Brazil-Export Financing Programme for Aircraft
Report of the Panel
IV. Main Arguments of the Parties, Section 4.206 (continued)
4.206 Brazil disagrees
with Canada that it has the burden of establishing its eligibility for the "phase
out" clause, or any other clause, in Article 27. Brazil submits that if Canada
believes that it is not entitled to the exemption for which it and other developing
countries in the Uruguay Round bargained, it is up to Canada to prove it.
4.207 Brazil submits that putting aside the issue of
burden of proof, it is clear that the "phase out" requirement in Article 27.4 is
not a "phase down" requirement, which is what Canada implies. Article 27.4
specifies that a developing country Member "shall phase out its export subsidies
within the eight-year period, preferably in a progressive manner." The ordinary
meaning of the words "in a progressive manner" is that there should be a
downward trend over the eight years. Yet Article 27.4 states that this should occur
"preferably." It is not mandatory. Thus, a developing country that fails to
phase out its export subsidies "progressively" does not lose entitlement to
Article 27’s benefits. Canada attempts to read into this language a requirement to
phase export subsidies out of use "in a staged manner," somehow contrasting this
"progressive" phase out with the "real" phase out, which would be
rapid, steep, or abrupt. There is absolutely no support in the text of Article 27 or any
other part of the Agreement for such a requirement.
4.208 Brazil asserts that Canada's argument that PROEX
payments over the financing period are inconsistent with the clause, as some of those
payments will occur after the eight-year exemption period has ended, is without any merit.
Brazil notes that PROEX subsidies are granted in connection with the export sale of the
aircraft. They are disbursed every six months for the period of the financing of the
aircraft, which, in most cases, is 15 years. These payments are made to the holders of the
NTN-I’s, which are a form of bond. As each NTN-I becomes due, it is retired. The
PROEX subsidy itself is granted when the commitment is made. The entire subsidy is paid
when the aircraft is exported. Brazil submits that it includes the full face amount (i.e.,
undiscounted) in its budget for the year in which the delivery is made, not over the
financing period of approximately 15 years. This is in accordance with the standards of
the International Monetary Fund which require that the full amount of the subsidy be
included in the budget for the year in which it is made available. Thus, to count the
later disbursement of funds in accordance with the PROEX commitment as a subsidy would be
to double count the subsidy. 165
4.209 Canada asserts that Brazil has
misunderstood its submission. It asserts that "phase out" should not be equated
with "phase down." "Phase down" simply means "reduce
gradually." "Phase out" means "bring gradually out of use." In
other words, the term "phase out" includes the idea of "phase down,"
but also the idea to eliminate at some point. Canada also takes issue with Brazil’s
use of the Article 27.4 phrase "preferably in a progressive manner" to infer
that while there should be a downward trend, this is not mandatory. The word
"progressive" means that the phase out should preferably be carried out at an
increasing rate. That is to say, the higher the level of subsidies, the higher the rate of
reduction – much like progressive taxation.
(i) Arguments relating
to the issue of inconsistency with developing country Member's development needs
4.210 Canada submits that the third
condition of Article 27 is that export subsidies shall be phased out in a period shorter
than eight years if they are inconsistent with a country’s development needs. It
argues that this provision is not a self-judging provision and should be applied on the
basis of objective standards. Canada suggests that one such standard is the domestic
content rules of PROEX established by Brazil.
4.211 Canada argues that domestic content rules are
typically incorporated into export financing and export support programmes with the
objective of ensuring that a government's expenditure of foreign exchange is focussed on
supporting domestic rather than foreign production. Under the terms of the PROEX
regulations, exports with a domestic content ratio of 60 per cent or more are eligible for
interest equalization payments on 100 per cent of their value. For goods with a domestic
content index of less than 60 per cent, the percentage eligible for interest equalization
is reduced according to a formula. For example, for the ERJ-145, which has a domestic
content index of approximately 15 per cent, the formula dictates that only 55 per cent of
the value of the aircraft should be eligible for interest equalization. However, PROEX
interest equalization is paid on 100 per cent of the value of the aircraft because of a
waiver granted to EMBRAER. Canada also submits that there are provisions for
foreign-produced spare parts to be included in the "export" package and these
spare parts can make up 30 per cent of the value of the export package. Thus, export
subsidy payments can be paid on spare parts with zero Brazilian content.
