DEFINITION OF "SUBSIDY" WITHIN THE MEANING OF ARTICLE 1 OF THE SCM AGREEMENT

DEFINITION OF "SUBSIDY" WITHIN THE MEANING OF ARTICLE 1 OF THE SCM AGREEMENT

1. 
   A critical issue in this case concerns the definition of "subsidy" within the meaning of Article 1 of the SCM Agreement. Leaving aside the issue of "income or price support[s]" (Article 1.1(a)(2)), Article 1 of the SCM Agreement provides that a "subsidy" exists when there is a "financial contribution" by a "government or any public body within the territory of a Member" (Article 1.1(a)(1)) that confers a "benefit" (Article 1.1(b)).
   
2. 
   The parties do not disagree on the notion of a "financial contribution" by a "government" or "public body". However, there is significant disagreement between the parties on the meaning of the term "benefit" in Article 1.1(b) of the SCM Agreement. This disagreement influences much of the parties' argumentation before the Panel. Therefore, before proceeding with our analysis of Brazil's claims, we shall first provide our interpretation of "benefit".
   

1. Arguments of the parties

   1. 
      Canada asserts that a "benefit" is conferred when a public financial contribution by a public body (i) imposes a cost on the government, and (ii) results in an advantage above and beyond what the market could provide. Canada claims that this interpretation of the term "benefit" is based on 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.⁵³¹
      
   2. 
      According to Canada, the ordinary meaning of "benefit" is "an advantage". However, in the context of the SCM Agreement, Canada argues that this ordinary meaning is overly broad, since it could include "normal commercial activity", such as a commercial contract (entered into by a government) that accords an advantage to a firm relative to its competitors. For this reason, Canada interprets "benefit" in light of Annex IV amd Article 14 of the SCM Agreement, which it relies on as relevant context for the interpretation of Article 1.
      
   3. 
      Canada notes that Article 14 of the SCM Agreement applies commercial benchmarks as guidelines for the 'benefit to recipient method' of calculating the amount of a subsidy.⁵³² For this reason, Canada accepts that commercial benchmarks are relevant in determining the existence of "benefit" within the meaning of Article 1. However, Canada also refers to Annex IV of the SCM Agreement as relevant context. Annex IV concerns the calculation of the total ad valorem subsidization with regard to the presumption of "serious prejudice" under Article 6.1(a). Paragraph 1 of Annex IV provides that [a]ny calculation of the amount of a subsidy for the purpose of paragraph 1(a) of Article 6 shall be done in terms of the cost to the granting government". Canada asserts that if "benefit" is defined exclusively in terms of commercial benchmarks (i.e., without any reference to net cost to government), a subsidy might be deemed to exist under Article 1 because it was on below-market terms, but it might nonetheless have no value within the meaning of Article 6.1(a) if it does not involve any net cost to the government. By applying Annex IV as context for the interpretation of Article 1 of the SCM Agreement, Canada asserts that net cost to the government should be a condition for establishing "benefit" within the meaning of Article 1 of the SCM Agreement.
      
   4. 
      With regard to government credit, Canada asserts that item (k) of the Illustrative List of Export Subsidies of Annex I of the SCM Agreement provides specific contextual guidance as to what constitutes a "subsidy" within the meaning of Article 1 of the SCM Agreement. On the basis of this specific contextual guidance, Canada submits that there are two elements in determining whether particular credit terms are subsidies: (1) does a government provide credit at rates below those which it has to pay for the funds so employed, and (2) does such credit secure a material advantage in the field of export credit terms? Canada emphasised, however, that neither item (k), nor other items in the Illustrative List, identify a contrario what would not constitute a "subsidy" within the meaning of Article 1. For Canada, such an a contrario reading would turn the Illustrative List into an exclusive list.
      
   5. 
      With regard to the object and purpose of the SCM Agreement, Canada states that "the 'mischief' that the Agreement seeks to discipline are measures that distort the market by (i) imposing a cost on the treasury of the providing Member, and (ii) conferring an advantage to the recipient above and beyond the market".
      
   6. 
      For Brazil, neither the ordinary meaning of Article 1.1, nor its context, nor the object and purpose of the Subsidies 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, thereby improving the recipient’s condition above and beyond the market.
      
