In their dispute over aircraft subsidies, Canada has recently been given the green light by the WTO to impose trade sanctions on Brazil to the tune of up to US$233.5 million a year, which so far is the largest compensation package authorised by the WTO. Both the parties are currently in discussion to resolve the dispute.

by Chakravarthi Raghavan

Geneva, 29 Aug 2000 -- The governments of Brazil and Canada are holding talks in Sao Paulo, the industrial capital of Brazil, on the aircraft subsidy dispute between the countries that has resulted in Canada getting the green light from the World Trade Organization to impose trade sanctions against Brazil of up to $233.5 million a year (or $1.4 billion over the next six years) - the largest compensation package the WTO has so far authorised in a trade dispute.

The arbitration award by the original panel fixed the level of “appropriate counter-measures” that Canada could take against Brazil over the trade impairment losses caused to the Canadian Bombardier aviation company as a result of ‘prohibited’ export subsidies granted by Brazil to its Embraer aircraft manufacturer.

The award, circulated Monday to all the WTO members, allows Canada to suspend tariff concessions or to take other actions against Brazilian exports for up to $233.5 million annually, over the next six years.

This amount according to trade officials is almost half of the total value of Brazilian exports to Canada.

Brazilian agricultural and some industrial products exported to Canada under a preferential trade programme, could be affected by the trade reprisals, Brazilian sources said.

In claims before the arbitrators, Canada claimed that on the basis of value of the Brazilian prohibited subsidies to each exported aircraft, the trade damage to Canada was an annual US$480 million. On the basis of trade impairment, Canada estimated the damage caused to it at US$3.2 billion (at current exchange rates).

Brazil challenged the methodology, and presented to the arbitrators a methodology based on the prospective aircraft sales Canada could have achieved if Brazil had complied with the ruling and had withdrawn the subsidies to the undelivered aircraft exports on the date when compliance by Brazil was to be effective (18 November 1999) and for transactions entered into after that date. Brazil had said that if Brazil’s PROEX (the government’s Export Financing Programme) interest rate equalization subsidies to Embraer had been withdrawn, Canada could have sold eight aircraft a year (out of 168 manufactured by Canada’s Bombardier) and the arbitration award must be based on this. While agreeing that Canadian “appropriate countermeasures” (allowed under the WTO agreements) could relate to the amount of subsidy granted, Brazil argued it could not be based on the total amount of PROEX interest rate equalization payments granted by Brazil, but to the number of aircraft exports of Canada which suffered.

The arbitrators did not accept this and applied their own methodology of calculation related to the average sale prices of subsidised aircraft sales, the annual production of over six years (2000-2005), calculation of the present value of subsidy for each aircraft model on the basis of PROEX interest equalization rate, and the total aircrafts sold with a PROEX subsidy.

On the basis of this methodology, the arbitrators set the maximum amount of suspension of concessions by Canada at C$344.2 million (US$233.5 million) a year.

Before the award of the Appellate Body of the WTO on the compliance panel rulings, and the latest arbitration award became public, the two sides had met in Ottawa to try to reach a settlement. But they failed, though the two sides agreed to resume the talks later.

The hope in Brazil appears to be that the two sides will now reach an accord that compensates Canada through increased sales to Brazil or that Canadian firms would see more business in Brazilian government purchases, whether through lower tariffs or other measures.

This would drive up bilateral trade, but would tilt the bilateral trade balance in Canada’s favour, instead of cutting trade through retaliatory measures. The Canadian Bombardier company itself may benefit from the export to Brazil of specialised aircraft and railroad equipment.

According to an IPS report from Rio de Janeiro, Brazil’s foreign minister, Luiz Felipe Lampreia, lamented the WTO decision, stressing that he considered the government’s incentives for Embraer to be a valid policy. It allowed the nation to consolidate a high-technology company as a competitor on the extremely competitive global market for aeronautics, he said.

Embraer, which was suffering a full-blown financial crisis when it was privatised in December 1994, is now ranked fourth among the major aircraft manufacturers in the world. The company today has orders for 1,200 aircraft, for some $10.3 billion in sales. The sum could double if the clients add on further options, according to Embraer president Mauricio Botelho.

In an intervention at the WTO Dispute Settlement Body (when it adopted earlier this month the reports of the Appellate Body on the compliance panel rulings), Celso Amorim, Brazilian ambassador to the WTO, stressed that the Embraer case was unique because it reflected the difficulties developing countries have in competing on the international market in the high-tech industries.

Brazil had long maintained that the benefits provided by PROEX simply sought to balance the interest rates paid by Brazilian exporters with those existing in financially stronger nations.

Embraer and Bombardier compete on the world market of regional passenger jets with a capacity of up to 50 people. The WTO dispute process stretched over four years and also involved Brazilian charges against the Canada Technology Association for its subsidies to that country’s defence and aerospace sectors.

The WTO had recommended changes in the incentives applied by both countries. After evaluating the two, its officials said in July that the adjustments of PROEX had not been sufficient and its financial support continued to violate the rules of international trade, but the Canadian programme had achieved compliance.

But the Appellate Body (on Canadian compliance in relation to its technology support) has also left the way open for Brazil to raise a fresh dispute and agitate issues relating to the Canadian subsidies that have not been dealt.

In addition to obstructing Brazilian exports to Canada (if Canada imposes the sanctions), or increasing Canadian imports in the case an agreement is reached, the ERJ-135 and ERJ-145 jets, of 37 and 50 passengers, respectively, will see their final price tags rise due to the loss of government financing.

But Embraer will maintain its competitive edge worldwide, even in wealthy countries, despite the price adjustment, according to Botelho, confident his company will feel just a “slight impact” in business.

In addition to the regional passenger aircraft, Embraer has also been successful with previous models, including the Bandeirante (capacity of 18 passengers) and the Tucan (for military training), and smaller planes for agricultural use.-SUNS4729

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

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