CANADA - MEASURES AFFECTING THE EXPORT
OF CIVILIAN AIRCRAFT



Recourse by Brazil to Article 21.5 of the DSU




Report of the Panel

(Continuation)

Brazil's Arguments

28. As I have just set out, Canada has terminated all obligations to disburse funds to the Canadian regional aircraft industry under the former TPC programme. As Mr. Hankey noted, Brazil does not dispute this, and certainly does not offer any evidence to the contrary.

29. In addition, in order to achieve compliance, Canada has restructured TPC so that assistance to the regional aircraft industry under this programme will not run afoul of Article 3 of the SCM Agreement in the future. In its second submission, and again here this morning, Brazil presents a lengthy and rather inflamed critique of a position that Canada manifestly did not take; namely that until such time as there is a transaction under the restructured TPC, a Panel constituted under Article 21.5 of the DSU cannot determine whether Canada has complied with the DSB's rulings and recommendations. That was not and is not Canada's view.

30. Lest we all be distracted by a jurisdictional argument not made, let me be very clear. Canada certainly believes that this Panel can - and indeed should - assess whether the restructured TPC programme implements the DSB's rulings and recommendations regarding de facto export contingency. In that regard, as we have demonstrated and as the restructured TPC's Terms and Conditions and Framework Document make explicit, export performance is in no way a consideration in the granting of assistance under the new TPC. Consequently, there is no evidence to support Brazil's claim that the restructured programme is de facto export contingent.

31. Beyond that, Canada's point was simply the obvious one that since there have been no transactions under the restructured TPC, it is naturally impossible at present, to look at facts relating to specific applications of the new programme. Canada is confident that when such transactions arise, they will be fully consistent with the SCM Agreement. At the same time, Canada recognises that, in the future, Brazil may want to examine the facts surrounding specific transactions to satisfy itself that the restructured TPC as applied in practice is not de facto export contingent.

32. Brazil, for its part, does not adduce evidence that the granting of funds under the restructured TPC programme would be de facto export contingent. Nor does Brazil attempt to apply the three part test set out by the Appellate Body for determining export contingency, namely that there must be (1) a subsidy that (2) is tied to (3) anticipated exports. Rather Brazil fabricates its own test based on an impossible burden of proof and a presumption of bad faith. In its second submission, Brazil states, and I quote, that:

"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."²

33. Brazil's proposed test imposes the burden of proof in this case on Canada, rather than Brazil. However, as we all know, it is the complaining party that bears the burden of proof.³ Brazil is arguing that Canada must prove that Canadian law prevents it from granting subsidies that are de facto contingent on exports. There is no basis in the findings of the Panel or the Appellate Body, 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. Of course, the proper test in this case is the three part test set out by the Appellate Body that requires Brazil to demonstrate on the facts assistance under the restructured TPC is tied to, or contingent upon export performance. It is precisely because Brazil cannot meet the test of the Appellate Body that it tries to invent and impose its own test.

34. According to Brazil's test, Canada's restructured TPC programme must always be tainted by the finding that some aspects of the former programme operated to create de facto export subsidies in some circumstances. At the heart of this test is the presumption that Members intend to circumvent their WTO obligations - hence the purported necessity for Canada to establish that its replacement programmes cannot grant de facto export contingent subsidies.

35. In effect, Brazil argues that TPC can never be restructured to comply with Canada's WTO obligations. This directly contradicts by the Appellate Body's rule in Chile - Alcohol, which is, and I quote, "[m]embers of the WTO should not be assumed, in any way, to have continued previous protection or discrimination through the adoption of a new measure." The Appellate Body has found that, and here again I quote, "This would come close to an assumption of bad faith."

36. Brazil argues that the rule in Chile - Alcohol does not apply in the case of de facto violations. However, Brazil offers no rationale to explain why de facto violations should be subject to a different legal standard than de jure violations. This is clearly unsupported by the text of the SCM Agreement, WTO rulings or indeed common sense. Indeed, Brazil's argument is contradicted by the Appellate Body in this very case where it held that the prohibition of de jure and de facto export subsidies are subject to the same legal standard, but are established through different evidence.

