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

Canada - Measures Affecting the Export of Civilian Aircraft

Report of the Panel

(Continued)


2. Canada's interpretation of "export subsidy"

7.32 The United States does not take a position on whether the measures at issue are, in fact, export subsidies. The United States agrees with Canada that the first Brazilian submission is somewhat cryptic on the question of what constitutes an export subsidy, and notes that not understanding Brazil's legal theory, it is difficult to comment on Brazil's arguments.

7.33 The United States strongly disagrees with Canada's interpretation of the term "export subsidy". In the view of the United States, Canada's interpretation is not supported by the relevant rules of treaty interpretation,490 and, if accepted, would eviscerate the stronger disciplines against the use of export subsidies that were one of the principal achievements of the Uruguay Round subsidy negotiations.

7.34 The United States notes Canada's interpretation that: "'Article 3.1 prohibits subsidies that are, in law or in fact, contingent upon or tied to export performance. A subsidy is so contingent or tied when it is available only on condition that exports take place.'" The United States recalls the following factors identified by Canada as "'useful in determining whether subsidies are in fact contingent upon export performance:

(a) evidence that the subsidy would not have been paid but for the exports flowing from it;

(b) whether there are penalties -- in the sense of reduction or withdrawal of payments -- if exports do not take place; or

(c) whether there are bonuses or additional payments if exports do take place.'" [emphasis in original] (para. 5.56)

7.35 For the United States, these conclusions are premised on a flawed interpretative analysis. First, Canada places great reliance on the presence of the word "performance" in Article 3.1(a), concluding that "'on its plain meaning, Article 3.1(a) applies only to subsidies that are conditional on exports being executed or accomplished.'"491 However, the United States argues, Article 3.1(a) does not, as Canada suggests, state that exports must actually be executed or accomplished. Instead, Canada is impermissibly trying to read words into Article 3.1(a) that are not there.492

7.36 Second, the United States maintains that throughout its discussion of export subsidy, Canada ignores one key word: "anticipated". Footnote 4 to Article 3.1(a) provides that a de facto export subsidy exists "'when the facts demonstrate that the granting of a subsidy, without having been made legally contingent upon export performance, is in fact tied to actual or anticipated exportation or export earnings.'" (emphasis added by the United States). For the United States, the ordinary meaning of "'anticipate'" is to "'look forward to; colloq. expect.'"493 Thus, under Article 3.1(a), a de facto export subsidy can exist where the granting of a subsidy is tied to expected exportation or export earnings, according to the United States, and there is no requirement that exportation or export earnings actually have occurred or that penalties be imposed if expectations are not fulfilled. Therefore, the United States submits, the text of Article 3.1(a) contradicts Canada's assertion that the intent or objective of a subsidy is irrelevant.

7.37 Finally, the United States argues, Canada's discussion of the negotiating history behind Article 3.1(a) is inaccurate and incomplete. In the view of the United States, it is inaccurate because Canada concludes that the evolution of the text somehow demonstrates that intent became irrelevant (paras. 5.75- 5.76), but the word "'anticipated'" connotes a test based on intent. For the United States, all that the various draft versions of Article 3.1(a) show is that the manner in which the drafters express the intent factor changed over time.

7.38 The United States asserts that Canada's discussion of the negotiating history is incomplete, because it ignores the reason why footnote 4 was added in the first place. According to the United States, footnote 4 originated with a proposal by the European Communities, which the European Communities explained as follows:

  • The prohibition of export subsidies in Article 9 of the Subsidies Code should be reformulated in order to define clearly its scope.
  • This prohibition must apply to all export subsidies, that is, all government interventions which confer, through a charge on the public account (in the form of direct financial outlays or revenue foregone, such as tax relief and debt forgiveness), a benefit on a firm or an industry contingent upon export performance.
  • In addition, since experience has shown that government practices may be easily manipulated or modified in order to avoid this prohibition, it is apparent that a prohibition only of those subsidies which are de jure (that is, expressly) made contingent upon export performance is open to circumvention.
  • The prohibition, in the present discipline also applies to subsidies de facto contingent upon export. This, however, makes it necessary to provide for clearer guidance in identifying de facto export subsidies . . . de facto export subsidies are those where facts which were known -- or should clearly have been known -- to the government when granting the subsidy demonstrate that the subsidy, without having been made expressly contingent upon export performance, was indeed intended to increase exports.494

