World Trade

Organization

Brazil - Export Financing Programme for Aircraft

AB - 1999-1

Report of the Appellate Body

4. Recommendation of the Panel

28. Brazil notes that Article 4.12 of the SCM Agreement provides that, when specific time periods are not provided by Article 4, "time-periods applicable under the DSU for the conduct of such disputes shall be half the time prescribed therein." Brazil disagrees with the Panel's conclusion that Brazil should withdraw its export subsidy within 90 days, instead of within the seven and one-half months that would be half the 15-month standard period set out in Article 21.3(c) of the DSU. Brazil states does not contend that 90 days or some other period (including a longer period) might not be appropriate in a particular case. However, there must be good reason for such a conclusion. TThe Panel's "brief, cursory treatment of the question" provides "no reason whatsoever" for departing from the seven and one-half month "standard" provided by Article 4.12 of the SCM Agreement and Article21.3(c) of the DSU.

B. Arguments by Canada – Appellee

1. Consultations

29. Canada agrees with the Panel's finding that "the consultations and request for establishment [of a panel] relate to what is fundamentally the same 'dispute', because they involve essentially the same practice, i.e., the payment of export subsidies under PROEX."[24] In this case, Canada’s request for consultations, dated 18 June 1996, was made under Article4 of the SCM Agreement and Article4 of the DSU, in respect of "certain export subsidies granted under the Brazilian Programa
de Financiamento às Exportações (PROEX) to foreign purchasers of Brazil’s Embraer aircraft."[25] Canada’s request for a panel, dated 10 July 1998, was in respect of "the payment of export subsidies through interest rate equalization and export financing programmes under PROEX."[26] The measures alleged by Brazil to have been improperly before the Panel as of 10 July 1998 constitute the legislative and regulatory basis for the granting of the PROEX subsidies. The specific instruments set out in its request for the establishment of a panel merely reflect amendments and replacements to the measures underlying PROEX. In Canada's view, Tthe measures at issue form the continuing legislative and regulatory basis for PROEX subsidy payments, which were the "matter" in the request for consultations and in the request for establishment of a panel.

2. Are PROEX Interest Rate Equalization Payments Used "To Secure a Material Advantage in the Field of Export Credit Terms"?

30. Canada notes Brazil's claim that whether export credit terms "secure a material advantage" should be based on the terms available in the "marketplace", which, according to Brazil, includes the terms available to all companies in the industry from private and public sources. Canada disagrees with this interpretation, and submits that "material advantage" refers to export credit terms that provide an advantage to a purchaser over the terms otherwise available in the private international financing market. The Panel followed this approach, and specifically rejected Brazil's argument, stating, inter alia, that such an approach could lead to a "race to the bottom" in which Members justified the provision of export subsidies on the grounds that other Members were providing them as well.

31. Canada contests Brazil's interpretation that PROEX payments are not "used to secure a material advantage" in the sense of item (k) because they are designed to offset Brazil's risk and Canada's level of subsidies. PROEX export subsidies are, in fact, "used to secure a material advantage",, as they provide for the purchaser, credit terms for the purchaser more favourable than those that could be obtained in the market. Where a government, financial institution, exporter or purchaser uses an export credit or a payment to gain an advantage or benefit for a beneficiary (i.e., purchasers of exported goods) relative to the international financing market, such practice "secure[s] a material advantage" under item (k) and is an export subsidy prohibited by Article3.1.

32. Canada rejects Brazil's claim that the Panel's analysis reduces the "material advantage" clause to a nullity. The Panel's test is whether finding was that the "material advantage" clause is used to determine whether the subsidy puts the recipient in a better position than if the recipient had obtained financing without government support in the international financing market. Item (k) refers to a situation where a government lends funds at an interest rate that is below the rate it would pay for raising such funds or a similar situation where the government makes up for costs incurred by private lenders. The "material advantage" clause provides that such practice is an export subsidy only when the resulting terms are more favourable than those available in the international financial markets. Without the "material advantage" clause, simply lending below the cost of funds or paying the costs incurred by exporters or financial institutions in obtaining credits would be an export subsidy regardless of the financing terms that result. It is possible for a government to correct for high costs of country risks without providing terms that are more favourable than those available on the market. Therefore, Canada concludes that the "material advantage" clause is not reduced to a nullity under the Panel's interpretation.

33. Canada states also that Brazil's reliance on the negotiating history is misplaced, since because neither Canada nor the Panel has denied that the "material advantage" clause should be given meaning.

