NATIONAL LAW UNIVERSITY, DELHI

(2023-24)

RESEARCH PROJECT
WT/DS46: BRAZIL-EXPORT FINANACING PROGRAMME FOR
AIRCARFT
(International Trade Law)

UNDER THE ABLE GUIDANCE OF: SUBMITTED BY:

DR. MONIKA NEGI Kishor Kumar Panchal

Roll No. 47LLB19

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TABLE OF CONTENTS

Introduction..................................................................................................................2
Background of the Dispute..........................................................................................3
Main Issue in Contention.............................................................................................4
Overall Approach of the Panel....................................................................................4
Analysis of the Issue.....................................................................................................5
1.1. Whether item (k) of the Illustrative List of Export Subsidies may be used
an exception?.............................................................................................................5
Arguments of the Party: Canada.........................................................................5
Approach of the Panel...........................................................................................7
1.2. Whether PROEX payments are used to secure a material advantage in the
field of export credit term...........................................................................................8
Arguments of the Party: Canada.........................................................................8
Approach of the Panel.........................................................................................12
Issue Before the Appellate Body.........................................................................15
Conclusion & Findings...............................................................................................16

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 I NTRODUCTION
Under Article 4 of the Agreement on Subsidies and Countervailing Measures ("SCM
Agreement") and Article 4 of the Understanding on Rules and Procedures Governing the
Settlement of Disputes ("DSU"), Canada began negotiations with Brazil about export
subsidies given to foreign buyers of Brazil's EMBRAER aircraft through Brazil's Programa
de Financiamento as Exportações ("PROEX").

The Comitê de Crédito as Exportações ("Committee"), an inter-agency organization housed

under Brazil's Ministry of Finance, is in charge of the PROEX program. The Bank of Brazil
oversees the daily operations of PROEX. The Brazilian government offers interest rate
equalization subsidies within the PROEX framework for deals involving Brazilian exports,
such as Embraer airplanes.

PROEX provides export credits to Brazilian exporters in the following manner:

 Direct Financing: Brazil lends a portion of the funds required for the transaction. Or,

 Interest equalization for a long period in contrary to their normal practice in other
industries.

Interestingly, the PROEX-provided interest rate equalization subsidies take effect only after
the aircraft is exported and the buyer has paid for it in full. PROEX issues these subsidies to
the financing institution in the form of bonds. The Bank of Brazil publicly proposes that the
National Treasury of Brazil issue bonds known as National Treasury Note – Series I ("NTN-
I") bonds once each export contract has been confirmed. After that, these bonds are given to
the Bank of Brazil, which then gives them to the bank that is lending the money or acting as
its agent. Over the course of the financing period, the lending bank has the option to redeem
the bonds semi-annually or sell them at a discount as soon as they are received. At the time of
issuance, the NTN-I bonds have a Brazilian currency value that is pegged to the US dollar.
These bonds can only be redeemed in Brazilian dollars and within Brazil1.

1
Appellate Body Report, Page 2, Para 6
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BACKGROUND OF THE DISPUTE

Canada and Brazil held consultations on 22 and 25 July 1996 in Geneva, but failed to reach a
mutually satisfactory solution. [1]

On 16 September 1996, Canada requested the establishment of a panel under Articles 4 and
30 of the SCM Agreement and Articles 4 and 6 of the DSU. IUO54Y Again, on 3 October
1996, Canada again requested the establishment of a panel.3 That request was subsequently
withdrawn to allow the parties to seek a mutually satisfactory solution to the problem .

On 10 July 1998, Canada again requested the establishment of a panel under Article 4 of the
SCM Agreement. Finally on 23 July of 1998, the DSB established a Panel in accordance with
Article 4 of the SCM agreement.

Canda requests the Panel to make the following Findings of Law:

a. That, as admitted by Brazil, PROEX interest equalization payments are export

subsidies within the meaning of Article 3 of the SCM Agreement
b. That the first paragraph of Item (k) of Annex 1 of the SCM Agreement does not
provide an exception to Article 3.

c. That, even if the first paragraph of Item (k) does provide, through an a contrario
inference such an exception, PROEX interest equalization payments are not payments
within the meaning of Item (k), or do provide a material advantage in the field of
export credit terms, and as such do not fall within the exception. [4]

MAIN ISSUE IN CONTENTION

For the purpose of this project, the researcher will only deal about the following issues:

1. Whether PROEX interest rate equalization payment ‘permitted’ by item (k) of the
illustrative list of export Subsidies?

