|español - français - português|
2 August 1999
Brazil - Export Financing Programme for Aircraft
AB - 1999-1
Report of the Appellate Body
171. In coming to this conclusion, the Panel first interpreted the phrase "used to secure a material advantage in the field of export credit terms", and then applied its interpretation to the facts relating to export subsidies for regional aircraft under PROEX. In its reasoning on this issue, the Panel made four, not entirely consistent, statements of its interpretation.
172. In examining the ordinary meaning of the phrase "used to secure a material advantage in the field of export credit terms" in item (k), the Panel noted that the word "advantage" has been defined as "a more favorable or improved position" and as a "superior position". The Panel also concurred with Brazil that "advantage" involves the concept of comparison. The Panel went on to say, however, that:
(italics in the original, underlining added)
173. The Panel then considered the context of the "material advantage" clause generally in the SCM Agreement,, and stated that, "the general approach of the SCM Agreement to determining whether a measure is a subsidy and thus subject to discipline is whether the measure confers a 'benefit' within the meaning of Article 1." The Panel also discussed its view of the object and purpose of the SCM Agreement, which it stated "is to impose multilateral disciplines on subsidies which distort international trade." The Panel reasoned that Brazil's approach of allowing a Member to "match" the export subsidies granted by another Member "would entail a race to the bottom, as each WTO Member sought to justify the provision of export subsidies on the grounds that other Members were doing the same."
174. Then, before examining the facts, the Panel again stated its interpretation of the "material advantage" clause in item (k), this time, as follows:
103] (emphasis added)
175. Finally, in its concluding paragraph, the Panel repeated its interpretation of the "material advantage" clause of item (k) as follows:
176. We note that, in its very first statement of its interpretation of the "material advantage" clause, the Panel characterized "material advantage" as "materially more favorable than the terms that would have been available in the absence of the payment." (emphasis added) However, we observe also that, in its subsequent statements, the Panel interpreted "material advantage" as simply "more favourable than the terms that would otherwise be available in the marketplace to the purchaser with respect to the transaction in question." (emphasis added) In the latter interpretation, the Panel omitted the word "material".
177. As always, we examine the terms of the provision at issue, in this case, the "material advantage" clause of item (k). We look first to the ordinary meaning of the language used. We agree with the Panel's statement that the ordinary meaning of the word "advantage" is "a more favorable or improved position" or a "superior position". However, we note that item (k) does not refer simply to "advantage". The word "advantage" is qualified by the adjective "material". As mentioned before, in its ultimate interpretation of the phrase "used to secure a material advantage" which the Panel finally adopted and applied to the export subsidies for regional aircraft under PROEX, the Panel read the word "material" out of item (k). This, we consider to be an error.
178. We also note that in two of its interpretive statements, the Panel used the "marketplace" as the benchmark for comparing the subsidies on sales of regional aircraft under PROEX. However, in two other statements, the Panel made no reference to the "marketplace" as the basis for comparison. In one of those two statements, it referred, instead, more generally, to "the terms that would have been available in the absence of the payment." For the purposes of our analysis, we will assume that the Panel meant to use the "marketplace" as the benchmark for determining whether the PROEX subsidies were "used to secure a material advantage".
179. We note that the Panel adopted an interpretation of the "material advantage" clause in item (k) of the Illustrative List that is, in effect, the same as the interpretation of the term "benefit" in Article1.1(b) of the SCM Agreement adopted by the panel in Canada – Aircraft. If the "material advantage" clause in item (k) is to have any meaning, it must mean something different from "benefit" in Article1.1(b). It will be recalled that for any payment to be a "subsidy" within the meaning of Article1.1, that payment must consist of both a "financial contribution" and a "benefit". The first paragraph of item (k) describes a type of subsidy that is deemed to be a prohibited export subsidy. Obviously, when a payment by a government constitutes a "financial contribution" and confers a "benefit", it is, a "subsidy" under Article1.1. Thus, the phrase in item (k), "in so far as they are used to secure a material advantage", would have no meaning if it were simply to be equated with the term "benefit" in the definition of "subsidy". As a matter of treaty interpretation, this cannot be so. Therefore, we consider it an error to interpret the "material advantage" clause in item (k) of the Illustrative List as meaning the same as the term "benefit" in Article1.1(b) of the SCM Agreement.
