7.6 The objections raised by
Brazil present us with an issue regarding the relationship between the matter before a
panel as defined by its terms of reference and the matter consulted upon. Specifically, we
must consider whether and to what extent a panel is limited in its consideration of the
matter identified in its terms of reference by the scope of the matter with respect to
which consultations were held. In considering this question in this dispute, we must apply
not only the relevant provisions of the DSU, but also the special or additional dispute
settlement provisions found in Article 4.2 through 4.12 of the SCM Agreement, keeping in
mind the injunction of Article 1.2 of the DSU that, "[t]o the extent there is a
difference between the rules and procedures of the [DSU] and the special or additional
rules and procedures set forth in Appendix 2, the special or additional rules and
procedures in Appendix 2 shall prevail."
7.7. In examining this issue, we first recall that our
terms of reference are the standard terms of reference provided for in Article 7.1 of the
DSU. Under those terms of reference, we are required to examine the "matter referred
to the DSB" by Canada in its request for establishment (WT/DS46/5). As the Appellate
Body explained in Guatemala – Anti-Dumping Investigation Regarding Portland Cement
from Mexico 190 "the 'matter
referred to the DSB', therefore, consists of two elements: the specific measures at
issue and the legal basis of the complaint (or the claims)"(emphasis in
original). The Appellate Body derived the meaning of the term "matter" in
Article 7 of the DSU from Article 6.2 of the DSU, which requires that a request for
establishment of a panel "identify the specific measures at issue and provide a brief
summary of the legal basis of the complaint.…" In this case, the measures
alleged by Canada in its request for establishment of a panel to be inconsistent with the
SCM Agreement are "export subsidies under PROEX." Thus, although Canada in its
request for establishment of a panel identifies a list of legal instruments which it
refers to as "measures", Canada is not, in our view, alleging that each of these
legal instruments separately represents a measure inconsistent with Article 3 of the SCM
Agreement. Rather, the legal instruments identified by Canada taken collectively represent
a list of legal instruments relating to the payment of the alleged export subsidies under
the PROEX scheme.
7.8. Turning next to Canada's request for
consultations, we note that Article 4.4 of the DSU requires that a request for
consultations "give the reasons for the request, including identification of the
measures at issue and an indication of the legal basis for the complaint." Article
4.2 of the SCM Agreement requires a statement of available evidence with regard to
"the existence and nature of the subsidy in question" and Article 4.3 of the SCM
Agreement requires the Member "granting or maintaining the subsidy in question"
to enter into consultations as quickly a possible. In this case, Canada requested
consultations "regarding certain export subsidies granted under the Brazilian Programa
de Financiamento ás Exportações (PROEX) to foreign purchasers of Brazil's EMBRAER
aircraft." Thus, it is clear to us that the request for consultations related to the
same general subject as the request for establishment of a panel, i.e., "export
subsidies under PROEX". The request for consultations does not, however, identify the
particular legal instruments which Brazil contends that we should not consider, nor could
it have, because those particular legal instruments did not exist at the time the request
for consultations was made. In fact, it is clear that the PROEX regime (and thus
potentially the attributes of the PROEX payments under it) has changed over time, and that
between the date the last consultations were held and the date that establishment of a
panel was requested, some such changes occurred.
7.9. We recall that our terms of reference are based
upon Canada's request for establishment of a panel, and not upon Canada's request for
consultations. These terms of reference were established by the DSB pursuant to Article
7.1 of the DSU and establish the parameters for our work. 191 Nothing in the text of the DSU or Article 4 of the SCM
Agreement provides that the scope of a panel's work is governed by the scope of prior
consultations. Nor do we consider that we should seek to somehow imply such a requirement
into the WTO Agreement. One purpose of consultations, as set forth in Article 4.3 of the
SCM Agreement, is to "clarify the facts of the situation", 192 and it can be expected that
information obtained during the course of consultations may enable the complainant to
focus the scope of the matter with respect to which it seeks establishment of a panel.
Thus, to limit the scope of the panel proceedings to the identical matter with respect to
which consultations were held could undermine the effectiveness of the panel process.
