“SUBSIDY” PER SCM ARTICLE 1

“SUBSIDY” PER SCM ARTICLE 1

1. Arguments of Canada

   1. 
      Canada argues that based on the language of SCM Article 1, for a “subsidy” to exist, two elements must be present, and there must be a causal link between the two. First, there must be either one of the government “financial contribution(s)” enumerated in subparagraphs (i) to (iv) or a form of income or price support as defined in Article XVI of GATT 1994. Second, a “benefit” must thereby be conferred.
      
   2. 
      According to Canada, the customary rules of interpretation in international law require that interpretation reflect the ordinary meaning of the words used in context and in the light of the object and purpose of the agreement in question (paras. 5.1- 5.4). As well in Canada's view, in interpreting and analysing the relevant provisions of an international agreement, the interpreter must ensure that the resolution of any ambiguity does not upset the “carefully drawn balance of rights and obligations of Members”¹¹⁴ set down in that agreement.
      

1. The meaning of “financial contribution”

   1. 
      Canada submits that under Article 1.1(a)(1), the term “financial contribution by a government or any public body” is defined exhaustively¹¹⁵ and is limited to the circumstances described in the four sub-paragraphs (i) to (iv). Accordingly, Canada states, if the measures at issue do not fall within any of the items in (i) to (iv), then the practices cannot be considered to be “financial contributions by government or any public body”.
      

2. The meaning of “benefit”

   1. 
      Canada notes that the term "benefit" is not defined in the SCM Agreement or elsewhere in the WTO Agreement, and argues that to determine under what circumstances a benefit is "conferred", one must turn to the customary rules of treaty interpretation, in particular Article 31 of the Vienna Convention.
      
   2. 
      Canada submits that the word "benefit" as it is found in Article 1.1(b) of the SCM Agreement has two components: a benefit is conferred when a financial contribution by a government a) imposes a cost on the government, and b) results in an advantage above and beyond what the market could provide. For Canada, this conclusion flows from the ordinary meaning of "benefit", the context in which it is found and the object and purpose of the SCM Agreement read as a whole.
      

1. Ordinary meaning

   1. 
      Canada submits that the relevant ordinary meaning of benefit is "advantage", but that the dictionary definition does not adequately narrow the term, i.e., that it contains nothing that would distinguish a subsidy from normal commercial activity. For Canada, any commercial contract could accord an advantage to a firm relative to its competitors, and therefore it is necessary also to consider context and object and purpose.
      

2. Context

   1. 
      Canada argues that “benefit” should not be interpreted simply to mean “the advantage given beyond commercial or market activity”, an interpretation that in Canada's view Brazil makes (paras. 6.60, 6.148, 6.179). According to Canada, viewed in the context of the SCM Agreement, including its annexes, “benefit” and hence “subsidy” requires a more nuanced and sophisticated approach.
      
   2. 
      Canada notes that under the SCM Agreement the calculation of subsidy may be done in one of two ways: Article 14 sets out the guidelines, based on a market-referenced “benefit to the recipient” test, that are to be used for determining the maximum value of countervailing duties to be imposed. Canada further notes that for the purpose of determining the amount of ad valorem subsidisation under Article 6.1, Annex IV sets out a “cost to government” test.
      
   3. 
      According to Canada, neither test defines “benefit” or provides a definitive guide as to when a “benefit” exists under Article 1, but taken together, they provide important contextual guidance as to the types of governmental measures that could be considered “subsidies”, and therefore the measures that could be considered to have conferred a benefit.
      
   4. 
      Canada submits that this contextual element should be considered in the light of the consideration that the SCM Agreement should be interpreted so as to function logically and seamlessly. In Canada's view, taking one test -- as Brazil seems to have done -- without considering how it would work within the SCM Agreement as a whole would have the potential of rendering the SCM Agreement nonsensical, i.e., if “benefit” were based solely on a market-based “benefit to the recipient”, a “subsidy” found under Article 1 might be found under Article 6.1 to have no value. For that reason, Canada argues, “benefit” must be interpreted in such a way as to ensure that a subsidy found to exist under Article 1 would also be found to exist -- even if the values were different -- under both tests set out in the SCM Agreement.
      

