NOT REQUIRE EVIDENCE OF CANADA ACCOUNT FINANCING SUBSEQUENT TO 18 NOVEMBER 1999 75

      2. CANADAS CLAIM THAT THE RECOMMENDATIONS AND RULINGS OF THE DSB REQUIRED NO IMPLEMENTATION BY CANADA IS IN ERROR 76

    4. CANADA’S PROPOSAL REGARDING THE ESTABLISHMENT OF ‘VERIFICATION PROCEDURES’ 78

      WT/DS70/RW

      Page 61

    5. CONCLUSION 78

LIST OF EXHIBITS. 80

WT/DS70/RW

Page 62


  1. INTRODUCTION


    1. In its first submission1 Canada claims to have adopted measures implementing the recommendations and rulings of the Dispute Settlement Body (“DSB”) regarding the withdrawal of subsidies provided by the Canadian government to the regional aircraft industry via two programmes

      • Technology Partnerships Canada (“TPC”) and Canada Account. In Canada – Measures Affecting the Export of Civilian Aircraft2 these subsidies were determined to constitute prohibited export subsidies under Article 3.1(a) of the Agreement on Subsidies and Countervailing Measures (“Subsidies Agreement”), and were accordingly ordered withdrawn, pursuant to Article 4.7 of that Agreement.


    2. Brazil reiterates its claim that the Canadian measures do not adequately implement the DSB’s recommendations and rulings, and that the impugned programmes remain inconsistent with the Subsidies Agreement. In this submission, Brazil addresses arguments levied by Canada in its first submission, and demonstrates that Canada’s implementation measures are insufficient to comply with the recommendations and rulings of the DSB that it “withdraw ” TPC and Canada Account subsidies to the regional aircraft industry.


  2. CANADA’S AMENDMENTS TO THE TPC PROGRAMME DO NOT MAKE IT CONSISTENT WITH THE SUBSIDIES AGREEMENT, AND DO NOT CONSTITUTE EFFECTIVE IMPLEMENTATION OF THE DSB’S RECOMMENDATIONS AND RULINGS


    1. TPC CONTRIBUTIONS STILL CONSTITUTE SUBSIDIES UNDER ARTICLE 1 OF THE SUBSIDIES AGREEMENT


      1. Without repeating the arguments included in paragraphs 8-11 of its first submission, Brazil simply reiterates that the legal status of TPC contributions as “subsidies” under Article 1 of the Subsidies Agreement remains unchanged under the “new” TPC.


      2. Canada argues that the question whether TPC contributions will continue to constitute subsidies is “not the issue in this case.3 With this statement, Canada effectively concedes that should the Panel determine that contributions under the “new” TPC will continue to be contingent in fact on export performance under Article 3 of the Subsidies Agreement, it should also presume that those contributions will continue to constitute “subsidies” under Article 1 of the Agreement.


    2. DETERMINING WHETHER CANADA HAS IMPLEMENTED THE RECOMMENDATIONS AND RULINGS OF THE DSB DOES NOT REQUIRE EVIDENCE OF TPC CONTRIBUTIONS SUBSEQUENT TO 18 NOVEMBER 1999


      1. In its first submission, Canada contends that in the absence of new “financial contributions” to the regional aircraft industry made subsequent to 18 November 1999 under the “restructured” TPC, this Panel cannot judge whether Canada has effectively implemented the recommendations and rulings of the DSB. Specifically, Canada claims that “in the absence of any such financial contribution and a full consideration of those facts, there can be no grounds to support Brazil’s allegations of de facto export contingency under the restructured TPC programme.4


        image

        1 First Article 21.5 Submission of Canada, dated 10 January 2000 [“Canadian First Submission”].

        2 WT/DS70/R (14 April 1999) (Adopted as modified by the Appellate Body, 20 August 1999) [ “Panel Report”]; WT/DS70/AB/R (2 August 1999) (Adopted 20 August 1999) [ “Appellate Body Report”].

        3 Canadian First Submission, para. 39.

        4 Id. at para. 45.

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        Page 63


      2. Canada appears to draw this conclusion from the first element of the Appellate Body’s test for de facto export contingency, which Canada characterizes as an inquiry into whether “there is granting of assistance by Canada.5 Since no new assistance has been granted under the “new” TPC, Canada asserts that the Panel cannot conclude that Canada has failed to implement the recommendations and rulings of the DSB. Canada’s assertion is in error, for two reasons.


      1. Canada Mischaracterizes the Appellate Body’s Test for De Facto Export Contingency


      1. First, Canada mischaracterizes and takes wholly out of context the first element of the Appellate Body’s test. What the Appellate Body actually said is that


        the initial inquiry must be on whether the granting authority imposed a condition based on export performance in providing the subsidy. In the words of Article 3.2 and footnote 4, the prohibition is on the “granting of a subsidy”, and not on receiving it. The treaty obligation is imposed on the granting Member, and not on the recipient. Consequently, we do not agree with Canada that an analysis of “contingent

        . . . in fact . . . upon export performance” should focus on the reasonable knowledge of the recipient.6


        Brazil has retained the original italicized emphasis employed by the Appellate Body to demonstrate that the Appellate Body’s point with this first element was to show the error of Canada’s assertion that an interpreter should look to a subsidy recipient’s knowledge to determine whether the recipient, rather than the grantor, understood the subsidy to be conditioned in fact on export performance.


      2. To interpret this first element of the Appellate Body’s test otherwise, as Canada suggests the Panel should, would be to render redundant Article 1.1 of the Subsidies Agreement – which already requires demonstration of a “financial contribution by a government.” In Brazil – Export Financing Programme for Aircraft, the Appellate Body held that the Panel erred in importing the notion of a “benefit,” from Article 1.1(b) of the Subsidies Agreement, into the definition of a “financial contribution” in Article 1.1(a); it termed these two sub-parts of the same Article “two separate legal elements.7 Since there was no textual basis to read one provision (regarding “benefit”) into another provision (regarding “financial contribution”), the Appellate Body concluded that it was not permissible to do so.


      3. Similarly, there is no textual basis to import the notion of a “financial contribution by a government,” from Article 1 of the Subsidies Agreement, into the legal test of “contingen[cy] . . . in fact . . . upon export performance,” from Article 3 of the Agreement. Nor, when read in context, does the Appellate Body’s exposition of the first element of demonstrating de facto export contingency create such a requirement.


      2. Canada’s Argument Reduces Article 21.5 to ‘Inutility’


      1. Second, Canada’s claim confuses a de novo challenge to a financial contribution not yet judged to be a prohibited export subsidy, with a challenge to those measures allegedly remedying something already judged to be a prohibited export subsidy. If accepted, Canada’s claim would make measures allegedly constituting effective implementation impervious to effective challenge under Article 21.5 of the Understanding on Rules and Procedures Governing the Settlement of Disputes



        image

        5 Id. at para. 38.

        6 Appellate Body Report, para. 170 (emphasis in original).

        7 WT/DS46/AB/R (2 August 1999) (Adopted 20 August 1999) para. 157.

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        Page 64


        (“DSU”). This is because a Member determined by a Panel to have adopted measures constituting subsidies contingent in fact on export could, under Canada’s theory, escape effective Article 21.5 scrutiny by merely refraining from applying any remedial measures until the 20-day time period to seek compensation has passed.8


      2. The opportunity to manipulate the system in this way did not escape Canada; according to TPC’s website, Canada waited until 10 January 2000 to award its first contribution under the “new” TPC.9 Nor should it escape other Members. The effect, of course, would be to reduce Article 21.5 to “inutility,” a result considered unacceptable by the Appellate Body.10 Members that have successfully challenged a subsidy contingent in fact on export would be left, effectively, with little more than a Pyrrhic victory. When it comes to enforcement of the most egregious of export subsidies

        • those subsidies determined by a Panel or the Appellate Body to be levied in a manner designed to circumvent the prohibition of de jure export contingency – Members would be left without an effective remedy.11


      3. Finally, beyond undermining Article 21.5, accepting Canada’s theory would also undermine any incentive a Member would have to implement the DSB’s recommendations and rulings at all. If implementation measures remedying a finding of a subsidy programme’s de facto export contingency are impervious to effective challenge, what incentive would a Member have to undertake those implementation measures? More specifically, if all Canada considers it needed to do to insulate TPC from challenge was to refrain from making a contribution under the “new” TPC, why did it bother to undertake any implementation measures at all?


      4. It would not have had to do so, under its own logic, since it could have defended Brazil’s challenge under Article 21.5 strictly on the basis that no new subsidies to the regional aircraft industry had been granted. Obviously, Canada undertook the implementation measures detailed in its first submission because it considered itself compelled to do more than simply not issue TPC subsidies to the regional aircraft industry for the time being.12 The fact that Canada felt compelled to do so demonstrates that it does not consider the absence of subsequent subsidies to immunize it from Brazil’s Article 21.5 challenge. For this and the other reasons expressed above, Canada’s argument must be rejected.


    3. COSMETIC CHANGES DO NOT CURE TPC OF DE FACTO EXPORT CONTINGENCY


    1. “TPC assistance to the Canadian regional aircraft industry” was determined by the Panel and the Appellate Body to be contingent in fact on export performance.13 Canada’s response, however, as demonstrated by its implementation strategy and detailed in its first submission, has been to treat TPC


      image

      8 See DSU Article 22.2.

      9 Moreover, this contribution does not involve the regional aircraft industry. TPC News Release, 10 January 2000 (Exhibit Bra-30). According to TPC’s website, no other TPC awards had been made since

      17 November 1999, one day before expiration of the “reasonable period of time” for implementation. TPC News Release, 17 November 1999 (Exhibit Bra-31).

      10 United States – Standards for Reformulated and Conventional Gasoline, WT/DS2/AB/R, pg. 23 (29 April 1996) (Adopted 20 May 1996) (An interpreter “is not free to adopt a reading that would result in reducing whole clauses or paragraphs of a treaty to redundancy or inutility.”).

      11 The Panel will recall that the European Communities proposed the express prohibition of subsidies contingent in fact on export because the de jure provision is “open to circumvention.” Elements of the

      Negotiating Framework, Submission of the European Communities, MTN.GNG/NG10/W/31 (27 November 1989).

      12 In paragraph 2 of its first submission, Canada confirmed this fact, characterizing its TPC implementation measures as “new measures to ensure full and faithful implementation of the DSB rulings and recommendations and compliance with the SCM Agreement.”

      13 Panel Report, paras. 10.1(f), 10.3; Appellate Body Report, paras. 220(b), 221.

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      as though it had been judged de jure, rather than de facto, export contingent. Canada considers that by demonstrating that it made some changes to TPC, such as the removal of the term “export” from some (although not all) TPC documents, or the inclusion of self-serving statements regarding its undertaking not to consider export information, the task of implementing the DSB’s recommendations and rulings is complete.


    2. This is not effective implementation of a determination of de facto export contingency. According to the Appellate Body, while de jure export contingency is indeed demonstrated (or remedied) “on the basis of the words of the relevant legislation, regulation or other legal instrument,” de facto export contingency is to be “inferred from the total configuration of the facts constituting and surrounding the granting of the subsidy . . .14 Brazil demonstrated in its first submission, at paragraphs 18-38, that the facts surrounding the “new” or the “restructured” TPC still support an inference of de facto export contingency. Under the “new” TPC,


      • contributions remain targeted to specific industries – in particular, the aerospace industry, which is to continue, as before, receiving two-thirds of TPC fund15 – that are overwhelmingly export- oriented and recognized by the Government of Canada as such (discussed at section 1 below);


      • the same types of projects continue to be eligible for “new” TPC funds as were eligible under the “old” TPC (discussed at section 2 below);


      • applicants must demonstrate that they will contribute to goals and objectives the achievement of which requires a commitment to export performance, according to the Government of Canada itself (discussed at section 3 below);


      • Canada has failed to amend or to provide documents that the Panel previously considered supported an inference of de facto export contingency (discussed at section 4 below).


    3. Apart from removing references to the word “export” from some TPC documents, the only thing that the DSB’s recommendations and rulings have prompted Canada to do is to increase, by 396 per cent, what TPC itself projects to be “Total funds available for new contributions in future years.16 Additionally, over the period 1998-2003, TPC’s “Available contribution funding” is slated to increase from $203 million to $367 million.17


    4. Thus, under the “new” TPC, the same recipient industries will receive even more government subsidies to undertake the same types of projects. This is not effective implementation.


    5. The facts surrounding TPC, described in paragraphs 18-38 of Brazil’s first submission, lead to the conclusion that funds granted to the regional aircraft industry under the “new” TPC will continue, unavoidably, to be contingent in fact on export performance. It is for this reason that Brazil argued, in its first submission, that “withdrawing the subsidy” in the case of TPC – the very design, structure,


      image

      14 Appellate Body Report, para. 167 (emphasis in original).

      15 Canadian First Submission, para. 32. Canada notes at paragraph 32 that “it cannot be assumed that

      regional aircraft industry-related projects will receive the majority of the funds.” This may be so, but is utterly irrelevant. If the regional aircraft industry is able to receive $1 of funds contingent in fact on export performance, Canada has not implemented the recommendations and rulings of the DSB.

      16 TPC Annual Report, 1998-1999, pg. 28 (row titled “Total funds available for new contributions in future years,” comparing 1999-2000 figure with 2002-2003 figure) (Exhibit Bra-6). Canada complains in Annex A to its first submission that “[t]his is a distortion of the actual programme funding situation.” Brazil reiterates that these figures are taken directly from the TPC Annual Report.

      17 TPC Annual Report, 1998-1999, pg. 28 (row titled “Available contribution funding”).

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      and economic reality of which betrays its de facto export contingency – cannot be achieved without withdrawal of the programme altogether, with regard to the regional aircraft industry.18


    6. At a minimum, Canada’s implementation measures must ensure that prohibited export subsidies cannot be granted to the regional aircraft industry under the facts surrounding the operation of TPC, and not merely that they might not be granted. Since TPC, as it applies to the regional aircraft industry, was judged de facto export contingent, maintaining funding under the “new” TPC requires that Canada ensure that the programme will operate in full compliance with the Subsidies Agreement. It is not sufficient for Canada to simply provide a framework which, in consideration of the “total configuration of the facts constituting and surrounding the granting of the subsidy19 , could permit it to maintain operation of TPC as a de facto export contingent programme. To constitute effective implementation, any amendments made by Canada to TPC should not focus on making the programme merely de jure compliant (which it may already have been), but instead on making it de facto compliant, on a consideration of the “total configuration of the facts.20


    7. A review of the “total configuration of the facts” reveals that Canada has not met this obligation. Brazil recalls that under the “new” TPC, the same industry recipients are getting even more TPC subsidies to undertake the same types of projects. This does not suggest effective implementation of a finding of de facto export contingency.


    1. TPC Remains Focused on the Aerospace Industry and the Regional Aircraft Industry, the Export Orientation of Which Has Been Singled out by the Canadian Government As Significant


    1. As discussed in Brazil’s first submission, the same three industries eligible for funding under the “old” TPC are targeted for continued funding under the “new” TPC.21 Moreover, Canada has confirmed that the aerospace industry will continue, as it did under the “old” TPC, to receive two- thirds of all “new” TPC funds.22 Although the Panel determined that the regional aircraft industry had in its period of review received approximately 68 per cent of TPC funds allotted to the aerospace industry.23 Canada contends that under the “new” TPC, “it cannot be assumed that regional aircraft- industry related projects will receive the majority of the funds.24 Whether regional aircraft-industry related projects are to receive the majority of the “new” TPC’s funds or $1 of those funds, if TPC subsidies remain de facto export contingent, Canada has not implemented the recommendations and rulings of the DSB.


      image

      18 As discussed in paragraph 7 of its first submission, Brazil reiterates that this result is also supported by Canada itself. In its submissions to the Appellate Body, Canada argued that the word “subsidy” is used interchangeably with the term “subsidy programme” in the Subsidies Agreement, and that TPC is just such a “subsidy programme.” See Submission of Appellant Canada, 13 May 1999, paras. 45-46 (Exhibit Bra-28). The requirement that Canada “withdraw the subsidy,” therefore, must by force of Canada’s own logic mean that it is required to withdraw TPC in its entirety.

      19 Appellate Body Report, para. 167 (emphasis in original).

      20 Id.

      21 For a list of the three industries eligible for funds under the “new” TPC, see, e.g., TPC Terms and

      Conditions, pg. 1, Section 3.1 (“Eligible Areas”) (Exhibit Bra-15). For a list of the identical three industries eligible for funds under the “old” TPC, see, e.g., Panel Report, paras. 6.173, 9.283.

      22 Canadian First Submission, para. 32.

      23 Panel Report, para. 9.307.

      24 Canadian First Submission, para. 32. Canada also states that “no new regional aircraft-related projects have been approved or contracted since 14 November 1997.” This is simply not true. In March 1998,

      TPC announced a $9.9 million subsidy to Sextant Avionique Canada Inc. for the development of both the avionics system for the Dash 8-400 and the flight control system for the CRJ-700. Panel Report, para. 6.193.

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    2. Furthermore, Canada did not, with its amendments to TPC, change the nature of the Canadian aerospace industry generally or the regional aircraft segment specifically. Brazil has demonstrated that the Canadian aerospace industry in general and the regional aircraft segment in particular continue to be overwhelmingly export-oriented. More importantly, the Canadian government itself recognizes the exceptional export performance of the industry, and has cited that performance as its motivation for funding the industry.25


    3. Canada complains that certain of the Canadian government documents cited to establish this point, in paragraph 19 of Brazil’s first submission, may not be relied upon to challenge Canada’s implementation and to demonstrate a continued inference of de facto export contingency. According to Canada, this evidence “relates not to the restructured TPC, but to TPC as it was previously constituted.26


    4. Canada cites two decisions for support. At paragraph 41 of its first submission, Canada cites to what it claims to be a principle “duly recognised by the Panel in Australia – Subsidies Provided to Producers and Exporters of Automotive Leather.” According to Canada, the Panel stated that “WTO Members cannot be prevented from replacing purported prohibited export subsidies with other measures that are not prohibited, thereby bringing themselves into compliance with their multilateral obligations under the SCM Agreement.27


    5. Brazil encourages the Panel to review paragraph 9.64 of the decision in Australia – Leather, for two reasons. First, the sentence extracted by Canada merely records an argument made by Australia, rather than a conclusion made by the Panel. The Panel only offers its views on the issue in the final sentence of paragraph 9.64, commencing with its statement that “We agree that . . .”


    6. Even if the sentence extracted by Canada represents a conclusion of the Panel, however, that conclusion represents only half of the story. In the first instance, Canada has not “replaced” TPC contributions to the aerospace industry and the regional aircraft segment with anything else; TPC is still available to this same industry for the same types of projects even after implementation.


    7. Moreover, after the sentence from Australia – Leather quoted by Canada, the Panel stated that even if measures previously constituting prohibited export subsidies are no longer in place, and have instead been “replaced” with purportedly non-prohibited “other measures” providing funds to the same recipient, statements made by a Member in conjunction with the earlier but now superseded measures are relevant to an analysis of the subsequent, purportedly compliant measures.28


    8. Therefore, since the “new” TPC has retained its focus on the same recipient industries funded under the “old” TPC, comments made by the Canadian government regarding its rationale for funding those recipients are relevant to the Panel’s analysis of the “new” TPC. For example, the Leader of the Government in the House of Commons noted that a key “output” of the TPC-funded Dash 8-400 project was “the building of exports,” which was, with job creation, “just what the government had in mind when we established” TPC.29 Canada cannot seriously expect to maintain funding to the same industry under the “new” TPC, and yet at the same time escape the implications of its earlier statements regarding why it chose that industry in the first place. Australia – Leather provides support for the Panel, in its analysis of any “inferences” of de facto export contingency flowing from


      image

      25 See Brazilian First Submission (and sources cited therein), para. 19. Regarding the role of the regional aircraft industry’s export-orientation in TPC’s funding decisions, see, e.g., the comments by the Leader of the Government in the House of Commons, included in Brazil’s first submission, para. 19.

      26 Canadian First Submission, para. 43.

      27 WT/DS126/R (25 May 1999) (Adopted 16 June 1999), para. 9.64.

      28 Id. at para. 9.65.

      29 Industry Canada News Release, 17 December 1996 (Exhibit Bra-10).

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      the surrounding facts, to consider statements by the Canadian government regarding its support for particular recipient industries of “old” TPC funding, where Canada has maintained its focus on those same recipients in the “new” TPC.


    9. Canada also cites the Appellate Body in Chile – Taxes on Alcoholic Beverages for the principle that “previous . . . measures” cannot be relied upon to assume continued non-compliance with a Member’s obligations.30 Since certain of the documents relied upon by Brazil pre-date 18 November 1999 – the date on which the “new” TPC took effect – Canada contends that any reliance upon them to infer de facto export contingency would fall afoul of the Appellate Body’s ruling in Chile – Alcohol.


    10. While Brazil does not quarrel with Canada’s statement of the rule in Chile – Alcohol, that rule is simply inapplicable in the circumstances of this case. Chile – Alcohol did not, in the first instance, involve subsidies de facto contingent on export performance. Furthermore, Canada’s objection, and its citation to the rule in Chile – Alcohol, would only have been appropriate and relevant had Brazil not relied upon the “measures” constituting the “new” TPC, and instead relied upon the “measures” constituting the “old” TPC.


    11. But this is not the situation at hand. The facts enumerated in paragraph 19 of Brazil’s first submission are not, to begin, Canadian “measures.” They are instead facts that remain unaltered by anything Canada claims to have accomplished with its amendments to TPC. Canada has retained its commitment to offer two-thirds of “new” TPC funds to an industry that it has previously recognized as “highly export oriented31, “globally competitive with exports exceeding 70 per cent of output,32 and “crucial . . . for Canada’s economy, with exports growing at 10 per cent per year.33 Even after 18 November 1999, Canada continues to recognize this industry as a source of ever increasing export revenue.34 As far as Brazil is aware, nothing that Canada has proposed in restructuring TPC alters the truth of these statements.


    12. These statements lead to the inference that in choosing which industry would receive the lion’s share of “ old” and “new” TPC funds, Canada was not casually indifferent to the trading patterns of that industry. Instead, Canada chose, as TPC’s showcase, an industry that exports significantly more than others, because it exports significantly more than others.