37. Brazil also argues that, in any event, its allegations of non-implementation are based solely on the new TPC programme⁴ and that therefore the rule in Chile - Alcohol does not apply. This is clearly at odds with the text of Brazil's submissions. While Brazil's submissions do make some reference to the restructured TPC programme, the evidence it puts forward as representing the "total configuration of the facts" from which de facto export contingency must be inferred consists almost exclusively of evidence relating to the old programme. This evidence is largely recycled from Brazil's submission to the Panel in the original proceedings. Here I refer you to Annex I of Canada's first submission where Canada reviews Brazil's evidence and reveals that it is dated and riddled with errors and misrepresentations.

38. In its second submission Brazil does acknowledge that its arguments rely heavily on dated evidence but argues that such evidence should be presumed to be equally applicable to the new TPC programme.⁵ This reasoning is directly at odds with the statement of the Appellate Body in Chile - Alcohol and amounts to an unsubstantiated allegation of bad faith.

39. Indeed, the only evidence that Brazil adduces regarding the restructured TPC relates to the objectives of the programme and its subsidiary documentation.

40. Brazil underlines that one of the objectives of TPC is the promotion of economic growth, and the creation of wealth and jobs, and notes that potential projects are assessed in relation to the extent to which they achieve these objectives. Brazil contends that the consideration of economic benefits of a project is equivalent to making export performance a condition to granting funding. Brazil's reasoning goes something like this:

• In assessing a potential project, TPC considers the economic benefits of the project to Canada.

• Examples of economic benefits include economic growth, creating jobs and wealth.

• Economic growth and wealth are achieved in Canada, in part, through trade, which includes, of course, exports.

• Therefore, and here is where Brazil makes an untenable leap of logic, the consideration of the economic benefits of a project is equivalent to making export performance a condition of the granting of funding.

41. Brazil's assertion that economic objectives such as creating jobs, increasing Canadian wealth and spurring economic growth are surrogates for export conditionality is untenable. If this argument were to be accepted, and positive economic objectives were equated with exports, the scope of prohibited export subsidies would be radically expanded from that envisioned by the drafters of the SCM Agreement. Clearly, when governments give subsidies to industry, the intent is to make a positive contribution to the economy in one form or another. However, Brazil's reasoning would effectively prohibit all subsidies to any industry that exports, unless that subsidy has no benefit whatsoever to the economy. This is clearly not acceptable as it would preclude WTO Members from providing any subsidies to industries that export - a result directly contrary to the text of footnote 4 of the SCM Agreement.

42. Despite Brazil's spurious argument, Mr. Chairman, the fact remains that under the restructured TPC, the eligibility criteria reflect the overall objectives of the revised programme and do not include any consideration whatsoever of exportation or export earnings.

43. Finally, Mr. Chairman, Brazil has made much of the fact that Canada has not produced certain documents related to the restructured programme. However, the key documents that provide the restructured TPC with Cabinet authority to operate have been provided by Canada. These are the Terms and Conditions and the Special Operating Agency (SOA) Framework Document.⁶

44. The remaining documents are subsidiary documents that must respect the authority provided in the Terms and Conditions and the SOA Framework Document. This authority explicitly requires that TPC be administered in accordance with Canada's international obligations. Therefore all subsidiary documents must respect Canada's WTO obligations.

45. Canada would like to underline, once again, that the restructuring of TPC involves a complete re-engineering of all TPC's administrative documents. Consequently, no documents relating to TPC, as it was previously constituted, are valid under the new programme. To put it another way, those documents no longer exist for the purposes of TPC as it is now constituted.

46. Despite Canada's assurances - which I now reaffirm - that it will provide these documents as soon as they are finalized, Brazil has accused Canada of bad faith and alleged that Canada is "holding back" relevant documents.⁷ Canada takes exception to this baseless allegation.

47. Furthermore, Canada wishes once again to reiterate and make absolutely clear that no investments have been approved under the restructured TPC, and none will be approved until such time as all the supporting documents have been finalized. Despite Canada's assurance to this effect, Brazil, in its second submission, accuses Canada of having approved an investment under the revised TPC. Brazil refers to a press release made on 10 January 2000 regarding a TPC contribution to an Ontario company for the development of a robotics system. I have here a copy of the title and signature pages of the Contribution Agreement in question that I would like to submit to the Panel as Canada's Exhibit 14. As you will see this project was approved prior to November 18, 1999, under the former TPC.

