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Brazil-Export Financing Programme for Aircraft

IV. Main Arguments of the Parties, Section 5.21 (continued)

5.21 The United States argues that the specific recommendations ¹⁷¹ requested by Canada go far beyond the types of recommendations made by the overwhelming preponderance of prior GATT 1947 and WTO Panels. In virtually every case in which a Panel has found a measure to be inconsistent with a GATT obligation, Panels have issued the general recommendation that the country "bring its measures . . . into conformity with GATT." ¹⁷² This well-established practice is codified in Article 19.1 of the DSU, which provides: "Where a Panel or the Appellate Body concludes that a measure is inconsistent with a covered agreement, it shall recommend that the Member concerned bring the measure into conformity with that agreement." Indeed, in the first case to work its way through the new dispute settlement system, the recommendations of both the Panel and the Appellate Body carefully adhered to Article 19.1. ¹⁷³ Moreover, in the first WTO dispute to focus on the propriety of specific recommendations, the Panel found that Article 19.1 precluded such recommendations. In rejecting a request by Mexico for specific recommendations, the Panel in the Guatemala - Cement case stated:

"In our view, this language clearly establishes a distinction between the recommendation of a Panel, and the means by which that recommendation is to be implemented. The former is governed by Article 19.1, and is limited to a particular form. The latter may be suggested by a Panel, but the choice of means is decided, in the first instance, by the Member concerned. Of course, it is possible that the prevailing Member in the dispute may not be satisfied with the Member's implementation. The DSU recognises this possibility, and provides for recourse to the dispute settlement procedures to resolve any such disagreements. ¹⁷⁴(emphasis in original)

5.22 The United States argues that the requirement that Panels make general recommendations reflects the purpose and role of dispute settlement in the WTO, and before it the GATT 1947. Article 3.4 of the DSU provides that "[r]ecommendations and rulings made by the DSB shall be aimed at achieving a satisfactory settlement of the matter," and Article 3.7 provides that "[a] solution mutually acceptable to the parties to a dispute . . . is clearly to be preferred." To this end, Article 11 of the DSU directs Panels to "consult regularly with the parties to the dispute and give them adequate opportunity to develop a mutually satisfactory solution." Ideally, a mutually agreed solution will be achieved before a Panel issues its report. However, if this does not occur, a general Panel recommendation that directs a party to conform with its obligations still leaves parties with the necessary room to cooperate in arriving at a mutually agreed solution. Indeed, a Member generally has many options available to it to bring a measure into conformity with its WTO obligations. A Panel cannot and should not prejudge by its recommendation the solution to be arrived at by the parties to the dispute after the DSB adopts the Panel’s report.

5.23 The United States further notes that the requirement that panels issue general recommendations comports with the nature of a Panel’s expertise, which lies in the interpretation of covered agreements. Panels generally lack expertise in the domestic law of a defending party. ¹⁷⁵ Thus, while it is appropriate for a Panel to determine in a particular case that a Member’s legislation was applied in a manner inconsistent with that country’s obligations under a WTO agreement, it is not appropriate for a Panel to dictate which of the available options a party must take to bring its actions into conformity with its international obligations. The compliance process under the DSU makes the precise manner of implementation a matter to be determined in the first instance by the Member concerned, subject to limited rights to compensation or retaliation by parties that have successfully invoked the dispute settlement procedures. In Article 19 of the DSU, the drafters precluded a Panel from prejudging the outcome of this process in their recommendations.

5.24 The United States observes that the preceding analysis is not affected by the existence of Article 4.7 of the SCM Agreement, a provision which, pursuant to Article 1.2 and Appendix 2 of the DSU, is a special or additional rule and procedure. While Article 4.7 prescribes a recommendation (withdrawal of the subsidy) that is different from the recommendation prescribed in Article 19.1 of the DSU (bring the measure into conformity), there is nothing in the text, context, or object and purpose of Article 4.7 indicating that Panels have greater freedom in a prohibited subsidies dispute to dictate the means by which a subsidy is to be withdrawn. Indeed, the text of Article 4.7 suggests exactly the opposite. In Article 4.7, the drafters expressly granted Panels the authority to recommend the timing of withdrawal, but did not confer a similar express grant of authority on Panels to recommend the means of withdrawal. This suggests that the drafters consciously refrained from granting Panels the authority to recommend, in the first instance, the means of withdrawal.

