BRAZIL – EXPORT FINANCING PROGRAMME FOR AIRCRAFT
Document: Second Recourse by Canada to Article 21.5 of the DSU Report of the Panel
Date: 26 July 2001
Document codes: WT/DS46/RW/2
Complainant: Canada
Respondent: Brazil
Third parties: Australia, EU, South Korea, U.S.
Dispute stage: Retaliation & Arbitration
Agreements cited: Art. XVI  GATT 1994Art. 3, 27  Subsidies and Countervailing Measures (SCM)

BRAZIL – EXPORT FINANCING PROGRAMME
FOR AIRCRAFT
Second Recourse by Canada to Article 21.5 of the DSU
Report of the Panel
The report of the Panel on – Second Recourse by
Canada to Article 21.5 of the DSU is being circulated to all Members, pursuant to the DSU. The
report is being circulated as an unrestricted document from 26 July 2001 pursuant to the Procedures
for the Circulation and Derestriction of WTO Documents (WT/L/160/Rev.1). Members are reminded
that in accordance with the DSU only parties to th e dispute may appeal a panel report. An appeal
shall be limited to issues of law covered in the Panel report and legal interpretations developed by the
Panel. There shall be no ex parte communications with the Panel or Appellate Body concerning
matters under consideration by the Panel or Appellate Body.

I. PROCEDURAL BACKGROUND
1.1 On 20 August 1999, the Dispute Settlement Body ("DSB") adopted the Appellate Body
Report () and the Panel Report (WT/ DS46/R), as modified by the Appellate Body
Report, in the dispute (hereafter " Brazil –
Aircraft").
1.2 The DSB recommended that Brazil bring its export subsidies for regional aircraft under the
Programa de Financiamento às Exportações ("PROEX") interest rate equalization scheme into
conformity with its obligations under Articles 3.1(a) and 3.2 of the Agreement on Subsidies and
Countervailing Measures (hereafter " SCM Agreement"). The DSB further recommended that Brazil
withdraw the export subsidies for regional aircraft within 90 days.
1.3 On 19 November 1999, Brazil submitted to the Chairman of the DSB, pursuant to
Article 21.6 of the Dispute Settlement Unders tanding (hereafter "DSU"), a status report
() on implementation of the Appell ate Body's and the Panel's recommendations and
rulings in the dispute. The status report described measures taken by Brazil which, in Brazil's view,
implemented the recommendation of the DSB to withdraw the measures within 90 days.
1.4 Canada disagreed that the Brazilian measure brought Brazil into conformity with its
obligations under the SCM Agreement. As a result, on 23 November 1999, Canada requested the
establishment of a panel under Article 21.5 of the DSU. On 9 December 1999, the DSB referred the
matter to the original Panel pursuant to Article 21.5 of the DSU.
1.5 The report of the Article 21.5 Panel was circulated to Members on 9 May 2000. The Panel
found that the measures taken by Brazil to comply with the Panel's recommendation either did not
exist or were not consistent with the SCM Agreement. Accordingly, the Panel concluded that Brazil
had failed to implement the 20 August 1999 recommendation of the DSB that it withdraw the export
subsidies for regional aircraft within 90 days. The Appellate Body, in a report circulated to Members
on 21 July 2000, upheld the Panel's conclusions. The DSB adopted the Appellate Body Report
(WT/DS46/AB/RW) and the Panel Report (WT/DS46 /RW), as modified by the Appellate Body
Report, on 4 August 2000.
1.6 In the light of Brazil's failure to implement the 20 August 1999 recommendations of the DSB,
on 12 December 2000 the DSB authorized Canada to take appropriate countermeasures in the amount
of C$344.2 million annually. At the same meeting, Brazil advised the DSB of new measures it had
taken, which, in its view, brought PROEX into compliance with Brazil's obligations under the SCM
Agreement.
1.7 On 22 January 2001, Canada submitted a communication to the Chairman of the DSB
(WT/DS46/26), seeking recourse to Article 21.5 of the DSU. In that communication, Canada
indicated that there was disagreement between Canada and Brazil as to whether the measures taken by
Brazil to comply with the 20 August 1999 and 4 August 2000 recommendations of the DSB brought
Brazil into conformity with the provisions of the SCM Agreement and resulted in the withdrawal of
the export subsidies to regional aircraft under PROEX. Canada, therefore, requested that the DSB
refer the matter to the original panel, pursuant to Article 21.5 of the DSU. In its communication,
Canada also noted that it had not yet implemented the countermeasures authorized by the DSB on
12 December 2000 and that its second recourse to Article 21.5 of the DSU was without prejudice to
its legal position with respect to the implementation of those authorized countermeasures. Canada
stated that it was invoking Article 21.5 in the interest of further legal clarity.
1.8 At its meeting on 16 February 2001, the DSB decided, in accordance with Article 21.5 of the
DSU, to refer to the original panel the matter ra ised by Canada in document WT/DS46/26. At that
DSB meeting, it was also agreed that the Panel should have standard terms of reference as follows:

1.9 To examine, in the light of the relevant provisions of the covered agreements cited by Canada
in document WT/DS46/26, the matter referred to the DSB by Canada in that document and to make
such findings as will assist the DSB in making the recommendations or in giving the rulings provided
for in those agreements.
1.10 The Panel was composed as follows:
Chairperson: Dr. Dariusz Rosati
Members: Prof. Akio Shimizu
Mr. Kajit Sukhum
1.11 Australia, the European Communities, Korea and the United States reserved their rights to
participate in the Panel proceedings as third parties.1
1.12 The Panel met with the parties on 4-5 April 2001. It met with the third parties on
5 April 2001.
1.13 The Panel submitted its interim report to the parties on 20 June 2001. On 25 June 2001, both
parties submitted a written request that the Panel review precise aspects of the interim report. Neither
party requested an interim review meeting. The Panel submitted its final report to the parties on
10 July 2001.
II. FACTUAL ASPECTS
2.1 As described in our original Panel Report
2, the Programa de Financiamento às Exportações
(PROEX) was created by the Government of Brazil on 1 June 1991 by Law No. 8187 and is being
maintained by provisional measures issued by the Brazilian government on a monthly basis.
PROEX provides export credits to Brazilian exporter s, inter alia through interest rate equalisation
payments.
3 Interest rate equalisation involves payments by Brazil's National Treasury to entities
financing or refinancing export transactions involving goods and services.
2.2 In an effort to comply with the 20 August 1999 recommendations of the DSB, Brazil revised
the interest rate equalisation system of PROEX through Central Bank of Brazil (BCB) Resolution
2667 of 19 November 1999 (hereafter "PROEX II"). That Resolution was the focus of the previous
Article 21.5 proceedings initiated by Canada.
2.3 The subject of these second Article 21.5 proceedings commenced by Canada is another
revision of the interest rate equalisation system of PROEX (hereafter "PROEX III"), effectuated by
Brazil in view of the 4 August 2000 recommendations of the DSB. That revision is set out in Central
Bank of Brazil (BCB) Resolution 2799 of 6 December 2000.
4
2.4 Of particular relevance to the instant proceedings are the provisions of Article 1 and Article 8,
paragraph 2 of BCB Resolution 2799. Article 1 stipulates in relevant part:
Art 1. In export financing operations for goods and services, as well as for software,
in compliance with Law No. 9,609, dated February 19, 1998, the National Treasury
may provide to the financing or re-financing agency, as the case may be, equalization

1 Australia did not make any written or oral submissions to the Panel.
2 ("Brazil- Aircraft"), Report of the Panel ("original
Panel Report") adopted on 20 August 1999, WT/DS46/R, paras. 2.1-2.6.
3 Law No. 8187 of 1 June 1991, replaced by Provisional Measure No. 1629 of 12 February 1998.
4 Exhibit BRA-1.

enough to render financing costs compatible with those practiced in the international
market.
Paragraph 1. When financing exports of regional aviation aircraft, interest rate
equalisation shall be established on a case-by-case basis, at levels that may vary
according to the characteristics of each operation, complying with the Commercial
Interest Reference Rate (CIRR) publishe d monthly by the OECD corresponding to
the currency and maturity of the operation.
2.5 Article 8, paragraph 2 of BCB Resolution 2799 states as follows:
Paragraph 2. In the process of analyzing received requests for eligibility [for
PROEX III support ], the [Export Credit Committee] shall have as reference the
financing terms practiced in the international market.
2.6 The other main features of PROEX III remain essentially as they were during the previous
Article 21.5 panel proceedings.
2.7 Thus, the maximum financing terms for which interest rate equalisation payments may be
made are established by a Ministerial Directive.5 The length of the financing term, in turn, determines
the spread to be equalised: the payment ranges from 0.5 percentage points per annum, for a term of
up to six months, to a maximum of 2.5 percentage points per annum, for a term of over nine years and
up to ten years.6 The spread is fixed throughout the financing term.
2.8 PROEX III, like its predecessor versions, is administered by the Comitê de Crédito as
Exportações (hereafter "Export Credit Committee"), a 13-agency group, with the Ministry of Finance
serving as its executive. While day-to-day operations of PROEX III are conducted by the Central
Bank of Brazil, all requests for PROEX III support in respect of exports of regional aviation aircraft
must be approved by the Export Credit Committee.
2.9 PROEX III involvement in aircraft financing transactions begins when the manufacturer
requests a letter of commitment from the Committee prior to conclusion of a formal agreement with
the buyer. This request sets forth the terms and conditions of the proposed transaction. If the Export
Credit Committee approves, the Central Bank of Brazil issues a letter of commitment to the
manufacturer. This letter commits the Government of Brazil to providing support as specified for the
transaction provided that the contract is entered into according to the terms and conditions contained
in the request for approval, and provided that it is entered into within a specified period of time,
usually 90 days (and provided the aircraft is exported, as explained below). If a contract is not
entered into within the specified time, the commitment contained in the letter of approval expires.
2.10 PROEX III interest rate equalisation payments begin after the aircraft is exported and paid for
by the purchaser. PROEX III payments are made to the lending financial institution in the form of
non-interest-bearing National Treasury Bonds ( Notas do Tesouro Nacional – Série I ), referred to as
NTN-I bonds. The bonds are issued by the Brazilian National Treasury to its agent bank, the Central
Bank of Brazil, which then passes them on to the lending banks financing the transaction. The bonds
are issued in the name of the lending bank which can decide to redeem them on a semi-annual basis
for the duration of the financing or discount them for a lump sum in the market. PROEX III thus
resembles a series of zero-coupon bonds which mature at six-month intervals over the course of the
financing period. The bonds can only be redeemed in Brazil and only in Brazilian currency at the

5 See Ministerial Directive 374 of 21 December 1999 (hereafter "Directive 374") (Exhibit BRA-3).
6 See Central Bank of Brazil Circular Letter No. 2881 of 19 November 1999 (hereafter "Circular Letter
2881") (Exhibit BRA-2).

exchange rate prevailing at the time of payment. If the lending bank is outside of Brazil, it may
appoint a Brazilian bank as its agent to receive the semi-annual payments on its behalf.
III. PROCEDURAL ISSUE
3.1 Brazil asserts that, during the meeting of the Panel with the parties, while the representative
of Brazil was presenting Brazil's oral statement, a member of the Canadian delegation left the room
carrying a copy of the confidential written version of Brazil's oral statement. According to Brazil, a
member of its delegation later left the room to investigate and found that several persons who were
not members of Canada's delegation were sitting in the lounge outside the meeting room reading
Brazil's confidential statement. Brazil does not contest that Members are entitled to decide for
themselves the composition of their delegations, but considers that they have no right to decide for
themselves which documents designated by the other parties as confidential should be treated as such.
3.2 Brazil objects strongly to the alleged disclosure of its confidential statements to the
representatives of private parties who were not members of Canada's delegation. Brazil submits that
the aforementioned alleged incident is a serious breach of Canada's obligations to respect the rules of
confidentiality, including Article 14 of the DSU and paragraph 3 of the Panel's Working Procedures.
According to Brazil, nothing in the Panel's Working Procedures or the DSU authorizes disclosure of
confidential documents to persons who are not members of a delegation. Brazil requests that the
Panel specifically note this alleged breach of the rules in its Report and that it take whatever other
steps it deems appropriate.
3.3 Canada explains that it has not given access to Brazil's submissions (including exhibits)
and/or statements (including exhibits) in these proceedings to any employees of Canadian regional
aircraft manufacturers. Canada notes that it has shared these documents with members of a private
law firm retained by a Canadian regional aircraft manufacturer. According to Canada, these
individuals have served as advisors to the Government of Canada, form part of Canada's "litigation
team", and are subject to a confidentiality agreement whereby they are not to disclose the documents
such as those previously mentioned, including to their client. Canada also states that these individuals
would not have received any business confidential information if Brazil had filed any in these
proceedings.
3.4 In the view of Canada, paragraph 13 of the Panel's Working Procedures recognizes that
parties may consult advisors who are not members of their delegations. Canada submits that the only
reason why parties should have the responsibility for these advisors in regard to the confidentiality of
the proceedings is because a party may share submissions and other documents with these advisors.
Canada considers that statements by the Appellate Body in Canada – Measures Affecting the Export
of Civilian Aircraft
7 and Panel in Korea – Taxes on Alcoholic Beverages 8 confirm its view that
submissions may be shared with a party's advisors who are not on its "delegation". Canada also notes
that, were it otherwise, parties would simply protect their ability to make a full response by greatly
expanding their delegations, as is their right.
3.5 The Panel notes that, as a factual matter, Canada does not deny that a member of its
delegation at the meeting of the Panel with the parties of 4 April 2001 provided a copy of Brazil's
written version of its oral statement to people who were not members of its delegation, as notified to
the Panel. In fact, Canada acknowledges that it has "shared [Brazil's submissions and statements]

7 Canada refers to the Appellate Body Report on Canada – Measures Affecting the Export of Civilian
Aircraft, WT/DS70/AB/RW, adopted 20 August 1999, para. 141 (hereafter "Original Appellate Body Report on
Canada – Aircraft").
8 Canada refers to the Panel Report on Korea – Taxes on Alcoholic Beverages , WT/DS75/R and
WT/DS84/R, adopted 17 February 1999, para. 10.32 (hereafter "Panel Report on Korea – Alcoholic
Beverages").

with members of a private law firm retained by a Canadian aircraft manufacturer". 9 Accordingly, the
issue facing us is whether it was permissible for Canada to share Brazil's oral statement and other
documents submitted to the Panel with the private law firm in question. In considering this issue, we
note that Article 18.2 of the DSU provides in relevant part that:
… Members shall treat as confidential information submitted by another Member to
the panel or the Appellate Body which that Member has designated as confidential.10
3.6 In our view, it emerges from this provision that Canada must keep confidential all information
submitted to this Panel by Brazil. 11 However, as the Appellate Body has noted, "a Member's
obligation to maintain the confidentiality of […] proceedings extends also to the individuals whom
that Member selects to act as its representatives, counsel and consultants." 12 Thus, the Appellate
Body clearly assumed that Members may provide confidential information also to non-government
advisors.
3.7 We see nothing in Article 18.2 of the DSU, or any other provision of the DSU13, to suggest
that Members may share such confidential informat ion with non-government advisors only if those
advisors are members of an official delegation at a panel meeting. 14 Indeed, paragraph 13 of this
Panel's Working Procedures expressly provides that:
The parties and third parties to this proceeding have the right to determine the
composition of their own delegations. Delegations may include, as representatives of
the government concerned, private counsel and advisers. The parties and third parties
shall have responsibility for all members of their delegations and shall ensure that all
members of their delegations, as well as any other advisors consulted by a party or
third party, act in accordance with the rules of the DSU and the working procedures
of this Panel, particularly in regard to confidentiality of the proceedings. Parties shall
provide a list of the participants of their delegation before or at the beginning of the
meeting with the Panel. (emphasis added)
3.8 It is apparent from the second and third sentences of paragraph 13 of the Working Procedures
that the "other advisors" referred to are advisors who are not part of a Member's delegation at a panel
meeting. It is equally clear to us that paragraph 13 is based on the premise that parties to panel
proceedings may give their "other advisors" access to confid ential information submitted by the other

9 Canada's Response to Panel Question 31 (Annex A-4).
10 Paragraph 3 of this Panel's Working Procedures also includes the quoted sentence.
11 This is subject, of course, to the provisions of the last sentence of Article 18.2 of the DSU, which
allow a party to panel proceedings to disclose to the public non-confidential summaries of the information
contained in the written submissions of the other party, if such summaries are requested.
12 Original Appellate Body Report on Canada – Aircraft , supra, para. 141 (emphasis added). The
Appellate Body made the quoted statement in respect of appellate review proceedings. We do not see, however,
why the same reasoning should not extend, by analogy, to panel proceedings.
13 Contrary to Brazil, we do not think that Article 14 of the DSU is relevant to the issue before us.
Article 14 focuses on panels and their obligations in resp ect of confidentiality; it does not address itself to the
obligations of the parties in respect of confidentiality.
14 The following statement by the Panel in Korea – Alcoholic Beverages supports this view:
We note that written submissions of the parties which contain confidential information may,
in some cases, be provided to non-government advisors who are not members of an official
delegation at a panel meeting. The duty of confidentiality extends to all governments that are
parties to a dispute and to all such advisors regardless of whether they are designated as
members of delegations and appear at a panel meeting . (Panel Report on Korea – Alcoholic

party.15 Were it otherwise, there would be no point in requiring parties to safeguard the
confidentiality of panel proceedings in respect of such "other advisors".16
3.9 On the basis of the foregoing, we are unable to accept Brazil's argument that Canada acted
inconsistently with the requirements of the DSU or this Panel's Working Procedures by giving
advisors not designated as members of its delegation access to information submitted to this Panel by
Brazil.
17
3.10 In reaching this conclusion, we note, however, that, pursuant to paragraph 13 of the Working
Procedures, Canada must ensure that any advisors who were not members of its official delegation
respect the confidentiality of the present proceedings.
3.11 We note Canada's statement that the members of the law firm which have had access to
Brazil's submissions have been part of its litigation team and have served as "advisors" to the
Government of Canada. Since no members of a priv ate law firm were part of Canada's delegation to
the meeting of the Panel with the parties, the private lawyers Canada says were advising it fall within
the "other advisors" category within the meaning of paragraph 13 of the Panel's Working Procedures.
It was (and is), therefore, the responsibility of Canada to ensure that those private lawyers maintain
the confidentiality of the documents submitted by Brazil.
3.12 Based on Canada's representations, we also understand that the law firm in question has an
attorney-client relationship with a Canadian regional aircraft manufacturer. We think that the dual
role performed by the law firm -- as advisor to the Government of Canada and attorney for a Canadian
regional aircraft manufacturer -- places the law firm in a particularly delicate position as far as the
protection of Brazil's submissions, statements and exhibits is concerned.18 In our view, it is crucial, in
such circumstances, that Canada put in place appropriate safeguards to ensure non-disclosure of
confidential information.
3.13 Importantly, Canada has represented that the members of the law firm who have had access to
Brazil's submissions, statements and exhibits are subject to a confidentiality agreement with the
Government of Canada which requires them not to disclose any such information, including to the
Canadian regional aircraft manufacturer which is their client.
3.14 Brazil does not contest these facts. Moreover, Brazil has provided no evidence that those
private lawyers have disclosed Brazil's confidential documents to the regional aircraft manufacturer
which is their client or any other persons who are not advisors to the Government of Canada.
3.15 We agree that maintaining confidentiality in accordance with the obligations of the DSU is
important. On the other hand, in applying the rules on confidentiality we must be careful not to stifle
necessary communication between Member governments and their advisors, as long as appropriate
safeguards are in place. In the absence of arguments and evidence to the contrary, we have no basis

15 Brazil is correct in pointing out that paragraph 13 does not expressly authorize disclosure of
confidential information to "other advisors", but, in our view, it does so by implication. We stress, however,
that paragraph 13 talks about "advisors" and not other members of the public, such as private parties interested
in the outcome of particular panel proceedings.
16 We note that there is nothing in the other paragraphs of this Panel's Working Procedures to suggest
that confidential information may be disclosed to non-government advisors only if those advisors are members
of an official delegation to a panel meeting.
17 It should be pointed out that Brazil did not, in these proceedings, submit any business confidential
information.
18 We recall that Brazil's concern is with the confidentiality of its arguments and statements. Business
confidential information, which might require other procedures and safeguards, is not, as already mentioned,
involved in this situation.

for questioning Canada's representation that the relevant private lawyers are subject to a
confidentiality agreement with the Government of Canada.19
IV. INTERIM REVIEW20
4.1 In letters dated 25 June 2001, Canada and Brazil requested an interim review by the Panel of
certain aspects of the Interim Report issued to the parties on 20 June 2001. Neither party requested an
interim review meeting. As agreed by the Panel, both parties were permitted to submit further
comments on the other party's interim review requests. Brazil submitted such further comments on 28
June 2001.
A.
COMMENTS BY CANADA
4.2 Canada requests that the Panel complement its description of the facts of this case by adding
a reference to the "undisputed fact" that the Export Credit Committee has the authority to waive some
of the published PROEX III guidelines. Brazil disagrees with Canada's characterization of its
position and of the facts before the Panel. Brazil recalls its argument that, while PROEX III support
will be considered on a case-by-case basis, Article 8, paragraph 2 of BCB Resolution 2799 imposes a
specific affirmative requirement on the Export Credit Committee to ensure that PROEX III support, in
addition to meeting the specific criteria enumerated elsewhere, is consistent with the terms practised
in the international markets. The Panel notes that the issue of Brazil's discretion to waive some of the
published PROEX III guidelines, and of the circumstances under which it may do so, is addressed in
some detail at various points in our findings, including paras. 5.186–5.188 and 5.159-5.161. We
therefore decline Canada's request to include further language on this issue in para. 2.8.
4.3 With respect to footnote 24, Canada believes to have established that PROEX III is now
offered, at least by Embraer, in conjunction with, or as part of BNDES export financing packages.
Canada supports its view by reference to exhibit CDA-19, which contains a sworn declaration by a
Bombardier employee and an attached confidential report by that employee to his employer. Canada
says the confidential report demonstrates that Embraer offered a particular regional airline company
PROEX support through BNDES. Brazil does not accept that Canada has established that Embraer
"offered PROEX support" through BNDES to that par ticular airline company. Brazil recalls, in this
regard, that it has stated to the Panel that it has not received an application for interest rate support for
putative Embraer sales to that airline company and that it has not approved any support for sales of
regional aircraft to that company. In the Panel's view, exhibit CDA-19 may be (indirect) evidence
that, in one particular instance, Embraer offered BNDES financing in conjunction with PROEX
support. It is not evidence that the Brazilian government offered PROEX support through BNDES.
Even disregarding this critical distinction (see footnote 27), exhibit CDA-19 cannot serve as
conclusive evidence in respect of PROEX III since it reproduces information allegedly received by the
Bombardier employee in question on 20 October 2000, a date well before the date of enactment of
BCB Resolution 2799 and thus before the date of the entry into force of PROEX III. With these
considerations in mind, we have made appropriate changes to footnote 24 in order to clarify the issue
raised by Canada.
4.4 Canada recalls that Article 1.1(b) of the SCM Agreement requires, as one of the conditions
for the existence of a subsidy, that "a benefit is thereby conferred". According to Canada, Article
1.1(b) does not specify which participant in a subsidized transaction must be the recipient of that
benefit. Canada asserts, therefore, that the text of the SCM Agreement does not support what it

19 Since Brazil has not responded to Canada's argument that the private lawyers in question are subject
to a confidentiality agreement, there are no grounds fo r assuming that that agreement inadequately protects
confidential information.
20 Pursuant to Article 15.3 of the DSU, the findings of the final panel report shall include a discussion
of the arguments made at the interim review stage. This Section of our report is, therefore, part of our findings.

understands to be the Panel's view, namely that, so long as the benefits of PROEX III payments could
be retained entirely by the lender, Brazil maintain s at least a theoretical discretion not to confer a
benefit within the meaning of Article 1.1(b). Brazil does not agree that Canada has identified any
flaws or inconsistencies in the Panel's analysis. Brazil states that the Panel's analysis appears to be
consistent with both the text of Article 1 of the SCM Agreement and with relevant statements of the
Appellate Body. The Panel, in considering this issue, and without endorsing Canada's re-statement of
its view, recalls that it has explained its analytical approach in paras. 5.27-5.29 and accompanying
footnotes. It is true, as Canada notes, that Article 1.1(b) does not specify or define "which participant
in a subsidized transaction must be the recipient of [a] benefit". It should be recalled, however, that
the SCM Agreement is a Multilateral Agreement on Trade in Goods in Annex 1A of the WTO
Agreement. Thus, the SCM Agreement only regulates subsidies in the goods sector. In our view, the
text of Article 1.1(b) must be read in this light. We fail to see how a subsidy to a provider of financial
services can be a subsidy in the goods sector in cases where the benefit is retained exclusively by the
services provider. We are, therefore, not persuaded by Canada's implied argument that, as long as a
financial contribution by a government confers a benefit on any of the participants to the supported
transaction, including on a lender, there is, without more, a subsidy within the meaning of Article 1.1
of the SCM Agreement. On these grounds, we decline Canada's invitation to modify our findings in
paras. 5.27-5.51.
4.5 Canada considers that, contrary to the Panel's statement in para. 5.49, it has specifically
responded to Brazil's contention that Brazil has discretion not to apply PROEX III in situations where
doing so would confer a benefit. In support of its contention, Canada refers the Panel to two of its
statements, which the Panel has referenced in footnote 41 and para. 5.24. Brazil considers that, in the
context of para. 5.49, the Panel's statement is accurate. Brazil is of the view that Canada has not
responded to Brazil's contention that the language of the PROEX III regulations permits Brazil not to
provide PROEX III payments where to do so would confer a benefit. Although the Panel is not sure
that the statements referred to by Canada specifically address the issue of whether or not Brazil has
discretion not to apply PROEX III in certain factual situations, it acknowledges that these statements
could be deemed relevant to the issue. Accordingly, para. 5.49 has been modified appropriately.
4.6 Canada has also drawn the Panel's attention to a number of typographical errors. The Panel
corrected those.
B.
COMMENTS BY BRAZIL
4.7 Brazil notes that, in para. 5.92, the Panel has accurately summarized Brazil's position on the
meaning and scope of the term "interest rates provisions" in the second paragraph of item (k). Brazil
submits, however, that the Panel's findings in para. 5.98 appear to be inconsistent with the Panel's
summary of Brazil's arguments on this issue. In the Panel's view, there is no inconsistency between
the two paragraphs referred to by Brazil. In order to avoid any misunderstandings in this regard, we
nevertheless found it appropriate to slightly re-draft para. 5.98.
4.8 Brazil has also drawn the Panel's attention to typographical errors. The Panel corrected those.
V. FINDINGS
A.
MEASURE AT ISSUE AND TASK OF THE PANEL
5.1 Canada submits that the only issue to be decided in these second Article 21.5 proceedings is
whether PROEX III is consistent with the SCM Agreement . Canada notes that, so long as Brazil
continues to make payments pursuant to letters of commitment issued under PROEX I and II, it will
remain non-compliant with the recommendations of the DSB of 18 November 1999 that it withdraw
its prohibited export subsidies.

5.2 Canada states that it is challenging the PROEX III scheme in so far as it relates to the
financing of exports of regional aircraft because, no matter how it is delivered, it enables Brazil to
continue to grant prohibited export subsidies. Canada is also challenging PROEX III payments made
in support of regional aircraft exports because payments under PROEX III remain prohibited export
subsidies. With respect to its challenge to PROEX payments, Canada refers to the original Panel
Report in this dispute, which stated that "we understand Canada to be challenging not only specific
payments, but more generally the practice involving PROEX payments relating to exported Brazilian
regional aircraft."21
5.3 Brazil agrees that the sole issue before the Panel is whether PROEX III complies with the
requirements of the SCM Agreement. Brazil also agrees that the commitments made under PROEX I
and II for aircraft which have not yet been delivered are not at issue in these second Article 21.5
proceedings.
5.4 Brazil considers that the Panel must review PROEX III on its face and by its terms. Brazil
points out in this regard that no payments have been made under PROEX III in support of exports of
regional aircraft and that Brazil has not issued any letters of commitment under PROEX III in respect
of exports of regional aircraft.
5.5 The Panel notes that it is common ground that these second Article 21.5 proceedings relate
exclusively to the latest revision of the PROEX programme (which we will refer to hereafter as
"PROEX III") in so far as it concerns the financing of exports of regional aircraft. 22 It is also not in
dispute that the revised PROEX programme is a measure which was taken to comply with the 18
November 1999 and 20 August 2000 recommendations and rulings of the DSB in the sense of
Article 21.5 of the DSU.23 PROEX III is, therefore, a proper subject of proceedings under
Article 21.5 of the DSU.24
5.6 Regarding the nature of Canada's complaint, it is clear that, in these proceedings, Canada
challenges the PROEX III programme as such. 25 In our view, it is not open to question, and Brazil

21 Panel Report on , WT/DS46/R, adopted 20
August 1999, para. 7.2 (hereafter "Original Panel Report on Brazil – Aircraft").
22 Both parties agree that any payments on exports of regional aircraft Brazil may have made or may
continue to make pursuant to commitments made under PROEX I and II are outside the scope of the present
proceedings. We also observe that these proceedings, like the original proceedings, relate only to that aspect of
the PROEX scheme involving interest rate equalisation. Th ey do not, therefore, relate to direct export financing
under PROEX III. See Original Panel Report on Brazil – Aircraft, supra, footnote 184.
23 See Appellate Body Report on Canada – Measures Affecting th e Export of Civilian Aircraft ,
WT/DS70/AB/RW, adopted 4 August 2000, para. 36 (h ereafter "Article 21.5 Appellate Body Report on Canada
– Aircraft").
24 Canada contends that PROEX financing now appears to be offered not only in the form of traditional
PROEX payments, but also in conjunction with, or as part of, export financing packages provided by Brazil's
development bank, the Banco Nacional de Desenvolvimento Econômico e Social (BNDES) . Brazil responds that
it is confused by Canada's reference to BNDES lending, which it submits is not within the terms of reference of
this Panel. In considering this issue, we note that, to the extent Canada is alleging merely that BNDES lending
is being supported by PROEX III interest rate equalisation, there is no need to address that situation separately.
To the extent Canada is challenging BNDES financing as a prohibited export subsidy separate from PROEX III,
we agree with Brazil that such financing is not identified in Canada's request for establishment of a panel
(WT/DS46/26) and is thus outside our terms of reference. In any event, Canada has offered no convincing
evidence that such financing has actuall y been provided in respect of exports of regional aircraft, nor even that
BNDES offered to provide such financing. At most, it has established that Embraer "offered" BNDES financing
in conjunction with PROEX support in respect of one particular transaction.
25 It should be recalled that, by contrast, in the original proceedings, Canada did not challenge the
PROEX programme per se. See Original Panel Report on Brazil – Aircraft, supra, footnote 187.

does not contest, that a panel is entitled to review a subsidy programme per se for its consistency with
the SCM Agreement.26
5.7 Canada also challenges payments under PROEX III, by which it means "the practice
involving PROEX payments". Canada has not, however, disputed Brazil's contention that, under
PROEX III, no payments have yet been made, nor letters of commitment issued, in respect of exports
of regional aircraft. Therefore, and in the absence of specific evidence to the contrary
27, we are not in
a position to review the consistency either of indi vidual PROEX III payments in respect of regional
aircraft or a "practice" in respect of such payments with the SCM Agreement.28 It is evident to us that,
in the absence of any payments or letters of commitment under PROEX III in respect of regional
aircraft, there is no "practice" that we could review.
5.8 It follows from the foregoing that our task in these proceedings is to examine the consistency
with the SCM Agreement of the PROEX III programme per se , i.e. the legal framework of
PROEX III, in so far as it relates to exports of regional aircraft29.
B. REVIEW OF LEGISLATION PER SE
5.9 Our conclusion regarding the nature of the measure before us has implications with respect to
the nature of the findings we must make with re spect to the consistency of the measure with the
SCM Agreement. Specifically, we observe that, in both WTO and GATT dispute settlement involving
challenges to legislation as such, a distinction has been made between mandatory and discretionary
legislation. Under this approach, panels have not found legislation as such to be inconsistent with
GATT/WTO obligations, unless that legislation mandated, or required, the executive branch to take

26 A number of panels have reviewed subsidy programmes for their consistency with the SCM
Agreement. See, e.g., the Panel Reports on Canada – Measures Affecting th e Export of Civilian Aircraft ,
WT/DS70/R, adopted 20 August 1999 (hereafter "Original Panel Report on Canada – Aircraft "); United States
– Tax Treatment for "Foreign Sales Corporations" , WT/DS108/R, adopted 20 March 2000; Indonesia – Certain
Measures Affecting the Automobile Industry , WT/DS54/R, WT/DS55/R, WT/DS59/R, WT/DS64/R, adopted 23
July 1998.
27 Canada has alleged that PROEX support was "offered" by the Brazilian regional aircraft
manufacturer, Embraer, in negotiations to sell regional aircraft which would have been governed by PROEX III.
See Canada's Rebuttal Submission, paras. 32-38 (Annex A-2). We recall, however, that an exporter that seeks
PROEX interest rate equalisation submits a request, setting forth the proposed terms and conditions for a
transaction, to the Export Credit Committee. Only if the Committee approves the transaction does the
Committee issue a "letter of commitment" committing the Government of Brazil to provide PROEX support if a
contract is concluded according to the terms and conditions contained in the request. See Panel Report on – Recourse by Canada to Article 21.5 of the DSU , WT/DS46/RW,
adopted 4 August 2000, para. 2.5 (hereafter "Article 21.5 Panel Report on Brazil - Aircraf t"). Brazil has
confirmed that it has issued no letters of commitment in respect of regional aircra ft under PROEX III, and that,
with respect to the negotiations for sales of regional jets to Air Wisconsin Airlines Corporation raised by
Canada, no application for interest rate support had been received. See Brazil's Response to Canada's Question
1 (Annex B-5). Canada has not contested those statements, much less offered any evidence to the contrary. Nor
has Canada provided any evidence that the Government of Brazil, as opposed to Embraer sales representatives,
has otherwise "offered" interest rate support under PROEX III in respect of regional aircraft. We do not believe
that we can establish the existence of a practice by the Government of Brazil on the basis of offers by a private
entity.
28 To the extent that Canada's challenge to PROEX III payments may be understood as a challenge to
the legal framework governing the provision of PROEX III payments for exports of regional aircraft, that
challenge would be subsumed, in our view, within Canada's challenge to the PROEX III programme per se .
Indeed, where this Report uses the term "PROEX III payments", it is to be understood in the aforementioned
sense.
29 In the original proceedings, Canada defined the regi onal aircraft market as consisting of commercial
aircraft of 20-90 seats, whether turboprop or jet. See Original Panel Report on Brazil – Aircraft, supra, footnote
188. We see no reason to deviate from that definition in these Article 21.5 proceedings.

action which was not in conformity with a Contra cting Party's/Member's obligations under the GATT
1947/WTO Agreement.
5.10 This principle was most recently explained by the Appellate Body in United States –
Anti-Dumping Act of 1916 as follows:
The concept of mandatory as distinguished from discretionary legislation was
developed by a number of GATT Panels as a threshold consideration in determining
when legislation as such – rather than a specific application of that legislation – was
inconsistent with a Contracting Party's GATT 1947 obligations.30
The Appellate Body further explained that:
[P]anels developed the concept that mandatory and discretionary legislation should be
distinguished from each other, reasoning that only legislation that mandates a
violation of GATT obligations can be found as such to be inconsistent with those
obligations.
31
The Appellate Body in that case upheld, to the exte nt it found it necessary to consider the issue, the
interpretation and application by the Panel of the distinction between mandatory and discretionary
legislation.32
5.11 The principle was also applied by the Panel in Canada – Measures Affecting the Export of
Civilian Aircraft. In that dispute, the Panel found that Brazil had not established that certain Canadian
programmes which were alleged by Brazil to constitute prohibited export subsidies mandated the
grant of subsidies and that, as a result, no findings could be made in respect of those programmes
per se.33
5.12 We are aware that the Panel in United States – Section 301-310 of the Trade Act of 1974
found that even discretionary legislation could violate certain WTO obligations. 34 We recall that that
Panel was considering an alleged violation of Article 23 of the DSU and focused on the specific
nature of the obligations in that Article in concluding that Article 23 itself prohibited certain
legislative discretion. Neither party has suggested that Article 3.1(a) of the SCM Agreement prohibits
legislation that would permit, but not require, the grant of prohibited subsidies. We agree. In fact, we
recall that the original Panel in Canada – Aircraft applied this approach in the context of a claim
under Article 3.1(a). Thus, we see no reason to deviate from the distinction between mandatory and
discretionary legislation in the context of claims pursuant to Article 3.1(a) of the SCM Agreement.35

30 Appellate Body Report on United States – Anti-Dumping Act of 1916 , WT/DS136/AB/R,
WT/DS162/AB/R, adopted 26 September 2000, para. 88.
31 Ibid., para. 60.
32 Ibid., para. 102.
33 See Original Panel Report on Canada – Aircraft, supra, paras. 9.124-9.129, 9.208-9.213. The Panel
in that case proceeded to assess the consistency of the programmes in question as applied. GATT panel reports
applying this principle include the following: Panel Report on United States – Measures Affecting the
Importation, Internal Use and Sale of Tobacco, BISD 41S/131, adopted 4 October 1994, para. 123; Panel
Report on Thailand – Restrictions on Importation of and Internal Taxes on Cigarettes, BISD 37S/200, adopted
7 November 1990, para. 84; Panel Report on United States – Taxes on Petroleum and Certain Imported
Substances, BISD 34S/136, adopted 17 June 1987.
34 See Panel Report on United States – Section 301-310 of the Trade Act of 1974 , WT/DS152/R,
adopted 27 January 2000, paras. 7.53-7.54.
35 Canada does not specifically contest the relevance of the distinction between mandatory and
discretionary legislation to claims under Article 3.1(a) of the SCM Agreement . It asserts, however, that the
distinction does not apply in the context of an affirmative defence such as the second paragraph of item (k) of

5.13 For the foregoing reasons, in reviewing whether the PROEX III scheme per se is a prohibited
export subsidy, our examination will entail a consideration as to whether PROEX III requires Brazil
to provide subsidies prohibited by Article 3.1(a) of the SCM Agreement.
C. OVERVIEW OF THE PARTIES' ARGUMENTS
5.14 Canada considers that PROEX III support in respect of exports of regional aircraft, however
it is delivered, is a subsidy contingent upon export performance prohibited by Article 3.1(a) of the
SCM Agreement. Canada further argues that PROEX III is not in conformity with the interest rates
provisions of the OECD Arrangement on Guidelines for Officially Supported Export Credits
(hereafter the " OECD Arrangement") and thus does not qualify for the "safe haven" in the second
paragraph of item (k) of the Illustrative List of Export Subsidies contained in Annex I to the
SCM Agreement (hereafter "item (k)"). Canada submits, finally, that there is no a contrario exception
under the first paragraph of item (k) and that, even if there were, PROEX III support would not
qualify for it. For these reasons, Canada requests the Panel to find that Brazil has failed to implement
measures that would bring it into compliance with the applicable recommendations and rulings of the
DSB.
5.15 Brazil submits that Canada has not sustained its burden of proving that PROEX III confers a
benefit and is thus a subsidy within the meaning of Article 1 of the SCM Agreement. Brazil argues,
moreover, that, even if it were considered to be a subsidy contingent upon export performance,
PROEX III conforms to the interest rates provisions of the OECD Arrangement and thus falls within
the "safe haven" provided for in the second paragraph of item (k). Brazil further contends that, even if
PROEX III were not eligible for the safe haven in the second paragraph of item (k), PROEX III 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). Brazil argues, in this regard, that the first paragraph of item (k) may be read a
contrario to permit a payment that is not used to secure a material advantage. Brazil therefore
requests the Panel to reject Canada's claims and to find that PROEX III is in conformity with the
SCM Agreement.
5.16 The Panel finds it appropriate, in the light of the claims and arguments presented by the
parties, to begin its examination by considering whether PROEX III is a subsidy contingent upon
export performance within the meaning of Article 3.1(a) of the SCM Agreement .
36 W e w i l l n e x t
consider the affirmative claims put forward by Brazil in its defence. Consistently with Brazil's
submissions, the Panel will address first Brazil's affirmative "safe haven" defence under the second
paragraph of item (k) in Annex I to the SCM Agreement. The Panel will then proceed to consider
Brazil's assertion that PROEX III is not used to secure a material advantage within the meaning of the
first paragraph of item (k) and is thus "permitted".
D. ARTICLE 3 OF THE SCM AGREEMENT
1. General
5.17 Article 3.1(a) of the SCM Agreement provides that:
Except as provided in the Agreement on Ag riculture, the following subsidies, within
the meaning of Article 1, shall be prohibited:

the Illustrative List of Export Subsidies. We address th is issue in the context of our consideration of Brazil's
defence under the second paragraph of item (k). See Section E.3(a) infra.
36 We recall that, in the original proceedings, this Panel found that Brazil did not benefit from the
transition period for developing country Members set forth in Article 27.4 of the SCM Agreement because it did
not comply with certain conditions contained in that provision and that, as a result, the prohibition of
Article 3.1(a) of the SCM Agreement applied to Brazil. See Original Panel Report on Brazil – Aircraft , supra,
para. 8.1. In the present proceedings, Brazil does not argue that Article 3.1(a) is not applicable to it.

(a) subsidies contingent, in law or in fact, whether solely or as one of several
other conditions, upon export performance, including those illustrated in Annex I
(footnotes omitted).37
5.18 Article 1.1 of the SCM Agreement sets out a general definition of a subsidy. It provides that a
subsidy is deemed to exist, inter alia, if there is "a financial contribution by a government" and "a
benefit is thereby conferred".
5.19 From the provisions of Articles 1.1 and 3.1(a) it may be deduced, then, that, a prohibited
export subsidy exists where (i) there is a subsidy, i.e. there is a financial contribution by a
government, and a benefit is thereby conferred, and (ii) the subsidy is contingent upon export
performance.
2. Examination of PROEX III
(a) Financial Contribution by a Government
5.20 Canada submits that PROEX III payments involve a direct transfer of funds from the
Government of Brazil within the meaning of Article 1.1(a)(1)(i) of the SCM Agreement . Canada
argues that PROEX payments are "essentially grants". Canada notes that PROEX III is not different
in this regard from PROEX I.
5.21 Brazil does not specifically contest that PROEX III support involves a direct transfer of funds
from the Government of Brazil.
5.22 The Panel considers that PROEX III payments in respect of exports of regional aircraft, like
the payments under PROEX I and II 38, are financial contributions by the Government of Brazil. As
noted, PROEX III payments are made to the recipien ts in the form of so-called NTN-I bonds which
are redeemable. 39 Article 1.1(a)(1)(i) of the SCM Agreement provides that there is a financial
contribution by a government where "a government practice involves a direct transfer of funds (e.g.
grants, loans, and equity infusion)". In our view, this particular practice constitutes a direct transfer of
funds. Brazil does not, in any event, contest that PROEX III payments are financial contributions by
its Government.
5.23 We therefore conclude that PROEX III payments in respect of exports of regional aircraft
constitute financial contributions by the Brazilian government within the meaning of Article 1.1 of the
SCM Agreement.
(b) Conferral of a Benefit
5.24 Canada considers that, like PROEX I and II, PROEX III confers a benefit on the recipient.
Canada argues that PROEX III is constructed as a buy-down of interest rates that have already been
freely negotiated by the buyers of Brazilian Embraer regional aircraft, in the marketplace. Canada
asserts, in other words, that PROEX III allows an aircraft purchaser to seek the best export credit
terms available in the market, whether from a Brazilian or foreign financial institution, and then
receive a buy-down of that interest rate in the amount of the PROEX III payments. From this it
follows, according to Canada, that any such buy-down below freely negotiated interest rates
necessarily results in net interest rates more favourable than those available to Embraer's customers in
the market. Canada notes that, under the Appellate Body's definition, this amounts to a "benefit"

37 Article 3.2 of the SCM Agreement specifies that subsidies of the kind referred to in Article 3.1 must
neither be granted nor maintained.
38 See Original Panel Report on Brazil – Aircraft, supra, para. 7.13; Article 21.5 Panel Report on Brazil
– Aircraft, supra, para. 6.21.
39 See Articles 5-7 of BCB Resolution 2799.

within the meaning of Article 1.1 of the SCM Agreement. Canada adds that, if Embraer's customers
could achieve financing in the marketplace at rates equivalent to those achieved by PROEX III buy-
downs, there would be no need for PROEX III.
5.25 Brazil argues that it is inaccurate to say that PROEX III is a buy-down of interest rates that
have already been freely negotiated by the recipients in the marketplace. Brazil notes that PROEX III
is not a system whereby the customer negotiates for the most favourable rate and then uses that as a
starting point in applying for PROEX III suppor t, which, if granted, would further reduce the
commercially negotiated rate. Brazil maintains that, to the contrary, PROEX III is part of the
transaction itself, a transaction which is limited by the market, as reflected in the CIRR, a 10-year
term, 85 percent maximum financing and by the requirement that the resulting transaction be
compatible with the international market. In Brazil's view, PROEX III payments which result in net
interest rates at or above the CIRR in any event do not confer a benefit, because the CIRR reflects
with reasonable precision market rates and may in fact be higher than market rates. In addition, Brazil
asserts that PROEX III requires the Export Credit Committee to follow the rates prevailing in the
international marketplace in deciding whether to approve PROEX III support. Thus, according to
Brazil, PROEX III merely allows particular financial institutions to provide export credit financing on
the terms and conditions available in the marketpl ace. Brazil considers, therefore, that PROEX III
does not provide for net interest rates that are more favourable than those a customer could obtain in
the market or, at a minimum, that it does not necessarily so provide.
5.26 Canada counters that nothing in PROEX III limits the amount of payments that may be made
to the difference between what a borrower could ob tain elsewhere in the marketplace and the rate at
its preferred bank. Canada notes, moreover, that, PROEX III payments are conditional on the
purchase of Brazilian aircraft. According to Canada, this would be illogical if the purpose of
PROEX III was simply to assist banks in Brazil and in foreign countries. Canada maintains that, in
fact, PROEX III subsidizes exported Embraer aircraft and not just lending institutions.
5.27 In considering whether PROEX III payments confer a benefit, the Panel notes that the
financial contribution in this case is in the form of a (non-refundable) payment, rather than in the form
of a loan. As a usual matter, of course, a non-refundable payment will confer a benefit. Thus, there
would be no need for complex benefit analysis if PROEX III payments were made directly to
producers or to purchasers of Brazilian regional aircraft. In this case, however, the payment is not
provided to a producer of regional aircraft . Rather, PROEX III payments are provided to a lender in
support of an export credit transaction relating to Brazilian regional aircraft.
40 Thus, while there can
be no doubt that PROEX III payments confer a benefit, we consider that the question remains whether
PROEX III payments confer a benefit to producers of regional aircraft.41

40 Canada itself acknowledges this. See Canada's Comments on Brazil's Responses to the Panel
Questions 2 and 3, para. 4 (Annex A-5). See also Article 5 of BCB Resolution 2799.
41 At a late stage in these proceedings, Canada suggested that, because PROEX III payments are
"essentially grants", they per se confer a benefit irrespective of how the payments are used by the recipient. See
Canada's Comments on Brazil's Responses to Panel Questions 2 and 3 (Annex A-5). While this might well be
the case where the recipient is a producer of the product in question, the recipient of the financial contribution in
this case is a lender. As the SCM Agreement is an Annex 1A agreement on trade in goods, and as this case
relates to alleged export subsidies in respect of a particular good -- Brazilian regional aircraft -- it is incumbent
upon Canada to establish that the benefit derived from PROEX III payments is not retained exclusively by the
lender but rather is passed through in some way to producers of regional aircraft. Separately, Canada argued
that PROEX III confers a benefit by providing regional aircraft purchasers with a greater choice of lenders to
handle a particular transaction than would have been available in the market. See Canada's Comments on
Brazil's Responses to Panel Questions 2 and 3 (Annex A-5). However, we do not believe that Canada has
established that this in itself constitutes a benefit to regional aircraft producers within the meaning of Article 1.1
of the SCM Agreement.

5.28 In our view, whether the financial contribution has conferred a benefit to producers of
regional aircraft -- as opposed merely to a benefit to suppliers of financial services -- depends upon
the impact of PROEX III payments on the terms and conditions of the export credit financing
available to purchasers of Brazilian regional aircraft. In fact, the arguments of the parties have
focused on precisely this question.42
5.29 The Appellate Body has found that the existence of a benefit is to be established by reference
to the market.43 Accordingly, our inquiry regarding benefit will concentrate on whether, as a result of
PROEX III payments, purchasers of Brazilian regional aircraft obtain export credits on terms more
favourable than those available to them in the ma rket. We consider it evident that the "market" to
which reference must be made is the commercial market, i.e. a market undistorted by government
intervention.
(i) Structure and Design of PROEX III
5.30 Having stated the test for determining whether PROEX III confers a benefit, we now proceed
to apply it to PROEX III. We first consider Canada's argument that, by reason of the very structure
and design of PROEX III, PROEX III payments will necessarily result in net interest rates that are
more favourable than those available to purchasers of Brazilian regional aircraft in the market.
5.31 It should be recalled, in this respect, that, through PROEX III payments, the Government of
Brazil intervenes in a transaction between a lender and a borrower which plans to purchase Brazilian
regional aircraft. It is clear to us that the purpose of PROEX III payments is to allow the lender to
offer better export credit terms with respect to a transaction than it could otherwise make available.
We do not understand Brazil to dispute that this is the case. 44 It should also be noted that Brazil does
not impose any limit on the nature of the lender that may be the recipient of PROEX III payments.
Specifically, the lender could be a financial institution in Brazil, in another developing country, or a
major international lending institution anywhere else in the world. Thus, the borrower is free to
choose the financial institution which is prepared to offer it the most competitive rates.
5.32 It follows from these elements -- that the bo rrower is free to select the lender, whether
Brazilian or otherwise, that offers him the best terms, and that PROEX III payments allow that lender
to offer better export credit terms than he could otherwise provide -- that PROEX III payments may,
in the absence of some limitation placed by Brazil on the degree of concessionality of export credits
supported by interest rate equalisation , be expected to allow purchasers of Brazilian regional aircraft
to obtain export credits on terms more favourable than those available to them in the commercial
market, and thus to confer a benefit.
45

42 We note that PROEX III payments are made in support of export credits extended to the purchaser,
and not to the producer, of Brazilian regional aircraft. In our view, however, to the extent Canada can establish
that PROEX III payments allow the purchasers of a product to obtain export credits on terms more favourable
than those available to them in the market, this will, at a minimum, represent a prima facie case that the
payments confer a benefit on the producers of that product as well, as it lowers the cost of the product to their
purchasers and thus makes their product more attractive relative to competing products. We do not understand
the parties to dispute this proposition.
43 See Appellate Body Report on Canada – Measures Affecting th e Export of Civilian Aircraft ,
WT/DS70/AB/R, adopted 20 August 1999, para. 157 (hereafter "Original Appellate Body Report on Canada –
Aircraft").
44 Neither party has suggested that lenders might not, in response to the offer of PROEX III support,
offer improved terms of conditions for export credits offered to buyers of Brazilian regional aircraft. We
consider that it is very unlikely that lenders will not pass on at least part of the PROEX III payments in the form
of better credit terms. Otherwise, borrowers could simply choose other lenders.
45 See, e.g., Canada's Rebuttal Submission, para. 12 (Annex A-2); Canada's Comments on Brazil's
Response to Panel Question 1, para. 3 (Annex A-5).

5.33 Brazil has identified two features of PROEX III which it considers ensure that PROEX III
does not confer a benefit in respect of regional aircraft. 46 First, Brazil argues that BCB Resolution
2799 establishes a minimum net interest rate of the CIRR for all PROEX-supported transactions.
Second, Brazil contends that BCB Resolution 2799 employs the "international market" as a
benchmark for determining whether or not PROEX III support may be granted. We will consider
these alleged features in turn.
(ii) CIRR as Minimum Interest Rate
5.34 First we turn to Brazil's broad assertion that PROEX III support which results in net interest
rates at or above the CIRR does not confer a benefit on buyers of Brazilian regional aircraft. As a
preliminary matter, we agree with Brazil that BCB Resolution 2799 establishes a minimum interest
rate of the CIRR for all PROEX-supported transactions relating to regional aircraft. Article 1,
paragraph 1 of that Resolution specifically provides that:
When financing exports of regional aviation aircraft, interest rate equalization shall
be established on a case-by-case basis, at levels that may vary according to the
characteristics of each operation, complying with the Commercial Interest Reference
Rate (CIRR) published monthly by the OECD corresponding to the currency and
maturity of the operation.
47
5.35 In considering Brazil's argument regarding the CIRR, it is important to bear in mind that the
CIRR is "a constructed interest rate for a particular currency, at a particular time, that does not always
necessarily reflect the actual state of the credit markets." 48 It is, therefore, at best a rough proxy for
commercial interest rates. Moreover, the CIRR is designed to correspond to commercial interest rates
for "first-class" borrowers. 49 It is certainly not a precise market proxy for rates which borrowers of
lesser creditworthiness could obtain in the market.50
5.36 Brazil has not suggested to us that all buyers of regional aircraft are first-class borrowers and,
hence, could obtain funds at rates close to the CIRR. In fact, there is evidence on record to suggest
that many actual or potential buyers of regional aircraft are not first-class borrowers.51 It follows that,

46 We note that Brazil did not assert, either in th e original proceedings or in the first Article 21.5
proceedings, that PROEX payments did not confer a benefit within the meaning of Article 1.1 of the SCM
Agreement. To the contrary, Brazil conceded in those pro ceedings that PROEX I and II did confer a benefit.
See Original Panel Report on Brazil – Aircraft, supra, para. 7.12; Article 21.5 Panel Report on Brazil – Aircraft,
supra, para. 6.21.
47 Canada's argument that the wording of Article 1, paragraph 1 of BCB Resolution 2799 does not
preclude Brazil from supporting net interest rates at below CIRR-level, is addressed at para. 5.141.
48 Appellate Body Report on , WT/DS/46/AB/RW,
adopted 4 August 2000, para. 64 (footnote omitted) (hereafter "Article 21.5 Appellate Body Report on Brazil –
Aircraft"). The CIRR may be out of line with commercial rates because it is constructed on the basis of
government bond yields plus a fixed margin and also because, due to the method of its fixation, it may lag
behind the market.
49 See Article 15 of the 1998 OECD Arrangement.
50 Brazil's argument that net interest rates at the CIRR level would not confer a benefit appears to rest,
at least in part, on the Appellate Body's view that net interest rates at the CIRR level would not secure a material
advantage in the field of export credit terms within the meaning of the first paragraph of item (k). In making
this argument, Brazil seems to interpret the term "benefit" in Article 1.1 of the SCM Agreement to have the same
meaning as the "material advantage" advantage clause in the first paragraph of item (k), something the Appellate
Body specifically said is impermissible. See Appellate Body Report on , WT/DS/46/AB/R, adopted 20 August 2000, para. 179 (hereafter "Original Appellate Body Report
on Brazil – Aircraft").
51 We note, based on evidence submitted by Canada, that, as of 31 January 2001, out of thirteen US
airlines, including the major ones, none had a "first-class" rating for unsecured debt. Thus, none of the thirteen
airlines had "triple A" rating or, for that matter, any "A" rating at all. See Exhibit CDA-17, p. 6. Brazil itself

even if the CIRR did accurately reflect commercial market rates for first-class borrowers, the
requirement in BCB Resolution 2799 that PROEX III support must not result in net interest rates
below the CIRR does not mean that PROEX-supported interest rates are no more favourable than
those which particular purchasers of Brazilian aircraft could have obtained in the commercial
marketplace. We therefore find that the prescription of a CIRR floor for financing operations
involving regional aircraft does not establish the absence of a benefit for the buyers of such aircraft.
5.37 We recognise the theoretical possibility that a particular purchaser of Brazilian regional
aircraft might be able to obtain export credit financing at (or even below
52) CIRR rates in the
commercial marketplace. Even if, as a result, PROEX III did not always confer a benefit on the buyer
of Brazilian regional aircraft, it is important to bear in mind that this Panel's task is to review the
PROEX III programme as such (insofar as it relates to exports of regional aircraft), not just specific
situations which may arise under it. We are concerned, in this case, with all situations in which
PROEX III may reasonably be expected to be involv ed. Thus, to the extent that PROEX III required
Brazil, in some situations, to make PROEX III payments that would result in a benefit being conferred
in respect of regional aircraft, the PROEX III programme would be mandatory legislation (in respect
of the conferral of a benefit) 53 and thus a subsidy potentially inconsistent with the SCM Agreement.54
(iii) International Market Benchmark
5.38 Next we must turn to Brazil's argument that it cannot, as a matter of law, use PROEX III in
such a way as to confer a benefit on the buyers of Brazilian regional aircraft. 55 Specifically, Brazil
refers to Article 8, paragraph 2 of BCB Resolution 2799, which reads as follows:
In the process of analyzing received requests for eligibility, the [Export Credit
Committee] shall have as reference the financing terms practiced in the international
market.
5.39 We have addressed a series of questions to Brazil regarding the meaning of Article 8,
paragraph 2. In response, Brazil has stated, inter alia , that Article 8, paragraph 2 imposes an
affirmative requirement on the Export Credit Committee to ensure consistency with the terms
practised in the international market; that the relevant "international market" is the market for the
product for which PROEX III support is requested; that the relevant financing "practices" are those
which do not include official financing support; and that the benchmark "financing terms" are those
which would be available to the buyer in question for a comparable transaction in the commercial
marketplace.
56 These statements are, in principle, consistent with Brazil's contention that Article 8,
paragraph 2 sets forth a mandatory "benefit to recipient" test within the meaning of Article 1.1 of the
SCM Agreement.

has stated that at least one of these airlines, Continental Airlines, has actually purchased Embraer regional jets.
See Brazil's Comments on Canada's Response to Panel Question 18 (Annex B-6). Continental Airlines was
rated, on the date indicated, at "Ba2/BB-".
52 We believe it may be inferred from the Appellate Body's statement that the CIRR "does not always
necessarily reflect the actual state of the credit ma rkets" that it is possible, in principle, for commercial interest
rates to fall below the CIRR, at least temporaril y. See Article 21.5 Appellate Body Report on Brazil – Aircraft,
supra, para. 64.
53 The issue of whether PROEX III requires Brazil to confer a benefit in respect of regional aircraft is
discussed in Section D.2(b)(iv) infra.
54 Of course, a subsidy is not prohibited by the SCM Agreement , unless it falls within the scope of
Article 3 of the SCM Agreement , and unless defences such as the second paragraph of item (k) (discussed in
Section E infra) are unavailable.
55 See Brazil's First Submission, para. 15 (Annex B-1); Brazil's Oral Statement, paras. 20 and 23
(Annex B-3).
56 See Brazil's Responses to Panel Questions 14(a), 14(c), 14(d) and 14(e) (Annex B-5).

5.40 However, Brazil has also noted that "there may be situations in which the CIRR is below the
marketplace rates [… ]. In those circumstances, the Committee could provide PROEX support [in
accordance with the provisions of the second paragraph of item (k)]."57 We understand this statement
to mean that Article 8, paragraph 2 would not preclude Brazil from granting PROEX III support to
reduce net interest rates below those which could be obtained commercially. 58 This reply squarely
contradicts some of the aforementioned statements by Brazil.
5.41 Since we have no grounds for believing that Brazil's latter statement was made inadvertently59
and since we see no possibility of resolving the inconsistencies in Brazil's statements other than in
favour of Brazil's latter statement 60, we are not persuaded by Brazil's argument that Article 8,
paragraph 2 of BCB Resolution 2799 legally precludes Brazil from conferring a benefit to the buyers
of Brazilian regional aircraft.
(iv) Mandatory versus Discretionary Conferral of a Benefit
5.42 To recapitulate, we have found, thus far, that PROEX III payments may, in the absence of
some limitations placed by Brazil on the degree of concessionality of export credits supported by
interest rate equalisation , be expected to allow purchasers of Brazilian regional aircraft to obtain
export credits on terms more favourable than those available to them in the commercial market. We
have further found that neither of the limitations identified by Brazil -- the minimum interest rate of
the CIRR provided for in Article 1, paragraph 1 of BCB Resolution 2799, and the "international
market" benchmark established by Article 8, paragraph 2 of that Resolution -- precludes Brazil from
conferring a benefit through PROEX III interest rate equalisation. The issue which arises, then, is
whether our findings up to this point are sufficient for us to conclude that the PROEX III programme,
as such, is inconsistent with Article 3.1(a) of the SCM Agreement.
5.43 As previously discussed, we are dealing, in this case, with a claim in respect of the
PROEX III programme per se. Thus, we apply the distinction between mandatory and discretionary
legislation. Specifically, the question we must answer is whether PROEX III requires the executive
branch of the Government of Brazil to act inconsistently with its obligations under Article 3.1(a) of
the SCM Agreement, and in particular whether PROEX III requires the executive branch to confer a
benefit on buyers of Brazilian regional aircraft. In our view, a conclusion that PROEX III could be
applied in a manner which confers a benefit, or even that it was intended to be and most likely would
be applied in such a manner, would not be a sufficient basis to conclude that PROEX III as such is
mandatory legislation susceptible of inconsistency with Article 3.1(a) of the SCM Agreement.
5.44 In considering this issue, we note that BCB Resolution 2799 contains a number of elements
which indicate a degree of discretion with respect to the implementation of PROEX III in particular
cases. First, we note that Article 1 of BCB Resolution 2799 states in relevant part that:

57 Brazil's Response to Panel Question 14(e) (footnote omitted) (Annex B-5). Brazil made a similar
assertion in its Closing Statement to the Panel: "In sum, the Committee, operating under PROEX III will either
operate under the safe haven of the second paragraph of item (k) or, when providing terms of interest rates [ sic]
support consistent with the market under the exception, will confer no 'benefit'." See Brazil's Closing
Statement, para. 11 (Annex B-4).
58 See also Canada's Comments on Brazil's Response to Panel Question 14, para. 7 (Annex A-5).
59 Brazil specifically reiterated the relevant statement in its response to Panel Question 14(g)
(Annex B-5).
60 We note that nothing on the face of the phrase "the financing terms practiced in the international
market" suggests that the benchmark terms must necessarily be the commercial terms available to the buyer in
question for a comparable transaction. See also Canada's Comments on Brazil's Response to Panel Question 14,
para. 4 (Annex A-5).

… the National Treasury may provide to the financing or re-financing agency […]
equalization enough to render financing costs compatible with those practiced in the
international market. (emphasis added)61
5.45 Brazil considers that, pursuant to this provision, the Export Credit Committee retains
discretion regarding whether or not a request for PROEX III support is approved even when all the
eligibility criteria are met. 62 On its face, this would appear to be a reasonable interpretation of the
text of Article 1. It follows that the Committee would be in a position to deny PROEX III interest rate
equalisation in cases where the underlying export credit would, as a result of PROEX III support, be
on terms that the borrower could not otherwise obtain in the commercial market.
5.46 We note a further element of the text of BCB Resolution 2799 which would appear to give the
Export Credit Committee flexibility to modulate the amount of PROEX III interest rate equalisation
depending on the terms of the underlying export credits. Article 1, paragraph 1 of the Resolution
provides that:
… interest rate equalization shall be established on a case-by-case basis, at levels that
may vary according to the characteristics of each operation , complying with the
Commercial Interest Reference Rate (CIRR) … (emphasis added)
5.47 Brazil contends that this means that the Committee is not required to approve a net interest
rate as low as the CIRR in every case, nor to approve 2.5 per cent support in every case.
63 Again, this
would appear to be a reasonable reading of this provision. Thus, in addition to having the discretion
to deny interest rate equalisation altogether in certain cases, Brazil would appear to have the
discretion to reduce the amount of interest rate equalisation in cases where the underlying export
credit would, as a result of the full 2.5 per cent equalisation, be on terms that the borrower could not
otherwise obtain in the commercial market.
5.48 Finally, we recall that Article 8, paragraph 2 of Resolution 2799 provides that, "[i]n the
process of analyzing received requests for eligibility, the [Export Credit Committee] shall have as
reference the financing terms practiced in the intern ational market." We have previously rejected,
based primarily upon inconsistent statements by Brazil itself regarding the meaning of this text,
Brazil's contention that, as a result of this provision, Brazil could not, as a matter of law, use
PROEX III in such a way as to confer a benefit in respect of Brazilian regional aircraft.
64 W e
consider, however, that this provision offers Brazil substantial discretion to decide how to apply
PROEX III. In particular, we consider that Brazil could consistently with this language decline to
offer PROEX III interest rate equalisation in case s where the underlying export credit would, as a
result of PROEX III support, be on terms that th e borrower could not otherwise obtain in the
commercial market.

61 The term "may" is expressed as "pode ser" in the original Portuguese-language text.
62 Brazil also refers to another provision which it considers supports its contention that the Export
Credits Committee has discretion regarding whether or not PROEX III support is provided. The provision in
question, Article 2 of BCB Resolution 2799, states that "[e]qualization may be granted when financing the
importer, for cash payments to the exporter established in Brazil, as well as when re-financing granted to the
latter." We are not persuaded that Article 2 is meant to confer discretion on the Committee as Brazil suggests.
Rather, we think Article 2 simply makes clear in what situations interest equalisation is possible (Article 2
mentions three). Thus, it does not appear to address the issue of whether the Committee has discretion to refuse
to grant interest rate equalisation for financing, say, to an importer when the relevant request meets all other
eligibility criteria of PROEX III.
63 See Brazil's Response to Panel Question 13 (Annex B-5)
64 See Section D.2(b)(iii) supra.

5.49 We note that Canada itself has asserted that Brazil's executive branch has broad discretionary
authority with respect to the administration of PROEX III. 65 Further, Canada has recognised that,
under the traditional distinction between mandatory and discretionary legislation, it is incumbent on
the complaining party to establish that the executive branch of the responding party is required to act
inconsistently with its obligations under the WTO Agreement.66
5.50 In the light of the foregoing, we conclude that Canada has failed to establish that Brazil is
required by PROEX III to confer a benefit on producers of Brazilian regional aircraft through interest
rate equalisation payments.67
5.51 We emphasize that our ruling is limited to a finding that Brazil is not required by PROEX III
to confer a benefit on producers of Brazilian regional aircraft through interest rate equalisation
payments. We do not mean to suggest that Brazil will not confer a benefit in some if not most cases
in which PROEX III interest rate equalisation is provided. To the contrary, we believe that the very
logic of PROEX III would be undermined if Brazil were to limit the provision of PROEX III interest
rate equalisation to cases where no benefit was conferred.
68 We recall, however, that Brazil may
avoid violating Article 3.1(a) of the SCM Agreement either by not conferring a benefit (such that no
subsidy contingent upon export performance exists) or by taking advantage of the "safe haven"
provided for in the second paragraph of item (k) 69, and that Brazil has asserted that it will operate
PROEX III in such a manner70.
(c) Export Contingency
5.52 Canada argues that PROEX III payments are de jure contingent on export performance.
5.53 Brazil does not contest that PROEX III payments are de jure contingent upon export
performance.
5.54 The Panel considers that PROEX III payments are contingent in law upon export
performance within the meaning of Article 3.1(a). PROEX III, by name and design, is an export
financing programme. Moreover, the legal instrument s at issue in these proceedings, by their terms,

65 See, e.g., Canada's Comments on Brazil's Response to Panel Question 8, para. 3 (Annex A-5).
66 See Canada's Response to Panel Question 21 (Annex A-4).
67 This is not a case where PROEX III interest rate equalisation would necessarily confer a benefit, and
where the only discretion available is that of not providing the equalisation at all. We do not express a view as to
whether our approach in this case would be equally applicable in such factual circumstances. Rather, this is a
case where Brazil has discretion to operate PROEX III interest rate equalisation in such a manner that it does not
confer a benefit. Further, we note that the facts before us are unlike those before the Appellate Body in
Argentina – Measures Affecti ng Imports of Footwear, Tex tiles, Apparel and Other Items . In that case, the
Appellate Body was reviewing mandatory legislation. See Appellate Body Report on Argentina – Measures
Affecting Imports of Footwear, T extiles, Apparel and Other Items , WT/DS56/AB/R, adopted 22 April 1998,
paras. 49 and 54.
68 Brazil has stated that PROEX III payments are intended to enable Embraer to avoid a competitive
disadvantage vis-à-vis other regional aircraft manufacturers the sales of which are enjoying official support. See
Brazil's Response to Panel Question 4 (Annex B-5). To the extent that PROEX III payments do not allow
purchasers of Brazilian regional aircraft to obtain export credit financing on terms more favourable than would
be available to them in the commercial market, it is hard to see how this stated purpose would be served.
Rather, the sole beneficiaries of PROEX III payments in such cases would be lenders. In other words,
PROEX III payments in such cases would be subsidies in respect of financial services , rather than regional
aircraft. Given that the lender receiving PROEX III payments need not be Brazilian, this is an unlikely scenario.
69 See Section E infra.
70 See Brazil's Closing Statement, para. 11 (Annex B-4).

apply only to export financing operations.71 Again, Brazil does not dispute that PROEX III payments
are export-contingent.
3. Conclusion
5.55 On the basis of all the foregoing considerations, we find that PROEX interest rate equalisation
payments are financial contributions within the meaning of Article 1.1 and that they are contingent
upon export performance within the meaning of Article 3.1(a) of the SCM Agreement. However, we
further find that Brazil maintains the discretion to limit the provision of PROEX III interest rate
equalisation payments to circumstances where a benefit is not conferred in respect of regional aircraft.
Accordingly, we conclude that Brazil is not required by the PROEX III scheme to provide, in respect
of the export of regional aircraft, a subsidy within the meaning of Article 1.1 of the SCM Agreement
which is contingent upon exportation in the sense of Article 3.1(a).
5.56 In the light of our conclusion with respect to Canada's claim under Article 3.1(a) of the
SCM Agreement, we could exercise judicial economy and end our analysis at this point. We consider,
however, that a more complete analysis of the issues before us would facilitate the work of the
Appellate Body in the event that this Panel Report is appealed. We further recall Brazil's statement
that "the [Export Credit] Committee, operating under PROEX III will either operate under the safe
haven of the second paragraph of item (k) or, when providing terms of interest rates [ sic] support
consistent with the market under the exception [provided for in Article 8, paragraph 2 of BCB
Resolution 2799], will confer no 'benefit'".
72 In the light of Brazil's stated intention to rely on the
"safe haven" in certain circumstances, and in the interests of promoting a full resolution of this
dispute, we proceed to consider Brazil's arguments in respect of the "safe haven" in the second
paragraph of item (k).73
E. SECOND PARAGRAPH OF ITEM (K)
5.57 As previously outlined, it is Brazil's position that, even if Canada were correct and PROEX III
were, in fact, an export subsidy within the meaning of Article 3.1(a) of the SCM Agreement ,
PROEX III would nevertheless be justified unde r the "safe haven" in the second paragraph of
item (k). Brazil did not invoke the second paragraph of item (k) during the previous proceedings in
this dispute. It is, therefore, appropriate to discuss this particular defence in some detail.
1. Burden of Proof
5.58 Brazil contends that, even if PROEX III conferred a benefit and was thus a subsidy
contingent upon export performance within the meaning of Article 3.1(a), Brazil in practice applies
the interest rates provisions of the relevant OECD Arrangement and is thus covered by the safe haven
of the second paragraph of item (k). Brazil does not dispute that it is incumbent on the party invoking
the second paragraph of item (k), to demonstrate that the requirements of the second paragraph of
item (k) are satisfied.
5.59 Canada does not contest that an export credit practice which is in conformity with the interest
rates provisions of the relevant OECD Arrangement is not a prohibited export subsidy. Canada
contends, however, that whoever invokes the second paragraph as an affirmative defence must bear
the burden of proving that the measure for which justification is claimed meets all of the conditions of

71 See Article 1 and Article 1, paragraph 1 of BCB Resolution 2799.
72 Closing Statement of Brazil, para. 11 (emphasis added) (Annex B-4).
73 There is, in our view, particular justification for f acilitating a full resolution of this particular dispute
in view of the fact that this is the second time that Canada has asked us to review Brazil's measures taken to
comply with the relevant recommendations and rulings of the DSB.

the second paragraph. Specifically, it is necessary, according to Canada, to establish conformity with
all of the "interest rates provisions" of the relevant OECD Arrangement.
5.60 The Panel recalls that the text of the second paragraph of item (k) reads as follows:
Provided, however, that if a Member is a party to an international undertaking on
official export credits to which at least twelve original Members to this Agreement
are parties as of 1 January 1979 (or a successor undertaking which has been adopted
by those original Members), or if in practice a Member applies the interest rates
provisions of the relevant undertaking, an export credit practice which is in
conformity with those provisions shall not be considered an export subsidy prohibited
by this Agreement. (emphasis added)
5.61 On a reading which gives meaning to all of the terms used, the second paragraph suggests that
export credit practices which are in conformity with the interest rates provisions of the relevant
international undertaking are export subsidies -- and, as such, would normally be prohibited under the
provisions of Article 3 of the SCM Agreement --, but that they are nevertheless not prohibited under
the SCM Agreement.
5.62 This interpretation leads us to the conclusion th at the second paragraph of item (k) provides
for an exception from any prohibition on export subsidies laid down elsewhere in the
SCM Agreement. The fact that the second paragraph does not, itself, impose obligations supports that
conclusion.
5.63 Consistently with our view that the second paragraph of item (k) makes available an
exception, it must be possible to invoke it as an affirmative defence to a claim of violation. As is
clear from relevant WTO jurisprudence, the burden of establishing an affirmative defence rests with
the party raising it.
74
2. Specific Interpretative Issues
5.64 A number of specific interpretative issues need to be resolved before the provisions of the
second paragraph of item (k) can be applied to the facts of the present case. In particular, it is
necessary (a) to address what are "export credit practices", (b) to determine which is the relevant
"international undertaking on export credits", and (c) to identify the "interest rates provisions" of the
relevant undertaking and to establish what it means to be "in conformity" with those provisions.
These issues are addressed in turn.
(a) "Export Credit Practices"
5.65 The Article 21.5 Panel in Canada – Aircraft considered that there is "… no basis to consider
any practice associated with export credits as a priori not constituting an 'export credit practice' in the
sense of the second paragraph of item (k)."
75
5.66 The term "export credit practice" is a broad one which on its face encompasses any practice
relating to export credits. Further, neither party to these proceedings has disputed that the term should
be read in this manner. We, therefore, adopt the view of the Article 21.5 Panel in Canada – Aircraft.

74 See the Appellate Body Report on United States – Measure Affecting Imports of Woven Wool Shirts
and Blouses from India , adopted 23 May 1997, WT/DS33/AB/R, p. 16; Article 21.5 Appellate Body Report on
Brazil – Aircraft, supra, para. 66.
75 Article 21.5 Panel Report on Canada – Aircraft, supra, para. 5.81 (footnote omitted).

(b) "Relevant International Undertaking on Official Export Credits"
5.67 Brazil recalls that the second paragraph refers not only to the OECD Arrangement as it
existed in 1979, but also to "a successor undertaking which has been adopted" by the original
Members. Brazil considers that the phrase "a successor undertaking which has been adopted" can
only be interpreted to refer to the 1992 OECD Arrangement on Guidelines for Officially Supported
Export Credits (hereafter the "1992 OECD Arrangement"). In support of its interpretation, Brazil
adduces the fact that the aforementioned phrase uses the present perfect tense. According to Brazil,
the term "has been" refers to a time regarded as present when the provisions of item (k) became
effective, i.e. 1 January 1995. Brazil notes that, at that time, the only "successor undertaking" already
in existence was the 1992 OECD Arrangement.
5.68 Brazil further contends that, if, instead, the phrase "a successor undertaking which has been
adopted" were interpreted to refer to versions of the OECD Arrangement adopted after the entry into
force of the SCM Agreement, this would lead to an absurd and unreasonable result. According to
Brazil, such an interpretation would effectively give a handful of OECD countries carte blanche to
amend the scope of the safe haven in the second paragraph of item (k). Brazil points out, for example,
that nothing would prevent the Participants to post-1995 versions of the OECD Arrangement from
including in the second paragraph of item (k) export credit practices they engage in while excluding
export credit practices of other WTO Members that are not members of the OECD. Brazil notes that
this could be done without official notification to the WTO and even though most WTO Members are
not even eligible to join the OECD. In Brazil's view, this would also completely evade the regular
process for amending WTO provisions. Brazil submits that, in such circumstances, the Panel should
adopt Brazil's interpretation of the "has been adopted" clause, which is a possible interpretation and
which avoids an absurd and unreasonable result.
5.69 Canada disagrees with Brazil's interpretation. According to Canada, the text "has been" does
not focus on the past, i.e. 1 January 1995, as Brazil suggests, but on the time of the consideration of
the application of item (k). The present perfect tense is used in the second paragraph of item (k), in
the view of Canada, to make clear that an undertaking must be adopted before it can take effect. On
that basis, Canada considers that the currently relevant OECD Arrangement is the 1998 OECD
Arrangement on Guidelines for Officially Supported Export Credits (hereafter "the 1998 OECD
Arrangement"), because it is the most recent version of the OECD Arrangement which has been
adopted. Canada also argues that the 1998 OECD Arrangement is clearly a "successor undertaking"
to the 1978 Arrangement. Canada considers that the term "successor" is forward looking. Canada
adds, in this regard, that the OECD Arrangement has developed since its inception and continues to
do so. Canada argues that the drafters of item (k) could not have been unaware of this evolving
character of the OECD Arrangement on 1 January 1995, since, by that time, the OECD Arrangement
had undergone several changes, e.g. in 1987, 1991 and 1994.
5.70 In respect of Brazil's interpretation, Canada argues that if the drafters had meant to refer to the
1992 OECD Arrangement , they could simply have done so. Canada also recalls that the second
paragraph of item (k) tracks the text of the 1979 GATT Subsidies Code. Canada notes that the 1979
GATT Subsidies Code also referred to a "successor undertaking" to the 1978 OECD Arrangement.
Canada points out, however, that, in 1979, there was no successor undertaking to the 1978 OECD
Arrangement. Canada deduces from this that the term "successor undertaking" must necessarily be
forward looking.
5.71 Among third parties, the
European Communities argues that the 1998 version of the OECD
Arrangement is the only one relevant to the present proceedings. The second paragraph of item (k)
makes a dynamic reference to the OECD Arrangement in line with the fact that the Arrangement is an
evolving understanding. The United States considers that the version of the OECD Arrangement in
effect on the date that a Member grants the export credit at issue is the "relevant undertaking" with
which the Member must comply. The drafters of the SCM Agreement were aware of the need for

flexibility to update agreements and, therefore, included the possibility of an updated OECD
Arrangement in the language "a successor undertaking".
5.72 The task facing the Panel is to determine the relevant "international undertaking on official
export credits". It is well to begin that task by setting out the relevant part of the text of the second
paragraph of item (k). It reads:
… if a Member is a party to an international undertaking on official export credits to
which at least twelve original Members to this Agreement are parties as of
1 January 1979 (or a successor undertaking which has been adopted by those original
Members) …
5.73 It is not in dispute that the phrase "an international undertaking on official export credits to
which at least twelve original Members to this Agreement are parties as of 1 January 1979" is a
reference to the OECD Arrangement in effect on 1 January 1979. 76 Nor is it in contention that the
bracketed phrase "a successor undertaking which has been adopted […]" refers to a "successor
undertaking" to the OECD Arrangement in effect in 1979. The parties differ, however, regarding
whether the relevant "successor undertaking" is the 1992 version of the OECD Arrangement or the
1998 version.
5.74 Brazil submits that the relevant successor undertaking is the 1992 OECD Arrangement
because it was in effect at the time the SCM Agreement came into force, i.e. 1 January 1995. Canada,
on the other hand, argues for the 1998 OECD Arrangement on the grounds that it is the current
version. Simply put, then, the issue we must decide is whether the second paragraph of item (k) uses
the most recent adopted version of the OECD Arrangement as a reference or a historic version
thereof.
5.75 In interpreting the phrase "a successor undertaking which has been adopted […]", we focus
first on the language "has been adopted". Brazil attaches great importance to the fact that that
language is in the present perfect tense. The pres ent perfect tense, Brazil maintains, refers to a time
regarded as present. We agree. Brazil goes on to argue, however, that the relevant present is the time
when the SCM Agreement entered into force. From this Brazil concludes that only those successor
undertakings which had been adopted before the entry into force of the SCM Agreement are, textually,
within the scope of the second paragraph of item (k). We are not persuaded by that view.
5.76 The second paragraph of item (k) does not say that only a successor undertaking which has
been adopted "at the date of entry into force of the WTO Agreement" is relevant. Nor is there any
other indication in the text of the second paragraph which would support Brazil's argument. It is true,
of course, that the SCM Agreement began to speak, as it were, in 1995. It does not follow, however,
that every time that Agreement speaks in the present tense or the present perfect tense this necessarily
refers to the present of its drafters, i.e. 1 January 1995. To the contrary, as a general matter, we
would expect that the present tense and present perfect tense are used in the SCM Agreement ,
including in the second paragraph of item (k), to refer to the present of the addressees of the SCM
Agreement. After all, the SCM Agreement is meant to regulate the conduct of Members and must,
therefore, inform Members as to what their rights and obligations are at the time they refer to the
Agreement.
5.77 Another phrase contained in the second paragraph of item (k) reinforces our view. That
phrase reads: "[…] if a Member is a party to […] a successor undertaking […]" (emphasis added). On
Brazil's view, as Canada notes, that phrase would cover only Members that were parties to the 1992
OECD Arrangement on 1 January 1995. A Member that becomes a party after that time would not
fall within the terms of that phrase, even though they would clearly be a party to the Arrangement.

76 See also Article 21.5 Panel Report on Canada – Aircraft, supra, para. 5.78.

There is, to be sure, another relevant phrase in the second paragraph which reads: "[…] if in practice a
Member applies the interest rates provisions of the relevant undertaking". However, a Member that
becomes a party to the 1992 OECD Arrangement after 1995 would not be covered by that phrase
either. It would apply the 1992 OECD Arrangement as a matter of law. It cannot, in our view, be
said to apply that Arrangement as a matter of practice.77 Thus, such a Member would, in effect, be
precluded from successfully invoking the safe haven in the second paragraph of item (k), a result
which we think the drafters could not have intended.
5.78 It should be noted, moreover, that, on our interpretation, the language "has been adopted"
retains meaning and effect. Thus, the use of the present perfect tense tells Members that any time
they seek to determine the relevant successor undertaking, they should consider only those successor
undertakings which, at that time, have been adopted by the relevant OECD Members. In other words,
Members are not allowed to rely on, nor are they bound by the relevant provisions of a successor
undertaking which has not yet been formally accepted by the relevant OECD Members. A successor
undertaking which is merely being proposed for adoption or which exists only in draft form could not,
therefore, constitute a successor undertaking which "has been adopted".
5.79 On the basis of the foregoing considerations, we find that the phrase "has been adopted" is
properly read as referring to the present of its addres sees rather than as referring to an act of adoption
prior to the entry into force of the SCM Agreement, i.e. prior to 1 January 1995.
5.80 Turning next to the term "successor undertaking" , we note that, in its ordinary meaning, this
term refers to an undertaking which "succeeds [i.e. follows] another in [… ] function".
78 There can be
no question, in our view, that both the 1992 and the 1998 version of the OECD Arrangement
constitute "successor" undertakings to the OECD Arrangement in effect in 1979 .79 It should be
pointed out, in this regard, that the 1998 OECD Arrangement is the latest adopted version of the
OECD Arrangement and, as such, is currently in effect, whereas the 1992 OECD Arrangement is no
longer in effect. This raises the question of which successor undertaking is the relevant successor
undertaking if there is more than one. The text of the second paragraph of item (k) does not explicitly
answer that question.80
5.81 We consider that the relevant successor undertaking is the most recent successor undertaking
which has been adopted. It would not, in our view, have been rational for the drafters to consider,
without specifying so, that, say, the fifth successor undertaking should be the relevant one. Indeed, the
fact that the drafters used the simple and unqualified term "a successor undertaking" strongly suggests
to us that they intended to incorporate, and thus give effect to, the relevant provisions of all adopted
successor undertakings. This, however, would not logically be possible, unless effect is given also to
the changes introduced by the most recent successor undertaking. On that basis, we find that, in the
absence of other textual directives, the most recent successor undertaking is the relevant benchmark
undertaking for purposes of the second paragraph of item (k), subject to the one condition that it must
have been adopted.
5.82 Specifically with respect to the issue of whether the 1992 OECD Arrangement or the 1998
OECD Arrangement is the relevant successor undertaking, it should be noted that the 1992 OECD

77 We do not, in any event, see what purpose would be served by drawing a legally relevant distinction,
in the second paragraph of item (k), between those Members parties to a particular version of the 1992 OECD
Arrangement as of 1995 and those Members parties to that Arrangement as of a later date.
78 The New Shorter Oxford English Dictionary, Vol. II, Oxford (1993), pp. 3127 and 3128.
79 For the 1998 OECD Arrangement, see its Introduction, p. 7 ("Status").
80 It is clear to us, however, that the drafters could not have left the addressees of the second paragraph
free to choose among different successor undertakings. Were it otherwise, complainants could select the
strictest successor undertaking with as much justifi cation as respondents could select the most generous
successor undertaking. The second paragraph would then fail to do what it is there to do, i.e. to inform
Members regarding what their rights and obligations are.

Arrangement was in existence at the time the SCM Agreement was negotiated. Had Members
intended the 1992 OECD Arrangement to be the relevant successor undertaking, they could simply
have expressed that intention in the text of the second paragraph of item (k). It is significant, in our
view, that they did not do so and instead chose to refer, broadly, to "a successor undertaking".
5.83 In view of the foregoing, we conclude that the "successor undertaking" at issue in the second
paragraph of item (k) is the most recent successor undertaking which has been adopted prior to the
time that the second paragraph is considered. For purposes of these proceedings, we conclude that the
most recent successor undertaking which has been adopted is the 1998 OECD Arrangement.81
5.84 In reaching our conclusion, we have carefully considered Brazil's assertion that to interpret
the phrase "a successor undertaking which has been adopted" to refer, at the present time, to the 1998
OECD Arrangement leads to a result which is manifestly absurd and unreasonable. Specifically,
while Brazil acknowledges that the safe haven in the second paragraph of item (k) is available both to
Participants and non-Participants to the OECD Arrangement, it argues that this means accepting that a
sub-group of Members -- the Participants to the OECD Arrangement -- could modify the scope of the
second paragraph of item (k), and thus the exception it sets forth, by modifying the relevant
provisions of the OECD Arrangement. In fact, Brazil contends, they would have carte blanche to
"perpetually legislate on behalf of the overwhelming majority of the membership". But not only that -
- they could legislate in such a way as to accommodate their own preferences at the cost of the rest of
the Members. Brazil submits that the Panel must avoid interpreting the second paragraph of item (k)
to allow such a result.
5.85 We do not agree that the interpretation of the second paragraph of item (k) which we found to
be the correct one and which is based on Article 31 of the Vienna Convention on the Law of Treaties
"leads to a result which is manifestly absurd or unr easonable" within the meaning of Article 32 of the
Vienna Convention.
82
5.86 It is true that, under our interpretation, the Participants to the OECD Arrangement could
modify the 1998 OECD Arrangement, and thus effectively the scope of the safe haven in the second
paragraph of item (k), without Members' consent. 83 As the Article 21.5 Panel in Canada – Aircraft
(hereafter "the Article 21.5 Panel") has remarked:

81 It should be reiterated here that the 1992 OECD Arrangement is no longer in effect.
82 Article 31(1) of the Vienna Convention reads:
A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given
to the terms of the treaty in their context and in the light of its object and purpose.
Article 32 of the Vienna Convention reads:
Recourse may be had to supplementary means of interpretation, including the preparatory
work of the treaty and the circumstances of its conclusion, in order to confirm the meaning
resulting from the application of article 31, or to determine the meaning when the
interpretation according to article 31:
(a) Leaves the meaning ambiguous or obscure; or
(b) Leads to a result which is mani festly absurd or unreasonable.
83 We are unable, however, to agree with the view of Brazil that this would amount to an impermissible
circumvention of the regular process for amending WTO provisions. Members themselves have agreed to the
provisions of the second paragraph of item (k) and to granting to the Participants to the OECD Arrangement, de
facto, the power of modifying the scope of the safe haven. There can thus be no question of "circumvention" of
the amendment provisions set forth in the WTO Agreement. Brazil further argues that our interpretation would
have serious constitutional implications for Members such as Brazil that incorporate WTO rules into their

… the second paragraph of item (k) is quite unique in the sense that it creates an
exemption from a prohibition in a WTO Agreement, the scope of which exemption is
left in the hands of a certain subgroup of WTO Members – the Participants, all of
which as of today are OECD Members – to define, and to change as and when they
see fit.84
5.87 Like the Article 21.5 Panel, we find the provisions of the second paragraph of item (k)
unusual. We further recognise that, as Brazil argues, the Participants to the 1998 OECD Arrangement
could conceivably abuse their de facto power to modify the scope of the safe haven in a way which
benefits them but does not equally benefit the rest of the WTO membership.85
5.88 We consider, however, that the drafters of the second paragraph could well have considered
that such a "delegation" was justifiable. They could have reached that conclusion on the basis, for
instance, that the Participants, at the time, had greater expertise in the area of officially supported
export credits. Similarly, they could have considered that it was inappropriate to "freeze" the scope of
the safe haven in the light of the fact that the OECD Arrangement was -- and still is -- in a process of
evolution.
5.89 We do not intend to express a view about the relative weight of these considerations. That is
the task of the parties to a negotiation, not a dispute settlement panel. Our sole task is to consider
whether the interpretation we have reached on the basis of customary principles of public
international law is so outlandish as to be "m anifestly absurd or unreasonable". As already
mentioned, we think it is not.
86
5.90 Assuming arguendo that Brazil was correct and our interpretation led to a manifestly absurd
or unreasonable result, the consequence would be that we would be entitled to have recourse to
supplementary means of interpretation, including the negotiating history. Based on the arguments the
parties have presented in this regard, it seems to us that the negotiating history of the second
paragraph of item (k) tends to confirm rather than undermine the conclusion we have reached on the
basis of our application of Article 31 of the Vienna Convention.

domestic legal order, inasmuch as it would allow other governments to effect changes in Brazil's domestic law
without Brazil's consent. We limit ourselves to observing, in this regard, that the WTO Agreement, once ratified,
is binding on Members, whether they incorporate it into their domestic legal order or not ( pacta sunt servanda).
Even if Brazil had not incorporated the WTO Agreement , it would still be required to make changes to its
domestic law if a modification of the scope of the second paragraph of item (k) so required. We do not,
therefore, see great force in that argument.
84 Article 21.5 Panel Report on Canada – Aircraft, supra, para. 5.132.
85 Brazil refers to a passage in the Article 21.5 Panel Report on Canada – Aircraft , supra, para. 5.132,
where the Article 21.5 Panel stated that:
… it is important that the second paragraph of item (k) not be interpreted in a manner that
allows [the Participants to the OECD Arrangement] to create for [themselves] de facto more
favourable treatment under the SCM Agreement than is available to all other WTO Members.
We agree with that statement. However, it must be noted that this statement does not support Brazil's
position. In fact, the Article 21.5 Panel never referred to anything other than the 1998 OECD Arrangement .
The Article 21.5 Panel made the above-quoted statement in a different context, namely in support of its
interpretation of the concept of "conformity" with the interest rates provisions of the 1998 OECD Arrangement.
86 In any event, we must assume that the drafters were aware that the OECD Arrangement had
undergone a number of changes pre-1995 (see Exhibit CDA-31) and, hence, were equally aware of the
possibility of the scope of the safe haven being modified post-1995. Thus, this result in our view reflects a
negotiated balance of rights and obligations, which is not for a panel to upset. If the Participants were to abuse
their power to modify the scope of the safe haven, the recourse of other Members would be to renegotiate the
second paragraph of item (k).

5.91 As noted by Canada, the 1979 GATT Subsidies Code contained a provision the wording of
which was almost exactly identical to that of the second paragraph of item (k) as it appears in the
SCM Agreement. Specifically, the 1979 GATT Subsidies Code also used as benchmarks the OECD
Arrangement as in effect in 1979 or a "successor undertaking which has been adopted by those
original signatories". Applying Brazil's interpretation of the SCM Agreement to the 1979 GATT
Subsidies Code, the relevant "successor undertaking" for purposes of the 1979 GATT Subsidies Code
would need to be one that "ha[d] been adopted" in 1979 or on 1 January 1980, when the GATT
Subsidies Code came into force. However, neither in 1979 nor on 1 January 1980 was there a
"successor undertaking". This confirms our view that the present perfect "has been adopted" cannot
be read to refer to the drafters' present, i.e. 1 January 1980.87
(c) "Conformity with the Interest Rates Provisions of the Relevant Undertaking"
5.92 Brazil considers that the term "interest rates provisions" in the second paragraph of item (k)
should be interpreted narrowly because that term, in and of itself, calls for a narrow interpretation.
Brazil recalls, in this regard, that the second paragraph narrowly refers to the "interest rates
provisions" of the OECD Arrangement, and not to the provisions governing the terms and conditions
of export credits. On those grounds, Brazil disagrees with the Article 21.5 Panel in Canada – Aircraft
(hereafter "the Article 21.5 Panel"), which, in its view, used a broad approach to identify the interest
rates provisions of the OECD Arrangement. According to Brazil, the relevant interest rates provisions
of the 1998 OECD Arrangement are those set forth in Articles 15 through 19 of the main text and
Article 22 of Annex III on civil aircraft.
5.93 Canada argues that the interest rates provisions at issue in the second paragraph of item (k)
include all those identified by the Article 21.5 Panel, that is to say, Articles 7-10 and 12-26 of the
main text of the OECD Arrangement as well as Articles 18-24 and Articles 27-29(a)-(c) of Annex III.
Canada also submits, however, that the term "interest rates provisions" arguably has a broader
meaning than that given to it by the Article 21.5 Panel.
5.94 As to third parties, the European Communities understands the term "interest rates
provisions" of the OECD Arrangement to refer to all provisions that may affect the interest rate of a
transaction, that is to say, all provisions containing substantive rather than procedural obligations.
The substantive provisions include those relating to the risk involved in a transaction. The European
Communities also considers that the matching of supported rates in accordance with Article 29 of the
OECD Arrangement is in conformity with the interest rates provisions of the OECD Arrangement.
The United States submits that the term "interest rates provisions" encompasses all the terms and
conditions of the OECD Arrangement. It would be illogical if a Member were unable to use the
matching provisions of the key enforcement provisions of the OECD Arrangement for fear that such
action might be deemed an export subsidy under the SCM Agreement.
5.95 The Panel notes that the parties disagree over the meaning of the term "interest rates
provisions" as it appears in the second paragraph of item (k). We further note that this issue has been
addressed recently and in great detail by the Article 21.5 Panel. Further, the parties have used the
findings of that Panel as a point of reference for their arguments. We will therefore take the relevant
findings of the Article 21.5 Panel as a starting point in our consideration of this issue.

87 Brazil's argument that the term "successor undertaking" was included in the GATT Subsidies Code
to refer to any possible action within the OECD between 1 January 1979, i.e. the effective date of the
OECD Arrangement, and 1 January 1980, i.e. the effective date of the GATT Subsidies Code, is not convincing.
Had the drafters intended to do so, they could have referred to the date of the entry into force of the GATT
Subsidies Code. In fact, we believe they would have done so precisely to preclude an interpretation of the term
"successor undertaking" which allows for the incorporation of successor undertakings which post-date the
effective date of the GATT Subsidies Code.

5.96 The Article 21.5 Panel began its inquiry into what were the "interest rates provisions" of the
OECD Arrangement by noting that, unlike the second paragraph of item (k), the OECD Arrangement
did not use or define the term "interest rates provisions".88 It was therefore incumbent on that Panel to
construe the term "interest rates provisions". It found that the "interest rates provisions" of the OECD
Arrangement were those provisions which "specifically" or "directly or explicitly" address interest
rates "as such". 89 With that interpretation in mind, the Article 21.5 Panel turned to the OECD
Arrangement to identify those provisions which were consistent with its interpretation of the term
"interest rates provisions". It indicated that it would base its conclusions on a reading of the OECD
Arrangement which was in accordance with the customary rules of interpretation of public
international law and which, in particular, was consiste nt with the ordinary meaning of the text of the
OECD Arrangement.90
5.97 The Article 21.5 Panel concluded that the following provisions of the OECD Arrangement
directly or explicitly pertained to interest rates as such: Article 15 (on minimum interest rates);
Article 16 (on the construction of CIRRs); Article 17 (on the application of CIRRs); Article 18 (on
cosmetic interest rates) and Article 19 (on official support for cosmetic interest rates). 91 It pointed
out, moreover, that the Sector Understanding on Export Credits for Civil Aircraft in Annex III to the
OECD Arrangement contained additional "interest rates provisions". Specifically with respect to
regional aircraft, the Article 21.5 Panel considered Articles 22 (on minimum interest rates with
respect to new aircraft) and 28b) (on minimum interest rates with respect to used aircraft) of the
Sector Understanding to constitute "interest rates provisions".92
5.98 In the instant proceedings, neither Brazil nor Canada disputes that the provisions of the
OECD Arrangement identified by the Article 21.5 Panel as pertaining directly or explicitly to interest
rates as such are, in fact, "interest rates provisions" within the meaning of the second paragraph of
item (k).93 We, for our part, are of the view that all of those provisions are properly viewed as
"interest rates provisions" within the meaning of that provision.94
5.99 We note that Canada as well as two third-party participants -- the European Communities and
the United States -- argue for a broader reading of the term "interest rates provisions". Concretely, the
European Communities invites us to read the term "interest rates provisions" as meaning all of the
"substantive provisions [of the OECD Arrangement] which can affect interest rates".
95 The United
States, on the other hand, would have us understand the term "interest rates provisions" as a shorthand
for "all of the terms and conditions of the Arrangement".96
5.100 Like the Article 21.5 Panel, we consider that the term "interest rates provisions" is not readily
susceptible of the broad meaning ascribed to it by Canada. As a matter of textual interpretation, we
are not persuaded that any substantive provision of the OECD Arrangement, by the mere fact that it
"affects" the minimum interest rates envisioned by the OECD Arrangement, ipso facto becomes an
"interest rate" provision. Nor do we see a possibility of reconciling the specific term "interest rates
provisions" with the view that "all" terms and conditions of the OECD Arrangement are interest rates

88 Article 21.5 Panel Report on Canada – Aircraft, supra, para. 5.83.
89 Ibid., paras. 5.83 and 5.91.
90 Ibid., 5.74 and 5.83.
91 Ibid., 5.83.
92 Ibid., 5.83 and 5.84.
93 See the parties' responses to Panel Question 25. The parties have not specifically discussed
Article 28b) (on minimum interest rates with respect to used aircraft). There can be no question, in our view,
that Article 28b) is an interest rate provision within the meaning of the second paragraph of item (k).
94 We consider that Article 19 of Annex III (on best endeavours to respect customary market terms)
also directly addresses interest rates.
95 EC Submission, footnote 21 (Annex C-1).

provisions. To accept that view would, in our opinion, be to disregard, even to render nugatory, the
explicit textual reference to "interest rates" provisions. This we do not feel entitled to do.97
5.101 We further note that, if an expansive reading of the term "interest rates provisions" were
adopted, then export credit practices with respect to which the 1998 OECD Arrangement establishes
no minimum interest rates -- and with respect to which the Arrangement establishes no disciplines
regarding interest rates -- would nevertheless be "in conformity with the interest rates provisions" of
the 1998 OECD Arrangement. In our view, it is not possible to read the second paragraph of item (k)
in such a manner that export credit practices which are not subject to the minimum interest rates set
forth in the 1998 OECD Arrangement are nevertheless in conformity with the interest rates provisions
of the Arrangement.98
5.102 In this respect, we agree with the Article 21.5 Panel that the only export credit practices
which are subject to the interest rates provisions of the 1998 OECD Arrangement at present and
which, therefore, are potentially "in conformity" with those provisions are those which are (i) in the
form of "official financing support", i.e. direct cred its/financing, refinancing or interest rate support,
(ii) have repayment terms of at least two years and (iii) have fixed interest rates.99 It is only in respect
of these categories of export credit practices that any minimum interest rates apply.
5.103 While the Article 21.5 Panel did not take a broad view of the term "interest rates provisions",
it considered that adherence to the "interest rates provisions" alone was insufficient for export credit
practices to qualify for the safe haven in the second paragraph of item (k). 100 Brazil, however,
contests that the safe haven clause contemplates compliance with any provisions of the OECD
Arrangement other than its interest rates provisions. In the light of Brazil's challenge, it is appropriate
to examine the reasons which support the view adopted by the Article 21.5 Panel.
5.104 The analysis of the Article 21.5 Panel is premised on the proposition that a requirement to
apply minimum interest rates, as envisaged in the OECD Arrangement (and thus also in the safe haven
clause), could not, in and of itself, place an effective limitation on the terms of official financing

97 In declining to make an expansive reading of the term "interest rates provisions", we are mindful of
the argument, advanced notably by the European Communities and the United States, that it would defeat the
purpose of the safe haven in the second paragraph of item (k) to make eligibility for the safe haven conditional
on conformity with nothing more than the interest rates provisions narrowly construed. We note, however, that
the Article 21.5 Panel addressed this argument through a consideration of what it meant for a practice to be "in
conformity with" the interest rates provisions of the OECD Arrangement. This issue is discussed at paras. 5.103
et seq.
98 Export credits benefiting from official support in the form of export credit insurance and guarantees,
while subject to certain provisions of the 1998 OECD Arrangement , are not currently subject to any minimum
interest rates. As explained by the Article 21.5 Panel, the implication of a broad interpretation of "interest rates
provisions" is that official support for export credit insurance and guarantees would qualify for the safe haven
even if the supported export credits were at interest rates below the minimum interest rates defined in the OECD
Arrangement. See Article 21.5 Panel Report in Canada – Aircraft , supra, para. 5.137 and footnote 117. In
addition, if export credit guarantees were covered by the safe haven, this would accord, de facto , more
favourable treatment to developed country Members than to developing country Members. To appreciate this, it
is necessary to recall that, through export credit guarantees, governments can effectively make their borrowing
rates available to borrowers. However, the borrowing rates for developed country governments are generally
lower than those of developing country governments. As a result, developing country Members -- to the extent
no longer exempt from the export subsidy prohibition -- could never meet the financing terms secured by
developed country Members through government guarantees. See Article 21.5 Panel Report in Canada –
Aircraft, supra, para. 5.136. In our view, these implications do not support the broad interpretation of the term
"interest rates provisions" advocated by the European Communities and the United States.
99 See Article 21.5 Panel Report on Canada – Aircraft, supra, paras. 5.81 and 5.106.
100 There is no need, however, to duplicate the reasoning of the Article 21.5 Panel. It is sufficient, for
present purposes, to outline the main analytical steps of the approach followed by the Article 21.5 Panel.

support.101 The Article 21.5 Panel submitted that any financing transaction consisted of a package of
financing terms and conditions, many of which affect the interest rate. Among these were the
maximum repayment term, the amount of the cash down payment and the timing of principal and
interest payments. The Article 21.5 Panel concluded on that basis that, if minimum interest rates were
prescribed when no limitations existed for those terms and conditions which could affect the
minimum interest rate, it would be easy to circumvent the limiting effect of that minimum interest
rate.
102 The Article 21.5 Panel pointed out, however, that the OECD Arrangement did impose
limitations on the generosity of the terms which affect its minimum interest rates provision.103
5.105 The safe haven clause, of course, only refers to the "interest rates provisions" of the OECD
Arrangement, including its minimum interest rates provision. The Article 21.5 Panel recalled,
however, that the safe haven clause spoke of "conformity with" the interest rates provisions of the
OECD Arrangement. In the view of the Article 21.5 Panel, it was appropriate to adopt a sufficiently
broad interpretation of the concept of "conformity" so as to guard against the possibility of
circumvention of the minimum interest rates provision. 104 More specifically, the Article 21.5 Panel
considered that conformity with the interest rates provisions of the OECD Arrangement had to be
judged on the basis of (i) conformity with the minimum interest rates provision, i.e. the CIRR, and (ii)
adherence to those provisions of the OECD Arrangement which "operate to support or reinforce the
minimum interest rate rule".105
5.106 The Article 21.5 Panel then considered which provisions of the OECD Arrangement operate
to support or reinforce the minimum interest rates provision. It concluded that the following
provisions performed a supporting or reinforcing function in respect of the minimum interest rates
provision: Article 7 (on minimum cash payments), Article 8 (on the definition of repayment terms),
Article 9 (on the definition of the starting point of credit), Article 10 (on maximum repayment terms),
Article 12 (on the classification of countries for maximum repayment terms), Article 13 (on the
repayment of principal), Article 14 (on the payment of interest), Article 20, as well as the related
Articles 21-24 (on minimum premium benchmarks), Article 25 (on local costs) and Article 26 (on the
maximum validity period for export credits).
106 With respect to regional aircraft, that Panel found that
the following provisions of Sector Understanding on Export Credits for Civil Aircraft in Annex III to
the OECD Arrangement also had to be respected, in addition to the minimum interest rates provision:
Article 21 (on maximum repayment terms for new aircraft), Article 28 (on maximum repayment terms
for used aircraft), Article 23 (on insurance premium and guarantee fees), Article 24 (on aid support),
Article 29a)-c) (on the financing of spare engines and spare parts) and Article 30 (on support for
maintenance and service contracts). 107 In identifying the above provisions, the Article 21.5 Panel
stressed that not all of them would necessarily be applicable to every transaction enjoying official
financing support.
108
5.107 The Article 21.5 Panel next considered various provisions of the OECD Arrangement which
authorize exceptions and derogations from the aforementioned terms and conditions. Specifically, the
issue was whether official financing support prov ided under those exceptions and derogations could
be viewed as being "in conformity" with the intere st rates provisions within the meaning of the safe

101 Ibid., para. 5.109. The Article 21.5 Panel stressed, in this regard, that the OECD Arrangement, by
its own terms, "seeks to encourage competition among exporters … based on quality and price of goods and
services exported rather than on the most favourable officially supported [export credit] terms" by placing
"limitations on the terms and conditions of export credits that benefit from official support". See ibid., paras.
5.82 and 5.110.
102 Ibid.
103 Ibid., para. 5.110.
104 Ibid.
105 Ibid., para. 5.114.
106 Ibid., paras. 5.116-5.117.
107 Ibid., para. 5.118.
108 Ibid., para. 5.119.

haven clause. The Article 21.5 Panel noted that the OECD Arrangement , by its terms, drew a
distinction between "permitted exceptions" and "derogations". 109 It found that permitted exceptions
were "in conformity" with the rules of the OECD Arrangement , inasmuch as they involved a
departure from relevant provisions of the OECD Arrangement in a way which was specifically
foreseen and permitted. 110 The Article 21.5 Panel thus concluded that, where official financing
support was provided under a permitted exception, the underlying transaction would nevertheless be
"in conformity" with the interest rates provisions of the OECD Arrangement and thus could qualify
for the safe haven in the second paragraph of item (k).111
5.108 With respect to derogations, on the other hand, the Article 21.5 Panel considered that they
were not "in conformity" with the rules of the OECD Arrangement , inasmuch as they involved a
departure from relevant provisions of the OECD Arrangement in a way which was not foreseen and
not permitted. 112 Accordingly, where official financing support "derogated" from one of the
provisions which could affect the minimum interest rates provision, the underlying transaction would
not be "in conformity" with the interest rates provisions of the OECD Arrangement and thus could not
qualify for the safe haven in the second paragraph of item (k).113
5.109 The Article 21.5 Panel also addressed the so-called "matching" provisions of the OECD
Arrangement which permit the Participants to the OECD Arrangement , within certain limits, to
"match" the terms and conditions offered by other Participants and by non-Participants. On this issue,
the Article 21.5 Panel took the view that matched permitted exceptions "conformed" with the
provisions of the OECD Arrangement and, hence, also "conformed" with the interest rates provisions
in the sense of the safe haven clause. 114 In contrast, matched derogations were not "in conformity"
with the provisions of the OECD Arrangement and, as a result, were also not "in conformity" with the
interest rates provisions in the sense of the safe haven clause. 115 The Article 21.5 Panel stated, in this
regard, that, if it were accepted that matched derogations were "in conformity" with the interest rates
provisions of the OECD Arrangement, then the concept of "conformity" could not possibly discipline
official financing support.116 The Article 21.5 Panel also recalled that non-Participants to the OECD
Arrangement would not, as a matter of right, have access to information regarding the terms and
conditions offered or matched by Participants. Such information was available only to Participants.
Thus, if matched derogations were eligible for the safe haven in the second paragraph of item (k),
non-Participants would be at a systematic disadvantage vis-à-vis Participants.117
5.110 Brazil argues that the approach taken by the Article 21.5 Panel is too broad and that the safe
haven clause only requires conformity with the interest rates provisions of the OECD Arrangement, as
identified by the Article 21.5 Panel. We disagree. The Article 21.5 Panel was correct, in our view, in
its underlying assumption that the OECD Arrangement provides for minimum interest rates in order
to discipline official financing support and that it was on the same grounds that the minimum interest
rates provision was incorporated into the safe haven clause. We also agree that minimum interest

109 Ibid., paras. 5.121 and 5.126.
110 Ibid., paras. 5.121 and 5.124. The Article 21.5 Panel referred to Articles 27b), 48 and 49 of the
OECD Arrangement. Ibid., para. 5.123.
111 Ibid., para. 5.126.
112 Ibid., paras. 5.121 and 5.125. The Article 21.5 Pa nel referred to Articles 28, 29 and 47b) of the
OECD Arrangement. Ibid., para. 5.125.
113 Ibid., para. 5.126.
114 Ibid., paras. 5.124 and 5.126. The Article 21.5 Panel referred to Articles 29 and 51 of the OECD
Arrangement as well as Articles 25, 29d) and 31 of the Sector Understanding on civil aircraft. Ibid., para. 5.124
and footnote 113.
115 Ibid., paras. 5.125 and 5.126. The Article 21.5 Panel referred to Articles 29 and 47b) of the OECD
Arrangement as well as Articles 25, 29d) and 31 of the Sector Understanding on civil aircraft. Ibid., para. 5.125
and footnote 113.
116 Ibid., paras. 5.120 and 5.125.
117 Ibid., para. 5.134.

rates, on their own, could not meaningfully exercise a limiting effect. As we see it, the minimum
interest rates were fixed, at a particular level, in the light of and with regard for the fixing of other
relevant parameters, i.e. credit terms and conditions. The intended limiting effect of the minimum
interest rates cannot, therefore, be achieved unless the relevant parameters are fully respected.
Consequently, the Article 21.5 Panel was justified, in our view, in adopting a reading of the concept
of "conformity with the interest rates provisions" wh ich safeguards the intended limiting effect of the
minimum interest rates provision of the OECD Arrangement by requiring adherence also to those
terms and conditions of the OECD Arrangement which support or reinforce the minimum interest
rates provision. We therefore conclude that eligibility of an individual financing transaction for the
safe haven in the second paragraph of item (k) cannot be judged on the basis of conformity with
minimum interest rates alone.
5.111 As concerns the list of provisions of the OECD Arrangement identified by the Article 21.5
Panel as reinforcing the minimum interest rates, we note that that list has not prompted specific
comments by the parties, with two exceptions. Brazil considers that Articles 7 of the main text and
29a) of Annex III do not affect interest rates. Brazil argues that Article 7 (on minimum cash
payments) affects the amount of the loan at issue, but not the interest rate. In our view, it may be
expected that, all other things being equal, a borrower seeking 100 per cent financing will have to pay
higher interest than a borrower which is prepared to put 15 per cent down. This will be especially true
in cases where the financing is secured by the property being financed. In any event, there can be no
doubt that Article 7 supports and reinforces the minimum interest rates provision as defined in the
OECD Arrangement . Assuming the applicable minimum interest rate is the same, a borrower
receiving an officially supported export credit which covers 100 per cent of the value of the export
credit is better off than a borrower receiving an officially supported export credit which covers only
85 per cent of the value of the export credit. The disciplining effect of the minimum interest rate
defined in the OECD Arrangement is not the same in each case.
5.112 With respect to Article 29a) (on financing of spare parts for aircraft), Brazil notes that that
Article limits spare parts financing to 15 or 10 per cent of the value of the transaction and that this
limitation does not affect the interest rate for the transaction. It should be noted that Article 29
distinguishes between financing for spare parts when ordered with aircraft and when not ordered with
aircraft. In the latter case, spare parts may be financed for either 5 or 2 years.
118 In cases where spare
parts are ordered together with aircraft, the total order comprising the aircraft plus spare parts may be
financed for 10 years (in the case of regional aircraft).119 In either situation, the minimum interest rate
is the same. 120 It may, in our view, be inferred from this distinction that financing at the minimum
interest rate defined by the OECD Arrangement -- i.e. at the level of the relevant CIRR -- is
"appropriate" in the case of spare parts not ordered with aircraft only for 2 or 5 years. Seen in this
light, we believe that Article 29a) is meant to prevent the "appropriate" rate for spare parts from being
circumvented. For Article 29a) places a limit on the percentage of spare parts that may be financed at
the "appropriate" rate for regional aircraft. Thus, we agree with the Article 21.5 Panel that
Article 29a) operates to support or reinforce the minimum interest rate for spare parts not ordered with
aircraft.
5.113 We also concur with the Article 21.5 Panel regarding the other provisions it identified as
constituting provisions which operate to support or reinforce the minimum interest rates.
121 In respect
of these other provisions, it should be noted, however, that particularly the European Communities
and the United States are of the view that the Article 21.5 Panel erred in concluding that financing

118 See Article 29b).
119 See Article 29a) in conjunction with Article 20 of Annex III.
120 See Article 15 and Article 22 of Annex III.
121 In our view, Article 19 of Annex III of the OECD Arrangement (on best endeavours to respect
customary market terms) may also be viewed as being one of the provisions which operates to support or
reinforce the minimum interest rates provision.

transactions involving matching of derogations were not eligible for the safe haven in the second
paragraph of item (k). We find the reasoning of the Article 21.5 Panel in this regard persuasive.
There is nothing in the arguments advanced by the two third parties which would give us grounds for
deviating from the findings of the Article 21.5 Panel.
5.114 It seems to us that both third parties tend to argue -- incorrectly -- from the standpoint of the
OECD Arrangement rather than from the standpoint of the safe haven clause and the SCM Agreement.
The United States considers that it would be unfortunate if Participants to the OECD Arrangement
were dissuaded from using its matching provisions for fear that doing so might be contrary to the
provisions of the SCM Agreement . The United States appears to suggest that, deprived of the
possibility of matching, Participants would somehow be left defenceless in the face of non-
conforming practices under the OECD Arrangement . This is not the case, however. It notably
overlooks the fact that, to the extent those non-conforming practices are covered by the
SCM Agreement, they would be enforceable through the WTO dispute settlement mechanism.
122
5.115 The European Communities asserts that the reasoning on matching by the Article 21.5 Panel
ignores the fact that the OECD Arrangement is a non-binding gentlemen's agreement. The
Article 21.5 Panel was well aware of the nature of the OECD Arrangement.123 As we understand it,
however, the Article 21.5 Panel based its view on the provisions of the SCM Agreement and the need
to prevent the scope of the safe haven clause from being improperly enlarged. 124 It convincingly
stated that, to accept, for purposes of the SCM Agreement, that even non-conforming departures from
the provisions of the OECD Arrangement were covered by the safe haven, would, in effect, remove
any disciplines on official financing support for export credits. The European Communities contests
that statement, arguing that the Participants to the OECD Arrangement consider matching to be
compatible with effective disciplines on officially supported export credits. However, the fact that the
OECD Arrangement allows matching of derogations does not logically imply that it should also be
allowed under the SCM Agreement. Indeed, the OECD Arrangement and the SCM Agreement are
very different. The European Communities itself acknowledges that the OECD Arrangement is a
non-binding gentlemen's agreement. In those circumstances, matching may serve an important
deterrent and enforcement function. That rationale for matching does not apply to the SCM
Agreement. The SCM Agreement is a binding instrument, and it is enforceable through the WTO
dispute settlement mechanism. The European Communities' argument is therefore unavailing.
5.116 What is more, the Article 21.5 Panel correctly noted that, if matching of derogations were not
subject to challenge under the SCM Agreement, Members could, in principle, match the practices of
non-Members. This would lead to the odd and unjustifiable result that a Member could justify the
provision of an otherwise prohibited export subsidy on the basis of measures taken by a non-
Member.
125 Another argument advanced by the Article 21.5 Panel which the European Communities
fails to mention is that matching could, de facto, lead to the elimination of special and differential
treatment of developing country Members provided for in Article 27 of the SCM Agreement, in so far
as export credit practices are concerned. To appreciate this, it is sufficient to recall the example given
by the Article 21.5 Panel, whereby a developed country Member matches the subsidized terms of a
developing country Member, even though those terms are in accordance with a provision according
special and differential treatment to that Member, such as Article 27 of the SCM Agreement.
126

122 It is worth noting here that, arguably, the findings of the Article 21.5 Panel in Canada – Aircraft did
not, in any event, affect the provisions of the OECD Arrangement requiring notification to other Participants of
non-conforming terms. Thus, if anything, Participants would be at an advantage vis-à-vis non-Participants in
terms of their abilities of monitoring compliance with the SCM Agreement.
123 See Article 21.5 Panel Report in Canada – Aircraft, supra, para. 5.82.
124 See ibid., para. 5.137.
125 Ibid., para. 5.138.
126 Ibid., para. 5.136.

5.117 Finally, we note the European Communities' view that the fact that non-Participants do not
receive the notifications of non-conforming terms which Participants receive should not stop them
from matching non-conforming offers. According to the European Communities, non-Participants
could simply proceed to match if they did not receive adequate information from the party which they
suspect of offering non-conforming terms. 127 Even were we to accept this point, non-Participants
would still be at a systematic disadvantage compared to Participants in all those situations where
Participants notify other Participants, on their own motion, of non-conforming terms, as required by
the OECD Arrangement.128 The European Communities' point fails to dispose of this argument.
5.118 In conclusion, having carefully considered the reasoning of the Article 21.5 Panel and the
arguments presented by the parties and third parties to these proceedings, we adopt the interpretation
adopted by the Article 21.5 Panel of the phrase "in conformity with [the interest rates provisions of
the OECD Arrangement]".
3. Examination of PROEX III
5.119 In the preceding Sections, we have considered a number of issues relating to the interpretation
of the second paragraph of item (k). We must now consider whether, in the light of our resolution of
those issues, PROEX III payments represent an export credit practice which is in conformity with the
interest rates provisions of the 1998 OECD Arrangement.
(a) The Distinction between Mandatory and Discretionary Legislation in the Context of an
Affirmative Defence
5.120 It will be recalled that we have found that it is the PROEX III scheme as such, i.e. the legal
framework for PROEX III, which is before this Panel, and that, applying the distinction between
mandatory and discretionary legislation, the question presented is whether Brazil is required to apply
PROEX III in a manner that gives rise to a prohibited export subsidy.129 However, at this point in our
analysis, we are dealing with an affirmative defence raised by Brazil under the second paragraph of
item (k). Thus, we are confronted with the preliminary issue of whether the distinction between
mandatory and discretionary legislation is applicable in the context of an affirmative defence under
the second paragraph of item (k).
5.121 Canada contends that the distinction between mandatory and discretionary legislation is not
applicable to the question of what a Member must do in order to invoke the second paragraph of
item (k) as an affirmative defence. Canada contends that a Member invoking the second paragraph of
item (k) must establish that its challenged actions ar e in conformity with the interest rates provisions
of the OECD Arrangement. According to Canada, a demonstration that the Member's internal law
allows it to act in conformity with the interest rates provisions of the OECD Arrangement would be
insufficient. Canada notes that, given the presumption that a Member will act in accordance with its
domestic legal requirements, one way for a Member to meet its burden would be to show that its
internal law requires it to act in conformity with the interest rates provisions of the
OECD Arrangement.
5.122 Brazil responds that, while it invokes the second paragraph of item (k) as an affirmative
defence, the mandatory/discretionary standard has nothing to do with the burden of proof. Rather, it
is a substantive standard. Once Brazil has established a prima facie case that PROEX III allows

127 The European Communities considers that this would, in fact, be analogous to what is provided for
in Article 53 of the OECD Arrangement. See EC Oral Statement, para. 22 (Annex C-4).
128 It is interesting to note, in this regard, that the United States appears to argue that the option pointed
out by the European Communities is inadequate in that the United States would require even non-Participants to
notify non-conforming terms to Participants. See US Submission, para. 24 (Annex C-3).
129 See para. 5.43.

compliance with the interest rates provisions of the OECD Arrangement, PROEX III should, under
the traditional mandatory vs. discretionary distinction, be considered to be in conformity with Brazil's
WTO obligations until Canada proves otherwise.
5.123 The Panel considers that the distinction between mandatory and discretionary legislation is
applicable in the context of the second paragraph of item (k). It is of course correct that, in the
present context, we are concerned not with conformity with a WTO obligation, but with conformity
with conditions attached to a WTO exception. This fact alone does not, however, render the
GATT/WTO distinction between mandatory and discretionary legislation inapplicable or
inappropriate.
130
5.124 In our understanding, the rationale underpinning the traditional GATT/WTO distinction
between mandatory and discretionary legislation is that, when the executive branch of a Member is
not required to act inconsistently with requirements of WTO law, it should be entitled to a
presumption of good faith compliance with those requirements. We consider that that rationale is no
less valid in the context of WTO exceptions than it is in the context of WTO obligations. Indeed,
were we to take the opposite view, we would, in effect, create a situation where Members would be
entitled to a presumption of good faith compliance with their WTO obligations, but not with the
conditions attached to WTO exceptions. Such a situation would, in our view, be unwarranted and
contrary to logic.
131
5.125 We have stated above that the Member invoking an exception as an affirmative defence has
the burden of establishing it. In our view, the allocation of the burden of proof is a procedural issue132
which is distinct from the substantive standard to be applied in assessing the conformity of legislation
with a particular provision of the WTO Agreement. Simply put, the allocation of the burden of proof
determines who must show something. On the other hand, the GATT/WTO distinction between
mandatory and discretionary legislation determines what somebody must show. We believe the
standard to be applied in judging the conformity of a piece of legislation with WTO requirements
should be the same irrespective of who has the burden of adducing argument and evidence sufficient
to establish a prima facie case of conformity.
5.126 Accordingly, the task before us is to examine whether, under PROEX III, Brazil is required to
act in a manner that is not in conformity with the interest rates provisions of the 1998 OECD

130 We are aware that the Article 21.5 Panel in Canada – Aircraft employed a different substantive
standard in determining whether certain Canadian measures qualified for the safe haven of the second paragraph
of item (k). Specifically, its inquiry focused on whether certain policy guidelines were sufficient to "ensure" the
conformity of the future application of a Canadian subsidy programme with the second paragraph of item (k).
See Article 21.5 Panel Report on Canada – Aircraft, supra, para. 5.141. Three observations should be made in
this respect. First, the Article 21.5 Panel adopted the "ensure" standard on the basis that Brazil and Canada
effectively agreed that this should be the applicable standard. In the present proceedings, the parties do not
agree that this Panel should apply the "ensure" standard. Second, the Appellate Body, in reviewing the report of
the Article 21.5 Panel, expressed some discomfort with the possible implications of applying a strict "ensure"
standard. The Appellate Body considered that no Member could provide "a strict guarantee or absolute
assurance as to the future application of [a measure] […] since no one can predict how unknown administrators
would apply, in the unknowable future, even the most conscientiously crafted compliance measure". See
Article 21.5 Appellate Body Report on Canada – Aircraft, supra, para. 38. Third, we recall that the Article 21.5
Panel in Canada – Aircraft was reviewing a subsidy programme as applied , and not a subsidy programme as
such. In the light of the foregoing, we think it would not be appropriate, in this case involving a challenge to the
PROEX III programme per se, to require Brazil to demonstrate that it is "ensuring" that all future PROEX III
payments in respect of regional aircraft will satisfy the requirements of the second paragraph of item (k).
131 It should be pointed out that the various exceptions provided for in the WTO Agreement are an
integral and important part of the carefully negotiated balance of rights and obligations of Members.
132 We note the Appellate Body's view that "… th e burden of proof is a procedural concept which
speaks to the fair and orderly management and disposition of a dispute." (Original Appellate Body Report on
Canada –Aircraft, supra, para. 198)

Arrangement133 or, expressed otherwise, whether PROEX III allows compliance with the interest rates
provisions.134
(b) Applicability of the Second Paragraph of Item (K)
5.127 As noted above, while the concept of "export credit practices" is a broad one, the only export
credit practices that are subject to the interest rates provisions of the 1998 OECD Arrangement and
thus potentially "in conformity" with those provisions are those which take the form of "official
financing support", i.e. direct credits/financing, refinancing and interest rate support. 135 Thus, in
examining whether PROEX III allows compliance w ith the interest rates provisions of the 1998
OECD Arrangement , we must first consider whether PROEX III payments are "official financing
support".
5.128 Brazil does not assert that PROEX III payments represent direct credits/financing or
refinancing. It does, however, assert that PROEX III payments are interest rate support. Brazil
recalls that the OECD Arrangement does not define "interest rate support". Brazil notes that the
OECD Arrangement says that the Participants themselves do not agree on the definition of the term.
Brazil also states that it has tried to find out from the OECD and OECD members what is meant by
"interest rate support", but that it has not received any useful answers. Brazil argues that, in any
event, PROEX III payments support the interest rate for a given transaction. Brazil considers,
therefore, that they are a form of interest rate support within any reasonable definition of the term.
5.129 Canada does not specifically contest that PROEX III payments are interest rate support. It
does, however, argue that PROEX III payments are significantly different from the interest rate
support practices of the Participants to, and do not conform to the interest rates provisions of the 1998
OECD Arrangement. Canada points out, first, that the level of buy-down provided by PROEX III is
divorced from the interest rate which prevails in the market when the transaction is approved. Canada
notes, second, that interest rate equalisation normally varies according to the difference between the
short-term interest rate during the period over which the financing is provided and the level at which
the interest rate was fixed for the borrower. When the market rate is below the rate at which support
was fixed, the financial institution would be required to pay back part of the interest rate support.
Canada submits that PROEX III payments constitu te a one-way flow from the government to a
financial institution and there is no requirement to pay back part of the support depending on the
market situation. Canada asserts, finally, that credit risk insurance or guarantee is usually provided in
association with interest rate support, which is not the case under PROEX III.
5.130 Among third parties, the European Communities considers that "interest rate support"
covers measures by which "official" bodies support interest rates without directly financing or
refinancing transactions or providing guarantees or insurance. Because PROEX III is a government
measure that allows the effective rate of interest to be lower than it would otherwise be, it is interest
rate support. Korea contends that a government can provide interest rate support by buying down
financing provided by a commercial lender, but declines to express a view as to whether PROEX III is

133 Were we to ask Brazil to establish that PROEX III requires Brazil to act in a manner consistent with
the interest rates provisions of the 1998 OECD Arrangement, legislation governing export credit practices would
need to set forth highly detailed, binding rules in order to benefit from the safe haven. Further, legislation that
allowed Participants the discretion to match non-conforming terms offered by other Participants or non-
Participants might also be WTO-inconsistent.
134 In a challenge to a particular application of legislation governing export credits, of course, the
Member invoking the second paragraph of item (k) as an affirmative defence would have to show actual
conformity with the interest rates provisions of the 1998 OECD Arrangement.
135 It is not in dispute that PROEX III is an "expor t credit practice" within the meaning of the second
paragraph of item (k); that PROEX III is available for export credit financing for regional aircraft with
repayment terms of two years or more; and that PROEX III applies in respect of export credits with fixed
interest rates. We see no need to disagree with the parties regarding these points.

interest rate support. The United States notes that "interest rate support" refers to practices under
which a government enters into an agreement on interest rates with a commercial bank that is
providing the export credit financing for an export credit transaction, but is not sufficiently familiar
with the facts to opine as to whether PROEX III payments, as applied, constitute interest rate support.
5.131 The Panel notes that the 1998 OECD Arrangement does not define the term "interest rate
support". It merely states that "interest rate support" is a form of official financing support. 136 Since
the 1998 OECD Arrangement does not give a special meaning to the term "interest rate support", we
must read it in accordance with its ordinary meaning in context.
5.132 We consider that, in its ordinary meaning, the term "interest rate support" relates broadly to
official support for one particular export credit term, namely the interest rate to be paid in connection
with export credits. Moreover, as a matter of relevant context, it is clear from the 1998
OECD Arrangement that interest rate support is distinct from direct credits/financing, refinancing,
export credit insurance and guarantees. 137 From this it may be deduced that official interest rate
support will normally involve government payments to providers of export credits. 138 F o r s u c h
payments to amount to "support", we think they need to be made with the aim or effect of securing net
borrowing rates for the recipients of export credits which are lower than they would have been in the
absence of official financing support.139
5.133 Turning to PROEX III, we note that BCB Resolution 2799 envisages payments by the
Government of Brazil to financial institutions "enough to render financing costs [i.e. net interest rates]
compatible with those practiced in the international market." 140 Thus, PROEX III provides for
support for interest rates ("financing costs"), involves payments by the Brazilian Government to
commercial providers of export credits and is designed to lower the net interest rates charged by
particular commercial lenders to levels which are compatible with those prevailing in the international
market. In light of this, we conclude that PROEX III support constitutes "interest rate support" as we
understand that term.
141
5.134 The above considerations also lead us to conclude that PROEX III is an export credit practice
subject to the interest rates provisions of the 1998 OECD Arrangement. Accordingly, PROEX III is
potentially in conformity with the interest rates provisions of the OECD Arrangement.
(c) Conformity with the Interest Rates Provisions of the 1998 OECD Arrangement
5.135 The safe haven of the second paragraph of item (k) is available, by its terms, to Participants to
the relevant undertaking on official export credits, i.e. the OECD Arrangement, as well as to those

136 See the Introduction to the 1998 OECD Arrangement . In fact, notes to the 1992 OECD
Arrangement indicate that "it has not proved possible to establish common definitions of interest rate and
official support in light of differences between long-established national systems …" See Article 24(m) 1992
OECD Arrangement. We see no indication in the text of the 1998 OECD Arrangement that these differences of
view among Participants have been resolved.
137 See the Introduction and Articles 2 and 15 of the 1998 OECD Arrangement.
138 See Article 21.5 Panel Report on Brazil – Aircraft, supra, para. 6.53 and footnote 53.
139 Canada argues that PROEX III payments are "significantly different from the interest rate support
practices of the Participants" (Canada's Response to Panel Question 17; Annex A-4). Our task, however, is not
to determine whether PROEX III is like practices of the Participants to the 1998 OECD Arrangement , but
whether it involves interest rate support within the meaning of the Arrangement. As for Canada's argument that,
whether or not PROEX III payments are interest rate support, they are not in conformity with the interest rates
provisions of the 1998 OECD Arrangement, we will address this in the context of our examination of whether
PROEX III allows Brazil to provide payments in conformity with those provisions.
140 Article 1 of BCB Resolution 2799. See also Article 1, paragraph 1 of the same Resolution, which
specifically relates to interest rate equalisation for export financing operations involving regional aircraft.
141 None of the Participants in these proceedings has specifically contested that PROEX III is properly
viewed as one form of "interest rate support".

