WORLD TRADE
ORGANIZATIONWT/DS70/R
14 April 1999
(99-1398)
Original: English
CANADA – MEASURES AFFECTING THE
EXPORT OF CIVILIAN AIRCRAFT
REPORT OF THE PANEL
The report of the Panel on Canada – Measures Affecting the Export of Civilian Aircraft is being
circulated to all Members, pursuant to the DSU.  The report is being circulated as an unrestricted
document from 14 April 1999 pursuant to the Procedures for the Circulation and Derestriction of
WTO Documents (WT/L/160/Rev.1).  Members are reminded that in accordance with the DSU only
parties to the dispute may appeal a panel report.  An appeal shall be limited to issues of law covered in
the Panel report and legal interpretations developed by the Panel.  There shall be no ex parte
communications with the panel or Appellate Body concerning matters under consideration by the
Panel or Appellate Body.
Note by the Secretariat:  This Panel Report shall be adopted by the Dispute Settlement Body (DSB) within 30 days after the
date of its circulation unless a party to the dispute decides to appeal or the DSB decides by consensus not to adopt the report .
If the Panel Report is appealed to the Appellate Body, it sha ll not be considered for adoption by the DSB until after the
completion of the appeal.  Information on the current status of the Panel Report is available from the WTO Secretariat.WT/DS70/R
Page i
TABLE OF CONTENTS
Page
I. INTRODUCTION................................................................................................................. .................. 1
II. FACTUAL ASPECTS............................................................................................................. ................ 2
III. FINDINGS AND RECOMMENDATIONS RE QUESTED BY TH E PARTIE S............................... 2
IV. REQUESTS FOR PREL IMINARY RULINGS ................................................................................... 4
A. CANADA’S REQUEST REGARDING THE PANEL’S JURISDICTION .............................................4
1. General issues ............................................................................................................... ........................4
(a) Arguments of Canada ......................................................................................................... ...............................4
(i) The Panel’s responsibility to decide the scope of its jurisdiction.......................................................... ........4
(ii) Request that the Panel should rule before the first submissions of the Parties are due .................................5
(b) Arguments of Brazil ......................................................................................................... .................................6
2. Consistency with Article 4.4 of the SCM Agreement of Brazil’s Request for the Establishment of a
Panel with respect to financing by the Export Development Corporation ....................................................6
(a) Arguments of Canada ......................................................................................................... ...............................6
(i) Applicable law.............................................................................................................. ................................7
(ii) Whether Brazil requested consultations on financing provided by the Export Development Corporation ...9
(b) Arguments of Brazil ......................................................................................................... ...............................10
(c) Response of  Canada.......................................................................................................... ...............................12
3. Consistency with Article 6.2 of the DSU and Brazil's request for a Panel in respect of certain claims
12
(a) Arguments of Canada ......................................................................................................... .............................12
(i) Applicable law.............................................................................................................. ..............................13
(ii) The matters at issue....................................................................................................... ..............................13
(iii) Brazil’s request for the establishment of a panel does not meet the requirements of Article 6.2 of the DSU.
............................................................................................................................... .....................................15
(b) Arguments of Brazil ......................................................................................................... ...............................16
(i) EDC “financing”............................................................................................................. ............................17
(ii) Definition of “civil aircraft industry”.................................................................................... ......................18
(iii) TPC “predece ssor prog ramme s”.............................................................................................. ...................18
(iv) Benefits provided under the Subsidiary Agreements and SDI .................................................................. ..19
B. REQUEST OF CANADA FOR PRELIMINARY FINDING ON JURISDICTION : THE SCM A GREEMENT DOES NOT
APPLY TO CONTRIBUTIONS AND TRANSACTIONS THAT TOOK PLACE BEFORE THE ENTRY INTO FORCE OFTHE 
WTO A GREEMENT ............................................................................................................................19
1. Request of  Canada ............................................................................................................ ..................19
2. Response of  Brazil........................................................................................................... ....................20
C. BRAZIL’S REQUEST REGARDI NG ADDITIONAL FACT FINDING..............................................20
1. Arguments of Brazil.......................................................................................................... ...................20
2. Arguments of Canada.......................................................................................................... ................21
(a) Background to Brazil’s motion: the consultations, “transaction-specific” information and confidentiality ....21
(b) Brazil’s request is inconsistent with WTO law and practice.................................................................. ..........21
(c) Brazil’s request further supports Canada’s preliminary submissions .......................................................... ....25
3. Response of  Brazil........................................................................................................... ....................26
4. Rebuttal of Canada ........................................................................................................... ..................27
D. CANADA’S REQUEST FOR A DEADLINE FOR THE SUBMISSION OF NEW EVIDENCE.........27
1. Arguments of Canada.......................................................................................................... ................27
2. Arguments of Brazil.......................................................................................................... ...................28
E. BRAZIL’S REQUEST REGARDING DEADLINE FOR SUBMISSION OF NEW EVIDENCE ........28
1. Arguments of Brazil.......................................................................................................... ...................28
2. Arguments of Canada.......................................................................................................... ................29
3. Actions of the Panel ......................................................................................................... ...................29
4. Response of  Brazil........................................................................................................... ....................29
5. Proposal by the Panel ........................................................................................................ .................31
6. Joint letter from Brazil and Canada, and Pane l action ......................................................................31WT/DS70/R
Page ii
F. A RGUMENTS CONCERNING THE SUBMISSION OF EVIDENCE IN RESPONSE TO PANEL QUESTIONS POSED IN
CONNECTION WITH THE SECOND MEETING ................................................................................................31
1. Comment of Canada............................................................................................................ ................31
2. Comment of Brazil............................................................................................................ ...................32
G. PROCEDURES FOR PROTECTION OF BUSI NESS CONFIDENTIAL INFORMATION................34
1. Procedure Propos ed by Canada ................................................................................................. ........34
2. Arguments of Brazil.......................................................................................................... ...................36
(a) Advisors of a Party should be considered an a pproved person................................................................. .......36
(b) Review of Confidential Business Information should be permitted outside the WTO premises .....................36(c) Third Parties should be granted access to Confidential Bu siness Info rmation................................................. 37
(d) A complete administrative record should be maintained for the Appellate Body............................................37
3. Action by the Panel .......................................................................................................... ...................37
4. Statements  of Canada......................................................................................................... .................38
V. ARGUMENTS OF THE PARTIES REGARDING LEGAL ISSUES CONCERNING SCM
ARTICLES 1 AND 3............................................................................................................... .............. 39
A. GENERAL ...................................................................................................................... ........................39
1. Arguments of Canada.......................................................................................................... ................39
(a) Principles of Treaty Interpretation......................................................................................... ..........................39
(b) Burden of  Proof ............................................................................................................. ..................................40
(i) A complainant must present a prima facie cas e in respect of each el ement of its  claim. ............................41
(ii) The principles applicable to the evaluation of evidence.................................................................... ..........41
(c) Judicial Economy ............................................................................................................ ................................42
2. Response of  Brazil........................................................................................................... ....................43
B. “SUBSIDY” PER SCM ARTICLE 1.................................................................................................. ....44
1. Arguments of Canada.......................................................................................................... ................44
(a) The meaning of “fin ancial contribution” ..................................................................................... ....................45
(b) The meaning of “benefit” .................................................................................................... ............................45
(i) Ordinary meaning ............................................................................................................ ...........................45
(ii) Context .................................................................................................................... ...................................45
(iii) The object and purpose of the SCM Agreement ............................................................................... ..........46
2. Arguments of Brazil.......................................................................................................... ...................46
3. Response of  Canada........................................................................................................... .................48
C. “CONTINGENT, IN LAW OR IN FACT, … ON EXPORT PERFORMANCE” .................................49
1. Arguments of Canada.......................................................................................................... ................49
(a) Brazil’s interpretation of Article 3.1(a)................................................................................... .........................49
(b) Article 3.1(a) prohibits subsidies that are conditional on or tied to export performance..................................49
(i) The ordinary meaning of “contingent ... upon export performance”...........................................................5 0
(ii) The context of Article 3.1(a).............................................................................................. .........................51
(iii) The object and purpose of the SCM Agreement ............................................................................... ..........52
(iv) The negotiating history of the SCM Agreement ............................................................................... ..........53
(v) The implications of Brazil’s interpretation ................................................................................. ................54
(vi) The OECD Arrangement on Guidelines for Officially Supported Export Credits (OECD Consensus)......55(vii) The United States misunderstands Canada’s interpretation of Article 3 ................................................56
2. Arguments of Brazil.......................................................................................................... ...................58
3. Response of  Canada........................................................................................................... .................61
VI. ARGUMENTS OF PARTIES REGARDING CANADIAN MEASURES ALLEGED BY BRAZIL
TO BE PROHIBITED EXPORT SUBSIDIES IN THE SENSE OF SCM ARTICLES 1 AND 3.. 63
A. E XPORT DEVELOPMENT CORPORATION (“EDC”) ....................................................................................63
1. General arguments of the parties............................................................................................. ...........63
(a) Alleged concessionary terms of EDC financing; EDC risk level and performance .........................................63
(i) Arguments of Brazil......................................................................................................... ...........................63
(ii) Arguments of Canada ........................................................................................................ .........................66
(iii) Rebuttal of Brazil on EDC’s risk level and performance.................................................................... ........70
(iv) Response of Canada on EDC’ s risk level and performance..................................................................... ...72
(b) Contingency on ex port performance........................................................................................... .....................73
(i) Arguments of Brazil......................................................................................................... ...........................73
(ii) Arguments of Canada ........................................................................................................ .........................73
(iii) Response of Brazil........................................................................................................ ..............................74
2. EDC Debt Financing ........................................................................................................... ...............74
(a) Arguments of Brazil ......................................................................................................... ...............................74WT/DS70/R
Page iii
(b) Arguments of Canada ......................................................................................................... .............................76
(i) Substantive issues .......................................................................................................... .............................76
(ii) Arguments regarding whether Brazil has presented a prima facie case against EDC financing. ................80
(c) Response of Brazil.......................................................................................................... .................................81
3. Loan gu arantees.............................................................................................................. ....................82
(a) Arguments of Brazil ......................................................................................................... ...............................82
(b) Arguments of Canada ......................................................................................................... .............................83
4. Equity infusions into corporations es tablished to facilitate the export of civil aircraft ......................84
(a) Arguments of Brazil ......................................................................................................... ...............................84
(b) Arguments of Canada ......................................................................................................... .............................88
(c) Response of Brazil.......................................................................................................... .................................90
5. Residual va lue guarantees .................................................................................................... ..............91
(a) Arguments of Brazil ......................................................................................................... ...............................91
(b) Arguments of Canada ......................................................................................................... .............................92
(c) Response of Brazil.......................................................................................................... .................................92
6. Canada Ac count............................................................................................................... ...................93
(a) Arguments of Brazil ......................................................................................................... ...............................93
(b) Arguments of Canada ......................................................................................................... .............................95
(c) Comments of Brazil.......................................................................................................... ...............................98
B. T ECHNOLOGY PARTNERSHIPS CANADA (“TPC”) AND PREDECESSOR DEFENCE INDUSTRY PRODUCTIVITY
PROGRAMME (“DIPP”) ....................................................................................................................... .....99
1. General arguments of the parties............................................................................................. ...........99
(a) Arguments of Brazil ......................................................................................................... ...............................99
(b) Arguments of Canada ......................................................................................................... ...........................100
2. Subsidy ...................................................................................................................... ........................100
(a) Arguments of Brazil ......................................................................................................... .............................100
(b) Arguments of Canada ......................................................................................................... ...........................104
(c) Comments of Brazil.......................................................................................................... .............................106
(i) TPC’s anticipated or expected return is below market........................................................................ ......107
(ii) TPC’s expected return - “expected” at the time the loan commitment was made - was insufficient, evenunder Canada’s “cost  of funds” test............................................................................................ ........................107
3. Export contingency ........................................................................................................... ................109
(a) Arguments of Brazil ......................................................................................................... .............................109
(b) Arguments of Canada ......................................................................................................... ...........................111
(c) Comments of Brazil.......................................................................................................... .............................117
C. S ALE BY ONTARIO OF OWNERSHIP SHARE IN DE HAVILLAND .................................................................118
1. Subsidy ...................................................................................................................... ........................118
(a) Arguments of Brazil ......................................................................................................... .............................118
(b) Arguments of Canada ......................................................................................................... ...........................120
(c) Response of Brazil.......................................................................................................... ...............................121
(d) Comments of Canada.......................................................................................................... ...........................122
2. Export contingency ........................................................................................................... ................122
(a) Arguments of Brazil ......................................................................................................... .............................122
(b) Arguments of Canada ......................................................................................................... ...........................123
D. C ANADA -QUÉBEC SUBSIDIARY AGREEMENT ON INDUSTRIAL DEVELOPMENT .......................................124
1. Subsidy ...................................................................................................................... ........................124
(a) Arguments of Brazil ......................................................................................................... .............................124
(b) Arguments of Canada ......................................................................................................... ...........................126
(c) Comments of Brazil.......................................................................................................... .............................126
2. Export contingency ........................................................................................................... ................127
(a) Arguments of Brazil ......................................................................................................... .............................127
(b) Arguments of Canada ......................................................................................................... ...........................128
(c) Response of Brazil.......................................................................................................... ...............................129
E. S OCIÉTÉ DE DÉVÉLOPPEMENT INDUSTRIEL DU QUÉBEC (“SDI”) ...........................................................129
1. Subsidy ...................................................................................................................... ........................129
(a) Arguments of Brazil ......................................................................................................... .............................129
(b) Arguments of Canada ......................................................................................................... ...........................130
(c) Comments of Brazil.......................................................................................................... .............................131
2. Export contingency ........................................................................................................... ................131
(a) Arguments of Brazil ......................................................................................................... .............................131
(b) Arguments of Canada ......................................................................................................... ...........................132
F. A RGUMENTS REGARDING THE FINAN  REPORT SUBMITTED BY  BRAZIL ...................................................133
1. Arguments of   Canada......................................................................................................... ..............133WT/DS70/R
Page iv
2. Response of  Brazil........................................................................................................... ..................135
(a) The Time Frames Over Which Subs idies are Quantified and Aggregated.....................................................135
(i) EDC Equity Infusions........................................................................................................ .......................135
(ii) Can$87 Million “Investment” in the 70-seat CRJ-700......................................................................... .....135
(iii) Can$57 Million “’Investment‘” in the Dash 8-400........................................................................... ........136
(iv) Can$100 Million “Investmen t” in Turbopr op Engines .......................................................................... ...136
(v) The Acquisition and Restructuring of de Havilland........................................................................... .......136
(b) The Comparative Treatment of Repaya ble and Non-Repayable Contributions.............................................136
(c) The Comparative Treatment of Actual and Anticipated Benefits ................................................................ ..136
3. Rebuttal by Canada........................................................................................................... ................137
G. ARGUMENTS REGARDING THE CLARK REPORT ........................................................................................137
1. Arguments of Canada.......................................................................................................... ..............137
(a) Saturation of the Canadian regional turboprop market ........................................................................ ..........137
(b) The 26 CRJs delivered to Air Canada......................................................................................... ...................138
2. Response by  Brazil ........................................................................................................... .................139
3. Rebuttal of Canada ........................................................................................................... ................140
4. Rebuttal of Brazil ........................................................................................................... ...................143
VII. ARGUMENTS OF THIRD PARTIES .............................................................................................. 143
A. EUROPEAN COMMUNITIES .......................................................................................................................143
1. Export contingency ........................................................................................................... ................143
2. Annex I (k), first paragraph SCM Ag reement ................................................................................... 145
B. SUBMISSION OF THE UNITED STATES .......................................................................................................147
1. Applicability of the SCM Agreement to subsidies provided prior to the entry into force of the WTOAgreement ...................................................................................................................... ............................147
2. Canada’s interpretation of “export subsidy” .................................................................................. .149
3. The relevance of item (k) of the Illustrative List to export financing activities of the EDC ..............151
VIII. INTERI M REVI EW ............................................................................................................ ............... 152
IX. FINDINGS .................................................................................................................... ....................... 154
A. INTRODUCTION................................................................................................................. ................154
B. PRELIMINARY ISSUES........................................................................................................... ...........155
1. Jurisdiction of the Panel .................................................................................................... ...............155
(a) Article 4.4 of the SCM Agreement ............................................................................................ ....................155
(i) Arguments of the parties.................................................................................................... .......................155
(ii) Evaluation by the Panel .................................................................................................... ........................156
(b) Specificity of Brazil's request for establishment of a panel ................................................................ ...........158
(i) Arguments of the parties.................................................................................................... .......................158
(ii) Evaluation by the Panel .................................................................................................... ........................160
2. Temporal application of the SCM Agreement...................................................................................1 63
3. Fact-finding by the Panel.................................................................................................... ..............164
(a) Arguments of the parties.................................................................................................... ............................164
(b) Evaluation by  the Panel ..................................................................................................... ............................165
4. Procedures governing Business Confidential In formation ...............................................................166
(a) Arguments of the parties.................................................................................................... ............................166
(b) Evaluation by  the Panel ..................................................................................................... ............................166
5. Deadline for the submission of new evidence or allegations ............................................................169
(a) Submission of new evidence.................................................................................................. ........................170
(b) Submission of new allegations ............................................................................................... .......................170
6. Deadline for the submission of affirmative defences.........................................................................1 70
7. Panel's right to seek information in re spect of defences Canada has not made ...............................171
8. Panel's right to seek information in the absence of a preliminary ruling on the establishment of a
prima facie case............................................................................................................... ..........................172
9. Panel's right to seek information in the absen ce of an allegation by the complaining party............173
C. DEFINITION OF "SUBSIDY" WITHIN THE MEANING OF ARTICLE 1 OF THE SCM
AGREEMENT ...................................................................................................................... ................174
1. Arguments of the parties ..................................................................................................... ..............174
2. Interpretation by the Panel .................................................................................................. .............176
D. EXPORT DEVELOPMENT CORPORATION....................................................................................178
1. Is the EDC programme per se a prohibited export subsidy? ............................................................179WT/DS70/R
Page v
2. Does the EDC programme as applied provide prohibited export subsidies? ...................................180
(a) EDC debt financing .......................................................................................................... .............................180
(i) Arguments of the parties.................................................................................................... .......................180
(ii) Evaluation by the Panel .................................................................................................... ........................186
(b) EDC loan guarantees ......................................................................................................... ............................190
(c) EDC residual value guarantees ............................................................................................... .......................191
(d) EDC equity  financing ........................................................................................................ ............................192
E. CANADA ACCOUNT............................................................................................................... ...........193
1. Is the Canada Account programme pe r se a prohibited export subsidy?..........................................194
2. Does the Canada Account programme as app lied provide prohibited export subsidies?.................195
3. Is there a prima facie case against Canada Account financing in the regional aircraft sector?......196
4. Has Canada rebutted the prima facie case? .................................................................................... .197
5. Is the Canada Account debt fin ancing contingent  on export?...........................................................197
F. SALE TO BOMBARDIER BY THE ONTARIO AEROSPACE CORPORATION OF A 49 PER
CENT INTEREST IN DE HAVILLAND INC. ....................................................................................198
G. BENEFITS PROVIDED UNDER THE CANADA-QUEBEC SUBSIDIARY AGREEMENTS ON
INDUSTRIAL DE VELOPMENT......................................................................................................... 202
1. Arguments of the parties ..................................................................................................... ..............202
2. Evaluation by the Panel ...................................................................................................... ..............204
H. SOCIETE DE DEVELOPPEMENT INDUSTRIEL DU QUEBEC .....................................................206
1. Arguments by the parties..................................................................................................... ..............206
2. Evaluation by the Panel ...................................................................................................... ..............208
(a) Assistance provided under the IQ programme.................................................................................. .............208
(b) Assistance provided under the SDI programme................................................................................. ............208
I. TECHNOLOGY PARTNERSHIPS CANADA  AND DIPP.................................................................209
1. Does the application of the TPC programme result in subsidies for the Canadian regional aircraftindustry? ...................................................................................................................... ..............................209
(a) Arguments of the parties.................................................................................................... ............................209
(i) $87 million to Bombardier................................................................................................... .....................210
(ii) $57 million TPC contribution to de Havilland; and $100 million TPC contribution to Pratt & Whitney .210
(iii) $12.7 million TPC contribution to Allied Signal; and $9.9 million TPC contribution to Sextant
Avionique ...................................................................................................................... ...........................211
(b) Additional information on the specific TPC contributions identified by Brazil.............................................21 1
(i) $87 million to Bombardier................................................................................................... .....................211
(ii) $57 million TPC contribution to de Havilland; and $100 million TPC contribution to Pratt & Whitney .213
(iii) $12.7 million TPC contribution to Allied Signal; and $9.9 million TPC contribution to Sextant
Avionique ...................................................................................................................... ...........................214
(c) Evaluation by  the Panel ..................................................................................................... ............................215
(i) Is there a prima facie case that TPC assistance to the Canadian regional aircraft industry takes the
form of subsidies?............................................................................................................. ........................215
(ii) Has Canada rebutted the  prima facie case of subsidization?................................................................ ....215
(iii) Is TPC assistance to the Canadian regional aircraft industry contingent on export performance?............217(iv) Interpretation of "contingent … in fact … upon export performance" and "in fact tied to …
anticipated exportation or export earnings".................................................................................... ....................221
(v) Application of the "but for" test........................................................................................... .....................223
(vi) Conclusion................................................................................................................. ...............................227
2. Assistance provided unde r the DIPP programme.............................................................................227
X.     CONCLUSIONS  AND RECOMMENDATION ................................................................................. 227
ANNEX I ........................................................................................................................ ................................. 229
ANNEX II ....................................................................................................................... ................. 235WT/DS70/R
Page 1
I. INTRODUCTION
1.1 On 10 March 1997, Brazil requested consultations with the Government of Canada pursuant
to Article 4 of the Agreement on Subsidies and Countervailing Measures (“SCM Agreement”)
regarding certain alleged subsidies granted by the Government of Canada or its provinces that support
the export of civilian aircraft from Canada.
1.2 Brazil and Canada held consultations on 30 April 1997, but failed to reach a mutually
satisfactory solution.
1.3 On 10 July 1998, pursuant to Article 4.4 of the SCM Agreement and Article 6 of the
Understanding on Rules and Procedures Governing the Settlement of Disputes (“DSU”), Brazil
requested the immediate establishment of a panel with standard terms of reference.
1.4 At its meeting on 23 July 1998, the DSB established a panel pursuant to the request by Brazil
(WT/DS70/2).
1.5 At that DSB meeting, parties agreed that the Panel should have standard terms of reference.
The terms of reference of the Panel are the following:
"To examine, in the light of the relevant provisions of the covered agreements cited by
Brazil in document WT/DS70/2, the matter referred to the DSB by Brazil in that
document and to make such findings as will assist the DSB in making the
recommendations or in giving the rulings provided for in those agreements".
1.6 On 16 October 1998, Brazil requested the Director-General to determine the composition of
the Panel, pursuant to paragraph 7 of Article 8 of the DSU.  This paragraph provides:
"If there is no agreement on the panelists within 20 days after the date of the
establishment of a panel, at the request of either party, the Director-General, in
consultation with the Chairman of the DSB and the Chairman of the relevant Council or
Committee, shall determine the composition of  the panel by appointing the panellists
whom the Director-General considers most appropriate in accordance with any relevant
special or additional rules or procedures of the covered agreement or covered
agreements which are at issue in the dispute,  after consulting with the parties to the
dispute.  The Chairman of the DSB shall in form the Members of the composition of the
panel thus formed no later than 10 days after the date the Chairman receives such arequest."
1
1.7 On 22 October 1998, the Director-General accordingly composed the panel as follows:
                                                     
1 Paragraph 12 of Article 4 of the SCM Agreement provides:
"For purposes of disputes conducted pursuant to this Article, except for time-periods
specifically prescribed in this Article, time-periods applicable under the DSU for the conduct ofsuch disputes shall be half the time prescribed there."WT/DS70/R
Page 2
Chairman:    Mr. David de Pury
Members:    Mr. Maamoun Abdel Fattah
Mr. Dencho Georgiev
1.8 The European Communities and the United States reserved their rights to participate in the
Panel proceedings as third parties.
1.9 The Panel met with the parties on 26 and 27 November 1998 and 12 and 13 December 1998.
It met with the third parties on  27 November 1998.
1.10 The Panel submitted its interim report to the parties on 17 February 1999.  Although on 25
February 1999 both parties requested the Panel to review precise aspects of the interim report, neither
party requested an additional meeting with the Panel.  The Panel submitted its final report to the
parties on 12 March 1999.
II. FACTUAL ASPECTS
2.1 This dispute concerns various Canadian measures which Brazil alleges are subsidies
inconsistent with Canada’s obligations under Articles 3.1(a) and 3.2 of the SCM Agreement in thatthey are contingent in law or in fact, whether solely or as one of several other conditions, upon export
performance.
2.2 The measures as identified in Brazil’s request for a panel are  financing and loan guarantees
provided by the Export Development Corporatio n including equity infusions into corporations
established to facilitate the export of civil aircraft; support provided to the civil aircraft industry by theCanada Account; funds provided to the civil aircraft industry by Technology Partnerships Canada and
predecessor programmes; the sale by the Ontario Ae rospace Corporation, an agency or instrumentality
of the Government of the Province of Ontario, of a 49 per cent interest in a civil aircraft manufacturer
to another civil aircraft manufacturer on other than commercial terms; benefits provided under the
Canada-Québec Subsidiary Agreement on Industrial Development; and benefits provided by theGovernment of Québec under the Société de Développement  Industriel du Québec.
III. FINDINGS AND RECOMMENDATIONS REQUESTED BY THE PARTIES
3.1 Brazil requests the Panel to find that the following are subsidies contingent in law or in fact
upon export performance and, therefore, are inconsistent with the requirements of Article 3 of theSCM Agreement:
“a) Financing and loan guarantees provided by the EDC, including equity
infusions made by the EDC into corporations established to facilitate the
export of civil aircraft;
b) Support provided to the civil aircraft industry by the Canada Account;
c) Funds provided to the civil aircraft industry by TPC and its predecessor
programmes;
d) The sale to a civil aircraft manufacturer (Bombardier Inc.) by OAC, an
agency or instrumentality of the Government of the Province of Ontario, of a
49-per cent interest in another civil aircraft manufacturer (de Havilland, Inc.)
on other than commercial terms;WT/DS70/R
Page 3
e) Benefits provided under the Canada-Québec Subsidiary Agreement on
Industrial Development;
f) Benefits provided by the Government of Québec under SDI”.
3.2 Brazil requests that the  panel recommend that “the Dispute Settlement Body request Canada
to withdraw all of these subsidies without delay and bring its federal and provincial programmes with
regard to support for the civilian aircraft industr y into conformity with its obligations under the
Agreement on Subsidies and Countervailing Measures”.
3.3 Canada requests that the Panel make preliminary findings prior to the deadline for Brazil’s
first written submission that:
(a) “Brazil’s request for a Panel with respect to financing provided by the Export
Development Corporation is inconsistent with SCM Agreement Article 4.4 because
no consultations were requested with respect to this claim, and therefore, Brazil’s
claims regarding financing provided by the Export Development Corporation fall
outside the jurisdiction of the Panel”;
(b) “Brazil’s request for Panel does not ‘identify the specific measures at issue’, as
required by Article 6.2 of the DSU with respect to the following items:
financing  provided by the Export Development Corporation;
funds provided to the civil aircraft industry by Technology Partnerships
Canada and predecessor programmes;
benefits provided under the Canada-Québec Subsidiary Agreement on
Industrial Development; and
benefits provided by the Government of Québec under the Société de
Développement Industriel du Québec.
Therefore, Brazil’s claims pertaining to these measures fall outside the jurisdiction of the Panel.”
3.4 Canada additionally requests that the Panel rule that:
(c) “the complaining Party may not adduce new allegations or evidence after the end of
the first substantive meeting of the Panel with the Parties”;
(d) “pursuant to Article 28 of the Vienna Convention on the Law of Treaties  (‘Vienna
Convention’), contributions made prior to the entry into force of the WTO Agreement
fall outside the jurisdiction of the Panel.  Specifically, Canada requests that the Panel
find and conclude that contributions made in 1989 by the Defence Industry
Productivity Programme (DIPP) and the Canada-Québec Subsidiary Agreement fall
outside the jurisdiction of the Panel”.
3.5 Canada also requests that the Panel dismiss Brazil’s claims.WT/DS70/R
Page 4
IV. REQUESTS FOR PRELIMINARY RULINGS2
A. CANADA’S REQUEST REGARDING THE PANEL’S JURISDICTION
1. General issues
(a) Arguments of Canada
4.1 Canada requested preliminary rulings with respect to two issues regarding the Panel’s
jurisdiction.  The first issue is whether certain measures identified in Brazil’s request for a panel had
been the subject of a request for consultations, and thus could be the subject of a panel request under
SCM Article 4.4.  The second issue is whether certain of the measures identified in Brazil’s requestfor a panel were sufficiently specific as required by Article 6.2 of the DSU. Canada asked the Panel to
issue the requested rulings prior to the deadline for the parties’ first submissions.
(i) The Panel’s responsibility to decide the scope of its jurisdiction
4.2 Canada states that a Panel’s terms of reference establish the jurisdiction of the panel by
defining the precise claims at issue in the dispute,
3  and notes that in the present case, the terms of
reference are set out in the complainant’s request fo r the establishment of the panel.  Canada argues
that the Panel must examine Brazil’s request to ensure that it complies with the DSU Article 6.2, sinceit determines the scope of the Panel’s jurisdiction, and quotes the Appellate Body:
“… it is incumbent  upon a panel to examine the request for the establishment of the
panel very carefully to ensure its compliance with both the letter  and the spirit  of
Article 6.2 of the DSU.  It is important that a panel request be sufficiently precise for
two reasons: first, it often forms the basis for the terms of reference of the panelpursuant to Article 7 of the DSU; and, second, it informs the defending party and the
third parties of the legal basis of the complaint.”
4 [emphasis added by Canada]
4.3 Canada submits that this reasoning applies equally to compliance with Article 4 of the SCM
Agreement, as Article 4 also limits the jurisdiction of the Panel in this dispute.  For Canada, the Panel
may not look to the submissions of the complainant to cure uncertainties in the panel request,5 nor
may the Panel adopt a claim pursuant to its own ruling:6 a Panel may not assume jurisdiction that it
                                                     
2 Except as otherwise noted, the footnotes and citations, and the emphasis in the text are as contained in
the parties’ submissions.
3 Brazil – Measures Affecting Desiccated Coconut  (Complaint by the Phillippines ) (1997), WTO Doc.
WT/DS22/AB/R at 21 (Appellate Body Report) [hereinafter Brazil – Desiccated Coconut ].
4 European Communities - Regime for the Importation, Sale and Distribution of Bananas (Complaints
by Ecuador, Guatemala, Honduras, Mexico and the United States) (1997) WTO Doc. WT/DS27/AB/R at
para. 142 (Appellate Body Report) [hereinafter European Communities -  Bananas ].
5 Id.. at para. 143:
“We do not agree with the Panel that ‘even if there was some uncertainty whether the panel
request had met the requirements of Article 6.2, the first written submission of the Complainants
“cured” that uncertainty because their submissions were sufficiently detailed to present all the factual
and legal issues clearly.’  Article 6.2 of the DSU requires that the claims , but not the arguments , must
all be specified sufficiently in the request for the establishment of a panel in order to allow thedefending party and any third parties to know the legal basis of the complaint.  If a claim  is not
specified in the request for the establishment of a panel, then a faulty request cannot be subsequently‘cured’ by a complaining party’s argumentation in its first written submission to the panel or in any
other submission or statement made later in the panel proceeding.”
6India - Patent Protection for Pharmaceutical and Agricultural Chemical Products (Complaint by the
United States)  (1997) WTO Doc. WT/DS50/AB/R at para. 92 (Appellate Body Report) [hereinafter India –
Pharmaceuticals ]:WT/DS70/R
Page 5
does not have.  Canada states that in accordance with the views of the Appellate Body, recent panels
have examined their jurisdiction and ruled that certain claims did not fall within it.7
(ii) Request that the Panel should rule before the first submissions of the Parties are due
4.4 Canada argues that although there are no explicit panel working procedures that govern
preliminary requests for findings,8 there is an evolving practice of WTO panels and the Appellate
Body concerning preliminary ruling s.  According to Canada, preliminary issues of an organisational
nature have been dealt with before the first substa ntive hearing of the parties with the panel or the
Appellate Body: in European Communities - Bananas , the panel issued a preliminary ruling on the
participation of third parties prior to the first substantive meeting;9 and more recently, in the case of
United States – Import Prohibition of Certain Shrimp and Shrimp Products,10 the Appellate Body
issued a preliminary decision four days after an objection was raised by the appellees in their written
submissions concerning the admissibility of amicus curiae  briefs. 11
4.5 Canada submits that Indonesia –Automobiles provides the most recent example, where in its
first written submission, Indonesia argued as a preliminary matter that a claim made in the first
submission of the United States was not within the terms of reference of the panel.  Canada recallsthat the panel considered and ruled on Indonesia’s ob jection at the first subs tantive meeting with the
parties.
12
4.6 For Canada, the common theme in these decisions is that many kinds of preliminary issues
should be decided at an early stage in the panel proceedings.  Canada submits that the issues of
                                                                                                                                                                    
“We note also the Panel's statement that it "ruled, at the outset of the first substantive meeting
held on 15 April 1997, that all legal claims would be considered if they were made prior to the end ofthat meeting; and this ruling was accepted by both parties". We do not find this statement at all
persuasive in advancing the argument made by the United States on this issue.  Nor do we find this
statement consistent with the letter and the spirit of the DSU.  Although panels enjoy some discretionin establishing their own working procedures, this discretion does not extend to modifying thesubstantive provisions of the DSU.  To be sure, Article 12.1 of the DSU says:  "Panels shall follow theWorking Procedures in Appendix 3 unless the panel decides otherwise after consulting the parties tothe dispute".  Yet that is all that it says.  Nothing in the DSU gives a panel the authority either to
disregard or to modify other explicit provisions of the DSU.  The jurisdiction of a panel is established
by that panel's terms of reference, which are governed by Article 7 of the DSU.  A panel may consideronly those claims that it has the authority to consider under its terms of reference.  A panel cannotassume jurisdiction that it does not have.  In this case, Article 63 was not within the Panel'sjurisdiction, as defined by its terms of reference.  Therefore, the Panel had no authority to consider thealternative claim by the United States under Article 63.”
7 See for example, Japan – Measures Affecting Consumer and Photographic Film and Paper
(Complaint by the United States)  (1998), WTO Doc. WT/DS44/R at para. 10.21 (Panel Report) [hereinafter
Japan - Film ]; Indonesia – Certain Measures Affecting the Automobile Industry (Complaints by Japan,
European Communities, United States) (1998), WTO Doc. WT/DS54,55,59,64/R at para. 14.3 (Panel Report)
[hereinafter Indonesia - Automobiles ].
8 In European Communities –  Bananas,  at para. 144, the Appellate Body noted:
“We note, in passing, that this kind of issue could be decided early in panel proceedings,
without causing prejudice or unfairness to any party or third party, if panels had detailed, standardworking procedures that allowed, inter alia , for preliminary rulings.”
9 European Communities - Regime for the Importation, Sale and Distribution of Bananas (Complaints
by Ecuador, Guatemala, Honduras, Mexico, United States) (1997) WTO Doc. WT/DS27/ECU at para. 7.6
(Panel Report).
10 United States – Import Prohibition of Certain Shrimp and Shrimp Products (Complaints by India,
Malaysia, Pakistan, Thailand)  (1998), WTO Doc. WT/DS58/AB/R [hereinafter United States - Shrimp ].
11 Id.. at para. 83.
12 Indonesia –Automobiles,  at para. 14.3.WT/DS70/R
Page 6
jurisdiction identified here are precisely these kinds of issues because an early decision would best
fulfil the objectives of due process, quoting the Appellate Body:
“… terms of reference fulfil an important due process objective -- they give the
parties and third parties sufficient information concerning the claims at issue in the
dispute in order to allow them an opportunity to respond to the complainant's case.”13
4.7 Canada submits that certain claims made by Brazil in its request for the establishment of a
Panel are not within the Panel’s jurisdiction because they are not identified with sufficient precision or
they were not the subject of consultations.  Canada argues that it must be given sufficient notice andspecificity concerning Brazil’s claims to allow Canada an opportunity to respond to Brazil’s case, and
that it follows that if certain claims are not pr operly within the Panel’s jurisdiction, the Panel should
so rule before the Parties’ first submissions are due, to give both Canada and Brazil adequate notice of
the actual claims in dispute, and to allow them adequate time to prepare their submissions
accordingly.
(b) Arguments of Brazil
4.8 Brazil agrees with Canada’s statements, consistent with the observations of the Appellate
Body in "Brazil - Measures Affecting Desiccated Coconut"
14 and "European Communities - Regime
for the Importation, Sale and Distribution of Bananas",15 that it is for the Panel to ensure compliance
with Article 6.2 of the DSU and, by analogy, Article 4 of the SCM Agreement.  Brazil also agrees that
it is within the Panel’s authority to make preliminary rulings on objections raised by the parties.  In
Brazil’s view, however, there is no specific requirement nor any established practice, requiring apanel to rule on preliminary objections concerning the Panel’s jurisdiction before the first submissions
of the parties. Brazil considers, however, that it may be in the best interests of the parties for the Panel
to expedite its ruling on the questions raised by Canada.
2. Consistency with Article 4.4 of the SCM Agreement of Brazil’s Request for the
Establishment of a Panel with respect to financing by the Export DevelopmentCorporation
(a) Arguments of Canada
4.9 Canada states that although Brazil’s request for the establishment of a panel includes
financing provided by the Export Development Corporation, no previous consultations were requested
with respect to this item.  Canada requests, theref ore, that the Panel make a preliminary finding that
any claim relating to financing provided by the EDC is not within its terms of reference, and therefore
cannot be addressed by the Panel.
                                                     
13 Brazil – Desiccated Coconut,  at 21.
14 (1997) WTO Doc. WT/DS22/AB/R.
15 (1997) WTO Doc. WT/DS27/AB/R.WT/DS70/R
Page 7
(i) Applicable law
4.10 Canada states that as required by the SCM Agreement, a request for a panel must be in
respect of a matter that has already been the subject of consultations.  Canada notes that Article 4,paragraphs 1 to 4 provide that:
4.1 Whenever a Member has reason to believe that a prohibited subsidy  is being granted
or maintained by another Member, such Member may request consultations with such
other Member.
4.2 A request for consultations under paragraph 1 shall include a statement of available
evidence with regard to the existence and nature of the subsidy in question .
4.3 Upon request for consultations under paragraph 1, the Member believed to be
granting or maintaining the subsidy in question  shall enter into such consultations as
quickly as possible.  The purpose of the consultations shall be to clarify the facts of
the situation and to arrive at a mutually  agreed solution.
4.4 If no mutually agreed solution has been reached within 30 days of the request for
consultations, any member party to such consultations may refer the matter  to the
Dispute Settlement Body (‘DSB’) for the immediate establishment of a panel, unless
the DSB decides by consensus not to establish a panel. (emphasis added)
4.11  Canada states that in Article 4.4, the ordinary meaning of “the matter” in the light of the
context and object and purpose of the SCM Agreement can only refer to an alleged “prohibited
subsidy” on which a Member has requested consultations in accordance with Article 4.1 and the
“subsidy in question” referred to in Articles 4.2 and 4.3.  The “matter”, Canada submits, cannot bemeasures that have not been the subject of consultations. Rather, for Canada, the “matter” referred to
in Article 4.4 is one on which “such consultations” have been requested, and not simply any other
matter on which a WTO Member may consider  worthy of adjudication by the panel.
4.12 Canada notes that under the DSU, the consultations step in the dispute settlement process is
not a mere formality,
16 and that SCM Agreement Article 4.3 provides that the responding Member
shall enter into consultations, for the purpose of arriving at a mutually agreed solution. Canada views
consultations under the SCM Agreement Article 4 as more onerous than under the DSU: Article 4.2
requires that in its request for consultations the Member must provide a statement of available
evidence with regard to the existence and nature of the subsidy in question.
4.13 For Canada, the question is the nature, and strength, of the connection that has to exist
between an alleged “prohibited subsidy” subject to a request for consultations and a “matter” subject
to a request for a panel.17  Canada submits that there must be a rational connection between the
                                                     
16 DSU Article 4.3 provides, inter alia , that if a request for consultations is made under a covered
agreement, the Member to which the request is made shall enter into consultations in good faith, with a view to
reaching a mutually satisfactory solution.
17 The issue here is not what took place during the consultations between Canada and Brazil: WTO
panels have no mandate to inquire into the adequacy of consultations.  The issue of the adequacy  of
consultations arose before the panels in European Communities - Bananas , and more recently in Korea – Taxes
on Alcoholic Beverages (Com plaints by European Co mmunities and United States) (1998), WTO Doc.
WT/DS75,84/R (Panel Report) [hereinafter Korea – Liquor Taxes ].  In the latter case, the Panel noted the report
in European Communities - Bananas , and agreed that it was impossible for a Panel to adjudicate on what
occurred in the consultations  (at para. 10.19):
“In our view, the WTO jurisprudence so far has not recognized any concept of ‘adequacy’ of
consultations.  The only requirement under the DSU is that consultations were in fact held, or were atleast requested, and that a period of sixty days has elapsed from the time consultations were requestedWT/DS70/R
Page 8
request for consultations (the “subsidy in question”) and the “matter” to be the subject of dispute
settlement; the “matter” must necessarily  follow from the “subsidy in question.”  For Canada, the
SCM Agreement explicitly  requires these connections, as do the implicit  requirements of due process.
Canada cites the Appellate Body:
“All parties engaged in dispute settlement under the DSU must be fully forthcoming
from the very beginning both as to the claims involved in a dispute and as to the facts
relating to those claims.  Claims must be stated clearly.  Facts must be disclosed
freely.  This must be so in consultations as well as in the more formal setting of panelproceedings.  In fact , the demands of due process that are implicit in the DSU make
this especially necessary during consultations.   For the claims that are made and the
facts that are established during consultations do much to shape the substance and the
scope of subsequent panel proceedings.”
18 [emphasis added by Canada]
4.14 For Canada, this analysis is equally applicable to requests for consultations; Article 4.4 is not
a licence for a fishing expedition.  In Canada’s view, the SCM Agreement is not observed, and due
process is not served, if Canada is forced to respond to a “matter” on which no consultations wererequested and none took place.
4.15 In response to a question from the Panel, Canada further argues that whether a matter has
been raised in the consultations is not relevant to th e determination of whether it is properly within the
request for a panel in accordance with Article 4.4 of  the SCM Agreement, for two reasons, the first
being its argument (para. 4.13) that the measures identified in the request for a panel must berationally connected to the “prohibited subsidy” identified in the request for consultations and must
flow directly from that alleged prohibited subsidy, and that the scope of the request for consultations
is determined, in turn, by the requirements of Article 4.2 of the SCM Agreement.
4.16 In view of the above, according to Canada, whether a “matter” is raised during consultations
is immaterial to the question of whether a request for a panel is consistent with Article 4.4.  It is notthe content or the context of the consultations that is governed by Article 4.2 and 4.4, but rather the
content of the request for consultations, which launches a dispute, and the content of the request for a
panel, which establishes the Panel’s terms of reference.
4.17 Canada’s second reason is that WTO panels have consistently held that the substantive  merits
of consultations are impossible to police and therefore to discipline by the WTO
19, as the WTO
Secretariat is not present during these consultations and, indeed, consultations are generally
confidential.  In Canada’s view, introduction of evidence relating to consultations would have three
consequences that would be deleterious to the dispute settlement system of the WTO:
                                                                                                                                                                    
to the time a request for a panel was made.   What takes place in those consultations is not the concern
of a panel.  The point was put clearly by the Panel in Bananas III , where it was stated:
‘[7.19] Consultations are . . . a matter reserved for the parties.  The DSB is not
involved; no panel is involved; and the consultati ons are held in the absence of the Secretariat.
While a mutually agreed solution is to be preferred, in some cases it is not possible for partiesto agree upon one.  In those cases, it is our view that the function of a panel is only to
ascertain that the consultations, if required, were in fact held. ...’
We do not wish to imply that we consider consultations unimportant.  Quite the
contrary, consultations are a critical and integral part of the DSU.  But, we have no mandate toinvestigate the adequacy of the consultation pr ocess that took place between the parties and
we decline to do so in the present case.”
18 India -  Pharmaceuticals , at para. 94 .
19 European Communities - Regime for the Importation, Sale and Distribution of Bananas (Complaints
by Ecuador, Guatemala, Honduras, Mexico, United States) (1997) WTO Doc. WT/DS27/ECU at paras. 7.17-
7.20 (Panel Report).  See also Korea - Taxes on Alcoholic Beverages  (1998) WTO Doc. WT/DS75,84/R (Panel
Report) at paras 10.17-10.19.WT/DS70/R
Page 9
a) in the event of a disagreement between the two sides as to what took place, a panel
would be put in the impossible position of determining which set of notes taken by the Parties to a
dispute represent a closer version of the truth;
b) in the event of multiple complainants that have held separate consultations, a panel
would be put in the difficult position of determining which statements during which set of
consultations have more probative weight; and
c) consultations are the first step in litigation in the WTO dispute settlement process.
They are also, in many instances, the last step in the process of diplomatic negotiations to avoid
litigation.  The introduction of evidence of the consultations would, in Canada’s submission, inhibit a
full discussion of the facts and issues and thereby render consultations a formality.
(ii) Whether Brazil requested consultations on financing provided by the Export Development
Corporation
4.18 Canada notes that Brazil’s request for consultations dated 10 March 1997, mentioned in part:
“1. Export Development Corporation (EDC) equ ity infusions into corporations specially
established to facilitate the export of aircraft;
EDC loan guarantees for exported aircraft; …”20
4.19 Canada states that in a letter of 19 March 1997 acknowledging Brazil’s request for
consultations, Canada stated:
“…as the Government of Brazil is aware, to ensure meaningful consultations and to
encourage Members to reach mutually satisfactory solutions to disagreements,Article 4.2 of the [SCM] Agreement requires that a request for consultations ‘include
a statement of available evidence with regard to the existence and nature of the
subsidy in question.’  The Government of Canada notes that the request from the
Government of Brazil relies only on ‘information available’ to the Government of
Brazil that merely ‘suggests’ inconsistencies; the request from the Government ofBrazil provides no statement of evidence in respect of any of the measures or
programmes listed.
Accordingly, with a view to clarifying the facts of the situation and arriving at a
mutually agreed solution, the Government of  Canada would respectfully request that
the Government of Brazil provide to the Government of Canada the availableevidence required to be provided under Article 4.2 of the Agreement in advance of
the consultations.”
21
4.20 According to Canada, Brazil’s response of 2 April 199722 mentioned only “[EDC] equity
infusions into special purpose corporations” and EDC loan guarantees. Thus, regarding financing
activity by the EDC, Canada argues, Brazil provided no notice at all, let alone a statement of evidenceas required by SCM Article 4.2.
                                                     
20Request for consultations by Brazil, WTO document WT/DS70/1, G/SCM/D12/1, 14 March 1997.
21Letter from the Government of Canada to the Government of Brazil dated 19 March 1997.  [TAB D,
23 October 1998 preliminary submission of Canada]
22 Letter from the Government of Brazil to the Government of Canada dated 2 April 1997.  [TAB E
23 October 1998 preliminary submission of Canada]WT/DS70/R
Page 10
4.21 Canada maintains that EDC’s financing activities (direct lending) are distinct and different
from EDC’s guarantee activities, stating that loans and loan guarantees are clearly distinguished in
EDC’s annual reports, which are public documents and were readily available to Brazil at the time itmade its request for consultations.
23  Canada asserts that Brazil recognised the distinction between
financing and loan guarantees at the time it made its request for the establishment of a panel, but had
elected to request consultations on one and not the other activity of EDC.
4.22 Canada states that similarly, equity infusions are distinct from loans,24 and that therefore
financing provided by the EDC, though related to  EDC’s other activities, is legally and factually
distinct from loan guarantees or equity infusions.
4.23 Canada therefore submits that financing provided by the EDC was not “a prohibited subsidy”
on which Brazil requested consultations in accordance with SCM Agreement Article 4.1, and was not
a “subsidy in question” within the meaning of SCM Agreement Articles 4.2 and 4.3.  Consequently,
for Canada financing provided by the EDC cannot  be the “matter” referred to the DSB under SCM
Agreement Article 4.4, and as such is not within the Panel’s terms of reference and falls outside the
Panel’s jurisdiction.
(b) Arguments of Brazil
4.24 Brazil requests that the Panel reject Canada’s request to find Brazil’s request for review of
EDC financing inconsistent with Article 4.4 of the SCM Agreement.  Brazil contends that its
identification of the EDC in its consultation request, combined with the language of that request (“ . . .
certain subsidies granted by the Government of Canada or its provinces that support the export ofcivilian aircraft from Canada”), covered all subsidy aspects of the EDC.  In Brazil’s view, a request
for consultations need not set forth an exhaustive list of questionable measures, particularly where, as
here, the very non-transparency of the system makes compilation of such a list virtually impossible.
To Brazil, such a requirement would reward non-transparent practices and place an unreasonable
burden on other Members.
4.25 Moreover, Brazil asserts, the full range of EDC support for exports of civilian aircraft,
including what Canada now terms as “EDC’s financing activities (direct lending),” in fact was subject
to consultations.  According to Brazil, in the consul tations it explicitly asked about all aspects of EDC
support, including financing, and therefore any claim that Canada’s due process rights will now
somehow be violated if it is “forced to respond” to claims concerning EDC “financing activities
(direct lending)” is without any basis in fact.
4.26 In response to a Panel request for evidence to substantiate the range of subjects on which
consultations were held, Brazil notes that direct evidence of the range of actual discussion during
consultations usually is not available, and is not available in this case.  Transcripts of consultation
meetings are not kept, and were not in fact kept in these proceedings.  Brazil directs the Panel’sattention to an article submitted by Brazil
25 which Brazil asserts was the specific impetus behind
Brazil’s request and, along with information from EMBRAER (the Brazilian aircraft manufacturer),
informed Brazil’s agenda for consultations with Canada in April 1997.  Brazil notes that the article
refers, with respect to EDC, to:  “’. . . direct loans and other export assistance available to non-
Canadian purchasers of Canadian aircraft . . .’”; “’. . . export credit insurance, guarantee services and
buyer credits; the latter usually by means of direct loans. . . .’”; and “’. . . bridging the gap between
equity and senior debt available from other sources. . . .’”
                                                     
23 Export Development Corporation, 1996  Annual Report  at 38, 43, 68.  [TAB F 23 October 1998
preliminary submission of Canada]
24 SCM Agreement Article 1.1(a)(1)(i) lists loans and equity infusions as distinct forms of financial
contribution.
25 Exh. BRA-18WT/DS70/R
Page 11
4.27 Brazil indicates that it also had at its dispos al EDC’s response to an inquiry of Ministry,
submitted by Brazil,26 which detailed “loans and loan guarantees to foreign buyers in support of the
sale of Canadian goods and services by” Bombardi er, de Havilland, Canadair, Boeing of Canada and
others.27  Brazil maintains that this evidence formed the basis for Brazil’s consultation request, and
framed Brazil’s agenda for the consultations themselves, and that it is evidence of the range of issues
discussed at consultations, which included the full ra nge of EDC financing, including debt, equity and
guarantees.
4.28 According to Brazil, the fact that its request focused upon the use of equity financing and loan
guarantees as particularly egregious infringements of Canada’s obligations under the SCM Agreement
speaks only to the broad press coverage granted EDC’s incorporation of a new subsidiary, Exinvest,
Inc., as a new vehicle for using these devices to support exports of civilian aircraft.  As an example,
Brazil provides an article from Transport Finance  which illustrates and describes the structure and
operation of EDC’s equity financing vehicle.28  According to Brazil, while the request for
consultations may have emphasized this aspect of EDC’s activities, the request and the consultations
covered all aspects of EDC financing, including direct lending.
4.29 Additionally, Brazil contends, although Canada  claims in its preliminary submission that
there is a marked legal and factual distinction between loan guarantees, equity infusions and
“financing,”29 recourse to the common definition of the term proves instructive.  Black’s Law
Dictionary  defines the verb “finance” in the following terms:
to supply with funds through the payment of cash or issuance of stocks, bonds, notes, or
mortgages; to provide with capital or lo an money as needed to carry on business.
4.30 In Brazil’s view, this definition suggests that “financing” does not imply a distinct form of
“direct lending,” but is a broader, more general term encompassing direct lending, debt and equity
support.  For Brazil, all of these types of support together constitute “financing.”  Brazil cites the
Panel in Japan - Measures Affecting Consumer Photographic Film and Paper  that “the requirements
of Article 6.2 would be met in the case of a ‘measure’ that is subsidiary or so closely related to a
‘measure’ specifically identified , that the responding party can reasonably be found to have received
adequate notice of the scope of the claims asserted by the complaining party.”30  Brazil contends that
all of these types of EDC support are “so closely related to one another” that, coupled with the fact
that they were all discussed in consultations, Canada must be held to have received “adequate notice”of Brazil’s claims.
4.31 Brazil also notes Canada’s own statement that it “does not suggest that the initial request for
consultations and the request for a Panel must be identical” (para. 4.55), and recalls Canada’s
observation of the Appellate Body’s statement in India - Patent Protection for Pharmaceutical and
Agricultural Chemical Products  that “the claims that are made and the facts that are established
during consultations do much to shape the substance and the scope of subsequent panel
proceedings.”
31  For Brazil, the whole point of consultations, according to the Panel in Korea - Taxes
on Alcoholic Beverages , “is to enable the parties to gather correct and relevant information,”32 and the
fact that Brazil would refine its knowledge of EDC’s operations as a result of consultations with
                                                     
26 Exh. BRA-28
27 Exh. BRA-69, which is an extract from the Cana dian Parliamentary reporter, Hansard, demonstrates
that responses to the inquiry of Ministry included as Exh. BRA-28 were tabled in Parliament on 16 September1996.
28 Transport Finance No. 74, 3 October 1996, Exh. BRA-18.
29 Government of Canada, Preliminary Submission, dated 23 October 1998, at para. 34.
30 (1998) WTO Doc. WT/DS44/R, at para. 10.8.
31 (1997) WTO Doc. WT/DS50/AB/R, at para. 94.
32 (1998) WTO Doc. WT/DS75, 84/R, at para. 10.23.WT/DS70/R
Page 12
Canada should come as no surprise, and in fact is consistent with the very purpose for those
consultations.
(c) Response of Canada
4.32 Canada rejects Brazil’s argument that:
“its identification of the EDC in its consultation request, combined with the language
of that request (“ … certain subsidies granted by the Government of Canada […] that
support the export of civilian aircraft for Canada”) covered all subsidy aspects of the
EDC.”
4.33 Canada argues that under the SCM Agreement, requests for consultation are subject to
specific requirements.  Article 4.2 provides, for example, that a “request for consultations under
paragraph 1 shall  include a statement of available evidence w ith regard to the existence and nature of
the subsidy in question.”  The “prohibited subsidy” in Article 4.1 is the subsidy with respect to which
such a statement must be made.
4.34 For Canada, if Brazil is correct that its general statement about “certain subsidies” and EDC
practices established the scope of its request for consultation – so that EDC “financing” would becaptured – then, in view of its letter of 2 April 1997 its entire request for consultation is inconsistent
with Article 4.2 and the case must be dismissed in its entirety.
4.35 Canada also rejects Brazil’s argument that “financing” does not imply a distinct form of
“direct lending”, but is “a broader, more general term encompassing direct lending, debt and equity
support,” and that its request for a panel on “financing by the EDC” is consistent with Article 4.4.  ForCanada, if Brazil’s reference to equity infusion and loan guarantees in its request for consultations
were also references to EDC financing, then its request for consultations would be completely
inconsistent with the requirements of Article 4.2, as it did not include a statement of evidence, as
required by that Article, of “financing” by the EDC, and therefore Brazil’s case, based on its own
arguments, must fail ab initio .
4.36 Canada does not request such an action, but rather that Brazil’s case be narrowed to include
only those prohibited subsidies on which consultati ons had been requested – that is, only those with
respect to which Brazil had provided Canada with a statement of evidence as required by Article 4.2.
4.37 Responding at the request of the Panel to Braz il’s statement that “the full range of EDC
support … was subject to consultations”, Canada reiterates that Brazil’s initial request forconsultations consisted of a series of vague allegations and therefore was not consistent with the
requirements of Article 4.2 of the SCM Agreement.  Canada agreed to enter into consultations, but
requested that Brazil provide it a statement of evidence as required by Article 4.2 of the SCM
Agreement.  Canada argues that Brazil’s letter of  2 April 1997 did not in any way include a statement
of evidence relating to the “full range of EDC support for the exports of civilian aircraft.”Accordingly, such full range of support was not, in Canada’s view, subject to consultations.
3. Consistency with Article 6.2 of the DSU and Brazil's request for a Panel in respect of
certain claims
(a) Arguments of Canada
4.38 Canada submits that Brazil’s request for Panel is inconsistent with Article 6.2 of the DSU in
that it does not “identify the specific measures at issue”, as required by Article 6.2 of the DSU with
respect to the following items:WT/DS70/R
Page 13
• financing  and loan guarantees provided by the Export Development Corporation … [emphasis
added by Canada]
• funds provided to the civil aircraft industry  by Technology Partnerships Canada and
predecessor programmes ; …[emphasis added by Canada]
• benefits  provided under the Canada-Québec Subsidiary Agreement on Industrial
Development; [emphasis added by Canada]
• benefits  provided by the Government of Québec under the Société de Développement
Industriel du Québec. [emphasis added by Canada]
4.39 For Canada, these items in the request are too vague to provide Canada with sufficient
information concerning the claims at issue, prejudicing Canada’s due process right to know the case
against it. Canada requests, in accordance with Article 6.2 of the DSU and principles of due process,
that the Panel make a preliminary finding that Brazil’s request is inconsistent with Article 6.2 of theDSU with respect to these items.
(i) Applicable law
4.40 Canada cites language from DSU Article 6.2:
“The request for the establishment of a panel shall … identify the specific measures at issue
and provide a brief summary of the legal basis of the complaint sufficient to present theproblem clearly.” [emphasis added by Canada]
4.41 Canada recalls the due process objectives the Appellate Body identified in  Brazil –
Desiccated Coconut , and European Communities – Bananas  (paras. 4.2 and 4.6), and states that in the
latter case, the Appellate Body also found that a panel could not cure defects in a panel request (see
footnote 5, supra).
4.42 Canada submits that the reasoning of the Appellate Body is applicable to the case where a
defending party is not given specific information as to the  factual  basis of the claims against it, and
that this is so a fortiori  in a process subject to an accelerated time-table.  The time allotted to a
defending Party is simply not adequate from a due process perspective, in Canada’s view, for the
preparation of a credible defence against a vague accusation, and any clarification that might be
provided in Brazil’s first submission cannot, therefore, “cure” the fundamental inconsistency of the
request for the establishment of a panel with Article 6.2.
(ii) The matters at issue
4.43  Canada states that with respect to the items identified in paragraph 4.38, Brazil’s request does
not provide any precision, and Canada simply does not know the case against it.
(1) “Financing” provided by the Export Development Corporation
4.44 Canada claims to be at a loss as to the scope of this heading of the request for the
establishment of a panel, having noted that this was not a matter on which consultations had been
requested. For Canada, nothing in the course of consultations could therefore guide it as to the nature
of the case against it.
4.45 Canada notes the less-than-two-week period for it to respond to Brazil’s first submission,
arguing that given the accelerated procedure of Article 4, it is manifestly contrary to Canada’s dueWT/DS70/R
Page 14
process rights to be forced to respond to a legal claim that could potentially cover hundreds of clients,
many thousands of financing transactions over several years, and a portfolio of Can$10 billion.
(2) “Civil aircraft industry”
4.46 Canada submits that in the particular circumstances of this case, especially in view of the
accelerated time-table under which this panel operates, “civil aircraft industry” does not meet the
requirement for specificity under Article 6.2 of the DSU.
4.47 For Canada, the civil aircraft industry is char acterised by a complex network of forward and
backward relationships between firms in many different industrial sectors that, nevertheless, because
of specialisation, may be considered part of the civil aircraft sector.33  It thus includes firms ranging
from machine shops and metal treatment facilities to  those involved in advanced instrumentation and
communications equipment.34 In Canada, this comprises over 200 enterprises employing 38,000
workers.35
4.48 Canada states that Brazil is not unaware of this complexity, as during the last set of bilateral
negotiations to resolve this dispute that immediatel y preceded the request for the establishment of this
panel, Brazil provided Canada with an all-encompassing definition:
“Aircraft Industry  means the industry producing any and all types of aircraft and its
related suppliers of engines, systems, parts, components, materials and services
through a company or any other related entity engaged in such industry of a Party,
including but not limited to corporations, joint ventures, special purpose companies(SPCs) and any related ‘off-balance sheet’ companies, as well as subsidiaries and
affiliates and any companies that are directly or indirectly controlled by said
companies or entities or that are under its direct or indirect control.  This definition
does not apply to helicopters, {military aircraft} nor to any item related here above
which individually costs represents [ sic] less than 2 per cent of the standard sales
price of the aircraft in which such item is used.”
36
4.49 For Canada, this over-broad description puts Canada in an impossible position in preparing a
defence to this claim.
4.50 Canada cites the Korea – Liquor Taxes37 dispute, in which Korea argued that the request for
the establishment of a panel--which referred to products under HS heading 2208--was not specificenough to satisfy the requirements of Article 6.2, and that each distilled alcoholic beverage had to be
specifically identified.  The complainants responded that the appropriate imported product was all
distilled beverages  and simply identifying the HS heading was appropriate.
                                                     
33 Industry Canada, Aerospace and Defence:  Part C , online:  Industry Canada homepage
http://strategis.ic.gc.ca/SSG/ad01475e.html  (last modified:  8 December 1995 ).  [TAB G 23 October 1998
preliminary submission of Canada]
34 Id..
35 Industry Canada, Aerospace and Defence:  Part B , online:  Industry Canada homepage
http://strategis.ic.gc.ca/SSG/ad01541e.html  (last modified:  16 May 1997).  [TAB H 23 October 1998
preliminary submission of Canada]
36 Government of Brazil, Proposed Memorandum of Understanding between the Government of Brazil
and the Government of Canada on Exchange of Information on the Aircraft Industry, 26 June 1998.  [TAB J23 October 1998 preliminary submission of Canada]
37 Korea – Liquor Taxes..WT/DS70/R
Page 15
4.51 According to Canada, the panel, noting the impor tance of ensuring that the panel request met
the criteria set out in Article 6.2, observed that the issue required the weighing of evidence,
particularly in view of the previous findings made in Japan – Taxes on Alcoholic Beverages38:
“While it is possible that in some cases, the complaint could be considered so vague
and broad that a respondent would not have adequate notice of the actual nature of the
alleged discrimination, it is difficult to argue that such notice was not provided here
in light of the identified tariff heading and the Appellate Body decision in the Japan -
Taxes on Alcoholic Beverages  II.”39
4.52 For Canada, in the present dispute there is no identified tariff heading and no previous
decision to guide Canada as to what Brazil might mean by the “civil aircraft industry”, and
accordingly, in view of the short time-lines of the Article 4 process and in view of the nature of
Article 3 as an outright prohibition, Canada submits that it is contrary to its due process rights as
protected by the DSU to be forced to respond to cases of which it has been given no specific notice,
contrary to the explicit requirements of the DSU.
(3) “Predecessor programmes”
4.53 Canada submits that “predecessor programmes” does not identify with adequate specificity
the programmes that, Brazil alleges, are inconsistent with Article 3.  Canada states that it does not
know which “predecessor” programmes to Technology Partnerships Canada are being challenged, nor
which activities or transactions are being challenged.
(4) Benefits provided under the Canada-Québec Subsidiary Agreement  and the Société
de Développement Industriel du Québec
4.54 Canada argues that the last two headings of the request are also inconsistent with Article 6.2,
in that “benefits provided” does not provide any measure of specificity as required by Article 6.2.  ForCanada, it is not clear which aspect of these programmes, or which activities or transactions under
these programmes, Brazil considers to have conferred a “benefit”, and thus the request does not give
Canada any clue as to the scope of the challenge against it.
(iii) Brazil’s request for the establishment of a panel does not meet the requirements of Article 6.2
of the DSU
4.55 Canada argues that Brazil’s request for a Panel is far vaguer than its initial request for
consultation..  Canada does not suggest that the initial request for consultations and the request for a
Panel must be identical, recalling the observation by the Appellate Body that “the claims that are
made and the facts that are established during consultations do much to shape the substance and the
scope of subsequent panel proceedings,”
40 and by the Panel in Korea – Taxes on Alcoholic Beverages
that “in our view, the very essence of consultations is to enable the parties to gather correct and
relevant information.”41
4.56 According to Canada, consultations thus afford the Parties the opportunity to give more
precision to the dispute, not less; additional facts gathered in the consultations phase should give
substance to a complaining Party’s allegations, not make them less substantial, as Brazil’s claims have
become.
                                                     
38 Japan - Taxes on Alcoholic Beverages (Compl aints by European Communities, Canada and the
United States)  (1996), WTO Doc. WT/DS8,10,11/AB/R (Appellate Body Report).
39 Korea – Liquor Taxes,  para. 10.16.
40 India - Pharmaceuticals , at para. 94.
41 Korea – Liquor Taxes,  at para. 10.23.WT/DS70/R
Page 16
4.57 For Canada, the integrity of the procedures set out in the DSU and amplified in successive
Panel and Appellate Body Reports goes to the root of the Dispute Settlement Body’s principal
objective of “providing security and predictability to the multilateral trading system.”42  In Canada’s
view, due process, fairness, procedural justice: these inexact concepts permeate the DSU -- indeed any
legal order -- and though implicit, they give meaning and embellish the explicit procedural guarantees
provided for in the DSU, one of the most important of which is Article 6.2, the effective grant of
jurisdiction to the panel.
4.58 Canada submits that the importance put on Article 6.2 of the DSU by the Appellate Body
arises from the recognition that security and predictability evaporate when a party attempts to conduct
its case as “‘trial by ambush.’”43
(b) Arguments of Brazil
4.59 Brazil maintains that its request for establishment of a panel is consistent with Article 6.2 of
the DSU.  Brazil notes, concerning the factual basis of Brazil’s claims, its request in a preliminary
submission that the Panel ask Canada to reveal the complete details of all operations of EDC, the
Canada Account, the Technology Partnerships Canada (“TPC”) and its predecessor programmes, theCanada-Québec Subsidiary Agreements on Industria l Development (the “Subsidiary Agreements”),
and the Société de Développement Industriel du Québec (“SDI”) with regard to the civil aircraft
industry.  (paras. 4.79 - 4.83 )
4.60 Before addressing Canada’s arguments concerning particular problems with the specificity of
Brazil’s request for the establishment of a panel, Brazil considers it crucial to address Canada’s failureto participate meaningfully in the consultation proc ess by offering factual information regarding the
programmes at issue.  Brazil cites the Appellate Body in India - Patent Protection for Pharmaceutical
and Agricultural Chemical Products :
All parties engaged in dispute settlement  under the DSU must be fully forthcoming
from the very beginning both as to the claims involved in a dispute and as to the factsrelating to those claims.  Claims must be clearly stated.  Facts must be disclosed
freely.  This must be so in consultations as well as in the more formal setting of panel
proceedings.  In fact, the demands of due process that are implicit in the DSU make
this especially necessary during consultations.  For the claims that are made and the
facts that are established during consultations do much to shape the substance and thescope of subsequent panel proceedings.
44
4.61 Brazil argues that due process flows two ways, and that it would violate all notions of basic
procedural fairness to blame Brazil for any alleged lack of specificity in stating the factual bases for
its claim stemming from Canada’s failure to disclose  those facts crucial to the process envisioned in
the DSU.  For Brazil, Canada, in making its own request to the panel regarding procedures forhandling confidential information (See paras. 4.152 - 4.161) implicitly admits that it failed to disclose
those facts. Brazil accepts that Canada’s concern for protecting confidential business information is
genuine, and that this genuine concern motivated the refusal to disclose.  But for Brazil this refusal,
however genuinely motivated, cannot then be turned on Brazil in the form of an accusation of failure
to be specific.
                                                     
42 Article 3.2 of the DSU .
43Redfern, A. and M. Hunter, Law and Practice of International Commercial Arbitration , 2nd ed.
(London: Sweet & Maxwell, 1991) at 320-21.  The authors were referring to the withholding of principal
arguments in the written submission, only to make them in  the oral hearing; in the context of this case, however,
and in view of Article 6.2, their observation is apposite.  [TAB I 23 October 1998 preliminary submission ofCanada]
44 (1997) WTO Doc. WT/DS50/AB/R, at para. 94.WT/DS70/R
Page 17
4.62 Brazil further notes the Appellate Body’s statement in European Communities - Regime for
the Importation, Sale and Distribution of Bananas  that “Article 6.2 of the DSU requires that the
claims , but not the arguments , must all be specified sufficiently in the request for the establishment of
a panel . . .” 45  According to Brazil, the Appellate Body’s decision emphasized that Article 6.2
requires that a panel request be “sufficiently precise” because (1) it serves as the basis for the panel’s
terms of reference, and (2) “it informs the defending party and the third parties of the legal basis of
the complaint .”46
4.63 For Brazil, Canada’s contention that Article 6.2 is infringed by an alleged failure to provide
“specific information as to the factual  basis of the claims against it” (para. 4.42) is irrelevant; the
Appellate Body in European Communities - Regime for the Importation, Sale and Distribution of
Bananas  required only that “ legal  basis” of the complaining party’s claim be “sufficiently precise.”
4.64 Brazil contends that the claims stated in its panel request meet the test of Article 6.2 of the
DSU, as applied by the Appellate Body in European Communities - Regime for the Importation, Sale
and Distribution of Bananas . Brazil notes that its panel request states that “Canada grants or
maintains an extensive array of subsidies for the Canadian industry producing civil aircraft which areinconsistent with Canada’s obligations under Article 3.1(a) and Article 3.2 of the SCM Agreement in
that they are contingent in law or in fact, whether solely or as one of several other conditions, upon
export performance,”
47 and specifies those programmes exemplifying Canada’s breach of its
obligations under Articles 3.1(a) and 3.2 of the SCM Agreement.  Brazil maintains that as such it
identified the two components of a claim essential to maintain Canada’s due process rights pursuant toArticle 6.2:  (1) the particular provisions of the SCM Agreement with which Canada is charged with
failure to comply; and (2) the particular Canadian measures demonstrating that failure.  Brazil
contends that it has therefore satisfied the test of identifying its claim with “sufficient precision,” as
required by Article 6.2 and the Appellate Body’s decision in European Communities - Regime for the
Importation, Sale and Distribution of Bananas .
48
(i) EDC “financing”
4.65 Brazil recalls its view (see paras. 4.61, 4.73) th at it would be contrary to the purposes of
Article 6.2 of the DSU and Article 4.4 of the SCM Agreement for the Panel to reward Canada for its
failure to participate meaningfully in the type of disclosure required by the consultation process, as
discussed by the Appellate Body in India - Patent Protection for Pharmaceutical and Agricultural
Chemical Products .49  Brazil argues that Canada maintains a veil of secrecy around EDC and the
other export subsidy programmes provided to the civilian aircraft industry which makes it impossible
for Brazil to perceive what Canada contends are clear “legal[] and factual[]” distinctions between the
various forms of EDC financing (para. 4.22), and that this should not stand in the way of Brazil’s right
to pursue its claim.  Brazil maintains that “EDC’s  financing activities (direct lending)” ( para. 4.21)
were discussed in consultations, and Canada was therefore on notice of Brazil’s claim.
4.66 Brazil also notes that Canada purports to know precisely what Brazil means in its use in its
panel request of the term “financing” by the ED C; Canada defined this term to mean “EDC’s
financing activities (direct lending).” For Brazil, this indicates that Canada appears to understand fully
the meaning of the term “financing,” calling into question how the use of that term in its panel request
prejudices Canada’s “due process right to know the case against it.”50
                                                     
45 (1997) WTO Doc. WT/DS27/AB/R, at para. 143.
46 Id. at para. 142 (emphasis added by Brazil).
47 Government of Brazil, Request for the Establishment of a Panel.
48 (1997) WTO Doc. WT/DS27/AB/R, at paras. 139-144.
49 (1997) WTO Doc. WT/DS50/AB/R, at para. 94.
50 Id. at para. 37.WT/DS70/R
Page 18
(ii) Definition of “civil aircraft industry”
4.67 Regarding the definition of “civil aircraft indust ry”, Brazil contends that this term is more
specific than “aircraft,” the term used by Canada in its panel request concerning Brazil’s export credit
programme.51  Brazil views as implausible Canada’s contention that it does not have notice  of the
meaning of that term, one of the primary purposes behind the requirement of specificity in Article 6.2,
as Canada provides the definition of “aircraft industry” proposed by Brazil during bilateral
negotiations preceding the establishment of this Panel (para. 4.48).  In Brazil’s view, Canada thereforehad notice of the meaning of that term in its panel request, and cannot now claim that its “due process
right to know the case against it” is somehow prejudiced (para. 4.39).
4.68 Regarding Canada’s apparent contention that this working definition is “over-broad” and
therefore fails to meet the specificity requirement of Article 6.2 of the DSU, (para. 4.49) Brazil recalls
an Appellate Body statement in European Communities - Customs Classification of Certain Computer
Equipment , that an infringement of Article 6.2 is not created because of a “lack of precision of the
terms . . . in the request for the establishment of a panel . . .”
52  For Brazil, there is no requirement in
Article 6.2 that a complaining party somehow circum scribe a narrow category of products to which
the challenged measures apply, particularly in the context of export subsidies, which are considered
de facto  specific within the meaning of Article 2.3 of the SCM Agreement.  Rather, if the products
subject to the defending party’s export subsidies fall  within a broad category, then it is a complaining
party’s right to challenge the full effect of those export subsidies, as long as the due process ornotification purpose underlying Article 6.2 is met.  In Brazil’s view, if it were otherwise, Article 6.2
would serve as an incentive for Members to structure export subsidies to benefit as broad a range of
products as possible, in order to escape a panel’s jurisdiction.
4.69 Brazil objects to Canada’s citation of the Panel in Korea - Taxes on Alcoholic Beverages  as
support for Canada’s argument that Brazil’s failure to identify the tariff headings relevant to the “civilaircraft industry” suggests that Brazil has failed to meet the specificity requirement of Article 6.2
(para. 4.50). In Brazil’s view, Canada neglects to note that Panel’s citation to European Communities
- Customs Classification of Certain Computer Equipment , in which the Appellate Body found that “a
panel request based on a broader grouping of products [than those included in an identified tariff
heading] was sufficiently specific for the purposes of Article 6.2.”
53
4.70 Brazil also argues that here, as in Korea - Taxes on Alcoholic Beverages , “[t]he issue of the
appropriate categories of products to compare is important to this case,”54 and that determining the
scope of the definition of “civil aircraft industry” is an issue “that requires a weighing of evidence”
and that is therefore “not an issue appropriate for a preliminary ruling . . .”55
(iii) TPC “predecessor programmes”
4.71 Regarding Canada’s argument that the reference in Brazil’s panel request to TPC’s
“predecessor programme” does not meet the specificity requirement of Article 6.2, Brazil asserts that
Canada is well aware that there is one and only one predecessor programme to TPC, i.e., the Defence
Industry Productivity Programme (“DIPP”), as evid enced in numerous statements concerning the
                                                     
51 Brazil – Export Financing Programme for Aircraft,  WT/DS/46/5.
52 (1998) WTO Doc. WT/DS62, 67/AB/R, at para. 70.
53 Korea - Taxes on Alcoholic Beverages , (1998) WTO Doc. WT/DS75, 84/R, at para. 10.16, citing
European Communities - Customs Classification of Certain Computer Equipment , (1998) WTO Doc.
WT/DS62,67/AB/R, at paras. 58-73.
54 (1998) WTO Doc. WT/DS75, 84/R, at para. 10.16.
55 Id.WT/DS70/R
Page 19
launching of TPC in 1996.  Brazil refers to a response to a March 1996 Parliamentary inquiry56 in
which Industry Canada (the Canadian government agency overseeing TPC) announced that “no new
commitments are being made under DIPP,” and that “[a]ny future funding will be considered underthe auspices of the new programme, Technology Partnerships Canada.”  Brazil argues that Canada’s
professions of ignorance concerning TPC’s predece ssor programme must therefore be rejected.  In
response to a question from the Panel, Brazil indicate s that its claims with respect to “funds provided
to the civil aircraft industry by TPC and its predecessor programmes” is restricted to funds provided
by TPC and DIPP.
(iv) Benefits provided under the Subsidiary Agreements and SDI
4.72 Regarding Canada’s argument that Brazil’s panel request with regard to “benefits provided”
to the civil aircraft industry under the Subsidiary  Agreements and SDI does not meet the specificity
requirement of Article 6.2, Brazil notes that these programmes were explicitly included in its request
for consultations and were on the table for discussion during consultations.  Brazil argues that Canada
was therefore on notice of these matters, and their inclusion in Brazil’s panel request therefore
satisfies the requirements of Article 6.2 of the DSU.
4.73 In Brazil’s view, the Panel should not reward Canada for its failure to uphold its duty, as
identified by the Appellate Body in India - Patent Protection for Pharmaceutical and Agricultural
Chemical Products , to be “fully forthcoming” in consultations.  Brazil contends that the facts of
Canada’s provision of export subsidies under the Subsidiary Agreements and SDI are within Canada’s
exclusive control, and that it would be contrary to the letter and spirit of both the consultationprovisions and Article 6.2 of the DSU to reward Canada’s failure to “disclose[] freely” the facts of
those programmes by limiting the scope of the Panel’s jurisdiction.
B. 
REQUEST OF CANADA FOR PRELIMINARY FINDING ON JURISDICTION : THE SCM A GREEMENT
DOES NOT APPLY TO CONTRIBUTIONS AND TRANSACTIONS THAT TOOK PLACE BEFORE THE
ENTRY INTO FORCE OF THE WTO A GREEMENT
1. Request of Canada
4.74 Canada argues that claims by Brazil concerni ng certain 1989 funding by the Defense Industry
Productivity Programme “(DIPP”) and the Société de Développement Industriel (“SDI”) for
development of the 50-seat regional jet are outside the Panel’s jurisdiction because they were
provided prior to 1 January 1995, the date of entry into force of the WTO Agreement.  Canada asksthe Panel to so rule.
4.75 According to Canada, pursuant to Article 28 of the Vienna Convention, the SCM Agreement
is not applicable to these contributions, as it provides that a treaty shall not be applied retroactively
‘unless a different intention appears from the treaty or is otherwise established’.
57
4.76 Canada maintains that there is no contrary intention expressed in either the SCM Agreement
or the WTO Agreement that demonstrates the SCM Agreement would apply to an event that took
place in 1989.  Therefore, according to Canada, this claim lies outside the jurisdiction of the Panel and
should be dismissed.
                                                     
56 Exh. BRA-28
57 Brazil – Measures Affecting Desiccated Coconut , WTO Doc. WT/DS22/AB/R Report of the
Appellate Body adopted on 20 March 1997, at 15.WT/DS70/R
Page 20
2. Response of Brazil
4.77 Brazil agrees that, with regard to prohibited subsidies, the SCM Agreement is not intended to
apply retroactively.  Thus, for Brazil , this 1989 DIPP and SDI subsidy, even though it was
inconsistent with Canada’s obligations under the Tokyo Round Code, which applied at the time the
subsidy was granted, is not subject to the current SCM Agreement. Accordingly, Brazil concedes that
the Panel may disregard DIPP contributions made prior to 1 January 1995.
4.78 The Panel  notes that because Brazil has dropped these claims, the substantive arguments of
the parties concerning them are not included in this report.
C. BRAZIL’S REQUEST REGARDING ADDITIONAL FACT FINDING
1. Arguments of Brazil
4.79 Brazil, in a preliminary submission, requests the Panel to engage in additional fact-finding by
requesting Canada to present to the Panel and the parties, at the first meeting of the Panel, the
complete details of all operations of the Export Development Corporation, the Canada Account, the
Technology Partnerships Canada and its predecessor programmes, the Canada-Québec Subsidiary
Agreement on Industrial Development, and the Soci été de Développement Industriel du Québec with
regard to the civil aircraft industry, including all grants, loans, equity infusions and loan guarantees, or
any other direct or indirect financial contribution of any kind.
4.80 According to Brazil, public information is availa ble to show that the measures listed in its
request for establishment of a panel (1) involve a financial contribution by government;  (2) to the
Canadian manufacturer of regional civil aircraft; (3) conferring a benefit on that manufacturer;  (4)contingent in law or in fact on export. Brazil argues that its arguments in the case would be
handicapped because Canada declined to provide transaction-specific details concerning these
measures during consultations, on the stated grounds of confidentiality.
4.81 For Brazil, Canada's position is at odds with the teachings of the Appellate Body in India –
Patent Protection for Pharmaceutical and Agricultural Chemical Products :
All parties engaged in dispute settlement  under the DSU must be fully forthcoming
from the very beginning both as to the claims involved in a dispute and as to the facts
relating to those claims.  Claims must be stated clearly.  Facts must be disclosed
freely.  This must be so in consultations as well as in the more formal setting of panel
proceedings.  In fact, the demands of due process that are implicit in the DSU makethis especially necessary during consultations.
58
4.82 Brazil asserts that this statement makes clear that Canada was not justified in declining to
disclose relevant details during consultations.  Brazil further argues that there is no justification for
declining to produce confidential information at the panel stage of dispute settlement.  Article 18.2 of
the Understanding on Rules and Procedures Governing the Settlement of Disputes permits Membersto designate information submitted to the Panel as confidential and requires other Members to respect
that designation.  Brazil notes that Members that believe the procedures of Article 18.2 are inadequate
are free to propose an alternative procedure to the Panel.
59
4.83 Brazil recalls that in India Pharmaceuticals  the Appellate Body specified that, "If, in the
aftermath of consultations, any party believes that a ll the pertinent facts relating to a claim are, for any
                                                     
58 AB-1997-5, WT/DS50/AB/R (19 December 1997) para. 94.
59 Indonesia – Certain Measures Affecting the Automobile Industry , WT/DS54/R, WT/DS55/R,
WT/DS59/R, WT/DS64/R (2 July 1998) para. 14.7.WT/DS70/R
Page 21
reason, not before the panel, then that party should ask the panel in that case to engage in additional
fact-finding".60  Brazil argues that the result of Canada's refusal to disclose the details of the
operations of these measures with regard to regional civil aircraft would be that not all of the pertinentfacts relating to its claim would be before the Panel.
2. Arguments of Canada
(a) Background to Brazil’s motion: the consultations, “transaction-specific” information and
confidentiality
4.84 Canada responds that it began providing information to Brazil long before formal WTO
consultations were requested in this case. According to Canada, Brazil raised concerns about “secret”
accounts and “vast arrays of subsidies” in the course of consultations and negotiations in the case
launched by Canada in 1996,  Brazil - Export Financing Programme for Aircraft .  Canada states that
at the time it pointed out that much of the information requested by Brazil was public; and that it
nevertheless provided considerable public documentation to Brazil.  For Canada, the questions posed
by Brazil throughout the negotiations in the Brazil - Export Financing Programme for Aircraft  case
and then during the consultations in this case, indicated that Brazil was already in possession ofsignificant detailed information.
4.85 With respect to “transaction-specific” information requested by Brazil in its letter, Canada
states that it repeatedly noted during consultations the difficulty of responding to a shotgun request for
documents on “all transactions” relating to the mentioned programmes.  Canada asserts that it asked
Brazil to narrow its request to specific transactions and to identify its claim in respect of suchtransactions so that it might be made aware of the case against it and so that it might provide Brazil
with more information.  According to Canada, no such specificity was forthcoming.
4.86 Further, Canada argues, throughout the consultations and negotiations, Canada underlined the
commercial confidentiality of the “transaction-specific” information that might be covered by Brazil’s
shotgun requests.  In Canada’s view, its efforts in good faith to protect the interests of privateenterprises not parties to this dispute were fully consistent with the principles underlying the DSU.
61
Canada maintains that its proposal on procedures governing confidential business information (paras.4.152- 4.161) is intended to enable all necessary disclosure while protecting the interests of private
persons not party to this dispute.
(b) Brazil’s request is inconsistent with WTO law and practice
4.87 Canada argues that Brazil’s request, without having first presented a prima facie  case before
the Panel, is inconsistent with the WTO Agreement and international law and practice.  Canada notes
the statement by the Appellate Body in India- Pharmaceuticals II
62 relied upon by Brazil.  According
to Canada, in that case, the Appellate Body was discussing the panel’s error in deciding on a US claim
that was not within the panel’s terms of reference.  There, the United States alleged that it had notmade the relevant claim in its panel request because it had no way of knowing that India would rely
on a particular defence not disclosed to the United States during consultations.  Canada states that the
                                                     
60 AB-1997-5, WT/DS50/AB/R (19 December 1997) Para. 94
61 The impact of a particular interpretation of Article 6.10 on private persons was an element for
consideration by the Appellate Body in United States - Restrictions on Imports of Cotton and Man-made Fibre
Underwear  (Cotton Underwear ), WT/DS24/AB/R, Report of the Appellate Body Adopted on 25 February 1997,
at 15.
62 India - Patent Protection for Pharmaceutical and Agricultural Chemical Products  (India -
Pharmaceuticals II ), WT/DS50/AB/R, Report of the Appellate Body adopted on 16 January 1998.WT/DS70/R
Page 22
Appellate Body found that, nevertheless, there wa s no basis in the DSU for a complaining party to
make an additional claim, outside the scope of the panel’s terms of reference.63
4.88 Canada notes that the Appellate Body then commented on the importance of parties engaged
in dispute settlement being “…fully forthcoming from the very beginning, both as to the claims
involved in a dispute, and as to the facts relating to those claims,”64 then described the importance of
meeting the demands of due process in consultations, and then stated that:
“If, in the aftermath of consultations, any party believes that all the pertinent facts
relating to a claim are, for any reason, not before the panel , then that party should ask
the panel in that case to engage in additional  fact-finding.”65 [emphasis added by
Canada]
4.89 For Canada, it is well-established practice for a WTO panel, having received the first
submissions and evidence of the parties and having heard their first substantive oral arguments, to ask
the parties for information additional to that submitted by the parties.  In Canada’s view, there is also
precedent for a party to the dispute to ask a panel to seek further information at this stage, and for a
panel to reject that request if the panel considers the information requested is irrelevant orunnecessary.
66
4.90 According to Canada, there is no support in th e statement of the Appellate Body, however, or
indeed in the DSU, WTO practice, or international law and practice for turning the panel process into
something akin to a commission of inquiry;67 there is, more important, no provision in the DSU and
no precedent in GATT or WTO jurisprudence for subjecting a responding party to a discoveryprocess.
68
                                                     
63 Id.. at para. 93.
64 Id.. at para. 94.
65 Id.. at para. 94.
66 See, for example, European Communities – Measures C oncerning Meat and Meat Products
(Hormones) , WT/DS48/R/CAN, Report of the Panel adopted on 13 February 1998, at paras. 8.5 and 8.11.
67 J.G. Merrills states that ‘inquiry’ can be defined as:  “a specific institutional arrangement which
states may select in preference to arbitration or other techniques , because they desire to have some disputed
issue independently investigated .” [emphasis added] See J.G. Merrills, International Dispute Settlement , 2nd ed.
(Cambridge:  Grotius Publications Ltd., 1991), at 43.  [TAB A 23 October 1998 preliminary submission of
Canada ]  According to Merrills, commissions of inquiry were introduced by the Hague Convention for the
Pacific Settlement of International Disputes , 1899.  Among the limitations on their mandate was that they
should handle only questions of fact and not of law, and that their findings should not be seen as obligatory.  See
Id.. at 44.  [TAB A October 1998 preliminary submission of Canada ]  This is manifestly at odds with the
objectives and the nature of WTO dispute settlement.
68 The basic instruments to ensure that an arbitral  tribunal has the authority to order a discovery of
evidence are “through certain specific stipulations.”  See V.S. Mani, International Adjudication: Procedural
Aspects , (The Hague: Martinus Nijhoff Publishers, 1980), at 212.  [TAB B October 1998 preliminary
submission of Canada ]  The power to order evidentiary discovery is therefore not inherent in arbitral tribunals.
For example, evidentiary discovery has been explicitly provided for in the Statute of the International
Court of Justice . [Annex to the Charter of the United Nations , 26 June 1945, 15 U.N.C.I.O. 335 at 355 (entered
into force 24 October 1945)] Article 49 provides that “[t]he Court may, even before the hearing begins, call
upon the agents to produce any document or to supply any explanations.  Formal note shall be taken of any
refusal.” [TAB C October 1998 preliminary submission of Canada ]  The Optional Rules for Arbitrating
Disputes between Two States  of the Permanent Court of Arbitration [TAB D October 1998 preliminary
submission of Canada ] provides, in its Article 24.3, that:
At any time during the arbitral proceedings th e arbitral tribunal may call upon the parties to
produce documents, exhibits or other evidence within such a period of time as the tribunal shalldetermine.  The Tribunal shall take note of any refusal to do so as well as any reasons given for suchrefusal.WT/DS70/R
Page 23
4.91 In this respect Canada notes the ruling of the panel in Indonesia - Automobiles  concerning the
request of Indonesia “to require the United States to submit its confidential data immediately:”69
“We encourage all parties to submit relevant data to the Panel as early as possible.
However, we have concluded that it would not be appropriate for us to require the
United States to submit the information in question in the context of this meeting.  It
is a matter for each party to decide when and if to submit information and
argumentation within the schedule set forth by the Panel.   In this respect, we note that
there is no rule in the DSU or our working procedures that requires parties to submitall factual information in their first submissions.  In fact, factual information is often
provided in second submissions or in response to questions from a panel as the issues
in the case come into sharper focus.  We see no reason to deviate from that approach
in this case.”
70 [emphasis added by Canada]
4.92 For Canada, “additional fact-finding”, if a panel deems it necessary, is precisely that: it is
additional  to facts presented in support of a particular claim.  In Canada’s view, there is neither
precedent in WTO practice nor provision in the DSU for a panel to engage in fact-finding when it hasnot had an opportunity to examine the evidence submitted by the parties in their first submissions and
the relevance of that evidence to or support for the cl aims of the disputing parties, or to request that a
party submit information in respect of defences it has not yet raised in response to claims that have yet
to be made out.
4.93 Canada asserts that it cannot be expected to provide the information requested by Brazil when
it does not yet know what the scope of Brazil’s claims is, when Canada has not yet put its defence
before the Panel, when it is impossible for the Panel to determine what are the “pertinent facts” given
the lack of specificity of Brazil’s request for a panel and Brazil’s subsequent motion for discovery,
and when the Panel has not had the chance to examine whether Brazil has a prima facie  case that
would require Canada to present any evidence in its own defence.
4.94 Canada notes that it is the responsibility of Brazil to present its case; it must adduce
“’evidence sufficient to raise a presumption‘”
71 that its claims are true.  In Canada’s view, if Brazil
does not have such evidence, there is no obligation on the part of Canada to provide additional
information: Brazil’s claims must fail;  if, on the other hand, Brazil has such information, then the
                                                                                                                                                                    
The specific grants of authority noted above may be contrasted with Article 13 of the DSU, which
provides that:
1. Each panel shall have the right to seek information and technical advice from any individualor body which it deems appropriate. However, before a panel seeks such information or advice fromany individual or body within the jurisdiction of a Member it shall inform the authorities of that
Member.  A Member should respond promptly and fully to any request by a panel for such information
as the panel considers necessary and appropriate.  Confidential information which is provided shall notbe revealed without formal authorization from the individual, body, or authorities of the Memberproviding the information.2. Panels may seek information from any relevant source and may consult experts to obtain theiropinion on certain aspects of the matter.  With respect  to a factual issue concerning a scientific or other
technical matter raised by a party to a dispute, a panel may request an advisory report in writing from
an expert review group.  Rules for the establishment of such a group and its procedures are set forth inAppendix 4.This clearly is not a “specific stipulation” of authority for discovery, as noted by Mani and as provided
for in the Statute of the ICJ.
69 Indonesia - Certain Measures Affecting the Automobile Industry  (Indonesia - Automobiles ), Report
of the Panel adopted on 23 July 1998, at para. 14.6.
70 Id.. at para. 14.7.
71 United States - Measure Affecting Imports of Woven Wool Shirts and Blouses from India  (Shirts and
Blouses ), WT/DS33/AB/R, Report of the Appellate Body adopted on 23 May 1997, at 14.WT/DS70/R
Page 24
“’burden shifts to the other party, who will fail unless it adduces sufficient evidence to rebut the
presumption.’”72  In this regard, Canada quotes Dr. Mojtaba Kazazi:
“First, it is an established rule that if the claimant does not provide any evidence  at
all, there is no duty for the other party to do so.  In Anglo-American Law, from which
seemingly the rule of collaboration originates, if the claimant is not able to show  at
the early stages of the proceedings that it has a solid case, the judge will announce
that there is no case to answer , and the respondent will not be required to provide any
evidence ”.  [emphasis added by Canada]
“Second, as to the order of production of evidence, it is also an established rule in
both municipal and international procedure that the respondent does not have to
initiate the production of evidence before the claimant does ”.  [emphasis added by
Canada]
“Third, not only should the claimant initiate the production of evidence but the
evidence, it provides should be of some value.  The minimum standard of proof
known in many municipal jurisd ictions is prima facie evidence ”.  [emphasis added by
Canada]
4.95 Canada argues that the duty to cooperate in no way relieves the claimant of its burden of
proof, nor does it allow a claimant to embark upon a broad and unfounded request for information.  In
this regard, Canada argues that the situation in the Argentina – Footwear  case is not even remotely
similar to the situation in the present case. Canada  notes that in its report, that Panel considered
evidence based on specific transactions  that was adduced by the United States.  In particular, the
United States submitted copies of invoices of shipments to support its arguments.  Argentina
challenged the validity of these documents, and argued that the evidence submitted was not the best
evidence. 73
4.96 Canada also notes that the Panel observed that the United States had tried to obtain the
original copies that were in Argentina’s possession.  The Panel then noted the duty to collaborate and
stated that in the absence of the originals, and after careful examination and consideration of the
evidence, it considered that the copies submitted by  the United States constituted sufficient evidence
to allow it to make conclusions.74  The Panel stated that the obligation to provide it with relevant
documents which are in its sole possession does not arise until the claimant has actually produced
some prima facie evidence in support of its case.   In Canada’s view, Brazil has not done so.
According to Canada, vague or ambiguous quotations presented out of context and jumbled to
produce a misleading impression of what the person cited actually meant, does not constitute
evidence.  Nor, in Canada’s view, is there precedent or place for wide-ranging discovery in the WTO.
4.97 For Canada, it is difficult to see how the WTO dispute settlement mechanism could work if
even before a complainant has shown that it has a prima facie  case, it could force the responding party
to furnish it with evidence in the course of a wi de-ranging and apparently limitless fishing expedition.
For Canada, this would open the door to endless intrusion in confidential records of WTO Members,
such as tax files, banking and financial records, regulatory proceedings and a host of other
governmental activities.  Canada asserts that this is not the way the WTO functions.
4.98 Canada argues that it has nothing to hide, and is fully prepared to cooperate in the normal way
of WTO proceedings, and acknowledges the duty of collaboration as discussed and applied by thepanel in Argentina – Footwear :
                                                     
72 Id..
73 Argentina – Footwear  at paras. 6.52-6.53
74 Argentina – Footwear  at para. 6.58WT/DS70/R
Page 25
“Another incidental rule  to the burden of proof is the requirement for collaboration of
the parties in the presentation of facts and evidence to the panel, and especially the
role of the respondent in that process.  It is often said that the idea of peacefulsettlement of disputes before international tribunals, is largely based on the premise
of co-operation of the litigating parties.  In  this context, the most important result of
the rule of collaboration appears to be that the adversary is obligated to provide the
tribunal with relevant documents which are in its sole possession.  This obligation
does not arise until the claimant has done its best to secure evidence and has actuallyproduced some prima facie evidence in support of its case.   It should be stressed,
however, that “’discovery’ of documents, in its common-law system sense, is not
available in international procedures”.  We shall, therefore, follow these general rules
when addressing, for instance, the request of the United States to Argentina for
production of documents and the fact that Argentina did not do so.”
75 [emphasis
added by Canada]
4.99 With respect to any attempt to import discovery into the WTO process, Canada notes and
agrees with the observations of the panel in Argentina – Footwear ,76 referring to the works of Dr.
Mojtaba Kazazi, on the burden of proof before international tribunals:
It should be stressed, however, that “’disc overy’ of documents, in its common-law
system sense, is not available in international procedures”.77
(c) Brazil’s request further supports Canada’s preliminary submissions
4.100  Canada asserts that Brazil’s request confirms the position of Canada set out in its preliminary
submissions.  First, Canada asserts, it will put before the Panel information, including commercial
confidential information, necessary to rebut Brazil’s allegations when they are known; and that it is
willing to provide the Panel with information, in cluding commercial confidential information, in
response to the Panel’s requests. Canada notes that to those ends it has made a preliminary submissionregarding procedures governing confidential business information, which notes that evidence it may
need to submit in its defence could contain confidential proprietary business information.  For Canada
therefore, it is imperative that adequate safeguards be developed for the protection of such
information.  Canada states that its proposed confidentiality procedure, once established by the Panel,
would provide such a safeguard and permit Canada to adduce such evidence as may be necessary todefend its case.
4.101  Canada also takes issue with Brazil’s request for “’fact-finding’” in respect of “’all
operations’” under the listed programmes.  Canada recalls its argument (see paras. 4.38-4.58) that
Brazil’s request for a panel is not consistent with Article 6.2 of the DSU as it fails to identify the
“specific measures at issue.”  Canada reiterates that the panel process is not a licence for a fishingexpedition; that the responding party must be given notice of the case against it in the request for a
panel, which forms the terms of reference of the Panel; and that, as a result, it is important that the
request for a panel not contain a sweeping statement relating to programmes that could cover, for
example in the case of “financing by the Export Development Corporation”, thousands of transactions
in the context of a Can$10 billion portfolio.
4.102  According to Canada, Brazil wishes to engage the Panel and, by necessary implication,
Canada, in this fishing expedition.  In Canada’s view, having failed to inform Canada of the specificprogrammes, activities or transactions that are at issue as required by DSU Article 6.2, Brazil
                                                     
