(a) Arguments of Brazil

6.288 According to Brazil, as part of the transaction Bombardier is required "'to operate the de Havilland business with a view to continuing aircraft final assembly . . .'", which for Brazil constitutes a covenant making the transaction contingent upon maintenance of, among other things, de Havilland's current export-oriented sales strategies. Brazil asserts that at the time this language was drafted, de Havilland's order book stood at 61 aircraft, all but one of which was sold for export. In other words, Brazil states, Bombardier received a substantially discounted price for the purchase of de Havilland, in exchange for what the Government of Ontario anticipated would be the Dash 8's continued export orientation. Brazil argues that Bombardier has held to this commitment; as established by the Clark Report, all of de Havilland's Dash 8 aircraft sold since 1992 have been sold solely for export.³⁹⁸ Therefore, Brazil argues, the benefits accruing to Bombardier of OAC's investment in de Havilland were tied to anticipated, if not to actual exportation or export earnings and thus are prohibited export subsidies within the meaning of Article 3 of the SCM Agreement.

(b) Arguments of Canada

6.289 Canada describes the factors forming the background to the 1992 commitments by the Province of Ontario and the Government of Canada in support of the restructuring of de Havilland,³⁹⁹ noting that Boeing had owned de Havilland since 1986, and while the Dash 8 continued to be viewed as a superior product in the market, de Havilland's losses throughout the late 1980s - amounting to $1 billion by 1992 - persuaded Boeing to end its foray into the turboprop market. Canada states that sharply decreased orders following the recession of the early 1990s and aggressive sales financing and pricing practices by subsidised competitors had a considerable impact on the company's finances, such that by the end of 1991, Boeing indicated that it intended to close de Havilland if a suitable purchaser could not be found.

6.290 Canada submits that in view of the contribution of de Havilland to the economy of the province, both in absolute monetary terms and in terms of strategic depth, the Government of Ontario and Bombardier examined the potential for long-term viability of de Havilland, and came to the conclusion that an appropriate business plan, a revitalized Dash 8 programme, continuing productivity improvements and diversification of business operations through involvement in other Bombardier aircraft programmes could help de Havilland in attaining long-term commercial strength. Canada states that it was also clear that restructuring would take several years and that the risk of failure was significant.

6.291 According to Canada, on 22 January 1992 Ontario and Bombardier entered into an asset purchase agreement with Boeing to acquire the assets of its de Havilland division, and the deal closed on 9 March 1992. At that time, de Havilland Holdings Inc. (DHI) acquired the assets of de Havilland. Canada states that DHI was capitalized at Can$100 million, and the equity was fully invested in de Havilland. For Canada, Ontario's equity investment ensured that the Province would be a partner in decisions on the future direction of de Havilland. Ontario appointed three of seven members of the board of directors.

6.292 Canada argues that the Shareholders' Agreement, concluded in 1992 and binding on both parties, included a "put" option: Ontario had the right to require Bombardier to purchase its equity for Can$49 million. In opting for a fixed price, Canada submits, Ontario had decided to forego any upside potential in the value of de Havilland following restructuring. At the same time, Canada states, given the significant possibility of the failure of restructuring, Ontario's decision on the fixed price eliminated any downside potential as well. Canada notes that a five-year restructuring time-frame was established; the exercise period was set for 1 February 1996 to 31 January 1997.

6.293 According to Canada, in June 1995 the Government of Ontario changed, and the new Government was committed to withdrawing from certain functions in the marketplace and to selling certain government assets. Canada argues that by February 1996, Ontario determined that de Havilland had emerged as a viable entity, that continued involvement of the Province in de Havilland was no longer necessary, and that it could exercise its "put" option which right Ontario exercised within the permitted period, with the sale of Ontario's equity position in de Havilland Holdings Inc. concluded on 28 January 1997.⁴⁰⁰

