RESTRICTEDWORLD TRADE
ORGANIZATIONWT/DSB/M/81
26 June 2000
(00-2606)
Dispute Settlement Body
22 May 2000
MINUTES OF MEETING
Held in the Centre William Rappard
on 22 May 2000
Chairman:  Mr. Stuart Harbinson (Hong Kong, China)
Prior to the adoption of the agenda, the item concerning the Panel Report on "Brazil - Export
Programme for Aircraft - Recourse by Canada to Article 21.5 of the DSU" (WT/DS46/RW) and the
item concerning the Panel Report on "Canada - Measures Affecting the Export of Civilian Aircraft -
Recourse by Brazil to Article 21.5 of the DSU" (WT/DS70/RW) were withdrawn from the agenda
following Brazil's appeal of the Reports.
1. Brazil - Export financing programme for aircraft
(a) Recourse by Canada to Article 4.10 of the SCM Agreement and Article 22.2 of the DSU
(WT/DS46/16)
1. The Chairman drew attention to the communi cation from Canada contained in document
WT/DS46/16.
2. The representative of Canada said that his c ountry was requesting authorization from the DSB
to take appropriate countermeasures pursuant to Article 4.10 of the SCM Agreement and Article 22.2
of the DSU in the amount of Can$700 million per year.  It was with regret that Canada was making its
request.  However, it had been forced to take this step due to Brazil's persistent disregard of its
binding obligations under the WTO Agreement.  Canada valued strongly its relations with Brazil and
the two countries had an extensive and significant array of bilateral, political, trade and investment
links.  However, Canada fully expected Brazil to live up to all of its international commitments.
3. In order to put Canada's request in context, he wished to briefly recall the history of the
dispute.  Canada had first requested consultations with Brazil in 1996 and then also in 1996 it had
requested the establishment of a panel.  The panel request had subsequently been withdrawn to enable
the parties to seek a negotiated settlement.  Canada had always been prepared to work towards a
mutually satisfactory solution.  Unfortunately, these negotiations had failed to resolve the dispute, andCanada had been compelled to submit another panel request in July 1998.  Subsequently, in
April 1999, the panel had found that Brazil violated its obligations under Article 3 of the
SCM Agreement by providing prohibited export subsidies.  In August 1999, the Appellate Body had
upheld the panel's finding.  The resulting DSB's rulings included the recommendation that Brazil
withdraw its illegal export subsidies within 90 days.  Brazil had to comply with this ruling by18 November 1999 but had failed to do so.WT/DSB/M/81
Page 2
4. Canada had then entered into an agreement with Brazil to establish the correct sequencing:
i.e. it had agreed that it would not proceed immediately to seek countermeasures, but would first
request an Article 21.5 panel to determine whether Brazil had complied with the DSB's rulings.
Canada had followed the letter and the spirit of the DSU and the Article 21.5 panel had circulated its
report on 9 May 2000.  As expected, the panel had found that Brazil's measures to comply with theDSB recommendations and rulings either did not exist or were not consistent with the SCM
Agreement, and that Brazil had failed to withdr aw the export subsidies for regional aircraft under
PROEX.  The Article 21.5 panel report had thus fully endorsed the position maintained by Canada
from the beginning of this dispute, namely, that Brazil's PROEX export subsidies programme was
illegal, and could not continue to be provided for undelivered aircraft or for new contracts.
5. Thus Brazil had lost in three separate proceedings:  i.e. before the original panel, the
Appellate Body and the Article 21.5 panel.  There was a well-established rule in baseball:  threestrikes and you are out.  Unfortunately, Brazil did not seem to want to understand this rule.  Brazil
now wanted a fourth chance by seeking to appeal the decision of the Article 21.5 panel.  Even if one
were to assume that an Article 21.5 panel's decision could be appealed - which was not clear - the
only purpose of such an appeal would be for Brazil to delay, once again, its obligation to comply.
