CANADA - MEASURES AFFECTING THE EXPORT
OF CIVILIAN AIRCRAFT



Recourse by Brazil to Article 21.5 of the DSU




Report of the Panel

(Continuation)

Question to both Parties

Please comment on the EC argument (para. 7 of the EC's oral statement) that, in light of the Panel's terms of reference set forth in document WT/DS70/9, "[t]he Panel may not� in this case consider whether Canada has failed to implement the report retroactively since Brazil has only asked for a finding that the changes to the two programmes at issue have not implemented the Report."

Response

1. We believe that the EC is correct. Brazil did not request the Panel to examine the sufficiency of Canada's withdrawal of previous subsidies, but has only questioned whether the changes to the two programmes are sufficient to conform with the SCM Agreement. This is in stark contrast to the situation in the Australia - Leather 21.5 hearing where the Panel found repayment of the subsidy in question to be required. In that case, the issue of repayment was already before the Panel as the United States was seeking repayment of a portion of the monies already paid out. In deciding how much repayment was necessary, the Panel may have gone further than any Party desired, but the issue of repayment had been placed before the Panel.
    
2. Canada notes that Canada has fully complied with its WTO obligations in terminating, by the required date, all assistance found to have been export subsidies.

Questions by Brazil to Canada in the Canada Case Re Canada Account

Q1. Please identify any publicly-available sources from which information regarding particular Canada Account transactions could be obtained.

Response

1.  As Canada noted at the hearing, information on specific Canada Account transactions is not made publicly available due to commercial confidentiality. It is for this reason that Canada proposed a reciprocal verification procedure so that Brazil could have access to that information.
    
2. Information on the Canada Account in general can be found from the following publicly available sources:

• EDC's Annual Report
   
• The Summary Report of the Canada Account Report to the Treasury Board. (This summary report can be found on EDC's website.)
   
• The Government Expenditure Plan and Main Estimates

Q2. Is there any information available to WTO Members that are not Participants in the OECD Arrangement of that have not negotiated bilateral transparency or verification arrangements with Canada that would allow those Members to determine whether particular Canada Account transactions constitute prohibited export subsidies?

Response

1. Canada is not aware of any sources of information that would allow WTO members that are not OECD members and that are not party to bilateral verification procedures to determine whether particular Canada Account transactions constitute prohibited export subsidies.

Q3. In a document provided to the Panel during its meeting of 6 February, Canada states that Article 15 of the OECD Arrangement, which "requires providers of official financing support to apply minimum interest rates, or the relevant Commercial Interest Reference Rates (CIRRs), " is amongst the "interest rates provisions" referred in the second paragraph of Item (k) to Annex 1 to the Subsidies Agreement¹⁰ Brazil poses the following questions:

(a) Please define the term "official financing support."

Response

1. "Official financing support" is referred to in the fourth paragraph of the Introduction to the OECD Arrangement: "Direct credits/financing, refinancing and interest rate support are referred to as official financing support."

(b) Is Canada's term "official financing support" the same as the term "official support," form the OECD Arrangement? If not, what is the difference between the two terms?

Response

1. All "official financing support" is "official support", but not all "official support" is "official financing support". The fourth paragraph of the Introduction is clear in that regard. Aid financing (credits and grants) as well as export credit insurance and guarantees (without interest rate support, i.e. "pure cover") are listed as possible forms of "official support", but they do not represent "official financing support".

(c) As Canada Account now exists, subsequent to the adoption of Canada's implementation measures, would support from it for transactions involving Canadian regional aircraft constitute "official financing support"? If so, why? If not, why not?

Response

1. All Canada Account financing transactions involving regional aircraft will comply with the Arrangement. If Canada Account were used to provide loan guarantees, the transactions would, as a matter of definition, not constitute "official financing support"; however, they would still comply with the Arrangement rules on "official support". In the more typical cases of direct financing offered under Canada Account, the transactions will, of course, comply with the Arrangement rules on "official financing support". Whether a transaction is undertaken in the form of a direct loan or a guarantee, it will be structured in a way to be in full compliance with the relevant interest rates provisions of the Arrangement.

