Panel rules some Canadian aircraft subsidies illegal

A WTO dispute settlement panel hearing a Brazilian complaint has adjudged Canada to have provided illegal aircraft export subsidies. This ruling constitutes the latest development in a long-running trade feud between the two countries that has, in its evolution, brought to light substantive and procedural inequities in the WTO system.

by Chakravarthi Raghavan

GENEVA: In the bitter, nearly six-year-old series of disputes between Brazil and Canada over charges of subsidized exports of civil aircraft for regional airlines, Brazil has secured a partial victory in the latest episode, with a WTO panel holding that exports of Canadian Bombardier aircraft in three specific cases involved prohibited export subsidies and Canada must withdraw them within 90 days of the adoption of the ruling by the Dispute Settlement Body (DSB).

The mutual cases between the two countries had previously gone through the entire range of panel rulings, Appellate Body reports, adoption of reports, complaints of non-compliance, and rulings by compliance panels and the Appellate Body (with one case even going through a second compliance panel ruling), resulting in WTO authority to Canada to impose trade sanctions against Brazil to the tune of about $1.4 billion.

In the present case, the Canadian exports of aircraft that were found to be illegal relate to 199 planes in two transactions involving Air Wisconsin and Air Nostrum, which, according to a Brazilian press communique, are valued at about $4 billion. The report of the three-member panel was circulated on 28 January, and, subject to any appeal being preferred by Canada, the ruling will be adopted within 60 days.

Some trade sources believe that with the two sides perhaps now ‘even’, the feeling in both countries may be that, rather than continue along the same route as in the past, the whole dispute should now be resolved bilaterally and settled.

Built-in asymmetries

The latest panel ruling is highly technical in some parts and is difficult for outsiders to judge or understand because many of the facts and evidence have not been disclosed but left out of the published version (with some empty square brackets indicating the omitted parts). Given the highly subjective nature of the assessment of these facts, outsiders will be forced to take on faith the judgements of the three members of the panel.

The entire dispute and the successive rulings thereon have brought out elements whose scope ranges beyond just the ability of the panels to rule, to encompass the way the WTO’s Subsidies and Countervailing Measures Agreement itself was negotiated and crafted, with some built-in asymmetries as between the industrialized-country members of the Organization for Economic Cooperation and Development (OECD) and others.

Somewhat belatedly, after the first of these disputes came to the fore, Brazil identified some of these asymmetries in the agreement and brought them up as one of the “implementation” issues. These now figure as part of the work programme and negotiations mandated by the recent 4th Ministerial Conference of the WTO in Doha.

However, it is not an esoteric issue of high-technology exports involving a few exporters, but one that involves high mercantilist stakes for the North and its corporations. As such, it might easily result in the same kind of accord as that reached in the Uruguay Round, where, with so many issues on the table and in order to secure what was viewed (by a large number of developing countries) as some small gains in the area of trade in goods, the rule-making was in the hands of only a few negotiators (though Brazil was one of them); and the new rules came and were accepted as a package, including the asymmetric provisions of Annex I, item (k) of the Subsidies Agreement and a proviso slipped in enabling the OECD countries to escape subsidy disciplines through their own arrangements on export credits.

In the Uruguay Round, most developing-country negotiators viewed this as essentially a problem between OECD countries and not one that affected them, with some even thinking that the subsidies would help their own imports of hi-tech products. Indeed, this danger of developing countries ignoring such issues in exchange for some small piffles held out as gains (such as the ACP waiver granted at Doha) still remains.

At a more general level of international political economy (which most trade diplomats, negotiators and trade establishments in governments try to avoid) and in terms of the ‘globalization’ debates about the fairness and equity of the system, this series of disputes between Brazil and Canada has raised many questions about the equity and fairness of the WTO and its dispute settlement mechanism and the law and procedures applied at international level over so-called “business secrets”, where the WTO’s dispute procedures are unlike those in civil tort litigations in national jurisdictions.

Within national jurisdictions there is a settled procedure for discovery of documents and evidence in the other’s possession and the mandatory drawing of adverse inferences, whereas under the WTO’s dispute settlement mechanism, the complainant has first to prove a prima facie case before the other can be asked to rebut. This is, in such transactions, well-nigh impossible, more so when the industrialized-country governments with broad experience in these matters can use sophisticated instruments and a web of public corporations functioning at a business level whose actual dealings and books are not so easily available for scrutiny.

The issue has some serious implications of fairness and equity and how markets in fact function, in the context of current international debates and what economist Paul Krugman (in a column in the New York Times of 29 January) has called the “great divide” (before and after the Enron affair, with its ever-burgeoning reports about the involvement of auditors, rating organizations and even investment banks and their market analysts and consultancies, high government officials and legislators). Krugman views the Enron affair not merely as involving a “rogue company” (as the Bush administration would have everyone believe), but as an instance of a range of institutions “deceiving” the public. Perceptions of the unfairness of the system and of the public being deceived with the support of the authorities make for a shaky foundation for a market system.

Prohibited or not?

