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CANADA - MEASURES AFFECTING THE EXPORT
COMMENTS OF CANADA ON BRAZIL'S RESPONSES
TO THE QUESTIONS FROM THE PANEL
(17 February 2000)
CANADA ACCOUNT
Question 1
1. Canada confirms the statements made in its written submissions and in its
response to question 4 from the Panel regarding the serious and effective nature
of the Ministerial Policy Guideline. The Guideline is not at all hortatory.
Question 4
2. Canada would like to re-confirm that Canada is committed to complying with
the rulings and recommendations of the Panel and Appellate Body on an on-going
basis. Accordingly, and in response to the criticism directed at Canada by the
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 to be contained in future TPC contribution
agreements and in future EDC transactions, so as to facilitate, if requested,
the disclosure of such information in the context of WTO dispute settlement
proceedings.
TECHNOLOGY PARTNERSHIPS CANADA
Question 2
3. The Panel has asked Brazil whether the provision of specific subsidies to
export-oriented industries, for that reason alone, necessarily violates Article
3.1(a) of the SCM Agreement. While it is not stated directly, Brazil's answer,
and in particular Brazil's quotation of the United States third party
submission, implies that in Brazil's opinion, granting a subsidy to an industry
that exports is not, in and of itself a violation of Article 3.1(a).
4. Canada has two comments regarding Brazil's response.
5. First, Brazil's assertion that "two-thirds of all funds [under TPC] will go
to the aerospace industry", and its implication that "aerospace" and "regional
aircraft" mean the same thing, are incorrect. Regional aircraft is but one part
of the aerospace industry, which is one component of the A&D sector. The sector
includes 800 establishments and encompasses everything from satellites to combat
boots. This sector is, in turn, only one of the areas designated for funding
under TPC. Indeed, it is in an effort to focus on Enabling and Environmental
technology projects, and recognizing that projects in the A&D sector are
significantly more costly than those in other eligible areas, that TPC has
placed a limit on the share of funds that can be allocated to A&D.
6. In any event, as Brazil rightly notes in its Second Submission, the issue is
not whether Canadian regional aircraft related projects receive the majority of TPC funds (which they clearly do not) or $1 of those funds, but whether TPC
funding is export contingent. The facts demonstrate that it is not.
7. Second, TPC provides funding for R&D in the A&D sector because it is a sector
with significant potential for important industrial research and development.
8. The OECD Economic Survey of Canada noted the widely held view that Canadian
industry suffers from an innovation gap compared with other developed countries,
ranking 9th out of 10 countries in industrial research. This innovation gap has
contributed to weak productivity performance over the past two decades,
resulting in sub-optimal employment growth and contributing to high government
deficits.
9. In exploring ways of increasing industrial R&D, it is natural for the
Government to look for sectors or technologies that are already or potentially
positioned to conduct R&D on a large scale and at the leading edge of the
technology spectrum.
10. Canada's A&D sector is one such sector. It is one of the country's largest
investors in R&D and a source of high-paying jobs employing some 800,000
Canadians. R&D expenditures in the A&D sector total more than $1 billion
annually. The R&D intensity (R&D/sales) of the A&D sector was 7.28 per cent in
1998, well in excess of the average of 1.2 per cent for all Canadian
manufacturing enterprises.
Question 3
11. Brazil did not answer the Panel's question; namely, whether the granting of TPC assistance to the regional aircraft sector is contingent on the fulfilment
of sales forecasts. The answer is no, and Canada notes that Brazil has offered
no evidence to the contrary.
Question 4
12. Brazil proposes two alternatives for reforming TPC: (1) "making funds
available to Canadian industry generally", and (2) "changing TPC so that its
contributions do not confer benefits, and therefore do not constitute subsidies
within the meaning of Article 1.1 of the SCM Agreement".