75 Argentina – Footwear , at para. 6.40.
76 Argentina – Measures Affecti ng Imports of Footwear, Tex tiles, Apparel and Other Items ,
WT/DS56/R, Report of the Panel adopted as modified by the Appellate Body on 22 April 1998.
77 Id.., at  para 6.40.WT/DS70/R
Page 26
compounds the difficulty by asking the Panel to enga ge in fact-finding with respect to “all operations”
under the listed programmes.
4.103  Accordingly, for Canada, this request by Brazil confirms that Brazil has yet to state its case
against Canada.  In Canada’s view, the Panel should not assist a complaining party to find or develop
a case not made.
3. Response of Brazil
4.104  Brazil counters by arguing that it has encountered significant difficulty in obtaining
information about the various Canadian export subs idy programmes at issue.  According to Brazil,
citing confidentiality, Canada has declined to provide transaction-specific information concerning the
operations of EDC, the Canada Account, Technol ogy Partnerships Canada, the Canada-Québec
Subsidiary Agreements on Industrial Development, and the Société de Développement Industriel du
Québec, and has not even notified EDC or Canada Account funding, as required by Article 25 of the
SCM Agreement, to enable other Members like Brazil “to evaluate the trade effects and to understand
the operation of” support programmes provided thereunder.  According to Brazil, Canada’s
notifications pursuant to Article 25 of the SCM Agreement fail in some instances to provide any
description of these programmes.
4.105  Brazil appreciates concerns regarding the confidentiality of proprietary business information,
but states that in this case Canada’s posture seems to be, “Our officials do not mean what they say
when testifying before Parliament or when they issue official reports or when they speak to industry
groups.  We cannot tell you why, but despite what these officials might say, we are acting inconformity with the terms of the SCM Agreement.  Trust us.”
4.106  Brazil acknowledges that it bears the burden of proving its affirmative case, but states that at
the same time Canada bears the burden of collaboration, a concept well-founded in public
international law and in WTO law.  In addition to the obligation of Members to act in good faith,
Brazil recalls the Appellate Body’s statement in India – Patent Protection for Pharmaceutical and
Agricultural Chemical Products , that all parties engaged in dispute settlement “’must be fully
forthcoming from the very beginning,’” and that this  duty includes the requirement that facts “’must
be disclosed freely.’”  In Brazil’s view, facts have not been disclosed freely by Canada in this case.
4.107  In Brazil’s view, particularly where, as here, concerns regarding confidentiality hinder access
by a complaining Party to information peculiarly  within the control of a responding Party, that
responding Party’s burden to produce evidence in good faith to the Panel is considerable.  Brazil
argues that where a party fails to provide information peculiarly within its control, or where, in the
words of the Appellate Body in India Pharmaceuticals , “in the aftermath of consultations, any party
believes that all the pertinent facts relating to a claim are, for any reason, not before the panel, then
that party should ask the panel . . . to engage in additional fact-finding.”
4.108  Regarding Canada’s contention that Brazil’s request is not appropriate until the Panel has
received the first submissions and heard the first substantive arguments of the Parties,  Brazil states
that it is aware of no such limitation, noting that the Appellate Body, in India Pharmaceuticals  stated
only that such a request should be made in the “’ aftermath’”  of consultations, and stating that Brazil
made its request in the aftermath of consultations.
4.109  Brazil also states that even if Canada is correct, as of receipt of the first submissions of the
parties and the hearing of the first substantive arguments, it is time for Canada, even by its own terms,to fulfil its obligation to cooperate with the Panel and Brazil in producing all relevant information.
4.110  Regarding Canada’s argument that the Panel’s authority to seek information is dependent
upon presentation by Brazil of its prima facie  case, Brazil finds two problems.  First, Brazil argues,WT/DS70/R
Page 27
Canada confuses the prerequisites for the Panel to engage in additional fact-finding with the
prerequisites for the Panel ultimately to decide that a complainant has satisfied its burden of proof,
which are not the same thing.  Second, Brazil asserts that in making its submission of approximately1,600 pages of supporting documentation and two expert reports, it has presented a prima facie  case.
4.111  As regards Canada’s concern over the breadth of Brazil’s request, Brazil does not view its
request as a fishing expedition, but as a proper attempt to obtain evidence relevant to the issues before
this Panel.  Brazil submits that to the extent Canada does not produce, in a timely fashion, necessary
information in its possession, the Panel should draw the appropriate adverse inferences.
4. Rebuttal of Canada
4.112  Canada submits that Brazil’s allegations of secrecy are unfounded, arguing that given
Canada’s character as a flourishing democracy with a vigorous opposition, hyperactive and
multifaceted media, an independent judiciary whose powers are enhanced by constitutionally
entrenched Charter of Rights, as well as state-of-t he-art access to information legislation, it is counter-
intuitive to suppose that Canada’s public institutions are as secretive as Brazil claims them to be.
According to Canada, Brazil’s much vaunted 1,600-plus pages of evidence from public sources byitself belies this assertion.  Canada notes that Brazil has, in fact, relied on many sources of public
information about the pertinent Canadian institutions, including annual reports of the EDC and the
Department of Industry, the public accounts of the federal government and the provinces, the reports
of the Auditor General and even the considerable volume of materials obtained by an Opposition
Member of Parliament and handed over to Brazil’s Embassy in Ottawa.  In spite of all these efforts,Canada argues that Brazil has failed to produce a single shred of material, credible evidence that will
stand up to scrutiny, because there is simply nothing to find.
4.113  As to the alleged secrecy of EDC and the Ca nada Account, which Canada states are the
principal targets of Brazil’s allegations of secrecy, Canada notes that these are financial institutions,
essentially export banks, and questions what bank or financial institution willingly releases legallyprotected transaction-specific, confidential busin ess information.  According to Canada, the very
nature of the EDC’s operations as a commercial lender means that this is what would be required to
make out the negative proof that Brazil alleges is necessary to clear EDC of the general presumption
that any state-owned financial institution active in export markets ipso facto  constitutes an export
subsidy measure.
D. CANADA’S REQUEST FOR A DEADLINE FOR THE SUBMISSION OF NEW
EVIDENCE
1. Arguments of Canada
4.114  Canada observes that despite three volumes of annexes, Brazil’s first written submission
suffers from a paucity of credible evidence, and states that this is not surprising.  The impugnedprogrammes, activities and transactions are consistent with the SCM Agreement; Brazil brought this
dispute before the WTO in response to Canada’s case against Brazil’s export subsidy programmes.
Nevertheless, in view of the vagueness of Brazil’s claims in its request for a panel, Canada is
concerned that Brazil might advance allegations about programmes, activities or transactions other
than those already mentioned in Brazil’s first submission, or adduce evidence at a late stage in these
proceedings.
4.115  Canada submits that, given the accelerated procedure under Article 4, any such late
submission of allegations or evidence would be prejudicial, as Canada would be effectively denied an
adequate opportunity to respond.  Canada requests, ther efore, that the Panel rule that the complaining
Party may not adduce new allegations or evidence after the end of the first substantive meeting of the
Panel with the Parties.WT/DS70/R
Page 28
2. Arguments of Brazil
4.116  Brazil counters that Canada’s request that Brazil, as the complaining Party, not be permitted
to adduce new allegations or evidence after the end of the first substantive meeting of the Parties iswithout support in WTO law.  According to Brazil, no provision of either the DSU or the SCM
Agreement would require or even suggest such a rule. Brazil argues that in Argentine Footwear , the
Appellate Body affirmed the Panel’s authority to permit the submission of new facts at any point in
the proceedings, provided that the other party is given an adequate opportunity to respond.
4.117  Brazil maintains that it has not deliberately held  back any evidence for later presentation in an
effort to surprise Canada or to attempt in any way to limit its due process ability to respond.  Brazil
states that it cannot predict, however, whether particular arguments to be made by Canada will require
a response from Brazil employing new arguments or additional evidence.  Brazil asserts that any such
evidence would not, of course, expand the scope or range of the dispute, or in any way increase the
number of claims involved, but rather would be responsive to any evidence made available by
Canada.
4.118  Brazil submits that it also has a due process right to react to what Canada argues and presents,
particularly when, as here, Canada has been so unforthcoming about a number of highly non-
transparent measures.
E. BRAZIL’S REQUEST REGARDING DEADLINE FOR SUBMISSION OF NEW
EVIDENCE
1. Arguments of Brazil
4.119  At the first meeting of the Panel, Brazil requested that the Panel not permit Canada to
introduce evidence in support of any affirmative defences  after the first meeting of the parties.  In this
regard, Brazil notes a suggestion by Canada (para. 6.161) that Canada Account financing and loan
guarantees are excluded from the prohibition in Ar ticle 3 of the Agreement because they comply with
the interest rates provisions of the OECD Arrang ement on Guidelines for Officially Supported Export
Credits, or are not used to secure a material advantage in the field of export credit terms.  This
suggests to Brazil that Canada might intend to assert that the provisions of paragraph (k) of Annex I to
the Agreement excuse its otherwise prohibited subsides.  Brazil notes that a similar but slightly varied
suggestion is made with regard to financing activities of the Export Development Corporation (para.
6.64).
4.120  Brazil argues that if this is Canada’s position, it is an affirmative defense for which Canada
bears the burden of proof.  Brazil believes that good faith implementation of the Dispute Settlement
Understanding requires a party making an affirmative defense to set out the grounds for that defense
in its first written submission.  Brazil asserts that it did exactly that with regard to its claim under
paragraph (k) in the other Panel proceeding.
4.121  For Brazil, Canada’s allusion to a paragraph (k) defense, combined with the absence of any
relevant evidence in its first submission, suggests to Brazil that Canada may be withholding the
evidence in this time-constrained proceeding so as to hinder Brazil’s ability to respond.  Brazil does
not believe there is room in WTO dispute settlement, between parties called upon to act in good faith,
for conduct of this kind.  Accordingly, Brazil requests that the Panel not accept any evidence or
claims of defense in the nature of affirmative defences with regard to the Canada Account, the EDC
or any other measure at issue which is not submitted to the Panel and to Brazil prior to the scheduledclose of the first meeting of the Panel.
4.122  For Brazil, this is particularly important in a fast track proceeding, where the time constraints
on the Panel could limit, or even preclude, the Panel’s giving Brazil a reasonable time to respond toWT/DS70/R
Page 29
new information after the date for the final submission, or particularly after the second meeting of the
Panel.
2. Arguments of Canada
4.123  Canada notes a Panel request during the first meeting that the parties consider whether they
could provide the Panel with additional information.  Canada states that in light of this request, and of
Brazil’s concern about being ‘sandbagged’ by new evidence, it would endeavour to provide the Panel
with additional contextual evidence in its second written submission.
4.124  Canada insists that this decision was not made lightly, as Canada continues to believe that
Brazil has failed to present a prima facie  case and that Canada is under no obligation to produce any
evidence in response to a case that has not been made (see paras. 5.5- 5.12).  Canada also recalls its
statements (see paras. 4.173 - 4.183) that the amended confidentiality procedure does not adequately
protect private sector interests and the interests of the Government of Canada in maintaining effective
control over the dissemination of business confidential information.
4.125  Canada emphasizes that the introduction of any additional evidence pursuant to the Panel’s
request would be without prejudice to Canada’s position on these two issues, and that the introductionof such evidence would not be done to ‘sandbag’ Brazil, an allegation that Canada rejects.
3. Actions of the Panel
4.126  In connection with the second meeting of the Panel, held on 12-13 December 1998, the Panel
posed a number of questions to both parties, many of which were of a factual nature, and announced a
deadline of one week after the meeting for the parties to respond, and one further week for the partiesto comment on any new factual evidence or arguments submitted in response to questions.  This was
in addition to the Panel’s letter to Canada, dated 9 December 1998, in which the Panel stated that it
“expects to receive clear and complete answers” to certain of the Panel’s original questions to which
Canada had not “replied in full”.  Because the one week period to prepare comments on any new
factual evidence or arguments submitted in response to the Panel’s questions fell over the Christmasholidays, and because Brazil believed that Canada might submit voluminous new evidence in answer
to questions, Brazil expressed concern over the shortness of time for commenting on Canada’s replies,
and requested that the Panel withdraw all of the questions to Canada, and rely on the evidence before
it at that time.  Canada did not agree with Brazil’s suggestion.  The Panel, in response, indicated that it
could allow one additional week for comments on answer s to questions, if the parties would agree to a
one-week extension in the timetable for the Panel (in light of footnote 6 to Article 4 of the SCM
Agreement that any time periods in that Article may be extended by mutual agreement).  In response
to this Panel proposal, Brazil responded as follows.
4. Response of Brazil
4.127  In a letter to the Panel dated 13 December 1998, Brazil argued that with the parties clearly
satisfied with the cases they had put forward the panel would have been entitled to decide the case on
the record as made to this point; neither party w ould have grounds to complain that it had not had fair
opportunity to present evidence or advance argument.
4.128  Brazil acknowledges the panel's right to request information from any source at any time, but
believes it was not necessary for the Panel to request this particular information at this particular time.
More important for Brazil in this accelerated proceeding, the Panel's decisions have placed it in a
position in which, depending upon the nature of Canada's response, it might not be able to comment atall on the new information that might be supplied by Canada.WT/DS70/R
Page 30
4.129  Brazil recalls its concerns that Canada might be planning on presenting an affirmative defence
to one or more of Brazil's complaints in its second written submission or even at the second meeting
of the Panel, and its related request that the Panel not accept any such information after the firstmeeting of the Panel (paras. 4.119- 4.122)
4.130  Brazil notes a Panel statement that even before receiving Brazil's request it had decided to ask
Canada, in questions to be presented to the parties, whether or not it intended to assert any defence
based upon items (j) or (k) of the Illustrative List of Export Subsidies, and its further statement that it
expected a clear and complete response to the questions, on which it also gave the other party a periodto comment.
4.131  Brazil notes that Canada did not invoke any affirmative defences in its response to questions
from the Panel, nor did Canada supply information that would support such defences.  Brazil indicates
that the Panel granted Canada an additional opportunity to submit answers responsive to certain of the
Panel's original questions, and notified the parties of its intention to present further questions, and
stated that except for responses to those questions, it would not accept further submissions from the
parties after the deadline for those responses, except for good cause shown.  In the same message,Brazil argues, despite the fact that Canada had not responded with affirmative defence information by
the deadline for answers to previous questions, the Panel stated that "’Canada shall invoke any
positive defences it intends to raise in this case du ring or before, the second meeting with the Panel on
Saturday, 12 December 1988‘".
4.132  Brazil contends that although by this action the panel gave Canada an additional eight days to
provide affirmative defence information, information that, in Brazil's view, properly belonged in its
first submission and not in a response provided at the second meeting with the Panel, Canada again
declined to submit the information by 12 December, and reaffirmed that it did not intend to use any
kind of affirmative defence since, in its view, Brazil had not presented a prima facie  case.  Brazil
states that in fact, the Panel orally confirmed at the second meeting that that meeting would be the lastopportunity for Canada to invoke an affirmative line of defence.
4.133  However, in Brazil’s view, the additional questions provided by the Panel to Canada In
connection with the second meeting effectively asked for the kind of information on which such a
defence could be based, which could consist of a large quantity of transaction-specific, confidential
business information that would take time to produce and time to analyse.  The panel's questionstherefore in Brazil's view effectively extend Canada's time to provide this kind of information by 17
days. Brazil notes that to analyse and prepare any comment it may wish to make on such response, the
Panel has provided Brazil seven days, including the Christmas holiday, and that should Canada
concur in a one-week extension of the Panel's deadline, the Panel would extend Brazil's time for
comment by an additional week, encompassing the New Year's holiday.
4.134  Brazil believes this procedure is unnecessary and unfair to Brazil; unnecessary because
Canada, as a Member of the WTO, was entitled to have its case decided on the basis on which it chose
to present it.  This is particularly important, in Brazil's view, in an accelerated procedure under the
SCM Agreement.
4.135  Brazil believes it is unfair because, not only does it permit Canada to supply last-minute
information, it effectively denies Brazil a fair opportunity to respond.  In Brazil’s view, the
occurrence of major religious and secular holidays in the midst of the response period would causedifficulty for any Member, and causes particular difficulty in this case because of Canada’s indication
that the information Canada will furnish will include confidential business information that may be
dealt with only under strict procedures to ensure its security.
4.136  Brazil states that as a developing country, it does not have the same resources or personnel as
Canada to enable it to prepare and present its argumentation in the manner envisioned by the DSU,WT/DS70/R
Page 31
noting that in this case, it chose to utilize the services of non-government specialists.  Brazil argues
that this presents a difficulty because these specialists are resident in neither Geneva nor Brasilia,
where the Brazilian officials with whom they are working are located, and it had been learned thatairline reservations for them to return to Geneva over this holiday period would be extremely difficult
if not impossible to obtain.
4.137  Brazil argues that it thus was unable to choose between the options provided by the panel, as
its needs would depend entirely on what Canada woul d supply in the way of answers to the Panel's
questions.
5. Proposal by the Panel
4.138  In light of the concerns raised over the proposed schedule for answers to questions and
comments thereon, and in light of an absence of consensus among the parties on extending the Panel’s
overall timetable, the Panel proposed a new schedule that would allow the parties 17 days to comment
on one another’s answers to questions, but would reduce the time for interim review.  The Panel noted
that 17 days was the same amount of time as between the deadlines for first and second submissions.
That is, the parties would have exactly the same amount of time for commenting as if all of theinformation had been presented in the first submissions.
6. Joint letter from Brazil and Canada, and Panel action
4.139  In response to the Panel’s proposal, the parties s ubmitted a joint letter to this Panel and to the
Panel in the parallel case on Brazil –Export Financing Programme for Aircraft.  In this letter, the
parties note that the time available under the Panel's proposed new schedule for the review of theinterim report and for the travel of delegations to Geneva for a possible additional meeting with that
Panel was likely to be insufficient, and requested that the two Panels examine the possibility to
readjust their respective timetables as follows:
(a) the interim reports of both Panels shall be issued on the same dates, but no later than
17 February;
(b) the final reports of the two Panels shall be issued on the same dates;
(c) the interim review meetings should be held on dates as close as possible to each
other;  and
(d) adequate time should be allowed for all stages of the interim review, providing
sufficient time for internal consultations and travel arrangements.
4.140  The letter further states that Brazil and Canada realize that such request would call for some
flexibility regarding the date of issuance of the final report, and indicate that they therefore would
agree to a one-week postponement of the deadline for issuance of the final report.
4.141  The Panel, taking into consideration this letter, announced its revised timetable.
F. A
RGUMENTS CONCERNING THE SUBMISSION OF EVIDENCE IN RESPONSE TO PANEL QUESTIONS
POSED IN CONNECTION WITH THE SECOND MEETING
1. Comment of Canada
4.142  In replying to the Panel’s questions posed in connection with the second meeting, Canada
indicates that its replies are provided in the light of certain concerns.  First, Canada states, the Panel
has requested the production of evidence in respect of defences Canada has not made.  Canada recallsWT/DS70/R
Page 32
that consistent with the principle of judicial economy, particularly in the context of the expedited
proceedings under SCM Article 4, it is neither necessary nor desirable that the respondent make out a
defense for both of the two prongs of the test for a prohibited export subsidy in Part II of the SCM
Agreement.  Canada states that Brazil must prov e both that a subsidy exists within the meaning of
Article 1, and that the subsidy is export contingent within the meaning of Article 3.  In response, it is
sufficient for Canada to demonstrate in relation to each impugned measure, the measure is either not a
subsidy or not export contingent.   Canada asserts that in its letter to the Chairman of the Panel of
13 December 1998, Brazil has agreed  with this thesis.
4.143  Second, Canada states, the Panel has requested the production of evidence in respect of
matters where in Canada’s view Brazil has clearly not made out a prima facie  case.  Canada notes that
the Panel has not ruled on whether Brazil has made out a prima facie case on any of the impugned
programmes, activities or transactions.  Canada notes that the covering letter to the Panel’s questions
of 10 December 1998 states that the questions are posed without prejudice to the Panel’s eventual
findings with respect to any issue raised by either party.
4.144  Third, Canada objects that the Panel has requested the production of evidence in respect of
transactions where Brazil has not even made an allegation. Canada does not consider it appropriate to
adduce evidence in response to an allegation that has not been made and a case that has not been
established.
4.145  Finally, Canada states that it has been placed in a very difficult position because the Panel’s
questions ask Canada to produce business confidential information, recalling its position (see paras.4.173- 4.183) that the Procedures Governing Business Confidential Information do not provide the
requisite level of protection for such information.
2. Comment of Brazil
4.146  Regarding Canada’s comments about the Panel’s questions, and Canada’s answers thereto,
Brazil raises concerns regarding what it views as Canada’s failure to uphold its obligation to discloseinformation peculiarly within its control.  Brazil notes its view that the Panel could, consistent with
the principle of judicial economy, have decided the issues raised in this case on the basis of the facts
before it as of the second meeting, rather than offer Canada yet another chance to present information
in its defense (para. 4.126).  Brazils states that regardless, the Panel exercised its right, pursuant to
Article 13 of the WTO Understanding on Rules and Procedures Governing the Settlement of Disputes(“DSU”), to request further information from Canada, and in Brazil’s view, this request triggered
Canada’s obligation, again under the terms of Article 13, to “’respond promptly and fully‘” to the
Panel’s request.
4.147  Brazil asserts that Canada has failed to meet this obligation, noting Canada’s repeated
invocation in its answers to the Panel’s questions of “’the lack of adequate procedures to protectbusiness confidential information‘” to justify its fa ilure to provide information specifically requested
by the Panel.  Brazil argues that where documentary evidence has been provided by Canada, it has
been redacted to such an extreme degree that it contributes nothing to the Panel’s understanding of the
programmes and issues involved.  Brazil states that in other instances, Canada has selectively
provided particular pages, lines or figures from various documents, claiming that these extracts
support its defense.
4.148  Brazil contends that Canada must bear the consequences of its decision to withhold
information from the Panel.  Where Canada has expressly refused to provide documentary
information specifically requested, or where Canada has wholly or selectively redacted documentary
information specifically requested, in Brazil’s view the Panel should adopt adverse inferences,
presuming that the information withheld constitute s inculpatory evidence of Canada’s infringement of
the SCM Agreement.  In Brazil’s view, adoption of su ch adverse inferences is not prohibited by theWT/DS70/R
Page 33
DSU, and is entirely consistent with the practice of international tribunals such as the Iran-US Claims
Tribunal,78 the Inter-American Commission on Human Rights,79 and the Inter-American Court of
Human Rights.80  Moreover, Brazil asserts, reliance on adverse inferences in instances where a party
fails to produce information specifically requested and within the party’s exclusive possession and
control provides a Panel with the only practical means at its disposal of upholding the duty of
collaboration recognized in Argentina - Measures Affecting Imports of Footwear, Textiles, Apparel
and Other Items  as central to the WTO dispute settlement process, and of upholding the obligation
incumbent on a WTO Member under Article 13 of the DSU to “’respond promptly and fully to anyrequest by a panel‘” for information.
4.149  Brazil argues that Canada’s claims concerning the “’inadequacy‘” of the Panel’s
confidentiality procedures, if permitted, would make a sham of WTO dispute settlement proceedings
concerning activities alleged to violate the SCM Agreement.  Brazil submits that in requesting that
private parties waive their confidentiality rights, Canada apparently represented that “’the Brazilian
government (including Embraer)‘” would receive copies of confidential business information.
81
Brazil states that this is simply untrue, and that it calls into question the sincerity of Canada’s effort to
secure the agreement of private parties to the release of particular information.82
4.150  More importantly according to Brazil, activit ies reviewable under the SCM Agreement will
nearly always involve contributions to a private party, and will therefore depend upon information
which can be characterized by a private party as sensitive or business confidential.  If dispute
settlement proceedings under the SCM Agreement are to be at all meaningful, Brazil maintains, WTOMembers must not be permitted to appeal to domestic confidentiality concerns as a way to impede a
Panel’s right, under Article 13 of the DSU, to s eek information, or its obligation, under Article 11 of
the DSU, to undertake “’an objective assessment of the facts of the case and the applicability of and
conformity with the relevant covered agreements . . .‘”  Brazil states that it is for these reasons, and to
ensure consistency with the obligation, under Article 3(10) of the DSU, of WTO Members to engagein dispute settlement in good faith, that Brazil has been responsive to questions requiring the
submission of confidential business information to a separate Panel reviewing the consistency of
Brazil’s PROEX programme with the terms of the SCM Agreement.
4.151  Moreover, Brazil states, in some instances, Canada’s decision to withhold documentation
from the Panel is based not upon the refusal of private parties to waive their confidentiality rights, butinstead upon the Canadian government’s own refusa l to release documents prepared for itself by
itself.  In particular, Brazil directs the Panel’s attention to Canada’s refusal to provide Canadian
government documents constituting TPC “’project assessments and funding decisions.‘”(para. 6.260.)
Brazil submits that the decision to withhold these documents, which are exclusively within the
possession and control of the Canadian government, must carry adverse consequences for Canada, orthe good faith obligation contained in Article 3(10) of the DSU will become meaningless.  Brazil
                                                     
78 INA Corporation v. The Government of the Islamic Republic of Iran , Award No. 184-161-1
(13 August 1985), reprinted in  8 Iran-US CTR, 373-384, at Westlaw  pg. 8 (extracted in Exh. BRA-100);
William J. Levitt v. Islamic Republic of Iran, Ministry of Agriculture and Natural Resources of Iran, et al. ,
Award No. 520-210-3 (29 August 1991), reprinted in  27 Iran-US CTR, 145-187, at paras. 56-66 (extracted in
Exh. BRA-101).
79 Tom Farer, “Finding the Facts:  The Procedures of the Inter-American Commission on Human
Rights of the Organization of American States,” in Fact-Finding by International Tribunals (R. Lillich, Ed.,
1991), pgs. 275-287, at 281 (extracted in Exh. BRA-102).
80 Thomas Buergenthal, “Judicial Fact-Finding:  Inter-American Human Rights Court,” in Fact-Finding
by International Tribunals (R. Lillich, Ed., 1991), pgs. 261-274, at 266 (extracted in Exh. BRA-103).
81 Exh. CDN-106 (letter to Blair Hankey, Associate General Counsel, Trade Law Division, Department
of Foreign Affairs and International Trade, from Peter Keyser, Manager, Business Development Programmes,
Allied Signal, at pg. 2).
82 The Panel  notes that Canada, in its 29 January 1999 cover letter transmitting Canada’s comments on
the draft descriptive part of this report, denies as unfounded and untrue this allegation by Brazil.WT/DS70/R
Page 34
argues that he Panel should presume that these documents contain information prejudicial to Canada’s
position.
G. PROCEDURES FOR PROTECTION OF BUSINESS CONFIDENTIAL INFORMATION
1. Procedure Proposed by Canada
4.152  Canada requests that the Panel adopt as part of its working procedures, pursuant to DSU
Article 12.1, a procedure for the protection of confidential proprietary information that may be
submitted to the Panel.  Canada requests that the proposed procedures be adopted prior to the deadline
for Brazil’s first submission.  Canada notes that such a procedure is necessary as, in making itsdefence, it may have to submit evidence to the Pane l that contains confidential proprietary business
information.
4.153  Canada acknowledges that some provisions of the Understanding on Rules and Procedures
Governing the Settlement of Disputes  (DSU) address the need for confidentiality.  Article 18.2 of the
DSU provides:
“Written submissions to the panel or the Appellate Body shall be treated as
confidential, but shall be made available to the parties to the dispute.  Nothing in this
Understanding shall preclude a party to a dispute from disclosing statements of its
own positions to the public.  Members shall treat as confidential information
submitted by another Member to the panel or the Appellate Body which that Member
has designated as confidential.  A party to a dispute shall also, upon request of a
Member, provide a non-confidential summary of the information contained in itswritten submissions that could be disclosed to the public.”
4.154  Canada cites paragraph 3 of the Working Procedures (DSU Appendix 3):
“The deliberations of the panel and the documents submitted to it shall be kept
confidential.  Nothing in this Understanding shall preclude a party to a dispute from
disclosing statements of its own positions to the public.  Members shall treat asconfidential information submitted by another Member to the panel which that
Member has designated as confidential.  Where a party to a dispute submits a
confidential version of its written submissions to the panel, it shall also, upon request
of a Member, provide a non-confidential summary of the information contained in its
submissions that could be disclosed to the public.”
4.155  For Canada, however, these DSU provisions do not provide adequate procedural protection
for confidential proprietary business information.
4.156  Canada maintains that there is scant WTO practice with respect to the protection of such
information in the context of a dispute, but that this problem has arisen in a previous dispute under the
SCM Agreement ( Indonesia – Certain Measures Affecting the Automobile Industry )
83 in which the
United States indicated in its first submission that it possessed proprietary business information
relevant to its serious prejudice claims.  Canada notes that the United States was reluctant to provide
such information to the Panel unless the Panel firs t established adequate procedures to protect that
                                                     
83 Indonesia – Certain Measures Affecting the Auto mobile Industry (Complaints by Japan, European
Communities, United States)  (1998), WTO Doc. WT/DS54,55,59,64/R (Panel Report) [hereinafter Indonesia –
Automobiles ].WT/DS70/R
Page 35
information,84 and Indonesia requested the Panel to require the United States to submit this
information before the first substantive meeting of the Panel with the parties.85
4.157  Canada recalls that the Indonesia Panel did not require the United States to submit the
requested information, noting that there was no obligation on parties to present all factual information
in its first submission, but nonetheless found:
“Finally, we would like to remind all parties that Article 18.2 of the DSU does allow
parties to designate information as confidential.  Such designation will be respected
by this Panel, the WTO Secretariat and the other parties to the dispute.  Accordingly,we encourage all parties to submit to the Panel such information as they consider may
be helpful to the resolution of this dispute.  In this respect, we note that the parties
agree that the complainants alleging serious prejudice must demonstrate its existence
by positive evidence.  If the United States considers that the information in question
is necessary in order to meet that burden, and if it believes that Article 18.2 is
inadequate, the United States may propose to the Panel in writing, at the earliest
possible moment, a procedure that it considers sufficient to protect the information inquestion .”
86 [emphasis added]
4.158  Canada notes that the United States did not propose or request the Panel to adopt any such
procedure, and  that the Panel found that while complainants could not be required to submit
confidential business information, neither could they “…invoke confidentiality as a basis for their
failure to submit the positive evidence required, in the present case, to demonstrate serious prejudiceunder the SCM Agreement.”
87  The Panel concluded that the United States had not demonstrated
serious prejudice by positive evidence.88
4.159  Canada submits that as complainant in the Indonesia - Automobiles  case, the United States
had a choice as to whether it would submit evidence necessary to meet its evidentiary burden.  Canada
argues that in this case, if Brazil meets its prima facie  burden, Canada cannot afford the luxury of not
adducing the evidence necessary to defend its impugned programmes, and may have to rely upon
confidential proprietary business information.
4.160  Canada submits that the protection of confidential proprietary business information is a new
and significant challenge to the WTO dispute settlement process, in which the Panel must balance two
competing interests, both deeply ro oted in fairness and due process, neither in itself having a claim to
better protection than the other: first, that reason able access to such information, when introduced into
evidence, must be provided to the Panel and the other disputing parties; second, that additional
procedural safeguards are necessary to provide priv ate business interests with adequate protection for
their proprietary business information when a disputing party deems it necessary to present such
evidence in support of its case.  Canada believes that its proposed procedure strikes the necessarybalance.
4.161  The procedure proposed by Canada would allow access to business confidential information
only to persons having signed a declaration of non-di sclosure and who were either panelists, assistants
to panelists, WTO Secretariat staff, PGE members, or “representatives” of parties, the latter defined as
employees of or agents for parties, excluding employees, officers or agents of private companies
engaged in aircraft manufacturing.  The procedures as proposed would require business confidential
information to remain on the premises of the WTO Secretariat, which would be the only place where
                                                     
84 Id.. at para 4.56.
85 Id.. at para. 4.51.
86 Id.. at para. 14.7.
87 Id.. at para. 14.235.
88 Id.. at para. 14.236.WT/DS70/R
Page 36
it could be consulted.  The information would need to be kept in a locked receptacle at the WTO
Secretariat and the Secretariat staff would control and monitor access to and use of the information.
Approved persons could take summary notes on the information but would not be permitted to copyor distribute it, or remove it from WTO premises.  Only approved persons would be permitted to be
present in panel meetings at which business confidential information was discussed and tapes of such
meetings would be subject to the same procedures as the written material submitted.  At the
conclusion of the panel process, the BCI would be returned to the submitter and all tapes and
transcripts would be destroyed.
2. Arguments of Brazil
4.162  Brazil, while receptive to Canada’s proposal, outlined a number of concerns, in light of which
it proposed a modified procedure.
(a) Advisors of a Party should be considered an approved person
4.163  Brazil notes that Canada’s definition of “representative” includes reference to employees,
agents and legal counsel but omits reference to other types of representatives or advisors.  Brazil
states that the complexity of the aircraft financin g market is such that much of the information that
Brazil would want to present to the Panel in support of its position would of necessity rely upon the
analysis of experts and others knowledgeable about the industry.  For Brazil it is crucial to be able to
share confidential business information with its advisors to rebut arguments presented by Canada.
Brazil agrees with Canada that in no circumstances should the definition of an advisor or other
representative include an employee, officer or agent of a private company engaged in aircraftmanufacturing.
(b) Review of Confidential Business Information should be permitted outside the WTO premises
4.164  Brazil notes that Canada’s proposal omits reference to copies submitted to any party, and that
DSU Article 18.2 provides that “[w]ritten submissions . . . shall be made available to the parties to the
dispute.”  Brazil submits that Article 18.2 requires Canada to provide a complete copy of itssubmissions, and that forcing a party, a third party,  a panel member or a PGE member to travel to the
WTO to review submissions places enormous administrative burdens on approved parties.  Especially
given the short time-frames in this dispute, Brazil submits that an approved person – whether a party,
a panel member or a PGE member – must have unrestricted access to the information.  Brazil argues
that a copy of such information therefore should be permitted to be kept in secure locations outsidethe premises of the WTO.
4.165  In Brazil’s view, by limiting the access to such information to the premises of the WTO,
Canada would prohibit effective review of confidential business information, information that may be
crucial to the case, and in so doing, would effec tively bar any approved party from analyzing portions
of submissions containing confidential business information.  For Brazil, this would significantlyhamper any substantive rebuttal of Canada’s submissions.
4.166  Brazil argues that providing a party copies of the confidential business information presents
no risk to Canada, as each party is bound to ensure that its representatives comply with the non-
disclosure obligation.  Brazil notes that DSU Article 18.2 provides that “Members shall treat as
confidential information submitted by another Member . . . which that Member has designated as
confidential.”
4.167  Brazil also notes the Vienna Convention on the Law of Treaties, which states in Article 31
that “a treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given toWT/DS70/R
Page 37
the terms of the treaty in their context an d in the light of its object and purpose.”89  In Brazil’s view,
Canada’s original proposal is too restrictive in its limits regarding access to confidential business
information; as written, it would prevent Canada’s submissions from being made effectively“available” to Brazil or to any other “approved person”, including a panel member, in direct
contradiction to the spirit of the DSU and to the provisions of DSU Article 18.2.
(c) Third Parties should be granted access to Confidential Business Information
4.168  Brazil notes that Canada’s definition of “approved persons” omits reference to third parties,
although DSU Article 10.3 provides that “Third partie s shall receive the submissions of the parties to
the dispute to the first meeting of the panel,” and paragraph 6 of the Working Procedures (DSU
Appendix 3) provides that “All third parties . . . sh all be invited . . . to present their views during a
session of the first substantive meeting of the panel . . . All such third parties may be present during
the entirety  of this session.” (emphasis added by Brazil).  For Brazil, since third parties are entitled to
receive written submissions to the first panel meeting and are entitled to be present during the entire
first panel meeting, they should also be granted access to confidential business information disclosed
by a party in its first submission or at the first panel meeting.
4.169  Brazil believes that the proposed provisions requiring that only approved persons be present
at panel meetings where business confidential information is discussed are redundant.  By adding
third parties to the definition of approved parties, as required by DSU Article 10.3 and paragraph 6 of
the Working Procedures (DSU Appe ndix 3), Brazil submits, no persons other than approved persons
may be present at a panel meeting.  Brazil notes Canada’s acknowledgement of paragraph 3 of theWorking Procedures (DSU Appendix 3): “The de liberations of the panel . . . shall be kept
confidential.”  Brazil also does not object to the requirement that parties and third parties provide a
non-confidential summary of the information containe d in written submissions that could be disclosed
to the public at the same time that they provide their submission to the panel.
(d) A complete administrative record should be maintained for the Appellate Body
4.170  Brazil notes that Canada’s proposal omits reference to the Appellate Body, and recalls that in
accordance with the provisions of DSU Article 17, the Appellate Body may hear appeals from panel
cases and may uphold, modify or reverse the legal findings and conclusions of the panel.  To do so,
Brazil submits, the Appellate Body must have unrestr icted access to a complete administrative record.
Destroying confidential business information at the end of the panel process might seriously limit theAppellate Body’s ability to obtain a true understanding of the factual arguments made by the parties.
3. Action by the Panel
4.171  After considering the arguments of the parties, the Panel transmitted to the parties procedures
for the protection of business confidential information and indicated that if either party identified
concerns that the Panel considered sufficiently serious to call into question the type of information tobe submitted by the parties, it would consider amending the procedures. Comments were received
from Brazil, which requested that the procedures include a requirement that one copy of business
confidential information be served on each party’s Geneva mission, and from Canada, which objected
to Brazil’s proposal as in Canada’s view such a procedure would provide insufficient protection of
private interests.
                                                     
89 Vienna Convention on the Law of Treaties, Art. 31; see also , United States - Standards for
Reformulated and Conventional Gasoline, WTO Doc. WT/DS2/R at para. 6.7.WT/DS70/R
Page 38
4.172  The Panel, after considering these comments, adopted the procedures for the protection of
business confidential information contained in Annex 1 to this report.90
4. Statements of Canada
4.173  After the Panel adopted the procedures, Canada sent a letter to the Panel indicating that it did
not consider the procedures as adopted to confer sufficient protection for business confidential
information. Canada indicates a serious concern regarding the protection of confidential business
information, and states that it cannot divulge confidential business information in the absence of
adequate procedures to protect that information.  Canada notes that it proposed procedures that itconsidered sufficient to protect confidential business information.
91   In Canada’s view, the original
procedures adopted by the Panel governing confidential business information provided a sufficient
level of protection for that information.
4.174  Canada notes that its position regarding the treatment of certain sensitive confidential
information is not an indication of a lack of good faith.  In Canada’s view, such information
necessitates the strongest possible confidentiality procedure.  The procedure suggested by Canada is
such a procedure and it is clearly workable within the context of WTO dispute settlementproceedings.   Insofar as it provides Members with the confidence to provide such information, such a
procedure advances the goals and objectives of the WTO.
4.175  Canada submits that requiring a Party to hand over business confidential information to an
adverse Party having a legal and commercial interest in that material and the absence of legal
sanctions for the breach of these procedures, does not constitute effective procedures for theprotection of such information.   In putting in place such a procedure and subsequently requesting in
its questions of 27 November and 10 December 1998 that Canada produce business confidential
information, Canada argues that the Panel has placed it in a very difficult position.
4.176  Canada also stated that, while it would produce certain of the business confidential
information requested by the Panel, it would do so only where it had been able to obtain releases fromthe private parties to the pertinent transactions, wa iving their contractual rights to confidentiality.
4.177  Canada notes that in its view, the procedures governing confidential business information as
modified at Brazil’s request do not provide the requisite level of protection for any confidential
business information that Canada would adduce.  Canada argues that this information is of extreme
sensitivity and is well protected in domestic law, under which the release of such information issubject to civil and criminal sanctions.  Canada submits that in contrast, the WTO system does not
provide for such sanctions, so that if a breach were to occur, there would be no effective recourse
except potentially under domestic law against the very government that produced the evidence in
compliance with a request from a Panel, an impossible situation.  As a result, Canada states, it is not
in a position to provide confidential business information to the Panel.  Canada notes that Brazil’sconcerns over access could be overcome by special arrangements for 24-hour access to business
confidential information at the WTO Secretariat and at any Canadian mission or embassy designated
by Brazil.
4.178  The Panel  asked Canada to explain how the level of protection under the procedures
ultimately adopted by the Panel for the protection of confidential business information differs, in
substance , from what would have been afforded by the procedures to which Canada indicates it could
have agreed, given that under these latter procedures, only good faith would prevent a representative
                                                     
90 The Panel  notes that Canada, on 21 December 1998, so ught clarification in the procedures to
indicate that the “representative” referred to in Articles VI.2 and VIII.3 shall be an approved person.  Theprocedures in Annex 1 reflect this change.
91 Indonesia –Automobiles,  WT/DS54,55,59,64R (Panel Report) at para. 14.7.WT/DS70/R
Page 39
of a party that had signed a non-disclosure form from taking verbatim notes on the confidential
business information on the premises of either the WTO or the opposing party, removing those notes
from those premises and then disclosing them to non-authorized persons.  The Panel asked whetherexactly the same degree of good faith would not be involved under either set of procedures.
4.179  In response to this question, Canada indicated that the Panel’s amended confidentiality
procedures do not adequately protect private sector interests and the interests of the Government of
Canada in maintaining effective control over the dissemination of business confidential information.
In particular they may not be adequate to protect the Government of Canada from potential liabilityunder domestic law, in the event the confidentiality provisions are not strictly observed.
4.180  In Canada’s view, the essential difference be tween the confidentiality procedures originally
proposed by the panel and those ultimately adopted are that the original procedures entrusted the
commercial confidential materials to the care of a neutral third party, i.e. the WTO Secretariat.  The
modified procedures oblige Canada to entrust the materials to the care of the opposing Party, which
Party, or at least nationals of the Party on whose be half the present case is being pursued, may have an
immediate and commercial interest in these materials.
4.181  For Canada, under the original procedures, any breach of these procedures is likely to take the
form of detailed or verbatim notes on a document, as is implied in the Panel’s question. Under the
modified procedures, breach could take the form of a photocopy of the actual document.  In Canada’s
view, the difference between the commercial and legal effects of the two potential forms of breach are
substantial.
4.182  As to commercial effects, Canada submits that the uncertain authenticity of notes on a
document will diminish its utility and correspondingly decrease the potential commercial  injury that
might be caused by its disclosure to an interested party.  For example, in negotiations for the sale of
aircraft, a purchaser might pass a copy of the term sheet proposed by one manufacturer/seller to the
agents of a competing manufacturer/seller, as a means of inducing the first manufacturer/seller tolower its price or otherwise improve the terms of its o ffer.   Canada views a copy of a term sheet as a
far more effective inducement for the manufacturer/seller to vary his proposal than the assertion by
the purchaser that the competing manufacturer/seller  has offered better terms, even if the specific
content of the alleged better terms is detailed by the purchaser.
4.183  As to legal liability, in Canada’s view any claim, based on the production of detailed or
verbatim notes, that business confidential information was improperly disclosed would constitute
hearsay under Canadian law, and its evidentiary value would be limited.   A photocopy of an original
document, however, would constitute best evidence.
V. ARGUMENTS OF THE PARTIES REGARDING LEGAL ISSUES CONCERNING
SCM ARTICLES 1 AND 3
92
A. GENERAL
1. Arguments of Canada
(a) Principles of Treaty Interpretation
5.1 Canada observes that Article 3.2 of the Understanding on Rules and Procedures Governing
Dispute Settlement  (DSU) provides that the WTO dispute settlement system serves to clarify the
existing provisions of the covered agreements in accordance with “customary rules of interpretation of
                                                     
92 Except as otherwise noted, the footnotes and citations, and the emphasis in the text in this section are
as contained in the parties’ submissions.WT/DS70/R
Page 40
public international law.”  Canada recalls the Appellate Body’s view that the rules of treaty
interpretation set out in Articles 31 and 32 of the Vienna Convention on the Law of Treaties  (Vienna
Convention)93 have attained the status of customary or general international law.94
5.2 Canada states that according to Article 31 of the Vienna Convention, an international treaty
must be interpreted “in good faith in accordance with the ordinary meaning to be given to the terms of
the treaty in their context and in the light of its object and purpose.”95  For Canada, Article 32 of the
Vienna Convention provides that supplementary means of interpretation, including the negotiating
history, may also be used to confirm an interpretation of the agreement or to resolve ambiguities inthe text.
96
5.3 Canada submits that several other interpretative principles are also applicable to the present
case, recalling that the Appellate Body has noted that the principle of effectiveness flows from
Article 31:
“One of the corollaries of the “general rule of interpretation” in the Vienna
Convention  is that interpretation must give meaning and effect to all terms of the
treaty.  An interpreter is not free to adopt a reading that would result in reducingwhole clauses or paragraphs of a treaty to redundancy or inutility.”
97
5.4 For Canada, similarly, good faith underlies the principle that the interpreter must avoid
interpreting the treaty in a way that would lead to a manifestly absurd or unreasonable result.98
(b) Burden of Proof
5.5 Canada observes that in its report in United States - Measure Affecting Imports of Woven
Wool Shirts and Blouses from India ,99 the Appellate Body dealt extensively with the issue of
allocation of the burden of proof,100 stating:
“In addressing this issue, we find it difficult, indeed, to see how any system of
judicial settlement could work if it incorporated the proposition that the mere
assertion of a claim might amount to proof.  It is, thus, hardly surprising that variousinternational tribunals, including the International Court of Justice, have generally
and consistently accepted and applied the rule that the party who asserts a fact,
whether the claimant or the respondent, is responsible for providing proof thereof.
Also, it is a generally-accepted canon of evidence in civil law, common law and, in
fact, most jurisdictions, that the burden of proof rests upon the party, whethercomplaining or defending, who asserts the affirmative of a particular claim or
                                                     
93Vienna Convention on the Law of Treaties  (Vienna Convention), 1969, 1155 U.N.T.S. 332 (entered
into force 1980) (Exh. CDN-4).
94United States - Standards for Reformulated and Conventional Gasoline  (Reformulated Gasoline ),
W/DS2/AB/R, Report of the Appellate Body adopted on 20 May 1997, at 16-17; Japan - Taxes on Alcoholic
Beverages  (Japan Liquor Tax ), WT/[DS8/DS10/DS11]/AB/R, Report of the Appellate Body adopted on
11 November 1997 at 10; most recently reaffirmed in India - Patent Protection for Pharmaceutical and
Agricultural Chemical Products  (Pharmaceuticals ), WT/DS50/AB/R, Report of the Appellate Body adopted on
16 January 1998, at paras. 43-48.
95Vienna Convention , at Article 31.
96Id. at Article 32.
97 Reformulated Gasoline , at 23.
98I. Sinclair, The Vienna Convention on the Law of Treaties , 2nd rev. ed. (Manchester U.K.: Manchester
University Press: 1984) at 120 (Exh. CDN-5).
99WT/DS33/AB/R, Report of the Appellate Body adopted on May 23, 1997 (“ Shirts and Blouses ”).
100Id.., at 12-17.WT/DS70/R
Page 41
defence.  If that party adduces evidence sufficient to raise a presumption that what is
claimed is true, the burden then shifts to the other party, who will fail unless it
adduces sufficient evidence to rebut the presumption .”101 [emphasis added and
footnotes omitted by Canada]
5.6 For Canada, a prima facie  case of inconsistency means that the complainant must adduce
sufficient evidence that would permit a tribunal to find for the complainant in the absence of evidence
to the contrary.102  The respondent must then present enough evidence to cast doubt on the proposition
of the complainant to prevent the tribunal from finding in favour of the complainant.
5.7 According to Canada, international tribunals, for obvious reasons, have refused to accept
unsupported statements of the parties as evidence.  Canada recalls the statement by the British-
Mexican Claims Commission of 1926, “’if an international tribunal were to accept all ... allegations
without evidence, it would expose itself to the not unjustifiable criticism of placing jurisdiction as
between nations below the level prevailing in all civilized States for jurisdiction as between
citizens.‘”103
(i) A complainant must present a prima facie case in respect of each element of its claim.
5.8 For Canada, a prima facie  case is one which, in the absence of effective refutation by the
defending party, requires a panel, as a matter of law, to rule in favour of the complaining party
presenting the prima facie  case.104  Canada states that the Appellate Body has observed that a panel
should begin its analysis of each legal provision by examining whether the complaining party has
presented evidence and legal arguments sufficient to demonstrate that the challenged measures areinconsistent with respect to each relevant legal provision for which an inconsistency is alleged ,
105 and
that for claims with multiple elements, all the elements of that claim must be established.106
5.9 Thus, in Canada’s view, Brazil must present a prima facie  case with respect to each element
of its claim, that is, Brazil must demonstrate that a programme, activity or transaction at issue is:
(a) a subsidy within the meaning of Article 1 of  the SCM Agreement, that is, there is a
“financial contribution” within the meaning of Article 1.1(a) that imposes a net cost
on the government  making the contribution and that confers an advantage above and
beyond the market ; (paras. 5.28 - 5.38) and
(b) contingent on export performance, in the sense that it would not be paid unless
exports took place , that there would be rewards  if exports took place or that there
would be penalties  if exports did not take place (paras. 5.55 -5.80).
(ii) The principles applicable to the evaluation of evidence
                                                     
101Id.., at 14.
102See M. Kazazi, Burden of Proof and Related Issues: A Study on Evidence Before International
Tribunals  (The Hague: Kluwer Law International, 1996) at 326-343 (Exh. CDN-6).
103Id.., at 39-42 quoting Further Decisions and Opinions of Commissioners, Claim of W. Allen Odell , p.
63 (Exh. CDN-6).
104 European Communities - Measures Concerning Me at and Meat Products (European Communities -
Hormones) , WT/DS26/AB/R and WT/DS48/AB/R, Report of the Appellate Body adopted on 13 February 1998,
at para. 104.
105 Id.. at para. 109.
106 Id.. at paras. 214-15.WT/DS70/R
Page 42
5.10 Canada notes the Appellate Body’s observation that in evaluating the evidence presented by
the complaining party to determine whether a prima facie  case has been made with respect to each
element of its claim, a panel must be satisfied that the adduced evidence is “sufficient to raise apresumption that what is claimed is true”,
107 that mere assertions of fact do not amount to proof and
cannot be relied upon by a complaining party to meet this standard,108 and that it is not enough for the
complaining party to merely raise a reasonable doubt as to whether a measure might be inconsistent
with a WTO provision.109
5.11 Canada submits that a panel should not accept that a prima facie  case has been established
where the evidence presented in support of an allegation:
(a) does not support the proposition for which it is tendered;
(b) is internally inconsistent and does not amount to proof;
(c) consists of press reports which are uncorroborated or do not otherwise contain
material with an independent title of credibility and persuasiveness;110 or
(d) is so meagre that it can be ignored.111
5.12 In Canada’s view, submitting a large volume of documents does not demonstrate that a prima
facie case has been made. (para. 4.110). Rather, it must be shown that the evidence adduced is
credible and cogent, and that it establishes a prima facie  case for each element of the claim.  Canada
submits that applying these principles, Brazil has not made out a prima facie  case against any of the
programmes, activities or transactions it has impugned.
(c) Judicial Economy
5.13 Canada argues that the principle of judicial economy has guided panels since the inception of
the GATT.  Canada states that, relying on GATT panel practice and Article 11 of the DSU, the
Appellate Body observed in Shirts and Blouses  that:
“Nothing in this provision [Article 11] or in previous GATT practice requires a panel
to examine all legal claims made by the complaining party.  Previous GATT 1947
and WTO panels have frequently addressed only those issues that such panels
considered necessary for the resolution of the matter between the parties , and have
declined to decide other issues. … In recent WTO practice, panels likewise have
refrained from examining each and every claim made by the complaining party and
have made findings only on those claims that such panels concluded were necessaryto resolve the particular matter. …
“A panel need only address those claims which must be addressed in order to resolve
the matter in issue in the dispute.”
112 [italics added by Canada]
                                                     
107 United States – Measures Affecting Imports of Woven Wool Shirts and Blouses from India  (Shirts
and Blouses ), WT/DS33/AB/R, Report of the Appellate Body adopted on 23 May 1997, at 14.
108 Id..
109 India – Patent Protection for Pharmaceutical and Agricultural Chemical Products ,
WT/DS50/AB/R, Report of the Appellate Body adopted on 16 January 1998, at paragraph 74.
110 Keith Highet, “Evidence and Proof of Facts” in The International Court of Justice at Crossroads,
(New York:  Transactional Publishers, Inc., 1987) at 367 (Exh. CDN-54).
111 Kazazi, at 326
112 Shirts and Blouses , at 18-19.WT/DS70/R
Page 43
5.14 Canada submits that given the accelerated time-frame of the SCM Agreement Article 4
process, the principle of judicial economy is particularly important; in Canada’s view the Panel should
address only those issues which must be addressed in order to resolve the matter in issue in thedispute.
5.15 Canada observes that in the present case, Brazil makes one claim with respect to each
impugned Canadian programme, transaction or activity: a violation of SCM Agreement Article 3.  For
each of these claims, Canada states, Brazil must demonstrate two distinct and necessary elements:
(i) that as a result of that programme, transaction or activity, a subsidy exists (SCM
Agreement Article 1); and
(ii) that the subsidy is contingent, in law or in fact, upon export performance (SCM
Agreement Article 3).
5.16 Canada believes that in response it suffices for Canada to show that Brazil has failed to
demonstrate either one of the two necessary elements.  Indeed, Canada argues, to resolve each of the
claims in the dispute, if the Panel finds that either one of the two necessary elements has not been
shown, then the relevant claim fails and the aim of  the dispute settlement system – to secure a positive
solution to the dispute -- will have been met.
5.17 In accordance with the principle of judicial economy, Canada argues, it is not necessary for
this Panel to determine whether impugned programmes, activities or transactions are “subsidies”, if it
finds that they are not “contingent … on export performance”, and vice versa .  Canada indicates that
its arguments with respect to Articles 1 and 3 of the SCM Agreement focus, therefore, on the elementthat allows the Panel to dispose of each of Brazil’s claims in the most efficient manner possible.
2. Response of Brazil
5.18 Regarding the weight to be attached to the evidence it has submitted, Brazil notes that this
evidence includes statements by current and past presidents of the EDC, other EDC officials, the
Canadian Department of Industry Minister, other Industry Canada officials, and members of the
Canadian Parliament.  Brazil refers the Panel to an article provided by Canada
113.  Brazil argues that
Canada considers this article, which concerns the evidentiary standards applied by the International
Court of Justice, to provide the relevant framework for the Panel in its consideration of the evidence
presented by Brazil.  Brazil agrees.
5.19 In particular, Brazil directs the Panel’s attention to the ICJ’s treatment of public statements by
high government officials in the Nicaragua  case, discussed thoroughly in the article, and notes a
finding by the Court in that case:
“The material before the Court also includes statements by representatives of States,
sometimes at the highest political level.  Some of these statements were made before
official organs of the State or of an international or regional organization, and appearin the official records of those bodies.  Others, made during press conferences or
interviews, were reported by the local or international press.  The Court takes the
view that statements of this kind, emanating from high-ranking official political
figures, sometimes indeed of the highest rank, are of particular probative value when
they acknowledge facts or conduct unfavourable to the State represented by the
person who made them.  They may then be construed as a form of admission.”
                                                     
113 Exh. CDN-54.WT/DS70/R
Page 44
5.20 In Brazil’s view, the Court in fact considers statements by a party that are “’against its own
interest‘” to be “’ of superior credibility ‘” and on equal footing with evidence offered by disinterested
witnesses, and deems that such statements “’may . . . be construed as a form of admission.‘”
5.21 According to Brazil, the author of the article concludes that the Court “’arrived at a process of
taking at face value the public statements of high officials when such statements were arguably made
against the legal interest of the state in the government of which such officials served,‘” and of taking
“’the unfavourable  evidence as probative, but in general to reject the favorable  evidence as not being
disinterested or veracious‘”.  Brazil states that the author concludes that these evidentiary practices are
not restricted to the particular circumstances of the Nicaragua  case, but have in fact “’long been
employed by the Court in normal bilateral litigations as a way of winnowing through the vast
quantities of documentary assertion and evidentiary pleading to which it is normally subjected . . .‘”
5.22 Brazil reiterates that it has faced tremendous difficulty in these proceedings, given the
unreasonable secrecy of the Canadian government and given Canada’s failure to fulfill its duty of
collaboration, recognized in Argentina – Measures Affecting Imports of Footwear, Textiles, Apparel
and Other Items , as central to the WTO dispute settlement process.  For this reason, and because
Canada has apparently agreed that the ICJ’s evidentiary rules are relevant to the Panel’s weighing of
the evidence, Brazil asks that the Panel attach par ticular weight to the contemporaneous statements by
Canadian government ministers and officials offere d by Brazil as evidentiary proof of its claims.
Brazil argues that these statements, made against Canada’s legal interest, are, in the ICJ’s words, “’of
superior credibility.’”
5.23 Brazil argues that although Canada has secured a statement by a Bombardier officer
attempting to explain away his recent comments confirming Bombardier’s use of Canada Account
funds at non-commercial rates, no other such statements have been offered to correct or explain the
dozens of comments by current and past presidents of the EDC, other EDC officials, the Canadian
Department of Industry Minister, other Industry Canada officials, and members of the Canadian
Parliament offered by Brazil as “’statements against interest‘” in support of Brazil’s claims.
5.24 According to Brazil, the many statements by many Canadian ministers and officials therefore
retain, in the words of the ICJ, their “superior credibility” and persuasiveness as reliable indications of
the accuracy of the facts asserted.  For Brazil, post-hoc rationalizations and defences offered by
Canada in the course of these proceedings, coming not from the ministers or officials themselves, andlacking any contemporaneous connection to the orig inal statements, are not under the ICJ’s practice
considered credible or persuasive.
B. “SUBSIDY” PER SCM ARTICLE 1
1. Arguments of Canada
5.25 Canada argues that based on the language of SCM Article 1, for a “subsidy” to exist, two
elements must be present, and there must be a causal link between the two. First, there must be either
one of the government “financial contribution(s)” enumerated in subparagraphs (i) to (iv) or a form of
income or price support as defined in Article XVI of GATT 1994.  Second, a “benefit” must thereby
be conferred.
5.26 According to Canada, the customary rules of in terpretation in international law require that
interpretation reflect the ordinary meaning of the wo rds used in context and in the light of the object
and purpose of the agreement in question (paras. 5.1- 5.4).  As well  in Canada's view, in interpretingand analysing the relevant provisions of an intern ational agreement, the interpreter must ensure thatWT/DS70/R
Page 45
the resolution of any ambiguity does not upset the “carefully drawn balance of rights and obligations
of Members”114 set down in that agreement.
(a) The meaning of “financial contribution”
5.27 Canada submits that under Article 1.1(a)(1), the term “financial contribution by a government
or any public body” is defined exhaustively115 and is limited to the circumstances described in the four
sub-paragraphs (i) to (iv).  Accordingly, Canada states, if the measures at issue do not fall within any
of the items in (i) to (iv), then the practices cannot be considered to be “financial contributions by
government or any public body”.
(b) The meaning of “benefit”
5.28 Canada notes that the term "benefit" is not defined in the SCM Agreement or elsewhere in the
WTO Agreement, and argues that to determine under what circumstances a benefit is "conferred", one
must turn to the customary rules of treaty interpretation, in particular Article 31 of the Vienna
Convention.
5.29 Canada submits that the word "benefit" as it is found in Article 1.1(b) of the SCM Agreement
has two components:  a benefit is conferred when a financial contribution by a government a) imposesa cost on the government, and b) results in an advantage above and beyond what the market could
provide.  For Canada, this conclusion flows from the ordinary meaning of "benefit", the context in
which it is found and the object and purpose of the SCM Agreement read as a whole.
(i) Ordinary meaning
5.30 Canada submits that the relevant ordinary meaning of benefit is "advantage", but that the
dictionary definition does not adequately narrow the term, i.e., that it contains nothing that would
distinguish a subsidy from normal commercial activity.  For Canada, any commercial contract could
accord an advantage to a firm relative to its compet itors, and therefore it is necessary also to consider
context and object and purpose.
(ii) Context
5.31 Canada argues that “benefit” should not be interpreted simply to mean “the advantage given
beyond commercial or market activity”, an interpretation that in Canada's view Brazil makes (paras.
6.60, 6.148, 6.179). According to Canada, viewed in the context of the SCM Agreement, including its
annexes, “benefit” and hence “subsidy” requires a more nuanced and sophisticated approach.
5.32 Canada notes that under the SCM Agreement the calculation  of subsidy may be done in one
of two ways: Article 14 sets out the guidelines, based on a market-referenced “benefit to the recipient”
test, that are to be used for determining the maximum value of countervailing duties to be imposed.
Canada further notes that for the purpose of determining the amount of ad valorem  subsidisation
under Article 6.1, Annex IV sets out a “cost to government” test.
                                                     
114United States – Restrictions on Imports of Cotton and Man-made Fibre Underwear (United States -
Cotton Underwear ) WT/DS24/AB/R, Report of the Appellate Body adopted 25 February 1997, at 15.
115That is, for Canada, the use of the term “i.e.” indicates that the items that follow are intended to be
an exhaustive, rather than an illustrative list.  In this regard, Canada notes that the Uruguay Round negotiators
agreed to replace the term “such as” in the Cartland I draft of the SCM Agreement (18 May 1989)(Exh.
CDN-21), with “i.e.” in Cartland II (Exh. CDN-22), thus clearly indicating an intent to move from an illustrativedefinition to an exhaustive definition.  Canada also notes that “e.g.” is also used within the subsidy definition inArticle 1 to indicate an illustrative list.WT/DS70/R
Page 46
5.33 According to Canada, neither test defines “benefit” or provides a definitive guide as to when a
“benefit” exists under Article 1, but taken together, they provide important contextual  guidance as to
the types of governmental measures that could be considered “subsidies”, and therefore the measuresthat could be considered to have conferred a benefit.
5.34 Canada submits that this contextual element should be considered in the light of the
consideration that the SCM Agreement should be interpreted so as to function logically and
seamlessly.  In Canada's view, taking one test -- as Brazil seems to have done -- without considering
how it would work within the SCM Agreement as a whole would have the potential of rendering theSCM Agreement nonsensical, i.e., if “benefit” were based solely on a market-based “benefit to the
recipient”, a “subsidy” found under Article 1 might be found under Article 6.1 to have no value .  For
that reason, Canada argues, “benefit” must be interpreted in such a way as to ensure that a subsidy
found to exist under Article 1 would also be found to exist -- even if the values were different -- under
both tests set out in the SCM Agreement.
(iii) The object and purpose of the SCM Agreement
5.35 Canada maintains that a pure “benefit to the recipient” approach is not consistent with the
object and purpose of the SCM Agreement, as demonstrated by anomalous results set out in the
“Finan Report” and relied upon by Brazil.
116  In this regard, Canada states that Brazil argues using this
approach (para. 6.184) that the “subsidy value” of a repayable  contribution of $87 million was
between $94 million and $211 million -- that is, potentially over twice  the subsidy value of an
equivalent outright grant .117
5.36 Canada submits that Brazil thus implicitly argues that there is more  distortion in the
international economy when a government requires that research and development contributions be
repaid, than when such contributions are made with no expectation of return or repayment.  In
Canada's view, to the extent that the object and purpose of the SCM Agreement is to restrict the use of
trade distorting subsidies, Brazil’s approach is not consistent with that object and purpose.
5.37 Canada submits that the “mischief” that the Agreement seeks to discipline are measures that
distort the market by a) imposing a cost on the treasury of the providing Member, and b) an advantage
to the recipient above and beyond the market .
5.38 Canada further argues with respect to credit terms that the first paragraph of Item (k) of the
Illustrative List of Export Subsidies of Annex I of the SCM Agreement (Annex I) provides a specific
contextual indication of what constitutes a subsidy.  Canada notes that the first paragraph of Item (k)
identifies two elements in determining whether particular credit terms are subsidies: first, where
governments provide credit at rates below those which they have to pay for the funds so employed,
and second, where such credit secures a material advantage in the field of export credit terms.  For
Canada, the test in determining whether government credit is a subsidy is therefore whether there is a
net cost to the government, and whether as a result an advantage is granted above and beyond what
the market would provide.
2. Arguments of Brazil
5.39 Brazil argues that Article 1.1 includes a three-part test: first, paragraph (a)(1) of Article 1.1
requires that, for a subsidy to occur, there must be a “financial contribution by a government or any
                                                     
116 The “revenue foregone” is not to be confused with the “cost to government” method set out in
Annex IV.  The cost to the Government of Canada of a contribution cannot, by definition, exceed the value of
that contribution as an outright grant.  The “cost”  to the Government, in the case of a TPC contribution,
therefore would be calculated by subtracting repayments from the original contribution.
117 The Parties ’ arguments regarding the Finan Report are set forth in Section VI.F of this report.WT/DS70/R
Page 47
public body within the territory of a Member . . .”; second, under clauses (i) through (iv) of
paragraph (a) of Article 1.1, the financial contribution may take one of several forms; third, whether a
“benefit” is conferred, within the meaning of paragraph (b) of that Article.  For Brazil, Canada’sinterpretation of the word “benefit” would rob the term of its ordinary meaning, and indeed, of any
recognizable meaning.
5.40 Brazil, considering the ordinary meaning of the phrase “a benefit is . . . conferred”, notes that
Webster’s Third New International Dictionary defines the verb “confer” as to “grant,” “bestow” or
“give.”  The noun “benefit” means “advantage” or “something that guards, aids, or promotes well-being.”  To “aid,” in turn, means “to give help or support to.”  Alternatively, an “advantage” is “a
more favorable or improved position or condition.”  For Brazil, Article 1.1 therefore states that a
subsidy exists where a government contributes something, and in so doing gives help or support, or
improves the recipient’s condition.  For Brazil, EDC and the Canada Account, in granting assistance,
improve a recipient’s condition by granting the recipient something, in words taken directly from
Canada’s first written submission, “above and beyond the market.”
5.41 Brazil submits that the structure of Article 1.1 requires this construction: paragraph (a) of
Article 1.1 tells about the source of the financial contribution – the government; as structural matter,
paragraph (b), in requiring that a “benefit” be conferred, must then speak to the effect this
contribution has on its recipient.
5.42 Brazil notes that Canada appears to agree that demonstrating a “benefit to the recipient” is one
part of the “benefit” test, but argues that Canada invents a second, additional requirement – that thegovernment, in making its contribution, realize a “net cost.”  Brazil rejects each of Canada’s reasons
for this additional asserted requirement.
5.43 Brazil disputes Canada’s argument that applying the ordinary meaning of the term “benefit” –
which in Brazil’s view means “advantage” or “aid” – would not “adequately narrow the term”,
arguing that no provision of the Vienna Convention  requires, that the ordinary meaning of a term be
narrowed  in order for it to be valid.  Brazil notes Canada’s statement that a broad definition of
“benefit” could mean that a “commercial contract” could possibly be considered a “subsidy,” but
argues that such a contract is not, without something more, a subsidy prohibited by the terms of the
SCM Agreement .  Brazil asserts that Canada’s concern is with the scope of the prohibitions  included
in the SCM Agreement, and not the definition of the term “ subsidy,”  and is therefore misplaced.
5.44 Brazil also disagrees that item (k) of Annex I to the SCM Agreement offers “context”
supporting Canada’s proposed test.  According to Brazil, Annex I does not speak to whether
government activity constitutes a subsidy , but rather to whether government activity constitutes a
prohibited export  subsidy.  Brazil submits that a measure may constitute a subsidy, but not be on the
Illustrative List of Export Subsidies included in Annex I.  For Brazil, the relevant reference to theIllustrative List of Export Subsidies included in Annex I falls in Article 3, which specifies, among
those activities already identified as subsidies , those that are prohibited by the SCM Agreement.
Brazil states that Article 1 of the Agreement contains no reference to Annex I relevant to the
definition of a subsidy, and that the Canadian definition must therefore be rejected.
5.45 Brazil also takes issue with Canada’s view that paragraph (a) of Article 6.1 of the SCM
Agreement provides contextual support for its net cost  argument given that Article 6.1(a) requires that
for purposes of that paragraph the value of a subsidy be calculated on the basis of cost to the grantinggovernment. Brazil disagrees with Canada that if “benefit” under Article 1.1 means “benefit to the
recipient,” a government contribution identified under Article 1.1 as a “subsidy” could not be valued
under Article 6.1 and Annex IV, stating that Canada ignores that valuation is only one of several ways
to establish “serious prejudice” under Article 6.1 of the SCM Agreement.  For Brazil, if the particular
subsidy in question is defined based on the “benefit to the recipient,” “serious prejudice” could still befound based on the other alternative provisions of Article 6.1 which characterize the effect of theWT/DS70/R
Page 48
subsidy according to the extent of the benefit realized  by the recipient.  Moreover, for Brazil, Article
6.1 is not relevant to an export subsidy, which need not be quantified or subject to specific valuation
in order to trigger the prohibition of Article 3.
5.46 Regarding Canada's argument that using a “benefit to the recipient” test is against the object
and purpose of the SCM Agreement, which for Canada is “'to restrict the use of trade distorting
subsidies'” , Brazil finds incomprehensible Canada's implication (see para. 5.37) that the type of
benefit estimated by Brazil under TPC's $87 million contribution to Bombardier is not, consistent
with the object and purpose of the SCM Agreement, “’trade distortive.‘”  Brazil also does notunderstand how Canada's argument demonstrates that the “benefit to recipient” test is inconsistent
with the object and purpose of the Agreement.
5.47 Brazil notes that Revenue Canada’s Special Import Measures Act Handbook states that while
the determination of “benefit” on a government loan is generally related to whether the government
recovers its costs, such a test will not always capture the true effect of the subsidy.  According to
Brazil, the Handbook states that:
“[I]t is also possible that a benefit would accrue to an exporter or an importer as a
result of a government guarantee which would not necessarily result in a cost to the
government.  The benefit could be a lower interest rate or a loan at a commercial rate
which the company would otherwise not get without government involvement.”
5.48 Furthermore, according to Brazil, in defining a subsidy,” the Canadian Handbook states that a
“benefit” can be direct or indirect:
“A direct financial or other commercial benefit is one which accrues directly to the
person, firm or industry which is the intended recipient, such as an outright grant of
funds to a producer of goods.  An indirect benefit is one which does not accrue
directly, but which alters the economic environment within which firms operate, andhence the level of their costs.”
5.49 For Brazil, therefore, Canada’s position concer ning the definition of “subsidy” and “benefit”
before this Panel is irreconcilable with that adopted in its own law, noting that in the Handbook,
Canada agrees with a definition of the term “subsidy” which focuses on whether a benefit accrues
either directly to the recipient , or somehow alters the  recipient’s , and not the grantor’s, costs.  Brazil
also states that Canada agrees with Brazil that covering the government’s cost does not necessarily
mean that the recipient is getting a rate it would otherwise get on the market, without government
involvement.
5.50 For Brazil, neither the ordinary meaning of Article 1.1, nor its context, nor the object and
purpose of the SCM Agreement, nor Canada itself, outside the confines of these proceedings, suggest,much less require, a “net cost to government” test.  Brazil argues that the proper test is evident from
the ordinary meaning of Article 1.1:  a subsidy ex ists where a government contributes something, and
in so doing grants an aid, which gives help or support, or an advantage, which improves the
recipient’s condition above and beyond the market.
3. Response of Canada
5.51 In response, Canada notes Brazil’s own admission that under its definition, a purely
commercial contract could be covered by Article 1 of the SCM Agreement.  This conclusion, arrived
at through a contextual  interpretation of the word “benefit” is inescapable: according to economic
theory, any contract involves at least one party that is better off – that benefits  from the contract – and
one party that, at least, does not lose.  If “ benefits ” or advantage were considered without the broaderWT/DS70/R
Page 49
context of the SCM Agreement, including Article 14 and Annex IV, then all purely commercial
contracts entered into by governments would be subject to the disciplines of the SCM Agreement.
This, in Canada’s view, widens the scope of application of the SCM Agreement significantly beyondwhat the drafters intended.  In this context Canada reiterates the anomalous results that would be
obtained if the Article 14 approach – benefit to the recipient – to the determination of the value of a
subsidy were used for the purposes of Article 1: an CAN$87 million repayable  contribution was
found by Brazil to have a subsidy value nearly three times higher than the subsidy value of the same
amount as a cash grant .
5.52 Canada also observes that the Revenue Canada Handbook definitions relate to the valuation
of subsidies for the purpose of imposing countervailing duties. In that respect, the definitions and
methodologies set out in the Handbook are in Canada’s view fully consistent with the guidelines set
out in Article 14, for the express purpose of the valuation of subsidies in countervailing duty cases.
The Handbook, though fully consistent with Article 14, does not, however, predetermine Canada’s
understanding of what types of governmental contributions or activities should come within the scope
of the SCM Agreement.
C. “CONTINGENT, IN LAW OR IN FACT, … ON EXPORT PERFORMANCE”
1. Arguments of Canada
(a) Brazil’s interpretation of Article 3.1(a)
5.53 Canada argues that Brazil’s first submission nowhere states how Brazil interprets “contingent
… upon export performance” in Article 3.1(a); and Canada infers that, according to Brazil, thiscriterion is met where a subsidy is granted in any one  of the following conditions:
• by an organisation that has the mandate to support export trade and the capacity to engage
in that trade and to respond to international business opportunities;
 (para. 6.49)
• because the industry is export-oriented or has significant export potential;(para. 6.221)
• because an export-oriented company is required to stay in business; (para. 6.287)
• an objective of a subsidy programme is promoting domestic and international sales; (para.
6.308) or
• the sales of specific products of the recipient have all been export sales.(para. 6.221)
5.54 In Canada's view, these implicit interpretations of what constitutes “contingent … upon
export performance” are incorrect under the customary rules of interpretation of public internationallaw, as required by Article 3.2 of the DSU.
(b) Article 3.1(a) prohibits subsidies that are conditional on or tied to export performance
5.55 Canada submits that in accordance with the customary rules of international law on the
interpretation of treaties, Article 3.1(a) should be interpreted to apply to subsidies that are, in law or in
fact, conditional on or tied to  export performance.
5.56 More specifically, Canada submits that the following factors are useful in determining
whether subsidies are in fact  contingent upon export performance:
(a) evidence that the subsidy would not have been paid but for  the exports flowing from
it;WT/DS70/R
Page 50
(b) whether there are penalties -- in the sense of reduction or withdrawal of payments -- if
exports  do not take place; or
(c) whether there are bonuses  or additional payments if exports do take place.
5.57 For Canada, this interpretation accords with the ordinary meaning of Article 3.1(a), in the
light of its context and the object and purpose of the SCM Agreement, and is supported by the
negotiating history of the SCM Agreement.  Canada submits that Brazil’s interpretations, if adopted,
would lead to a manifestly absurd or unreasonable result.
(i) The ordinary meaning of “contingent ... upon export performance”
5.58 For Canada, the key words to interpreting Article 3.1(a) are “contingent ... upon export
performance”.  Canada argues that the relevant ordinary meaning of “contingent upon” is “dependent
for its existence on something else”, “conditional; dependent on, upon ;”118 the ordinary meaning of
“performance”, in pertinent part, is “execution or accomplishment of an action, operation or process
undertaken or ordered.”119  Thus, for Canada, on its plain meaning, Article 3.1(a) applies only to
subsidies that are conditional on exports being executed or accomplished.
5.59  Canada submits that this is further supported by footnote 4 to Article 3.1(a), which states the
following regarding whether an ostensibly domestic subsidy is “in fact” contingent upon export
performance:
“This standard is met when the facts demonstrate that the granting of a subsidy,
without having been made legally contingent upon export performance, is in fact tied
to actual or anticipated exportation or export earnings.  The mere fact that a subsidy isgranted to enterprises which export shall not for that reason alone be considered to be
an export subsidy within the meaning of this provision.” [emphasis added by Canada]
5.60  In Canada's view, the relevant ordinary meaning of “tied to” is “restrain or constrain to or
from  an action etc; limit or restrict as to behaviour, location, conditions, etc.”
120  Thus, Canada argues,
it must be shown that, exportation or export earnings must be a condition  for the grant of a subsidy for
it to be prohibited under Article 3.1(a).  The fact that exports take place, or that increased exports
were intended (without the subsidy having been made conditional  on exportation), does not render a
subsidy a prohibited subsidy.
5.61 For Canada, this interpretation finds additional support in the Panel Report in Indonesia –
Autos , which noted that Article 3 “…prohibits subsidies which are conditional on export performance
and on meeting local content requirements …”.121   Canada argues that the prohibition in Article 3 is
not triggered by the effect of a subsidy,122  by the objective of a subsidy.  Rather, Canada submits,
Article 3 addresses subsidies that are granted or maintained only if  certain conditions are met:  Article
3.1(a) captures subsidies where the condition attached to the subsidy is that exports must be executed
                                                     
118 The New Shorter Oxford English Dictionary on Historical Principles , Vol. 1, (Oxford:  Clarendon
Press, 1993) at 494 (Exh. CDN-8).
  The French version uses “subordonné”, which translates as  “subordinate to”; Robert & Collins
French-English Dictionary , (Paris & London:  Dictionnaires Le Robert and Collins Publishers, 1987) at 680
(Exh. CDN-9).
119 The New Shorter Oxford English Dictionary on Historical Principles , Id.. Vol. 2 at 2160 (Exh.
CDN-10).
120 Id.. at 3307 (Exh. CDN-11).
121 Indonesia – Certain Measures Affecting the Automobile Industry  (“Indonesia-  Autos ”) Report of
the Panel adopted on 23 July 1998, at para. 14.33.
122 In contrast, actionable  subsidies are triggered by effect: SCM Agreement Article 5 and 6.WT/DS70/R
Page 51
or accomplished; likewise, Article 3.1(b) captures  subsidies where the condition attached to the
subsidy is that there must be domestic content.
5.62 Canada contends that based strictly on its ordinary meaning, Article 3 does not, therefore,
prohibit programmes or subsidies that only have as a general objective the expansion of trade or the
increase in international competitiveness that might lead to increased exports. For Canada, a subsidy
may have, as a general objective, an increase in competitiveness and hence increased exports, and
may meet its competitiveness objectives and lead to increased exports.  If, however, such a subsidy is
available to recipients whether or not  they engage in exports, in Canada's view the subsidy is not
contingent upon  export performance and therefore not inconsistent with Article 3.1(a).
(ii) The context of Article 3.1(a)
5.63 Canada argues that three contextual elements support this analysis.
5.64 First, Canada observes, the SCM Agreement makes a fundamental distinction between
prohibited and non-prohibited subsidies: export subsidies, together with domestic content requirement
subsidies, are singled out for prohibition under Part II, whereas other subsidies may be actionable
under Part III or non-actionable under Part  IV.  In Canada's view, this distinction is central to the legal
structure of the SCM Agreement, under which there are three discrete  categories of subsidies.  Canada
argues that a subsidy falling within Article 3 is prohibited, regardless of its actual or expected impact
on international trade or on the interests of other WTO Members; and that the trade distorting impact
of actionable subsidies is presumed only under certain conditions (set out in Article 6), and even then,
unlike in the case of prohibited subsidies, the presumptions are rebuttable (Article 6.2); and thatsubsidies that fall within the category of “non-actionable” subsidies are subject to disciplines only in
the rare circumstance that they “cause damage which would be difficult to repair” (Article 9.1).
5.65 For Canada, Brazil’s argument tries to obscure these essential distinctions.  Canada notes the
example of certain research and development subsidies that are inherently aimed at increasing
“international competitiveness” and in that broad sense possibly lead to the expansion of exports.  InCanada's view, to the extent that the subsidies are not paid only on condition that exports take place --
that is, the exports do not arise as a result of the desire to take advantage of a subsidy that can only be
obtained if exports take place, but are incidental to the general increase in competitiveness that has
resulted from the subsidies -- such subsidies must not be considered “contingent …upon export
performance” and therefore prohibited by Article 3.
5.66 Canada refers to a second contextual element, Article 3.1(b), which prohibits subsidies
“contingent… upon the use of domestic over imported goods.”  According to Canada, Brazil’s
interpretation of “contingency” as “propensity”, if pushed to its logical conclusion in Article 3.1(b),
would result in the prohibition  of subsidies made to domestic industries that have a domestic content
“propensity” or “orientation”.  For Canada, if Brazil’s argument with respect to Article 3.1 is correct,at a minimum, subsidies to the following sectors or concerns would be prohibited :
(a) natural resources processing plants;
(b) subcontractors for major manufacturing concerns;
(c) enterprises in remote locations; and
(d) medium- to small-sized enterprises in large economies.
5.67 Canada submits that these enterprises tend, by the nature of their operation, to source their
inputs domestically, and are thus “oriented” to the use of domestic goods over imported goods.  ForWT/DS70/R
Page 52
Canada, according to Brazil’s interpretation of “contingent upon”, subsidies to such enterprises would
be prohibited.
5.68 A third contextual element referred to by Canada is the list of export subsidies in SCM
Agreement Annex I.  Canada states that a ll of the listed examples describe situations in which the
subsidy is conditional on or tied to  the export of a good.  At the same time, Canada argues, the fact
that Item (a) identifies "direct subsidies…contingent upon export performance" does not by a
contrario  implication, lead to the conclusions that indirect subsidies are thereby excluded from the
scope of Article 3.
5.69 Further in this regard, Canada, in answer to a panel question, submits that its argument that no
subsidy under Article 1  may be found where no net cost to the treasury of the granting country can be
shown is not an a contrario  conclusion based on Item (k), but rather a statement setting out the
elements that have to be established under Article 1.  Canada submits that there is a resemblance
between the structure of Item (k) and Article 1, and states that this similarity is the reason why Canada
referred to Item (k) as contextual guidance in inte rpreting Article 1 of the SCM Agreement in its First
Written Submission.
5.70 Canada notes with respect to the example of direct and indirect subsidies (para. 5.68) that
while no a contrario  conclusion can be drawn, from Item (a), that indirect subsidies  are permitted, a
responding Party might show, under Article 3 , that an impugned subsidy is not “contingent upon
export performance”; or it might demonstrate that an impugned contribution is not a subsidy , and it
would do so under Article 1.  For Canada , neither argument would be drawing a contrario
conclusions from an Item in the Illustrative List.
(iii) The object and purpose of the SCM Agreement
5.71 Canada notes that the object and purpose of the SCM Agreement is not set out in a purposive
clause, or in a preamble, but can be determined nonetheless from the text and structure of the SCM
Agreement itself, as well as from the historical context in which disciplines on export subsidies
developed.
5.72  Canada submits that the SCM Agreement is based on the premise that some forms of
government intervention distort international trade, some have the potential to distort, and still others
do not distort at all, and that the disciplines imposed by the SCM Agreement reflect this accepted
approach, commonly known as the “traffic light approach”:123 trade distorting subsidies are to be
prohibited outright (red light); potentially trade distorting subsidies are to be disciplined if they cause
distortions in the market (amber); non-trade distorting subsidies are not subject to disciplines (green).
Hence the prohibition on export subsidies, the disciplines on actionable subsidies if they cause serious
prejudice, and the absence of disciplines on certain types of research and development subsidies,
according to Canada.
5.73 It is essential, Canada submits, that in construing the scope of Article 3.1 the Panel does not
blur this distinction.  For Canada, Article 3.1 does not capture domestic subsidies merely because an
objective and effect of a programme is to increase export competitiveness.
                                                     
123 See Communication from Switzerland, 1 February 1988, MTN.GNG/ NG10/W/17 at 1-2 (Exh.
CDN-12); Note by Secretariat, Negotiating Group on Subsidies and Countervail Measures,  Meeting of 1-
2 June, 1998 , MTN.GNG/NG10/7 (Exh. CDN-13); and Montreal Meeting of the Trade Negotiations Committee ,
MTN.TNC/7(MIN) 9 December 1988, at 18-20 (Exh. CDN-14).WT/DS70/R
Page 53
(iv) The negotiating history of the SCM Agreement
5.74 Canada argues that its interpretation is supported by the negotiating history of the SCM
Agreement, as provided for in Article 32 of the Vienna Convention.  Canada submits that the questionof how to determine whether a subsidy is “in law or in fact” an export subsidy was an issue that
highlighted the key fissures in the negotiations on the SCM Agreement between the United States and
almost all other countries, including Brazil.  According to Canada, the United States, basing its
position on its own “disproportionality” test for the imposition of countervailing duties on export
subsidies, argued for a quantitative approach and an “export propensity” test to determine whether agiven measure was a prohibited subsidy.
124  Canada states that this position was rejected by other
delegations,125 because it would be inequitable for small economies that were more dependent on
export markets, quoting a "status report" from the Chairman of the Negotiating Group:
“Several participants found the proposal to prohibit subsidies granted to
predominantly exporting firms unacceptable.   They considered it biased against
countries with small internal markets, where firms were forced to export most of their
production to be economically viable.   They also considered that the same disciplinesshould apply to all firms irrespective of whether their sales happened to take place in
the domestic or a foreign market.”
126
5.75 Similarly, Canada asserts, the evolution of the footnote to Article 3.1(a) demonstrates the
negotiators’ rejection of an object or intent-based test for that of a conditions-based test.  According to
Canada, in the earliest draft, the footnote was cast as a test of intent:
“This standard is met whenever the granting authority knew or should have known
that the subsidy, without having been expressly made contingent upon export
performance, was intended to increase exports.”127
which was modified to:
“This standard is met whenever the facts which were known or should have been
known to the government when granting the subsidy demonstrate that the subsidy,
without having been made expressly contingent upon export performance, would
operate as an export subsidy.”128
and subsequently to:
                                                     
124 See: Communication from the United States , 15 June 1988, MTN.GNG/ NG10/W/20 at 5 (Exh.
CDN-15);  Elements of the Framework for Negotiations – Submission by the United States , 22 November 1989,
MTN.GNG/NG10/W/29 (Exh. CDN-16); Elements of the Negotiating Framework – Submission by the
United States , 27 September 1990, MTN.GNG/NG 10/W/39 at 3 (Exh. CDN-17).
125 See, for example: Elements of the Framework for Negotiations – Submission by Japan ,
6 October 1989, MTN.GNG/NG10/ W/27 at 1 (Exh. CDN-18); Elements of the Framework for Negotiations –
Submission by India , 30 November 1989, MTN.GNG/NG10/W/33 at 1 (Exh. CDN-19).
126 Note by the Secretariat, Negotiating Group on Subsidies and Countervailing Measures,  Meeting of
27-28 March 1990 , MTN.GNG/NG10/17 at paragraph 3 (Exh. CD N-20), recording the response of some
delegations to the US export propensity proposal.
127Status Report by the Chairman, 18 July 1990, MTN.GNG/NG10/W/38, co ntaining a text distributed
by the Chairman on 18 May 1990 at 2 (“Cartland I”) (Exh. CDN-21)
128 Draft Text by the Chairman, 4 September 1990, MTN.GNG/NG10/W/38 /Rev.1, at 2 (“Cartland II”)
(Exh. CDN-22)WT/DS70/R
Page 54
“This standard is met whenever the facts demonstrate that the granting of a subsidy,
without having been made legally contingent upon export performance, is in practice
tied to actual or anticipated exportation.”129
and later to:
“This standard is met whenever the facts demonstrate that the granting of a subsidy,
without having been made legally contingent upon export performance, is in practice
tied to actual or anticipated exportation or export earnings.”130
and finally to:
“This standard is met whenever the facts demonstrate that the granting of a subsidy,
without having been made legally contingent upon export performance, is in fact tied
to actual or anticipated exportation or export earnings.  The mere fact that a subsidy is
accorded to enterprises which export shall not for that reason alone be considered to
be an export subsidy within the meaning of this provision.”131
5.76 For Canada, the rejection of an “export propensity” test, along with the change from a
footnote test based on “intent” to one based on conditions attached to the subsidy ( i.e. whether a
subsidy is “in fact tied to ” exports) must give rise to the “commonplace inference”132 that neither
export propensity nor “intent” to increase exports is a correct measure for determining whether a
subsidy is “in fact” contingent upon exports.  Rather, Canada asserts, the correct test is whether thesubsidy in question is available only for exports, or only on condition  that goods are exported.
(v) The implications of Brazil’s interpretation
5.77 Canada submits that it is an axiom of treaty  interpretation that the interpreter must avoid
interpreting the treaty in a way that would lead to a manifestly absurd or unreasonable result.
133  In
Canada's view, Brazil proposes that “contingent upon” should be interpreted more expansively thanits ordinary meaning, and argues that Article 3.1(a) applies not only to subsidies that are conditional
upon export performance, but also those subsidies that have an “export propensity”, an interpretation
that, in addition to ignoring the plain meaning of Article 3 and the negotiating context of the SCM
Agreement, would lead to a manifestly absurd or unreasonable result in three ways.
5.78 First, Canada asserts, such a definition would create a serious imbalance between the
obligations of smaller and larger economies under the SCM Agreement.  In Canada's view, such an
outcome was not only not intended, but would be manifestly unreasonable, for it would mean that
                                                     
129 Draft Text by the Chairman, 2 November 1990, MTN.GNG/NG10/W/38/ Rev.2 at 5 (“Cartland III”)
(Exh. CDN-23)
130 Draft Text by the Chairman, 6 November 1990, MTN.GNG/NG10/ W/38/Rev.3 (“Cartland IV”)
(Exh. CDN-24).
131 Draft Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations,
20 December 1991, MTN.TNC/W/FA (“Dunk el Draft”) at I.3 (Exh. CDN-25).
132 United States - Restrictions on Imports of Cotton and Man-made Fibre Underwear  (Cotton
Underwear ), WT/DS24/AB/R, Report of the Appellate Body adopted on 25 February 1997, at 17:
“We believe the disappearance in the ATC of the earlier MFA  express provision for backdating
the operative effect of a restraint measure, strongly reinforces the presumption that such retroactiveapplication is no longer permissible.  This is the commonplace inference that is properly drawn from such
disappearance.   We are not entitled to assume that that disappearance was merely accidental or an
inadvertent oversight on the part of either harassed negotiators or inattentive draftsmen. That no official
record may exist  of discussions or statements of delegations on this particular point is, of course, no basisfor making such an assumption.” [emphasis added]
133 Sinclair, (Exh. CDN-5).WT/DS70/R
Page 55
there would be one law for larger economies that are not dependent on international trade and another
for smaller economies that are.
5.79 Second, Canada states, if “export propensity” -- so clearly rejected as a benchmark throughout
the negotiations -- were considered the appropriate standard for making a prohibited subsidy finding,
Article 3.1 would be over-broad to the point of absurdity.  For Canada, under such a definition, almost
any subsidy that would help in the development of the competitive advantage of a state -- that would
make its industries more efficient globally -- would then be prohibited as an export subsidy.
5.80 Third, in Canada's view, Brazil’s interpretati on would render government planning for WTO-
consistent subsidies impossible.  Canada submits that any purely domestic subsidy could have the
effect of increasing the general competitiveness of a sector or a company, and that a properly
structured subsidy would have the achievement of this outcome as its prime directive.  For Canada,
even if the output of the sector or the company in question only serves the domestic market, greater
efficiencies in one sector or company could have a ripple effect in the economy as a whole, and such
greater efficiency could lead to greater exports.  Canada maintains that if Brazil’s interpretation were
acceptable, the resulting exports would render the otherwise WTO-consistent subsidy illegal, makingit impossible for governments to exercise their right under the SCM Agreement to structure WTO-
consistent subsidies.
(vi) The OECD Arrangement on Guidelines for Of ficially Supported Export Credits (OECD
Consensus)
5.81 Finally, Canada notes, Article 3 is subject to exceptions, recalling that Footnote 5 to Article 3
provides that “[m]easures referred to in Annex I as not constituting export subsidies shall not be
prohibited under this or any other provision of this Agreement.”  Canada submits that one such
“measure” is set out in Annex I, Item (k), which provides:
“The grant by governments (or special institutions controlled by and/or acting under
the authority of governments) of export credits at rates below those which theyactually 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.
Provided, however, that if a Member is a party to an international undertaking on
official export credits to which at least twelve original Members to this Agreement
are parties as of 1 January 1979 (or a successor undertaking which has been adopted
by those original Members), or if in practice a Member applies the interest rates
provisions of the relevant undertaking, an export credit practice which is in
conformity with those provisions shall not be considered an export subsidy prohibited
by this Agreement .” [emphasis added]
Canada observes that the OECD Consensus
134 is such an “international undertaking”, of which
Canada is a Member.
5.82 Canada argues that if, therefore, an export financing transaction is entered into consistently
with the interest rate provisions of the OECD Consensus, then such export credit practice, according
to the express terms of the SCM Agreement, “shall not be considered an export subsidy prohibited by
this Agreement.”
                                                     
134Exh. CDN-3.WT/DS70/R
Page 56
5.83 Canada notes its view that item (j) and the fi rst paragraph of item (k) of Annex I to the SCM
Agreement are not exceptions; they merely set out what type of practice would be ipso facto  an export
subsidy.  That is, an export  credit provided by government that met the conditions of the first
paragraph of Item (k) would be an export subsidy; a complainant need only prove the elements of
Item (k) and does not need to further prove, for example, that the provision of the credit was
“contingent on export performance”.  Canada submits that the examples provided in the Illustrative
List do not identify a contrario  what would not constitute an export subsidy, and that such an
interpretation would turn the Illustrative List into an exhaustive list.
(vii) The United States misunderstands Canada’s interpretation of Article 3
5.84 Canada disagrees with the argument in the United States' third party submission (Section VII)
that Canada’s interpretation of Article 3 is premised on a flawed interpretative analysis because
Canada is reading words into Article 3.1(a), is ignoring the word “anticipated” in footnote 4, and has
presented an inaccurate and incomplete discussion of the negotiating history.
5.85 Canada argues that the US position in its third party submission is little different from the
position it took throughout the Uruguay Round – a position that was specifically and unambiguouslyrejected in the SCM Agreement.  In Canada's view, the United States also misunderstands Canada’s
position and misinterprets footnote 4 by emphasising the wrong verb in that provision, making the
example it provides (see paras. 7.41 - 7.42) both inconsequential and illogical.
5.86 For Canada, the prohibition in Article 3 is both forward looking and backward looking. A
subsidy that is conditional on  or tied to  past exports as well as expected or anticipated exports is one
that is “contingent upon … export performance.”  In this sense, Canada asserts, “actual or anticipated
exportation or export earnings” is a reformulation of “export performance”, just as “tied to” is a
reformulation of “contingent upon”.  In Canada's view, the introduction of “anticipated” in the
footnote does not in any way change the conditionality explicit in “tied to” into a test based on general
objectives or intent.
5.87 For Canada, an export subsidy that is in fact  tied to anticipated exportation  is found where,
for example:
(a) a subsidy programme is, in law , neutral as to destination; and
(b) it is administered so that a subsidy:
(i) is granted only if exports are anticipated (whether or not this is the only
condition or there are other criteria), or
(ii) is not granted where exports are not expected to take place.
5.88 Accordingly, Canada argues in commenting on a hypothetical example posed by the Panel, a
subsidy that is restricted in law only to enterprises that are, based on past performance, “export-
oriented” is not, for that reason alone , contingent on export performance.
5.89 Canada submits that a specific example of a subsidy that is in fact tied to anticipated
exportation would be a tax holiday granted for the construction of a plant that will in fact only
produce products that do not meet domestic standards.
5.90 Canada additionally submits that, whether “export performance” is the only criterion, or one
among many, does not change the conditionality  of Article 3 and does not transform the test into an
intent-based  test:  “tied to … anticipated exportation” cannot and does not translate into “granted with
the general intent that exports somehow increa se”;  but rather means that “one of the conditions  forWT/DS70/R
Page 57
the grant of the subsidy is the expectation  that exports will flow thereby.”  For Canada, the distinction,
though perhaps subtle, is nevertheless important.
5.91 In Canada's view, the United States fails to identify this distinction and therefore presents the
Panel with a hypothetical that is at once inconsequential and illogical. Canada agrees that the US
hypothetical is an export subsidy.  For Canada, however, in the US example the grant is in law  tied to
anticipated exportation, i.e., it is tied to  or conditional on  export performance.  In Canada's view, the
US example adds nothing to the analysis of export contingency in fact .135
5.92 Canada also takes issue with the US suggestion that Canada’s discussion of the negotiating
history is incomplete because it ignores the purported reason for adding footnote 4: a proposal by the
European Communities.136  Canada submits that the United States has not explained that this proposal
was made137 seven months before  the first of the draft texts of the SCM Agreement – i.e. Cartland I.
138
5.93 Canada acknowledges that the first draft of the footnote reflected the proposal of the
European Communities – almost word for word,139 but states that the first iteration of footnote 4 was
part of the on-going negotiations for establishing the scope of Article 3; that the EuropeanCommunities was not the only participant in the negotiations; and that the test it proposed was clearly
rejected by the negotiators.  Canada states that the United States acknowledges (see para. 7.39) that
“the final text of footnote 4 does not contain a ‘knowledge’ test as originally articulated by the EC
…”.  For Canada, the commonplace inference to be drawn from this is that knowledge and intent are
not part of the conditionality  test contained in Article 3.
5.94 Canada states that its view on intent is confirmed by the original proponent of the intent test,
noting that the European Communities stated in its third party submission to this Panel:
“The EC supports Canada’s view that the effect  of a subsidy or the objective  of a
subsidy cannot  on their own be sufficient to establish de facto  export contingency
under Article 3.1(a).  Exportation, or export earnings must be a condition  for the grant
of the subsidy.” (para. 7.3).
5.95 Canada asserts in response to a panel question that a subsidy the intent or objective of which
is to increase exports can be distinguished from a subsidy that is tied to anticipated export
performance, that a subsidy may have “increasing exports” as a general objective, but that because
this general objective may be achieved in any number of ways, the existence of that intention orobjective alone does not mean that a subsidy is tied to  anticipated exports.  For example, Canada
states, a country may suffer from declining productiv ity, or declining competitiveness due to currency
                                                     
