6.352 In responding to Canada's specific comments, Brazil notes generally that the Finan Report performed two separate calculations: first, the aggregate present value in 1998 of benefits received by Bombardier in the past as well as those expected to be received in the future.⁴⁴⁶ second, benefits per 50-seat jet delivered in 1998.⁴⁴⁷ Brazil states that the per-aircraft benefits relate only to benefits which have already been received and do not include benefits relating to the development of 70-seat aircraft.

(a) The Time Frames Over Which Subsidies are Quantified and Aggregated

6.353 Brazil states that it does not disagree with KPMG's proposed tests for evaluating the timeframes used in the Finan Report, but emphasizes the importance of applying the correct time-frame consistent with the facts and circumstances of the case. Brazil argues that since each of the different Canadian Government subsidies analysed in the Finan Report involve different facts and circumstances, it correctly applied different time frames in calculating the benefits to Bombardier appropriate to the facts:

(i) EDC Equity Infusions

6.354 Time-frame: Benefits calculated for each of 20 years from fiscal 1996 through 2015.

6.355 Rationale: The EDC is presumed to participate in the financing of every jet sold by Bombardier, beginning in January 1996 and continuing for the estimated 20-year economic life of the product.⁴⁴⁸ Brazil notes that extending the analysis out 20 years does not significantly alter the analysis of aggregate benefits, because benefits received in the future are discounted back to the present at 16.9 per cent. Thus, 75 per cent of the net present value of benefits relating to EDC equity infusions are generated in the first 10 years of the analysis, i.e. through 2005.

(ii) Can$87 Million "Investment" in the 70-seat CRJ-700

6.356 Time-frame: For the purpose of calculating an aggregate benefit to Bombardier, the analysis extends to 2019. However, no per-aircraft benefit relating to this subsidy is calculated, since deliveries of the 70-seat jet have not yet commenced.

6.357 Rationale: Brazil notes that the government expects repayment, plus receipt of a modest profit, through per-aircraft royalties commencing with the 250th jet sold. Therefore, the analysis is extended through the estimated life of the 70-seat jet, 20 years.

(iii) Can$57 Million "'Investment'" in the Dash 8-400

6.358 Time-frame: For the purpose of calculating an aggregate benefit to Bombardier, the analysis extends to 2019. However, no per-aircraft benefit relating to this subsidy is calculated, since deliveries of the Dash 8-400 have not yet commenced.

6.359 Rationale: As in the case of the Can$87 million "investment", Brazil argues that the government expects repayment, plus receipt of a modest profit, through per-aircraft royalties. Therefore, again the analysis extends through the estimated life of the product, 20 years.

(iv) Can$100 Million "Investment" in Turboprop Engines

6.360 The time-frame and rationale are identical to those relating to the Can$57 million "'investment'".

(v) The Acquisition and Restructuring of de Havilland

6.361 Time-frame: Benefits are amortized over 131/2 years, beginning in the year in which funds were received.

6.362 Rationale: Amortization is based on the depreciable life of Bombardier fixed assets for the period 1994-1998.⁴⁴⁹ This is appropriate since the subsidies relate to the acquisition of the assets of the de Havilland business. Amortizing the benefits based on the average depreciable life of fixed assets anchors the duration of benefit to the life of the underlying assets.

(b) The Comparative Treatment of Repayable and Non-Repayable Contributions

6.363 Brazil concedes that the value of a grant should exceed the value of a repayable contribution, and that any statement to the contrary would be silly. Brazil states that its "low estimate" correctly computes the value of the repayable contributions, as noted by KPMG, but acknowledges a spreadsheet error made in calculating the "high estimate" for benefits relating to the Technology Partnerships Canada subsidies. Correcting this technical error does not change the low estimate of the present value of benefits received by Bombardier, and reduces the high estimate from US$2.4 billion to US$2.3 billion.

