CANADA - MEASURES AFFECTING THE EXPORT
OF CIVILIAN AIRCRAFT



Recourse by Brazil to Article 21.5 of the DSU




Report of the Panel

(Continuation)

ANNEX 2-1

FIRST SUBMISSION OF CANADA

(10 January 2000)

TABLE OF CONTENTS

1. INTRODUCTION
    
2. TECHNOLOGY PARTNERSHIPS CANADA

1.  FINDINGS OF THE PANEL AND THE APPELLATE BODY
    
2. MEASURES TAKEN BY CANADA

1. Termination of Activities under TPC

(a) Canada has Cancelled Funding 

(b) Canada has Withdrawn Approvals-in-Principle

(c) Canada has Closed all TPC Files in the Regional Aircraft Sector

2. Canada has Restructured the TPC Programme

(a) TPC statements of it's overall objectives: The restructured TPC's objectives focus on innovation and not export promotion 

(b) The types of information called for in applications for TPC funding: Information on exports is not called for or accepted under the restructured TPC 

(c) The considerations, or eligibility criteria, employed by TPC in deciding whether to grant assistance: Eligibility criteria under the restructured TPC do not encompass export considerations 

(d) The Factors to be identified by TPC officials in making recommendations about applications for funding: Under the restructured TPC administrators will not consider exports when making funding recommendations

(e) The restructured TPC's record of funding in the export field generally, and in the  aerospace and defence sector in particular

(f) The nearness-to-the-export-market of projects funded: The restructured TPC is  considerably less near-market 

(g) Significance of projected export sales to funding decisions under the restructured TPC:  There will be no recording of projected Export Sales.

3. AS CANADA HAS COMPLIED WITH THE RECOMMENDATIONS AND RULINGS OF THE DSB, BRAZIL'S ALLEGATIONS ARE UNFOUNDED 

3. CANADA ACCOUNT

1. FINDINGS OF THE PANEL AND THE APPELLATE BODY
    
2. MEASURES TAKEN BY CANADA

1. No Outstanding Contracts
    
2. Canada has Taken Measures in Respect of Future Export Financing Transactions

(a) The Minister has Adopted a Guideline

(b) Canada Proposes the Establishment of Verification Procedures

3.  AS CANADA HAS COMPLIED WITH THE RECOMMENDATIONS AND RULINGS OF THE DSB, BRAZIL'S ALLEGATIONS ARE UNFOUNDED

4. REQUESTED FINDING

Annex A

LIST OF EXHIBITS

I. INTRODUCTION

1. In Canada - Measures Affecting the Export of Civilian Aircraft (Canada - Aircraft)¹ the Panel and the Appellate Body found that contributions under Technology Partnerships Canada (TPC) to the Canadian regional aircraft industry were de facto contingent on export performance and thus such contributions were prohibited export subsidies within the meaning of Articles 3.1(a) and 3.2 of the Agreement on Subsidies and Countervailing Duties (SCM Agreement).² The Panel also concluded that Canada Account debt financing as applied to certain regional aircraft exports constituted subsidies, which were de jure contingent on exports, and thus inconsistent with Articles 3.1(a) and 3.2. Canada did not appeal this finding. On 20 August 1999, the Dispute Settlement Body (DSB) adopted the Reports of the Panel and the Appellate Body. It recommended that Canada bring assistance to the regional aircraft industry under TPC and Canada Account into conformity with its obligations under the SCM Agreement within 90 days, that is by 18 November 1999.

2. In response, Canada has put in place new measures to ensure full and faithful implementation of the DSB rulings and recommendations and compliance with the SCM Agreement. In summary:

• with regard to TPC, Canada terminated all obligations for the disbursement of funds to the Canadian regional aircraft sector, and undertook a complete restructuring of the TPC programme to ensure that actual or anticipated exports will play no role whatsoever in eligibility or decision-making regarding future TPC assistance; and

• with respect to the Canada Account programme, transactions financed under this programme were all completed as of 18 November 1999. Further, to prevent prohibited export subsidies under this programme in the future, Canada adopted a policy requiring that any future Canada Account transactions comply with the OECD Arrangement on Guidelines for Officially Supported Export Credits, thus bringing them within the exception of the second paragraph of Item (k) of the Illustrative List of Export Subsidies (Annex I to the SCM Agreement).