135 The US hypothetical is also illogical.  Governments do not grant export  subsidies for planned
exportation only.  A government that sets itself on the course of providing export-contingent subsidies would beexpected, in the US hypothetical, to adjust the eligibility criteria so as to ensure that subsidies are paid whenexports actually take place.  Or, if it is simply intere sted in granting subsidies contingent on plans and
expectations whether or not exports actually do take place , one would expect such a government to structure a
domestic subsidy programme rather than one that is prohibited under the SCM Agreement.  In any event, as a
practical matter WTO Members have little incentive to challenge an ostensibly export-contingent subsidy that
does not result in any exports.
136 Id.. at para. 14.
137 Elements of the Negotiating Framework , Submission by the European Community,
MTN.GNG/NG10/W/31, 27 November 1989 (Exh. CDN-56).
138Status Report by the Chairman, 18 July 1990, MTN.GNG/NG10/W/38, co ntaining a text distributed
by the Chairman on 18 May 1990 at 2 (“Cartland I”) (Exh. CDN-21)
139 The draft footnote in Cartland I states:
“This standard is met whenever the granting authority knew or should haveknown that the benefit is conferred on certain enterprises.”WT/DS70/R
Page 58
realignments or changes in the pattern of trade in re sources.  It may, to spur its economy -- and with a
general objective that exports might increase – establish a system of domestic  subsidisation, to
encourage productivity, increase competitiveness or effect a change from reliance on one set ofresources or industries to another.
5.96 According to Canada, such subsidies may take many forms and focus on many different
things.  For example, subsidies may be made to change factories over from textiles to newer
industries, or indeed services.  Shipyards may be helped to move from oil tankers to cruise-ships.
Canada maintains that in all of this, any improv ement in productivity or competitiveness, or indeed
any restructuring or change over to other sectors, may well result in increased exports.  For Canada,
however, to argue that these essentially domestic subsidies are tied to  anticipated exports would be to
stretch the term beyond recognition.
5.97 In response to a question of the Panel regarding whether “tied to” could also be interpreted to
mean that one of the “reasons” for the grant of the subsidy is the expectation that exports will flow
thereby, or that the subsidy is granted because  of the expectation that exports will flow thereby,
Canada refers to an article in the Economist of 31 October 1998, concerning Magnetic Levitationtrains,
140 and argues that the country or company that finds the right solution to land transport is
guaranteed world market dominance for the foreseeable future.  The article notes that NASA, the
National Aeronautics and Space Agency of the United States, is “paying for an experimental version”
of the trains.  Canada submits that the ostensible reason  is NASA’s own requirements, but that since it
is clear that if the technology takes off, world market dominance would follow, it might be argued thatthe reason may well be  increased exports.
5.98 Canada argues that this payment is not a subsidy tied to  anticipated exports, because Article 3
prohibits subsidies that are contingent on  or tied to  export performance, that is, the subsidy would not
be paid but for  the expectation that exports  would ensue.  For Canada, the reason  why a subsidy is
granted, even if it could be adequately determined, is only relevant to the extent that it establishes thecondition; that reason in itself  – that is, the intention  in itself – is not enough to turn an otherwise
domestic subsidy into a prohibited subsidy.
5.99 Canada further argues that determination of de facto  export contingency cannot be made on
the basis of a single example, and submits that Article 2.1(c) of the SCM Agreement, which deals
with de facto  specificity , is helpful in this regard, particularly its provision that the length of time a
subsidy programme has been in operation is one of the factors that should be taken into account in
such a determination.
5.100  This also applies to de facto  contingency , according to Canada.  Therefore, while establishing
conditionality for anticipated  exportation may not be easy in respect of a single  transaction, it could
be indeed done over time , in Canada's view where for example, parts of a stream of payment are not
paid because export expectations are not fulfilled; or where future eligibility is curtailed because such
expectations are not fulfilled; or, where additional subsidies are paid as exports increase.
2. Arguments of Brazil
5.101  Brazil notes Canada’s argument that contingency on export can be determined on the basis of
three factors:  that the subsidy “’would not have been paid but for  the export flowing from it‘”; that
“’penalties . . . in the sense of reduction or withdrawal of payments” occur “if exports  do not take
place‘”; or that “’ bonuses  or additional payments‘” occur “’if exports do take place.‘”
5.102  For Brazil, none of these factors finds textual support in the SCM Agreement, and they share
one common assumption, which is that Article 3.1(a) applies only to those subsidies made conditional
                                                     
140 Exh. BRA- 89.  “Maglev trains: A permanent solution”, The Economist , 31 October 1998, at 88.WT/DS70/R
Page 59
on exports actually  being executed or export earnings actually  being realized.  With this presumption,
Brazil argues Canada has failed to give effect to the ordinary meaning of Article 3.1(a) of the SCM
Agreement, which states at footnote 4 that a subsidy is considered contingent “in fact” upon exportnot only if tied to actual  exports, as the Canadian definition requires, but also if tied to anticipated
export or export earnings. In Brazil’s view, Canada’s interpretation thus lacks support in the relevant
rules of treaty interpretation, identified by Canada itself as derived from Articles 31 and 32 of the
Vienna Convention on the Law of Treaties .
5.103  Brazil submits that the ordinary meaning of the word “anticipate” is to “look forward to,” or
to “expect.”  In Brazil’s view, under the ordinary meaning of Article 3.1(a), therefore, a subsidy is
considered contingent in fact upon export if it is tied to expected  exportation or export earnings.  If in
granting a subsidy a Member “anticipates,” or “expects,” that exports or export earnings will occur, it
has granted a subsidy contingent in fact upon export .  In Brazil’s view, the ordinary meaning of the
word “anticipated” defeats Canada’s interpretation, and the very fact that the word “anticipated”
survived the various drafts of footnote 4 and emerged in the final text belies Canada’s claim that a
Member’s intent is irrelevant to determine whether a subsidy is “in fact” contingent upon export.  ForBrazil, nothing in Article 3.1(a) requires that to be considered contingent upon export, post hoc
penalties be levied or bonuses paid depending on whether exports are actually made.
5.104  Brazil asserts that Canada also fails to recognize that footnote 4 to Article 3.1 states that
export performance may be either  the sole contingency for the subsidy or merely “’one of several
other conditions.’”  Brazil notes that while Article 3.1(a) provides that the mere granting of a subsidyto an exporting entity will not “’for that reason alone’” make it a prohibited export subsidy, the Panel
is not here faced with such a case.
5.105  Brazil disagrees with Canada’s view that Brazil’s entire claim turns on what Canada terms the
“export propensity” of the Canadian regional aircraft industry alone.  For Brazil, there are many
factors contributing to Brazil’s conclusion that various support to the Canadian regional aircraftindustry (including through TPC) is “in fact ti ed to actual or anticipated exportation or export
earnings.” Brazil cites information concerning TPC, and submits that the Panel is faced with a
situation in which several factors  converge, together illustrating that the Canadian Government and
the provinces have supported the Canadian regional aircraft industry precisely because  it is a total
export industry, and precisely because they anticipate  that this performance will continue (see also
para. 6.227):
(1) TPC funding statistics (see para. 6.220), which for Brazil demonstrate that TPC is
captive to the Canadian aerospace industry, and more specifically, the regional
aircraft industry, and  TPC’s own recognition that its main beneficiary is “highly
export oriented.”
141
(2) The historical high level of support (asserted to be approximately $2 billion) through
TPC’s predecessor, DIPP to the aerospace sector.142
(3) The statements of the Canadian Government in announcing its $267 million in grants
the regional aircraft industry demonstrate that those grants are tied to the Canadian
Government’s anticipation, based on ample historical evidence, that the industry willmaintain its 100 per cent export orientation (see para. 6.227).
                                                     
141 TPC Annual Report 1996-1997, pg. 5 (Exh. BRA-5).
142 Canadian Taxpayers Federation study, “Corporate Welfare – A Report on Sixteen Years of Industry
Canada Financial Assistance,” 16 April 1998, Tab 4 (Exh. BRA-31).  This statement of total DIPP funding tothe aerospace sector represents aggregate DIPP fu nds released to four Canadian companies, i.e., Bombardier, de
Havilland, Pratt & Whitney Canada Inc., and CAE Electronics Ltd.WT/DS70/R
Page 60
5.106  According to Brazil, neither these statements by senior Canadian Government officials nor
the statements about the industry in TPC’s promotional materials were crafted in a vacuum. Brazil
maintains that at the time the Canadian Government  was making these statements, it was eminently
aware of the fact that every single sale of Dash 8 series aircraft made since 1992, and every single sale
of the CRJ since its development and commercializ ation, was for export. For Brazil, the industry is
devoted to exports, and the Canadian Government has therefore made it very clear that it maintains
massive amounts of support to the Cana dian regional aircraft industry precisely because  it is an export
industry and precisely because it anticipates  that the Canadian regional aircraft industry will continue
to be an export industry.
5.107  Regarding Canada’s arguments (para. 5.86) concerning anticipated exportation or export
earnings, Brazil indicates first that it agrees with Canada’s statement that “’[t]he prohibition in
Article 3 is both forward looking and backward looking’”, noting that it is for this reason that Brazil
cites the overwhelming export orientation of the Canadian regional aircraft industry as one reason
supporting the conclusion that assistance granted under or through TPC, the Subsidiary Agreements,
SDI/IQ and the sale of de Havilland constitute subsidies contingent upon export.  Brazil argues that indisbursing funds to the Canadian regional aircraft industry under the auspices of these programmes,
the federal and provincial governments, based on the past export orientation of the industry, anticipate
or expect that the this orientation will continue in the future .
5.108  Second, Brazil also agrees with Canada’s statement that “’tied to . . . anticipated exportation’”
means that “‘one of the conditions  for the grant of the subsidy is the expectation  that exports will flow
thereby’” (para. 5.90).  Brazil contends that the evidence before the Panel demonstrates that assistance
under or through TPC, the Subsidiary Agreements, SDI/IQ and the sale of de Havilland would not
have been granted were it not for the virtually total export orientation of the Canadian regional aircraft
industry.  In this sense, exportation is a condition of the Canadian subsidies.
5.109  According to Brazil, there is no requirement in Article 3.1 that for a subsidy to be contingent
“in fact” upon export, the condition be express , and were that the case, there would be no distinction
between a subsidy contingent “in law” and a subsid y contingent “in fact” upon export.  Members thus
would be able to avoid the prohibition of Article 3.1 by simply leaving the word “export” out of their
laws, regulations and dealings.
5.110  Third, Brazil emphasizes that it is challenging the application of  TPC, the Subsidiary
Agreements and SDI/IQ to the Canadian regional aircraft industry, which is overwhelmingly export
oriented.  As a result, Brazil submits that it is not relevant to the Panel’s decision in this case that
TPC, the Subsidiary Agreements and SDI/IQ may also grant assistance to other  industries with sales
in export markets, or to other industries with sales in domestic  markets.  Brazil argues that when
assistance under these programmes is granted to the regional aircraft industry, it is granted becausethe industry is totally export oriented, and because the Canadian federal and provincial governments
anticipate or expect that it will remain so.  Brazil states that it has identified many factors  apart from
export performance or orientation as contributing to its conclusion that that assistance granted to the
regional aircraft industry under these programmes is therefore contingent “’in fact’” upon export (e.g.,
paras.  6.227, 6.231).  Thus, Brazil disagrees with Canada’s argument that the export performance of
the regional aircraft industry is the only factor called upon by Brazil in support of its case.
5.111  Fourth, Brazil disagrees with Canada’s statement that the terms “’actual’” and “’anticipated’”
from footnote 4 to the SCM Agreement are nothing more than a “’reformulation’” of the term
“’export performance’” in the body of Article 3. 1(a).  According to Brazil, the implication of
Canada’s statement is that the terms “’actual’” and “’anticipated’” should not be accorded their
ordinary meaning.  Brazil submits that footnote 4 discusses the meaning of the term contingent “’in
fact,’” and therefore the ordinary meaning of the terms included in that footnote are crucial to an
understanding of contingent “’in fact.’”  Brazil notes that footnote 4 provides that subsidies are
considered contingent in fact on export if they are “tied to actual or anticipated exportation or exportWT/DS70/R
Page 61
earnings”.  Brazil recalls its argument regarding the “’ordinary meaning’” of the word “’anticipate’”
and Brazil contends that funding to the Canadian regional aircraft industry under or through TPC,
DIPP, the Subsidiary Agreements, SDI/IQ, and the de Havilland sale was granted because theCanadian federal and provincial governments anticipated, or expected, based on ample historical
evidence, that the industry would remain  virtually totally export oriented.
5.112  Regarding Canada’s argument that Brazil’s view of Article 3.1(a) as applying to situations of
“’anticipated’” exportation or export earnings would lead to “’a manifestly absurd or unreasonable
result’” (para. 5.4), namely that “’that there would be one law for larger economies that are notdependent on international trade and another for smaller economies that are’”, Brazil states that
Canada is effectively arguing that despite the terms of Article 3.1(a), Canada’s alleged position as a
“’small economy’” warrants that it be accorded special treatment.  Brazil doubts Canada’s claim of
“’small economy’” status – as a founding Member of the WTO, a member, with the United States,
Japan and the European Communities, of the WTO “Q uad,” and a member of the OECD.  For Brazil,
moreover, Canada’s argument must fail as a matter of law, because there is only one law, applying
equally to large and small economies alike, and it is found in the ordinary meaning of Article 3.1(a).
5.113  Brazil argues that this is not a case of a small economy of necessity having a small share of a
global market, as Canada claims, or of support bein g given to an industry by a government indifferent
to whether that industry sells in domestic or export markets, but is a case in which, by the deliberate
action of the Canadian Government, whatever demand existed in the domestic market was satisfied by
what were legally export sales, not domestic sales.
5.114  In this regard, Brazil recalls the EDC President’s comments to Parliament about EDC’s
support, with export  funds, of a sale to a foreign company of planes developed with TPC funds and
ultimately leased to a domestic  carrier, in order, according to the EDC President, to “‘launch an
aircraft that has a world  market.’”
5.115  For Brazil, these facts belie Canada’s “small market” claim, and demonstrate that the Panel is
not faced with a situation in which domestic sales are a small percentage of total sales because the
domestic market is small, but is rather faced with a situation in which domestic demand, however
large or small, was satisfied by the Export Development Corporation with export development funds
for the purpose of launching an export product which had benefited from TPC development funds.  To
Brazil, these facts establish that Canada’s use of TPC support for the aircraft industry was, de facto  if
not de jure , an export subsidy.
3. Response of Canada
5.116  In response to Brazil’s argument that Canada’s proposed tests for de facto  export contingency
do not find textual support in the SCM Agreement (paras. 5.101-5.102), Canada notes that it proposed
three tests for determining whether a subsidy is in fact  tied to exports.  Canada submits that the tests
Canada proposed find their support in the text of the SCM Agreement, in the words “contingent upon”
and “tied to”, and that though anchored in legal provisions, tests, by definition, attempt to elaborate
and clarify  those provisions.  Thus, Canada argues, tests are used as an aid to the application of laws.
Canada notes that Brazil has not shown what other criteria would be used, or useful, in determining
whether a subsidy is in fact  contingent on export performance.  Canada submits that it is because of
that, and to help the Panel in its determination, that Canada has put forward these suggested tests.
Canada acknowledged that regardless of the test used, the legal requirement is still the same: one ofthe conditions for granting a subsidy must be that exports take place.  Regarding the United States's
(paras. 7.35-7.37) and Brazil's (paras. 5.101-5.102) ob jection that Canada’s argument on Article
3.1(a) applies only to actual  exports, rather than anticipated or expected  exports, Canada asserts that
the objection is based on a reading that the test proposed in footnote 4 is one of intent  rather than
conditionality .  Canada submits that this reading of Canada’s arguments is not accurate, in thatWT/DS70/R
Page 62
Canada's view is that footnote 4 prohibits subsidies that are conditional on, or tied to, exportation,
whether anticipated or actual .
5.117  For Canada, Article 3.1 refers to both actual and anticipated exports, but whether exports are
taking place or are expected to take place, the key verbs in Article 3.1, are contingent upon  in the
body and tied to  in footnote 4.  Canada submits that each of these denotes  the existence of a condition;
each connotes  a “but for” test.  Canada notes that exports that were expected  might not happen, but
that this does not mean that a subsidy that had been contingent upon such expectations is saved.
Canada observes, however, that if a government wants to grant export subsidies, and exports do not
result, the government would change the programme to ensure exports do follow.  For Canada, that is
how a de facto  export subsidy can be detected, even if initially no exports take place.
5.118  Regarding Brazil’s arguments that Canada’s interpretation “lacks support” in the relevant
rules of treaty interpretation, Canada recalls that the principles of treaty interpretation require that the
ordinary meaning of the words of a treaty be viewed in the light of its context  and object and purpose .
For Canada, the phrase “ anticipated  exportation or export earnings” should therefore be read in
context – that is to say, in the context of the condition  explicitly provided for in the verb tied to .  In
Canada's view, nothing in footnote 4 or in Article 3 changes the nature of the condition : whether it is
the only one or one of many, and therefore whethe r anticipated or actual, exportation must be a
requirement  of a subsidy for it to fit within Article 3.
5.119  In this sense, Canada asserts, “actual or anticipated exportation” is simply a reformulation –
an elaboration – of “export performance”, just as  “tied to” is a reformulation of “contingent upon.”
That is, the first sentence of footnote 4 does not purport to create a new obligation, but rather,
elaborates the existing obligation in Article 3.
5.120  Regarding Brazil's views on footnote 4, Canada argues that Brazil ignores the second
sentence, which according to Canada was the sentence that finally made compromise on this provision
possible.  Canada submits that Brazil’s claims should be examined in the light of the interpretationthat Canada has put forward for Article 3, an interpretation that respects the second sentence of
footnote 4.  In Canada's view, this sentence renders Brazil’s case null and void.WT/DS70/R
Page 63
VI. ARGUMENTS OF PARTIES REGARDING CANADIAN MEASURES ALLEGED BY
BRAZIL TO BE PROHIBITED EXPORT SUBSIDIES IN THE SENSE OF SCM
ARTICLES 1 AND 3143
A. EXPORT DEVELOPMENT CORPORATION (“EDC”)
1. General arguments of the parties
(a) Alleged concessionary terms of EDC fina ncing; EDC risk level and performance
(i) Arguments of Brazil
6.1 Brazil states that the Export Development Corporation (“EDC”) is an agency of the
Government of Canada which was established by the Export Development Act “’for the purposes of
supporting and developing, directly or indirectly, Canada’s export trade and Canadian capacity to
engage in that trade and to respond to international business opportunities.’”144 In response to a
question from the Panel concerning the scope of Brazil’s claim, Brazil indicates that it challenges the
EDC as de jure  export subsidies prohibited by SCM Article 3, and thus as a programme per se .  As a
result, Brazil states that it also challenges the measure as applied in the context of the regional aircraft
industry.
6.2 According to Brazil, “’EDC’s mandate is to help Canadian business compete and succeed in
the global marketplace’”145 attempting to satisfy “’the seemingly endless appetite of Canadian
exporters for financial support’”146 through a variety of financial and risk absorption services,
including export trade insurance, sales financing, loan guarantees, and equity investments.  Brazil
states that these benefits are not available to Canadian exporters from private financial institutions,arguing that EDC itself acknowledges that “’ EDC complements the banks and other financial
intermediaries, but cannot substitute for them.’”
147  Thus, according to Brazil, EDC’s “’goal is to help
absorb the risk on behalf of Canadian exporters, beyond what is possible by other financial
intermediaries.’”148
6.3 Brazil argues that EDC provides high levels of financing assistance to Canadian regional
aircraft exporters.  Brazil cites EDC Vice President Henri Souquières as indicating that of
Can$1.7 billion in funding provided to the Canadian aerospace sector in 1995, fully 62 per cent, or
$1 billion, constituted support for the Canadair Regional Jet alone.
6.4 According to Brazil, this is equivalent to US$18.3 million per airplane delivered by
Bombardier in that year alone, representing virtually 100 per cent of the price of the airplane.
6.5 For Brazil, EDC’s programmes involve the direct transfer of government funds through
grants, loans, and equity infusions, and the potential direct transfer of funds or liabilities through loan
guarantees, and confer a clear benefit to the recipient.  Brazil argues that any aircraft manufacturer
that receives government largesse that approximates 100 per cent of the selling price of its product is
benefiting handsomely, and that any party receiving any direct or indirect benefit of the kinddescribed in Article 1 of the Agreement and conferred by EDC is being benefited, albeit perhaps not
                                                     
143 Except as otherwise noted, the footnotes and citations, and the emphasis in the text are as contained
in the parties’ submissions.
144 Export Development Act, Section 10(1).  (The text of the Export Development Act, as amended, is
attached as Exh. BRA-6).
145 Export Development Corporation, 1995 Chairman and President’s Message  (“Message”), p. 2 (Exh.
BRA-7).
146 Id. at 4.
147 Id. at 4.
148 Id. at 2.WT/DS70/R
Page 64
as handsomely as Bombardier was in 1995.  According to Brazil, EDC’s former President,
Paul Labbé, acknowledged this in stating that EDC’s programmes give “’Canadian exporters an edge
when they bid on overseas projects.’”149
6.6 Brazil states that EDC’s financing of up to 90 per cent (or more) of an aircraft’s cost
constitutes a direct transfer of funds by grant or loan, within the meaning of Article 1.1 of the
Agreement.  Brazil argues that similarly, EDC’s investment in SPCs established to support the export
of aircraft constitutes a direct transfer of funds by equity infusion.  Moreover, according to Brazil,
EDC’s provision of loan guarantees, and the grant of residual value guarantees, constitute thepotential direct transfer of funds or liabilities, within the meaning of Article 1.1 of the SCM
Agreement.  Thus, for Brazil, all of these transfers (or potential transfers) of funds confer a benefit,
within the meaning of Article 1.1.
6.7 Brazil asserts that regardless of the form in which export financing is offered, EDC has itself
acknowledged the concessionary nature of its subs idies, noting that in order to avoid “’los[ing]
money, [EDC] should be making at least the rate of inflation on [its] capital base which is [its] aim.
That goal is a long cry from the 15 per cent or 20 per cent return on equity that would be required tosurvive in the private sector.’”
150  According to Brazil, EDC’s annual reports underscore its
shortcoming in this regard, as EDC’s net interest margin was a mere 2.82 per cent in 1997, and 3.03
per cent in 1996,151 and even the Canadian Parliament has expressed its concerns with EDC’s poor
returns.  Brazil indicates that the Standing Senate Committee on Banking, Trade and Commerce in
April 1996 observed that despite the appearance of po sitive returns, “’only looking at the bottom line
can give a misleading impression of how EDC is faring on its loan portfolio.’”152  Brazil states that the
Committee noted that EDC was in actuality masking poor returns with two types of “government debt
relief”: first, with Can$151 million in direct government relief to EDC for two of its “‘problem’
accounts,” and; second, with earnings realized from  EDC’s practice of trading in financial instruments
(facilitated by its ability, as a Crown institution, to borrow at privileged rates and lend at slightlyhigher rates, “’thus generating profits by essentially acting as an intermediary between borrowers and
capital markets.’”).
153
6.8 In response to a question from the Panel regarding what net interest margin Brazil
believes private sector investors would expect for financing in the civil aircraft sector, Brazil
discusses the risk level of EDC’s loan portfolio.  According to Brazil, impaired loans, for which the
EDC no longer has reasonable assurance that principal and interest will be collected on a timely basis,
comprise 14.4 per cent of gross loans receivable154, and 57.6 per cent of EDC’s performing loan
portfolio (total loans less impaired loans) has been classified by EDC itself, in its 1997 Annual
Report, as “’below investment grade’” or “’speculative grade.’”155 Brazil states that it cited EDC’s
low net interest margin156 to establish that EDC is not being compensated for this extra risk and,
                                                     
149 CanadExport On-Line, Focus on Export Development Corporation, p.2 (Exh. BRA-67).
150 Committee on Banking, Trade and Commerce at 48:22 (Exh. BRA-10).
151 EDC 1997 Annual Report at 22 (Exh. BRA-21); EDC 1996 Annual Report at 33 (Exh. BRA-22).
152 Report of the Standing Senate Committee on Banking, Trade and Commerce, April 1996, at p. 43
(Exh. BRA-23).
153 Id. at 42-43.
154 Exh. BRA-79.
155 EDC 1997 Annual Report, pgs. 32-33 (Exh. BRA-21).  Combined sovereign and commercial ratios
are as follows:  for below investment grade (Ba1 to Ba3) gross loans receivable net of non-accrued capitalized
interest, as a per cent of total performing gross loan s receivable net of non-accrued capitalized interest, 30 per
cent; and for speculative grade (<Ba3) loans, 27.6 per cent.
156 Net interest margin is an expression of “net interest income expressed as a percentage of average
total assets.”  Net interest income, in turn, “is intere st and dividends earned on assets, less interest paid on
liabilities.”  Canadian Imperial Bank of Commerce Annual Report, dated 31 October 1997, pg. 30 (Exh.BRA-80).WT/DS70/R
Page 65
conversely, that recipients of EDC funding are pa ying less for that funding than they would for
funding from commercial sources.
6.9 Brazil also submits that Canada’s comparison of EDC’s net interest margin with that of
commercial banks (para. 6.27), fails to make the pr oper adjustment for risk -- a factor key to the
analysis of EDC’s loan portfolio.  Brazil states that a fundamental tenet operating in financial markets
is that “investors increase their required rates of return as perceived risk (uncertainty) increases”157,
and that it is therefore impossible to assess return in isolation, without knowledge of the underlying
risk involved.
6.10 Brazil submits a comparison both by risk and tenor (term) of the market return demanded by
bondholders lending to the different risk classes to illustrate this risk/return principle158. Brazil states
that for maturities of three to four years, as the riskiness of the borrower increases (no risk at AAA to
very speculative at CCC+ or lower), the return de manded by lenders increases by 599 basis points.159
For loans extended for 15 or more years, Brazil argues that the comparison demonstrates that the
spread demanded by bondholders lending to the most speculative class of borrowers increases to
1,242 basis points.
6.11 According to Brazil, EDC lends to speculative borrowers for regional aircraft financing for
terms of 15 or more years160, and the comparison demonstrates that private sector independent
bondholders would demand a spread of 1,242 basis points over riskless US Treasuries of 15+ years
maturity, or 17.73 per cent, for this risk class.  The comparison therefore, in Brazil’s view, supports a
conclusion that EDC’s 1996 and 1997 reported net interest margins (para. 6.7) do not reflect returnscommensurate with the risk borne by EDC.
6.12 Brazil submits that to understand why Canada’s comparison of EDC’s net interest margin to
that of commercial banks is not valid, it is necessary to examine two key ratios which amplify the
riskiness of EDC’s loan portfolio relative to thos e of three major Canadian banks and the US banking
industry averages:  the ratio of gross impaired loans to gross loans receivable, and the ratio of theallowance for losses on loans to gross loans receivable.  Brazil submits that concerning this ratio, the
Panel should take account of EDC’s own statements in its 1997 Annual Report:
Loans are classified as impaired when circumstances indicate that [EDC] no longer
has reasonable assurance that the full amount of principal and interest will be
collected on a timely basis in accordance with the terms of the loan agreement.
161
6.13 Brazil submits a comparison162 to show that that EDC’s ratio of gross impaired loans to gross
loans receivable is 14.4 per cent, compared with a ratio of approximately one per cent for the Royal
Bank of Canada, Canadian Imperi al Bank of Commerce, and the industry average for all US banks.
This ratio is less than one per cent for the Bank of Montreal.  Brazil cites Standard and Poor’s as
saying that “’when [the ratio of nonperforming loans to total loans] exceeds 3 per cent . . . it can causeconcern.  For a bank with a very high level of nonperforming loans – approaching 7 per cent or more
– the future may be doubtful.’”
163
                                                     
157 Frank K. Reilly, Investment Analysis and Portfolio Management (Dryden Press), Fourth Edition, pg.
25 (Exh. BRA-81).
158 Exh. BRA-82
159 A basis point is 1/100th of a percentage point.
160 “Optimism over Regional Jets Hit by Wrangling over Export Support,” Commuter/Regional Airline
News, 21 July 1997 (Exh. BRA-83); “Export Credit,” Airfinance Journal , October 1995, pg. 30 (Exh. BRA-84).
161 EDC 1997 Annual Report, pg. 47 (Exh. BRA-21).
162 Exh. BRA-79
163 Standard & Poor’s Banking Industry Survey, dated 11 June 1998, pg. 23 (Exh. BRA-86).WT/DS70/R
Page 66
6.14 Concerning the ratio of allowance (or reserve) for losses on loans to gross loans receivable,
Brazil notes that “’[t]o cover possible future loan losses, banks are required to maintain a reserve for
loan losses.’”164  The level of reserve maintained by a bank therefore “’reflects management’s
judgment regarding the quality of its loan portfolio.’”165  Brazil submits a table166 to show that EDC’s
allowance for loan losses as a per cent of total loans is 13.2 per cent, compared with amounts between
one and two per cent for each of three major Canadian banks and the US industry average.  Brazil
recalls as well that approximately 57.6 per cent of EDC’s performing  loan portfolio has been
classified by EDC as “below investment grade” or “speculative grade.”167
6.15 For Brazil, there is therefore a clear and marked differential in risk between EDC’s loan
portfolio and the loan portfolios of commercial banks.  Brazil submits that commercial banks would
not be able to sustain the risk levels inherent  in EDC’s loan portfolio, and that while other
independent investors might be willing to take on this level of risk, they would demand a return
significantly higher than that shown in Canada’s comparison168 as compensation.  Brazil recalls its
view that financing of EDC’s risk class would de mand a spread of 1,242 basis points over riskless US
Treasuries of 15+ years maturity, or 17.73 per cent.
6.16 Brazil asserts that Canada’s statement that EDC’s exemption from corporate income tax and
the payment of dividends is not relevant to the calculation  of net interest margin (para. 6.32) misses
the point, which is that comparing EDC’s net interest margin with that of commercial financial
institutions of similar rating is not valid.  Brazil submits that unlike commercial financial institutions,
the EDC does not, in forecasting an acceptable rate of return, need to account for payment ofcorporate taxes or dividends, and as such can obviously accept a lower rate of return than can
commercial financial institutions, putting EDC at a decided advantage in the marketplace.  Thus, the
risks undertaken by private, commercial, tax- and dividend- paying institutions are in no way
comparable to those engaged in by the EDC and thus a comparison of their returns is meaningless
absent accounting for the relative underlying riskiness of their portfolios.
(ii) Arguments of Canada
(a) Evidence submitted by Brazil on alleged concessionary terms of EDC financing
6.17 Canada argues in the first instance that Brazil’s allegations about EDC financing are not
supported by the evidence cited.  Canada objects to what it terms Brazil’s selective quotation of
certain materials adduced as evidence, to the point of changing the very sense of the material itself.
6.18 Canada states that at the beginning of its discussion on the Export Development Corporation
(EDC), Brazil begins with what appears to be a descriptive paragraph (para. 6.2 .), and that the
description and “’quotations’” of this paragraph underlie Brazil’s claims about the “’benefits’”
allegedly conferred by the EDC in the course of its operations.  Canada asserts that this paragraph is
thus the central element of Brazil’s final conclusion that “EDC is precisely what Article 3 of the SCMAgreement was intended to prohibit.” ( para. 6.49).  Canada indicates that Brazil, apparently quoting a
message from the Chairman and the President of the EDC (the Message), states that:
“[EDC] attempts to satisfy ‘the seemingly endless appetite of Canadian exporters for
financial support’ through a variety of financial and risk absorption services,
including export trade insurance, sales financing, loan guarantees, and equity
investments.  These benefits are not available to Canadian exporters from private
                                                     
164 Id. at pg. 21.
165 Id.
166 Exh. BRA-79
167 EDC 1997 Annual Report, pgs. 32-33 (Exh. BRA-21).
168 Exh. CDN-38WT/DS70/R
Page 67
financial institutions.  As EDC itself acknowledges, ‘EDC complements the banks
and other financial intermediaries, but cannot substitute for them.’  For this reason,
EDC’s ‘goal is to help absorb the risk on behalf of Canadian exporters, beyond whatis possible by other financial intermediaries.’” [emphasis added by Canada]
6.19 According to Canada, these quotations are taken out of context, in that the first two are
actually from the concluding part of the Message, and that Brazil’s submission omits a connecting
sentence that substantially qualifies the passage.  Canada submits that the full paragraph, as set out in
the fourth page of Exhibit BRA-7, reads:
“It will be hard to maintain the pace of 1995 and earlier, but EDC has a lot of
growing to do before it begins to satisfy the seemingly endless appetite of Canadian
exporters for financial support and advice.  However, EDC cannot nor should not
strive to be the solution for all the challenges faced by Canadian exporters.   EDC
complements the banks and other financial intermediaries, but cannot substitute for
them.” [emphasis added by Canada]
6.20 For Canada, by saying that EDC cannot substitute for banks and other financial institutions,
the Chairman and the President of the EDC were acknowledging that EDC should not  try to satisfy
the “’endless appetite of Canadian exporters.’” Canada submits that contrary to Brazil’s conclusion
from the misquoted passages, this is manifestly not what the EDC attempts  to do.  In addition, Canada
submits that Brazil’s argument  that “…export trade insurance, sales financing, loan guarantees, and
equity investments…” are “benefits” that “…are not available  to Canadian exporters from private
financial institutions” is not true, and notes that it has provided documents from a variety of private
financial institutions operating in Canada, demonstrating that they provide these services to Canadian
exporters.
169
6.21 Canada notes that the third quotation, concerning the absorption of risk by the EDC, is
repeated later by Brazil (para. 6.60), to support the allegation that “[n]o private financial institution orinvestor would provide this degree of financing on concessionary terms ” [emphasis added by
Canada], and to allege (para. 6.49), that “every move [EDC] makes” is in support of this “risk
absorption” goal.  According to Canada, the quotat ion is the basis for Brazil’s claim that “EDC is
precisely what Article 3 of the SCM Agreement was intended to prohibit.”
6.22 Canada asserts that Brazil has omitted the qualifying subordinate clause of the quoted
sentence, and that the full sentence, placed in context, is:
170
“In addition to the shift from sovereign to  commercial loans, the complexity, scale
and duration of financing are changing, and thereby changing the risks  associated
with insuring and financing Canadian exports.
To reinforce its capacity to manage these changing risks, EDC has established a new
Financial Services Office and procedures for evaluating loan portfolios on an
industry, geographic, and individual transaction basis.  Our goal is to help absorb risk
on behalf of Canadian exporters, beyond what is possible by other financial
intermediaries, by diversifying the Corporation’s business both on a country and
sectoral basis.   We are determined to achieve this goal through growth in both
emerging and established markets .” [emphasis added by Canada]
6.23 Canada states that, contrary to Brazil’s assertion, the passage when quoted in full does not
support the proposition that EDC enters into “’financing on concessionary terms,’” nor the assertion
                                                     
169 Exh. CDN-52
170 Exh. BRA-7, p. 2WT/DS70/R
Page 68
that “’every move’” the EDC makes is to absorb risks on behalf of Canadian businesses.  According
to Canada, the sentence quoted by Brazil is concerned with portfolio diversification by the EDC, an
elementary and prudent market activity, and has nothing to do with whether EDC financing confers abenefit.
6.24 Canada also takes issue with Brazil’s allegation regarding EDC’s “’concessionary’” rates or
terms, arguing that Brazil does not define this term, and adduces no evidence in support of the
allegation.  Canada maintains that there is no such evidence.  According to Canada, the EDC does not
provide financing at concessionary rates.  Canada states that apparently as support for its assertion,Brazil relies on statements that do not in any way support its allegation.
6.25 Canada notes Brazil’s allegation (para. 6.56) that “’EDC funding may be structured as direct
financing at concessionary rates  for up to 90 per cent of the cost of an aircraft.’” [emphasis added by
Canada], noting that Brazil cites two sources as support for this assertion, one of which is a newspaper
article, dated 5 April 1995,
171 which quotes an Industry Canada official as saying:
“the government is risking less than it once did.  The Air Canada guarantee may look
similar to those provided for years on sales of such aircraft as the Dash 8 ….  But inthose deals, Ottawa put up as much as 90 per cent of the purchase price, Mr. Dixon
said.  Here, as little as 20 per cent is at risk.”
6.26 Canada asserts that Mr. Dixon is identified as an official at Industry Canada, that he was not
speaking on behalf of the EDC, and that his statem ent did not refer to the EDC and in any event did
not mention “concessionary financing”.  Canada notes that the other source cited by Brazil is thetestimony, on 11 May 1995, of Mr. Paul Labbé, then-President of the EDC
172.  Canada indicates that
Mr. Labbé notes that “[h]istorically, we would have financed 85 per cent of the cost of an aircraft.
Our capacity won’t do that any more.” Canada mainta ins that there is no support in this statement for
the proposition that the EDC provides financing at concessionary rates.
(b) EDC’s risk level and performance
6.27 According to Canada, EDC operates on commercial principles and is self-sustaining, as
attested to by the fact that it earns a net interest ma rgin that is equal to or better than most commercial
financial institutions of similar credit rating.  Canada states that net interest margin represents the
difference between gross interest income and gross interest expense on all interest bearing assets,
divided by the value of all interest bearing assets, and thus is a useful measure of how well a financialinstitution’s assets are performing.  Canada submits that EDC ranks just behind Chase Manhattan
Bank and Citibank, and well ahead of other banks such as Barclay’s Bank, Deutsche Bank, and the
Union Bank of Switzerland.
173
6.28 In response to a Panel question in light of Brazil’s arguments concerning the risk level of
EDC’s portfolio, regarding whether EDC’s credit rating is attributable to the fact that it is a CrownCorporation of Canada, Canada replied that EDC’ s credit rating of Aa2/AA+ is based upon the rating
accorded to the Government of Canada, and that the EDC has – on more than one occasion –
requested Moody’s and Standard & Poor’s to rate the EDC separately from the Government of
Canada, based upon the EDC’s portfolio of assets, but that these agencies have indicated that they see
no benefit in providing such a rating.
6.29 Canada asserts that in making an assessment of a financial institution, the rating agencies
would assess, among other things, the sufficiency of the financial institution’s provisioning levels.
                                                     
171 Exh. BRA-8, p.2
172 Exh. BRA-9
173 Bankstat, Net Interest Margin Chart, 2 October 1998 (Exh. CDN-38).WT/DS70/R
Page 69
Based on regular discussions with the rating agencies, EDC provisions so that it maintains a notional
rating for its total portfolio of business at a targetted level of Aa2/AA+.  According to Canada, the
balance sheet of the EDC remains at the Aa2/AA+ level due to the overall level of its provisions andthe EDC’s conservative accounting treatment of non-performing loans.
174
6.30 In turn, Canada states, the EDC’s provisions have been funded by the risk margins charged by
the EDC to its clients. According to Canada, the EDC maintains an overall Net Interest Margin (NIM)
– which takes into account the carrying costs of the non-performing loans on which no income is
earned -- which compares favourably with a number of private financial institutions. 175 The net
interest margin is a useful measure as it allows an apples to apples comparison of financial
institutions.
6.31 Canada argues that EDC employs one of the largest pools of trade financing experts in
Canada, and has experience in over 200 markets and expertise in many highly specialised fields.
According to Canada, private financial institutions such as Citibank or Bank of America employ a
similar pool of talent,176  and like Citibank and Bank of America, the “competitive edge” that EDC
gives Canadian exporters is EDC’s experience and expertise (para. 6.49).
6.32 Canada notes, in reply to a Panel question, that EDC pays business taxes, but not corporate
income tax, and does not normally pay a dividend. For Canada, these facts are not relevant for the net
interest margin calculation because the net interest margin is calculated before tax and before
dividends are paid.  That is, whether or not a financial institution pays corporate income taxes or
dividends does not affect its cost of funds, or the risk margin charged.
6.33 Regarding Brazil's assertion that EDC's portfolio is riskier than the portfolios of other
commercial financial institutions, Canada disagrees with Brazil's conclusion that the EDC’s net
interest margin is insufficient given the level of the EDC’s non-performing loans in its portfolio,
because net interest margin already takes non-performing loans into account (para.6.12 - 6.15).
6.34 According to Canada, when a loan becomes non-performing, all financial institutions,
including the EDC, cease to recognize interest in come on that non-performing loan, but continue to
carry the interest expense  of that non-performing loan. That is, the gross interest income is the interest
income on performing loans , but interest expense is the cost of funding all loans  in the portfolio,
performing and non-performing .  Therefore, Canada maintains that it is incorrect for Brazil to assert
that a further deduction should be made from the net interest margin to cover the cost of funding thesenon-performing loans, as this would be double-counting.
6.35 Regarding Brazil's arguments about EDC’s non-performing loan portfolio, Canada argues that
EDC recognizes three classes of loans: 1) investment grade - which corresponds to an S&P credit
rating of AAA to BBB; 2) below investment grade – which corresponds to the range BB to B and 3)
speculative grade, which is CCC.   Canada states that EDC’s civil aviation portfolio is as follows:65 per cent investment grade; 13 per cent below investment grade and 22 per cent speculative grade,
before security has been recognized.  According to Canada, every commercial loan in EDC’s aircraft
portfolio is secured against the aircraft in the transaction, much like a mortgage on a house.  Canada
asserts that credit rating agencies suggest that a credit can improve by up to two categories if
                                                     
174 (EDC 1997 Annual Report at p. 47, “N et Loans Receivable” – Exh. BRA-21).
175 Exh. CDN-101.
176 Bank of America, “Industry Expertise” on line:  Bank of America Homepage
<http://www.bankamerica.com > (date accessed:  5 November 1998) (Exh. CDN-39); Citibank, “Small Business
& Professional” and “Global Banking Services” online:  Citibank homepage
<http://www.citibank.com/US/businessbanking/main.htm >  and <… /global.htm > (date accessed:
3 November 1998) (Exh. CDN-40).WT/DS70/R
Page 70
secured.177 178  Canada maintains that securing the loan against the asset – the aircraft – improves the
credit rating of the credit typically by one to two rating designations, and that where EDC is over-
secured, the credit enhancement is even greater.  Ca nada argues that after considering the value of the
security, 91 per cent of EDC’s aircraft portfolio is investment grade or higher - in other words BBB or
better.
6.36 Canada characterizes Brazil’s comparison of spreads between corporate bonds, on the one
hand, and secured lending, on the other hand, as fundamentally flawed.  Canada states that corporate
bonds are unsecured and generally have “bullet” payments, in which the full amount of the principalis paid in a lump sum at the end, while EDC’s lend ing is secured, and the principal is amortized over
the life of the loan. For Canada, there is obviously a considerable difference between the two, which
has an impact on the credit risk.  According to Cana da, EDC is not, therefore, engaged in the high risk
lending in the civil aircraft sector that Brazil implies.
6.37 Regarding Brazil's assertion that “'EDC’s allowances for loan losses as a percentage of total
loans is 13.2 per cent, compared with amounts between one and two per cent for each of three major
Canadian banks and the US industry average'" (para. 6.14) [emphasis added by Canada], Canadaargues that EDC allowances for loan losses are at this level to ensure that EDC’s total portfolio
maintains an equivalent credit rating of at least AA.  In Canada's view, the only thing that matters is
how much money is lost on a portfolio and whether there is adequate provisioning.  Canada states that
the EDC’s write-offs against provisions have never  exceeded 0.15 per cent of gross loans receivable
over the past 8 years, in comparison to the Canadian commercial banks, none of which in that sameperiod have had write-offs of less than 0.21 per cent and which in one case has been as high as
1.52 per cent.  Canada notes in addition, quoting from Brazil’s Exhibit 86, that the US Federal
Deposit Insurance Corporation stated that the net write-offs of the US banking industry amounted to
0.63 per cent of average loans in 1997, down from a peak of 1.59 per cent in 1991. Thus, in Canada's
view, EDC’s write-offs against provisions are more conservative than any of these other institutions.
(iii) Rebuttal of Brazil on EDC’s risk level and performance
6.38 Regarding Canada’s arguments concerning EDC’s cr edit rating (para. 6.28) Brazil argues that
the fact that Moody’s and Standard & Poor’s have “’indicated that they see no benefit’” in rating EDC
separate from the Government of Canada does not mean that EDC has earned an Aa2/AA+ rating by
having reserves for loan losses commensurate with the risk of its portfolio; rather, it means thatMoody’s and Standard & Poor’s recognize that the EDC is backed by the Government of Canada.
Based on the evidence of the riskiness of EDC’s portfolio (paras. 6.12- 6.15), Brazil submits that were
Moody’s or Standard & Poor’s to consider it necessary or beneficial to rate EDC independently, EDC
would be accorded a rating significantly lower than the Aa2/AA+ rating accorded the Government of
Canada.
6.39 Concerning Canada’s rebuttal arguments on net interest margin, the ratio of gross impaired
loans/gross loans receivable and the allowance fo r losses on loans/gross loans receivable, Brazil
argues that on net interest margin Canada’s response ignores the fundamental premise of Brazil’s
argument, which is essentially the risk/return principle:  “’Investors increase their required rates of
return as perceived risk (uncertainty) increases.’”
179  For Brazil, simply asserting that EDC’s net
interest margin is roughly in line with those achieved by commercial banks ignores the fact that EDC
should, in fact, earn a much higher return as compensation for the higher risk of the portfolio.  Brazil
                                                     
177 Exh. CDN-98 and 99
178 Standard & Poors, S&P’s Corporate Finance Criteria , (McGraw-Hill, 1994) at 53-54 (Exh.
CDN-98); Moody’s, A Sense of Security – Moody’s Approach to Evaluating Bank Loan Structure and
Collateral , (New York, Moody’s: 1997) (Exh. CDN-99).
179 Frank K. Reilly, Investment Analysis and Port folio Management, Fourth Edition (Dryden Press),
pg. 25.WT/DS70/R
Page 71
notes Canada’s statement, with respect to “Analysis of EDC’s Financial Performance,”180 that EDC’s
“’average portfolio of business is of a poorer risk quality’”, and disputes Canada’s statement that
Brazil argues that a further deduction should be made from the net interest margin to cover the cost offunding these non-performing loans.  Brazil states that it made no such assertion, but instead asserts
investments with higher risks demand higher return s, which higher return compensates the investor
for taking on additional risk, not for the cost of funding the investments.
6.40 Regarding the ratio of gross impaired loans/gross loans receivable, Brazil notes Canada’s
acknowledgement (para. 6.47) that EDC’s non-perfor ming loans comprise 14.4 per cent of gross loans
receivable, and recalls that this same ratio is approximately one per cent for The Royal Bank of
Canada, The Bank of Montreal, Ca nadian Imperial Bank of Commerce, and the average of all US
FDIC-insured commercial banks.
181  Brazil also notes that non-performing (also called “impaired”)
loans are defined by the EDC as follows:
Loans are classified as impaired when circumstances indicate that [EDC] no longer
has reasonable assurance that the full amount of principal and interest will be
collected on a timely basis in accordance with the terms of the loan agreement.182
6.41 Brazil notes that Canada provides a breakdown of sovereign versus commercial non-
performing loans and notes that the EDC’s level of non-performing loans has been declining in recent
years183.  For Brazil, Canada fails to respond to Brazil’s assertion that the overall level of impaired
loans provides strong evidence that the riskiness of the EDC’s overall portfolio far exceeds those of
commercial banks and should be accompanied by  a much higher return on the portfolio.
6.42 Brazil argues that Canada’s argument actually focuses on the EDC’s performing loans,
omitting a discussion of impaired loans, and notes Canada’s acknowledgement (para. 6.45) that the
EDC’s civil aviation performing portfolio is classified by the EDC itself as 65 per cent investment
grade, 13 per cent below investment grade, and 22 per cent speculative grade.  Brazil argues that in
the same paragraph and without citation to any source, Canada asserts that the EDC has apparentlymisclassified its own loans, with the result that 91 per cent of EDC’s aircraft-related loans should be
considered, according to Canada, of investment grade or higher.  Brazil finds the EDC’s own
classification, with 13 per cent below investment gr ade and 22 per cent speculative grade, to be more
credible than the speculation offered by Canada.
6.43 Regarding the allowance for losses on loans/gro ss loans receivable, Brazil states that Canada
acknowledges that the allowance for losses on loans/gross loans receivable reflects the “’poorer risk
quality’” of the EDC portfolio
184, which is precisely the point made by Brazil; that is, that the
allowance ratio of 13 per cent (versus one to two per cent for commercial banks) provides strong
evidence of a much riskier portfolio than those of commercial banks.
6.44 Brazil notes Canada’s conclusion (para. 6.37) that “’the only thing that matters is how much
money you lose on your portfolio and whether you have adequately provisioned against this loss’”,
and the information on EDC’s write-off history provided by Canada as evidence that the EDC has not
lost much money on its portfolio.  Brazil notes that Standard and Poor’s Banking Industry Survey
states that “’[w]hen management deems a loan uncollectible, it’s written off the books and a
deduction is made from the reserve for loan losses.’”185  Brazil states that managers exercise a great
                                                     
180 Exh. CDN-101
181 Exh. BRA-79.
182 EDC 1997 Annual Report, pg. 47 (Exh. BRA-21).
183 Exh. CDN-101
184 Exh. CDN-101, Section I(b) (“Due to the nature of the business, EDC’s provision charge is higher
than that for a commercial bank because the average por tfolio of business is of a poorer risk quality.”).
185 Standard and Poor’s Banking Industry Survey, dated 11 June 1998, pg. 21 (Exh. BRA-86).WT/DS70/R
Page 72
deal of discretion in deciding when to write off a loan, and argues that the EDC’s 1997 net write-offs
of 0.15 per cent of gross loans receivable is absurdly low, particularly given the very high level of
impaired loans.  For Brazil, the level of write-offs does not provide evidence that the EDC “’has notlost much money’”, but rather begs the question of what criteria are applied by the EDC in
determining when loans are written off, and whether or not these criteria are similar to those
employed by commercial banks.
(iv) Response of Canada on EDC’s risk level and performance
6.45 Regarding Brazil’s response to Canada’s discussion of EDC’s risk level, Canada comments
that Brazil ignores that the cost of carrying non-performing loans lowers the EDC’s NIM, recalling
that the EDC’s non-performing loans comprise 14.4 per cent of gross loans receivable, in contrast to
one to two per cent for commercial banks, and arguing that if it were not for the fact that the EDC’s
portfolio contains a relatively higher level of non- performing loans, the EDC’s NIM would be higher.
In spite of these non-performing loans, Canada ar gues, the EDC maintains a NIM that is equal to or
better than many commercial banks with a comparable credit rating, that according to Brazil have less
risky portfolios and lower levels of impaired loans.  Thus, contrary to Brazil’s assertions, the EDC’sNIM does not indicate that the EDC does not earn a return commensurate with the risk of its portfolio.
6.46 Canada also denies that it asserts that the EDC has misclassified its own loans, stating that
Brazil ignores the explanation Canada provided (para. 6.35) regarding the effect of taking security on
these loans. Canada notes that it focussed on the EDC’s aircraft portfolio and noted that these loans
are secured against the aircraft in the transaction, which according to Canada is common in aircraftfinancing
186, and effectively raises the percentage of investment grade assets from 65 to 91 per cent187.
6.47 Regarding allowance for losses on loans/gross loan receivable, Canada maintains that a more
complete quotation of its exhibit188 than that cited by Brazil reads “Due to the nature of the business;
EDC’s provision charge is higher than that for a commercial bank  because the average portfolio of
business is of a poorer risk quality…” [emphasis added by Canada].  According to Canada, this higherprovision charge has resulted in higher allowances for losses on loans
189, and these allowances
effectively offset the risk in EDC’s portfolio.
6.48 Canada rejects Brazil’s suggestion that EDC employs different criteria for loan write-offs
than do commercial banks, and refers the Panel to  a letter from Canada’s Auditor General reproduced
at page 43 of the EDC’s 1997 Annual Report190.  According to Canada, this letter confirms that the
EDC’s financial statements are presented in accordance with Generally Accepted Accounting
Principles, which cover financial disclosure by all entities that are subject to them, including both the
EDC and commercial banks.  According to Canada, essential elements of Generally Accepted
Accounting Principles are the criteria applied and the consistent application of those criteria when
valuing and writing off loans, and an auditor must be assured that management applies theseprinciples on a consistent basis so that the value of assets would not be overstated or manipulated, and
thus the Auditor can opine that the financial statem ents present fairly in all material respects the
financial position of the entity.  Canada argues that Brazil provides no evidence to support its
assertion that “’managers exercise a great deal of discretion in deciding to write off a loan’”, or that
EDC uses criteria different from t hose employed by commercial banks.
                                                     
186 Exh. CDN-48
187 Exh. CDN-98 and 99
188 Exh. CDN-101
189 Exh. BRA-79.
190 Exh. BRA-21WT/DS70/R
Page 73
(b) Contingency on export performance
(i) Arguments of Brazil
6.49 Brazil submits that the EDC provides prohibited export subsidies.  First, Brazil argues, the
EDC exists solely to support export transactions.  Brazil cites to testimony by EDC’s President before
the Canadian Parliament that “[t]he goal for Canada is to make sure that we have a competitive
advantage for Canadian exporters, not just a level playing field.”191  According to Brazil, every
subsidy EDC grants, every benefit it confers, every move it makes, is intended to “’absorb the risk on
behalf of Canadian exporters, beyond what is possible by other financial intermediaries.’”192  Brazil
asserts that EDC bills itself “not [as] a profit maximizer, but an export maximizer.”193  Brazil argues
that subsidies granted Canadian enterprises by EDC are, as a matter of legal directive, “’for the
purposes of supporting and developing, directly or indirectly, Canada’s export trade and Canadian
capacity to engage in that trade and to respond to international business opportunities.’”194  Brazil
states that these subsidies are, within the meanin g of Article 3, contingent in law and in fact upon
export performance, and are therefore prohibited; and that EDC is precisely what Article 3 of the
SCM Agreement was intended to prohibit.
6.50 Brazil contends that Section 10(1) of  the Canadian Export Development Act states that EDC
was established “'for the purposes of supporting and developing, directly or indirectly, Canada’s
export trade and Canadian capacity to engage in that trade and to respond to international business
opportunities.'”195  Brazil asserts that EDC is required to fund exports, as opposed to domestic sales,
and that as a result, EDC itself and assistance to the regional aircraft industry granted thereunder, is de
jure contingent upon export, within the meaning of Article 3 of the SCM Agreement.
(ii) Arguments of Canada
6.51 In answer to Panel questions whether Canada concedes that EDC activities are contingent
upon export performance, and whether given EDC’s mandate it is reasonable to assume that any
transaction financed with EDC assistance is necessarily an export transaction, Canada replies in thenegative. Canada states that the EDC has the mandate, under section 10 of the Export Development
Act, to engage in activities with, in essence, objectives of supporting and developing Canada’s export
trade; and Canadian capacity to engage in th at trade, and respond to international business
opportunities.
6.52 According to Canada, EDC’s mandate allows it to offer a full range of risk management
services and financing products “for the purpose of supporting and developing, directly or indirectly,
Canada’s export trade and Canadian capacity to engage in that trade and to respond to international
business opportunities.”  Canada states that EDC offers, therefore, a variety of services and products,
some of which are contingent on export, and others – such as foreign investment insurance, domestic
credit insurance, funding investments overseas, and various equity investments – that are notcontingent on export.
6.53 Canada states that an article submitted by Brazil
196 supports this, as it refers to the “’the new
legislative mandate adopted by the EDC in June this year [1994]’” and notes that the new regulations
                                                     
191 Testimony of EDC President Mr. Ian Gillespie before the Standing Committee on Foreign Affairs
and International Trade, 6 November 1997, p. 15 (Exh. BRA-66).
192 Message at 2 (Exh. BRA-7).
193 Testimony of EDC President Mr. Ian Gillespie before the Standing Committee on Foreign Affairs
and International Trade, 6 November 1997, p. 3 (Exh. BRA-66).
194 Export Development Act, Section 10(1) (Exh. BRA-6).
195 Export Development Act (Exh. BRA-6).
196 Exh. BRA-13WT/DS70/R
Page 74
“’allow EDC to, among other things, provide comprehensive cover for domestic as well as export
receivables …’”.  While Canada does not vouch for the accuracy of the rest of the article, it states that
this part is accurate.
6.54 Further, for Canada, Mr. Labbé’s comments relied upon by Brazil establish simply the
following: that, although the focus of the EDC is  exports and international business (as indeed it
cannot be otherwise), it may engage in certain domestic transactions that help develop Canada’s
capacity to engage in export trade and to respond to international business opportunities.  That is to
say, for Canada, the fact that the EDC is involved in a transaction does not mean that the transaction
itself is necessarily an export one.
(iii) Response of Brazil
6.55 Regarding Canada’s argument concerning EDC’s “’new legislative mandate’”, Brazil
questions Canada’s reliance upon the article submitted by Brazil, in view of Canada’s characterization
of that article as a press report which is “’uncorroborated or does not otherwise contain material with
an independent title of credibility and persuasiveness’”  (paras. 6.97).  In addition, Brazil argues that
Canada surely could have provided the Panel with the actual legislative or regulatory languageevidencing this change in Canadian law, rather than relying on a press article.  Brazil argues that
under similar circumstances, the Panel in Indonesia - Certain Measures Affecting the Automobile
Industry  considered that reliance on press reports constituted “’failure to submit the positive evidence
required’” to support a claim
. . . given that the affected companies certainly had at their disposal copious evidence
in support of the claims of the complainants , such as the actual business plans relating
to the new models, government documentation indicating approval for such plans
(assuming the "approval" referred to by th e complainants with respect to the Optima
means approval by the Indonesian government), and corporate minutes or internal
decision memoranda relating both to the initial approval, and the subsequentabandonment, of the plans in question.
197
2. EDC Debt Financing
(a) Arguments of Brazil
6.56 Brazil states that EDC export financing takes various forms, and may be structured as direct
financing at concessionary rates for up to 90 per cent of the cost of an aircraft.198  Brazil asserts that
EDC itself acknowledges the concessionary nature of its export assistance, referring to testimony
before Parliament by Paul Labbé, President and Ch ief Executive Officer of EDC, that EDC strives to
“mak[e] at least the rate of inflation,” and that such a return is well below the return “that would be
required to survive in the private sector.”199  Brazil cites as an example of EDC’s direct financing an
April 1997 agreement by Bombardier for the sale of 30 CRJs (with options for an additional 60aircraft), valued at approximately US$600 million, to  ASA Holdings, Inc. and its subsidiary, Atlantic
                                                     
197 Indonesia - Certain Measures Affecting the Automobile Industry , WT/DS54/R, WT/DS55/R,
WT/DS59/R, WT/DS64/R, adopted 23 July 1998, at paras. 14.234-14.235.
198 “Ottawa Joins Bombardier in jet-leasing venture,” The Globe and Mail, 5 April 1995 (Exh. BRA-8)
(To support Dash 8 sales, “Ottawa put up as much as 90 per cent of the purchase price.”).  See also  House of
Commons of Canada, 35th Parliament, 1st Sess., Evidence, Standing Committee on Foreign Affairs and
International Trade, Meeting No. 43, 11 May 1995, 43:10 (“Committee on Foreign Affairs and International
Trade”) (Exh. BRA-9).
199 House of Commons of Canada, 35th Parliament, 1st Sess., Standing Committee on Banking, Trade
and Commerce, Issue No. 48, 28 November 1995, 48:22 (“Committee on Banking, Trade and Commerce”)(Exh. BRA-10).WT/DS70/R
Page 75
Southeast Airlines.200  According to Brazil, the transac tion included a commitment from EDC to
finance up to 85 per cent of the lease or purchase price for all 30 CRJs, an option exercised by ASA
for those aircraft delivered to date201 to finance 16.5-year leases of the CRJs.202
6.57 According to Brazil, EDC President Paul Labbé, in information published by EDC, expressly
acknowledged the benefit granted to Canadian exporters by EDC financing:
EDC’s financing support gives Canadian exporters an edge when they bid on
overseas projects. . . .  Trade deals increasingly depend on complex and tightly
negotiated financing arrangements where a few basis points in interest rates can makeor break the deal.  Exporters are having to bid not just on the basis of quality and
price, but also on the basis of the financing package supporting the sale.
203
6.58 For Brazil, EDC’s help – to the tune of a “’few basis points’” –  must be better than that
which would otherwise be commercially available, or an EDC financing package would not, in EDC’s
former President’s words, “’give Canadian exporters an edge.’”  For Brazil, this “’edge’” is a
“benefit” conferred upon exporters, within the ordinary meaning of Article 1.1 of the SCMAgreement.
6.59 Similarly, according to Brazil, one of the benefits of EDC financing is that a Canadian
exporter can “'advis[e] potential foreign buyers that Canadian financing may be available for their
purchase,'” thereby “’enhanc[ing] the competitiveness of [the exporter’s] sales proposal.'”
204  Brazil
asserts that the Canadian regional aircraft exporter’s product is more attractive to a purchaser, in turn,for the simple reason that it costs less than it would without the Canadian Government’s help.
6.60 According to Brazil, therefore, EDC’s provision of financing of up to 90 per cent (or more) of
an aircraft’s cost over a 15-year or 15-year-plus period at concessionary rates confers the obvious
benefit, within the meaning of Article 1.1, of lowering the price of an exported aircraft for the
purchaser.  For Brazil, no private financial institution or investor would provide this degree offinancing on concessionary terms, which is why EDC steps in to “’help absorb the risk . . . beyond
what is possible by other financial intermediaries.‘”
205
6.61 Brazil argues that even if it is relevant, under Article 1.1, to inquire whether the government
in making a financial contribution has covered its costs, pure analysis of the cost to the lender is not
appropriate in the case of EDC, which boasts of its ability to “’absorb the risk on behalf of Canadianexporters, beyond what is possible by other financial intermediaries.’”
206  As compensation for this
risk, which is a cost according to Brazil, EDC should be expected to collect a risk premium.  Brazil
notes that it is a fundamental tenet operating in financial markets that “’investors increase their
required rates of return as perceived risk (uncertainty) increases.’”207  Yet, Brazil argues, EDC’s
former president, in testimony to Parliament, has spoken of EDC’s goal of avoiding losing money by“’making at least the rate of inflation,’” which he recognized is well below the return “’that would be
                                                     
200 ASA Holdings, Inc., Form 10-Q, filed with the US Securities and Exchange Commission for the
quarterly period ended 31 March 1997 (File No. 333-13071), pgs. 8-9 (Exh. BRA-11).
201 ASA Holdings, Inc. Annual Report 1997, “Liquidity and Capital Resources,” Lexis Disclosure
Report, pgs. 15-16 (Exh. BRA-12).
202 Id.
203 CanadExport On-Line, Focus on Export Development Corporation, at 2 (Exh. BRA-67).
204 Infoentrepreneurs website, pg. 13 (Exh. BRA-68).
205 Message at 2 (Exh. BRA-7).
206 Export Development Corporation, 1995 Chairman and President’s Message , pg. 2 (Exh. BRA-7).
207 Frank K. Reilly, Investment Analysis and Portfolio Management (Dryden Press), Fourth Edition, pg.
25 (Exh. BRA-81).WT/DS70/R
Page 76
required to survive in the private sector.’”208  Brazil questions how, if EDC is absorbing risk beyond
that which the private sector is willing to accept, merely making the rate of inflation allows it to meet
its costs?
6.62 Brazil recalls its reference to EDC’s low net interest margin to establish that EDC is not being
compensated for this extra risk and, conversely, that recipients of EDC funding are paying less for
that funding than they would from commercial sources (paras. 6.7-6.16, 6.38-6.44).
6.63 Brazil takes issue with Canada's response referring to EDC’s 1996 net interest margin of 3.03
per cent – which Canada claims is higher than that achieved by some commercial banks -- as evidencethat it is covering costs incurred on its lending ac tivities. (para. 6.73).  Brazil maintains that for a
commercial bank to accept EDC’s loan portfolio a much higher return would be required, and submits
an analysis of the differential in risk between EDC’s loan portfolio and the loan portfolios of
commercial banks
209.  For Brazil, this analysis shows that financing of EDC’s risk class by private
investors would demand a spread of 1,242 basis points over riskless US Treasuries of 15+ years
maturity, or 17.73 per cent, a conclusion which demonstrates the degree to which EDC’s lending
activities, yielding a net interest margin in 1996 of only 3.03 per cent, do not effectively cover thecosts associated with the riskiness of EDC’s loan portfolio, and grant borrowers access to rates not
otherwise available from lenders disciplined by market forces.  Brazil further argues that even if all of
EDC’s loans are secured, private lenders still demand a spread of at least 150 basis points above the
riskless US Treasuries of identical tenor.  In response to a Panel question, Brazil states that this
assertion is based on a comparison of the yield for riskless US Government 15-year securities and theyield for investment grade-rated unsecured non-rail transportation bonds.
210
(b) Arguments of Canada
(i) Substantive issues
6.64 Canada submits that financing activity by the EDC under its corporate account (EDC
financing) is not a subsidy within the meaning of Article 1, and that it is therefore not necessary forthe Panel to determine whether such activity is contingent upon export performance.  Canada further
submits that Canada Account activity is not inconsistent with Article 3 as it benefits from the
exception contained in Item (k) of Annex I of the SCM Agreement.  Canada notes, finally, that
Brazil’s other allegations about the EDC are factually incorrect and must therefore fail.
6.65 Canada states that as an official export credit agency and agent in all respects for the Crown,
the EDC has a public policy function that it carries out applying commercial disciplines and
principles, and that it may also conduct financial acti vities that the Government may deem to be in the
national interest, any obligations under which would be funded by the Government of Canada.
Canada notes that these latter activities of EDC are called the “Canada Account”, and that EDC’s
activities on its own account as a commercial operator are referred to as “corporate account” orsimply EDC financing or loan guarantees.  Accord ing to Canada, the EDC engages in such activities
in accordance with its broad mandate, prudent risk management and international export credit
disciplines.
6.66 According to Canada, the Government of Ca nada may, in view of its international
commitments through the Paris Club, on occasion require that the EDC forgive sovereign debts under
its corporate account.  In these circumstances, Cana da states, the Government of Canada indemnifies
the EDC.  Canada, noting Brazil’s reference to “’ Can$151 million in direct government relief to EDC
                                                     
208 House of Commons of Canada, 35th Parliament, 1st Sess., Standing Committee on Banking, Trade
and Commerce, Issue No. 48, 28 November 1995, pg. 48:22 (Exh. BRA-10).
209 Exh. BRA-85
210 Exh. BRA-85WT/DS70/R
Page 77
for two of its ‘problem' accounts‘” (para. 6.7), main tains that this amount was paid to the EDC as
indemnification for the forgiveness of the sovereign debts of Poland and Egypt by the EDC in
accordance with instructions by the Government of Canada and Canada’s international commitments,and that these were unrelated to the civil aircraft sector.
6.67 Canada maintains that Canada Account and EDC activities are not prohibited under Article 3
of the SCM Agreement.  Canada recalls Brazil’s argument that EDC financing may be structured at
“’concessionary rates,‘” asserting that Brazil alleges seven times that the EDC provides loans at
concessionary rates, but provides no evidence for these allegations, nor defines what it means by“’concessionary rates‘”.   According to Canada, Brazil extrapolates the concessionary “’nature‘” on
the basis of an unfounded allegation that the EDC’s profits are lower than those expected in the
private sector.
6.68 Canada denies that the EDC provides subsidies, stating that the EDC does not finance at
concessionary rates, and characterizing Brazil’s argument as based on unfounded speculation.
Canada notes that Brazil does not define what it means by “’concessionary rates‘”; Canada submits
that Article 38(c) of the OECD Consensus provides a useful point of reference for such practice,quoting this Article as follows:
“(c) For the purpose of calculating the overall concessionality level  of an
associated financing package, the concessionality level of the following credits, funds
and payments are considered to be zero:
-  export credits that are in conformity with the Arrangement;-  other funds at or near market rates; ….” [emphasis added]
6.69 Canada asserts that the EDC does not provide loans at “concessionary rates”, as the EDC’s
financing activities are based on commercial pricing (“’at or near market rates‘”).  That is, according
to Canada, rates for EDC financings reflect commercial benchmarks
211 and “’spreads‘”212 that are in
accordance with commercial credit ratings213 -- and, where this is not available, internal credit ratings
in accordance with prudent commercial practices.  As well, Canada argues, EDC’s financing terms
and structures are consistent with market trends and practices.  In response to a question from the
Panel seeking elaboration of these statements, Canada replied that it does not seek shelter in the ‘safe
haven’ provided in the second paragraph of item k,  with respect to EDC financing under its corporate
account, and that its reference to Article 38(c) of the OECD consensus was to provide contextualguidance as to what Brazil might have meant by ‘concessionary rates’, and to make the point that
EDC’s corporate account does not provide concessionary financing.
                                                     
211 In a floating rate transaction the lender sets an interest rate that will be moved up or down in relation
to general movements in interest rates in the wider economy.  In floating-rate aircraft financing transactions, thebenchmark used (to reflect the “general movements in interest rates”) is the three-month or the six-monthLIBOR (London Inter-Bank Offer Rate).
In fixed-rate transactions, the borrower’s interest payments are set at the outset of the transaction and
are not subject to variation in the underlying interest rate.  In aircraft financing transactions (which are mostlyUS dollar-denominated) the benchmark used is US Treasury.
212 The charge added to a benchmark that reflects the credit risk of the transaction.
213 “Credit rating”, whether done by a rating agency or by a financial institution, is a measure of the
degree of risk of default by an enterprise of a loan or an investment, determined on the basis of the revenue,
profitability and the assets of the enterprise, as well as collateral guarantees underwriting the transactions of that
enterprise and the likelihood of change in any of these variables.  Such ratings may also be given to bond issuescovering, for example, the purchase of capital assets by an enterprise.  The market perception of the asset, its
value and durability may factor in determining the rating to be given to such an issue.WT/DS70/R
Page 78
6.70 According to Canada, like several other international financial institutions, the EDC’s internal
credit ratings are based upon the results of analyses using a sophisticated computer programme: LA
Encore .214  Canada maintains that this programme is employed for the same purpose by other major
financial institutions, such as Lloyd’s Bank and Barclay’s Bank in the United Kingdom.
6.71 In terms of the pricing process, according to Canada, EDC’s transportation group has a
committee that reviews and approves the pricing on all transactions in the civil aircraft sector.  Canada
argues that in setting this pricing, EDC compares what the relevant borrower has recently paid in the
market for similar terms  and with similar security .  The EDC then prices according to that
benchmark.  In the absence of this benchmark, the EDC compares the relevant borrower to borrowers
of comparable credit standing in the civil aviation sector for whom a similar credit history exists; the
EDC then prices according to this alternative benchmark.
6.72 Canada maintains that to ensure that the EDC’s pricing reflects the proposed risks being
assumed and before approving the pricing, the EDC does one final test:  based upon the credit rating
and security of the transaction, the EDC ensures th at the pricing will add value to the EDC’s capital
base, using the EDC’s portfolio analysis tool for the civil aviation sector.  For Canada, the rationalefor this test is that market pricing is usually efficient and, if a transaction is priced to market, then
generally it should always add value to the EDC’s capital base. Canada asserts that the EDC’s civil
aviation portfolio is performing well and for any new deal, the EDC incorporates that deal into the
current portfolio to ensure that it at least maintain s the value of the portfolio; and that if not, the EDC
will increase the interest rate su ch that the value of the portfolio is maintained. Canada responds to
Brazil’s allegation, based on a quotation of Mr. Paul Labbé from an article that appeared in
CanadExport On-Line (para. 6.57)215, that “EDC’s help – to the tune of a ‘few basis points’ – must be
better than that which would otherwise be commercially available, or an EDC financing package
would not, in EDC’s former President’s words, ‘give Canadian exporters an edge’.”  Canada argues
that Mr. Labbé’s statement is not evidence that EDC finances below market and refers to Mr. Labbé’s
quote earlier in the article describing the role of EDC:216
“What we bring to the table is a wide variety of financial solutions and insurance support, as
well as extensive market and sectoral expertise… We have teams dedicated to different
market sectors such as information technol ogy and industrial equipment so that we
understand your business as well as you do.”
In Canada’s view, taken in context, then, the edge that EDC’s financing support gives Canadian
exporters derives from their knowledge of the various export markets, from their expertise in
“complex and tightly negotiated financing arrangements” and from their awareness that a “few basispoints in interest rates can make or break the deal”.   Canada reiterated that this sort of knowledge and
expertise is something that almost all financial institutions trumpet in their promotional literature.
Canada provided  provided examples fr om Barclays, Warburg Dillon Read and UBS.217  Canada
submitted that in this context, Mr. Labbé’s statement shows that EDC recognises the factors that are
important in making a deal in the international market.  This is not, however, according to Canada a
prima facie case that EDC’s finances below market.
                                                     
214 Famas Inc. “Products: Famas Financial Statement Analysis Software” online: Famas homepage
http://www.famas.com  (date accessed: 3 December 1998) (Exh. CDN-57).
215 Brazil Exh. BRA- 67.
216 Id.
217 See Barclays, online: What Barclay’s Can Offer homepage
<http://www.business.barclays.co.uk/corp/cb11.htm > (date accessed:  08 December 1998).  (Exh. CDN-95);
Warburg Dillon Read, online:  Banking Finance homepage <http://www.wdr.com/public/products/finance >
(date accessed:  08 December 1998).  (Exh. CDN-96); UBS, online:  Data Mining homepage
<http://www.ubs.com/e/index/about/ubilab/ext/projects/dm/e_index.htm > (date accessed:  08 December 1998).
(Exh. CDN-97)WT/DS70/R
Page 79
6.73 Canada maintains that the commercial viability of EDC’s financing activity should be viewed
in the context of the fact that the core lending business of many major banks is “increasingly
unrewarding”,218 asserting that at 3.03 per cent, EDC’s net interest margin – which for Canada is a
better measure of performance than “return on equity” -- is better than most commercial banks of
similar or better credit rating.219 In commenting on Brazil’s response to the Panel’s question
concerning risk spreads demanded by private lenders (para. 6.63), Canada observes that Brazil cites as
its source the yield for investment grade-rated unsecured non-rail transportation bonds, purportedly in
support of Brazil’s assertion that “[e]ven if we assume that all of the EDC’s loans for aircraft aresecured , private lenders still demand a spread of at least 150 basis points…”   Canada submits that the
yield on unsecured  bonds does not support an argument regarding secured  lending.
6.74 Canada submits that Item (k) of Annex I provides a specific  contextual guide as to the
conditions under which EDC’s financing activity -- that is, export credits -- could be considered
subsidies.  For Canada, the structure of Item (k) parallels that of Article 1; as such, a strong inference
may be drawn that the definition of subsidy in Article 1 should be informed by that set out in Item (k)
as far as government credit is concerned.
6.75 Canada notes that Item (k) sets out a test with two elements.  It provides, in relevant part, that:
“The grant by governments (or special institutions controlled by and/or acting under
the authority of 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 samematurity 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.”
6.76 Thus, according to Canada, export credit constitutes a prohibited subsidy, and government
credit constitutes a subsidy, where the rate of interest charged by a government in granting such a
subsidy is lower than the rate it has paid, or would pay, to raise such amount, and where such credit
secures a material advantage in the field of credit terms.  That is, in the field of government credit, a
subsidy exists where (a) a net cost to the treasury ha s been identified, that (b) results in an advantage
above and beyond the market.
6.77 Canada argues that as the EDC always lends above its cost of funds, and does not incur a net
cost on its financing activities, and that as it operates on the basis of commercial principles, it does not
provide an advantage above and beyond the market.   For Canada, EDC financing does not therefore
constitute a subsidy, and Brazil’s claims in this respect must therefore fail.
6.78 In response to a Panel question seeking documentary support for its statement that EDC
always lends above its cost of funds, Canada provides, as Business Confidential Information, a
certified copy of the EDC’s Standing Board Resolution of 17 June 1992
220.  According to Canada, this
Resolution applies to all business conducted by ED C under its corporate account, including the civil
aircraft sector, and  EDC has, in accordance with this resolution, lent above its cost of funds under its
corporate account with respect to the civil aircraft sector since 1 January 1995.
6.79 Also in response to a Panel request for information and documentation relating to the terms of
and conditions of the EDC financing allegedly provided to ASA, Canada states that the ASA deal ismentioned by Brazil at the end of a paragraph describing purported “concessionary” financing
                                                     
218 “The trials of megabanks”, The Economist , 31 October 1998, 23 at 23. (Exh. CDN-41)
219 Bankstat, Net Interest Margin Chart, 2 October 1998 (Exh. CDN-38).
220 see BCI Tab 4.WT/DS70/R
Page 80
provided by EDC, but that Brazil has made no allegation concerning ASA. Rather, Canada states,
according to Brazil, ASA is merely an example of how EDC debt financing works (para. 6.56).
Canada does not dispute the  relevant quotes referred to by Brazil from the Form 10-Q filed with theUS Securities and Exchange Commission by ASA Holdings Inc.
6.80 Canada states that the information requested by the Panel is sensitive business confidential
information, and that Canada’s desire to present to the Panel such information as may help it arrive at
a decision must be balanced against the commercial interests and legal rights of private parties not
Party to this dispute. In this context, Canada does not consider it appropriate to adduce evidence inresponse to allegations not made and a case that has not been established.
6.81 Canada disputes Brazil's assertion that EDC funding for the CRJ “'is equivalent to
US$18.3 million per airplane…virtually 100 per cent of the price of the airplane.'” (para. 6.4.) Canada
asserts that the reference to $1.7 billion was to the volume of export insurance and export financing
undertaken in the transportation sector, and that the reference to 62 per cent represents the percentage
of EDC’s total aircraft portfolio that was accounted for by Canadair Regional Jets as of June 1996,
rather than to the volume of business for 1995.
(ii) Arguments regarding whether Brazil has presented a prima facie  case against EDC
financing.
6.82 In Canada's view, Brazil has provided no evidence for the allegation of EDC loans at
concessionary rates, and therefore has not made a prima facie  case.   According to Canada, Brazil’s
allegations about EDC financing are without f oundation and false, and Brazil has adduced no
evidence  to support its allegation that the EDC offers financing at “concessionary rates” (para.6.67 -
6.73 ); Canada asserts as well that the evidence that it has adduced to support its general claim that the
EDC gives a benefit to Canadian companies does not stand up to scrutiny. (paras. 6.17- 6.26.)
6.83 For Canada, Brazil's reliance on a quote by then-EDC president Paul Labbé in support of its
argument that “’EDC’s help – to the tune of a ‘few  basis points’ – must be better than that which
would otherwise be commercially available, or an EDC financing package would not, in EDC’s
former President’s words, ‘give Canadian exporters an edge‘” (para. 6.58) is misplaced.  Canada
argues that earlier in the same article Mr. Labbé refers to EDC's expertise in “complex and tightly
negotiated financing arrangements” and from their awareness that a “few basis points in interest rates
can make or break the deal”.  For Canada, the edge that EDC’s financing support gives Canadianexporters derives from this knowledge and expertise.  Thus, Canada argues, Mr. Labbé's statement
shows that EDC recognises the factors that are important in making a deal in the international market;
it is not, however, a prima facie case that EDC’s finances below market.
6.84 In Canada’s view, to raise a prima facie  case that EDC financing is a subsidy, Brazil must
demonstrate that there is a “financial contribution” within the meaning of Article 1.1(a) that imposes anet cost on the government  making the contribution and that confers an advantage above and beyond
the market .  (paras. 6.76)
6.85 Canada notes Brazil's disagreement with this interpretation, and states that Brazil’s
interpretation of Article 1 appears to be that “’Article 1.1 therefore states that a subsidy exists where a
government contributes something, and in so doing gives an advantage.‘” In Canada’s view, Brazil
seems to suggest that Canada has the burden of presenting a prima facie  case when there is no prima
facie  case raised by the complainant, as reflected in Brazil’s statement (paras. ) that:
“Apart from the fact that Canada has not as a factual matter offered any evidence establishing
that EDC’s debt financing meets this test, Brazil considers that the plain meaning of Article
1.1 does not support Canada’s test.”WT/DS70/R
Page 81
6.86 For Canada, whether Brazil agrees with “’Canada’s test’” is immaterial to the question of
which party bears the burden of raising a prima facie  case under Article 1.  Canada asserts that it is
the complainant Brazil, not Canada, and that it is not for Canada, “’as a factual matter’”, to offerevidence that EDC’s financing meets the test of Article 1 until Brazil has raised a prima facie  case.
According to Canada, regardless of whether the Panel adopts the Article 1 interpretation proposed by
Canada or Brazil,  Brazil has not raised a prima facie  case.
6.87 In answer to a Panel question to Canada regarding what evidence a complaining party would
need to adduce to establish a prima facie case of subsidization in respect of a credit at an interest ratebelow prevailing commercial rates, Canada provided  the following examples of evidence that would
constitute, in Canada’s view, prima facie evidence of subsidization in aircraft financing:
• Statements by airlines (e.g., in annual report or securities filings) citing interest rates on debt
resulting from government support that are:
• Below that obtainable in the market and
• Below the cost of funds of the supporting government (as evidenced by the
yield on the government’s bonds at the time of the commitment);
• Offering memoranda, investment prospectuses, or other documents published by a reliable source
that would be privy to the financing terms of a transaction referring to subsidies provided by a
government that reduce the costs (e.g., interest costs) of the aircraft purchaser;
• Documents pertaining to a transaction that identify the payment of a subsidy to reduce financing
costs; or
• Legislation or regulations that mandate the payment of subsidies to reduce interest rates on export
financing.
Canada submits that other types of evidence may also form prima facie evidence, and reasonable
inferences may be drawn from each piece of evidence to establish a prima facie case in respect of the
broader application of the programme or measure in question.
(c) Response of Brazil
6.88 Regarding Canada’s response to the Panel’s request for information on EDC financing
allegedly provided to ASA, Brazil argues that Canada has refused to provide the documents requested
by the Panel.  As a result, the Panel should adop t adverse inferences, presuming that the information
withheld is prejudicial to Canada’s position (paras. 4.146-4.151).
6.89 Regarding the evidence submitted by Canada in support of its statement that EDC always
lends above its cost of funds (para. 6.78), Brazil submits that Canada’s reply is not responsive to thePanel’s question.  In Brazil’s view Canada does not, as requested by the Panel, provide documentary
support for this statement, with respect to the aircraft sector.  Rather, Brazil notes, Canada provides an
EDC Standing Board Resolution covering all EDC activities.  Therefore, in Brazil’s view, the
Resolution identifying the general goal leaves un answered whether “EDC’s lending to the civil
aircraft sector” is above EDC’s cost of funds.  Brazil argues that the Resolution also makes it clearthat EDC’s general goal of covering costs may be overridden in particular circumstances, which could
include EDC’s activities in the civil aircraft sector.
6.90 Brazil disagrees with what it characterizes as Canada’s “test” regarding whether EDC
financing constitutes a subsidy, according to which a complainant must establish two factors:  first,WT/DS70/R
Page 82
that in lending money a government fails to recover its costs; and second, that the terms extended by
the government are better than those available on the market.  Brazil states that apart from the fact that
Canada has not as a factual matter offered any evidence establishing that EDC’s debt financing meetsthis test, Brazil recalls that it considers that the plain meaning of Article 1.1 does not support
Canada’s proposed test (para. 5.43)
6.91 For Brazil, Canada’s reliance on item (k) of Annex I to the SCM Agreement as support for its
proposed test is misplaced, as Annex I does not speak to whether government activity constitutes a
subsidy , but rather to whether government activity constitutes a prohibited export  subsidy. Brazil
argues that a measure may constitute a subsidy, but not be on the Illustrative List of Export Subsidies
included in Annex I, and notes that Article 1 of the Agreement, entitled “Definition of a Subsidy,”
contains no relevant reference to Annex I (para. 5.44).  Rather, Brazil states, the relevant reference to
the Illustrative List of Export Subsidies included in Annex I falls in Article 3, which specifies, among
those activities already identified as subsidies , those that are prohibited by the SCM Agreement.  For
Brazil, the Canadian definition must therefore be rejected.
6.92 Brazil recalls its argument that Canada’s proposed test ignores the ordinary meaning and
structure of Article 1.1.  For Brazil, Article 1.1(a) indicates that to have a subsidy, the government
must be the source of the financial contribution; Ar ticle 1.1(b), in turn, states that these government
financial contributions are considered subsidies if, in giving them, “a benefit is thereby conferred.”
Recalling its position that the verb “confer” means to “grant,” “bestow,” “give” or “endow”
221 and the
noun “benefit” means “advantage” or “something that guards, aids, or promotes well-being”222, Brazil
submits that read in its entirety, Article 1.1 therefore states that a subsidy exists where a government
contributes something, and in so doing gives an advantage (para.5.40).
6.93 It is not evident to Brazil what specific part of Article 1.1 imposes the requirement that a
complainant demonstrate a “’net cost’” (para. 6.77) to the government by virtue of a financial
contribution.  Brazil believes that the ordinary meaning of Article 1.1(b) states that a subsidy existswhere a government contribution gives an advantage. In Brazil’s view, lending above cost does not
demonstrate that no advantage is given; governments may lend above their cost and give an advantage
to a recipient relative to the terms a borrower could receive elsewhere.
3. Loan guarantees
(a) Arguments of Brazil
6.94 Brazil argues that EDC supplements its direct financing by offering long-term loan guarantees
to purchasers or lessors of Canadian regional aircraft.  Brazil quotes a Canadian regional jet (“CRJ”)
purchaser as stating that “’Comair expects to finance the aircraft . . . through a combination of
working capital and lease, equity and debt financing, utilizing manufacturers’ assistance and
government guarantees  to the extent possible.’”
223  Brazil cites a news report that EDC has provided
“’up to $45 million in new loan guarantees’” for recent CRJ purchases which Canadian government
officials reportedly stated would allow Bombardier “’to shave as much as 20 per cent off the selling
price of a Canadair jet.’”224  For Brazil, this represents a substantial benefit, which has the effect of
                                                     
221 Webster’s Third New International Dictionary of the English Language.
222 Id.
223 Comair Holdings Inc. Form 10-K, filed with the US Securities and Exchange Commission for the
fiscal year ending 31 March 1998, p. 27 (emphasis added) (Exh. BRA-14); Comair Holdings Inc. Form 10-K,
filed with the US Securities and Exchange Commission for the fiscal year ending 31 March 1997, pgs. 18, 39-40
(Exh. BRA-15).
224 “Bombardier first to gain from equity investments by EDC,” Financial Post, 5 April 1995 (Exh.
BRA-16).WT/DS70/R
Page 83
increasing the amount of EDC direct financing well beyond 85 per cent, and which may be passed
along to purchasers or lessors.
6.95 In response to questions from the Panel, Brazil clarifies that its claim regarding EDC loan
guarantees covers such guarantees per se  as de jure export subsidies, and thus in all instances.
(b) Arguments of Canada
6.96 Canada rejects as incorrect Brazil’s assertions, arguing that Brazil implies that the very fact of
loan guarantees indicates the existence of a subsidy, using an example of an airline that “’expect[ed]’”
to finance its aircraft through a combination of inst ruments, including government guarantees, “’to the
extent possible’”. Canada maintains that Brazil ha s failed to provide any evidence that the EDC has
provided subsidies in the form of loan guarantees for any transaction concerning the civil aircraft
sector, arguing that Brazil’s “example” is not evidence but innuendo, and that Brazil thus has not met
the burden of adducing a prima facie  case.
6.97 According to Canada, the loan guarantee referred to  in the article cited by Brazil was in fact a
guarantee by the federal government, through Industry Canada, to assist in the financing of the sales
of CRJs to Air Canada, not an EDC loan guarantee.  In addition, Canada states, this transaction was adomestic sale.  In any event, Canada argues, press reports quoting unnamed officials which are
uncorroborated or do not otherwise contain material with an independent title of credibility and
persuasiveness simply do not constitute a prima facie case.  Contrary to Brazil’s allegation, Canada
argues, the EDC does not use any loan guarantees to supplement its financing activity, and Brazil’s
argument in this respect must therefore fail.
6.98 Canada asserts that the EDC issues conventional financial guarantees of third party payment
obligations, in which cases the financial guarantor is supporting the third party’s credit and will
require that upon payment it will have recourse to the third party, either directly or by subrogation.
Canada maintains that EDC loan guarantees are paid for by commercial fees from the recipient of the
guarantee, and that there is no subsidy in this.
6.99 In response to a Panel question seeking clarification of Canada’s statement that it does not use
any loan guarantees to supplement its financing activ ity, in light of other statements suggesting that
EDC does undertake loan guarantees, Canada responds that these statements are consistent.  That is,
Canada states, EDC provides loan guarantees on its corporate account, and EDC provides loan
guarantees on the Canada Account, but EDC has not supplemented its corporate account financing(i.e., direct lending) with loan guarantees on the same transaction, which Canada states was Brazil’s
allegation.
6.100  In response to a Panel request for the details of any loan guarantees issued by EDC for
transactions concerning the civil aircraft sector since 1 January 1995, Canada states its position that
Brazil has not made a prima facie  case against EDC loan guarantees, and notes the lack of adequate
procedures to protect business confidential information.  In this context, Canada provides to the Panel
non-business confidential details of the two loan guar antees for export transactions provided by the
EDC in the civil aircraft sector since 1 January 1995.  The first of these was in support of the sale of
two used de Havilland Twin Otters and two used de Havilland Dash 8-102s to an airline operating in
the South Pacific.  Canada states that the guarantee was provided at commercial rates.  The second
was in support of pre-shipment financing of a flight inspection system sold to a sovereign Latin
American buyer, again at commercial rates.
225
                                                     
225 The Panel  notes that Brazil, in its comments on this response of Canada to the Panel’s question,
stated that Canada had not provided documents that in Brazil’s view Canada indicated were being provided.The Panel understands Canada’s reply to the question, recounted above, to constitute the entirety of theWT/DS70/R
Page 84
4. Equity infusions into corporations established to facilitate the export of civil aircraft
(a) Arguments of Brazil
6.101  Brazil argues that because of the high cost of maintaining direct financing at concessionary
rates, and the toll such financing takes on its resources, EDC has developed alternative funding
schemes.226  Brazil cites to a 4 April 1995 EDC press release regarding the formation, as one of
“’several strategic initiatives aimed at further improving service and support to Canadian exporters’”
of a new subsidiary -- Structured Finance Inc. (“ SFI”) -- which would “’increase the capital available
to Canadian exporters by leveraging private- sector investment and structuring risk-sharing
partnerships.’”227  According to Brazil, the statement indicates that “’SFI will be the vehicle through
which several special purpose companies, capitalized jointly by EDC and private-sector partners, are
envisaged to support key export sectors . . . .,’”228  among the first of which was Canadair RJ Capital
Inc. (“CRJ Capital”), which “’will be formed on a risk-shared basis primarily between EDC and
Bombardier, with each partner providing equal amounts of equity.’”229 Brazil notes that SFI’s name
subsequently was changed to Exinvest Inc. (“Exinvest”).
6.102  Brazil argues that according to the 1995 Message of the Chairman and President of EDC,
Exinvest permits EDC “’to support its customers with a unique combination of debt, equity and
insurance instruments.’”230  Brazil argues that this Message announced the realization of the hopes
expressed in the April 1995 statement by confirming that “’[Exinvest’s] first investment is Canadair
RJ Capital Inc., a 50-50 joint venture with Bombardier used specifically to finance the export of
regional jets.’”231
6.103  Brazil asserts that although aircraft may initially be sold to airline operators, they are most
frequently then immediately re-sold to corporations, referred to in the industry as Special Purpose
Companies or “SPCs,”232 which are specifically established to own and lease aircraft.  According to
Brazil, the SPCs then lease the aircraft back to the airlines, a structure that is favoured for a variety of
reasons, including protection against default and, in some jurisdictions, the realization of certain taxbenefits.  According to Brazil, these benefits result in reduced costs which may be passed along to
enable the airline to achieve the lowest payments possible for the aircraft.
6.104  Brazil argues that CRJ Capital facilitates
 233 export transactions by providing equity capital to
the SPC, which supplements debt capital obtained from lenders, and asserts that in consultations,
Canada declined to disclose to Brazil any pertinent information concerning the full scope of CRJCapital’s operations, asserting that the information was confidential.  Brazil states that it nevertheless
has been able to determine from publicly-available information that the SPC will receive 20 per cent
of its capital in the form of equity from CRJ Capital and the remaining 80 per cent from lenders.
234
Thus, according to Brazil, the only charge on the SPC’s  total capital is the charge required to service
                                                                                                                                                                    
information referred to by Canada in that reply, and in this regard notes that Canada’s reply makes no reference
to documents.
226 Committee on Foreign Affairs and International Trade, 43:10 (Exh. BRA-9).
227 EDC Press Release No. 8, 4 April 1995 (Exh. BRA-17).
228 Id.
229 Id.
230 Message  at 3 (Exh. BRA-7).
231 Id.
232 Transport Finance No. 74, dated 3 October 1996, at 3 (Exh. BRA-18).
233 The Panel notes that in its second submission, Brazil indicates that the references to CRJ Capital
reflected in this and the following paragraph should have been to Exinvest, the provider of equity capital to CRJ
Capital, the SPC.  The references as initially made by Braz il are retained in the text of this report, to ensure that
Canada’s response arguments in the next section are comprehensible.
234 Id. at 3 (EDC chart of CRJ financing scheme).WT/DS70/R
Page 85
the debt, since equity owners are paid only fr om profits.  Moreover, Brazil argues, EDC typically
guarantees a portion of the debt capital supplied by the lenders 235 (see section  VI.A.3.)
6.105  Brazil states that after initially purchasing the aircraft from the manufacturer, the airline re-
sells the aircraft to the SPC, which leases it, typically for periods of 15 or more years, back to the
airline.  According to Brazil, the stream of leas e payments from the airline to the SPC is used to
service only the debt obligations of the SPC; since the object of utilizing the SPC device is to
minimize the cost to the customer, the stream of paym ents is not sufficient to provide a return to the
equity investors in the SPC.  Thus, Brazil asserts, at the end of the lease the SPC owns a 15-year-oldused airplane, the residual value of which is the sole source of whatever return will accrue to CRJ
Capital, and in turn to EDC, as a supplier of equity capital.
6.106  For Brazil, this residual value alone cannot provide a commercial return to EDC as an equity
investor; a 30-per cent residual value, for example, would not begin to compensate a non-subsidizing
equity investor.  Brazil asserts that the EDC contribution of 10 per cent of total capital
236 represents
half of the equity capital in the SPCs established to support the export of civilian aircraft, which
means that EDC’s share of the assumed 30-per cent residual value is half of that, or 15 per cent.According to Brazil, this would yield an annual return of a mere 2.74 per cent, which for Brazil
demonstrates quite clearly and quite graphically that EDC equity infusions are little more than
outright grants.
237  Brazil further states that even a 50-per cent residual value produces an annual
return of only 6.3 per cent, hardly the level of return sought by risk-taking equity investors.238
6.107  In response to a question from the Panel seeking Brazil’s view on what an appropriate level of
return would be for such “risk-taking equity investors”, Brazil notes that in Parliamentary testimony,
then-EDC President Paul Labbé identified 15 to 20 per cent as the “’return on equity that would be
required to survive in the private sector‘”239, and refers to an article from Airfinance Journal240 that
cites after-tax  yields on private aircraft leasing deals of between seven and 14 per cent (or 15 to 20 per
cent on a pre-tax basis).  Brazil also submits a chart241 providing annual US returns on a range of low-
risk to high-risk investments over the period 1991- 1997, which Brazil states shows similar returns for
investments involving any even nominal level of risk .  Finally, according to Brazil, this rate accords
with another appropriate benchmark – Bombardier’s pre-tax cost of capital, which factors at 16.9 per
cent.242
6.108  Brazil notes, however, that a return on EDC’s equity investment of 6.3 per cent is highly
speculative, presuming a 50-per cent residual value for the underlying aircraft, and states that a
residual value of 30 per cent is more in line with the value projected by industry analysts,243 and in the
case of a 16-year lease would yield a 2.57 per cent rate of return,244 a rate which fails in all but three
of the last 20 years to outpace the US inflation rate.245  EDC’s acceptance of this rate of return for its
                                                     