    13. The “new” TPC retains a focus on contributions to the aerospace industry. Canada simply cannot expect to retain a focus on this industry, and yet at the same time escape the inference created by all of its previous statements about the esteem in which it holds that industry as a result of its export performance. Such an expectation is neither credible, nor demanded by the rule in Chile – Alcohol. Some elements, essential to the Panel's and Appellate Body's consideration, were not, and cannot be, erased by the cosmetic amendments to TPC.



    image

    30 Canadian First Submission, para. 44, quoting WT/DS87/AB/R, WT/DS110/AB/R (13 December 1999) (Adopted 12 January 1999) para. 74.

    31 TPC Annual Report, 1996-1997, pg. 5 (Exhibit Bra-8); “Think Canada, Think Bottom Line, Think Aerospace Industry, Think Investment,” October 1999, pg. 33 (Exhibit Bra-11).

    32 “Think Canada, Think Bottom Line, Think Aerospace Industry, Think Investment,” October 1999, pg. 3 (Exhibit Bra-11).

    33 Industry Canada News Release, 10 January 1997 (Exhibit Bra-9).

    34 Industry Canada, “Results of the 1998/99 Survey of the Canadian Aerospace and Defence Industry,” 29 November 1999 (Exhibit Bra-12).

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    2. Removing the ‘Near to Market’ Terminology from TPC Documents is Irrelevant


    1. Canada claims that TPC now focuses on funding projects aimed at “improving the technological capability of the firm or sector, rather than on the commercial viability and export potential of supported products.35 In its first submission, Brazil noted, first, the Appellate Body’s statement that “[i]t is . . . no ‘less possible’ that the acts, taken together, may demonstrate that a pre- production subsidy for research and development is ‘contingent . . . in fact . . . upon . . . export performance.’36 Simply including “Industrial Research” as a category of funding under the “new” TPC does not make it any less possible to infer from the facts that TPC constitutes a prohibited export subsidy.


    2. Second, Brazil demonstrated that the available descriptions of eligible activities under the “new” TPC, to the extent they are different at all from eligible activities under the “old” TPC37 betray an interest in “near market” projects with high commercialization potential. The “new” TPC Terms and Conditions, along with the “new” TPC Investment Application Guide, describe as eligible those projects “aimed at the discovery of knowledge, with the objective that such knowledge may be useful in developing new products,” and those projects leading to “translation of industrial research findings into a plan, blueprint or design for new, modified or improved products . . . 38


    3. Finally, Canada has withheld from the Panel documents that could shed some light on these categories of eligible activities, and whether they contribute to an inference of de facto export contingency – for example, the “new” TPC’s “Framework Investment Proposals.” Exhibit Cdn-9 states that Canada has not yet provided, and is still developing, this document, which presumably could contain a description of the three eligible categories of TPC projects.39 Canada cannot claim, as it has in paragraphs 33-34 of its first submission, that it has implemented the recommendations and rulings of the DSB by making TPC “less near-market,” without providing the documents demonstrating this fact.


    3. To Qualify for TPC Funds, Applicants Must Demonstrate a Contribution to Goals and Objectives Requiring a Commitment to Export Performance


    1. Brazil demonstrated in its first submission that to qualify for TPC funds, an applicant must demonstrate that it meets TPC’s “selection criteria” and “assessment criteria,” and that it provides the “strategic benefits” sought by the programme. Brazil also demonstrated that among those selection or assessment criteria and strategic benefits is the requirement that applicants establish that TPC funds would be used to create Canadian jobs, to increase Canadian economic growth, or to increase Canadian wealth. To wit:


      • The “new” TPC’s Investment Application Guide states that applicants’ proposals “are assessed in the context of their relevance to the objectives of TPC, namely the extent to which they demonstrate,” among other things, “that the project contributes to the strategic objectives of the government, including technological and net economic benefits to Canada (increasing economic growth, creating jobs and wealth, and supporting sustainable development).40


        image

        35 Canadian First Submission, para. 33.

        36 Appellate Body Report, para. 174.

        37 Brazilian First Submission, paras. 29-30.

        38 TPC Terms and Conditions, pg. 2 (emphasis added) (Exhibit Bra-15); TPC Investment Application Guide, pg. 4 (emphasis added) (Exhibit Bra-16).

        39 Exhibit Cdn-9 (Serial 16). Although Canada claims that this document is not available, it is able at paragraph 34 of its first submission to describe in some detail what is included in one of the categories, “Industrial Research.”

        40 TPC Investment Application Guide, pg. 6 (Exhibit Bra-16).

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      • The Investment Application Guide also states that a proposal must include information regarding the “strategic benefit” offered by the project, including “[p]otential economic benefit to Canada (for example, jobs created or maintained, economic growth, wealth creation . . .).41


      • The “new” TPC’s Terms and Conditions state that applicants’ proposals “will be assessed in terms of the extent to which they demonstrate,” among other things, “ that the project contributes to the strategic objectives of the government, including technological and net economic benefits to Canada42, the latter of which are defined in the Investment Application Guide as “increasing economic growth, creating jobs and wealth, and supporting sustainable development.43


      • The “new” TPC’s Investment Decision Document, to be completed by TPC officials evaluating an applicant’s proposal, requires that those officials identify “strategic considerations” of the project that would constitute “benefits to Canada,” including “the link between the proposed R&D initiative and achieving Canada’s objectives of increasing economic growth, creating jobs and wealth and sustainable development.44


    2. In paragraph 33 of its first submission, Brazil then demonstrated, quoting numerous Industry Canada publications and the Canadian Minister of Industry, along with economic experts like the Conference Board of Canada, that creating Canadian jobs, increasing Canadian wealth and spurring Canadian economic growth requires, first and foremost, exports. These objectives are driven by, and cannot be achieved without, massive Canadian exports.


    3. For a regional aircraft applicant for TPC funds to demonstrate a proposed project’s contribution to “increasing economic growth, creating jobs and wealth,” therefore, it must – even if implicitly – commit to export performance. The “new” TPC has, in other words, imposed mandatory selection and assessment criteria that can only be met if an applicant can demonstrate export performance. Such a requirement is the very essence of de facto “export contingency” – concealing export contingency in a requirement that does not actually employ the word “export.”


    4. The Panel is not here faced, however, with a situation in which it is required to determine that all subsidies contingent on “increasing economic growth, creating jobs and wealth,” in all cases, are prohibited export subsidies, as Canada claims at paragraph 42 of its first submission. Brazil has discussed elsewhere in this and its first submission the “total configuration of the facts constituting and surrounding” TPC subsidies to the regional aircraft industry which lead to an “inference” of de facto export contingency.45


    5. For example, with the “new” TPC, Canada has retained as its target the aerospace industry, which will continue to receive two-thirds of all TPC funds.46 The Panel found, and the Appellate Body confirmed, that this same funding under the “old” TPC was intended by Canada to circumvent its obligations under the Subsidies Agreement – it was provided contingent in fact on export performance.47 The Canadian government has frequently extolled the overwhelming export-


      image

      41 Id. at pg. 8.

      42 TPC Terms and Conditions, pg. 2 (Exhibit Bra-15).

      43 TPC Investment Application Guide, pg. 6 (Exhibit Bra-16). 44 TPC Investment Decision Document, pg. 2 (Exhibit Cdn-7). 45 Appellate Body Report, para. 167.

      46 Canadian First Submission, para. 32.

      47 Elements of the Negotiating Framework, Submission of the European Communities,

      MTN.GNG/NG10/W/31 (27 November 1989) (The prohibition of subsidies contingent in fact on export was proposed because the de jure provision is “open to circumvention”).

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      orientation of that industry generally, and the regional aircraft industry specifically48 including in its decisions to award TPC funds.49 It has, as such, shown something considerably more than casual indifference regarding the trading patterns of that industry retained in the “new” TPC as the main target for funding.


    6. In these circumstances, the requirement that successful applicants demonstrate the ability to fulfill particular assessment and selection criteria that are inextricably linked to export becomes all the more significant, and adds to the inference that the “new” TPC retains its de facto export contingency. TPC knows, before it even sees an application, that regional aircraft industry applicants will be able to fulfill these criteria by virtue of their extreme export orientation. The deck, as the saying goes, is stacked. In these circumstances, TPC does not have to express the export contingency of its contributions; it knows that requiring applicants to demonstrate a proposal’s ability to contribute to “increasing economic growth, creating jobs and wealth” is nothing more than a euphemism for export contingency, as that requirement applies to regional aircraft industry applicants.


    7. In its decision in Australia – Leather, the Panel was faced with similar circumstances, and made a similar inference of de facto export contingency. Where Australia was aware that an applicant, to meet an objective or requirement for a subsidy, must, “of necessity, have to continue and probably increase exports,” Australia’s imposition of the objective or requirement was considered a condition on the grant of the subsidy.50 The Panel reached this conclusion, in the circumstances of that case, even though there was no express mention of exports or an export requirement. In the specific circumstances of the case before this Panel, Brazil contends the Panel should do the same.


      1. Export Contingency Need Not Be the Sole Condition for Receipt of a Subsidy


    8. Canada attempts to counter Brazil’s claim with two arguments. First, Canada attempts, at paragraphs 22-25 of its first submission, to de-emphasize the requirement that a TPC applicant demonstrate how its proposal will “increase economic growth, jobs and wealth,” by listing that requirement as one among many. Canada’s attempt must fail, however. Article 3.1(a) of the Subsidies Agreement requires only that export performance be “one of several other conditions,” and not the sole condition for receipt of a subsidy. It is, quite simply, irrelevant that the “new” TPC requires that an applicant demonstrate “strategic benefits” or meet selection and assessment criteria that do not constitute evidence of de facto export contingency, as long as it must comply with one requirement that does constitute evidence of de facto export contingency.


      1. Brazil Has Relied on Valid Evidence


    9. Second, Canada objects on two grounds to the evidence used by Brazil in paragraph 33 of its first submission to demonstrate that for the regional aircraft industry to increase economic growth, jobs and wealth in Canada requires export performance. In Annex A to its first submission, Canada argues, in the first instance, that Brazil’s sources are “from the period prior to the restructuring of TPC.51


    10. Canada’s argument is in error. Brazil did not rely on evidence relating to TPC “as it was previously constituted,” thus objecting to “previous [Canadian] measures,” in the words of the


      image

      48 See sources cited in Brazilian First Submission, para. 19.

      49 See, e.g., Industry Canada News Release, 17 December 1996 (The then-Government House Leader stated that “[t]hese two outputs of the Dash 8-400 project – the creation of jobs and the building of exports – are just what the government had in mind when we established Technology Partnerships Canada . . .”) (Exhibit Bra- 10).

      50 Australian Leather, para. 9.67.

      51 Canadian First Submission, Annex A, para. 5.

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      Appellate Body in Chile – Alcohol.52 To demonstrate that applicants for TPC funds are required to show that their proposals provide “ strategic benefits” or meet “selection” and “assessment criteria” related to the creation of Canadian jobs, economic wealth and growth, Brazil relied on the “new” TPC’s Investment Application Guide, Terms and Conditions, and (in this submission) Investment Decision Document.53 These citations are repeated above, at the outset of this section of Brazil’s submission.


    11. Brazil then went on, in paragraph 33 of its first submission, to demonstrate that according to the Canadian government and the Conference Board of Canada, increasing and creating Canadian jobs, economic wealth and growth requires exports. It is utterly irrelevant whether the statements supporting this conclusion, contained in paragraph 33 of Brazil’s first submission, were made before or after 18 November 1999. As far as Brazil is aware, Canada did not, with its amendments to the TPC programme, change or even attempt to change these aspects of the Canadian economy. Unless Canada can show that something about the Canadian economy and the Canadian regional aircraft industry changed on 18 November 1999 as a result of its implementation measures, such that increasing and creating Canadian jobs, economic wealth and growth no longer depends, as a matter of necessity, on export, the documents and statements compiled by Brazil at paragraph 33 of its first submission retain both their validity and persuasive force, and contribute to an inference that TPC retains its de facto export contingency.


    12. Canada also states that the evidence cited by Brazil in paragraph 33 of its first submission is either “of a general nature,” providing “general sectoral information unrelated to TPC,” or “from non- governmental sources.54 Brazil notes, in the first instance, that six of the seven documents quoted in paragraph 33, to establish the link between exports and the increase and creation of Canadian jobs, economic wealth and growth, were in fact published by Industry Canada, a government source. TPC is an agency of Industry Canada and reports to the Minister of Industry.55


    13. Brazil also notes that the source of this generic information regarding the Canadian economy is utterly irrelevant, as long as the source is reliable. As discussed above, Brazil first relied on the “new” TPC Investment Application Guide, Terms and Conditions, and (in this submission) Investment Decision Document56 to demonstrate that applicants for TPC funds are required to show that their proposals provide “strategic benefits” or meet “selection criteria” and “assessment criteria” related to the creation of Canadian jobs, economic wealth and growth. To establish the link, in the Canadian economy, between exports and the increase of jobs, wealth and growth, Brazil then turned to documents published by Industry Canada.


    14. To establish this link, why must Brazil rely, as Canada insists it must, solely on documents or statements made by TPC itself? TPC is not the only authority on the Canadian economy. TPC has itself elsewhere acknowledged its own reliance on other government authorities for what it dubs, in its first submission, “general sectoral information.57 In the Memorandum of Understanding between TPC and the Industry Sector of Industry Canada, for example, TPC has committed to rely on Industry Canada’s Industry Sector Branches as the “first source for technological and sectoral analysis and


    image

    52 Id. at paras. 43-44, quoting Chile – Alcohol, para. 74.

    53 Brazilian First Submission, paras. 31, 34. Brazil notes that the Investment Decision Document was not available until Canada filed its first submission on 10 January 2000.

    54 Canadian First Submission, Annex A, para. 5 (introductory paragraph and discussion of the Industry Canada CIBS documents cited by Brazil at footnotes 60, 61 and 62 to paragraph 33 of its first submission).

    55 TPC Special Operating Agency Framework Document, cover page, pg. 8 (Exhibit Bra-5).

    56 Brazilian First Submission, paras. 31, 34.

    57 Canadian First Submission, Annex A, para. 5.

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    advice.58 Sectoral advice emanating from Industry Canada is therefore considered reliable and persuasive by TPC. Brazil’s citation to Industry Canada documents to establish a fundamental fact about the Canadian economy – the link between exports and the increase and creation of Canadian jobs, economic wealth and growth – is equally reliable and persuasive.


    4. References to the Term ‘Export’ Have Not Been Removed from All TPC Documents


    1. Canada has acknowledged that not all TPC documents have in fact been cleansed of references to the term “export.” In Exhibit Cdn-9, Canada lists 40 TPC documents59 only 13 (or 32 per cent) of which have been reformulated and provided to the Panel.60 On the one hand, Canada claims that it has effectively implemented the recommendations and rulings of the DSB, thus ridding TPC of de facto export contingency, by removing references to the term “export” from TPC documents. On the other hand, Canada has failed to provide 68 per cent of those documents.


    2. Canada has, therefore, failed to implement the recommendations and rulings of the DSB, by Canada’s own measure of what constitutes effective implementation. Alternatively, Canada’s failure to provide certain “new” TPC documents supports a presumption that as-yet-unreplaced TPC documents supporting the Panel’s original inference of de facto export contingency still apply. In either case, Brazil requests that the Panel determine that Canada has failed effectively to implement the recommendations and rulings of the DSB.


    3. Experience demonstrates that many of the documents not provided by Canada could potentially aid the Panel’s determination whether Canada has effectively implemented the DSB’s recommendations and rulings, since they served as some of the sources of facts from which the Panel inferred de facto export contingency. For example, a “new” TPC Aerospace and Defence Sector Generic Model Agreement has not been provided.61 The Panel determined that this Model Agreement served as one source of facts from which the de facto export contingency of TPC could be inferred, citing to the requirement that applicants “distinguish between domestic sales and exports when reporting forecast and actual sales.62


    4. Similarly, TPC’s Business Plan was found by the Panel to include facts leading to an inference of de facto export contingency, with the statement that TPC’s approach in the aerospace


      image

      58 Exhibit Cdn-10, pg. 1, para. 6 (emphasis added). Brazil notes that Industry Canada’s Industry Sector focuses on “develop[ing] initiatives to maximize Canada’s share of global trade and investment” and on “working with industry to get more Canadian firms involved in trade, in more sectors and in more markets.” The result of Industry Sector’s activities will be to “help Canada, the most open of G7 countries, become a nation of traders. Currently, Canada’s top five exporters account for 21 per cent of Canadian exports and less than 10 per cent of Canadian SMEs export at all.” About the Industry Sector of Industry Canada, Industry Canada website, published 27 May 1999 (Exhibit Bra-32).

      59 Although the list is numbered 1-36, Serial 16 actually lists five separate documents.

      60 In fact, only 12 of the 40 documents were provided to the Panel. Canada states, however, that there is no equivalent under the “new” TPC for the document listed as Serial 15.

      61 It is unclear whether this document is mentioned in the list included as Exhibit Cdn-9. It may be Serials 8 or 9. In any case, the document has not been provided.

      62 Panel Report, para. 9.340 (bullet point 10) (emphasis in original). Brazil notes that even if the Model

      Agreement were to request only undifferentiated sales data and forecasts, without a distinction between domestic sales and exports, it would still lead to an inference of de facto export contingency in the instance of contributions to the Canadian regional aircraft industry. The Panel in Australia – Leather determined that requesting undifferentiated sales performance targets led to an inference of de facto export contingency because the Australian government knew that in order to reach those targets, the recipient would have to export. Australia – Leather, para. 9.67. The same logic applies in the case of the Canadian regional aircraft industry; the Canadian government knows that the industry exports virtually all it produces, and thus to reach sales forecasts, it must export.

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      sector is to support projects with “high export potential.63 Canada has not provided a Business Plan for the “new” TPC.


    5. It is simply inaccurate to claim, as Canada has at paragraph 51 of its first submission, that the documents not yet completed and produced “will not exist until such time as the restructured programme approves and contracts new investments.” Many of these documents are simply generic forms or templates, and were produced in the original proceedings without connection to any particular TPC investment. The Panel’s conclusion that de facto export contingency could be inferred from those documents came not from information regarding any particular investments. Brazil refers, for example, to the TPC Aerospace and Defence Sector Generic Model Agreement64 and the TPC Business Plan65


    6. The same must be said of the “new” TPC documents cited by Canada as “under development” in Exhibit Cdn-9. It is by no means clear why many of these documents will not be created “until such time as the restructured programme approves and contracts new investments.66 Brazil cites to some, but not all, of the examples of the “new” TPC documents listed in Exhibit Cdn-9 that are apparently “under development”: the “TPC Repayment Policy” (Serial 2), “Assessment Guidelines for Due Diligence” (Serial 3), the various “Framework Investment Proposals” (Serial 16), the “TPC Business Plan” (Serial 18), “TPC Review Procedures” (Serial 20), “Special Purpose Equipment List” (Serial 21), “TPC Policies and Procedures on Incrementality, Irreversibility and Retroactivity” (Serial 25), etc. The nature of these documents does not suggest that they are in any way associated with individual contributions, such that they would not be created until contributions were made.


    7. Even those documents that would, once completed, be associated with individual projects and contributions, start out as blank, generic forms or templates. These forms would certainly be developed well in advance of the grant of actual contributions under the “new” TPC. Brazil notes several examples from Exhibit Cdn-9, although this list is by no means exhaustive: “Standard Contribution Agreement” (Serial 8), “Performance Measures – Project Data Sheet” (Serial 23), “TPC Project File Structure” (Serial 24), “Evaluation Framework” (Serial 25), “Claims Package for Clients” (Serial 28), “PBS Integrity Review Checklist” (Serial 29), “Claims Verification Checklist” (Serial 32), “Contribution Verification Checklist” (Serial 36), etc. These “Standard Agreements,” “Packages,” “Sheets,” “Frameworks,” “Checklists” and the like should exist in the abstract, even without data regarding particular contributions written on them.


    8. In any event, investments have already been approved under the “new” TPC. On 10 January 1999 – the very day on which Canada filed its first submission with this Panel and claimed that these documents were as yet unavailable because no contributions had yet been approved

      • TPC announced the award of a contribution to an Ontario company for the development of a robotics system. The news release recording this announcement is included as Exhibit Bra-30. Therefore, even if the TPC documents withheld from the Panel were in fact not produced until actual investments under the “new” TPC were approved, such approvals have in fact occurred. The documents should, therefore, exist.


    9. If the Panel permits Canada to hold back these documents until after the close of these proceedings, and the documents, when eventually produced, betray evidence of continued de facto export contingency, Brazil may, of course, be able to bring a new case against TPC support. At the same time, however, the remedy provided Brazil under Article 21.5 of the DSU would be utterly and completely undermined. Telling Brazil to “wait and see” would reduce Article 21.5 to a nullity, a


      image

      63 Panel Report, para. 9.340 (bullet point 2) (emphasis in original).

      64 Id. (bullet point 10).

      65 Id. (bullet point 2).

      66 Canadian First Submission, para. 51.

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      result that, according to the Appellate Body in United States – Standards for Reformulated and Conventional Gasoline, cannot attach.67


    10. In sum, Canada cannot claim compliance with the DSB’s recommendations and rulings on the basis of amendments made to TPC documents, without actually demonstrating that those amendments were made.68 In fact, if documents that originally contributed to the Panel’s inference of de facto export contingency do not yet exist for the “new” TPC, Canada has offered this Panel further evidence of its failure to implement the recommendations and rulings of the DSB by 18 November 1999. The Panel should conclude that Canada’s failure to produce these documents constitutes a failure to implement the recommendations and rulings of the DSB, or, in the very least, should presume that the original documents, and the inferences of de facto export contingency drawn therefrom, continue to apply.


  3. CANADA’S AMENDMENTS TO THE CANADA ACCOUNT DO NOT MAKE IT CONSISTENT WITH THE SUBSIDIES AGREEMENT, AND DO NOT CONSTITUTE EFFECTIVE IMPLEMENTATION OF THE DSB’S RECOMMENDATIONS AND RULINGS


    1. Canada’s implementation of the recommendation that it withdraw “Canada Account debt financing since 1 January 1995 for the export of Canadian regional aircraft69 consists of a one- sentence “Policy Guideline” not to approve transactions that do not comply with the OECD Arrangement on Guidelines for Officially Supported Export Credits.70 In its first submission, Canada now asserts that the intent of this “Policy Guideline” is, specifically, to appeal to the second paragraph of Item (k) of the Illustrative List of Export Subsidies, and the OECD Arrangement’s “interest rates provisions” cited therein.


