5.77 Canada submits that it is an axiom of treaty interpretation that the interpreter must avoid interpreting the treaty in a way that would lead to a manifestly absurd or unreasonable result.¹³³ In Canada's view, Brazil proposes that "contingent upon" should be interpreted more expansively than its ordinary meaning, and argues that Article 3.1(a) applies not only to subsidies that are conditional upon export performance, but also those subsidies that have an "export propensity", an interpretation that, in addition to ignoring the plain meaning of Article 3 and the negotiating context of the SCM Agreement, would lead to a manifestly absurd or unreasonable result in three ways.

5.78 First, Canada asserts, such a definition would create a serious imbalance between the obligations of smaller and larger economies under the SCM Agreement. In Canada's view, such an outcome was not only not intended, but would be manifestly unreasonable, for it would mean that there would be one law for larger economies that are not dependent on international trade and another for smaller economies that are.

5.79 Second, Canada states, if "export propensity" -- so clearly rejected as a benchmark throughout the negotiations -- were considered the appropriate standard for making a prohibited subsidy finding, Article 3.1 would be over-broad to the point of absurdity. For Canada, under such a definition, almost any subsidy that would help in the development of the competitive advantage of a state -- that would make its industries more efficient globally -- would then be prohibited as an export subsidy.

5.80 Third, in Canada's view, Brazil's interpretation would render government planning for WTO-consistent subsidies impossible. Canada submits that any purely domestic subsidy could have the effect of increasing the general competitiveness of a sector or a company, and that a properly structured subsidy would have the achievement of this outcome as its prime directive. For Canada, even if the output of the sector or the company in question only serves the domestic market, greater efficiencies in one sector or company could have a ripple effect in the economy as a whole, and such greater efficiency could lead to greater exports. Canada maintains that if Brazil's interpretation were acceptable, the resulting exports would render the otherwise WTO-consistent subsidy illegal, making it impossible for governments to exercise their right under the SCM Agreement to structure WTO-consistent subsidies.

5.82 Canada argues that if, therefore, an export financing transaction is entered into consistently with the interest rate provisions of the OECD Consensus, then such export credit practice, according to the express terms of the SCM Agreement, "shall not be considered an export subsidy prohibited by this Agreement."

5.83 Canada notes its view that item (j) and the first paragraph of item (k) of Annex I to the SCM Agreement are not exceptions; they merely set out what type of practice would be ipso facto an export subsidy. That is, an export credit provided by government that met the conditions of the first paragraph of Item (k) would be an export subsidy; a complainant need only prove the elements of Item (k) and does not need to further prove, for example, that the provision of the credit was "contingent on export performance". Canada submits that the examples provided in the Illustrative List do not identify a contrario what would not constitute an export subsidy, and that such an interpretation would turn the Illustrative List into an exhaustive list.

5.91 In Canada's view, the United States fails to identify this distinction and therefore presents the Panel with a hypothetical that is at once inconsequential and illogical. Canada agrees that the US hypothetical is an export subsidy. For Canada, however, in the US example the grant is in law tied to anticipated exportation, i.e., it is tied to or conditional on export performance. In Canada's view, the US example adds nothing to the analysis of export contingency in fact.¹³⁵

5.92 Canada also takes issue with the US suggestion that Canada's discussion of the negotiating history is incomplete because it ignores the purported reason for adding footnote 4: a proposal by the European Communities.¹³⁶ Canada submits that the United States has not explained that this proposal was made¹³⁷ seven months before the first of the draft texts of the SCM Agreement - i.e. Cartland I. ¹³⁸

5.93 Canada acknowledges that the first draft of the footnote reflected the proposal of the European Communities - almost word for word,¹³⁹ but states that the first iteration of footnote 4 was part of the on-going negotiations for establishing the scope of Article 3; that the European Communities was not the only participant in the negotiations; and that the test it proposed was clearly rejected by the negotiators. Canada states that the United States acknowledges (see para. 7.39) that "the final text of footnote 4 does not contain a 'knowledge' test as originally articulated by the EC ...". For Canada, the commonplace inference to be drawn from this is that knowledge and intent are not part of the conditionality test contained in Article 3.

