Brazil - Export Financing Programme for Aircraft -
Recourse by Canada to Article 21.5 of the DSU

Report of the panel

C. ARE PAYMENTS PURSUANT TO THE PROEX SCHEME AS MODIFIED BY BRAZIL CONSISTENT WITH THE SCM AGREEMENT?

6.18 In the first section of this Report, we addressed the existence of measures taken to comply with the recommendation of the DSB in respect of payments on exports of regional aircraft pursuant to letters of commitment issued under PROEX prior to its modification by Brazil. In this section, we address the consistency with the SCM Agreement of measures taken by Brazil to comply with the recommendation of the DSB in respect of payments on exports of regional aircraft pursuant to letters of commitment issued under PROEX after its modification by Brazil.

1. Steps taken by Brazil to comply with the recommendation of the DSB

6.19 The basic language authorising PROEX interest rate equalisation, found in Provisional Measure 1892-33, has not changed since the date of establishment of the original panel in this dispute(24). Brazil however argues that it has implemented the DSB's recommendation in this dispute through Resolution 2667 of 19 November 1999(25). Article 1 of the Resolution repeats the basic standard of Provisional Measure 1892-33 that the National Treasury may grant equalisation sufficient "to ensure that the relevant financial charges are consistent with standard practices on the international market." Article 1 further provides that:

"Paragraph 1. In the financing of aircraft exports for regional aviation markets, equalisation rates shall be established on a case by case basis and at levels that may be differential, preferably based on the United States Treasury Bond 10-year rate, plus an additional spread of 0.2% per annum, to be reviewed periodically in accordance with market practices.
Paragraph 2. The equalisation rate shall be limited to the percentages established by the Central Bank of Brazil, and shall remain fixed throughout the period in question."

6.20 As discussed in paras. 6.75-6.77, infra, Brazil considers that, as a result of this Resolution, PROEX payments are no longer used to secure a material advantage in the field of export credit terms and are hence "permitted" by the first paragraph of item (k) of the Illustrative List.

2. Assessment of the Panel

6.21 In the original dispute, we found that Brazil had failed to comply with certain conditions of Article 27.4 of the SCM Agreement, and that the prohibition of Article 3.1(a) of the SCM Agreement was therefore applicable to Brazil(26). The Appellate Body sustained this finding on appeal(27). Brazil has not suggested before this Article 21.5 Panel that this situation has changed in any respect. Accordingly, we conclude that Article 3.1(a) continues to apply to Brazil. We further found, and Brazil did not dispute, that PROEX payments are subsidies within the meaning of Article 1 of the SCM Agreement that are contingent upon export performance within the meaning of Article 3.1(a) of that Agreement. This finding was not appealed, nor has Brazil suggested that Resolution 2667 in any way affects the status of PROEX payments as export subsidies

6.22 Brazil does however assert that PROEX payments are "payments" within the meaning of the first paragraph of item (k) of the Illustrative List which are not "used to secure a material advantage in the field of export credit terms" and which are therefore "permitted". Thus, Brazil's defence in this dispute depends upon the proposition that the first paragraph of item (k) may be used to establish that an export subsidy within the meaning of item (k) is "permitted" by the SCM Agreement. It further depends upon Brazil establishing that (a) PROEX payments are "payments" within the meaning of item (k); and (b) PROEX payments are not "used to secure a material advantage in the field of export credit terms". Further, Brazil has acknowledged that it is asserting an affirmative defence, and that the burden of establishing entitlement to it is thus on Brazil(28)

6.23 We note that, in the original dispute, this Panel restricted itself to a finding that PROEX payments were used to secure a material advantage in the field of export credit terms. We did not address the two other elements necessary to Brazil's defence, i.e., whether the first paragraph of item (k) can be used to establish that an export subsidy is "permitted", and whether PROEX payments are "payments" within the meaning of item (k). Nor did the Appellate Body make findings on these issues. In this Article 21.5 dispute, however, we have decided to address all three elements of Brazil's defence. In our view, this more comprehensive approach will provide a greater degree of clarity and guidance to the parties in respect of implementation. It also facilitates a better understanding of the relevant provisions in the context of the broader operation of the SCM Agreement.