5.25 The United States submits that in the first subsidies case to work its way through the WTO dispute settlement system, the Panel declined to make a specific recommendation. In the Indonesia - Autos case, the United States and the European Communities alleged that subsidies provided by Indonesia caused serious prejudice to their respective interests. ¹⁷⁶ Article 7.8 of the SCM Agreement, which is a special or additional rule and procedure under Article 1.2 and Appendix 2 of the DSU, essentially provides that where a complainant proves its case of serious prejudice, the subsidising Member "shall take appropriate steps to remove the adverse effects or shall withdraw the subsidy." In Indonesia - Autos, the Panel found that the European Communities had proved its serious prejudice case, but declined to specify the means by which Indonesia had to eliminate the adverse effects or withdraw the subsidies. ¹⁷⁷

5.26 The United States submits that the issue as to when the Brazilian government grants a subsidy is not that "important" in this particular case. In a response to a question ¹⁷⁸ posed by the Panel, it stated that:

"The United States does not…contest [the argument of the European Communities regarding] the timing of this particular subsidy…[It ] does not believe, [however], that the timing of the subsidy in this case is an important issue. Here, the United States simply notes that there is a difference between the "timing" and the "duration" of a subsidy. The timing of a subsidy deals with the question of how long a subsidy lasts, and would seem to be the more relevant issue for purposes of the instant dispute…[T]he United States does disagree with the [European Communities] regarding the conclusions to be drawn from this fact. More specifically, the United States does not believe that there is anything in the SCM Agreement in particular, or in public international law in general, that would preclude repayment of a subsidy by the recipient as one means of withdrawing a subsidy within the meaning of Article 4.7 of the SCM Agreement. The point made by the United States in its third-party submission was that it is not for the Panel to specify the means by which a subsidy is to be withdrawn. The United States agrees with the proposition that remedies in the WTO dispute settlement system are not retroactive. However, in the case of a subsidy that is properly allocated over several years (as appears to be the case with respect to PROEX subsidies in question), the withdrawal of that portion of the subsidy allocated to future time periods would not constitute a retroactive remedy or retroactive implementation. Instead, it would constitute prospective implementation based on a recognition of the distinction between the measure conferring a subsidy and the subsidy itself. In this regard, the…[European Communities] focuses on the timing of the subsidy, but ignores the duration of the subsidy. While a subsidy comes into existence at a particular point in time, the benefit of the subsidy can extend over a period of years, depending on the nature of the subsidy in question…[T]he argument that repayment (or a cessation of future payments on PROEX government bonds) would be disruptive to private parties proves too much. The United States submits that it is the rare case in which the behaviour of private parties is not disrupted when WTO dispute settlement results in a recommendation and ruling that a Member withdraw a measure on which private parties have come to rely or on which they have based their plans. Moreover, it is difficult to see how anyone, whether in the private or governmental sector, could have legitimate expectations regarding subsidies found to be prohibited by the WTO. The United States also sees no merit to the [European Communities] distinction between the remedy available in a WTO dispute and the remedy available in a countervailing duty case, and notes that the EU does not cite anything in the text of the SCM Agreement to support this distinction. Both types of cases provide a means for offsetting the artificial benefit bestowed on recipients of a subsidy. In a countervailing duty case, this takes the form of an offsetting duty (or an undertaking which, inter alia, may require the elimination of the subsidy). In a WTO dispute, the remedy may take the form of a withdrawal of the subsidy (and, thus, the benefit inherent in the subsidy). "

5.27 The United States further maintains that the interpretation of the European Communities would "eviscerate the utility of WTO dispute settlement as a vehicle for addressing trade distortive subsidies. As an example, assume that Country X provides a $1 billion grant to Company Y. The purpose of the grant is to allow Company Y to construct a facility that will produce widgets for export. A WTO panel finds that the grant is a prohibited subsidy, but at the time when the DSB adopts the panel report, Country X already has disbursed the $1 billion to Company Y and Company Y already has contracted for construction of the facility… as the United States understands the position of the [European Communities], the best remedy that could come from this case is that Country X could not provide another subsidy to Company Y. However, widgets produced by Company Y would continue to be subsidized by virtue of the $1 billion grant."

