4. Is the TPC now in conformity with the WTO Agreements?

37. The question of whether the TPC has now been brought into conformity with the SCM Agreement depends evidently on the facts which the Panel will verify but on which the EC is ill-equipped to comment - especially since it has not been provided with all the facts. The EC can agree with US that it is not sufficient to establish that there is a de facto export subsidy to show that subsidies are provided to companies which export. It must at a minimum be established that they have been provided to companies because they export. Establishing the legal rule does not however help to resolve the case since there does not appear to be any basis on which to decide that subsidies are still being provided to companies "because they export".

38. In fact, it would appear logically impossible to establish that companies are in fact receiving subsidies "because they export" where there are no exports. Brazil is complaining that the TPC programme is still de facto export contingent. The EC makes the following comments on the legal constructions that are used by Brazil in its second written submission in an attempt to establish de facto export contingency of a programme - the new TPC - of which the details are not known and under which no subsidies have been paid.

39. The original panel report in conjunction with Article 4.7 SCM Agreement obliges Canada to take positive action to remove the inconsistency found. But it does not create any additional obligation to that which applies generally with respect to export subsidies. For the EC this follows from general principles and is confirmed by Article 3.2 DSU which states that:

Recommendations and rulings of the DSB cannot add to or diminish the rights and obligations provided in the covered agreements.

40. Thus the Panel Recommendation cannot diminish a Member's rights or increase its obligations under the SCM Agreement. As the EC has already submitted, Canada is not required to abolish the TPC, nor is it prevented from subsidising the regional aircraft sector, provided that it does so in a manner consistent with the SCM Agreement.

41. Similarly, Canada is not prevented from increasing the TPC budget; this is not inconsistent with the SCM Agreement. It should be remembered that WTO Members still have adequate redress against the injurious use of subsidies under Part III of the SCM Agreement, even if they are not prohibited.

42. Thus Brazil is wrong to argue that Canada must now take measures to ensure that TPC cannot in the future give rise to export subsidies. As the Community has already submitted, Canada, in restructuring the TPC, is simply required to do two things. Firstly, to remove those features of the regime that gave rise to the original finding, and secondly, not to introduce any new elements into the restructured programme which can already be demonstrated to give rise to export contingency. In this respect, the restructured TPC has to be judged on its merits and on the extent to which it has addressed the inconsistencies identified by the Appellate Body. To the extent that Canada has remedied such inconsistencies, it must be given the benefit of the doubt. It is not sufficient for Brazil to make assumptions about the new programme on the basis of statements made in relation to the old TPC.

43. On this point, the EC notes Brazil's allegation that the restructured TPC has "retained its focus" on the same recipient industries funded by the old TPC. The Appellate Body did not identify the apportioning of TPC funds by sector as a factor leading to de facto export contingency. Consequently, Canada is not required to change the distribution of funding by sector in order to remedy de facto contingency.

44. In view of the measures that have been taken and the fact that no new support has been granted, the EC maintains its view that the inconsistency must be considered to have been removed, or at least that the contrary cannot yet be proved. Brazil is right to point out that absence of any financial contribution is not by itself sufficient to ensure implementation,¹³ but in this case changes that have been made to the restructured TPC must create a presumption that any such contribution will not lead to the granting of an export subsidy. In this regard, implementation of a panel report does not require an absolute guarantee of future good behaviour, especially in the case of de facto export subsidies, where the Government may not even know that it is granting such a subsidy.

45. Brazil argues that the Article 21.5 DSU proceeding will be ineffective and therefore reduced to "inutility" (referring to the case law of the Appellate Body) if the measures taken by Canada are judged sufficient. The EC does not consider that this is a reason for the Panel to create new rights and obligations in violations of Article 3.2 DSU for three reasons:

• First the WTO Agreement, as international law, cannot be expected to guarantee "effective remedies" in all cases.

• Second, there is an available remedy in the possibility of bringing new panel proceedings.