6.294 Regarding the covenant,⁴⁰¹ which it argues is directly relevant to the question of de jure export contingency, Canada submits that the covenant required Bombardier to keep de Havilland running as an aircraft manufacturer if it made commercial sense, nothing more. Canada argues that if it makes commercial sense to sell aircraft domestically, then de Havilland will sell aircraft domestically and stay in business, and states that indeed, given that 20 per cent of all Dash 8s -- the most popular product manufactured by de Havilland -- in operation are in the Canadian market, de Havilland can expect to make more sales as required by market expansion and fleet renewal in Canada. Canada argues that this fact is well recognised by Brazil, which notes that the price of the sale had been agreed to long before -- in 1992. Canada maintains that the sale price was not conditional on or tied to export performance by de Havilland. It could not have been raised or reduced, and would not be raised or reduced, by virtue of the market into which de Havilland makes its sales. Accordingly, Canada argues, the sale of de Havilland by the Government of Ontario was not contingent, in law or in fact, upon export performance, and Brazil has not presented a prima facie case in this regard.

6.295 Canada also argues that Brazil overlooks the fact that, in line with the covenants it entered into, Bombardier has invested hundreds of millions of dollars in diversifying de Havilland's operations. According to Canada, De Havilland now produces the wing for Bombardier's new Learjet 45 and does the final assembly on the new intercontinental Global Express business jet, and the Learjet 45 was certified in late 1997, and the Global Express in mid 1998. Canada notes that there are firm orders from Canadian customers for both these aircraft.

6.296 For Canada, the important point is that Bombardier will not get a reduction in the sale price if it sells more into export markets, and will not pay a penalty -- through, for example, a prospective increase in the sale price -- if all of its sales are in the Canadian market.

D. Canada-Québec Subsidiary Agreement on Industrial Development

1. Subsidy

(a) Arguments of Brazil

6.297 Brazil argues that pursuant to the 1984 Economic and Regional Development Agreement, the governments of Canada and Québec entered into two Canada-Québec Subsidiary Agreements on Industrial Development (the "Subsidiary Agreements"), signed in 1985 and 1992, which together pledged Can$743 million in assistance to industrial projects in Québec.⁴⁰² According to Brazil, although the Subsidiary Agreements were to have expired effective 31 March 1998,⁴⁰³ programmes receiving funding through the Subsidiary Agreements were announced in June 1998.⁴⁰⁴

6.298 Brazil submits a study prepared by the Canadian Reform Party⁴⁰⁵, which it cites to illustrate that the Canadian regional aircraft industry has received "conditionally-repayable" contributions under the auspices of the Subsidiary Agreements. Brazil notes that the spreadsheet included in the study is limited to funding granted before 22 October 1996, the date of the study. According to Brazil, Canada has not been forthcoming concerning Subsidiary Agreement assistance to the regional aircraft industry after this date (or concerning details of the terms of assistance granted prior to 22 October 1996 and included on the Reform Party spreadsheet). In response to a Panel question regarding which of the transactions identified in that spreadsheet Brazil alleged constitute subsidies within the meaning of SCM Article 1, Brazil replies that it offered the list of transactions to illustrate that the Canadian regional aircraft industry has received "conditionally-repayable" contributions under the auspices of the Subsidiary Agreements, and that Brazil does not consider that any of the specific contributions listed themselves constitute export subsidies to the Canadian regional aircraft industry prohibited by Article 3 of the SCM Agreement.

6.299 Brazil submits⁴⁰⁶ an extract from the 1996-97 Public Accounts of Canada for the Department of Industry, which shows that Bombardier's Canadair division received funds under the Subsidiary Agreements during that period. According to Brazil, Canada has not been forthcoming with information within its sole control about Subsidiary Agreement assistance to the Canadian regional aircraft industry. Brazil believes that the evidence it has presented is sufficient to warrant further questions from the Panel to Canada concerning the existence and terms of repayment for Subsidiary Agreement assistance to the regional aircraft industry.

