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DISPUTE SETTLEMENT: DISPUTE DS46

Brazil — Export Financing Programme for Aircraft

This summary has been prepared by the Secretariat under its own responsibility. The summary is for general information only and is not intended to affect the rights and obligations of Members.

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See also: One-page summary of key findings of this dispute

Appellate Body and Panel Reports Adopted

Complaint by Canada.

On 19 June 1996, Canada requested consultations with Brazil based on Article 4 of the Subsidies Agreement, which provides for special procedures for export subsidies. Canada claimed that export subsidies granted under the Brazilian Programa de Financiamento às Exportações (PROEX), to foreign purchasers of Brazil’s Embraer aircraft are inconsistent with the Subsidies Agreement Articles 3, 27.4 and 27.5.

Canada requested the establishment of a panel on 16 September 1996, alleging violations of both the Subsidies Agreement and GATT 1994. The DSB considered this request at its meeting on 27 September 1996. Due to Brazil’s objection to the establishment of a panel, Canada agreed to modify its request, limiting the scope of the request to the Subsidies Agreement. The modified request was submitted by Canada on 3 October 1996 but was subsequently withdrawn prior to a DSB meeting at which it was to be considered.

On 10 July 1998, Canada again requested the establishment of a panel. At its meeting on 23 July 1998, the DSB established a Panel. The EC and the US reserved their third-party rights. On 16 October 1998, Canada requested the Director-General to determine the composition of the Panel. On 22 October 1998, the Panel was composed. The report of the Panel was circulated to Members on 14 April 1999. The Panel found that Brazil’s measures were inconsistent with Articles 3.1(a) and 27.4 of the Subsidies Agreement.

On 3 May 1999, Brazil notified its intention to appeal certain issues of law and legal interpretations developed by the Panel. The report of the Appellate Body was circulated to Members on 2 August 1999. The Appellate Body upheld all the findings of the panel, but reversed and modified the panel’s interpretation of the “material advantage” clause in item (k) of the Illustrative List of Export Subsidies in Annex I of the SCM Agreement.

The DSB adopted the Appellate Body Report and the Panel Report, as modified by the Appellate Body Report, on 20 August 1999.

Appellate Body and Panel Compliance Reports (Article 21.5) Adopted

On 23 November 1999, Canada requested the establishment of a panel under Article 21.5 of the DSU, requesting that the panel find that Brazil had not taken measures to comply fully with the rulings and recommendations of the DSB. Canada and Brazil reached an agreement concerning the procedures to be applicable pursuant to Articles 21 and 22 of the DSU and Article 4 of the Subsidies Agreement. At its meeting on 9 December 1999, the DSB agreed to reconvene the original panel pursuant to Article 21.5 of the DSU. Australia, the EC and the US reserved their third-party rights. On 17 December 1999, the compliance panel was composed.

The report of the compliance panel was circulated to Members on 9 May 2000. The panel found that Brazil's measures to comply with the recommendations and rulings of the DSB either did not exist or were not consistent with the Subsidies Agreement. In reaching this conclusion, the panel notably rejected Brazil's defence that PROEX payments were permitted under item (k) of Annex I of the Subsidies Agreement, adding that, if a WTO Member encountered an export credit that had been provided on terms that it could not meet consistent with the SCM Agreement, the proper response was to challenge that export credit in WTO dispute settlement.

On 22 May 2000, Brazil notified its intention to appeal certain issues of law and legal interpretations developed by the review panel. The report of the Appellate Body was circulated to Members on 21 July 2000. The Appellate Body upheld the review panel's conclusion that Brazil has failed to implement the recommendation of the DSB because of the continued issuance by Brazil of NTN-I bonds, after 18 November 1999, pursuant to letters of commitment issued before 18 November 1999. The Appellate Body also upheld the review panel's findings that payments made under the revised PROEX are prohibited by Article 3 of the Subsidies Agreement and are not justified under item (k) of the Illustrative List of the same Agreement. The Appellate Body therefore upheld the review panel's conclusion that Brazil has failed to implement the recommendations of the DSB. The DSB adopted the Appellate Body report and the panel report, as modified by the Appellate Body report, at its meeting on 4 August 2000.

