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World Trade
Organization

WT/DS70/R
14 april 1999
(99-1398)
Original: English

Canada - Measures Affecting the Export of Civilian Aircraft

Report of the Panel

(Continued)


(b) Contingency on export performance

(i) Arguments of Brazil

6.49 Brazil submits that the EDC provides prohibited export subsidies. First, Brazil argues, the EDC exists solely to support export transactions. Brazil cites to testimony by EDC's President before the Canadian Parliament that "[t]he goal for Canada is to make sure that we have a competitive advantage for Canadian exporters, not just a level playing field."191 According to Brazil, every subsidy EDC grants, every benefit it confers, every move it makes, is intended to "'absorb the risk on behalf of Canadian exporters, beyond what is possible by other financial intermediaries.'"192 Brazil asserts that EDC bills itself "not [as] a profit maximizer, but an export maximizer."193 Brazil argues that subsidies granted Canadian enterprises by EDC are, as a matter of legal directive, "'for the purposes of supporting and developing, directly or indirectly, Canada's export trade and Canadian capacity to engage in that trade and to respond to international business opportunities.'"194 Brazil states that these subsidies are, within the meaning of Article 3, contingent in law and in fact upon export performance, and are therefore prohibited; and that EDC is precisely what Article 3 of the SCM Agreement was intended to prohibit.

6.50 Brazil contends that Section 10(1) of the Canadian Export Development Act states that EDC was established "'for the purposes of supporting and developing, directly or indirectly, Canada's export trade and Canadian capacity to engage in that trade and to respond to international business opportunities.'"195 Brazil asserts that EDC is required to fund exports, as opposed to domestic sales, and that as a result, EDC itself and assistance to the regional aircraft industry granted thereunder, is de jure contingent upon export, within the meaning of Article 3 of the SCM Agreement.

(ii) Arguments of Canada

6.51 In answer to Panel questions whether Canada concedes that EDC activities are contingent upon export performance, and whether given EDC's mandate it is reasonable to assume that any transaction financed with EDC assistance is necessarily an export transaction, Canada replies in the negative. Canada states that the EDC has the mandate, under section 10 of the Export Development Act, to engage in activities with, in essence, objectives of supporting and developing Canada's export trade; and Canadian capacity to engage in that trade, and respond to international business opportunities.

6.52 According to Canada, EDC's mandate allows it to offer a full range of risk management services and financing products "for the purpose of supporting and developing, directly or indirectly, Canada's export trade and Canadian capacity to engage in that trade and to respond to international business opportunities." Canada states that EDC offers, therefore, a variety of services and products, some of which are contingent on export, and others - such as foreign investment insurance, domestic credit insurance, funding investments overseas, and various equity investments - that are not contingent on export.

6.53 Canada states that an article submitted by Brazil196 supports this, as it refers to the "'the new legislative mandate adopted by the EDC in June this year [1994]'" and notes that the new regulations "'allow EDC to, among other things, provide comprehensive cover for domestic as well as export receivables ...'". While Canada does not vouch for the accuracy of the rest of the article, it states that this part is accurate.

6.54 Further, for Canada, Mr. Labbé's comments relied upon by Brazil establish simply the following: that, although the focus of the EDC is exports and international business (as indeed it cannot be otherwise), it may engage in certain domestic transactions that help develop Canada's capacity to engage in export trade and to respond to international business opportunities. That is to say, for Canada, the fact that the EDC is involved in a transaction does not mean that the transaction itself is necessarily an export one.

(iii) Response of Brazil

6.55 Regarding Canada's argument concerning EDC's "'new legislative mandate'", Brazil questions Canada's reliance upon the article submitted by Brazil, in view of Canada's characterization of that article as a press report which is "'uncorroborated or does not otherwise contain material with an independent title of credibility and persuasiveness'" (paras. 6.97). In addition, Brazil argues that Canada surely could have provided the Panel with the actual legislative or regulatory language evidencing this change in Canadian law, rather than relying on a press article. Brazil argues that under similar circumstances, the Panel in Indonesia - Certain Measures Affecting the Automobile Industry considered that reliance on press reports constituted "'failure to submit the positive evidence required'" to support a claim

