WORLD TRADE
ORGANIZATIONWT/DS46/AB/R
2 August 1999
(99-3216)
Original: English
BRAZIL – EXPORT FINANCING PROGRAMME FOR AIRCRAFT
AB-1999-1
Report of the Appellate BodyWT/DS46/AB/R
Page i
I. Introduc tion................................................................................................................. ............1
II. Arguments of the Participants  and the Third Particip ants ......................................................4
A. Claims of Error by Brazil  – Appellant .......................................................................4
1. Consultations.................................................................................................4
2. Are PROEX Interest Rate Equalization Payments Used "To Secure
a Material Advantage in the Fiel d of Export Credit Terms"? .......................5
3. Has Brazil Increased the Leve l of its Export Subsidies?...............................8
4. Recommendation of  the Panel.......................................................................9
B. Arguments by Canada  – Appellee ............................................................................10
1. Consultations...............................................................................................10
2. Are PROEX Interest Rate Equalization Payments Used "To Secure
a Material Advantage in the Fiel d of Export Credit Terms"? .....................10
3. Has Brazil Increased the Leve l of its Export Subsidies?.............................12
4. Recommendation of  the Panel.....................................................................15
C. Claims of Error by Canada  – Appellant ..................................................................16
1. Burden of Proof Under Article 27.4 of the  SCM Agreement .....................16
2. Has Brazil Increased the Leve l of its Export Subsidies?.............................16
3. Conditional Appeal: "Maintaining" Subsidies Under Article 3.2
of the SCM Agreement ................................................................................17
D. Arguments by Brazil  – Appellee ...............................................................................18
1. Burden of Proof Under Article 27.4 of the  SCM Agreement .....................18
2. Has Brazil Increased the Leve l of its Export Subsidies?.............................19
3. Conditional Appeal: "Maintaining" Subsidies Under Article 3.2
of the SCM Agreement ................................................................................19
E. Arguments by Third Participants .............................................................................20
1. European Communities...............................................................................20
2. United States ...............................................................................................23
III. Preliminary Procedur al Matter an d Ruling ...........................................................................27
A. Procedures Governing Business Confidential Information .....................................27
1. Arguments of Participants  and Third Participants ......................................27
2. Ruling and Reasons.....................................................................................31
IV. Issues Raised In This Appeal................................................................................................ 33
V. Consultations ................................................................................................................ ........35WT/DS46/AB/R
Page ii
VI. Burden of Proof Under Article 27.4 of the  SCM Agreement ...............................................37
VII. Has Brazil Increased the Le vel of its Expor t Subsid ies? ......................................................40
A. Actual Expenditures or Budgeted Amounts .............................................................41
B. When are PROEX Subsidies "Granted "?.................................................................43
C. Constant or Nominal Dollars ..................................................................................46
VIII. Are PROEX Interest Rate Equalization Payments Used "To Secure a
Material Advantage in the Fiel d of Export Cr edit Term s"?..................................................48
IX. Recommendation of  the Panel ..............................................................................................56
X. Conditional Appeal:  "Maintaining" Subsidies Under Article 3.2
of the  SCM Agreement .........................................................................................................58
XI. Findings and Conclusions.................................................................................................... .58WT/DS46/AB/R
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WORLD TRADE ORGANIZATION
APPELLATE BODY
Brazil – Export Financing Programme for
Aircraft
Brazil,  Appellant/Appellee
Canada,  Appellant/Appellee
European Communities,  Third Participant
United States,  Third ParticipantAB-1999-1
Present:El-Naggar,  Presiding Member
Bacchus,  Member
Ehlermann,  Member
I. Introduction
1. Brazil and Canada appeal from certain issues of law and legal interpretation in the Panel
Report, Brazil – Export Financing Programme for Aircraft  (the "Panel Report").1  The Panel was
established to consider a complaint by Canada  with respect to certain export subsidies granted underthe Brazilian  Programa de Financiamento às Exportações  ("PROEX") on sales of aircraft to foreign
purchasers of Empresa Brasileira de Aeronáutica S. A. ("Embraer"), a Brazilian manufacturer of regional
aircraft.
 2
2. The Panel described certain factual aspects of  PROEX at paragraphs 2.1 to 2.6 of the Panel
Report.  Below we provide a summary of these factual aspects, focusing on the details relating tointerest rate equalization subsidies under PROEX to the regional aircraft industry.
3. PROEX is administered by the Comitê de Cr édito as Exportações  (the "Committee"), an
inter-agency group within the Ministry of Finance in Brazil.  Day-to-day operations of PROEX are
conducted by the Bank of Brazil.
3  Under PROEX, the Government of Brazil provides interest rate
equalization subsidies for sales by Brazilian exporters, including Embraer.
                                                     
1WT/DS46/R, 14 April 1999.
2The Panel noted that, in its submissions, Canada defines the regional aircraft market as consisting of
commercial aircraft with 20-90 seats, whether turboprop or jet.  Panel Report, footnote 188.
3Ibid., para. 2.4.WT/DS46/AB/R
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4. For sales of regional aircraft, PROEX interest rate equalization subsidies amount to 3.8
percentage points of the actual interest rate on any particular transaction.4  The lending bank charges
its normal interest rate for the transaction, and r eceives payment from two sources:  the purchaser,
and the Government of Brazil.  Of the total interest rate payments, the Government of Brazil pays 3.8
percentage points, and the purchaser pays the rest.  In this way, PROEX reduces the financing costs of
the purchaser and, thus, reduces the overall cost to the purchaser of purchasing an Embraer aircraft.
5. The involvement of PROEX in aircraft financing transactions begins when the manufacturer 
– Embraer – requests approval for PROEX interest rate equalization subsidies before the conclusionof a formal contract with a buyer.  If the Committee approves the request, it then issues a letter ofcommitment to the manufacturer, committing the Government of Brazil to PROEX support, provided
that the buyer and the manufacturer conclude a contract for the transaction within a specified periodof time, usually 90 days (subject to renewal), and in accordance with the terms and conditions setforth in the original request.
5  The letter of commitment usually provides that PROEX payments will
be made in 30 equal and consecutive semi-annual instalments during a financing period of 15 years.
The first instalment payment is typically due six months after the delivery date of each aircraft.  6
6. PROEX interest rate equalization subsidies begin after the aircraft is exported and paid for by
the purchaser.  The payments are made in the form of bonds issued by PROEX to the financing
institution.  After each export transaction is confirmed, the Bank of Brazil applies to the NationalTreasury of Brazil for the issuance of bonds designated as National Treasury Note – Series I("NTN-I") bonds.  The National Treasury issues these bonds and transfers them to the Bank of Brazil,which in turn passes the bonds to the lending bank  (or its agent bank).  The lending bank can redeem
the bonds on a semi-annual basis for the duration of the financing, or can sell them on the market at a
discount immediately upon receipt.
7  NTN-I bonds are denominated in Brazilian currency, indexed to
the dollar as of the date the bonds are issued.  The bonds can only be redeemed in Brazil, and only inBrazilian currency.
8
7. The Panel considered claims by Canada that PROEX is inconsistent with the prohibition on
export subsidies under Article 3.1(a) of the  Agreement on Subsidies and Countervailing Measures
(the " SCM Agreement ").  The Panel Report was circulated to the Members of the World Trade
Organization (the "WTO") on 14 April 1999.  The Panel reached the conclusion that PROEX interest
                                                     
4Panel Report, para. 2.3.
5Ibid., para. 2.5.
6Ibid., para. 2.6;  sample letter of commitment provided by Brazil.
7Ibid., para. 2.6.
8Ibid.WT/DS46/AB/R
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rate equalization payments are subsidies within the meaning of Article 1 of the  SCM Agreement , and
are contingent upon export under Article 3.1(a) of that Agreement.  In reaching this conclusion, thePanel found that the PROEX interest rate equalization payments were not "permitted" under the firstparagraph of item (k) of the Illustrative List of Export Subsidies in Annex I of the  SCM Agreement
(the "Illustrative List").  The Panel also found th at Brazil failed to comply with certain of the
conditions of Article 27.4 of the SCM Agreement , and that, therefore, the prohibition in Article 3.1(a)
of the  SCM Agreement   applied to Brazil.
9  Having found that PROEX payments are inconsistent
with Article 3.1(a), the Panel recommended that Brazil withdraw the subsidies within 90 days
pursuant to Article 4.7 of the SCM Agreement .10
8. On 3 May 1999, Brazil notified the Dispute Settle ment Body (the "DSB") of its intention to
appeal certain issues of law covered in the Panel Report and legal interpretations developed by thePanel, pursuant to Article 4.8 of the  SCM Agreement  and paragraph 4 of Article 16 of the
Understanding on Rules and Procedures Go verning the Settlement of Disputes  (the "DSU"), and filed
a Notice of Appeal pursuant to Rules 20 and 31(1) of the Working Procedures for Appellate Review
(the " Working Procedures ").  On 13 May 1998, Brazil filed its appellant's submission.
11  O n
18 May 1998, Canada filed its own appellant's submission.12  On 28 May 1998, Brazil13 and
Canada14 both filed appellee's submissions.  On the same day, the European Communities and the
United States filed third participant's submissions.15
9. As described more fully in Section III of this  Report, by joint letter of 27 May 1999, Brazil
and Canada requested that the Appellate Body apply, mutatis mutandis , the Procedures Governing
Business Confidential Information adopted by the Panel in this case.  A preliminary hearing on this
issue was held on 10 June 1999, with this Division sitting jointly with the Division of the Appellate
Body hearing the appeal in  Canada – Measures Affecting the Export of Civilian Aircraft  ("Canada –
Aircraft "),16 and a preliminary ruling was issued by this Division on 11 June 1999.
                                                     
9Panel Report, para. 8.1.  We note that for the purposes of determining whether there was an increase in
"the level of … export subsidies" under Article 27.4, the Panel examined subsidies under PROEX, and also
under BEFIEX, which provides tax relief to exporters.  Panel Report, paras. 4.160 and 7.75.
10Ibid., paras. 8.2 and 8.5.
11Pursuant to Rule 21(1) of the Working Procedures .
12Pursuant to Rule 23(1) of the Working Procedures .
13Pursuant to Rule 23(3) of the Working Procedures .
14Pursuant to Rule 22 of the Working Procedures .
15Pursuant to Rule 24 of the Working Procedures .
16WT/DS70/AB/R, circulated to WTO Members on 2 August 1999.WT/DS46/AB/R
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10. The oral hearing in the appeal was held on 17 June 1999.  The participants and third
participants presented oral arguments and responded to questions put to them by the Members of theDivision hearing the appeal.
II. Arguments of the Participants and the Third Participants
A. Claims of Error by Brazil  – Appellant
1. Consultations
11. As appellant, Brazil argues that certain measures about which the parties did not consult were
not properly before the Panel.  Specifically, Canada's July 1998 request for the establishment of apanel referred to certain Brazilian measures that were enacted in 1997 and 1998, long afterconsultations had concluded.  Those measures are:  Provisional Measure 1700/15, ProvisionalMeasure 1629/13, Decree No. 2414 of 12/9/97, Resolution of the National Monetary Council No.2490/98, Resolution of the National Monetary Council No. 2452/97, Resolution of the NationalMonetary Council No. 2381/97, Resolution of the National Monetary Council No. 2380/97, MICTOrder 28/98, MICT Order 23/98, MICT Order 7/ 98, MICT Order 121/97, MICT Order 83/97, MICT
Order 53/97¸ MICT Order 34 /97, and MICT Order 33/97.
17  As these measures did not exist at the
time Canada's request for the establishment of the Panel was made, Brazil maintains that these
measures were not properly before the Panel.
12. Brazil argues that the Panel erred in concluding that these 1997 and 1998 measures were
properly before it.  The Panel came to this conclusion because "the request for consultations related tothe same general subject as the request for establishment of a panel, i.e., 'export subsidies underPROEX'"
 18, and that "the consultations and request for establishment relate to what is fundamentally
the same 'dispute', because they involve essentially the same practice,  i.e., the payment of exportsubsidies under PROEX."
19
13. In Brazil's view, the issue is whether particular measures that the parties themselves
acknowledge were neither included in the consultation request nor the subject of consultations can,
nevertheless, properly be before a panel.  Article 4.7 of the DSU provides that a complainant mayrequest the establishment of a panel only if "the consultations" fail to settle a dispute.  A request forthe establishment of a panel must include only measures that were either identified in the request for
                                                     
17Panel Report, para. 4.1.
18Ibid., para. 7.8.
19Ibid., para. 7.11.WT/DS46/AB/R
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consultations or raised subsequently during the consultations.  Brazil contends that both Article 6.2 of
the DSU and Article 4.4 of the  SCM Agreement   provide a necessary and limiting connection
between the subject matter of the panel request and the subject matter of the consultations.
2. Are PROEX Interest Rate Equalization Payments Used "To Secure a Material
Advantage in the Field of Export Credit Terms"?
14. Brazil acknowledges that the PROEX interest equalization scheme is a subsidy under
Article 1 of the  SCM Agreement  that is contingent upon export under Article 3.1(a) of that
Agreement.  Nonetheless, Brazil argues that PROE X interest equalization payments for aircraft are
"permitted" by the terms of item (k) of the Illustrative List.  Under the express terms of item (k),government payment in support of export credit constitutes a prohibited export subsidy only "in so faras they are used to secure a material advantage in the field of export credit terms".  It follows, a
contrario , that they do not constitute prohibited export subsidies if they are not used "to secure a
material advantage in the field of export credit terms."  Moreover, PROEX payments are not, in fact,used "to secure a material advantage in the field of export credit terms."  Therefore, according to
Brazil, PROEX payments are allowed under the  SCM Agreement .
15. Brazil also argues that the justification for the PROEX subsidies are twofold.  First, PROEX
subsidies simply compensate for higher interest  rates incurred on transactions involving Embraer
that result from what it terms "Brazil risk".  "Brazil risk" occurs because a Brazilian commercialentity cannot avoid bearing the additional cost of Brazil sovereign risk when it raises capital orfinances a purchase or a sale.  Brazil sovereign risk results from the perception in the market for debtsecurities as to the likelihood of repayment on schedule.
20  Brazil presented evidence to the Panel that
PROEX payments are not "used to secure a material advantage" on  two types  of transactions:
transactions in which the lender is a financial institution inside  Brazil;  and transactions in which the
lender is  outside  Brazil.  When the lender is inside Brazil, PROEX offsets the "Brazil risk" incurred
by the  lender .  When the lender is outside Brazil, Embraer  itself   incurs "Brazil risk".  According to
Brazil, the Panel and the other participants ignored the distinction between these two types of
transactions, and ignored the fact that Brazil offered separate arguments that these two types oftransactions do not "secure a material advantage".
16. Brazil contends that, PROEX subsidies are intended to "match" the subsidies provided by the
Government of Canada to Bombardier.  Canada provides a wide range of subsidies for Canadian
regional aircraft, and these subsidies reduce the price of the aircraft.
                                                     
20Panel Report, paras. 4.94-4.96.WT/DS46/AB/R
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17. In support of its position, Brazil notes first that the verb "secure", which is found in the
"material advantage" clause of item (k), has been defined to mean "succeed in obtaining or achieving;
gain possession of" and "to procure".  The verb "secure" (or "securing") is used no fewer than 14times in WTO Agreements, and, that, in every instance the word "obtain" (or "obtaining") would be
an accurate synonym.  "Secure" is used in this sense in item (k) as well, referring to action by a
Member to obtain, to gain possession of, or to procure a material advantage "in the field of exportcredit terms" for itself or its nationals, such as Embraer.  Brazil maintains that the Panel'sinterpretation leads to an interpretation of item (k) that covers action by Brazil to "confer" or
"bestow", by providing more favourable financing terms, a material advantage on the nationals ofother Members who purchase from the Brazilian exporter.
18. Next, Brazil argues that the Panel's interpretation reduces the "material advantage" clause to
"redundancy or inutility" by construing the clause to include within this prohibition nothing more thanpayments that improve "the terms that would otherwise have been be [sic] available to the purchaser
with respect to the transaction in question."
21  The Panel's interpretation of the "material advantage"
clause adds nothing to item (k) because all payments of costs incurred will improve the terms thatwould have been available in their absence.
19. Also, Brazil contends that the Panel's interpretation is inconsistent with the context of the
"material advantage" clause.  Footnote 5 of the  SCM Agreement   specifies that Annex I contains not
only a list of prohibited  exported subsidies, but also measures that do not constitute export subsidies,such as in items (b), (h), (i) and (k).  Comparin g the structure of item (j) and item (k), the two
provisions share a similar structure in that they define practices that constitute prohibited export
subsidies with language that limits the scope of the definition.  In the case of item (j) regarding export
credit guarantee or insurance programmes, the limiting language is "premium rates which areinadequate to cover the long-term operating costs and losses of the programmes."  In the case ofitem (k) regarding export credit terms, the limiting la nguage is "in so far as [government payments]
are not used to secure a material advantage in the field of export credit terms."  Thus, practicescovered by the first paragraph of item (k) are prohibited only "in so far as they are used to secure amaterial advantage in the field of export credit terms."  Otherwise, Brazil contends, they are,a contrario , permitted.
20. In addition, Brazil asserts that its interpretation is confirmed both by the preparatory work
relating to the  SCM Agreement   and by the circumstances that led to the inclusion of the "material
advantage" clause in item (k).  The language that now comprises the first paragraph of item (k),
                                                     
