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WORLD TRADE
ORGANIZATION

WT/DS70/RW
9 May 2000

(00-1750)
Original: English

CANADA - MEASURES AFFECTING THE EXPORT
OF CIVILIAN AIRCRAFT



Recourse by Brazil to Article 21.5 of the DSU




Report of the Panel



ANNEX 2-5

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.


 



ANNEX 3-1

SUBMISSION OF THE EUROPEAN COMMUNITIES

(17 January 2000)

TABLE OF CONTENTS

  1. INTRODUCTION
     
  2. BUSINESS CONFIDENTIAL INFORMATION
     
  3. TECHNOLOGY PARTNERSHIPS CANADA 
  1. Introduction 
     
  2. Assessment by the EC 

  1. THE CANADA ACCOUNT SUBSIDIES 
  1. Introduction 
     
  2. Assessment by the EC 

  1. TRANSPARENCY AGREEMENT BETWEEN CANADA AND BRAZIL
     
  2. CONCLUSION

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.

2 Paragraph 167 of Appellate Body Report

3 Section D.3 of Brazil's submission.

4 Paragraph 9.213 of the Panel Report.

5 It appears from the Panel Report (paragraph 6.171) that deliveries were also completed by 1998.
 


Continuation: Annex 3-2 Return to Index of WT/DS70/RW