4.212 Brazil disagrees with Canada that in
order for it to avail itself of the provisions of Article 27, it has to establish that
PROEX is consistent with its development needs. Brazil argues that Article 27 presumes
that the development needs of developing countries require subsidies, as is made plain by
the first paragraph of Article 27, which provides that "Members recognise that
subsidies may play an important role in economic development programmes of developing
country Members." Brazil submits that under Canada’s theory, a Member may
challenge any developing country’s export subsidies at any time, and the developing
country has the immediate burden of proving that they are consistent with its development
needs. A developed country, Canada argues, could ask for consultations tomorrow on every
developing country Member’s export subsidies and begin a process of requiring every
developing country to prove that those subsidies are consistent with its development
needs. And it could do so a month later, and a month after that in a never-ending process
of harassment.
4.213 Brazil argues that such a situation would
effectively do away with Article 27. At the very least, it would reverse the bargain of
the Uruguay Round. By explicitly recognising the legitimacy of export subsidies for
developing countries, Article 27.1 effectively presumes that subsidies are consistent with
a developing country’s development needs. Article 27.4, in turn, provides that such
subsidies shall be eliminated in less than eight years "when the use of such
subsidies is inconsistent with" a Member’s development needs. That language
clearly means that the burden is on the party challenging a developing country’s
subsidies to prove that the situation envisioned by Article 27.1 has changed by adducing
evidence that the subsides in question are inconsistent with a Member’s development
needs. Brazil submits that any other interpretation would undo the bargain of the Uruguay
Round and ignore the holding of the Appellate Body in United States – Shirts and
Blouses, which makes clear that the burden is on Canada, the challenger to this
presumption. 166
4.214 Brazil argues further that if there is any doubt
concerning Brazil’s development needs, the following will demonstrate the extent of
the needs of Brazil: (a) Brazil experienced a US$30 billion drain on its foreign currency
reserve in a matter of days due to factors completely outside Brazil and entirely
unrelated to the health of Brazil’s economy; (b) Brazil is still suffering the brunt
of the international financial crises, and prospects for the near future are uncertain;
(c) UNCTAD reports that in 1997 the current account deficit was $33.5 billion, down from a
$6 billion surplus four years earlier; (d) the trade deficit in 1997 was nearly $20
billion, contrasted with a $12 billion surplus five years earlier; (e) in the second
quarter of 1998 domestic interest rates for borrowers were 92.2 per cent per year; (f) in
1997 the public deficit was 4.3 per cent of GDP; there was a surplus only three years
earlier; and (g) unemployment is at the highest level of all the years covered in the
UNCTAD report, 1989 through the first half of 1998.
4.215 Brazil argues that the domestic content ratio
argument of Canada is without any merit. Noting Article 2 of TRIMs, Brazil notes a certain
irony in the accusation, as traditionally there has been the accusation in the GATT that
the content requirements of developing countries were too high and burdensome. In any
event, there is no domestic content requirement in Article 27, and Canada’s attempt
to insert one is totally without justification.
4.216 Canada disagrees with Brazil that it
wants to insert a domestic content requirement into Article 27. Its argument is that
PROEX contains domestic content requirements, placed there for reasons related to
development needs, and that these requirements are not being fulfilled in the case of
aircraft exports. According to Canada, Brazil has not contested this point. Canada submits
that the recital of the economic problems facing Brazil as a result of the global
financial crises does not establish that PROEX is consistent with its development needs.
Brazil should have explained how PROEX helps Brazil overcome these problems or, more
generally, contributes to meeting Brazil’s development needs, for example by
contributing to its foreign exchange earnings.
4.217 In respect of Canada's submission that Brazil
should have explained how PROEX helps it to overcome the problems identified in paragraph
4.133 above, and in response to a question 167
from the Panel, Brazil stated that:
"The importance of exports – and PROEX therefore – is
not limited to the correction of current account imbalances or to supply additional
economic stimulus or job positions, although it is certainly necessary for these purposes.