48. To summarise, Mr. Chairman, the thrust of Brazil's submission is that it should be presumed that the restructured TPC programme will in practice violate the SCM Agreement, even though Brazil can point to nothing to substantiate its claim beyond evidence and innuendo regarding the predecessor programme and the regional aircraft industry's propensity to export.

49. Canada, for its part, has carefully noted the findings of the Panel and the Appellate Body and has made substantial and meaningful changes to the TPC programme so as to bring it into compliance with Canada's obligations under the SCM Agreement.

50. Accordingly, Mr. Chairman, Canada requests that the Panel find that Canada has fully and faithfully implemented the rulings and recommendations of the DSB by:

• Withdrawing assistance to the Canadian regional aircraft industry under TPC as previously constituted; and

• Amending the structure and administration of TPC so that assistance granted to the Canadian regional aircraft industry under this programme is not contingent in fact upon export performance.

51. Thank you for your attention. Mr. Hankey, will now address the measures taken by Canada in respect of the EDC Canada Account.

III. EXPORT DEVELOPMENT CORPORATION - CANADA ACCOUNT

52. Mr. Chairman, Members of the Panel, I would like to turn now to the measures that Canada has taken to bring the Canada Account programme into compliance with the recommendations and rulings of the DSB. Before doing so, however, I shall briefly review the findings of this Panel with respect to the Canada Account.

Appellate Body and Panel findings

53. In the original proceeding Brazil claimed that the Canada Account programme was inconsistent with the SCM Agreement and that it mandated export subsidies. The Panel rejected these claims. It found that the programme constituted discretionary legislation and did not mandate subsidies that are contingent on export performance. The Panel did not, as a result, make any findings on the Canada Account per se.

54. The Panel did find, however, that Canada Account debt financing in two transactions -- one involving South African Express and the other LIAT -- constituted export subsidies prohibited by Article 3.1(a). The Panel ruled that Brazil made a prima facie case that such debt financings were subsidies contingent on export performance, and that Canada had not rebutted that case, nor had Canada - and I quote - "sought to rely on the safe haven provided for in item (k) of the Illustrative List of Export Subsidies".⁸

55. These findings of the Panel - that the debt financing in the South African Express and LIAT transactions was contingent in law on export performance and that the Canada Account programme constituted discretionary legislation - were not appealed to the Appellate Body. The Panel's findings were limited, therefore, to Canada Account debt financing in two transactions.

EDC Compliance

56. Let me recall that the two Canada Account debt financing transactions that the Panel addressed were completed in 1995 and 1998. Since 18 November 1999, there have been no financing transactions in the regional aircraft sector. Canada has also taken action to ensure that, in the future, the discretionary authority under the Canada Account programme will be exercized in a way that is consistent with the SCM Agreement. Under Canadian law, no Canada Account transaction may proceed without the approval of the Minister for International Trade and no transaction may be approved unless the Minister determines that it is in the "national interest".

57. Canada adopted a Policy Guideline on 15 November 1999 that informs EDC and the world that the Minister for International Trade, from that date forward, will consider any Canada Account financing transaction that does not comply with the OECD Arrangement for Officially Supported Export Credits not to be "in the national interest".

58. The Minister is thereby saying that all future Canada Account financing transactions must comply with the OECD Arrangement if they are to receive the required Ministerial authorization. This is perfectly clear and unambiguous. A copy of the Guideline can be found at Tab 13 of Canada's Exhibits and is also publicly available and has been posted on the web site of the Department of Foreign Affairs. I have here a printout from the web site that I would like to present as Canada's Exhibit 15.

59. As the Appellate Body noted in the Brazil-Aircraft (PROEX) case, the OECD Arrangement is an international undertaking on official export credits that satisfies the requirements of the proviso in the second paragraph of item (k). Pursuant to this paragraph of item (k), an export credit practice that is in conformity with the interest rates provisions of the Arrangement is not a prohibited subsidy under the SCM Agreement. Therefore, by conforming to the OECD Arrangement, future Canada Account financing transactions will conform with the requirements of the exception provided by the second paragraph of item (k).

