Tense exchanges over Canadian sanctions against Brazil

by Chakravarthi Raghavan

Geneva, 12 Dec 2000 -- The WTO’s Dispute Settlement Body (DSB), after some testy exchanges between Canada and Brazil, with Canada using language not usually heard in international diplomatic fora, authorized Canada Tuesday to impose trade sanctions for a value of Canadian dollars (C$) 344.2 millions against Brazil in their mutual aircraft subsidy dispute.

Trade diplomats present at the meeting said the atmosphere became tense after the Canadian ambassador, Sergio Marchi, (a former Minister in his country) characterised as “silly” a statement by the Brazilian ambassador, Celso Amorim, about the DSU role against ‘wilder’ assertions of unilateralism (in determining compliance).  While subsequent interventions by the Chair and Amorim’s own explanation about his statement helped smooth matters slightly, the overall atmosphere remained tense and showed up the inadequacies of the system in the face of the mercantalist realities of the WTO behind its ‘free trade, free market’ ideology.

The dispute over Canadian complaint against Brazil, and a Brazilian complaint against Canada, which has gone through two stages of panel and appellate body rulings, compliance panel rulings and appeals on them, and an arbitrator’s finding on the extent of trade sanctions to be permitted—has raised some serious issues about the way the subsidies agreement itself is worded, providing some unfair advantages to the industrialized countries in the high-tech export sectors, as well as the dispute process itself. In the Brazilian counter-complaint against Canada for e.g., Canada was able to refuse to provide details about its financing and support to the Canadian industry on the ground of ‘commercial secrecy’.

But at issue currently is the extent to which Brazil should go back on commitments about external financing already made on export arrangements between the Brazilian firm and purchasers of the aircraft that have been concluded before the ruling.

In a statement Tuesday to the DSB, Amorim said that despite efforts, a mutually satisfactory bilateral solution could not be reached, and this had been hampered by Canada’s “unreasonable demands” over the regulations of a reformed PROEX (the Brazilian export financing programme to help exports by domestic industry).

Brazil, Amorim earlier said, had taken steps to place all future PROEX operations within the framework of the ruling and the DSB recommendations. A, new resolution of the Monetary Council of Brazil had been issued putting into force new regulations for PROEX that he said brought the program into full compliance with Brazil’s obligations. Under the revised program, no equalization would be authorized in amounts that brought the net interest rate (charged to the exporter by Brazil) below the relevant CIRR (Commercial Interest Reference Rate, the benchmark rates set by the OECD).

The Appellate Body in its ruling, Amorim noted, had said that in order for Brazil to establish that PROEX payments were not used to secure a material advantage in the field of export credit terms, Brazil had either to prove that the net interest rates under the revised scheme were at or above the relevant CIRR or an alternative ‘market benchmark’ other than CIRR is appropriate, and that the net interest rates under the revised PROEX were at or above this alternative benchmark.

Instead of using any alternative market benchmark, Brazil had decided to ensure that PROEX payments did not result in interest rates below the relevant CIRR, Amorim added.

Earlier, Amorim had said that in the consultations with Canada, Brazil had offered to provide ‘adequate compensation’ to Canada for Brazil’s decision to honour past commitments in sales under previous regulations which would have benefited the Canadian aircraft company Bombardier and other Canadian companies directly interested. The compensation Brazil had offered was fully consistent with Brazil’s obligations. And while Canada had accepted the ‘compensation option’ from the outset, efforts at mutually acceptable solutions had been hampered by Canada’s “unreasonable demands.”

Canada, Amorim added, had always insisted on sine qua non conditions clearly going beyond the parameters set by the Panel and Appellate Body reports, and trying to get in the process results it wished it could have gotten from the WTO dispute settlement system. Canada, he added, had wanted a verification mechanism, implying commitments contemplated neither in the DSB recommendations nor in the WTO agreements.

Under Canada’s proposals, he said, Brazil financing support to its exporters would have to observe limitations that the Canadian export agency admittedly never followed.

Canada’s Marchi however insisted that the Brazilian proposal did not constitute compliance, but rather it was a “continued debasing of the market”. Canada also wanted Brazil to comply with additional disciplines to PROEX which Canada claimed had been outlined by the panel and the AB.