The achievement of a competitive level of exports is an integral part of the major goal of
increasing the productivity and "tradability" of the Brazilian economy as a
whole. The idea is to do away with the structural and conceptual distortions that resulted
from decades of the protectionist "import substitution model." The external
market should be viewed not as an occasional alternative to the internal market in times
of slow economic growth, but as part of medium and long term strategic planning. The
exposure to external markets must be increased and PROEX plays a crucial role in this
regard. In an article about the stabilization and opening of the Brazilian economy,
economist Antonio Correa de Lacerda underlines the importance of full integration with the
world markets and identifies four basic hurdles for the exporting sector: (a) extremely
high interest rates (average overnight interest rates are around 30 per cent) and
difficult access to internationally competitive financing; (b) a burdensome tributary
system; (c) a complex bureaucratic structure; and (d) a significant structural
"Brazil cost"…PROEX helps overcome the first of the hurdles listed by
Correa de Lacerda and is a crucial factor in the strategy [of the government]…to
consolidate the transformation of Brazil into an open and stable economy."
4.218 Canada submits that Brazil's explanation
amounts to nothing more than a statement that the PROEX export subsidy is necessary to
increase exports. This cannot be considered to be a sufficient explanation of why an
export subsidy is not inconsistent with Brazil's development needs. Any export subsidy,
properly administered, should increase exports. Brazil's explanation in no way rebuts
Canada's comment that PROEX, as applied in civil aircraft sector, is inconsistent with
Brazil's own view of its development needs as indicated in the very same programme through
its domestic content requirements.
E. Arguments relating to the Panel's recommendations
4.219 Canada argues that as PROEX payments
constitute prohibited subsidies within the meaning of the SCM Agreement, Brazil must
neither grant nor maintain such payments as stipulated in Article 3.1 of the SCM
Agreement. Brazil must not: (i) enter into new arrangements by which PROEX would be paid;
(ii) begin paying subsidies promised or committed, such as those in respect of aircraft
that have yet to be delivered, including on the conversion of options to firm orders; and
(iii) continue to pay PROEX subsidies.
4.220 In addition to the recommendations sought by
Canada under Paragraphs 3.1 - 3.3 of this report, Canada further submits that Article 4.7
of the SCM Agreement sets out the specific remedy available to it, as well as the grant of
authority to the Panel with respect to the application of Article 3.2. It argues that the
Panel may recommend the withdrawal of subsidies already granted where the circumstances of
the case and the distortions caused by the subsidies in question warrant such a remedy. In
this light, Canada submits that in respect of transactions entered into by EMBRAER and
subsidies granted by Brazil in the period between the composition of the Panel and the
adoption of the Report of the Panel, the Panel should make a specific recommendation, for
the following reason. In a report issued on August 10, 1998, the investment bankers Bear
Stearns gave the following advice to prospective customers of EMBRAER aircraft:
"Finally, cognizant that a WTO decision is eminent [sic]
and may result in the ending of an attractive subsidy, any remaining potential customers
who were considering a future purchase may decide to anticipate orders with EMBRAER over
the 12 months before the ruling is handed down."
4.221 Canada submits that the particular circumstances
of the regional aircraft market require that the Panel fashion a specific remedy in
respect of subsidies granted to induce sales in anticipation of an adverse ruling by the
Panel, as termination of PROEX subsidies after the adoption of the Panel report would not,
in such circumstances, redress the harm that would be caused by such subsidies.
Accordingly, Canada urges the Panel to recommend the withdrawal of subsidies granted
pursuant to transactions entered into in the period following the composition of the Panel
on October 22, 1998.
4.222 Canada submits that "without delay" in
respect of new subsidy arrangements must mean as of the date of adoption of the Report of
the Panel by the DSB. Canada further submits that "without delay" in respect of
existing subsidies or subsidies already granted means as soon as practicable to terminate
the arrangements and, in any event, no later than ninety days after the adoption of the
Report of the Panel by the DSB.
4.223 Brazil submits that Canada's request for
a detailed, specific remedy goes beyond the powers of the Panel to grant even if the Panel
were to agree with Canada on the merits of this dispute. Brazil asserts that Article 4.7
of the Subsidies Agreement specifies that, "If the measure in question is found to be
a prohibited subsidy, the Panel shall recommend that the subsidising Member withdraw the
subsidy without delay." The Panel is authorized to do no more. Specifically, the
means by which any withdrawal is accomplished is for the Member concerned to determine.
Accordingly, the Panel should reject Canada’s request for a specific remedy.