21Panel Report, para. 7.37.WT/DS46/AB/R
Page 7
without the "material advantage" clause, had its origins in rules adopted in 1958 by the Organization
for European Economic Cooperation.  The provision was included verbatim   in a 1960 Report of a
GATT Working Party on Subsidies.  This report provided the basis for the Illustrative List of ExportSubsidies in the Agreement on Interpretation and Application of Articles VI , XVI and XXIII of the
General Agreement on Tariffs and Trade  (the " Tokyo Round SCM Code "), which was concluded
in 1979.  The previous year, in 1978, just prior to the conclusion of the Tokyo Round,  theOrganization for Economic Cooperation and Development (the "OECD") concluded the OECD
Arrangement on Guidelines for Officially Supported Export Credits  (the " OECD Arrangement ").
Because the  OECD Arrangement   expressly permitted the provision by governments of certain export
credits, an exception was inserted by the Tokyo Round negotiators as the second paragraph of item (k)for practices that conform to the interest rate provisions of certain international undertakings onexport credits – the "safe harbour" clause.  Some time after deciding to include this OECD "safeharbour" clause, the GATT negotiators added the "material advantage" clause to the first paragraph of
item (k).  According to one of the negotiators at the time, the "material advantage" clause was
intended to provide "a weak injury test in the event of a departure from the basic GATT [subsidy]standard."  The "material advantage" clause was intended to restrict the definition of this type ofexport subsidy to instances where a "material advantage" has been "secured".  If no "materialadvantage" is secured, no export subsidy exists.  Thus, Brazil concludes that the Panel's interpretationof the "material advantage" clause denies the words of that clause any meaningful effect and shouldtherefore be reversed.
21. Finally, with respect to the availability of item (k) as an "affirmative defence", Brazil notes
the Panel's concern that Brazil's interpretation could lead to "inconsistent results"
 22, because a
measure in the form of a payment could be found to be a prohibited export subsidy when challengedby one complainant yet found not to be a prohibited subsidy when challenged by a differentcomplainant.  Brazil responds that such "inconsistent" results are both anticipated and permitted by anumber of covered agreements, including Part III and Part V of the  SCM Agreement , as well as the
Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994   and
the  Agreement on Safeguards .
                                                     
22Panel Report, para. 7.27.WT/DS46/AB/R
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3. Has Brazil Increased the Level of its Export Subsidies?
(a) Actual Expenditures or Budgeted Amounts
22. Brazil states that in determining whether Brazil has increased the level of subsidies in a
manner inconsistent with Article 27.4 of the  SCM Agreement , the criterion should be the budgeted
amounts, not the level of expenditure.  The Panel's conclusion on this issue was in error.
23. Brazil first notes that PROEX budgetary numbers are not simply estimates of amounts to be
paid, but are actual appropriations that may be used by beneficiaries of the programme.  Theappropriate definition of the word "grant" in footnote 55 is "agree to, promise, undertake".  The resultof the budgetary appropriation is that Brazil agrees to, promises, and undertakes to make a specifiedamount of funds available in the next fiscal year to the private sector for export subsidies under
PROEX.  Brazil argues that its budgetary appropriations have been "granted", as used in the context
of footnote 55, and are, therefore, the appropriate basis for determining the level of export subsidies.
24. In Brazil's view, the context provided by Article 25 of the  SCM Agreement   confirms that the
budgeted amount of subsidies is the relevant criterion for calculating the increase in the level ofexport subsidies under Article 27.4.  Article 25 provides that notifications shall contain the "subsidyper unit or, in cases where this is not possible, the total amount or the annual amount budgeted for thatsubsidy ... ."  Because PROEX payments are not provided on a per unit or lump sum basis, Brazil, inaccordance with Article 25.3(ii), notified PROEX on the basis of the annual amount budgeted.Nothing in Article 27 suggests, let alone supports, the notion that Members should use one basis for
notifying the level of their subsidies under Article 25 of the  SCM Agreement  and another basis for
determining whether the level of export subsidies has increased for purposes of Article 27.4.
(b) When are PROEX Subsidies "Granted"?
25. Brazil argues that a subsidy occurs within the meaning of Article 1 of the  SCM Agreement
when the Brazilian authorities issue a letter of commitment to the parties to a proposed transaction.The Panel's conclusion that the letter of commitment itself is not a subsidy, because it is neither a
direct transfer of funds nor a potential direct transfer of funds under Article 1.1 of the
SCM Agreement , was erroneous.  Neither the text of the  SCM Agreement   nor logic supports the
Panel's finding that in order to qualify as a "potential direct transfer of funds" within the meaning ofArticle 1.1(a)(1)(i) of the  SCM Agreement , a measure must give rise to a benefit and thus confer a
subsidy irrespective of whether any payment occurs.  The ordinary meaning of "potential directtransfer of funds" includes a letter of commitment, and Brazil notes the Panel's statement that theword "potential" has been defined as "possible as opposed to actual" or "capable of coming intobeing."  These definitions apply not only to loan guarantees expressly mentioned in Article 1.1(a)(i)WT/DS46/AB/R
Page 9
of the SCM Agreement , but also to the PROEX letters of co mmitment.  The letter of commitment
makes PROEX support "possible" and "capable of coming into being", and therefore constitutes a
"potential direct transfer of funds".  The letter of commitment benefits Embraer by permitting it tooffer its potential customers financing on terms more favourable than it would be able to offer
otherwise.  This benefit exists  regardless  of whether a formal contract is signed.  In Brazil's view,
Canada acknowledges this point in its assertion that Brazil has "intensified" subsidization bymaking long-term commitments in recent months.
26. Brazil also argues that the Panel's finding on this issue is contrary to its statement that "the
object and purpose of the  SCM Agreement  … is to reduce economic distortions caused by
subsidies."
 23  Although Brazil denies that PROEX subsidies cause economic distortions, any
distortions that would be caused by such subsidie s would occur at the time the letter of commitment
was issued, for it is this commitment that determ ines whether the purchaser awards the contract to
Embraer or to a competitor.
27. Finally, Brazil notes that, under domestic law, the Government of Brazil is "legally liable"
for damages should it fail to provide a PROEX payment to which it is committed by virtue of a letterof commitment, when private parties have acted in  good faith in reliance on this commitment.  Thus,
a ruling by the Appellate Body that PROEX subsidies that have already been committed must bewithdrawn would force Brazil to violate its domestic legal obligations.  An interpretation of theSCM Agreement   that would require Members to breach their contractual financial commitments
would be "unfortunate" from the perspective of both the international trading and financial systems.
4. Recommendation of the Panel
28. Brazil notes that Article 4.12 of the  SCM Agreement  provides that, when specific time
periods are not provided by Article 4, "time-periods applicable under the DSU for the conduct of suchdisputes shall be half the time prescribed therein."  Brazil disagrees with the Panel's conclusion thatBrazil should withdraw its export subsidy within 90 days, instead of within the seven and one-halfmonths that would be half the 15-month period set out in Article 21.3(c) of the DSU.  Brazil does not
contend that 90 days or some other period (including a longer period) might not be appropriate in aparticular case.  However, there must be good reason for such a conclusion.  The Panel's "brief,cursory treatment of the question" provides "no reason whatsoever" for departing from the seven andone-half month "standard" provided by Article 4.12 of the  SCM Agreement  and Article 21.3(c) of the
DSU.
                                                     
23Panel Report, para. 7.66.WT/DS46/AB/R
Page 10
B. Arguments by Canada  – Appellee
1. Consultations
29. Canada agrees with the Panel's finding that "the consultations and request for establishment
[of a panel] relate to what is fundamentally the same 'dispute', because they involve essentially the
same practice, i.e., the payment of export subsidies under PROEX."  24  In this case, Canada’s request
for consultations, dated 18 June 1996, was made under Article 4 of the  SCM Agreement   and
Article 4 of the DSU, in respect of "certain export subsidies granted under the Brazilian Programa
de Financiamento às Exportações  (PROEX) to foreign purchasers of Brazil’s Embraer aircraft."  25
Canada’s request for a panel, dated 10 July 1998, was in respect of "the payment of export subsidies
through interest rate equalization and export financing programmes under PROEX."  26  The measures
alleged by Brazil to have been improperly before the Panel as of 10 July 1998 constitute the
legislative and regulatory basis for the granting of the PROEX subsidies.  The specific instruments setout in its request for the establishment of a panel merely reflect amendments and replacements to themeasures underlying PROEX.  In Canada's view, the measures at issue form the continuing legislativeand regulatory basis for PROEX subsidy payments , which were the "matter" in the request for
consultations and in the request for establishment of a panel.
2. Are PROEX Interest Rate Equalization Payments Used "To Secure a Material
Advantage in the Field of Export Credit Terms"?
30. Canada notes Brazil's claim that whether export credit terms "secure a material advantage"
should be based on the terms available in the "marketplace", which, according to Brazil, includes theterms available to all companies in the industry from private and public sources.  Canada disagreeswith this interpretation, and submits that "mater ial advantage" refers to export credit terms that
provide an advantage to a purchaser over the terms otherwise available in the private international
financing market.  The Panel followed this approach, and specifically rejected Brazil's argument,stating, inter alia , that such an approach could lead to a "race to the bottom" in which Members
justified the provision of export subsidies on the grounds that other Members were providing them aswell.
31. Canada contests Brazil's interpretation that PROEX payments are not "used to secure a
material advantage" in the sense of item (k) because they are designed to offset Brazil's risk andCanada's level of subsidies.  PROEX export subsidies are, in fact, "used to secure a material
                                                     
24Panel Report, para. 7.11.
25WT/DS46/1, G/SCM/D3/1, 21 June 1996.
26WT/DS46/5, 13 July 1998.WT/DS46/AB/R
Page 11
advantage", as they provide credit terms for the purchaser more favourable than those that could be
obtained in the market.  Where a government, financial institution, exporter or purchaser uses anexport credit or a payment to gain an advantage or benefit for a beneficiary (i.e., purchasers ofexported goods) relative to the international financing market, such practice "secure[s] a material
advantage" under item (k) and is an export subsidy prohibited by Article 3.1.
32. Canada rejects Brazil's claim that the Panel's analysis reduces the "material advantage" clause
to a nullity.  The Panel's finding was that the "material advantage" clause is used to determine whetherthe subsidy puts the recipient in a better position than if the recipient had obtained financing withoutgovernment support in the international financing market.  Item (k) refers to a situation where agovernment lends funds at an interest rate that is below the rate it would pay for raising such funds ora similar situation where the government makes up for costs incurred by private lenders.  The"material advantage" clause provides that such practice is an export subsidy only when the resultingterms are more favourable than those available in the international financial markets.  Without the
"material advantage" clause, simply lending below the cost of funds or paying the costs incurred by
exporters or financial institutions in obtaining credits would be an export subsidy regardless of thefinancing terms that result.  It is possible for a government to correct for high costs of country riskswithout providing terms that are more favourable than those available on the market.  Therefore,Canada concludes that the "material advantage" clause is not reduced to a nullity under the Panel'sinterpretation.
33. Canada states also that Brazil's reliance on the negotiating history is misplaced, because
neither Canada nor the Panel has denied that the "material advantage" clause should be given
meaning.
34. Canada rejects Brazil's interpretation that PROEX payments are permitted under item (k) on
an  a contrario   basis.  Such interpretation would convert the Illustrative List into an exhaustive list of
prohibited export subsidies, which it is not.  The use of the word "including" in Article 3 of theSCM Agreement   clearly indicates that there are measures other than those listed in the Illustrative List
that could be covered by Article 3.  Thus, the use of  a contrario   inferences in the Illustrative List is
inappropriate.  According to Canada, Brazil's interpretation is not supported by footnote 5, whichprovides that "measures referred to in Annex I as not constituting export subsidies shall not beprohibited under this or any other provision of this Agreement."
35. Canada notes that there is nothing in the first paragraph of item (k) that indicates that
measures not meeting the item (k) criteria are to be "permitted" under footnote 5.  The Brazilianargument for an a contrario  finding that certain measures are "permitted" under the Illustrative ListWT/DS46/AB/R
Page 12
should be rejected because, instead of a "list with numerous references to what is an export subsidy",
the Annex becomes "a list with numerous references to what is not an export subsidy."  Moreover,nothing in the text of the  SCM Agreement  supports the view of the United States that each item in the
Illustrative List "sets forth the standard" for when a particular type of measure is a subsidy.
36. Finally, Canada addresses the question of whether  PROEX results in a "payment" within the
meaning of item (k).  The first part of the first paragraph of item (k) refers to a situation where agovernment lends funds at an interest rate that is below the rate it would pay for raising such funds.The phrase "the costs incurred … in obtaining credits" in the second part of item (k) refers to a similarsituation, but with private financing.  PROEX subsidie s have little to do with Embraer's cost of raising
funds to provide financing.  In fact, PROEX expo rt subsidies are typically paid when sales are
financed by non-Brazilian financial institutions.  The higher cost of credit due to "Brazil risk" is notan issue.  Thus, PROEX subsidies are not payments to cover the added costs incurred by exporters orBrazilian financial institutions in raising funds used for financing purchases.  In Canada's view, they
are simply cash grants made for the benefit of purchasers of Brazilian exported products, and do not
constitute payments within the meaning of the first paragraph of item (k).
3. Has Brazil Increased the Level of its Export Subsidies?
(a) Actual Expenditures or Budgeted Amounts
37. In Canada’s view, Article 27.4’s prohibition that a developing country Member "shall not
increase the level of its export subsidies" refers to the level of expenditures, not to the level of
budgetary appropriations.  In support of the Panel's finding that actual expenditures should be used for
the purposes of this measurement, Canada argues first of all that the  SCM Agreement   as a whole, and
Article 1 of that Agreement in particular, is phrased in terms of transfers of value, such as whenpayments are made.  The text of footnote 55 refers to "the level of export subsidies granted
 ".
(emphasis added)  It does not refer to the level of export subsidies "budgeted".  Moreover, wheredisciplines have been imposed on subsidies elsewhere in the  WTO Agreement , the disciplines are
based on expenditure levels.
38. Canada then argues that interpreting "level of … export subsidies" to mean expenditures is
consistent with the object and purpose of the  SCM Agreement , which is "to reduce the economic
distortions caused by subsidies."  Such distortions are caused by actual expenditures of export
subsidies, not by budgeting or planning for subsidies.
39. Canada notes that certain "absurdities" result from Brazil’s argument that the "level of its
export subsidies" should be based on budgetary am ounts.  First, a developing country could haveWT/DS46/AB/R
Page 13
budgeted a large amount of export subsidies in 1994 without actually spending them, in order to
expand its actual expenditures of export subsidies in later years.  Second, it could create a situationwhere a developing country Member that does not grant  export subsidies could lose the protection
provided by Article 27 if it  budgets  for export subsidies at a level higher than its 1994 calendar year
baseline.  Conversely, a Member that maintains its budget at its previous level, but overspends on
actual expenditures, would not be in breach of this condition.
40. With respect to Brazil’s alternative definition of "grant" as "agree to, promise, undertake",
Canada agrees with the Panel's finding that, in this context, this suggested definition is "inapposite".
 27
Brazil’s argument that it "grants" PROEX subsidies when they are appropriated in the budget isinconsistent with Brazil's argument on the timing of a subsidy, in which Brazil claims that thePROEX subsidy is granted by the letter of comm itment and not by the issuance of the bonds.  In
addition, Brazil’s argument is incorrect because a subsidy cannot be said to have been "granted" whenneither a beneficiary nor an amount have been identified.
41. Finally, Canada maintains that Brazil’s argument that its notification of subsidies under
Article 25 is based on budgeted amounts is irreleva nt.  The purpose of Article 25 is quite different
from Article 27.4.  Article 27.4 provides a limited and conditional exception to the prohibition onexport subsidies if developing country Members place a ceiling on their overall expenditures onexport subsidies, whereas Article 25 requires Members to report all subsidies.  Moreover, underArticle 25, budgeted amounts are to be used in such notifications only where it is not possible tonotify on a per unit basis.
(b) When Are PROEX Subsidies "Granted"?
42. Canada argues that the Panel correctly found that the issuance of bonds, as opposed to the
letter of commitment, is the point at which a subsid y occurs under PROEX.  This issue is really about
effective implementation of the  SCM Agreement .  If the PROEX subsidy is found to be granted when
letters of commitment are issued, Brazil can "lock in" the conditional commitments it has made, aswell as any it is continuing to make, with respect to  the letters of commitment.  That is, if it is the
letter of commitment that results in a "grant", all existing letters of commitment, i.e., those that have
already been issued, will be consistent with WTO rules.
43. Canada submits that Brazil's argument is not consistent with the ordinary meaning of
"potential direct transfer of funds" in Article 1.1(a)(1)(i) in the light of its context and object andpurpose.  Looking at the context of the provision demonstrates that the Panel was correct that
                                                     
