13. In Brazil's view, the issue at hand is whether particular measures that the parties themselves acknowledge were neither included in the consultation request nor the subject of consultations can, nevertheless, properly be before a panel. Article4.7 of the DSU provides that a complainant may request the establishment of a panel only if "the consultations" fail to settle a dispute. While A request for the establishment of a panel must include only measures that were either identified in the request for consultations or subsequently raised subsequently during the consultations themselves. Brazil contends that both Article6.2 of the DSU and Article 4.4 of the SCM Agreement provide a necessary and limiting connection between the subject matter of the panel request and the subject matter of the consultations.

2. Are PROEX Interest Rate Equalization Payments Used "To Secure a Material Advantage in the Field of Export Credit Terms"?

14. Brazil acknowledges that the PROEX interest equalization scheme is a subsidy under Article1 of the SCMAgreement that is contingent upon export under Article3.1(a) of that Agreement. Nonetheless, Brazil argues that PROEX interest equalization payments for aircraft are "permitted" by the terms of item (k) of the Illustrative List. Under the express terms of item(k), government payment in support of export credit constitutes a prohibited export subsidy only "in so far as they are used to secure a material advantage in the field of export credit terms". It follows, a contrario, that they do not constitute prohibited export subsidies if they are not used "to secure a material advantage in the field of export credit terms,." a Moreover, 2) PROEX payments are not, in fact, used "to secure a material advantage in the field of export credit terms." Therefore, according to Brazil, PROEX payments are allowed under the SCMAgreement.

15. Brazil also argues that the justification for the PROEX subsidies are twofold. First, PROEX subsidies simply compensate for higher interest rates incurred on transactions involving Embraer that result from what it terms "Brazil risk". "Brazil risk" occurs because a Brazilian commercial entity cannot avoid bearing the additional cost of Brazil sovereign risk when it raises capital or finances a purchase or a sale. Brazil sovereign risk results from the perception in the market for debt securities as to the likelihood of repayment on schedule.[20] Brazil presented evidence to the Panel that PROEX payments are not "used to secure a material advantage" on two types of transactions: transactions in which the lender is a financial institution inside Brazil; and transactions in which the lender is outside Brazil. When the lender is inside Brazil, PROEX offsets the "Brazil risk" incurred by the lender. When the lender is outside Brazil, Embraeritself incurs "Brazil risk". According to Brazil, the Panel and the other participants ignored the distinction between these two types of transactions, and ignored the fact that Brazil offered separate arguments that these two types of transactions do not "secure a material advantage".

16. Brazil contends that, PROEX subsidies are intended to "match" the subsidies provided by the Government of Canada to Bombardier. Canada provides a wide range of subsidies for Canadian regional aircraft, and these subsidies reduce the price of the aircraft.

17. Brazil offers five arguments inIn support of its its position. First, Brazil notes first that the verb "secure", which is found in the material advantage clause of item(k), has been defined to mean "succeed in obtaining or achieving; gain possession of" and "to procure". The The verb "secure" (or "securing") is used no fewer than 14 times in WTO Agreements, and, that, in every instance the word "obtain" (or "obtaining") would be an accurate synonym. "Secure" is used in this sense in item (k) as well, referring to action by a Member to obtain, to gain possession of, or to procure a material advantage "in the field of export credit credit terms" for itself or its nationals, such as Embraer. Brazil maintains that the Panel's interpretation leads to an interpretation of item (k) that covers action by Brazil to "confer" or "bestow", by providing more favourable financing terms, a material advantage on the nationals of other Members who purchase from the Brazilian exporter.

18. Second Next, Brazil argues that the Panel's interpretation reduces the "material advantage" clause to "redundancy or inutility" by construing the material advantage clause to mean include nothing more than including within this prohibition nothing more than payments that improve "the terms that would otherwise have been be [sic] available to the purchaser with respect to the transaction in question."[21] The Panel's interpretation of the "material advantage" clause adds nothing to item (k) because all payments of costs incurred will improve the terms that would have been available in their absence.

19. Third Also, Brazil contends that the Panel's interpretation is inconsistent with the context of the "material advantage" clause. Footnote 5 of the SCM Agreement specifies that Annex I contains not only a list of prohibited exported subsidies, but also includes measures that do not constitute export subsidies, such as in items (b), (h), (i) and (k). Comparing the structure of item(j) and item (k), the two provisions share a similar structure in that they define practices that constitute prohibited export subsidies with language that limits the scope of the definition. In the case of item(j) regarding export credit guarantee or insurance programmes, the limiting language is "premium rates which are inadequate to cover the long-term operating costs and losses of the programmes." In the case of item(k) regarding export credit terms, the limiting language is "in so far as [government payments] are not used to secure a material advantage in the field of export credit terms." Thus, practices covered by the first paragraph of item (k) are prohibited only "in so far as they are used to secure a material advantage in the field of export credit terms." Otherwise, Brazil contends, they are, acontrario, permitted.