5.28 The United States submits that such a result would be absurd, which could neither be justified "by the terms of the SCM Agreement, the DSU, or public international law…[It] would render the increased disciplines of the SCM Agreement meaningless. Instead, the appropriate outcome would be a withdrawal of that portion of the $1 billion grant allocated to future time-period. How such a withdrawal would occur would depend on the domestic law of Country X. If a withdrawal was not permissible under the domestic law, then compensation or countermeasures would be appropriate".

5.29 In a response to a question from the Panel as to whether it agreed with the Brazilian argument that "because Article 27 is lex specialis to Article 3 of the SCM Agreement, Article 3 does not apply to developing countries. Therefore, it is not possible for developing countries to act in a manner inconsistent with Article 3", the United States stated that:

"As a general matter, the United States does not see any basis for the above-quoted argument…Article 27.2(b), by its very terms, excuses a developing country Member, such as Brazil, from the prohibition in Article 3.1(a) only if it complies with Article 27.4. The United States disagrees with the proposition that the general legal principle of lex specialis (assuming it applies to this dispute at all), could override the plain text of a treaty."

Relying on the ruling of the Appellate Body in United States - Measure Affecting Imports of Woven Wool Shirts and Blouses from India ¹⁷⁹, the United States was of the view that since "the relevant provisions of Article 27…[operated] as affirmative defences against the prohibition in Article 3.1(a), the initial burden of proof was on Brazil.

6.1 On 25 February 1999 both parties submitted written requests for the Panel to review precise aspects of the interim report, and on 3 March 1999 each party submitted written comments regarding the other's request. Neither party requested a further meeting with the Panel.

6.2 Canada notes that, in paragraph 7.18 and in footnotes 194 and 195 of the interim report (footnotes 197 and 198 of this report) , we considered but failed to make findings on two legal issues related to Brazil's affirmative defense based on the first paragraph of item (k) of the Illustrative List of Export Subsidies. In Canada's view, the principle of judicial economy does not properly apply to these issues, and the Panel should have resolved them. Canada states that, as the Appellate Body observed in Australia – Salmon ¹⁸⁰,the aim of dispute settlement, according to Article 3.7 of the DSU, is to "secure a positive solution to the dispute." Accordingly,

"A Panel has to address those claims on which a finding is necessary in order to enable the DSB to make sufficiently precise recommendations and rulings so as to allow for prompt compliance by a Member with those recommendations and rulings...." ¹⁸¹

6.3 Canada contends that Brazil has argued that the first paragraph of item (k) is an exception that provides cover for PROEX payments. As it stands, the Interim Report concludes that PROEX, an admitted export subsidy, is applied in such a way that it would not benefit from the "material advantage" clause of this item. The import of the Panel's findings is that Brazil could not bring PROEX payments into compliance by, for example, simply adjusting the rate of subsidization and then arguing that these payments no longer "secure a material advantage". Canada considers that the Panel should give this point greater precision by finding that the first paragraph of item (k) cannot be used as an exception at all, and that in any event, PROEX payments are not "payments" within the meaning of item (k).

6.4 In paragraph 7.18 of our interim report, we found that Brazil's "material advantage" defense under the first paragraph of item (k) could succeed only if Brazil prevailed on three legal issues. We concluded that PROEX payments were "used to secure a material advantage in the field of export credit terms", and declined to reach the other two legal issues presented with respect to that defense. In considering Canada's argument that we should address the remaining legal issues, we note that, in Australia – Salmon, the Appellate Body addressed the circumstances under which a panel might or might not address certain claims raised by a complainant. In this case, however, the question is whether we should have reached all legal issues related to a particular claim. In any event, Canada has not convinced us that, in this case, deciding the remaining legal issues would provide any further guidance with respect to compliance with the recommendations and rulings of the DSB. Thus, recalling that the purpose of the dispute settlement process is to "secure a positive solution to the dispute", and because in our view issues of legal interpretation are best addressed in concrete cases where they are necessary to resolve the case at hand, we decline to take up Canada's invitation to resolve the two legal issues in question.

