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World Trade

Organization

WT/DS46/R
2 August 1999
(99-3216)
Original: English

 

Brazil - Export Financing Programme for Aircraft

AB - 1999-1

Report of the Appellate Body


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

142. Our ruling on the issue of the burden of proof under Article 27.4 has implications not only for determining which party has the burden of proof in demonstrating whether the conditions of Article 27.4 are met, but also for determining whether or not Article 3.1(a) applies to the developing country Member in question. In this case, the Panel, having determined correctly that the complaining party had the burden of proof in demonstrating whether the developing country Member had complied with Article 27.4, then failed to apply the logic of its own reasoning in examining Canada's claim that Brazil had acted inconsistently with its obligations under Article 3.1(a).

143. The Panel commenced its legal reasoning by considering whether the interest rate equalization payments for regional aircraft under PROEX constitute "subsidies" within the meaning of Article1 of the SCM Agreement which are "contingent … upon export performance" within the meaning of Article 3.1(a) of that Agreement.[57] As Brazil had not disputed these two issues, the Panel concluded that the payments under PROEX relating to exports of Brazilian regional aircraft are subsidies contingent upon export performance.[58] The Panel then went on to examine an "affirmative defense" put forward by Brazil, that is, whether PROEX support for the regional aircraft industry, even if it did constitute an "export subsidy", was nevertheless "permitted" by item (k) of the Illustrative List.[59] Given the Panel's correct analysis of the relationship between Articles 27 and 3.1(a) in its reasoning on the burden of proof [60], we find it odd that the Panel then went on to examine, in the following order: first, whether the conditions of Article 3.1(a) of the SCM Agreement had been met; next, a contention by Brazil of an "affirmative defense" to a claim of violation of Article 3.1(a), based on item (k) of the Illustrative List; and, only then, whether Brazil had complied with the conditions of Article 27.4 so as to determine whether the prohibition of export subsidies in Article 3.1(a) even applied to Brazil in this case. The Panel should not have considered Brazil's "affirmative defense" based on item (k) of the Illustrative List before determining whether Article 3.1(a) even applied to Brazil.

144. Our interpretation of the relationship between Article 27 and Article 3.1(a) of the SCM Agreement leads us, in this appeal, to examine, first, the issues appealed relating to whether Brazil has increased the level of its export subsidies contrary to the provisions of Article 27.4. Only if we determine that Brazil has not complied with the conditions of Article 27.4, and thereby find that the provisions of Article 3.1(a) do in fact apply to Brazil, will we need to examine Brazil's appeal of the Panel's findings relating to its alleged "affirmative defense" under item (k) of the Illustrative List.

145. The Panel made a number of findings in its analysis of whether Brazil has increased "the level of its export subsidies" under Article 27.4 of the SCM Agreement. Brazil appeals two of these findings, and Canada appeals one. Brazil appeals the Panel's finding that actual expenditures, rather than budgeted amounts, is the "proper point of reference" for determining whether Brazil has increased the level of its export subsidies.[61] Brazil also appeals the Panel's finding that PROEX subsidies for regional aircraft are "granted" when the NTN-I bonds are issued, not when the letter of commitment is issued. Canada appeals the Panel's conclusion that it is appropriate, in this case, to use constant dollars, rather than nominal dollars, in assessing whether Brazil has increased the level of its export subsidies.

A. Actual Expenditures or Budgeted Amounts

146. Brazil argues that the Panel erred in using actual expenditures, rather than budgetary appropriations, in determining whether Brazil had increased the level of its export subsidies.[62] Canada argues that the Panel was correct in examining actual expenditures, rather than budgetary appropriations.[63]

147. The Panel found that "the level of a Member's export subsidies in its ordinary meaning refers to the level of subsidies actually provided, not the level of subsidies which a Member planned or authorized its government to provide through its budgetary process."[64] (emphasis added) The Panel said this view was confirmed by footnote55 to the SCM Agreement, which provides that, "[f]or a developing country Member not granting export subsidies as of the date of entry into force of the WTO Agreement, this paragraph shall apply on the basis of the level of export subsidies granted in1986." (emphasis added) The Panel noted that "[t]he verb 'grant' has been defined to mean, interalia, 'to bestow by a formal act' and 'give, bestow, confer'."[65]

148. We agree with the Panel's reasoning on this issue. To us, the word "granted" used in this context means "something actually provided". Thus, to determine the amount of export subsidies "granted" in a particular year, we believe that the actual amounts provided by a government, and not just those authorized or appropriated in its budget for that year, is the proper measure. A government does not always spend the entire amount appropriated in its annual budget for a designated purpose. Therefore, in this case, to determine the level of export subsidies for the purposes of Article 27.4, we believe that the proper reference is to actual expenditures by a government, and not to budgetary appropriations.