    2. This is, quite simply, insufficient. Canada’s “Policy Guideline” merely suggests that prohibited export subsidies via Canada Account might not be granted; as noted above, to be sufficient, an implementation measure must instead ensure that prohibited export subsidies cannot be granted.


      1. DETERMINING WHETHER CANADA HAS IMPLEMENTED THE RECOMMENDATIONS AND RULINGS OF THE DSB DOES NOT REQUIRE EVIDENCE OF CANADA ACCOUNT FINANCING SUBSEQUENT TO 18 NOVEMBER 1999


    3. In its first submission, Brazil argued that Canada has a burden to demonstrate its entitlement to a defence included in Item (k), since it chooses to appeal to such a defence.71 According to Canada, however, it has no obligation and bears no burden to demonstrate what compliance with Item (k) means unless, at some time “in the future, there is a financing transaction under Canada Account in relation to which Canada claims the exception in Item (k) and the exception is challenged.72 According to Canada, because the Panel “expressly did not find that the Canada Account programme per se was a prohibited export subsidy,” and instead found that the Canada Account programme constituted a prohibited export subsidy as it was applied in the context of two specific transactions for the export of regional aircraft, Canada had no duty to do anything whatsoever


      image

      67 WT/DS2/AB/R, pg. 23 (An interpreter “is not free to adopt a reading that would result in reducing whole clauses or paragraphs of a treaty to redundancy or inutility.”).

      68 Of course, TPC also must not be de facto export contingent, based on the “ total configuration of the facts constituting and surrounding” its operation. Appellate Body Report, para. 167.

      69 Panel Report, para. 10.1(b).

      70 Canadian First Submission, para. 57. See also Exhibit Cdn-13.

      71 Brazilian First Submission, para. 46.

      72 Canadian First Submission, paras. 67-68.

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      in order to implement the Panel ’s ruling, other than to ensure that those two transactions were completed by 18 November 1999.73


    4. As it has for TPC, Canada therefore effectively claims that its implementation measures with regard to Canada Account are impervious to challenge under Article 21.5 of the DSU, since it has not yet extended Canada Account financing for regional aircraft subsequent to the adoption of those measures.


    5. This position must be rejected. The consequence of Canada’s position would be to reduce Article 21.5 of the DSU to “inutility” in any and all instances of successful “as applied” challenges to the violation by a Member of any of its WTO obligations (not just those contained in the Subsidies Agreement). A Member determined by a Panel to have maintained measures inconsistent with its WTO obligations could escape effective Article 21.5 scrutiny by merely refraining from applying those measures until the 20-day time period to seek compensation had passed.74 Rendering Article 21.5 useless for the entire category of “as applied” challenges is not a result envisaged by the DSU, nor one accepted by the Appellate Body75 and should therefore be rejected.


      1. CANADA’S CLAIM THAT THE RECOMMENDATIONS AND RULINGS OF THE DSB REQUIRED NO IMPLEMENTATION BY CANADA IS IN ERROR


    6. Canada’s argument that the Panel’s findings did not require it to take any action at all, apart from ensuring that the two Canada Account transactions identified in paragraph 54 of its first submission were completed by 18 November 1999, does not accord with the Panel’s definition of the subsidy to be withdrawn. The Panel did not hold that only the two transactions identified in paragraph 54 of Canada’s first submission were prohibited export subsidies. This is too narrow an interpretation of the Panel’s determination regarding Canada Account financing “as applied.” The Panel’s conclusion was, rather, “that Canada Account debt financing since 1 January 1995 for the export of Canadian regional aircraft constitutes export subsidies inconsistent with Article 3.1(a) and

      3.2 of the SCM Agreement.76 From 1 January 1995 onward, Canada Account debt financing for Canadian regional aircraft exports will be considered to constitute a prohibited export subsidy, unless

      Canada implements sufficient changes.


    7. Thus, to achieve effective implementation, Canada was required to do more than simply ensure the completion of the two Canada Account transactions identified in paragraph 54 of its first submission. What it did is simply not enough, and is fully susceptible to challenge under Article 21.5 of the DSU.


    8. The “Policy Guideline” included as Exhibit Cdn-13 states simply that the Minister for International Trade will, as a policy matter, not approve transactions that are not in compliance with the OECD Arrangement on Guidelines for Officially Supported Export Credits. Canada asserts that this “Policy Guideline” states an intention to “meet the criteria to qualify for an exception under the second paragraph of Item (k)” of the Illustrative List of Export Subsidies included in Annex 1 to the Subsidies Agreement.77


    9. The “Policy Guideline” does no such thing. It does not refer to conformity with the second paragraph of Item (k), or the “interest rates provisions” of the OECD Arrangement referred to therein.


      image

      73 Id. at para. 56.

      74 See DSU Article 22.2.

      75 United States – Gasoline, pg. 23 (An interpreter “is not free to adopt a reading that would result in reducing whole clauses or paragraphs of a treaty to redundancy or inutility.”).

      76 Panel Report, para. 10.1(b).

      77 Canadian First Submission, para. 68.

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      It merely states a hortatory intention to comply with the OECD Arrangement generally, without any indication of the specific provisions with which it intends to comply. Under the “Policy Guideline,” it is by no means evident that Canadian practices would qualify it for the specific “safe haven” included in the second paragraph of Item (k).


    10. Even Canada’s assertion that the “Policy Guideline” refers to Item (k) and thus the “ interest rates provisions” of the OECD Arrangement begs an obvious question – what does Canada consider to be the “interest rates provisions” of the Arrangement with which it will comply? Even if the Panel accepts Canada’s bald, unsupported assertion that the reference in the “ Policy Guideline” to compliance with the OECD Arrangement means, specifically, compliance with the second paragraph of Item (k) and the application of the Arrangement’s “interest rates provisions,” Canada has not identified which articles of the Arrangement constitute the “interest rates provisions” mentioned in Item (k).


    11. In the DSB’s recommendations and rulings regarding the Canada Account, Canada was determined to have maintained measures constituting or providing prohibited export subsidies. The Panel is not here conducting de novo review of Canada Account debt financing for regional aircraft. In these circumstances, implementing the DSB’s recommendations and rulings regarding the Canada Account should at a minimum ensure that prohibited export subsidies via the Canada Account cannot be granted, and not merely that they might not be granted.


    12. To determine whether the “Policy Guideline” so ensures, Canada should be held to a duty of disclosure similar to that contained in the notification provisions of Article 25 to the Subsidies Agreement, thus enabling Members to inform themselves of the terms on which a measure previously judged to be or to provide a prohibited export subsidy will “comply with the OECD Arrangement” in future. Without the provision of this type of information, the lack of transparency regarding what Canada considers “comply with the OECD Arrangement” to mean, or with which “interest rates provisions” Canada intends to comply, will enable it to continue to operate the Canada Account as a prohibited export subsidy, undetected and undetectable. There will be no assurance that prohibited export subsidies will not continue. At the implementation stage of dispute settlement proceedings, when a Member has already been found to be in violation of its WTO obligations, more is required; unelaborated policy guidelines offering vague hortatory statements regarding the Member’s intentions do not constitute effective implementation.


    13. If this is permitted, Canada will have accomplished a very clever trick – it will have successfully passed off as an implementation measure something that, in the original Panel proceedings, it repeatedly contended it was already doing.


    14. In the original Panel proceedings, Canada submitted “that Canada Account activity is not inconsistent with Article 3 as it benefits from the exception contained in Item (k) of Annex I of the SCM Agreement.78 More specifically, on three separate occasions, Canada represented to the Panel, without elaboration, that Canada Account financing and loan guarantees for exports “have been consistent with the interest rate provisions of the OECD Consensus, as required by Item (k) of Annex I.79


      image

      78 Panel Report, para. 6.64.

      79 First Written Submission of Canada, 16 November 1998, para. 173 (Exhibit Bra-33). See also First Oral Submission of Canada, 26 November 1998, para. 101 (“Canada Account financing and loan guarantees for exports committed since the entry into force of the SCM Agreement have complied with the interest rate provisions of the OECD Consensus, as required by Item (k) of Annex I.”) (Exhibit Bra-34); Second Written

      Submission of Canada, 4 December 1998, para. 77 (“Canada Account transactions are consistent with the interest rates provisions of the OECD Consensus.”) (Exhibit Bra-35).

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    15. Canada subsequently decided not to invoke “the second paragraph of item (k) as a positive defence.80 The relevant point, however, is that Canada expects to pass off the “Policy Guideline” contained in Exhibit Cdn-13 as a new measure sufficient to constitute valid implementation of the DSB’s recommendations and rulings, when it was, according to its previous submissions to this Panel, already applying this measure well in advance of the Panel’s determination that the Canada Account provides prohibited export subsidies to the Canadian regional aircraft industry.


    16. To claim satisfactory implementation of the DSB’s rulings and recommendations, Canada must bear the burden to do more than this. The minimum burden accorded Canada must be to explain with some precision what “comply with the OECD Arrangement” will mean, so that Members are informed of the terms on which a measure previously judged to be or to provide a prohibited export subsidy will operate in future. Canada has failed to discharge this minimum burden. Accordingly, Brazil requests that this Panel determine that Canada has failed to implement the recommendations and rulings of the DSB with regard to the Canada Account.


  4. CANADA’S PROPOSAL REGARDING THE ESTABLISHMENT OF VERIFICATION PROCEDURES’


    1. Canada proposes that the Panel suggest to the parties, pursuant to Article 19.1 of the DSU, that they establish a reciprocal arrangement for verifying their mutual compliance with their obligations under the Subsidies Agreement.81 Brazil notes that the parties have been engaged for some time in negotiations concerning these disputes and have discussed, inter alia, the question of verification. Brazil also notes, however, that the issue of transparency thus far has had to do with Canada’s programmes, not Brazil’s.82


    2. While Brazil does not, in principle, oppose such an agreement, it considers that resolution of the matter in the context of dispute settlement is not clearly compatible with the spirit, if not the letter, of Article 19 of the DSU. Brazil also believes that such an arrangement is better agreed to by the parties in the course of bilateral discussions. It is, in particular, fundamentally necessary for Brazil that any such arrangement involves balanced and truly reciprocal offers of transparency, not only by Brazil, but also by Canada. Discussions between the parties in this regard are on-going, but no agreement has been reached either on the specific Canadian and Brazilian programmes to be included and subjected to verification, or on the institutional framework for a potential monitoring mechanism.


  5. CONCLUSION


  1. For the reasons expressed in this and Brazil’s first submission, Canada has not withdrawn the subsidies determined by the Panel and the Appellate Body to be prohibited export subsidies. The implementation measures Canada has adopted, in the case of both TPC and Canada Account, merely suggest to Members that Canada might not continue to grant subsidies contingent in fact on export performance, rather than provide an assurance that it cannot do so.


  2. Moreover, Canada’s defence – that its implementation measures are protected from challenge until such time as they are actually applied – is untenable. Such a solution reduces Article 21.5 of the


    image

    80 Panel Report, para. 6.161. See also Id., para. 9.225 (footnote 576).

    81 Canadian First Submission, paras. 59-61.

    82 Both the Panel and the Appellate Body noted Canada’s failure to produce documents requested by the Panel in the original proceedings. Appellate Body Report, para. 199 (“Canada refused to provide the information requested by the Panel.”). See also Panel Report, paras. 6.80, 6.171, 6.203, 6.258, 6.259, 6.260,

    6.279, 6.303, 6.304, 6.326, 6.327, 9.176, 9.188, 9.218, 9.244, 9.253, 9.272, 9.293, 9.294, 9.299, 9.303, 9.313,

    9.314 (footnote 621), 9.327, 9.345, 9.347 (footnote 633).

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    DSU to inutility, and would render hollow a finding that a Member had maintained measures inconsistent with its WTO obligations.


  3. Accordingly, Brazil requests that the Panel reject Canada’s defence, and determine that Canada has not implemented the recommendations and rulings of the DSB with regard to TPC and Canada Account.

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LIST OF EXHIBITS


TPC News Release, 10 January 2000 Exhibit Bra-30


TPC New s Release, 17 November 1999 Exhibit Bra-31


About the Industry Sector of Industry Canada, Industry Canada website, published 27 May 1999

Exhibit Bra-32


First Written Submission of Canada, 16 November 1998, para. 173

Exhibit Bra-33


First Oral Submission of Canada, 26 November 1998, para. 101

Exhibit Bra-34


Second Written Submission of Canada, 4 December 1998, para. 77

Exhibit Bra-35

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ANNEX 1-3


FIRST ORAL STATEMENT OF BRAZIL


(6 February 2000)


Mr. Chairman and Members of the Panel,


  1. Brazil thanks the Panel for this opportunity to present its views regarding Canada’s implementation of the Report in Canada – Measures Affecting the Export of Civilian Aircraft. As the Panel is aware, Brazil considers that the implementation measures adopted by Canada to withdraw subsidies provided by the Canadian government to the regional aircraft industry via two programmes


    Significance of 18 November


  2. Let me begin by addressing Canada’s argument that the Panel may not consider anything that happened before 18 November 1999, the date on which Canada purports to have implemented the DSB’s recommendations and rulings.


  3. First, Canada argues that Brazil may not, in these proceedings, rely on any documents dated prior to 18 November, even though the facts addressed in those documents remain unchanged after 18 November. In its Rebuttal Submission, Brazil addressed this argument in considerable detail. I would simply note here that where facts remain unchanged by Canada’s implementation measures, the publication date of documents supporting those facts is utterly irrelevant.


  4. Second, Canada argues that its implementation measures are impervious to challenge under Article 21.5 of the DSU, since no TPC or Canada Account subsidies have been provided to the regional aircraft industry after 18 November. As noted in Brazil’s Rebuttal Submission, I ask the Panel to consider the impact that Canada’s argument, if accepted, would have on the broad question of implementation not just in this case, but in all cases. Canada’s argument would reduce Article 21.5 to inutility.


  5. As the Panel is aware, Brazil argues that the structure of TPC, as it applies to the regional aircraft industry, is tainted by de facto export contingency. The facts underlying that structure must be changed for Canada to claim that it has implemented the recommendations and rulings of the DSB. The changes made to TPC are merely cosmetic. In Brazil’s view, in fact, the only way for Canada to rid TPC of the inference of de facto export contingency, as it applies to the regional aircraft industry, is to exclude that industry from TPC funding opportunities, or alternatively, to change radically the programme’s eligibility and allocation requirements.


  6. Canada argues, however, that Brazil cannot here challenge the amendments made to TPC, since no subsidy has actually been granted to the Canadian regional aircraft industry since 18 November 1999. The obvious implication of Canada’s argument is that Brazil must wait until yet another prohibited TPC subsidy is granted to the regional aircraft industry, presumably after the Article 21.5 review has ended, and then begin dispute settlement proceedings anew. In the meantime, Canada demands that Brazil – and this Panel – simply take Canada’s word that it will not do wrong again.

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  7. This is not acceptable. Were the Panel to accept Canada’s argument, the inescapable result would be to lock Brazil into a futile spiral of endless challenges to a continual string of TPC subsidies, identical to ones already judged by this Panel and the Appellate Body to be prohibited. There would be, in that case, no way for Brazil to vindicate its rights and force Canada to observe its obligations. This is not an effective remedy, and cannot be considered acceptable.


  8. Canada’s position presents this Panel with the same problem faced by the Panel in Australia – Leather. That Panel found that the approach urged by Australia, as recorded in paragraph 6.35 of the Report, was unacceptable. In paragraph 6.38 of its Report, the Panel stated that this approach “would grant full absolution to Members who grant export subsidies that are fully disbursed to the recipient before a recommendation to withdraw the subsidy is issued in dispute settlement, and for which the export contingency is entirely in the past.” According to the Panel, the drafters of Article 3.1(a) of the Subsidies Agreement would not have included “the strict prohibition against subsidies contingent on export performance, including one-time subsidies contingent in fact on export performance, only to undermine that prohibition by providing a remedy which is ineffective in the case of such subsidies.” To ensure an effective remedy, the Panel then required retroactive repayment of the subsidies granted.


  9. This is precisely the situation with which this Panel is faced. Canada’s proposal is to “withdraw the subsidy” prospectively only, but at the same time to make the measures constituting that withdrawal impervious to challenge.


  10. Mr. Chairman, Brazil believes that the decision in Australia – Leather to require retroactive repayment was wrong, and that such a result is not required by the language of the Subsidies Agreement. However, Canada leaves the Panel in this case with no choice. If, under Canada’s theory, Brazil is not permitted to challenge Canada’s amendments to the TPC, the only remaining remedy is the retroactive repayment of TPC subsidies provided to the regional aircraft industry. Leaving Brazil without any effective remedy would negate completely the “strict prohibition against subsidies contingent on export performance” included in Article 3.1(a).


  11. Brazil therefore requests, first and foremost, that the Panel reject Canada’s argument that its implementation measures, in the form of amendments to the TPC, are impervious to challenge under Article 21.5. In the alternative – and although Brazil does not in general agree with the requirement of retroactive repayment of prohibited export subsidies – Brazil requests that should the Panel accept Canada’s argument, it then recommend the retroactive repayment of TPC subsidies to the regional aircraft industry. Later in this statement, I will have more to say about the similarities between the facts of Australia – Leather and the facts of this case, should it be necessary for the Panel to reach the question of retroactive repayment of TPC subsidies to the regional aircraft industry.


    TPC


  12. I now turn to the substance of Canada’s implementation measures regarding TPC. Brazil has demonstrated in detail that those measures make nothing more than cosmetic changes to the documents underlying TPC. Canada’s actions fail to meet its obligations to achieve effective implementation.


  13. TPC subsidies to the Canadian regional aircraft industry were not held to be de jure export contingent. Rather, those subsidies were determined by this Panel and the Appellate Body to be contingent in fact upon export performance. In other words, this Panel, affirmed by the Appellate Body, determined that in providing subsidies to the regional aircraft industry via TPC, Canada circumvented the Subsidies Agreement. As the Appellate Body noted at paragraph 167 of its report in this case, “the Uruguay Round negotiators have, through the prohibition against export subsidies that

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    are contingent in fact upon export performance, sought to prevent circumvention of the prohibition against subsidies contingent in law upon export performance.”


  14. Canada contends that merely removing the term “export” from TPC documents constitutes effective implementation. As I will discuss shortly, that would normally be true for subsidies that are contingent in law on export, but it is not true for subsidies that are contingent in fact on export. However, even if we accept, for the sake of argument, that Canada is correct, Brazil has shown in its submissions that Canada has failed to meet even its own measure of what constitutes effective implementation. Canada has failed to provide most of the documents associated with the “new” TPC to the Panel. As Canada itself admitted, in its Exhibit 9, it has failed to provide 68 percent of those documents. Canada cannot maintain that it has effectively implemented the DSB’s recommendations and rulings by virtue of changes to TPC’s documentation, without providing that documentation. Moreover, Brazil has demonstrated that those few documents Canada has provided still reveal a number of the factors considered by the Panel to support a finding of de facto export contingency.


  15. But Canada’s discussion of TPC documents is beside the point. As I have already noted, removing the term “export” from those documents might have been sufficient implementation had TPC been judged contingent in law on export performance. It is not, however, sufficient to remedy something determined to have circumvented the Subsidies Agreement; that is, something determined to be contingent in fact on export performance.


  16. Remedying de facto export contingency requires more than merely going through a checklist of what Canada terms, at paragraph 21 of its First Submission, “the factual elements considered relevant by the Panel and Appellate Body in determining that contributions to the Canadian regional aircraft industry” were de facto export contingent. As stated in paragraph 6.21, footnote 24 of Australia – Leather, “the specific details of the factual evidence underlying the conclusion that the subsidies were in fact contingent upon export performance . . . and therefore prohibited do not, in our view, determine what is required in order to ‘withdraw the subsidy’ . . .”


  17. In other words, the task of remedying de facto export contingency is not a mere matter of formula. For implementation to be effective, more than “the specific details of the factual evidence underlying the conclusion that” TPC subsidies were de facto export contingent must change. However, the facts leading to the inevitable “inference” of TPC’s de facto export contingency have not or cannot be changed. For this reason, Brazil has argued that TPC, as it applies to the regional aircraft industry, must be withdrawn in its entirety.


  18. At a minimum, since Canada was judged to have circumvented the prohibitions of the Subsidies Agreement by providing TPC subsidies contingent in fact on export, its implementation measures must ensure that prohibited export subsidies cannot be granted to the regional aircraft industry in future, and not merely that they might not be granted.


  19. Short of the retroactive repayment of subsidies already granted, requiring positive action by a Member to ensure that such subsidies will not be provided is the only means available to provide an effective remedy. Without such positive action, or in its place, without retroactive repayment, Members lodging successful “as applied” challenges to de facto export subsidies would be locked in an unending loop of litigation concerning something that had been already been found to violate the Subsidies Agreement.


  20. The problem is that the facts of the “new” TPC do not ensure that prohibited export subsidies cannot be granted to the regional aircraft industry in future. Brazil describes those facts in detail in its submissions, and I will not repeat them here. The salient point, however, is that under the “new” TPC, the same, specifically-selected industries will receive even more TPC money than before for the

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    same types of projects. I ask the Panel to note that on page 3 of the Industry Canada news release included as Brazil’s Exhibit 18, Canada reports that it has even encouraged those companies whose TPC applications were closed on 18 November 1999 simply “to submit new proposals” under the TPC as amended.


  21. In paragraph 22 of its First Submission, Canada claims that its sole motivation with the “new” TPC is “to promote technological innovation and enhance the technological capability of Canadian industry.” But “Canadian industry” is not the beneficiary of the “new” TPC. Rather, specifically- selected sectors of Canadian industry are the beneficiaries. And, it is the overwhelmingly export- oriented aerospace industry that will continue to receive two-thirds of all TPC funds, as Canada itself states at paragraph 32 of its first submission.


  22. The regional aircraft sector is, moreover, totally export-oriented. As you know, even Bombardier sales to Air Canada were structured as export sales to obtain export financing and to launch an export product. The Canadian government has consistently expressed something considerably short of casual indifference to the trading patterns of this industry, and has in fact explicitly said that it selected this industry to receive TPC funds because of its export orientation. Statements like this cannot now be “unsaid.” They reveal the intent of the Canadian government in extending TPC funds to this industry. And according to Section 5.15.1.3 of Canada’s Special Import Measures Handbook, cited by the United States at paragraph 5 of its submission, Canada considers the grantor’s intent to be an important indication of export contingency where a government, rather than revealing a “direct linkage to export performance,” instead circumvents the prohibition of export subsidies by establishing de facto export contingency.