27Panel Report, footnote 220.WT/DS46/AB/R
Page 14
"potential direct transfer of funds" refers only to loan guarantees or to similar measures.  Under
Article 1.1 of the  SCM Agreement   a "financial contribution" can exist only if the measure in question
is capable of conferring a "benefit".  The example of a "potential direct transfer of funds" provided inArticle 1.1 – loan guarantees – re-inforces this interpretation.  Loan guarantees are capable of being
paid out in the future in the event of default by the debtor, but they confer a benefit even if they are
not.  Thus, to be considered a "potential direct transfer of funds", a government practice must becapable of becoming a payment, and confer a "benefit",  even if no payment is made .
44. Canada argues that the letter of commitment is incapable of conferring a "benefit" in and of
itself.  A commitment is entered into before a sa le even occurs.  It becomes "binding" only when
certain conditions are met.  No money is transferred unless there is an export delivery.  Thus, theissuance of the letter of commitment itself does no t confer a "benefit".  The letter of commitment only
anticipates possible future benefits if subsidies are actually granted.  Until an actual delivery is made,and bonds are consequently issued, no "benefit" can be said to exist.
45. Canada maintains that additional context for this conclusion is provided by the absence of the
word "potential" in any of the other examples of "financial contributions" provided in Article 1.1.This omission is evidence that the drafters did not intend that "potential direct transfer of funds"should cover every promise to provide a "financial contribution" in the future.  Rather, it should berestricted to the meaning elucidated by the example of loan guarantees.
46. Canada argues, furthermore, that if Brazil's argument is accepted, the result will simply be
that Brazil will be in violation of its Article 3 obligations at an earlier date.  Canada explains that itsubmitted evidence showing that if the letter of commitment were to be used as the point at which the
subsidy occurs, Brazil would not have been in compliance, since 1996, with its obligation in
Article 27.4 not to increase the level of its subsidies.
47. Canada notes Brazil's argument that any economic distortion occurs at the time the letter of
commitment is issued.  Canada responds by pointing out that, from the standpoint of reducing
economic distortion, it is more effective to define the subsidy as the issuance of bonds.  If the subsidyis defined as the issuance of a letter of commitment, then the result will be greater trade distortions,because the continued issuance of PROEX bonds under existing letters of commitment will result inmany more subsidized aircraft being built in Brazil.  In response to Brazil's argument that, underBrazilian law, it is legally liable for damages if it does not uphold a letter of commitment, Canada
responds by stating that Members may not "contract out" of their WTO obligations.WT/DS46/AB/R
Page 15
48. In response to the European Communities' argument that subsidies should be deemed
"granted" when a sales contract is signed, Canada responds that even after a contract is signed, bondswill not be issued if the aircraft is not delivered and exported.
4. Recommendation of the Panel
49. Canada notes Brazil’s argument that the Panel's recommendation for the time period for
withdrawal of the subsidy should be extended from 90 days to seven and one-half months.
50. In reply, Canada states that Article 4.7 of the  SCM Agreement   instructs panels, whenever
subsidies are found to be prohibited, to require th at such subsidies be withdrawn "without delay."
Unlike Article 21.3(c) of the DSU, this requirement is  not qualified in any way.  The difference in the
language between the two provisions makes clear that Article 21.3(c) of the DSU is not thebenchmark for determining the period for withdrawing prohibited subsidies in this case.
51. Canada notes also that Article 4.12 of the  SCM Agreement   is only applicable with respect to
time-limits for the purposes of the "conduct of … disputes."  However, Article 4.12 refers to only
disputes , not to the period of  implementation , which is fundamentally different from the periods for
the conduct of disputes.  Accordingly, Article 4.12  is of no value in interpreting withdrawal of
subsidies "without delay", which is relevant only to implementation.
52. Canada argues that Article 7.9 of the  SCM Agreement   provides that countermeasures may be
imposed if actionable subsidies are not withdrawn within six months of the adoption of the panel orAppellate Body report.  It is logical that where a subsidy is required to be withdrawn "without delay",the timeframe for withdrawal must be shorter than the six month period provided under Article 7.9and in no circumstances should be longer than six months.
53. Canada asks the Appellate Body to recomme nd that PROEX export subsidies be withdrawn
without delay as of the date of adoption of the Panel and Appellate Body Reports, because Brazil iscontinuing to grant new subsidies and maintain old subsidies, and is intensifying efforts to enter intolong-term subsidization commitments before the end of the implementation period.
54. Finally, Canada recalls that its request for a three-month period for withdrawal was made in
view of its analysis that "withdrawal" meant sto pping the payments of bonds paid in semi-annual
instalments.  Canada notes that if Brazil does not need to effect a legislative or regulatory change tostop these payments, withdrawal could come even faster.WT/DS46/AB/R
Page 16
C. Claims of Error by Canada  – Appellant
1. Burden of Proof Under Article 27.4 of the  SCM Agreement
55. Canada is appealing the issue of the proper allocation of the burden of proof under
Article 27.4 of the  SCM Agreement  even though the finding did not affect the outcome of the case.
Article 27.4 is an "exception" to Article 3, and therefore Brazil, as the party invoking the "exception",has the burden of proof.  The Panel's conclusion that Article 27 is not an exception was based on thefact that Article 27 is phrased as "[t]he prohibition of [Article 3.1(a)] … shall not apply to … ."Article 27 should not be considered an element of a claim of violation of Article 3.1(a), as opposed to
an affirmative defense or exception, simply because the words "exception" or "exemption" were notexplicitly used in Article 27.  Rather, like Article XX of the GATT 1994, Article 27.2 contains an
exception to the obligations of Article 3.1(a).  Therefore, the burden of proof is on the party invoking
Article 27.  Although the words "exception" or "exemption" are not explicitly used in Article 27,Canada asserts that it should be regarded as an affirmative defence, not an element in a claim ofviolation of Article 3.1(a).
2. Has Brazil Increased the Level of its Export Subsidies?
(a) Constant or Nominal Dollars
56. Canada argues that the Panel's finding that it is appropriate in this case to use constant dollars
in order to provide a more meaningful assessment of whether Brazil has increased the level of its
export subsidies is "unreasoned" and does not respect the text, context and the object and purpose ofthe  SCM Agreement .
57. Canada submits that there is no explicit provision for conversion of the level of export
subsidies to a constant value either in Article 27.4 or in footnote 55.  Moreover, paragraph 5 ofAnnex IV of the SCM Agreement  specifically provides for inflation adjustment.  Thus, the fact that
the drafters did not provide for inflation adjustment in Article 27 gives rise to the "commonplaceinference" that they did not intend for inflation to be taken into account in this provision.  Indeed,
there is no guidance in the Agreement on how indexation should be accomplished if it were to be
used.
58. In the alternative, Canada argues that the one provision in the  SCM Agreement  where
indexation is used – paragraph 5 of Annex IV – only applies if the amounts would be significantlyaffected by inflation.  Canada notes that a large part of Brazil's trade takes place in U.S. dollars, thatPROEX bonds are indexed to U.S. dollars, and that the PROEX budget and expenditures are notifiedto the WTO in U.S. dollars.   Given that Brazil expressed its export subsidies in the currency of aWT/DS46/AB/R
Page 17
non-inflationary economy, and, therefore, inflation could not have had a significant effect, in Canada's
view, there is no basis for the Panel's conclusion that constant dollars provide a more "meaningful
assessment" as to whether Brazil has increased the level of its export subsidies.
3. Conditional Appeal: "Maintaining" Subsidies Under Article 3.2 of the
SCM Agreement
59. In its appellant's submission, Canada argues that if the Appellate Body reverses the Panel's
finding that subsidies are "granted" at the time bonds  are issued, not when the letter of commitment is
issued, the Appellate Body should then complete the legal analysis, relying on the factual record
before the Panel.  To this end, the Appellate Body should find that subsequent issuance of PROEXbonds upon the delivery of the subject aircraft is inconsistent with Brazil's obligation not to"maintain" prohibited export subsidies under Article 3.2 of the Agreement.
60. Canada notes the overall importance of this issu e by quoting the Panel's statement that if there
were no prospective discipline for the provision of subsidies, "
 the SCM Agreement's prohibitions could
not be invoked until a particular prohibited subsidy had actually been paid."  28  If the Appellate Body
does not give proper meaning to the word "maintain" in Article 3.2, the  SCM Agreement   will be
rendered ineffective because Brazil will be free to provide prohibited export subsidies for many years
after the deadline for implementation of the report, as long as the letter of commitment was provided
before the report was adopted.  For the same reason, the eight-year phase out period in Article 27.4will be extended indefinitely.
61. Canada notes that the plain meaning of "maintain" is "go on with, continue, persevere in;
preserve or retain;  cause to continue".  The is suance of the PROEX bonds causes the PROEX subsidy
to continue to exist, and consequently preserves that subsidy, and, therefore, "maintains" a prohibitedsubsidy within the meaning of Article 3.2 of the  SCM Agreement .  In the context of Article 27, this
interpretation would lead to the commitment to i ssue PROEX bonds extending past the end of the
eight-year phase out period, and, therefore, "mai ntain" a prohibited export subsidy beyond the phase
out deadline.
                                                     
28Panel Report, footnote 187.WT/DS46/AB/R
Page 18
D. Arguments by Brazil  – Appellee
1. Burden of Proof Under Article 27.4 of the  SCM Agreement
62. In Brazil’s view, the Panel correctly disagreed with Canada’s argument that the temporary
exemption provided for developing countries in Article 27.2 is the legal equivalent of the permanent
exception from  GATT 1994   obligations for all Members provided by Article XX of  GATT 1994 .
63. Brazil argues that Article 27, entitled "Special and Differential Treatment of Developing
Country Members", is in no way subordinate to Article 3 or any other article of the  SCM Agreement ,
nor is it to be narrowly interpreted in favor of any other provision.  Rather, Article 27 is a transitionalarrangement with its own terms.  In Brazil's view , the temporary legitimacy of developing country
Member's export subsidies is presumed unless it is proven that a particular Member is not incompliance with its obligations under Article 27.
64. In Brazil’s view, if Article 27 is read in the order in which its terms are set out, the meaning is
clear.  Article 27.2 begins:  "Article 3 shall not apply".  For Article 3 to apply, the burden of proof
must reside with the complainant to demonstrate that the conditions of Article 27 are not met, and
Article 3 therefore does apply.  Otherwise, Article 3 always would apply, subject only to the ability of
a developing country Member to bear the burden of proof under Article 27.  The fact that non-application depends upon compliance with Article 27.4 does not alter the ordinary meaning of "shallnot apply".  A  seriatim   reading of Article 27 first establishes that Article 3 does not apply, and only
then reaches the "subject to compliance" clause in Article 27.2(b).
65. Brazil further argues that both the context and the object and purpose of Article 27 support the
Panel's conclusion.   The context is provided by the title, "Special and Differential Treatment of
Developing Country Members".  This title is indica tive of the nature of the provision, and expresses a
concern for the well-being of developing country Members.  Thus, a high degree of liberality ininterpretation of this provision is required.  Similarly, the object and purpose is stated in the firstparagraph of Article 27, which reads:  "Members recognize that subsidies may play an important rolein economic development programmes of developing country Members."  According to Brazil,Canada’s arguments placing the burden of proof under Article 27 on developing country Members
ignore the context and the object and purpose.
66. Brazil notes two final points.  First, placing the burden of proof on a complaining party would
not  mean that potential complainants would be frustrated by a lack of information.  Information of
this nature is available in the panel proceedings and through Article 25 subsidy notifications.  In this
case, Brazil has provided information through both avenues.  Second, Article 27.7 of theWT/DS46/AB/R
Page 19
SCM Agreement   provides that a Member adversely affected by export subsidies has an additional
avenue for a complaint under the provisions of Article 7 of that Agreement.
2. Has Brazil Increased the Level of its Export Subsidies?
(a) Constant or Nominal Dollars
67. Brazil notes that Canada appeals the Panel's decision to use constant dollars to measure the
level of increase in export subsidies, on two gr ounds:  1) the Panel confined its conclusion to "this
case";  and 2) use of a constant measure of value is contrary to the ordinary meaning of the phrase"level of … export subsidies".
68. In Brazil’s view, the Panel's confining of its conclusion to the facts of this case is a proper,
prudent exercise of judicial economy.  The Panel had to decide only this case, not another case, and
there is nothing irreversible in the Panel's approach.
69. Brazil notes Canada’s argument that because Article 27.4 does not explicitly require the use
of constant value, panels are prohibited from using that measure.  Brazil draws the oppositeconclusion from the terms of Article 27.4:  since Article 27.4 does not prohibit the use of constantvalue, nothing in the  SCM Agreement   precludes the Panel's conclusion.
70. Brazil argues further that the use of a constant measure is required if the special rules for
developing countries in Article 27 are to be given genuine meaning.  The Appellate Body may take"judicial notice" that currencies tend to depreciate  over time because of inflationary pressures, and
these pressures are greatest in developing countries.  A failure to adjust the level of export subsidies
for inflation would effectively repeal the Article 27 "exemption".  Brazil explains that the fact that
Brazil reported its subsidies in dollars means that  the inflation rate was smaller than it otherwise
would have been, but inflation was present nevertheless, and the Panel properly allowed for it.
3. Conditional Appeal: "Maintaining" Subsidies Under Article 3.2 of the
SCM Agreement
71. Brazil notes Canada's argument that if the Appellate Body reverses the Panel and finds that
the subsidy occurs at the point the letter of commitment is issued, then it should make an additionalfinding that the issuance of the NTN-I bonds cons titutes "maintaining" a subsidy under Article 3.2.
Brazil agrees with Canada that "maintain" is define d as "go on with, continue, persevere in;  preserve
or retain;  cause to continue".  However, what must not be "maintained" under the SCM Agreement
are "subsidies," a term Brazil claims that Canada defines in the  Canada – Aircraft  appellate
proceeding as the equivalent of "subsidy programme".  Thus, it is simply the subsidy programme
itself, in this case PROEX, which must not be "maintained".WT/DS46/AB/R
Page 20
72. Brazil first notes that the word "maintain" logically applies only to subsidies granted prior to
the effective date of the WTO, 1 January 1995.  If subsidies were granted before that date, they wouldbe consistent with the requirements of Article 3.2 of the  SCM Agreement  if that paragraph did not
prohibit the maintenance of such subsidies.
73. Brazil argues that, in this case, the "subsidy" occurs when the letter of commitment is issued.
The subsequent issuance of the bonds is no more the maintenance of a subsidy than is the subsequentpayment received by redeeming the bonds over the life of the financing.  The only way the PROEXsubsidy would be "maintained" is if Brazil did not  withdraw the subsidy element of the programme in
the event of adoption of a report finding PROEX to be inconsistent with Brazil’s WTO obligations.
By contrast, it would not be "maintaining" the PROEX subsidy if it eliminated PROEX and simplycontinued to honour contractual obligations made before the elimination of the programme.
74. Brazil refers to Canada’s argument that this interpretation allows Members to "contract out"
of their obligations.  In response, Brazil contends that, to the extent that this is true, it is true of
virtually any subsidy that is subsequently determin ed to be inconsistent with WTO obligations.  For
example, a finding that a low-interest loan is a s ubsidy would not require the borrower to agree to less
favourable terms.  It simply requires that no new low-interest loans be granted.
75. Brazil notes that subsidy programmes often utilize payments made over a long period.
Indeed, Canada’s most recent subsidy notification under Article 25 demonstrates that it has madepayments under certain programmes after the termination of the programme.  In Brazil’s view, thehonouring of prior subsidy commitments cannot constitute "maintaining" export subsidies underArticle 3.2 of the  SCM Agreement .
E. Arguments by Third Participants
1. European Communities
(a) "Material Advantage" Clause of Item (k) of the Illustrative List of
Export Subsidies
76. The European Communities disagrees with the Panel's interpretation of the "material
advantage" clause in item (k) of the Illustrative Li st.  In the European Communities' view, this clause
allows Members to "match" the export credits granted by other Members, even if the rates providedare less than commercial rates.  The second para graph of item (k) explicitly permits certain export
credit practices under conditions which conform to the  OECD Arrangement .  The
OECD Arrangement   authorizes participants to apply in terest rates lower than the designated
minimum interest rate, the Commercial Interest Refe rence Rate (the "CIRR"), in order to "match" theWT/DS46/AB/R
Page 21
rates applied by other participants or by non-participants in the Arrangement.  The level at which the
minimum interest rates, as well as the "matching" mechanism, are set, demonstrates that the purposeof the OECD Arrangement   is to ensure that export credits do not distort competition, rather than to
ensure that export credits are always offered at "commercial rates".  The European Communities
believes that the second paragraph of item (k) provides context for the "material advantage" clause in
the first paragraph of item (k), and that this clause in the first paragraph serves the same purpose asthe second paragraph.
77. The European Communities then argues that footnote 5 to Article 3.1(a) of the
SCM Agreement   does not include a contrario   inferences.  On the contrary, footnote 5 requires an
"affirmative statement" in the Illustrative List to the effect that a measure does not constitute an exportsubsidy.  The second paragraph of item (k) provides an example of such an "affirmative statement";this paragraph describes the type of measure to which footnote 5 refers as "not constituting exportsubsidies".  By contrast, the language of the "material advantage" clause in the first paragraph of
item (k) does not constitute such an "affirmative st atement".  The "material advantage" clause simply
defines the scope of the prohibition in the first paragraph of item (k).  Therefore, the EuropeanCommunities concludes that the "material advantage" clause is not an example of the type of measureto which footnote 5 refers.
78. The European Communities disagrees with the United States position that the Panel made an
"alternative finding" related to the "material advantage" clause.  What the United States calls a"finding" is in reality merely an "interpretation".  The difficulty arises because the Panel has treatedBrazil's argument for an exception under item (k) as an affirmative defence.  In fact, item (k) is in the
nature of a prohibition.  Thus, according to the European Communities, the Panel's decision to place
the burden of proof on Brazil was in error.
(b) Has Brazil Increased the Level of its Export Subsidies?
(i) Actual Expenditures or Budgeted Amounts
79. The European Communities agrees with the Panel' s finding that actual expenditures should be
used to determine whether there is an increase in the "level of … export subsidies" under Article 27.4.Footnote 55 of the  SCM Agreement   indicates that the relevant "level of … export subsidies" is that
of the subsidies "granted".  Authorization given by the budgetary authority of a Member to theexecutive to spend funds does not create any rights for the potential beneficiaries of the fund.Therefore, in the European Communities' view, th e PROEX payments may not be deemed "granted"
until the sales contracts are concluded.WT/DS46/AB/R
Page 22
(ii) When are PROEX Subsidies "Granted"
80. According to the European Communities, PROEX payments should be deemed "granted"
when a definitive purchase contract (i.e., not a simple option contract) is signed by Embraer and theforeign purchaser.  The European Communities agrees with the Panel that the issuance of a letter ofcommitment is not sufficient to consider that the subsidy has been "granted", since the obligation to
issue the bonds is conditional upon the conclusion of a sales contract.  Each of the parties is free tosign or not to sign the contract after the letter of commitment has been issued, and in at least somecases letters of commitment are issued with respect to option contracts.  The benefit to Embraeroccurs upon concluding a sales contract.
81. The European Communities maintains that if the PROEX payments are deemed "granted" by
the Appellate Body when the aircraft is physically exported, all bond issues will be prohibited in the
future by virtue of the Appellate Body ruling.  As a result, bonds may not be issued even under thoseexisting sale contracts for which export has not yet occurred.  This would be "extremely disruptive" ofthe rights of private parties under sales contracts that have already been concluded and are legallyenforceable.  Furthermore, any harm caused by the subsidy occurs at the moment when the salescontract is signed.
82. The European Communities notes that the United States made a similar argument in
Australia – Subsidies Provided to Producers and Exporters of Automotive Leather
 29, where the
United States claimed that a contract between the Government of Australia and a private party to
provide a grant constituted a "subsidy" within the meaning of Article 1 of the  SCM Agreement .
(c) Recommendation of the Panel
83. The European Communities does not express any views on whether the 90-day period for
withdrawal of PROEX subsidies set by the Panel is appropriate, particularly given the Panel's failureto advance specific reasoning for its conclusion.  However, the European Communities considers thatBrazil’s rationale for applying a seven and one-half month period is incorrect.  A period of seven and
one-half months could under no circumstances qualify as implementation "without delay."  Moreover,
the use of the 15 month period referred to in Article 21.3(c) is inappropriate as a guideline.
84. The European Communities notes that Article 4.12 only applies with respect to time-periods
for the "conduct of … disputes".  The implementation of a panel report, however, is not part of the"conduct" of a dispute.
                                                     