3. described in detail below, these measures fully satisfy the requirement to withdraw the TPC and Canada Account assistance to the Canadian regional aircraft industry that was found to constitute prohibited export subsidies. In addition, these measures ensure - through programmatic changes - that any future assistance under either of these programmes with respect to regional aircraft will be consistent with the SCM Agreement. Canada has, therefore, fully implemented the DSB recommendations.

4. Brazil nonetheless challenges Canada's implementation measures pursuant to Article 21.5 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU). It argues that Canada's measures are insufficient to constitute effective implementation of the recommendations and rulings of the DSB.

5. Brazil's contentions have no merit.

6. With regard to TPC, Brazil ignores the termination of ongoing assistance and the restructuring of TPC. It asks the Panel to find export contingency, not based on the three part test established by the Appellate Body, but rather on a combination of past statements made about the programme before restructuring and an argument that TPC objectives of economic growth and jobs should be regarded as legal surrogates for export contingency. Brazil's contentions amount to a request that the Panel find that TPC must cease all contributions under any conditions to the regional aircraft industry because of the export orientation of the sector. That request has no foundation in the SCM Agreement or the recommendations and rulings of the DSB.

7. With regard to the Canada Account programme, Brazil's contentions are equally unfounded. Transactions financed under this programme were all completed as of 18 November 1999. In addition, Canada has adopted measures to ensure that financing under the Canada Account for transactions after 18 November 1999 will have to conform with the exception in Item (k) of the Illustrative List of Export Subsidies.

8. Canada therefore respectfully requests that the Panel reject Brazil's allegations and arguments, and find that Canada's measures implement fully and faithfully the rulings and recommendations of the DSB.

II. TECHNOLOGY PARTNERSHIPS CANADA

A. FINDINGS OF THE PANEL AND THE APPELLATE BODY

9. In Canada Aircraft, the Panel found that that TPC contributions to the regional aircraft sector were subsidies "contingent . . . in fact . . . upon export performance" within the meaning of Article 3.1(a). Brazil did not allege, and the Panel and Appellate Body did not find, that the TPC programme per se constituted an export subsidy under Articles 3.1(a) and 3.2. Rather Brazil challenged, in the words of the Panel "the actual application of the TPC . . . programme . . . in the Canadian regional aircraft sector"³

10. The Appellate Body upheld the Panel's findings, while further elaborating on the interpretation of "contingent . . . in fact . . . upon export performance" and modifying the analysis of the legal weight to be accorded to the nearness-to-the-market of a financed project.⁴ de facto export contingency, according to the Appellate Body, requires proof of three different substantive elements:

(1) "the granting of a subsidy";

(2) that "is tied to ";

(3) "actual or anticipated exportation or export earnings.⁵

11. In agreeing with the Panel that contributions to the regional aircraft industry under the TPC programme as then constituted were de facto contingent on export performance, the Appellate Body noted that the Panel considered sixteen factual elements covering a variety of matters, which the Appellate Body grouped into the following eight categories⁶:

(a) TPC's statements of its overall objectives;

(b) the types of information called for in applications for TPC funding;

(c) the considerations, or eligibility criteria, employed by TPC in deciding whether to grant assistance;

(d) the factors to be identified by TPC officials in making recommendations about applications for funding;

(e) TPC's record of funding in the export field generally and in the aerospace and defence sector in particular;

(f) the nearness-to-export-market of the projects funded;

(g) the importance of the projected export sales by applicants to TPC's funding decisions; and

(h) the export orientation of the firms or the industry supported.

12. The Panel and Appellate Body found that those factual elements taken together warranted a finding of a prima facie case of de facto export contingency. However, the Panel and the Appellate Body both affirmed that the export propensity of a recipient could not, by itself, form the basis for a finding of export contingency.⁷ Further, as the Appellate Body emphasised, "the facts must 'demonstrate' that the granting of a subsidy is tied to or contingent upon actual or anticipated exports. It does not suffice to demonstrate solely that a government granting a subsidy anticipated that exports would result.⁸

B. MEASURES TAKEN BY CANADA

13. Canada implemented the recommendations and rulings of the DSB by taking two sets of measures. First, Canada terminated all obligations for the disbursement of funds relating to the Canadian regional aircraft industry under TPC as it was previously constituted. Second, in order to ensure that any future transaction involving the Canadian regional aircraft industry would be compliant with the SCM Agreement, Canada comprehensively amended the structure and administration of TPC.