7.10. We do not believe, however, that the question of
consultations is completely outside our consideration. A party is not entitled to request
establishment of a panel unless consultations have been held. Specifically, Article 4.7 of
the DSU provides that a complaining party may request establishment of a panel only if
"consultations fail to settle a dispute". Similarly, Article 4.4 of the SCM
Agreement allows a "matter" to be referred to the DSB for establishment of a
panel only if consultations have failed to lead to a mutually agreed solution. Given that
Article 6.1 of the DSU and Article 4.4 of the SCM Agreement essentially require the DSB to
establish a panel automatically upon request of a party, a panel cannot rely upon the DSB
to ascertain that requisite consultations have been held and to establish a panel only in
those cases. 193 Accordingly, we
consider that a panel may consider whether consultations have been held with respect to a
"dispute", and that a preliminary objection may properly be sustained if a party
can establish that the required consultations had not been held with respect to a dispute.
We do not believe, however, that either Article 4.7 of the DSU or Article 4.4 of the SCM
Agreement requires a precise identity between the matter with respect to which
consultations were held and that with respect to which establishment of a panel was
requested.
7.11. Applying this analysis to the case at hand, we
recall that Brazil and Canada consulted "regarding certain export subsidies granted
under the Brazilian Programa de Financiamento ás Exportações (PROEX) to foreign
purchasers of Brazil's EMBRAER aircraft", and that the request for establishment of a
panel relates to "export subsidies under PROEX". We consider that the
consultations and request for establishment relate to what is fundamentally the same
"dispute", because they involve essentially the same practice, i.e., the payment
of export subsidies under PROEX. Under these circumstances, and notwithstanding the fact
that both the authorizing legal instrument and certain other legal instruments relating to
the administration of the PROEX interest equalization regime changed or were only
introduced subsequent to the last consultations, we cannot say that Canada has failed to
comply with the requirements of Article 4.7 of the DSU. Accordingly, the preliminary
objection of Brazil is denied.
C. Are
PROEX interest rate equalization payments export subsidies?
7.12. Canada argues that PROEX payments are subsidies
within the meaning of Article 1 of the SCM Agreement which are contingent upon export
performance within the meaning of Article 3.1(a) of that Agreement. Specifically, Canada
contends that PROEX payments are financial contributions in the form either of a direct
transfer of funds (a grant) within the meaning of Article 1.1(a)(1)(i) or an
"indirect financial contribution" through a funding mechanism or a private body
in the sense of Article 1.1(a)(1)(iv) of the SCM Agreement. Canada further contends that
this "financial contribution" confers a "benefit" within the meaning
of Article 1.1(b) of the SCM Agreement in as much as it reduces the interest rate paid by
purchasers of exported Brazilian regional aircraft by up to 3.8 percentage points.
Finally, Canada asserts that PROEX payments are contingent upon export performance within
the meaning of Article 3.1(a) of the SCM Agreement in as much as they are available only
with respect to the financing of export shipments. In its first submission, Brazil stated
that it "does not dispute the assertion that PROEX interest equalization payments for
aircraft constitute an export subsidy." 194 In response to a question from the Panel, Brazil reaffirmed
that it "has not denied that PROEX interest rate equalization payments for aircraft
fulfill the definition of a subsidy within the meaning of Article 1 and are contingent
upon export within the meaning of Article 3.1(a)." 195
7.13. As noted above, the parties agree that PROEX
payments are subsidies within the meaning of Article 1 of the SCM Agreement which are
contingent upon exportation within the meaning of Article 3.1(a) of the Agreement, and we
agree with them. Although the parties disagree about the form of the financial
contribution involved – with Canada arguing that they involve a direct transfer of
funds, and Brazil adopting the European Communities' view that they also involve a
potential direct transfer of funds provided at an earlier moment in time – we
consider that the issue presented relates to the question as to when the subsidies in
question are paid and not as to whether they exist. We note that, according to Article
1:1(i) a subsidy exists if a government practice involves a direct transfer of funds or a
potential direct transfer of funds and not only when a government actually effectuates
such a transfer or potential transfer (otherwise the text of (i) would read: "a
government directly transfers funds … or engages in potential direct transfers of
funds or liabilities"). The PROEX interest rate equalization scheme for aircraft
fulfils the definition of a subsidy because there is a government practice, whether it
involves a direct transfer of funds -- as Canada believes -- or a potential direct
transfer of funds – as Brazil believes. As soon as there is such a practice, a
subsidy exists, and the question whether the practice involves a direct transfer of funds
or a potential direct transfer of funds is not relevant to the existence of a subsidy. One
or the other is sufficient. If subsidies were deemed to exist only once a direct or
potential direct transfer of funds had actually been effectuated, the Agreement would be
rendered totally ineffective and even the typical WTO remedy (i.e. the cessation of the
violation) would not be possible. We, therefore, consider that, the parties having agreed
that PROEX payments are subsidies, the question of the form of financial contribution
relates to the question of when the subsidy is paid, not when it comes into existence.
