WORLD TRADE
ORGANIZATION |
WT/DS70/RW
9 May 2000
(00-1750) |
|
Original: English |
CANADA - MEASURES AFFECTING THE EXPORT
OF CIVILIAN AIRCRAFT
Recourse by Brazil to Article 21.5 of the DSU
Report of the Panel
(Continuation)
(f) Will any Canada Account transactions in the regional aircraft sector be
provided in the form of export credit guarantees? If so, in what sense does
Canada consider that such transaction would be in conformity with the interest
rate provisions of the Arrangement.
Response
- Canada Account transactions in the regional aircraft sector will typically
take the form of direct loans, although, for example, guarantees could also be
envisaged. Guarantee transactions would also have to be in compliance with the
relevant interest rates provisions of the Arrangement.
- The package of disciplines reflected in the interest rates provisions is as
important in a guarantee context as it is in the context of direct financing.
See also Canada's response to question 2(b).
- All future Canada Account transactions, whether undertaken on a direct
lending basis or on a guarantee basis, will comply with the relevant interest
rates provisions of the OECD Arrangement.
(g) How is it envisioned that the provision of official support for cosmetic
interest rates with respect to the regional aircraft sector will be prevented
(Article 19)?
Response
- Canada will simply not offer any cosmetic interest rates as defined in
Article 18 when entering into regional aircraft transactions on Canada Account.
- As a matter of clarification, interest rates below CIRR offered under the
matching provisions of the Arrangement are not cosmetic interest rates because
they do not involve compensatory measures (i.e. hidden measures) in the form of
contractual adjustments. Matching is "open", not "cosmetic".
(h) Could Canada please describe how it will be ensured that appropriate
risk-based premiums will be charged on Canada Account transactions in the
regional aircraft sector. Why are the premium-related provisions of the
Arrangement other than Article 22.a not, in Canada's view, part of the "interest
rate provisions" of the Arrangement?
Response
- Canada selected only Article 21.a) because it articulates the principle of
risk-based premiums and is the only premium-related provision that is available
to WTO members that are not also OECD Participants. Clearly, the obligation to
comply with the OECD Arrangement in its entirety imposes disciplines on Canada
Account transactions in the regional aircraft sector that go beyond the
obligation to adhere to the mere principle of Article 21.a). There are
provisions in the Arrangement that add greater precision as to the nature of
these premium-related disciplines.
- Basically, OECD Participants have agreed on a common system for classifying
countries into risk categories and setting minimum premiums in relation to the
risk levels associated with each category that are expected to cover the
Participants' long-term operating costs and losses. The actual country
classifications and premium levels applicable to countries remain confidential
because OECD Participants would like to avoid political interference with the
country classification process. For an extensive description of the OECD premium
system, we attach the OECD communications piece on premiums as a Canada's
Exhibit 17.
- Canada recognises that it would be unreasonable to expect a non-OECD WTO
Member to charge a minimum premium level which is unknown to such Member, in
order for that Member to be in full compliance with the interest rates
provisions of the Arrangement. Canada is prepared to accept the consequence that
in relation to premiums and for the purpose of the second paragraph of Item (k),
a higher threshold is imposed on those WTO Members that are also OECD
Participants.
(i) Please explain in detail how the matching provision will be applied with
respect to Canada Account transactions in the regional aircraft sector. What, if
any, are the limits on matching under the Arrangement? Does Canada consider that
any Canada Account transaction in the regional aircraft sector that "matches",
in the sense of the Arrangement, a non-complying transaction would be in
conformity with the interest rate provisions of the Arrangement? Please explain.
Response
- Canada confirms that it considers any Canada Account transaction in the
regional aircraft sector that is undertaken in full compliance with the matching
provisions of the OECD Arrangement, to be in conformity with the Arrangement and
its interest rates provisions.
- This is because matching itself is an interest rates provision of the
Arrangement as it specifically allows the offering of terms and conditions that
are more favourable than otherwise allowed under the Arrangement, provided they
do not render the offer more favourable than the competing offer that is
officially supported by another government and includes non-compliant terms and
conditions for the same transaction.
