CANADA - MEASURES AFFECTING THE EXPORT
OF CIVILIAN AIRCRAFT



Recourse by Brazil to Article 21.5 of the DSU




Report of the Panel

(Continuation)

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

21. As discussed in Brazil's first submission, the same three industries eligible for funding under the "old" TPC are targeted for continued funding under the "new" TPC.²¹ Moreover, Canada has confirmed that the aerospace industry will continue, as it did under the "old" TPC, to receive two-thirds of all "new" TPC funds.²² Although the Panel determined that the regional aircraft industry had in its period of review received approximately 68 per cent of TPC funds allotted to the aerospace industry.²³ Canada contends that under the "new" TPC, "it cannot be assumed that regional aircraft-industry related projects will receive the majority of the funds.²⁴ Whether regional aircraft-industry related projects are to receive the majority of the "new" TPC's funds or $1 of those funds, if TPC subsidies remain de facto export contingent, Canada has not implemented the recommendations and rulings of the DSB.

22. Furthermore, Canada did not, with its amendments to TPC, change the nature of the Canadian aerospace industry generally or the regional aircraft segment specifically. Brazil has demonstrated that the Canadian aerospace industry in general and the regional aircraft segment in particular continue to be overwhelmingly export-oriented. More importantly, the Canadian government itself recognizes the exceptional export performance of the industry, and has cited that performance as its motivation for funding the industry.²⁵

23. Canada complains that certain of the Canadian government documents cited to establish this point, in paragraph 19 of Brazil's first submission, may not be relied upon to challenge Canada's implementation and to demonstrate a continued inference of de facto export contingency. According to Canada, this evidence "relates not to the restructured TPC, but to TPC as it was previously constituted.²⁶

24. Canada cites two decisions for support. At paragraph 41 of its first submission, Canada cites to what it claims to be a principle "duly recognised by the Panel in Australia - Subsidies Provided to Producers and Exporters of Automotive Leather." According to Canada, the Panel stated that "WTO Members cannot be prevented from replacing purported prohibited export subsidies with other measures that are not prohibited, thereby bringing themselves into compliance with their multilateral obligations under the SCM Agreement.²⁷

25. Brazil encourages the Panel to review paragraph 9.64 of the decision in Australia - Leather, for two reasons. First, the sentence extracted by Canada merely records an argument made by Australia, rather than a conclusion made by the Panel. The Panel only offers its views on the issue in the final sentence of paragraph 9.64, commencing with its statement that "We agree that . . ."

26. Even if the sentence extracted by Canada represents a conclusion of the Panel, however, that conclusion represents only half of the story. In the first instance, Canada has not "replaced" TPC contributions to the aerospace industry and the regional aircraft segment with anything else; TPC is still available to this same industry for the same types of projects even after implementation.

27. Moreover, after the sentence from Australia - Leather quoted by Canada, the Panel stated that even if measures previously constituting prohibited export subsidies are no longer in place, and have instead been "replaced" with purportedly non-prohibited "other measures" providing funds to the same recipient, statements made by a Member in conjunction with the earlier but now superseded measures are relevant to an analysis of the subsequent, purportedly compliant measures.²⁸

28. Therefore, since the "new" TPC has retained its focus on the same recipient industries funded under the "old" TPC, comments made by the Canadian government regarding its rationale for funding those recipients are relevant to the Panel's analysis of the "new" TPC. For example, the Leader of the Government in the House of Commons noted that a key "output" of the TPC-funded Dash 8-400 project was "the building of exports," which was, with job creation, "just what the government had in mind when we established" TPC.²⁹ Canada cannot seriously expect to maintain funding to the same industry under the "new" TPC, and yet at the same time escape the implications of its earlier statements regarding why it chose that industry in the first place. Australia - Leather provides support for the Panel, in its analysis of any "inferences" of de facto export contingency flowing from the surrounding facts, to consider statements by the Canadian government regarding its support for particular recipient industries of "old" TPC funding, where Canada has maintained its focus on those same recipients in the "new" TPC.

