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World Trade

Organization

WT/DS46/R
14 April  1999
(99-1402)
Original: English

 

Brazil-Export Financing Programme for Aircraft

Report of the Panel


VII. Findings Section 7.81 (continued)

7.81 Although the issue identified above is an interesting and complex one, we do not consider that we need resolve it in the context of this dispute. In our view, even if the term "phase out" does require the phased elimination of export subsidies by a developing country Member within the eight-year period, it does not specify in how many phases the elimination should be carried out, what the time-period between these phased reductions should be, and how these phased reductions should be distributed within the eight-year period. 229 We acknowledge that Brazil has not to date carried out any phased reductions in the level of its export subsidies, and that there is nothing in the record indicating that Brazil at the moment has any intention to do so. Thus, it may be said that it is possible, or even highly likely, that Brazil will not engage in phased reductions in its export subsidies within the eight-year period. Nevertheless, we cannot preclude that Brazil will engage in phased reductions between now and 31 December 2002. Accordingly, we cannot conclude on the basis of Brazil's actions in the first four years since the date of entry into force of the WTO Agreement that Brazil has failed to comply with the phase-out requirement of Article 27.4 by reason of a failure to undertake phased reductions within the eight-year transition period. 230

7.82. The question remains whether Brazil has failed to comply with the phase-out requirement of Article 27.4 by reason of an alleged failure to eliminate its export subsidies by the end of the eight-year period. In this respect, Canada submits that PROEX does not have a termination date; that the financing period provided for regional aircraft under PROEX interest rate equalization is from ten to fifteen years; and that various purchasers have firm orders or options for aircraft to be delivered "well after 1 January 2003" on which they expect to receive PROEX payments. With respect to the latter contention, Canada cited a press report and a study indicating that at least one carrier benefiting from PROEX interest rate equalization is expected to continue taking delivery of Brazilian regional jets into the year 2004. Canada further argues that, comparing EMBRAER's current firm orders and options to its production schedule, EMBRAER must be reserving delivery slots beyond 2002 for existing customers, and that, "to the extent that these airlines expect to receive PROEX export subsidies", Brazil is not complying with its obligation to phase out its export subsidies by the end of the eight-year period.

7.83. Turning first to Canada's argument that PROEX does not have a termination date, we do not consider that the absence of a termination date for PROEX demonstrates that Brazil is not in compliance with its obligation to eliminate its export subsidies by the end of the eight-year period. In this respect, we do not agree with Canada that,

"in order to establish its conformity with the 'phase out' Brazil must, at the very least, demonstrate that it has put in place a programme or a schedule of phased reductions of its export subsidies, with a view to elimination at the end of the grace period."(emphasis in original). 231

While developing country Members certainly would be well advised to plan as far as possible in advance for the elimination of their export subsidies, their failure to do so does not in itself demonstrate that the required elimination will not occur. Nor does the fact that PROEX interest rate equalization has been provided with respect to financing extending beyond the 31 December 2002 in our view warrant a different conclusion. As discussed in paragraph 7.72, above, we consider that a PROEX interest rate equalization subsidy is granted at the moment that title to the bonds relating to the equalization is transferred to the lender financial institution. Accordingly, the relevant question in our view is not whether bonds issued before the end of the transition period may be redeemed after the end of that period, but rather whether Brazil continues to issue new bonds – and therefore to grant further subsidies – after the end of the transition period. It is to this issue that we now turn.

7.84. As noted in paragraph 7.82 above, Canada relies upon a press report 232 and estimates in a study, 233 as well as calculations based on EMBRAER'sorder book and production schedule, for the proposition that Brazil has already committed to provide PROEX interest rate equalization with respect to regional aircraft that will be delivered after 31 December 2002. 234 The most telling evidence is the press report, which states that "Eagle expects to take delivery of its first ERJ-135 in July of next year, and continue accepting airplanes through 2004". Brazil concedes that this transaction involves PROEX interest rate equalization. 235 Further, Brazil has argued forcefully that it is legally required, as of the date that it issues a letter of commitment to EMBRAER, to issue the bonds if the terms of the letter of commitment are respected. 236 Because, under the PROEX interest rate equalization scheme, bonds relating to an export transaction are not issued until it has been confirmed that an export transaction will in fact occur, 237 this strongly suggests that Brazil will continue to issue bonds – and hence to grant new subsidies – after 31 December 2002. Accordingly, Canada has established in our view that Brazil will continue to issue bonds, and thus to grant PROEX interest rate equalization subsidies – although at a level which cannot be determined -- beyond 31 December 2002.

7.85. Is the foregoing demonstration sufficient to show, in advance, that Brazil has not complied with the condition of Article 27.4 that it "phase out its export subsidies within the eight-year period"? We consider that it is. It is true, as we stated above, 238 that the Committee on Subsidies and Countervailing Measures may extend the eight-year period, and that during the period of any such extension the Article 3.1(a) prohibition on export subsidies would continue to be inapplicable to the developing country Member in question. Brazil, however, has entered into a legally binding commitment to issue bonds where certain conditions are met without having yet even requested an extension of that period. Further, we note that this commitment has had an effect on the marketplace by allowing EMBRAER to conclude export contracts for deliveries of regional aircraft to occur, and for subsidies to be granted, after the end of that period. Accordingly, we must conclude on the facts before us that Brazil has not complied with its obligation to phase out its export subsidies by the end of the transition period.

7.86. For the foregoing reasons, we find that Brazil has failed to comply with the condition of Article 27.4 relating to the phase out of its export subsidies.

5. Are Brazil's export subsidies "inconsistent with its development needs"?

7.87. Canada considers that, under the second sentence of Article 27.4, a developing country Member seeking to benefit from non-application of the Article 3.1(a) prohibition on export subsidies must demonstrate that its export subsidies are consistent with its development needs. Canada considers that this is not a self-judging provision, and that it should be applied on the basis of objective standards. Although Canada "does not propose to set out these standards", it does argue that one objective standard in this case consists of the domestic content standards established by Brazil with respect to PROEX. Specifically, Canada argues that with respect to regional aircraft Brazil has waived the domestic content rules generally applicable under PROEX and provides interest rate equalization on the full value of the aircraft in spite of the low domestic content of those aircraft. Canada argues that another relevant standard may be foreign exchange earnings versus foreign exchange expenditure on export subsidies.

7.88. Brazil argues that Article 27 presumes that export subsidies are consistent with a developing country Member's development needs. In support of this view, it cites Article 27.1 of the SCM Agreement, which provides that "Members recognize that that subsidies may play an important role in economic development programmes of developing country Members." Brazil further argues that the language of Article 27.4, which provides that export subsidies shall be eliminated in a period shorter than eight years "when the use of subsidies is inconsistent with" a developing country Member's development needs, clearly means that the burden is on the challenging Member to demonstrate the "inconsistency". Brazil rejects Canada's view that the waiver of certain domestic content regulations in the case of PROEX interest rate equalization payments for regional aircraft is relevant: Article 27 contains no domestic content requirement, and any standards applied with respect to this issue should in Brazil's view relate to the overall needs of the developing country Member, not to one particular industry or economic sector. Finally, Brazil asserts on the basis of certain information regarding economic conditions and the importance of an open, export-oriented economy that PROEX is in fact consistent with its development needs.

7.89. In considering this issue, we note that this element of Article 27.4 is troubling from the perspective of a panel. Article 27.4 provides in relevant part that a developing country Member "shall eliminate [its export subsidies] within a period shorter than that provided for in this paragraph when the use of such export subsidies is inconsistent with its development needs." We recognize that as written this clause is mandatory, and a conclusion that this clause was not susceptible of application by a panel would be inconsistent with the principle of effective treaty interpretation. On the other hand, an examination as to whether export subsidies are inconsistent with a developing country Member's development needs is an inquiry of a peculiarly economic and political nature, and notably ill-suited to review by a panel whose function is fundamentally legal. 239 Further, the SCM Agreement provides panels with no guidance with respect to the criteria to be applied in performing this examination. We consider that it is the developing country Member itself which is best positioned to identify its development needs and to assess whether its export subsidies are consistent with those needs. Thus, in applying this provision we consider that panels should give substantial deference to the views of the developing country Member in question.