Q4. As Canada Account now exists, subsequent to the adoption of Canada's implementation measures, would support from it for transactions involving Canadian regional aircraft always be extended at interest rates equal to of above the OECD Arrangement's CIRR?

Response

1. Notwithstanding that Canada believes that floating rates are encompassed within the OECD, and should be included as "interest rate provisions" and thus fall under the exception in Item k, the issue of floating rates is still under discussion in the OECD. In the interest of contributing to a speedy resolution of this dispute, Canada wants to avoid making this an issue in this case and has consequently decided not to implement any floating rate transactions under Canada Account in the regional aircraft sector unless and until this issue is clarified either under the OECD Arrangement or in the context of WTO proceedings that directly address this issue. Accordingly, except in the cases of matching and humanitarian tied aid, all Canada Account financing transactions in the regional aircraft sector will take the form of fixed rate financing at interest rates at or above the CIRR.

(a) If Canada responds in the negative, under what circumstances would such financing not be extended at interest rates equal to or above the OECD Arrangement's CIRR?

Response

1. If official support were provided by way of "pure cover", i.e. a guarantee issued to a lending bank, the interest rates provision in Article 17.b) would be applicable. It is conceivable that the financing bank could price the loan on a floating rate basis and at a face rate below CIRR. The transaction would still be in full compliance with the interest rates provisions of the Arrangement. (Indeed, Article 17 is itself an interest rates provision.)

(b) If Canada responds in the affirmative, please reconcile this response with the following: first, Canada's statement, reported at paragraph of the Panel Report, that Canada Account financing is used where support under EDC's Corporate Account cannot be extended, i.e., where a particular transaction involves risk factors or requires financing terms in excess of those which EDC's Corporate Account would normally undertake; and second, Canada's statement, in the 3-4 February Panel meeting in the companion Article 21.5 case against PROEX, that EDC's Corporate Account does sometimes lend at rates below the CIRR.

Response

1. Support under Canada Account will continue to be offered in circumstances where for risk, size or capacity reasons, EDC cannot provide support under the Corporate Account. In such cases, the risks will be assessed and the borrower offered terms and conditions commensurate with the risk, but in accordance with the interest rates provisions of the Arrangement. A risk premium would be applied to compensate Canada for the risk incurred. Canada's statement, in the 3-4 February Panel meeting in the companion Article 21.5 case against PROEX, that EDC's Corporate Account has sometimes lent at rates below the CIRR, is correct. In such a case the terms and conditions are not only commensurate with the risk, but are also consistent with the terms and conditions that would be available to the borrower from commercial banks/lenders.

Q5. As Canada Account now exists, subsequent to the adoption of Canada's implementation measures, would support from it for transactions involving Canadian regional aircraft always comply with the 10-year maximum repayment term applicable to regional aircraft transactions under the OECD Arrangement?¹¹

(a) If Canada responds in the negative, under what circumstances would such financing not comply with the 10-year maximum repayment term?

Response

1. Canada confirms that Canada Account transactions in the regional aircraft sector will always comply with the maximum repayment terms of Article 21 of Annex III of the Arrangement, except in those cases where Canada might exercise its right to match non-compliant terms and conditions in accordance with Article 29 of the Arrangement, as confirmed by Article 25 of Annex III.