29. Canada also cites the Appellate Body in Chile - Taxes on Alcoholic Beverages for the principle that "previous . . . measures" cannot be relied upon to assume continued non-compliance with a Member's obligations.³⁰ Since certain of the documents relied upon by Brazil pre-date 18 November 1999 - the date on which the "new" TPC took effect - Canada contends that any reliance upon them to infer de facto export contingency would fall afoul of the Appellate Body's ruling in Chile - Alcohol.

30. While Brazil does not quarrel with Canada's statement of the rule in Chile - Alcohol, that rule is simply inapplicable in the circumstances of this case. Chile - Alcohol did not, in the first instance, involve subsidies de facto contingent on export performance. Furthermore, Canada's objection, and its citation to the rule in Chile - Alcohol, would only have been appropriate and relevant had Brazil not relied upon the "measures" constituting the "new" TPC, and instead relied upon the "measures" constituting the "old" TPC.

31. But this is not the situation at hand. The facts enumerated in paragraph 19 of Brazil's first submission are not, to begin, Canadian "measures." They are instead facts that remain unaltered by anything Canada claims to have accomplished with its amendments to TPC. Canada has retained its commitment to offer two-thirds of "new" TPC funds to an industry that it has previously recognized as "highly export oriented³¹, "globally competitive with exports exceeding 70 per cent of output,³² and "crucial . . . for Canada's economy, with exports growing at 10 per cent per year.³³ Even after 18 November 1999, Canada continues to recognize this industry as a source of ever increasing export revenue.³⁴ As far as Brazil is aware, nothing that Canada has proposed in restructuring TPC alters the truth of these statements.

32. These statements lead to the inference that in choosing which industry would receive the lion's share of " old" and "new" TPC funds, Canada was not casually indifferent to the trading patterns of that industry. Instead, Canada chose, as TPC's showcase, an industry that exports significantly more than others, because it exports significantly more than others.

33. The "new" TPC retains a focus on contributions to the aerospace industry. Canada simply cannot expect to retain a focus on this industry, and yet at the same time escape the inference created by all of its previous statements about the esteem in which it holds that industry as a result of its export performance. Such an expectation is neither credible, nor demanded by the rule in Chile - Alcohol. Some elements, essential to the Panel's and Appellate Body's consideration, were not, and cannot be, erased by the cosmetic amendments to TPC.

2. Removing the 'Near to Market' Terminology from TPC Documents is Irrelevant

34. Canada claims that TPC now focuses on funding projects aimed at "improving the technological capability of the firm or sector, rather than on the commercial viability and export potential of supported products.³⁵ In its first submission, Brazil noted, first, the Appellate Body's statement that "[i]t is . . . no 'less possible' that the acts, taken together, may demonstrate that a pre-production subsidy for research and development is 'contingent . . . in fact . . . upon . . . export performance.'³⁶ Simply including "Industrial Research" as a category of funding under the "new" TPC does not make it any less possible to infer from the facts that TPC constitutes a prohibited export subsidy.

35. Second, Brazil demonstrated that the available descriptions of eligible activities under the "new" TPC, to the extent they are different at all from eligible activities under the "old" TPC³⁷ betray an interest in "near market" projects with high commercialization potential. The "new" TPC Terms and Conditions, along with the "new" TPC Investment Application Guide, describe as eligible those projects "aimed at the discovery of knowledge, with the objective that such knowledge may be useful in developing new products," and those projects leading to "translation of industrial research findings into a plan, blueprint or design for new, modified or improved products . . .³⁸

36. Finally, Canada has withheld from the Panel documents that could shed some light on these categories of eligible activities, and whether they contribute to an inference of de facto export contingency - for example, the "new" TPC's "Framework Investment Proposals." Exhibit Cdn-9 states that Canada has not yet provided, and is still developing, this document, which presumably could contain a description of the three eligible categories of TPC projects.³⁹ Canada cannot claim, as it has in paragraphs 33-34 of its first submission, that it has implemented the recommendations and rulings of the DSB by making TPC "less near-market," without providing the documents demonstrating this fact.

