BENEFITS PROVIDED UNDER THE CANADA-QUEBEC SUBSIDIARY AGREEMENTS ON INDUSTRIAL DEVELOPMENT

BENEFITS PROVIDED UNDER THE CANADA-QUEBEC SUBSIDIARY AGREEMENTS ON INDUSTRIAL DEVELOPMENT

1. Arguments of the parties

   1. 
      Brazil claims that benefits provided to the regional aircraft industry⁵⁹⁰ under the Canada-Québec Subsidiary Agreements on Industrial Development constitute prohibited export subsidies contrary to Article 3.1(a) and 3.2 of the SCM Agreement.
      
   2. 
      Brazil asserts that under the Subsidiary Agreements, the Governments of Canada and Québec jointly fund major industrial projects aimed at improving the competitiveness of Québec’s economy. Brazil argues that Subsidiary Agreement assistance has "as an historical matter" been granted to the Canadian regional aircraft industry on terms described as "conditionally repayable". Brazil asserts that assistance under the Subsidiary Agreements may be in the form of repayable or non-repayable contributions. Brazil states that both types of contribution confer a "benefit" within the meaning of Article 1.1(b) of the SCM Agreement. Brazil states that conditional repayment confers a benefit "because the recipient has no down-side risk; if the project is unsuccessful, the contribution need not be repaid."⁵⁹¹ Even if the loan is repaid, Brazil asserts that a "benefit" is conferred if "the rate of return is such that the lender is not compensated for either the risk that it would have received no payment or the extended repayment period during which neither principal nor interest is due."⁵⁹² Brazil notes that Canada notified the 1988 Memorandum of Understanding that provided the authority for the 1992 Subsidiary Agreement to the WTO SCM Committee. In its notification, Canada informed the Committee that "[a]ssistance was provided in the form of repayable or non-repayable contributions."⁵⁹³
      
   3. 
      According to Brazil, the purpose of the Subsidiary Agreements is explicitly to foster development of export markets for Québec products by “[p]romot[ing] access to new foreign as well as domestic markets.”⁵⁹⁴ Brazil argues that financing provided under the auspices of the Subsidiary Agreements is often explicitly directed at export-oriented projects and industries. Brazil cites a study prepared by the Canadian Reform Party which reports that the regional aircraft sector has been a significant recipient of benefits under the Subsidiary Agreements. According to Brazil, Subsidiary Agreement funds disbursed to the Canadian regional aircraft industry were granted to an industry that is totally export oriented, precisely because it is an export industry and was anticipated to remain so. For these reasons, Brazil asserts that the Subsidiary Agreement as applied, but not per se, grants prohibited export subsidies to the regional aircraft sector, contrary to Article 3 of the SCM Agreement. In support of its claim, Brazil has adduced evidence with regard to a number of alleged instances of Subsidiary Agreement assistance. Brazil has referred to press releases concerning the grant of a $2.5 million repayable loan to Rolls Royce Canada Ltd., and a $4.6 million repayable loan to Lamines CTEK. However, in response to a question from the Panel, Brazil stated that it has not claimed that the assistance described in these press releases constitutes a subsidy within the meaning of Article 1 of the SCM Agreement, "among other reasons because this assistance is not [granted] to the regional aircraft industry."
      
   4. 
      Brazil also submitted a study prepared by the Canadian Reform Party which identifies five instances of assistance allegedly provided to Bombardier under the Subsidiary Agreement programmes. Brazil refers to this study to demonstrate that, "as an historical matter",⁵⁹⁵ Subsidiary Agreement assistance has been granted to the Canadian regional aircraft industry "on terms described as 'conditionally repayable'".
      
   5. 
      The final Subsidiary Agreement transaction identified by Brazil concerns a payment of $6,586,547 to Bombardier Canadair Group Montreal Que, identified in the 1996-1997 Public Accounts of Canada. This payment is presented by Brazil as proof that "Subsidiary Agreement assistance has gone to the Canadian regional aircraft industry".
      
   6. 
      While not conceding this issue, Canada notes that it has not put in a defence on whether Subsidiary Agreement assistance to the Canadian regional aircraft industry takes the form of "subsidies" within the meaning of Article 1 of the SCM Agreement. Canada argues primarily that Subsidiary Agreement assistance is not contingent on export. In particular, Canada notes that contributions under the Subsidiary Agreement promote access “to new foreign as well as domestic markets."
      
   7. 
      On the basis of information in the record, we asked Canada to submit details of the Subsidiary Agreement contributions to Rolls Royce and Lamines CTEK identified by Brazil. Canada replied:
      

Canada notes two additional points. First, Brazil has made no specific allegation about contributions to Rolls Royce or Lamines CTEK. Neither has it has adduced any evidence whatever in support of its vague and unspecific allegations concerning “benefits” under the Subsidiary Agreement. Canada does not consider it appropriate to adduce evidence in response to allegations not made and a case that has not been established. Second, As Canada noted in paragraph 99 of its Second Oral Submission, the contribution to Lamines CTEK was in respect of certain electronic materials not related to the civil aircraft sector. As such, it is not within the Panel’s jurisdiction.

Finally, most of the information requested by the Panel is sensitive business confidential information. Canada’s desire to present to the Panel such information as may help it arrive at a decision must be balanced against the commercial interests and legal rights of private parties not Party to this dispute.

Accordingly, Canada, with the consent of the Government of Quebec, has provided the Rolls Royce contribution agreement, as Business Confidential Information, with clauses relating to repayment terms blocked (see BCI Tab 4).

