CANADA - MEASURES AFFECTING THE EXPORT
OF CIVILIAN AIRCRAFT



Recourse by Brazil to Article 21.5 of the DSU




Report of the Panel

(Continuation)

ANNEX 2-2

REBUTTAL SUBMISSION OF CANADA

(17 January 2000)

TABLE OF CONTENTS

1. INTRODUCTION
    
2. CANADA HAS FULLY COMPLIED WITH THE RECOMMENDATIONS AND RULINGS OF THE DSB

1. TECHNOLOGY PARTNERSHIPS CANADA
    
2. CANADA ACCOUNT

3. BRAZIL'S ALLEGATIONS ARE UNFOUNDED

1. TECHNOLOGY PARTNERSHIPS CANADA
    
2. CANADA ACCOUNT

4. REQUESTED FINDING
    

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). 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 of the SCM Agreement. Canada did not appeal this finding.

2. 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.

3. 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. 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) and argues that Canada' s measures are insufficient to constitute effective implementation of the recommendations and rulings of the DSB.

4. In Canada's first written submission in these 21.5 proceeding², Canada established that it has fully implemented the DSB recommendations and rulings and that thus Brazil 's allegations are unfounded. The purpose of this second submission is not to put forward any additional information or arguments but to provide a summarised version of Canada's position.

II. CANADA HAS FULLY COMPLIED WITH THE RECOMMENDATIONS AND RULINGS OF THE DSB

A. TECHNOLOGY PARTNERSHIPS CANADA

5. As of 18 November 1999, Canada has terminated all obligations for the disbursements of funds pursuant to the five Canadian regional aircraft Contribution Agreements cited in Canada-Aircraft, and has withdrawn the approvals-in-principle that were issued under TPC for two other regional aircraft projects.³

6. In addition, taking full account of the factual elements which led the Panel and the Appellate Body to reach the finding of de facto export contingency, Canada has restructured the TPC programme and its administration to ensure that actual or anticipated exports or export earnings play no role in the goals, the application process, or decision-making under TPC. The key aspects of the restructured TPC are set out in the TPC Terms and Condition⁴, the Special Operating Agency Framework Document⁵ the Investment Application Guide⁶ and the Investment Decision Document⁷ Various secondary administrative documents are currently being finalised.⁸

7. Files relating to outstanding applications for financial assistance submitted prior to the restructuring were closed as of 18 November 1999. In order to pursue funding under TPC, applicants must submit applications in accordance with the new Terms and Conditions and Investment Application Guide. No transactions in relation to the Canadian regional aircraft industry will be approved until such time as the restructuring of the programme (including the finalisation of all secondary documentation) has been fully completed.

8. These measures fully and faithfully implement the DSB rulings and recommendations in Canada-Aircraft and are in compliance with the provisions of the SCM Agreement.

B. CANADA ACCOUNT

9. The Canada Account debt financing transactions that were examined by the Panel in Canada-Aircraft were completed in 1995 and 1998 and there have been no new financing transactions in the regional aircraft sector under the Canada Account programme since 18 November 1999.

10. Canada has taken further action to ensure that financing under the Canada Account will, in the future, be consistent with the SCM Agreement. First, Canada has confirmed in a Ministerial Guideline that all Canada Account financing transactions must comply with the OECD Arrangement on Guidelines for Officially Supported Export Credits (the OECD Arrangement). Second, recognising the importance of verification of compliance, Canada is prepared to agree to procedures that will enable the disputing parties to verify that each is complying with the SCM Agreement in the way it administers export-finance related governmental programmes.

11. These measures fully and faithfully implement the DSB rulings and recommendations in Canada-Aircraft and are in compliance with the provisions of the SCM Agreement.

III. BRAZIL'S ALLEGATIONS ARE UNFOUNDED

A. TECHNOLOGY PARTNERSHIPS CANADA

12. Despite the measures taken by Canada with respect to TPC, Brazil argues that these measures fail to comply with the rulings and recommendations of the DSB.