4.224 Responding to the arguments of Brazil and the
third parties in this dispute that its request for specific recommendations go beyond the
mandate of the Panel, Canada made the following two points: First, that at no point
had it asked the Panel to "dictate the means by which a subsidy is to be
withdrawn." Canada did note that the obligation in Article 3.2 was simple: a Member
shall not grant, and shall not maintain, prohibited subsidies. Where such subsidies were
found to exist under a programme, Article 3.2 prohibits the granting of new subsidies and
the maintenance of existing ones. Canada asked the Panel to recommend that Brazil abide by
its explicit obligation in Article 3.2 of the SCM Agreement.
4.225 Second, Canada agrees that it is seeking
recommendations from the Panel that are different from recommendations previously made by
panels under GATT and WTO practice. Canada submits, however, that the present dispute is
very different from any other dispute settlement procedure conducted to date under the
GATT or the WTO Agreement. Canada argued that its position was supported by two
considerations. First, the SCM Agreement as a whole and the dispute settlement procedure
in Article 4 are novel and unique in the WTO. Second, and more to the point, Article 4.7 -
the grant of authority to the Panel to make recommendations - is also new and unique. It
is, indeed, a "special or additional" procedure in the sense of Article 1.2 of
the DSU. For this reason, previous GATT and WTO practice is of limited value as guidance
in interpreting the remedy provisions of Article 4 - except perhaps to draw the a
contrario conclusion that Article 4.7 should not be interpreted to mean the
same thing as Article 19 of the DSU. Article 4.7 provides the Panel with the authority to
recommend the withdrawal of a subsidy, and not simply, as Article 19
provides, to bring a subsidy programme into conformity with the SCM Agreement. As
the authority of the Panel is significantly different from the authority reflected in the
"overwhelming preponderance" of practice prior to the entry into force of the
WTO Agreement, the Panel may exercise this novel authority in a way that would be
different from prevailing GATT and WTO practice (emphasis in original).
V. ARGUMENTS PRESENTED BY THIRD
PARTIES
A. European Communities
5.1 The European Communities submits that
although Brazil has stated that it does not contest the existence of a subsidy in
this case, nor indeed that it is contingent upon export performance, it will nonetheless
be essential for the Panel to precisely define the subsidy at issue. The European
Communities asserts that this has implications for the analysis under Article 27.4 of the
SCM Agreement and, if Brazil’s measure should be considered contrary to Brazil’s
WTO obligations, for the action which will be required of Brazil to implement the
Panel’s recommendations. The European Communities further note that the approach
taken by the Panel in this case will be an important precedent for the interpretation of
Article 1 of the SCM Agreement in future cases.
5.2 The European Communities refer to Article 1 of the
SCM Agreement which defines a subsidy as being a financial contribution by a government
and which confers a benefit. The European Communities observes that payments by Brazil to
effect interest rate equalization are made by means of zero-coupon bonds maturing on
interest payment dates and being worth 3.8 per cent of the capital outstanding.
Canada, the European Communities submit, analyses the payments under these bonds as
"financial contributions" of the kinds mentioned in subparagraph (i) or
alternatively (iv) of Article 1.1(a)(1) of the SCM Agreement. The European Communities
argue that Canada's analysis is incomplete, as it overlooks certain important
considerations.
5.3 The European Communities submits that Canada does
not identify the beneficiary of the subsidy in its legal analysis. The European
Communities argues that the direct recipient of these payments will not necessarily be the
purchaser – it will be the holder of the bonds on maturity, as it appears that the
purchaser may "elect to pay instead a more commercial rate of interest to obtain a
lump-sum reduction in the purchase price through the sale of the bonds in the
market."
5.4 The European Communities submits that although
Canada characterises PROEX payments as "outright grants whether received in a stream
of payments or in a lump sum," it does not draw the consequences of these alternative
"payments" for the case at hand. The European Communities submits that it is
important to do so, as an analysis which considers that PROEX confers a series of
subsidies in the form of payments over 15 years will result in different contributions to
the total "levels of export subsides" in each year compared with an analysis
which treats PROEX as an outright subsidy in the form of a lump sum payment. It will
therefore affect Brazil’s compliance with its obligations under Article 27.4 of the
SCM Agreement to phase out its export subsidies and not increase their level. The two
alternative analyses also have different consequences in the event of a Panel
recommendation to Brazil to "withdraw" the measure and the subsidy under Article
4.7 of the SCM Agreement.
