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New panel on Canadian aircraft export subsidy

by Chakravarthi Raghavan

Geneva, 12 Mar 2001 -- The Dispute Settlement Body of the World Trade Organization Tuesday set up a panel to go into Brazil’s renewed complaints against Canada over its illegal export subsidies for mid-range regional passenger jet aircraft through export credits and loan guarantees of Canada’s Export Development Corporation (EDC) - by way of its Corporate Account and Canada Account, as well as export credits and guarantees provided by the Canadian province of Quebec.

In other actions, the DSB referred to panels, a US complaint against Belgium for imposing tariffs on imported rice from the US, ignoring the ‘transaction’ values, and an Argentine complaint against Chile over its price-band system and safeguard measures against imports of wheat, wheat flour and edible vegetable oils.

[Separately, Guatemala has taken the first step to start a dispute with Chile on the price-band system and safeguard measures on agricultural products, and has asked for consultations with Chile over this. The Guatemala request does not specify the particular products, merely referring to Chilean notifications.]

The DSB also adopted the Appellate Body ruling against the EC in the anti-dumping complaint by India over imports from India of certain cotton and cotton-type bed linen (SUNS #4848).

The EC said it was taking steps to comply and would issue notifications inviting the Indian exporters concerned to make representations for the EC to hear their case again. The EC, however, added that the practice of ‘zeroing’ by the EC, held to be contrary to the WTO obligations, was also being followed in Indian investigations, and India should cease this practice.

The EC action, for investigation, against the imports of bed linen from India, treated it as a single product, competing with EC domestic production (which has a whole range of the articles described under the item including bed sheets, duvet covers and pillow cases, packaged for sale either separately or in sets, and made up of various types of fibres), and then used subsets for calculating and establishing dumping.

The practice of ‘zeroing’, objected to and found illegal by the AB, is the term used in investigating the existence of margins of dumping, taking account of the averaging of positive dumping margins in investigated products, but ignoring cases where there is a negative margin but giving a zero value to them.

There was no immediate Indian response on whether it was in fact following such a practice.

But the US, in its intervention, expressed its “grave concerns” over the Appellate Body ruling and said it was monitoring the situation carefully. The US was aggrieved that in this case, the AB had not properly applied the “standard of review” found in Article 17.6(ii) of the AD agreement.

Though the US statement, issued in a press release, did not elaborate, trade diplomats said that the US supported the ‘zeroing’ practice and appeared to be of the view that the AD agreement’s “standard of review” provision, namely, deference to the domestic proceedings, meant that the AB should have deferred to the EC ‘interpretation’ of the relevant provisions of the agreement as allowing ‘zeroing’ by ignoring negative margins (for averaging) and treating them as zero.

The Brazil-Canada aircraft dispute is a 4-year old running dispute between Brazil and Canada in the hi-tech trade sector, where the WTO agreement, particularly its subsidies agreement enables the OECD countries to provide export credits under the OECD formula and at rates that developing countries can never match, as well as other subsidies and facilities where unearthing evidence in the possession of the other party can be frustrated by the citing of ‘commercial secrecy’.

The dispute is also a test of the tolerance level of the major industrialized nations in relation to the challenges of developing countries in contesting the global markets in the high-tech sector.

The rules of the WTO agreements on subsidies etc, have been written in such a manner as to enable the practices of industrialized countries to continue. And panel and Appellate Body rulings have complicated the problem of developing countries in challenging these; by first having to establish prima facie, the ‘facts’ of the subsidy practices of the other side (hidden in most cases, through complicated and secretive practices, with evidence invariably in the possession of the other side that can be withheld under arguments of commercial secrecy).

Canada brought the complaints against Brazil, that through its Pro-ex programs Brazil was subsidising exports of its Embraer aircraft. Brazil brought counter-complaints of Canadian subsidies for exports of its Bombardier aircraft. Both aircraft cater to a niche market of medium-range aircraft for regional airlines - a market segment long dominated by Canada but which has been challenged by Brazil.

In the case of the Canadian complaint, which has gone through all the stages - panel, Appellate Body, compliance panel, and an Appellate Body ruling on that, and a WTO authorization to Canada to take trade sanctions, and a new compliance panel looking into Brazilian compliance.

The Brazilian complaint has also similarly gone through several stages (excepting for sanctions), and Brazil has since found new evidence of Canadian subsidies that could not be brought up before the compliance panel, thus forcing Brazil to come up with a new complaint against Canada, which has now been sent to a panel.

Brazil had sought consultations with Canada on this new complaint (after getting evidence, not available to Brazil during the original complaint and compliance panel proceedings, of the Canadian subsidy practices when it surfaced in the Canadian media and statements). Brazil and Canada had held consultations on this new complaint on 21 February, but the consultations failed, and Brazil came up for a panel before the DSB.