  23. Brazil has also demonstrated that, given the regional aircraft industry’s virtually total export- orientation, any consideration of production or sales targets for applicants will, necessarily, be a reference to export performance. Additionally, the “strategic benefits,” “selection criteria” and “assessment criteria” that must be demonstrated by regional aircraft industry applicants to receive TPC funds are, when applied to that industry, nothing more than euphemisms for export contingency. Furthermore, Brazil has demonstrated that the “new” TPC retains its “near market” focus, and will continue to fund the same types of projects as it did before. Finally, Brazil has noted that Canada has not granted the Panel access to the majority of documents associated with the “new” TPC – documents that, under the “old” TPC, demonstrated facts from which the inference of de facto export contingency was drawn.


  24. Under all of these circumstances – in the words of the Appellate Body at paragraph 167 of its Report, “the total configuration of the facts constituting and surrounding” TPC – the “inference” of de facto export contingency still exists. Canada’s measures do not, therefore, constitute effective implementation. Brazil asks that the Panel so conclude.


    Repayment of TPC Subsidies


  25. Canada states that it has terminated $16.4 million in TPC subsidies to the regional aircraft industry as part of what it calls “full and faithful implementation” of the DSB’s recommendations and rulings. This $16.4 million figure apparently represents the amount of outstanding disbursements not yet paid under the five TPC subsidies to the Canadian regional aircraft industry discussed in the original Panel proceedings. Those five large non-recurring grants, discussed in paragraph 9.285 of the Panel Report, totaled $266.6 million.


  26. Whether Canada’s prospective termination of $16.4 million in as-yet-unpaid TPC subsidies is sufficient to achieve effective implementation quite obviously raises the question of the applicability of the Article 21.5 decision in Australia – Leather. I have introduced that decision earlier, but allow

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    me to expand somewhat upon it. In that case, the Panel determined that to “withdraw the subsidy” under Article 4.7 of the Subsidies Agreement means more than simply withholding any prospective, not-yet-paid portion of a subsidy. Rather, at paragraph 6.39 of its Report, the Panel determined that to “withdraw the subsidy” means to repay the subsidy.


  27. As I have already stated, Brazil believes that the Panel in Australia – Leather reached a result that is not required by the language of the Subsidies Agreement. As long as an effective remedy is available apart from retroactive repayment, Brazil does not believe that repayment should, in general and as a matter of law, be recommended.


  28. However, Brazil faces two unknowns. First, this Panel may consider itself, like the Panel in Australia – Leather, not to be bound by the arguments of the Parties or the Third Parties regarding the issue of retroactive repayment. In that case, it may decide to follow the reasoning in Australia – Leather.


  29. Second, the Panel may accept Canada’s argument that its amendments to the TPC are impervious to challenge under Article 21.5, leaving Brazil without any effective remedy. In that case, as I have already stated, the only way to achieve an effective remedy and uphold the “strict prohibition against subsidies contingent on export performance” is to follow the reasoning of the Panel in Australia – Leather.


  30. Brazil hopes that neither of these situations comes to pass. But if they do, the Panel will find that the circumstances of Australia – Leather are similar to the facts surrounding the grant of TPC subsidies to the regional aircraft industry. Applying the reasoning in Australia – Leather to the facts of this case leads to the conclusion that the TPC subsidies to the regional aircraft industry should be repaid in full and their impact eliminated.


  31. First, the form in which TPC subsidies were provided is similar to the form in which the subsidies in Australia – Leather were provided. Both cases involve large “investment” grants enjoyed by recipients, and therefore allocable, over a period of time. Second, like the subsidies provided in Australia – Leather, TPC subsidies, which were first granted in 1996, were not notified by Canada, under Article 25.2 of the Subsidies Agreement, until 30 April 1999, after the Panel rendered its decision in this case.


  32. Third, and again like Australia, Canada was held to have circumvented the Subsidies Agreement via the provision of subsidies contingent in fact on export performance. And like Australia, when faced with a determination that it had provided prohibited subsidies, Canada worked a second circumvention; in Australia – Leather, as described at paragraphs 6.13 and 6.50 of the Report, Australia simply replaced one de facto export contingent subsidy with another. Similarly, under the “new” TPC, the same, specifically-selected recipient industry is to receive even more TPC money to conduct the same types of projects funded by the “old” TPC. As I stated earlier, Canada has even encouraged companies whose TPC applications were closed on 18 November 1999 simply “to submit new proposals” under the “new” TPC.


  33. Under these circumstances, the Panel in Australia – Leather determined, at paragraph 6.45 of its Report, that nothing less than “full repayment would suffice to satisfy the requirement to ‘withdraw the subsidy’ . . .” Under that line of reasoning, Canada has not secured “full repayment” of the TPC subsidies provided to the regional aircraft industry, and has not therefore withdrawn the subsidy.


  34. Once again, I reiterate that Brazil does not believe that this or any other Panel should follow

    Australia – Leather. However, if this Panel accepts the interpretation of Article 4.7 offered by the

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    Panel in Australia – Leather, or if it accepts Canada’s argument that its amendments to the TPC are not subject to challenge under Article 21.5, it should determine that Canada’s failure to secure repayment means that it has not implemented the DSB’s recommendations and rulings, and that the subsidies must be repaid.


    Canada Account


  35. In paragraph 2 of its First Submission, Canada states that its implementation of the DSB’s recommendations and rulings regarding the Canada Account involves two steps: first, the completion of Canada Account transactions involving the regional aircraft industry; and second, the adoption of a policy to conform Canada Account financing to the terms of the OECD Arrangement.


  36. Brazil has explained why these actions do not constitute effective implementation. The Canadian “policy statement” included as Canadian Exhibit 13 does not, as Canada claims at paragraph 10 of its Rebuttal Submission, state that Canada Account financing “must” comply with the OECD Arrangement. Nor does it state what “comply with the OECD Arrangement” means. Canada now asserts that it means that Canada Account financing will adhere to Item (k) of the Illustrative List of Export Subsidies and the “interest rates provisions” of the OECD Arrangement. The policy statement does not say this, but even if it did, neither the statement itself nor anything else issued by Canada defines what are the “interest rates provisions” with which it intends to comply, or how it will apply those provisions.


  37. Brazil has also noted that Canada already stated – on at least three occasions during the original Panel proceedings – that Canada Account financing already complied with the terms of the OECD Arrangement and, specifically, with the terms of Item (k). Extracts from the submissions in which Canada made this statement were included as Brazilian Exhibits 33-35. Contrary to Canada’s claim, measures that were already in place at the time of the Panel’s and the Appellate Body’s ruling cannot credibly be touted as evidence of “full and faithful implementation.”


  38. Canada Account financing to the regional aircraft industry was determined by this Panel to constitute a prohibited export subsidy. Measures adopted by Canada to implement the Panel’s ruling must ensure that the same thing will not happen again. In the absence of information regarding what “comply with the OECD Arrangement” means, or with which “interest rates provisions” Canada intends to comply, Canada will be able to continue to operate Canada Account as a prohibited export subsidy, undetected and undetectable. This is not effective implementation.


  39. Several questions arise. For example, does “comply with the OECD Arrangement” mean that Canada Account financing will in every instance be issued at or above the OECD Arrangement’s Commercial Interest Reference Rate, with an appropriate add-on for the risk factors associated with the particular transaction and the particular parties involved? Does it mean that all Canada Account financing will in every instance adhere to the 10-year maximum repayment term set by the OECD Arrangement? The Canadian “policy statement” fails to address these questions.


  40. In the companion case against Brazil’s PROEX, Brazil provided details regarding its implementation measures, and not just vague suggestions styled as government “policy.” It offered specifics about how it had amended PROEX to comply with the DSB’s recommendations and rulings. In light of Canada’s implementation strategy with respect to the Canada Account, maybe Brazil should instead have issued a “policy statement” stating its intention to “comply with the OECD Arrangement.” I hesitate to speak for Canada, but my guess is that it would not have found such a statement sufficient to implement effectively the recommendations and rulings of the DSB. I also presume that the Panel in the PROEX case would not have found such a change acceptable. Nor should this Panel, in consideration of Canada’s “policy statement” regarding the Canada Account.

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  41. Brazil is not a Participant in the OECD Arrangement. Our understanding, however, is that it is unenforceable, not subject to dispute settlement, and subject, in its application, to often widely- varying interpretations by its various Participants. Under these circumstances, there is no way of knowing what Canada means when it says it will “comply with the OECD Arrangement” or the “interest rates provisions” included in the Arrangement.


  42. Based on the information provided, Canada cannot possibly claim that it has put in place what it purports at paragraph 2 of its First Submission to be “new measures to ensure full and faithful implementation of the DSB rulings and recommendations.” Canada has not offered anything “new” at all with regard to Canada Account, and has fallen well short of providing assurances that Canada Account cannot continue to provide prohibited export subsidies to the regional aircraft industry. The Panel should conclude that this is not effective implementation.


    Conclusion


  43. In conclusion, Brazil requests that the Panel determine that Canada has not implemented the recommendations and rulings of the DSB, with regard to both TPC and the Canada Account. Once again, Brazil thanks the Panel for this opportunity to present its views, and welcomes any questions the Panel might have.

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ANNEX 1-4


CONCLUDING STATEMENT OF BRAZIL


(6 February 2000)


Mr. Chairman and members of the Panel:


  1. We heard a large number of arguments from the parties and the third parties today, some referring to technical details of the case, some to political considerations, some to procedural aspects of the case. I felt that, in the midst of all these arguments, we may lose the focus of what is really at stake before the Panel, and of what the essence of this case is. That is why I choose to make this brief summary of Brazil's views.


  2. I guess the best way to start is to picture a scenario. I would ask the Members of the Panel to imagine a situation where a given country has a highly export-oriented industry. Some segments of this industry reach 100% export orientation. That country decides to support the export sales of that industry and builds a subsidy programme around it. The programme is very carefully designed to avoid a possible finding of de jure export contingency. At first 90% of all funds in the programme are directed to that industry, and in subsequent years, never less than 2/3 of the funds are allocated to that same highly export-oriented industry.


  3. A Member who is directly affected by the exports of the beneficiary industry questions that programme in the WTO. A Panel constituted to examine the dispute understands that it is not facing a case where an industry that happens to be highly export oriented incidentally receives subsidies. That Panel finds that it is before a case where a highly export-oriented industry is specifically targeted to receive massive subsidies because it exports.


  4. After the DSB recommends that the subsidizing country withdraw the prohibited subsidy – and not merely bring it into conformity with the WTO disciplines – that country completely ignores those recommendations and simply makes cosmetic alterations to the regulations of the original subsidizing programme. For example, they delete the word exports from all flyers and administrative documents.


  5. The subsidizing country announces that it now has a "new" programme and that it has faithfully implemented the recommendations of the DSB. The fact, however, is that under this "new" programme the same companies will continue to receive subsidies to use in the same type of projects approved under the "old" programme. Actually, they will now receive even more money, since the results of the original programme have proven to be quite successful.


  6. Such "implementation" is obviously challenged by the complaining country, which brings about Article 21.5 procedures. Under these procedures, the complainant shows unequivocally that the programme remains essentially the same and requests that the Panel make a finding of non- implementation. The subsidizing country nonetheless alleges that it has put in place a new programme, which cannot be deemed to be a de facto export subsidy. After all, it implemented the recommendations of the DSB in good faith and it could not possibly prove, after just a few weeks of implementation, that the de facto export contingency has disappeared. The complainant, it submits, is proposing a burden of proof that is impossible to be meet. It further argues that, quite on the contrary, it is the complainant who bears the burden of proof. It is the complainant that has to prove that the "new" programme is also de facto contingent on export subsidies. Furthermore, such proof would

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    have to be based on "new" factual evidence, which could positively infer that the payments under the new subsidy programme are still de facto contingent on exports.


  7. Mr. Chairman and members of the Panel, Brazil agrees that the complainant has the initial burden of proof, but since no payments were made under the new programme, it would be impossible for the complaining country to meet the standards suggested by this subsidizing country. The subsidizing country figures, therefore, that if it takes no actions during 60 or 90 days – or whatever the duration of the Article 21.5 Review Panel is – it will get away with its carefully planned circumvention of the Subsidies Agreement. The "impossible" burden of proof is now on the complainant.


  8. Turning to the specific case of TPC payments, let me recall that the Appellate Body put before us a three-part test. First, one has to establish the "granting of a subsidy" – and Canada does not dispute that this occurs. The second part of the test concerns the expression "tied to". Finally, one should determine that exports are "anticipated" or "expected". Canada does not dispute that the regional aircraft industry in Canada is highly export-oriented, and even pointed out that this is a fact that will not change. Canada anticipates and expects export sales from that industry and this is not disputed either. What Canada does argue, is that Brazil failed to meet the second part of the test, the one concerning the "tied to" provision.


  9. Mr. Chairman, Brazil has provided conclusive evidence that the targeted industries of the "old" TPC are the same recipients under the "new" TPC. Canada itself confirmed that when answering a follow-up question posed by you this morning. When it first examined this case, this Panel found that the way TPC was conceived and operated provided ample evidence that the subsidies granted to the targeted industries were "tied to" anticipated and expected export earnings. The Appellate Body unconditionally confirmed this finding. Under the "new" TPC the same three industries are targeted and Canada knows that whatever sales are made by those industries will be almost entirely directed to foreign markets. Nothing has changed, the granting of the subsidy is still firmly "tied to" anticipated and expected export earnings of the same industry.


  10. Brazil showed that we still have the same answers to the three parts of the test the Appellate Body put before us. By doing this, Brazil has given the Panel ample evidence that Canada did not implement the recommendations of the DSB and has, therefore, met its burden of proof. On the other hand, Canada has given us nothing that would resemble a credible effort to implement those recommendations. It claims, nonetheless, that it must be deemed to be in compliance, since it has adopted the implementing measures in good faith and that Brazil is proposing a standard of proof that is impossible to meet. I will soon show that this is definitely not the case.


  11. Mr. Chairman, Brazil admits that the task to implement recommendations to withdraw a de facto export subsidy is more complex than when we are dealing with a de jure export subsidy; but it is by no means impossible, as Canada claims.


  12. One possible way to implement the findings on TPC could be, for example, the simple withdrawal of the 100 per cent export-oriented regional aircraft industry from the list of eligible recipients of the programme.


  13. Nevertheless, if Canada still wanted to avoid such action, its changes to the regulations of the programme would have to ensure that the de facto contingency would not exist anymore. Let me recall that payments under the "old" TPC were not found to be de jure contingent on exports. However, Mr. Chairman, the regulatory changes made to TPC not only would allow the programme to be operated as before, it virtually ensures that it will. The representative from the EC said in the third party session that Canada must be given the "benefit of the doubt". There is no doubt here

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    Mr. Chairman. TPC will operate as before, will benefit exactly the same companies – but, I forgot, now there will be even more money to be dispensed.


  14. Canada claims that it could not possibly make changes to TPC that would ensure that the de facto contingency would disappear. This is an impossible task they say. Let me assure you Mr. Chairman that this is not true. It would not be particularly difficult to devise changes to the programme that would ensure the withdrawal of the export contingency. I could think of hundreds of alternatives.


    The Chairman of the Panel asks if Mr. Azevêdo could provide examples of these alternatives.


  15. Mr. Chairman, certainly the Canadian officials are aware of the concept of general availability of a subsidy. Canada could make TPC subsidies available to all industries. It did not do so. It maintained the programme resources limited to the same highly export oriented industries targeted by the "old" TPC. Canada could also make eligibility automatic and reduce the subjectivity of the criteria and conditions governing the approval of grants. Canada did not do so. Instead, Canada maintained highly subjective criteria and conditions, linking disbursements to vague goals such as "increasing economic growth, creating jobs, and supporting sustainable development", or to "strategic" concerns. I could go on providing examples of how Canada could reduce or eliminate the specificity of the programme, therefore eliminating the contingency on export earnings. But I do not wish to offer Canada an implementation roadmap. I wonder if later they would not simply characterize these examples as a sufficiency test proposed by Brazil.


  16. The point is that Canada could have introduced changes that would ensure that, operating with a broader range of automatically eligible recipients (export oriented and otherwise), the granting authority had little or no room to arbitrarily make funds available based on the export propensity of the beneficiary. Canada chose not to do so. In fact Canada scrupulously tried to make sure that the programme would function just as it did before. The standard proposed by Brazil is by no means impossible to meet. It falls well within the boundaries of what is reasonable.


  17. With regard to the Canada Account I believe that there's not a whole lot to be said. Before this Panel, during the original procedures of this case, Canada affirmed, in good faith I am sure, that Canada Account complied with the terms of the OECD Arrangement. Brazil pointed this out in its submissions in the current proceedings. Regardless of that good faith interpretation of the OECD Arrangement, this Panel found Canada Account to violate the SCM Agreement – a finding confirmed by the Appellate Body. Canada has now issued a "policy guideline" which, in effect, merely reproduces in writing what Canada had already said it was doing before the programme was found to grant prohibited subsidies.


  18. If this is to be considered as effective implementation Mr. Chairman, the implications for the Multilateral Trading System would be grave indeed. Members could from then on feel obliged to merely state in writing, as a policy guideline or as part of a regulation, that the programmes found not to be in conformity with the WTO Agreement will henceforth operate in full compliance with the recommendations of the DSB; in compliance with the WTO Agreements; or any similar variation. In good faith, Mr. Chairman, they will then interpret the DSB recommendations, or the WTO Agreements, and implement the "new" programmes as they see fit. In the case of the Canada Account, the WTO Members not participants in the OECD Arrangement, as Canada itself asserts, would not even be able to verify such implementation.


  19. I would further note that, regarding Canada Account, Canada itself acknowledges the issue of interpretation of the OECD Arrangement. Let me read a sentence found in the introductory paragraph of the document where Canada lists what it considers to be the relevant interest rate provisions of the OECD Arrangement: "within limits, variations of certain of these provisions are permitted under the

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    terms of the Arrangement." Mr. Chairman, the DSB found that Canada Account subsidies were to be withdrawn, and Canada asks Brazil and the other WTO Members to believe that, from now on, they will interpret the OECD Arrangement, in good faith as before, but now in ways that would not be found to be in violation of the SCM Agreement.


  20. Mr. Chairman, nothing has changed with regard to Canada Account. If Canada's policy guideline is found to be effective implementation, the multilateral trading system will have suffered a serious setback.

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    ANNEX 1-5


    RESPONSES BY BRAZIL

    TO QUESTIONS FROM THE PANEL


    (14 February 2000)


    Canada Account


    Q1. Could Brazil please elaborate regarding the basis on which it considers the Policy Guideline “purely hortatory” (Brazil’s second submission at para. 69)? In Brazil’s view, what changes would be necessary for it to become mandatory?


    Response


    The Policy Guideline adopted for Canada Account is hortatory because, according to Brazil’s information, Policy Guidelines are not binding in Canadian law and cannot fetter Ministerial discretion. They provide guidance on how decision makers will exercise their discretion, but they are not binding and do not require a specific outcome. In Maple Lodge Farms v. Canada [1982] 2SCR 2 at 7, the Supreme Court of Canada held that Ministerial discretion cannot be fettered through the issuance of a Policy Guideline.


    The Federal Court of Canada has also held that Policy Guidelines may be issued, but should not be drawn so narrowly that they “crystallize into binding and conclusive rules.” See Dawkins v. Canada [1992] 1 FC 639 at 649. Similarly, decision-makers that issue Policy Guidelines may not construe those Policy Guidelines as binding obligations which restrict their ability to exercise discretion. Saunders Farms v. B.C. [1985] 32 Admin. L.R. (2d) 145 (BCCA).


    Therefore, the Policy Guideline adopted by Canada for use with Canada Account cannot bind the Minister because that would fetter Ministerial discretion and violate Canadian law. Consequently, as the Policy Guideline is not binding but merely provides direction, it is merely hortatory.


    In fact, Canada’s actions demonstrate that its Policy Guideline does not remove Canada Account financing from the category of prohibited export subsidies; the policy was already in existence before the Panel determined that Canada provided prohibited export subsidies via the Canada Account. Despite the fact that Canada stated to the Panel in the original proceedings, on at least three different occasions, that Canada Account financing and loan guarantees for exports “have been consistent with the interest rate provisions of the OECD Consensus, as required by Item (k) of Annex I,” the Panel determined that Canada Account support constituted prohibited export subsidies.1 If this policy did not provide a disincentive for Canada to maintain prohibited export subsidies via the Canada Account before the Panel’s determination, why would it do so after the Panel’s determination?


    image

    1 First Written Submission of Canada, 16 November 1998, para. 173 (Exhibit Bra-33). See also First Oral Submission of Canada, 26 November 1998, para. 101 (“Canada Account financing and loan guarantees for exports committed since the entry into force of the SCM Agreement have complied with the interest rate provisions of the OECD Consensus, as required by Item (k) of Annex I.”) (Exhibit Bra-34); Second Written Submission of Canada, 4 December 1998, para. 77 (“Canada Account transactions are consistent with the interest rates provisions of the OECD Consensus.”) (Exhibit Bra-35).

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    As to what changes would be necessary for the guideline to become mandatory under Canadian law, Brazil would note that it is not expert on Canadian law. However, it would seem that a minimum mandatory language should be used, and provision should be made for consequences in the event of non-compliance.


    Q2. Does Brazil agree with Canada’s identification of the “interest rate provisions” of the OECD Arrangement as set forth at paragraphs 69-80 of its oral statement and in the document provided by Canada entitled “Item (k): Interest Rates Provisions of the OECD Arrangement”? Are there other provisions of the OECD Arrangement that Canada has not mentioned but that in Brazil’s view form part of the “interest rate provisions” of the OECD Arrangement in the sense of the second paragraph of item (k) of the Illustrative List of Export Subsidies? Are there any provisions identified by Canada that in Brazil’s view do not form part of the “interest rate provisions” of the OECD Arrangement in the sense of the second paragraph of item (k) of the Illustrative List of Export Subsidies? Please explain in detail.


    Response


    Brazil, like most Members of the WTO, is not a Participant in the OECD Arrangement, and for that reason has limited knowledge of the Arrangement and its workings. Therefore, rather than questioning the specific list of “interest rates provisions” listed by Canada, Brazil has asked Canada a series of questions regarding the significance of the provisions it cites.