60. Finally, Canada has indicated that it is prepared to agree to the establishment of verification procedures whereby Canada and Brazil would exchange relevant information regarding specific future financing transactions in the regional aircraft sector so as to allow both Canada and Brazil to verify compliance of such transactions with the SCM Agreement. Canada has proposed this procedure in the interest of avoiding future dispute settlement proceedings, believing that such a procedure would provide sufficient transparency to allow both Parties to satisfy themselves that the other is in compliance with its WTO obligations. Canada would like to make clear that it asks only that the Panel endorse the establishment of such an arrangement, and is not proposing an ongoing role for the Panel should a verification process be established. We also note, Mr. Chairman, that in the light of the rulings and recommendations of the Panel and Appellate Body concerning the provision of confidential information, EDC is revising the form of its confidentiality agreements entered into with its customers, to facilitate, if required, disclosure of such information in the context of the WTO dispute settlement proceedings.

61. In summary, the South African Express and LIAT transactions were completed before 18 November 1999. The implementation of the Policy Guideline will ensure that all future Canada Account financing transactions will comply with the OECD Arrangement, and thereby with the proviso in the second paragraph of item (k). Canada has, therefore, fully complied with the recommendations and rulings of the DSB.

Brazil's arguments

62. Mr. Chairman, Members of the Panel, Brazil has produced no evidence to call into question Canada's compliance in this case, because there is none.

63. Instead Brazil resorts to the same arguments it has advanced in the case of TPC. It argues that completion of the two transactions found to be de jure export contingent by this Panel is "simply not enough" and suggests that Canada must "do more" to bring itself into compliance with the DSB's recommendations and rulings. Canada has, of course, done "more" by adopting the Ministerial Policy Guideline. Brazil, however, dismisses this action on the basis that the Ministerial Guideline "does not ensure that prohibited export subsidies cannot be granted". This legal standard for compliance has no foundation in the WTO or international law.

64. Brazil's novel legal standard seeks not only to reverse the burden of proof onto Canada, but to create an extraordinary degree of burden: that Canada must prove that the Canada Account programme cannot be used to grant export subsidies. Brazil states this position in paragraph 71 of its second submission as follows: "�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, but not merely that they might not be granted".

65. Ms. Hillman has already noted that this standard finds no support whatsoever in the DSU, the SCM Agreement or international law. The Appellate Body has said that the complaining party bears the burden of proving a violation and there is nothing in Article 21.5 that suggests a different burden of proof in a proceeding under that Article.

66. In addition to seeking to reverse the burden of proof and to set it at an unreasonably high level, Brazil complains about Canada's compliance on two grounds. First, Brazil complains that the Guideline refers to the OECD Arrangement, and does not explicitly state that Canada will thereby meet the criteria to qualify for an exception under the second paragraph of Item (k). Second, it complains that Canada has not identified which of the articles in the Arrangement it believes constitute the "interest rates provisions" referred to in item (k).

67. With respect to Brazil's first point, Canada has already explained in its submissions why the Guideline does ensure that any future Canada Account financing transactions will be in conformity with the interest rate provisions of the Arrangement and therefore the provisions referred to in the second paragraph of item (k). In requiring compliance with the OECD Arrangement, Canada requires compliance with the totality of the Arrangement, including all of its interest rates provisions. Canada has thereby required that all future Canada Account financing transactions will conform to the requirements of the exception provided in the second paragraph of item (k).

68. Regarding Brazil's second argument, Canada has already noted the reasons why Canada does not think it is necessary to set out all the provisions of the Arrangement with which Canada must comply. First, the Guideline ensures that Canada will comply with all provisions of the OECD Arrangement, which include the Arrangement's interest rates provisions. Second, it is far from clear what the legal consequence would be of attempting in this proceeding to delineate in the abstract, and before-the-fact, the various ways that Canada considers WTO members can act within the exception in the second paragraph of Item (k). Canada accepts that should it invoke the exception in the future, Canada would have the burden of demonstrating compliance with the second paragraph of Item (k) and is prepared to do so, should a transaction be challenged.