13. The first proposal - making TPC generally available - would be legally
irrelevant to remedying a practice found to be an export subsidy, since export
subsidies are deemed to be specific under Article 2, regardless of general
availability. Brazil is also wrong on the facts, since TPC contributions are
available to Canadian industry generally. Funds are available to two
technologies (enabling and environmental) that cut across all industrial,
agricultural and service sectors, and a group of industrial sectors broadly
termed aerospace and defence that encompass a vast area of the Canadian economy.
14. Regarding Brazil's second alternative - eliminating any benefit from TPC
contributions, Canada notes that Canada is not required to refrain from
subsidizing the regional aircraft industry, provided Canada has taken steps so
that any such subsidization will not be contingent on export performance. Canada
has done so.
SUBMISSION OF THE EUROPEAN COMMUNITIES
(17 January 2000)
TABLE OF CONTENTS
I. INTRODUCTION
1. The European Communities (hereafter "the EC") makes this third party
submission because of its systemic interest in the correct interpretation of the SCM Agreement and the of the Understanding on Rules and Procedures Governing the
Settlement of Disputes ("DSU").
2. It will comment on the facts and arguments of the parties as they appear from
the Reports and the first written submissions of the parties. The arguments
presently before the Panel are not however as yet fully developed and the EC
anticipates that it will have more to say at the third party session of the
meeting with the Panel. The EC does not consider that it is appropriate for it
at this stage to discuss arguments that have not yet been developed by the
parties.
3. Section III will discuss the Technology Partnerships Canada programme ("TPC")
and Section IV the Canada Account subsidies.
II. BUSINESS CONFIDENTIAL INFORMATION
4. The EC must first recall its position on the special procedures for the
protection of "Business Confidential Information."
5. The EC recognises that certain information used in panel proceedings may be
of such a nature that particular care is called for to protect it. The EC cannot
accept however that protective procedures are adopted which it is impossible for
the EC to follow. As the EC explained before the Appellate Body, EC officials
are not allowed to enter into personal commitments to third country governments
concerning the conduct of dispute settlement proceedings. Such obligations may
only be undertaken by the EC, which is bound vis-�-vis other WTO Members by
Article 18.2 DSU to ensure that confidential information is protected. In the
case of the EC, the effectiveness of this obligation is ensured by the fact that
EC officials are all bound by the EC Treaty and their terms of employment not to
disclose confidential information, including business confidential information.
III. TECHNOLOGY PARTNERSHIPS CANADA
1. Introduction
5. The Panel has found and the Appellate Body has affirmed that the TPC
programme as applied to the regional aircraft industry constituted a de facto
export subsidy, and was therefore inconsistent with Articles 3.1(a) and 3.2 of
the SCM Agreement. The Panel recommended that Canada bring these subsidies into
conformity of the SCM Agreement within 90 days.
7. Canada claims to have implemented the Appellate Body's findings in the
following way :
(a) Canada has terminated all obligations to regional aircraft projects under
the TPC programme, with effect from 18 November 1999. It has cancelled all
outstanding funding for regional aircraft projects. It has also withdrawn
approvals-in-principle and has closed all files relating to outstanding
applications. Canada claims that it now has no further obligation to disburse
funds or consider applications with regard to regional aircraft under the TPC
programme as previously constituted.
(b) Canada has also restructured the TPC programme, with a view to eliminating
the inconsistencies identified by the Panel and the Appellate Body. In
particular, in the framework of the new TPC, it has restructured the TPC's
objectives to remove the references to export promotion, it has removed export
considerations from the eligibility and approval criteria and it has opened up
the programme to activities which a further from the market (e.g. industrial
research), although certain elements of the documentation have not yet been
finalised. Significantly, Canada states that under the new TPC information on
export sales will no longer be gathered or recorded.
8. Canada claims that these actions amount to implementation of the Panel's and
Appellate Body's findings.
2. Assessment by the EC
9. The Panel found TPC to be de facto export contingent. Establishing whether
de
facto export contingency has ceased (and not been re-introduced in some way)
obviously involves difficult questions of fact.
10. The EC considers that Canada's actions with regard to the TPC do prima facie
amount to implementation of the Appellate Body's findings. In addition since no
disbursements have been made since 18 November and no new applications for
assistance have been approved since that date, 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.