235 Id.
236 Since the SPC receives 20 per cent of its capital in the form of equity from CRJ Capital, and CRJ
Capital is itself 50-per cent owned by EDC, EDC's equity contribution to the SPC amounts to 10 per cent.
237 See Exh. BRA-19.
238 Id.
239 Committee on Banking, Trade and Commerce, pg. 48:22 (Exh. BRA-10).
240 Exh. BRA-74
241 Exh. BRA-75
242 JP Morgan Securities, “Bombardier,” 1 September 1998, pg. 10 (adjusting 11 per cent to pre-tax
cost of capital) (Exh. BRA-76).
243 “Consider Residual Values When Computing RJ Costs, Say Analysts,” Commuter/Regional Airline
News, 7 April 1997 (Exh. BRA-77).
244 "Evaluation of Export Subsidies Received by Bombardier Inc. and Certain Suppliers", Expert
Report of Horst, Frisch, Clowery and Finan, 29 October 1998 ("Finan Report") (included as a separateattachment to the first written submission of Brazil), at Exhibit B, Table B.4.
245 Stocks, Bonds, Bills and Inflation, 1998 Yearbook (Exh. BRA-78).WT/DS70/R
Page 86
equity financing vehicle serves a purpose; according to Industry Canada’s Director of Airframe
Systems, Richard Dixon, it helps meet “[t]he challenge . . . to provide low cost financing to airlines
with lower credit ratings,” and permits “airlines with double-B credit ratings . . . to lease new planesat interest rates normally offered to double-A credit risks.”
246
6.109  Thus, Brazil argues, EDC’s equity infusions into SPCs confer a benefit by lowering the lease
payment required from the ultimate customer, the airline, thereby effectively lowering the price of the
aircraft and making it more competitive than would otherwise be the case.
6.110  Brazil notes that the foregoing analysis assumes a 15-year lease, and that to the extent a lease
exceeds 15 years, the residual value of the aircraft would be less because it is older, which would in
turn affect the equity investor's ultimate return.  That is, according to Brazil, the equity investors’
return would be less because its pay-back would occur at a later date; for example, a 16-year lease,
with an anticipated 30-per cent residual value yields an annual return of 2.57 per cent.247
6.111  Brazil states that in consultations, Canada declined to disclose specific information
concerning the number of regional aircraft sales benefiting from EDC’s equity financing vehicle.
According to Brazil, EDC officials have stated that CRJ Capital “could be involved in purchasing andleasing as many as 75 jets.”
248
6.112  According to Brazil, publicly-available information indicates that CRJ Capital has been used
to finance sales both to Comair and Air Canada.249  Brazil asserts, citing to the expert report of Grey,
Clark, Shih and Associates, Ltd. (the “Clark Repor t”) that the sale to Air Canada, which at first
impression would seem to be a domestic sale, is in fact an export sale entered into with the explicitaim of promoting export sales.
250  According to Brazil, when questioned by a Committee of
Parliament concerning EDC support for sales of civilian aircraft to Air Canada -- seemingly a
domestic sale and not, therefore, within EDC’s purview -- EDC President Paul Labbé explained that
these in fact were export sales, having been made through an SPC (a “tax vehicle”) established in the
United States,251  which in turn leased the aircraft to Air Canada, thereby qualifying for treatment as
an export transaction within EDC’s authority.  Brazil quotes Mr. Labbé as saying:
Our focus is export financing.  What we’re trying to do in this particular case -- this is
an exceptional case -- is launch an aircraft that has a world market.  The Canadian
market for this aircraft is minimal compared with what this world market is going to
be, but it has to be launched.  You have to get a good customer base established sothat you have a good market for that thing.
252
6.113  According to Brazil, EDC’s equity infusion into the SPC amounts to approximately 10 per
cent of the value of each aircraft, or approximately $1,500,000 to $2,000,000 for every airplane sold.
Brazil argues that the present value in 1998 of benefits to Bombardier associated with these equity
infusions ranges from a low estimate of US$894 million to a high estimate of US$979 million.253
6.114  Brazil argues that SPCs are designed not to earn a profit during the term of the lease;
therefore, only the debt portion of their capital needs to be serviced during the 15-year or 15 year-plus
                                                     
246 “Ottawa Joins Bombardier in jet-leasing venture,” The Globe and Mail, 5 April 1995 (Exh.
BRA-8).
247 Finan Report at Exhibit B, Table B.4.
248 “Ottawa Joins Bombardier in jet-leasing venture,” The Globe and Mail, 5 April 1995 (Exh. BRA-
8).
249 “Closing the Stable Door,” Airfinance Journal, July/August 1995, p. 25 (Exh. BRA- 20).
250 Clark Report at pgs. 13, 21-24.
251 Committee on Foreign Affairs and International Trade, 43:30 (Exh. BRA- 9).
252 Id.
253 Exhibit B, Table B.5 of Finan Report.WT/DS70/R
Page 87
period of the lease, and no payment is made to the equity investors.  Thus, for Brazil, the greater the
percentage of equity capital in the SPC, the lower the percentage of debt capital that actually must be
serviced by the lease payments.  In effect, Brazil argues, when EDC utilizes the SPC mode of support,it purchases 10 per cent of a new aircraft, with no prospect of return on this investment during the
entire period of the lease, in exchange for a 50-per cent interest, 15 or more years later, in a 15-year-
old or more used aircraft.
6.115  Brazil states that this equity infusion is a benefit because no private financial institution or
investor would contribute equity on such unremunerative terms; and argues that were non-subsidizingprivate investors willing to provide funds on such terms, there would be no need for EDC, since its
mission is to go “beyond what is possible by other financial intermediaries” by, in this instance,
providing equity infusions to feed “the seemingly endless appetite of Canadian exporters for financial
support.”
254  According to Brazil, these equity infusions  go far beyond “what is possible by other
financial intermediaries,” and in so doing, confer benefits of the type envisioned by Article 1.1 of the
SCM Agreement.  Thus, for Brazil, EDC, through CRJ Capital, therefore confers a clear benefit on
Canadian producers and exporters of regional aircraft by assuming an equity investor’s risk in itscontribution of capital, with no prospect of obtaining an equity investor’s reward.
6.116  In addition, Brazil states that using Canada’s words, EDC incurs a “net cost” in that no
private financial institution or investor would contribute equity on such unremunerative terms, as
evidenced by the apparent fact that no one other than Bombardier, the final beneficiary, has done so.
Brazil submits that EDC’s only return depends upon the residual value of a 15-year-old (or older)airplane, which the Finan Report
255 and Exhibit Bra-19 establish cannot provide anything remotely
resembling a commercial return to EDC as an equity investor.
6.117  Brazil further argues that because all EDC funding is de jure  contingent upon export, all sales
using the equity financing vehicle, including those sales to Air Canada, have been structured as export
transactions, and that as a result, extension of this type of funding constitutes an export subsidy withinthe meaning of Article 3 of the Agreement.
6.118  Brazil states that it is aware of one other apparent SPC, Canadian Regional Aircraft Finance
Transaction, or “CRAFT,” which may be a successor to or replacement of sorts for Exinvest.
According to Brazil, CRAFT was launched in Apri l 1998 as an aircraft securitization structure to
provide lease and loan financing for customers buying Bombardier’s CRJ and Dash 8 aircraft.
256
Brazil, referring to a chart of CRAFT’s structure and operations that it submits257, states its
understanding that EDC and the Government of Québec provide equity capital and are preferred
shareholders in CRAFT.
6.119  Brazil indicates that CRAFT came to the market with an initial portfolio of 26 aircraft and a
total appraised value of $458 million, which can be expanded over the next 18 months to reach 70aircraft worth $1.1 billion.
258  In Brazil’s view, CRAFT diversifies the risk to debt holders by
packaging together deals and offering portions of the total package to the debt holders, thereby
lowering the cost of financing.  Brazil asserts that EDC and the Government of Québec provided
preferred capital to the CRAFT structure.  Brazil states that it is estimated by Standard & Poor’s that
                                                     
254 Message at 2, 4 (Exh. BRA- 7).
255 See Exhibit B, Table B.4 of Finan Report.
256 Standard & Poor’s Presale Report, “CRAFT No. 1 Trust 1998 – A,” 17 April 1998 (Exh. BRA-70);
“Turning finance into a fine craft,” Airfinance Journal, June 1998 (Exh. BRA-71); “CRAFT takes off for
Bombardier,” Euroweek, 8 May 1998 (Exh. BRA-72).
257 Exh. BRA-73
258 Id.WT/DS70/R
Page 88
EDC and the Government of Québec’s combined participation could exceed US$300 million.259
Brazil presumes that investment by the Canadian federal and provincial governments was required
because the return to the other shareholders would be below the return demanded by private investorsgiven the level of risk they would have to assume in the financing structure.  In Brazil’s view, by
accepting below market returns on their investment, EDC and the Québec Government allow the
CRAFT SPC to reduce the monthly lease cost to the aircraft lessee.
6.120  Brazil notes that it has encountered significant difficulty obtaining access to information on
EDC’s equity financing activities, as it has for other EDC activities.  Brazil believes that in its defenseof EDC’s  equity activities (see paras. 6.128-6.129), Canada is relying on sophistic and misleading
parsing of Brazil’s claim (as in Brazil’s view it did during the Panel meeting on 26 November with
regard to Brazil’s claims concerning EDC’s extension of loan guarantees).  Brazil recalls here
Canada’s emphasis on the word “supplement” in that defence (see para. 6.99).  Brazil reiterates that
its factual understanding of EDC’s equity financing activities is derived directly from public
information issued by EDC itself.  For Brazil, Canada’s mere conclusory denial of facts which it has
often and repeatedly held out to be true in public should not be considered by the Panel to be asufficient rebuttal of Brazil’s prima facie  case.
(b) Arguments of Canada
6.121  Canada argues that CRJ Capital, Inc. (“CRJCI”) does not do what Brazil argues it does, i.e.,
that Brazil’s submission is based on a misunderstanding of the operation of the CRJCI.  Canada
further submits  that Brazil’s allegation also casts in bold relief the difficulties that could arise as aresult of a failure to conform to Article 6.2 of the DSU in fashioning a request for a  panel  (para. 4.38
- 4.58).
6.122  Canada states that its understanding of Brazil’s request for a panel has been that Brazil wished
to challenge the EDC’s part ownership of the CRJCI, and that it was only upon receiving Brazil’s first
submission that Canada understood that by “’corporations established to facilitate the export of civilaircraft‘” Brazil did not mean the CRJCI, but some “’special purpose corporations‘” that have never
been the subject of discussion between Canada and Brazil.
6.123  For Canada, the short answer to Brazil’s claim (and the answer that Brazil would have
received had the claim been put to Canada over the previous two years) is that neither the EDC nor
the CRJCI have invested equity in the “special purpose corporations” mentioned by Brazil.
6.124  Canada states that the CRJCI was created as a result of a joint investment by Exinvest, a
wholly-owned subsidiary of the EDC and Bombardi er Inc.  Each shareholder owns 50 per cent of
CRJCI.  Canada indicates that to date, in addition to the initial equity investment, the two shareholders
have in equal proportion provided interest-bearing lo ans to CRJCI at commercial rates.  According to
Canada, CRJCI offers financing services for the CRJ through either direct lending at commercial ratesor loan guarantees (paid for by fees from the borrower). To reduce the EDC’s risk exposure,
Bombardier’s investment is in a first loss position, i.e., that in the event of a loss, Bombardier takes
the loss first.  Canada asserts that the only fina ncing transactions that the CRJCI has participated in
were for the sale of 17 CRJs to Air Canada.  Canada indicates that these are domestic transactions and
that therefore the financing provided did not constitute export credits, and that this is the only activity
undertaken by CRJCI to date.
                                                     
259 Standard & Poor’s Presale Report, “CRAFT No. 1 Trust 1998 – A,” pg. 3 (Exh. BRA-70) (Notes
that the debt portion of the CRAFT SPC will be up to $770 million in amortizing notes,  with a total portfolio of
aircraft at an appraised value of $1.1 billion.  The difference, $330 million, has therefore to come from equityfinancing).WT/DS70/R
Page 89
6.125  Canada states that neither the EDC nor the CRJCI has made any investments in special
purpose corporations, and that Brazil’s challenge is therefore without foundation.
6.126  Canada argues that Brazil’s allegations with respect to “equity infusions” by CRJ Capital into
Special Purpose Companies rest solely  on an article in a transportation financing journal (para. 6.104)
which Canada asserts is inaccurate, as CRJ Capital has provided no such equity infusions.  For
Canada, this is a clear example of why press reports that are uncorroborated or do not otherwise
contain material with an independent title of credibility and persuasiveness are insufficient to support
a prima facie  case.260
6.127  The Panel  asked Canada to comment on a number of exhibits submitted by Brazil in support
of the claim of EDC equity infusions: 2611995 EDC Chairman and President’s Message, which
indicates, regarding Exinvest, that EDC is able to support its customers with a unique combination of
debt, equity  and insurance instruments, and states that Exinvest’s first investment is Canadair RJ
Capital, a “50-50 joint venture with Bombardier used specifically to finance the export of regional
jets”;  a newspaper article262 stating that by forming CRJ Capital EDC “is getting into the aircraft-
leasing business”, that CRJ Capital “marks the EDC’s first foray into equity financing”, and that “CRJCapital will buy up to 30 per cent of each new Regional Jet, syndicate the rest to private-sector
lenders and lease the aircraft back to the airlines”; a newspaper article
263 containing a diagram,
attributed to EDC, that shows RJ Capital Corp. providing 20 per cent of the equity to a special
purpose company which owns the aircraft and leases it back to the airline; a newspaper article264
referring to CRJ Capital as “a leasing company designed to support sales of the Canadair RJ”, and
stating that “CRJC’s initial mandate was to support sales of 75 aircraft”
6.128  Canada responded regarding the 1995 EDC Message th at EDC has equity powers, but that
these have not been used to invest in special pur pose corporations.  Regarding the first article, Canada
states that it is incorrect in that: a) CRJ Capital is  not an aircraft leasing company; b) CRJ Capital is
not an equity financing vehicle; and c) CRJ Capital does not buy equity positions in aircraft.Regarding the second article, Canada states that the diagram is incorrect.  Regarding the third article,
Canada states that CRJ Capital is not a leasing company and has only participated in the commercial
financing for the sale of 17 CRJs for Air Canada.  Canada’s response further indicates that neither the
Canadian government nor EDC has provided through CRJ Capital or, by any other means, equity
participation in any sales of Canadian produced civilian aircraft.  Canada also states that that neitherExinvest, which is 100 per cent owned by EDC, nor CRJ Capital, which is 50 per cent owned by
Exinvest, are special purpose corporations.  Canada submits that in the civil aircraft sector, a special
purpose corporation is generally utilized for the sole purpose of owning a single asset, and is
predominantly used in US leveraged leases and other types of tax leveraged leases; in Canada’s view,
this appears to be consistent with Brazil’s definition of an SPC.
6.129  Canada also disputes as incorrect Brazil’s allegations that CRJ Capital acts as an aircraft
leasing company, stating that CRJ Capital has not purc hased aircraft and then leased them to airlines.
Canada provides an officer’s certificate from CRJCI
265, and an officer’s certificate for EDC’s
subsidiary, Exinvest, to this effect,266 and notes that the officer’s certificate of CRJ Capital also states
that CRJ Capital has not made any such equity investment, and that the officer’s certificate for
Exinvest also states that Exinvest has not made any equity investment in any corporation aside from
its equity investment in CRJ Capital.
                                                     
260 Keith Highet, (Exh. CDN-54).
261 Exh. BRA-7
262 Exh. BRA-8 (also included in Exh. BRA- 17)
263 Exh. BRA-18
264 Exh. BRA-20
265 See Officer’s Certificate, CRJCI, 3 December 1998 (Exh. CDN-94).
266 Officer’s Certificate, Exinvest, 10 December 1998 (Exh. CDN-93).WT/DS70/R
Page 90
6.130  Canada also challenges Brazil’s arguments with respect to Canadian Regional Aircraft
Finance Transaction No. 1 Limited, (or CRAFT), as without foundation. Canada notes Brazil’s
understanding that “EDC and the Government of Québec provide equity capital and are preferredshareholders in CRAFT”, which understanding Brazil appears to attribute to Standard & Poor’s:  “It is
estimated by Standard & Poor’s that EDC and the Government of Québec’s combined participation
could exceed US $300 million.”  (para. )  Canada argues that the source referenced by Brazil -- a
Standard & Poor’s Presale Report on CRAFT
267 - makes no reference to participation by the EDC or
the Government of Québec, and that there was no reference in Exhibits BRA-71 or 72, either.  Canadasubmits that the figure set out in Exhibit BRA- 73, however, has a prominent, bolded box listing EDC
and the Government of Québec as preferred shareholders in CRAFT and that the source of this
information, according to that figure, is Embraer.  Canada maintains that CRAFT is a special purpose,
independent company without any ties to the Govern ment of Canada or the Government of Québec.
Canada submits a letter from the Director of CRAFT Ltd. attesting to the fact that neither the
Government of Canada, nor the Government of Québ ec, nor any agency of the Government of Canada
(in particular EDC) nor any agency of the Government of Québec, have participated in the financingof CRAFT.
268
(c) Response of Brazil
6.131  Brazil contests Canada’s denial of the facts underlying its equity activities.  Although Canada
claims that CRJ Capital does not lease aircraft, but rather helps finance aircraft, and that it is not an
SPC, Brazil argues that public statements from EDC itself state flatly that CRJ Capital is both aleasing company and an SPC.
6.132  In this regard, Brazil cites an EDC announcement of the creation of “’Structured Finance,
Inc.,’” later called “’Exinvest,’” which states that Exinvest is to be “’the vehicle through which
several special purpose companies,’” or SPCs, were to be created, the first of which was CRJ
Capital.
269  Brazil notes that the announcement states that CRJ Capital receives equity infusions from
EDC, through Exinvest.  Brazil also cites EDC’s 1995 Message of the Chairman and President of
EDC270 which states that Exinvest’s first investment was CRJ Capital, as well as a quote from a
former EDC President271 that CRJ Capital was to be the model for other  SPCs.  For Brazil, the
obvious implication of this is that CRJ Capital is an SPC itself.
6.133  Brazil also cites a quote from an EDC Vice-President272 characterizing CRJ Capital as a
leasing company, and stating that the plan is for it to be used in the lease or sale of as many as 75
CRJs.  Brazil asserts that in interviews273, EDC officials, including EDC’s president, stated that CRJ
Capital purchases part of a plane, syndicates the rest to private-sector lenders, and leases the aircraft
to an airline.
6.134  Brazil asserts that its factual understanding of EDC’s equity financing activities is, therefore,
derived directly from information issued by EDC itself , and not, as Canada argues, based “‘ solely  on
an article in a transportation financing journal.’” (para. 6.126)  For Brazil, Canada’s denial of facts
which EDC and its officials have often and repeatedly held out to be true in public should not be
considered credible.
                                                     
267 Exh. BRA-70
268 Letter from Timothy R. Myers, Director, Canadian Regional Aircraft Finance Transaction No. 1
Limited to Robert Greenhill, Bombardier Inc., dated 10 December 1998;  letter from Charles Hyatt, Director,
Greenwich NatWest Limited to Richard Sloan, Bombardier, dated 10 December 1998 (Exh. CDN-91).
269 Exh. BRA-17
270 Exh. BRA-7
271 Exh. BRA-8
272 Exh. BRA-20
273 Exh. BRA-8WT/DS70/R
Page 91
6.135  In Brazil’s view, Canada’s arguments simply fail to respond to Brazil’s claims.  Canada
states, in response to a question from the Panel,  that EDC, Exinvest and CRJ Capital have not
“provided . . . equity participation in . . . sales of Canadian produced civilian aircraft.”  According toBrazil, this is not, and has never been, Brazil’s claim.  Rather, Brazil’s claim is that EDC, directly or
indirectly, has made equity infusions into CRJ Capital  which have facilitated CRJ Capital’s ability to
lease or sell Canadian regional aircraft at a reduced price.
6.136  Brazil, it is irrelevant whether or not CRJ Capital leases, or helps finance, aircraft, and
whether or not CRJ Capital is, or is not, an SPC.  In Brazil’s view, the distinction is not relevant to thequestion whether EDC, through its direct or indirect equity investments in CRJ Capital, provides a
“benefit.”  The point is that EDC’s direct or indirect equity investment in CRJ Capital frees CRJ
Capital up to accept a lower lease or loan payment from a lessor or purchaser of a Canadian regional
aircraft than it would be able to accept in the abse nce of that equity investment, or to facilitate the
ability of another SPC to do so.  CRJ Capital is designed not to earn a profit during the term of the
lease; therefore, only the debt portion of the cap ital used to finance the lease needs to be serviced
during this period.  According to Brazil, no payment is made to equity investors.  Thus, the greater thepercentage of equity capital in CRJ Capital, the lower the percentage of debt capital that must be
serviced.  The benefit, in short, is lower lease or debt payments for the airlines.  As support, Brazil
cites an Industry Canada official’s statement that EDC’s equity vehicle meets “[t]he challenge . . . to
provide low cost financing to airlines with lower credit ratings,” by permitting airlines with double-B
credit ratings to lease new planes at interest rates normally offered to double-A credit risks.
6.137  Brazil argues that all of the information submitted by it regarding CRJ Capital is based upon
undisputed and undenied public statements by EDC officials and public announcements issued by
EDC itself.  The statements regarding the benefits of EDC’s equity vehicle remain unanswered
“‘statements against interest,’”
274 to which Brazil argues the Panel should attach “‘superior
credibility.’”  For Brazil, these statements illustrate both the nature and the degree of the “’benefit’”provided by EDC’s equity investments, and demonstrate why those efforts constitute a subsidy under
Article 1.1 of the Agreement.
5. Residual value guarantees
(a) Arguments of Brazil
6.138  Brazil asserts that at the end of an aircraft lease, in certain instances EDC also offers a
“residual value guarantee,” protecting against the risk that the residual value of the used aircraft will
be lower than anticipated, with the guarantee further reducing the cost of financing.
275 According to
Brazil, such guarantees generate savings due to the reduced risk of having to absorb a loss from a
lower-than-expected residual value, which savings can  be passed along to the airline customer in the
form of lower lease payments, essentially increasing the amount of direct financing beyond 85 percent.
6.139  Brazil argues that although a higher residual value would normally mean a higher return for
the SPC’s equity investors, that benefit does not accrue to EDC, since EDC underwrites the cost of
maintaining the higher residual value in the first place .  According to Brazil, an inflated residual value
does enhance Bombardier’s return on its equity investment in CRJ Capital, and the residual value
guarantee also benefits the airline customer -- the SPC is relieved of the burden of absorbing a loss
from a lower-than-expected residual value, and can pass any savings along to the airline customer in
the form of lower lease payments.  According to Brazil, residual value guarantees thereby confer a
clear benefit under Article 1.1 of the SCM Agreement.
                                                     
274 Exh. CDN-54
275 “A Very Tactical Regional Response,” Airfinance Journal, November 1994, at pgs. 18-20 (Exh.
BRA- 13).WT/DS70/R
Page 92
6.140  In response to Panel questions regarding the coverage of Brazil claim in respect of residual
value guarantees, Brazil states that its claim includes the grant by EDC of residual value guarantees
per se  as de jure  export subsidies, and thus in all instances.
(b) Arguments of Canada
6.141  According to Canada, a residual value guarantee, which may take the form of an insurance
policy, will guarantee to the lessor that, if the equipment is returned at the location and in the
condition required by the lease or the guarantee, the equipment will be worth not less than a stated
sum.  Canada states that the residual value guarantor’s sole recourse is to the equipment and its risk isentirely dependent on equipment value, not the credit of another person.
276
6.142  Canada denies Brazil’s allegations regarding residual value guarantees, arguing that Brazil’s
“’evidence‘” with respect to “’residual value guarantees‘” is based on an article that notes a
“’suggestion‘” that a deal completed in 1992 “’may have‘” involved a residual value guarantee.  The
suggestion of a possibility in respect of a deal made prior to the entry into force of the WTO
Agreement does not, in Canada’s submission, amount to a prima facie  case. In Canada’s view, this is
an example of a press report which is uncorroborated or does not otherwise contain material with anindependent title of credibility and persuasiveness. Canada argues that Neither the EDC nor the
Government of Canada has provided residual value guarantees through CRJ Capital
277 or any other
means in support of civil aircraft.  Canada provides, in support of its argument, an officer’s certificate
from CRJCI 278 and an officer’s certificate for EDC’s subsidiary, Exinvest, to this effect.279
(c) Response of Brazil
6.143  Brazil argues that although Canada has submitted “officer’s certificates” claiming that CRJ
Capital and Exinvest have not issued a residual value guarantee, no such document has been
submitted with regard to EDC itself .  Brazil quotes from Exhibit CDN-54 to argue that Canada’s
“‘failure to deny news stories published on the subject’” (paras. 5.18-5.21) – such as, in Brazil’s view,
the statements in an article included in Exhibit BRA-13 regarding EDC’s provision of residual loanguarantees – constitutes a valid reason to infer that Canada’s failure to include a similar certificate for
EDC itself constitutes an admission of the practice.
6.144  Brazil believes that the circumstances of this case make this rule all the more applicable.
Brazil states that when questioned by the Panel regarding its statements that “‘EDC does not use any
loan guarantees to supplement its financing activities,’” Canada defended itself by stating that it doesnot consider EDC loan guarantees to supplement  EDC’s other financing activities (para. 6.99).  In
light of Canada’s tendency, in Brazil’s view, to employ semantics to reveal less than the full and
complete truth about EDC’s operations, Brazil believes that the Panel should find the omission of a
sworn statement regarding EDC’s issuance of residual value guarantees to constitute an admission of
the practice.  Brazil states that it stands by its claim, therefore, that EDC has issued a residual loanguarantee on one or more occasions.
                                                     
276 Milbank, Tweed, Hadley and McCloy, Re Residual Value Guarantees , 17 November 1998 (Exh.
CDN-59); also, H. Ruda, Asset-Based Financing: A Transactional Guide , Vol. 4 (New York: Matthew Bender,
1998) at 38-20 to 38-21 (Exh. CDN-60).
277 Officer’s Certificate, CRJCI, 3 December 1998 (Exh. CDN-58).
278 Officer’s Certificate, CRJCI, 3 December 1998 (Exh. CDN-58).
279 Officer’s Certificate, Exinvest, 10 December 1998 (Exh. CDN-93)WT/DS70/R
Page 93
6. Canada Account
(a) Arguments of Brazil
6.145  Brazil asserts that the operations of the Canada Account are marked by an extreme degree of
secrecy.  Brazil states that EDC’s 1996 and 1997 Annual Reports omit any meaningful description of
the Canada Account, and that the two most recent Canada Account reports have not in fact been
tabled in the Canadian Parliament,280 and quotes EDC’s 1995 Annual Report as follows regarding the
Canada Account:
Canada Account funds are used to support export transactions which the federal
government deems to be in the national interest but which, for reasons of size or risk,
the Export Development Corporation (EDC ) cannot support through regular export
credits.  Transactions are negotiated, executed and administered by EDC on behalf of
the government, and are accounted for separately on the books of the Department of
Foreign Affairs and International Trade (DFAIT).  These activities are known
collectively as the Canada Account.281
Therefore, according to Brazil, before a transaction can be supported by the Canada Account, it first
must be considered and rejected by the EDC:  “The Canada Account provides the Government of
Canada with the authority and means to support transactions which, on the basis of prudent risk
management as defined by the Board of Directors of EDC, cannot be supported by the [Export
Development] Corporation.”282  Brazil asserts that the transaction is then referred to the Minister of
International Trade who, together with the Minist er of Finance, may approve transactions up to
Can$50 million,283 contingent upon a finding by the Ministers that the transaction is in the national
interest.  Brazil argues that among the grounds for finding a transaction to be in the national interest is
the “’importance of the transaction to the exporter ‘”284.   Brazil cites the EDC as indicating that
Canada Account financing may be extended at below-market or concessional rates.285
6.146  Brazil indicates that there are no publicly-available statements of the level of funding for
regional aircraft development and sales provided under the auspices of the Canada Account, and notes
that during consultations, Canada stated that details concerning all Canada Account transactions were
confidential, and refused to disclose any details of the operations of the Canada Account.
6.147  Brazil submits that in response to a March 1996 inquiry from a Member of Parliament
concerning assistance provided during the prior 15 years to the Canadian aerospace sector, EDC,which administers the Canada Account, stated th at during that period, Bombardier received
Can$450 million and US$61.172 million, while de Havilland received Can$131.04 million and
US$279.656 million for loans and US$14.95 million for loan guarantees,
286 that US$11.0 million was
provided for a single project for Canadair, and that a loan to a foreign buyer in the amount of
US$14.2 million was provided in support of a joint sale by Bombardier and Canadair.287  Brazil notes
                                                     
280 EDC’s Summary Reports to Treasury Board on Canada Account Operations for the periods 1994-
95, 1993-94 and 1992-93, respectively, Exhs. BRA-24, 25 and 26.
281 EDC 1995 Annual Report, “Canada Account Profile” (Exh. BRA-27).
282 Summary of the Report to Treasury Board on Canada Account Operations for the Fiscal Year 1994-
1995 by the Export Development Corporation, p. 1 (Exh. BRA-24).
283 EDC 1995 Annual Report, “Canada Account Profile” (Exh. BRA-27).  Larger transactions must be
approved by the Cabinet.
284 Id. (emphasis added).
285 Id.  See also  Summary of the Report to Treasury Board on Canada Account Operations for the
Fiscal Year 1994-1995 by the Export Development Corporation, p. 3 (Exh. BRA-24).
286 EDC Response to Inquiry of Ministry, Question No. Q-30 by Mr. Schmidt, dated 19 March 1996
(Exh. BRA-28).
287 Id.WT/DS70/R
Page 94
that the spreadsheets attached to the official response appear to include only those benefits granted
through 1991.288
6.148  According to Brazil, the official response ma kes clear that the amounts listed represent only
those transactions for which press releases were issued, and do not include transactions which were
not the subject of press releases, as such information is considered commercially confidential.289
Brazil argues that because EDC administers the Ca nada Account, it is possible that these amounts
include Canada Account transactions, and that without further disclosure from Canada, the Panel
should so presume, and should presume as well that the funding is extended on concessional terms.
6.149  Brazil maintains that the major difference between the EDC and the Canada Account is that
projects financed through the Canada Account do not even meet EDC’s criteria because of extremely
high risk, and therefore require ministerial approval.  One exception according to Brazil is that the
Canada Account has not been used for equity infusions to support exports of civilian aircraft, but
instead has supported exports of civilian aircraft over the years with millions of dollars in grants, low-
interest loans, interest-free loans, loan guarantees  and similar direct or potentially-direct transfers of
funds from the Canadian government.  For Brazil,  the Canada Account, unlike the EDC, does not
even pretend to be a “self-supporting” operation, but is a direct charge to the books of the Department
of Foreign Affairs and International Trade.290
6.150  Brazil asserts that like the EDC, the Canada Account exists for one purpose only:  to support
exports -- risky exports, recalling the EDC President’s statement that “’Canada Account funds are
used to support export transactions which the federal government deems to be in the national interestbut which, for reasons of size or risk, the Ex port Development Corporation (EDC) cannot support
through regular export credits.‘”
291  According to Brazil, the Canada Account not only “’absorb[s] the
risk on behalf of Canadian exporters beyond what is possible by other financial intermediaries,‘”292 it
absorbs risk beyond what is possible from the EDC, and is an integral, vital part of Canada’s effort to
satisfy “’the seemingly endless appetite of Canadian exporters for financial support.‘”293  B r a z i l
claims that as an alternative to EDC and the financier of last resort for export transactions, the Canada
Account grants funds contingent in law or in fact upon export performance, and is therefore
prohibited by Article 3 of the Agreement.  Brazil, in response to a Panel question, states that its claim
regarding Canada Account is that Canada Account per se  is de jure contingent on export, and that
Brazil also challenges the Canada Account as applied.
6.151  Brazil argues that Canada does not challenge its assertion that Canada Account assistance is
contingent on export, within the meaning of Articl e 3 of the SCM Agreement, and that Canada could
not do so, in light of the above language of the  EDC’s 1995 Annual Report.
6.152  Brazil maintains that the grants, interest-free lo ans, low-interest loans, guarantees and other
give-aways and support supplied through the Canada Account confer a benefit on the exporters ofcivilian aircraft in Canada by artificially facilitating their sale.  For Brazil, in the absence of subsidies,
high-risk buyers would pay higher interest rate s and would be required to make higher down-
payments.  According to Brazil, the Canada Account eliminates these requirements, to the benefit of
civilian aircraft exporters, and therefore is a subsidy and confers a benefit within the meaning of
Article 1.1 of the SCM Agreement.
                                                     
288 Id.
289 Id.
290 EDC 1995 Annual Report, “Canada Account Profile” (Exh. BRA- 27).
291 Id.
292 Message at 2 (Exh. BRA- 7).
293 Id. at 4.WT/DS70/R
Page 95
6.153  Brazil also argues that the most recent WTO Trade Policy Review of Canada reports that
export financing through the Canada Account soared from $100 million in 1996 to $1.6 billion  in
1997, an increase of 1600 per cent  in a single year.
6.154  According to Brazil, EDC’s 1995 Annual Report  states that a portion of Canada Account
financing is extended on what it refers to as non-concessional terms, while the remainder is extended
at admittedly below-market or concessional rates.  Brazil notes that a nominally non-concessional rate
would amount to a concessional rate if extended to a borrower with a poor credit rating, i.e., that
whether a rate is or is not concessional depends in large part upon the risk associated with a particularborrower.  Brazil asserts that the Canada Account funds the riskiest of borrowers.
6.155  Brazil argues that from the perspective of the recipient, financing extended at rates that are
concessional by definition constitutes a clear “benefit” to that recipient within the meaning of
Article 1.1.  For Brazil, support at concessional rates confers a benefit on the exporters of Canadian
regional aircraft by artificially facilitating their sales.
6.156  Brazil submits a press article
294 which quotes Bombardier’s executive vice-president as
stating that Bombardier has used the Canada Accoun t for some transactions, under terms of financing
which he describes  as “’ close  to commercial‘” (emphasis added by Brazil).   Brazil requests the Panel
to ask Canada, in light of this statement, to provide the Panel and Brazil with all of the details
regarding all of the support given to the regional aircraft industry in Canada through the Canada
Account.
6.157  Brazil argues that Canada has refused to reveal the existence, much less the terms, of any
support from the Canada Account to the Canadian regional aircraft industry or its customers, while
Bombardier has acknowledged using the Canada Account for some transactions on “close to
commercial”295 terms.  Brazil states that it utilized the services of an expert Canadian economic
consulting firm and of a highly-reputable Canadian law firm to obtain information regarding the
Canada Account.  Brazil asserts that it has produced all the evidence about Canada Account support tothe Canadian regional aircraft industry it could locate from public sources, which evidence in Brazil’s
opinion establishes that the Canada Account has been used to support the sale of Canadian regional
aircraft on non-commercial terms.  For Brazil, Canada is obligated as a legal matter under the rule of
collaboration recognized in Argentina – Measures Affecting Imports of Footwear, Textiles, Apparel
and Other Items , “to provide the tribunal with relevant documents which are in its sole possession”.
Brazil argues that Canada has refused to comply with this obligation, and submits that the Panel
accordingly should adopt inferences adverse to Canada with regard to the Canada Account.
6.158  Brazil further submits that Canada has suggested an appeal to item (k) of Annex I to the SCM
Agreement, which Canada contends exempts Canada Account financing and loan guarantees from the
prohibition in Article 3 of the Agreement (para. 6.161).  According to Brazil, Canada bears the burdenof proving its entitlement to this exemption, and has not done so.
(b) Arguments of Canada
6.159  Canada denies Brazil’s allegations, maintaining that Canada Account operations are not
inconsistent with Article 3.  Canada characterizes “Canada Account” operations as financing and loan
guarantee activities undertaken by the EDC on the accounts of the Government of Canada; that is, any
obligations under the Canada Account are funded by the Government of Canada. The Canada
Account is therefore not a pool of money used to subsidise export sales, Canada argues.
                                                     
294 “Ottawa slams Brazil’s Bombardier claims,” The Globe and Mail, 23 November 1998 (Exh.
BRA-87).
295 Id.WT/DS70/R
Page 96
6.160  Canada submits that the EDC has been, throughout its history, self-sufficient and operates on
the basis of prudent risk management, and that as a result it would not, on that basis, accept all
requests for financing or loan guarantees.  According to Canada, among the factors that woulddissuade the EDC from extending financing or guar antees on its own account are that the transaction
could:
(a) exceed the EDC’s exposure guidelines for a particular country  (that is, the maximum
amount of business the EDC has decided it can prudently undertake in a specific
market, rather than the riskiness of the venture itself);
(b) involve countries where the EDC is “off-cover” (markets where, for reasons of
commercial or political risk, EDC is unwilling to support Canadian export business);
(c) involve an amount or a term in excess of that which the EDC would normally
undertake for a single borrower or transaction; or
(d) require below-market financing to match subsidised foreign financing.
296
6.161  Canada states that in exceptional circumstances the EDC may provide financing or loan
guarantees under the Canada Account, and that requests that meet the EDC’s basic objectives areauthorised by Canada’s Minister for International Trade with the concurrence of the Minister of
Finance after taking into consideration the following:
(a) EDC’s usual criteria, such as the number and quality of other financial parties
involved, country risk considerations, and legal and regulatory structures;
(b) the Government’s general willingness to consider the country risk and/or the
creditworthiness of non-sovereign borrowers;
(c) an assessment of the economic costs and benefits to Canada, including the
employment generated by the transaction in question;
(d) the importance of the transaction to the exporter;
(e) foreign policy implications, including Canada’s bilateral relationship with the country
of the purchaser; and
(f) the importance of the purchasing market to Canada.
297
6.162  According to Canada, Canada Account financing and loan guarantees for exports committed
since the entry into force of the SCM Agreement have been consistent with the interest rate provisions
of the OECD Consensus, as required by Item (k) of Annex I, and such financing and loan guarantees
are therefore not prohibited, as provided in footnote 5 to Article 3.  In response to a Panel question,
Canada indicates that it is not invoking the second paragraph of item (k) as a positive defense to any
of the claims made by Brazil, in view of its position that Brazil has not made out a prima facie  case.
Canada argues that in the context of government credit, a subsidy exists where: first, there is a net
charge to the treasury of the Member providing th e loan (for example, where a government provides
credit at rates below those at which it borrows); and second, there is an advantage above and beyond
the market (for example, where a government lends at rates below the market).  Therefore, according
to Canada, to make out a case on Article 1 that Canada Account constitutes a subsidy, Brazil, as the
                                                     
296 Exh. BRA-27.
297 Id..WT/DS70/R
Page 97
complainant, must establish a prima facie  case on both elements of the test of Article 1.  In Canada’s
view, Brazil has not done so.
6.163  Canada asserts that Brazil relies on two pieces of evidence in support of its allegation that the
Canada Account is a subsidy, and that Brazil invites the Panel to presume  that a subsidy exists
because of an alleged “blanket of confidentiality” or a “veil of secrecy” that surrounds the Canada
Account.  For Canada, this evidence does not stand for the proposition in support of which it is
adduced, and does not stand up to closer scrutiny.
6.164  Canada objects to the conclusion that Brazil dr aws a statement in the EDC’s Annual Report --
that Canada Account funds are “’used to support export transactions which … for reasons of size or
risk, the … EDC cannot support through regular export credits‘” -- that the Canada Account provides
subsidies.   According to Canada, the EDC may determine not to engage in a given financing
transaction on the basis of prudent portfolio  management.  A transaction may be rejected by the EDC
because further exposure to a particular country or credit is judged not to be prudent for the
corporation , given its existing portfolio.  At the same time, the EDC under the Canada Account may
not have the same exposure to the country or credit in question, and if the transaction is deemed bythe Canadian Government to be in the national interest, such transaction may be considered under the
Canada Account.  Canada states that like the corporate account, the Canada Account is managed in
accordance with prudent commercial risk practices, and therefore, the fact that the EDC under the
Canada Account may advance credit where the EDC, for the reasons of portfolio management, would
not do so under its corporate account, does not support the proposition that the Canada Accountimposes a net charge against the treasury of Canada or that it provides an advantage above and
beyond the market.
6.165  In response to Brazil’s arguments on the alleged “non-transparency” of the Canada Account
and Brazil’s statement that an expert Canadian economic consulting firm and highly reputable
Canadian law firm have produced all the evidence about Canada Account they could find from publicsources, Canada provided a copy of the Summar y of the Report to the Treasury Board on EDC’s
Canada Account Operations for the Fiscal Ye ar 1995-96 that was posted on EDC’s website.
298
Canada acknowledges that, as argued by Brazil (para. 6.153) Canada Account loans may be provided
on either concessional (that is, below market) or non-concessional (that is, commercial) terms.
Canada notes that the Canada Account report299 contains two tables – one detailing concessional
loans, and the other non-concessional loans.  According to Canada, the “concessionary” financing is
part of Canada’s Official Development Aid, and is provided in accordance with the Helsinki tied-aid
rules of the OECD Consensus.  Canada maintain s that since 1995, tied-aid has not been used in
respect of any country other than China, and has not been used in respect of civil aircraft, which in
any event is prohibited under the OECD Consensus.  Since this concessionary financing is not used in
respect of civil aircraft, it is Canada’s view that it falls outside the Panel’s jurisdiction.
6.166  Regarding the newspaper quote from Bombardier that Canada Account financing is at “close
to commercial rates” (para. 6.155), Canada assert s that the comment was made in reference to the
Commercial Interest Reference Rates established by the OECD Consensus.300 Canada notes its
argument that Canada Account transactions are cons istent with the interest rates provisions of the
OECD Consensus.
                                                     
298 Summary of the Report to the Treasury Board on EDC’s Canada Account Operations for the Fiscal
Year 1995-96, EDC online: homepage <http://www.edc.ca/edcweb/about/summary.html > (date accessed:  10
December 1998). (Exh. CDN-92)
299 Exh. CDN-92, pp. 8-9
300 Letter to whom it may concern from Dr. Yvan Allaire, dated 27 November 1998. (Exh. CDN-64);
Arrangement on Guidelines for Officially Supported Export Credits (OECD Consensus) TD/Consensus(97)70(Exh. CDN-3).WT/DS70/R
Page 98
6.167  Canada submits that according to the OECD Consensus, the Commercial Interest Reference
Rates “represent commercial lending interest rates in the domestic market of the currency
concerned.”301  These commercial reference rates are, therefore, by definition, “’close to commercial
rates‘”, and indeed , may be above or below the market for a particular credit, Canada states.
Accordingly, in Canada’s view, Brazil’s refere nce to this comment does not amount to proof that
Canada Account financing confers an advantage above and beyond the market.
6.168  More important for Canada, the quoted statement says nothing at all  about the “’net cost‘”
element of the test in Article 1, in Canada’s view because the relevant Commercial Interest ReferenceRate for the currency in which the Canada Account transactions for civil aircraft have been done (the
commercial reference rate for the US dollar is equivalent to the yield on US Treasuries plus 100 basis
points) was well above the cost of funds for the Government of Canada in both instances.
6.169  According to Canada, Brazil therefore has not raised a prima facie case with respect to either
of the two prongs of the test for establishing that government export credit is a subsidy.
6.170  Canada further submits that since Brazil has not made a prima facie  case that Canada Account
lending constitutes an export subsidy, Canada is not invoking the second paragraph of Item (k) ofAnnex I of the SCM Agreement as a defence to any of the claims made by Brazil in respect of Canada
Account financing.
6.171  Canada submits that in the regional aircraft sector, Canada Account plays a minor role in
financing of exports.  According to Canada, out of a total of 281 aircraft financed and delivered in the
period 1 January 1995 to 29 October 1998,
302 Canada Account was used to finance only six deliveries,
all of them Dash 8-300’s303 split equally between LIAT of Antigua and South African Express of
South Africa.304
6.172  In response to a Panel request for the details of these six deliveries, including terms,
conditions and copies of the relevant finance arrangements, Canada replies that the information
requested by the Panel is sensitive business confidential information, and that Canada’s desire topresent to the Panel such information as may help it arrive at a decision must be balanced against the
commercial interests and legal rights of private parties not Party to this dispute.
(c) Comments of Brazil
6.173  Regarding Canada’s response to the Panel’s request for information on Canada Account
financing of the six deliveries of regional jets, Brazil argues that Canada has refused to provide thedocuments requested by the Panel.  As a result, the Panel should adopt adverse inferences, presuming
that the information withheld is prejudicial to Canada’s position (paras. 4.146-4.151).  Such treatment
is particularly compelling here, where Canada has acknowledged that the Canada Account has been
used to finance particular regional aircraft transactions (para. 6.170), and where Bombardier has
acknowledged that it has used Canada Account financing under terms described as “’close tocommercial.’”
305
                                                     
301 OECD Consensus, at 12 (Exh. CDN-3).
302 Chart showing Canadian Regional Aircraft Exports - Financed and Delivered: 1 January 1995 –
29 October 1998 (Exh. CDN-61).
303 Chart showing Canadian Regional Jet Exports - Financed and Delivered: 1 January 1995 –
29 October 1998 (Exh. CDN-62).
304 Chart showing Canadian Regional Turboprop Exports - Financed and Delivered: 1 January 1995 –
29 October 1998 (Exh. CDN-63).  See also, table provided in answer to Question 17 of the Panel.
305 Exh. BRA-87.WT/DS70/R
Page 99
B. TECHNOLOGY PARTNERSHIPS CANADA (“TPC”) AND PREDECESSOR DEFENCE INDUSTRY
PRODUCTIVITY PROGRAMME (“DIPP”)
1. General arguments of the parties
(a) Arguments of Brazil
6.174  Brazil states that in 1996, Technology Partnershi ps Canada (“TPC”) “’was created to address
the need by established companies in specific industrial segments to ensure that near-market products
-- those with a high potential to stimulate economic growth and job creation -- actually reach the
marketplace.‘”306 According to Brazil, sectors eligible for assistance from TPC are “’environmental
technologies, enabling technologies, and aerospace and defence industries‘”307, although Brazil
maintains that in reality TPC represents a captive financing opportunity for the aerospace industry
generally and the regional aircraft industry specifically.
6.175  Brazil indicates that TPC’s predecessor was the Defense Industry Productivity Programme
(“DIPP”), under which subsidies to the Canadian aerospace sector totaled approximately
Can$2 billion.308  Brazil quotes Canadian Industry Minister John Manley as emphasizing that despite
the reference to “Defence,” “’virtually all funding under the DIPP fund has been earmarked forcivilian applications,‘”
309  and argues that DIPP in fact “’had been used primarily by aerospace
companies . . .‘”310  Brazil argues that in launching TPC, the Canadian government created a
programme which “’is really nothing more than a redesigned and renamed Defence Industry
Productivity Programme,‘”311 noting that Industry Canada announced that “’no new commitments are
being made under DIPP,‘” but that “’[a]ny future funding will be considered under the auspices of thenew programme, Technology Partnerships Canada,‘”
312 and quoting TPC’s annual report that TPC
funding “’is intended to cover outstanding commitments under the Defence Industry Productivity
Programme (DIPP) . . .‘”313
6.176  According to Brazil, TPC explicitly targets “’conditionally repayable investments‘”314 to
projects that result in a high technology product for sale in “’ export markets .‘”315 For Brazil, this
explains the programme’s extensive support for the Canadian aerospace industry, which according to
Brazil is described by TPC itself as “’highly export oriented.‘”316  Brazil asserts that the
overwhelming export orientation of the Canadian regi onal aircraft industry has been confirmed in the
                                                     
306 Industry Canada website, “Technology Partnerships Canada” (emphasis added) (Exh. BRA-29).
307 Industry Canada website, “Technology Partnerships Canada -- How It Works” (Exh. BRA-30).
308 Canadian Taxpayers Federation study, “Corporate Welfare - A Report on Sixteen Years of Industry
Canada Financial Assistance,” 16 April 1998, at Tab 4 (Exh. BRA-31).  This statement of total DIPP funding tothe aerospace sector represents aggregate DIPP funds releas ed to four Canadian companies, i.e., Bombardier, de
Havilland, Pratt & Whitney Canada Inc., and CAE Electronics Ltd.
309 Hansard, House of Commons Debates, 14 March 1996, Oral Question Period, at 709 (Exh.
BRA-32).
310 “Superfund to boost science, technology:  Federal budget to unveil $200-million pot for
development of new products for export,” The Globe and Mail, 5 March 1996 (Exh. BRA-33).
311 Id.
312 Industry Canada Response to Inquiry of Minister, Question No Q-30 by Mr. Schmidt, dated
19 March 1996 (Exh. BRA-34).
313 TPC Annual Report 1996-1997, p. 20 (Exh. BRA-5).
314 Id. at pgs. 5, 15.
315 Industry Canada website, “Technology Partnerships Canada -- How It Works” (emphasis added)
(Exh. BRA- 30).  See also  “Superfund to boost science, technology:  Federal budget to unveil $200-million pot
for development of new products for export,” The Globe and Mail, March 5, 1996 (TPC contributions are to
cover “the development costs of new products, particularly those destined for export.”  (Exh. BRA-33).
316 TPC Annual Report 1996-1997, pgs. 5, 15 (Exh. BRA-5).  TPC’s Advisory Board, which includes
among its members Bombardier Aerospace Group’s President and Chief Operating Officer, maintains thissupport network by “provid[ing] expert advice on the vision and goals of TPC’s programme.”  Id. at 23, 26.WT/DS70/R
Page 100
Clark Report, a study submitted separately by Brazil, which concludes that all CRJ sales, and all Dash
8 sales since 1992, have been for export.
6.177  In answer to a question from the Panel concerning the coverage of its claim regarding TPC,
Brazil indicates that it is challenging all TPC and DIPP funding extended to the Canadian regional
aircraft industry after 1 January 1995.
(b) Arguments of Canada
6.178  Canada argues Brazil’s case against Technology Partnerships (TPC) appears to be based on
an “export propensity” and “intent” interpretation of Article 3.  Brazil argues that TPC contributionsare subsidies that are “contingent, in law or in fact, on export performance” because the Canadian
aerospace industry is an “export-oriented” sector, because exports in the sector are growing at 10
percent a year and because the “building of expo rts” was, along with job creation, one of the
objectives of TPC.
6.179  Canada asserts that Brazil’s arguments are based on an incorrect reading of the law and faulty
methodology in analyzing the evidence.  Canada argues that TPC is not contingent, in law or in fact,
upon export performance.
2. Subsidy
(a) Arguments of Brazil
6.180  Brazil asserts that TPC transfers funds in the form of grants and loans on concessional terms
to specified industries, including the civilian aircraft industry, specifically on a “’royalty basis,‘”
which for Brazil means that repayment will only occur if the underlying project achieves a certaindegree of success as described by Brazil.  In Brazil’s view, as with any government-provided low (or
interest-free) loan or grant, these funds confer an obvious benefit on the recipient; namely, the
recipient has no down-side risk-- if the project is unsuccessful, TPC loans need not be repaid.  Brazil
argues that TPC is not compensated for the risk that it will not be repaid, or for the extended
repayment period during which neither principal nor interest on TPC contributions to the Canadianregional aircraft industry are due.  Brazil further argues that even if the Canadian government
recovers its investment – which, according to Brazil, recent audits show that it does not do for most
conditionally-repayable assistance granted to Bombardier, de Havilland and Pratt & Whitney -- its
anticipated rate of return is approximately 1.76 per cent for the CRJ loan from TPC, and 3.02 and 3.31
per cent for the Dash 8 loans from TPC, figures well below that expected by a “’reasonable marketinvestor’” (paras. 6.188-6.192)
317.
6.181  In response to a question from the Panel, Brazil stated its view that a loan that is
conditionally-repayable on a royalty basis constitutes a subsidy under Article 1.1 of the SCM
Agreement where, if the loan is repaid, the rate of return is such that the lender is not compensated for
either the risk that it would have received no repayment or the extended repayment period duringwhich neither principal nor interest are due.  If co mpensated for these two factors, such a loan could
be considered commercial.  If the lender is not so compensated, the recipient is realizing a benefit by
receiving access to funds at a rate not available on the market.  For Brazil, TPC is not compensated
for that risk, but rather takes an equity investor’s  risk in exchange for a secured creditor’s rate of
return.
6.182  Brazil argues that on 21 October 1996, TPC announced that it was providing a
Can$87 million loan to assist the development of Bo mbardier’s 70-seat Canadair Regional Jet project,
                                                     
317 See Tables in Exhibit B of Finan Report.WT/DS70/R
Page 101
known as the CRJ-700.318  According to Brazil, the loan is conditionally repayable on a “royalty
basis,” which for Brazil means that the loan will be repaid only if the project generates profits.319
Brazil asserts that Bombardier has as an historical matter failed to repay its conditionally-repayable
loans from the Government of Canada, citing an April, 1996 Industry Canada audit of conditionally-
repayable Canadian Government assistance to Bombardier which concluded that repayments
amounted to a mere five per cent  of funds received by the company.320
6.183  Brazil states that repayment, if any, of the TPC loan for the CRJ-700 project will therefore
begin only after Bombardier realizes profit on the project, which it is not projected to do until it hassold 250 of the CRJ-700s, the first of which is scheduled for delivery in 2000.
321  Furthermore, Brazil
argues, Bombardier CEO Laurent Beaudoin has estimat ed that the company must sell 400 of the CRJ-
700s to enable it to pay back the principal amount of the loan, without interest.322  Thus, according to
Brazil, any return  on TPC’s investment would only begin to accrue with the 401st plane sold, and
Brazil asserts that industry estimates predict that only approximately 25 of the CRJ-700s will be
produced annually.323  Brazil also submits an article which, it indicates, reflects “industry forecasts”
projecting that Bombardier will produce between 127 and 178 CRJs by 2005.324
6.184  Brazil asserts that assuming a “royalty rate” of Can$580,000 per aircraft,325 with 25 aircraft
sold annually, TPC’s expected rate of return on this loan is 1.76 per cent,326 a return which illustrates
that TPC “investments” are nothing more than outright gifts.  For Brazil, as a result of this rate of
return, the Government of Canada on an annual basis is foregoing an extremely conservative
minimum interest amount of Can$4,054,200 (based on the difference between the 1.76 per centexpected rate of return and an extremely conservative benchmark rate of 6.42 per cent for the 1997
Canadian 10-year bond).
327  Brazil states that assuming a more realistic benchmark rate -- the rate a
commercial investor would expect to achieve for such an investment, i.e., 16.91 to 21.92 per cent328 --
Canada is foregoing between Can$13,180,500329 and Can$17,539,200330 annually on this TPC loan.
6.185  Brazil emphasizes that these figures do not account for the fact that repayment of this loan
will not even begin until the year 2011 , after Bombardier has sold 250 of the CRJ-700s.331  I n  t h e
meantime, according to Brazil, Canada is foregoing altogether a return on its TPC “investments” in
the CRJ-700, resulting in a delay, and therefore incr eased risk, that would generally translate into a
demand for a higher rate of return once such return is actually paid.  Brazil asserts that with this
considerable delay, no reasonable market investor could be expected to accept TPC’s expected rate ofreturn of 1.76 per cent, noted above.  Brazil argues that assuming the benchmark rate a commercial
                                                     
318 Industry Canada News Release, October 21, 1996 (Exh. BRA- 35).
319 Id.  See also  Industry Canada definition of “conditionally repayable contribution” (Exh. BRA- 36).
320 Industry Canada audit report, included in  Canadian Taxpayers Federation study, “Corporate Welfare
Volume Two,” 4 June 1998, at Tab 6, pgs. 57-61 (Exh. BRA- 37).  Although the Canadian government, to
preserve confidential information, heavily edited the report of the Bombardier audit before releasing it to theCanadian Taxpayers Federation, Bombardier’s identity and its repayment level were not expunged.
321 See Exhibit A, pgs. A.3-A.4 of Finan Report.
322 Id.
323 Id.
324 Exh. BRA-92
325 Calculated as Can$87 million/(400-250), reflecting the fact that repayment will not begin until 250
jets have been sold, and will be paid in full when 400 je ts have been sold.  Exhibit A, p. A.4 of Finan Report.
326 Id.
327 Using the 1997 rate of 6.42 per cent for Canada’s “10 Year and Over Federal Government Bond
Yield to Maturity.”  (Exh. BRA- 38).
328 Exhibit B, Table B.6 of Finan Report.
329 ($87,000,000)(.1691-.0176).
330 ($87,000,000)(.2192-.0176).
331 Exhibit B, Table B.6 and Exhibit A, pgs. A.3-A.4 of Finan Report.WT/DS70/R
Page 102
borrower would expect to pay for such an investment, i.e., 16.91 to 21.92 per cent,332 the present value
in 1998 of the benefit received by Bombardier from this TPC “investment” is between Can$94 million
and Can$211 million.333
6.186  In response to a question from the Panel concerning why Brazil considers that TPC will only
be repaid if the CRJ-700 project is profitable, Brazil argued that under the repayment plan described
above, before it has to begin repaying the principal amount of the contribution, Bombardier must sell
250 planes, which, at approximately US $23 million334 per plane, would gross Bombardier
$5.75 billion.  To begin to pay TPC a return on the contribution, Bombardier must sell 400 planes,gross income on which would reach $9.2 billion.  Bombardier has stated that developing the CRJ-700
cost it $645 million.
335  The conclusion to draw from this inform ation, according to Brazil, is that TPC
will not even recover the principal amount of its contribution, let alone realize any return, until the
CRJ-700 has achieved for Bombardier a very significant degree of success which one can reasonably
deem “profitable.”
6.187  Brazil states that on 17 December 1996, TPC announced that it was providing a further
Can$57 million to Bombardier’s de Havilland subsidiary to develop a 70-seat “stretch” version of itsDash 8 turbo-prop airplane.
336 According to Brazil, this loan, too, is repayable only when and if the
venture is ever profitable.337  Using calculations similar to those used with regard to the $87 million
loan, Brazil estimates that TPC's expected rate of return (if any) is 3.02 per cent, which Brazil states is
well below that which would be expected by a market investor.338  Moreover, citing to an Industry
Canada list, Brazil asserts that de Havilland has a rather poor repayment history having  repaid a mereone per cent  of the Can$424 million in DIPP funds provided to the company.
339  Assuming the
asserted benchmark rate a commercial borrower would expect to pay for such an investment, i.e.,
16.91 to 21.92 per cent,340 Brazil estimates that the present value in 1998 of the benefit received by de
Havilland from this TPC “investment” is between Can$43 million and Can$77 million.341
6.188  Brazil further argues that in January 1997, TPC announced a total investment of
Can$147 million in Pratt & Whitney Canada, Can$100 million of which was targeted for work on the
firm’s 6,500 SHP PW150 turboprop engine, used in Bombardier’s Dash 8 aircraft, all of which
according to Brazil are destined for export.342  Brazil characterizes Industry Minister Manley as
emphasizing, in granting this funding, the crucial role played in the Canadian economy by export-
oriented sectors such as the Canadian aerospace industry, quoting Minister Manley as stating that“[a]erospace is a crucial sector for Canada’s economy, with exports  growing at 10 per cent per
year.”
343  Using calculations similar to those discussed with regard to the $87 million and $57 million
loans, Brazil estimates TPC's expected rate of return at 3.31 per cent, which according to Brazil is
                                                     
332 Exhibit B, Table B.6 of Finan Report.
333 id.
334 "Orders soar for Canadair jet", The Globe and Mail, February 20, 1997 (Exh. Bra-90).
335  Id.  See also  “Le Quitte où double de Bombardier,” Commerce , December 12, 1996, pg. 3
(Exh. BRA-92).
336 Industry Canada, News Release, 17 December 1996 (Exh. BRA- 4).
337 Id.
338 Exhibit A, p. A.5 and Exhibit B, Table B.7 of Finan Report.
339 “Billions in Federal loans unpaid:  Biggest aerospace companies return as little as 2 per cent of
money advanced for technology development,” The Globe and Mail, 13 June 1998 (Exh. BRA- 39).
340 Exhibit B, Table B.6 of Finan Report.
341 Exhibit B, Table B.7 of Finan Report.
342 See Clark Report.
343 Industry Canada, News Release, 10 January 1997 (Exh. BRA- 40).WT/DS70/R
Page 103
well below that which would be expected by a market investor.344  A s  w i t h  B o m b a r d i e r  a n d  d e
Havilland, Brazil states, Pratt & Whitney’s repayment history is poor, indicating that of nearly
Can$900 million in “direct cash subsidies” from the Canadian government since 1980, less thanCan$100 million has been repaid.
345  Assuming the benchmark rate which Brazil argues a commercial
borrower would expect to pay for such an investment, i.e., 16.91 to 21.92 per cent,346 Brazil estimates
that the present value in 1998 of the benefit received by Pratt & Whitney from this TPC “investment”is between Can$97 million and Can$182 million.
347
6.189  In response to a Panel question as to the rate of return that a “reasonable market investor” in
the civil aviation sector would expect, Brazil submits that its argument in the context of EDC
regarding risk and return (para. 6.11) frames the issue clearly: investors in speculative grade bonds
expect a return greater than 17 per cent.
6.190  For Brazil, another relevant benchmark is the particular return expected by Bombardier on its
own investments.  In Bombardier’s case, Brazil states, the required pre-tax rate of return is
Bombardier’s weighted average pre-tax cost of capital, which Bombardier expects to achieve across
all risk classes of its investments; that is to say, this rate represents the average return onBombardier’s investment in new aircraft development, capital equipment and structures, and other
investments.  Brazil states that Bombardier’s after-tax cost of capital is 11 per cent.
348  Applying a
35 per cent effective tax rate, Bombardier’s pre-tax cost of capital is determined to be 16.9 per cent.
According to Brazil, if Bombardier’s investments fa il to achieve this rate of return, then Bombardier
fails to provide a return to its debt and equity holde rs sufficient to compensate them for the risk they
bear in investing in Bombardier.
6.191  According to Brazil, the required cost of capita l return for Bombardier is not constant across
all investments.  Certain investments are inherently more risky and, hence, should have a higher
expected return to compensate for the additional ri sk.  Development of a new airframe, such as the
CRJ-700, certainly falls into this riskier class of investment.
6.192  Brazil states that economic studies report higher costs of capital for these types of research
and development projects.  For example, a Federal Reserve Bank of New York study of the cost of
capital in the United States and other countries found that the required cost of capital return for R&D
projects averaged 19.2 per cent, while the required cost of capital return for equipment and machinery
with a physical life of 20 years yielded an average return of 10.6 per cent.349  Brazil notes that other
researchers have found R&D to have an even higher rate of return, in the range of 25 per cent to
35 per cent.350
6.193  Brazil states that based on this analysis, the Finan Report concluded that the benchmark rate a
commercial borrower would expect to pay for airf rame development expenses is between 16.91 per
cent, which is Bombardier’s pre-tax cost of capital, and 21.92 per cent, which includes a five per centrisk premium to compensate for the risk normally associated with R&D investment projects, as
discussed in the previous paragraph.
                                                     
344 Exhibit A, pgs. A.5-A.6 and Exhibit B, Table B.13 of Finan Report.
345 “As Bombardier takes off, Pratt descends:  Diverging fortunes raise questions about subsidies,” The
Globe and Mail, 19 October 1998 (Exh. BRA- 41).
346 Exhibit B, Table B.6 of Finan Report.
347 Exhibit B, Table B.13 of Finan Report
348 J.P. Morgan Securities report, “Bombardier,” 1 September 1998, pg. 10 (Exh. BRA- 76).
349 Federal Reserve Bank of New York, “Explaining International Differences in the Cost of Capital,”
Quarterly Review, Summer 1989, Table 2 (average for the years 1984 – 1988) (Exh. BRA-95).
350 See US Congressional Budget Office report on “Federal Investment in Intangible Assets”
(July 1991) (Exh. BRA-96).  See also  Edwin Mansfield, “Appropriating the Returns from Investment in R&D
Capital,” in K. Cool, D. Neven, and I. Walters (eds.), European Industrial Restructuring in the 1990s (1992)
(Exh. BRA-97).WT/DS70/R
Page 104
6.194  According to Brazil, other TPC “repayable investments” for the development of Canadian
regional aircraft, all of which are destined for export, have been recently announced, although without
enough detail to permit analysis of the precise rates of return to be expected by TPC.  In April 1997,Brazil states, TPC announced a Can$12.7 million “rep ayable investment” in Allied Signal Aerospace
Canada, a portion of which is targeted for development of the power management generating system
for the Dash 8-400.
351  Brazil also states that in March 1998, TPC announced a Can$9.9 million
“repayable investment” in Sextant Avionique Canada Inc., to be used for development of the avionics
system for the Dash 8-400 and the flight control system for the CRJ-700.352
6.195  Brazil asserts that the most recent WTO Trade Policy Review of Canada lists TPC as one of a
number of “’Selected federal subsidy  programmes.‘”  Brazil considers it significant that the Report
has identified TPC as a “’subsidy.‘”  Moreover, according to Brazil, the WTO identified the form of
subsidy offered by TPC as “’grants,‘” as opposed to certain other programmes identified as
“’repayable contributions‘” or “’conditionally-repayable‘” contributions.
(b) Arguments of Canada353
6.196  Canada confirms that there have been commitments, under the TPC programme, for
repayable contributions of $87 million to Bombardier for the development of the CRJ-700;
$57 million to de Havilland for the development of the Dash 8-400; $100 million to Pratt & Whitney
for the development of the PW150 turboprop engine; $12.7 million to Allied Signal Aerospace
Canada, a portion of which is for the development of the power management generating system; and
$9.9 million to Sextant Avionique Canada inc., for the development of avionics systems.  Canadastates that in every case, these amounts have not been completely disbursed to the recipients, but that
a contribution is disbursed in predetermined portions as milestones set out in the project’s work
programme are met.
6.197  Canada challenges Brazil’s description of the repayment obligations under the TPC.
354
According to Canada, royalty-based repayment is not tied to profits , but to sales : in the case of some
contributions, such as the contribution for the CRJ-700, the royalties are related to the sales of the
specific product  that are to be developed under the project; with respect to other projects, although the
contribution may be in respect of a specific product , royalties would be paid on the sales of a family
of products  that would be developed following the original project.  Canada notes as an example that
the contribution towards the Pratt and Whitney 150 engine, under which royalties are payable on thesales of the family  of engines that may be developed based on the original engine.  Finally, Canada
states, if it is a process  or a technology  that is being developed – such as one related to fuel efficiency
– then royalties would be due on the basis of the total sales of the recipient enterprise .  Thus, Canada
states, in no circumstance is profitability  a criterion of repayment.
6.198  Regarding Brazil’s reference to Canada’s recent WTO Trade Policy Review, Canada recalls
that this Trade Policy Review, dated 19 November 1998, was conducted pursuant to the Agreement
Establishing the Trade Policy Review Mechanism  (TPRM Agreement) contained in Annex 3 of the
WTO Agreement.  Section A(i) of the TPRM Agreement specifically provides that:
“… the review mechanism … is not … intended to serve as a basis for the
enforcement of specific obligations under the Agreements or for dispute settlement
procedures …”.
                                                     
351 Industry Canada, News Release, April 25, 1997 (Exh. BRA- 42).
352 Industry Canada, News Release, March 6, 1998 (Exh. BRA- 43).
353 See also comments of Canada and responses of Brazil on the Finan Report regarding TPC in
Section VI.F.
354 This paragraph responds to Question 18 of the Panel to Canada.WT/DS70/R
Page 105
6.199  Canada notes that the information contained in the report concerning Canada’s alleged
subsidy practices was obtained from Canada’s notification under Article 25 of the SCM Agreement.355
Article 25.7 specifically provides that:
“Members recognize that notification of a measure does not prejudge either its legal
status under GATT 1994 and this Agreement, the effects under this Agreement, or the
nature of the measure itself.”
6.200  For Canada, the Secretariat’s description of a Canadian programme in a TPR review therefore
has no relevance whatever for the purposes of dispute settlement.356  Canada further states that the
notification referenced by Brazil is Canada’s  Notification of the Technology Partnership Programme ,
and not Technology Partnerships Canada.  Canada states that according to the Notification (at
page 15), the objective of the Technology Partnership Programme is “to provide support to enable
Canadian small- and medium-sized enterprises to enter into partnerships with university laboratories
to develop university research to the point where it can be exploited by industry.”  Canada notes that
the TPR Review correctly describes Technology Partnerships Canada , the programme at issue in this
dispute, in its paragraph 117.
6.201  Canada contends that TPC contributions usually constitute a portion – on average less than
30 per cent – of  the eligible costs incurred by the recipient, that eligible costs are limited to research
and development expenses, and that TPC contributions may not be made for costs associated with
facilities or capital equipment.   Further, Canada argues, these contributions are repayable, generally
on a royalty basis tied to the market success of a project: the more successful a product, the higher itsreturns.  In that sense, according to Canada, TPC contributions are investments rather than loans: the
Government of Canada shares in the rewards of su ccessful projects.  Unlike debts, TPC returns are
not limited to a fixed amount.
6.202  In response to a Panel request for full details on the terms and conditions for the provision and
repayment of the funds provided by TPC for the five transactions identified (para. 6.195) Canadanotes that it has not put in a defence regarding whether these contributions are subsidies  within the
meaning of Article 1 of the SCM Agreement. Accordin gly, Canada indicates, to the extent that any
documents are produced by Canada in response to this question of the Panel, they are provided to
support Canada’s submissions that the contributions at issue are not “contingent on export
performance” within the meaning of Article 3 of the SCM Agreement.
6.203  With regard to the Panel’s request for “commercial borrowing rates” for debt of comparable
size, risk level and maturity, Canada submits that the relevant consideration for determining the rate
of return for the TPC contributions in question was the Government of Canada’s cost of funds, and
states that at the time these transactions were entered into, Canada’s long term bonds were yielding
approximately 6 to 7 per cent
357 According to Canada, TPC repayment terms are negotiated so that on
a net present value basis they are cost-revenue neutral or better.  Canada provides as business
confidential information in response to a Panel qu estion regarding whether it agreed with any of the
rate of return calculations of the Finan Report a calculation of TPC’s rate of return on this transaction,
and stated that this was clearly above Canada’s cost of funds of 6-7 per cent.
6.204  In response to a Panel request for full details and documentation on TPC contributions to
Bombardier, CAE Electronics and Pratt & Whitney listed in the 1996-97 Public Accounts of Canada,
Canada states that the figures in the Public Accounts detail disbursements actually made  in respect of
                                                     
355 WT/TPR/S/53, at 71.
356 Indeed, the description of TPC in the TPR itself is internally inconsistent: see WT/TPR/S/53.  The
description of TPC at page 69, para. 117 correctly describes TPC investments and repayment conditions.  Thereference to “Grants” in the Table on page 71 is to the Technology Partnerships Programme .
357 Exh. CDN-108WT/DS70/R
Page 106
existing commitments, and that information requested by the Panel concerning the TPC contributions
to Bombardier for the CRJ-700 was provided in Canada’s answer to the Panel’s question concerning
this funding.  With respect to the CAE Electronique contribution, Canada states that Brazil has madeno allegation and adduced no evidence in respect of this contribution, and that Canada does not
consider it appropriate to adduce evidence in response to an allegation that has not been made and a
case that has not been established.
(c) Comments of Brazil
6.205  Brazil observes that in response to a question from the Panel, Canada has provided documents
for only one of the five TPC grants challenged by Brazil, and that with regard to that grant, Canada
has wholly or selectively redacted any and all information which could be at all informative to the
Panel.  Brazil submits that the Panel should adop t adverse inferences, presuming that all information
withheld by Canada is inculpatory, and that each of the five TPC contributions to the Canadian
regional aircraft industry challenged by Brazil constitute export subsidies under Article 3 of the SCM
Agreement.  In this connection, Brazil argues that Canada has failed to provide documents
specifically requested by the Panel on the TPC co ntributions identified in the Public Accounts of
Canada (para. 6.203), and Brazil therefore requests the Panel to adopt adverse inferences regarding
these transactions.
6.206  In Brazil’s view, the Panel should presume, from Bombardier’s decision to permit disclosure
of information regarding the $87 million TPC grant for the development of the CRJ-700, that
permission to disclose information regarding the $57 million grant to its subsidiary, de Havilland, forthe development of the Dash 8-400 was withheld because such information would prove
incriminating.
6.207  Moreover, Brazil argues, Canada has selectively provided in BCI Tab 1 various pages -
largely redacted - from certain market assessments, pr esumably to show that the potential market for
the CRJ-700 is large enough to give some hope that TPC will one day recover its “’investment‘” inthe development of the aircraft.  Brazil notes Canada’s reply to a Panel question (para. 6.367) that
Brazil’s conclusions in the Finan Report concerning the market prospects of the CRJ-700 are “’unduly
pessimistic,‘” citing to what Brazil terms Canada’s selective and incomplete excerpts from the market
forecasts included in BCI Tab 1.   Brazil states that Canada has left out a critical portion of these
studies - projections regarding Bombardier’s production capacity for the CRJ-700 - which makeBrazil’s and the Finan Report’s conclusions regarding the near impossibility of Canada’s recovery of
its “investment” crystal clear, noting that Brazil submitted
358 a report of the Forecast International
study extracted in Canada’s BCI Tab 1, and indicating that that forecast concludes that Bombardier is
able to manufacture only 178 CRJ-700s over the next ten years, or by 2006.359  For Brazil, this is a
perfect illustration of why the Panel should adopt ad verse inferences, presuming that the information
withheld by Canada is prejudicial to its position.
6.208  Additionally Brazil states, the December 1997 and July 1998 programme updates and the
July 1998 programme forecast included in BCI Tab 1, along with the progress reports included in BCI
Tab 2, are redacted to such an extreme degree as to make them utterly worthless.   Brazil states that all
schedules and reports contained therein are redacted in their entirety, and that Canada’s claim
regarding whether destinations are listed in the order book redacted from the July 1998 programme
update, for example, is without any support, as the information which would permit the Panel to reachthis conclusion has been redacted.
                                                     
358 Exh. BRA-92
359 Another forecast cited in Exh. BRA-92, by the Teal Group, concludes Bombardier will manufacture
only 127 CRJ-700s by 2005.WT/DS70/R
Page 107
(i) TPC’s anticipated or expected return is below market
6.209  Brazil recalls the documentation it submitted to demonstrate that commercial lenders to
speculative borrowers (bonds rated CCC+ to C) as of the fourth quarter 1998 were requiring returns ofat least 17 per cent (para. 6.110), and its argument that development of a new airframe, such as the
CRJ-700, certainly falls into this risk class, and that investment therein therefore should yield a return
commensurate with this risk (paras. 6.188-6.192)  Brazil states that economic studies report higher
costs of capital for these types of research and development projects.  For example, a study by the
Federal Reserve Bank of New York concluded that the required cost of capital return for R&Dprojects averaged 19.2 per cent, while the required cost of capital return for equipment and machinery
with a physical life of 20 years yielded an average return of 10.6 per cent
360, and other researchers
have found R&D to have an even higher rate of return, in the range of 25 per cent to 35 per cent.361
As a result, Brazil argues, the Finan Report demonstrated that the benchmark rate a commercialborrower would expect to pay for airframe development expenses is between 16.91 per cent, which is
Bombardier’s pre-tax cost of capital, and 21.92 per cent, which includes a five per cent risk premium
to compensate for the risk normally associated with R&D investment projects.
6.210  Brazil argues that as a result of the structure of the TPC contribution, it is impossible for TPC
to achieve this rate of return, or any rate of retu rn even remotely compensating TPC for the substantial
risk undertaken in making this contribution:  firs t, if Bombardier were to deliver only 200 CRJ-700s,
for example, TPC’s return would be zero, and it w ould fail to even recover the principal amount of its
contribution; second, only if CRJ-700 deliveries meet the most optimistic of market forecasts - which,as discussed above (para. 6.206), have been misrepresented by Canada in its reply - does TPC’s return
reach the figure offered by Canada in its reply to question 33 as the maximum rate of return; third,
were Bombardier to sell these aircraft over a longer time horizon than ten years, TPC would fail to
earn the return heralded by Canada, which is, according to Canada, the maximum  TPC can earn;
fourth, while TPC could suffer a negative return, its return on the upside is capped, no matter whatBombardier’s actual success in the market is.
6.211  Therefore, Brazil submits, it is only under the most optimistic of forecasts that TPC gets back
both the principal amount of its contribution, and earns the maximum return permitted by the
contribution agreement concluded with Bombardier, and even this return fails to compensate TPC
adequately for the risk involved in its “investment.”
(ii) TPC’s expected return - “expected” at th e time the loan commitment was made - was
insufficient, even under Canada’s “cost of funds” test
6.212  According to Brazil, the risk inherent in TPC’s $87 million CRJ-700 grant is not with the
design or development stage of the project, noting Canada’s statements (para    ) that “’project risk
was considered manageable in light of Bombardier’s proven track record and because the technicalrisk was mitigated by the fact that this aircraft was a stretch version of an existing platform - the
CRJ50‘”, and that the “’market risk was also manageable.‘”
6.213  Brazil states that the risk inherent in TPC’s $87 million CRJ-700 grant is attributable to two
factors, the first of which (see para. 6.184) involves the lengthy delay before repayment of principal,
let alone interest, even begins.  According to Brazil, the documents provided by Canada in response to
                                                     
360 Federal Reserve Bank of New York, “Explaining International Differences in the Cost of Capital,”
Quarterly Review, Summer 1989, Table 2 (average for the years 1984 – 1988) (Exh. BRA-95).
361 See US Congressional Budget Office report on “Federal Investment in Intangible Assets”
(July 1991) (Exh. BRA-96).  See also  Edwin Mansfield, “Appropriating the Returns from Investment in R&D
Capital,” in K. Cool, D. Neven, and I. Walters (eds.), European Industrial Restructuring in the 1990s (1992)
(Exh. BRA-97).WT/DS70/R
Page 108
Panel questions do not in any way rebut this factor, which would motivate any reasonable market
investor to seek returns well beyond those anticipated by TPC for this type of loan.
6.214  For Brazil the second factor concerns uncertainty surrounding the number of CRJ-700 aircraft
that will be delivered.  Brazil argues that Canada cites to selectively quoted market forecasts to
conclude that the size of the potential market for 60-90 seat regional jets will support the projections
memorialized in the contribution agreement with Bombardier, and that TPC’s anticipated return is
very sensitive to the number of CRJ-700 aircraft delivered per year, and states that there is wide
variation in the projections for the total number of units of the CRJ-700 that will be delivered (seepara. 6.206).
6.215  Brazil does not ask to engage the Panel or Canada over which forecast is better or more
plausible, but makes the point that for TPC to earn its anticipated return, and to meet even Canada’s
own estimate of its cost of funds (six to seven per cent) everything must go exactly  according to plan.
According to Brazil, the rate of return cited by Ca nada as TPC’s anticipated return is actually based
on a market projection which lies at the upper end of a very wide range of forecasts.  Brazil argues
that if the number of CRJ-700s delivered per year slips below that projection, TPC would fail toachieve the six to seven per cent minimum return required to meet its cost of funds.
6.216  Brazil argues that therefore there is a critical shortcoming with Canada’s justification or
support for the rate of return it calculates.  In Brazil’s view, Canada simply shows that it may be
feasible to achieve that return under ideal circumstances, but this is not what an investor would focus
on in deciding what its anticipated return on an in vestment should be.  For Brazil, the question is not
which forecast of future CRJ-700 deliveries is more credible; rather, the question is what an investor
would do when faced with uncertainty about the potential market size for the CRJ-700.  In Brazil’s
view, the investor would not simply rely upon the highest possible value for unit deliveries and use
that to justify the expected rate of return, but ra ther, faced with uncertainty over the number of future
aircraft deliveries, would is compute an expected value  for the future deliveries of the CRJ-700, using
this information to determine the expected royalty stream and, in turn, the expected rate of return.
6.217  Brazil submits that given the range of equally credible forecasts of CRJ-700 annual deliveries,
the expected value is the mid-point of the range.  At that midpoint, Brazil argues, TPC’s expected
return  on annual deliveries of CRJ-700s fails to meet th e cost of funds threshold identified by Canada
itself.
6.218  Regarding Canada’s assertion that TPC does not grant lump-sum contributions, Brazil argues
that whether the TPC contributions are disbursed as a lump-sum or disbursed over time, the result
remains the same - a benefit is provided to the recipient, who gains access to a below-market source
of funds.  In this context, Brazil submitted a table (BCI Exhibit Bra-1) showing the cash flows
associated with the $87 million TPC grant for development of the CRJ-700, calculated with the grantbeing disbursed both as a lump sum, and over time.
6.219  Brazil further argues that business confidential information submitted by Canada in
connection with the $87 million contribution to Bombardier suggests that the repayment terms do not
appear to be consistent with that set out in TPC’s repayment policy. In this connection, Brazil
discusses, in business confidential comments on Canada’s 21 December 1998 replies to the Panel’s
questions, a number of examples of what Brazil considers to be departures from TPC’s repayment
policy in the case of this particular transaction.  For Brazil, this begs the question whether theCanadian government departs from this policy in the case of  grants to the Canadian regional aircraft
industry.WT/DS70/R
Page 109
3. Export contingency
(a) Arguments of Brazil
6.220  Brazil discusses a number of factors which in its view demonstrate that TPC and DIPP
support to the Canadian regional aircraft industry is “in fact tied to actual or anticipated exportation or
export earnings”.  Brazil submits that the comments of Industry Minister John Manley in announcing
its “’partnership‘” with de Havilland, that “’Aerospace is a crucial sector for Canada’s economy, with
exports  growing at 10 per cent per year‘” apply equally to the TPC’s interest-free $87 million loan to
Bombardier, the $147 million loan to Pratt & Whitney, the loans to Allied Signal and SextantAvionique, and the DIPP loan for initial development of the CRJ.  Brazil also states that Mr. Herb
Gray, Leader of the Government in the House of Commons and Solicitor General of Canada, added,
in remarks that also apply equally to the other lo ans, that “’[t]hese two outputs of the Dash 8-400
project -- the creation of jobs and the building of exports  -- are just what the government had in mind
when we established Technology Partnerships Canada earlier this year.‘”
362  Brazil emphasizes that
each Dash 8 series aircraft sold since 1992, and each CRJ sold since its development, has been sold
for export.
6.221  According to Brazil, in June 1998, after only two years of operation, TPC investments in the
Canadian aerospace industry totaled Can$407.6 million,363 representing 72 per cent of total TPC
funding to all sectors.  According to Brazil, of that total Can$267 million (paras. 6.181, 6.186, 6.187,
6.193), or 66 percent, was invested in the regional aircraft industry.  Brazil notes a press report
indicating that the Canadian aerospace industry has indicated that an “’additional $300 million inannual TPC funding is required to build on current technology and secure the future for Canadian
aerospace.‘”
364
6.222  For Brazil, TPC and DIPP assistance to the civilian regional aircraft industry is contingent in
law or in fact upon export, in that, according to Brazil (citing to the Clark Report),  all CRJ aircraft,
and all Dash 8 aircraft sold since 1992, have been sold solely for export .  For Brazil, although under
the terms of the SCM Agreement “’[t]he mere fact that a subsidy is granted to enterprises which
export shall not for that reason alone be considered to be an export subsidy,‘”365 funding mechanisms
meet the definition of subsidy when they are “’in fact tied to actual or anticipated exportation or
export earnings.‘”366  Brazil asserts that the Canadian Government supports the Canadian aerospace
industry (and Bombardier) through TPC precisely beca use it is an “’export-oriented‘” sector the
“’well-being‘” of which “’is vital to Canada’s economy.‘”367  Most significantly for Brazil, every
Dash 8-400 and every CRJ-700 sale benefiting from TPC and DIPP funding has been for export.368
Accordingly, the TPC and DIPP “investments” advanced to support these aircraft are export subsidiesin law or in fact and are, accordingly, prohibited by Article 3 of the SCM Agreement.
6.223  That is, according to Brazil, Canada maintains massive amounts of support to its regional
aircraft industry precisely because  it is 100-per cent export oriented and precisely because they
anticipate  that this trend will continue.  For Brazil, the available evidence supports only one
conclusion:  were it not for the total export orientation of the Canadian regional aircraft industry,
Canada would not continue to give it billions of dollars in subsidies.
                                                     
362 Exh. BRA-4 (emphasis added by Brazil).
363 TPC investment summary, from TPC website, dated 22 July 1998 (Exh. BRA- 47).
364 “As Bombardier takes off, Pratt descends:  Diverging fortunes raise questions about subsidies,” The
Globe and Mail, 19 October 1998 (Exh. BRA- 41).
365 SCM Agreement, Article 3.1(a), note 4.
366 TPC Annual Report 1996-1997, p. 5 (Exh. BRA- 5); Industry Canada, News Release, 17 Dec. 1996
(Exh. BRA- 4).
367 Id.
368 Clark Report, at pgs. 7-8, 13, 50-51, and Tables 1 and 2.WT/DS70/R
Page 110
6.224  In Brazil’s view, this is particularly important in determining whether TPC and DIPP grants
constitute, within the meaning of Article 3 of the SCM Agreement, export subsidies “in fact.”  Brazil
maintains that the drafters of Article 3 appreciated the fact that a subsidy need not be “legallycontingent on export performance,” if it is instead “in fact tied to actual or anticipated exportation or
export earnings.”
6.225  Brazil submits that the significant support offered to the Canadian regional aircraft industry is
both a reward for past export performance, and a grant which various Canadian statements make
eminently clear is given in anticipation of continued, exceptional export growth and total, 100 per
cent export orientation.
6.226  For Brazil, Canadian practices embody precisely the meaning of the term “export subsidies in
fact.”  To fail to apply the de facto  export subsidy provision in these circumstances would be to render
the prohibition of de facto  export subsidies empty, and to give Members a license to provide export
subsidies with abandon, subject only to the limitation that they avoid using the word “export” in their
laws and regulations and in their dealings with export-oriented companies.
6.227  Brazil acknowledges that some TPC and DIPP funds may have gone to other  industries with
sales in export markets, or to other industries with sales in domestic  markets, but states that Brazil’s
claim is unrelated to these possible instances of  TPC and DIPP funding.  For Brazil, when TPC funds
were disbursed to the Canadian regional aircraft industry, they were given to an industry which is
100-per cent export oriented, precisely because  it is an export industry and was anticipated  to remain
so.
6.228  Brazil contends that while Article 3.1(a) provides that the mere granting of a subsidy to an
exporting entity will not “for that reason alone” make it a prohibited export subsidy, the Panel is not
here faced with such a case.  In Brazil’s view, although Canada would have the Panel believe that
Brazil’s entire claim turns on what Canada calls the “export propensity” of the Canadian regional
aircraft industry alone, there are many convergent factors contributing to Brazil’s conclusion thatsupport to the Canadian regional aircraft industry through TPC and DIPP is “in fact tied to actual or
anticipated exportation or export earnings,” i.e., that the Canadian Government and the provinces
have supported the Canadian regional aircraft industry precisely because  it is a total export industry,
and precisely because they anticipate  that this performance will continue:
(1) That TPC funding statistics (para. 6.220) demonstrate that TPC is captive to the
Canadian aerospace industry, and more specifically, the regional aircraft industry;
that TPC itself recognizes its main beneficiary as “highly export oriented,”
369 and
evidently believes that fact is noteworthy in justifying TPC’s own operation.
(2) That such support is, as an historical matter, par for the course: that TPC’s
predecessor, DIPP, channelled subsidies to the aerospace sector totalling
approximately $2 billion,370 giving TPC ample experience testing whether its
anticipations or expectations regarding the industry’s export performance are
founded.
(3) That statements made by the Canadian Government in announcing its $267 million in
grants to the regional aircraft industry demonstrate that those grants are tied to the
                                                     
369 TPC Annual Report 1996-1997, pg. 5 (Exh. BRA-5).
370 Canadian Taxpayers Federation study, “Corporate Welfare – A Report on Sixteen Years of Industry
Canada Financial Assistance,” 16 April 1998, Tab 4 (Exh. BRA-31).  This statement of total DIPP funding tothe aerospace sector represents aggregate DIPP funds releas ed to four Canadian companies, i.e., Bombardier, de
Havilland, Pratt & Whitney Canada Inc., and CAE Electronics Ltd.WT/DS70/R
Page 111
Canadian Government’s anticipation, based on ample historical evidence, that the
industry will maintain its 100 per cent export orientation:
• Statement of Industry Minister John Manley that “[a]erospace is a crucial sector
for Canada’s economy, with exports  growing at 10 per cent per year.”
• Statement of Mr. Herb Gray, Leader of the Government in the House of
Commons and then-Solicitor General of Canada, that “[t]hese two outputs of theDash 8-400 project -- the creation of jobs and the building of exports  -- are just
what the government had in mind when we established Technology Partnerships
Canada earlier this year.”
• Statement of Mr. Paul Labbé, then-Pre sident of the EDC explaining EDC’s
decision to support the launch of the CRJ:
Our focus is export financing.  What we’re trying to do  in this
particular case – this is an exceptional case – is launch an aircraft
that has a world market .  The Canadian market for this aircraft is
minimal compared with what this world market is going to be, but it
has to be launched.  You have to get a good customer base
established so that you have a good market for that thing.
371
(4) That when these statements were made, the Canadian Government was aware
of the fact that, according to Brazil, every single sale of Dash 8 series aircraftmade since 1992, and every single sale of the CRJ since its development and
commercialization, had been for export.  For Brazil, the Canadian
Government has therefore made it very clear that it maintains massive
amounts of support to the Canadian regional aircraft industry precisely
because it is an export industry and precisely because they anticipate  that it
will continue to be an export industry.
6.229  Brazil disagrees with Canada’s argument concerning small economies (para. 5.74).  In
Brazil’s view, Canada is effectively arguing that despite the terms of Article 3.1(a), its alleged
position as a “small economy” warrants that it be accorded special treatment.  Brazil questions
Canada’s claim of “small economy” status for itself, noting that Canada is a founding Member of theWTO, a member, with the United States, Japan and the European Communities, of the WTO “Quad,”
and a member of the OECD.  For Brazil, Canada’s argument also must fail as a matter of law, because
there is only one law, applying equally to large and small economies alike, and it is found in the
ordinary meaning of Article 3.1(a).
6.230  Brazil further argues that this is not a case of a small economy of necessity having a small
share of a global market, as Canada claims, or of support being given to an industry by a government
indifferent to whether that industry sells in domestic or export markets, but is a case in which, by the
deliberate action of the Canadian Government, whatever demand existed in the domestic market was
satisfied by what were legally export sales, not domestic sales (paras. 5.113-5.115).
(b) Arguments of Canada
6.231  Canada argues that the evidence cited by Brazil regarding the alleged export contingency of
TPC’s funding for civil aircraft does not support Brazil’s argument.  In Canada’s view, Brazil’s
argument (para. 6.175) that “’TPC explicitly targets ‘conditionally repayable investment’ to projects
                                                     
371 Committee on Foreign Affairs and International Trade, pg. 43:30 (emphasis added) (Exh. BRA-9).WT/DS70/R
Page 112
that result in a high technology product for sale in ‘ export markets ,’ which explains the programme’s
extensive support for the Canadian aerospace industry …‘” [emphasis in original] is a complete
distortion of the document on which Brazil relies.  According to Canada, quoted in full, the citedpassage states that the TPC targets “’projects that result in a high technology product or process for
sale in domestic  and export markets.‘” [emphasis added by Canada] Thus, in Canada’s view, the
passage stands for precisely the opposite of the proposition for which Brazil’s selective and
misleading quotation stands.  Thus Canada argues, to the extent that Brazil alleges that TPC is in law
contingent upon export performance, its allegation is based on a misquotation of TPC’s objectives.
6.232  Canada notes Brazil’s argument that Brazil’s claim is unrelated to possible instances of TPC
funds to other industries with sales in export markets, or to other industries with sales in domestic
markets.  In Canada’s view, here Brazil is arguing that the mere fact that companies in the aircraft
sector engage in exports turns a programme that is also available, as agreed by Brazil, for domestic
markets into an export contingent subsidy.  For Canada, this directly contradicts the second sentence
of footnote 4.
6.233  Canada further argues that Brazil’s case against Technology Partnerships Canada (TPC)
appears to be based on an “’export propensity‘” and an “’intent‘” interpretation of Article 3. In
Canada’s view, Brazil argues that TPC contributions are subsidies that are “’contingent, in law or in
fact, on export performance‘” because the Canadian aerospace industry is an “’export-oriented‘”
sector, because exports in the sector are growing at 10 per cent a year and because the “’building of
exports‘” was, along with job creation, one of the objectives of TPC. Canada maintains that Brazil’sarguments are based on an incorrect reading of the law and faulty methodology in analysing the
evidence, and submits that TPC is not contingent, in law or in fact, upon export performance.
6.234  Canada states that TPC is a programme admini stered by the Department of Industry of the
Government of Canada (Industry Canada).  It was established in 1996 under the authority of the
Department of Industry Act ,
372 with a funding in the amount of $150 million in 1996/97, $200 million
in 1997/98 and $250 million thereafter, with repaymen ts and revenues recycled to sustain and increase
the fund.373
6.235  According to Canada, TPC provides support to a broad base of sectors and technologies that
touch on virtually all industrial sectors of Canada.  Specifically, eligible sectors and technologies
include the Aerospace and Defence sector (including defence conversion), environmentaltechnologies and “’enabling‘” technologies, which include biotechnologies, information and
communication technologies, and advanced materials and advanced manufacturing technologies.
Canada indicates that as of September 30, 1998 TPC had approved 65 projects representing a total of
$582 million in multi-year investments; and that of these, 48 projects ($174.5 million) involved
environmental and enabling technologies, with the balance going to the Aerospace and Defencesector.
6.236  Canada states that the basic objectives of the TPC programme, set out in its Charter
374,
include “’to maintain and build the industrial te chnology and skill base essential for internationally
competitive products and services‘”375.  Canada asserts that TPC does not have “’export
performance‘” as a condition , in law or in fact, of project support. Canada submits that nothing in the
                                                     
372Statutes of Canada 1995, c. 1, sections 4(1)(a), 5(c), 5(d), 6(c) and 14(1)(c) (Exh. CDN-26).
373 Technology Partnerships Canada, 1996-97 Annual Report (Ottawa:  Industry Canada, 1996) at 26-
28 (Exh. CDN-27).
374 Technology Partnerships Canada, Charter, 2 December 1996 (Ottawa:  Industry Canada, 1996) at 3.
(Exh. CDN-28).
375 Id..WT/DS70/R
Page 113
application documents or the contribution agreements of TPC identifies export performance as a
condition for eligibility for or approval of contributions.376
6.237  Canada states that the basic objectives of TPC, approved by the Government of Canada
following its 1995 Budget, are to:
(a) be an investment approach supportive of the government’s priorities for jobs, growth
and sustainable development with all repayments of TPC contributions being
recycled to help fund the programme;
(b) be strongly market driven and results-oriented;(c) focus on activities in environmental technologies, strategic enabling technologies
(e.g., advanced manufacturing and processing, advanced material processes and
applications, applications of biotechnology and applications of selected information
technologies) and aerospace and defence (including defence conversion); and
(d) adhere to the twin principles of international competitiveness and national access by
putting in place the necessary 
programme  machinery, rules and processes to ensure
that competitive and capable high technology small and medium-sized enterprises
from all regions of the country are encouraged to participate and have fair access to
the programme .
6.238  Canada argues that TPC’s eligibility criteria reflect these objectives and are set out in the
application documents.377
6.239  Canada provides Volumes I and II of the Interim Reference Binder  (Binder) of the TPC
programme,378 including the following documents379:
a) “Terms and conditions: Technology Partnerships Canada”, which sets out the
eligibility criteria for the programme;
b) “Technology Partnerships Canada: Repayment of Contributions”, which sets out the
policy guidelines for determining repayment obligations;
c) The “Project Summary Form” and criteria (environmental assessment forms are
excluded); and
d) A “Statement of Work”, to be filled out by an applicant.
6.240  Canada argues that none of these documents in  any way indicates or intimates that “’export
performance‘” is a criterion of eligibility for the TPC programme.  Canada states that Ministerial
assessment criteria under TPC are not related to export performance.
6.241   For Canada, the “export propensity” of the aerospace sector is a fact of the market rather than
a condition or requirement of the programme.  The world aircraft industry is one of the most
                                                     
