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Brazil & Canada Regional Aircraft

Brazil & Canada Regional Aircraft. Agustin Castro Heather Collins Akinleye Akinrinade. History & Context. Canadian aerospace sector consists of 400 companies employing 60,000 people (1997) Major economic engine, generating business for numerous suppliers & sub-contractors.

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Brazil & Canada Regional Aircraft

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  1. Brazil & Canada Regional Aircraft Agustin Castro Heather Collins Akinleye Akinrinade

  2. History & Context • Canadian aerospace sector consists of 400 companies employing 60,000 people (1997) • Major economic engine, generating business for numerous suppliers & sub-contractors. • In 1997 alone Canada exported $9.4b worth of aircraft industry products to world markets • Exports were 70% of total sales of $13.4b

  3. History and Context • Brazil also developed aerospace sector of its economy • Largest Brazilian aircraft exporter is Embraer • Employs 16,500 people. • Contributes at least 3000 indirect jobs to the economy • 4th largest exporter

  4. History & Context • Brazil poses threat to Canadian aerospace industry by taking valuable contracts from its businesses • Moreover Brazil facilitates this by providing “illegal subsidies” under its Programa de Financiamento as Exportacoes (PROEX) • Series of consultations between Brazil and Canada.

  5. History & Context • Consultations reach an impasse prompting Canada to initiate formal dispute settlement procedures under WTO (DS 46) • Brazil retaliates by challenging Canada’s Technology Partnership Canada (TPC) and Export Development Corporation (EDC) programs as illegal subsidies under WTO rules. • Disputes proceed in sequence agreed upon by both parties • Canada’s first expression of concern about PROEX in June 1996. DSB procedures commenced July 10 1998. Show of bilateral commitment to settle issues outside WTO

  6. DS 46Brazil — Export Financing Programme for Aircraft • PROEX – Brazilian government subsidy on interest rates • Article 4 subsidies agreement – request for consultations • Subsidies Agreement Article 3 – prohibits subsidies • Subsidies Agreement Article 27.4 – deals with how long developing countries can maintain their subsidies • Subsidies Agreement Article 27.5 – developing countries become competitive

  7. Position of Main Parties Canada (DS 46) • PROEX interest equalization payments create unfair competitive environment • PROEX subsidies have increased since 1 January 1995 • PROEX subsidies are not exempt from Item (k) of Annex 1 of SCM Agreement • Brazil does not qualify for 8 year grace period under Article 27.2(b) of SCM Agreement

  8. Position of Main Parties Brazil • PROEX is simply putting Brazil on equal footing in financing terms • Brazil has made changes to PROEX since Canada initial complaint Canada • Disregard Brazil’s legislative changes to PROEX, they are cosmetic, avoiding litigation rather than complying with int’l regulation

  9. Panel Decision: DS 46 • The Panel found that Brazil’s measures were inconsistent with: • Articles 3.1(a) which states “Except as provided in the Agreement on Agriculture, the following subsidies, within the meaning of Article 1, shall be prohibited: (a)  subsidies contingent, in law or in fact(4), whether solely or as one of several other conditions, upon export performance, including those illustrated in Annex (5) • 27.4 of the Subsidies Agreement – developing countries will phase out export subsidies within 8 years. However, a developing country Member shall not increase the level of its export subsidies(55), and shall eliminate them within a period shorter than that provided for in this paragraph when the use of such export subsidies is inconsistent  with its development needs.

  10. Appellate Body Decision: DS 46 • 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. • Item (k) in Annex I: governments cannot give export credits at rates below those which they actually have to pay for the funds so employed or would have to pay if they borrowed money on the international capital markets

  11. DS 70Canada-Measures Affecting the Export of Civilian Aircraft • TPC (Technology Partnership Canada) – a repayable loan for R&D that gets paid back once the technology comes to market. • EDC – Export Development Corporation gives loans to companies that export products from Canada • Article 4 subsidies agreement – provides procedures for how to settle a dispute between 2 countries when one countries feels it is being abused by subsidies. • Subsidies Agreement Article 3 which prohibits subsidies.

  12. Position of Main Parties Brazil (DS 70) • Challenged subsidies granted by the Government of Canada or its provinces intended to support the export of civilian aircraft • Brazil contended that these measures are inconsistent with Article 3 of the Subsidies Agreement.

  13. Position of the Parties (cont’d) • EDC equity infusion into aircraft industry • EDC loan guarantees • Subsidies to Bombardier from Gov’t of Canada in amounts of $87m and $57m • $147m subsidy to Pratt & Whitney of Canada • Benefits to Bombardier by Gov’t of Quebec available only to exports • Sale of asset to Bombadier by Gov’t of Ontario on non-commercial terms. • Others

  14. Position of the Parties (cont’d) Canada • Providing funds to counteract Brazilian subsidies on a case by case basis

  15. Panel Decision: DS 70 • The Panel found that certain of TCP measures were inconsistent with Articles • 3.1(a) of the Subsidies Agreement • 3.2 of the Subsidies Agreement • Panel rejected Brazil’s claim that EDC assistance to the Canadian regional aircraft industry constitutes export subsidies.