7.39 The United States submits that while the final text of footnote 4 does not contain a "'knowledge'" test as originally articulated by the European Communities,495 the word "'anticipated'" is consistent with a test that takes into account the intent of the subsidizing government.

7.40 For the United States, Canada's discussion of the negotiating history also is incomplete because it fails to identify another change that was made in order to expand the scope of the export subsidy category. Specifically, instead of requiring that export performance be the "'only'" or the "'most important'" element, Article 3.1(a) provides that export performance may be either the sole contingency for the subsidy or merely "'one of several other conditions.'" Thus, the United States argues, Canada's constricted interpretation of export subsidy is at odds with this textual evidence of an intent to craft a more liberal test for identifying an export subsidy.

7.41 The United States submits that the flaws in Canada's reasoning can best be demonstrated with an example where a government establishes a subsidy programme that provides large grants for the construction of production facilities. The only eligibility criterion for a grant is that a firm must submit a plan explaining how the construction of such facilities will increase the firm's exports or export earnings. If a firm does not submit such a plan, it cannot receive a grant. Once the grant is bestowed, however, the government does not impose penalties if the export plan is not fulfilled.

7.42 In the view of the United States, according to Canada such a programme would not constitute an export subsidy, because grants would not be contingent on the condition that exports actually take place. In the view of the United States, such a programme clearly would be an export subsidy under Article 3.1(a) because the grants would be tied to anticipated exportation or export earnings.

7.43 The United States submits that in this dispute the Panel should not apply Canada's erroneous standard for identifying an export subsidy. If adopted, this standard would enable governments to engage in the very sorts of manipulation and modifications of subsidy programmes that the drafters of the SCM Agreement sought to curtail.

3. The relevance of item (k) of the Illustrative List to export financing activities of the EDC

7.44 The United States notes that in its discussion of the export financing activities of the Export Development Corporation ("EDC"), Canada appears to distinguish between the activity of the EDC under its corporate account and activities under the Canada Account, appearing to argue that activities under the Canada Account are governed by item (k) of the Illustrative List of Export Subsidies contained in Annex I to the SCM Agreement, but that activities under the corporate account are governed by some other standard.

7.45 In the view of the United States, both activities (the corporate account and the Canada Account) are governed by item (k). Thus, the United States submits, if financing provided under either account is inconsistent with the standard set forth in the first paragraph of item (k), the financing is potentially an export subsidy. Conversely, if financing provided under either account is consistent with the standard set forth in the first paragraph, it is not an export subsidy in the US view, because item (k) establishes the exclusive standard for determining whether the practices described therein constitute export subsidies. In addition, the United States argues, even if financing provided under either account should run afoul of the first paragraph of item (k), it still would not be deemed an export subsidy if the financing conformed to the provisions of the OECD Consensus referred to in the second paragraph of item (k).

7.46 In response to a Panel question regarding the United States' understanding of the term "interest rate provisions" of the relevant undertaking in item (k) of the Illustrative List of Export Subsidies, the United States responds that the "'interest rate provisions'" of the undertaking (i.e., the OECD Arrangement) provide rules for the provision by governments of fixed interest rate financing (either through direct lending or interest rate support mechanisms) or pure cover (provision of guarantees or insurance to banks providing either fixed or floating rate financing). The "'interest rate provisions'" do not provide rules for the provision by governments of floating interest rate financing (e.g., through direct lending). Thus, the United States states, if the EDC were to provide export subsidies in the form of a direct loan at a floating rate of interest, the second paragraph of item (k) would not apply to such financings.