- Clearly, "overmatching", i.e. offering more favourable terms and conditions
than the competing, non-compliant offer, is not compliant with the Arrangement.
Any case of matching by an OECD participant such as Canada must be notified to
the other OECD Participants prior to the issuance of the commitment and will be
scrutinised by them, particularly in cases of "non-identical matching" which are
subject to a discussion procedure. "Non-identical matching" is still compliant
provided it is not "overmatching". For instance, Canada would not have an issue
with another Participant notifying a "non-identical matching" at CIRR over 12
years to match a non-compliant offer at CIRR minus 5 per cent over 10 years as
there is no reason why a matching Participant should be obliged to provide a
cash subsidy if another tool is available to reduce the distortion created by
the non-compliant offer to be matched.
- For more details on the matching procedures of the Arrangement, we refer the
Panel to Articles 50 through 53. We draw the Panel's attention to the high level
of due diligence and disclosure required in the case of matching of a
non-Participant. These cases are rare.
- In Canada's view, the right to match is also available to WTO members that
are not OECD Participants. If the matching transaction of a non-Participant were
challenged at the WTO and found to provide a prohibited export subsidy, the
"safe haven" of Item (k) would be available to that non-Participant, provided
that the matching was undertaken in good faith and on the basis of reasonable
due diligence.
(j) Please describe in detail, including the nature of the differences, any
particular provisions of the Sector Understanding on Export Credits for Civil
Aircraft (Annex III of the Arrangement) that prevail over corresponding
provisions of the Arrangement. To the extent that provisions of the Sector
Understanding apply, will all Canada Account transactions in the regional
aircraft sector fall within their scope and be in full compliance with them?
Please explain in detail.
Response
- Annex III prohibits tied aid, except for humanitarian purposes (Article 24 of
Annex III). This is an additional restriction applicable to the regional
aircraft sector that Canada will obviously respect when entering into regional
aircraft transactions on Canada Account.
- Annex III also sets different maximum repayment terms. Rather than linking
the repayment term to the wealth of the recipient country, the Sector
Understanding ties it to the type (and effectively, the size) of the aircraft
being exported. This rule can be more generous in one case (e.g. a Category A
aircraft going into a Country I country) and more restrictive in another case
(e.g. a Category B aircraft going into a Category II country).
- As envisaged in Article 3, the sector-specific rule (i.e. Article 21 of Annex
III) prevails over and effectively replaces the general Arrangement rule (i.e.
Article 10).
- Article 21 and Article 24 of Annex III are the interest rates provisions of
the Sector Understanding that govern the repayment term and tied aid support.
They are applicable to all Canada Account transactions in the regional aircraft
sector, and all Canada Account transactions in the regional aircraft sector will
comply with these two articles, except in cases of matching..
(k) In the context of the responses to the above questions, would Canada please
provide full details on all "variations" "allowed" under the relevant provisions
of the Arrangement, referred to inter alia in the introductory paragraph of the
Canada's paper ("Within limits, variations of certain of these provisions are
permitted under the terms of the Arrangement"). Will Canada Account transactions
in the regional aircraft sector in all cases respect the applicable limits on
any variations? Please explain in detail.
Response
- Canada Account transactions in the regional aircraft sector will respect the
applicable limits on allowed variations.
- Allowed variations are called Permitted Exceptions under the Arrangement, and
a comprehensive list can be found in Articles 48 and 49. The only Permitted
Exception that is relevant for the purpose of regional aircraft transactions is
the variation listed under Article 49 a) 2), which relates to irregular payment
practices with respect to principal and interest.
- One formal limitation on irregular payment practices is the no derogations
engagement in relation to the repayment date of the first instalment of
principal (Article 27). Generally speaking, and acknowledging that not all of
the OECD Participants' conventions can be found written in the Arrangement text,
the basic principle is that Permitted Exceptions are not supposed to make the
offer more favourable than the most favourable terms and conditions that are
allowed under the Arrangement. For instance, Canada would not have an issue with
another Participant notifying a modest balloon payment after 7 years if the
average life of the loan remained shorter than in the case of a standard
repayment profile of 20 equal, semi-annual instalments.