7.90. As discussed above, we consider that Canada bears the burden of demonstrating that, because Brazil has not complied with the conditions set forth in Article 27.4, the Article 3.1(a) prohibition on export subsidies applies to Brazil. Further, we note that Article 27.4 does not provide that a developing country Member must eliminate its export subsidies in a period shorter than eight years unless the use of such export subsidies is consistent with its development needs. Rather, it provides that a developing country Member must eliminate its export subsidies in a period shorter than eight years if the use of such export subsidies is inconsistent with its development needs. Thus, in order to prevail on this issue Canada must present evidence and argument sufficient to raise a presumption that the use of export subsidies by Brazil is inconsistent with Brazil's development needs.

7.91. Canada argues that PROEX payments on exports of regional aircraft are inconsistent with Brazil's development needs because Brazil has waived certain domestic content rules generally applicable under PROEX in the context of the export of such regional aircraft. Specifically, Canada asserts that under PROEX regulations, exports with a domestic content index of 60 per cent or more are subject to interest rate equalization payments on 100 per cent of their value, while for goods with a domestic content index of less than 60 per cent, the percentage eligible for interest rate equalization is reduced according to a formula. Canada asserts that the ERJ-145 regional jet, for example, has a domestic content index of approximately 15 per cent, and thus should be eligible for interest rate equalization on only 55 per cent of its value, but that it in fact benefits from 100 per cent equalization. Canada further notes that the spare parts may make up as much as thirty per cent of the value of the export package, and that these spare parts could have no Brazilian content whatsoever. Brazil has not contested Canada's calculations of the Brazilian value-added of the ERJ-145, nor its characterization of PROEX domestic content rules. 240

7.92. It is not entirely clear whether under Article 27.4 it is a particular export subsidy practice or a Member's export subsidies generally which must be shown to be inconsistent with its development needs. 241 Even if we assume that it is appropriate to review whether a particular subsidy practice with respect to a particular product is inconsistent with a developing country Member's development needs, we do not believe that the evidence submitted by Canada is sufficient to raise a presumption that PROEX payments on regional aircraft are inconsistent with Brazil's development needs. In our view, the fact that Brazil has a generally applicable rule regarding the relationship between the domestic content of an exported product and the extent of the PROEX interest rate equalization available with respect to that product does not mean that the deviation from that rule in a particular case is necessarily inconsistent with a developing country Member's development needs. Nor do we see any basis to conclude that PROEX payments on regional aircraft are necessarily inconsistent with Brazil's development needs merely because the Brazilian value-added of the aircraft being exported is relatively low. There could be any number of reasons why the provision of export subsidies might be consistent with a Member's development needs in such a case. For example, a developing country Member might be interested in the possible technological spin-off effects from the development and production of the product in question, or the need to establish a strong market presence and reputation in foreign markets as a stepping stone to introducing products with greater national value-added. In fact, Canada has not made any meaningful effort to relate the issue of Brazilian value-added to the broader issue of Brazilian development needs. 242

7.93. For the foregoing reasons, we conclude that Canada has failed to present evidence and argument sufficient to raise a presumption that the use of export subsidies by Brazil is inconsistent with Brazil's development needs.

VIII. CONCLUSIONS AND RECOMMENDATION

8.1. In conclusion, we find that:

(a) PROEX interest rate equalization payments on exports of Brazilian regional aircraft are subsidies within the meaning of Article 1 of the SCM Agreement which are contingent upon export performance within the meaning of Article 3.1(a) of that Agreement;

(b) PROEX interest rate equalization payments on exports of Brazilian regional aircraft are not "permitted" by reason of the first paragraph of item (k) of the Illustrative List of Export Subsidies;

(c) Brazil has failed to comply with certain of the conditions of Article 27.4 of the SCM Agreement and the prohibition of Article 3.1(a) of the SCM Agreement is therefore applicable to Brazil.

8.2. Accordingly, we find that payments on exports of regional aircraft under the PROEX interest rate equalization scheme are export subsidies inconsistent with Article 3 of the SCM Agreement.

8.3. Pursuant to Article 3.8 of the DSU, the finding in paragraph 8.2 also constitutes a case of prima facie nullification or impairment of benefits accruing to Canada under the SCM Agreement, which Brazil has not rebutted.

8.4. Canada has requested that the Panel make specific recommendations regarding implementation of these findings. We consider however that we are required to make the recommendation provided for in Article 4.7 of the SCM Agreement and are authorized to make no other. Accordingly, we recommend that Brazil withdraw the subsidies identified above without delay.