This issue is taken up in section E.3. of these findings, where we consider whether Brazil
has increased the level of its export subsidies.
7.14. For the foregoing reasons, we conclude that
PROEX payments on exports of Brazilian regional aircraft are subsidies within the meaning
of Article 1 of the SCM Agreement which are contingent upon export performance within the
meaning of Article 3.1(a) of that Agreement.
D. Are
PROEX interest rate equalization payments "permitted" by item (k) of the
Illustrative List of Export Subsidies?
7.15. We have found -- and Brazil does not dispute --
that PROEX payments are subsidies within the meaning of Article 1 of the SCM Agreement
which are contingent upon export performance within the meaning of Article 3.1(a). Brazil
does not concede, however, that these export subsidies are prohibited subsidies.
Rather, Brazil contends that, although PROEX payments are export subsidies, they are
nevertheless permitted by item (k) of the Illustrative List of Export Subsidies.
Specifically, Brazil asserts that PROEX payments are the "payment by [governments] of
all or part of the costs incurred by exporters or financial institutions in obtaining
credits" within the meaning of item (k). Brazil further argues that, pursuant to item
(k), such payments are prohibited only "in so far as they are used to secure a
material advantage in the field of export credit terms", and that a contrario "such
payments are permitted in so far as they are not used to secure a material
advantage in the field of export credit terms." Finally, Brazil argues that PROEX
payments are not used to secure a material advantage in the field of export credit terms,
because they are merely used to offset "Brazil risk" and Canada's subsidies to
Bombardier. Accordingly, Brazil concludes that PROEX payments are permitted by the SCM
Agreement.
7.16. Canada contests Brazil's arguments on a number
of grounds. First, Canada disputes Brazil's view that the first paragraph of item (k) may
be used to establish that a measure is "permitted" by the SCM Agreement. It is
Canada's view – strongly supported by the European Communities as third party -- that
footnote 5 to the SCM Agreement, which states 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", constitutes the only basis for arguing on the basis of
the Illustrative List of Export Subsidies that a measure that does not fall within the
scope of the Illustrative List is not prohibited, and Canada considers that the first
paragraph of item (k) does not fall within the scope of that footnote. Second, Canada
rejects Brazil's view that PROEX payments are the "payment by [governments] of all or
part of the costs incurred by exporters or financial institutions in obtaining
credits". Finally, Canada both disagrees with Brazil's interpretation of the
"material advantage" clause in the first paragraph of item (k) and contends that
PROEX payments are in fact "used to secure a material advantage" within the
meaning of item (k).
