CANADA - MEASURES AFFECTING THE EXPORT
OF CIVILIAN AIRCRAFT



Recourse by Brazil to Article 21.5 of the DSU




Report of the Panel

(Continuation)

55. It is simply inaccurate to claim, as Canada has at paragraph 51 of its first submission, that the documents not yet completed and produced "will not exist until such time as the restructured programme approves and contracts new investments." Many of these documents are simply generic forms or templates, and were produced in the original proceedings without connection to any particular TPC investment. The Panel's conclusion that de facto export contingency could be inferred from those documents came not from information regarding any particular investments. Brazil refers, for example, to the TPC Aerospace and Defence Sector Generic Model Agreement⁶⁴ and the TPC Business Plan⁶⁵

56. The same must be said of the "new" TPC documents cited by Canada as "under development" in Exhibit Cdn-9. It is by no means clear why many of these documents will not be created "until such time as the restructured programme approves and contracts new investments.⁶⁶ Brazil cites to some, but not all, of the examples of the "new" TPC documents listed in Exhibit Cdn-9 that are apparently "under development": the "TPC Repayment Policy" (Serial 2), "Assessment Guidelines for Due Diligence" (Serial 3), the various "Framework Investment Proposals" (Serial 16), the "TPC Business Plan" (Serial 18), "TPC Review Procedures" (Serial 20), "Special Purpose Equipment List" (Serial 21), "TPC Policies and Procedures on Incrementality, Irreversibility and Retroactivity" (Serial 25), etc. The nature of these documents does not suggest that they are in any way associated with individual contributions, such that they would not be created until contributions were made.

57. Even those documents that would, once completed, be associated with individual projects and contributions, start out as blank, generic forms or templates. These forms would certainly be developed well in advance of the grant of actual contributions under the "new" TPC. Brazil notes several examples from Exhibit Cdn-9, although this list is by no means exhaustive: "Standard Contribution Agreement" (Serial 8), "Performance Measures - Project Data Sheet" (Serial 23), "TPC Project File Structure" (Serial 24), "Evaluation Framework" (Serial 25), "Claims Package for Clients" (Serial 28), "PBS Integrity Review Checklist" (Serial 29), "Claims Verification Checklist" (Serial 32), "Contribution Verification Checklist" (Serial 36), etc. These "Standard Agreements," "Packages," "Sheets," "Frameworks," "Checklists" and the like should exist in the abstract, even without data regarding particular contributions written on them.

58. In any event, investments have already been approved under the "new" TPC. On 10 January 1999 - the very day on which Canada filed its first submission with this Panel and claimed that these documents were as yet unavailable because no contributions had yet been approved - TPC announced the award of a contribution to an Ontario company for the development of a robotics system. The news release recording this announcement is included as Exhibit Bra-30. Therefore, even if the TPC documents withheld from the Panel were in fact not produced until actual investments under the "new" TPC were approved, such approvals have in fact occurred. The documents should, therefore, exist.

59. If the Panel permits Canada to hold back these documents until after the close of these proceedings, and the documents, when eventually produced, betray evidence of continued de facto export contingency, Brazil may, of course, be able to bring a new case against TPC support. At the same time, however, the remedy provided Brazil under Article 21.5 of the DSU would be utterly and completely undermined. Telling Brazil to "wait and see" would reduce Article 21.5 to a nullity, a result that, according to the Appellate Body in United States - Standards for Reformulated and Conventional Gasoline, cannot attach.⁶⁷

60. In sum, Canada cannot claim compliance with the DSB's recommendations and rulings on the basis of amendments made to TPC documents, without actually demonstrating that those amendments were made.⁶⁸ In fact, if documents that originally contributed to the Panel's inference of de facto export contingency do not yet exist for the "new" TPC, Canada has offered this Panel further evidence of its failure to implement the recommendations and rulings of the DSB by 18 November 1999. The Panel should conclude that Canada's failure to produce these documents constitutes a failure to implement the recommendations and rulings of the DSB, or, in the very least, should presume that the original documents, and the inferences of de facto export contingency drawn therefrom, continue to apply.

III. CANADA'S AMENDMENTS TO THE CANADA ACCOUNT DO NOT MAKE IT CONSISTENT WITH THE SUBSIDIES AGREEMENT, AND DO NOT CONSTITUTE EFFECTIVE IMPLEMENTATION OF THE DSB'S RECOMMENDATIONS AND RULINGS

61. Canada's implementation of the recommendation that it withdraw "Canada Account debt financing since 1 January 1995 for the export of Canadian regional aircraft⁶⁹ consists of a one-sentence "Policy Guideline" not to approve transactions that do not comply with the OECD Arrangement on Guidelines for Officially Supported Export Credits.⁷⁰ In its first submission, Canada now asserts that the intent of this "Policy Guideline" is, specifically, to appeal to the second paragraph of Item (k) of the Illustrative List of Export Subsidies, and the OECD Arrangement's "interest rates provisions" cited therein.

62. This is, quite simply, insufficient. Canada's "Policy Guideline" merely suggests that prohibited export subsidies via Canada Account might not be granted; as noted above, to be sufficient, an implementation measure must instead ensure that prohibited export subsidies cannot be granted.

A. DETERMINING WHETHER CANADA HAS IMPLEMENTED THE RECOMMENDATIONS AND RULINGS OF THE DSB DOES NOT REQUIRE EVIDENCE OF CANADA ACCOUNT FINANCING SUBSEQUENT TO 18 NOVEMBER 1999

63. In its first submission, Brazil argued that Canada has a burden to demonstrate its entitlement to a defence included in Item (k), since it chooses to appeal to such a defence.⁷¹ According to Canada, however, it has no obligation and bears no burden to demonstrate what compliance with Item (k) means unless, at some time "in the future, there is a financing transaction under Canada Account in relation to which Canada claims the exception in Item (k) and the exception is challenged.⁷² According to Canada, because the Panel "expressly did not find that the Canada Account programme per se was a prohibited export subsidy," and instead found that the Canada Account programme constituted a prohibited export subsidy as it was applied in the context of two specific transactions for the export of regional aircraft, Canada had no duty to do anything whatsoever in order to implement the Panel 's ruling, other than to ensure that those two transactions were completed by 18 November 1999.⁷³

64. As it has for TPC, Canada therefore effectively claims that its implementation measures with regard to Canada Account are impervious to challenge under Article 21.5 of the DSU, since it has not yet extended Canada Account financing for regional aircraft subsequent to the adoption of those measures.

65. This position must be rejected. The consequence of Canada's position would be to reduce Article 21.5 of the DSU to "inutility" in any and all instances of successful "as applied" challenges to the violation by a Member of any of its WTO obligations (not just those contained in the Subsidies Agreement). A Member determined by a Panel to have maintained measures inconsistent with its WTO obligations could escape effective Article 21.5 scrutiny by merely refraining from applying those measures until the 20-day time period to seek compensation had passed.⁷⁴ Rendering Article 21.5 useless for the entire category of "as applied" challenges is not a result envisaged by the DSU, nor one accepted by the Appellate Body⁷⁵ and should therefore be rejected.

B. CANADA'S CLAIM THAT THE RECOMMENDATIONS AND RULINGS OF THE DSB REQUIRED NO IMPLEMENTATION BY CANADA IS IN ERROR

66. Canada's argument that the Panel's findings did not require it to take any action at all, apart from ensuring that the two Canada Account transactions identified in paragraph 54 of its first submission were completed by 18 November 1999, does not accord with the Panel's definition of the subsidy to be withdrawn. The Panel did not hold that only the two transactions identified in paragraph 54 of Canada's first submission were prohibited export subsidies. This is too narrow an interpretation of the Panel's determination regarding Canada Account financing "as applied." The Panel's conclusion was, rather, "that Canada Account debt financing since 1 January 1995 for the export of Canadian regional aircraft constitutes export subsidies inconsistent with Article 3.1(a) and 3.2 of the SCM Agreement.⁷⁶ From 1 January 1995 onward, Canada Account debt financing for Canadian regional aircraft exports will be considered to constitute a prohibited export subsidy, unless Canada implements sufficient changes.

67. Thus, to achieve effective implementation, Canada was required to do more than simply ensure the completion of the two Canada Account transactions identified in paragraph 54 of its first submission. What it did is simply not enough, and is fully susceptible to challenge under Article 21.5 of the DSU.

68. The "Policy Guideline" included as Exhibit Cdn-13 states simply that the Minister for International Trade will, as a policy matter, not approve transactions that are not in compliance with the OECD Arrangement on Guidelines for Officially Supported Export Credits. Canada asserts that this "Policy Guideline" states an intention to "meet the criteria to qualify for an exception under the second paragraph of Item (k)" of the Illustrative List of Export Subsidies included in Annex 1 to the Subsidies Agreement.⁷⁷

69. The "Policy Guideline" does no such thing. It does not refer to conformity with the second paragraph of Item (k), or the "interest rates provisions" of the OECD Arrangement referred to therein. It merely states a hortatory intention to comply with the OECD Arrangement generally, without any indication of the specific provisions with which it intends to comply. Under the "Policy Guideline," it is by no means evident that Canadian practices would qualify it for the specific "safe haven" included in the second paragraph of Item (k).

70. Even Canada's assertion that the "Policy Guideline" refers to Item (k) and thus the " interest rates provisions" of the OECD Arrangement begs an obvious question - what does Canada consider to be the "interest rates provisions" of the Arrangement with which it will comply? Even if the Panel accepts Canada's bald, unsupported assertion that the reference in the " Policy Guideline" to compliance with the OECD Arrangement means, specifically, compliance with the second paragraph of Item (k) and the application of the Arrangement's "interest rates provisions," Canada has not identified which articles of the Arrangement constitute the "interest rates provisions" mentioned in Item (k).

71. In the DSB's recommendations and rulings regarding the Canada Account, Canada was determined to have maintained measures constituting or providing prohibited export subsidies. The Panel is not here conducting de novo review of Canada Account debt financing for regional aircraft. In these circumstances, implementing the DSB's recommendations and rulings regarding the Canada Account should at a minimum ensure that prohibited export subsidies via the Canada Account cannot be granted, and not merely that they might not be granted.

72. To determine whether the "Policy Guideline" so ensures, Canada should be held to a duty of disclosure similar to that contained in the notification provisions of Article 25 to the Subsidies Agreement, thus enabling Members to inform themselves of the terms on which a measure previously judged to be or to provide a prohibited export subsidy will "comply with the OECD Arrangement" in future. Without the provision of this type of information, the lack of transparency regarding what Canada considers "comply with the OECD Arrangement" to mean, or with which "interest rates provisions" Canada intends to comply, will enable it to continue to operate the Canada Account as a prohibited export subsidy, undetected and undetectable. There will be no assurance that prohibited export subsidies will not continue. At the implementation stage of dispute settlement proceedings, when a Member has already been found to be in violation of its WTO obligations, more is required; unelaborated policy guidelines offering vague hortatory statements regarding the Member's intentions do not constitute effective implementation.

73. If this is permitted, Canada will have accomplished a very clever trick - it will have successfully passed off as an implementation measure something that, in the original Panel proceedings, it repeatedly contended it was already doing.

74. In the original Panel proceedings, Canada submitted "that Canada Account activity is not inconsistent with Article 3 as it benefits from the exception contained in Item (k) of Annex I of the SCM Agreement.⁷⁸ More specifically, on three separate occasions, Canada represented to the Panel, without elaboration, that Canada Account financing and loan guarantees for exports "have been consistent with the interest rate provisions of the OECD Consensus, as required by Item (k) of Annex I.⁷⁹

75. Canada subsequently decided not to invoke "the second paragraph of item (k) as a positive defence.⁸⁰ The relevant point, however, is that Canada expects to pass off the "Policy Guideline" contained in Exhibit Cdn-13 as a new measure sufficient to constitute valid implementation of the DSB's recommendations and rulings, when it was, according to its previous submissions to this Panel, already applying this measure well in advance of the Panel's determination that the Canada Account provides prohibited export subsidies to the Canadian regional aircraft industry.

76. To claim satisfactory implementation of the DSB's rulings and recommendations, Canada must bear the burden to do more than this. The minimum burden accorded Canada must be to explain with some precision what "comply with the OECD Arrangement" will mean, so that Members are informed of the terms on which a measure previously judged to be or to provide a prohibited export subsidy will operate in future. Canada has failed to discharge this minimum burden. Accordingly, Brazil requests that this Panel determine that Canada has failed to implement the recommendations and rulings of the DSB with regard to the Canada Account.

IV. CANADA'S PROPOSAL REGARDING THE ESTABLISHMENT OF VERIFICATION PROCEDURES'

77. Canada proposes that the Panel suggest to the parties, pursuant to Article 19.1 of the DSU, that they establish a reciprocal arrangement for verifying their mutual compliance with their obligations under the Subsidies Agreement.⁸¹ Brazil notes that the parties have been engaged for some time in negotiations concerning these disputes and have discussed, inter alia, the question of verification. Brazil also notes, however, that the issue of transparency thus far has had to do with Canada's programmes, not Brazil's.⁸²

78. While Brazil does not, in principle, oppose such an agreement, it considers that resolution of the matter in the context of dispute settlement is not clearly compatible with the spirit, if not the letter, of Article 19 of the DSU. Brazil also believes that such an arrangement is better agreed to by the parties in the course of bilateral discussions. It is, in particular, fundamentally necessary for Brazil that any such arrangement involves balanced and truly reciprocal offers of transparency, not only by Brazil, but also by Canada. Discussions between the parties in this regard are on-going, but no agreement has been reached either on the specific Canadian and Brazilian programmes to be included and subjected to verification, or on the institutional framework for a potential monitoring mechanism.

V. CONCLUSION

79. For the reasons expressed in this and Brazil's first submission, Canada has not withdrawn the subsidies determined by the Panel and the Appellate Body to be prohibited export subsidies. The implementation measures Canada has adopted, in the case of both TPC and Canada Account, merely suggest to Members that Canada might not continue to grant subsidies contingent in fact on export performance, rather than provide an assurance that it cannot do so.

80. Moreover, Canada's defence - that its implementation measures are protected from challenge until such time as they are actually applied - is untenable. Such a solution reduces Article 21.5 of the DSU to inutility, and would render hollow a finding that a Member had maintained measures inconsistent with its WTO obligations.

81. Accordingly, Brazil requests that the Panel reject Canada's defence, and determine that Canada has not implemented the recommendations and rulings of the DSB with regard to TPC and Canada Account.

LIST OF EXHIBITS

 

TPC News Release, 10 January 2000	Exhibit Bra-30
TPC New s Release, 17 November 1999	Exhibit Bra-31
About the Industry Sector of Industry Canada, Industry Canada website, published 27 May 1999	Exhibit Bra-32
First Written Submission of Canada, 16 November 1998, para. 173	Exhibit Bra-33
First Oral Submission of Canada, 26 November 1998, para. 101	Exhibit Bra-34
Second Written Submission of Canada, 4 December 1998, para. 77	Exhibit Bra-35

64 Id. (bullet point 10).

65 Id. (bullet point 2).

66 Canadian First Submission, para. 51.

67 WT/DS2/AB/R, pg. 23 (An interpreter "is not free to adopt a reading that would result in reducing whole clauses or paragraphs of a treaty to redundancy or inutility.").

68 Of course, TPC also must not be de facto export contingent, based on the " total configuration of the facts constituting and surrounding" its operation. Appellate Body Report, para. 167.

69 Panel Report, para. 10.1(b).

70 Canadian First Submission, para. 57. See also Exhibit Cdn-13.

71 Brazilian First Submission, para. 46.

72 Canadian First Submission, paras. 67-68.

73 Id. at para. 56.

74 See DSU Article 22.2.

75 United States - Gasoline, pg. 23 (An interpreter "is not free to adopt a reading that would result in reducing whole clauses or paragraphs of a treaty to redundancy or inutility.").

76 Panel Report, para. 10.1(b).

77 Canadian First Submission, para. 68.

78 Panel Report, para. 6.64.

79 First Written Submission of Canada, 16 November 1998, para. 173 (Exhibit Bra-33). See also First Oral Submission of Canada, 26 November 1998, para. 101 ("Canada Account financing and loan guarantees for exports committed since the entry into force of the SCM Agreement have complied with the interest rate provisions of the OECD Consensus, as required by Item (k) of Annex I.") (Exhibit Bra-34); Second Written Submission of Canada, 4 December 1998, para. 77 ("Canada Account transactions are consistent with the interest rates provisions of the OECD Consensus.") (Exhibit Bra-35).

80 Panel Report, para. 6.161. See also Id., para. 9.225 (footnote 576).

81 Canadian First Submission, paras. 59-61.