Such delays in implementation would only serve to compound the damage already suffered byCanada's regional aircraft industry.  Every month, 13 new Brazilian regional aircraft were delivered,
with this number slated to increase by 2001.  Also every month, Brazil granted illegal subsidies worth
more than Can$47 million.  Brazil's appeal of the Article 21.5 panel report was simply an attempt to
continue to pay those subsidies - subsidies found to be prohibited three times by the WTO - for an
additional two months.  Canada resisted this attempt not only for the commercial harm it caused or forthe distortions in the international economy it implied, but also in order to uphold the integrity of the
dispute settlement process and the system of laws governing the conduct of nations.  The failure of
Brazil to comply with its obligations would have institutional and systemic implications, since the
inability of the WTO to ensure compliance with it s rulings would only bring the dispute settlement
system into disrepute.  Canada believed that it was time Brazil heeded that process and respected thatdecision and law.
6. If the Article 21.5 panel report was appealed, then Canada would, of course, await the
outcome of the appellate process before return ing to the DSB to seek authorization to take
countermeasures.  This was a point of fundamental importance.  Canada fully respected the principle
of sequencing and would not seek countermeasures until the Appellate Body report had been adopted.
Moreover, any request for countermeasures would be fully consistent with the findings of both the
Arbitrators and the Appellate Body.  However, there was no reason why the arbitration on the level ofcountermeasures could not proceed concurrently with  the appeal.  The arbitration was a separate and
largely technical exercise to assess the appropriate level of countermeasures.  It would be a needless
waste of time and the Canadian interests would con tinue to be damaged, if this process could not
begin until the appeal was over.  This fact had already been recognized in the Salmon case
(WT/DS18).  In July 1999
1, on the same day, and in the same case, the DSB had agreed to two
concurrent proceedings:  (i) it had established an Article 21.5 panel to determine the consistency of
Australia's implementing measures;  and (ii) it had referred to arbitration Canada's request for
retaliation.  The situation before the DSB at the pres ent meeting was similar.  If in the case at hand the
arbitration was completed before the Appellate Body had rendered its decision, then one would
simply hold the arbitral award in reserve and await the outcome of the appeal.  This approach wasfully consistent with Canada's longstanding strong support for the principle of multilateralism of the
dispute settlement mechanism.
7. In recent negotiations, Canada had offered to delay invoking its rights to seek
countermeasures under Article 4.10 of the SCM Agreement in exchange for Brazil's commitment to
                                                     
1 WT/DSB/M/66.WT/DSB/M/81
Page 3
forgo issuing new PROEX bonds on any aircraft delivered while settlement negotiations were
ongoing.  He regretted that Brazil had rejected that offer.  Accordingly, Canada maintained its request
for appropriate countermeasures.  The text of the WTO Agreement was clear:  i.e. Canada's request
had to be granted, unless the DSB decided by consensus to reject the request - Canada would
obviously not join in any such consensus - or Brazil requested that the matter be referred toarbitration.  There were no other options.  Canada had acted in order to safeguard its legal rights.
Both the WTO Agreement and the Canada-Brazil bilateral agreement provided time-periods within
which a complaining party had to act.  His country had  respected those time-periods and had thereby
preserved its rights.  He stressed that Canada had been forced into this action as a last resort.  There
were no winners in a situation of retaliation.  This was why - despite the long-standing dispute and the
three decisions in its favour - Canada would continue to negotiate with Brazil, in utmost good faith, in
an effort to resolve the dispute.  In fact, bilateral negotiations would resume later in the week. Canadacalled on Brazil, yet again, to respect its WTO obligations and to comply with the DSB rulings.
8. The representative of Brazil said that, as stated by Canada, both countries enjoyed an
excellent relationship and supported the multilateral trading system and the rule of law.  However,
there was one difference, namely, Canada was a developed country while Brazil was a developing
country.  He recalled that on 23 November 1999, Brazil and Canada had signed two bilateralagreements regarding their respective Aircraft cases.  Those agreements were aimed at establishing a
procedural sequence between Articles 21 and 22 of th e DSU.  The parties had agreed that arbitration
under Article 22.6 of the DSU would not take place until a proper finding under Article 21.5
procedures on implementation was available.  Both parties were aware of serious systemic
implications of precedents when a complainant was allowed to unilaterally and arbitrarily determine
whether or not the respondent had implemented the DSB's recommendations.  During their
negotiations, Brazil and Canada had disagreed on two basic points:  (i) whether the matter should be
referred directly to the Appellate Body, which as the higher court had examined the two cases in the
first stage of the dispute.  In line with the first sentence of Article 21.5 DSU, the parties had agreed
that the original panels should initially conduct the implementation review;  and (ii) the possibility toappeal Article 21.5 panel reports.  Brazil, unlike Canada, believed that such an appeal was possible.