5.5 The European Communities submits that the key to
clarifying this issue lies in carefully considering the notion of "financial
contribution" in Article 1.1 of the SCM Agreement. While in Canada's analysis, this
is assumed to mean "payments," the European Communities submits that Article
1.1(a) of the SCM Agreement deliberately permits a much broader interpretation. For
example a "financial contribution" under Article 1.1(a)(1)(i) of the SCM
Agreement may be not only a "transfer of funds" but also a "potential
direct transfer of funds or liabilities." Also, the other items in the List make
clear that payments need not be immediate but may be simply committed. The European
Communities argues that given the facts of the case, the Brazilian government makes a
financial contribution when it issues, or enters into a commitment to issue, bonds in
support of an export transaction. The facts of this case show that the issue of these
bonds has an immediately realisable value which supports the export sale. This is also the
point in time when the ultimate and intended beneficiary, the Brazilian exporter, obtains
its benefit by concluding an export sale, on the basis of the existence of a financial
incentive without which the sale may not have taken place.
5.6 The European Communities considers that this
interpretation is supported by a consideration of the context of Article 1 of the SCM
Agreement, its object and purpose as well as general principles of law. The European
Communities submit that the relevant elements of context and legal principles which the
European Communities submit should guide the Panel are as follows:
Article 4.7 of the SCM Agreement provides that a finding by the Panel
that PROEX is a prohibited subsidy would require it to recommend "that the subsidy be
withdrawn without delay" and to specify in its recommendation "the time period
in which the measure must be withdrawn."
One purpose of the dispute settlement system is to provide
"security and predictability to the multilateral trading system" (Article 3.2
DSU). The same provision also provides that "recommendations and rulings of the DSB
shall not add to or diminish rights and obligations provided for in the covered
agreements." A corollary of this for the European Communities
is that the dispute settlement system cannot produce retroactive effects. Nothing in the
SCM Agreement demonstrates a contrary intention.
The WTO Agreements, like international law in general, lay down rights
and obligations for the states and international organisations which are its Members. They
do not create rights and obligations for private parties.
It is a general principle of law that legitimate expectations should be
protected.
5.7 The European Communities asserts that these
elements of context and legal principles support its interpretation of Article 1.1 of the
SCM Agreement. An interpretation of the SCM Agreement which would consider the payments
under the bonds to constitute subsidies (rather than the fact of entering into a legal
obligation to make such payments in support of an export sale) could also have as its
result that a scheme could never be considered a subsidy until actual payments are made;
this interpretation would unjustifiably limit the scope of Article 1 of the SCM Agreement
(which specifically refers to "potential transfers of funds"). Moreover, such an
approach would entail that, in case the Panel makes a finding against PROEX, Brazil would
be required to withdraw the subsidy and therefore all subsidies not yet granted, i.e.,
payments could no longer be made under Brazilian government bonds or that a purchaser of
EMBRAER aircraft would have to pay a higher price than that resulting from the contract.
This would be extremely disruptive of the rights of private parties, purchasers, suppliers
and banks. In addition, since in this case the payments are "tied" to specific
contracts and made to a person other than the ultimate or intended beneficiary of the
subsidy, such an interpretation could not contribute to removing the harm of any
prohibited subsidy. It is therefore to be avoided in such a context.
5.8 The European Communities submits that a
recommendation of the Panel to withdraw the subsidy based on the assumption that each
payment made under a PROEX contract constituted a separate financial contribution would
probably be impossible to implement. It would inevitably lead to countermeasures under
Article 4.10 of the SCM Agreement.
5.9 The European Communities considers that this
interpretation is particularly appropriate in the present case of an alleged prohibited
subsidy in the aircraft sector in order to ensure a remedy consistent with the intention
of the SCM Agreement and the general principles of international law. The remedy may not,
of course, be the same in, for instance, countervailing duty cases, where there is a
requirement to establish the existence of a quantifiable amount of subsidy. The European
Communities submits that the issue of when the financial contribution is made and the
benefit granted should not be confused with the issue of the appropriate timing and level
of duties in a countervailing duty investigation; there, the investigating authorities aim
to "capture" the benefit of the subsidy for the purpose of
"offsetting" it through the imposition of countervailing duties and may
therefore take into consideration the actual flow of cash as a reasonable basis for
quantifying the benefit in any given investigation period.