• Third, the alleged "ineffectiveness" of a remedy does not mean that the corresponding provision of the Agreement is reduced to inutility. As the panel in US - Foreign Sales Corporations held, inutility in the sense used by the Appellate Body means "without meaning" or "redundant" and refers to the "principle of effective treaty interpretation" which requires that a treaty be interpreted so as to give meaning to all its terms. This does not mean that there must be a satisfactory sanction for the violation of every provision.¹⁴

46. The EC also takes issue with Brazil's statement¹⁵ that "When it comes to enforcement of the most egregious of export subsidies - those subsidies determined by a Panel or the Appellate Body to be levied in a manner designed to circumvent the prohibition of de jure export contingency - Members would be left without an effective remedy."

47. The EC does not consider it appropriate for WTO remedies to depend on the presumed intent or "design" of Members, a matter that is notoriously difficult to establish.

48. While it is true that the Uruguay Round negotiators sought to prevent circumvention of the de jure prohibition¹⁶, it does not follow that all de facto export subsidies are motivated by circumvention. de facto export subsidies can be determined to exist in many other circumstances, depending on the panel's appreciation of the totality of the facts in question, which do not involve any notion of circumvention. Indeed, there is arguably no need to demonstrate that a Government originally intended to grant an export subsidy at all; Footnote 4 of the SCM Agreement merely requires that the subsidy "�is in fact tied to actual or anticipated exportation�.". The Appellate Body did not conclude that Canada intended to circumvent any provisions of the SCM Agreement. There is no basis for Brazil's claim that de facto export subsidies are the "most egregious form of export subsidies", since all export subsidies are subject to the same remedy under Part II of the SCM Agreement.

5. Item (k) of the Illustrative List

49. The EC now comes to the issue of item (k) of the Illustrative List. Canada has declared that it will not in future approve Canada Account financing "which does not comply with the OECD Arrangement."¹⁷ If it respects this commitment (and in the view of the EC Canada is entitled to a presumption of good faith), there can be no prohibited export subsidy because of footnote 5 to the SCM Agreement and the second paragraph of item (k). Much has already been written on this matter and the EC will confine its remarks to the argument made by the US that item (k) is part of the definition of a subsidy rather than being in the nature of an "affirmative defence," which is the position of all the parties and of the EC.

50. The US position is that:

� the items contained in the Illustrative List are not "exceptions" to the rest of the SCM Agreement, but rather are particular applications of the general standards in Article 1 to particular types of government practices.¹⁸

51. This cannot be right and the US does seek to justify its self-serving¹⁹ contention. But the EC will briefly examine the relevant provisions. The Illustrative List is incorporated into Article 3.1(a) in two ways. First the prohibition in Article 3.1(a) is stated to include the subsidies illustrated in Annex I. Second, footnote 5 states that that:

"Measures referred to in Annex I as not constituting export subsidies shall not be prohibited under this or any other provision of this Agreement".

52. Let us consider these two sources of incorporation in turn:

53. It seems absolutely clear that the word "including" means that in principle the Annex to does diminish the generality of the prohibition in Article 31.(a). The word "illustrated" does not do so either. This is particularly clear from the explanation given by the 1960 GATT Working Party Report that originally proposed the list:²⁰

"The Working Party agreed that this list should not be considered exhaustive or to limit in any way the generality of the provisions of paragraph 4 of Article XVI."²¹

54. It is the fact that the Illustrative List in Annex I is incorporated into Article 3.1(a) without restricting the generality of the prohibition that renders footnote 5 necessary. The drafters realised that Annex I contained certain exceptions and they wanted to preserve these in the SCM Agreement. However what they clearly did not intend was that the Illustrative List should be exhaustive of the disciplines applying to the measures it described. If it were, there would be no need for Article 3.1(a) but simply a reference to the Annex and a statement prohibiting "any other subsidies contingent upon export performance". The fact that the drafters did otherwise must have some meaning.