20. In addition, Brazil believes asserts that its interpretation is confirmed both by the preparatory work of relating to the SCMAgreement and by the circumstances of that led to the inclusion of the "material advantage" clause in item (k). The language that now comprises the first paragraph of item (k), without the "material advantage" clause, had its origins in rules adopted in 1958 by the Organization for European Economic Cooperation. The provision was included verbatim in a 1960 Report of a GATT Working Party on Subsidies. This report provided the basis for the Illustrative List of Export Subsidies in the Agreement on Interpretation and Application of Articles VI, XVI and XXIII of the General Agreement on Tariffs and Trade (the "Tokyo Round SCM Code")., which was concluded in 1979. The previous year, in 1978,Jjust prior to the conclusion of the Tokyo Round, the Organization for Economic Cooperation and Development (the "OECD") concluded the OECD Arrangement on Guidelines for Officially Supported Export Credits was concluded(the "OECD Arrangement"). Since Because the OECD Arrangement expressly permitted the provision by governments of certain export credits, an exception was inserted by the Tokyo Round negotiators as the second paragraph under of item(k) for practices that conform to the interest rate provisions of certain international undertakings on export credits – the "safe harbour" clause. Some time after deciding to include the this OECD "safe harbour" clause, the GATT negotiators added the "material advantage" clause to the first paragraph of item (k). According to one of the negotiators at the time, the "material advantage" clause was intended to provide "a weak injury test in the event of a departure from the basic GATT [subsidy] standard." The "material advantage" clause was intended to restrict the definition of this type of export subsidy to instances where a "material advantage" has been "secured". IIf no "material advantage" is secured, no export subsidy exists. Thus, Brazil concludes that Ithe Panel's interpretation of the "material advantage" clause denies the words of that clause any meaningful effect and should therefore be reversed.

21. Fifth, according to Brazil Finally, with respect to the availability of item(k) as an "affirmative defence", Brazil notes the Panel's concern that Brazil's interpretation could lead to "inconsistent results"[22], in that because a measure in the form of a payment could be found to be a prohibited export subsidy when challenged by one complainant yet found not to be a prohibited subsidy when challenged by a different complainant. Brazil responds that such "inconsistent" results are both anticipated and permitted by a number of covered agreements, including Part III and Part V of the SCM Agreement, as well as the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 and the Agreement on Safeguards.

3. Has Brazil Increased the Level of its Export Subsidies? 

(a) Actual Expenditures or Budgeted Amounts

22. Brazil states that in determining whether Brazil has increased the level of subsidies in a manner inconsistent with Article27.4 of the SCMAgreement, the criterion should be the budgeted amounts, not the level of expenditure. The Panel's conclusion on this issue was in error.

23. Brazil first notes that PROEX budgetary numbers are not simply estimates of amounts to be paid, but are actual appropriations that may be utilized used by beneficiaries of the programme. The appropriate definition of the word "grant" in footnote55 is "agree to, promise, undertake". The result of the budgetary appropriation is that Brazil agrees to, promises, and undertakes to make a specified amount of funds available in the next fiscal year to the private sector for export subsidies under PROEX. Brazil argues that its budgetary appropriations have been "granted", as used in the context of footnote55, and are, therefore, the appropriate basis for determining the level of export subsidies.

24. In Brazil's view, the context provided by Article 25 of the SCM Agreement confirms that the budgeted amount of subsidies is the relevant criterion for calculating the increase in the level of export subsidies under Article 27.4. Article 25 provides that notifications shall contain the "subsidy per unit or, in cases where this is not possible, the total amount or the annual amount budgeted for that subsidy ... Since Because PROEX is payments are not provided on a per unit or lump sum basis, Brazil, in accordance with Article25.3(ii), notified PROEX on the basis of the annual amount budgeted. Nothing in Article 27 suggests, let alone supports, the notion that Members should use one basis for notifying the level of their subsidies under Article 25 of the SCM Agreement and another basis for determining whether the level of export subsidies has increased for purposes of Article 27.4.

(b) When are PROEX Subsidies "Granted"?

25. Brazil argues that a subsidy occurs within the meaning of Article 1 of the SCM Agreement when the Brazilian authorities notify issue a letter of commitment to the parties with a letter of commitment to a proposed transaction. The Panel's conclusion that the letter of commitment itself is not a subsidy, because it is neither a direct transfer of funds nor a potential direct transfer of funds under Article 1.1 of the SCMAgreement, was erroneous. Neither the text of the SCMAgreement nor logic supports the Panel's finding that in order to qualify as a "potential direct transfer of funds" within the meaning of Article1.1(a)(1)(i) of the SCMAgreement, a measure must give rise to a benefit and thus confer a subsidy irrespective of whether any payment occurs. The ordinary meaning of "potential direct transfer of funds" includes a letter of commitment., and Brazil notes the Panel's statement that the word "potential" has been defined as "possible as opposed to actual" or "capable of coming into being." These definitions apply not only to loan guarantees expressly mentioned in Article1.1(a)(i) of the SCMAgreement, but also to the PROEX letters of commitment. The letter of commitment makes PROEX support "possible" and "capable of coming into being", and therefore constitutes a "potential direct transfer of funds". The letter of commitment benefits Embraer by permitting it to offer its potential customers financing on terms more favourable than it would be able to offer otherwise. This benefit exists regardless of whether a formal contract is signed. In Brazil's view, Canada acknowledges this point in its assertion that Brazil has "intensified" subsidization by entering making long-term commitments in recent months.

26. Brazil also argues that the Panel's finding on this issue is contrary to its statement that "the object and purpose of the SCM Agreement … is to reduce economic distortions caused by subsidies."[23] While Although Brazil denies that PROEX subsidies cause economic distortions, any distortions that would were to be caused by such subsidies would occur at the time the letter of commitment was issued, for it is this commitment that determines whether the purchaser awards the contract to Embraer or to a competitor.