11. The TPC was found to constitute an export subsidy in fact, not in law.
Therefore Canada is not required to change the law in order to bring the TPC
into conformity with the SCM Agreement, but it must satisfactorily address the
elements which have been found by the Appellate Body to justify a conclusion of
de facto export contingency. The Panel and the Appellate Body held that a number
of facts relating to the TPC, when considered together, demonstrated that the
granting of TPC subsidies was tied to actual or anticipated export1 and that
export contingency could be "� inferred from the total configuration of the
facts..2
12. It should be noted that Canada is required to remove the export contingency,
it is not required to stop subsidising the aircraft industry. In order to meet
the 'but for' test established by the Panel in paragraph 9.332 of its Report,
Canada must satisfy the Panel that TPC assistance will in future be granted
without reference to actual or anticipated export earnings, in order to avoid a
finding of de facto export contingency as defined by Article 3.1(a) and footnote
4 of the SCM Agreement. Put another way, Canada must ensure that the freedom of
choice of applicants to decide between selling on the domestic or export markets
is not limited in any way by the conditions attached to the receipt of the
subsidy.
13. The EC notes that the amendments to the TPC programme introduced by Canada
are designed to address each of the groups of facts found to warrant the
conclusion of de facto export contingency. In the restructured TPC programme
export performance is no longer referred to as an objective, export
considerations have been removed as a criterion for eligibility or approval, and
the scope of eligible activities under TPC have been expanded to include
industrial research, thus shifting the focus of support further away from the
market. The systematic gathering of information on export performance has also
been stopped. Therefore it seems that export contingency can no longer be
inferred from the total configuration of the facts, the balance of which has
clearly been changed by the amendments to the TPC, and in this way Canada has
prima facie removed the basis for a finding of de facto export contingency.
14. Brazil claims in its First Written Submission that Canada's amendments to
the TPC are "cosmetic" and do not change the fact that the programme is export
contingent. In particular, it argues that the sectoral coverage of the TPC has
not changed, that the aerospace sector (including regional aircraft) will
continue to receive the largest share of funds and that the regional aircraft
industry remains export-oriented.
15. The EC considers that Canada is not prevented by the SCM Agreement from
limiting eligibility for a subsidy to certain sectors or from concentrating
funding on certain industries. As for the export-oriented nature of the regional
aircraft industry, while the Appellate Body found that it was legitimate for the
Panel to consider it as a relevant fact in its assessment of export contingency,
it cannot by itself justify such a finding, in view of the provisions of
footnote 4 of the SCM Agreement . However, Brazil has not produced any other
relevant arguments to support its contention that the restructured TPC is still
export-contingent; most of its other argument3 seem to relate the operation of
the previous TPC programme.
16. In the view of the EC, the requirements imposed on a WTO Member to remove de
facto export contingency cannot be so onerous as to effectively prevent a Member
from exercising its basic right to grant subsidies which are not prohibited. In
this regard, the fact that a Member continues to subsidise the same firms or
sectors under a modified scheme is not by itself sufficient to conclude that the
status of the scheme has not changed.
17. It is of course possible that in the future the restructured TPC programme
may, in the light of evidence on its actual operation, be found to provide
export subsidies to regional aircraft. For instance, if the stated eligibility
criteria were not adhered to and/or funding was found to be disproportionately
granted to export projects, such a situation may arise. In such a case, the
amendments to the restructured TPC prove not to have been sufficient to prevent
a finding of export contingency. However, at the moment, there are no facts
before the Panel, with regard to the restructured TPC, to indicate that this is
likely happen. The Panel can only take its decision on the basis of the
information currently available; the implementing party must be assumed to be
acting in good faith unless there are good reasons to believe the contrary.