Therefore, the text of the bilateral agreements had deliberately been left silent on this point.  The idea
was that in case such appeals were to be made, the Appellate Body would have to decide whether or
not to accept them.  Since the two appeals had just been made it was up to the Appellate Body to deal
with the issue.  Therefore, Brazil was surprised about Canada's decision to request authorization to
take countermeasures on the basis of the findings of the Article 21.5 panel report and despite the fact
that the reports had been appealed and would not be adopted by the DSB at the present meeting.  Hedid not wish to engage in a lengthy legal interpretation of the bilateral agreements.  Brazil and Canada
had disagreed on how to interpret that agreement.  It was enough to note that Canada's interpretation
of that agreement had defeated its original purpose, namely, to establish a procedural sequence
between Articles 21 and 22 of the DSU and had led to absurd results.
9. He noted that the panel report
2 in relation to the item under consideration would not be
adopted at the present meeting and, therefore, there was no legal determination on the degree of
inconsistency, if any, of the implementation measures taken by Brazil.  In the first stage of the
dispute, the Appellate Body had questioned several fundamental findings of the panel.  It was Brazil's
firm belief that the Article 21.5 panel had insisted on the mistakes made in the first stage of the
dispute, and that the findings made under the Article 21.5 review would be overturned by theAppellate Body.  With regard to the case where Brazil was the complaining party, Canada had
informed Brazil that, according to its interpretati on of the bilateral agreement, Brazil had now missed
the deadline to request authorization to impose countermeasures regardless of what the Appellate
Body were to conclude.  The Article 21.5 pa nel had examined two measures:  Technology
Partnerships Canada (TPC) and the Canada Acc ount.  It had found that Canada had failed to
                                                     
2 WT/DS46/RW.WT/DSB/M/81
Page 4
implement the DSB recommendations concerning the Canada Account, but had implemented the
DSB's recommendations with regard to TPC.  Thus Brazil was appealing the conclusion with regard
to TPC.  If Brazil were to initiate the procedures under Article 4.10 SCM Agreement or Article 22.2
DSU, such procedures would have to be limited to the Canada Account.  According to Canada's
interpretation of the bilateral agreements, Brazil could never take countermeasures with regard toTPC.  It could not do so now because the Article 21.5 panel had found compliance.  It could not do so
later, even if the Appellate Body were to reve rse the panel's conclusions because the deadline to
request authorization to impose countermeasures would have passed before the Appellate Body could
rule.  This interpretation of the WTO Agreements and the bilateral agreements, while convenient for
Canada, amounted to an absurd interpretation. Brazil did not agree with Canada's interpretation that
the bilateral agreements allowed one of the parties to initiate procedures under Article 4.10 of the
SCM Agreement or Article 22.2 DSU on the basis of an Article 21.5 panel report that had not beenadopted.  The bilateral agreements established that the deadline for action under the first sentence of
Article 22.6 DSU was "… 15 days after the circulat ion of the report under Article 21.5 of the DSU
…".
3  Canada's interpretation of the bilateral agreements was without legal merit, defeated the purpose
of the agreements, led to absurd results and amounted to a unilateral and arbitrary determination by
the complaining party on the implementation of the DSB's recommendations by the responding party.