69. That said, Canada is willing to set forth its view as to which provisions of the current text of the OECD Arrangement would constitute interest rates provisions within the meaning of item (k) for the purposes of this dispute and in the context of regional aircraft transactions.

70. Canada considers that the most logical interpretation of the term "interest rates provisions" would include all provisions in the OECD Arrangement that affect what the interest rate and the amount of interest payable will be in a given regional aircraft transaction.

71. For the purposes of this dispute, the relevant "interest rates provisions" are generally contained in Chapter II of the Arrangement, which deals with the general rules governing the provision of officially supported export credits, and in Annex III, which contains the sector specific rules on Export Credits for Civil Aircraft. Canada notes that there may be other provisions of the Arrangement that are relevant to other sectors. Also, contrary to what Brazil has asserted, by complying with the OECD Arrangement, Canada will also respect the non-derogation commitment set forth in the Arrangement.

72. For ease of understanding, we would group the most relevant provisions into two categories:

73. First, there are provisions that set the minimum interest rates for official financing support and that establish how these minimum rates are constructed and applied, and the terms by which they are offered. These include all the articles that cover the definition, construction and application of the minimum interest rates called the Commercial Interest Reference Rates, or CIRRs, such as Articles 15, 16 and 17 of Chapter II and Article 22 of Annex III.

74. In the second group of provisions are those that either directly or indirectly affect the amount of the interest charged and the timing of when it is paid, in a given transaction. These include provisions such as Article 7, which deals with cash payments, because the amount of the cash payment will affect the amount of interest charged; Article 10, which deals with the maximum repayment term, because the length of the term will determine the applicable minimum interest rates, as well as the overall amount of interest payable throughout the life of the loan; Article 14, which deals with payment of interest, because the payment profile will determine when an interest rate materializes in the form of an actual cash outlay; and Article 29, which deals with matching another government's terms and conditions that are outside of the Arrangement rules, because the terms and conditions that are being matched in such a case include interest rates. The requirements for a risk-based premium referred to in Article 21(a) and providing for higher effective interest rates for higher credit risks for direct lenders should also be included.

75. In Canada's view, this identification of interest rates provisions flows from the plain meaning of the words. The text of paragraph 2 of Item (k) refers to "interest rates provisions" and not simply to "interest rate". Thus, it must refer to more than the CIRR.

76. As this Panel and the Appellate Body have noted, pursuant to the second paragraph of Item (k), an export credit practice that is in conformity with the "interest rates provisions" of the Arrangement is not a prohibited subsidy under the SCM Agreement. If the term were applied only to the CIRR, the benefit of the exception would be extended to financing transactions that apply the CIRR, but do not abide by any of the other Arrangement rules, such as those relating to maximum terms and minimum risk premiums.

77. A financing transaction that applied a naked interest rate alone - one that is divorced from the other terms and conditions that affect the interest rate, and are generally part of any financing transaction - could very easily confer a benefit to the recipient that would be considered a subsidy under Article 1 of the Agreement and, if contingent on export, a prohibited export subsidy under Article 3.

78. Finally, one should bear in mind that the Illustrative List of the SCM Agreement was carried over from the Tokyo Round Subsidies Code. After more than ten years of negotiations, the OECD Arrangement was adopted in 1978. In 1979, the Tokyo Round Subsidies Code was agreed together with other Tokyo Round Agreements. It is inconceivable that the signatories of the GATT Subsidies Code, who were at the same time participants in the OECD Arrangement, would have agreed to an item (k) that incorporated only a single, isolated provision of the Arrangement thus undermining the rest of the Arrangement less than one year after its adoption.

79. To assist the Panel, Canada has prepared a list of provisions that Canada considers to be "interest rates provisions" for the purposes of Item (k) in the context of this dispute. We are pleased to provide a copy of this list to the Panel, and to Brazil.

80. We would be happy to further discuss our rationale for this categorization of "interest rates provisions", if the Panel so wishes.