IV. THE CANADA ACCOUNT SUBSIDIES
1. Introduction
18. In the original proceeding, the Panel found that the Canada Account programme provided debt financing (export credits on projects which are deemed
to be in the national interest, but which the EDC cannot support for reasons of
size or risk) which constituted de jure export subsidies prohibited by Article
3.1(a) of the SCM Agreement. Canada did not seek to rebut the prima facie
evidence of an export subsidy provided under this programme, nor did it appeal
the Panel's finding to the Appellate Body.
19. The Panel also held that since Canada Account financing was discretionary,
it could only rule on the particular cases of support.4 This finding was not
challenged on appeal. As a result, the Panel merely found a number of transactions to have been de jure export contingent.
20. Canada has however accepted that the Canada Account programme was
inconsistent with the SCM Agreement, and has taken steps to rectify this
inconsistency and make the programme compatible with the Agreement.
21. First Canada points out that the cases of Canada Account debt financing
transactions on which the Panel ruled had been completed in 19955 and 1998 and
that there had been no transactions financed under Canada Account since 18
November 1999. Secondly, it has, for future transactions, adopted a policy that
the Minister of Finance will not consider Canada Account financing which does
not conform to the OECD Arrangement on Export Credits to be in the national
interest.
2. Assessment by the EC
22. Since, according to Canada, the Minister is required to approve all such
transactions and may not approve financing transactions which are not in the
national interest, it would seem that all Canada Account transactions (not only
those concerning regional aircraft) will in future comply with the OECD
Arrangement. Under the second paragraph of item (k) of Annex 1 of the SCM
Agreement, in conjunction with footnote 5, any Member which respects the
provisions of the OECD Arrangement (Canada is a party to it) is not considered
to be granting a prohibited export subsidy. Therefore, since Canada has
undertaken to respect all the provisions of the OECD Arrangement (including
presumably the interest rate provisions), it appears to the EC that Canada has
prima facie correctly implemented the Panel's findings by amending the Canada
Account programme to eliminate those elements which the Panel found be
inconsistent with the SCM Agreement.
23. Brazil has not produced any evidence to call into question Canada's
implementation. It merely suggests that Canada could have opted to assert the
affirmative defence under the second paragraph of item (k) before the original
panel, and argues that Canada still bears the burden of proving this affirmative
defence in the implementation Panel.
24. This is clearly correct (and would also be correct if Canada had invoked the defence and it had been rejected). The EC presumes that Canada did not invoke
item (k) in the original panel proceeding because the Canada Account financing
did not meet the requirements of the OECD Arrangement at that time.
25. Now that the programme has been amended by Canada's undertaking to comply
with the OECD Arrangement, it must, in accordance with the presumption of good
faith to which WTO Members are entitled, be considered to no longer constitute a
prohibited export subsidy.
26. Unless Brazil can show reasons which lead to Panel to conclude that the programme will not be applied according to the rules, the Panel must conclude
that the implementation is sufficient.
V. TRANSPARENCY AGREEMENT BETWEEN CANADA AND BRAZIL
27. Canada proposes to enter into a transparency agreement with Brazil to ensure
financing complies with the SCM Agreement and asks the Panel to suggest this in
its recommendations.
28. Canada and Brazil are of course free to settle their dispute in whatever way
they wish so long as the settlement complies with the WTO Agreement.
29. The EC does not however consider that it would be appropriate for the Panel
to suggest a transparency agreement. Canada and Brazil already have an
obligation to notify all their subsidies, including the ones found by the Panel
in this case. They do not seem to have fully complied with this obligation.. It
would appear more appropriate for the Panel to insist that Canada and Brazil fulfil their WTO commitments than to make the suggestion requested by Canada.
VI. CONCLUSION
30. The EC is conscious that the case before the Panel today poses a number of
important issues concerning the interpretation of the SCM Agreement.
31. The state of the arguments presented by the parties and the information and
time for reflection available to the EC has not allowed it to make as full a
contribution to the reflections of the Panel as it might have liked. It will
therefore supplement its arguments at the Third Party Session in the light of
the other submissions to be presented to the Panel before that meeting.
1 Paragraphs 9.316 to 9.348 of the Panel Report. Sixteen
factual elements were identified.
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