(a) May the first paragraph of item (k) be used to establish that an export subsidy is "permitted"?

6.24 The first paragraph of item (k) of the Illustrative List identifies as an export subsidy:

"The grant by governments (or special institutions controlled by governments) of export credits at rates below those which they actually have to pay for the funds so employed (or would have to pay if they borrowed on international capital markets in order to obtain funds of the same maturity and other credit terms and denominated in the same currency as the export credit), or the payment by them of all or part of the costs incurred by exporters or financial institutions in obtaining credits, in so far as they are used to secure a material advantage in the field of export credit terms." (emphasis added

6.25 As noted above, Brazil's "material advantage" defence is predicated on the proposition that payments within the meaning of the first paragraph of item (k) that are not "used to secure a material advantage in the field of export credit terms" are "permitted" by the SCM Agreement(29). Accordingly, we will first consider whether, as a matter of law, the first paragraph of item (k) can be used to establish that a subsidy which is contingent upon export performance within the meaning of Article 3.1(a) is nevertheless "permitted", or whether, as argued by Canada, the first paragraph of item (k) cannot be used in this manner.

 (i) Has this issue already been addressed by the Appellate Body?

6.26 In considering this question, we first observe that this issue has not been decided, either by the Panel or by the Appellate Body, in the original dispute. To the contrary, both the Panel and the Appellate Body specifically declined to rule on this issue. In the words of the Appellate Body:

"Nor do we opine on whether a 'payment' within the meaning of item (k) which is not 'used to secure a material advantage in the field of export credit terms' is, a contrario, 'permitted' by the SCM Agreement, even though it is a subsidy which is contingen upon export performance within the meaning of Article 3.1(a) of that Agreement. The Panel did not rule on these issues, and the lack of Panel findings on these issues was not appealed.(30)"

6.27 Nor do we accept Brazil's contention that we should infer some implicit finding on this issue by the Appellate Body. The fact that the Appellate Body considered and decided the issue of whether PROEX payments are used to "secure a material advantage in the field of export credit terms" does not mean that the Appellate Body accepted (nor, for that matter, that it rejected) Brazil's view that the first paragraph of item (k) can be used to establish that an export subsidy is "permitted". We decline to speculate about how the Appellate Body might have resolved this issue had it been before it. Rather, we will make our finding on this issue on the basis of the SCM Agreement as interpreted in accordance with customary rules of public international law.

 (ii) The relationship between Article 3.1(a) and the Illustrative List of Export Subsidies

6.28 In examining whether the first paragraph of item (k) can be used to establish that a subsidy which is contingent upon export performance within the meaning of Article 3.1(a) is nevertheless "permitted", our starting point is of course the text of the SCM Agreement. In this respect, and turning first to the text of Article 3.1(a), we note that that Article states that:

"Except as provided in the Agreement on Agriculture, the following subsidies within the meaning of Article 1, shall be prohibited:

(a) Subsidies contingent [footnote omitted], in law or in fact, whether solely or as one of several other conditions, upon export performance, including those illustrated in Annex I ⁵;

........

⁵ Measures referred to in Annex I as not constituting export subsidies shall not be prohibited under this or any other provision of this Agreement.

6.29 Leaving aside for the moment the issue of the role of footnote 5 – an issue to which we will return shortly – we consider that two conclusions can be derived from the text of Article 3.1(a)

6.30 First, Annex I is purely illustrative, i.e., it does not purport to be an exhaustive list of export subsidies. In other words, it contains examples of prohibited export subsidies. It is clear, however, that it is legally possible – and, as a matter of fact, highly likely – that there are prohibited export subsidies within the meaning of Article 3.1(a) that do not fall within the scope of Annex I. Should there be any doubt on this score – and neither the parties nor the third parties have expressed any such doubt – this conclusion is borne out by the title given to Annex I, to wit, "Illustrative List of Export Subsidies".