6.5 Brazil argues that the appropriate time-period to withdraw the subsidy noted in paragraph 8.5 of the Report should be seven and one-half months. In Brazil's view, since Article 4.7 of the SCM Agreement does not specify a specific time-period, the time-period set forth in Article 21.3(c) of the DSU should be halved pursuant to Article 4.12 of the SCM Agreement. Brazil further contends that no evidence has been presented in this case to justify departing from the seven and one-half month guideline. Brazil further notes that PROEX was created by the Brazilian Congress, and that any changes therefore must also be enacted by Congress. It is therefore impracticable for Brazil to comply with the Panel's recommendation within 90 days. Finally, Brazil noted that the world financial crisis had had a significant and detrimental effect on Brazil. Brazil noted that, in Indonesia – Autos, the arbitrator allocated Indonesia an additional period of six months over and above the time required for the completion of its domestic rule-making process pursuant to Article 21.2 of the DSU. ¹⁸²

6.6 Canada responds that, at issue in this dispute is not the PROEX programme as such, but the way that programme is applied to the export sales of regional aircraft. Brazil can comply with the recommendation of the Panel simply by stopping the payment of such subsidies on exported regional aircraft delivered after the date of adoption of the Panel Report. Because neither the annulled PROEX legislation nor the monthly Presidential decrees that currently maintain the programme are mandatory, there is no legal requirement for Congressional action before the payment of PROEX export subsidies – that is, the issuance of NTN-1 bonds – on the delivery of exported aircraft is stopped. Canada further argues that Article 4.12 applies only to the "conduct of such disputes", not to implementation, and that the "reasonable period of time" standard set forth in Article 21.3(c) is not the benchmark of "without delay" for the purposes of Article 4.7 of the SCM Agreement. Finally, Canada argues that it is not apparent how Brazil's mention of its status as a developing country Member or mention of its current financial crisis in any way affects the period of time for compliance with the Panel's recommendation.

6.7 We decline Brazil's request to modify the time-period set forth in paragraph 8.5. Assuming that the time-period set forth in Article 21.3(c) of the DSU, as halved pursuant to Article 4.12 of the SCM Agreement, is applicable to disputes under Article 4 of the SCM Agreement -- an issue we do not decide – Article 21.3(c) of the DSU merely states that the "reasonable period of time" to implement panel or Appellate Body recommendations "should not exceed" 15 months. In this case, and reading that provision in conjunction with the requirement of Article 4.7 that the subsidy be withdrawn "without delay", we do not consider that a seven and one-half month time-period would be appropriate. We note that, while PROEX was created by legislation, it is currently maintained in force through Provisional Measures issued by the Brazilian government on a monthly basis. In any event, we recall Canada's view that implementation does not in the first instance require the modification of the PROEX interest rate equalization scheme itself, but merely a cessation in the issuance of new bonds upon exportation of Brazilian regional aircraft. Nor do we consider that, in the particular circumstances of this case, Article 21.2 of the DSU would warrant stretching the ordinary meaning of the phrase "without delay" to provide for an implementation period of seven and one-half months. Accordingly, we have not modified the time-period specified for withdrawal of the measure.

6.8 Canada states that it is implicit in our findings and conclusions that all of the conditions of Article 27 have to be met before a developing country Member may benefit from Article 27, and asks that we state this explicitly. We have modified paragraphs 7.57 and 8.1(c) in response to Canada's request. We have also clarified our findings through modifications to paragraphs 8.1(a), 8.1(b) and footnote 198. Finally, we have made other minor modifications of a typographical nature, including those in paragraphs 7.13, 7.30, 7.34, 7.53, 7.56, 7.68, 7.71, 7.72, 7.73, 7.75 and footnotes 198, 200, 215, 220, 231, and 241.

