Four-year old Brazil-Canada dispute shows up failings of the WTO

by Chakravarthi Raghavan

Geneva, 1 Feb 2001 --  The Dispute Settlement Body of the World Trade Organization (WTO) is again seized of trade disputes between Brazil and Canada, involving charges by each that the other is using WTO-illegal export subsidies to promote respectively exports of the mid-range regional passenger jet aircrafts made by their aircraft manufacturing industry to the world market.

The dispute, and the exchanges, often in sharp tones, between Brazil and Canada, underscore an important element: the trading system has been so structured, and its rules so lopsided that without major change to correct the imbalances and inequities and inbuilt asymmetry in the rules, developing countries can never hope to industrialize and compete with highly industrialized nations in advanced high-tech industries and export markets.

The dice is loaded against the developing world, whether in relation to credit and finance for their enterprises, or their access to technology, or getting support from the State to cross the hump.

The original dispute by Canada against Brazil over the latter’s alleged subsidy for export of the Embraer aircraft manufactured in Brazil by a Brazilian enterprise, and Brazil’s complaint of Canadian subsidisation of the export of the Bombardier, has gone through the stages of panel and Appellate Body rulings, compliance panel and Appellate Body rulings, and Canada getting authorization to retaliate against Brazil for purported non-compliance.

Brazil's Embraer and Canada’s Bombardier are the two competitors in this range of aircraft in the world market, particularly in the profitable United States market.

After the last round of compliance panel (and Appellate Body) rulings, and an arbitration ruling about the extent of trade damage to Canada for which it could retaliate, Canada sought and obtained authorization to retaliate.

On the ruling relating to its own export programmes, Canada had told the DSB that it had complied with the ruling, a view that Brazil at that time had challenged.

Now based on statements by the Canadian minister, and that of the provincial government of Quebec, Brazil has come back to challenge the Canadian claim of compliance by eliminating WTO-illegal practices, and has sought fresh consultations, which could either lead to a new dispute and new round of rulings or to Brazil initiating its own request to the DSB for authorization to retaliate against Canada.

Canada in the meanwhile, has come to the DSB to ask for the convening of a compliance panel to look at Brazil’s statement about compliance, but insisting meanwhile that this would not in any way preclude Canada from going ahead with the retaliation measures already authorized.

The continuing dispute, now in its fifth year, brings out also the problems of the dispute settlement processes of the WTO, and more so because of its extremely legalistic approach, as well as the basic asymmetry of rights and obligations in terms of the subsidies agreement and the international financial system and credit markets that perpetually place the developing-country governments and their borrowers at a disadvantage.

One of the problems thrown up in the extreme legalism surrounding the dispute resolution mechanism, is the difficulty also of a developing-country complainant ‘proving’ the existence of a prohibited subsidy, particularly when the ‘facts’ may be in the possession of the other party (government or company) but which are withheld on grounds of ‘commercial secrecy’.

In the original Brazil-Canada dispute, where Brazil asked the panel to call for the facts and evidence in the possession of Canada, and draw an adverse inference when Canada cited 'commercial secrecy' to refuse to provide the information. But the panel ruled that it could call for the information in Canada’s possession, and draw any adverse inference, only after Brazil first established a prima facie case (a virtual impossibility as many trade experts believe in such cases).

The Appellate Body reversed this ruling, holding that a panel at any stage can ask for the information. Nevertheless, the Appellate Body held that whether or not to draw an adverse inference and finding had to be based on an overall assessment and appreciation of the facts, something within the ken of a panel (and not the Appellate Body, whose job is only to look at legal issues raised).

Now this issue has come full circle, so to say, with Brazil citing public Canadian statements to show that its contention about illegal Canadian subsidies had all along been correct.

Getting beyond the statements and counter-statements of the two sides, it is even more clear that for developing countries to try to challenge and contest the ‘markets’ in hi-technology industries -, now dominated by exporters of the very advanced and rich countries - is a herculean task, since their public finances and market ratings for loans will never enable them to match the advantages that industrialized countries could provide.

Even more (in the context of the attempts to launch a new round with new issues) is the fact that when the Uruguay Round was concluded and the WTO was established, with the mechanism to deal with disputes, even the most objective and favourable panel can do little against asymmetric rules that the majors managed to incorporate in the agreements, and to change these (under the so-called implementation issues raised by the developing world), they want a new price from the developing world.