    It should fall to Canada, as one of a minority of WTO Members that is a Participant in the Arrangement, to explain what those provisions are and how, precisely, it will apply them. As stated in its Statement to the Panel, Brazil’s understanding is that in their application – and not merely in their identification – the provisions of the OECD Arrangement are subject to widely-varying interpretations by the various Participants. There is no dispute settlement mechanism in the Arrangement to regulate or constrain those different interpretations. There are no publicly-available documents recording the agreement of the Participants to abide by particular interpretations of particular provisions.


    Brazil understands, however, that in applying the Arrangement, some Participants have adopted rather controversial interpretations of various provisions that affect the scope of financing subject to the disciplines of the Arrangement. Brazil’s questions to Canada are posed in an attempt to discover whether Canada itself, as a Participant in the Arrangement, has adopted some of these interpretations in its provision of export financing.


    We begin, for example, with Article 2 of the Arrangement, which states that it applies to “official support for exports.” The Arrangement contains no definition of the term “official support,” and Brazil has confirmed with the OECD that the Participants have not reached agreement on a definition.2 As a result, Brazil understands, some Participants take the position that “official support” consists only of the provision of support at rates below a government’s cost of funds. According to those Participants, support extended at rates equal to or above the government’s cost of funds constitutes so-called “market window” support. These Participants consider that, so long as support is granted through this “market window,” it may be provided at rates below the minimum Commercial Interest Reference Rates (“CIRR”) applicable to “official support” for exports. This interpretation of the “market window” exception may be perfectly acceptable, but it demonstrates why Brazil considers Canada’s statement that it will “comply with the OECD Arrangement” ambiguous.



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    2 OECD Arrangement, Article 88. See also Correspondence with OECD Secretariat (Exhibit Bra-37).

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    Further, there is an apparent discrepancy in the particular “interest rates provisions” identified by Canada, even under Canada’s own standard. According to Canada, the “interest rates provisions” of the OECD Arrangement, incorporated into Item (k), include those provisions that “affect what the interest rate and the amount of interest payable will be in a given transaction.”3 Brazil understands that the so-called “Knaepen Package,” which took effect on 1 April 1999, requires Participants to adhere to certain sovereign and country risk premiums. These requirements may have been incorporated into the Arrangement, and may be incorporated via Canada’s listing of Article 21(a). As a non-Participant, Brazil does not know whether this is the case. However, those requirements, which in Canada’s words “affect what the interest rate and the amount of interest payable will be in a given transaction,” should be included as “interest rates provisions” of the Arrangement, or Canada should explain why they are not. Thus far, Canada has been silent on this point.


    Finally, Brazil has not knowingly asserted in this proceeding that Canada will not comply with the “non-derogation commitment,” as Canada argues at paragraph 71 of its Oral Statement. Indeed, Brazil is not certain what that commitment is, and Canada has not specified which provisions compose the “non-derogation commitment set forth in the Arrangement.” If Canada is referring to Article 27, however, titled “No Derogation for Export Credits,” Brazil notes that Canada has not included this provision on its list.


    Q3. Could Brazil describe in detail what it considers is required for full compliance with the interest rate provisions of the OECD Arrangement in the sense of the second paragraph of item (k) of the Illustrative List of Export Subsidies. That is, what precisely would Canada have to do for Canada Account transactions in the regional aircraft sector to qualify for the safe haven of the second paragraph of item (k)? How if at all does this differ from what Canada has said would be necessary? If Canada Account transactions in the regional aircraft sector complied to the letter with all of the provisions of the OECD Arrangement that Canada identified in paragraphs 69-80 of its oral statement and in the Canadian document entitled “Item (k): Interest Rates Provisions of the OECD Arrangement”, does Brazil believe that such transactions would qualify for the safe haven in the second paragraph of item (k)? Please explain in detail.


    As discussed in its response to Question 2, Brazil considers that Canada has not fulfilled its implementation commitments by merely listing what it considers the “interest rates provisions” of the OECD Arrangement to be. Canada should state how it intends to apply those provisions, and what it means when it says it will “comply” with them.


    Brazil has described above the ambiguities surrounding the application of the Arrangement regarding, for example, the definition of “official support” and the concept of “market windows.” Without information from Canada regarding how it intends to apply each of the provisions included on its list, a non-Participant like Brazil will have no way of knowing what to “comply with” those provisions actually means. Only with this information could the Panel, or any WTO Member who is a non-Participant in the Arrangement, reasonably determine whether the Canada Account, as the Panel’s question states, “complies to the letter with all of the provisions of the OECD Arrangement” included on Canada’s list.


    The Arrangement would appear to make the obtaining of information difficult for non- Participants. For example, it appears to Brazil that Article 52 of the Arrangement requires a Participant intending to match alleged non-conforming terms and conditions by another Participant to inform that Participant. However, Article 53 appears to permit a Participant to match the alleged non-conforming terms and conditions of a non-Participant by simply notifying other Participants of



    image

    3 Canadian document provided to the Panel on 6 February 2000, “Item (k): Interest Rates Provisions of the OECD Arrangement,” pg. 1.

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    that fact, with no notice to the non-Participant. Thus, if the matching provisions of the OECD Arrangement were considered to be part of its “interest rates provisions,” it would appear that a Participant would have to notify another WTO Member that is a Participant but not one that, like Brazil, is not a Participant. It is also unclear to Brazil what a non-Participant’s obligations would be under these provisions. The point is, however, that it is up to Canada as the Member invoking the second paragraph of Item (k) to explain whether it intends to comply with these, and the other provisions, and if so, how it intends to do so. This is not a question of proof; it is a question of explanation.


    Q4. Concerning Canada’s proposal that the Panel endorse the verification mechanism suggested by Canada, Brazil states that it considers that resolution of the matter in the context of dispute settlement “is not clearly compatible with the spirit, if not the letter, of Article 19 of the DSU” (Brazil’s second submission at para. 78). Could Brazil please elaborate on this point. In particular, in what specific sense might Canada’s proposal be considered out of keeping with the spirit and with the letter of Article 19? Are there any other provisions of the DSU or the SCM Agreement that would be relevant to Canada’s proposal?


    Response


    Under Article 19.1 of the DSU, a Panel may make recommendations that a Member violating its commitments bring its measure into conformity with a particular agreement. Within the context of prohibited export subsidies, however, Panels are, more specifically, required by Article 4.7 of the Subsidies Agreement to recommend that a Member providing such a subsidy “withdraw the subsidy.” Put simply, while a bilateral transparency and verification mechanism may be desirable, it is not a replacement for the requirement that Canada withdraw the prohibited export subsidies identified in the recommendations and rulings of the DSB. Canada is proposing that the Panel recommend verification, not implementation. Brazil would also note that Article 3.2 of the Dispute Settlement Understanding provides that recommendations and rulings of the Dispute Settlement Body cannot add to the obligations of the Members. A verification requirement would add to the obligations of the parties.


    Bilateral discussions between Brazil and Canada regarding transparency and verification of programmes maintained for the support of their regional aircraft manufacturers are on-going. Whether those discussions succeed or fail will depend in part on Canada’s willingness to submit a broader range of programmes than merely the Canada Account and TPC to the terms of any transparency and verification arrangement. Any such arrangement must be truly reciprocal to be acceptable to Brazil.


    Further, the proposed bilateral agreement envisions the disclosure of extensive amounts of highly confidential commercial information. Confidentiality requirements, therefore, are vital in any bilateral arrangement. As the Panel is aware, confidentiality has been, and continues to be, an issue in these cases.


    The Panel will recall that in Brazil – Export Financing Programme for Aircraft, WT/DS46, the interim report of the original Panel, containing its findings and conclusions, was prematurely released to the Parties, despite the understanding – otherwise adhered to in these proceedings – that all reports would be issued simultaneously. Late in the afternoon of the premature release, Northwest Airlines announced that it was awarding a contract for a large number of aircraft to the Canadian producer, Bombardier, rather than to Embraer of Brazil. Northwest had previously informed both manufacturers that it would await the results of the WTO proceedings before making its decision. Brazil is confident that it did not provide the interim report in DS46 to Northwest.

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    Likewise, in this Article 21.5 proceeding, the Panel will recall that Brazil’s confidential Second Submission to this Panel somehow was obtained by the European Communities, despite the fact that it had not been provided to the EC by Brazil. While it has not been established exactly how the unauthorized disclosure to the EC occurred, the Panel will appreciate that incidents of this nature do not contribute to building confidence that unauthorized disclosure of highly sensitive commercial information under a transparency agreement will not occur.


    Technology Partnerships Canada


    Q1. At paras. 18 and 19 of its second submission, Brazil claims that “[a]t a minimum, Canada’s implementation measures must ensure that prohibited export subsidies cannot be granted to the regional aircraft industry under the facts surrounding the operation of the TPC programme . . .” (emphasis in original). Out of preference, Brazil would have Canada implement the Panel’s findings on TPC assistance by eliminating the TPC programme altogether with respect to the regional aircraft sector.


    1. Please comment on Canada’s assertion (para. 32 of oral submission of Canada) that, with regard to TPC assistance to the regional aircraft industry, Brazil has set Canada an “impossible burden of proof”. Is it possible, in practice, for a panel to verify that a sovereign state has eliminated all discretionary authority to grant de facto export subsidies to a specific sector of its domestic industry? Is the elimination of all such discretionary authority required by Article 3.1(a) of the SCM Agreement?


      Response


      Brazil does not agree that it suggested that a sovereign state must eliminate all of its discretionary authority. Obviously, a sovereign state cannot do that and remain a sovereign state. Nor does Brazil agree that it has set Canada “an impossible burden of proof.” Brazil recognizes that it bears the burden of showing that Canada has failed to implement, and Brazil has done so. Brazil has shown that all the essential elements of the programme remain unchanged, and that many of these elements will never change. It then becomes Canada’s burden to explain how Brazil was wrong and how Canada’s purported changes actually constitute effective implementation. This Canada has not done. This is especially true here, where Canada has admitted that it has not in fact yet even completed its revisions of the programme.


      The Panel will not, of course, be able to verify in these Article 21.5 proceedings that Canada never again will grant a subsidy de facto contingent on export to the regional aircraft industry. For the recommendations and rulings of the DSB in this case to have any meaning, however, withdrawal of the prohibited subsidy should consist of measures that make it clear to the Panel that Canada is not simply going to continue the same programme as before once these proceedings are completed. Otherwise, to obtain an effective remedy, Brazil would be required to engage in endless challenges to future generations of TPC subsidies issued under circumstances virtually identical to ones already judged to be prohibited by this Panel.


      Brazil does not consider that the elimination of all discretionary authority is required by Article 3.1(a) of the Subsidies Agreement. For example, in Brazil’s view, Article 3.1(a) does not prohibit the exercise of discretion in evaluating the financial or technical feasibility of a proposal. Rather, the specific question in this proceeding is whether Canada has “withdrawn the subsidy,” under Article 4.7 of the Agreement. Under the “new” TPC, Canada has not withdrawn the subsidy; instead, the same, specifically-selected industries will receive even more TPC money than before for the same types of projects. By any reasonable standard, this is not sufficient to achieve the effective remedy required by Article 4.7.

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    2. Would elimination of the TPC programme have the effect desired by Brazil (i.e., elimination of discretionary authority to grant prohibited export subsidies to the Canadian regional aircraft industry) if Canada were subsequently able to introduce a new programme that could, in principle, lead to the grant of de facto export subsidies to the Canadian regional aircraft industry?


Response


Brazil agrees that it is not possible to prevent all eventualities. However, the fact that a remedy could be subject to manipulation, does not mean that no remedy should be provided. Regardless of what new programmes are created in the future, the issue now before the Panel is whether Canada has fully implemented the DSB’s recommendations and rulings.


Q2. Does Brazil consider that the provision of specific subsidies to export-oriented industries – in the absence of other factual considerations demonstrating de facto export contingency – necessarily violates Article 3.1(a) of the SCM Agreement? Please explain.


Response


When an industry is specifically targeted for a subsidy because of its undisputed export orientation, a violation of Article 3.1(a) of the SCM Agreement occurs. As the United States said, at paragraph 7 of its Third Party Submission, “there is a fundamental difference between a government granting a subsidy to an enterprise which happens to export and a government granting a subsidy to an enterprise because it exports.”4


Moreover, Brazil has demonstrated that the export-orientation of the industry has not changed since the original Panel proceedings, and Canada has acknowledged that it maintains the same focus in the “new” TPC as it did in the “old” TPC – two-thirds of all funds will continue to go to the aerospace industry. Canada cannot maintain the identical focus on this industry, originally selected because of its exports, in the “new” TPC, with the export-orientation of the industry as evident as ever, and expect that the motivations underlying this focus in the “old” TPC are no longer relevant.


The Panel will recall that the Appellate Body concluded that a de facto export subsidy exists when it is “tied to” actual or anticipated exportation or export earnings. Brazil has shown that TPC subsidies were and, under the “new” TPC, will continue to be, provided to the aircraft sector because of its high export performance. As Canada has decided to provide subsidies to this industry because it exports, TPC subsidies clearly are “tied to” actual or anticipated exportation or export earnings.


Q3. At footnote 62 of its second submission, Brazil states that, “to reach sales forecasts”, the Canadian regional aircraft industry must export. Is the grant of TPC assistance to the regional aircraft sector contingent on fulfillment of sales forecasts?


Response


Brazil noted in its submissions to the Panel that Canada has not yet provided 68 per cent of the documents associated with the “new” TPC. Therefore, Canada has made it impossible to determine whether this or other factors considered by the Panel in the original proceedings to constitute evidence demonstrating de facto export contingency are maintained in the “new” TPC. Canada has also admitted to the Panel that it has not yet completed the revision of many of these



image

4 Emphasis in original.

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documents. For these reasons alone, the Panel may properly find that Canada has failed to implement the recommendations and rulings of the DSB.


Under the TPC Aerospace and Defence Sector Generic Model Agreement, applicants are required to report forecast and actual sales.5 Since Canada did not provide a new version of this document by the deadline for implementation of the recommendations and rulings of the DSB, the Panel should presume that the prior version still applies. Given its status as a generic form agreement, there is no reason why a new version of this document will not be created “until such time as the restructured programme approves and contracts new investments,” as Canada suggests.


Brazil also notes that even after 18 November 1999, TPC’s website states that TPC contributions, 65 per cent of which are allocated to the aerospace industry, “are forecasted to generate sales of more than $89.6 billion . . .”6 TPC therefore records and tracks sales forecasts.


Finally, Brazil notes that under the “new” TPC, one form of repayment of TPC contributions will be based upon “royalties on total company or division sales.”7 To prepare a repayment schedule based upon royalties from sales, TPC must obtain information on and evaluate forecasted sales.


Q4. If, hypothetically (and as Brazil claims), the current measures taken by Canada to comply with the DSB recommendation are not a sufficient change in the factual situation which led to the initial conclusion that TPC assistance to the regional aircraft industry is de facto contingent on export, what alternative action(s) does Brazil consider Canada could take to implement the DSB recommendation other than withdrawal of the TPC programme in respect of the Canadian regional aircraft industry?


Response


Alternatives available to Canada would include making TPC funds available to Canadian industry generally, and changing TPC so that its contributions do not confer benefits, and therefore do not constitute subsidies, within the meaning of Article 1.1 of the SCM Agreement.


Q5. At para. 37 of its first submission, Canada claims that “[t]he restructuring of TPC has removed all elements that had formed the basis for the Panel and Appellate Body finding of de facto export contingency, with the exception of one, namely that the Canadian regional aircraft industry has a high propensity to export its final products”. Does Brazil agree that all other elements that had formed the basis of the Panel and Appellate Body rulings on export contingency – with the exception of the export orientation of the Canadian regional aircraft industry – were removed by Canada? If not, why not? If yes, and if the export orientation is the only element remaining, does it not then logically follow that the subsidies granted are no longer export contingent, especially in the light of the Appellate Body’s statement in para. 173 of its report that the “export orientation of a recipient may be taken into account as a relevant fact, provided that it is one of several facts which are considered and is not the only fact supporting a finding”?


Response


Brazil does not agree with Canada’s claim that it has removed all elements forming the basis, in the original proceedings, for the determination that TPC contributions to the regional aircraft industry were de facto export contingent. In paragraph 15 of its Second Submission, Brazil describes


image

5 Canada – Measures Affecting the Export of Civilian Aircraft, WT/DS70/R (14 April 1999) (Adopted as Modified by the Appellate Body, 20 August 1999) para. 9.340 (bullet point 10) (“Panel Report”).

6 TPC Current Statistics, 6 December 1999 (Exhibit Bra-17).

7 Industry Canada News Release, 18 November 1999, pg. 4 (Exhibit Bra-18).

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the factors that in its view support a continued inference of de facto export contingency and a determination that Canada has not “withdrawn the subsidy”:



In this regard, we would recall the language of the Panel in Australia – Leather, at paragraph 6.21, note 24: “The specific details of the factual evidence underlying the conclusion that the subsidies were in fact contingent upon export performance within the meaning of Article 3.1(a) of the SCM Agreement and therefore prohibited do not, in our view, determine what is required in order to ‘withdraw the subsidy’ within the meaning of Article 4.7 of the SCM Agreement.


Q6. At para. 11 of its oral statement, Brazil “requests that should the Panel accept Canada’s argument, it then recommend the retroactive payment of TPC subsidies to the regional aircraft industry”. Was this request contained in Brazil’s first two written submissions to the Panel? If not, why not? Is Brazil seeking repayment of TPC subsidies to the Canadian regional aircraft industry? If so, what would be the basis for the Panel to recommend repayment?


Response


Brazil’s First and Second Submissions did not contain a request for this retroactive repayment, which, as expressly stated in paragraph 11 of its Statement for the Meeting of the Panel, is an alternative, though not a preferred, remedy. Brazil’s presentation of arguments regarding the retroactive repayment of TPC subsidies was in response to the circulation of the Article 21.5 decision in Australia – Leather, which was not circulated to the Members until 21 January 2000, four days after Brazil’s Second Submission was filed on 17 January 2000.


Brazil submits that retroactive repayment may be appropriate only in the event that either or both of two scenarios materializes. First, if the Panel considers itself required to follow the reasoning of the Panel in Australia – Leather, Brazil has argued that the factual similarity between Australia – Leather and the case at hand make the reasoning of Australia – Leather applicable here. Second, if

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the Panel accepts Canada’s argument that “in the absence of any such financial contribution and a full consideration of [the] facts, there can be no grounds to support Brazil’s allegations of de facto export contingency under the restructured TPC programme,”8 Brazil will be left without recourse to Article

21.5 review of Canada’s implementation measures. In that event, Brazil will be left with no effective remedy apart from the retroactive repayment of TPC subsidies granted to the Canadian regional aircraft industry.


Question to both parties


Please comment on the EC argument (para. 7 of the EC’s oral statement) that, in light of the Panel’s terms of reference set forth in document WT/DS70/9, “[t]he Panel may not . . . in this case consider whether Canada has failed to implement the report retroactively since Brazil has only asked for a finding that the changes to the two programmes at issue have not implemented the Report”.


Response


This argument was raised by the European Communities and the parties before the Panel in Australia – Leather and was not accepted by that Panel. As Brazil stated in its oral presentation, Brazil believes the EC and the parties were correct in their positions in Australia – Leather, and that the case was wrongly decided. However, the fact remains that this Panel, like the Panel in Australia


  1. In Australia – Leather, the Panel was faced with two, one-time financial contributions. The first of these financial contributions was found by the Panel to have been a subsidy contingent upon export performance. Australia purported to implement the Panel’s findings, which had not been appealed, by placing the specific export subsidy found to have been prohibited, with another specific export subsidy. It was this second subsidy that was required to be removed. This, very clearly, is not the case here.


  2. As you well know, it was the operation of TPC in the regional aircraft sector that was at issue. And it is the operation of TPC, as newly constituted, that is at issue in this proceeding. There is no evidence, and, indeed, no suggestion, that new subsidies have been granted to “circumvent” a Panel ruling. The claim here is that the restructuring of TPC has not gone far enough. In these

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    circumstances, naturally, repayment of subsidies, even if such a remedy were available under the SCM Agreement, is not warranted.


  3. Mr. Chairman, Brazil has made a valiant effort to bring the findings of the 21.5 panel in Australia - Leather into the discussion of this case. But, despite such effort, Brazil has failed to demonstrate the relevance of that decision in the context of the matter that is now before the Panel.


  4. First, Brazil has not explained why the Panel should now entertain Brazil’s argument for a retrospective application of Canada’s obligation to withdraw, under Article 4.7 of the SCM Agreement, to subsidies that had already been granted before the recommendations of the DSB. Second, Brazil has not demonstrated how the specific findings of the panel report in Australia - Leather would be applicable to the facts of this case. I will address each issue in turn.


  5. First, Mr. Chairman, Brazil is now in effect seeking to modify its original claim for a remedy. In fact, Brazil now asks the Panel to issue new recommendations as to what constitute Canadas obligation to withdraw subsidies found to have been contingent upon export performance. Brazil asks the Panel to use those new recommendations to assess Canadas compliance with those same recommendations.


  6. Brazil does so, however, in the context of a procedure that is solely concerned with determining whether Canada has implemented the original rulings and recommendations of the DSB. Brazil is trying to get not only what it never got but, more importantly, what it never sought. This can only be characterized as “trial by ambush”, to borrow Lord Denning’s famous phrase.


  7. Brazil has known Canada’s position on the interpretation and application of Article 4.7, in particular insofar as it applies to subsidies already granted. Canada’s position on this issue was set out in Canada’s second written Submission (para. 142 ss.) in the PROEX dispute running parallel to this case, where, of course, Canada is the complainant. In that submission, Canada indicated very clearly that its interpretation of the obligation to withdraw export subsidies under Article 4.7 of the Agreement does not allow for a retroactive withdrawal of subsidies that have already been granted. In that case, Brazil heartily supports Canada’s view. In fact, in that case, Brazil has severely criticized the decision in Australia – Leather as bad policy and bad law.


  8. In any event, Brazil could not have been unaware of Canada’s interpretation of the scope and application of the obligation to “withdraw”.


  9. Nevertheless, during the various stages of the Panel process or even before the Appellate Body, Brazil has never taken exception with Canada’s interpretation. It raises serious question of fairness and equity now for Brazil to ask the Panel to make a finding of non-compliance because Canada did not withdraw subsidies that had been granted before the recommendations of the DSB. Brazil never made that claim; in the course of implementing the rulings and recommendations of the DSB, Canada was not aware and could not have been aware of the nature of the obligation that Brazil now seeks to impose on Canada.