10. It was difficult to understand that Canada was seeking the DSB's authorization before the
Appellate Body had made its conclusions and was thereby forcing Brazil to request arbitration.  Due
to the inconsistencies in the DSU text on the question of sequencing between Articles 21.5 and 22.6 of
the DSU, Brazil was being forced to request, pursuant to Article 22.6 of the DSU, that the matter be
referred to arbitration.  It had no other alternative.  In fact, since there was no legal determination onthe degree of consistency, if any, of the implementation measure taken by the parties, Brazil had to
object to the level of suspension proposed by Canada, which was entirely arbitrary. Brazil regretted
that Canada's request was on the agenda of the present meeting and believed that its rights for a full
defence under the arbitration procedures would be irreparably impaired if the Arbitrators had to start
any substantive work before the Appellate Body repo rt had been adopted by the DSB.  Prior to the
present meeting, Brazil had filed two notices of appeal of the Article 21.5 panel reports in relation to
the Aircraft disputes.  Brazil would challenge a number of the legal findings and conclusions of the
panels, and hoped that the Appellate Body would agree that Brazil's appeals were justified.  He did
not wish to go into the details of Brazil's argument s to be made before the Appellate Body.  He only
wished to draw attention to some important issues concerning these appeals.
11. Both cases involved export subsidies and raised questions of what Members could or could
not do. In Brazil's view, the reports represented an imbalance between what developed-countryMembers could do in relation to what developing-country Members could do.  For that reason
developments concerning those disputes should be monitored with the above question in mind.  There
were also issues of evidence and proof which raised systemic concerns.  He recalled that in the
original case concerning Canada's subsidies, the Appellate Body had disapproved Canada's refusal to
provide information requested by the Panel.  The issue of Members' obligation to cooperate in goodfaith in dispute settlement procedures and to provide all relevant information, had been and remained
an issue in the disputes under consideration.  Another issue concerned the legal or evidentiary
standard to be applied by panels to statements made by Members.  In the original case against Brazil,
Brazil had made a statement before the panel concerning the interest rates applicable to a number of
transactions in the Brazilian market.  The Panel had requested details in writing and, unfortunately,Brazil had not been able to supply that information within the time available.  The Panel had noted
this and had ruled against Brazil on the ground that it had not met the burden of proof.  Brazil had not
appealed the Panel's conclusion.  Furthermore, when the Appellate Body, while ruling on a related
issue, had noted that Brazil had not supplied documentary evidence to support that particular claim,
                                                     
3 WT/DS46/13 and WT/DS70/9.WT/DSB/M/81
Page 5
Brazil had not raised any complaints.  It had regret ted that the information was not provided in time
and had accepted the ruling.
12. Brazil was surprised and disappointed when the Article 21.5 panel had applied the opposite
standard to an important statement by Canada.  Canada had made a statement concerning the interest
rates applicable to a number of transactions in Canada, but had refused to provide any details.However, the Panel did not hold, as in case of Brazil, that Canada had not supported its claim with
documentary evidence.  On the contrary, the Panel had stated that it could not assume bad faith on the
part of Canada and therefore it had to accept the veracity of Canada's statements.  However, a year
earlier, in the same circumstances, the same Panel had assumed bad faith on the part of Brazil and had
not accepted the veracity of Brazil's statements.  He questioned whether it was in this way that special
and differential treatment should be interpreted.  Th e relevant parts of the two reports did not show a
substantive difference between the statements made by Brazil and Canada or with regard to thedocumentary evidence that they had been unable to produce.  The only difference was that one
statement had been made by a developing countr y, Brazil, and the other by a developed country,
Canada.  The statement made by Brazil had been rejected by the panel while Canada's statement had
been accepted.
13. Unfortunately, this was not the only example where Canada had been effectively rewarded for
the absolute lack of transparency regarding its m easures.  The original panel that had examined the
financing practices of the Export Development Corporation (EDC) had found that Brazil had not
provided sufficient evidence to establish a prima facie violation of the SCM Agreement by Canada.
That panel had not been impressed by the fact that Brazil did all it could possibly do to obtain
information concerning EDC operations, and that such efforts had always been defeated by theallegations of confidentiality by Canada.  The panel had decided that Canada was not breaching its
duty to be forthcoming and to engage in the DSU procedures in good faith efforts to resolve the
dispute.  The panel had refused to draw adverse in ferences from Canada's refusal to provide the data
that was requested by the panel even in light of the provisions of Article 13.1 of the DSU that "[a]
Member should respond promptly and fully to any request by a panel for such information as thepanel considers necessary and appropriate".