. . . given that the affected companies certainly had at their disposal copious evidence in support of the claims of the complainants, such as the actual business plans relating to the new models, government documentation indicating approval for such plans (assuming the "approval" referred to by the complainants with respect to the Optima means approval by the Indonesian government), and corporate minutes or internal decision memoranda relating both to the initial approval, and the subsequent abandonment, of the plans in question.197

2. EDC Debt Financing

(a) Arguments of Brazil

6.56 Brazil states that EDC export financing takes various forms, and may be structured as direct financing at concessionary rates for up to 90 per cent of the cost of an aircraft.198 Brazil asserts that EDC itself acknowledges the concessionary nature of its export assistance, referring to testimony before Parliament by Paul Labbé, President and Chief Executive Officer of EDC, that EDC strives to "mak[e] at least the rate of inflation," and that such a return is well below the return "that would be required to survive in the private sector."199 Brazil cites as an example of EDC's direct financing an April 1997 agreement by Bombardier for the sale of 30 CRJs (with options for an additional 60 aircraft), valued at approximately US$600 million, to ASA Holdings, Inc. and its subsidiary, Atlantic Southeast Airlines.200 According to Brazil, the transaction included a commitment from EDC to finance up to 85 per cent of the lease or purchase price for all 30 CRJs, an option exercised by ASA for those aircraft delivered to date201 to finance 16.5-year leases of the CRJs.202

6.57 According to Brazil, EDC President Paul Labbé, in information published by EDC, expressly acknowledged the benefit granted to Canadian exporters by EDC financing:

EDC's financing support gives Canadian exporters an edge when they bid on overseas projects. . . . Trade deals increasingly depend on complex and tightly negotiated financing arrangements where a few basis points in interest rates can make or break the deal. Exporters are having to bid not just on the basis of quality and price, but also on the basis of the financing package supporting the sale.203

6.58 For Brazil, EDC's help - to the tune of a "'few basis points'" - must be better than that which would otherwise be commercially available, or an EDC financing package would not, in EDC's former President's words, "'give Canadian exporters an edge.'" For Brazil, this "'edge'" is a "benefit" conferred upon exporters, within the ordinary meaning of Article 1.1 of the SCM Agreement.

6.59 Similarly, according to Brazil, one of the benefits of EDC financing is that a Canadian exporter can "'advis[e] potential foreign buyers that Canadian financing may be available for their purchase,'" thereby "'enhanc[ing] the competitiveness of [the exporter's] sales proposal.'"204 Brazil asserts that the Canadian regional aircraft exporter's product is more attractive to a purchaser, in turn, for the simple reason that it costs less than it would without the Canadian Government's help.

6.60 According to Brazil, therefore, EDC's provision of financing of up to 90 per cent (or more) of an aircraft's cost over a 15-year or 15-year-plus period at concessionary rates confers the obvious benefit, within the meaning of Article 1.1, of lowering the price of an exported aircraft for the purchaser. For Brazil, no private financial institution or investor would provide this degree of financing on concessionary terms, which is why EDC steps in to "'help absorb the risk . . . beyond what is possible by other financial intermediaries.'"205

6.61 Brazil argues that even if it is relevant, under Article 1.1, to inquire whether the government in making a financial contribution has covered its costs, pure analysis of the cost to the lender is not appropriate in the case of EDC, which boasts of its ability to "'absorb the risk on behalf of Canadian exporters, beyond what is possible by other financial intermediaries.'"206 As compensation for this risk, which is a cost according to Brazil, EDC should be expected to collect a risk premium. Brazil notes that it is a fundamental tenet operating in financial markets that "'investors increase their required rates of return as perceived risk (uncertainty) increases.'"207 Yet, Brazil argues, EDC's former president, in testimony to Parliament, has spoken of EDC's goal of avoiding losing money by "'making at least the rate of inflation,'" which he recognized is well below the return "'that would be required to survive in the private sector.'"208 Brazil questions how, if EDC is absorbing risk beyond that which the private sector is willing to accept, merely making the rate of inflation allows it to meet its costs?