8.5. Article 4.7 further provides that "the panel shall specify in its recommendation the time-period within which the measure [i.e., the measure found to be a prohibited subsidy] must be withdrawn." Presumably, we are expected to take into account the nature of the measures and the difficulties likely to be faced in implementing the recommendation when specifying what period would represent withdrawal "without delay". We note, however, that there is no experience with respect to what steps could constitute "withdrawal" of the subsidies in various factual circumstances, and we do not consider that it is within our mandate to tell Brazil what steps are required in order to implement our recommendation. Accordingly, taking into account the nature of the measures and the procedures which may be required to implement our recommendation, on the one hand, and the requirement that Brazil withdraw its subsidies "without delay" on the other, we conclude that Brazil shall withdraw the subsidies within 90 days.


Continuation: "Annex 1"


229 It is instructive in this respect to compare, for example, the highly detailed provisions regarding the phased integration into GATT 1994 of textile and clothing products in Article 2 of the Agreement on Textiles and Clothing.

230 We note that the definition of "phase out" cited by Canada is "to bring gradually...out of use", and that gradually has been defined as taking place "by degrees, slowly progressive, not rapid, steep or abrupt". Canada deduces from this that Brazil's obligation is not only to "bring its export subsidies out of use in a phased manner" but also to show that it "does not intend to bring its subsidies to a rapid, steep or abrupt end' before the end of the eight-year period". We do not consider however that in the absence of more precise requirements we can reasonably infer into the term "phase out" any more than an obligation to bring one's export subsidies out of use in a phased manner.

231 Canada answer to Panel question 49.

232 See American Eagle to Replace Aging Saabs with ERJ-135s, in Flight International, 1 October 1998 (Canada exhibit 71)..

233 See Canada exhibit 64.

234 Although this evidence may be less than conclusive, we consider it sufficient to raise a presumption that Canada's factual assertion is correct, particularly in light of the fact that access to definitive information on this issue is in the sole pessession of Brazil and the companies in question, and that Brazil has at no point not contested the accuracy of Canada's assertion in this regard.

235 See Brazil submission "Comments on Additional Information Submitted by Canada", paragraph 26.

236 According to a written legal opinion sumitted by Brazil to the panel, "it is our opinion that, within the validity period of the letters of commitment and provided there are no pending debts."

237According to Brazil, where there is confirmation of the shipment of goods or the effective settlement of the relevant foreign exchange contract for the aircraft in question. See Brazil's answer to Panel question 28.

238 Paragraph 7.82.

239 It may be noted that under Article 27.14, "[t]he Committee [on Subsidies and Countervailing measures] shall, upon request by an interested Member, undertake a review of a specific export subsidy practice of a developing country member to examine whether the practice is in conformity with its development needs." In our view, a body such as the Committe is far better equipped to perform this type of examination than is a panel.

240 Canada's calculations appear to be based on a study performed by Ernst and Young on behalf of Canada entitled Analysis of EMBRAER's use of the Brazilian Export Financing Program PROEX. Although Canada did not submit this study into evidence, Brazil submitted it as exhibit 9 to support certain arguments of its own. On the basis of this study (p.18), it appears that the domestic content figure cited by CAnada in fact referred to the ERJ-135 (with an estimated Brazilian value-added of 14.8 per cent) rather than to the ERJ-145 (with an estimated Brazilian value-added of 26.1 per cent). We note however that business confidential documents submitted by Brazil indicate that in the view of the Bank of brazil the domestic content of the ERJ-145 is substantially higher than estimated by Canada.

241 Article 27.14 envisions the review by the Committee of whether a "specific export susidy practice" by a developing country member is in conformity with its development needs. This language differs notably from that of Article 27.4, which refers merely to "such export subsidies", with "such" presumably referring back to the export subsidies whose level a Member is not to increase (and recalling that, in this case at least, the "level of export subsidies" is being examined in terms of the overall level of export subsidies being provided by Brazil).

242 In light of our view that the evidence submitted by Canada is insufficient to raise a presumption that PROEX payments are inconsistent with Brazil's development needs, we need not consider Brazil's response to Canada's assertions.