CANADA - MEASURES AFFECTING THE EXPORT
OF CIVILIAN AIRCRAFT



Recourse by Brazil to Article 21.5 of the DSU




Report of the Panel

(Continuation)

(iv) What provisions and considerations are relevant to judging "conformity" with the Arrangement's "interest rates provisions" and hence qualification for the safe haven in item (k)?

5.107 Having determined which export credit practices are potentially eligible for the safe haven in the second paragraph, we recall that of course, not every individual transaction that is so eligible will necessarily qualify for that safe haven. Rather, to take advantage of the safe haven, eligible export credit practices must be "in conformity with the interest rates provisions"⁹² of the Arrangement. Thus, we turn next to the question of how, i.e., on the basis of what provisions and considerations, conformity with the interest rate provisions should be judged.

5.108 It is in this context of "conformity", rather than the context in which it was provided by Canada, that Canada's list of the provisions that it considers to be the "interest rates provisions"⁹³ arguably is most relevant. That is, as noted above, Canada has identified a sizeable list of provisions which it argues must be considered part of the Arrangement's "interest rates provisions", because these provisions directly or indirectly affect the amount of interest charged and the timing of when it is paid. In Canada's view, the fact that item (k) refers to "interest rates provisions" and not simply to the "interest rate" means that it must refer to more than the CIRR standing alone. In other words, Canada argues, if this term referred only to the CIRR, the benefit of the safe haven 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, thereby circumventing the disciplines of the SCM Agreement⁹⁴.

5.109 As discussed above, the text of the Arrangement itself seems to define its "interest rates provisions" much more narrowly than argued by Canada. Nevertheless, Canada's basic point is very important, and seems to us to go to the issue of conformity. That is, if not supported and reinforced by provisions related to the financing terms and conditions other than the interest rate, a minimum interest rate rule standing alone could exercise no real discipline on the generosity of terms of official support for export credits. Obviously, any financing transaction has a number of terms and conditions, many of which do directly or indirectly affect the interest rate. These include, as Canada points out, the amount of the cash down payment, the maximum repayment term, the timing of principal and interest payments, maximum "holding periods" or lock-in periods for interest rates, risk premiums, and similar terms. To use an example, if the interest rate of a transaction were fixed at CIRR, but for example the repayment term was 30, 50 or 100 years, or no amortization of principal was required over the life of the loan, the fact that the interest rate respected the CIRR would not in any real sense discipline the terms of the financing. Thus, if the generosity of the other terms and conditions were unlimited, such terms and conditions could completely circumvent any limiting effect that the minimum interest rate rule was intended to exercise.

5.110 Of course, the Arrangement does address and set limits with respect to many such terms and conditions, not limited to the minimum interest rate. Thus, in developing an approach for determining whether a given "official financing support" transaction qualifies for the safe haven of the second paragraph of item (k), it would seem appropriate to adopt an approach to the question of "conformity" with the interest rate provisions that is sufficiently broad to capture not just conformity with the CIRR standing alone, but also respect for the Arrangement's limits on the generosity of the other financing terms having an effect on the interest rate. That is, recalling⁹⁵ that the stated purpose of the Arrangement is, inter alia, to "encourage competition among exporters...based on quality and price of goods and services exported rather than on the most favourable officially supported terms", by placing "limitations on the terms and conditions of export credits that benefit from official support", it would not make sense from the standpoint of the Arrangement to so narrowly interpret the concept of "conformity" with the interest rate provisions as to provide an exemption under the SCM Agreement for transactions that unabashedly circumvent that purpose. Nor would such a narrow interpretation make sense from the standpoint of the SCM Agreement, as doing so would have the effect of exempting from the prohibition on export subsidies practices that respected the CIRRs in name only, even if their other terms were so generous as to remove any limiting effect of the minimum interest rate rule.

5.111 In our view, Articles 19(c) and (d) of the Arrangement (which concern official support for cosmetic interest rates) appear in effect to establish this very approach to judging conformity with the Arrangement's interest rate provisions. That is, as discussed above⁹⁶, Articles 19(c) and (d) provide for an evaluation by a Participant of all terms and conditions of a transaction in order to judge whether it "conform[s] to the provisions of Article 15", i.e., the minimum interest rate rule.

