(a) Brazil's interpretation of Article 3.1(a)

5.53 Canada argues that Brazil's first submission nowhere states how Brazil interprets "contingent ... upon export performance" in Article 3.1(a); and Canada infers that, according to Brazil, this criterion is met where a subsidy is granted in any one of the following conditions:

• by an organisation that has the mandate to support export trade and the capacity to engage in that trade and to respond to international business opportunities; (para. 6.49)
• because the industry is export-oriented or has significant export potential;(para. 6.221)
• because an export-oriented company is required to stay in business; (para. 6.287)
• an objective of a subsidy programme is promoting domestic and international sales; (para. 6.308) or
• the sales of specific products of the recipient have all been export sales.(para. 6.221)

5.54 In Canada's view, these implicit interpretations of what constitutes "contingent ... upon export performance" are incorrect under the customary rules of interpretation of public international law, as required by Article 3.2 of the DSU.

(b) Article 3.1(a) prohibits subsidies that are conditional on or tied to export performance

5.55 Canada submits that in accordance with the customary rules of international law on the interpretation of treaties, Article 3.1(a) should be interpreted to apply to subsidies that are, in law or in fact, conditional on or tied to export performance.

5.56 More specifically, Canada submits that the following factors are useful in determining whether subsidies are in fact contingent upon export performance:

5.57 For Canada, this interpretation accords with the ordinary meaning of Article 3.1(a), in the light of its context and the object and purpose of the SCM Agreement, and is supported by the negotiating history of the SCM Agreement. Canada submits that Brazil's interpretations, if adopted, would lead to a manifestly absurd or unreasonable result.

(i) The ordinary meaning of "contingent ... upon export performance"

5.58 For Canada, the key words to interpreting Article 3.1(a) are "contingent ... upon export performance". Canada argues that the relevant ordinary meaning of "contingent upon" is "dependent for its existence on something else", "conditional; dependent on, upon;"¹¹⁸ the ordinary meaning of "performance", in pertinent part, is "execution or accomplishment of an action, operation or process undertaken or ordered."¹¹⁹ Thus, for Canada, on its plain meaning, Article 3.1(a) applies only to subsidies that are conditional on exports being executed or accomplished.

5.59 Canada submits that this is further supported by footnote 4 to Article 3.1(a), which states the following regarding whether an ostensibly domestic subsidy is "in fact" contingent upon export performance:

5.60 In Canada's view, the relevant ordinary meaning of "tied to" is "restrain or constrain to or from an action etc; limit or restrict as to behaviour, location, conditions, etc."¹²⁰ Thus, Canada argues, it must be shown that, exportation or export earnings must be a condition for the grant of a subsidy for it to be prohibited under Article 3.1(a). The fact that exports take place, or that increased exports were intended (without the subsidy having been made conditional on exportation), does not render a subsidy a prohibited subsidy.

5.61 For Canada, this interpretation finds additional support in the Panel Report in Indonesia - Autos, which noted that Article 3 "...prohibits subsidies which are conditional on export performance and on meeting local content requirements ...".¹²¹ Canada argues that the prohibition in Article 3 is not triggered by the effect of a subsidy,¹²² by the objective of a subsidy. Rather, Canada submits, Article 3 addresses subsidies that are granted or maintained only if certain conditions are met: Article 3.1(a) captures subsidies where the condition attached to the subsidy is that exports must be executed or accomplished; likewise, Article 3.1(b) captures subsidies where the condition attached to the subsidy is that there must be domestic content.

5.62 Canada contends that based strictly on its ordinary meaning, Article 3 does not, therefore, prohibit programmes or subsidies that only have as a general objective the expansion of trade or the increase in international competitiveness that might lead to increased exports. For Canada, a subsidy may have, as a general objective, an increase in competitiveness and hence increased exports, and may meet its competitiveness objectives and lead to increased exports. If, however, such a subsidy is available to recipients whether or not they engage in exports, in Canada's view the subsidy is not contingent upon export performance and therefore not inconsistent with Article 3.1(a).