6.31 Second, a measure that falls within the scope of the Illustrative List is deemed to be a prohibited export subsidy. In other words, a Member may establish that a measure is a prohibited export subsidy by going directly to the Illustrative List, without first demonstrating that a measure falls within the scope of Article 3.1(a). This is confirmed from the words "subsidies contingent . . . upon export performance, including those illustrated in Annex I" (emphasis added), which in their ordinary meaning tell us that measures identified in the Annex are ipso facto "subsidies contingent upon export performance".

6.32 There is however a third conclusion that we cannot draw from the text of Article 3.1(a). Canada argues that a finding that the Illustrative List could be used a contrario to establish that measures were "permitted", would turn the Illustrative List into an exhaustive list. We do not agree. Rather, another possible interpretation is that offered by Brazil but perhaps expressed most clearly by the United States as third party:

"The Illustrative List does not deal with all possible financial contributions, but for those it does deal with, it establishes, by virtue of footnote 5, a dispositive legal standard insofar as prohibited subsidies are concerned.(31)"

Without necessarily agreeing with the US interpretation of the role of the Illustrative List – as our subsequent discussion will clearly demonstrate – we do not consider that we can conclude, based on the mere fact that the Illustrative List is "illustrative", that the List cannot be used a contrario.

(iii) The role of footnote 5 to the SCM Agreement

6.33 How thus may we resolve the question whether and under what conditions the Illustrative List can be used to demonstrate that a subsidy which is contingent upon export performance is not prohibited, i.e., that it is "permitted"? One possibility would be to resort to general interpretive techniques. Thus, it could be argued that the Panel should interpret the Illustrative List a contrario sensu, a term defined as meaning "on the other hand; in the opposite sense"(32), or should apply the principle of lex specialis. For the reasons discussed below, however, we need not rely on such general principles in this case.

6.34 The drafters of the SCM Agreement must have recognized that the insertion of the Illustrative List of Export Subsidies – which was imported with only minor modifications from the Tokyo Round Subsidies Code – into an Agreement that contained for the first time definitions of "subsidy" and "export subsidy" would create interpretive difficulties, as the SCM Agreement provides us with a specific textual basis to resolve this question. This textual basis is footnote 5 to the SCM Agreement (33)

 Footnote 5 provides that:

"Measures referred to in Annex I as not constituting export subsidies shall not be prohibited under this or any other provision of this Agreement"

6.35 Brazil contends that payments within the meaning of the first paragraph of item (k) that are not used to secure a material advantage in the field of export credit terms fall within the scope of this footnote. We disagree.

6.36 In its ordinary meaning, footnote 5 relates to situations where a measure is referred to as not constituting an export subsidy. Thus, one example of a measure that clearly falls within the scope of footnote 5 involves export credit practices that are in conformity with the interest rate provisions of the Arrangement on Guidelines for Officially Supported Export Credits ("Arrangement"). The second
paragraph of item (k) provides that such measures "shall not be considered an export subsidy prohibited by this Agreement". Arguably, footnote 5 in its ordinary meaning could extend more broadly to cover cases where the Illustrative List contains some other form of affirmative statement that a measure is not subject to the Article 3.1(a) prohibition, that it is not prohibited, or that it is allowed, such as, for example, the first and last sentences of footnote 59(34) and the proviso clauses of items (h)(35) and (i)(36) of the Illustrative List.(37)

6.37 The first paragraph of item (k), however, does not contain any affirmative statement that a measure is not an export subsidy nor that measures not satisfying the conditions of that item are not prohibited. To the contrary, the first paragraph of item (k) on its face simply identifies measures that are prohibited export subsidies. Thus, the first paragraph of item (k) on its face does not in our view fall within the scope of footnote 5 read in conformity with its ordinary meaning.