7.47 In its comments on the draft descriptive part of this report, the United States requested permission from the Panel to withdraw its submissions in this dispute, and asked the Panel to modify the descriptive part of the reports so as not to reflect those submissions. The United States further asked that, if the Panel declined the United States' request to withdraw its submissions, the descriptive part of the report reflect that this request had been made."496

VIII. Interim Review

8.1 On 25 February 1999, both parties requested the Panel to review, in accordance with Article 15.2 of the DSU, precise aspects of the interim report issued on 17 February 1999. While neither party requested an additional meeting with the Panel, both parties provided written replies to certain of one another's comments.

A. Comments by Brazil

8.2 Brazil identified a number of typographical errors in the interim report, which have been corrected by the Panel.

8.3 Regarding para. 9.85, Brazil commented that the Panel initially overlooked Brazil's reaction to Canada's argument set forth in para. 9.84. We amended para. 9.85 accordingly.

8.4 Brazil commented that, at para. 9.199, the Panel has mischaracterized its statements regarding EDC equity infusions. With reference to para. 59 of its oral statement at the second substantive meeting (see para. 6.136 above), Brazil denies that it considers the fact that CRJ Capital purchases and/or leases aircraft to be an "essential element" of its claim.

8.5 We have amended the final sentence of para. 9.199, in order to clarify that it is the Panel's understanding that the fact that CRJ Capital allegedly purchases and/or leases aircraft is an "essential element" of Brazil's claim regarding EDC equity financing. The Panel's understanding is based on Brazil's submissions throughout the Panel process, in which Brazil repeatedly argued that EDC equity infusions confer a "benefit" because they enable CRJ Capital (which, as indicated at note 233 above, Brazil treats as a Special Purpose Company) to offer airlines lower lease payments than would be available on the market. Brazil's repetition of the factual basis for this argument is reflected inter alia at paras. 6.103, 6.105, 6.106, 6.108, 6.109, 6.110, 6.111, 6.114, 6.116 and 6.135 above. The only reference by Brazil to EDC equity infusions conferring a "benefit" through lower loan payments was included at para. 59 of its oral statement at the second substantive meeting (see para. 6.136 above). We note, however, that at para. 57 of the very same oral statement (see para. 6.135 above), Brazil asserted:

Brazil's claim is that EDC, directly or indirectly, has made equity infusions into CRJ Capital which have facilitated CRJ Capital's ability to lease or sell Canadian regional aircraft at a reduced price." (italics in original, bold emphasis supplied)

For these reasons, and especially in light of Brazil's own description of its claim at para. 6.135 above, we believe that we have correctly identified the fact that CRJ Capital allegedly purchases and/or leases aircraft as an "essential element" of Brazil's claim regarding EDC equity infusions.

8.6 With regard to paras. 9.220-9.224, Brazil commented that the Panel could include an additional source as further support for its conclusions regarding Canada Account debt financing. Brazil refers in particular to the Canada Account Profile, which states that a portion of Canada Account financing is extended on "concessional" terms. Brazil asserts that the Canada Account Profile defines "concessional" to include "interest-free or low-interest loans repayable over extended periods." Canada replied that Canada Account "concessional" financing falls outside the Panel's jurisdiction, because it has not been used in respect of civil aircraft since 1995. Canada referred to its argument at para. 6.164 above in this regard.

8.7 In the present instance, the Panel was required to determine whether or not the Canada Account debt financing in issue constitutes a "subsidy" within the meaning of Article 1.1 of the SCM Agreement. Whether or not such debt financing is "concessional" within the meaning of the Canada Account Profile is of no relevance to the Panel's findings. For this reason, we have not made the change requested by Brazil.

B. Comments by Canada

8.8 Canada suggested a number of changes to the Panel's description of its arguments. To the extent that Canada indicated the source for these changes, they have been made by the Panel. Canada also made a comment on the relevance of certain text in para. 4.126, without requesting any specific changes in this regard. In addition, Canada identified a number of typographical errors in the interim report, which have been corrected by the Panel.