13. 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. This test requires the proof of three substantive elements:

(1) the granting of a subsidy by Canada under the restructured TPC;

(2) that is tied to;

(3) actual or anticipated exports.⁹

14. Rather than applying the three-part test set out by the Appellate Body, Brazil attempts to infer export contingency from evidence that suffers from a number of errors and distortions and relates, almost entirely, to TPC as previously constituted.¹⁰ The Appellate Body has clearly ruled that de facto export contingency must be demonstrated by the facts.¹¹ Brazil has failed to demonstrate, on the facts, that TPC as currently constituted will result in transactions that are de facto export contingent.

15. As fully set out in Canada's first submission in these 21.5 proceedings, and as noted above, Canada has terminated all obligations for the disbursement of funds to the regional aircraft sector under TPC, as it was previously constituted. No new transactions have been approved under the restructured TPC and therefore no new financial contributions have occurred. Canada has also made fundamental and pervasive changes to the nature and administration of TPC that ensure that funding under the programme, if and when it occurs with respect to the regional aircraft industry, will in no way be tied to or contingent upon any consideration of actual or anticipated exports or export earnings

16. By these actions, Canada has withdrawn the subsidies found by the Panel and Appellate Body to be de facto export contingent and thus has complied with the recommendations and rulings of the DSB and with its obligations under the SCM Agreement. Brazil's allegations are therefore unfounded.

B. CANADA ACCOUNT

17. Despite the measures taken by Canada with respect to Canada Account, Brazil argues that these measures fail to comply with the rulings and recommendations of the DSB.

18. The financing transactions found by the Panel to be subsidies contingent in law upon export performance have been completed, i.e. all disbursements under the relevant loan agreements have been made. Furthermore, no new financing transactions in the regional aircraft sector have been entered into since 18 November 1999.

19. To ensure complete implementation of the rulings and recommendations of the DSB and full compliance with the SCM Agreement, the Minister for International Trade has made a commitment not to authorise any financing transaction under Canada Account unless it complies with the OECD Arrangement. Pursuant to the second paragraph in Item (k) of Annex I to the SCM Agreement, an export credit practice that is in conformity with the interest rate provisions of the OECD Arrangement is not a prohibited export subsidy under the SCM Agreement. Therefore, to the extent that future financing transactions under the Canada Account programme are subsidies within the meaning of Article 1.1 and export subsidies within the meaning of Article 3.1, these transactions will benefit from the exception in Item (k).

20. Brazil has suggested that Canada must establish its entitlement to use Item (k) as an affirmative defence. Canada agrees that should Canada claim the exception under Item (k) in relation to any future financing transaction under Canada Account, and if the claim to that exception is challenged, Canada will accordingly bear the burden of demonstrating compliance with Item (k) at that time.

21. Recognising that it is in the interest of both Canada and Brazil to avoid such future challenges and in an attempt to reach a definitive solution to this dispute, Canada suggests that the Parties develop a verification procedure. Under this procedure the two governments would exchange relevant information regarding specific financing transactions in the regional aircraft sector so as to enable verification of their respective compliance with the SCM Agreement.
Canada has withdrawn the subsidies found by the Panel to be de jure contingent on exports and has thus complied with the recommendations and rulings of the DSB and with its obligations under the SCM Agreement. Brazil's allegations are therefore unfounded.

IV. REQUESTED FINDING

23. Canada requests that the Panel reject Brazil's claim and find that Canada's measures fully implement the rulings and recommendations of the DSB.
 

ANNEX 2-3

ORAL STATEMENT OF CANADA

(6 February 2000)

I. INTRODUCTION

Thank you, Mr. Chairman,

Mr. Chairman, distinguished members of the Panel, distinguished members of the delegation of Brazil, on behalf of Canada, let me first express our sincere appreciation to the Panel for agreeing to serve once more in this dispute, which we know has already been demanding of your time and attention. We will try to cooperate in every way possible to facilitate your task.

1. Mr. Chairman, in this proceeding under Article 21.5 of the DSU, Brazil has claimed that Canada has not complied with the rulings and recommendations of the DSB regarding Canada's TPC and EDC programmes. As the Panel knows well, it found that TPC contributions to the Canadian regional aircraft industry were subsidies contingent in fact upon export performance under the then applicable criteria and circumstances, and that two EDC Canada Account transactions were subsidies contingent in law upon export performance. The DSB recommended that Canada withdraw the subsidies within 90 days.

