World Trade

Organization

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.[97]

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."[105] (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."[106] (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[107], the Panel used the "marketplace" as the benchmark for comparing the subsidies on sales of regional aircraft under PROEX. However, in two other statements[108], 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.[109] 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.[110] 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."[111]

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."[113] 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.[114] 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'."[115] 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.

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."[116] 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 [4], 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."[117] 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.[118]

189. Article 4.7 of the SCM Agreement provides:

If the measure in question is found to be a prohibited subsidy, the Panel shall recommend that the subsidizing Member withdraw the subsidy without delay. In this regard, the Panel shall specify in its recommendation the time period within which the measure must be withdrawn. (emphasis added)

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".[119] 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.[120]

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[121], 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.[122]

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.

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.[123] 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.

196. For the reasons set out in this Report, the Appellate Body:

(a) upholds the ruling of the Panel that certain regulatory instruments specified in the request for the establishment of a panel, but not discussed in the consultations, were measures properly before the Panel;

(b) upholds the finding of the Panel that, in a dispute involving a claim of violation of Article 3.1(a) of the SCM Agreement by a developing country Member, the complaining party has the burden of proving that the developing country Member in question has not acted in compliance with the provisions of Article 27.4 of that Agreement;

(c) upholds the appealed findings of the Panel relating to the Panel's determination that Brazil had failed to comply with its obligations under Article 27.4 of the SCM Agreement, to "not increase the level of its export subsidies", and, in particular, upholds the following findings of the Panel:

(i) that the "proper point of reference" for the purpose of determining whether a Member has increased the level of its export subsidies is actual expenditures, rather than budgeted amounts;

(ii) that for the purposes of Article27.4, the export subsidies for regional aircraft under PROEX should be considered to be "granted" when the NTN-I bonds are issued, rather than when the letter of commitment is issued; and

(iii) 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; and,

therefore, upholds the overall conclusions of the Panel that Brazil has not complied with the provisions of Article 27.4 of the SCM Agreement,, with the result that the export subsidy prohibition in Article 3.1(a) applies to Brazil;

(d) reverses and modifies the interpretation by the Panel of the phrase "used to secure a material advantage in the field of export credit terms" in item (k) of the Illustrative List; but upholds the conclusion of the Panel that Brazil failed to demonstrate that the 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); and, therefore, upholds the Panel's rejection of the "affirmative defence" claimed by Brazil on the basis of item (k) of the Illustrative List;

(e) upholds the recommendation of the Panel that Brazil shall withdraw the export subsidies for regional aircraft under PROEX within 90 days; and

(f) in light of the finding in (c)(ii) above, makes no finding on the conditional appeal by Canada on whether the issuance of the NTN-I bonds is consistent with Brazil's obligation not to "maintain" prohibited export subsidies under Article 3.2 of the SCM Agreement,.

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.