(c) The Comparative Treatment of Actual and Anticipated Benefits

6.364 Brazil does not object to making the distinction between benefits already received and those that may be received in the future. Brazil asserts that its calculation of the benefits per 50-seat jet delivered in 1998 relate entirely to benefits received in 1998 and prior years, and that the 1998 per-aircraft benefit excludes EDC benefits generated in later years and ignores benefits relating to the development of 70-seat aircraft.

6.365 In separating past vs. future benefits in the calculation of the aggregate present value of benefits, Brazil states that the only "anticipated" benefits are EDC benefits for 1999 and beyond. Brazil disagrees with the percentages calculated of the percentage of EDC benefits which may be considered "anticipated". Brazil argues that the number of planes actually sold is not the relevant benchmark to be used in distinguishing between actual and anticipated benefits, but rather the present value of benefits relating to deals consummated in or before 1998 vs. deals which are expected to take place in the future. Brazil calculates the present value of benefits relating to deals taking place in or before 1998 at between US$215 million and US$236 million. Brazil's estimate of the present value of benefits relating to future deals is between US$679 million and US$743 million. Thus, Brazil states, the portion of the total present value of benefits relating to anticipated benefits is roughly 30 per cent.

3. Rebuttal by Canada

6.366 Canada submitted a report by KPMG in support of Canada's criticisms of the Finan Report. In the report, Canada notes, first, that for EDC equity infusions, extending the timeframe of analysis increases the amount of the aggregate alleged benefits, because most of the alleged benefits identified were to be received in the future, as aircraft are sold. For the other funds for the development of airplanes and engines, Canada asserts, the alleged benefit has already been entirely received up front; extending the timeframe, be increasing the estimated repayments or royalties, diminished the magnitude of the alleged benefit.

6.367 Canada notes that Brazil acknowledges a spreadsheet error with respect to only one calculation. Canada submits that the same error is equally applicable to the calculations pertaining to TPC.

6.368 In response to Brazil's assertion that the Can$87 million TPC contribution in 1996 would have a net present value, in 1998, of Can$119 million, Canada notes first, that the Finan Report assumes that the TPC contributions are all paid in lump sum, which according to Canada is not the case. Canada states that as of the date of its First Written Submission, only about Can$22 million had been disbursed. Canada also indicates that the rate of inflation in Canada over the previous two years was only about 1.5 to 2 percent. Thus, for Canada, even if the Can$87 million had been disbursed in lump sum in 1996, a 25 percent inflation in two years in the "net present value" of the contribution was unjustified and again highlighted the difficulties in the methodology of the Finan Report. Canada also argues that the Finan Report is unduly pessimistic about the market prospects of the CRJ700, in view of the market forecasts by independent and highly respected forecasters that Canada has submitted in response to a Panel question.

G. Arguments Regarding the Clark Report

1. Arguments of Canada

(a) Saturation of the Canadian regional turboprop market

6.369 Canada criticises the "Clark Report" submitted by Brazil in support of its arguments concern the proportion of regional aircraft exported by Canada on a number of grounds. Canada asserts, first, that the report chooses a period of analysis that ignores the reality that the Canadian regional turboprop aircraft market has been saturated since 1992. Canada states that because of this saturation, since 1992, there have been only two firm sales of any new regional turboprop aircraft to Canadian customers⁴⁵⁰, and one import of a used Dash-8, in 1998.

6.370 According to Canada, in the period 1984-90, Canadian airlines invested heavily in turboprop regional aircraft and the Canadian domestic regional aircraft fleet increased by 776 per cent⁴⁵¹, thereafter stabilizing, as the Canadian market was saturated.

6.371 Canada argues that as of 1 January 1998, Canadian carriers operated almost 100 Dash 8's in regular service⁴⁵², and states that from its introduction in 1983/84 to 31 December 1997, 481 Dash 8's had been delivered. According to Canada, domestic Canadian carrier fleets therefore represent about 20 per cent of the Dash 8 deliveries.