3. The object and purpose of the SCM Agreement

   1. 
      Canada maintains that a pure “benefit to the recipient” approach is not consistent with the object and purpose of the SCM Agreement, as demonstrated by anomalous results set out in the “Finan Report” and relied upon by Brazil.¹¹⁶ In this regard, Canada states that Brazil argues using this approach (para. 6.184) that the “subsidy value” of a repayable contribution of $87 million was between $94 million and $211 million -- that is, potentially over twice the subsidy value of an equivalent outright grant.¹¹⁷
      
   2. 
      Canada submits that Brazil thus implicitly argues that there is more distortion in the international economy when a government requires that research and development contributions be repaid, than when such contributions are made with no expectation of return or repayment. In Canada's view, to the extent that the object and purpose of the SCM Agreement is to restrict the use of trade distorting subsidies, Brazil’s approach is not consistent with that object and purpose.
      
   3. 
      Canada submits that the “mischief” that the Agreement seeks to discipline are measures that distort the market by a) imposing a cost on the treasury of the providing Member, and b) an advantage to the recipient above and beyond the market.
      
   4. 
      Canada further argues with respect to credit terms that the first paragraph of Item (k) of the Illustrative List of Export Subsidies of Annex I of the SCM Agreement (Annex I) provides a specific contextual indication of what constitutes a subsidy. Canada notes that the first paragraph of Item (k) identifies two elements in determining whether particular credit terms are subsidies: first, where governments provide credit at rates below those which they have to pay for the funds so employed, and second, where such credit secures a material advantage in the field of export credit terms. For Canada, the test in determining whether government credit is a subsidy is therefore whether there is a net cost to the government, and whether as a result an advantage is granted above and beyond what the market would provide.
      

1. Arguments of Brazil

   1. 
      Brazil argues that Article 1.1 includes a three-part test: first, paragraph (a)(1) of Article 1.1 requires that, for a subsidy to occur, there must be a “financial contribution by a government or any public body within the territory of a Member . . .”; second, under clauses (i) through (iv) of paragraph (a) of Article 1.1, the financial contribution may take one of several forms; third, whether a “benefit” is conferred, within the meaning of paragraph (b) of that Article. For Brazil, Canada’s interpretation of the word “benefit” would rob the term of its ordinary meaning, and indeed, of any recognizable meaning.
      
   2. 
      Brazil, considering the ordinary meaning of the phrase “a benefit is . . . conferred”, notes that Webster’s Third New International Dictionary defines the verb “confer” as to “grant,” “bestow” or “give.” The noun “benefit” means “advantage” or “something that guards, aids, or promotes well-being.” To “aid,” in turn, means “to give help or support to.” Alternatively, an “advantage” is “a more favorable or improved position or condition.” For Brazil, Article 1.1 therefore states that a subsidy exists where a government contributes something, and in so doing gives help or support, or improves the recipient’s condition. For Brazil, EDC and the Canada Account, in granting assistance, improve a recipient’s condition by granting the recipient something, in words taken directly from Canada’s first written submission, “above and beyond the market.”
      
   3. 
      Brazil submits that the structure of Article 1.1 requires this construction: paragraph (a) of Article 1.1 tells about the source of the financial contribution – the government; as structural matter, paragraph (b), in requiring that a “benefit” be conferred, must then speak to the effect this contribution has on its recipient.
      
   4. 
      Brazil notes that Canada appears to agree that demonstrating a “benefit to the recipient” is one part of the “benefit” test, but argues that Canada invents a second, additional requirement – that the government, in making its contribution, realize a “net cost.” Brazil rejects each of Canada’s reasons for this additional asserted requirement.
      
   5. 
      Brazil disputes Canada’s argument that applying the ordinary meaning of the term “benefit” – which in Brazil’s view means “advantage” or “aid” – would not “adequately narrow the term”, arguing that no provision of the Vienna Convention requires, that the ordinary meaning of a term be narrowed in order for it to be valid. Brazil notes Canada’s statement that a broad definition of “benefit” could mean that a “commercial contract” could possibly be considered a “subsidy,” but argues that such a contract is not, without something more, a subsidy prohibited by the terms of the SCM Agreement. Brazil asserts that Canada’s concern is with the scope of the prohibitions included in the SCM Agreement, and not the definition of the term “ subsidy,” and is therefore misplaced.
      
   6. 
      Brazil also disagrees that item (k) of Annex I to the SCM Agreement offers “context” supporting Canada’s proposed test. According to Brazil, Annex I does not speak to whether government activity constitutes a subsidy, but rather to whether government activity constitutes a prohibited export subsidy. Brazil submits that a measure may constitute a subsidy, but not be on the Illustrative List of Export Subsidies included in Annex I. For Brazil, the relevant reference to the Illustrative List of Export Subsidies included in Annex I falls in Article 3, which specifies, among those activities already identified as subsidies, those that are prohibited by the SCM Agreement. Brazil states that Article 1 of the Agreement contains no reference to Annex I relevant to the definition of a subsidy, and that the Canadian definition must therefore be rejected.
      