14. However, the Appellate Body recalled that "Members are ... under a duty and an obligation to
'respond promptly and fully' to requests made by panels for information under Article 13.1 of the
DSU".  Nevertheless, despite its misgivings about the panel's conclusions, the Appellate Body had
indicated that it could not hold that the panel had erred in law and had implicitly invited Brazil to
pursue the case once more.  One year later, in the Article 21.5 review conducted by the panel
reviewing Brazil's export financing programme, Canada had finally admitted that EDC provided
financing below the OECD CIRR rate.  That panel, not surprisingly, had admitted to be "struck by
Canada's assertion that export credits provided by  EDC through the 'market window', even at interest
rates below CIRR, were nevertheless 'commercial' export credits that did not confer a benefit within
the meaning of Article l".  Despite the Appellate Body's views on Canada's lack of transparency and
the panel's statement about how EDC operated in th e so-called "market window", Brazil had found no
remedy concerning EDC financing, which would continue to injure exports from Brazil and other
Members.  To find satisfaction, Brazil would have to reinitiate a costly case that would last 18 months
or more.  Brazil would also have to endure a few more years of injury caused by the TPC if the
Appellate Body had upheld the Article 21.5 panel re view.  That programme had initially been found
to be a "de facto" export subsidy.  Despite making few cosmetic changes to the language of theprogramme, which still targeted exactly the same industries, Canadian authorities had announced
publicly that they would provide even more funds to the recipients of TPC assistance.  In other words,
the same recipients will receive more funds to conduct the same programmes.  The only difference
was that the Canadian Government now risked not be ing fully repaid for the grants authorized under
TPC, a luxury of proportions no developing country could afford.  In short, the panel had found thatWT/DSB/M/81
Page 6
Brazil had to sustain several more years of injury before a new and costly case could be made against
the TPC.
15. Not all of the issues presented in those complex cases were as obvious as those to which he
had just referred.  There were also other systemic issues of interest to Members, in particular
developing-country Members.  One concerned the extent to which the WTO permitted anotherorganization - the OECD - to make WTO rules.  Many Members would be surprised to learn that this
was being done with an exemption for the OECD rules contained in the second paragraph of item (k)
of the Illustrative List of Export Subsidies.  At any time the OECD members decided to change their
rules with regard to export credits, they also changed the WTO rules.  Yet most WTO Members were
not members of the OECD.  The OECD exemption was not a subject of these appeals, but constituted
an important part of these cases.  The panel had provided an extended discussion on this issue.
16. Brazil would continue to work with Canada to achieve a negotiated solution to these
long-standing disputes.  In fact, Brazilian nego tiators would shortly meet with their Canadian
counterparts.  At the same time, Brazil would pursue the appeals, and was confident that the Appellate
Body would take a different view from that take n by the panels on those important legal questions.
However, regardless of their outcome, the cases in question raised a number of very important issues
relating to fairness and balance between Members and, as such, deserved Members' attention.
17. The representative of the European Communities said that the EC had followed the matter at
hand with great interest and expected Brazil to implement very quickly the DSB's recommendations.
He noted the statement by Canada to the effect that millions of dollars were still being paid every
month.  Nevertheless, on account of the systematic implications arising once again from the difficult
problem of the sequencing of Articles 21.5 and 22 of the DSU, the EC considered it necessary to actwith prudence and restraint, as long as the basic problem of the relationship between the two Articles
remained unsolved.  The EC was therefore surprised that Canada, having had recourse to Article 21.5,
had not pursued this line of action to its logical conclusion and maintained its request for
authorization from the DSB to implement retaliatory measures, since the DSB had yet to issue a ruling
concerning Brazil's failure to make its regime WTO-consistent, and in view of the fact that the panelreport had not been adopted and was the subject of an appeal.  Furthermore, it was difficult to imagine
how the Arbitrator with a mandate provided for by Article 22.6 would be able to determine if the level
of the suspension requested was equivalent to the level of the nullification or impairment resulting
from a new measure whose consistency was being examined by the Appellate Body.  The EC
concluded that all the controversy and difficulties of implementation over sequencing created a
continuing difficulty regarding the implementation of the relevant DSU provisions.  This difficulty
needed to be resolved as a matter of urgency in order to avoid further problems with regard to therequirements of due process in the relevant DSU procedures.