6.300 In response to a question from the Panel asking Brazil to cite instances of Subsidiary Agreement assistance in the form of "non-repayable contributions" provided to the civil aircraft industry, Brazil replies that Schedule B of the 1992 Subsidiary Agreement⁴⁰⁷ states that assistance under the Subsidiary Agreement may be granted in the form of "a repayable or non-repayable contribution." Brazil argues that the Canadian Reform Party study that it submits as an exhibit⁴⁰⁸ demonstrates that as an historical matter certain assistance granted Bombardier under the auspices of the Subsidiary Agreements has been characterized as "'non-repayable'" or simply as a "'contribution.'" Brazil argues that Canada refuses to release information which would permit Brazil, and the Panel, to determine whether non-repayable contributions under the Subsidiary Agreements subject to the SCM Agreement have in fact been made. Brazil considers that it has presented evidence sufficient to establish its prima facie case, and that the burden of production has shifted to Canada to rebut that case.

6.301 Brazil also argues that, according to Canada's notification to the WTO's SCM Committee, certain funds provided under the auspices of the Subsidiary Agreements are in the form of "non-repayable contributions,"⁴⁰⁹ and as such confer significant benefits on recipients within Article 1.1 of the SCM Agreement.

6.302 Brazil further argues that even those contributions classified as "repayable" should be considered to confer benefits within the meaning of Article 1.1, noting its arguments (para. 6.323) as to why it considers conditionally-repayable contributions failing to compensate for various factors to constitute subsidies within the meaning of Article 1.1 of the Agreement.

(b) Arguments of Canada⁴¹⁰

6.303 In answer to a Panel request for information concerning alleged loans made under the 1992 Subsidiary Agreement to Rolls-Royce and Lamines CTEK, Canada notes that it has not put in a defence regarding whether these contributions are subsidies within the meaning of Article 1 of the SCM Agreement. Canada notes that Brazil agrees with Canada regarding the relevance of the principle of judicial economy to the issues to be determined in this case. Accordingly, Canada states, to the extent that any documents are produced by Canada in response to this question of the Panel, they are provided to further support Canada's submission that the contributions at issue are not "contingent on export performance" within the meaning of Article 3 of the SCM Agreement.

6.304 Canada also states that Brazil has made no specific allegation about contributions to Rolls Royce or Lamines CTEK, nor adduced any evidence in support of its allegations concerning "benefits" under the Subsidiary Agreement. Canada does not consider it appropriate to adduce evidence in response to allegations not made and a case that has not been established. In addition, Canada states that the contribution to Lamines CTEK was in respect of certain electronic materials not related to the civil aircraft sector, and as such is not within the Panel's jurisdiction.

6.305 Finally, Canada indicates, most of the information requested by the Panel is sensitive business confidential information, and Canada's desire to present to the Panel such information as may help it arrive at a decision must be balanced against the commercial interests and legal rights of private parties not Party to this dispute. Canada notes that with the consent of the Government of Québec, it provides the Rolls Royce contribution agreement, as Business Confidential Information, with clauses relating to repayment terms blocked. ⁴¹¹

6.306 In response to a question from the Panel, Canada indicates that a $2.25 million contribution identified in the report by the Auditor General involved pharmaceuticals, and further, that the Auditor General's use of the term "repayable" includes conditionally repayable. According to Canada, all contributions under the Subsidiary Agreement are repayable, over time, in fixed annual payments. Canada states that there are three conditionally repayable contributions, based on sales, and that all other contributions are unconditionally repayable.

(c) Comments of Brazil

6.307 Regarding Canada's citation to Brazil's belief in judicial economy, Brazil recalls its reference to judicial economy in its letter to the Panel dated 13 December 1998 (see para. 6.281).

6.308 Brazil states that Canada appears not to have provided all of the information requested by the Panel concerning Subsidiary Agreement assistance. First, Brazil notes, the repayment terms are redacted from the agreement setting out the terms of the $2.5 million contribution to Rolls Royce. According to Brazil, the Panel should therefore adopt adverse inferences, presuming that these terms tie repayment to export performance (paras. 4.146-4.151). Furthermore, Brazil notes that while Canada has provided the Rolls Royce contribution agreement, it appears to have provided as "Annex A" thereto the project description for the Lamines CTEK contribution, rather than the project description associated with the Rolls Royce contribution. Brazil submits that the Panel should adopt adverse inferences, presuming from Canada's failure to produce the annex containing the project description for the Rolls Royce contribution that this description contains inculpatory information suggesting that the contribution is tied in fact to actual or anticipated export.