Brazil does not dispute -- that PROEX payments are subsidies within the meaning of Article
1 of the SCM Agreement which are contingent upon export performance within the meaning

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of Article 3.1(a). Brazil does not concede, however, that these export subsidies are prohibited
subsidies. Thus, we will directly deal with the above-mentioned main issue.

OVERALL APPROACH OF THE PANEL

In reviewing Brazil's item (k) defence, Panel note that in order to rule in favour of Brazil they
must find for Brazil on all of the following points.

 That PROEX payments are the "payment by [governments] of all or part of the costs
incurred by exporters or financial institutions in obtaining credits" within the meaning
of item (k).
 That ROEX payments are not "used to secure a material advantage in the field of
export credit terms" within the meaning of item (k).
 Finally, Panel must find 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 within the meaning of Article 1 of
the SCM Agreement which is contingent upon export performance within the
meaning of Article 3.1(a) of that Agreement.

If Panel were to find against Brazil on any of these points, Brazil's item (k) defence would
fail.

ANALYSIS OF THE ISSUE

1.1. WHETHER ITEM (K) OF THE ILLUSTRATIVE LIST OF EXPORT SUBSIDIES

MAY BE USED AN EXCEPTION?

ARGUMENTS OF THE PARTY: CANADA

 Canada disputes the assertion made by Brazil that the conventional understanding of
the phrase "measures referred to" in footnote 5 implies the opposite conclusion. The
interpretation put forth by Brazil is in opposition to the explicit references in Annex I

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 that list measures that are specifically designated as "not constituting export
subsidies2."
 Canada maintains that any measure that satisfies the requirements outlined in item (k)
is inherently classified as an export subsidy and is, therefore, proscribed. A
complainant is not required to establish that the export credit in question constitutes a
"subsidy" as defined in Article 1 or that it is "conditional on export performance" for
the implementation of this measure. Conversely, in order to obtain a substantial
advantage in the domain of export credits, a complainant may merely demonstrate
that a government export credit is granted at a rate below its cost of funds; in such
case, the credit in question would be prohibited. It is important to note, however, that
the absence of exact alignment between a measure and the first paragraph of item (k)
does not necessarily imply that the measure is not prohibited3.
 Canada maintains that an acceptance of Brazil's argument would result in a
comprehensive cataloguing of export subsidies, as the Illustrative List would be
radically altered. Such is the case, as subsidies that fail to precisely satisfy the
requirements of an item in Annex, I would continue to be permissible and unaffected4.
 Canada maintains that the primary purpose of Annex I is to serve as an illustrative list
of export subsidies. Article 3 makes no indication that the Illustrative List is designed
to encompass every conceivable export subsidy. Indeed, the inclusion of the word
"including" in Article 3 implies that measures or activities not explicitly mentioned in
the Illustrative List may still fall within the purview of that article.
 Canada maintains that its perspective is substantiated by the historical context
surrounding the Illustrative List. The inception of the Illustrative List can be identified
in a proposition put forth by the French Government to the Working Party, which was
charged with executing the stipulations outlined in Article XVI:4 of the GATT 1947.
Canada maintains that, in accordance with Article XVI:4, the Working Party reviewed
and approved a list of measures that are commonly perceived as subsidies.
Nevertheless, a consensus was reached that this enumeration ought not to be
considered exhaustive or to restrict in any way the scope of paragraph 4 of Article
XVI5.

