The rulings of the WTO's Appellate Body on reports of two separate compliance panels in the Brazil and Canada aircraft export subsidy issues, adopted by the DSB, suggest that unless the WTO’s subsidy agreement and the DSU are changed, developing countries will always be at a disadvantage within the trading system.

by Chakravarthi Raghavan

Geneva, 4 Aug 2000 -- The rulings of the Appellate Body (AB) on reports of two separate compliance panels in the Brazil and Canada aircraft export subsidy issues, adopted by the Dispute Settlement Body (DSB) Friday, suggest that unless the WTO’s subsidy agreement and the DSU are changed, developing countries will always be at a disadvantage within the trading system in their efforts to compete and catch-up with industrialized world.

The DSB adopted the compliance panel rulings, as modified by the Appellate Body.

In terms of the ruling in the complaint brought by Canada against Brazil over its export credits under its Proex scheme, through interest rate equalization payments and bonds, to exports of the Brazilian Embraer aircraft, Brazil is required not to issue National Treasury Note Series bonds, after 18 Nov 1999 (when Brazil had to comply with the ruling) to the local financing institution in respect of aircraft exports that have been contracted, but not yet exported.  Canada has sought the DSB’s authority to retaliate against Brazil for non-compliance, and the extent of trade damage suffered by it and for which authorization is to be granted is before arbitrators. The arbitrator’s ruling is expected about 23 August. In the light of that ruling, Canada is to come back to the DSB for trade retaliation authority (which is automatic).

There are still some efforts by Brazil and Canada to find a mutually agreeable solution. But if this does not happen, it is clear that Brazil would be able to raise a new dispute against Canada (as it has been virtually invited to do by the Appellate Body).

In any event, the issues brought to the fore in these disputes, about the uneven playing field for developing countries in international trade, strengthens the case for changes, under whatever rubric, whether as ‘implementation issues’ or any other, to restore a level playing field without developing countries making other concessions to the developed countries, before developing countries allow themselves to be pushed into a new round.

In the counter-dispute, where Canada’s Technology Partnership Canada (TPC) programme and its subsidy to the Defense and Aerospace industry sector, with programmes targeted to the Bombardier aircraft exports, Canada was asked to modify the programme, which had specifically made the subsidy contingent on exports. Canada has terminated the old programme and put in place a new TPC programme which it says does not have the characteristics held to be a subsidy contingent on exports.  Brazil challenged the compliance on the ground that the aircraft industry was an export-oriented one, and thus aid to it was in fact an export subsidy. The compliance panel only went into the issue whether its original rulings in respect of the TPC, adopted by the DSB, had been complied with, and not whether the new TPC still specifically targeted the Canadian regional aircraft industry for subsidies and thus violated the Subsidies and Countervailing Measures (SCM) agreement. In this view of its job, the compliance panel held that Canada had complied with the ruling.

Nevertheless, the compliance panel said Canada’s implementation should ‘ensure’ that ‘future’ TPC assistance to the Canadian regional aircraft industry “will not be de facto contingent on export performance”. The AB did not agree with this and held that the standards about “ensure” and ‘future’ would be difficult to satisfy if read too literally.

But AB held that the view of the compliance panel that its job was only to consider whether Canada had complied with its original ruling, by removing the objectionable aspects, was erroneous and that in compliance proceedings, the panel had also to consider whether the new TPC programme violated the SCM agreement. The AB itself went into the issue based on the ‘facts’ on record, and held that Brazil had not established that the revised TPC violated the SCM agreement.

However, added the AB, “the outcome of the present proceedings does not, of course, preclude possible subsequent dispute resolution proceedings regarding the WTO-consistency of the revised TPC programme, or of specific instances of assistance actually granted under that programme.”

The dispute involves the Brazilian government's export credits to its aircraft industry, which exports regional aircraft, and the export credits and subsidies under the Technology Cooperation Partnership arrangements provided by Canada, raises some complicated issues.