34. Canada rejects Brazil's interpretation that PROEX payments are permitted under item (k) on an acontrario basis. Such interpretation would convert the Illustrative List into an exhaustive list of prohibited export subsidies, which it is not. The use of the word "including" in Article 3 of the SCM Agreement clearly indicates that there are measures other than those listed in the Illustrative List that could be covered by Article 3. Thus, the use of acontrario inferences in the Illustrative List is inappropriate. According to Canada, Brazil's interpretation is not supported by footnote5, which provides that "measures referred to in Annex I as not constituting export subsidies shall not be prohibited under this or any other provision of this Agreement."

35. Canada notes that there is nothing in the first paragraph of item (k) that indicates that measures not meeting the item (k) criteria are to be "permitted" under footnote 5. The Brazilian argument for an a contrario finding that certain measures are "permitted" under the Illustrative List should be rejected because, instead of a "list with numerous references to what is an export subsidy", the Annex becomes "a list with numerous references to what is not an export subsidy." Moreover, nothing in the text of the SCM Agreement supports the United States’ view of the United States that each item in the Illustrative List "sets forth the standard" for when a particular type of measure is a subsidy.

36. Second Finally, Canada addresses the question issue of whether, under the first element of this claim, PROEX results in a "payment" within the meaning of item (k). The first part of the first paragraph of item (k) refers to a situation where a government lends funds at an interest rate that is below the rate it would pay for raising such funds. The phrase "the costs incurred … in obtaining credits" in the second part of item (k) refers to a similar situation, but with private financing. PROEX subsidies have little to do with Embraer's cost of raising funds to provide financing. In fact, PROEX export subsidies are typically paid when sales are financed by non-Brazilian financial institutions. The higher cost of credit due to "Brazil risk" is not an issue. Thus, PROEX subsidies are not payments to cover the added costs incurred by exporters or Brazilian financial institutions in raising funds used for financing purchases. In Canada's view, they are simply cash grants made for the benefit of purchasers of Brazilian exported products, and do not constitute payments within the meaning of the first paragraph of item (k).

3. Has Brazil Increased the Level of its Export Subsidies?

(a) Actual Expenditures or Budgeted Amounts

37. In Canada’s view, Article 27.4’s prohibition that a developing country Member "shall not increase the level of its export subsidies" refers to the level of expenditures, not to the level of budgetary appropriations. Canada makes three arguments in support of the Panel's finding that actual expenditures should be used for the purposes of this measurement,Canada argues first of all that the SCM Agreement as a whole, and Article 1 of that Agreement in particular, is phrased in terms of transfers of value, such as when payments are made. Second. The text of footnote55 refers to "the level of export subsidies granted". (emphasis added) It does not refer to the level of export subsidies "budgeted". Moreover, where disciplines have been imposed on subsidies elsewhere in the WTO Agreement, the disciplines are based on expenditure levels.

38 Canada then argues that interpreting "level of … export subsidies" to mean expenditures is consistent with the object and purpose of the SCM Agreement, which is "to reduce the economic distortions caused by subsidies." Such distortions are caused by actual expenditures of export subsidies, not by budgeting or planning for subsidies.

39. Canada notes that certain "absurdities" result from Brazil’s argument that the "level of its export subsidies" should be based on budgetary amounts. First, a developing country could have budgeted a large amount of export subsidies in 1994 without actually spending them, in order to expand its actual expenditures of export subsidies in later years. Second, it could create a situation where a developing country Member that does not grant export subsidies could lose the protection provided by Article 27 if it budgets for export subsidies at a level higher than its 1994 calendar year baseline. Conversely, a Member that maintains its budget at its previous level, but overspends on actual expenditures, would not be in breach of this condition.

40. With respect to Brazil’s alternative definition of "grant" as "agree to, promise, undertake", Canada first agrees with the Panel's finding that, in this context, this suggested definition is "inapposite".[27] Brazil’s argument that it "grants" PROEX subsidies when they are appropriated in the budget is inconsistent with its Brazil's argument on the timing of a subsidy, in which Brazil claimed that the PROEX subsidy is granted by the letter of commitment and not by the issuance of the bonds. In addition, Brazil’s argument is farfetched incorrect because a subsidy cannot be said to have been "granted" when neither a beneficiary nor an amount have been identified.

41. Finally, Canada states maintains that Brazil’s argument that its notification of subsidies under Article 25 is based on budgeted amounts is irrelevant. The purpose of Article 25 is quite different from Article 27.4. Article 27.4 provides a limited and conditional exception to the prohibition on export subsidies if developing country Members place a ceiling on their overall expenditures on export subsidies, whereas Article 25 requires Members to report all subsidies. Moreover, under Article25, budgeted amounts are to be used in such notifications only where it is not possible to notify on a per unit basis.

