World Trade

Organization

Brazil - Export Financing Programme for Aircraft

AB - 1999-1

Report of the Appellate Body

71. Brazil notes Canada's argument that if the Appellate Body reverses the Panel and finds that the subsidy occurs at the point the letter of commitment is issued, then it should make an additional finding that the issuance of the NTN-I bonds constitutes "maintaining" a subsidy under Article3.2. Brazil agrees with Canada that "maintain" is defined as "go on with, continue, persevere in; preserve or retain; cause to continue". However, what must not be "maintained" under the SCM Agreement are "subsidies," a term Brazil claims that Canada defines in the Canada – Aircraft appellate proceeding as the equivalent of "subsidy programme". Thus, it is simply the subsidy programme itself, in this case PROEX, which must not be "maintained".

72. Brazil first notes that the word "maintain" logically applies only to subsidies granted prior to the effective date of the WTO, 1 January 1995. If subsidies were granted before that date, they would be consistent with the requirements of Article3.2 of the SCM Agreement if that paragraph did not prohibit the maintenance of such subsidies.

73. Brazil argues that, in this case, the "subsidy" occurs when the letter of commitment is issued. The subsequent issuance of the bonds is no more the maintenance of a subsidy than is the subsequent payment received by redeeming the bonds over the life of the financing. The only way the PROEX subsidy would be "maintained" is if Brazil did not withdraw the subsidy element of the programme in the event of adoption of a report finding PROEX to be inconsistent with Brazil’s WTO obligations. By contrast, it would not be considered "maintaining" the PROEX subsidy if it eliminated PROEX and simply continued to honour contractual obligations made before the elimination of the programme.

74. Brazil refers to Canada’s argument that this interpretation allows Members to "contract out" of their obligations. In response, Brazil argues that, to the extent that this is true, it is true of virtually any subsidy that is subsequently determined to be inconsistent with WTO obligations. For example, a finding that a low-interest loan is a subsidy would not require the borrower to agree to less favourable terms. It simply requires that no new low-interest loans be granted.

75. Brazil notes that subsidy programmes often utilize payments made over a long time period. Indeed, Canada’s most recent subsidy notification under Article 25 demonstrates that it has made payments under certain programmes after the termination of the programme. In Brazil’s view, the honouring of prior subsidy commitments cannot constitute "maintaining" export subsidies under Article 3.2 of the SCM Agreement.

E. Arguments by Third Participants

1. European Communities 

(a) "Material Advantage" Clause of Item (k) of the Illustrative List of Export Subsidies

76. The European Communities disagrees with the Panel's interpretation of the "material advantage" clause in item(k) of the Illustrative List. In the European Communities' view, this clause allows Members to "match" the export credits granted by other Members, even if the rates provided are less than commercial rates. The second paragraph of item (k) explicitly permits certain export credit practices under conditions which conform to the OECD Arrangement. The OECD Arrangement authorizes its participants to apply interest rates lower than the designated minimum interest rate, the Commercial Interest Reference Rate (the "CIRR"), in order to "match" the rates applied by other participants or by non-participants in the Arrangement. The level at which the minimum interest rates, as well as the "matching" mechanism, are set, demonstrates that the purpose of the OECD Arrangement is to ensure that export credits do not distort competition, rather than to ensure that export credits are always offered at "commercial rates". The European Communities believes that the second paragraph of item(k) provides context for the "material advantage" clause in the first paragraph of item(k), and that this clause reflects in the first paragraph serves the same purpose as the second paragraph of item(k).

77. The European Communities then the argues that footnote 5 to Article3.1(a) of the SCM Agreement does not include a contrario inferences. On the contrary, footnote 5 requires an "affirmative statement" in the Illustrative List to the effect that a measure does not constitute an export subsidy. The second paragraph of item (k) provides an example of such an " affirmative statement"; this paragraph describes the type of measure referred to in which footnote5 refers as "not constituting export subsidies". By contrast, the language of the "material advantage" clause itself clearly does not set out such an exception in the first paragraph of item(k) does not constitute such an "affirmative statement". The "material advantage" clause simply defines the scope of the prohibition in the first paragraph of item (k). Therefore, the European Communities concludes that the "material advantage" clause is not an example of the type of measure to which footnote 5 refers.