2
Para 4.56 of the Panel Report
3
Para 4.58 of the Panel Report
4
Para 4.59 of the Panel Report
5
Para 4.61 of the Panel Report
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  Canada contends that, with respect to the stipulations outlined in Article XVI:4, any
practice that corresponds to the instances given in the Illustrative List would be
classified as an export subsidy. Nevertheless, the absence of these criteria did not
conclusively disqualify the assistance from being classified as an export subsidy. An
alternative approach was to conduct an independent assessment in accordance with
Article XVI or, later, the Tokyo Round Subsidies Code in order to ascertain whether
the action constituted an export subsidy.
 Canada contends that a comparable perspective should be applied to the first
paragraph of item (k). As stated in this paragraph, Article 3 expressly prohibits a
government from covering "all or part of the costs incurred by financial institutions or
exporters in obtaining credits" in order to "secure a material advantage in the field of
export credit terms." However, in the event that said payment deviates significantly
from the provisions of item (k) – in the event that Brazil can provide evidence that it
did not yield any "material advantage" – an aggrieved party may still contend that the
payment functions as a subsidy, is contingent upon export performance, and is thus in
violation of Article 3.6

APPROACH OF THE PANEL

 Brazil does not dispute our conclusion that PROEX payments constitute subsidies in
accordance with the definition in Article 1 of the SCM Agreement and are contingent
on export performance as stated in Article 3.1(a). Nevertheless, Brazil refuses to
acknowledge the prohibition of these export subsidies. Conversely, Brazil contends
that PROEX payments remain permissible under item (k) of the Illustrative List of
Export Subsidies, despite the fact that they qualify as export subsidies7.
 In particular, Brazil contends that PROEX payments qualify as "government payment
of a portion or the entirety of the expenses borne by exporters or financial institutions
in procuring credits," as specified in point (k).
 Finally, Brazil asserts that PROEX payments are merely utilized to mitigate "Brazil
risk" and Canadian subsidies to Bombardier and not to gain a material advantage in
the field of export credit terms. Brazil therefore concludes that PROEX payments
adhere to the terms of the SCM Agreement.
6
Para 4.62 of the Panel Report
7
Para 7.15 of the Panel Report
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  Before reaching a verdict in favour of Brazil regarding its argument based on item (k),
there are a number of crucial factors that must be taken into account. Prior to
proceeding, it is essential to ascertain that PROEX payments qualify as "payment by
[governments] of the entire or a portion of the expenses borne by financial institutions
or exporters in procuring credits," as defined in item (k). Furthermore, as item (k)
suggests, we must ascertain that PROEX payments are not being exploited to obtain a
substantial advantage in the realm of export credit terms.
 In conclusion, it is essential to determine whether a "payment" outlined in item (k)
that does not aim to obtain a significant advantage in the realm of export credit terms
is still permissible under the SCM Agreement, despite meeting the criteria for a
subsidy as per Article 1 and being dependent on export performance as per Article
3.1(a) of the aforementioned agreement. Inability to substantiate Brazil's position on
any of these points would lead to the item (k) defence being rejected.8

1.2. WHETHER PROEX PAYMENTS ARE USED TO SECURE A MATERIAL

ADVANTAGE IN THE FIELD OF EXPORT CREDIT TERM.

ARGUMENTS OF THE PARTY: CANADA

 Canada argues that PROEX payments are utilized to attain a significant competitive
advantage with respect to the conditions of export credit and notable benefit is
obtained when an administration extends export credit at interest rates that are lower
than the prevailing rates observed in the international financing market. Moreover,
material advantage is secured when
a. interest rates on government payments to financial institutions or exporters are
reduced relative to the prevailing rates on the global market. Canada places
significant emphasis on the utilization of the London Interbank Offer Rate
(LIBOR) or the United States Treasuries rate, in conjunction with an extra