No decision could be taken by the DSB on Thursday over the Canadian request for the original panel to look into the Brazilian compliance, since this was the first time the issue came up and was opposed by Brazil; the negative consensus rule that comes play at a second-time request for a panel could not be invoked by Canada. Canada protested that in regard to the compliance panel requests, the DSB could act at the first request itself, a view challenged by Brazil, which received support on this from the EU.

On the Brazilian complaint against Canada, Brazil has cited several press reports of Canada, citing the Bombardier aircraft exporters and of the Canadian ministers, to complain that prohibited export subsidies in the form of export credits are being provided (in relation to export sales to a US airline, Air Wisconsin), as Brazil has all along been contending.

The Canadian subsidies, according to Brazil, amount to $2 million per aircraft.

Canada, without specifically denying the statements attributed to its ministers and to the provincial government, insisted it was not violating the WTO agreements, but merely matching what it claims to be illegal export credits and subsidies of Brazil.

Brazilian ambassador Celso Amorim in renewing the complaint against Canada of non-compliance and continued subsidised exports, told the DSB that on 10 January, the Canadian Minister of Industry had publicly announced that Canada would use loans and loan guarantees of ‘Investment Quebec’ to ‘match’ financing offers of Brazil, and that Canada would be “using the borrowing strength and capacity of the government to give a better rate of interest on loan[s] than could otherwise be secured by the (manufacturer) Bombardier.”

Amorim told the DSB that Brazil was glad that Canada had at last decided publicly to concede the nature of its practices with regard to regional jets - an issue on which the Brazilin exporter, Embraer, had been complaining for over four years about the ‘overly generous financial support’ by Canada to its rival Bombardier. “Despite the absolute secrecy of the (Canadian) programs aiding the Canadian company, the presence of an elusive but heavy ‘hand’ in the market of regional jets was always felt,” he said.

Ever since the Brazilian enterprise Embraer became a player in the market, Canada has been providing support to its enterprise (to counter the Brazilian competition for the market), Amorim pointed out, adding that Canada’s “resourcefulness in the area of export support is without limits and that the Canadian government was determined to impose its views by force, in blatant disregard for the multilateral trading system.”

Amorim’s statement brought out what he called a ‘few elements’ arising from recent Canadian statements:

·        while accusing Brazil of providing ‘below market’ financing (for its Embraer aircraft exports), the chief executive officer of the (rival Canadian) Bombardier had told the press that the ‘matching’ loan from the Canadian agency was not illegal ‘in the way it is being structured’.

Canada’s argument appeared to be that the Brazilian loans to its Embraer and Canada’s to Bombardier were covered by different WTO disciplines. In Canada’s view it was “alright” for an industrialized country (Canada) to slash down the price of each aircraft sold by two million dollars per aircraft - using credit guarantees that a developing country could not match, even if it wished to (because of country ratings and credit risks added on to the market rates for loans under the financial system and the way the banks are required to hold capital against loans, under the Basle accords).

And if a developing country is forced to spend more resources to offer the same financial terms, with a different financing structure, the developing country would be violating the subsidies agreement.

·        the Canadian minister had also said in justification that “what we are doing is retaliating” against Brazil, and in response to press questions had said that the WTO had authorized Canada to retaliate, and that Canada would soon come forward with further proposals for ‘additional retaliation’.

The DSB, Amorim underlined, had given no such permission to Canada, nor do the WTO agreements contain any such provision. “They are unilateral and constitute economic violence without parallel or precedent in the WTO... and is a flagrant violation of Canada’s obligations under the WTO agreements. Let us not pretend otherwise.”

·        the Canadian export credit loans to Bombardier were going to be provided under the so-called ‘Canada Account’ which the WTO had thrice held to be inconsistent. Though in bilateral consultations, after the Art. 21.5 (compliance panel) review of the ruling, Canada had assured Brazilian authorities that the program would be changed and new regulations were being drafted. Brazil had taken assurances at face value and had now been proved wrong.

“We are therefore re-examining all our options,” Amorim said, presumably a reference to the Brazilian government weighing whether it should seek a new panel and go through another 2-year process or seek from the DSB under Art.22.6 of the DSU, authorization for Brazilian retaliation against Canada.

While Brazil had revised its own export credit schemes (Proex) after the WTO rulings, Canada had never attempted to change its ‘Canada Account’ programmes. Canada, Amorim charged, had aggressively tried to force Brazil to follow the rulings of the original panel (that the Appellate Body had over-ruled and thus not adopted by the DSB) and rulings that the Appellate Body had held to be ‘moot’ and having ‘no legal effect’.