1. Termination of Activities under TPC

(a) Canada has Cancelled Funding

14. As of 18 November 1999, the Government of Canada terminated all obligations for the disbursement of funds pursuant to the five Canadian regional aircraft industry Contributions Agreement cited in Canada- Aircraft.

15. As shown in the amendments to the Contribution Agreements contained in Canada's Exhibit 1, the Government of Canada and the private party to each of the Contribution Agreements entered into irrevocable amendments providing that:

"Notwithstanding any other provisions of this Agreement, the Minister shall not, on or after 18 November 1999, disburse any part of the contribution provided for in the Contribution Agreement, whether or not the Claim on which such disbursement would otherwise be made, was submitted before or after 18 November 1999."

16. As a result of these cancellations, more than $16.4 million of funding has been cancelled.

(b) Canada has Withdrawn Approvals-in-Principle

17. In 1998 TPC had approved-in-principle two projects in the regional aircraft sector, for which no Contribution Agreements had yet been concluded. As documented by letters in Canada Exhibit 2, on 5 November 1999, Industry Canada informed the applicants that it would not proceed with contracts for the projects in question, and the applicants acknowledged that the Minister of Industry has no obligations vis-�-vis the applicants pursuant to the prior approvals-in-principle. Consequently, as of 18 November 1999, TPC had no obligation whatsoever to disburse funds to the Canadian regional aircraft industry.

(c) Canada has Closed all TPC Files in the Regional Aircraft Sector

18. As described below, the Government of Canada undertook a thorough restructuring of the TPC programme. The restructuring applied not only to the regional aircraft sector, but to the programme as a whole. To bring all TPC activities under the restructured programme, all files relating to outstanding applications for financial assistance submitted prior to the restructuring were closed as of 18 November 1999. Letters so advising the applicants are contained in Canada Exhibit 3. In order to pursue funding under TPC, applicants must now submit applications under the new programme in accordance with the new Terms and Condition⁹ and the new Investment Application Guide.¹⁰

2. Canada has Restructured the TPC Programme

19. Following the Panel and Appellate Body rulings, Industry Canada undertook fundamental amendments to the structure and administration of TPC to ensure that TPC assistance is not contingent in law or in fact upon export performance. Indeed, export performance is not even a consideration in TPC activities.

20. The new restructured TPC came into effect on 18 November 1999. The specific elements of the TPC restructuring are set forth in a series of documents that are described below and appended as Exhibits. The most important of these are the TPC Terms and Condition¹¹, the Special Operating Agency Framework Document (SOA Framework)¹² the Investment Application Guide¹³ and the Investment Decision Document (IDD).¹⁴ These documents set out and reflect the key aspects of the programme, including its mandate, objectives and guiding principles, as well as eligibility and application and requirements and the required format for bringing recommendations forward for approval.

21. Canada has taken all the steps it can to address the factual elements considered relevant by the Panel and Appellate Body in determining that contributions to the Canadian regional aircraft industry under the previous version of the TPC programme were de facto export contingent. The following analysis uses the categories employed by the Appellate Body.

(a) TPC statements of it's overall objectives: The restructured TPC's objectives focus on innovation and not export promotion

22. The restructured TPC's objectives, put simply, are to promote technological innovation and enhance the technological capability of Canadian industry. The mandate and overall programme objective of the restructured TPC are set out in the Terms and Conditions and the SOA Framework as follows:

"In a context in which innovation is essential in an increasingly knowledge-based economy, TPC is a technology investment fund established to contribute to the achievement of Canada's objectives of increasing economic growth, creating jobs and wealth, and supporting sustainable development. TPC will advance and support government initiatives by investing strategically in research, development and innovation in order to encourage private sector investment, and so maintain and grow the technology base and technological capabilities of Canadian industry. TPC will also encourage the development of SMEs in all regions of Canada.¹⁵

23. As set out in the SOA Framework, specific programme objectives indicate that contributions under TPC will be administered in a way that will contribute to:

• "increasing economic growth, jobs and wealth;

• supporting sustainable development;

• maintaining and building the industrial technology and skill base essential to a knowledge-based economy;

• encouraging the development of SMEs in all regions of Canada;

• encouraging private sector investment;