8
Para 7.17 of the Panel Report
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 margin that mirrors the credit risk associated with the transaction, as the
pertinent interest rates for evaluation in the global market9.
 Canada reaffirms its stance concerning the appropriate criterion in regard to a query
presented by the Panel. The inquiry pertained to whether determining a material
advantage should be predicated on-
 the improvement of export credit terms in a particular transaction as a result of
a government payment, or
 a comparison between the terms of export credit extended to a buyer in a
transaction facilitated by the payment and those extended to that buyer in
transactions involving competing products. Canada affirms that LIBOR or US
Treasury rates continue to influence its stance on the most suitable
benchmark10.
 Canada raises doubts regarding the veracity of Dr. Finan's presentations and asserts
that Brazil's argument, which posits that PROEX subsidies are essential to offset
perceived market advantages enjoyed by industrialized nations, is unfounded and
unjustified.
 Canada continues by asserting that the "Brazil risk" argument would be futile even if
it were deemed pertinent. Canada asserts that in the event that PROEX export
subsidies were intended to alleviate the "Brazil risk," they would be allocated to the
Brazilian lender that is confronted with increased borrowing expenses, as stipulated in
item (k).11
 Canada vehemently contests Brazil's claim that it does not actively contest Canada's
argument regarding the lack of a "material advantage" when the lender is situated in
Brazil, and asserts that "the actual interest rate consistently exceeded LIBOR or the
OECD rate in practice when the lender was within Brazil." Canada maintains that
without regard to other potential lenders, the crucial criterion for determining
"material advantage" is not whether the lender incurs a "Brazil risk" or any other
unique expense.
 Canada additionally asserts that financing conducted within Brazil is, if not
exclusively, facilitated via the National Bank for Economic and Social Development
(BNDES). When providing financing to airlines, BNDES does so at rates that are
9
Para 4.92 of the Panel Report
10
Para 4.93 of the Panel Report
11
Para 4.102 of the Panel Report
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 considered international commercial. Consequently, when applied to BNDES
financing, PROEX export subsidies reduce commercial interest rates to levels
substantially below those observed on the international market.
 According to Canada, BNDES financing effectively eradicates the "Brazil risk." As a
consequence, the beneficiary is granted a PROEX export subsidy of greater value.
This procedure is comprised of two stages by providing loans at interest rates
determined by LIBOR-plus or OECD standards, BNDES effectively mitigates the
unpredictability typically associated with external financing. The website of BNDES-
Exim, the Brazilian export financing program now known as BNDES-Exim, provides
public access to the interest rates it offers. Explicitly stated, they correspond to
LIBOR plus either 1% or 2%, in addition to a risk premium.12
 Canada submits that the financing of BNDES undermines Brazil's assertion in the
second paragraph of Item (k) that the "safe haven" provides "little or no practical
value for developing countries." With the exception of PROEX export subsidies, the
export credit practices implemented by Brazil via BNDES function according to the
exact same principles as the "safe haven" that Brazil asserts is impracticable for
developing nations because of the exorbitant expenses associated with obtaining
dollars. Canada contends that it would not have filed suit against Brazil had BNDES
and PROEX simply reduced the proposed interest rate to an airline to a level
surpassing that of LIBOR or OECD rates. Canada posits that BNDES extended loans
to prospective buyers at these global interest rates, subsequent to which PROEX
export subsidies were furnished. As a result, Canada maintains that PROEX has no
bearing on the "risk posed by Brazil13."
 According to Canadian claims, BNDES assumes and manages "Brazil risk" in a
different way. Specifically, BNDES assumes the Brazil risk connected with PROEX
bonds, which refers to the risk that PROEX export subsidies would not be delivered.
BNDES, as the lender, takes on the extra risk that other financial institutions will
underestimate the value of these bonds because of the country of Brazil. As a result,
airlines don't have to warn investors about the likelihood that they won't receive
subsidies. As long as they owe money to Brazil - at subsidized rates, presumably -
there is no fear that the subsidies won't be provided14.
12
Para 4.104 of the Panel Report
13
Para 4.105 of the Panel Report
14
Para 4.106 of the Panel Report
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  Evidence produced by Canada in this case, it says, proves that "PROEX export
subsidies are primarily intended to benefit foreign buyers who, for the most part,
secure funds from non-Brazilian institutions based on their individual
creditworthiness." As evidence, Canada points to one of its most renowned customers,
Continental Airlines, which financed the purchase of its first 25 ERJ145s with a
lender outside of Brazil at rates that did not include a premium for doing business in
Brazil. Canada asserts that Brazil's assertion that the financing expenses faced by non-
Brazilian consumers of Brazilian products are primarily due to the Brazilian origin of
the items is unconvincing.
 It is impossible to suggest that non-Brazilian purchasers, who acquire financing
based on their own credit, sometimes supported by assurances from non-Brazilian
suppliers, and often in non-Brazilian financial markets, are somehow impacted by
a "Brazil risk."
 Canada adds that when taking into account things like the financial stability of
acquiring airlines and expert opinions on EMBRAER and the ERJ-145, its
financing alternatives for EMBRAER products rate higher than Brazil's.
Airfinance Journal, a highly regarded publication in the aviation industry, recently
surveyed financiers, lessors, and airlines and found that EMBRAER products
were easier to finance than those of British Aerospace and ATR, two well-
established European manufacturers. Canada cites this survey as evidence that the
ERJ-145 is a superior investment. Canada also notes that developed-nation
suppliers help EMBRAER with aircraft manufacture and development15.
 In spite of Brazil's protests, Canada insists that PROEX export subsidies do, in fact,
provide a "material advantage." Canada emphasizes that EMBRAER, Brazilian
government officials, and a large number of airlines are all sources of this recognition.
All of these organizations have gone on record as saying that PROEX's monetary
incentives played a role in their final decisions to purchase EMBRAER planes.
Comair, an American regional airline, used the differential between the subsidized
credit rates it enjoys on the acquisition of Brazilian regional aircraft and the
commercial interest rates it pays for Canadair Regional Jets as an example. Another
American regional airline, Skywest, found that while long-term debt that reaped the
benefits of Brazilian export subsidies had interest rates of 4.0 percent, long-term debt