While Brazil had said in respect of its aircraft exports, it would honour all past commitments, but in full consistency with WTO obligations, Canada had never revised its programmes (the Canada Account).  It was in order to clarify these matters, that Brazil has sought new consultations, Amorim said.

In his response, the Canadian ambassador Sergio Marchi said that the Canadian announcement of the export financing related to one particular transaction, and in order to match what he called terms offered by the Brazilian Embraer enterprise, and that it was “a measured and focussed” response. The financing proposed to Air Wisconsin (the US party buying the Canadian aircraft) mirrored the conditions and terms of Brazil, and that this related to different Brazilian subsidies than those against which Canada had been authorized to retaliate to the tune of C$344 million a year.

Separately, Canada asked the DSB to establish a compliance panel (under Art.21.5 of the DSU) over the revised export credit programme (ProEx) of Brazil and its consistency with earlier WTO rulings. While Canada has already received authorization to withdraw equivalent sanctions, and was in the process of doing so, Canada was seeking the compliance for legal clarity. Though Canada had no legal obligation to seek further rulings, it was still doing before implementing counter-measures, Marchi claimed.

Brazil however opposed the reference and said since this was a ‘first time’ request, reference was not automatic, a view supported by the EC.

In other comments, Japan expressed its concern about this continuing dispute which was affecting the credibility of the WTO system. If any Art.21.5 panel was established, Japan said, that panel should be instructed to provide clear and specific guidelines to enable the parties to resolve the dispute. The EC shared Japan’s concerns in this regard.

Argentina said that panels could not make decisions that only the members could make while Uruguay said that the General Council should interpret the rules and not panels.

[It was not clear under what DSU rule the panels could provide the kind of guidance on how parties should implement (as the EC and Japan were suggesting), going beyond their ruling that the measures were contrary to the obligations and the country concerned should bring the measures into conformity.]

Earlier, the DSB set a panel, as requested by the United States, to go into the complaint about the patent laws of Brazil, which the US said illegally required the local working of patents and enabled compulsory licensing of the patent or authorize imports of the patented product (parallel imports) without the authorization of the patent holder.

In a statement under any other business at the end of the DSB, Brazil (which has contended that the provisions in its law are analogous to those in the US patent code) made a statement that it was seeking consultations with the US on this question.

Brazil, Amorim said, had detected several discriminatory provisions in the US patents code, in particular provisions in the code relating to ‘Patent Rights in Inventions Made with Federal Assistance’.

The US patent code, Brazil said, stipulated that no small business firm or non-profit organization which received title (patent) to any subject invention and no assignee of any such small business firm or non-profit organization shall grant to any person the exclusive right to use or sell any subject invention in the US unless the small business or non-profit organization agrees that any products embodying the invention or produced through the use of that invention “will be manufactured substantially in the US.”

In addition, the US law requires that each funding agreement with a small business firm or non-profit organization shall contain appropriate provisions to effect such a requirement.

The US patent code, Brazil said, also imposed statutory restrictions limiting the right to use or sell any federally owned invention in the US only to a licensee that agrees that any products embodying the invention or produced by use of that invention “will be manufactured substantially in the US.”

Brazil, Amorim told the DSB, had requested consultations with the US to examine these and other provisions of the US patent code with a view to understanding how the US justified the consistency of such requirements with its obligations under the TRIPS Agreement, especially Articles 27 and 28, the TRIMS Agreement and its Art. 3 in particular, and Articles III and XI of GATT 1994.

The US said the Brazilian request for consultation was an obvious reaction to the establishment of the panel against Brazilian patent law. The US law was consistent with the WTO. The provisions cited by Brazil were merely contractual terms for anyone wanting to license a patent owned by the US government or would like US funding for their research and development projects. They were contractual arrangements that anyone could voluntarily enter into, and not conditions on enjoyment of patent rights.

Meanwhile, the international humanitarian medical relief agency, Medecines Sans Frontieres (doctors without borders) in a statement criticised the US for bringing the complaint against Brazil over patents and compulsory licensing and said that if the US were successful, it would hit the very successful policies used by Brazil to attack HIV/AIDS, by providing affordable medicines. The respected international NGO called upon the US to withdraw its request.

The US complaint threatens Brazil’s HIV/AIDS policy, said the organiztion, and added that it supported the call by more than 120 Brazilian NGOs. A key factor in the success of the Brazilian programme, Medecines Sans Frontieres said, was the domestic manufacture of generic drugs by Brazilian companies. The patent policy has been the key to the success of the strategies to offer universal access to HIV/AIDS medication in Brazil, and Brazil has offered assistance to other developing countries to develop simiilar policies, the NGO pointed out.