2. Export contingency

(a) Arguments of Brazil

6.309 Under the Subsidiary Agreements, Brazil states, the governments of Canada and Québec jointly fund major industrial projects aimed at improving the competitiveness of Québec's economy. The purpose of the Subsidiary Agreements is explicitly to foster development of export markets for Québec products by "[p]romot[ing] access to new foreign as well as domestic markets,"⁴¹² and for this reason, Brazil maintains, financing provided under the auspices of the Subsidiary Agreements is often explicitly directed at export-oriented projects and industries.⁴¹³ In answer to a Panel question as to how the cited press articles support its "explicitly directed" allegation, Brazil states that the projects described are concrete examples establishing Brazil's point that Subsidiary Agreement funding "explicitly" - meaning in actual fact - goes to export-oriented projects, as one describes Subsidiary Agreement funding to a company with 92 per cent of its revenue dedicated to export sales, and the other describes Subsidiary Agreement funding to a company "[m]ost of" the production of which is destined for export to the United States. In answer to a Panel question regarding why Brazil states that the purpose of the Subsidiary Agreements is to foster development of export markets, but cites only the 1985 Agreement, Brazil replied that the same quote does not appear in the text of the 1992 Subsidiary Agreement. Brazil reiterates that it does not claim that assistance granted to the Canadian regional aircraft industry under the Subsidiary Agreements is contingent in law on export, but rather that assistance granted to the Canadian regional aircraft industry under the auspices of the Subsidiary Agreements is contingent in fact on export. As a result, in Brazil's view, it is not necessary that both, or either, of the Subsidiary Agreements include provisions speaking expressly to export contingency.

6.310 Brazil cites a study prepared by the Canadian Reform Party which reports that the regional aircraft sector has been a significant recipient of benefits under the Subsidiary Agreements,⁴¹⁴ and notes that the Canadian regional aircraft industry is 100 per cent export oriented according to the Clark Report. Brazil also notes that 1992 Subsidiary Agreement identifies aerospace is one of the "'key sectors'" the support of which is central to the development of the Québec economy.⁴¹⁵

6.311 According to Brazil, assistance under the Subsidiary Agreements may be "in the form of repayable or non-repayable contributions."⁴¹⁶ In answer to a question from the Panel as to why Brazil considers that "repayable loans" under the Subsidiary Agreement, referred to in the articles submitted by Brazil⁴¹⁷, constitutes subsidies within the meaning of SCM Article 1, Brazil states that it cited to that assistance for the purposes of illustrating, with the help of other evidence cited that funding under the Subsidiary Agreements is contingent in fact upon export performance within the meaning of Article 3 of the SCM Agreement. Brazil states that it has not claimed that the specific assistance described in these exhibits constitutes a subsidy within the meaning of Article 1.1 of the SCM Agreement, among other reasons because this assistance is not to the regional aircraft industry.

6.312 According to Brazil, loans provided under the Subsidiary Agreements grant benefits to businesses with an established export trade or significant export potential, consistent with the goal of the Subsidiary Agreements to "'[p]romote access to new foreign as well as domestic markets.'"⁴¹⁸ For Brazil, together the above factors suggest that Subsidiary Agreement funds are in fact tied to actual or anticipated exportation or export earnings.

(b) Arguments of Canada

6.313 Canada argues that the Subsidiary Agreement is not in law or in fact contingent upon export performance. Canada observes Brazil's acknowledgement that contributions under the Subsidiary Agreement promote access "'to new foreign as well as domestic markets'" [emphasis added by Canada] (para. 6.308)

6.314 Canada submits that the evidence that Brazil has adduced does not address the correct interpretation of export contingency. That is, Canada argues, Brazil has not adduced any evidence to show that Subsidiary Agreement contributions are contingent on export performance, in the sense that contributions would not be paid unless exports took place, that there would be rewards if exports took place or that there would be penalties if exports did not take place. Canada submits that there is no such evidence because this is not how contributions under the Subsidiary Agreement are made. In Canada's view, therefore, Brazil does not put before the Panel a prima facie case that contributions under the Subsidiary Agreement are contingent upon export performance.