The two disputes have gone through the entire gamut of the dispute settlement process, with two separate panels hearing the disputes (which were in fact disputes and counter-disputes), rulings by two separate divisions of the AB, and then the original panels being reconvened as compliance panels to rule on whether each of the parties, Brazil and Canada, had complied with the rulings, and appeals by Brazil against the compliance panel rulings that went to the AB—but all without a definitive settling of the WTO law!

In its rulings, the AB effectively upheld the compliance panel rulings, though finding fault in an aspect of the ruling (vis-a-vis Canadian compliance with subsidies to its aircraft industry, through the TPC programme).

The outcome of the rulings show that under the WTO system a country which is being charged with violating the subsidies (and a few other agreements having similar provisions) can frustrate panel proceedings by refusing to disclose information in its possession on the ground of breach of “business confidentiality.”

Insofar as export credits are concerned, the position appears to be that in terms of the SCM Agreement, and in particular item (k) of Annex I of that agreement (giving an illustrative list of prohibited export subsidies):

*        In terms of the ruling by the panel, Brazil, a developing country invoking the item ‘k’ of the annex I, must follow the OECD matching arrangements (dealt with in the second paragraph of ‘k’, and which the OECD does not make public or clarify to non-OECD members) in order to escape export subsidy claims and complaints.

The obligations of the WTO members, under the rules-based system, is thus to be determined by the changing rules of an outside limited body of its rich (privileged) membership.

*        otherwise, any developing country government that has to borrow on international capital markets, where creditors apply a country-premium over and above the market rate for a particular currency, and then lends it (as export credit) to its enterprise, either it must lend at the international market rate plus country premium rate (and thus be at a disadvantage) or run foul of the prohibited export subsidy if it lends to its enterprise at the prevalent international market rates (available or provided to competitors from the industrialized world) and thus be competitive with exporters from industrialized countries.

For, if they do not pass on to their exporting enterprise, the international rate plus the country premium (which even a highest rated private enterprise in that country has to automatically pay), they will be hitting the prohibition in para (k) of Annex I. But an industrialized country, a member of the OECD, borrowing at the periodically adjusted OECD export credit rate (to reflect the market conditions in which it borrows in its currency) will be well within its range and thus in a position to provide export credits. And the OECD country can also provide matching credit terms, notify it to the OECD, and thus be in WTO compliance!

As a result, in any high-technology industry and exports, where the credit terms that can be provided to a foreign buyer by an exporting firm is an important element, developing country firms will be at a disadvantage, and the rules-based system of the WTO and its SCM agreement will ensure they are always at the bottom of the heap.

The other aspect of the ruling appears to be that if a country has an industry which is 100 percent or even predominantly export-oriented, and the industry as such is targeted for providing a subsidy, in terms of the currently worded SCM Agreement, this is fine, and there is no subsidy contingent on exports. A complaining country must prove, with its own evidence, that in fact the subsidy to the targeted industry is contingent on exports, though not overtly so stated. It is no use if the complaining country has reason to believe that the information in the possession of the other country proves its own case. The other country (Canada in this case) could cite the provisions of the Agreement about the business confidentiality of the information and refuse to provide it, and no adverse inference can be drawn if the complainant does not first make a prima facie case.

In an intervention at the DSB, Canada’s Amb. Sergio Marchi said it was eight months since the expiry of the deadline for compliance and Canada was still waiting for Brazil to comply. It asked for Brazil’s immediate implementation.

In two statements (on the two separate AB rulings, but in reality linked disputes), Brazil’s Amb. Celso Amorim focused on what clearly is emerging as one of the inequities of the WTO/SCM Agreement - the provisions relating to official export financing and export credit insurance.

The present dispute, Amorim pointed out, concerned a developing country that had ventured into an industry which was high cost, high-tech, with high value added content. As in many others, in this industry export financing was critical. And, there were some systemic aspects of multilateral rules on export credits, particularly from the viewpoint of a non-Member of the OECD. Brazil had already raised this in terms of the “laconic and unbalanced” language of item ‘k’ of Annex I of the SCM agreement.