(b) When Are PROEX Subsidies "Granted"?

42. Canada argues that the Panel correctly found that the issuance of bonds, as opposed to the letter of commitment, was is the point at which a subsidy occurs under PROEX. Brazil had claimed that the letter of commitment constituted a "potential direct transfer of funds." This issue is really about effective implementation of the SCM Agreement. If the PROEX subsidy is found to be granted when letters of commitment are issued, Brazil can "lock in" the conditional commitments it has made, and as well as any it is continuing to make, with respect to the letters of commitment. That is, if it is the letter of commitment that results in a "grant", all existing letters of commitment, i.e., those that have already been issued will be consistent with WTO rules.

43. Canada submits that Brazil's argument is not consistent with the ordinary meaning of "potential direct transfer of funds" in Article1.1(a)(1)(i) in the light of its context and object and purpose. Looking at its the context of the provision demonstrates that the Panel's interpretation, was correct that
"potential direct transfer of funds" only refers only to loan guarantees or to similar measures, was correct. Under Article 1.1 of the SCM Agreement a "financial contribution" can only exist only if the measure in question is capable of conferring a "benefit". The example of a "potential direct transfer of funds" provided in Article1.1, – loan guarantees, – re-inforces this interpretation. Loan guarantees are capable of being paid out in the future in the event of default by the debtor, but they confer a benefit even if they are not. Thus, to be considered a "potential direct transfer of funds", a government practice must be capable of becoming a payment, and confer a "benefit", even if no payment is made.

44. Canada argues that the letter of commitment is incapable of conferring a "benefit" in and of itself. A commitment is entered into before a sale even occurs. It becomes "binding" only when certain conditions are met. No money is transferred unless there is an export delivery. Thus, the issuance of the letter of commitment itself does not confer a "benefit". The letter of commitment only anticipates possible future benefits if subsidies are actually granted. Until an actual delivery is made, and bonds are consequently issued, no "benefit" can be said to exist.

45. A Canada maintains that additional context, Canada states, for this conclusion is provided by the absence of the word "potential" in any of the other examples of subsidies "financial contributions" provided in Article 1.1. This omission is evidence that the drafters did not intend that "potential direct transfer of funds" should cover every promise to provide a "financial contribution" in the future. Rather, it should be restricted to the narrow meaning elucidated by the example of loan guarantees.

46. Canada argues that, furthermore, that if Brazil's argument were to be is accepted, the result would will simply be that Brazil would will be in violation of its Article 3 obligations at an at an earlier date point in time. Canada explains that it submitted evidence showing that if the letter of commitment were to be used as the point at which the subsidy occurs, Brazil would not have been in compliance, since 1996, with its obligation in Article27.4 not to increase the level of its subsidies.

47. Canada notes Brazil's argument that any market economic distortion occurs at the time the letter of commitment is issued. Canada responds by pointing out that, from the standpoint of reducing economic distortion, it is more effective to define the subsidy as the issuance of bonds. If the subsidy is defined as the issuance of a letter of commitment, then the result will be greater trade distortions, because the continued issuance of PROEX bonds under existing letters of commitment will result in many more subsidized aircraft being built in Brazil. In response to Brazil's argument that, under Brazilian law, it is legally liable for damages if it does not uphold a letter of commitment, Canada responds by stating noting that Members may not "contract out" of their WTO obligations.

48. In response to the European Communities' argument that subsidies should be deemed "granted" when a sales contract is signed, Canada responds that even after a contract is signed, bonds will not be issued if the aircraft is not delivered and exported.

4. Recommendation of the Panel

49. Canada notes Brazil’s argument that the Panel's recommendation for the time period for withdrawal of the subsidy should be extended from 90 days to seven and one-half months. Canada makes three arguments against overturning the Panel's recommendation.

50. First In reply, Canada states that, Article 4.7 of the SCM Agreement instructs panels, whenever subsidies are found to be prohibited, to require that such subsidies be withdrawn "without delay." Unlike Article 21.3(c) of the DSU, this requirement was is not qualified in any way. The difference in the language between the two provisions makes clear that Article 21.3(c) of the DSU is not the benchmark for determining the period for withdrawing prohibited subsidies in this case.

51. Second Canada notes also that, Article 4.12 of the SCM Agreement is only applicable with respect to time-limits for the purposes of the "conduct of … disputes." However, Article4.12 refers to only disputes, not to the period of implementation, which is fundamentally different than from the periods for the conduct of disputes. Accordingly, Article4.12 is of no value in interpreting withdrawal of subsidies "without delay", which is relevant only to implementation.