- The number of notifications of Permitted Exceptions generally exceeds 100 per
year. Participants clearly consider Permitted Exceptions to be "permitted", i.e.
in conformity with the Arrangement.
(l) Will Canada please elaborate on its apparent pledge, at para. 71 of its oral
statement, that Canada "will also respect the non-derogation commitment set
forth in the Arrangement".
Response
- Article 27.a) of the Arrangement states that "(t)he Participants shall not
derogate from maximum repayment terms, minimum interest rates, minimum premium
benchmarks (...), the six-month limitation on the validity period for export
credit terms and conditions, or extend the repayment term by extending the
repayment date of the first instalment of principal (...)."
- A derogating Participant is not in compliance with the Arrangement, nor in
compliance with its interest rates provisions. As Canada Account transactions
must comply with the Arrangement, Canada will not derogate from the Arrangement.
- Canada notes that derogations are different from Permitted Exceptions and are
also different from matching. Permitted Exceptions and matching are compliant;
derogations are not.
Q4. Does Canada agree with the EC that Canada has "undertaken" to respect all of
the provisions of the OECD Arrangement? If so, does Canada consider that this
"undertaking" is legally binding on Canada Account transactions in the regional
aircraft sector, and would Canada please elaborate on the specifics of this
undertaking, making reference both to the interest rate provisions of the
Arrangement as identified by Canada and to Canada's responses to questions 1-3,
above.
Response
- Canada has undertaken to respect all of the provisions of the OECD
Arrangement with respect to financing transactions under the Canada Account.
Through the Ministerial Policy Guideline the Minister for International Trade
has undertaken not to authorise any financing transaction under Canada Account
that does not comply with the OECD Arrangement. While the Ministerial Guideline
is an administrative instrument and not a legislative one, for all practical
purposes the effect is almost the same. This is because the exercise of
discretion under the Canada Account programme is in the hands of the Minister
and it is the Minister who has given the undertaking. In addition, officials
administering the programme and/or referring financing transactions to the
Minister for authorization will act in accordance with the Guideline. With
respect to the difference between administrative guidelines and legislative
instruments we refer the Panel to the comments made by the Panel in United
States - Sections 301 -310 of the Trade Act of 1974 (Sections 301-310) where it
stated:
"We recognize of course that an undertaking given by one Administration can be
repealed by that Administration or by another Administration. But this is no
different from the possibility that statutory language under examination by a
panel be amended subsequently by the same or another Legislator."
- The critical question, according to the Panel is whether the instrument in
question is "lawful and effective." In this case, the Ministerial Guideline is
effective in requiring that all Canada Account financing transactions in the
regional aircraft sector comply with the OECD Arrangement and thereby comply
with the interest rates provisions of the Arrangement.
- Canada's view of which interest rates provisions are pertinent to this
dispute is fully set out in Canada's exhibit -- and a detailed explanation of
how these would apply in practice can be found in Canada's responses to
questions 1 and 2 from the Panel.
Q5. Would Canada please indicate the extent of and basis for its compliance
obligations with respect to Canada Account. In this regard, we note that Brazil
(at paragraph 66 of its second submission) characterizes Canada's position as
being that the Panel's findings did not require Canada to take any action other
than to ensure that the two Canada Account transactions identified in paragraph
54 of Canada's first submission were completed by 18 November 1999. Canada
appears to disagree, as it stated at the meeting with the Panel that it does
consider that the Panel's ruling imposes a legal obligation on Canada to take
remedial action with respect to future Canada Account transactions in the
regional aircraft. Does Canada confirm the Panel's understanding of Canada's
position? Could Canada please discuss the implications, if any, of
Australia-Leather for Canada's arguments as to its obligations concerning Canada
Accounts.
Response
- Yes, Canada confirms the Panel's understanding of Canada's position.