55. That the US position is erroneousness is also clear from the consequences that it would entail:

• The first consequence of the US position would seem to be that Brazil has to prove that the new Canada Account export credits are inconsistent with the second paragraph of item (k). If that were true, the Panel could never have found a violation in the original proceeding where Brazil left it to Canada to raise this defence and Canada declined to do so. Accordingly, if there was no established violation, there can be no obligation to implement and, also, Brazil would have to prove that the existing practice does not comply with the Arrangement.

• Second, the US approach of making the Illustrative List exhaustive for those matters addressed by it, would mean that stricter disciplines only exist for those rare measures not included in the Illustrative List. This also cannot have been the intention. The intent of the parties in incorporating Annex I was not to ensure that everything that was previously not prohibited would now be exempted (which would mean no progress). It was to ensure that what was previously prohibited would remain prohibited (which means no backtracking). If the Illustrative List exempted measures that are simply not identified as export subsidies, the general words of Article 3.1(a) would fail in their basic task of introducing stricter disciplines.

• Finally, the US approach by making the Illustrative List relevant to the definition of subsidy in Article 1, would make the Illustrative List a rich source of exceptions to all the disciplines of the SCM Agreement. Where the drafters wanted the Illustrative List to be relevant for the purpose of the definition of subsidy, they said so. Footnote 1 to the SCM Agreement is a clear example.

6. Conclusion

56. The EC is conscious that the case before the Panel today is complex and poses a number of important issues concerning the interpretation of the SCM Agreement. The EC has sought to provide arguments that it thinks may assist the Panel in coming to the correct conclusion on a number of these issues. The EC has not however commented on all the issues which the Panel may potentially decide are relevant to a resolution of this case. It would be happy to respond to any questions that the Panel may have on such issues, just as it is ready, if requested, to clarify and develop the comments that it has made today.

ANNEX 3-4

ORAL STATEMENT OF THE UNITED STATES

(6 February 2000)

1. Mr. Chairman and Members of the Panel, it is my honour to appear before you today to present the views of the United States as a third party in this Article 21.5 proceeding. It is not my intent today simply to repeat the comments already stated in our written submission. Instead, I will first comment briefly on certain statements made by the EC in its written submission, and then make a few broader observations on the overall purpose of the SCM Agreement, which the United States believes should inform the Panel as it considers the difficult issues at hand. Finally, although I had not intended to do so, I will also make a few brief comments on the Australia - Leather decision in light of the EC's comments this afternoon.

2. Turning first to the comments of the EC in its written submission, in paragraph 12 of its 17 January submission, the EC claims that Canada will be able to avoid a finding of de facto export contingency for the TPC programme if it is able to satisfy the Panel that future assistance is being granted without reference to actual or anticipated export earnings. To quote the EC's submission, "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".

3. The EC's argument before the Panel is similar to the arguments that it raised without success before the Appellate Body. There, the EC argued that there are various tests that the Panel should have applied in determining the export contingency of the TPC programme. For example, the EC argued that the panel could have considered "whether the recipient's freedom to direct his sales effort to the domestic or the export market is somehow restricted".¹ This is essentially what the EC is arguing here.

4. The Appellate Body rejected this kind of rigid approach. To quote its opinion (at para. 169):

We agree with the Panel that what facts should be taken into account in a particular case will depend on the circumstances of that case. We also agree with the Panel that there can be no general rule as to what facts or what kinds of facts must be taken into account.²

The Appellate Body's statement reflects the simple truth that the determination whether a subsidy is contingent in fact upon export is a complicated task. Again quoting the Appellate Body (this time at para. 167), proving de facto export contingency is "much more difficult" than proving de jure export contingency because the existence of the contingency must be "inferred" from all of the facts surrounding the granting of the subsidy.