On 22 January 2001, Canada requested the DSB to refer the matter again to the original panel, pursuant to Article 21.5 of the DSU. At its meeting of 16 February 2001, the DSB referred the matter to the original panel. Australia, the EC and Korea reserved their third-party rights. The Panel circulated its report on 26 July 2001. The Panel concluded as follows:

• It has not been established that PROEX III as such was inconsistent with Article 3.1(a) of the SCM Agreement;
   
• PROEX III as such is justified under the second paragraph of item (k) of the Illustrative List of Export Subsidies of Annex I of the SCM Agreement;
   
• PROEX III cannot be justified under paragraph 1 of the above-mentioned item.

At its meeting on 23 August 2001, the DSB adopted the Panel Report on this second recourse to Article 21.5 of the DSU.

Implementation Status of Adopted Reports

At the DSB meeting of 19 November 1999, Brazil announced that it had withdrawn the measures at issue within 90 days and had thus implemented the recommendations and rulings of the DSB.

On 23 November 1999, Canada requested the establishment of a panel under Article 21.5 of the DSU, requesting that the panel find that Brazil had not taken measures to comply fully with the rulings and recommendations of the DSB. Canada and Brazil reached an agreement concerning the procedures to be applicable pursuant to Articles 21 and 22 of the DSU and Article 4 of the Subsidies Agreement. At its meeting on 9 December 1999, the DSB agreed to reconvene the original panel pursuant to Article 21.5. The report of the Panel was circulated to the Members on 9 May 2000.

For details of the Article 21.5 panel and Appellate Body proceedings, see above.

On 10 May, Canada requested authorization from the DSB to take appropriate countermeasures, pursuant to Article 4.10 of the Subsidies Agreement and Article 22.2 of the DSU, in an amount of Can$700 million per year.

At the DSB meeting on 22 May 2000, Brazil requested arbitration, pursuant to Article 22.6 of the DSU and Article 4.11 of the Subsidies Agreement, to determine whether the countermeasures requested by Canada were appropriate. The DSB referred the matter to the original panel for arbitration, it being understood that no countermeasures would be sought pending the report of the Appellate Body and until after the arbitration report.

The report of the Appellate Body was circulated to Members on 21 July 2000.

The arbitrator’s report was circulated to Members on 28 August 2000. The arbitrators found that the appropriate countermeasures in this case amounted to C$344.2 million per year. The arbitrators found that Canada may request authorization by the DSB to suspend tariff concessions or other obligations under GATT 1994, the Agreement on Textiles and Clothing and the Agreement on Import Licensing Procedures. At the DSB meeting of 12 December 2000, Canada received, pursuant to Article 22.7 of the DSU and Article 4.10 of the SCM Agreement, authorization from the DSB to suspend the application to Brazil of tariff concessions or other obligations under GATT 1994, the Agreement on Textiles and Clothing and the Agreement on Import Licensing Procedures covering trade in a maximum amount of C$ 344.2 million per year. On 12 December 2000, Brazil advised the DSB of changes that it had made to the measures at issue in this case and claimed that PROEX had been brought into compliance with Brazil’s obligations under the SCM Agreement. Canada was of the view that Brazil continued to violate its SCM Agreement obligations. According to Canada, there was therefore a disagreement between Canada and Brazil as to whether the measures taken by Brazil to comply with the 20 August 1999 and 4 August 2000 rulings and recommendations of the DSB bring Brazil into conformity with the provisions of the SCM Agreement and result in the withdrawal of the export subsidies to regional aircraft under PROEX.

On 22 January 2001, Canada requested the DSB to refer the matter again to the original panel, pursuant to Article 21.5 of the DSU. At its meeting of 16 February 2001, the DSB referred the matter to the original panel. Australia, the EC and Korea reserved their third-party rights.

For details of the second Article 21.5 panel and Appellate Body proceedings, see above.

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