Brazilian sources said that though it was not directly involved in this dispute raised by the US, any successful challenge by the US could adversely affect Brazil’s anti-AIDS programme and provision of medicines to patients that has been widely commended as a successful policy that other developing countries should imitate.

[Another NGO sign-on statement on bulletin-boards, complained that the pharmaceutical industry was trying to upset South African laws of compulsory licensing that are being used to provide affordable drugs for AIDS patients in that country.]

Two other disputes before the DSB, and in which being first-time requests, no panel could be set, were:

·        a US complaint about Belgium’s administration of customs measures on imports of rice, where Belgium was said to have ignored the ‘transaction value price’ in levying customs duties, and for disclosing confidential information provided by the party to others. Belgium, the US complained, instead of accepting the transaction value, used the value in the US and the export price to third market, to assess the customs duty parable for imports into Belgium, and using an interpretative note (of the EC) on the value to be assigned based on the product characteristics (presumably other than that described in the invoice).

Though no particulars have been specified in the US complaint, and in fact the EC made this an issue to block reference to a panel, some trade sources said (but this could not be confirmed at this stage either from the US or the EC) this related to disputes about basmati rice (a variety from India and Pakistan) that receives a special tariff, and an attempt to bring in by import a US variety not eligible for the special tariff.

·        an Argentine complaint against Chile that it was using a special price band system, and use of safeguard measures against imports of wheat, wheat flour and edible vegetable oils from Argentina.

Earlier, in the DSB’s item on surveillance of implementation of adopted rulings and recommendations, the report of the EC on its measures to implement the banana ruling and the comments on all sides, showed that none of the parties,   neither the Latin American and Central American countries that raised the complaint, nor the Caribbean countries who export bananas under special preferences, nor the US (which does not produce or export any banana but defending the interests of the Chiquita banana TNC and its interests in the Latin American region) were satisfied that the EC had in fact complied with the WTO ruling as claimed.

In reporting that its new tariff-quota regime ( for imports on a first-come-first-served , FCFS, system) had now been approved within the EU internal processes (the agriculture ministers have agreed to the changes) and should be formally adopted and published in the official EU journal, the EC ambassador claimed it was WTO compatible and that the long delay was due to the difficulties in finding a solution acceptable to all the parties involved. He also claimed it was a non-discriminatory and transparent system.

The US regretted no agreed solution could be found. Honduras, Guatemala, Panama, Costa Rica all complained that the new regime was still WTO inconsistent. Honduras said the EC regime would ruin its banana industry. The import regime was something worse than the earlier regime found illegal. Moreover, it continued to provide discriminatory benefits on the basis of the origin of bananas (from the ACP countries).

Jamaica said that the new regime would not be consistent with the EU’s commitment under its agreement with the ACP countries and the FCFS import regime would do economic damage to the frail economies of the Caribbean. St. Lucia, also speaking for Dominica, said they were overwhelmingly dependent on their exports of bananas to the EC and their economies would suffer catastrophically if they were to lose the EC market.

Ecuador found some parts of the new regime favourable, but said other parts were unjustifiable and continued to be contrary to the WTO.

The EC said that no body seemed to be happy with its regime, and there at least was consensus on that.

In other reports and surveillance actions, Canada reported that it had implemented the ruling on imports of milk and exports of dairy products, and that the prices and volumes were set on commercial terms between producers and their purchasers, without any Canadian government intervention.

But the Canadian view of compliance was challenged by New Zealand and the United States, which said the new Canadian measures were still export subsidies on dairy products, provided contrary to the export subsidy reduction commitments of Canada under the Agreement on Agriculture. New Zealand said it was seeking further consultations with Canada and if no agreement was reached, it would seek a compliance panel ruling under Art.21.5 of the DSU.

On the issue of Turkey’s compliance with the ruling over the restrictions imposed on imports of textiles and clothing products from India (purportedly to comply with Turkey’s customs union with the EU, but which have been held illegal), Turkey made a bland statement that its steps to comply were at an advanced stage.

India however reminded that the reasonable period of time to comply was due to end on 19 February, and wanted more details. India also complained that new measures put in place by Turkey meanwhile were discriminatory. Turkey denied this, but refused to provide details of how it would be complying, explaining it was having ‘bilateral consultations’ with others, and did not want to disclose details now lest it create more difficulties. – SUNS4828

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

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