WORLD TRADE
ORGANIZATIONG/SCM/33
7 May 2001
(01-2312)
Committee on Subsidies
and Countervailing MeasuresOriginal:  English
STATEMENT BY BRAZIL ON EXPORT FINANCING
AT THE MEETING OF 2 MAY 2001
Brazil requested the inclusion of this item on the agenda of today’s meeting with a view to
sharing with other Members its views and concerns regarding the available WTO rules on export
financing practices.  For the last three years, Brazil has been participating in a dispute that concerns
precisely those rules, as applied for exports of aircraft.
In these proceedings, Brazil has identified a number of points that raise serious concerns
about the adequacy of the relevant provisions contained in the WTO agreements.  They are just a few,
maybe inordinately few, with a large number of grey areas that need to be clarified.  Unfortunately,
these clarifications sometimes come under the shape of panel or Appellate Body findings.  However,
given the number of grey areas, the dispute settlement mechanism has, in the case of export financing,
taken the driving seat in a rules making exercise that should be conducted by the Members of thisOrganization.
Brazil’s concerns touch on a number of issues that I will try to summarize next.
I. INSUFFICIENT COVERAGE
Item (j)
First, as far as export financing is specifically concerned, the Agreement on Subsidies and
Countervailing Measures dedicates just a couple of items in the illustrative list of prohibited subsidies
found in Annex I to the Agreement.  They are items (j) and (k).  Item (j) supposedly provides
guidance concerning insurance and guarantee programmes applied to export financing.
What item (j) basically offers is just a notion that insurance and guarantee  programmes
should charge premium rates that are adequate to cover its long-term costs and losses.  Put differently,
they should “break even”.  Some countries understand that the way item (j) is drafted could lead to a
result where it is left open, for example, the question of how to treat guarantees that bring transactionrates under usual market levels.  This is an issue of utmost importance for the countries that cannot
match these terms, even if they offered similar guarantees.  After all, sovereign credit ratings differ
considerably even among homogeneous economies.  In a membership so diverse as WTO’s, the
“break even” requirement of item (j) falls way short of ensuring a level playing field among Members,
in a clear disadvantage to those that enjoy lower credit ratings.
Moreover, a number of other forms of guarantees are not clearly regulated, such as equity
insurance or guarantees associated to an export credit package.  Although these “complements” have a
substantial impact on export transactions, they are not even mentioned in item (j), nor anywhere else
in the SCM Agreement.  The provisions of item (j) are obviously insufficient to deal with the diversity
of mechanisms found in the market today.G/SCM/33
Page 2
Item (k)
In just two paragraphs, item (k) is supposed to give Members guidance enough on how to
conduct their export credit programmes.  Once again, just a few principles are set out in item (k).  In
its first paragraph, item (k) generally establishes that Members must not finance exports at rates thatare below their cost of funds.  Given the last phrase of that first paragraph, one would infer that rates
below their costs of funds would be acceptable if they did not secure a “material advantage”.
This last phrase should give Members some comfort since, in their vast majority, WTO
Members have high costs of funds, at levels that are much more elevated than those of a few
developed economies.  However, a finding by a WTO panel (fortunately not yet endorsed by the
Appellate Body) points in a very troubling direction.  That panel found that a Member could be inviolation of its WTO obligations depending on the way that it supports the interest rates to bring them
to market levels.  In other words, depending on the way that a developing country chooses to match
market conditions – even if it is not securing a material advantage – this practice or mechanism could
be challenged.  This finding is a source of inequity that some Members cannot live with.  The costs of
funds of WTO Members are different and that, in itself, should not be a parameter for determiningWTO compliance or not.
The appropriate benchmark is the market.  However, panels may find the market too elusive
to use as a benchmark.   If the guidance the SCM Agreement provides to panels is insufficient, then
we must tackle this problem.
Article 3
Another source of difficulties is the way that Article 3 deals with “de facto” export subsidies.
The Appellate Body has found that targeting of a pa rticular industry – or company even – to receive
funds is not a criterion to characterize a “de facto” export subsidy.  Accordin g to the Appellate Body,
export orientation is not a factor either.  As long as the subsidy granted is not “tied to” exportation or
export earnings, the grant is not a “de facto” export subsidy.
Under this rationale, a Member could choose a company or industry that exports 100 per cent
of its production, grant funds to this company in amounts that virtually distorts the market in its
favour, and still be found to be granting a domestic subsidy.  The only condition to be in compliancewith the SCM Agreement is not to require paybacks linked to export earnings.  In fact, if there is no
payback whatsoever, there is no contingency, and therefore there is no WTO violation.  This is a type
of support that developing countries cannot engage in.
Brazil agrees that export orientation alone is not conclusive evidence to characterize a “de
facto” export subsidy, but the standards that are being developed under the dispute settlement
mechanism are inequitable and clearly insufficient.
II. THE OECD CONSENSUS
The second paragraph of item (k) makes explicit reference to the “interest rate provisions” of
the OECD Arrangement on Guidelines for Officially Supported Export Credits.  Brazil was quite
surprised to find out that some major WTO Members find that the term “interest rate provisions”
refers to the whole body of that Arrangement.  As mentioned earlier, at least one panel seems to
equate the market to the terms of that Arrangement, and this is a very disturbing development,particularly if the term “interest rates provisions” is read broadly.