6.38 We recall the view of Brazil and the United States that "the Illustrative List does not deal with all possible financial contributions, but for those it does deal with, it establishes, by virtue of footnote 5, a dispositive legal standard insofar as prohibited subsidies are concerned.(38)" In other words, we understand them to argue that, with respect to financial contributions dealt with by the Illustrative List, the List provides the sole basis to determine whether the measure is prohibited or permitted. While we agree that an illustrative list could in principle operate in such a manner, we do not consider that such an interpretation is readily supported by the text of footnote 5 itself. To the contrary, if the drafters had intended the meaning which the United States attributes to footnote 5, they could certainly have found appropriate language to do so.

6.39 The United States advances arguments based on the negotiating history of footnote 5 in support of its broad interpretation of that footnote to apply to the first paragraph of item (k). In this respect, it points out that in a Chairman's text of the SCM Agreement known as Cartland III, footnote 5 provided as follows:

"Measures expressly referred to as not constituting export subsidies shall not be prohibited under this or any other provision of this Agreement." (emphasis added)(39).

As the United States correctly observes, a new Chairman's text (known as "Cartland IV") was released just a few days later(40). In that new text, the word "expressly" was dropped from the footnote, which took its present form. In the view of the United States, this change demonstrates that the drafters "intended to expand, rather than restrict" the scope of footnote 5, and that "they did not intend the sort of narrow construction of footnote 5 advanced by Canada and the EC.(41}"

6.40 We agree with the United States that the deletion of the term "expressly" appears to have broadened the scope of footnote 5 in Cartland IV beyond its scope in Cartland III. We do not agree, however, that it served to broaden footnote 5 to the extent suggested by the United States. As we discussed above, the Illustrative List contains – and already contained at the time of Cartland III and IV – a number of provisions that include affirmative statements that arguably represent authorizations to use certain measures. The language of Cartland III ("expressly referred to") could have precluded asserting that footnote 5 applied to any of these provisions, and it may be that the purpose of the modification was to rectify this situation. If on the other hand the intention of the drafters in changing footnote 5 had been to extend the scope of that footnote to cover situations where the Illustrative List merely referred to things that were export subsidies, they might have been expected to modify the structure of the second part of the footnote, and not merely delete the word "expressly". At the very least, we conclude that the implications of the negotiating history referred to by the United States are inconclusive and cannot lead us to disregard the ordinary meaning of the footnote.

6.41 Of course, it could be argued that, based on an a contrario argument, the Illustrative List permits admitted export subsidies even where those subsidies do not fall within the scope of footnote 5. As we have already indicated, however, the drafters have provided us with a specific textual provision that addresses the issue when the Illustrative List can be used to demonstrate that a measure is not a prohibited export subsidy. The fact that this footnote was adjusted on at least one occasion suggests that the drafters gave this issue consideration and provided the answer to this question(42). If we were to conclude that the Illustrative List by implication gave rise to "permitted" measures beyond those allowed by footnote, we would be calling into serious question the raison d'être of footnote 5.

 (iv) The material advantage clause and the principle of effective treaty interpretation

6.42 Brazil, and the United States as third party, contend that a finding that the first paragraph of item (k) cannot be used a contrario to permit export credits and payments that are not used to secure a material advantage would render the "material advantage" clause ineffective( 43). We do not agree. In our view, the primary role of the Illustrative List is not to provide guidance as to when measures are not prohibited export subsidies – although footnote 5 allows it to be used for this purpose in certain cases – but rather to provide clarity that certain measures are prohibited export subsidies. Thus, it would be possible to demonstrate that a measure falls within the scope of an item of the Illustrative List and was thus prohibited without being required to demonstrate that Article 3, and thus Article 1, was satisfied. To borrow a concept from the field of competition law, the Illustrative List could be seen as analogous to a list of "per se" violations. Seen in this light, the material advantage clause is not "ineffective", in the sense that it is reduced to redundancy or inutility, by a finding that the first paragraph of item (k) cannot be used a contrario to establish that a measure is permitted. To the contrary, the material advantage nevertheless continues to serve an important role by narrowing the range of measures that would otherwise be subject to the "per se" violation set forth in the first paragraph of item (k), as discussed below

