SOCIETE DE DEVELOPPEMENT INDUSTRIEL DU QUEBEC

SOCIETE DE DEVELOPPEMENT INDUSTRIEL DU QUEBEC

1. Arguments by the parties

   1. 
      Brazil submits that SDI assistance has been provided to the Canadian regional aircraft industry⁵⁹⁹ in the form of prohibited export subsidies, contrary to Articles 3.1(a) and 3.2 of the SCM Agreement. Brazil asserts that, under the Société de Développement Industriel du Québec (“SDI”), the Government of Quebec sponsors export programs "designed to promote the export of Quebec-produced goods and services.”⁶⁰⁰ Referring to the SDI Act, Brazil states that SDI was formed with the objective “to promote economic development in Québec, particularly by encouraging the development of businesses, the growth of exports, research and the development of new techniques.”⁶⁰¹ SDI provides Quebec businesses with “guarantee[s] of payment or repayment of a financial obligation” and “loan[s] at the current market rate”⁶⁰² for the purpose of assisting those businesses with “[l]a conquète de marchés à l’exportation,”⁶⁰³ and to assist with “tout projet d’exportation” or “de démarrage à l’exportation.”⁶⁰⁴ Brazil asserts that SDI not only funds exports to other of the Canadian Provinces, but also specifically supports transactions “à l’étranger".
      
   2. 
      Brazil asserts that SDI funding is extended on conditionally repayable terms that confer a "benefit" within the meaning of Article 1.1 of the SCM Agreement "because the recipient has no down-side risk -- that is to say, if the project is unsuccessful, SDI funds need not be repaid …"⁶⁰⁵ Brazil claims that SDI funding is "contingent …in fact … upon export performance" within the meaning of Article 3.1(a) because (1) one of the objectives of the SDI is the "growth of exports" and (2) when SDI funds were disbursed to the Canadian regional aircraft industry, they were given to an industry that is overwhelmingly export oriented, precisely because it is an export industry and was anticipated to remain so.
      
   3. 
      Brazil notes that SDI was recently “regrouped” for administrative purposes into a new corporation, known as Investissement-Québec (“IQ”).⁶⁰⁶ On the basis of materials from the SDI website, Brazil states that IQ maintains the resources, including the staff, of SDI.⁶⁰⁷ Brazil notes that, according to the WTO November 1998 Trade Policy Review of Canada, the IQ programme “provides export guarantees for projects considered too risky by private financial institutions.”⁶⁰⁸ The Trade Policy Review also states that IQ assistance “is available for export development or expansion, or purchases of foreign companies, or for contract finance.”⁶⁰⁹ Brazil asserts that IQ confers an Article 1.1 "benefit" by offering guarantees for projects which are “considered too risky by private financial institutions,” because it provides resources which would otherwise not be available.
      
   4. 
      Brazil understands Canada to argue that SDI activities are "immunized" from the Article 3 prohibition because SDI also provides funding to domestic projects. Brazil does not contest that some SDI or IQ funds may have gone to other industries with sales in domestic markets. However, Brazil claims that "when SDI or IQ funds were disbursed to the Canadian regional aircraft industry, they were given to an industry that is overwhelmingly export oriented, precisely because it is an export industry and was anticipated to remain so."
      
   5. 
      Canada claims that Brazil's allegations about the SDI are unfounded and incorrect. While expressly denying that SDI assistance in the civil aircraft sector takes the form of "subsidies" within the meaning of Article 1.1 of the SCM Agreement, Canada states that it has not put in a defence regarding whether such SDI assistance constitutes "subsidies". Rather, Canada argued primarily that SDI assistance in the civil aircraft sector is not in law or in fact contingent upon export performance. Canada notes that, according to Article 2 of the SDI Act, the objective of the SDI is to "favoriser le développement économique du Québec, notamment en encouragent le développement des entreprises, la croissance des exportations et les activités de recherche et d’innovation." Canada claims that Brazil itself acknowledges that "exportation" in this context means exports outside Québec, including the other provinces of Canada. Canada submits that SDI has as a general objective the enhancement of Québec’s competitiveness and, as a desirable but not necessary result, an increase in Québec’s exports. Canada asserts that export performance is not a criterion of success for either the programme as a whole or its activities;⁶¹⁰ nor is export performance a condition for receiving SDI contributions. Canada asserts that 458 SDI activities were authorised in 1997-1998, of which 53 percent involved loans or loan guarantees of less than C$200,000. Canada states that SDI comprises four sets of eligibility criteria, one of which concerns "export development". According to Canada, "export development" includes credit insurance, financing for foreign direct investment by Québec companies, and inventory financing. Canada asserts that one out of 39 financing activities and 96 out of 419 guarantees authorised were carried out under the exportation criterion.⁶¹¹ Canada claims that none of these related to the civil aircraft sector.
      
   6. 
      Canada also asks the Panel to ignore Brazil's "inappropriate use" of the WTO's November 1998 Trade Policy Review of Canada. Canada asserts that section A(i) of the WTO Trade Policy Review Mechanism provides that the review mechanism "is not, however, intended to serve as a basis for the enforcement of specific obligations under the Agreements or for dispute settlement procedures …."
      