29Adopted 16 June 1999, WT/DS126/R, para. 7.43.WT/DS46/AB/R
Page 23
85. The European Communities attaches great importa nce to the principle in Article 3.2 of the
DSU that no retroactive remedies may be imposed.
(d) Conditional Appeal:  "Maintaining" Subsidies Under Article 3.2 of
the  SCM Agreement
86. With respect to Canada’s argument that the continued issuance of bonds violates the
prohibitions in Article 3.2 on "maintaining" export subsidies, the European Communities notes brieflythat Canada’s position is incompatible with the principle that the DSB’s rulings and recommendations
are not retroactive.  If Canada’s argument were accepted, it would require Members to recover
subsidies that have already been "granted".  The obligation not to "maintain" prohibited subsidies isintended to address the situation where a Member grants prohibited subsidies within the framework ofa specific programme.  Article 3.2 simply requires that this programme not be "maintained", that is, itmust be abolished.
2. United States
(a) Burden of Proof Under Article 27.4 of the  SCM Agreement
87. The United States notes that it agrees with the arguments made by Canada that the burden of
proof under Article 27 is on the developing country Member to show that it is in compliance with theprovisions of Article 27.4.
(b) Are PROEX Interest Rate Equalization Payments Used "To Secure a
Material Advantage in the Field of Export Credit Terms"?
88. The United States notes two separate findings by the Panel on the "material advantage" clause
in item (k) of the Illustrative List.  First, the Panel found that an item (k) payment is "used to secure amaterial advantage" where the payment makes available export credit on terms more favourable thanotherwise available in the marketplace.  Second, the Panel made an alternative finding based on theassumption that Brazil was correct in its assertion that the "material advantage" clause required anexamination of export credit terms available with respect to competing products exported from otherMembers.  In this alternative finding, the Panel found that the field of export credit terms is limited to
interest rates, grace periods, transaction costs, maturities and the like, and does not encompass the
price at which the product is sold.
30  The United States argues that the Panel's first finding was
incorrect as a matter of law, but that the Panel's alternative finding was correct and should be upheldby the Appellate Body.
                                                     
30Panel Report, para. 7.28.WT/DS46/AB/R
Page 24
89. According to the United States, the Panel's first finding reads the "material advantage" clause
out of item (k).  The United States states that, under this first finding by the Panel, any payment by agovernment of costs incurred by exporters or financial institutions in obtaining credits necessarilyresults in "terms which are more favourable than would otherwise be available" in the marketplace,
and, therefore, any advantage becomes a "material advantage".
90. In addition, the United States argues, by adopting an interpretation that renders the "material
advantage" clause meaningless, the Panel's first fi nding ignores the fact that, in addition to listing
practices that  do constitute prohibited export subsidies, the Illustrative List also lists some practices
that do not constitute prohibited export subsidies.  The intent of the drafters in using the term
"illustrative" was to signify that not all types of potential export subsidy practices are addressed by theIllustrative List.  However, where an item of the Illustrative List does address a particular type ofpractice, that item sets forth the standard for determining whether that practice is, or is not, aprohibited export subsidy.  Thus, when item (k) provides that export credits constitute prohibited
export subsidies "in so far as they are used to secure a material advantage in the field of export credit
terms", item (k), by necessary implication, also provides,  a contrario , that export credits do not
constitute prohibited export subsidies if they are not "used to secure a material advantage in the fieldof export credit terms".
 
91. The United States argues that the Panel's alternative finding was correct.  According to the
United States, a Member would not "secure a material advantage" if it merely "matched" exportcredits offered by another Member.  Here, however, a different set of facts occurred.  Here, the Panelproperly rejected Brazil’s argument for a comparison of Brazil’s export credit terms to Canada’s non-
export credit subsidies, by limiting the "field of ex port credit terms" to "items directly related to
export credits, such as interest rates, grace periods, transaction costs, maturities and the like."
 31
92. The United States concludes that because Brazil does not appear to have demonstrated, or
even claimed, that PROEX financing is intended to match "export credit terms" under the standardadopted by the Panel in its alternative finding, the Appellate Body should uphold the Panel'salternative finding.
                                                     
31Panel Report, para. 7.28.WT/DS46/AB/R
Page 25
(c) Has Brazil Increased the Level of its Export Subsidies?
(i) Actual Expenditures or Budgeted Amounts
93. The United States notes that Brazil’s appeal focuses on "dueling dictionary definitions" of the
verb "to grant", arguing that the term also means "[a]gree to, promise, undertake".  Brazil argues that
because budgeted amounts are appropriate for Article 25, they are therefore appropriate for Article 27as well.
94. In the view of the United States, Article 25 establishes exactly the opposite.  Clause (ii)
contemplates three methods of measuring subsidies.  Budgeted subsidies is the third method listed in
Article 25, and that method is only to be used in cases where the other two methods are not possible.
The preferred method, subsidy per unit, contemplates the use of actual subsidies, which leads to areasonable inference that the use of actual expenditures is the normal rule for purposes of theSCM Agreement .
(ii) Constant or Nominal Dollars
95. The United States agrees with Canada that the use of constant dollars was not the appropriate
means of determining whether Brazil had increased the "level of its subsidies" under Article 27.4 –
with one exception.  The United States disagrees with Canada’s reliance on the reference to inflationadjustments in paragraph 5 of Article IV of the  SCM Agreement   as evidence that the drafters
intended to preclude the consideration of inflation in all other instances.  The fact that the drafters of
the  SCM Agreement   referenced an inflation adjustment in Annex IV does not necessarily mean that
they intended to preclude a consideration of inflation for all other purposes.  A more likelyexplanation is that the drafters did not consider the issue in other contexts.
96. The United States raises a concern that the application of an all-purpose, undefined inflation
adjustment for purposes of assessing a Member’s compliance with its commitments would add a
considerable element of uncertainty to the rights and obligations of Members, because a Member’scompliance or non-compliance could depend entirely upon the particular deflator chosen by a disputesettlement panel.  As a result, the proper interpretation of Article 27.4 is that the level of exportsubsidies should be assessed in nominal, rather than constant, terms.
(d) Recommendation of the Panel
97. The United States disagrees with Brazil that the requirement in Article 4.12 that the time
periods in the DSU be halved applies in the context of withdrawal of subsidies.  Under Brazil's
argument, the time period for withdrawal of the subsidy should be seven and one-half months, or onehalf the 15 months provided in Article 21.3(c).  The United States agrees with the Panel's rejection ofWT/DS46/AB/R
Page 26
the Brazilian argument, for two reasons.  First, Article 4.12 applies "except for time-periods
specifically prescribed in [Article 4]".  However, a time period for implementation  is specifically
prescribed in Article 4.7, namely, the time-period to be specified by the panel.  Second, under theDSU, there is no set time period for implementation that can be halved under Article 4.12.  The 15
months referred to in Article 21.3(c) is "only a guideline", and is only relevant if immediate
compliance is impracticable.
(e) Conditional Appeal:  "Maintaining" Subsidies Under Article 3.2 of
the  SCM Agreement
98. The United States agrees with Canada that if the Appellate Body finds that the letter of
commitment is the point at which the subsidy occurs , it should also find that the issuance of PROEX
bonds pursuant to existing letters of commitment is inconsistent with the prohibition in Article 3.2that Members shall not "maintain" export subsidie s.  The United States then offers the following
additional observations.
99. The United States disagrees with what it consid ers Brazil’s "implicit" position that a subsidy
comes into, and goes out of, existence simultaneously at the moment of its granting.  It is well-accepted that the timing and duration of a subsidy are two different things, and that a subsidy can have
a duration that extends over a period of years.  When a subsidy is properly allocated over a period of
several years, the withdrawal of that portion of the subsidy allocated to future time periods would not
constitute a retroactive remedy.  Rather, it would constitute prospective implementation based on arecognition of the distinction between the measure conferring a subsidy and the subsidy itself.
100. The United States rejects the argument of Brazil that issuance of new bonds under existing
letters of commitment cannot be stopped because it would be disruptive to private parties.  Virtuallyall WTO dispute settlement rulings will cause disruption to private parties.  The United States refersto the Award of the Arbitrator in  Indonesia – Certain Measures Affecting the Automobile Industry
("Indonesia – Automobiles "),
32 which notes that some degree of adjustment by the domestic industry
occurs in response to every ruling.
101. The United States further notes that the European Communities, which supported Brazil’s
argument on this point at the Panel stage, took a "contradictory" position in the panel report inIndonesia – Automobiles .
33  In that case, the European Communities argued that the "withdrawal" of a
subsidy could entail the recovery by the subsidizing government of previously bestowed subsidies.
                                                     
32Award of the Arbitrator, WT/DS54/15, WT/DS 55/14, WT/DS59/13, WT/D S64/12, 7 December 1998,
para. 23.
33Adopted 23 July 1998, WT/DS54/R, WT/DS55/R, WT/DS59/R, WT/DS64/R, paras. 5.276-5.278.WT/DS46/AB/R
Page 27
102. The United States contends that Canada’s argu ment that Brazil must not pay out additional
prohibited subsidies in the form of PROEX bonds is correct, and is consistent with theSCM Agreement   and the DSU.  Otherwise, dispute settlement would be largely useless as a tool for
addressing distortive subsidies.  Regardless of whether the letter of commitment or the issuance of a
bond constitutes the PROEX subsidy, the appropriate outcome is that Brazil must refrain from issuing
new bonds and withdraw the subsidy.
III. Preliminary Procedural Matter and Ruling
A. Procedures Governing Business Confidential Information
103. By joint letter of 27 May 1999, Brazil and Canada requested that we apply,  mutatis mutandis ,
the Procedures Governing Business Confidential Information adopted by the Panel in this case
(the "BCI Procedures").  In their request, they also  asked that certain of the BCI Procedures be applied
to the third participants in this appeal;  in partic ular, that the third participants designate authorized
representatives who would be required to file declarations of non-disclosure with the PresidingMember of this Division before being allowed to view any information designated as "businessconfidential" or to attend portions of the oral hearing when such information may be discussed.
104. By letter of 31 May 1999, we invited the participants to file legal memoranda in support of
their request, and offered each an opportunity to respond to the legal memorandum submitted by theother.  The third participants were also given an opportunity to file legal memoranda.  Brazil and
Canada submitted legal memoranda on 2 June 1999.  On 4 June 1999, the third participants, the
European Communities and the United States, also filed legal memoranda.  On the same date, Braziland Canada each filed a written response to the memorandum previously submitted by the otheron 2 June 1999.  A preliminary hearing on this issue was held on 10 June 1999, with this Divisionsitting jointly with the Division of the Appellate Body hearing the appeal in  Canada – Aircraft .
34
1. Arguments of Participants and Third Participants
(a) Canada
105. Canada considers that Article 18.2 of the DSU does not provide adequate procedural
protection for confidential proprietary business information of the type that is before the Appellate
Body in this case.  This information is not in the public domain and would be of significant
commercial interest, particularly to competitors of the enterprises that it concerns.
                                                     