6.372 For Canada, it thus is not surprising that Dash 8 sales post 1992 have been for export. Canada argues, however, that when the domestic demand for turboprop regional aircraft returns as older aircraft need replacing, it is likely that Canadian airlines will order new Dash 8s, given the economies of training on and maintaining new aircraft that have the same lineage as their established turboprop fleets.

(b) The 26 CRJs delivered to Air Canada

6.373 According to Canada, the Clark Report's "determination" that the 26 CRJs delivered to Air Canada are "export sales"⁴⁵³ is untenable. Canada submits that these 26 CRJs were purchased by a Canadian airline (Air Canada) from a Canadian manufacturer (Bombardier), and were never intended for export: each aircraft was required by contract to be manufactured in compliance with Transport Canada requirements for a Canadian Certificate of Airworthiness and a Canadian Certificate of Registration. The Standard Certificate of Airworthiness should be contrasted with a Certificate of Airworthiness for Export: CRJs acquired by Air Canada require the former, whereas export customers (such as Slovenia and the United States) require the latter. Air Canada took delivery of the aircraft directly from Bombardier. Canada states that the aircraft are based and registered in Canada,⁴⁵⁴ and fly regular routes between Canadian centres, and between Canadian and US centres.⁴⁵⁵

6.374 Canada also takes issue with the Report's statement that that Air Canada ordered 26 of the 50-passenger CRJs in several separate transactions and that Air Canada was not interested in owning these aircraft.⁴⁵⁶ According to Canada, this assertion is not supported by the evidence. Canada states that to finance its acquisitions, Air Canada chose to use US leveraged leases for 24 CRJs, with the remaining two CRJs purchased for cash.⁴⁵⁷ Thus, Canada maintains, Air Canada has demonstrated a patent interest in owning CRJs. Canada asserted that the latter two purchases are established beyond any doubt by the Bills of Sale and Certificates of Acceptance for these aircraft.

6.375 According to Canada, airlines purchasing aircraft look to a variety of financing mechanisms in order to reduce financing costs, and at present, the US leveraged lease is one of the most popular financing vehicles, as it allows an airline to pass US tax benefits to an equity participant, in return for lower financing costs.⁴⁵⁸ Canada states that similar advantages can be found in other jurisdictions: Japan, Germany and the United Kingdom.

6.376 In Canada's view, given the globalisation of financial services and capital movements, these transactions cannot be characterised as exports simply because they are financed or underwritten in another country. That is, Air Canada's choice of financing vehicle cannot change the fundamental nature of these transactions: they are domestic and not export sales.

6.377 Thus, Canada argues, the "Clark Report" incorrectly concludes that 100 per cent of all of Bombardier's regional aircraft sales have been for export.

6.378 Canada also argues that the Clark Report's definition of "sale", which counts firm orders as sales, is incorrect.⁴⁵⁹ Canada maintains that sales are properly marked when the plane is delivered; even firm orders may not turn into sales, as was evident during the downturn in the aircraft industry in the early 1990's.⁴⁶⁰ Canada noted that Air BC acquired two Dash 8 aircraft in April and May 1992 on rolling one-month interim finance leases and subsequently took title to the aircraft in July 1992. Thus, using the proper definition of sale, de Havilland made domestic sales in the "review period" chosen by the Clark Report.

2. Response by Brazil

6.379 Brazil takes issue with Canada's criticism that the Clark Report does not include sales of Dash 8 series aircraft sold to domestic airlines prior to 1992, and that had the Clark Report taken account of the period 1984-1990, it would have found evidence of domestic sales (paras. 6.368-6.371).

6.380 Brazil notes that it has conceded, pursuant to arguments by Canada, that a 1989 alleged subsidy by DIPP and SDI was not within the Panel's jurisdiction because it was made before the entry into force of the WTO Agreement (para. 4.77), and argues that Canada cannot "have its cake and eat it too." For Brazil, the period before 1 January 1995 is either relevant and subject to the Panel's jurisdiction or it is not. Canada cannot have it both ways.