149. In coming to this conclusion, we are not persuaded by Brazil's argument relating to the notification provisions of Article25 of the SCM Agreement. We note that Article25 has a fundamentally different purpose from Article 27 of the SCM Agreement. Whereas Article 25 aims to promote transparency by requiring Members to notify their subsidies, without prejudging the legal status of those subsidies[66],Article 27 imposes positive obligations on developing country Members with respect to export subsidies. In interpreting the phrase "the level of its export subsidies" in Article 27.4, we believe the most appropriate context is footnote55, which is, it will be recalled, a footnote to that very phrase in Article 27.4. Because of its different purpose, Article 25 is considerably less useful as context in interpreting the phrase "the level of its export subsidies" in Article 27.4. Moreover, the provisions of Article 25 do not contradict the conclusion we draw from footnote 55. In particular, in paragraph 3 of Article 25, Members are required to ensure that their notifications contain, inter alia, the following information:

...

(iii) subsidy per unit or, in cases where this is not possible, the total amount or the annual amount budgeted for that subsidy … (emphasis added)

We note that the preferred notification method is on the basis of subsidy per unit. It is only in cases where it is not possible to provide information on that basis that the total amount, or the annual amount budgeted for that subsidy, may be reported. For transparency purposes, we can understand why Members would want to know what subsidies other Members have planned or projected. Yet this consideration is different from the objective of determining whether a developing country Member has increased "the level of its export subsidies" under Article 27.4.

150. Accordingly, we uphold the finding of the Panel that the "proper point of reference" in determining whether a Member has increased the level of its export subsidies under Article 27.4 is actual expenditures, rather than budgeted amounts or appropriations.[67]

B. When are PROEX Subsidies "Granted"?

151. One of the legal issues the Panel considered in determining whether Brazil had increased the level of its export subsidies was "the question of when PROEX payments should be considered to have been 'granted' for the purposes of calculating the level of Brazil's export subsidies in terms of expenditures."[68] In examining this issue, the Panel considered two questions: what is the form of "financial contribution" made by PROEX, within the meaning of Article1.1(a)(1) of the SCM Agreement? And, when does the "subsidy" that is created, in part, by that "financial contribution", "exist" within the meaning of Article1.1? Brazil argued, before the Panel, that the form of financial contribution involved in this dispute is a "potential direct transfer of funds", within the meaning of Article1.1(a)(1)(i), which "exists" at the time a letter of commitment is issued.[69] Canada argued, before the Panel, that PROEX subsidies for regional aircraft involve a "direct transfer of funds", within the meaning of Article1.1(a)(1)(i), which "exists" either when payments are made pursuant to an NTN-I bond or, in the alternative, when NTN-I bonds are issued to an agent bank.[70]

152. In analyzing the form of "financial contribution" made by export subsidies for regional aircraft under PROEX, the Panel said, inter alia:

We believe that a "potential direct transfer of funds" exists only where the action in question gives rise to a benefit and thus confers a subsidy irrespective of whether any payment occurs.[71]

… In this case, however, it clearly is not the alleged "potential direct transfer of funds", i.e., the letter of commitment, that confers the benefit. Rather, the benefit in the PROEX interest rate equalization scheme derives from the fact that a payment, i.e., a direct transfer of funds, has been or will be made.[72]

153. The Panel then posed the question of when Brazil can be considered to "grant" PROEX payments. The Panel gave the following answer:

As noted above, the verb "grant" has been defined to mean, inter alia, "to bestow by formal act" and "give, bestow, confer". Arguably, therefore PROEX payments may be "granted" where the unconditional legal right of the beneficiary to receive the payments has arisen, even if the payments themselves have not yet occurred. It is clear to us, however, that PROEX payments have not yet been "granted" at the time a letter of commitment is issued. We note that the issuance of a letter of commitment, even if legally binding on the Government of Brazil in the event certain conditions are fulfilled, provides no assurance that PROEX payments will actually be made. To the contrary, at the time the letter of commitment is issued no export sales contract has been signed, and the letter of commitment expires if a contract that conforms to the request for approval is not negotiated and signed within 90 days. … Rather, the right to receive the PROEX payments only arises after the conditions relating to receipt of PROEX payments, and specifically the condition that the product in question actually be exported, has been fulfilled.[73]

