Brazil-Export Financing Programme for Aircraft
Report of the Panel
IV. Main Arguments of the Parties, Section 4.24 (continued)
4.24 Canada, however, maintains
that entering into a commitment when no money has changed hands could not, in itself, be
considered a "financial contribution" or a subsidy. This is because commitments,
even those by governments, may not always be kept. Canada introduced evidence, which
according to it, demonstrated that some airline companies which dealt with EMBRAER, the
Brazilian manufacturer of regional aircraft, were of the same view and assumed that it was
possible that the Brazilian government may not honour its commitments.
4.25 Brazil contests the arguments of Canada
regarding when a subsidy is granted. In its submissions, Brazil explained the operation of
PROEX with regard to interest equalization payments. In an oral statement before the
panel, it also summarized that an application is made and, if the application is in order,
that the Banco de Brasil, as agent for PROEX, makes a legally binding commitment. Brazil
stated that it would be liable for damages if it did not honour its commitment 26. Brazil also submitted as an exhibit a
legal opinion from a Brazilian legal scholar supporting its position. 27
4.26 Brazil argued that this commitment is to provide
specified PROEX benefits if the transaction is concluded, within a specified time, in
accordance with the terms contained in the application. The most important parts of this
commitment concern the number of airplanes covered and the price. Both ultimately may be
lower than listed in the application, but neither can be greater. When this commitment is
issued, Brazil becomes legally obligated to furnish PROEX benefits, and the private
parties are free to act in reliance on this commitment. Production is scheduled. Parts and
components are purchased. Crew training begins. Both the manufacturer and the airline
incur a variety of expenses associated with the production, acquisition, and use of a new
aircraft. When actual export occurs, PROEX is paid in the form of NTN-I’s, generally
30 non-interest bearing bonds redeemable over the next 15 years. The entire face amount of
the 30 bonds is charged to the budget for the year of export. 28
4.27 Specifically, Brazil argued that the steps taken
by the manufacturer include commitments and investments regarding the acquisition of raw
materials, supplies and equipment necessary for the production of the aircraft. This
involves contractual obligations between the manufacturer and suppliers of such major
components as engines, avionics, and landing gear. It may involve increases in the
workforce. Positions are scheduled in the workline so that the contracted aircraft may be
delivered on time. Finally, the aircraft is manufactured and exported to the purchaser. At
the point of export the bonds are issued. At that stage, the manufacturer has incurred all
of the expenses involved in producing aircraft ready to be flown.
29
4.28 Brazil argued that the steps taken by purchasers
are not as extensive as those taken by the manufacturer, but they are significant and
involve the commitment of resources. These steps include investments regarding the
preparation for the start of operations with the new aircraft, including crew training and
establishment of a maintenance infrastructure along the points where the aircraft will be
flown. Typically schedules are arranged, and promotional expenses incurred. In addition,
purchasers are responsible for complying with numerous regulatory requirements of the
jurisdictions in which the aircraft will be flown, a process begun before the arrival of
the aircraft. 30
4.29 In these circumstances, Brazil submits that it is
clear that the granting of the subsidy occurs at the point at which Brazil makes a legally
binding commitment to provide PROEX payments, a commitment on which private actors can and
do rely.
4.30 In responding to a question from the Panel asking
Brazil to clarify the nature of a "firm order," 31 Brazil explained that a firm order is a binding contract,
imposing rights and obligations on both the buyer and the seller. It represents a
commitment by the buyer to purchase an agreed number of aircraft, in accordance with and
under the terms and conditions of a binding, legal purchase agreement, and an obligation
on the seller to produce and deliver the aircraft to a buyer.
4.31 Brazil further submits that there are no
circumstances under which a purchaser (or a seller) may cancel a firm order by its
unilateral action. Of course, as with any contract, either party would be excused from
performance if the other failed to comply with its obligations under the purchase
agreement. For example, a purchaser could cancel a firm order if the manufacturer failed
to provide the financing support required by the purchase agreement. In addition, aircraft
purchase agreements typically permit the purchaser to cancel a firm order if excusable
delays in delivery amount to 300 days or longer, or if non-excusable delays amount to 90
days or longer. The purchase agreement would specify reasons for delay that would be
considered excusable. In addition, purchasers typically may cancel firm orders upon the
accidental damage or destruction of the aircraft before its acceptance by the purchaser.
Brazil submits it is not common for a purchaser of a civil aircraft to cancel a firm
order.
4.32 Brazil states that in the event of cancellation
of a firm order, a purchaser would be liable for damages under the law of the jurisdiction
specified in the purchase agreement. In addition, the purchaser normally would lose all
amounts previously paid to the manufacturer. Alternatively, depending upon the terms of
the purchase agreement, the purchaser would be liable for liquidated damages.
4.33 Brazil states that a firm order differs from an
option only in that the purchaser is not obligated to buy, but if the purchaser elects to
do so, the manufacturer is obligated to sell. Thus, an option is equivalent to a
"call" acquired by the purchaser. In confidential business information submitted
in response to a question from the panel, Brazil provided a letter of commitment that
showed that the Brazilian Government makes no distinction between firm orders and options
when granting letters of commitment. 32
As such, Brazil disagrees with Canada as to the legal consequences of a letter of
commitment. It is of the view that upon the fulfilment of the conditions specified by the
Banco do Brasil, the letter becomes irrevocable, in the sense that if the Brazilian
government should default, it could be sued for damages in the Brazilian courts. The view
of Brazil is confirmed in an opinion prepared by Professor Luiz Olavo Baptisa, who in
response to a question 33 from the
Panel regarding the legal consequences of a "letter of commitment" stated that :
"[W]ithin the validity period of the Letters of Commitment and
provided there are no pending debts from the exporter [EMBRAER] to the Government of
Brazil, it is illegal and not viable the cancellation or the revoking of the interest rate
equalization concessions made for the referred to transactions. To accept the cancellation
or the revoking of the Letters of Commitment unilaterally done by the administration,
other than being clearly illegal, would cause doubts and uncertainties to business and
legal relationships and it would also allow the exporter to go to the Courts against the
Government of Brazil for indemnification purposes. Therefore it is irrelevant the issue
related to the timing of issuance of the NTN-1, [sic], for the issuance of such bonds is
nothing else than the materialization of an obligation created upon the issuance of the
Letters of Commitment."
4.34 Canada submits that the commitment to
issue a bond is simply the mechanism by which the Government of Brazil entrusts private
entities to make the payment, in periodic instalments or in lump sum, of the subsidies in
question to the purchasers of exported Brazilian regional aircraft, in the sense of
Article 1.1(a)(iv) of the SCM Agreement. In this sense, the date of the commitment says
little about the actual payment of the subsidies that would take place under Article
1.1(a)(iv).
4.35 Canada contends that the European Communities and
Brazilian position on the timing of a subsidy is not applicable, at least in the
circumstances of this case. On the facts of this case, Canada argues that the phrase
"potential direct transfer of funds or liabilities" is irrelevant. In the
context of the SCM Agreement, the phrase "potential direct transfer of funds or
liabilities" encompasses government practices such as loan guarantees and
agricultural crop insurance, but does not include conditional promises or commitments to
grant subsidies at some point in the future. The distinction relates to the legal
enforceability of a "potential" transfer such as a loan guarantee, as opposed to
the contingent nature of a promise or a "commitment" to grant subsidies at some
point in the future if certain purchases are made. For example, financial institutions as
a matter of course list [loan] guarantees or other contingent liabilities such as
insurance commitments as "liabilities." This is not the same as promises or
commitments to consider and to give subsidies if purchases are made. The promise to pay
subsidies upon future purchase is simply too remote to fit within the terms of
"potential direct transfer of funds."
4.36 Canada argues that since PROEX subsidies are not
expensed in the Brazilian budget until after the aircraft is delivered, it cannot be
argued that, at the time of the order of the aircraft (firm, conditional or optional), the
promise to pay a subsidy if an order is exercised amounts to a "potential transfer of
funds." The consequences of a failure on the part of EMBRAER to provide financing
that was a condition of an order would simply be that the buyer would be relieved of its
obligation to purchase the aircraft. Canada further argues that the situation becomes more
complicated in the case of option contracts for future deliveries negotiated in a sales
agreement. An "option" may be agreed to in recognition of a
"commitment" to pay subsidies in the event an option to purchase is exercised by
a purchaser. However, such an option may not be exercised. Any "commitment" in
respect of such options is not a subsidy unless the option is exercised – that is, a
sale takes place – and until the aircraft is delivered – that is, until it
becomes necessary for the purchaser to pay for the aircraft and therefore benefit from the
subsidies promised. In such instances, the issuance of the Brazilian bonds occurs only
after the financing party declares that the goods have been shipped and the exchange
contracts have been settled for the total value of the export.