Another question that needs to be addressed is the theory that the reference to the OECD
Consensus gives a permanent “carte blanche” to th e participants of that Arrangement to alter WTOG/SCM/33
Page 3
rules.  When Members agreed to incorporate the in terest rate provisions of the Arrangement, they
incorporated the provisions that were in place at the time the Marrakech Agreement was signed.  They
did not waive their rights to decide on any change s to the text of the WTO Agreements, or even to
their domestic legislation, when they have incorporated the WTO Agreement to their internal law.  If
the evolutionary theory prevails, non-OECD particip ants may go to sleep one day in compliance with
their WTO obligations and, the following day, wake up being challenged, simply because with no
warning, the participants changed some provisions of  the Arrangement.  Let me assure you that this is
not a hypothetical situation, as Brazil may be living it just now.
Brazil finds it useful that Members be aware that, as of this moment, the Arrangement
participants are developing rules that will apply to floating rate transactions, and that would take
environmental concerns into account.  The rules on floating rates are certainly “interest ratesprovisions” within the meaning of item (k).  These ru les, if the evolutionary theory prevails, will alter
the obligations of some 120 WTO Members, and they probably will find out about their new
obligations, if they are lucky, on the Internet, if they bother to check it out. One OECD Member has
announced that it is advancing the goal of incorpor ating environmental risk assessment into officially
supported export credits. The environmental provisions may or may not be an “interest ratesprovision”; they certainly are for the Members that equate the “interest rates provisions” to the whole
body of the Arrangement.
III. THE “MARKET WINDOW”
Another factor further complicating the scenario described so far is the use of the so-called
“market window” by some developed countries.  I say developed because this window does not open
to developing countries.  Let me explain why.
A participant of the OECD Arrangement may depart from the OECD rules by claiming that it
is operating as a private entity, under the same conditions as market operators.  The market conditions
today would allow an export credit agency from a c ountry with low cost of funds to provide financing
at rates lower than the OECD rate – the CIRR – or at terms longer than the OECD permits, and still
claim that it does not confer a “benefit” within  the meaning of Article 1 of the SCM Agreement.
Therefore, it is not providing a “subsidy”.
The first observation is that this same claim cannot be raised by a developing country – even
if it had the economic resources and political will to develop such practices – since this country would
likely have cost of funds higher than the OECD rate s. Following this line, it might be argued that, by
providing loans at rates lower than their cost of f unds this country would fall within the prohibition of
item (k).
The second observation is that the use of the “market window” is virtually unchallengeable,
for all “market window” operations are under a dark cloak of alleged “business confidentiality”.  The
complainant cannot provide a panel any evidence that the “market window” operation is more
generous than the market.  This threatens to be an insurmountable burden of proof for Members that,
unlike other OECD participants, have no way to request notifications or clarifications.
Finally, these agencies compete with private operators with the only – once again alleged –
mandate to “break even”.  However, neither do they pay income taxes nor do they have to pay
dividends or justify their practices to a body of stockholders.  They enjoy privileges that enhance their
ability to compete to a level that no private bank can possibly achieve.
These operations must be disciplined and the WTO has a role to play in this regard.G/SCM/33
Page 4
IV. NEW ECONOMIC CIRCUMSTANCES
Brazil is, to the extent possible, following with  interest  the efforts undertaken in the OECD
and in other organizations with a view to developing disciplines regarding export credits.  Those
efforts adapt the disciplines to the new market circumstances and reflect the changing practices foundin the international market.
The WTO Agreements have changed little in the past 40 years.  Items (j) and (k) of the
illustrative list derive from provisions that were first incorporated in WTO rules in 1960.  These rules
on export credits were developed by a small number of countries that were engaged in medium and
long-term financing practices.  The items of the 1960 list that pertain to export credits have been
adapted only once, when the Annex of the 1979 Subsidies Code was elaborated. That Code had verylimited application given its plurilateral nature.  A Code that was adopted at a time when credits
provided under the OECD Arrangement terms were far more favourable than the market.  At a time
when the cost of funds of all Members – even the major players – was above the Arrangement rates.
A minor change was made to item (j) and no change was made to item (k) by the drafters of the SCM
Agreement.
The SCM Agreement is the first instrument with disciplines on export subsidies and export
credits that apply on a multilateral basis.  Its rules must be equitable and provide a level playing field
for all Members.  Maybe the OECD participants are comfortable with the present situation because
they have a system of notifications among themselves and they keep their guidelines updated to theirneeds and compatible with their practices.  The same does not happen to the other WTO Members,
particularly those that have aspirations to market products that demand long-term financing.
The WTO rules need to provide clarity and predictability in a fair and equitable way.  They
must reflect the realities of the market today and the innovations introduced in the area ofinternational financing in the last 41 years.
In sum, in the last few years Brazil has tried to be a participant in the market of goods with
technology content that demand long-term financing.  Financing terms in this market were established
long before Brazil became a player in it.  But this has proven to be a Herculean and very frustrating
task.
The task may be challenging but Brazil will not give up on its rights for equal and fair
conditions of competition in the international markets.  This is what WTO should be about.  If the
rules are inequitable and/or insufficient to provide a level playing field to its Members, then the rules
must be changed.  What is certain is that developing countries must not be content with and abide by
rules that do not offer them a fair chance to compete in all segments of the international markets.Brazil, for one, will not allow strenuous efforts by private companies to develop high technology
goods – and, unlike in most countries, without government funding – be thwarted by unfair
competition allowed by inequitable rules.
To conclude, I would stress that Brazil is seriously concerned about the issues raised above,
which do not exhaust all questions concerning this matter.  It is Brazil’s view that Members must take
a closer look at official export credits as soon as possible.  Brazil is carefully following the disputes
that are currently under way and hopes that their outcome will avoid further inequities.  Under any
circumstances, since the points raised today are of a systemic nature and need urgent attention, Brazil
decided to bring this matter to the attention of this Committee, without prejudice to other courses ofaction within the WTO framework.
__________