7.17. In reviewing Brazil's item (k) defense, we note
that in order for this Panel to rule in favour of Brazil we must find for Brazil on all of
the following points. First, we must find that PROEX payments are the "payment by
[governments] of all or part of the costs incurred by exporters or financial institutions
in obtaining credits" within the meaning of item (k). Second, we must find that PROEX
payments are not "used to secure a material advantage in the field of export credit
terms" within the meaning of item (k). Finally, we must find that a
"payment" within the meaning of item (k) which is not "used to secure a
material advantage in the field of export credit terms" is "permitted" by
the SCM Agreement even though it is a subsidy within the meaning of Article 1 of the SCM
Agreement which is contingent upon export performance within the meaning of Article 3.1(a)
of that Agreement. If we were to find against Brazil on any of these points, Brazil's item
(k) defense would fail. Finally, we note Brazil's explicit acknowledgement that "its
view of the 'material advantage' clause is that it constitutes an affirmative defense and,
therefore, the burden of establishing entitlement to it is on the challenged party."
196
7.18. It is by no means clear to us that it is
permissible to use the first paragraph of item (k) as the basis for an a contrario
argument as asserted by Brazil, 197
or that PROEX payments in fact constitute the "payment by [governments] of all or
part of the costs incurred by exporters or financial institutions in obtaining
credits". 198 Even assuming
for the sake of argument, however, that Brazil is correct with respect to these two
points, we consider Brazil's interpretation of the "material advantage" clause
of item (k) is incorrect, and that, under a proper interpretation of that clause, Brazil
has not demonstrated that PROEX interest rate equalization payments do not confer a
material advantage in the field of export credit terms. As noted above, Brazil's
"item (k)" defense can succeed only if Brazil prevails on all three legal
issues. Because we dispose of Brazil's defense on the issue of whether PROEX interest rate
equalization payments have been demonstrated not to confer a "material
advantage", we need not decide whether Brazil's arguments on the first two issues are
correct.
7.19. It will be recalled that, under item (k) of the
Illustrative List, the following is an export subsidy:
"The grant by governments (or special institutions controlled by
and/or acting under the authority of governments) of export credits at rates below those
which they actually have to pay for the funds so employed . . . , or the payment by
them 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." (emphasis added).
Assuming for the sake of argument that PROEX payments are payments
within the meaning of item (k), the question presented in this dispute is the benchmark
that should be used in determining whether such payments are in fact "used to secure
a material advantage." In Brazil's view, the proper benchmark for determining whether
PROEX payments are "used to secure a material advantage in the field of export credit
terms" is to compare the export credit terms of transactions supported by PROEX
payments with the export credit terms available to purchasers of Canadian regional
aircraft. As stated in the Finan Report, "Material advantage in the field of export
credit terms cannot be measured by evaluating just one country's subsidy benefits. Rather,
determining material advantage requires evaluating one country's set of export credit
terms relative to another country's set by applying a consistent methodology appropriate
under the facts and circumstances." 199
7.20. Brazil considers that, as a result of several
factors, PROEX payments do not result in export credit terms for purchasers of Brazilian
regional aircraft which secure a material advantage --i.e., are more favourable -- than
the export credit terms available for purchasers of Canadian regional aircraft:
"The concept of material advantage, as noted above, includes
comparison – advantage vis-à-vis someone or something. Two points of comparison are
relevant to the determination in this dispute of whether PROEX is used by Brazil to secure
a material advantage in the field of export credit terms: (1) Brazil risk and (2) Canada's
subsidies to Bombardier. On either measure alone, PROEX provides no material advantage.
When the two are considered together, it is clear that it is Canada's programmes, not
Brazil's, that are used to secure a material advantage." 200
7.21. Turning to the first "point of
comparison" proposed by Brazil, Brazil argues that PROEX payments do no more than
offset "Brazil risk". Specifically, Brazil contends that, due to the high level
of risk perceived by international markets with respect to Brazilian borrowers, the cost
to EMBRAER and to Brazilian financial institutions of raising funds to finance exports of
Brazilian regional aircraft is higher than the cost to Bombardier and Canadian financial
institutions of raising funds to finance exports of Canadian regional aircraft. Because
PROEX payments merely offset in part that higher cost of funds, allowing export credit
financing for Brazilian regional aircraft on terms that are closer to, but still less
favourable than, those available for competing Canadian regional aircraft, those payments
are not in Brazil's view used to secure a material advantage in the field of export credit
terms.