154. In our view, the Panel reached the correct conclusion. However, it did so on the basis of faulty reasoning. The issue in this case is when the subsidies for regional aircraft under PROEX should be considered to have been "granted" for the purposes of calculating the level of Brazil's export subsidies under Article 27.4 of the SCM Agreement. The issue is not whether or when there is a "financial contribution", or whether or when the "subsidy" "exists", within the meaning of Article1.1 of that Agreement.

155. The Panel noted, early in its findings, that Brazil did not dispute the assertion by Canada that PROEX support for the regional aircraft industry constitutes an export subsidy.[74] On this, the Panel stated:

As noted above, the parties agree that PROEX payments are subsidies within the meaning of Article1 of the SCM Agreement which are contingent upon exportation within the meaning of Article 3.1(a) of the Agreement, and we agree with them.[75]

156. Thus, the issue before the Panel under the heading "Has Brazil increased the level of its export subsidies?"[76] was simply this: given that the export subsidies in this case were already deemed to "exist", when were they "granted"? At issue was the interpretation and application of Article 27.4, not of Article1. It is pursuant to the provisions of Article 27.4 that Brazil is obliged not to increase "the level of its export subsidies". And, to ascertain the meaning of this phrase, it is necessary to look, again, at footnote55, which is affixed to Article 27.4 and which speaks of "the level of export subsidies granted" (emphasis added) by a developing country Member. Consequently, for the purposes of Article 27.4, we see the issue of the existence of a subsidy and the issue of the point at which that subsidy is granted as two legally distinct issues. Only one of those issues is raised here and, therefore, must be addressed. That issue is: when is this subsidy, which admittedly exists, actually granted?

157. In our view, the Panel did not have to determine whether the export subsidies for regional aircraft under PROEX constituted a "direct transfer of funds" or a "potential direct transfer of funds", within the meaning of Article1.1(a)(i), in order to determine when the subsidies are "granted" for the purposes of Article 27.4. Moreover, the Panel compounded its error in finding that the "financial contribution" in the case of PROEX subsidies is not a "potential direct transfer of funds" by reasoning that a letter of commitment does not confer a "benefit".[77] In this way, in its interpretation of Article1.1(a)(i), the Panel imported the notion of a "benefit" into the definition of a "financial contribution". This was a mistake. We see the issues – and the respective definitions – of a "financial contribution" and a "benefit" as two separate legal elements in Article1.1 of the SCM Agreement, which together determine whether a subsidy exists, and not whether it is granted for the purpose of calculating the level of a developing country Member's export subsidies under Article 27.4 of that Agreement.

158. In addressing the correct legal question under Article 27.4, our answer is that export subsidies for regional aircraft under PROEX are "granted" when the NTN-I bonds are issued. We agree with the Panel that "PROEX payments may be 'granted' where the unconditional legal right of the beneficiary to receive the payments has arisen, even if the payments themselves have not yet occurred."[78] We also agree with the Panel that the export subsidies for regional aircraft under PROEX have not yet been "granted" when the letter of commitment is issued, because, at that point, the export sales contract has not yet been concluded and the export shipments have not yet occurred.[79] For the purposes of Article 27.4, we conclude that the export subsidies for regional aircraft under PROEX are "granted" when all the legal conditions have been fulfilled that entitle the beneficiary to receive the subsidies. We share the Panel's view that such an unconditional legal right exists when the NTN-I bonds are issued.[80]

159. For these reasons, we uphold the Panel's conclusion that the export subsidies for regional aircraft under PROEX are "granted", for the purposes of Article 27.4 of the SCM Agreement, when the NTN-I bonds are issued, and not when the letter of commitment is issued. However, we wish to emphasize the modifications we have made in the Panel's legal reasoning. We wish to underscore especially that we find that it was not relevant, for the purpose of calculating the level of Brazil's export subsidies under Article 27.4, for the Panel to decide whether the "financial contribution" for PROEX subsidies involved a "direct transfer of funds" or a "potential direct transfer of funds" under Article 1.1 of the SCM Agreement.