6.381 Brazil also disagrees with Canada's argument that because 26 CRJs are operated by Air Canada and registered to operate in Canada, they represent domestic rather than export sales (paras. 6.372-6.376).

6.382 Brazil notes, first that 10 of the 26 CRJs operated by Air Canada were sold in 1993, before the effective date of the SCM Agreement.⁴⁶¹ Brazil states that according to Canada, events occurring before the effective date of the SCM Agreement are not subject to the Panel's jurisdiction.

6.383 Second, Brazil argues, Canada admits that for at least 24 of the 26 CRJs, the aircraft were not sold to and are not currently owned by Air Canada, but that rather because they are operated by Air Canada, they constitute domestic sales. Brazil does not dispute that these aircraft are, for the moment, part of the Air Canada fleet, but submits that they are not owned by Air Canada and were in fact sold via EDC's equity financing vehicle to a US SPC, from which Air Canada merely leases the aircraft, a fact which Brazil states that Canada acknowledges. In response to a Panel question concerning the basis for this alleged acknowledgement by Canada, Brazil notes Canada's statement (para. 6.373) that "'US leveraged leases'" were used to finance the sale of these aircraft, and Canada's statement (para. 6.124) that CRJ Capital, which according to Brazil is the "'EDC equity financing vehicle'", was used for the Air Canada transaction. Brazil also states that this transaction is the focus of former EDC President Paul Labbé's comments to the Canadian Parliament's Committee on Foreign Affairs and International Trade (see para. 6.112). Brazil states that its arguments in this regard do not speak to the remaining two CRJs, which Canada alleges were purchased by Air Canada.

6.384 Brazil notes that even if the two remaining CRJs operated by Air Canada and sold in 1997⁴⁶² constitute domestic sales, the result would be that during the period from 1 January 1995 to the present, 99.64 per cent of sales by the Canadian regional aircraft industry would still have been for export.⁴⁶³

6.385 Third, regarding Canada's argument (para. 6.372) that Air Canada's compliance with Transport Canada requirements regarding a Canadian Certificate of Airworthiness and a Canadian Certificate of Registration demonstrates that these CRJs "were never intended for export . . .", Brazil states that as a matter of Canadian law, it is illegal to operate aircraft in Canada without a Canadian Certificate of Airworthiness.⁴⁶⁴ Brazil notes that because the CRJs are in fact operating in the Air Canada fleet, this would presumably subject them to this domestic regulatory requirement. For Brazil, however, the fact that Air Canada would secure a Canadian Certificate of Airworthiness does not diminish the fact that the aircraft were sold to a foreign buyer.

6.386 Brazil also maintains that it is illegal under Canadian law for Air Canada to operate foreign-registered aircraft without obtaining a Canadian Certificate of Registration,⁴⁶⁵ and for Brazil the fact that Air Canada needed to secure this certificate simply makes it all the more evident that the CRJs at issue had been sold to and are owned by a US SPC, and are therefore "foreign-registered" within the meaning of Transport Canada regulations.

6.387 Brazil characterizes Canada's argument (para. 6.375) that although these aircraft were sold to foreign buyers and structured as export sales precisely so that they would fall within EDC's export financing mandate, the "'choice of financing vehicle cannot change the fundamental nature of these transactions'" as another instance of Canada's trying to "'to have its cake and eat it too.'" Brazil recalls a statement by EDC's former president in testimony to Parliament that the "reality" of this sale was that it was to a US party,⁴⁶⁶ in order to take advantage of EDC financing to launch an export product. For Brazil, Canada cannot credibly now be heard to claim that these were not export sales.

To continue with Rebuttal of Canada

⁴⁴⁶ The aggregate amounts appear in Table B.1 of The Finan Report.

⁴⁴⁷ The per-aircraft amounts are summarized in Table B.16 of The Finan Report.