4.37 Canada submits that a "financial
contribution" may be found to exist under the PROEX interest equalization scheme at
one of only two points, namely (i) where a payment is made pursuant to a NTN-I bond that
becomes due; or (ii) where NTN-I bonds are issued to the agent bank at the point of
delivery of the aircraft and the cost to government is effectively (though not actually)
incurred through expensing in the budget. In the case of the former, the two elements of
"subsidy" – a net charge to the treasury and an advantage above and beyond
the market are coterminous at the point of each instalment of PROEX subsidies. In the case
of the latter, it may be argued that that is also the point at which the terms of a
promised subsidy are finally crystallised.
4.38 Canada, however, submits that if the Panel were
to decide that a financial contribution is made by the Brazilian government at the point
of the issuance of a letter of commitment, then this characterization would significantly
increase the level of annual expenditure of export subsidies for the purposes of the
second condition of Article 27.4, that is, the requirement not to increase such subsidies.
Canada provided calculations based on evidence put forward by Brazil to show that if
Brazil is correct in its argument that the issuance of the letter of commitment
constitutes the grant of a subsidy, then Brazil has clearly not been in compliance since
1996 with the condition not to increase the level of its export subsidies.
4.39 With respect to the legal opinion submitted by
Brazil, Canada submitted that the question of whether domestic legal consequences flow
from breaking a commitment to pay export subsidies is not relevant for this Panel. The
issue before the Panel is Brazil's obligation, in international law, not to grant and not
to maintain export subsidies that are illegal under Article 3 of the SCM Agreement.
3. Whether PROEX
payments confer a benefit
4.40 Canada argues that the ordinary meaning of
"benefit" in context and with a view to the object and purpose of the SCM
Agreement accords well with the dictionary definition of the term: a benefit is an
advantage 34. A financial
contribution that is not repayable - in other words, a grant - bestows an advantage. Such
a contribution, when made by a government, directly or indirectly, amounts to a subsidy.
According to the terms of the law under which PROEX payments are made, they are never to
be repaid by the beneficiary. As such they amount to outright grants. This alone, in
Canada's view, demonstrates the benefit conferred by PROEX.
4.41 Canada argues that since EMBRAER entered
into the regional jet market with the certification of the EMB-145 model (now ERJ-145) in
1996, followed by the launch of the 37-seat ERJ-135 in 1997, it has captured over half of
the regional aircraft market, and has announced plans to increase its production of
regional jets to 12 a month, enough to satisfy, on its own, the demand for regional jet
aircraft in this market segment for the foreseeable future. Canada argues that it is PROEX
payments which have enabled EMBRAER to become a dominant player in the regional jet
aircraft industry and increased its market share. According to Canada, EMBRAER has
acknowledged in various documents and communications the benefit conferred by PROEX
including in the following news release dated 18 May 1998: "EMBRAER
receives up to 3.8 per cent equalization interest rate support from the Brazilian
government to help offset high domestic interest rates carried for financing Brazilian
exports to foreign buyers."
