ANNEX 1-2

REBUTTAL SUBMISSION OF BRAZIL

(17 January 2000)


TABLE OF CONTENTS

1. INTRODUCTION
    
2. CANADA'S AMENDMENTS TO THE TPC PROGRAMME DO NOT MAKE IT CONSISTENT WITH THE SUBSIDIES AGREEMENT, AND DO NOT CONSTITUTE EFFECTIVE IMPLEMENTATION OF THE DSB'S RECOMMENDATIONS AND RULINGS

1. A. TPC CONTRIBUTIONS STILL CONSTITUTE SUBSIDIES UNDER ARTICLE 1 OF THE SUBSDIESS AGREEMENT 
    
2. DETERMINING WHETHER CANADA HAS IMPLEMENTED THE RECOMMENDATIONS AND RULINGS OF THE DSB DOES NOT REQUIRE EVIDENCE OF TPC CONTRIBUTIONS SUBSEQUENT TO 18 NOVEMBER 1999

1. Canada Mischaracterizes the Appellate Body's Test for de facto Export Contingency
    
2. Canada's Argument Reduces Article 21.5 to 'Inutility'

3. COSMETIC CHANGES DO NOT CURE TPC OF de facto EXPORT CONTINGENCY

1. TPC Remains Focused on the Aerospace Industry and the Regional Aircraft Industry, the Export Orientation of Which Has Been Singled out by the Canadian Government As Significant
    
2. Removing the 'Near to Market' Terminology from TPC Documents is Irrelevant
    
3. To Qualify for TPC Funds, Applicants Must Demonstrate a Contribution to Goa 1s and Objectives Requiring a Commitment to Export Performance

(a) Export Contingency Need Not Be the Sole Condition for Receipt of a Subsidy 
(b) Brazil Has Relied on Valid Evidence

4. References to the Term 'Export' Have Not Been Removed from All TPC Documents

3. CANADA'S AMENDMENTS TO THE CANADA ACCOUNT DO NOT MAKE IT CONSISTENT WITH THE SUBSIDIES AGREEMENT, AND DO NOT CONSTITUTE EFFECTIVE IMPLEMENTATION OF THE DSB'S RECOMMENDATIONS AND RULINGS

1. DETERMINING WHETHER CANADA HAS IMPLEMENTED THE RECOMMENDATIONS AND RULINGS OF THE DSB DOES NOT REQUIRE EVIDENCE OF CANADA ACCOUNT FINANCING SUBSEQUENT TO 18 NOVEMBER 1999
    
2. CANADA'S CLAIM THAT THE RECOMMENDATIONS AND RULINGS OF THE DSB REQUIRED NO IMPLEMENTATION BY CANADA IS IN ERROR

4. CANADA'S PROPOSAL REGARDING THE ESTABLISHMENT OF 'VERIFICATION PROCEDURES'
    
5. CONCLUSION

LIST OF EXHIBITS 

 

I. INTRODUCTION

1. In its first submission¹ Canada claims to have adopted measures implementing the recommendations and rulings of the Dispute Settlement Body ("DSB") regarding the withdrawal of subsidies provided by the Canadian government to the regional aircraft industry via two programmes - Technology Partnerships Canada ("TPC") and Canada Account. In Canada - Measures Affecting the Export of Civilian Aircraft²  these subsidies were determined to constitute prohibited export subsIdies under Article 3.1(a) of the Agreement on Subsidies and Countervailing Measures ("Subsidies Agreement"), and were accordingly ordered withdrawn, pursuant to Article 4.7 of that Agreement.

2. Brazil reiterates its claim that the Canadian measures do not adequately implement the DSB's recommendations and rulings, and that the impugned programmes remain inconsistent with the Subsidies Agreement. In this submission, Brazil addresses arguments levied by Canada in its first submission, and demonstrates that Canada's implementation measures are insufficient to comply with the recommendations and rulings of the DSB that it "withdraw " TPC and Canada Account subsidies to the regional aircraft industry.

II. CANADA'S AMENDMENTS TO THE TPC PROGRAMME DO NOT MAKE IT CONSISTENT WITH THE SUBSIDIES AGREEMENT, AND DO NOT CONSTITUTE EFFECTIVE IMPLEMENTATION OF THE DSB'S RECOMMENDATIONS AND RULINGS

A. TPC CONTRIBUTIONS STILL CONSTITUTE SUBSIDIES UNDER ARTICLE 1 OF THE SUBSIDIES AGREEMENT

3. Without repeating the arguments included in paragraphs 8-11 of its first submission, Brazil simply reiterates that the legal status of TPC contributions as "subsidies" under Article 1 of the Subsidies Agreement remains unchanged under the "new" TPC.