C. Constant or Nominal Dollars

160. On appeal, Canada argues that the Panel's statement that it was "appropriate in this case" to use constant dollars, rather than nominal dollars, to assess whether Brazil had 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."[81] Canada maintains that there is no explicit provision for the conversion of the level of export subsidies to a constant value either in Article 27.4 or in footnote 55 of the SCM Agreement. With respect to the context of the SCM Agreement, Canada asserts that, where the negotiators intended to provide adjustments for inflation, they did so, but that such indexation is not so provided in Article 27.[82] In reply, Brazil argues that the Panel was correct in its conclusion based on the facts of this case. Brazil contends that the use of a constant value is required if the special rules for developing country Members in Article 27 are to be given genuine meaning.[83]

161. On this issue, the Panel said the following:

In our view, however, it is appropriate in this case to use constant dollars, as that will provide a more meaningful assessment as to whether Brazil has increased the level of its export subsidies. We note that, in this case, the conclusion with respect to this issue would be the same whether constant or nominal dollars are used.[84] (emphasis added)

The Panel concluded:

Applying the foregoing criteria to these undisputed data, we conclude that Brazil had by 1997 increased the level of its export subsidies above that prevailing in 1994, whether the data are expressed in nominal or in constant dollars. The increase for 1998 was even more substantial than that for 1997, reflecting as it does data for only the first ten months of the year.[85] (emphasis added)

 

162. We note that the Panel did not make a legal finding that the level of a developing country Member's export subsidies must be measured, in every case, using a constant value. The Panel simply made a pragmatic observation that using constant dollars is appropriate in this case. The Panel also noted that, in this case, "the conclusion with respect to this issue would be the same whether constant or nominal dollars are used."[86] (emphasis added) In examining the data before it relating to Brazilian export subsidies under PROEX and BEFIEX, the Panel examined data denominated both in current US dollars and in1994 constant US dollars.[87] The conclusion of the Panel was "that Brazil had by 1997 increased the level of its export subsidies above that prevailing in 1994, whether the data are expressed in nominal or in constant dollars."[88] (emphasis added)

163. As the Panel relied on data denominated both in current dollars and in constant dollars, we see no reason to overturn this conclusion of the Panel. Moreover, in our view, to take no account of inflation in assessing the level of export subsidies granted by a developing country Member would render the special and differential treatment provisions of Article 27 meaningless. For these reasons, we uphold the conclusion of the Panel in paragraph 7.75 of the Panel Report.

164. And, for all these reasons, we uphold the overall conclusion of the Panel, in paragraph 7.76 of the Panel Report, that "Brazil has 'increased the level of its export subsidies' within the meaning of Article 27.4 of the SCM Agreement." And, thus, we find that Article 3.1(a) applies to Brazil in this case, because Brazil has not complied with the provisions of Article 27.4.

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

165. Having determined that Brazil has not complied with the provisions of Article 27.4, we conclude that the prohibition of Article 3.1(a) applies to Brazil in this case. We must therefore examine Brazil's appeal of the finding of the Panel relating to Brazil's alleged "affirmative defense" under item (k) of the Illustrative List.

166. Brazil appeals the Panel's conclusion that Brazil failed to demonstrate that PROEX payments are not "used to secure a material advantage in the field of export credit terms", and the Panel's consequent rejection of Brazil's "affirmative defense" based on item (k) of the Illustrative List.[89] Brazil argues that the Panel erred in its interpretation of the phrase "used to secure a material advantage in the field of export credit terms", both with respect to the ordinary meaning of the word "secure"[90] and by determining "advantage" with respect to "the terms that would have been available in the absence of the payment".[91] Also, Brazil contends that the Panel misconstrued the context of the "material advantage" clause, in particular, in its assessment of the origins of item (k) in the Tokyo Round SCM Code.[92]

167. In Canada's view, the Panel did not err in its interpretation of the "material advantage" clause in item (k), either with respect to its analysis of the ordinary meaning or the context of that clause.[93] Thus, Canada argues that the Panel properly rejected Brazil's alleged "affirmative defense" based on item (k).

168. Item (k) of the Illustrative List provides as follows:

(k) The grant by governments (or special institutions controlled by and/or acting under the authority of governments) of export credits at rates below those which they actually have to pay for the funds so employed (or would have to pay if they borrowed on international capital markets in order to obtain funds of the same maturity and other credit terms and denominated in the same currency as the export credit), or the payment by them of all or part of the costs incurred by exporters or financial institutions in obtaining credits, in so far as they are used to secure a material advantage in the field of export credit terms.