2. Canada has done so. Specifically, in response to those findings and recommendations, as of 18 November 1999, the date fixed for compliance, Canada has taken two types of actions.

3. First, Canada has terminated all subsidies and all obligations to provide subsidies to the Canadian regional aircraft industry that were outstanding under TPC as of the compliance date. The two Canada Account debt financing transactions addressed by the Panel have been completed and there have been no new Canadian regional aircraft financing transactions under Canada Account. Brazil does not dispute this.

4. Second, in response to the rulings and recommendations of the DSB, Canada has modified the rules and ministerial guidance under which these programmes operate so that any future assistance that Canada may provide to the regional aircraft industry under the TPC and the EDC Canada Account programmes will not conflict with the requirements of Article 3.1 (a) of the SCM Agreement.

5. In the case of TPC, Canada terminated all obligations to disperse funds related to the Canadian regional aircraft industry under the previous programme. Canada then completely restructured TPC to remove any consideration of export performance in the granting of assistance.

6. In the case of the EDC Canada Account Programme, Canada has taken a policy decision that future Canada Account financing of regional aircraft will be carried out in accordance with the OECD Arrangement. Thus, to the extent that future financing transactions under Canada Account may be prohibited export subsides, they will benefit from the exception in the second paragraph of item (k) of the Illustrative List of Export Subsidies.

7. Thus, Canada has not only withdrawn the subsidies that were found to be prohibited, but has revised its programmes to be fully consistent with Canada's obligations under the SCM Agreement.

8. Furthermore, in response to the criticism directed at Canada by this Panel and the Appellate Body for failing to produce certain commercially confidential information in the earlier proceedings, Canada is revising the form of the confidentiality provisions contained in TPC contribution agreements and in EDC transactions, so as to facilitate, if requested, the disclosure of such information in the context of WTO dispute settlement proceedings. Finally, to facilitate a definitive resolution of this dispute Canada has proposed to Brazil the development of a bilateral compliance verification procedure.

9. In the face of Canada's actions, Brazil has not been able to base its claims in this proceeding on any currently pertinent evidence that even remotely suggests non-compliance- for there is none. Instead, Brazil bases its claims on (i) innuendo, (ii) a presumption of bad faith and (iii) a wholly unfounded legal theory that Canada, rather than Brazil, has the burden of proof in this case.

10. Ensuring compliance with the export subsidy rules is the goal of Canada's actions, and it is the effect that would be expected on the basis of the changes Canada has made. According to Brazil, Canada's burden is to prove that the restructured programmes could never possibly be applied so as to grant export contingent subsidies. But there is no basis in the DSU or the SCM Agreement, or international law for imputing to Canada an obligation to prove that discretionary laws could not possibly be used to grant export subsidies. Brazil presumably advances this novel theory because only by imposing that essentially impossible burden on the defending party could Brazil prevail in a complaint where neither the law nor the facts support Brazil's claim.

11. The remainder of Canada's opening statement is divided into two parts: My colleague, Ms. Kirsten Hillman, will first address the TPC programme, and I will then address the Canada Account. In each case, Mr. Chairman, we will briefly summarise the compliance measures that Canada has taken both to withdraw the subsidies found to be illegal and to prevent future illegal export subsidies. We will also respond to the various claims made by Brazil. With your permission, Sirs, I will now ask Ms. Hillman to address the Panel.

II. TPC COMPLIANCE

12. Thank you Mr. Chairman. It is an honour to have the opportunity to appear before this Panel to discuss Canada's implementation with respect to TPC. As you know, this Panel did not find that TPC was per se an export subsidy. Rather the Panel found that TPC assistance as applied to the Canadian regional aircraft industry was contingent in fact on export performance.

13. Canada has implemented the rulings and recommendations of the DSB as follows:

14. First, effective 18 November 1999 Canada terminated all obligations for the disbursement of funds to the Canadian regional aircraft industry under TPC. As a result more than $16.4 million in funding to the sector has been cancelled.

15. Second, the Government of Canada withdrew two approvals in principle that had been issued under the old TPC programme to projects relating to the Canadian regional aircraft industry.