78. The European Communities disagrees with the United States position that the Panel made an "alternative finding" related to the "material advantage" clause. What the United States calls a "finding" is in reality merely an "interpretation". The difficulty arises because the Panel has treated Brazil's argument for an exception under item(k) as an affirmative defence. In fact, item(k) is in the nature of a prohibition. Thus, according to the European Communities, the Panel's decision to place the burden of proof on Brazil was in error.

(b) Has Brazil Increased the Level of its Export Subsidies? 

(i) Actual Expenditures or Budgeted Amounts

79. The European Communities agrees with the Panel's finding that actual expenditures should be used to determine whether there is an increase in the "level of … export subsidies" under Article27.4. Footnote 55 of the SCM Agreement indicates that the relevant "level of … export subsidies" is that of the subsidies "granted". Authorization given by the budgetary authority of a Member to the executive to spend funds does not create any rights for the potential beneficiaries of the fund. Therefore, in the European Communities' view, the PROEX payments may not be deemed "granted" until the sales contracts are concluded. 

(ii) When are PROEX Subsidies "Granted"

80. According to the European Communities, PROEX payments should be deemed "granted" when a definitive purchase contract (i.e., not a simple option contract) is signed by Embraer and the foreign purchaser. The European Communities agrees with the Panel that the issuance of a letter of commitment is not sufficient to consider that the subsidy has been "granted", since the obligation to issue the bonds is conditional upon the conclusion of a sales contract. Each of the parties is free to sign or not to sign the contract after the letter of commitment has been issued, and in at least some cases letters of commitment are issued with respect to option contracts. The benefit to Embraer occurs upon concluding a sales contract.

81. The European Communities argues maintains that if the PROEX payments are deemed "granted" by the Appellate Body when the aircraft is physically exported, all bond issues will be prohibited in the future by virtue of the Appellate Body ruling. As a result, bonds may not be issued even under those existing sale contracts for which export has not yet occurred. This would be "extremely disruptive" of the rights of private parties under sales contracts that have already been concluded and are legally enforceable. Furthermore, any harm caused by the subsidy occurs at the moment when the sales contract is signed.

82. The European Communities notes that the United States made a similar argument in Australia – Subsidies Provided to Producers and Exporters of Automotive Leather[29], where it the United States claimed that a contract between the Government of Australia and a private party to provide a grant constituted a "subsidy" within the meaning of Article1 of the SCM Agreement.

(c)Recommendation of the Panel

83.  The European Communities expresses no opinion does not express any views on whether the 90-day period for withdrawal of PROEX subsidies set by the Panel is appropriate, particularly given the Panel's failure to advance specific reasoning for its conclusion. However, the European Communities considers that Brazil’s rationale for applying a seven and one-half month period is incorrect. A period of seven and one-half months could under no circumstances qualify as implementation "without delay." Moreover, the use of the 15 month period referred to in Article21.3(c) is inappropriate as a guideline.

84. The European Communities notes that Article 4.12 only applies with respect to time-periods for the "conduct of … disputes". The implementation of a panel report, however, is not part of the "conduct" of a dispute.

85. The European Communities attaches great importance to the principle in Article3.2 of the DSU that no retroactive remedies may be imposed.

(d) Conditional Appeal: "Maintaining" Subsidies Under Article 3.2 of the SCM Agreement

86. With respect to Canada’s argument that the continued issuance of bonds violates the prohibitions in Article 3.2 on "maintaining" export subsidies, the European Communities notes briefly that Canada’s position is incompatible with the principle that the DSB’s rulings and recommendations are not retroactive. If Canada’s argument were accepted, it would require Members to recover subsidies that have already been "granted". The obligation not to "maintain" prohibited subsidies is intended to address the situation where a Member grants prohibited subsidies within the framework of a specific programme. Article 3.2 simply requires that this programme not be "maintained", that is, it must be abolished.

2. United States 

(a)Burden of Proof Under Article27.4 of the SCM Agreement

87. The United States notes that it agrees with the arguments made by Canada that the burden of proof under Article 27 is on the developing country Member to show that it is in compliance with the provisions of Article 27.4.