  16. Appellate Body Decision: DS 70 • The Appellate Body upheld the findings of the panel.

  17. DS 71 Canada-Measures Affecting the Export of Civilian Aircraft • On 10 March 1997, Brazil requested consultations with Canada in respect of the same measures complained of in WT/DS70. However, the request was made pursuant to Article 7 of the Subsidies Agreement. In this request, Brazil contended that the measures are “actionable subsidies” within the meaning of Part III of the Subsidies Agreement, and cause adverse effects within the meaning of Article 5 of the Agreement. The case was never followed through with.

  18. DS 222Canada — Export Credits and Loan Guarantees for Regional Aircraft • EDC – Export Development Corporation • IQ – Investment Quebec – gives funding to different companies • Canada Account – provided export credits to companies • Article 1 of the SCM Agreement, since they are financial contributions that confer a benefit. • Article 3 of the SCM Agreement, they are also contingent, in law or in fact, upon export, and constitute, therefore, a violation • Item (k) of Annex I - which prohibits export credits • Item (j) of Annex I - which government guaranteed insurance programs

  19. Position of Main Parties Brazil • Canada providing export credits via Export Development Corp (EDC) within meaning of item (k) of Annex 1 to SCM • EDC, Industry Canada and Province of Quebec providing loan guarantees to support exports within meaning of item (j) of Annex 1 to SCM • Subsidies within the meaning of Article 1 of the Subsidies Agreement, since they are financial contributions that confer a benefit. They are also contingent, in law or in fact, upon export, and constitute, therefore, a violation of Article 3 of the Subsidies Agreement

  20. Position of the Parties (cont’d) Canada • EDC financing is within OECD guidelines which seek to put member countries on even keel with other exporters

  21. Panel Decision: DS 222 • Rejected Brazil’s claims that the EDC Corporate Account, Canada Account, the IQ programs “as such” or “as applied” constitute prohibited export subsidies • Upheld Brazil’s claim that the EDC Canada Account financing to Air Wisconsin, to Air Nostrum and to Comair constitutes a prohibited export subsidy • Rejected Brazil’s claim that the EDC Corporate Account financing to ASA, ACA, Kendell Air Nostrum and Comair in December 1996, March 1997 and March 1998 constitutes a prohibited export subsidy • Rejected Brazil’s claim that IQ equity guarantees to ACA, Air Littoral, Midway, Mesa Air group, Air Nostrum and Air Wisconsin constitute prohibited export subsidies • Rejected Brazil’s claim that IQ loan guarantees to Mesa Air Group and Air Wisconsin constitute prohibited export subsidies

  22. Implementation and Sanctions • Love is in the air… • Recapitulation: • DS46 Canada: “Brazil — Export Financing Program for Aircraft”, June 1996-July 2001 • DS70 Brazil: “Canada — Measures Affecting the Export of Civilian Aircraft”, March 1997-July 2000 • DS222 Brazil: Canada — Export Credits and Loan Guarantees for Regional Aircraft”, January 2001-February 2003.

  23. Implementation and Sanctions • Trading… blows • Every time complainant won, at least partially • Each time loser said it would comply with the findings • Not surprisingly, every time complainant went back claiming that the loser did not comply fully with the rulings and recommendations • DSU found that claim correct, and everything started again 

  24. Implementation and Sanctions • Tweaking the subsidies • Brazil: • PROEX I • PROEX II • PROEX III • Canada: • TPC (eliminated) • Canada Account • Revised Canada Account

  25. Implementation and Sanctions • Not enough to satisfy each other • Tit-for-tat • Canada was given the right (December 12th, 2000) to impose sanctions of up to C$344.2 million per year –an amount equivalent to roughly $229.5 million at that time. • Brazil got authorization (March 18th, 2003) to suspend concessions covering trade by $247.8 million, after seeking $3.36 billion • Neither country exercised its right, and instead started bilateral negotiations to find a solution

  26. Implementation and Sanctions • Talk, but keep going • Canada: • http://www.edc.ca/corpinfo/disclosure/canadaacct_e.htm?cid=red1062 • Brazil: • Embraer delivered 361 regional jets between 2001 and 2003, with an estimated value of $6.2 billion • $4.7 billion would have been financed by BNDES, which is equivalent to three quarters of the total sales in regional aircraft

  27. Interests Flying Around • Governments doing the bid of their natl champions: • “Canada”=“Bombardier”, the 3rd largest worldwide • “Brazil” is a synonym of “Embraer”, the 4th largest • Fighting for a bounty:

  28. Interests Flying Around • European Union • Fairchild Dornier • On January 6th, 2004 closed procedure opened in 1999 alleging that: • after the final decision in DS46, “during the last two years of monitoring no further allegations have been made or evidence submitted against Brazil in that respect” • “In the absence of any evidence concerning unfair trade practices by Brazil after the adoption of the WTO Panel report on PROEX III, the European Communities considers that no action is required and that, therefore (…) the procedure should be terminated”. • EADS, Dassault Aviation, Snecma and Thales own 20% Embraer • USA and Korea also, with active participation

  29. Trade Issues: Our Observations • High-skies battle • Two big countries, two big firms, a juicy market… • Countries always try to evade full compliance • “How to comply the rules but preserving most of the distortion” game • DSU working well under those circumstances • Slowly but inexorably nudging countries to change offending rules • No trade war: successful mixing of proceedings to address grievances with diplomatic efforts • A peek into the near future –Airbus-Boeing?

  30. Work Cited Cont’ • Bombardier website, Profile and Press Releases: • http://www.bombardier.com/index.jsp • “Bombardier statement on WTO”, Montreal, Aug. 23, 2001: http://www.bombardier.com/index.jsp?id=0_0&lang=en&file=/en/0_0/pressrelease.jsp%3Fgroup%3D0_0%26lan%3Den%26action%3Dview%26mode%3Dlist%26year%3D2001%26id%3D1270%26sCateg%3D0_0 • “Bombardier statement on WTO panel ruling”, Montreal, Jan. 28, 2002: http://www.bombardier.com/index.jsp?id=0_0&lang=en&file=/en/0_0/pressrelease.jsp%3Fgroup%3D0_0%26lan%3Den%26action%3Dview%26mode%3Dlist%26year%3D2001%26id%3D1270%26sCateg%3D0_0 • “Bombardier Analysis of Embraer's Financing Data”, Mar 01, 2004: http://www.bombardier.com/index.jsp?id=0_0&lang=en&file=/en/0_0/pressrelease.jsp%3Fgroup%3D0_0%26lan%3Den%26action%3Dview%26mode%3Dlist%26year%3D2001%26id%3D1270%26sCateg%3D0_0 • Embraer website: • http://www.embraer.com/english/content/empresa/profile.asp • http://www.embraer.com/ri/english/content/informacoes_corporativas/historia.asp

  31. Work Cited Cont’ • European Union, Official Journal, Jan. 8, 2004, L 4/25: • http://72.14.203.104/search?q=cache:MIc2hnUtFOwJ:europa.eu.int/eur-lex/lex/LexUriServ/LexUriServ.do%3Furi%3DOJ:L:2004:004:0025:0026:EN:PDF+proex+iii&hl=en&gl=us&ct=clnk&cd=2 • Department of Foreign Affairs and International Trade of Canada, “Canada Account Transaction for Aerospace Industry”, May 05, 2005: • http://w01.international.gc.ca/minpub/Publication.asp?publication_id=382524&Language=E • The Economist: • “Small is beautiful”, Mar. 15, 2001: http://www.economist.com/displaystory.cfm?story_id=533266 • “Flying into battle”, May 6, 2004: http://www.economist.com/displaystory.cfm?story_id=2653557 • The Gazette “Tories Start draining the Subsidy Swamp” http://www.canada.com/montrealgazette/news/editorial/story.html?id=fb4aa55d-065b-4114-80b7-159f63b765b8 • The National Post “Bernier out to revamp Subsidies” http://www.canada.com/nationalpost/financialpost/story.html?id=4eb9d498-6511-4b68-8b6d-a178409634a4

  32. Work Cited • WTO “Canada — Export Credits and Loan Guarantees for Regional Aircraft” http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds222_e.htm • WTO “Canada — Measures Affecting the Export of Civilian Aircraft” http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds70_e.htm • WTO “Agreement on Subsidies and Countervailing Measures” http://www.wto.org/english/docs_e/legal_e/24-scm_01_e.htm#articleV • WTO “Brazil — Export Financing Program for Aircraft” http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds46_e.htm • WTO “Agreement on Subsidies and Countervailing Measures”http://www.wto.org/english/docs_e/legal_e/24-scm_01_e.htm • Defense-Aerospace.com “Appeal Panel Slams Canada's TPC, Questions EDC And Rules ProEx Is Not Illegal”. http://www.defense-aerospace.com/cgi-bin/client/modele.pl?prod=546&session=dae.19813570.1144984189.RD8SfcOa9dUAABsWC-s&modele=jdc_1 • Sice “Canada - Measures Affecting the Export of Civilian Aircraft” http://www.sice.oas.org/DISPUTE/wto/70r00/70r21.asp

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