34Supra , footnote 16.WT/DS46/AB/R
Page 28
106. Canada observes that, in the absence of procedures to protect business confidential
information at the appellate review stage, Brazil ma de references in its other appellant's submission
and in its appellee's submission to business confidential information that Canada had submitted to thePanel under the BCI Procedures.  The information submitted by Brazil was not, therefore, subject to
any procedures to protect its confidentiality.  Canada also argues that the Appellate Body should
adopt procedures to ensure that the questions it poses at the oral hearing can be given a completeresponse, where necessary by reference to business confidential information included in the panelrecord.
107. In adopting procedures for protecting business confidential information, Canada submits that
the Appellate Body must balance two competing in terests, both rooted in fairness and due process,
and neither having a claim to better protection than the other.  First, both the Appellate Body and theparticipants must be given reasonable access to th e information that was introduced into evidence
before the Panel.  Second, however, additional procedural safeguards are necessary to provide private
business interests with adequate protection for their proprietary business information when Canada or
Brazil deems it necessary to refer to such evidence in support of its case.  Canada, therefore, requeststhat, pursuant to Rule 16(1) of the Working Procedures , the Appellate Body adopt, mutatis mutandis ,
the Panel's BCI procedures and the "Declaration of N on-Disclosure" set out in Annexes I and II of the
Panel Report.
(b) Brazil
108. Brazil states that it agreed to join in Canada's request that the Appellate Body adopt
procedures for protecting business confidential information as a good faith attempt to accommodate
Canada's concerns on confidentiality.  Brazil notes two qualifications to its acceptance in principle of
the BCI Procedures by the Appellate Body.  First, the procedures should not unduly restrict the accessof authorized persons to the information.  Second, the procedures must be limited to businessproprietary information of private parties who are not  subject to the confidentiality obligations of the
DSU.
109. Brazil recalls that in its submissions to the Appellate Body, it cited certain information that
Canada had designated before the Panel as business confidential information.  Brazil does notconsider that this particular information is, in any sense, business confidential information entitled tospecial protection.
110. Brazil emphasizes that, in including certain information Canada had designated as "business
confidential" before the Panel, in its submissions to the Appellate Body, and in serving thosesubmissions on Canada and on the third participants in this appeal, it did not act inconsistently withWT/DS46/AB/R
Page 29
either the letter or the spirit of the DSU.  Brazil notes that Rule 18(2) of the Working Procedures
required it to serve its written submissions on Canada as well as the third participants, and Brazilstates that it "has no reason to doubt" that the thir d participants will comply with their obligations
under Article VII:1 of the  Rules of Conduct for the Understanding on Rules and Procedures
Governing the Settlement of Disputes  (the " Rules of Conduct ").  Brazil maintains as well that the
confidentiality provisions of Article 18.2 of the DSU also apply to the third participants.
(c) European Communities
111. The European Communities considers that the BCI Procedures are based on the
administrative protective order system used in countervailing duty procedures before theadministrative authorities of certain Members of the WTO.  This system cannot simply betransplanted into the WTO.
112. The European Communities contends that the proposed procedures for protecting business
confidential information are inconsistent with the DSU in two ways.  First, the proposed procedures
deprive Members of rights contained in the DSU.  They are inconsistent with Article 18.1 of the DSU,
which forbids ex parte  communications with a panel or the Appellate Body.  In the case of the
Appellate Body, the prohibition against ex parte  communications also extends to third participants
under Rule 19(1) of the Working Procedures .  Such procedures would deny a party to a dispute access
to business confidential information if that party could not accept the procedures for protectingbusiness confidential information developed by the panel or the Appellate Body Division.  Theproposed procedures for protecting business confidential information are also inconsistent withRule 18(2) of the Working Procedures , which requires "every document" filed by a participant or a
third participant to be served on the other participants and third participants.
113. Second, the proposed procedures would impose new obligations on Members and create new
rights for Members, contrary to Article 3.2 of the DSU.  Such additional procedures would restrictaccess to certain documents to defined places, thereb y restricting a party's ability to consider them.
They would require the receiving party to permit the providing party to inspect the safe in its Mission
where the information is to be stored.  The European Communities argues that this is "tantamount to awaiver of the immunity enjoyed by those premises under international law".  In addition, theprocedures would require officials of the European Communities to sign undertakings incompatiblewith the "conduct of their duties".
114. The European Communities submits that Articles 14 and 18.2 of the DSU regulate the
question of confidentiality in dispute settlement proceedings.  If information is designated asconfidential by a party to a dispute, Article 18.2 requires the other parties to take all necessaryWT/DS46/AB/R
Page 30
precautions according to their own administrative traditions and structures.  The "bad faith" of other
Members cannot be presumed.  The proper place to resolve problems posed by the treatment ofconfidential information is in the current review of the DSU by WTO Members.
(d) United States
115. The United States argues that the need for additional procedures for protecting business
confidential information is extremely important , "because it goes to the viability of WTO dispute
settlement as a vehicle for preserving the rights and obligations of Members".  In the view of theUnited States, "basic considerations of due process, as well as the need to preserve rights andobligations of Members, require the Appellate Body  to apply such procedures".  As a consequence,
the United States has no objection to the joint request made by Brazil and Canada.
116. The United States makes three general arguments in support of the use of additional
procedures for protecting business confidential information in WTO dispute settlement proceedings.First, the United States argues that nothing in the DSU precludes panels or the Appellate Body from
adopting additional procedures for protecting business confidential information.  On the contrary,
Article 12.1 of the DSU explicitly allows panels to deviate from the working procedures set out inAppendix 3 of the DSU.  The United States believes that the Appellate Body has authoritycomparable to that of panels to adopt such pro cedures as a result of Article 17.9 of the DSU and
Article 16(1) of the Working Procedures .
117. Second, the United States argues that the application of procedures for protecting business
confidential information promotes important objectives because Members' rights and obligationsunder the covered agreements can only be preserved if due process is accorded to both the
complaining party and the responding party.  The United States maintains that the demands of due
process are not satisfied, however, if the absence of such procedures precludes a Member fromproperly making its case.
118. Third, the United States maintains, contrary to the position taken by the European
Communities, that a Member's national laws do not provide a basis for depriving another Member ofits rights under the  WTO Agreement .  Thus, the United States asserts, the claim by the European
Communities that its officials would be unable, under their staff regulations, to accept theundertakings proposed "should not be allowed".WT/DS46/AB/R
Page 31
2. Ruling and Reasons
119. In our preliminary ruling of 11 June 1999, we concluded that it is not necessary, under all the
circumstances of this case, to adopt  additional  procedures to protect business confidential
information in these appellate proceedings.  Our ruling was as follows:
Pursuant to Article 17.9 of the Understanding on Rules and
Procedures Governing the Settlement of Disputes  (the "DSU"), the
Appellate Body has the authorit y to draw up its own Working
Procedures.  Under Rule 16.1 of our Working Procedures for
Appellate Review , a Division of the Appellate Body may adopt
additional procedures for the orderly conduct of a particular appeal,provided that any such additional procedures are not inconsistent with
the DSU, the other covered agreements and the Working Procedures
for Appellate Review .  We have concluded, however, that it is not
necessary, under all the circumstances of this case, to adopt
additional  procedures to protect "business confidential information"
during these appellate proceedings.
We note that, with respect to "business confidential
information" submitted to the Pane l that remains currently in the
possession of the participants, Article XII of the Panel ProceduresGoverning Business Confidential Information required the parties,
"[a]t the conclusion of the Panel", to "return any printed or binary-
encoded Business Confidential information in their possession to the
party that submitted such Business Confidential (sic)" and to "destroy
all tapes and transcripts of the Panel hearings that contain BusinessConfidential information, unless the parties mutually agree
otherwise."  It thus appears that each participant has an obligation,
under the Panel Procedures, to return any Business Confidential
information submitted by the other participant.  The WTO Secretariat,
assisting the Panel, was required, by the Panel Procedures, to
"transmit any printed or binary-encoded Business Confidential
information, plus all tapes and transcripts of the panel hearings thatcontain Business Confidential Information, to the Appellate Body as
part of the record of the Panel proceedings."  That information will be
kept in a secure, locked cabinet in the Appellate Body Secretariat.
We also note that  all  Members are obliged, by the provisions
of the DSU, to treat these proceedings of the Appellate Body,
including written submissions and other documents filed by the
participants and the third participants, as confidential.  We are
confident that the participants and the third participants in this appeal
will  fully respect  their obligations under the DSU, recognizing that a
Member's obligation to maintain the confidentiality of these
proceedings extends also to the individuals whom that Member selects
to act as its representatives, counsel and consultants.
Accordingly, we decline the request of Brazil and Canada.
The reasons for this ruling will be set out more fully in the Appellate
Body Report in this appeal.WT/DS46/AB/R
Page 32
120. We have no further reasons to add to the first two paragraphs of our ruling above.  The
following is an elaboration of the reasons in the th ird paragraph of our ruling.  Our ruling applies only
to the request for  additional   procedures to protect "business confidential information" in these
appellate proceedings, and it, therefore, has no effect on the BCI Procedures adopted by the Panel.
Neither the Panel's decision to adopt BCI Procedures, nor the content of those Procedures, has been
appealed.
121. With respect to appellate proceedings, in particular, the provisions of the DSU impose an
obligation of confidentiality which applies to WTO Members generally as well as to Appellate BodyMembers and staff.  In this respect, Article 17.10 of the DSU states, without qualification, that "[t]heproceedings  of the Appellate Body  shall be confidential ." (emphasis added)  The word "proceeding"
has been defined as follows:
In a general sense, the form and manner of conducting juridical
business before a court or judicial officer.  Regular and orderlyprogress in form of law,  including all possible steps in an action from
its commencement to the execution of judgment .
35  (emphasis added)
More broadly, the word "proceedings" has been defined as "the business transacted by a court".36  In
its ordinary meaning, we take "proceedings" to include, in an appellate proceeding, any writtensubmissions, legal memoranda, written responses to questions, and oral statements by the participantsand the third participants;  the conduct of the oral hearing before the Appellate Body, including anytranscripts or tapes of that hearing;  and the delib erations, the exchange of views and internal workings
of the Appellate Body.
122. Article 18.2 of the DSU also contains rules protecting the confidentiality of written
submissions and information submitted to the Appellate Body:
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 fromdisclosing 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.  (emphasis
added)
                                                     
35Black's Law Dictionary , (West Publishing Co., 1990), p. 1204.
36The New Shorter Oxford English Dictionary , (Clarendon Press, 1993), Vol. II, at 2364.WT/DS46/AB/R
Page 33
123. In our view, the provisions of Articles 17.10 and 18.2 apply to all Members of the WTO, and
oblige them to maintain the confidentiality of any submissions or information submitted, or received,in an Appellate Body proceeding.  Moreover, those provisions oblige Members to ensure that suchconfidentiality is fully respected by any person that a Member selects to act as its representative,
counsel or consultant.  In this respect, we note, with approval, the following statement made by the
panel in  Indonesia – Automobiles :
We would like to emphasize that  all members of parties' delegations
--  whether or not they are government employees -- are present as
representatives of their governments, and as such are subject to theprovisions of the DSU and of the standard working procedures,
including Articles 18.1 and 18.2 of the DSU and paragraphs 2 and 3
of those procedures .  In particular, parties are required to treat as
confidential all submissions to the Panel and all information so
designated by other Members;  and, in addition, the Panel meets inclosed session.  Accordingly,  we expect that all delegations will fully
respect those obligations and will treat these proceedings with the
utmost circumspection and discretion .
37  (emphasis added)
124. Finally, we wish to recall that Members of the Appellate Body and its staff are covered by
Article VII:1 of the  Rules of Conduct ,38 which provides:
Each covered person  shall at all times  maintain the confidentiality of
dispute settlement deliberations and proceedings together with any
information identified by a party as confidential .  (emphasis added)
125. For these reasons, we do not consider that it is necessary, under all the circumstances of this
case, to adopt  additional  procedures for the protection of business confidential information in these
appellate proceedings.  We, therefore, decline the request of Brazil and Canada.
IV. Issues Raised In This Appeal
126. The following issues are raised in this appeal:
(a) whether the Panel erred in finding that ce rtain regulatory instruments specified in the
request for the establishment of a panel, but not discussed in the consultations, were
properly before the Panel;
                                                     
37Supra , footnote 33.
38The Rules of Conduct  have been directly incorporated into the Working Procedures  (see Rule 8 of
those Working Procedures ).WT/DS46/AB/R
Page 34
(b) whether the Panel erred in finding that in a dispute involving a claim of violation of
Article 3.1(a) of the SCM Agreement  by a developing country Member, the
complaining party has the burden of proving that the developing country Member inquestion has not acted in conformity with the provisions of Article 27.4 of that
Agreement;
(c) whether the Panel erred in interpreting and applying the phrase "shall not increase the
level of its export subsidies" under Article 27.4 of the  SCM Agreement , in particular,
in finding that:
i) the "proper point of reference" for the purpose of determining whether a
Member has increased the level of its export subsidies is actual expenditures,rather than budgeted amounts;
ii) the export subsidies for regional aircraft under PROEX should be considered
to be "granted" when the NTN-I bonds are issued, rather than when the letter
of commitment is issued;  and
iii) it is appropriate in this case to use constant dollars, rather than nominal
dollars, in assessing whether Brazil has increased the level of its exportsubsidies;
(d) whether the Panel erred in finding that Brazil had failed to demonstrate that the
export subsidies for regional aircraft under PROEX are not "used to secure a materialadvantage in the field of export credit terms" under item (k) of the Illustrative List;
(e) whether the Panel erred in recommending that Brazil withdraw its subsidies within 90
days;  and
(f) if we find that the export subsidies for regional aircraft under PROEX are "granted" at
the time of issuance of a letter of commitment, whether the subsequent issuance ofNTN-I bonds is consistent with Brazil's obligation not to "maintain" prohibited exportsubsidies under Article 3.2 of the  SCM Agreement .WT/DS46/AB/R
Page 35
V. Consultations
127. Brazil argues on appeal that certain regulatory instruments relating to PROEX were not
properly before the Panel because those instruments came into effect in 1997 and 1998 – afterconsultations were held between Canada and Brazil.
39  Canada maintains that these instruments were
properly before the Panel because Canada's request for consultations40, dated 18 June 1996, and its
request for the establishment of a panel41, dated 10 July 1998, referred to the same "matter", that is, to
"PROEX and prohibited subsidies granted thereunder."  42  Furthermore, according to Canada, "the
programme has remained unchanged  in its essence ." 43
128. On this preliminary objection by Brazil, the Panel made the following ruling:
Applying this analysis to the case at hand, we recall that Brazil and
Canada consulted "regarding certain export subsidies granted under
the Brazilian Programa de Financiamento ás Exportações  (PROEX)
to foreign purchasers of Brazil's EMBRAER aircraft", and that the
request for establishment of a panel relates to "export subsidies underPROEX".  We consider that the consultations and request for
establishment relate to what is fundamentally the same "dispute",
because they involve essentially the same practice, i.e., the payment
of export subsidies under PROEX.  Under these circumstances, and
notwithstanding the fact that both the authorizing legal instrument and
certain other legal instruments relating to the administration of the
PROEX interest equalization regime changed or were only introducedsubsequent to the last consultations, we cannot say that Canada has
failed to comply with the requirements of Article 4.7 of the DSU.
44
129. In its request for consultations of 18 June 1996, Canada described the specific measures at
issue as "certain export subsidies granted under the Brazilian Programa de Financiamento às
Exportações  (PROEX) to foreign purchasers of Brazil's Embraer aircraft".45  In its request for the
establishment of a panel, Canada identified the specific measures at issue as follows:
On 18 June 1996, the Government of  Canada requested consultations
with the Government of Brazil concerning certain export subsidiesgranted under the Programa de Financiamento às Exportações
(PROEX) to foreign purchasers of Brazil's Embraer aircraft.
                                                     
39Brazil's appellant's submission, paras. 4-18.
40WT/DS46/1, G/SCM/D3/1, 21 June 1996.
41WT/DS46/5, 13 July 1998.
42Canada's appellee's submission, para. 30.
43Ibid.
44Panel Report, para. 7.11.
45WT/DS46/1, G/SCM/D3/1, 21 June 1996.WT/DS46/AB/R
Page 36
…
The Brazilian measures in question  include  Provisional Measure 1700-
15 replacing Provisional Measur e 1629-13 and Law 8187 establishing
PROEX;  Law no. 8249/91;  Decree no. 2414 of December 8, 1997;
Resolutions of the National Monetary Council nos. 2490/98, 2452/97;
2381/97, 2380/97, 2224/95;  Circ ular DIRIN 5;  Resolution No. 50 of
the Federal Senate of June 13, 1993;  MICT Orde rs 28/98, 23/98, 7/98,
121/97, 83/97, 53/97, 34/97, 33/ 97 and MF/MICT Order 314/95;  and
Central Bank Circular no. 2601.  These measures provide for the
payment of export subsidies through interest rate equalization and
export financing programmes under PROEX .46 (emphasis added)
130. We note that Brazil and Canada consulted about "certain export subsidies granted under the
Brazilian Programa de Financiamento às Exportações  (PROEX) to foreign purchasers of Brazil's
Embraer aircraft"47, and that the request for the establishment of a panel also relates to "the payment
of export subsidies through interest rate equalization and export financing programmes underPROEX."
 48  We have been advised by Brazil that the re gulatory instruments that came into effect in
1997 and 1998, after the consultations had taken place, and that relate to the administration ofPROEX, did not change the essence of that regime.
49
131. In our view, Articles 4 and 6 of the DSU, as well as paragraphs 1 to 4 of Article 4 of the
SCM Agreement , set forth a process by which a complaining party must request consultations, and
consultations must be held, before a matter may be referred to the DSB for the establishment of apanel.  Under Article 4.3 of the  SCM Agreement , moreover, the purpose of consultations is "to clarify
the facts of the situation and to arrive at a mutually agreed solution."
132. We do not believe, however, that Articles 4 and 6 of the DSU, or paragraphs 1 to 4 of
Article 4 of the  SCM Agreement , require a  precise and exact identity   between the specific measures
that were the subject of consultations and the specific measures identified in the request for theestablishment of a panel.  As stated by the Panel, "[o]ne purpose of consultations, as set forth inArticle 4.3 of the SCM Agreement, is to 'clarify the facts of the situation', and it can be expected that
information obtained during the course of consul tations may enable the complainant to focus the
                                                     