5.10 The European Communities submits, based on the
above analysis, that a financial contribution is made, and a benefit is conferred, when a
binding commitment of PROEX support for an export-contingent sales contract is concluded.
The European Communities is aware of the practice of concluding option contracts for the
purchase of aircraft. These are of many different kinds and the application of the above
principles to them will depend on their precise terms.
5.11 The European Communities submits that if it is
considered that a financial contribution is made, and a benefit is conferred, when a
binding commitment of PROEX support for an export-contingent sales contract is concluded,
then it would not be feasible to require Brazil to "withdraw the subsidy" for
contracts already concluded by EMBRAER with PROEX support, as demanded by Canada. There is
no basis in the Dispute Settlement Understanding or the SCM Agreement for the Panel to
make a recommendation retroactive to 22 October 1998.
5.12 The European Communities confirms its view that
the Brazilian government grants a subsidy when it "issues or enters into a commitment
to issue bonds in support of an export transaction" in its response to the following
question from the Panel: "The European Union argues that under Article 1 of the SCM
Agreement, the Brazilian government grants a subsidy when it 'issues or enters into a
commitment to issue bonds in support of an export transaction' as opposed to when the
payments are actually made. Would such a finding limit the impact of a panel
recommendation, as only future commitments with the support of PROEX would be affected?
Would the view of the European Union be affected if a disproportionate number of contracts
were concluded between the date of establishment of the panel and when the panel/Appellate
Body report is adopted?"
"PROEX payments, [which] are made to the lending financial
institution in the form of non-interest bearing National Treasury Bonds, … may either
be redeemed on a semi-annual basis for the duration of the financing period or may be sold
on the market and the proceeds paid to the purchaser as a lump sum. This clearly
demonstrates that the subsidy is granted at the moment the PROEX commitment is made by
Brazil in connection with the binding purchase contract for an aircraft to which it is
tied; the subsequent "use" of the subsidy is left to the discretion of the
purchaser…As a result in these specific circumstances (contract-specific subsidies),
a Panel recommendation cannot affect subsidies already granted without disrupting the
rights of private parties, purchasers, suppliers and banks…[A] Panel recommendation
in this case can only relate to definitive PROEX commitments made after the adoption of a
Report by the Dispute Settlement Body. Accordingly, it will not apply to PROEX commitments
made on aircraft sales contracts which are binding before the report is adopted…The
European Communities realises that this position means that, if the Panel finds the PROEX
subsidies to be prohibited, this will mean that there is no "remedy" against
certain past subsidies. However, this is an unavoidable consequence of the present rules
and must be accepted. Canada's potential remedy in the present case can only be to have
the PROEX scheme modified or terminated for the future…The absence of remedy for past
and consummated violations is a well-known feature of the GATT/WTO system. First, it is
inherent in the principle that DSB rulings do not have retroactive effect. Second, it is
established and accepted that it can lead in some cases to there being no remedy at all
for the complaining party. [The decision ]…of the Panel in Norway - Procurement of
Toll Collection Equipment for the City of Trondheim 168,… [a case under the Agreement on Government
Procurement] is still. pertinent…[There the Panel] did not consider it appropriate
for it to recommend that Norway negotiate a mutually satisfactory solution with the United
States that took into account the lost opportunities of the United States companies in the
procurement or that, in the event that such a negotiation did not yield a mutually
satisfactory result, the Committee be prepared to authorise the United States to withdraw
benefits under the Agreement from Norway with respect to opportunities to bid of equal
value to the Trondheim contract."
5.13 The European Communities disagrees with Brazil's a
contrario interpretation of the item (k) of the Illustrative List. If this
interpretation were to be accepted, it could change Annex I of the SCM Agreement from an
illustrative to an exhaustive list of export subsidies. The European Communities
submits that there is a clear contrast between the first and second paragraphs of item (k)
of the Illustrative List. The first paragraph, the only one on which Brazil relies,
declares to be an export subsidy certain measures "in so far as they are used to
secure a material advantage in the field of export credit terms." This defines the
scope of the prohibition; it does not derogate from Article 3.1(a). The second paragraph
provides that export credit practices within certain defined limits "shall not be
considered an export subsidy prohibited by this Agreement." The second paragraph is
covered by footnote 5; the first paragraph is not.
