WORLD TRADE
ORGANIZATIONWT/DS46/AB/RW
21 July 2000
(00-2990)
Original: English
BRAZIL – EXPORT FINANCING PROGRAMME FOR AIRCRAFT
RECOURSE BY CANADA TO ARTICLE 21.5 OF THE DSU
AB-2000-3
Report of the Appellate BodyWT/DS46/AB/RW
Page i
I. Introduc tion................................................................................................................. ............1
II. Background.................................................................................................................. ...........3
III. Arguments of the Participants  and the Third Particip ants ......................................................5
A. Claims of Error by Appellant – Brazil....................................................................... 5
1. Issuance of NTN-I Bonds Pursuant to Letters of Commitment Issued
before 18 November 1999 ............................................................................5
2. Are Export Subsidies under PROEX "Permitted" under Item (k) of
the Illustrativ e List? ......................................................................................5
B. Arguments by Appellee – Canada.............................................................................. 7
1. Issuance of NTN-I Bonds Pursuant to Letters of Commitment Issued
before 18 November 1999 ............................................................................7
2. Are Export Subsidies under PROEX "Permitted" under Item (k) of
the Illustrativ e List? ......................................................................................7
C. Arguments of the Third Participants.......................................................................... 9
1. European Co mmunities.................................................................................9
2. United States...............................................................................................11
IV. Issues Raised in this Appeal ................................................................................................ .12
V. Issuance of NTN-I Bonds Pursuant to Letters of Commitment Issued before
18 November 1999............................................................................................................... .12
VI. Are Export Subsidies under PROEX "Permitted" under Item (k) of the
Illustrativ e List? ............................................................................................................. .......15
A. Introduc tion ............................................................................................................. 15
B. Are export subsidies under PROEX "used to secure a material advantage
in the field of expor t credit terms"? ......................................................................... 19
C. Are export subsidies under PROEX "payments" within the meaning of
the first paragr aph of item (k)?................................................................................ 26
D. May the first paragraph of item (k) be interpreted to establish that an
export subsidy is  "permitted"?................................................................................. 26
VII. Findings and Conclusions................................................................................................... ..27WT/DS46/AB/RW
Page 1
WORLD TRADE ORGANIZATION
APPELLATE BODY
Brazil – Export Financing Programme for
Aircraft
Recourse by Canada to Article 21.5 of the DSU
Brazil,  Appellant
Canada,   Appellee
European Communities,  Third Participant
United States,  Third ParticipantAB-2000-3
Present:Bacchus,  Presiding Member
Ehlermann,  MemberLacarte-Muró,  Member
I. Introduction
1. Brazil appeals from certain issues of law and legal interpretation in the Panel Report,
Brazil – Export Financing Programme for Aircraft , Recourse by Canada to Article 21.5 of the DSU
(the "Article 21.5 Panel Report").  1  The Article 21.5 Panel was established pursuant to Article 21.5 of
the  Understanding on Rules and Procedures Governing the Settlement of Disputes   (the "DSU") to
consider a complaint by Canada with respect to the existence or consistency with the  Agreement on
Subsidies and Countervailing Measures (the " SCM  Agreement ")  of measures taken by Brazil to
comply with the recommendations and rulings of  the Dispute Settlement Body (the "DSB") in
Brazil – Export Financing Programme for Aircraft ("Brazil – Aircraft ").2
2. The original panel found as follows: "… we find that payments on exports of regional aircraft
under the PROEX interest rate equalization scheme are export subsidies inconsistent with Article 3 ofthe SCM Agreement."
 3  The original panel then recommended "that Brazil withdraw the subsidies
                                                     
1WT/DS46/RW, 9 May 2000.
2The recommendations and rulings of the DSB resulted from the adoption, by the DSB, of the
Appellate Body Report in Brazil – Aircraft  and the original panel report in that dispute, as modified by the
Appellate Body Report (Appellate Body Report, Brazil – Aircraft , WT/DS46/AB/R, adopted 20 August 1999;
original panel report, Brazil – Aircraft , WT/DS46/R, adopted 20 August 1999, as modified by the Appellate
Body Report).  The DSB recommended that Brazil "withdraw" its prohibited export subsidies within 90 days,
that is, by 18 November 1999.
3Original panel report, Brazil – Aircraft , supra , footnote 2, para. 8.2.WT/DS46/AB/RW
Page 2
identified above without delay"  4, which in this dispute was found to be within 90 days.  5  On appeal,
the Appellate Body upheld this recommendation.  6
3. Brazil took steps to implement the recommendations and rulings of the DSB.  Taking the
view that the measures adopted by Brazil to co mply with the recommendations and rulings of the
DSB were not consistent with Article 3.1(a) of the  SCM Agreement , Canada requested that the matter
be referred to the original panel, pursuant to Article 21.5 of the DSU.7  On 9 December 1999, the DSB
referred the matter to the original panel.
4. The Article 21.5 Panel considered claims by Canada that Brazil had failed to comply with the
recommendations and rulings of the DSB.  Canada ar gued that Brazil continued to issue NTN-I bonds
pursuant to letters of commitment issued before 18 November 1999 under the terms and conditions ofPROEX before its modification;  and that the modifications to PROEX adopted by Brazil did notconstitute the withdrawal of the subsidies, as PR OEX was still inconsistent with the prohibition on
export subsidies under Article 3.1(a) of the SCM  Agreement .
5. The Article 21.5 Panel Report was circulated to the Members of the World Trade
Organization (the "WTO") on 9 May 2000.  The Article 21.5 Panel concluded that, as a result of thecontinued issuance of NTN-I bonds pursuant to letters of commitment issued before
18 November 1999, and as a result of the inconsistency of PROEX as modified with Article 3.1(a) of
the  SCM Agreement , Brazil's measures to comply with the DSB's recommendation either do not exist
or are not consistent with the SCM Agreement .  Accordingly, the Article 21.5 Panel concluded that
Brazil has failed to implement the DSB's recommendation that it withdraw the export subsidies forregional aircraft under PROEX within 90 days.
 8
6. On 22 May 2000, Brazil notified the DSB of its intention to appeal certain issues of law
covered in the Article 21.5 Panel Report and legal interpretations developed by the Article 21.5 Panel,pursuant to Article 4.8 of the  SCM Agreement  and paragraph 4 of Article 16 of the DSU, and filed a
Notice of Appeal pursuant to Rules 20 and 31(1) of the  Working Procedures for Appellate Review
(the " Working Procedures ").  On 29 May 2000, Brazil filed its appellant's submission.
 9  O n
                                                     
4Original panel report, Brazil – Aircraft , supra , footnote 2, para. 8.4.
5Ibid., para. 8.5.
6Appellate Body Report, Brazil – Aircraft , supra , footnote 2, para. 197.
7WT/DS46/13 (26 November 1999).
8Article 21.5 Panel Report, para. 7.1.
9Pursuant to Rule 21(1) of the  Working Procedures .WT/DS46/AB/RW
Page 3
5 June 2000, Canada filed an appellee's submission.  10  On the same day, the European Communities
and the United States each filed a third participant's submission.  11
7. The oral hearing in the appeal was held on 19 June 2000.  The participants and third
participants presented oral arguments and responded to questions put to them by the Members of theDivision hearing the appeal.
II. Background
8. Before the original panel, the measures at issue were certain export subsidies granted under
Brazil's  Programa de Financiamento às Exportações  ("PROEX") on sales of aircraft to foreign
purchasers of Empresa Brasileira de Aeronáutica S. A. ("Embraer"), a Brazilian manufacturer of regional
aircraft.  The original panel described certain factual aspects of PROEX
 12 as PROEX existed at that
time.  We provided a summary of these aspects.  13  The Article 21.5 Panel described the factual
aspects of PROEX as revised by Brazil (the "revis ed PROEX "), in light of the recommendations and
rulings of the DSB.  14  Below we provide a summary of the factual aspects of the revised PROEX,
based on the summary set out in the Article 21.5 Panel Report.
9. PROEX is administered by the Comitê de Cr édito às Exportações  (the "Committee"), an
inter-agency group within the Ministry of Finance in Brazil.  Day-to-day operations of PROEX are
conducted by the Bank of Brazil.  15  Under PROEX, the Government of Brazil provides interest rate
equalization subsidies for sales by Brazilian exporters, including Embraer, as described below.
10. The financing conditions for which interest rate equalization payments are made are set by
Ministerial Decrees.  The length of the financin g term, which is determined by the product to be
exported, varies normally from one year to ten years.  In the case of regional aircraft, however, this
                                                     
10Pursuant to Rule 22 of the  Working Procedures .
11Pursuant to Rule 24 of the  Working Procedures .
12Original panel report, Brazil – Aircraft , supra , footnote 2, paras. 2.1-2.6.
13Appellate Body Report, Brazil – Aircraft , supra , footnote 2, paras. 3-6.
14Article 21.5 Panel Report, paras. 2.1-2.6.  Brazil informed the DSB that it had implemented the
recommendations of the DSB thr ough, in addition to Resolution 2667, Newsletter 2881.  Newsletter 2881
establishes "the maximum percentages that may be applied under tax rate equalisation systems used for PROEXoperations."  These maximum percentages cover financing for up to ten years, with the highest interest rateequalization rate set at 2.5 per cent for financing of "over 9 years and up to 10 years".  In the First Submission ofBrazil to the Panel, however, Brazil indicated that Ne wsletter 2881 represents "an additional action that does not
directly affect the question before this Panel".  From this statement, the Article 21.5 Panel concluded that Brazil
does not assert that Newsletter 2881 is relevant to its consideration of whether the revised PROEX is consistent
with the SCM Agreement . Article 21.5 Panel Report, footnote 25.  This conclusion was not appealed.
15Ibid., para. 2.4.WT/DS46/AB/RW
Page 4
term has often been extended to 15 years, by waiver of the relevant PROEX guidelines.  The length of
the financing term, in turn, determines the spread to be equalised:  the payment ranges from 0.5percentage points per annum, for a term of up to six months, to 2.5 percentage points per annum, for aterm of nine years or more.  Resolution No. 2667 of 19 November 1999 provides that, in respect ofregional aircraft financing, "equalisation rates shall be established on a case by case basis and at levelsthat may be differential, preferably based on the United States Treasury Bond 10-year rate, plus anadditional spread of 0.2% per annum, to be reviewed periodically in accordance with market
practices."
 16  The lending bank charges its normal interest rate for the transaction and receives
payment from two sources:  the purchaser and the Government of Brazil.  In this way, PROEXreduces the financing costs of the purchaser and, thus, reduces the overall cost to the purchaser ofpurchasing an Embraer aircraft.
11. The involvement of PROEX in aircraft financing transactions begins when the manufacturer 
– Embraer – requests approval for PROEX interest rate equalization subsidies before the conclusionof a formal contract with a buyer.  If the Committee approves the request, it then issues a letter ofcommitment to the manufacturer, committing the Government of Brazil to PROEX support, provided
that the buyer and the manufacturer conclude a contract for the transaction within a specified period
of time, usually 90 days (subject to renewal), and in accordance with the terms and conditions set
forth in the original request.
 17  The letter of commitment usually provides that PROEX payments
will be made in 30 equal and consecutive semi-annual instalments during a financing period of 15years.  The first instalment payment is typically due six months after the delivery date of eachaircraft.
 18
12. PROEX interest rate equalization payments begin after the aircraft is exported.  The payments
are made in the form of bonds issued by PROEX to the financing institution.  After each exporttransaction is confirmed, the Bank of Brazil applies to the National Treasury of Brazil for the issuanceof bonds designated as National Treasury Note – Series I ("NTN-I") bonds.  The National Treasury
issues these bonds and transfers them to the Bank of Brazil, which in turn passes the bonds to the
lending bank (or its agent bank).  The lending bank can redeem the bonds on a semi-annual basis forthe duration of the financing, or can sell them on the market at a discount immediately upon receipt.
 19
                                                     
16Article 21.5 Panel Report, para. 2.3.
17Ibid., para. 2.5.
18Ibid., para. 2.6.
19Ibid.WT/DS46/AB/RW
Page 5
NTN-I bonds are denominated in Brazilian currency, indexed to the dollar as of the date the bonds are
issued.  The bonds can only be redeemed in Brazil, and only in Brazilian currency.  20
III. Arguments of the Participants and the Third Participants
A. Claims of Error by Appellant – Brazil
1. Issuance of NTN-I Bonds Pursuant to Letters of Commitment Issued before
18 November 1999
13. Brazil argues that, contrary to the Article 21.5 Panel's findings, the continued issuance of
NTN-I bonds pursuant to commitments made prior to the modification of PROEX is consistent withthe SCM Agreement .  In particular, Brazil submits that the subsidies in question have already been
"granted" within the meaning of Article 3.2 of the  SCM Agreement , and therefore no remedy is
available under Article 3 for these subsidies.  Brazil contends that the Article 21.5 Panel erred in
concluding that PROEX interest equalization payments for regional aircraft are "granted" upon the
issuance of NTN-I bonds, regardless of  when   the aircraft were sold.  The Article 21.5 Panel
improperly found that the timing of the "grant" of an export subsidy for the purpose of Article 3.2 ofthe  SCM Agreement   is legally distinct from the timing of when a subsidy is "conferred" under
Article 1 of that Agreement.
14. In Brazil's view, the Article 21.5 Panel should have determined that a subsidy is "granted"
when Brazil makes a "financial contribution" and a benefit is thereby "conferred".  This occurs whena letter of commitment is issued and the transaction is finalized by a contract made pursuant to thatcommitment.  Thus, for contracts that were signed before 18 November 1999, the subsidy has already
been "granted" within the meaning of Article 3.2.  Therefore, these subsidies are not subject to the
DSB's recommendation to "withdraw" the prohibited export subsidies.
2. Are Export Subsidies under PROEX "Permitted" under Item (k) of the
Illustrative List?
15. Brazil argues that subsidies under the revised PROEX are "permitted" under item (k) of the
Illustrative List of Export Subsidies in Annex I of the  SCM Agreement   (the "Illustrative List").
Brazil argues that the Article 21.5 Panel erred in concluding that the first paragraph of item (k) maynot be interpreted " a contrario " to establish that a subsidy is "permitted".  According to Brazil, if
subsidies of the type defined in the first paragraph of item (k) are "used to secure a material advantagein the field of export credit terms", they constitute prohibited export subsidies.  If, by contrast, they
                                                     
20Article 21.5 Panel Report, para. 2.6.WT/DS46/AB/RW
Page 6
are not "used to secure a material advantage in the field of export credit terms", then they do not
constitute prohibited export subsidies under the  SCM Agreement .
16. Brazil considers that the Article 21.5 Panel erred in concluding that the "material advantage"
clause in the first paragraph of item (k) cannot be used to establish that an export subsidy is"permitted".  The Article 21.5 Panel's reliance on footnote 5 of the  SCM Agreement   ignores the
ordinary meaning of the text of item (k).  The Article 21.5 Panel should have interpreted the "materialadvantage" clause " a contrario " and concluded that a payment that is  not "used to secure a material
advantage" is not prohibited  under the SCM Agreement ;  in other words, that such a subsidy is
"permitted".
17. Brazil notes that the first paragraph of item (k) applies,  inter alia , to the "payment [by
governments] of all or part of the costs incurred by exporters or financial institutions in obtainingcredits".  Brazil contends that the Article 21.5 Panel erred in concluding that PROEX payments arenot "payments" within the meaning of the first pa ragraph of item (k).  According to Brazil, the
Article 21.5 Panel made two errors on this issue.  The terms of the first paragraph of item (k) shouldnot be interpreted narrowly so that financial institu tions are not considered to incur costs in obtaining
export credits.  The fact that an exporter or a financial institution  provides   credits does not mean that
it does not  obtain   them at a cost.  Furthermore, the Article 21.5 Panel failed to distinguish between
situations in which the lender is a financial institution  outside   Brazil and situations in which the
lender is a financial institution  inside   Brazil.
18. According to Brazil, the Article 21.5 Panel er red in its conclusion that Brazil failed to
demonstrate that PROEX subsidies are not "used to secure a material advantage in the field of exportcredit terms."  In particular, the Article 21.5 Panel incorrectly held that an interest rate that resultsfrom a government guarantee, which Brazil submitted as evidence of the market for export credits,can never be a "commercial" rate.  This conclusion is contradicted by the undisputed evidence in theArticle 21.5 Panel record that rates supported by government guarantees are very much a part of the
market.  Neither the Article 21.5 Panel nor Canada po inted to any evidence of any commercial aircraft
export financing not supported in some way by a government.  The Article 21.5 Panel should havefound that the term "commercial" for the purposes of assessing material advantage means any marketrate that is not inconsistent with the  SCM Agreement .  The Article 21.5 Panel also erred by
concluding that floating rate transactions were not relevant to an evaluation of the question of whether
PROEX was "used to secure a material advantage in the field of export credit terms."
19. Furthermore, Brazil states, the Article 21.5 Panel erred in placing on Brazil the burden of
proving that its measure implements the recommendations and rulings of the DSB, rather than placingon Canada the burden of proving that the measure does not implement them.  The Article 21.5 Panel'sWT/DS46/AB/RW
Page 7
reversal of the burden of proof was contrary to the holding of the Appellate Body in  Chile – Taxes on
Alcoholic Beverages  ("Chile – Alcoholic Beverages ")  21, which attaches a presumption of compliance
to the measures taken by Members to implement DSB recommendations and rulings.  Finally, Brazilargues that the Article 21.5 Panel applied an erroneous presumption of correctness to unsupportedstatements made by Canada regarding interest rates actually applied by Canada.
B. Arguments by Appellee – Canada
1. Issuance of NTN-I Bonds Pursuant to Letters of Commitment Issued before
18 November 1999
20. According to Canada, it is undisputed that Braz il took no steps to modify pre-existing PROEX
letters of commitment pertaining to aircraft exported after 18 November 1999, and that Brazilcontinues to issue NTN-I bonds to provide interest equalization payments on aircraft exported after
18 November 1999 pursuant to the terms and conditions in letters of commitment issued before that
date.  The Article 21.5 Panel was consequently correct in finding that Brazil has failed to "withdraw"the prohibited export subsidies, as it continues to "grant" these subsidies.  Whatever else "withdraw"may mean, at a minimum it must encompass ceasing to "grant or maintain" prohibited subsidies underArticle 3.2 of the  SCM Agreement , as Brazil continues to do.
21. Contrary to Brazil's assertion, Canada argues that the plain language and the structure of the
SCM Agreement  supports the Article 21.5 Panel's conclusion that the issue of whether a subsidy
"exists" is legally distinct from the issue of when a subsidy is "granted" for the purpose of Article 3.2,and that PROEX subsidies are "granted" at the time the NTN-I bonds are issued.  Moreover, as the
Article 21.5 Panel observed, acceptance of Brazil's  claim would permit a WTO Member, up to the
final day of the implementation period, to contract to "grant" prohibited subsidies for years into thefuture and be insulated from any meaningful remedy under the WTO dispute settlement system.
2. Are Export Subsidies under PROEX "Permitted" under Item (k) of the
Illustrative List?
22. Canada argues that the Article 21.5 Panel was correct in its finding that PROEX subsidies are
not "permitted" under item (k) of the Illustrative List.  Canada refers to Brazil's argument that theArticle 21.5 Panel erred in concluding that the language in the first paragraph of item (k) cannot beused to establish that a subsidy which is contingent upon export performance within the meaning ofArticle 3.1(a) is "permitted".  Canada notes that this argument is at the core of Brazil's claim that therevised PROEX is in compliance with the  SCM Agreement .
                                                     
21WT/DS87/AB/R, WT/DS110/AB/R, adopted 12 January 2000, para. 74.WT/DS46/AB/RW
Page 8
23. Canada submits that the Article 21.5 Panel correctly determined that the first paragraph of
item (k) does not create such an " a contrario " exception.  While Brazil urges that the Article 21.5
Panel should have looked only to the language of item (k) itself, Canada argues that the Article 21.5Panel rightly began by interpreting the text of Article 3 and footnote 5 of the  SCM Agreement , which
contain the prohibition on, and the parameters of an y exception to, the prohibition on export subsidies.
In particular, the Article 21.5 Panel determined that, in its ordinary meaning, footnote 5 provides atextual basis for deciding when the Illustrative List can be used to demonstrate that a practice included
in the Illustrative List is not a prohibited export subsidy.  The Article 21.5 Panel correctly determined
that only the provisions of the Illustrative List that  affirmatively state that a practice is not an export
subsidy fall within the scope of footnote 5, when r ead in conformity with its ordinary meaning. The
first paragraph of item (k) does not contain such an affirmative statement.  Therefore, in Canada'sview, it does not create an exception to the prohibition in Article 3.
24. Canada notes that Brazil alleges the Article 21.5 Panel erred in concluding that PROEX
payments are not "payments" within the meaning of the first paragraph of item (k) of the IllustrativeList.  Brazil disagrees with the Article 21.5 Panel's factual conclusion that financing institutionsinvolved in financing PROEX-supported transactions  that provide export credits cannot be seen as
obtaining   such credits.  According to Canada, howev er, the Article 21.5 Panel's conclusion follows
from the ordinary meaning of the text of item (k) as applied to PROEX payments, which, as found inthe original proceedings, are made to reduce interest  rates below market rates rather than to reimburse
borrowing costs.
25. Canada also submits that the Article 21.5 Panel was not convinced, as argued by Brazil, that
PROEX payments serve to reimburse costs incurred by financing institutions in obtaining credits.  Itfound as an undisputed fact that the financial in stitutions receiving PROEX payments are in many
cases leading international institutions which do not incur the additional costs faced by Brazilianfinancial institutions.  Moreover, both the Article 21.5 Panel and the Appellate Body in the original
proceedings had concluded that PROEX payments are payments to reduce the interest rate paid by
purchasers of the aircraft.  Canada argues that PROEX payments, in this context, do nothing to reducethe cost of obtaining credits for Brazilian financing institutions.
26. According to Canada, Brazil's claim, that the Article 21.5 Panel erred in several respects in
finding that payments under the revised PROEX are "used to secure a material advantage to the fieldof export credit terms" is unfounded. In light of the Appellate Body's earlier analysis of "material
advantage", the Article 21.5 Panel's task was to measure PROEX supported interest rates in relation tocommercial   rates that might be available in the marketplace.  The Article 21.5 Panel's refusal to
consider a transaction supported by a loan guarantee provided by the Export-Import Bank of theWT/DS46/AB/RW
Page 9
United States as evidence of such commercial intere st rates was correct because, by its very nature, a
government-guaranteed loan cannot be considered to be made at a commercial rate.
27. In addition, the Article 21.5 Panel correctly determined that, in the circumstances of this case,
floating rate transactions were not relevant as evidence of the market for fixed interest rates.According to Canada, Brazil could not explain what minimum rate it would apply if it providedPROEX payments in support of floating interest rates.  In these circumstances, the Article 21.5 Panelhad no choice but to disregard the floating rate transaction example provided by Brazil.
28. Furthermore, contrary to Brazil's allegation, the Article 21.5 Panel appropriately allocated the
burden of proof at every stage of the proceeding.  Brazil's argument completely mischaracterizes thefinding of the Appellate Body in  Chile – Alcoholic Beverages .  The issue here has nothing to do with
Brazil's previous measures or with presuming that Brazil is acting in bad faith, but rather with itsfailure to meet the burden of proof on an "affirmative defence".  It was for Brazil to demonstrate thatthe market provided interest rates at the level of those resulting from the application of PROEXpayments.  Brazil did not prove that such rates exist.
C. Arguments of the Third Participants
1. European Communities
29. The European Communities begins its submission with comments on the agreement reached
between Brazil and Canada, in this dispute, on, inter alia , the conduct of the procedure under
Article 21.5 of the DSU.  Although the European Communities accepts that parties may makeagreements relating to procedural issues in dispute settlement proceedings, such agreements may not,in its view, affect the rights of third parties.  The European Communities is concerned that, in certaindisputes under Article 21.5, parties have agreed bilaterally to dispense with formal consultationsunder Article 4 of the DSU. The European Communities considers this to be inconsistent with theDSU and to prejudice third party rights.  The European Communities recognizes that this issue wasnot raised before the Article 21.5 Panel and is not the subject of an appeal. However, the European
Communities considers that it would be useful to all Members to have a ruling on this issue and
would appreciate a statement from the Appellate Body to the effect that "the parties to a dispute maynot enter into agreements regarding the conduct of dispute settlement proceedings that prejudice therights and interests of other Members, in particular to participate as third parties."
 22
                                                     
22European Communities' third participant's submission, para. 15.WT/DS46/AB/RW
Page 10
(a) Issuance of NTN-I Bonds Pursuant to Letters of Commitment Issued
before 18 November 1999
30. According to the European Communities, the Article 21.5 Panel's finding that Brazil has not
withdrawn PROEX subsidies made pursuant to letters of commitment issued before18 November 1999 was correct, as Brazil continues to "grant" those subsidies within the meaning ofArticle 3.2 of the  SCM Agreement .  The subsidies are "granted" for the purposes of Article 3.2 when
the NTN-I bonds are issued, rather than when the letters of commitment are issued.  When the subsidy"exists" under Article 1 is not relevant to this issue.
(b) Are Export Subsidies under PROEX "Permitted" under Item (k) of
the Illustrative List?
31. The European Communities agrees with the Article 21.5 Panel's finding that the relationship
between the prohibition contained in Article 3.1(a) of the  SCM Agreement  and the Illustrative List is
governed exclusively by footnote 5.  The interpretation " a contrario " of items in the Illustrative List,
even in the qualified manner proposed by the United States, would read footnote 5 out of theSCM Agreement .  Moreover, Brazil does not explain why the drafters would have restricted the scope
of footnote 5 to only some of the measures in the Illustrative List.
32. The European Communities agrees with the Article 21.5 Panel's finding that a Member may
demonstrate through positive evidence that a net interest rate below the relevant Commercial InterestReference Rate ("CIRR") established by the  Arrangement on Guidelines for Officially Supported
Export Credits  (the " OECD Arrangement ") is not "used to secure a material advantage in the field of
export credit terms".  The European Communities considers, nevertheless, that the Article 21.5 Panelfailed to formulate and apply the appropriate benchmark in order to assess whether an interest ratebelow the CIRR secures a "material advantage".  A ccording to the Article 21.5 Panel, the relevant
benchmark would be the "minimum commercial intere st rate" available in the marketplace, which the
Article 21.5 Panel considered to exclude any officially supported rates.  In the European
Communities' view, the appropriate benchmarks are the interest rates available in the marketplace,irrespective of whether those interest rates are officially supported.
33. However, the European Communities agrees with the Article 21.5 Panel's conclusion that
Brazil did not meet its burden of proving that the benchmark that it established, the 10-year UnitedStates Treasury Bond rate plus a spread of 20 basis points, is appropriate.  The example provided byBrazil of a floating rate transaction guaranteed by the Export-Import Bank of the United States did not
constitute, as rightly concluded by the Article 21.5 Panel, relevant evidence, since floating rates arenot directly comparable to fixed rates.WT/DS46/AB/RW
Page 11
2. United States
(a) Issuance of NTN-I Bonds Pursuant to Letters of Commitment Issued
before 18 November 1999
34. The United States submits that in the context of this case, the Article 21.5 Panel's conclusion,
that the continued issuance of NTN-I bonds pursuant to letters of commitment issued before18 November 1999 is not consistent with the recomm endation of the DSB to "withdraw" the subsidies
pursuant to Article 4.7 of the  SCM Agreement , was correct.  Therefore, the United States believes that
the Appellate Body should affirm the Article 21.5 Panel's ultimate conclusion.  The United Statesnotes, however, that it considers that the issue of when the subsidy "exists" under Article I of theSCM Agreement   is not relevant to the question of Brazil's obligation to "withdraw" the subsidies
found to be prohibited and to refrain from "granting" or "maintaining" such subsidies.
(b) Are Export Subsidies under PROEX "Permitted" under Item (k) of
the Illustrative List?
35. As argued during previous stages of this dispute, the United States considers that the
Appellate Body should reverse the Article 21.5 Panel's interpretation regarding the " a contrario "
issue.  The United States refers to its prior arguments on this issue.  In addition, the United States
disagrees with the following statement of the Article 21.5 Panel:  "We agree with Brazil that theSCM Agreement   should not be interpreted in a manner that provides special and  less  favourable
treatment for developing country Members in the field of export credit terms if the text of theAgreement permits of an alternative interpretation."
 23  The United States submits that there is no basis
for employing this consideration as a method of interpretation.
36. The United States then argues that Brazil is incorrect when it argues that any rate offered by a
commercial bank which is supported by a government-supplied loan guarantee that is consistent withthe  SCM Agreement   is a "commercial" rate.  In the view of the United States, the fact that a
government-supplied loan guarantee is consistent with item (j) of the Illustrative List does not mean
that the financing that is being guaranteed is "commercial".  It simply means that the transaction doesnot constitute a prohibited export subsidy.
37. Furthermore, the Article 21.5 Panel erred by imposing on Brazil the burden of proving that
PROEX, as revised, is not "used to secure a material advantage in the field of export credit terms."The United States considers that neither item (k) nor any other of the items in the Illustrative Listconstitutes an "affirmative defence."  Instead, item (k) describes the legal standard that Canada, as thecomplainant, must demonstrate that Brazil has violated.
                                                     
23Article 21.5 Panel Report, para. 6.47.WT/DS46/AB/RW
Page 12
IV. Issues Raised in this Appeal
38. The following issues are raised in this appeal:
(a) whether the continued issuance of NTN-I bonds, pursuant to letters of commitment
issued before 18 November 1999, under the terms and conditions of PROEX as itexisted before it was revised, is consistent with the recommendation of the DSB,made pursuant to Article 4.7 of the  SCM Agreement , to withdraw the measures found
to be prohibited export subsidies inconsistent with Article 3.1(a) of the
SCM Agreement ;  and
(b) whether payments made under PROEX, as revised by Brazil, are "permitted" under
Item (k) of the Illustrative List of Export Subsidies in Annex I of theSCM Agreement  (the "Illustrative List").
V. Issuance of NTN-I Bonds Pursuant to Letters of Commitment Issued before
18 November 1999
39. Canada's complaint, on this issue, is limited to the claim that Brazil has failed to "withdraw"
the prohibited export subsidies under PROEX that were found by the original panel to be inconsistentwith Article 3.1(a) of the  SCM Agreement .  Canada alleges that Brazil has continued,  after  the
90-day period of implementation which ended on 18 November 1999, to issue NTN-I bonds, pursuantto letters of commitment issued  before  18 November 1999, on the basis of the terms and conditions
of PROEX as that programme existed before Brazil revised it.
40. The Article 21.5 Panel found that the continued issuance of NTN-I bonds, pursuant to letters
of commitment issued  before  18 November 1999, represents the "grant" of subsidies contingent
upon export performance inconsistent with the provisions of Article 3.2 of the  SCM Agreement.   The
Article 21.5 Panel noted the finding by the original panel that export subsidies under PROEX are"granted", within the meaning of Article 27.4 of the  SCM Agreement , when the NTN-I bonds are
issued, and also noted that the Appellate Body had confirmed this finding.
24  In the Article 21.5
Panel's view, there was no basis on which to attribute a different meaning to the term "grant" inArticle 3.2 of the  SCM Agreement   than that attributed to the word "grant" in Article 27.4 of that
Agreement.  Therefore, the Article 21.5 Panel reasoned that the issuance of NTN-I bonds by Brazilconstitutes the "grant" of prohibited export subsidies within the meaning of Article 3.2.
 25
Accordingly, the Article 21.5 Panel concluded that  by continuing to "grant" prohibited export
                                                     
24Article 21.5 Panel Report, para. 6.10.
25Ibid., para. 6.11.WT/DS46/AB/RW
Page 13
subsidies through the continued issuance of NTN-I bonds, Brazil has failed to implement the
recommendation of the DSB that it "withdraw" these export subsidies for regional aircraft underPROEX within 90 days, that is, by 18 November 1999.
 26
41. On appeal, Brazil argues that the Article 21.5 Panel erred in finding that the continued
issuance of NTN-I bonds, pursuant to letters of commitment issued  before  18 November 1999,
represents the "grant" of subsidies contingent upon export performance.  Brazil argues that theissuance   of the NTN-I bonds does not involve the "g rant" of "PROEX subsidies", because "PROEX
subsidies" are "granted" at an earlier stage.  Br azil contends that "PROEX subsidies are granted when
the Government of Brazil makes a financial contribution 'and a benefit is thereby conferred'" 
27; that
is, the subsidies are "granted" when they are deemed  to "exist" under Article 1.  According to Brazil,
"this occurs when a letter of commitment is issued and the transaction is finalized by a contract madepursuant to that commitment."
  28  As a result, Brazil maintains that the continued issuance of NTN-I
bonds after 18 November 1999, pursuant to these "previous PROEX commitments"  29, does not
involve the "granting" of prohibited export subsidies which it is obliged to "withdraw".
42. We recall the conclusion of the original panel that "payments on exports of regional aircraft
under the PROEX interest rate equalization scheme are export subsidies inconsistent with Article 3 of
the SCM Agreement".  30  On appeal, we upheld this conclusion of the original panel.  31  As a result, the
DSB recommended that Brazil withdraw the prohibited export subsidies under PROEX within90 days, that is, by 18 November 1999.
43. With respect to letters of commitment issued before 18 November 1999, Canada's complaint
is limited to its allegation that Brazil has failed to "withdraw" the measure found to involve prohibitedexport subsidies because Brazil has continued to issue NTN-I bonds,  after  18 November 1999.
 32  We
are not asked, in our examination of this issue, to address any other aspect of Brazil's obligation to"withdraw" the measures found to be prohibited export subsidies pursuant to the recommendation of
the DSB.
44. We do not believe that Brazil's arguments about when a subsidy is deemed to "exist" under
Article 1.1 of the  SCM Agreement , and when it is "granted" under Article 3.2 of that Agreement, are
                                                     
26Article 21.5 Panel Report, para. 6.17.
27Brazil's appellant's submission, para. 18.
28Ibid.
29Ibid., p. 4, Heading III.
30Original panel report, Brazil – Aircraft , supra , footnote 2, para. 8.2.
31Appellate Body Report, Brazil – Aircraft , supra , footnote 2, para. 197.
32Supra , para. 39.WT/DS46/AB/RW
Page 14
relevant to our inquiry into the issue before us.  The export subsidies under PROEX that are at issue in
this appeal were found, by the original panel and by us, to be prohibited export subsidies inconsistentwith Article 3.1(a) of the  SCM Agreement .  The existence of a "subsidy" was not contested by Brazil
in the proceedings before the original panel
 33;  and Brazil also conceded before the original panel that
subsidies under PROEX were export contingent.  34  The only issue before us now is whether the
continued issuance of NTN-I bonds by Brazil  after   18 November 1999, pursuant to letters of
commitment issued  before   18 November 1999, is consistent with the recommendation of the DSB to
"withdraw" the prohibited export subsidies within 90 days.
45. Turning to the ordinary meaning of "withdraw", we observe first that this word has been
defined as "remove" or "take away"  35, and as "to take away what has been enjoyed; to take from."  36
This definition suggests that "withdrawal" of a subsidy, under Article 4.7 of the  SCM Agreement ,
refers to the "removal" or "taking away" of that su bsidy.  We observe also that Brazil concedes that it
has taken  no action   to implement the recommendation of the DSB with respect to transactions
relating to NTN-I bonds issued pursuant to lett ers of commitment issued before 18 November 1999.  37
In this respect, the Article 21.5 Panel stated that "Brazil does not deny that it continues to issue NTN-I
bonds in respect of commitments made prior to 18 November 1999."  38  Thus, NTN-I bonds continue
to be issued, after 18 November 1999, on precisely the same terms and conditions as they were
before.  These bonds, in essence, represent disbursements made under PROEX.  The financinginstitution can choose either to sell the bonds in the market or simply receive payments as theybecome due.
39  Thus, Brazil is continuing to make payments, after 18 November 1999, under a
subsidy programme found to involve prohibited export subsidies inconsistent with Article 3.1(a) ofthe  SCM Agreement , namely the PROEX programme as previously constituted.  In our view, to
continue to make payments under an export subsidy measure found to be prohibited is not consistentwith the obligation to "withdraw" prohibited export subsidies, in the sense of "removing" or "taking
away".  Thus, we find that the recommendation of the DSB requires Brazil to stop issuing NTN-I
                                                     
33Original panel report,  Brazil – Aircraft , supra , footnote 2, para. 7.12.
34Ibid.
35Concise Oxford English Dictionary  (Clarendon  Press, 1995), p. 1609.
36Black's Law Dictionary  (West Publishing, 1990), p. 1602
37Article 21.5 Panel Report, para. 6.7.
38Ibid.
39See, supra , para. 12.WT/DS46/AB/RW
Page 15
bonds as from 18 November 1999 pursuant to letters of commitment issued before
18 November 1999.  40
46. We note Brazil's argument before the Article 21.5 Panel that Brazil has a contractual
obligation under domestic law to issue PROEX bonds pursuant to commitments that have alreadybeen made, and that Brazil could be liable for damages for breach of contract under Brazilian law if itfailed to respect its contractual obligations.
 41  In response to a question from us at the oral hearing,
however, Brazil conceded that a WTO Member's domestic law does not excuse that Member from
fulfilling its international obligations.  Like the Article 21.5 Panel,42 we do not consider that any
private contractual obligations, which Brazil may have under its domestic law, are relevant to theissue of whether the DSB's recommendation to "withdraw" the prohibited export subsidies permits thecontinued issuance of NTN-I bonds under letters of commitment issued before 18 November 1999.
47. For all these reasons, we uphold the Article 21.5 Panel's conclusion that Brazil has failed to
implement the recommendation of the DSB that it withdraw the export subsidies on sales of regionalaircraft under PROEX pursuant to letters of commitment issued before 18 November 1999.
VI. Are Export Subsidies under PROEX "Permitted" under Item (k) of the Illustrative
List?
A. Introduction
48. The original panel found that export subsidies under PROEX are prohibited under
Article 3.1(a) of the  SCM Agreement , and we upheld this finding.  The DSB recommended that
Brazil "withdraw" these prohibited subsidies, pursuant to Article 4.7 of the  SCM Agreement , by
18 November 1999.  Brazil elected to implement the recommendation of the DSB by revising
PROEX.  Canada claims, in this aspect of these Article 21.5 proceedings, that Brazil has not"withdrawn" the prohibited export subsidies, as recommended by the DSB, because the revised
                                                     
40We recall that, in paragraph 18 of its appellant's submission, Brazil referred to the "finalization" of
the contract made pursuant to a letter of commitment, as well as to the issuance of the letter of commitmentitself (see, supra , para. 41).  We note that our conclusion, in paragraph 45, is based on the date when the  NTN-I
bonds  are issued, and not on the date when the letter of  commitment is issued or when the contract is
"finalized".  For our reasoning, it is not relevant whether the letter of commitment was or was not "finalized" bya contract signed before 18 November 1999.
41Article 21.5 Panel Report, para. 6.16.
42Ibid.WT/DS46/AB/RW
Page 16
PROEX is not consistent with Brazil's obligations under Article 3.1(a) of the  SCM Agreement . 43
Brazil maintains, in response, that the revised PROEX is justified by item (k) of the Illustrative List.  44
49. The original panel found, and Brazil did not contest, that PROEX involves "subsidies" within
the meaning of Article 1 of the  SCM  Agreement   that are "contingent upon export performance"
within the meaning of Article 3.1(a) of that Agreement.45  The Article 21.5 Panel noted that Brazil did
not suggest that the modifications Brazil has since made to PROEX mean that the revised PROEXdoes not involve export subsidies under Article 3.1(a).
46  Rather, Brazil maintains in these Article 21.5
proceedings that the export subsidies under the revised PROEX are justified by item (k) of the
Illustrative List.47  In this respect, the Article 21.5 Panel also stated that Brazil acknowledged that it is
asserting, through its reliance on item (k), an alleged "affirmative defence", and that, therefore, theburden of establishing entitlement to that "defence" is on Brazil.
 48
50. To determine whether Brazil was entitled to the benefit of such a "defence", the Article 21.5
Panel considered the following issues.  First, the Article 21.5 Panel stated that Brazil's "defence"depends upon the proposition that the first paragraph of item (k) may be used to establish that anexport subsidy within the meaning of item (k) is "permitted" by the  SCM Agreement .  Then, the
Article 21.5 Panel stated that Brazil's "defence" depends upon Brazil establishing:  (a) that PROEX
payments are "the payment by [governments] of all or part of the costs incurred by exporters or
financial institutions in obtaining credits" within the meaning of the first paragraph of item (k);and (b) that PROEX payments are not "used to secure a material advantage in the field of exportcredit terms."
 49
51. The Article 21.5 Panel stated that Brazil's argument "depends upon" Brazil succeeding in its
legal and factual arguments on  all three of these issues . 50  Thus, if Brazil had failed to meet its
burden of proof on  any one   of these issues, the Article 21.5 Panel could have rejected Brazil's
argument on that basis alone.  The Article 21.5 Pane l stated that "[i]n this Article 21.5 dispute,
however, we have decided to address all three elements of Brazil's defence.  In our view, this more
comprehensive approach will provide a greater degree of clarity and guidance to the parties in
                                                     
43Article 21.5 Panel Report, para. 6.3.
44Ibid.
45Original panel report, Brazil – Aircraft , supra , footnote 2, paras. 7.12 and 7.15.
46Article 21.5 Panel Report, para. 6.21.
47Ibid., para. 6.22.
48Ibid.
49Ibid.
50Ibid.WT/DS46/AB/RW
Page 17
respect of implementation."  51  The Article 21.5 Panel, therefore, examined each of these three issues,
and subsequently found that Brazil had not met its burden of proof on any of them.  Consequently, thePanel concluded that the revised PROEX was not justified by item (k), and that, therefore, Brazil hadnot implemented the recommendation of the DSB that it "withdraw" its export subsidies underPROEX within 90 days.
52. Having stated the Article 21.5 Panel's conclusions, we think it useful to summarize the
Article 21.5 Panel's reasoning on each of these three issues.
53. As we have noted, the first issue is whether the first paragraph of item (k) of the Illustrative
List may be interpreted such that payments  not  "used to secure a material advantage in the field of
export credit terms" are "permitted" under the  SCM Agreement .  In examining this issue, the
Article  21.5 Panel emphasized the importance of footnote 5 to Article 3.1(a).  Footnote 5 provides
that: "Measures  referred to in Annex I as not constituting export subsidies   shall not be prohibited
under this or any other provision of this Agreement." (emphasis added)  The Article 21.5 Panel saidthat:  "In its ordinary meaning, footnote 5 relates to situations where a measure is referred to as  not 
constituting an export subsidy."
 52  The Article 21.5 Panel found that:
The first paragraph of item (k) … does not contain any affirmative
statement that a measure is  not  an export subsidy nor that measures
not satisfying the conditions of that item are  not  prohibited.  To the
contrary, the first paragraph of item (k) on its face simply identifiesmeasures that  are  prohibited export subsidies.  Thus, the first
paragraph of item (k) on its face does not in our view fall within the
scope of footnote 5 read in conformity with its ordinary meaning.
 53
The Article 21.5 Panel concluded that the first paragraph of item (k) cannot be used to establish that a
subsidy which is contingent upon export performance within the meaning of Article 3.1(a) is"permitted".
54
54. The second issue considered by the Article 21.5 Panel was whether export subsidies under the
revised PROEX constitute the "payment" by Brazil "of all or part of the costs incurred by exporters orfinancial institutions in obtaining credits" within th e meaning of the first paragraph of item (k).  The
Article 21.5 Panel found as follows:
                                                     
51Article 21.5 Panel Report, para. 6.23.
52Ibid., para. 6.36.
53Ibid., para. 6.37.
54Ibid., para. 6.67.  The Article 21.5 Panel repeated this conclusion in para. 6.106(ii).WT/DS46/AB/RW
Page 18
While the financial institutions involved in financing PROEX-
supported transactions certainly  provide  export credits, they cannot
be seen as  obtaining  such credits. … In short, we do not agree that
payments to a lender that amount to interest rate support can
reasonably be understood to be payments of all or part of the costs of
obtaining export credits.  55
55. The third issue considered by the Article 21.5 Panel was whether export subsidies under the
revised PROEX are "used to secure a material advantage in the field of export credit terms" within themeaning of the first paragraph of item (k) of the Illustrative List.  The Article 21.5 Panel said that:
… a Member may under the first paragraph of item (k) as interpreted
by the Appellate Body establish that a payment was not used to secure
a material advantage in the field of export credit terms, even if itresulted in a below-CIRR interest rate, if it could establish that the net
interest rate resulting from the payment was not lower than the
minimum  commercial  interest rate in respect of that currency.
 56
56. In its reasoning on this third issue, the Article 21.5 Panel considered evidence presented by
Brazil in support of its argument.57  The Panel examined the evidence and concluded "that Brazil has
failed to demonstrate that PROEX payments are not 'used to secure a material advantage in the fieldof export credit terms' within the meaning of the first paragraph of item (k)."
 58
57. On appeal, Brazil argues that the Article 21.5 Panel erred in its findings on all three of these
issues, and erred also in its finding that the burden of proof under item (k) is on Brazil.  First, withregard to whether the first paragraph of item (k) may be used as a basis for arguing that certain export
subsidies are "permitted", Brazil submits that the Article 21.5 Panel's reliance on footnote 5 was
misplaced.  Brazil emphasizes, first of all, that its argument that subsidies under the revised PROEXare "permitted" was not based on footnote 5 but rather on an " a contrario " interpretation of the text of
the first paragraph of item (k).
59  Second, Brazil argues that the Article 21.5 Panel erred in its finding
that Brazil failed to demonstrate that subsidies under the revised PROEX are the "payment" bygovernments "of all or part of the costs incurred by exporters or financial institutions in obtainingcredits" within the meaning of the first paragraph of item (k).
 60  And, third, Brazil argues that the
                                                     
55Article 21.5 Panel Report, para. 6.72.
56Ibid., para. 6.92.
57Ibid., paras. 6.94-6.105.
58Ibid., para. 6.106.
59Brazil's appellant's submission, para. 26.
60Ibid., paras. 35-48.WT/DS46/AB/RW
Page 19
Article 21.5 Panel erred in finding that Brazil failed to demonstrate that  subsidies under the revised
PROEX are  not  "used to secure a material advantage in the field of export credit terms."  On this
third issue, Brazil asserts that the Article 21.5 Panel erred in concluding that a net interest rate that"results from a government guarantee" is not a "commercial" rate.
 61  On this issue, in addition, Brazil
argues that the Article 21.5 Panel erred in rejecting evidence of a floating rate transaction as irrelevantto a fixed rate transaction.
 62  Furthermore, Brazil submits that the Article 21.5 Panel reversed the
burden of proof by requiring Brazil to demonstrate that subsidies under the revised PROEX are   not 
"used to secure a material advantage in the field of export credit terms."  63
58. Having stated the Article 21.5 Panel's conclusions, having summarized the Article 21.5
Panel's reasoning in reaching those conclusions, and having summarized Brazil's arguments on appealwith respect to those conclusions, we turn now to our own analysis of these three issues.  We note at
the outset that we agree with the Article 21.5 Panel that in order for Brazil to establish its alleged"affirmative defence", Brazil must succeed in its legal and factual arguments on  each  of the three
issues examined by the Article 21.5 Panel.  Thus, if Brazil is unsuccessful in proving  any one   of
these three issues, Brazil's alleged "affirmative defence" under item (k) fails.  With this in mind, webegin our analysis by addressing the last issue dealt with by the Article 21.5 Panel, that is, whether
subsidies under the revised PROEX are "used to secu re a material advantage in the field of export
credit terms."
B. Are export subsidies under PROEX "used to secure a material advantage in the field
of export credit terms" ?
59. In addressing this issue, we begin by recallin g that, in this aspect of its complaint, Canada
claims that Brazil has not "withdrawn" the prohibit ed export subsidies, as required by the DSB
recommendation made pursuant to Article 4.7 of the  SCM Agreement , because the revised PROEX is
not consistent with Brazil's obligations under Article 3.1(a) of the  SCM Agreement . Thus, it follows
that this aspect of these Article 21.5 proceedings covers only the measures taken by Brazil for thepurpose of "withdrawing" the prohibited export  subsidy measure through revising the PROEX
programme.
                                                     
61Brazil's appellant's submission, para. 51.
62Ibid., para. 58.
63Ibid., paras. 60-61.WT/DS46/AB/RW
Page 20
60. The first paragraph of item (k) of the Illustrative List reads as follows:
The grant by governments (or special institutions controlled by and/or
acting under the authority of governments) of export credits at rates
below those which they actually have to pay for the funds so employed(or would have to pay if they borro wed on international capital markets
in order to obtain funds of the same maturity and other credit terms and
denominated in the same currency as the export credit), or  the payment
by them of all or part of the costs incurred by exporters or financial
institutions in obtaining credits , in so far as they are used to secure a
material advantage in the field of export credit terms . (emphasis added)
61. The first paragraph of item (k) contains examples – illustrations – of certain kinds of export
credit practices that constitute prohibited export subsidies under Article  3.1(a) of the  SCM Agreement .
One of these examples, or illustrations, relates to the "payment by [governments] of all or part of the
costs incurred by exporters or financial institutio ns in obtaining credits".  Such "payments" are
considered to be export subsidies under item (k) "i n so far as they are used to secure a material
advantage in the field of export credit terms."  In our Report in  Brazil – Aircraft , we examined the
meaning of this "material advantage" clause in item (k).  We ruled in that Report that the determination
of whether a payment is "used to secure a material advantage" calls for a comparison between theexport credit terms available under the measure at issue and some other "market benchmark".
 64  We
stated that "we see the second paragraph of item (k) as useful context for interpreting the 'materialadvantage' clause in the text of the first paragraph".
 65  And, in this respect, we identified the
Commercial Interest Reference Rate (the "CIRR"), defined in the  Arrangement on Guidelines for
Officially Supported Export Credits  (the " OECD Arrangement "), as an "appropriate" "market
benchmark" for assessing whether a payment "is used to secure a material advantage".  66  W e
explained:
… the  OECD Arrangement   can be appropriately viewed as  one
example   of an international undertaking providing a  specific market
benchmark   by which to assess whether payments by governments,
coming within the provisions of item (k), are 'used to secure a
material advantage in the field of export credit terms'.  67 (emphasis
added)
                                                     
64Appellate Body Report, Brazil – Aircraft , supra , footnote 2, para. 181.
65Ibid.
66Ibid.
67Ibid.WT/DS46/AB/RW
Page 21
62. We also indicated, in that Report, that the CIRR represents the  minimum   authorized interest
rate that can be offered to borrowers in officially-supported export credit transactions under theOECD Arrangement .
 68  We then noted that:
The fact that a particular  net  interest rate is below the relevant CIRR
is a  positive indication   that the government payment in that case has
been 'used to secure a material advantage in the field of export credit
terms'.  69 (emphasis added)
63. The Article 21.5 Panel correctly concluded from our Report in  Brazil – Aircraft   that "the
CIRR was not intended as the exclusive and immutable benchmark applicable in all cases."  70  Th e
Article 21.5 Panel then stated that:
… we consider that a Member may under the first paragraph of
item (k) as interpreted by the Appellate Body establish that a payment
was not used to secure a material advantage in the field of export
credit terms, even if it resulted in a below-CIRR interest rate , …  71
(emphasis added)
64. We agree with this legal interpretation by the Article 21.5 Panel of the "material advantage"
clause in item (k).  Again, as we said in our Report in  Brazil – Aircraft , the CIRR is " one example "
of a "market benchmark" that may be used to de termine whether a "payment" is used to "secure a
material advantage". (emphasis added)  The CIRR is a constructed interest rate for a particularcurrency, at a particular time, that does not always necessarily reflect the actual state of the creditmarkets.
72  Where the CIRR does not, in fact, reflect the rates available in the marketplace, we believe
that a Member should be able, in principle, to rely on evidence from the marketplace itself in order to
establish an alternative "market benchmark", on which it might rely in one or more transactions.73
Thus, the CIRR is not, necessarily, the  sole  "market benchmark" that may be used to determine
whether a payment "is used to secure a material advantage in the field of export credit terms", withinthe meaning of item (k) of the Illustrative List.
                                                     
68We note that a participant in the  OECD Arrangement  can always offer borrowers officially-
supported export credits if, besides respecting the CIRR, it also respects the other "repayment terms and
conditions" of the  OECD Arrangement  (see Introduction, OECD Arrangement ).
69Appellate Body Report, Brazil – Aircraft , supra , footnote 2, para. 182.
70Article 21.5 Panel Report, para. 6.84.
71Ibid., para. 6.92.
72The CIRR is constructed on the basis of the rules and principles set out in Articles 15 and 16 of the
OECD Arrangement .
73See, further, infra , para. 73.  We note that it is not necessary  for us to address, in these proceedings,
whether transactions involving government intervention,  such as government loan guarantees, can provide
evidence of an appropriate "market benchmark", below  the CIRR, to determine whether "payments", under
item (k), are "used to secure a material advantage in the field of export credit terms."WT/DS46/AB/RW
Page 22
65. Before addressing the issue of the application of the "material advantage" clause in this case,
though, we must first examine the issue of burden of proof under item (k).  The Article 21.5 Panelfound that Brazil's argument under item (k) constituted an alleged "affirmative defence" for whichBrazil bore the burden of proof.
 74  Brazil appeals this finding.  75
66. We recall that, before the original panel in  Brazil – Aircraft , Brazil conceded that it had the
burden of proof in demonstrating its alleged "defence" under item (k).  76  However, in these Article 21.5
proceedings, Brazil argues that this burden of proof, under item (k), is on Canada.  77  In our view, the
fact that the measure at issue was "taken to co mply" with the "recommendations and rulings" of the
DSB does not alter the allocation of the burden of proving Brazil's "defence" under item (k).  In thisrespect, we note that Brazil concedes that the revi sed PROEX measure is, in principle, prohibited under
Article 3.1(a) of the SCM Agreement ;  yet Brazil asserts nonetheless that the PROEX measure is
justified, under the first paragraph of item (k).  Thus, in our view, Brazil is, clearly, using item (k) tomake an affirmative claim in its defence.  In  United States – Measure Affecting Imports of Woven
Wool Shirts and Blouses from India , we said:  "It is only reasonable that the burden of establishing [an
affirmative] defence should rest on the party asserting it."
 78  As it is Brazil that is asserting this
"defence" using item (k) in these proceedings, we agree with the Article 21.5 Panel that Brazil has the
burden of proving that the revised PROEX is justified under the first paragraph of item (k), including the
burden of proving that payments under the revised PROEX are  not  "used to secure a material
advantage in the field of export credit terms."
67. To establish that subsidies under the revised PROEX are not "used to secure a material
advantage in the field of export credit terms", Brazil must prove  either :  that the net interest rates
under the revised PROEX are at or above the rele vant CIRR, the specific "market benchmark" we
identified in the original dispute as an "appropriate"  79 basis for comparison;  or, that an alternative
"market benchmark", other than the CIRR, is appropriate, and that the net interest rates under therevised PROEX are at or above this alternative "market benchmark".
68. Brazil does not argue that the net interest rates under the revised PROEX are at or above the
relevant CIRR.  Indeed, Brazil does not contest that  the net interest rates under the revised PROEX are
                                                     
74Article 21.5 Panel Report, para. 6.22.
75Brazil's appellant's submission, paras. 60-61.  Brazil's arguments are summarized, supra , at para. 19.
76Original panel report, Brazil – Aircraft , supra , footnote 2, para. 7.17.
77Brazil's appellant's submission, paras. 60-61.
78WT/DS33/AB/R, adopted 23 May 1997, p. 16.
79Appellate Body Report, Brazil – Aircraft , supra , footnote 2, para. 181.WT/DS46/AB/RW
Page 23
normally  below   the relevant CIRR.  80  Instead, Brazil argues that there is an alternative "market
benchmark" that is "appropriate", and that the net interest rates under the revised PROEX are at orabove this alternative "market benchmark".  In Resolution 2667, Brazil identifies the United StatesTreasury Bond rate plus 20 basis points (0.2 per cent) as the "appropriate" "market benchmark".
81
Before the Article 21.5 Panel, Brazil argued that the enactment of Resolution 2667:
… means, effectively . . . that no application for PROEX interest
equalization support for regional aircraft will be favorably consideredunless it reflects a net interest rate to the borrower equal to or more
than the 10-year United States Treasury Bond ("T-Bill") plus
0.2 per cent per annum.
 82
Brazil contends, on this basis, that the revised PROEX is  not  "used to secure a material advantage in
the field of export credit terms" within the meaning of the first paragraph of item (k) of theIllustrative  List.
69. To prove this argument, Brazil must establish  both  of two elements:  first, Brazil must prove
that it has identified an appropriate "market benchmark";  and, second, Brazil must prove that the netinterest rates under the revised PROEX are at or above that benchmark.
70. We consider, first, whether Brazil has established an appropriate "market benchmark", other
than the CIRR.  In an effort to do so, before the Article 21.5 Panel, Brazil submitted evidence relating
to two examples.
71. As its first example, Brazil submitted documentation relating to the terms of an export
financing transaction, at a floating interest rate, for large civil aircraft supported by an export creditguarantee from the Export-Import Bank of the United States.  Brazil argued before the Article 21.5Panel that the interest rate for this transaction
 83, plus an amount to reflect a one-time guarantee fee
Brazil estimated would have been charged by the lender, should be compared to the "minimum" netinterest rate for export credits benefiting from payments under the revised PROEX, that is, the 10-yearUnited States Treasury Bond rate plus 20 basis points (or 0.2 per cent).  In Brazil's view, the
"minimum" net interest rate for PROEX-supported export  credits is higher than the net interest rate of
                                                     