4.42 Canada argues that the above statement of
EMBRAER, while technically correct, is also misleading in one important respect. PROEX
payments to foreign purchasers of Brazilian civil aircraft reduce the rate of interest
payable by purchasers of regional aircraft by 3.8 percentage points below the rate freely
negotiated in the international market by such purchasers. These payments have nothing to
do with "high domestic interest rates." Indeed, from at least as early as 1994,
PROEX payments have been available where "foreign banks and credit institutions"
have financed Brazilian exports. 35
4.43 Canada maintains that, contrary to the assertions
of EMBRAER and the Government of Brazil about "leveling the playing field,"
these payments reduce the interest rate paid by purchasers of Brazilian aircraft to (often
non-Brazilian) financiers to levels considerably lower than those that may be obtained in
the international financing market. Canada introduced evidence in which airlines such as
Comair, Skywest and ASA have acknowledged that Brazilian export subsidies brought down
their financing costs by about 1.8 to 3.5 percentage points below market-based costs of
financing. PROEX payments thus generally reduce by about half the actual interest paid by
such purchasers. As such, they serve as an important part of EMBRAER's success in the
market. Canada referred to a number of industry reports that, according to it, supported
its argument that PROEX payments conferred a benefit. One industry report dated 10 August
1998 observed that:
"Of the regional aircraft manufacturers, EMBRAER has the distinct
benefit of having the most developed financing programme, sponsored by the Brazilian
government, called PROEX. The PROEX programme is underwritten by the government in Brazil
to enhance trade in its aircraft and nearly 1,500 other items and products from Brazil. It
promised commercial airlines savings of up to $3.5 milion per aircraft. It also allows for
a subsidized interest rate that is 3.8 percentage points less than the market rate,
along with a 15-year term…As mentioned, the primary advantage EMBRAER has over its
competitors is its PROEX financing programme." 36 (emphasis in original)
4.44 Canada also adduced as evidence an investors'
circular on EMBRAER issued on 26 August 1998, that noted the following:
"Dependence on Government Financing: EMBRAER's ERJ-145's most
significant orders with American Eagle (for 42 firm orders and 25 options) and Continental
(for 25 firm orders and 175 options) were made possible through the use of government
financing - the BNDES-Exim and PROEX programmes, designed to assist the country's
exporters by extending financing for up to 15 years at interest rates below what the
company would obtain on its own…[W]e estimate that the bulk of the company's
orders to date have been dependent …[sic] on the Brazilian government's willingness
(and ability) to finance the sales." 37
(emphasis in original)
Canada concludes by asserting that PROEX payments amount to outright
grants whether received in a stream of payments or in a lump sum. There is no obligation
to repay any portion of PROEX payments received. These payments reduce the cost of
exported Brazilian aircraft to the purchaser, and therefore confer a "benefit"
for the purpose of Article 1.1.
4.45 As noted above 38, Brazil does not contest that actual PROEX payments
confer a benefit within the meaning of Article 1.1(a)(2) of the SCM Agreement. Brazil
adopts, however, the argument of the European Communities that a subsidy is granted within
the meaning of Article 1 of the SCM Agreement by the Brazilian government at the point
when it "issues or enters into a commitment to issue bonds in support of an export
transaction."
4.46 Further, Brazil disputes Canada’s claim that
"PROEX export subsidies are made for the benefit of foreign purchasers that, for the
most part, borrow funds from non-Brazilian institutions on the basis of their own credit
risk." 39 Brazil noted, in
response to a question from the Panel, that there were only four transactions involving
the EMB-120 entered into since 1 January 1995 and that in each the lender was inside of
Brazil; in none of the transactions was the lender outside Brazil. Of the 11 transactions
involving the ERJ-145, seven involved lenders inside of Brazil, while only four involved
lenders outside Brazil. 40
4.47 Brazil also submitted that Brazil risk has a
dramatic and severe impact on all financial terms and transactions involving Brazil,
including export credit terms 41.
Brazil accepts that when the lender is outside of Brazil that Brazil risk does not apply
to that lender, but argues that Brazil risk continues to apply to Brazilian exporters as
well as Brazilian financial institutions when the lender is outside of Brazil and is
reflected in their higher costs 42.
Brazil submitted that EMBRAER itself bears Brazil risk and that the costs it incurs in
obtaining credits for its customers outside of Brazil, from lenders outside of Brazil,
reflect Brazil risk. 43
4.48 Finally, Brazil disputes Canada’s reference
that Brazilian subsidies brought down the financing costs of specific airlines below
market-based costs of financing. Brazil stated that it does not make PROEX payments to
airlines. PROEX interest equalization payments are made only to financial institutions.
44 Brazil noted that PROEX was preceded
by FINEX, which was ended in 1991. FINEX involved what was essentially an open-ended
commitment from the Government of Brazil to equalize the spread for Brazil risk. The
Brazilian government determined that FINEX, which incurred bad debts totalling over US$3.5
billion by 1991, was too expensive, and decided in 1991 to replace FINEX with PROEX, the
terms of which are more limited. Existing FINEX commitments were honoured after the
programme’s termination 45.
Regarding the transaction involving Sky West, Brazil states it has no first-hand
information concerning the statements made by this airline concerning direct payment of
subsidies to it from Brazil. If Sky West in fact is receiving such payments, Brazil
presumes they are from transactions involving FINEX. In any event, Brazil makes no PROEX
payments to airlines themselves 46.