3. To Qualify for TPC Funds, Applicants Must Demonstrate a Contribution to Goals and Objectives Requiring a Commitment to Export Performance

37. Brazil demonstrated in its first submission that to qualify for TPC funds, an applicant must demonstrate that it meets TPC's "selection criteria" and "assessment criteria," and that it provides the "strategic benefits" sought by the programme. Brazil also demonstrated that among those selection or assessment criteria and strategic benefits is the requirement that applicants establish that TPC funds would be used to create Canadian jobs, to increase Canadian economic growth, or to increase Canadian wealth. To wit:

• The "new" TPC's Investment Application Guide states that applicants' proposals "are assessed in the context of their relevance to the objectives of TPC, namely the extent to which they demonstrate," among other things, "that the project contributes to the strategic objectives of the government, including technological and net economic benefits to Canada (increasing economic growth, creating jobs and wealth, and supporting sustainable development).⁴⁰
   
• The Investment Application Guide also states that a proposal must include information regarding the "strategic benefit" offered by the project, including "[p]otential economic benefit to Canada (for example, jobs created or maintained, economic growth, wealth creation . . .).⁴¹
   
• The "new" TPC's Terms and Conditions state that applicants' proposals "will be assessed in terms of the extent to which they demonstrate," among other things, " that the project contributes to the strategic objectives of the government, including technological and net economic benefits to Canada⁴², the latter of which are defined in the Investment Application Guide as "increasing economic growth, creating jobs and wealth, and supporting sustainable development.⁴³

• The "new" TPC's Investment Decision Document, to be completed by TPC officials evaluating an applicant's proposal, requires that those officials identify "strategic considerations" of the project that would constitute "benefits to Canada," including "the link between the proposed R&D initiative and achieving Canada's objectives of increasing economic growth, creating jobs and wealth and sustainable development.⁴⁴

38. In paragraph 33 of its first submission, Brazil then demonstrated, quoting numerous Industry Canada publications and the Canadian Minister of Industry, along with economic experts like the Conference Board of Canada, that creating Canadian jobs, increasing Canadian wealth and spurring Canadian economic growth requires, first and foremost, exports. These objectives are driven by, and cannot be achieved without, massive Canadian exports.

39. For a regional aircraft applicant for TPC funds to demonstrate a proposed project's contribution to "increasing economic growth, creating jobs and wealth," therefore, it must - even if implicitly - commit to export performance. The "new" TPC has, in other words, imposed mandatory selection and assessment criteria that can only be met if an applicant can demonstrate export performance. Such a requirement is the very essence of de facto "export contingency" - concealing export contingency in a requirement that does not actually employ the word "export."

40. The Panel is not here faced, however, with a situation in which it is required to determine that all subsidies contingent on "increasing economic growth, creating jobs and wealth," in all cases, are prohibited export subsidies, as Canada claims at paragraph 42 of its first submission. Brazil has discussed elsewhere in this and its first submission the "total configuration of the facts constituting and surrounding" TPC subsidies to the regional aircraft industry which lead to an "inference" of de facto export contingency.⁴⁵

41. For example, with the "new" TPC, Canada has retained as its target the aerospace industry, which will continue to receive two-thirds of all TPC funds.⁴⁶ The Panel found, and the Appellate Body confirmed, that this same funding under the "old" TPC was intended by Canada to circumvent its obligations under the Subsidies Agreement - it was provided contingent in fact on export performance.⁴⁷ The Canadian government has frequently extolled the overwhelming export-orientation of that industry generally, and the regional aircraft industry specifically⁴⁸ including in its decisions to award TPC funds.⁴⁹ It has, as such, shown something considerably more than casual indifference regarding the trading patterns of that industry retained in the "new" TPC as the main target for funding.

42. In these circumstances, the requirement that successful applicants demonstrate the ability to fulfill particular assessment and selection criteria that are inextricably linked to export becomes all the more significant, and adds to the inference that the "new" TPC retains its de facto export contingency. TPC knows, before it even sees an application, that regional aircraft industry applicants will be able to fulfill these criteria by virtue of their extreme export orientation. The deck, as the saying goes, is stacked. In these circumstances, TPC does not have to express the export contingency of its contributions; it knows that requiring applicants to demonstrate a proposal's ability to contribute to "increasing economic growth, creating jobs and wealth" is nothing more than a euphemism for export contingency, as that requirement applies to regional aircraft industry applicants.