16. Third, the Government of Canada closed all application files under TPC as it was previously constituted. These three actions together mean that Canada has no obligations to disburse funds to the Canadian regional aircraft industry under the former TPC. In addition, under the restructured TPC no new investments have been approved and none will be approved until such time as all the necessary administrative documentation related to the restructured TPC has been finalized.

17. And the fourth implementation measure that the Government has taken to amend the very structure and administration of TPC in so as to address the factual elements that led the Panel and Appellate Body to find that contributions to the Canadian regional aircraft industry were de facto contingent upon export.

Restructuring of the TPC Programme

18. As of 18 November 1999, TPC, as it was previously constituted, no longer exists. The former TPC has been abolished and a new programme has been created with a new mandate from Cabinet. Under this new mandate exports or export performance will have absolutely no relevance to assistance to the Canadian regional aircraft industry - or to any other industry.

19. In undertaking the task of restructuring TPC, Canada was guided by the analysis and findings of the Panel and the Appellate Body. The Appellate Body concluded that there are three elements to a subsidy that is contingent in fact upon export performance. There must be (1) the granting of a subsidy (2) that is tied to (3) actual or anticipated exports. In reforming TPC, Canada focused on the second element of this three part test, and sought to eliminate those aspects of the TPC programme that led the Panel to conclude (and the Appellate Body to confirm) that the subsidies were "tied to" anticipated exports.

20. As to the first element - whether there is a subsidy - as Canada has noted, no new transactions have been approved under the restructured TPC. Future TPC assistance may or may not constitute subsidies under Article 1 of the SCM Agreement.

21. The third element of the Appellate Body test is "anticipated exports". Here we would note, Mr. Chairman, that the Canadian regional aircraft industry, like virtually every aircraft industry in the world, can be "anticipated" to export. Brazil suggests that the Government of Canada should take steps to alter the export orientation of the Canadian regional aircraft industry¹ and should even attempt to change the nature of the Canadian economy as a whole. Clearly an industry's export orientation, or lack thereof, is not within the control of the Government. In fact, the Brazilian, American and European regional aircraft industries, even though they exist in much larger domestic markets than that of Canada, are all also substantially export dependent. Furthermore, the SCM Agreement is very clear that subsidies to industries that export are not forbidden as such. The mere awareness or even anticipation of such exports does not preclude subsidization to such an industry. As the Appellate Body has clearly stated, and I quote "It does not suffice to demonstrate solely that a government granting a subsidy anticipated that exports would result".

22. According to the Appellate Body, a subsidy to an export oriented industry only becomes a prohibited subsidy when, the facts demonstrate that the granting of a subsidy is tied to or conditional on actual or anticipated exports. This is the second element of the Appellate Body's test, to which I will now turn.

23. In this case, the facts surrounding the administration of TPC led the Panel and the Appellate Body to conclude that TPC assistance was tied to or conditional upon anticipated exports. In response to this finding, Canada addressed the elements that the Panel and the Appellate Body determined were indicative of export contingency. We have reformed TPC so export performance is not even a consideration when funding is granted under TPC - let alone a condition for the granting of assistance.

24. The modifications made to the TPC programme in order to implement the rulings and recommendations of the DSB are fully set out in Canada's first submission and I will not reiterate them in detail here today. I would simply like briefly mention a few of the major changes, these include:

• First, the objectives of the restructured TPC focus on the promoting innovation and on improving the technological capability of Canadian industry;

• Second, information on exports will not be accepted from applicants under the restructured TPC; and

• Third, administrators will not in any way consider exports when making funding recommendations.

25. In addition, confidentiality clauses will be included in all future contribution agreements so as to permit the Government to release the pertinent information contained in these agreements in the context of WTO dispute settlement proceedings.

26. In summary, Mr. Chairman, the "total configuration of the facts" demonstrates that funding under the restructured TPC is not contingent in any sense on export performance. The European Communities are clearly of the same view and have stated in their third party submission that, and I quote: "The EC considers that Canada's actions with regard to TPC do prima facie amount to implementation of the Appellate Body's findings�there does not seem to be any basis on which continued de facto export contingency or some other violation of the SCM Agreement can be established."

27. Let me now turn to the arguments raised by Brazil.