46WT/DS46/5, 13 July 1998.
47WT/DS46/1, G/SCM/D3/1, 21 June 1996.
48WT/DS46/5, 13 July 1998.
49Answer by Brazil to questions at the oral hearing, 17 June 1999.  These specific measures are listed in
paragraph 11, supra .WT/DS46/AB/R
Page 37
scope of the matter with respect to which it seeks establishment of a panel."  50  We are confident that
the specific measures at issue in this case are the Brazilian export subsidies for regional aircraft underPROEX.  Consultations were held by the parties on these subsidies, and it is these same subsidies thatwere referred to the DSB for the establishment of a panel.  We emphasize that the regulatory
instruments that came into effect in 1997 and 1998 did not change the essence of the export subsidies
for regional aircraft under PROEX.
133. For these reasons, we conclude that the export subsidies for regional aircraft under PROEX,
including the regulatory instruments that came in to effect after consultations were held between
Canada and Brazil, were properly before the Panel.
VI. Burden of Proof Under Article 27.4 of the  SCM Agreement
134. Canada appeals the Panel's finding that, in a case involving a claim of violation of
Article 3.1(a) against a developing country Member, the complaining party has the burden ofdemonstrating that the developing country Member in question has not complied with at least one ofthe elements of Article 27.4.
135. The Panel found as follows:
Where, as here, it is agreed that the Member in question is a
developing country Member within the meaning of Article 27.2(b), itis for the Member alleging a violation of Article 3.1(a) of the SCM
Agreement to demonstrate that the substantive obligation in that
provision -- the prohibition on export subsidies -- applies to the
developing country Member complained against.  That is, it is for the
complaining Member to demonstrate that the developing countryMember in question is not in compliance with at least one of the
elements laid out in Article 27.4.
51
136. Canada asserts that Article 27.4 is in the nature of a conditional exception or an affirmative
defence for a developing country Member, and that, therefore, the burden of proof rests with therespondent developing country Member – in this case, Brazil.
52  Brazil, on the other hand, maintains
that Article 27 is a transitional provision that contains a set of special and differential rights andobligations for developing country Members, and that, therefore, the complaining party – here,
                                                     
50Panel Report, para. 7.9.
51Ibid., para. 7.57.
52Canada's appellant's submission, paras. 15-21.WT/DS46/AB/R
Page 38
Canada – has the burden of proving that the developing country Member is not in compliance with
Article 27.4.53
137. In  United States – Measures Affecting Imports of Woven Wool Shirts and Blouses from India ,
we stated that "the burden of proof rests upon the party … who asserts the  affirmative of a particular
claim or defence ." 54 (emphasis added)  There, we also noted that "Articles XX and XI:(2)(c)(i) are
limited exceptions from obligations under certain  other provisions of the GATT 1994, not positive
rules establishing obligations in themselves.  Th ey are in the nature of affirmative defences."  55  We
have also stated previously that the simple characterization of a provision of an agreement as an"exception" to a specific obligation does not, in itself, determine which party has the burden of proof.In  EC Measures Concerning Meat and Meat Products  (Hormones ), we stated:
The general rule in a dispute settlement proceeding requiring a
complaining party to establish a prima facie  case of inconsistency
with a provision of the SPS Agreement  before the burden of showing
consistency with that provision is taken on by the defending party, is
not avoided by simply describing that same provision as an
"exception".
56
138. Article 3.1(a) of the  SCM Agreement , states, in relevant part:
3.1 … the following subsidies, within the meaning of Article 1,
shall be prohibited:
(a) subsidies contingent, in law or in fact, whether solely or
as one of several other conditions, upon export
performance, including those illustrated in Annex I;
…
Article 27.2(b) of the  SCM Agreement  provides as follows:
27.2 The prohibition of paragraph 1(a) of Article 3 shall not apply  to:
…
(b) other developing country Members for a period of
eight years from the date of entry into force of the WTO
Agreement, subject to compliance with the provisions
in paragraph 4 .
(emphasis added)
                                                     
53Brazil's appellee's submission, paras. 2-12.
54Adopted 23 May 1997, WT/DS33/AB/R, p. 14.
55Ibid., p. 16.
56Adopted 13 February 1998, WT/DS26/AB/R, WT/DS48/AB/R, para. 104.WT/DS46/AB/R
Page 39
Article 27.4 of the  SCM Agreement   reads, in relevant part:
27.4 Any developing country Member referred to in paragraph 2(b)
shall phase out its export subsidies within the eight-year period,preferably in a progressive manner.  However, a developing country
Member shall not increase the level of its export subsidies
55, and shall
eliminate them within a period shor ter than that provided for in this
paragraph when the use of such export subsidies is inconsistent  with
its development needs.
_________________________________________________________
55For a developing country Member not granting export subsidies as of the date of
entry into force of the WTO Agreement, this  paragraph shall apply on the basis of the
level of export subsidies granted in 1986.
139. The ordinary meaning of the text of Article 27.2(b) is clear.  For a period of eight years after
the date of entry into force of the  WTO Agreement , the prohibition on export subsidies in
paragraph 1(a) of Article 3 of the  SCM Agreement   does not apply  to developing country Members
described in Article 27.2(b) – as long as they comply with the provisions of Article 27.4.  Withrespect to the  application  of the prohibition of export subsidies in Article 3.1(a) of the
SCM Agreement , paragraphs 2 and 4 of Article 27 contain a carefully negotiated balance of rights and
obligations for developing country Members.  During the transitional period from 1 January 1995to 1 January 2003, certain developing country Members are  entitled  to the  non-application  of
Article 3.1(a), provided  that they comply with the specific obligations set forth in Article 27.4.  Put
another way, when a developing country Member complies with the conditions in Article 27.4, aclaim of violation of Article 3.1(a) cannot be en tertained during the transitional period, because the
export subsidy prohibition in Article 3 simply  does not apply  to that developing country Member.
140. The title of Article 27 is "Special and Differential Treatment of Developing Country
Members".  Paragraph 1 of that Article provides that "Members recognize that subsidies may play animportant role in economic development programmes of developing country Members."  Both fromits title and from its terms, it is clear that Article 27 is intended to provide special and differentialtreatment for developing country Members, under certain specified conditions.  In our view, too,paragraph 4 of Article 27 provides certain obligations that developing country Members must fulfill ifthey are to benefit from this special and differential treatment during the transitional period.  Onreading paragraphs 2(b) and 4 of Article 27 together, it is clear that the conditions set forth in
paragraph 4 are  positive obligations  for developing country Members, not affirmative defences.  If a
developing country Member complies with the obligations in Article 27.4, the prohibition on exportsubsidies in Article 3.1(a) simply does not apply.  However, if that developing country Member doesnot comply with those obligations, Article 3.1(a)  does apply.WT/DS46/AB/R
Page 40
141. For these reasons, we agree with the Panel that the burden is on the complaining party
(in casu  Canada) to demonstrate that the developing country Member ( in casu  Brazil) is not in
compliance with at least one of the elements set forth in Article 27.4.  If such non-compliance isdemonstrated, then, and only then, does the prohibition of Article 3.1(a)  apply  to that developing
country Member.
VII. Has Brazil Increased the Level of its Export Subsidies?
142. Our ruling on the issue of the burden of proof under Article 27.4 has implications not only for
determining which party has the burden of proof in demonstrating whether the conditions ofArticle 27.4 are met, but also for determining whether or not Article 3.1(a)  applies to the developing
country Member in question.  In this case, the Panel, having determined correctly that the
complaining party had the burden of proof in demonstrating whether the developing country Memberhad complied with Article 27.4, then failed to appl y the logic of its own reasoning in examining
Canada's claim that Brazil had acted inconsistently with its obligations under Article 3.1(a).
143. The Panel commenced its legal reasoning by considering whether the interest rate
equalization payments for regional aircraft under PROEX constitute "subsidies" within the meaningof Article 1 of the  SCM Agreement  which are "contingent … upon export performance" within the
meaning of Article 3.1(a) of that Agreement.
57  As Brazil had not disputed these two issues, the Panel
concluded that the payments under PROEX relating to exports of Brazilian regional aircraft are
subsidies contingent upon export performance.58  The Panel then went on to examine an "affirmative
defence" put forward by Brazil, that is, whether PROEX support for the regional aircraft industry,
even if it did constitute an "export subsidy", was nevertheless "permitted" by item (k) of theIllustrative List.
59  Given the Panel's correct analysis of the relationship between Articles 27
and 3.1(a) in its reasoning on the burden of proof  60, we find it odd that the Panel then went on to
examine, in the following order:  first, whether the conditions of Article 3.1(a) of the  SCM Agreement
had been met;  next, a contention by Brazil of an "affirmative defence" to a claim of violation ofArticle 3.1(a), based on item (k) of the Illustrative List;  and, only then, whether Brazil had compliedwith the conditions of Article 27.4 so as to determine whether the prohibition of export subsidies in
Article 3.1(a) even  applied   to Brazil in this case.  The Panel should not have considered Brazil's
                                                     
57Panel Report, paras. 7.12-7.13.
58Ibid., para. 7.14.
59Ibid., paras. 7.15-7.37.
60Ibid., paras. 7.49 and 7.56-7.57.WT/DS46/AB/R
Page 41
"affirmative defence" based on item (k) of the Illustrative List  before   determining whether
Article 3.1(a) even applied to Brazil.
144. Our interpretation of the relationship between Article 27 and Article 3.1(a) of the
SCM Agreement   leads us, in this appeal, to examine, fi rst, the issues appealed relating to whether
Brazil has increased the level of its export subsidies contrary to the provisions of Article 27.4.  Only if
we determine that Brazil has not complied with the conditions of Article 27.4, and thereby find thatthe provisions of Article 3.1(a) do in fact  apply  to Brazil, will we need to examine Brazil's appeal of
the Panel's findings relating to its alleged "affirmative defence" under item (k) of the Illustrative List.
145. The Panel made a number of findings in its analysis of whether Brazil has increased "the level
of its export subsidies" under Article 27.4 of the  SCM Agreement .  Brazil appeals two of these
findings, and Canada appeals one.  Brazil appeals the Panel's finding that actual expenditures, ratherthan budgeted amounts, is the "proper point of reference" for determining whether Brazil has
increased the level of its export subsidies.
 61  Brazil also appeals the Panel's finding that PROEX
subsidies for regional aircraft are "granted" when the NTN-I bonds are issued, not when the letter of
commitment is issued.  Canada appeals the Panel's conclusion that it is appropriate, in this case, to useconstant dollars, rather than nominal dollars, in assessing whether Brazil has increased the level of itsexport subsidies.
A. Actual Expenditures or Budgeted Amounts
146. Brazil argues that the Panel erred in using actual expenditures, rather than budgetary
appropriations, in determining whether Brazil had increased the level of its export subsidies.
62
Canada argues that the Panel was correct in examining actual expenditures, rather than budgetary
appropriations.63
147. The Panel found that "the level of a Member's export subsidies in its ordinary meaning refers
to the level of subsidies  actually provided , not the level of subsidies which a Member planned or
authorized its government to provide through its budgetary process."  64 (emphasis added)  The Panel
said this view was confirmed by footnote 55 to the  SCM Agreement , which provides that, "[f]or a
developing country Member not   granting  export subsidies as of the date of entry into force of the
WTO Agreement , this paragraph shall apply on the basis of the level of export subsidies  granted
                                                     
61Panel Report, para. 7.65.
62Brazil's appellant's submission, paras. 19-25.
63Canada's appellee's submission, paras. 48-62.
64Panel Report, para. 7.65.WT/DS46/AB/R
Page 42
in 1986." (emphasis added)  The Panel noted that "[t]he verb 'grant' has been defined to mean,
inter alia , 'to bestow by a formal act' and 'give, bestow, confer'."  65
148. We agree with the Panel's reasoning on this issue.  To us, the word "granted" used in this
context means "something actually provided".  Thus, to determine the amount of export subsidies
"granted" in a particular year, we believe that the actual amounts  provided  by a government, and not
just those  authorized  or  appropriated  in its budget for that year, is the proper measure.  A
government does not always spend the entire amount appropriated in its annual budget for adesignated purpose.  Therefore, in this case, to determine the level of export subsidies for the purposesof Article 27.4, we believe that the proper reference is to actual expenditures by a government, andnot to budgetary appropriations.
149. In coming to this conclusion, we are not persuaded by Brazil's argument relating to the
notification provisions of Article 25 of the  SCM Agreement .  We note that Article 25 has a
fundamentally different purpose from Article 27 of the  SCM Agreement .  Whereas Article 25 aims to
promote transparency by requiring Members to notify their subsidies, without prejudging the legal
status of those subsidies
66, Article 27 imposes positive obligations on developing country Members
with respect to export subsidies.   In interpreting the phrase "the level of its export subsidies" in
Article 27.4, we believe the most appropriate context is footnote 55, which is, it will be recalled, afootnote  to that very phrase in Article 27.4.  Because of its different purpose, Article 25 is
considerably less useful as context in interpreting the phrase "the level of its export subsidies" inArticle 27.4.  Moreover, the provisions of Article 25 do not contradict the conclusion we draw fromfootnote 55.  In particular, in paragraph 3 of Article 25, Members are required to ensure that their
notifications contain, inter alia , the following information:
…
(ii) subsidy per unit  or,  in cases where this is not possible , the
total amount  or the  annual amount budgeted  for that subsidy …
(emphasis added)
We note that the  preferred  notification method is on the basis of subsidy per unit.  It is only in cases
where it is not possible to provide information on that basis that the total amount, or the annualamount budgeted for that subsidy, may be reported.  For transparency purposes, we can understand
why Members would want to know what subsidies other Members have planned or projected.  Yet
                                                     
65Panel Report, para. 7.65.
66Article 25.7 of the SCM Agreement  states 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 themeasure itself."WT/DS46/AB/R
Page 43
this consideration is different from the objective of determining whether a developing country
Member has increased "the level of its export subsidies" under Article 27.4.
150. Accordingly, we uphold the finding of the Panel that the "proper point of reference" in
determining whether a Member has increased the level of its export subsidies under Article 27.4 is
actual expenditures, rather than budgeted amounts or appropriations.67
B. When are PROEX Subsidies "Granted "?
151. One of the legal issues the Panel considered in determining whether Brazil had increased the
level of its export subsidies was "the question of when PROEX payments should be considered tohave been 'granted' for the purposes of calculatin g the level of Brazil's export subsidies in terms of
expenditures."
 68  In examining this issue, the Panel considered two questions:  what is the form  of
"financial contribution" made by PROEX, with in the meaning of Article 1.1(a)(1) of the
SCM Agreement ?  And, when  does the "subsidy" that is created, in part, by that "financial
contribution", "exist" within the meaning of Article 1.1?  Brazil argued, before the Panel, that the
form of financial contribution involved in this dispute is a "potential direct transfer of funds", within
the meaning of Article 1.1(a)(1)(i), which "exists" at the time a letter of commitment is issued.69
Canada argued, before the Panel, that PROEX subsidies for regional aircraft involve a "direct transferof funds", within the meaning of Article 1.1(a)(1)(i), which "exists" either when payments are madepursuant to an NTN-I bond or, in the alternative, when NTN-I bonds are issued to an agent bank.
70
152. In analyzing the form of "financial contribution" made by export subsidies for regional
aircraft under PROEX, the Panel said, inter alia :
We believe that a "potential direct transfer of funds" exists only where
the action in question gives rise to a benefit and thus confers a subsidy
irrespective of whether any payment occurs.71
…
                                                     
67Panel Report, para. 7.65.
68Ibid., para. 7.67.
69Ibid., paras. 4.20 and 7.67.
70Ibid., paras. 4.22 and 7.67.
71Ibid., para. 7.68.WT/DS46/AB/R
Page 44
… In this case, however, it clearly is not the alleged "potential direct
transfer of funds", i.e., the letter of commitment, that confers the
benefit.  Rather, the benefit in the PROEX interest rate equalization
scheme derives from the fact that a payment, i.e., a direct transfer of
funds, has been or will be made.72
153. The Panel then posed the question of when  Brazil can be considered to "grant" PROEX
payments.  The Panel gave the following answer:
As noted above, the verb "grant" has been defined to mean, inter alia ,
"to bestow by formal act" and "g ive, bestow, confer".  Arguably,
therefore PROEX payments may be "granted" where the
unconditional legal right of the beneficiary to receive the paymentshas arisen, even if the payments themselves have not yet occurred.  It
is clear to us, however, that PROEX payments have not yet been
"granted" at the time a letter of commitment is issued.  We note that
the issuance of a letter of commitment, even if legally binding on the
Government of Brazil in the event certain conditions are fulfilled,provides no assurance that PROEX payments will actually be made.
To the contrary, at the time the letter of commitment is issued no
export sales contract has been signed, and the letter of commitment
expires if a contract that conforms to the request for approval is not
negotiated and signed within 90 days. …  Rather, the right to receivethe PROEX payments only arises after the conditions relating to
receipt of PROEX payments, and specifically the condition that the
product in question actually be exported, has been fulfilled.
73
154. In our view, the Panel reached the correct conclusion.  However, it did so on the basis of
faulty reasoning.  The issue in this case is when the subsidies for regional aircraft under PROEX
should be considered to have been "granted"  for the purposes of calculating the level of Brazil's
export subsidies under Article 27.4 of the   SCM Agreement .  The issue is  not whether or when there is
a "financial contribution", or whether or when the "subsidy" "exists", within the meaning ofArticle 1.1 of that Agreement.
155. The Panel noted, early in its findings, that Brazil did not dispute the assertion by Canada that
PROEX support for the regional aircraft industry constitutes an export subsidy.
74  On this, the Panel
stated:
                                                     