   7. 
      Canada confirms that it does consider that the fact that SDI funds are available to both domestic and export markets does immunise them to the prohibition of Article 3.1(a). According to Canada, Article 3.1(a) does not prohibit subsidies that are aimed at both domestic and export markets.
      
   8. 
      On the basis of information in the record, we asked Canada to provide details of three Aerospace Industry Development Fund contributions, and five Private Investment and Job Creation Promotion Fund ("FAIRE") transactions, all identified in the SDI Annual Report 1997-1998. Canada refused to provide this information in full. Canada asserted that it had not put in a defence regarding whether the Aerospace Industry Development Fund contributions are "subsidies", and that Brazil had not made a specific allegation against these contributions. Canada submitted some of the information requested by the Panel, but redacted information concerning repayment terms relevant to determining whether or not the relevant contributions constitute "subsidies". With regard to FAIRE, Canada asserted that the five activities were not in the civil aircraft sector. In commenting on Canada's failure to respond to the Panel in full in respect of the Aerospace Industry Development Fund contributions, Brazil asked the Panel to adopt "adverse inferences" that these contributions are de facto contingent on export.
      

2. Evaluation by the Panel

   1. 
      Brazil challenges assistance provided to the Canadian regional aircraft industry under the SDI and IQ programmes. We shall examine both types of assistance in turn, considering first whether such assistance takes the form of "subsidies" within the meaning of Article 1 of the SCM Agreement. Only if we find subsidization will we consider whether such assistance is "contingent … upon … export performance", within the meaning of Article 3.1(a) of the SCM Agreement.
      

1. Assistance provided under the IQ programme

   1. 
      Brazil refers to the WTO November 1998 Trade Policy Review of Canada to argue that IQ assistance to the regional aircraft industry confers a "benefit" by "provid[ing] export guarantees for projects considered too risky by private financial institutions". We note that section A(i) of the WTO Trade Policy Review Mechanism provides that the review mechanism "is not, however, intended to serve as a basis for the enforcement of specific obligations under the Agreements or for dispute settlement procedures …." Accordingly, we attach no importance to the Trade Policy Review of Canada in considering Brazil's arguments concerning IQ assistance to the regional aircraft industry.
      
   2. 
      Brazil has failed to adduce any evidence of IQ assistance to the Canadian regional aircraft sector. Accordingly, there is no basis for a prima facie case that IQ assistance has been provided to the regional aircraft industry in the form of export subsidies, contrary to Articles 3.1(a) and 3.2 of the SCM Agreement.
      

2. Assistance provided under the SDI programme

   1. 
      In its first submission, Brazil included a claim concerning a joint SDI / DIPP conditionally-repayable contribution of $43 million made in April 1989 for the development of Bombardier's 50-seat Canadair Regional Jet ("CRJ"). However, Brazil subsequently withdrew this claim on the grounds that the contribution is not subject to the SCM Agreement because, in its view, the SCM Agreement does not apply to allegedly prohibited export subsidies granted prior to 1 January 1995.⁶¹² In these circumstances, we will not consider this contribution in resolving Brazil's claim concerning SDI assistance to the Canadian regional aircraft industry.
      
   2. 
      The SDI Annual Report 1997-1998 refers to three contributions under the Aerospace Industry Development Fund. We consider that these contributions are covered by Brazil's claim, since its claim effectively covers all SDI assistance to the regional aircraft industry.⁶¹³ We note that these contributions are described in the SDI Annual Report as "loans and shares". In its first submission, Brazil expressly cites SDI documentation that refers to "loan[s] at the market rate". Since we consider that a "loan at the market rate" would not confer a "benefit" within the meaning of Article 1.1(b) of the SCM Agreement,⁶¹⁴ these three Aerospace Industry Development Fund contributions provide no support for Brazil's claim against SDI assistance to the Canadian regional aircraft industry.
      
   3. 
      The SDI Annual Report 1997-1998 also refers to five FAIRE transactions. However, Canada has asserted that these transactions did not relate to the civil aircraft industry. As Brazil does not contest this assertion, these transactions provide no support for Brazil's claim against SDI assistance to the Canadian regional aircraft industry.
      
   4. 
      Brazil has adduced no further evidence in support of its claim against SDI assistance to the regional aircraft industry. Accordingly, there is no prima facie case that SDI assistance has been provided to the regional aircraft industry in the form of subsidies within the meaning of Article 1 of the SCM Agreement
      
   5. 
      For the above reasons, we reject Brazil's claims that SDI and IQ assistance to the Canadian regional aircraft industry takes the form of prohibited export subsidies, contrary to Articles 3.1(a) and 3.2 of the SCM Agreement.
      
   6. 
      We recall that Brazil asked the Panel to adopt "adverse inferences" that the SDI contributions under the Aerospace Industry Development Fund were de facto export contingent. In light of the above finding, it is not necessary for us to consider whether SDI assistance to the regional aircraft industry is contingent on export. Accordingly, we decline to consider Brazil's request for "adverse inferences" on this issue.
      
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