(a) Arguments of Canada

4.9 Canada states that although Brazil's request for the establishment of a panel includes financing provided by the Export Development Corporation, no previous consultations were requested with respect to this item. Canada requests, therefore, that the Panel make a preliminary finding that any claim relating to financing provided by the EDC is not within its terms of reference, and therefore cannot be addressed by the Panel.

(i) Applicable law

4.10 Canada states that as required by the SCM Agreement, a request for a panel must be in respect of a matter that has already been the subject of consultations. Canada notes that Article 4, paragraphs 1 to 4 provide that:

4.12 Canada notes that under the DSU, the consultations step in the dispute settlement process is not a mere formality,¹⁶ and that SCM Agreement Article 4.3 provides that the responding Member shall enter into consultations, for the purpose of arriving at a mutually agreed solution. Canada views consultations under the SCM Agreement Article 4 as more onerous than under the DSU: Article 4.2 requires that in its request for consultations the Member must provide a statement of available evidence with regard to the existence and nature of the subsidy in question.

4.13 For Canada, the question is the nature, and strength, of the connection that has to exist between an alleged "prohibited subsidy" subject to a request for consultations and a "matter" subject to a request for a panel.¹⁷ Canada submits that there must be a rational connection between the request for consultations (the "subsidy in question") and the "matter" to be the subject of dispute settlement; the "matter" must necessarily follow from the "subsidy in question." For Canada, the SCM Agreement explicitly requires these connections, as do the implicit requirements of due process. Canada cites the Appellate Body:

4.14 For Canada, this analysis is equally applicable to requests for consultations; Article 4.4 is not a licence for a fishing expedition. In Canada's view, the SCM Agreement is not observed, and due process is not served, if Canada is forced to respond to a "matter" on which no consultations were requested and none took place.

4.15 In response to a question from the Panel, Canada further argues that whether a matter has been raised in the consultations is not relevant to the determination of whether it is properly within the request for a panel in accordance with Article 4.4 of the SCM Agreement, for two reasons, the first being its argument (para. 4.13) that the measures identified in the request for a panel must be rationally connected to the "prohibited subsidy" identified in the request for consultations and must flow directly from that alleged prohibited subsidy, and that the scope of the request for consultations is determined, in turn, by the requirements of Article 4.2 of the SCM Agreement.

4.16 In view of the above, according to Canada, whether a "matter" is raised during consultations is immaterial to the question of whether a request for a panel is consistent with Article 4.4. It is not the content or the context of the consultations that is governed by Article 4.2 and 4.4, but rather the content of the request for consultations, which launches a dispute, and the content of the request for a panel, which establishes the Panel's terms of reference.

4.17 Canada's second reason is that WTO panels have consistently held that the substantive merits of consultations are impossible to police and therefore to discipline by the WTO¹⁹, as the WTO Secretariat is not present during these consultations and, indeed, consultations are generally confidential. In Canada's view, introduction of evidence relating to consultations would have three consequences that would be deleterious to the dispute settlement system of the WTO:

4.19 Canada states that in a letter of 19 March 1997 acknowledging Brazil's request for consultations, Canada stated:

4.20 According to Canada, Brazil's response of 2 April 1997²² mentioned only "[EDC] equity infusions into special purpose corporations" and EDC loan guarantees. Thus, regarding financing activity by the EDC, Canada argues, Brazil provided no notice at all, let alone a statement of evidence as required by SCM Article 4.2.

4.21 Canada maintains that EDC's financing activities (direct lending) are distinct and different from EDC's guarantee activities, stating that loans and loan guarantees are clearly distinguished in EDC's annual reports, which are public documents and were readily available to Brazil at the time it made its request for consultations.²³ Canada asserts that Brazil recognised the distinction between financing and loan guarantees at the time it made its request for the establishment of a panel, but had elected to request consultations on one and not the other activity of EDC.

4.22 Canada states that similarly, equity infusions are distinct from loans,²⁴ and that therefore financing provided by the EDC, though related to EDC's other activities, is legally and factually distinct from loan guarantees or equity infusions.