18. The representative of Uruguay said that the issue of sequencing between Articles 21.5 and 22
had been discussed in the context of the DSU Review, but, thus far, it had not been resolved.  The
case under consideration pointed out to the need to resolve problems related to the inconsistencies in
the DSU text.  Uruguay believed that, in the case at hand, the procedures of Article 21.5 had not beenconcluded and, therefore, it would not be approp riate to take further action.  His country always
supported the principle of sequencing in procedures starting from the adoption of panel and Appellate
Body reports leading up to the implementation stage under Articles 21.5 and 22.6.  Uruguay would
have preferred that Canada did not take the position it had taken at the present meeting, in particular,
in light of the ambiguities in the DSU text.  Both Canada and Brazil had raised substantive issues butthe correct sequence should be respected.
19. The representative of the United States said  that the question of whether there was any
requirement for sequencing Articles 21.5 and 22 had already been discussed on many occasions both
in the DSB and in other fora.  He therefore did not think that it was necessary to repeat those longWT/DSB/M/81
Page 7
debates in the present DSB meeting.  However, the position of the United States was quite clear on
this question and that position had not changed.  The approach agreed by Canada and Brazil to refer
the matter to arbitration at the present time rather than waiting was a sensible approach and would
help to move the process forward.  Like the EC, the United States also hoped that it would be possible
to make changes to improve the operation of the DSU.
20. The representative of Malaysia said that he  wished to make comments from the systemic
point of view and in the light of the implementation problems faced by developing countries, in
particular under the SCM Agreement.  In Malaysia's view, Canada should have awaited the outcome
of Article 21.5 appeal before proceeding with its request for retaliation.  While his country fully
recognized the position of Canada, which as the aggrieved party would wish an early redressal, it
believed that the process had to be respected.  The current DSU text did not outlaw an appeal of an
Article 21.5 panel report and Brazil had chosen to seek recourse to this process.  Irrespective of earliermodels used in the Salmon case, Canada should have awaited the outcome of the Article 21.5 appeal.
Otherwise, it would further overload the system  and would complicate the question of sequencing.
Malaysia acknowledged that Canada would await the outcome of the Article 21.5 panel prior to
seeking authorization from the DSB to suspend con cessions.  However, even seeking authorization at
the present meeting, in the absence of the multila teral determination, was inconsistent with the DSU.
He also wished to seek clarification from Canada in regard to its intention to suspend Brazil from its
GSP scheme.  That scheme was a unilateral initiative and Canada had a right to do whatever it wished
at any time.  However, he wished to know whether Canada intended to do so within the meaning of
Article 22.2 of the DSU which stipulated that suspension of concessions or related obligations were
limited to the covered agreements.
21. The representative of India said that the matter under consideration raised many systemic
concerns.  His country shared the views expressed by Malaysia.  The DSB meetings in which
ambiguities in the DSU text, real or perceived, had to be dealt with constituted sad occasions.  At the
July 1999 DSB meeting4, India had made a statement with regard to the Salmon case which involved
Canada and Australia.  At that time, India had stated that Members wished to preserve their rights inlegally ambiguous situations but in that process multilateralism was being undermined.  In India's
view, Articles 21.5 and 22 of the DSU were sequentia l.  India could not accept a situation in which a
prevailing party unilaterally determined compliance or non-compliance by a losing party.  It was also
clear that a party had a right of appeal from the Article 21.5 panel's decision.  He noted that Canada
had always taken a principled stand on the issue of sequencing and had always supported
multilateralism.  At the present meeting, Canada had stated that it could not wait until the appeal was
over.  Canada was unlikely to lose much in this long-standing dispute if it waited for another two orthree months.  On the other hand, the benefits to the system would be enormous if Canada could defer
its request for retaliation until such time as the Appellate Body had concluded its proceedings.  India,
therefore, wished to make an appeal to Canada in this regard.  There was certain amount of delay in
any judicial process and therefore possibility of delay could not be cited as an argument against
allowing the judicial process to run its full course.  Members should reflect on the situation in the caseat hand and in past cases such as Bananas and Salmon.  It was important that the DSU ambiguities,
real or perceived, were removed collectively in good faith.  Unless Members acted quickly, the
credibility and predictability of the dispute settlement mechanism would be undermined.