43. In its decision in Australia - Leather, the Panel was faced with similar circumstances, and made a similar inference of de facto export contingency. Where Australia was aware that an applicant, to meet an objective or requirement for a subsidy, must, "of necessity, have to continue and probably increase exports," Australia's imposition of the objective or requirement was considered a condition on the grant of the subsidy.⁵⁰ The Panel reached this conclusion, in the circumstances of that case, even though there was no express mention of exports or an export requirement. In the specific circumstances of the case before this Panel, Brazil contends the Panel should do the same.

(a) Export Contingency Need Not Be the Sole Condition for Receipt of a Subsidy

44. Canada attempts to counter Brazil's claim with two arguments. First, Canada attempts, at paragraphs 22-25 of its first submission, to de-emphasize the requirement that a TPC applicant demonstrate how its proposal will "increase economic growth, jobs and wealth," by listing that requirement as one among many. Canada's attempt must fail, however. Article 3.1(a) of the Subsidies Agreement requires only that export performance be "one of several other conditions," and not the sole condition for receipt of a subsidy. It is, quite simply, irrelevant that the "new" TPC requires that an applicant demonstrate "strategic benefits" or meet selection and assessment criteria that do not constitute evidence of de facto export contingency, as long as it must comply with one requirement that does constitute evidence of de facto export contingency.

(b) Brazil Has Relied on Valid Evidence

45. Second, Canada objects on two grounds to the evidence used by Brazil in paragraph 33 of its first submission to demonstrate that for the regional aircraft industry to increase economic growth, jobs and wealth in Canada requires export performance. In Annex A to its first submission, Canada argues, in the first instance, that Brazil's sources are "from the period prior to the restructuring of TPC.⁵¹

46. Canada's argument is in error. Brazil did not rely on evidence relating to TPC "as it was previously constituted," thus objecting to "previous [Canadian] measures," in the words of the Appellate Body in Chile - Alcohol.⁵² To demonstrate that applicants for TPC funds are required to show that their proposals provide " strategic benefits" or meet "selection" and "assessment criteria" related to the creation of Canadian jobs, economic wealth and growth, Brazil relied on the "new" TPC's Investment Application Guide, Terms and Conditions, and (in this submission) Investment Decision Document.⁵³ These citations are repeated above, at the outset of this section of Brazil's submission.

47. Brazil then went on, in paragraph 33 of its first submission, to demonstrate that according to the Canadian government and the Conference Board of Canada, increasing and creating Canadian jobs, economic wealth and growth requires exports. It is utterly irrelevant whether the statements supporting this conclusion, contained in paragraph 33 of Brazil's first submission, were made before or after 18 November 1999. As far as Brazil is aware, Canada did not, with its amendments to the TPC programme, change or even attempt to change these aspects of the Canadian economy. Unless Canada can show that something about the Canadian economy and the Canadian regional aircraft industry changed on 18 November 1999 as a result of its implementation measures, such that increasing and creating Canadian jobs, economic wealth and growth no longer depends, as a matter of necessity, on export, the documents and statements compiled by Brazil at paragraph 33 of its first submission retain both their validity and persuasive force, and contribute to an inference that TPC retains its de facto export contingency.

48. Canada also states that the evidence cited by Brazil in paragraph 33 of its first submission is either "of a general nature," providing "general sectoral information unrelated to TPC," or "from non-governmental sources.⁵⁴ Brazil notes, in the first instance, that six of the seven documents quoted in paragraph 33, to establish the link between exports and the increase and creation of Canadian jobs, economic wealth and growth, were in fact published by Industry Canada, a government source. TPC is an agency of Industry Canada and reports to the Minister of Industry.⁵⁵

49. Brazil also notes that the source of this generic information regarding the Canadian economy is utterly irrelevant, as long as the source is reliable. As discussed above, Brazil first relied on the "new" TPC Investment Application Guide, Terms and Conditions, and (in this submission) Investment Decision Document⁵⁶ to demonstrate that applicants for TPC funds are required to show that their proposals provide "strategic benefits" or meet "selection criteria" and "assessment criteria" related to the creation of Canadian jobs, economic wealth and growth. To establish the link, in the Canadian economy, between exports and the increase of jobs, wealth and growth, Brazil then turned to documents published by Industry Canada.