In its new complaint, Brazil has said that Canada:

        provides and continues to provide export credits, including financing, loan guarantees, or interest rate subsidy by or through the Canada Account, which are prohibited subsidies;

        has not implemented the report of an Art. 21.5 (compliance) panel asking Canada to withdraw its Canada Account subsidies;

        continues (in defiance of DSB rulings) to grant or offer export credits through the Canada Account; and

        has granted or offered export credits to Air Wisconsin ($400 million, according to Brazil)

Brazil has also complained that the French-speaking Quebec province of Canada, in addition to providing prohibited export subsidies through its ‘Investissement Quebec’, provides export credits and guarantees including loan guarantees, equity guarantees, residual value guarantees and ‘first loss deficiency guarantees’.

At the DSB, Brazil complained that as in its previous consultations with Canada, “no significant information concerning the Canadian programs was made available” in the current Brazil-Canada consultations. In fact, said Brazil, no information at all was made available, thus frustrating the requirement of Art. 4.3 of the DSU, that members enter into consultations “in good faith ... with a view to reach a mutually satisfactory solution.”

Brazil, Amb. Celso Amorim said, would request the panel to examine the export financing provided by Canada’s Export Development Corporation (EDC) - through its ‘Corporate Account’ and through the ‘Canada Account’, as well as the guarantees provided by the Province of Quebec.

Recalling Brazil’s earlier complaints about lack of transparency in Canadian programs and “the double standards [that] Canada applies when comparing financing practices of other members,” the Brazilian statement before the DSB underscored the systemic issues that the panel would have to tackle.

In relation to the EDC’s “Corporate Account”, the panel would have to investigate the issue of government agencies competing with private banks in the so-called ‘market window’.

While some members would like developing countries to be constrained by the OECD (export credit) Arrangement rules, the export credit agencies (ECAs) of a number of developed countries operate in this ‘market window’, paying no regard to the rules and displacing exports of other WTO members.

“These ECAs hope to elude any scrutiny from other members by simply alleging that their interest rates are above cost of funds, and by claiming, without offering any evidence whatsoever, that the rates they offer are equivalent to those practised in the international market.”

“Given the high cost of funds in developing countries, the imbalance of this argument is obvious,” said the Brazilian ambassador, and hoped that the panel would conduct a thorough examination of the issue.

The illegal operation of the Canada Account, he said, was an old issue for the DSB. The program had been first found inconsistent with Canada’s obligations under the Subsidies Agreement in April 1999, and the Art.21.5 review (compliance panel) was concluded in May 2000.

“Since then, Canada has not even attempted to bring the program into conformity with the WTO agreements, despite promises to the contrary, repeatedly made to Brazilian officials."

“In fact, last January, Canada announced that the program would continue to be used in the future to secure contracts for Bombardier with terms that are, as Canada itself acknowledged, more generous than those prevailing in the market. The panel should also address this overt disregard of the multilateral trading system,” he added.

The Quebec Province's investment incentives programmes had been used in the regional aircraft export transactions, and was present in the financing package offered by Canada to Air Wisconsin, “a package that, according to Canadian sources, slashes aircraft prices by $2 million each.”

In this matter, the panel would be faced with serious systemic issues.

One of them was the fact that developed countries could guarantee credits in a way that no developing country ever would. The financing institutions receive guarantees that, in effect, transfer all risks of the operation to the Government guaranteeing the transactions. “In other words, the private bank charges interest rates that it would charge if lending to the guarantor Government itself.”

These loans are offered at rates that are below the CIRR (Commercial Interest Reference Rates) and with repayment terms longer than those established in the OECD Arrangement. If the few provisions of the Subsidies and Countervailing Duties Agreement on this subject were not interpreted, bearing in mind the need to ensure a level playing field for all WTO members, developing countries will forever be facing an insurmountable obstacle in the area of export financing.

The panel, Brazil said, would be dealing with issues of critical systemic importance, not only to Brazil, but also to all developing countries.

“Long-term export financing is an area that was not among the highest priorities of negotiators from developing countries during the previous multilateral trade rounds, for the simple reason that export credit agencies concentrate most of their resources to finance operations of key enterprises or economic sectors that deal with high cost, high technology products, in markets mostly captive of developed countries."

“.... very few provisions of the Subsidies and Countervailing Measures agreement regulate export financing, just a few sentences, actually. These provisions must be interpreted in a way that takes fully into account notions of equity and fairness, which are essential to the preservation and strengthening of the multilateral trading system,” Brazil added.

In its response, Canada expressed its surprise at the Brazilian panel request, arguing that the financing terms being provided to Air Wisconsin (for the Canadian Bombardier planes) were on terms equivalent to those offered by Brazil to its Embraer aircraft. And since Brazil considered its financing to be WTO-consistent, it should hold the Canadian terms too as consistent. Canada’s support was a measured and focussed response to the Brazilian schemes, and Canada hoped that the Art.21.5 compliance panel sitting over the Brazilian scheme would clarify the rules.-SUNS4854

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

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