4. Canada argues that the question whether TPC contributions will continue to constitute subsidies is "not the issue in this case.³ With this statement, Canada effectively concedes that should the Panel determine that contributions under the "new" TPC will continue to be contingent in fact on export performance under Article 3 of the Subsidies Agreement, it should also presume that those contributions will continue to constitute "subsidies" under Article 1 of the Agreement.

B. DETERMINING WHETHER CANADA HAS IMPLEMENTED THE RECOMMENDATIONS AND RULINGS OF THE DSB DOES NOT REQUIRE EVIDENCE OF TPC CONTRIBUTIONS SUBSEQUENT TO 18 NOVEMBER 1999

5. In its first submission, Canada contends that in the absence of new "financial contributions" to the regional aircraft industry made subsequent to 18 November 1999 under the "restructured" TPC, this Panel cannot judge whether Canada has effectively implemented the recommendations and rulings of the DSB. Specifically, Canada claims that "in the absence of any such financial contribution and a full consideration of those facts, there can be no grounds to support Brazil's allegations of de facto export contingency under the restructured TPC programme.⁴

6. Canada appears to draw this conclusion from the first element of the Appellate Body's test for de facto export contingency, which Canada characterizes as an inquiry into whether "there is granting of assistance by Canada.⁵ Since no new assistance has been granted under the "new" TPC, Canada asserts that the Panel cannot conclude that Canada has failed to implement the recommendations and rulings of the DSB. Canada's assertion is in error, for two reasons.

1. Canada Mischaracterizes the Appellate Body's Test for de facto Export Contingency

7. First, Canada mischaracterizes and takes wholly out of context the first element of the Appellate Body's test. What the Appellate Body actually said is that

the initial inquiry must be on whether the granting authority imposed a condition based on export performance in providing the subsidy. In the words of Article 3.2 and footnote 4, the prohibition is on the "granting of a subsidy", and not on receiving it. The treaty obligation is imposed on the granting Member, and not on the recipient. Consequently, we do not agree with Canada that an analysis of "contingent . . . in fact . . . upon export performance" should focus on the reasonable knowledge of the recipient^.6

Brazil has retained the original italicized emphasis employed by the Appellate Body to demonstrate that the Appellate Body's point with this first element was to show the error of Canada's assertion that an interpreter should look to a subsidy recipient's knowledge to determine whether the recipient, rather than the grantor, understood the subsidy to be conditioned in fact on export performance.

8. To interpret this first element of the Appellate Body's test otherwise, as Canada suggests the Panel should, would be to render redundant Article 1.1 of the Subsidies Agreement - which already requires demonstration of a "financial contribution by a government." In Brazil - Export Financing Programme for Aircraft, the Appellate Body held that the Panel erred in importing the notion of a "benefit," from Article 1.1(b) of the Subsidies Agreement, into the definition of a "financial contribution" in Article 1.1(a); it termed these two sub-parts of the same Article "two separate legal elements.⁷ Since there was no textual basis to read one provision (regarding "benefit") into another provision (regarding "financial contribution"), the Appellate Body concluded that it was not permissible to do so.

9. Similarly, there is no textual basis to import the notion of a "financial contribution by a government," from Article 1 of the Subsidies Agreement, into the legal test of "contingen[cy] . . . in fact . . . upon export performance," from Article 3 of the Agreement. Nor, when read in context, does the Appellate Body's exposition of the first element of demonstrating de facto export contingency create such a requirement.

2. Canada's Argument Reduces Article 21.5 to 'Inutility'

10. Second, Canada's claim confuses a de novo challenge to a financial contribution not yet judged to be a prohibited export subsidy, with a challenge to those measures allegedly remedying something already judged to be a prohibited export subsidy. If accepted, Canada's claim would make measures allegedly constituting effective implementation impervious to effective challenge under Article 21.5 of the Understanding on Rules and Procedures Governing the Settlement of Disputes ("DSU"). This is because a Member determined by a Panel to have adopted measures constituting subsidies contingent in fact on export could, under Canada's theory, escape effective Article 21.5 scrutiny by merely refraining from applying any remedial measures until the 20-day time period to seek compensation has passed.⁸

11. The opportunity to manipulate the system in this way did not escape Canada; according to TPC's website, Canada waited until 10 January 2000 to award its first contribution under the "new" TPC.⁹ Nor should it escape other Members. The effect, of course, would be to reduce Article 21.5 to "inutility," a result considered unacceptable by the Appellate Body.¹⁰ Members that have successfully challenged a subsidy contingent in fact on export would be left, effectively, with little more than a Pyrrhic victory. 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.¹¹

12. Finally, beyond undermining Article 21.5, accepting Canada's theory would also undermine any incentive a Member would have to implement the DSB's recommendations and rulings at all. If implementation measures remedying a finding of a subsidy programme's de facto export contingency are impervious to effective challenge, what incentive would a Member have to undertake those implementation measures? More specifically, if all Canada considers it needed to do to insulate TPC from challenge was to refrain from making a contribution under the "new" TPC, why did it bother to undertake any implementation measures at all?