While the dispute was about export subsidies on aircraft, the PROEX program, Marchi said, also applied to most other Brazilian exports. And in fact, he added, Canada had recently taken counter-vailing duty action against imports of certain steel products from Brazil which received export subsidies including under the PROEX program.

Marchi insisted that Brazil’s claim of compliance would not suffice, and Brazil could not “escape indefinitely” the consequences of its non-compliance by asserting compliance. If Brazil believed that its revised PROEX program was WTO consistent, Brazil should demonstrate it through an appropriate panel process.

This however seemed to suggest that Brazil should try to follow the same path as the EC sought to do in December 1998 over its new banana regime - when it asked the compliance panel to look at its new regime and find it to be in compliance. But the US and others challenged this, and that panel did not go into this.

At the time that Canada had originally asserted Brazil’s non-compliance and had sought WTO/DSB authorization for retaliatory sanctions for an annual amount of C$700 million, it had published a wide range of products on which it wanted to slap 100% duties.

While it got authorization now for C$ 344.2 million, Canada has neither indicated when it will impose the sanctions nor the products on which it will place the duties.

In the case of the US retaliation against the EU over the banana regime and the separate one on the beef-hormone restrictions, the US published a list of products against which the sanctions were being imposed, choosing out of its original list. But the US publication in its trade register and for customs authorities was under its domestic laws and regulations.

Trade officials said there seemed to be no rule in the WTO/DSU to require a party either to notify the products and value to the DSB nor any time-limit within which the authorized sanctions should be put in place!

The level of retaliation set by the arbitrators is on the basis of the trade damage that Canada is assessed to be impaired over six years - the period over which the export orders already contracted and in respect of which the Brazilian government has said it is ‘committed’ to provide the export financing.

Among the other members that intervened to make comments or seek clarifications, the EC wanted Canada to indicate the type of counter-measures and the products.

Japan recognized Canada’s right to seek authorization, but were not comfortable with Canada’s “unilateral judgement” of compliance of Brazil’s new regime with the WTO obligations. Japan was not taking sides in the dispute, but merely pointing to the shortcomings in the DSU.

The Philippines also said it was not taking sides in the dispute, but said the case showed the gap in the DSU. The arbitrator’s ruling on the nullification and impairment suffered by Canada had a punitive aspect.

The United States said that under Art. 22.7 of the DSU Canada was entitled to receive authorization, but hoped Canada and Brazil could still find a way to resolve it.

Earlier, the DSU had a series of reports about compliance by countries with panel rulings and the steps being taken by them to implement.

Among these was the long-running banana dispute issue which, as Ecuador put it at the DSB, represented a record of sorts - “of non-compliance” by a party with a ruling.

The EC was supposed to put in place by 1 January 1999, a new banana regime to comply with the ruling. The US slapped sanctions against the EU for non-compliance early in 1999. The EU has been repeatedly reporting to the DSU that it was still trying to put in place a regime that would be in compliance, and was discussing various proposals with the parties, but no agreement had been reached so far.

In another case, that of India against Turkey over its textiles and clothing quotas, where Turkey has been held in violation of its obligations, Turkey reported that its authorities had intensified their work on different aspects at issue with the intention of finding the most appropriate solution.

But the report of Turkey, India said, gave no indications or details of the progress. Moreover, complained India, Turkish authorities most recently appeared to have placed some restrictions on imports of fabrics from India by licensing procedures. Local importers seeking ‘Teshvik’ licences for import of fabrics were being asked not to import from India and this was a development resulting in selective restrictions and discrimination.

The Turkish representative said he would report this complaint to Ankara and report back to the DSU and India.

The DSB also referred to a panel the EC complaint against Chile over restrictions on swordfish—restrictions imposed on EC fishing vessels, some six Spanish owned vessels overfishing swordfish in the Pacific and wanting to land them in Chilean ports for onward transport.

Chile has imposed restrictions, on grounds of protecting the species against over-fishing, against its own and other vessels fishing in its territorial waters and economic zone.-SUNS4804

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

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