22. The representative of Argentina said that, from the systemic point of view, his country
believed that it was not appropriate to resort to arbitration on the level of suspension when there was
still no multilateral determination with regard to compliance.
23. The representative of Hong Kong, China said that his delegation did not have a trade interest
in the matter at hand and only wished to make comments from the systemic point of view.  Canada
                                                     
4 WT/DSB/M/66.WT/DSB/M/81
Page 8
had stated there were no winners in terms of retaliation.  He, therefore, urged both parties to make an
effort towards reaching a mutually agreeable solution as soon as possible.  Since the panel report had
been appealed it would not be adopted at the pr esent meeting.  Hong Kong, China believed that
Article 21.5 procedures should be exhausted before the complaining party might proceed to Article 22
of the DSU.  This was in line with the fundamental principle of sequencing.  Hong Kong, China wasconcerned that the request at the present meeting would have an impact on that principle.  The request
questioned the legal basis and conditions for invoking Article 22 of the DSU.  Moreover, the question
of whether and how such request might affect the ongoing efforts by many Members in resolving the
problems arising from Articles 21 and 22 in the wider context should be monitored closely.
Hong Kong, China urged Canada to reconsider its request.  It urged both parties to intensify their
bilateral efforts in finding an early solution to the dispute.  From the multilateral point of view it was
necessary to urgently seek an early agreement on how to resolve the issues arising from Articles 21and 22 of the DSU.
24. The representative of Saint Lucia said that her delegation wished to restate its believe in the
sequencing issue as set out in the DSU calling for clear multilateral determination before recourse to
Article 22.6.  Saint Lucia shared many of the views expressed by previous speakers, in particular, the
concern expressed by Malaysia with regard to suspension of the GSP scheme for Brazil.  Herdelegation also shared the disappointment about sanctions against developing countries.  At the same
time, Saint Lucia respected Canada's adherence to following procedures under Article 21.5.  It
believed that Canada, as a supporter of the multilateral trading system, should consider restraint.
Recourse to arbitration, at this stage, would be of little effect because the Appellate Body could
change the results of the case.  Saint Lucia, therefore, asked Canada to go a step further in support ofthe multilateral trading system while all tried to solve the ambiguities in the DSU text.
25. The representative of Canada said that he wished to respond to a few issues raised both by
Brazil and other delegations.  First, he wished to reassure delegations that the parties should spare no
effort in seeking a negotiated solution.  Canada had never pulled back from that attempt and, as stated
by both parties at the present meeting, negotiations would start this week.  He hoped that thosecontinued efforts would provide a satisfactory resolution to the dispute.  Second, it had been
recognized that the difficulties faced in the case at hand were due to the deficiencies in the DSU.
There were two ways of resolving them.  First, Members could collectively make the appropriate
legislative changes to fill in those gaps in an efficient way and Canada supported any collective
efforts along those lines.  Second, the parties to the dispute could try to reach a contractual agreement.
Canada had reached such an agreement with Brazil.  In the event of a failure of a collective legislative
arrangement and a failure of a contractual arrangement between the two parties, the current text of theDSU should apply.  Therefore, to protect and promot e its interest, Canada had to follow the DSU text.
26. Third, one delegation had stated that it was surprised about Canada's position taken at the
present meeting.  He believed that that surprise was because of Canada's record on the issue.  Canada
was clearly following the sequencing that it had worked out in its bilateral agreement with Brazil.
Canada had been a leading proponent in the DSU Review of the need to resolve the sequencingproblem.  To that end, it had tabled a proposal to establish clear and unambiguous procedures for
sequencing, which had formed the basis for the subsequent negotiations on this issue.  Unfortunately,
the DSU amendments had not been adopted by the Third Ministerial Conference in Seattle and, in the
absence of that legal certainty, Canada had no choice but to proceed in the manner that ensured that
there was no risk of impairment to its legal rights.  Canada looked forward to the resolution of thosesystemic issues through broader multilateral discussions.