6.62 Brazil recalls its reference to EDC's low net interest margin to establish that EDC is not being compensated for this extra risk and, conversely, that recipients of EDC funding are paying less for that funding than they would from commercial sources (paras. 6.7-6.16, 6.38-6.44).

6.63 Brazil takes issue with Canada's response referring to EDC's 1996 net interest margin of 3.03 per cent - which Canada aims is higher than that achieved by some commercial banks -- as evidence that it is covering costs incurred on its lending activities. (para. 6.73). Brazil maintains that for a commercial bank to accept EDC's loan portfolio a much higher return would be required, and submits an analysis of the differential in risk between EDC's loan portfolio and the loan portfolios of commercial banks209. For Brazil, this analysis shows that financing of EDC's risk class by private investors would demand a spread of 1,242 basis points over riskless US Treasuries of 15+ years maturity, or 17.73 per cent, a conclusion which demonstrates the degree to which EDC's lending activities, yielding a net interest margin in 1996 of only 3.03 per cent, do not effectively cover the costs associated with the riskiness of EDC's loan portfolio, and grant borrowers access to rates not otherwise available from lenders disciplined by market forces. Brazil further argues that even if all of EDC's loans are secured, private lenders still demand a spread of at least 150 basis points above the riskless US Treasuries of identical tenor. In response to a Panel question, Brazil states that this assertion is based on a comparison of the yield for riskless US Government 15-year securities and the yield for investment grade-rated unsecured non-rail transportation bonds.210

To continue with Arguments of Canada


191 Testimony of EDC President Mr. Ian Gillespie before the Standing Committee on Foreign Affairs and International Trade, 6 November 1997, p. 15 (Exh. BRA-66).

192 Message at 2 (Exh. BRA-7).

193 Testimony of EDC President Mr. Ian Gillespie before the Standing Committee on Foreign Affairs and International Trade, 6 November 1997, p. 3 (Exh. BRA-66).

194 Export Development Act, Section 10(1) (Exh. BRA-6).

195 Export Development Act (Exh. BRA-6).

196 Exh. BRA-13

197 Indonesia - Certain Measures Affecting the Automobile Industry, WT/DS54/R, WT/DS55/R, WT/DS59/R, WT/DS64/R, adopted 23 July 1998, at paras. 14.234-14.235.

198 "Ottawa Joins Bombardier in jet-leasing venture," The Globe and Mail, 5 April 1995 (Exh. BRA-8) (To support Dash 8 sales, "Ottawa put up as much as 90 per cent of the purchase price."). See also House of Commons of Canada, 35th Parliament, 1st Sess., Evidence, Standing Committee on Foreign Affairs and International Trade, Meeting No. 43, 11 May 1995, 43:10 ("Committee on Foreign Affairs and International Trade") (Exh. BRA-9).

199 House of Commons of Canada, 35th Parliament, 1st Sess., Standing Committee on Banking, Trade and Commerce, Issue No. 48, 28 November 1995, 48:22 ("Committee on Banking, Trade and Commerce") (Exh. BRA-10).

200 ASA Holdings, Inc., Form 10-Q, filed with the US Securities and Exchange Commission for the quarterly period ended 31 March 1997 (File No. 333-13071), pgs. 8-9 (Exh. BRA-11).

201 ASA Holdings, Inc. Annual Report 1997, "Liquidity and Capital Resources," Lexis Disclosure Report, pgs. 15-16 (Exh. BRA-12).

202 Id.

203 CanadExport On-Line, Focus on Export Development Corporation, at 2 (Exh. BRA-67).

204 Infoentrepreneurs website, pg. 13 (Exh. BRA-68).

205 Message at 2 (Exh. BRA-7).

206 Export Development Corporation, 1995 Chairman and President's Message, pg. 2 (Exh. BRA-7).

207 Frank K. Reilly, Investment Analysis and Portfolio Management (Dryden Press), Fourth Edition, pg. 25 (Exh. BRA-81).

208 House of Commons of Canada, 35th Parliament, 1st Sess., Standing Committee on Banking, Trade and Commerce, Issue No. 48, 28 November 1995, pg. 48:22 (Exh. BRA-10).

209 Exh. BRA-85

210 Exh. BRA-85