180. We note that there are two paragraphs in item (k), and that the "material advantage" clause appears in the first paragraph. Furthermore, the second paragraph is a proviso to the first paragraph. The second paragraph applies when a Member is "a party to an international undertaking on official export credits" which satisfies the conditions of the proviso, or when a Member "applies the interest rates provisions of the relevant undertaking". In such circumstances, an "export credit practice" which is in conformity with the provisions of "an international undertaking on official export credits" shall not be considered an export subsidy prohibited by the SCM Agreement. The OECD Arrangement is an "international undertaking on official export credits" that satisfies the requirements of the proviso in the second paragraph in item (k). However, Brazil did not invoke the proviso in the second paragraph of item (k) in its defense. Brazil argued before the Panel that it "has concluded that conformity to the OECD provisions is too expensive."
181. Thus, this case falls under the first paragraph, and not under the proviso of the second paragraph, of item (k) of the Illustrative List. Consequently, the issue here is whether the export subsidies for regional aircraft under PROEX "are used to secure" for Brazil "a material advantage in the field of export credit terms". Nevertheless, we see the second paragraph of item (k) as useful context for interpreting the "material advantage" clause in the text of the first paragraph. The OECD Arrangement establishes minimum interest rate guidelines for export credits supported by its participants ("officially-supported export credits"). Article15 of the Arrangement defines the minimum interest rates applicable to officially-supported export credits as the Commercial Interest Reference Rates ("CIRRs"). Article16 provides a methodology by which a CIRR, for the currency of each participant, may be determined for this purpose. We believe that the OECD Arrangement can be appropriately viewed as one example of an international undertaking providing a specific market benchmark by which to assess whether payments by governments, coming within the provisions of item (k), are "used to secure a material advantage in the field of export credit terms". Therefore, in our view, the appropriate comparison to be made in determining whether a payment is "used to secure a material advantage", within the meaning of item (k), is between the actual interest rate applicable in a particular export sales transaction after deduction of the government payment (the "net interest rate") and the relevant CIRR.
182. It should be noted that the commercial interest rate with respect to a loan in any given currency varies according to the length of maturity as well as the creditworthiness of the borrower. Thus, a potential borrower is not faced with a single commercial interest rate, but rather with a range of rates. Under the OECD Arrangement, a CIRR is the minimum commercial rate available in that range for a particular currency. In any given case, whether or not a government payment is used to secure a "material advantage", as opposed to an "advantage" that is not "material", may well depend on where the net interest rate applicable to the particular transaction at issue in that case stands in relation to the range of commercial rates available. The fact that a particular net interest rate is below the relevant CIRR is a positive indication that the government payment in that case has been "used to secure a material advantage in the field of export credit terms".
183. Brazil has conceded that it has the burden of proving an alleged "affirmative defence" under item (k). In light of our analysis, it was for Brazil to establish a prima facie case that the export subsidies for regional aircraft under PROEX do not result in net interest rates below the relevant CIRR. We note, however, that Brazil did not provide any information to the Panel on this point. We also note that Brazil declined to provide this information, even when specifically requested to do so by the Panel. Because Brazil provided no information on the net interest rates paid by purchasers of Embraer aircraft in actual export sales transactions, we have no basis on which to compare the net interest rates resulting from the interest rate equalization payments made under PROEX with the relevant CIRR.
184. Accordingly, we find that Brazil has failed to meet its burden of proving that export subsidies for regional aircraft under PROEX are not "used to secure a material advantage in the field of export credit terms" within the meaning of item (k) of the Illustrative List.
185. We are aware that the OECD Arrangement allows a government to "match", under certain conditions, officially-supported export credit terms provided by another government. In a particular case, this could result in net interest rates below the relevant CIRR. We are persuaded that "matching" in the sense of the OECD Arrangement is not applicable in this case. Before the Panel, Brazil argued for an interpretation of the clause "in the field of export credit terms" that would include as an "export credit term" the price at which a product is sold, and maintained that, therefore, Brazil was entitled to "offset" all the subsidies provided to Bombardier by the Government of Canada. The Panel rejected Brazil's argument, finding instead that "[w]e see nothing in the ordinary meaning of the phrase to suggest that 'the field of export credit terms' generally encompasses the price at which a product is sold." We note that this finding was not appealed by either Brazil or Canada. Even if we were to assume that the "matching" provisions of the OECDArrangement apply in this case (an argument Brazil did not make), those provisions clearly do not allow a comparison to be made between the net interest rates applied as a consequence of subsidies granted by a particular Member and the total amount of subsidies provided by another Member. We also note that under PROEX, the interest rate equalization subsidies for regional aircraft are provided at an "across-the-board" rate of 3.8 per cent for all export sales transactions. That rate is fixed, and does not vary depending on the total amount of subsidies provided by another Member to its regional aircraft manufacturers. Thus, we cannot accept Brazil's argument that the export subsidies for regional aircraft under PROEX should be "permitted" because they "match" the total subsidies provided to Bombardier by the Government of Canada.
186. For all these reasons, we do not agree with the Panel's interpretation of the phrase "used to secure a material advantage in the field of export credit terms" in item (k) of the Illustrative List. We do, however, agree with the Panel's conclusion that "Brazil has failed to demonstrate the PROEX payments are not 'used to secure a material advantage in the field of export credit terms'." We, therefore, uphold the Panel's rejection of the "affirmative defence" claimed by Brazil on the basis of item (k) of the Illustrative List.
187. In so doing, we do not rule on whether the export subsidies for regional aircraft under PROEX are "the payment by [governments] of all or part of the costs incurred by exporters or financial institutions in obtaining credits". Nor do we opine on whether a "payment" within the meaning of item (k) which is not "used to secure a material advantage within the field of export credit terms" is, a contrario, "permitted" by the SCM Agreement, even though it is a subsidy which is contingent upon export performance within the meaning of Article3.1(a) of that Agreement. The Panel did not rule on these issues, and the lack of Panel findings on these issues was not appealed.IX. Recommendation of the Panel
188. Brazil appeals the Panel's recommendation that Brazil shall withdraw the export subsidies for regional aircraft under PROEX within 90 days, stating that "the Panel's conclusion that 90 days is the proper time-period is in error." Brazil argues that although Article 4.7 of the SCM Agreement, directs a panel to specify the time-period within which a prohibited subsidy must be withdrawn, that provision does not specify a particular time-period. Brazil argues also that under Article 4.12 of the SCM Agreement, "except for time-periods specifically prescribed in … Article , time-periods applicable under the DSU for the conduct of such disputes shall be half the time prescribed therein." Brazil maintains that Article21.3(c) of the DSU provides that the time-period allowed for implementation of DSB rulings and recommendations "normally should not exceed 15 months, unless there are 'particular circumstances' justifying a longer or shorter period." Therefore, Brazil maintains that the Panel should have concluded that Brazil must withdraw its export subsidies within half of fifteen months, that is, within seven and one-half months, rather than within 90 days.
189. Article 4.7 of the SCM Agreement provides:
190. In this case, the Panel, in examining the language of Article 4.7 of the SCM Agreement, considered that it was required to make the recommendation provided for in that Article, and, therefore, recommended that Brazil withdraw its subsidies "without delay". The Panel also determined that the requirement that Brazil withdraw its subsidies "without delay" meant that, in the circumstances of this case, Brazil shall withdraw its subsidies within 90 days.
191. We note that Article 4.7 of the SCM Agreement is listed in Appendix 2 to the DSU as a "special or additional rule or procedure" on dispute settlement. We note also that Article 4.7 contains several elements which are different from the provisions of Articles19 and 21 of the DSU with respect to recommendations by a panel and implementation of rulings and recommendations of the DSB. For example, Article19 of the DSU requires a panel to recommend that the Member concerned bring its measure "into conformity" with the covered agreements. In contrast, Article 4.7 of the SCM Agreement, requires a panel to recommend that the subsidizing Member withdraw the subsidy. In addition, paragraph1 of Article21 of the DSU requires "prompt compliance with recommendations or rulings of the DSB", and paragraph3 of that Article allows an implementing Member "a reasonable period of time" to implement the recommendations or rulings of the DSB, where it is impracticable to comply immediately. In contrast, Article 4.7 of the SCM Agreement, requires a panel to recommend that a subsidy be withdrawn "without delay".