72Panel Report, para. 7.70.
73Ibid., para. 7.71.
74Ibid., para. 7.12.WT/DS46/AB/R
Page 45
As noted above, the parties agree that PROEX payments are  subsidies
within the meaning of Article 1 of the SCM Agreement which are
contingent upon exportation within the meaning of Article 3.1(a) of
the Agreement, and we agree with them.75
156. Thus, the issue before the Panel under the heading "Has Brazil increased the level of its
export subsidies?"  76 was simply this:  given that the export subsidies in this case were already deemed
to "exist", when were they "granted"?  At issue was the interpretation and application of Article 27.4,not of Article 1.  It is pursuant to the provisions of Article 27.4 that Brazil is obliged not to increase
"the level of its export subsidies".  And, to ascertain the meaning of this phrase, it is necessary to look,again, at footnote 55, which is affixed to Article 27.4 and which speaks of "the level of exportsubsidies  granted " (emphasis added) by a developing country Member.  Consequently, for the
purposes of Article 27.4, we see the issue of the  existence   of a subsidy and the issue of the point at
which that subsidy is  granted  as two legally distinct issues.  Only one of those issues is raised here
and, therefore, must be addressed.  That issue is:  when is this subsidy, which admittedly exists,actually  granted ?
157. In our view, the Panel did not have to determine whether the export subsidies for regional
aircraft under PROEX constituted a "direct transfer of funds" or a "potential direct transfer of funds",within the meaning of Article 1.1(a)(i), in order to  determine when the subsidies are "granted" for the
purposes of Article 27.4.  Moreover, the Panel compounded its error in finding that the "financialcontribution" in the case of PROEX subsidies is  not  a "potential direct transfer of funds" by
reasoning that a letter of commitment does not confer a "benefit".
77  In this way, in its interpretation of
Article 1.1(a)(i), the Panel imported the notion of a "benefit" into the definition of a "financialcontribution".  This was a mistake.  We see the issues – and the respective definitions – of a "financialcontribution" and a "benefit" as two separate legal elements in Article 1.1 of the  SCM Agreement ,
which  together   determine whether a subsidy exists , and not whether it is  granted  for the purpose of
calculating the level of a developing country Member's export subsidies under Article 27.4 of thatAgreement.
158. In addressing the correct legal question under Ar ticle 27.4, our answer is that export subsidies
for regional aircraft under PROEX are "granted"  when the NTN-I bonds are issued.  We agree with
the Panel that "PROEX payments may be 'granted' where the unconditional legal right of the
beneficiary to receive the payments has arisen, even if the payments themselves have not yet
                                                     
75Panel Report, para. 7.13.
76Ibid., top of p. 95.
77Ibid., para. 7.70.WT/DS46/AB/R
Page 46
occurred."  78  We also agree with the Panel that the export subsidies for regional aircraft under
PROEX have not yet been "granted" when the letter of commitment is issued, because, at that point,the export sales contract has not yet been concluded and the export shipments have not yet occurred.
79
For the purposes of Article 27.4, we conclude that the export subsidies for regional aircraft under
PROEX are "granted" when all the legal conditions ha ve been fulfilled that entitle the beneficiary to
receive  the subsidies.  We share the Panel's view that such an unconditional legal right exists when the
NTN-I bonds are issued.80
159. For these reasons, we uphold the Panel's conclusion that the export subsidies for regional
aircraft under PROEX are "granted", for the purposes of Article 27.4 of the  SCM Agreement ,  when
the NTN-I bonds are issued, and not when the letter of commitment is issued.  However, we wish toemphasize the modifications we have made in the Panel's legal reasoning.  We wish to underscoreespecially that we find that it was not relevant, for the purpose of calculating the level of Brazil'sexport subsidies under Article 27.4, for the Panel to decide whether the "financial contribution" for
PROEX subsidies involved a "direct transfer of funds " or a "potential direct transfer of funds" under
Article 1.1 of the  SCM Agreement .
C. Constant or Nominal Dollars
160. On appeal, Canada argues that the Panel's statement that it was "appropriate in this case" to
use constant dollars, rather than nominal dollars, to assess whether Brazil had increased the level of itsexport subsidies is "unreasoned" and "does not respect the text, context and the object and purpose ofthe SCM Agreement."
 81  Canada maintains that there is no explicit provision for the conversion of the
level of export subsidies to a constant value eith er in Article 27.4 or in footnote 55 of the
SCM Agreement .  With respect to the context of the  SCM Agreement , Canada asserts that, where the
negotiators intended to provide adjustments for inflation, they did so, but that such indexation is notso provided in Article 27.
82  In reply, Brazil argues that the Panel was correct in its conclusion based
on the facts of this case.  Brazil contends that the use of a constant value is required if the special rules
for developing country Members in Article 27 are to be given genuine meaning.83
                                                     
78Panel Report, para. 7.71.
79Ibid.
80Ibid., para. 7.72.
81Canada's appellant's submission, para. 24.
82Ibid., paras. 28-30.
83Brazil's appellee's submission, paras. 17-18.WT/DS46/AB/R
Page 47
161. On this issue, the Panel said the following:
In our view, however, it is appropriate in this case  to use constant
dollars, as that will provide a more meaningful assessment as towhether Brazil has increased the level of its export subsidies.  We
note that, in this case, the conclusion with respect to this issue would
be the same whether constant or nominal dollars are used .
84
(emphasis added)
…
The Panel concluded:
Applying the foregoing criteria to these undisputed data , we conclude
that Brazil had by 1997 increased the level of its export subsidies
above that prevailing in 1994, whether the data are expressed in
nominal or in constant dollars .  The increase for 1998 was even more
substantial than that for 1997, reflecting as it does data for only the
first ten months of the year.85 (emphasis added)
162. We note that the Panel did   not  make a legal finding that the level of a developing country
Member's export subsidies must be measured, in every case, using a constant value.  The Panel simplymade a pragmatic observation that using constant dollars is appropriate in this case .  The Panel also
noted that, in this case, "the conclusion with respect to this issue  would be the same  whether constant
or nominal dollars are used."
 86 (emphasis added)  In examining the data before it relating to Brazilian
export subsidies under PROEX and BEFIEX, the Panel examined data denominated  both in current
US dollars and in 1994 constant US dollars.87  The conclusion of the Panel was "that Brazil had by
1997 increased the level of its export subsidies above that prevailing in 1994,  whether  the data are
expressed in nominal or in constant dollars ." 88 (emphasis added)
163. As the Panel relied on data denominated  both in current dollars and in constant dollars, we
see no reason to overturn this conclusion of the Panel.  Moreover, in our view, to take no account ofinflation in assessing the level of export subsidies granted by a developing country Member would
render the special and differential treatment provisions of Article 27 meaningless.  For these reasons,
we uphold the conclusion of the Panel in paragraph 7.75 of the Panel Report.
                                                     
84Panel Report, para. 7.73.
85Ibid., para. 7.75.
86Ibid., para. 7.73.
87Ibid., para. 7.75, Table 9.
88Ibid., para. 7.75.WT/DS46/AB/R
Page 48
164. And, for all these reasons, we uphold the overall conclusion of the Panel, in paragraph 7.76 of
the Panel Report, that "Brazil has 'increased the level of its export subsidies' within the meaning ofArticle 27.4 of the SCM Agreement."  And, thus, we find that Article 3.1(a) applies to Brazil in thiscase, because Brazil has not complied with the provisions of Article 27.4.
VIII.  Are PROEX Interest Rate Equalization Payments Used "To Secure a Material
Advantage in the Field of Export Credit Terms"?
165. Having determined that Brazil has not complied with the provisions of Article 27.4, we
conclude that the prohibition of Article 3.1(a) applies to Brazil in this case.  We must thereforeexamine Brazil's appeal of the finding of the Pa nel relating to Brazil's alleged "affirmative defence"
under item (k) of the Illustrative List.
166. Brazil appeals the Panel's conclusion that Brazil failed to demonstrate that PROEX payments
are not "used to secure a material advantage in the field of export credit terms", and the Panel'sconsequent rejection of Brazil's "affirmative defence" based on item (k) of the Illustrative List.
89
Brazil argues that the Panel erred in its interpretation of the phrase "used to secure a materialadvantage in the field of export credit terms", both with respect to the ordinary meaning of the word"secure"
 90 and by determining "advantage" with respect to "the terms that would have been available
in the absence of the payment".91  Also, Brazil contends that the Panel misconstrued the context of the
"material advantage" clause, in particular, in its  assessment of the origins of item (k) in the
Tokyo Round SCM Code .92
167. In Canada's view, the Panel did not err in its interpretation of the "material advantage" clause
in item (k), either with respect to its analysis of  the ordinary meaning or the context of that clause.  93
Thus, Canada argues that the Panel properly rejected Brazil's alleged "affirmative defence" based on
item (k).
                                                     
89Brazil's appellant's submission, paras. 47-52.  From  Brazil's responses to questioning during the oral
hearing, we understand Brazil's underlying argument to  be the following:  PROEX subsidies are not "used to
secure a material advantage" in the sense of item (k) because they are designed only to offset "Brazil risk" and
to "match" the subsidies given by the Government of Canada to Bombardier – the competitor of Embraer in the
regional aircraft industry.
90Brazil's appellant's submission, paras. 53-57.
91Ibid., paras. 58-60.
92Ibid., paras. 61-66.
93Canada's appellee's submission, paras. 144-158.WT/DS46/AB/R
Page 49
168. Item (k) of the Illustrative List provides as follows:
(k) 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 topay 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 anddenominated 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 partiesas 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 relevantundertaking, an export credit practice which is in conformity
with those provisions shall not be considered an export
subsidy prohibited by this Agreement.
(emphasis added)
169. Before the Panel, Brazil contended that, although PROEX payments are export subsidies, they
are nevertheless "permitted" by item (k) of the Illustrative List.
94  The Panel noted that to rule in
favour of Brazil on this issue, it would need to find for Brazil on all of the following three points:
first, that PROEX payments are "the payment by [governments] of all or part of the costs incurred by
exporters or financial institutions in obtaining credits";  second, that PROEX payments are not "usedto secure a material advantage in the field of e xport credit terms";  and, third, that a "payment" within
the meaning of item (k) which is not "used to secure  a material advantage in the field of export credit
terms" is "permitted" by the  SCM Agreement  even though it is a subsidy which is contingent upon
export performance within the meaning of Article 3.1(a) of that Agreement.  The Panel also noted thatBrazil had explicitly acknowledged that the "materia l advantage" clause in item (k) constitutes an
"affirmative defence", and, therefore, that the burden of establishing that "defence" was on Brazil.
95
                                                     
94Panel Report, para. 7.15.
95Ibid., para. 7.17.WT/DS46/AB/R
Page 50
170. The Panel concluded as follows:
In conclusion, we consider that an item (k) payment is "used to secure
a material advantage" where the payment has resulted in theavailability of export credit on terms which are more favourable than
the terms that would otherwise have been be [sic] available to the
purchaser with respect to the transaction in question.   Even if we
were to assume, as argued by Brazil, that PROEX payments are the
"payment by [a government] of all or part of the costs incurred byexporters or financial institutions in obtaining credits", and that such
payments can be deemed to be "permitted" by item (k) where they are
not "used to secure a material advantage in the field of export credit
terms" -- issues we need not here decide -- Brazil has failed to
demonstrate the PROEX payments are not "used to secure a materialadvantage in the field of export credit terms".  Accordingly, we reject
Brazil's affirmative defense based on item (k) of the Illustrative List.
96
171. In coming to this conclusion, the Panel first interpreted the phrase "used to secure a material
advantage in the field of export credit terms", and th en applied its interpretation to the facts relating to
export subsidies for regional aircraft under PROEX.  In its reasoning on this issue, the Panel made
four, not entirely consistent, statements of its interpretation.97
172. In examining the ordinary meaning of the phrase "used to secure a material advantage in the
field of export credit terms" in item (k), the Panel noted that the word "advantage" has been defined as"a more favorable or improved position" and as a "superior position".
98  The Panel also concurred
with Brazil that "advantage" involves the concept of  comparison.  The Panel went on to say, however,
that:
… nothing in the text of the first paragraph of item (k) indicates that
the examination of material advantage involves a comparison with the
export credit terms available with respect to competing products from
other Members .  To the contrary, we consider that, in its ordinary
meaning, a payment is "used to secure a material advantage in the
field of export credit terms" where the payment is used to secure
export credit terms that are materially more favorable than the terms
that would have been available in the absence of the payment.
Accordingly, we consider that an item (k) payment is "used to securea material advantage" where the payment has resulted in the
availability of export credit on terms which are more favourable than
the terms that would otherwise be available in the marketplace to the
purchaser with respect to the transaction in question.99
(italics in the original, underlining added)
                                                     
96Panel Report, para. 7.37.
97Ibid., paras. 7.23, 7.33 and 7.37.
98Ibid., para. 7.23.
99Ibid.WT/DS46/AB/R
Page 51
173. The Panel then considered the context of the "material advantage" clause generally in the
SCM Agreement , and stated that, "the general approach of the SCM Agreement to determining
whether a measure is a subsidy and thus subject to discipline is whether the measure confers a 'benefit'within the meaning of Article 1."
 100  The Panel also discussed its view of the object and purpose of
the SCM Agreement , which it stated "is to impose multilateral disciplines on subsidies which distort
international trade."  101  The Panel reasoned that Brazil's approach of allowing a Member to "match"
the export subsidies granted by another Member "would entail a race to the bottom, as eachWTO Member sought to justify the provision of export subsidies on the grounds that other Memberswere doing the same."
 102
174. Then, before examining the facts, the Panel again stated its interpretation of the "material
advantage" clause in item (k), this time, as follows:
For the reasons discussed above, we consider that an item (k) payment
is "used to secure a material advantage" and is thus a prohibitedexport subsidy where the payment has resulted in the availability of
export credit on terms which are  more favourable  than the terms that
would  otherwise be  available in the marketplace  to the purchaser with
respect to the transaction in question .
103 (emphasis added)
175. Finally, in its concluding paragraph, the Panel repeated its interpretation of the "material
advantage" clause of item (k) as follows:
In conclusion, we consider that an item (k) payment is "used to secure
a material advantage" where the payment has resulted in the
availability of export credit on terms which are  more favourable  than
the terms that would otherwise have been be [sic] available to the
purchaser  with respect to the transaction in question .104 (emphasis
added)
176. We note that, in its very first statement of its interpretation of the "material advantage" clause,
the Panel characterized "material advantage" as " materially  more favorable than the terms that would
have been available  in the absence of the payment."  105 (emphasis added)  However, we observe also
that, in its subsequent statements, the Panel interpreted "material advantage" as simply "morefavourable than the terms that would otherwise be available in the marketplace to the purchaser with
                                                     
100Panel Report, para. 7.24.
101Ibid., para. 7.26.
102Ibid.
103Ibid., para. 7.33.
104Ibid., para. 7.37.
105Ibid., para. 7.23 (second to last sentence).WT/DS46/AB/R
Page 52
respect to the transaction in question."  106 (emphasis added)  In the latter interpretation, the Panel
omitted the word "material".
177. As always, we examine the terms of the provision at issue, in this case, the "material
advantage" clause of item (k).  We look first to the ordinary meaning of the language used.  We agree
with the Panel's statement that the ordinary meanin g of the word "advantage" is "a more favorable or
improved position" or a "superior position".  However, we note that item (k) does not refer simply to"advantage".  The word "advantage" is qualified by  the adjective "material".  As mentioned before, in
its ultimate interpretation of the phrase "used to secure a material advantage" which the Panel finallyadopted and applied to the export subsidies for regional aircraft under PROEX, the Panel read theword "material" out of item (k).  This, we consider to be an error.
178. We also note that in two of its interpretive statements
107, the Panel used the "marketplace" as
the benchmark for comparing the subsidies on sale s of regional aircraft under PROEX.  However, in
two other statements108, the Panel made no reference to the "marketplace" as the basis for comparison.
In  one of those two statements, it referred, instead, more generally, to "the terms that would have
been available in the absence of the payment."  For the purposes of our analysis, we will assume thatthe Panel meant to use the "marketplace" as th e benchmark for determining whether the PROEX
subsidies were "used to secure a material advantage".
179. We note that the Panel adopted an interpretation of the "material advantage" clause in item (k)
of the Illustrative List that is, in effect, the same as the interpretation of the term "benefit" inArticle 1.1(b) of the SCM Agreement  adopted by the panel in  Canada – Aircraft .
109  If the "material
advantage" clause in item (k) is to have  any meaning, it must mean something different from
"benefit" in Article 1.1(b).  It will be recalled that for any payment to be a "subsidy" within the
meaning of Article 1.1, that payment must consist of both a "financial contribution" and a "benefit".The first paragraph of item (k) describes a type of subsidy that is deemed to be a prohibited export
subsidy.  Obviously, when a payment by a government constitutes a "financial contribution" andconfers a "benefit", it is, a "subsidy" under Article 1.1.  Thus, the phrase in item (k), "in so far as theyare used to secure a material advantage", would have no meaning if it were simply to be equated with
                                                     