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

88. The United States notes two separate findings by the Panel regarding on the "material advantage" clause in item (k) of the Illustrative List. First, the Panel found that an item (k) payment is "used to secure a material advantage" where the payment makes available export credit on terms more favourable than otherwise available in the marketplace. Second, the Panel made an alternative finding based on the assumption that Brazil was correct in its assertion that the "material advantage" clause required an examination of export credit terms available with respect to competing products exported from other Members. In this alternative finding, the Panel found that the field of export credit terms is limited to interest rates, grace periods, transaction costs, maturities and the like, and does not encompass the price at which the product is sold.[30] The United States argues that the Panel's first finding was incorrect as a matter of law, but that the Panel's alternative finding was correct and should be upheld by the Appellate Body.

According to the United States, the Panel's first finding reads the "material advantage" clause out of item (k). The United States states that, under this first finding by the Panel, any payment by a government of costs incurred by exporters or financial institutions in obtaining credits necessarily results in "terms which are more favourable than would otherwise be available" in the marketplace, and, therefore, any advantage becomes a "material advantage".

90. In addition, the United States argues, by adopting an interpretation that renders the "material advantage" clause meaningless, the Panel's first finding ignores the fact that, in addition to listing practices that do constitute prohibited export subsidies, the Illustrative List also references lists some practices that do not constitute prohibited export subsidies. The intent of the drafters in using the term "illustrative" was to signify that not all types of potential export subsidy practices are addressed by the Illustrative List. However, where an item of the Illustrative List does address a particular type of practice, that item sets forth the standard for determining whether that practice is, or is not, a prohibited export subsidy. Thus, when item (k) provides that export credits constitute prohibited export subsidies "in so far as they are used to secure a material advantage in the field of export credit terms", item (k), by necessary implication, also provides, a contrario, that export credits do not constitute prohibited export subsidies if they are not "used to secure a material advantage in the field of export credit terms".

92.The United States concludes that because Brazil does not appear to have demonstrated, or even claimed, that PROEX financing is intended to match "export credit terms" under the standard adopted by the Panel in its alternative finding, the Appellate Body should uphold the Panel's alternative finding.

(c)Has Brazil Increased the Level of its Export Subsidies?

(i) Actual Expenditures or Budgeted Amounts

93. The United States notes that Brazil’s appeal focuses on "dueling dictionary definitions"of the verb "to grant", arguing that the term also means "[a]gree to, promise, undertake". Since Brazil argues that because budgeted amounts are appropriate for Article25, they are therefore appropriate under for Article27 as well.

94. In the view of the United States, Article 25 establishes exactly the opposite. Clause (ii) contemplates three methods of measuring subsidies. Budgeted subsidies is the third method listed in Article25, and that method is only to be used in cases where the other two methods are not possible. The preferred method, subsidy per unit, contemplates the use of actual subsidies, which leads to a reasonable inference that the use of actual expenditures is the normal rule for purposes of the SCM Agreement.

(ii) Constant or Nominal Dollars

95. The United States agrees with Canada that the use of constant dollars was not the appropriate means of determining whether Brazil had increased the "level of its subsidies" under Article 27.4, – with one exception. The United States disagrees with Canada’s reliance on the reference to inflation adjustments in paragraph 5 of Article IV of the SCM Agreement as evidence that the drafters intended to preclude the consideration of inflation in all other instances. The fact that the drafters of the SCM Agreement referenced an inflation adjustment in Annex IV does not necessarily mean that they intended to preclude a consideration of inflation for all other purposes. A more likely explanation is that the drafters simply did not consider the issue in other contexts.

96. The United States raises a concern that the application of an all-purpose, undefined inflation adjustment for purposes of assessing a Member’s compliance with its commitments would add a considerable element of uncertainty to the rights and obligations of Members, because a Member’s compliance or non-compliance could depend entirely upon the particular deflator chosen by a dispute settlement panel. As a result, the proper interpretation of Article 27.4 is that the level of export subsidies should be assessed in nominal, rather than constant, terms.