4.23 Canada therefore submits that financing provided by the EDC was not "a prohibited subsidy" on which Brazil requested consultations in accordance with SCM Agreement Article 4.1, and was not a "subsidy in question" within the meaning of SCM Agreement Articles 4.2 and 4.3. Consequently, for Canada financing provided by the EDC cannot be the "matter" referred to the DSB under SCM Agreement Article 4.4, and as such is not within the Panel's terms of reference and falls outside the Panel's jurisdiction.

(b) Arguments of Brazil

4.24 Brazil requests that the Panel reject Canada's request to find Brazil's request for review of EDC financing inconsistent with Article 4.4 of the SCM Agreement. Brazil contends that its identification of the EDC in its consultation request, combined with the language of that request (" . . . certain subsidies granted by the Government of Canada or its provinces that support the export of civilian aircraft from Canada"), covered all subsidy aspects of the EDC. In Brazil's view, a request for consultations need not set forth an exhaustive list of questionable measures, particularly where, as here, the very non-transparency of the system makes compilation of such a list virtually impossible. To Brazil, such a requirement would reward non-transparent practices and place an unreasonable burden on other Members.

4.25 Moreover, Brazil asserts, the full range of EDC support for exports of civilian aircraft, including what Canada now terms as "EDC's financing activities (direct lending)," in fact was subject to consultations. According to Brazil, in the consultations it explicitly asked about all aspects of EDC support, including financing, and therefore any claim that Canada's due process rights will now somehow be violated if it is "forced to respond" to claims concerning EDC "financing activities (direct lending)" is without any basis in fact.

4.26 In response to a Panel request for evidence to substantiate the range of subjects on which consultations were held, Brazil notes that direct evidence of the range of actual discussion during consultations usually is not available, and is not available in this case. Transcripts of consultation meetings are not kept, and were not in fact kept in these proceedings. Brazil directs the Panel's attention to an article submitted by Brazil²⁵ which Brazil asserts was the specific impetus behind Brazil's request and, along with information from EMBRAER (the Brazilian aircraft manufacturer), informed Brazil's agenda for consultations with Canada in April 1997. Brazil notes that the article refers, with respect to EDC, to: "'. . . direct loans and other export assistance available to non-Canadian purchasers of Canadian aircraft . . .'"; "'. . . export credit insurance, guarantee services and buyer credits; the latter usually by means of direct loans. . . .'"; and "'. . . bridging the gap between equity and senior debt available from other sources. . . .'"

4.27 Brazil indicates that it also had at its disposal EDC's response to an inquiry of Ministry, submitted by Brazil,²⁶ which detailed "loans and loan guarantees to foreign buyers in support of the sale of Canadian goods and services by" Bombardier, de Havilland, Canadair, Boeing of Canada and others.²⁷ Brazil maintains that this evidence formed the basis for Brazil's consultation request, and framed Brazil's agenda for the consultations themselves, and that it is evidence of the range of issues discussed at consultations, which included the full range of EDC financing, including debt, equity and guarantees.

4.28 According to Brazil, the fact that its request focused upon the use of equity financing and loan guarantees as particularly egregious infringements of Canada's obligations under the SCM Agreement speaks only to the broad press coverage granted EDC's incorporation of a new subsidiary, Exinvest, Inc., as a new vehicle for using these devices to support exports of civilian aircraft. As an example, Brazil provides an article from Transport Finance which illustrates and describes the structure and operation of EDC's equity financing vehicle.²⁸ According to Brazil, while the request for consultations may have emphasized this aspect of EDC's activities, the request and the consultations covered all aspects of EDC financing, including direct lending.