A. The measures at issue

7.1. In its request for establishment of a panel (WT/DS46/5), Canada asks that the Panel "consider and find that export subsidies under PROEX are inconsistent with Article 3 of the SCM Agreement." In its first submission to the Panel, Canada clarifies that "[a]t issue in this dispute is whether the Programa de Financiamento ás Exportações (PROEX) . . . confers export subsidies on sales of Brazilian regional aircraft that are prohibited under Article 3 of the . . . SCM Agreement" ¹⁸³ , and asks the Panel to find that "payments made under the 'Interest Equalization' component of PROEX on exported Brazilian regional aircraft" constitute prohibited subsidies ¹⁸⁴ . In its second submission, Canada states that "the 'matter' subject to its request for a Panel was PROEX and the export subsidies paid under that programme to civil aircraft. This was the same 'prohibited subsidy' on which Canada had requested consultations." ¹⁸⁵ A few paragraphs later, Canada states that "it is Canada's submission that export subsidies paid under PROEX, the Brazilian export subsidy programme, on all exported Brazilian regional aircraft, in whatever amount and regardless of the specific legislative instrument that underlies the programme, are prohibited by Article 3 and must be withdrawn. It is this practice that is the subject of Canada's challenge." ¹⁸⁶

7.2. We note that there is a certain lack of clarity regarding the precise measures being challenged by Canada. We do not understand Canada to be alleging that the interest rate equalization component of the PROEX programme per se is the prohibited measure, because Canada does not seek a finding or recommendation with respect to the programme itself. ¹⁸⁷ In fact, it limits itself to challenging PROEX payments relating to the particular sector of regional aircraft. ¹⁸⁸ On the other hand, neither is Canada restricting its challenge to a particular specified payment or payments already made pursuant to the interest rate equalization component of PROEX. To the contrary, although Canada identifies specific transactions with respect to which it considers that PROEX payments have been or will be made, Canada is arguing that all PROEX payments, to the extent they relate to exported Brazilian regional aircraft, including payments to be made in the future pursuant to the PROEX interest rate equalization scheme, are prohibited subsidies. Thus, we understand Canada to be challenging not only specific payments, but more generally the practice involving PROEX payments relating to exported Brazilian regional aircraft (which we will hereafter refer to as "PROEX payments"). In order to analyse this contention, we are required to go beyond an examination of individual PROEX payments that have been identified and look more generally at the nature and operation of the PROEX interest rate equalization scheme which governs the payment of the alleged export subsidies. ¹⁸⁹

7.3. Because Canada is challenging not only specific PROEX payments relating to regional aircraft, but more generally the practice of providing PROEX payments, we do not and could not have before us a comprehensive list of the transactions supported by PROEX interest rate equalization which are challenged by Canada. We note however that Brazil has provided a list of post 1 January 1995 transactions supported by PROEX interest rate equalization relating to two Brazilian regional aircraft, the EMB-120 and the ERJ-145, and Canada has requested that we make specific findings regarding PROEX payments relating to these transactions. The transactions relating to the EMB-120 involve Great Lakes Airlines, Rio Sul, Skywest and "others", while those relating to the ERJ-145 involve American Eagle, British Regional, City Airlines, Continental Express, Luxair, Portugalia, Regional, Rio Sul, Siv Am, Trans States, Wexford and "other". Thus, the payments subject to challenge in this dispute include, but are not limited to, PROEX payments made or to be made with respect to the transactions identified above.

B. Preliminary objection by Brazil

7.4. Canada's request for establishment of a panel (WT/DS46/5) contains a list of provisional measures, laws, decrees and other legal instruments which govern the operation of the PROEX programme. Brazil objects to the Panel's consideration of certain of these "measures" on the grounds that they were enacted or implemented subsequent to the last consultations between the parties and, as a result, were not and could not have been the subject of consultations. Brazil contends that Article 6.2 of the DSU requires that consultations with respect to the specific measures at issue must have taken place in order for a measure to be within a panel's terms of reference. Brazil further argues that Article 4 of the DSU requires that parties consult regarding a matter before resorting to a panel with respect to that matter.

7.5. Canada acknowledges that the legal instruments in question did not exist at the time consultations were held and thus were not themselves the subject of consultations. It contends, however, that the "matter" referred to in Canada's request for establishment of a panel – the payment of export subsidies under PROEX – was the same prohibited subsidy with respect to which the parties held consultations, in the sense that that matter is directly connected to the prohibited subsidy subject to the consultations and flows directly from it. Canada further notes that the Provisional Measure underlying PROEX must be renewed every month, and that Brazil's argument, if accepted, would bar examination of PROEX by a WTO dispute settlement panel altogether.