376 A TPC applications kit and a TPC model contribution agreement are set out in Exhs. CDN-29 and
30.
377 Technology Partnerships Canada, Terms and Conditions, at 1 (Exh. CDN-65).
378 Exh. CDN-65
379 Canada  initially provided the documents listed in this  paragraph, and subsequently, in response to a
request from the Panel, provided Volumes I and II in their entirety.WT/DS70/R
Page 114
globalised industries, with few countries producing all the necessary technology domestically and all
relying on economies of scale for profitability, and the Canadian aerospace sector is no different.
6.242  Canada submits that in view of the small size of the Canadian market, the significant
dependence of the Canadian economy in general and the manufacturing sector in particular on
exports,380 it would not be unusual if a large proportion of the sales of Canadian manufacturers are
made in markets other than Canada.381
6.243  For Canada, however, there is no requirement, in law or in fact, that the products resulting
from the research and development investment by the Government of Canada be exported; there areno penalties  if exports do not take place; royalties are not reduced if exports increase; repayment
obligations are not in anyway affected by whether the sales are made in Canada or outside Canada.
Accordingly, Canada argues, TPC contributions are not, in law or in fact, conditional on or tied to
export performance.
6.244  Canada submits that Brazil has not presented a prima facie case with respect to export
contingency.  Canada challenges the evidence adduced by Brazil in support of its “export propensity”-
and “intent”-based argument that TPC funding to the civil aircraft industry is contingent on exportperformance.
6.245  For Canada, evidence adduced by Brazil from Industry Canada’s annual report,
acknowledging the export orientation of the aerospace sector (para. 6.175) is not relevant to the
question of export contingency .
6.246  Canada also disputes as incorrect the conclusion of the “Clark Report” that all CRJ and Dash
8 sales since 1992 have been for export. (See section VI.G  for detailed arguments concerning the
Clark Report.)  Thus, for Canada, this evidence has been rebutted, and does not establish a prima facie
case.
6.247  Canada also maintains that the statements cited by Brazil of Canadian Ministers
acknowledging the importance of the aerospace sector to the Canadian economy and that the creationof jobs and building of exports was an objective of TPC is not relevant to the question of export
contingency .
6.248  That is, Canada argues, Brazil has not adduced any evidence to show that TPC contributions
are contingent  on export performance, in the sense that contributions would not be paid unless exports
took place , that there would be rewards  if exports took place or that there would be penalties  if
exports did not take place. Canada maintains that there is no such evidence because this is not how
TPC contributions are made.
6.249  According to Canada, TPC’s area of activity is defined very broadly, and TPC has invested in
projects ranging from closed loop, zero-effluent environmental solutions for the pulp and paper
industry, research into a vaccine for cancer, pr ecision laser welding technology to advanced flight
simulators.  Canada states that the TPC programme is thus aimed at building and improving Canada’s
                                                     
380In 1997, the total value of Canadian exports was Can$344 bn, constituting 40 per cent of Canada's
GDP.  See Statistics Canada, “Gross domestic product (expenditure-based)”, (1998) online:  Statistics Canada
Homepage <http://www.statcan.ca/english/Pgdb/Economy/Economic/Econ04.htm > (date accessed:
14 November 1998) (Exh. CDN-31).
381 Exports constitute 70 per cent of the total sectoral production.  53.5 per cent of manufacturing
shipments were exported in 1996. Canadian Industry Statistics Development Team, “The Canadian Economy”
(1998) Strategis, online:  Industry Canada homepage <http://strategis.ic.gc .ca/SSC/ci00034e.html > (date
accessed:  14 November 1998) (Exh. CDN-32).WT/DS70/R
Page 115
technological and international competitiveness.  TPC invests in products and technologies that
advance this general objective.
6.250  Canada argues that the TPC is not contingent on export performance because it is neutral  as
to the destination  of a successful product or the fruits of a successful technology.  That is, a
contribution is made where a product or a technology has the potential of achieving market success,
either  domestically or internationally.
6.251  According to Canada, eligibility for the programme does not depend on export performance:
export performance does not increase TPC’s share of the costs that are eligible under the programme– that is, there will not be more TPC contributions if there are exports; there are no penalties if there
are no export sales; there are no rewards if products are exported.  Rather, practically the opposite is
true: higher sales – export or domestic – mean that a producer has to pay more in royalty payments to
the Government of Canada.
6.252  Canada submits that at no point in the process of qualifying for a TPC investment is there a
requirement that exports take place:  the eligibility criteria for the TPC do not include export
performance; in applying for a TPC contribution, an enterprise is not required to show that it makesany exports; and in entering into an agreement to receive TPC contributions, an enterprise is not
required to show or promise that it will export.  Canada notes the example of a contribution for the
treatment of tar sands in Athabasca in Northern Canada, indicating that there is no requirement there
that the process that is developed is then exported.  For Canada, this is how TPC is applied in the
aerospace sector; thus the TPC programme is not contingent on export performance.
6.253  According to Canada, TPC contributions are conditional on success – and on presenting a
successful business plan.  Canada argues that regardless of the destination of sales in a business plan,
the questions that the administrators of the programme will put to the proponent of the project will not
concentrate on the export  aspects of the project, but rather on whether the project is going to be
viable, i.e., whether the business plan makes sense so that the contribution is not wasted.  In answer toa Panel question regarding assessment criteria, Canada indicates that “other assessment criteria” that
may apply include regional distribution; sectoral balance (both within and across eligible sectors); the
need for an appropriate mix of projects between large firms and small to medium enterprises (SME);
availability of funds; and portfolio management considerations (for example, balanced risk profile,
matching cash flows to requirements).  Also in response to a Panel question regarding performanceindicators for projects in the aerospace and defense sector, Canada states that there are no
performance indicators unique to projects in the Aerospace and Defence sector, but that rather the
following key indicators (and as reported in the 1997/98 TPC Annual Report) are tracked for the
Programme as a whole: progress on SME delivery: the distribution of the number of projects and
dollars of investment by size of recipient; region al balance: the distribution of the number of projects
and dollars of investment by region; sectoral balance: the distribution of the number of projects and
dollars of investment by component (TPC’s target being that the Environmental and Enabling
Technologies component of the programme utilizes one-third or more of the programme’s budget by
1998-99; leverage:  dollars of private sector invest ment in innovation per dollar of TPC investment;
sharing ratio: the weighted average sharing ratio (TPC’s target being to average below 33 per cent;
job creation:  the number of forecasted jobs created or maintained over the life of the investments; and
economic activity: the value of forecasted sales over the life of the investments.
6.254  Canada states that where a recipient fails to make any sales – including export sales – the
investment of the Government of Canada in the project will have failed.  According to Canada, the
recipient does not suffer additional penalties because it did not sell into export markets, and if
additional contributions by the government are due, they are not terminated because exports  do not
take place, nor are royalties payable to the government increased on domestic sales if export sales arenot made.WT/DS70/R
Page 116
6.255  Canada also argues that no distinction is made between export and domestic sales for the
purpose of TPC royalty payments.  That is, Canada states, export royalties are not lower than
domestic ones.
6.256  Regarding the phrase “maintain and build upon the technological capabilities and production,
employment and export base ” of Canada in the TPC eligibility criteria for the aerospace and defence
sector, which was the subject of a Panel question, Canada states that subsidies that develop a
country’s global competitiveness and thus maintain and build upon its export base are not inconsistent
with the SCM Agreement for that reason alone .  To so argue in Canada’s view would be to suggest
that the SCM Agreement permits only subsidies that are, at best , neutral as to competitiveness and
productivity, which would simply render illegal just about every industrial and labour adjustment
programme the world over.
6.257  Thus, for Canada, the fact that an increase in global competitiveness was an objective of the
TPC does not make the TPC, or contributions given under it to the aerospace sector, illegal under
Article 3, as governments do not generally make investments to make their economies less
competitive.
6.258  Responding to a Panel question regarding advice from the Department of Foreign Affairs and
International Trade to TPC, Canada states that the Government of Canada through TPC tries to spur
investment by the private sector in technologies and sectors that are considered to be important for
Canada’s competitiveness and for increased productivity.  In the process, Canada states, the
Government wishes to ensure that it shares in th e upside benefits of its investments, so that new
investments can be made, and in doing so has to ensure that a proposed project has a market.
According to Canada, in determining the strength of this market, the Government takes advantage of
all the information available to it, including the expertise of the Department of Foreign Affairs and
International Trade.
6.259  In response to a Panel request for full details and documentation relating to the evaluation and
decisions relating to the five TPC contributions acknowledged by Canada, Canada states that most of
the information requested by the Panel is highly sensitive business confidential information, and that
Canada’s desire to present to the Panel such information as may help it arrive at a decision must be
balanced against the commercial interests and legal ri ghts of private parties not Party to this dispute.
According to Canada, these private parties, and othe rs in the process of submitting applications under
the TPC programme, have already expressed reluctance in sharing information, or additional
information, concerning their business plans, and such reluctance, if it were to continue, would have a
serious deleterious impact on the functioning of the TPC programme.
6.260  Canada states that it has requested the interested private parties to release Canada from
obligations arising under the business confidentiality clauses of Canada’s arrangements with them.With the exception of Bombardier, these interested parties have indicated that they are not prepared to
allow Canada to release business confidential information, or have not responded to the request for
release
382.  Canada indicates that Bombardier agreed to release specific business confidential
documents relating to the CRJ-700 programme that illustrate the operation of TPC, and that
exceptionally sensitive confidential information in those documents was redacted to protect the
commercial interests of Bombardier.383
6.261  Canada states that it is unable to comply with  the Panel’s request for all project assessments
and funding decisions documents.  Since the level of contribution was in excess of $20 million,
Cabinet approval was required for this invest ment, and therefore according to Canada, the
recommendation, options, communications strategy, supporting rationale and analysis are contained in
                                                     
382 Exh. CDN-106
383 Exh. CDN-107WT/DS70/R
Page 117
a Memorandum to Cabinet (MC) and as such constitutes a cabinet confidence and cannot be divulged.
Similarly, the Project Summary Form (PSF) in this case was required to be presented to the Minister
of Industry Canada for signature, and therefore constitutes Ministerial advice that Canada statescannot be released.
6.262  Canada summarizes the basis for its investment in the CRJ-700 project, indicating that the key
considerations were: that the timing of the project coincided with planned Canadair workforce
reductions and would create or maintain 1,000 jobs during the development phase alone; that the CRJ-
700 was planned to advance the state-of-the-art in regional jet operating performance and wouldprovide tangible benefits to operators in Canada and abroad; that the project would offer real
opportunities for participation by domestic aerospace sub-contractors to expand their sales base and
enhance their technical capabilities; that project risk was considered manageable in light of
Bombardier’s proven track record and because the technical risk was mitigated by the fact this aircraft
was a stretch version of an existing platform - the CRJ50; that market risk was also manageable given
the CRJ50's strong position in the regional jet market, and the preference by airlines to utilize families
of aircraft to reduce part inventories and training requirements; and that independent market forecasts
and Industry Canada’s sectoral experts confirmed that the size of the potential market for a 60-90 seat
regional jet to be in excess of 1,000 units through 2010.
6.263  Canada also indicates that there are no Memoranda of Understanding between TPC and
relevant companies.  The rights and obligations of the Government of Canada and the applicants are
set out in the contribution agreements.
(c) Comments of Brazil
6.264  Brazil notes several documents included in the TPC reference binders which in its view
demonstrate that TPC’s funding decisions for the aerospace and defense industry are tied to export:
• Section 3.2.3 of TPC’s “Terms and Conditions” states that “[c]ontributions under the Aerospace
and Defence component will be directed to projects that will maintain and build upon the
technological capabilities and production, employment and export base extant  in the aerospace
and defence sector” (emphasis added by Brazil).
• Section 3.3 of the TPC Charter, entitled “Aerospace and Defence (including Defence
Conversion)” and included in TPC Reference Binder 2 states that “[i]nvestments will be directed
to projects that build on and maintain technological capabilities and the production, employment
and export base of the sector ” (emphasis added by Brazil).
• Part B of Schedule B of the TPC Aerospace and Defense Generic Model Agreement specifically
calls for any representations by an applicant regarding “export markets penetration through
marketing partnership agreements with foreign companies.”
• Schedule C from the same Model Agreement, representing a form for “Report[s] on Estimated &
Actual Sales and Royalties” requires the reporting of export sales revenues.
• Page 10 of the 1996-1997 TPC Business Plan notes that TPC’s “approach” in the aerospace and
defense sector is to “[d]irectly support the near market R & D projects with high export marketpotential.”
• Page 12 of the 1996-1997 TPC Business Plan  records the proportion of the aerospace and defense
industry’s revenue allocable to exports.
6.265  According to Brazil, export orientation and performance are central, therefore, to TPC’s
decision-making processes in the aerospace and defense sector, since maintaining exports is identifiedWT/DS70/R
Page 118
as a key factor to consider in awarding TPC grants and evaluating TPC projects, and since
information about a project’s export performance is requested and maintained by TPC. For Brazil this
represents further evidence demonstrating that TPC grants  to the industry are “’in fact tied to actual or
anticipated exportation or export earnings‘” within the meaning of Article 3 of the SCM Agreement.
6.266  In Brazil’s view, the information provided by Canada regarding the $87 million CRJ-700
grant is so incomplete as to make it wholly unrel iable, noting that information regarding financing
terms, repayment plans, operations summaries, the timing of government disbursements, estimated
development costs and projected programme revenues has been redacted from the first ten documentsincluded in BCI Tab 1. Brazil asserts that much of the redacted information may have given the Panel
information about whether the grant was contingent on export.
6.267  Finally, Brazil states, despite the Panel’s specific request, Canada has refused to provide
project assessments and funding decision documents, including a Cabinet Memorandum detailing a
“’recommendation, options, communications strategy,  supporting rationale and analysis,‘” and a
Project Summary Form.  Brazil observes that Canada’s decision to withhold this information is based
not upon the refusal of private parties to waive their confidentiality rights, but instead upon theCanadian government’s own refusal to release documents prepared for itself by itself.  Brazil submits
that these documents likely provide insight into th e very issue central to the dispute between Canada
and Brazil regarding TPC grants to the Canadian regional aircraft industry - whether those grants are
“’in fact tied to actual or anticipated exportation or export earnings.‘”  As a result of Canada’s
strategic decision to withhold these documents, Brazil contends, the Panel should adopt adverseinferences, presuming that the information containe d therein demonstrates that TPC grants to the
Canadian regional aircraft industry are in fact tied to actual or anticipated export (paras. 4.146-4.151).
Brazil recalls the evidence it has submitted supporting this conclusion (paras. 6.219-6.229), and
argues that Canada’s decision to withhold documentation that could cast more light on the matter
requires the Panel to conclude that Canada is hiding incriminating information.
C. S
ALE BY ONTARIO OF OWNERSHIP SHARE IN DE HAVILLAND
1. Subsidy
(a) Arguments of Brazil
6.268  Brazil asserts that in January 1992, Bombardier and the Government of Ontario, through the
Ontario Aerospace Corporation (“OAC”), purchased 51 and 49 per cent, respectively, of the shares inBoeing’s de Havilland Division, for a total purchase price of Can$100 million,
384 and that at the same
time, Bombardier reserved the option to purchase from the Government of Ontario the latter’s
remaining 49-per cent share in de Havilland for a total of Can$49 million.  Brazil states that in
January 1997, Bombardier exercised this option, is suing to the Government of Ontario and the
Ontario Aerospace Corporation (“OAC”) a 15-year promissory note bearing interest at seven per centwith annual principal repayments of Can$4.9 million in years six through 15.
385  A s  a  r e s u l t ,
according to Brazil, increases in de Havilland’s equity did not accrue to OAC, whose return was
strictly limited to its initial investment in de Ha villand.  Brazil further argues that OAC does not even
appear to anticipate payment of Bombardier’s $49 million note, as according to Brazil, the
Government of Ontario forgave the obligation effective 31 March 1996.386  Brazil argues that
Bombardier therefore has at its disposal OAC’s equ ity capital, without the prospect of ever having to
pass along an equity investor’s reward to OAC.
                                                     
384 Bombardier press release, dated 29 January 1997 (Exh. BRA- 48).
385 Id.  See also  Bombardier 1996-1997 Annual Report, pgs. 49 (note 2), 55-56 (note 9) (Exh. BRA-
49).
386 Ontario Public Accounts, 1995-96, re. Ontario Aerospace Corporation, note 4 (Exh. BRA- 50).  See
also Exhibit B, Table B.8 of Finan Report.WT/DS70/R
Page 119
6.269  Brazil also draws attention to a statement in Bombardier’s Annual Report387 that
Bombardier’s payments on the $49 million note to OAC are “‘reimbursable in anticipation under
certain conditions‘”, and submits that the Panel should request that Canada explain completely whatthese conditions are, and why this does not mean that Bombardier will be reimbursed by some party
for its payments on the $49 million loan.
6.270  Brazil further argues that during the period 1992-1997, OAC provided to de Havilland four
distinct types of subsidies which made the pu rchase of OAC’s 49-per cent interest even more
attractive to Bombardier:  interest-free shareholder loans in the amount of Can$200 million; cashgrants (under DIPP) of up to Can$100 million; sales financing support for de Havilland’s Dash 8
aircraft, including coverage of losses; and reimbursement of restructuring costs of up to
Can$370 million,
388 and OAC’s offer to forgive all loans to de Havilland, absent certain undefined
events of default.389
6.271  For Brazil, OAC’s purchase of a 49-per cent interest in de Havilland and its simultaneous
granting of an option to Bombardier to purchase that  interest, within five years, for the same price
initially paid by OAC, amounted to a cost-free opt ion to Bombardier; Bombardier, in effect, got to
play with OAC’s money.  According to Brazil, if  de Havilland did not prosper, then OAC was the
loser, while if de Havilland did prosper, then Bomb ardier was the winner.  Ultimately, Brazil argues,
Bombardier exercised the option and took over OAC’s interest, and Bombardier’s note for payment of
OAC’s remaining 49-per cent interest was subsequently forgiven.  For Brazil, the Government of
Ontario, through this action alone, conferred a benefit on Bombardier.
6.272  Moreover, the asserted extensive list of interest-free, non-repayable loans and grants provided
by OAC to de Havilland during the period 1992-1997, totalling in excess of Can$300 million, confers
according to Brazil a significant and obvious benefit to Bombardier.  According to Brazil, the present
value of these contribution is $874.7 million.  For Brazil, it is inconceivable that OAC’s 49-per cent
share in de Havilland was worth the same in 1997, when purchased by Bombardier, as it was wheninitially acquired in 1992, given the extensive array of subsidies provided to de Havilland by OAC in
the interim period.  Brazil states that as a result of these subsidies, Bombardier received a massive
windfall in 1997 when purchasing OAC’s shares in de Havilland at a price fixed in 1992, before those
subsidies made de Havilland a cash-rich venture.  Brazil states that increases in de Havilland’s equity
resulting from these government contributions did not accrue to Ontario, whose return was strictlylimited to its initial investment in de Havilland.  Rather, the entire benefit flowed to Bombardier.
6.273  Brazil maintains that the accrual of this subsidy benefit occurred in January 1997 when
Bombardier purchased OAC’s remaining share of de Havilland.  In response to a question from the
Panel, Brazil clarified that it does not consider that the various contributions in the previous paragraph
were themselves subsidies contingent upon export pe rformance.  Rather, they amplified the “benefit,”
within the meaning of Article 1.1 of the Subsid ies Agreement, accruing to Bombardier when it
purchased the remaining share of de Havilland in January 1997.  Brazil maintains that contributions,
the present value of which constitute $874.7 million, were made by the Canadian and Ontario
Governments to de Havilland between 1992, when the $49 million price was set, and 1997, when
Bombardier completed the purchase of de Havilland.  Yet, the purchase price remained unchanged
from that set in 1992.  As a result, according to Brazil, it did not reflect the value added by these
contributions.
                                                     
387 Exh. BRA-49
388 Ontario Public Accounts, 1992-93, re. Ontario Aerospace Corporation (Exh. BRA- 51).  See also
Exhibit B, Table B.8 of Finan Report.
389 Ontario Public Accounts, 1992-93, re. Ontario Aerospace Corporation, note 4 (Exh. BRA- 51).WT/DS70/R
Page 120
6.274  Brazil estimates the present value in 1998 of benefits to Bombardier related to the acquisition
and restructuring of de Havilland to be $874.7 million.390  For Brazil the amounts granted constitute
both a transfer of funds and a massive benefit to Bombardier, within the meaning of Article 1.1 of theSCM Agreement.
(b) Arguments of Canada
6.275  In answer to a request from the Panel for do cumentation regarding the determination of the
interest rate on the sale, Canada states that it has not put in a defence regarding whether these
contributions are subsidies  within the meaning of Article 1 of the SCM Agreement.  Canada notes that
Brazil is in agreement with Canada regarding the relevance of the principle of judicial economy to the
issues to be determined in this case. Canada does not consider it appropriate to adduce evidence in
response to what it views as baseless and false allegations and a case that has not been established,
and in support of a defence Canada has not made. Accordingly, to the extent that any documents are
produced by Canada in response to this question of the Panel, Canada states, they are provided to
support Canada’s submission that the contributi ons at issue are not “’contingent on export
performance‘” within the meaning of Article 3 of the SCM Agreement.
6.276  As a factual matter, Canada denies Brazil’s allegation that “’Bombardier’s note for payment
of OAC’s remaining 49-per cent interest was subsequently forgiven ’”.  According to Canada, the
Government of Ontario, forgave its loan to the Ontario Aerospace Corporation -- Ontario’s own
wholly-owned corporation  -- on 31 March 1996.  According to Canada, the Finan Report concludes,
without any evidence whatever, that “’[i]t is clear that OAC does not expect to receive payment fromBombardier for its 49 per cent share in de Havilland.‘”
391
6.277  Canada states additionally that the promissory  note of Bombardier was not forgiven.  Canada
confirms that the sale price of $49 million, agreed to in 1992, was paid in the form of a promissory
note by Bombardier to the Government  of Ontario at the rate of 7 per cent; a copy of this promissory
note was adduced into evidence by Canada.392  Canada states that the interest rate was determined by
the Ontario Financing Authority to be the appropriate  market rate of interest to provide a commercial
basis to the transaction.   Canada submits a memorandum of January 1997 detailing the interest rate
determination, in response to the Panel’s request.  Canada maintains that in terest payments owing to
date have been paid by Bombardier, indicating that the first payment of $3,430,000 was received by
the Government of Ontario in January 1998.  A copy of the cheque for this amount was adduced byCanada into evidence.
393
6.278  Canada further indicates that that on January 28, 1997, Ontario announced the sale of its
49 per cent interest in de Havilland Holdings Inc. to Bombardier.  The sale took place on the basis of
a “put/call” option on the purchase of de Havilland Holdings Inc. by Bombardier and Ontario in 1992.
The exercise period for this option was 1 February 1996, to 31 January 1997.  Contrary to Brazil’sassertion,
394 Canada asserts, the option of selling its interest in de Havilland was exercised by
Ontario.395
                                                     
390 Exhibit B, Tables B.9 and B.10 of Finan Report.
391 See also Section VI.F for the parties’ comments on the Finan Report regarding the de Havilland
sale. TPC Annual Report 1996-1997, p. 5 (Exh. BRA- 5); Industry Canada, News Release, 17 Dec. 1996 (Exh.BRA- 4).
392 Exh. CDN-49
393 Exh. CDN-51
394 Brazil asserts that:
“At the same time, Bombardier reserved the option to purchase from the Government of
Ontario the latter’s remaining 49-per cent share in de Havilland for a total of Can$49 million.  InJanuary 1997, Bombardier exercised this option , issuing to the Government of Ontario and the Ontario
Aerospace Corporation (“OAC”) a 15-year promissory  note bearing interest at seven per cent withWT/DS70/R
Page 121
6.279  Regarding the $49 million sale price of de Havilland determined in 1992, Canada argues that
whether or not de Havilland was solvent, whether or not its equity had increased, whether or not the
restructuring loans would add value to de Havilland, the sale price in 1997 would be what had beenagreed to in 1992.  Canada explains that the Government of Ontario agreed to the sale price in 1992
because Boeing had poured $1.3 billion in de Havilland, only to sell it for $100 million after 6 years
of operation.  According to Canada, Ontario’s participation in the project to revive de Havilland in
1992 was conditional on ensuring that at the very least Ontario would get its purchase money back.
6.280  Regarding the equity value of de Havilland at the time of the 1997 sale to Bombardier, in
request to a question from the Panel, Canada submits a letter from the Vice President Legal Services
of Bombardier. According to the letter, at the point of its sale to Bombardier by Ontario, de
Havilland’s audited statements showed that it had a negative equity value.  The Panel requested
copies of the audited statements and accompanying notes, and in response Canada states that the
information requested by the Panel – detailed audited statements of de Havilland along with all
accompanying notes and any other relevant documentation - is highly sensitive business confidential
information that is not in the possession of the Go vernment of Canada or the Government of Ontario,
and that Canada’s desire to present to the Panel such information as may help it to arrive at a decision
must be balanced against the concerns of private parties not Party to this dispute.
6.281  Canada further asserts that Brazil has adduced no evidence in support of its assertions about
the increase in de Havilland’s value as a result of alleged subsidies between 1992 and 1997.  In
Canada’s view, Brazil’s unfounded and incorrect allegations about the alleged forgiveness of the$49 million promissory note show that Brazil’s assertions about de Havilland suffer from a
fundamental lack of credibility, and that Brazil’s allegations about the rise in value of de Havilland
should be viewed in that light.
(c) Response of Brazil
6.282  Regarding Canada’s citation to Brazil’s belief in the principle of “judicial economy”, Brazil
notes that in a letter to the Panel dated 13 December, reacting to the list of questions presented to
Canada by the Panel, Brazil stated that in the course of these proceedings, Canada had made a
deliberate decision not to present evidence rebutting Brazil’s claims.  In light of that decision, Brazil
stated, the Panel could, consistent with the principle of judicial economy, have decided the issues
raised in this case on the basis of the facts before it, rather than offer Canada yet another chance topresent information in its defense.
6.283  Brazil disagrees with Canada’s argument that “‘Brazil’s central allegation’” is that Ontario
forgave Bombardier’s $49 million loan to Bombardier for the purchase in 1997 of Ontario’s
remaining share in de Havilland.  According to Brazil, paying this $49 million debt will not bring
Bombardier anywhere close to offsetting the tremendous benefits that accrued to Bombardier when itpurchased the remaining shares of de Havilland in 1997, given the contributions with a present value
of $874.7 million made by the Canadian and Ontario Governments to de Havilland between 1992,
when the $49 million price was set, and 1997, when Bombardier completed the purchase of de
Havilland (paras. 6.271)
396.  Yet, the purchase price remained unchanged from that set in 1992,
accruing a massive benefit to Bombardier when it completed the transaction in 1997.
                                                                                                                                                                    
annual principal repayments of Can$4.9 million in years six through 15.” [emphasis added by Canada ]
(para. 6.254).
395 Government of Ontario, News Release, “Ontario Recoups Taxpayer Investment in De Havilland”
(28 January 1997) (Exh. CDN-34).
396 Finan Report, pg. A.9-A.10.WT/DS70/R
Page 122
6.284  Regarding the letter from Bombardier concerning de Havilland’s equity value at the time of
the 1997 sale to Bombardier, Brazil  comments first that even if de Havilland’s net equity value was
negative at the time of its sale in 1997, this does not change the fact that it would have been evenmore negative if government contributions, the present value of which constitute $875 million, had
not been made to de Havilland between 1992 and 1997.  According to Brazil, these contributions
increased the value of Ontario’s equity beyond the price set in 1992, but Ontario was given no share
in this increase.
6.285  Second, Brazil states, a negative net equity value does not give the complete picture of the
value of a shareholder’s equity.  For Brazil, it does not mean that de Havilland was worth nothing – or
less than nothing – to Ontario and Bombardier when purchased in 1997, noting for example that de
Havilland’s book of orders at the time of the sale
397, although not factored into net equity value,
represented value which an equity investor selling its shares could reasonably expect to be captured in
the selling price of its shares.
6.286  Regarding Canada’s response to the Panel’s request for the audited financial statements of de
Havilland, Brazil argues that Canada has failed to supply the background documents supporting thestatements in the letter submitted as evidence in support of its defense, and that Canada has failed
effectively to rebut evidence submitted by Brazil from the Public Accounts of Ontario detailing
contributions, the present value of which constitute $875 million, made by the Canadian federal and
Ontario governments to de Havilland between 1992, when the $49 million purchase price for
Ontario’s share in de Havilland was set, and 1997, when Bombardier completed the purchase ofOntario’s share.  For Brazil, Canada’s argument that this injection of capital did not affect the value of
Ontario’s equity lacks credibility.
(d) Comments of Canada
6.287  Canada comments regarding Brazil’s argument concerning de Havilland’s order book that
Brazil has adduced no evidence as to what the value of the de Havilland order book was on the date ofsale, nor demonstrated that the value would have been sufficient to compensate the purchaser for the
negative net equity value of de Havilland at the time.  Thus, Canada submits, Brazil has not
demonstrated that a benefit was conferred by the sale.  Second, for Canada, any such valuation would
have to reflect the possibility that orders might not result in actual sales.  Third, according to Canada
an order book does not indicate the viability of an aircraft manufacturer: Fokker’s order book justprior to its bankruptcy in early 1996 contained firm orders for 81 aircraft, according to a table
submitted by Canada on “Fokker Orderbook – As of December 1995”, source: Lundkvist.
2. Export contingency
(a) Arguments of Brazil
6.288  According to Brazil, as part of the transaction Bombardier is required “’to operate the de
Havilland business with a view to continuing aircraft final assembly . . .‘”, which for Brazil
constitutes a covenant making the transaction contingent upon maintenance of, among other things, de
Havilland’s current export-oriented sales strategies.   Brazil asserts that at the time this language was
drafted, de Havilland’s order book stood at 61 airc raft, all but one of which was sold for export.  In
other words, Brazil states, Bombardier received a substantially discounted price for the purchase of de
Havilland, in exchange for what the Government of Ontario anticipated would be the Dash 8’s
continued export orientation.  Brazil argues that Bombardier has held to this commitment; asestablished by the Clark Report, all of de Havilland’s Dash 8 aircraft sold since 1992 have been sold
                                                     
397 The Clark Report notes that at the time of the sale, de Havilland had firm orders for the sale of 61
Dash 8 series aircraft.  Clark Report, pgs. 39-40.WT/DS70/R
Page 123
solely for export.398  Therefore, Brazil argues, the benefits accruing to Bombardier of OAC’s
investment in de Havilland were tied to anticipated, if not to actual exportation or export earnings and
thus are prohibited export subsidies within the meaning of Article 3 of the SCM Agreement.
(b) Arguments of Canada
6.289  Canada describes the factors forming the background to the 1992 commitments by the
Province of Ontario and the Government of Canada in support of the restructuring of de Havilland,399
noting that Boeing had owned de Havilland since 1986, and while the Dash 8 continued to be viewed
as a superior product in the market, de Havilland’s losses throughout the late 1980s – amounting to$1 billion by 1992 – persuaded Boeing to end its foray into the turboprop market.  Canada states that
sharply decreased orders following the recession of the early 1990s and aggressive sales financing and
pricing practices by subsidised competitors had a considerable impact on the company’s finances,
such that by the end of 1991, Boeing indicated that it intended to close de Havilland if a suitable
purchaser could not be found.
6.290  Canada submits that in view of the contribution of de Havilland to the economy of the
province, both in absolute monetary terms and in terms of strategic depth, the Government of Ontarioand Bombardier examined the potential for long-term viability of de Havilland, and came to the
conclusion that an appropriate business plan, a revitalized Dash 8 programme, continuing productivity
improvements and diversification of business operations through involvement in other Bombardier
aircraft programmes could help de Havilland in attaining long-term commercial strength.  Canada
states that it was also clear that restructuring would take several years and that the risk of failure wassignificant.
6.291  According to Canada, on 22 January 1992 Ontario and Bombardier entered into an asset
purchase agreement with Boeing to acquire the assets of its de Havilland division, and the deal closed
on 9 March 1992.  At that time, de Havilland Holdings Inc. (DHI) acquired the assets of de Havilland.
Canada states that DHI was capitalized at Can$100 million, and the equity was fully invested in deHavilland.  For Canada, Ontario’s equity investment ensured that the Province would be a partner in
decisions on the future direction of de Havilland.  Ontario appointed three of seven members of the
board of directors.
6.292  Canada argues that the Shareholders’ Agreement, concluded in 1992 and binding on both
parties, included a “put” option:  Ontario had the right to require Bombardier to purchase its equity forCan$49 million.  In opting for a fixed price, Canada submits, Ontario had decided to forego any
upside potential in the value of de Havilland following restructuring.  At the same time, Canada states,
given the significant possibility of the failure of restructuring, Ontario’s decision on the fixed price
eliminated any downside potential as well.  Canada notes that a five-year restructuring time-frame
was established; the exercise period was set for 1 February 1996 to 31 January 1997.
6.293  According to Canada, in June 1995 the Government of Ontario changed, and the new
Government was committed to withdrawing from certa in functions in the marketplace and to selling
certain government assets.  Canada argues that by February 1996, Ontario determined that de
Havilland had emerged as a viable entity, that continued involvement of the Province in de Havilland
was no longer necessary, and that it could exercise its “put” option which right Ontario exercised
                                                     
398 Id.
399 See Minister of Industry, Science and Technology and Minister for International Trade, News
Release , “Wilson welcomes purchase of de Havilland and provides federal assistance”, 22 January 1992, (Exh.
CDN-66) and Ministry of Industry, Trade and Technology, News Release , “Ontario and Bombardier purchase de
Havilland”, 22 January 1992 (Exh. CDN-67) listing the commitments made by the two governments at the timeof the purchase of this company by the Ontario Government and Bombardier from Boeing in 1992.WT/DS70/R
Page 124
within the permitted period, with the sale of Ontario’s equity position in de Havilland Holdings Inc.
concluded on 28 January 1997.400
6.294  Regarding the covenant,401 which it argues is directly relevant to the question of de jure
export contingency, Canada submits that the covenant required Bombardier to keep de Havilland
running as an aircraft manufacturer if it made commercial sense, nothing more.  Canada argues that if
it makes commercial sense to sell aircraft domestically, then de Havilland will sell aircraft
domestically and stay in business, and states that indeed, given that 20 per cent of all Dash 8s -- the
most popular product manufactured by de Havilland -- in operation are in the Canadian market, deHavilland can expect to make more sales as required by market expansion and fleet renewal in
Canada. Canada argues that this fact is well recognised by Brazil, which notes that the price  of the
sale had been agreed to long before -- in 1992.  Canada maintains that the sale price was not
conditional on or tied to  export performance by de Havilland.  It could not have been raised or
reduced, and would not be raised or reduced, by virtue of the market into which de Havilland makes
its sales.  Accordingly, Canada argues, the sale of de Havilland by the Government of Ontario was not
contingent, in law or in fact, upon export performance, and Brazil has not presented a prima facie  case
in this regard.
6.295  Canada also argues that Brazil overlooks the fact that, in line with the covenants it entered
into, Bombardier has invested hundreds of millions of dollars in diversifying de Havilland’s
operations.  According to Canada, De Havilland now produces the wing for Bombardier’s new Learjet
45 and does the final assembly on the new intercontinental Global Express business jet, and theLearjet 45 was certified in late 1997, and the Global Express in mid 1998. Canada notes that there are
firm orders from Canadian customers for both these aircraft.
6.296  For Canada, the important point is that Bombardier will not get a reduction in the sale price if
it sells more into export markets, and will not pay a penalty -- through, for example, a prospective
increase in the sale price -- if all of its sales are in the Canadian market.
D. C
ANADA -QUÉBEC SUBSIDIARY AGREEMENT ON INDUSTRIAL DEVELOPMENT
1. Subsidy
(a) Arguments of Brazil
6.297  Brazil argues that pursuant to the 1984 Economic and Regional Development Agreement, the
governments of Canada and Québec entered into two Canada-Québec Subsidiary Agreements onIndustrial Development (the “Subsidiary Agreements”), signed in 1985 and 1992, which together
pledged Can$743 million in assistance to industrial projects in Québec.
402  According to Brazil,
although the Subsidiary Agreements were to have expired effective 31 March 1998,403 programmes
receiving funding through the Subsidiary Agreements were announced in June 1998.404
6.298  Brazil submits a study prepared by the Canadian Reform Party405, which it cites to illustrate
that the Canadian regional aircraft industry has received “conditionally-repayable” contributions
under the auspices of the Subsidiary Agreements. Br azil notes that the spreadsheet included in the
                                                     
400 See Ministry of Economic Development, Trade and Tourism, News Release , “Ontario recoups
taxpayer investment in de Havilland” 28 January 1997 (Exh. CDN-33).
401 Exh. CDN- 68
402 Report of the Auditor General of Canada to the House of Commons, November 1995, p. 21-8
(relevant chapter of Report – Exh. BRA-52).
403 Amendment No. 2 to the 1992 Subsidiary Agreement (Exh.BRA-59).
404 “Industry Canada - Contribution to Aeterna Laboratories Inc. under Canada-Québec Subsidiary
Agreement on Industrial Development,” Canada NewsWire, 15 June 1998 (Exh. BRA-60).
405 Exh. BRA-58WT/DS70/R
Page 125
study is limited to funding granted before 22 October 1996, the date of the study.  According to
Brazil, Canada has not been forthcoming concerning Subsidiary Agreement assistance to the regional
aircraft industry after this date (or concerning details of the terms of assistance granted prior to22 October 1996 and included on the Reform Party spreadsheet).  In response to a Panel question
regarding which of the transactions identified in th at spreadsheet Brazil alleged constitute subsidies
within the meaning of SCM Article 1, Brazil replies that  it offered the list of transactions to illustrate
that the Canadian regional aircraft industry has received “conditionally-repayable” contributions
under the auspices of the Subsidiary Agreements, and that Brazil does not consider that any of thespecific contributions listed themselves constitute export subsidies to the Canadian regional aircraft
industry prohibited by Article 3 of the SCM Agreement.
6.299  Brazil submits
406 an extract from the 1996-97 Public Accounts of Canada for the Department
of Industry, which shows that Bombardier’s Canada ir division received funds under the Subsidiary
Agreements during that period.  According to Brazil, Canada has not been forthcoming with
information within its sole control about Subsidiary Agreement assistance to the Canadian regional
aircraft industry.  Brazil believes that the evidence it has presented is sufficient to warrant furtherquestions from the Panel to Canada concerning the existence and terms of repayment for Subsidiary
Agreement assistance to the regional aircraft industry.
6.300  In response to a question from the Panel asking Brazil to cite instances of Subsidiary
Agreement assistance in the form of “non-repayab le contributions” provided to the civil aircraft
industry, Brazil replies that Schedule B of the 1992 Subsidiary Agreement
407 states that assistance
under the Subsidiary Agreement may be granted in the form of “a repayable or non-repayable
contribution.”  Brazil argues that the Canadian Reform Party study that it submits as an exhibit408
demonstrates that as an historical matter certain assistance granted Bombardier under the auspices ofthe Subsidiary Agreements has been characterized as “’non-repayable‘” or simply as a
“’contribution.‘”  Brazil argues that Canada refuses to release information which would permit Brazil,and the Panel, to determine whether non-repayable contributions under the Subsidiary Agreements
subject to the SCM Agreement have in fact been made.  Brazil considers that it has presented
evidence sufficient to establish its prima facie  case, and that the burden of production has shifted to
Canada to rebut that case.
6.301  Brazil also argues that, according to Canada’s notification to the WTO’s SCM Committee,
certain funds provided under the auspices of the Subsidiary Agreements are in the form of “ non-
repayable  contributions,”
409 and as such confer significant benefits on recipients within Article 1.1 of
the SCM Agreement.
6.302  Brazil further argues that even those contributions classified as “repayable” should be
considered to confer benefits within the meaning of Article 1.1, noting its arguments (para. 6.323) asto why it considers conditionally-repayable contributio ns failing to compensate for various factors to
constitute subsidies within the meaning of Article 1.1 of the Agreement.
                                                     
406 Exh. BRA-89
407 Exh. BRA-57
408 Exh. BRA-58
409 Communication at para. XXIX:5 (Exh. BRA- 56).  See also  1992 Canada-Québec Subsidiary
Agreement on Industrial Development, Schedule B, p. 31 (Exh. BRA- 57).  Canada has not disclosed sufficient
information concerning the Subsidiary Agreement to determine whether even those contributions deemed
repayable were in fact granted at concessionary rates.WT/DS70/R
Page 126
(b) Arguments of Canada410
6.303  In answer to a Panel request for informatio n concerning alleged loans made under the 1992
Subsidiary Agreement to Rolls-Royce and Lamines CTEK, Canada notes that it has not put in adefence regarding whether these contributions are subsidies  within the meaning of Article 1 of the
SCM Agreement.  Canada notes that Brazil agrees with Canada regarding the relevance of the
principle of judicial economy to the issues to be determined in this case.  Accordingly, Canada states,
to the extent that any documents are produced by Canada in response to this question of the Panel,
they are provided to further support Canada’s s ubmission that the contributions at issue are not
“contingent on export performance” within the meaning of Article 3 of the SCM Agreement.
6.304  Canada also states that Brazil has made no specific allegation about contributions to Rolls
Royce or Lamines CTEK, nor adduced any evidence in support of its allegations concerning
“benefits” under the Subsidiary Agreement.  Canada does not consider it appropriate to adduce
evidence in response to allegations not made and a case that has not been established. In addition,
Canada states that the contribution to Lamines CTEK was in respect of certain electronic materials not
related to the civil aircraft sector, and as such is not within the Panel’s jurisdiction.
6.305  Finally, Canada indicates, most of the information requested by the Panel is sensitive business
confidential information, and Canada’s desire to pr esent to the Panel such information as may help it
arrive at a decision must be balanced against the commercial interests and legal rights of private
parties not Party to this dispute.  Canada notes th at with the consent of the Government of Québec, it
provides the Rolls Royce contribution agreement, as Business Confidential Information, with clausesrelating to repayment terms blocked. 
411
6.306  In response to a question from the Panel, Canada indicates that a $2.25 million contribution
identified in the report by the Auditor General invo lved pharmaceuticals, and further, that the Auditor
General’s use of the term “repayable” includes c onditionally repayable. According to Canada, all
contributions under the Subsidiary Agreement are repayable, over time, in fixed annual payments.Canada states that there are three conditionally repayable contributions, based on sales, and that all
other contributions are unconditionally repayable.
(c) Comments of Brazil
6.307  Regarding Canada’s citation to Brazil’s belief in judicial economy, Brazil recalls its reference
to judicial economy in its letter to the Panel dated 13 December 1998 (see para. 6.281).
6.308  Brazil states that Canada appears not to have provided all of the information requested by the
Panel concerning Subsidiary Agreement assistance.  First, Brazil notes, the repayment terms are
redacted from the agreement setting out the terms of the $2.5 million contribution to Rolls Royce.
According to Brazil, the Panel should therefore a dopt adverse inferences, presuming that these terms
tie repayment to export performance (paras. 4.146-4.151).  Furthermore, Brazil notes that whileCanada has provided the Rolls Royce contribution agreement, it appears to have provided as “Annex
A” thereto the project description for the Lamines CTEK  contribution, rather than the project
description associated with the Rolls Royce contribution.  Brazil submits that the Panel should adopt
adverse inferences, presuming from Canada’s failure to produce the annex containing the project
description for the Rolls Royce contribution that this description contains inculpatory information
suggesting that the contribution is tied in fact to actual or anticipated export.
                                                     
410 See also Section VI.F for the parties’ comments on the Finan Report regarding the Subsidiary
Agreement.
411 See BCI Tab 4.WT/DS70/R
Page 127
2. Export contingency
(a) Arguments of Brazil
6.309  Under the Subsidiary Agreements, Brazil states, the governments of Canada and Québec
jointly fund major industrial projects aimed at improving the competitiveness of Québec’s economy.
The purpose of the Subsidiary Agreements is explicitly to foster development of export markets for
Québec products by “[p]romot[ing] access to new foreign  as well as domestic markets,”412  and for
this reason, Brazil maintains, financing provided under the auspices of the Subsidiary Agreements is
often explicitly directed at export-oriented projects and industries.413  In answer to a Panel question as
to how the cited press articles support its “explicitly directed” allegation, Brazil states that the projects
described are concrete examples establishing Brazil’s point that Subsidiary Agreement funding
“explicitly” – meaning in actual fact – goes to export-oriented projects, as one describes Subsidiary
Agreement funding to a company with 92 per cent of its revenue dedicated to export sales, and the
other describes Subsidiary Agreement funding to a company “[m]ost of” the production of which is
destined for export to the United States.  In answer to a Panel question regarding why Brazil states
that the purpose of the Subsidiary Agreements is to foster development of export markets, but cites
only the 1985 Agreement, Brazil replied that the sa me quote does not appear in the text of the 1992
Subsidiary Agreement.  Brazil reiterates that it do es not claim that assistance granted to the Canadian
regional aircraft industry under the Subsidiary Agreements is contingent in law on export, but rather
that assistance granted to the Canadian regional aircraft industry under the auspices of the Subsidiary
Agreements is contingent in fact  on export.  As a result, in Brazil’s view, it is not necessary that both,
or either, of the Subsidiary Agreements include provisions speaking expressly to export contingency.
6.310  Brazil cites a study prepared by the Canadian Reform Party which reports that the regional
aircraft sector has been a significant recipient of benefits under the Subsidiary Agreements,414 and
notes that the Canadian regional aircraft industry is 100 per cent export oriented according to the
Clark Report.  Brazil also notes that 1992 Subsidiary Agreement identifies aerospace is one of the“’key sectors‘” the support of which is central to the development of the Québec economy.
415
6.311  According to Brazil, assistance under the Subs idiary Agreements may be “in the form of
repayable or non-repayable contributions.”416  In answer to a question from the Panel as to why Brazil
considers that “repayable loans” under the Subsidiary Agreement, referred to in the articles submitted
by Brazil417, constitutes subsidies within the meaning of SCM Article 1, Brazil states that it cited to
that assistance for the purposes of illustrating, with the help of other evidence cited that funding under
the Subsidiary Agreements is contingent in fact upon export performance within the meaning of
Article 3 of the SCM Agreement.  Brazil states that it has not claimed that the specific assistance
                                                     
412 1985 Canada-Québec Subsidiary Agreement on Industrial Development, Art. 2.2(d).  Id. at
Schedule A, para. (d) (emphasis added) (Exh. BRA- 53).
413 “Rolls-Royce swells:  Ottawa, Québec jointly lend $2.5 million to help finance Lachine plant
expansion,” The Gazette (Montreal), 23 April 1997 (92 per cent of $2.5 million loan recipient’s sales were for
export) (Exh. BRA- 54); “Federal and Provincial Gove rnments Contribute to the Lamines CTEK Project in
Montreal,” Canada NewsWire, 17 October 1997 (Deputy Premier and Minister of State for Economy and
Finance Bernard Landry states that “Most of the [funded] plant’s production will be exported to theUnited States.”) (Exh. BRA- 55).
414 Canadian Reform Party Research, “Bombardier and the Federal Government - 15 Years of
Corporate Handouts,” dated 22 October 1996 (Exh. BRA- 58).
415 1992 Subsidiary Agreement, Schedule A, p. 27 (Exh. BRA- 57).
416 Canadian Communication Updating Notification Pursuant to Article XVI:1 of the GATT 1994 and
Article 25 of the SCM Agreement, G/SCM/N/16/CAN, 25 June 1997, para. XXIX:5 (“Communication”) (Exh.
BRA- 56).  See also  1992 Canada-Québec Subsidiary Agreement on Industrial Development, Schedule B, p. 31
(Exh. BRA- 57).
417 Exhs. BRA-54 and BRA-55WT/DS70/R
Page 128
described in these exhibits constitutes a subsidy within the meaning of Article 1.1 of the SCM
Agreement, among other reasons because this assistance is not to the regional aircraft industry.
6.312  According to Brazil, loans provided under th e Subsidiary Agreements grant benefits to
businesses with an established export trade or significant export potential, consistent with the goal of
the Subsidiary Agreements to “’[p]romote access to new foreign as well as domestic markets.‘”418
For Brazil, together the above factors suggest that Subsidiary Agreement funds are in fact tied toactual or anticipated exportation or export earnings.
(b) Arguments of Canada
6.313  Canada argues that the Subsidiary Agreement is not in law or in fact contingent upon export
performance.  Canada observes Brazil’s acknowledgement that contributions under the Subsidiary
Agreement promote access “’to new foreign as well as domestic  markets‘” [emphasis added by
Canada]  (para. 6.308)
6.314  Canada submits that the evidence that Brazil has adduced does not address the correct
interpretation of export contingency. That is, Canada argues, Brazil has not adduced any  evidence to
show that Subsidiary Agreement contributions are contingent  on export performance, in the sense that
contributions would not be paid unless exports took place , that there would be rewards  if exports took
place or that there would be penalties  if exports did not take place.  Canada submits that there is no
such evidence because this is not how contributions under the Subsidiary Agreement are made.  In
Canada’s view, therefore, Brazil does not put before the Panel a prima facie  case that contributions
under the Subsidiary Agreement are contingent upon export performance.
6.315  Canada states that the Subsidiary Agreement was signed by the Government Canada and the
Government of Québec (Québec) on 27 March 1992 for a five year period,
419 and that it was
terminated on 31 March 1998.420  According to Canada, no new applications are entertained, but
applications submitted prior to the date of termination are still in the process of being considered.
Canada argues that the purpose of the Subsidiary Agreement was to improve the competitiveness andvitality of the Québec economy by providing financial support for major industrial projects in Québec.
6.316  Canada indicates that contributions under the Subsidiary Agreement have been made in 111
major industrial projects, including 7 feasibility studies, and that only nine projects -- 8 per cent of the
total -- were in the aerospace sector.  Accordin g to Canada, the involvement of the Government of
Québec in support provided under the Subsidiary Agreement touched virtually all industrial sectors inQuébec, including hygiene products, electric power system s, aircraft and aircraft parts, glass, textiles,
plastics, ferro-alloys, major appliances, chemicals, waterworks and sewage systems, and cosmetics .
According to Canada, if alleged subsidies under the Subsidiary Agreement are, as Brazil points out,
available for both domestic and export markets, by definition  they are not contingent  on export
performance. Canada argues that Brazil’s de facto  argument rests on its “export propensity”
interpretation, which in Canada’s view is incorrect (paras.  5.53- 5.94).   In Canada’s view, Brazil’s
argument must therefore fail.
6.317  In response to a Panel question as to the starting and ending dates for the 1985, 1988 and
1992 Subsidiary Agreements, and the dates on which funding began and ended under each, Canada
states that the 1985 Subsidiary Agreement was entered into on 23 January 1985 and was terminated in
                                                     
418 1985 Canada-Québec Subsidiary Agreement on Industrial Development, Art. 2.2(d).  Id. at
Schedule A, para. (d) (Exh. BRA- 53).
419 Canada-Québec Subsidiary Agreement on Industrial Development (1991 ), 27 March 1992
(Exh. CDN-34).
420 Amendment No. 2 to the Canada-Québec Subsidiary Agreement on Industrial Development  (1991) ,
8 August 1996 at 2 (Exh. CDN-35).WT/DS70/R
Page 129
June 1991, and contributions committed under it were terminated in 1996; and that the 1992
Subsidiary Agreement was entered into on 27 March 1992 and was terminated on 31 March 1998, and
contributions committed under it will terminate in 2003. Canada further indicates that theseagreements were entered into under the authority of a framework Memorandum of Understanding
(MOU) on economic development between the Government of Québec and the Government of
Canada.  According to Canada, the first MOU was signed on 14 December 1984; the 1985 Subsidiary
Agreement was entered into under the auspices of the 1984 MOU.  The second framework MOU was
signed on 9 June 1988, and the 1992 Subsidiary Agreement was entered into under this MOU.
6.318  In response to a Panel question asking why Canada in its arguments does not refer to Brazil’s
arguments concerning the 1985 Subsidiary Agreement, Canada states that Brazil makes no claims in
respect of that Agreement.
(c) Response of Brazil
6.319  Brazil notes Canada’s argument in defending Subsidiary Agreement funding from
characterization as “’contingent on export,‘” that because some Subsidiary Agreement funding
supports domestic products or markets, or because such funding has been directed to projects outsideof the Canadian regional aircraft industry, it cannot be considered to be contingent upon export
performance.
6.320  Brazil does not contest that some Subsidiary Agreement funds may well have gone to other
industries with sales in export markets, or to other industries with sales in domestic  markets.  Brazil
submits that its claim that Subsidiary Agreement assistance constitutes a prohibited export subsidy
under Article 3 of the SCM Agreement is unrelated to these incidences of Subsidiary Agreement
funding.  Rather, Brazil argues, when Subsidiary Agreement funds were disbursed to the Canadian
regional aircraft industry, they were given to an industry that is totally export oriented according to
the Clark Report, precisely because  it is an export industry and was anticipated  to remain so.
6.321  Brazil considers that the evidence it has submitted, regarding conditional repayability of
Subsidiary Agreement funds, the Agreement’s objectives, the assistance to export-oriented companies
and assistance to the regional aircraft industry (paras.6.297-6.298) constitutes a prima facie  case that
Subsidiary Agreement assistance to the Canadian regional aircraft industry constitutes a prohibited
export subsidy.
E. S
OCIÉTÉ DE DÉVÉLOPPEMENT INDUSTRIEL DU QUÉBEC (“SDI”)
1. Subsidy
(a) Arguments of Brazil
6.322  According to Brazil, the Société de Dévélo ppement Industriel du Québec (“SDI”) provides
prohibited export subsidies, in the form of loans and guarantees, to the civil aircraft industry.  Brazil
states that SDI has recently been “’regrouped‘” for administrative purposes into a new corporation,known as Investissement-Québec (“IQ”).
421  Brazil indicates that IQ maintains the resources,
including the staff, of SDI.422  Brazil states that IQ administers the Industrial Development Fund and
the Private Investment and Job Creation Promotion Fund (“FAIRE”),423 which provides various forms
of “’financial assistance‘” and “’government support‘” to certain focus industries, foremost among
which is the aerospace industry.424  Brazil draws particular attention to what Brazil terms FAIRE’s
                                                     
421 Materials from SDI/Investissement-Québec website, at 1 (Exh. BRA- 65).
422 Id. at 1, 3.
423 Id. at 2, 4-6.
424 Id. at 7-9, 10-11.WT/DS70/R
Page 130
pledge to extend “’refundable or non-refundable contributions,‘” loan guarantees, and the
“’assumption of interest charges‘” for eligible projects.425
6.323  Brazil argues that SDI funding is extended on a conditionally-repayable basis, meaning that
repayment will only occur if the underlying project achieves the degree of success outlined by Brazil.
Brazil asserts that because the recipient has no down-side  risk – i.e., if the project is unsuccessful, SDI
funds need not be repaid -- a clear benefit is conferred, within the meaning of Article 1.1 of the SCM
Agreement.
6.324  Brazil draws attention to the finding in the most recent WTO Trade Policy Review of Canada
that IQ “provides export guarantees for projects considered too risky by private financial institutions,”
and that IQ assistance “is available for export development or expansion, or purchases of foreign
companies, or for contract finance.”  For Brazil, by offering guarantees for projects which are, in the
words of the Trade Policy Review “considered too risky by private financial institutions,” IQ makes a
potential direct transfer of funds and confers the obvious benefit, within the meaning of Article 1.1 of
the SCM Agreement, of providing resources which w ould otherwise simply not be available.  In light
of this, Brazil states, SDI funding need not be extended on a conditionally repayable basis toconstitute a subsidy.  Brazil also states that although the joint DIPP/SDI contribution for the
development of Bombardier’s 50-seat regional jet is not subject to the Panel’s jurisdiction (paras.
4.74-4.78), it still considers the “’conditionally-repayable‘” terms attached to it to be persuasive as
evidence that funding on such terms is as a general matter available and extended to the Canadian
regional aircraft industry.
6.325  Brazil maintains that it has demonstrated that funds are being and have been provided to this
industry, and that they are being and have been provided under conditions constituting a subsidy
within the meaning of Article 1.1 of the SCM Agreem ent.  Brazil believes that, having come forward
with this evidence, Canada should be asked by the Panel to produce the evidence placed at the
disposal of the WTO Secretariat in the process of conducting the Trade Policy Review.
(b) Arguments of Canada
426
6.326  In response to a Panel request for an explanation of, and the internal assessment documents
and loan/share agreements under, Garantie Québec “ad hoc programmes” and “the financing of major
projects”, in particular the three “financing of major project” activities totalling $7.1 million under the
Aerospace Industry Development Fund, and five FAIRE activities, during the 1997- 1998 periodCanada states that Canada notes that it has not put in a defence regarding whether these contributions
are subsidies within the meaning of Article 1 of the SCM Agreement.  Canada notes that Brazil agrees
with Canada regarding the relevance of the prin ciple of judicial economy to the issues to be
determined in this case.  Accordingly, Canada states, to the extent that any documents are produced
by Canada in response to this question of the Panel, they are provided to further support Canada’ssubmissions that the contributions at issue are not “contingent on export performance” within the
meaning of Article 3 of the SCM Agreement.
6.327  Canada also states that Brazil has made no specific allegation about contributions made under
the SDI, nor adduced any evidence in support of its vague and unspecific allegations concerning
“benefits” under the SDI.  Canada further states that Brazil has made no allegations and has adduced
no evidence in respect of the Aerospace Industry Development Fund . Canada does not consider it
appropriate to adduce evidence in response to allegations not made and a case that has not beenestablished.
                                                     
425 Id. at 5.
426 See also Section VI.F for the parties’ comments on the Finan Report regarding SDI.WT/DS70/R
Page 131
6.328  Finally, Canada states, most of the information requested by the Panel is sensitive business
confidential information, and Canada’s desire to pr esent to the Panel such information as may help it
arrive at a decision must be balanced against the commercial interests and legal rights of privateparties not Party to this dispute.  Accordingly, Ca nada indicates, with the express permission of the
Government of Québec, it has provided as business confidential information the contribution
agreements with les Industries Aerospatiales Mecair Inc., Héroux Inc., and Finition de Métal National
N.M.F. (Canada) Ltée. relating to the three projects under the Aerospace Industry Development Fund ,
with the clauses relating to repayment terms blocke d.  Canada states that each agreement details the
terms of the project, the contribution, and reimbursement.
427
6.329  Canada also notes that the “ad hoc programmes” listed under the SDI relating to the civil
aircraft sector are, in fact, activities under the Subsidiary Agreement that are administered (for
Québec) through SDI, and that as a result, these programmes have already been accounted for.
6.330  In addition, Canada states, the five FAIRE activities in the 1997-98 period were not in the
civil aircraft sector: one project was in the wood products sector, one in the heavy vehicles (trucks)
sector, one in the tourist industry sector, and two in the computer sector.  Accordingly, Canada states,these FAIRE activities do not fall within the jurisdiction of the Panel.
(c) Comments of Brazil
6.331  Regarding Canada’s citation to Brazil’s belief in judicial economy, Brazil recalls its reference
to judicial economy in its letter to the Panel dated 13 December 1998 (see para. 6.281).
6.332  Brazil also argues that although Canada has provided the contribution agreements for the
three Aerospace Industry Development Fund projects identified by the Panel, it has redacted the
sections regarding repayment terms, as well as cert ain of the “conditions préalables.”  Brazil submits
that these sections likely provide insight into whethe r the contributions are “in fact tied to actual or
anticipated exportation or export earnings.”  Brazil argues that as a result of Canada’s strategic
decision to withhold this information, the Panel sh ould adopt adverse inferences, presuming that the
information suggests that the contributions are in fa ct tied to actual or anticipated export (paras.
4.146-4.151).
2. Export contingency
(a) Arguments of Brazil
6.333  For Brazil, SDI loans and guarantees (as well as those of Investissement-Québec) confer
direct benefits on Québec businesses for the express purpose of assisting those businesses with “’[l]a
conquète de marchés à l’exportation,‘”
428 and to support transactions “’à l’étranger.‘”429
6.334  Brazil asserts that under SDI, the Government of Québec sponsors export programmes
“’designed to promote the export  of Québec-produced goods and services.‘”430  According to Brazil,
SDI was formed with the objective “’to promote economic development in Québec, particularly byencouraging the development of businesses, the growth of exports , research and the development of
new techniques.‘”
431  Brazil states that SDI provides Québec businesses with “’guarantee[s] of
                                                     
427 See BCI Tab 4.
428 SDI Website at 2 (Exh. BRA- 63).
429 Gouvernement du Québec, Ministère de L’Industrie, du Commerce, de la Science et de la
Technologie, Répertoire des services offerts à l’exportation, p. 53 (Exh. BRA- 64).
430 Government Assistance Programmes - A Practical Handbook (15th ed., 1995), para. 135.230
(emphasis added) (Exh. BRA- 61).
431 An Act Respecting the Société de Développement Industriel du Québec, para. 2 (Exh. BRA- 62).WT/DS70/R
Page 132
payment or repayment of a financial obligation‘” and “’loan[s] at the current market rate‘”432 for the
purpose of assisting those businesses with “’[l]a conquète de marchés à l’exportation,‘”433 and to
assist with “’tout projet d’exportation‘” or “’de démarrage à l’exportation.‘”434  According to Brazil,
SDI does not fund only exports to other of the Canadian Provinces, but specifically supports
transactions “’à l’étranger.‘”435 Brazil asserts that every CRJ sale benefiting from the Can$43 million
SDI loan for the development of the 50-seat CRJ has been for export,436 and that accordingly, SDI
funding to the civilian aircraft industry constitutes an export subsidy in law or in fact prohibited by
Article 3 of the SCM Agreement.
6.335  Brazil does not contest that some SDI/IQ funds may well have gone to other industries with
sales in domestic markets.  Brazil states that its claim that SDI/IQ assistance constitutes a prohibited
export subsidy under Article 3 of the SCM Agreement is unrelated to these incidences of SDI/IQ
funding.  For Brazil, when SDI/IQ assistance goes to the Canadian regional aircraft industry, it goes to
an industry that is totally export oriented, precisely because it is an export industry and the
Government of Québec anticipates that it will remain so.  For Brazil, the ordinary meaning of Article
3.1(a) of the SCM Agreement prohibits such assistance.
(b) Arguments of Canada
6.336  Canada maintains that the SDI is not continge nt upon export performance.  Canada observes
that Brazil admits that the programme is available for goods destined for domestic as well as export
market.
6.337   According to Canada, the SDI was established by the Loi sur la société de développement
industriel du Québec437 (the SDI Act).  In June 1996, the Garantie Québec  programme replaced most
operations under the SDI.  Canada states that this programme is designed to guarantee loans, lines of
credit or other forms of financing offered through a financial institution, and indicates that the
programme supports projects dealing with start-up, expansion or modernisation, in the manufacturing
or tourist sectors and in certain service industries; research, development or design, as well asmarketing and financing of tax credits for scientific research or experimental development; marketing,
acquisition of a company in another country, and financing of a line of credit; and business mergers,
regrouping of common activities and take-over of one firm by another in the manufacturing and
tourist sectors, and in certain service industries.
6.338  Canada states that according to Article 2 of the SDI Act, the objective of the SDI is to
‘«favoriser le développement économique du Québec, notamment en encouragent le développement
des entreprises, la croissance des exportations et les activitiés de recherche et d’innovation.»’  Canada
notes that Brazil acknowledges that ‘«exportation»’ in this context means exports outside Québec,
including the other provinces of Canada.  Therefore, for Canada, SDI has as a general objective the
enhancement of Québec’s competitiveness and, as a desirable but not necessary result, an increase inQuébec’s exports.  Canada maintains that export performance is not a criterion of success for either
the programme as a whole or its activities;
438 and that export performance is manifestly not a
condition for receiving contributions.
                                                     
432 Id. at para. 135.240.
433 SDI Website at 2 (Exh. BRA- 63).
434 Gouvernement du Québec, Ministère de L’Industrie, du Commerce, de la Science et de la
Technologie, Répertoire des services offerts à l’exportation, p. 53 (Exh. BRA- 64).
435 Id.
436 Clark Report, at pgs. 7-8, 13, 50-51, and Tables 1, 5 and 6.
437Lois Révisées du Quebéc, c. S-11.01 (Codification administrative 94-09-16) (Exh. CDN-36).
438 Société de développement industriel du Québec, 1997-1998 Annual Report (Québec: Gouvernement
du Québec, 1998) at 36-37, 40 (Exh. CDN-37).WT/DS70/R
Page 133
6.339  Canada maintains that the SDI comprises four sets of eligibility criteria, one of which is for
‘export development’, which includes credit insurance, financing for foreign direct investment by
Québec companies, and inventory financing.  Canada argues that 458 activities were authorised in1997-1998, of which 53 per cent involved loans or loan guarantees of less than Can$200,000.  One
out of 39 financing activities and 96 out of 419 guarantees authorised was for exportation.
439
According to Canada, the activities covered a wide range of industrial, transportation, resources and
agricultural sectors (278 authorisations) and services (180 authorisations),440 but none were related to
the civil aircraft sector.
6.340  Canada submits that in individual projects there are no rewards if exports take place and no
penalties if they do not. More important, in Canada ’s view, is that SDI is not in law or in fact
contingent upon export performance.
6.341  According to Canada, the sole basis for Brazil’s  allegation that SDI is inconsistent with SCM
Agreement Article 3 appears to be that one of the objectives of the programme is “the growth of
exports,” although Brazil admits that Québec counts sales to Canada’s other provinces as export sales.
(para. 6.333) Accordingly, in Canada’s view, there is no prima facie  case for Canada to answer.
6.342  Canada also objects, for the reasons identified in its arguments concerning TPC (paras. 6.197-
6.199) to what it views as the inappropriate use by Brazil of Canada’s trade policy review. Canada
asks the panel to ignore Brazil’s arguments about SDI that are based on that document.
F. ARGUMENTS REGARDING THE FINAN  REPORT SUBMITTED BY  BRAZIL
1.  Arguments of  Canada
6.343  Canada raises a number of general criticisms of what it views as flawed analysis and
assumptions, and inaccurate facts in the “Finan Report” submitted by Brazil in support of its
allegations of subsidization of the Canadian aircraft industry. Canada questions 441 the timeframes
over which the analysis is conducting, arguing that  in general the rationale for the choice of any
timeframe should be explicit, and that a consistent approach should be used in determiningtimeframes to be used.  Canada takes issue with the Finan Report's use of different timeframes for
different subsidies, with no rationale provided for any timeframe used, and no explanation of why
different timeframes are used.  That is, for some calculations the analysis extends through 2015, while
for others it ends in 2000. For Canada, these concerns over timeframes are important because of their
effect on the results of the analysis, in particular, the magnitude of the alleged subsidies.  Canadaargues that had different timeframes been used, the aggregate subsidy amounts calculated could have
been greatly reduced.
6.344  Canada further argues that the Finan Report calculates a higher value on investments that
require repayment than on the equivalent amount of funds as an unencumbered grant.  For Canada,
such a result is nonsensical, as the repayable funds clearly are less attractive to the recipient, giventheir repayment obligation, than outright grants with no strings attached.
6.345  Canada also criticises the Finan Report's comparative treatment of actual and anticipated
benefits.  According to Canada, there should be a clear distinction between those alleged subsidies
that have already been received, and those that will only be received in the future if certain other
events occur as well.  Canada states that one-half of the benefits alleged in the Report have already
                                                     
439Id.. at 22, Table 1 (Exh. CDN-37).
440 Id.. at 24, Table 2 (Exh. CDN-37).
441 The comments in paras. 6.343 and 6.346 are contained in a document prepared by KPMG LLP
submitted as an attachment to Canada’s first submission.WT/DS70/R
Page 134
been received, and the other half may or may not occur in the future, and that the lack of distinction
between those categories of alleged benefits results in a potentially misleading statement of results.
6.346  Canada argues, with respect to the CRJCI, that the “Finan Report” assumes  that “EDC’s
return is generated by Exinvest’s share in the residual value of the aircraft”442,  then assumes  that
“EDC participates in all of Bombardier’s sale of regional jets”443, and thirdly assumes implicitly that
the EDC participates in all of Bombardier’s sales through  equity infusions.  Canada asserts that no
evidence is adduced in support any of these “assumptions”, in spite of which the “Finan Report”
declares that “EDC is clearly providing a subsidy to Bombardier.”
6.347  Canada argues the “Finan Report” observes that the Canada-Québec Subsidiary Agreement
has been “previously determined  to confer subsidy benefits to other companies.” [emphasis added]
The “Finan Report” does not explain how such a finding is relevant to this dispute.  It does not cite
any evidence or authority for the assertion.  It does not say when, by whom or under what
circumstances any such determinations were made.  Indeed, no support is offered and no evidence
adduced in respect of an assertion without relevance.  This is neither evidence nor argument; it is
simply innuendo.
6.348  Canada states, with respect to Québec’s SDI, that the Report makes no “assumptions”; but
rather an unsupported assertion of “fact”: “Projects must  be aimed at markets outside Québec.”444
[emphasis added by Canada] Canada denies this (paras.  6.335-6.340).  According to Canada, the SDI
includes a number of programmes, only one of which is related to “exportation”, and in any event,
Canada states, by “exportation” SDI refers to “exportation out of Québec”, including to the other
provinces of Canada , as Brazil itself admits.
6.349  Canada recalls its argument that the conclusion of the “Finan Report” with respect to
Ontario’s forgiveness of its loan to Bombardier is without foundation and false (see para. 6.275-
6.276). Nevertheless, Canada notes what it terms the methodological paradox created as a result of the
assertion by the “Finan Report” that the alleged forgiveness of the loan concerning the sale in 1997
should be viewed as a cash grant in 1992 : if the “subsidy” element of the sale was granted in 1992,
then the sale is outside the jurisdiction of this Panel.   If, however, the sale is to be the subject of WTO
dispute settlement, any “subsidy” would have to be found to have been granted in 1997 .  If this is the
case, Canada submits, the “present value in 1998” of the subsidy as calculated by the “Finan Report”
is inflated and, in any event, irrelevant.
6.350  Canada notes that the Finan Report in Table B4 estimates the alleged benefits received by
Bombardier as a result of “equity infusions” from the EDC into the CRJCI.  According to Canada,
these alleged benefits are estimated on the presumption that private sector investors require a 15 per
cent to 20 per cent pre-tax return on similar aircraft leasing deals, reflecting a misunderstanding of the
nature of US leveraged leasing transactions.  According to Canada, US leveraged leases are driven bytax considerations: because of the tax benefits received, private equity investors are prepared to earn
very low pre-tax  returns; indeed, pre-tax returns may be zero or even negative.  This is because,
Canada submits, their after-tax  returns, incorporating the tax benefits associated with leveraged
leasing, reach acceptable levels.
 445  Accordingly, in Canada's view, the “Finan Report” grossly over-
estimates the value of the alleged benefit from these transactions.  In these circumstances, Canada
maintains, even assuming that all other assumptions are correct, EDC’s alleged pre-tax return on
equity of 2.75 per cent would, in view of the after-tax  returns that EDC would expect in a leveraged
lease transaction, be consistent with what private sector investors would expect.
                                                     
442 Finan Report, at A.1.
443 Id.. at A.2.
444 Id.. at A.3.
445 Andrew Littlejohns and Stephen McGairl, eds., Aircraft Financing , 3rd ed. (New Jersey, US:
Euromoney Books, 1997) at Chapter 8 (Exh. CDN-48) and Appendix 1 (Exh. CDN-75).WT/DS70/R
Page 135
2. Response of Brazil
6.351  In response to Canada’s general argument that the Finan Report overstates or improperly
calculates the present value in 1998 of the benefits received by the Canadian regional aircraft industryfrom subsidies, Brazil emphasizes that whether the benefit is $1 or $1 billion is in large part
irrelevant.  According to Brazil, the fundamental point established by Brazil and the Finan Report is
that whatever the value, and whether the test is “benefit to recipient” or “cost to government,” the
Canadian programs confer a benefit and constitute a subsidy within the meaning of Article 1 of the
SCM Agreement.
6.352  In responding to Canada's specific comments, Brazil notes generally that the Finan Report
performed two separate calculations:  first, the aggregate present value in 1998 of benefits received by
Bombardier in the past as well as those expected to be received in the future.
446  second, benefits per
50-seat jet delivered in 1998.447  Brazil states that the per-aircraft benefits relate only to benefits which
have already been received and do not include benefits relating to the development of 70-seat aircraft.
(a) The Time Frames Over Which Subsidies are Quantified and Aggregated
6.353  Brazil states that it does not disagree with KPMG's proposed tests for evaluating the
timeframes used in the Finan Report, but emphasizes the importance of applying the correct time-
frame consistent with the facts and circumstances of the case .  Brazil argues that since each of the
different Canadian Government subsidies analysed in the Finan Report involve different facts and
circumstances, it correctly applied different time frames in calculating the benefits to Bombardier
appropriate to the facts:
(i) EDC Equity Infusions
6.354  Time-frame:  Benefits calculated for each of 20 years from fiscal 1996 through 2015.
6.355  Rationale:  The EDC is presumed to participate in the financing of every jet sold by
Bombardier, beginning in January 1996 and continuing for the estimated 20-year economic life of the
product.448  Brazil notes that extending the analysis out 20 years does not significantly alter the
analysis of aggregate benefits, because benefits received in the future are discounted back to the
present at 16.9 per cent.  Thus, 75 per cent of the net present value of benefits relating to EDC equity
infusions are generated in the first 10 years of the analysis, i.e. through 2005.
(ii) Can$87 Million “Investment” in the 70-seat CRJ-700
6.356  Time-frame:  For the purpose of calculating an aggregate benefit to Bombardier, the analysis
extends to 2019.  However, no per-aircraft benefit relating to this subsidy is calculated, since
deliveries of the 70-seat jet have not yet commenced.
6.357  Rationale:  Brazil notes that the government expects repayment, plus receipt of a modest
profit, through per-aircraft royalties commencing with the 250th jet sold.  Therefore, the analysis is
extended through the estimated life of the 70-seat jet, 20 years.
                                                     
446 The aggregate amounts appear in Table B.1 of The Finan Report.
447 The per-aircraft amounts are summarized in Table B.16 of The Finan Report.
448 See R. Baldwin and P. Krugman, "Industrial Policy and International Competition in Wide-Bodied
Jet Aircraft", in R. Baldwin, ed., Trade Policy Issues and Empirical Analysis  (Chicago:  University of Chicago
Press, 1988).  Baldwin and Krugman state:  "… the product  cycles in aircraft are quite long …  (T)he life of a
successful airframe is something like twenty years."WT/DS70/R
Page 136
(iii) Can$57 Million “’Investment‘” in the Dash 8-400
6.358  Time-frame:  For the purpose of calculating an aggregate benefit to Bombardier, the analysis
extends to 2019.  However,  no per-aircraft benefit relating to this subsidy is calculated, sincedeliveries of the Dash 8-400 have not yet commenced.
6.359  Rationale:  As in the case of the Can$87 million “investment”, Brazil argues that the
government expects repayment, plus receipt of a modest profit, through per-aircraft royalties.
Therefore, again the analysis extends through the estimated life of the product, 20 years.
(iv) Can$100 Million “Investment” in Turboprop Engines
6.360  The time-frame and rationale are identical to those relating to the Can$57 million
"'investment'".
(v) The Acquisition and Restructuring of de Havilland
6.361  Time-frame:  Benefits are amortized over 13½ years, beginning in the year in which funds
were received.
6.362  Rationale:  Amortization is based on the depreciable life of Bombardier fixed assets for the
period 1994-1998.
449  This is appropriate since the subsidies relate to the acquisition of the assets of
the de Havilland business.  Amortizing the benefits based on the average depreciable life of fixed
assets anchors the duration of benefit to the life of the underlying assets.
(b) The Comparative Treatment of Repayable and Non-Repayable Contributions
6.363  Brazil concedes that the value of a grant should exceed the value of a repayable contribution,
and that any statement to the contrary would be silly.  Brazil states that its “low estimate” correctly
computes the value of the repayable contributions, as noted by KPMG, but acknowledges a
spreadsheet error made in calculating the “high es timate” for benefits relating to the Technology
Partnerships Canada subsidies.  Correcting this technical error does not change the low estimate of the
present value of benefits received by Bombardier, and reduces the high estimate from US$2.4 billionto US$2.3 billion.
(c) The Comparative Treatment of Actual and Anticipated Benefits
6.364  Brazil does not object to making the distinction between benefits already received and those
that may be received in the future.  Brazil asserts that its calculation of the benefits per 50-seat jet
delivered in 1998 relate entirely to benefits received in 1998 and prior years, and that the 1998 per-aircraft benefit excludes EDC benefits generated in later years and ignores benefits relating to the
development of 70-seat aircraft.
6.365  In separating past vs. future benefits in the calculation of the aggregate present value of
benefits, Brazil states that the only “anticipated” benefits are EDC benefits for 1999 and beyond.
Brazil disagrees  with the percentages calculated of the percentage of EDC benefits which may beconsidered “anticipated”.  Brazil argues that the number of planes actually sold is not the relevant
benchmark to be used in distinguishing between actual and anticipated benefits, but rather the present
value of benefits relating to deals consummated in or before 1998 vs. deals which are expected to take
                                                     
449 The method used to determine the depreciable life of Bombardier's fixed assets is discussed in
G. White, A. Sondhi, D. Fried, The Analysis and Use of Financial Statements , (John Wiley, New York) 1994,
page 453.WT/DS70/R
Page 137
place in the future.  Brazil calculates the present value of benefits relating to deals taking place in or
before 1998 at between US$215 million and US$236 million.  Brazil's estimate of the present value of
benefits relating to future deals is between US$679 million and US$743 million.  Thus, Brazil states,the portion of the total present value of benefits relating to anticipated benefits is roughly 30 per cent.
3. Rebuttal by Canada
6.366  Canada submitted a report by KPMG in support of Canada's criticisms of the Finan Report.
In the report, Canada notes, first, that for EDC eq uity infusions, extending the timeframe of analysis
increases the amount of the aggregate alleged benefits, because most of the alleged benefits identifiedwere to be received in the future, as aircraft are sold.  For the other funds for the development of
airplanes and engines, Canada asserts, the alleged benefit has already been entirely received up front;
extending the timeframe, be increasing the estima ted repayments or royalties, diminished the
magnitude of the alleged benefit.
6.367  Canada notes that Brazil acknowledges a spreadsheet error with respect to only one
calculation.  Canada submits that the same error is equally applicable to the calculations pertaining to
TPC.
6.368  In response to Brazil’s assertion that the Can$87 million TPC contribution in 1996 would
have a net present value, in 1998, of Can$119 million, Canada notes first, that the Finan Report
assumes  that the TPC contributions are all paid in lump sum, which according to Canada is not the
case.  Canada states that as of the date of its First Written Submission, only about Can$22 million had
been disbursed.  Canada also indicates that the rate of inflation in Canada over the previous two yearswas only about 1.5 to 2 percent.  Thus, for Canada, even if the Can$87 million had been disbursed in
lump sum in 1996, a 25 percent inflation in two years in the “net present value” of the contribution
was unjustified and again highlighted the difficulties in the methodology of the Finan Report.  Canada
also argues that the Finan Report is unduly pessimistic about the market prospects of the CRJ700, in
view of the market forecasts by independent and highly respected forecasters that Canada hassubmitted in response to a Panel question.
G. 
ARGUMENTS REGARDING THE CLARK REPORT
1. Arguments of Canada
(a) Saturation of the Canadian regional turboprop market
6.369  Canada criticises the “Clark Report” submitted by Brazil in support of its arguments concern
the proportion of regional aircraft exported by Canada on a number of grounds.  Canada asserts, first,
that the report chooses a period of analysis that ignores the reality that the Canadian regional
turboprop aircraft market has been saturated since 1992.  Canada states that because of this saturation,
since 1992, there have been only two  firm sales of any new regional turboprop aircraft to Canadian
customers450, and one import of a used Dash-8, in 1998.
                                                     
450 Two 2 Saab 340Bs were ordered in 1994; ten British Aerospace J41 were ordered in 1995, but all
were subsequently cancelled or returned to British Aerospace.   The remaining additions to the regional aircraftfleets of Canadian airlines post 1992 have been 26 Canadair CRJs delivered to Air Canada: see Orders, Canada,
20-90 Seat Market, 1984-1998 (Lundkvist Aviation Research, 1998) (Exh. CDN-42).WT/DS70/R
Page 138
6.370   According to Canada, in the period 1984-90, Cana dian airlines invested heavily in turboprop
regional aircraft and the Canadian domestic regional aircraft fleet increased by 776 per cent451,
thereafter stabilizing, as the Canadian market was saturated.
6.371  Canada argues that as of 1 January 1998, Canadian carriers operated almost 100 Dash 8’s in
regular service452, and states that from its introduction in 1983/84 to 31 December 1997, 481 Dash 8’s
had been delivered.  According to Canada, domestic Canadian carrier fleets therefore represent about
20 per cent of the Dash 8 deliveries.
6.372  For Canada, it thus is not surprising that Dash 8 sales post 1992 have been for export.
Canada argues, however, that when the domestic demand for turboprop regional aircraft returns as
older aircraft need replacing, it is likely that Canadian airlines will order new Dash 8s, given the
economies of training on and maintaining new aircraft that have the same lineage as their established
turboprop fleets.
(b) The 26 CRJs delivered to Air Canada
6.373  According to Canada, the Clark Report's “determination” that the 26 CRJs delivered to Air
Canada are “export sales”453 is untenable.  Canada submits that these 26 CRJs were purchased by a
Canadian airline (Air Canada) from a Canadian manufacturer (Bombardier), and were never intended
for export: each aircraft was required by contract to be manufactured in compliance with Transport
Canada requirements for a Canadian Certificate of Airworthiness and a Canadian Certificate of
Registration.  The Standard Certificate of Airworthiness should be contrasted with a Certificate of
Airworthiness for Export:  CRJs acquired by Air Canada require the former, whereas exportcustomers (such as Slovenia and the United States) require the latter.  Air Canada took delivery of the
aircraft directly from Bombardier.  Canada states that the aircraft are based and registered in
Canada,
454 and fly regular routes between Canadian centres, and between Canadian and US centres.455
6.374    Canada also takes issue with the Report's statement that that Air Canada ordered 26 of the
50-passenger CRJs in several separate transactions and that Air Canada was not interested in owningthese aircraft.
456  According to Canada, this assertion is not supported by the evidence. Canada states
that to finance its acquisitions, Air Canada chose to use US leveraged leases for 24 CRJs, with the
remaining two CRJs purchased for cash.457  Thus, Canada maintains, Air Canada has demonstrated a
patent interest in owning CRJs.  Canada asserted that the latter two purchases are established beyond
any doubt by the Bills of Sale and Certificates of Acceptance for these aircraft.
6.375  According to Canada, airlines purchasing aircraft look to a variety of financing mechanisms
in order to reduce financing costs, and at present, the US leveraged lease is one of the most popular
financing vehicles, as it allows an airline to pass US tax benefits to an equity participant, in return for
                                                     
451 Regional Market History: Orders, Deliveries, an d Total Fleet, Canadian Market (Lundkvist Aviation
Research, 1998) (Exh. CDN-43).
452 Ninety-seven Dash 8-100 and 300 series aircraft were operated by Canadian carriers as of
31 December 1997: see Summary of Dash 8 Aircraft in Service with Operators of Canadian Airlines as at1 January 1998 and World Airline Directory, the Americas, Flight International  25-31 March 1998 at pp 37-60
(Exh. CDN-44).
453 “Clark Report” at 10, 13, 21-24.
454 Transport Canada Registry of Civilian Aircraft, online:  Transport Canada homepage
<http://www.tc.gc.ca/cgi-bin/webdbc.dll/Av > (date accessed:  10 November 1998) (Exh. CDN-45).
455 Air Canada, Press Release, “Air Canada to Add Two New Canadair Jets to Fleet” (31 January 1997)
(Exh. CDN-46).
456 “Clark Report”  at 13.
457 Air Canada, 1997 Annual Report (Exh. CDN-47).WT/DS70/R
Page 139
lower financing costs.458 Canada states that similar advantages can be found in other jurisdictions:
Japan, Germany and the United Kingdom.
6.376  In Canada's view, given the globalisation of financial services and capital movements, these
transactions cannot be characterised as exports simply because they are financed or underwritten in
another country.  That is, Air Canada’s choice of financing vehicle cannot change the fundamental
nature of these transactions: they are domestic and not export sales.
6.377  Thus, Canada argues, the “Clark Report” incorrectly concludes that 100 per cent of all of
Bombardier’s regional aircraft sales have been for export.
6.378  Canada also argues that the Clark Report's definition of  “sale”, which counts firm orders as
sales, is incorrect.459 Canada maintains that sales are properly marked when the plane is delivered ;
even firm orders may not turn into sales, as was ev ident during the downturn in the aircraft industry in
the early 1990’s.460   Canada noted that Air BC acquired two Dash 8 aircraft in April and May 1992
on rolling one-month interim finance leases and subsequently took title to the aircraft in July 1992.
Thus, using the proper definition of sale, de Havilland made domestic sales in the "review period"
chosen by the Clark Report.
2. Response by Brazil
6.379  Brazil takes issue with Canada's criticism that the Clark Report does not include sales of Dash
8 series aircraft sold to domestic airlines prior to 1992, and that had the Clark Report taken account of
the period 1984-1990, it would have found evidence of domestic sales (paras. 6.368-6.371).
6.380  Brazil notes that it has conceded, pursuant to arguments by Canada, that a 1989 alleged
subsidy by DIPP and SDI was not within the Panel's jurisdiction because it was made before the entry
into force of the WTO Agreement (para. 4.77), and argues that Canada cannot “have its cake and eat it
too.”  For Brazil, the period before 1 January 1995 is either relevant and subject to the Panel’s
jurisdiction or it is not.  Canada cannot have it both ways.
6.381  Brazil also disagrees with Canada's argument that because 26 CRJs are operated by Air
Canada and registered to operate in Canada, they represent domestic rather than export sales (paras.
6.372-6.376).
6.382  Brazil notes, first that 10 of the 26 CRJs operated by Air Canada were sold in 1993, before
the effective date of the SCM Agreement.461 Brazil states that according to Canada, events occurring
before the effective date of the SCM Agreement are not subject to the Panel’s jurisdiction.
6.383  Second, Brazil argues, Canada admits that for at least 24 of the 26 CRJs, the aircraft were not
sold to and are not currently owned by Air Canada, but that rather because they are operated  by Air
Canada, they constitute domestic sales.  Brazil does not dispute that these aircraft are, for the moment,
part of the Air Canada fleet, but submits that they are not owned by Air Canada  and were in fact sold
                                                     
458 Andrew Littlejohns and Stephen McGairl, eds., Aircraft Financing , 3rd ed. (New Jersey, US:
Euromoney Books, 1997) at Chapter 8 (Exh. CDN-48).
459 “Clark Report” at 4: “Our analysis is based on the numbers of aircraft sold, i.e., those which are the
subject of firm orders or commitments, not on value.  As deliveries may lag firm orders by several months orseveral years, whenever possible we selected the date of the reported firm order, not subject to any conditions,as the most appropriate basis for determining the date of sale.”
460 For example, a cancellation of a near-term order by GPA Jetprop caused de Havilland to reduce its
production of Dash 8’s and to shutdown the Downsview, Ontario plant for an extended period in the summer of
1993: See “GPA Jetprop Cancels Backlog, DHC Forced to Extend Summer Shutdown”, Commuter Regional
Airline News , 26 April 1993 at 3. (Exh. CDN-72).
461 Clark Report, Tables 5D and 5F.WT/DS70/R
Page 140
via EDC’s equity financing vehicle to a US SPC, from which Air Canada merely leases  the aircraft, a
fact which Brazil states that Canada acknowledges.  In response to a Panel question concerning the
basis for this alleged acknowledgement by Canada, Brazil notes Canada’s statement (para. 6.373) that“’US leveraged leases‘” were used to finance the sale of these aircraft, and Canada’s statement (para.
6.124) that CRJ Capital, which according to Brazil is the “’EDC equity financing vehicle‘”, was used
for the Air Canada transaction.  Brazil also states that this transaction is the focus of former EDC
President Paul Labbé’s comments to the Canadian Parliament’s Committee on Foreign Affairs and
International Trade (see para. 6.112).  Brazil states that its arguments in this regard do not speak to theremaining two CRJs, which Canada alleges were purchased by Air Canada.
6.384  Brazil notes that even if the two remaining CRJs operated by Air Canada and sold in 1997
462
constitute domestic sales, the result would be that during the period from 1 January 1995 to the
present, 99.64 per cent of sales by the Canadian regional aircraft industry would still have been for
export.463
6.385  Third, regarding Canada's argument (para. 6.372) that Air Canada’s compliance with
Transport Canada requirements regarding a Canadian Certificate of Airworthiness and a CanadianCertificate of Registration demonstrates that these CRJs “were never intended for export . . .”, Brazil
states that as a matter of Canadian law, it is illegal to operate aircraft in Canada without a Canadian
Certificate of Airworthiness.
464  Brazil notes that because the CRJs are in fact operating in the Air
Canada fleet, this would presumably subject them to this domestic regulatory requirement.  For
Brazil, however, the fact that Air Canada would secure a Canadian Certificate of Airworthiness doesnot diminish the fact that the aircraft were sold to a foreign buyer.
6.386  Brazil also maintains that it is illegal under Canadian law for Air Canada to operate foreign-
registered aircraft without obtaining a Canadian Certificate of Registration,
465 and for Brazil the fact
that Air Canada needed to secure this certificate simply makes it all the more evident that the CRJs at
issue had been sold to and are owned by a US SPC, and are therefore “foreign-registered” within themeaning of Transport Canada regulations.
6.387  Brazil characterizes Canada's argument (para. 6.375) that although these aircraft were sold to
foreign buyers and structured as export sales precisely so that they would fall within EDC’s export
financing mandate , the “'choice of financing vehicle cannot change the fundamental nature of these
transactions‘”  as another instance of Canada's trying to “’to have its cake and eat it too.‘”  Brazilrecalls a statement by EDC’s former president in testimony to Parliament that the “reality” of this sale
was that it was to a US party,
466 in order to take advantage of EDC financing to launch an export
product.  For Brazil, Canada cannot credibly now be heard to claim that these were not export sales.
3. Rebuttal of Canada
6.388  In response to Brazil's argument that 10 of  the 26 CRJs were sold prior to 1995, Canada
argues that counting a sale as when a delivery is made, Air Canada has acquired 22 CRJs since 1
January 1995467 two of which were paid for in cash in January 1997 (para. 6.373), and the remaining
20 were financed through US leveraged leases.  With respect to Dash 8 sales and Brazil's argument
                                                     
462 Clark Report, Table 5H.
463 Clark Report, Table 8 (during the period 1 January 1995 to the present, there have been 563 sales of
Canadian regional aircraft, two (or 0.36 per cent) of which are operated by Air Canada).
464 Section 700.05(1)(a) of the Transport Canada regulations (attached in relevant part in Exh.
BRA-98).
465 Section 202.42(1) of the Transport Canada regulations (attached in relevant part in Exh. BRA-98).
466 House of Commons of Canada, 35th Parliament, 1st Sess., Evidence, Standing Committee on Foreign
Affairs and International Trade, Meeting No. 43, 11 May 1995, pg. 43:30 (emphasis added) (“Committee on
Foreign Affairs and International Trade”) (Exh. BRA-9).
467 Bombardier Inc, list of CRJ delivery dates to Air Canada (Exh. CDN-90)WT/DS70/R
Page 141
that Canada cannot "have its cake and eat it too", Canada submits that its comments on the Clark
Report were simply responding to the assertions and analysis of that document and that it was the
Clark Report that chose to review the period before 1995.  In Canada's view, its comments on theClark Report took no position on whether the transactions prior to 1995 are within the scope of the
Panel's jurisdiction.
6.389  Canada’s denies that it acknowledges that any of the 26 Air Canada CRJs were sold via
EDC’s equity financing vehicle to a US SPC (para.  6.381).  Canada asserts that the statements of
Canada cited by Brazil in this regard make no mention of EDC involvement, nor of CRJ Capital, andargues that Brazil continues to mischaracterize CRJ Capital as “’EDC’s equity financing vehicle‘”.
Canada recalls its statements and the officers’ certificate that it submitted,
468 to this effect.
6.390  Regarding Brazil’s argument that the aircraft acquired by Air Canada through leveraged
leases are export sales, Canada submits that the fact that the owners of these US leveraged lease
financed aircraft are owner-trustees located in the United States does not make these transactions into
export sales.  For Canada, US leveraged leases are just a means of financing an acquisition which are
used to finance a variety of capital goods.  Canada states that, for example, a Canadian electricalutility could finance a new coal-fired electrical power plant built and located wholly within Canada
with a US leveraged lease, and that the power pl ant never leaves Canadian soil and thus is not
exported.
469
6.391  For Canada, regarding the term “export” for the purposes of Article 3 of the SCM Agreement,
the ordinary meaning is to “send out (goods …) esp. for sale in another country”.470  Canada submits
that there is nothing in the context, object and purpose, or negotiating history of the SCM Agreement
that would indicate that the interpretation of “export” should be any different than the ordinary
meaning.  In this sense, Canada states, there is no indication of these aircraft being exported.
6.392  Canada takes issue with Brazil's characterization of its argument regarding Transport
Canada's requirements (para. 6.384).  Canada states that its argument is that each aircraft was requiredby contract  to be manufactured in compliance  with Transport Canada requirements for domestic
aircraft.
471  This, Canada submits, is evidence that these aircraft were not intended for export, as if
they had been intended for export to the United States, they would have been manufactured in
compliance with the requirements of that jurisdiction – that is, requirements set by the US Federal
Aviation Authority.
6.393  In this regard, the Standard Certificate of Airworthiness should be contrasted with an Export
Airworthiness Certificate, according to Canada. Canada states that CRJs acquired by Air Canada
receive a Standard Certificate of Airworthiness,472 whereas export customers such as those in the
United States would receive an Export Airworthiness Certificate473, the significance of which is set
out in the Canadian Aviation Regulations.474
6.394  Canada submits that according to these Regulations, where the Canadian Minister of
Transport agrees to issue an Export Airworthiness Certificate  in respect of an aircraft being exported
                                                     
468 Exh. CDN-93
469 Memorandum to Blair Hankey from William Macan, 14 November 1998, “US Cross-Border
Leasing – No ‘Export’ Requirement” (Exh. CDN-79)
470 Hawkins and Allen, eds., The Oxford Encyclopedic English Dictionary  (Oxford University Press:
Oxford, 1991) definition of “export” at 500 (Exh. CDN-80).
471 Declaration of Michel Bourgeois, 24 November 1998.  (Exh. CDN-69).
472 Standard Certificate of Airworthiness, 27 May 1996, CRJ serial number 7120, Canadian
Registration Mark C-FWSC (a CRJ delivered to Air Canada) (Exh. CDN-69).
473 Export Certificate of Airworthiness, 17 August 1998, for CRJ serial number 7253 (Exh. CDN-69).
474 See, Transport Canada, online: Transport Canada homepage, www.tc.gc.ca  (date accessed:
3 December 1998) Canadian Aviation Regulations  – General Information on the CARS (Exh. CDN-81)WT/DS70/R
Page 142
as conforming to a foreign airworthiness standar d, the Minister must verify compliance with any
special requirements set out in that foreign standard475, which for aircraft exported to the United States
are set out in an Appendix to the Regulations.476  According to Canada, The US Federal Aviation
Authority (or FAA) will accept Canadian export airworthiness certification, as long as the aircraft
conforms to certain FAA requirements, pursuant to a bilateral agreement between Canada and the
United States concerning, among other things, the airworthiness of imported civil aircraft.477
6.395  Canada argues that the 24 CRJs in question were not manufactured to comply with the
requirements for Export Airworthiness Certificates for the United States – precisely because there
was no intention to export them , and they were not exported.   Canada states that the results of a
Transport Canada database search on all of the CRJs in question show that none of the 24 CRJs
acquired by Air Canada under US leveraged leases have been exported478, and that none of them ever
was registered by Transport Canada as being imported  into Canada.479   Canada also argues that if an
aircraft is imported, that fact is registered in the Canadian Civil Aircraft Registry, so in the Registry
for a used Dash 8 imported by Air Nova, the entry lists the "Year imported", as 1988.  Similarly, the
entries for two SAAB 340Bs s how they were imported in 1994 and 1995 respectively.  Canada
submits, however, that the Canadian Civil Aircraft Registry entries for all Air Canada CRJs, shows
that the aircraft financed through US leveraged leases have never been imported.
6.396  Canada also disagrees with Brazil's argument  that it would be illegal under section 202.42 of
the Canadian Aviation Regulations for Air Canada to operate foreign-registered aircraft without
obtaining a Canadian Certificate of Registration.  Canada states that this section does allow for the
operation of foreign-registered aircraft on lease operations in Canada, without requiring that those
aircraft receive a Canadian Certificate of Registration.480  Canada argues that a Canadian operator
operating a foreign-registered aircraft can only do so only for a period of twenty-four months in a
thirty month period481, but also notes that under the Convention on International Civil Aviation ,
Article 18, an aircraft cannot be validly registered in more than one State482, meaning that either the
CRJs are registered in Canada, or they are registered elsewhere (such as the United States) – they
cannot be registered in two countries at the same time.
6.397  Canada asserts that a Canadian Certificate of Registration is necessary for Canadian aircraft,
as is clear in the Canadian Aviation Regulations483.  The fact that the Air Canada CRJs have Canadian
                                                     