6.43 Let us consider the first situation envisioned by the first paragraph of item (k), the grant by governments of export credits at rates below their cost of funds. It may generally be assumed that in such circumstances there will be a benefit to the recipient and thus a subsidy. This is however not always the case. Whenever a government's cost of funds is higher than that of the borrower, a loan at below the government's cost of funds may nevertheless fail to confer a benefit on the recipient. For example, Brazil argues in this dispute that its cost of funds is in excess of 13 per cent. By contrast, it is likely that many purchasers of Brazilian exports could obtain private export credit financing, not benefiting from government intervention of any kind, at an interest rate significantly lower than 13 per cent. Thus, direct financing by Brazil in these circumstances could well entail a cost to the government but provide no advantage, material or otherwise, to the recipient. Under these circumstances, and in the absence of the material advantage clause, Brazil would be prohibited from providing export credits at an interest rate lower than 13 per cent(44) , even if the export credits provided no advantage whatsoever(45). The role of the material advantage clause in this situation is to narrow the scope of the per se prohibition in such cases.

6.44 A similar situation could arise in cases of payments under the first paragraph of item (k). Without the material advantage clause, a complainant could demonstrate the existence of a prohibited subsidy merely by demonstrating the existence of a payment within the meaning of item (k). However, a financial institution in a developing country may have a higher cost of funds than financial institutions in developed countries, and thus be unable to provide export credits on terms competitive with those of foreign financial institutions. A payment by Brazil that allowed a Brazilian financial institution to provide export credits to an overseas customer on precisely the same terms as that customer could have obtained in international financial markets could, absent the material advantage clause, constitute a prohibited export subsidy, even though the borrower – and hence the exporter – was no better off than it would have been but for the payment(46). The material advantage clause narrows the scope of the "per se" violation in the first paragraph of item (k) and precludes this results(47)

6.45 In light of the foregoing, we consider that the "material advantage" clause would not be rendered "ineffective" by a finding that the first paragraph of item (k) cannot serve as a basis to establish that a measure is "permitted".

(v) Developing countries and the object and purpose of the SCM Agreement

6.46 Finally, we recall Brazil's view that the first paragraph of item (k) must be read to "permit" payments that are not used to secure a material advantage – and that for this reason footnote 5 must be read broadly to apply to the first paragraph of item (k) – in order to ensure that developing country Members are not placed at a "permanent, structural disadvantage" in the field of export credit terms. Because this argument appears to us to be at the core of Brazil's defence, we consider that we must address it in some detail.

6.47 We agree with Brazil that the SCM Agreement should not be interpreted in a manner that provides special and less favourable treatment for developing country Members in the field of export credit terms if the text of the Agreement permits of an alternative interpretation. In particular, an interpretation of the SCM Agreement that allowed developed country Members to consistently offer export credit terms more favourable than those that could in practice be offered by developing country Members(48) – at least as of the date the export subsidy prohibition applies to any given developing country Member – would be at odds with one of the objects and purposes of the WTO Agreement generally and the SCM Agreement specifically(49).

6.48 We consider however that the broad reading of footnote 5 urged by Brazil is not necessary in order to ensure equitable treatment for developing country Members. To the contrary, we fear that a broad interpretation of footnote 5 would have the opposite effect, and we consider that the natural reading of the footnote discussed above is more in keeping with this important object and purpose of the WTO Agreement

6.49 The essence of Brazil's argument in this Article 21.5 dispute, and in the original dispute which gave rise to the recommendation the implementation of which we are considering here, is that items (j) and (k) of the Illustrative List permit developed country Members to provide, consistent with the WTO Agreement and the Arrangement, export credit terms that a developing country would not be able to meet. Brazil further considers that the only way in practice to rectify this imbalance is to interpret the first paragraph of item (k) to permit Members to provide payments in so far as they are not used to secure a material advantage and to interpret that clause in a sufficiently broad manner so as to allow developing countries to meet developed country export credit terms(50).