5.112 Article 27 of the Arrangement, concerning the "no derogation engagement", provides further contextual support for this approach to judging conformity with the interest rate provisions, in the sense that it refers to all elements of a financing transaction as parts of a single package. Specifically, under this provision, Participants are not to derogate from "maximum repayment terms, minimum interest rates, premium benchmarks, the six-month limitation on the validity period for export credit terms and conditions, or extend the repayment term by extending the repayment date of the first instalment of principal set out in the Arrangement". Thus, the Arrangement seems to recognize that financing terms and conditions must be treated as a package, and that derogation from one will undercut the others.

5.113 By the same token, however, we do not agree with the very broad reading advocated by Canada of what "conformity" with the interest rate provisions would be, as this reading would sweep in inter alia all of the provisions that permit various kinds of exceptions and derogations from some provisions of the Arrangement that affect interest rates. In particular, we cannot reconcile identifying as "conforming" with the interest rate provisions any practice that on its face breaks, i.e., does not conform with, the interest rate rules (even where this is tolerated as matching). Such a reading would seriously undermine the disciplines of the SCM Agreement in the field of export credits. (We discuss the provisions of the Arrangement concerning exceptions and derogations in more detail in paragraphs 5.120 - 5.125, infra.)

5.114 Thus, we conclude that full conformity with the "interest rates provisions" - in respect of "export credit practices" subject to the CIRR - must be judged on the basis not only of full conformity with the CIRR but in addition full adherence to the other rules of the Arrangement that operate to support or reinforce the minimum interest rate rule by limiting the generosity of the terms of official financing support.

Provisions of the Arrangement imposing disciplines or limits that reinforce the minimum interest rate rule

5.115 A review of the Arrangement in the light of the above discussion suggests that the provisions that would need to be respected in order for official financing support to be in full conformity with the interest rate provisions would include, in addition to the provisions concerning the CIRR, most of the articles of Chapter II of the Arrangement, along with (for this dispute) most of the articles of Annex III, Parts 2 and 3 (Sector Understanding on Export Credits for Civil Aircraft, All New Aircraft Except Large Aircraft (Part 2) and Used Aircraft, Spare Engines, Spare Parts, Maintenance and Service Contracts (Part 3)). These provisions are discussed in detail in this section.

5.116 Taking Chapter II of the Arrangement first, the first provision thereof, Article 7 on cash payments, limits the generosity of financing terms by establishing a minimum percentage that must be paid in cash (i.e., a maximum percentage that can be financed). Article 8 defines the starting and ending point of the repayment term, Article 9 defines the starting point of credit for different types of contracts, and Article 10 establishes specific maximum repayment terms for different categories of countries. Article 12 establishes criteria and procedures for classifying countries for maximum repayment terms. Article 13 establishes rules concerning the schedule for repayment of principal. Again, the underlying purpose of all of these provisions is to set limits on the generosity of the financing terms.

5.117 Article 14 establishes rules governing the schedule and other aspects relating to the payment of interest, with a view to ensuring that interest is paid at regular intervals over the life of a loan, rather than deferred, again imposing limits on the generosity of the financing terms. Article 20 requires the application of risk premiums at least sufficient to cover sovereign credit risk and country credit risk⁹⁷. (Subsidiary to Article 20, Articles 21, 22, 23, and 24 establish various rules and procedures for setting and verifying the minimum premium benchmarks, on a Participants'-wide basis.) Article 25 sets limits on the amount and kind of official support that can be provided for so-called "local costs"⁹⁸. (According to Canada, the local cost provision is not relevant in the context of aircraft finance⁹⁹.) Finally, Article 26 establishes the maximum validity period for credit terms and conditions for an individual export credit or line of credit, again limiting the generosity of the financing terms and thus reinforcing the minimum interest rate rule.

5.118 Similar provisions pertaining directly to regional aircraft are found in Part 2 of the Sector Understanding for civil aircraft (Annex III), pertaining to new aircraft other than large aircraft¹⁰⁰, as well as in Part 3 of that Understanding, which pertains to used aircraft (of all sizes), spare engines, spare parts, maintenance and service contracts¹⁰¹. Specifically, Article 21 of the Sector Understanding fixes maximum repayment terms for different categories of new "non-large" aircraft and Article 28 does the same for different categories of used aircraft. In addition, Article 23 of the Sector Understanding, pertaining to "non-large" aircraft, provides that the insurance premium or guarantee fee shall not be waived in whole or in part. Article 24 of that Annex prohibits aid support except in the form of untied grants, although it appears to permit tied aid for humanitarian purposes¹⁰². Article 29 (a) - (c) of the Sector Understanding establish limits on the financing terms for spare engines and spare parts, while Article 30 establishes limits on official financing support for maintenance and service contracts.