475 Airworthiness Manual, Chapter 509, CAR 509.03(1) “Authority for Export”; and also see Canadian
Aviation Regulations , subpart 9 – Export Airworthiness Certificates (Exh. CDN-82)
476 Canadian Aviation Regulations , Airworthiness Manual, Chapter 509, Appendix B “Foreign Special
Requirements” and Annex I “United States of America”.  (Exh. CDN-83)
477 Exchange of Notes regarding Agreement Concerning the Airworthiness and Environmental
Certification, Approval, or Acceptance of Imported Civil Aeronautical Products : Note No. ETT-1583, dated
31 August 1994, from Lloyd Axworthy, Minister of Transport, to Paul Robinson, Ambassador for the
United States of America; Note No. 330, dated 31 August 1994, from John Rouse, Charge d’Affaires to
Lloyd Axworthy, Minister of Transport.  (Exh. CDN-78)
478 Affidavit of Sheila Dowd, Chief, Aircraft Registry and Leasing, General Aviation Branch of the
Department of Transport. (Exh. CDN-84) One aircraft, mark C-FZSI, purchased outright for cash by Air Canadaand delivered in January 1997, (see Exh. CDN-70) was sent to Argentina in November 1997, and wassubsequently returned to Air Canada in April 1998.
479 Affidavit of Sheila Dowd, (Exh. CDN-84).
480 Canadian Aviation Regulations  Section 202.42 is expressly subject to Section 203.03.  (Exh.
CDN-85)  Section 203.03, and Subpart 3 in general, set out the conditions for, among other things, a Canadianoperator to operate a foreign-registered aircraft that the operator has leased for use in Canada.  (Exh. CDN-86)
See also  Standard 223, Respecting the Operation of a Leased Aircraft by a Non-registered Owner.  (Exh.
CDN-87)
481 Canadian Aviation Regulations  Section 203.08. (Exh. CDN-86).
482 Convention on International Civil Aviation , International Civil Aviation Organization Doc. 7300/5,
1980 (Exh. CDN-88)
483 Canadian Aviation Regulations  Sections 202.13 to 202.17 and 202.69.WT/DS70/R
Page 143
Certificates of Registration thus does not make it “'all the more evident that the CRJs at issue… are
therefore ‘foreign-registered’”, in Canada's view.  Canada reiterates that the CRJs cannot be  both
Canadian registered and foreign-registered.  And since these aircraft have never been exported andsubsequently imported, they never were  foreign-registered.
4. Rebuttal of Brazil
6.398  Brazil takes issue with Canada’s argument that the Clark Report used an “‘incorrect’”
definition of the term “sale.”  Brazil recalls Canada’s argument that a sale only occurs when a plane is
delivered, and that had the Clark Report used this date, it would have accounted for the purchase oftwo Dash 8 aircraft in 1992 by Air BC, a Canadian airline.  Brazil notes that it appears that these
aircraft were ordered in 1989, and were therefore not included in the Clark Report’s results.
6.399  For Brazil, Canada’s criticism is of no consequence, since it relates to sales occurring before
the effective date of the Subsidies Agreement, no matter what the proper definition of “sale.”  In any
event, the Clark Report adopted the “date of sale” used by Canada in trade remedy cases, where it
identifies the “date of sale” as:
generally considered to be the date that the parties establish the terms of sale.  The
date of order confirmation is usually considered as the date of sale, although the date
of sale could be the contract, purchase order or invoice date, whichever establishes
the terms of sale.
484
6.400  This definition would not, according to Brazil, dictate that the correct date of sale is
determined by the delivery date.
VII. ARGUMENTS OF THIRD PARTIES485
A. EUROPEAN COMMUNITIES
1. Export contingency
7.1 The European Communities disagree with Brazil's interpretation of export contingency
under Article 3.1(a) SCM Agreement which would include “export propensity” or “intent to increaseexports”.  The European Communities state that under this approach whenever a benefit is conferred
to an export-oriented undertaking with the explicit or implicit aim to increase its exports, the
requirement of export contingency would be fulfilled, that is that benefits:
provided by an Organization that “exists solely to support export transactions” (para. 6.49), or
given to a specific industry because it is an “export-oriented” sector (para. 6.221), ora covenant making a transaction contingent upon maintenance of, among other things, an
export-oriented sales strategy (para. 6.287), or
loans and guarantees provided to businesses with “an established export trade or significant
export potential” (para. 6.311), or
loans and guarantees for the express purpose of assisting businesses to the “conquête de
marchés à l'exportation” and support transactions “à l'étranger”. (para. 6.332)
                                                     
484 Exh. BRA-99.
485 The footnotes and citations and the emphasis in the text are the third parties’.WT/DS70/R
Page 144
would constitute subsidies contingent upon export performance.
7.2 The European Communities consider that Brazil's approach is unjustifiably broad and puts all
industrial promotion activities into the category of potential prohibited subsidies, and does not takeinto account that the SCM Agreement distinguishes three categories of subsidies:  prohibited
subsidies, actionable subsidies and non-actionable subsidies.  The European Communities believe that
Brazil's approach is in contradiction to this basic distinction by declaring even certain non-actionable
subsidies to be prohibited.
7.3 According to the EC Article 3.1(a) of the SC M Agreement and its footnote provide for a
much more limited definition of prohibited subsidies.  For the European Communities, the plain
meaning of the words “contingent” and “tied” require conditionality  between the subsidies and
exportation or export performance.  The European Communities support Canada's view that the effect
of a subsidy or the objective  of a subsidy cannot  on their own be sufficient to establish de facto  export
contingency under Article 3.1(a).  The European Communities submit that exportation, or export
earnings must be a condition  for the grant of the subsidy, and that such a condition would be fulfilled
in cases where exports arise out of the desire of companies to take advantage of a subsidy that canonly be obtained if exports take place;  in other words, it would cover cases where,  although the
subsidy is not specifically linked to export performan ce, in practice companies are obliged to export if
they are to fulfil the requirements for obtaining the subsidy.
7.4 The European Communities submit that the language of Article 3.1(a) was the result of a long
debate between the opposing views represented in  the Uruguay Round negotiations.  For the European
Communities, Canada's explanation of the negotiating history demonstrates that the broad view being
put forward by Brazil was excluded from the text through a succession of improvements in the
wording.  Thus, the European Communities argue what was called the “quantitative approach”, as
well as the “export propensity” test to determine whether a given measure was a prohibited subsidy
were rejected in the context of the Negotiating Group on Subsidies and Countervailing Measures
486,
and similarly, the evolution of footnote 4 demonstrates the negotiator's rejection of an objective or
intent-based test in favour of a conditions-based test.
7.5 The European Communities also agree with Canada's view that as a practical matter the
following factors are useful in determining whether a subsidy is in fact  contingent upon export
performance:
evidence that the subsidy would not have been paid but for  the exports flowing from it;
whether there are penalties  – in the sense of reduction or withdrawal of payments – if exports
do not take place;  or
whether there are bonuses  or additional payments if exports do take place (para. 5.56).
7.6 Regarding a hypothetical example posited by the Panel, in which a WTO Member
administered a subsidy programme eligibility for which was restricted de jure  to enterprises which
qualified, based on past performance, as “export-oriented”, the European Communities remark that
the problem becomes clearer when the case is even more hypothetical, i.e., where eligibility is
restricted de jure  to enterprises which exported a certain product in the year 1900.  It would not in the
view of the European Communities be within the intent of Article 3.1(a) of the SCM Agreement that
this be considered a de jure  export contingent subsidy in such circumstances.  In the EC’s view,
therefore, the term “’export performance‘” in Article 3.1(a) can only mean present  or future  export
performance.  The European Communities argue that this interpretation is supported by footnote 4 to
                                                     
486 Note by the Secretariat, Negotiating Group on Subsidies and Countervailing Measures, Meeting of
27-28 March 1990 , MTN.GNG/NG10/17 at para. 3.WT/DS70/R
Page 145
Article 3.1(a) which refers to subsidies which are “’in fact tied to actual or anticipated exportation or
export earnings‘”.  The European Communities also consider that export performance within the
meaning of Article 3.1 of the SCM Agreement must be measurable in some way.
7.7 The European Communities consider that th e subsidy described in the example should
probably be considered a prohibited subsidy as being de facto  contingent, as in the real world, it is
hard to see how a subsidy based de jure  on past export performance would be granted for any other
reason than to enhance anticipated exportation or ex port earnings in the future.  Therefore, in the
absence of other evidence to the contrary, for the European Communities it would be reasonable tomake this assumption and consider the scheme in question to be a de facto  export subsidy.  This
would in particular be the case if the scheme were kept in force for a period of time or was regularly
repeated, as it would then constitute an incentive to all producers to start exporting to benefit from the
subsidy.
7.8 Regarding the example posited by the United States (paras. 7.41-7.42), the European
Communities in response to a question from the Panel indicate that the example is more instructive if
slightly varied or clarified such that an eligibility criterion for a grant is that a firm must submit a planexplaining how the construction of the facilities will affect  the firm’s exports or export earnings.  As
there is no de jure  link between the granting of the subsidy a nd future exports, in order to determine
whether such a requirement constitutes a de facto  export subsidy, the European Communities
maintain that it would be necessary to examine how the scheme is applied in practice.  For the
European Communities, if the grant is granted whether the plan shows that export earnings willincrease or decrease, it is clearly not contingent on export performance and not a prohibited subsidy;
if the grant is discretionary and only in fact given to firms which will increase their export
performance, it may be considered de facto  export contingent.  The European Communities note that
future exports may not be according to the plan for some unforeseen reason without the subsidy being
refundable, but that if it is because the plan was fraudulent, the subsidy will no doubt be recoverableand the scheme is therefore contingent upon export performance in the form of a good faith execution
of the plan.
7.9 For the European Communities, the US example is misleading since it speaks of “’a plan
explaining how the construction of such facilities will increase the firm’s exports or export earnings‘”.
Such an ‘”increase‘” will in practice inevitably be  measurable and the firm will be committed to a
good faith execution of the plan.  Therefore, in the view of the European Communities the US
example sets a condition for the granting of the subsidy which is tied to anticipated exportation or
export earnings and would fall squarely within th e conditionality approach advanced by the European
Communities; the subsidy will be de facto  export contingent and prohibited.
7.10 The European Communities contend that the US example demonstrates the need to perform a
more subtle analysis than proposed by the United States and examine how the eligibility criterion is
applied, for example by examining whether applications for aid would be refused where the submitted
plans showed that the subsidy (i) would not affect e xports at all (i.e., they would remain at the current
level), or (ii) would only affect exports in proportion  to the overall increase in production (thus
maintaining the current domestic/export sales ratio).  If the application for aid was accepted in both
cases, then in the view of the European Communitie s it is not necessarily an export subsidy as it is
granted also to producers selling on the domestic market.
2. Annex I (k), first paragraph SCM Agreement
7.11 The European Communities comment on the “safe haven” provided by the second paragraph
of Item (k) to Annex I of the SCM Agreement for export credit practices which conform to the
conditions referred to therein.WT/DS70/R
Page 146
7.12 The European Communities note that Canada does not defend the financing and loan
guarantees of EDC on this basis but rather argues that EDC financed loan guarantees “no material
advantage” in the field of export credit terms and that its finance is not on “concessionary terms”.
7.13 For the European Communities, the OECD Guidelines on Officially Supported Export Credits
to clearly satisfy the requirements of paragraph 2 of Item (k) of Annex I SCM Agreement.  The
European Communities submit that the importance of the OECD Guidelines derives from footnote 5
to Article 3.1 of the SCM Agreement, which states 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.”
7.14 The European Communities argue that reading th is footnote together with paragraph 2 of
Item (k) of Annex I SCM Agreement leads to the conclusion that export credit activities which
conform with an international undertaking on official export credits, as described in paragraph 2 of
Item (k) of Annex I SCM Agreement, and, therefor e, all export credit activities which conform with
the OECD Guidelines, are not prohibited under Article 3.1 or any other provision of the SCM
Agreement.  That is, for the purposes of the SCM Agreement, paragraph 2 of Item (k) of Annex ISCM Agreement creates a “safe haven” for Member export credit practices which conform to the
OECD Guidelines.
7.15 The European Communities defend the principle of application of the OECD Guidelines on
officially supported export credits to all the organizations which fall under its scope.  It considers that
the interest rates allowed by the OECD Guidelines should be used in the case of public financing
support.  The European Communities argue that publicly supported rates below those of the
Arrangement fall outside the “safe haven” and are subject to the full rigours of the SCM Agreement.
If they constitute a subsidy and are export contingent, they are prohibited.
7.16 In response to a Panel question regarding the EC’s understanding of the term “’interest rate
provisions‘” of the relevant undertaking in item (k) of the Illustrative List of Export Subsidies, theEuropean Communities reiterate that the first paragraph of Annex I(k) is to be considered an
illustrative  prohibition (i.e., it does not exhaustively define the scope of Article 3.1(a) in this sector),
and that the second paragraph by contrast contains an exception, not only from the first paragraph but
from the whole of the SCM Agreement (the OECD “’safe haven‘”).
7.17 For the European Communities, these are important principles to recall since the parties and
the other third party do not appear to have correctly construed the provisions of item (k).  Particularly
noteworthy to the European Communities in this rega rd is the position of the United States (in para.
7.45) where the US asserts, without any reasoning and in contradiction to the clear text of the SCM
Agreement that:
item (k) establishes the exclusive standard for determining whether the practices
described therein constitute export subsidies.
7.18 For the European Communities it is clear from the text of Article 3.1(a) (“’ including  those
illustrated  in Annex I [emphasis added by the European Communities]) and the title to Annex I itself
(“’Illustrative  List of Export Subsidies‘” [emphasis added by the European Communities]), that in
general the paragraphs of Annex I contain illustrative prohibitions .  It is only otherwise where the
Annex provides that a certain measure does not constitute an export subsidy.  In such a case the
measure is, by virtue of footnote 5 to Article 3,  not prohibited under any provision of the SCM
Agreement, according to the European Communities.
7.19 The European Communities maintain that this is the case of the second paragraph of item (k)
to Annex I of the SCM Agreement which creates a “’safe haven‘” for the export credit practicesWT/DS70/R
Page 147
which conform to the conditions therein.  The European Communities submit that the second
paragraph of item (k) and in particular the term “’interest rate provisions‘” must be interpreted in the
light of the fact that it creates an exception to the whole SCM Agreement.
7.20 According to the European Communities, if these wo rds were taken to refer, in the case of the
OECD Arrangement, only to the provisions on mini mum interest rates, any  “’export credit practice‘”
which respected those provisions would be deemed not prohibited by the SCM Agreement.  Since the
term “’export credit practice‘” can cover much else besides the provision of interest rates below those
provided for in the Arrangement, the European Communities argue that these other practices would
also be deemed not to be prohibited by the Agreement even if they did not comply with the
Arrangement, defeating the object and purpose of th e provision.  It would for example be possible to
increase the term of the loan, or alter the repayment profile (which can change the average term of the
credit although the total length of two credits are the same) or provide for reductions of premia and
fees (Arrangement interest rates are supposed to be for risk free lending – premia for
insurance/guarantees is to be paid in addition) so as  to reduce the effective cost of the loan in the same
way as a reduction in the interest rate.
7.21 The European Communities consider that such a wide interpretation of the exception is not
warranted and that the exception should be interpreted more narrowly, meaning that the term
“’interest rate provisions‘” must be taken to refer to all the provisions of the OECD Arrangement
which are related to interest rates, and in particular the whole of Chapter II.
7.22 The European Communities consider that this would correspond to the object and purpose of
the OECD Arrangement and thus of the second pa ragraph of item (k) in Annex I of the SCM
Agreement, namely to prevent export credits from being used to distort competition by harmonising
their conditions.  Therefore, the European Communities maintain, the priority is to ensure that export
credit conditions are equal and the question of whether they are commercial rates is of less importance
(although the European Communities consider the inte rest rates in the Arrangement to be broadly in
line with the total costs of commercial loans with the same terms (credit length, etc.)).  In the view of
the European Communities, this objective of equalising conditions of competition in export credits
would be defeated if export credit practices which can be translated into interest rates were not
covered.
B. SUBMISSION OF THE UNITED STATES
1. Applicability of the SCM Agreement to subsidies provided prior to the entry into force
of the WTO Agreement
7.23 The United States argues that, contrary to Canada’s argument (para. 4.74), the SCM
Agreement does apply to subsidies provided prior to  the entry into force of the WTO Agreement.  In
the view of the United States, Canada’s arguments are wrong for two reasons.  First, putting aside thequestion of a different intention in the SCM Agr eement or the WTO Agreement, Article 28 of the
Vienna Convention states that a treaty does not apply to “’any situation which ceased to exist‘” before
the entry into force of a treaty.  In this case, th e United States notes, the “’situation‘” complained
about by Brazil is subsidization.  The United States argues that depending on the nature of the alleged
subsidies provided under DIPP and SDI, it may be the case that subsidization did not cease as of
1 January 1995, the date on which the WTO Agreement entered into force with respect to Canada.
7.24 More specifically, the United States argues that it is well-accepted that the benefits of certain
types of subsidies can last for a period of years, no ting that this concept is recognized in Annex IV of
the SCM Agreement, paragraph 7 of which provides as  follows:  “’Subsidies granted prior to the date
of entry into force of the WTO Agreement, the benefits of which are allocated to future production ,WT/DS70/R
Page 148
shall be included in the overall rate of subsidization‘”.  (emphasis added by the United States).487  The
Tokyo Round Subsidies Code Committee also recognized the concept when it adopted Guidelines on
Amortization and Depreciation  that called for the allocation of certain subsidies over time.488
Moreover, to the best of the US’ knowledge, all major users of the countervailing duty remedy,
including Canada, allocate certain subsidies over time, although the mechanics of allocation
methodology may vary from country to country.  Finally, for the United States, common sense
dictates that, for example, the provision of a $100 million grant to a firm does not constitute a subsidy
only with respect to merchandise produced by the firm on the day the grant is received.  Instead, thegrant benefits merchandise produced over a period of time.
7.25 The United States maintains that because certain subsidies bestowed in the past can be
deemed to benefit current or future  production, it follows that a situation of subsidization can exist
long after a subsidy is initially bestowed.  Where this is the case, in the United States’s view, the fact
that the action creating the situation of subsidization may have been taken prior to 1 January 1995
does not mean that the situation of subsidization is exempt from the obligations and remedies of the
SCM Agreement if that situation persists after 1 January 1995.
7.26 For the United States, the second reason why Canada is wrong is that the SCM Agreement
does, in fact, demonstrate that it applies to subsidies provided prior to 1 January 1995, recalling
paragraph 7 of Annex IV, which expressly provides that pre-WTO subsidies must be included for
purposes of Article 6.1(a).  Thus, the United States maintains, Canada is clearly wrong when it states
that the SCM Agreement “’does not . . . apply to events that took place prior to 1 January 1995.’”
7.27 The United States submits that under Article 28 of the Vienna Convention , the DIPP and SDI
subsidies could be subject to the SCM Agreement.
489  Therefore, in the view of the United States, this
preliminary objection of Canada’s is unfounded.
7.28 In response to a Panel question whether the distinction between the SCM Agreement’s
parts II and III is relevant to the question of temporal application of the part II prohibition (in light ofthe US argument based on the serious prejudice provisions including paragraph 7 of Annex IV), the
United States replies that this distinction is not relevant.  Here, the United States recalls the reference
in paragraph 7 of Annex IV to subsidies “’ the benefits of which are allocated to future production‘”
(emphasis added by the United States), and argues that the wording of paragraph 7 makes clear that
insofar as the allocation of subsidies is concerned, the drafters did not intend paragraph 7 to be aspecial rule applicable exclusively to serious prejudice cases involving Article 6.1(a) of the SCM
Agreement.  Instead, the drafters took as a given the notion that the benefits of certain types of
subsidies should be allocated to future production ( i.e., should be allocated over time), and added
paragraph 7 in order to clarify how these types of subsidies figured into the calculation of the ad
valorem  subsidy rate for purposes of Article 6.1(a).  For the United States, the phrase “’the benefits of
which are allocated‘” connotes a proposition that is universally applicable, regardless of the context,
and had the drafters intended otherwise, they w ould have used different language, such as the
following:
“Subsidies granted prior to the date of entry into force of the WTO Agreement [the
benefits of which are] shall be  allocated to future production and shall be included in
the overall rate of subsidization.”
                                                     
487  Annex IV deals with the calculation of the total ad valorem  subsidization for purposes of
Article 6.1(a) of the SCM Agreement.
488  BISD 32S/154.  These guidelines were app licable to countervaili ng duty proceedings.
489  Whether those subsidies are, in fact, subject to the SCM Agreement raises a factual question on
which the United States does not opine.  To answer this question, the Panel would have to determine (1)
whether these subsidies are of the type that should be allocated over time; and (2) if they are, the number of
years over which they should be allocated.WT/DS70/R
Page 149
7.29 Moreover, the United States maintains, even if the drafters had intended that paragraph 7
function as an acknowledgement of the propriety of allocating subsidies over time for purposes of
Article 6.1(a), the fact that paragraph 7 expressly recognizes, for purposes of Article 6.1(a) of theSCM Agreement, that the benefits of subsidies can last for a period of years does not mean that in
other contexts the benefits of subsidies cannot last for a period of years.  Put differently, the fact that
the drafters expressly recognized in one portion of the SCM Agreement the concept of allocating
subsidy benefits over time does not mean that the drafters intended to preclude the application of this
concept in other portions of the Agreement.
7.30 The United States also notes that it did not cite only paragraph 7 of Annex IV in its third party
submission, but also referred to experience under the Tokyo Round Subsidies Code, the
countervailing duty practice of Members (including Canada), and common sense, the latter probably
being the most important factor of all.
7.31 Finally, the United States notes that it also cited paragraph 7 of Annex IV for purposes of
responding to Canada’s across-the-board assertion that the SCM Agreement does not apply to
subsidies provided prior to 1 January 1995.  If nothing else, the United States argues, the existence ofparagraph 7 effectively rebuts such a sweeping assertion.
2. Canada’s interpretation of “export subsidy”
7.32 The United States does not take a position on whether the measures at issue are, in fact,
export subsidies.  The United States agrees with Canada that the first Brazilian submission is
somewhat cryptic on the question of what constitutes an export subsidy, and notes that notunderstanding Brazil’s legal theory, it is difficult to comment on Brazil’s arguments.
7.33 The United States strongly disagrees with Canada’s interpretation of the term “export
subsidy”.  In the view of the United States, Canada’s interpretation is not supported by the relevant
rules of treaty interpretation,
490 and, if accepted, would eviscerate the stronger disciplines against the
use of export subsidies that were one of the principal achievements of the Uruguay Round subsidynegotiations.
7.34 The United States notes Canada’s interpretation that:  “’Article 3.1 prohibits subsidies that
are, in law or in fact, contingent upon or tied to export performance.  A subsidy is so contingent or
tied when it is available only on condition that exports take place.‘”  The United States recalls the
following factors identified by Canada as “’useful in determining whether subsidies are in fact
contingent upon export performance:
(a) evidence that the subsidy would not have been paid but for  the exports
flowing from it;
(b) whether there are penalties -- in the sense of reduction or withdrawal of
payments -- if exports  do not take place; or
(c) whether there are bonuses  or additional payments if exports do take place.‘”
[emphasis in original] (para. 5.56)
7.35 For the United States, these conclusions are premised on a flawed interpretative analysis.
First, Canada places great reliance on the presence of the word “performance” in Article 3.1(a),
concluding that “’on its plain meaning, Article 3.1(a) applies only to subsidies that are conditional on
exports being executed or accomplished.‘”
491  However, the United States argues, Article 3.1(a) does
                                                     
490 Articles 31 and 32 of the Vienna Convention .
491  Id., para. 82.WT/DS70/R
Page 150
not, as Canada suggests, state that exports must actually  be executed or accomplished.  Instead,
Canada is impermissibly trying to read words into Article 3.1(a) that are not there.492
7.36 Second, the United States maintains that throughout its discussion of export subsidy, Canada
ignores one key word:  “anticipated”.  Footnote 4 to Article 3.1(a) provides that a de facto  export
subsidy exists “’when the facts demonstrate that the granting of a subsidy, without having been made
legally contingent upon export performance, is in fact tied to actual or anticipated  exportation or
export earnings.‘”  (emphasis added by the United States).  For the United States, the ordinary
meaning of “’anticipate‘” is to “’look forward to; colloq.  expect.‘”493  Thus, under Article 3.1(a), a de
facto  export subsidy can exist where the granting of a subsidy is tied to expected exportation or export
earnings, according to the United States, and there is no requirement that exportation or export
earnings actually have occurred or that penalties be imposed if expectations are not fulfilled.
Therefore, the United States submits, the text of Article 3.1(a) contradicts Canada’s assertion that the
intent or objective of a subsidy is irrelevant.
7.37 Finally, the United States argues, Canada’s discussion of the negotiating history behind
Article 3.1(a) is inaccurate and incomplete.  In the view of the United States, it is inaccurate becauseCanada concludes that the evolution of the text somehow demonstrates that intent became irrelevant
(paras. 5.75- 5.76),  but the word “’anticipated‘” connotes a test based on intent.  For the United
States, all that the various draft versions of Article 3.1(a) show is that the manner in which the drafters
express the intent factor changed over time.
7.38 The United States asserts that Canada’s discussion of the negotiating history is incomplete,
because it ignores the reason why footnote 4 was added in the first place.  According to the
United States, footnote 4 originated with a proposal by the European Communities, which the
European Communities explained as follows:
• The prohibition of export subsidies in Article 9 of the Subsidies Code should be reformulated in
order to define clearly its scope.
• This prohibition must apply to all export subsidies, that is, all government interventions which
confer, through a charge on the public account (in the form of direct financial outlays or revenue
foregone, such as tax relief and debt forgiveness), a benefit on a firm or an industry contingent
upon export performance.
• In addition, since experience has shown that gove rnment practices may be easily manipulated or
modified in order to avoid this prohibition, it is a pparent that a prohibition only of those subsidies
which are de jure  (that is, expressly) made contingent upon export performance is open to
circumvention.
• The prohibition, in the present discipline also applies to subsidies de facto  contingent upon export.
This, however, makes it necessary to provide for clearer guidance in identifying de facto  export
subsidies . . . de facto  export subsidies are those where facts which were known -- or should
clearly have been known -- to the government when granting the subsidy demonstrate that the
                                                     
492  As the Appellate Body stated in European Communities - Measur es Affecting Meat and Meat
Products (Hormones) , WT/DS26/AB/R, Report of the Appellate Body adopted 13 February 1998, para. 181,
“The fundamental rule of treaty interpretation requires a treaty interpreter to read and interpret the wordsactually used by the agreement under examination, and not words which the interpreter may feel should have
been used.”
493  The New Shorter Oxford English Dictionary  (1993).WT/DS70/R
Page 151
subsidy, without having been made expressly contingent upon export performance, was indeed
intended to increase exports.494
7.39 The United States submits that while the final text of footnote 4 does not contain a
“’knowledge‘” test as originally articulated by the European Communities,495 the word “’anticipated‘”
is consistent with a test that takes into account the intent of the subsidizing government.
7.40 For the United States, Canada’s discussion of the negotiating history also is incomplete
because it fails to identify another change that wa s made in order to expand the scope of the export
subsidy category.  Specifically, instead of requiring that export performance be the “’only‘” or the“’most important‘” element, Article 3.1(a) provides that export performance may be either  the sole
contingency for the subsidy or merely “’one of several other conditions.‘”  Thus, the United States
argues, Canada’s constricted interpretation of export subsidy is at odds with this textual evidence of
an intent to craft a more liberal test for identifying an export subsidy.
7.41 The United States submits that the flaws in Canada’s reasoning can best be demonstrated with
an example where a government establishes a subsidy programme that provides large grants for the
construction of production facilities.  The only eligibility criterion for a grant is that a firm mustsubmit a plan explaining how the construction of such facilities will increase the firm’s exports or
export earnings.  If a firm does not submit such a plan, it cannot receive a grant.  Once the grant is
bestowed, however, the government does not impose penalties if the export plan is not fulfilled.
7.42 In the view of the United States, according to Canada such a programme would not constitute
an export subsidy, because grants would not be contingent on the condition that exports actually takeplace.  In the view of the United States, such a programme clearly would be an export subsidy under
Article 3.1(a) because the grants would be tied to anticipated  exportation or export earnings.
7.43 The United States submits that in this disput e the Panel should not apply Canada’s erroneous
standard for identifying an export subsidy.  If adopted, this standard would enable governments to
engage in the very sorts of manipulation and modifications of subsidy programmes that the drafters ofthe SCM Agreement sought to curtail.
3. The relevance of item (k) of the Illustrative Li st to export financing activities of the EDC
7.44 The United States notes that in its discussion of the export financing activities of the Export
Development Corporation (“EDC”), Canada appears to distinguish between the activity of the EDC
under its corporate account and activities under the Canada Account, appearing to argue that activitiesunder the Canada Account are governed by item (k ) of the Illustrative List of Export Subsidies
contained in Annex I to the SCM Agreement, bu t that activities under the corporate account are
governed by some other standard.
7.45 In the view of the United States, both activities (the corporate account and the Canada
Account) are governed by item (k).  Thus, the United States submits, if financing provided undereither account is inconsistent with the standard set forth in the first paragraph of item (k), the
financing is potentially an export subsidy.  Conversely, if financing provided under either account is
consistent with the standard set forth in the first pa ragraph, it is not an export subsidy in the US view,
because item (k) establishes the exclusive standard for determining whether the practices described
therein constitute export subsidies.  In addition, th e United States argues, even if financing provided
under either account should run afoul of the first paragraph of item (k), it still would not be deemed an
                                                     
494  “Elements of the Negotiating Framework,” Submission by the European Communities,
MTN.GNG/NG10/W/31 (27 November 1989).
495  And correctly so, because it would be nonsensical  to have a standard based on a government’s
knowledge of it own intent.WT/DS70/R
Page 152
export subsidy if the financing conformed to the prov isions of the OECD Consen sus referred to in the
second paragraph of item (k).
7.46 In response to a Panel question regarding the United States’ understanding of the term
“interest rate provisions” of the relevant undertaking in item (k) of the Illustrative List of Export
Subsidies, the United States responds that the “’interest rate provisions‘” of the undertaking ( i.e., the
OECD Arrangement) provide rules fo r the provision by governments of fixed interest rate financing
(either through direct lending or interest rate support mechanisms) or pure cover (provision of
guarantees or insurance to banks providing either fixed or floating rate financing).  The “’interest rateprovisions‘” do not provide rules for the provision by governments of floating interest rate financing
(e.g., through direct lending).  Thus, the United States states, if the EDC were to provide export
subsidies in the form of a direct loan at a floating rate of interest, the second paragraph of item (k)
would not apply to such financings.
7.47 In its comments on the draft descriptive part of this report, the United States requested
permission from the Panel to withdraw its submissions in this dispute, and asked the Panel to modify
the descriptive part of the reports so as not to reflect those submissions.  The United States furtherasked that, if the Panel declined the United States' request to withdraw its submissions, the descriptive
part of the report reflect that this request had been made."
496
VIII.  INTERIM REVIEW
8.1 On 25 February 1999, both parties requested the Panel to review, in accordance with
Article 15.2 of the DSU, precise aspects of the interim report issued on 17 February 1999.  Whileneither party requested an additional meeting with the Panel, both parties provided written replies to
certain of one another's comments.
A. COMMENTS BY BRAZIL
8.2 Brazil identified a number of typographical errors in the interim report, which have been
corrected by the Panel.
                                                     
496 Brazil submitted a letter requesting the Panel to decline the request of the United States, in view of
practical and substantive concerns over the request.  In Brazil's view, complete deletion of the US submissions
would pose logistical problems in these time-constraine d proceedings, as both the section containing the US
submissions, and all references in the parties' arguments to those submissions, would need to be removed.Substantively, Brazil states that such deletion would prejudice the rights of the parties,  because parties (and allMembers) have an interest in preserving an accurat e and complete record of the proceedings; and because
parties may have either developed or foregone particular lines of argument in response to arguments made by
the United States.  In Brazil's view, granting the request would prejudice these interests, and would be contrary
to the twin goals of "security and predictability" identified by Article 3.2 of the DSU as central to the WTOdispute settlement system.  Brazil believes that the Panel does not have the authority to fulfill the US request, inview of the provision of Article 10.2 of the DSU that third party submissions "' shall  be reflected in the panel
report'" (emphasis added by Brazil), and the provision of Rule XXV(2) of the Working Procedures for AppellateReview that third party written submissions, recorded oral statements and written answers to questions are part
of the record of the panel proceedings.  The Panel , in view of the practical difficulties of removing the US
submissions and all references thereto from this report, in view of the strong opposition of one of the parties,and in view of the fact that the Panel had asked the parties to submit comments on specific aspects of the USsubmissions, declined the United States' request.WT/DS70/R
Page 153
8.3 Regarding para. 9.85, Brazil commented that the Panel initially overlooked Brazil's reaction
to Canada's argument set forth in para. 9.84.  We amended para. 9.85 accordingly.
8.4 Brazil commented that, at para. 9.199, the Panel has mischaracterized its statements regarding
EDC equity infusions.  With reference to para. 59 of its oral statement at the second substantive
meeting (see para. 6.136 above), Brazil denies that it considers the fact that CRJ Capital purchases
and/or leases aircraft to be an "essential element" of its claim.
8.5 We have amended the final sentence of para. 9.199, in order to clarify that it is the Panel's
understanding that the fact that CRJ Capital allegedly purchases and/or leases aircraft is an "essentialelement" of Brazil's claim regarding EDC equity financing.  The Panel's understanding is based on
Brazil's submissions throughout the Panel process, in  which Brazil repeatedly argued that EDC equity
infusions confer a "benefit" because they enable CRJ Capital (which, as indicated at note 233 above,
Brazil treats as a Special Purpose Company) to offer airlines lower lease payments than would be
available on the market.  Brazil's repetition of the factual basis for this argument is reflected  inter alia
at paras. 6.103, 6.105, 6.106, 6.108, 6.109, 6.110, 6.111, 6.114, 6.116 and 6.135 above.  The only
reference by Brazil to EDC equity infusions conferring a "benefit" through lower loan payments was
included at para. 59 of its oral statement at the second substantive meeting (see para. 6.136 above).
We note, however, that at para. 57 of the very sa me oral statement (see para. 6.135 above), Brazil
asserted:
Brazil's claim is that EDC, directly or indirectly, has made equity infusions into CRJ
Capital  which have facilitated CRJ Capital's ability to  lease or sell  Canadian
regional aircraft at a reduced price."  (italics in original, bold emphasis supplied)
For these reasons, and especially in light of Brazil's own description of its claim at para. 6.135 above,
we believe that we have correctly identified the fact that CRJ Capital allegedly purchases and/or
leases aircraft as an "essential element" of Brazil's claim regarding EDC equity infusions.
8.6 With regard to paras. 9.220-9.224, Brazil commented that the Panel could include an
additional source as further support for its conclusions regarding Canada Account debt financing.
Brazil refers in particular to the Canada Accoun t Profile, which states that a portion of Canada
Account financing is extended on "concessional" terms.  Brazil asserts that the Canada Account
Profile defines "concessional" to include "interest-free or low-interest loans repayable over extended
periods."  Canada  replied that Canada Account "concessional" financing falls outside the Panel'sjurisdiction, because it has not been used in respect of civil aircraft since 1995.  Canada referred to its
argument at para. 6.164 above in this regard.
8.7 In the present instance, the Panel was required to determine whether or not the Canada
Account debt financing in issue constitutes a "subsidy" within the meaning of Article 1.1 of the SCM
Agreement.  Whether or not such debt financing is "concessional" within the meaning of the Canada
Account Profile is of no relevance to the Panel's findings.  For this reason, we have not made the
change requested by Brazil.
B. COMMENTS BY CANADA
8.8 Canada suggested a number of changes to the Panel's description of its arguments.  To the
extent that Canada indicated the source for these changes, they have been made by the Panel.  Canada
also made a comment on the relevance of certain text in para. 4.126, without requesting any specific
changes in this regard.  In addition, Canada identified a number of typographical errors in the interimreport, which have been corrected by the Panel.
8.9 At the request of Canada, we included the phrase ",on 21 December 1998," in the second
sentence of para. 9.64.WT/DS70/R
Page 154
8.10 At the request of Canada, we included the phrase "as well as one from Exinvest" in the last
sentence of para. 9.193, and pluralized "Officer's Certificates" in para. 9.194.
8.11 With regard to para. 9.246, we clarified our finding that there is no prima facie  case that the
sale by the OAC of its 49 percent share in de Havilland to Bombardier in 1997 constitutes a
prohibited export subsidy.
8.12 In respect of para. 9.253, Canada requested changes to the description of Canada's reaction to
the Panel's request for information.  Brazil objected to Canada's request, stating that the Panel's text
"accurately describe[d] the purported rationale supporting Canada's refusal to comply with the Panel'srequest for information.  …  Moreover, to adopt the modifications … advocated by Canada would
result in an inaccurate description of Brazil's position."  In order to avoid any uncertainty, the Panel
included at para. 9.253 the full text of Canada's response to the Panel's request, and at para. 9.254 the
full text of Brazil's comment on Canada's response.
8.13 At the request of Canada, we included in para. 9.289 Canada's argument that royalties can be
tied "to total sales of the recipient enterprise."
8.14 With regard to para. 9.290, Canada asked the Panel to include an additional element in its
description of Canada's argument against reliance on the latest WTO Trade Policy Review of Canada.
Brazil objected to Canada's request.  The Panel's views on the relevance of the latest WTO Trade
Policy Review of Canada are set forth at para. 9.274.  None of the Panel's findings are based on the
latest WTO Trade Policy Review.  Since the Panel attaches no importance to this Trade Policy
Review, and since Canada's specific argument on this issue is in any event set forth in full at para.6.199 above, we do not consider it necessary to make the change requested by Canada.
IX. FINDINGS
A. INTRODUCTION
9.1 This dispute concerns prohibited export subsidies allegedly provided by the Government of
Canada or its provinces to the Canadian civil aircraft industry.
9.2 On 10 March 1997, Brazil requested consultations with Canada concerning "certain subsidies
granted by the Government of Canada or its provinces that support the export of civilian aircraft from
Canada."
497  Consultations were requested under Article 4 of the Agreement on Subsidies and
Countervailing Measures (hereinafter "SCM Agreement").  Consultations were held in Geneva on 30
April 1997, but the parties failed to reach a mutually satisfactory solution.
9.3 On 10 July 1998, Brazil requested the establishment of a panel498 pursuant to Article 4.4 of
the SCM Agreement and Article 6 of the Understanding on Rules and Procedures Governing the
Settlement of Disputes (hereinafter the "DSU").  This Panel was established on 23 July 1998, with the
following standard terms of reference:
"To examine, in the light of the relevant provisions of the covered agreements cited by
Brazil in document WT/DS70/2, the matter referred to the DSB by Brazil in that
document and to make such findings as will assist the DSB in making the
recommendations or in giving the rulings provided for in those agreements".
                                                     
497 WTO document WT/DS70/1.
498 WTO document WT/DS70/2.WT/DS70/R
Page 155
B. PRELIMINARY ISSUES
9.4 The parties requested a number of preliminary rulings, and raised a number of preliminary
issues, concerning the jurisdiction of the Panel, the temporal application of the SCM Agreement, fact-
finding by the Panel, procedures for the protection of business confidential information, deadlines for
the submission of new evidence and allegations, deadlines for the submission of affirmative defences,
the Panel's right to seek information in respect of defences not raised, the Panel's right to seek
information without finding the establishment of a prima facie  case, and the Panel's right to seek
information in respect of allegations not made.
1. Jurisdiction of the Panel
9.5 Canada has raised two preliminary issues concerning the jurisdiction of the Panel.  The first
issue is whether certain measures identified in Brazil’s request for a panel had been the subject of a
request for consultations and were in fact consulted upon, and thus could be the subject of a panel
request under Article 4.4 of the SCM Agreement.  The second issue is whether certain of the measures
identified in Brazil’s request for a panel were sufficiently specific as required by Article 6.2 of theDSU. Canada asked the Panel to issue the requested ru lings prior to the deadline for the parties’ first
submissions.
(a) Article 4.4 of the SCM Agreement
(i) Arguments of the parties
9.6 Canada recalls that, with regard to the Export Development Corporation ("EDC"), Brazil's
request for establishment of a panel referred to "fin ancing and loan guarantees provided by the [EDC],
including equity infusions into corporations established to facilitate the export of civil aircraft",
whereas Brazil's request for consultations referred to "[EDC] equity infusions into corporations
specially established to facilitate the export of aircraft", and "EDC loan guarantees for exported
aircraft".
9.7 Canada submits that Brazil's claim concerning EDC "financing" is outside the Panel's
jurisdiction because that claim was not included in Brazil's request for consultations.  Canada notes
that the only EDC activities referred to in Brazil' s request for consultations were "equity infusions"
and "loan guarantees".  Canada asserts that "financing" is a form of activity distinct from either
"equity infusions" or "loan guarantees".
9.8 Canada recalls that Article 4.1 - 4.4 of the SCM Agreement provides:
4.1 Whenever a Member has reason to believe that a prohibited subsidy is being
granted or maintained by another Member, such Member may request consultations
with such other Member.
4.2 A request for consultations under paragraph 1 shall include a statement of
available evidence with regard to the existence and nature of the subsidy in question.
4.3 Upon request for consultations under paragraph 1, the Member believed to be
granting or maintaining the subsidy in ques tion shall enter into such consultations as
quickly as possible.   The purpose of the consultations shall be to clarify the facts of the
situation and to arrive at a mutually  agreed solution.
4.4 If no mutually agreed solution has been reached within 30 days of the request
for consultations, any Member party to such  consultations may refer the matter to theWT/DS70/R
Page 156
Dispute Settlement Body ("DSB") for the im mediate establishment of a panel, unless
the DSB decides by consensus not to establish a panel.  (footnote omitted)
9.9 Canada submits that there must be a rational connection between "the subsidy in question"
identified in the complaining party's request for consultations under Article 4.2 of the SCM
Agreement, and the "matter" referred to the DSB in the request for establishment of a panel under
Article 4.4 of the SCM Agreement.  Canada submits that the "matter" must necessarily follow from
the "subsidy in question".  Canada asserts that the SCM Agreement is not observed, and due process
is not served, if Canada is forced to respond to a "matter" on which no consultations were requested.
9.10 Brazil makes a number of arguments in support of its request that the Panel reject this
preliminary issue raised by Canada.  First, Brazil asserts that the identification of the EDC in its
request for consultations, combined with the broad language of that request of a panel (" … certain
subsidies granted by the Government of Canada or its provinces that support the export of civilian
aircraft from Canada"), covered all subsidy aspects of the EDC.  Second, Brazil asserts that EDC
"financing" was discussed during consultations with Canada.  Third, Brazil denies that there is a
marked distinction between "financing", and "equity infusions" and "loan guarantees".  Brazil arguesthat "financing" is a broader, more general term encompassing direct lending, debt and equity support.
Fourth, Brazil argues that a request for establishment will often not be identical to a request for
consultations, because of the refinement of claims likely to result from consultations.
(ii) Evaluation by the Panel
9.11 We note that Canada's argument is base d exclusively on Article 4.1 - 4.4 of the SCM
Agreement.
499  In focusing on Article 4.1 - 4.4 of the SCM Agreement to establish the jurisdiction of
the panel, we consider that Canada has overlooked Article 7.1 of the DSU.  Article 7.1 defines the
terms of reference of a panel, providing that a panel's terms of reference are "to examine … the matter
referred to the DSB by (name of party) in [the] document [containing the party's request for
establishment of a panel…"  Thus, except where the parties agree on special terms of reference, theterms of reference are typically determined on the basis of the complaining party's request for
establishment.  The terms of reference are critical to the preliminary issue before us, since the
Appellate Body stated generally in India -  Patents that "[t]he jurisdiction of a panel is established by
that panel's terms of reference …"
500  Likewise, the Appellate Body stated in Brazil - Desiccated
Coconut  that "a panel's terms of reference … establish the jurisdiction of the panel by defining the
precise claims at issue in the dispute." 501
9.12 In our view, a panel's terms of reference woul d only fail to be determinative of a panel's
jurisdiction if, in light of Article 4.1 - 4.4 of the SCM Agreement applied together with502 Article 4.2 -
4.7 of the DSU, the complaining party's request for establishment were found to cover a "dispute" that
had not been the subject of a request for consultations.  Article 4.4 of the SCM Agreement permits aMember to refer a "matter" to the DSB if "no mutually agreed solution" is reached during
consultations.  In our view, this provision comp lements Article 4.7 of the DSU, which allows a
                                                     
499 Brazil argues that EDC "financing" was consulted on.  If this were the case, we consider that this
fact would normally dispose of the preliminary issue raised by Canada.  However, Canada does not accept
Brazil's argument that EDC "financing" was consulted on, and Brazil has provided no support for its position.
We are therefore unable to establish whether or not EDC "financing" was in fact consulted on.
500 India -  Patent Protection for Pharmaceuticals and Agricultural Chemical Products ,
WT/DS50/AB/R, adopted 16 January 1998, para. 93.
501 Brazil - Measures Affecting Desiccated Coconut , WT/DS22/AB/R, adopted 20 March 1997, page
22.
502 According to the Appellate Body in Guatemala - Anti-Dumping Investigation Regarding Portland
Cement from Mexico , wherever possible, special or additional rules and procedures for dispute settlement in
Annex 1 of the DSU (such as Article 4.1 - 4.4 of the SCM Agreement) should be read so as to complement theprovisions of the DSU (WT/DS60/AB/R, adopted 25 November 1998, paras. 64-66).WT/DS70/R
Page 157
Member to refer a "matter" to the DSB if "consultations fail to settle a dispute".  Read together, these
provisions prevent a Member from requesting the establishment of a panel with regard to a "dispute"
on which no consultations were requested. In our view, this approach seeks to preserve due processwhile also recognising that the "matter" on which consultations are requested will not necessarily be
identical to the "matter" identified in the request for establishment of a panel.  The two "matters" may
not be identical because, as noted by the Appellate Body in India - Patents , "the claims that are made
and the facts that are established during consultations do much to shape the substance and the scope of
subsequent panel proceedings"
503
9.13 The terms of reference of this Panel are to:
examine, in the light of the relevant prov isions of the covered agreements cited by
Brazil in document WT/DS70/2, the matter referred to the DSB by Brazil in that
document and to make such findings as will assist the DSB in making the
recommendations or in giving the rulings provided for in those agreements.504
9.14 Accordingly, our terms of reference are determined by document WT/DS70/2, i.e., Brazil's
request for establishment of this Panel.  This doc ument refers expressly to "financing … provided by
the Export Development Corporation …"  In principle, therefore, EDC "financing" falls within our
jurisdiction.  As noted above, EDC "financing" would only fall outside our jurisdiction if EDC
"financing" were not part of the "dispute" on which Brazil had requested consultations.  In our view,
Brazil requested consultations in respect of a "dispute" concerning prohibited export subsidies
allegedly provided to the Canadian civil aircraft industry by inter alia  EDC.  This "dispute" is also the
subject of Brazil's request for establishment of this Panel.  Since the EDC "financing" identified in
Brazil's request for establishment of a panel was part of the same "dispute" with respect to which
consultations were requested, we find  that EDC "financing" falls within the Panel's jurisdiction.
9.15 Canada asked the Panel to issue the requested ruling on the Panel's jurisdiction prior to the
deadline for the parties’ first written submissions.  In our view, there is no requirement in the DSU forpanels to rule on preliminary issues prior to the parties' first written submissions.  Nor is there any
established practice to this effect, for there are numerous panel reports where rulings on preliminary
issues have been reserved until the final report.
505  Furthermore, there may be cases where the panel
wishes to seek further clarification from the parties before providing a preliminary ruling.  Indeed, we
considered it necessary to request such clarification in the present case.  In our view, the possibilityfor obtaining such clarification would be lost - or at least significantly undermined - if a panel were
required to rule on preliminary issues before the deadline for the parties' first written submissions.
For these reasons, we rejected Canada's request for a preliminary ruling on this issue prior to the
deadline for the parties' first submissions.
                                                     
503 India -  Patent Protection for Pharmaceuticals and Agricultural Chemical Products ,
WT/DS50/AB/R, adopted 16 January 1998, para. 94.
504 WTO document WT/DS70/3.
505 See, for example, European Communities - Bananas ( WT/DS27//R, adopted 25 September 1997 ),
and European Communities - Computer Equipment (WT/DS62, 67/R, adopted 22 June 1998).WT/DS70/R
Page 158
(b) Specificity of Brazil's request for establishment of a panel
(i) Arguments of the parties
9.16 Canada requests a preliminary ruling that Brazil's request for establishment of a panel does
not meet the requirements of Article 6.2 of the DS U.  Canada recalls that Article 6.2 of the DSU
provides, in relevant  part, that the request for the establishment of a panel shall:
... identify the specific measures at issue and provide a brief summary of the legal
basis of the complaint sufficient to present the problem clearly.  ...
9.17 According to Canada, certain items in Brazil's request for establishment are inconsistent with
Article 6.2 because they are too vague to provide Canada with sufficient information concerning the
claims at issue, and their lack of precision prej udices Canada’s due process right to know the case
against it.  In support, Canada cites the Appellate Body in  European Communities - Bananas , where
it  stated that:
Article 6.2 of the DSU requires that the claims , but not the arguments , must all be
specified sufficiently in the request for establishment of a panel in order to allow the
defending party and any third parties to know the legal basis of the complaint.  If aclaim  is not specified in the request for the establishment of a panel, then a faulty
request cannot be subsequently 'cured' by a complaining party's argumentation in its
first written submission to the panel or in any other submission or statement made
later in the panel proceeding.
506
9.18 Canada submits that the reasoning of the Appellate Body is applicable to the case where a
defending party is not given specific information as to the factual basis of the claims against it.
Canada argues that in cases with an accelerated time-table, the time allotted to a defending party is
simply not adequate from a due process perspective for the preparation of a credible defence against a
vague accusation.  Canada also asserts that Brazil's request for establishment is more vague than its
request for consultations.  According to Canada, consultations afford parties the opportunity to givemore precision to a dispute, not less.
9.19 Brazil denies that its request for establishment is inconsistent with Article 6.2 of the DSU.
Brazil asserts that due process must flow two ways.  Brazil asserts that it would violate all notions of
basic fairness to blame Brazil for any alleged lack of specificity in stating the factual bases for its
claim stemming from Canada's failure to disclose those facts crucial to the process envisioned in theDSU.  Brazil also argues that the aforementioned extract from the Appellate Body in European
Communities - Bananas required only that the "legal basis" of the complaining party's claim be
"sufficiently precise."  Brazil argues that Canada's claims concerning any alleged lack of specificity of
the factual basis of Brazil's claims is therefore irrelevant.  Brazil submits that it identified the two
components of a claim essential to maintain Canada's due process rights pursuant to Article 6.2 of theDSU:  (1) the particular provisions of the SCM Ag reement with which Canada is charged with failure
to comply; and (2) the particular Canadian measures demonstrating that failure.  Brazil states that it
therefore identified its claims with "sufficient precision", as required by Article 6.2 and the Appellate
Body in European Communities - Bananas .
9.20 The preliminary issue raised by Canada concerns the following items identified in Brazil's
request for establishment:
• "financing" provided by the EDC ;
                                                     
506 European Communities - Regime for the Importation, Sale and Distribution of Bananas ,
WT/DS27/AB/R, adopted 25 September 1997, para. 143.WT/DS70/R
Page 159
• funds provided to the "civil aircraft industry" by Technology Partnerships Canada and
"predecessor programs"; and
• "benefits" provided under the Canada-Québec Subsidiary Agreement on Industrial
Development and the Société de Développement Industriel du Québec.
EDC "financing"
9.21 Canada recalls its claim that this matter was not included in Brazil's request for consultations,
and states that nothing in the course of consultations could, therefore, guide Canada as to the nature of
Brazil's claim.  Canada argues that, given the accelerated procedure of Article 4 of the SCM
Agreement, it is manifestly contrary to Canada's due process rights to have to respond to a claim thatcould potentially cover hundreds of clients, many thousands of financing transactions over several
years, and a portfolio of C$10 billion.
9.22 Brazil submits that there is a veil of secrecy around the EDC, and that this veil of secrecy
should not stand in the way of Brazil's right to pursue its claim.  Brazil asserts that EDC "financing"
was discussed in consultations, and that Canada was therefore on notice of Brazil's claim.  Brazil alsonotes that in a preliminary submission to the Panel, Canada defined the term EDC "financing" to
mean "EDC's financing activities (direct lending)", suggesting that Canada appears to understand fully
the meaning of this term.
Funds provided to the "civil aircraft industry" by Technology Partnerships Canada and
"predecessor programs"
9.23 Canada asserts that the term "civil aircraft industry" is over-broad for the purpose of Article
6.2 of DSU, because "[i]t includes firms ranging from machine shops and metal treatment facilities to
those involved in advanced instrumentation a nd communications equipment.  In Canada, this
comprises over 200 enterprises employing over 38,000 workers."507 Canada asserts that Brazil is not
unaware of the broad nature of the "civil aircraft industry", since it provided an all-encompassing
definition of the "aircraft definition" during consultations.  With reference to Korea - Alcoholic
Beverages , Canada notes that there is no identified tariff heading and no previous decision to guide
Canada as to what Brazil might mean by the "civil aircraft industry".
9.24 Canada also argues that Brazil failed to identi fy with adequate specificity which "predecessor
programs" to Technology Partnerships Canada ("TPC"), and which activities or transactions, are
being challenged by Brazil.
9.25 Brazil notes that Canada refers to the definition of "aircraft industry" provided by Brazil
during consultations.  Brazil asserts that Canada therefore had sufficient knowledge of the meaning of
the term "aircraft industry".  Brazil denies Canada's argument that the term "civil aircraft industry" is
over-broad for the purpose of Article 6.2 of DSU, quoting the Appellate Body's statement in
European Communities - Computer Equipment  that Article 6.2 is not violated through a "lack of
precision of the terms … in the request for the establishment of a panel".508  Brazil asserts that Article
6.2 does not require the complaining party to circumscribe a narrow category of products to which the
challenged measures apply.  Brazil also challe nges Canada's argument that Brazil should have
specified the products subject to the challenged measures by use of tariff headings.  Brazil cites from
the panel in Korea - Alcoholic Beverages  which, in interpreting the Appellate Body in European
Communities - Computer Equipment , stated that "a panel request based on a broader grouping of
                                                     
507 See para. 4.47 above.
508 European Communities - Customs Classification of Certain Computer Equipment , WT/DS62, 67,
68/AB/R, adopted 22 June 1998, para. 70.WT/DS70/R
Page 160
products [than those included in an identified tariff heading] was sufficiently specific for the purposes
of Article 6.2".
9.26 With regard to TPC "predecessor programs", Brazil argues that Canada must be well aware
that there is only one "predecessor program" to the TPC, namely the Defence Industry Productivity
Program ("DIPP").
Benefits provided under the Canada-Québec Subsidiary Agreement on Industrial
Development and the Société de Développement Industriel du Québec
9.27 Canada asserts that the phrase "benefits provided" is not sufficiently specific for the purpose
of Article 6.2, since it is not clear which aspect of these programmes, or which activities or
transactions under these programmes, are considered by Brazil to confer a "benefit".
9.28 Brazil argues that Canada was on notice of these matters, since its claims concerning benefits
under the abovementioned programmes were included in Brazil's request for consultations and were
on the table for discussion.  Brazil asserts that Canada failed to provide details of the Canada - Québec
Subsidiary Agreements on Industrial Development ("Subsidiary Agreements") or the Société deDéveloppement Industriel du Québec ("SDI") during consultations, and that it would be contrary to
the letter and spirit of both the consultation provision and Article 6.2 of the DSU to reward Canada's
failure to disclose freely the facts of these programmes by limiting the scope of the Panel's
jurisdiction.
(ii) Evaluation by the Panel
9.29 We will consider the preliminary issue raised by Canada in light of the following general
observations.  First, we note that Canada refers on a number of occasions
509 to the accelerated
timetable of a "fast-track" case, suggesting that any impact on Canada's due process rights caused by
the alleged absence of specificity in Brazil' s request for establishment is compounded in an
accelerated timetable.  However, although Article 4.2 of the SCM Agreement requires the Memberrequesting consultations to provide a "statement of av ailable evidence", there is nothing in either the
DSU or the SCM Agreement to suggest that requests for establishment of panels for "fast-track" cases
should be any more precise than requests for establishment of panels in "standard" WTO dispute
settlement cases.
9.30 Second, in European Communities - Computer Equipment  the Appellate Body was required
to consider the specificity of the US panel request, which referred inter alia  to "all types of LAN
[Local Area Network] equipment".  In doing so, the Appellate Body stated that:
Whether these terms are sufficiently precise to "identify the specific measure at issue"
under Article 6.2 of the DSU depends, in our view, upon whether they satisfy the
purposes of the requirements of that provision .
In EC - Bananas , we stated that:
It is important that a panel request be sufficiently precise for two reasons:
first, it often forms the basis for the terms of reference of the panel pursuant
to Article 7 of the DSU; and, second, it informs the defending party and the
third parties of the legal basis of the complaint.
                                                     
509 See, for example, paragraphs 40, 43 and 45 of Canada's preliminary submission regarding the
jurisdiction of the Panel, dated 23 October 1998.WT/DS70/R
Page 161
The European Communities argues that the lack of precision of the term, LAN
equipment, resulted in a violation of its right to due process which is implicit in the
DSU.  We note, however, that the European Communities does not contest that theterm, LAN equipment, is a commercial term which is readily understandable in the
trade.  The disagreement between the European Communities and the United States
concerns its exact definition and its precise product coverage. We also note that the
term, LAN equipment, was used in the consultations between the European
Communities and the United States prior to the submission of the request for theestablishment of a panel and, in particular, in an "Information Fiche" provided by the
European Communities to the United States during informal consultations in Geneva
in March 1997. We do not see how the alleged lack of precision of the terms , LAN
equipment and PCs with multimedia capability, in the request for the establishment of
a panel affected the rights of defence of the European Communities in the course
of the panel proceedings .  As the ability of the European Communities to defend
itself was not prejudiced  by a lack of knowing the measures at issue, we do not
believe that the fundamental rule of due process was violated by the Panel.
510  (bold
emphasis supplied)  (footnotes deleted)
9.31 We consider it appropriate to apply a similar standard in determining whether Brazil's request
for establishment meets the requirements of Article 6 .2 of the DSU in the present case.  In particular,
we shall consider whether any alleged imprecision in Brazil's request for establishment affectedCanada's due process rights of defence in the course of the Panel proceedings.  Indeed, we understand
Canada to advocate a similar interpretation of Article 6.2, since Canada asserts that Brazil's "lack of
precision prejudices Canada's due process right to know the case against it.  These claims are
therefore  inconsistent with Article 6.2 of the DSU."
511 (emphasis supplied).  Thus, we understand
Canada to argue that Brazil's request for establishment would not be inconsistent with Article 6.2 ofthe DSU if the alleged lack of precision did not pr ejudice Canada's due process right to know the case
against it.
9.32 We note Canada's argument that a party's request for establishment of a panel should be more
specific than its request for consultations.  As a general rule, it may be true that a request for
establishment will be more specific than a request for consultations.  However, we consider thatArticle 6.2 of the DSU is concerned exclusively with  a party's request for establishment.  Thus, the
consistency of a party's request for establishmen t with Article 6.2 of the DSU should be judged
exclusively in light of the specificity of the re quest for establishment, and not in light of the
specificity of the party's earlier request for consultations.
9.33 Finally, we recall that Canada asked the Panel to rule on the consistency of Brazil's request
for establishment with Article 6.2 of the DSU prior to the deadline for the parties’ first written
submissions.  We recall our finding that there is no requirement in the DSU for panels to rule on
preliminary issues prior to the parties' first written submissions.  Nor is there any established practice
to this effect, for there are numerous panel reports where rulings on preliminary issues have been
reserved until the final report.
512  Furthermore, we have stated above that we will decide this
preliminary issue by determining whether any alleged imprecision in Brazil's request for
establishment prejudiced Canada's due process right of defence during the panel process.  We cannecessarily only undertake such an analysis at the end of the panel process.  For these reasons, we
                                                     
510 European Communities - Customs Classification of Certain Computer Equipment , WT/DS62, 67,
68/AB/R, adopted 22 June 1998, paras. 68, 69 and 70.
511 Canada's preliminary submission regarding the jurisdiction of the Panel, dated 23 October 1998,
para. 37.
512 See, for example, European Communities - Bananas ( WT/DS27//R, adopted 25 September 1997 ),
and European Communities - Computer Equipment (WT/DS62, 67/R, adopted 22 June 1998).WT/DS70/R
Page 162
rejected Canada's request for a preliminary ruling on this issue prior to the deadline for the parties'
first submissions.
EDC "financing"
9.34 According to Brazil, the term "financing" does not imply a distinct form of 'direct lending',
but is a broader, more general term encompassing direct lending, debt and equity support".513  By its
own admission, therefore, Brazil could have chosen a more specific term in its request for
establishment.  However, this does not necessarily mean that Brazil's use of the term "financing"
prejudiced Canada's due process right of defence during the Panel process.
9.35 In addition to EDC "financing", Brazil's request for establishment refers to EDC "loan
guarantees" and "equity infusions".  Given the express references to "loan guarantees" and "equity
infusions", and given that EDC is primarily a lending institution,514 we consider that there is very little
else left under the term "financing" besides  direct lending.    For this reason alone, we believe that
Canada would have been on notice that Brazil intended to advance claims concerning direct lending
by the EDC under the concept of "financing".  We at tach further importance to the fact that, in its
preliminary submission concerning the jurisdiction of the Panel, Canada itself interpreted Brazil'sreference to "financing" as a reference to "direct lending".
515  For these reasons we consider that,
insofar as Brazil advances claims concerning EDC direct lending in the course of Panel proceedings,
Canada's due process right of defence is not impaired by any lack of precision in the term "financing".
We therefore find that the term "financing" is sufficiently clear and specific for the purpose of Article
6.2 of the DSU, insofar as claims concer ning EDC direct lending are concerned.
Funds provided to the "civil aircraft industry" by Technology Partnerships Canada and
"predecessor programs"
Civil aircraft industry
9.36 We do not consider that the mere fact that the scope of a measure is identified in the request
for establishment by reference to a broad product or industry grouping necessarily renders that request
for establishment inconsistent with Article 6.2 of the DSU.  We believe that the Appellate Body was
of a similar opinion in LAN Equipment,  where it shared the US concern that:
if the EC arguments on specificity of product definition are accepted, there will
inevitably be long, drawn-out procedural battles at the early stage of the panel processin every proceeding.  The parties will contest every product definition, and the
defending party in each case will seek to exclude all products that the complaining
parties may have identified by grouping, but not spelled out in 'sufficient' detail.
9.37 Although the Appellate Body's remarks were made  in the context of a reference to a broad
product grouping in the complaining party's request for establishment, we can see no basis for not
adopting a similar approach when the request for establishment refers to a broad industry sector, such
as the "civil aircraft industry".  If a complaining party believes that a measure affects a broad industrysector, in our view that complaining party should be entitled to challenge that measure insofar as it
affects the totality of the industry concerned, without having to spell out the individual components of
that industry, and without running afoul of Article 6.2 of the DSU.
                                                     
513 Brazil's reply to Canada's preliminary submission, dated 30 October 1998, page 4.
514 According to EDC's 1997 Annual Report (page 27), loan interest was by far EDC's greatest source
of income during 1997.  EDC's corporate plan provides for this trend to continue through 1998.
515 Canada's preliminary submission regarding the jurisdiction of the Panel, dated 23 October 1998,
para. 33.WT/DS70/R
Page 163
9.38 Furthermore, despite the breadth of the indust ry sector selected by Brazil, Canada was
nevertheless able to define and establish the outer-limits of that industry.  Canada stated specifically
that "[i]t includes firms ranging from machine shops and metal treatment facilities to those involvedin advanced instrumentation and communications e quipment.  In Canada, this comprises over 200
enterprises employing over 38,000 workers."
516  Given Canada's ability to define the outer-limits of
the "civil aircraft industry", we fail to see how Canada's due process right of defence could be
prejudiced by an alleged lack of precision in the terms employed by Brazil.
9.39 For these reasons, we find that the phrase "civil aircraft industry" is sufficiently specific for
the purpose of Article 6.2 of the DSU.
Predecessor programmes
9.40 Despite the reference to "predecessor programs" in  the plural, Brazil has argued that, in fact,
there is only one predecessor program, i.e., the DIPP.  Given the existence of only one predecessor
programme, the reference to "predecessor programs" in the plural could have caused some uncertainty
to Canada.  However, Brazil has demonstrated517 that the TPC programme was perceived by Industry
Canada to constitute the "new" programme replacing the DIPP.  Thus, despite any potential foruncertainty concerning the exact parameters of Brazil's claim against "predecessor programs", Canada
should have known that Brazil's "predecessor programs" claim would at least include DIPP.  For this
reason, we do not consider that the term "predecessor programs" would have prejudiced Canada's due
process rights during the Panel process insofar as claims regarding the DIPP are concerned.  In these
circumstances, we find that the reference to "predecessor programs" is "readily understandable"
518 and
sufficiently specific for the purpose of Article 6.2 of the DSU insofar as claims concerning DIPP are
concerned.
"Benefits" provided under the Canada-Québec Subsidiary Agreement on Industrial
Development and the Société de Développement Industriel du Québec
9.41 Article 1.1(b) of the SCM Agreement explicitly provides that, in order to constitute a
"subsidy", a "financial contribution" by a government or public body must confer a "benefit".  In the
context of a dispute under the SCM Agreement, therefore, the term "benefits" should be "readily
understandable"519 to an informed reader.  Canada asserts that the reference to "benefits" does not
make it clear which aspect of the relevant programmes, or which activities or transactions under theseprogrammes, are considered by Brazil to confer a "benefit".  However, and especially in the context of
claims against the application of alleged subsidy programmes that could involve tens or even
hundreds of transactions, we consider that such detailed information would normally be included in
the arguments adduced by the complaining party in its various submissions to a panel.  The mere fact
that such detailed information is not included in th e request for establishment does not in and of itself
prejudice the respondent's due process right of defence.  For these reasons, we find that the term
"benefits" is sufficiently specific for the purpose of Article 6.2 of the DSU.
2. Temporal application of the SCM Agreement
9.42 Canada has raised a preliminary issue concerning Brazil's claim against an alleged export
subsidy granted in April 1989.  Canada requested a preliminary ruling that the SCM Agreement does
not apply to contributions and transactions that t ook place prior to 1 January 1995, the date of entry
                                                     
516 See para. 4.47 above.
517 Brazil's reply to Canada's preliminary submission, dated 30 October 1998, para. 4.16.
518 European Communities - Customs Classification of Certain Computer Equipment , WT/DS62, 67,
68/AB/R, adopted 22 June 1998, para. 70.
519 European Communities - Customs Classification of Certain Computer Equipment , WT/DS62, 67,
68/AB/R, adopted 22 June 1998, para. 70.WT/DS70/R
Page 164
into force of the WTO Agreement.  Canada's request is based on Article 28 of the Vienna Convention
on the Law of Treaties, which provides:
Unless a different intention appears from the treaty or is otherwise established, its
provisions do not bind a party in relation to any act or fact which took place or any
situation which ceased to exist before the date of the entry into force of the treaty
with respect to that party.
9.43 Brazil agreed with Canada that, with regard to prohibited subsidies, the SCM Agreement does
not apply to contributions made prior to 1 January 1995.  For this reason, Brazil withdrew its claimconcerning the 1989 measure in issue.
9.44 In light of Brazil's decision to withdraw its claim concerning the 1989 measure in issue, we
do not consider it necessary to rule on the preliminary issue raised by Canada.
3. Fact-finding by the Panel
(a) Arguments of the parties
9.45 In a letter to the Panel dated 23 October 1998, Brazil stated that it would be "handicapped" in
pursuing its case "because Canada declined to provide transaction-specific details concerning [certain]measures during consultations."  Brazil referred to the following statement by the Appellate Body in
India Pharmaceuticals  to argue that Canada was not justified in declining to disclose relevant details
during consultations:
All parties engaged in dispute settlement  under the DSU must be fully forthcoming
from the very beginning both as to the claims involved in a dispute and as to the factsrelating to those claims.  Claims must be st ated clearly.  Facts must be disclosed freely.
This must be so in consultations as we ll as in the more formal setting of panel
proceedings.  In fact, the demands of due pr ocess that are implicit in the DSU make this
especially necessary during consultations.
9.46 Brazil argued that Canada's refusal to disclose the details of the operations of certain
measures with regard to regional civil aircraft meant that "not all of the pertinent facts relating to its
claim [were] before the Panel."  Brazil then referred to the following statement by the Appellate Body
in India Pharmaceuticals :
If, in the aftermath of consultations, any party believes that all the pertinent facts
relating to a claim are, for any reason, not be fore the panel, then that party should ask
the panel in that case to engage in additional fact-finding.
9.47 For these reasons, Brazil requested the Panel "to engage in additional fact-finding by
requesting Canada to present to the panel and the parties, at the first meeting of the Panel, the
complete details of all operations of the Export Development Corporation, the Canada Account, the
Technology Partnerships Canada and its predecessor programs, the Canada-Québec SubsidiaryAgreement on Industrial development, and the Société de Développement Industriel du Québec with
regard to the civil aircraft industry, including all grants, loans, equity infusions, and loan guarantees,
or any other direct or indirect financial contribution of any kind."
9.48 Canada submits that it is a well-established practice for a WTO panel, having received the
first submissions and evidence of the parties, and having heard their first substantive oral arguments,
to ask the parties for information additional to that submitted by the parties.  According to Canada,
there is no support from the Appellate Body, however, or from the DSU, WTO practice, orinternational law and practice for turning the pane l process into something akin to a commission ofWT/DS70/R
Page 165
inquiry.  Canada submits that there is also no provision in the DSU and no precedent in GATT or
WTO jurisprudence for subjecting a responding party to a discovery process.
(b) Evaluation by the Panel
9.49 We note that, by virtue of Article 13.1 of the DSU, we "have the right to seek information …
from any … body which [we] deem[] appropriate."  We note further that, according to the Appellate
Body in Argentina - Textiles and Apparel , Article 13 of the DSU constitutes "a grant of discretionary
authority:  a panel is not duty-bound to seek information in each and every case…" 520 We also recall
the Appellate Body's statement in European Communities - Hormones  that "Article 13 of the DSU
enables a panel to seek information … as it deems appropriate in a particular case…"521
9.50 We did not consider it appropriate to seek any information before receiving at least the first
written submissions of both parties.  We considered that it was only on the basis of these first written
submissions that we could properly determine what, if any, additional information might need to be
sought.  In this regard, we recall that the Appellate Body in India - Patents referred to "additional
fact-finding" by a panel in a context where pertinent facts are "not before the panel".522   In our view,
the Appellate Body could not have been referring in that case to a situation where information is notbefore the panel because the panel has not yet received any submissions from the parties.  Any
contrary view would be absurd, since it would at  once defeat the very purpose of the parties making
written submissions.
9.51 Brazil and Canada filed their first written submissions on 3 and 16 November 1998
respectively.  Brazil renewed its 23 October 1998 request at the first meeting with the Panel on 26November 1998.  The Panel sent the parties written questions on 27 November 1998, in order to seek
clarification of a number of issues raised in the fi rst written submissions and at the first substantive
meeting with the Panel.  These questions were not intended to elicit the detailed information referred
to in Brazil's request of 23 October 1998.
9.52 Following receipt of the parties' second written and oral submissions, and the parties' written
replies to the Panel's questions of 27 November 1998, a number of relevant transactions had been
identified in the record.  Accordingly, on 10 and 13 December 1998 we exercised our discretionary
authority under Article 13.1 and asked Canada to provide detailed information (including the terms
and conditions of various loans and contributions etc., and internal assessment documents concerning
such loans and contributions etc.) concerning some of those transactions.
523  However, we did not
consider it appropriate to seek detailed information in respect of transactions (if any) not identified in
the record.
9.53 In the circumstances of the present case, we did not consider it appropriate to exercise our
discretionary authority under Article 13.1 to make generalized requests for information.  Instead, we
only sought  detailed information of relevant loans, funds, contributions, assistance etc. identified inthe record.  Whereas more generalized requests for  information  (of the sort envisaged in Brazil's
submission of 23 October 1998) may be appropriate for bodies such as commissions of enquiry, we
do not consider them appropriate for a panel acting under Article 13.1 of the DSU.  In cases involving
alleged prohibited export subsidies, we appreciate that a complaining party may have difficulty in
obtaining information necessary to support its case, especially where details of the alleged subsidy has
                                                     
520 Argentina - Measures Affecti ng Imports of Footwear, Tex tiles, Apparel and Other Items ,
WT/DS56/AB/R, adopted 22 April 1998, para. 84.
521 EC Measures Concerning Meat and Meat Products (Hormones) , WT/DS26,48, AB/R, adopted
13 February 1998, para. 147.
522 India - Patent Protection for Pharmnaceutical And Agricultural Chemical Products ,
WT/DS50/AB/R, adopted 16 January 1998 para. 94.
523 Our questions also addressed more general issues relevant to the case.WT/DS70/R
Page 166
not been notified under Article 25 of the SCM Agreement, and where the respondent Member chooses
not to divulge relevant information during dispute settlement proceedings.  This raises obvious
systemic issues regarding the effectiveness of the SCM Agreement notification procedures, and of theWTO dispute settlement procedures generally.  Howeve r, we consider that such systemic issues are a
matter for serious consideration by the WTO Members in the appropriate fora, and not a matter to be
resolved by this Panel acting under Article 13.1 of the DSU.
4. Procedures governing Business Confidential Information
(a) Arguments of the parties
9.54 Early in this proceeding, Canada asked the Panel to adopt special working procedures for the
protection of Business Confidential Information (hereina fter "BCI").  To this end, Canada submitted a
set of draft procedures to the Panel.   Canada  stated that its draft procedures struck a balance between
(1) the need for "reasonable access" to BCI by the Pa nel and the other disputing parties, and (2) the
need to provide private business interests with adequate protection for their proprietary business
information.
9.55 Brazil agreed in principle with Canada's request, but recommended a number of changes to
the draft procedures submitted by Canada.
(b) Evaluation by the Panel
9.56 We note that procedures concerning the protection of confidential information are provided
for in Article 18.2 of the DSU.  We note, however, that Article 12.1 of the DSU effectively permits
panels to adopt working procedures in addition to those set forth in the DSU, after consulting theparties to the dispute.
524  Given the sensitive nature of the BCI that could be submitted to the Panel in
the present case, and given the agreement between the parties on the need for additional protection of
such Business Confidential Information, the Panel decided to adopt special Procedures Governing
Business Confidential Information that go beyond the protection afforded by Article 18.2 of the DSU.
The Panel agreed with Canada that such Procedures should strike a balance between "reasonableaccess" to BCI, and the need to protect the integrity of such BCI.
9.57 The Panel sent proposed Procedures Governing BCI to the parties on 4 November 1998.
Brazil provided comments on the proposed Procedures later the same day.  Brazil noted that the
proposed Procedures only provided for BCI to be submitted to, and stored at, the premises of the
WTO or the premises of the submitting party's embassy or mission.  Brazil expressed its concern thatthe Procedures proposed by the Panel did not allow a party to keep a set of BCI submitted by the other
at its Geneva Mission.  Brazil considered that this would "unduly restrict the ability of the parties to
deal effectively with [BCI] during the course of this  very rapid proceeding."  Brazil proposed changes
that would allow either party to keep a set of BCI submitted by the other party in a secure location,
namely a locked safe, at its Geneva mission, and that would grant the other party to visit the otherparty's Geneva mission to review the secure location and propose changes in the arrangements.  Brazil
asserted that such changes would "achieve a reasonable balance between the competing interests of
providing reasonable access to information and providing adequate safeguards for [the BCI] of private
business interests."
9.58 The Panel wrote to Canada to solicit its views on the changes proposed by Brazil.  Canada
replied that, in its view, the change proposed by Braz il did "not afford private interests the protection
provided for in the special procedure devised by the Panel [on 4 November 1998]."  Canada alsoexpressed the concern that disagreement between parties over the adequacy of protection afforded
                                                     
524 Argentina - Measures Affecti ng Imports of Footwear, Tex tiles, Apparel and Other Items ,
WT/DS56/AB/R, adopted 22 April 1998, para 79.WT/DS70/R
Page 167
BCI at one another's Geneva missions "could in itself cause unwanted delays in providing access to
the information and thus undermine the very reason for Brazil's request."
9.59 Having taken into account the comments made by both parties, the final Procedures
Governing BCI adopted by the Panel (see Annex I) provided for the submission of BCI at inter alia
the Geneva mission of the other party.  The Procedures stated that such BCI shall be stored in a safe in
a locked room at the premises of the relevant Geneva mission, with restrictions imposed on access to
the locked room and safe.  The Procedures also provided for either party to visit the other party's
Geneva mission and review the proposed location of the safe, and to propose any changes.
9.60 In a subsequent submission, Canada stated that because "the modified procedures do not
provide the requisite level of protection for [BCI]. … Canada would not be in a position to submit
[BCI] under the modified procedures."  Canada submitted, however, that the Procedures proposed by
the Panel on 4 November 1998 "struck a reasonable balance between the interests of the parties to
have access to evidence submitted to the Panel and to provide protection for [BCI]."
9.61 In light of Canada's comments, it appeared to the Panel that Canada was essentially concerned
that the level of protection afforded by the final Procedures was less than that afforded by the
Procedures proposed on 4 November 1998.  Accordingly, the Panel addressed the following question
to Canada:
Canada stated in its oral presentation [at the first substantive meeting] (paras. 20-21)
that “the original  procedures adopted by the Panel governing confidential business
information provided…a sufficient level of protection for that information”, but that“the procedures governing confidential business information, as modified at Brazil’s
request, … do not provide the requisite level of protection…” (emphasis in original).
Could Canada please explain how the level of protection under the procedures
ultimately adopted by the Panel for the protection of confidential business
information differs, in substance, from what would have been afforded by the
procedures to which Canada indicates it could have agreed.  For example, under the
first set of procedures, what other than good faith would prevent a representative of a
party that had signed a non-disclosure form from taking verbatim notes on the
confidential business information on the premises of either the WTO or the opposing
party, removing those notes from those premises and then disclosing them to non-authorized persons?   Would not exactly the same degree of good faith be involved
under either set of procedures?
9.62 In response, Canada stated:
Canada continues to believe that the Panel’s amended confidentiality procedures do
not adequately protect private sector interests and the interests of the Government ofCanada in maintaining effective control over the dissemination of business
confidential information.  In particular they may not be adequate to protect the
Government of Canada from potential liability under domestic law, in the event the
confidentiality provisions are not strictly observed.
In Canada’s view, the essential difference between the confidentiality procedures
originally proposed by the panel and those ultimately adopted are that the original
procedures entrusted the commercial confidential materials to the care of a neutral
third party, i.e. the WTO Secretariat.  The modified procedures oblige Canada to
entrust the materials to the care of the opposing Party, which Party, or at least
nationals of the Party on whose behalf the present case is being pursued, may have an
immediate and commercial interest in these materials.WT/DS70/R
Page 168
Under the original procedures, any breach of these procedures is likely to take the
form of detailed or verbatim notes on a document, as is implied in the Panel’s
question. Under the modified procedures, breach could take the form of a photocopy
of the actual document.  The difference between the commercial and legal effects of
the two potential forms of breach are substantial.
As to commercial effects, the uncertain authenticity of notes on a document will
diminish its utility and correspondingly decr ease the potential commercial  injury that
might be caused by its disclosure to an interested party.  For example, in negotiationsfor the sale of aircraft, a purchaser might pass a copy of the term sheet proposed by
one manufacturer/seller to the agents of a competing manufacturer/seller, as a means
of inducing the first manufacturer/seller to lower its price or otherwise improve the
terms of its offer.   A copy of a term sheet is a far more effective inducement for the
manufacturer/seller to vary his proposal than the assertion by the purchaser that the
competing manufacturer/seller has offered better terms, even if the specific content of
the alleged better terms is detailed by the purchaser.
As to legal liability, any claim, based on the production of detailed or verbatim notes,
that business confidential information was improperly disclosed would constitute
hearsay under Canadian law, and its evidentiary value would be limited. A photocopy
of an original document, however, woul d constitute best evidence. (emphasis
supplied)
9.63 The Panel considers that any special procedures ( i.e., in addition to Article 18.2 of the DSU)
for the protection of BCI in the context of WTO dispute settlement will necessarily depend on the
good faith of the parties and their representatives.  This is true of the final Procedures adopted by the
Panel, and is equally true of the 4 November 1998 Procedures.
9.64 We recall that both the 4 November 1998 Procedures, and the final Procedures, provided that
BCI "shall not be copied, … except as specifically provided in these Procedures."
525  In response to a
request from Canada, the Panel subsequently, on 21 December 1998, amended the final Procedures to
clarify that the term "copied" included verbatim transcription.  Despite the prohibition of copies,
therefore, both sets of Procedures effectively allowed approved persons to make detailed (but not
verbatim) handwritten notes of a party's BCI.
9.65 Canada suggests that it is the potential for approved persons representing one party to make
photocopies of BCI submitted by the other party (because the BCI is entrusted to the care of that other
party) that renders the final Procedures unacceptable.  Canada effectively argues that there was no
potential to make photocopies under the 4 November 1998 Procedures, because the BCI was entrusted
to the WTO Secretariat, and that this potential exists under the final Procedures because they envisageBCI being provided to the other party to the disput e.  Canada submits that "the uncertain authenticity
of notes on a document will diminish its utility and correspondingly decrease the potential
commercial injury that might be caused by its disclo sure to an interested party".  Canada asserts that
photocopies of documents have greater commercial effects than detailed handwritten notes of the
contents of such documents.
526  We note that Canada has advanced no additional arguments in support
of its assertion that the protection afforded to BCI by  the final Procedures is less than that afforded by
the 4 November 1998 Procedures.
                                                     
525 Section VIII.4 of the 4 November 1998 Procedures, and Section VIII.5 of the final Procedures.
526 Canada also points to the superiority of photocopies over handwritten notes for the purposes of
Canadian rules of evidence.  As Canadian rules of evid ence are not relevant in this proceeding, we shall not
address this argument.WT/DS70/R
Page 169
9.66 We are not convinced by Canada's arguments in this regard.  In particular, although detailed
handwritten notes of BCI documents may be less authentic than photocopies of documents containing
BCI, we consider that handwritten notes of BCI would nevertheless have some commercial value to
certain unscrupulous individuals.  The Procedures seek to protect the substance of the BCI, not the
form of the BCI.  This is because it is the substance of the BCI that has the potential to cause
significant commercial prejudice in any form, be it handwritten note or photocopy.  Accordingly, we
attach no importance to Canada's argument that the final Procedures provide unscrupulous approved
persons with the opportunity to make photocopies of BCI documents, whereas the 4 December 1998Procedures would only have provided unscrupulous approved persons an opportunity to make
handwritten notes of BCI.  Under both sets of Pr ocedures, the substance of the BCI could have been
disclosed by unscrupulous approved persons bent on this course.
9.67 Furthermore, assuming arguendo  that a photocopy of BCI does have greater commercial
effect than detailed handwritten notes of BCI,  we are not convinced that the possibility of approved
persons making photocopies of documents containing BCI was totally precluded under the 4
November 1998 Procedures.  In order to exclude any potential for approved persons to makephotocopies under the 4 November 1998 Procedures, the Secretariat would have had to continually
monitor all approved persons' access to the BCI.  Ho wever, the Secretariat is not responsible for the
enforcement of the Procedures, and would not therefore have engaged in such monitoring.  Thus, even
under the 4 November Procedures, there was a potential for unscrupulous and determined approved
persons, having been granted access to the relevant BCI by the Secretariat, to temporarily remove BCIdocuments for photocopying.
9.68 In our opinion, the important distinction be tween the 4 November 1998 Procedures, and the
final Procedures, is that the latter would facilitate the work of the parties in preparing themselves for
these "fast-track" proceedings, without impairing the protection afforded to the substance of the BCI.
The timetable of the proceedings is such that party representatives would be likely to spend largeperiods of time in Geneva.  As noted above, Canada itself has recognised the need for a party to have
"reasonable access" to BCI submitted by the other party.  In the context of a fast-track case in
particular, we do not consider that there is "reasonable access" to the BCI if a party is required to
adjust its work in respect of that BCI to the official working hours of the WTO Secretariat, excluding
evenings and weekends.  Under the final Procedures, authorised representatives of the parties wouldhave had the convenience of access to the BCI of the other party at any time of day or night, rather
than during the working hours of the WTO Secretariat.  In our view, the final Procedures therefore
strike a reasonable balance between (1) the need for "reasonable access" to BCI by the Panel and the
other disputing parties, and (2) the need to provid e private business interests with adequate protection
for their proprietary business information.
9.69 For these reasons, we reject Canada's arguments concerning the inadequacies of the final
Procedures Governing Business Confidential Information.
5. Deadline for the submission of new evidence or allegations
9.70 In its submission dated 16 November 1998, Canada requested a preliminary ruling that the
complaining party may not adduce new evidence or allegations after the end of the first substantive
meeting of the Panel with the parties.  Canada submitted that, given the accelerated procedure under
Article 4 of the SCM Agreement, the late submission of allegations or evidence would be prejudicial,as Canada would be effectively denied an adequate opportunity to respond.
9.71 Brazil asked the Panel to reject Canada's request.  Brazil argued that the request is without
support in WTO law.  In addition, Brazil argued that in Argentine Footwear the Appellate Body
affirmed the Panel's authority to permit the submission of new facts at any point in the proceedings,
provided that the other party is given an adequate opportunity to respond.WT/DS70/R
Page 170
(a) Submission of new evidence
9.72 We recall that the Appellate Body found in Argentine Footwear  that neither Article 11 of the
DSU, nor the Working Procedures in Appendix 3 of the DSU, establish precise deadlines for the
presentation of evidence by parties to a dispute.  There is nothing in the DSU, or in the Appendix 3
Working Procedures, to suggest that a different approach should be taken in "fast-track" cases under
Article 4 of the SCM Agreement.
9.73 In our opinion, an absolute rule excluding the submission of evidence by a complaining party
after the first substantive meeting would be inappropriate, since there may be circumstances in whicha complaining party is required to adduce new evidence in order to address rebuttal arguments made
by the respondent.  Furthermore, there may be instances, as in the present case,
527 where a party is
required to submit new evidence at the request of the panel.  For these reasons, we rejected Canada's
request for a preliminary ruling that the Panel should not accept new evidence submitted by Brazil
after the first substantive meeting.
(b) Submission of new allegations
9.74 We also consider that we are not bound to exclude the submission of new allegations after the
first substantive meeting.  We can see nothing in th e DSU, or in the Appendix 3 Working Procedures,
that would require the submission of new allegations  to be treated any differently than the submission
of new evidence.  Indeed, one could envisage situations in which the respondent might present
information to a panel during the first substantive meeting that could reasonably be used as a basis for
a new allegation by the complaining party.  Provided the new allegation falls within the panel's termsof reference, and provided the respondent party's due process rights of defence are respected, we can
see no reason why any such new allegation should necessarily be rejected by the panel as a matter of
course, simply because it is submitted after the firs t substantive meeting with the parties.  We consider
that this approach is consistent with the Appellate Body's ruling in European Communities - Bananas
that "[t]here is no requirement in the DSU or in GATT practice for arguments on all claims relating tothe matter referred to the DSB to be set out in a complaining party's first written submission to the
panel.  It is the panel's terms of reference, governed by Article 7 of the DSU, which set out the claims
of the complaining parties relating to  the matter referred to the DSB."
528
6. Deadline for the submission of affirmative defences
9.75 By letter dated 26 November 1998, and during its oral statement at the first substantive
meeting on 26 November 1998, Brazil expressed its view, on the basis of certain statements in
Canada's first written submission to the Panel, that "Canada might intend to assert that the provisions
of paragraph (k) of Annex I to the [SCM] Agreement excuse its otherwise prohibited subsidies."
Brazil asserted that reliance on paragraph (k) would amount to a positive defence for which Canada
bears the burden of proof.    According to Brazil, a good faith interpretation of the DSU requires aparty making an affirmative defence to set out the grounds for that affirmative defence in its first
written submission to the panel.  Accordingly, Brazil asked the Panel "not to accept any evidence or
claims of defense in the nature of affirmative defences with regard to the Canada Account, the EDC
                                                     
527 At the time of the second substantive meeting, we asked the parties a series of questions that could
have led to the submission of new evidence or arguments.  In order to ensure due process, we allowed each
party 18 days ( i.e., equivalent to the time between the deadline for the respondent's first submission and the
deadline for rebuttal submissions) in which to comment on any new evidence or arguments adduced by the other
party in response to our questions.
528 European Communities - Regime for the Importation, Sale and Distribution of Bananas ,
WT/DS27/AB/R, adopted 25 September 1997¸ para. 145WT/DS70/R
Page 171
or any other measure at issue which is not submitted to the Panel and to Brazil prior to the scheduled
close" of the first substantive meeting.  Brazil asserted that "this is particularly important in this fast-
track proceeding, where the time constraints on the Panel could limit, or even preclude, the panel'sgiving Brazil a reasonable time to respond to new information after" the second written submission, or
particularly after the second substantive meeting.
9.76 Canada did not comment on Brazil's request.
9.77 As noted above, there is nothing in the DSU,  or in the Appendix 3 Working Procedures, to
prevent a party submitting new evidence or allegations after the first substantive meeting.  We can seeno basis in the DSU to treat the submission of affirmative defences after the first substantive meeting
any differently.  Thus, although it is desirable that affirmative defences, as with any claim, should be
submitted as early as possible, there is no requirement that affirmative defences should be submitted
before the end of the first substantive meeting with th e parties.  Provided that due process is respected,
we see nothing to prohibit the submission of affirmative defences after the first substantive meeting
with the parties.
9.78 In the present case, we considered that Brazil's due process rights would not be respected if
Canada were able to submit an affirmative defence after 12 December 1998, i.e., after the second
substantive meeting with the Panel.  We therefore re quired Canada to invoke any  affirmative defence
it intended to raise in this case by 12 December 1998.    In the event, Canada did not adduce any
affirmative defences.
7. Panel's right to seek information in respect of defences Canada has not made
9.79 In introductory comments to its 21 December 1998 response to questions from the Panel,
Canada expressed the "concern" that "the Panel has requested the production of evidence in respect of
defences Canada has not made."   Canada asserts that "this method of proceeding ignores the principle
of judicial economy."  Consistent with the principle of judicial economy, Canada submits that the
Panel should address only those issues which must be addressed in order to resolve the matter in issuein the dispute.  By way of example, Canada argues that it is not necessary for this Panel to determine
whether impugned programmes, activities or transactions are “subsidies”, if it finds that they are not
“contingent … on export performance”, and vice versa.
9.80 Brazil has expressly endorsed Canada's views on the principle of judicial economy generally.
However, Brazil has not expressly endorsed Canada's view that the principle of judicial economyshould necessarily prevent the Panel from asking a party questions on issues in respect of which it has
not adduced defences.
9.81 We note that, according to Canada, Brazil must demonstrate two distinct and necessary
elements in order to pursue its claims in the present case.  First, Brazil must demonstrate the existence
of a subsidy.  Second, Brazil must demonstrate that the subsidy is contingent on export performance.Canada effectively submits that it has the option of choosing whether to defend itself on both these
elements, or only one of them.  In principle, we agree with Canada in this regard.
9.82 Canada asserts, however, that if Canada chooses to defend on only one element, then the
Panel is precluded from seeking information on the other element in respect of which Canada has not
raised a defence.  We do not accept this argument.
9.83 With regard to certain measures before the Panel, Canada chose to defend itself on the issue
of export contingency.  Thus, Canada does not advance detailed arguments on the question ofsubsidization.  Despite the absence of any defence on the issue of subsidization, Canada states
expressly that it does not admit that the relevant measures constituted subsidies.  Canada defends
itself on the issue of export contingency, because it believes that the Panel will reject Brazil's claim onWT/DS70/R
Page 172
export contingency.  However, Canada has ignored the possibility that the Panel could find in favour
of Brazil on the question of export contingency.  If the Panel were to find against Canada on the
question of export contingency, the Panel would then be required to make findings on the subsidyissue, particularly given Canada's express statement that it does not admit that the relevant measures
constitute subsidies.
529  If the Panel were prevented from seeking information on the subsidy issue
because of Canada's decision not to defend itself on that issue, the basis for the Panel's findings on
subsidization would be weak at best. It is for these reasons that we reject Canada's argument that a
party's decision not to put in a defence on a particular issue, when that party denies or refuses to admitelements of the claim, should prevent the Panel from seeking information on that issue.
8. Panel's right to seek information in the absence of a preliminary ruling on the
establishment of a  prima facie case
9.84 In introductory comments to its 21 December 1998 response to our questions, Canada
expressed the "concern" that "the Panel has requested the production of evidence in respect of matters
where in Canada's view Brazil has clearly not made out a prima facie  case."  Canada also notes that
"the Panel has not ruled on whether Brazil has made out a prima facie  case on any of the impugned
programmes, activities or transactions."  With regard to the latter consideration, Canada noted at the
second substantive meeting with the Panel that "the fact that the Panel has not ruled on what Canada
considers to be an essential preliminary issue, that is, whether Brazil has made out a  prima facie  case,
makes it difficult for Canada to defend itself."
9.85 Brazil characterized Canada's concern as "illogical", noting that "[n]either of the Parties will
know what the Panel thinks of the case until a point in this proceeding at which neither will be able to
present new evidence."
9.86 We understand that there are two elements to the "concern" raised by Canada.  First, Canada
appears to argue that a panel should rule on whether the complaining party has established a prima
facie  case as a preliminary matter.  Second, Canada appears to argue that a panel should only seek
information on matters with respect to which it has ruled as a preliminary matter that a prima facie
case has been established.  We do not accept Canada's argument.
9.87 We note that there is nothing in the DSU that requires a panel to rule on the establishment of a
prima facie  case as a preliminary matter.  Indeed, the DSU makes no provision for any form of
preliminary or interim ruling.  Furthermore, we are not aware of any WTO panels that have madepreliminary rulings on whether the complaining party has established a prima facie  case.  Whereas a
critical decision for panels in every case is whether or not a prima facie  case has been established, and
whether or not the respondent has rebutted any such prima facie  case, in practice these decisions are
made in light of all the evidence adduced by the parties, including both written and oral submissions.
Such decisions are, therefore, necessarily made in the latter stages of the panel process.
9.88 We recall Canada's assertion that it had experienced difficulty in defending itself as a result of
the Panel's failure to issue a preliminary ruling on whether Brazil had established a prima facie  case.
Without expressing any opinion on Canada's assertion that it experienced difficulty in defending itself
in the present case, we consider that Canada could defend itself fully during the Panel proceedings
simply by assuming that Brazil had, or would, establish a prima facie  case in respect of all its claims.
9.89 Furthermore, a panel's right to seek information is governed by Article 13.1 of the DSU.
There is nothing in Article 13.1 to suggest that a panel's right to seek information is restricted to
                                                     
529 Canada states that it is not necessary for this Panel to determine whether impugned programmes,
activities or transactions are “subsidies”, if it finds that they are not “contingent … on export performance”, andvice versa .  A contrario , we understand Canada to argue that it is  necessary for the Panel to determine whether
impugned programmes etc. are subsidies if it finds that they are contingent on export.WT/DS70/R
Page 173
matters in respect of which the complaining party has been deemed (as a preliminary matter) to have
established a prima facie  case.  The only express restriction on a panel's right to seek information is
the Article 13.1 obligation for a panel to "inform the authorities" of a Member before seeking
information or advice from any individual or body within the jurisdiction of that Member.  In our
opinion, any requirement that panels should provide preliminary rulings on whether the complaining
party has established a prima facie  case before seeking information or advice under Article 13.1 could
render that provision ineffective.  This is because in certain circumstances a panel may consider it
appropriate to seek information or advice precisel y in order to determine whether the complaining
party has established a prima facie  case.  Canada's approach to a panel's right to seek information
would preclude this possibility, and therefore re nder Article 13.1 ineffective in such circumstances.
9.90 For these reasons, we reject Canada's criticism of the Panel for having requested information
on matters in respect of which there had not been a preliminary ruling on whether or not Brazil had
established a prima facie  case.
9. Panel's right to seek information in the absence of an allegation by the complaining
party
9.91 Canada objects that the Panel has requested the production of evidence in respect of
transactions where Brazil has not made an allegation.
9.92 Brazil does not comment on Canada's objection.
9.93 We note that Canada has raised this objection in respect of questions asked by the Panel
concerning:  contributions made under the SDI programme generally; specific SDI contributionsunder the Aerospace Industry Development Fund; the EDC debt financing to ASA; and the Subsidiary
Agreement assistance to Rolls Royce and Lamines CTEK.
9.94 We recall that Brazil presented very broad allegations effectively covering all assistance
granted to the Canadian civil aircraft industry under the various programmes identified in its request
for establishment.  Accordingly, any assistance pr ovided to the civil aircraft industry under the
relevant programmes was effectively covered by the scope of Brazil's allegations.   Thus, to the extent
that the Panel sought information under Article 13.1 with regard to specific instances of assistance
(provided under the relevant programmes) identified in the record, the Panel necessarily only sought
information in respect of assistance covered by Brazil's allegations.
9.95 We note, however, that in its submission dated 4 December 1998, Brazil stated that it was not
making any specific allegation against the Subsidiary Agreement assistance to Rolls Royce or
Lamines CTEK identified in the record, since such assistance did not concern the regional aircraft
industry.  On the basis of this statement, the Panel ultimately decided not to take these two
transactions into account when reviewing Brazil's claim concerning Subsidiary Agreement assistance
to the regional aircraft industry.
530  In normal circumstances, the Panel would not have sought
additional information regarding these transactions under Article 13.1 of the DSU.  However, the
request for information on these transactions was sent to Canada on 10 December 1998.  At the time
the request was sent, the Panel had not had sufficient time to reach a final decision on the full
implications of Brazil's 4 December 1998 statement concerning these transactions.  Accordingly, it
was considered appropriate to request detailed information concerning these transactions, to cover the
possibility that this information might be relevant  to the Panel's deliberations at a future date.
Consistent with the Panel's finding that these transactions were not covered by Brazil's allegationsconcerning Subsidiary Agreement assistance to the Canadian regional aircraft industry, the requested
information ultimately did not become relevant to the Panel's deliberations.
                                                     