5.94 Canada states that its view on intent is confirmed by the original proponent of the intent test, noting that the European Communities stated in its third party submission to this Panel:

5.95 Canada asserts in response to a panel question that a subsidy the intent or objective of which is to increase exports can be distinguished from a subsidy that is tied to anticipated export performance, that a subsidy may have "increasing exports" as a general objective, but that because this general objective may be achieved in any number of ways, the existence of that intention or objective alone does not mean that a subsidy is tied to anticipated exports. For example, Canada states, a country may suffer from declining productivity, or declining competitiveness due to currency realignments or changes in the pattern of trade in resources. It may, to spur its economy -- and with a general objective that exports might increase - establish a system of domestic subsidisation, to encourage productivity, increase competitiveness or effect a change from reliance on one set of resources or industries to another.

5.96 According to Canada, such subsidies may take many forms and focus on many different things. For example, subsidies may be made to change factories over from textiles to newer industries, or indeed services. Shipyards may be helped to move from oil tankers to cruise-ships. Canada maintains that in all of this, any improvement in productivity or competitiveness, or indeed any restructuring or change over to other sectors, may well result in increased exports. For Canada, however, to argue that these essentially domestic subsidies are tied to anticipated exports would be to stretch the term beyond recognition.

5.97 In response to a question of the Panel regarding whether "tied to" could also be interpreted to mean that one of the "reasons" for the grant of the subsidy is the expectation that exports will flow thereby, or that the subsidy is granted because of the expectation that exports will flow thereby, Canada refers to an article in the Economist of 31 October 1998, concerning Magnetic Levitation trains,¹⁴⁰ and argues that the country or company that finds the right solution to land transport is guaranteed world market dominance for the foreseeable future. The article notes that NASA, the National Aeronautics and Space Agency of the United States, is "paying for an experimental version" of the trains. Canada submits that the ostensible reason is NASA's own requirements, but that since it is clear that if the technology takes off, world market dominance would follow, it might be argued that the reason may well be increased exports.

5.98 Canada argues that this payment is not a subsidy tied to anticipated exports, because Article 3 prohibits subsidies that are contingent on or tied to export performance, that is, the subsidy would not be paid but for the expectation that exports would ensue. For Canada, the reason why a subsidy is granted, even if it could be adequately determined, is only relevant to the extent that it establishes the condition; that reason in itself - that is, the intention in itself - is not enough to turn an otherwise domestic subsidy into a prohibited subsidy.

5.99 Canada further argues that determination of de facto export contingency cannot be made on the basis of a single example, and submits that Article 2.1(c) of the SCM Agreement, which deals with de facto specificity, is helpful in this regard, particularly its provision that the length of time a subsidy programme has been in operation is one of the factors that should be taken into account in such a determination.

5.100 This also applies to de facto contingency, according to Canada. Therefore, while establishing conditionality for anticipated exportation may not be easy in respect of a single transaction, it could be indeed done over time, in Canada's view where for example, parts of a stream of payment are not paid because export expectations are not fulfilled; or where future eligibility is curtailed because such expectations are not fulfilled; or, where additional subsidies are paid as exports increase.

To continue with Arguments of Brazil

¹³³ Sinclair, (Exh. CDN-5).

¹³⁴ Exh. CDN-3.

¹³⁵ The US hypothetical is also illogical. Governments do not grant export subsidies for planned exportation only. A government that sets itself on the course of providing export-contingent subsidies would be expected, in the US hypothetical, to adjust the eligibility criteria so as to ensure that subsidies are paid when exports actually take place. Or, if it is simply interested in granting subsidies contingent on plans and expectations whether or not exports actually do take place, one would expect such a government to structure a domestic subsidy programme rather than one that is prohibited under the SCM Agreement. In any event, as a practical matter WTO Members have little incentive to challenge an ostensibly export-contingent subsidy that does not result in any exports.

¹³⁶ Id.. at para. 14.

¹³⁷ Elements of the Negotiating Framework, Submission by the European Community, MTN.GNG/NG10/W/31, 27 November 1989 (Exh. CDN-56).

¹³⁸ 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)

¹³⁹ The draft footnote in Cartland I states:

¹⁴⁰ Exh. BRA- 89. "Maglev trains: A permanent solution", The Economist, 31 October 1998, at 88.