Brazil does not acknowledge that any sales of Brazilian manufactured regional aircraft
supported by PROEX interest rate equalization were "made at an interest rate below
that of the CIRR rate (taking into account interest rate equalization)."
4. Whether PROEX payments are contingent upon export performance
4.49 Canada argues that a subsidy is
"contingent ... upon export performance" when it is conditional on or tied to
exports; that is, where it is available only on condition that goods are exported. Since
PROEX subsidies are paid only on the exportation of products from Brazil, they are
"contingent on export performance" within the meaning of Article 3.1(a) of the
SCM Agreement.
4.50 Canada maintains that regulations supporting
PROEX make it clear that it is contingent upon the exports of goods or services. The
Provisional Measure continuing the operation of PROEX does so only with respect to
"operations to finance the export of domestic goods or services." Under
Article 6 of Monetary Council Resolution No. 2380/97, national treasury bonds for the
payment of PROEX subsidies will be issued "only after the financing party or its
legal representative declares to the Banco do Brasil that … the goods have been
shipped." According to Article 5(2) of Order 33/97, which identifies the goods
eligible for PROEX subsidies, "[g]oods shall be eligible for interest equalization
only if their [Registration of Export form] has been completed." Indeed, Brazil noted
in its official response to questions posed by Canada and other WTO Members at the
Committee on Subsidies and Countervailing Measures that, "[PROEX] provides financing
for Brazilian exports and not for sales in the domestic market." 47
4.51 Brazil does not contest that PROEX
payments are contingent upon export performance. It, however, contends that they are not
prohibited as claimed by Canada.
C. whether proex payments are permitted subsidies under item
(k) of the illustrative list of export subsidies
4.52 Brazil argues that although the promise of
PROEX payments is a subsidy that is contingent upon export performance, it is not
prohibited by virtue of item (k) of the Illustrative List of Export Subsidies, which
includes within the definition of prohibited subsidies "the payment by [governments]
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." Brazil asserts that the "converse of this statement is that such
payments are permitted in so far as they are not used to secure a material
advantage in the field of export credit terms" (italics in original). Brazil submits
that since PROEX payments are not used to secure a material advantage in the field of
export credit terms, they are permitted by the Illustrative List of Export Subsidies.
Brazil submits that even if it were determined that PROEX is used to secure an advantage
in the field of export credits, that alone would not be enough to determine that PROEX is
prohibited. It would also be necessary to determine that the advantage is material
48. Canada disagrees with Brazil
on its interpretation of item (k) of the Illustrative List of Export Subsidies. It submits
that the approach adopted by Brazil is not permissible under the SCM Agreement and that,
in any event, PROEX payments are used to secure a material advantage in the field of
export credit terms. As such, they are not permitted under item (k) of the Illustrative
List, even if it were applicable in this instance.
1. Whether item
(k) of the Illustrative List of Export Subsidies may be used a contrario
4.53 Brazil argues that the interpretation
advanced by it is in accordance with Article 31 of the Vienna Convention on the Law of
Treaties, which provides that a treaty "shall be interpreted in good faith in
accordance with the ordinary meaning to be given to the terms of the treaty in their
context and in the light of its object and purpose." Brazil submits that the ordinary
meaning of the words "in so far as they are used to secure a material advantage in
the field of export credit terms" make clear that when governments grant credits
below the cost of funds or when they pay part or all of the costs incurred by financial
institutions or exporters in obtaining funds, in so far as these activities are used to
secure a material advantage, they are prohibited. A necessary corollary is that when these
activities are not so used, they are not prohibited.
4.54 In response to a question from the Panel, Brazil
stated that the "material advantage" clause of item (k) constituted an
affirmative defence and that it was up to the party seeking to rely on it to demonstrate
that its measures are not being used to secure a material advantage in the field of export
credit terms. Brazil argues that since PROEX payments are not used to secure a material
advantage in the field of export credit terms, it has discharged this burden.
4.55 Canada argues that Brazil’s
characterisation of the first paragraph of item (k) as an exception is incorrect. It
contends that contrary to the specific direction of the DSU, as amplified and repeated in
WTO jurisprudence by the Appellate Body, Brazil does not "follow all of the steps of
applying the ‘customary rules of interpretation of public international
law.’" Canada submits the basic rule is that "[a] treaty interpreter must
begin with, and focus upon, the text of the particular provision to be interpreted."
49 Canada submits that the applicable
provisions are footnote 5 and item (k). Footnote 5 provides that "[m]easures referred
to in Annex I as not constituting export subsidies shall not be prohibited under this or
any other provision of this Agreement." Canada argues that Brazil does not articulate
the legal basis for its interpretation of the first paragraph of item (k) as providing an
exception within the meaning of footnote 5. Brazil simply quotes the first paragraph of
item (k) of Annex I and casually notes the a contrario implication that a measure that
does not fit squarely within the terms of item (k) is therefore not prohibited. Its legal
analysis fails, however, to consider footnote 5.
4.56 Canada asserts that the ordinary meaning of the
phrase "measures referred to" in footnote 5 does not encompass an a contrario
inference, as Brazil seems to argue. Brazil’s interpretation is inconsistent with the
direct references in Annex I to measures "not constituting export subsidies."
4.57 Canada argues that there are four exceptions that
fit within the meaning of footnote 5. First, the last paragraph of footnote 59 states, in
respect of item (e), that "Paragraph (e) is not intended to limit a Member from
taking measures to avoid the double taxation of foreign sourced income earned by its
enterprises or the enterprises of another Member." This language ("is not
intended to limit …") is similar in structure to GATT Article XX ("nothing
in this Agreement shall be construed to prevent the adoption … of measures
…"). Accordingly, the last paragraph of item (e) provides that the identified
measures are not export subsidies and are, therefore, not prohibited under Article 3. The
second exception is to be found in item (h) of the Illustrative List, which states
"provided, however, that prior-stage cumulative indirect taxes may be exempted,
remitted or deferred on exported products even when not exempted, remitted or deferred on
like products when sold for domestic consumption, if the prior-stage cumulative indirect
taxes are levied on inputs that are consumed in the production of the exported product
(making normal allowance for waste)." Canada submits that the second subordinate
clause of item (h) carves out an exception from the scope of the opening clause of
item (h) and that it is this type of exception which is contemplated by footnote 5. The
third exception, according to Canada, is to be found in the second subordinate clause of
the first sentence of item (i), which contains similar language ("provided, however
…") used in item (h). Canada further submits that the fourth and last exception
in the Illustrative List is to be found in the second paragraph of item (k) and not in the
last paragraph as contended by Brazil.
4.58 Canada submits that a measure that meets the
criteria of item (k) is ipso facto an export subsidy and therefore prohibited. In
respect of such a measure, it is not necessary for a complainant to establish that the
export credit in question is a "subsidy" within the meaning of Article 1, or
that it is "contingent on export performance." Rather, a complainant may simply
demonstrate that a government export credit is granted below its cost of funds so as to
"secure a material advantage in the field of export credits"; such an export
credit would be prohibited. It does not follow, however, that where a measure does not fit
squarely within the first paragraph of item (k), it is, by virtue of that fact alone, not
prohibited.
4.59 Canada argues that if the Brazilian argument were
accepted, it would turn the Illustrative List into an exhaustive list of export subsidies,
as a subsidy which does not meet the exact criteria of an item in Annex I would not be
prohibited. Such an outcome would not accord with the ordinary meaning of the terms of the
Illustrative List, is not supported by the negotiating history of the Illustrative List,
and would lead to a manifestly absurd or unreasonable result.
4.60 Canada submits that Annex I, by its very terms,
is an illustrative list of export subsidies. Nothing in Article 3 indicates that the
Illustrative List is exhaustive of the universe of export subsidies. Indeed, the use of
the word "including" in Article 3 clearly indicates that there are measures or
activities other than those listed in the Illustrative List that could be caught by that
Article; that is, there could be subsidies that do not meet the exact definitions set out
in Annex I that would, nevertheless, be prohibited under Article 3.
4.61 Canada argues that the negotiating history of the
Illustrative List confirms its view. The origins of the Illustrative List can be found in
a proposal submitted by the Government of France to the Working Party established to bring
into force the provisions of Article XVI:4 of the GATT 1947 50. Canada submits that the Working Party considered and adopted
a list of measures that were generally to be considered as subsidies in the sense of
Article XVI:4. It agreed, however, that "this list should not be considered
exhaustive or to limit in any way the generality of the provisions of paragraph 4 of
Article XVI." 51 Canada argues
that for the purposes of Article XVI:4, if a practice fell within the examples set out in
the Illustrative List, it would be considered an export subsidy. If it did not, however,
it did not mean that it was not an export subsidy; rather, an independent analysis under
Article XVI or, subsequently, under the Tokyo Round Subsidies Code had to be undertaken to
determine whether the practice was an export subsidy.
4.62 Canada contends that the first paragraph of item
(k) is no different. According to this paragraph, the payment by a government "of all
or part of the costs incurred by exporters or financial institutions in obtaining
credits" is clearly prohibited by Article 3 where the payment is "used to secure
a material advantage in the field of export credit terms." If, however, such payment
does not fit item (k) squarely – if Brazil can show that no "material
advantage" was bestowed – a complaining party can still establish that the
payment is a subsidy, that it is contingent on export performance, and that it is
therefore prohibited under Article 3.
4.63 Canada insists that Brazil’s approach, if it
were to hold, would produce a manifestly absurd result. The absurdity of the Brazilian
argument is highlighted by the following example: item (a) provides that "[t]he
provision by governments of direct subsidies to a firm or an industry contingent upon
export performance [shall be prohibited]." If Brazil’s interpretation prevails,
the a contrario operation of item (a) would exclude indirect export subsidies, subsidies
provided through non-governmental agents, and subsidies granted to natural persons from
the scope of Article 3. That is to say, Annex I would contradict, implicitly and
explicitly, the very terms of Article 3.
4.64 Brazil considers that the interpretation
of item (k) advanced by Canada and the European Communities would render the words of item
(k) meaningless and conflict with the view expressed by the Appellate Body in the Gasoline
case: "One of the corollaries of the ‘general rule of interpretation’
in the Vienna Convention is that interpretation must give meaning and effect to all
the terms of a treaty. An interpreter is not free to adopt a reading that would result in
reducing whole clauses or paragraphs to redundancy or inutility." 52 A reading that did not accept these
words of limitation in their ordinary meaning would reduce them to total inutility. The
interpretation of Canada and the European Communities ignores the ordinary meaning of the
words and is "the equivalent of eliminating the clause entirely and placing a full
stop after the word "credits" in the next to last line of the first paragraph of
item (k)." Such an interpretation, in its view, is contrary to the customary
rules of interpretation of public international law as enunciated by the Appellate Body in
the United States - Gasoline case.
4.65 Brazil submits that the "material
advantage" clause of item (k) does not mean that any measure that does not
confer a material advantage would not be prohibited. It means only that measures that
otherwise would be prohibited by item (k) would not be prohibited. Specifically, the first
paragraph of item (k) refers to two practices and two practices only: first, it refers to
the grant by governments of export credits at rates below those which they actually have
to pay for funds, and second, it refers to the payment by governments of all or part of
the costs incurred by exporters or financial institutions in obtaining credits. Both of
these practices are prohibited by the first sentence of item (k) "in so far as they
are used to secure a material advantage in the field of export credit terms." In
other words, the "material advantage" clause of item (k) refers to and limits
only the two practices specified earlier in the same paragraph. Brazil argues that the
"material advantage" clause does not "exempt from the prohibition of
Article 3 any and all practices of whatever kind that happen not to confer a material
advantage." It submits that Canada's view that it is only the second paragraph (the
OECD safe-haven clause) which provides an exception to the prohibition of the first
paragraph is implausible, as such a reading of the item completely ignores the specific
treaty language that is the "material advantage" clause. Canada’s
interpretation of the item would be no different if a full stop, or a period, appeared
after the word "credits" in the second to last line of item (k), with all of the
remaining words deleted. As a result, Brazil argues that Canada’s interpretation is
not consistent with the customary rules of interpretation of public international law, as
codified in the Vienna Convention on the Law of Treaties, is not consistent with
the holding of the Appellate Body in the Gasoline case and other cases, and does
violence to the bargain reached between developed and developing countries in the Uruguay
Round. 53
4.66 Brazil argues that the "safe haven" of
the second paragraph of item (k) does not negate or derogate from the plain meaning of the
text of the first paragraph. The ordinary meaning of the text of the second paragraph is
that a Member may engage in one of the activities specified in the first paragraph, even
if in doing so it gains a material advantage, provided it is in conformity with the OECD
Guidelines referred to in the second paragraph. In essence, there are three tiers to item
(k). The first tier specifies the practices that constitute prohibited export subsidies.