5.119 Thus, all of the provisions identified above limit the generosity of some aspect of the financing terms where official financing support is provided, and thereby reinforce the minimum interest rate rule. While not all of these provisions would necessarily apply in respect of any given instance of official financing support, under the approach described, those that did apply would need to be respected fully for that transaction to be "in conformity" with the Arrangement's interest rate provisions and thus to qualify for the safe haven in the second paragraph of item (k) of the Illustrative List of Export Subsidies¹⁰³.

Provisions of the Arrangement providing for exceptions and derogations

5.120 The final Articles of Chapter 2 (in particular Articles 27 and 29), as well as Articles 25, 29(d) and 31 of Annex III, concern inter alia various situations in which certain variations, exceptions and derogations from the Arrangement's terms are foreseen and explicitly permitted or not prohibited. Articles 47-53 contain procedures (notifications, etc.) to be followed in these situations. In our view, it is not obvious on its face that sweeping all of these provisions into the group of provisions that must be respected for a transaction to be in "conformity" with the interest rate provisions would be consistent with the approach outlined above. This is because these provisions essentially run counter to, rather than reinforcing, the Arrangement's minimum interest rate rule and other limits on the generosity of financing terms. Thus, the issue is whether a transaction that makes use of flexibilities and/or outright departures from the rules through any or all of these Articles or any part(s) thereof can be considered to be "in conformity" with the interest rate provisions in the sense of item (k). On the one hand, an argument could be made that anything that is explicitly not prohibited by the Arrangement must be ipso facto "in conformity" with it, even if it is recognized as a derogation. (This is in fact what Canada argues¹⁰⁴.) On the other hand, if even matched derogations (i.e., non-conforming departures from the rules) are considered to be "in conformity", then the notion of "conformity" cannot be understood to represent a discipline or limitation of any kind.

5.121 We note in this context as an initial matter that not all exceptions under the Arrangement are necessarily equal. In this regard, Canada itself makes a distinction between "variations", which are "permitted" "within limits" under the Arrangement, and the "matching" of terms and conditions that are "outside of the Arrangement's rules"¹⁰⁵. In its answers to questions, Canada confirms that this distinction is the same as that in the Arrangement's Chapter IV (procedures) between "permitted exceptions" and "derogations"¹⁰⁶. Chapter IV makes clear on the one hand that permitted exceptions in fact refer to certain variations in terms that are foreseen and permitted, subject to limits, under various specific provisions of the Arrangement. Chapter IV further makes clear on the other hand that derogations are terms and conditions that depart from the Arrangement's provisions, i.e., in a way not foreseen and not permitted, even within limits, under the plain language of the Arrangement.

5.122 We turn to the specifics of the Articles in question while bearing in mind all of these general considerations. Article 27 of Chapter 2, entitled the "no derogation engagement for export credits", in fact envisages certain deviations. That is, as noted, this Article provides that Participants shall not derogate from maximum repayment terms, minimum interest rates, minimum premium benchmarks, the limitation on the validity period for credit terms and conditions, and shall not extend the repayment term by extending the repayment date of the first instalment of principal per Article 13(a).

5.123 Nevertheless, Article 27 goes on to provide that countries may go below the relevant minimum premium benchmark in certain cases where the country credit risk is "externalised/removed or limited/excluded for the entire life of the debt repayment obligation". Chapter IV (Article 48) explicitly refers to this deviation as a "permitted exception". Article 49 identifies a list of "permitted exceptions" having to do inter alia with maximum repayment terms, principal and interest payments, and discounts to minimum sovereign risk premium benchmarks.

5.124 Article 29, on matching, further clarifies the distinction between "derogations" and "permitted exceptions". In particular, while under this Article there is a general permission to match terms and conditions offered by both Participants and non-Participants, some matching, i.e., where Participants "match credit terms and conditions by supporting terms that comply with the Arrangement"¹⁰⁷ is not considered a derogation. Rather, this seems to refer to matching another country's offer of terms that are within the permitted variations that exist under certain provisions. (For example, under Article 10, there is a certain amount of permitted variation concerning maximum repayment terms, which is explicitly recognized in Article 49 as a permitted exception. Article 51 specifically deals with the matching of permitted exceptions.) Thus, if a country offers terms that are within permitted variations, the Arrangement appears to consider that such terms "comply" with the provisions of the Arrangement, and that any matching of those terms therefore also "complies". Canada agrees with this interpretation¹⁰⁸.