13. It would not have had to do so, under its own logic, since it could have defended Brazil's challenge under Article 21.5 strictly on the basis that no new subsidies to the regional aircraft industry had been granted. Obviously, Canada undertook the implementation measures detailed in its first submission because it considered itself compelled to do more than simply not issue TPC subsidies to the regional aircraft industry for the time being.¹² The fact that Canada felt compelled to do so demonstrates that it does not consider the absence of subsequent subsidies to immunize it from Brazil's Article 21.5 challenge. For this and the other reasons expressed above, Canada's argument must be rejected.

C. COSMETIC CHANGES DO NOT CURE TPC OF de facto EXPORT CONTINGENCY

14. "TPC assistance to the Canadian regional aircraft industry" was determined by the Panel and the Appellate Body to be contingent in fact on export performance.¹³ Canada's response, however, as demonstrated by its implementation strategy and detailed in its first submission, has been to treat TPC as though it had been judged de jure, rather than de facto, export contingent. Canada considers that by demonstrating that it made some changes to TPC, such as the removal of the term "export" from some (although not all) TPC documents, or the inclusion of self-serving statements regarding its undertaking not to consider export information, the task of implementing the DSB's recommendations and rulings is complete.

15. This is not effective implementation of a determination of de facto export contingency. According to the Appellate Body, while de jure export contingency is indeed demonstrated (or remedied) "on the basis of the words of the relevant legislation, regulation or other legal instrument," de facto export contingency is to be "inferred from the total configuration of the facts constituting and surrounding the granting of the subsidy . . .¹⁴ Brazil demonstrated in its first submission, at paragraphs 18-38, that the facts surrounding the "new" or the "restructured" TPC still support an inference of de facto export contingency. Under the "new" TPC,

• contributions remain targeted to specific industries - in particular, the aerospace industry, which is to continue, as before, receiving two-thirds of TPC fund¹⁵ - that are overwhelmingly export-oriented and recognized by the Government of Canada as such (discussed at section 1 below);
   
• the same types of projects continue to be eligible for "new" TPC funds as were eligible under the "old" TPC (discussed at section 2 below);
   
• applicants must demonstrate that they will contribute to goals and objectives the achievement of which requires a commitment to export performance, according to the Government of Canada itself (discussed at section 3 below);
   
• Canada has failed to amend or to provide documents that the Panel previously considered supported an inference of de facto export contingency (discussed at section 4 below).

16. Apart from removing references to the word "export" from some TPC documents, the only thing that the DSB's recommendations and rulings have prompted Canada to do is to increase, by 396 per cent, what TPC itself projects to be "Total funds available for new contributions in future years.¹⁶ Additionally, over the period 1998-2003, TPC's "Available contribution funding" is slated to increase from $203 million to $367 million.¹⁷

17. Thus, under the "new" TPC, the same recipient industries will receive even more government subsidies to undertake the same types of projects. This is not effective implementation.

18. The facts surrounding TPC, described in paragraphs 18-38 of Brazil's first submission, lead to the conclusion that funds granted to the regional aircraft industry under the "new" TPC will continue, unavoidably, to be contingent in fact on export performance. It is for this reason that Brazil argued, in its first submission, that "withdrawing the subsidy" in the case of TPC - the very design, structure, and economic reality of which betrays its de facto export contingency - cannot be achieved without withdrawal of the programme altogether, with regard to the regional aircraft industry.¹⁸

19. At a minimum, Canada's implementation measures must ensure that prohibited export subsidies cannot be granted to the regional aircraft industry under the facts surrounding the operation of TPC, and not merely that they might not be granted. Since TPC, as it applies to the regional aircraft industry, was judged de facto export contingent, maintaining funding under the "new" TPC requires that Canada ensure that the programme will operate in full compliance with the Subsidies Agreement. It is not sufficient for Canada to simply provide a framework which, in consideration of the "total configuration of the facts constituting and surrounding the granting of the subsidy¹⁹, could permit it to maintain operation of TPC as a de facto export contingent programme. To constitute effective implementation, any amendments made by Canada to TPC should not focus on making the programme merely de jure compliant (which it may already have been), but instead on making it de facto compliant, on a consideration of the "total configuration of the facts.²⁰

20. A review of the "total configuration of the facts" reveals that Canada has not met this obligation. Brazil recalls that under the "new" TPC, the same industry recipients are getting even more TPC subsidies to undertake the same types of projects. This does not suggest effective implementation of a finding of de facto export contingency.