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"Continue on to Findings, Section 7.6"

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¹⁷¹ By "specific" recommendations, the United States means a recommendation that requires a party to take a particular, specific action in order to cure a WTO-inconsistency found by a Panel.

¹⁷² See for example, Canada - Measures Affecting Exports of Unprocessed Herring and Salmon, L/6268, adopted 22 March 1988, BISD 35S/98, 115, para. 5.1. The United States noted that the number of panel reports in which panels have made recommendations using similar language is well in excess of 100.

¹⁷³ In its report on United states - Standards for Reformulated and Conventional Gasoline, adopted 20 May 1996, WT/DS2/AB/R, the Appellate Body recommended "that the Dispute Sttlement Body   request the United States to bring the baseline establishment rules contained in Part 80 of Title 40 of the Code of Federal Regulations into conformity with it obligations under the General Agreement." The panel in that case issued a virtually identical recommendation. WT/DS2/R, para 8.2, adopted 20 May 1996.

¹⁷⁴ Guatemala - Anti-Dumping Investigation Regarding Portland Cement from Mexico, WT/DS60/R, report of the Panel circulated on 19 June 1998, para. 8.3, reversed on other grounds, WT/DS60/AB/R, report of the Appellate Body adopted on 25 November 1998.

¹⁷⁵ See Article 8.3 of the DSU, which provides that citizens of members whose governments are parties to a dispute normally shall not serve on a Panle concerned with that dispute, absent agreement by the parties.

¹⁷⁶ Indonesia - Certain Measures Affecting tha Automobile Industry, WT/DS54/R, report of the Panel adopted 23 July 1998, paras. 3.3 (e) and 3.4 (h).

¹⁷⁷ Id., paras. 15.3-15.4.

¹⁷⁸ The same question was posed to the European Communities: see, para. 5.12 of this report.

¹⁷⁹ Supra footnote 142.

¹⁸⁰ Australia - Measures Affecting the Importation of Salmon, WT/DS18/AB/R, Report of the Appellate Body on 6 November 1998.

¹⁸¹ Id., para. 223.

¹⁸² Indonesia - Certain Measures Affecting the Automobile Industry, Award of the Arbitrator, WT/DS64/15, WT/DS55/14, WT/DS59/13, WT/DS64/12, PARA. 24.

¹⁸³ Canada first submission, paragraph 1.

¹⁸⁴ Canada first submission, paragraph 2. Although Canada's request for establishment of a panel also identifies "export financing under PROEX", i.e., PROEX direct export financing, Canada states that it "does not challenge PROEX Financing in this dispute."Canada first submission, paragraph 30.

¹⁸⁵ Canada second submission, paragraph 19.

¹⁸⁶ Canada second submission, paragraph 23.

¹⁸⁷ Because we understand that Canada has not challenged the PROEX programme per se, we need not address the issue whether the PROEX programme may be subject to challenge under Article 4 of the SCM Agreement. We note however that in our view the effective operation of the SCM Agreement requires that a party be able in some manner to obtain prospective discipline on the provision of subsidies in cases where it can be established in advance, based upon the legal framework governing the provision of those subsidies , that they would be inconsistent with Article 3 of the SCM Agreement. Otherwise, the SCM Agreement's prohibitions could not be invoked until a particular prohibited subsidy had actually been paid. This would be tantamount to the proverbial closing of the barn door after the cows have gone.

¹⁸⁸ In its request for findings, Canada sometimes refers to "civil aircraft" and at other times refers to "regional aircraft". Judging from the totality of Canada's submissions, however, we conclude that Canada is challenging PROEX interest rate equalization payments only with respect to regional aircraft. Canada defines the regional aircraft market as consisting of commercial aircraft with 20-90 seats, whether turboprop or jet. On the basis or the evidence before us, it appears that three EMBRAER aircraft --the ERJ-145, the ERJ-135 and the EMB-120 -- fall within this definition.

¹⁸⁹As discussed in the following section of these findings, there are wide range of legislative and regulatory instruments which collectively govern the operation of the PROEX programme. As these provisions have changed over time, certain aspects of the operation of PROEX interest rate equalization have also changed. In assesing the consistency of PROEX payments with the SCM Agreement, we will examine the operation of the regime up to and as of the date of the request for establishment of a panel by Canada.

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