Members that "in practice … appl[y] [its] interest rates provisions". Brazil is not a Participant to the
1998 OECD Arrangement, but claims that it will in practice apply the interest rates provisions of the
Arrangement. We are satisfied, therefore, that PROEX III can, in principle, qualify for protection
under the second paragraph of item (k) and that we may entertain Brazil's claim of justification under
that paragraph.142 Canada has not suggested otherwise.
5.136 Accordingly, we proceed to analyse whether PR OEX III, as such, is "in conformity with the
interest rates provisions" of the 1998 OECD Arrangement. We will first turn to the interest rates
provisions of the Arrangement and will then consider the Arrangement provisions supporting or
reinforcing the interest rates provisions.
(i) Interest Rates Provisions143
Article 22 of Annex III (on minimum interest rates)144
5.137 Brazil argues that BCB Resolution 2799 has brought a significant change to the
PROEX programme, in that it provides that interest rate support must not bring the net interest rate
below the CIRR. According to Brazil, PROEX III thus uses the CIRR as a floor. Brazil considers
that, by requiring that all PROEX III support "comply with" 145 the CIRR, PROEX III conforms to
Article 15 of the main text of the 1998 OECD Arrangement and Article 22 of Annex III thereof.
5.138 Canada does not dispute that BCB Resolution 2799 has revised PROEX II by adding the
requirement that interest rate support must be established "in accordance with" 146 the CIRR. Canada
argues, however, that the phrasing "in accordance with" imposes no explicit prohibition on interest
rate buy-downs to levels below the relevant CIRR.
5.139 The Panel recalls that Article 22 of Annex III requires the Participants providing official
financing support, including interest rate support, to apply minimum interest rates. More specifically,
the Participants are to "apply the relevant CIRR".
147 Brazil submits that by promulgating Article 1,
paragraph 1 of BCB Resolution 2799 it has met the requirements of Article 22. We agree, and so
conclude, for the following three reasons.
5.140 First, Article 1, paragraph 1 explicitly refers to the "CIRR" published monthly by the OECD.
Second, Article 1, paragraph 1 makes clear that the applicable or "relevant" CIRR is the CIRR
"corresponding to the currency and maturity of the operation". And third, Article 1, paragraph 1
requires "compliance with" and, hence, "application" of the relevant CIRR.148

142 We do not think that the mere fact that PROEX III has not yet been applied should preclude us from
entertaining Brazil's claim under the second paragraph.
143 For the sake of convenience Article 19 of Annex III (on best endeavours) is discussed below under
the heading "Provisions Supporting or Reinforcing the Interest Rates Provisions" even though it is also an
interest rates provision within the meaning of the second paragraph of item (k).
144 The conformity of PROEX III with Article 28b) of Annex III (on minimum interest rates for used
aircraft) is not specifically discussed here. However, we discuss the conformity of PROEX III with Article 28a)
below under a separate sub-heading. Our find ings under that sub-heading are applicable, mutatis mutandis, to
Article 28b) as well. In any event, Article 28b), like Article 22 of Annex III, incorporates by reference the
requirements of Article 15 of the main text of the 1998 OECD Arrangement.
145 Brazil translates the Portuguese phrase "respeitada a … CIRR" as "complying with" the CIRR.
146 Canada translates the Portuguese phrase "respeitada a … CIRR" as "in accordance with" the CIRR.
147 We note that Article 22 refers to Article 15 of the main text of the 1998 OECD Arrangement .
Article 15 contains the general minimum interest rates provision. Its wording is essentially identical to that of
Article 22 of Annex III, except that Article 15 spells ou t, in addition, the princi ples according to which the
CIRRs are to be established. For purposes of the present examination, these principles are not relevant.
148 It is our understanding from Brazil's submissions that, notwithstanding the provisions of Article 8,
paragraph 2 of BCB Resolution, the Export Credit Committee must comply with the CIRR in all cases involving

5.141 Canada disagrees with the last point, arguing that the wording of Article 1, paragraph 1 would
not prevent Brazil from supporting net interest rates at below-CIRR level. The Portuguese version of
BCB Resolution 2799 uses the words "respeitada a … CIRR", which Brazil translates as "complying
with". We are satisfied that this is an accurate translation and also that this language requires Brazil
to "respect" or "comply with" the relevant CIRR.149
5.142 In any event, we recall that we are examining the consistency of the PROEX III scheme as
such and that the question before us is, therefore, whether PROEX III allows compliance with the
interest rates provisions of the 1998 OECD Arrangement. Even if Canada were correct that BCB
Resolution 2799 did not require that net interest rates supported by PROEX III be at or above the
CIRR, it certainly envisions that they will be. Thus, we cannot say that PROEX III does not allow
compliance with Article 22 of Annex III.
Article 16 (on the construction of CIRRs) and Article 17 (on the application of CIRRs)
5.143 Brazil notes that Article 16 deals with the construction of CIRRs. Brazil points out, in this
regard, that it does not construct CIRRs. Rath er, Brazil explains, it follows and applies them,
particularly the CIRR constructed by the United States for the dollar. With respect to Article 17a),
Brazil argues that it is not relevant to PROEX III because PROEX III does not fix the interest rate.
According to Brazil, Article 17b) is also not relevant because it deals with floating interest rates.
Brazil recalls that PROEX III, by its terms, only applies to fixed rates.
5.144 Canada considers that Brazil has offered no evidence of conformity with Article 17.
According to Canada, Article 17 contains important conditions on how to define the interest rate that
is appropriate for a given transaction. Canada submits, in particular, that, given the expansive
discretion enjoyed by the Government of Brazil, it can only be expected that Brazil would use this
discretion in applying Article 17 and waive the 20 basis point margin to be added to the CIRR in cases
where the terms of the official financing support are fixed before the contract date.
5.145 The Panel first turns to Article 16, which deals with the construction of CIRRs. There is no
indication in the evidence on record that Brazil itself constructs CIRRs. Moreover, Article 1,
paragraph 1 of BCB Resolution 2799 states that interest rate support for transactions involving
regional aircraft must comply with the CIRR "publ ished monthly by the OECD corresponding to the
currency and maturity of the operation". Thus, Brazil simply adopts the relevant CIRR as published
by the OECD. It also follows that Brazil uses the base rate system selected by the Participants for
their own national currencies.
150 For these reasons, we conclude that PROEX III is consistent with the
provisions of Article 16.
5.146 Article 17 has two sub-paragraphs. Article 17a) states that the interest rate applying to a
transaction shall not be fixed for a period longer th an 120 days. It also requires that a margin of 20
basis points be added to the CIRR if the terms of the official financing support are fixed before the
contract date.

transactions in the regional aircraft sector. See, e.g., Brazil's Response to Panel Question 1 (Annex B-5);
Brazil's First Submission, para 44 (Annex B-1).
149 Canada translates the phrase "respeitada a … CIRR" as "in accordance with the CIRR". According
to the Appellate Body, however, the expression "in accordance with" is synonymous with "in conformity with".
See Appellate Body Report on Korea – Measures Affecting Imports of Fresh, Chilled and Frozen Beef ,
WT/DS161/AB/R, WT/DS169/AB/R, adopted 10 January 2001, para. 111. Thus, even accepting Canada's
translation as accurate, BCB Resolution 2799 would be consistent with Article 22.
150 See Article 16d).

5.147 In reviewing PROEX III for conformity with Article 17a), it must be borne in mind that, once
the Export Credit Committee has approved a request for PROEX III support, a letter of commitment is
issued to the applicant.151 As we explained in our previous Article 21.5 report, such a letter
[… ] commits the Government of Brazil to providing support as specified for the
transaction provided that the contract is entered into according to the terms and
conditions contained in the request for approval, and provided that it is entered into
within a specified period of time, usually 90 days [… ]. If a contract is not entered
into within the specified time, the commi tment contained in the letter of approval
expires.
152
5.148 PROEX III is not different from PROEX II with respect to the maximum period for offers of
interest rate support.153 We therefore have no basis for finding, at this point, that offers of PROEX III
support will not be in conformity with the 120-day maximum period laid down in Article 17a).
5.149 We also found in our previous Article 21.5 report that applicants requested letters of
commitment prior to conclusion of a formal agreement with the buyer. 154 Assuming that remains the
case, the minimum net interest rate Brazil could fix would be the relevant CIRR plus 20 basis points.
It should be noted, in this regard, that Article 1, paragraph 1 of BCB Resolution 2799 requires that the
CIRR be the floor rate. It does not oblige Brazil to approve interest rate support at the CIRR in all
cases. In fact, it specifically states that the extent of the interest rate support to be provided is to be
established "on a case-by-case basis".
155 On its face, PROEX III is not, therefore, inconsistent with
the provisions of Article 17a). At a minimum, we cannot say that PROEX III does not allow Brazil to
comply with this provision.
5.150 Article 17b) applies to situations where official financing support is provided for floating rate
loans. It provides that financial institutions must not be allowed to offer borrowers the option of the
lower of either the CIRR, at the level prevailing on the date of the original contract, or the short-term
market rate throughout the life of the loan. Brazil submits that PROEX III only applies to fixed rate
export credits.
156 We consider that this assertion is consistent with Article 1, paragraph 1 of BCB
Resolution 2799, which, to recall, stipulates that PROEX III support must not reduce net interest rates
below the CIRR level. This suggests to us that Br azil could not support export credits which entail
the possibility, envisaged in Article 17b), of net interest rates (temporarily) below the CIRR. We
therefore agree with Brazil that Article 17b) is not applicable to PROEX III. At a minimum, we
cannot say that PROEX III does not allow Brazil to comply with this provision.
Articles 18 and 19 (on official support for cosmetic interest rates)
5.151 Brazil notes that Articles 18 and 19 concern cosmetic interest rates, which are rates below the
CIRR. Brazil recalls that PROEX III sets the CIRR as the minimum interest rate. Brazil considers,
therefore, that Articles 18 and 19 are not relevant to PROEX III.
5.152 Canada submits that, if PROEX III payments are interest rate support, Articles 18 and 19 are
relevant to PROEX III.

151 See Article 8, letter d) of BCB Resolution 2799.
152 Article 21.5 Panel Report on Brazil – Aircraft, supra, para. 2.5. See also the Article 21.5 Appellate
Body Report on Brazil – Aircraft, supra, para. 11.
153 See, inter alia, Brazil's Response to Panel Question 1 (Annex B-5); Canada's Comments on Brazil's
Response to Panel Question 1 (Annex A-5).
154 Article 21.5 Panel Report on Brazil – Aircraft, supra, para. 2.5.
155 See Brazil's Responses to Panel Questions 1 and 13 (Annex B-5).
156 See Brazil's Comments on the United States' Response to Panel Question 26 (Annex B-6). Brazil
also refers to Article 1, paragraph 2 of BCB Resolution 2799. See Brazil's First Submission, para. 44
(Annex B-1).

5.153 The Panel agrees with Canada that Articles 18 and 19 apply to official financing support in
the form of interest rate support. 157 Interest rate support must not, therefore, be offered at cosmetic
interest rates.158 Article 18 defines cosmetic interest rates as rates below the relevant CIRR which
benefit from official support.
5.154 PROEX III does not allow for interest rate suppo rt to bring down net interest rates below the
level of the relevant CIRR. 159 PROEX III does not, in other words, allow Brazil to offer interest rate
support at cosmetic rates. We are satisfied, therefore, that PROEX III is in conformity with the
relevant provisions of Articles 18 and 19. At a minimum, we cannot say that PROEX III does not
allow Brazil to comply with this provision.
(ii) Provisions Supporting or Reinforcing the Interest Rates Provisions
Article 7 (on minimum cash payments)
5.155 Brazil argues that according to Article 5 of Directive 374 interest rate support is limited to 85
per cent financing of the value of the sale. Brazil submits that this conforms to the requirements of
Article 7. Brazil acknowledges that Article 8, paragraph 2 of BCB Resolution 2799 allows the Export
Credit Committee to depart from the 85 per cent rule. Brazil contends, however, that the Committee
may provide interest rate support based on more than 85 per cent of the export value of the sale only if
the applicant in question can convince the Committee that this would be consistent with the terms
prevailing in the international market. According to Brazil, the Committee is not obliged to deviate
from the 85 per cent rule.
5.156 Canada submits that Brazil has failed to establish that PROEX III support is limited to 85 per
cent of the value of the aircraft. Canada notes that Directive 374 is not a measure taken to revise
PROEX II, but one that already applied to PROEX II. Canada considers that Article 5 of
Directive 374 imposes only a nominal limitation, given that Brazil has the authority to waive the 85
per cent limit. Canada also refers to certain reported statements by Brazilian officials, among them a
statement by Brazil's then-Foreign Minister Lampreia, reported in Brazil's press in the weeks before
BCB Resolution 2799 was made operational, to the effect that Brazil would provide financing for 100
per cent of the value of the aircraft. Canada argues that these statements confirm that there will be
waivers of the 85 per cent rule under PROEX III.
5.157 The Panel notes that Article 7 obliges the Participants to the 1998 OECD Arrangement to
require purchasers of goods which are the subject of official support to make cash payments of a
minimum of 15 per cent of the export contract value at or before the starting-point of credit. Both
Canada and Brazil interpret Article 7 to require that official support for export contracts must not
exceed 85 per cent of the export contract value. We see no need to disagree with that interpretation
and, accordingly, conduct our analysis on that basis.
5.158 Brazil's claim of conformity with Article 7 is based, in the main, on Article 5 of
Directive 374. Article 5 stipulates that the maximum percentage admitted for purposes of interest rate
equalisation is 85 per cent of the export value under a contracted sale, limited to the financed part.
Canada has not argued that Article 5 fails to satisfy the requirements of Article 7. For our part, we are
satisfied that the provisions of Article 5 are not, as such, inconsistent with those of Article 7.
5.159 Brazil acknowledges that, notwithstanding the provisions of Article 5, the Export Credit
Committee may approve requests for PROEX III support even if such support exceeds 85 per cent of
the export contract value. According to Brazil, this discretionary power is granted to the Committee

157 See the first tiret of Article 19b).
158 See ibid.
159 See Article 1, paragraph 1 of BCB Resolution 2799.

under Article 8, paragraph 2 of BCB Resolution 2799. Brazil argues that, in accordance with the
provisions of that Article, the Committee could -- but would not be required to -- approve interest rate
support in excess of 85 per cent of the export contract value only if this were consistent with the terms
prevailing in the international market.
5.160 We note that it is legally possible for Brazil to approve interest rate support exceeding the 85
per cent limit, but that Brazil is not obliged to do so. Thus, by necessary implication, PROEX III
allows Brazil to comply with Article 7. In fact, the Export Credit Committee is required to adhere to
the maximum percentage set forth in Article 5 of Directive 374 unless it affirmatively decides to use
the discretion conferred on it under Article 8, paragraph 2 of BCB Resolution 2799. 160
5.161 This finding is unaffected by Canada's argument that Article 5 of Directive 374 existed
already prior to PROEX III. Even if Article 5 did not, as Canada alleges, impose any disciplines in
respect on PROEX II, we see no justification for assuming, on the basis of an alleged past practice,
that Brazil will, much less that it is required to apply PROEX III in a manner inconsistent with
Article 7.
5.162 Canada relies on public statements by certain Brazilian officials, as reported in the Brazilian
press, for its claim that Brazil will not apply PROEX III in such a way that it will respect the
requirements of Article 7. We do not preclude that official statements of a Member regarding how it
intends to apply a programme could be relevant to an assessment of the WTO-consistency of that
programme per se to the extent they could be seen as committing the relevant Member under its
domestic legal system to apply the programme in a certain manner. However, in our view, the
statements referred to by Canada cannot properly be seen as legally committing the Government of
Brazil to apply PROEX III in a particular manner. Nor do we understand Canada to so argue.
161
5.163 In conclusion, therefore, we find that PROEX III, as such, is in conformity with Article 7.
Article 13 (on repayment of principal) and Article 14 (on payment of interest)
5.164 Brazil is of the view that Article 13 does not contain mandatory provisions. Brazil submits,
moreover, that, in any event, Article 4 of BCB Resolution 2799 conforms with the requirements of
Articles 13 and 14 in that it provides for the calculation of the amounts due for equalisation purposes
on a six-month basis, the issuance of NTN-I bonds also on a six-month basis and a maximum grace
period of six months for the repayment of the principal sum.
5.165 Canada accepts that the Participants may have a certain amount of flexibility under
Article 13 with respect to some aspects of the repayment schedule which may be used. According to
Canada, Article 13 leaves Participants no flexibility, however, with respect to the timing of the first
instalment of principal. In this regard, Canada alleges that Article 2 of Directive 374 enables Brazil to
approve transactions in which, contrary to Article 13, the first payment of principal is made more than
six months after the starting point of credit. Canada further submits that Article 14 requires more than
just the payment of interest on a six-monthly basis. Specifically, Canada notes that, to the extent

160 Canada does not argue that Brazil is required to depart from the provisions of Article 5 of Directive
374. It goes without saying that, if Brazil were to make use of that possibility, it would not be operating within
the legal constraints imposed by the second paragraph of item (k).
161 The most pertinent statement submitted by Canada is that of the then-Foreign Minister of Brazil
who is reported to have said, some time before PROEX III entered into force, that the maximum percentage of
interest rate support would be 100 per cent. We agree with Canada that the Minister's statement, assuming it
was accurately reported, suggests that Brazil does not intend to apply PROEX III in a manner that would
comply with the safe haven. On the other hand, we note that the statement in question was made before
PROEX III came into force and, hence, before Brazil formally claimed to be in conformity with its WTO
obligations. We further note that the relevant comments were made by a Minister who was not in charge of the
administration of PROEX and that they were apparently made to a journalist.

PROEX III is used to buy down risk premiums, Brazil would not be providing interest rate support as
envisaged in Article 14.
5.166 The Panel recalls that Article 13 of the 1998 OECD Arrangement requires that the principal
sum of an export credit must normally be repaid in equal and regular instalments not less frequently
than every six months, with the first instalment to be made no later than six months after the starting
point of credit. Article 14 of the 1998 OECD Arrangement stipulates that interest must not normally
be capitalised during the repayment period, but must be paid not less frequently than every six
months, with the first payment to be made no later than six months after the starting point of credit.
5.167 We recall that we have agreed with the Article 21.5 Panel in Canada – Aircraft that, where
official financing support was provided under a permitted exception, the underlying transaction would
nevertheless be in conformity with the interest rates provisions of the 1998 OECD Arrangement.
162
We note that Articles 13a) and 14a) provide that principal and interest "shall normally" be treated in a
particular fashion. We further note that Article 49 of the 1998 OECD Arrangement , entitled
"Permitted Exceptions: Prior Notification Without Discussion" includes notification of a Participant's
intention "not to follow normal payment practices with respect to the principal or interest referred to
in Articles 13 a), b) and 14 a)". 163 Thus, we conclude that Brazil may be in conformity with the
interest rates provisions of the 1998 OECD Arrangement even if it does not respect these
provisions.164
5.168 We agree with Canada that one element of Article 13a), the requirement that the first
instalment of principal be made within six months after the starting point of credit, is subject to a non-
derogation engagement under Article 27 of the 1998 OECD Arrangement. It thus is not a permitted
exception. Canada alleges that Article 2 of Directive 374 enables Brazil to approve transactions
which do not comply with this element of Article 13a).
165 Canada does not, however, contend that
Brazil is required to approve transactions that do not comply. Further, Canada does not address
Article 3 of BCB Resolution 2799, referred to by Brazil 166, which specifically requires that the
principal of the underlying commercial export credit be repaid in six-monthly instalments and that the
first instalment be made six months after one of certain specified events. 167 In the absence of a
response from Canada, we see no reason to reject Brazil's assertion that Article 3 of BCB Resolution
2799 may be applied consistently with Article 13a).
Articles 20–24 (on minimum premium benchmarks)
5.169 Brazil considers that the provisions of the 1998 OECD Arrangement on minimum premiums
do not apply to interest rate support and are, therefore, not relevant to PROEX III. Brazil notes that

162 See Section E.2(c) supra.
163 Article 49a)2) of the 1998 OECD Arrangement.
164 We note that Article 3 of BCB Resolution 2799 in any event appears to require that both principal
and interest be repaid in six-month (or "semi-annual") instalments.
165 Article 2 of Directive 374 does not appear to place any limit on the grace period for principal which
may be negotiated for exports.
166 Brazil has explained to us that Article 3 of BCB Resolution 2799, which post-dates Directive 374,
limits any flexibility which exists under Article 2 of Directive 374. See Brazil's Comments on Canada's
Response to Panel Question 16 (Annex B-6). We see no reason to disagree with Brazil on this point.
167 PROEX III stipulates that, depending on the case, the starting point of credit is the date of shipment
or delivery of the goods, of the invoice, or of the commercial or financing contract. Article 9 of the 1998 OECD
Arrangement provides that the starting point of credit "in the case of a contract for the sale of capital goods […]
useable in themselves (e.g. locomotives)" is the date on which the buyer takes possession of the goods in his
own country. We assume regional aircraft fall within the scope of this provision. The reference in PROEX III
to the date of "delivery of the goods" is, in our view, consistent with the language of Article 9. As regards the
other starting points contemplated under PROEX III, we cons ider that they would, likewise, be consistent with
Article 9 to the extent that the relevant events do not occur after the delivery of the goods.

the language of Article 20 expressly omits interest rate support from the application of the minimum
premiums. Brazil also points out that PROEX III does not provide protection to the lender for
possible default by the borrower. Brazil considers that there is, therefore, no need for charging a
premium.
5.170 Canada agrees that interest rate support is not covered by Article 20 because its provision
does not remove the risk of non-repayment by the borrower for the lending institution. Canada also
acknowledges that this risk can only be assumed wh en a government provides interest rate support in
association with a guarantee or insurance in respect of the credit risk.
5.171 The Panel notes that Article 20 requires the Participants to the 1998 OECD Arrangement to
charge the appropriate minimum premium rate wh en providing official support through direct
credits/financing, refinancing, export credit insurance and guarantees. Article 20 conspicuously fails
to include interest rate support in the categories of official support for which a minimum premium is
to be charged. This raises the issue of whether this omission should be given meaning. No party or
third party to these proceedings suggests that, under the 1998 OECD Arrangement, governments must
necessarily provide interest rate support in conjunction with credit risk insurance or guarantees. This
being so, it is not apparent why governments should be required to charge a premium when they do
not assume an obligation to compensate exporters or financial institutions in the case of default by
borrowers.
168 In the light of this, we consider it implausible that the concept of interest rate support
was omitted in Article 20 by inadvertence. We therefore conclude that interest rate support is not
covered by the provisions of Article 20 or the other provisions dealing with the issue of minimum
premiums, i.e. Articles 21-24.169
5.172 Since we have found that PROEX III support constitutes interest rate support and since it has
not been suggested that PROEX III requires the Government of Brazil to provide interest rate support
in association with credit risk insurance or guarantees, we conclude that PROEX III is not subject to
the provisions of Articles 20-24.170
Article 25 (on local costs) and Article 26 (on maximum validity periods for export credit terms)
5.173 Brazil notes with respect to Article 25 that PROEX III does not provide for the financing of
local costs. As concerns Article 26, Brazil considers that the maximum validity periods for lines of
credits do not apply to interest rate support such as PROEX III.
5.174 Canada has not addressed the conformity of PROEX III with Articles 25 and 26.

168 For the same reason, we do not appreciate the Eur opean Communities' assertion that the provision
of pure interest support amounts to a circumvention of the minimum premium provisions of the 1998 OECD
Arrangement. See the European Communities' Response to Panel Question 27 (Annex C-6).
169 It is important to note, however, as did the Article 21.5 Panel in Canada – Aircraft , that " [… ] a
transaction that involve [s] interest rate support and a guarantee or insurance would need to respect the interest
rate provisions of the Arrangement, as well as the requirements pertaining to minimum premia [… ] t o be ' i n
conformity' with the interest rate provisions of the Arrangement." (Article 21.5 Panel Report on Canada –
Aircraft, supra, footnote 103; emphasis added.)
170 The European Communities, in our view, mischaracterizes PROEX III when it asserts that it is the
economic equivalent of an insurance or guarantee. See the European Communities' Response to Panel Question
27 (Annex C-6) and also Canada's Comments on Brazil's Response to Panel Question 11 (Annex A-5). It is true
that interest rate support under PROEX III may, in effect, reduce the risk of non-repayment by the borrower
inasmuch as lower interest rates make it easier for the borrower to meet its obligation to repay the principal sum
and pay interest. However, this kind of risk reduction is not at issue in Articles 20-24, which are not concerned
with interest rate support. It is also very different from the kind of risk reduction associated with export credit
insurance and guarantees. Unlike in the case of pure interest rate support, credit risk insurance or guarantees
require a government to compensate the lender in case the borrower actually fails to repay the principal sum or
pay interest. No such requirement is envisaged under PROEX III.

5.175 The Panel is not aware, and has not been made aware, of any requirement or authorization,
under PROEX III, of official support for local costs. Article 25 on local costs is not, therefore,
relevant to the issue of whether or not PROEX II I is in conformity with the second paragraph of
item (k).
5.176 As regards Article 26, we note that it lays down a six-month maximum validity period for
individual offers of particular export credit terms. Assuming that Article 26 applies to interest rate
support (a question we do not here decide), we see nothing in the legal instruments submitted to us
which would require Brazil to fix the credit terms under PROEX III for a period exceeding six
months. To the contrary, we recall that letters of commitment issued by the Export Credit Committee
as a usual matter are valid for 90 days. 171 We therefore have no basis for finding that PROEX III
support will not be in conformity with the six-month maximum validity period laid down in
Article 26.172
Article 19 of Annex III (on best endeavours)
5.177 Brazil submits that Article 19 imposes a hortatory burden on Participants to use best
endeavours to respect the terms of that chapter of Annex III which deals with new non-large civil
aircraft. Brazil argues that PROEX III is in conformity with this article since it requires that the
relevant CIRR be the minimum interest rate which may be offered.
5.178 Canada notes that Article 19 talks about the most generous terms that Participants may offer
when providing official support. Canada is of the view that Brazil cannot, therefore, claim conformity
with Article 19 on the sole basis that PROEX III requires a minimum interest rate of the CIRR.
5.179 The Panel notes that Article 19 has two sentences. The first sentence makes clear that the
Participants to the 1998 OECD Arrangement must not offer more favourable terms than those set
forth in the chapter of Annex III which deals with new non-large civil aircraft, specifically in Articles
21-24.173 For reasons which are explained under the relevant headings of our inquiry, we are satisfied
that PROEX III does not envisage, much less require, that Brazil provide more generous terms than
those permitted under Articles 21 (on maximum repayment terms), 22 (on minimum interest rates), 23
(on insurance premium and guarantee fees) and 24 (on aid support).
5.180 The second sentence of Article 19 requires the Participants to continue to respect "customary
market terms" for the different categories of aircraft and to "do everything in their power" to prevent
these terms from being eroded. 174 In considering whether PROEX III "respect [s] the customary
market terms" for regional aircraft, we must recall the provisions of Article 8, paragraph 2 of BCB
Resolution. They instruct the Export Credit Committee to approve only those requests for PROEX III
support which are consistent with "the financing terms practiced in the international market". We are
of the view that this language is compatible with that of Article 19.
175 With respect to the other

