WORLD TRADE  
ORGANIZATION  TN/RL/GEN/88 
18 November 2005 
 (05-5447) 
Negotiating Group on Rules Original:   English 
  
 
DE FACTO EXPORT CONTINGENCY 
 
Paper from Brazil
 
  
 The following communication, dated 16 November 2005, is being circulated at the request of 
the Delegation of Brazil.   The submitting delegation has requested that th is paper, which was submitted to the Rules 
Negotiating Group as an informal document (JOB(05)/ 291), also be circulated as a formal document. 
 
_______________ 
 
 
I. INTRODUCTION 
 
1. Brazil is encouraged by the ongoing consid eration by WTO Members in the Negotiating 
Group on Rules of the disciplines applicable to pr ohibited export subsidies under Article 3 of the 
WTO Agreement on Subsidies and Counte rvailing Measures (“SCM Agreement”). 
 2. We recall the discussion of the Group and proposals of certain WTO Members to clarify the 
standard for de facto  export contingency contained in Article  3.1(a) of the SCM Agreement.  Brazil 
shares concerns about ensuring that any changes to th e text do not disturb the important principle that 
prohibited subsidies by their sole ex istence cause serious trade effects. 
 3. In the context of these ongoing discussions, Brazil would like to take this opportunity to raise its specific concerns regarding de facto  export contingency and propose certain textual amendments to 
Article 3.1(a) to address our concerns.  
 
II. DE FACTO EXPORT CONTINGENCY 
 
4. Article 3.1(a) of the SCM Agreement provides that certain subsidies are prohibited if they 
“are contingent, in law or in fact, whether so lely or as one of several conditions, upon export 
performance”.  Footnote 4 clarifies how to apply this standard.  It states: 
 
This standard is met when the fact s demonstrate that the granting of a 
subsidy, without having been made legally contingent upon export 
performance, is in fact  tied to actual or anticipated exportation or 
export earnings. The mere fact that a subsidy is granted to enterprises which export shall not for that reas on alone be considered to be an 
export subsidy within the meaning of this provision. 
 5. The WTO Appellate Body interpreted footnot e 4 as containing three substantive elements: 
(1) “granting of a subsidy”;  (2) “…is…tied to…” ;  and (3) “actual or anticipated exportation or TN/RL/GEN/88 
Page 2  
 
 export earnings”.
1  The second element is the key, and the Appellate Body defined the term “tied to” 
to mean “limit or restrict as to … conditions” and th en stated that “the fact s must ‘demonstrate’ that 
the granting of a subsidy is tied to  or contingent upon  actual or anticipated exports”.2 
 6. Brazil is concerned about this  interpretation of footnote 4.  The Appellate Body defined “tied 
to” as equivalent to “contingent upon,” even though  in footnote 4 the drafters explicitly chose the 
phrase “ tied to actual or anticipated exportation or export earnings”, over the phrase “ contingent  upon 
actual or anticipated exportation or export earnings”. In effect, by reading “tied to” as interchangeable 
with “contingent upon”, the Appellate Body introduced  additional complexity regarding how to apply 
footnote 4 for purposes of distinguishing between de jure  and de facto  export contingency. 
  
7. In making this interpretation of footnote 4, the Appellate Body appears to raise the burden of 
proof parties have to meet when challenging subsidies that are de facto  export contingent, ignoring the 
significant problems associated with collecting ev idence that would support such challenges. In 
footnote 4, WTO Members expressly used the term “tie d to” rather than “contingent upon” in order to 
highlight strict conditionality  may be extremely difficult to demonstrate in a de facto  case.  In these 
cases, the subsidizing government is the source of vi rtually all information a nd can withhold or delay 
disclosure of critical factual information for confid entiality reasons or to further litigation tactics.  
This evidentiary problem, along with the tendency of  WTO panels of not appl ying adverse inferences 
to enforce their information requests, entails that  the Appellate Body’s interpretation of footnote 4 
may considerably undermine the ability of Memb ers to challenge prohibited subsidies that are 
contingent, in fact, on export. 
 8. One problem with characterizing de facto  export subsidies as “contingent upon actual or 
anticipated exportation or export earnings” (instead of “tied to actual or anticipated exportation or 
export earnings”) is that under this approach, a “l ump sum” export subsidy may not be viewed as a de 
facto  export subsidy, because the amount of the subsidies provided may not be  dependent upon  the 
amount of exports. However, this approach cannot be in conformity  with Article 3 and footnote 4, 
because it could exempt export subsidies from the disciplines set out in Article 3 depending upon the manner in which such export subsidies were dis bursed, even in cases where those subsidies were 
conferred to an enterprise that only 
exports or to an enterprise for making a product that will only be 
exported.3    
 
III. PROPOSED TEXTUAL AMENDMENT 
 
9.  In light of the above considerations, Brazil w ould like to refer specifically to the situation in 
which the subsidy is only granted in order to make it possible to fill export contracts or agreements 
with an enterprise or government in another coun try.  In other words, domestic sales within the 
territory of the granting WTO Member are never even contemplated.  This is particularly problematic 
when WTO Members act to subsidize an enterprise w ithin its own territory for the sale of customized 
products that are destined to be exported for u se in the production of another product within the 
territory of another country.  
10. In order to address its concerns and othe rwise facilitate discussion, Brazil proposes the 
following amendment to Article 3.1(a) of the SCM Agreement:  
                                                     
 
 1 Report of the Appellate Body, Canada - Measures Affecting the Export of Civilian Aircraft , 
WT/DS70/AB/R, para. 169 (adopted 8 August 1999). 
 2 Id. at para. 171. 
 3 By this assertion, Brazil is not claiming a subsidy bestowed to an enterprise should be automatically 
considered a de facto  export subsidy merely because  due to competitive conditions that enterp rise exports part 
of its production or has a high degree of export orientation.   TN/RL/GEN/88 
 Page 3 
 
 
 3.1 Except as provided in the Agreement on Agriculture, the 
following subsidies, within the meaning of Article 1, shall be prohibited: 
 (a) subsidies contingent, in law or in fact
4, whether solely or as 
one of several other conditions, upon export performance, including 
those illustrated in Annex I…  -------------------------------------- 
4 This standard is met when the facts demonstrate that the granting of a 
subsidy, without having been made legally contingent upon export 
performance, is in fact tied to actua l or anticipated exportation or export 
earnings. The mere fact that a subsidy is granted to enterprises which export shall not for that reason alone be consid ered to be an export subsidy within 
the meaning of this provision. Nevertheless, a subsidy tied to actual or 
anticipated exportation to a particular country granted only to enable the fulfilment of exports contracts or agreements, or similar arrangements, with an enterprise or government of another country 
shall be deemed to be in fact an export subsidy. 
 
11. Brazil reserves the right to revise and expa nd its views and to submit further comments and 
proposals on this issue. 
 
__________