50. To establish this link, why must Brazil rely, as Canada insists it must, solely on documents or statements made by TPC itself? TPC is not the only authority on the Canadian economy. TPC has itself elsewhere acknowledged its own reliance on other government authorities for what it dubs, in its first submission, "general sectoral information.⁵⁷ In the Memorandum of Understanding between TPC and the Industry Sector of Industry Canada, for example, TPC has committed to rely on Industry Canada's Industry Sector Branches as the "first source for technological and sectoral analysis and advice.⁵⁸ Sectoral advice emanating from Industry Canada is therefore considered reliable and persuasive by TPC. Brazil's citation to Industry Canada documents to establish a fundamental fact about the Canadian economy - the link between exports and the increase and creation of Canadian jobs, economic wealth and growth - is equally reliable and persuasive.

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

51. Canada has acknowledged that not all TPC documents have in fact been cleansed of references to the term "export." In Exhibit Cdn-9, Canada lists 40 TPC documents⁵⁹ only 13 (or 32 per cent) of which have been reformulated and provided to the Panel.⁶⁰ On the one hand, Canada claims that it has effectively implemented the recommendations and rulings of the DSB, thus ridding TPC of de facto export contingency, by removing references to the term "export" from TPC documents. On the other hand, Canada has failed to provide 68 per cent of those documents.

52. Canada has, therefore, failed to implement the recommendations and rulings of the DSB, by Canada's own measure of what constitutes effective implementation. Alternatively, Canada's failure to provide certain "new" TPC documents supports a presumption that as-yet-unreplaced TPC documents supporting the Panel's original inference of de facto export contingency still apply. In either case, Brazil requests that the Panel determine that Canada has failed effectively to implement the recommendations and rulings of the DSB.

53. Experience demonstrates that many of the documents not provided by Canada could potentially aid the Panel's determination whether Canada has effectively implemented the DSB's recommendations and rulings, since they served as some of the sources of facts from which the Panel inferred de facto export contingency. For example, a "new" TPC Aerospace and Defence Sector Generic Model Agreement has not been provided.⁶¹ The Panel determined that this Model Agreement served as one source of facts from which the de facto export contingency of TPC could be inferred, citing to the requirement that applicants "distinguish between domestic sales and exports when reporting forecast and actual sales.⁶²

54. Similarly, TPC's Business Plan was found by the Panel to include facts leading to an inference of de facto export contingency, with the statement that TPC's approach in the aerospace sector is to support projects with "high export potential.⁶³ Canada has not provided a Business Plan for the "new" TPC.

21 For a list of the three industries eligible for funds under the "new" TPC, see, e.g., TPC Terms and Conditions, pg. 1, Section 3.1 ("Eligible Areas") (Exhibit Bra-15). For a list of the identical three industries eligible for funds under the "old" TPC, see, e.g., Panel Report, paras. 6.173, 9.283.

22 Canadian First Submission, para. 32.

23 Panel Report, para. 9.307.

24 Canadian First Submission, para. 32. Canada also states that "no new regional aircraft-related projects have been approved or contracted since 14 November 1997." This is simply not true. In March 1998, TPC announced a $9.9 million subsidy to Sextant Avionique Canada Inc. for the development of both the avionics system for the Dash 8-400 and the flight control system for the CRJ-700. Panel Report, para. 6.193.

25 See Brazilian First Submission (and sources cited therein), para. 19. Regarding the role of the regional aircraft industry's export-orientation in TPC's funding decisions, see, e.g., the comments by the Leader of the Government in the House of Commons, included in Brazil's first submission, para. 19.

26 Canadian First Submission, para. 43.

27 WT/DS126/R (25 May 1999) (Adopted 16 June 1999), para. 9.64.

28 Id. at para. 9.65.

29 Industry Canada News Release, 17 December 1996 (Exhibit Bra-10).

30 Canadian First Submission, para. 44, quoting WT/DS87/AB/R, WT/DS110/AB/R (13 December 1999) (Adopted 12 January 1999) para. 74.

31 TPC Annual Report, 1996-1997, pg. 5 (Exhibit Bra-8); "Think Canada, Think Bottom Line, Think Aerospace Industry, Think Investment," October 1999, pg. 33 (Exhibit Bra-11).

32 "Think Canada, Think Bottom Line, Think Aerospace Industry, Think Investment," October 1999, pg. 3 (Exhibit Bra-11).