   7. 
      Brazil notes that Canada agrees that demonstrating a “benefit to the recipient” is one part of the “benefit” test. Brazil argues, however, 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. First, 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”. Brazil argues 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 Subsidies Agreement.
      
   8. 
      Second, Brazil disagrees with Canada’s view that paragraph (a) of Article 6.1 of the SCM Agreement provides contextual support for its net cost argument. 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 have a value of zero under Article 6.1 and Annex IV. Brazil asserts that valuation is only one of several ways to establish “serious prejudice” under Article 6.1 of the Subsidies Agreement. 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.
      
   9. 
      Furthermore, Brazil also disagrees that item (k) of Annex I to the Subsidies 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.
      
   10. 
       Third, concerning the object and purpose of the SCM Agreement, Brazil finds incomprehensible Canada's implication that the type of benefit estimated by Brazil for TPC's $87 million contribution to Bombardier is not, consistent with the object and purpose of the Subsidies Agreement, “trade distortive.”
       
   11. 
       Furthermore, with regard to Canada's own administrative practice, 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:
       

“[I]t is also possible that a benefit would accrue to an exporter or an importer as a result of a government guarantee which would not necessarily result in a cost to the government. The benefit could be a lower interest rate or a loan at a commercial rate which the company would otherwise not get without government involvement.”

12. 
    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.
   

1. Interpretation by the Panel

   1. 
      In interpreting the term "benefit" in Article 1.1(b) of the SCM Agreement, we recall that Article 31.1 of the Vienna Convention on the Law of Treaties provides that a treaty shall be interpreted "in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose." We note that Canada purports to respect Article 31.1 of the Vienna Convention in its interpretation of the term "benefit". However, for the following reasons, we are not persuaded that the application of Article 31.1 results in the interpretation of "benefit" advocated by Canada.
      
   2. 
      First, in our opinion the ordinary meaning of "benefit" clearly encompasses some form of advantage. We do not consider that the ordinary meaning of "benefit" per se includes any notion of net cost to the government. As Canada itself has noted, the dictionary definition of "benefit" refers to "advantage", and not to net cost.⁵³³ In order to determine whether a financial contribution (in the sense of Article 1.1(a)(i)) confers a "benefit", i.e., an advantage, it is necessary to determine whether the financial contribution places the recipient in a more advantageous position than would have been the case but for the financial contribution. In our view, the only logical basis for determining the position the recipient would have been in absent the financial contribution is the market. Accordingly, a financial contribution will only confer a "benefit", i.e., an advantage, if it is provided on terms that are more advantageous than those that would have been available to the recipient on the market.
      
   3. 
      We note that the relevant context supports our interpretation of the ordinary meaning of "benefit". In particular, we note that Article 14 provides guidelines for calculating "the benefit to the recipient conferred pursuant to paragraph 1 of Article 1." These guidelines employ a commercial benchmark, whereby a financial contribution "shall not be considered as conferring a benefit" unless that financial contribution is made on terms that are more advantageous than would have been available to the recipient on the commercial market. Although Article 14 applies expressly for the purposes of Part V of the SCM Agreement (countervailing measures), and although the commercial benchmark approach of Article 14 is not the only test for calculating the amount of a subsidy, we recall that Article 14 refers expressly to commercial benchmarks for identifying explicit situations in which an Article 1.1 "benefit" shall not arise. We see no reason why the commercial benchmarks applied in Article 14 for the purpose of determining when an Article 1.1 "benefit" does not arise should not serve as relevant context for determining when an Article 1.1 "benefit" does arise.
      
   4. 
      Second, we do not accept Canada's argument that "benefit" must be interpreted more narrowly than its ordinary meaning of "advantage". Canada asserts that a narrow interpretation is necessary in order to exclude "normal commercial activity" such as commercial contracts (by a government) that accord advantages to firms relative to their competitors. In light of the preceding paragraph, however, we consider that using a commercial benchmark to identify the existence of a "benefit" will not create the problem alluded to by Canada. That is, under such a benchmark, "normal [governmental] commercial activity" will not be deemed to confer a "benefit", i.e., an advantage, provided it really is "normal commercial activity". In other words, such activity will not be deemed to confer a "benefit" provided the terms of the contract are not more advantageous than those that would have been negotiated on the market for an equivalent transaction.
      