• managing the contributions so that all repayments are recycled into TPC, allowing potential for future growth;

• managing the sharing ratios on TPC contributions, with a target of an average TPC sharing ratio of no more than 33 per cent (with typical project sharing ratios between 25 per cent and 30 per cent); and

• taking an investment approach through sharing in rewards as well as risks.¹⁶

24. Consistent with these objectives, the Terms and Conditions stipulate that Aerospace and Defence component:

"�encourages and supports the development and application of those technologies essential for the development of these sectors. It involves projects that sustain and expand the technological capacity and capability of these sectors. Support is also available for defence conversion projects aimed at reducing the dependency of enterprises on military contracts.¹⁷

25. In short, the restructured TPC's mandate and objectives clearly do not encompass the enhancement of exports or Canada's export base.

(b) The types of information called for in applications for TPC funding: Information on exports is not called for or accepted under the restructured TPC

26. The restructured TPC's application procedure has been reformed consistent with the new objectives of the programme. As such applicants must provide information on the proposed research and development initiative and its strategic benefit to Canada.¹⁸ The Investment Application Guide does not require the applicant to submit information regarding actual or anticipated exportation and explicitly states that: "TPC will not accept or consider information concerning the extent to which your company does or may export".¹⁹

(c) The considerations, or eligibility criteria, employed by TPC in deciding whether to grant assistance: Eligibility criteria under the restructured TPC do not encompass export considerations

27. All investment proposals submitted for consideration will be evaluated against the revised assessment criteria as set out in the restructured programme's Terms and Conditions. Project assessment concentrates on the contribution that a project makes to improving the technological capability of a firm, rather than on the commercial viability and export potential of a specific product.

28. Applications for contributions are assessed in the context of the relevance of the project to the objectives of TPC and whether they fall within one of the eligible activities set out in section 3.3 of the Terms and Conditions. Specifically, proposals are assessed in terms of the extent to which they demonstrate:

"a. that the that project contributes to the strategic objectives of the government, including technological and net economic benefits to Canada;

b. that the project is technologically feasible, and the applicant possesses, or can reasonably be expected to secure, the requisite technological and managerial capabilities, and financial resources, to achieve the stated objectives of the project;

c. that a contribution under TPC is necessary to ensure that the project (either individually or as part of a portfolio of related activities of the applicant) proceeds with the desired scope, timing or location; and

d. that the contribution can be repaid.²⁰

29. In granting assistance in the aerospace and defence sector under TPC, as previously constituted, consideration was given to whether a project maintained and built "upon the technological capabilities and production, employment and export base.²¹. The focus under TPC is now squarely on the "development and application of technology" and the expansion of "technology capacity and capability". Indeed, under the restructured TPC, export performance is explicitly not a consideration. Section 6.1 of the Terms and Conditions mandate that:

"TPC will be administered in accordance with Canada's international agreements, and in particular, the granting of contributions will not be contingent, either in law or in fact, upon actual or anticipated export performance."

30. TPC has also taken a number of steps to enhance it's transparency and will publicly announce all TPC investments identifying who the recipient is, the amount of funding provided, and the government's rationale for granting the assistance.

(d) The Factors to be identified by TPC officials in making recommendations about applications for funding: Under the restructured TPC administrators will not consider exports when making funding recommendations

31. When making a funding recommendation under the restructured TPC, officials will base their decision on the information compiled in the course of the due diligence process and summarised in the Investment Decisions Document (IDD). This document, which is included as Canada Exhibit 7, draws out all of the information on a project that is relevant for the purposes of assessing it in relation to the mandate and objectives of TPC. The IDD is submitted to TPC Management Board, the Programmes and Services Board, the Deputy Minister of Industry Canada and the Minister of Industry Canada, as required for approval. The IDD contains all the necessary information to authorise TPC to enter into Contribution Agreements (i.e. the contribution amount, sharing ratio, and any special conditions). Decision-makers are explicitly directed that "TPC will not accept or consider information concerning the extent to which a company does or may export.²²

(e) The restructured TPC's record of funding in the export field generally, and in the aerospace and defence sector in particular

32. While the aerospace and defence component of TPC will continue to receive two-thirds of the programme funds, it cannot be assumed that regional aircraft industry-related projects will receive the majority of the funds. In fact, no new regional aircraft-related projects have been approved or contracted since 14 November 1997.