(ii) The context of Article 3.1(a)

5.63 Canada argues that three contextual elements support this analysis.

5.64 First, Canada observes, the SCM Agreement makes a fundamental distinction between prohibited and non-prohibited subsidies: export subsidies, together with domestic content requirement subsidies, are singled out for prohibition under Part II, whereas other subsidies may be actionable under Part III or non-actionable under Part IV. In Canada's view, this distinction is central to the legal structure of the SCM Agreement, under which there are three discrete categories of subsidies. Canada argues that a subsidy falling within Article 3 is prohibited, regardless of its actual or expected impact on international trade or on the interests of other WTO Members; and that the trade distorting impact of actionable subsidies is presumed only under certain conditions (set out in Article 6), and even then, unlike in the case of prohibited subsidies, the presumptions are rebuttable (Article 6.2); and that subsidies that fall within the category of "non-actionable" subsidies are subject to disciplines only in the rare circumstance that they "cause damage which would be difficult to repair" (Article 9.1).

5.65 For Canada, Brazil's argument tries to obscure these essential distinctions. Canada notes the example of certain research and development subsidies that are inherently aimed at increasing "international competitiveness" and in that broad sense possibly lead to the expansion of exports. In Canada's view, to the extent that the subsidies are not paid only on condition that exports take place -- that is, the exports do not arise as a result of the desire to take advantage of a subsidy that can only be obtained if exports take place, but are incidental to the general increase in competitiveness that has resulted from the subsidies -- such subsidies must not be considered "contingent ...upon export performance" and therefore prohibited by Article 3.

5.66 Canada refers to a second contextual element, Article 3.1(b), which prohibits subsidies "contingent... upon the use of domestic over imported goods." According to Canada, Brazil's interpretation of "contingency" as "propensity", if pushed to its logical conclusion in Article 3.1(b), would result in the prohibition of subsidies made to domestic industries that have a domestic content "propensity" or "orientation". For Canada, if Brazil's argument with respect to Article 3.1 is correct, at a minimum, subsidies to the following sectors or concerns would be prohibited:

5.70 Canada notes with respect to the example of direct and indirect subsidies (para. 5.68) that while no a contrario conclusion can be drawn, from Item (a), that indirect subsidies are permitted, a responding Party might show, under Article 3, that an impugned subsidy is not "contingent upon export performance"; or it might demonstrate that an impugned contribution is not a subsidy, and it would do so under Article 1. For Canada, neither argument would be drawing a contrario conclusions from an Item in the Illustrative List.

(iii) The object and purpose of the SCM Agreement

5.71 Canada notes that the object and purpose of the SCM Agreement is not set out in a purposive clause, or in a preamble, but can be determined nonetheless from the text and structure of the SCM Agreement itself, as well as from the historical context in which disciplines on export subsidies developed.

5.72 Canada submits that the SCM Agreement is based on the premise that some forms of government intervention distort international trade, some have the potential to distort, and still others do not distort at all, and that the disciplines imposed by the SCM Agreement reflect this accepted approach, commonly known as the "traffic light approach":¹²³ trade distorting subsidies are to be prohibited outright (red light); potentially trade distorting subsidies are to be disciplined if they cause distortions in the market (amber); non-trade distorting subsidies are not subject to disciplines (green). Hence the prohibition on export subsidies, the disciplines on actionable subsidies if they cause serious prejudice, and the absence of disciplines on certain types of research and development subsidies, according to Canada.

5.73 It is essential, Canada submits, that in construing the scope of Article 3.1 the Panel does not blur this distinction. For Canada, Article 3.1 does not capture domestic subsidies merely because an objective and effect of a programme is to increase export competitiveness.

(iv) The negotiating history of the SCM Agreement

5.74 Canada argues that its interpretation is supported by the negotiating history of the SCM Agreement, as provided for in Article 32 of the Vienna Convention. Canada submits that the question of how to determine whether a subsidy is "in law or in fact" an export subsidy was an issue that highlighted the key fissures in the negotiations on the SCM Agreement between the United States and almost all other countries, including Brazil. According to Canada, the United States, basing its position on its own "disproportionality" test for the imposition of countervailing duties on export subsidies, argued for a quantitative approach and an "export propensity" test to determine whether a given measure was a prohibited subsidy.¹²⁴ Canada states that this position was rejected by other delegations,¹²⁵ because it would be inequitable for small economies that were more dependent on export markets, quoting a "status report" from the Chairman of the Negotiating Group:

5.75 Similarly, Canada asserts, the evolution of the footnote to Article 3.1(a) demonstrates the negotiators' rejection of an object or intent-based test for that of a conditions-based test. According to Canada, in the earliest draft, the footnote was cast as a test of intent:

which was modified to:

and subsequently to:

and later to:

and finally to:

5.76 For Canada, the rejection of an "export propensity" test, along with the change from a footnote test based on "intent" to one based on conditions attached to the subsidy (i.e. whether a subsidy is "in fact tied to" exports) must give rise to the "commonplace inference"¹³² that neither export propensity nor "intent" to increase exports is a correct measure for determining whether a subsidy is "in fact" contingent upon exports. Rather, Canada asserts, the correct test is whether the subsidy in question is available only for exports, or only on condition that goods are exported.

To continue with The implications of Brazil's interpretation

¹¹⁸ The New Shorter Oxford English Dictionary on Historical Principles, Vol. 1, (Oxford: Clarendon Press, 1993) at 494 (Exh. CDN-8).

The French version uses "subordonné", which translates as "subordinate to"; Robert & Collins French-English Dictionary, (Paris & London: Dictionnaires Le Robert and Collins Publishers, 1987) at 680 (Exh. CDN-9).

¹¹⁹ The New Shorter Oxford English Dictionary on Historical Principles, Id.. Vol. 2 at 2160 (Exh. CDN-10).

¹²⁰ Id.. at 3307 (Exh. CDN-11).

¹²¹ Indonesia - Certain Measures Affecting the Automobile Industry ("Indonesia- Autos") Report of the Panel adopted on 23 July 1998, at para. 14.33.

¹²² In contrast, actionable subsidies are triggered by effect: SCM Agreement Article 5 and 6.

¹²³ See Communication from Switzerland, 1 February 1988, MTN.GNG/NG10/W/17 at 1-2 (Exh. CDN-12); Note by Secretariat, Negotiating Group on Subsidies and Countervail Measures, Meeting of 1-2 June, 1998, MTN.GNG/NG10/7 (Exh. CDN-13); and Montreal Meeting of the Trade Negotiations Committee, MTN.TNC/7(MIN) 9 December 1988, at 18-20 (Exh. CDN-14).

¹²⁴ See: Communication from the United States, 15 June 1988, MTN.GNG/NG10/W/20 at 5 (Exh. CDN-15); Elements of the Framework for Negotiations - Submission by the United States, 22 November 1989, MTN.GNG/NG10/W/29 (Exh. CDN-16); Elements of the Negotiating Framework - Submission by the United States, 27 September 1990, MTN.GNG/NG10/W/39 at 3 (Exh. CDN-17).

¹²⁵ See, for example: Elements of the Framework for Negotiations - Submission by Japan, 6 October 1989, MTN.GNG/NG10/W/27 at 1 (Exh. CDN-18); Elements of the Framework for Negotiations - Submission by India, 30 November 1989, MTN.GNG/NG10/W/33 at 1 (Exh. CDN-19).

¹²⁶ Note by the Secretariat, Negotiating Group on Subsidies and Countervailing Measures, Meeting of 27-28 March 1990, MTN.GNG/NG10/17 at paragraph 3 (Exh. CDN-20), recording the response of some delegations to the US export propensity proposal.

¹²⁷ Status Report by the Chairman, 18 July 1990, MTN.GNG/NG10/W/38, containing a text distributed by the Chairman on 18 May 1990 at 2 ("Cartland I") (Exh. CDN-21)

¹²⁸ Draft Text by the Chairman, 4 September 1990, MTN.GNG/NG10/W/38/Rev.1, at 2 ("Cartland II") (Exh. CDN-22)

¹²⁹ Draft Text by the Chairman, 2 November 1990, MTN.GNG/NG10/W/38/Rev.2 at 5 ("Cartland III") (Exh. CDN-23)

¹³⁰ Draft Text by the Chairman, 6 November 1990, MTN.GNG/NG10/W/38/Rev.3 ("Cartland IV") (Exh. CDN-24).

¹³¹ Draft Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations, 20 December 1991, MTN.TNC/W/FA ("Dunkel Draft") at I.3 (Exh. CDN-25).

¹³² United States - Restrictions on Imports of Cotton and Man-made Fibre Underwear (Cotton Underwear), WT/DS24/AB/R, Report of the Appellate Body adopted on 25 February 1997, at 17: