2. Arguments of Brazil
5.39 Brazil argues that Article 1.1 includes a three-part test: first, paragraph (a)(1) of Article 1.1 requires that, for a subsidy to occur, there must be a "financial contribution by a government or any public body within the territory of a Member . . ."; second, under clauses (i) through (iv) of paragraph (a) of Article 1.1, the financial contribution may take one of several forms; third, whether a "benefit" is conferred, within the meaning of paragraph (b) of that Article. For Brazil, Canada's interpretation of the word "benefit" would rob the term of its ordinary meaning, and indeed, of any recognizable meaning.
5.40 Brazil, considering the ordinary meaning of the phrase "a benefit is . . . conferred", notes that Webster's Third New International Dictionary defines the verb "confer" as to "grant," "bestow" or "give." The noun "benefit" means "advantage" or "something that guards, aids, or promotes well-being." To "aid," in turn, means "to give help or support to." Alternatively, an "advantage" is "a more favorable or improved position or condition." For Brazil, Article 1.1 therefore states that a subsidy exists where a government contributes something, and in so doing gives help or support, or improves the recipient's condition. For Brazil, EDC and the Canada Account, in granting assistance, improve a recipient's condition by granting the recipient something, in words taken directly from Canada's first written submission, "above and beyond the market."
5.41 Brazil submits that the structure of Article 1.1 requires this construction: paragraph (a) of Article 1.1 tells about the source of the financial contribution - the government; as structural matter, paragraph (b), in requiring that a "benefit" be conferred, must then speak to the effect this contribution has on its recipient.
5.42 Brazil notes that Canada appears to agree that demonstrating a "benefit to the recipient" is one part of the "benefit" test, but argues that Canada invents a second, additional requirement - that the government, in making its contribution, realize a "net cost." Brazil rejects each of Canada's reasons for this additional asserted requirement.
5.43 Brazil disputes Canada's argument that applying the ordinary meaning of the term "benefit" - which in Brazil's view means "advantage" or "aid" - would not "adequately narrow the term", arguing that no provision of the Vienna Convention requires, that the ordinary meaning of a term be narrowed in order for it to be valid. Brazil notes Canada's statement that a broad definition of "benefit" could mean that a "commercial contract" could possibly be considered a "subsidy," but argues that such a contract is not, without something more, a subsidy prohibited by the terms of the SCM Agreement. Brazil asserts that Canada's concern is with the scope of the prohibitions included in the SCM Agreement, and not the definition of the term " subsidy," and is therefore misplaced.
5.44 Brazil also disagrees that item (k) of Annex I to the SCM Agreement offers "context" supporting Canada's proposed test. According to Brazil, Annex I does not speak to whether government activity constitutes a subsidy, but rather to whether government activity constitutes a prohibited export subsidy. Brazil submits that a measure may constitute a subsidy, but not be on the Illustrative List of Export Subsidies included in Annex I. For Brazil, the relevant reference to the Illustrative List of Export Subsidies included in Annex I falls in Article 3, which specifies, among those activities already identified as subsidies, those that are prohibited by the SCM Agreement. Brazil states that Article 1 of the Agreement contains no reference to Annex I relevant to the definition of a subsidy, and that the Canadian definition must therefore be rejected.
5.45 Brazil also takes issue with Canada's view that paragraph (a) of Article 6.1 of the SCM Agreement provides contextual support for its net cost argument given that Article 6.1(a) requires that for purposes of that paragraph the value of a subsidy be calculated on the basis of cost to the granting government. Brazil disagrees with Canada that if "benefit" under Article 1.1 means "benefit to the recipient," a government contribution identified under Article 1.1 as a "subsidy" could not be valued under Article 6.1 and Annex IV, stating that Canada ignores that valuation is only one of several ways to establish "serious prejudice" under Article 6.1 of the SCM Agreement. For Brazil, if the particular subsidy in question is defined based on the "benefit to the recipient," "serious prejudice" could still be found based on the other alternative provisions of Article 6.1 which characterize the effect of the subsidy according to the extent of the benefit realized by the recipient. Moreover, for Brazil, Article 6.1 is not relevant to an export subsidy, which need not be quantified or subject to specific valuation in order to trigger the prohibition of Article 3.
5.46 Regarding Canada's argument that using a "benefit to the recipient" test is against the object and purpose of the SCM Agreement, which for Canada is "'to restrict the use of trade distorting subsidies'" , Brazil finds incomprehensible Canada's implication (see para. 5.37) that the type of benefit estimated by Brazil under TPC's $87 million contribution to Bombardier is not, consistent with the object and purpose of the SCM Agreement, "'trade distortive.'" Brazil also does not understand how Canada's argument demonstrates that the "benefit to recipient" test is inconsistent with the object and purpose of the Agreement.
5.47 Brazil notes that Revenue Canada's Special Import Measures Act Handbook states that while the determination of "benefit" on a government loan is generally related to whether the government recovers its costs, such a test will not always capture the true effect of the subsidy. According to Brazil, the Handbook states that:
"[I]t is also possible that a benefit would accrue to an exporter or an importer as a result of a government guarantee which would not necessarily result in a cost to the government. The benefit could be a lower interest rate or a loan at a commercial rate which the company would otherwise not get without government involvement."
5.48 Furthermore, according to Brazil, in defining a subsidy," the Canadian Handbook states that a "benefit" can be direct or indirect:
"A direct financial or other commercial benefit is one which accrues directly to the person, firm or industry which is the intended recipient, such as an outright grant of funds to a producer of goods. An indirect benefit is one which does not accrue directly, but which alters the economic environment within which firms operate, and hence the level of their costs."
5.49 For Brazil, therefore, Canada's position concerning the definition of "subsidy" and "benefit" before this Panel is irreconcilable with that adopted in its own law, noting that in the Handbook, Canada agrees with a definition of the term "subsidy" which focuses on whether a benefit accrues either directly to the recipient, or somehow alters the recipient's, and not the grantor's, costs. Brazil also states that Canada agrees with Brazil that covering the government's cost does not necessarily mean that the recipient is getting a rate it would otherwise get on the market, without government involvement.
5.50 For Brazil, neither the ordinary meaning of Article 1.1, nor its context, nor the object and purpose of the SCM Agreement, nor Canada itself, outside the confines of these proceedings, suggest, much less require, a "net cost to government" test. Brazil argues that the proper test is evident from the ordinary meaning of Article 1.1: a subsidy exists where a government contributes something, and in so doing grants an aid, which gives help or support, or an advantage, which improves the recipient's condition above and beyond the market.
3. Response of Canada
5.51 In response, Canada notes Brazil's own admission that under its definition, a purely commercial contract could be covered by Article 1 of the SCM Agreement. This conclusion, arrived at through a contextual interpretation of the word "benefit" is inescapable: according to economic theory, any contract involves at least one party that is better off - that benefits from the contract - and one party that, at least, does not lose. If "benefits" or advantage were considered without the broader context of the SCM Agreement, including Article 14 and Annex IV, then all purely commercial contracts entered into by governments would be subject to the disciplines of the SCM Agreement. This, in Canada's view, widens the scope of application of the SCM Agreement significantly beyond what the drafters intended. In this context Canada reiterates the anomalous results that would be obtained if the Article 14 approach - benefit to the recipient - to the determination of the value of a subsidy were used for the purposes of Article 1: an CAN$87 million repayable contribution was found by Brazil to have a subsidy value nearly three times higher than the subsidy value of the same amount as a cash grant.
5.52 Canada also observes that the Revenue Canada Handbook definitions relate to the valuation of subsidies for the purpose of imposing countervailing duties. In that respect, the definitions and methodologies set out in the Handbook are in Canada's view fully consistent with the guidelines set out in Article 14, for the express purpose of the valuation of subsidies in countervailing duty cases. The Handbook, though fully consistent with Article 14, does not, however, predetermine Canada's understanding of what types of governmental contributions or activities should come within the scope of the SCM Agreement.
To Continue With "Contingent, in Law or in Fact, ... on Export Performance"
114 United States - Restrictions on Imports of Cotton and Man-made Fibre Underwear (United States - Cotton Underwear) WT/DS24/AB/R, Report of the Appellate Body adopted 25 February 1997, at 15.
115 That is, for Canada, the use of the term "i.e." indicates that the items that follow are intended to be an exhaustive, rather than an illustrative list. In this regard, Canada notes that the Uruguay Round negotiators agreed to replace the term "such as" in the Cartland I draft of the SCM Agreement (18 May 1989)(Exh. CDN-21), with "i.e." in Cartland II (Exh. CDN-22), thus clearly indicating an intent to move from an illustrative definition to an exhaustive definition. Canada also notes that "e.g." is also used within the subsidy definition in Article 1 to indicate an illustrative list.
116 The "revenue foregone" is not to be confused with the "cost to government" method set out in Annex IV. The cost to the Government of Canada of a contribution cannot, by definition, exceed the value of that contribution as an outright grant. The "cost" to the Government, in the case of a TPC contribution, therefore would be calculated by subtracting repayments from the original contribution.
117 The Parties' arguments regarding the Finan Report are set forth in Section VI.F of this report.