(f) The nearness-to-the-export-market of projects funded: The restructured TPC is considerably less near-market

33. TPC has been restructured to enable it to be less near-market. The programme's objectives themselves now focus on the contribution a project makes to improving the technological capability of the firm or sector, rather than on the commercial viability and export potential of supported products.

34. The programme now includes Industrial Research as an eligible category; this permits the restructured TPC to support earlier stage research and development that is further removed from the production and sale of specific products. The pre-competitive development category of eligible activity enables TPC to support the development of horizontal technologies that cut across the operations of recipient firms (e.g. measures to improve product quality, improve engineering efficiency, develop generic technologies with multiple applications, etc.) rather than the development of specific products.

(g) Significance of projected export sales to funding decisions under the restructured TPC: There will be no recording of projected Export Sales.

35. As noted above, TPC will no longer accept or gather, much less consider, any information whatsoever related to actual or anticipated exports or export sales. Accordingly, TPC Contribution Agreements will not record projections of export sales by recipients as was previously the case.

C. AS CANADA HAS COMPLIED WITH THE RECOMMENDATIONS AND RULINGS OF THE DSB, BRAZIL'S ALLEGATIONS ARE UNFOUNDED

36. Canada has terminated all obligations for the disbursement of funds relating to Canadian regional aircraft industry under TPC as of 18 November 1999. It has, in addition, restructured the programme and its administration to de-link funding under TPC from any consideration of actual or anticipated exports or export earnings. Canada has, therefore, complied fully with the recommendations and rulings of the DSB.

37. The restructuring of TPC has removed all elements that had formed the basis for the Panel and Appellate Body finding of de facto export contingency, with the exception of one, namely that the Canadian regional aircraft industry has a high propensity to export its final products.²³ This element is clearly beyond the purview of the TPC. A company's or an industry's export orientation, or lack thereof, is not within the control of the Government of Canada. Moreover, as the Appellate Body has found, the SCM Agreement does not prohibit the granting of subsidies to firms or industries that are export oriented, including in circumstances where the government is aware of this export orientation:

"The second sentence of footnote 4 precludes a panel from making a finding of de facto export contingency for the sole reason that the subsidy is 'granted to enterprises which export'. In our view, merely knowing that a recipient's sales are export-oriented does not demonstrate, without more, that the granting of a subsidy is tied to actual or anticipated exports�We agree with the Panel that�the export orientation of a recipient may be taken into account as a relevant fact, provided that it is one of several facts which are considered and it is not the only fact supporting the finding. [emphasis added]".²⁴

38. Despite the measures taken by Canada with respect to TPC, Brazil argues that nonetheless these measures fail to comply with the rulings and recommendations of the DSB. Brazil does not attempt to demonstrate, as it must, that contributions under the restructured TPC will be de facto export contingent by applying the three-part test established by the Appellate Body: that (1) there is granting of assistance by Canada under the restructured TPC that is (2) tied to (3) actual or anticipated exports. Rather, it makes the following three main arguments, none of which satisfies the standard for establishing de facto export contingency established by the Appellate Body.

39. First, Brazil makes the point that Canada's measures do not alter the status of TPC contributions as subsidies under Article 1 of the SCM Agreement. Canada's future assistance under TPC may or may not constitute subsidies. However, that is not the issue in this case. The issue of relevance to this proceeding is whether such assistance is contingent in fact upon export performance. Canada notes, in any event, that it has not made any contributions to the regional aircraft industry since 18 November 1999.

1 WT/DS70/R and WT/DS70/AB/R, Reports of the Panel and the Appellate Body adopted on 2 August 1999.

2 Unless otherwise stated, all Articles refer to the SCM Agreement.

3 Panel Report at para. 9.282

4 Appellate Body Report at paras. 162-180; see Panel Report at para. 9.339.

5 Appellate Body Report at para. 169.

6 Appellate Body Report at para. 175

7 Panel Report at paras. 9.336-9.337; Appellate Body Report at para. 173 (stating that "[t]he second sentence of footnote 4 precludes a panel from making a finding of de facto export contingency for the sole reason that the subsidy is 'granted to enterprises which export'. In our view, merely knowing that a recipient's sales are export-oriented does not demonstrate, without more, that the granting of a subsidy is tied to actual or anticipated exports.")