6.50 In the original dispute, Brazil's developing country argument focused on the second paragraph of item (k). We will therefore first address the implications of that paragraph for developing countries.

6.51 The second paragraph of item (k) creates a safe harbour for export credit practices that are in conformity with the interest rate provisions of the Arrangement(51). The Arrangement is a plurilateral "gentlemen's" agreement, negotiated in the context of the Organization for Economic Cooperation and Development. The purpose of the Arrangement, as stated in its Introduction, is to "provide a framework for the orderly use of officially supported export credits" and to "encourage competition among exporters from the OECD-exporting countries based on quality and price of goods and services rather than on the most favourable officially supported terms". The Arrangement sets forth certain guidelines with respect to the terms and conditions of officially supported export credits with repayment terms of two years or more, including minimum interest rates for export credits benefiting from official financing support(52) based on Commercial Interest Reference Rates, or CIRRs. There is a CIRR for the currency of each Participant to the Arrangement, which is constructed based upon long-term bond yields for that Participant plus a fixed margin (which for most currencies is 100 basis points, i.e., one percentage point).

6.52 Brazil does not dispute that any Member, whether or not a Participant to the Arrangement, can invoke the second paragraph of item (k) in respect of its export credit practices which are in conformity with interest rate provisions of the Arrangement. Thus, in the case at hand, Brazil could provide dollar-denominated export credits in respect of Brazilian regional aircraft on terms that might otherwise be prohibited by Article 3.1(a) of the SCM Agreement, provided those export credits conformed to the interest rate provisions of the Arrangement.

6.53 Brazil argued, however, that developing countries could not afford to provide direct export credit financing at the CIRR rate, because of their high cost of funds, and thus could not in practice use the safe harbour created by the second paragraph of item (k). In order to avoid the high cost of direct financing, developing countries such as Brazil had to use a system of payments in support of export credits provided through commercial banks. Because commercial lenders in many cases have a lower cost of borrowing than the governments of developing countries, those governments could afford to "buy down" interest rates provided by commercial lenders at much lower cost than if they offered direct export credit financing itself(53). Thus, developing countries needed to be able to use the first paragraph of item (k) as a safe harbour for payments that were equivalent in effect to the direct financing provided pursuant to the safe harbour in the second paragraph of item (k) by developed countries. This would only be possible if the first paragraph of item (k) could be used to establish that "payments" under the first paragraph of item (k) were "permitted" under certain circumstances.

6.54 Brazil's argument in the original dispute was not well-founded. Under the Arrangement, minimum interest rates in the form of CIRRs apply with respect to "official financing support", which includes "interest rate support". Thus, there is no reason why a developing country could not invoke the second paragraph of item (k) in respect of a payment scheme such as PROEX, provided that it is "in conformity with the interest rate provisions" of the Arrangement. In short, Brazil's argument that developing country Members needed to be able to use the first paragraph of item (k) as a safe harbour for their export credit interest buy-down schemes (and that footnote 5 thus had to be interpreted to apply in respect of the first paragraph of item (k)) because they could not in practice benefit from the safe harbour in the second paragraph was, in our view, simply incorrect(54)

6.55 In this implementation dispute, Brazil continues to argue that it must be allowed to use the first paragraph of item (k) to establish that an admitted export subsidy is "permitted" so that it can ensure the availability of WTO-consistent export credit financing for Brazilian products on terms equivalent to those that Canada is allowed to provide by the SCM Agreement and the Arrangement. Specifically, Brazil argues that Canada is allowed by the Arrangement and the SCM Agreement to provide or support below-CIRR export credits which, in the absence of the legal interpretations of the first paragraph of item (k) advanced by Brazil, cannot be met by Brazil as a practical matter without violating its WTO obligations.