The WTO panel hearing the latest case, like the Appellate Body and panels in earlier cycles of the dispute, has attempted to close one loophole - by insisting that while export credits of OECD countries, in accordance with their own OECD arrangements including so-called matching arrangements, have been exempt from being considered prohibited export subsidies, subsidies provided by them to ‘match’ the derogations of other OECD countries would not, as the US, the EC and Canada had argued, be exempt.

And given the high stakes of the neo-mercantilist export policies of the industrialized countries and the influence wielded by industry in their capitals (and the determination not to allow independent competition to come up from the developing world), rule-making in the new round of trade negotiations launched at Doha, and the deal-making that might be possible in a “single undertaking”, could prove very tricky.

In the present dispute, Brazil had challenged some of the “programmes” (as such) of Canada for export credits and export financing, as well as some specific cases of financing and benefits provided for the Canadian producers and exporters of the Bombardier aircraft, which in the Brazilian complaint were per se prohibited export subsidies, and in particular cases were subsidies provided on condition of exports.

Three specific measures or instances complained of by Brazil were upheld, and seven cases of a more general challenge to the programmes were rejected (on the ground that on the face of it the programmes did not “mandate” subsidies or benefits to the producer contingent on exports, but that the programmes and the law and regulations setting them up enabled “discretionary” provisions).

The three specific cases where Brazil’s complaint was upheld were: in respect of export financing for Bombardier aircraft to Air Wisconsin and to Air Nostrum under the so-called EDC Canada Account financing, and exports to Comair under the EDC’s Corporate Account financing. The EDC (Export Development Corporation) is a statutorily established and wholly government-owned public corporation.

The complaints turned down related to the programmes themselves, as well as the related Investment Quebec (IQ) equity guarantee schemes operated by the Quebec Province of Canada.

The panel turned down the Brazilian complaint that Canada’s EDC is required to provide assistance in programmes on the Canada Corporate Account and on the Canada Account (the latter where the Canadian government determines it is in the national interest) with government providing the funds.

The panel found that the financing provided on the Canada Account to Air Wisconsin is an export subsidy, and rejected the view that it was nevertheless covered by the exception in item (k) of Annex I of the Subsidies Agreement and its “safe haven” for export credits provided in accord with the OECD Export Credit Arrangements, even where the credits were provided on a “matching basis” to export credits by another OECD member, below or in “derogation of” the OECD’s agreed Commercial Interest Reference Rates (CIRR). The OECD “understanding” enables its members to do this.

However, like an earlier panel and Appellate Body, this panel too considered that importing these abilities to match “derogations” would in effect be against the special and differential (S&D) treatment provisions of the agreement favouring developing countries, more so since the derogations being offered would not be “public” and not be known to non-OECD members.

An issue that has not been brought up, however, is that the OECD arrangements that were made a “safe haven” - as, the US and other OECD members claim, part of a “package” - not only have enabled the OECD members to provide export credits at rates much lower than what developing-country governments could raise for themselves in the international capital markets, but are now being used under a 1998 revision that has not even been officially notified to the WTO.

The Canadian argument that the derogations to the OECD were covered by the “safe haven” proviso of item (k) of Annex I, was supported strongly by the US. The US argued that such OECD permitted derogations acted as a deterrent to force OECD members to observe the guidelines, and that “it would only undermine part of the S&D treatment” and that this more limited structural inequity in respect of the developing countries should be tolerated (by panels, Appellate Body and the DSB) because of the importance attached by Members to the “safe harbour” in item (k), which was an important part of the overall package agreed to in the Subsidies Agreement.

The panel declined to accept this view on the ground that the inclusion of a matching derogation in the “safe harbour” concept of item (k) would mean that there would be no objective benchmark left to judge whether a WTO Member (from the OECD) is observing the WTO obligations, and that interpreting the provision as sought by the US would render “Art. 27 (for S&D treatment) in part at least ineffective.”

Perhaps one has to be thankful to the panel that it has refused to agree to make the admittedly inequitable system of the WTO more inequitable.

In turning down, on the ground that Brazil has not “proved” its case, some of the Brazilian contentions about the EDC’s use of “A Encore” credit rating software (now a part of the Moody’s rating system, that enables each export credit agency to ‘customize’ its ratings and thus enables the EDC to judge the market rate available to an exporter or an importer), the panel perhaps has treaded ground that needs rethinking. In particular, it relies more on a Merrill Lynch analysis that regional airlines are sounder than bigger airlines and thus could raise funds on the market at a lower spread. Such reliance will not induce much conviction among a public growingly skeptical about market analysts and their views in the light of current knowledge as a result of the Enron affair (about Wall Street analysts (whose banks themselves engage in trading), consultancies and audit firms (e.g., Andersen)).

The panel also held that Quebec’s IQ equity guarantees were not prohibited subsidies, since they were not contingent on exports, even if the guarantees were provided to enterprises that mainly were export-oriented. It also deemed specific instances of EDC Corporate Account financing in five cases (of supply of Bombardier aircraft to Atlantic Southeast Airlines, Atlantic Coast Airlines, Kendell, Air Nostrum and Comair) not to be a prohibited export subsidy.

In terms of the Subsidies Agreement, the panel recommended that Canada be asked to comply and end the prohibited subsidies within 90 days of the adoption of the report. (SUNS5049)