(b) If Canada responds in the affirmative, please reconcile this response with the following: first, Canada's statement, at paragraphs 6.159-6. 160 of the Panel Report, that Canada Account financing is used where support under EDC's Corporate Account cannot be extended, i.e., where a particular transaction involves risk factors or requires financing terms in excess of those which EDC's Corporate Account would normally undertake; and second, the fact that EDC's Corporate Account provides repayment terms (specifically, 16.5 -year terms)¹² beyond the maximum 10-year term identified for regional aircraft transactions in the OECD Arrangement

Response

1. The circumstances that would give rise to 16.5 year terms under Corporate Account would not be such that Canada Account support would be required. Canada Account continues to be used in circumstances where Corporate Account can not be extended, for reason of risk, size of transaction, or country concentration reasons. In other words, such a term would be granted because it would be consistent with the terms and conditions available to that particular borrower from commercial banks/lenders. Canada could not, under Canada Account, support terms in excess of the ten-year repayment term identified for regional aircraft transactions in the OECD Arrangement, unless it was doing so in order to match another country's financing offer on other than the standard terms and conditions of the OECD Arrangement.

Q6. In a document provided to the Panel during its meeting on 6 February, Canada states that Article 29 of the OECD Arrangement, which "permits the offering of terms and condition that are outside of the Arrangement's rules, but only if such terms and conditions are matching another government's offer with terms and conditions that are outside of the Arrangement's rules" is amongst the "interest rates provisions" referred to in the second paragraph of Item (k) to Annex 1 to the Subsidies Agreement.¹³

(a) When Canada states that in the circumstances detailed in Article 29, it may provide "terms and conditions that are outside of the Arrangement's rules" would the provision of those "terms and conditions" still constitute "official financing support", as that term is defined by Canada?

Response

1. Whether or not a transaction is undertaken on a matching basis, if it falls under the Arrangement's definition of "official financing support" (i.e., official support offered by way of direct credits/financing, refinancing and/or interest rate support), it remains "official financing support". Canada notes that the definition is the OECD Arrangement definition, not a definition devised by Canada.

(b) Does Canada consider it to be consistent with the interest rates provisions OECD Arrangement to offer terms that are "outside of the Arrangement's rules" where it is "matching another government's offer with terms and conditions that are outside of the Arrangement's rules"?

Response

1. Yes. Article 29 grants a positive right. As a result, matching (unlike unilateral derogations) is compliant with the Arrangement. It is an interest rates provision because it allows Participants to offer terms and conditions affecting the interest rate and the amount of interest payable that are more favourable than the terms and conditions envisaged in the other interest rates provisions of the Arrangement.

(c) Does Canada consider it to be consistent with the Subsidies Agreement to offer terms that are "outside to the Arrangement's rules", where it is "matching another government's offer with terms and conditions that are outside of the Arrangement's rules"? If Canada's response is in the affirmative, please identify which provision of the Subsidies Agreement permits "matching" in these circumstances.

Response

1. Matching involves the provision of an export subsidy. An export subsidy is, as a rule, prohibited under the SCM Agreement. Matching is, however, permitted under the second paragraph of Item (k) as an export credit practice that complies with the interest rates provisions of the OECD Arrangement.

Q7. In paragraph 71 of its Statement for the Meeting of the Panel, dated 6 February 2000, Canada stated that the "interest rates provisions" of the OECD Arrangement relevant to this dispute are "generally" contained in Chapter 11 and Annex III to the Arrangement. Please identify any exceptions.

Response

1. In its list of "interest rates provisions", Canada also identified Article 2 ("Scope of Application") and Article 3 ("Special Sectoral Applications and Exclusions"). These two articles can be found in Chapter I of the Arrangement.
    
2. Canada listed Article 2 because the scope of the Arrangement naturally determines the scope of the interest rates provisions of the Arrangement. Article 3 is of particular relevance in the context of export credits for regional aircraft because it effectively establishes how the interest rates provisions of the Annexes are related to the interest rates provisions of the Arrangement.

Canada wishes to note that it limited its list to those interest rates provisions that are relevant for regional aircraft transactions. Other interest rates provisions might be relevant in other sectors. For illustrative purposes only, Article 25 ("Local Cost") would, in Canada's view, be among the interest rates provisions that are relevant for export credits in support of power projects.