106Panel Report, paras. 7.23 (last sentence), 7.33 and 7.37.
107Ibid., paras. 7.23 (last sentence) and 7.33.
108Ibid., paras. 7.23 (second to last sentence) and 7.37.
109WT/DS70/R, circulated to WTO Members on 14 April 1999, paras.  9.112 and 9.120 (as upheld by
the Appellate Body, s upra , footnote 16, paras. 154-162).WT/DS46/AB/R
Page 53
the term "benefit" in the definition of "subsidy".  As a matter of treaty interpretation, this cannot be
so.110  Therefore, we consider it an error to interpret the "material advantage" clause in item (k) of the
Illustrative List as meaning the same as the term "benefit" in Article 1.1(b) of the SCM Agreement .
180. We note that there are two paragraphs in item (k), and that the "material advantage" clause
appears in the first paragraph.  Furthermore, the second paragraph is a proviso to the first paragraph.
The second paragraph applies when a Member is "a party to an international undertaking on officialexport credits" which satisfies the conditions of the proviso, or when a Member "applies the interestrates provisions of the relevant undertaking".  In such circumstances, an "export credit practice"which is in conformity with the provisions of "an international undertaking on official export credits"shall not be considered an export subsidy prohibited by the  SCM Agreement .  The
OECD Arrangement   is an "international undertaking on official export credits" that satisfies the
requirements of the proviso in the second paragraph in item (k).  However, Brazil did not invoke theproviso in the second paragraph of item (k) in its defence.  Brazil argued before the Panel that it "has
concluded that conformity to the OECD provisions is too expensive."
 111
181. Thus, this case falls under the first paragraph, and not under the proviso of the second
paragraph, of item (k) of the Illustrative List.  Consequently, the issue here is whether the exportsubsidies for regional aircraft under PROEX "are used to secure" for Brazil "a material advantage inthe field of export credit terms".  Nevertheless, we see the second paragraph of item (k) as usefulcontext for interpreting the "material advantage" cl ause in the text of the first paragraph.  The  OECD
Arrangement   establishes minimum interest rate guidelines for export credits supported by its
participants ("officially-supported export credits").  Article 15 of the Arrangement defines the
minimum interest rates applicable to officially-supported export credits as the Commercial Interest
Reference Rates ("CIRRs").  Article 16 provides a methodology by which a CIRR, for the currency of
each participant, may be determined for this purpose.  We believe that the OECD Arrangement  can be
appropriately viewed as one example of an international undertaking providing a specific marketbenchmark by which to assess whether payments by governments, coming within the provisions ofitem (k), are "used to secure a material advantage in the field of export credit terms".  Therefore, inour view, the appropriate comparison to be made in determining whether a payment is "used to securea material advantage", within the meaning of item (k),  is between the actual interest rate applicable in
                                                     
110As we stated in our report in United States – Standards for Reformulated and Conventional Gasoline
("United States – Gasoline "), "[a]n interpreter is not free to adopt a reading that would result in reducing whole
clauses or paragraphs of a treaty to redundancy or inutility."  Adopted 20 May 1996, WT/DS2/AB/R, p. 23.
This statement is quoted with approval in Japan – Taxes on Alcoholic Beverages , adopted 1 November 1996,
WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, p. 12.
111Oral Statement of Brazil at First Meeting of the Pane l, para. 22.  See also Oral Statement of Brazil at
Second Meeting of the Panel, paras. 54 and 56.WT/DS46/AB/R
Page 54
a particular export sales transaction after deduction of the government payment (the " net  interest
rate")  and the relevant CIRR.
182. It should be noted that the commercial interest rate with respect to a loan in any given
currency varies according to the length of matur ity as well as the creditworthiness of the borrower.
Thus, a potential borrower is not faced with a single commercial interest rate, but rather with a range
of rates.  Under the  OECD Arrangement , a CIRR is the  minimum   commercial rate available in that
range for a particular currency.  In any given case, whether or not a government payment is used tosecure a " material  advantage", as opposed to an "advantage" that is not "material", may well depend
on where the  net  interest rate applicable to the particular transaction at issue in that case stands in
relation to the range of commercial rates available.  The fact that a particular  net  interest rate is
below the relevant CIRR is a positive indication that the government payment in that case has been"used to secure a material advantage in the field of export credit terms".
183. Brazil has conceded that it has the burden of proving an alleged "affirmative defence" under
item (k).  In light of our analysis, it was for Brazil to establish a  prima facie  case that the export
subsidies for regional aircraft under PROEX do not result in net interest rates below the relevantCIRR.  We note, however, that Brazil did not provide  any information   to the Panel on this point.  We
also note that Brazil declined to provide this info rmation, even when specifically requested to do so
by the Panel.
112  Because Brazil provided  no information  on the net interest rates paid by purchasers
of Embraer aircraft in actual export sales transactions, we have no basis on which to compare the netinterest rates resulting from the interest rate equalization payments made under PROEX with therelevant CIRR.
184. Accordingly, we find that Brazil has failed to meet its burden of proving that export subsidies
for regional aircraft under PROEX are not "used to se cure a material advantage in the field of export
credit terms" within the meaning of item (k) of the Illustrative List.
185. We are aware that the  OECD Arrangement   allows a government to "match", under certain
conditions, officially-supported export credit terms provided by another government.  In a particularcase, this could result in net interest rates below the relevant CIRR.  We are persuaded that"matching" in the sense of the  OECD Arrangement   is not applicable in this case.  Before the Panel,
Brazil argued for an interpretation of the clause "in the field of export credit terms" that would includeas an "export credit term" the price at which a product is sold, and maintained that, therefore, Brazil
                                                     
112Reply of Brazil to the Panel's Questions for the Parties, 23 December 1998, Brazil's response to
Question 34, pp. 7-8.WT/DS46/AB/R
Page 55
was entitled to "offset"  all the subsidies   provided to Bombardier by the Government of Canada.  The
Panel rejected Brazil's argument, finding instead that  "[w]e see nothing in the ordinary meaning of the
phrase to suggest that 'the field of export credit terms' generally encompasses the price at which aproduct is sold."
 113  We note that this finding was  not  appealed by either Brazil or Canada.  Even if
we were to assume that the "matching" provisions of the  OECD Arrangement   apply in this case (an
argument Brazil did not make), those provisions clearly do not allow a comparison to be madebetween the net interest rates applied as a consequence of subsidies granted by a particular Memberand the total amount of subsidies provided by another Member.  We also note that under PROEX, theinterest rate equalization subsidies for regional aircraft are provided at an "across-the-board" rate of3.8 per cent for  all  export sales transactions.
114  That rate is fixed, and does not vary depending on
the total amount of subsidies provided by another Member to its regional aircraft manufacturers.Thus, we cannot accept Brazil's argument that the export subsidies for regional aircraft under PROEXshould be "permitted" because they "match" the total subsidies provided to Bombardier by the
Government of Canada.
186. For all these reasons, we do not agree with the Panel's interpretation of the phrase "used to
secure a material advantage in the field of export credit terms" in item (k) of the Illustrative List.  Wedo, however, agree with the Panel's conclusion that "Brazil has failed to demonstrate the PROEXpayments are not 'used to secure a material advantage in the field of export credit terms'."
115  We,
therefore, uphold the Panel's rejection of the "affirmative defence" claimed by Brazil on the basis ofitem (k) of the Illustrative List.
187. In so doing, we do not rule on whether the export subsidies for regional aircraft under
PROEX are "the payment by [governments] of all or part of the costs incurred by exporters or
financial institutions in obtaining credits".  Nor do we opine on whether a "payment" within themeaning of item (k) which is not "used to secure a material advantage within the field of export creditterms" is,  a contrario , "permitted" by the  SCM Agreement , even though it is a subsidy which is
contingent upon export performance within the meanin g of Article 3.1(a) of that Agreement.  The
Panel did not rule on these issues, and the lack of Panel findings on these issues was not appealed.
                                                     
113Panel Report, para. 7.28.
114Ibid., para. 2.3.
115Ibid., para. 7.37.WT/DS46/AB/R
Page 56
IX. Recommendation of the Panel
188. Brazil appeals the Panel's recommendation that Brazil shall withdraw the export subsidies for
regional aircraft under PROEX within 90 days, stating that "the Panel's conclusion that 90 days is theproper time-period is in error."
 116  Brazil argues that although Article 4.7 of the SCM Agreement 
directs a panel to specify the time-period within which a prohibited subsidy must be withdrawn, that
provision does not specify a particular time-period.  Brazil argues also that under Article 4.12 of the SCM Agreement , "except for time-periods specifically prescribed in … Article [4], time-periods
applicable under the DSU for the conduct of such disputes shall be half the time prescribed therein."Brazil maintains that Article 21.3(c) of the DSU provides that the time-period allowed forimplementation of DSB rulings and recommendations "normally should not exceed 15 months, unless
there are 'particular circumstances' justifying a longer or shorter period."
117  Therefore, Brazil
maintains that the Panel should have concluded that Brazil must withdraw its export subsidies withinhalf of fifteen months, that is, within seven and one-half months, rather than within 90 days.
118
189. Article 4.7 of the  SCM Agreement   provides:
If the measure in question is found to be a prohibited subsidy, the
Panel  shall recommend  that the subsidizing Member  withdraw   the
subsidy  without delay .  In this regard, the Panel  shall specify   in its
recommendation the time period within which the measure must be
withdrawn. (emphasis added)
190. In this case, the Panel, in examining the language of Article 4.7 of the  SCM Agreement ,
considered that it was  required  to make the recommendation provided for in that Article, and,
therefore, recommended that Brazil withdraw its subsidies "without delay".119  The Panel also
determined that the requirement that Brazil withdraw  its subsidies "without delay" meant that, in the
circumstances of this case, Brazil shall withdraw its subsidies within 90 days.120
191. We note that Article 4.7 of the  SCM Agreement   is listed in Appendix 2 to the DSU as a
"special or additional rule or procedure" on dispute settlement.  We note also that Article 4.7 containsseveral elements which are different from the provisions of Articles 19 and 21 of the DSU withrespect to recommendations by a panel and implementation of rulings and recommendations of theDSB.  For example, Article 19 of the DSU requires a panel to recommend that the Member concernedbring its measure "into conformity" with the covered agreements.  In contrast, Article 4.7 of the                                                     
116Brazil's appellant's submission, para. 82.
117Ibid., para. 80.
118Brazil's appellant's submission, para. 82.
119Panel Report, para. 8.4.
120Ibid., para. 8.5.WT/DS46/AB/R
Page 57
SCM Agreement  requires a panel to recommend that the subsidizing Member  withdraw  the subsidy.
In addition, paragraph 1 of Article 21 of the DSU requires "prompt compliance withrecommendations or rulings of the DSB", and paragraph 3 of that Article allows an implementingMember "a reasonable period of time" to implement the recommendations or rulings of the DSB,
where it is impracticable to comply immediately.  In contrast, Article 4.7 of the SCM Agreement
requires a panel to recommend that a subsidy be withdrawn "without delay".
192. With respect to implementation of the recommendations or rulings of the DSB in a dispute
brought under Article 4 of the SCM Agreement , there is a significant difference between the relevant
rules and procedures of the DSU and the special or additional rules and procedures set forth inArticle 4.7 of the  SCM Agreement .  Therefore, the provisions of Article 21.3 of the DSU are not
relevant in determining the period of time for implementation of a finding of inconsistency with theprohibited subsidies provisions of Part II of the  SCM Agreement .  Furthermore, we do not agree with
Brazil that Article 4.12 of the  SCM Agreement  is applicable in this situation.  In our view, the Panel
was correct in its reasoning and conclusion on this issue.  Article 4.7 of the  SCM Agreement , which is
applicable to this case, stipulates a time-period.  It states that a subsidy must be withdrawn "without
delay".  That is the recommendation the Panel made.
193. Finally, we note that although Canada requested that we recommend that Brazil withdraw the
export subsidies on regional aircraft under PROEX as of the date of adoption of the Appellate Bodyand Panel Reports
121, Canada did not formally appeal this issue.  Canada's request was made in its
appellee's submission, and was not included in its appellant's submission.  We therefore decline thisrequest by Canada.
122
194. Based on our analysis above, we see no reason to disturb the Panel's recommendation that, in
this case, "without delay" means 90 days and, therefore, Brazil must withdraw the export subsidies forregional aircraft under PROEX within 90 days.
                                                     
121Canada's appellee's submission, para. 169.
122In United States – Gasoline , we similarly declined to address claims of appeal made by Brazil and
Venezuela in their appellees' submissions, finding that the issues were not properly appealed in accordance withthe Working Procedures .  Supra , footnote 110, pp. 11-12.WT/DS46/AB/R
Page 58
X. Conditional Appeal:  "Maintaining" Subsidies Under Article 3.2 of the  SCM Agreement
195. Canada makes a conditional appeal.  Canada requests that, if we accept Brazil's argument and
reverse the finding of the Panel that the export subsidies for regional aircraft under PROEX are"granted" at the time of issuance of the NTN-I bonds for the purposes of Article 27.4 of the
 SCM Agreement , then we should also reverse the Panel's decision not to make a finding on whether
Brazil had acted inconsistently with its obligations not to "maintain" export subsidies underArticle 3.2 of that Agreement.
123  As we have not accepted Brazil's argument and have, therefore, not
reversed the finding of the Panel on when the export subsidies for regional aircraft under PROEX are"granted", it is not necessary for us to consider this conditional appeal by Canada.
XI. Findings and Conclusions
196. For the reasons set out in this Report, the Appellate Body:
(a) upholds the ruling of the Panel that certain regulatory instruments specified in the
request for the establishment of a panel, but not discussed in the consultations, weremeasures properly before the Panel;
(b) upholds the finding of the Panel that, in a dispute involving a claim of violation of
Article 3.1(a) of the  SCM Agreement  by a developing country Member, the
complaining party has the burden of proving that the developing country Member inquestion has not acted in compliance with the provisions of Article 27.4 of that
Agreement;
(c) upholds the appealed findings of the Panel relating to the Panel's determination that
Brazil had failed to comply with its obligations under Article 27.4 of theSCM Agreement   to "not increase the level of its export subsidies", and, in particular,
upholds the following findings of the Panel:
(i) that the "proper point of reference" for the purpose of determining whether a
Member has increased the level of its export subsidies is actual expenditures,rather than budgeted amounts;
                                                     
123Canada's appellant's submission, paras. 47-57.WT/DS46/AB/R
Page 59
(ii) that for the purposes of Article 27.4, the export subsidies for regional aircraft
under PROEX should be considered to be "granted" when the NTN-I bondsare issued, rather than when the letter of commitment is issued;  and
(iii) that it is appropriate in this case to use constant dollars, rather than nominal
dollars, in assessing whether Brazil has increased the level of its exportsubsidies;  and,
therefore, upholds the overall conclusions of the Panel that Brazil has not complied
with the provisions of Article 27.4 of the  SCM Agreement , with the result that the
export subsidy prohibition in Article 3.1(a) applies to Brazil;
(d) reverses and modifies the interpretation by the Panel of the phrase "used to secure a
material advantage in the field of export credit terms" in item (k) of the IllustrativeList;  but upholds the conclusion of the Panel that Brazil failed to demonstrate that the
export subsidies for regional aircraft under PROEX are not "used to secure a material
advantage in the field of export credit terms"  within the meaning of item (k);  and,
therefore, upholds the Panel's rejection of the "affirmative defence" claimed by Brazilon the basis of item (k) of the Illustrative List;
(e) upholds the recommendation of the Panel that Brazil shall withdraw the export
subsidies for regional aircraft under PROEX within 90 days;  and
(f) in light of the finding in (c)(ii) above, makes no finding on the conditional appeal by
Canada on whether the issuance of the NTN-I bonds is consistent with Brazil's
obligation not to "maintain" prohibited export subsidies under Article 3.2 of the
SCM Agreement .
197. The Appellate Body recommends that the DSB request Brazil to bring its measures found in
this Report, and in the Panel Report as modified by this Report, to be inconsistent with its obligationsunder the  SCM Agreement  into conformity with the provisions of that Agreement.  In this respect,
we recall that we uphold the recommendation of the Panel that Brazil shall withdraw the exportsubsidies for regional aircraft under PROEX within 90 days.WT/DS46/AB/R
Page 60
Signed in the original at Geneva this 23rd day of July 1999 by:
_________________________
Said El-Naggar
Presiding Member
_________________________ _________________________
James Bacchus Claus-Dieter Ehlermann
Member Member