- In the original proceeding, the Panel found that the Canada Account was a
discretionary programme that did not mandate subsidies contingent on export
performance; the Panel therefore made no findings on the Canada Account
programme per se. The Panel concluded, however, that Brazil had established a
prima facie case, unrebutted by Canada, that applications of the Canada Account
programme in the form of two debt financings involving regional aircraft were
subsidies within the meaning of Article 1. (Because these financings were
expressly for exports, the Panel also found them to be contingent in law upon
export performance within the meaning of Article 3.1(a).) The Panel therefore
concluded that "Canada Account debt financing since 1 January 1995 for the
export of Canadian regional aircraft constitutes export subsidies inconsistent
with Article 3.1(a) and 3.2 of the SCM Agreement."
- Although the Panel's conclusion concerned the programme as applied, it did
not appear to be limited by its terms to the two transactions that had been
before the Panel. Consequently, Canada understood the Panel ruling to mean that
it was essential to take steps to ensure that any future financing transactions
involving regional aircraft would be consistent with Canada's obligations under
the SCM Agreement. Canada did so, by issuance of the Ministerial Policy
Guideline making clear that any financing transaction not in compliance with the
OECD Arrangement (necessarily including the interest rates provisions thereof)
will not be approved for Canada Account financing.
- Canada does not believe that the panel decision in Australia - Leather, which
addressed whether the withdrawal of an individual subsidy might, in some factual
circumstances, encompass the repayment of the subsidy, has any implications at
all for the steps Canada it has taken to ensure that any future Canada Account
financings involving regional aircraft are consistent with the SCM Agreement.
Because the discretionary Canada Account programme was not per se found to
mandate prohibited export subsidies, there can be no issue of withdrawing the
Canada Account programme itself. Even Brazil has not argued for that result.
- Nor does Canada believe that Australia - Leather has relevance for the Canada
Account financings that formed the basis for this Panel's conclusion on the
Canada Account as applied. Even assuming that Australia - Leather's
controversial conclusion that repayment may be a required form of "withdrawal"
in some circumstances were to be accepted, it could not, in Canada's view, apply
here. The Australia - Leather case involved a one-time subsidy to a producer and
its replacement measure which were contingent on a still ongoing stream of
exports, which that Panel viewed as remediable only through repayment. In this
dispute, by contrast, the two transactions before the Panel in the original
proceeding were completed, including the export of all aircraft that were
"subsidized", in 1995 and 1998, long before the date for compliance.
Q6. Could Canada please elaborate on the legal basis for its argument that DSU
Article 19.1 would allow the Panel to endorse, as part of its findings under DSU
Article 21.5, the verification mechanism that it has proposed. Are there any
other provisions of the DSU or the SCM Agreement that are relevant to this
issue?
Response
- Canada believes that reciprocal verification provisions would make both
Brazil and Canada more confident of their respective compliance in the future.
The second sentence of Article 19.1 authorizes a panel to "suggest" ways to
implement a recommendation. Canada believes that endorsing the concept of
reciprocal verification arrangements would be a useful suggestion, consistent
with the spirit of Article 19.1.
Questions posed to Canada by the Panel regarding TPC
Q1. Please provide an up-dated version of Exhibit Cdn-9, and provide copies of
all finalized "new" documents not already submitted to the Panel. Please provide
the latest draft version of any "new" document still "under development". If no
draft versions are available, please describe in detail the nature of the
planned changes to the "new" document still under development".
Response
- Exhibit Cdn-9 contains 35 serials of which 11 have already been provided to
the Panel. Appended below are copies of all recently finalized "new" documents,
as well as the latest draft versions of "new" documents still under development.
Moreover, summary sheets describing in detail the nature of the planned changes
to documents for which draft versions are not presently available are also
included. Finally, a new serial, the Contribution Verification Checklist, is
provided in draft form.
- The draft documents submitted with this response are still under active
consideration by TPC management and, therefore, are subject to change.
Similarly, the planning assumptions underlying the summary sheets on documents
not available in draft form could also change as the documents are developed.