171 See also our discussion above, at paras. 5.146-5.148, of Article 17 of the 1998 OECD Arrangement.
172 We recall that no letters of commitment have been issued under PROEX III in respect of regional
aircraft. See Brazil's Response to Panel Question 10 (Annex B-5).
173 We note that Article 19 refers to the "provisions of this Chapter". The Chapter of which Article 19
is part is entitled "Scope" and does not discuss the "terms that Participants may offer". It seems to us, therefore,
that the reference to "this Chapter" must be a reference to the Chapter entitled "Provisions for Export Credits
and Aid", which includes Articles 21-24. That Chapter does address the terms which Participants may offer.
174 Article 19 is entitled "Best Endeavours", but in the operative text uses the term "shall". It is not
necessary, for purposes of our inquiry, to take a position on whether Article 19 is mandatory in nature.
175 As we have explained above, we do not understand Article 8, paragraph 2 to use only "commercial"
market terms as a benchmark. On the other hand, the ordinary meaning of the term "customary market terms"
as it appears in Article 19 does not appear to be so lim ited either. In fact, it appears that, in practice, the
"customary market terms" for regional aircraft are terms which result from some form of official support. See

requirement in the second sentence of Article 19 -- that Participants must do everything in their power
to prevent an erosion of the customary market terms -- we think that Brazil, by promulgating
Article 8, paragraph 2 of BCB Resolution 2799, has "done" enough to bring PROEX III, as such, in
conformity with this requirement.
5.181 In view of the foregoing, we conclude that PROEX III, as such, is in conformity with the
provisions of Article 19 of Annex III.
Article 21 of Annex III (on maximum repayment terms)
5.182 Brazil submits that PROEX III complies fully with the requirements of Article 21 of
Annex III, which stipulates that the maximum repayment term for Category A aircraft, such as those
of Embraer, is 10 years. Brazil argues that the basis for its assertion that the maximum length of the
financing term under PROEX III is 10 years is the specific requirement to that effect in Directive 374
and the requirement of Article 1, paragraph 1 of BCB Resolution 2799 that interest rate equalisation
must be provided in compliance with the CIRR as well as BCB Circular Letter 2881. Brazil notes that
Article 8, paragraph 2 of BCB Resolution 2799 contains an exception. According to Brazil, that
provision allows, but would not require, the Export Credit Committee to approve requests for interest
rate support in excess of 10 years, if doing so woul d be consistent with the terms prevailing in the
international market.
5.183 Canada considers that PROEX III is inconsistent with Article 21 of Annex III in that it
allows for a repayment term in excess of 10 years for regional aircraft. Canada asserts that the
limitations referred to by Brazil, specifically those in Directive 374, BCB Resolution 2799 and BCB
Circular Letter 2881, are meaningless in the light of Brazil's admission that it can waive the 10-year
requirement under the provisions of Article 8, paragraph 2 of BCB Resolution 2799. Canada notes
that Brazil has admitted, in the first Article 21.5 proceedings, that, notwithstanding the fact that
Directive 374 and BCB Circular Letter 2881 already existed at the time, the 10-year term was
frequently waived for regional aircraft. Canada also refers to certain reported statements by Brazilian
officials, among them a statement by Brazil's then-Foreign Minister Lampreia, reported in Brazil's
press in the weeks before BCB Resolution 2799 was made operational, to the effect that there would
be no limits on the length of terms. Canada argues that these statements provide confirmation of the
fact that there will be waivers of the 10-year maximum financing term under PROEX III. Canada
submits, finally, that Brazil's actual practice confirms its non-conformity with the 10-year
requirement. Canada alleges that, in two recent cases, Brazil offered financing support through
Embraer that did not respect the 10-year maximum term.
5.184 The Panel notes that Article 21 of Annex III provides that the maximum repayment term for
Category A aircraft is 10 years.
176 It is common ground that Brazilian regional aircraft fall within
Category A. Both Brazil and Canada have construed the provisions of Article 21 -- in the context of
these proceedings concerning PROEX III -- as placing a limitation on the amount of time for which
interest rate support may be granted. We consider it appropriate to adopt that interpretation for
purposes of our analysis.
5.185 We begin our analysis with Article 3, paragraph 1, sub-paragraph II of Directive 374.
According to that provision, the term for interest rate equalisation may not exceed the maximum term
indicated for the good in the annex to Directive 374. The annex in question specifies, in relevant part,

Brazil's Response to Panel Question 4 (Annex B-5). This reinforces our view that Article 8, paragraph 2 is not,
as such, inconsistent with Article 19.
176 We note that Article 10 of the main text of the 1998 OECD Arrangement also contains rules on the
maximum repayment term. However, pursuant to Article 3c) of the 1998 OECD Arrangement, Annex III of the
OECD Arrangement prevails where it contains a corresponding provision. We believe Article 21 of Annex III
is a corresponding provision within the meaning of Article 3c). There is, therefore, no need separately to
examine the conformity of PROEX III with Article 10.

that the maximum financing term for aeroplanes (HS code 8802, except 8802.11 and 8802.20) is 120
months, i.e. 10 years. This, in our view, is fully consistent with Article 21 of Annex III. As an
additional matter, it is worth pointing out that the other provisions relied on by Brazil, that is to say,
Article 1, paragraph 1 of BCB Resolution 2799 and BCB Circular Letter 2881, support that
conclusion, albeit indirectly.177
5.186 Article 8, paragraph 2 of BCB Resolution 2799 allows, but does not require, the Export Credit
Committee to approve requests for interest rate support with maximum terms exceeding 10 years,
provided that this is consistent with the terms pr evailing in the international market. Thus, Brazil
could, in our view, apply PROEX III in such a wa y that it would respect the 10-year maximum term
in all cases, simply by declining to use its discre tion to waive the 10-year maximum term set forth in
Directive 374.
5.187 We note that, in accordance with Article 3, paragraph 2 of Directive 374, the term for
equalisation payment referred to in Article 3, paragraph 1, sub-paragraph II (on maximum
equalisation terms) "may be extended" up to a maximum of 96 months, depending on the unit value of
the good in the place of shipment. The parties differ regarding the meaning of Article 3, paragraph 2.
It is not necessary for us to take position on this issue. Even if Article 3, paragraph 2 allowed Brazil
to extend the maximum term of interest rate support for regional aircraft by a maximum of 8 years
beyond the 10-year maximum found in the Annex to Directive 374, it is quite clear that that provision
does not require Brazil to grant extensions.
178 Thus, the mere existence of Article 3, paragraph 2 of
Directive 374, assuming that it allows extensions of the maximum equalisation terms, does not
warrant the conclusion that PROEX III, as such, is not in conformity with Article 21 of Annex III.
5.188 Canada submits that, in the recent past, Brazil frequently waived the requirements set forth in
Article 3, paragraph 1, sub-paragraph II, as well as under BCB Circular Letter 2881, which, in
Canada's view, establishes that those requirements impose no real discipline. Even if these
requirements were waived in the past, we see no justification for assuming, on the basis of an alleged
past practice, that Brazil will, much less that it is required to apply PROEX III in a manner
inconsistent with Article 21 of Annex III.179
5.189 Canada considers that indications already exist as to how PROEX III will be applied. In
support of this contention, Canada refers to a number of press reports and reported statements by
Brazilian officials. According to one such statement, attributed to the then-Foreign Minister of Brazil,
Brazil will not respect the 10-year maximum term for interest rate equalisation. As we have stated,
when addressing Article 7 of the 1998 OECD Arrangement , we do not preclude that official
statements of a Member regarding how it intends to apply a programme could be relevant to an
assessment of the WTO-consistency of that programme per se to the extent they could be seen as
committing the relevant Member under its domestic legal system to apply the programme in a certain
manner. However, in our view, the statements referred to by Canada cannot properly be seen as
legally committing the Government of Brazil to ap ply PROEX III in a particular manner. Nor do we
understand Canada to so argue.

177 Article 1, paragraph 1 of BCB Resolution 2799 refers to the relevant CIRR. Both parties agree that
there is currently no CIRR for loan terms in excess of 10 years. To that extent, Brazil is correct that, as a
practical matter, Brazil could not offer financing in excess of 10 years at the CIRR level . With respect to BCB
Circular Letter 2881, it is sufficient to note that it is consistent with Brazil's contention that there is a 10-year
maximum term for interest rate equalisation. We need not decide here whether Circular Letter 2881, on its own,
imposes limits the maximum term for equalisation. In fact, we note that Article 4, paragraph 1 of BCB
Resolution 2799 states that the maximum terms for equalisation are to be established by means of a Ministerial
Directive. Circular Letter 2881 does not appear to constitute a Ministerial Directive.
178 Article 3, paragraph 2 uses the phrase "may be extended".
179 See also our findings concerning the conformity of PROEX III with Article 7 of the 1998 OECD
Arrangement, which address the same issue.

5.190 We are left, then, with Canada's allegation that, in two recent cases, Brazil has offered interest
rate support, through Embraer, on terms which do not satisfy the requirements of Article 21 of
Annex III. Brazil states that it has not issu ed any letters of commitment under PROEX III with
respect to regional aircraft and that the Government of Brazil is not responsible for what sales persons
from Embraer may or may not "offer" to prospective buyers of regional aircraft. We recall our
finding that Brazil has not, under PROEX III, issued any letters of commitment concerning regional
aircraft. Canada has not contested these statements, much less offered any evidence to the contrary.
Nor has Canada provided any evidence that the Government of Brazil, as opposed to Embraer sales
representatives, has otherwise "offered" interest rate support under PROEX III for terms in excess of
10 years.
180 Canada has, therefore, failed to establis h that PROEX III has been applied, in two recent
cases, in a manner inconsistent with Article 21 of Annex III.181
5.191 For the reasons set forth above, we conclude that PROEX III, as such, meets the requirements
of Article 21 of Annex III.
Article 23 of Annex III (on insurance premium and guarantee fees) and Article 24 of Annex III (on
aid support)
5.192 Brazil submits that the provisions of Article 23 do not apply to PROEX III, because it does
not involve guarantees. Brazil also notes that PROEX III does not contain provisions permitting aid
support.
5.193 Canada does not specifically address the conformity of PROEX III with Articles 23 and 24.
5.194 The Panel recalls that there is nothing in the record which would indicate that PROEX III
support will include credit risk insurance or guarantees or that it will be used for aid purposes.
182 For
that reason, Articles 23 and 24 of Annex III are not, in our view, relevant to our examination of
PROEX III.
Article 28a) of Annex III (on used aircraft)
5.195 Brazil argues that PROEX III does not contemplate the issue of used aircraft or the
possibility of PROEX III support for used aircraft sale s. Brazil states that it is not aware that the
Brazilian industry has made any sales of used aircraft and points out that no PROEX commitments
have been made to support sales of used aircraft. In the view of Brazil, Articles 27 and 28 are not,
therefore, relevant to PROEX III.
5.196 Canada submits that, as the regional aircraft market matures, it is possible that Brazil could
be in a position to market used aircraft in the futu re. Canada considers that Articles 27 and 28 would
be relevant to PROEX III.
5.197 The Panel notes that, on its face, PROEX III does not specifically envisage supporting export
financing operations involving used regional aircraft. The Panel also takes note of Brazil's statement
that no PROEX commitments were made in the past in respect of export sales of used aircraft.
Canada has offered no evidence to the contrary. It is true, as Canada points out, that Brazil could, in
the future, be in a position to sell used regional aircraft. However, until and unless it does so, we do

180 Canada has provided us with sworn declarations of people who claim to know about the terms
offered by Embraer in the relevant sales campaigns involving regional aircraft.
181 We recall our finding that we cannot review the practice involving PROEX III payments because
Brazil has not issued any letters of commitment under PROEX III in respect of regional aircraft. See Section A
supra. It is precisely for this reason that our review is restricted to PROEX III as such.
182 See Brazil's Comments on Canada's Response to Panel Question 24 (Annex B-6).

not think Brazil is obliged, at this point, to establish the conformity of PROEX III with Article 28a) of
Annex III.183
Article 29a) of Annex III (on spare engines and spare parts ordered with aircraft)
5.198 Brazil points out that Article 6 of Directive 374 permits applicants to include spare parts
financing in their application for equalisation support and gives the Export Credit Committee the
discretion to finance up to 20 per cent of the spare parts included in a transaction. Brazil argues,
however, that the Committee is not required to do so and will not do so with respect to regional
aircraft because of the insignificant percentage of the value of the spare parts included in regional
aircraft export sales. Brazil considers, therefore, that Article 6 conforms to the requirements of
Article 29a).
5.199 Canada submits that Article 6 of Directive 374 allows for financing of up to 20 per cent for
spare parts, whereas Article 29a) limits financing for spare parts to a maximum of 15 per cent of the
aircraft price for the first five aircraft and to 10 per cent for the sixth and subsequent aircraft. Canada
considers, therefore, that Article 6 explicitly exceeds the limit laid down in Article 29a). Canada also
asserts that, in any event, Brazil regularly uses its discretion to waive the limits on PROEX.
5.200 The Panel notes the provisions of Article 29a), according to which spare engines and spare
parts, when ordered with aircraft, may be financed on the same terms as the aircraft.
184 However,
Article 29a) makes this possibility subject to the requirement that account be taken of the size of the
fleet of each aircraft type. Accordingly, for the first five aircraft of a particular type in the fleet,
financing of spare engines and spare parts may be provided up to an amount equivalent to 15 per cent
of the aircraft price. For the sixth and subsequent aircraft of that type in the fleet the financing of
spare engines and spare parts must not exceed an amount equivalent to 10 per cent of the aircraft
price.
5.201 The parties disagree over whether PROEX III, and in particular Article 6 of Directive 374, is
consistent with the provisions of Article 29a). Article 6 states:
Parts and spares may be included in a transaction, in a consolidated form, up to a
limit of twenty percent (20%) of the aggregate value of the other goods.
5.202 As an initial matter, we note that Brazil does not contest that Article 6 applies to the financing
of spare parts for regional aircraft. We further note that the provisions of Article 6, on their face, set
a maximum percentage for spare parts financing which exceeds that set out in Article 29a), no matter
what the size of the fleet of a given aircraft type. Brazil does not dispute this either. Instead, it argues
that Article 6 is a discretionary provision. According to Brazil, Article 6 gives the Export Credit
Committee the discretion to approve spare parts financing equivalent to a maximum of 20 per cent of
the aircraft price, but does not require it to do so.
5.203 In considering this issue, we focus on the phrase "may be included in a transaction". It is
clear to us that the "transaction" at issue in Article 6 is the transaction for which PROEX III support is
sought. The characteristics of the transaction for which PROEX III support is requested are

183 We note that Article 27 of Annex III states that certain of the provisions dealing with new non-large
aircraft are applicable also to used non-large aircraft. However, since Brazil has not been shown to support or to
envisage supporting export credits for used aircraft, it is not required, at this point, separately to establish the
conformity of PROEX III with those provisions.
184 Sub-paragraphs b) and c) of Article 29 deal with new spare engines and spare parts which are not
ordered with aircraft. As Canada's complaint is dir ected at those parts of the PROEX III programme which
relate to the financing of exports of regional aircraft, we need not examine the conformity of PROEX III with
these provisions. Article 29c) is, in any event, not rele vant to these proceedings since it deals with new spare
engines for large rather than regional aircraft.

negotiated by the exporter and the buyer. They decide whether or not to "include" spare parts in a
transaction. Article 6, as we understand it, makes clear that transactions for which PROEX III support
is requested may include spare parts and are thus e ligible, in principle, for PROEX III support. It is
also apparent from Article 6 that if transactions include spare parts worth in excess of 20 per cent of
the price of the principal good of the transaction, they are not eligible for PROEX III support. Thus,
we are not convinced that the Committee could, on the basis of Article 6 , refuse to approve a request
for PROEX III support for a transaction which includes spare parts worth up to 20 per cent of the
price of the principal good in question.
5.204 We recall, however, Brazil's uncontested statement to the effect that the Export Credit
Committee has discretion regarding whether or not PROEX III support is provided, even where a
request for PROEX III support meets all applicable eligibility criteria. 185 It follows that the
Committee could deny PROEX III interest rate equalisation in cases where the value of the spare parts
exceeded the maximum percentage set forth in Article 29a).
5.205 We therefore conclude that PROEX III, as such, does not require Brazil to act in a manner
that is not in conformity with Article 29a).
4. Conclusion
5.206 For the foregoing reasons, we conclude that PROEX III as such allows Brazil to act in
conformity with the 1998 OECD Arrangement. Thus, Brazil has successfully invoked the safe haven
provided for in the second paragraph of item (k) in respect of PROEX III as such.
5.207 It should be emphasized that the scope of our ruling is limited to PROEX III as such. We do
not express any view as to whether the actual provision of PROEX III interest rate equalisation
payments in respect of regional aircraft will benefit from the safe haven in the second paragraph of
item (k).
5.208 We have concluded thus far that PROEX III, as such, is not inconsistent with Article 3.1(a) of
the SCM Agreement and that it is, in any event, justified under the safe haven in the second paragraph
of item (k). Therefore, we could exercise judicial economy and thus not examine Brazil's alternative
defence under the first paragraph of item (k). We reca ll, however, that this is the second time we are
called on to review Brazil's measures to comply with the recommendations and rulings of the DSB.
In these circumstances, we consider that providing a complete resolution of the issues before us will
not only assist the parties in achieving a full and effective solution to this dispute, but will also
facilitate the Appellate Body's task in case this Panel Report is appealed.
F.
FIRST PARAGRAPH OF ITEM (K)
5.209 It will be recalled that Brazil argues that even if PROEX III constituted an export subsidy
within the meaning of Article 3.1(a) of the SCM Agreement , PROEX III would nonetheless not
constitute a prohibited export subsidy. We have completed our analysis of Brazil's first affirmative
claim in its defence, i.e. Brazil's claim that PROEX III is covered by the safe haven of the second
paragraph of item (k). We now examine Brazil's other affirmative claim in its defence, which relies
on the provisions of the first paragraph of item (k) of the Illustrative List.
1. General
5.210 Brazil argues that, even if PROEX III constituted an export subsidy within the meaning of
Article 3.1(a) of the SCM Agreement , and even if it were not covered by the "safe haven" of the

185 See Brazil's Response to Panel Question 5 (Annex B-5). For a discussion of the discretionary
features of PROEX III see Section D.2(b)(iv) supra.

second paragraph of item (k), it would nevertheless not be prohibited because PROEX III payments
do not secure a material advantage in the field of export credit terms within the meaning of the first
paragraph of item (k). Brazil accepts that, for this defence to succeed, it must establish (i) that the
first paragraph of item (k) may be used to establish that PROEX III is not a prohibited export subsidy
(possibility of an a contrario interpretation of the first paragraph), (ii) that PROEX III payments are
payments within the meaning of the first paragraph of item (k) and (iii) that PROEX III payments are
not used to secure a material advantage in the field of export credit terms.
5.211 Canada rejects Brazil's defence under the first paragraph of item (k). Canada agrees,
however, that it is up to Brazil to make a prima facie case with respect to each of the three elements
referred to by Brazil. Canada also invites the Pane l to make detailed findings in respect of all three
elements in order to facilitate the effective resolution of the present dispute.
5.212 The Panel recalls that the first paragraph of item (k) identifies as an export subsidy:
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
borrowed 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)
5.213 Brazil submits that PROEX III payments are payments by the Government of Brazil "of the
costs incurred by exporters or financial institutions in obtaining credits". Brazil maintains, however,
that PROEX III payments are not "used to secure a material advantage in the field of export credit
terms" and that, therefore, they are not prohibited export subsidies.
5.214 In our view, Brazil's claim presents three issues. First, is Brazil correct, as a legal matter, that
the first paragraph of item (k) may operate as an affirmative defence? Second, are PROEX III
payments "payments" within the meaning of the first paragraph of item (k)? Third, are PROEX III
payments used to secure a material advantage in the field of export credit terms? We agree with the
parties that, if Brazil is correct that the first paragraph of item (k) may operate as an affirmative
defence, then Brazil would have the burden of proof with respect to the latter two issues. We further
note that, if Brazil is unsuccessful with respect to any of the three issues presented, Brazil's alleged
affirmative defence must fail.
186
2. Payment of the Costs Incurred in Obtaining Credits
5.215 We first examine whether Brazil has demonstrated that PROEX III payments are payments
within the meaning of the first paragraph of item (k).
5.216 Brazil contends that PROEX III payments are "payments" within the meaning of the first
paragraph of item (k). Brazil further argues that the language "payment of […] the costs incurred by
exporters or financial institutions in obtaining credits" contemplates that exporters and financial
institutions "obtain" credits. Neither exporters nor financial institutions, however, "obtain" credits
simply to hoard them. In Brazil's view, both "provide" to export purchasers the credits they have
previously "obtained". Brazil considers that the first sentence of the first paragraph of item (k)
supports this view. That sentence deals with the grant by governments "of export credits at rates
below those which they actually have to pay for the funds so employed". Brazil argues that, just as
the use of the term "export credits" in the first part of the first paragraph of item (k) justifies an

186 See Article 21.5 Appellate Body Report on Brazil – Aircraft, supra, para. 58.

interpretation of "credits" as meaning the same in the latter part, so the reference to "the funds so
employed" in the first part justified an interpretation of the word "obtaining" in the second part as
meaning "obtaining the funds [that are] so employed" when they are subsequently provided to export
purchasers.
5.217 Brazil argues that the Government of Brazil, in making PROEX III payments, bears all or part
of the costs incurred by exporters or financial institutions in obtaining credits. According to Brazil, in
situations where the lending institution is outside of Brazil, PROEX III offsets, at least partially, the
costs faced by Embraer, the Brazilian exporter, in obtaining for its customer a financial package that
is competitive in the market. On the other hand, in situation where the lending institution is in Brazil,
it is, in Brazil's view, the bank in Brazil itself which must obtain dollars in the market in order to
provide dollar credits. PROEX III payments offset, at least in part, the added costs faced by Brazilian
institutions in obtaining the credits they provide. Therefore, in Brazil's view, PROEX III is covered
by the first paragraph of item (k).
5.218 Canada notes that the "payment" clause in the first paragraph of item (k) refers to situations
where an exporter or a financial institution incurs costs by obtaining credits at rates higher than those
at which it lends to a purchaser, and a government pays for all or part of this difference. According to
Canada, PROEX III payments are not payments to cover the costs incurred by exporters or Brazilian
financial institutions in raising funds used for financing purchases. In Canada's view, they are simply
cash grants made for the benefit of purchasers of Brazilian exported regional aircraft. As such, they
are not "payments" within the meaning of the first paragraph of item (k).
5.219 Canada further submits that PROEX III payments are available to purchasers even when they
finance their purchases outside Brazil and through non-Brazilian banks. In such instances, any
"payments" by Brazil do not cover the cost incurred by a financial institution or an exporter in
"obtaining credits". Canada adds that, even if financing is offered by Brazilian financial institutions,
PROEX III payments are made to reduce interest rates below market rates, rather than to reimburse an
exporter or a financial institution for costs incurred in obtaining credits. Canada submits that there is
no evidence that PROEX III payments reimburse an exporter or financial institution for anything.
5.220 Among the third parties, the European Communities considers that the interpretation of the
"payment" clause should not turn on who formally receives the payment or incurs the cost. The
European Communities considers that such an approach would allow circumvention of the disciplines.
According to the European Communities, the purpose underlying item (k) is to avoid distortions of
competition arising out of export credit practices. Therefore, in the view of the European
Communities, it is the attractiveness of the package for the buyer that is important, not the details of
the payments between the actors involved. The United States believes that interest rate buy-downs
such as PROEX III fall within the scope of the "pay ment" clause. For the United States, the intent of
the "payment" clause is to reduce the risk to the exporter or financial institution lending money to a
borrower. The United States submits that buying dow n interest rates reduces the risk incurred by the
exporter or financial institution, which, in turn, results in lower lending costs. The savings thus
gained by the exporter or financial institution constitute the "payment" within the meaning of the first
paragraph of item (k).
5.221 The Panel recalls that the "payment" clause of the first paragraph of item (k) reads as follows:
… the payment by [governments] of all or part of the costs incurred by exporters or
financial institutions in obtaining credits …
5.222 In the previous Article 21.5 proceedings, we said the following in respect of the meaning of
the "payment" clause:

… we note first the use of the word "credits" in the plural. It seems clear in context
that the word "credits" refers to "export credits" as used earlier in the paragraph.
Second, the costs involved are those relating to obtaining export credits, and not costs
relating to providing them.
[… ]
Further, if the drafters had intended to refer to payments related to a financial
institution's cost of borrowing, the first part of the first sentence of item (k)
demonstrates that they knew how to do so.187
5.223 Based on this interpretation, we found that the financial institutions involved in financing
PROEX-supported transactions provided export credits, but that they could not be seen as obtaining
export credits. We therefore concluded that PROEX II payments were not "payments" within the
meaning of the first paragraph of item (k). Th at conclusion remains correct also with respect to
payments under PROEX III.
5.224 In the present proceedings, however, Brazil submits that our interpretation of the "payment"
clause was incorrect and that the clause should instead be construed to refer to the "payment of … the
costs incurred by exporters or financial institutions in obtaining the [export] credits [they provide to
borrowers]".188 Brazil argues that, thus interpreted, the "payment" clause covers PROEX III
payments.
5.225 For purposes of resolving the issue before us, we need not take position on the interpretation
of the "payment" clause advocated by Brazil. 189 Even assuming Brazil's interpretation were correct,
Brazil has, in our view, failed to demonstrate that PROEX III payments are payments by the
Government of Brazil of all or part of the costs incurred by Embraer or financial institutions "in
obtaining the export credits they provide".
5.226 Brazil argues that, when the financial institution is outside of Brazil, Embraer, i.e. the
Brazilian exporter, faces costs in obtaining export credits for its customers. While this may or may
not be true, PROEX III payments are made to financial institutions financing exports of regional
aircraft, not to Embraer. Thus, we fail to perceive how PROEX III payments could represent the
payment of all or part of the costs incurred by Embraer in "obtaining the export credits it provides".190
5.227 Brazil further argues that, when the financial institutions are Brazilian banks, PROEX III
payments help offset those banks' higher cost of raising funds internationally (Brazil risk). We thus
understand Brazil to argue that PROEX III payments are used where a Brazilian financial institution
provides export credits at rates which are below those it had to pay to obtain the export credits.
However, we see nothing in PROEX III that relates the availability of PROEX III payments to a
situation where the export credits are being provided by a Brazilian financial institution at below its
costs. In fact, nothing in PROEX III links interest rate equalisation in any way to costs incurred by
financial institutions "in obtaining the export credits they provide".

187 Article 21.5 Panel Report on Brazil – Aircraft, supra, para. 6.71 and 6.72.
188 See Brazil's Oral Statement, para. 74 (Annex B-3).
189 We note that, like Brazil, the United States considers that PROEX III payments are covered by the
"payment" clause, albeit for different reasons. Accordin g to the United States, measures by Members, including
interest rate buy-downs, which reduce the risk to the financial institution lending money to a borrower are
within the scope of the "payment" clause. We consider that the United States has failed to substantiate its view
on the basis of the text of the "payment" clause, opting instead to rely on the ostensible "intent" of the clause.
Moreover, we agree with Canada that the United Stat es' reading of the "payment" clause would improperly
enlarge the scope of the "payment" clause, such that it could cover even official support for export credit
guarantees and insurance.
190 We recall that Brazil does not argue that Embraer itself provides export credits.