530 See para. 9.259 above.WT/DS70/R
Page 174
C. DEFINITION OF "SUBSIDY" WITHIN THE MEANING OF ARTICLE 1 OF THE SCM
AGREEMENT
9.96 A critical issue in this case concerns the defi nition of "subsidy" within the meaning of Article
1 of the SCM Agreement.  Leaving aside the issue of "income or price support[s]" (Article 1.1(a)(2)),
Article 1 of the SCM Agreement provides that a "subsidy" exists when there is a "financial
contribution" by a "government or any public body  within the territory of a Member" (Article
1.1(a)(1)) that confers a "benefit" (Article 1.1(b)).
9.97 The parties do not disagree on the notion of a "financial contribution" by a "government" or
"public body".  However, there is significant disagreement between the parties on the meaning of the
term "benefit" in Article 1.1(b) of the SCM Agreement.  This disagreement influences much of the
parties' argumentation before the Panel.  Therefore, before proceeding with our analysis of Brazil's
claims, we shall first provide our interpretation of "benefit".
1. Arguments of the parties
9.98 Canada asserts that a "benefit" is conferred when a public financial contribution by a public
body (i) imposes a cost on the government, and (ii) results in an advantage above and beyond what themarket could provide.  Canada claims that this interpretation of the term "benefit" is based on the
ordinary meaning of "benefit", the context in which it is found, and the object and purpose of the
SCM Agreement read as a whole.
531
9.99 According to Canada, the ordinary meaning of "b enefit" is "an advantage".  However, in the
context of the SCM Agreement, Canada argues that this ordinary meaning is overly broad, since itcould include "normal commercial activity", such as a commercial contract (entered into by a
government) that accords an advantage to a firm relative to its competitors.  For this reason, Canada
interprets "benefit" in light of Annex IV amd Article 14 of the SCM Agreement, which it relies on as
relevant context for the interpretation of Article 1.
9.100  Canada notes that Article 14 of the SCM Agreement applies commercial benchmarks as
guidelines for the 'benefit to recipient method' of calculating the amount of a subsidy.
532  For this
reason, Canada accepts that commercial benchmarks are relevant in determining the existence of
"benefit" within the meaning of Article 1.  Howeve r, Canada also refers to Annex IV of the SCM
Agreement as relevant context.  Annex IV concerns the calculation of the total ad valorem
subsidization with regard to the presumption of "serious prejudice" under Article 6.1(a).  Paragraph 1of Annex IV provides that [a]ny calculation of the amount of a subsidy for the purpose of paragraph
1(a) of Article 6 shall be done in terms of the cost to the granting government".  Canada asserts that if
"benefit" is defined exclusively in terms of commercial benchmarks ( i.e., without any reference to net
cost to government), a subsidy might be deemed to exist under Article 1 because it was on below-
market terms, but it might nonetheless have no value within the meaning of Article 6.1(a) if it doesnot involve any net cost to the government.   By applying Annex IV as context for the interpretation
of Article 1 of the SCM Agreement, Canada asserts that net cost to the government should be a
condition for establishing "benefit" within the meaning of Article 1 of the SCM Agreement.
9.101  With regard to government credit, Canada asserts that item (k) of the Illustrative List of
Export Subsidies of Annex I of the SCM Agreement pr ovides specific contextual guidance as to what
constitutes a "subsidy" within the meaning of Article 1 of the SCM Agreement.  On the basis of this
                                                     
531 The Panel notes that Canada therefore purports to interpret the term "benefit" consistent with Article
31.1 of the Vienna Convention on the Law of Treaties.
532 The Panel notes that Article 14(a) provides, for example, that "government provision of equity
capital shall not be considered as co nferring a benefit, unless the investment decision can be regarded as
inconsistent with the usual investment practice … of private investors …".WT/DS70/R
Page 175
specific contextual guidance, Canada submits that  there are two elements in determining whether
particular credit terms are subsidies:  (1) does a government provide credit at rates below those which
it has to pay for the funds so employed, and (2) does such credit secure a material advantage in thefield of export credit terms?  Canada emphasised, however, that neither item (k), nor other items in
the Illustrative List, identify a contrario  what would not constitute a "subsidy" within the meaning of
Article 1.  For Canada, such an a contrario  reading would turn the Illustrative List into an exclusive
list.
9.102  With regard to the object and purpose of the SCM Agreement, Canada states that "the
'mischief' that the Agreement seeks to discipline are measures that distort the market by (i) imposing a
cost on the treasury of the providing Member, and (ii) conferring an advantage to the recipient above
and beyond the market".
9.103  For Brazil, neither the ordinary meaning of Article 1.1, nor its context, nor the object and
purpose of the Subsidies Agreement, nor Canada itself, outside the confines of these proceedings,
suggest, much less require, a “net cost to government” test.  Brazil argues that the proper test is
evident from the ordinary meaning of Article 1.1:  a subsidy exists where a government contributessomething, and in so doing grants an aid, which gives help or support, or an advantage, thereby
improving the recipient’s condition above and beyond the market.
9.104  Brazil notes that Canada agrees that demonstrating a “benefit to the recipient” is one part of
the “benefit” test.  Brazil argues, however, that Canada invents a second, additional requirement – that
the government, in making its contribution, realize a “net cost.”  Brazil rejects each of Canada’sreasons for this additional asserted requirement.  First, Brazil disputes Canada’s argument that
applying the ordinary meaning of the term “benefit” – which in Brazil’s view means “advantage” or
“aid” – would not “adequately narrow the term”.  Brazil argues that no provision of the Vienna
Convention  requires that the ordinary meaning of a term be narrowed  in order for it to be valid.
Brazil notes Canada’s statement that a broad definition of “benefit” could mean that a “commercialcontract” could possibly be considered a “subsidy,” but argues that such a contract is not, without
something more, a subsidy prohibited by the terms of the Subsidies Agreement.
9.105  Second, Brazil disagrees with Canada’s view that paragraph (a) of Article 6.1 of the SCM
Agreement provides contextual support for its net cost argument.  Brazil disagrees with Canada that if
“benefit” under Article 1.1 means “benefit to the recipient,” a government contribution identifiedunder Article 1.1 as a “subsidy” could have a value of zero under Article 6.1 and Annex IV.  Brazil
asserts that valuation is only one of several ways to establish “serious prejudice” under Article 6.1 of
the Subsidies Agreement.  Moreover, for Brazil, Article 6.1 is not relevant to an export subsidy, which
need not be quantified or subject to specific valuation in order to trigger the prohibition of Article 3.
9.106  Furthermore, Brazil also disagrees that item (k) of Annex I to the Subsidies Agreement offers
“context” supporting Canada’s proposed test.  According to Brazil, Annex I does not speak to whether
government activity constitutes a subsidy , but rather to whether government activity constitutes a
prohibited export  subsidy.  Brazil submits that a measure may constitute a subsidy, but not be on the
Illustrative List of Export Subsidies included in Annex I.
9.107  Third, concerning the object and purpose of the SCM Agreement, Brazil finds
incomprehensible Canada's implication that the type of benefit estimated by Brazil for TPC's $87
million contribution to Bombardier is not, consistent with the object and purpose of the SubsidiesAgreement, “trade distortive.”
9.108  Furthermore, with regard to Canada's own administrative practice, Brazil notes that Revenue
Canada’s Special Import Measures Act Handbook states that while the determination of “benefit” on a
government loan is generally related to whether the government recovers its costs, such a test will not
always capture the true effect of the subsidy.  According to Brazil, the Handbook states that:WT/DS70/R
Page 176
“[I]t is also possible that a benefit would accrue to an exporter or an importer as a result of a
government guarantee which would not necessarily result in a cost to the government.  Thebenefit could be a lower interest rate or a loan at a commercial rate which the company would
otherwise not get without government involvement.”
9.109  Furthermore, according to Brazil, in defining a “subsidy,” the Canadian Handbook states that
a “benefit” can be direct or indirect:
“A direct financial or other commercial benefit is one which accrues directly to the person,
firm or industry which is the intended recipient, such as an outright grant of funds to a
producer of goods.  An indirect benefit is one which does not accrue directly, but which alters
the economic environment within which firms operate, and hence the level of their costs.”
9.110  For Brazil, therefore, Canada’s position concer ning the definition of “subsidy” and “benefit”
before this Panel is irreconcilable with that adopted in its own law.
2. Interpretation by the Panel
9.111  In interpreting the term "benefit" in Article  1.1(b) of the SCM Agreement, we recall that
Article 31.1 of the Vienna Convention on the Law of Treaties  provides that a treaty shall be
interpreted "in good faith in accordance with the ordinary meaning to be given to the terms of the
treaty in their context and in the light of its object and purpose."  We note that Canada purports torespect Article 31.1 of the Vienna Convention in its interpretation of the term "benefit".  However, for
the following reasons, we are not persuaded that the application of Article 31.1 results in the
interpretation of "benefit" advocated by Canada.
9.112  First, in our opinion the ordinary meaning of  "benefit" clearly encompasses some form of
advantage.  We do not consider that the ordinary meaning of "benefit"  per se  includes any notion of
net cost to the government.  As Canada itself has noted, the dictionary definition of "benefit" refers to
"advantage", and not to net cost.
533  In order to determine whether a financial contribution (in the
sense of Article 1.1(a)(i)) confers a "benefit", i.e., an advantage, it is necessary to determine whether
the financial contribution places the recipient in a more advantageous position than would have been
the case but for the financial contribution.   In our view, the only logical basis for determining theposition the recipient would have been in absent the financial contribution is the market.
Accordingly, a financial contribution will only confer a "benefit", i.e., an advantage, if it is provided
on terms that are more advantageous than those that would have been available to the recipient on the
market.
9.113  We note that the relevant context supports our interpretation of the ordinary meaning of
"benefit".  In particular, we note that Article 14 pr ovides guidelines for calculating "the benefit to the
recipient conferred pursuant to paragraph 1 of Article 1."  These guidelines employ a commercial
benchmark, whereby a financial contribution "shall not be considered as conferring a benefit" unless
that financial contribution is made on terms that are more advantageous than would have been
available to the recipient on the commercial market.  Although Article 14 applies expressly for the
purposes of Part V of the SCM Agreement (count ervailing measures), and although the commercial
benchmark approach of Article 14 is not the only test for calculating the amount of a subsidy, we
recall that Article 14 refers expressly to commercial benchmarks for identifying explicit situations in
which an Article 1.1 "benefit" shall not arise.  We see no reason why the commercial benchmarks
applied in Article 14 for the purpose of determining when an Article 1.1 "benefit" does not arise
should not serve as relevant context for determining when an Article 1.1 "benefit" does arise.
                                                     
533 See para. 5.30 above.WT/DS70/R
Page 177
9.114  Second, we do not accept Canada's argument that "benefit" must be interpreted more
narrowly than its ordinary meaning of "advantage".  Canada asserts that a narrow interpretation is
necessary in order to exclude "normal commercia l activity" such as commercial contracts (by a
government) that accord advantages to firms relative to their competitors.  In light of the preceding
paragraph, however, we consider that using a commercial benchmark to identify the existence of a
"benefit" will not create the problem alluded to by Canada.  That is, under such a benchmark, "normal
[governmental] commercial activity" will not be deemed to confer a "benefit", i.e., an advantage,
provided it really is "normal commercial activity".  In other words, such activity will not be deemed to
confer a "benefit" provided the terms of the contract are not more advantageous than those that would
have been negotiated on the market for an equivalent transaction.
9.115  Third, if "benefit" were to include the notion of net cost to government, it could exclude from
the definition of "subsidy" situations explicitly identified in Article 1.1(a)(1) itself as constituting
government financial contributions even though no cost to the government might be involved.
Specifically, Article 1.1(a)(1)(iv) identifies as a "financial contribution" the situation where a
government directs a private body to make "financial contributions" within the meaning of Article1.1(a)(1)(i)-(iii).  In such a situation, the net cost could be incurred entirely by the private body rather
than the government.  Canada's interpretation of "benefit" ( i.e., to include net cost to government)
would render Article 1.1(a)(1)(iv) meaningless, since a form of "financial contribution" explicitly
included in Article 1.1(a) would automatically ( i.e., because it would never meet the net cost to
government test) be excluded by Article 1.1(b).
9.116  Fourth, we do not accept Canada's reliance on Annex IV.1 of the SCM Agreement as
contextual support for considering net cost to government in determining "benefit".  Annex IV.1
concerns the calculation of the amount of a subsidy for the purpose of Article 6.1(a) of the SCM
Agreement.  Canada effectively argues that the "cost to government" referred to in paragraph 1 of
Annex IV constitutes the definition, at least for the purpose of determining the existence of seriousprejudice under Article 6.1(a), of "benefit" in the sense of Article 1.1(b).  However, Canada's is
neither the only interpretation of this provision, nor the most convincing.  In our opinion, the need to
calculate the value of a subsidy only arises once the existence
 of the subsidy, and therefore the
"financial contribution" and "benefit ", have been established.  Because "benefit" must be established
before the value of the alleged subsidy may be considered, provisions concerning the valuation of
subsidies are not necessarily relevant for the purpose of establishing the existence of a subsidy (and
therefore "benefit").  The contextual relevance of Annex IV.1 differs significantly from that of Article
14, referred to in para. 9.113 above, since the latter provision deals expressly with the calculation of
"benefit" "pursuant to paragraph 1 of Article 1".  Annex IV.1, by contrast, refers only to the
calculation of the amount of a subsidy, and does not apply expressly for the purpose of calculating
"benefit" within the meaning of Article 1.1 of the SCM Agreement.
9.117  Fifth, we are unable to accept Canada's argument that item (k) of the Illustrative List of
Annex I of the SCM Agreement constitutes contex tual guidance for determining the existence of
"benefit" in the specific context of government credit under Article 1.  In our view, item (k) of the
Illustrative List applies in determining whether or  not a prohibited export subsidy exists.  We do not
consider, and the parties have not argued, that item (k) determines whether or not a "subsidy" exists
within the meaning of Article 1 of the SCM Agreement.  Whereas Canada might have argued thatitem (k) could be relied on for the purpose of determining when an Article 1 subsidy does not exist,
Canada expressly declined to rely on this a contrario  reading of item (k).  We therefore take no view
on the a contrario  approach as such.
 534
                                                     
534 In this regard, we note an apparent inconsistency in Canada's arguments as we see no difference
between Canada's reliance on item (k) as specific contextual guidance for the interpretation of "subsidy" underArticle 1, and the very a contrario  reading of item (k) that Canada has expressly rejected for the purpose of
defining when government credit constitutes a "subsidy" within the meaning of Article 1 of the SCMWT/DS70/R
Page 178
9.118  Furthermore, whereas Article 31.1 of the Vienna Convention requires "the ordinary meaning
to be given to the terms of the treaty in their context", we do not consider that this requires us to
ignore the ordinary meaning of the term "benefit" simply to accommodate a conflicting contextualinterpretation.  As noted above, we consider that the ordinary meaning of "benefit" refers to
advantage, to the exclusion of any notion of net cost to the government.
9.119  Sixth, we note that the SCM Agreement does not contain any express statement of its object
and purpose.  We therefore consider it unwise to attach undue importance to arguments concerning
the object and purpose of the SCM Agreement.  In  our view, however, the avoidance of net cost to
government is not the object and purpose of the multilateral disciplines contained in the SCM
Agreement.  Rather, as suggested by Canada itself at para. 96 of its first submission, we consider that
the object and purpose of the SCM Agreement could more appropriately be summarised as the
establishment of multilateral disciplines "on the pr emise that some forms of government intervention
distort international trade, [or] have the potential to distort [international trade]".
9.120  For all the above reasons, we reject Canada's 'net cost to government' interpretation of the
term "benefit" in Article 1.1(b) of the SCM Agreement.  Thus, leaving aside situations of alleged"income or price supports" within the meaning of Article 1.1(a)(2), we consider that a "financial
contribution" by a government or public body confers a "benefit", and therefore constitutes a
"subsidy" within the meaning of Article 1 of the SCM Agreement, when it confers an advantage on
the recipient relative to applicable commercial benchmarks, i.e., when it is provided on terms that are
more advantageous than those that would be available to the recipient on the market.
D. EXPORT DEVELOPMENT CORPORATION
9.121  Brazil challenges the EDC programme as a per se  export subsidy prohibited by Article 3 of
the SCM Agreement.  Brazil also challenges the EDC as applied, including funding, support, funds
and benefits granted under the auspices of the EDC programme to the regional aircraft industry.
535
9.122  Brazil submits that the EDC is an agency of the Government of Canada which was
established by the Export Development Act “for the purposes of supporting and developing, directly
or indirectly, Canada’s export trade and Canadian capacity to engage in that trade and to respond to
international business opportunities.”536  Brazil refers to EDC materials to the effect that "EDC's
mandate is to help Canadian business compete and succeed in the global marketplace", and to attempt
to satisfy "the seemingly endless appetite of Canadian exporters for financial support"537 through a
variety of financial and risk absorption services, including export trade insurance, sales, financing,
loan guarantees, and equity investments.  Brazil asserts that these benefits are not available from
                                                                                                                                                                    
Agreement.  That is, we consider that Canada is effectively seeking to rely on an a contrario  reading of item (k),
while at the same time asserting that it rejects this approach.
535 We note that Brazil's request for establishment of a panel (WT/DS70/2) refers to various alleged
prohibited export subsidies provided to the "Canadian industry producing civil aircraft".  Our terms of reference,therefore, relate to assistance provided  to the Canadian civil aircraft industry.  With the exception of its first
written submission, however, all findings requested by Brazil concerning assistance provided under the EDCprogramme refer to the "regional aircraft industry".  Similarly, all arguments adduced by Brazil concern the
regional aircraft industry.  We consider that the Canadian  regional aircraft industry is a sub-set of the Canadian
civil aircraft industry.  For these reasons, we only examine Brazil's claim against assistance provided under theEDC programme insofar as such assistance relates to the Canadian regional aircraft industry.  Brazil stated that"[r]egional aircraft generally range from 30 to 70 seats, and serve markets up to about 1,600 kilometres apart".Brazil noted in addition that customized regional aircraft may occasionally include up to 78 seats, and thatBombardier and Fairchild Dornier USA are currently devel oping regional aircraft that  may range up to 90 seats
(see para. 1.2 of Brazil's first written submission).
536 Export Development Act, Section 10(1).
537 Export Development Corporation, 1995 Chairman and President’s Message  (“Message”), pages 2
and 4.WT/DS70/R
Page 179
private financial institutions.  Brazil asserts that all assistance granted to the regional aircraft industry
under the EDC programme is contingent on export.
9.123  Brazil asserts that EDC provides financing assistance to Canadian regional aircraft exporters
in a variety of ways, four of which are specifically challenged by Brazil in these proceedings: debt
financing, loan guarantees, residual value guarantees, and equity financing.  Before addressing
Brazil's specific arguments concerning these EDC activities, it is first necessary to examine Brazil's
claim regarding the EDC programme per se .
1. Is the EDC programme per se  a prohibited export subsidy?
9.124  To assess Brazil's claim against the EDC programme, we must first determine whether the
EDC programme per se  mandates the grant of prohibited export subsidies in a manner inconsistent
with Articles 3.1(a) and 3.2 of the SCM Agreement.  In this regard, we recall the distinction that
GATT/WTO panels have consistently drawn between discretionary legislation and mandatory
legislation.  For example, in United States – Tobacco  the panel "recalled that panels had consistently
ruled that legislation which mandated action inconsistent with the General Agreement could be
challenged as such, whereas legislation which merely gave the discretion to the executive authority …to act inconsistently with the General Agreement co uld not be challenged as such;  only the actual
application of such legislation inconsistent with the General Agreement could be subject to
challenge".
538
9.125  During the Panel proceedings, we addressed the following question to Brazil:
In light of GATT practice regarding the distinction between mandatory and
permissive legislation, could Brazil please state whether it considers that the various
“programs” referred to in its oral statement to the Panel [at the first substantive
meeting] (26 November 1998) require Canada to act in a manner inconsistent with
Article 3.1(a) of the SCM Agreement.  Why?
9.126  In response, Brazil stated that:
In Brazil’s view, EDC has interpreted its own and the Canada Account’s mandate to
require it to fund projects that give “Canadian exporters an edge when they bid on
overseas projects.”539  Brazil has described in detail above how this mandate requires
EDC and the Canada Account to develop and structure funding schemes that give
Canadian exporters and their customers better terms than would be available on themarket, and that therefore confer “benefits” within the meaning of Article 1.1(b) of
the Subsidies Agreement.  Furthermore, Brazil has established that EDC and the
Canada Account are required to fund exports, as opposed to domestic sales.  As a
result, the programs themselves are de jure  contingent upon export, within the
meaning of Article 3 of the Subsidies Agreement.
9.127  Leaving aside the issue of export contingency, we thus understand Brazil to argue that EDC is
effectively required to grant subsidies.  However, we find nothing in Brazil's various submissions in
support of this argument.  The only factual evidence proffered by Brazil in support of its argument is
the quote from EDC's mandate that EDC was established "for the purposes of supporting and
developing, directly or indirectly, Canada’s export trade and Canadian capacity to engage in that trade
                                                     
538 United States - Measures Affecting the Importation, Internal Sale and Use of Tobacco , BISD
41S/131, para. 118, adopted on 4 October 1994 (" United States – Tobacco" ).
539 CanadExport On-Line, Focus on Export Development Corporation, pg. 2 (statement of Mr. Paul
Labbé, former President of the EDC).WT/DS70/R
Page 180
and to respond to international business opportunities.”540  This statement by itself clearly cannot be
viewed as a requirement to provide prohibited export subsidies.  Nor has Brazil demonstrated
otherwise that such support and development necessarily involves subsidization.  Although such
support and development might conceivably take the form of subsidization, there is nothing to suggest
that this will necessarily be the case.  In our view, a mandate to support and develop Canada's export
trade does not amount to a mandate to grant subsidies, since such support and development could be
provided in a broad variety of ways.
9.128  We consider that Brazil effectively concedes that the EDC mandate does not require the grant
of export subsidies when it states that the EDC mandate has been interpreted to require the EDC to
fund projects that give “Canadian exporters an edge when they bid on overseas projects.”541  For
Brazil, this "edge" necessarily refers to subsidization.  Even if the grant of an "edge" did imply the
grant of subsidies,542 and even if in practice the EDC programme were applied so as to grant
subsidies, this would not mean that, in law, the ED C mandate requires the grant of subsidies.  Rather,
in such circumstances the grant of subsidies would be the result of the exercise of the administering
authority's discretion in interpreting its mandate.  We again recall that the panel in US – Tobacco
recollected "that panels had consistently ruled that legislation which mandated action inconsistent
with the General Agreement could be challenged as such, whereas legislation which merely gave the
discretion to the executive authority … to act inc onsistently with the General Agreement could not be
challenged as such…"
9.129  For these reasons, we find that Brazil has failed to demonstrate that the EDC programme as
such mandates the grant of subsidies.  Rather, the EDC programme constitutes discretionary
legislation.  In light of the distinction that GATT/WTO panels have consistently drawn between
discretionary legislation and mandatory legislation, we find that we may not make any findings on the
EDC programme per se .  We therefore confine our analysis to Brazil's claims concerning the actual
application of the EDC programme in the regional aircraft sector.
2. Does the EDC programme as applied provide prohibited export subsidies?
9.130  We recall that Brazil challenges four types of EDC financing assistance allegedly provided to
the Canadian regional aircraft industry:  debt financing, loan guarantees, residual value guarantees and
equity financing.  We shall address each of these alleged forms of EDC financing assistance in turn,
for the purpose of determining whether they constitu te "subsid[ies]" within the meaning of Article 1
of the SCM Agreement.  Only if we make affirmative determinations in this regard will we consider
whether such subsidies are "contingent … upon export performance" within the meaning of Article
3.1(a).
(a) EDC debt financing
(i) Arguments of the parties
9.131  Brazil asserts that Canada grants subsidies in the form of direct financing at concessionary
rates for up to 90 percent of the cost of an aircraft.  According to Brazil, EDC financing of up to 90
percent (or more) of an aircraft's cost constitutes a di rect transfer of funds by grant or loan, within the
meaning of Article 1.1(b) of the Agreement.  Furthe rmore, "EDC's provision of financing of up to 90
percent (or more) of an aircraft's cost over a 15-year or 15-year-plus period at concessionary rates
confers the obvious benefit, within the meaning of Article 1.1, of lowering the price of an exported
                                                     
540 Export Development Act, Section 10(1).
541 CanadExport On-Line, Focus on Export Development Corporation, page 2 (statement of Mr. Paul
Labbé, former President of the EDC).
542 Canada expressly denies that giving an "edge" implies the grant of subsidies.  Canada asserts that
the "edge" given to Canadian exporters derives from EDC's experience and expertise.WT/DS70/R
Page 181
aircraft for the purchaser.  No private financial institution or investor would provide this degree of
financing on concessionary terms …"543  Brazil's claim against EDC debt financing is therefore based
on its view that a "benefit" is conferred when a financial contribution is provided at terms that wouldnot be available to the recipient on the market.
9.132  Brazil refers to a statement by Mr. Labbé, a former EDC President, to demonstrate the
"benefit" afforded to Canadian exporters by EDC debt financing:
EDC’s financing support gives Canadian exporters an edge when they bid on
overseas projects. . . .  Trade deals increasingly depend on complex and tightlynegotiated financing arrangements where a few basis points in interest rates can make
or break the deal.  Exporters are having to bid not just on the basis of quality and
price, but also on the basis of the financing package supporting the sale.
544
9.133  According to Brazil, "EDC’s help – to the tune of a 'few basis points' –  must be better than
that which would otherwise be commercially available, or an EDC financing package would not, in
EDC’s former President’s words, 'give Canadian exporters an edge.'  This 'edge' is a 'benefit'
conferred upon exporters, within the ordinary meaning of Article 1.1 of the Subsidies Agreement."
9.134  Brazil also asserts that "one of the benefits of EDC financing is that a Canadian exporter can
'advis[e] potential foreign buyers that Canadian fina ncing may be available for their purchase,' thereby
'enhanc[ing] the competitiveness of [the exporter’s] sales proposal.'545  The Canadian regional aircraft
exporter’s product is more attractive to a purchaser, in turn, for the simple reason that it costs less than
it would without the Canadian Government’s help."546
9.135  Brazil argues that EDC debt financing confers a "benefit" because it does not provide for the
collection of any risk premium.  Brazil notes statements by EDC personnel to the effect that EDC
"absorb[s] the risk on behalf of Canadian exporters, beyond what is possible by other financial
intermediaries."547  Brazil cites EDC's net interest margin (3.03 percent in 1996, and 2.82 percent in
1997) to establish that it is not being compensated for this extra risk and, conversely, that recipients ofEDC funding are paying less for that funding than  they would from commercial sources.  Brazil
asserts that, to accept a loan portfolio of EDC's ri sk class, private investors would demand a spread of
1,242 basis points over riskless US Treasuries of 15 plus years maturity, or 17.73 percent.  Brazil
submits that the difference between this figure and EDC's net interest margin demonstrates that EDC's
lending activities do not effectively cover the real and quantifiable costs associated with the riskiness
of EDC's loan portfolio.  Brazil considers that EDC's net interest margin should be higher than that of
commercial banks, since EDC's loan portfolio is higher risk than commercial banks' loan portfolio.
According to Brazil, it is a well-known and accepted financial concept that investments with higher
risks demand higher returns.
9.136  Brazil refers to EDC's loan portfolio to establis h that EDC's debt financing is riskier than that
undertaken by commercial banks.  Brazil notes that impaired or non-performing loans comprise 14.4
percent of gross loans receivable. Brazil asserts, on the basis of Standard & Poor's analysis, that an
equivalent ratio of 3 percent "can cause concern", and even a ratio of 7 percent would indicate that the
future of the relevant institution "may be doubtful".
548  Brazil asserts that EDC's 14.4 percent ratio of
gross impaired loans to gross loans receivable co mpares to ratios of approximately one percent for
The Royal Bank of Canada, the Bank of Montreal , Canadian Imperial Bank  of Commerce, and the
                                                     
543 See para. 6.60 above.
544 CanadExport On-Line, Focus on EDC, page 2.
545 Infoentrepreneurs website, page 13.
546 See para. 6.59 above.
547 Export Development Corporation, 1995 Chairman and President's Message , page 2.
548See para. 6.13 above.WT/DS70/R
Page 182
average of all US FDIC-insured commercial banks.  In addition, Brazil notes that approximately 57.6
percent of EDC's performing loan portfolio has been  classified by EDC itself as "below investment
grade" or "speculative grade".  Brazil also refers to EDC's ratio of allowance (or reserve) for losses onloans to gross loans receivable.  Brazil asserts that banks are required to maintain a reserve for loan
losses in order to cover possible future loan losses.   Brazil argues that the level of reserve maintained
by a bank therefore reflects management's judgment regarding the quality of its loan portfolio.  In this
regard, Brazil notes that EDC's allowance for loan losses as a percent of total loans is 13.2 percent,
compared with between one and two percent for each of the three major Canadian banks and the USindustry average.  Brazil also refers to EDC's ratio of net write-offs to gross loans receivable.  Brazil
asserts that EDC's ratio of 0.15 percent is "absurdly low", and questions both the criteria applied by
the EDC in determining when loans are written off, and whether the criteria are similar to those
applied by commercial banks.
9.137  Furthermore, Brazil relies on the following statement by an EDC official before the Canadian
Parliament to demonstrate that a risk premium is not collected by EDC:
If we are not to lose money, we should be making at least the rate of inflation on our
capital base which is our aim.  That goal is a long cry from the 15 percent or 20
percent return on equity that would be required to survive in the private sector.
Brazil submits that EDC cannot be collecting the requisite risk premium if it is merely making the rate
of inflation.
9.138  Brazil argues that, even if all EDC loans are secured, private lenders still demand a spread of
at least 150 basis points above the riskless US Treasuries of identical tenor.  Brazil bases this
calculation on the fact that EDC provides debt financing for CRJ aircraft for 15 years or longer.
Brazil asserts that the difference between the yield risk for riskless US Government 15-year securities
(5.31 percent) and the yield for investment grade-rated unsecured non-rail transportation bonds (6.88
percent) is approximately 150 basis points.
9.139  Brazil also submits even if the net cost to government approach to "benefit" advocated by
Canada were accepted generally, it would not be appropriate in the specific context of EDC debt
financing  since, in order to give the appearance of meeting its costs, EDC receives relief from the
Canadian government.  Brazil refers to the April 1996 Report of Canada's Standing Senate Committee
on Banking, Trade and Commerce, which notes that the Canadian Government provided debt relief of$151 million to two of EDC's "problem" accounts.  Brazil recalls that the Senate Report concludes
that "looking at the bottom line can give a misleading impression of how EDC is faring on its loan
portfolio."
549
9.140  Brazil notes that, in response to a question from the Panel, Canada submitted as Business
Confidential Information an EDC Standing Board Resolution of 17 June 1992, which applies to allbusiness conducted by EDC under its corporate account, including the regional aircraft sector.  Brazil
notes Canada's assertion that, in accordance with this Resolution, EDC has lent above its cost of funds
under its corporate account with respect to the regional aircraft sector since 1 January 1995.  Brazil
notes, however, that a clause in the Resolution expressly allows the EDC to derogate from the
Resolution in certain circumstances. Brazil submits that a question remains whether the derogation
has been applied for EDC lending in the regional aircraft sector.
9.141  Brazil also submits that, even if EDC were considered to be  profitable overall, this fact tells
the Panel nothing about whether EDC meets its costs on its lending activities to the regional aircraft
industry.  Brazil has adduced evidence with respect to one alleged instance of EDC of debt financing
in the regional aircraft sector.  Brazil asserts that EDC debt financing was provided for 30 Bombardier
                                                     
549 See para. 6.7 above.WT/DS70/R
Page 183
CRJs purchased by ASA Holdings, Inc. and its subsidiary, Atlantic Southeast Airlines (hereinafter
referred to collectively as "ASA"), in April 1997.
9.142  Canada denies that EDC debt financing in the regional aircraft sector constitutes "subsid[ies]"
within the meaning of Article 1.1 of the SCM Agreement.  Canada asserts that Brazil's allegations
concerning EDC are not supported by the evidence adduced.
9.143  Canada asserts that the EDC is a corporation in corporated under the laws of Canada that is
wholly-owned by the Government of Canada.  Canada states that EDC operates on commercial
principles with the objectives of (a) supporting and developing, directly or indirectly Canada’s exporttrade; and (b) supporting and developing, directly or indirectly Canada’s capacity to engage in
exports, and respond to international business opportunities.
550  Canada submits that EDC is self-
sustaining, and that it earns a significant net interest margin that is equal to or better than most
commercial financial institutions of similar rating.  Canada asserts that the commercial viability of
EDC’s activities should be viewed in the context of the fact that the core lending business of many
major banks is "increasingly unrewarding”.551  According to Canada, at 3.03 percent, EDC’s net
interest margin -- a better measure of performance than “return on equity” -- is better than mostcommercial banks of similar or better credit rating.
9.144  Canada denies Brazil's allegation that EDC provides debt financing at "concessionary" rates.
Canada submits that EDC’s financing activities are based on commercial pricing.  According to
Canada, rates for EDC financing reflect commercial benchmarks and spreads that are in accordance
with commercial credit ratings -- and, where this is not available, internal EDC credit ratings in
accordance with prudent commercial practices.  Canada also submits that EDC’s financing terms and
structures are consistent with market trends and practices.
9.145  Canada states that the EDC always lends above its cost of funds, and therefore does not incur
a net cost on its financing activities.  Canada also states that the EDC operates on the basis of
commercial principles, and therefore does not provide an advantage above and beyond the market.For these reasons, Canada argues that EDC financing does not constitute a subsidy.
9.146  Canada notes Brazil's general argument that EDC attempts to satisfy "the seemingly endless
appetite of Canadian exporters for financial support", Canada asserts that Brazil has selectively quoted
from the relevant source materials.  Canada states that Brazil omits a connecting sentence that
substantially qualifies  the passage.  Canada notes that the full paragraph from which Brazil quoted
states:
“It will be hard to maintain the pace of 1995 and earlier, but EDC has a lot of
growing to do before it begins to satisfy the seemingly endless appetite of Canadian
exporters for financial support and advice.  However, EDC cannot nor should not
strive to be the solution for all the challenges faced by Canadian exporters.   EDC
complements the banks and other financial intermediaries, but cannot substitute for
them.” [emphasis added by Canada]
9.147  Canada asserts that, by saying that EDC cannot substitute for banks and other financial
institutions, the Chairman and the President of the EDC were acknowledging that EDC should not try
to satisfy the “endless appetite of Canadian exporters.” Canada concludes that, contrary to Brazil’s
conclusion from the misquoted passages, EDC manifestly does not attempt to satisfy the "endless
appetite of Canadian exporters".
                                                     
550 Export Development Act, Section 10.
551 “The trials of megabanks”, The Economist , October 31, 1998, 23 at 23.WT/DS70/R
Page 184
9.148  Canada also notes Brazil's reliance on the statement in the Chairman and President's Message
that EDC's "goal is to help absorb the risk on behalf of Canadian exporters, beyond what is possible
by other financial intermediaries".  Canada notes that Brazil relies on this statement to support itsargument that "no private financial institution or investor would provide this degree of financing on
concessionary terms."  Canada states that the full text from which this statement is extracted reads:
In addition to the shift from sovereign to commercial loans, the complexity, scale and
duration of financing are changing, and thereby changing the risks  associated with
insuring and financing Canadian exports.
To reinforce its capacity to manage these changing risks, EDC has established a new
Financial Services Office and procedures for evaluating loan portfolios on an
industry, geographic, and individual transaction basis.  Our goal is to help absorb risk
on behalf of Canadian exporters, beyond what is possible by other financial
intermediaries, by diversifying the Corporation’s business both on a country and
sectoral basis.   We are determined to achieve this goal through growth in both
emerging and established markets . [emphasis added by Canada]
9.149  Canada submits that, contrary to Brazil’s assertion, the passage, when quoted in full, does  not
support the proposition that EDC enters into financing on concessionary terms.   Canada asserts that
the sentence quoted by Brazil is concerned with portfolio diversification by the EDC, which Canada
considers to be an elementary and prudent market activity, which has nothing to do with whether EDC
financing confers a benefit.
9.150  Canada asserts that the statement by Mr. Labbé, a former EDC President to the effect that
"EDC's financing support gives Canadian exporters an edge when they bid on overseas projects" is
not evidence that EDC finances below market.  Canada asserts that earlier in the same article, Mr.Labbé is quoted as stating that:
What we bring to the table is a wide variety of financial solutions and insurance
support, as well as extensive market and sectoral expertise… We have teams
dedicated to different market sectors such as information technology and industrial
equipment so that we understand your business as well as you do.
9.151  Canada argues that, taken in context, the "edge" that EDC’s financing support gives Canadian
exporters derives from their knowledge of the various export markets, from their expertise in
“complex and tightly negotiated financing arrangements” and from their awareness that a “few basis
points in interest rates can make or break the deal”.   Canada adduces evidence to demonstrate that
this sort of knowledge and expertise is something that almost all financial institutions trumpet in theirpromotional literature.
9.152  With regard to Mr. Labbé's statement before the Canadian Parliament that EDC's goal is to
avoid losing money by "making at least the rate of inflation", and his acknowledgement that the rate
of inflation would be below the return "that would be required to survive in the private sector",
Canada asserts that net interest margin is a better measure of performance than return on equity in thecontext of EDC debt financing.  Canada defines net interest margin as the difference between gross
interest income and gross interest expense on all interest bearing assets, divided by the value of
interest bearing assets.  Thus, Canada asserts that net interest margin is a useful measure of how well
a financial institution's assets are performing.  Canada asserts that EDC's net interest margin is better
than most commercial banks of similar or better cr edit rating.  Although Canada concedes that EDC
does not pay corporate income tax, and does not normally pay a dividend, Canada asserts that these
facts are not relevant for the net interest marg in comparison because the net interest margin is
calculated before tax and before dividends are paid.  Canada asserts that whether or not a financial
institution pays corporate income taxes or dividends does not affect its cost of funds, or the riskWT/DS70/R
Page 185
margin charged. Canada notes Brazil's argument that, even if all EDC loans are secured, private
lenders still demand a spread of at least 150 basis points above the riskless US Treasuries of identical
tenor.  Canada notes, however, that Brazil's argument is based on the difference between the yield forriskless US Government securities (5.31 percent) and the yield for investment grade-rated unsecured
non-rail transportation bonds (6.88 percent).  Canada submits that the yield on unsecured bonds does
not support an argument regarding secured lending.
9.153  Furthermore, Canada rejects Brazil's argument that EDC's net interest margin is insufficient to
cover the ratio of non-performing loans in its portfolio.  Canada argues that the net interest marginalready takes non-performing loans into account.
552  Thus, any further deduction from the net interest
margin to cover the cost of funding non-performing loans would constitute double-counting.
9.154  With regard to EDC's non-performing loan ra tio, Canada acknowledges that, overall, EDC's
non-performing loans comprise 14.4 percent of gross loans receivable.  Canada also acknowledges
that, overall, 57.6 percent of EDC's performing loans are classified as below investment grade.
Canada asserts, however, that EDC loans in the aircraft sector are secured against the asset, thereby
improving the rating of the credit.  Canada asserts whether or not a loan is secured or unsecured loanhas an impact on the credit risk.  Canada submits th at, after considering the value of such security, 91
percent of EDC's aircraft portfolio is investment grade or higher.  Thus, Canada denies that EDC is
engaged in high risk lending in the regional aircraft sector, as alleged by Brazil.
9.155  Canada notes Brazil's argument that EDC's allowances for loan losses as a percentage of total
loans is 13.2 percent, compared with one or two percent fore major Canadian banks and the USindustry average.  Canada asserts that EDC allowanc es for loan losses are set to ensure that EDC's
total portfolio maintains an equivalent rating of at least AA.  Canada asserts that it is more important
to consider how much is lost on the portfolio, and whether adequate provision has been made for such
loss.  In this regard, Canada submits that EDC's write-offs against provision have never exceeded 0.15
percent of gross loans receivable over the past eight years.  Over the same period, Canada asserts thatnone of the Canadian commercial banks had write-offs of less than 0.21 percent, and which in one
case was as high as 1.52 percent.  Canada also refers to material adduced by Brazil indicating that,
according to the US Federal Deposit Insurance Corporation, net write-offs of the US banking industry
amounted to 0.63 percent of average loans in 1997, down from a peak of 1.59 percent in 1991.
Canada concludes therefore that EDC's write-offs against provisions are more conservative than anyof these other institutions.  In addition, Canada refers to a letter form Canada's Auditor General
contained in EDC's 1997 Annual Report , which conf irms that the EDC financial statements are
presented in accordance with Generally Accepted Accounting Principles ("GAAP").  Canada asserts
that essential elements of GAAP are the criteria applied, and that it  consistently applies those criteria,
when valuing and writing-off loans.
9.156    Canada notes Brazil's reference to "Cdn $151 million in direct government relief to EDC for
two of its 'problem' accounts."
553  Canada asserts that this amount was paid to EDC as indemnification
for the forgiveness of the sovereign debts of Poland and Egypt by the EDC in accordance with
instructions from the Government of Canada re sulting from Canada's international commitments
through the Paris Club.  Canada asserts that the re levant sovereign debts were unrelated to the civil
aircraft sector.
                                                     
552 Canada asserted that "when a loan becomes non-performing, all financial institutions, including the
EDC, cease to recognize interest income on that non-performing loan. However, all financial institutions
continue to carry the interest expense  of that non-performing loan. In other words, the gross interest income is
the interest income on performing loans , but interest expense is the cost of funding all loans  in the portfolio,
performing and non-performing " (see para. 6.34 above).
553 See para. 6.7 above.WT/DS70/R
Page 186
9.157  In response to a question from the Panel, Canada submitted as Business Confidential
Information an EDC Standing Board Resolution of 17 June 1992, which applies to all business
conducted by EDC under its corporate account, including the regional aircraft sector.  Canada assertsthat, in accordance with this Resolution, EDC has lent above its cost of funds under its corporate
account with respect to the regional aircraft sector since 1 January 1995.
(ii) Evaluation by the Panel
9.158  In examining Brazil's claim against EDC debt financing, we recall that the Appellate Body
stated in EC - Hormones  that:
"[t]he initial burden lies on the complaining party, which must establish a prima facie
case of inconsistency with a particular provision of the SPS Agreement  on the part of
the defending party, or more precisely, of its SPS measure or measures complained
about.  When that prima facie  case is made, the burden of proof moves to the
defending party, which must in turn counter or refute the claimed inconsistency."
9.159  Thus, in order for Brazil's claim against EDC debt financing in the Canadian regional aircraft
sector to succeed, a prima facie  case must be made that EDC debt financing in the Canadian regional
aircraft sector constitutes a "subsidy" within the meaning of Article 1 of the SCM Agreement.  In
particular, there must be a prima facie  case that a "financial contribution" by a government or public
body confers a "benefit".
9.160  We are in no doubt that EDC debt financing in the Canadian regional aircraft sector
constitutes a "financial contribution" within the meaning of Article 1.1(a) of the SCM Agreement,since it constitutes a "direct transfer of funds".  Similarly, we are in no doubt that the EDC constitutes
a relevant "public body".  Canada has not disputed that EDC debt financing constitutes "financial
contributions" by a "public body".
9.161  Brazil's claim that EDC debt financing confers the requisite "benefit" is essentially based on
statements by EDC officials, an analysis of EDC' s financial performance, and the EDC debt financing
granted to ASA.  In analysing Brazil's claim, we recall that a "benefit" is conferred within the
meaning of Article 1.1(b) of the SCM Agreement when a financial contribution is provided on terms
that are more advantageous than those that would have been available to the recipient on the
market.
554
Statements by EDC officials
9.162  Brazil refers to a statement concerning EDC's alleged attempt to satisfy "the seemingly
endless appetite of Canadian exporters for financial support" through a variety of financial and risk
absorption services.  Canada has demonstrated, however, that the statement in full expressly provides
that "EDC cannot nor should not strive to be the solution for all the challenges faced by Canadian
exporters."  In context, therefore, we consider that the statement adduced by Brazil does not support aconclusion that EDC attempts to satisfy "the seemingly endless appetite of Canadian exporters for
financial support" through the provision of subsidized debt financing.
9.163  Brazil also refers to a statement by Mr. Labbé, a former EDC President, that "EDC's financing
support gives Canadian exporters an edge when they bid on overseas projects."  Brazil notes that this
statement was made in the context of references to financing packages supporting export sales, and
suggests that the "edge" in question is an edge in financing terms.  However, Canada has
demonstrated that the statement was also made in the context of references to "market and sectoralexpertise", suggesting that the relevant "edge" is the ability of EDC officials to assemble better
                                                     
554 See para. 9.120 aboveWT/DS70/R
Page 187
structured  financial packages on the basis of their knowledge and expertise.  Given the possibility for
divergent contextual interpretations of Mr. Labbé's reference to the "edge" provided by EDC debt
financing, this statement provides no firm guidance as to whether EDC provides exporters with an"edge" through subsidization.
9.164  Brazil also refers to a statement in the EDC Chairman and President's Message that EDC's
"goal is to help absorb the risk on behalf of Canadian exporters, beyond what is possible by other
financial intermediaries."  Brazil relies on this statement to argue that "no private financial institution
or investor would provide this degree of financing on concessionary terms."  Canada hasdemonstrated, however, that when taken in full, this statement does not establish that EDC engages in
subsidized debt financing.  Rather, it simply demonstrates that EDC engages in portfolio
diversification.
9.165  In addition, Brazil has relied on Mr. Labbé's statement before the Canadian Parliament that
EDC's goal is to avoid losing money by "making at least the rate of inflation", and Mr. Labbé's
acknowledgement that the rate of inflation woul d be below the return on equity "that would be
required to survive in the private sector."  In response, Canada asserts that  return on equity is not anappropriate measure of EDC's performance, and that a more appropriate measure of performance is
EDC's net interest margin.  We note that Brazil does not expressly disagree with Canada's assertion
that net interest margin is a better measure of  EDC's debt financing performance than return on
equity.  Indeed, Brazil itself referred to EDC's net interest margin as a relevant economic indicator in
its first written submission to the Panel.  In our view, net interest margin is a more appropriatemeasure of performance than return on equity in the context of debt financing.  We consider that
return on equity is a more appropriate measure of  performance in the investment sector, where equity
shares are held by the investor.  For the above reasons, we do not accept Brazil's argument that Mr.
Labbé's statement concerning EDC's return on equity necessarily demonstrates that EDC engages in
subsidized debt financing.
EDC's financial performance
9.166  In the context of EDC's financial performance, we understand Brazil to argue that EDC
provides concessionary, and therefore subsidized, debt financing because it provides debt financing
on terms that do not cover the risk margin of its loan portfolio.  Although EDC's net interest margin
appears to compare favourably with that of commercial banks, we understand Brazil to argue that atrue comparison cannot be made because of the greater riskiness of EDC's loan portfolio relative to
that of commercial banks.  Brazil does not dispute Canada's argument that its net interest margin
compares favourably with that of certain commercial banks.
9.167  By way of preliminary remark, we recall that Brazil itself initially referred to EDC's net
interest margin ("a mere 2.82 percent in 1997, and 3.03 percent in 1996")
555 to indicate the poor
financial performance of EDC.  We find unconvincing, therefore,  that Brazil subsequently seeks to
indicate that in fact EDC's net interest margin does not constitute a sufficient basis for comparison.
9.168  Furthermore, we consider that Canada has demonstrated that the net interest margin is a
sufficient basis for comparing EDC's debt financin g performance with that of commercial banks.  In
our view, Canada has demonstrated that EDC's net interest margin already takes into account any
additional riskiness in EDC's loan portfolio comp ared with commercial banks. We recall Canada's
argument that, when a loan becomes non-performing , in calculating net interest margin the EDC
ceases to recognize interest income on that non-performing loan, but continues to carry the interest
expense of that non-performing loan.  Thus, the gross interest income is the interest income on
performing loans, but interest expense is that of  all loans in the portfolio, performing and non-
performing.   This argument has not been challenged by Brazil .
                                                     
555 See para. 6.7 above.WT/DS70/R
Page 188
9.169  We do not accept Brazil's argument that EDC's net interest margin reflects a poor financial
performance indicative of concessionary, and therefore subsidized, financing as even if all EDC's
loans for aircraft were secured, private lenders would still demand a spread of at least 150 pointsabove riskless US Treasuries of identical tenor.  As noted by Canada, that assertion is based on the
yield for unsecured bonds.  We consider that assertions based on unsecured
 bonds provide no
guidance in reviewing returns on secured lending.
9.170  Brazil has also sought to establish the added risk of EDC's loan portfolio by emphasising
EDC's allowance for losses.  We note in this regard that Canada has expressly acknowledged that "theaverage portfolio of [EDC] business is of a poorer risk quality" than that of commercial banks.  As
also noted by Canada, however, "EDC's provision ch arge is higher than that for a commercial bank",
and therefore the risk in EDC's loan portfolio is offset by these allowances, or provision.
Furthermore, EDC's higher allowance for losses does not undermine any appraisal of EDC's debt
financing made on the basis of net interest margin, since the allowance, and therefore the higher risk
of the EDC portfolio, is reflected in EDC's net interest margin.  In this regard, we recall Canada's
express statement that "the provision charge is funded by the Net Interest Margin".
556
9.171  We recall Brazil's argument that the fact that 57.6 percent of EDC's performing loans
generally are classified as below investment grade demonstrates that EDC's loan portfolio is riskier
than that of commercial banks.  However, Canada explains that EDC's aircraft portfolio is not as riskyas its general portfolio.  In particular,  Canada asserts that all loans in the civil aircraft sector, and
therefore the regional aircraft sector, are secured, and that as a result in fact 91 percent of EDC'saircraft portfolio is investment grade or higher.  Brazil has provided no basis for us to dispute
Canada's argument, or otherwise suggested that a loan portfolio comprising 91 percent investmentgrade loans is inconsistent with commercial banks' aircraft portfolios.
9.172    We are not persuaded that our analysis of Brazil's arguments concerning EDC's debt
financing performance should be influenced by indemnification payments from the Government ofCanada to EDC following the writing-off of sovereign debt pursuant to Canada's Paris Club
commitments.  We do not consider that EDC action in response Canada's Paris Club commitments is
indicative of whether or not EDC debt financing in the Canadian regional aircraft sector confers a
"benefit".  In any event, we recall that the releva nt sovereign debt was unrelated to the civil aircraft
sector.
9.173  Before concluding our examination of Brazil's arguments concerning EDC's financial
performance, we  recall the EDC Standing Board Resolution of 17 June 1992, which applies to all
business conducted by EDC under its corporate account, including the regional aircraft sector.  We
note that, according to this Resolution, EDC's lendi ng yield must cover cost plus a minimum risk
margin (which varies according to the credit rating of the recipient).  Brazil makes no attempt tosuggest that this policy is inconsistent with that of commercial banks.  Although we acknowledge that
under the Resolution EDC may derogate from this policy, Brazil has made no attempt to establish
557
that such derogation has been exercised with respect to EDC debt financing in the regional aircraftsector.
9.174  In light of the above, we are not convinced by Brazil's argument that EDC's net interest
margin does not provide sufficient basis for compar ing EDC's debt financing performance with that of
commercial banks.  Brazil's position is based on its argument that EDC's net interest margin does notreflect the risk of EDC's loan portfolio.  However, in  light of the above we consider that the riskiness
                                                     
556 Section II(a), Analysis of EDC's Financial Performance, EDC Corporate Finance and Control, 12
December 1998.
557 We recall that the burden is on Brazil, as the complaining party, to adduce evidence sufficient to
support its case.WT/DS70/R
Page 189
of EDC's loan portfolio is reflected in its net interest margin.  Once again, we recall that EDC's net
interest margin compares favourably with that of certain commercial banks.
EDC debt financing for ASA
9.175  Brazil has referred to the EDC debt financing provided to ASA in April 1997, in support of its
claim that EDC debt financing is provided on concessionary, and therefore subsidized, terms.
9.176  On the basis of information in the record, on 13 December 1998 we asked Canada to provide
details of the terms and conditions of the alleged EDC debt financing to ASA, together with a copy
any relevant finance agreement.  Canada refused to provide the information requested by the Panel, onthe grounds that "Brazil has made no allegation concerning ASA", and that the information requested
is Business Confidential Information.
9.177  In commenting on Canada's response to our request, Brazil asked the Panel to "adopt adverse
inferences, presuming that the information withheld is prejudicial to Canada's position."
9.178  We recall our earlier rejection of Canada's criticism of the Panel's Procedures Governing
Business Confidential Information, and therefore regret deeply Canada's refusal to provide the
requested information.  With regard to Canada's assertion that Brazil failed to make any specificallegation concerning the ASA transaction, we unde rstand Brazil's claim against EDC debt financing
to cover all instances of EDC debt financing in the Canadian regional aircraft sector.  We therefore
reject Canada's assertion that Brazil has made no allegation concerning the ASA transaction.
9.179  In adducing evidence regarding the ASA transaction, Brazil does not assert, much less
provide evidence to show, that EDC provided ASA wi th debt financing at below-market rates.  The
only information adduced by Brazil concerning the financing terms for this transaction is contained in
ASA's 1997 annual report.  At pages 15/16 of the annual report, reference is made to loans or leases
"with interest payable at various interest rate opti ons determined by reference to either U.S. treasury
rates or LIBOR".  Brazil makes no attempt to specify what these rates are, or how they are calculated,
or that the rates referred to are below-market.  Accordingly, we find that Brazil's argumentsconcerning ASA provide no basis for finding that either this specific instance of EDC debt financing,
or EDC debt financing in the regional aircraft sector generally, confers a "benefit" within the meaning
of Article 1.1(b) of the SCM Agreement.
9.180  For the above reasons, we do not believe that the evidence and arguments adduced by Brazil
in respect of statements by EDC officials or EDC's overall financial performance demonstratessubsidized debt financing.  In particular, we find no basis for accepting Brazil's argument that EDC
debt financing confers a "benefit" because it does not provide for a margin to cover the additional risk
of EDC's loan portfolio.  Indeed, we note that as a matter of policy, EDC debt financing generally
(i.e., in all sectors) is designed to cover cost and provide a minimum  risk margin.  Brazil has not
demonstrated that this general policy is derogated from in respect of debt financing in the regionalaircraft sector.  Certainly, the evidence adduced  by Brazil concerning the ASA debt financing
transaction in no way indicates that the general EDC debt financing policy of covering costs and a
minimum risk margin has not been applied in the regional aircraft sector.
9.181  We note that Brazil asked us to make "adverse inferences" in light of Canada's refusal to
provide details of the ASA transaction.  In certain circumstances when direct evidence is not
available, we consider that a panel may be required to make such inferences when there is  sufficient
basis to do so.  This is especially true when direct evidence is not available because it is withheld by aparty with sole possession of that evidence.  In the present instance, however, we do not consider that
there is sufficient basis for an inference that EDC debt financing in the Canadian regional aircraft
sector confers a "benefit".  In particular, Brazil has made no attempt to demonstrate that EDC debt
financing was provided to ASA on below-market te rms.  Furthermore, Brazil has not demonstrated,WT/DS70/R
Page 190
on the basis of its arguments concerning stat ements by EDC officials and EDC's financial
performance, that EDC debt financing generally confers a "benefit".  Had Brazil done so, we may
have been required to make the inferences requested by Brazil.
9.182  Thus, we find that there is no prima facie  case that EDC debt financing confers a "benefit",
and therefore constitutes a "subsidy", within the meaning of Article 1 of the SCM Agreement.  In the
absence of such prima facie  case, we cannot find in favour of Brazil's claim that EDC debt financing
in the regional aircraft sector takes the form of prohibited export subsidies, contrary to Article 3.1(a)
and 3.2 of the SCM Agreement, and we therefore reject that claim
(b) EDC loan guarantees
9.183  Brazil claims that EDC offers long-term loan guarantees to purchasers or lessors of Canadian
regional aircraft, contrary to Article 3.1(a) and 3.2 of the SCM Agreement.  Brazil asserts that loan
guarantees constitute the "potential direct transfer of funds or liabilities" within the meaning of Article
1.1 of the SCM Agreement.  Brazil asserts that EDC loan guarantees confer a "benefit" within the
meaning of Article 1.1 because such guarantees allow Bombardier to deduct as much as 20 per cent
from the selling price of a CRJ.
9.184  In support of its claim against EDC loan guarantees to purchasers or lessors of Canadian
regional aircraft, Brazil has adduced evidence of tw o alleged EDC loan guarantees.  First, Brazil
claims that in April 1995 EDC provided loan guaran tees to a Bombardier customer for CRJs.  Brazil
refers to a press report of statements by an Industry Canada official in support of this claim.  In this
press report, one Industry Canada official is quoted as saying that "[i]n this case, the federal loanguarantee can shave as much as 20% off the selling price of a Canadair jet."  Second, Brazil claims
that EDC loan guarantees were provided to Comair Holdings Inc. ("Comair") in 1997.  Brazil refers to
10-K forms filed by Comair with the US Securities and Exchange Commission in support of this
claim.  The relevant 10-K forms state that "Comair expects to finance the aircraft … through a
combination of working capital and lease, equity and debt financing, utilizing manufacturers'assistance and government guarantees to the extent possible."
9.185  On the basis of information in the record concerning alleged EDC loan guarantees,  we asked
Canada to provide details, including terms and conditions, of any loan guarantees issued by EDC for
transactions concerning the civil aircraft sector since 1 January 1995.  We also asked Canada to
provide details of any loan guarantees provided by EDC to Comair in 1997.
9.186  In response to our question concerning loan guarantees to Comair, Canada denied that EDC
had provided loan guarantees to Comair in 1997.
558  In light of Canada's denial, and considering that
Brazil has merely adduced evidence of Comair's expectation of government guarantees, rather than
Comair's actual receipt of government guarantees, we reject Brazil's allegation that EDC granted anexport subsidy in the form of a loan guarantee to Comair in 1997.
9.187  Furthermore, Canada informed us that the Apri l 1995 loan guarantee referred to in the press
report cited by Brazil was provided for a domestic sale of CRJs by a government agency other than
EDC.  In light of this information, and in the ab sence of information to the contrary from Brazil, we
find that Brazil's allegation concerning the alleged April 1995 EDC loan guarantee falls outside our
terms of reference because the April 1995 guarantee does not constitute a "loan guarantee provided by
the Export Development Corporation."
559
9.188  In its reply to our question requesting details of any EDC loan guarantees granted since 1
January 1995, Canada informed us that the EDC had granted two loan guarantees since 1 January
                                                     
558 See para. 6.100 above.
559 WTO document WT/DS70/2.WT/DS70/R
Page 191
1995.  The first transaction was in support of the sale of two used de Havilland Twin Otters and two
used de Havilland Dash 8-102s to an airline operating in the South Pacific.  The second transaction
was in support of pre-shipment financing of a flight inspection system sold to a sovereign LatinAmerican buyer.  Canada asserts that both guarantees were provided at "commercial rates". Canada
refused to provide us with business confidential details of these transactions, because it claimed that
Brazil had failed to make a prima facie  case against EDC loan guarantees, and because it claimed a
lack of adequate procedures to protect business confidential information.
9.189  In its  comments on Canada's  reply, Brazil asserted that the Panel should adopt "adverse
inferences" where Canada has expressly refused to provide documentary information specifically
requested, presuming that the information withheld constitutes inculpatory evidence of Canada's
infringement of the SCM Agreement.
9.190  As noted above at para. 9.181, in certain circumstances we consider that a panel may be
required to make inferences on the basis of relevant facts when direct evidence is not available.  This
is especially true when direct evidence is not available because it is withheld by a party with sole
possession of that evidence.  In the present case, however, we do not consider that there is sufficientbasis for any such inference. The only evidence adduced by Brazil in support of its claim that EDC
grants subsidies in the form of loan guarantees to purchasers or lessors of Canadian regional aircraft
has been fully rebutted by Canada.  In particular, Brazil's evidence concerning alleged EDC loan
guarantees that "can shave as much as 20% off the selling price of a Canadair jet" has been shown to
relate to non-EDC loan guarantees. Thus, this statement is in no way relevant to EDC loan guarantees
provided for the export of Canadian regional aircraft.   Accordingly, we decline Brazil's request to
infer that  EDC loan guarantees to purchasers or lessors of Canadian regional aircraft  constitute
prohibited export subsidies contrary to Article 3.1(a) and 3.2 of the SCM Agreement.
9.191  For the above reasons, we find that there is no prima facie  case that EDC provides prohibited
export subsidies in the form of loan guarantees to purchasers or lessors of Canadian regional aircraft,contrary to Article 3.1(a) and 3.2 of the SCM Agreement.  We reject Brazil's claim accordingly.
(c) EDC residual value guarantees
9.192  Brazil claims that in certain instances EDC offers prohibited export subsidies in the form of
residual value guarantees to lessors of regional aircraft, protecting against the risk that the residual
value of the used aircraft will be lower than anticipated.  In support, Brazil relies on a press article thatrefers to a "suggestion that the residual value of [an] aircraft [sold in 1992] may have been
guaranteed."
560  Brazil asserts that EDC residual value guarantees constitute the potential direct
transfer of funds or liabilities within the meaning of Article 1.1 of the SCM Agreement.  Brazil asserts
that EDC residual value guarantees confer an Article 1.1 "benefit" because, "by protecting [a special
purpose company] against the risk that the residual value of a used aircraft at the end of a lease will belower than anticipated, the [special purpose company]  is relieved of the burden of absorbing a loss
from a lower-than-expected residual value, and can pass any savings along to the airline customer in
the form of lower lease payments."
561
9.193  Canada asserts that Brazil's claim is based on "an article that notes a 'suggestion' that a deal
completed in 1992 'may have' involved a residual value guarantee."  Canada denies the factual basis
of Brazil's claim, and states that "neither th e EDC nor the Government of Canada has provided
residual value guarantees through CRJ Capital or any other means in support of civil aircraft."Canada provides an Officer's Certificate from CRJ Capital as well as one from Exinvest to this effect.
                                                     
560 "A very tactical regional response", Airfinance Journal , November 1994, pages 18-20.
561 See para. 6.139 above.WT/DS70/R
Page 192
9.194  On the basis of Brazil's allegation that Canada "deliberately attempted to mislead the Panel"
in its response to another question from the Panel not related to EDC residual value guarantees, and
"because of the risk that Canada is also misr epresenting the truth" regarding EDC residual value
guarantees (because the Officer's Certificates presented by Canada only expressly concern CRJ
Capital and Exinvest, and not EDC), Brazil asserts that "the Panel should not accept Canada's denial
as an effective rebuttal of Brazil's prima facie  case." 562
9.195  We note that the only evidence adduced by Brazil to support its claim that EDC provides
residual value guarantees to lessors of regional aircraft is a 1994 press article containing the"suggestion" that residual value guarantees may have been granted in 1992.  In light of Canada's
express denial that EDC provides residual value guaran tees to lessors of regional aircraft, we find that
there is no factual basis to Brazil's claim that the EDC has provided prohibited export subsidies in the
form of residual value guarantees to lessors of regional aircraft.
9.196  For the above reasons, we find that there is no prima facie  case that EDC provides residual
value guarantees to lessors of regional aircraft, contrary to Article 3.1(a) and 3.2 of the SCM
Agreement.  We reject Brazil's claim accordingly.
(d) EDC equity financing
9.197  Brazil asserts that EDC, directly or indirectly, has made equity infusions into CRJ Capital
which have facilitated CRJ Capital's ability to lease or sell Canadian regional aircraft at a reduced
price, contrary to Article 3.1(a) and 3.2 of the SCM Agreement.  Brazil argues that EDC made an
equity infusion into Structured Finance, Inc., la ter called Exinvest, and that Exinvest subsequently
created a special purpose company called CRJ Capital.  Brazil relies on information from EDC
sources to support its claim that CRJ Capital acts as an aircraft leasing company.  For example, Brazil
argues that, according to press reports, Mr. Henri de Sonquières, Vice-President of Financial Services
and Transportation at EDC, characterized CRJ Capital as a leasing company, and stated that the plan
is for it to be used in the lease or sale of as many as 75 CRJs.  Brazil also argues that, in interviews,EDC officials stated that CRJ Capital purchases part of a plane, syndicates the rest to private-sector
lenders, and leases the aircraft to an airline.
9.198  Brazil argues that such equity infusions constitute direct transfers of funds by equity infusion
within the meaning of Article 1.1 of the SCM Agr eement.  Brazil also argues that such equity
infusions provide a "benefit" within the meaning of Article 1.1 because "EDC’s direct or indirect
equity investment in CRJ Capital frees CRJ Capital up to accept a lower lease or loan payment from a
lessor or purchaser of a Canadian regional aircraft than it would be able to accept in the absence of
that equity investment, or to facilitate the ability of another SPC to do so.  CRJ Capital is designed
not to earn a profit during the term of the lease; therefore, only the debt portion of the capital used to
finance the lease needs to be serviced during this period.  No payment is made to equity investors.
Thus, the greater the percentage of equity capital in CRJ Capital, the lower the percentage of debt
capital that must be serviced.  The benefit, in shor t, is lower lease or debt payments for the airlines."563
9.199  Canada acknowledges that Exinvest is a wholly  owned subsidiary of EDC, and that EDC has
made an equity infusion into CRJ Capital through Exinvest.  However, Canada provides a CRJ
Capital officer's certificate denying that CRJ Capita l has "purchased and/or leased any aircraft", or
"taken any ownership interest in any aircraft."  According to Canada, CRJ Capital simply provides
conventional financing for aircraft sales.  Canada therefore denies what the Panel considers to be anessential element of the factual basis to Brazil's claim concerning EDC's equity financing, namely that
CRJ Capital purchases and/or leases aircraft.
                                                     
562 See para. 6.144 above.
563 See para. 6.138 above.WT/DS70/R
Page 193
9.200  We note that Brazil considers that Canada's denial that CRJ Capital purchases and/or leases
any aircraft should not be considered credible, since Brazil's allegation regarding CRJ Capital is based
on EDC materials and statements by EDC officials.  However, in the face of Canada's express denial
that CRJ Capital operates as an aircraft leasing company, and an Officer's Certificate to that effect, we
are unable to attach any weight to the press reports relied on by Brazil in support of its claim
concerning EDC equity infusions into CRJ Capital. Accordingly, we find that there is no factual basis
on which to establish a prima facie  case that EDC has made equity infusions into CRJ Capital that
have facilitated CRJ Capital's ability to lease or sell Canadian regional aircraft at a reduced price.  Wetherefore reject Brazil's claim that EDC has granted prohibited export subsidies to the Canadian
regional aircraft industry in the form of equity infusions into CRJ Capital.
9.201  Brazil also alleges that EDC has made an equity infusion into another special purpose
company called Canadian Regional Aircraft Finance Transaction ("CRAFT"), which Brazil considers
may be a successor to or replacement of sorts for Exinvest.  Brazil asserts that CRAFT was launched
in April 1998 as an aircraft securitization structure to provide lease and loan financing for customers
buying Bombardier’s CRJ and Dash 8 aircraft.  Brazil argues that EDC and the Government of
Québec provided preferred capital to the CRAFT structure.  Brazil states that Standard & Poor's
estimate that EDC and the Government of Québec’s combined participation could exceed US $300
million.
564  Brazil presumes that investment by the Canadian federal and provincial governments was
required because the return to the other shareholders would be below the return demanded by private
investors given the level of risk they would have to assume in the financing structure.  Brazil assertsthat, by accepting below market returns on their investment, EDC and the Québec Government allow
the CRAFT SPC to reduce the monthly lease cost to the aircraft lessee.  Brazil asserts that CRAFT
falls within the Panel's terms of reference because it constitutes an EDC "equity infusion[] into [a]
corporation[] established to facilitate the export of civil aircraft."
565
9.202  Canada asserts that Brazil's allegations regarding CRAFT are "completely false".  Canada
notes that Brazil's understanding of the alleged role of EDC and the Government of Québec in
CRAFT is based on a Standard & Poor's Presale Report on CRAFT that makes no reference to
participation by the EDC or the Government of Québec.  Canada asserts that, according to additional
materials submitted by Brazil, the source of the information concerning participation by the EDC and
the Government of Québec is Embraer.  Canada has provided an attestation from the Director ofCRAFT that "at no time has the Canadian Government or the Québec Government or any agency of
the Canadian Government or Québec Government, in particular the Export Development Corporation,
participated in the financing of CRAFT."
9.203  In light of Canada's express denial of any ED C equity participation in CRAFT, supported by a
written attestation by a senior CRAFT official, we find that there is no factual basis to establish aprima facie  case that the EDC has provided a prohibited export subsidy in the form of an equity
infusion into CRAFT.  We reject Brazil's claim accordingly.
E. CANADA ACCOUNT
9.204  Brazil claims that the Canada Account programme per se  provides prohibited export subsidies
to the Canadian regional aircraft industry,
566 contrary to Article 3.1(a) and 3.2 of the SCM Agreement.
                                                     
564 Standard & Poor’s Presale Report, “CRAFT No. 1 Trust 1998 – A,” page 3.
565 WTO document WT/DS70/2.
566 We note that Brazil's request for establishment of a panel (WT/DS70/2) refers to various alleged
prohibited export subsidies provided to the "Canadian industry producing civil aircraft".  Our terms of reference,
therefore, relate to assistance provided  to the Canadian civil aircraft industry.  With the exception of its first
written submission, however, all findings requested by Brazil concerning assistance provided under the CanadaAccount refer to the "regional aircraft industry".  Similarly, all arguments adduced by Brazil concern theWT/DS70/R
Page 194
Brazil also challenges the Canada Account as appl ied, including funding, support, funds and benefits
granted in the regional aircraft sector under the auspices of the Canada Account programme.
9.205  Brazil notes that EDC’s 1995 Annual Report desc ribes the Canada Account in the following
terms:
Canada Account funds are used to support export transactions which the federal government
deems to be in the national interest but which, for reasons of size or risk, the Export
Development Corporation (EDC) cannot support through regular export credits.  Transactions
are negotiated, executed and administered by EDC on behalf of the government, and areaccounted for separately on the books of the Department of Foreign Affairs and International
Trade (DFAIT).  These activities are known collectively as the Canada Account.
567
9.206  Brazil asserts that the Canada Account exists for the sole purpose of supporting exports, and
that Canada Account support is therefore contingent upon export performance within the meaning of
Article 3.1(a) of the SCM Agreement.
9.207  Without conceding that the Canada Account programme, or assistance granted thereunder, is
contingent on export, Canada argues primarily that Canada Account assistance is not a "subsidy"
within the meaning of Article 1 of the SCM Agreement. Canada asserts that Canada Account
operations are financing and loan guarantee activities undertaken by the EDC on the account of the
Government of Canada.  Thus, any obligations  under the Canada Account are funded by the
Government of Canada. Canada asserts that the Canada Account is not a pool of money used tosubsidise export sales.
1. Is the Canada Account programme per se a prohibited export subsidy?
9.208  In order to assess Brazil's claim against the Canada Account programme, we must first
determine whether the Canada Account programme ma ndates the grant of prohibited export subsidies
in a manner inconsistent with Articles 3.1(a) and 3.2 of the SCM Agreement.  In this regard, we recall
our earlier discussion568 on the distinction that GATT/WTO panels have consistently drawn between
discretionary legislation and mandatory legislation.
9.209  During the Panel proceedings, we addressed the following question to Brazil:
In light of GATT practice regarding the distinction between mandatory and
permissive legislation, could Brazil please state whether it considers that the various“programs” referred to in its oral statement to the Panel [at the first substantive
meeting] (26 November 1998) require Canada to act in a manner inconsistent with
Article 3.1(a) of the SCM Agreement.  Why?
9.210  In response, Brazil stated that:
In Brazil’s view, EDC has interpreted its own and the Canada Account’s mandate to
require it to fund projects that give “Canadian exporters an edge when they bid on
overseas projects.”  Brazil has described in detail above how this mandate requires
EDC and the Canada Account to develop and structure funding schemes that give
Canadian exporters and their customers better terms than would be available on the
market, and that therefore confer “benefits” within the meaning of Article 1.1(b) of
                                                                                                                                                                    
regional aircraft industry.  For this reason, we only examine Brazil's claim against assistance provided under the
Canada Account insofar as such assistance relates to the Canadian regional aircraft industry.
567 EDC 1995 Annual Report, “Canada Account Profile”.
568 See para. 9.124 above.WT/DS70/R
Page 195
the Subsidies Agreement.  Furthermore, Brazil has established that EDC and the
Canada Account are required to fund exports, as opposed to domestic sales.  As a
result, the programs themselves are de jure  contingent upon export, within the
meaning of Article 3 of the Subsidies Agreement.  (footnote deleted)
9.211  Leaving aside the issue of export contingency, we understand Brazil to argue that Canada
Account assistance is, as a matter of law, granted in the form of subsidies.  However, we find nothing
in Brazil's various submissions in support of this argument.  As Brazil itself notes, "Canada Account
funds are used to support export transactions which the federal government deems to be in thenational interest but which, for reasons of size or risk, the Export Development Corporation (EDC)
cannot support through regular export credits."
569  Brazil has failed to demonstrate that such "support"
necessarily involves subsidization.  Although such "support" might conceivably take the form of
subsidization, there is nothing to suggest that this mu st, in law, be the case.  Indeed, we consider that
such "support" could be provided in a broad variety of ways other than subsidization.
9.212  In our view, Brazil effectively concedes that the Canada Account mandate does not require
the grant of subsidies when it states that EDC has interpreted the Canada Account mandate to require
it to fund projects that give “Canadian exporters an edge when they bid on overseas projects.”570  For
Brazil, this "edge" necessarily refers to subsidization.  Even if the "edge" did imply the grant of
subsidies,571 and even if in practice the Canada Account were applied so as to grant subsidies, this
would not mean that, in law, the Canada Account mandate requires the grant of subsidies.  Rather, in
such circumstances, the grant of subsidies would be the result of the exercise of the administeringauthority's discretion in interpreting the Canada Account mandate.  We again recollect "that
legislation which mandated action inconsistent with the General Agreement could be challenged as
such, whereas legislation which merely gave the discretion to the executive authority … to act
inconsistently with the General Agreement could not be challenged as such…"
572
9.213  For these reasons, we find that Brazil has failed to demonstrate that the Canada Account
programme as such mandates subsidies that are contingent upon export performance.  Rather, the
Canada Account programme constitutes discretionary legislation.  In light of the distinction thatGATT/WTO panels have consistently drawn between discretionary legislation and mandatory
legislation, we find that we may not make any findings on the Canada Account programme per se.
We  therefore confine our analysis to Brazil's claims concerning the actual application of the CanadaAccount programme.
2. Does the Canada Account programme as appl ied provide prohibited export subsidies?
9.214  Brazil asserts that the Canada Account provides grants, interest-free loans, low-interest loans,
guarantees and other give-aways and support which confer an Article 1.1(b) "benefit"  on  Canadian
exporters of regional aircraft  by artificially facilitating their sale.  In particular, Brazil asserts that inthe absence of Canada Account subsidies, high-ris k buyers would pay higher interest rates and would
be required to make higher down-payments.
9.215  Brazil notes that, according to the "Canada Account Profile" contained in the EDC 1995
Annual Report, there are two types of Canada Account expenditure:  "budgetary expenditures"
covering concessionary support, and "non-budget ary expenditures" covering non-concessionary
support.  Brazil asserts that concessionary assistance in the form of "budgetary expenditures" would
                                                     
569 EDC 1995 Annual Report.
570 CanadExport On-Line, Focus on Export Development Corporation, page 2 (statement of Mr. Paul
Labbé, former President of the EDC).
571 Canada expressly denies that giving an "edge" implies the grant of subsidies.  Canada asserts that
the "edge" given to Canadian exporters derives from EDC's experience and expertise.
572 See para. 9.124 above.WT/DS70/R
Page 196
certainly confer "benefits".  However, because of the limited Canada Account definition of
concessionary financing, Brazil asserts that non- concessionary support in the form of "non-budgetary
expenditures" could also confer "benefits" when it allows the recipient to borrow at rates that therecipient would not be able to obtain on the market.  Brazil states that the Canada Account Profile
limits its definition of concessionary financing to "interest-free or low-interest loans repayable over
extended periods."  Brazil asserts that this definition would seem, for example, not to characterize as
concessional those loans that, while extended at "market" interest rates, do not account for the
particularly high risk-status of the borrower.  In other words, a nominally non-concessional rate wouldamount to a concessional rate if extended to a borrower with a poor credit rating.  Thus, Brazil argues
that while ostensibly non-concessional loans may be at market rates, the loans would be concessional
if they were extended at lower rates than the particular recipient would have been able to obtain on the
market.
9.216  In support of its claim,  Brazil submitted  a November 1998 press report
573 in which Dr.
Allaire, a senior Bombardier official, acknowledged  that Bombardier had used the Canada Account
for "a very small number of transactions" under terms of financing described as "close tocommercial."
9.217  On the basis of information in the record,  we asked Canada to identify all projects /
transactions in the civil aircraft sector between 1 January 1995 and 30 June 1998 which involved
Canada Account financing.  In  response , Canada informed us that during the relevant period Canada
Account debt financing had been provided for two "e xport transactions" in the civil aircraft sector:
one transaction involved delivery of 3 Dash 8-300s to South African Express in 1995, and the other
transaction involved delivery of 3 Dash 8-300s to LIAT in 1996.  This information was presented in a
chart.  As the source of this chart is cited as EDC and Bombardier, and as Canada informed us of all
Canada Account assistance in the civil aircraft sector since 1 January 1995, we understand that the
two Canada Account transactions described by Cana da are the same Bombardier transactions referred
to by Dr. Allaire in the aforementioned November 1998 press report.
9.218  In light of all the above information, we asked Canada to provide details of the terms of the
two instances of Canada Account debt financin g acknowledged by Canada.  Canada refused to
provide this information to the Panel.  Canada asserted that:
The information requested by the Panel is sensitive business confidential information.
Canada’s desire to present to the Panel such information as may help it arrive at a
decision must be balanced against the commercial interests and legal rights of private
parties not Party to this dispute.
9.219  In commenting on Canada's refusal to provide the information requested by the Panel, Brazil
asked the Panel to "adopt adverse inferences, presuming that the information withheld is prejudicial toCanada's position."
3. Is there a prima facie  case against Canada Account financing in the regional aircraft
sector?
9.220  We recall that, in order for Brazil's claim against Canada Account financing in the regional
aircraft sector to succeed, there must be a prima facie  case that Canada Account assistance in the
regional aircraft sector constitutes a prohibited export subsidy.  For a prima facie  case of "subsidy"
within the meaning of Article 1 of the SCM Agreement, there must be a prima facie case that a
"financial contribution" by a government or public body confers a "benefit".
                                                     
573 "Ottawa slams Brazil's Bombardier claims", Globe & Mail , 23 November 1998 (Exh. BRA-87).WT/DS70/R
Page 197
9.221  We are in no doubt that the Canada Account debt financing in issue constitutes a "financial
contribution" by a public body, since Brazil has demonstrated that such assistance debt financing
constitutes a "direct transfer of funds" by a public body, within the meaning of Article 1.1(a)(i) of theSCM Agreement.
9.222  We recall that Canada Account debt financing would confer a "benefit" if it was provided on
terms more advantageous than those that would be available to the recipient on the market.  With
regard to Dr. Allaire's press statement, we understa nd Brazil to argue that "close to commercial" terms
means that the terms are more advantageous for the recipient than those available on the market.
9.223  Canada asserts that Dr. Allaire’s comment was made in reference to the Commercial Interest
Reference Rates established by the OECD Consensus.  Canada argues that, according to the OECD
Consensus, the Commercial Interest Reference Rates ("CIRRs") “represent commercial lending
interest rates in the domestic market of the currency concerned.”
574  According to Canada, these
commercial reference rates are, therefore, by definition, “close to commercial rates”.  Canada states
that "these commercial reference rates may be above or below the market for a particular credit".575
9.224  By stating that OECD Consensus CIRRs "may be above or below the market for a particular
credit", we consider that Canada is implicitly  acknowledging that the "close to commercial rates"
referred to by Dr. Allaire could themselves have been "below the market".  For this reason, we find a
prima facie  case that the Canada Account debt financing in issue confers a "benefit", and therefore
constitutes a "subsidy" within the meaning of Article 1 of the SCM Agreement.
4. Has Canada rebutted the prima facie  case?
9.225  We recall that once a prima facie  case is established, "the burden then shifts to the other
party, who will fail unless it adduces sufficient evidence to rebut the presumption."    Canada has
asserted that "it has not put in a defense regarding whether these contributions are subsidies within the
meaning of Article 1 of the SCM Agreement."  Nor has Canada sought to rely on the safe havenprovided for in item (k) of the Illustrative List of Export Subsidies in Annex I of the SCMAgreement.
576 In the absence of additional submissions by Canada, we find that Canada has not
rebutted the prima facie  case against the Canada Account debt financing in issue.
9.226  In light of the above, we find that the  Canada Account debt financing in issue constitutes a
"subsidy" within the meaning of Article 1 of the SCM Agreement.577
5. Is the Canada Account debt financing contingent on export?
9.227  We must now consider whether  Canada Account debt financing in the regional aircraft sector
is  "contingent … upon export performance".  Brazil asserts that as an alternative to EDC, and as the
financier of last resort for export transactions, the Canada Account grants funds contingent in law
upon export performance.   Brazil also argues that Canada does not challenge Brazil's assertion that
Canada Account assistance is contingent on export.
9.228  During the Panel proceedings, we asked Canada  whether it "concede[s] that EDC and Canada
Account activities are 'contingent … upon export perf ormance' within the meaning of Article 3.1(a) of
                                                     
574 OECD Consensus, at 12.
575 See para. 6.167 above.
576 Although Canada initially stated that "Canada Account financing and loan guarantees for exports
committed since the entry into force of the SCM Agreem ent have been consistent with the interest rate
provisions of the OECD Consensus",  Canada subsequently asserted that it is "not invoking the second
paragraph of item (k) [of the Illustrative List in Annex I of the SCM Agreement] as a positive defense to any ofthe claims made by Brazil."
577 As a result of this finding, it is not necessary to consider Brazil's request for "adverse inferences".WT/DS70/R
Page 198
the SCM Agreement".  Canada replied "[n]o, Canada does not concede this point."  We also asked
Canada "[g]iven the mandate of the EDC, is it reasonable to assume that any transaction financed with
EDC assistance is necessarily an export tran saction.  If not, why not?"  Canada replied inter alia  that:
EDC's mandate allows it to offer a full range of risk management services and
financing products 'for the purpose of supporting and developing, directly or
indirectly, Canada's export trade and Canadian capacity to engage in that trade and to
respond to international business opportunities.'  EDC offers, therefore, a variety of
services and products, some of which are contingent on export, and others - such asforeign investment insurance, domestic credit insurance, funding investments
overseas, and various equity investments - that are not contingent on export.
9.229  We also asked Canada whether "all EDC debt financing takes the form of export credits".
Canada replied that "it would appear that all of the debt financing provided by the EDC since 1
January 1995 in the civil aircraft sector has taken the form of export credits, with the exception of
debt financing of parts sold to Canadian civil aircraft manufacturers and debt financing for 5 Canadair
regional Jets for Air Canada [which] are domestic  transactions …"  In response to another question
from the Panel, Canada asserted that "[t]he term 'export credits' refers to direct financing for export of
goods."
9.230  We conclude from the preceding paragraph, and from Canada's description of the relevant
transactions as "export transactions",
578 that the  Canada Account debt financing in issue takes the
form of  export credits and, in Canada's own words, was granted "for export of goods".  In ouropinion, export credits granted "for the purpose of supporting and developing, directly or indirectly,
Canada's export trade" are expressly contingent in law on export performance.
579  We therefore find
that the Canada Account debt financing in issue  is "contingent in law… upon export performance"
within the meaning of Article 3.1(a) of the SCM Agreement.
9.231  In light of our above findings, we conclude th at the Canada Account debt financing at issue
constitutes  "subsid[ies] contingent in law … upon export performance" prohibited by Article 3.1(a)
of the SCM Agreement.  We also conclude that, in granting this prohibited export subsidy, Canada
necessarily acted in violation of Article 3.2 of the SCM Agreement.
F. SALE TO BOMBARDIER BY THE ONTARIO AEROSPACE CORPORATION OF A 49
PERCENT INTEREST IN DE HAVILLAND INC.
9.232  Brazil claims that the sale by the Ontario Aerospace Corporation of its 49 percent share to
Bombardier constitutes a prohibited export subsidy contrary to Articles 3.1(a) and 3.2 of the SCM
Agreement. We will first examine Brazil's claim that  the sale constitutes a "subsidy" within the
meaning of Article 1 of the SCM Agreement.  Only in the event of an affirmative finding on this
claim will we examine the question of export contingency.
9.233  Brazil asserts that in January 1992 Bombardier and the Government of Ontario, through the
Ontario Aerospace Corporation ("OAC"), purchased 51 and 49 percent, respectively, of the shares in
Boeing's de Havilland Division, for a total purchase price of $100 million. At the same time,
Bombardier reserved the option to purchase from the Government of Ontario the latter’s remaining 49
percent share in de Havilland for a total of Cdn $49 million.  In January 1997, Bombardier exercised
this option, 580 issuing to the Government of Ontario and OAC a 15-year promissory note bearing
                                                     
578 see para. 9.217 above.
579 We note that Canada does not include export credits or debt financing for export transactions in its
illustrative list of EDC services that in its view are not contingent on export (see para.  6.52 above).
580 During proceedings, Canada stated that the 1992 d eal contained a "put/call" option, and that the
1997 sale was triggered by OAC's "put", not by Bombardier's "call".WT/DS70/R
Page 199
interest at seven percent with annual principal repayments of Cdn $4.9 million in years six through
15.581  Brazil argues that, during the period 1992-1997, OAC provided to de Havilland four distinct
types of subsidies which made the purchase of OAC’s 49-percent interest even more attractive toBombardier:  interest-free shareholder loans in the amount of Cdn $200 million; cash grants of up to
Cdn $100 million; sales financing support for de Havilland’s Dash 8 aircraft, including coverage of
losses; and, reimbursement of restructuring costs of up to Cdn $370 million.  Brazil asserts that
"increases in de Havilland's equity … did not accrue to [OAC], whose return was strictly limited to its
initial investment in de Havilland."
582
9.234  Canada did not submit any arguments on the question of whether the de Havilland sale
constitutes a "subsidy" within the meaning of Article 1.1 of the SCM Agreement.  Canada explicitly
stated that it did not put in a defence on whether the transaction is a "subsidy".
9.235  In response to questions from the Panel, Brazil confirmed that it is not challenging the four
distinct types of subsidies allegedly provided by OAC to de Havilland during the period 1992-1997.
Rather, Brazil asserts that "the $49 million purchase price represented a major windfall for
Bombardier and a subsidy within the meaning of  Article 1.1 of the [SCM] Agreement, given that
contributions the present value of which constitute $874.7 million were made by the Canadian and
Ontario Governments to de Havilland between 1992, when the $49 million purchase price was set,
and 1997, when Bombardier completed the purchase of de Havilland."583  According to Brazil, the
"benefit" accrued to Bombardier when it purchased the remaining share of de Havilland in 1997  at a
price fixed in 1992 that "did not reflect the value added by [the] contributions"584 made by the
Canadian and Ontario Governments between 1992 and 1997.  According to Brazil, "paying this $49
million debt will not bring Bombardier anywhere close to offsetting the tremendous benefit that
accrued to it when [Bombardier] purchased the remaining shares of de Havilland in 1997",585  because
Bombardier "has pledged to pay to Ontario the same amount Ontario paid for its share in de Havilland
five years earlier, regardless of any increase in de Havilland's value in the interim."586
9.236  In our view, Brazil's claim of "benefit", and therefore subsidization, in the context of the de
Havilland sale is based on Brazil's understanding that the value of de Havilland's equity increased
between 1992 and 1997.  According to Brazil, Bombardier derived a "benefit" from such increase
because, in acquiring OAC's 49 percent share in 1997, it was merely required to pay the 1992 value of
that share.  The "benefit", in other words, resi des in the difference between the 1992 value of OAC's
49 percent equity share ( i.e., $49 million), and the increased 1997 value of that 49 percent equity
share (which the purchase price, fixed in 1992, did not account for).
9.237  On the basis of information in the record, on 27 November 1998 we asked Canada to specify
the total value of de Havilland's equity on the date of the sale of OAC's 49 percent share to
Bombardier.  Canada replied that OAC sold its share in de Havilland as a result of politicalimperative.  In view of this political imperative, and because the purchase price had been fixed in
1992, no analysis was done to determine the value of de Havilland in 1997.  Canada therefore stated
that it did not know the total value of de Havilland's equity at the time of sale.  At the second
substantive meeting on 12 December 1998, however, Canada asserted that the value of OAC's 49
percent equity share in de Havilland decreased between 1992 and 1997.  According to Canada, de
                                                     
581 Initially, Brazil had argued that the Government of Ontario forgave the 15-year promissory note
effective March 31, 1996.  Canada adduced evidence, however, to demonstrate that the promissory note has notbeen forgiven, and that Bombardier has commenced repayments in line with the promissory note.  Brazil has notdisputed the evidence adduced by Canada.
582 See para. 6.268 above.
583 See para. 6.273 above.
584 See para. 6.273 above..
585 See para. 6.284 above.
586 See para. 6.283 above.WT/DS70/R
Page 200
Havilland had a negative equity value in January 1997.  In support, Canada provided the Panel with a
letter from the Vice President, Legal Services, of Bombardier, who stated that "[t]he book value of de
Havilland in 1997 was irrelevant to the price paid at the time.  The 1992 agreement set the price ($49million) for the Government of Ontario's share of de Havilland.  According to the audited statements
of de Havilland, the net equity value of de Havilland when Ontario exercised its put in January, 1997
was negative …"
9.238  Brazil made two comments on the negative value of de Havilland's equity in January 1997.
First, Brazil stated that "even if de Havilland's net equity value was negative at the time of its sale in1997, it does not change the fact that it would have been even more negative if government
contributions, the present value of which constitute $875 million, had not been made to de Havilland
between 1992 and 1997.  These contributions increased the value of Ontario's equity beyond the price
set in 1992, but Ontario was given no share in this increase."
587
9.239  Second, Brazil states that "a negative equity value does not give the complete picture of the
value of a shareholder's equity.  It does not mean that de Havilland was worth nothing - or less than
nothing - to Ontario and Bombardier when purchase d in 1997.  De Havilland's book of orders at the
time of sale, for example, although not factored into net equity value, represented value which an
equity investor selling its shares could reasonably expect to be captured in the selling price of its
shares." 588
9.240  With regard to Brazil's first comment, Canada responds that "[w]hether de Havilland's net
equity value would have been more  negative without the contributions is immaterial:  Ontario's sale
price was still well in excess of what the equity was worth.  Hence, there is no benefit conferred by
the sale."  We agree with Canada's response.
9.241  Canada makes three observations with regard to Brazil's comment on the value of de
Havilland's order book.  First, Canada notes that "Brazil has adduced no evidence as to what the value
of the de Havilland order book was on the date of sale, let alone demonstrated that the value wouldhave been sufficient to compensate the purchaser for the negative net equity value of de Havilland at
the time.   Thus, Brazil has not demonstrated that a benefit was conferred by the sale.  Second, any
such valuation would have to reflect the possibility that orders may not result in actual sales …  Third,
an order book does not indicate the viability of an aircraft manufacturer: Fokker’s order book just
prior to its bankruptcy in early 1996 contained firm orders for 81 aircraft  (… source: Lundkvist)."We concur with these observations.
9.242  In light of the information concerning the value of de Havilland's equity at the time of sale in
January 1997, we asked Canada to "provide the audited statements of de Havilland that form the basis
of this statement, along with all accompanying not es and any other relevant documentation."  Canada
replied:
Canada notes that the information requested by the Panel – detailed audited
statements of de Havilland along with all accompanying notes and any other relevant
documentation - is highly sensitive business confidential information that is not in the
possession of the Government of Canada or the Government of Ontario.  Canada’s
desire to present to the Panel such informat ion as may help it to arrive at a decision
must be balanced against the concerns of private parties not Party to this dispute.
Canada further notes that Brazil has adduced no evidence whatever in support of its
assertions about the increase in de Havilland’s value as a result of alleged subsidies
between 1992 and 1997.  As well, Canada has shown, in respect of Brazil’s
                                                     
587 See para. 6.284 above.
588 See para. 6.285 above.WT/DS70/R
Page 201
unfounded and incorrect allegations about the alleged forgiveness of the $49 million
promissory note, that Brazil’s assertions about de Havilland suffer from a
fundamental lack of credibility.  Brazil’s allegations about the rise in value of deHavilland should be viewed, in Canada’s respectful submission, in that light.
Finally, Canada notes that it has not put in a defence regarding whether these
contributions are subsidies within the meaning of Article 1 of the SCM Agreement.
Canada notes that Brazil is in agreement with Canada regarding the relevance of theprinciple of judicial economy to the issues to be determined in this case.
Canada does not consider it appropriate to adduce evidence in response to baseless
and false allegations and a case that has not been established, and in support of a
defence Canada has not made.
9.243  In comments on Canada's response, Brazil stated:
Although Canada claims that the de Havilland audited financial statements used to
evaluate the company in January 1997 are “not in the possession of the Government
of Canada or the Government of Ontario,” Brazil finds it inconceivable that Ontario,
which at the time owned 49 percent of de Havilland, would not have been furnished a
copy of de Havilland’s financial statements.
It is Canada, and not Brazil, that “suffer[s] from [the] fundamental lack of credibility”
noted in Canada’s reply.  First, Canada has failed to supply the background
documents supporting the statements in the letter from Mr. Desjardins submitted asevidence in support of its defense.  Second, Canada has failed effectively to rebut
evidence submitted by Brazil from the Public Accounts of Ontario detailing
contributions, the present value of which constitute $875 million, made by the
Canadian federal and Ontario governments to de Havilland between 1992, when the
$49 million purchase price for Ontario’s share in de Havilland was set, and 1997,when Bombardier completed the purchase of Ontario’s share.  Canada’s argument
that this massive injection of capital did not effect the value of Ontario’s equity is the
only claim lacking credibility.
9.244  We are surprised that Ontario was not furnished with a copy of de Havilland’s financial
statements at the time of the 1997 sale.  We also regret that Canada chose not to provide us withcopies of the audited statements on which Canada's statement concerning the January 1997 value of
de Havilland was based.  However, in the absence of any  evidence to the contrary, we have no basis
for rejecting  Canada's assertion, based on a signed statement from a de Havilland executive, that de
Havilland had a negative equity value at the time of the January 1997 sale.
9.245  We note that, according to Brazil, "Canada has failed effectively to rebut evidence submitted
by Brazil from the Public Accounts of Ontario detailing contributions, the present value of which
constitute $875 million, made by the Canadian federal and Ontario governments to de Havilland
between 1992, when the $49 million purchase price for Ontario’s share in de Havilland was set, and
1997, when Bombardier completed the purchase of Ontario’s share."  We recall, however, that "Brazil
does not consider that [such contributions] were themselves subsidies contingent upon export
performance."
589  Accordingly, Canada's alleged failure to effectively rebut evidence adduced by
Brazil with regard to such contributions is not relevant to Brazil's claim.
9.246  We recall that Brazil's claim was premised on an increase in the value of de Havilland's equity
between 1992 and 1997.  In light of the unrebutted evidence of a decrease in the value of OAC's 49
                                                     
589 See para. 6.273 above.WT/DS70/R
Page 202
percent equity share in de Havilland between 1992 and 1997, we consider that there is no factual basis
to Brazil's claim of subsidization in the context of the sale of OAC's 49 percent share in de Havilland
to Bombardier in 1997.  Indeed, as a matter of logic, we cannot accept that an Article 1.1 "benefit" isconferred when a purchaser is required to pay $49 million for an equity share valued in the negative.
It makes no difference to this analysis that the amount of the deficit is less than it might have been
absent alleged government contributions.  For these reasons, we find that there is no prima facie  case
that the sale by the OAC of its 49 percent share in de Havilland to Bombardier in 1997 constitutes an
export subsidy contrary to Article 3.1(a) and 3.2 of the SCM Agreement, and we reject Brazil's claimaccordingly.
G. BENEFITS PROVIDED UNDER THE CANADA-QUEBEC SUBSIDIARY
AGREEMENTS ON INDUSTRIAL DEVELOPMENT
1. Arguments of the parties
9.247  Brazil claims that benefits provided to the regional aircraft industry
590 under the Canada-
Québec Subsidiary Agreements on Industrial Development constitute prohibited export subsidies
contrary to Article 3.1(a) and 3.2 of the SCM Agreement.
9.248  Brazil asserts that under the Subsidiary Agreements, the Governments of Canada and Québec
jointly fund major industrial projects aimed at improving the competitiveness of Québec’s economy.
Brazil argues that Subsidiary Agreement assistance has "as an historical matter" been granted to the
Canadian regional aircraft industry on terms described as "conditionally repayable".  Brazil asserts
that assistance under the Subsidiary Agreements may be in the form of repayable or non-repayablecontributions.  Brazil states that both types of contribution confer a "benefit" within the meaning of
Article 1.1(b) of the SCM Agreement. Brazil states  that conditional repayment confers a benefit
"because the recipient has no down-side risk;  if the project is unsuccessful, the contribution need not
be repaid."
591  Even if the loan is repaid, Brazil asserts that a "benefit" is conferred if "the rate of
return is such that the lender is not compensated for either the risk that it would have received no
payment or the extended repayment period during which neither principal nor interest is due."592
Brazil notes that Canada notified the 1988 Memorandum of Understanding that provided the authorityfor the 1992 Subsidiary Agreement to the WTO SCM Committee.  In its notification, Canada
informed the Committee that "[a]ssistance was provid ed in the form of repayable or non-repayable
contributions."
593
9.249  According to Brazil, the purpose of the Subs idiary Agreements is explicitly to foster
development of export markets for Québec products by “[p]romot[ing] access to new foreign as well
as domestic markets.”594  Brazil argues that financing provided under the auspices of the Subsidiary
Agreements is often explicitly directed at export-o riented projects and industries. Brazil cites a study
prepared by the Canadian Reform Party which reports that the regional aircraft sector has been asignificant recipient of benefits under the Subsid iary Agreements.  According to Brazil, Subsidiary
Agreement funds disbursed to the Canadian regional aircraft industry were granted to an industry that
is totally export oriented, precisely because it is an export industry and was anticipated to remain so.
                                                     