The second tier adds the "material advantage" clause, the ordinary meaning of
which is that it qualifies the prohibition of the first tier. The third tier is the second
paragraph which adds another limitation on the first two tiers, by providing that a
practice in conformity with the relevant provisions of the OECD Guidelines shall be
permitted regardless of whether it is used to confer a material advantage.
4.67 Brazil submits that to the extent that the
"material advantage" clause defines an area of government activity and provides
that it is permitted, it does indeed derogate from Article 3.1(a). There is nothing
alarming about this. Footnote 5 provides that, "[m]easures referred to in Annex I as
not constituting export subsidies shall not be prohibited under this or any other
provision of this Agreement." The "material advantage" clause is one of
those measures. There are others. For example, item (i) specifies that the remission or
drawback of import charges will constitute an export subsidy prohibited by Article 3.1(a)
if it is "in excess of those levied on imported inputs that are consumed in the
production of the exported product." The converse of necessity is true: the remission
or drawback of import charges not in excess of those levied on imported inputs that
are consumed in the production of the exported product is not prohibited. No other reading
of the text of the "in excess" clause of item (i) makes sense.
"Continue on to Main Arguments of the Parties, Section
4.68"
26 Brazil's Second
Oral Statement, para. 71.
27 See para. 4.33
of this report.
28 Brazil's Second
Oral Statement, para. 72
29Brazil's Response
to Questions From the Panel, No. 31.
30 Ibid.
31 Brazil's
Response to Questions From the Panel, No. 29
32 Brazil's
Response to Questions From the Panel, No. 31 (Exhibit Bra-15).
33The question from
the Panel was as follows: "Please explain in what sense the "letter of
commitment" represents a binding legal commitment by Brazil. In particular, would the
government of Brazil be legally entitled to revoke the letter of commitment before such
time as the bonds are issued. If not, please indicate the precise legal instrument and
relevant language establishing the legal obligation of Brazil?"
34Canada relies on The
Concise Oxford Dictionary of Current English, J.B. Sykes, Ed. (Oxford: Clarendon
Press, 1982) at 83; Nolan, Joseph R. and J.M. Nolan-Haley, Black's Law Dictionary,
(St. Paul: West Publishing Co., 6th ed; 1990) at p158.Canada notes that the French version
of the SCM Agreement notes :si un avantage est ainsi
conféré."Avantage"translates into "advantage"; Atkins, Beryl T., et.
al., Robert Collins Dictionnaire Nouvelle Édition (London: Collins, 1987) at p.56
35 Canada notes
that Resolution 2380, which sets out the criteria governing PROEX, specifically states
that, "[t]he right to interest equalization is not interrupted, excluded or
transferred if the notes relating to the export credit are negotiated abroad".
36 "Regional
Jets: Making Props Passe", Industry Report, Warburg Dillion Read, 10 August 1998, at
17-18.
37Bear Stearns But
Recommendation for Empresa Brazileira de Aeronáutica S.A. EMBRAER, 26 August 1998 at 7.
See Canadian Documentary Annex tab 32.
38See para. 4.20 of
this report.
39 Brazil's Second
Written Submission, para. 49.
40 Ibid at paras.
49-56.
41 See paras. 4.94
- 4.101 of this report.
42See para. 4.81 of
this report.
43Brazil's Second
Written Submission, para. 53; see Section 2.2.
44 Ibid at paras.
49-56.
45Ibid.
46See para. 4.110.
47See WTO Document
G/SCM/Q2/BRA/8, 25 August 1998, at p.3.
48 Brazil's First
Oral Statement, para. 47.
49 United States-
Import Prohibition of Certain Shrimp and Shrimps products, WT/DS58/AB/R, para. 114, report
of the Appellate Body adopted on 6 November 1998.
50 Report of the
Working Party on Subsidies, Contracting Parties, Seventeenth Session, November 1960,
L/1381 at pp. 4-7.
51 Ibid.
52 United States -
Standards for Reformulated and Conventional Gasoline, WT/DS2/AB/R, p 23, report of the
Appellate Body adopted 20 May 1996.
53 Brazil's Second
Oral Statement, paras. 51-53
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