6.56 In our view, however, the rules of the SCM Agreement as properly interpreted do not give rise to what Brazil refers to as a "permanent, structural disadvantage" in the field of export credit terms. We consider, however, that an unduly broad interpretation of footnote 5 to mean that measures not prohibited by an item of the Illustrative List are permitted would place developing country Members at a systematic disadvantage in respect of export credits(55)

6.57 To understand why this is so, we will first consider the implications in respect of direct export credit financing if the Panel were to find that footnote 5 should be interpreted to provide that measures not prohibited by the first paragraph of item (k) were "permitted". Under the first paragraph of item (k),

"[t]he grant by governments . . . of export credits at rates below those which they actually have to pay for the funds so employed . . . in so far as they are used to secure a material advantage in the field of export credit terms"

is an export subsidy prohibited by the SCM Agreement. The two conditions for the grant of export credits to fall within the scope of this paragraph – that (a) they are at rates below the government's cost of funds, and (b) they are used to secure a "material advantage" – are cumulative, i.e. they must both be satisfied in order for an export credit to fall within the scope of the paragraph. Thus, if we were to find that this paragraph could be used not only to establish that a measure is prohibited, but also to establish that certain measures are "permitted", it would follow that a WTO Member benefited from a safe harbour and provided a "permitted" export subsidy whenever it provided an export credit at above its own cost of funds (whether or not that export credit was used to secure a material advantage in the field of export credit terms).

6.58 As Brazil itself has so forcefully argued before the Panel, developing countries' costs of borrowing are almost inevitably higher than those of developed countries(56) . Accordingly, if we adopted the interpretation advocated by Brazil, the first paragraph of item (k) would "permit" developed countries to provide export credits at an interest rate – the developed countries' own cost of funds – which developing countries would almost never be able to meet without falling afoul of the SCM Agreement. Thus, not only is a broad interpretation of footnote 5 not necessary in order to prevent placing developing countries at a "permanent, structural disadvantage" in the field of export  credit terms but, to the contrary, such a broad interpretation of footnote 5 would in fact place developing countries at precisely the type of disadvantage in the field of export credit terms feared by Brazil.

6.59 The same situation exists in respect of item (j) of the Illustrative List. Brazil argues that its interpretation of the first paragraph of item (k) is necessary to allow it to meet export credit terms provided by developed country Members through export credit guarantees(57). If footnote 5 is interpreted broadly to encompass the first paragraph of item (k), however, it presumably would also apply to item (j) and thus "permit" export credit guarantees at premium rates adequate to cover long-term operating costs and losses, even where the guarantees constituted a subsidy contingent upon export performance within the meaning of Article 3.1(a)(58). As Canada points out, however, in the case of a government guarantee, a lending bank establishes financing terms in light of the risk of the guarantor government, not the borrower(59). Developed countries generally present a lower risk of default than developing countries, and a developing country may often be perceived as posing a higher risk than even the borrower to whom a guarantee might be extended. As a result, while developing countries in theory could utilise any "safe harbour" under item (j) to provide loan guarantees at the same premium rates as developed countries, the effect of guarantees by developing country Members on the interest rate of the guaranteed export credits would be minimal or non-existent in most cases. In other words, a broad reading of footnote 5 would, in respect of item (j), allow developed countries to support export credits at interest rates that would be consistently lower than those of export credits supported by developing countries

6.60 If, on the other hand, we interpret footnote 5 in accordance with its ordinary meaning, and conclude that it does not apply to items such as the first paragraph of item (k) and item (j), then all WTO Members are faced with a common set of rules in respect of export credit practices(60). First, they can ensure that those practices do not confer a benefit within the meaning of Article 1 and are therefore not subsidies(61). Because the existence of benefit is determined based on the existence of a benefit to a recipient, and without regard to whether there is a cost to the government(62), all Members compete on a level playing field in respect of this assessment, i.e., a measure which constitutes an export subsidy when provided by Brazil ipso facto will also constitute a subsidy when provided by Canada, and vice versa.