5.125 On the other hand, Article 29 further provides that if an initiating offer "does not comply with the Arrangement"¹⁰⁹, competing Participants are permitted to match those non-complying terms. The Arrangement defines "derogation" as terms and conditions that "depart from" the rules of the Arrangement¹¹⁰; thus, this reference in Article 29 equates non-compliance with derogation. This reading is confirmed in Article 47(b), which refers to derogations as "non-conforming terms and conditions". That is, these parts of the matching provisions confirm that, although matching of derogations is in certain cases not prohibited, this does not alter the fact that both the original derogation and the matching remain, by the Arrangement's own terms out of conformity with the provisions of the Arrangement¹¹¹. We note that Canada takes the opposite view, namely that the initial derogation does not comply with the Arrangement, but that matching, because tolerated, does fully comply therewith¹¹². For the reasons discussed above, however, we disagree. In our view, Canada's approach would directly undercut real disciplines on official support for export credits¹¹³.

Conclusion based on textual analysis

5.126 As the foregoing discussion indicates, the text of the Arrangement provides considerable guidance concerning how the term "conformity" in the second paragraph of item (k) of the Illustrative List should be understood. In the first place, the Arrangement text provides explicitly that derogations from provisions of the Arrangement, and the matching of such derogations, do not "conform" with the provisions of the Arrangement.¹¹⁴ Thus, any transaction that involves derogations or matching of derogations by definition cannot be in conformity with the interest rate provisions of the Arrangement, as under the approach outlined above, conformity with the interest rate provisions requires conformity not just with the minimum interest rate rule but also with the other provisions that support/reinforce that rule. As such, an otherwise eligible transaction¹¹⁵ involving derogations or matching of derogations could not qualify for the safe haven of the second paragraph of item (k). On the other hand, the Arrangement explicitly defines permitted exceptions and the matching of permitted exceptions, within the allowed limits, to be in compliance, i.e., in conformity with the relevant provisions of the Arrangement. Therefore, under this approach, making use of permitted exceptions, within the specified limits, would not disqualify an eligible transaction from the safe haven, so long as the transaction conformed with the minimum interest rate and all of the other applicable disciplines.

5.127 Through the above textual analysis, we have arrived at a process for judging the conformity of a specific, individual transaction with the interest rate provisions of the Arrangement, and thus qualification for the safe haven in item (k). Under this approach, first, it would need to be determined that the transaction was in the form of either direct credits/financing, refinancing or interest rate support with repayment terms of at least two years, at fixed interest rates, and therefore was subject to the Arrangement generally and to the CIRRs (or a sector-specific minimum interest rate, if applicable) specifically. Second, it would need to be determined whether the interest rate was at or above the CIRR (or the applicable sector-specific rate). Third, it would need to be determined which of the other provisions of the Arrangement that operate to reinforce the minimum interest rate rule applied to that particular transaction (a determination that would need to be made on a case-by-case, transaction-specific basis). Fourth, the details of the transaction would need to be examined to determine whether or not it respected all such additional provisions, and did not involve any derogations or matching of derogations.

(b) Considerations based on the context of the second paragraph of item (k) and the object and purpose of the SCM Agreement

5.128 It is clear from the above that a textual analysis leads us to a tentative conclusion that the safe haven in the second paragraph of item (k) of the Illustrative List of Export Subsidies is considerably narrower than argued by Canada. That is, the textual analysis suggests that a number of export credit practices covered by the Arrangement would not qualify for the safe haven because of their form or maturity alone (i.e., those not in the form of official financing support, and those with repayment terms of less than two years). The textual analysis also suggests that application of the CIRR (or relevant sector-specific minimum interest rate) by itself, while a necessary condition for "conformity with the interest rates provisions" of the Arrangement, is not a sufficient condition therefor; in addition, the other provisions supporting the minimum interest rate rule, to the extent that they apply to a given transaction, also would need to be fully respected for a transaction to be "in conformity" with the interest rate provisions. Thus to the extent that a transaction derogated in some respect from any of those provisions, or involved matching of another country's derogation, that transaction would not be "in conformity" with the Arrangement's interest rate provisions.