  10. The role of the Panel under Article 21.5 of the DSU is to determine whether Canada’s implementation measures are in conformity with the rulings and recommendations of the DSB. The ultimate role of the Panel is to settle the dispute between the parties. That dispute was framed by the parties in the course of their various submissions. The dispute, and therefore the rulings and recommendations of the DSB, do not include the withdrawal of subsidies that were granted before the recommendations of the DSB.

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  11. In conclusion on this point Mr. Chairman, Canada respectfully submits that in the light of the above considerations, it would not be an appropriate use of the Panel’s jurisdiction under Article 21.5 to now grant Brazil a remedy that it never sought.

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ATTACHMENT


Item (k): Interest Rates Provisions of the OECD Arrangement


This document sets out Canada's view of which provisions pertinent to regional aircraft financing in the current text of the OECD Arrangement would, for purposes of this dispute constitute "interest rates provisions" within the meaning of item (k) of Annex I of the SCM Agreement. The provisions described below affect what the interest rate and the amount of interest payable will be in a given transaction. Within limits, variations of certain of these provisions are permitted under the terms of the Arrangement. Canada notes that provisions in the Arrangement that are pertinent to sectors other than regional aircraft have not been listed. This list is thus without prejudice to Canada's position as far as other sectors are concerned. While Canada has not listed definitional provisions of the Arrangement, those provisions apply to the provisions listed below.


Article 2: Scope of Application


This article restricts the scope of the Arrangement to officially supported export credits with repayment terms of two years or more, and to official support in the form of tied aid.9


Article 3: Special Sectoral Applications and Exclusions


This article sets out the applicability of special guidelines to certain specific sectors. The guidelines applicable to the aircraft sector provide that in cases where provisions in the Sector Understanding on Export Credits for Civil Aircraft (Annex III) correspond with provisions in the Arrangement, the provisions of the Sector Understanding prevail.


The relevant provisions in the Sector Understanding are Articles 21, 22, 23, 24 and 25 of Annex III, Part 2, which covers new aircraft, and Articles 28, 29, 30 and 31 of Annex III, Part 3, which covers used aircraft, spare engines, spare parts, maintenance and service contracts.


Article 7: Cash Payments


This article requires providers of official support to require purchasers of goods and services to make cash payments of a minimum of 15 per cent of the export contract value of the goods or services, at or before the starting-point of a credit (defined in Article 9 of the Arrangement).


Article 9: Starting-point of Credit


This article requires that the repayment term begin by the actual date of delivery. However, depending on the complexity of the underlying export contract, other dates may be applicable.


Article 10: Maximum Repayment Term


This article sets out the maximum term for repayment of the export credit, which can be either five years (with a possible extension to eight and a half), or ten years, depending on whether the recipient country is classified as a Category I or Category II country. (The category of country is determined by world Bank data based on GNP per capita).


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9 Tied aid support is not permitted for civilian aircraft, except for humanitarian purposes (Annex III, Article 24).

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Article 13: Repayment of Principal


This article requires that the principal sum of the export credit is normally to be repaid in equal, and at least semi-annual instalments. It also permits equal, blended payments of principal and interest in the case of leases. Within limits, variations are allowed.


Article 14: Payment of Interest


This article requires payments of interest to be made in at least semi-annual instalments during the repayment term. Within limits, variations are allowed.


Article 15: Minimum Interest Rates


This article requires providers of official financing support to apply minimum interest rates, or the relevant Commercial Interest Reference Rates (CIRRs), and sets out the principles by which CIRRs are established. These include the principle that CIRRs should closely correspond to the rate for first-class domestic borrowers and to the rate available to first-class foreign borrowers.


Article 16: Construction of CIRRs


This article requires CIRRs to be set at a fixed margin of 100 basis points above their respective base rates. For most OECD Participants, the base rates are the yields of government bonds with terms that roughly correspond to the average life of the loan.


Article 17: Application of CIRRs


This article provides that CIRRs can be held for 120 days at an additional cost of 20 basis points. When official financing support is provided for floating rate loans (rather than on a CIRR basis), the Participants must not grant the borrower the option of choosing the lower of CIRR or the short-term market rate throughout the life of the loan.


Article 19: Official Support for Cosmetic Interest Rates


This article forbids the offering of artificially reduced interest rates, which give the borrower the illusion of obtaining more favourable financing terms than are envisaged under the Arrangement.


Article 21(a): "Premium shall be risk-based."


Paragraph (a) of Article 21 requires that premiums be risk-based. This is understood to mean that premiums must "not [be] inadequate to cover long-term operating costs and losses" (as provided in Article 22(a)).


Article 26: Validity Period for Export Credits


This article imposes a limit of six months on the length of time offers can remain outstanding for acceptance by the buyer/borrower.


Article 29: Matching


This article permits the offering of terms and conditions that are outside of the Arrangement's rules, but only if such terms and conditions are matching another government's offer with terms and conditions that are outside of the Arrangement's rules.

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ANNEX 2-4


ANSWERS TO QUESTIONS POSED TO CANADA BY THE PANEL AND BY BRAZIL


(14 February 2000)


Questions Posed by the Panel Concerning Canada Account


Q1. The Panel notes that the Policy Guidelines is worded in the negative, i.e., that a Canada Account financing transaction or class of financing transactions that does not comply with the OECD Arrangement would comply with the OECD Arrangement would not be considered to be in the national interest. This wording suggests that there may be transactions or classes of transactions that are outside the scope of, and therefore not subject to, the Arrangement. As a matter of logic, any such transactions could not “not comply with” the Arrangement, and therefore would neither be subject to, nor contrary to, the Guideline. Could Canada please explain why the Guideline was not worded in the affirmative, i.e. , that only transactions that do comply with the Arrangement would be considered to be in the national interest? Could Canada please indicate whether all Canada Account transactions in the regional aircraft sector will be subject to the Arrangement and will comply therewith. Question 1:


Response


  1. Under subsection 23(1) of Canada’s Export Development Act, a prerequisite to authorization of a financing transaction under the Canada Account is a determination by the Minister for International Trade that the transaction is in the national interest. In making this determination, the Minister may reject a financing transaction for any number of reasons. The wording of the Policy Guideline in the negative is designed to preserve the Minister’s ability to conclude that a proposed Canada Account financing transaction is not in the national interest based on other factors even though it complies with the OECD Arrangement. That is, if the Guideline were worded in the affirmative, as suggested in the Panel’s query, it could be read to provide in effect that compliance with the OECD Arrangement means that a transaction, without more, would be in the national interest. This would leave no scope for other “national interest” considerations to be factored in by the responsible Minister.


  2. As written, the Ministerial Guideline means that a transaction that does comply with the Arrangement may be in the “national interest”, but that a transaction that does not comply with the OECD Arrangement will be considered, ipso facto, and without more, incapable of being in the “national interest”. Compliance with the OECD Arrangement is therefore the one essential condition that must always be met in order for the transaction to be found to be in the national interest and authorized under the Canada Account.


  3. All Canada Account transactions in the regional aircraft sector will be subject to and will comply with the OECD Arrangement.


    Q2. Concerning Canada’s apparent pledge, through the Policy Guideline, that “any future Canada Account financing transactions will be in conformity with the OECD Arrangement” (Canada’s Oral Statement at para. 67.), the Panel notes, as acknowledged by Canada, that the “safe haven” in the second paragraph of item (k) of the Illustrative List makes specific reference to the “interest rate provisions” of the understanding in question, i.e., the OECD Arrangement. Canada

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    has provided a paper (“Item (k): Interest Rates Provisions of the OECD Arrangement”) and an oral statement concerning what it considers to be the interest rate provisions of the OECD Arrangement.


    1. Is it Canada’s view that, in general, all of the substantive interest rate provisions that it has identified (i.e., all of the provisions other than matching) must both apply and be complied with for an export credit practice to be in conformity with the interest rate provisions of the OECD Arrangement? Please explain. If yes, does Canada consider that where this is not the case because of matching with non-complying terms and conditions, (i.e., where the transaction in question is matching the terms and conditions of a non-complying transaction), the transaction is question nevertheless is in conformity with the interest rate provisions of the Arrangement? Please explain.


      Response


      1. All of the substantive interest rates provisions must be complied with to the extent that they are applicable. Not all substantive interest rates provisions are always applicable. For instance, for export credits in some sectors other than regional aircraft, Article 25 ("Local Costs") would, in Canada's view, represent a substantive interest rates provision; however, we did not retain Article 25 on our list because we decided to limit the list to those provisions that are relevant for the purpose of this case because they are generally applicable to regional aircraft. The local cost issue does not arise in the regional aircraft sector.


      2. Also, some of the substantive interest rates provisions that are relevant for regional aircraft might not apply depending on the circumstances of the underlying export credit transaction. For example, Article 10 ("Maximum Repayment Term") has substantive rules that are significantly amended by the specific provisions stipulated in Annex III. We still found it important to list Article 10 because the concept of a maximum repayment term as set out in the main Arrangement text is directly related to the levels of the CIRRs (see Article 16), and CIRRs are applicable to regional aircraft.


      3. The right to match is an intrinsic part of the disciplines of the Arrangement. It operates as a right to match financing by those countries which might provide financing pursuant to terms and conditions other than the standard terms and conditions. It works as a rather effective deterrent to those countries that might be tempted to not comply. Recent experience has shown that the total number of matching notifications has declined to less than 10 per year (all Participants combined). Because matching effectively amends some or all of the other interest rates provisions in their applicability to a particular transaction, matching is itself a substantive interest rates provision. Therefore, a matching transaction undertaken in conformity with the Arrangement is also in conformity with the interest rates provisions of the Arrangement.


    2. If in answering (a) Canada indicates that it does not believe that all of the substantive provisions that it has identified must apply and be complied with for a transaction to be in conformity with the interest rate provisions of the Arrangement, does Canada consider that a transaction which complies with any one of these provisions or some subgroup of them is in conformity with the interest rate provisions of the Arrangement? Please explain, and identify the provision of provisions in questions. In particular, does Canada consider that export credits that are not CIRR-based (e.g., floating-rate financing), or export credit practices that do not involve an interest rate as such (e.g., export credit guarantees), can qualify for the sage haven of the second paragraph of Item(k)? Please provide a detailed explanation.

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Response


  1. All the substantive interest rates provisions that are applicable and therefore can be complied with under the circumstances of the underlying export credit transaction, must be complied with for the transaction to be in conformity with the interest rates provisions of the Arrangement. Canada does not hold the view that any country should be allowed to not comply with an interest rates provision that is applicable to a transaction and still claim conformity with the interest rates provisions of the Arrangement.


  2. Floating rates are a good example for illustrating this point. Clearly, floating rate financing is envisaged by the Arrangement, and the face value of the floating interest rate can be below the face rate of the CIRR; otherwise, the restriction imposed in Article 17.b) on choosing between the "lower of either the CIRR (...) or the short-term market rate" would be pointless. A floating rate transaction like the one described in Article 17.b) is in full conformity with the interest rates provisions of the Arrangement (indeed, Article 17 is itself an interest rates provision); CIRR is constructed on a fixed rate basis (Article 16) and therefore not applicable in a pure floating rate scenario. It is also clear from the plain wording of the Article 17.b) that the minimum floating interest rate is "the short-term market rate"; this is generally understood to refer to international market benchmarks such as LIBOR.


  3. Canada wishes to clarify that export credit guarantees do involve an interest rate in respect of the underlying loans that are being guaranteed. A financial institution which receives an insurance policy or an unconditional guarantee (in either case, with or without interest rate support by government) from an export credit agency in respect of the financing of an export transaction may only provide a loan that respects the relevant interest rates provisions of the Arrangement.


  4. While Article 17.b) confirms that official support can be provided on a floating rate basis at short-term market rates below CIRR, a narrow interpretation of the provision limits its application to cases of “pure cover” as described above, i.e. loans insured or guaranteed by an export credit agency and extended at short-term market rates without interest rate support from the government. Canada holds the view that official support in the form of direct loans extended by export credit agencies at short-term market rates is equally legitimate under the Arrangement. Indeed, Canada believes that precluding direct lenders from undertaking floating rate transactions would give an undue advantage to those OECD Participants that operate insurance/guarantee systems. Moreover, short-term market rates such as LIBOR can be presumed to satisfy the principles for minimum interest rates set out in Article 15, insofar as they can be applied.


  5. OECD Participants are fully aware of Canada’s practice to offer floating rate financing under official support. While discussions on floating rate practices continue at the OECD, no Participant has alleged that Canada’s floating rate practice represents a derogation from the Arrangement. Based on all of the above, Canada is of the firm view that official support provided in the form of direct loans at short-term market rates is fully compliant with the Arrangement and its interest rates provisions.


  6. Notwithstanding that Canada believes that floating rates are encompassed within the OECD Arrangement, and should be included as “interest rates provisions” and thus fall under the exception in Item k, the issue of floating rates is still under discussion in the OECD. In the interest of contributing to a speedy resolution of this dispute, Canada wants to avoid making this an issue in this case and has consequently decided not to implement any floating rate transactions under Canada Account in the regional aircraft sector unless and until this issue is

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    clarified either under the OECD Arrangement or in the context of WTO proceedings that addresses this issue.


    Q3. Would Canada please elaborate on how it intends to comply with the interest rate provisions of the Arrangement, as it has identified them, in respect of Canada Account transactions in the regional aircraft sector?


    1. Please describe the form of forms that all Canada Account transactions in the regional aircraft sector will take. Please indicate, in particular, whether all such Canada Account transactions will take the form of official support for export credits with repayment terms of two years of more. In not please explain, and indicate how such transactions would be considered to be in conformity with the interest provisions of the Arrangement.


      Response


      1. Any regional aircraft transaction entered into under the Canada Account will likely take the form of direct lending. While official support could be given by way of other means, for example guarantees, it is Canada’s practice to provide support via direct lending. Because of the nature of the product, we do not expect any borrower to request repayment terms of less than two years. Accordingly, Canada would expect that all future Canada Account transactions in the regional aircraft sector will take the form of official support for export credits with repayment terms of two years or more. Whether in the form of a direct loan or a guarantee, the interest rates provisions of the OECD Arrangement will be followed.


    2. Will all Canada Account transactions in the regional aircraft sector fall within, and comply with the terms of Articles 7, 9, 10, 13, 14, 17, and 26 of the Arrangement in respect of cash payments, starting point of credit, maximum repayment term, repayment of principal, payment of interest, application of CIRRs, and validity period for export credits, respectively? If not, how would any such transactions be considered to be in conformity with the interest rate provisions of the Arrangement?

      Response


      1. Except in cases of matching or in cases of humanitarian aid, all Canada Account transactions in the regional aircraft sector will comply with Article 7 ("Cash Payments"), Article 9 ("Starting Point of Credit"), Article 13 ("Repayment of Principal"), Article 14 ("Payment of Interest"), Article 17 ("Application of CIRR"), and Article 26 ("Validity Period of Export Credits"). As for the maximum repayment term, Article 21 of Annex III effectively replaces Article 10 as the relevant interest rates provision for the purpose of compliance with regards to new regional aircraft


      2. Canada Account transactions in the regional aircraft sector that are undertaken in full compliance with the matching provisions of the OECD Arrangement, will also be in compliance with the Arrangement and its interest rates provisions. This is because matching itself is an interest rates provision of the Arrangement as it specifically allows the offering of terms and conditions that are more favourable than otherwise allowed under the interest rates provisions of the Arrangement, provided they do not render the offer more favourable than the competing offer which is supported by another government and includes non-compliant terms and conditions for the same transaction (i.e., provided the terms do not “overmatch”).


    3. Why does Canada not include Article 8 “repayment terms” in its list of relevant provisions?

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      Response


      1. Canada chose not to include definitional provisions in its list. Article 8 does not specify a rule; rather it provides a definition that is required for the purpose of setting rules in the subsequent articles. While the list of interest rates provisions provided to the Panel did not list definitional provisions of the Arrangement, as Canada noted in that document, those provisions apply.


    4. With all Canada Account transactions in the regional aircraft sector take the form of fixed rate financing at interest rates at or above the CIRR? If not, please explain in what sense any floating-rate financing and any below-CIRR fixed rate financing would be in conformity with the interest rate provisions of the Arrangement, given the requirement in Article 22 of the Sector Understanding that the CIRR shall be applied.


      Response


      1. As indicated in our answer to question 2 b: Notwithstanding that Canada believes that floating rates are encompassed within the OECD Arrangement, and should be included as “interest rate provisions” and thus fall under the exception in Item k, the issue of floating rates is still under discussion in the OECD. In the interest of contributing to a speedy resolution of this dispute, Canada wants to avoid making this an issue in this case and has consequently decided not to implement any floating rate transactions under Canada Account in the regional aircraft sector unless and until this issue is clarified either under the OECD Arrangement or in the context of WTO proceedings that directly address this issue. Accordingly, except in cases of matching or humanitarian tied aid, all Canada Account financing transactions in the regional aircraft sector will take the form of fixed-rate financing at interest rates at or above the CIRR.


      2. Also, if support were to be provided by way of “pure cover”, i.e. a guarantee issued to a lending bank, the interest rates provision in Article 17.b) would be applicable. It is conceivable that the financing bank could price the loan on a floating rate basis and at a face rate below CIRR. The transaction would still be in full compliance with the interest rates provisions of the Arrangement. (Indeed, Article 17 is itself an interest rates provision.) Article 22 of the Sector Understanding simply reconfirms the applicability of the CIRR regime to regional aircraft; this is required because Article 6 of the Sector Understanding creates a different system of minimum interest rates for large aircraft. It is not the purpose of Article 22 of the Sector Understanding to invalidate Article 17.b) of the Arrangement.


    5. Will any so-called “market window” financing or other transactions be undertaken under the Canada Account in the regional aircraft sector? If so, please explain in detail the nature of any such transactions and the sense in which Canada considers the they would be in conformity with the interest rate provisions of the Arrangement.

      Response


      1. Canada understands this question to ask whether Canada Account financing in the regional aircraft sector will be provided outside of the standard terms and conditions of the OECD Arrangement, notwithstanding whether such financing is consistent with the market. The answer is no. All Canada Account financing in the regional aircraft sector will be within the OECD Arrangement, whether or not the terms of a particular financing transaction are in fact market terms.

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    6. Will any Canada Account transactions in the regional aircraft sector be provided in the form of export credit guarantees? If so, in what sense does Canada consider that such transaction would be in conformity with the interest rate provisions of the Arrangement.

      Response


      1. Canada Account transactions in the regional aircraft sector will typically take the form of direct loans, although, for example, guarantees could also be envisaged. Guarantee transactions would also have to be in compliance with the relevant interest rates provisions of the Arrangement.


      2. The package of disciplines reflected in the interest rates provisions is as important in a guarantee context as it is in the context of direct financing. See also Canada’s response to question 2(b).


      3. All future Canada Account transactions, whether undertaken on a direct lending basis or on a guarantee basis, will comply with the relevant interest rates provisions of the OECD Arrangement.


    7. How is it envisioned that the provision of official support for cosmetic interest rates with respect to the regional aircraft sector will be prevented (Article 19)?

      Response


      1. Canada will simply not offer any cosmetic interest rates as defined in Article 18 when entering into regional aircraft transactions on Canada Account.


      2. As a matter of clarification, interest rates below CIRR offered under the matching provisions of the Arrangement are not cosmetic interest rates because they do not involve compensatory measures (i.e. hidden measures) in the form of contractual adjustments. Matching is “open”, not “cosmetic”.


    8. Could Canada please describe how it will be ensured that appropriate risk-based premiums will be charged on Canada Account transactions in the regional aircraft sector. Why are the premium-related provisions of the Arrangement other than Article 22.a not, in Canada’s view, part of the “interest rate provisions” of the Arrangement?

Response


  1. Canada selected only Article 21.a) because it articulates the principle of risk-based premiums and is the only premium-related provision that is available to WTO members that are not also OECD Participants. Clearly, the obligation to comply with the OECD Arrangement in its entirety imposes disciplines on Canada Account transactions in the regional aircraft sector that go beyond the obligation to adhere to the mere principle of Article 21.a). There are provisions in the Arrangement that add greater precision as to the nature of these premium- related disciplines.


  2. Basically, OECD Participants have agreed on a common system for classifying countries into risk categories and setting minimum premiums in relation to the risk levels associated with each category that are expected to cover the Participants' long-term operating costs and losses. The actual country classifications and premium levels applicable to countries remain confidential because OECD Participants would like to avoid political interference with the country classification process. For an extensive description of the OECD premium system, we attach the OECD communications piece on premiums as a Canada’s Exhibit 17.

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  3. Canada recognises that it would be unreasonable to expect a non-OECD WTO Member to charge a minimum premium level which is unknown to such Member, in order for that Member to be in full compliance with the interest rates provisions of the Arrangement. Canada is prepared to accept the consequence that in relation to premiums and for the purpose of the second paragraph of Item (k), a higher threshold is imposed on those WTO Members that are also OECD Participants.


    1. Please explain in detail how the matching provision will be applied with respect to Canada Account transactions in the regional aircraft sector. What, if any, are the limits on matching under the Arrangement? Does Canada consider that any Canada Account transaction in the regional aircraft sector that “matches”, in the sense of the Arrangement, a non-complying transaction would be in conformity with the interest rate provisions of the Arrangement? Please explain.

Response


  1. Canada confirms that it considers any Canada Account transaction in the regional aircraft sector that is undertaken in full compliance with the matching provisions of the OECD Arrangement, to be in conformity with the Arrangement and its interest rates provisions.


  2. This is because matching itself is an interest rates provision of the Arrangement as it specifically allows the offering of terms and conditions that are more favourable than otherwise allowed under the Arrangement, provided they do not render the offer more favourable than the competing offer that is officially supported by another government and includes non-compliant terms and conditions for the same transaction.


  3. Clearly, "overmatching", i.e. offering more favourable terms and conditions than the competing, non-compliant offer, is not compliant with the Arrangement. Any case of matching by an OECD participant such as Canada must be notified to the other OECD Participants prior to the issuance of the commitment and will be scrutinised by them, particularly in cases of "non-identical matching" which are subject to a discussion procedure. "Non-identical matching" is still compliant provided it is not "overmatching". For instance, Canada would not have an issue with another Participant notifying a "non-identical matching" at CIRR over 12 years to match a non-compliant offer at CIRR minus 5 per cent over 10 years as there is no reason why a matching Participant should be obliged to provide a cash subsidy if another tool is available to reduce the distortion created by the non-compliant offer to be matched.