5.228 In accordance with the foregoing, we conclude that PROEX III payments do not fall within
the scope of the "payment" clause of the first paragraph of item (k).
3. Material Advantage
5.229 Since we have found that PROEX III payments are not payments within the meaning of the
first paragraph of item (k), Brazil has not established its defence under the first paragraph. In the
interests of facilitating a full resolution of this dispute, however, we proceed to analyse whether Brazil
is correct that PROEX III payments are not "used to secure a material advantage in the field of export
credit terms" within the meaning of the first paragraph of item (k).
5.230 To resolve this issue, we must, as an initial ma tter, identify the appropriate benchmark, in the
present case, for determining whether PROEX III is "used to secure a material advantage in the field
of export credit terms". Once we have defined the relevant benchmark, we will examine whether
PROEX III complies with that benchmark.
(a) Appropriate Benchmark
5.231 Brazil is of the view that the CIRR, on its own, is an appropriate benchmark for assessing
whether PROEX III is used to secure a material advantage.
5.232 Canada considers that the determination of whether a material advantage exists must be
based on a consideration of all relevant export credit terms rather than on a comparison of only
interest rates. Moreover, a CIRR benchmark cannot be conclusive on the issue because it does not
take into account the creditworthiness of individual borrowers. Canada submits, finally, that, in the
present dispute, the CIRR is not an appropriate interest rate benchmark and that Brazil must,
therefore, employ an alternative interest rate benchmark.
5.233 The Panel will first address Brazil's argument that the CIRR alone is an appropriate
benchmark and will then consider Canada's argument that a benchmark other than the CIRR should be
used in the circumstances of the present case.
(i) Appropriateness of the CIRR Alone
5.234 According to Brazil, it is apparent from the Article 21.5 Appellate Body report on Brazil –
Aircraft that, to establish that PROEX III payments are not used to secure a material advantage, Brazil
need only establish that the net interest rates under PROEX III are at or above the relevant CIRR. The
Appellate Body has determined, in other words, that a payment that results in a net interest rate above
a CIRR benchmark does not confer a material advantage.
5.235 Canada agrees that the Appellate Body considered the CIRR an appropriate market
benchmark for purposes of the first paragraph of item (k). However, Canada considers that the
Appellate Body could not have been referring to the CIRR stripped of the other terms and conditions
set out in the OECD Arrangement. The CIRR is an interest rate which is constructed within the
context of the OECD Arrangement . The Appellate Body has recognised that, under the
OECD Arrangement, the CIRR can only be used when certain other terms and conditions are also
respected. As a matter of treaty interpretation, those other requirements constitute context for
understanding the relevance of the CIRR as a market benchmark. If those other requirements are not
met, the CIRR is not an appropriate market benchmark. Compliance with the CIRR alone cannot,
therefore, establish, in and of itself, that PROEX III does not secure a material advantage.
5.236 As always, the starting-point for the Panel's analysis is the text of the first paragraph of
item (k), which identifies as a prohibited export subsidy:

… the payment by [governments] 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.
5.237 We note that the first paragraph of item (k) refers to the securing of a material advantage "in
the field of export credit terms". In our view, th is broad formulation implies that, when examining
whether a payment is used to secure a material advantage, it would not suffice to consider only the
interest rate resulting from that payment. Rather, the examination should extend to all relevant terms
of the export credit in question. Thus, the first paragraph of item (k) indicates, in its ordinary
meaning, that the presence or absence of a mate rial advantage cannot be determined on the basis of
the applicable interest rate alone, irrespective of other export credit terms.
5.238 However, we are not, in this case, writing on a blank slate. The Appellate Body has already
had occasion to pronounce on what constitutes an appropriate benchmark for assessing whether a
"payment" within the meaning of the first paragr aph of item (k) is "used to secure a material
advantage in the field of export credit terms".
5.239 The parties to these proceedings differ regarding the correct interpretation of relevant
statements by the Appellate Body. Brazil attaches particular importance to the following statement
made by the Appellate Body in its Article 21.5 report on Brazil – Aircraft:
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 relevant CIRR, the
specific "market benchmark" identified in the original dispute as an "appropriate"
basis for comparison; or, that an alternative "market benchmark", other than the
CIRR, is appropriate, and that the net interest rates under the revised PROEX are at or
above this alternative "market benchmark".191
5.240 In these proceedings, Brazil argues for the appropriateness of a "CIRR only" benchmark. The
Appellate Body's statement is relevant to this issue in two respects. First, it emerges that Brazil may
indeed use the relevant CIRR as an "appropriate market benchmark" for determining whether the net
interest rates resulting from the "revised PROEX" are used to secure a "material advantage in the field
of export credit terms".
192 Second, the Appellate Body's statement makes no mention of any export
credit terms other than interest rates. This could conceivably be construed to support Brazil's view
that the CIRR, on its own, is dispositive of the existence of a material advantage.
5.241 However, we must be careful not to read the Appellate Body's statement in isolation and out
of context. In this regard, Canada draws our attention to a footnote in the same Article 21.5 report,
where the Appellate Body notes 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.193
5.242 It is clear to us from this statement that the Appellate Body was aware of the fact that, for
purposes of the OECD Arrangement , the CIRR can only be offered to borrowers if certain other
export credit terms and conditions are respected. In the light of this, we find it implausible to assume
that the Appellate Body meant to suggest that, for purposes of the first paragraph of item (k) , the

191 Article 21.5 Appellate Body Report, supra, para. 67 (footnote omitted).
192 There is no apparent reason why the Appellate Body's statement should not apply to the "revised
PROEX" at issue in these proceedings, i.e. PROEX III.
193 Article 21.5 Report on Brazil - Aircraft, supra, footnote 68 (reference omitted).

CIRR can be offered to borrowers irrespective of what the other export credit terms and conditions
are. We do not think that the Appellate Body would have introduced such a significant distinction sub
silentio.
5.243 In fact, when considering the implications of the view that, with respect to the first paragraph
of item (k), the CIRR, on its own, is an appropriate market benchmark, we have no hesitation in
concluding that the Appellate Body could not have adopted that view. On that view, Members could,
for instance, support export credits with net interest rates at CIRR level, repayment terms of 100
years, no cash payment requirement and with the principal sum to be repaid at the very end of the
credit term. To accept this possibility would, in our view, deprive the material advantage clause of
the first paragraph of item (k) of any useful effect.
5.244 By way of a final consideration, we wish to note that the Appellate Body's failure specifically
to acknowledge the importance of export credit terms other than the CIRR itself may well have been
inspired by the wording of the second paragraph of item (k). Like the Appellate Body's statement, the
second paragraph only refers to an "interest rate" benchmark, which, in essence, is the CIRR. Yet, as
discussed above, this reference in the second paragraph to the CIRR does not imply that export credit
practices benefit from the safe haven even if they do not conform to those provisions of the OECD
Arrangement which operate to support or reinforce the CIRR.
5.245 In conclusion, and for the reasons set forth above, we find that the Appellate Body did not
mean to suggest, at para. 67 of its Article 21.5 report on Brazil – Aircraft , that compliance with the
CIRR alone would, ipso facto, be dispositive of the issue of whether relevant payment support for
export credits is used to secure a material advantage in the field of export credit terms.
5.246 Having found that compliance with the CIRR alone is not sufficient to establish that
PROEX III does not confer a material advantage, it is necessary to determine, next, what terms and
conditions PROEX III would need to respect, in addition to the CIRR, to justify a finding that
PROEX III does not secure a material advantage.
5.247 We recall that, in reaching its conclusion that the CIRR was a relevant international
benchmark for determining whether payments were used to secure a material advantage in the field of
export credit terms, the Appellate Body relied upon the second paragraph of item (k) as relevant
context.
 194
5.248 As we have already seen, the second paragraph of item (k) offers a safe haven for export
credit practices that are in conformity with the interest rate provisions of the 1998 OECD
Arrangement. While compliance with the CIRR is a necessary element for establishing such
conformity, we have concluded that, on a proper interpretation, "conformity with" the CIRR cannot be
said to be achieved, unless the CIRR as well as all (applicable) rules of the OECD Arrangement
which operate to support or reinforce the CIRR are complied with.
5.249 As a matter of contextual interpretation, we beli eve that the concept of "conformity with the
CIRR" as it exists in the "material advantage" clause195 should normally have the same meaning as the

194 The Appellate Body stated that:
… the second paragraph of item (k) [constitutes] useful context for interpreting the "material
advantage" clause in the text of the first paragraph. (Appellate Body Report on Brazil –
195 We realise that the concept of "conformity with the CIRR" does not appear, as such, in the text of
the material advantage clause. It is sufficient to note, in this regard, that we must take as given the Appellate
Body's interpretation of that clause. See Article 21.5 Appellate Body Report on Brazil – Aircraft , supra, para.
67 ("To establish that subsidies under the revised PROEX are not 'used to secure a material advantage in the

concept of "conformity with the CIRR" as it exists in the second paragraph of item (k). In our view,
there would be little logic to interpreting the firs t paragraph of item (k) in the light of one element
found in the second paragraph of item (k) -- the CIRR -- while neglecting other elements of the
second paragraph which are essential to determining whether an export credit practice is in
conformity with the CIRR.
5.250 We note that the reasoning which underpins our interpretation of the second paragraph of
item (k) applies with equal force to the Appellate Body's interpretation of the "material advantage"
clause. In this regard, it is sufficient to recall our view that the CIRR cannot meaningfully perform
the limiting function of a minimum commercial interest rate unless it is applied as part of the package
of terms and conditions set forth in the OECD Arrangement.196 If that is a correct view, then it must
be correct regardless of whether the CIRR serves as an interest rate benchmark for purposes of the
"material advantage" clause or for purposes of the second paragraph of item (k).
5.251 It could be argued that this interpretation of the "material advantage" clause in effect re-
creates in the first paragraph of item (k) the standard already provided for in the second paragraph of
item (k), at least insofar as the interest rate benchmark used under the first paragraph of item (k) is the
CIRR.197 However, this is an unavoidable implication of the Appellate Body's adoption of the CIRR
as an appropriate benchmark for determining the existence of a material advantage. Had we adopted
Brazil's view, that is, had we found that compliance with the CIRR, on its own, was sufficient for
purposes of establishing that payments are not used to secure a "material advantage" within the
meaning of the first paragraph of item (k), we w ould have made it easier to comply with the first
paragraph of item (k) than with the second paragraph of item (k).
198 To the extent that the first
paragraph of item (k) could be used a contrario to establish that a payment that is not used to secure a
material advantage is not prohibited -- an issue addressed below -- we would, in other words, not only
have re-created a safe haven in the first paragraph, but, in fact, would have deprived the second
paragraph of all useful effect with respect to the export credit practices at issue in the first paragraph.
This we think we must not do.
5.252 For the foregoing reasons, we find that, in order for Brazil to establish by reference to the
CIRR that PROEX III interest rate equalisation payments are not used to secure a "material
advantage", Brazil must demonstrate that export credits supported by PROEX III respect, in addition
to the CIRR itself, the applicable rules of the OECD Arrangement which relate to the application of
the CIRR and which operate to support or reinforce the CIRR as a minimum interest rate.199

field of export credit terms', Brazil must prove [… ] that the net interest rates under the revised PROEX are at or
above the relevant CIRR.").
196 It is clear to us that the Appellate Body viewed the CIRR as an appropriate market benchmark for
purposes of the "material advantage" clause because it represents a minimum commercial interest rate. See
Article 21.5 Appellate Body Report on Brazil – Aircraft , supra, paras. 61-64; Article 21.5 Panel Report on
Brazil – Aircraft, supra, para. 6.91. It is useful to reiterate in this context that we find it implausible to assume
that the Appellate Body meant to "import" into the "material advantage" clause the CIRR alone, that is, divorced
from its surrounding terms and conditions as defined in the OECD Arrangement.
197 See Article 21.5 Panel Report on Brazil – Aircraft , supra, para. 6.87. Of course, the second
paragraph of item (k) is broader in scope than the first paragraph of item (k), which only refers to two types of
export credit practices. To that extent, the second pa ragraph of item (k) retains independent meaning also on
our interpretation of the "material advantage" clause.
198 Canada appears to have reached the same conclusion. See Canada's First Submission, para. 90
(Annex A-1).
199 See paras 5.97 et seq. and 5.106 et seq. It should be noted that Brazil does not seek to establish, in
these proceedings, an appropriate market benchmark other than the CIRR.

(ii) Appropriateness of a Benchmark Other than the CIRR
5.253 Canada recalls that the Appellate Body has stated that the CIRR may not always reflect the
rates available in the marketplace. In Canada's view, the Appellate Body has therefore recognized
that the role of the CIRR is to serve as a proxy for market rates. It follows that, whenever the CIRR is
not an adequate proxy for market rates, a benchmark other than the CIRR must be used. Specifically,
Canada asserts that the CIRR is not an appropriate benchmark with respect to transactions involving
regional aircraft, because the CIRR is usually significantly different from the rates available for
comparable market transactions involving regional aircraft. Canada notes that the CIRR is
significantly different even from the rates availabl e to the airline with the best credit rating, i.e.
American Airlines.
5.254 Canada argues, in addition, that, in assessing whether PROEX III is used to secure a material
advantage in the field of export credit terms, account must also be taken of the creditworthiness of the
borrower in question. Canada considers that a lender will certainly confer a material advantage if, by
offering financing at the CIRR, it is permitted to offer a less credit-worthy borrower the same low
interest rate as a more credit-worthy borrower.
5.255 Brazil counters that the CIRR, by its design, is intended to reflect market rates and that, in the
view of experts, the CIRR may from time to time actu ally be higher than market rates. In fact,
according to Brazil, the CIRR presently is above the ma rket rates. Brazil argues further that, in any
event, it follows from the Appe llate Body's Article 21.5 report on Brazil – Aircraft that Brazil is
entitled to establish a benchmark interest rate and that it may use the CIRR as a benchmark in
assessing applications for PROEX assistance.
5.256 The Panel agrees with the premise of Canada's argument, namely that the Appellate Body
considered (i) that the CIRR represents an example of a market benchmark and (ii) that the CIRR
need not accurately reflect the marketplace at all times . That premise, however, does not lead us to
the same conclusion as Canada, because we have a different reading of the Appellate Body's
Article 21.5 report on Brazil – Aircraft . We consider the following passage of that report to be
particularly pertinent:
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.
200
5.257 Canada would have us construe this statement as requiring that a Member that seeks to
demonstrate that its payments are not used to secure a material advantage must, in the circumstances
referred to, use a benchmark other than the CIRR. We think that the plain words of the Appellate
Body do not support such a conclusion. The Appe llate Body did not say that a Member "must"
establish an alternative benchmark where the CIRR does not reflect the rates available in the
marketplace. Instead, the Appellate Body said that a Member should, "in principle", be "able" to do
so, that is, that it should have the possibility to do so.
201
5.258 There is another statement by the Appellate Body which appears to contradict Canada's
interpretation. As will be recalled, the Appellate Body stated that:

200 Article 21.5 Appellate Body Report on Brazil – Aircraft , supra, para. 64 (footnote omitted and
emphasis added).
201 It is worth noting that we, too, in the previous Article 21.5 proceedings, used permissive rather than
mandatory language when addressing this issue ("may"). The Appellate Body reproduced, and agreed with, the
relevant statement of our previous Article 21.5 report. See Article 21.5 Appellate Body Report on Brazil –
Aircraft, supra, para. 63.

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 relevant CIRR, the
specific "market benchmark" we identified in the original dispute as an "appropriate"
basis for comparison; or, that an alternative "market benchmark", other than the
CIRR, is appropriate, and that the net interest rates under the revised PROEX are at or
above this alternative "market benchmark".202
5.259 This statement confirms, in our view, that the Appellate Body did not mean to suggest that
Members were under an obligation to use a benchmark other than the CIRR where the CIRR does not
correspond to market rates. To the contrary, this statement suggests to us that the Appellate Body
meant to leave it up to an individual Member to decide whether to use a CIRR benchmark or, in the
alternative, identify and establish the appropriateness of a different benchmark.
5.260 Accordingly, while we see merit in Canada's argument that the CIRR may not constitute an
"appropriate" market benchmark in situations where it differs significantly from the rates available to
borrowers in comparable market transactions, we nevertheless cannot accept that argument in view of
our understanding of the Appellate Body's Article 21.5 report on Brazil - Aircraft.203
5.261 Canada argues that, in examining whether PROEX III is used to secure a material advantage,
regard must also be had to the creditworthiness of the borrower in question. We recall that, in our
first Article 21.5 report, we explained that:
The reasoning of the Appellate Body in choosing the CIRR seems to have been that a
payment would be used to secure a material advantage … if it resulted in an interest
rate that was below the lowest commercial interest rates available to the best
borrowers in respect of a particular currency, irrespective of whether that rate would
have been available to the borrower in question.204
5.262 In other words, in our understanding, the Appellate Body identified the CIRR as an "absolute"
benchmark, that is to say, as a benchmark that could be used even where the borrower in question
could not have obtained a rate at the CIRR level in the commercial market.
5.263 It should be pointed out that the Appellate Body, in its Article 21.5 report, did not contradict
our interpretation of its reasoning. Nor do we see, in that report, any other statements which would
make us reconsider our statement. Whereas we find Canada's argument persuasive, as a general
matter,205 this does not provide us with a justification for departing from what we consider to be the
Appellate Body's view.
5.264 For these reasons, we reject Canada's argument that the creditworthiness of borrowers must
be taken into account when assessing whether PROEX III confers a material advantage within the
meaning of the first paragraph of item (k).

202 Article 21.5 Appellate Body Report, supra, para. 67 (emphasis in the original, but footnote omitted).
203 With respect to the fact that Canada's argument relates specifically to export transactions involving
regional aircraft, it is sufficient to note (i) that nothing in the Appellate Body's Article 21.5 report on Brazil -
Aircraft suggests that the CIRR benchmark does not apply to transactions involving regional aircraft and (ii)
that, in fact, the underlying dispute concerned regional aircraft. We must assume, therefore, that the Appellate
Body meant to make it possible for Members to use the CIRR as benchmark in transactions involving regional
aircraft.
204 Article 21.5 Panel Report on Brazil – Aircraft, supra, para. 6.91 (underlining added).
205 We note that Canada's argument is similar in content to our original finding that the question of
whether there was a "material advantage" was comparable to the question of whether there was a benefit to the
recipient. See Panel Report on Brazil – Aircraft , supra, para. 7.23. The Appellate Body, however, overturned
our finding on that issue. See Original Appellate Body Report on Brazil – Aircraft, supra, para. 179.

5.265 For the foregoing reasons, we find that a Member may always use the CIRR -- accompanied
by the applicable rules of the OECD Arrangement which operate to support or reinforce the CIRR as a
minimum interest rate -- as a benchmark to demonstrate that a payment is not used to secure a
material advantage in the field of export credit terms. 206 Given the nature of the CIRR as a
(periodically) constructed interest rate, a Member may, however, attempt to demonstrate that a rate
below the CIRR would, at a particular point in time, constitute a more appropriate benchmark.
(b) Examination of PROEX III
5.266 We recall that, to establish that PROEX III is not used to secure a material advantage in the
field of export credit terms, Brazil must either (i) demonstrate conformity with the relevant CIRR as
well as with all those rules of the 1998 OECD Arrangement which operate to support or reinforce the
CIRR, or (ii) identify an appropriate "market benchmark", other than the CIRR, and establish that net
interest rates resulting from PROEX III support are at or above that alternative "market benchmark".
5.267 In this case, Brazil claims justification for PROEX III on the basis that it uses a CIRR
benchmark for net interest rates.
207 In order for us to determine whether Brazil has met its burden of
demonstrating conformity with the relevant provisions of the 1998 OECD Arrangement , it is
necessary to perform the same type of analysis as that which has already been performed with respect
to Brazil's defence under the second paragraph of item (k). Since the provisions of the 1998 OECD
Arrangement which are to be addressed are the same and since the factual circumstances are the same,
we see no need to repeat the examination we have undertaken in the context of Brazil's defence under
the second paragraph. We consider it appropriate, instead, to incorporate, mutatis mutandis , our
findings in Section E.3(c) above into the present Section.
5.268 Accordingly, on the basis of the findings se t forth in Section E.3(c), we conclude that
PROEX III, as such, allows Brazil to provide PROEX III payments in such a manner that it is not
used to secure a material advantage in the field of export credit terms.
4. A Contrario Use of the First Paragraph of Item (k)
5.269 Brazil contends that "payments" within the meaning of the first paragraph of item (k) that are
not "used to secure a material advantage in the field of export credit terms" are not prohibited by the
SCM Agreement . In Brazil's view, the failure to permit such an a contrario interpretation would
effectively render the material advantage clause inutile, contrary to the customary rules of
interpretation of public international law. Brazil considers that the minimum meaning and effect that
can reasonably be given to the clause is that it qualifies the preceding language of the first paragraph
of item (k). Thus, according to Brazil, its ordinary, straightforward meaning is that payments that are
used to secure a material advantage are prohibited subsidies, whereas payments that are not so used
are not prohibited. Brazil recalls that, in the first Article 21.5 proceedings in Brazil – Aircraft , the
Appellate Body stated that, if Brazil had discharged its burden to show that PROEX III payments did
not confer a material advantage, the Appellate Body "would have been prepared to find" that an a
contrario interpretation of the material advantage clause could be used to justify PROEX payments.
5.270 Canada considers that the first paragraph of item (k) cannot be used a contrario in the
manner urged by Brazil. Canada considers that, as an explicit exclusionary clause, footnote 5 to the
SCM Agreement precludes the possibility of relying on an implied exclusion based on an alleged a
contrario exception independent of footnote 5. Canada submits that, otherwise, footnote 5 would be

206 Otherwise, there would have been no need for the Appellate Body to refer to the CIRR. It could,
instead, simply have said that, to establish that relevant payments are not used to secure a material advantage, a
Member must identify an appropriate market benchmark and must prove that the net interest rates resulting from
the relevant payments are at or above that benchmark.
207 Brazil has not identified a market benchmark other than the CIRR.

redundant and the principle of effective treaty interpretation breached. Nor can Brazil establish, in
Canada's view, that a measure impliedly excluded from the list of illustrations in Annex I is a
"measure referred to in Annex I as not constituting" an export subsidy. According to Canada, if
something must be "referred to" in a written text, the thing must be named or described in words set
out in the text. Thus, in Canada's view, footnote 5 requires positive authorizing language in Annex I
that a measure is not being categorized as a prohibited subsidy.
5.271 The Panel notes that the first paragraph of item (k) identifies as a prohibited export subsidy:
. . . the payment by [a government] 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.
5.272 The question before us is whether a measure which has been found to be a subsidy contingent
upon export performance within the meaning of Article 3.1(a) of the SCM Agreement is nevertheless
not prohibited if it is a "payment" which 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).
5.273 We recall that we addressed precisely this issue in the first Article 21.5 panel report in Brazil
– Aircraft. The Appellate Body, in considering our findings, stated that it was not "necessary for [it]
to rule on these general questions in order to resolve this dispute", and thus declared our findings to be
"moot" and "of no legal effect".
208 Nevertheless, given that the issue was considered in detail in that
dispute, we begin our examination with a review of the reasoning set forth in that report.
5.274 In the first Article 21.5 panel report on Brazil – Aircraft, we found that the first paragraph of
item (k) could not be used to establish that a subsidy which is contingent upon export performance
within the meaning of Article 3.1(a) of the SCM Agreement is permitted. 209 In reaching this
conclusion, we observed that footnote 5 to the SCM Agreement provides an explicit textual basis for
determining whether and under what conditions the Illustrative List may be used to demonstrate that a
subsidy which is contingent on export performance is not prohibited. 210 We noted that footnote 5
provides that "[m]easures referred to in Annex I as not constituting export subsidies shall not be
prohibited under this or any other provision of this Agreement." We observed that, in its ordinary
meaning, footnote 5 relates to situations where a measure is referred to as not constituting an export
subsidy. We considered that the first paragraph of item (k) does not contain any affirmative statement
that a measure is not an export subsidy, nor that a measure not satisfying the conditions of that
paragraph is not prohibited, and thus does not fall within the scope of footnote 5.
211 We observed that
this finding does not render the material advantage clause "ineffective", as the "material advantage"
clause nevertheless serves an important role by narrowing the range of measures that would otherwise
be subject to the "per se" violation set forth in the first paragraph of item (k).212 Finally, we noted that
a broad reading of footnote 5 could place developing country Members at a permanent, structural
disadvantage in the field of export credit terms, a result we considered to be inconsistent with one of
the objects and purposes of the WTO Agreement.213
5.275 We find the reasoning expressed in the first Article 21.5 panel report on Brazil – Aircraft to
be convincing. In our view, Brazil does not, in these proceedings, assert significant new arguments
that would call that reasoning into question. Thus, we remain of the view, expressed in our previous
Article 21.5 panel report, that the relationship between the Illustrative List and Article 3.1(a) is

208 Article 21.5 Appellate Body Report on Brazil – Aircraft, supra, para. 81.
209 Article 21.5 Panel Report on Brazil – Aircraft, supra, para. 6.67.
210 See ibid., paras. 6.33-6.34.
211 See ibid., paras. 6.36-6.37.
212 See ibid., paras. 6.42-6.45.
213 See ibid., paras. 6.46-6.66.

governed by footnote 5 to the SCM Agreement, and that the first paragraph of item (k) does not "refer
to" any measures as "not constituting export subsidies" within the meaning of the footnote. We
consider that this reading gives effect both to the material advantage clause and to footnote 5.214 As a
result, we incorporate by reference our reasoning in the first Article 21.5 panel report into this
Section.
5. Conclusion
5.276 We have concluded that, while PROEX III, as such, allows Brazil to make PROEX III
payments in such a way that they do not secure a material advantage in the field of export credit
terms, PROEX III payments are not the payment by Brazil of "all or part of the costs incurred by
exporters or financial institutions in obtaining credits". Brazil has, therefore, failed to demonstrate the
required elements for its defence under the first paragraph of item (k). We have further concluded
that, in any event, the first paragraph of item (k) cannot, as a legal matter, be invoked as an
affirmative defence.
5.277 In the light of this, PROEX III, as such, is not "justified" under the first paragraph of item (k).
VI. CONCLUSION
6.1 For the reasons set forth in this Report, we conclude that:
(a) It has not been established that PROEX III, as such, is inconsistent with Article 3.1(a)
of the SCM Agreement;
(b) PROEX III, as such, is, in any event, justified under the second paragraph of item (k)
of the Illustrative List of Export Subsidies contained in Annex I to the SCM
Agreement;
(c) PROEX III, as such, cannot, however, be justified under the first paragraph of
item (k) of the Illustrative List of Export Subsidies contained in Annex I to the SCM
Agreement.
6.2 In reaching this conclusion, we once again wish to recall the precise issue which we were
called on to resolve. That issue was whether the PROEX III programme, as such, that is to say, on its
face and independently of its application, is inconsistent with the SCM Agreement. Our conclusion
that the PROEX III programme, as such, is not inconsistent with the SCM Agreement is based on the

214 We note the following statement of the Appellate Body in the first Article 21.5 proceedings in Brazil
– Aircraft:
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 in obtaining credits", then we would have been prepared to find that the payments
made under the revised PROEX are justified under item (k) of the Illustrative List. […] 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. (Article 21.5 Appellate Body Report on Brazil – Aircraft ,
supra, para. 80)
Brazil argues on the basis of this statement that the Appellate Body takes the view that the first
paragraph of item (k) "should be read a contrario to permit a subsidy that does not confer a material advantage".
See Brazil's First Submission, para. 66 (Annex B-1). Although we acknowledge that this statement could be
understood in the manner suggested by Brazil, we note that the Appellate Body's statement does not form part of
the legal basis for its disposition of the appeal, nor did the Appellate Body explain its statement.

view that it is legally possible for Brazil to operate the PROEX III programme in such a way that it
will:
(a) not result in a benefit being conferred on producers of regional aircraft and, hence,
not constitute a subsidy within the meaning of Article 1.1 of the SCM Agreement; or
(b) result in a benefit being conferred on producers of regional aircraft, but conform to
the requirements of the safe haven of the second paragraph of item (k), in which case
it would not constitute a prohibited export subsidy within the meaning of Article 3.1
of the SCM Agreement.
6.3 We wish to be clear, however, that it does not necessarily follow from our conclusion that
future application of the PROEX III programme will, likewise, be consistent with the
SCM Agreement. It should be mentioned, in this regard, that Canada is free to challenge such future
application in accordance with the provisions of the DSU if it considers it not to be in conformity with
the SCM Agreement.