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 1January1979 (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.

(emphasis added)

169. Before the Panel, Brazil contended that, although PROEX payments are export subsidies, they are nevertheless "permitted" by item (k) of the Illustrative List.[94] The Panel noted that to rule in favour of Brazil on this issue, it would need to find for Brazil on all of the following three points: first, that PROEX payments are "the payment by [governments] of all or part of the costs incurred by exporters or financial institutions in obtaining credits"; second, that PROEX payments are not "used to secure a material advantage in the field of export credit terms"; and, third, that a "payment" within the meaning of item (k) which is not "used to secure a material advantage in the field of export credit terms" is "permitted" by the SCM Agreement even though it is a subsidy which is contingent upon export performance within the meaning of Article 3.1(a) of that Agreement. The Panel also noted that Brazil had explicitly acknowledged that the "material advantage" clause in item (k) constitutes an "affirmative defense", and, therefore, that the burden of establishing that "defense" was on Brazil.[95]

170. The Panel concluded as follows:

In conclusion, we consider that an item (k) payment is "used to secure a material advantage" where the payment has resulted in the availability of export credit on terms which are more favourable than the terms that would otherwise have been be [sic] available to the purchaser with respect to the transaction in question. Even if we were to assume, as argued by Brazil, that PROEX payments are the "payment by [a government] of all or part of the costs incurred by exporters or financial institutions in obtaining credits", and that such payments can be deemed to be "permitted" by item (k) where they are not "used to secure a material advantage in the field of export credit terms" -- issues we need not here decide -- Brazil has failed to demonstrate the PROEX payments are not "used to secure a material advantage in the field of export credit terms". Accordingly, we reject Brazil's affirmative defense based on item (k) of the Illustrative List.[96]


Continue on to: VIII. Are PROEX Interest Rate Equalization Payments Used "To Secure a Material Advantage in the Field of Export Credit Terms? 171


[57]Panel Report, paras. 7.12-7.13.

[58]Ibid., para. 7.14.

[59]Ibid., paras. 7.15-7.37.

[60]Ibid., paras. 7.49 and 7.56-7.57.

[61]Panel Report, para. 7.65.

[62]Brazil's appellant's submission, paras. 19-25.

[63]Canada's appellee's submission, paras. 48-62.

[64]Panel Report, para. 7.65.

[65]Panel Report, para. 7.65.

[66]Article 25.7 of the SCM Agreement states that "notification of a measure does not prejudge either its legal status under GATT 1994 and this Agreement, the effects under this Agreement, or the nature of the measure itself."

[67]Panel Report, para. 7.65.

[68]Ibid., para. 7.67.

[69]Ibid., paras. 4.20 and 7.67.

[70]Ibid., paras. 4.22 and 7.67.

[71]Ibid., para. 7.68.

[72]Panel Report, para. 7.70.

[73]Ibid., para. 7.71.

[74]Ibid., para. 7.12.

[75]Panel Report, para. 7.13.

[76]Ibid., top of p. 95.

[77]Ibid., para. 7.70.

[78]Panel Report, para. 7.71.

[79]Ibid.

[80]Ibid., para. 7.72.

[81]Canada's appellant's submission, para. 24.

[82]Ibid., paras. 28-30.

[83]Brazil's appellee's submission, paras. 17-18.

[84]Panel Report, para. 7.73.

[85]Ibid., para. 7.75.

[86]Ibid., para. 7.73.

[87]Ibid., para. 7.75, Table 9.

[88]Ibid., para. 7.75.

[89]Brazil's appellant's submission, paras. 47-52. From Brazil's responses to questioning during the oral hearing, we understand Brazil's underlying argument to be the following: PROEX subsidies are not "used to secure a material advantage" in the sense of item (k) because they are designed only to offset "Brazil risk" and to "match" the subsidies given by the Government of Canada to Bombardier – the competitor of Embraer in the regional aircraft industry.

[90]Brazil's appellant's submission, paras. 53-57.

[91]Ibid., paras. 58-60.

[92]Ibid., paras. 61-66.

[93]Canada's appellee's submission, paras. 144-158.

[94]Panel Report, para. 7.15.

[95]Ibid., para. 7.17.

[96]Panel Report, para. 7.37.