⁴⁴⁸ See R. Baldwin and P. Krugman, "Industrial Policy and International Competition in Wide-Bodied Jet Aircraft", in R. Baldwin, ed., Trade Policy Issues and Empirical Analysis (Chicago: University of Chicago Press, 1988). Baldwin and Krugman state: "... the product cycles in aircraft are quite long ... (T)he life of a successful airframe is something like twenty years."

⁴⁴⁹ The method used to determine the depreciable life of Bombardier's fixed assets is discussed in G. White, A. Sondhi, D. Fried, The Analysis and Use of Financial Statements, (John Wiley, New York) 1994, page 453.

⁴⁵⁰ Two 2 Saab 340Bs were ordered in 1994; ten British Aerospace J41 were ordered in 1995, but all were subsequently cancelled or returned to British Aerospace. The remaining additions to the regional aircraft fleets of Canadian airlines post 1992 have been 26 Canadair CRJs delivered to Air Canada: see Orders, Canada, 20-90 Seat Market, 1984-1998 (Lundkvist Aviation Research, 1998) (Exh. CDN-42).

⁴⁵¹ Regional Market History: Orders, Deliveries, and Total Fleet, Canadian Market (Lundkvist Aviation Research, 1998) (Exh. CDN-43).

⁴⁵² Ninety-seven Dash 8-100 and 300 series aircraft were operated by Canadian carriers as of 31 December 1997: see Summary of Dash 8 Aircraft in Service with Operators of Canadian Airlines as at 1 January 1998 and World Airline Directory, the Americas, Flight International 25-31 March 1998 at pp 37-60 (Exh. CDN-44).

⁴⁵³ "Clark Report" at 10, 13, 21-24.

⁴⁵⁴ Transport Canada Registry of Civilian Aircraft, online: Transport Canada homepage (http://www.tc.gc.ca/cgi-bin/webdbc.dll/Av [sic.]( (date accessed: 10 November 1998) (Exh. CDN-45).

⁴⁵⁵ Air Canada, Press Release, "Air Canada to Add Two New Canadair Jets to Fleet" (31 January 1997) (Exh. CDN-46).

⁴⁵⁶ "Clark Report" at 13.

⁴⁵⁷ Air Canada, 1997 Annual Report (Exh. CDN-47).

⁴⁵⁸ Andrew Littlejohns and Stephen McGairl, eds., Aircraft Financing, 3rd ed. (New Jersey, US: Euromoney Books, 1997) at Chapter 8 (Exh. CDN-48).

⁴⁵⁹ "Clark Report" at 4: "Our analysis is based on the numbers of aircraft sold, i.e., those which are the subject of firm orders or commitments, not on value. As deliveries may lag firm orders by several months or several years, whenever possible we selected the date of the reported firm order, not subject to any conditions, as the most appropriate basis for determining the date of sale."

⁴⁶⁰ For example, a cancellation of a near-term order by GPA Jetprop caused de Havilland to reduce its production of Dash 8's and to shutdown the Downsview, Ontario plant for an extended period in the summer of 1993: See "GPA Jetprop Cancels Backlog, DHC Forced to Extend Summer Shutdown", Commuter Regional Airline News, 26 April 1993 at 3. (Exh. CDN-72).

⁴⁶¹ Clark Report, Tables 5D and 5F.

⁴⁶² Clark Report, Table 5H.

⁴⁶³ Clark Report, Table 8 (during the period 1 January 1995 to the present, there have been 563 sales of Canadian regional aircraft, two (or 0.36 per cent) of which are operated by Air Canada).

⁴⁶⁴ Section 700.05(1)(a) of the Transport Canada regulations (attached in relevant part in Exh. BRA-98).

⁴⁶⁵ Section 202.42(1) of the Transport Canada regulations (attached in relevant part in Exh. BRA-98).

⁴⁶⁶ House of Commons of Canada, 35th Parliament, 1st Sess., Evidence, Standing Committee on Foreign Affairs and International Trade, Meeting No. 43, 11 May 1995, pg. 43:30 (emphasis added) ("Committee on Foreign Affairs and International Trade") (Exh. BRA-9).