80Response of Brazil to Question 1 of the Article 21.5 Panel (Article 21.5 Panel Report, p. 133).  We
note that on 12 July 2000, the CIRR for export credit transactions of greater than eight and one half yearsinvolving U.S. dollars was 7.69 per cent, whereas the 10-year United States Treasury Bond rate plus 20 basispoints was 6.29 per cent.
81Article 21.5 Panel Report, para. 6.19.
82Brazil's first submission to the Article 21.5 Panel, para. 6 (Article 21.5 Panel Report, p. 102).
83LIBOR plus 3 basis points, or 0.03 per centWT/DS46/AB/RW
Page 24
that particular Export-Import Bank transaction.84  In addition, as its second example, Brazil argued
that Canada, through the Canadian Export Development Corporation (the "EDC"), has providedexport credits for regional aircraft at rates which are below the relevant CIRR.
 85
72. Brazil submitted to the Article 21.5 Panel that, given these two examples, Brazil should also
be entitled to support export credits at net interest rates below CIRR, in particular the 10-year UnitedStates Treasury Bond rate plus 20 basis points.  In this appeal, Brazil contends that the Article 21.5Panel erred in finding that the evidence of these two examples did not establish an appropriate
"market benchmark" for the revised PROEX.  It becomes incumbent upon us, therefore, to examine
both these examples cited by Brazil.
73. With regard to the first example – the guarantee contract concluded with the Export-Import
Bank of the United States – we note that Brazil has presented evidence relating to one actual exportcredit transaction of this kind.  On the basis of this  single   transaction, Brazil attempted to establish a
generalized   "market benchmark", applicable to  all  export credit transactions, this benchmark being
the 10-year United States Treasury Bond rate plus 20 basis points.  We note that the terms andconditions of export credit transactions in the marketplace vary considerably, depending on thecircumstances of a particular export credit transaction, such as the product involved
86, the size or
volume of the transaction, the type of export credit practice, the duration of the repayment term, the
type of interest rate (fixed or floating) used, and when the transaction is concluded.  In our view,Brazil has not demonstrated that the evidence it submitted, relating to a  single   Export-Import Bank
export credit transaction, is sufficient, on its own, to justify the  generalized  "market benchmark"
relied on by Brazil in  all  transactions relating to regional aircraft under the revised PROEX.
74. In addition, we also note that there would, in an y event, be other difficulties in relying on the
Export-Import Bank transaction to establish a "mar ket benchmark" for PROEX.  As we have noted,
the terms and conditions of export credit transactions in the marketplace vary considerably.  Inidentifying an "appropriate" "market benchmark" below the CIRR, a WTO Member must show that
the "benchmark" on which it relies is based on evidence from relevant, comparable transactions in the
marketplace.  In this respect, we observe that the Export-Import Bank transaction relates to  large civil
aircraft , whereas PROEX payments involve  regional jet aircraft .  Further, the Export-Import Bank
transaction involves  floating   interest rate financing, whereas PROEX involves  fixed   interest rate
financing.  Finally, the Export-Import Bank transaction involves a government  loan guarantee , 
                                                     
84Article 21.5 Panel Report, para. 6.94.
85Ibid., para. 6.97;  see Response of Canada to Question 4(a) of the Article 21.5 Panel (Article 21.5
Panel Report, p. 82).
86We note that, in these proceedings, we are dealing wi th regional aircraft.  Of course, item (k) applies
in the context of export credit transactions involving other goods.WT/DS46/AB/RW
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rather than the  interest rate equalization payments   made under PROEX.87  We, therefore, have
reservations – on which we need not opine – as to the relevance of the Export-Import Banktransaction, relied upon by Brazil, in attempting to establish a "market benchmark" for PROEX.
75. With respect to the second example – Brazil's assertions relating to EDC financing at below
the relevant CIRR – we note that Canada has admitted that EDC financing has sometimes beenoffered at some, unspecified, interest rate below the relevant CIRR.
 88  However, Brazil has provided
no evidence   of any specific transaction in which the EDC has offered financing at rates below the
relevant CIRR, nor has Brazil offered any evidence of the specific rate actually offered by the EDC in
these transactions.  In our view, the admission by Canada that EDC has offered, in certaintransactions, an unspecified interest rate  somewhere   below the applicable CIRR does not, in any
way, identify an alternative  generalized   "market benchmark" below the CIRR.  In short, Canada's
admission does not explain why the specific interest rate chosen for the revised PROEX – the UnitedStates Treasury Bond 10-year rate, plus 20 basis points (or 0.2 per cent) – should be seen as anappropriate "market benchmark".
76. We, therefore, find that Brazil has not established an appropriate "market benchmark" for the
revised PROEX under the "material advantage" clause of the first paragraph of item (k) of the
Illustrative List.  We said Brazil had to prove  both  that it had identified an appropriate "market
benchmark" below the CIRR and that its net interest rates under the revised PROEX are at or abovethat benchmark.
89  As Brazil has not identified an "appropriate" "market benchmark" below the CIRR,
it is not possible to determine whether the net interest rates under the revised PROEX are at or abovesuch a "market benchmark".
77. For these reasons, we agree with the Article 21.5 Panel's conclusion that "Brazil has failed to
demonstrate that PROEX payments are not 'used to secure a material advantage in the field of exportcredit terms' within the meaning of the first pa ragraph of item (k)" of the Illustrative List.
90
                                                     
87We recall that it is not necessary for us to deci de, in this case, whether transactions involving
government loan guarantees can provide an appropria te "market benchmark", below the CIRR, to determine
whether a "payment", under item (k), is "used to secure a material advantage in the field of export credit terms."(Supra , para. 64, footnote 73).
88Canada concedes that there were "instances where certain of EDC's financing transactions were at a
rate less than the CIRR applicable on the date the transaction closed."  However, Canada claims that with the
exception of one Canada Account transaction, the interest rate charged in respect of regional aircraft has been
"market-based".  According to Canada, this is because the CIRR "lags" behind the market due to the fact that the
CIRR is set once a month whereas market rates fluctuate more regularly.  (See Response of Canada toQuestion 4(a) of the Article 21.5 Panel (Article 21.5 Panel Report, pp. 82-83).)
89See, supra , para 69.
90Article 21.5 Panel Report, para. 6.106.WT/DS46/AB/RW
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C. Are export subsidies under PROEX "payments" within the meaning of the first
paragraph of item (k) ?
78. Brazil also appeals the Article 21.5 Panel's finding that export subsidies under the revised
PROEX are not "payments" within the meaning of th e first paragraph of item (k).  We have found that
Brazil has failed to establish that export subsidies under the revised PROEX are not "used to secure amaterial advantage in the field of export credit te rms" within the meaning of the first paragraph of
item (k).  As we noted earlier, in order to establish a justification under item (k), Brazil was requiredto prove each of the three issues it argued before the Article 21.5 Panel.
91  As Brazil has failed to
prove one of the elements necessary to prove that payments made under the revised PROEX arejustified by item (k), we do not believe it is necessary to examine the issue of whether exportsubsidies under the revised PROEX are "the payment [by governments] of all or part of the costs
incurred by exporters or financial institutions in obtaining credits" within the meaning of the first
paragraph of item (k).  Therefore, we do not address the Article 21.5 Panel's findings
92 on this issue.
These findings of the Article 21.5 Panel are moot, and, thus, of no legal effect.
D. May the first paragraph of item (k) be interpreted to establish that an export subsidy
is "permitted" ?
79. Brazil also appeals the Article 21.5 Panel's finding that "the first paragraph of item (k) cannot
be used to establish that a subsidy which is co ntingent upon export performance within the meaning
of Article 3.1(a) is 'permitted".93
80. If Brazil had demonstrated that the payments made under the revised PROEX were not "used
to secure a material advantage in the field of export credit terms", and that such payments were"payments" by Brazil of "all or part of the costs incurred by exporters or financial institutions inobtaining credits", then we would have been prepared to find that the payments made under therevised PROEX are justified under item (k) of the Illustrative List.  However, Brazil has not
demonstrated that those conditions of item (k) are met in this case.  In making this observation, we
wish to emphasize that we are not interpreting footnote 5 of the  SCM Agreement , and we do not
opine on the scope of footnote 5, or on the meaning of any other items in the Illustrative List.
                                                     
91See, supra , para. 58.
92Article 21.5 Panel Report, para. 6.72.
93Ibid., para. 6.67.  See also, Article 21.5 Panel Report, para. 6.106(ii).WT/DS46/AB/RW
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81. However, we do not believe it is necessary for us to rule on these general questions in order to
resolve this dispute.  We, therefore, hold that the Article 21.5 Panel's finding that "the first paragraph
of item (k) cannot be used to establish that a subsidy which is contingent upon export performancewithin the meaning of Article 3.1(a) is 'permitted'"
 94 is moot, and, thus, is of no legal effect.
VII. Findings and Conclusions
82. For the reasons set out in this Report, the Appellate Body:
(a) upholds the conclusion of the Article 21.5 Panel that as a result of the continued
issuance by Brazil of NTN-I  bonds, after 18 November 1999, pursuant to letters of
commitment issued before 18 November 1999, Brazil has failed to implement therecommendation of the DSB that it withdraw the prohibited export subsidies underPROEX within 90 days;  and
(b) upholds the Article 21.5 Panel's findings that payments made under the revised
PROEX are prohibited by Article 3 of the  SCM Agreement , and are not justified
under item (k) of the Illustrative List, and therefore upholds the Article 21.5 Panel'sconclusion that Brazil has failed to implement the recommendation of the DSB that itwithdraw the export subsidies for regiona l aircraft under PROEX within 90 days.
                                                     
94Article 21.5 Panel Report, para. 6.67.  See also, Article 21.5 Panel Report, para. 6.106(ii).WT/DS46/AB/RW
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Signed in the original at Geneva this 12th day of July 2000 by:
_________________________
James Bacchus
Presiding Member
_________________________ _________________________
Claus-Dieter Ehlermann Julio Lacarte-Muró
Member Member