52. Third Canada argues that, Article 7.9 of the SCM Agreement provides that countermeasures may be imposed if actionable subsidies are not withdrawn within six months of the adoption of the panel or Appellate Body report. It is logical that where a subsidy is required to be withdrawn "without delay", the timeframe for withdrawal must be shorter than the six month period provided under Article 7.9 and in no circumstances should be longer than six months.

53. Canada asks the Appellate Body to recommend that PROEX export subsidies be withdrawn without delay as of the date of adoption of the Panel and Appellate Body Reports, because Brazil is continuing to grant new subsidies and maintain old subsidies, and is intensifying efforts to enter into long-term subsidization commitments before the end of the implementation period.

54. Finally, Canada recalls that its request for a three-month period for withdrawal was made in view of its analysis that "withdrawal" meant stopping the payments of bonds paid in semi-annual instalments. Canada notes that if Brazil does not need to effect a legislative or regulatory change to stop these payments, withdrawal could come even faster.

C. Claims of Error by Canada – Appellant  

1. Burden of Proof Under Article27.4 of the SCM Agreement

55. Canada is appealing the is issue of the proper allocation of the burden of proof under Article27.4 of the SCM Agreement even though the finding did not affect the outcome of the case. Article27.4 is an "exception" to Article3, and that therefore Brazil, as the party invoking the "exception", has the burden of proof. The Panel's conclusion that Article 27 is not an exception was based on the fact that Article 27 is phrased as "[t]he prohibition of [Article 3.1(a)] … shall not apply to … ." Article 27 should not be considered an element of a claim of violation of Article3.1(a), as opposed to an affirmative defense or exception, simply because the words "exception" or "exemption" were not explicitly used in Article 27. Rather, like Article XX of the GATT 1994, Article 27.2 contains an exception to the obligations of Article3.1(a). Therefore, the burden of proof is on the party invoking Article27. Although the words "exception" or "exemption" are not explicitly used in Article27, Canada asserts that it should be regarded as an affirmative defense, not an element in a claim of violation of Article3.1(a).

 2. Has Brazil Increased the Level of its Export Subsidies?

(a) Constant or Nominal Dollars

56. Canada argues that the Panel's finding that it is appropriate in this case to use constant dollars in order to provide a more meaningful assessment as to of whether Brazil has increased the level of its export subsidies is "unreasoned" and does not respect the text, context and the object and purpose of the SCM Agreement.

57. Canada submits that there is no explicit provision for conversion of the level of export subsidies to a constant value either in Article 27.4 or in footnote 55. Moreover, paragraph 5 of Annex IV of the SCM Agreement the SCM Agreement, the Agreement specifically provides for inflation adjustment. in paragraph 5 of Annex IV of the SCM Agreement Thus, the fact that the drafters did not provide for it inflation adjustment in Article 27 gives rise to the "commonplace inference" that they did not intend for inflation to be taken into account in this provision. Indeed, there is no guidance as to in the Agreement on how indexation should be accomplished if it were to be used.

58. In the alternative, Canada then argues in the alternative that in the one provision in the SCM Agreement where indexation is used, – paragraph 5 of Annex IV, – it only applies if the amounts would be significantly affected by inflation. Canada notes that a large part of Brazil's trade takes place in U.S. dollars, that PROEX bonds are indexed to U.S. dollars, and that the PROEX budget and expenditures are notified to the WTO in U.S. dollars. G Given that Brazil expressed its export subsidies in the currency of a
non-inflationary economy, and, therefore, inflation could not have had a significant effect, in Canada's view, there is no basis for the Panel's conclusion that constant dollars provide a more "meaningful assessment" as to whether Brazil has increased the level of its export subsidies.

3. Conditional Appeal: "Maintaining" Subsidies Under Article3.2 of the SCM Agreement

59. In its appellant's submission, Canada argues that if the Appellate Body reverses the Panel's finding that subsidies are "granted" at the time bonds are issued, not when the letter of commitment is issued, the Appellate Body should then complete the legal analysis, relying on the factual record before the Panel. To this end, the Appellate Body should find that subsequent issuance of PROEX bonds upon the delivery of the subject aircraft is inconsistent with Brazil's obligation not to "maintain" prohibited export subsidies under Article 3.2 of the Agreement.

60. Canada notes the overall importance of this issue by quoting the Panel's statement that if there were no prospective discipline for the provision of subsidies, "the SCM Agreement's prohibitions could not be invoked until a particular prohibited subsidy had actually been paid." [28] If the Appellate Body does not give proper meaning to the word "maintain" in Article3.2, the SCM Agreement will be rendered ineffective because Brazil will be free to provide prohibited export subsidies for many years after the deadline for implementation of the report, as long as the letter of commitment was provided before the report was adopted. For the same reason, the eight-year phase out period in Article 27.4 will be extended indefinitely.