590 We note that Brazil's request for establishment of a panel (WT/DS70/2) refers to various alleged
prohibited export subsidies provided to the "Canadian industry producing civil aircraft".  Our terms of reference,
therefore, relate to various forms of assistance provided to the Canadian civil aircraft industry.  With regard toSubsidiary Agreement assistance, however, argument s adduced by Brazil concerning the issue of export
contingency are restricted to the "reg ional aircraft industry".   For this reason, we only examine Brazil's claim
against Subsidiary Agreement assistance insofar as it is provided to the Canadian regional aircraft industry.
591 See para. 6.180 above.
592 See para. 6.180 above.
593 WTO document G/SCM/N/16/CAN, 25 June 1997, para. XXIX:5.
594 1985 Canada-Québec Subsidiary Agreement on Industrial Development, Art. 2.2(d).  Id. at Schedule
A, para. (d).WT/DS70/R
Page 203
For these reasons, Brazil asserts that the Subsidiary Agreement as applied, but not per se , grants
prohibited export subsidies to the regional aircraft sector, contrary to Article 3 of the SCM
Agreement.  In support of its claim, Brazil has adduced evidence with regard to a number of allegedinstances of Subsidiary Agreement assistance.  Braz il has referred to press releases concerning the
grant of a $2.5 million repayable loan to Rolls Royce Canada Ltd., and a $4.6 million repayable loan
to Lamines CTEK.  However, in response to a question from the Panel, Brazil stated that it has not
claimed that the assistance described in these press releases constitutes a subsidy within the meaning
of Article 1 of the SCM Agreement, "among other reasons because this assistance is not [granted] tothe regional aircraft industry."
9.250  Brazil also submitted a study prepared by the Canadian Reform Party which identifies five
instances of assistance allegedly provided to Bombardier under the Subsidiary Agreement
programmes.  Brazil refers to this study to demonstrate that, "as an historical matter",
595 Subsidiary
Agreement assistance has been granted to the Canadian regional aircraft industry "on terms described
as 'conditionally repayable'".
9.251  The final Subsidiary Agreement transaction identified by Brazil concerns a payment of
$6,586,547 to Bombardier Canadair Group Montreal Que, identified in the 1996-1997 Public
Accounts of Canada.  This payment is presented by Brazil as proof that "Subsidiary Agreement
assistance has gone to the Canadian regional aircraft industry".
9.252  While not conceding this issue, Canada notes that it has not put in a defence on whether
Subsidiary Agreement assistance to the Canadian regional aircraft industry takes the form of"subsidies" within the meaning of Article 1 of the SCM Agreement.  Canada argues primarily that
Subsidiary Agreement assistance is not contingent on export.  In particular, Canada notes that
contributions under the Subsidiary Agreement promote access “to new foreign as well as domestic
markets."
9.253  On the basis of information in the record, we asked Canada to submit details of the Subsidiary
Agreement contributions to Rolls Royce and Lamines CTEK identified by Brazil. Canada replied:
Canada notes that it has not put in a defence regarding whether these contributions
are subsidies within the meaning of Article 1 of the SCM Agreement.  Canada notes
that Brazil agrees with Canada regarding the relevance of the principle of judicialeconomy to the issues to be determined in this case.  Accordingly, to the extent thatany documents are produced by Canada in response to this question of the Panel, they
are provided to further support Canada’s submission that the contributions at issue are
not “contingent on export performance” within the meaning of Article 3 of the SCM
Agreement.
Canada notes two additional points.  First, Brazil has made no specific allegation
about contributions to Rolls Royce or Lamines CTEK.  Neither has it has adduced
any evidence whatever in support of its vague and unspecific allegations concerning
“benefits” under the Subsidiary Agreement.  Canada does not consider it appropriate
to adduce evidence in response to allegations not made and a case that has not been
established. Second, As Canada noted in pa ragraph 99 of its Second Oral Submission,
the contribution to Lamines CTEK was in respect of certain electronic materials not
related to the civil aircraft sector.  As such, it is not within the Panel’s jurisdiction.
Finally, most of the information requested by the Panel is sensitive business
confidential information. Canada’s desire to present to the Panel such information as
                                                     
595 See para. 6.300 above.WT/DS70/R
Page 204
may help it arrive at a decision must be balanced against the  commercial interests
and legal rights of private parties not Party to this dispute.
Accordingly, Canada, with the consent of the Government of Quebec, has provided
the Rolls Royce contribution agreement, as Business Confidential Information, with
clauses relating to repayment terms blocked (see BCI Tab 4).
9.254  In commenting on Canada's refusal to provide this information in full, Brazil stated:
It appears that Canada has not provided in BCI Tab 4 all of the information requested
by the Panel concerning Subsidiary Agreement assistance.  First, the repayment termsare redacted from the agreement setting out the terms of the $2.5 million contribution
to Rolls Royce.  The Panel should therefore adopt adverse inferences, presuming that
these terms tie repayment to export performance.  Furthermore, Brazil notes that
while Canada has provided the Rolls Royce contribution agreement, it appears to
have provided as “Annex A” thereto the project description for the Lamines CTEK
contribution, rather than the project description associated with the Rolls Royce
contribution.  The Panel should adopt adverse inferences, presuming from Canada’sfailure to produce the annex containing the project description for the Rolls Royce
contribution that this description contains inculpatory information suggesting that the
contribution is tied in fact to actual or anticipated export.
596
2. Evaluation by the Panel
9.255  We shall commence our examination of Brazil's claim by determining whether there is a
prima facie  case that Subsidiary Agreement assistance to the Canadian regional aircraft industry has
taken the form of "subsidies" within the meaning of Article 1 of the SCM Agreement.  Only if we
reach an affirmative conclusion in this regard will we consider whether such assistance is "contingent
… upon … export performance" within the meaning of Article 3.1(a).
9.256  Brazil initially argued that Subsidiary Agreement assistance could be provided in the form of
non-repayable contributions.  In support, Brazil relied on Canada's notification to the WTO SCM
Committee, made pursuant to Article 25.2 of the SCM Agreement.  We note that, however, that
Article 25.7 provides:
Members recognize that notification of a measure does not prejudge either its legal
status under GATT 1994 and this Agreement, th e effects under this Agreement, or the
nature of the measure itself.
In our view, Article 25.7 of the SCM Agreemen t effectively precludes us from finding a prima facie
case that Subsidiary Agreement assistance is provided in the form of non-repayable contributions
simply on the basis of Canada's notification of that programme.
9.257  Brazil also submitted a study prepared by the Canadian Reform Party.  This study refers to
five instances of alleged Subsidiary Agreement assistance.  The only instance of Subsidiary
Agreement defined as "non-repayable" relates to a 1989 project for "Snowmobile Chassis made out of
composite materials".  This study therefore lends no support to Brazil's claim concerning non-
repayable Subsidiary Agreement contributions to the Canadian regional aircraft industry.
                                                     
596 The Panel notes that Canada subsequently correct ed its administrative error and provided Annex A
to the Rolls Royce contribution agreement on 22 January 1999.WT/DS70/R
Page 205
9.258  Brazil has adduced no other evidence to demonstrate that Subsidiary Agreement assistance
generally is provided in the form of non-repayable contributions, or that non-repayable contributions
are provided to the Canadian regional aircraft industry in particular.
9.259  We note that Brazil has conceded that the two Subsidiary Agreement contributions to Rolls
Royce and Lamines CTEK did not concern the Canadian regional aircraft industry.  Accordingly, we
shall not take these contributions into account when reviewing Brazil's claim against Subsidiary
Agreement assistance to the Canadian regional aircraft industry.
9.260  Brazil also relies on the aforementioned Canadian Reform Party study to demonstrate that, "as
an historical matter",597 Subsidiary Agreement assistance has been granted to the Canadian regional
aircraft industry "on terms described as 'conditionally repayable'".598  Brazil asserts that "conditionally
repayable" contributions confer a "benefit" if the rate of return is such that the lender is not
compensated for either the risk that it would have received no payment or the extended repayment
period during which neither principal nor interest is due.  We note that the study identifies five
instances of alleged Subsidiary Agreement assistance.  However, Brazil fails to demonstrate that any
of the five instances of alleged Subsidiary Agreement assistance concerns the regional aircraftindustry.  Since four of the alleged instances of Subsidiary Agreement assistance identified in the
study are described as relating to projects concerning "Snowmobile Chassis made out of composite
materials", "Continued development of VENUS I, "equipment for centre of excellence", and
"Equipment for centre of excellence", and since none of the alleged Subsidiary Agreement assistance
is expressly labelled as relating to regional aircraft projects, we are not convinced that any of theSubsidiary Agreement assistance referred to in the study concerns Canadian regional aircraft.
Furthermore, none of the five instances of Subsidiary Agreement assistance identified in the study is
described as being "conditionally repayable", as alleged by Brazil.  For these reasons, we consider that
this study provides no support to Brazil's claim that Subsidiary Agreement assistance is provided to
the regional aircraft industry on "conditionally repayable" terms that confer a "benefit" within themeaning of Article 1.1(b) of the SCM Agreement.
9.261  We note that Brazil also refers to a Subsidiary Agreement contribution to Bombardier
Canadair Group Montreal Que, identified in the 1996-1997 Public Accounts of Canada, as proof that
Subsidiary Agreement assistance has gone to the Canadian regional aircraft industry.  We agree with
Brazil that this contribution does appear to have been provided to a Canadian manufacturer ofregional aircraft.  However, Brazil fails to provide any evidence, or even to argue, that the relevant
contribution confers a "benefit" within the meaning of Article 1.1(b) of the SCM Agreement.  As
noted above, Brazil claims that Subsidiary Agreement assistance confers a "benefit" if it is either non-
repayable, or if it is conditionally repayable and the rate of return is such that the lender is not
compensated for either the risk that it would have received no payment or the extended repaymentperiod during which neither principal nor interest is due.  However (assuming arguendo  that Brazil's
analysis of "benefit" in such circumstances is accu rate), Brazil makes no attempt to establish that this
particular contribution is either non-repayable, or that it is conditionally repayable and the rate of
return is such that the lender is not compensated for either the risk that it would have received no
payment or the extended repayment period during which neither principal nor interest is due.  In such
circumstances, the evidence adduced by Brazil concerning the Subsidiary Agreement contribution to
Bombardier provides no support for Brazil's claim that Subsidiary Agreement assistance to theCanadian regional aircraft industry takes the form of "subsidies".
9.262  For the above reasons, we find that there is no prima facie  case in support of  Brazil's claim
that Subsidiary Agreement assistance to the Canadian regional aircraft industry has taken the form of
subsidies within the meaning of Article 1 of the SCM Agreement.
                                                     
597 See para. 6.300 above.
598 See para. 6.298 above.WT/DS70/R
Page 206
9.263  In light of the above finding, it is not necessary for us to consider whether Subsidiary
Agreement assistance to the regional aircraft industry is contingent on export.  We recall that Brazil
asked the Panel to adopt "adverse inferences" that the Subsidiary Agreement contributions to RollsRoyce and Lamines CTEK were de facto  export contingent.  Since it is not necessary for us to
examine the issue of export contingency, we decline to consider Brazil's request for "adverse
inferences" on this issue.
9.264  Accordingly, we reject Brazil's claim that Subsidiary Agreement assistance to the Canadian
regional aircraft industry takes the form of prohibited export subsidies, contrary to Article 3.1(a) and3.2 of the SCM Agreement.
H. SOCIETE DE DEVELOPPEMENT INDUSTRIEL DU QUEBEC
1. Arguments by the parties
9.265  Brazil submits that SDI assistance has been provided to the Canadian regional aircraft
industry599 in the form of prohibited export subsidies, contrary to Articles 3.1(a) and 3.2 of the SCM
Agreement.  Brazil asserts that, under the Société de Développement Industriel du Québec (“SDI”),
the Government of Quebec sponsors export programs "designed to promote the export of Quebec-
produced goods and services.”600  Referring to the SDI Act, Brazil states that SDI was formed with
the objective “to promote economic development in Québec, particularly by encouraging the
development of businesses, the growth of exports, research and the development of new
techniques.”601  SDI provides Quebec businesses with “guarantee[s] of payment or repayment of a
financial obligation” and “loan[s] at the current market rate”602 for the purpose of assisting those
businesses with “[l]a conquète de marchés à l’exportation,”603 and to assist with “tout projet
d’exportation” or “de démarrage à l’exportation.”604  Brazil asserts that SDI not only funds exports to
other of the Canadian Provinces, but also specifically supports transactions “à l’étranger".
9.266  Brazil asserts that SDI funding is extended on conditionally repayable terms that confer a
"benefit" within the meaning of Article 1.1 of the SCM Agreement "because the recipient has no
down-side risk -- that is to say, if the projec t is unsuccessful, SDI funds need not be repaid …"605
Brazil claims that SDI funding is "contingent …in fact … upon export performance" within the
meaning of Article 3.1(a) because (1) one of the objectives of the SDI is the "growth of exports" and
(2) when SDI funds were disbursed to the Canadian regional aircraft industry, they were given to an
industry that is overwhelmingly export oriented, precisely because it is an export industry and was
anticipated to remain so.
9.267  Brazil notes that SDI was recently “regrouped” for administrative purposes into a new
corporation, known as Investissement-Québec (“IQ”).606  On the basis of materials from the SDI
                                                     
599 We note that Brazil's request for establishment of a panel (WT/DS70/2) refers to various alleged
prohibited export subsidies provided to the "Canadian industry producing civil aircraft".  Our terms of reference,therefore, relate to various forms of assistance provided to the Canadian civil aircraft industry.  With regard toSDI assistance, however, arguments adduced by Brazil concerning the issue of export contingency are restricted
to the "regional aircraft industry".   For this reason, we only examine Brazil's claim against SDI assistance
insofar as it is provided to the Canadian regional aircraft industry.
600 Government Assistance Programs - A Practical Handbook (15th ed., 1995), para. 135.230.
601 An Act Respecting the Société de Développement Industriel du Québec, para. 2.
602 Id. at para. 135.240.
603 SDI Website at 2.
604 Gouvernement du Québec, Ministère de L’Industrie, du Commerce, de la Science et de la
Technologie, Répertoire des services offerts à l’exportation, page 53.
605 See para. 6.323 above.
606 Materials from SDI/Investissement-Québec website, at 1 (Exhibit 65).WT/DS70/R
Page 207
website, Brazil states that IQ maintains the resources, including the staff, of SDI.607  Brazil notes that,
according to the WTO November 1998 Trade Policy Review of Canada, the IQ programme “provides
export guarantees for projects considered too risky by private financial institutions.”608  The Trade
Policy Review also states that IQ assistance “i s available for export development or expansion, or
purchases of foreign companies, or for contract finance.”609  Brazil asserts that IQ confers an Article
1.1 "benefit" by offering guarantees for projects which are “considered too risky by private financial
institutions,” because it provides resources which would otherwise not be available.
9.268  Brazil understands Canada to argue that SDI activities are "immunized" from the Article 3
prohibition because SDI also provides funding to domestic projects.  Brazil does not contest that some
SDI or IQ funds may have gone to other industries with sales in domestic markets.  However, Brazil
claims that "when SDI or IQ funds were disbursed to the Canadian regional aircraft industry, they
were given to an industry that is overwhelmingly export oriented, precisely because  it is an export
industry and was anticipated  to remain so."
9.269  Canada claims that Brazil's allegations about the SDI are unfounded and incorrect.  While
expressly denying that SDI assistance in the civil aircraft sector takes the form of "subsidies" withinthe meaning of Article 1.1 of the SCM Agreement, Canada states that it has not put in a defence
regarding whether such SDI assistance constitutes "subsidies".  Rather, Canada argued primarily that
SDI assistance in the civil aircraft sector is not in law or in fact contingent upon export performance.
Canada notes that, according to Article 2 of the SDI Act, the objective of the SDI is to "favoriser le
développement économique du Québec, notamment en encouragent le développement des entreprises,la croissance des exportations et les activités de recherche et d’innovation."  Canada claims that Brazil
itself acknowledges that "exportation" in this context means exports outside Québec,  including the
other provinces of Canada.  Canada submits that SDI has as a general objective the enhancement of
Québec’s competitiveness and, as a desirable but not necessary result, an increase in Québec’s
exports.  Canada asserts that export performance is not a criterion of success for either the programmeas a whole or its activities;
610 nor is export performance a condition for receiving SDI contributions.
Canada asserts that 458 SDI activities were authorised in 1997-1998, of which 53 percent involved
loans or loan guarantees of less than C$200,000.  Canada states that SDI comprises four sets of
eligibility criteria, one of which concerns "export development".  According to Canada, "export
development" includes credit insurance, financing for foreign direct investment by Québeccompanies, and inventory financing.  Canada asserts that one out of 39 financing activities and 96 out
of 419 guarantees authorised were carried out under the exportation criterion.
611  Canada claims that
none of these related to the civil aircraft sector.
9.270  Canada also asks the Panel to ignore Brazil's "inappropriate use" of the WTO's November
1998 Trade Policy Review of Canada.  Canada asserts that section A(i) of the WTO Trade PolicyReview Mechanism provides that the review mechanism "is not, however, intended to serve as a basis
for the enforcement of specific obligations under th e Agreements or for dispute settlement procedures
…."
9.271  Canada confirms that it does consider that the fact that SDI funds are available to both
domestic and export markets does immunise them to the prohibition of Article 3.1(a).  According to
Canada, Article 3.1(a) does not prohibit subsidies that are aimed at both domestic and export markets.
9.272  On the basis of information in the record, we asked Canada to provide details of three
Aerospace Industry Development Fund contributions, and five Private Investment and Job Creation
                                                     
607 Id. at 1, 3.
608 WTO document WT/TPR/S/53 (19 November 1998), at page 59.
609 Id.
610 Société de développement industriel du Québec, 1997-1998 Annual Report, at 36-37, 40.
611Id. at 22, Table 1.WT/DS70/R
Page 208
Promotion Fund ("FAIRE") transactions, all iden tified in the SDI Annual Report 1997-1998.  Canada
refused to provide this information in full.  Canada asserted that it had not put in a defence regarding
whether the Aerospace Industry Development Fund contributions are "subsidies", and that Brazil hadnot made a specific allegation against these contributions.  Canada submitted some of the information
requested by the Panel, but redacted information co ncerning repayment terms relevant to determining
whether or not the relevant contributions constitute "subsidies".  With regard to FAIRE, Canada
asserted that the five activities were not in the civil aircraft sector.  In commenting on Canada's failure
to respond to the Panel in full in respect of the Aerospace Industry Development Fund contributions,Brazil asked the Panel to adopt "adverse inferences" that these contributions are  de facto  contingent
on export.
2. Evaluation by the Panel
9.273  Brazil challenges assistance provided to the Canadian regional aircraft industry under the SDI
and IQ programmes.  We shall examine both types of assistance in turn, considering first whether
such assistance takes the form of "subsidies" with in the meaning of Article 1 of the SCM Agreement.
Only if we find subsidization will we consider whether such assistance is "contingent … upon …export performance", within the meaning of Article 3.1(a) of the SCM Agreement.
(a) Assistance provided under the IQ programme
9.274  Brazil refers to the WTO November 1998 Trade Policy Review of Canada to argue that IQ
assistance to the regional aircraft industry confers a "benefit" by "provid[ing] export guarantees for
projects considered too risky by private financial institutions".  We note that section A(i) of the WTOTrade Policy Review Mechanism provides that the review mechanism "is not, however, intended to
serve as a basis for the enforcement of specific obligations under the Agreements or for dispute
settlement procedures …."  Accordingly, we attach no importance to the Trade Policy Review of
Canada in considering Brazil's arguments concerning IQ assistance to the regional aircraft industry.
9.275  Brazil has failed to adduce any evidence of IQ assistance  to the Canadian regional aircraft
sector.  Accordingly, there is no basis for a prima facie  case that IQ assistance has been provided to
the regional aircraft industry in the form of export subsidies, contrary to Articles 3.1(a) and 3.2 of the
SCM Agreement.
(b) Assistance provided under the SDI programme
9.276  In its first submission, Brazil included a claim concerning a joint SDI / DIPP conditionally-
repayable contribution of $43 million made in April 1989 for the development of Bombardier's 50-
seat Canadair Regional Jet ("CRJ").  However, Brazil subsequently withdrew this claim on the
grounds that the contribution is not subject to the SCM Agreement because, in its view, the SCM
Agreement does not apply to allegedly prohibited export subsidies granted prior to 1 January 1995.
612
In these circumstances, we will not consider this contribution in resolving Brazil's claim concerning
SDI assistance to the Canadian regional aircraft industry.
9.277  The SDI Annual Report 1997-1998 refers to three contributions under the Aerospace Industry
Development Fund.  We consider that these contributions are covered by Brazil's claim, since its
claim effectively covers all SDI assistance to the regional aircraft industry.613  We note that these
contributions are described in the SDI Annual Report as "loans and shares".  In its first submission,
Brazil expressly cites SDI documentation that refers to "loan[s] at the market rate".  Since we consider
that a "loan at the market rate" would not confer a "benefit" within the meaning of Article 1.1(b) of
                                                     
612 See para. 9.43 above.
613 WTO document WT/DS70/2.WT/DS70/R
Page 209
the SCM Agreement,614 these three Aerospace Industry Development Fund contributions provide no
support for Brazil's claim against SDI assistance to the Canadian regional aircraft industry.
9.278  The SDI Annual Report 1997-1998 also refers to five FAIRE transactions.  However, Canada
has asserted that these transactions did not relate to the civil aircraft industry.  As Brazil does not
contest this assertion, these transactions provide no support for Brazil's claim against SDI assistance
to the Canadian regional aircraft industry.
9.279  Brazil has adduced no further evidence in support of its claim against  SDI assistance to the
regional aircraft industry.  Accordingly, there is no prima facie case that SDI assistance has been
provided to the regional aircraft industry in the fo rm of subsidies within the meaning of Article 1 of
the SCM Agreement
9.280  For the above reasons, we reject Brazil's claims that SDI and IQ assistance to the Canadian
regional aircraft industry takes the form of prohibited export subsidies, contrary to Articles 3.1(a) and
3.2 of the SCM Agreement.
9.281  We recall that Brazil asked the Panel to adopt "adverse inferences" that the SDI contributions
under the Aerospace Industry Development Fund were de facto  export contingent.  In light of the
above finding, it is not necessary for us to consider whether SDI assistance to the regional aircraft
industry is contingent on export.  Accordingly, we decline to consider Brazil's request for "adverse
inferences" on this issue.
I. TECHNOLOGY PARTNERSHIPS CANADA  AND DIPP
9.282  Brazil asserts that prohibited export subsidies have been provided to the Canadian regional
aircraft industry615 under the TPC programme and its predecessor programme, DIPP,616 contrary to
Articles 3.1(a) and 3.2 of the SCM Agreement.  Brazil is not challenging the TPC or DIPP
programmes per se .  Rather, Brazil is challenging the actual application of the TPC and DIPP
programmes in the Canadian regional aircraft sector.  We will first consider Brazil's claim against
TPC assistance in the regional aircraft sector, and then Brazil's claim against the DIPP as applied.Furthermore, in reviewing the TPC programme as applied, we shall first address Brazil's arguments
concerning subsidization.  Only if we find in favour of Brazil on this issue will we consider whether
TPC assistance to the regional aircraft industry is contingent on export.
1. Does the application of the TPC programm e result in subsidies for the Canadian
regional aircraft industry?
(a) Arguments of the parties
9.283  Brazil states that, according to TPC documentation, TPC was created in 1996 "to address the
need by established companies in specific  industrial segments to ensure that near-market products --
those with a high potential to stimulate econom ic growth and job creation -- actually reach the
marketplace.”  Brazil notes that the specific sectors eligible for assistance from TPC are
                                                     
614 We recall our interpretation of the meaning of "benefit" at para. 9.120 above.
615 We note that Brazil's request for establishment of a panel (WT/DS70/2) refers to various alleged
prohibited export subsidies provided to the "Canadian industry producing civil aircraft".  Our terms of reference,therefore, relate to assistance provided  to the Canadian civil aircraft industry.  With the exception of its first
written submission, however, all findings requested by Brazil concerning TPC refer to the "regional aircraftindustry".  Similarly, all arguments and evidence adduced by Brazil concerns the regional aircraft industry.  For
this reason, we only examine Brazil's claim against TPC assistance insofar as such assistance relates to the
Canadian regional aircraft industry.
616 In response to a question from the Panel, Brazil confirmed that the phrase "predecessor programs" in
its request for establishment is restricted to the DIPP.WT/DS70/R
Page 210
environmental technologies, enabling technologies, and aerospace and defence industries.  Brazil
submits that TPC’s predecessor was the Defense Industry Productivity Program (“DIPP”).  Brazil
cites to a press report that suggests that DIPP “had been used primarily by aerospace companies.”Brazil asserts TPC funding “is intended to cover outstanding commitments under the DIPP."
9.284  According to Brazil, TPC explicitly targets conditionally repayable investments in  projects
that result in a high technology product for sale in export markets.  Brazil submits that such
investments are conditionally repayable on a royalty basis, meaning that repayment will only occur if
the underlying project achieves a certain degree of profitability.  Brazil asserts that the provision offunds on such terms confers a "benefit" within th e meaning of Article 1.1 of the SCM Agreement
because the recipient has no down-side risk.  If the project is unsuccessful, TPC and DIPP loans need
not be repaid.  Brazil also submits that, even if the Canadian government recovers its investment, its
anticipated rate of return is well below that expected by a reasonable market investor, and does not
compensate the lender for either the risk that it would have received no payment or the extended
repayment period during which neither principal nor interest are due.  According to Brazil, a
reasonable market investor would expect a rate of return of 16.91 - 21.92 percent for airframedevelopment expenses.  Brazil also refers to the November 1998 WTO Trade Policy Review of
Canada, which identifies TPC as a "subsidy" in the form of "grants".
9.285  Brazil has adduced evidence with regard to a number of specific alleged TPC contributions.
In particular, Brazil has adduced evidence with regard to: a $87 million contribution to Bombardier
for the development of the CRJ-700 (1996);  a $57 million contribution to de Havilland for thedevelopment of the Dash 8-400 (1996);  a $100 million contribution to Pratt & Whitney for the
development of the PW150 turboprop engine used in the Dash 8(1997);  a portion of a $12.7 million
contribution to Allied Signal that concerns the development of power management generating system
for the Dash 8-400 (1997); and a $9.9 million contribution to Sextant for the development of avionics
systems for the Dash 8 and a flight control system for the CRJ (1998).
(i) $87 million to Bombardier
9.286  Brazil challenges a 1996 $87 million TPC contribution granted to Bombardier to assist the
development of Bombardier's 70-seat CRJ project, known as the CRJ-700.  Brazil asserts that this
contribution is conditionally repayable on a royalty basis.  Brazil asserts that TPC would only receive
a return on its investment upon the sale of the 401
st aircraft.  Assuming a royalty rate of $580,000 per
aircraft, with 25 aircraft sold annually, Brazil submits that TPC's expected rate of return on this loan is
1.76 percent.  Brazil submits that a commercial investor would expect to make a return of 16.91 -
21.92 percent for such an investment.  Brazil asserts that an Article 1.1 "benefit" is conferred because
the contribution was made to Bombardier on terms more favourable than those available to
Bombardier from a private investor.
(ii) $57 million TPC contribution to de Havilland; and $100 million TPC contribution to Pratt &
Whitney
9.287  Brazil also claims that a 1996 TPC $57 million contribution to de Havilland to develop a 70-
seat "stretch" version of the Dash 8 is inconsistent with Articles 3.1(a) and 3.2 of the SCM
Agreement.  Brazil estimates that this contribution would provide TPC a return of 3.02 percent.  A
similar claim is advanced by Brazil against a $100 million TPC contribution to Pratt & Whitney
Canada, for work on the firm's 6,500 SHP PW150 turboprop engine.  Brazil estimates a 3.31 percentreturn for TPC on this contribution.  Brazil asserts that the rates of return for both contributions are
"well below that which would be expected by a market investor", i.e., 16.91 - 21.92 percent,  and
therefore confer a benefit.WT/DS70/R
Page 211
(iii) $12.7 million TPC contribution to Allied Signal;  and $9.9 million TPC contribution to Sextant
Avionique
9.288  Brazil also made specific claims against a 1997 $12.7 million TPC contribution to Allied
Signal, a portion of which is for the development of the power management generating system for the
Dash 8-400, and a 1998 $9.9 million contribution to Sextant Avionique Canada Inc. (hereinafter
"Sextant") to be used for the development of the avionics system for the Dash 8-400 and the flight
control system for the CRJ-700.  However, Brazil stated that it was unable to analyse the precise rates
of TPC return on these contributions because of insufficient information in the public projectannouncements.
9.289  While expressly denying that TPC transactions constitute subsidies within the meaning of
Article 1 of the SCM Agreement, Canada did not put in a defence regarding whether TPC
contributions are subsidies.  Canada's argues primarily that TPC is not contingent upon export
performance.  However, Canada made a number of comments concerning the terms on which TPC
assistance is provided.  Canada states that TPC contributions usually constitute a portion - on average
less than 30 per cent - of the eligible costs of a project incurred by the recipient.  Canada asserts thatTPC contributions are repayable, generally on a royalty basis tied to the market success of a project.
Canada considers that TPC contributions constitute investments rather than loans, since TPC shares in
the rewards of successful projects, and TPC returns are not limited to a fixed amount.  Canada
asserted that TPC royalty-based repayment is not tied to profits, but to sales.  Royalties can either be
tied to sales of a specific product to be developed under the project, to sales of a family of products tobe developed under a project, or to total sales of the recipient enterprise.
9.290  Canada objects to Brazil's reliance on the November 1998 WTO Trade Policy Review of
Canada.  Canada asserts that the Trade Policy Review was conducted pursuant to the WTO Trade
Policy Review Mechanism, section A(i) of which provides that the review mechanism "is not,
however, intended to serve as a basis for the enforcement of specific obligations under theAgreements or for dispute settlement procedures …."
9.291  Canada confirmed that each of the specific contributions identified by Brazil were made
under the TPC programme.
(b) Additional information on the specific TPC contributions identified by Brazil
(i) $87 million to Bombardier
9.292  On the basis of the information adduced by Brazil concerning the $87 million TPC
contribution to Bombardier, we asked Canada to provide inter alia :  complete details of, and to
comment on, the terms and conditions of the $87 million Bombardier contribution;  copies of all
application documents (including any pre-screening submissions, application forms, supporting
business plans, sales and/or export projections including “expected clients, units, prices and timing”,repayment plan of the applicant, etc.); and assessments and funding decisions by TPC pertaining to
that contribution.  We also asked Canada to spec ify commercial borrowing rates in Canada for debt of
comparable size, risk level and maturity prevailing at the time the contribution was made by TPC.
Furthermore, we asked Canada to comment on the estimated rate of return calculated by Brazil for the
$87 million Bombardier contribution.
9.293  In its response, Canada stated:
Canada notes that it has not put in a defence regarding whether these contributions
are subsidies within the meaning of Article 1 of the SCM Agreement.  Brazil has
explicitly indicated its agreement with Canada in its letter of 13 December 1998,regarding the relevance of the principle of judicial economy to the issues to beWT/DS70/R
Page 212
determined in this case.  Accordingly, to  the extent that any documents are produced
by Canada in response to this question of the Panel, they are provided to support
Canada’s submissions that the contributions at issue are not “contingent on exportperformance” within the meaning of Article 3 of the SCM Agreement.
Most of the information requested by the Panel is highly sensitive business
confidential information. Canada’s desire to present to the Panel such information as
may help it arrive at a decision must be balanced against the commercial interests and
legal rights of private parties not Party to this dispute.  These private parties, and
others in the process of submitting applications under the TPC programme, have
already expressed reluctance in sharing information, or additional information,
concerning their business plans.  Such reluctance, if it were to continue, would have a
serious deleterious impact on the functioning of the TPC programme.
[…]
Bombardier agreed to release specific documents relating to the CRJ-700 programme
that illustrate the operation of TPC.  Exceptionally sensitive confidential informationin those documents was redacted to protect the commercial interests of Bombardier.
9.294  Regarding our request for internal TPC project assessments for the $87 million contribution,
Canada stated:
Canada is unable to comply to the Panel’s request for all project assessments and
funding decisions documents.  Since the level of contribution was in excess of $20million, Cabinet approval was required for this investment.  The recommendation,
options, communications strategy, supporting rationale and analysis are contained in
a Memoranda to Cabinet (MC) and as such constitutes a cabinet confidence and
cannot be divulged.  Similarly, the Project Summary Form (PSF) in this case was
required to be presented to the Minister of Industry Canada for signature, andtherefore constitutes Ministerial advice that cannot be released.
In an effort to comply to the greatest extent possible with the Panel’s request, Canada
will briefly summarize the basis for its investment in the CRJ-700 project. The key
considerations were as follows:
• the timing of the project coincided with planned Canadair workforce reductions and
would create or maintain 1,000 jobs during the development phase alone.
• the CRJ-700 was planned to advance the state-of-the-art in regional jet operating
performance and would provide tangible benefits to operators in Canada and abroad.
• the project would offer real opportunities for participation by domestic aerospace sub-
contractors to expand their sales base and enhance their technical capabilities.
• project risk was considered manageable in light of Bombardier’s proven track record
and because the technical risk was mitigated by the fact this aircraft was a stretchversion of an existing platform - the CRJ50.
• market risk was also manageable given the CRJ50's strong position in the regional jet
market, and the preference by airlines to utilize families of aircraft to reduce part
inventories and training requirements.WT/DS70/R
Page 213
• independent market forecasts and Industry Canada’s sectoral experts confirmed that
the size of the potential market for a 60-90 seat regional jet to be in excess of 1,000units through 2010.
9.295  With regard to our request for commercial borrowing rates, Canada responded that:
the relevant consideration for determining th e rate of return for the TPC contributions
in question was the Government of Canada’s  cost of funds.  At the time these
transactions were entered into, Canada’s long term bonds were yielding
approximately six to seven percent […]. TPC repayment terms are negotiated so that
on a net present value basis they are cost-revenue neutral or better […].
In response to our request for comments on the rate of return estimated by Brazil, Canada submitted
that a number of assumptions supporting Brazil's estimation "have no basis in fact".  Canada also
asserts that the methodology of Brazil's estimation of TPC's return is "less than credible", and that the
estimation contains a number of "fundamental problems" that have led to "fantastical estimates".  On
the basis of its own assumptions and methodology, Canada asserts that TPC's rate of return on theBombardier contribution would be "in the order of [ X - BCI ] percent."  Canada asserts that a return of
[X-BCI ] percent clearly covers the cost of funds.
9.296  Brazil provided a number of comments on Canada's replies to our questions.  Brazil states
inter alia  that Canada "has wholly or selectively redacted any and all information which could be at
all informative to the Panel."  For this reason, Brazil asks the Panel to "adopt adverse inferences,
presuming that all information withheld by Canada is inculpatory", and that the $87 millionBombardier contribution is an export subsidy prohibited by Article 3 of the SCM Agreement.
9.297  Brazil also submits that only if CRJ-700 meets the most optimistic market forecasts would
TPC reach the maximum rate of return estimated by Canada.  In any event, Brazil asserts that even
Canada's own estimate of TPC's rate of return on the $87 million Bombardier contribution is below
market, i.e., below 16.91 - 21.92 percent.
(ii) $57 million TPC contribution to de Havilland; and $100 million TPC contribution to Pratt &
Whitney
9.298  On the basis of the information adduced by Brazil concerning the TPC contributions to de
Havilland and Pratt & Whitney, we asked Canada to provide inter alia : complete details of, and
comment on, the terms and conditions of these contributions;  copies of all application documents(including any pre-screening submissions, application forms, supporting business plans, sales and/or
export projections including “expected clients, units, prices and timing”, repayment plan of the
applicant, etc.); and assessments and funding decisi ons by TPC pertaining to those contributions.  We
also asked Canada to specify commercial borrowing rates in Canada for debt of comparable size, risk
level and maturity prevailing at the time the contribution was made by TPC.  Furthermore, we askedCanada to comment on the estimated rate of return calculated by Brazil for these contributions.
9.299  In its response, Canada stated:
Canada notes that it has not put in a defence regarding whether these contributions
are subsidies within the meaning of Article 1 of the SCM Agreement.  Brazil has
explicitly indicated its agreement with Canada in its letter of 13 December 1998,
regarding the relevance of the principle of judicial economy to the issues to be
determined in this case.  Accordingly, to  the extent that any documents are produced
by Canada in response to this question of the Panel, they are provided to support
Canada’s submissions that the contributions at issue are not “contingent on export
performance” within the meaning of Article 3 of the SCM Agreement.WT/DS70/R
Page 214
Most of the information requested by the Panel is highly sensitive business
confidential information. Canada’s desire to present to the Panel such information as
may help it arrive at a decision must be balanced against the commercial interests andlegal rights of private parties not Party to this dispute.  These private parties, and
others in the process of submitting applications under the TPC programme, have
already expressed reluctance in sharing information, or additional information,
concerning their business plans.  Such reluctance, if it were to continue, would have a
serious deleterious impact on the functioning of the TPC programme.
Canada has requested the interested private parties to release Canada from obligations
arising under the business confidentiality clauses of Canada’s arrangements with
them.  With the exception of Bombardier, these interested parties have indicated that
are not prepared to allow Canada to release business confidential information, or have
not responded to the request for release […]
9.300  In response to our request for comments on the rates of return estimated by Brazil, Canada
relied on the same arguments as for the aforemen tioned $87 million TPC contribution to Bombardier.
Thus, Canada asserted that a number of assumptions supporting Brazil's estimation "have no basis in
fact".  Canada also asserted that the methodology of Brazil's estimation of TPC's return is "less than
credible", and that the estimation contained a number of "fundamental problems" that have led to
"fantastical estimates".  Unlike the Bombardier contribution, however, Canada did not provide
specific arguments seeking to rebut the rates of return estimated by Brazil.
9.301  As with Brazil's reaction to Canada's refusal to provide detailed information concerning the
$87 million Bombardier contribution, Brazil asks the Panel to "adopt adverse inferences, presuming
that all information withheld by Canada is inculp atory", and that the two TPC contributions in issue
are subsidies prohibited by Article 3 of the SCM Agreement.
(iii) $12.7 million TPC contribution to Allied Signal; and $9.9 million TPC contribution to Sextant
Avionique
9.302  On the basis of the information adduced by Brazil concerning the TPC contributions to Allied
Signal and Sextant, we asked Canada to provide inter alia :  complete details of, and comment on, the
terms and conditions of these contributions;  copies of all application documents (including any pre-
screening submissions, application forms, supporting business plans, sales and/or export projectionsincluding “expected clients, units, prices and timing”, repayment plan of the applicant, etc.); and
assessments and funding decisions by TPC pertaining to those contributions.  We also asked Canada
to specify commercial borrowing rates in Canada for debt of comparable size, risk level and maturity
prevailing at the time the contribution was made by TPC.
9.303  In its response, Canada stated:
Canada notes that it has not put in a defence regarding whether these contributions
are subsidies within the meaning of Article 1 of the SCM Agreement.  Brazil has
explicitly indicated its agreement with Canada in its letter of 13 December 1998,regarding the relevance of the principle of judicial economy to the issues to be
determined in this case.  Accordingly, to  the extent that any documents are produced
by Canada in response to this question of the Panel, they are provided to support
Canada’s submissions that the contributions at issue are not “contingent on exportperformance” within the meaning of Article 3 of the SCM Agreement.
Most of the information requested by the Panel is highly sensitive business
confidential information. Canada’s desire to present to the Panel such information as
may help it arrive at a decision must be balanced against the commercial interests andWT/DS70/R
Page 215
legal rights of private parties not Party to this dispute.  These private parties, and
others in the process of submitting applications under the TPC programme, have
already expressed reluctance in sharing information, or additional information,concerning their business plans.  Such reluctance, if it were to continue, would have a
serious deleterious impact on the functioning of the TPC programme.
Canada has requested the interested private parties to release Canada from obligations
arising under the business confidentiality clauses of Canada’s arrangements with
them.  With the exception of Bombardier, these interested parties have indicated thatare not prepared to allow Canada to release business confidential information, or have
not responded to the request for release […]
9.304  In light of Canada's refusal to provide the detailed information requested by the Panel, Brazil
asks the Panel to "adopt adverse inferences, presuming that all information withheld by Canada is
inculpatory", and that the two TPC contributions in issue are subsidies prohibited by Article 3 of the
SCM Agreement.
(c) Evaluation by the Panel
9.305  We recall that, in order for Brazil's claim against TPC assistance to the Canadian regional
aircraft industry to succeed, there must be, first, at least a prima facie  case that such TPC assistance
takes the form of "subsidies" within the meaning of Article 1 of the SCM Agreement.  In particular,
there must be a prima facie case that TPC assistance to the regional aircraft industry constitutes
"financial contributions" by a government or public body (Article 1.1(a)) that confer "benefits"(Article 1.1(b)).
(i) Is there a prima facie case that TPC assist ance to the Canadian regional aircraft industry
takes the form of subsidies?
9.306  We are in no doubt that TPC contributions constitute "financial contributions" by a public
body within the meaning of Article 1.1 of the SCM Ag reement, as they are direct transfers of funds by
the government of Canada, in the sense of Article 1.1(a)(1)(i).  Canada has not disputed this fact.
9.307  As to the question of "benefit", Brazil has adduced evidence demonstrating that at least three
specific TPC contributions in the regional aircraft sector have been negotiated on terms that do not
provide for a commercial rate of return.  The total value of these contributions is $244 million.  These
contributions therefore account for approximately 68 per cent of TPC contributions to the aerospaceand defence sector during the period 1996-1997.
617  We recall that, in our opinion, a "benefit" is
conferred when a financial contribution by a public body is made on terms more favourable than those
available to the recipient on the market.  Accordingly, we find that Brazil's arguments concerning
these three specific contributions establish a prima facie  case that TPC assistance to the Canadian
regional aircraft industry confers "benefits" within the meaning of Article 1.1(b) of the SCMAgreement.
9.308  In light of the above, we find a prima facie  case that TPC assistance to the Canadian regional
aircraft industry has taken the form of "subsidi es" within the meaning of Article 1.1 of the SCM
Agreement.
(ii) Has Canada rebutted the  prima facie case of subsidization?
9.309  We must now consider whether Canada has rebutted the  prima facie  case that TPC assistance
to the Canadian regional aircraft industry has taken the form of "subsidies".
                                                     
617 TPC Annual Report 1996-1997.  The TPC programme was launched in 1996.WT/DS70/R
Page 216
9.310  We note that Canada does not challenge Brazil's claim that TPC assistance to the Canadian
regional aircraft industry constitutes "financial contributions" by a public body, within the meaning of
Article 1.1(a) of the SCM Agreement.
9.311  As a general matter, Canada asserts that "TPC repayment terms are negotiated so that on a net
present value basis they are cost-revenue neutral or better".  Furthermore, Canada asserts that "the
relevant consideration for determining the rate of return for the [five] TPC contributions in question
was the Government of Canada's cost of funds."  With regard to the $87 million contribution to
Bombardier specifically, Canada states that its estimation of the return ( i.e., [X-BCI ]) percent is
sufficient to cover TPC's cost of funds.  Canada therefore seeks to rebut the  prima facie  case by
arguing that TPC contributions do not result in any net cost to the Canadian Government.  However,
we recall our earlier finding618 that net cost to government is not a relevant consideration for the
purpose of determining the existence of a "benefit" within the meaning of Article 1.1(b) of the SCM
Agreement.  Canada's arguments concerning net cost do not, therefore, rebut the  prima facie  case of
"benefit".
9.312  Canada has criticised the methodology behind Brazil's estimation of TPC's return on the three
specific contributions discussed above.  In the event that such criticisms were to demonstrate that
TPC's rate of return corresponded to a commercial benchmark, these criticisms would be highly
relevant in the present case.  However, Canada is unable to demonstrate that this is the case.619
Canada only provided detailed arguments concerning  Brazil's estimation of TPC return with regard to
the $87 million Bombardier contribution.  Canada argues that Brazil has underestimated TPC's returnon the Bombardier contribution by [ X-BCI ] percent.  Canada does not demonstrate that TPC's return
on the Bombardier contribution is actually equivalent to a commercial benchmark.  In fact, in
response to a Panel request for “commercial borrowing rates” for comparable investments, Canada
explicitly confirms that it does not seek a commercial return, noting that “the relevant consideration
for determining the rate of return for the [five] TPC contributions in question was the Government of
Canada’s cost of funds”.   In order to rebut the  prima facie  case of "benefit", we consider that Canada
must do more than simply demonstrate that the amount of specific "benefit" estimated by Brazil may
be incorrect, or that TPC’s rate of return covers Canada’s cost of funds.  Rather, Canada must
demonstrate that no "benefit" is conferred, in the sense that the terms of the contribution provide for a
commercial rate of return.  To the extent that  Canada's criticisms of Brazil's methodology and
estimates fail in this regard, and in light of Canada’s admission that it has sought only to cover its cost
of funds, we consider that Canada has failed to rebut the prima facie  case of "benefit".
620
9.313  We note that, in conjunction with its reply, Canada submitted a number of documents
concerning the $87 million Bombardier contributi on, including Bombardier's application for TPC
                                                     
618 See Section C above.
619 We note that Canada does not dispute Brazil's argument that a commercial investor would
expect a rate of return of 16.91 - 21.92 percent on TPC's $87 million contribution to Bombardier.
With regard to the $87 million TPC contribution to Bombardier, Canada's own estimate of TPC's
return on that contribution is [ X-BCI ] percent.  Thus, even Canada's own estimate of TPC's return is
substantially below the commercial investor benchmark proffered by Brazil and not rebutted by
Canada.  In this context, we recall as well the statement by a Canadian official in the context of EDC
(see para. [135] above), that commercial investors demand a return on equity of between 15 and 20
percent.  We find this statement to be useful corroboration of Brazil’s estimated commercial rates of
return, as in our view, TPC contributions are simila r to equity investments in that, as with equity
investments, TPC contributions will only be repaid if the funded projects are commercially successful.
620For this reason, we do not consider it necessary to address the merits of Canada's criticisms of the
methodology behind Brazil's estimates of TPC's rate of return.WT/DS70/R
Page 217
assistance, business plans, market assessments and sales forecasts.  However, these documents were
extensively redacted, which in our view significan tly undermined their practical value for the purpose
of assessing Brazil's claim of "benefit".  Canada provided no specific documentation whatsoeverconcerning the terms of the remaining four TPC contributions identified by Brazil.  As noted above,
however, Canada did state in answer to the Panel’s question that on all five of the contributions
identified by Brazil, the goal was only to cover Canada’s cost of funds.  We note in addition that,
more generally, Canada has provided as a business confidential document a memorandum concerning
TPC’s repayment policy. Canada states that, according to this policy, “TPC’s repayment terms arenegotiated so that on a net present value basis, they are cost-revenue neutral or better”.   We consider
this to be an admission by Canada that TPC generally, as a matter of policy, does not seek a
commercial rate of return on its contributions, including those to the Canadian regional aircraft
industry.  We note that Canada’s admission to this effect with respect to the five contributions
identified by Brazil confirms us in this view.
9.314  For the above reasons, we find that not only has Canada failed to rebut the  prima facie  case
that TPC contributions to the Canadian regional aircraft industry constitute "subsidies" within themeaning of Article 1 of the SCM Agreement, in fact Canada has confirmed that case by admitting that
TPC neither seeks nor earns a commercial rate of return on these contributions.
621
9.315  Accordingly, we find that TPC assistance to the Canadian regional aircraft industry
constitutes "subsidies" within the meaning of Article 1.1 of the SCM Agreement.
(iii) Is TPC assistance to the Canadian regional aircraft industry contingent on export
performance?
9.316  In order to complete our examination of Brazil's claim against TPC assistance to the Canadian
regional aircraft industry, we must now consider whether such assistance is "contingent … upon
export performance" within the meaning of Article 3.1(a) of the SCM Agreement.
9.317  Brazil submits that TPC assistance to the Canadian regional aircraft industry is contingent in
fact upon export since it is provided by TPC precisely because the Canadian regional aircraft industry
is export-oriented and is anticipated to remain so. Brazil argues that the export-orientation of the
Canadian regional aircraft industry is the condition fo r the grant of the subsidies, in the sense that the
subsidies "would not have been granted were it not for the virtually total export orientation of the
Canadian regional aircraft industry."
9.318  Brazil notes that the 1996-1997 TPC annual report itself recognizes the aerospace industry as
"highly export oriented".  Furthermore, Brazil refers to funding statistics in the TPC 1996-1997
annual report to allege that TPC is captive to the Canadian aerospace industry, and more specifically,
the regional aircraft industry.  Brazil submits that such support is, as an historical matter, par for the
course.  Brazil asserts that TPC’s predecessor, DIPP, channelled subsidies to the aerospace sectortotalling approximately $2 billion.
622 Brazil also asserts that statements made by the Canadian
Government in announcing its $267 million in grants to the regional aircraft industry demonstrate that
those grants are tied to the Canadian Government’s anticipation, based on ample historical evidence,
that the industry will maintain its 100 percent export orientation.  Brazil refers to Industry Minister
                                                     
621 In light of this finding, we do not consider it necessary to address Brazil's request that the
Panel adopt "adverse inferences" in examining the question of whether the TPC financing at issueconstitutes a "subsidy".   We regret, however, that Canada chose not to provide the Panel with the full
details requested by the Panel concerning this financing, and we believe that had it been necessary to
do so, the Panel may have been required to make inferences on the basis of the information available.
622 Canadian Taxpayers Federation study, “Corporate Welfare – A Report on Sixteen Years of Industry
Canada Financial Assistance,” April 16, 1998.WT/DS70/R
Page 218
John Manley's statement that “[a]erospace is a crucial sector for Canada’s economy, with exports
growing at 10% per year.”  Brazil also refers to a statement by Mr. Herb Gray, Leader of the
Government in the House of Commons and then-Solicitor General of Canada, concerning the $57million TPC contribution to de Havilland that “[t]hese two outputs of the Dash 8-400 project -- the
creation of jobs and the building of exports  -- are just what the government had in mind when we
established Technology Partnerships Canada earlier this year.”  Brazil asserts that neither these
statements by senior Canadian Government officials nor the statements about the industry in TPC’s
promotional materials were crafted in a vacuum.  According to Brazil, at the time the CanadianGovernment was making these statements, it was aware of the fact that every single sale of Dash 8
series aircraft made since 1992, and every single sale of the CRJ since its development and
commercialization, had been for export.
9.319  Brazil argues that the Canadian regional aircraft industry is devoted to exports. Brazil
acknowledges that TPC assistance may be granted to other industries with domestic sales.   Brazil
asserts, however, that such assistance is not relevant to its claim concerning TPC assistance in the
regional aircraft sector.  According to Brazil, the Canadian Government has made it very clear that itmaintains massive amounts of support to the Canadian regional aircraft industry precisely because it
is an export industry and precisely because they anticipate that it will continue to be an export
industry.  According to Brazil, export orienta tion and performance are central to TPC’s decision-
making processes in the aerospace and defense sector, since maintaining exports is identified as a key
factor to consider in awarding TPC grants and evaluating TPC projects, and since information about aproject’s export performance is requested and maintained by TPC.  Brazil submits that this represents
further evidence that TPC grants to the industry are “in fact tied to actual or anticipated exportation or
export earnings” within the meaning of Article 3 of the Subsidies Agreement.
9.320  Brazil asserts that TPC practices embody precisely the meaning of the term “export subsidies
in fact."  Brazil submits that to fail to apply the de facto  export subsidy provision in these
circumstances would be to reduce the prohibition of de facto  export subsidies to inutility, and to give
WTO Members a license to provide export subsidies with abandon, subject only to the limitation that
they avoid using the word “export” in their laws and regulations.
9.321  Canada asserts that TPC is not contingent upon export performance.  Canada submits that
TPC provides support to a broad base of sectors and technologies that touch on virtually all industrialsectors of Canada.  Specifically, eligible sectors and technologies include the aerospace and defence
sector (including defence conversion), envir onmental technologies and “enabling” technologies,
which include biotechnologies, information and communication technologies, and advanced materials
and advanced manufacturing technologies.  Canada states that, as of September 30, 1998 TPC has
approved 65 projects representing a total of $582 million in multi-year investments; of these, 48projects ($174.5 million) involved environmental and enabling technologies, with the balance going
to the aerospace and defence sector.  Canada submits that the basic objectives of the TPC programme
are set out in its Charter, according to which TPC aims, among other things, “to maintain and build
the industrial technology and skill base essential for internationally competitive products and
services”.  Canada asserts that the basic objectives of TPC are to:
a) be an investment approach supportive of the government’s priorities for jobs, growth
and sustainable development with all repayments of TPC contributions beingrecycled to help fund the programme;
b) be strongly market driven and results-oriented;
c) focus on activities in environmental technologies, strategic enabling technologies
(e.g., advanced manufacturing and processing, advanced material processes and
applications, applications of biotechnology and applications of selected informationtechnologies) and aerospace and defence (including defence conversion); andWT/DS70/R
Page 219
d) adhere to the twin principles of international competitiveness and national access by
putting in place the necessary program machinery, rules and processes to ensure that
competitive and capable high technology small and medium-sized enterprises fromall regions of the country are encouraged to participate and have fair access to the
program.
9.322  Canada asserts that TPC does not have “export performance” as a condition, in law or in fact,
of project support.  According to Canada, nothing in the application documents or the contribution
agreements of TPC identifies export performance as a condition for eligibility for or approval ofcontributions.  Canada submits that there is no requirement, in law or in fact, that the products
resulting from the research and development investment by the Government of Canada be exported.
The recipient does not suffer additional penalties because it did not sell into export markets.  If
additional contributions by the government are due, they are not terminated because exports do not
take place.  And royalties payable to the government are not increased on domestic sales if exportsales are not made.  Canada asserts that recipients' repayment obligations are not in anyway affected
by whether the sales are made in Canada or outside Canada.
9.323  Canada argues that TPC contributions are simply conditional on success – and on presenting a
successful business plan.  Canada provides the example of a prospective recipient, such as the
developer of a water-treatment facility for aircraft, in support of this argument.  Canada hypothesises
that the recipient comes to the administrators of TPC with the project, and suggests that it can sell
10,000 units, in export markets.  According to Cana da, the questions that the administrators of the
programme will put to the proponent of the project will not concentrate on the export aspects of the
project.  Rather, they will ask whether the project is going to be viable.  That is, whether the business
plan makes sense so that the contribution is not wasted.  Canada submits that the same questions will
be asked of a project proponent who asks for a contribution for the development of arctic flight
navigation equipment that can be used only in Canada.  That is to say, is the project viable?
9.324  Canada acknowledges the phrase “maintain and build upon the technological capabilities and
production, employment and export base [of Canada]" in the TPC eligibility criteria for the aerospace
and defence sector.  Canada asserts, however, that the export base can be maintained and built-upon in
different ways.  Subsidies that develop a country’s global competitiveness and thus maintain and build
upon its export base are not inconsistent with the SCM Agreement for that reason alone.  To so arguewould be to suggest that the SCM Agreement permits  only subsidies that are, at best, neutral as to
competitiveness and productivity.  According to Canada, that would render illegal just about every
industrial and labour adjustment programme the world over.
9.325  Canada understands Brazil to argue that TPC is inconsistent with Article 3 because some of
its contributions have been made in a sector that is export-oriented and to companies that export.Canada asserts that this is not the test in Article 3.  According to Canada, official acknowledgements
of the importance of the aerospace sector to the Canadian economy, and the fact that the creation of
jobs and building of exports are objectives of TPC, are irrelevant to the issue of export contingency.
Furthermore, Canada submits that the “export propensity” of the aerospace sector is a fact of the
market rather than a condition or requirement of the programme.  Canada asserts that the world
aircraft industry is one of the most globalized industries, with few countries producing all the
necessary technology domestically and all relying on economies of scale for profitability.  Canadasubmits that the Canadian aerospace sector is no different.  In addition, Canada argues that in view of
the small size of the Canadian market, the significant dependence of the Canadian economy in general
and the manufacturing sector in particular on exports, it would not be unusual if a large proportion of
the sales of Canadian manufacturers are made in markets other than Canada.  Canada notes that Brazil
acknowledges that TPC funding is also available for projects that result in sales in domestic markets.Canada understands Brazil to argue that the mere fact that companies in the civil aviation sector
engage in exports turns a programme that is also available for domestic markets into an export
contingent subsidy.  In this regard, Canada also denies Brazil's argument that every single sale ofWT/DS70/R
Page 220
Dash 8 series aircraft made since 1992, and every single sale of the CRJ since its development and
commercialization, had been for export.623
9.326  Canada suggests that Brazil, by emphasising the term "anticipated" in footnote 4, is
advocating a pure "intent" test.  Canada criticises such an approach because it would render the
general objective of a subsidy determinative of whether that subsidy is "contingent … in fact … upon
export performance".  Canada argues that any prospective analysis inherent in the term "anticipated"
cannot undermine the conditionality of the phrase "tied to".  Canada argues that conditionality must
be read into the phrase "tied to" because (1) this is the ordinary meaning of "tied to", and (2) the
phrase "tied to" elaborates on the term "condition" in the main text of Article 3.1(a).  Thus, Canada
argues that "'tied to … anticipated exportation' cannot and does not translate into 'granted with the
general intent that exports somehow increase'.  Rather, it means that 'one of the conditions for the
grant of the subsidy is the expectation  that exports will flow thereby'."  Canada also expressed this
approach using the phrase "but for", whereby a subsidy is "contingent … in fact … upon export
performance" or "tied to … anticipated exportation or export earnings" if the subsidy "would not
[have been] paid but for the expectation that exports would ensue" (emphasis in original).  In response
to a question from the Panel whether a subsidy would be "tied to … anticipated exportation or export
earnings … when one of the reasons for the grant of the subsidy is the expectation that exports will
flow thereby, or when the subsidy is granted because of the expectation that exports will flow
thereby", Canada acknowledged that the reason why a subsidy is granted could be relevant to the
extent that it "establishes the condition for the grant of the subsidy".
9.327  On the basis of the information adduced by Brazil, we asked Canada to provide inter alia  the
"project assessments and funding decisions by TPC" for each of the five TPC subsidies in issue.  We
recall that Canada refused to provide the Panel with  this material.  Canada asserts that the relevant
material constitutes "cabinet confidence" or "Minis terial advice" that cannot be divulged.  The Panel
also asked Canada to provide the full TPC Interim Reference Binder, which provides guidance to TPCemployees on the administration of the TPC programme.  Canada complied with this request.
9.328  Reacting to Canada's refusal to provide "cabinet confidence" or "Ministerial advice", Brazil
asserted that "[t]he decision to withhold these documents, which are exclusively within the possession
and control of the Canadian government, must carry adverse consequences for Canada, or the good
faith obligation contained in Article 3(10) of the DSU will become meaningless.  The Panel shouldpresume that these documents contain information prejudicial to Canada's position."
9.329  Concerning the TPC Interim Reference Binder which Canada did provide, Brazil identified
the following extracts which, in its view, demonstr ate that TPC’s funding decisions for the aerospace
and defense industry are tied to export:
• Section 3.2.3 of TPC’s “Terms and Conditions” states that “[c]ontributions under the Aerospace
and Defence component will be directed to projects that will maintain and build upon the
technological capabilities and production, employment and export base extant in the aerospace
and defence sector”;
• Section 3.3 of the TPC Charter, entitled “Aerospace and Defence (including Defence
Conversion)” states that “[i]nvestments will be directed to projects that build on and maintain
technological capabilities and the production, employment and export base of the sector”;
                                                     
623 Canada's principal argument is that Brazil has overlooked a domestic transaction involving one
Dash 8, and that Brazil has misclassified one transaction concerning 26 CRJs as for export, when in fact the
transaction was domestic.  We do not consider it necessary to make findings on the accuracy of Brazil'sargument, since in this paragraph Canada effectively acknowledges the "export propensity" of the aerospacesector, and that a "large proportion" of Canadian civil aircraft are exported.WT/DS70/R
Page 221
• Part B of Schedule B of the TPC Aerospace and Defense Generic Model Agreement specifically
calls for any representations by an applicant regarding “export markets penetration throughmarketing partnership agreements with foreign companies”;
• Schedule C from the same Model Agreement, representing a form for “Report[s] on Estimated &
Actual Sales and Royalties” requires the reporting of export sales revenues;
• Page 10 of the 1996-1997 TPC Business Plan notes that TPC’s “approach” in the aerospace and
defense sector is to “[d]irectly support the near market R & D projects with high export marketpotential”;
• Page 12 of the 1996-1997 TPC Business Plan records the proportion of the aerospace and defense
industry’s revenue allocable to exports.
9.330  We note that Brazil does not claim that the TPC programme is de jure  export contingent.
Rather, Brazil asserts that TPC contributions in the regional aircraft sector are "contingent … in fact
… upon exportation", within the meaning of Article 3.1(a) of the SCM Agreement.  We recall that,according to note 4 of the SCM Agreement, the "contingent … in fact … upon exportation" standard
is met when:
the facts demonstrate that the granting of a subsidy, without having been made legally
contingent upon export performance, is in fact tied to actual or anticipated exportation
or export earnings. The mere fact that a subsidy is granted to enterprises which exportshall not for that reason alone be considered to be an export subsidy within the
meaning of this provision.
We note that Brazil effectively claims that TPC assistance to the Canadian regional aircraft industry is
"contingent … in fact … upon export performance" (A rticle 3.1(a)) because it is "in fact tied to …
anticipated exportation or export earnings" (footnote 4 of the SCM Agreement).  In order to examine
Brazil's claim, we must first examine the legal standard against which Brazil's claim must bemeasured.  We shall do so on the basis of the principles of treaty interpretation contained inArticle 31.1 of the Vienna Convention on the Law of Treaties.
624
(iv) Interpretation of "contingent … in fact … upon export performance" and "in fact tied to …
anticipated exportation or export earnings"
9.331  In our view, the ordinary meaning of "contingent" in Article 3.1(a) is "dependent for its
existence on something else, "conditional; dependent on, upon".625  The ordinary meaning of "tied to"
in footnote 4 is "restrain or constrain to or from action;  limit or restrict as to behaviour, location,
conditions, etc.".626 The phrase "tied to" requires a specific connection between the grant of the
subsidy and "actual or anticipated exportation or export earnings" in order for a subsidy to be
"contingent … in fact … upon export performance" within the meaning of Article 3.1(a) of the SCM
Agreement.  When read in the context of the "con tingency" referred to in Article 3.1(a), we consider
that the connection between the grant of the subsidy and the anticipated exportation or export earnings
required by "tied to" is conditionality.  We note that the parties agree with this interpretation.  Canada
has repeatedly emphasised the conditionality inherent in "tied to".  For its part, Brazil has "agree[d]
with Canada's statement … that 'tied to … anticipated exportation' means that 'one of the conditions
                                                     
624 Article 31.1 of the Vienna Convention on the Law of Treaties  provides that a treaty shall be
interpreted "in good faith in accordance with the ordinary me aning to be given to the terms of the treaty in their
context and in the light of its object and purpose."
625 The New Shorter Oxford English Dictionary , Vol. 1 (Oxford:  Clarendon Press, 1993).
626 Id.WT/DS70/R
Page 222
for the grant of the subsidy is the expectation  that exports will flow thereby.'"  We concur with the
parties that this is an appropriate and useful formulation of the nature of the requisite conditionality.
9.332  We consider that we can examine most effectively whether there exists the requisite
conditionality between the grant of TPC assistance to the Canadian regional aircraft industry and
anticipated exportation or export earnings, by determining whether the facts demonstrate that such
TPC assistance would not have been granted to the regional aircraft industry but for anticipated
exportation or export earnings.  Again, we note that the parties effectively agree that a "but for" test isappropriate for the purpose of determining whether a subsidy is "tied to" anticipated exportation orexport earnings.  Canada has stated that a subsidy is "tied to" anticipated exportation or export
earnings if the subsidy "would not [have been] paid but for the expectation that exports would ensue"
(emphasis in original).  Brazil, in turn, has argued that export-orientation is the condition for the grantof the TPC subsidies in issue because these subsidies "would not have been granted were it not for the
virtually total export orientation of the Canadian regional aircraft industry."
9.333  The parties disagree on which factors are relevant in determining whether TPC assistance to
the Canadian regional aircraft industry would not have been granted but for anticipated exportation orexport earnings.  Brazil posits that this test is fulfilled when a subsidy is granted to a recipient because
it has been, and is anticipated to remain, export-oriented.  Canada has advanced a number of
arguments rejecting Brazil's position.  First, Canada asserts that Brazil's approach would "mean that
there would be one law for larger economies that are not dependent on international trade and another
for smaller economies that are."  Second, Canada asserts that Brazil's approach would be over-broad,since "any subsidy that would help in the development of the competitive advantage of a state -- that
would make its industries more efficient globally -- would then be prohibited as an export subsidy.
Third, Canada asserts that "Brazil's interpreta tion would render government planning for WTO-
consistent subsidies impossible", since "greater efficiency could lead to greater exports."
9.334  Canada seems to be arguing that export-orientation should not be taken into account at all in
considering whether de facto  export contingency exists.  In our opinion, Canada's arguments are based
on a misunderstanding of Brazil's approach to de facto  export contingency.  Canada's comments are
based on its view that "Brazil argues that Article 3.1(a) applies not only to subsidies that are
conditional upon export performance, but also those subsidies that have an 'export propensity'."
627
However, we do not understand Brazil to argue that any subsidy that could lead to increased exports is
de facto  export contingent.  Instead, Brazil refers to subsides that are granted precisely because they
are expected to lead to increased exports.628
9.335  Canada also advances an additional argument for rejecting Brazil's export-orientation
approach, in the form of the final sentence of footnote 4:  "[t]he mere fact that a subsidy is granted to
enterprises which export shall not for that reason alone be an export subsidy within the meaning of
this provision."  Canada argues that Brazil's approach to de facto  export contingency is inconsistent
with this sentence.  Again, however, we consider that Canada has missed the essence of Brazil's
argument.  Brazil does not in fact argue that the mere fact that a subsidy is granted to an exporter
renders that subsidy de facto  export contingent.  Rather, Brazil argues629 that "[w]hile Article 3.1(a)
provides that the mere granting of a subsidy to an exporting entity will not 'for that reason alone' make
it a prohibited export subsidy, the Panel is not here faced with such a case."  We understand Brazil to
argue that subsidies granted to exporters are not "for that reason alone" de facto  export contingent;
                                                     
627 See para. 5.77 above.
628 Brazil asserts in response to Question 19 from the Panel (27 November 1998) that "Brazil's entire
claim does not, as Canada claims, turn on the 'export propensity' of the Canadian regional aircraft industry
alone.  The Panel is faced with a situation in which several factors  converge, together illustrating that the
Canadian Government and the provinces have supported the Canadian regional aircraft industry precisely
because  it is a total export industry, and precisely because they anticipate  that this performance will continue".
629 See para. 5.104 above.WT/DS70/R
Page 223
they are de facto  export contingent if, in addition, they are granted precisely because the recipient was
export-oriented and anticipated by the granting authority to remain so.
9.336  For these reasons, we do not consider that Canada has effectively demonstrated that export-
orientation should not be taken into account in th e context of determining whether a subsidy would
not have been granted but for anticipated exportation or export earnings.  This does not mean,
however, that export-orientation alone can necessarily be determinative.
9.337  In our view, no fact should automatically be rejected when considering whether the facts
demonstrate that a subsidy would not have been granted but for anticipated exportation or exportearnings.  We note that footnote 4 provides that the "facts" must demonstrate de facto  export
contingency.  Footnote 4 therefore refers to "facts" in general, without any suggestion that certain
factual considerations should prevail over others.  In our opinion, it is clear from the ordinary
meaning of footnote 4 that any fact could be relevant, provided it "demonstrates" (either individually
or in conjunction with other facts) whether or not a subsidy would have been granted but foranticipated exportation or export earnings.  We consider that this is true of the export-orientation of
the recipient, or of the reason
630 for the grant of the subsidy, just as it is true of a host of other facts
potentially surrounding the grant of the subsidy in question.  In any given case, the relative
importance of each fact can only be determined in the context of that case, and not on the basis of
generalities.
9.338  We would emphasise, however, that our finding that a broad range of facts could be relevant
in this context does not mean that the de facto  export contingency standard is easily met.  On the
contrary, footnote 4 of the SCM Agreement makes it clear that the facts must "demonstrate" de facto
export contingency.  That is, de facto  export contingency must be demonstrable on the basis of the
factual evidence adduced.
9.339  Putting this into more concrete terms, we c onsider that the factual evidence adduced must
demonstrate that had there been no expectation of export sales (i.e., “exportation ” or “export
earnings”) “ensuing ” from the subsidy, the subsidy would not have been granted.  To us, this implies
a strong and direct link between the grant of the subsidy and the creation or generation of export sales.That is, we consider that the “but for” test is concerned principally with anticipated export sales.
Thus, the closer a subsidy brings a product to sale on the export market, the greater the possibility thatthe facts may demonstrate that the subsidy would not have been granted but for anticipatedexportation or export earnings.  Conversely, the further removed a subsidy is from sales on the export
market, the less the possibility that the facts may demonstrate that the subsidy would not have been
granted but for anticipated exportation or export earnings.  In this light, subsidies for pure research, or
for general purposes such as improving efficiency or adopting new technology, would be less likely to
satisfy the “but for” test than subsidies that direct ly assist companies in bringing specific products to
the (export) market.
(v) Application of the "but for" test
9.340  We recall that, in the present instance, there must be  a prima facie  case that TPC assistance
to the Canadian regional aircraft industry is "contingent … in fact … upon export performance", in
the sense of being "tied to … anticipated exportation or export earnings.  In light of the above
analysis, there must be  a prima facie  case that the facts demonstrate that TPC assistance to the
Canadian regional aircraft industry would not have been granted but for "anticipated exportation orexport earnings."  In our opinion, the following considerations, based on materials and arguments
submitted by the parties are especially relevant in this regard:
                                                     
630 We note that Canada has accepted (see para. 5.98 above) that the reason for the grant of the subsidy
could be relevant to the extent that the reason "establishes the condition for the grant of the subsidy".WT/DS70/R
Page 224
• as Canada admits, the Canadian aerospace sector exports a large proportion of its output, due to
the small size of the Canadian domestic market;631 (emphasis supplied)
• the 1996-1997 TPC Business Plan notes that TPC's "approach" in the aerospace and defence
sector is to "[d]irectly support the near market R & D projects with high export potential ";
(emphasis supplied)
• section 3.2.3 of the "Terms and Conditions" set forth in the TPC Interim Reference Binder states
“TPC will provide contributions to specific industrial development projects in order to enable
Canadian Aerospace and Defence Industries to compete fairly and openly on the world
competitive stage”; (emphasis supplied)
• the Industry Minister's Message included in the 1996-1997 TPC Annual Report states:
"Aerospace and defense also make a significant contribution to our economic well-
being.  The sector is highly export oriented.  Exports accounted for about 70 percentof sales, or $7.4 billion, in 1995.  And there is the prospect of real growth in this area.
Canada's aerospace sector currently ranks sixth in the world.  With investments from
TPC, and with industry's concerted efforts, this sector  will be better equipped to
compete effectively in the world marketplace and could grow to fourth place";
(emphasis supplied)
• the 1996-1997 TPC Annual Report states that "[t]he 12 largest firms [in the A&D sector]
account for most of the R&D and shipments, of which 80 percent are exported. … TPC is
proud to be an investment partner in this export-oriented success story"; (emphasis
supplied)
• an Industry Canada press release, issued in respect of the $100 million TPC contribution to Pratt
& Whitney, quotes Industry Minister Manley as stating "[A]erospace is a critical sector for
Canada's economy, with exports growing at a rate of 10% per year.  TPC's investment in theseprojects will help increase the global competitiveness of this industry, while supporting jobs in
Montreal, in Halifax and across the country, generating economic growth and export dollars";
(emphasis supplied)
• Concerning the $57 million contribution to de Havilland for the development of the Dash 8-400,
Mr. Herb Gray, Leader of the Government in th e House of Commons and then-Solicitor General
of Canada, stated that “[t]hese two outputs of the Dash 8-400 project -- the creation of jobs and
the building of exports -- are just what th e government had in mind when we established
Technology Partnerships Canada earlier this year”; (emphasis supplied)
• TPC website material states that "TPC approved projects are forecasted to generate sales of more
than $65 billion (mostly exports) and create or maintain 13,166 direct and indirect jobs";
(emphasis supplied)
• the TPC Applications Kit requires applicants to describe "potential broad economic and social
benefits, such as: job creation and retention, increased exports, new investment ….".  The
Applications Kit also states that TPC "invests in projects that have the potential to create jobs,
generate export, launch new industries, and transform or strengthen the competitiveness of
industry"; (emphasis supplied)
                                                     
631 See paras. 6.241 and 6.242 above.WT/DS70/R
Page 225
• according to the TPC Interim Reference Binder, Schedule C of the TPC Aerospace and Defence
Sector Generic Model Agreement requires applicants to distinguish between domestic sales and
exports when reporting forecast and actual sales; (emphasis supplied)
• the TPC Interim Reference Binder requires TPC employees, when completing Project Summary
Forms, to explain the reasons for recommending support or rejection of the project.  In particular,
employees are given the following instructions:
"Strategic Considerations, Benefits, Indicators
In justifying the recommendation in strategic terms emphasise "business results".  The
following may be considered:
1. Link the project with departmental strategies and priorities as relevant:
a) improvement of international competitiveness; when sales will result
directly from the project, report annual sales in terms of domestic and
export sales and any import replacement”; (emphasis supplied)
• section 3.2.3 of the "Terms and Conditions" set forth in the TPC Interim Reference Binder states
that TPC will “fill a financial void…where government action is required to level the competitive
playing field, at the near-market end of the sp ectrum”; and that “[c]ontributions under the
Aerospace and Defence component will be directed to projects that will maintain and build upon
the technological capabilities and production, employment and export base extant in the aerospace
and defence sector”; (emphasis supplied)
• Industry Canada website material concerning TPC "Application information" states that one
factor considered by TPC in determining the need  for federal government involvement is whether
"assistance is required to level the playing field against international competitors;  (emphasis
supplied)
• section 3.3 of the TPC Charter, entitled “A erospace and Defence (including Defence
Conversion)” states that “[i]nvestments will be directed to projects that build on and maintain
technological capabilities and the production, employment and export base of the sector”;
(emphasis supplied)
• the 1996-1997 TPC Business Plan records the proportion of the aerospace and defense industry’s
revenue allocable to exports; (emphasis supplied) and
• the TPC contributions identified by Brazil have been for the development of specific products,
and have been provided expressly on the basis of the projected sales of those products, the market
for which is known to be almost entirely outside Canada; the statistics maintained by TPC, andthe public statements about TPC, separately recount, and emphasize, the amount of export sales
“generated” by these contributions. (emphasis supplied)
9.341  In our view, these facts demonstrate that TPC funding in the regional aircraft sector is
expressly designed and structured to generate sales of particular products, and that the Canadian
Government expressly takes into account, and attaches considerable importance to, the proportion of
those sales that will be for export, when making TPC contributions in the regional aircraft sector.  In
this regard, we note again in particular that TPC contributions in the aerospace and defence sector,
including the regional aircraft industry, are provided for "near-market projects with high export
potential" (emphasis added).  To us, therefore, these  facts demonstrate that TPC assistance to the
Canadian regional aircraft industry would not have been granted but for some expectation ofWT/DS70/R
Page 226
exportation or export earnings.632  Accordingly, we find that there is sufficient basis for  a prima facie
case that the facts demonstrate that TPC assistance to the Canadian regional aircraft industry is "in
fact tied to …  anticipated exportation or export earnings", and therefore "contingent … in fact …upon export performance" within the meaning of Article 3.1(a) of the SCM Agreement.
9.342  We do not consider that Canada has effectively rebutted the prima facie  case.
9.343  Throughout the Panel proceedings, and during its final oral submission to the Panel, Canada's
basic rebuttal argument has been that the TPC is not conditional on exports taking place.  In
particular, Canada argues that there are no penalties if export sales are not realised.  While thisargument may be relevant in determining whether a subsidy would not have been granted but for
actual exportation or export earnings, we find this argument insufficient to rebut a prima facie  case
that a subsidy would not have been granted but for anticipated exportation or export earnings.
9.344  Furthermore, Canada has failed to adduce any evidence demonstrating that TPC assistance to
the Canadian regional aircraft industry would have been granted irrespective of anticipated
exportation or export earnings.  We note that Canada has made an assertion concerning the "key
considerations" behind the $87 million TPC contribution to Bombardier (see para. 9.294 above), inorder to demonstrate the absence of export contingency.  However, Canada has provided no evidence
to support this assertion, or to show that the e xport-related considerations, described above, that
permeate the general information about the policy and operation of TPC (such as anticipated
exportation or export earnings) were not also taken into account by the TPC administrators.  In the
absence of supporting evidence, such assertions are insufficient to rebut the  prima facie  case, based
on a considerable volume of documentary evidence,  that TPC assistance to the Canadian regional
aircraft industry, including but not limited to the $87 million contribution to Bombardier, is de facto
export contingent.
9.345  We also note that Canada has submitted documents designated as Business Confidential
Information concerning the $87 million subsidy to Bombardier, in order to demonstrate that thiscontribution is not export contingent.  However, the material submitted by Canada has been redacted
to such an extent that it is simply of no value to the Panel, and there is no means for the Panel to be
certain that information pointing to de facto  export contingency has not been redacted.  Moreover,
Canada has outright refused (on the basis of “Cabinet privilege”) to provide what in the Panel’s view
are the most relevant of the documentation that it requested regarding the five contributions identifiedby Brazil:  the Project Summary Forms, and the memoranda and other documents supporting the
recommendations and decisions to provide these contributions.  For this reason, the Business
Confidential documents submitted by Canada are not sufficient to rebut a prima facie  case that TPC
assistance to the Canadian regional aircraft indu stry, including but not limited to the $87 million
contribution to Bombardier, would not have been granted but for anticipated exportation or exportearnings.
9.346  We recall Canada’s own formulation (with which Brazil and we concur) of the nature of the
required conditionality as being that “one of the conditions  for the grant of the subsidy is the
expectation  that exports will flow thereby”.  We believe that the facts available demonstrate that one
of the conditions of the grant of TPC contributions to the Canadian regional aircraft industry is indeed
such an expectation, in the form of projected expo rt sales anticipated to “flow” directly from these
contributions.
                                                     
632 We note that  other conditions for TPC assistance in addition to anticipated exportation or export
earnings, may include the creation of jobs, the launching new industries, or transforming or strengthening thecompetitiveness of Canadian industry.  However, the existence of such additional conditions does not preclude afinding that TPC contributions are "contingent … upon export performance", since Article 3.1(a) of the SCMAgreement applies when export contingency exists "solely or as one of several other conditions…"WT/DS70/R
Page 227
9.347  For the above reasons, we find that TPC assistance to the Canadian regional aircraft industry
is "contingent … in fact … upon export performance" within the meaning of Article 3.1(a) of the
SCM Agreement.633
(vi) Conclusion
9.348  In light of the above findings, we conclude that TPC assistance to the Canadian regional
aircraft industry constitutes "subsidies contingent … in fact … upon export performance", contrary to
Articles 3.1(a) and 3.2 of the SCM Agreement.
2. Assistance provided under the DIPP programme
9.349  Brazil has adduced very little evidence in support of its claim that DIPP assistance to the
Canadian regional aircraft industry constitutes subsidies contingent on export, contrary to Articles
3.1(a) and 3.2 of the SCM Agreement.  In short, Br azil argues simply that the DIPP programme was
TPC's predecessor.
9.350  Brazil identified one instance of joint DIPP / SDI assistance provided in April 1989.
However, Brazil subsequently withdrew this claim on the grounds that the contribution is not subject
to the SCM Agreement because, in its view, the SCM Agreement does not apply to allegedlyprohibited export subsidies granted prior to 1 January 1995.
9.351  Canada made no specific arguments concerning Brazil's claim against DIPP assistance to the
Canadian regional aircraft industry.
9.352  In the absence of any relevant evidence adduced by Brazil, we have no basis for determining
the terms on which DIPP assistance has been provided to the Canadian regional aircraft industry, orwhether such assistance was contingent on export.  In the absence of any relevant evidence, we
therefore find that there is no  basis for a prima facie case that DIPP assistance to the Canadian
regional aircraft industry constitutes "subsidies contingent … in fact … upon export performance",
contrary to Articles 3.1(a) and 3.2 of the SCM Agreement.
X. CONCLUSIONS AND RECOMMENDATION
10.1 In conclusion, we:
(a) reject Brazil's claim that  EDC assistance  to the Canadian regional aircraft industry
constitutes export subsidies inconsistent with Article 3.1(a) and 3.2 of the SCM
Agreement;
(b) find 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;
                                                     
633 As a result of this finding, there is no need to address Brazil's request for adverse inferences in light
of Canada's refusal to submit certain BCI or documents protected by cabinet privilege.  We explained abovewhy we reject Canada's arguments based on the inadequate protection of BCI.  With regard to cabinet privilege,we note that in certain circumstances, such as national security, a Member may consider itself justified inwithholding certain information from a panel.  However, in such circumstances, we would expect that Memberto explain clearly the basis for the need to protect that  information.  In the present case, Canada has invoked
cabinet privilege for the purpose of protecting documents concerning the approval of contributions under the
TPC.  Canada has failed to explain why such informatio n needs to be protected.  In the absence of any such
explanation, we are not at all convinced of the merits of Canada's reliance on cabinet privilege in the present
case.WT/DS70/R
Page 228
(c) reject Brazil's claim that the sale by the Ontario Aerospace Corporation of its 49
percent interest in de Havilland Inc. to Bombardier in January 1997 constitutes an
export subsidy inconsistent with  Article 3.1(a) and 3.2 of the SCM Agreement;
(d) reject Brazil's claim that Subsidiary Agreement assistance to the Canadian regional
aircraft industry constitutes export subsidies inconsistent with Article 3.1(a) and 3.2
of the SCM Agreement;
(e) reject Brazil's claim that SDI and IQ assistance to the Canadian regional aircraft
industry constitutes export subsidies inconsistent with Article 3.1(a) and 3.2 of the
SCM Agreement;
(f) find that TPC assistance to the Canadian regional aircraft industry constitutes export
subsidies inconsistent with Article 3.1(a) and 3.2 of the SCM Agreement; and
(g) reject Brazil's claim that DIPP assistance to the Canadian regional aircraft industry
constitutes export subsidies inconsistent with Article 3.1(a) and 3.2 of the SCM
Agreement.
10.2 Pursuant to Article 3.8 of the DSU, the findings in sub-paragraphs (b) and (f) of the preceding
paragraph also constitute a case of prima facie  nullification or impairment of benefits accruing to
Brazil under the SCM Agreement, which Canada has not rebutted.
10.3 In light of the above findings, we are required to make the recommendation provided for in
Article 4.7 of the SCM Agreement.  Accordingly, we  recommend that Canada withdraw the subsidies
identified above without delay.
10.4 Article 4.7 further provides that "the panel shall specify in its recommendation the time-
period within which the measure must be withdrawn."   In other words, we are required to specify
what period would represent withdrawal "without delay".  Taking into account the procedures that
may be required to implement our recommendation on the one hand, and the requirement that Canada
withdraw its subsidies "without delay" on the other, we conclude that Canada shall withdraw thesubsidies identified in sub-paragraphs (b) and (f) of the preceding paragraph within 90 days.WT/DS70/R
Page 229
ANNEX 1
PROCEDURES GOVERNING BUSINESS CONFIDENTIAL INFORMATION
AND DECLARATION OF NON-DISCLOSURE
I. BASIC PRINCIPLE
1. The treatment of information as Business Confidential under these procedures imposes a
substantial burden on the Panel and the parties. The indiscriminate designation of information as Business
Confidential could limit the ability of a party to fully include in its litigation team individuals who have
particular knowledge and expertise relevant to presenting the party's case, impede the work of the Panel
and complicate the Panel's task in formulating credible public findings and conclusions. Finally, the Panel
recalls that all WTO Members are obliged under Article 25.9 of the SCM Agreement to provide
information regarding the nature and extent of any subsidy "in a comprehensive manner" and with"sufficient details to enable the other Member to assess their compliance with the terms" of the SCM
Agreement.  Accordingly, while the Panel recognizes that the parties have a legitimate interest in
protecting sensitive Business Confidential information, the Panel expects that parties will exercise the
utmost restraint in designating information as Business Confidential.
II. DEFINITIONS
“approved person” means
i) a Panel member;
ii) a representative;
iii) a Secretariat employee; or
iv) a PGE member,
who has filed with the Chairman of the Panel a Declaration of Non-disclosure.
“conclusion of the Panel” means when, pursuant to DSU Article 16.4, the Panel report is;
i) adopted;
ii) not adopted;  or
iii) the Panel report is appealed and the report of the Appellate Body is adopted.
“Business Confidential information” means any information that has been designated as Business
Confidential by the party submitting the information, and that is not otherwise available in the publicdomain.
“Declaration of Non-disclosure” means a copy of the declaration set out in Annex II, signed and dated by
the person making the declaration.
“designated as Business Confidential” means:
i) for printed information, clearly ma rked with the notation ‘BUSINESS
CONFIDENTIAL INFORMATION’ and with the name of the party that
submitted the document;
ii) for binary-encoded information, clearl y marked with the notation ‘BUSINESS
CONFIDENTIAL INFORMATION’ on a label on the storage medium, andclearly annotated with the notation ‘BUSINESS CONFIDENTIALINFORMATION’ in the binary-encoded files; andWT/DS70/R
Page 230
iii) for uttered information, declared by th e speaker to be “Business Confidential
information” prior to the disclosure.
“dispute” means Brazil's challenge to certain Canadian measures under Article 4 of the WTO Agreement
on Subsidies and Countervailing Measures, WT/DS70, entitled “Canada – Measures Affecting the Export
of Civilian Aircraft”.
“DSU” means the WTO Understanding on Rules a nd Procedures Governing the Settlement of
Disputes.
"Geneva mission" means the buildings and grounds of Brazil and Canada at Ancienne Route 17B, 1218
Grand-Saconnex and Rue du Pré-de-la-Bichette 1, 1202 Geneva, respectively.
“information” means:
i) printed information;
ii) binary-encoded information stored in computer diskettes, computer disc drives,
CD roms, or other electronic media; or
iii) uttered information,
including without limiting the generality of the foregoing, offers, agreements, reports, forecasts,
compilations, studies, plans, presentations, charts, graphs, pictures and drawings.
“Panel” means the WTO panel established pursuant to DSU Article 6 by the 23 July 1998 decision of
the WTO Dispute Settlement Body to examine the dispute.
“Panel meeting” means a substantive meeting of the Panel with the parties or the interim review
meeting of the Panel with the parties, as described in the working procedures of DSU Appendix 3.
“Panel member” means a person selected pursuant to DSU Article 8 to serve on the Panel.“Panel process” means the process of the Panel as described in DSU Articles 12, 15 and 16, until and
including the conclusion of the Panel.
“party” means Brazil or Canada.“PGE member” means a person appointed to the Permanent Group of Experts established pursuant to
SCM Agreement Article 24, and who has been requested to assist the Panel pursuant to Article 4.5 of the
SCM Agreement.
 “premises of the WTO” means buildings and grounds of the WTO at  Centre William Rappard, Rue de
Lausanne 154, Geneva, Switzerland.
“representative” means:
i) an employee of a party;
ii) an agent for all purposes of a party; or
iii) a legal counsel or other advisor of a party,
who has been authorized by a party to act on behalf of such party in the course of the dispute and
whose authorization has been notified to the Chairman of the Panel and to the other party, but in
no circumstances shall this definition include an employee, officer or agent of a private company
engaged in aircraft manufacturing.WT/DS70/R
Page 231
“SCM Agreement” means the WTO Agreement on Subsidies and Countervailing Measures .
“Secretariat” means the Secretariat of the World Trade Organization.“Secretariat employee” means a person employed or appointed by the Secretariat who has been
authorized by the Secretariat to work on this dispute and whose authorization has been notified to the
Chairman of the Panel, including without limiting the generality of the foregoing, translators and
transcribers present at the Panel hearings.
“secure location” means a locked storage receptacle on the premises of the WTO chosen by the
Secretariat to provide secure storage for Business Confidential information.
“submit” means:
i) the filing by a party of printed or binary-encoded information at the Secretariat during
the dispute;
ii) the filing by a party of printed or binary-encoded information with the Panel during a
Panel hearing; or
iii) the uttering of information during a Panel hearing.
"third party" means a Member having notified its interest in the dispute to the DSB pursuant to DSU
Article 10.
III. SCOPE
1. These procedures apply to all Business Confidential information submitted during the Panel
process.
IV. OBLIGATION ON PARTIES
1. Each party shall ensure that its representatives comply with these procedures.
V. SUBMISSION BY A PARTY
1. When submitting information, a party may designate all or any part or parts of that
information as Business Confidential information.  Business Confidential information shall be
submitted in two copies:  one copy of the Business Confidential information shall be submitted to the
Secretariat;  the other copy of the Business Confidential information shall be submitted to the other
party at its Geneva mission.
2. If, taking into the account the Basic Principle stated in Article I, the Panel considers that a
party has designated as Business Confidential information which is not reasonably entitled to such
treatment, the Panel may decline to consider such information.  In such a case, the party submitting
the information may, at its discretion:
i) withdraw the information, in which case the Panel and the other party shall
promptly return the informatio n to the party submitting it; or
ii) withdraw the designation of the information as Business Confidential.
3. When submitting printed or binary-encoded Business Confidential information, the
party shall also provide:WT/DS70/R
Page 232
i) a non-Business Confidential edited version, redacted in such a manner as to
convey a reasonable understanding of the substance of the information;
ii) a non-Business Confidential summary in sufficient detail to convey a reasonable
understanding of the substance of the information; or
iii) in exceptional circumstances, a written statement:
(a) that such a non-Business Confidential edited version or non-Business
Confidential summary cannot be made, or
(b) that such a non-Business Confidential edited version or non-Business
Confidential summary would disclose facts that the party has a proper reason for
wishing to keep business confidential.
4. If the Panel considers that a non-Business Confidential edited version or summary does not
fulfill the requirements of paragraph 3(i) or (ii), or that such exceptional circumstances as justify a
statement pursuant to paragraph 3(iii) do not exis t, the Panel may decline to consider the Business
Confidential information in question.   In such a case, the party submitting the information may, at its
discretion,
i) withdraw the information, in which ca se the Secretariat and the other party
shall promptly return the information to the party submitting it; or
ii) comply with the provisions of paragraph 3 to the satisfaction of the Panel.
5. When uttering Business Confidential information at a Panel meeting, the speaker shall also
provide a brief non-Business Confidential oral statement in sufficient detail to convey a reasonable
understanding of the substance of the information that will be uttered.
VI. STORAGE
1. The Secretariat shall store all Business Confidential information submitted in the secure
location when not in use by an approved person.
2. Each party shall store all Business Confidential information submitted to it by the other party
in a safe in a locked room at the premises of its Geneva mission, when not in use by a representative
who is an approved person.  Only a representative who is an approved person shall be given authority
to unlock the locked room containing the safe, and the locked safe.  If requested, either party may visitthe other party's Geneva mission to review the proposed location of the safe, and to propose any
changes.  Any disagreements between the parties regarding the location of the safe, or any other
aspect related to safeguarding of the Business Confidential information will be decided by the Panel.
3. An approved person shall take all necessary precautions to safeguard Business Confidential
information when in use.
VII. OBLIGATION NOT TO DISCLOSE
1. Where Business Confidential information has been submitted pursuant to these procedures, no
approved person who views or hears such information shall disclose that information, or allow it to be
disclosed, to any person other than another approved person, except in accordance with these procedures.
2. The Panel shall not disclose Business Confidential information in its interim and final reports,
but may make statements of conclusion drawn from such information.WT/DS70/R
Page 233
VIII. DISCLOSURE
1. The Secretariat shall make available for viewing or hearing only on the premises of the WTO
any Business Confidential information requested by an approved person.
2. Each party shall promptly, and in a convenient manner, make available for viewing on the
premises of its embassy or other diplomatic mission in the capital of the other party or, at the request
of a approved person, on the premises of its emba ssy or other diplomatic mission at some other
location, any Business Confidential information requested by an approved person.
3. Business Confidential information stored at the Geneva mission of a party may only be
viewed by a representative of that party who is an approved person.
 4. An approved person viewing or hearing Business Confidential information may take written
summary notes of that information for the sole purpose of the Panel process.
5. Business Confidential information shall not be copied, distributed, or removed from the
premises of the WTO, or from the premises of a party's Geneva mission, or from the premises of the
embassy or other diplomatic mission referred to in paragraph 2, except as specifically provided inthese Procedures.
6. Notwithstanding paragraph 5. above, a Panel member may remove a copy of Business
Confidential information from the premises of the WTO.  Any copies of Business Confidential
information removed from the premises of the WTO by a Panel member shall be used exclusively by
that Panel member for the purpose of working on the dispute, and shall be returned to the Secretariatupon conclusion of the Panel.  Copies of Business Confidential information removed from the
premises of the WTO by a Panel member shall be stored in a locked receptacle.
IX. DISCLOSURE AT A PANEL MEETING
1. A party that wishes to submit Business Confidential information during a Panel meeting may
request the Panel to exclude persons who are not approved persons from the meeting. The Panel shallexclude such persons from the meeting for the duration of the submission of such information.
X. DISCLOSURE TO THIRD PARTIES
1. Article 10.3 of the DSU provides that "[t]hird parties shall receive the submissions of the
parties to the dispute to the first meeting of the panel."  Accordingly, disclosure shall be granted to
representatives of third parties of Business Confidential information contained in the first submissions
of the parties on the premises of the WTO, or on the premises of an embassy or other diplomatic
mission of the party submitting the Business Confidential information consistent with Section VIII,
paragraph 2.  The provisions of these procedures shall apply mutatis mutandis  to any such disclosure.
XI. TAPES AND TRANSCRIPTS
1. Any tapes and transcripts of Panel meetings at which Business Confidential information is
uttered shall be treated as Business Confidential information under these procedures.
XII. RETURN AND DESTRUCTION
1. At the conclusion of the Panel the Secretariat and the parties shall:WT/DS70/R
Page 234
i) return any printed or binary-encoded Business Confidential information in their
possession to the party that submitted such Business Confidential, unless that party
agrees otherwise; and
ii) destroy all tapes and transcripts of the Panel hearings that contain Business
Confidential information, unless the parties mutually agree otherwise.
2. If the Panel Report is appealed, the Secretariat shall transmit any printed or binary encoded
Business Confidential information, plus all tapes and transcripts of the Panel hearings that contain
Business Confidential information, to the Appellate Body as part of the record of the Panel
proceedings.  The Secretariat shall transmit such information to the Appellate Body separately from
the rest of the record and shall inform the Appellate Body of the special procedures that the Panel has
applied with respect to such Business Confidential  information.  The parties shall comply with any
directive of the Appellate Body regarding disclosure of Business Confidential information to parties
or third parties as the Appellate Body may deem appropriate.WT/DS70/R
Page 235
ANNEX II
DECLARATION OF NON-DISCLOSURE
In accordance with the Procedures Governing Business Confidential information contained
Annex I to the Working Procedures of the Panel on Canada – Measures Affecting the Export of
Civilian Aircraft (the Procedures), I agree to the following:
Words defined in the procedures have the same meaning in this Declaration of  Non-Disclosure as in
the Procedures.
1. I acknowledge having received a copy of the Procedures, a copy of which is attached.2. I acknowledge having read and understood the Procedures.
3. I agree to be bound by, and to adhere to, the provisions of the Procedures and,
accordingly, without limitation, to treat confiden tially all Business Confidential information
that I may view or hear from time to time in accordance with the Procedures.
Executed on this __________  day of ____________ , 1998.
BY: __________________________
Name:
Title:(Advisors only)  Affiliation or employment:
__________