33 Industry Canada News Release, 10 January 1997 (Exhibit Bra-9).

34 Industry Canada, "Results of the 1998/99 Survey of the Canadian Aerospace and Defence Industry," 29 November 1999 (Exhibit Bra-12).

35 Canadian First Submission, para. 33.

36 Appellate Body Report, para. 174.

37 Brazilian First Submission, paras. 29-30.

38 TPC Terms and Conditions, pg. 2 (emphasis added) (Exhibit Bra-15); TPC Investment Application Guide, pg. 4 (emphasis added) (Exhibit Bra-16).

39 xhibit Cdn-9 (Serial 16). Although Canada claims that this document is not available, it is able at paragraph 34 of its first submission to describe in some detail what is included in one of the categories, "Industrial Research."

40 TPC Investment Application Guide, pg. 6 (Exhibit Bra-16).

41 Id. at pg. 8.

42 TPC Terms and Conditions, pg. 2 (Exhibit Bra-15).

43 TPC Investment Application Guide, pg. 6 (Exhibit Bra-16).

44 TPC Investment Decision Document, pg. 2 (Exhibit Cdn-7).

45 Appellate Body Report, para. 167.

46 Canadian First Submission, para. 32.

47 Elements of the Negotiating Framework, Submission of the European Communities, MTN.GNG/NG10/W/31 (27 November 1989) (The prohibition of subsidies contingent in fact on export was proposed because the de jure provision is "open to circumvention").

48 See sources cited in Brazilian First Submission, para. 19.

49 See, e.g., Industry Canada News Release, 17 December 1996 (The then-Government House Leader stated that "[t]hese two outputs of the Dash 8-400 project - the creation of jobs and the building of exports - are just what the government had in mind when we established Technology Partnerships Canada . . .") (Exhibit Bra-10).

50 Australian Leather, para. 9.67.

51 Canadian First Submission, Annex A, para. 5.

52 Id. at paras. 43-44, quoting Chile - Alcohol, para. 74.

53 Brazilian First Submission, paras. 31, 34. Brazil notes that the Investment Decision Document was not available until Canada filed its first submission on 10 January 2000.

54 Canadian First Submission, Annex A, para. 5 (introductory paragraph and discussion of the Industry Canada CIBS documents cited by Brazil at footnotes 60, 61 and 62 to paragraph 33 of its first submission).

55 TPC Special Operating Agency Framework Document, cover page, pg. 8 (Exhibit Bra-5).

56 Brazilian First Submission, paras. 31, 34.

57 Canadian First Submission, Annex A, para. 5.

58 Exhibit Cdn-10, pg. 1, para. 6 (emphasis added). Brazil notes that Industry Canada's Industry Sector focuses on "develop[ing] initiatives to maximize Canada's share of global trade and investment" and on "working with industry to get more Canadian firms involved in trade, in more sectors and in more markets." The result of Industry Sector's activities will be to "help Canada, the most open of G7 countries, become a nation of traders. Currently, Canada's top five exporters account for 21 per cent of Canadian exports and less than 10 per cent of Canadian SMEs export at all." About the Industry Sector of Industry Canada, Industry Canada website, published 27 May 1999 (Exhibit Bra-32).

59 Although the list is numbered 1-36, Serial 16 actually lists five separate documents.

60 In fact, only 12 of the 40 documents were provided to the Panel. Canada states, however, that there is no equivalent under the "new" TPC for the document listed as Serial 15.

61 It is unclear whether this document is mentioned in the list included as Exhibit Cdn-9. It may be Serials 8 or 9. In any case, the document has not been provided.

62 Panel Report, para. 9.340 (bullet point 10) (emphasis in original). Brazil notes that even if the Model Agreement were to request only undifferentiated sales data and forecasts, without a distinction between domestic sales and exports, it would still lead to an inference of de facto export contingency in the instance of contributions to the Canadian regional aircraft industry. The Panel in Australia - Leather determined that requesting undifferentiated sales performance targets led to an inference of de facto export contingency because the Australian government knew that in order to reach those targets, the recipient would have to export. Australia - Leather, para. 9.67. The same logic applies in the case of the Canadian regional aircraft industry; the Canadian government knows that the industry exports virtually all it produces, and thus to reach sales forecasts, it must export.