7.22. With respect to the second "point of
comparison", Brazil contends that "material advantage should be determined by
comparison of the total subsidy packages" available to competing regional aircraft.
In support of this view, Brazil argues that "the field of export credit terms"
includes not only the interest rate and duration of the financing but also the price of
the aircraft being financed. Brazil contends that Canada provides a wide range of
"direct and indirect subsidies" for Canadian regional aircraft, and that these
subsidies reduce the price of Canadian regional aircraft, the cost of credit to purchasers
or other "export credit terms." Brazil concludes that, because PROEX payments do
not fully offset these subsidies, those payments are not "used to secure a material
advantage in the field of export credit terms".
7.23. As can be seen from the above arguments,
Brazil's material advantage defense is based upon the principle that a consideration
whether an item (k) payment "is used to secure a material advantage in the field of
export credit terms" involves a comparison between the export credit terms of the
transaction supported by the payment and the export credit terms of potential competing
transactions. We do not agree. We note the definition of "advantage" in Webster's
New International Dictionary of the English Language, cited by Brazil, as "a more
favorable or improved position". Similarly, the Shorter Oxford English Dictionary
defines "advantage" as "superior position". Thus, we concur with
Brazil that the term "advantage" involves the concept of comparison. In our
view, however, nothing in the text of the first paragraph of item (k) indicates that the
examination of material advantage involves a comparison with the export credit terms
available with respect to competing products from other Members. To the contrary, we
consider that, in its ordinary meaning, a payment is "used to secure a material
advantage in the field of export credit terms" where the payment is used to secure
export credit terms that are materially more favorable than the terms that would have been
available in the absence of the payment. Accordingly, we consider that an item (k) payment
is "used to secure a material advantage" where the payment has resulted in the
availability of export credit on terms which are more favourable than the terms that would
otherwise be available in the marketplace to the purchaser with respect to the transaction
in question.
7.24. Our understanding of the meaning of the
"material advantage" clause is supported by its context in the SCM Agreement.
Brazil's approach to determining whether an item (k) payment is used to secure a material
advantage and thus represents an export subsidy differs strikingly from that applied
elsewhere in the SCM Agreement with respect to determining whether a measure is a subsidy
generally, or an export subsidy specifically. In this respect, the Agreement does not
focus on the conditions under which a competing product from another Member is being sold
and exported. Rather, the general approach of the SCM Agreement to determining whether a
measure is a subsidy and thus subject to discipline is whether the measure confers a
"benefit" within the meaning of Article 1. Although the concept of benefit is
not defined in the SCM Agreement, its application in various circumstances suggests that
one should examine objective benchmarks, whether involving a comparison of the terms of
the financial contribution to a market benchmark reflecting the terms under which the
beneficiary of the financial contribution would be operating in the absence of the
government financial contribution (as provided for in the calculation of the amount of the
subsidy in terms of benefit to the recipient in a countervailing duty context under
Article 14 of the Agreement) 201
or the existence of a cost to the government in providing the financial contribution (as
envisioned by Annex IV relating to the calculation of the ad valorem subsidization
for the purposes of the presumption of serious prejudice under Article 6.1(a) of the
Agreement). In no case is it suggested that whether or not a benefit exists would depend
upon a comparison with advantages available to a competing product from another Member.
"Continue on to Findings, Section 7.25"
190 Adopted 25
November 1998, WT/DS60/AB/R, para. 72.
191 See, e.g.,
India - Patent Protection for Pharmaceutical and Agricultural Chemical Products, adopted
16 january 1998, WT/DS50/AB/R, para. 92 ("The jurisdiction of a panel is
established by that Panel's terms of reference, which are governed by Article 7 of the
DSU.").
192 As the
Appellate Body has noted, "the claims that are made and the facts that are
established during consultations do much to shape the substance and the scope of
subsequent panel proceedings."India - Patent Protection for Pharmaceutical and
Agricultural Chemical Products, adopted 16 january 1998, WT/DS50/AB/R, para. 94.