81. I will now briefly address the findings of the 21.5 Panel in Australia - Leather. In Australia - Leather, the factual circumstances of the "circumvention" are fundamentally different from the facts of this case. Brazil argued that the Panel decision was not correctly decided. But even if the Panel considers that the reasoning was not correct, the findings of the Panel in Australia - Leather are not in any way appropriate to this case. Let me explain.

82. In Australia - Leather, the Panel was faced with two, one-time financial contributions. The first of these financial contributions was found by the Panel to have been a subsidy contingent upon export performance. Australia purported to implement the Panel's findings, which had not been appealed, by placing the specific export subsidy found to have been prohibited, with another specific export subsidy. It was this second subsidy that was required to be removed. This, very clearly, is not the case here.

83. As you well know, it was the operation of TPC in the regional aircraft sector that was at issue. And it is the operation of TPC, as newly constituted, that is at issue in this proceeding. There is no evidence, and, indeed, no suggestion, that new subsidies have been granted to "circumvent" a Panel ruling. The claim here is that the restructuring of TPC has not gone far enough. In these circumstances, naturally, repayment of subsidies, even if such a remedy were available under the SCM Agreement, is not warranted.

84. Mr. Chairman, Brazil has made a valiant effort to bring the findings of the 21.5 panel in Australia - Leather into the discussion of this case. But, despite such effort, Brazil has failed to demonstrate the relevance of that decision in the context of the matter that is now before the Panel.

85. First, Brazil has not explained why the Panel should now entertain Brazil's argument for a retrospective application of Canada's obligation to withdraw, under Article 4.7 of the SCM Agreement, to subsidies that had already been granted before the recommendations of the DSB. Second, Brazil has not demonstrated how the specific findings of the panel report in Australia - Leather would be applicable to the facts of this case. I will address each issue in turn.

86. First, Mr. Chairman, Brazil is now in effect seeking to modify its original claim for a remedy. In fact, Brazil now asks the Panel to issue new recommendations as to what constitute Canada?s obligation to withdraw subsidies found to have been contingent upon export performance. Brazil asks the Panel to use those new recommendations to assess Canada?s compliance with those same recommendations.

87. Brazil does so, however, in the context of a procedure that is solely concerned with determining whether Canada has implemented the original rulings and recommendations of the DSB. Brazil is trying to get not only what it never got but, more importantly, what it never sought. This can only be characterized as "trial by ambush", to borrow Lord Denning's famous phrase.

88. Brazil has known Canada's position on the interpretation and application of Article 4.7, in particular insofar as it applies to subsidies already granted. Canada's position on this issue was set out in Canada's second written Submission (para. 142 ss.) in the PROEX dispute running parallel to this case, where, of course, Canada is the complainant. In that submission, Canada indicated very clearly that its interpretation of the obligation to withdraw export subsidies under Article 4.7 of the Agreement does not allow for a retroactive withdrawal of subsidies that have already been granted. In that case, Brazil heartily supports Canada's view. In fact, in that case, Brazil has severely criticized the decision in Australia - Leather as bad policy and bad law.

89. In any event, Brazil could not have been unaware of Canada's interpretation of the scope and application of the obligation to "withdraw".

90. Nevertheless, during the various stages of the Panel process or even before the Appellate Body, Brazil has never taken exception with Canada's interpretation. It raises serious question of fairness and equity now for Brazil to ask the Panel to make a finding of non-compliance because Canada did not withdraw subsidies that had been granted before the recommendations of the DSB. Brazil never made that claim; in the course of implementing the rulings and recommendations of the DSB, Canada was not aware and could not have been aware of the nature of the obligation that Brazil now seeks to impose on Canada.

91. The role of the Panel under Article 21.5 of the DSU is to determine whether Canada's implementation measures are in conformity with the rulings and recommendations of the DSB. The ultimate role of the Panel is to settle the dispute between the parties. That dispute was framed by the parties in the course of their various submissions. The dispute, and therefore the rulings and recommendations of the DSB, do not include the withdrawal of subsidies that were granted before the recommendations of the DSB.

92. In conclusion on this point Mr. Chairman, Canada respectfully submits that in the light of the above considerations, it would not be an appropriate use of the Panel's jurisdiction under Article 21.5 to now grant Brazil a remedy that it never sought.