However, as all of these document must respect TPC's Terms and Conditions, in
their final form they will not be permitted to request or consider information
concerning the extent to which applicant enterprises do or may export.
- All of the documents identified in Exhibit Cdn-9 that remain to be finalized
will be rolled out as they are completed and approved. It is reiterated that TPC
will not approve contributions to the Canadian regional aircraft industry until
the programme has been fully restructured. Therefore, TPC has a vested interest
in completing this important task in a timely manner. But while time may be
important, it is far more critical that TPC's policy and procedural documents be
revised through a detailed review process that ensures that Canada is honouring
its international obligations.
- The current status of TPC documents are identified below under the three
categories solicited by the Panel, namely:
- finalized "new" documents not already submitted to the Panel;
- "new" documents still "under development"; and
- documents for which draft versions are not available at this time.
Exhibit Cdn-9
Serial No.
|
Document |
Finalised "new" documents not already submitted to the Panel (copies provided)
|
5 |
Financial Data
Outline (retitled) |
6
|
Contribution
Agreement Repayment Terms (retitled) |
30
|
Environmental
Assessment and Review Process |
"New" documents still "under development"(latest draft versions provided)
|
2
|
TPC Repayment Policy |
3
|
Assessment
Guidelines for Due Diligence |
20
|
TPC Review Procedures (including Standard Letters) |
21
|
Special Purpose
Equipment List |
24
|
TPC Project File Structure |
25
|
TPC Policies and Procedures on Incrementally, Irreversibility and
Retroactivity |
28
|
Claims Package for
Clients |
29 |
PSB Integrity Review Checklist |
31
|
Procedures for
Project Amendments (retitled) |
32 |
Claims
Verification Checklist |
33
|
Policy on Eligible
Overhead Costs |
34 |
Policy Guideline for
Treatment of Eligible Equipment costs and Project Assets (retitled) |
New
|
Contribution
Verification Checklist |
Documents for which draft versions are not available at this time (summary
sheets provided)
|
7
|
Statement of Work |
8 & 9
|
TPC Standard Contribution Agreement (merged) |
16
|
Framework Investment
Proposals:
* Industrial Research
* Pre-competitive Development
* Studies |
18 |
TPC Business Plan
(2000/2001-2001/2002) |
22 |
Schedules of Estimated and Actual Project Benefits (retitled) |
23 |
Performance Measures - Project Data Sheet |
26 |
Evaluation Framework |
35 |
Quality Assurance
Checklist
|
Q2. Does Canada agree with Brazil's argument (para. 5 of its oral submission)
that the only way for Canada to remove de facto export contingency is to
"exclude [the regional aircraft industry] from TPC funding opportunities, or
alternatively, to change radically the programme's eligibility and allocation
requirements", and that (para. 17 of Brazil's oral submission)"TPC, as it
applies to the regional aircraft industry, must be withdrawn in its entirety"?
If not, what other ways of implementing the DSB recommendation would be possible
in Canada's view if, hypothetically (and as Brazil claims), the current measures
taken by Canada to comply with the DSB recommendation are not considered a
sufficient change in the factual situation which led to the initial conclusion
that TPC assistance to the regional aircraft industry is de facto contingent on
export?
Response
- Canada rejects Brazil's argument and considers that it is not required to
cease all TPC assistance to the Canadian regional aircraft industry. As noted
previously, based on guidance provided by the Panel and the Appellate Body and
in accordance with the test for de facto export contingency developed therein,
Canada has taken the steps within Canada's control to ensure that any assistance
that TPC may provide in the future to the Canadian regional aircraft industry
will not be contingent on export performance in law or in fact. To go further
and require Canada to "exclude [the regional aircraft industry] from TPC
funding" would go beyond the rulings and recommendations of the DSB and be
contrary to footnote 4 of the SCM Agreement.
- Given the substantial steps already taken, we are aware of no other steps
that Canada could take or needs to take, other than ensuring that future
subsidiary documents and implementing measures as they are adopted conform with
the changes already implemented.
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