Brazil, Amorim said, used interest rate support to finance exports of the regional aircraft. Canada had challenged this, and Brazil had used the first para of ‘k’ to defend itself. The panel however shut down this defense, and said Brazil had to use the second para, which made references to the “interest rate provisions” of the OECD Agreement. The AB had “condemned” this interpretation, but left some question marks on how the first para of ‘k’ could be used by WTO members.

Brazil found several problems about the requirements of the second para of ‘k’ and its references to the ‘interest rate provisions’ of the OECD arrangement. Firstly, developing countries did not participate in the negotiations of those rules. Yet, at least one panel, intended to limit export financing activities of developing countries to the parameters of the OECD undertaking.

Secondly, developing countries were not familiar with the provisions of the OECD arrangements and the situation was quite difficult to overcome, since the OECD secretariat was not very responsive to inquiries from non-participants. Most of Brazil’s queries to the then OECD secretariat, even the simplest of them, were not answered due to the “alleged confidential nature” of the deliberations in the OECD.

“This is an astounding fact, given the interest of many of the OECD major participants in greater WTO transparency,” Amorim commented.

Thirdly, a mere reference in ‘k’ to the interest rate provisions of the OECD was not nearly enough to give any kind of clarity to non-participants on what they must do to comply with the SCM agreement.  The review panel that examined the Canadian implementation measures concerning the Canadian Account program tried to define what the OECD ‘interest rate provisions’ are. And that effort had raised more questions than ever before. “The fact is that no WTO member knows what those provisions are”.

The ‘matching’ provisions of the OECD arrangement, for example, allow an OECD participant to match ‘unduly generous’ credit terms offered by another country—OECD participant or not—as long as special and confidential intra-OECD notification procedures are observed. And at least one major WTO Member, Amorim added, believed that ‘matching’ is part of the ‘interest rate provisions’ of the OECD arrangement - though the panel against Canada disagreed with this view.

But if ‘matching’ was an OECD interest rate provision, then OECD participants could provide credit terms to its exporters and still be in compliance with the WTO disciplines. But transparency would be present only for OECD participants. Would a developing country practising ‘matching’ with no OECD notification requirements be deemed to be in compliance?

[One of Brazil’s arguments before the panel over its export subsidy was that its terms did no more than match terms available to those buying the rival Canadian aircraft]

Fourthly, the OECD rules were not suited to the needs and specificities of developing countries or to any non-participant. What would be appropriate Commercial Interest Reference Rate (CIRR) interest benchmark for supplier credit denominated in local currencies? Many developing country export credit agencies use the LIBOR (London Interbank Overnight Rate) as a reference. Was that practice inconsistent with the SCM just because LIBOR was not an OECD benchmark?

Fifthly, what version of the OECD ‘interest rate provisions’ was to be observed? The OECD rules in place at the time the Marrakesh Agreement was signed or the ones in place now?

In the 1992 version of the OECD arrangement, interest rate support was not defined in the text “in the light of differences between long-established national systems of export credit ... in operation in the participating countries.” In the latest version of the arrangement, added Amorim, interest rate support was mentioned in the body of the text, but non-participants had absolutely no idea how the mechanism worked or what the national practices were. And who knew what the next version of the (OECD) Arrangement would hold in store for non-participants. Have the latter given up their rights to define multilateral rules that would apply to them?

Brazil, Amorim said, had not raised this issue before the panel because their defence was not based on the second para of item ‘k’, but nevertheless it was important for Brazil.

This was just one of a number of systemic uncertainties and inequities on export financing. And while they did nothing in the WTO, rules on export financing were being further developed and changed to suit the needs and interests of OECD participants, completely disregarding the needs and interests of non-participants.