4.29 Additionally, Brazil contends, although Canada claims in its preliminary submission that there is a marked legal and factual distinction between loan guarantees, equity infusions and "financing,"²⁹ recourse to the common definition of the term proves instructive. Black's Law Dictionary defines the verb "finance" in the following terms:

4.30 In Brazil's view, this definition suggests that "financing" does not imply a distinct form of "direct lending," but is a broader, more general term encompassing direct lending, debt and equity support. For Brazil, all of these types of support together constitute "financing." Brazil cites the Panel in Japan - Measures Affecting Consumer Photographic Film and Paper that "the requirements of Article 6.2 would be met in the case of a 'measure' that is subsidiary or so closely related to a 'measure' specifically identified, that the responding party can reasonably be found to have received adequate notice of the scope of the claims asserted by the complaining party."³⁰ Brazil contends that all of these types of EDC support are "so closely related to one another" that, coupled with the fact that they were all discussed in consultations, Canada must be held to have received "adequate notice" of Brazil's claims.

4.31 Brazil also notes Canada's own statement that it "does not suggest that the initial request for consultations and the request for a Panel must be identical" (para. 4.55), and recalls Canada's observation of the Appellate Body's statement in India - Patent Protection for Pharmaceutical and Agricultural Chemical Products that "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."³¹ For Brazil, the whole point of consultations, according to the Panel in Korea - Taxes on Alcoholic Beverages, "is to enable the parties to gather correct and relevant information,"³² and the fact that Brazil would refine its knowledge of EDC's operations as a result of consultations with Canada should come as no surprise, and in fact is consistent with the very purpose for those consultations.

(c) Response of Canada

4.32 Canada rejects Brazil's argument that:

To continue with Consistency with Article 6.2 of the DSU and Brazil's request

¹⁶ DSU Article 4.3 provides, inter alia, that if a request for consultations is made under a covered agreement, the Member to which the request is made shall enter into consultations in good faith, with a view to reaching a mutually satisfactory solution.

¹⁷ The issue here is not what took place during the consultations between Canada and Brazil: WTO panels have no mandate to inquire into the adequacy of consultations. The issue of the adequacy of consultations arose before the panels in European Communities - Bananas, and more recently in Korea - Taxes on Alcoholic Beverages (Complaints by European Communities and United States) (1998), WTO Doc. WT/DS75,84/R (Panel Report)(hereinafter Korea - Liquor Taxes(. In the latter case, the Panel noted the report in European Communities - Bananas, and agreed that it was impossible for a Panel to adjudicate on what occurred in the consultations (at para. 10.19):

¹⁸ India - Pharmaceuticals, at para. 94.

¹⁹ European Communities - Regime for the Importation, Sale and Distribution of Bananas (Complaints by Ecuador, Guatemala, Honduras, Mexico, United States) (1997) WTO Doc. WT/DS27/ECU at paras. 7.17-7.20 (Panel Report). See also Korea - Taxes on Alcoholic Beverages (1998) WTO Doc. WT/DS75,84/R (Panel Report) at paras 10.17-10.19.

²⁰ Request for consultations by Brazil, WTO document WT/DS70/1, G/SCM/D12/1, 14 March 1997.

²¹ Letter from the Government of Canada to the Government of Brazil dated 19 March 1997. [TAB D, 23 October 1998 preliminary submission of Canada]

²² Letter from the Government of Brazil to the Government of Canada dated 2 April 1997. [TAB E 23 October 1998 preliminary submission of Canada]

²³ Export Development Corporation, 1996 Annual Report at 38, 43, 68. [TAB F 23 October 1998 preliminary submission of Canada]

²⁴ SCM Agreement Article 1.1(a)(1)(i) lists loans and equity infusions as distinct forms of financial contribution.

²⁵ Exh. BRA-18

²⁶ Exh. BRA-28

²⁷ Exh. BRA-69, which is an extract from the Canadian Parliamentary reporter, Hansard, demonstrates that responses to the inquiry of Ministry included as Exh. BRA-28 were tabled in Parliament on 16 September 1996.

²⁸ Transport Finance No. 74, 3 October 1996, Exh. BRA-18.

²⁹ Government of Canada, Preliminary Submission, dated 23 October 1998, at para. 34.

³⁰ (1998) WTO Doc. WT/DS44/R, at para. 10.8.

³¹ (1997) WTO Doc. WT/DS50/AB/R, at para. 94.

³² (1998) WTO Doc. WT/DS75, 84/R, at para. 10.23.