5. Therefore, addressing the EC's suggested test, it may well be that the recipients of a particular subsidy have complete freedom of choice to decide between selling in the domestic market and selling in the export market. The subsidy may still be a prohibited export subsidy. In the Australian Leather case, for example, the subsidy recipient was free as a legal matter to choose its own markets; it just happened that the nature of the market for its products meant that it had to export to meet the relevant sales targets. In this manner, the sales targets in essence became de facto export targets.³ The EC acknowledged the possibility of this type of scenario in its comments before the Appellate Body. The facts will vary from case to case.

6. Finally, in approaching this issue, it is important to keep in mind the Appellate Body's observation (at para. 167) that the Uruguay Round negotiators sought to prevent the circumvention of the prohibition on de jure export subsidies when they included the prohibition on de facto export subsidies. A clever government that wishes to provide export subsidies to its exporters may be able to do so in a way that leaves its reasons unclear. However, a subsidy that is neutral on its face may still be prohibited. The task for a panel is to determine whether, in spite of this facial neutrality, the surrounding facts lead to the inference that the grant of the subsidy was contingent upon export, that is, that it was tied to actual or anticipated exportation or export earnings. To quote this panel (at para. 9.332), "do the facts demonstrate" that the subsidy would not have been granted "but for" anticipated exportation or export earnings?

7. The United States would now like to comment briefly on certain broader points that we hope will influence the spirit in which the Panel evaluates this dispute.

8. This proceeding, as well as the companion proceeding brought by Canada against Brazil, is extremely important, for it revolves around the critical issue of compliance with DSB rulings and recommendations and the resultant effect on the SCM Agreement's ability to discipline injurious and prohibited subsidies.

9. As this Panel noted in its original opinion, subsidies by their very nature involve situations where governments insert themselves into the marketplace by providing benefits to favored companies, that is, financial contributions on better than market terms. While the SCM Agreement allows certain, non-injurious subsidies, it flatly prohibits export subsidies. These two cases are a good example of why this is so.

10. When a government chooses to provide an export subsidy, it effectively is deciding to interfere in the marketplace to provide its producers with an unjustified advantage over their foreign competitors in their competitors' home markets and in third country markets. Inevitably, this provokes a response from the affected countries and their producers. For example, in the companion case to this dispute, Brazil argued before the Appellate Body that PROEX subsidies were intended to match the subsidies provided by the Government of Canada to its producer. The result is a ruinous subsidy competition that distorts the world trading system, punishes taxpayers, and bleeds off resources that might better be used for other purposes. The governments concerned may well want to call off this competition; effective rules on export subsidies, effectively enforced, can make this possible.

11. Finally, I would like to comment briefly on the Panel's decision in the Australian Leather Article 21.5 proceeding. If the Panel would like detailed comments on this issue, I would prefer to provide them in writing. However, I am happy to provide some initial oral comments.

12. As an initial matter, the United States feels that the Panel's decision in the Leather case is not directly relevant to this dispute, because Brazil is not seeking the repayment of past TPC and Canada Account subsidies. For this reason, this Panel does not need to reach the issue addressed by the Leather panel.

13. If the Panel is nonetheless interested in our views, then I would simply observe that the Leather panel has spoken, so it is appropriate to conclude that its determination is definitive with regard to that case. The United States intends to support adoption of the report at the next meeting of the Dispute Settlement Body.

14. The United States notes that the Leather Panel itself acknowledged that the proper manner of withdrawing a prohibited export subsidy may differ from case to case.

15. While the Panel's conclusion in Leather went beyond the position that we took, we can't fault the logic of that conclusion.

16. As I noted at the beginning of my comments, the United States would be pleased to provide a more detailed response in writing if the Panel so desires.

17. As the United States noted in its written submission, we take no position on the issue of whether the amendments that Canada has made to the TPC programme and the Canada Account comply with the rulings and recommendations of the DSB. The United States hopes, nonetheless, that our comments today will prove useful to the Panel as it evaluates the complex issues at hand.

18. This concludes my comments. On behalf of the United States, I thank you again for providing us with this opportunity to present our views.