  4. For more details on the matching procedures of the Arrangement, we refer the Panel to Articles 50 through 53. We draw the Panel's attention to the high level of due diligence and disclosure required in the case of matching of a non-Participant. These cases are rare.


  5. In Canada's view, the right to match is also available to WTO members that are not OECD Participants. If the matching transaction of a non-Participant were challenged at the WTO and found to provide a prohibited export subsidy, the "safe haven" of Item (k) would be available to that non-Participant, provided that the matching was undertaken in good faith and on the basis of reasonable due diligence.


  1. Please describe in detail, including the nature of the differences, any particular provisions of the Sector Understanding on Export Credits for Civil Aircraft (Annex III of the Arrangement) that prevail over corresponding provisions of the Arrangement. To the extent that provisions of the Sector Understanding apply, will all Canada Account transactions in the regional aircraft sector fall within their scope and be in full compliance with them? Please explain in detail.

    Response

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    1. Annex III prohibits tied aid, except for humanitarian purposes (Article 24 of Annex III). This is an additional restriction applicable to the regional aircraft sector that Canada will obviously respect when entering into regional aircraft transactions on Canada Account.


    2. Annex III also sets different maximum repayment terms. Rather than linking the repayment term to the wealth of the recipient country, the Sector Understanding ties it to the type (and effectively, the size) of the aircraft being exported. This rule can be more generous in one case (e.g. a Category A aircraft going into a Country I country) and more restrictive in another case (e.g. a Category B aircraft going into a Category II country).


    3. As envisaged in Article 3, the sector-specific rule (i.e. Article 21 of Annex III) prevails over and effectively replaces the general Arrangement rule (i.e. Article 10).


    4. Article 21 and Article 24 of Annex III are the interest rates provisions of the Sector Understanding that govern the repayment term and tied aid support. They are applicable to all Canada Account transactions in the regional aircraft sector, and all Canada Account transactions in the regional aircraft sector will comply with these two articles, except in cases of matching..


  2. In the context of the responses to the above questions, would Canada please provide full details on all "variations" "allowed" under the relevant provisions of the Arrangement, referred to inter alia in the introductory paragraph of the Canada's paper ("Within limits, variations of certain of these provisions are permitted under the terms of the Arrangement"). Will Canada Account transactions in the regional aircraft sector in all cases respect the applicable limits on any variations? Please explain in detail.


    Response


    1. Canada Account transactions in the regional aircraft sector will respect the applicable limits on allowed variations.


    2. Allowed variations are called Permitted Exceptions under the Arrangement, and a comprehensive list can be found in Articles 48 and 49. The only Permitted Exception that is relevant for the purpose of regional aircraft transactions is the variation listed under Article 49 a) 2), which relates to irregular payment practices with respect to principal and interest.


    3. One formal limitation on irregular payment practices is the no derogations engagement in relation to the repayment date of the first instalment of principal (Article 27). Generally speaking, and acknowledging that not all of the OECD Participants’ conventions can be found written in the Arrangement text, the basic principle is that Permitted Exceptions are not supposed to make the offer more favourable than the most favourable terms and conditions that are allowed under the Arrangement. For instance, Canada would not have an issue with another Participant notifying a modest balloon payment after 7 years if the average life of the loan remained shorter than in the case of a standard repayment profile of 20 equal, semi- annual instalments.


    4. The number of notifications of Permitted Exceptions generally exceeds 100 per year. Participants clearly consider Permitted Exceptions to be "permitted", i.e. in conformity with the Arrangement.


  3. Will Canada please elaborate on its apparent pledge, at para. 71 of its oral statement, that Canada "will also respect the non-derogation commitment set forth in the Arrangement".

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Response


  1. Article 27.a) of the Arrangement states that "(t)he Participants shall not derogate from maximum repayment terms, minimum interest rates, minimum premium benchmarks (...), the six-month limitation on the validity period for export credit terms and conditions, or extend the repayment term by extending the repayment date of the first instalment of principal (...)."


  2. A derogating Participant is not in compliance with the Arrangement, nor in compliance with its interest rates provisions. As Canada Account transactions must comply with the Arrangement, Canada will not derogate from the Arrangement.


  3. Canada notes that derogations are different from Permitted Exceptions and are also different from matching. Permitted Exceptions and matching are compliant; derogations are not.


Q4. Does Canada agree with the EC that Canada has "undertaken" to respect all of the provisions of the OECD Arrangement? If so, does Canada consider that this "undertaking" is legally binding on Canada Account transactions in the regional aircraft sector, and would Canada please elaborate on the specifics of this undertaking, making reference both to the interest rate provisions of the Arrangement as identified by Canada and to Canada's responses to questions 1-3, above.


Response


  1. Canada has undertaken to respect all of the provisions of the OECD Arrangement with respect to financing transactions under the Canada Account. Through the Ministerial Policy Guideline the Minister for International Trade has undertaken not to authorise any financing transaction under Canada Account that does not comply with the OECD Arrangement. While the Ministerial Guideline is an administrative instrument and not a legislative one, for all practical purposes the effect is almost the same. This is because the exercise of discretion under the Canada Account programme is in the hands of the Minister and it is the Minister who has given the undertaking. In addition, officials administering the programme and/or referring financing transactions to the Minister for authorization will act in accordance with the Guideline. With respect to the difference between administrative guidelines and legislative instruments we refer the Panel to the comments made by the Panel in United States – Sections 301 –310 of the Trade Act of 1974 (Sections 301-310) where it stated:


    “We recognize of course that an undertaking given by one Administration can be repealed by that Administration or by another Administration. But this is no different from the possibility that statutory language under examination by a panel be amended subsequently by the same or another Legislator.”


  2. The critical question, according to the Panel is whether the instrument in question is “lawful and effective.” In this case, the Ministerial Guideline is effective in requiring that all Canada Account financing transactions in the regional aircraft sector comply with the OECD Arrangement and thereby comply with the interest rates provisions of the Arrangement.


  3. Canada’s view of which interest rates provisions are pertinent to this dispute is fully set out in Canada’s exhibit -- and a detailed explanation of how these would apply in practice can be found in Canada’s responses to questions 1 and 2 from the Panel.


Q5. Would Canada please indicate the extent of and basis for its compliance obligations with respect to Canada Account. In this regard, we note that Brazil (at paragraph 66 of its second submission) characterizes Canada's position as being that the Panel's findings did not require Canada to take any action other than to ensure that the two Canada Account transactions identified

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in paragraph 54 of Canada's first submission were completed by 18 November 1999. Canada appears to disagree, as it stated at the meeting with the Panel that it does consider that the Panel's ruling imposes a legal obligation on Canada to take remedial action with respect to future Canada Account transactions in the regional aircraft. Does Canada confirm the Panel's understanding of Canada's position? Could Canada please discuss the implications, if any, of Australia-Leather for Canada's arguments as to its obligations concerning Canada Accounts.


Response


  1. Yes, Canada confirms the Panel’s understanding of Canada’s position.


  2. In the original proceeding, the Panel found that the Canada Account was a discretionary programme that did not mandate subsidies contingent on export performance; the Panel therefore made no findings on the Canada Account programme per se. The Panel concluded, however, that Brazil had established a prima facie case, unrebutted by Canada, that applications of the Canada Account programme in the form of two debt financings involving regional aircraft were subsidies within the meaning of Article 1. (Because these financings were expressly for exports, the Panel also found them to be contingent in law upon export performance within the meaning of Article 3.1(a).) The Panel therefore concluded that “Canada Account debt financing since 1 January 1995 for the export of Canadian regional aircraft constitutes export subsidies inconsistent with Article 3.1(a) and 3.2 of the SCM Agreement.”


  3. Although the Panel’s conclusion concerned the programme as applied, it did not appear to be limited by its terms to the two transactions that had been before the Panel. Consequently, Canada understood the Panel ruling to mean that it was essential to take steps to ensure that any future financing transactions involving regional aircraft would be consistent with Canada’s obligations under the SCM Agreement. Canada did so, by issuance of the Ministerial Policy Guideline making clear that any financing transaction not in compliance with the OECD Arrangement (necessarily including the interest rates provisions thereof) will not be approved for Canada Account financing.


  4. Canada does not believe that the panel decision in Australia – Leather, which addressed whether the withdrawal of an individual subsidy might, in some factual circumstances, encompass the repayment of the subsidy, has any implications at all for the steps Canada it has taken to ensure that any future Canada Account financings involving regional aircraft are consistent with the SCM Agreement. Because the discretionary Canada Account programme was not per se found to mandate prohibited export subsidies, there can be no issue of withdrawing the Canada Account programme itself. Even Brazil has not argued for that result.


  5. Nor does Canada believe that Australia – Leather has relevance for the Canada Account financings that formed the basis for this Panel’s conclusion on the Canada Account as applied. Even assuming that Australia – Leather’s controversial conclusion that repayment may be a required form of “withdrawal” in some circumstances were to be accepted, it could not, in Canada’s view, apply here. The Australia – Leather case involved a one-time subsidy to a producer and its replacement measure which were contingent on a still ongoing stream of exports, which that Panel viewed as remediable only through repayment. In this dispute, by contrast, the two transactions before the Panel in the original proceeding were completed, including the export of all aircraft that were “subsidized”, in 1995 and 1998, long before the date for compliance.

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Q6. Could Canada please elaborate on the legal basis for its argument that DSU Article 19.1 would allow the Panel to endorse, as part of its findings under DSU Article 21.5, the verification mechanism that it has proposed. Are there any other provisions of the DSU or the SCM Agreement that are relevant to this issue?


Response


1. Canada believes that reciprocal verification provisions would make both Brazil and Canada more confident of their respective compliance in the future. The second sentence of Article

19.1 authorizes a panel to "suggest" ways to implement a recommendation. Canada believes that endorsing the concept of reciprocal verification arrangements would be a useful suggestion, consistent with the spirit of Article 19.1.


Questions posed to Canada by the Panel regarding TPC


Q1. Please provide an up-dated version of Exhibit Cdn-9, and provide copies of all finalized "new" documents not already submitted to the Panel. Please provide the latest draft version of any "new" document still "under development". If no draft versions are available, please describe in detail the nature of the planned changes to the "new" document still under development".


Response


  1. Exhibit Cdn-9 contains 35 serials of which 11 have already been provided to the Panel. Appended below are copies of all recently finalized “new” documents, as well as the latest draft versions of “new” documents still under development. Moreover, summary sheets describing in detail the nature of the planned changes to documents for which draft versions are not presently available are also included. Finally, a new serial, the Contribution Verification Checklist, is provided in draft form.


  2. The draft documents submitted with this response are still under active consideration by TPC management and, therefore, are subject to change. Similarly, the planning assumptions underlying the summary sheets on documents not available in draft form could also change as the documents are developed. However, as all of these document must respect TPC’s Terms and Conditions, in their final form they will not be permitted to request or consider information concerning the extent to which applicant enterprises do or may export.


  3. All of the documents identified in Exhibit Cdn-9 that remain to be finalized will be rolled out as they are completed and approved. It is reiterated that TPC will not approve contributions to the Canadian regional aircraft industry until the programme has been fully restructured. Therefore, TPC has a vested interest in completing this important task in a timely manner. But while time may be important, it is far more critical that TPC’s policy and procedural documents be revised through a detailed review process that ensures that Canada is honouring its international obligations.


  4. The current status of TPC documents are identified below under the three categories solicited by the Panel, namely:


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Exhibit Cdn-9 Serial No.

Document

Finalised “new” documents not already submitted to the Panel (copies provided)

5

Financial Data Outline (retitled)

6

Contribution Agreement Repayment Terms (retitled)

30

Environmental Assessment and Review Process

“New” documents still “under development”(latest draft versions provided)

2

TPC Repayment Policy

3

Assessment Guidelines for Due Diligence

20

TPC Review Procedures (including Standard Letters)

21

Special Purpose Equipment List

24

TPC Project File Structure

25

TPC Policies and Procedures on Incrementally, Irreversibility and Retroactivity

28

Claims Package for Clients

29

PSB Integrity Review Checklist

31

Procedures for Project Amendments (retitled)

32

Claims Verification Checklist

33

Policy on Eligible Overhead Costs

34

Policy Guideline for Treatment of Eligible Equipment costs and Project Assets (retitled)

New

Contribution Verification Checklist

Documents for which draft versions are not available at this time (summary sheets provided)


7

Statement of Work

8 & 9

TPC Standard Contribution Agreement (merged)

16

Framework Investment Proposals: Industrial Research

Pre-competitive Development Studies

18

TPC Business Plan (2000/2001-2001/2002)

22

Schedules of Estimated and Actual Project Benefits (retitled)

23

Performance Measures – Project Data Sheet

26

Evaluation Framework

35

Quality Assurance Checklist

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Q2. Does Canada agree with Brazil's argument (para. 5 of its oral submission) that the only way for Canada to remove de facto export contingency is to "exclude [the regional aircraft industry] from TPC funding opportunities, or alternatively, to change radically the programme's eligibility and allocation requirements", and that (para. 17 of Brazil's oral submission)"TPC, as it applies to the regional aircraft industry, must be withdrawn in its entirety"? If not, what other ways of implementing the DSB recommendation would be possible in Canada's view if, hypothetically (and as Brazil claims), the current measures taken by Canada to comply with the DSB recommendation are not considered a sufficient change in the factual situation which led to the initial conclusion that TPC assistance to the regional aircraft industry is de facto contingent on export?


Response


  1. Canada rejects Brazil’s argument and considers that it is not required to cease all TPC assistance to the Canadian regional aircraft industry. As noted previously, based on guidance provided by the Panel and the Appellate Body and in accordance with the test for de facto export contingency developed therein, Canada has taken the steps within Canada's control to ensure that any assistance that TPC may provide in the future to the Canadian regional aircraft industry will not be contingent on export performance in law or in fact. To go further and require Canada to “exclude [the regional aircraft industry] from TPC funding” would go beyond the rulings and recommendations of the DSB and be contrary to footnote 4 of the SCM Agreement.


  2. Given the substantial steps already taken, we are aware of no other steps that Canada could take or needs to take, other than ensuring that future subsidiary documents and implementing measures as they are adopted conform with the changes already implemented.


Question to both Parties


Please comment on the EC argument (para. 7 of the EC's oral statement) that, in light of the Panel's terms of reference set forth in document WT/DS70/9, "[t]he Panel may not… in this case consider whether Canada has failed to implement the report retroactively since Brazil has only asked for a finding that the changes to the two programmes at issue have not implemented the Report."


Response


  1. We believe that the EC is correct. Brazil did not request the Panel to examine the sufficiency of Canada’s withdrawal of previous subsidies, but has only questioned whether the changes to the two programmes are sufficient to conform with the SCM Agreement. This is in stark contrast to the situation in the Australia – Leather 21.5 hearing where the Panel found repayment of the subsidy in question to be required. In that case, the issue of repayment was already before the Panel as the United States was seeking repayment of a portion of the monies already paid out. In deciding how much repayment was necessary, the Panel may have gone further than any Party desired, but the issue of repayment had been placed before the Panel.


  2. Canada notes that Canada has fully complied with its WTO obligations in terminating, by the required date, all assistance found to have been export subsidies.

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Questions by Brazil to Canada in the Canada Case Re Canada Account


Q1. Please identify any publicly-available sources from which information regarding particular Canada Account transactions could be obtained.


Response


  1. As Canada noted at the hearing, information on specific Canada Account transactions is not made publicly available due to commercial confidentiality. It is for this reason that Canada proposed a reciprocal verification procedure so that Brazil could have access to that information.


  2. Information on the Canada Account in general can be found from the following publicly available sources:



6. Conclusion


56. The EC is conscious that the case before the Panel today is complex and poses a number of important issues concerning the interpretation of the SCM Agreement. The EC has sought to provide arguments that it thinks may assist the Panel in coming to the correct conclusion on a number of these issues. The EC has not however commented on all the issues which the Panel may potentially decide are relevant to a resolution of this case. It would be happy to respond to any questions that the Panel may have on such issues, just as it is ready, if requested, to clarify and develop the comments that it has made today.


image

21 BISD 9S/187, immediately following the list.

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ANNEX 3-4


ORAL STATEMENT OF THE UNITED STATES


(6 February 2000)


  1. Mr. Chairman and Members of the Panel, it is my honour to appear before you today to present the views of the United States as a third party in this Article 21.5 proceeding. It is not my intent today simply to repeat the comments already stated in our written submission. Instead, I will first comment briefly on certain statements made by the EC in its written submission, and then make a few broader observations on the overall purpose of the SCM Agreement, which the United States believes should inform the Panel as it considers the difficult issues at hand. Finally, although I had not intended to do so, I will also make a few brief comments on the Australia – Leather decision in light of the EC’s comments this afternoon.


  2. Turning first to the comments of the EC in its written submission, in paragraph 12 of its 17 January submission, the EC claims that Canada will be able to avoid a finding of de facto export contingency for the TPC programme if it is able to satisfy the Panel that future assistance is being granted without reference to actual or anticipated export earnings. To quote the EC’s submission, “Canada must ensure that the freedom of choice of applicants to decide between selling on the domestic or export markets is not limited in any way by the conditions attached to the receipt of the subsidy”.


  3. The EC’s argument before the Panel is similar to the arguments that it raised without success before the Appellate Body. There, the EC argued that there are various tests that the Panel should have applied in determining the export contingency of the TPC programme. For example, the EC argued that the panel could have considered “whether the recipient’s freedom to direct his sales effort to the domestic or the export market is somehow restricted”.1 This is essentially what the EC is arguing here.


  4. The Appellate Body rejected this kind of rigid approach. To quote its opinion (at para. 169):


    We agree with the Panel that what facts should be taken into account in a particular case will depend on the circumstances of that case. We also agree with the Panel that there can be no general rule as to what facts or what kinds of facts must be taken into account.2


    The Appellate Body’s statement reflects the simple truth that the determination whether a subsidy is contingent in fact upon export is a complicated task. Again quoting the Appellate Body (this time at para. 167), proving de facto export contingency is “much more difficult” than proving de jure export contingency because the existence of the contingency must be “inferred” from all of the facts surrounding the granting of the subsidy.


  5. Therefore, addressing the EC’s suggested test, it may well be that the recipients of a particular subsidy have complete freedom of choice to decide between selling in the domestic market and selling in the export market. The subsidy may still be a prohibited export subsidy. In the Australian Leather case, for example, the subsidy recipient was free as a legal matter to choose its own markets; it just happened that the nature of the market for its products meant that it had to export


    image

    1 Report of the Appellate Body, Canada -- Measures Affecting the Export of Civilian Aircraft, WT/DS70/AB/R, 2 August 1999, para. 104.

    2 Id., para. 169 (partial emphasis added).

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    to meet the relevant sales targets. In this manner, the sales targets in essence became de facto export targets.3 The EC acknowledged the possibility of this type of scenario in its comments before the Appellate Body. The facts will vary from case to case.


  6. Finally, in approaching this issue, it is important to keep in mind the Appellate Body’s observation (at para. 167) that the Uruguay Round negotiators sought to prevent the circumvention of the prohibition on de jure export subsidies when they included the prohibition on de facto export subsidies. A clever government that wishes to provide export subsidies to its exporters may be able to do so in a way that leaves its reasons unclear. However, a subsidy that is neutral on its face may still be prohibited. The task for a panel is to determine whether, in spite of this facial neutrality, the surrounding facts lead to the inference that the grant of the subsidy was contingent upon export, that is, that it was tied to actual or anticipated exportation or export earnings. To quote this panel (at para. 9.332), “do the facts demonstrate” that the subsidy would not have been granted “but for” anticipated exportation or export earnings?


  7. The United States would now like to comment briefly on certain broader points that we hope will influence the spirit in which the Panel evaluates this dispute.


  8. This proceeding, as well as the companion proceeding brought by Canada against Brazil, is extremely important, for it revolves around the critical issue of compliance with DSB rulings and recommendations and the resultant effect on the SCM Agreement’s ability to discipline injurious and prohibited subsidies.


  9. As this Panel noted in its original opinion, subsidies by their very nature involve situations where governments insert themselves into the marketplace by providing benefits to favored companies, that is, financial contributions on better than market terms. While the SCM Agreement allows certain, non-injurious subsidies, it flatly prohibits export subsidies. These two cases are a good example of why this is so.


  10. When a government chooses to provide an export subsidy, it effectively is deciding to interfere in the marketplace to provide its producers with an unjustified advantage over their foreign competitors in their competitors’ home markets and in third country markets. Inevitably, this provokes a response from the affected countries and their producers. For example, in the companion case to this dispute, Brazil argued before the Appellate Body that PROEX subsidies were intended to match the subsidies provided by the Government of Canada to its producer. The result is a ruinous subsidy competition that distorts the world trading system, punishes taxpayers, and bleeds off resources that might better be used for other purposes. The governments concerned may well want to call off this competition; effective rules on export subsidies, effectively enforced, can make this possible.


  11. Finally, I would like to comment briefly on the Panel’s decision in the Australian Leather Article 21.5 proceeding. If the Panel would like detailed comments on this issue, I would prefer to provide them in writing. However, I am happy to provide some initial oral comments.


  12. As an initial matter, the United States feels that the Panel’s decision in the Leather case is not directly relevant to this dispute, because Brazil is not seeking the repayment of past TPC and Canada Account subsidies. For this reason, this Panel does not need to reach the issue addressed by the Leather panel.


    image

    3 Report of the Panel, Subsidies Provided to Producers and Exporters of Automotive Leather, WT/DS126/R, 25 May 1999, para. 9.67.

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  13. If the Panel is nonetheless interested in our views, then I would simply observe that the Leather panel has spoken, so it is appropriate to conclude that its determination is definitive with regard to that case. The United States intends to support adoption of the report at the next meeting of the Dispute Settlement Body.


  14. The United States notes that the Leather Panel itself acknowledged that the proper manner of withdrawing a prohibited export subsidy may differ from case to case.


  15. While the Panel's conclusion in Leather went beyond the position that we took, we can't fault the logic of that conclusion.


  16. As I noted at the beginning of my comments, the United States would be pleased to provide a more detailed response in writing if the Panel so desires.


  17. As the United States noted in its written submission, we take no position on the issue of whether the amendments that Canada has made to the TPC programme and the Canada Account comply with the rulings and recommendations of the DSB. The United States hopes, nonetheless, that our comments today will prove useful to the Panel as it evaluates the complex issues at hand.


  18. This concludes my comments. On behalf of the United States, I thank you again for providing us with this opportunity to present our views.