   7. 
      Brazil also takes issue with Canada’s view that paragraph (a) of Article 6.1 of the SCM Agreement provides contextual support for its net cost argument given that Article 6.1(a) requires that for purposes of that paragraph the value of a subsidy be calculated on the basis of cost to the granting government. Brazil disagrees with Canada that if “benefit” under Article 1.1 means “benefit to the recipient,” a government contribution identified under Article 1.1 as a “subsidy” could not be valued under Article 6.1 and Annex IV, stating that Canada ignores that valuation is only one of several ways to establish “serious prejudice” under Article 6.1 of the SCM Agreement. For Brazil, if the particular subsidy in question is defined based on the “benefit to the recipient,” “serious prejudice” could still be found based on the other alternative provisions of Article 6.1 which characterize the effect of the subsidy according to the extent of the benefit realized by the recipient. Moreover, for Brazil, Article 6.1 is not relevant to an export subsidy, which need not be quantified or subject to specific valuation in order to trigger the prohibition of Article 3.
      
   8. 
      Regarding Canada's argument that using a “benefit to the recipient” test is against the object and purpose of the SCM Agreement, which for Canada is “'to restrict the use of trade distorting subsidies'” , Brazil finds incomprehensible Canada's implication (see para. 5.37) that the type of benefit estimated by Brazil under TPC's $87 million contribution to Bombardier is not, consistent with the object and purpose of the SCM Agreement, “’trade distortive.‘” Brazil also does not understand how Canada's argument demonstrates that the “benefit to recipient” test is inconsistent with the object and purpose of the Agreement.
      

9. 
   Brazil notes that Revenue Canada’s Special Import Measures Act Handbook states that while the determination of “benefit” on a government loan is generally related to whether the government recovers its costs, such a test will not always capture the true effect of the subsidy. According to Brazil, the Handbook states that:
   

10. 
    Furthermore, according to Brazil, in defining a subsidy,” the Canadian Handbook states that a “benefit” can be direct or indirect:
    

1. 
   For Brazil, therefore, Canada’s position concerning the definition of “subsidy” and “benefit” before this Panel is irreconcilable with that adopted in its own law, noting that in the Handbook, Canada agrees with a definition of the term “subsidy” which focuses on whether a benefit accrues either directly to the recipient, or somehow alters the recipient’s, and not the grantor’s, costs. Brazil also states that Canada agrees with Brazil that covering the government’s cost does not necessarily mean that the recipient is getting a rate it would otherwise get on the market, without government involvement.
   
2. 
   For Brazil, neither the ordinary meaning of Article 1.1, nor its context, nor the object and purpose of the SCM Agreement, nor Canada itself, outside the confines of these proceedings, suggest, much less require, a “net cost to government” test. Brazil argues that the proper test is evident from the ordinary meaning of Article 1.1: a subsidy exists where a government contributes something, and in so doing grants an aid, which gives help or support, or an advantage, which improves the recipient’s condition above and beyond the market.
   

1. Response of Canada

   1. 
      In response, Canada notes Brazil’s own admission that under its definition, a purely commercial contract could be covered by Article 1 of the SCM Agreement. This conclusion, arrived at through a contextual interpretation of the word “benefit” is inescapable: according to economic theory, any contract involves at least one party that is better off – that benefits from the contract – and one party that, at least, does not lose. If “benefits” or advantage were considered without the broader context of the SCM Agreement, including Article 14 and Annex IV, then all purely commercial contracts entered into by governments would be subject to the disciplines of the SCM Agreement. This, in Canada’s view, widens the scope of application of the SCM Agreement significantly beyond what the drafters intended. In this context Canada reiterates the anomalous results that would be obtained if the Article 14 approach – benefit to the recipient – to the determination of the value of a subsidy were used for the purposes of Article 1: an CAN$87 million repayable contribution was found by Brazil to have a subsidy value nearly three times higher than the subsidy value of the same amount as a cash grant.
      
   2. 
      Canada also observes that the Revenue Canada Handbook definitions relate to the valuation of subsidies for the purpose of imposing countervailing duties. In that respect, the definitions and methodologies set out in the Handbook are in Canada’s view fully consistent with the guidelines set out in Article 14, for the express purpose of the valuation of subsidies in countervailing duty cases. The Handbook, though fully consistent with Article 14, does not, however, predetermine Canada’s understanding of what types of governmental contributions or activities should come within the scope of the SCM Agreement.
      
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