15
Para 4.107 of the Panel Report
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 that did not receive subsidies had interest rates of 6.36 to 8.5 percent, a significant
difference of 2.36 to 4.5 percentage points16.
 Canada has three key objections to Dr. Finan's evidence about the COEX deal. First, it
claims that COEX's price was not adjusted to account for the allegedly paid by
EMBRAER costs, and that these costs were instead subsidized to a lesser extent. In
contrast, COEX's final cost was significantly lower than the initial contract price
because to discounts granted by PROEX export subsidies on top of an already
lowered price. Canada emphasizes, secondly, that the nature of the costs incurred by
EMBRAER in securing finance for the COEX agreement do not originate from
"Brazil risk." Manufacturers typically incur these charges when putting up finance
packages for similar projects. Canada concludes by saying the technique utilized to
determine the worth of EMBRAER's purportedly incurred costs is fundamentally
incorrect. It raises the question of why opportunity cost should be factored into the
pay for the "Brazil risk" that is said to exist17.

APPROACH OF THE PANEL

 Assuming, for the sake of argument, that PROEX payments are classified as payments
as defined in item (k), the crux of this disagreement pertains to the standards that
ascertain whether these payments truly result in the attainment of a "material
advantage." The criterion by which Brazil determines whether PROEX payments
"secure a material advantage in the field of export credit terms" should be a
comparison between the export credit terms offered to purchasers of Canadian
regional aircraft and those supporting transactions facilitated by PROEX payments.
 The assessment of "material advantage in the field of export credit terms" cannot be
exclusively based on the subsidies provided by a single country, as stated in the Finan
Report. Conversely, the determination of material advantage requires an assessment
of the range of export credit terms offered by one nation in comparison to those of
another nation, utilizing a methodical approach that is consistent with the current
conditions.

16
Para 4.108 of the Panel Report
17
Para 4.122 of the Panel Report
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  After careful examination of the arguments put forth, it becomes apparent that Brazil's
defence, which revolves around the notion of a "material advantage" as outlined in
item (k), is predicated on the notion that in order to determine whether a payment
qualifies for this category, one must compare the export credit terms of the transaction
facilitated by the payment with those of prospective competing transactions.
 This is an opinion with which we disagree. Brazil cites Webster's New
International Dictionary of the English Language as the source of the definition of
"advantage," which defines it as a "position that is more favorable or improved."
 The term "advantage" is defined similarly by the Shorter Oxford English
Dictionary as "a position of superiority." We share Brazil's viewpoint that the term
"advantage" inherently involves a comparative element18.
 Nevertheless, according to our analysis, the first paragraph of item (k) does not
contain any indication that comparing "material advantage" with export credit terms
offered for competing products from other Member countries is necessary.
 On the contrary, we maintain the view that a payment satisfies the definition of "used
to secure a material advantage in the field of export credit terms" when it results in
significantly more advantageous export credit terms than would be accessible without
the payment. Hence, with regard to the specific transaction at hand, we define an item
(k) payment as "used to secure a material advantage" when it enables the purchaser to
obtain export credit terms that are considerably more favourable than the customary
terms offered in the market.
 The SCM Agreement's Article 3.1(a) and the Illustrative List of Export Subsidies do
not provide any indication that the classification of a measure as a prohibited export
subsidy should be determined by whether it solely offsets advantages granted to
competing products from another Member. For example, item (c) of the Illustrative
List designates internal transport or freight charges on export shipments that are "on
terms more favourable than for domestic shipments" as export subsidies. This
evaluation remains unbiased regarding whether the charges incurred for shipments of
competing products from other members are greater, lesser, or equal.
 There is no implication in items (e), (f), (g), (h), and (i) of the Illustrative List that a
tax benefit falling below the exporter's tax burden to the same extent as foreign
competitors would not be classified as an export subsidy. These items all concern