(d)Recommendation of the Panel

97. The United States disagrees with Brazil that the requirement in Article 4.12 that the time periods in the DSU be halved applies in the context of withdrawal of subsidies. Under Brazil's argument, the time period for withdrawal of the subsidy should be seven and one-half months, or one half the 15 months provided in Article21.3(c). The United States agrees with the Panel's rejection of the Brazilian argument, for two reasons. First, Article 4.12 applies "except for time-periods specifically prescribed in [Article 4]". However, a time period for implementation is specifically prescribed in Article 4.7, namely, the time-period to be specified by the panel. Second, under the DSU, there is no set time period for implementation that can be halved under Article 4.12. The 15 months referred to in Article 21.3(c) is "only a guideline", and is only relevant if immediate compliance is impracticable.

(e)Conditional Appeal: "Maintaining"Subsidies Under Article 3.2 of the SCM Agreement

98. The United States agrees with Canada that if the Appellate Body finds that the letter of commitment is the point at which the subsidy occurs, it should also find that the issuance of PROEX bonds pursuant to existing letters of commitment is inconsistent with the prohibition in Article 3.2 that Members shall not "maintain" export subsidies. The United States then offers the following additional observations.

99. The United States disagrees with what it considers Brazil’s "implicit" position that a subsidy comes into, and goes out of, existence simultaneously at the moment of its granting. It is well-accepted that the timing and duration of a subsidy are two different things, and that a subsidy can have a duration that extends over a period of years. When a subsidy is properly allocated over a period of several years, the withdrawal of that portion of the subsidy allocated to future time periods would not constitute a retroactive remedy. Rather, it would constitute prospective implementation based on a recognition of the distinction between the measure conferring a subsidy and the subsidy itself.

100. The United States rejects the argument of Brazil that issuance of new bonds under existing letters of commitment cannot be stopped because it would be disruptive to private parties. Virtually all WTO dispute settlement rulings will cause disruption to private parties. The United States refers to the Award of the Arbitrator in Indonesia – Certain Measures Affecting the Automobile Industry ("Indonesia – Automobiles"), [32] which notes that some degree of adjustment by the domestic industry occurs in response to every ruling.

101. The United States further notes that the European Communities, which supported Brazil’s argument on this point at the Panel stage, took the opposite a "contradictory" position in the panel report in Indonesia – Automobiles. [33] In that case, the European Communities argued that the "withdrawal" of a subsidy could entail the recovery by the subsidizing government of previously bestowed subsidies.

102. The United States contends that Canada’s argument that Brazil must not pay out additional prohibited subsidies in the form of PROEX bonds is correct, and is consistent with the SCM Agreement and the DSU. Otherwise, dispute settlement would be largely useless as a tool for rules would not effectively addressing distortive subsidies. Regardless of whether the letter of commitment or the issuance of a bond constitutes the PROEX subsidy, the appropriate outcome is that Brazil must refrain from issuing new bonds and withdraw the subsidy.

III. Preliminary Procedural Matter and Ruling 

A. Procedures Governing Business Confidential Information

103. By joint letter of 27 May 1999, Brazil and Canada requested that we apply, mutatis mutandis, the Procedures Governing Business Confidential Information adopted by the Panel in this case (the"BCI Procedures"). In their request, they also asked that certain of the BCI Procedures be applied to the third participants in this appeal; in particular, that the third participants designate authorized representatives who would be required to file declarations of non-disclosure with the Presiding Member of this Division before being allowed to view any information designated as "business confidential" or to attend portions of the oral hearing when such information may be discussed.

104. By letter of 31 May 1999, we invited the participants to file legal memoranda in support of their request, and offered each an opportunity to respond to the legal memorandum submitted by the other. The third participants were also given an opportunity to file legal memoranda. Brazil and Canada submitted legal memoranda on 2 June 1999. On 4 June 1999, the third participants, the European Communities and the United States, also filed legal memoranda. On the same date, Brazil and Canada each filed a written response to the memorandum previously submitted by the other on 2 June 1999. A preliminary hearing on this issue was held on 10 June 1999, with this Division sitting jointly with the Division of the Appellate Body hearing the appeal in Canada – Aircraft. [ 34]