6.315 Canada states that the Subsidiary Agreement was signed by the Government Canada and the Government of Québec (Québec) on 27 March 1992 for a five year period,⁴¹⁹ and that it was terminated on 31 March 1998.⁴²⁰ According to Canada, no new applications are entertained, but applications submitted prior to the date of termination are still in the process of being considered. Canada argues that the purpose of the Subsidiary Agreement was to improve the competitiveness and vitality of the Québec economy by providing financial support for major industrial projects in Québec.

6.316 Canada indicates that contributions under the Subsidiary Agreement have been made in 111 major industrial projects, including 7 feasibility studies, and that only nine projects -- 8 per cent of the total -- were in the aerospace sector. According to Canada, the involvement of the Government of Québec in support provided under the Subsidiary Agreement touched virtually all industrial sectors in Québec, including hygiene products, electric power systems, aircraft and aircraft parts, glass, textiles, plastics, ferro-alloys, major appliances, chemicals, waterworks and sewage systems, and cosmetics. According to Canada, if alleged subsidies under the Subsidiary Agreement are, as Brazil points out, available for both domestic and export markets, by definition they are not contingent on export performance. Canada argues that Brazil's de facto argument rests on its "export propensity" interpretation, which in Canada's view is incorrect (paras. 5.53- 5.94). In Canada's view, Brazil's argument must therefore fail.

6.317 In response to a Panel question as to the starting and ending dates for the 1985, 1988 and 1992 Subsidiary Agreements, and the dates on which funding began and ended under each, Canada states that the 1985 Subsidiary Agreement was entered into on 23 January 1985 and was terminated in June 1991, and contributions committed under it were terminated in 1996; and that the 1992 Subsidiary Agreement was entered into on 27 March 1992 and was terminated on 31 March 1998, and contributions committed under it will terminate in 2003. Canada further indicates that these agreements were entered into under the authority of a framework Memorandum of Understanding (MOU) on economic development between the Government of Québec and the Government of Canada. According to Canada, the first MOU was signed on 14 December 1984; the 1985 Subsidiary Agreement was entered into under the auspices of the 1984 MOU. The second framework MOU was signed on 9 June 1988, and the 1992 Subsidiary Agreement was entered into under this MOU.

6.318 In response to a Panel question asking why Canada in its arguments does not refer to Brazil's arguments concerning the 1985 Subsidiary Agreement, Canada states that Brazil makes no claims in respect of that Agreement.

(c) Response of Brazil

6.319 Brazil notes Canada's argument in defending Subsidiary Agreement funding from characterization as "'contingent on export,'" that because some Subsidiary Agreement funding supports domestic products or markets, or because such funding has been directed to projects outside of the Canadian regional aircraft industry, it cannot be considered to be contingent upon export performance.

6.320 Brazil does not contest that some Subsidiary Agreement funds may well have gone to other industries with sales in export markets, or to other industries with sales in domestic markets. Brazil submits that its claim that Subsidiary Agreement assistance constitutes a prohibited export subsidy under Article 3 of the SCM Agreement is unrelated to these incidences of Subsidiary Agreement funding. Rather, Brazil argues, when Subsidiary Agreement funds were disbursed to the Canadian regional aircraft industry, they were given to an industry that is totally export oriented according to the Clark Report, precisely because it is an export industry and was anticipated to remain so.

6.321 Brazil considers that the evidence it has submitted, regarding conditional repayability of Subsidiary Agreement funds, the Agreement's objectives, the assistance to export-oriented companies and assistance to the regional aircraft industry (paras.6.297-6.298) constitutes a prima facie case that Subsidiary Agreement assistance to the Canadian regional aircraft industry constitutes a prohibited export subsidy.

To continue with Société de Dévéloppement

³⁹⁸ Id.