5.14 The European Communities submits that the OECD
Guidelines on Officially Supported Export Credits clearly satisfy the requirements of
paragraph 2 of item (k) of Annex I of the SCM Agreement. All export credit activities
which conform to the OECD Guidelines, are not prohibited under Article 3.1 or any other
provision of the SCM Agreement. Thus, for purposes of the SCM Agreement, paragraph 2 of
item (k) of the SCM Agreement creates a "safe haven" for Member export credit
practices which conform to the OECD Guidelines. The European Communities submits that the
OECD guidelines place important restrictions on the ability of member countries to
subsidise. Measures which effectively reduce rates below those of the Arrangement, fall
outside the "safe haven" and are subject to the full rigours of the SCM
Agreement. If they constitute a subsidy and are export contingent, they are prohibited.
5.15 In response to a question
169 from the Panel concerning the scope of item (k) of
the Illustrative List of Export Subsidies, the European Communities reiterated its view
that Brazil's interpretation of item (k) of the Illustrative List was unjustified and not
supported by the text of the SCM Agreement:
"[T]he first paragraph of Annex I(k) to the…[SCM Agreement
should be seen] to be defining an illustrative prohibition (i.e., not exhaustively
defining the scope of Article 3.1 (a) in this sector) and that the second paragraph by
contrast contained an exception, not only from the first paragraph but from the
whole…[SCM Agreement] (the OECD "safe haven")…Since the first
paragraph contains an illustrative prohibition, it does not much matter whether the
term "in the field of export credits" is limited to interest rates and
transaction costs. The same prohibition would apply, if not under this paragraph, then
under Article 3.1(a), to other elements of a transaction than interest rates and
transaction costs that have the same effect as a subsidy (in other words, bringing the
effective rate below the applicable Arrangement rate)…Of the two benchmarks proposed
by the question, the first would lead to the whole of the PROEX being considered contrary
to the first paragraph of item (k) since PROEX operates to reduce the commercial interest
rate available to the transaction by 3.8 per cent. The second benchmark would lead to
PROEX being contrary to that paragraph only when the commercial interest rate available to
the transaction exceeds the OECD Arrangement by less than 3.8 per cent…The
[European Communities] considers that the context of this paragraph (and in particular the
second paragraph of item (k) which even more clearly reflects the intention that export
credits should not distort competition) pleads in favour of the material advantage being
assessed by comparison with the generally available or OECD arrangement rate."
5.16 The European Communities submits that while it
recognises that subsidies may be important in the economic development of developing
countries and does not wish to impose any new obligations on developing countries in this
respect, Article 27.4 of the SCM Agreement should not be interpreted to exempt developing
countries unconditionally from the disciplines of Article 3.1 of the SCM Agreement.
Article 27.4 imposes a number of conditions which should be respected. These are that
export subsidies shall be (a) phased out during this period, preferably in a progressive
manner; (b) they should not be increased and (c) be eliminated earlier if the use of such
export subsidies is inconsistent with the country’s development needs. Since Article
27.4 is a conditional exception to a basic prohibition of the SCM Agreement, these
conditions should be strictly adhered to if a developing country Member were to avail
itself of the exemption provided by the Article.
5.17 With respect to the relationship between Articles
3 and 27 of the SCM Agreement, the European Communities in a response to questions from
the Panel stated:
"[There seems] to be no basis to consider that Article 27 is lex
specialis to Article 3.1(a), as this term is normally understood. A lex specialis
would contain a complete set of rules. Article 27 does not. It contains certain exceptions
or derogations and the conditions for their application. The rules which apply where the
conditions are not met, are not found in Article 27, but in other provisions of the
Agreement…If the Panel were to agree with Brazil that Article 27 is lex specialis,
the burden of proof would be borne by Canada. If, on the other hand, Article 27 is
considered to be an exception, it would be for Brazil, as the party invoking the
exception, to prove that the conditions of paragraph 4 are fulfilled. Since Article 27.4
is a conditional exception to a basic prohibition of the [SCM Agreement], these conditions
should be strictly adhered to…[T]his conclusion is confirmed by the corresponding
procedural exemption contained in Article 27.7. This is made subject to the same
conditions as the substantive exception…Indeed, since the Parties agreed to the
applicability of Article 4 of the [SCM Agreement], they have implicitly assumed that
Article 27…is not lex specialis. Otherwise Brazil would presumably have
objected to the application of the procedure in Article 4 of the [SCM Agreement], at least
until such time as Canada had demonstrated that the conditions of paragraphs 2 to 5 of
Article 27 were not fulfilled."