6.61 Second, they can establish that a measure that is a subsidy contingent on export performance is nevertheless permitted because it benefits from the safe harbour provided by the second paragraph of item (k) for export credit practices that are in conformity with the interest rate provisions of the  Arrangement. As noted earlier in this Report (para. 6.52, supra), the export credit practice of a Member which is not a Participant to the Arrangement but which "in practice applies the interest rate provisions" of the Arrangement benefits from the safe harbour of the second paragraph of item (k) provided that the practice is "in conformity with those [i.e., the interest-rate] provisions."

6.62 We have already seen that, even if a developing country Member cannot in practice afford to provide direct export credit financing at the CIRR rate, it can take advantage of the safe harbour in the second paragraph of item (k) by providing interest rate support in order to bring export credits provided by commercial lenders down to the CIRR rate(63). The question remains whether the second paragraph of item (k) would otherwise permit developed country Members to provide or support export credits which developing countries could meet only through the a contrario invocation of the first paragraph of item (k) argued by Brazil

6.63 In this respect, Brazil first refers to the issue of "market windows". According to Brazil, some Participants to the Arrangement, including Canada, take the view that export credits provided by their export credit agencies are not "official support" and thus not subject to the terms of the Arrangement if they are provided at rates equal to or above their cost of funds(64). According to Brazil, "this means that developed countries that are able to borrow US dollars at a rate below the CIRR rate are able to lend at that below-CIRR rate in conformity with the Arrangement as presently interpreted"(65). In other words, Brazil seems to be arguing that developed countries are permitted by the Arrangement, and thus by the WTO Agreement, to provide such below-CIRR export credits. Because developing countries have a higher cost of funds than do developed countries, their minimum interest rate under the second paragraph would be CIRR, and they would be unable to meet developed countries' market window operations. Thus, Brazil argues, developing countries must be "permitted" by operation of the first paragraph of item (k) to make payments resulting in export credits on equivalent terms.

6.64 Canada responds that Brazil confuses Canada's position on market windows. In Canada's view, the term "market windows" refers to circumstances where an export credit agency offers direct financing on terms comparable to those the recipient may receive in the market. In such circumstances, the agency is operating similarly to a private commercial bank, rather than as an official export credit agency. Thus, Canada argues that, for example, the Canadian Export Development Corporation, when operating under its Corporate Account, does not in any event confer a benefit and accordingly does not provide a subsidy within the meaning of Article 1 of the SCM Agreement (66)

6.65 We understand that the "market windows" debate, which is an ongoing one among the Participants, relates to whether or not certain export credit practices are "official support" and thus subject to the Arrangement. An export credit practice is not however "in conformity with" the "interest rate provisions" of the Arrangement within the meaning of the second paragraph of item (k) of the SCM Agreement merely because it is not subject to the Arrangement. To the contrary, we consider that the "interest rate provisions" to which the second paragraph of item (k) refers are those provisions that establish minimum interest rates(67). At present, the only generally applicable minimum interest rate under the Arrangement is the CIRR. Thus, an export credit which is provided through "market windows" at an interest rate below CIRR cannot be said to be "in conformity with" the interest rate provisions of the Arrangement and thus cannot benefit from the safe harbour provided for in that paragraph(68). Accordingly – and in light of our understanding of the ordinary meaning of footnote 5 – whether an export credit practice involving below-CIRR interest rates is or is not prohibited by the SCM Agreement will depend solely upon whether or not it falls within the scope of Article 3.1(a), and in particular whether it confers a benefit and therefore represents a subsidy within the meaning of Article 1(69).

6.66 In short, an interpretation of footnote 5 which accords with its ordinary meaning and does not allow the first paragraph of item (k) to be read in an a contrario manner to "permit" certain measures not only does not generate a "permanent, structural disadvantage" for developing country Members in the field of export credit terms but, to the contrary, prevents developed country Members from obtaining, through the a contrario invocation of the Illustrative List, a consistent advantage over developing countries in the field of export credit terms. Accordingly, we do not agree with Brazil that the object and purpose of the SCM Agreement requires us to read footnote 5 more broadly than its ordinary meaning would suggest.