8.9 At the request of Canada, we included the phrase ",on 21 December 1998," in the second sentence of para. 9.64.

8.10 At the request of Canada, we included the phrase "as well as one from Exinvest" in the last sentence of para. 9.193, and pluralized "Officer's Certificates" in para. 9.194.

8.11 With regard to para. 9.246, we clarified our finding that there is no prima facie case that the sale by the OAC of its 49 percent share in de Havilland to Bombardier in 1997 constitutes a prohibited export subsidy.

8.12 In respect of para. 9.253, Canada requested changes to the description of Canada's reaction to the Panel's request for information. Brazil objected to Canada's request, stating that the Panel's text "accurately describe[d] the purported rationale supporting Canada's refusal to comply with the Panel's request for information. ... Moreover, to adopt the modifications ... advocated by Canada would result in an inaccurate description of Brazil's position." In order to avoid any uncertainty, the Panel included at para. 9.253 the full text of Canada's response to the Panel's request, and at para. 9.254 the full text of Brazil's comment on Canada's response.

8.13 At the request of Canada, we included in para. 9.289 Canada's argument that royalties can be tied "to total sales of the recipient enterprise."

8.14 With regard to para. 9.290, Canada asked the Panel to include an additional element in its description of Canada's argument against reliance on the latest WTO Trade Policy Review of Canada. Brazil objected to Canada's request. The Panel's views on the relevance of the latest WTO Trade Policy Review of Canada are set forth at para. 9.274. None of the Panel's findings are based on the latest WTO Trade Policy Review. Since the Panel attaches no importance to this Trade Policy Review, and since Canada's specific argument on this issue is in any event set forth in full at para. 6.199 above, we do not consider it necessary to make the change requested by Canada.

To continue with Findings


490 Articles 31 and 32 of the Vienna Convention.

491 Id., para. 82.

492 As the Appellate Body stated in European Communities - Measures Affecting Meat and Meat Products (Hormones), WT/DS26/AB/R, Report of the Appellate Body adopted 13 February 1998, para. 181, "The fundamental rule of treaty interpretation requires a treaty interpreter to read and interpret the words actually used by the agreement under examination, and not words which the interpreter may feel should have been used."

493 The New Shorter Oxford English Dictionary (1993).

494 "Elements of the Negotiating Framework," Submission by the European Communities, MTN.GNG/NG10/W/31 (27 November 1989).

495 And correctly so, because it would be nonsensical to have a standard based on a government's knowledge of it own intent.

496 Brazil submitted a letter requesting the Panel to decline the request of the United States, in view of practical and substantive concerns over the request. In Brazil's view, complete deletion of the US submissions would pose logistical problems in these time-constrained proceedings, as both the section containing the US submissions, and all references in the parties' arguments to those submissions, would need to be removed. Substantively, Brazil states that such deletion would prejudice the rights of the parties, because parties (and all Members) have an interest in preserving an accurate and complete record of the proceedings; and because parties may have either developed or foregone particular lines of argument in response to arguments made by the United States. In Brazil's view, granting the request would prejudice these interests, and would be contrary to the twin goals of "security and predictability" identified by Article 3.2 of the DSU as central to the WTO dispute settlement system. Brazil believes that the Panel does not have the authority to fulfill the US request, in view of the provision of Article 10.2 of the DSU that third party submissions "'shall be reflected in the panel report'" (emphasis added by Brazil), and the provision of Rule XXV(2) of the Working Procedures for Appellate Review that third party written submissions, recorded oral statements and written answers to questions are part of the record of the panel proceedings. The Panel, in view of the practical difficulties of removing the US submissions and all references thereto from this report, in view of the strong opposition of one of the parties, and in view of the fact that the Panel had asked the parties to submit comments on specific aspects of the US submissions, declined the United States' request.