³⁹⁹ See Minister of Industry, Science and Technology and Minister for International Trade, News Release, "Wilson welcomes purchase of de Havilland and provides federal assistance", 22 January 1992, (Exh. CDN-66) and Ministry of Industry, Trade and Technology, News Release, "Ontario and Bombardier purchase de Havilland", 22 January 1992 (Exh. CDN-67) listing the commitments made by the two governments at the time of the purchase of this company by the Ontario Government and Bombardier from Boeing in 1992.

⁴⁰⁰ See Ministry of Economic Development, Trade and Tourism, News Release, "Ontario recoups taxpayer investment in de Havilland" 28 January 1997 (Exh. CDN-33).

⁴⁰¹ Exh. CDN- 68

⁴⁰² Report of the Auditor General of Canada to the House of Commons, November 1995, p. 21-8 (relevant chapter of Report - Exh. BRA-52).

⁴⁰³ Amendment No. 2 to the 1992 Subsidiary Agreement (Exh.BRA-59).

⁴⁰⁴ "Industry Canada - Contribution to Aeterna Laboratories Inc. under Canada-Québec Subsidiary Agreement on Industrial Development," Canada NewsWire, 15 June 1998 (Exh. BRA-60).

⁴⁰⁵ Exh. BRA-58

⁴⁰⁶ Exh. BRA-89

⁴⁰⁷ Exh. BRA-57

⁴⁰⁸ Exh. BRA-58

⁴⁰⁹ Communication at para. XXIX:5 (Exh. BRA- 56). See also 1992 Canada-Québec Subsidiary Agreement on Industrial Development, Schedule B, p. 31 (Exh. BRA- 57). Canada has not disclosed sufficient information concerning the Subsidiary Agreement to determine whether even those contributions deemed repayable were in fact granted at concessionary rates.

⁴¹⁰ See also Section VI.F for the parties' comments on the Finan Report regarding the Subsidiary Agreement.

⁴¹¹ See BCI Tab 4.

⁴¹² 985 Canada-Québec Subsidiary Agreement on Industrial Development, Art. 2.2(d). Id. at Schedule A, para. (d) (emphasis added) (Exh. BRA- 53).

⁴¹³ "Rolls-Royce swells: Ottawa, Québec jointly lend $2.5 million to help finance Lachine plant expansion," The Gazette (Montreal), 23 April 1997 (92 per cent of $2.5 million loan recipient's sales were for export) (Exh. BRA- 54); "Federal and Provincial Governments Contribute to the Lamines CTEK Project in Montreal," Canada NewsWire, 17 October 1997 (Deputy Premier and Minister of State for Economy and Finance Bernard Landry states that "Most of the [funded] plant's production will be exported to the United States.") (Exh. BRA- 55).

⁴¹⁴ Canadian Reform Party Research, "Bombardier and the Federal Government - 15 Years of Corporate Handouts," dated 22 October 1996 (Exh. BRA- 58).

⁴¹⁵ 992 Subsidiary Agreement, Schedule A, p. 27 (Exh. BRA- 57).

⁴¹⁶ Canadian Communication Updating Notification Pursuant to Article XVI:1 of the GATT 1994 and Article 25 of the SCM Agreement, G/SCM/N/16/CAN, 25 June 1997, para. XXIX:5 ("Communication") (Exh. BRA- 56). See also 1992 Canada-Québec Subsidiary Agreement on Industrial Development, Schedule B, p. 31 (Exh. BRA- 57).

⁴¹⁷ Exhs. BRA-54 and BRA-55

⁴¹⁸ 985 Canada-Québec Subsidiary Agreement on Industrial Development, Art. 2.2(d). Id. at Schedule A, para. (d) (Exh. BRA- 53).

⁴¹⁹ Canada-Québec Subsidiary Agreement on Industrial Development (1991), 27 March 1992 (Exh. CDN-34).

⁴²⁰ Amendment No. 2 to the Canada-Québec Subsidiary Agreement on Industrial Development (1991), 8 August 1996 at 2 (Exh. CDN-35).