8. 
   In commenting on Canada's refusal to provide this information in full, Brazil stated:
   

2. Evaluation by the Panel

   1. 
      We shall commence our examination of Brazil's claim by determining whether there is a prima facie case that Subsidiary Agreement assistance to the Canadian regional aircraft industry has taken the form of "subsidies" within the meaning of Article 1 of the SCM Agreement. Only if we reach an affirmative conclusion in this regard will we consider whether such assistance is "contingent … upon … export performance" within the meaning of Article 3.1(a).
      
   2. 
      Brazil initially argued that Subsidiary Agreement assistance could be provided in the form of non-repayable contributions. In support, Brazil relied on Canada's notification to the WTO SCM Committee, made pursuant to Article 25.2 of the SCM Agreement. We note that, however, that Article 25.7 provides:
      

In our view, Article 25.7 of the SCM Agreement effectively precludes us from finding a prima facie case that Subsidiary Agreement assistance is provided in the form of non-repayable contributions simply on the basis of Canada's notification of that programme.

1. 
   Brazil also submitted a study prepared by the Canadian Reform Party. This study refers to five instances of alleged Subsidiary Agreement assistance. The only instance of Subsidiary Agreement defined as "non-repayable" relates to a 1989 project for "Snowmobile Chassis made out of composite materials". This study therefore lends no support to Brazil's claim concerning non-repayable Subsidiary Agreement contributions to the Canadian regional aircraft industry.
   
2. 
   Brazil has adduced no other evidence to demonstrate that Subsidiary Agreement assistance generally is provided in the form of non-repayable contributions, or that non-repayable contributions are provided to the Canadian regional aircraft industry in particular.
   
3. 
   We note that Brazil has conceded that the two Subsidiary Agreement contributions to Rolls Royce and Lamines CTEK did not concern the Canadian regional aircraft industry. Accordingly, we shall not take these contributions into account when reviewing Brazil's claim against Subsidiary Agreement assistance to the Canadian regional aircraft industry.
   
4. 
   Brazil also relies on the aforementioned Canadian Reform Party study to demonstrate that, "as an historical matter",⁵⁹⁷ Subsidiary Agreement assistance has been granted to the Canadian regional aircraft industry "on terms described as 'conditionally repayable'".⁵⁹⁸ Brazil asserts that "conditionally repayable" contributions confer a "benefit" if the rate of return is such that the lender is not compensated for either the risk that it would have received no payment or the extended repayment period during which neither principal nor interest is due. We note that the study identifies five instances of alleged Subsidiary Agreement assistance. However, Brazil fails to demonstrate that any of the five instances of alleged Subsidiary Agreement assistance concerns the regional aircraft industry. Since four of the alleged instances of Subsidiary Agreement assistance identified in the study are described as relating to projects concerning "Snowmobile Chassis made out of composite materials", "Continued development of VENUS I, "equipment for centre of excellence", and "Equipment for centre of excellence", and since none of the alleged Subsidiary Agreement assistance is expressly labelled as relating to regional aircraft projects, we are not convinced that any of the Subsidiary Agreement assistance referred to in the study concerns Canadian regional aircraft. Furthermore, none of the five instances of Subsidiary Agreement assistance identified in the study is described as being "conditionally repayable", as alleged by Brazil. For these reasons, we consider that this study provides no support to Brazil's claim that Subsidiary Agreement assistance is provided to the regional aircraft industry on "conditionally repayable" terms that confer a "benefit" within the meaning of Article 1.1(b) of the SCM Agreement.
   
5. 
   We note that Brazil also refers to a Subsidiary Agreement contribution to Bombardier Canadair Group Montreal Que, identified in the 1996-1997 Public Accounts of Canada, as proof that Subsidiary Agreement assistance has gone to the Canadian regional aircraft industry. We agree with Brazil that this contribution does appear to have been provided to a Canadian manufacturer of regional aircraft. However, Brazil fails to provide any evidence, or even to argue, that the relevant contribution confers a "benefit" within the meaning of Article 1.1(b) of the SCM Agreement. As noted above, Brazil claims that Subsidiary Agreement assistance confers a "benefit" if it is either non-repayable, or if it is conditionally repayable and the rate of return is such that the lender is not compensated for either the risk that it would have received no payment or the extended repayment period during which neither principal nor interest is due. However (assuming arguendo that Brazil's analysis of "benefit" in such circumstances is accurate), Brazil makes no attempt to establish that this particular contribution is either non-repayable, or that it is conditionally repayable and the rate of return is such that the lender is not compensated for either the risk that it would have received no payment or the extended repayment period during which neither principal nor interest is due. In such circumstances, the evidence adduced by Brazil concerning the Subsidiary Agreement contribution to Bombardier provides no support for Brazil's claim that Subsidiary Agreement assistance to the Canadian regional aircraft industry takes the form of "subsidies".
   
6. 
   For the above reasons, we find that there is no prima facie case in support of Brazil's claim that Subsidiary Agreement assistance to the Canadian regional aircraft industry has taken the form of subsidies within the meaning of Article 1 of the SCM Agreement.
   
7. 
   In light of the above finding, it is not necessary for us to consider whether Subsidiary Agreement assistance to the regional aircraft industry is contingent on export. We recall that Brazil asked the Panel to adopt "adverse inferences" that the Subsidiary Agreement contributions to Rolls Royce and Lamines CTEK were de facto export contingent. Since it is not necessary for us to examine the issue of export contingency, we decline to consider Brazil's request for "adverse inferences" on this issue.
   
8. 
   Accordingly, we reject Brazil's claim that Subsidiary Agreement assistance to the Canadian regional aircraft industry takes the form of prohibited export subsidies, contrary to Article 3.1(a) and 3.2 of the SCM Agreement.
   
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