5.129 In our view, this reading of the text of the second paragraph of item (k) and of the OECD Arrangement is the most natural and logical reading, as it flows from the words of those texts. We recognize, however that there is another possible reading of these provisions, namely the broad reading advocated by Canada. In considering this alternative reading, we note that it is incumbent upon us to try to resolve any ambiguities in the texts in a manner which is the most consistent possible with the object and purpose of the SCM Agreement and of the WTO Agreement. In our view, the object and purpose of the SCM Agreement and the WTO Agreement do not support the textual analysis proposed by Canada. Rather, they support the textual analysis developed by the Panel above.

5.130 In particular, under Canada's approach, all substantive provisions of the OECD Arrangement would be considered its "interest rates provisions" and all "export credit practices" which conformed to those of the "interest rates provisions" applicable to them would be "in conformity with" the interest rate provisions of the OECD Arrangement. That is, under this approach, the term "interest rates provisions" would be understood as a means of distinguishing the substantive from the procedural provisions of the Arrangement, in recognition of the fact that non-Participants cannot use those procedural provisions. In other words, the safe haven would be understood to apply to all types of practices covered by the Arrangement that are in compliance with the relevant substantive provisions of the Arrangement, whether or not any minimum interest rate applied in respect of the export credit practice in question¹¹⁶ .

5.131 One implication of the broad approach in this context is that any practice that is not out of conformity with the relevant provisions of the Arrangement, whether or not even covered by provisions explicitly pertaining to interest rates, would qualify for the safe haven in item (k)¹¹⁷. In this regard, matching of derogations, because tolerated although not in compliance, would be considered to be "in conformity" under this approach. We note that the main argument in support of this sort of a broad reading of the term "in conformity with the interest rates provisions", would be that the Participants to the OECD Arrangement would not have on the one hand negotiated for themselves a set of rules in the OECD with a broad scope, covering, regulating in different ways, and permitting a variety of practices, and on the other hand negotiated a safe haven in item (k) of the SCM Agreement covering only a subset of those practices.

5.132 In considering this alternative approach, we note first that the second paragraph of item (k) is quite unique in the sense that it creates an exemption from a prohibition in a WTO Agreement, the scope of which exemption is left in the hands of a certain subgroup of WTO Members - the Participants, all of which as of today are OECD Members - to define, and to change as and when they see fit. Given this, it is important that the second paragraph of item (k) not be interpreted in a manner that allows that subgroup of Members to create for itself de facto more favourable treatment under the SCM Agreement than is available to all other WTO Members. The OECD Arrangement, as a plurilateral Arrangement to which most WTO Members are not Participants, clearly has the potential to give rise to such differential treatment of Participants and non-Participants.

5.133 Related to this, i.e., because the Arrangement as such is in the hands of a subgroup of WTO Members, it is important that any interpretation of the second paragraph of item (k) provide clarity and certainty concerning what the (SCM Agreement) rules are and how to comply with them. Thus, any interpretation should be clear and transparent, and capable of application by all Members, rather than left to the discretion of individual Members or groups of Members.

5.134 In our view, the reading advocated by Canada would pose serious problems in respect of these important considerations. In particular, information about the actions of Participants is available only to Participants. None of this information is published, nor can it be obtained upon request by non-Participants. Thus, a reading that would, for example, include within the safe haven in the second paragraph of item (k) a transaction involving matching of a derogation, would put all non-Participants at a systematic disadvantage as they would not have access to the information about the terms and conditions being offered or matched by Participants. This concern obviously is relevant as well to the issue of transparency and clarity of the rules. We note that the CIRRs and the sector-specific interest rates are published. Therefore, all WTO Members, whether Participants or not, can offer financing on terms consistent with the minimum interest rates¹¹⁸. Similarly, the text of the Arrangement itself sets forth the limits to most of the permitted exceptions. Thus these as well can be applied by all WTO Members, whether Participants or not¹¹⁹. Financing terms and conditions known only to Participants clearly cannot be universally applied.

5.135 We note further in this context the particular potential for different, indeed stricter, rules de facto applying to developing than to developed countries, or at a minimum for developed countries to be able de facto to enjoy the same less strict rules as are provided de jure, through the SCM Agreement's special and differential treatment provisions, to developing countries. Arguably, such situations would be out of keeping with one of the key stated purposes of the WTO Agreement, namely the need for positive efforts on behalf of developing countries (which is the basis for the extensive special and differential treatment provisions of the SCM Agreement)¹²⁰.