18
Para 7.23 of the Panel Report
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 exemptions, reductions, or postponements of import duties or taxes. Brazil is
essentially requesting that we interpret the "material advantage" clause in a way that
differs from the SCM Agreement's general approach by encouraging us to consider
the relative position of competitors when determining the regulations applicable to
item (k) payments19.
 Brazil's understanding of "material advantage" can be summed up as follows: if it can
be demonstrated that a recognized export subsidy just balances out one or more
advantages that a competitive product from another Member has, it should not be
illegal. We think that such an interpretation would result in things that are not in line
with the SCM Agreement's aims and objectives. We believe that the establishment of
multilateral controls on subsidies that distort international commerce is the main goal
and purpose of the SCM Agreement. For this reason, the SCM Agreement forbids two
types of subsidies that are especially intended to affect trade: those associated with
exportation and those that favour native products over imports20.
 However, the Brazilian approach to item (k) would essentially allow a Member to use
the provision of export subsidies or any other type of subsidy by the complaining
Member as a defence to support its own export subsidy program. As a result, WTO
members would compete with one another to defend their export subsidies by citing
the actions of other members.
 It's also important to remember that some Members are excluded from the ban on
export subsidies and are entitled to special and differential treatment under Articles 27
and 29 of the SCM Agreement. It begs the question of whether developed country
Members would effectively be permitted to match the export credit terms—however
favourable—offered by developing country Members without going against the SCM
Agreement's prohibition on export subsidies—should we interpret item (k) as Brazil
has proposed. Such results would manifestly contradict the stated goals and purposes
of the Agreement.
 Brazil's attempt to present the first paragraph of item (k) as a debate between
developed and developing nations is not persuasive in our opinion.
a. First of all, Panel notes that the SCM Agreement kept the "material
advantage" phrase exactly as it was in the Tokyo Round Subsidies Code. It
seems improbable that the material advantage clause was originally intended
19
Para 7.25 of the Panel Report
20
Para 7.26 of the Panel Report
14 | P a g e
 as a safeguard for developing countries, given that developing country
signatories to the Code were exempt, under Article 14.2 of the Code, from the
commitment not to provide export subsidies for products other than certain
primary products. Furthermore, Brazil has not offered convincing proof to
back up the assertion that developing country members sought to keep the
"material advantage" clause in place during the Uruguay Round so that item
(k) payments could continue to be used to offset the high sovereign risk that
developing country members bear.
b. Second, Panel reject Brazil's basic premise that item (k)'s second paragraph
provides protection only for direct export credit financing. The second
paragraph of item (k) states that "an export credit practice that complies with
the "interest rate provisions" of the OECD Arrangement shall not be regarded
as an export subsidy prohibited by the SCM Agreement," regardless of
whether it comes from an Arrangement Participant or a non-Arrangement
WTO Member. The OECD Arrangement's "Scope of Application," Chapter
I:2, states that the Arrangement covers any official support—whether through
direct credit/financing, refinancing, interest rate support, guarantee, or
insurance—for exports of goods and/or services with repayment terms of two
years or longer21