In a separate statement relating to the Canadian compliance with the ruling on its aircraft subsidies for the Bombardier aircraft manufacturer, under the Canadian TPC programme, Amorim said that the Canada Account and the TPC programmes were found inconsistent with the SCM Agreement. Brazil had now become more knowledgeable about the financing activities of the Canadian Export Development Corporation (EDC), since it first raised the dispute and held consultations with Canada.

Brazil, Amorim recalled, had serious reservations about the credit terms extended by EDC, but “unassailable alleged confidentiality barriers” hampered Brazil’s efforts to have the EDC transactions examined by the original panel. It was only during the Art. 21.5 proceedings that there was recognition that EDC financing was offered with repayment periods and interest rates that did not conform to the OECD arrangements. But this recognition came too late in the process, and the original panel’s decision to “reward EDC’s lack of transparency was there.” But Brazil was nevertheless keeping the matter under evaluation, Amorim added.

The compliance panel had agreed with Brazil’s position that Canada did not withdraw the subsidies provided by the Canada Account program which, to this date, remained inconsistent with the SCM Agreement.  Brazil hoped that the ongoing bilateral consultations with Canada would settle this issue.

As regards the TPC, this program was originally found to be a de facto export subsidy. Under the Art. 21.5 proceedings, Brazil had said that any changes made to the legal framework of the programmes should ensure that prohibited export subsidies would no longer be granted.

“Despite these arguments, the standards adopted by the review panel, tacitly endorsed by the AB, sets a very low threshold for the implementation of the DSB recommendations regarding de facto export subsidies. In fact, under the standards set out in the review panel report, a Member could ‘fix’ a de facto export subsidy by making a few changes to the legal framework of the program (which was not found to be violating the WTO disciplines any way) and by taking no improper action during the course of the Art. 21.5 proceedings. After the Art. 21.5 reports have been adopted by the DSB, the subsidizing member would then be free to resume the practice found to violate the multilateral disciplines and the complaining party would be left with the sole regrettable option of starting dispute settlement procedures afresh.”

“This outcome is unreasonable and highly undesirable,” Amorim added.

Another issue that Brazil found troubling was “the cornerstone of the AB’s reasoning: the ‘contingency’ test to establish whether or not a subsidy is an export subsidy.”

“In short,” Amorim said, “the AB had ruled that even 100% export-oriented industries may be selected to receive subsidies, as long as the grant of these subsidies, is not ‘contingent’ on export sales.”

Brazil had pointed out in the original proceedings that in order to fulfil the repayment requirements of the TPC, recipients had to achieve sales targets. “Since their production was entirely directed to foreign markets, the ‘contingency’ would be evident: in order to repay they had to sell, in order to sell they had to export.”

Not surprisingly, Amorim added, the TPC’s amended regulations were quite vague on the repayment aspect of the program. And this was considered enough by the compliance panel and the AB!

The AB report actually states that Art.3 of the SCM Agreement does not preclude an industrial sector that has a ‘high export orientation’ from ‘being expressly identified as an eligible or a privileged recipient of subsidies.” The AB report goes on to say that there is also no limitation on ‘the amount of subsidies that may be granted to that industry.’

In his statement on the compliance ruling over Brazil’s own exports, Amorim said, he had shown “how tilted the playing field is in favour of developed countries as far as export financing is concerned.”

In the case Brazil brought against the massive subsidies granted to the Canadian aircraft manufacturer, Bombardier - “an instrument that is also liberally used to support other high technology and highly export oriented Canadian companies”—Brazil found that “here as well, the playing field is anything but level.”

“Not just a few adjustments to the WTO disciplines are needed if developing countries are to have minimal hopes of being even modest players in industries that developed countries are determined to maintain captive.”

But in the case relating to the TPC, the AB report, however had made quite clear that the outcome of the Art. 21.5 proceedings did not preclude possible subsequent dispute resolution proceedings regarding the WTO-consistency of the revised TPC programme or of specific instances of assistance actually granted under that programme.

“Brazil takes careful note of these words,” Amorim added. – SUNS4723

The above article first appeared in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.

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