61. Canada notes that the plain meaning of "maintain" is "go on with, continue, persevere in; preserve or retain; cause to continue". The issuance of the PROEX bonds causes the PROEX subsidy to continue to exist, and consequently preserves that subsidy, and, therefore, "maintains" a prohibited subsidy within the meaning of Article 3.2 of the SCM Agreement. In the context of Article 27, this interpretation would lead to the commitment to issue PROEX bonds extending past the end of the eight-year phase out period, and, therefore, "maintain" a prohibited export subsidy beyond the phase out deadline.

D. Arguments by Brazil – Appellee  

1. Burden of Proof Under Article27.4 of the SCM Agreement

62. In Brazil’s view, the Panel correctly disagreed with Canada’s argument that the temporary exemption provided for developing countries in Article 27.2 is the legal equivalent of the permanent exception from GATT 1994 obligations for all Members provided by Article XX of GATT 1994.

63. Brazil argues that Article 27, entitled "Special and Differential Treatment of Developing Country Members", is in no way subordinate to Article 3 or any other article of the SCM Agreement, nor is it to be narrowly interpreted in favor of any other provision. Rather, Article 27 is a transitional arrangement with its own terms. The provision presumes. In Brazil's view, the temporary legitimacy of developing country Member's export subsidies is presumed unless it is proven that a particular Member is not in compliance with the its obligations of under Article27.

64. In Brazil’s view, if Article 27 is read in the order in which its terms are set out, the meaning is clear. Article27.2 begins: "Article 3 shall not apply". For Article3 to apply, the burden of proof must reside with the complainant to demonstrate that the conditions of Article27 are not met, and Article3 therefore does apply. Otherwise, Article 3 always would apply, subject only to the ability of a developing country Member to bear the burden of proof under Article27. The fact that non-application depends upon compliance with Article 27.4 does not alter the ordinary meaning of "shall not apply". A seriatim reading of Article 27 first establishes that Article 3 does not apply, and only then reaches the "subject to compliance" clause in Article27.2(b).

65. Brazil further argues that both the context and the object and purpose of Article 27 support the Panel's conclusion. T The context is provided by the title, "Special and Differential Treatment of Developing Country Members". This title is indicative of the nature of the provision, and expresses a concern for the well-being of developing country Members. Thus, a high degree of liberality in interpretation of this provision is required. Similarly, the object and purpose is stated in the first paragraph of Article 27, is which reads: "Members recognize that subsidies may play an important role in economic development programmes of developing country Members." According to Brazil, Canada’s arguments placing the burden of proof under Article 27 on developing country Members ignore the context and the object and purpose.

66. Brazil notes two final points. First, placing the burden of proof on a complaining party would not mean that potential complainants are would be frustrated by a lack of information. Information of this nature is available in the panel proceedings and through Article25 subsidy notifications. In this case, Brazil has provided information through both avenues. Second, Article27.7 of the SCM Agreement provides that a Member adversely affected by export subsidies has an additional avenue for a complaint under the provisions of Article7 of that Agreement.

2. Has Brazil Increased the Level of its Export Subsidies? 

(a) Constant or Nominal Dollars

67.  Brazil notes that Canada appeals the Panel's decision to use constant dollars to measure the level of increase in export subsidies, on two grounds: 1) the Panel confined its conclusion to "this case"; and 2) use of a constant measure of value is contrary to the ordinary meaning of the phrase "level of … export subsidies".

68. In Brazil’s view, the Panel's confining of its conclusion to the facts of this case is a proper, prudent exercise of judicial economy. The Panel had to decide only this case, not another case, and there is nothing irreversible in the Panel's approach.

69. Brazil notes Canada’s argument that because Article 27.4 does not explicitly require the use of constant value, panels are prohibited from using that measure. Brazil draws the opposite conclusion from these facts the terms of Article27.4: since Article 27.4 does not prohibit the use of constant value, nothing in the SCM Agreement precludes the Panel's conclusion.

70. Brazil argues further that the use of a constant measure is required if the special rules for developing countries in Article 27 are to be given genuine meaning. The Appellate Body may take "judicial notice" that currencies tend to depreciate over time because of inflationary pressures, and these pressures are greatest in developing countries. A failure to adjust the level of export subsidies for inflation would effectively repeal the Article27 "exemption". T Brazil explains that the fact that Brazil reported its subsidies in dollars means that the inflation rate was smaller than it otherwise would have been, but inflation was present nevertheless, and the Panel properly allowed for it.