   5. 
      Third, if "benefit" were to include the notion of net cost to government, it could exclude from the definition of "subsidy" situations explicitly identified in Article 1.1(a)(1) itself as constituting government financial contributions even though no cost to the government might be involved. Specifically, Article 1.1(a)(1)(iv) identifies as a "financial contribution" the situation where a government directs a private body to make "financial contributions" within the meaning of Article 1.1(a)(1)(i)-(iii). In such a situation, the net cost could be incurred entirely by the private body rather than the government. Canada's interpretation of "benefit" (i.e., to include net cost to government) would render Article 1.1(a)(1)(iv) meaningless, since a form of "financial contribution" explicitly included in Article 1.1(a) would automatically (i.e., because it would never meet the net cost to government test) be excluded by Article 1.1(b).
      
   6. 
      Fourth, we do not accept Canada's reliance on Annex IV.1 of the SCM Agreement as contextual support for considering net cost to government in determining "benefit". Annex IV.1 concerns the calculation of the amount of a subsidy for the purpose of Article 6.1(a) of the SCM Agreement. Canada effectively argues that the "cost to government" referred to in paragraph 1 of Annex IV constitutes the definition, at least for the purpose of determining the existence of serious prejudice under Article 6.1(a), of "benefit" in the sense of Article 1.1(b). However, Canada's is neither the only interpretation of this provision, nor the most convincing. In our opinion, the need to calculate the value of a subsidy only arises once the existence of the subsidy, and therefore the "financial contribution" and "benefit", have been established. Because "benefit" must be established before the value of the alleged subsidy may be considered, provisions concerning the valuation of subsidies are not necessarily relevant for the purpose of establishing the existence of a subsidy (and therefore "benefit"). The contextual relevance of Annex IV.1 differs significantly from that of Article 14, referred to in para. 9.113 above, since the latter provision deals expressly with the calculation of "benefit" "pursuant to paragraph 1 of Article 1". Annex IV.1, by contrast, refers only to the calculation of the amount of a subsidy, and does not apply expressly for the purpose of calculating "benefit" within the meaning of Article 1.1 of the SCM Agreement.
      
   7. 
      Fifth, we are unable to accept Canada's argument that item (k) of the Illustrative List of Annex I of the SCM Agreement constitutes contextual guidance for determining the existence of "benefit" in the specific context of government credit under Article 1. In our view, item (k) of the Illustrative List applies in determining whether or not a prohibited export subsidy exists. We do not consider, and the parties have not argued, that item (k) determines whether or not a "subsidy" exists within the meaning of Article 1 of the SCM Agreement. Whereas Canada might have argued that item (k) could be relied on for the purpose of determining when an Article 1 subsidy does not exist, Canada expressly declined to rely on this a contrario reading of item (k). We therefore take no view on the a contrario approach as such. ⁵³⁴
      
   8. 
      Furthermore, whereas Article 31.1 of the Vienna Convention requires "the ordinary meaning to be given to the terms of the treaty in their context", we do not consider that this requires us to ignore the ordinary meaning of the term "benefit" simply to accommodate a conflicting contextual interpretation. As noted above, we consider that the ordinary meaning of "benefit" refers to advantage, to the exclusion of any notion of net cost to the government.
      
   9. 
      Sixth, we note that the SCM Agreement does not contain any express statement of its object and purpose. We therefore consider it unwise to attach undue importance to arguments concerning the object and purpose of the SCM Agreement. In our view, however, the avoidance of net cost to government is not the object and purpose of the multilateral disciplines contained in the SCM Agreement. Rather, as suggested by Canada itself at para. 96 of its first submission, we consider that the object and purpose of the SCM Agreement could more appropriately be summarised as the establishment of multilateral disciplines "on the premise that some forms of government intervention distort international trade, [or] have the potential to distort [international trade]".
      
   10. 
       For all the above reasons, we reject Canada's 'net cost to government' interpretation of the term "benefit" in Article 1.1(b) of the SCM Agreement. Thus, leaving aside situations of alleged "income or price supports" within the meaning of Article 1.1(a)(2), we consider that a "financial contribution" by a government or public body confers a "benefit", and therefore constitutes a "subsidy" within the meaning of Article 1 of the SCM Agreement, when it confers an advantage on the recipient relative to applicable commercial benchmarks, i.e., when it is provided on terms that are more advantageous than those that would be available to the recipient on the market.
       
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