B. United States
5.18 The United States submits that Brazil's
claim that it could provide export subsidies to counter non-export credit subsidies
offered by another Member has no basis in WTO law, neither is it supported by a standard Vienna
Convention analysis. The United States claims that Brazil’s approach is
incorrect, and, perhaps recognising the weakness of its position, Brazil does not even
argue that its approach is supported by such an analysis. The ordinary meaning of the
phrase "to secure a material advantage in the field of export credit terms" does
not support Brazil’s position. The phrase refers to the "field of export credit
terms" and not to the "field of subsidies in general." Moreover, the United
States is not aware of anything in the context or object and purpose of the SCM Agreement
that would warrant departing from the ordinary meaning of the phrase in question.
5.19 In a response to a question 170 from the Panel regarding which
benchmark should be used to determine whether PROEX secures material advantage in the
field of export credit terms, the United States stated that:
"Within the context of the OECD Arrangement on Guidelines for
Officially Supported Export Credits (the Arrangement), the provision of export credit
terms outside the boundaries of the Arrangement is considered to imbalance the playing
field (thereby generating the possibility of material advantage) and, therefore, to be
subject to compensatory actions (e.g., matching). Hence, in the context of this question,
the relevant reference point for comparison in evaluating the possible existence of
material advantage are the terms available through the Arrangement (e.g., CIRR levels and
repayment limits).
5.20 The United States submits that the following
specific recommendations requested by Canada go far beyond the mandate of the Panel:
- Brazil shall not grant new subsidies under PROEX, including subsidies
promised or committed, but not yet granted, on regional aircraft not yet delivered;
- Brazil shall no longer maintain existing subsidies under PROEX and
must terminate such subsidies no later than three months after the adoption of the Report
of the Panel by the DSB; and
- Brazil shall withdraw without delay PROEX subsidies granted pursuant
to transactions entered into following the composition of the Panel on October 22,
1998.
The United States argues not only are they inconsistent with the
express terms of Article 4.7 of the SCM Agreement, but also the Understanding on Rules and
Procedures Governing the Settlement of Disputes ("DSU"), and established GATT
1947 and WTO practice. Consequently, should the Panel agree with Canada on the merits, it
should reject the requested remedies. The Panel should, instead, make a general
recommendation that Brazil withdraw its PROEX subsidies without delay, and leave it to
Brazil, in the first instance, to determine how such a withdrawal can best be
accomplished. The United States notes, however, that under Article 4.7 of the SCM
Agreement, the Panel also must specify the time period within which the subsidies must be
withdrawn.
"Continue on to Arguments Presented by Third Parties, Section
5.21"
165 Brazil's
Second Written Submission, para. 20.
166 United States
- Measure Affecting Imports of Woven Wool Shirts and Blouses from India, WT/DS33/AB/R,
report of the Appellate Body adopted on 23 May 1997.
167 The question
posed by the Panel was as follows: "In its second submission..., Brazil indicated
that in its view Article 27 presumes that the development needs of developing country
Member require subsidies, but states that it is ready to provide the panel with support
for the position that PROEX is consistent with Brazil's development needs if the panel so
requests. In paragraph 16 of its oral statement to the second meeting of the panel, Brazil
identified development difficulties facing it but did not explicity explain the link
between PROEX interest rate equalisation and those development difficulties. Could Brazil
please elaborate?"
168 See,
GPR/DS.2/R, adopted on 13 May 1992, paras. 4.21, 4.24 and 4.26.
169 The question
posed by the Panel was as follows: "It could be argued that the phrase "in the
field of export credits"as used in item (k) of the Annex I of the SCM Agreement is
limited to the interest rates and other transaction costs. Assuming for the sake of
argument that this view is correct, what would be the appropriate benchmark for a
comparison? Specifically, should the export credit terms of a transaction supported by
PROEX interest rate equalization be compared to the export credit terms that would be
available to that purchaser of EMBRAER aircraft on the market for the purchase of those
aircraft if the PROEX interest rate equalization were not available for the transaction,
or should it relate to the export credit terms available (including through official
financing at OECD consensus rates by a Participant to the OECD Arrangement ) to the
purchaser if it purchased a competing aircraft".
170 The same
question was posed to the European Communities; ibid.
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