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ANNEX 3-5


ANSWER OF THE UNITED STATES TO QUESTION POSED BY BRAZIL


(14 February 2000)


Q1. Please confirm the United States’ statement, at the 6 February Meeting of the Panel, that it did not receive Brazil’s Rebuttal Submission, dated 17 January 2000.


Response


The United States confirms the referenced statement.

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ANNEX 3-6


ANSWERS OF THE UNITED STATES TO QUESTIONS POSED BY THE PANEL


(14 February 2000)


Questions to third parties US

Q1. The US argues that the items contained in the Illustrative List are not, in Canada’s words, ‘exceptions’ to the rest of the SCM Agreement, but rather are particular applications of the general standards in Article 1 to particular types of government practices. Would the US please elaborate on this statement. In particular, is the US suggesting that Canada’s view is that the entire Illustrative List consists of exceptions to the rest of the SCM Agreement? Whatever the response to the preceding question, would the US disagree with a statement that the second paragraph of item (k) might at least in some circumstances be characterized as an “exception” to the first paragraph, in the sense that measures defined in the first paragraph of item (k) are prohibited export subsidies except if nevertheless they conform to the provisions of the second paragraph?

Response

  1. With respect to the Panel’s request that the United States elaborate on its statement, the question of the status of the items contained in the Illustrative List is connected to the so-called “a contrario issue”. Because the US position regarding the latter issue has been set out more fully in its written submissions in other dispute settlement proceedings, the United States will restate this position below for the benefit of this Panel, and hopes that this more detailed treatment of the issue will assist the Panel in its resolution of the matter before it. Following that discussion, the United States will address the other questions posed by the Panel in Question #1.


    The “A Contrario” Issue


  2. The basic question underlying the a contrario issue is this: In the case of a measure that is described by a particular item of the Illustrative List, is the measure’s status as a prohibited or non- prohibited export subsidy governed by the standards contained in the item itself or by the general standards set forth in Article 1 and Article 3.1(a) of the SCM Agreement? For example, in the case of Canadian export financing under the Canada Account, if one assumes that the type of financing in question is of a type dealt with by item (k), is the prohibited/non-prohibited status of such financing controlled by item (k) or by Article 1 and Article 3.1(a)?


  3. In the view of the United States, as a general matter of public international law, it is item (k) which is controlling. The principle of generalia specialibus non derogant holds that “a matter governed by a specific provision, dealing with it as such, is thereby taken out of the scope of the general provision dealing with the category of subject to which that matter belongs, and which otherwise might govern it as part of that category.”1 While the Appellate Body has not necessarily invoked this principle by name, it repeatedly has emphasized the importance of analyzing a measure based on the provision of the WTO agreements that most specifically addresses the measure.2 Of all


    image

    1 Gerald Fitzmaurice, The Law and Procedure of the Court of International Justice, 1951-4: Treaty Interpretation and Other Treaty Points, 1957 British Y.B. Int’l L. 236; see also Case Concerning Payment of Serbian Loans, P.C.I.J. Ser. A, No. 20/21, page 30; and Grotius, De Iure Belli Ac Pacis, Lib. II, Cap. XVI, XXIX (Classics, 3, 1929).

    2 European Communities - Regime for the Importation, Sale and Distribution of Bananas

    (“Bananas”), WT/DS27/AB/R, Report of the Appellate Body adopted 25 September 1997, paragraph 204

    WT/DS70/RW

    Page 188


    the provisions in the SCM Agreement, item (k) clearly is the provision that most specifically addresses export credit practices.


  4. In addition to general principles of public international law, the items of the Illustrative List are controlling – where they apply – by virtue of footnote 5 of the SCM Agreement. Specifically, while Article 3.1(a) prohibits export subsidies, including those described in the Illustrative List, footnote 5 to Article 3.1(a) provides that “[m]easures referred to in Annex I as not constituting export subsidies shall not be prohibited under this or any other provision of this Agreement.” Footnote 5 makes clear that a practice identified by the Illustrative List as not constituting an export subsidy is not prohibited by Article 3.1(a) or any other provision of the SCM Agreement. Thus, if, for example, an export credit practice is permitted under item (k) – rather than prohibited – that is the end of the matter; no further analysis is needed. As such, footnote 5 constitutes an express incorporation into the SCM Agreement of the generalia principle.3


  5. The disagreement as to whether an item of the Illustrative List is controlling appears to focus on the word “illustrative”. While all of the parties and third parties involved in this dispute agree that the Illustrative List is “illustrative”, they disagree on the manner in which it is illustrative. Canada and the EC appear to argue that if a particular type of financial contribution is described by a particular item in the Illustrative List, but cannot be considered as an export subsidy under the standard contained in the particular item, that financial contribution nonetheless can be found to be an export subsidy under some other standard.


  6. In the view of the United States, this is not what the drafters intended when they used the term “illustrative” to refer to Annex I of the SCM Agreement. Instead, a more reasonable interpretation is that the drafters used the term “illustrative” simply to signify that not all types of financial contributions are covered by the Illustrative List.4 However, where an item of the Illustrative List does address a particular type of financial contribution – as is the case with respect to item (k) and export credits – that item sets forth the standard for determining whether the financial contribution is or is not an export subsidy.


  7. Consider, for example, item (j) of the Illustrative List, which deals with export guarantee and insurance programmes. Looking just at the standard for premium rates, premium rates give rise to an export subsidy if they are “inadequate to cover the long-term operating costs and losses of the programmes.” Implicit in item (j), however, is the notion that premium rates do not give rise to an export subsidy if they are “adequate” to cover long-term operating costs and losses. Thus, on its face, item (j) provides Members with a predictable standard to use in establishing and administering export guarantee and insurance programmes.


    image

    (where the issues before a panel implicate two provisions, a panel should examine the more specific provision first); and Argentina - Measures Affecting Imports of Footwear, Textiles, Apparel and Other Items, WT/DS56/AB/R, Report of the Appellate Body adopted 22 April 1998, para. 45 (“Because the language of Article II:1(b), first sentence, is more specific and germane to the case at hand, our interpretive analysis begins with, and focuses on, that provision.”).

    3 Footnote 5 is not unique in this regard. Article 1.2 of the DSU, which provides that special or additional rules and procedures prevail over the general rules of the DSU, constitutes a very significant

    application of the generalia principle.

    4 For example, with the exception of export credits, which are dealt with in item (k) and which relate to the sale of goods, the Illustrative List does not address export-contingent loans, such as government loans provided solely to exporters for purposes of capacity expansion. Indeed, debt financing provided under

    Canada’s TPC programme does not fall under item (k). Similarly, with the exception of export credit-related guarantees, which are dealt with in item (j), the List does not address loan guarantees to producers that are contingent on export performance. Likewise, the List does not address forgiveness of government-held debt which may be contingent upon export performance. Finally, the List does not address export-oriented equity infusions, a practice alleged in this very case. Canada - Measures Affecting the Export of Civilian Aircraft (“Canada Aircraft”), WT/DS70/AB/R, Report of the Appellate Body adopted 20 August 1999, paras. 217-219.

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  8. Under the approach to the Illustrative List taken by Canada and the EC, however, any predictability is lost. For example, if item (j) was only “illustrative”, there would be numerous ways in which an export insurance or guarantee programme could be considered to be an export subsidy even though the premium rates conform to the standard in item (j). If premium rates were inadequate to cover short-term operating costs or losses, a programme could be considered to be an export subsidy. If premium rates were inadequate to cover short- or long-term non-operating costs, a programme could be considered to be an export subsidy. If premium rates were less than what an exporter might pay for comparable coverage in the marketplace, there could be an export subsidy under a “benefit to recipient” approach. This would be particularly true in a situation where a specific export transaction involves an unusually severe risk of nonpayment or currency fluctuation.5


  9. It is extremely unlikely that the drafters of the SCM Agreement went to the trouble of crafting in the Illustrative List specific and detailed rules for particular types of financial contributions, such as the rules in item (j) and item (k), with the intent that those rules could be readily ignored in favor of more general standards found elsewhere in the SCM Agreement. Instead, a more plausible reading is that the drafters intended to use the Illustrative List as a vehicle for establishing detailed rules for certain types of financial contributions, rules that elaborate on the general principles contained in Article 1 but that cannot be ignored in favor of those more general principles.


  10. The counter-arguments that have been made against this interpretation are not persuasive. For example, the EC has argued that in order for footnote 5 to exclude a measure from the prohibitions of the SCM Agreement, there has to be “a clear statement in Annex I that a measure does not constitute an export subsidy.”6 In its prior submissions to the Appellate Body on this issue, the EC stated that “footnote 5 requires an ‘affirmative statement’ in the Illustrative List to the effect that a measure does not constitute an export subsidy.7 Under either standard, the EC has identified only the second paragraph of item (k) as falling within the purview of footnote 5.8


  11. However, the text of footnote 5 does not require such a “clear” or “affirmative” statement, and there is a reason for this: the drafters had a different intent. Footnote 5 first appeared in the third draft agreement prepared by the Chairman of the Negotiating Group on Subsidies.9 In this draft, footnote 5 appeared for the first time – as footnote 4 to Article 3.1(a). Footnote 4 read as follows: “Measures expressly referred to in the Illustrative List as not constituting export subsidies shall not be prohibited under this or any other provision of this Agreement.” (Emphasis added). Thus, the


    image

    5 Similarly, the approach taken by Canada and the EC would render irrelevant the “material advantage” clause in the first paragraph of item (k), a clause which the Appellate Body already has acknowledged must be given meaning. Brazil - Export Financing Programme for Civil Aircraft (“Brazil Aircraft”), WT/DS46/AB/R, Report of the Appellate Body adopted 20 August 1999, para. 179. Under the Canadian and EC interpretation, export credits that otherwise fall under the first paragraph could constitute prohibited export subsidies regardless of whether they “are used to secure a material advantage.”

    6 United States - Tax Treatment for “Foreign Sales Corporations” (“FSC”), WT/DS108/R, Report of

    the Panel circulated 8 October 1999, para. 4.932 (emphasis in original).

    7 Brazil Aircraft, para. 77.

    8 Id.; and FSC, para. 4.932. If the drafters truly intended that footnote 5 apply only to the second paragraph of item (k), presumably they would have articulated this intent more directly by expressly referring

    to that paragraph.

    9 MTN.GNG/NG10/W/38/Rev. 2 (2 November 1990). In the prior two drafts, the prohibition against certain subsidies was contained in Article 1.1, which referred to three categories of subsidies: (a) subsidies

    contingent upon export performance; (b) subsidies listed in the Illustrative List; and (c) subsidies contingent upon the use of domestic over imported goods. MTN.GNG/NG10/W/38 (18 July 1990); and MTN.GNG/NG10/W/38/Rev. 1 (4 September 1990). In the third draft, Article 1.1 was redesignated as Article 3.1, and the first two categories were combined into a single subparagraph (a).

    WT/DS70/RW

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    original version of footnote 5 had an additional word – “expressly” – which, had it been retained, might have supported the EC interpretation.


  12. The word “expressly” was not retained, however. In the very next draft, the word was deleted from the footnote (still numbered as footnote 4).10 This change demonstrates that the drafters intended to expand, rather than restrict, the scope of footnote 5.11 The change also demonstrates that the drafters did not intend the sort of narrow construction of footnote 5 advanced by the EC.


  13. The second principal argument – advanced by both Canada and the EC – is that the US interpretation somehow would transform the Illustrative List into an exhaustive list that allegedly would allow “all sorts of measures” to escape the export subsidy prohibition.12 Both Canada and the EC have offered as an example item (a) of the Illustrative List, which prohibits “direct subsidies,” claiming that under the US approach, indirect export subsidies would escape item (a) and, thus, prohibition under Article 3.1(a).13


  14. However, this is a mischaracterization of the US position. First, as noted above, the US position is not that the Illustrative List is exhaustive. Instead, the US position is that the Illustrative List does not deal with all possible financial contributions, but for those that it does deal with, it establishes, by virtue of footnote 5, a dispositive legal standard insofar as prohibited subsidies are concerned. Second, in the case of the EC’s item (a) example, the US position is that item (a) simply does not address “indirect” subsidies. Thus, indirect subsidies do not “escape” any prohibition. Instead, the standard for a prohibited indirect subsidy must either be found elsewhere in the Illustrative List or, if the specific provisions of the Illustrative List are silent, in the general principles of Articles 1 and 3.1(a) of the SCM Agreement.


  15. Finally, the opponents of the a contrario interpretation have never been able to explain how their approach to footnote 5 and the Illustrative List does not render various portions of the Illustrative List ineffective. For example, they have been unable to explain how their approach does not render the “material advantage” clause of item (k) superfluous. Because such an outcome is incorrect under public international law,14 a correct interpretation of footnote 5 and the Illustrative List is that the provisions of the Illustrative List are controlling with respect to the measures addressed therein.


    image

    10 MTN.GNG/NG10/W/38/Rev. 3 (6 November 1990).

    11 Cf., Bananas, para. 186, in which the Appellate Body found that where the negotiating history of the Lomé Waiver demonstrated that the word “foreseen” was replaced by “required”, the “change clearly suggests that the CONTRACTING PARTIES wanted to restrict the scope of the Lomé Waiver.” In the case of footnote 5, the change runs in the opposite direction; the drafters clearly wanted to expand the scope of footnote 5.

    Likewise, one is “not entitled to assume that the disappearance [of “expressly”] was merely accidental or an inadvertent oversight on the part of either harassed negotiators or inattentive draftsmen.” United States - Restrictions on Imports of Cotton and Man-Made Fibre Underwear, WT/DS24/AB/R, Report of the Appellate Body adopted 25 February 1997, page 17. The negotiating record demonstrates that after the word “expressly” was deleted from the text, footnote 5 – then footnote 4 – continued to be the subject of discussion, including an unsuccessful attempt to delete the footnote altogether. Negotiating Group on Subsidies and Countervailing Measures; Meeting of 6 November 1990: Note by the Secretariat, MTN.GNG/NG10/24 (29 November 1990), page 2.

    12 FSC, para. 4.933.

    13 Brazil Aircraft, WT/DS46/R, Report of the Panel, as modified by the Appellate Body, adopted 20 August 1999, para. 4.64; FSC, para. 4.933-4.934.

    14 See, e.g., Japan - Taxes on Alcoholic Beverages, (“Japan Alcoholic Beverages”), WT/DS8/AB/R,

    WT/DS10/AB/R, WT/DS11/AB/R, Report of the Appellate Body adopted 1 November 1996, page 12.

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    Canada’s View


  16. Canada’s view appears to be that footnote 5, as well as any item in the Illustrative List that – in Canada’s view – is encompassed by footnote 5, is an exception to Article 3.15 In the view of the United States, neither footnote 5 nor the items in the Illustrative List constitute “exceptions”. To the contrary, footnote 5 and the Illustrative List are part of Article 3, not exceptions to it.


    The Second Paragraph of Item (k)


  17. Whether one considers the second paragraph of item (k) to be an “exception to”, a “qualification of”, or a “refinement of” the first paragraph is, in the view of the United States, essentially a semantic exercise with no legal significance. The Appellate Body has stated that the assignment of the burden of proof is not affected by describing a particular provision as an “exception” to something else.16 Likewise, characterizing a provision as an “exception” does not affect the interpretation of the provision. As the Appellate Body has stated:


    [M]erely characterizing a treaty provision as an "exception" does not by itself justify a "stricter" or "narrower" interpretation of that provision than would be warranted by examination of the ordinary meaning of the actual treaty words, viewed in context and in the light of the treaty's object and purpose, or, in other words, by applying the normal rules of treaty interpretation.17


  18. Thus, whether or not one characterizes the second paragraph of item (k) as an exception to the first paragraph, the complainant in a dispute – in this case, Brazil – has the burden of proving that the alleged offending practice fails to satisfy the terms of the second paragraph.


Q2. In any case, what are the practical implications, if any, for the issues before the Panel (and for the parties’ arguments) of the US argument concerning the parties’ characterizations of the Illustrative List (or at least of the second paragraph of item (k) thereof)? That is, the parties seem to agree that it would be for Canada eventually to choose whether to invoke that provision as a defense, and if it did so, to provide evidence to demonstrate its compliance therewith. Does the US agree or disagree with this? Please explain.


Response


  1. The practical implications of the US argument depend upon whether the Panel considers itself bound by an agreement between the two parties as to how the SCM Agreement should be interpreted; i.e., the parties’ agreement that Canada bears the burden of proving that Canada Account financing now conforms to the second paragraph of item (k). If the Panel simply decides that it will accept the parties’ interpretation because it happens to be something on which they agree, then the US argument is irrelevant.


  2. However, in the view of the United States, a panel is not obliged to accept the interpretation of an agreement that happens to be shared by the two litigants present before it. Although it is true that WTO dispute settlement is a Member-driven process, that does not mean that a panel can ignore its mandate under Article 11 of the DSU to “make an objective assessment of the matter before it ... .”


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    15 Canada - Measures Affecting the Export of Civilian Aircraft, WT/DS70/AB/R, Report of the Panel, as modified by the Appellate Body, adopted 20 August 1999, para. 5.81.

    16 EC - Measures Affecting Meat and Meat Products, WT/DS26/AB/R, WT/DS48/AB/R, Report of the

    Appellate Body adopted 16 January 1998, para. 104.

    17 Id.

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  3. Thus, the United States believes that the Panel must interpret the SCM Agreement objectively and independently of any agreement between the parties. When it does so, the United States believes that it should interpret the SCM Agreement – and, in particular, item (k) – in the manner described by the United States in its response to Question #1. Such an interpretation leads to the conclusion that the burden is on Brazil to demonstrate that the Canada Account does not conform to the second paragraph of item (k).


Q3. Concerning the verification mechanism proposed by Canada, the US argument seems to be that were the Panel to endorse any such mechanism, this would constitute a violation of Article 19.1 of the DSU, in that it would constitute a “modification” thereof which the Appellate Body has ruled is impermissible. Is this a correct understanding of the US argument. Please elaborate.


Response


1. The Panel’s understanding is correct. Under the DSU, panels may suggest methods of implementation, not methods of monitoring implementation. Surveillance of implementation is the subject of other provisions of the DSU, not Article 19.

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ANNEX 3-7


RESPONSES BY THE EUROPEAN COMMUNITIES TO THE QUESTIONS FROM THE PANEL AND FROM BRAZIL


(14 February 2000)


Question 1 to the EC


The EC takes the view that because Canada has "undertaken" to respect all the provisions of the OECD Arrangement, Canada has prima facie correctly implemented the Panel's findings. Would the EC please elaborate on what it means by "undertaken". That is, is the EC's position dependent on the specific nature of characteristics of that undertaking, and if so, what are the elements that persuade the EC that the undertaking does constitute prima facie correct implementation? Under what circumstances, if any, would the EC consider that a statement issued by a government body, or made by a government employee acting in an official capacity, did not have the status of an undertaking constituting prima facie evidence of compliance with a ruling by the DSB ?


Response


  1. The EC did not use the term “undertaken” to suggest that Canada had entered into a binding commitment. Canada has rather declared that it will not in future approve Canada Account financing “which does not comply with the OECD Arrangement.”1


  2. In the original proceeding, the Panel took the view that since Canada Account financing was discretionary, it could only rule on particular cases of support.2 This finding was not challenged on appeal. As a result, the Panel merely found a number of transactions to have been de jure export contingent.


  3. There is not therefore any finding of an export subsidy programme to implement although Canada has taken some steps to ensure that the programme will not in future give rise to the same problems.


  4. There is a change in Canada’s practice on Canada Account financing since before the declaration it claimed that this financing was “consistent” with the OECD Arrangement, which can be taken simply to mean that Canada did not consider that Canada Account financing fell under the OECD Arrangement. Now, it positively declares that future Canada Account financing will comply with the Arrangement.


  5. But this is not really the question before the Panel. If it was not possible in the original proceeding to declare the Canada Account financing incompatible with the SCM Agreement as a programme, that is in general, because it was discretionary, then it is still not possible now. The existence of the Panel Report cannot add to or diminish the rights and obligations of Members (Article 3.2 DSU).


Question 2 to the EC


Would the EC please elaborate on the specific reasons why it does not believe that it would be appropriate for the Panel to suggest a transparency agreement, as proposed by Canada. In


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1 Paragraph 57 of Canada’s First Written Submission.

2 Paragraph 9.213 of the Panel Report.

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particular, does the EC consider that such a suggestion by the Panel would be impermissible under the DSU and/or the SCM Agreement, or simply inadvisable for other reason? Please explain.


Response


  1. The EC finds itself in agreement with the statement of the US that Article 19.1 DSU, by its plain terms, allows a panel to suggest ways of implementing the recommendations that it makes after concluding that a measure is inconsistent with the covered agreement. A transparency agreement is not capable in itself to achieve the result of bringing Canada's subsidies into conformity. It is rather a means of verifying compliance, which is not a matter in which panels should become involved.


  2. Accordingly, Article 19.1 DSU does not give to the Panel the necessary authority to make the suggestion and it is therefore impermissible.


QUESTION FROM BRAZIL


Brazil notes several references to its Rebuttal Submission, dated 17 January 2000, in the European Communities' Statement for the Meeting of the Panel on 6 February 2000. Please identify from whom the European Communities received this document.


Response


  1. The European Communities received Brazil’s second written submission by e-mail. No record of the origin of the transmission was kept. It expected to have received the text from Brazil.


  2. The European Communities is concerned that Brazil contests its right of have received the second submission and states that it did declined to send a copy to the EC as required by the Working Procedures of the Panel. How can the EC usefully contribute to the consideration of this matter by the Panel if it is not aware of all the arguments that have been presented to the Panel prior to the meeting?


  3. Article 10:3 of the Understanding on Rules and procedures governing the settlement of disputes (DSU) states that :


  4. Third parties shall receive the submissions of the Parties to the dispute to the first meeting of the Panel. (emphasis added).


  5. Furthermore, the DSU does not foresee any specificity in the application of this rule to panels reconvened pursuant to Article 21.5.


  6. As the meeting of 6 February 2000 was the first and only meeting of the Panel in this case, the EC was entitled to receive all submissions made to that meeting.


  7. A refusal by Brazil to allow the EC to have its second written submission would be a breach of the DSU and the Working Procedures an undermine the validity of the procedure.


  8. The European Communities can assure Brazil that there has been no breach of confidentiality since its second written submission has only been made available to Members participating in the proceeding and for that purpose, as required by the DSU.


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