193 As stated by
the Appellate Body in a somewhat different context in European Communities - Regime for
the Importation, Sale and Distribution of Bananas, adopted 25 September 1997,
WT/DS27/AB/R, para. 142:
"We recognize that a panel request will usually be
approved automatically at the DSB meeting following the meeting at which the request first
appears on the DSB's agenda. As a panel request is normally not subjected to detailed
scrutiny by the DSB, it is incumbent upon a panel to examine the request for the
establishment of the panel carefully to ensure its compliance with both the letter and the
spirit of Article 6.2 of the DSU."
194 Brazil first
submission, para. 6.1.
195 The question
asked by the panel was: "Brazil stated in its first submission (para. 6.1) that it
'does not dispute the assertion that PROEX equalization payments fro aircraft constitute
an export subsidy.' Without perjudice to your material advantage defense under item (k) of
the Illustrative List, do you aknowledge that PROEX payments otherwise fulfill the
definition of a subsidy within the meaning of Article 1 which is contingent upon export
performance within the meaning of Article 3.1 (a)? If not, please identify precisely all
elements of Articles 1 and 3 you consider are not satisfied and a detailed explanation of
your views with regard to those elemnets."
196 Brazil answer
to panel question 41. See United States - measure Affecting Imports of Woven Wool Shirts
and Blouses from India, WT/DS33/AB/R, p. 16 adopted 23 May 1997 ("It is only
reasonable that the burden of establishing [an affirmative] defence should rest on the
party asserting it.").
197 Footnote 5 to
the SCM Agreement states that "[m]easures referred to in Annex I as not constituing
export subsidies shall not be prohibited under [Article 3.1 (a)] or any other provision of
this Agreement". The only measures in the Illustrative List that are explicitly
"referred to... as not constituing export subsidies"are export credit practices
in conformity with the interest rate provisions of the Arrangement under the second
paragraph of item (k). There are also a number of other cases, cited by Canada, where the
illustrative List affirmatively provides that a measure is not prohibited -- at least by
that item -- or is permissible. The first paragraph of item (k), however, does not contain
any such affirmative language, and would not appear to fall within the scope of footnote
5. Thus, a strong argument can be made that footnote 5 -- together with footnote 1 --
define the extent to which the Illustrative List can be used to establish that a measure
is a "permitted" subsidy or, in the case of footnote 1, is not a subsidy at all.
In light of our findings with respect to "material advantage", however, we need
not decide this question.
198 PROEX
payments relating to export of Brazilian regional aircraft are provided in support of
buyers'credits, i.e., export credits are extended to the foreign purchaser rather than to
EMBRAER. Brazil's theory appears to be that lenders providing export credits must borrow
funds in order to finance their lending, that the export credits so funded are provided at
below the lenders'cost of borrowing, and that PROEX payments are provided to compensate
the lenders for this difference. In brazil's view, this difference between the lender's
cost of borrowing and the rate it charges for the export credits extended to purchasers
therefore represents a "cost incurred by... financial institutions in obtaining
credits." In addition, brazil seeks to demonstrate, that although EMRAER itself does
not extend export credits to its customers, EMBRAER incurred certain costs in relation to
the provision of buyer's credits to purchasers of brazilian regional aircraft. because our
findings on the issue of "material advantage"dispose of Brazil's item (k)
defense, we need not decide whether Brazil's view on this issue is correct. We note in
passing, however, that -- assuming lenders providing export credits supported by PROEX
payments are in fact providing export credits at below their cost of funds -- it is highly
questionable whether that represents a cost for the lenders in "obtaining
credits" as opposed to a cost incurred in providing credits.
200 Brazil first
submission, para 6.6.
201 The example
of loans under Article 14 is instructive. Under Article 14 (b), "a loan by government
shall not be considered as conferring a benefit, unless there is a difference between the
amount that the firm receiving the loan pays on the government loan and the amount the
firm would pay on a comparable commercial loan which the firm could actually obtain on the
market."In other words, the relevant question is whether, as a result of the
government intervention, the firm receiving the loan is better off than if that same firm
had been required to obtain a loan in the marketplace.