27. Fourth, Brazil and other Members had referred to the broader issue in relation to developing
versus developed countries.  The principle of illegal subsidies was an issue that was viable for both
developing and developed countries.  However, he wished to make comments with regard to Brazil's
statement on this matter.  The Article 21.5 panel as well as earlier decisions had found that Brazil hadWT/DSB/M/81
Page 9
lost its developing-country exemption for the PROE X export subsidy because it had failed to comply
with the conditions not to increase the level of export subsidies and to phase out the subsidy by 2003.
Evidence before the panels demonstrated that Brazil had increased the overall level of its export
subsidies and had also committed itself to grant PROEX well after the year 2002.  The panels had also
rejected the use of what has been termed "Brazil risk" that was high domestic interests rates reflectinguncertainty about the country's economic prospects as a justification of the PROEX export subsidy.
But PROEX was used to buy down the interest rate s applied to loans assumed by Embraer customers
outside of Brazil and, therefore, the subsidy amounted to a transfer of resources from a developing
nation and its tax payers to what could be called prosperous North American and European aircrafts
and airlines.  Neither of those two specific points s hould be ignored in regard to this specific issue in
relation to the question of developing versus developed countries.
28. Finally, Brazil had referred to the issue of TPC as well as the Canada Account.  The
Article 21.5 panel in the Canadian aircraft case confirmed, in no uncertain terms, that the revisions
that Canada had made to its TPC programme had fully implemented the DSB's rulings and
recommendations.  With regard to the Canada Account, however, the panel had found that the
measures taken by Canada were not sufficient.  The panel had adopted a narrower interpretation on
the exemption in item (k) of Annex I of the SC M Agreement than that put forward by Canada.
Canada noted that this had not been interpreted prior to the panel's rulings and appreciated the
guidance and clarification that had now been provided.  Accordingly, Canada had not appealed this
decision but instead it was in the process of developing a regulatory instrument that would fully
implement the Article 21.5 panel's decision.
29. The representative of Brazil said that his country was not seeking exemption from the SCM
Agreement.  In his statement concerning the OECD, he had only referred to the question of fairness.
He did not wish to go into details of the arguments to be made before the Appellate Body.  He only
wished to indicate that his reference to special a nd differential treatment in no way meant that Brazil
should be exempted from the rules.  He had also refered to different ways in which good faith of the
parties had been recognized or not by the panel.  Those points would be examined by the Appellate
Body.  Some Members believed that, from the system ic point of view, Canada should withdraw its
request for retaliation in order to act in line with  the principle of sequencing.  There was a legal
problem because there was no DSB recommendation and a practical problem because the case
involved many specific measures which could make the assessment of the Arbitrators completely
different.  The same would apply to a possible request by Brazil for retaliation in regard to TPC.
Therefore, the best approach would be for Canada to withdraw its request which would be consistent
with its strong support for multilateral rules.  If not, there should be an understanding that Arbitratorswould not even meet before the Appellate Body had completed its proceedings.
30. The Chairman said that a large number of delegations, if not all, who had spoken at the
present meeting, had expressed concern as to the problems created by certain perceived ambiguity in
the DSU, in particular over the question of sequencing.  He noted that this was not the first experience
of problems in this regard.  It was encouraging to note that there appeared to be a willingness on thepart of a number of delegations to continue to address these.  He believed that this was desirable and
hoped that delegations would continue and perhaps intensify their discussions in this regard with a
view to trying to clarify the provisions concerned as soon as possible.
31. He then proposed that the DSB take note of all the statements made at the present meeting,
and agree that, as requested by Brazil pursua nt to Article 4.11 of the SCM Agreement and
Article 22.6 of the DSU, the matter be referred to arbitration to determine whether the
countermeasures requested by Canada in document WT/DS46/16 were appropriate;  it being
understood that no countermeasures would be sought pending the Appellate Body report and until
after the Arbitration report in the present case.WT/DSB/M/81
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32. The DSB so agreed.
33. The representative of the European Communities said that the decision taken at the present
meeting with regard to the bilateral arrangements, which had a primarily pragmatic aim to avoid the
paralysis of the system, should not constitute a precedent prejudging the need to find a solution to the
problem of the sequence between Articles 21.5 and 22 of the DSU.
34. The DSB took note of the statement.
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