192. With respect to implementation of the recommendations or rulings of the DSB in a dispute brought under Article 4 of the SCM Agreement, there is a significant difference between the relevant rules and procedures of the DSU and the special or additional rules and procedures set forth in Article 4.7 of the SCM Agreement. Therefore, the provisions of Article21.3 of the DSU are not relevant in determining the period of time for implementation of a finding of inconsistency with the prohibited subsidies provisions of Part II of the SCM Agreement. Furthermore, we do not agree with Brazil that Article 4.12 of the SCM Agreement is applicable in this situation. In our view, the Panel was correct in its reasoning and conclusion on this issue. Article 4.7 of the SCM Agreement, which is applicable to this case, stipulates a time-period. It states that a subsidy must be withdrawn "without delay". That is the recommendation the Panel made.
193. Finally, we note that although Canada requested that we recommend that Brazil withdraw the export subsidies on regional aircraft under PROEX as of the date of adoption of the Appellate Body and Panel Reports, Canada did not formally appeal this issue. Canada's request was made in its appellee's submission, and was not included in its appellant's submission. We therefore decline this request by Canada.
194. Based on our analysis above, we see no reason to disturb the Panel's recommendation that, in this case, "without delay" means 90 days and, therefore, Brazil must withdraw the export subsidies for regional aircraft under PROEX within 90 days.X. Conditional Appeal: "Maintaining" Subsidies Under Article3.2 of the SCM Agreement
195. Canada makes a conditional appeal. Canada requests that, if we accept Brazil's argument and reverse the finding of the Panel that the export subsidies for regional aircraft under PROEX are "granted" at the time of issuance of the NTN-I bonds for the purposes of Article 27.4 of the SCM Agreement,, then we should also reverse the Panel's decision not to make a finding on whether Brazil had acted inconsistently with its obligations not to "maintain" export subsidies under Article 3.2 of that Agreement. As we have not accepted Brazil's argument and have, therefore, not reversed the finding of the Panel on when the export subsidies for regional aircraft under PROEX are "granted", it is not necessary for us to consider this conditional appeal by Canada.XI. Findings and Conclusions
196. For the reasons set out in this Report, the Appellate Body:
197. The Appellate Body recommends that the DSB request Brazil to bring its measures found in this Report, and in the Panel Report as modified by this Report, to be inconsistent with its obligations under the SCM Agreement, into conformity with the provisions of that Agreement. In this respect, we recall that we uphold the recommendation of the Panel that Brazil shall withdraw the export subsidies for regional aircraft under PROEX within 90 days.Signed in the original at Geneva this 23rd day of July 1999 by:
Ibid., paras. 7.23, 7.33 and 7.37.
Ibid., para. 7.23.
Panel Report, para. 7.24.
Ibid., para. 7.26.
Ibid., para. 7.33.
Ibid., para. 7.37.
Ibid., para. 7.23 (second to last sentence).
Panel Report, paras. 7.23 (last sentence), 7.33 and 7.37.
Ibid., paras. 7.23 (last sentence) and 7.33.
Ibid., paras. 7.23 (second to last sentence) and 7.37.
WT/DS70/R, circulated to WTO Members on 14 April 1999, paras. 9.112 and 9.120 (as upheld by the Appellate Body, supra, footnote 16, paras. 154-162).
As we stated in our report in United States – Standards for Reformulated and Conventional Gasoline ("United States – Gasoline"), "[a]n interpreter is not free to adopt a reading that would result in reducing whole clauses or paragraphs of a treaty to redundancy or inutility." Adopted 20 May 1996, WT/DS2/AB/R, p. 23. This statement is quoted with approval in Japan – Taxes on Alcoholic Beverages, adopted 1November 1996, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, p. 12.
Oral Statement of Brazil at First Meeting of the Panel, para. 22. See also Oral Statement of Brazil at Second Meeting of the Panel, paras. 54 and 56.
Reply of Brazil to the Panel's Questions for the Parties, 23 December 1998, Brazil's response to Question 34, pp. 7-8.
Panel Report, para. 7.28.
Ibid., para. 2.3.
Ibid., para. 7.37.
Brazil's appellant's submission, para. 82.
Ibid., para. 80.
Brazil's appellant's submission, para. 82.
Panel Report, para. 8.4.
Ibid., para. 8.5.
Canada's appellee's submission, para. 169.
In United States – Gasoline, we similarly declined to address claims of appeal made by Brazil and Venezuela in their appellees' submissions, finding that the issues were not properly appealed in accordance with the Working Procedures. Supra, footnote 110, pp. 11-12.
Canada's appellant's submission, paras. 47-57.