 Therefore, if a developing country Member finds direct financing at those rates to be

excessively expensive, it may, in accordance with the second paragraph of item (k),
offer interest rate support to lower the interest rates on export credits to the levels
allowed by the OECD Arrangement. As a result, Brazil's claim that Members of
underdeveloped countries are unable to pay for the protection offered by item (k)'s
second paragraph and must instead depend on the first paragraph's "material
advantage" clause is likewise unjustified.
 Henceforth, Panel observed that an item (k) payment qualifies as being "used to
secure a material advantage," making it a prohibited export subsidy, when it makes
export credit available on terms that are substantially better than what the purchaser
would normally be able to obtain in the market for the particular transaction in
question. This is based on the previously mentioned reasons.22
21
Para 7.31 of the Panel Report
22
Para 7.32 of the Panel Report
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ISSUE BEFORE THE APPELLATE BODY

On May 1999, Brazil notified it intention to the DSB for raise issue before the appellate body.
Before the appellate body, Canada argues that Panel is right in interpretating the meaning of
‘material advantage’ in item (k), therefore, Brazil’s alleged ‘affirmative defence’ is null.

The following issues were raised in appeal23-

1. (a) 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
material advantage in the field of export credit terms" under item (k) of the
Illustrative List?

APPROACH OF THE APPELLATE BODY

 Regarding the Panel's interpretation of the "material advantage" phrase, the Appellate
Body draws attention to an important detail. "Material advantage" was first defined by
the Panel as something that was "materially more favourable than the terms that
would have been available in the absence of the payment." Nevertheless, as the
Appellate Body notes, the Panel modified its meaning in later remarks to refer to
terms that are "more favourable than the terms that would otherwise be available in
the marketplace to the purchaser with respect to the transaction in question."

 Notably, the word "material" was removed from this revised understanding. The
Panel asserts—and the Appellate Body agrees—that the word "advantage" denotes "a
more favourable or improved position" or a "superior position." However, it does
draw attention to the fact that item (k) expressly uses the adjective "material" to
define the word "advantage." As previously indicated, the Panel effectively eliminated
the word "material" from item (k) in its final interpretation of the phrase "used to
secure a material advantage" applicable to the export subsidies for regional aircraft
under PROEX. The Appellate Body believes that this is a mistake24.

 Furthermore, the Appellate Body notes that the Panel used the "marketplace" as a
point of reference when assessing the subsidies associated with the sale of regional
aircraft under PROEX in two of its explanatory remarks. Nevertheless, the Panel did

23
Appellate Body Report, Page 3, Para 8
24
Para 7.17 of the Panel Report
16 | P a g e
 not refer to the "marketplace" as the benchmark for comparison in either of its two
comments.

In summary, the meaning of the phrase "used to secure a material advantage in the field of
export credit terms" in item (k) of the Illustrative List has been reversed and revised by the
Appellate Body. The Panel's conclusion that Brazil failed to demonstrate that the export
subsidies for regional aircraft under PROEX do not meet the criteria of being "used to secure
a material advantage in the field of export credit terms" as stated in item (k) has been
affirmed anyhow. As such, the Panel's denial of Brazil's "affirmative defence" on the grounds
of item (k) of the Illustrative List is upheld by the Appellate Body25.

CONCLUSION & FINDINGS

Brazil's understanding of "material advantage" basically says that if an export subsidy is

disclosed and only serves to offset the benefits received by a competing product from another
Member, it should not be illegal. This point of view runs counter to the SCM Agreement's
main objective, which is to create international rules for subsidies that stifle trade
internationally. Two specific forms of subsidies are expressly prohibited by the SCM
Agreement: those that are tied to export performance and those that purposefully aim to affect
trade by favouring domestically produced goods over imports.

Brazil's approach to item (k) would allow a Member to essentially use the conduct of the
complaining Member as justification for providing export subsidies or any other type of
subsidy. Because each WTO member might attempt to defend the offering of export subsidies
based on the behaviour of other Members, this could result in a race to the bottom.

The following obe4rvation made by the Appellate body in line with Panel findings-

 PROEX interest rate equalization payments for Brazilian regional aircraft exports are
not "permitted" as per the first paragraph of item (k) in the Illustrative List of Export
Subsidies.

Therefore, Appellate body 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 and alters the Panel's

25
Appellate Body Report, Page 56, Para 186
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interpretation of "material advantage" in item (k) but agrees with the Panel's conclusion that
Brazil didn't prove its case, upholding the Panel's dismissal of Brazil's "affirmative defence"
based on item (k).

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